INDIAN ECONOMY 1

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CIVIL SERVICES
‘INTERVIEW’
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2016-17
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CURRENT UPDATE - 8
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INDIAN ECONOMY - 1

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2 INDIAN ECONOMY

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CONTENTS
1. Overview 7. NPA

2. Economic Survey 2016-17 8. Fiscal Deficit

3. Union Budget 2017-18 9. Foreign Trade Policy

4. Savings and Investments 10. Foreign Direct Investment

5. Jobless growth 11. Inflation in India

6. Rising Inequality 12. Demonetisation

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Notes
INTERVIEW - 2016-17
CURRENT UPDA TE

Overview Questions
Introduction
1. Discuss some of the steps
India has emerged as the fastest growing major economy in the world as taken by government of
per the Central Statistics Organisation (CSO) and International Monetary India to promote:
Fund (IMF). According to the Economic Survey 2015-16, the Indian a. investments
economy will continue to grow more than 7 per cent in 2016-17. b. infrastructure
The improvement in India’s economic fundamentals has accelerated in the c. agriculture
year 2015 with the combined impact of strong government reforms, RBI’s
d. trade
inflation focus supported by benign global commodity prices.
India’s Consumer Confidence score in the April-June 2016 quarter declined
to 128 from the high of 134 in the January-March 2016 quarter. India was
ranked the highest globally in terms of consumer confidence during October- Notes

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December quarter of 2015, continuing its earlier trend of being ranked the
highest during first three quarters of 2015, as per the global consumer
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confidence index created by Nielsen.
Market size
According to IMF World Economic Outlook Update (January 2016),
Indian economy is expected to grow at 7-7.75 per cent during FY 2016-
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17, despite the uncertainties in the global market. The Economic Survey
2015-16 had forecasted that the Indian economy will growing by more
than seven per cent for the third successive year 2016-17 and can start
growing at eight per cent or more in next two years.
According to Fitch Ratings Agency, India’s Gross Domestic Product (GDP)
will likely grow by 7.7 per cent in FY 2016-17 and slowly accelerate to
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8 per cent by FY 2018-19, driven by the gradual implementation of

structural reforms, higher disposable income and improvement in economic
activity.
According to Mr Arun Singh, Indian Ambassador to the US, the Indian
pharmaceutical market is expected to grow to US$ 55 billion by 2020,
thereby emerging as the sixth largest pharmaceutical market globally by
absolute size.
India’s foreign exchange reserves stood at US$ 360 billion by end of
March 2016, as compared with US$ 342 billion at same time last year,
according to data from the Reserve Bank of India (RBI).
According to a report by the rating agency ICRA Limited, the Indian
securitisation market increased by 45 per cent year-on-year to Rs 25,000
crore (US$ 3.7 billion) in FY 2016, primarily due to the increased number
of asset-backed securitisation (ABS) transactions.
The steps taken by the government in recent times have shown positive
results as India’s gross domestic product (GDP) at factor cost at constant
(2011-12) prices 2014-15 is Rs 106.4 trillion (US$ 1.58 trillion), as against
Rs 99.21 trillion (US$ 1.47 trillion) in 2013-14, registering a growth rate
of 7.3 per cent. The economic activities which witnessed significant growth
were ‘financing, insurance, real estate and business services’ at 11.5 per
cent and ‘trade, hotels, transport, communication services’ at 10.7 per
cent.
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According to a Goldman Sachs report released in September 2015, India

could grow at a potential 8 per cent on average during from fiscal 2016 to
Notes
2020 powered by greater access to banking, technology adoption,
urbanisation and other structural reforms.
Recent Developments
With the improvement in the economic scenario, there have been various
investments leading to increased M&A activity. Some of them are as
follows:
India has emerged as one of the strongest performers in terms of deals
related to mergers and acquisitions (M&A). According to data from
Thomson-Reuters, total M&A deals involving Indian companies grew by
82 per cent to US$ 27 billion during January to June 2016, which is the
highest in the first six months in any year since 2011, led by a four and
a half time increase of Indian acquisitions abroad at US$ 4.5 billion.
• The Government of India and the Government of the United States
of America have signed a memorandum of understanding (MoU) to

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enhance cooperation on energy security, clean energy and climate
change through increased bilateral engagement and further joint

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initiatives for promoting sustainable growth.
• Under the new National Mineral Exploration Policy (NMEP), the
Government of India plans to conduct e-auction of 62 mineral blocks
of minerals such as iron ore, limestone and gold located across several
states to further open up the mining sector and increase output of
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minerals in 2016-17.
• The Department of Electronics and Information Technology (DeitY)
has been entrusted with the task of developing India’s first national
social security platform, aimed at distributing social security benefits
directly to the beneficiaries account, thus doing away with
intermediaries.
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·• According to The World Bank, India’s per capita income is expected

to cross Rs 100,000 (US$ 1,505) in FY 2017 from Rs 93,231 (US$
1,403.5) in FY 2016.
• India’s Index of Industrial Production (IIP) grew by 2.1 per cent year-
on-year in June 2016, led by expansion in electricity and mining
production.
• India’s Consumer Price Index (CPI) inflation increased to 6.07 per
cent in July 2016 as compared to 5.77 per cent in June 2016. On the
other hand, the India’s Wholesale Price Index (WPI) inflation increased
to 3.6 per cent in July 2016, a 23-month high, as against negative
1.62 per cent in the previous month.
Government Initiatives
Numerous foreign companies are setting up their facilities in India on
account of various government initiatives like Make in India and Digital
India. Mr. Narendra Modi, Prime Minister of India, has launched the
Make in India initiative with an aim to boost the manufacturing sector of
Indian economy. This initiative is expected to increase the purchasing
power of an average Indian consumer, which would further boost demand,
and hence spur development, in addition to benefiting investors. Besides,
the Government has also come up with Digital India initiative, which
focuses on three core components: creation of digital infrastructure,
delivering services digitally and to increase the digital literacy. Finance

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Minister Mr Arun Jaitley stated that the government is looking at a number

of reforms and resolution of pending tax disputes to attract investments.
Notes
Currently, the manufacturing sector in India contributes over 15 per cent
of the GDP. The Government of India, under the Make in India initiative,
is trying to give boost to the contribution made by the manufacturing
sector and aims to take it up to 25 per cent of the GDP. Following the
government’s initiatives several plans for investment have been undertaken
which are as follows:
• The Government of India has certified 20 private organisations as
incubators under the Startup India Action Plan, which is expected to
promote entrepreneurship, provide pre-incubation training and a seed
fund for high growth start-ups in the country.
• The Government of India aims to improve its ease of doing business
ranking from 130 at present to within the top 100 by 2016 and the
top 50 by 2017, based on reforms undertaken in areas like construction
permits, enforcing contracts and starting business, especially by top
cities such as Mumbai and Delhi.

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• The Government of India has successfully completed the double
taxation avoidance agreement (DTAA) negotiations with the
Government of Cyprus, which is expected to further develop the
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trade and economic links between the two countries.
• The Union cabinet has approved the establishment of a Fund of
Funds for Startups (FFS) at Small Industries Development Bank of
India (SIDBI), with a corpus of Rs 10,000 crore (US$ 1.48 billion),
which would extend funding support to start-ups and encourage
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entrepreneurship in the country.

• The Ministry of Commerce and Industry plans to establish India as
a hub for world class designing by setting up four National Institute
of Design (NIDs) across the country, aimed at providing skills to
empower India’s human capital towards world class designing.
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• The Government of India is preparing a new National Mineral

Exploration Policy (NMEP), aimed at augmenting mineral production
in the country by allowing private companies, including foreign
companies, to participate in mine exploration.
• The Union Cabinet has approved the introduction of several short
term (within one year) and medium term measures (within two years)
to be implemented by government ministries, departments and
organisations for promotion of payments through cards and digital
means, and to reduce cash transactions.
• Government of India has prioritised sustainability as the key aspect
of India’s development. To achieve this, the government aims to
encourage education, skill development, digital connectivity and
entrepreneurship in a sustainable manner.
• Prime Minister Mr Narendra Modi announced at the International
Monetary Fund (IMF) conference on ‘Advancing Asia: Investing for
the Future’ in New Delhi that the government will continue to bring
in new reforms for transforming economy without resorting to
undervaluing its exchange rate to boost trade.
• The Government of India plans to build five new railway links with
Nepal, which will boost India’s economic links with its neighbouring
country and promote growth, employment and prosperity in the region.

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• India has signed a loan agreement worth US$ 35 million with the
Notes
World Bank for Madhya Pradesh Citizen Access to Responsive
Services Project which aims to improve access and quality of public
services in Madhya Pradesh through implementation of the 2010
Public Service Delivery Guarantee Act.
• The Cabinet Committee of Economic Affairs (CCEA) has approved
the allocation of coal linkages for non-regulated sectors such as cement,
steel, sponge iron, aluminium and others, through the route of e-
auction to be conducted in April 2016, which is expected to bring in
transparency in allotment process and ensure all market participants
have a fair opportunity to secure coal for their operations.
• Government of India plans to create a National Investment Grid to
map business opportunities across the country which will make it
easier for investors, especially domestic investors, to access and explore
investment opportunities.
• Prime Minister, Mr Narendra Modi, launched the Start-up India

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initiative and unveiled the Start-up Action Plan which includes creation
of a dedicated Start-up fund worth Rs 10,000 crore (US$ 1.48 billion)

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apart from other incentives like no tax on profits for first three years
and relaxed labour laws.
British telecom giant Vodafone, India’s second largest telecom operator,
plans to invest over Rs 13,000 crore (US$ 1.93 billion) in India, to
upgrade and expand its network and also for its payments bank
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operations.
• Chinese smartphone handset maker, Vivo, has set up an assembly
unit in India at Greater Noida which will initially manufacture 150,000
smartphone units a month, to produce three smartphone models,
namely Y11, Y21 and Y15S.
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• Foxconn Technology group, Taiwan’s electronics manufacturer, is

planning to manufacture Apple iPhones in India. Besides, Foxconn
aims to establish 10-12 facilities in India including data centers and
factories by 2020.
Under the Digital India initiative numerous steps have been taken by the
Government of India. Some of them are as follows:
• The Government of India has launched a digital employment exchange
which will allow the industrial enterprises to find suitable workers and
the job-seekers to find employment. The core purpose of the initiative
is to strengthen the communication between the stakeholders and to
improve the efficiencies in service delivery in the MSME ministry.
According to officials at the MSME ministry over 200,000 people
have so far registered on the website.
• The Ministry of Human Resource Development recently launched
Kendriya Vidyalaya Sangthan’s (KVS) e-initiative ‘KV ShaalaDarpan’
aimed at providing information about students electronically on a
single platform. The program is a step towards realising Digital India
and will depict good governance.
• The Government of India announced that all the major tourist spots
like Sarnath, Bodhgaya and Taj Mahal will have a Wi-Fi facility as
part of digital India initiative. Besides, the Government has started
providing free Wi-Fi service at Varanasi ghats.

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The Government of India has launched an initiative to create 100 smart

cities as well as Atal Mission for Rejuvenation and Urban Transformation Notes
(AMRUT) for 500 cities with an outlay of Rs 48,000 crore (US$ 7.47
billion) and Rs 50,000 crore (US$ 7.34 billion) crore respectively. Smart
cities are satellite towns of larger cities which will consist of modern
infrastructure and will be digitally connected. The program was formally
launched on June 25, 2015. The Phase I for Smart City Kochi (SCK) will
be built on a total area of 650,000 sq. ft., having a floor space greater than
100,000 sq. ft. Besides, it will also generate a total of 6,000 direct jobs in
the IT sector.
Road Ahead
The International Monetary Fund (IMF) and the Moody’s Investors Service
have forecasted that India will witness a GDP growth rate of 7.5 per cent
in 2016, due to improved investor confidence, lower food prices and better
policy reforms. Besides, according to the World Bank, the Indian economy
will likely grow at 7.6 per cent in 2016-17, followed by further acceleration
to 7.7 per cent in 2017-18 and 7.8 per cent in 2018-19.
Indian economy would continue to grow at 7 to 9 per cent and would

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double in size to US$ 4–5 trillion in a decade, becoming the third largest
economy in absolute terms.
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Furthermore, initiatives like Make in India and Digital India will play a
vital role in the driving the Indian economy.

Economic Survey 2016-17 Questions

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The Economic Survey 2016-17, was tabled in the Parliament on January 1. Fiscal deficit
31, 2017, by Mr Arun Jaitley, Union Minister for Finance, Government improvement is one of the
biggest development for
of India. The Survey forecasts a growth rate of 6.75 to 7.5 per cent for
Government of India?
FY18, as compared to the expected growth rate of 6.5 per cent in FY17.
discuss steps taken for
Over the medium run, the implementation of the Goods and Services Tax that...
(GST), follow-up to demonetisation, and enacting other structural reforms
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should take the economy towards its potential real GDP growth of 8 per 2. Is economic growth
slowing down in India?
cent to 10 per cent.
discuss factors...
Key Highlights: 3. Trade deficit has been on
a decline? discuss factors
Fiscal Deficit:
and impact?
• Central Government is confident of achieving fiscal deficit of 3.5 per 4. What is UBI and discuss
cent for 2016-17 of GDP. its features

• Non-tax revenues have been challenged owing to shortfall in spectrum

and disinvestment receipts but also to forecast optimism; the stress
in public sector enterprises has also reduced dividend payments.
• The consolidated deficit of the states has increased steadily in recent
years, rising from 2.5 per cent of GDP in 2014-15 to 3.6 per cent of
GDP in 2015-16, in part because of the Ujwal DISCOM Assurance
Yojana (UDAY) scheme.
GDP Growth:
• GDP growth expected to be between 6.75 and 7.50 per cent in 2017-
18.
• Real GDP growth expected at 6.5 per cent in 2016-17
• GVA growth at basic prices 7.0 per cent in 2016-17
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Inflation and monetary policy:

Notes
• Average retail inflation, measured by Consumer Price Index (CPI), in
2016-17 (April – December) seen at 4.9 per cent.
• Average Wholesale Price Index (WPI) inflation, in 2016-17 (April –
December) seen at 3.4 per cent from -5.1 per cent in August 2015.
• RBI’s target of below 5 per cent CPI inflation this year is expected
to be assisted by demonetisation.
• The Reserve Bank of India (RBI) has cut the repo rate by 25 basis
points each in April 2016 and October 2016 to 6.25 per cent.
External Sector:
• The current account deficit has declined to reach about 0.3 per cent
of GDP in the first half of FY2017.
• During April-December 2016, trade deficit declined by 23.5 per cent
over corresponding period of previous year as contraction in imports

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were quite higher than fall in exports.
• During October-December 2016, both exports and imports grew at

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the rate of 5 per cent, starting a long-awaited recovery.
During 2016-17 (April-December) imports declined by 7.4 per cent to
US$ 275.4 billion compared to the corresponding period of previous
year.
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• Net private remittances declined US$ 4.5 billion in the first half of
2016-17 compared to the same period of 2015-16 on account of oil
price decline affecting inflows from the Gulf region.
Performance of key sectors:
• Agriculture and food management:
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• The growth rate for the agriculture and allied sectors is estimated to
be 4.1 per cent for 2016-17.
• The production of Kharif food-grains during 2016-17 is estimated at
135.0 million tonnes compared to 124.1 million tonnes in 2015-16.
• The area sown under kharif and rabi crops during 2016-17 was 3.5 per
cent and 5.9 per cent higher respectively compared to 2015-16.
• During the South West Monsoon Season (June-September) of 2016
the country as a whole received rainfall which was 97 per cent of its
long period average (LPA).
• The stock of food-grains (Rice and Wheat) was 43.5 million tonnes
as on December 01, 2016 compared to 50.5 million tonnes as on
December 01, 2015 vis-à-vis the buffer stock norm of 30.77 million
tonnes as on October 01, 2015.
• Industries, corporate and infrastructure sector:
o Growth rate of industrial sector is estimated to moderate to 5.2
per cent in 2016-17 from 7.4 per cent last fiscal.
o During April-November 2016, a modest growth of 0.4 per cent
has been observed in the Index of Industrial Production (IIP)
due to strong growth in electricity generation offset by moderation
in mining and manufacturing.

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o The eight core infrastructure supportive industries, viz. coal, crude

oil, natural gas, refinery products, fertilers, steel, cement and
Notes
electricity that have a total weight of nearly 38 per cent in the
IIP, registered a cumulative growth of 4.9 per cent during April-
November, 2016-17 as compared to 2.5 per cent during April-
November, 2015-16.
o The performance of corporate sector (as reported by RBI in
January 2017) highlighted that the growth in sales was 1.9 per
cent in Q2 of 2016-17 as compared to near stagnant growth of
0.1 per cent in Q1 of 2016-17. The growth of operating profits
decelerated to 5.5 per cent in Q2 of 2016-17 from 9.6 per cent
in the previous quarter. Growth in net profits registered a
remarkable growth of 16.0 per cent in Q2 of 2016-17, as
compared to 11.2 per cent in Q1 of 2016-17.
o Many new initiatives taken by the Government in the form of
Make-in-India, Invest India, Start Up India and e-biz Mission
Mode Project under the national e-governance plan are facilitating
investment and ease of doing business in the country.

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• Services sector:
o The services sector is projected to grow at 8.8 per cent in 2016-
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17, similar to 2015-16.
o As per World Trade Organisation (WTO) data, India’s
commercial services exports increased from US$ 51.9 billion in
2005 to US$ 155.3 billion in 2015, taking its share in global
services exports to 3.3 per cent in 2015 from 3.1 per cent in
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2014.
o In terms of growth in tourism sector, during January to December
2016, Foreign Tourist Arrivals (FTAs) were 8.9 million with
growth of 10.7 per cent and foreign exchange earnings (FEE)
were at US$ 23.1 billion with a growth of 9.8 per cent.
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Public Finance:
• The growth in non-debt receipts at 25.8 per cent during April-November
2016 surpassed the budgeted growth rate of 16.4 per cent for the full
year (over 2015-16 PA).
• The realisation of the gross tax revenue during April-November 2016
as ratio of the budget estimates for 2016-17 was 57.2 per cent
compared to 53 per cent in the corresponding period of the previous
year.
GST & Demonetisation:
• The GST will create a common Indian market, improve tax compliance
and governance, and boost investment and growth; it is also a bold
new experiment in the governance of India’s cooperative federalism.
• The two largest denomination notes, Rs 500 and Rs 1000—together
comprising 86 per cent of all the cash in circulation—were
“demonetised” with immediate effect, ceasing to be legal tender except
for a few specified purposes, on November 8, 2016.
• Demonetisation has had short-term costs in the form of slow growth
but holds the potential for long-term benefits. Long-term benefits
include reduced corruption, greater digitalisation of the economy,

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increased flows of financial savings, and greater formalisation of the

economy, all of which could eventually lead to higher GDP growth, Notes
better tax compliance and greater tax revenues.
Financial Intermediation:
• The benchmark 10-year yield continued to tread high in spite of the
rate cut and in fact increased marginally after the rate cut to settle at
6.63 per cent as of December 30, 2016.
• The Government increased the limit on securities under market
stabilisation scheme from Rs 30,000 crore (US$ 4.4 billion) to Rs 6
lakh crore (US$ 88.5 billion).
• The gross non-performing assets (GNPA) to total advances ratio of
scheduled commercial banks (SCBs) increased to 9.1 per cent from
7.8 per cent between March and September 2016.
• Indian markets recorded a modest growth of 1.95 to 3 per cent (Sensex
was up by 1.95 per cent while Nifty was higher by 3.0 per cent) for

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the calendar year 2016 as compared to losses registered in 2015.
• For the first time since the meltdown of 2008, Net Foreign Portfolio

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Investments (FPI) have turned negative (implying that there was an
outflow from the Indian markets to the tune of Rs 23,079 crore or
US$ 3.4 billion), led by increase in US Fed rate by the Federal Reserve
leading to outflows from several emerging market economies.
Proposed Universal Basic Income (UBI) mechanism:
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• The Economic Survey considers the idea of UBI as a potent tool to
bring about eradication of poverty.
• UBI has several objective benefits such as recalibration of burden on
Government finances through unconditional cash transfer, elimination
of administrative inefficiencies in the agency model of government
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operations, quantification and accountability of benefits.

• From a intangible/philosophical point of view, UBI could be viewed
as a fundamental right to accord a life of dignity and social justice to
the citizens of the country.
• On the other hand, the negative shades of UBI could manifest in
terms of reduced incentive to work, income detached from
employment, and being viewed as unconditional income without
contribution to society.
• The arguments both in favour of and against UBI need to be discussed
further and the shortcomings need to be addressed through better
design of implementation tools. However, the time has come for a
serious consideration of UBI in view of the enormous burden on the
fiscal due to systemic inefficiencies in traditional welfare programs.

Union Budget 2017-18

The Union Budget for 2017-18 has been announced by Mr Arun Jaitley,
Union Minister for Finance, Government of India, in Parliament on February
1, 2017. Budget 2017-18 contains three major reforms: advancement of
date of presentation, merger of railway budget with general budget, done
away with Plan and non-Plan expenditure.

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Roadmap and Priorities for 2017-18

Notes
• Agenda for 2017-18 is: “Transform, Energise and Clean India” –
TEC.
• TEC India seeks to-
o Transform the quality of governance and quality of life of people;
o Energise various sections of society, especially the youth and
the vulnerable, and enable them to unleash their true potential;
and
o Clean the country from the evils of corruption, black money
and non-transparent political funding
Highlights of Union Budget 2017-18
• Overview of the Economy and fiscal deficit
o Economic growth expected at 6.5 per cent in 2016-17.
o IMF expects India to grow at 7.2 per cent in 2017 and 7.7 per

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cent in 2018.
o CPI inflation has come down to 3.4 per cent in December 2016
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from 6.0 per cent in July 2016.
o Current Account deficit declined from about 1 per cent of Gross
Domestic Product (GDP) last year to 0.3 per cent of GDP in
the first half of 2016-17.
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o Foreign exchange reserves have reached US$ 361 billion as on

January 20, 2017.
o Government has recommended 3 per cent (of GDP) fiscal deficit
target for the next three yeaRs Fiscal deficit for 2017-18 is
targeted at 3.2 per cent.
o Revenue deficit of 2.3 per cent (of GDP) in Budget Estimates
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(BE) 2016-17 stands reduced to 2.1 per cent in the Revised

Estimates (RE). The Revenue deficit for next year is pegged at
1.9 per cent.
• Budget Estimates 2017-18
o Total receipts (excluding Borrowings and other liabilities)
estimated at Rs 15.16 lakh crore (US$ 224 billion), a growth of
6.48 per cent.
o Revenue receipts comprise of Rs 12.27 lakh crore (US$ 181
billion) of tax revenues and Rs 2.88 lakh crore (US$ 42.7 billion)
of non-tax revenues.
o Total expenditure estimated at Rs 21.47 lakh crore (US$ 317
billion), an increase of 6.57 per cent over previous year.
o Plan / Non-Plan classification to be done away with from 2017-
18. Instead, expenditure will now be classified henceforth into
‘Scheme’ and ‘Non-Scheme’ expenditure. Every new scheme
sanctioned to have a sunset date and an outcome review.
o Total scheme expenditure expected to be Rs 9.45 lakh crore
(US$ 139.7 billion).

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o Total non-scheme expenditure expected to be Rs 12.02 lakh

crore (US$ 177.6 billion). Notes
o Expenditure on revenue account is expected to be Rs 18.37 lakh
crore (US$ 271.5 billion), or 85.57 per cent of total expenditure.
• Financial Performance 2016-17
Receipts
o Total receipts (excluding Borrowings and other liabilities) stood
at Rs 14.24 lakh crore (US$ 210.5 billion) in Revised Estimates
(RE), which is more than the Budgeted Estimates (BE) of Rs
13.77 lakh crore (US$ 203.6 billion) by Rs 46,540 crore (US$
6.88 billion), led by higher tax collections.
o Tax revenues stood at Rs 10.89 lakh crore (US$ 160.9 billion)
in RE, which were more than the BE of Rs 10.54 lakh crore
(US$ 155.8 billion) by Rs 34,691 crore (US$ 5.13 billion), led by
higher excise and service tax collections.

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o There was an substantial increase of 21.6 per cent in collection
of Union Excise Duties which stood at Rs 3.87 lakh crore (US$

OR
57.2 billion) in RE, an increase of Rs 68,700 crore (US$ 10.15
billion) over the BE of Rs 3.18 lakh crore (US$ 47 billion).
Expenditure
o Total expenditure was Rs 20.14 lakh crore (US$ 297.7 billion) in
RE, which exceeded the BE of Rs 19.78 lakh crore (US$ 292.4
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billion) by Rs 36,347 crore (US$ 5.37 billion).
o Total scheme expenditure expected to be Rs 9.45 lakh crore
(US$ 139.7 billion). Total non-scheme expenditure expected to
be Rs 12.02 lakh crore (US$ 177.6 billion).
o Expense on Defence sector was lower by 0.44 per cent or Rs
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1,094 crore (US$ 161 million) in RE, while that on Pensions was
higher by 3.89 per cent. Significantly, subsidies expenditure RE
was lower by 0.5 per cent than BE.
• Farmers -
o Target for agricultural credit in 2017-18 has been fixed at a record
level of Rs 10 lakh crore (US$ 147.8 billion).
o Farmers will also benefit from 60 days’ interest waiver announced
on December 31, 2016.
o Coverage under Fasal Bima Yojana scheme will be increased
from 30 per cent of cropped area in 2016-17 to 40 per cent in
2017-18 and 50 per cent in 2018-19 for which a budget provision
of Rs 9,000 crore (US$ 1.33 billion) has been made.
o The Long Term Irrigation Fund already set up in NABARD to
be augmented by 100 per cent to take the total corpus of this
fund to Rs 40,000 crore (US$ 5.9 billion).
o Dedicated Micro Irrigation Fund in NABARD to achieve ‘per
drop more crop’ with an initial corpus of Rs 5,000 crore (US$
739 million).
o Coverage of National Agricultural Market (e-NAM) to be
expanded from 250 markets to 585 APMCs. Assistance up to
Rs 75 lakhs (US$ 110,872) will be provided to every e-NAM.
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o Dairy Processing and Infrastructure Development Fund to be

set up in NABARD with a corpus of Rs 2,000 crore (US$ 296 Notes
million) and will be increased to Rs 8,000 crore (US$ 1.2 billion)
over 3 years.
• Rural Population- Allocation: Rs 1,87,223 crore (US$ 27.7 billion)
o Over Rs 3 lakh crore (US$ 44.3 billion) were spent on rural
areas every year for rural poor.
o According to Mission Antyodaya, 10 million households will be
brought out of poverty and 50,000 gram panchayats will be
made poverty-free by 2019.
o Under the Prime Minister Gram Sadak Yojana, Rs 19,000 crore
(US$ 2.8 billion) has been allocated along with states, while Rs
27,000 crore (US$ 4 billion) is expected to be spent in FY18.
o Under the Pradhan Mantri Awas Yojana, Rs 23,000 crore (US$
3.4 billion) is allocated for 2017-18 to complete 10 million houses
by 2019 for the houseless and those living in kutcha houses.

E
o A sum of Rs 48,000 crore (US$ 7.1 billion) allocated for
Mahatma Gandhi National Rural Employment Guarantee
Scheme (MGNREGS).
OR
o Rural livelihood mission has been allocated Rs 4,500 crore (US$
665 million).
o A 100 per cent village electrification target looks achievable by
May 1, 2018
SC

o PMGSY roads construction accelerated to 133 km roads per

day in 2016-17, against 73 km during 2011-14.
o Women participation in MGNREGS has increased to 55 per
cent from less than 48 per cent.
GS

• Youth
o Skill Acquisition And Knowledge Awareness for Livelihood
Promotion program (SANKALP) will be launched at a cost of
Rs 4,000 crore (US$ 591 million) providing market relevant
training to35 million youth.
o Pradhan Mantri KaushalKendras to be extended to more than
600 districts across the country for imparting skill education.
About 100 India International Skills Centres will be established
across the country.
o SWAYAM platform to be launched with at least 350 online
courses enabling students to virtually attend courses taught by
best faculty.
o Next phase of Skill Strengthening for Industrial Value
Enhancement (STRIVE) will also be launched in 2017-18 at a
cost of Rs 2,200 crore (US$ 325 million).
o Incredible India 2.0 campaign will be launched across the world
to promote tourism and employment.
• The Poor and the underprivileged:
o Mahila Shakti Kendra will be set up with an allocation of Rs
500 crore (US$ 73.9 million) in 1.4 million Integrated Child
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 INDIAN ECONOMY 15

Development Scheme (ICDS) Anganwadi Centres. This will

provide one stop convergent support services for empowering
Notes
rural women with opportunities for skill development,
employment, digital literacy, health and nutrition.
o Under Maternity Benefit Scheme Rs 6,000 (US$ 89) each will
be transferred directly to the bank accounts of pregnant women
who undergo institutional delivery and vaccinate their children.
o National Housing Bank will refinance individual housing loans
of about Rs 20,000 crore (US$ 2.9 billion) in 2017-18.
o Government has prepared an action plan to eliminate Kala-Azar
and Filariasis by 2017, Leprosy by 2018, Measles by 2020 and
Tuberculosis by 2025.
o The allocation for Scheduled Castes has been increased by 35
per cent compared to BE 2016-17. The allocation for Scheduled
Tribes has been increased to Rs 31,920 crore (US$ 4.7 billion)

E
and for Minority Affairs to Rs 4,195 crore (US$ 620 million).
o Action plan has been prepared to reduce Infant Mortality Rate

•
OR
(IMR) from 39 in 2014 to 28 by 2019 and Maternal Mortality
Rate (MMR) from 167 in 2011-13 to 100 by 2018-2020.
Infrastructure
o Provision has been made of Rs 241,387 crore (US$ 35.7 billion)
SC
in 2017-18 for transportation sector as a whole, including, rail,
roads and shipping.
o For 2017-18, the total capital and development expenditure of
Railways has been pegged at Rs 1,31,000 crore (US$ 19.4 billion).
This includes Rs 55,000 crore (US$ 8.1 billion) provided by the
Government.
GS

o For passenger safety, a Rashtriya Rail Sanraksha Kosh will be

created with a corpus of Rs 1 lakh crore (US$ 14.8 billion) over
a period of 5 years.
o Railway lines of 3,500 kms will be commissioned in 2017-18.
o It is proposed to feed about 7,000 stations with solar power in
the medium term.
o In the road sector, Budget allocation for highways increased from
Rs 57,976 crore in BE 2016-17 to Rs 64,900 crore (US$ 9.6
billion) in 2017-18.
o Total length of roads, including those under PMGSY, built from
2014-15 till the current year is about 1,40,000 kms which is
significantly higher than previous three years.
o Second phase of Solar Park development to be taken up for
additional 20,000 MW capacity.
o For creating an eco-system to make India a global hub for
electronics manufacturing a provision of Rs 745 crore (US$ 110
million) in 2017-18 in incentive schemes like Modified-Special
Incentive Package Scheme (M-SIPS) and Electronic Development
Fund (EDF).

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 16 INDIAN ECONOMY

• Financial sector
Notes
o Lending target under Pradhan Mantri Mudra Yojana to be set at
Rs 2.44 lakh crore (US$ 36.1 billion). Priority will be given to
Dalits, Tribals, Backward Classes and Women.
o In line with the ‘Indradhanush’ roadmap, Rs 10,000 crore (US$
1.48 billion) for recapitalisation of Banks provided in 2017-18.
o Foreign Investment Promotion Board (FIPB) to be abolished in
2017-18 and further liberalisation of Foreign Direct Investment
(FDI) policy is under consideration.
o A Computer Emergency Response Team for our Financial Sector
(CERT-Fin) will be established.
o Government will put in place a revised mechanism and procedure
to ensure time bound listing of identified Central Public Sector
Enterprises (CPSEs) on stock exchanges. The shares of Railway
PSEs like IRCTC, IRFC and IRCON will be listed in stock
exchanges.

E
• Digital Economy
o A Mission will be set up with a target of 25 billion digital
OR
transactions for 2017-18 through Unified Payment Interface
(UPI), Unstructured Supplementary Service Data (USSD), Aadhar
Pay, Immediate Payment Service (IMPS) and debit cards. A
task force has been constituted for rationalisation of human
resources in various Ministries.
SC

o Banks have targeted to introduce additional 1 million new Point-

of-Sales (POS) terminals by March 2017. They will be encouraged
to introduce 2 million Aadhar based POS by September 2017.
o Aadhar Pay, a merchant version of Aadhar Enabled Payment
System, will be launched shortly.
GS

o 12.5 million people have adopted the Bharat Interface for Money
(BHIM) app so far. The Government will launch two new schemes
to promote the usage of BHIM; these are Referral Bonus Scheme
for individuals and a Cashback Scheme for merchants.
• Public Service
o A Centralised Defence Travel System has been developed through
which travel tickets can be booked online by our soldiers and
officers.
o Web based interactive Pension Disbursement System for Defence
Pensioners will be established.
• Prudent fiscal management
o Capital expenditure allocation has been stepped up by 25 per
cent over the previous year.
o Total resources being transferred to the States and the Union
Territories with Legislatures is Rs 4.11 lakh crore (US$ 60.8
billion), against Rs 3.60 lakh crore (US$ 53.2 billion) in BE
2016-17.
o Fiscal Responsibility and Budget Management (FRBM)
Committee has recommended 3 per cent fiscal deficit for the

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 INDIAN ECONOMY 17

next three years, keeping in mind the sustainable debt target and
need for public investment, fiscal deficit for 2017-18 is targeted
Notes
at 3.2 per cent of GDP and Government remains committed to
achieve 3 per cent in the following year.
o Net market borrowing of Government restricted to Rs 3.48 lakh
crore (US$ 51.4 billion) after buyback in 2017-18, much lower
than Rs 4.25 lakh crore (US$ 62.8 billion) of the previous year.
o Revenue deficit of 2.3 per cent in BE 2016-17 stands reduced
to 2.1 per cent in the Revised Estimates. The Revenue Deficit
for next year is pegged at 1.9 per cent, against 2 per cent mandated
by the FRBM Act.
• Promoting affordable housing and real estate sector
o Under the scheme for profit-linked income tax deduction for
promotion of affordable housing, carpet area instead of built up
area of 30 and 60 Sq.mtr. will be counted.

E
o The 30 Sq.mtr. limit will apply only in case of municipal limits
of 4 metropolitan cities while for the rest of the country including
in the peripheral areas of metros, limit of 60 Sq.mtr. will apply.
o
OR
Reduction in the holding period for computing long term capital
gains from transfer of immovable property from 3 years to 2
years. Also, the base year for indexation is proposed to be shifted
from 1.4.1981 to 1.4.2001 for all classes of assets including
immovable property.
SC
o Between November 8 and December 30, 2016, deposits between
Rs 2 lakh (US$ 2,957) and Rs 80 lakh (US$ 118,263) were made
in about 10.9 million accounts with an average deposit size of
Rs 5.03 lakh (US$ 7,436). Deposits of more than 80 lakh (US$
118,263) were made in 148,000 accounts with average deposit
size of Rs 3.31 crore (US$ 489,313).
GS

• Measures for stimulating growth

o Concessional withholding rate of 5 per cent charged on interest
earned by foreign entities in external commercial borrowings or
in bonds and Government securities is extended to June 30,
2020, including rupee denominated (Masala) Bonds.
o In order to make Micro, Small and Medium Enterprises (MSME)
companies more viable, income tax for companies with annual
turnover upto Rs 50 crore (US$ 7.4 million) is reduced to 25 per
cent.
o For the purpose of carry forward of losses in respect of start-
ups, the condition of continuous holding of 51 per cent of voting
rights has been relaxed subject to the condition that the holding
of the original promoter/promoters continues. Also the profit
(linked deduction) exemption available to the start-ups for 3
years out of 5 years is changed to 3 years out of 7 years.
o Minimum Alternate Tax (MAT) credit is allowed to be carried
forward up to a period of 15 years instead of 10 years at present.
o Basic customs duty on Liquefied Natural Gas (LNG) reduced
from 5 per cent to 2.5 per cent.
o Allowable provision for Non-Performing Asset (NPA) of banks
increased from 7.5 per cent to 8.5 per cent.
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 18 INDIAN ECONOMY

• Promoting digital economy

Notes
o Under scheme of presumptive income for small and medium
tax payers whose turnover is up to Rs 2 crore (US$ 295,658) at
present, 8 per cent of their turnover which is counted as
presumptive income is reduced to 6 per cent in respect of
turnover which is by non-cash means.
o No transaction above Rs 300,000 (US$ 4,435) will be permitted
in cash subject to certain exceptions.
• Transparency in electoral funding
o A political party can receive a maximum of Rs 2,000 (US$ 30)
in cash from one person.
o Every political party would have to file its returns within the
time prescribed in accordance with the provision of the Income-
tax Act.
o Existing exemption to the political parties from payment of
income-tax would be available only subject to the fulfilment of
these conditions.
• Ease of doing business

E
o Threshold limit for audit of business entities who opt for
presumptive income scheme increased from Rs 1 crore (US$
OR
147,829) to Rs 2 crore (US$ 295,658). Similarly, the threshold
for maintenance of books for individuals and HUF increased
from turnover of Rs 10 lakhs (US$ 14,783) to Rs 25 lakhs (US$
36,957) or income from Rs 1.2 lakhs (US$ 1,774) to Rs 2.5
lakhs (US$ 3,696).
SC

o Under scheme for presumptive taxation for professionals with

receipt upto Rs 50 lakhs (US$ 73,914) p.a. advance tax can be
paid in one instalment instead of four.
o Time period for revising a tax return is being reduced to 12
months from completion of financial year, at par with the time
period for filing of return.
GS

• Personal income-tax
o Existing rate of taxation for individual assesses between income
of Rs 2.5 lakhs (US$ 3,695) to 5 lakhs (US$ 7,391) has been
reduced to 5 per cent from the present rate of 10 per cent.
o Surcharge of 10 per cent of tax payable will be levied on
categories of individuals whose annual taxable income is between
Rs 50 lakhs (US$ 73,914) and Rs 1 crore (US$ 147,829). The
surcharge of 15 per cent for annual taxable income above Rs 1
crore remains.
o Individuals having taxable income upto Rs 5 lakhs (US$ 7,391)
other than business income can file a simple one-page form as
income tax return.
• Goods and services tax (GST)
o The GST Council has finalised its recommendations on almost
all the issues based on consensus on the basis of 9 meetings
held.
o Preparation of IT system for GST is also on schedule.
o The extensive reach-out efforts to trade and industry for GST
will start from April 01, 2017 to make them aware of the new
taxation system.

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 INDIAN ECONOMY 19

• RAPID (Revenue, Accountability, Probity, Information and

Digitisation)
Notes
o Maximise efforts for e-assessment in the coming year
o Enforcing greater accountability of officers of Tax Department
for specific act of commission and omission.

Fall in Savings and Investments

Perspective/ Thinking Line
1. What is the most worrying trend for Indian Economy
2. How is this phenomenon linked to falling health of banks
3. Why government spending is very critical in present scenario in Indian
economy
4. Is India becoming a consumerist society
1. What is the most worrying trend for Indian Economy

E
India’s savings rate is declining. The private sector, including households
and corporates are the main driver of total savings, while the public sector
has been a drag. Within the private sector, households are the main source

OR
of savings. This component has, however, emerged as a key drain, with its
share in total savings falling to 60% in FY2014-2015 from 70% four years
earlier. According to IMF, India’s gross savings rate has fallen to 31 per
cent of GDP from 37 per cent in 2007-08.
The fall in savings needs to be arrested given India’s investment needs.
SC
Relying on foreign savings puts pressure on the current account and the
returns from that investment go abroad as well. Corrective measures are
underway to lift savings and investment, but a quick turnaround is unlikely.
Reasons:
• Low incomes growth since 2008 recession
GS

• High inflation
• Low deposit rates in banks
• Changing consumption trend and demand boost due to deeper
penetration of credit cards
• Rising real estate also pushed savings rate earlier as people received
additional capital gains income from this sector, which was largely
reinvested.
2. How is this phenomenon linked to falling health of banks
The year ended March 2016 saw aggregate deposits with banks grow by
just 9.9%, on top of a not-so-big increase of 10.7% in 2014-15.This fall
in deposit growth to single digits was last recorded in 1962-63.
If deposits don’t grow at sufficient rates, then banks would have to borrow
at repo rate/bank rate from RBI for generating loans, which will be more
expensive for them and would further affect their profits.
This is also related to slow growth of banking sector as a whole.
3. Why government spending is very critical in present scenario in
Indian economy
In the present scenario, when due to twin balance sheet phenomenon
operating-in, credit growth has slowed down significantly.
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 20 INDIAN ECONOMY

Twin Balance Sheet (TBS) problem, includes the two intertwined economic
issues, namely : 
Notes
i) Over-leveraged corporates & 
ii) Bad-loan-encumbered banks
During mid-2000s, the peak of GDP growth, industry was optimistic of
future and banks, banking on optimistic industries, followed a credit boom
policy.
i.e. Industries beckoned, credit boom, over-leveraged corporates
All, seemed fine, before the recessionary trend surfaced, where after the
overall growth cycle slowed, and the hopeful investments soured.
i.e. recession, project delays, bad debt servicing , NPAs
The two pillars of TBS were created. Now, TBS creates a vicious economic
circle where,
A slowing economy dampens private investment

E
Dampened investment impedes debt ridden corporates from servicing debts,
Poor debt recovery leads to increasing NPAs for the bank,
OR
Increasing NPAs discourages banks from financing future private
investments,
Lack of credit finance in turns slows the economic growth.
in such a scenario, it is imperative that government push the spending and
SC

cover up for lack of borrowing by the private sector, even if it comes at

a cost of higher fiscal deficit.
This will benefit Indian economy as it would lead to crowding-in
phenomenon.
Crowding-in phenomenon.
GS

An economic principle in which private investment increases as debt-

financed government spending increases. This is caused by government
spending boosting the demand for goods, which in turn increases private
demand for new output sources, such as factories. This is in contrast to
crowding out.
Recent steps, such as:
7th Pay commission; Increased Agricultural spending; OROP, etc have not lead
to inflation and neither led to increase in deficit precisely because this
spending creased economic growth and tax collection simultaneously.
1. Is India becoming a consumerist society?
The fall in savings rate and resultant consumption led growth has given an
impression that India is becoming consumerist society. However, despite
increase in consumption, this is not entirely true, as:
• Most economist believe consumption growth has been there more in
monetary terms, than in physical consumption sense, because of high
inflation during 2006-2013.
• Also, this decline is not considered to be a part of long-term trend,
but a short-term business cycle and savings rates are investments are
likely to bounce back.

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 INDIAN ECONOMY 21

• Deeper penetration of credit card system has affected the spending

pattern in metros a bit, but it is not significant yet.
Notes
• Similarly introduction of e-commerce has also increased the spending
a bit, helping ushering in a wave of consumerism. In case of e-
commerce the change in spending pattern is also observed in towns
as well as it has increased consumption choices for them.

Jobless Growth in India: An Analysis

Questions
Key Trends in Job Creation in Last Few years
1. Why India is facing
• During the last decade (2001-11), the growth rate of the labour force unemployment problems
(2.23 per cent) was significantly higher than the growth rate of despite decent growth
employment (1.4 per cent), which itself was several-fold less than the rate?
growth rate of the economy. According to Census 2011, the average 2. What can be done to
growth rate of the economy was 7.7 per cent per annum, when it was reverse the problem of
only 1.8 per cent for employment. jobless growth?

• 66th round of the National Sample Survey Office (NSSO) data on

E
employment in 2011 revealed that during 2004-05 and 2009-10, only
1 million jobs were added per year; in a period when the economy

•
averaged a record 8.43% growth annually.

OR
An Indian Labour Bureau survey of 2015 showed that 2,000 companies
in eight sampled industries generated all of one lakh jobs, a fall from
the four lakh generated in 2014, even though growth in 2014 was
lower than in 2015.
SC
• A HDFC Bank report on India’s tapering jobs growth says that
“employment elasticity” in the economy is now close to zero – for
every one point rise in GDP, jobs grow only 0.15. Fifteen years ago,
it was 0.39
What is jobless growth?
GS

In a jobless growth economy, unemployment remains stubbornly high even

as the economy grows.
India is the fastest growing large economy, posting a growth rate of over
7 per cent, yet jobs are not growing as fast as GDP.
Why it is happening in India-
In India, growth is attributed to service sector, whereby both employment and
wages have seen a rise. But as figures say, the biggest employing sector in
India is the Agriculture sector, employing 45% of the population but
contributing 15% to the GDP, whereas Service sector is the biggest
contributor to the GDP but employs less than 30%. Manufacturing
contributes 16% to the GDP and employs around 13%.
Manufacturing should take greater responsibility of job creation
as agriculture already employs over half of India’s workforce,
and services can’t absorb the million youth who are joining it every month.
The Centre is trying its best to push manufacturing through the Make in
India initiative. But that doesn’t seem to be working, at least when it
comes to job creation.
What went wrong?
India’s rigid and often confusing labour laws enforced by myriad agencies
have done irreparable damage to the cause of labour. Our labour laws

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discourage entrepreneurs to employ more workers because then they have

to comply with more stringent laws,waste of time and money.
Notes
States must tweak their labour laws according to the demand. Off-late
some states like Rajasthan, MadhyaPradesh, Maharashtra and Gujarat
government have come up with favourablelabour laws.
Imports are hurting job creation
The domestic market is flooded with competitively priced imports (often
subsidised by countries such as China) that reduce the market size for
indigenous manufacturers. This is not to argue that imports should be
banned. But it certainly calls for a serious examination into why domestic
businesses are not able to compete with imported products.
Solution-
• Make in India;though, it will take time.
• SMEs and first-time entrepreneurs are not able to compete with
imported products because of high transaction cost arising out of
inefficient logistics and India’s overall poor record on ease of doing

E
business.
• More employed workers even at lower wages are a better option than
OR
less employed workers at higher wages. The Government should focus
on productivity-enhancing skills upgrade measures rather than fixing
minimum wages.
• Prudent macroeconomic policy will bring in more FDI that will aid
job creation if major concerns on the demand and supply sides are
SC

addressed.
• Encouraging people’s entrepreneurial instincts — whether they create
mom-and-pop undertakings countrywide, or deliver results under the
Startup India or Stand-up India missions — will generate sustainable
outcomes.
GS

• The education system needs to be revamped to create the desired

skill-sets. At present, the education system is failing miserably in
delivering even whatever it is designed to.
• Job Intensive sector like Food Processing Should be promoted.
• MUDRA scheme should be expanded as it can be a game changer for
MSME sector and this sector has a potential to create required jobs
in India.

Rising Inequality
Questions
India is the second-most unequal country globally, with millionaires
1. Discuss why inequality is
controlling 54% of its wealth. With a total individual wealth of $5,600 on rise in India?
billion, it’s among the 10 richest countries in the world – and yet the
average Indian is relatively poor. 2. Where does India stands
w.r.t rest of the world in
Compare this with Japan, the most equal country in the world, where terms of income
according to the report millionaires control only 22% of total wealth. inequality.
3. How to address
In India, the richest 1% own 53% of the country’s wealth, according to the
inequality?
latest data from Credit Suisse. The richest 5% own 68.6%, while the top
10% have 76.3%. At the other end of the pyramid, the poorer half jostles
for a mere 4.1% of national wealth.

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 INDIAN ECONOMY 23

What’s more, things are getting better for the rich. The Credit Suisse data
shows that India’s richest 1% owned just 36.8% of the country’s wealth
Notes
in 2000, while the share of the top 10% was 65.9%. Since then they have
steadily increased their share of the pie. The share of the top 1% now
exceeds 50%.
This is far ahead of the United States, where the richest 1% own 37.3%
of total wealth. But India’s finest still have a long way to go before they
match Russia, where the top 1% own a stupendous 70.3% of the country’s
wealth.
Why does it matter?
Rising inequality will lead to slower poverty reduction, undermine the
sustainability of economic growth, compound the inequalities between
men and women, and drive inequalities in health, education and life chances.
For the third year running, the World Economic Forum’s Global Risks
Report 2016has found “severe income disparity” to be one of the top
global risks in the coming decade. A growing body of evidence has also

E
demonstrated that economic inequality is associated with a range of health
and social problems, such as mental illness and violent crime. This is true

What can India do to reduce inequality?

OR
across both rich and poor countries. Inequality hurts everyone.

Specifically, there are two main areas where changes to policy could boost
economic equality: taxation and social spending.
SC
1. Progressive taxation
2. Social spending
Two key indicators are: how much has a government committed to spend
on education, health and social protection? And how progressive are the
spending levels? This chart shows the money India has spent on public
GS

services over the past eight years; the horizontal lines represent expenditure
as a percentage of GDP, and vertical bars expenditure in rupees.

India performs relatively poorly on both counts. Its total tax effort, currently
at 16.7% of GDP, is low (about 53% of its potential) and the tax structure
is not very progressive since direct taxes account for only a third of total
taxes. South Africa, by comparison, raises 27.4% of GDP as taxes, 50%

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 24 INDIAN ECONOMY

of which are direct taxes. This would improve by introducing broader tax
reforms like GST, which will incentivize tax compliance, among others.
Notes
When it comes to the second indicator (levels and progressivity of social-
sector spending), India compares less well. Only 3% of GDP goes towards
education and only 1.1% towards health. South Africa spends more than
twice as much on education (6.1%) and more than three times as much
on health (3.7%). While it’s assessed as more unequal than India, South
Africa rates much higher than India in its commitment to reducing
inequality.
The dream of ending poverty
If India stops inequality from rising further, it could end extreme poverty
for 90 million people by 2019. If it goes further and reduces inequality by
36%, it could virtually eliminate extreme poverty.
India – along with all the other countries in the world – has committed to
attaining the Sustainable Development Goals by 2030, and to ending
extreme poverty by that\ year. But unless we make an effort to first
contain and then reduce the rising levels of extreme inequality, the dream

E
of ending extreme poverty for the 300 million Indians – a quarter of the
population – who live below an extremely low poverty line, will remain a
pipe dream.
OR
NPA
Questions
According to RBI October to December report, the gross Non-Performing 1. Reasons for NPA problem
Assets (NPAs) of Public Sector Banks are just under Rs. 4 lakh crore, and suddenly
SC

they collectively account for 90% of such rotten apples in the country’s
2. steps taken by
banking portfolio. In terms of net NPAs, their share is even higher - at government to curb it.
92% of the total bad loans reported so far in the banking system.
3. Why this menace is more
Reasons for the rise in NPA in recent years in case of PSBs?

• GDP slowdown
GS

• Lack of proper scrutiny by banks

• 5 sectors Textile, aviation, mining, Infrastructure contributes to most
of the NPA, since most of the loan given in these sector are by PSB,
They account for most of the NPA.
• Public Sector banks provide around 80% of the credit to industries
and it is this part of the credit distribution that forms a great chunk
of NPA. Last year, when kingfisher was marred in financial crisis, SBI
provided it huge amount of loan which it is not able to recover from
it.
• There is a myth that main reason for rise in NPA in Public sector
banks was Priority sector lending, However according to the findings
of Standing Committee on Finance  NPAs in the corporate sector are
far higher than those in the priority or agriculture sector. However,
even the PSL sector has contributed substantially to the NPAs. As
per the latest estimates by the SBI, education loans constitute 20%
of its NPAs.
• The Lack of Bankruptcy code in India and sluggish legal system
make it difficult for banks to recover these loans from both corporate
and non-corporate.

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 INDIAN ECONOMY 25

Other factors
Notes
• Banks did not conducted adequate contingency planning, especially
for mitigating project risk. They did not factor eventualities like failure
of gas projects to ensure supply of gas or failure of land acquisition
process for highways.
• Restructuring of loan facility was extended to companies that were
facing larger problems of over-leverage& inadequate profitability. This
problem was more in the Public sector banks.
• Companies with dwindling debt repayment capacity were raising more
& more debt from the system.
Steps taken by RBI and Government in last few years to curb NPA:
• Government has launched ‘Mission Indradhanush’ to make the working
of public sector bank more transparent and professional in order to
curb the menace of NPA in future.
• Government has also proposed to introduce Bankruptcy code.

E
• RBI introduced number of measures in last few years  which include
tightening the Corporate Debt Restructuring (CDR) mechanism, setting

OR
up a Joint Lenders’ Forum, prodding banks to disclose the real picture
of bad loans, asking them to increase provisioning for stressed assets,
introducing a 5:25 scheme where loans are to be amortized over 25
years with refinancing option after every 5  years, and empowering
them to take majority control in defaulting companies under the
SC
Strategic Debt Restructuring (SDR) scheme. 
How to curb the menace of Public Sector Banks (PSB) 
(a) Short Term measures
• Review of NPA’S/Restructured advances- We need to assess the
viability case by case. Viable accounts need to be given more finance
GS

for turnaround and unviable accounts should either be given to Asset

Reconstruction Company or Management/ownership restructuring
or permitting banks to take over the units.
• Bankruptcy code should be passed as soon as possible. Bankruptcy
code will make it easier for banks to recover loans from unviable
enterprises.
• Government should establish Asset Reconstruction Company (ARC)
with equity contribution from the government and the Reserve Bank
of India (RBI). The established ARC should take the tumor (of non-
performing assets or NPAs) out of the banking system. An ARC
acquires bad loans from banks and financial institutions, usually at a
discount, and works to recover them through a variety of measures,
including sale of assets or a turnaround steered by professional
management. Relieved of their NPA burden, the banks can focus on
their core activity of lending.
(b) Long term Measures
• Improving credit risk management- This includes credit appraisal,
credit monitoring and efficient system of fixing accountability and
analyzing trends in group leverage to which the borrowing firm belongs
to:
• Sources/structure of equity capital-Banks need to see that promoter’s
contribution is funded through equity and not debt.

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 26 INDIAN ECONOMY

• Banks should conduct necessary sensitivity analysis and contingency

planning while appraising the projects and it should built adequate
Notes
safeguards against such external factors.
• Strengthen credit monitoring-Develop an early warning mechanism
and comprehensive MIS(Management Information System) can play
an important role in it. MIS must enable timely detection of problem
accounts, flag early signs of delinquencies  and facilitate timely
information to management on these aspects.
• Enforce accountability- Till now lower ring officials considered
accountable even though loaning decisions are taken at higher level.
Thus sanction official should also share the burden of responsibility. 
• Restructured accounts should treated as non performing and technical
write offs where Banks remove NPA’S from their balance sheets
Permanently should be dispensed with.
• Address corporate governance issues in PSB. This include explicit fit
and proper criteria for appointment of top executives and instituting
system of an open market wide search for Chairman.

Fiscal Deficit
E Questions
OR
The concept of a fiscal responsibility framework was first mooted by 1. How well is India on fiscal
former finance minister Yashwant Sinha ahead of the 2001 Union Budget. consolidation path?
At the time, the government was running a fiscal deficit close to 6 percent 2. What are the
of GDP and Sinha felt it was necessary to bring that down. expectations as per
SC

recent Economic Survey

The roadmap was laid down as part of the Fiscal Responsibility and and Budget?
Budget Management Act of 2003, which asked that the government’s
revenue deficit be eliminated by March 2008 and the fiscal deficit be 3. What are impacts of large
brought down to 3 percent of GDP. The framework saw early success and fiscal deficits and how it
is linked to inflation
the Central government managed to bring down its deficit to a 30-year
targetting?
low of 2.5 percent of GDP in 2007-08.
GS

Then came the global financial crisis. What followed was a period of
expansion of the government’s fiscal deficit, which surged to above 6
percent in fiscal 2009 and fiscal 2010. Since then, the government has
failed to bring the deficit back down to 3 percent of GDP, choosing
instead, to keep pushing back the objective.
This is likely to continue in 2017-18 with the NK Singh Committee,
which submitted recommendations for a revised fiscal framework very
recently, likely to give the government enough room to stretch the deficit.

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Markets Building in a Higher Deficit

Notes
Few economists are expecting the government to be in a position to bring
the fiscal deficit down to 3 percent next fiscal as projected.
Many have argued that a higher deficit is required to provide a buffer
against the impact of demonetisation. This is despite the fact that the
official estimates suggest that growth is cruising above 7 percent, which
means there is little need for fiscal support.
Also, there could be some justification of going with a higher deficit for
the coming year. Fiscal deficits, after all, are meant to work best when
they are counter-cyclical. Various experts predicted a Central fiscal deficit
of 3.3 percent of GDP, 30 basis points higher than the planned 3 percent
for the current year. The budget then set it around 3.2 percent.
The lower reduction in fiscal deficit is to stimulate demand in a weak
economic environment post demonetisation.
The government should not get straitjacketed in the fiscal consolidation

E
agenda so as to compromise development goals. Textbook macroeconomics
suggest fiscal policy should ideally be counter-cyclical, that is, fiscal deficits

OR
should decline when the economy is expanding and increase during
downturns. 
After paying for the 7th Pay Commission outgo, PSU bank recapitalisation and
a step-up in social schemes, the government will be barely able to fund the
budgeted level of public capital expenditure. Rising oil prices pose a risk.
SC
For instance, the controller general of accounts has revised the FY16 fiscal
deficit to 4.3 percent of GDP compared to the revised estimate of 3.9
percent.
Fiscal Implications for Monetary Policy
The government’s fiscal deficit has always been part of the monetary
GS

policy calculations. The difference now, though, is that the Reserve Bank
of India is held accountable for an inflation target, which in turn, is based
on a given expectation of fiscal deficit.
The deficit is actually already running higher than what the RBI would
like it to.
In January 2014, when the Urjit Patel committee recommended an
inflation targeting framework, it said that as a pre-condition, the goal of
reducing the Central government deficit to 3 percent of GDP by 2016-17
is necessary and achievable.
The committee is of the view that the goal of reducing the Central
government deficit to 3 per cent of GDP by 2016-17 is necessary and
achievable. Towards this objective, the government must set a path of
fiscal consolidation with zero or few escape clauses; ideally this should be
legislated and publicly communicated.
Urjit Patel Committee Report
A further delay in meeting that target will only complicate the central
bank’s task of bringing down inflation to its medium term target of 4
percent. While the RBI has the option to maintain inflation within a band
of 2-6 percent under the framework, establishing the credibility of the
new framework by targeting the mid-point of that range is important for
the central bank.

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Follow-up
Notes
The uncertain global backdrop is another reason for the government to
strive to achieve the stated fiscal deficit targets. Global fund flows have
not favoured India in recent months. In particular, investors withdrew Rs
43,000 crore from Indian debt in 2016 and outflows have continued in
January. Any uncertainty about India’s commitment to pursue prudent
fiscal and monetary policies could hit India’s standing as a destination for
foreign portfolio flows.
Finally, the following3 factors loom large presently:
1. Rise in oil prices and decrease in excise duty on oil which were
decrease after price fall.
2. GST factor and its impact and uncertainty
3. Support to banking sector

Foreign Trade Policy

E
Introduction
The integration of the domestic economy through the twin channels of
OR
trade and capital flows has accelerated in the past two decades which in
turn led to the Indian economy growing from Rs 32 trillion (US$ 474.37
billion) in 2004 to about Rs 129.57 trillion (US$ 1.92 trillion) by 2015.
Simultaneously, the per capita income also nearly trebled during these 11
years. India’s trade and external sector had a significant impact on the
SC

GDP growth as well as expansion in per capita income.

Recently, India overtook Italy, Germany and Bangladesh to emerge as the
world’s second largest textile exporter, as per the data released by Apparel
Export Promotion Council (AEPC). According to The Cotton Textiles
Export Promotion Council (Texprocil), India’s textile and clothing exports
stood at US$ 41.4 billion in 2015 as compared to US$ 39.3 billion in 2014,
GS

growing by 5.34 per cent over the previous year.

According to data from the Ministry of Commerce and Industry, India has
maintained its lead over China in pharmaceutical exports with a year-on-
year growth of 7.55 per cent to US$ 12.54 billion in 2015.
Capital Inflows
According to data released by the Reserve Bank of India (RBI), India’s
foreign exchange reserves were US$ 365.82 billion in the week up to
August 12, 2016.
Foreign Direct Investments (FDI)
During April 2000–March 2016, India received total foreign investment
(including equity inflows, re-invested earnings and other capital) worth
US$ 424.167 billion. The country was one of the top destinations for FDI
inflows from Asian countries, with Mauritius contributing 33.24 per cent,
Singapore 15.9 per cent and the UK contributing 8.01 per cent of the total
foreign inflows.
Foreign Institutional Investors (FIIs)
FIIs net investments in Indian equities and debt stood at US$ 4.8 billion
in January-July 2016. FIIs invested net US$ 43.5 billion in FY 2014-15
which was their highest investment in any fiscal year so far. Of the total

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investment, US$ 26.3 billion was invested in debt while the rest US$ 17.2
billion was invested in equities. Notes
External Sector
India and Kenya have signed seven agreements, such as in the fields of
double taxation avoidance and defence cooperation, to strengthen the
bilateral relations, which will also be boosted by the Indian government
extending the concession line of credit of US$ 44.95 million to Small and
Medium Enterprises (SMEs) and textile industry of Kenya.
The Jawaharlal Nehru Port (JNPT) has become the first port in the country
to implement logistics data tagging of containers, which will help importers
and exporters track their goods in transit through logistics data bank service.
The Government of India has successfully completed the double taxation
avoidance agreement (DTAA) negotiations with the Government of Cyprus,
which is expected to further develop the trade and economic links between
the two countries.

E
The Reserve Bank of India (RBI) has allowed start-ups, with a subsidiary
abroad, to open foreign currency accounts with a bank outside India for
crediting foreign exchange earnings from exports and sales made by them.

OR
India’s current account deficit (CAD) narrowed to a seven year low of
US$ 300 million during January-March 2016, as against US$ 700 million
during the same period last year, according to data from the Reserve Bank
of India (RBI).
SC
The Ministry of Finance is planning to ease the process for importers by
uniting and expanding the scope of the Accredited Clients Programme
(ACP) and the Authorised Economic Operator (AEO) scheme, which will
extend direct port transfers, thereby allowing members to move their cargo
as it arrives at a land or sea port to a warehouse without checks.
The Government of India has increased the validity of free sale certificates,
GS

which are required by domestic medical device manufacturers for selling

their products abroad, to two years, thereby encouraging exports of medical
devices from India.
India has expressed interest in signing a preferential trade agreement with
Iran once international sanctions on the Persian Gulf nation are lifted
which would make it India’s first trade agreement with a country in West
Asia.
The Government of India plans to build five new railway links with Nepal,
which will boost India’s economic links with its neighbouring country and
promote growth, employment and prosperity in the region.
The Union Cabinet has approved a proposal to provide US$ 150 million
credit from Export Import Bank of India (EXIM Bank) for the development
of Chabahar Port in Iran.
India and China plan to undertake a joint study on the impact of regional
trade agreements, to be conducted by India’s NITI Aayog and China’s
Development Research Centre (DRC).
India and South Africa are considering prospect of setting up a joint venture
(JV) for mining and owning coal blocks in South Africa. India and the
United Arab Emirates (UAE) will set up a joint working group to forge
stronger linkages in the hydrocarbon, chemicals and fertiliser sectors. India
is looking to develop the Chabahar port project in Iran by signing an
international transit corridor agreement with Iran and Afghanistan.
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 30 INDIAN ECONOMY

India and Belarus set a trade target of US$ 1 billion by 2018 during the
Seventh Session of the India-Belarus Intergovernmental Commission on
Notes
Trade, Economic, Scientific, Technological and Cultural Cooperation.
The US has restored its program for concessional duty treatment to Indian
products, called ‘Generalised System of Preferences’, till 2017.
India and Japan are expected to sign a pact of cooperation in the field of
intellectual property. The pact will aim to enhance efforts to support
innovation in both the countries and will be renewed automatically every
four years. India and Poland have set an ambitious target to increase
bilateral trade from US$ 2.3 billion in 2014 to US$ 5 billion by 2018 at
the fourth session of the bilateral joint commission on economic
cooperation held in Warsaw. India was praised by several members of the
World Trade Organisation (WTO) for following liberal and open
macroeconomic policies while increasing its global presence at the same
time.
During the visit of Mr Vladimir Putin, President of Russia, to India, the
two countries signed several agreements, in areas spanning civil nuclear
cooperation, defense and energy.

E
Foreign Trade Policy
OR
All export and import-related activities are governed by the Foreign Trade
Policy (FTP), which is aimed at enhancing the country’s exports and use
trade expansion as an effective instrument of economic growth and
employment generation.
The Department of Commerce has announced increased support for export
SC

of various products and included some additional items under the

Merchandise Exports from India Scheme (MEIS) in order to help exporters
to overcome the challenges faced by them.
The Central Board of Excise and Customs (CBEC) has developed an
‘integrated declaration’ process leading to the creation of a single window
which will provide the importers and exporters a single point interface for
GS

customs clearance of import and export goods.

As part of the FTP strategy of market expansion, India has signed a
Comprehensive Economic Partnership Agreement with South Korea which
will provide enhanced market access to Indian exports. These trade
agreements are in line with India’s Look East Policy. To upgrade export
sector infrastructure, ‘Towns of Export Excellence’ and units located therein
will be granted additional focused support and incentives.
The Reserve Bank of India (RBI) has simplified the rules for credit to
exporters, through which they can now get long-term advance from banks
for up to 10 years to service their contracts. This measure will help exporters
get into long-term contracts while aiding the overall export performance.
The Government of India is expected to announce an interest subsidy
scheme for exporters in order to boost exports and explore new markets.
Road Ahead
India is presently known as one of the most important players in the
global economic landscape. Its trade policies, government reforms and
inherent economic strengths have attributed to its standing as one of the
most sought after destinations for foreign investments in the world. Also,
technological and infrastructural developments being carried out throughout
the country augur well for the trade and economic sector in the years to
come.

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 INDIAN ECONOMY 31

Boosted by the forthcoming FTP, India’s exports are expected reach US$
750 billion by 2018-2019 according to Federation of India Export
Notes
Organisation (FIEO). Also, with the Government of India striking important
deals with the governments of Japan, Australia and China, the external
sector is increasing its contribution to the economic development of the
country and growth in the global markets. Moreover, by implementing the
FTP 2014-19, by 2020, India’s share in world trade is expected to double
from the present level of three per cent.

Foreign Direct Investment

The Indian government’s favourable policy regime and robust business
environment have ensured that foreign capital keeps flowing into the country.
The government has taken many initiatives in recent years such as relaxing
FDI norms across sectors such as defence, PSU oil refineries, telecom,
power exchanges, and stock exchanges, among others.
Additionally India is one of the best countries in the world on RiRi (Rational

E
Investors Ratings Index), which consists of Macroeconomic vulnerability
Index and Economic Growth.
Market size
OR
According to Department of Industrial Policy and Promotion (DIPP), the
total FDI investments India received during April - September 2016 rose
30 per cent year-on-year to US$ 21.6 billion, indicating that government’s
SC
effort to improve ease of doing business and relaxation in FDI norms is
yielding results.
Data for April - September 2016 indicates that the services sector attracted
the highest FDI equity inflow of US$ 5.29 billion, followed by
telecommunications – US$ 2.79 billion, and trading – US$ 1.48 billion.
Most recently, the total FDI equity inflows for the month of September
GS

2016 touched US$ 5.15 billion.

During April - September 2016, India received the maximum FDI equity
inflows from Mauritius (US$ 5.85 billion), followed by Singapore (US$
4.68 billion), Japan (US$ 2.79 billion), (US$ 1.62 billion), and USA (US$
1.44 billion).
Impact investments in India is expected to grow at a compound annual
growth rate (CAGR) of 20-24 per cent to touch US$ 6-8 billion by 2025,
from US$ 1 billion in 2015.1
Investments/developments
Some of the recent significant FDI announcements are as follows:
• BSH Home Appliances Group, one of the leading home appliances
manufacturers worldwide, opened its first technology centre in India
at Adugodi, Bengaluru, which will enable the company to further
develop localised technologies for the Indian market.
• Ford Motor Co. plans to invest Rs 1,300 crore (US$ 189.2 million) to
build a global technology and business centre in Chennai, which will
be designed as a hub for product development, mobility solutions and
business services for India and other markets.
• JW Marriott plans to have 175-200 hotels in India over the next four
years.

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• China based LCD and touchscreen panel manufacturer, Holitech

Technology, plans to invest up to US$ 1 billion in India next year, as
Notes
per the company’s CEO Mr Bingshuang Chen.
• Mr Abdul Lahir Hassan, Chairman of UAE-based Gamma Group,
outlined plans of investing around Rs 3,000 crore (US$ 436.5 million)
in the infrastructure, health and education sectors of Kerala, which is
expected to generate around 2,000 indirect and direct jobs in the
state.
• Mr StephaneDescarpentries, Director of operations FM Logistic Asia,
outlined plans of investing around EUR 50 million (US$ 52.9 million)
in India in the next four years, to contribute to a better efficiency of
logistics market in the country.
• The first Incredible India Tourism Investment Summit 2016, which
was organised from September 21-23, 2016, witnessed signing of 86
Memoranda of Understanding (MoUs) worth around Rs 15,000 crore
(US$ 2.18 billion), for the development of tourism and hospitality
projects.

E
• Apple Inc has started its first development centre outside the US in
Hyderabad, which will employ over 4,000 people and focus on Apple
OR
Maps, the company’s digital maps and navigation service.
• Panasonic Corporation plans to set up a new manufacturing plant for
refrigerators in India with an investment of Rs 250 crore (US$ 36.4
million), and also invest around Rs 20 crore (US$ 3 million) on an
assembly unit for lithium ion batteries at its existing facility in Jhajjar
SC

in the next 8-10 months.

• Vistra Group Ltd, a Hong Kong-based professional services provider,
has acquired IL&FS Trust Company Ltd, India’s largest independent
corporate trust services provider, which will enable Vistra to expand
the platform to provide a broader suite of corporate and fiduciary
GS

services and thereby gain a foothold in the Indian corporate services

market.
• Silver Spring Capital Management, a Hong Kong-based equity hedge
fund, plans to invest over 2,000 crore (US$ 291.0 million) in
Hyderabad-based infrastructure developer Transstroy India Ltd, for
construction of highways in the country.
• Global beverage company Pepsi plans to invest Rs 500 crore (US$
72.8 million) to set up another unit in Maharashtra to make mango,
pomegranate and orange-based citrus juices, while biotechnology giant
Monsanto plans to set up a seed plant in Buldhana district of
Maharashtra.
Government Initiatives
The Government of India has approved 100 per cent FDI in other financial
services carried out by non-banking finance companies (NBFCs), which is
expected to attract more foreign capital into the country.
The National Highways Authority of India (NHAI) plans to offer a risk
cover to foreign investors who are willing to invest in government owned
operational national highways, which would cover risk associated with the
possibility of structural design fault, sub-standard quality of construction,
and loss of traffic.

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The Union Cabinet has approved a scheme allowing the grant of Permanent
Residency Status (PRS) to foreign investors based on a minimum investment
Notes
of Rs 10 crore (US$ 1.5 million) within 18 months or Rs 25 crore (US$
3.6 million) within 36 months, which is expected to encourage foreign
investment and facilitate Make in India programme.
The Department of Industrial Policy and Promotion (DIPP) has allowed
100 per cent foreign direct investment (FDI) in asset reconstruction
companies (ARC) under automatic route, which will help to tackle the
issue of declining asset quality of banks.
The Government of India has amended the FDI policy regarding
Construction Development Sector. The amended policy includes easing of
area restriction norms, reduction of minimum capitalisation and easy exit
from project. Further, in order to provide boost to low cost affordable
housing, it has indicated that conditions of area restriction and minimum
capitalisation will not apply to cases committing 30 per cent of the project
cost towards affordable housing.
The Government of Karnataka has approved three investment proposals

E
worth Rs 2,211 crore (US$ 321.7 million), which includes that of PepsiCo
and Biocon for setting up their new production facilities in the state, and

OR
one expansion project proposal of Manyata Promoters Private Limited.
The government has also raised FDI cap in insurance from 26 per cent to
49 per cent through a notification issued by the DIPP. The limit is composite
in nature as it includes foreign investment in the form of foreign portfolio
investment, foreign institutional investment, qualified foreign investment,
SC
foreign venture capital investment, and non-resident investment..
India’s cabinet cleared a proposal which allows 100 per cent FDI in railway
infrastructure, excluding operations. Though the initiative does not allow
foreign firms to operate trains, it allows them to invest in areas such as
creating the network and supplying trains for bullet trains etc.
GS

Road ahead
According to United Nations Conference on Trade and Development
(UNCTAD) World Investment Report 2016, India acquired 10th slot in
the top 10 countries attracting highest FDI inflows globally in 2015. The
report also mentioned that among the investment promotion agencies,
India has moved up by one rank to become the sixth most preferred
investment destination.
India will require around US$ 1 trillion in the 12th Five-Year Plan (2012–
17), to fund infrastructure growth covering sectors such as highways, ports
and airways. This would require support from FDI flows. India’s growth Questions
rate, along with competitive location in terms of wages and policies like
Stand Up India, is expected to boost FDI in the coming future. 1. What is MPC and what is
its role

Inflation in India 2. WHat are different

measure of Inflation?
3. Why Indian has replaced
Major Developments WPI with CPI as
benchmark index?
• New Index for measuring inflation:
4. Can price index measure
Reserve Bank of India (RBI) had adopted the new Consumer Price Index impact w.r.t sections of
(CPI) (combined) as the key measure of inflation. The national CPI is population; i.e. does it
meant to measure retail inflation. This index will combine urban and rural affect rich and poor in
CPIs, both under preparation and to be released simultaneously. different way?

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•  Salient features of Monetary policy framework:

Notes
a) It has been signed between Union Government and the Reserve Bank
of India (RBI).
b) The Reserve Bank of India will aim to bring retail inflation below 6%
by January 2016. The target of financial year 2016-17 and all
subsequent years shall be four per cent with a band of (+/-) 2 per
cent.
c) The agreement also requires the RBI to give the government a report
in case the target is missed for a specified period. 
d) The RBI is also required to make public every six months a document
explaining the sources of inflation and the inflation forecast for the
period between six and eight months. In case of any dispute arising
out of interpretation of the agreement, it would be resolved through
a meeting between the RBI governor and the government. 
e) The new monetary policy committee, which will set the inflation
target.

E
f) The Monetary Policy Committee will comprise :
I. The Reserve Bank Chairperson as its chairperson;
OR
II. One executive member of the Reserve Bank Board nominated
by the Reserve Bank Board;
III. One employee of the Reserve Bank nominated by the Reserve
Bank Chairperson; and
SC

IV. Our persons appointed by the Central Government.

The objective of monetary policy is to achieve price stability while striking
a balance with the objective of the Central government to achieve
growth.
Criticism of mechanism: 
GS

a) The Indian economy is inflation prone and fiscal populism, is its

biggest contributor. From loan waivers to corporate give-aways, fiscal
policy primes the pump needlessly on many occasions for non-
economic considerations.
b) The government works on short term basis as Political considerations
like re-election make the central government more than willing to
consistently spend more than it earns despite the risks of higher
future inflation and increased interest rates. This begs the question as
to how the central government can be entrusted with conducting
monetary policy when such a task requires a long term perspective. 
Inflation Rate in India during past 10 years
Average Inflation Inflation  
 CPI India 2017 1.86 %  
 CPI India 2016 4.97 %  
 CPI India 2015 5.88 %  
 CPI India 2014 6.37 %  
 CPI India 2013 10.92 %  

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 CPI India 2012 9.30 %  

Notes
 CPI India 2011 8.87 %  
 CPI India 2010 12.11 %  
 CPI India 2009 10.83 %  
 CPI India 2008 8.32 %  
Selective Inflation in pulses and oilseed
India’s quest for self-sufficiency in pulsesand oilseeds goes back, at least,
to 1990-1991, when pulses were incorporated in the technology mission
on oilseeds. In 1992, and 1995-1996, oil palm and maize were added to
the mission, which was re-christened the Integrated Scheme on Oilseeds,
Pulses, Oil palm and Maize (ISOPOM). In 2007, ISOPOM’s pulses
component was merged with the National Food Security Mission. However,
despite having such schemes for decades, India has not achieved self-
sufficiency in pulses and edible oils (oilseeds).

E
In the fiscal year (FY) 2016, imports of pulses touched an unprecedented
5.8 million metric tonnes (MMT), against the domestic production of
16.5 MMT. Pulses production peaked in FY14, touching 19.25 MMT, but
receded due to droughts in FY 2015 and FY 2016. 
OR
Pulses attract government attention when inflation crosses the “tolerance
limit”, as it did last year. Even in August 2016, retail inflation of pulses
was 22 per cent. But in September, as moong started arriving in markets,
its wholesale price crashed, in several markets, below its minimum support
SC
price (MSP). Such volatility hits both the farmers and consumers. One
way of tackling such price volatility is to create a buffer stock of about
2 MMT of pulses, by procuring or importing when prices are low. This has
been recommended several times; the latest recommendation has come
from Arvind Subramanian’s report on pulses. It is heartening that the
Union cabinet had already approved this limit for buffer stocking of pulses.
GS

Second, as quality of pulses deteriorates fast, it would need better handling

of procured amounts. Subramanian’s suggestion of creating a new agency
that runs on public private partnership, may be worth trying, but private
agencies cannot wait for years to get their reimbursements from the GoI,
which happens routinely with state agencies like the FCI and NAFED.
The latter still has an outstanding liability of Rs 1,083 crores on account
of losses incurred in the procurement of chana, groundnut, copra and tur.
Third, if the economic cost of pulses (procurement price plus procurement
incidentals, processing charges, stocking and distribution costs) to the state
agencies is higher than the market prices, the buffer stocking operations of
disposing pulses in the open market may end up in “losses” to the GoI;
these are not taken very favourably by the Comptroller and Auditor General
(CAG) of India. Unless these operations are treated as “subsidy” for price
stabilisation operations, officials would be reluctant to run them for fear of
CAG’s adverse comments.
Impact of Food inflation
Headline inflation numbers tell us little about the burden of prices being
faced by different segments of the population. This is because consumption
baskets vary drastically across different classes. Poorer people spend a
larger amount of their earnings on food, while the rich would spend more
on things like consumer durables and services. So the poor would be hurt
more if prices of items like pulses or vegetables go up, while they would
gain little if smartphone or airline tickets prices come down.

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For example, the share of food consumption for urban rich is 23.35% and
rural rich is 40.95%. So, the adjusted share of food consumption for our
Notes
rich category would be 31.26%.
This in the context of the greater share of food consumption for poorer
people has an effect in terms of overall inflationary expectations. White
collar employees such as financial sector workers had a lower expectation
of rise in inflation in comparison to manual workers, the survey showed.
Seen in this context, it is barely surprising that corporate India is demanding
rate-cuts on account of low inflation, whereas India’s working class is
protesting against rising prices at the same time. While it might be tempting
to dismiss the protest by trade unions as obduracy in the face of much
lower inflation than what it was a couple of years ago, their demands
seem to be rooted in day-to-day experience rather than polemics.

Demotization
Imapct of Demonetisation

E
OR
SC
GS

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Notes

E
OR
SC
GS

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