Economic Assessment

India: Country Growth Analysis


Subir Gokarn & Gunjan Gulati

October 2006
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CONTENTS

Introduction ......................................................................................................................................................................1
I. Growth Performance...............................................................................................................................................3
International Comparisons 5
II. Role of Reforms........................................................................................................................................................7
III. Agricultural Growth .............................................................................................................................................11
Agricultural Diversification 14
Recommendations 17
IV. Industrial Growth..................................................................................................................................................20
Investment Scenario 21
V. Services Growth.....................................................................................................................................................26
Growth patterns in the Indian service sectors 28
Drivers of Service Sector Growth: Some Hypotheses 29
Macro drivers 30
Can services emerge as an engine of growth? 35
VI. Growth in Employment ........................................................................................................................................37
Emergence of Non‐Farm Rural Sector 42
Determinants of access to non‐farm employment 44
VII. Investment ..............................................................................................................................................................49
Public‐ Private Investment 54
VIII. Regional Pattern OF Growth ............................................................................................................................58
Growth Performance 58
Social Infrastructure 63
Investment 65
Employment 66
Infrastructure 68
IX. Recommendations for Strategy............................................................................................................................76
The Employment Trap 77
Regional Inequities – Vicious Circles 78
A Concluding Comment 79
Bibliography...................................................................................................................................................................80

List of Figures

Figure 1: Sectoral Growth Volatility..............................................................................................................................4
Figure 2: Sectoral Composition ......................................................................................................................................4
Figure 3: Agricultural Volatility...................................................................................................................................11
Figure 4: Investment in Agriculture (Per cent Share)...............................................................................................13
Figure 5: Yield Performance .........................................................................................................................................15
Figure 6: Sectoral Growth .............................................................................................................................................20
Figure 7: Share in GVA (2002‐03).................................................................................................................................21
Figure 8: Sectoral Growth Volatility............................................................................................................................26
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Figure 9: Sectoral Growth .............................................................................................................................................29
Figure 10: Employment Share......................................................................................................................................31
Figure 11: Share of Organised Sector in Employment of Each Sector ..................................................................31
Figure 12: Relative Tax Burden on Industry & Services..........................................................................................32
Figure 13: Significance of India’s service exports .....................................................................................................34
Figure 14: Labour Intensity (Labour‐capital ratio) ...................................................................................................39
Figure 15: Employment output trade off....................................................................................................................39
Figure 16: Organised Manufacturing Employment Elasticity (1989/90‐2002/03) ...............................................41
Figure 17: Jobless growth!.............................................................................................................................................42
Figure 18: Growth Resilience‐ Production Growth..................................................................................................45
Figure 19: Growth in Employment and Fixed Investment in SSI units ..............................................................46
Figure 20: Debt/ GDP.....................................................................................................................................................51
Figure 21: Share of foreign investment in infrastructure.........................................................................................55
Figure 22: Investment in PPI Projects in India, 1990‐2004.......................................................................................56
Figure 23: Per capita Income at current prices ..........................................................................................................60
Figure 24: State‐wise Industrial Investment Proposals (August 1991 to December 2005)................................66
Figure 25: Per Capita Consumption of Electricity (Utility & Non‐utilities).........................................................69

List of Tables
Table 1: World Share of GDP at purchasing power parity .......................................................................................3
Table 3: Growth and Development Performance (Per cent).....................................................................................7
Table 4: Savings Investment Ratio, FD .........................................................................................................................8
Table 5: International comparison of yield of selected commodities –2002.........................................................12
Table 6: Growth in Investment in Agriculture (Per cent)........................................................................................13
Table 7: Investment Growth .........................................................................................................................................13
Table 8: Target Growth rate of Agricultural Crops..................................................................................................14
Table 9: Projected Production and Per capita Consumption in Selected Commodities....................................14
Table 10: Institutional Credit to Agriculture (Rs Crore)..........................................................................................18
Table 11: Share in Sectoral GDP...................................................................................................................................20
Table 12: Gross Domestic Capital Formation (as a % of GDP)...............................................................................21
Table 13: Industrial Investment Proposals.................................................................................................................22
Table 14: Industry‐wise Investment Proposals‐ Share of Top 15 industries........................................................22
Table 15: Composition and Growth in Exports ........................................................................................................23
Table 16: Share of India’s exports of manufactured goods.....................................................................................23
Table 17: Shares of Service Activities in Aggregate Service Sector GDP (%).......................................................28
Table 18: Share and Growth of Major Consumption Categories...........................................................................34
Table 19: Unemployment situation during the first three years of the Tenth Plan ............................................37
Table 20: Trends in organised sector employment...................................................................................................37
Table 21: Falling labour costs........................................................................................................................................38
Table 22: Growth in Organised Manufacturing Employment...............................................................................40
Table 23: Non‐farm employment ................................................................................................................................43
Table 24: Income Share in Rural India (1993/94).......................................................................................................43
Table 25: Non‐farm employment growth vs Labour force and Population Growth (CAGR – Per cent) .....44
Table 26: Investment/GDP ............................................................................................................................................49
Table 27: Industry wise public sector investment (at constant prices)‐ Share.....................................................50
Table 28: Alternative Scenarios for Eleventh Plan....................................................................................................50
Table 29: Implications of the Savings Requirement for the Eleventh Plan ..........................................................50
Table 30: Crowding out of Private Investment due to Increased Public Investment‐Literature Review.......52
Table 31: Cumulative Investment in 1990‐2004 PPI Projects by Sector, 1990‐2004.............................................56
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Table 32: Project Investment by Region/ Country, 2004..........................................................................................56
Table 33: Annual Average Growth of GSDP (Per cent)........................................................................................58
Table 34: Coefficient of Variation in Annual GSDP Growth ..................................................................................60
Table 35: Average Annual Growth in Per Capita Income ......................................................................................61
Table 36: Percentage Change in Percentage Share in NSDP (1987‐88 to 1999‐00)..............................................62
Table 37: Percentage of Population Below Poverty line ..........................................................................................63
Table 38: Poverty Projection for 2007..........................................................................................................................64
Table 39: Literacy Rate...................................................................................................................................................65
Table 40: Growth in Employment (Per cent per annum)........................................................................................67
Table 41: Change in Percentage Share in employment (1987‐88 to 1999‐00).......................................................68
Table 42: Road Length ...................................................................................................................................................70
Table 43: Credit‐Deposit Ratio of Scheduled Commercial Banks (Per cent) .......................................................71
Table 44: Overall Competitiveness Ranking of the States‐ 2004 ............................................................................74

[2]
INTRODUCTION

T his paper attempts to provide a broad‐based description of the growth performance of
the Indian economy over the past decade and a half. The choice of the period for
analysis is, of course, based on the 1991 reforms programme, which many people consider a
significant structural break in the country’s policy regime, whose ultimate criterion of
success is whether it has taken the economy to a higher growth path, which is sustainable.

Good description is necessary for good prescription. A detailed, factual representation of the
growth process over this period is essential for understanding the many linkages that exist
between economic policy and growth performance. At the aggregate level, it is becoming
increasingly clear that the economy has found a new groove. In the immediate aftermath of
the 1991 reforms, growth did ratchet up to an unprecedented streak of over seven per cent
for three successive years (1994‐97). This was an early indication of the potential dividend
from reforms, but a variety of factors combined to cut short that streak. As a backdrop to the
discussion in this paper, three of these deserve mention.

First, inflation accelerated rather sharply quite early in that three‐year period. An aggressive
anti‐inflationary policy caused interest rates to rise sharply, which possibly contributed to an
industrial slowdown that set in after 1997 and persisted until 2002, after which the sector has
showed gained enormous momentum. Not surprisingly, this recovery and expansion has
taken place in an environment of sharply declining and then stabilizing interest rates.
Second, in 1997, the monsoons failed after an unprecedented nine‐year streak of normal
rainfall across the nation. Stable agricultural growth had played an important part in the
post‐reform acceleration and the sharp decline in growth rates in 1997 contributed the
overall slowdown.

Third, from the external perspective, 1997 was the year of the Asian Crisis, one outcome of
which as a very large depreciation of the currencies of many Asian countries, with whom
India competed in the global marketplace. Exports from India, particularly in the
manufactured goods segment, which had been growing rapidly in the years prior to the
crisis suffered a significant, though eventually short‐lived, setback.

From 1997 until 2003, the economy grew at a relatively sluggish pace. During this period,
the merits of the reform agenda naturally came into question. However, from the analytical
perspective, there were plausible reasons for the slowdown, which really had nothing to do
with the reforms themselves. Agricultural instability during that period was a significant
contributor. On the industrial front, investment activity came to a standstill, partially in
response to the high interest rate regime but also in reaction to the steadily declining trade
barriers, which intensified competition in domestic markets. Finally, for some time after the
East Asian crisis, India’s major export competitors benefited from sharply depreciated
exchange rates. In short, all the major drivers of the mid‐1990s growth went into reverse
gear during this period.

However, this could not last forever. Continuing financial sector reforms allowed interest
rates to fall dramatically, moving them to a permanently lower level. Combined with tax
[1]
concessions for housing, these led to a boom in demand in this sector. Increased competition
in the retail finance sector rapidly expanded the number of products and services that could
be financed and industrial growth recovered as a result of surging consumption
expenditure. As this gained momentum, capacities that had stopped expanding at the end of
the mid‐1990s boom were stretched. New investment activity began in significant measure
during 2003 and has not slackened since. All this while, the services sector continued to
maintain its very powerful momentum, playing a solo role as the engine of growth. The
industrial recovery strengthened that momentum. The consumption and investment driven
recovery has now stretched to a four‐year streak of over 8 per cent growth per year.

While the overall growth scenario is undoubtedly healthy, it is not without imbalances.
These are significant enough to raise concerns and questions about the sustainability of the
growth momentum. If these concerns are valid, any strategy to ensure sustainability must
put priority on addressing these imbalances. As indicated earlier, good prescription must be
preceded by good description. This paper attempts to describe the patterns of growth
observed in the Indian economy over the last decade. It first describes the pattern using the
traditional agriculture‐industry‐services disaggregation. It then goes on to look at growth
from the perspective of speficific imbalances – employment, infrastructure and regional
inequalities. These descriptions provide a basis for a set of strategic recommendations,
which are rooted in both the perspectives presented in the paper.

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I. GROWTH PERFORMANCE

D
uring the last three decades, Indian economy has witnessed a significant shift in its
position in the world economy. The share of Indian economy in the world GDP
stood at 6 per cent of world GDP in 2002. During the eighties, India along with
China, contributed to the rising share of Asia in world GDP. The last three decades have
witnessed a shift in the structure of world GDP away from US‐ the single largest economy,
in favour of emerging economies like India and China. With the robust growth witnessed in
these economies, the ongoing trend of change in their weights in the world GDP is expected
to strengthen further.

An independent study 1 suggests that by 2025, the share of Indian economy in the world
GDP is expected to scale up from 6 per cent in 2002 to 11 per cent in 2025 and further to 14
per cent in 2035. Thus becoming the third largest contributor to the world GDP after China
and US, and significantly above Japan and Euro zone economies.

Table 1: World Share of GDP at purchasing power parity
Current Projections (2002 prices)
2002 2015 2025
US$ billion Share Share Rank Share Rank
China 586.1 12.1 19.5 1 25.2 1
US 1030.8 21.3 19.5 2 17.8 2
India 280.5 5.8 8.2 3 11.2 3
Japan 342.5 7.1 5.2 4 5.5 4
Germany 223.8 4.6 3.5 5 3.0 5
France 150.1 3.3 2.7 6 2.4 6
UK 154.9 3.2 2.7 7 2.3 7
Russia 118.8 2.4 2.8 8 2.8 8
Italy 152.5 3.1 2.5 9 2.0 9
Brazil 135.5 2.8 2.2 10 1.9 10
Source: Working Paper, ICRIER 1

The following discussion analyses India’s growth performance exploring the aggregate,
sectoral and regional issues significant in bringing about the observed growth pattern in the
economy. The discussion further highlights the key structural and policy bottlenecks
governing each sector and discusses feasibility of sustainability of current growth
momentum.

The sentiment on the ongoing buoyancy in Indian economy got further strengthened with
the expectations of higher than expected growth rate of 8.1 per cent for the current fiscal
year (2005‐06) on the back of an equally robust growth 7.5 per cent growth during 2004‐05.
The current growth momentum is supported by strong performance of the manufacturing
and services sector. The performance of agriculture however has been marked by significant
1 Virmani, Arvind, ‘Economic Performance, Power potential and Global Governance: Towards a New
International Order,ʹ ICRIER Working Paper No. 150, December 2005

[3]
volatility. The sector recovered from the drought of 2002‐03 to record a strong growth of 10
per cent in 2003‐04, growth slowed down again in 2004‐05 to 0.7 per cent.

During the last decade while the industrial growth has been led by the manufacturing
sector, the services sector has registered robust performance on account of growth
acceleration of sub‐sectors like communication, hotels and restaurants and banking and
insurance.

Figure 1: Sectoral Growth Volatility
Growth Volatility
15.0 Growth Volatility
15.0
10.0
10.0
5.0
per cent
5.0
per cent
0.0
0.0
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2005-06AE
2001-02
2002-03
2003-04
2004-05
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2005-06AE
2001-02
2002-03
2003-04
2004-05
-5.0
-5.0
-10.0
-10.0
GDP Agriculture Industry Services
GDP Agriculture Industry Services

Source: CSO

While the agricultural growth volatility has remained high, its contribution to the gross state
domestic product has been continuously declining. Agriculture’s share fell from 42 per cent
during 1970s to 35 per cent and then to 29 per cent during 1980s and 1990s respectively. The
share has further reduced to about 21.7 per cent of the total domestic product during 2000‐
05. While the industrial growth has remained strong, its share has remained stable around
26 per cent. Services sector on the other hand, now accounting for more than half of the GDP
has exhibited continued and significant growth acceleration.

Figure 2: Sectoral Composition
Se ctoral Composition
Se ctoral Composition
Agriculture
Agriculture
1970s
1970s
1980s
1980s
Industry 1990s
Industry 1990s
2000-01/05-06
2000-01/05-06
Services
Services
0.0 10.0 20.0 30.0 40.0 50.0 60.0

0.0 10.0 20.0 pe r 30.0
ce nt 40.0 50.0 60.0
pe r ce nt
Source: CSO
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International Comparisons

This section compares the structural changes in a small sample of countries. The sample is
not entirely scientific. It covers three broad groups of countries, all of which have been used
in one context or another when India’s economic structure and performance is being
discussed. The first group is the set of East Asian countries, which represent a collective
experience of manufacturing export‐led growth. The second are two Latin American
countries, Brazil and Mexico, which reflect a predominantly import‐substitution based
strategy. The third are India’s neighbours in South Asia, which are included in the sample to
examine whether there is a “sub‐continental” effect at work in the structural evolution of the
economy. Table 2 provides a picture of the structural change in these countries over two
decades, with the five‐year average share of each sector reported for each country. The
countries are ranked in ascending order of affluence so that the structural evolution can be
seen in context of the development process.

Table 2: Structural change across countries
GDP per
capita, PPP
Country
(constant 1995 Agriculture Share Industry Share Services Share
Name
international
$)
1991‐ 1997‐
2002 1980‐84 1985‐90 1991‐96 1997‐02 1980‐84 1985‐90 1991‐96 1997‐02 1980‐84 1985‐90
96 02
Bangladesh 1,501 31.5 31.5 27.3 25.0 21.1 21.2 23.6 25.6 47.4 47.3 49.1 49.4
Pakistan 1,719 30.0 26.9 25.7 26.0 22.9 23.9 24.6 23.4 47.1 49.2 49.7 50.6
India 2,365 36.8 32.2 30.2 25.7 25.5 26.9 27.0 26.4 37.7 40.9 42.8 47.9
Indonesia 2,857 23.4 22.4 17.7 17.6 40.0 36.8 40.9 44.8 36.7 40.9 41.4 37.6
Sri Lanka 3,160 27.7 26.7 24.4 20.6 27.3 26.6 26.0 27.0 45.0 46.7 49.6 52.4
Philippines 3,694 24.1 23.3 21.4 16.4 38.8 34.8 32.7 31.9 37.1 41.9 45.9 51.7
China 4,054 32.0 26.7 21.2 17.1 45.6 43.3 46.6 50.0 22.4 30.0 32.2 32.8
Thailand 6,208 20.2 15.2 10.3 9.5 30.2 34.4 39.9 41.2 49.7 50.5 49.8 49.2
Brazil 6,878 10.6 9.9 8.4 7.2 44.6 43.6 37.1 26.2 44.8 46.5 54.5 66.6
Mexico 7,947 8.8 8.9 6.3 4.6 34.1 33.0 27.7 27.9 57.1 58.1 66.0 67.5
Malaysia 8,080 21.0 18.8 13.5 10.2 39.3 39.3 41.4 46.9 39.7 41.8 45.1 42.9
Korea, Rep. 15,009 14.1 10.3 6.7 4.7 40.1 42.4 43.4 42.5 45.8 47.2 49.9 52.8
Source: World Development Indicators
Three significant observations can be made on the patterns presented in the table. First, it is
quite clear that the service sector is a dominant entity in virtually all the countries in the
sample, across the entire range of per capita GDP represented in the sample. In terms of the
share of services in GDP, only China appears as a negative outlier, with the share of services
consistently below 40 per cent. One clear message from this comparison is that the absolute
share of service activity in GDP is itself not much of an indicator of structural differences
across economies. Of course, these are all sector aggregates and do not reveal anything
about the relative importance of specific segments of a sector, but the point that a large
service sector is compatible with a range of development attainments comes out strongly in
the comparison.

The key comparison is, therefore, not to be found in services share of GDP; it is the split
between industry and agriculture. The second observation is that there is a clear divide
[5]
amongst the countries belonging to different regions in terms of how their agriculture‐to‐
industry transitions have taken place. Clearly, the East Asian countries as a group have seen
significant declines in their shares of agriculture in GDP, which are more or less matched by
the increases in their shares of industry in GDP. The shares of industry in GDP for this
group were uniformly and persistently higher than for the other countries in the sample,
whether from Latin America or South Asia.

China, again, is something of an outlier, but in the positive direction as far as industry is
concerned. It always had a relatively high share, which has increased somewhat over the
decades. This indicates that China’s transformation displayed a relatively closer link
between declining agriculture and growing industry than the others, but overall, the East
Asian pattern is strikingly different from the others in terms of the significance of industry,
even across a fairly wide range of per capita income levels. Korea, the most affluent country
in the sample, with a per capita income more than thrice that of China’s, still has over 40 per
cent of its GDP coming from industry, which underlines the persistence of industrial
competitiveness at relatively high levels of affluence.

The third observation is that there is some validity to the notion of a “South Asia” effect in
the pattern of structural evolution. Of course, all four South Asian economies rank fairly low
in the affluence; this might explain the collective weight of the agriculture sector in GDP, but
the striking pattern is that the share of industry in all four countries has remained at around
one‐quarter over the two‐decade period. Whatever decline there has been in the share of
agriculture has been largely absorbed by services. This fits in with the pattern that is
observed for the two Latin American economies, which, at far higher levels of affluence, also
have rather low shares of industry in GDP, comparable to South Asia. Of course, their
agriculture sectors are small, which is consistent with their levels of affluence, but their
service sectors have taken up all the slack and have a far higher share than either the East
Asian or the South Asian countries.

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II. ROLE OF REFORMS

During 1980s, India witnessed an average growth rate of 5.9 per cent. The growth, however,
was primarily financed by increased government borrowings resulting in increased
accumulation of debt, thus resulting in a severe balance of payments crisis in 1991, and
arousing a shift in policy framework. The reforms of 1990s aimed at a systematic shift
towards a more open economy with a greater involvement of market forces, change in the
regulatory structure, increased participation of private sector and redefining the role of
public sector.

Post reforms period saw the average growth during the 1992‐93/99‐00 increasing up to 6.4
per cent. While the average growth during the 90s was slightly better than that during the
80s, unlike the latter period it was backed by a stable external debt scenario. Post reform
period also witnessed a sharp reduction in overall poverty in the country.

Table 3: Growth and Development Performance (Per cent)
GDP Growth Debt/ GDP Poverty
1980s 5.9 41.7 41.7
1990s 5.8 48.2 31.0
1990‐91/94‐95 5.0 48.9 36.0
1995‐96/99‐00 6.5 47.5 26.1
2000‐01/05‐06 6.3 59.2 19.3*
Note:* Based on Planning Commission projections for 2007.
Source: CSO, Planning Commission, RBI

The following section will discuss the major reforms initiated since 1991 and their impact on
the overall growth performance. The section will look into the reforms whereby looking at
the reforms in the five key sectors in the economy – fiscal discipline, industrial and foreign
investment and trade policy, agriculture reforms, infrastructure development and social
sector development.

i) Fiscal Discipline

While fiscal stabilisation is not just an essential precondition for the success of economic
reforms, in India achieving it was the urgent priority, which resulted in initiation of the
reform process.

Centre’s fiscal deficit during the 80s was at an average of 6.8 per cent of GDP, which further
shot up to 7.8 per cent of GDP in 1990‐91. Together with states fiscal deficit, the total deficit
stood at a significant 9.4 per cent of GDP in 1990‐91. The reforms were able to reduce the
centre’s fiscal deficit to 5.6 and 5.4 per cent of GDP in 1991‐92 and 1992‐93 respectively.

The reduction in fiscal deficit was achieved by systematically strengthening the fiscal
situation by way of abolishing export subsidies, restructuring fertiliser subsidy,
announcement of progressive phasing out of budget support in the form of government
loans to the loss making public sector units and restricting development expenditure.
[7]

While the reforms also aimed to improve public savings in the economy to support
substantial investment in the economy. The public‐savings to GDP ratio declined from 3.0
per cent during 80s to 1.4 per cent during early 90s, and further worsened to 0.6 per cent
during the second half of the 90s. The deterioration in the public savings ratio continued
during the 2000s with the average ratio during 2000‐01 to 2004‐05 falling to –0.2 per cent of
the GDP.

Table 4: Savings Investment Ratio, FD
1990‐91/ 1995‐96/
1970s 1980s 1990s 2000‐01/ 04‐05
94‐95 99‐00
GDS/GDP 17.5 19.4 23.3 22.9 23.7 26.3
GDCF/GDP 17.6 21.2 24.7 24.3 25.1 26.0
FD/GDP 3.8 6.8 5.9 6.3 5.5 5.3
Source: National Accounts Statistics

A scenario of high fiscal deficit together with low savings and investment ratio witnessed
during the 90s raised concern about sustainability of overall growth and about the efficacy
of economic reforms. However, latest available national accounts data indicates a spurt in
the investment and savings activity in the economy. The investment rate peaked up to its all
time high of 30 per cent of GDP during 2004‐05 with a moderate fiscal deficit of 4.5 per cent.

Tax reforms helped improve the total tax revenues of the centre from 9.1 per cent of GDP in
1980‐81 to 10.1 per cent during 1990‐91 to 1992‐93. Tax reforms involved lowering of tax
rates, broadening the tax base and reducing loopholes in the tax structure. The ratio
however has declined to 9 per cent during 2000‐01 to 2004‐05

Despite a significant improvement achieved in a lot of fronts, further strengthening of fiscal
discipline is called for by way of reducing distortionary subsidies, improving state fiscal
finances and reducing borrowings of the government.

ii) Industrial and foreign investment and trade policy

Industrial and trade policies of India were witness to the most radical changes brought
about by the reform process by way of dismantling of most central government controls
existing in the economy. Industrial policy prior to reforms was characterised by multiple
controls over private investment, scale/location of operations –protecting individual
industries, thus resulting in an inefficient system. Post reforms, licensing is restricted to few
industries primarily on account of environmental and pollution considerations. The list of
industries reserved for public sector has been significantly reduced and private participation
is being encouraged in a lot of critical areas.

One of the most crucial changes incorporated in the trade policy post reform has been
encouraging foreign investment in a wide range of activities. Earlier, India adopted a
selective foreign investment policy with restricting the maximum amount of investment in
most of the sector to 40 per cent.
[8]

Trade policy before reforms was characterised by high tariffs, import restrictions and import
licences for a significant amount of commodities. The criteria for issue of licences were not
transparent, further characterised by delays and widespread corruption. Post reforms, the
import control regime on import of raw materials and other inputs into production and
capital goods has been almost dismantled. Import licensing for capital goods and
intermediate goods was also removed. Quantitative restrictions on imports of capital goods
and intermediate goods were undertaken in early 90s with the restriction on imports of
manufactured consumer goods and agricultural products being removed in April 2001.
Progress has also been made on reducing the tariff rate existing in the economy with the
weighted import duty rate declined from a high of 72.5 per cent in 1990‐91 to 24 per cent in
2004‐05.

iii) Agriculture reforms

Agricultural growth decelerated during the post reform period from an average of 4.4 per
cent during the 80s to an average of 3 per cent during the 90s. It has been widely argued that
the reforms in India were primarily targeted around industrial and trade issues, thus
neglecting the agriculture sector. The sector, however, benefited from the policy changes
incorporated in the industrial and trade policy by way of favourable prices of agricultural
products and spurt in the level of agricultural exports in the economy.

However, post reform period witnessed a sharp decline in the share of public investment in
the sector (Refer Fig.4 Agricultural Growth). The main reason behind shrinkage of public
investment has been the worsening fiscal condition of the state governments along with
dominance of politically popular but less efficient policies.

After more than a decade of incorporating the policy changes, it is however time to re‐look
at the efficacy of the implemented changes. Agricultural policies should be restructured so
as to help in the promotion and adoption of new and better agriculture techniques and
methods‐ such as agricultural diversification, movement of food stocks etc.

iv) Infrastructure development

A proper and developed infrastructure is crucial for overall economic development. During
the pre‐reform period basic services like electric power, road and rail connectivity,
telecommunication, air transport and ports were provided by the public sector monopolies.
However the inability of the public sector to mobilise investment for capacity expansion and
to meet quality controls resulted in the opening up of the sector for private sector
participation.

The financial sector saw a wide range of reforms in the banking system and capital markets
and further in the insurance sector as well. Major banking sector reforms included a)
measures of liberalisation like dismantling the interest rate control system, eliminating prior
approval from the central bank for large loans, and reducing the statutory requirements to
invest in government securities b) increasing financial soundness by way of introducing
capital adequacy and other prudential norms for banks and strengthening banking
[9]
supervision and c) measures for increasing competition like more liberal licensing of private
banks and freer expansion of foreign banks. The reforms thus resulted in sharp reduction in
non‐performing assets of the banks along with more than 90 per cent of banks meeting the
capital adequacy norms.

Stock market reforms were initiated by a stock market scam in 1992. The reforms involved
establishment of statutory regulator, promulgation of rules and regulations governing
various types of participants and activities like insider trading and takeover bids,
introduction of electronic trading to improve transparency in price determination and
dematerialisation of shares.

The insurance sector was a public sector monopoly before the reforms. By 2000 the law was
amended to allow private sector participation with foreign equity upto 26 per cent. An
independent Insurance Development and Regulatory Authority (IRDA) has also been set up.

While privatisation has been a vital component of economic reforms across countries, the
idea was not very well received in India until recently. Initially, the government adopted
“disinvestment” whereby it sold a minority stake in the public sector while retaining the
management control with the government.

v) Social sector development

India significantly lagged behind emerging and south‐ east Asian economies with respect to
the key social indicators. Development and creation of a firm social sector infrastructure is
essential in improving the welfare of the poor and increasing their earning capacity. The
central government expenditure on social services and rural development increased from 7.6
per cent in 1990‐91 to 8 per cent in 2000‐01 and 10 per cent in 2004‐05.

Reforming the reform process -Labour reform, investment, infrastructure to unleash
India’s economic potential
The continuing structural change in industrial, trade and financial sectors has been
continuous and has contributed significantly to higher productivity of the economy.
Implementation of remaining reforms and re‐ordination of government spending towards
high‐priority areas of education, infrastructure and investment will help attain a sustained
robust growth in the economy, going forward. It is thus necessary to move swiftly to carry
on many of the reforms. Some of the continuing reforms are reduction in protection levels,
continuing reforms in banking sector, product de‐reservation in small‐scale industry,
decontrol of prices of products like petroleum, reform of power sector etc. Initiatives also
need to be undertaken in bringing about labour reforms, commercialising key infrastructure
sectors, furthering trade reforms and revitalisation of agriculture. Sustaining higher rates of
economic growth would require a vigorous pursuit of economic reforms at both central and
state levels.

A decade of opening of economy during the 90s gave the economy a new dynamism.
However, should India be able to address and implement the remaining reforms, it is likely
to attain and sustain even higher rates of growth.
[10]
III. AGRICULTURAL GROWTH

Even though the share of agriculture has sharply declined from more than 50 per cent
during 1960s to a little above 20 per cent during the last few years, it continues to remain the
predominant sector in the economy. Around 60 per cent of population is still dependent on
the sector for employment and livelihood opportunities. Further, due to its linkages with
manufacturing and services sectors, the impact of bad agricultural performance adversely
affects the demand for goods and services provided by these industries. Due to its
importance in national product and employment and the challenges associated with it, the
sector has drawn special attention of the policy makers.

Some of the key challenges faced by the sector relate to the issues of total output growth,
efficiency, equity and sustainability. The biggest challenge in the sector remains that of
revival of growth and reduction of rainfall dependence in the sector. However, with the
declining agricultural growth, the per capita agricultural income is falling. The sector should
also need to ensure sustainable use of natural resource in the economy given the limited
resource base in the economy.

Figure 3: Agricultural Volatility
Growth Volatility
20.0
GDP
15.0
Agriculture
10.0
5.0
per cent
0.0
1994-95
1996-97
1998-99
1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
2000-01
2002-03
2004-05
-5.0
-10.0
-15.0

Source: CSO

Given the vast dependence on the sector and nation’s deficiency in foodgrain production,
the period of 1970s through the spread of Green Revolution aimed at attaining food self‐
sufficiency in the economy. During the 1980s, the focus shifted from self‐sufficiency to
generation of additional income in rural areas to combat the poverty situation. However,
agricultural growth since the 1990s has not been able to pick up. The average growth during
the Ninth Plan (1997‐2002) period sharply fell down to 2.1 per cent from a moderate 4.7 per
cent during the Eight Plan (1992‐93/1996‐97). However continued dependence on the
domestic factors like monsoons and external factors like depressed agricultural commodity
prices has resulted in failure in agricultural growth pick up even during the first three years
of the Tenth Plan period (2002‐03 to 2006‐07).

[11]
The table 5 highlights the productivity difference in Indian agriculture. It charts the
international comparison of yield of selected commodities with that in India in 2002,
indicating that low productivity has significantly afflicted growth of Indian agriculture.
Though India accounts for about 22 per cent of world’s paddy/rice production, it records a
lower yield per hectare than that in Bangladesh and Myanmar. Yield per hectare in India for
wheat is also significantly lower despite the fact that India contributes to 12 per cent of the
total wheat production in the world. Targeting productivity enhancement is thus essential
for achieving accelerated agricultural growth and a healthy overall growth in the country.

Table 5: International comparison of yield of selected commodities –2002
Rice/paddy Wheat Maize
U.S.A 7372 U.K 8043 Italy 9560
Thailand 2597 France 7449 France 8813
Pakistan 2882 China 3885 Egypt 7789
Myanmar 3532 India 2770 China 5022
Japan 6582 Pakistan 2262 Philippines 1803
India 2915 Bangladesh 2164 Pakistan 1769
Egypt 9135 Iran 1905 India 1705
Bangladesh 3448
World 3916 World 2720 World 4343
Sugarcane Tobacco Leaves Groundnut
Egypt 119893 Italy 3333 China 2986
Colombia 94789 France 2778 U.S.A 2869
Guatemala 94032 Canada 2600 Argentina 2329
India 68049 Pakistan 1848 Brazil 2043
China 66353 India 1353 India 794
Pakistan 48042 Bangladesh 1233 Uganda 701
Bangladesh 39890 Indonesia 829 Sudan 630
World 65802 World 1589 World 1381
Source: Ministry of Agriculture and Cooperation

The key causes of decline in agricultural growth were inadequate irrigation facilities, on the
back of irregular monsoons; decreasing public investment and a weakened support system
due to financial problems of the states thus resulting in a weak credit delivery system. Total
investment in agriculture has witnessed a sharp decline over the years. The share of
investment in agriculture of the total investment declined from 14.4 per cent during the
1970s to 11.6 per cent and 7.7 per cent during the 80s and 90s respectively.

[12]
Figure 4: Investment in Agriculture (Per cent Share)
30.0
30.0
Public
25.0 Public
per cent of Total Investment
25.0 Private
per cent of Total Investment Private
20.0 T otal
20.0 T otal
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
1970s 1980s 1990s 1990/91- 1995/96- 2000/01-
1970s 1980s 1990s 1990/91- 1995/96- 2000/01-
94/95 99/00 02/03
94/95 99/00 02/03

Source: CSO

While the public investment in agriculture sharply declined during the 80s, the initial
decline was off set by increase in private investment. The public investment in agriculture
grew at an average rate of 9.9 per cent during the 70s, however during the 80s the average
growth slipped to –3.5 per cent. Private investment on the other hand registered an average
growth of 3.5 and 2.5 per cent during the periods considered. However, since the mid‐90s
the private investment in agriculture has stagnated while the public investment has been
declining.

Table 6: Growth in Investment in Agriculture (Per cent)
1970s 1980s 1990s 1990/91‐94/95 1995/96‐99/00 2000/01‐02/03
Total 6.3 ‐0.3 3.9 5.3 2.6 3.5
Public 9.9 ‐3.5 ‐0.1 2.2 ‐2.3 1.3
Private 3.5 2.5 6.3 7.7 4.9 4.8
Source: CSO

A comparison of the investment in agriculture against that observed in other sectors
suggests that during the 90s, private investment growth took over that in public investment.
The second half of 90s saw a growth surge in private investment in industry. Share of
private investment in agriculture increased from 5.7 per cent during latter half of 90s to 8.3
per cent during 2000‐01 to 2003‐04. Share of industry in total private investment though
significant, declined from 57 per cent to 46.3 per cent during the corresponding period.

Table 7: Investment Growth
1970s 1980s 1990s 1990/91‐94/95 1995/96‐99/00 2000/01‐02/03
Public Investment
Agriculture 9.9 ‐3.5 ‐0.1 2.2 ‐2.3 1.3
Industry 10.2 5.6 0.6 4.6 ‐3.5 ‐2.9
Services 5.6 4.9 4.9 7.0 2.7 3.1
Private Investment
Agriculture 3.5 2.5 6.3 7.7 4.9 4.8
Industry 4.5 18.4 5.8 2.3 9.4 ‐0.2
Services 5.9 7.1 5.2 8.3 2.1 8.5
Source: CSO
[13]
Agricultural Diversification

With the persistent deceleration observed in agricultural growth over the years, overall food
consumption has stagnated. With an average growth of 0.2 per cent during the 70s and 80s,
the area under food grain production almost remained constant. The total food grain
production thus underwent a growth deceleration of –0.3 per cent during the 90s. The
average growth in yield increased from 1.2 per cent during the 70s to 4.6 per cent during 80s.
Growth in yield slowed down to 2.4 per cent during the 90s and further to 0.4 per cent
during 2000‐04.

Per capita consumption expenditure on food declined from Rs 5856 in 1996‐97 to Rs 5472 in
2002‐03, before recovering to Rs 6134 in 2004‐05. Also, cereals consumption witnessed a
larger decline than that in other food. Cereals consumption witnessed an average growth of
9.3 per cent during 1995‐96/99‐00 against the corresponding growth of 7.3 per cent in food.
However, during 2000‐01/04‐05, per capita cereals consumption registered an average
growth of –5.6 per cent against the corresponding growth of 1.4 per cent in food
expenditure. Further, decline in cereals consumption is also not being made up by increased
consumption of other food. This marks a diversification away from agricultural products.

Table 8: Target Growth rate of Agricultural Crops
Production
IX Plan X Plan XI Plan
Agricultural crop 3.82 4.54 4.27
Food grains 3.05 3.57 2.73
Fruits & Vegetables 7.00 8.01 7.89
Total Agriculture 4.5 5.3 5.1
Source: Planning Commission

Further, there exists a wide divergence between the expected growth in production and the
per capita consumption of agricultural commodities. The Ninth plan documents the
projected per annum growth in production and consumption of selected agricultural
commodities. The expected growth in per capita consumption of food grains at 1.1 per cent
is significantly lower than the expected production growth of 3.6 per cent.

Table 9: Projected Production and Per capita Consumption in Selected Commodities
CAGR (2011‐12/ 96‐97)
Production Consumption
Agricultural Crop Per cent Per cent
Food grain 3.6 1.1
Rice 3.1 0.7
Wheat 4.3 1.7
Coarse Cereal 2.4 0.0
Pulses 4.9 2.7
Oilseeds 5.8 3.1
Sugar Cane 6.2 3.5
Livestock
Milk 8.3 5.3
Fishery 7.0 4.2
[14]
The decline in level of consumption indicates structural change in the consumption pattern
of the individuals due to changes in life style and standard of living. It also suggests
weakening of demand stimuli from industry and services sector for the agricultural sector.
Further, low employment growth in the agricultural sector (Refer Table 20) has resulted in
declining or stagnant agricultural incomes, which is a significant contributor of demand for
food grains, and thus declining consumption levels.

Agricultural diversification is one of the methods for accelerating agricultural growth in
India. Comparing the productivity of the horticulture crops against that of food grains
brings out a significant difference between the two. Productivity of all horticultural crops in
India ranged from 7.5 MT/million hectare in 1991‐92 to 8.9 MT/million hectare in 2002‐03,
with a high of 9.8 MT/million hectare in 1999‐00. On the other hand, food grains
productivity ranged from 1.4 MT/ million hectare in 1991‐92 to 1.6 MT/million hectare in
2002‐03.

Figure 5: Yield Performance
Yie ld Pe rformance
12 Yie ld Pe rformance
12
10
10
MT/Million Hec
8
MT/Million Hec
8
6
6
4
4
2
2
0
0
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
Horticulture FoodGrains
Horticulture FoodGrains

Note: *Horticulture crops include fruits, vegetables, potato & tuber crops, mushrooms, flower and plantation
crops, spices & honey.
Source: National Horticulture Board, Department of Agriculture and Cooperation

Structural Rigidities
However, diversification of agricultural production cannot be adopted across the country, as
certain structural rigidities across the region need to be addressed for its overall growth.
• Primarily, the shift from food grains to horticulture requires a supportive policy
framework, with greater emphasis on marketing arrangements, including increased
private sector participation in marketing products, encouragement of downstream food
processing and research linked to market requirements for diversifying into horticulture.
• Poor marketing arrangements: There exists significant differential between the price
received by the farmers and that paid by the final consumer, which reflects inefficient
marketing arrangements in the system. The organised markets are also controlled by a
few traders, which makes the entire process of price fixation highly non‐transparent.
• Absence or poor condition of infrastructure set‐ups required like cold storage etc. not
just hampers the process of diversification, it also discourages the farmers from the new
[15]
opportunities available. Apart from the policy constraints, the shift to animal husbandry,
dairy and fisheries is constrained by lack of availability of green fodder, grazing land
and proper supply chain facilities especially in case of fruits, vegetables and milk
products.
• Need for adequate agricultural research focussing on development of products suitable
to varied regional conditions, market requirements and end requirement of domestic
consumption against that for export promotion or food processing. .

While the pursuit and development of agricultural diversification need to be given high
priority in government’s agenda, it should be seen in the light of sustained need for food
security. However, diversifying the existing agricultural structure will involve significant
increase in investment.

Food Security
Indiaʹs food security policy holds a laudable objective of ensuring availability of food grains
to the common people at an affordable price and enabling the poor to have access to food
where none exist. Over the years, the policy has focused essentially on growth in agriculture
production and on support price for procurement and maintenance of rice and wheat stocks.
The responsibility of procuring and stocking of foodgrains lies with the Food Corporation of
India (FCI) and that of distribution is with the public distribution system (PDS).

While the PDS was introduced to address the issue of food security, inefficiencies increased
over the years due to problems associated with the system. Mismanagement leading to
increased operational costs and market distortion, neglect of rural sector, widespread
corruption and illegal sales, being some of them.

In the short term, there needs to be a recognition that food insecurity stems from lack of
opportunity. There is a need to ensure employment opportunities for at least one able‐
bodied member of a household. For children, the midday meal scheme should be
implemented in lagging states as soon as possible.

In the long term, food security will result from the wider tackling of poverty. This will
require improvements in infrastructure and time‐limited targeted policies to improve rural
farm and non‐farm productivity.

To the extent the government is able to attend to the problems that the system has inherited
over the years, adoption of new policy options like diversification will not hinder with the
food security policy.

Further, reduction in number of people below the poverty line would result in decline in food
subsidy burden and hence would provide for enough scope for growth and development in
the sector.

[16]
Recommendations

Structural Issues
i) Encouraging emerging areas of agriculture like horticulture, floriculture, organic

farming, genetic engineering, food processing, branding and packaging.
ii) Introducing contract farming: Contract farming is a system for the production and
supply of agricultural and horticultural produce under forward contracts
between buyers and growers. Contract farming helps the farmers access credit,
quality inputs, technical guidance and reduce risks of deficient market demand
and adverse price fluctuations.
iii) Futures market and free trade: The present system marked by input subsidies and

high Minimum Support Price (MSP) should be phased out. To avoid wide
fluctuations in prices and prevent distress selling by small farmers, futures
market can be encouraged. Improved communication systems through the use of
information technology may help farmers get a better deal for their produce.
Crop insurance schemes can be promoted with government meeting a major part
of the insurance premium to protect the farmers against natural calamities.
• Restrictions on foodgrains regarding inter‐State movement, stocking, exports and
institutional credit and trade financing should be renounced. Free trade will help
make‐up the difference between production and consumption needs, reduce
supply variability, increase efficiency in resource‐use and permit production in
regions more suited to it.
iv) Food‐for‐education programme: To achieve full literacy, the food security need can
be productively linked to increased enrolment in schools. With the phasing out of
PDS, food coupons may be issued to poor people depending on their entitlement.
v) Modified food‐for‐work scheme/ direct subsidies: Attempt of rationalisation of input
subsidies and MSP would result in sufficient funds with the central government,
which may be given as grants to each State depending on the number of the
poor.
vi) Enhancing agriculture productivity: The government, through investments in vital
agriculture infrastructure, credit linkages and encouraged use of latest techniques
should motivate each district/ block to achieve local self‐sufficiency in food grain
production. However, instead of concentrating only on rice or wheat, the food
crop specific to the regions’ profile must be encouraged. Creation of necessary
infrastructure like irrigation facilities will also simulate private investments in
agriculture.
vii) Enhancing rural non‐farm employment: Despite the declining share of population
dependent on agriculture, the sector has witnessed over dependence thus
resulting in significant disguised unemployment. Thus, there should be emphasis
on promotion of rural non‐farm employment so as to improve the earning
potential of the rural population.

[17]
Policy Recommendations
i) Improving competitiveness: One of the major challenges faced by the Indian
agricultural sector is that of improving the competitiveness of the sector. With
increased liberalisation, the domestic price of several commodities has overshot
their international counterparts making the imports more attractive and affecting
the domestic exports adversely. This calls for improvement in productivity,
marketing, storage, transport facilities etc.
ii) Improving the viability of small size holdings: Small sized holding constitute for
majority of the farm holdings in India. Agricultural policies thus should be so
aimed that the small size holdings are also able to draw equal advantage from
them.
iii) Institutional and regulatory revival: There exists a need to change the institutional
mechanisms and regulatory framework in concomitance with the changing
domestic and global scenario so to create conducive environment for stable
agricultural growth. The agricultural sector also calls for improvement of basic
infrastructure like irrigation facilities, etc for the sector to withstand against any
environmental vagaries.

Strengthening the demand side
Apart from increasing profitability in the agriculture sector by reducing costs and improving
technical efficiency, addressing the demand side is also one of the key factors, which needs
to be considered for attaining the objective of improved and sustained agricultural growth.
Increased focus needs to be given to strengthening the demand side issues by way of
improving the individual’s capacity to buy‐ especially the rural consumer. A focussed
approach on improving rural employment opportunities and rural income along with
increasing the flow of agricultural exports will support the demand side. (Refer Section:
Rural non‐farm employment). Direct schemes such as cash transfer schemes and old‐age
pension schemes can improve the purchasing power of the rural consumer who spends
around 70 per cent of his income on food, thus generating demand for food, even in local
markets, and further generating the second round impact of production and employment.

Table 10: Institutional Credit to Agriculture (Rs Crore)
Agency 2000‐01 2001‐02 2002‐03 2003‐04 2004‐05 2005‐06*
Cooperative Banks 20,800 23,604 23,716 26,959 31,231 28,947
RRBs 4,220 4,854 6,070 7,581 12,597 11,146
Commercial Banks 27,807 33,587 39,774 52,441 81,481 77,806
Total 52,827 62,045 69,560 86,981 125,309 117,899
Note: * Upto December 31, 2005
Source: NABARD

The overall flow of institutional credit to agriculture has been increasing significantly over
the years along with the increased policy initiatives undertaken to increase the limit of
institutional credit allocated to the sector. There still exist several gaps in the system like
inadequate provision of credit to small and marginal farmers, paucity of medium and long‐
[18]
term lending, limited deposit mobilisation and heavy dependence on borrowed funds by
major agricultural credit suppliers.

Time to revive and diversify towards new options
The problems emerging in the agricultural sector needs to be urgently addressed so as to
ensure a sustainable and stable overall economic growth. The poor performance of
agriculture during the Tenth Plan period is due to poor performance of monsoons along
with sluggish implementation of policies.

A volatile agricultural growth has been the key factor holding Indian economy’s ability to
consistently achieve a healthy growth rate. While revival in the farm growth is important to
achieve sustainable growth, due focus needs to be given to exploiting the potential of
avenues like agricultural diversification for expansion of rural income along with
employment growth.

Thus there exists a need to focus on increasing investment in rural roads, irrigation, better
management of existing natural resources, improved and efficient credit delivery system,
new and improved production techniques, better storage and transportation facilities.

[19]
IV. INDUSTRIAL GROWTH

Industry contributed to about 22 per cent of all‐India GDP during the 1970s, the contribution
of which increased and has remained stable around 26 per cent of the domestic product
since the 90s. Within the sector, registered manufacturing with a share of about 40 per cent,
remains the highest contributing sector, followed by construction and unregistered
manufacturing. While the share of industry remains stable, growth in the sector led by the
manufacturing sector has exhibited significant buoyancy over the years. The average growth
increased significantly from 4 per cent during the 70s to 6.8 per cent during the 80s. While
the first half of the fiscal saw the slow down in average growth to 5.3 per cent, the growth
picked up to 6.3 per cent during 1995‐96 to 1999‐00.

Table 11: Share in Sectoral GDP
1970s 1980s 1990s 2000‐01 /04‐05
Registered manufacturing 39.7 39.1 40.0 39.7
Construction 20.5 19.4 20.2 23.4
Unregistered manufacturing 28.7 23.8 21.5 18.8
Mining & quarrying 5.7 10.5 9.1 9.6
Elect. gas & water supply 5.6 7.2 9.1 8.6
Source: CSO

Construction and registered manufacturing witnessed significant pick up in the growth
during 2000‐05 against that during the 90s. The two sectors together contribute to about 20
per cent of the total domestic product in the economy.

Figure 6: Sectoral Growth
S ectoral Growth: Average Growth 1993-94/96-97
S ectoral Growth: Average Growth 1993-94/96-97
1997-98/05-06
1997-98/05-06
14
14
12
12
10
10
per cent
8
per cent
8
6
6
4
4
2
2
0
0
Construction Manufacturing- Registered Unregistered Elect. gas & Mining &
Construction Manufacturing- Registered Unregistered Elect. gas & Mining &
T otal manufacturing manufacturing water supply quarrying
T otal manufacturing manufacturing water supply quarrying

Source: CSO

Within manufacturing, registered manufacturing accounts for about 65 per cent of the total
gross value added with the balance 35 per cent being accounted for the unregistered sector.
The latest available data shows that manufacturing of chemicals and chemical products with
a share of about 18.9 per cent had the highest contribution to the total value added during
2002‐03. Manufacturing of basic metals; coke, refined petroleum products and nuclear fuel
followed close behind. Top ten industries contributed to about 79 per cent of the total value
added during 2002‐03.
[20]
Figure 7: Share in GVA (2002‐03)
Share in GVA
Share in GVA
18.9
20.0 18.9
20.0
18.0
18.0
16.0 Share in GVA
16.0
14.0 Share in GVA
11.7
14.0
12.0 11.7 10.2
12.0 10.2 9.3
9.3 7.8
10.0
10.0
8.0 7.8
8.0 4.9 4.8 4.6
6.0 4.9 4.8 4.6 3.5 3.3
6.0
4.0 3.5 3.3
4.0
2.0
2.0
0.0
0.0
Rubber and
Chemicals
vehicles,
Food pdts
metals
plastic pdts
Machinery
petroleum
Basic
machinery
Textiles
Electrical
Other non-
Coke, ref
and equip
Motor
Rubber and
Chemicals
metallic
vehicles,
Food pdts
metals
plastic pdts
Machinery
petroleum
Basic
machinery
Textiles
Electrical
Other non-
Coke, ref
and equip
and
and
Motor
metallic
and
and

Source: Annual Survey of Industries

Investment Scenario
After peaking during 1995‐96 and 1996‐97, the rate of capital formation in manufacturing
sector declined thereafter till 2001‐02. While the share started to pick up since 2002‐03, it still
needs to attract significant volumes of investment. The share of capital formation in the
registered manufacturing though higher than that in the unregistered sector, has been
considerably low at around 4 per cent during the past few years and unlike the overall
manufacturing sector has not witnessed a sustained pick up since 2002‐03.

Table 12: Gross Domestic Capital Formation (as a % of GDP)
GDCF at current
prices Manufacturing Registered Unregistered
1994‐95 26.0 8.38 6.12 2.26
1995‐96 26.9 13.53 9.48 4.04
1996‐97 24.5 10.19 7.56 2.62
1997‐98 24.6 9.29 7.22 2.06
1998‐99 22.6 7.57 5.87 1.70
1999‐00 25.3 7.75 6.39 1.36
2000‐01 24.4 6.09 4.27 1.82
2001‐02 23.1 5.03 3.74 1.28
2002‐03 24.8 5.55 4.06 1.49
2003‐04 26.3 6.12 3.92 2.20
Source: CSO

Industrial investment intentions as captured by the industrial entrepreneur memorandums
(IEM) indicate a spurt in the number of proposals and total investment together with the
growth in proposed employment opportunities generated due to the investment intentions.
The average growth in total number of proposals received for IEM’s during 2003‐2005* was
at 18.1 per cent as compared to the growth in proposed investment and proposed
employment of 53.4 per cent and 47.5 per cent respectively.
[21]
Table 13: Industrial Investment Proposals
IEM Total (IEM+LOI+DIL)
Proposed Proposed Proposed Proposed
No of Investment Employment Investment Employment
Year Proposals (Rs crore) (Numbers) No of Proposals (Rs crore) (Numbers)
2000 3058 72332 411266 3261 73374 442114
2001 2981 91234 809120 3098 92552 823191
2002 3172 91291 380209 3261 91940 388441
2003 3875 118612 833282 3991 120007 847194
2004 5118 267069 855914 5218 272334 877304
2005* 5118 280642 1033681 5225 283143 1052506
Total 61423 1703556 10877644 65519 1820399 11758744
Note: *Upto Octʹ05
Source: Ministry of Commerce & Industry

Industry‐wise distribution of investment proposals indicates preference towards
metallurgical industries, chemicals, fuels, electrical equipments, textiles etc. During August
1991 to October 2005, metallurgical industries received the highest share of 19.5 per cent of
the total investments. The top fifteen industries together accounted for a share of 92 per cent
during the period.

Table 14: Industry‐wise Investment Proposals‐ Share of Top 15 industries
Total Investment %age Share
Industry (Rs.Crore)
Metallurgical Industries 354585 19.48
Chemicals (Except Fertilizers) 225099 12.37
Fuels 191785 10.54
Electrical Eqipts 188131 10.33
Textiles 154916 8.51
Misc.Industry 150232 8.25
Sugar 90275 4.96
Cement and Gypsum 84007 4.61
Paper and Pulp 60248 3.31
Food Processing Industry 40455 2.22
Telecommunications 33454 1.84
Transportation 31576 1.73
Fertilizers 25374 1.39
Industrial Machinery 24671 1.36
Misc.Mechanical & Engg.Ind 23751 1.30
Total (All Industries) 1820399 100

India: Export hub of manufactured products

The buoyancy in industrial growth has been translating into an equally strong growth in
exports of manufactured products. Manufacturing sector accounts for around three‐fourths
of total exports, thus fuelling the overall export growth. Manufactured product exports have
sustained their growth momentum during the last three years, with a consistent growth of
[22]
about 20 per cent each year. Engineering goods, chemical and related products and gems
and jewellery have registered significant growth during the last three years.

Table 15: Composition and Growth in Exports
Share (%) of Total Exports Growth Rate (%)
Commodity 1990s 2000‐01 01‐02 02‐03 03‐04 04‐05 1990s 2000‐01 01‐02 02‐03 03‐04 04‐05
I. Primary products 21.7 16.0 16.3 16.5 15.5 15.4 6.3 9.2 0.5 21.5 13.7 23.2
Agriculture and allied
A. products 17.9 13.4 13.5 12.7 11.8 10.1 8.2 6.5 ‐1.2 13.7 12.3 6.3
II. Manufactured goods 75.6 77.1 76.1 76.3 76.0 73.4 9.8 15.6 ‐2.8 20.6 20.5 20.0
Leather and
A. manufactures 5.8 4.4 4.4 3.5 3.4 2.9 3.7 22.3 ‐1.8 ‐3.2 17.0 5.8
Chemicals and Related
B. products 11.2 13.2 13.8 14.1 14.8 15.0 12.4 25.1 2.8 23.2 26.7 25.7
C. Engineering goods 13.7 15.3 15.9 17.1 19.4 20.7 10.6 32.3 2.0 29.8 37.3 32.5
Textile and Textile
D. Products 25.9 25.3 23.3 22.0 20.0 15.9 10.4 14.9 ‐9.6 13.8 10.1 ‐1.4
E. Gems and jewellery 16.7 16.6 16.7 17.1 16.6 17.3 9.8 ‐1.6 ‐1.1 23.6 17.1 29.6
Handicrafts (excluding
F. handmade carpets) 1.5 1.5 1.3 1.5 0.8 0.4 11.8 ‐1.1 ‐17.0 43.0 ‐36.4 ‐31.3
Other Manufactured
G. Goods 0.7 0.8 0.9 0.9 1.0 1.1 13.1 30.5 9.1 22.5 29.0 47.1
III. Petroleum products 1.5 4.2 4.8 4.9 5.6 8.6 ‐13.5 4706.4 13.3 21.6 38.5 90.3
IV. Others 1.2 2.8 2.7 2.3 2.9 2.6 9.2 125.6 ‐4.5 1.5 57.7 11.1
Total exports 100.0 100.0 100.0 100.0 100.0 100.0 8.6 21.0 ‐1.6 20.3 21.1 24.1
Source: Reserve Bank of India

The share of manufactured products in total exports has improved significantly over the
years. India’s share in world exports of manufactured goods increased from 0.52 per cent in
1990 to 0.88 in 2003 (2004).

Table 16: Share of India’s exports of manufactured goods
1995 2001 2002 2003
Manufactured Goods‐ Total 0.61 0.73 0.79 0.88
Iron & steel 0.61 0.88 1.50 1.58
Chemical Products 0.53 0.80 0.88 0.92
Machinery & transport equipment 0.12 0.15 0.17 0.21
Automotive products 0.12 0.10 0.12 0.18
Office and telecom equipment 0.08 0.07 0.07 0.09
Textiles 2.86 3.66 3.95 4.04
Clothing 2.60 2.82 2.98 2.93
Source: International Trade Statistics, WTO

Bottlenecks and Desired Corrective Initiatives

Low levels of industrial growth during the Ninth plan along with robust growth in tertiary
sector raised the debate of transition of India’s growth momentum from agriculture focussed
policy to a services dominant economy, ignoring the middle phase of industrialisation. A
long‐term sustainable industrial growth needs to focus on a number of issues. During the
Tenth plan, the industry registered a growth of 8.4 per cent for the first four years of the plan
[23]
against a significantly robust growth of 9.2 per cent in the services sector. However, a
number of issues need to be considered to sustain long‐term growth in the sector.

i) Manufacturing buoyancy: The manufacturing sector has exhibited robust growth of
8.5 per cent during the Tenth Plan period against the average growth of 5 per
cent during the Ninth Plan. The country has been emerging as the export hub of
manufactured products –especially labour intensive products like apparel,
footwear, jewellery, leather and textiles. While the export of manufactured
products remains high, India needs to also tap its potential with respect to the
skill‐intensive exports such as auto components and pharmaceuticals.
ii) Improving infrastructure quality especially related to power and transport facilities
is essential for realising the true potential for industrialisation. India significantly
lacks in the existing infrastructure as compared to other emerging economies.
Steps to increase investment in physical infrastructure in the long‐run are
called for the revival of existing infrastructure base in the economy. In the
short‐term, strategy to develop special economic regions to encourage
establishment of new manufacturing industries should be undertaken.
iii) Labour laws: Rigid labour laws still remain as one of the key factors affecting
competitiveness of the domestic industry. Besides focussing on improving the
position of labour in the organised sector, the laws should not hamper the
prospects of new employment in the sector‐ especially in the industries where the
scope of expanding employment is linked to export possibilities.
iv) Indirect taxes and import duties: There has been a significant reduction in the
customs duties on industrial products over the years. Even the further lowered
peak rate of 12.5 per cent significantly hampers the efficiency of the industrial
sector. The Kelkar Task force on Indirect Taxes recommends a shift to three‐rate
structure of 5 per cent, 8 per cent and 10 per cent.
While the central government and most of the states have moved towards
state level Value Added Taxation system with two principle rates of 12.5 per
cent and 4 per cent, rest of the states should be encouraged to join the
structure so as to gain from the overall efficiencies. Further, since the existing
VAT does not extend to all indirect taxes on goods, entry tax and octroi
continue to exist.
The planning commission suggests that along with lowering of customs duty
and indirect taxes across the goods, immediate attention needs to be focussed
towards products and tariff lines suffering from inverted duty structure.
v) Existence of entry and exit barriers: The ease of entry and exit from business
activities significantly affects the investment climate in industry. The Indian
economy however imposes a large number of regulations, and central and state
level clearances required to be taken before entering a business. The resulting
delays thus result in poor realisation of approved investment proposals. Systems
like single‐window clearances and availability of information for clearances
should be made available publicly.
[24]
vi) The planning commission considers the policy of reserving certain items for
manufacture by small‐scale industrial units as one of the major bottleneck on the
growth of overall industry. Over the years, with the elimination of import
restrictions and falling level of duty protection, the small‐scale units in reserved
sectors have to compete against foreign manufacturers while being still protected
from domestic local and medium enterprises. However, these units are not
allowed to expand to meet the growing competition.

[25]
V. SERVICES GROWTH

Over the last decade and more, the growth of the Indian economy has been propelled by its
services sector. Agriculture and industry may have contributed their bit in various years, but
as the above discussion suggests, while the performance of agriculture has been marked by
significant volatility, particularly since 1997‐98. Industry though registering a buoyant
growth, has been unable to increase its share in the total domestic product over the years.
Only the services sector, which now collectively accounts for more than half of GDP,
showed not only remarkable stability but also significant acceleration in recent years from
an already high base. The contribution of the services sector to GDP growth during 1980s
was 47.2 per cent. The contribution increased to 56 per cent during the 90s and further to
62.3 per cent during 2000‐01 to 2004‐05.

Figure 8: Sectoral Growth Volatility
Se ctoral Growth: Ave rage Growth
25.0
25.0
20.0
20.0 1993-94/96-97
1993-94/96-97
15.0 1997-98/04-05
per cent
15.0 1997-98/04-05
per cent
10.0
10.0
5.0
5.0
0.0
0.0
Railways
Storage
Trade
Banking &
restaurants
Other services
Communication
estate,ownership
administration &
Insurance
Transport by
other means
Hotels &
Railways
Storage
Trade
Banking &
restaurants
Other services
Communication
estate,ownership
administration &
Insurance
Transport by
other means
Hotels &
Public
Real
Public
Real

Source: CSO

This kind of growth pattern raises a number of analytical questions and policy issues. The
questions arise essentially from the fact that India’s experience is distinct from the
experience of other emerging economies, which have been through similar (although more
rapid) sustained growth phases. The typical pattern of growth seen in recent decades (which
mirrors that seen in earlier eras as well) is that there is a significant transfer of economic
activity from agriculture to industry in the early phases of rapid growth. In fact, this is one
of the characteristics of “modern economic growth” identified by Simon Kuznets. Virtually
all of the countries, which India is now compared with in terms of levels of affluence,
economic structure and performance have followed this pattern. Industry has been the
“leading” sector, seeing its share increase to far more than the levels that India has achieved.
Service activity has increased, but usually as a concomitant to industry. This transition in
economic activity has typically been accompanied by a shift of comparable magnitude in
employment, with a large proportion of agricultural labour moving to industry.

[26]
If this is a pattern that virtually all countries, which have made the transition from low
income to middle income and beyond have followed, does the fact that India seems to be
breaking the mould have any implications for the viability and sustainability of the growth
pattern? Have domestic and global patterns of demand and supply changed enough to
allow a services‐led growth pattern to take the place of a historically predominant industry‐
led model? Can India do with services what China, in recent years, has done with
manufacturing?

The policy issues are driven by the quest for sustainability of the pattern of stable growth we
have seen in services. What are the key elements of the policy and business environment
that have supported this pattern? Are these unique to services and, therefore, do they
presage a continuing dependence on this sector for accelerating growth? What are the
threats to sustaining services sector momentum and are there appropriate policy responses
available to counter them? And, very importantly, does the experience of a virtuous policy‐
performance nexus in this sector bear lessons for the industrial sector, in terms of feasible
reforms that could strengthen its performance?

What are the implications of these patterns for the basic questions being addressed in this
paper? Keeping in mind the limitations imposed by the sample selection, some inferences
can be drawn. First, if one compares the experiences of East Asia and Latin America, the role
of industry as a leading engine of growth does not appear to be a necessary one. Brazil and
Mexico have reached relatively high levels of affluence apparently on the back of strong
service sector performance. Looking back over the two decades, which encompassed at least
some part of the import‐substituting regimes in both Latin America and South Asia, this
pattern suggests that this policy environment considerably retarded the prospects for
industry‐led growth when compared to the export‐oriented regimes of East Asia. However,
this is an issue that has been debated extensively elsewhere and this is not the place to go
any further into it. The relevant point for this discussion is that we do have some evidence of
countries reaching relatively high levels of affluence on the basis of a transition from
agriculture to services, virtually bypassing the industrialization phase that Kuznets pointed
to as an invariable concomitant to modern economic growth.

The same observation, however, can be used to develop the argument in the opposite
direction. In a globalized world, does the outward orientation of the East Asian economies
provide a more meaningful model? These were countries, which took full advantage of the
growing opportunities for manufactured exports from developing to developed countries.
Their export focus drove their economic structure, which is reflected in the growth and
persistence of the importance of industry in their economies. Can India (and its South Asian
neighbours) take full advantage of trade and investment opportunities in an increasingly
integrated world without making some effort to put their share of industry in GDP on an
upward path? On the basis of historical experience, export‐led (or, more broadly speaking,
outward‐oriented) growth strategies seem to have gone hand in hand with the dominance of
industry and the persistence of its share in GDP. However, this experience relates to a world
trade environment in which manufactured products dominated international transactions
(besides commodities). Services trade was not a significant factor until the 1990s the
developing world is concerned; it has only picked up in the last decade. From India’s
[27]
perspective, the key question in this evolving trade environment is whether services can
play the role that manufacturing played in East Asia with the same effect.

Growth patterns in the Indian service sectors

A recent paper by Gordon and Gupta (2003) provides an analysis of growth trends in
services at the maximum level of disaggregation permitted by India’s National Accounts
Statistics. The paper analyses growth in services from a very long‐term perspective. We do
not repeat that exercise here; the conclusions of that paper serve as a backdrop for this
section as well as the discussion in the next. We use the exhibits provided here largely to
motivate the discussions on specific issues in the next section, which develops hypotheses
about various macro and micro drivers of services growth.

The comparative picture of shifts in the shares of the three major sectors was provided in
Table 1. In Figure 1, we showed the relative growth rates of the three sectors in India. In
Table 17, we break down service sector activity into the sub‐aggregates provided by the
National Accounts Statistics. The distribution is relatively skewed; trade, which is clearly an
omnibus category, accounts for slightly over a quarter and has maintained its share over the
last three decades. Within the aggregate of real estate and financial services (labelled
banking and insurance here), there has been a significant shift in favour of the latter, but the
aggregate of the two has remained fairly stable. A similar shift is seen in the transport sector,
with the railways losing some share to transportation by other means. The “real estate, etc.”
includes business services, which in turn includes IT and ITES, which have been growing
very rapidly over the past decade; however, their growth seems to have displaced other
activities rather than propelling the share of this aggregate upwards; They are still, clearly, a
relatively small part of the overall service sector aggregate.

Given the skew in shares, growth rates could be quite divergent and still lead to stability in
shares over a long period. In Figure 9, we show the growth rates of each of these categories
over the last decade or so, divided into two sub‐periods. These can be seen in comparison
with the sector aggregate in the graph.

Table 17: Shares of Service Activities in Aggregate Service Sector GDP (%)
2000‐01 /
1970s 1980s 1990s 2004‐05
Trade 26.1 29.4 28.4 26.9
Other services 17.2 16.1 15.4 15.8
Real estate, ownership of dwellings &
15.7
business services 21.3 16.0 13.3
Public administration & defence 14.2 14.3 13.2 12.1
Banking & insurance 6.9 8.9 12.7 11.5
Transport by other means 7.2 8.2 9.4 9.9
Communication 1.7 1.9 2.9 3.3
Hotels & restaurants 1.6 1.8 1.9 2.6
Railways 3.4 3.1 2.6 2.0
Storage 0.2 0.3 0.2 0.1
[28]
Figure 9: Sectoral Growth
25.0
25.0
20.0
20.0 1993-94/96-97
1993-94/96-97
15.0 1997-98/04-05
per cent
15.0 1997-98/04-05
per cent
10.0
10.0
5.0
5.0
0.0
0.0
Railways
Storage
Trade
Banking &
restaurants
Other services
Communication
estate,ownership
administration &
Insurance
Transport by
other means
Hotels &
Railways
Storage
Trade
Banking &
restaurants
Other services
Communication
estate,ownership
administration &
Insurance
Transport by
other means
Hotels &
Public
Real
Public
Real

Source: CSO

Over the last decade, the sectors that have shown an accelerating tendency are
communications, other services and real estate ownership, etc (which includes the IT and
ITES sectors). While services as a whole has registered a pick up in growth arte over the two
periods, this acceleration was obviously offset by decelerations in several sectors, the most
significant of these in trade, which is also the largest sector. Banking, insurance and financial
services also saw a deceleration. Some of these patterns are obviously sensitive to the choice
of the dividing line between periods. Of the ones that are in line with intuitive expectations,
the boom in communications and housing are clearly reflected in these growth transitions.
The decline in trade and hotels and restaurants does not conform to anecdotal evidence
about the buoyancy in these sectors, but the slowing down in the growth of value added in
the face of rapid acceleration in the volume of services delivered may well reflect the
increasing competitive intensity in these activities, which is consistent with intuitive
expectations. Other services, which include health and education also showed a noticeable
acceleration in the later period.

These patterns suggest that even though there has been an overall buoyancy in the services
sector, that buoyancy has not impacted all the activities within the aggregate equally. Such a
pattern is conveniently attributable to a mix of macroeconomic and microeconomic factors.

Drivers of Service Sector Growth: Some Hypotheses

The patterns described in the preceding sections clearly do not point in the direction of a
single, dominant driver of services growth in India. We have to look for explanations at two
levels. At the macro level, there is clearly a set of factors that is common to all; these are a
pointer to the kind of policy and business environment, which provides momentum to the
sector. At the micro level, there are clearly activity‐specific demand and supply forces,
which reinforce the macro drivers and have caused some service sectors to outperform
others.

[29]
Macro drivers

Labour market flexibility

The key differentiator between the labour market environment in industry and services is
the degree of flexibility inherent in the latter. Terms of employment in the
industrial/manufacturing sector are governed by the Industrial Disputes Act (IDA). A
critical clause in the act is that government approval be sought for the dismissal of
employees in any establishment, which employs over a 100 people. Service establishments
are governed by the Shops and Establishments Act (SEA), which, while specifying a set of
conditions for employment, does not impose any comparable restriction on termination of
employment.

There is an argument to be made that the constraints on termination imposed by the IDA
have deterred the growth of employment in industry, particularly in the organized sector.
The basic reasoning is as follows. When an establishment, which is subject to termination
restrictions, hires a worker, it does so with the realization that it will have to keep him on the
rolls even if business conditions do not warrant this. The effective cost of hiring a worker,
therefore, is a multiple of the wage, the multiple being directly proportional to the
probability of a business downturn. In an unemployment insurance scenario, this is
tantamount to the employer bearing the entire cost of such insurance. In industrial activities
that are subject to cycles of uncertain duration and severity, this multiple significantly raises
the effective cost of labour to industry, thus deterring the hiring of more workers.

On the other hand, in the services sector, as far as private providers are concerned, there is
no such multiple. The effective cost of labour is the market wage for the requisite set of
skills. Faced with a market‐determined relative price of labour, which will truly reflect the
abundance of this resource in the economy, service activities are clearly extremely
competitive. This competitiveness can be measured along two dimensions. First, it reduces
the relative price of services to those of manufacturing goods. This should shift domestic
demand for services, in the aggregate, away from manufactured products towards services.
This shift is clearly reflected in the changing pattern of aggregate consumption expenditures
over the last several years.

Second, it makes services provided in India globally competitive. One key distinction
between the experiences of the countries discussed in Section II and that of India is the
dramatic change in the global trading environment that they face(d). All of the comparator
countries grew in an environment in which international trade in services was relatively low
and manufacturing overwhelmingly dominated global transactions. That has changed very
significantly and Indian competitiveness in services, driven largely by its low effective cost
of labour with a variety of skills, has been able to take full advantage of this change.

The combination of domestic competitiveness relative to industrial goods and international
competitiveness based on low relative labour/human capital costs have created a market
niche for services that is unprecedented in terms of the experiences of comparable countries.
While one may legitimately argue that India’s share of industry in GDP is lower than what it
might be with a more level playing field between industry and services, it is also equally
[30]
valid to state that the new consumption and trade environment are consistent with a much
higher proportion of services in GDP than the experiences of other countries suggest.

This hypothesis is rather difficult to validate on the basis of direct evidence. However, it has
clear implications for the pattern of employment associated with the structural shift in the
economy. We would expect to see the share of industry in employment remain rather static.
We would also expect such employment as is created to be done within the unorganized
sector, which works in an environment of complete labour market flexibility. Figures 10 and
11 provide some evidence in support of this. Comparing the change between 1993 and 2000,
based on the National Sample Survey’s large sample household employment surveys done
in these two years, we do see some increase in the overall share of industrial employment;
however, the bulk of the exit from agriculture between the two years was accounted for by
an increase in service sector employment, which is broadly consistent with the hypothesis
being postulated.

Figure 10: Employment Share
Employment Share
80.0 64.8 59.8

per cent
60.0
40.0 19.7 22.7
15.6 17.4
20.0
0.0
Agriculture Industry Services
1993-94 1999-00

Source: Planning Commission Publication

Figure 11: Share of Organised Sector in Employment of Each Sector
Share
ShareofofOrganised
OrganisedSector
SectorininEmployment
Employmentofof
Each
EachSector
Sector
25.0 22.0
25.0 22.0 18.6
20.0 16.7 18.6
20.0 16.7 14.4
per cent
14.4
per cent
15.0
15.0
10.0
10.0
5.0 0.6 0.6
5.0 0.6 0.6
0.0
0.0
1993-94 1999-00
1993-94 1999-00


In Figure 11, the share of the organized sector in each of the three activities is compared
across the two years of the large sample surveys. Clearly, there is a decline in the
significance of this sector in both industry and services. Some of this is attributable to the
[31]
slowdown of employment growth in the public sector as a whole, but this pattern is also
consistent with the key implication of the labour market flexibility argument that whatever
employment increase is seen in industry is likely to be in the unorganized sector.

The skewed fiscal burden

The above discussion emphasized the inherent competitiveness of the service sector based
on its ability to engage labour at its “true” market value. The same argument indicates that
industry has been discriminated against because its effective cost of labour has been biased
upwards by loading employers with the entire burden of unemployment insurance. A
similar kind of discrimination in favour of services is to be found in the fiscal system. The
traditional “golden goose” for the tax system has been industry; both excise and customs
duties, which are the two largest sources of central revenues, are levied overwhelmingly on
industry. The service tax, which is the only central indirect tax levied on services, has been
imposed only for the last few years and, while it is growing at a very rapid rate, its effective
incidence on service transactions is still far lower than that of taxes levied on industry. While
not providing a complete picture of relative tax incidence, the order of magnitude of the
differential central tax incidence across sectors suggests a strong bias against industry.
Figure 12 provides a graphic picture of this measure of relative tax incidence.

Figure 12: Relative Tax Burden on Industry & Services
24.2
25.0 23.3 22.2 24.2 22.9
25.0 23.3 22.2 22.9 21.1 21.1 20.7
21.1 21.1 20.7 20.2
20.2
19.9
19.9
20.0
20.0
per cent
15.0
per cent
15.0
10.0
10.0
5.0 1.3
5.0 0.3 0.3 0.2 0.3 0.3 0.3 0.6 0.9
0.3 0.3 0.2 0.3 0.3 0.3 0.6 0.9 1.3
0.0
0.0
06 RE
1997-
1998-
1999-
2000-
2001-
2002-
2003-
2004-
2005-
98
99
00
01
02
03
04
05
06 RE
1997-
1998-
1999-
2000-
2001-
2002-
2003-
2004-
2005-
98
99
00
01
02
03
04
05
Excise + Customs/ Industrial GDP Services T ax/ Services GDP

Excise + Customs/ Industrial GDP Services T ax/ Services GDP


While an accurate measurement of the overall burden of taxation on the two sectors should
also account for state and local taxes, which may well be somewhat more balanced in the
net, it is unlikely that the inference of a skewed tax burden will change by bringing these
levies into the picture.

The issue of the unorganized sector also plays some role in this discussion. From Figure 11,
we saw that a significant share of service sector employment was also in the unorganized
sector. This is despite the fact that organized private sector service enterprises do not face
significant employment‐related hindrances. This pattern testifies to the fact that, besides
labour market regulations, there are various other barriers to moving from the unorganized
to the organized sector. Various regulations at all levels and the costs of legal compliance
contribute to the building up of these barriers. Service taxes will obviously add another
reason for unorganized providers to stay that way. This is not an argument against service
[32]
taxes. Rather, is to suggest that barriers to organization (and, thereby, recognition by the tax
system) have to be dealt with across the board.

Will an evening out of the tax burden significantly reduce the bias towards services? It is
difficult to provide an unqualified answer to this question. But, to the extent that it does
cause a bias, bringing about some parity in the tax burden across sectors, using all available
fiscal instruments is something the government ought to be considering. Once a more even
playing field is provided, it is up to the intrinsic competitiveness of the two sectors to
determine what their shares of GDP will be. But, at this point, it is clear that there are
significant macro biases against industry, which appear to be contributing to the share of
services being what it is.

Micro factors

The above argument is not intended to imply that services across the board are doing well
because there is a favourable bias towards them. There are clearly activities within the
services aggregate that have done extremely well as a result of favourable demand and
supply conditions. Notable amongst these are IT and ITES (embedded in the business
services aggregate) and health services (embedded in the other services aggregate). Gordon
and Gupta identify four categories (we do not have the data at their level of disaggregation
for some of them) based on their long‐term trend analysis. These are business services,
communication services, banking and community services (their aggregate includes hotels
and restaurants).

In all cases, there is either a predominant role of external demand (reflecting a change in the
global trade environment, where far more services are being traded particularly from
developing countries, than before) or a shift in the domestic consumption pattern towards
certain types of services. Business services would clearly fall in the former category, while
health and hotels and restaurants would fall in the latter. It is not possible to segregate the
direct impact of these forces on individual service activities, but there are again a number of
indirect indicators that provide some plausibility to the hypotheses of external and domestic
demand drivers.

Figure 13 shows the rapidly increasing share of service exports in India’s total export basket.
From an average level of about 20 per cent during the decade of the 1990s, they began to
accelerate in the late 1990s and have now reached a significant 65 per cent in 2004‐05. They
have more than doubled their share over a period of about 6 years, reflecting the huge
contribution to the overall growth in exports of the country and the dramatic change in the
current account of the balance of payments that this has affected.

[33]
Figure 13: Significance of India’s service exports
70.0
95000 70.0
95000
60.0
80000 60.0
80000 50.0
US$ million 65000 50.0
per cent
US$ million 65000 40.0
per cent
40.0
50000
50000 30.0
30.0
35000 20.0
35000 20.0
20000 10.0
20000 10.0
5000 0.0
5000 0.0
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04 PR
2004-05 P
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04 PR
2004-05 P
Non-factor Services receipts
Non-factor Exports
Merchandise Services fob
receipts
Merchandise
Non-factor Exports
Service fob Merchandise Exports
Receipts/
Non-factor Service Receipts/ Merchandise Exports


On the domestic demand front, an analysis of private final consumption expenditure during
the 1990s also provides some evidence of a shift in the consumption basket towards services.
Table 18 shows the changing composition of the consumption basket.

Table 18: Share and Growth of Major Consumption Categories
Share(%) Share(%) CAGR (%) CAGR (%)
2000‐01 2004‐05 1999/00‐2004/05 1999/00‐2004/05
Consumption Items (99‐00 prices) (99‐00 prices) (99‐00 prices) (Current prices)
food, beverages & tobacco 47.7 42.5 0.07 0.32
clothing & footwear 6.0 5.3 0.51 0.81
gross rent, fuel & power 11.5 10.5 0.28 0.97
furniture, furnishing, appliances & services 3.4 3.5 0.64 0.96
medical care & health services 4.7 6.3 1.31 1.65
transport & communication 14.3 17.5 1.13 1.59
recreation, education & cultural services 3.7 4.3 1.00 1.20
miscellaneous goods & services 8.6 10.1 1.05 1.46
private final consumption exp. in domestic market 100 100 0.47 0.83

The combined share of the three categories that are clearly service‐oriented – transport and
communication, health and medical and educational and cultural – has increased from
slightly below 22.7 per cent in 2000‐01 to about 28 per cent in 2004‐05. The miscellaneous
category, which also includes some services, saw its share rising appreciably as well. At least
the communication and health components of this basket tie up neatly with the acceleration
that Gordon and Gupta identify.

An important qualification must be offered here, though. One, some of the shift towards
services reflects the deteriorating availability and quality of public services, which is
inducing consumers to spend on private provision. For the same service delivered, private
providers would typically charge more, which would show up in a higher share of
expenditure on the part of the household, assuming that the price elasticity of demand for
[34]
many of these services is low. If this is the case, then consumption of services is coming at
the cost of consumption of manufactures (and other services), which have a high price
elasticity of demand. This again reflects a favourable bias towards services growth emerging
from a shift from public to private provision – not because of any “real” increase but because
consumers are now paying a price more reflective of cost than before.

This point underscores the importance of identifying supply‐side forces. In the case of
communications, the boost from increased availability, which stemmed from the sector
reforms, the huge entry of private providers that this induced and the consequent drop in
prices clearly reflects a massive structural change in the supply of this service. In the case of
health, or education, while people are spending more and private provision is growing,
there is a clear “growth dividend” from better measurement. Clearly, not all the service
sector growth can be attributed to more production.

Can services emerge as an engine of growth?

The Changing International Context

In the light of the international comparisons made in Chapter I, it appears that services have
played the role of the engine of growth in two parts of the developing world – South Asia
and Latin America. Obviously, the countries in these regions, on the whole, have not had as
spectacular a long‐term growth record as their East Asian comparators. But, they have
grown at reasonable average rates over several decades, with services accounting for the
bulk of the transition in economic activity away from agriculture. The contrasting East Asian
experience demonstrates that the higher rates of growth that this group of countries
achieved was driven primarily by industry, which saw its share of GDP increase
significantly during the high‐growth period.

The key message emerging from this simple set of comparisons is that, at least from a
historical perspective, the power of the services sector has not been able to match that of
industry as an engine of growth. The common factor in both Latin America and South Asia
was an entrenched strategy of import‐substituting industrialization, which, in hindsight,
stifled industrial growth, prevented the sector from playing the role it might have in a more
favourable policy regime and, eventually, contributed to a slower average long‐term rate of
growth.

However, the lessons on economic growth that are drawn from historical experience have to
be qualified by the argument that structural changes may significantly change the context in
which various growth drivers operate. From India’s perspective, the key structural change is
the significant increase in the direct demand for services that was demonstrated in Section
IV. The East Asian growth phase, over the decades of the 1960s to the 1990s, took place in a
global trading environment that was heavily focussed on products – primary commodities
and manufactured goods. For a country whose relatively small domestic markets would
always act as a constraint on growth performance, it was imperative that external markets
be accessed if growth was to be accelerated.

[35]
The North East Asian countries were poorly endowed with natural resources, so it was
logical that they emphasized manufacturing as their growth engine, based largely on
imported inputs. The South East Asian economies were far better endowed with natural
resources, but, following the success of their neighbours, they realized that adding value by
manufacturing could be a more effective strategy than simply exporting unprocessed
commodities. By contrast, during this period, inward‐looking strategies driven by notions
of self reliance saw the Latin American and South Asian economies become primary
commodity exporters, whose manufacturing sectors, with a few exceptions like textiles and
garments, simply could not match the global competitiveness of the East Asians.

However, the global trading regime had already begun to change by the end of the 1980s.
Commodities would still be important, but the role of three other categories – services,
capital and “knowledge” – was becoming more significant in transactions between
countries. The broad framework of agreements that emerged out of the Uruguay Round of
global trade negotiations, which commenced in 1987 and ended in 1994 and saw the
establishment of the World Trade Organization (WTO) in 1995 as a body to oversee the
various agreements covered these other categories in specific agreements. Of particular
relevance to this discussion is the General Agreement on Trade in Services (GATS).

[36]
VI. GROWTH IN EMPLOYMENT

Despite existence of strong growth over the last three years, trends in employment over the
period have been quite disturbing leading to concerns of jobless growth in India. Estimates
of labour force, work opportunities and unemployment during the first three years of the
Tenth Plan suggest an improvement in the total employment generated, however along with
an increase in the unemployment rate (Table 19). On the other hand, employment in the
organised sector has decreased from 277.89 lakh in 2000‐01 to 270 laks in 2002‐03.

Table 19: Unemployment situation during the first three years of the Tenth Plan
Unit 2001‐02 2002‐03 2003‐04 2004‐05
Labour Force Million 378.21 385.02 391.95 399.00
Employment Million 344.68 349.89 356.16 362.64
Unemployment Rate % 8.87 9.12 9.13 9.11
No of unemployed Million 33.53 35.13 35.79 36.36

Between 1999 and 2003, the organised sector for which reliable data is available showed a
drop of 4 per cent in total employment. Of this public sector employment fell by 4.3 per cent
compared to a 3.5 per cent decline in the private sector. The trend is however not uniform
across sectors. Mining and manufacturing have seen a steep decline in employment both in
the public and private sectors (Table 20). However, services sectors like finance, insurance
and real estate and wholesale and retail trade have seen a simultaneous increase in
production and employment. But this clearly was not enough to offset the quantum of
decline in employment in other sectors leading to an overall decline in organised sector
employment.

Table 20: Trends in organised sector employment
Public Sector Private Sector
Share in Share in
Employment Growth Employment Growth
(2003) 2003/1999 (2003) 2003/1999
Agriculture 2.7 ‐1.7 10.6 2.8
Mining and Quarrying 4.6 ‐8.5 0.8 ‐24.1
Manufacturing 6.8 ‐19.7 56.3 ‐8.4
Electricity, Gas etc 4.9 ‐5.1 0.6 22.0
Construction 5.1 ‐14.4 0.5 ‐38.0
Wholesale and retail trade 1.0 11.7 4.3 11.5
Transport, storage Communication 15.8 ‐4.7 0.9 14.5
Finance, insurance etc 7.4 6.3 5.1 19.0
Community and social service 51.7 ‐1.9 20.9 1.9
Total 100.0 ‐4.3 100.0 ‐3.5
Source: Ministry of Labour

The manufacturing sector is one of the key employers of labour in the organised private
sector accounting for over 56 per cent of employment in 2003. While on the one hand decline
in public sector employment in manufacturing is understandable as it makes sense for the
[37]
government to withdraw from manufacturing activity, the declining trend in private sector
employment is a cause of concern.

Micro picture

The current recovery as shown by the Indian corporate sector engaged in manufacturing is
based on large improvement in operating efficiency coming from a reduced workforce and
wage bill. A sample of around 2500 manufacturing companies shows that net sales of these
companies registered a growth of around 15 and 20 per cent respectively during 2003‐04 and
2004‐05. The total cost of production increased by 13 and 20 per cent during these two years.
However, wages and salaries component of total costs has risen just by around 7 per cent
during both 2003‐04 and 2004‐05. This clearly suggests that the wage cost as a proportion of
total cost of production has declined significantly in the last couple of years. Almost all
industries have witnessed a fall in labour cost as a proportion of total cost of production.
Wages and salaries as a proportion of net sales have also witnessed a similar fall since the
total cost of production as a proportion of net sales are nearly constant for the period
considered. This implies that cost savings witnessed is primarily on account of savings on
labour.

Table 21: Falling labour costs
Wages and salaries as proportion of total cost of
production
No. of
companies Mar‐00 Mar‐01 Mar‐02 Mar‐03 Mar‐04 Mar‐05
Food Products 305 9.4 8.7 8.2 7.3 6.9 6.8
Beverages and tobacco products 30 10.4 11.4 11.4 11.6 12.5 11.9
Textiles 347 7.9 8.0 8.0 8.1 7.6 7.5
Chemicals 448 8.2 8.1 8.7 9.1 8.7 8.2
Rubber, plastic and petroleum products 215 2.2 2.3 2.2 1.9 1.8 1.7
Non‐metallic mineral products 157 8.4 8.1 8.1 8.0 6.6 6.2
Metals and metal products 272 12.4 11.9 12.3 10.9 9.6 6.5
Machinery 367 13.9 15.3 14.9 13.8 13.4 11.9
Transport equipment 161 9.6 9.3 9.5 9.2 8.2 7.2
Paper and paper products 63 12.5 11.1 12.1 12.1 10.7 10.2
Leather products 22 17.5 18.0 19.0 17.9 17.5 16.1
Wood products 11 10.0 9.8 10.2 9.6 8.7 8.4
Other manufacturing 58 16.0 18.0 16.7 17.9 17.3 16.6
Diversified 39 11.1 11.4 11.2 10.8 10.2 9.5
Manufacturing 2495 7.2 6.9 6.9 6.4 6.0 5.4
Source: Prowess database, CMIE

Macro picture

Considering the average labour intensity of different industries during 2000‐01 to 2002‐03,
measured in terms of number of employees per Rs. Crore of invested capital, industries such
as food products, textiles, wood and metal products emerge as relatively more labour
intensive in comparison to chemicals, basic metals and rubber and plastic products.
[38]
Figure 14: Labour Intensity (Labour‐capital ratio)
40 36.5 36.5
40 36.5 36.5
33.7
35 33.7
35 29.7
30 29.7 28.4
28.4
30
25 23.0
25 23.0
19.3 18.6
20 19.3 18.0
20 18.6 18.0 16.8
16.8
15 11.3
15 11.3 8.7
10 8.7
10 5.9
5.9
5
5
0
0
Non-metallic
equipment
Chemicals
Metals
Machinery and
Paper
Metal products
Textiles
manufacturing
Wood
plastic, petro
All
products,
Transport
Non-metallic
equipment
Chemicals
Metals
Machinery and
Paper
Metal products
Textiles
manufacturing
Wood
plastic, petro
All
equipment
products,
Transport
mineral
Food
Rubber,
equipment
mineral
Food
Rubber,
Other
Other


Relative capital or labour intensity can also be discerned by considering the share of
individual industries in gross value added (GVA) and total employment. In terms of
employment, textiles and food and beverages emerge as the largest employers of factory
workers. However, their contribution to GVA in manufacturing is much lower. On the other
hand, basic chemicals, machinery and equipment, basic metals; and rubber, plastic,
petroleum and coal products have relatively higher share in total value added as compared
to their share in total employment. Chemical has the largest share in GVA manufacturing
and has also shown substantial growth in the ongoing decade compared to previous one. On
the other hand, share of some of the labour intensive industries, such as textiles and food
products and beverages in aggregate manufacturing gross value added is more or less
stagnant overtime.

Figure 15: Employment output trade off
Em ploym ent generating
25.0 Em ploym ent generating
25.0
Food & bev
Food & bev
20.0
Share in employment
20.0
Share in employment
Textiles
Textiles
15.0
15.0
Non met
10.0 Non met Machinery
10.0 mineral Machinery
mineral
Metal Chemicals
5.0 Metal Chemicals
5.0 Less em ploym ent
Transport Less em ploym ent
Transport Rubber etc. generating
Rubber etc. generating
0.0
0.0
0.0 5.0 10.0 15.0 20.0 25.0
0.0 5.0 10.0 15.0 20.0 25.0
Share in value added
Share in value added

Source: Annual Survey of Industries, Various Issues

To the extent labour‐intensive industries in the economy witness buoyant growth, it would
result in significant demand for labour and thus employment creation. During 1990s, among
[39]
the major generators of employment in organised manufacturing sector, only some were
labour intensive (as defined above) and others capital intensive. Manufacturing of rubber,
plastic, petroleum and coal products; and basic chemicals have seen huge growth in
employment in organised sector during the decade of 1990s. While the growth in
employment of coal and petroleum sector during the decade of 80’s is clearly an outcome of
rapid growth witnessed by public enterprises in these sectors, rubber and plastic witnessed
employment growth primarily driven by rapid technological advancement in these areas.
However, there were some other capital‐intensive segments, which did see buoyancy during
the period but that did not translate into employment generation. Some such segments were
transport equipment and parts, machinery and equipment and basic metals. This implies
that these manufacturing industries witnessed growth in output without adding to
employee numbers.

Table 22: Growth in Organised Manufacturing Employment
2000s (2000‐01/
1980s 1990s 2002‐03)
Food products, beverages and tobacco products ‐0.56 1.57 ‐0.50
Textiles ‐0.65 0.73 ‐2.81
Wood and wood products ‐0.93 ‐2.86 0.40
Paper and paper products ‐0.01 0.22 ‐0.50
Rubber, plastic, petroleum and coal products 3.48 3.66 1.77
Basic chemicals 1.62 4.56 ‐2.81
Non‐metallic mineral products 2.55 0.51 16.04
Basic metals 0.24 0.14 ‐2.60
Metal products and parts 1.37 2.47 ‐1.84
Machinery and equipment 1.46 0.00 ‐2.17
Transport equipment and parts ‐0.27 ‐0.03 ‐0.30
All 0.60 0.01 ‐0.32

Among the labour intensive industries, food products, beverages and tobacco products,
metal products and parts; and to some extent textiles have contributed positively to growth
in employment during the decade of 1990s. During 2000s, almost all the industries, with the
exception of rubber, plastic, petroleum and coal products and non‐metallic mineral
products, have seen a fall in employment. Although rubber, plastic, petroleum and coal
products were the fastest growing segment in term of output during the first three years of
the current decade, the non‐metallic mineral products slowed down during the period.
Among labour intensive industries, wood products have seen some growth in employment
during 2000‐01 to 2002‐03.

The overall employment elasticity as defined by percentage increase in employment due to a
per cent increase in GVA, for the total organised manufacturing sector during 1989‐90 to
2002‐03 turned out to be 0.22 2. Indicating that for a percentage increase in manufacturing
2 The elasticity for the private organised sector employment was obtained by using log‐log model (employment
regressed on GVA) for data from 1989/90‐2002/03. To calculate the elasticity we have used the real gross value
added, by deflating nominal GVA, given by ASI, using commodity level wholesale price indices.

[40]
GVA the employment went up by 0.22 per cent in the organised manufacturing sector
during the period considered.

To the extent the significance of agriculture in income generation is declining and only
certain share of the surplus labour in the economy can be absorbed by the services sector,
the significance of manufacturing sector in overall employment generation is highly crucial.
However, the low employment elasticity in the manufacturing sector is a cause of concern.
This thus suggests that the sector not only needs to consistently register robust growth rates
but it also calls for increased focus on labour‐intensive strategies for production.

Figure 16: Organised Manufacturing Employment Elasticity (1989/90‐2002/03)
Machinery and equipment -0.01

Basic metal 0.04
Transport equipment 0.05
Non-met mineral 0.11
Textiles 0.13 0.32 (FY90-FY98)
Paper 0.16
Food, bev 0.18
All 0.22
Rubber etc 0.23
Wood 0.32
Metal products 0.33
Chemicals 0.41
Other manufacturing 0.56
-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60

Source: Annual Survey of Industries, Various Issues

On industry specific elasticity estimates chemicals and rubber, plastic, petroleum and coal
were the two capital‐intensive industries to have witnessed above average employment
elasticity. On the other hand, some of the major labour intensive industries such as food
products and beverages and textile have relatively lower employment elasticity. Low
employment elasticity of textiles though puzzling may be due to huge presence of
unorganised sector whereby output gets recorded in the organised sector but not the
employment due to distorted production chain.

Current manufacturing recovery‐ contribution of employment elastic segments
A negative correlation coefficient of –0.48 between employment elasticity and growth in the
individual segment during July 2002 to October 2005, suggests that segments with lower
employment elasticity have witnessed higher growth during the ongoing recovery, barring a
few.
[41]
Figure 17: Jobless growth!
15.0
Growth (%) (July 2002 - Oct 2005)

10.0
5.0
0.0
-0.10 0.00 0.10 0.20 0.30 0.40 0.50
-5.0
-10.0
Employment elasticity

Source: Annual Survey of Industries, Various Issues; CSO

This negative correlation between growth and employment elasticity along with declining
share of wage costs as shown by the Indian corporate sector suggests that the buoyancy in
manufacturing has yet not translated into enough employment generation.

Implications of Jobless Growth

The emerging trends in organised sector manufacturing are clearly a source of worry. In
future, India is expected to witness a bloating of population in the working age group. There
exist clear limitations in absorption of surplus labour by the services sector. On the back of
the declining significance of agriculture in income generation in the economy, the surplus
labour from agriculture needs to be gainfully employed.

Emergence of Non‐Farm Rural Sector

Employment growth suffered a setback during the late 1990s. As discussed above the
decline in employment growth was also witnessed in the manufacturing sector, primarily
due to the sluggish growth in the organised manufacturing sector. As a result the Planning
commission suggested that the agriculture and non‐formal sector need to be targeted to
meet the growing employment demands in the economy.

Historically, rural households have been viewed to be exclusively associated with
agriculture. Mounting evidence however suggests that the rural households have access and
potential to engage in varied and multiple sources of income. One of the arguments
suggesting the emergence of the rural non‐farm sector is that positive externalities from the
liberalisation measures involving regional and international trade, setting up industries, led
to growth in industrial and service activities in rural India. However, lack of productive
opportunities in the agriculture sector is also believed to have supported the growth of the
rural non‐farm sector.

[42]
Table 23: Non‐farm employment
NFE as % of total workers (P+SS)
1983
Male Female
Rural 22.2 12.2
Urban 89.7 68.0
1993–94
Rural 26.0 13.8
Urban 91.0 75.3
1999–2000
Rural 28.6 14.6
Urban 93.4 82.3
Source: NSSO

Table 24: Income Share in Rural India (1993/94)
Non‐farm Sources
Non‐farm
Agricultural Non‐farm Non‐farm self Regular
Cultivation Wage labour Total labour employment employment Other Sources
54.9 8.0 34.4 5.9 11.5 17.1 2.7
Source: NCAER 3

The share of population dependent on the non‐farm sector has increased over the years.
Non‐farm employment for rural male increased significantly from 22 per cent in 1983 to 26
per cent in 1993‐94 and further to 28.6 per cent during 1999‐00. However, the decline
witnessed in total employment has been accompanied by growth reduction in non‐farm
employment as well. Nevertheless, growth in non‐farm employment during both the
periods considered was higher than that in total labour force and population growth (Table
25). While the observed growth during the latter period has declined for non‐farm
employment along with a growth slowdown in labour force, the extent of reduction remains
lower than that in labour force for almost all the categories considered. However, the growth
slowdown is considerably significant for both rural and urban females against their male
counterpart.

3 Rural Non‐farm employment in India: Access, Income and Poverty Impact: Peter Lanjouw, Abusaleh Shariff,
NCAER
[43]
Table 25: Non‐farm employment growth vs Labour force and Population Growth
(CAGR – Per cent)
Non‐farm employment Labour Force Population
1983 – 1993/4 – 1983 – 1993/4 – 1983 – 1993/4 –
Categories 1993/4 1999/2000 Difference 993/4 1999/2000 Difference 1993/4 1999/2000 Difference
Rural Males 3.3 2.6 ‐0.8 1.8 0.9 ‐0.9 1.8 1.6 ‐0.1
Rural Females 2.5 1.1 ‐1.4 1.3 0.2 ‐1.2 1.7 1.7 0.0
Rural Persons 3.1 2.2 ‐0.9 1.7 0.7 ‐1.0 1.7 1.7 ‐0.1
Urban Males 3.1 3.1 ‐0.1 3.0 2.6 ‐0.4 2.8 2.7 ‐0.1
Urban Females 4.2 2.4 ‐1.7 3.2 0.9 ‐2.3 3.0 2.8 ‐0.2
Urban Persons 3.3 3.0 ‐0.4 3.1 2.3 ‐0.8 2.9 2.8 ‐0.2
Total Males 3.2 2.8 ‐0.4 2.1 1.4 ‐0.7 2.0 1.9 ‐0.1
Total Females 3.2 1.7 ‐1.5 1.6 0.3 ‐1.3 2.0 2.0 0.0
Total Persons 3.2 2.6 ‐0.6 1.9 1.0 ‐0.9 2.0 2.0 ‐0.1
Source: NSSO

Determinants of access to non‐farm employment

i) Agricultural development: Development of non‐farm sector is linked with that in
the agriculture sector from the demand and supply side. Increased agricultural
production enables growth of downstream activities. It also increases the rural
incomes and hence the spending capacity of the individuals which can be
channelled to rural non‐farm activities. The extent of impact depends on the
strength of inter‐linkages between the two sectors.
ii) Natural Resource Endowments: Non‐farm sector’s development is also dependent
on the natural resource base of the region.
iii) Economic Infrastructure: The extent to which the non‐farm activities can be
developed depends on the extent and spread of available economic
infrastructure. Sectors like transport, power, water supply, road connectivity, and
telecommunication are significant in developing the non‐farm activities in a
region.
iv) Presence of state and spread of public services is a significant determinant in
generating new employment opportunities in the non‐farm segment.
v) Business environment: To the extent the level of investment and setting up of new
initiatives depends on the level of entry barriers, regulatory norms, policy
framework, labour laws, efficiency of judicial system, tax regime level of
corruption, the overall business environment of the region plays a key role in
non‐farm employment generation.
vi) Micro/individual characteristics: Some of the micro characteristics like the level of
education and skill, access to land, finance, caste, gender also impact the
employment creation.

While the non‐farm sector contributed to more than a third of rural household’s income
during 1993/94, the fall in contribution of cultivation over the years is expected to register a
significantly higher share today. While the sector has its share of benefits, the empirical data
suggests that the sector provides relatively lower employment opportunities for the females.
[44]
Also, it needs to be kept in consideration that the process of employment creation in the
non‐farm sector should be such that it results in growth income generation and thus
improvement in living standards and not just growth in employment.

Box 1: Small Scale Industry

An industrial undertaking in which the investment in fixed assets in plant and machinery whether
held on ownership terms, on lease or on hire purchase does not exceed Rs 10 million is characterised
as a Small Scale Industry (SSI). The sector not only includes SSI units but also small scale service and
business enterprises as well. The small‐scale industries sector plays a vital role in the economic
growth of India contributing to almost 40 per cent of the gross industrial value added in the economy
and 34 per cent of the exports from the country. The sector has witnessed significant growth over the
years. The number of SSI units itself has increased from 6.8 million in 1990‐91 to 11.8 million in 2004‐
05. The total production also increased from Rs 683 billion to Rs 2515.1 billion during the
corresponding period growing at a compound rate of 9.8 per cent per annum.

The small‐scale sector has made a significant contribution to the industrial development of the
country. The small‐scale industries contribute to a significant 40 per cent of the industrial production
and 35 per cent of the total manufactured products.

Number of SSI units has increased from 67.87 lakhs in 1990‐91 to 118.59 lakh in 2004‐05. While the
number of units grew at 4.1 per cent per annum, the employment registered a growth of 4.3 per cent
per annum during the period. The value of production 4 during the period increased from Rs 68295
crore to Rs 251511 crore in 2004‐05 growing at 9.8 per cent per annum. Given that the sector is less
capital intensive, it thus suits the Indian economic environment with scarce capital resources and
abundant labour supply.

Figure 18: Growth Resilience‐ Production Growth
Growth Resilience
16.0
14.0
12.0
10.0
per cent
8.0
6.0
4.0
2.0
0.0
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
IIP_G IIP_Mfg SSI

Source: Reserve Bank of India, Annual Survey of SSI

Being highly employment intensive, the sector has contributed significantly in employment
creation. Manufacturing sector employment is largely generated by the small‐scale sector.
4 At constant prices
[45]

Figure 19: Growth in Employment and Fixed Investment in SSI units
10.0
10.0
9.0 Employment
9.0 Employment
8.0 Fixed Investment
8.0 Fixed Investment
7.0
7.0
6.0
per cent
6.0
per cent
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04

Source: Annual Survey of SSI

Some of the suggested measures so as to increase employment opportunity in the sector are:‐
• Some of the larger issues of reforms in infrastructure development (especially power) and
reforms in labour laws, are particularly important for the SSI sector, much more so than they are
for large industry. Progress in these areas will therefore help SSI development and the growth of
employment in this sector.
• The benefits currently given to the SSI sector in industry should be extended to small‐scale
enterprises in the non‐industrial sector, including services.
• Government should provide resources for upgrading infrastructure for industry clusters where
there is a sufficient agglomeration of SSI units.
• State governments must undertake concerted efforts, in close consultation with SSI organizations,
to reduce the burden of “inspector raj” which is especially heavy on SSI units.
• The policy of reservation has become an impediment to the development of a strong SSI sector
capable of competing effectively in the new more open trading regime. We recognize this is a
sensitive subject but after careful consideration of all factors, we recommend phased abolition of
reservation over a period of 4 years. This will give existing units time to adjust and will create a
healthier and more vibrant SSI sector.

Given the significant contribution of the sector both to the value added and to the employment
opportunities generated, the potential in the small‐scale sector needs to be further tapped. The
problems faced by the sector relating to access to timely and adequate credit, technological
obsolescence, infrastructure bottlenecks, marketing constraints, size of the enterprise and multiplicity
of rules and regulations, needs to urgently addressed. With increasing global competition and an
increased exposure of the enterprises to the global environment, immediate policy initiatives need to
taken to help enhance the overall contribution of the sector to the economy, especially in creating
more employment potential.

[46]
Ensuring employment in future growth?

The issue of employment needs to addressed in consonance with the overall economic
development. A few of the measures suggested involve promotion of labour‐intensive
growth through economic openness, investment in infrastructure and basic services for poor
people in the area of health and education, expanding economic opportunities for the poor
by stimulating overall growth and building up their assets and increasing the returns on
those assets.

• Accelerating the rate of growth of GDP, with a particular emphasis on sectors likely
to ensure the spread of income to the low‐income segments of the labour force.
Aggregate employment problem in the country cannot be solved except through a
process of accelerated growth which would create additional demand for labour and
also provide the increase in labour productivity needed to achieve the much needed
improvement in employment quality. Planning Commission’s 5 report suggests that a
shift from 6.5 per cent growth to 8 per cent growth generates an additional
employment of 14.5 million in the terminal year 2012. In contrast, the total volume of
employment created by all special employment programmes put together is only
about 4.4 million and this level has actually declined over time. The report further
asserts that because of severe resource constraints, it is unlikely that the volume of
employment provided by special employment programme can be increased
significantly in future. Indeed substantial additional resources may be needed simply
to maintain the present level of employment while improving the quality of
employment created. The role of growth in generating additional employment is
therefore overwhelming.
• Strategies should be designed appropriately to promote growth and employment in
the economy. Labour intensive technology can be fruitfully employed in many
sectors of production with significant emphasis on agriculture, as it still remains the
key employer of labour force in the country.
• Productivity in agriculture needs to be enhanced through land reforms and
redistribution of land. Labour intensive production like handicrafts should be
promoted. Promotion of non‐farm sector along with agro‐related and agro‐based
industry is important in increasing employment.
• Fiscal consolidation by the government will help divert resources towards job
creating investments of the government thus positively affecting the employment
growth.
• An equal distribution of social assets in rural India will help generate employment
opportunities for the unemployed and the underemployed, thus increasing the
purchasing power of the population boosting the overall demand. With the demand,
the market for these goods is expected to develop along with development of small‐
scale industries, thus providing income and further boosting the demand.
• Proper strategies for small‐scale sector should be set in place.
5 Report of the Task force on Employment opportunities, Planning Commission, Government of India, July 2001
[47]
• Creating employment in sectors like agriculture and construction where employment
elasticity is relatively high and incremental capital‐output ratio is low will help
improve the employment scenario in the economy.
• Improving labour reforms will help improve the employment situation in the
organised sector.

While growth is highly important in creating jobs, it is not the only factor in raising
employment growth from the current levels. Government intervention in providing
appropriate infrastructure and delivery systems, especially in the rural areas, is important
and essential for higher job growth.

[48]
VII. INVESTMENT

During the post‐independence period India focused on improving economic growth
through a stated growth strategy of rapid industrialisation with capital‐intensive industries.
The development strategy which was centrally planned and under the purview of the public
sector. Along with investing in traditional areas of public investment, such as infrastructure,
the government was also competing with the private sector in commercial and industrial
activities.

Public Investment vs. Private Investment
The private investors had to face the complex regulatory system for decades involving
comprehensive licensing for firm’s entry, expansion or diversification plans; high barriers to
foreign trade, and mandatory credit allocation schemes imposed on the banking system.
While the reforms during the 1990s significantly reduced the extent of public sector
involvement in commercial and industrial activities, public sector, however, remained an
important part of the economy.

The growth strategy led to steady increase of the investment/GDP ratio and also in the
overall economic growth. The aggregate real investment/ GDP ratio increased from 17 per
cent during the 70s to over 20 per cent during the 80s and 90s. The significance of public
sector is evident from the rising share of the public investment over the 90s, almost reaching
the levels of private investment (undertaken by the households and corporates).

Table 26: Investment/GDP
2000/01‐
1970s 1980s 1990s 1990/91‐94/95 1995/96‐99/00 04/05
Aggregate Investment 21.3 23.1 25.1 24.2 26.0 25.5
Public Investment 9.9 11.0 8.3 9.4 7.3 7.0
Private Investment 11.4 12.1 16.7 14.8 18.7 18.5
Source: CSO

Table 27 suggests that public sector investment was primarily targeted towards electricity,
gas and water supply and provision of transport, storage and communication services. A
large share of investment was also undertaken in the industrial and commercial activities‐
usually undertaken by the private sector. Further, an increased share of investments was
targeted at the non‐infrastructure sectors. While anecdotal evidence certainly supports the
argument that infrastructure requirements of the economy are not being met, a comparison
across countries confirms the impression that India is significantly below average with
respect to the share of investments allocated towards the infrastructure sectors.

[49]
Table 27: Industry wise public sector investment (at constant prices)‐ Share
1990/91‐ 1995/96‐ 2000/01‐
1970s 1980s 1990s 94/95 99/00 02/03
Agriculture 1.42 1.29 0.56 0.65 0.47 0.25
Mining & Quarrying 0.52 1.21 0.80 0.98 0.61 0.23
Manufacturing 1.82 1.56 1.06 1.24 0.89 0.31
Electricity, gas & water supply 1.81 2.62 2.13 2.45 1.80 0.94
Construction 0.11 0.06 0.05 0.05 0.05 0.09
Trade, hotels & restaurants 0.32 0.05 0.02 0.02 0.02 0.01
Transport, storage & communication 1.51 1.47 1.55 1.71 1.39 0.89
Financing, insurance, real estate 0.22 0.34 0.43 0.44 0.43 0.14
Community, social & personal services 2.18 2.36 1.74 1.84 1.64 1.14
Source: CSO

The approach paper to the Eleventh Five Year Plan (2007‐08 to 2011‐2012) lays down
investment and savings requirements of different target growth rates. Acceleration from 7
per cent growth (average of Tenth Plan) to 9 per cent will require investment rate to increase
from 29.1 per cent to 35.1 per cent. The increased level of investment has to be financed from
increased domestic and foreign savings thus increasing the current account deficit from 2
per cent of the GDP to 2.8 per cent of GDP. A constrained current account deficit however
would imply an increase in total domestic savings rate from 27.1 per cent to 32.3 per cent.

Table 28: Alternative Scenarios for Eleventh Plan
Target GDP Growth rate in 11th Plan 7% 8% 9%
Average Investment Rate 29.1 32.0 35.1
Average CAD as a % of GDP 2.0 2.4 2.8
Domestic Savings Rate: of which 27.1 29.6 32.3
(a) Households 20.1 20.5 21.0
(b) Corporate 5.0 5.5 6.1
(c) PSEs 3.1 3.1 2.8
(d) Government ‐1.1 0.5 2.4
Source: Approach to Eleventh Five‐Year Plan, Planning Commission

The growth target of 9 per cent would require a significant escalation in both public and
private rate of investment. The public investment being an important determinant of private
investment, especially when the public investment is targeted towards infrastructure
development, has been targeted at a significant level of 11.2 per cent.

Table 29: Implications of the Savings Requirement for the Eleventh Plan
Target GDP Growth rate in 11th Plan 7% 8% 9%
Public Investment Rate (as a % of GDP) 8.4 9.8 11.2
Private Investment Rate (as a % of GDP) 20.7 22.2 23.9
Government Revenue Balance (% of GDP) ‐2.9 ‐1.3 0.6
Government Fiscal Balance (% of GDP) ‐6.4 ‐6.2 ‐6
Source: Approach to Eleventh Five‐Year Plan, Planning Commission

[50]
Crowding In/Out?
Public investment undertaken by way of government borrowings reduces loanable funds
available for private investment, driving the interest rates up and thus reducing the level of
private investment in the economy. However, to the extent public investment in
infrastructure contributes to strengthening the productivity and profitability of private
production, it has a crowding‐in effect on private investment. However, public investment
in industrial and commercial sectors, whereby the public sector competes with the private
sector resulting in competition for similar input and output markets, can crowd‐out private
investment from the economy.

Figure 20: Debt/ GDP
70.0 9.0
70.0 9.0
65.0
65.0 8.0
8.0
per cent of GDP

60.0
per cent of GDP
per cent of GDP

60.0 7.0
per cent of GDP
55.0 7.0
55.0
50.0 6.0
50.0 6.0
45.0
45.0 5.0
40.0 5.0
40.0 4.0
35.0 4.0
35.0
30.0 3.0
30.0 3.0
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
Debt GFD 2004-05

Debt GFD

Source: RBI

Thus, impact of public investment on the private sector cannot be considered in aggregate.
Distinction by way of sector to which the former is targeted along with the time horizon of
the investment also needs to be taken into account.

The heterogeneity of public capital implies that different types of public investment are
likely to have opposing effects on private sector activity: public projects in areas such as
basic infrastructure and human capital formation presumably tend to raise the profitability
of private production and thereby encourage private investment, while public projects in
more conventional activities ‐ where public enterprises basically compete with private firms
‐‐ might be expected to have the opposite effect, by competing with the private sector in
goods and factor markets activity. Public investment in infrastructure sectors reserved to the
state contribute to raise the profitability of private production and have a crowding‐in effect
on private investment. By contrast, public investment in industrial and commercial sectors
open to competition between private and public firms might have the opposite effect: by
competing with private firms for productive inputs and output markets (and investment
licenses), crowding‐out private investment.

Luis Serven (1996) 6 highlights the heterogeneous nature of public investment in determining
private investment. Serven empirically examines the crowding‐out scenario by
6 Does public capital crowd out private capital? Evidence from India, Luis Serven, World Bank
[51]
implementing a simple analytical model encompassing two types of public capital. The
empirical results show that in the long run, capital for public infrastructure projects crowds
in private capital – other types of public capital have the opposite effect. But in the short run,
both kinds of public investment may crowd out private investment. A. Soumya and K. N.
Murty (2006), show that sustained increase in public sector investment in infrastructure,
financed through borrowing from commercial banks, results in substantial increase in
private investment and thereby output in this sector. Further, due to increase in absorption,
real output in the manufacturing and services sectors also seems to increase, which sets‐in
motion all other macro economic changes. Pritha Mitra, empirically tests the crowding‐out
hypothesis in India. The short‐run impact of government investment in India has been less
positive. Empirical evidence suggests that government investment has been crowding out
private investment. Lal , Bhide and Vasudevan (2001) show that if fiscal deficit is entirely
bond financed then there will be no shift in the expenditure (absorption) line, the real
exchange rate will remain unchanged and the only real effect will be through the crowding
out of private investment by public borrowing.

Table 30: Crowding out of Private Investment due to Increased Public Investment‐
Literature Review
Date of
Paper Conclusion
Publication
Luis Serven‐ Does Public In the long run capital for public infrastructure projects
World Bank
Capital Crowd out crowds in private capital – other types of public capital
Policy research
Private Capital‐ Evidence have the opposite effect. In the short run, both kinds of
Group, May 1996
from India public investment may crowd out private investment.
A. Soumya and K. N.
Substantial increase in private investment and thereby
Murty ‐Macro Economic
University of output.
Effects of Changes in
Hyderabad & A 10% sustained increase in public sector investment in
Public Investment in
IGIDR, June 2006 infrastructure, can accelerate the macro economic
India‐ A Simulation
growth by nearly 2.5% without causing any inflation.
Analysis
Pritha Mitra‐ Has
A positive impact on the economy in the long‐run.
Government Investment
Empirical evidence suggests that government
Crowded Out Private
investment has been crowding out private investment.
Investment in India?
Kul B. Luintel and
Public investment significantly reduces private
George Mavrotas‐
investment and the extent of crowding out effect is
Examining Private UN University,
directly related with the country specific level of real
Investment December, 2005
income. Countries with higher real per capita income
Hetrogeneity‐ Evidence
experience more crowding out and vice versa
from a Dynamic Panel
Lal, Deepak, S Bhide and
If fiscal deficit is entirely bond financed then there will
D Vasudevan: ‘Financial
be no shift in the expenditure (absorption) line, the real
Exuberance:Savings
2001 exchange rate will remain unchanged and the only real
Deposits, Fiscal Deficits
effect will be through the crowding out of private
and Interest Rates in
investment by public borrowing
India’
Krishnamurty, 2001; IEG‐
DSE, 1999; Rangarajan Weakening of crowding in of private investment
and Mohanty, 1997
[52]
Some of the recent evidence by Krishnamurty 7, 2001; IEG‐DSE 8, 1999; Rangarajan and
Mohanty 9, 1997suggests the weakening of crowding in phenomenon in the last decade
possibly due to resource constraint and the negative price effect of public sector investment
financed by fiscal deficit. Kulkarni and Erickson (1995) apply a vector autoregression (VAR)
model to Indian budget deficits, interest rates, price level, and exchange rates and find no
statistically significant evidence of crowding out.

An across country study by Luintel and Mavrotas (2005) suggests that public investment
significantly reduces private investment and the extent of crowding out effect appears
directly related with the country specific level of real income. Countries with higher real per
capita income experience more crowding out and vice versa.
Key challenges for increasing public investment rate
(a) Crowding Out: As discussed above, government investment, financed by borrowing from
private sector lowers the amount of funds available thus crowding out private investment in
the economy. If the positive impact of increased government investment outweighs the
negative impact of reduced private investment then it will improve the overall economic
growth. In the opposite scenario, whereby the negative impact of reduced private
investment completely cancels the positive impact of increased government investment, it
renders economic growth unaffected.

(b) Increased Deficit cost: The public sector led‐growth in India came at the cost of a large
budget deficit financed by domestic borrowing. India’s budget deficit grew from 4.01 per
cent in 1960 to 9.28 percent in 1986 and back to the range of 5.5 per cent during the current
decade. The persistence of the deficit reflects heavy domestic borrowing by the government
to finance government investment.

During the 70s with the state led development strategy, the public sector was involved in all
economic activities, with basic infrastructure activities reserved for the state. The reforms of
90s have brought about a significant change in the system, with increased shift towards
market oriented development model. However, a lot still needs to be done by way of
providing the private sector an adequate regulatory framework and policy structure.
Further, as the role of public investment in infrastructure is very important as has been
supported empirically, public investment in infrastructure helps crowding‐in private
investment. Investment in infrastructure projects, however, should not be left for the
purview of the public sector alone.

7 Krishnamurty, K. (2001): Macro econometric Models for India; Past, Present and Prospects, Economic and
Political Weekly, October 19‐25
8 IEG‐DSE Research Team (1999): Policies for Stability and Growth: Experiments with a Large and
Comprehensive Structural Model for India, Journal of Quantitative Economics, Special Issue on Policy Modeling,
Vol. 15, pp. 25‐109
9 Rangarajan, C. and Mohanty, M.S. (1997): Fiscal Deficit, External balance and Monetary Growth – A Study of
Indian Economy, Reserve bank of India, Occasional Papers, December 1997
[53]
Public‐ Private Investment

Infrastructure sectors have to face the long gestation period along with a lack of financial
viability of the projects relying solely on the budgetary support. The government is thus
promoting a Public Private Partnership (PPP) in infrastructure development to remove the
shortcoming and to bring in private sector resources and techno‐managerial efficiencies to
the sector. The government provides special support to the PPP projects through ‘viability
gap funding’ whereby reducing the cost of capital of the projects by credit enhancement and
to make them viable and attractive and private investments.

India initiated an ambitious reform programme, involving a shift from a controlled to an
open market economy showing signs of overheating because of basic infrastructure
constraints, both physical and human. So far, the bulk of infrastructure was in the public
sector. With the government trying to reduce its borrowing over the years, infrastructure
investment is one area where there is a need for private sector and foreign investment to
come in.

The recent available data suggests that the share of foreign investors in investment of
infrastructure in South Asia declined from 7.8 per cent in 1995 to 2.3 per cent in 1998. The
overall economic growth in India during the corresponding period moderated down from
7.3 per cent to 6.5 per cent. The growth momentum of early 90s could not be sustained, thus
was unable to provide an attractive investment destination for foreign investors. The Indian
economy has however witnessed a surge in foreign investment inflows during recent years
supported by strong macro economic fundamentals and the existence of investment
opportunities in the country. India experienced an average growth of 8 per cent during the
last three years starting 2003‐04. Increased investor confidence in the economy was reflected
in increased share of foreign investment directed towards the economy. The share of foreign
investment in infrastructure in South Asia increased to a significant 15.4 per cent in 2004.

[54]
Figure 21: Share of foreign investment in infrastructure
1995 1998
Sub-saharan Africa 2.5

1.6 9.6
East Asia & 2.3
35.1 Paciifc 3.1
38.6 South Asia
Middle East &

12.0
North America
Europe & Central
Asia
16.6 0.2 7.8 Latin America & 70.6
the Carribean

2004
7.6
27.1 13.6
15.0
19.5
17.0

Source: World Bank & PPIAF

The table below captures the trend in investment in PPI projects in India during 1990 to
2004. Total investment in PPI projects increased from a mere US$ 2 million in 1990 to US$
7785 million in 2004. Last ten years investment trends suggest a significant growth of 30 per
cent per annum.

The investment by way of PPI projects during 1990 to 2004 has been primarily focused
around energy and telecom sector. Of the cumulative investment undertaken during the
period, telecom projects accounted for a significant share of 49 per cent. Energy projects
followed close with a share of 42 per cent.

[55]
Figure 22: Investment in PPI Projects in India, 1990‐2004
8000
6000
US$ million
4000
2000
0 1990
1992
1994
1996
1998
2000
2002
2004

Source: World Bank

Table 31: Cumulative Investment in 1990‐2004 PPI Projects by Sector, 1990‐2004
Cumulative Investment
(US$ million) Per cent Share
Energy 16718 42.2
Telecom 19395 49.0
Transport 3235 8.2
Water & sewage 223 0.6
Grand Total 39571 100.0

An international comparison of the projects receiving investment priority across regions
suggests that of the total investment, Latin America & Carribbean invested the highest
share of 89 per cent in facilities against the world average of 60 per cent. The share of South
Asian economies in the facilities in 2004 was around 61 per cent, with the share of India at 66
per cent. China on the other hand targeted 71 per cent of the investment in facilities.

Table 32: Project Investment by Region/ Country, 2004
Investment in Investment in
Government Assets facilities Total Investment
East Asia & Pacific 2107.1 2371 4478.1
China 558 1341.3 1899.3
Europe & central Asia 816.1 713.8 1529.9
Latin America & Caribbean 532.8 4314.2 4847
Middle East & North Africa 3878 3055 6933
South Asia 1985.1 3095.8 5080.9
India 1402.6 2770.8 4173.4
Sub‐Saharan Africa 99.3 446.4 545.7
Total 9418.4 13996.2 23414.6
Note: *The investment figures include private and public contributions
Source: World Bank

[56]
While the amount of FDI flowing into the economy is improving over the years, there exists
the need to distribute the benefits accruing from the same evenly across the sectors. There
exists a need to establish a transparent, broad and effective policy environment for
investment, providing incentives for innovation and improvement of skills and contribute
towards improved competitiveness.

A sound legal and regulatory framework is required for regulation and enforcement of
infrastructure project contracts. A delicate system of checks and balances is required to
frame right infrastructure policy. Policy initiatives should be framed so as to give right
incentives to the private sector to invest adequately, at the same time preventing it from
extracting monopoly rights.

Given the significant infrastructure investment requirements in the coming years, the task of
funding the infrastructure projects and deploying them productively calls for a close
partnership between the public and private sectors, with a vital role reserved for foreign
capital. The domestic savings rate also needs to be increased to finance the projects.

[57]
VIII. REGIONAL PATTERN OF GROWTH

While the analysis of national economic performance and the factors governing the overall
economic growth is critical for sustaining healthy economic growth, the economic progress
of a large country also deserves a comparative analysis of development of regions within the
country.

Growth Performance

Table 33 presents the average growth of the 16 major states during the last two and a half
decades. The growth is estimated for three periods‐ the pre reform period of 1980s, the post
reform period of 1990s and the last five years (2000‐01 to 2004‐05). The last column captures
growth performance across the states during 2003‐04 and 2004‐05 so as to capture the impact
of the current overall economic buoyancy.

Table 33: Annual Average Growth of GSDP (Per cent)
State 1980s 1990s 2000‐05 03‐04/04‐05
Gujarat 6.4 7.0 7.9 15.4
Rajasthan 7.2 6.7 4.9 11.9
Madhya Pradesh 4.3 6.3 2.7 10.1
Kerala 3.3 5.9 6.9 9.8
Orissa 5.4 2.9 4.5 8.6
Haryana 6.3 5.3 6.9 8.5
All‐States 5.3 5.6 4.7 7.9 (a)
Himachal Pradesh 5.2 5.7 6.4 7.8
All‐India GDP 5.6 5.8 5.9 7.7
Andhra Pradesh 6.7 5.3 6.5 7.7
West Bengal 4.3 6.6 7.0 7.5
Maharashtra 6.3 6.8 4.0 7.3
Karnataka 5.6 6.9 6.0 6.2
Tamil Nadu 5.5 6.4 4.1 6.1
Punjab 5.7 4.4 4.0 5.8
J & K 3.2 4.9 4.5 5.2
Uttar Pradesh 5.0 4.0 3.8 4.7
Bihar 4.4 3.3 7.1 3.8

Jharkhand ‐‐ ‐‐ 4.4 4.8
Chattisgarh ‐‐ ‐‐ 7.0 16.8
Uttaranchal ‐‐ ‐‐ 9.3 10.1
Note: States are arranged in the descending order of growth in 2000‐05 at constant (1993‐94) prices
(a) Corresponds to growth in 2003‐04
Source: CSO

The growth rate of the combined SDP of the 16 states together has increased from 5.3 per
cent in the pre‐reform period to 5.6 per cent during the 1990s. This acceleration in growth is
matched by that in the overall economic growth. However, during 2000‐05, while the overall
[58]
economic growth further picked up to 5.9 per cent, the average growth in the key states
considered, significantly moderated down to 4.7 per cent.

The current buoyancy in the overall economic growth as captured by the national accounts
data reflects an average growth of 7.7 per cent during 2003‐04 and 2004‐05. The lack of
availability of data for 2004‐05 for all the states restricts the comparison with the all‐states
aggregate. However, during 2003‐04 the all‐states average picked up to a significant 7.9 per
cent capturing the overall growth exhibited by the national growth of 8.9 per cent.

While the growth for economy as a whole picked up during the 90s, Bihar, Uttar Pradesh,
Punjab, Andhra Pradesh and Orissa experienced slowdown as compared to that during the
80s. Haryana and Rajasthan also experienced deceleration, however, the slowdown was
from a relatively higher level of growth.

One of the interesting features of the growth performance is with respect to the
characterisation of the so‐called BIMARU states (Bihar, Madhya Pradesh, Rajasthan and UP)
as a homogeneous group of poor performers‐ grouping originally proposed in the context of
observed similarities in demographic behaviour. However, the grouping does not appear to
hold now with respect to the economic performance. While UP continued to perform slowly
during the three periods considered, Rajasthan and Madhya Pradesh performed reasonably
well, especially during 2003‐04 and 04‐05. While Bihar has registered poor average growth
over the years, the annual growth performance is highly volatile. Bihar registered growth of
14.3 per cent in 2004‐05 on the back of –6.7 per cent growth in 2003‐04, thus pulling the
average growth during 2000‐05 to 7.1 per cent.

One of the reasons behind faster acceleration of the overall GDP data is that while the
national accounts data were revised for the period from 1993‐94 (and further in 1999‐00),
similar revision has not yet been done for the state domestic product. Thus there is a need to
revise the methodological changes made in the national accounts at the state level as well.
As it would significantly revise the assessment of the relative performance of the states.

Growth Disparity

The range of variation has continued to increase over the three periods. During the 80s, J&K
had the lowest average growth of 3.2 per cent while in the third period the lowest annual
average growth further fell to 2.7 per cent for MP. The gap during the respective periods
widened as the highest growth increased from 7.2 per cent (Rajasthan) to 7.9 per cent
(Gujarat) during the respective periods.

The degree of variation across the states can be considered from table illustrating the
coefficient of variation in the annual GSDP growth rates across the periods considered.

[59]
Table 34: Coefficient of Variation in Annual GSDP Growth
State 1980s 1990s 2000‐05 03‐04/04‐05
Madhya Pradesh 121.5 81.7 420.4 119.6
Rajasthan 188.6 127.3 230.8 123.1
Bihar 113.9 322.3 192.0 390.5
Maharashtra 71.6 66.9 138.0 ‐‐
Orissa 177.8 284.4 136.9 95.4
Tamil Nadu 92.9 44.6 104.4 59.6
Gujarat 207.8 148.5 91.7 ‐‐
Karnataka 65.6 52.2 52.2 ‐‐
Kerala 120.7 40.4 50.2 13.4
Uttar Pradesh 63.9 77.4 49.1 3.4
All‐States 53.8 25.4 47.6 ‐‐
Punjab 42.5 39.2 46.1 10.9
Andhra Pr. 100.8 82.5 34.8 23.8
J & K 165.5 16.2 33.1 2.4
All‐India GDP 41.4 32.2 31.5 14.7
Haryana 125.1 70.0 24.2 2.0
Himachal Pr. 125.8 43.3 23.6 5.1
West Bengal 79.9 21.5 6.6 ‐‐
Jharkhand ‐‐ ‐‐ 51.7 15.2
Chattisgarh ‐‐ ‐‐ 144.8 ‐‐
Uttaranchal ‐‐ ‐‐ 24.5 ‐‐
Source: CSO

The performance across the states is more meaningful while considering the level of per
capita income across the states. The figure below compares the level of per capita income in
1993‐94 and in 2003‐04. Haryana with a per capita income (at current prices) of Rs 29504 had
the highest amongst the states considered, closely followed by Maharashtra at Rs 29204.
Punjab, which secured the top position in 1993‐94, moved to third rank at Rs 28607. Bihar,
Orissa, UP and Jharkhand remained at the bottom of the series with lowest level of per
capita income.

Figure 23: Per capita Income at current prices
35000
35000
30000
30000
20989
25000
20989
2003-04
25000 2003-04
20000 1993-94
20000 1993-94
Rs
15000
Rs
15000
10000
10000
5000
5000
0
0
Orissa
Punjab
UP
Tamil Nadu
West Bengal
Rajasthan
Haryana
Chattisgarh
Andhra Pr.
Himachal Pr.
Orissa
Punjab
UP
Tamil Nadu
West Bengal
Rajasthan
Haryana
Chattisgarh
Andhra Pr.
Himachal Pr.

Source: CSO
[60]
The difference in performance across states becomes starker if we consider the growth in per
capita income. The states recording highest per capita incomes are not the ones which are
experiencing high growth as well. Gujarat has been able to cash‐on on the ongoing
buoyancy in economy, translating into an average growth of more than 15 per cent in the per
capita income. During 2000‐05 the range of variation lay at around growth level of 0.5 per
cent and 6.3 per cent, which was concentrated in the last two years when the range hovered
around 2 and 15 per cent.

Table 35: Average Annual Growth in Per Capita Income
State 1980s 1990s 2000‐01/ 04‐05 2003‐04/ 04‐05
Gujarat 4.4 4.8 6.3 15.4
West Bengal 1.9 4.8 5.7 6.0
Andhra Pr. 4.5 3.6 5.5 6.6
Kerala 1.5 4.9 5.1 7.1
Bihar 2.4 0.4 5.0 2.0
Haryana 3.9 2.7 4.9 7.1
Karnataka 3.5 5.1 4.8 5.0
All‐India 3.4 3.5 4.3 6.2
Himachal Pr. 3.3 3.8 4.1 6.8
All‐States 2.9 3.4 3.2 6.9
Tamil Nadu 3.9 5.2 2.9 5.0
Rajasthan 4.8 4.0 2.9 10.7
Orissa 3.3 1.0 2.9 7.8
Punjab 3.8 2.3 2.5 4.3
Maharashtra 3.9 4.5 2.1 5.8
J & K ‐0.1 2.0 1.7 2.4
Uttar Pradesh 2.5 1.4 1.6 2.6
Madhya Pr. 1.4 3.9 0.5 8.5
Uttaranchal ‐‐ ‐‐ 6.9 8.4
Chattisgarh ‐‐ ‐‐ 6.2 15.6
Jharkhand ‐‐ ‐‐ 2.4 3.4
Note: States are arranged in descending order of growth during 2000‐05
Source: CSO

Economic Structure

There has been a significant change in the structure of the economy as expected in the
structure of a developing economy. There has been shift from primary to secondary and
tertiary sectors. The table highlights the change across the states. From being a
predominantly agrarian economy, the share of agriculture has declined significantly over
the last decade. While the growth in contribution of secondary sector has varied across
states, tertiary sector has witnessed an increase in the percentage share across states.

[61]
Table 36: Percentage Change in Percentage Share in NSDP (1987‐88 to 1999‐00)
Change in Percentage Share
States Primary Secondary Tertiary
Andhra Pradesh ‐12.0 5.0 7.9
Bihar ‐23.6 ‐10.4 34.6
Gujarat ‐21.7 12.5 4.7
Haryana ‐15.2 10.9 9.5
Himachal Pradesh ‐25.0 48.2 11.8
J&K ‐11.4 ‐17.2 10.4
Karnataka ‐25.4 10.5 18.5
Kerala ‐28.0 ‐23.2 24.3
Madhya Pradesh ‐16.4 21.1 13.4
Maharashtra ‐32.5 ‐4.7 18.5
Orissa ‐4.9 ‐66.3 22.6
Punjab ‐5.0 ‐5.0 7.3
Rajasthan ‐18.2 0.9 15.7
Tamil Nadu ‐26.2 ‐13.7 18.7
Uttar Pradesh ‐10.8 27.1 3.0
West Bengal 16.7 ‐38.2 3.7

Key Observations
The state of Gujarat has performed significantly well with respect to the key economic indicators
and has been able to harness the current buoyancy in the economy better than other states. This
suggests that the state was able to provide an environment most conducive to benefiting from
new policies.
Interestingly not all high‐income states have been able to sustain high growth rates and not all
low‐income states have continued with low growth over the three periods, thus negating the
argument that richest state got richer while the poor states got poorer over the decades. West
Bengal and Bihar had lower than national aggregate per capita income level. However, both of
them have been the highest growing states during 2000‐05. On the other hand, Tamil Nadu,
Punjab and Maharashtra with relatively high levels of per capita income have witnessed a growth
deceleration as compared to that during the 80s.
However, leaving apart Haryana, Maharashtra, Gujarat and Himachal Pradesh, all other states
have widened the per capita income gap with the richest state in 2003‐04 as compared to that in
1993‐94.
The poor states of Bihar, UP, Orissa and Jharkhand accounting for 25 per cent of total population
registered growth improvement during the 90s. However the average growth was lower than the
national average for all the periods. The per capita income also grew significantly during the 90s
and the momentum was maintained during the 2000s.
The southern states have always been believed to be the best performers. While the states as a
group have performed well, they have not been the only beneficiaries of the growth acceleration.
Amongst the new states ‐ Uttaranchal and Chattisgarh have remarkably exhibited growth
buoyancy during the last two years, surpassing the growth witnessed in high growth states by a
significant margin. While they register lower than national aggregate per capita income, the
average growth in the same has been significantly higher than the national average.
[62]
The BIMARU characterisation does not hold while looking at the economic performance of the
states with Rajasthan and MP performing reasonably better than the Bihar and UP and several
other states.

Social Infrastructure

Poverty
Relative growth performance of the states is expected to have significant implications for the
poverty reduction in a particular state. With the latest available data on poverty
corresponding to 1999‐00, the states with high per capita income growth during the 1990s
are expected to have rapid and relatively higher reduction in poverty. States of Karnataka,
Tamil Nadu, Maharashtra, Kerala, Gujarat and West Bengal witnessed relatively high per
capita income growth during the 90s and registered significant reduction in poverty in 1999‐
00 from that in 1993‐94.

While all the states have registered a decline in overall poverty over the two periods, states
like Orissa, Bihar and MP still have a sizeable share of population below poverty line.

Table 37: Percentage of Population Below Poverty line
State 1993‐94 1999‐00
Total Total Rural Urban
Orissa 48.6 47.2 48.0 42.8
Bihar* 55.0 42.6 44.3 32.9
Madhya Pradesh* 42.5 37.4 37.1 38.4
Uttar Pradesh* 40.9 31.2 31.2 30.9
West Bengal 35.7 27.0 31.9 14.9
All India 36.0 26.1 27.1 23.6
Maharashtra 36.9 25.0 23.7 26.8
Tamil Nadu 35.0 21.1 20.6 22.1
Karnataka 33.2 20.0 17.4 25.3
Andhra Pradesh 22.2 15.8 11.1 26.6
Rajasthan 27.4 15.3 13.7 19.9
Gujarat 24.2 14.1 13.2 15.6
Kerala 25.4 12.7 9.4 20.3
Haryana 25.1 8.7 8.3 10.0
Punjab 11.8 6.2 6.4 5.8
Jammu and Kashmir 25.2 3.5 4.0 2.0
Note: * Indicator for Undivided state
Source: NSS 1993‐94/ 1999‐00

[63]
Table 38: Poverty Projection for 2007
Poverty Projection for 2007
Rural Urban Combined
State % of Poor No. of Poor % of Poor No. of Poor % of Poor No. of Poor
Andhra Pradesh 4.6 27.0 19.0 41.8 8.5 68.7
Bihar 44.8 482.2 32.7 54.7 43.2 536.9
Gujarat 2.0 6.9 2.0 4.4 2.0 11.3
Haryana 2.0 3.3 2.0 1.5 2.0 4.8
Himachal 2.0 1.2 2.0 0.1 2.0 1.3
J&K N.A. N.A. N.A. N.A. N.A. N.A.
Karnataka 7.8 28.7 8.0 16.3 7.9 45.0
Kerala 1.6 4.0 9.3 8.0 3.6 12.0
Madhya Pradesh 28.7 192.1 31.8 74.5 29.5 266.5
Maharashtra 17.0 101.6 15.2 72.7 16.2 174.3
Orissa 41.7 139.1 37.5 23.6 41.0 162.7
Punjab 2.0 3.4 2.0 2.0 2.0 5.4
Rajasthan 11.1 54.4 15.4 23.4 12.1 77.9
Tamil Nadu 3.7 12.5 9.6 31.6 6.6 44.1
Uttar Pradesh 24.3 373.2 26.2 111.3 24.7 484.4
West Bengal 22.0 137.5 9.0 22.2 18.3 159.7
India 21.1 1705.3 15.1 495.7 19.3 2200.9

Literacy

The quality of human resource development is critical to growth. Due to lack of availability
of extensive data on skill set of the labour force in a state, the literacy rate is thus used as a
proxy for quality of human infrastructure.

The level of literacy has increased for all the states in 2001 as compared to that in 1991. The
percentage of literate population in urban regions significantly exceeds that in the rural
areas. Low growing states of Bihar, UP, Orissa, Jharkhand experienced low levels of
literacy. This reflects inadequacies in the human resource base of these states, thus affecting
their overall growth performance. States like Rajasthan, MP and Chattisgarh experienced
significantly high growth during the 90s, which was matched by a significant acceleration in
the level of literacy in the state over the period.

[64]
Table 39: Literacy Rate
Area Name Total Rural Urban
1991 2001 1991 2001 1991 2001
Kerala 89.8 90.9 88.9 90.0 92.2 93.4
Maharashtra 64.9 77.3 55.5 70.8 79.2 85.8
Himachal Pradesh 62.9 75.9 60.8 74.4 84.2 89.6
Tamil Nadu 62.7 73.5 54.6 66.7 78.0 82.1
Uttaranchal 57.7 72.3 52.7 68.9 74.0 81.5
Punjab 58.5 70.0 52.8 65.2 72.1 79.1
West Bengal 57.7 69.2 50.5 64.1 75.3 81.6
Haryana 55.8 68.6 49.9 63.8 73.7 79.9
Karnataka 56.0 67.0 47.7 59.7 74.2 81.0
Gujarat 58.3 66.4 50.3 58.5 73.2 79.2
All India 51.5 65.2 44.0 59.2 72.2 80.1
Chhattisgarh 42.9 65.1 36.7 60.9 71.4 81.1
Madhya Pradesh 44.7 64.1 35.5 58.1 70.7 79.7
Orissa 49.1 63.6 45.5 60.4 72.0 81.0
Andhra Pradesh 44.1 61.1 35.7 55.3 66.3 76.4
Rajasthan 38.6 61.0 30.4 55.9 65.3 76.9
Uttar Pradesh 40.7 57.4 35.8 53.7 60.2 70.6
Jammu & Kashmir ‐ 54.5 ‐ 48.2 ‐ 72.2
Jharkhand 41.4 54.1 32.7 46.3 71.7 79.9
Bihar 37.5 47.5 34.2 44.4 65.2 72.7
Source: Census 1991, 2001

Further there are gender disparities at all India level and within individual states as well.
The gap is widest in Rajasthan with male literacy rate of 76.5 per cent against the female
literacy rate of 44 per cent in 2001.Kerala had the lowest gender gap of 6.3 per cent points
with a female literacy rate of 87.8 per cent during 2001.

Investment

Investment remains a critical determinant to growth in the development of state economy.
With lack of firm data on level of investment undertaken in a state, we consider the
industrial investment proposals attracted by the states during August 1991 to December
2005. The investment proposals include industrial entrepreneur memorandums, letters of
intent and direct industrial licences. While the data only captures the investment proposed,
it however is a good proxy to compare the relative performance of the states in attracting
investment.

Gujarat and Maharashtra have together attracted a significant share of about 32 per cent of
the total proposed investment. Tamil Nadu, Chattisgarh, UP and Orissa have each attracted
a share of around 7 per cent of the total investment proposals. While Gujarat and
Chattisgarh have experienced high growth during 2000‐05, the rest of the states have not
observed that level of growth.

[65]
Bihar, Kerala, Uttaranchal and Himachal Pradesh have been able to attract a very marginal
share of total investment proposed. However, all of the four states have performed
significantly well during 2000‐05.

Therefore a low level of growth does not indicate low levels of investment or investment
potential in the economy and vice‐versa. However, low levels of investment in high growth
states can be due to low levels of efficiency‐ determined by level of human resource
development, infrastructure quality, economic policy environment and governance quality
in a state.

Figure 24: State‐wise Industrial Investment Proposals (August 1991 to December 2005)
350000 18.0
350000 18.0
16.0
300000 16.0
300000 14.0
250000 14.0
250000 12.0
12.0
Rs crore
per cent
200000 10.0
Rs crore
per cent
200000 10.0
150000 8.0
150000 8.0
6.0
100000 6.0
100000 4.0
50000 4.0
50000 2.0
2.0
0 0.0
0 0.0
Orissa
Gujarat
J&K
Punjab
Bihar
Kerala
UP
MP
Tamil Nadu
Himachal
West Bengal
Rajasthan
Jharkhand
Haryana
Chhattisgarh
Karnataka
Maharashtra
Uttaranchal
Pradesh
Orissa
Gujarat
J&K
Punjab
Bihar
Kerala
UP
MP
Tamil Nadu
Himachal
West Bengal
Rajasthan
Jharkhand
Haryana
Chhattisgarh
Karnataka
Maharashtra
Uttaranchal
Pradesh
T otal Investment %age share

T otal Investment %age share


Employment

The states witnessing high employment growth during 1983 to 1993‐94, witnessed a relative
slowdown in employment growth during the second period. However, the states that did
not witness significant employment growth in the first period saw a growth pick up in the
second period.

Gujarat was the only state that maintained its growth resilience during the two periods.
Punjab and Kerala were the only states to have exhibited growth improvement over the two
periods.

[66]
Table 40: Growth in Employment (Per cent per annum)
1983 to 1993‐94 1993‐94 to 1999‐2000
States Male Female Persons Male Female Persons
Punjab 1.8 ‐1.4 1.0 1.5 6.1 2.6
Bihar 1.8 ‐1.7 0.9 2.3 3.0 2.5
Gujarat 2.4 1.6 2.1 2.1 2.2 2.1
Madhya Pradesh 2.4 1.7 2.2 1.9 1.5 1.8
Uttar Pradesh 2.3 1.1 2.0 1.8 1.4 1.7
Karnataka 2.2 2.4 2.3 2.0 0.8 1.6
Kerala 2.0 ‐1.2 0.9 1.6 1.4 1.6
All India 2.2 1.7 2.1 1.9 0.9 1.6
Rajasthan 2.6 2.4 2.5 2.2 0.5 1.5
Himachal Pradesh 2.8 3.0 2.9 1.4 1.5 1.4
Orissa 1.8 2.9 2.1 1.5 1.0 1.3
Andhra Pradesh 2.1 2.7 2.4 1.6 0.3 1.1
J&K 1.7 5.9 2.9 2.2 ‐1.2 1.1
West Bengal 2.4 2.1 2.4 1.6 ‐0.8 1.1
Maharashtra 2.1 2.3 2.2 1.8 ‐0.2 1.0
Tamil Nadu 1.6 2.0 1.8 1.4 ‐0.3 0.8
Haryana 2.5 4.7 3.1 1.9 ‐3.1 0.6
Note Growth in employment has been estimated as compound annual growth in the persons employed in the
age group 15 years and above on the usual principal and subsidiary status.
Source: The 38th, 50th and the 55th Rounds of the NSSO on Employment and Unemployment Situation in India.

The change in employment trends is consistent with the structural trends in income –
measured by the observed shift in structure in the economy for most of the states except
West Bengal. West Bengal witnessed a decline in growth in employment in agriculture
sector despite a positive growth in sectoral income.

Andhra Pradesh, Haryana, Kerala, Punjab and J&K suffered significant deceleration in
employment growth in industry. The observed change in the economic structure in favour
of services sector is also supported by the positive and significant shift in growth in
employment opportunities originating in the tertiary sector.

[67]
Table 41: Change in Percentage Share in employment (1987‐88 to 1999‐00)
Change in Percentage Share
States Primary Secondary Tertiary
Andhra Pradesh ‐10.2 ‐9.8 35.3
Bihar ‐2.8 9.3 8.7
Gujarat ‐6.1 8.5 7.4
Haryana ‐23.4 ‐2.0 49.3
Himachal Pradesh ‐20.0 4.3 76.7
J&K ‐2.8 ‐54.7 24.7
Karnataka ‐12.6 ‐4.0 41.9
Kerala ‐27.6 ‐1.7 37.3
Madhya Pradesh ‐10.9 ‐0.5 54.6
Maharashtra ‐20.9 11.8 46.7
Orissa ‐1.2 0.0 4.0
Punjab ‐16.5 ‐8.3 29.4
Rajasthan ‐6.1 4.3 13.8
Tamil Nadu ‐18.1 1.0 31.4
Uttar Pradesh ‐14.3 29.0 35.7
West Bengal ‐9.5 ‐0.8 17.0

Infrastructure

It is undisputable that rapid industrial growth critically depends upon the availability and
quality of infrastructure in the form of efficient system of power, road and rail transport and
telecommunications. Rural development hinges on the spread and quality of irrigation, land
development, extent of rural electrification and spread of rural roads. Good infrastructure
raises productivity of existing resources, lowers production costs and helps in attracting
more investment that further boosts the overall growth in the state.

Power

While availability of electricity is a good indicator of the existence of infrastructure set up in
the state, the per capita consumption of electricity captures the quality of infrastructure by
way of measuring the amount of demand actually met by the state. Tamil Nadu, Andhra
Pradesh, Karnataka and Himachal Pradesh registered moderate growth of around 6‐8 per
cent per annum during 1999‐00 to 2003‐04. While the all India consumption grew at a rate of
2.4 per cent per annum, states like Punjab, Bihar, MP and Rajasthan witnessed a growth
deceleration during the corresponding period. Bihar experienced a growth deceleration of
about 25 per cent per annum during the period. One of the key reasons behind the observed
occurrence is the creation of a new state‐ Jharkhand, which has been the key source of power
to Bihar.

[68]
Figure 25: Per Capita Consumption of Electricity (Utility & Non‐utilities)
1000
1000
900
900
800 1999-00
800 1999-00
700
700 2003-04
600 2003-04
600
Kwh
390
500
Kwh
390
500
355
400
355
400
300
300
200
200
100
100
0
0
Orissa
Gujarat
J&K
Punjab
Bihar
All India
Kerala
Andhra
UP
MP
Tamil Nadu
Himachal
West Bengal
Rajasthan
Jharkhand
Haryana
Chhattisgarh
Karnataka
Maharashtra
Uttaranchal
Orissa
Gujarat
J&K
Punjab
Bihar
All India
Kerala
Andhra
UP
MP
Tamil Nadu
Himachal
West Bengal
Rajasthan
Jharkhand
Haryana
Chhattisgarh
Karnataka
Maharashtra
Uttaranchal

Source: Central Electricity Authority, SEB

Roads

Over the past decades road transport has emerged as the major mode of transporting freight
and passenger traffic in India. It is the main mechanised means of transport in hilly and
rural areas, not served by railways.

While the road length has significantly improved over the past few years, the total road
length is still very low. Further, the quality of the existing road is also a matter of great
concern across the states. Punjab with about 42 km per 1000 sq km had the highest road
density during 2001. Even better performing states like Gujarat had relatively low road‐
density of 27 km/1000 sq km. Hilly states like Himachal and Uttaranchal, where railway
structure is not very developed are highly dependent on the available road infrastructure,
which itself is not very developed.

[69]
Table 42: Road Length
Route km per lakh of population Route km per 1000 sq km
as on March 31, 2001
Punjab 8.65 41.73
West Bengal 4.56 41.26
Bihar 4.15 36.55
Uttar Pradesh 5.16 35.93
Haryana 7.34 35.00
Tamil Nadu 6.74 32.21
Gujarat 10.50 27.10
Kerala 3.30 27.02
Jharkhand 6.68 22.54
Andhra Pradesh 6.78 18.67
Maharashtra 5.64 17.74
Rajasthan 10.49 17.32
Madhya Pradesh 7.93 15.52
Karnataka 5.64 15.51
Orissa 6.29 14.83
Chhattisgarh 5.68 8.73
Uttaranchal 4.20 6.37
Himachal Pradesh 4.42 4.83
J&K 0.95 0.43
Total 135.56 700.36

Financial Infrastructure

The table reflects the ratio of credit disbursed to deposits received by the states during 2002
to 2005. While the credit‐deposit ratio captures the specificities of an individual state, the
ratio also highlights the inequality between different states as banks absorb deposits in
backward regions and funnel the funds to fund activities in relatively developed regions.

The ratio has improved for most of the states except Haryana, Gujarat, J&K, Uttar Pradesh
and Himachal Pradesh. While Tamil Nadu registered a significantly high ratio of 98 per cent
during 2004‐05, the disparity is significantly high with Uttaranchal registering a ratio of 24.7
per cent. Further, with the inability of the states with low ratios to register a significant pick
up, the range of disparity has significantly worsened over the years.

[70]
Table 43: Credit‐Deposit Ratio of Scheduled Commercial Banks (Per cent)
State 2002 2003 2004 2005
Tamil Nadu 88.5 93.1 96.1 98.4
Maharashtra 77.5 77.4 66.5 95.2
Andhra Pradesh 67.7 69.3 70.9 75.1
Karnataka 68.9 71.1 69.0 74.1
Rajasthan 55.4 55.3 62.9 69.0
Orissa 51.4 56.9 58.6 62.2
Kerala 43.7 43.6 47.8 55.8
Madhya Pradesh 50.3 51.7 50.1 55.4
West Bengal 49.2 50.0 53.8 53.6
Haryana 55.0 58.3 59.6 51.9
Gujarat 54.7 56.0 54.8 46.7
Chhatishgarh 54.2 43.8 44.9 45.8
Punjab 43.9 43.4 45.7 45.7
J&K 40.9 39.0 41.7 38.6
Uttar Pradesh 34.3 36.0 38.0 37.0
Jharkhand 31.0 30.9 26.9 30.6
Bihar 21.9 23.7 26.9 27.8
Uttaranchal 26.0 21.4 23.4 24.7
ALL India 58.4 59.2 58.2 66.0

These regional inequalities translate into deeper poverty in the countryʹs poorest regions.
However, they should not be interpreted as the favouring of one region over another; rather,
they are an indicator of distorted growth and the growing inequality between different
income groups.

Some areas are exclusive responsibility of the central government like national highways,
rail transportation, telecommunications, airports and major ports. The central government
has considerable flexibility to determine the regional distribution of central public sector
investment. The scale on which the centre can undertake such investment, however, is
constrained by the total resource availability.

State governments also have a major role to play in developing infrastructure required for
accelerating growth. Some of the critical sectors are being investment in social sectors‐
schools and health facilities, investments in economic infrastructure such as power system
(including rural electrification), development of irrigation and water management systems,
land development, state highways and district and rural roads.

There is an urgent need to increase public investment in critical areas across the states. As
growth observed even in the better performing states might not be sustained in future if
corrective action vis‐à‐vis ensuring adequate and efficient system of infrastructure is
established.

[71]
Causes of Regional Inequality
As is evident from the above discussion, there exists wide growth disparity across the states.
As the above discussion highlights the performance of states with respect to the key socio‐
economic attributes, the following discussion will summarise the role of the major
characteristics which are instrumental to the existing disparity.
Social and demographic factors
The states vary considerably in social indicators, such as infant mortality rates and the level
of adult literacy. Improved social and demographic factors provide for an enriched human
resource base in the state. While a superior performance raises the standard of well being of
the population, improved set of social and demographic indicators needs to be clubbed with
quality infrastructure, good governance and significant investment opportunities in the state
for it to translate into discernably higher rates of economic growth.

Human Resources
The quality of human resource development in a state is a critical determinant of growth.
States with superior availability of human skills are expected to witness faster rate of
growth. Taking literacy as a proxy for human resource development indicate that literacy
levels in the slow growing states are distinctly lower than the average for all states. An
absolute improvement in skill set of the existing human base in the state should help
improve the productivity of human resources in the state, in turn favourably impacting the
overall economic growth and development in the state. However, given that literacy rates
have risen over time in all states, including the slow growing states of Bihar, UP and Orissa,
the continuing relative gap means that poorer states will continue to find it difficult to
compete with the more advanced states in attracting investment and hence closing the
growth disparity.

Investment
Investment plays a significant role in accelerating economic growth and development in a
state. While the mobility of private corporate investment has increased in the post‐
liberalisation period since decontrol has eliminated the central government’s ability to direct
investment to particular areas, competition has greatly increased the incentive for private
corporate investment to locate where costs are minimised. To the extent private corporate
investment is likely to flow to states having skilled labour, good infrastructure and good
governance; the poorer performing states suffer from obvious handicaps in attracting
private investment.

Quality of Infrastructure
Rapid industrial growth depends critically upon the availability of infrastructure support in
the form of electric power, road and rail transportation and telecommunications. Further,
agricultural growth also depends upon rural infrastructure such as the spread and quality of
irrigation, land development, extent of rural electrification and the spread of rural roads.
Although all states suffer from infrastructural deficiencies, the poorer performing states
definitely lag behind in this area. While private participation in infrastructure is called for,
state governments have a crucial role to play in developing infrastructure needed for
accelerating growth.
[72]

Urbanisation
Level of urbanisation has both a cause and effect relationship with economic growth. An
already existing urban area would be a preferred destination for new investments. The
degree of urbanisation itself depends on underlying geographical factors, especially the
location of the main national ports as well as the productivity of agriculture in the region.

Policy Environment and Governance
The overall policy environment and the quality of governance are also important factors
determining the growth potential of a state. There are several ways in which good
governance affects growth. First, it has a direct impact on the effectiveness with which
developmental programmes are implemented. Poor administration and corruption are now
widely recognised as major problems reducing the effectiveness of many government
programmes. Second, the quality of governance can help stimulate growth by making the
policy environment more business friendly through deregulation, decontrol and procedural
simplification. Third, the general conditions for law and order are a reflection of the overall
level of governance and are particularly important for stimulating private sector investment.
Finally, a neglected area, where state governments could take an initiative to improve the
policy environment for investment, relates to the degree of flexibility allowed with regard to
labour laws.

Binding State finances
Acceleration in growth calls for higher levels of public investment in critical social and
economic infrastructure sectors by state governments. However a constrained fiscal position
of the state may result in forced constriction on plan investment.

The literature documenting the reasons for divergence in growth across states cites several
possible reasons. Sachs et al 10 list several possible hypotheses for the lack of unconditional
convergence among Indian states. Firstly, significant geographical differences in India
(larger than that in the US, Europe and Japan). Secondly, slow response of population
movements in India to income differentials. Thirdly, policies of national or state
governments do not facilitate convergence. Lastly economic convergence is slower at lower
levels of economic development, as is the case in India. He also identifies coastal access and
climate as factors of convergence.

In a related study, Bhide and Shand 11 (2000) bring out the stark differentiation between
“progressive” and “backward” states. While infrastructure appears to have a facilitating
role, growth appears to be negatively related to the size of public administration. The results
suggest that rather than physical infrastructure social infrastructure as determined by
institutional and political factors is an important determinant of the attractiveness of state as
an investment destination.
Sachs, J.D., N. Bajpai and A. Ramiah (2002), “Geography and Regional Growth” The Hindu, February 25 and
10
26.

11 Bhide, S. and R. Shand (2000), “Inequalities in Income Growth in India Before and After Reforms”, South Asia
Economic Journal, Vol. 1, No.1, March, pp. 19‐51.

[73]

Paper by Ahluwalia 12 (2000) analysed the growth performance of 14 major Indian states in
the post reform period 1991‐92 to 1998‐99 and compared it with the performance in the
previous decade. The paper attempted to analyse the causes of the growth disparities and to
identify the policy measures needed for the acceleration of future growth in the slow
growing states. In regard to determinants of growth in the post‐reform period, private
investment rate, literacy rate, teledensity, proportion of villages electrified and per capita
energy consumption were found to be individually positively correlated with SDP growth.
The paper noted that the dispersion of growth rates of states increased considerably in the
post‐reform period: the coefficient of variation of growth rates increased from 15 per cent in
the 1980s to 27 per cent in the 1990s. Growth accelerated in the richest states of Gujarat and
Maharashtra, while it decelerated in the poorest states of Bihar, Uttar Pradesh and Orissa.

Summary

The table below charts the competitiveness of individual states based on study conducted by
the National Productivity Council. The ranking is based on comprehensive set of indicators
on indicators of economic strength, governance, business efficiency, governance quality,
human resource and infrastructure in each individual state.

Table 44: Overall Competitiveness Ranking of the States‐ 2004
State STD values Rank
Maharashtra 0.54 1
Punjab 0.52 2
Gujarat 0.51 3
Karnataka 0.48 4
Kerala 0.45 5
Tamil Nadu 0.44 6
Andhra Pradesh 0.23 7
Haryana 0.09 8
WB ‐0.02 9
MP ‐0.07 10
Orissa ‐0.09 11
Rajasthan ‐0.09 12
Bihar ‐0.10 13
UP ‐0.11 14
Smaller States
Himachal Pradesh 0.29 3
Uttaranchal 0.14 5
Jharkhand 0.11 6
Chattisgarh ‐0.01 9
J&K ‐0.11 10
Source: State Competitiveness Report 2004, National Productivity Council

12 Montek S Ahluwalia Economic Performance of States in Post‐reform period. Economic Political Weekly, May 6,
2000
[74]
Policy Implications

Different states grow at different rates and this should not be observed as a failure of central
or state level policy. Some states may grow faster than the other as they may be better placed
exploit new opportunity that arises. However, growth differences might arise because of
some states being better managed and thus have created a growth conducive environment.
The quality of economic management will thus result in greater inter‐stare variation.

While the objective of balanced regional development should be pursued, policies should
help states realise their full growth potential. The well‐managed states should be
encouraged to reach their full growth potential. While this is expected to generate growth
differences across the states, the growth buoyancy is expected to have positive
demonstration effect.

However, accepting growth differences should not imply that the centre should passively
accept consistent level of low growth rates in the economy. As it would result in aggravation
of inter state inequality and further more regional concentration of poverty.

While high growth is a necessary condition for ensuring equality and poverty reduction
across states, the growth needs to ensure broad based expansion in income earning
opportunities within the state and needs to be supplemented with sustainable reduction in
poverty by way of targeting specific segments.

While the focus on level of investment undertaken in a state needs to be ensured, the
efficiency of investment already undertaken needs to be improved as it significantly alters
the potential investment flow. Efficiency can be improved on by improving factors such as
level of human resource development, infrastructure quality, economic policy environment
and governance quality in a state.

The concept of regional disparities needs to go beyond economic indicators and encompass
social dimensions as well. Furthermore, to an extent the focus on inter‐state disparities
masked the incidence of intra‐state disparities, a multi‐pronged approach to provide
additional funding to backward regions in each state, coupled with governance and
institutional reforms needs to be pursued.

[75]
IX. RECOMMENDATIONS FOR STRATEGY
Three sets of “core” issues emerge from the descriptions in the paper. These form the basis
of the recommendations made in this section. They clearly do not encompass the entire set of
issues addressed in the paper. They are intended to prioritize matches between the
requirements for sustained and inclusive growth and the funding approaches of a
multilateral financial institution.
The Infrastructure Gap: The pattern of industrial growth observed in recent years has to be
viewed in the context of the declining trend in public investment. The former suggests a
growing demand for infrastructure, while the latter suggests a plateauing of supply. On the
face of it, this indicates that industrial growth will decelerate as the supply of infrastructure
becomes a binding constraint. However, this conclusion needs to be qualified by two factors.

The declining trend in public investment has been visible for some time. It straddles periods
of industrial stagnation as well as expansion. In other words, industry has been able to
expand despite infrastructure supply being a problem. The first reason for this is that the
existing infrastructure capacity operated at such low levels of efficiency that even limited
efforts to improve them paid off in significant measure. Hidden capacity was brought out
into the open, allowing the system to meet demand growth without significant new
investments.

The second reason is that there is substantial substitution of private investment for public
investment. For example, any new industrial capacity is inevitably accompanied by a captive
power source. Going beyond manufacturing, any new real estate development in virtually
all parts of the country would not be commercially viable without full power back‐up
facilities. While power supply is the most significant example of private solutions to
inadequate public investment, there are examples of this across a whole range of services
that have traditionally been provided by the state.

Both these factors have provided significant room for the economy to sustain a relatively
high growth trajectory. But, by their very nature, they are self‐limiting. Efficiency
improvements can only increase output by so much and cannot substitute for expanded
capacity. Private solutions are typically far more expensive than public services delivered
with reasonable efficiency. They raise the capital requirements for new projects and, since
their services are not directly revenue‐generating, reduce the return on capital for most
projects. In effect, they divert private capital from more efficient to less efficient uses. Both
the overall level of investment and its efficiency are therefore compromised.

The point is that the current combination of improved efficiency and private solutions
cannot be expected to continue to meet the demands on the system imposed by the current
growth trajectory. There is no alternative to new investment in most infrastructure sectors.
Lessons from other countries as well as our own experiences in a sector like telecom suggest
that the source of financing – public, private or mixed – is now less critical than developing a
viable business model. This means getting the right policy and regulatory framework in
[76]
place for each sector, enabling investments to be made on the basis of reasonable commercial
criteria, regardless of how it is financed.

Once this framework is created, commercially viable investment will flow into the sector. If
it is financed from private sources, it will generate returns to investors without recourse to
any subsidies or transfers from public resources that have not been pre‐committed to the
sector or specific projects within it. If it is financed from public sources, it will meet the spirit
of fiscal responsibility by generating a positive return on capital expenditure by the
government.

Substantial knowledge combining theory and experience exists as to the nature of such
enabling frameworks for different sectors. This needs to be consolidated and synthesized
into policy statements and regulatory structures for each sector. Multilateral institutions
have an important role to play in this process, which they have been doing. However,
mechanism design, however important it may be, is only a first step. The actions of several
government agencies at various levels have to be brought into alignment with the
mechanism. This will require both human and financial capital. Finding the resources to
make investments required by the mechanism that is designed for the sector is a critical
challenge. Without these resources being deployed, a viable business model is not likely to
emerge and investment made on the basis of largely commercial criteria will not take place.
Once the model is in place though, the mechanism can become self‐sustaining by way of, for
example, license fees collected by the regulator. In this sense, the initial investment also has
the potential to generate returns.

Multilaterals are prime candidates for this role. However, they need to develop a reasonably
simple and clear national and sub‐national roadmap, which ensures consistency across
jurisdictions, while allowing some flexibility to sub‐national governments to accommodate
local constraints.

The Employment Trap

A striking feature of the Indian growth pattern is the rigidity of the sectoral employment
pattern. Agriculture has conceded a substantial portion of its share of GDP to services, but
has held fast to its share of the workforce. Over the 1990s, industry’s share of total
employment went up by less than two percentage points, while that of services went up by
about three percentage points. The paper does a relatively detailed analysis of employment
patterns and elasticities in the manufacturing sector. It points to the inescapable conclusion
that output growth is simply not translating into employment growth. Admittedly, some of
the conclusions may emerge from data that does not fully capture the recent buoyancy in a
whole range of service activities. The fact remains, however, that whatever is happening in
services does not seem to be happening in industry. The chapter on growth in services in the
paper addresses these issues in some detail. The main policy implication is that flexible
labour markets, which services enjoy but organized industry does not, are conducive to
employment growth.

The challenge is to move from the current regime to one in which employers have greater
flexibility to lay off workers in times of business downturns while protecting the interests of
[77]
individual workers. This implies a social safety net that provides workers a reasonable level
of income for specified periods of unemployment. Designing, financing and administering
such a programme will require substantial resources. There are, clearly, programmes that
have worked in this area. A critical requirement for success is that the financing load be
distributed amongst three agents – the employee himself, the employer and the state. At
some point, contributions from the former two along with budgetary support from the
government will allow any such programme to achieve financial stability, but there will
inevitably be a transition period, during which financial support will be required.

Here again, substantial investment needs to be made in designing the financial and
administrative components of the scheme. A first step is unique identification of all
individuals, which allows tracking of their employment status. Some beginnings have been
made but the efforts have not sustained. Investment in creating a unique identification
system for the country, building on the fragmented databases that now constitute the public
distribution and electoral identification systems is imperative. Simultaneously, work can
begin on developing a income security system, which is perhaps predominantly funded by
the state, but increasingly comes to rely on employer and employee contributions.

If the argument that inflexibility in the labour market is a major deterrent to employment
growth is valid, any movement towards greater flexibility should induce significant
numbers of new jobs. This growth provides the basis for a reasonable social security tax with
matching contributions from employers. If the employment elasticities across most sectors
increase significantly as a consequence of these reforms, the path to financial stability should
not take too long. Once the programme design is finalized, multilaterals can make time‐
bound commitments to finance individual components based on anticipated cash inflows
from the new taxes. In any case, a unique identification system has many benefits beyond
social security. As these benefits begin to be realized, the social rate of return on the initial
investment will increase. Some of these benefits will clearly be commercially exploitable,
which will provide an additional inflow for debt servicing.

Regional Inequities – Vicious Circles

The paper points out several dimensions along which the performance of states differs
widely. The pattern is clearly reflective of vicious circles – weak resource endowments –
human and physical ‐ resulting in poor growth performance, in turn weakening state
finances and constraining investments in infrastructure and human capital development. In
order to break out of a vicious circle, the force has to be applied to the weakest link in the
loop. Since there are at least some common elements to the experience of all states, a generic
approach can be recommended. However, since state‐level conditions vary, there will have
to be a strategy tailored to the requirement of each state based on the generic principles.

A generic approach to regional development must be based on finding the closest match
between the resources that the state has and economically viable activities that these
resources can carry out. The gap between the two is the result of a combination of human
capabilities and infrastructure, broadly speaking, including efficient access to markets. A
critical path presumably exists to bridge that gap, indicating priorities on both the human
capital development and infrastructure investment fronts. Acting on these priorities should
[78]
provide the quickest route from the status quo to viable deployment of the region’s
resources. It is not that such approaches have not been attempted before. Their overall
effectiveness, however, has been limited by issues of efficiency, governance and commercial
orientation. The underlying principle remains valid but identifying the critical path and the
priorities that it implies for investments in different activities remains the challenge.

Multilateral institutions have brought this learning to bear in designing their state‐focused
lending programmes. These were based on the idea that there were strong
complementarities among different sector requirements, so dealing with all of them at once
would increase the prospects for success. However, it is rather difficult to define the
boundaries of complementarity. There is always some unaddressed issue or sector that
proves to be the weak link in the effectiveness of the strategy. That risk remains in the
approach being suggested, but there should be some learning from the previous experience
that indicates the most important unaddressed links in each state, which will be addressed
by the design of state‐specific strategies.

A Concluding Comment

A common theme runs through all the recommendations made above. They all involve
detailed designing of programmes – at various of government – to address constraints to
sustainable, inclusive and balanced growth. They are also all based on an expectation that a
well designed and executed programme will not face resource constraints beyond a start‐up
phase. It is during this period that the need for external finance as well as technical support
is most critical. And finally, they all require substantial institutional capacity, whether of a
regulatory or a managerial nature, to be built up. The essential point is that all solutions,
whether the ones recommended here or other alternatives, will require reasonable
investments in all these components.

[79]
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Approach Paper: Eleventh Five‐Year Plan (2007‐08 / 2012‐13), Planning Commission Govt. of
India
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India
Approach to the Mid‐Term Appraisal of the Tenth Five Year Plan (2002‐03/ 2006‐07),
Planning Commission Govt. of India
Can India sustain its economic growth? November 01, 2005, M Govinda Rao
Determinants of access to rural non‐farm employment: Evidence from Africa, South Asia
and transition economies, DFID, A study by Tiago Wandschneider (NRI) March 2003
Does Public Capital In the long run, capital for public infrastructure projects Crowd Out
Private Capital? Evidence from India Luis Serven The World Bank Policy Research
Department Macroeconomics and Growth Division May 1996
Economic Reforms and Jobless Growth in India in the 1990s ‐ B.B. Bhattacharya & S.
Sakthivel*
Economic Reforms in India since 1991: Has Gradualism Worked?by Montek S. Ahluwalia*
Financing Private Infrastructure: Lessons from India Montek S. Ahluwalia
Food Security & Nutrition: Vision 2020 R. Radhakrishna and K. Venkata Reddy
Food Security in India Policy challenges and responses Debashis Chakraborty, Rajiv Gandhi
Institute for Contemporary Studies, New Delhi, February 2005
Food Security in India: John Farrington and N.C. Saxena
General Review Study of Small & Medium enterprise (SME) Clusters In India
Has Government Investment Crowded Out Private Investment in India? Pritha Mitra*
India’s Agricultural Challenges and their Implications for Growth of It’s Economy, Ramesh
Chand, December , 2005.
Indiaʹs Economic Reforms Montek S Ahluwalia*
Indiaʹs Economy — The Challenges Ahead, Montek Singh Ahluwalia, April 1994
Inflation, investment and growth: the role ofmacroeconomic policy in India Ila Patnaik and
D.K. Joshi1
[80]
Inter-Sectoral Growth Linkages in India: Implications for Policy and Liberalized Reforms,
Seema Bathla Institute of Economic Growth, University of Delhi Enclave
Jobless Growth and Unemployment: A Global Phenomenon ‐ M Victor Louis Anthuvan
Report of the Special Group on Targeting Ten MillionEmployment Opportunities per year
over the Tenth Plan Period, Dr. S. P. Gupta Member Planning Commission Govt. of India
New Delh May, 2002
Report of the Task force on Employment Opportunities, Government Of India, Planning
Commission, July 2001
Rural Non‐Farm Employment in India: Access, Income and Poverty Impact Peter Lanjouw
Abusaleh Shariff, Working Paper Series No. 81, NCAER ,Feb 2002
Rural Non‐farm Employment: an Analysis of Rural Urban Interdependencies, Amitabh
Kundu Niranjan Sarangi Bal Paritosh Dash February 2003
Tenth Five‐Year Plan Document, Planning Commission Govt. of India
The Rural Non‐Farm Economy in India: Some Policy Issues N. C. Saxena March 2003
Vision 2020 — The jobless growth conundrum P. V. Indiresan
Why India needs a strategic Plan B September 13, 2004 Subir Gokarn
[81]

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India: Country Growth Analysis

0.0 10.0 20.0 30.0 40.0 50.0 60.0

i) Encouraging emerging areas of agriculture like horticulture, floriculture, organic

iii) Futures market and free trade: The present system marked by input subsidies and

80.0 64.8 59.8

Excise + Customs/ Industrial GDP Services T ax/ Services GDP

Machinery and equipment -0.01

-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60

Growth (%) (July 2002 - Oct 2005)

IIP_G IIP_Mfg SSI

per cent of GDP

per cent of GDP

Debt GFD 2004-05

Sub-saharan Africa 2.5

Middle East &

T otal Investment %age share

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