Economic Survey 2010-11

(released in February 2011)

1) Core Sector : six core industries : crude oil, petroleum refinery products, coal, electricity, cement, and finished steel. 2) The growth of manufacturing is crucial for employment generation, augmentation of domestic supply, resource utilization and value addition, and for sustainable growth of exports. Neglect of research and development (R&D) in new technology and skill development continues to shackle growth in the manufacturing sector. High technology base and skilled manpower are crucial for enhancing manufacturing

competitiveness in the globalized economy. 3) The share of Indian manufacturing in world manufacturing is less than 1.4 % 4) Infrastructure means electricity, roads and bridges, ports, airports, telecommunications,railways, irrigation, water supply and sanitation, storage, and oil and gas pipelines

5) Efficient and reliable energy supplies are a precondition for accelerated growth of the Indian economy. Oil and gas constitute around 45 per cent of total energy consumption. The dependence on imports of petroleum and petroleum products continues to be around 80 per cent of total oil consumption in the country.

6) Cities On the Brink : A recent rating on sanitation (19 indicators) by the Ministry of Urban Development reveals that 190 out of 423 municipalities in India are on the brink of environmental disaster (coded red)-- -many in the poorest states of UP and Bihar, but also Andhra Pradesh. Another 229 are judged in need of major improvement, many in the richest states. . Only 4 make it to safe levels, and none to the highest standard.

7) Inclusive Growth : Focus on Aam Aadmi and higher funds for flagship programmes. The budget for 2010-11 had indicated that inclusive development is an act of faith for the government. Social-sector spending has progressively been stepped up and it stood at 37 % of the plan outlay in 2010-11. Priorities of the Govt are in rural development, education, medical and public health, family welfare, water supply and sanitation, housing, urban development and welfare of SC/ST/OBCs. 8) One way of formalizing the inclusion target is to evaluate the performance of an economy in terms of the performance of the bottom quintile of the population. Thus, instead of treating the overall per capita income as a target, we should aim to enhance the growth of the per capita income of the bottom 20 per cent (what is called the quintile income) of the population 9) The HDI reported in the Human Development Report (HDR) published by the United Nations Development Programme (UNDP) is an alternative to the more standard method of measuring Growth using gross domestic product (GDP). It captures progress in terms of three basic capabilities: to live a long and healthy life, to be educated and knowledgeable, and to enjoy a decent economic standard of life. According to HDR 2010, the HDI for India was 0.519 in 2010 with an overall global ranking of 119 (out of the 169 countries) compared to 134 (out of 182 countries) in 2007 (HDR, 2009). The existing gap in health and education indicators as compared to developed countries and also many of the developing countries indicates a need for much faster and wider spread of basic health and education. Life expectancy at birth in India was 64.4 years in 2010 as against 81 years in Norway, 81.9 years in Australia, 74.4 years in Sri Lanka, and 73.5 years in China (Global average 69.3 years). Similarly, the performance of India in terms of Mean years of schooling is not only much below that of countries like Sri Lanka, China, Egypt, and Vietnam, but also lower than the

global average. In terms of gender equality index (GEI), India with an index value of 0.748 ranks 122 out of a total of 168 countries in 2008. The GEI captures the loss in achievement due to gender disparities in the areas of reproductive health, empowerment, and labour force participation with values ranging from 0 (perfect equality) to 1 (total inequality). The GEI index value of 0.748 indicates a higher degree of gender iscrimination in India compared to countries like China (0.405) and Sri Lanka (0.599).

10) A major financial inclusion intiative was formally launched as Swabhimaan on 10 February, 2011 which aims at providing branchless banking through the use of technology. Banks will provide basic services like deposits, withdrawal and remittances using the services of Business Correspondents (Banks Saathi). The initiative enables Government subsidies and social security benefits to be directly credited to the accounts Of the beneficiaries, enabling them to draw the money from the Business correspondents in their village itself.

11) The banking penetration ratio (defined as the proportion of the households availing banking facilities) is very low in the north-east region. According to the Analytical Report on Household Assets, Census of India 2001, the banking penetration ratio in almost all states except Arunachal Pradesh is lower than the national average, with Manipur having the lowest ratio 12) In rural India, around 42 per cent of savings are held as cash. In this

environment, once we initiate policies for financial inclusion and help people open bank accounts and put their money in the accounts, we will be bringing money that was earlier lying dormant into circulation. Once people are financially included, that is, they put away their money in banks and mutual funds, this money goes into circulation. Hence, the total effective money supply in the economy goes up. In this situation, even if there is no change in the behaviour of the RBI and GOI, there will be inflationary

pressure.

13) Sarva Shiksha Abhiyan is being implemented by the central govt in partnership with states for addressing the needs of children in the age group of 6-14 years : enrolment of all children in school,setting up of education guarantee centres, significant enhancement in the learning achievements of children etc.

14) National Rural Health Mission (special focus on 18 states)

15) Climate change : Key sectors that are affected are : agriculture, water, natural ecosystem, biodiversity and health. India specific report warns of : sea level rise, increase in cyclonic intensity, reduced crop yield in rain fed crops, reduction in milk productivity, stress on livestock, increased flooding and spread of malaria.

16) Real per capita income of Indians = approximately 1300 dollars per annum

17) Inflation in India is measured by a wholesale price index (WPI) and four different consumer price indices (CPIs) for various categories of

consumers.Interestingly, measured by all five price indices, it was in single digits from October 2010. This had not happened since April 2009

18) One of the main reasons why inflation is high is because the difference between farm gate prices and retail prices is quite high. If we allow new traders to come into the market, buy where prices are low, and sellwhere prices are high, the large price differentials will vanish. So the critical question is why such new traders and farmers do not come into the market.Though a firm answer is not possible at this stage, it seems likely that there are barriers to their entry,caused by the rules and regulations of the Central and State governments and by deliberate barriers to entry created by the incumbent traders. It is arguable that our Agricultural Produce Market Committees (APMC) Act, by restricting the traders permitted to trade through the main mandis, facilitates collusive pricing. Also the various tolls and checks that a trader faces in bringing supplies into a city make it difficult for small, new traders and farmers to bring their products to retail outlets. It is also believed that new traders are deterred by

incumbent traders. If this is established, then section 3 of the Competition Act 2002, can be invoked to put an end to these practices.

19) Another quicker, method to curtail the margin between farm gate and retail prices is to bring in modern supply chain management systems and retail sellers into the picture. This will involve a lot of new know-how. A quick way to get at this is to allow foreign direct investment (FDI) in multi-product retail into India. It could enable farmers to get higher prices and consumers to have to pay less

20) Teaser Loans or Terraced Loans.

These are loans in which the monthly repayment instalment rises over time . Unlike Most industrialized countries, India has had considerable success with terraced loans. The State Bank of India (SBI), for instance, came out with two different terraced loan productsHappy Home Loan in February 2009 and Easy and Advantage Home Loan in August 2009. Both these loans hold the interest rates fixed and below the market rate in the initial years. In the case of Happy Home Loan also,a similar stategy was adopted. Though there were fears that these loans are similar to the Sub Prime Loans given in USA (Sub Prime Loans were the root cause of many problems in the US and elsewhere),in India these terraced loans were not given to sub-prime borrowers. In the case of Easy and Advantage Home Loans, a borrowers repayment capacity and hence eligibility was worked out under the presumption that the person would have to pay from the beginning what she would actually have to pay from the fourth year onwards. Second, there was a lot of effort made to keep the contracts transparent so that the borrowers knew exactly what they were getting into

21) Diversion of PDS products meant for the poor.

In 2001-02, 18.2 per cent of PDS rice and 67 per cent of PDS wheat was diverted. In other words, over 40 per cent of all grain targeted at the poor missed the poor. Jha and Ramaswamy,using the NSS expenditure survey of 2004-05, report an overall diversion of 55 per cent of the grain meant for the poor. No matter where the exact figure lies between 40 and 55 per cent, the fact of the matter is the leakage that currently takes place is far too high. Once we give a legal guarantee to people about the food that they are to receive, if we try to deliver on this promise using our current delivery mechanism, we shall have to send twice the targeted amount of grain towards the targeted population.

22) Tourism Potential is immense. In 2007, 5.1 million tourists came to India,compared to 54.7 million to China and 20.1 Million to Malaysia. Interestingly enough, India sends out more outbound tourists than it gets inbound ones. This is fairly unusual for an emerging economy. To exploit the huge potential that this sector has, will require investment in infrastructure and even improvements in our immigration and visa services. But it will be unwise not to reap the large benefits that are lying unutilized in this sector.

23) The Visa-on-Arrival (VoA) scheme was started in the country from January 2010 on pilot basis for nationals of five countries, namely Finland,Japan,

Luxembourg, New Zealand, and Singapore. The scheme is being extended to nationals of five more countries, namely Cambodia, Laos, Phillipines, Myanmar, and Vietnam from January 2011.

24) Education- More needs to be done Potential is tremendous India currently has a gross enrolment ratio (GER) of 13.5 per cent in higher education, often also called the tertiary enrolment ratio. That is, 13.5 per cent of all those who are aged between 18 and 23 (that is the college-going age) are actually enrolled in a college or a university. For the United States, the figure is 81.6 per cent. Even China and Malaysia over which India had a lead a few decades ago have now crossed our GER with figures of 22.1 and 29.7, respectively. India currently produces close to 6000 PhDs per annum.China produces close over 22,000. In principle, it is possible for India to quickly double the GER and reach 30 per cent within a decade from now. In the long run an economys growth depends on the quality of its citizenry and the human capital and innovativeness of the population. Clearly we need to invest more and more intelligently in this sector 25) Our countrys inefficiency : Data released by the World Bank show that in terms of the bureaucratic efficiency for doing business, India ranks as low as 134th in the world. 26) FDI : Domestic savings in India have not been large enough to wholly meet investment requirements. Capital inflows from other countries, particularly of an investment nature, have become important. Equity inflows are more stable and bring in managerial skills and technological knowhow together with the investment.

27) The 2009 survey of the Japan Bank for International Cooperation (JBIC), conducted among Japanese investors, continued to rank India as the second most promising country for overseas business operations, after China.

28) In FDI equity investments, Mauritius tops the list of first ten investing countries followed by the US, the UK.

29) The report of the Task Force on MSMEs- Micro, Small and Medium Enterprises, presented to the Honble PM on 30th January, 2010, provides a roadmap for the development and promotion of MSMEs. The detailed recommendations cover six major thematic areas, namely credit marketing, labour,rehabilitation and exit policy, infrastructure, technology and skill development, and taxation as also special measures for the north-eastern region and Jammu and Kashmir. The implementation of these recommendations is being

monitored periodically by the Steering Group constituted under the chairmanship of Principal Secretary to the Prime Minister.

Further, Council on Micro, Small and Medium Enterprises under the chairmanship of the Prime Minister has been set up to lay down broad policy guidelines and review the development of the MSME sector.

30) Maharatna Scheme : With a view to delegating enhanced financial and operational powers to the CPSEs, the Government had introduced the Navratna and Miniratna schemes. During 2010-11, the Government has introduced the Maharatna scheme to empower mega Navratna CPSEs to expand their operations both in domestic as well as foreign markets. During the year, four CPSEs, namely Indian Oil Corporation Ltd., National Thermal Power Corporation Ltd., Oil and Natural Gas Corporation Ltd., and Steel Authority of India Ltd., were granted Maharatna status. Two more CPSEs, i.e. Oil India and Rashtriya Ispat Nigam Ltd., were granted Navratna status in 2010-11 and there are now 16 Navratna CPSEs as a result. Three more CPSEs, namely the Bridge & Roof Company Ltd., Bharat Pumps & Compressors Ltd. and National Seeds Corporation Ltd., were granted Miniratna status during the year and presently there are

62 Miniratna CPSEs.

31) Services sector contributes 57.3 % of our GDP. (55.2 % - chapter 10) growing by 10 per cent annually, contributing to aout a quarter of total employment, accounting for a high share in foreign direct investment (FDI) inflows and over one-third of total exports, and recording very fast (27.4 per cent) export growth through the first half of 2010-11.

32) CSOs classification of the services sector falls under four broad categories, namely a) trade, hotels, and restaurants; b) transport, storage, and communication; c) financing, insurance, real estate, and business services; and d) community, social, and personal services.

33) High growth services categories are : financing,insurance,real estate, business services,transport,storage and communication. 34) Overall share of Services Sector = 64.2 per cent in world GDP in 2009. Chinas share of services in its national GDP at 39.2 per cent is relatively low, though it is ahead of India in absolute terms (as its overall GDP is more than three times that of India)

35) The housing sector contributes more than 9 per cent of national employment.

36) The IT-ITeS industry has four major components:IT services, business process outsourcing (BPO), engineering services and R&D, and software products.

37) Banking : The growth in deposits is much less than the growth in advances. This is because of several reasons including Negative Rate of Return. (Real Interest Rates depressed).

The Government of India decided to extend interest subvention of 2 percentage points with effect from 1 April 2010 to 31 March 2011 on pre- and postshipment rupee export credit for four export sectors, namely handicrafts, carpets, handlooms, and small and medium enterprises (SMEs) subject to the condition that the interest rate after subvention will not fall below 7 per cent, which is the rate applicable

to a short-term crop loan under priority-sector lending.

38) Priority-sector Lending

A target of 40 per cent of loans has been stipulated for lending to the priority sector by domestic SCBs, both in the public and private sectors Within this, sub-targets of 18 per cent and 10 per cent have been stipulated for lending to agriculture and the weaker sections respectively

Foreign banks should give 32 % of their loans to Priority sector.

39) The current monetary policy stance is to contain inflation and anchor inflationary expectations while being prepared to respond to any further build-up of inflationary pressures . Maintain an interest rate regime consistent with price, output, and financial stability. Actively manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.

Monetary policy in tightening mode (tight money policy as opposed to easy money policy) to fight inflation.

40) A new WPI series with 2004-05 base was released on 14 September 2010 so that the new WPI will
represent the prices in the wholesale markets, in a better manner. The food index consists of two sub components, namely primary food articles and manufactured food products. The overall weight of the composite food index in the WPI is 24.31 per cent.

41)

household food spending accounting for above 40 per cent of total

household expenditure (versus some 7-8 per cent in richer countries

The prices of food items went up because of : poor summer wheat harvest in Russia ,Australian floods, dry spell in Argentina, Indonesian flooding, poor US maize yields,

42) Measures to contain inflation

The Government monitors the price situation regularly as price stability remains high on its agenda. Measures taken to contain prices of essential commodities include selective ban on exports and futures trading in foodgrains, zero import duty on select food items, permitting import. of pulses and sugar by public-sector undertakings, distribution of imported pulses and edible oils through the PDS, and release of higher quota of non-levy sugar. In addition, State Governments are empowered to act against hoarders of food items by holding in abeyance the removal of restrictions on licensing, stock limits, and movement of food articles under the Essential Commodities Act 1955

43) Core inflation is a measure of inflation that excludes items that face volatile price movement, notably food and energy. It is, therefore, a preferred tool for framing long-term policy

44) As per RBI and Govt of India,Inflation has become the biggest concern and thats why interest rates are going up. The second biggest concern is current account deficit.

45) 13 th finance commission has recommended that the combined public debt to GDP ratio should be reduced to 68 % by 2014-15.

46) Conolidated General govt debt was 73 % of GDP in 2009-10 47) The Direct Taxes Code Bill, 2010 introduced in Parliament, seeks to consolidate and amend the laws relating to all direct taxes, that is income-tax, dividend distribution tax, and wealth tax so as to establish an economically efficient, effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP ratio.

The salient features of the DTC are :

It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax Act 1957 with a single legislation.

It simplifies the language of the legislation. The use of direct, active speech, expressing only a single point through one sub-section and rearranging the provisions into a rational structure will assist a layperson to understand the provisions of the DTC.

It indicates stability in direct tax rates. Currently, the rates of tax for a particular year are stipulated in the Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is proposed.

The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent and raises the exemption limit as well as broadens the tax slabs for personal income tax.

It strengthens taxation provisions for international transactions. In the context of a globalized economy, it has become necessary to provide a stable framework for taxation of international transactions and global capital.

48) Interest payments have been growing at a steady rate and appropriating about 35 per cent of the revenue receipts in the last five years

49) Indian Railways has decided to add 206 more railway stations to the existing list of 378 Adarsh Stations. Railways will develop Adarsh Stations with basic

facilities such as drinking water, Adequate toilets, catering services, waiting rooms, and dormitories especially for lady passengers. Work has started at various stations.

50) A greenfield electric loco manufacturing unit is being set up at Madhepura, Bihar, to manufacture 12,000 hp locomotives.

51) The Cabinet has approved setting up of a greenfield rail coach factory at Kanchrapara, West Bengal to manufacture and supply 500 railcars per annum over a period of 10 years.