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ECONOMIC SURVEY 2010-11

(Ministry of Finance, Govt. of India)

TABLE OF CONTENTS

1. State of the Economy and Prospects 1


2. Micro-Foundations of Macroeconomic Development 23
3. Fiscal Developments and Public Finance 42
4. Prices and Monetary Management 69
5. Financial Intermediation and Markets 99
6. Balance of Payments 134
7. International Trade 156
8. Agriculture and Food Management 187
9. Industry 217
10. Services Sector 237
11. Energy, Infrastructure and Communications 258
12. Human Development, Equity and Environment 291
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1.2 It is important to note here that during the negative growth in agriculture and allied sectors in
immediate past three years, the Indian economy 2008-09, erratic monsoons resulted in a severe
has been severely buffeted by, but has successfully drought in 2009-10 and unseasonal late rains
withstood, two shocks in rapid succession: (a) a affecting the winter season crops in 2010-11.
collapse in world growth, finances, and trade with
the onset of the global financial crisis in 2007-09 1.3 This period of economic stress has severely
whose ripple effects continued into 2009-10 and tested citizens and policymakers alike. Yet the
persisted into 2010-11 (with fiscal stresses in Indian economy is coming through with resilience
Europe); and (b) domestically, following a year of and strength. While some clouds linger—such as

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0.1 KEY INDICATORS

Data categories and components Units 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

1 GDP and Related Indicators

GDP (current market prices) !"crore 3692485 4293672 4986426 5582623PE 6550271QE 7877947AE

Growth Rate % 13.9 16.3 16.1 12.0 17.3 20.3

GDP (factor cost 2004-05 prices) !"crore 3254216 3566011 3898958 4162509PE 4493743QE 4879232AE

Growth Rate % 9.5 9.6 9.3 6.8 8.0 8.6

Savings Rate % of GDP 33.5 34.6 36.9 32.2 33.7 na

Capital Formation (rate) % of GDP 34.7 35.7 38.1 34.5 36.5 na

Per Cap. Net National Income


(factor cost at current prices) ! 27123 31198 35820 40605 46492 54527

2 Production

Foodgrains Mn tonnes 208.6 217.3 230.8 234.5 218.1a 232.1b

Index of Industrial Production c (growth) Per cent 8.0 11.9 8.7 3.2 10.5 na

Electricity Generation (growth) Per cent 5.2 7.2 6.4 2.8 6.0 na

3 Prices

Inflation (WPI) (12 month average) % change 4.3 6.5 4.8 8.0 3.6 9.4d

Inflation CPI (IW) (average) % change 4.4 6.7 6.2 9.1 12.4 11.0d

4 External Sector

Export Growth ( US$) % change 23.4 22.6 29.0 13.6 -3.5 29.5e

Import Growth (US$) % change 33.8 24.5 35.5 20.7 -5.0 19.0e

Current Account Balance (CAB)/GDP Per cent -1.2 -1.0 -1.3 -2.3 -2.8 na

Foreign Exchange Reserves Us$ Bn. 151.6 199.2 309.7 252.0 279.1 297.3 f

Average Exchange Rate !"/ US$ 44.27 45.25 40.26 45.99 47.42 45.68 g

5 Money and Credit

Broad Money (M3) (annual) % change 16.9 21.7 21.4 19.3 16.8 16.5h

Scheduled Commercial Bank Credit


(growth) % change 30.8 28.1 22.3 17.5 16.9 24.4h

6 Fiscal Indicators (Centre)

Gross Fiscal Deficit % of GDP 4.0 3.3 2.5 6.0 6.3i 4.8

Revenue Deficit % of GDP 2.5 1.9 1.1 4.5 5.1i 3.5

Primary Deficit % of GDP 0.4 -0.2 -0.9 2.6 3.1i 1.7

7 Population Million 1106 1122 1138 1154 1170 1186


(Year-wise projected propultion (2005) (2006) (2007) (2008) (2009) (2010)
as on 1st Oct.)

AE GDP figures for 2010-11 are advance estimates; PE Provisional Estimates. QE quick estimates.
na not yet available / released for 2009-10.
a Final estimates.
b Second advance estimates.
c The annual growth rates have been recompiled from 2005-06 onwards since the indices have been recompiled from April 04 onwards using new
seried of WPI for the IIP items reported in value terms.
d Average Apr.-Dec. 2010.
e Apr.-Dec. 2010.
f as of December 31, 2010.
g Average exchange rate for 2010-11 (Apr.-Dec. 2010).
h Provisional.
i fiscal indicators for 2009-10 are based on the provisional actuals for 2009-10.

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continued high food inflation and a temporary elevated levels given the geopolitical risks in Middle
slowdown in industrial growth the dynamism in overall East. All these could have implications for slowing
growth is evident, even as a series of social protection down the momentum albeit in the short run. Fourth,
measures have considerably strengthened the ability fiscal policy is on the consolidation path with
to withstand shocks. These results owe to the revenues doing well on the strength of the rebound
counter-cyclical macroeconomic policies, structural in economic activity and, going forward, this is likely
measures to promote growth, social spending to to yield growth dividends in the medium to long term
provide a stronger foundation to protect the poor and, setting in motion a virtuous cycle.
as always with economic progress, some luck in
1.5 Headline inflation, year-on-year, as measured
the form of good weather and slow but steady recovery
by the wholesale price index (WPI), remained at
of the global economy. In each of these areas,
elevated levels from December 2009, even though it
enormous progress was made during this crisis, and
has, by and large, been on a downward trajectory
valuable lessons learnt for the future.
since April 2010, when WPI inflation peaked at 11
1.4 The estimated level of growth in the GDP at per cent year-on-year. Inflation stood at 8.23 per cent
constant 2004-05 prices at factor cost (real GDP) in in January 2011. The financial-year build-up (from
2010-11 was composed of: growth of 5.4 per cent in March 2010) remained at 7.44 per cent upto January
agriculture, which rebounded from a downturn in the 2011. Inflation in primary articles, particularly food
previous year; growth of 8.1 per cent in industry, articles, was the main contributor to the elevated
which had a growth of 8.0 per cent in 2009-10; and a levels of WPI inflation. With diminishing base effect,
decelerated growth of 9.6 per cent in services as there was gradual moderation in overall WPI inflation
against 10.1 per cent in 2009-10 (Table 1.1). On the in November 2010 when it was placed at 7.48 per
demand side, the GDP at constant prices (2004-05) cent; there was a rise again in December 2010, driven
at market prices is estimated to grow by 9.7 per mainly by certain food articles (fruits and vegetables,
cent. Four distinct facts emerge out of the recent milk, egg, meat and fish) and also petroleum
macroeconomic data. First, adjusted for the base products. A series of steps, both structural and
effect on community, social, and personal services, macroeconomic, was taken to combat the rising food
the services sector with a share of 57.3 per cent in inflation.
2009-10 has finally started to gather momentum and
given the fact that it has been the power house of 1.6 On the basis of weekly data on prices, inflation
the Indian growth story, this portends well for the in food articles remained in double digits for 76 weeks
medium-term prospects. Second, the savings rate from 5 June 2009; after briefly ruling below the double-
has gone up to a level of 33.7 per cent and investment digit mark for three weeks between 20 November
rate is up to 36.5 per cent of the GDP in 2009-10, 2010 and 4 December 2010, it again was in double
which, given the incremental capital-output ratio of digits trending higher with inflation at 17.05 per cent
about 4, indicates prospects of sustained output on 22 January 2011. Between 15 January 2010 and
growth. Third, there is a marked deceleration in 19 June 2010 it was ruling above 20 per cent in 22
industry as per recent monthly IIP data, decline in weeks out of 23. While food inflation had remained
imports and signs of headline inflation remaining at high even last year, compositionally the higher

Table 1.1 : Growth in GDP at factor cost at 2004-2005 prices (per cent)
2005-06 2006-07 2007-08 2008-09PE 2009-10QE 2010-11AE
Agriculture, Forestry & Fishing 5.1 4.2 5.8 -0.1 0.4 5.4
Mining & Quarrying 1.3 7.5 3.7 1.3 6.9 6.2
Manufacturing 10.1 14.3 10.3 4.2 8.8 8.8
Electricity, Gas & Water Supply 7.1 9.3 8.3 4.9 6.4 5.1
Construction 12.8 10.3 10.7 5.4 7.0 8.0
Trade, Hotels, Transport & Communication 12.1 11.7 10.7 7.6 9.7 11.0
Financing, Insurance, Real Estate & Business Services 12.7 14.0 11.9 12.5 9.2 10.6
Community, Social & Personal Services 7.0 2.9 6.9 12.7 11.8 5.7
GDP at Factor Cost 9.5 9.6 9.3 6.8 8.0 8.6
Source : CSO.

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inflation this year is different; last year the main revisions take into account the new series of WPI
drivers were pulses, cereals, and sugar which could with base 2004-05 and also subsequent revision in
be attributed to monsoon deficiency, whereas this Index of industrial production (IIP)}. Growth in real
year inflation seems to be driven by demand factors GDP for 2008-09 also stands revised to 6.8 per cent
despite higher supply levels. Inflation as measured (up by 0.1 percentage point). Compositionally, there
by consumer price indices, wherein greater weights are significant changes in the GDP as per the Quick
are assigned to food items, rose sharply to reach Estimates with growth in agriculture at 0.4 per cent
peak levels in January 2010; thereafter it has (0.2 per cent as per the Revised Estimates); growth
moderated broadly in tandem with movements in in industry of 8.0 per cent as against 9.3 per cent in
WPI inflation. the Revised Estimates and a sharper rise in growth
1.7 The inflationary pressures on the domestic front in services at 10.1 per cent as against the 8.5 per
are likely to be exacerbated by the higher levels of cent indicated in the Revised Estimates. Growth in
global commodity prices and also the easy money GDP at factor cost current prices was placed at 16.1
policy being followed in several industrial nations per cent in the Quick Estimates as against a level of
trying to jump-start their own economies. The 12.2 per cent suggested by the Revised Estimates.
International Monetary Fund (IMF) forecast (as per 1.10 The Quick Estimates also indicate the extent
the January 2011 World Economic Outlook [WEO] of overall inflation as measured by the GDP deflator
update) indicates the likely continuance of high and the sectoral composition. Agriculture and allied
consumer price inflation for emerging and developing activities were estimated to have grown by 17.3 per
economies in 2011 due to continued robust demand cent in terms of current prices in Quick Estimates
and a sluggish supply response to tightening market 2009-10 (as against 11.8 per cent in Revised
conditions. The IMF has also upped its baseline Estimates 2009-10). With growth in terms of constant
projection for petroleum prices from US $ 79/bbl in prices at 0.4 per cent, the implicit inflation is placed
WEO October 2010 to US $ 90/bbl in the January at 16.8 per cent. In so far as the growth rates in
update of the WEO. Non-oil commodity prices are industry are concerned, the revision was smaller and
forecast to increase by 11 per cent in 2011. The the implicit inflation is placed at 2.8 per cent in 2009-
update also indicated that near-term risks were now 10. In services as per the revisions in growth in current
on the upside for most commodity classes and for and constant prices implicit inflation of 7.6 per cent
some emerging economies that had grown rapidly in 2009-10 is indicated (3.8 per cent as per the
there was danger of overheating on account of closing Revised Estimates). The level of inflation as
of output gaps. measured by the implicit GDP deflator have risen
1.8 The IMF has revised upwards the global growth resulting in widening of the differential in growth
projections, which are placed now at 4.4 per cent in between current and constant prices for key
2011. The Indian economy is estimated to grow by macroeconomic indicators (Figures 1.1 and 1.2 ).
8.4 per cent in 2011 following a growth of 9.7 per
1.11 The CSO has released the Advance Estimate
cent in 2010 (in terms of GDP at constant market
of GDP for 2010-11 on 7 February 2011. The Indian
prices). Under the baseline scenario in which
economy grew robustly in the current financial year
contagion from the financial turmoil in the euro area
and is on firmer footing. With growth in real GDP at
is contained, emerging market capital inflows are
8.6 per cent in 2010-11, which followed a revised
expected to remain strong and financial conditions
growth of 8.0 per cent in 2009-10 and 6.8 per cent in
robust. Key risks to emerging markets as per the
2008-09, the economy has moved closer to the pre-
update relate to overheating, a rapid rise of inflationary
crisis levels. The decomposition of growth in 2010-
pressures, and the possibility of a hard landing.
11 indicated that it was relatively broad based across
the major sub-sectors in industry and services,
3)45)6% 78% )97:7;59 besides the rebound in agriculture. Agriculture is
<)4)=7/;):>! estimated to grow relatively rapidly on the strength
of growth of 6.5 per cent in foodgrains; 11.9 per cent
Growth broad based, recovery on firmer in oil seeds; 41.2 per cent in cotton; 15.2 per cent in
footing sugarcane; 4.1 per cent in fruits; and 3.8 per cent in
1.9 In its Quick Estimates released on 31 January vegetables. This should help arrest the food price
2011, the CSO revised growth in real GDP for 2009- situation if demand does not rise at faster rates.
10 from a level of 7.4 per cent to 8.0 per cent {these Growth in industry was rapid in the first half of the

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Figure 1.1 Growth in GDP at FC at current and constant prices
and inflation based on deflator
22
20 Growth in
GDP at FC
18 at constant
16 prices
14
Growth in
12 GDP at FC
at current
10 prices
8
Inflation
6 based on
GDP
4 deflator
2
2005-06 2006-07 2007-08 2008-09 2009-10 20010-11
Year

Figure 1.2 Growth in GDP at MP at current and constant prices


and inflation based on deflator
22
20 Growth in
GDP at MP
18 at constant
16 prices
14
Growth in
12 GDP at MP
at current
10 prices
8
Inflation
6 based on
GDP
4 deflator
2
2005-06 2006-07 2007-08 2008-09 2009-10 20010-11
Year

current fiscal in terms of national accounts as well Quarterly trend


as the IIP. Robust performance in terms of key
indicators in telecom services, civil aviation, and 1.12 The revisions to the annual GDP estimates
financial services and the level of growth in services between the Quick Estimates released on 31
excluding community, social, and personal services January 2011 and the Revised Estimates for 2009-
in the current fiscal indicates brighter prospects for 10 released in May 2010 indicate some likely
next year. With manufacturing estimated to remain revisions in the quarterly GDP estimates for the
at about the same levels as last year and a pickup current and previous years. These revisions to
in the construction sector estimated to offset the quarterly GDP are likely to be made available at a
deceleration in the other sub-sectors, growth in later date. The available data (reported also in the
industry is estimated to remain at more or less the Mid-year Analysis 2010) indicated a robust growth
same levels of 8 per cent that obtained last year. A momentum with growth in real GDP at 8.9 per cent
part of the deceleration in year-on-year growth as in each of the first two quarters as well as the first
per the monthly IIP data owes to the large base half of the current fiscal. The growth in real GDP and
effect; but the quarter-on-quarter sequential its broad based nature indicated that economic
deseasonalized index movements also reflect a recovery that began in 2009-10 has gathered
positive but weak momentum, which needs close momentum and is at the robust level that obtained
monitoring. prior to the global crisis. Growth in the GDP at

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constant market prices is placed at 10.4 per cent in Growth in exports was also revised downwards for
the first half of the current fiscal. That fiscal stimulus 2008-09 and 2009-10. Imports were also estimated
packages were central to the recovery as attested to have declined only marginally by 1.8 per cent as
by the demand-side aggregates, was reported in against 17.2 per cent indicated in the Advance
detail in the Mid-year Analysis 2010. Estimates.
1.14 Demand-side GDP as measured at constant
Aggregate demand and its composition
market prices is estimated to grow by 9.7 per cent
Pickup in private consumption and investment in 2010-11 (Table 1.2); in terms of current market
driving rebound in demand prices (nominal GDP) it is placed at 20.3 per cent.
At constant market prices, while total consumption
1.13 The expenditure estimates of the GDP (at
expenditure and capital formation are estimated to
constant market prices) reveal the dimensions of
decelerate year-on-year in 2010-11, with private final
the impact of the global crisis on the Indian economy.
consumption expenditure picking up, Government
Though the crisis deepened only in the second half
final consumption expenditure decelerating sharply
of 2008-09, the demand-side GDP grew at much
owing to base effect and a pickup in gross fixed
lower levels than the supply-side GDP (at constant
capital formation and net exports compositionally
prices at factor cost) on quarterly basis and year-
positive shifts are indicated. Inflation measured by
on-year it was placed at one-half the levels of
the GDP deflator implicit in the demand- side
2007-08. The revisions to the GDP data effected by
estimates for 2010-11 is at 9.6 per cent. Similar
the Quick Estimates for 2009-10 entailed a change
estimates based on the levels of growth in the GDP
in the dimensions of the impact of the crisis and the
at factor cost at constant and current prices was at
subsequent recovery that was documented in the
9.0 per cent.
earlier editions of the Economic Survey. The
deceleration in growth in private final consumption 1.15 The levels of shares and contribution to growth
expenditure was lower in 2008-09 than reported of key demand-side aggregates do indicate that in
earlier; the fiscal stimulus was only moderate with 2008-09, the demand slowdown was largely
growth in Government final consumption expenditure explained by gross capital formation and net exports
at 10.7 per cent in 2008-09 (as against 16.7 per (Table 1.3). The rebound in demand-side GDP in
cent in the Quick Estimates of 2008-09). The real 2009-10 was also explained by the two and was
impact of the fiscal stimulus measures was felt in obtained in the face of reduced levels of contribution
2009-10 with a growth in Government final to growth from private final consumption expenditure.
consumption expenditure at 16.4 per cent. Gross A decomposition of the growth in private final
capital formation was estimated to have fallen consumption expenditure indicates that the sub-
sharply in 2008-09 and recovered equally sharply in group food, beverages and tobacco with a share of
2009-10, mainly attributable to change in stocks. over 30 per cent in private final consumption

Table 1.2 : Growth in GDP at constant market prices


2005-06 2006-07 2007-08 2008-09PE 2009-10QE 2010-11AE

1. Total final consumption expenditure 8.6 7.6 9.3 8.2 8.7 7.3
1.1 Private final consumption expenditure 8.5 8.3 9.3 7.7 7.3 8.2
1.2 Government final consumption expenditure 8.9 3.7 9.5 10.7 16.4 2.6
2. Gross capital formation 16.3 15.3 17.2 -3.1 13.8 8.8
2.1 Gross fixed capital formation 16.2 13.8 16.2 1.5 7.3 8.4
2.2 Changes in stocks 26.9 31.5 31.1 -48.6 90.8 7.1
2.3 Valuables -1.4 13.7 2.8 26.9 54.2 19.5
3. Exports 25.8 20.0 5.9 14.4 -5.5 12.0
4. Less Imports 32.5 21.3 10.2 22.7 -1.8 6.3
5. Discrepancies 33.6 35.5 124.8 -140.9 -133.6 -220.2
Growth in GDP at 2004-05 market prices 9.3 9.3 9.8 4.9 9.1 9.7

Source : CSO.

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Table 1.3 : Demand side growth of GDP, growth contribution and relative share at
2004-05 market prices (per cent)
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

GDP at Market Prices 9.3 9.3 9.8 4.9 9.1


Consumption (Private) 8.5 8.3 9.3 7.7 7.3
Consumption (Govt) 8.9 3.7 9.5 10.7 16.4
Gross Fixed Capital Formation 16.2 13.8 16.2 1.5 7.3
Change in Stocks 26.9 31.5 31.1 -48.6 90.8
Exports 25.8 20.0 5.9 14.4 -5.5
Imports 32.5 21.3 10.2 22.7 -1.8
Contribution to Growth
Consumption (Private) 54.2 52.5 54.9 90.5 47.8
Consumption (Govt) 10.4 4.4 10.0 22.3 19.6
Gross Capital Formation 57.3 50.4 67.2 -44.3 72.3
Gross Fixed Capital Formation 49.9 45.5 52.4 10.4 26.2
Net Exports -18.6 -10.2 -13.6 -57.6 -8.0
Relative Share
Consumption (Private) 59.1 58.7 58.2 57.9 59.4 58.5
Consumption (Govt) 10.9 10.9 10.3 10.3 10.9 11.6
Gross Capital Formation 32.8 34.9 36.2 39.0 35.1 38.2
Gross Fixed Capital Formation 28.7 30.5 31.8 33.6 32.5 32.0
Source : CSO.
Note : Does not add to 100 because only major items are included in the table.

expenditure fell sharply in terms of growth in both indicated that sequencing the rollback of fiscal
2008-09 and 2009-10; this sub-group and the sub- measures would be guided by recovery in investment
group furniture and furnishings were the only two and the latest data indicate that the pickup in gross
that had decelerated in terms of growth, year-on- fixed capital formation is not fuller in terms of the
year (Table 1.4). The Economic Survey 2009-10 had pre-crisis levels.

Table 1.4 : Private final consumption-annual growth and share at 2004-05 prices
2004-05 2005-06 2006-07 2007-08 2008-09PE 2009-10QE
Annual Growth (per cent)
Food, Beverages & Tobacco 6.3 3.4 6.4 3.1 0.5
Clothing & Footwear 19.7 23.3 5.0 5.6 5.2
Gross Rent, Fuel & Power 3.8 3.8 4.7 4.3 5.9
Furniture, Furnishings Etc. 15.1 17.1 16.1 12.9 13.5
Medical Care & Health Services 8.8 8.7 4.5 6.9 8.9
Transport & Communication 5.2 8.1 7.4 9.2 14.2
Recreation, Education & Cultural Services 11.0 8.4 9.8 11.9 6.4
Miscellaneous Goods & Services 20.2 21.2 28.6 20.2 15.9
Total Private Consumption 8.4 8.5 9.1 7.6 7.4
Share of Total (per cent)
Food, Beverages & Tobacco 40.0 39.2 37.4 36.4 34.9 32.6
Clothing & Footwear 6.6 7.3 8.3 8.0 7.9 7.7
Gross Rent, Fuel & Power 13.8 13.2 12.7 12.2 11.8 11.6
Furniture, Furnishings, etc. 3.4 3.6 3.9 4.1 4.3 4.6
Medical Care & Health Services 5.0 5.0 5.0 4.8 4.7 4.8
Transport & Communication 19.3 18.7 18.7 18.4 18.6 19.8
Recreation, Education & Cultural Services 3.0 3.0 3.0 3.1 3.2 3.2
Miscellaneous Goods & Services 8.9 9.9 11.1 13.0 14.6 15.7
Total Private Consumption 100.0 100.0 100.0 100.0 100.0 100.0
Source : CSO.

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Savings and investment cent in 2009-10, up from the crisis-affected levels of


34.5 per cent in 2008-09. However, gross fixed capital
Movements in public-sector savings and formation had not picked up in 2009-10. The fall in
corporate investment explain the slowdown and investment rate in 2008-09 was mostly due to its fall
subsequent recovery in the private sector, particularly the corporate sector.
1.16 The CSO’s Quick Estimates for 2009-10 In 2009-10, as per the Quick Estimates, there has
placed gross domestic savings at 33.7 per cent of been a pickup in corporate-sector investment;
the GDP at current market prices (savings rate). The household-sector investment that had shot up in
savings rate for 2008-09 was also revised from 32.5 2008-09 changed tack and is back to pre-crisis
per cent to 32.2 per cent. With private-sector savings levels. Thus the impact of the crisis in 2008-09 was
more or less static, it was the savings of the public manifest mainly in the levels of changes in stocks,
sector (essentially public enterprises) that went up which recovered in 2009-10. However, as per the
from a revised level of 0.5 per cent in 2008-09 to 2.1 Quick Estimates, gross fixed capital formation is
per cent in 2009-10 (Table 1.5). Private-sector savings placed at 30.8 per cent in 2009-10, which is a
had remained sticky in the range of 30.1 per cent to deceleration on a year-on-year basis.
31.9 per cent in the last six years and seemingly Savings-investment gap narrows; but still wide
the global crisis had no significant impact.
1.18 The overall savings-investment gap that was
1.17 Gross capital formation, as a proportion of implicit in these estimates was 2.3 per cent in 2008-
the GDP at current market prices (investment rate) 09 and 2.8 per cent in 2009-10. The gap in terms of
grew rapidly in the period 2004-05 to 2007-08. This sectors indicated a widening of the public-sector
reflected the process of fiscal consolidation balance in 2008-09 to - 9.0 per cent, which
undertaken by the Centre and the States, which subsequently moderated to - 7.0 per cent in 2009-
allowed the economy to reap rich dividends in the 10. This reflected the expansionary polices and was
form of higher investment rates and thus higher GDP partly made up by the upward shift in the private-
growth rate. Investment rate was placed at 36.5 per sector savings-investment balance on the component

Table 1.5 : Ratio of savings and investment to GDP (in per cent at current market
prices)
2004-05 2005-06 2006-07 2007-08 2008-09PE 2009-10QE

Gross Domestic Saving 32.4 33.5 34.6 36.9 32.2 33.7


Public Sector 2.3 2.4 3.6 5.0 0.5 2.1
Private Sector 30.1 31.0 31.0 31.9 31.7 31.6
Household Sector 23.6 23.5 23.2 22.5 23.8 23.5
Financial Saving 10.1 11.9 11.3 11.7 10.8 11.8
Saving in Physical Assets 13.4 11.7 11.9 10.8 13.1 11.7
Private Corporate Sector 6.6 7.5 7.9 9.4 7.9 8.1
Gross Capital Formation (Investment) 32.8 34.7 35.7 38.1 34.5 36.5
Public Sector 7.4 7.9 8.3 8.9 9.5 9.2
Private Sector 23.8 25.2 26.4 28.1 24.6 24.9
Corporate Sector 10.3 13.6 14.5 17.3 11.5 13.2
Household Sector 13.4 11.7 11.9 10.8 13.1 11.7
Gross fixed Capital Formation 28.7 30.3 31.3 32.9 32.0 30.8
Stocks 2.5 2.8 3.4 4.0 2.0 3.3
Valuables 1.3 1.1 1.2 1.1 1.3 1.7
Saving-investment Gap
Public Sector -5.1 -5.5 -4.7 -3.9 -9.0 -7.0
Private Sector 6.3 5.8 4.6 3.8 7.1 6.7
Source : CSO.
Note : Totals may not tally due to adjustment for errors and omissions.

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side and on the macroeconomic side reflected and quarrying and construction--has picked up
relatively stronger domestic demand vis-à-vis external sharply in 2009-10. The following sectors evinced a
demand. While the expansionary fiscal stance was decelerating trend in 2009-10: electricity, gas and
considered apposite given the level of demand water supply; railways; and communications. There
slowdown arising from fall in investment, going was a decline in the rates of investment in trade,
forward, the need to deepen the process of fiscal hotels, and restaurants with trade declining sharply;
consolidation that has resumed in the Budget for for the third year banking and insurance declined
2010-11 cannot be overemphasized. and real estate declined on base effect.
1.19 The rates of investment across sectors
indicated the varying levels of impact of the crisis /37<?9>57:% @:<% !?//=A
and recovery. Growth in investment in the agriculture
sector, even after the revisions, was strong in 2007-
Agriculture is critical for macroeconomic
08 and 2008-09, but appeared to have dipped in 2009-
stability and sustained growth
10 (Quick Estimates) with growth at 3.7 per cent 1.20 The growth of agriculture and allied sectors
(Table 1.6). Forestry and logging continues to decline- continues to be a critical factor in the overall
-a process that began in 2007-08--but more sharply performance of the Indian economy. It might be
in 2009-10. Sectoral investment in fishing was recalled that this sector had grown in excess of 5.0
relatively static. Investment in two sectors--mining per cent on average annual basis in the triennium

Table 1.6 : Sectoral investment growth rates at 2004-05 prices


Rate of growth of GCF
2005-06 2006-07 2007-08 2008-09 2009-10
Agriculture, Forestry & Fishing 13.8 4.7 15.8 22.5 3.7
Agriculture 13.9 4.2 17.0 23.9 3.4
Forestry & Logging 30.8 13.4 -20.2 -4.0 -13.5
Fishing 9.5 9.5 9.5 9.6 9.5
Mining & Quarrying 40.0 15.6 13.3 -13.4 62.1
Manufacturing 17.6 16.6 29.5 -31.6 34.8
Registered 39.3 11.0 37.3 -27.0 25.2
Unregistered -36.7 47.4 -2.6 -58.8 134.1
Electricity, Gas & Water Supply 21.3 18.1 11.4 12.3 3.5
Construction 5.7 66.3 20.4 -24.7 16.8
Trade, Hotels & Restaurants 26.7 40.3 -17.7 29.9 -27.4
Trade 22.6 44.9 -22.8 35.8 -32.7
Hotels & Restaurants 49.2 19.5 10.4 7.0 -1.0
Transport, Storage & Communication 20.1 -7.4 25.9 37.6 0.9
Railways 14.6 12.9 13.7 22.5 9.3
Transport by Other Means 12.8 -14.8 29.6 12.8 -8.9
Storage -285.7 14.9 7.1 62.4 -1.5
Communication 33.2 -7.8 30.1 86.7 6.6
Financing, Insurance, Real Estate
& Business Services 6.2 -0.4 10.6 41.0 -3.3
Banking & Insurance 70.4 61.8 -6.8 -5.0 -26.1
Real Estate, Ownership Of Dwellings
& Business Services 4.3 -3.3 12.0 44.0 -2.3
Community, Social & Personal Services 19.6 12.3 18.4 -3.6 12.3
Public Administration & Defence 17.3 14.0 13.4 3.3 11.1
Other Services 22.7 10.2 25.0 -11.9 14.0
Total 17.0 15.3 17.7 -3.9 12.2
Source : CSO

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ending 2007-08 when real GDP grew in excess of 9 second green revolution is being recognized more
per cent. This sector accounted for 12.7 per cent of than ever before. There is need to significantly step
the real GDP in the first half of 2010-11. Despite up both private and public investment in the
experiencing the most deficient south-west monsoon agriculture sector to ensure sustained growth so as
since 1972 and a significant fall in the levels of kharif to achieve the target growth of around 4 per cent per
foodgrain production in 2009-10, the growth in annum. The rise in prices of agricultural produce
agriculture marginally recovered to 0.4 per cent would in part help incentivize production; the moot
primarily due to a good rabi crop. Several measures question remains what proportion of the rise accrues
taken in advance by the Government for raising the to the producer and what proportion gets appropriated
rabi crop output had the desired effect. The farming by middlemen. The creation of more direct farm-to-
sector was also broadly supported by more fork supply chains in food items across the country
remunerative prices and, earlier, by the waiver of would be critical in incentivizing the farmer with higher
loans and other measures taken. With above normal producer prices and at the same time would lower
rainfall, the prospects for growth of the sector were the prices for end-consumers.
bright in the current year with a growth of 3.8 per
cent during the first half of 2010-11 as against 1.0 Behaviour of prices and inflation
per cent during the first half of 2009-10. The Advance Inflation continues to be a cause for concern
Estimates of the CSO placed the growth in
agriculture and allied sectors at 5.4 per cent which 1.23 Inflation continues to be a cause for concern.
implied an overall share of 14.2 per cent in real GDP The year-on-year WPI inflation that started trending
in 2010-11. Even with the level of growth in the current up in December 2009 continued through the current
fiscal, the full Eleventh Plan period target of 4 per fiscal. The financial year 2010-11 started with a
double-digit headline inflation of 11.0 per cent in April
cent per annum may not be realized.
2010. After remaining in double digits from April to
1.21 For four consecutive years from 2005-06 to July 2010, headline inflation came down to single
2008-09, foodgrains production registered a rising digits and stood at 8.8 per cent in August 2010.
trend and touched a record level of 234.47 million Headline inflation in November 2010 was 7.5 per cent;
tonnes in 2008-09. The production of foodgrains but the trend reversed and in December 2010 it was
declined to 218.20 million tonnes during 2009-10 (4th 8.4 per cent. In spite of having a good monsoon this
Advance Estimates) due to the long spells of drought year, headline inflation at elevated levels owed to
in various parts of the country in 2009. The high levels of food inflation. The inflation in food
productivity of almost all the crops suffered articles which had moderated to single digit in
considerably which led to decline in their production November 2010 again jumped to double digits and
in 2009. As per the 1st Advance Estimates (covering stood at 13.6 per cent in December 2010.
only kharif crops), production of kharif foodgrains
1.24 The spurt in inflation in December 2010 could
during 2010-11 is estimated at 114.63 million tonnes
be attributed to supply bottlenecks especially in
which is lower than the target of 125.31 million tonnes
vegetables, onions, tomatoes, fruits, milk, eggs, and
but higher than kharif foodgrain production of 103.84
fish. A sudden spike in prices of onions during
million tonnes recorded during 2009-10 (4th Advance
December 2010 was witnessed on account of
Estimates). The shortfall in the estimated kharif
damage to the onion crop. It may be mentioned that
foodgrain production compared to the target in 2010-
food price inflation during the last financial year was
11 is mainly due to drought conditions reported in
mainly driven by high inflation in pulses, cereals,
major rice-producing areas in the country.
and sugar due to bad monsoon. The rise in the
1.22 The country has made great strides in purchasing power owing to the rapid growth of the
increasing foodgrains production since the mid- economy and inclusive programmes like the
1960s. Today India ranks high in the production of Mahatma Gandhi National Rural Employment
various commodities such as milk, wheat, rice, fruits, Guarantee Act (MNREGA) partly might have
and vegetables. However, the agriculture sector in contributed to the upward trend in inflation. The
India is at a crossroads with rising demand for food average inflation in primary articles was reported at
items and relatively slower supply response in many 18 per cent on an average during the period April
commodities resulting in frequent spikes in food 2010 to December 2010 as compared to 10 per cent
inflation. The technological breakthrough achieved last year for the same period. Recovery in the
in the 1960s is gradually waning. The need for a domestic economy led to demand-side pressure on

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inflation. The inflationary pressure persists both from next two months; in December 2010 there is again
domestic demand and higher global commodity a massive build-up; indicating a much higher
prices on account of the global recovery. momentum (Figure 1.3). Core inflation also moved
up in the current fiscal indicating that the inflation in
1.25 Food has higher weight in consumer price
food items might have spilled over into a more
indices than in the WPI. Overall consumer price
index (CPI) for industrial workers (IW) inflation, generalized phenomenon. Inflation in manufactured
year-on-year, ruled higher than WPI from November items with a weight of 65 per cent in the WPI has
2008; this continues through the current fiscal. In been above the 4 per cent mark since January 2010
August 2010, inflation in terms of all price indices and after reaching 6.4 per cent in April 2010 has
had come down to single digit after 15 consecutive evinced a moderating trend. The rise in wage goods
months of double-digit inflation. Year-on-year inflation and levels of inflation in intermediates has implications
in the CPI-IW was 9.47 per cent in December 2010 for the industrial output.
as compared to 14.97 per cent in December 2009.
On year-on-year basis, inflation in the consumer Industry and Infrastructure
price indices for agriculture workers (CPI-AL) and Recent data indicate volatility and waning
rural workers (CPI-RL) was 7.99 per cent and momentum
8.01 per cent respectively in December 2010 as
1.28 Growth in the industrial sector as per the IIP
compared to 17.21 and 16.99 per cent respectively
was buoyant during the first two quarters of the current
in December 2009.
financial year. The manufacturing sector, in particular,
1.26 In terms of financial year build-up of inflation, showed a remarkable robustness, growing at rates
that is per cent change in the WPI index in December of 12.6 per cent and 9.7 per cent respectively during
2010 over the levels in March 2010, a level of 6.11 these two quarters. IIP data on monthly basis
per cent obtained as against 7.9 per cent last year indicated that growth in IIP has decelerated sharply
in the same period. A decomposition of the year-on- to a level of 2.7 per cent in November from 11.3 per
year inflation in terms of base effect and price effect cent in November 2009. For the current financial year
revealed the large base effect in the rise in the levels (April-November), growth in the IIP was placed at
of inflation in 2010-11, albeit evincing a moderating 9.5 per cent as against the 7.4 per cent that obtained
trend in recent months. This was true also of a in the corresponding period last year. Data on the
decomposition of the year-on-year inflation in primary IIP has exhibited volatility in the current fiscal with
articles. growth varying widely in the range of 2.7 per cent to
1.27 Therefore, it is instructive to monitor the 16.6 per cent. While earlier the volatility was
emerging trend in inflation on a sequential month- associated with capital goods in the use-based
on-month basis. As there are seasonalities classification, components like consumer non-
associated with such a measure, a deseasonaliza- durables and basic goods were the main depressants
tion of the data would provide indications of the in the deceleration in November 2010. The CSO has
change if any in the direction and the momentum released the IIP data for the month of December
embedded in it. The seasonally adjusted sequential 2010 on 11 February 2011. Year-on-year, the IIP has
measure of headline inflation points to a spurt in grown by 1.6 per cent in December 2010 and 8.6
September 2010 followed by a moderation in the per cent during April-December 2010.

Figure 1.3 Deseasonalised sequential month-on-month movement


2.5
2.0 Desea-
M-o-M variation

sonalised
1.5 WPI
1.0
0.5
0
-0.5
Feb
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009-10 2010-11
Year

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1.29 As per the IIP, manufacturing growth rate consumer non-durable segment in particular, though
decelerated to 9.7 per cent in the second quarter of not discernible so far, is expected to materialize in
the current financial year. Compared to the peak the fourth quarter of this fiscal. However, a higher
growth of 16.8 per cent achieved during the fourth base effect may impact the industrial growth rate in
quarter (January-March) of the last financial year, the months of December 2010 and January 2011
this growth rate was moderate. Within the and accordingly may moderate the industrial sector’s
manufacturing sector, the capital goods segment has contribution to the GDP for the current financial year.
been the main driver of growth; it has shown extreme As there is a large base effect involved, it is useful to
volatility as it registered a growth of 3.5 per cent in see the trend indicated by the quarter-on-quarter
the first quarter of 2009-10, surged up to 45.7 per deseasonalized sequential growth momentum and
cent during the fourth quarter of the last financial direction. The quarter-on-quarter deseasonalized
year, and has continued to be in double digits since headline IIP indicated large volatility largely on
then. account of the movements in capital goods and
consumer goods (Figure 1.4). The short-run nature
1.30 Post recovery, industrial output growth has of the IIP slowdown suggests that the deceleration
been largely driven by a few sectors such as the is more in the nature of road bumps than indication
automotive sector along with a revival in cotton of any long-run problem.
textiles, leather, food products, and metal products.
Some sectors have exhibited extreme month-on-
Six core industries growing; but not at full
steam
month output volatility. The impact of favourable
monsoons on the domestic-demand-driven industrial 1.31 Six core industries that have a large bearing
sector has not been widespread. Its effect on the on infrastructure and have a combined weight of 26.7

Figure 1.4 Sequential (deseasonalised) rate of growth (per cent) in IIP and its components
7
Rate of growth (per cent)

6 Desea-
sonalised
5 rate of
4 growth
3
2
1
0
-1
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


Year

Mining Manufacturing
7.5 6
6.25 5
Rate of growth (per cent)

Rate of growth (per cent)

5.0 4
5.75 3
2.5 2
1.25 1
0 0
-1.25 -1
-2.5 -2
Q2 2004-05

Q4 2004-05

Q2 2005-06

Q4 2005-06

Q2 2006-07

Q4 2006-07

Q2 2007-08

Q4 2007-08

Q2 2008-09

Q4 2008-09

Q2 2009-10

Q4 2009-10

Q2 2010-11

Q2 2004-05

Q4 2004-05

Q2 2005-06

Q4 2005-06

Q2 2006-07

Q4 2006-07

Q2 2007-08

Q4 2007-08

Q2 2008-09

Q4 2008-09

Q2 2009-10

Q4 2009-10

Q2 2010-11

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Rate of growth (per cent) Rate of growth (per cent) Rate of growth (per cent)

-6
-4
-2
0
2
4
6
8
10
-6
-3
0
3
6
9
12
15
18
-3
-2
-1
0
1
2
3
4
5
Q2 2004-05 Q2 2004-05 Q2 2004-05

Q4 2004-05 Q4 2004-05 Q4 2004-05


Electricity

Q2 2005-06 Q2 2005-06 Q2 2005-06

Non-durables
Capital goods
Q4 2005-06 Q4 2005-06 Q4 2005-06

Q2 2006-07 Q2 2006-07 Q2 2006-07

Q4 2006-07 Q4 2006-07 Q4 2006-07

Q2 2007-08 Q2 2007-08 Q2 2007-08

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Q4 2007-08 Q4 2007-08 Q4 2007-08

Q2 2008-09 Q2 2008-09 Q2 2008-09

Q4 2008-09 Q4 2008-09 Q4 2008-09

Q2 2009-10 Q2 2009-10 Q2 2009-10

the corresponding period of the previous year.


Q4 2009-10 Q4 2009-10 Q4 2009-10

Q2 2010-11 Q2 2010-11 Q2 2010-11

cent in December 2009. During April-December


(provisional) in December 2010 compared to 6.2 per

2010-11, these industries registered a growth of 5.3


per cent (provisional) as against 4.7 per cent during
per cent in the IIP registered a growth of 6.6 per cent
Rate of growth (per cent) Rate of growth (per cent) Rate of growth (per cent)

-6
-4
-2
0
2
4
6
8
10
-3
-1.5
0
1.5
3
4.5
6
7.5
9
-2
-1
0
1
2
3
4
5
6

Q2 2004-05 Q2 2004-05 Q2 2004-05

Q4 2004-05 Q4 2004-05 Q4 2004-05

Durables
Q2 2005-06 Q2 2005-06 Q2 2005-06
Basic goods

Intermediate

Q4 2005-06 Q4 2005-06 Q4 2005-06

Q2 2006-07 Q2 2006-07 Q2 2006-07

Q4 2006-07 Q4 2006-07 Q4 2006-07

Q2 2007-08 Q2 2007-08 Q2 2007-08

Q4 2007-08 Q4 2007-08 Q4 2007-08

Q2 2008-09 Q2 2008-09 Q2 2008-09

Q4 2008-09 Q4 2008-09 Q4 2008-09

Q2 2009-10 Q2 2009-10 Q2 2009-10


(232,'#4'25,'!"#$#%-'3$6'7*#89,"28

Q4 2009-10 Q4 2009-10 Q4 2009-10

Q2 2010-11 Q2 2010-11 Q2 2010-11

2010-11 was targeted to go up by 7.7 per cent to

as compared to about 6.2 per cent during April-


December 2009. During April-December 2010, the
830.757 billion KWh. The growth of power generation
during April-December 2010 was about 4.5 per cent
"*#

1.32 Electricity generation by power utilities during


*$ !"#$#%&"' ()*+,-! ./0/100

generation from nuclear, hydro, and thermal units been awarded for a total length of about 3780 km up
registered growth of 33 per cent, 8 per cent, and 3 to November 2010.
per cent respectively. The overall plant load factor
1.36 In the civil aviation sector, the scheduled
(PLF) of thermal power stations during April-
domestic passenger traffic at 51.53 million clocked
December 2010, though lower than that achieved
a growth rate of 19 per cent during January-December
during April-December 2009, exceeded the target of
2010 as compared to a level of 43.3 million during
71.35 per cent for the first three quarters of the current
the corresponding period in 2009. Domestic cargo
financial year. During April-December 2010, the peak
transported by air increased from 3.4 million tonnes
and total energy deficits came down to 10.2 per cent
in 2009 to 4.7 million tonnes in 2010 registering a
and 8.8 per cent respectively from 12.6 per cent and
growth of 30 per cent. At present 12 scheduled
9.8 per cent during the corresponding period in the
airlines are operational (10 passenger and 2 cargo).
previous year, mainly due to growth of availability of
The total number of aircraft in their fleet has risen to
power exceeding the growth in its requirement.
419 at the end of December 2010. The total number
1.33 During the current financial year (2010-11), of non-scheduled operators stood at 121 in
production of crude oil is estimated at 37.96 million December 2010 with 360 aircraft in their fleet.
metric tonnes (MMT), which is about 12.67 per cent
1.37 With increasing private-sector participation,
higher than the crude oil production of 33.69 MMT
the share of the private sector in total telephone
during 2009-10. The projected production of natural
connections has increased to 84.5 per cent in
gas, including coal bed methane (CBM) for 2010-11
November 2010 as against a meagre 5 per cent in
is 53.59 billion cubic metres (BCM) which is 12.80
1999. Teledensity, an important indicator of telecom
per cent higher than the production of 47.51 BCM in
penetration, rose from 7.02 per cent in March 2004
2009-10. The increase in natural gas production is
to 64.34 per cent in November 2010. Rural teledensity
primarily from KG deepwater block. The production
which was above 1.57 per cent in March 2004 has
of raw coal during April to November 2010 was 319.80
increased to 30.18 per cent at the end of November
million tonnes (MT) against 317.79 MT in the same
2010. Urban teledensity has increased from 20.74
period of the previous year. Coking coal production
per cent in March 2004 to 143.95 per cent at the
during this period was 28.72 MT against 25.64 MT
end of November 2010.
during the same period last year, registering a growth
of 12.01 per cent. 1.38 There has been steady decline in the time
and cost overruns of Central-sector projects costing
1.34 Freight loading on Indian Railways in the
!150 crore and above thanks to closer monitoring
period April-November, 2010 was 593.43 million
and systems improvements by the Ministries
tonnes as compared to 574.40 million tonnes in April-
concerned. An examination of cost overruns in the
November 2009—an increase of 3.31 per cent. This
last twenty years as against originally approved costs
was short of the proportionate target of 605.11 million
shows that the former declined from 61.6 per cent in
tonnes by 11.68 million tonnes. The low growth was
March 1991 to 12.06 per cent in March 2008. There
primarily on account of negative growth in iron ore.
is, however, an upward trend from March 2008 as
Iron ore loading has mainly been affected in the
cost overruns reached 14.72 per cent in March 2010
current year due to the restriction imposed by the
and further climbed to 20.7 per cent in October 2010.
State Governments of Orissa and Karnataka.
The rise is partly due to exclusion of projects costing
Frequent bandhs by Naxalites adversely affected
less than !150 crore from the monitoring system as
loading, particularly in the Bailadila sector on East
these had lower cost overruns compared to the bigger
Coast Railway.
projects. The increase is also partly due to steep
Infrastructure – a mixed bag of performances rise in prices of steel and cement in 2006-07.
1.35 About 25 per cent of the total length of National 1.39 Overall, the infrastructure sector has had a
Highways (NHs) is single lane / intermediate lane; mixed bag of performances; some like
about 52 per cent is two-lane standard; and the telecommunications have done exceedingly well and
balance 23 per cent is four-lane standard or more. In in some others there has been less than targeted
2010-11, the achievement under various phases of achievement. During 2007-08 to 2009-10, capacity
the National Highways Development Project (NHDP) addition has been lower than target in power, roads
up to November 2010 has been about 1007 km of (NHDP), new railway lines, and doubling of railway
road. During 2010-11, under the NHDP, projects have lines. The sub-sectors where physical achievements

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have been above or close to targets are Among other services, the two important services
telecommunications, villages electrified under the are education and medical health in terms of relative
Rajiv Gandhi Grameen Vidyutikaran Yojana share of the GDP; they had growth rates of 13.9 per
(RGGVY), railway lines electrification, railway gauge cent and 5.3 per cent in 2009-10 respectively. While
conversion, and new and renewal of roads total services including construction grew by 9.7 per
construction under the Pradhan Mantri Gram Sadak cent, total services excluding construction grew by
Yojana (PMGSY). The investment in infrastructure 10.1 per cent in 2009-10. In 2010-11(Advance
has reached 7.18 per cent of the GDP in 2008-09 Estimates), they grew by 9.4 per cent and 9.6 per
and is expected to increase to 8.37 per cent in the cent respectively. The outlook for the services sector
terminal year of the Eleventh Plan. Rapid reduction which had slightly dimmed due to the fallouts of the
of the infrastructure deficit holds the key to sub-prime crisis in US and the global financial crisis
competitiveness in an increasingly globalized has once again brightened. Recent business
economic environment. performance indicators of different service firms in
the different services also support this healthy
Services Sector – the potential growth engine
prognosis. Even during the crisis years, annual
1.40 The services sector has played a dominant services growth has been around the 10 per cent
role in the Indian economy with a 57.3 per cent share mark which it has maintained since 2005-06. This is
in the GDP; a growth of 10.1 per cent in 2009-10; a in contrast to the overall GDP growth which fell to
high share in FDI equity inflows with the financial 6.8 per cent in 2008-09 from 9.3 per cent in 2007-
and non-financial services category alone contributing 08.
21 per cent during April 2000 to November 2010;
and a 35 per cent share in total exports with 27.4 External-sector developments
per cent export growth in the first half of 2010-11. A Global economy on the upturn; to support
comparison of shares of the services sector in the growth momentum
GDP of different States and Union Territories shows
that the services sector is also the dominant sector 1.42 The global economy was estimated to have
in most of the States of India. grown rapidly in 2010 by 5.0 per cent according to
the update of the WEO (25 January 2011); which
1.41 High-growth services categories are financing, was one of the highest rates of growth in recent years
insurance, real estate, and business services and and compares favourably with the robust levels in
transport, storage, and communication with the latter the pre-crisis period. Growth in emerging economies
overtaking the former in 2009-10 with a high growth remains strong, while advanced countries are
of 15 per cent. Growth of trade, hotels, and growing slowly and facing uncertainty with large fiscal
restaurants which slowed down in 2008-09 has deficit and high public debt and unemployment levels.
recovered moderately in 2009-10. Among the sub- This indicated the two-paced nature of the global
categories, in 2008-09, double- digit growth was growth process in the current conjuncture. While
registered by communications (25.7 per cent), public growth in 2010 was partly a rebound from weak levels
administration and defence (22.1 per cent), banking in 2009, the estimate for 2011 and 2012 at about 4.5
and insurance (13.9 per cent), and storage (11.6 per per cent indicated the prospects. The Market Update
cent). Negative growth was registered only by hotels of the Global Financial Stability Report of the IMF
and restaurants (-3.5 per cent). Among business (January 2011) observed that global financial stability
services, the most important categories are computer- is still to be assured and significant policy challenges
related service; and the category consisting of many remain to be addressed: slow progress in the as yet
services like research and development (R&D) incomplete balance sheet restructuring process;
services, market research, business and interaction between the banking and sovereign credit
management consultancy, architectural engineering, risks in the euro area; and need for more regulatory
and advertising., with shares in the GDP of 3.26 per reforms to the financial sector to anchor stability. In
cent and 0.88 per cent respectively. While computer- several emerging market economies (EMEs),
related services which grew by 21.2 per cent in 2008- however, there has been surge in capital inflows with
09 registered a moderate growth of 5.2 per cent in the associated risk of bubbles in asset and credit
2009-10 due to the global crisis, R&D services markets. There have also been signs of rising inflation,
registered good growth of 19.6 per cent and 19.9 per in response to strong global demand, combined with
cent in both 2008-09 and 2009-10 respectively. supply constraints.

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Trade developments billion during the first half of 2009-10. The lower
invisible surplus combined with higher trade deficit
Imports slowing; exports gathering pace and
resulted in widening of the current account deficit to
trade deficit set to narrow
US$ 27.9 billion during the first half of 2010-11
1.43 In tandem with world trade volumes, India’s compared to US$ 13.3 billion in the first half of 2009-
exports fell rapidly following the deepening of the 10. With merchandise trade indicators showing
global financial crisis midway through 2008-09; they moderation in trade deficit, performance in transfers
rose in the second half of 2009-10, which continued and information technology (IT) and IT-enabled
through 2010-11 until June 2010. Thereafter growth services (ITeS) holds the key to anchoring the
decelerated till October 2010 and picked up elevated levels of current account deficit to
subsequently to reach 36.4 per cent in December sustainable levels.
2010, which is the highest growth in the last two
1.46 Net capital flows at US$ 36.7 billion in the
years. Nevertheless cumulative export growth in
first half of 2010-11 were higher as compared to US$
April-December 2010-11 was at 29.5 per cent with 23.0 billion in the first half of 2009-10. The increase
cumulative exports reaching US $ 164.7 billion during was primarily composed of inflow of portfolio
this period. Current indications are that India would investment, mainly FIIs, short-term trade credits, and
not only achieve the target of US$ 200 billion but external commercial borrowings (ECBs). The large
surpass it in 2010-11. India’s merchandise imports increase, however, was considerably offset by the
also affected by the global recession fell to US$288.4 moderation in net FDI inflows to India.
billion with a negative growth of - 5.0 per cent in Notwithstanding significant increase in net capital
2009-10. This was due to the fall in growth of inflows, accretion to reserves during the first half of
petroleum, oil, and lubricants (POL) imports by 7.0 2010-11 was lower, mainly due to more than doubling
per cent and non-POL imports by 4.2 per cent. POL of current account deficit over the levels in the first
import growth was low mainly due to decline in import half of 2009-10.
price of the Indian crude oil import basket by 16.5
per cent despite the increase in quantity by 7.7 per Foreign Exchange Reserves
cent. 1.47 Foreign exchange reserves increased from
1.44 Trade deficit (on customs basis) increased US$ 252 billion at the end of March 2009 to US$
by 2.4 per cent to US$ 82 billion in 2010-11 (April- 279.1 billion at the end of March 2010, showing a
December) from US$ 80.1 billion in the corresponding rise of US$ 27.1 billion. Of the total increase, US$
period of the previous year. Trade deficit reached a 13.6 billion was on account of valuation gain (due to
peak of US $ 118.4 billion in 2008-09 and moderated decline of the US dollar in the international market)
to US $ 109.6 billion in 2009-10. With lower levels of and the remaining US$ 13.5 billion on account of
surpluses on the invisibles balance, the relatively the BoP. During the current fiscal, reserves increased
higher import growth compared to export growth in from US$ 279.6 billion at the end of April 2010 to
the first half of 2010-11 raised concerns of US$ 292.4 billion at the end of November 2010. The
unsustainable current account deficit levels. With reserves stood at US$ 297.3 billion at the end of
import growth slowing down from October 2010 and December 2010, showing an increase of US$ 18.2
exports picking up in November 2010, the concerns billion over the end-March 2010 level mainly on
on the trade deficit have been allayed; the concerns account of valuation changes.
on the moderation in levels of invisibles surplus Exchange Rate
remain as per the latest data on balance of payments
(BoP), which are for April-September 2010 and need 1.48 During the current fiscal, the monthly average
to be closely monitored. exchange rate of the rupee has generally been range
bound, moving in the range of !44-47 per US dollar
BoP developments between April and December 2010. The exchange
rate of the rupee depreciated by 1.5 per cent against
Invisibles key to reduced deficit on the current
the US dollar, from !44.50 per US dollar in April 2010
account; capital flows easily absorbed without
to !45.16 per US dollar in December 2010. The rupee
forex market intervention
also depreciated against other major international
1.45 The net invisibles surplus (invisibles receipts currencies such as the pound sterling (3.2 per cent)
minus payments) was lower at US$ 39.1 billion and Japanese yen (12.2 per cent) during the
during the first half of 2010-11 vis-a-vis US$ 42.5 period.

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External Debt of steps, key policy rates were raised. The RBI raised
the policy rates six times during the current fiscal
1.49 India’s external debt stood at US$ 295.8 billion
wherein the repo rates under its liquidity adjustment
at the end of September 2010, recording an increase
facility (LAF) was increased cumulatively by 175 basis
of US$ 33.5 billion (12.8 per cent) over the level of
points (bps) raising it to 6.5 per cent and the reverse
end-March 2010. The rise in debt was largely due to
repo rate was increased by 225 bps raising it to 5.5
higher commercial borrowings, short-term trade
per cent. The cash reserve ratio (CRR) was at 6 per
credits, and multilateral Government borrowings. The
cent of net demand and time liabilities (NDTL) of
valuation effect contributed to an increase of US$
banks.
6.3 billion in the total increase. The maturity profile
of India’s external debt indicates the dominance of 1.52 In its subsequent reviews of the monetary
long-term borrowings with long-term debt accounting policy statement, the RBI has revised growth to 8.5
for 77.7 per cent of the total external debt at the end per cent and inflation to 7.0 per cent for end-March
of September 2010. 2011. During the year 2010-11, the growth in reserve
money (M0) at 21.6 per cent as on 28 January 2011
1.50 In 2007-08, a surge in capital flows far in
was higher than in the preceding year while broad
excess of the absorptive capacity and with
money (M3) growth was lower at 16.6 per cent as on
implications for competitiveness had complicated
14 January 2011.Year-on-year, non-food credit growth
monetary management on account of trade-offs
was up 24 per cent at the end of December 2010
involving the impossible trinity objectives—of open
and financed many sectors more broadly (from the
capital account, exchange rate stability, and
monetary policy independence. However, with agriculture rebound to the 3G [third generation]
recovery in 2009-10 and in the current fiscal, the spectrum sales and private infrastructure projects),
external sector broadly remained supportive as the while the overall credit to GDP ratio rose to about 55
elevated levels of current account deficits were easily per cent, continuing its progress (but still structurally
financed by rising capital flows; though concerns of well below potential).
sustainability had emerged. Thus, with orderly 1.53 Reflecting the tightening of the policy rates
conditions in the forex markets, the external sector and a pickup in credit demand, liquidity conditions
remained supportive of the monetary policy setting. tightened. The fiscal began with a gradual decline in
the absorption mode in liquidity conditions ; and a
Monetary and financial sector developments switch to injection mode in May 2010 mainly on
Monetary policy in tightening mode—fighting account of 3G spectrum and broadband wireless
inflationary pressure and supportive of growth; access (BWA) auctions and the resultant rise in
some volatility in securities markets with broad Central Government’s cash balance account with
stability in financial markets the RBI . The levels of injection grew in October and
November 2010. The RBI moved in to address the
1.51 The Reserve Bank of India (RBI) had begun
problem of such frictional liquidity with a slew of
the process of withdrawing from the accommodative
measures like conduct of a special second LAF on
policy stance in October 2009 itself. In its Annual
29 October and 1 November 2010, conduct of a
Monetary Policy Statement in April 2010, it had
special two-day repo auction under the LAF on 30
estimated that the economy would grow by 8.0 per
October 2010, and waiver of penal interest on shortfall
cent with an upward bias and that inflation as per
in maintenance of the statutory liquidity ratio (SLR)
the WPI would decline to a level of 5.5 per cent by
(on 30-31October) to the extent of 1 per cent of NDTL
end-March 2011. The Policy Statement sought to
for availing of additional liquidity support under the
balance the credit demands of the private sector and
LAF.
the need of Government borrowing as indicated in
the Budget Estimates of 2010-11 with a broad money 1.54 Money markets remained orderly in the current
(M3) growth of 17.0 per cent. Aggregate deposits of fiscal with the call money rate remaining within the
the scheduled commercial banks (SCBs) were LAF corridor with some overshooting episodes. The
estimated to grow by 18.0 per cent and credit growth rates in the collateralized segments have continued
was placed at 20.0 per cent. Economic events as to move in tandem with the call rate, albeit below it,
they unfolded in the current fiscal in the form of rising so far during 2010-11. India’s financial markets
food inflation and the risk of it impinging on inflationary continued to gain strength in recent years, following
expectations, necessitated revisions and, in a series steady reforms since 1991. Prudent regulations and

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institutions protected the economy from the recent The fiscal outcome in the first nine months of the
global financial shocks and its dynamism is now current financial year remained broadly on the
leading the current recovery. Domestic capital consolidation track chalked out by the Budget. With
markets performed well in 2010, primary markets growth reverting to pre-crisis levels in the current
financing record levels, including the largest-ever fiscal, revenues remaining buoyant, and a much
initial public offer (IPO) (for Coal India), while higher than budgeted realization in non-tax revenues
secondary markets reached new highs. Record arising from telecom 3G/ BWA auctions, there was
foreign inflows helped support the market. Pensions headroom for higher levels of expenditure at the given
and insurance gained, with life insurance premium fiscal deficit targets.
growing nearly 26 per cent and penetration doubling
1.57 The Budget for 2010-11 followed up on the
to 5.4 per cent of the GDP in 2009, from 2.3 per cent
Thirteenth Finance Commission (ThFC)
in 2000 (when insurance reforms started). Looking
recommendations on limiting the combined public
to the future, the twin challenges are to continue
debt to GDP ratio to 68 per cent by 2014-15 with a
this ongoing progress on gradual financial reform and
promise to analyse the issues in a Status Paper,
modernize regulations and institutions to ensure its
which would also unveil the roadmap for the reduction.
continued safety and stability.
In pursuance of the announcement made in the
1.55 The past year saw banking deposit growth Budget for 2010-11 to this effect, a status paper on
slow, as real interest rates were depressed, especially government debt was presented in November 2010.
compared to returns in other fast-recovering asset The paper made a detailed analysis of the situation
markets (real estate, gold, and stock markets). The and chalked out a roadmap for reduction in overall
priority is to considerably extend the reach of banking debt as a percentage of the GDP for the General
to help mobilize more savings, add more depth, and Government during the period 2010-11 to 2014-15.
more efficiently intermediate opportunities, including The Centre’s debt was projected to come down to
those in the traditional ‘priority’ sectors. To move 43 per cent of the GDP in 2014-15 when the fiscal
ahead,(1) financial inclusion needs to be accelerated deficit would be limited to 3.0 per cent of the GDP.
as a next crucial step; innovative solutions are With combined debt of the State Governments
needed in this regard; (2) similar efforts are needed estimated to decline from 24.8 per cent of the GDP
to deepen domestic capital markets and the role of in 2009-10 to 23.1 per cent in 2014-15, consolidated
non-bank institutions, especially in corporate bond General Government debt was estimated to come
and debt markets; (3) the rapid lowering of fiscal down from 73 per cent of the GDP in 2009-10 to
deficits is needed to help crowd-in such 64.9 per cent in 2014-15. The recent Budgets had
developments; and (4) the Government and the RBI indicated the reform measures that would drive the
have already begun a series of essential regulatory process, which included subsidy reforms in fertilizers
overhaul aimed at updating the modern legislation and petroleum and public expenditure management,
underlying financial markets and improving macro- besides the tax reforms that are on the anvil.
prudential safeguards and institutions. We need to
continue along this path. 1.58 The fiscal outcome in the first nine months of
the current financial year being robust, there was
Fiscal developments headroom for higher levels of expenditure at the given
fiscal deficit targets. In the first nine months of the
Fiscal consolidation on track in the current current fiscal,with year-on-year growth in total
fiscal; reforms to drive the process in the expenditure at 11.2 per cent as against a level of 8.5
medium term per cent envisaged for the full year by the Budget
1.56 With clear evidence of economic recovery in Estimates for 2010-11, fiscal and revenue deficits
2009-10 as indicated by the Advance Estimates of are placed at !"171,249 crore and !116,309 crore
the GDP, the Budget for 2010-11 resumed the path respectively, which constituted 44.9 per cent and
of fiscal consolidation with a partial exit from the 42.1 per cent of the Budget Estimates. With nominal
stimulus measures. As a proportion of the GDP, fiscal GDP placed at !78,77,947 crore for the year by the
deficit was estimated at 5.5 per cent of the GDP by Advance Estimates of the CSO, the target for the
the Budget 2010-11 and the Medium Term Fiscal current fiscal in terms of the fiscal deficit to GDP
Policy Statement indicated a further reduction to 4.8 ratio is placed at 4.8 per cent and in terms of revenue
per cent and 4.1 per cent in 2011-12 and 2012-13. deficit at 3.5 per cent.

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Social-sector developments crore households were provided employment under
this scheme as against more than 4.51 crore during
Focus on aam aadmi and higher funds for 2008-09. During 2010-11, about 4.10 crore
flagship programmes; implementation key to households have been provided employment till
realizing the desired outcomes December 2010. Out of the 145 crore person days
1.59 The Budget for 2010-11 had indicated that created under the scheme during this period, 23 per
inclusive development is an act of faith for the cent and 17 per cent were accounted for by SC and
government. The entitlements for individuals backed ST population respectively and 50 per cent by
by legal guarantees provide ample testimony to this women.
effect. Social-sector spending has progressively been 1.62 The Sarva Shiksha Abhiyan (SSA) being
stepped up and it stood at 37 per cent of the total implemented in partnership with the States for
plan outlay in 2010-11. Sector-specific priorities of addressing the needs of children in the age group of
the Government are reflected in the continued higher 6-14 years seeks, inter alia: enrolment of all children
budgetary allocations in areas like rural development, in school; setting up of Education Guarantee Centres
education, medical and public health, family welfare, (EGC), Alternate Schools, ‘Back-to-School’ camps;
water supply and sanitation, housing, urban retention of all children till the upper primary stage
development, and welfare of Scheduled Castes by 2010; bridging of gender and social category gaps
(SCs), Scheduled Tribes (STs), and other Backward in enrolment with retention and learning; and
Classes (OBCs). The share of Central Government ensuring that there is significant enhancement in
expenditure on social services including rural the learning achievement levels of children at the
development in total expenditure (Plan and non-Plan) primary and upper primary stage. The achievements
has increased from 13.75 per cent in 2005-06 to under the SSA till September 2010 include 3,09,727
19.27 per cent in 2010-11 (Budget Estimates). new schools, construction of 2,54,935 school
Similarly, the expenditure on social services by the buildings, 11,66,868 additional classrooms, 1,90,961
General Government (Centre and States combined) drinking water facilities, and 3,47,857 toilets, supply
has also shown increase in recent years reflecting of free textbooks to 8.70 crore children, and
higher priority to social services. The expenditure appointment of 11.13 lakh teachers. Around 14.02
on social services as a proportion of total expenditure lakh teachers received in-service training under this
has increased from 21.1 per cent in 2005-06 to 23.8 programme. There has been a significant reduction
per cent in 2008-09 and further to 25.2 per cent in in the number of out-of-school children on account
2010-11 (Budget Estimates). of SSA interventions.
1.60 On the employment front, the country has 1.63 The National Rural Health Mission (NRHM)
been able to withstand the adverse impact of the was launched in 2005 to provide accessible,
global crisis and generate employment since July affordable, and accountable quality health services
2009 as reported in the quarterly quick employment to the rural areas with emphasis on poor persons
surveys conducted by the Labour Bureau. The and remote areas. It is being operationalized
upward trend in employment has been continuously throughout the country, with special focus on 18
observed since July 2009. During the quarter July to States which include 8 Empowered Action Group
September 2010, the overall employment has been States (Bihar, Jharkhand, Madhya Pradesh,
estimated to have increased by 4.35 lakh. A Chhattisgarh, Uttar Pradesh, Uttarakhand, Orissa,
comparison of the results of the last four quarterly and Rajasthan), 8 north-eastern States, Himachal
surveys, i.e. September 2010 over September 2009, Pradesh, and Jammu and Kashmir. The
indicates that overall employment has increased by achievements under the NRHM as on September
12.96 lakh, with the highest increase of 9.36 lakh in 2010, include selection of 8.33 lakh accredited social
IT/business process outsourcing (BPO), followed by health activists (ASHAs), employment of 1572
0.79 lakh in textiles, 0.99 lakh in metals, 1.15 lakh specialists, 8284 MBBS doctors, 26,734 Staff
Nurses, 53,552 auxiliary nurse midwives (ANMs),
in automobiles, and 0.39 lakh in gems and
18,272 paramedics on contract basis and setting
jewellery.
up of a total of 16,338 additional primary health
1.61 The progress under the MGNREGA that centres (APHCs), primary health centres (PHCs),
guarantees wage employment on an unprecedented community health centres (CHCs) and other sub-
scale has been satisfactory. During 2009-10, 5.26 district facilities made functional on 24 x 7 basis.

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1.64 While the Government has consciously 1.67 India’s determination in addressing climate
undertaken a large increase in budgetary allocations change is evident from an indicative target of
for anti-poverty programmes and employment increasing energy efficiency by 20 per cent by 2016,
generation schemes, the delivery mechanism needs now supplemented with the domestic mitigation goal
to be bolstered and streamlined to facilitate the of reducing emissions intensity of the GDP by 20-
effective implementation of these programmes. To 25 per cent of the 2005 level by 2020 through
ensure that allocations result in outputs and outputs proactive policies. The resources required to achieve
in outcomes, initiatives like the outcome budget and this objective will need to be mobilized from various
the setting up of the Unique Identification Authority sources. Studies in respect of a low carbon strategy
of India by the Government are steps in the right are under way as one of the key pillars of the Twelfth
direction. Five Year Plan. Second, India is taking conscious
steps for diversifying the energy fuel mix such as
Climate change
setting up of 20,000 MW of solar power-generating
1.65 Climate Change as a result of greenhouse capacity by 2022, doubling the present 3 per cent
gas (GHG) emissions has been receiving intense share of nuclear power in the energy mix over the
political attention at domestic and international next decade, putting in place a major market-based
levels. The industrialized countries have the largest programme to stimulate energy efficiency, imposing
total emissions, and India’s share of global GHG clean energy cess on coal for funding R&D of clean
emissions is relatively small. Climate change has energy technologies even though coal will continue
enormous implications for India. Various studies to play a key role in our future energy strategy, and
indicate that key sectors impacted by climate aggressively expanding the use of natural gas in
change are agriculture, water, natural ecosystem, power production. Third, India has been pursuing
biodiversity, and health. This is happening precisely aggressive strategies for forestry and has launched
at a time when India is confronted with huge a major new programme on coastal zone
development imperatives. A recent India-specific management to address the adaptation challenges
report warns of impacts such as sea-level rise, facing over 300 million people in our country who live
increase in cyclonic intensity, reduced crop yield in
in vulnerable areas near our coast. In addition, India
rainfed crops, stress on livestock, reduction in milk
implements a number of Central sector and Centrally
productivity, increased flooding, and spread of
sponsored schemes with many elements decidedly
malaria.
geared to adaptation. An exercise carried out for this
1.66 Internationally, the United Nations Framework Survey suggests India’s expenditure on these
Convention on Climate Change (the Convention, adaptation-oriented schemes has increased
entered into force in 1994) aimed to reduce emissions impressively from 1.45 per cent of the GDP in the
to sustainable levels and provide support to year 2000-01 to 2.82 per cent during 2009-10. India
developing countries in terms of finance and has also announced a National Action Plan on
technology. The Convention led to the adoption of Climate Change (NAPCC) in June 2008—including
the Kyoto Protocol in 1997.The Conference of Parties eight national missions in the areas of solar energy,
(CoP), which is the supreme body of the Convention, enhanced energy efficiency, sustainable agriculture,
meets annually; during the 13th CoP held at Bali, sustainable habitat, water, Himalayan ecosystem,
Indonesia, in December 2007, a comprehensive increasing the forest cover, and strategic knowledge
programme called the Bali Action Plan was for climate change. State Action Plans are also under
launched, followed by the ‘Copenhagen Accord’ in way
December 2009. The most recent negotiations held
at Cancun during 29 November – 11 December 2010 1.68 All actions to address climate change
have resulted in further decisions including mitigation ultimately involve costs. Funding is vital in order for
adaptation, technology, and finance. The Cancun countries like India to design and implement
Agreements are widely perceived as a modest, small adaptation and mitigation plans and projects. One
step forward and a reaffirmation of faith in the of the important outcomes of the Cancun Agreements
multilateral process. Decisions were taken at is the decision on ‘fast start finance, long-term
Cancun to set up a Green Climate Fund, a finance, and Green Climate Fund’. It was decided to
Technology Mechanism, and an Adaptation set up a ‘Green Climate Fund’, approaching US$30
Committee at global level to support developing billion, for the period 2010-12, to be supported by an
country actions for adaptation and mitigation. independent Secretariat and designed by a

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Transitional Committee with 40 members—15 from petroleum can lead to slower growth. Equally, a
developed countries and 25 from developing. It also sudden movement of these variables in a favourable
recognized the goal of jointly mobilizing US$ 100 direction can give a boost to the growth rate. Apart
billion per year by 2020 as ‘long-term finance’ to from the factors just mentioned, it should be pointed
address the needs of developing countries. The goal out that a certain amount of uncertainty continues
of US$100 billion falls short of developing countries’ to prevail over the economic conditions in Europe
call for assessed contributions of 1.5 per cent of and the USA. Japan also has not yet shown definite
developed countries’ GDP. Further, developing signs of recovery from its long slowdown. The fiscal
countries had been insisting on public funds as the situation and level of sovereign debt in a large number
major source, whereas the Cancun Agreements do of these industrialized nations are also in a somewhat
not specify how the finances would be mobilized by tenuous situation. While India’s growing trade and
the developed countries. In this context, India’s finance links with emerging economies provide some
initiatives will succeed if the global framework of insurance against a downturn in industrialized
actions is effective and supportive, including nations, our economy has vital links with the
technology development and transfer efforts, built industrialized nations. Hence India will be adversely
on sound principles of equity and common, but hit in the event of a serious crisis in any of the
differentiated responsibilities. major industrialized nations. However, the
expectation is that there will not be a serious
Prospects, short term and medium term downturn in industrialized nations; or, more
accurately, a second dip recession is a very low
1.69 Based on the performance of the economy
probability event. Hence the point expectation for
over the last five years and analysis of the underlying
India’s growth is 9 per cent.
trends of critical variables, India’s real GDP is
expected to grow by 9 per cent (+/- 0.25) in 2011- 1.71 Looking further, into the medium to long term,
12. The Indian economy had grown at above 9 per the expectation is that India’s pace of economic
cent for three consecutive years starting in 2005-06. development will pick up even more. There are two
So the economy is expected to revert to pre-crisis reasons for this expectation. Given the momentum
growth levels next year. The country’s savings and in the savings and investment rates and also the
investment rates had gone down a little during 2008- fact that India’s demographic dividend is yet to peak
09 because of the deliberate decision by the and there is evidence that the savings rate for the
Government to encourage consumption as an working- age population of India, especially for those
antidote to the economic downturn. The latest data in the 30s and 40s, is disproportionately high, the
on savings and investments, which pertain to 2009- ratio of investment to ICOR is expected to rise in the
10, show that these rates have turned around. In next half to one decade. Further, the fraction of
2009-10 the savings rate was 33.7 per cent, up from investment that is going towards building up
the previous year’s 32.3 per cent, and the investment infrastructure has been rising. The importance of
rate had also risen and stood at 36.5 per cent. India’s infrastructure for sustainable and inclusive
incremental capital-output ratio (ICOR) is estimated development is now well recognized and the Planning
to be 4.1 for the Eleventh Plan. Given that the Commission is scheduling to give this a large boost
economy still has excess capacity, these two in the Twelfth Five Year Plan.
indicators lead to a projection of GDP growth just
1.72 It is known that once an economy begins to
short of 9 per cent. Since savings and investments
operate close to its capacity, the savings and
now show a positive momentum and the Government
investment rates are no longer such effective drivers
is implementing a gradual exit from the stimulus
of GDP growth. Growth then depends much more
package, the savings and investment rates are likely
on skill development and innovative activity in the
to rise further. Hence it is expected that the
country. Fortunately, there is awareness of this in
economy’s growth will breach the 9 per cent mark in
India and efforts are afoot in terms of budgetary
2011-12.
allocation and actual initiatives to boost the
1.70 Growth forecasts and, for that matter, all development of skill and human capital. Innovative
forecasts in life, however carefully made, are subject activity in a nation is difficult to measure but, judging
to error. A sharp deterioration in weather conditions by patenting activity, there seems to be a pickup in
or a disproportionate spike in the price of crude research and innovation in India. Patent applications

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used, traditionally, to be few and far between. There research. It is expected that these initiatives will
is, however, a sharp rise in this over the last few gather steam and more than make up for eventually
years. In 2004-05, 17,466 patents were filed and 1911 waning power of the savings rate as a driver of
granted. In contrast, in 2008-09, 36,812 patents were economic growth. As a consequence, the next two
filed and 16,061 granted. There are also initiatives to decades should see the Indian economy growing
bolster India’s higher education system, including faster than it has done any time in the past and also
universities, institutes of technology, and centres of faster than the growth in the next two years.

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56789:5;<. =>?@AB. C61. 56D8CA5?6 So clearly there has been an easing of the overall
inflationary situation even though the recent spike
2.2 This has been a difficult year in terms of in food prices is a cause for concern and will be
inflation, even though the overall trend of inflation addressed in this and other chapters. On the other
has been downwards. Inflation peaked around March hand, the high growth that India has achieved this
and April 2010 and has since been on a downward year, when much of the industrialized world is still
trend despite a disturbing turnaround in December teetering on the brink of a possible second dip, is
2010. Inflation in India is measured by a wholesale remarkable. As always with high growth, this is also
price index (WPI) and four different consumer price a moment of opportunities. This is the time when
indices (CPIs) for various categories of consumers. we have to make sure that the economy builds up
Interestingly, measured by all five price indices, it strengths—fiscal, infrastructural and more—so that
was in single digits from October 2010. This had not only do we improve our current standard of living,
not happened since April 2009. Till September 2010, we also accumulate resources and create fiscal
for 17 months, one or the other inflation index has space for bad times that may come our way in the
been in double digits. In fact, from March 2010 to future. In short, a part of the current recovery must
July 2010 all five indices showed double-digit inflation. be stored away to build future resilience.
!" !"#$#%&"' ()*+,-! ./0/100
2.3 When growth is as high as it has been for India be based on the comprehensive study of available
this year, if it were the case that all segments of the statistics, the lessons of economic theory and, not
population were partaking in the growth in exactly least, judgement.
the same way, then inflation would not be a matter 2.6 Recognizing the complex nature of inflation,
of great concern. This is because the growth being with roots in domestic and international factors, the
real, everybody is better off and the inflation does Government has set up an inter-ministerial group
not take away anything from this. It is when the (IMG), under the chairmanship of the Chief Economic
average growth is unevenly distributed that we have Adviser, Ministry of Finance, to “review trends in
to worry about the worse-off and vulnerable segments overall inflation, with particular reference to primary
of society. Hypothetically it is possible that while food articles,” and “make recommendations for action
the average Indian is better off by the per capita on fiscal, monetary, administrative and other fronts.”
income growth of approximately 7 per cent per annum In the mean time, in understanding and analysing
that the country has had, some poor people are inflation, it is important to distinguish between two
actually worse off because their nominal incomes different kinds of phenomena. The first is a short-
have hardly grown and inflation has negated that term relative price rise in a couple of commodities
growth. Given India’s objective of inclusive growth, and the second is a sustained overall price increase.
this is a matter of concern. In fact, in much of standard economics, the former
2.4 According to the unit level data of the NSSO is not even called inflation. The latter, on the other
2004-05 round of monthly consumption expenditure, hand, is classic inflation and calls for standard
based on uniform recall period, the bottom quintile remedies involving monetary and fiscal policies. This
of India’s rural population devotes approximately 67% is not to deny that relative price adjustments can be
of their aggregate household expenditure on food. a contributory factor in a country’s overall inflation.
Since food price inflation during much of the year However, these two kinds of phenomena call for very
has been over 10 per cent, it is possible that some different kinds of policy interventions. To begin with
of these people are worse off, despite the high real the phenomenon of sustained overall price increase
gross domestic product growth (GDP) growth. The or inflation, it is important to note an interesting
way this has to be handled is by developing stronger connection between inclusion and inflation. While
systems of food security for the poor, more effective the Reserve Bank of India (RBI) controls the total
systems of providing cheap fertilizer to small farmers, amount of currency in the economy and the Ministry
dependable micro credit to poor households in rural of Finance, Government of India (GOI), controls the
and urban areas, and basic health support and other fiscal and revenue deficits, what is not often
such services. There are several initiatives afoot in understood is that inflation depends on overall liquidity
India right now to make sure that not only do we try in the economy, and that can be affected by the
to control inflation, we also try to put these supportive decisions and behaviour of firms, farms, corporations,
policy structures in place so that the vulnerable and ordinary citizens.
segments of India’s population are protected from 2.7 As Figure 2.1 shows, Indians continue to hold
the ravages of inflation. These policies are important a lot of their savings as cash. In rural India, around
because, though the Government aims to bring down 42 per cent of savings are held as cash. In this
inflation further, there may be reason to expect that environment, once we initiate policies for financial
in the medium term we will have to live with a little inclusion and help people open bank accounts and
higher inflation than the 3 per cent or so that we put their money in the accounts, we will be bringing
used to have in earlier years. money that was earlier lying dormant into circulation.
2.5 In designing inflation control measures it is In the old set-up where lots of Indians, especially in
important to be aware that sudden, sharp policy- rural areas, kept their savings as cash in their homes,
induced contractions in demand can cause the Government and the RBI had the freedom to
unemployment to rise. Given that India’s inflation indulge in an additional amount of spending without
data are remarkably comprehensive and are this giving rise to inflationary pressures. This is a
published on a weekly and monthly basis, whereas case of one person’s decision not to put his money
our employment statistics come out with long into circulation enabling another agent to put her
intervals and time-lag, the trade-off between inflation money into circulation without causing inflationary
and employment escapes public awareness and pressures. Once people are financially included, that
slants discourse. There is however, enough evidence is, they put away their money in banks and mutual
from around the world that, at least in the short run, funds, this money goes into circulation. Hence, the
there is a negative relation between inflation and total effective money supply in the economy goes
unemployment. This is what makes it critical for up. In this situation, even if there is no change in the
government to carefully calibrate the demand behaviour of the RBI and GOI, there will be inflationary
management measures when bringing down inflation. pressure. There is evidence from around the world
There is no known formula for doing this. This has to that monetization of the economy and the desirable

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2&"*#13#)$456&#$7'#3'25"*#,"#$#%&"'8,+,9#:%,$6 ##!$
objective of bringing more and more people into December) broad money (M3) growth was 16.5 per
systems of modern money management contribute cent. This is not only reasonable but it is less than
to the overall pressure on prices. This is a case of the growth in the previous year, which was 17.9 per
one good development, namely, greater financial cent. Narrow money (M1) also grew less in 2010-11
inclusion, having an undesired consequence, to wit, compared to 2009-10. This year (year on year, up to
a greater inflationary propensity. This must not deter 31 December) the growth was 15.5 per cent and
us from pursuing financial inclusion since the overall last year the growth was 17.9 per cent). During this
benefit of this can be enormous. What is being year currency growth has been greater than deposit
pointed out is the need to be aware of all its fall- growth, resulting in a higher currency to deposit ratio.
outs, and take appropriate action against possible Also, during the year the growth in bank credit to
negative side effects. Government has also gone down. The demand for
2.8 An analysis of India’s recent monetary and liquidity is evident from the fact that the repo rate
liquidity conditions lends credence to the foregoing emerged as the operative policy rate, at least for
analysis. Overall money supply seems to be well most of the latter part of the calendar year 2010.
under control. In 2010-11 (year on year, up to 31 This shows that the raising of the repo rate was being

Figure 2.1 Prefered form of cash savings


by location
100
7.6 9.7
90 5.4 4.2 Others

80
Post office
Per cent of cash saving

70
45.3
Banks
60 62.6

50 Keeping at
home
40

30

20
41.7
10 23.4

0
Rural Urban
Source: National Council for Applied Economic Research–Center for Macro Consumer
Research (NCAER-CMCR), NSHIE, analysis from Rajesh Shukla (2010), How India
Earns, Spends and Saves: Unmasking the Real India, Sage Publications, New Delhi.

tolerated well by the real economy. The inflation that in India can buy with 100 dollars will typically require
occurred despite these features point to the possible 290 dollars in the US. We also know that by the
role of other non-central bank factors. time a country becomes industrialized, the PPP
2.9 The other route through which a desirable correction has to be smaller. This happens partly
because of exchange rate changes but more
change can have the adverse effect of creating
substantially because the prices of basic non-traded
inflationary pressures in an emerging economy is
goods and unskilled labour in the formerly poor
integration with the global economy and, more
country rise and partly catch up with prices in
generally, globalization. It is well-known that in poor
countries, the purchasing power parity (PPP) is low. industrialized nations.
In other words, the kind of living standard one can 2.10 The most major break for the Indian economy
achieve in a poor country with 100 dollars is occurred with the far-reaching economic reforms of
considerably higher than what one can achieve with the early 1990s. From 1994 India was clearly on a
the same money in the United States, Europe, or higher growth path than ever before. The next big
any other industrialized nation. Currently, India’s PPP step up in growth happened in 2005. If India keeps
correction factor is 2.9. In other words, what a person up the high growth rate it has had from 2005, it will

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mean that the real per capita income of Indians will spikes, it is important to take a longer-run view and
rise from the current level of approximately 1300 be restrained in the use of such interventions. We
dollars per annum to 10,000 dollars in 2039. Using should use each such inflationary episode to try and
the data on PPP corrections needed for countries locate and rectify the flaws in the system of
just above the 10,000 dollar benchmark, we would production and marketing.
expect India’s average dollar prices to rise (see Box
2.12 Before going into this, it is important to stress
2.1). If this happened entirely through the adjustment
that not all price increase should be met with
of prices with no change in real exchange rate, we
Government interventions. Prices rise and fall in
would have an additional 2 per cent per annum
response to changing demand and supply scenarios
inflation rate. In reality, there could be some
in the country. Prices are signals to consumers and
exchange rate adjustment as well, though cross-
producers to alter their behaviour in response to
country data suggest this is dominated by the price
exogenous changes in the economy. It is not
adjustment. If simply as a rule of thumb, we take
advisable for Government to step in and flatten out
three-fourths of this to be determined by price
all these price fluctuations. Trying to control these
adjustment, this will mean that we will, over the next
price increases by legislating price controls runs the
30 years, have an inflation rate that is 1.5 percentage
risk of prices being lower but goods vanishing from
points greater than would have been the case in the
store shelves, as happened in countries which tried
absence of this growth spurt. In the years
this strategy in the 1970s and 1980s. In other words,
immediately preceding 2003-04, from when GDP
we risk having low prices for no goods. Such a policy
growth picked up (and went even higher after 2005),
could also give rise to black markets. When an
the average annual WPI inflation was just below 3.5
unwarranted price spike occurs, the need is to see
per cent (it was 3.61 per cent in 2001-02 and 3.38
if there are defects in our marketing system, take
per cent in 2002-03). This implies that, other policies
away lessons, and put corrective measures in place
remaining unchanged, we will have an average annual
to prevent a recurrence. Some such food distribution
inflation of nearly 5 per cent during the next decade
flaws were isolated during the high inflation in
or so of the rapid growth that is widely expected to
foodgrains that occurred from November 2009 to May
occur in India. This suggests the need to revisit some
2010 and corrective measures put in place.
of our standard policies for managing inflation, and
also underlines the need to ensure that India’s growth 2.13 It can be argued that the sharp hike in the
is inclusive and that we have better designed price of vegetables seen during December 2010 and
systems for providing basic security to the vulnerable. January 2011, especially of onions, reveals defects
in our food production and marketing systems. What
2.11 Around this average inflation, there will
came to light during this period was the great
certainly be periods of price spikes and even price
difference in prices for the same product at the farm
declines for different commodities and different
gate and in city retail outlets, and also across different
classes of commodities. The year 2010-11 has been
cities and towns. On 7 January 2011, for instance,
a year of more than one such skewflationary episode.
onions were selling for!" 30 in Agra and 57.5 in Delhi;
At the beginning of the calendar year 2010 and even
for!" 35 in Nagpur and 62 in Mumbai; for!" 23 in
in the first months of the fiscal year 2010-11 inflation
Thiruvananthapuram and 60 in Dindigul. Surely with
was high for foodgrains, sugar, and pulses. During
an efficiently functioning and competitive market
the course of the year, inflation in these commodities
such price differentials could not have survived. What
stabilized, but by November there was another spike
these price differentials suggest more than anything
in prices of another set of commodities, led by
else is not so much hoarding as the cartelization of
onions, cabbage, milk, and a couple of other
trade resulting in the prevention of entry of new
products. While we are often forced to use the blunt
traders. The problem needs to be tackled using our
instrument of controlling aggregate demand in the
Competition Act 2002.
economy through monetary and fiscal instruments,
these price spikes should be treated as occasion to 2.14 When we give free rein to enforcers to check
investigate the micro structure of markets, in these practices in the market and among traders,
particular the production and distribution of goods the tendency often is to lump together a motley
from farm and factory to retail store and consumer. category of behaviour—hoarding, entry deterrence,
While political compulsions sometimes oblige and collusive price hikes—and treat them all as
Government to take short-term measures like banning malpractices to be avoided. Yet such indiscriminate
exports and changing tax rates to correct the price lumping together and punishing traders can do more

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Box 2.1 : The Mechanics of PPP Catch-up and Increases in Price Levels
%)*+,-.,*/0+-1+$$$+,20,)34/+5.16205-.+2758*8+17-9+0)*+*9/575,26+-:8*7;205-.+0)20+28+,-4.075*8+<7-=+5.+0*798+-1+/*7+,2/502
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JKL+0-+M(LL+5.+(LLNO+65P*+Q.A52O+$2P5802.O+R5,272<42O+2.A+S5*0.29O+2//*27+0-+)2;*+2.+2;*72<*+$$$+,-77*,05-.+-1+2//7-T5920*6U
(FVFM+Q.+,-9/2758-.O+,-4.075*8+=50)+/*7+,2/502+>?$8+:*0=**.+GHI+JKLL+2.A+GHIM(OLLLO+65P*+%47P*UO+G74<42UO+W*T5,-O+2.A
X72Y56O+)2;*+2.+2;*72<*+$$$+,-77*,05-.+-1+27-4.A+MFZF+Q0+0)*7*1-7*+2//*278+0)20O+28+0)*+/*7+,2/502+>?$+-1+2+,-4.07U+5.,7*28*8O
508+$$$+,-77*,05-.+:*,-9*8+89266*7F+%)58+=-46A+268-+5.A5,20*+0)20+A4*+0-+0)58+2//27*.0+1266+5.+0)*+$$$+,-77*,05-.+12,0-7O+0)*7*
=-46A+:*+8-9*+5.,7*28*+5.+/75,*8F+D-7+*T29/6*O+5.+MNJL+X72Y56+)2A+2+/*7+,2/502+>?$+-1+GHI+MV[M+=50)+2+$$$+,-77*,05-.+-1
(F[F+XU+(LLN+50+)2A+2+/*7+,2/502+>?$+-1+GH+I+J((L+2.A+2+$$$+,-77*,05-.+-1+MFVF+Q.A52+,477*.06U+)28+2.+2..426+/*7+,2/502+>?$
-1+27-4.A+GHI+MVLL+=50)+2+$$$+,-77*,05-.+-1+(FNF+Q1+50+7*2,)*8+2+$$$+,-77*,05-.+6*;*6+-1+MFZ+C2;*72<*+$$$+,-77*,05-.+-1
,-4.075*8+=50)+/*7+,2/502+>?$+GHI+JOKLL3M(OLLLEO+-;*7+2+/*75-A+-1+27-4.A+VL+U*278+50+=-46A+12,*+2.+5.16205-.+-1+(+/*7+,*.0
/*7+2..49+8-6*6U+-.+2,,-4.0+-1+0)58+$$$+2AB4809*.0+C/7-;5A*A+0)*7*+58+.-+,477*.,U+2//7*,5205-.EF
%)*+0)*-7*05,26+:2858+1-7+0)58+,-9*8+17-9+0)*+=-7P+-1+X262882+2.A+H294*68-.F+#8+*T/625.*A+:U+D7--0+2.A+'-<-11+CMNNKEO+0)*
X2628823H294*68-.+*11*,0+/-8508+0)20+\210*7+2AB4805.<+1-7+*T,)2.<*+720*8O+!$Q8+5.+75,)+,-4.075*8+=566+:*+)5<)+7*6205;*+0-+0)-8*
5.+ /--7+ ,-4.075*8+ 2.A+ 0)20+ !$Q8+ 5.+ 12803<7-=5.<+ ,-4.075*8+ =566+ 758*+ 7*6205;*+ 0-+ !$Q8+ 5.+ 86-=3<7-=5.<+ ,-4.075*8F]+ %)*
4.A*76U5.<+9*,)2.589+2758*8+17-9+0)*+)580-75,26+0*.A*.,U+=)*7*5.+0*,).-6-<5,26+/7-<7*88+58+1280*7+5.+0)*+072A*A+<--A8
8*,0-7+0)2.+0)*+.-.3072A*AF+'585.<+=2<*8+5.+0)*+072A*A+<--A8+8*,0-7+6*2A+0-+7585.<+=2<*8+5.+0)*+*.057*+*,-.-9UF+%)*+.-.3
072A*A+<--A8+/7-A4,*7+0)*.+.**A8+0-+7258*+0)*+7*6205;*
/75,*+-1+.-.3072A*A+<--A8+0-+/2U+0)*+)5<)*7+=2<*8F PPP adjustment factor and
per capita GDP (2009)
H4//-8*+ =*+ ,-.85A*7+ 2+ :28P*0+ -1+ <--A8+ 5.+ Q.A52+ 0)20
,-808!"+KLLL+0-A2UF+>5;*.+2.+*T,)2.<*+720*+-1!"+KL+/*7 6
GH+ A-6627O+ 0)58+ ,-808+ GHI+ MLL+ 5.+ Q.A52F+ ^50)+ 2+ $$$ PPP adjustment factor
5
,-77*,05-.+12,0-7+-1+(FNO+0)*+829*+:28P*0+-1+<--A8+=-46A 4
,-80+ GHI+ (NL+ 5.+ 0)*+ GHF+ Q1+ 5.+ 82U+ VL+ U*278+ 0)*7*+ 58+ .-
3
5.16205-.+ 5.+ 0)*+ GHO+ 2.A+ 0)*+ $$$+ ,-77*,05-.+ 12,0-7+ 1-7
2
Q.A52+,-9*8+A-=.+0-+27-4.A+MFZO+0)*+:28P*0+,-805.<+GHI
(NL+=-46A+,-80+2//7-T5920*6U+GHI+MJM+5.+Q.A52F+Q1+0)* 1
*T,)2.<*+720*+7*925.8+20!"+KL+/*7+GH+A-6627O+0)*+:28P*0 0
=-46A+,-80! "+NLKLF+%)58+=-46A+59/6U+2+$$$+,20,)34/
0

20

40

60

80

100

120
5.16205-.+ -1+ 2:-40+ (+ /*7+ ,*.0+ /*7+ 2..49+ 1-7+ VL+ U*278
C,-9/-4.A+ 2..426+ <7-=0)+ 720*33!#>'EF+ %)*+ -0)*7 Per capita GDP (2009) (in US$ thousands)
*T07*9*+/-885:5650U+58+0)20+0)*7*+58+.-+5.16205-.+5.+Q.A52
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/*7+GH+A-6627F
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harm than good. Our enforcers have to be taught to for small, new traders and farmers to bring their
distinguish between legitimate activities and genuine products to retail outlets. It is also believed that new
malpractices. Hoarding, for instance, like cholesterol, traders are deterred by incumbent traders. If this is
can be both good and bad. When ordinary citizens established, then section 3 of the Competition Act
hoard for a rainy day, they serve the useful role of 2002, can be invoked to put an end to these
evening out price fluctuations. This falls in the practices.
category of good hoarding. When Government talks
2.16 Another, and quicker, method to curtail the
in terms of setting up new warehouses and storage
margin between farm gate and retail prices is to bring
facilities, it implicitly recognizes the socially useful
in modern supply chain management systems and
function of this type of hoarding. On the other hand,
retail sellers into the picture. This will involve a lot of
when hoarding is done by large traders to deliberately
new know-how. A quick way to get at this is to allow
manipulate prices, this can be detrimental to the
foreign direct investment (FDI) in multi-product retail
economy and go against the interest of consumers.
into India. We will certainly need to have a regulatory
It is this latter kind of hoarding that we need to deter.
structure within which such foreign companies will
The important press release by the Prime Minister’s
be required to function, even if it were argued that
Office made on 13 January 2011, which led to the large organized-sector firms would be more wary of
setting up of the IMG referred to earlier, shows violating the nation’s antitrust laws. At any rate, we
awareness of the need to distinguish between are at a juncture where FDI in multi-product retail is
different kinds of hoarding stating as it does, worth considering. It could enable farmers to get
‘Government will take stringent action against higher prices and consumers to have to pay less.
hoarders and black marketers manipulating market We could, as a first step, consider limiting
prices.’ The last three qualifying words are important. international multi-product retailers to a few outlets
The same paragraph goes on to point out the need in each major city. This will prevent them from getting
to use not just our Essential Commodities Act 1955, full control of the market and, at the same time, set
but also the Competition Act 2002. an upper bound on the prices that other retailers will
2.15 The main relevance of the Competition Act be able to charge for their products. Further opening
occurs in the context of the natural propensity of up can follow depending on the success we have
established traders to prevent the entry of new with this.
traders. It was observed in an earlier paragraph how 2.17 The policy changes discussed in the preceding
the same product on the same day had vastly different paragraphs can improve our food delivery and
prices at the farm gate and at different retails distribution systems and provide great benefit to
locations. This does suggest the occurrence of entry- consumers. They can even achieve a once-and-for-
deterrence. For a policy analyst it is important to all lowering of retail prices that consumers pay. But
realize that the best antidote to these large price this in itself will not cure the risk of long-run inflation,
margins and the consequent large profits made by which refers to a sustained across-the-board price
the incumbent traders is the drive of others not increase. Sustained inflation is, in part, a by-product
currently operating in this market to make profit from of growth and financial inclusion. As discussed
the large margins. If we allow new traders to come earlier, with more people putting their savings in banks
into the market, buy where prices are low, and sell and mutual funds, the scope of the RBI and
where prices are high, the large price differentials Government to increase money and run a fiscal deficit
will vanish. So the critical question is why such new may go down. A deficit that earlier did not cause
traders and farmers do not come into the market. inflation may now do so because ordinary citizens
Though a firm answer is not possible at this stage, it are putting their money into circulation. In the parlance
seems likely that there are barriers to their entry, of economics, there may be a steady increase in
caused by the rules and regulations of the Central the velocity of circulation of money. Unfortunately,
and State governments and by deliberate barriers to there are no known formulae for how much we have
entry created by the incumbent traders. It is arguable to cut back on deficit and liquidity to counteract the
that our Agricultural Produce Market Committees fact of rising velocity. This will have to be achieved
(APMC) Act, by restricting the traders permitted to through trial and error. The secular lowering of inflation
trade through the main mandis, facilitates collusive seen through this year suggests that the moves
pricing. Also the various tolls and checks that a trader made by the RBI and Government have been in the
faces in bringing supplies into a city make it difficult right direction.

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2.18 There is another novel dimension to inflation economy. But since each nation has a central bank,
today that puts it beyond the full control of any single we are unwittingly returning to a predicament that
nation. This has to do with globalization. As barriers we had once escaped, to wit of having multiple
between economies come down, and goods, money-creating authorities in a single economy. This
services, and capital flow more easily between has given rise to destabilizing currency competitions
nations, there is a natural tendency for each nation’s and may be a factor behind the recent increase in
monetary authority to lose some of the effectiveness inflation in emerging economies (see Table 2.1).
it earlier had. Equivalently, one nation’s monetary 2.19 It is time for the world’s major economies to
policy now has greater externalities for other nations. get together through appropriate international
In earlier times, when one country increased its agencies such as the G-20 to address this problem
money supply, it boosted demand in that nation, and have systemically important economies try and
leading to a combination of greater output and some achieve greater coordination in their monetary and
upward pressure on prices. Nowadays, it is possible fiscal policies. The global economy is beginning to
for the newly created money to flow out of the nation exhibit some troubling characteristics that need
to other countries and give rise to greater demand attending to. What we have is a variant of stagflation
there, boosting output but also creating inflationary at global level. But unlike the standard melting-pot
pressures. It was realized a long time ago that for stagflation, where the stagnation and inflation occur
one economy to have more than one central bank in the same economy, the global economy is
with money-creating rights can be destabilizing. characterized by a salad-bowl stagflation—stag in
Starting with the founding of the Bank of England in some nations, flation in others. This is probably a
1694 it gradually became the norm to have one consequence of the world becoming increasingly
central bank for one economy. With globalization boundaryless. Money creation in such a world is
and the lowering of boundaries between nations, the like pouring water on a flat surface. No matter where
world economy is gradually moving towards a single the water is poured it ends up in the same place, in
this case stimulating growth and prices in those
Table 2.1 : Cross-country Inflation over places, and not necessarily stimulating the economy
the Last Year where the money was created.
Inflation Food Inflation
!57>?D56C67<I.D56C675C8.H>?197A:I
Year Year C61. D56C675C8. 56789:5?6
ago 2010 ago 2010
2.20 Over the last year, there has been a lot of
Argentina 7.1 11.0 * 4.7 15.8 * effort to strengthen economic inclusion. This is as it
Brazil 4.3 5.9 ** 3.3 9.2 * should be. Of the Government’s lynchpin for
China 0.6 5.1 * 3.2 11.7 * economic policy, namely ‘inclusive growth’, the
Egypt 10.7 11.6 *** 17.4 21.9 *** country has done very well on ‘growth,’ but needs to
press more on the peddle for ‘inclusion’. To do better
India 13.5 8.3 * 17.6 5.4 *
on this front we have to define this target more sharply
Indonesia 2.8 7.0 ** 4.7 13.2 $
and then pursue policies to achieve it. It was argued
Iran 7.4 12.5 * 6.6 12.1 *** in last year’s Economic Survey that one way of
Pakistan 10.5 15.5 ** 7.5 20.1 @
formalizing the inclusion target is to evaluate the
Philippines 4.3 3.0 ** 2.2 3.2 *** performance of an economy in terms of the
performance of the bottom quintile of the population.
Russia 8.8 8.8 ** - -
Thus, instead of treating the overall per capita income
Thailand 3.5 3.0 ** 0.8 6.6 ***
as a target, we should aim to enhance the growth of
Turkey 6.5 6.4 ** 9.3 7.0 ** the per capita income of the bottom 20 per cent
Ukraine 12.3 9.1 ** 7.6 13.1 @
(what is called the quintile income) of the population.
Vietnam 6.5 11.8 ** - - Such a definition would avoid the common pitfall of
Uruguay 5.9 6.9 ** 4.6 10.1 @ treating growth and equity as pulling in different
directions. Even with this clarity of definition, the
Source: International Labour Organization (ILO) question remains about how best to achieve this
Department of Statistics, World Bank, National Bureau
of Statistics of China. target? What should be the components of a policy
Notes: *November, **December, ***September, aimed at raising the standards of the marginalized
@
October, $ August. population?

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2.21 This Government took the view that in the large SKS Micro Finance, this sector seems to have come
agenda of inclusion, a central and in some ways of age. However, in 2010-11 the sector ran into
pivotal feature is financial inclusion. In order to achieve difficulty with reports of unfair practices by MFIs to
such inclusion, there are plans to expand India’s recover loans and some farmer suicides attributed
banking sector, enable the creation of new financial to these practices.
products and use modern technology to enable the 2.23 These developments have put the microfinance
poor to keep their savings in interest earning sector at crossroads. In regulating MFIs it has to
accounts. One of the most ambitious schemes for be recalled that they have played a major role in
achieving these is the Swabhimaan programme, drawing poor people into India’s mainstream finance
which, takes off on the idea of financial inclusion and enabling farmers to make useful investments
proposed and developed in the Rangarajan and marginal workers to start up small self-employed
Committee Report (Committee on Financial enterprises. There are approximately 30 million
Inclusion). Swabhimaan, launched on 10 February, people throughout India who have been beneficiaries
2011, is an innovative scheme to take banks to the of MFI lending. There is evidence that some of these
doorstep of the rural poor instead of the latter having people have been subjected to unfair threats to make
to go in search of banks. The idea is to have business them repay loans. Such practices must be stopped.
correspondents, or bank saathis, (who may be the However, to react to this by announcing blanket
local merchant) armed with electronic hand-held amnesties and encouraging farmers to default en
devices, which can recognize the bio-markers of bank masse will do more damage than good. Such
customers. The customers can then deposit and practices would lead to the MFI sector disappearing
draw money directly from the bank saathi, without since no MFI, whether it be a profit-making one or a
having to travel long distances to get to the nearest non-profit NGO, would want to give out loans knowing
brick and mortar bank branch. The programme will that these will not be recovered. While we must
be making use of aadhaar which will make it possible recognize that borrowers in special situations have
for individuals to establish their identities in any part the right to plead bankruptcy and not pay back, we
of India. By combining India’s strength in information need an intelligent regulatory structure which
technology with innovative ideas in banking, protects borrowers and, at the same time, allows
Swabhimaan promises to be a major catalyst for this sector to flourish. It is with this in mind that the
growth and inclusion. RBI set up a committee headed by Y.H. Malegam to
2.22 Another constituent of financial inclusion, study and advise on the microfinance sector (see
which could potentially benefit from Swabhimaan, is Box 2.2). The report will, no doubt, give rise to
the extension of the reach of micro finance. discussion, debate, and analysis. In the light of this,
Microfinance can empower the poor so that they it is worthwhile recounting some of the principles we
can move on from relying on hand-outs to being self- have to keep in mind while regulating this important
sufficient and seeing their incomes grow. For sector.
microfinance this has been a year of remarkable 2.24 The central principle of a good system of
developments. The sector has grown rapidly but it finance is a transparent contract. Hence the first
has also been mired in controversy. A micro finance and foremost principle in drafting a regulatory system
institution (MFI) can take many different forms. It for the microfinance sector is to require that the
can be a non-government organization (NGO), a non- lending MFI make the terms and conditions of the
profit non-banking financial company (NBFC), or a loan clear to the borrower. It is, for instance, well
profit-making NBFC incorporated under the Indian known that people often fail to understand the
Companies Act 1956. Following the RBI guidelines meaning of compound interest rates. A poor farmer
of 18 February 2000, MFIs have been taking bulk told that he has to pay 10 per cent interest rate per
loans from banks and on-lending to small borrowers. month tends to believe that he will be paying an
MFIs cannot take in retail deposits and to that extent interest of 120 per cent over the year. However, if the
fall in the category of NBFCs. This sector has grown 10 per cent interest rate is meant to be a compound
exponentially and on 31 March 2010, based on rate, then this works out to an interest of 214 per
returns filed with the National Bank for Agriculture cent over the year. To misunderstand this can lead
and Rural Development (NABARD) we know that there the borrower to make huge losses and the lender to
were 1659 MFIs availing a total credit of!" 13,955 make huge, unfair profits. We have seen these kinds
crore from the banking system. With the success of of phenomena even in advanced economies like the
the initial public offer (IPO) of a leading MFI, namely United States where the sub-prime home borrowers

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Box 2.2 : Issues and Concerns of the MFI Sector : Extracts from the Report of the Sub Committee
of RBI Central Board of Directors—the Malegam Committee.
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took on loans without understanding the terms they 2.25 At first sight an MFI charging an interest rate
were signing on to. Government has to take of 24 per cent or 30 per cent per annum may seem
measures to ensure that MFIs make the terms of extortionist since big urban borrowers manage to
contract transparent to the borrowers. This is more get money at much lower interest rates. However,
important than setting caps on interest rates and there are two arguments against this reaction. First,
other restrictions on the terms of the contract. This it has to be kept in mind that lending to many small
is not to deny that we may have to set some limits borrowers is much more costly than lending to a few
on the terms. But the economics of this is important large borrowers. Second, for a lot of these poor
to understand before we go about ring-fencing the borrowers the alternative to an MFI is not a bank or
terms of the contract. an organized-sector financial institution but the rural

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)! !"#$#%&"' ()*+,-! ./0/100

moneylender and such moneylenders often charge investment companies, also came under criticism.
interest rates which, on annual basis, go up to 100 It can be argued that these CDOs caused a ‘rating
per cent or even 200 per cent. Hence to place too inflation’, since in mixing and matching these
severe a cap on the maximum interest rate that an mortgages, banks made sure that each such product
MFI can charge can drive some of the poorest and making it to a certain rating category made it to just
least bankable borrowers towards even greater the edge of that category. In earlier times, ratings
extortion. agencies, such as Standard and Poor’s or Fitch,
used to rate whole companies or even nations. So
2.26 Is there then a case for having an interest when debt issued by some company was given an
rate cap or should we simply insist on transparency AA+rating, the lender knew that this company’s
of the terms of the contract, whatever those terms quality rating was somewhere in the interval from
may be? Even most industrialized nations such as AA+ to just below AAA. Once CDOs came into
the United States have usury laws which cap the vogue, investment banks started creating new assets
interest rate that a lender can charge. Recent that were deliberately aimed at certain ratings. Since
research in behavioural economics shows that human the demand for these CDOs depends on the ratings,
beings have a propensity to make inter-temporal it is not worthwhile creating tranches that lie in the
decisions badly. Over and above the old idea of middle or upper end of a ‘rating interval’. In other
discounting through time, people have an additional words, these new securities were almost invariably
propensity to value a bird in the hand clustered at the bottom cut-off of each interval. It is
disproportionately higher than all future birds in their arguable that many agents buying these assets failed
hands. Moreover, people typically tend to to take adequate account of this change that had
underestimate the pace at which compound interest occurred as a consequence of structured finance.
rates cause the repayment burden to rise over time. They were used to treating an AA+ asset as an asset
In other words, inter-temporal decision making is somewhere between the start of AA+ and below AAA.
often done in a way which is not fully in keeping with But with the arrival of CDOs that was no longer the
a person’s rational interest. This leads to a possible case. The average quality of assets in each rate
view that when a person signs onto a contract where category was invariably at the bottom end of the
the interest rate is too high, that in itself shows that interval. In other words, there was ‘rating inflation’
the person has miscalculated the repayment burden. the way some universities have had ‘grading inflation’.
This could be a justification for why consumers’ Just as happened in the early days of grade inflation,
sovereignty may have to be curtailed in the interest buyers of these assets were partly deceived. In the
of the consumer’s own true interest. For this reason, world of finance, a small mistake per asset of this
there may be a case for setting some limits to the kind can amplify into big errors and, given the
kinds of terms and conditions that go into a lending complicated interdependencies in this market among
contract including a cap on interest rates. However, lenders, the total impact can be vastly amplified, as
in figuring out the exact details of these, we have to happened in 2007 and 2008. Box 2.3 discusses some
keep in mind the two factors earlier mentioned, other reasons for rating inflation.
namely that micro lending is costly to the lender
and to many a poor borrower the alternative to an 2.28 One way of handling this is to go for greater
MFI loan is money from the informal moneylender granularity in grading as Standard and Poor’s rating
whose interest charges tend to be much higher. system specially designed for East Asian nations
does. But for India the more relevant matter right
2.27 These conceptual issues have a bearing on now is the status of new financial products like teaser
some matters that pertain to larger questions of loans. The terminology is sufficiently tainted for a
organized finance. The financial crisis that began neutral term to be of some value. We shall here refer
with the sub-prime housing mortgage market in the to loans in which the monthly repayment instalment
US and spread to other parts of the world has raised rises over time as a ‘terraced loan’. Unlike most
important questions about new financial products industrialized countries, India has had considerable
and structured finance. Teaser loans, in which the success with terraced loans. The State Bank of India
initial repayments are low but then escalate, over (SBI), for instance, came out with two different
time, to larger repayments, have come under terraced loan products—Happy Home Loan in
criticism. Collateralized debt obligations (CDOs), February 2009 and Easy and Advantage Home Loan
whereby new financial products are created by in August 2009. Both these loans hold the interest
packaging different mortgages of differing risk profiles rates fixed and below the market rate in the initial
together and sold off in slices to other finance and years. In the case of Happy Home Loan this was

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2&"*#13#)$456&#$7'#3'25"*#,"#$#%&"'8,+,9#:%,$6 ##))
in the US, these loans in India were not given to
Box 2.3 : Securities, Seniorities, and the sub-prime borrowers. In the case of Easy and
Lending Boom Advantage Home Loans, a borrower’s repayment
#+65006*+6*88+0)2.+M+/*7+,*.0+-1+266+,-7/-720*+:-.A8+<*0+2. capacity and hence eligibility was worked out under
###+ 7205.<F+ ?475.<+ 0)*+ 6*.A5.<+ :--9O+ /7*,*A5.<+ 0)* the presumption that the person would have to pay
15.2.,526+,728)+-1+(LL[3LNO+,6-8*+0-+ZL+/*7+,*.0+-1+266+288*03
from the beginning what she would actually have to
:2,P*A+8*,47505*8+=*7*+720*A+###F+^)20+=28+0)*+92<5,
:*)5.A+0)*8*+8*,47505*8+:*5.<+720*A+8-+)5<)6Uh+#8+A58,488*A pay from the fourth year onwards. Second, there
5.+0)*+0*T0O+0)*+2:5650U+0-+,7*20*+/2,P2<*8+:U+95T5.<+2.A was a lot of effort made to keep the contracts
920,)5.<+9-70<2<*8+,2.+,248*+8-9*+-1+0)58+7205.<+5.16205-.F transparent so that the borrowers knew exactly what
X40+0)*7*+27*+-0)*7+7*28-.8+28+=*66F+%)*+/-/4627+/72,05,* they were getting into. Given what behavioural
-1+ ,7*205.<+ 8*,47505*8+ -1+ A511*7*.0+ 8*.5-750U+ ,2.+ 268-
,-.075:40*+0-+0)58F economics has taught us, we know that this may
not always be adequate, that a borrower’s nod does
H4//-8*+2+:2.P+8*668+0=-+9-70<2<*8+-1++"!MLL+*2,)+2.A
not always mean that the borrower has fully
84//-8*+ *2,)+ -1+ 0)*8*+ 9-70<2<*8+ )28+ 2+ 758P+ -1+ A*12460
*@426+0-+-.*3*5<)0)F+D470)*7+28849*+0)20+0)*+758P8+-1+0)* comprehended what it is that he or she is getting
0=-+9-70<2<*8+27*+4.3,-77*620*AF+R-=O+84//-8*+0)20+2 into. However, especially the decision not to make
,6*;*7+15.2.,*+,-.84602.0+2A;58*8+0)*+:2.P+0-+/40+0)*8* these products available to the sub-prime borrowers
0=-+9-70<2<*8+0-<*0)*7+2.A+,7*20*+0=-+.*=+8*,47505*8+-1
but instead to expand the choice available to
'8MLL+*2,)+2.A+8*66+0)*9+-11+0-+0=-+:4U*78F+%)*8*+0=-
8*,47505*8+27*O+)-=*;*7O+<5;*.+A511*7*.0+6*;*68+-1+8*.5-750UF borrowers with an assured capacity to replay played
%)*+B4.5-7+8*,4750U+=566+8**+2+A*12460+51+2.U+-1+0)*+9-70<2<*8 a major role. The fact that this enabled many new
A*124608F+%)*+8*.5-7+8*,4750U+=566+5.,47+2+A*12460+-.6U+51 home buyers to enter this market speaks well of the
:-0)+ 9-70<2<*8+ <-+ 5.0-+ A*12460F+ R-0*+ 0)20+ 0)*+ B4.5-7 inclusiveness of the scheme, even though the sub-
8*,4750U+58+2+65006*+=-78*+0)2.+-.*+-1+0)*+-75<5.26+9-70<2<*8
:*,248*+0)*+758P+-1+A*12460+58+0=-3*5<)0)8F+b.+0)*+-0)*7 prime segment was deliberately left out. This is
)2.AO+0)*+8*.5-7+8*,4750U+58+;2806U+:*00*7+:*,248*+50+58+65P* what enabled India’s mortgage market to remain
0)*+-75<5.26+9-70<2<*+:40+=50)+0)*+758P+-1+A*12460+7*A4,*A stable even as such markets in industrialized
0-+ -.*385T0U31-470)F+ Q0+ 58+ 0)58+ 9*0)-A+ -1+ *T/6-505.<+ 0)* countries faltered. The basic lesson is clear. In
62=8+-1+/7-:2:5650U+2.A+*6*;205.<+,*7025.+/--68+-1+9-70<2<*8
5.0-+5.1620*A+7205.<+,20*<-75*8+0)20+=28+29-.<+0)*+,248*8
general, it is worthwhile giving banks and financial
-1+0)*+6*.A5.<+:--9F+H5.,*+:U+95T5.<+2.A+920,)5.<+.-0)5.< institutions the freedom to introduce new products
14.A29*.026+20+2<<7*<20*+6*;*6+58+,)2.<*AO+0)*+84:8*@4*.0 and thereby expand the options available to
15.2.,526+9*60A-=.+=28+266+:40+5.*;502:6*F consumers and firms. This can enhance
!"#"$"%&"'(. WF+ X74..*79*5*7O+ C(LLNEO+ \?*,5/)*75.<+ 0)* entrepreneurship and enable ordinary citizens to
a5@45A50U+ 2.A+ !7*A50+ !74.,)+ (LL[3(LLJ]O+ ;"*+.'5( "2 achieve a higher standard of living than would
6,"."74,(<$+8=$,#4>$8O+(VF otherwise have been possible. The important
'F>F+'2B2.+C(LMLEO+?'*5#(@4.$8c+-"A(-4//$.(?+',#*+$8()#455 restriction should be that banks and even NBFCs
BC+$'#$.(BC$(D"+5/(6,"."7EO(!-665.8+X485.*88F should be discouraged from lending to categories of
borrowers who are clearly not in a position to take
on such debt burdens. As far as restrictions on the
fixed for the first 12 months and in the case of Easy types of products go, these should be used
and Advantage Home Loan interest was held constant minimally and with judiciousness.
and below the market rate for three years. Thereafter
the rates were expected to move to higher and floating 7CH5AC8. D8?@:. C61. =<?H?85A57C8
interest rates. The response of the market to this ?HA5?6:
was very good. The number of loans offered in January
2.30 Overall capital flows into India this fiscal year
2009 was 18,780 with an aggregate value of!" 1499
have been greater than ever before in the country’s
crore. By November 2009 this had risen to 28,492
history. This has been caused largely by a
loans with an aggregate value of! " 3273 crore.
groundswell of money coming through the foreign
Defaults on these have been negligible and cases of
institutional investor (FII) route, in response to the
foreclosure rare. Also, these loans played a major
robust performance of the Indian economy but also
role in promoting inclusiveness. Around 90 per cent
because of low interest rates and returns in general
of the home loan borrowers were first-time home
in industrialized nations. Midway through the fiscal
buyers.
year, there was also ‘currency competition’, with
2.29 Two factors were behind the success of these China allegedly holding its exchange rate at what
terraced loans. First, despite having the shape of was believed to be a depreciated level, the US
repayment associated with conventional teaser loans responding to this and its own sluggish growth and

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high unemployment with two rounds of quantitative term capital bring with them. Moreover, the kind of
easing, and Japan buying up foreign exchange and apprehension that India once had about foreign
releasing yens on the market. All these moves investment and political interference is of much less
contributed to a greater flow of money our way. This concern now since it is now a much more robust
was initially a matter of concern to India. However, economy and has greater say in international political
there seems to have been no substantial appreciation matters. To attract more FDI, we will have to think in
of the nominal exchange rate of the rupee during the terms of new areas into which we may channel these
year. This is testimony to India’s growing strength investments. But more than this, the serious
and power of absorption. stumbling block to attracting FDI into India is the
2.31 This must, however, not lull us into fact that our bureaucratic machinery continues to
complacency. We will have to keep open the options be sluggish. Data released by the World Bank show
of having to take corrective measures should these that in terms of the bureaucratic efficiency for “doing
flows affect us adversely. The most important step business,” India ranks as low as 134th in the world.
in this context is to work with the G-20 countries Clearly, this is one area with scope for improvement.
and try to figure out collective decision rules whereby If we can make our bureaucratic, administrative
each country tries to intervene minimally in the flow machinery more efficient, the benefits for the
of capital and, when it does intervene, it does so economy will be enormous. There are examples of
taking into account the externalities on other nations. nations that inherited the cumbersome bureaucratic
But till such a plan of coordinated action is worked system of colonial governments but managed to
out successfully, a nation has to be prepared to adopt reform those. We can learn from those nations but,
policy measures on its own. In contemplating such interestingly, we can also learn from within our own
policy measures in India two inter-related factors have country. A simple calculation shows that if all of India
to be kept in mind. First, although there is very little adopted the best practices found in some part of
nominal appreciation of the rupee, our real exchange India, for instance in terms of facilitating the opening
rate, especially vis-a-vis the systemically important of new business, enforcing contracts, simplifying
currencies, has been on a fairly steady path of procedures to help bankrupt firms close down quickly,
appreciation. This is likely to have contributed to the it would rank 79th in terms of efficiency. In other words,
relatively slow pickup of India’s exports, even though we can improve our ranking by 55 positions simply
over the last few months these have done well. It by learning from within our own nation. This is not to
has also contributed to the large current account promote the parochialism of refusing to learn from
deficit (CAD) that the country faces. In itself this beyond our borders but to emphasize that there is a
would not be a matter of concern but, in this case, a lot that can be achieved even without that.
substantial part of the CAD is being financed by 2.33 Digressing briefly, it is worth turning to the
relatively footloose capital. One possible strategy in interesting question of the economic and
response to this is the market-based intervention of representational power of Governments. There was
buying up some of the foreign exchange coming in a comment earlier about India’s greater say in global
through this route. This will limit the amount of capital economic matters. Indeed, India’s G-20 membership
available for financing the deficit and could also is recognition of this fact. The ‘economic power’ of a
stabilize the real exchange rate. Against this, we Government is an important indicator of how much
will have to balance out the risk of inflationary say that Government has in global fora and also how
pressures generated by the rupees that will be much say it ought to have. The economic power of a
released on the market. However, it can be argued Government is a more complex idea than the
that since the rupees that will come on the market economic power of an individual. We usually measure
will be replacing other currencies, which are the latter by looking at a person’s income or wealth.
convertible and therefore fairly liquid, the inflationary Taking a cue from this, we may think of a
impact of this will not be as serious as is often Government’s power as measured by the total
presumed. It is also hoped that with India’s savings amount of revenue the Government earns and so is
rate beginning to rise, some of the pressures on the able to disburse. We may also look at the ownership
CAD will ease. of assets by a Government to get an approximate
2.32 All these policies must be complemented by idea of the permanent income of the Government.
the effort to attract more FDI into India. FDI capital However, a Government’s economic power depends
is much more stable and, therefore, does not give also on the amount of human capital available in the
rise to the kind of volatility that some forms of short- nation and so at some level available to the

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2&"*#13#)$456&#$7'#3'25"*#,"#$#%&"'8,+,9#:%,$6 ##)$
Box 2.4 : Government Economic Power in the Post-crisis World
%)*+*,-.-95,+2:56505*8+-1+.205-.8+2.A+<-;*7.9*.08+)2;*+26=2U8+:**.+2+1-7,*+0-+7*,P-.+=50)F+^)56*+0)*+/7-,*88+-1+<6-:265Y205-.
82=+<-;*7.9*.0+*,-.-95,+/-=*7+84//6*9*.05.<+0)*+1-7,*8+-1+0)*+927P*0O+0)*+<6-:26+*,-.-95,+,75858+=50.*88*A+<-;*7.9*.08
/62U5.<+2+,74,526+7-6*+5.+802:565Y5.<+15.2.,526+927P*08+2.A+92.2<5.<+0-+,--7A5.20*+7*8/-.8*8+5.+-7A*7+0-+/7-/+4/+0)*+=-76A
*,-.-9UF++>-;*7.9*.08+268-+/62U+2+,7505,26+7-6*+5.+*.8475.<+7*A58075:405;*+*@450U+2.A+A*;*6-/9*.0F+W-05;20*A+:U+0)*+.**A
0-+A*;*6-/+2+8*0+-1+9*075,8+0-+*.,-9/288+0)58+59/-702.0+/)*.-9*.-.O+2.+5.A*T+-1+<-;*7.9*.0+*,-.-95,+/-=*7+=28
A*;*6-/*AF++%)*+5.A*T+,2.+268-+:*+-1+;264*+5.+A*,5A5.<+-.+0)*+;-05.<+75<)08+2.A+-0)*7+/-=*78+0)*+<-;*7.9*.08+-1+;275-48
,-4.075*8+-4<)0+0-+)2;*+5.+5.0*7.205-.26+-7<2.5Y205-.8+65P*+0)*+QWD+2.A+0)*+^-76A+X2.PF+%)*+5.A*T+)28+:**.+,7*20*A+1-7+ML
U*278+C(LLL3LNE+,-;*75.<+MM(+*,-.-95*8F
%)*+5.A*T+-1+<-;*7.9*.0+*,-.-95,+/-=*7+CQ>&$E+*.A*2;-478+0-+,2/047*+0)*+2:5650U+-1+2+<-;*7.9*.0+0-+/7-B*,0+508*61+5.+0)*
5.0*7.205-.26+8/)*7*F+%)*7*+58+268-+2+.-79205;*+,-.0*.0+0-+0)58F+H5.,*+0)*+5.A*T+8)-=8+0)*+*T0*.0+-1+,)27<*+2+<-;*7.9*.0+)28O
50+268-+,2.+:*+48*A+0-+A*0*795.*+)-=+94,)+82U+0)*+>-;*7.9*.0+8)-46A+)2;*+5.+94605620*726+1-72F+%)*+5.A*T+58+,-9/-8*A+-1
1-47+;2752:6*8c+<-;*7.9*.0+7*;*.4*8O+1-7*5<.+,477*.,U+7*8*7;*8O+*T/-70+-1+<--A8+2.A+8*7;5,*8O+2.A+)492.+,2/5026F+%)*8*
;2752:6*8+:7-2A6U+,2/047*+2+>-;*7.9*.0]8+2:5650U+0-+7258*+7*8-47,*8O+508+,7*A50=-70)5.*88+2.A+,7*A5:5650U+5.+5.0*7.205-.26
15.2.,526+927P*08O+508+5.164*.,*+-.+<6-:26+*,-.-95,+2,05;50UO+2.A+508+7*/7*8*.0205-.26+807*.<0)O+0)20+58+)-=+94,)+-1+0)*+<6-:26
*,-.-9UO+ 5.,64A5.<+ <6-:26+ 92./-=*7O+ 50+ ,2.+ ,6259+ 0-
7*/7*8*.0F+Q.+-7A*7+0-+*.847*+48*+-1+802.A27A+A202O+0)*+5.A*T Fig 1: Index values
)28+:**.+,-.8074,0*A+485.<+0)7**+=5A*6U+2,,*/0*A+A2028*08e
0)*+ QDH+ 2.A+ ^&b+ -1+ 0)*+ QWDO+ 2.A+ 0)*+ G.50*A+ R205-.8 0.6
?*;*6-/9*.0+ $7-<7299*]8+ CGR?$]8E+ "492. 0.5

Index values
?*;*6-/9*.0+Q.A*T+C"?QEF 0.4
%)*+(LLN+7*84608+8)-=+0)20+0)*+0-/+0*.+72.P8+27*+-,,4/5*A+:U 0.3
CME+0)*+G.50*A+H020*8O+C(E+!)5.2O+CVE+f2/2.O+C`E+>*792.UO+CKE 0.2
Q.A52O+CZE+'48852O+C[E+X72Y56O+CJE+D72.,*O+CNE+Q026UO+2.A+CMLE+0)* 0.1
G.50*A+d5.<A-9F++Q.+(LLL+0)*+0-/+0*.+/62,*8+=*7*+)*6A+:U+CME 0
0)*+ G.50*A+ H020*8O+ C(E+ f2/2.O+ CVE+ !)5.2O+ C`E+ >*792.UO+ CKE 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
D72.,*O+CZE+0)*+G.50*A+d5.<A-9O+C[E+Q026UO+CJE+C'*/4:65,+-1E
d-7*2O+CNE+!2.2A2O+2.A+CMLE+Q.A52F+#9-.<+0)*+0-/+72.P5.<
Year
*,-.-95*8+8-9*+-1+0)*+9-80+A729205,+758*8+5.+72.P+)2;*+:**.
X72Y56]8+ 28,*.0+ 17-9+ MV0)+ /62,*+ 5.+ (LLL+ 0-+ [0)+ 5.+ (LLN+ 2.A USA Japan China
Q.A52]8+758*+17-9+ML0)+/-8505-.+5.+(LLL+0-+K0)+5.+(LLNF+f2/2.
=28+7*/62,*A+:U+!)5.2+5.+0)*+8*,-.A+8/-0+5.+(LL`F+%)*+G.50*A Fig 2: Index values
d5.<A-9+=*.0+A-=.+17-9+Z0)+/62,*+5.+(LLL+0-+ML0)+5.+(LLJ 0.14
2.A+,-.05.4*A+0)*7*+5.+(LLNF+!2.2A2+1*66+17-9+N0)+5.+(LLL+0-
0.12
MK0)+5.+(LLJF
Index values

0.10
%)*+,)2.<5.<+AU.295,8+-1+<6-:26+*,-.-95,+/-=*7+,2.+:*
1470)*7+8**.+51+=*+2.26U8*+0)*+5.A*T+;264*8+-;*7+059*+1-7+8-9* 0.08
-1+0)*+627<*7+*,-.-95,+*.0505*8F+Q1+=*+,-9/27*+0)*+0)7**+0-/ 0.06
72.P5.<+,-4.075*8+-1+(LLLO+0)*+GHO+f2/2.O+2.A+!)5.2O+0)*+GH 0.04
2.A+ f2/2.+ )2A+ 2+ 86-=+ 758*+ 5.+ 5.A*T+ ;264*8O+ *T,*/0+ 1-7+ 0)* 0.02
865<)0+1266+5.+(LLNF+Q.+,-.07280O+!)5.2+)28+758*.+72/5A6U+2.AO
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
210*7+847/2885.<+f2/2.+5.+(LL`O+)28+269-80+7*2,)*A+0)*+829*
6*;*6+28+0)*+GH+5.+(LLN+C8**+D5<47*+MEF Year
b.+2.+2.26U858+-1+0)*+,-4.075*8+)-6A5.<+0)*+`0)+O+N0)+2.A+ML0) Germany Canada India
/-8505-.8+ 5.+ (LLL+ C.29*6UO+ >*792.UO+ !2.2A2O+ 2.A+ Q.A52EO
Q.A52+9-;*8+17-9+2.+5.A*T+;264*+B480+:*6-=+!2.2A2+5.+(LLL Fig 3: Change in GDP growth 2009 to 2010
0-+-.*+;*7U+,6-8*+0-+>*792.U+:U+(LLN+CD5<47*+(EF+#9-.<+0)*
627<*+ *,-.-95*8O+ !)5.2+ 2.A+ Q.A52+ 268-+ A*9-.80720* 12
7*927P2:6*+7-:480.*88+:U+.-0+)2;5.<+6-=*7+5.A*T+;264*8+5. 10
(LLN+ 4.65P*+ 266+ 0)*+ -0)*7+ ,-4.075*8+ -,,4/U5.<+ 0)*+ 0-/+ 0*. 8
/-8505-.8+5.+(LLLF 6
Percent

Q.0*7*805.<6UO+0)*7*+58+2+807-.<+/-8505;*+,-77*6205-.+:*0=**. 4
0)*+<7-=0)+5.+*,-.-95,+/-=*7+C/*7,*.02<*+,)2.<*+5.+5.A*T 2
;264*+:*0=**.+(LLL+2.A+(LLNE+2.A+0)*+,)2.<*+5.+>?$+2,7-88
0
0)*+ /-803,75858+ /*75-A+ C0)20+ 58+ :*0=**.+ (LLN+ 2.A+ (LMLE
5.A5,205.<+ 2+ 65.P+ :*0=**.+ <7-=0)+ 5.+ *,-.-95,+ /-=*7+ 28 -2
9*2847*A+:U+0)*+5.A*T+2.A+0)*+2:5650U+0-+7*,-;*7+17-9+0)* -4
,75858+ CD5<47*+ VEF+ %)58+ A-*8+ .-0+ *802:658)+ 2+ A57*,0+ ,24826
0

50

100

150

200

250

300

350

400

450

7*6205-.8)5/+:*0=**.+0)*+0=-+;2752:6*8+:40+58+-1+A*8,75/05;*
5.0*7*80F Percentage change in index value (2000 to 2009)

)"*+,$%+#+,-9/6*0*+A*8,75/05-.+-1+0)*+5.A*T+-1+<-;*7.9*.0+*,-.-95,+/-=*7+2.A+508+59/65,205-.8+58+2;2562:6*+5.+2+1-70),-95.<
&,-.-95,+?5;585-.O+?*/2709*.0+-1+&,-.-95,+#112578O+W5.5807U+-1+D5.2.,*O+=-7P5.<+/2/*7c+\%)*+&;-6;5.<+?U.295,8+-1
>6-:26+&,-.-95,+$-=*7+5.+0)*+$-803,75858+^-76Ac+'*;*6205-.8+17-9+2.+Q.A*T+-1+>-;*7.9*.0+&,-.-95,+$-=*7]F

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)% !"#$#%&"' ()*+,-! ./0/100

Government. A Government’s power further depends it comes to distribution and the mitigation of poverty,
on the nation’s level of integration with the world. A Government has to be more proactive with policy
nation that is rich but largely a closed economy may interventions. However, wherever possible, the
not be of much importance to other nations and so intervention should take the form of direct transfers
not able to exercise influence in international matters. from the better-off sections to the poor, with as
On the other hand, a nation that exports and imports minimal a tampering with prices as possible. The
a lot has the power of leverage. The potential threat fact that markets are not naturally inclined to deliver
of interrupting these flows gives such a Government on equity and poverty eradication does not mean
more economic muscle than another nation that may that we should ignore the market. The laws of the
be wealthier but has negligible trade and capital links market will be there whether or not we acknowledge
with the world. Combining all these factors, an index their presence. Good policymaking entails
was created by researchers in the Economic Division recognizing and understanding these laws and
of the Ministry of Finance and is reported in the Box utilizing them to deliver on the targets that we have.
2.4. It shows, as expected, that the US Government
2.36 There are two reasons for having a system of
has the greatest economic power. This is followed,
a minimal amount of food procurement and
in descending order, by China, Japan, Germany,
distribution carried out by the State. The first is to
India, Russia, Brazil, and France. What is interesting
do with evening out foodgrain availability and price
in this story is the rapid rise in the economic power
fluctuations from one year to another. This is also
of India and, more so, China over the last decade.
related to the issue of self-sufficiency. In times of
Box 2.4 is of interest in itself since there is so much
food shortage, we do not want to rely entirely on
writing nowadays on the shifting economic base of
imports from other countries and should be able to
the world.
depend on our own stocks and supply to our
consumers. The second motive is to provide food
6<@. 565A5CA5;<: security to the poor and vulnerable. No one, no matter
2.34 The buoyant growth of the economy creates how poor, should have to suffer from food deprivation
opportunities; and it is important to seize them so and malnutrition.
that the growth becomes sustainable. There are
2.37 As far as the aim of evening out food prices
many areas with opportunities for new initiatives, and
from one year to another goes, our success has
only a few of these will be discussed here for
been moderate. Thanks to our procurement policy,
illustrative purposes. It is widely accepted outside
mainly in wheat and rice, we have not had to be held
of and within Government that we have a great
to ransom by international suppliers. However, a
distance to go in eradicating poverty and drawing
study of our food stocks shows that we have
into the mainstream of our economy segments of
continued to hold these at elevated levels in good
the population that are currently marginalized and
years and bad. Likewise, procurement has taken
live on the fringes. The first step towards this is to
place from year to year without the cyclical features
make sure that no one is deprived of basic food and
that one would expect in an effective price
all attain minimal nutritional standards. There have
stabilization system. Thus, in 2006-07 the total
been new initiatives on this front, such as the new
procurement of wheat, rice, and coarse grain was
food security bill.
34.3 million tonnes, in 2007-08 40.1 million tonnes,
2.35 At this stage, some broad principles of in 2008-09 57.7 million tonnes, and in 2009-10 57.2
economic policy are worth outlining. There is a million tonnes. Clearly, given that the last fiscal year
common presumption that markets and inclusion was one of high foodgrain price inflation, we would
are inimical to each other. The truth, however, is that, have expected lower than usual procurement and a
while markets have a natural propensity to deliver larger offloading of stored grains. But neither of these
on efficiency, they do not have any innate propensity happened. Evidently, there is ample scope for
for equity or equality. Hence it is true that for improvement in our strategy of foodgrain release.
eradicating poverty and creating a more equitable The current practice has some systemic flaws. Trying
and inclusive society, there is need for purposive to ensure that the procured food is not released at a
action by Government—Central, State, and local. price which inflicts too large a loss on Government,
The view we take is that Government should play an we have often priced it so high that there were no
enabling role vis-a-vis the market, facilitating trade, buyers. Not releasing foodgrain defeats the purpose
exchange, and enterprise. On the other hand, when of bringing down market prices.

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2.38 This has at times led to the suggestion that that some of these are working. We must now
the state should just release this grain at near-zero endeavour to sustain the momentum.
price. At first sight, this sounds reasonable since
2.40 Returning to the food security bill, this is an
there is excess foodgrain lying in warehouses and
important move that can transform the face of poverty
even in the open and going waste. But there is a
and malnutrition in India. There has been a lot of
problem with following this seemingly obvious policy.
debate about how extensive the coverage of this
The way we run our minimum support price (MSP)
programme ought to be. What is, however, not
policy is to have a fixed price and allow farmers to
always appreciated is that the coverage of this
sell their foodgrain at that price to the Government.
programme will depend on the efficacy of the
If with the MSP policy intact, we began the practice
mechanism through which we try to distribute the
of selling off excess food in Government granaries
at near zero price, this is bound to give rise to food food. The current system of handing over cheap food
recycling. That is, traders will buy the food from the to the approximately 500,000 ration shops all over
Government at zero or near zero price and sell it India, and then requiring them to sell the it at below-
back to the Government at the MSP and again buy market price to poor households leads to large
it back; and so on. There is evidence that a certain leakages. In the current method the subsidy is
amount of food recycling happens even now. But if handed over to the ration shop and not directly to
the gap between the MSP and the release price the poor households. Studies show (see Box 2.5)
becomes sufficiently large, this problem can get that ration shopkeepers often sell off the food at the
exacerbated. Our problem of foodgrain policy cannot high market price on the open market and turn away
be corrected through piecemeal action such as the below poverty line (BPL) households or adulterate
getting the government to release food at near zero the food that the BPL households are supposed to
prices without correcting other defects in the system. receive. Clearly, if we try to make the coverage of
We need to take stock of both our release and subsidized rice and wheat wide and stick to the
procurement policies. Procurement should vary from present system of distribution, the total procurement
year to year, depending on production. Also, the will have to be large to the point of being unachievable.
windows for procurement ought to be opened up Hence the important need is to plug the seepage in
much more widely in different parts of the country. the distribution mechanism; and the more effectively
Currently outside of a few States the MSP is a purely we manage to design this, the larger we will be able
notional price as far as farmers are concerned. They to make the coverage of cheap food to our population.
know that they have the right to sell their food at that 2.41 The obvious way of doing this, and this has
price but they have no access to Government been widely discussed in the economics literature,
granaries or take-in windows where they can sell. is to give the subsidy directly to the poor households
There is also urgent need to increase storage space and allow the PDS stores to sell food at market price.
so that foodgrains do not go waste. It should be This will involve handing over smart cards or food
clear that the act of better storage, important though coupons to poor households and then giving them
it is, is not going to cure inflation. For that we have the freedom to go to any PDS or other store and buy
to develop effective strategies for releasing the food at the prevailing market price by using the
foodgrains, and the release should take place not in smart card or the coupons. In this system, a poor
large bulks, which would create monopolies but in customer is as valuable as a rich customer from the
numerous small batches. shopkeeper’s point of view, since both pay the same
2.39 On the second objective of guaranteeing food price. Also, if one shop adulterates its foodgrain
to the poor there are several initiatives and the supply, people will have the freedom to go to another
Government is currently considering a food security store and this, in turn, will mean that the incentive to
bill which will give people legal right to a certain adulterate foodgrain will go down vastly. As the
amount of basic foods. Before venturing into this, it system of Aadhaar-based identification comes into
would be well to stress what is discussed elsewhere activation, the smart card system will become
in the Survey and also in various Plan documents, portable. In other words, the poor can move from
namely, the importance of increasing agricultural one part of India to another and still be able to exercise
productivity and production. This sector used to lag their right to subsidized food. The current system
behind. But there are policies being implemented to places an effective barrier on the ability of poor people
correct this. The estimated growth of agriculture, to move location in response to better wages, since
forestry and fishing of 5.4% in 2010-11 raises hope they risk losing out on other benefits.

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the market at market price. This will improve targeting


Box 2.5 : Food Subsidies and Leakages and cut out corruption. It is true that the poor may
Q0+58+2+/270+-1+,-99-.+=58A-9+0)20+2+627<*+29-4.0+-1+0)* misuse some of these subsidies on non-essentials,
84:85A5Y*A+1--A<725.O+027<*0*A+20+X$a+)-48*)-6A8O+8-9* but it is surely better for the poor to do so than for
#$a+)-48*)-6A8O+2.A+-0)*7+;46.*72:6*+<7-4/8O+15.A+508+=2U the shopkeeper to do so using the subsidy meant
0-+0)*+-/*.+927P*0O+=)*7*+50+58+8-6A+-11+20+2+)5<)*7+/75,*+0)2.
0)*+ 805/4620*A+ 7205-.+ 8)-/+ /75,*F+ Q8+ 0)58+ 074*h+ #.A+ 51+ 8-O
for the poor.
=)20+58+0)*+*T0*.0+-1+0)*+/561*72<*h+'*,*.0+7*8*27,)+:U+'**05P2 2.43 There are other areas where new initiatives
d)*72+2.A+:U+H)5P)2+f)2+2.A+X)2720+'2928=295+)28+,-9*
-40+=50)+,27*146+80205805,26+*805920*8O+=)*7*+*2765*7+=*+)2A
are likely to likely to yield large benefits for society.
0-+7*6U+-.+<4*88=-7PF+%)*+W5.5807U+-1+D--A+2.A+!-.849*7 One example of this is tourism. Given the vast
#112578+ /4:658)*8+ 9-.0)6U+ A202+ -.+ 0)*+ -1102P*+ -1+ =)*20 attractions in India, ranging from diverse natural
2.A+75,*+4.A*7+0)*+/4:65,+A58075:405-.+8U80*9+C$?HEF+%)* formations to historical monuments and relics going
R205-.26+H29/6*+H47;*U+CRHHE+<5;*8+A202+:28*A+-.+72.A-9
829/6*8+ -1+ 0)*+ 29-4.0+ -1+ $?H+ =)*20+ 2.A+ 75,*+ 0)20+ 27*
back to more than two millennia, there is vast scope
2,04266U+/47,)28*A+:U+0)*+)-48*)-6A8F+%)*+<2/+:*0=**. for expansion of tourism in India. Till now we have
0)*+-1102P*+2.A+0)*+29-4.0+2,04266U+7*2,)5.<+)-48*)-6A8 not reaped more than a fraction of this possibility. In
<5;*8+2+9*2847*+-1+/561*72<*+-7+A5;*785-.+17-9+0)*+027<*0 2010 the total number of foreign tourists that arrived
/-/46205-.F+G85.<+0)58+9*0)-AO+d)*72+8)-=8+0)20+5.+(LLM3
in India was 5.58 million and they brought in a foreign
L(+MJF(+/*7+,*.0+-1+$?H+75,*+2.A+Z[+/*7+,*.0+-1+$?H+=)*20
=28+A5;*70*AF+Q.+-0)*7+=-7A8O+-;*7+`L+/*7+,*.0+-1+266+<725. exchange earning of!" 64,889 crore. It should be
027<*0*A+20+0)*+/--7+9588*A+0)*+/--7F+f)2+2.A+'2928=29UO possible for India to get many times more inbound
485.<+0)*+RHH+*T/*.A5047*+847;*U+-1+(LL`3LKO+7*/-70+2. tourists than it currently does. In 2007, for instance,
-;*7266+A5;*785-.+-1+KK+/*7+,*.0+-1+0)*+<725.+9*2.0+1-7+0)* there were 5.1 million tourists who came to India,
/--7F+R-+9200*7+=)*7*+0)*+*T2,0+15<47*+65*8+:*0=**.+`L+2.A
KK+/*7+,*.0O+0)*+12,0+-1+0)*+9200*7+58+0)*+6*2P2<*+0)20+,477*.06U compared to 54.7 million to China and 20.1 million
02P*8+/62,*+58+127+0--+)5<)F+b.,*+=*+<5;*+2+6*<26+<4272.0** to Malaysia. Interestingly enough, India sends out
0-+/*-/6*+2:-40+0)*+1--A+0)20+0)*U+27*+0-+7*,*5;*O+51+=*+07U+0- more outbound tourists than it gets inbound ones.
A*65;*7+ -.+ 0)58+ /7-958*+ 485.<+ -47+ ,477*.0+ A*65;*7U This is fairly unusual for an emerging economy. To
9*,)2.589O+=*+8)266+)2;*+0-+8*.A+0=5,*+0)*+027<*0*A+29-4.0
-1+<725.+0-=27A8+0)*+027<*0*A+/-/46205-.F
exploit the huge potential that this sector has will
require investment in infrastructure and even
>/'/$/)#/-G.>L.XQ/$+I.YVWFFZI.5)*"+[-.H(E3"#.1"-,$"E(,"%) improvements in our immigration and visa services.
:J-,/0G.9,"3"O+,"%).+)*.504+#,I.)*+$%,-.*#./"0"-*12"%3
But it will be unwise not to reap the large benefits
43+56"'7.'%$,Q#%0")NL
that are lying unutilized in this sector.
:L. UQ+I. +)*. SL. >+0+-P+0". YVWFWZI. \B%P. #+). D%%*
:(E-"*"/-. @%$T. S/,,/$]. C)-P/$-. '$%0. 5)*"+. +)*. ,Q/ 2.44 Another sector with scope for development
HQ"3"44")/-[I.C-"+).1/2/3%40/),.S+)TI.@%$T")N.H+4/$
and large potential dividend is education, both school-
6%L.VVFL
level and higher education. India currently has a gross
enrolment ratio (GER) of 13.5 per cent in higher
2.42 The same idea carries over to other goods
education, often also called the tertiary enrolment
such as kerosene, diesel, and fertilizers. This
ratio. That is, 13.5 per cent of all those who are
Government’s policy of ensuring that these vital
aged between 18 and 23 (that is the college-going
goods reach the poor, instead of leaving it all to the
age) are actually enrolled in a college or a university.
vagaries of the market as conservative analysts would
For the United States, the figure is 81.6 per cent.
recommend, has much to commend it. But in
Even China and Malaysia over which India had a
choosing the mechanism for reaching these goods
lead a few decades ago have now crossed our GER
to the poor the same principles discussed in the
with figures of 22.1 and 29.7, respectively. India
context of foodgrains apply. As soon as we lower
currently produces close to 6000 PhDs per annum.
the price of a commodity by Government diktat, be
China, which in 1993 produced 1900 PhDs per
it for kerosene, diesel, or fertilizers, we invite
annum, now produces close over 22,000. In principle,
adulteration, pilferage, and corruption. The need,
it is possible for India to quickly double the GER
therefore, is to design mechanisms of delivery which
and reach 30 per cent within a decade from now. In
are incentive-compatible and minimize these
the long run an economy’s growth depends on the
distortions. For the most part this means that it is
quality of its citizenry and the human capital and
best not to distort prices to subsidize the poor but
innovativeness of the population. Clearly we need to
to give the subsidy to the poor directly. We may as
invest more and more intelligently in this sector.
a first step try this on one product, such as kerosene,
by handing over the subsidy to the poor in the form 2.45 One large potential of our higher education
of a smart card; and letting them buy kerosene from sector is to develop India as a hub for global

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education. Given that historically we have been very of these investments may need 5, 10, or even 15
strong in higher education and also our advantage in years to become financially viable. Banks are
the English language, it is possible for India to understandably wary of making such long-maturity
develop as a major centre for higher education where loans. The need, therefore, is to create appropriate
students come from all over the world to study. Given systems for drawing domestic and international, and
the high cost of education in industrialized nations private and public investments into infrastructure. For
(annual tuition fees in leading US universities are private money to be directed into any form of
around $40,000), it is possible for India to attract investment the critical ingredient is the reliability of
students not only from developing and emerging contracts. Having put your money into an
countries but even from the United States and other investment, can you be reasonably sure that the
industrialized nations. We can offer these students borrower will not renege? Of course, there will have
education at a price where we will cover all our costs to be clauses under which a borrower can get
and have a profit left over and they will get education legitimate bankruptcy cover, but the legal
at a price which is vastly less than what they would administrative set-up must be such as to ensure
have paid in the United States, or the Government that there is no spurious reneging on contracts. This
would have paid for them in many European is important not only for micro finance but even to
countries. The profit can then be used to expand our ensure that more money flows into infrastructural
universities and colleges for the enrolment of our investments.
own students. For all this, we need complementary
investments. There will have to be quality hostels :?75C8.SC:5:.?D.<7?6?!57.H>?=><::
and broadband internet connectivity. We will also
2.48 The foregoing analysis emphasised that in
need to tone up our bureaucratic processes. We
crafting good economic policy it is important to treat
will, for instance, need to give students visas for
the various players on the market —the policeman,
multiple years because no one will want to come to
the ration-shop owner and the ordinary citizen—as
study for two years with a one-year visa and live
reasonably self-seeking, rational agents. If these
under the uncertainty of it being extended. These
agents get the opportunity to earn some extra money
investments in infrastructure and in creating a more
with little effort, they will seize the opportunity. Hence,
efficient bureaucracy can not only boost the higher
to cut down on corruption and pilferage, we have to
education sector, but all these initial costs will be
design policies in such a way that there is no incentive
more than made up for by the high returns they will
for ordinary citizens and the enforcers of the law to
yield in the medium to long term.
cheat. Accordingly, good mechanism design is the
2.46 As just discussed, underlying both the above heart of the problem. Many a noble plan to reach out
initiatives and other developmental projects is the to the poor and increase the welfare of our citizens
need for better infrastructure. This being the eve year has fallen on hard times because of the policymakers’
of the Twelfth Five Year Plan, it is a good moment to propensity to assume that the policies are delivered
take stock of India’s infrastructural needs. As by flawlessly moral agents or perfectly- programmed
discussed elsewhere in this Survey, India has, over robots. Models based on such faulty assumptions
the last few years, made special effort to enhance are destined to fail. It is important for Indian citizens
the country’s infrastructural base. The initiatives cut to understand this because, in democracies, popular
across rural infrastructure, railways, highways, power, opinion plays an important role in promoting
and the development of our cities, small and large. progressive policies.
East Asian economies financed a lot of this through
2.49 This analysis must not be taken to imply that
public land sales implemented through well-designed
uncompromising self-seeking behaviour is innate in
auctions. There is a lesson in this for us to make
human beings. This dismal assumption, widespread
sure that such large infrastructural expansions
in some early mainstream economics, is, fortunately,
remain fiscally viable.
not true. Recent research shows that human beings
2.47 The Planning Commission is working to give have a natural propensity to cooperate, to be
a major thrust to infrastructure over the next Five trustworthy, and to be honest. They are often willing
Year Plan. To ensure that this happens, the big need to give up some personal gains in order to
is not so much a matter of bricks and mortar as of demonstrate pro-social behaviour. These qualities
finance and mechanism design. Infrastructural of honesty and trustworthiness can, however, vary
investments require long-term loans because some from one society to another and, even within one

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society, over time and depending on the context (see job, people may prefer to leave their homes unpainted
Box 2.6). What is increasingly recognized is that for longer stretches of time. A person lends money
successful economic development has a strong to a company with the company making a promise
correlation with these human qualities of honesty of paying a certain interest rate over the next 10
and trustworthiness. The drive for greater profit and years and then paying back the principal. In a country
greater personal ulility, devoid of these social where such contracts are not dependable and
qualities, creates a dysfunctional and chaotic society. companies are likely to renege on the contract, it is
unlikely that people will invest money in companies.
2.50 There are studies showing that societies in The bond market will flounder and companies will be
which interpersonal trust is greater are societies that able to invest less than what is optimal. In brief, a
exhibit faster economic growth. It is not difficult to modern, vibrant economy relies critically on contracts
see why this is so. A modern and efficient economy and our ability to have trust in the contracts. A part
critically depends on contracts and the ability of of the responsibility for enforcing contracts lies with
individuals to rely on these contracts. An individual the State and the Judiciary. Long-term contracts,
gives money to a painter to paint her home. If the like a mortgage for buying a house with the promise
risk is high that the painter will breach the contract of repayment over the next 20 years, necessarily
by taking the money and then doing an insignificant have to rely on the State machinery for enforcement.

Box 2.6 : Pro-Social Behaviour and Economic Development


%)*7*+58+2+<7-=5.<+650*72047*+5.+*,-.-95,8+27<45.<+0)20+/7-38-,526+:*)2;5-47O+=)5,)+5.,64A*8+26074589+2.A+07480=-70)5.*88O
58+5..20*+0-+)492.+:*5.<8+2.AO+9-7*-;*7O+1-798+2.+*88*.0526+5.<7*A5*.0+1-7+0)*+*115,5*.0+14.,05-.5.<+-1+*,-.-95*8F+Q.+-0)*7
=-7A8O+)492.+:*5.<8+)2;*+2+.204726+2:5650U+0-+1-7*<-+/*78-.26+<25.8+1-7+0)*+82P*+-1+-0)*7+/*-/6*+-7+:*,248*+0)20+58+=)20+58
7*@457*A+:*,248*+-1+2+/7-958*+0)*+/*78-.+)2A+92A*F+%)58+07250+92U+=*66+)2;*+*;-6405-.27U+7--08+:40+508+*T580*.,*+58+.-=+=*66
A*9-.80720*A+5.+62:-720-7U+0*808F+%)*+:7-2A+5A*2+:*)5.A+0)*8*+62:-720-7U+*T/*759*.08+58+0)*+1-66-=5.<F+%)*+*T/*759*.0*7
/2578+4/+266+0)*+84:B*,08+5.+2+62:-720-7U+2.A+0)*.+28P8+*2,)+/257+0-+)2;*+0)*+1-66-=5.<+5.0*72,05-.F+b.*+-1+0)*+0=-+/*78-.8O+,266
)59+#O+58+28P*A+0-+)2.A+-;*7+51+)*+=58)*8+2+,*7025.+29-4.0+-1+9-.*U+C=)5,)+92U+:*+,266*A+#]8+5.;*809*.0E+0-+XF+Q1+#+7*148*8
0-+5.;*80+2.U0)5.<O+0)*57+5.0*72,05-.+58+-;*7O+#+2.A+)58+/270.*7O+XO+<*0+.-0)5.<+2.A+0)*U+<-+)-9*F+Q1+#+5.;*808+2+,*7025.+29-4.0
-1+9-.*UO+0)20+58+<5;*8+0)58+0-+XO+0)*.+0)*+*T/*759*.0*7+2AA8+8-9*+9-7*+9-.*U+2.A+6*08+X+)2;*+50+266F+X+58+0)*.+28P*A+=)*0)*7
X+=2.08+0-+)2.A+2+/270+-1+0)*+0-026+9-.*U+8)*+7*,*5;*A+:2,P+0-+#F+Q.+-0)*7+=-7A8O+X+58+<5;*.+2.+-//-704.50U+0-+/2U+:2,P+0-
#+8-9*+-1+X]8+<25.8O+85.,*+X+=-46A+)2;*+<-0+.-0)5.<+51+#+)2A+.-0+92A*+0)*+15780+9-;*F+Q.+0)*+%7480+>29*O+-.,*+X+A*,5A*8+)-=
94,)+0-+<5;*+#O+0)20+58+<5;*.+0-+#O+2.A+0)20+58+0)*+*.A+-1+0)*+5.0*72,05-.F+C%)*+"-6A34/+<29*+58+2+;2752.0+-1+0)58+=50)+2+865<)06U
A511*7*.0+,6-847*+746*FE
Q.+2+0-0266U+8*6158)+=-76AO+=*+=-46A+*T/*,0+X+0-+-11*7+.-0)5.<+0-+#+2.A+1-7+#O+2.05,5/205.<+0)58O+.-0+0-+<5;*+2.U+9-.*U+0-+X+0-
80270+=50)F+"-=*;*7O+*T/*759*.08+,-.A4,0*A+266+-;*7+0)*+=-76A+=50)+0)58+-7+7*620*A+<29*8+A*9-.80720*A+0)20+5.+2+627<*
.49:*7+-1+,28*8O+0)*+15780+/62U*7+A-*8+<5;*+9-.*U+0-+0)*+8*,-.A+/62U*7+2.A+0)*+8*,-.A+/62U*7+A-*8+<5;*+:2,P+2+/270+-1+)*7
5.,-9*+0-+0)*+15780+/62U*7F+W-7*-;*7O+0)*7*+27*+,-.A505-.8+=)5,)+6*2A+0-+2+)5<)*7+/7-/*.850U+29-.<+0)*+/62U*78+1-7+0)58+P5.A
-1+,--/*7205;*+:*)2;5-47F+'*,*.06UO+"-A2P2+W-7502+2.A+W27-8+H*7;20P2+,-.A4,0*A+2.+*T/*759*.0+-.+(KJ+4.A*7<72A420*
804A*.08+20+0)*+G.5;*7850U+-1+!2.0*7:47U+5.+0)*+R*=+i*262.A+&T/*759*.026+&,-.-95,8+a2:-720-7UO+485.<+0)*+"-6A34/+<29*F
%)*U+1-4.A+0)20+/*-/6*+0U/5,266U+A5A+92P*+/-8505;*+5.;*809*.0+2.A+0)*+/*78-.+7*,*5;5.<+0)*+5.;*809*.0+A5A+<5;*+:2,P+8-9*
7*047.+0-+0)*+5.;*80-7F+W-7*-;*7O+51+0)*+/62U*78+27*+5.505266U+/759*A+8-+28+0-+:*65*;*+0)20+0)*U+8)27*+2+,-99-.+<7-4/+5A*.050UO
0)*U+0*.A+0-+:*+9-7*+,--/*7205;*F
^)20+58+.-0+=5A*6U+7*,-<.5Y*A+:40+A*8*7;*8+9*.05-.+58+0)20+-.*+-1+0)*+*2765*80+8020*9*.08+-1+0)*+%7480+>29*+2.A+0)*+,7505,26
7-6*+-1+9-72650U+2.A+07480=-70)5.*88+5.+0)*+*115,5*.0+14.,05-.5.<+-1+2.+*,-.-9U+-,,477*A+5.+?2;5A+"49*]8+M[VN+,62885,O+F
B+$'#48$( ".( -*7'.( !'#*+$. CX--P+ QQQO+ $270+ QQO+ 8*,05-.+ 5;Ec+ \j%)*k+ ,-99*7,*+ -1+ 92.P5.A+ 58+ .-0+ ,-.15.]A+ 0-+ 0)*+ :270*7+ -1
,-99-A505*8O+:40+92U+*T0*.A+0-+8*7;5,*8+2.A+2,05-.8O+=)5,)+=*+92U+*T,)2.<*+0-+-47+940426+5.0*7*80+2.A+2A;2.02<*F+l-47
,-7.+58+75/*+0-A2Ue+95.*+=566+:*+8-+0-9-77-=F+\%58+/7-1502:6*+1-7+48+:-0)O+0)20+Q+8)-4]A+62:-47+=50)+U-4+0-3A2U+2.A+0)20+U-4
8)-4]A+25A+9*+0-9-77-=F+Q+)2;*+.-+P5.A.*88+1-7+U-4O+2.A+P.-=+0)20+U-4+)2;*+28+65006*+1-7+9*F+Q+=566+.-0+0)*7*1-7*+02P*+/25.8
-.+ U-47+ 2,,-4.0e+ 2.A+ 8)-4]A+ Q+ 62:-47+ =50)+ U-4+ -.+ 9U+ -=.+ 2,,-4.0O+ 5.+ *T/*,0205-.+ -1+ 2+ 7*047.O+ Q+ P.-=+ Q+ 8)-4]A+ :*
A582//-5.0*AO+2.A+0)20+Q+8)-4]A+5.+;25.+A*/*.A+-.+U-47+<720504A*F+"*7*+0)*.+Q+6*2;*+U-4+0-+62:-47+26-.*c+l-4+07*20+9*+5.+0)*
829*+92..*7F+%)*+8*28-.8+,)2.<*e+2.A+:-0)+-1+48+6-8*+-47+)27;*808+1-7+=2.0+-1+940426+,-.15A*.,*+2.A+8*,4750UF]
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:%(,Q.@+3/-L

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However, these are not the only kinds of contracts. it is true that we do not as yet have a hard science
Economic life is full of little promises—I will supply of how to develop these cultural qualities in a
you X today, and you will pay me Y tomorrow. For population, we know that even the mere
these, it is impossible each time to bring in the understanding of the importance of certain qualities
policeman and the judge to ensure enforcement. The for promoting the economic development of a group
best enforcer of these little contracts is our word of of people, helps nurture these qualities in people.
honour and the ‘culture of honesty’ and After all, people have learnt not to smoke in a
trustworthiness. If a particular citizenry is known to crowded room even when not smoking is not in their
be trustworthy, people will be more likely to cut deals self-interest simply because they have come to
with the people of that nation and, over time, the understand that this is not in their collective interest.
nation will do better and prosper economically. These good values are then further supported in
2.51 For India to develop faster and do better as society through mechanisms of social stigma, which
an economy, it is therefore important to foster the help bring individual and social interests into
culture of honesty and trustworthiness. Thanks to alignment. So once we recognize that honesty,
the fact of this social prerequisite of economic integrity, and trustworthiness are not just good moral
development remaining unrecognized for a very long qualities in themselves but qualities which, when
time, this has not received adequate attention in the imbibed by a society, lead to economic progress
scientific literature. Fortunately, a large body of recent and human development, people will have a tendency
economics research has been stressing the to acquire these qualities; and that should help build
importance of these social and cultural factors. While a more tolerant and progressive society.

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30+)2*1$+/$-"#$(+/'+*&2)-&+/$-0)(4$(")0-#2$31$-"#$5,26#-7$8-$.&6"-$3#$0#()**#2$-")-$-"#
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2#%&(&-$-)06#-'7$!"#$(+.3&/#2$2#%&(&-'$+%$K-)-#$F+@#0/.#/-'$)*'+$&/2&()-#2$-"#$+@#0)**
(+/'+*&2)-&+/$=0+(#''$)-$K-)-#$*#@#*7$A&-"$(+/-&/,#2$60+>-"$.+.#/-,.B$-"#$=0+'=#(-'
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3.2 The macroeconomic impact of the global these could be partly compensated by the rise in
financial and economic crisis and the Government final consumption expenditure (GFCE)
expansionary fiscal stance was clearly visible in (Figure 3.1). As the crisis impacted the economy
the demand-side components of the national in the second half of 2008-09, movements in
income aggregates. A contraction of the aggregate quarterly estimates of the demand side of the GDP
demand was manifest in the rates of growth of provided better indication of the recovery process
private final consumption expenditure (PFCE) and and thus the Budget for 2010-11 envisaged a partial
gross capital formation in 2009-10, which had exit from the stimulus measures on the strength of
shares of 58.4 per cent and 35.4 per cent the outcome of the second quarter of 2009-10. This
respectively in 2008-09. Net indirect taxes minus response was broadly in line with the international
subsidies, an important component of the nominal practices in this regard, which had preferred fiscal
gross domestic product (GDP), also declined. The policy instruments for counteracting the adverse
lower levels of point contribution to growth from economic impact of the crisis.

Figure 3.1 Point contribution to GDP at current market prices


20
Point contribution

15 GDP
(CMP)
10
per cent

5 PFCE
0
GFCE
-5
Indirect
2005-06

2006-07

2007-08

2008-09

2009-10

tax–
subsidy

Year

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3.3 As a proportion of the GDP (purchasing power year-on-year growth of 20.3 per cent, and was 7.8
parity [PPP]), the overall fiscal balance of the world percentage points higher than envisaged at the time
was estimated by the International Monetary Fund of Budget formulation. As proportions of the GDP
(IMF) (Fiscal Monitor 2010) to have risen from - as per the AE, budgeted fiscal and revenue deficits
0.4 per cent in 2007 to - 2.0 per cent and - 6.8 per work out to 4.8 per cent and 3.5 per cent for the
cent respectively in 2008 and 2009; it was estimated current fiscal. Thus, as proportions of the GDP, the
to have moderated to - 6.0 per cent in 2010 and recent trends in deficit indicators, post-crisis, have
projected at - 4.9 per cent in 2011. At a major been influenced to some extent by the swings in the
grouping level, advanced economies accounted for levels of aggregate demand (Table 3.1 and Figure
the bulk of the fiscal expansion. Among the emerging 3.2).
economies, India had one of the largest fiscal
expansions of the order of about 10 per cent of the Table 3.1 : Trends in Deficits of Central
GDP in both 2009 and 2010. In terms of proportions Government
of potential GDP also, the expansion was sizeable
Year Revenue Fiscal Primary Revenue
in 2009 in the case of India; it was estimated to Deficit Deficit Deficit Deficit as
have declined to - 8.7 per cent in 2010. Going per cent
forward, the Fiscal Monitor indicated that the fiscal of Fiscal
adjustment in emerging economies in general which Deficit
was driven by economic recovery in 2010 would be (As per cent of GDP)
driven by discretionary policies in 2011--a Enactment of FRBM Act
development that would be noteworthy in light of the 2003-04 3.6 4.5 0.0 79.7
fact that the discretionary impulse of the expansion
2004-05 2.4 3.9 0.0 62.3
was estimated to be small.
2005-06 2.5 4.0 0.4 63.0
3.4 In actual terms, the Budget for 2010-11 had
2006-07 1.9 3.3 -0.2 56.3
estimated the level of fiscal deficit at! "! 3,81,408
crore and revenue deficit at! "! 2,76,512 crore. At 2007-08 1.1 2.5 -0.9 41.4
the time of presentation of the Budget for 2010-11 it 2008-09 4.5 6.0 2.6 75.2
was envisaged that nominal GDP (GDP at current
2009-10(P) 5.1 6.3 3.1 80.7
market prices) would grow by 12.5 per cent and
was estimated at!"!69,34,700 crore. As proportions 2010-11(BE) 3.5 4.8 1.7 72.5
of the nominal GDP, fiscal and revenue deficits were Source: Union Budget documents.
estimated at 5.5 per cent and 4.0 per cent BE-Budget estimates
respectively. As per the advance estimates (AE) P: Provisional actuals (unaudited)
released by the Central Statistics Office (CSO) on FRBM : Fiscal Responsibility and Budget Management
7 February 2011, the nominal GDP for 2010-11 was Note: The ratios to GDP at current market prices are based
on the CSO’s National Accounts 2004-05 series.
placed at! "! 78,77,947 crore, which represents a

Figure 3.2 Trends in deficits of Central Government


7
6 Fiscal
deficit
Per cent of GDP

5
4
3 Revenue
deficit
2
1
0 Primary
deficit
-1
2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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456789:';<=586>567'!?69645@ initiatives in expenditure. First, below-the-line


3.5 The key driver of the rapid fiscal consolidation issuance of bonds for financing under-recoveries
after the notification of the FRBM Rules in July 2004 of petroleum oil companies (as also other such
was the buoyancy in tax revenues. As a proportion bonds) was discontinued and all such funds were
of the GDP, gross tax revenue rose from a level of brought into the Budget as subventions booked as
9.2 per cent in 2003-04 to reach a peak level of cash expenditure. Second, the nutrient-based
11.9 per cent in 2007-08; after falling to 10.8 per subsidy policy for fertilizers was put in place. Third,
cent and 9.6 in 2008-09 and 2009-10 respectively, given the elevated levels of prices of international
it was estimated to recover to 10.8 per cent in 2010- crude petroleum, it was proposed that the level of
11 (BE) as per the then estimated levels of GDP. administered prices for domestic petroleum products
However, as a proportion of the GDP as per the would be calibrated to international prices.
advance estimates of the CSO, it is at 9.5 per cent. Budgetary developments in 2010-11
Two significant developments in the recent past in
3.7 Against the backdrop of the fast-paced
terms of the composition of taxes have been the
recovery of the economy in 2009-10 and the elevated
growth in direct tax revenues, particularly corporate
levels of food inflation as well as the
income tax, and in service tax revenues. Union excise
recommendations of the Thirteenth Finance
duties that have traditionally been the single largest
Commission (ThFC), the budget for 2010-11
revenue earner ceded place to corporate income
resumed the path of fiscal consolidation to make
tax in 2006-07. In 2009-10, owing to the fiscal economic growth more broad based and ensure
stimulus package which envisaged significant that supply-demand imbalances are managed better.
reduction in duties and a demand slowdown, union Acting on the ThFC recommendation for limiting
excise duties declined substantially. In 2010-11, with the combined public debt to GDP ratio to 68 per
partial restoration in rates and surge in demand, cent by 2014-15, the Union Budget for 2010-11
union excise duties have done exceedingly well. came up with a promise to analyse the issues in a
With continuance of high growth in corporate Status Paper, which would also unveil the roadmap
income tax and a higher than budgeted outcome in for reduction.
personal income tax in the current year, the
3.8 The Budget for 2010-11 indicated that effective
prospects of revenue-led medium-term consolidation
management of public expenditure by bringing it in
appears bright.
line with the Government’s objectives, particularly
3.6 While tax revenues provided the anchor for through proper targeting of subsidies, was a key
deepening of the fiscal consolidation process in the factor in fiscal management. The Budget for 2010-
post FRBM period (2004-05 to 2007-08), there was 11 also announced the operationalization of the
also some compression in the expenditure to GDP Nutrient Based Subsidy Policy for fertilizers effective
ratio (Table 3.2 and Figure 3.3). Average annual 1 April 2010 and indicated that the recommendations
growth in expenditure in the four-year period was of the Expert Group on a Viable and Sustainable
11.2 per cent, below the 16 per cent growth in the System of Pricing of Petroleum Products would also
nominal GDP. Besides, there were significant reform be operationalized in due course.

Figure 3.3 Receipts and expenditure of the Central Government


16.0
14.0 Revenue
expenditure
Per cent of GDP

12.0
10.0 Revenue
8.0 receipts

6.0 Capital
4.0 receipts
2.0 Capital
0 expenditure
2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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Table 3.2 : Receipts and Expenditure of the Central Government
2005-06 2006-07 2007-08 2008-09* 2009-10 2009-10 2010-11
(BE) (P) (BE)
" crore)
("
1. Revenue Receipts (a+b) 347077 434387 541864 540259 614497 575458 682212
(a) Tax Revenue (net of States’ share) 270264 351182 439547 443319 474218 459444 534094
(b) Non-tax Revenue 76813 83205 102317 96940 140279 116014 148118
2. Revenue Expenditure 439376 514609 594433 793798 897232 908011 958724
of which:
(a) Interest Payments 132630 150272 171030 192204 225511 211643 248664
(b) Major Subsidies 44480 53495 67498 123581 106004 123396 109092
(c) Defence Expenditure 48211 51682 54219 73305 86879 90668 87344
3. Revenue Deficit (2-1) 92299 80222 52569 253539 282735 332553 276512
4. Capital Receipts 158661 149000 170807 343697 406341 443068 426537
of which:
(a) Recovery of Loans 10645 5893 5100 6139 4225 6204 5129
(b) Other Receipts (mainly PSU disinvestment) 1581 534 38795 566 1120 24557 40000
(c) Borrowings and Other Liabilities** 146435 142573 126912 336992 400996 412307 381408
5. Capital Expenditure 66362 68778 118238 90158 123606 110515 150025
6. Total Expenditure [2+5=6(a)+6(b)] 505738 583387 712671 883956 1020838 1018526 1108749
of which:
(a) Plan Expenditure 140638 169860 205082 275235 325149 302199 373092
(b) Non-plan Expenditure 365100 413527 507589 608721 695689 716327 735657
7. Fiscal Deficit [6-1-4(a)-4(b)] 146435 142573 126912 336992 400996 412307 381408
8. Primary Deficit [7-2(a)] 13805 -7699 -44118 144788 175485 200664 132744
(As per cent of GDP)
1. Revenue Receipts (a+b) 9.4 10.1 10.9 9.7 10.5 8.8 8.7
(a) Tax Revenue (net of States’ share) 7.3 8.2 8.8 7.9 8.1 7.0 6.8
(b) Non-tax Revenue 2.1 1.9 2.1 1.7 2.4 1.8 1.9
2. Revenue Expenditure 11.9 12.0 11.9 14.2 15.3 13.9 12.2
of which:
(a) Interest Payments 3.6 3.5 3.4 3.4 3.9 3.2 3.2
(b) Major Subsidies 1.2 1.2 1.4 2.2 1.8 1.9 1.4
(c) Defence Expenditure 1.3 1.2 1.1 1.3 1.5 1.4 1.1
3. Revenue Deficit (2-1) 2.5 1.9 1.1 4.5 4.8 5.1 3.5
4. Capital Receipts 4.3 3.5 3.4 6.2 6.9 6.8 5.4
of which:
(a) Recovery of Loans 0.3 0.1 0.1 0.1 0.1 0.1 0.1
(b) Other Receipts (mainly PSU disinvestment) 0.0 0.0 0.8 0.0 0.0 0.4 0.5
(c) Borrowings and Other Liabilities** 4.0 3.3 2.5 6.0 6.8 6.3 4.8
5. Capital Expenditure 1.8 1.6 2.4 1.6 2.1 1.7 1.9
6. Total Expenditure [2+5=6(a)+6(b)] 13.7 13.6 14.3 15.8 17.4 15.5 14.1
of which:
(a) Plan Expenditure 3.8 4.0 4.1 4.9 5.6 4.6 4.7
(b) Non-plan Expenditure 9.9 9.6 10.2 10.9 11.9 10.9 9.3
7. Fiscal Deficit [6-1-4(a)-4(b)] 4.0 3.3 2.5 6.0 6.8 6.3 4.8
8. Primary Deficit [7-2(a)] 0.4 -0.2 -0.9 2.6 3.0 3.1 1.7
Memorandum Items " crore)
("
(a) Interest Receipts 22032 22524 21060 20717 19174 22018 19253
(b) Non-plan Revenue Expenditure 327518 372191 420861 559024 618834 654188 643599

Source: Union Budget documents.


BE-Budget estimates P: Provisional actuals (unaudited)
* Based on provisional actuals for 2008-09.
** Does not include receipts in respect of the Market Stabilization Scheme, which will remain in the cash balance of the Central
Government and will not be used for expenditure.
Note: 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
2. The figures may not add up to the total due to rounding/approximations.

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Revenue and capital receipts the ratios were 58.6 per cent and 39.5 per cent
respectively (Table 3.3 and Figure 3.4).
3.9 The full impact of the fiscal stimulus measures
relating to excise duty cuts and the indirect impact Direct taxes
on gross tax revenues became evident only in 2009-
10. As a proportion of the GDP, gross tax revenues 3.11 The Budget for 2010-11 carried forward the
declined from 10.8 per cent in 2008-09 to 9.6 per thrust on maintaining moderate levels of taxation
cent in 2009-10; the levels would have been even and expanding the tax base. The tax slabs under
lower in 2008-09 had the nominal GDP grown at personal income were broadened and the surcharge
trend levels. Thus the Budget for 2010-11 partially on corporate income tax was reduced from 10 per
restored the excise duties and with economic cent to 7.5 per cent. At the same time, the rate of
recovery gaining momentum envisaged a rise in minimum alternate tax was raised to 18 per cent to
the tax to GDP ratio to 10.8 per cent in the current expand the tax base and improve inter-se equity in
fiscal; this implied a year-on-year growth of 19.1 the taxation of corporates.
per cent and amounted to!"!7,46,651 crore. The
3.12 The Government had signalled its intention
restoration of excise duty levels, albeit partial, was
to consolidate and comprehensively amend the
expected to result in a year-on-year growth of 26.1
existing Income Tax Act 1961 and Wealth Tax Act
per cent in 2010-11 as against a level of 29.4 per
1957 through a single legislation, by releasing a
cent envisaged by the RE. It was also estimated
draft Direct Taxes Code (DTC) and a discussion
that revenue from customs would grow at 36.5 per
paper for public comments in August 2009. Based
cent in 2010-11. With service tax estimated to grow
on analysis of the numerous inputs received from
by 16.3 per cent to reach a level of!"!68,000 crore,
stakeholders, a revised discussion paper was
indirect taxes were estimated at " 3,15,000 crore,
released in June 2010 followed by the introduction
implying an overall growth of 19.1 per cent in 2010-
of the Direct Taxes Code Bill 2010 in Parliament in
11 over 2009-10. Overall revenue from direct taxes
August 2010. It has now been proposed to make it
was expected to grow by 15.0 per cent in 2010-11
effective from 1 April 2012 (Box 3.1).
to reach! "! 4,22,500 crore. In part, this owed to
some positive developments arising from the
Indirect taxes
economic recovery and growth in manufacturing/
industry on the one hand and the higher levels of 3.13 The Budget for 2010-11 had indicated that
exemption arising from broadening of the income the formulation of indirect tax proposals was guided
tax brackets on the other. This was reflected in the by the need to return to the path of fiscal
budget estimates of year-on-year growth of 23.2 consolidation without affecting the growth momentum
per cent in corporate income tax and decline of 1.4 of the economy and moving forward on the road to
per cent in personal income tax. The varying levels a goods and services tax (GST). There was
of growth in the different components of tax accordingly a recalibration of the rates and certain
revenues, given the levels of their relative shares in rationalization and relief measures in the Budget.
gross tax revenues, indicate changes in the
composition of taxes. 3.14 The following were the important measures
taken in the Budget for 2010-11:
3.10 At the beginning of the economic reforms
process in 1991-92, the ratio of direct and indirect ! The standard rate of excise duty (CENVAT)
taxes in gross tax revenue was 22.6 per cent and which was brought down to 8 per cent after two
74.8 per cent respectively. As part of the larger successive reductions in December 2008 and
economic reforms, the reforms in the tax structure February 2009 was increased to 10 per cent.
effected through a gradual and sequenced ! Excise duty on petrol and diesel was increased
reduction in the rates of duties in both customs and by " 1 per litre so as to restore it to pre-June
excise together with the increase in the levels of 2008 levels.
income resulted in a gradual shift in the composition
of taxes. As a result in 2004-05--the year when the ! Full or partial excise duty exemptions/
FRBM regime was operationalized--the ratios of concessions available on some items were
direct and indirect taxes were 56.1 per cent and withdrawn and duty imposed on them at the
43.3 per cent of gross tax revenue; in 2009-10, rate of 4 per cent or 10 per cent.

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Table 3.3 : Sources of Tax Revenue
2005-06 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11
(BE) (P) (BE)

" crore)
("
Direct (a) 157557 219724 295938 319859 370000 367415 422500
Personal Income Tax 55985 75093 102644 106046 112850 122280 120566
Corporation Tax 101277 144318 192911 213395 256725 244630 301331
Indirect(b) 199348 241538 279031 269433 269477 247357 315000
Customs 65067 86327 104119 99879 98000 84244 115000
Excise 111226 117613 123611 108613 106477 104659 132000
Service Tax 23055 37598 51301 60941 65000 58454 68000
Gross Tax Revenue * 366151 473512 593147 605298 641079 626916 746651
Tax Revenue as a Percentage of Gross Tax Revenue
Direct (a) 43.0 46.4 49.9 52.8 57.7 58.6 56.6
Peronal Income Tax 15.3 15.9 17.3 17.5 17.6 19.5 16.1
Corporation Tax 27.7 30.5 32.5 35.3 40.0 39.0 40.4
Indirect(b) 54.4 51.0 47.0 44.5 42.0 39.5 42.2
Customs 17.8 18.2 17.6 16.5 15.3 13.4 15.4
Excise 30.4 24.8 20.8 17.9 16.6 16.7 17.7
Service Tax 6.3 7.9 8.6 10.1 10.1 9.3 9.1
Tax Revenue as a Percentage of Gross Domestic Product
Direct(a) 4.3 5.1 5.9 5.7 6.3 5.6 5.4
Personal Income Tax 1.5 1.7 2.1 1.9 1.9 1.9 1.5
Corporation Tax 2.7 3.4 3.9 3.8 4.4 3.7 3.8
Indirect(b) 5.4 5.6 5.6 4.8 4.6 3.8 4.0
Customs 1.8 2.0 2.1 1.8 1.7 1.3 1.5
Excise 3.0 2.7 2.5 1.9 1.8 1.6 1.7
Service Tax 0.6 0.9 1.0 1.1 1.1 0.9 0.9
Gross Tax Revenue * 9.9 11.0 11.9 10.8 10.9 9.6 9.5

Source: Union Budget documents.


BE-Budget estimates P: Provisional actuals (unaudited)
* includes Taxes referred to in (a) & (b) and Taxes of Union Territories and ‘other’ Taxes.
Note: 1. Direct Taxes also include Taxes pertaining to expenditure, interest, wealth, gift, and estate duty.
2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

Figure 3.4 Composition of gross tax revenue


45
Per cent of gross tax revenue

40 Excise
35
Customs
30
25 Corporate
tax
20
15 Personal
income tax
10
5 Service
tax
0
2010-11 (BE)
1990-91

1995-96

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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Box 3.1 : Direct Taxes Code (DTC)


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0)*+)1<53+4F+0)*+54<4.J

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2&3"45' 6,+,5#7%,$83' 4$9' :);5&"' 2&$4$", ##!)
! Excise duty on cigarettes and other tobacco ! Full exemption from basic customs duty for truck
products was increased. refrigeration units for the manufacture of
! Ad-valorem component of excise duty on large refrigerated vans/trucks. Such units are
cars, multi utility vehicles, and sports utility already exempt from excise duty.
vehicles was increased from 20 per cent to ! Reduction of basic customs duty from 7.5 per
22 per cent. cent to 5 per cent on specified agricultural
! Customs duty was increased on crude machinery such as paddy transplanters, laser
petroleum from nil to 5 per cent; petrol and land levellers, cotton pickers, reaper-cum-
diesel from 2.5 per cent to 7.5 per cent; and binders, straw or fodder balers, sugarcane
other specified petroleum products from 5 per harvesters, tracks used for manufacture of
cent to 10 per cent—once again to restore track-type combine harvester, etc.
these duties to pre-June 2008 levels. ! Full exemption from excise duty on specified
! Customs duty on gold, silver, and platinum equipment for preservation, storage, or
increased by 50 per cent of the earlier transportation of apiary, horticultural, dairy,
applicable specific rates. poultry, aquatic and marine produce, and meat
and processing thereof.
! Eight new services were brought under the
service tax net to broaden the tax base. In ! Exemption from service tax for transportation
addition, scope of some existing taxable of cereals and pulses by road.
services was expanded. ! Exemption from service tax for testing and
3.15 Fiscal concessions were given to priority/ certification of seeds.
thrust areas of the economy like agriculture, food ! Concessional basic customs duty rate of 5 per
processing, renewable energy and conservation of cent on machinery items, instruments, and
energy, and infrastructure. The objective was to appliances required for initial setting up of solar
attract fresh investments in the agricultural/food power generation projects or facilities. These
processing and other related sectors like horticulture/ items are also exempt from excise duty.
apiary/diary/poultry for: (a) creation of farm to ! Full exemption from basic customs duty and
market supply chains; (b) prevention of wastage of special additional customs duty for ground
produce; and (c) infusion of technology to boost source heat pump to tap geo-thermal energy.
production. In the energy sector, the aim was to
reduce dependence on fossil fuels and harness the ! Full exemption from excise duty on additional
specified raw materials for the manufacture of
new and clean sources of energy. In specific terms,
rotor blades for wind-operated electricity
the following major fiscal concessions were granted:
generators.
! Project imports status, with concessional rate
! Mono Rail Projects for urban transport granted
of basic customs duty of 5 per cent, for
installation of mechanized handling systems and project imports status with concessional rate of
5 per cent basic customs duty. Concessional
pallet racking systems in mandis or warehouses
customs duty rate of 5 per cent presently
for foodgrains and sugar along with exemption
from additional customs duty and special available up to 6 July 2010 on specified
machinery for tea, coffee, and rubber
additional customs duty . Installation and
plantations extended up to 31 March 2011.
commissioning of such systems is also exempt
from service tax. Excise duty exemption has also been
reintroduced on these items up to 31 March
! Project imports status, with concessional rate 2011.
of basic customs duty of 5 per cent, and full
! A uniform concessional rate of duty of 4 per
exemption from service tax for the initial setting
cent prescribed for parts, required for
up or substantial expansion of a cold storage,
cold room (including farm pre-coolers) for manufacture of all categories of electrical
vehicles including cars, two wheelers, and three
preservation or storage or an industrial unit for
wheelers (like ‘Soleckshaw’) subject to actual
processing of agricultural, apiary, horticultural,
dairy, poultry, aquatic and marine produce, and user condition. Such vehicles will also be
charged excise duty at the rate of 4 per cent.
meat.

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%* !"#$#%&"'()*+,-! ./0/100

! Excise duty reduced from 8 per cent to 4 per from basic customs duty and CVD. Project
cent on LED lights/lighting fixtures. imports status was accorded to ‘Setting up of
Digital Head End’ with 5 per cent concessional
3.16 As regards simplification of procedures, with
basic customs duty and nil special additional
effect from 1 April 2010 small-scale industrial (SSI)
customs duty .
units were allowed to take full CENVAT credit on
capital goods in one instalment in the year of receipt ! Basic customs duty on rhodium which is used
of such goods. Facility of payment of excise duty primarily for the manufacture of gold jewellery,
on quarterly basis was extended to SSI units. The was reduced from 10 per cent to 2 per cent.
relaxation from brand name restriction under the ! The limit of!"!1 lakh per annum on duty-free
general SSI exemption scheme was extended to import of samples was enhanced to!"!3 lakh
plastic bottles and plastic containers used as packing per annum.
material.
! The list of exempted components, raw materials,
3.17 The following important relief and and accessories for the manufacture of sports
rationalization measures were also extended: goods was enlarged by including some
additional items.
! Varying rates of customs duty on medical
equipment were done away with and now all Collection rates
medical equipment (with some exceptions)
attracts 5 per cent basic customs duty, 4 per 3.18 Various measures like simple average tariffs,
cent countervailing duty (CVD)/excise duty, and weighted average tariffs, and tariff dispersion
nil special additional customs duty (i.e. effective indicate the levels of protection in an economy and
duty of 9.2 per cent). Parts required for the are often used for cross-country comparisons. In
manufacture and accessories of medical many emerging economies, the level of nominal
equipment were also charged 5 per cent tariffs as indicated in the schedule under the customs
concessional basic customs duty with nil special acts might be very different from the applied levels
CVD. as there are numerous exemptions. It is therefore
useful to refer to such measures as collection rates
! Prior to the Budget, umbrellas attracted 4 per
cent excise duty while umbrella parts were for understanding the inter-temporal changes within
charged 8 per cent excise duty and umbrella the country better. The collection rates have steadily
cloth was fully exempt. The rate of excise duty declined over the years. Given the fact that the rates
on umbrellas and all umbrella parts was unified include CVDs, which are not counted as protection,
at 4 per cent in the Budget. the real levels of protection in India are much smaller.
Barring chemicals, man-made fibres, metals, and
! Full exemption from excise duty was provided
capital goods, the collection rates are in single digit
on articles of bedding wholly made of quilted
(Table 3.4 and Figure 3.5).
textile materials; toy balloons made of natural
rubber; betel nut product known as ‘supari’;
Service Tax
dementholised oil, deterpenated mentha oil,
spearmint/ mentha piperita oils, and all 3.19 Since its introduction in 1994-95, service tax
intermediates and by-products of menthol. has helped widen the tax base of indirect taxes.
! Excise duty was reduced from 8 per cent to There has been an increase in the number of
4per cent on replaceable kits for all household- services over the years (Table 3.5). The Budget for
type water filters (except those operating on 2010-11 announced the following measures:
RO technology); corrugated boxes/ cartons (a) Rate of service tax was retained at 10 per
manufactured by stand-alone manufacturers; cent (which had earlier been reduced from
and latex rubber thread 12 per cent in February 2009 as part of the
! Basic customs duty was reduced from 10 per fiscal stimulus package).
cent to 5 per cent on magnetrons of up to 1000 (b) Eight new services were brought under the
kw for the manufacture of microwave ovens. service tax net:
! Promotional material like trailors of films are (i) Services of promoting, marketing, or
imported free of cost in the form of electronic
organizing of games of chance, including
promotion kits /betacams were fully exempted
lottery.

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2&3"45' 6,+,5#7%,$83' 4$9' :);5&"' 2&$4$", ##%+
Table 3.4 : Collection Rates for Selected Import Groups*
(per cent)
Sl. Commodity
No. Groups 1990-91 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
(Prov.)
1. Food Products 47 22 32 23 19 4 3
2. POL 34 10 6 5 6 3 2
3. Chemicals 92 22 20 22 22 16 14
4. Man-made Fibres 83 39 34 28 30 17 22
5. Paper & Newsprint 24 7 9 10 10 8 8
6. Natural Fibres 20 11 13 12 13 6 4
7. Metals 95 26 25 24 24 17 17
8. Capital Goods 60 16 13 14 16 13 11
9. Others 20 6 5 6 6 4 4
10. Non-POL 51 12 12 12 13 9 8
11. Total 47 11 10 10 10 7 6
Source: Department of Revenue, Ministry of Finance
* Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of imports
unadjusted for exemptions, expressed in percentage.
POL-Petroleum oil and lubricants
Sl.No. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar.
Sl.No. 3 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber.
Sl.No. 5 includes pulp and waste paper, newsprint, paperboards and manufactures, and printed books.
Sl.No. 6 includes raw wool and silk.
Sl.No. 7 includes iron and steel and non-ferrous metals.
Sl.No. 8 includes non-electronic machinery and project imports and electrical machinery.

(ii) Health services, namely health check up (iii) Services provided for maintenance of
undertaken by hospitals or medical medical records of employees of a
establishments for the employees of business entity;
business entities and health services
(iv) Services of promoting of a ‘brand’ of
provided under health insurance
goods, services, events, business
schemes offered by insurance
companies. entity, etc.;

(The tax on these health services would be payable (v) Services of permitting commercial use
or exploitation of any event organized
only to the extent payment for such medical check-
by a person or organization;
up or preventive care or treatment, etc. is made
directly by the business entity or the insurance (vi) Services provided by electricity
company to the hospital or medical establishment); exchanges;

Figure 3.5 Collection rates for selected import groups


70
60 Capital
goods
50
Per cent

40 Total
30
20 Food
products
10
0 POL
1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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Table 3.5 : Service Tax-A Growing Revenue ! An explanation was added in the definition
Source of the taxable service ‘Commercial Training
No. of Tax Revenue Growth or Coaching Service’ to clarify that the term
Services* Rate " crore)
(" in per ‘commercial’ appearing in the relevant
in per cent definitions only means that such training
cent over or coaching is being provided for a
Previous
Year** consideration whether or not such training
or coaching is conducted with a profit
2004-05 75 10 14200 80.0
motive. This change was given
2005-06 78 10 23055 62.4
2006-07 93 12 37598 63.1 retrospective effect from 01.07.2003;
2007-08 100 12 51301 36.4
2008-09 106 12*** 60941 18.8 ! In the definition of the taxable service
2009-10(P) 109 10 58454 -4.1 ‘Sponsorship Service’, the exclusion
2010-11 relating to sponsorship pertaining to sports
(April- was removed;
December) 117 10 44081 19.2
Source : Receipts Budget and Controller General of ! In the definition of ‘Construction of Complex
Accounts. Service’, and ‘Commercial or Industrial
* Based on new entries added each year.
Construction Service’, it was provided that
** Growth for 2010-11 (April-December) is over
corresponding period previous year. unless the entire consideration for the
*** Reduced to 10 per cent w.e.f. 24-2-2009. property is paid after the completion of
P : Provisional actuals (unaudited)
construction (i.e. after issuance of
completion certificate by the competent
(vii) Services related to two types of
authority), the activity of construction would
copyrights hitherto not covered under
existing taxable service ‘Intellectual be deemed to be a taxable service provided
by the builder/promoter/developer to the
Property Right (IPR)’, namely those on
prospective buyer and the service tax
(a) cinematographic films; and (b)
sound recording; would be charged accordingly;

(viii) Special services provided by a builder, ! Amendments were made in the definition
of the taxable service ‘Renting of Immovable
etc. to prospective buyers such as
Property’ to: (i) provide explicitly that the
providing preferential location or
external or internal development of activity of ‘renting’ itself is a taxable service.
This change was given retrospective effect
complexes on extra charges.
from 1June 2007; and (ii) provide that
(c) Certain modifications were made in the renting of vacant land, where the
definition of existing taxable services to widen agreement or contract between the lessor
the scope of the levy of service tax: and lessee provides for undertaking
construction of buildings or structures on
! The scope of the taxable service ‘Air
such land for furtherance of business or
Passenger Transport Service’ expanded to commerce during the tenure of the lease,
include domestic journeys and
shall be subject to service tax;
international journeys in any class;
! The definitions of the taxable services,
! Prior to the Budget, ‘Information
‘Airport Services’, ‘Port Services’, and the
Technology (IT) Software Service’ was ‘Other Port Services’ were amended to
subject to tax only in cases where such IT
provide that (a) all services provided
software is used for furtherance of
entirely within the airport/port premises
business or commerce. The scope of the would fall under these services; and (b)
taxable service expanded to tax such
an authorization from the airport/port
service even if the service provided is used
authority would not be a precondition for
for purposes other than business or taxing these services;
commerce;

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! An explanation was added in the definition These conditions include that either the
of the taxable service‘ Auctioneer’s Service’ customs duty (in case of import) or excise
to clarify that the phrase ‘auction by duty (in case of domestic production) has
Government’ means an auction involving been paid on the entire amount received
sale of Government property by any from the buyer;
auctioneer and not when the Government ! scope of exemption from service tax
acts as an auctioneer for sale of a private available for transport of fruits, vegetables,
property; eggs, or milk by road by a goods transport
! The definition of ‘Management of agency was expanded by including
Investment under ULIP Service’ was foodgrains and pulses in the list of exempted
amended to provide that the value of the goods;
taxable service for any year of the ! Exemption from service tax was provided
operation of policy shall be the actual to Indian news agencies under ‘Online
amount charged by the insurer for Information and Database Retrieval Service’
management of funds under ULIP or the and ‘Business Auxiliary Service’ subject to
maximum amount of fund management specified conditions ;
charges fixed by the Insurance Regulatory
! Exemption from service tax for ‘Technical
and Development Authority (IRDA),
Testing and Analysis Service’ and ‘Technical
whichever is higher;
Inspection and Certification Service’
(d) Certain exemptions from service tax were provided by Central and State seed testing
provided: laboratories, and Central and State seed
certification agencies;
! Statutory taxes charged by any
Government (including foreign ! Exemption from service tax provided for
Governments, where a passenger transmission of electricity.
disembarks) on air passengers were
excluded from taxable Value for the
Tax Expenditure
purpose of levy of service tax under the 3.20 Tax expenditure statement (Statement of
Air Passenger Transport Service; revenue foregone on account of tax incentives or
preferences) was first placed before Parliament in
! Exemption was provided from service tax
on air transport of passengers for journeys the Budget for 2007-08. The estimates are somewhat
originating from the north-eastern Region; counterfactual in nature and seek to quantify the
potential revenue (including through a sampling
! Exemption from service tax was provided process) had these exemptions been not given;
to services relating to ‘Erection, assume that tax base and other conditions remain
Commissioning or Installation’ of, unaltered. Subsequently this continued to be
published every year and in the Budget for 2010-
" Mechanized Food Grain Handling
11, tax foregone on account of exemptions under
Systems, etc.;
corporate income tax for 2008-09 and 2009-10 was
" Equipment for setting up or substantial estimated at! "! 66,901 crore and! "! 79,554 crore
expansion of cold storage; and respectively. Accelerated depreciation, deduction
of export profits of units located in software
" Machinery/equipment for initial setting
technology parks and of export-oriented units
up or substantial expansion of units for
(EOUs) were some of the major items under such
processing of agricultural, apiary,
corporate exemptions. Tax foregone on account of
horticultural, dairy, poultry, aquatic,
exemptions under personal income tax was
marine, or meat products;
estimated at! "! 33,216 crore and! "! 36,186 crore
! Packaged IT software, pre-packed in retail respectively in 2008-09 and 2009-10 with deduction
packages for single use, was exempted on account of certain eligible investments and
from service tax leviable under IT Software expenditures under section 80C of the IncomeTax
Service, subject to specified conditions. Act being the main exemptions.

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3.21 Revenue foregone estimates in excise and expenditure, pay, and pensions. As a proportion of
customs broadly correspond to the differences in the GDP, defence expenditure and interest payments
statutory or Schedule rates of duties and the have been more or less stable. Given the committed
effective or applied rates of duties multiplied by the nature of other expenditure, the immediate and real
value assessed. Total revenue foregone in excise compression under this classification could only
for 2008-09 was estimated at!"!1,35,496 crore, of come from subsidies; hence the focus on reforms
which area-based exemptions amounted to!"!10,589 in subsidies in recent budgets. Front loading of Plan
crore. Tax expenditure is estimated to have risen to expenditure was possible in 2008-09 and 2009-10
" 1,70,765 in 2009-10 with area-based exemptions in view of the fiscal expansion to combat the adverse
accounting for only! "! 5,882 crore. In customs, impact of the global crisis. Though an amount of!"
revenue foregone under various exemptions was 3,25,149 crore (equivalent of 5.6 per cent of the
estimated to be of the order of!"!2,02,240 crore in GDP) was earmarked as Plan expenditure in Budget
2008-09 and! "! 2,18,191 crore in 2009-10. The estimates for 2009-10, as per the provisional actual
following sectors benefited the most from such data released by the Controller General of Accounts
exemptions: crude oil and mineral oils; machinery; (CGA), plan expenditure was at!"!3,02,199 crore
diamond, gold and jewellery; edible vegetable, fruits, (equivalent of 4.6 per cent of the GDP). As per the
cereals, edible oils; chemicals and plastics; and Budget for 2010-11, plan expenditure for the current
primary metals and articles thereof. Revenue fiscal was placed at!"!3,73,092 crore, equivalent of
foregone on account of various export promotion 4.7 per cent of the GDP. (Figures 3.6 and 3.7)
schemes was estimated at!"!44,417 crore in 2008-
09 and! "! 37,970 crore in 2009-10. Overall, tax Interest payments
expenditure as a proportion of aggregate tax
3.23 The levels of outstanding liabilities in end-
collection was placed at 68.6 per cent in 2008-09
March and assumption of incremental liabilities
and is estimated to have risen to 79.5 per cent in during the fiscal have a crucial bearing on the levels
2009-10.
of interest payments in a given year. Reflecting the
less than prudent fiscal management of the past,
Expenditure trends
interest payments have been growing at a steady
3.22 In a 2x2 schema of classification of public rate and appropriating about 35 per cent of the
expenditure into revenue and capital, and Plan and revenue receipts in the last five years. Given the
non-Plan, the thrust of public expenditure fact that the levels of outstanding liabilities could
management policies, particularly in terms of FRBM only come down in the medium to long term with
commitments, has been on containing non-Plan fiscal consolidation, one of the important targets of
revenue expenditure and raising the levels of Plan the FRBM framework was the progressive reduction
expenditure, preferably the capital variety. Non-Plan in assumption of incremental liabilities. Reflecting
revenue expenditure has five major components, this, as a proportion of the GDP, interest payments
namely interest payments, subsidies, defence came down from 4.5 per cent in 2003-04 to 3.4 per

Figure 3.6 Trends in Centre's revenue expenditure


400
350 Others
! thousand crore

300
250 Interest payments
200
Major subsidies
150
100 Defence
expenditure
50
0 Grants to states
and UTs
2010-11 (BE)
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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Figure 3.7 Composition of revenue expenditure
100

28.4 29.9 31.9 33.9 32.5 Others


80 35.4 37.6 37.4

60 13.4 14.0 Grants to states


Per cent

16.8 16.5 18.2 15.6 and UTs


11.9 15.5 16.1
11.4
11.0 10.0 9.1 9.2 9.1
40 12.0 10.0
11.6 10.1 Defence
10.4 11.4
15.6 13.6 11.4 expenditure
20
34.3 33.0 30.2 29.2 28.8 24.2 23.3 25.9
Major subsidies
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Year (Prov.) (BE) Interest payments

cent in 2007-08. Net of the interest payments on the Supplementary demands for grants
National Small Savings Fund (NSSF), the average
3.25 Supplementary demands for grants are placed
cost of borrowing has risen to 7.9 per cent from 7.7
before the Parliament to include all those expenditure
per cent in 2010-11 in the current fiscal reflecting
the higher levels of debt outstanding last year (Table proposals (excess or fresh or reappropriations) that
were not envisaged at the time of presentation of the
3.6 and Figure 3.8).
Budget and have to be incurred in the current year.
Subsidies Two supplementary demands for grants have so far
been presented in the current fiscal. The first batch
3.24 As a proportion of the GDP, subsidies have was approved by Parliament in August 2010
grown from 1.4 per cent in 2004-05 to 2.3 per cent
in 2008-09 (Figure 3.9). Below-the-line bonds issued Table 3.6 : Interest on Outstanding Internal
in lieu of subsidies also rose to a level of!"! 1,10,510 Liabilities of Central Government
crore in 2008-09 (2 per cent of the GDP). This rise Out- Interest Average
in subsidies owes to the elevated levels of global standing on Cost of
crude oil prices and the less than full pass through Internal Internal Borrowings
of the international prices to the domestic markets Liabilities Liabilities (per cent
per annum)
and is also reflected in fertilizer subsidies as cost
of feedstock is the major cost. Following the global " crore)
("
financial crisis, there was a brief respite; 2004-05 1603785 105176 7.2
2005-06 1752403 111476 7.0
nevertheless global crude prices have started to
2006-07 1967870 128299 7.3
trend up. Some of the subsidies were also not
2007-08 2247104 149801 7.6
targeted properly. The Budget for 2010-11 also
2008-09* 2565991 170388 7.6
announced the intent of bringing all subsidy-related 2009-10(RE) 2902990 198797 7.7
liabilities to fiscal accounting. It was in this context 2010-11(BE) 3306626 227942 7.9
that the recent Budgets have focused on Source: Union Budget documents.
restructuring the subsidy regime in fertilizers and * Excludes " 563 crore towards premium on account of
petroleum. As a first step, pricing of petrol (motor domestic debt buyback scheme and prepayment of
external debt.
spirit) was liberalized and a modest hike in
Note: 1. Average cost of borrowing is the percentage
administered prices of kerosene and LPG (liquefied of interest payment in year ‘ t’ to outstanding
petroleum gas) was announced. The retail selling liabilities in year ‘t-1’.
price of public distribution system (PDS) kerosene 2. Outstanding internal liabilities exclude NSSF
loans to States,with no interest liability on the
was increased by! "! 3 per litre in Delhi with part of the Centre.
corresponding increase in the rest of the country 3. The figures of interest payments reported in
the earlier issues may differ as these figures
and the price of domestic LPG was increased by
are net of interest payments on NSSF paid by
"!35 per cylinder (14.2 kg) in Delhi with corresponding the Government since 1999-2000 i.e. constitution
increase in the rest of the country. of the NSSF.

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Figure 3.8 Interest on internal liabilities and average interest cost of borrowing
250 12
Interest on
11 internal
200 liabilities

Per cent per annum


! thousand crore

(!)
10
150
Average
9 cost of
100 borrowing
8 (%)

50
7

0 6
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)
Year

(61 grants and two appropriations) for total gross paramilitary forces (" 2,000 crore); and additional
additional expenditure of!"!68,294.3 crore, of which requirement of the PMGSY ("!3,000 crore).
those with a net cash outgo aggregated to!"!54,588.6
crore. The main items entailing cash outgo included Central Plan outlay
compensation to oil companies ("!14,000 crore); 3.26 With a higher level of gross budgetary support
additional requirement of the Pradhan Mantri Gram (GBS) of!"!2,29,163 crore and internal and extra
Sadak Yojana(PMGSY) ("! 7,337.5 crore); and budgetary resources (IEBR) of Central public-sector
transfers to State and Union Territories Governments enterprises (CPSEs) of!"!1,96,427 crore, Central
("!6,379 crore). The second batch of supplementary Plan outlay was placed at!"!4,25,590 crore for 2009-
demands for grants approved by Parliament in 10 ( revised estimates—RE). The GBS constituted
December 2010 included 56 grants and two 53.8 per cent of the total outlay. With a growth of
appropriations. Total gross additional expenditure 23.2 per cent over 2009-10 (RE), the Central Plan
approved by Parliament was!"!44,945.5 crore. This outlay now stands at!"!5,24,484 crore in the Budget
involves a net cash outgo aggregate of!"!19,812.4 for 2010-11. The outlay comprised budgetary support
crore and technical supplementary involving gross of!"!2,80,600 crore and IEBR of CPSEs of!"!2,43,884
additional expenditure, matched by savings of the crore. The broad sector-wise allocations for important
ministries/departments or by enhanced receipts/ sectors included energy (27.9 per cent); social
recoveries aggregates of!"!25,132.5 crore. The main services (24.3 per cent); transport (19.4 per cent);
items entailing cash outgo included compensation communication (3.5 per cent); rural development
to the Department of Fertilizers ("!5,000 crore) and (10.5 per cent); industry and minerals (7.4 per cent);
the Department of Food and Public Distribution (" agriculture and allied activities (2.3 per cent); and
5,000 crore); additional requirement for Central irrigation and flood control (0.1 per cent). Central

Figure 3.9 Subsidies as per cent of GDP


140 3.5
120 3.0 Subsidies
! thousand crore

Per cent of GDP

100 2.5
80 2.0
Subsidies
60 1.5 as % of
40 GDP
1.0
20 0.5
0 0
2009-10 (RE)

2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09

Year

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assistance to State and UT Plans in 2010-11 (BE) is and Functional Classification of the Central
placed at!"!92,492 crore, a growth of 7.5 per cent Government Budget details the impact of the
over 2009-10 (RE). operations of the Central Government on the levels
of consumption expenditure and capital formation.
Government debt Of the total expenditure of!"!10,79,985 crore in BE
3.27 In many countries, the fiscal rules also include 2010-11 (equivalent of 13.7 per cent of the GDP),
21 per cent was used up as consumption expenditure
a debt reduction target. The FRBM Rules 2004
(amounting to!"!2,24,027 crore or 2.8 per cent of
contain an incremental assumption rule for public
debt which states that ‘the Central Government shall the GDP) and 18 per cent resulted in capital
formation (amounting to! "! 1,94,473 crore or 2.5
not assume additional liabilities (including external
per cent of the GDP) with the rest being accounted
debt at current exchange rate) in excess of 9 per
cent of GDP for the financial year 2004-05 and in for as transfer payments (mainly to States).The levels
of dissavings of the Government came down
each subsequent financial year, the limit of 9 per
progressively and in 2007-08 became positive
cent of GDP shall be progressively reduced by at
least one percentage point of GDP’. There is, savings; however, the fiscal expansion resulted in
the re-emergence of dissavings in 2008-09 (Table
however, no explicit rule targeting reduction in the
3.8). After briefly going up in 2008-09 to a level of
overall level of public debt. As a proportion of the
GDP, public debt could come down through limiting " 2,53,712 crore, the dissavings of the Government
were estimated at!"!1,92,705 crore in 2010-11 (BE).
its growth relative to growth in nominal GDP or
As the gap between the level of savings and capital
through lower assumption of incremental liabilities
or retirement of debt. The ThFC had recommended formation is financed preponderantly by draft on
the other sectors of the domestic economy, the
limiting the combined debt of the Centre and States
reversal of dissavings is an imperative.
to 68 per cent of the GDP by 2014-15. The Budget
for 2010-11 announced the intent of bringing out a
Fiscal outcome
status paper giving detailed analysis of the situation
and a roadmap for curtailing overall public debt 3.30 The outcomes in terms of key fiscal indicators
within six months. A status paper was presented to were much better than was envisaged by the Budget
the Parliament on November 2010 (Box 3.2). estimates on account of the higher than estimated
revenue from telecom 3G/BWA auctions and indirect
3.28 As a proportion of the GDP, the outstanding taxes. The headroom so available facilitated
internal liabilities of the Central Government fell from
additional expenditure proposed through
a level of 58.7 per cent in 2005-06 to 51.5 per cent
supplementary demands for grants. The data on
in 2009-10 (RE). They were budgeted at 48 per Union finances for April-December 2010 released
cent of the GDP in 2010-11 (Table 3.7A and Figure
by the CGA on 31 December 2010 indicated that
3.10). There has been steady decline in the levels
the key fiscal indicators were broadly on the
till 2007-08 subsequent to the operation of the FRBM consolidation track charted by the Budget for 2010-
Act. Thereafter there has been moderation in
11. Growth in gross tax revenue in the nine months
decline following the fiscal expansion in 2008-09
of the current fiscal was 26.8 per cent (year-on-
and 2009-10; a modest deterioration is evident in year) as against a level of 17.9 per cent envisaged
2010-11 (BE) (Table 3.7B). This is also reflected in
for the fiscal by the BE. Non-tax revenues grew by
the assumption of incremental liabilities, which have
136.4 per cent in the first nine months of current
significantly gone up in the last two years. fiscal as against a level of growth of 23.7 per cent
in the corresponding period last year and 32 per
Economic and functional classification of
cent envisaged by the BE. Revenue receipts grew
the Budget
by over 50 per cent in the first nine months (Table
3.29 While analysis on the basis of fiscal indicators 3.9). In major taxes the following were the year-on-
are instructive in understanding the fiscal situation year growth rates (as against growth envisaged by
and management thereof, the macroeconomic the BE): customs 65.8 per cent (36.1 per cent);
dimensions of fiscal policies are better understood Central excise 36.5 per cent (29.4 per cent), service
though a reclassification of the fiscal magnitudes in tax 19.7 per cent (17.2 per cent); corporate income
terms of national income aggregates. The Economic tax 20.4 per cent (18.1 per cent), and personal

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Box 3.2 : Government Debt Report


L<+H=.3=1</*+4F+0)*+1<<4=</*>*<0+>15*+-<+0)*+6=5A*0+F4.+9:;:B;;+04+0)-3+*FF*/08+1+3010=3+H1H*.+4<+I4C*.<>*<0+5*D0
@13+H.*3*<0*5+-<+^4C*>D*.+9:;:J+%)*+H1H*.+>15*+1+5*01-7*5+1<17E3-3+4F+0)*+3-0=10-4<+1<5+/)17?*5+4=0+1+.415>1H+F4.
.*5=/0-4<+-<+4C*.177+5*D0+13+1+H*./*<01A*+4F+0)*+I,$+F4.+0)*+I*<*.17+I4C*.<>*<0+5=.-<A+0)*+H*.-45+9:;:B;;+04+9:;[B
;PJ+%)*+317-*<0+F*10=.*3+4F+0)*+.*H4.0+1.*+5*01-7*5+13+F4774@3K

! %)*+ 4DZ*/0-C*3+ 4F+ 0)*+ 5*D0+ >1<1A*>*<0+ H47-/E+ 1.*+ 04+ >**0+ !*<0.17+ I4C*.<>*<0V3+ F-<1</-<A+ <**5+ 10+ 0)*+ 74@*30
H433-D7*+74<AB0*.>+D4..4@-<A+/4303+1<5+1734+04+?**H+0)*+04017+5*D0+@-0)-<+3=301-<1D7*+7->-03+J+#55-0-4<177E8+-0+1->3
10+3=HH4.0-<A+5*C*74H>*<0+4F+1+@*77BF=</0-4<-<A+1<5+C-D.1<0+54>*30-/+D4<5+>1.?*0J

! %)*+0).**+->H4.01<0+100.-D=0*3+4F+I4C*.<>*<0+5*D0+-</7=5*+34=./*+4F+F-<1</-<A8+F-2*5+-<0*.*30+<10=.*+4F+5*D08+1<5
74<A+.*3-5=17+>10=.-0EJ+_F+0)*+4C*.177+!*<0.17+I4C*.<>*<0+5*D08+1D4=0+M9+H*.+/*<0+-3+-<0*.<17+5*D0+1<5+`+H*.+/*<0
-3+*20*.<17+5*D0J+L<0*.<17+5*D0+71.A*7E+/4<3-303+4F+>1.?*0+741<3+-<+0)*+F4.>+4F+510*5+3*/=.-0-*3+@)-/)+1.*+/4<0.1/0*5
0).4=A)+1=/0-4<J+a430+4F+0)*+510*5+3*/=.-0-*3+WMQ+H*.+/*<0X+1.*+F-2*5+/4=H4<+1<5+4<7E+0)*+D171</*+(+H*.+/*<0+1.*
F7410-<A+.10*+D4<53J+%)*+@*-A)0*5+1C*.1A*+>10=.-0E+4F+0)*3*+510*5+3*/=.-0-*3+-3+1D4=0+;:+E*1.3+@)-7*+0)*+@*-A)0*5
1C*.1A*+-<0*.*30+.10*+-3+1D4=0+QJ`+H*.+/*<0+H*.+1<<=>J

! T=D3*G=*<0+04+0)*+'*H4.0+4F+0)*+%)R!+@)-/)+)15+*30->10*5+5*D0+04+I,$+.10-43+1<5+1+.415>1H+F4.+-03+.*5=/0-4<8
0)*+!T_+.*C-3*5+0)*+<4>-<17+I,$+3-A<-F-/1<07E+1<5+13+H*.+0)*+.*C-3*5+5101+0)*+.*5=/0-4<+-<+0)*+7*C*73+4F+5*D0+13
H.4H4.0-4<+4F+0)*+I,$+/4=75+D*+>15*+*C*<+@-0)+)-A)*.+0)1<+.*/4>>*<5*5+F-3/17+5*F-/-03J+#3+3=/)8+1+)-A)*.+0)1<
%)R!+.*/4>>*<5*5+01.A*0+@13+H.*F*..*5+@)*.*DE+0)*+F-3/17+5*F-/-0+4F+0)*+!*<0.*+@4=75+D*+.*5=/*5+04+(+H*.+/*<0
4F+0)*+I,$+DE+9:;[B;P+1<5+1//4.5-<A7E+5*D0+13+1+H.4H4.0-4<+4F+0)*+I,$+@4=75+/4>*+54@<+F.4>+P:JP+H*.+/*<0+-<
9::MB;:+04+[(+H*.+/*<0+-<+9:;[B;PJ

! %)*+4=0301<5-<A+5*D0+4F+T010*+I4C*.<>*<03+-3+*30->10*5+10+9NJ(+H*.+/*<0+4F+0)*+I,$+F4.+9::MB;:J+"4@*C*.8+1F0*.
<*00-<A+ 4F+ 0)*+ 7-1D-7-0-*3+ 4<+ 1//4=<0+ 4F+ -<C*30>*<03+ >15*+ -<+ ;[B51E3+ 0.*13=.E+ D-773+ 4F+ !*<0.17+ I4C*.<>*<08+ 0)-3
/4>*3+ 54@<+ 04+ 9[J`+ H*.+ /*<0+ 4F+ 0)*+ I,$J+ %)*+ .415>1H+ F4.+ T010*3+ )13+ D**<+ H.*H1.*5+ @-0)+ F-3/17+ 5*F-/-0+ 13+ 1
H*./*<01A*+4F+0)*+I,$+10+0)*+7*C*7+.*/4>>*<5*5+DE+0)*+%)R!J+O-0)+0)*+F4.*A4-<A+133=>H0-4<+4<+F-3/17+5*F-/-08
/4<347-510*5+5*D0+F4.+T010*+I4C*.<>*<03+-3+*30->10*5+04+.*5=/*+F.4>+9[J`+H*.+/*<0+4F+0)*+I,$+-<+9::MB;:+04+9(J;
H*.+/*<0+-<+9:;[B;PJ

! #F0*.+F1/04.-<A+-<+0)*+->H1/0+4F+!*<0.17+741<3+04+T010*38+0)*+/4<347-510*5+5*D0+4F+I*<*.17+I4C*.<>*<0+)13+/4>*
54@<+F.4>+QMJ(+H*.+/*<0+-<+9::[B:P+04+N`JQ+H*.+/*<0+-<+9::QB:`J+"4@*C*.8+-0+)13+3=D3*G=*<07E+-</.*13*5+5=.-<A+0)*
A74D17+*/4<4>-/+/.-3-3+H*.-45+04+Q;J;+H*.+/*<0+-<+9::`B:M+1<5+F=.0)*.+04+Q(+H*.+/*<0+4F+0)*+I,$+-<+9::MB;:J+!"#$%&#'(
)(*%++(,#"-%"#"-(#./"-#012%2*(#34$$155142#-%,#)(*4$$(2,(,#%#*4254+1,%"(,#,('"#64)#"-(#3(2")(#%2,#7"%"(#849()2$(2"5#%"#:;#<()
*(2"#46#"-(#8=>#64)#"-(#&(%)#/??@A.?B#C9(2#D1"-#5+1<<%E(#12#/??FA?@#%2,#/??@A.?#42#615*%+#,(61*1"#"%)E("5G#"-(#49()%++#8(2()%+
849()2$(2"#,('"#%"#:H#<()#*(2"#46#"-(#8=>#12#/??@A.?#-%5#)($%12(,#D1"-12#"-(#)(*4$$(2,(,#"%)E("B

! %)*+3=AA*30*5+.415>1H+F4.+/4<347-510*5+I*<*.17+I4C*.<>*<0+5*D0+3*03+1+01.A*0+4F+.*5=/0-4<+F.4>+Q(+H*.+/*<0+4F
0)*+I,$+-<+9::MB;:+04+N[JM+H*.+/*<0+-<+9:;[B;PJ+%)-3+3)4@3+1+.*5=/0-4<+4F+`J;+H*.+/*<0+4F+0)*+I,$+-<+0)*+/4<347-510*5
5*D0+ F4.+ 0)*+ I*<*.17+ I4C*.<>*<0J

! L<+0)*+.415>1H+3=AA*30*5+F4.+5*D0+.*5=/0-4<+5=.-<A+0)*+H*.-45+9:;:B;;+04+9:;[B;P8+0)*+I4C*.<>*<0V3+/4>>-0>*<0
04@1.53+F-3/17+/4<347-510-4<+)13+D**<+.*-0*.10*5J+O-0)+0)*+.*5=/0-4<+-<+F-3/17+5*F-/-0+F4.+9:;:B;;8+0)*+0.*<5+@-0<*33*5
-<+0)*+7130+0@4+E*1.3+4F+-</.*13-<A+5*D0+)13+D**<+1..*30*5J+I-(#849()2$(2"#-%5#J2,()"%K(2#*42*()"(,#(664)"5#"4#)(,J*(#"-(
615*%+#,(61*1"#E)%,J%++&#54#%5#"4#')12E#,4D2#"-(#,('"#%5#%#<)4<4)"142#46#"-(#8=>#"4#"-(#<)(A*)1515#+(9(+#46#LFB:#<()#*(2"#'&#/?.HA
.;#%2,#6J)"-()#1$<)49(#"4#%'4J"#LM#<()#*(2"#46#"-(#8=>#12#/?.;A.MB

Figure 3.10 Debt GDP ratios


70
60 Total
Per cent of GDP

outstanding
50 liabilities
40
Internal
30 liabilities
20
Market
10 borrowings
0
External
debt
2009-10 (RE)

2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09

(outstand-
ing)

Year

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Table 3.7A : Outstanding Liabilities of the Central Government
(end-March)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
" crore)
("
1. Internal Liabilities # 2165902 2435880 2725394 3036132 3376325 3782553
a) Internal Debt 1389758 1544975 1808359 2028549 2337682 2736754
i) Market Borrowings 862370 972801 1092468 1326094 1734505 2079535
ii) Others 527388 572174 715891 702455 603177 657219
b) Other Internal Liabilities 776144 890905 917035 1007583 1038643 1045799
2. External Debt (Outstanding)* 94243 102716 112031 123046 139581 162045
3. Total Outstanding Liabilities (1+2) 2260145 2538596 2837425 3159178 3515906 3944598
4. Amount Due from Pakistan on Account 300 300 300 300 300 300
of Share of Pre-partition Debt
5. Net Liabilities (3-4) 2259845 2538296 2837125 3158878 3515606 3944298
(As per cent of GDP)
1. Internal Liabilities 58.7 56.7 54.7 54.4 51.5 48.0
a) Internal Debt 37.6 36.0 36.3 36.3 35.7 34.7
i) Market Borrowings 23.4 22.7 21.9 23.8 26.5 26.4
ii) Others 14.3 13.3 14.4 12.6 9.2 8.3
b) Other Internal Liabilities 21.0 20.7 18.4 18.0 15.9 13.3
2. External Debt (Outstanding)* 2.6 2.4 2.2 2.2 2.1 2.1
3. Total Outstanding Liabilities 61.2 59.1 56.9 56.6 53.7 50.1
Memorandum Items
(a) External Debt (" crore)@ 194078 201204 210083 264076 249311 272779
(as per cent of GDP) 5.3 4.7 4.2 4.7 3.8 3.5
(b) Total Outstanding Liabilities
(adjusted) ("!crore) 2359980 2637084 2935477 3300208 3625636 4055332
(as per cent of GDP) 63.9 61.4 58.9 59.1 55.4 51.5
(c) Internal Liabilities(Non-RBI)(" crore)## 1969106 2217671 2471396 2687037 3041134 3447362
(as per cent of GDP) 53.3 51.6 49.6 48.1 46.4 43.8
(d) Outstanding Liabilities
(Non-RBI)("!crore)## 2163184 2418875 2681479 2951113 3290445 3720141
Outstanding Liabilities (Non-RBI)
(as per cent of GDP) 58.6 56.3 53.8 52.9 50.2 47.2
(e) Contingent Liabilities of
Central Government ("!crore) 110626 109826 104872 113335 n.a. n.a.
Contingent Liabilities of
Central Government
(as per cent of GDP) 3.0 2.6 2.1 2.0 n.a. n.a.
(f) Total Assets ("!crore) 1194446 1339119 1571668 1569043 1590027 1754040
Total Assets
(as per cent of GDP) 32.3 31.2 31.5 28.1 24.3 22.3
Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India.
n.a. : not available
* External debt figures represent borrowings by Central Government from external sources and are based upon
historical exchange rates.
@ Converted at year end exchange rates. For 1990-91, the rates prevailing at the end of March,1991; For 1999-2000, the
rates prevailing at the end of March, 2000 and so on.
# Internal debt includes net borrowing of "! "!29,062 crore for 2005-06, " 62,974 crore for 2006-07, "!
"!1,70,554 crore for
2007-08, "!
"!88,773 crore for 2008-09, "!
"!2,737 crore for 2009-10(RE) and "!
"!50,000 crore for 2010-11(BE) under the Market
Stabilisation Scheme.
## This includes marketable dated securities held by the RBI.
Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

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Table 3.7B : Incremental Net Liabilities of the Central Government*

2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)


Target as per FRBM Rules 8 7 6 5 4 3
(as per cent of GDP)
Actual ( " crore) 265723 278451 298829 321753 356728 428692
Actual as per cent of GDP 7.2 6.5 6.0 5.8 5.4 5.4
*Incremental net liablities assumed has been compiled from data on liabilities given in Annex 3(i) of Receipts
Budget, 2010-11.

income tax 13.1 per cent (-3.6 per cent). crore posted a growth of 9.1 per cent over 2008-
09. Taking into account further accumulation of
3.31 Year-on-year growth in total expenditure in the " 141 crore in the traffic outstandings, the gross
first nine months of the current fiscal was at 11.2 per
traffic receipts of the Railways for 2009-10 stood at
cent as against a level of 18.5 per cent in 2009-10
"!86,964 crore.
(April-December) and 8.5 per cent envisaged for the
full year by BE 2010-11. While Plan expenditure grew 3.33 Ordinary working expenses at!"!65,810 crore
by 18.9 per cent in April-December 2010-11 as during 2009-10 showed an increase of 21.1 per
against 23.0 per cent in 2009-10 (April-December), cent over the preceding year. This higher growth
non-Plan expenditure grew by 7.9 per cent as against in ordinary working expenses was primarily
16.6 per cent. As per the CGA, 84.7 per cent of the attributable to payment of the second instalment (60
gross market borrowings were completed by end of per cent) of arrears of the Sixth Central Pay
December 2010. Reflecting the above trend in revenue Commission. The total working expenses including
and expenditure, revenue deficit was placed at appropriations for Depreciation Reserve Fund and
"!1,16,309 crore, which was 42.1 per cent of its BE Pension Fund at! "! 82,915 crore recorded an
and lower by 53.7 per cent than the April-December increase of 15.4 per cent over the preceding year.
2009 level. Fiscal deficit was!"!1,71,249 crore, which
came to 44.9 per cent of its BE (Table 3.10) and 3.34 Taking into account the net variation of the
represented a decline of 44.8 per cent over the miscellaneous receipts and miscellaneous
level in April-December 2009. The deficit indicators expenditure, Railways net revenue in 2009-10 was
would thus remain at targeted levels even with a "!5,544 crore. After fully discharging the dividend
pickup in expenditure in the next three months. liability of! "! 5,543 crore for the fiscal, Railways
during 2009-10 generated an excess of around
158!<8>9645' <!'(51987>5679: "!1 crore. Lower growth of traffic revenues on account
of prevailing economic conditions, stiff increase in
5675818?@5@' <!'7A5'456789:
working expenses due to implementation of the Sixth
;<=586>567 Central Pay Commission recommendations and
inflationary factors have adversely affected the
Railways
financial health of the Railways in 2009-10, which
3.32 Indian Railways achieved a freight loading is reflected in its Operating Ratio1 deteriorating to
of 887.79 million tonnes in 2009-10 with an 95.3 per cent as against 90.5 per cent in 2008-09.
incremental loading of 54.40 million tonnes over the The net revenue as a proportion of capital-at-charge
levels in 2008-09. However, freight loading during and investment from the Capital Fund for the fiscal
2009-10 fell short of the revised target by 2.2 million was 4.5 per cent.
tonnes. Consequently freight earnings at!"!58,502
crore, though registering a growth of 9.5 per cent 3.35 The Plan Outlay for 2009-10 stood at!"!39,235
over 2008-09, fell short of the revised target for crore including internally generated resources of
2009-10 by! "! 214 crore. Passenger earnings "!12,196 crore (31 per cent of the total outlay) and
(excluding other coaching earnings) during 2009- market borrowings of!"!9,323 crore by the Indian
10 were!"!23,488 crore as against!"!21,931 crore Railway Finance Corporation which also includes
in 2008-09, registering an increase of 7.1 per cent. borrowing for Rail Vikas Nigam Limited. Apart from
Overall traffic revenues for 2009-10 at! "! 87,105 strengthening of the golden quadrilateral under the
1
The Operating Ratio represents the percentage of working expenses to traffic earnings.

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Table 3.8 : Total Expenditure and Capital Formation by the Central Government and its Financing
(As per Economic and Functional Classification of the Central Government Budget)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
" crore)
("
I. Total Expenditure 501083 570185 688908 864530 1005297 1079985
II. Gross Capital Formation out of Budgetary
Resources of Central Government 84757 87885 143892 136935 154827 194473
(i) Gross Capital Formation
by the Central Government 34450 36487 43652 51464 61190 71537
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 50307 51398 100240 85471 93637 122936
III. Gross Savings of Central Government -61431 -33918 13674 -176082 -253712 -192705
IV. Gap (II-III) 146188 121803 130218 313017 408539 387178
Financed by
a. Draft on Other Sectors of
Domestic Economy 109799 110801 118180 299208 361926 362654
(i) Domestic Capital Receipts 130687 106284 145351 246612 367507 362654
(ii) Budgetary Deficit/Draw Down of
Cash Balance -20888 4517 -27171 52596 -5581 0
b. Draft on Foreign Savings 36389 11002 12038 13809 46613 24524
(As per cent of GDP)
I. Total Expenditure 13.6 13.3 13.8 15.5 15.3 13.7
II. Gross Capital Formation out of Budgetary
Resources of Central Government 2.3 2.0 2.9 2.5 2.4 2.5
(i) Gross Capital Formation
by the Central Government 0.9 0.8 0.9 0.9 0.9 0.9
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 1.4 1.2 2.0 1.5 1.4 1.6
III. Gross Savings of Central Government -1.7 -0.8 0.3 -3.2 -3.9 -2.4
IV. Gap (II-III) 4.0 2.8 2.6 5.6 6.2 4.9
Financed by
a. Draft on Other Sectors of Domestic Economy 3.0 2.6 2.4 5.4 5.5 4.6
(i) Domestic Capital Receipts 3.5 2.5 2.9 4.4 5.6 4.6
(ii) Budgetary Deficit/Draw Down of -0.6 0.1 -0.5 0.9 -0.1 0.0
Cash Balance
b. Draft on Foreign Savings 1.0 0.3 0.2 0.2 0.7 0.3
(increase over previous year)
II. Gross Capital Formation out of Budgetary
Resources of Central Government -8.7 3.7 63.7 -4.8 13.1 25.6
Memorandum Items " crore)
("
1 Consumption Expenditure 116305 121609 131396 174345 226987 224027
2 Current Transfers 297267 356560 408676 543347 594989 651168
(As per cent of GDP)
1 Consumption Expenditure 3.1 2.8 2.6 3.1 3.5 2.8
2 Current Transfers 8.1 8.3 8.2 9.7 9.1 8.3
Source: Ministry of Finance, An Economic and Functional classification of the Central Government Budget-various issues.
Notes: (i) Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently
domestic capital receipts include loan repayments to the Central Government.
(ii) Consumption expenditure is the expenditure on wages and salaries and commodities and services for current use.
(iii) Interest payments, subsidies, pension etc. are treated as current transfers.
(iv) Gross capital formation and total expenditure are exclusive of loans to States’/UTs’ against States’/UTs’ share in the small
savings collection.
(v) The figures of total expenditure of the Central Government as per economic and functional classification do not tally with
figures given in the Budget documents. In the economic and functional classification, interest transferred to DCUs, loans
written off etc, are excluded from the current account. In the capital account, expenditure financed out of Railways, Posts
and Telecommunications own funds, etc. is included.
(vi) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

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Table 3.9 : Central Government Finances


Budget April-December Col.4 as Per cent
Estimates per cent of change
2010-11 2009-10 2010-11 2010-11 over
(BE) 2009-10
1 2 3 4 5 6
" crore)
("
1. Revenue Receipts 682,212 389,271 584,268 85.6 50.1
Gross Tax Revenue 746,651 416,094 527,782 70.7 26.8
Tax (net to Centre) 534,094 307,591 391,148 73.2 27.2
Non Tax 148,118 81,680 193,120 130.4 136.4
2. Capital Receipts 426,537 318,269 202,584 47.5 -36.3
of which:
Recovery of Loans 5,129 3,983 8,591 167.5 115.7
Other Receipts 40,000 4,306 22,744 56.9 428.2
Borrowings and Other Liabilities 381,408 309,980 171,249 44.9 -44.8
3. Total Receipts (1+2) 1,108,749 707,540 786,852 71.0 11.2
4. Non-Plan Expenditure (a)+(b) 735,657 497,381 536,898 73.0 7.9
(a) Revenue Account 643,599 460,970 487,692 75.8 5.8
of which:
Interest Payments 248,664 130,005 146,304 58.8 12.5
Major Subsidies 108,667 96,740 94,318 86.8 -2.5
Pensions 42,840 37,465 40,210 93.9 7.3
(b) Capital Account 92,058 36,411 49,206 53.5 35.1
5. Plan Expenditure (i)+(ii) 373,092 210,159 249,954 67.0 18.9
(i) Revenue Account 315,125 179,555 212,885 67.6 18.6
(ii) Capital Account 57,967 30,604 37,069 63.9 21.1
6. Total Expenditure (4)+(5)=(a)+(b) 1,108,749 707,540 786,852 71.0 11.2
(a) Revenue Expenditure 958,724 640,525 700,577 73.1 9.4
(b) Capital Expenditure 150,025 67,015 86,275 57.5 28.7
7. Revenue Deficit 276,512 251,254 116,309 42.1 -53.7
8. Fiscal Deficit 381,408 309,980 171,249 44.9 -44.8
9. Primary Deficit 132,744 179,975 24,945 18.8 -86.1
Source: Controller General of Accounts, Ministry of Finance.

National Rail Vikas Yojana, certain important projects yielding a deficit of!"!6,641.3 crore. In the current
and land acquisition work on dedicated freight fiscal as per BE 2010-11, the gross receipts are
corridors are in progress. Railways has also started budgeted to go up to!"!6,955.5 crore and with gross
work on setting up of some mega workshops to meet and net working expenses estimated at!"!11,328.8
its rolling stock requirements. It is also modernizing crore and!"!10,892.1 crore respectively, the deficit
and upgrading its systems to augment rail services. is projected to be!"!3936.6 crore.

Department of posts 3.37 India Post is the largest Postal network in


the world and provides access to postal services at
3.36 The gross receipts of the Department of Posts affordable rates to all citizens in the country through
in 2009-10 were placed at! "! 6,266.7 crore. The its vast network, which has grown from 23,344 post
gross and net working expenses during the year were offices at time of Independence to 1,54,979 post
"!13,346.9 crore and!"!12,908 crore respectively, offices as on 31 March 2010. Of the total, 1,39,173

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Table 3.10 : Trends in Cumulative Central Government Finance (April-December) for 2010-11
Budget April April- April- April- April- April- April- April- April-
Estimates May June July August Sept. Oct. Nov. Dec.

1. Revenue Receipts
" crore)
(" 682212 12979 44657 199810 238524 290799 398234 447625 476716 584268
Per cent to BE 1.9 6.5 29.3 35.0 42.6 58.4 65.6 69.9 85.6
2. Capital Receipts
"! crore)
("! 426537 54247 102252 42398 94176 156904 139743 169810 213971 202584
3. Total Receipts
"! crore)
("! 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
4. Non Plan Expenditure
"! crore)
("! 735657 48206 100101 154148 222900 311249 368270 424893 479771 536898
Per cent to BE 6.6 13.6 21.0 30.3 42.3 50.1 57.8 65.2 73.0
5. Plan Expenditure
"! crore)
("! 373092 19020 46808 88060 109800 136454 169707 192542 210916 249954
Per cent to BE 5.1 12.5 23.6 29.4 36.6 45.5 51.6 56.5 67.0
6. Total Expenditure
"! crore)
("! 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
7. Revenue Expenditure
"! crore)
("! 958724 63617 125877 210387 288599 391151 473155 542455 616874 700577
Per cent to BE 6.6 13.1 21.9 30.1 40.8 49.4 56.6 64.3 73.1
8. Revenue Deficit
"! crore)
("! 276512 50638 81220 10577 50075 100352 74921 94830 140158 116309
Per cent to BE 18.3 29.4 3.8 18.1 36.3 27.1 34.3 50.7 42.1
9. Fiscal Deficit
"! crore)
("! 381408 53993 100907 40196 90915 151425 133252 162336 186522 171249
Per cent to BE 14.2 26.5 10.5 23.8 39.7 34.9 42.6 48.9 44.9
Source: Controller General of Accounts, Ministry of Finance.

post offices are in rural areas and 15,797 in urban. and catering to the advertising needs of various
India Post has introduced franchisee outlets to cater entities through a single window facility. Doordarshan
to the growing demand for postal services where it as Host Broadcaster for the Commonwealth Games
is not possible to open departmental post offices. (CWG) provided the entire TV coverage of the CWG
As on 31 March 2010, 1082 franchised outlets have in HDTV format, a noteworthy achievement in the
been opened. The Department of Posts has been broadcasting sector. As Right Holder Broadcaster,
given the responsibility of disbursing wages to the Doordarshan provided customized TV coverage of
Mahatma Gandhi National Rural Employment CWG for Indian viewers besides launching an HDTV
Guarantee Scheme (MGNREGS) beneficiaries channel called DDHD to provide high quality services.
through post office savings bank accounts. Nearly Digitalization of the All India Radio network is one of
4.67 crore MGNREGS Accounts have been opened the major thrust areas of the Eleventh Plan. There is
up to October 2010 and the wages amounting to!" an approved scheme of digitalization of transmitters,
7113 crore have already been disbursed during the studios, and connectivity which, inter alia, envisages
current financial year (up to October 2010). A total digitalization of 98 studios and connectivity and 100
of !"!18,876 crore has been disbursed as wages to watts FM digital compatible transmitters at 100
MGNREGS beneficiaries through post offices since locations. Government has allocated a total!"! 2,050
the inception of the scheme. crore including CWG 2010 in BE 2010-11 to cover
the resource gap in Prasar Bharati.
Broadcasting
State-level finances
3.38 Prasar Bharati, a public service broadcaster,
incurred a total expenditure of! "! 2949.4 crore in 3.39 In the post-FRBMA period the performance of
2009-10 (excluding charges on account of the space combined States was impressive with fiscal deficit
segment and spectrum charges and interest and declining to 2.4 per cent of the GDP in 2005-06
depreciation costs). The total gross revenue earned and further to 1.5 per cent in 2007-08. With the
in 2009-10 was!"!1352.7 crore and the net revenue exception of 2009-10 (RE), the level of fiscal deficit
worked out to!"!1176.3 crore. Prasar Bharati has had remained below the 3 per cent of GDP mark. In
taken a number of steps to increase revenue 2010-11 (BE), it has been estimated at 2.5 per cent
generation by adopting aggressive marketing strategy of the GDP (Table 3.11 and Figure 3.11). A more

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noteworthy feature has been that a surplus on exemptions in central excise; widening of service
revenue account has been recorded in the three- tax base through inclusion of eight new services
year period 2007-08 and 2008-09. Revenue receipts and expansion of scope of some of the existing
grew at the rate of 17.6 per cent and 10.7 per cent ones; reduction in excise duty from 16 per cent to
for 2007-08 and 2008-09 respectively. Buoyant 10 per cent on medicines and toilet preparations
revenues of the States (as also Centre) and non-tax containing alcohol (excise duty on medicinal and
receipts combined with a moderate growth in toilet preparations is one of the taxes to be subsumed
revenue have helped in this regard. However, there under the GST); approval of a Mission Mode Project
are significant variations among States in respect for the computerization of State Commercial Tax
of these indicators. Departments.

State-level Reforms 3.42 Though considerable progress has been


made in moving towards a comprehensive GST, the
3.40 Given the exceptional circumstances of 2008- timeline of April 2011 for its introduction is not likely
09 and 2009-10, the fiscal consolidation process of to be met. This is because the convergence of views
the States was disrupted. States would be able to between the Centre and States needed for the
get back to their fiscal correction path by 2011-12, introduction of legislation for a constitutional
allowing for a year of adjustment in 2010-11. The amendment in this regard is yet to be achieved. In
stimulus packages of the Central Government as the meantime, the working groups involved in
well as those announced by individual States coupled developing the IT architecture, business processes,
with the increased transfers recommended by the and draft legislations for the effective implementation
ThFC have implications for the financial position of of GST are continuing their work. An empowered
the States in the medium term. The group under the Chairmanship of Dr Nandan
recommendations of ThFC for the period 2010-15 Nilekani, Chairman UIDAI, is working out the
are presently under implementation. The modalities for creation of a special purpose vehicle
recommendations take into account the current and (SPV) which envisages the setting up of a common
likely macroeconomic and fiscal scenarios so as to portal for the Centre and State Governments through
secure fiscal stability and adequate resource which taxpayers could interact with the two tax
availability for the Centre, the States, and the local administrations. Work is also under way to create
bodies. The higher levels of devolution of taxes and and strengthen the IT infrastructure in State
the inter-se sharing thereof together with higher VAT(value-added tax) departments so that their
levels of non-Plan grants under Article 275 of the transition to the GST becomes easier.
Constitution which include specific grants like grants
for elementary education, outcomes and
environment related grants, maintenance grants, and 4<6@<:?(975(';56589:';<=586>567
state-specific grants are likely to bring the combined 3.43 Given the grant dependance of local bodies
deficit of the States down to the targeted levels faster. and limited availability of data, consolidated General
The borrowing ceiling for each State for the year Government finances are taken to be the
2010-11 has been fixed by the Government of India, aggregation of Union and combined State finances
keeping in view the recommendations of the ThFC after due process of netting of inter-Governmental
based on targets for fiscal deficit. Besides, the ThFC transactions. The macroeconomic impact of the
has also provided a basis for the finances of local Government’s fiscal operations is thus evaluated by
bodies through a basic grant and a performance looking at consolidated General Government
grant based on a percentage of the divisible pool of finances. As with the Centre and States individually,
the preceding year. The estimated total grant collectively also a revenue buoyancy and relatively
recommended for local bodies aggregates to! " limited growth in expenditure helped in the fiscal
87,519 crore over the award period of the ThFC. consolidation phase in the post-FRBM period up to
2007-08. In 2007-08, the gross fiscal deficit of the
3.41 In this year’s Budget, measures were also
consolidated General Government was placed at 4.1
taken to facilitate movement towards a goods and
services tax (GST). These included unification of per cent of the GDP on a cash basis (Table 3.12 and
Figure 3.12); and revenue deficit was close to zero.
rates between central excise (goods) and service
After the fiscal expansion in 2008-09 and 2009-10,
tax (services) at 10 per cent; removal of certain

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Table 3.11 : Receipts and Disbursements of State Governments*
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
" crore)
("
I. Total Receipts(A+B) 595,628 673,605 765,735 886,875 1,049,437 1,149,031
A. Revenue Receipts (1+2) 431,021 530,556 623,748 690,581 802,708 906,495
1. Tax Receipts 306,332 372,841 437,948 481,854 529,740 624,380
of which:
State’s Own Tax Revenue 212,307 252,548 286,546 321,351 364,997 426,014
2. Non-tax Receipts 124,690 157,714 185,799 208,727 272,968 282,114
of which:
Interest Receipts 9,380 11,825 12,637 16,594 16,782 16,331
B. Capital Receipts 164,607 143,049 141,987 196,294 246,728 242,536
of which:
Recovery of Loans & Advances 8,904 7,579 7,770 11,068 7,960 4,208
II. Total Disbursements (a+b+c) 561,682 657,280 752,324 877,747 1,073,800 1,167,404
a) Revenue 438,034 505,699 580,805 678,856 849,571 932,683
b) Capital 109,224 137,793 157,258 183,013 207,073 220,022
c) Loans and Advances 14,424 13,789 14,261 15,879 17,155 14,699
III. Revenue Deficit 7,013 -24,857 -42,943 -11,725 46,863 26,189
IV. Gross Fiscal Deficit 90,084 77,508 75,455 134,245 214,137 198,097
(As per cent of GDP)
I. Total Receipts(A+B) 16.1 15.7 15.4 15.9 16.0 14.6
A. Revenue Receipts (1+2) 11.7 12.4 12.5 12.4 12.3 11.5
1. Tax Receipts 8.3 8.7 8.8 8.6 8.1 7.9
of which:
State’s Own Tax Revenue 5.7 5.9 5.7 5.8 5.6 5.4
2. Non-tax Receipts 3.4 3.7 3.7 3.7 4.2 3.6
of which:
Interest Receipts 0.3 0.3 0.3 0.3 0.3 0.2
B. Capital Receipts 4.5 3.3 2.8 3.5 3.8 3.1
of which:
Recovery of Loans & Advances 0.2 0.2 0.2 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 15.2 15.3 15.1 15.7 16.4 14.8
a) Revenue 11.9 11.8 11.6 12.2 13.0 11.8
b) Capital 3.0 3.2 3.2 3.3 3.2 2.8
c) Loans and Advances 0.4 0.3 0.3 0.3 0.3 0.2
III. Revenue Deficit 0.2 -0.6 -0.9 -0.2 0.7 0.3
IV. Gross Fiscal Deficit 2.4 1.8 1.5 2.4 3.3 2.5
Source: Reserve Bank of India.
*: Data from 2008-09 onwards pertain to 27 State Governments.
RE: Revised Estimates.
Note: (1) Negative (-) sign indicates surplus in deficit indicators.
(2) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
(3) Capital receipts include public accounts on a net basis.
(4) Capital disbursements are exclusive of public accounts.

Figure 3.11 Revenue and fiscal deficit of states


4
Per cent of GDP

3 Gross fiscal
deficit
2
1
Revenue
0 deficit
-1
-2
2009-10 (RE)

2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09

Year

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&& !"#$#%&"'()*+,-! ./0/100

both revenue and fiscal deficits are estimated to for the economy as whole is bright with continued
decline sharply in 2010-11 (BE). Thus the outlook fiscal consolidation.

Figure 3.12 Combined (centre and states) revenue and fiscal deficit
12
Per cent of GDP

10 Gross fiscal
deficit
8
6
Revenue
4 deficit
2
0

2009-10 (RE)

2010-11 (BE)
2004-05

2005-06

2006-07

2007-08

2008-09
Year

Table 3.12 : Receipts and Disbursements of Consolidated General Government


2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
" crore)
("
I. Total Receipts (A+B) 1,014,689 1,125,252 1,329,654 1,604,238 1,885,017 2,052,774
A. Revenue Receipts (1+2) 707,054 877,075 1,061,892 1,112,877 1,250,511 1,446,332
1. Tax Receipts 576,596 724,023 877,496 925,173 994,843 1,158,475
2. Non-tax Receipts 130,458 153,052 184,396 187,704 255,668 287,857
of which:
Interest Receipts 18,735 21,744 22,584 25,462 24,774 25,120
B. Capital Receipts 307,635 248,177 267,762 491,361 634,506 606,442
of which:
a) Disinvestment Proceeds 1,590 2,440 45,750 832 26,319 43,155
b) Recovery of Loans & Advances 11,651 -773 4,682 8,935 9,505 5,520
II. Total Disbursements (a+b+c) 959,855 1,109,174 1,316,246 1,595,110 1,909,380 2,071,147
a) Revenue 806,366 932,441 1,071,518 1,354,691 1,626,434 1,749,031
b) Capital 132,585 157,316 225,803 217,476 257,787 296,787
c) Loans and Advances 20,904 19,417 18,925 22,943 25,159 25,329
III. Revenue Deficit 99,312 55,366 9,626 241,814 375,923 302,699
IV. Gross Fiscal Deficit 239,560 230,432 203,922 472,466 623,045 576,140
(As per cent of GDP)
I. Total Receipts (A+B) 27.5 26.2 26.7 28.7 28.8 26.1
A. Revenue Receipts (1+2) 19.1 20.4 21.3 19.9 19.1 18.4
1. Tax Receipts 15.6 16.9 17.6 16.6 15.2 14.7
2. Non-tax Receipts 3.5 3.6 3.7 3.4 3.9 3.7
of which:
Interest Receipts 0.5 0.5 0.5 0.5 0.4 0.3
B. Capital Receipts 8.3 5.8 5.4 8.8 9.7 7.7
of which:
a) Disinvestment Proceeds 0.0 0.1 0.9 0.0 0.4 0.5
b) Recovery of Loans & Advances 0.3 0.0 0.1 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 26.0 25.8 26.4 28.6 29.1 26.3
a) Revenue 21.8 21.7 21.5 24.3 24.8 22.2
b) Capital 3.6 3.7 4.5 3.9 3.9 3.8
c) Loans and Advances 0.6 0.5 0.4 0.4 0.4 0.3
III. Revenue Deficit 2.7 1.3 0.2 4.3 5.7 3.8
IV. Gross Fiscal Deficit 6.5 5.4 4.1 8.5 9.5 7.3
Source: Reserve Bank of India.
Note: The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

Website: http://indiabudget.nic.in
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7A5'697E85'<!'!?@49:'4<6@<:?(97?<6 given the very low discretionary fiscal stimuli. In the
fiscal consolidation phase in the post-FRBMA period
3.44 The impact of the global financial crisis brought
to the fore the criticality of fiscal policies in combating (2004-05 to 2007-08), there was considerable fiscal
economic shocks. With little monetary headroom in space generated that facilitated the high levels of
advanced economies and given the transmission lags expansion that India had. It is therefore instructive
in emerging market economies, fiscal policies were to analyse the nature of fiscal deficits in India through
the preferred policy instruments across the globe. their decomposition into structural and cyclical
As per international institutional research on the components (Box 3.3).
subject, advanced economies were able to put in
place large doses of fiscal stimuli as they had the
advantage of automatic stabilizers while emerging
18<@1547@F<E7:<<G
markets, including India, had large fiscal expansion 3.45 With significant levels of reduction envisaged

Box 3.3 : Decomposition of Fiscal Deficit into Structural and Cyclical Components
%)*+ I4C*.<>*<0+ D=5A*0+ D171</*+ -3+ D13-/177E+ -<F7=*</*5+ DE+ D40)+ /E/7-/17+ W0*>H4.1.EX+ 1<5+ 30.=/0=.17+ WH*.>1<*<0X
F1/04.38+ *<01-7-<A+ 0)10+ /)1<A*+ -<+ 0)*+ F-3/17+ 5*F-/-0+ /4=75+ 1.-3*+ *-0)*.+ -<+ .*3H4<3*+ 04+ /E/7-/17+ /)1<A*3+ -<+ 4=0H=0+ 4.+ 04
30.=/0=.17+F1/04.3J+%)*+/E/7-/17+/)1<A*3+-<+4=0H=0+)1C*+1+0.1<3-04.E+*FF*/0+4<+0)*+F-3/17+5*F-/-08+@)*.*13+0)*+30.=/0=.17
F1/04.3+)1C*+ 1+ >4.*+ 5=.1D7*+ ->H1/0J+ #+ 30.=/0=.17+ 5*F-/-0+ 4//=.3+ @)*<+ 1+ /4=<0.E+ A*<*.10*3+ 1+ 5*F-/-0+ *C*<+ @)*<+ 0)*
*/4<4>E+4F+0)*+/4=<0.E+-3+4H*.10-<A+10+-03+F=77+*>H74E>*<0+7*C*7J+_<+0)*+40)*.+)1<58+1+/E/7-/17+5*F-/-0+4//=.3+@)*<+1<
*/4<4>E+-3+<40+H*.F4.>-<A+04+-03+H40*<0-178+F4.+*21>H7*+-F+1<+*/4<4>E+-3+30.=AA7-<A+0).4=A)+1+.*/*33-4<J+#+30.=/0=.17
5*F-/-0+ >*1<3+ 0)10+ 1+ 5*F-/-0+ @-77+ D*+ H430*5+ .*A1.57*33+ 4F+ )4@+ @*77+ 1<+ */4<4>E+ -F+ F=</0-4<-<AB\.*/*33-4<+ 4.+ D44>J
O)*<+0)*+*/4<4>E+-3+F=</0-4<-<A+30.4<A7E8+.*C*<=*+A*<*.10-4<+-3+)-A)*.+5=*+04+>4.*+Z4D38+>4.*+3H*<5-<A8+*0/J+D=0
@-0)+30.=/0=.17+5*F-/-0+0)*+A445+1<5+30.4<A+)*170)+4F+0)*+*/4<4>E+-3+-..*7*C1<0BB1+5*F-/-0+@-77+D*+A*<*.10*5+.*A1.57*33J

T0.=/0=.17+5*F-/-0+/4=75+D*+F=.0)*.+5*/4>H43*5+-<04+0).**+H1.03+0)10+-3+W1X+F-3/17+5.1A8+WDX+5-3/.*0-4<1.E+F-3/17+H47-/E
1/0-4<8+1<5+W/X+D13*+E*1.+D171</*8+04+A1-<+30-77+>4.*+-<3-A)0+-<04+0)*+5*0*.>-<1<03+4F+0)*+30.=/0=.17+5*F-/-0J+_F+0)*+0).**
7-30*5+/4>H4<*<038++0)*+F-.30+0@4+1.*+->H4.01<0+F.4>+0)*+H4-<0+4F+=<5*.301<5-<A+F-3/17+301</*J

!"#$%&' (B%C

#>4<A+ 0)*+ /4>H4<*<03+ 4F+ 0)*+ 30.=/0=.17+ 5*F-/-08+ 0)*+ F-3/17+ 5.1A+ -3+ ->H4.01<0+ 1<5+ <4.>177E+ .*F*.3+ 04+ -</.*13*+ -<
1C*.1A*+012+.10*3+-<+1+H.4A.*33-C*+-</4>*+012+3/)*>*+ 13+ 1+ /4<3*G=*</*+ 4F+ -</.*13*+ -<+ <4>-<17+ -</4>*+ 4C*.+ 0->*BB
*-0)*.+ 4<+ 1//4=<0+ 4F+ )-A)*.+ 7*C*73+ 4F+ -<F710-4<+ 4.+ .*17+ I,$+ A.4@0)J+ L0+ )13+ D**<+ 4D3*.C*5+ 0)10+ F-3/17+ 5.1A+ -3+ 0)*
54>-<1<0+/4<0.-D=04.E+F1/04.+F4.+30.=/0=.17+5*F-/-0+4F+!*<0.17+I4C*.<>*<0+D171</*3J

("#$B)/"+.%BD'!"#$%&'1+&"$D'9$/"+.

_<+0)*+40)*.+)1<58+0)*+3*/4<5+/4>H4<*<08+-J*J+5-3/.*0-4<1.E+F-3/17+H47-/E+1/0-4<38+1F0*.+.*>1-<-<A+.*710-C*7E+@*1?+=H
04+9::QB:`8+)15+3)4@<+-</.*13*3+-<+9::`B:M+1<5+9::MB;:+@)-/)+/1<+D*+100.-D=0*5+04+.*C*<=*+7433*3+5=*+04+374@54@<
-<+0)*+*/4<4>E+1<5+5=0E+/=0+04A*0)*.+@-0)+)-A)*.+*2H*<5-0=.*+04+H.4C-5*+F-3/17+30->=7=3+04+3=301-<+*/4<4>-/+A.4@0)J

%.15-0-4<17+ 5*F-/-0+ -<5-/104.3+ <4.>177E+ 54+ <40+ 5-3/.->-<10*+ D*0@**<+ 0)*3*+ 0@4+ *FF*/038+ 1<5+ )*</*+ F1-7+ 04+ /4..*/07E
*C17=10*+1<5+H4.0.1E+0)*+->H1/0+4F+F-3/17+4H*.10-4<3+4<+0)*+*/4<4>E+13+1+@)47*J+%)*+5*/4>H43-0-4<+4F+0)*+D=5A*0
D171</*+-<04+-03+30.=/0=.17+1<5+/E/7-/17+/4>H4<*<03+-3+4D01-<*5+<4.>177E+0).4=A)+0)*+1HH7-/10-4<+4F+0@4+->H4.01<0
>*0)45474A-*38+<1>*7E+0)*+LaR+1<5+_.A1<-U10-4<+F4.+&/4<4>-/+!44H*.10-4<+1<5+,*C*74H>*<0+W_&!,X+>*0)45474A-*3J
%)*+*1.7-*.+.*3*1./)+4<+0)*+3=DZ*/0+0)10+)15+D**<+54<*+>4307E+-<+0)*+H.*BR'6a#+H*.-45+)15+-<5-/10*5+0)*+H.*3*</*
4F+0)*+71.A*+30.=/0=.17+.-A-5-0-*3+-<+0)*+/4>H43-0-4<+4F+F-3/17+5*F-/-03+-<+L<5-1+1<5+1+C*.E+3>177+/E/7-/17+/4>H4<*<0J+%)*
H.*7->-<1.E+F-<5-<A3+4F+0)*+30=5E+4<+0)-3+3=DZ*/0+/4>>-33-4<*5+-<+0)*+H430BR'6a#+H*.-45+=3-<A+_&!,+>*0)45474AE
044+)1C*+-<5-/10*5+/4<0-<=*5+54>-<1</*+4F+0)*+30.=/0=.17+/4>H4<*<0+-<+0)*+D=5A*01.E+D171</*+4F+0)*+I4C*.<>*<0b
0)-3+4D3*.C10-4<+)4753+A445+-<+0)*+5*/4>H43-0-4<+4F+H.->1.E+5*F-/-03+4F+0)*+!*<0.*8+/4>D-<*5+T010*38+1<5+/4<347-510*5
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(#)*+'+*"#$%&'''',
Estimates of Structural and Cyclical Components of the GFD
(As per cent of GDP)
Year Structural Cyclical Gross Fiscal Year Structural Cyclical Gross Fiscal
Deficit(SD) Deficit(CD) Deficit(GFD) Deficit(SD) Deficit(CD) Deficit(GFD)

1990-91 8.0 -0.4 7.6 2000-01 5.4 0.1 5.5


1991-92 5.7 -0.3 5.4 2001-02 6.1 -0.1 6.0
1992-93 5.4 -0.2 5.2 2002-03 6.1 -0.4 5.7
1993-94 6.9 -0.1 6.8 2003-04 4.7 -0.4 4.3
1994-95 5.4 0.1 5.5 2004-05 4.2 -0.3 3.9
1995-96 4.6 0.3 4.9 2005-06 4.2 -0.3 4.0
1996-97 4.3 0.4 4.7 2006-07 3.4 -0.1 3.3
1997-98 5.3 0.3 5.7 2007-08 2.5 0.1 2.5
1998-99 5.9 0.4 6.3 2008-09 6.0 0.0 6.0
1999-2000 4.9 0.4 5.2 2009-10 6.1 0.2 6.3

Decomposition of gross fiscal deficit into structural and cyclical components


(As per cent of GDP)
9
8 Gross fiscal
deficit
7 (GFD)
Per cent of GDP

6
Structural
5 deficit
4 (SD)
3
Cyclical
2 deficit
1 (CD)
0
-1
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
Year

in the combined State Government deficit in 2010- the terminal year of the award of the ThFC, the
11 (BE) and the progress in the current fiscal in proportion of total expenditure to the GDP is to go
respect of Central Government finances, the down by 2.5 percentage points to reach 13.5 per
resumption of the process of fiscal consolidation at cent of the GDP in 2014-15 and at the same time
both Centre and State levels as also of the the proportion of tax to GDP is set to rise by 1.4
consolidated General Government has really begun percentage points to reach 12.2 per cent of the GDP
after two years of purposive expansion. With the in 2014-15. This estimated level of growth in tax
roadmap laid out by the Medium Term Fiscal Policy revenues seems likely given the recovery in the
Statement coupled with that indicated in the economy to the pre-crisis levels and the fact that it
Government Debt Report 2010, the prospects of was at the same levels before the crisis. Thus it is
extending this process to the medium term and critical to anchor expenditure reforms to realize the
beyond are bright. While the roadmap in terms of projected deficit levels. A beginning has already been
deficit indicators is important in itself, these being made with the reforms announced in subsidies, some
in the nature of derived indicators, it is useful to of which have already been implemented. Going
look at the process by which the reduction is sought forward, deepening the reform process would hold
to be achieved. The Government Debt Report 2010 the key to sustaining the fiscal consolidation
indicates that between 2010-11 (BE) and 2014-15 process.

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!12345 4.3 Some of the important items included in the


new series basket are flowers, lemons, and crude
Main features of the new WPI series petroleum in primary articles and ice cream,
4.2 A new WPI series with 2004-05 base was canned meat, palm oil, readymade/instant food
released on 14 September 2010. A representative powder, mineral water, computer stationery, leather
commodity basket comprising 676 items has been products, scooter / motorcycle tyres, polymers,
petrochemical intermediates, granite, marble, gold
selected and weighting diagram derived for the
and silver, construction machinery, refrigerators,
new series. The total number of price quotations
computers, dish antenna, transformers, microwave
has also increased from 1918 in the old series to
ovens, communication equipment (telephone
5482 in the new series, indicating better
instruments), TV sets, VCDs, washing machines,
representation of the prices in the wholesale
and auto parts in manufactured products.
markets. Sector-wise price quotations have
increased from the old to new series from 455 to General wholesale price situation
579 in primary group and from 1391 to 4831 in the 4.4 During the first half of 2009-10, the headline
manufactured products group. A comparison of the year-on-year inflation remained significantly low at
weighting diagram and number of commodities 0.36 per cent on account of sharp increases in prices
between the old and new series for the major groups recorded in 2008-09. The second half of 2009-10
is drawn in Table 4.1.
!" !"#$#%&"' ()*+,-! ./0/100

Table 4.1 : Major Changes in the Weights and Commodities in the Revised WPI Series
Weights No. of Commodities
Items New Series Old Series New Series Old Series New Items
(base: (base: (base: (base: Added/
2004-05) 1993-94) 2004-05) 1993-94) Revised
All Commodities 100.00 100.00 676 435 417
Primary Articles 20.12 22.03 102 98 11
Food Articles 14.34 15.40 55 54 1
Non-Food & Minerals 5.78 6.63 47 44 10
Fuel and Power 14.91 14.23 19 19 0
Manufactured Products 64.97 63.75 555 318 406
Food Products 9.97 11.54 57 41 25
Non-Food Products 55.00 52.21 498 277 381
Source : The Office of the Economic Adviser, Ministry of Commerce and Industry.

showed increasing food prices on account of whose inflation hovered in the range of 14.7 per
unfavourable agricultural supply conditions coupled cent to 21.5 per cent and fuel which recorded
with the waning of base effect, leading to sharp inflation in the range of 10.3 per cent to 14.4 per
increase in inflation. Thereafter, the headline WPI cent. However, the inflation in manufactured
inflation reached 10.23 per cent in March 2010. products remained in the lower range of 4.5 to 6.4
per cent during the current year (Figure 4.1).
4.5 Financial year 2010-11 started with 11 per
cent headline inflation in April 2010.During 2010- 4.7 The Government is committed to ensuring
11, the monsoon situation has been better than last availability of cooking fuels to the common man at
year. As per the Second Advance Estimates, affordable prices. In view of the importance of
production of foodgrains in 2010-11 is likely to be household fuels, namely kerosene and domestic
232.07 million tonnes as compared to 218.11 million liquefied petroleum gas (LPG), the Government has
tonnes last year. However, demand pressures decided that the subsidies on these products will
became visible in early 2010. be continued. The PDS Kerosene and Domestic
LPG Subsidy Scheme 2002 as well as the Freight
4.6 At disaggregate level, the price behaviour of Subsidy (for Far-flung Areas) Scheme 2002 have
three major commodities groups has been in marked been extended till 31 March 2014. However, in order
contrast to the previous year when inflation to reduce the burden of under-recoveries, it has been
remained low on account of global decline in decided to increase the retail price of public
commodity prices. From March to July 2010, distribution system (PDS) Kerosene by ! 3 per
headline inflation remained in double digits. The litre and of domestic LPG by"!35 per cylinder, at
major contributors to this were primary articles Delhi, with corresponding increases in other parts

Figure 4.1 Inflationary trend in major subgroups of WPI


25
20 Primary
Inflation (per cent)

articles
15
10 Fuel &
5 power

0 Manufac-
-5 tured
products
-10
-15 All commo-
dities
Feb
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009-10 2010-11
Year

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #!$
of the country. Prices of petrol and diesel, both at Table 4.2 : Annual Average Inflation Rate-
the refinery gate and retail level, will be market based on WPI
determined. However, it is proposed that increase (per cent)
in prices of diesel will be staggered over time to Year Primary Fuel & Manufac- All
minimize the overall impact on the poor and Articles Power tured Commo-
vulnerable. It has also been decided that in case of Products dities
a high rise and volatility in international oil prices, Weights(%) 20.12 14.91 64.97 100
Government will suitably intervene in the pricing of 2000-01 2.8 28.5 3.3 7.2
petrol and diesel. 2001-02 3.6 8.9 1.8 3.6
2002-03 3.3 5.5 2.6 3.4
Average trends in WPI inflation 2003-04 4.3 6.4 5.7 5.5
2004-05 3.7 10.1 6.3 6.5
4.8 The ten-year average of headline WPI inflation
1st 5 Years’
was around 5.3 per cent from 2000-01 to 2009-10;
Average 3.5 11.9 3.9 5.2
in this decade 2000-01, 2003-04, 2004-05, 2006-
2005-06 4.3 13.5 2.3 4.3
07, and 2008-09 had higher inflation relative to the 2006-07 9.6 6.5 5.6 6.5
decadal average. In the current financial year, the 2007-08 8.3 0.0 4.9 4.8
average inflation (April–December 2010) of 9.4 per 2008-09 11.0 11.6 6.2 8.0
cent was also much higher than the decadal rate. 2009-10 12.7 -2.1 1.8 3.6
The ten-year average inflation in fuel was around 2nd 5 Years’
8.9 per cent. The major portion of that was Average 9.2 5.9 4.1 5.5
contributed by the high inflation of 2000-01. The years Decadal
2003-04, 2004-05, 2006-07, and 2008-09 also Average 6.4 8.9 4.0 5.3
witnessed high inflation in manufactured products 2009-10
mainly on account of high prices of raw materials (Apr.-Dec.) 9.8 -5.8 0.7 1.7
such as basic metal alloys and metal products, non- 2010-11
metallic mineral products, and machinery and (Apr.-Dec.)P 18.0 12.3 5.3 9.4
machine tools. The year 2008-09 was different from Source: The Office of the Economic Adviser, Ministry
the previous three years as inflation in all the three of Commerce and Industry.
sectors remained high on account of high Note: P—Provisional
international fuel and commodity prices. The year
2009-10 was an abnormal one due to global in the revised series at 21.9 per cent in February
slowdown and unfavourable monsoon. 2010, thereafter declining to 9.4 per cent in
Notwithstanding, the average inflation was 3.6 per November 2010 and once again rising to 13.6 per
cent backed by negative inflation in fuel. In the cent in December 2010 (Table 4.3). However,
current financial year (2010-11), overall average manufactured food products exhibited a decline in
inflation from April-December 2010 at 9.4 per cent, inflation from 19.3 per cent in December 2009 to
is the highest recorded in the last ten years 0.4 per cent in December 2010. Among food items,
(Table 4.2). sharp rise in prices was observed in onions, fruits,
eggs, meat and fish, and milk. The prices of
Food Inflation in WPI foodgrains, however, remained low on the back of
4.9 The food index consists of two sub good monsoons with a year-on-year inflation of
components, namely primary food articles and -2.6 per cent in December 2010.
manufactured food products. The overall weight of
the composite food index in the WPI is 24.31 per Main drivers of food inflation
cent, comprising primary food articles with a weight 4.10 In 2010-11, inflation in primary food articles
of 14.34 per cent and manufactured food products was mainly driven by rice, vegetables, potatoes,
with a weight of 9.97 per cent. A major concern in onions, fruits, milk, eggs, meat and fish, condiments
the domestic economy has been a sharp rise in and spices, and tea. However, the WPI of
food price inflation during the year 2010-11. The WPI manufactured food products with 2004-05 base is
food inflation has moderated to 8.59 per cent in in the comfortable zone. It was 142.7 in December
December 2010 after reaching its peak of 20.22 2010 as against 142.2 in December 2009. This
per cent in February 2010. Of its two components, has marginally increased due to vanaspati oil,
primary food price inflation touched a historic high groundnut oil, sunflower oil, rice bran extraction,

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!% !"#$#%&"' ()*+,-! ./0/100

Box 4.1: An Unexpected Surge in Food Inflation


D00=.+<5,8:+0<.*8/.7--<.A<-E2-9:-=,B.*+6*.+<.4-9-<:.@-->/F=4+3-<.7B./A46+<6.24+9-/.05.3-6-:87,-/?.54A+:/?.=8+4B?.0+,/--=/?
8<=./2+9-/C.;:.@8/.A<-E2-9:-=.7-98A/-.600=.48+<58,,.+<.GHIH.@8/.-E2-9:-=.:0.74+<6.=0@<.24+9-/C.;:.=+=J.504.9-4-8,/.K@*-8:?
4+9-L.8<=.2A,/-/?.@*+9*.:06-:*-4.2403+=-.10/:.05.:*-.-<-46B.8<=.240:-+<.+<:8>-.05.*0A/-*0,=/.+<.;<=+8?.-/2-9+8,,B.05.:*-
2004C.MA:.:*-./A46+<6.24+9-/.05.0:*-4.500=/.98A/-=.:*-.03-48,,.500=.+<5,8:+0<.:0.4+/-C.N+3-<.:*-.94+:+98,.+1204:8<9-.05.500=
+<.;<=+8O/./-::+<6F@+:*.*+6*.48:-/.05.18,<A:4+:+0<.8<=.*0A/-*0,=.500=./2-<=+<6.8990A<:+<6.504.8703-.(H.2-4.9-<:.05.:0:8,
*0A/-*0,=.-E2-<=+:A4-.K3-4/A/./01-.PQR.2-4.9-<:.+<.4+9*-4.90A<:4+-/LF@-.=+/-<:8<6,-.+<.:*+/.M0E.:*-.4-,8:+3-.+1204:8<9-
05./01-.9012-:+<6.8<=.202A,84./-:/.05.-E2,8<8:+0</.04.589:04/C

6?8'1#&#)/'2)-%")(-#,)(<'!"#$%&@A%0()*B5:==<.'5C,$D&',"'E%)%"(<#F%*'3,00,*#-.'5:"/%>'%*-4-.@8/.8./A==-<
/A46-.+<.6,078,.500=.24+9-/.+<.GHHSQHR?.@*+9*./A7/-TA-<:,B.948/*-=.@+:*.:*-.6,078,.5+<8<9+8,.94+/+/C.$4+9-/?.*0@-3-4?.868+<
/:84:-=./A46+<6./+<9-.,8:-.GHHU?.8<=.*83-.<0@./A428//-=.:*-.GHHR.2-8>F,-=.7B./A684?.0+,/.8<=.58:/?.8<=.9-4-8,/.K7A:.<0:
=8+4B.8<=.1-8:LC.)*8:.+/.=4+3+<6.:*+/.6,078,.+<94-8/-V.#.WA,B.GHIH./:A=B.KM855-/.8<=."8<+0:+/L.,00>+<6.8:.:*-.24-3+0A/
GHHSQHR.24+9-.4+/-.2403+=-/.-3+=-<9-.:*8:.+:.@8/.=A-.:0.8.6-<-48,+X-=.90110=+:B.24+9-.4+/-?.-/2-9+8,,B.+<.0+,?.+:/-,5.98A/-=
7B.8.@04,=.8@8/*.@+:*.,+TA+=+:B.8<=.8.58,,+<6.=0,,84C.;:.8,/0.2403+=-/.-3+=-<9-.:*8:.+:.@8/.<0:?.8/.202A,84.-E2,8<8:+0</
@0A,=.*83-.A/.7-,+-3-?.7-98A/-.05.KIL.4+/+<6.=-18<=.+<.-1-46+<6.184>-:/.K/A9*.8/.!*+<8.8<=.;<=+8LY.KGL.8./*+5:.:0.7+05A-,/Y
8<=.KZL.8.:4-<=.4+/-.K7-98A/-.24+9-.384+87+,+:B.=01+<8:-/.8<B.:4-<=LC.[-3-4:*-,-//?.:*-.24-3+0A/.\Z.2-4.9-<:.58,,.+<.4-8,.500=
24+9-/.7-:@--<.IUP\.8<=.GHHI.@8/.240787,B.03-4=0<-.8<=./01-.8=]A/:1-<:.@8/.+<-3+:87,-C.%*-.GHHUQIH.24+9-.4-/A46-<9-
+/.3-4B./+1+,84C.&3-4B:*+<6.5401.8.2004./A11-4.@*-8:.*843-/:.+<.'A//+8.:0.:*-.4-9-<:.#A/:48,+8<.5,00=/?.=4B./2-,,.+<
#46-<:+<8?.;<=0<-/+8<.5,00=+<6?.2004.^_.18+X-.B+-,=/?.8<=.4+/+<6.=-18<=.+<.!*+<8.8<=.;<=+8.+/.7-+<6.7,81-=F7A:
/A==-<.24+9-.4+/-/.05.:*+/.186<+:A=-.8940//./A9*.8.384+-:B.05.500=.240=A9:/.84-.=+55+9A,:.:0.8::4+7A:-.:0.8<B./2-9+5+9
/A22,B.04.=-18<=.2407,-1.-E9-2:.+<.:*-.90<:-E:.05.8.6-<-48,+X-=.90110=+:B.24+9-./A46-.K@*0/-./0,A:+0</.,+-.-,/-@*-4-LC

FAO Annual Real Food Price Index


300
300
FAO annual
Food Price Index

300 real food


(2002-04=100)

price index
295
290
285
280
275
270
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

Food Commodity Price Indices FAO Food Price Index


Index (2002-04=100)

350
Index (2002-04=100)

200
300
250
180
200 160
150 140
100
120
Feb
Dec
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

100
2009-10 2010-11
Feb
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

Meat Dairy Cereals Oils Sugar


price index price index price index price index price index 2006 2007 2008 2009 2010

'678'2&'2)*#('9:;;%-%*'9.'"#&#)/'#)-%")(-#,)(<'="#$%&>')*+,-./01-./2+,,03-4/.05.6,078,.24+9-/.:0.;<=+8<.184>-:/.84-
+<-3+:87,-?.@04,=.:48=-.+<.864+9A,:A4-.+/.05:-<.3-4B.:*+<?.@+:*.,846-.:48=-.4-/:4+9:+0<.8<=.:84+55.@-=6-/.7-:@--<.=01-/:+9
8<=.+<:-4<8:+0<8,.24+9-/C.)*+,-.=01-/:+9.500=.24+9-/.98<<0:.7-.5A,,B.+</A,8:-=.5401.6,078,.0<-/?.,098,.184>-:/.=0.=+55-4?

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #!&
6N,J'OM?'3,)-#):%*8

Wholesale price of wheat, India and Brazil Wholesale price of rice: India, Thailand and China
900
550
800
475 700

US$/ton
400
US$/ton

600
325 500
250 400
300
175
200
100

Jan 2005
Jul 2005
Jan 2006
Jul 2006
Jan 2007
Jul 2007
Jan 2008
Jul 2008
Jan 2009
Jul 2009
Jan 2010
Jul 2010
Nov 2010
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
India Brazil India Thailand China

:*-.30,8:+,+:B.05.6,078,.24+9-/.+/.584.64-8:-4.:*8<.:*8:.05.=01-/:+9.24+9-/?.8<=.;<=+8O/.24+9-/.*83-.7--<.1A9*.104-./:87,-?
830+=+<6.:*-.*+6*/.8<=.,0@/C.;<=--=?.4-9-<:.9-4-8,/.24+9-/.*83-.7--<.=-9,+<+<6.+<.;<=+8.4-,8:+3-.:0.6,078,.0<-/C

6G8' 5,H' IC(-' $(:&%*' -C%' :)%J=%$-%*' &:"/%' #)' ),)B$%"%(<' ="#$%&>' K:)*(0%)-(<&' L%"&:&' :)$,0=%-#-#L%' 0("D%-&M
`<-.202A,84.-E2,8<8:+0<.504./A==-<,B.4+/+<6.24+9-/.05.3-6-:87,-/?./2+9-/?.=8+4B?.8<=./+1+,84.240=A9:/.+/.4+/+<6.+<901-/
+<.;<=+8.=4+3+<6.24+9-/.*+6*-4?.8/.90</A1-4/.84-.24-/A1-=.:0.7-./*+5:+<6.5401.,0@Q38,A-.240=A9:/.:0.*+6*-4.38,A-.0<-/
K90</+/:-<:.@+:*.&<6-,O/.a8@LC.)*+,-.:*+/.18B.9-4:8+<,B.7-.:4A-.8/.8.6-<-48,.=-18<=Q/+=-.-E2,8<8:+0<?.+:.1-4+:/.=--2-4
-E81+<8:+0<.7-98A/-.05.:@0.0:*-4.589:04/J.KIL.:*-./A==-<./2+>-.+<.24+9-/Y.8<=.KGL.:*-.6-<-48,,B.*+6*./A22,B.-,8/:+9+:+-/
+<./A9*.240=A9:/.:*8:./*0A,=.24-3-<:.:*+/C.;</:-8=?.90</+/:-<:.@+:*.@*8:.+/.-3+=-<:.6,078,,B?.@*-<./01-.A<-E2-9:-=
/A22,B. 04. =-18<=. /*09>/. *822-<?. +:. +/. 05:-<. -8/+-4. 504. 90110=+:B. 24+9-/. :0. /2+>-. :-120484+,BFA<4-,8:-=. :0
5A<=81-<:8,/.8<=.=4+3-<./01-:+1-/.7B.,098,.984:-,+X8:+0<.04.0:*-4.90<=+:+0</./A9*.8/./A==-<.5,0@/.05./2-9A,8:+3-
982+:8,.+<:0.:*+<.90110=+:B.5A:A4-/.184>-:/C.%*-.98/-.05.0<+0<.24+9-/.+/.8.600=.-E812,-.05.:*-.5041-4?.8<=./2+9-/.05
:*-.,8::-4C.`<+0<.24+9-/./A46-=.5401.'/.I\.2-4.>6.:0.03-4.'/.RH.2-4.>6.03-4.8.18::-4.05.@-->/?.8::4+7A:-=.202A,84,B
:0.:*-.-55-9:/.05.-E:-<=-=.48+<58,,.8<=.=8186-=.9402.+<.[8/*+>C."0@-3-4?.0<+0</.84-.+<.589:.640@<.8,,.03-4.;<=+8?.8<=
:*-.8,,Q;<=+8.184>-:.+/.6-<-48,,B.@-,,Q7-*83-=.8<=.9012-:+:+3-F+<.:*8:.,098,.24+9-/.90<3-46-.:0.<8:+0<8,.0<-/C."0@-3-4?
+<.:*-.24-/-<9-.05.A<8<:+9+28:-=./A22,B.04.=-18<=./*09>/?.,098,.0<+0<.184>-:/.=0.54861-<:.8<=.7-901-.1A9*.104-
b+,,Q7-*83-=O.8<=.+:.+/.20//+7,-.:0.07/-43-./A==-<.:-120484B./2+>-/.8<=.=+3-46-<9-.:*8:.+/.104-.90</+/:-<:.@+:*.,098,
984:-,+X8:+0<.90<=+:+0</?./A2204:-=.7B.98/98=+<6.-<:4B.7844+-4/.8,0<6.:*-./A22,B.9*8+<.K+<9,A=+<6.:*-.4-/:4+9:+0</.05.:*-
#64+9A,:A48,.$40=A9-.c84>-:+<6.#9:.d#$c!e.8<=.:*-.4-/:4+9:+0</.8<=.5--/.8:.18<=+/LC.DA<=81-<:8,/?.*0@-3-4?.98:9*
A2?. 8/. -3+=-<:. +<. 0<+0<. 24+9-/. 948/*+<6. +<. 4-9-<:. @-->/. :0. 870A:. '/C. G\f>6. 8:. :*-. 4-:8+,. ,-3-,. 8<=. -3-<. ,0@-4. 8:
@*0,-/8,-. 184>-:C. _+1+,84. 90<=+:+0</. 822,B. +<. 90110=+:B. -E9*8<6-/. @*-4-. /A==-<. /2-9A,8:+3-. 89:+3+:B. 98<. =4+3-
5A:A4-/. 24+9-/. :-120484+,B. *+6*-4FA<:+,. /A22,+-/. 8<=. 5A<=81-<:8,/. 74+<6. /20:. 8<=. *-<9-. 5A:A4-/. 24+9-/. 789>. :0
4-8,+:BC.&3-<.3-6-:87,-.24+9-/.K/A9*.8/.:018:0-/L?.@*+9*.*8=.4+/-<.=4818:+98,,B?.84-.-8/+<6.789>?.8/./A22,B.98:9*-/.A2C

“Well behaved” and convergent regional series of


onion retail prices, Andhra Pradesh, 2006-2008
Temporarily less "well-behaved" weekly retail
onion price movements, Northern India, Delhi
18 versus Amritsar, Dec 2009 - Dec 2010
16
70
14
12 60
Price: !/Kg Retail
!/Kg.

10 50
8
6
40
4 30
2
20
Average

2006-07

Jan 2006

Apr 2006

Jul 2006

Oct 2006

Jan 2007

Apr 2007

Jul 2007

Oct 2007

Jan 2008

Apr 2008

10
0
Viziana-garam Kakinada & Jaggaiahpet &
1
5
9
13
17
21
25
29
33
37
41
45
48

& Chittivalasa Rajahmundry Miryalguda

Tirupathi & Nizamabad & Kothagudem & Weeks


Renigunta Bodhan Palwaneha Amritsar Delhi

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!' !"#$#%&"' ()*+,-! ./0/100

6N,J'OM?'3,)-#):%*8

Daily trading value futures surge for spices


200
Daily
180
trading
160 value
140 futures for
spices
120
! crores

grouped
100 together:
80 chillies,
jeera,
60
dhaniya,
40 castor,
20 turmeric
and pepper.
0
11 Oct 10

22 Oct 10

02 Nov 10

13 Nov 10

24 Nov 10

05 Dec 10

16 Dec 10

27 Dec 10

07 Jan 11

18 Jan 11
!"#"$"%&"'J.W0*<.M855-/.8<=.%8//0/."8<+0:+/.KGHIHL?.b$,89+<6.:*-.GHHSfHR.!0110=+:B.$4+9-.M001.+<:0.$-4/2-9:+3-O?.$0,+9B
'-/-849*.)04>+<6.$82-4.\ZPI?.%*-.)04,=.M8<>C.D00=.8<=.#64+9A,:A4-.`468<+X8:+0<.KD#`L?.N,078,.500=.24+9-.10<+:04?
I(.W8<A84B.GHII.8<=.N,078,.;<50418:+0<.8<=.&84,B.)84<+<6._B/:-1.KN;&)_L.!0A<:4B.g8:8C

Table 4.3 : Monthly Break-up of WPI Food Inflation


(per cent)
All (A) (B) (A+B)
Commodities Food Articles Food Products Food Combined
Wt% 100 14.34 9.97 24.31
Period 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11

Apr. 0.89 11.00 8.69 20.49 8.86 9.09 8.76 16.09

May 1.21 10.60 8.91 21.37 10.12 7.09 9.37 15.85

Jun. -0.71 10.28 11.28 20.97 9.05 6.13 10.42 15.30

Jul. -0.62 10.02 12.74 18.48 8.46 7.34 11.10 14.31

Aug. 0.31 8.82 14.36 14.96 10.73 4.58 12.97 11.06

Sep. 1.09 8.93 13.92 16.29 12.08 3.62 13.21 11.49

Oct. 1.48 9.12 12.47 14.64 12.97 3.75 12.66 10.56

Nov. 4.50 7.48P 16.73 9.41P 17.94 0.57P 17.17 6.11P

Dec. 6.92 8.43P 20.76 13.55P 19.30 0.35P 20.21 8.59P

Jan. 8.53 20.19 19.16 19.80

Feb. 9.68 21.85 17.68 20.22

Mar. 10.23 20.65 15.11 18.50


Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P—Provisional.

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #!(
Table 4.4 : Main Drivers of Food Inflation
WPI y-o-y y-o-y *Financial Financial
Inflation WC year year
inflation WC
Items Weight% Dec. Mar. Dec. Dec. Dec. Apr. Dec.
2009 2010 2010 2010 2010 Dec. 2010
2010
All Commodities 100.00 132.9 135.8 144.1 8.43 100.00 6.11 100.00
Primary Articles 20.12 162.2 165.9 188.9 16.46 47.96 13.86 55.75
Primary Food Articles 14.34 164.6 163.6 186.9 13.55 28.55 14.24 40.25
Rice 1.79 164.5 163.3 166.4 1.16 0.30 1.90 0.67
Wheat 1.12 180.8 172.8 171.6 -5.09 -0.92 -0.69 -0.16
Pulses 0.72 212.1 198.9 189.0 -10.89 -1.48 -4.98 -0.85
Vegetables 1.74 180.0 132.0 224.9 24.94 6.96 70.38 19.43
Potatoes 0.20 240.1 105.4 176.3 -26.57 -1.15 67.27 1.72
Onions 0.18 268.2 171.3 391.1 45.82 1.95 128.31 4.71
Fruits 2.11 136.0 145.6 163.8 20.44 5.23 12.50 4.62
Milk 3.24 151.0 167.2 178.5 18.21 7.95 6.76 4.41
Eggs, Meat, & Fish 2.41 164.3 172.1 195.9 19.23 6.81 13.83 6.92
Condiments & Spices 0.57 202.7 204.9 270.6 33.50 3.45 32.06 4.50
Tea 0.11 165.8 129.1 156.7 -5.49 -0.09 21.38 0.37
Manufactured Food 9.97 142.2 141.7 142.7 0.35 0.45 0.71 1.20
Sugar 1.74 185.7 183.6 167.3 -9.91 -2.85 -8.88 -3.41
Vanaspati 0.71 107.3 108.5 119.6 11.46 0.79 10.23 0.96
Oil, Groundnut 0.30 133.0 131.5 147.8 11.13 0.40 12.40 0.60
Oil, Sunflower 0.17 115.8 112.5 128.4 10.88 0.20 14.13 0.33
Rice Bran Extraction 0.09 210.3 210.4 231.2 9.94 0.17 9.89 0.23
Tea & Coffee Process 0.71 148.6 140.7 160.4 7.94 0.75 14.00 1.69
Malt Liquor 0.15 150.9 150.4 167.1 10.74 0.22 11.10 0.31
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: WC – weighted contribution.

tea and coffee process, and malt liquor. The per cent in September 2010 from 9.18 per cent in
movement of index, inflation, and their contribution April 2010.
to overall inflation among food groups, may be seen
in Table 4.4. 4.12 Main items of concern in non-food inflation
are raw cotton, raw jute, raw silk, copra, castor seed,
4.11 Core inflation is a measure of inflation that sunflower, raw rubber, copper ore, zinc, iron ore,
excludes items that face volatile price movement, cotton textiles, petrochemical intermediate, and
notably food and energy. It is, therefore, a preferred industrial machinery and machine tools. Movement
tool for framing long-term policy. Core inflation, which of index of non-food components in the WPI is
was 0.55 per cent in November 2009, reached its presented in Figure 4.2.
peak in April 2010 at 8.07 per cent (Table 4.5).
Thereafter it has moderated in response to monetary 4.13 In the fuel and power group the major
measures taken by the Reserve Bank of India (RBI). contribution to inflation is from mineral oils
However, inflation in non-food manufactured products accounting for over 90 per cent (Table 4.6).
(weight 55.00 per cent) had not increased much
and remained in the range of 5.1 to 5.9 per cent in Annual inflation as per different price indices
the current financial year. Notwithstanding, year-on- 4.14 The inflation in terms of the consumer price
year inflation in the composite non-food index index for industrial workers (CPI-IW) remained in
(weight 75.7 per cent) has increased to 8.36 per double digits from July 2009 to July 2010. The
cent in December 2010 after moderating to 7.96 inflation in terms of the CPI-AL (Agricultural

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Table 4.5 : Movement in WPI Non-food Inflation during 2010-11


(per cent)
Non-food Non-food Minerals Fuel & Power Core inflation Non-food
Composite Articles Manu-
Index factured
Weight 75.69 4.26 1.52 14.91 60.78 55.00
Apr.2010 9.18 18.08 34.56 13.61 8.07 5.92
May-10 8.71 14.76 25.34 14.42 7.27 5.77
Jun.2010 8.47 15.83 22.08 13.92 7.09 5.55
Jul. 2010 8.43 15.30 31.60 13.26 7.16 5.41
Aug.2010 7.97 15.81 23.77 12.55 6.77 5.21
Sep.2010 7.96 20.75 26.77 11.06 7.13 5.09
Oct.2010 8.57 25.74 29.38 11.02 7.91 5.25
Nov.2010 8.02 23.22 21.54 10.32 7.40 5.41
Dec.2010 8.36 22.31 27.69 11.19 7.60 5.34
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: Core Index= Total WPI— (Total food+ Fuel & power).

Figure 4.2 Movement of non-food WPI during 2010


Index (2004-05=100)

180
170 Primary
non-food
160 articles
150 (Wt. 4.26%)
140 Fuel &
power (Wt.
130 14.91%)
120
Manufac-
Feb 10
Dec 09

Jan 10

Mar 10

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10
tured non-
food (Wt.
55.00%)
Year
Total non-
food index
(Wt.
75.69%)

Table 4.6: Index and Contribution of Fuel and Power (disaggregated to overall inflation)
Items Weight WPI:2004-05=100 Dec.2010/Dec.2009 Dec.2010/Mar.2010
% Dec. Mar. Dec. Y-o-Y Y-o-Y FY FY
2009 2010 2010 Inflation WC Inflation WC

Fuel & Power 14.91 135.0 140.1 150.1 11.19 20.10 7.14 17.96
Coal 2.09 162.7 163.0 163.0 0.18 0.06 0.00 0.00
Mineral Oils 9.36 138.6 146.6 160.5 15.80 18.31 9.48 15.68
Electricity 3.45 108.6 108.6 114.0 4.97 1.66 4.97 2.25
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: Y-on-Y—year-on-year.
WC- Weighted Contribution

Labourers) and CPI-RL (Rural Labourers) had come down to single digit for the first time in 15
reached double digits in May 2009 and continued months (Table 4.7).
so until July 2010. Further, inflation in terms of the
CPI-AL and CPI-RL was higher than inflation based 4.15 At 9.47 per cent, inflation in the CPI-IW has
on the CPI-IW during all these months. In August substantially declined in December 2010 from its
2010, the inflation in terms of all price indices has peak of 16.22 per cent in January 2010. The CPI

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Table 4.7 : Year-on-Year Inflation Based on Different Consumer Price Indices
Month WPI CPI(IW) CPI(AL) CPI(RL)
(2004-05=100) (2001=100) (1986-87=100) (1986-87=100)
2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11
APR. 0.89 11.00 8.70 13.33 9.09 14.96 9.09 14.96
MAY 1.21 10.60 8.63 13.91 10.21 13.68 10.21 13.68
JUN. -0.71 10.28 9.29 13.73 11.52 13.02 11.26 13.02
JUL. -0.62 10.02 11.89 11.25 12.90 11.02 12.67 11.24
AUG. 0.31 8.82 11.72 9.88 12.89 9.65 12.67 9.66
SEP. 1.09 8.93 11.64 9.82 13.19 9.13 12.97 9.34
OCT. 1.48 9.12 11.49 9.70 13.73 8.43 13.51 8.45
NOV. 4.50 7.48P 13.51 8.33 15.65 7.14 15.65 6.95
DEC. 6.92 8.43P 14.97 9.47 17.21 7.99 16.99 8.01
JAN. 8.53 16.22 17.57 17.35
FEB. 9.68 14.86 16.45 16.45
MAR. 10.23 14.86 15.77 15.52
Average (Apr-Mar) 3.57 12.37 13.91 13.76
Source: Labour Bureau, Shimla and the Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P : Provisional.

maintained higher levels last year relative to the of relatively high inflation is concentrated in food,
WPI, mainly because of the larger weight assigned pan, supari, tobacco and intoxicants, and housing.
to food items. In consumer price indices, food items Two major contributors to high CPI-IW inflation were
contribute a weight of 46.20 per cent in the CPI-IW food and housing. The housing sector is the third
and 69.15 per cent in the CPI-AL as against 24.31 major contributor after food and the miscellaneous
per cent in the WPI. The food inflation has group, having a 15.3 per cent weight in the CPI-IW
decelerated after reaching its peak in January 2010. commodities basket. However, the average inflation
As a result CPI inflation rates have gone down (April-December 2010) was lower than in the
substantially. corresponding period last year (Table 4.8).
4.17 The non-food inflation in CPI-IW has
Disaggregated Consumer Price Inflation
increased during April-December 2010 to 11.64 per
4.16 Analysis at this level has assumed cent as against 8.78 per cent in the corresponding
importance in view of the fact that the current phase period last year. During April-December 2010, food

Table 4.8 : Quarterly Inflation Trend in CPI-IW by Major Commodity Groups (Base: 2001=100)
2009-10 2010-11
Apr.- Jul. Oct. Apr.- Apr. Jul.- Oct.- Apr. -
Weights Jun.- Sep. Dec. Dec. Jun.- Sep. Dec. Dec.

General index 100.00 8.87 11.75 13.06 11.67 13.66 10.31 9.16 10.96
Food Group 46.20 11.47 13.97 16.56 14.70 13.99 10.34 7.01 10.29
Pan, Supari, Tobacco & 2.27 7.44 8.80 7.86 8.34 12.93 12.13 11.26 12.10
Intoxicants
Fuel & Light 6.43 4.59 3.02 3.91 4.08 6.00 11.26 10.84 9.41
Housing 15.27 5.97 22.06 22.06 16.82 33.1 21.08 21.08 24.68
Clothing, Bedding & Footwear 6.57 4.14 4.38 4.22 4.34 4.51 5.51 7.05 5.70
Miscellaneous Group 23.26 7.11 5.95 4.30 6.11 5.03 4.72 5.35 5.03
Total Non-food 53.80 6.45 9.64 9.62 8.78 13.33 10.27 11.42 11.64
Source: Labour Bureau, Shimla.

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Figure 4.3 Onions movement in Dec 2010: state wise CPI and Y-o-Y inflation
700 180
Inflation (%)

Y-o-Y inflation (per cent)


600 Dec 10/
150 Dec 09
CPI-IW (2001=100)

500 120
CPI
Dec 09
400 90

CPI
300 60 Dec 10

200 30

100 0

West Bengal
Assam

Bihar

Chandigarh

Chhattisgarh

Delhi

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Kerala

Madhya Pradesh

Maharashtra

Punjab

Rajasthan

Uttar Pradesh

All India
inflation has declined to 10.29 per cent as unprecedented rise in inflation in the northern
compared to 14.70 per cent during the region, particularly Punjab (Figure 4.3).
corresponding period last year (Table 4.8). Inflation
in the CPI-IW has increased in December 2010 to Introduction of CPI-Urban and CPI-Rural
9.47 per cent as against 8.33 per cent in November 4.19 The Central Statistics Office (CSO) has taken
2010. Food inflation in the CPI-IW has also up a new initiative of compilation of CPI (urban), CPI
increased to 7.98 per cent in December 2010 from (rural), and CPI (rural+urban) for all States/UTs and
5.35 per cent in November 2010. all India by considering all sections of the urban
4.18 Inflation in fruits and vegetables and onions and rural population. These indices would reflect
based on the CPI-IW in December 2010 was 15.3 the true picture of price behaviour of various goods
per cent and 77.6 per cent respectively as against and services consumed by the urban and rural
22.77 per cent and 45.82 per cent respectively based population. Box 4.2 is a short note on the CPI
on the WPI. State-wise CPI-IW and year-on-year (urban), CPI (rural), and national CPI giving salient
inflation in December 2010 for onions shows features of this new series of indices.

Box 4.2 : New Series of CPI numbers


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Figure 4.4 Annual trend in price indices and PFCED
170
Indices (2004-05=100)

160 PFCED
150
CPI-IW
140
130 CPI-RL
120
110
100

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


PFCED 100.0 103.4 109.9 115.4 122.8 132.9 145.9
CPI-IW 100.0 104.4 111.4 118.3 129.1 145.0 158.3
CPI-RL 100.0 103.9 111.7 119.7 131.9 150.0 163.0

Sources: Labour Bureau and CSO


Note: The PFCED for 2010-11 is based on advance estimates, CPI-IW and CPI-RL for 2010-11 are for the period
April-December 2010.

Private Final Consumption Expenditure deflator’s ability to account for such substitutions
Deflator (PFCED) makes it the preferred measure of inflation. The
CPI-RL represents rural areas, where price indices
4.20 The gross domestic product (GDP) or gross
are reigning higher than the CPI-IW in response
domestic income (GDI) is the market value of all
to improvements in purchasing power and
final goods and services produced within a country
consumption pattern on account of various
in a given period. It is often positively correlated with
the standard of living. Movement of the consumption employment generation schemes of the Government
pattern of a country can be analysed through its like the Mahatma Gandhi National Rural Employment
deflator generated by the Private Final Consumption Guarantee Scheme (MNREGS).
Expenditure (PFCE) at current prices over constant
prices base 2004-05. Annual price indices data for Global and domestic inflation
the CPI-RL, CPI-IW and PFCED from 2004-05 4.22 From April 2009 global food prices showed
onwards indicate an upward swing in the standard much lower volatility than the WPI-based domestic
of living (Figure 4.4). food inflation. However, a higher volatility was seen
4.21 Price changes may cause consumers to in international food inflation from September 2010
switch from buying one good to another. Whereas as compared to domestic food inflation in India.
the fixed basket CPI does not account for altered Costlier imports could push up domestic inflation
spending habits caused by price changes, the PFCE (Figure 4.5 and Table 4.9).

Figure 4.5 Global and domestic food inflation


40
Y-o-Y inflation (per cent)

30 Global food
inflation
20
10 Domestic
0 food
inflation
-10
-20
-30
-40
Feb

Feb
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

2008-09 2009-10 2010-11


Year

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Table 4.9 : Domestic and Global Y-o-Y Inflation Trend (per cent)
(base: 2004-05=100 )
Commodity Domestic Global Domestic Global Domestic Global
Dec-09 Dec-09 Mar-10 Mar-10 Dec-10 Dec-10

Agriculture 18.5 28.5 20.6 17.8 15.3 27.8


Beverages 6.5 27.8 8.2 23.0 5.3 32.4
Energy 4.6 55.4 13.8 60.1 11.2 19.7
Fats & Oils -0.7 34.6 3.3 18.2 5.0 35.4
Fertilizers 7.0 -41.7 6.2 -27.1 5.5 39.6
Food 20.2 23.8 18.5 8.5 8.6 25.3
Grains 19.5 5.0 13.2 -10.3 -2.6 25.3
Metal & Minerals -7.1 42.8 3.4 41.4 12.4 38.6
Non-fuel 7.4 27.8 9.6 23.0 7.9 32.4
Raw Materials 11.1 36.5 26.1 44.0 24.1 45.8
Timber -1.3 -9.2 8.8 -5.6 50.3 13.4
Other Raw materials 18.3 88.4 44.2 91.1 33.6 63.5
Other Food 16.3 30.7 7.0 16.9 -0.5 10.2

Sources : Pink sheet of the World Bank and the Office of the Economic Adviser, Ministry of Commerce and Industry.

4.23 A comparison of the global food inflation and The pilot study covered 5 cities, namely Bengaluru,
WPI-based domestic food inflation gives the actual Bhopal, Delhi, Kolkata, and Mumbai. Thereafter,
picture of food inflation (Table 4.9). compilation of RESIDEX has been expanded to ten
more cities, namely Ahmedabad, Faridabad,
4.24 During the current year, high inflation in food
Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow,
articles is not unique to India and is widespread.
Pune, and Surat. RESIDEX is now being updated
The domestic food price situation could get
on a quarterly basis with 2007 as base year. The
exacerbated by the increase in global food prices
latest data cover 15 cities and have been updated
because of dependency on import of some food
up to June 2010 (April – June).
items like edible oils. Current growth and inflation
trends warrant persistence with an anti-inflationary 4.27 The movement in prices of residential
monetary stance. properties has shown a mixed trend in the 15 cities
covered under the NHB RESIDEX in the first half of
Housing Price Index (NHB- RESIDEX) 2010. Residential housing prices in 10 cities have
4.25 As one of the most populous and fastest- shown an increasing trend compared to the base
growing countries in the world, India has promising year. They are Surat, Mumbai, Lucknow,
conditions for a vibrant housing market with Ahmedabad, Chennai, Pune, Kolkata, Patna,
considerable growth potential. The housing sector Faridabad and Bhopal. However, the 5 cities that
contributes more than 9 per cent of national have shown correction in prices in first half of 2010
employment. Housing finance in India, however, are Jaipur, Bengaluru, Kochi, Delhi and Hyderabad.
remains underdeveloped. The challenge in the Indian Jaipur has shown the maximum price correction in
housing market is primarily in the low and moderate residential property prices (Figure 4.6).
income segments. Though there is no lack of
demand for housing, there is shortage of credit flow. Measures to contain inflation
4.26 RESIDEX was first launched in 2007 by the 4.28 The Government monitors the price situation
National Housing Bank (NHB) to provide an index of regularly as price stability remains high on its
residential prices in India across cities and over agenda. Measures taken to contain prices of
time. Initially a pilot study was conducted with 2001 essential commodities include selective ban on
as base year during the period 2001- 05 to capture exports and futures trading in foodgrains, zero
the trend of price movements in residential property. import duty on select food items, permitting import

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Box 4.3 : Measures to Contain Inflation, Particularly Food Inflation
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Figure 4.6 Movement in city-wise average RESIDEX


190
170 2007
Index (2007=100)

150
2008
130
110 2009
90
2010 H-1
70
50
Patna

Kolkata

Kochi

Faridabad
Surat

Pune

Mumbai

Lucknow

Jaipur

Hyderabad

Delhi

Chennai

Bhopal

Bengaluru

Ahmedabad
of pulses and sugar by public-sector undertakings, scheduled commercial banks (SCBs) to its pre-
distribution of imported pulses and edible oils crisis level.
through the PDS, and release of higher quota of
4.30 As there were clear signs that the recovery
non-levy sugar. In addition, State Governments are
was consolidating, it was felt that the main policy
empowered to act against hoarders of food items
instruments were at levels more consistent with a
by holding in abeyance the removal of restrictions
fast recovering economy than a crisis economy
on licensing, stock limits, and movement of food
articles under the Essential Commodities Act 1955. and it was imperative therefore to carry forward
Some of the important anti-inflationary measures the process of exit from an accommodative policy
taken are given in Box 4.3. stance. Taking this consideration into account,
during 2010-11 the RBI raised the policy rates six
times whereby the repo rate under the LAF has
+QR4SP1T'A4U4VQ!+4RS5'AW12RE cumulatively been increased by 175 basis points
7X?XB?? (bps) to stand at 6.5 per cent and the reverse repo
rate by 225 bps to 5.5 per cent. The RBI has
4.29 In response to the global financial crisis moreover retained the cash reserve ratio (CRR) at
beginning mid-September 2008, the RBI adopted 6 per cent of the net demand and time liabilities
an accommodative monetary policy stance that (NDTL) of banks. Thus in 2010-11, the persistently
helped instil confidence among market participants high inflation above the comfort level of the RBI ,
and ensure that the economy recovered as quickly together with growth buoyancy, necessitated that
as possible. The Indian economy exhibited the monetary policy focus remain on containing
acceleration in the momentum of recovery during inflation and inflationary expectations.
the course of 2009-10. Despite a deficient monsoon,
4.31 The RBI indicated in its First Quarter Review
the expansionary monetary and fiscal stance
of Monetary Policy (27 July 2010) that it will now
adopted in response to the global crisis contributed
undertake mid-quarter reviews roughly at the
to the recovery. After remaining subdued during
interval of one and half months after each quarterly
the first half of the year, headline inflation spiked
review. By instituting these, it was the Bank’s
in the second half, initially driven by high food
intention to take the surprise element out of off-
prices but turning more generalized over successive
cycle actions. Accordingly, the Reserve Bank
months. In view of rising food inflation and the risk
announced the mid quarter monetary policy review
of it impinging on inflationary expectations alongside
on 16 September 2010 and 16 December 2010.
the consolidating recovery, the RBI stated a clear
shift in stance from ‘managing the crisis’ to 4.32 In 2010-11, the RBI continued its policy of
‘managing the recovery’ and announced the first maintaining adequate liquidity in the system so that
phase of exit from the expansionary monetary policy all legitimate credit requirements for productive
in its Second Quarter Review of October 2009 by purposes were met, consistent with the objective of
terminating some sector-specific facilities and price and financial stability. The management of
restoring the statutory liquidity ratio (SLR) of liquidity was achieved through appropriate use of

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #*&
open market operations (OMOs), the Market 4.35 The current monetary policy stance, as
Stabilization Scheme (MSS), LAF, and a slew of indicated in the Bank’s Second Quarter Review
special facilities. While the overall liquidity in the (November 2010) was as follows:
system has remained in deficit consistent with the
a. Contain inflation and anchor inflationary
policy stance, the extent of tightness has been
expectations while being prepared to respond
beyond the comfort level of the RBI of (+)/(-) 1 per to any further build-up of inflationary
cent of NDTL, mainly due to the persistence of pressures.
large Government cash balances. In addition, the
liquidity deficit has been accentuated by structural b. Maintain an interest rate regime consistent
factors such as significantly above-trend currency with price, output, and financial stability.
expansion and relatively sluggish growth in bank c. Actively manage liquidity to ensure that it
deposits even as the credit growth accelerated in remains broadly in balance, with neither a
2010-11. While the liquidity deficit improved surplus diluting monetary transmission nor
transmission of monetary policy signals with several a deficit choking off fund flows.
banks raising deposit and lending interest rates,
excessive deficits induce unpredictability in both In the same document the RBI observed that ‘based
availability and cost of funds, making it difficult for purely on current growth and inflation trends, the
the banking system to sustain credit delivery. Reserve Bank believes that the likelihood of further
rate actions in the immediate future is relatively low’.
4.33 In view of the persistent liquidity pressures, This indication of pause will not deter it from taking
the RBI in November 2010 implemented some further policy actions if required and, accordingly, it
measures such as additional liquidity support to also indicated that ‘however, in an uncertain world,
SCBs under the LAF up to 2.0 per cent of their we need to be prepared to respond appropriately to
NDTL, continuation of the second LAF (SLAF), and shocks that may emanate from either the global or
OMO purchase of Government securities. domestic environment’. In continuation of that
Subsequently in the mid quarter review, 16 announced policy, and renewed inflationary
December 2010, the RBI reduced the SLR of SCBs pressures, especially in food prices, the RBI raised
from 25 per cent of their NDTL to 24 per cent with policy rates again in January 2010 by 25 bps in
effect from 18 December 2010. Furthermore, it their Third Quarter Review.
decided to conduct OMO auctions for purchase of
government securities for an aggregate amount of Trends in Monetary Aggregates
! 48,000 crore in the next one month. It was also
4.36 During the year 2010-11, the growth rates of
clearly communicated that as the economy
reserve money (M0) and narrow money (M1)1 have
expands, it needs primary liquidity, which will have been higher as compared to the preceding year
to be provided in a manner consistent with the while broad money (M3) growth has been lower
monetary policy stance. Such provision of liquidity (Table 4.10). The moderation in growth of narrow
should not be construed as a change in the monetary and broad money is largely on account of the
policy stance since inflation continues to remain a deceleration in growth of deposits, both demand and
major concern. time (up to 3 December 2010).
4.34 To sum up, the underlying growth momentum
of the Indian economy remains strong. Even as Reseve Money (M0)
inflation has moderated, it remains significantly 4.37 During 2010-11, on a financial-year basis,
above the comfort level of the RBI. Moreover, risks M0 expanded by 8.4 per cent (up to 10 December
to inflation remain on the upside, both from domestic 2010), compared to an increase of 1.6 per cent
demand and higher global commodity prices. There during the corresponding period of the preceding
is, therefore, a need for continued vigilance on the year (Table 4.11).
inflation front against the build-up of demand-side
4.38 The net foreign assets (NFA) of the RBI
pressures. A major challenge for the RBI in recent
increased by 6.1 per cent during this period, as
times has been liquidity management. It is the RBI’s
against an increase of 1.5 per cent during the
endeavour to alleviate the liquidity pressure in a
corresponding period of the previous year. On a year-
manner consistent with the monetary policy stance
on-year basis, as on 11 December 2010, the NFA
of containing inflation and anchoring inflationary
of the RBI marginally increased by 0.6 per cent
expectations.
compared to a 6.8 per cent increase a year earlier
1
For the period up to 19 November 2010. (Figure 4.7).

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Table 4.10 : Movement of select monetary parameters


(per cent)
Items Yearly Variation Growth rates as on December 3, 2010
2008-09 2009-10 Financial-year basis Year-on-year basis
2009-10 2010-11 2009-10 2010-11
M0 6.4 17 1.7 6.3 15.3 22.2
M1 9 18.6 5.1 3.1 18.3 16.5
M3 19.3 16.8 9.6 8.2 18.6 15.3
Source : RBI

Table 4.11 : Sources of change in reserve money


(per cent)
Growth rate
Financial-year basis Year -on-Year
Dec. 11 Dec. 10, Dec. 11 Dec. 10,
2009 2010 2009 2010
over over over over
2009-10 March 31, March 31, Dec. 12, Dec. 11
2009 2010 2008 2009

Reserve Money 17 1.6 8.4 12.8 24.8

A. Components

a) Currency in Circulation 15.7 10.8 14 17.2 19

b) Bankers’ Deposits with RBI 21 -19.6 -4.1 1.2 44.2

c) Other Deposits with RBI -31.1 -34.4 0.3 -28 5.5

B. Select Sources of Reserve Money

1. Net Foreign Exchange Assets of RBI -3.8 1.5 6.1 6.8 0.6

2. Government’s Currency Liabilities to the Public 12.1 7.7 4.4 10.6 8.6

3. Net Non-monetary Liabilities of RBI -22.3 -1.5 17.1 19.5 -7.6

Source: RBI.

Figure 4.7 Reserve money and RBI net foreign exchange assets-annual growth rate
30
25 RM
20
NFA
15
Per cent

10
5
0
-5
-10
Feb
Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009-10 2010-11
Year

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #*(
4.39 Net RBI credit to the Central Government cent during the corresponding period of the
increased by" ! 70,856 crore during the financial previous year. On a year-on-year basis, as on 3
year so far (up to 10 December 2010). This was December 2010, the growth of currency with the
mainly on account of increase in repo operations public was higher at 18.7 per cent as compared to
under the LAF and open market purchases of the 17.2 per cent a year earlier. For the same period,
Bank, partly offset by increase in the cash balances growth in demand deposits was 13.7 per cent as
of the Central Government. On a year-on-year basis, compared to 19.9 per cent a year earlier.
increase in the net RBI credit to the Central
Government, as on 10 December 2010, was Broad money (M3)
! 2,10,714 crore as against an increase of"! 98,273 4.42 Broad money (M3) supply increased by 16.8
crore a year earlier. per cent during 2009-10 which was lower than the
17.0 per cent indicative growth envisaged in the
Narrow Money (M1) Annual Policy Statement of the Reserve Bank for
4.40 Narrow money (M1) increased by 18.6 per 2009-10.
cent in 2009-10 as compared to an expansion of
4.43 The main components and sources of broad
9.0 per cent during 2008-09. During 2010-11, M1
money are indicated in Table 4.12.
growth has generally been higher than in 2009-10,
though there was significant deceleration during 4.44 Time deposits with banks during 2010-11
the latest fortnight for which data are available (i.e., grew at a lower rate of 10.1 per cent (up to 3
3 December 2010). On a financial-year basis, M1 December 2010) as compared to 11.2 per cent
increased by 3.1 per cent during the current year during the corresponding period of the previous
(up to 3 December 2010) compared to increase of year. On a year-on-year basis also, as on 3
5.1 per cent during the corresponding period of December 2010, the growth in time deposits
the previous year. On a year-on-year basis, as on moderated to 14.9 per cent from 18.7 per cent a
3 December 2010, M1 growth was 16.5 per cent as year earlier (Table 4.12).
compared to 18.3 per cent a year earlier (Figure
4.45 During the current financial year 2010-11
4.8). During the current financial year (up to 3
(up to 3 December 2010) the growth in M3 was 8.2
December 2010), currency with the public
per cent as compared to 9.6 per cent during the
expanded by 12.9 per cent (! 99,324 crore),
corresponding period of the previous year. On a
compared to an increase of 9.8 per cent (! 64,962
year-on-year basis, M3 grew by 15.3 per cent on 3
crore) during the corresponding period of the
December 2010, as against growth of 18.6 per cent
previous year.
on the corresponding date of the previous year
4.41 The other important component of M 1 , (Table 4.12 and Figure 4.9). This is lower than the
namely demand deposits with banks decreased by indicative 17.0 per cent target set in the Second
7.3 per cent during the period up to 3 December Quarter Review of the Annual Policy Statement for
2010 as against a marginal increase of 0.1 per 2010-11.

Figure 4.8 Narrow money (M1) - annual growth rate


24
22 2008-09
20
18 2009-10
16
Per cent

14 2010-11
12
10
8
6
4
11 Apr
25 Apr

01 Aug
15 Aug
29 Aug

13 Feb
27 Feb
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul

12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan

13 Mar
27 Mar

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Table 4.12 : Sources of Change in Money Stock (M3)


Growth Rate
31 March 31 March 31 March 5 December 4 December
2009 2009 2010 2008 2009
to to to to to
31 March 4 December 3 December 4 December 3 December
2010 2009 2010 2009 2010
(per cent)
I. M1 (Narrow Money) 18.6 5.1 3.1 18.3 16.5
II. M3 (Broad Money) (1+2+3+4) 16.8 9.6 8.2 18.6 15.3
1. Currency with the Public 15.4 9.8 12.9 17.2 18.7
2. Demand Deposits with Banks 22.8 0.1 -7.3 19.9 13.7
3. Time Deposits with Banks 16.1 11.2 10.1 18.7 14.9
4 Other’ Deposits with RBI -31.1 -33.7 9.1 -23.1 13.4
III. Sources of Change in Money Stock (M3)
1. Net Bank Credit to Government 30.5 19.4 8.7 38.2 18.8
of which:
Other Banks’ credit to
Government 19.7 19.5 6.9 26.7 7.1
2. Bank Credit to Commercial Sector 15.9 4.8 10.3 10.5 21.9
of which:
Other Banks’ credit to
Commercial Sector 16.3 5.1 10.3 10.4 22.0
3. Net Foreign Exchange Assets of
the Banking Sector -5.2 -0.3 5.3 9.0 0.1
4. Government’s Currency
Liabilities to the Public 12.1 7.7 4.4 10.6 8.6
5. Banking Sector’s Net Non-
monetary Liabilities Other than
Time Deposits 16.0 15.1 9.9 23.4 10.8
Memo Items:
1. Money Multiplier (M3\M0) 4.85
2. Velocity of Money 1.20
3. Net Domestic Assets 25.4 13.5 9.1 22.2 20.6
4. Net Domestic Credit 20.2 9.2 9.8 18.2 20.9
Source : RBI.

Figure 4.9 Broad money (M3) - annual growth rate


24
2008-09
22
2009-10
20
Per cent

2010-11
18

16

14
11 Apr
25 Apr

01 Aug
15 Aug
29 Aug

13 Feb
27 Feb
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul

12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan

12 Mar
27 Mar

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #*!
Figure 4.10 Bank credit to commercial sector - annual growth rate
30
2008-09
25
2009-10
20
Per cent

2010-11
15

10

5
13 Apr
27 Apr

03 Aug
17 Aug
31 Aug

01 Feb
15 Feb
29 Feb
11 May
25 May
08 Jun
22 Jun
06 Jul
20 Jul

14 Sep
28 Sep
12 Oct
26 Oct
09 Nov
23 Nov
07 Dec
21 Dec
04 Jan
18 Jan

14 Mar
28 Mar
4.46 Among the sources of M3, however, bank close to the indicative projection of 17 per cent,
credit to the commercial sector has been non-food credit growth at 24.4 per cent was much
accelerating since November 2009 (Figure 4.10). above the indicative projection of 20 per cent.
Credit expansion in the recent period has been
Money Multiplier rather sharp, far outpacing the expansion in
4.47 During 2009-10, the expansion in M0 was deposits. Rapid credit growth without
higher than that in M3. Accordingly, the ratio of M3 commensurate increase in deposits is not
to M0 (money multiplier) showed a decrease. At the sustainable, with banks having to rely on borrowing
end of March 2010, this ratio was 4.8, marginally from the Central bank. As a result of injection of
lower than the end-March 2009 figure of 4.11. During primary liquidity of over" ! 67,000 crore through
the current financial year 2010-11, the money OMO auctions since early November 2010, the
multiplier has generally shown a decreasing trend structural liquidity deficit in the system has declined
on account of reserve money registering a higher significantly.
growth than broad money supply. As on 3 December
2010, the money multiplier was 4.9 compared to 4.49 Monetary deepening, as measured by the
5.2 on the corresponding date of the previous year ratio of average M3 to the GDP, increased from
(Figure 4.11). 43.8 per cent in 1990-91 to 83.1per cent in 2009-
10. This could be attributed to the spread of banking
Movement in other monetary indicators services in the country and development of the
4.48 While the year-on-year money supply (M3) financial sector. The monetization of the economy
growth at 16.5 per cent in December 2010 was as measured by the ratio of average M1 to the GDP

Figure 4.11 Movements in money multiplier


6.0
2008-09
5.6
2009-10
5.2
Per cent

2010-11
4.8

4.4

4.0
11 Apr
25 Apr

01 Aug
15 Aug
29 Aug

30 Feb
13 Feb
27 Feb
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul

12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan

12 Mar
26 Mar
31 Mar

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Table 4.13 : Select monetary aggregates (ratios to GDP)


As per cent of GDP at Market Prices (1999-2000 base)
Currency Demand deposits Time deposits Aggregate M1 M3
with public with banks with banks deposits

1990-91 8.7 6.4 28.5 34.9 15.3 43.8


1991-92 8.8 6.9 28.8 35.7 15.9 44.7
1992-93 8.6 6.9 29.8 36.6 16 45.7
1993-94 8.8 6.6 30.3 36.9 15.7 46.1
1994-95 9.1 7.2 30.4 37.6 16.7 47.1
1995-96 9.4 6.7 29.8 36.5 16.6 46.4
1996-97 9.2 6.5 30.5 37 16.1 46.6
1997-98 9.3 6.7 33 39.7 16.3 49.2
1998-99 9.1 6.7 35.5 42.2 16 51.5
1999-00 9.5 6.8 37.7 44.5 16.4 54.1
2000-01 9.6 7.2 41.3 48.5 17 58.2
2001-02 10 7.4 44.9 52.2 17.5 62.3
2002-03 10.5 7.5 49 56.5 18.2 67.1
2003-04 10.7 7.8 48.9 56.7 18.7 67.6
2004-05* 10.4 8 47 55 18.5 65.5
2005-06* 10.3 8.8 46.8 55.6 19.3 66.1
2006-07* 10.5 9.4 48.8 58.2 20 68.9
2007-08* 10.5 9.5 52.7 62.2 20.1 72.8
2008-09* 11 9.3 57.5 66.8 20.4 77.9
2009-10* 11.4 9.7 61.9 71.5 21.2 83.1
Source : RBI.
Note:* Based on GDP data with 2004-05 as base.

Figure 4.12 Select monetary aggregates as per cent of GDP


90
Ratios to GDP (per cent)

80 Aggregate
deposits
70
60
M1
50
40 M3
30
20
10
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Year

has also shown an upward trend, albeit at a slower 15.3 per cent and it increased to 21.2 per cent in
rate, during this period. In 1990-91, this ratio was 2009-10 (Table 4.13 and Figure 4.12).

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V2YW2A2ST'+PRPE4+4RS further build-up of inflationary pressure, the RBI
increased the repo and reverse repo rates as well
4.50 The Reserve Bank continued its active policy as CRR by 25 bps each in April 2010 in the Annual
of liquidity management through the LAF, CRR, Monetary Policy for 2010-11.The surplus liquidity
and OMOs. During 2010-11 so far, the centre’s in the domestic market gradually declined
surplus balance with the RBI has been a key driver thereafter. A significant development was that the
of autonomous liquidity. Currency in circulation LAF window of the RBI, after remaining in surplus
has been another key determinant of autonomous mode for nearly 18 months, switched into deficit
liquidity. The LAF window of the Reserve Bank, mode towards the end of May 2010 mainly on
which remained in surplus mode for nearly 18 account of 3G (3rd generation spectrum) and BWA
months, switched into deficit mode towards end- (broadband wireless access) auctions and the
May 2010 and largely maintained the trend consequent migration of liquidity to the Central
subsequently. Government’s cash balance account with the RBI.
4.51 The liquidity conditions changed significantly In anticipation of temporary tightening of liquidity
during the first quarter of 2010-11. The gradual conditions, the RBI introduced measures allowing
moderation in volume of surplus liquidity in the SCBs to avail of additional liquidity support under
system since February 2010 reflected the the LAF to the extent of up to 0.5 per cent of their
calibrated normalization of the monetary policy by NDTL and also access to the SLAF on a daily basis
the RBI. Accordingly, the LAF remained in the for the period 28 May - 2 July 2010. The average
absorption mode, though the absorption volume daily liquidity injection under the LAF during June
declined gradually. To anchor inflation and prevent 2010 was around"! 47,000 crore in contrast to the

Table 4.14 : Liquidity management


(! crore)
Outstanding as on last Friday LAF MSS Centre’s surplus* Total
of the month
2009
January 54,605 1,08,764 -9166 1,54,203
February 59,820 1,01,991 -9603 1,52,208
March** 1485 88,077 16,219 1,05,781
April 1,08,430 70,216 -40412 1,38,234
May 1,10,685 39,890 -6114 1,44,461
June 1,31,505 22,890 12,837 1,67,232
July 1,39,690 21,063 26,440 1,87,193
August 1,53,795 18,773 45,127 2,17,695
September 1,06,115 18,773 80,775 2,05,663
October 84,450 18,773 69,391 1,72,614
November 94,070 18,773 58,460 1,71,303
December 19,785 18,773 1,03,438 1,41,996
2010
January 88,290 7737 54,111 1,50,138
February 47,430 7737 33,834 89,001
March* 990 2737 18,182 21,909
April 35,720 2737 -28,868 9589
May 6215 317 -7531 -999
June -74,795 317 76,431 1953
July 1775 0 16,688 18,463
August 11,815 0 20,054 31,869
September -30,250 0 65,477 35,227
October -1,17,660 0 86,459 -31,201
November -1,03,090 0 93,425 -9665
Note : * Excludes minimum cash balances with the RBI in case of surplus.
** Data pertain to 31March.
-ve sign under LAF indicates injection of liquidity through the LAF.
-ve sign under Centre’s surplus indicates WMA /OD (ways and means advances/overdraft).

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+" !"#$#%&"' ()*+,-! ./0/100

Figure 4.13 LAF reverse - repo and repo volume


200

150 FLAF

100
! thousand crores

SLAF
50

-50

-100

-150
01 Feb

01 Apr

01 Aug

01 Feb

01 Apr

01 Aug
01 Jan

01 Mar

01 May
01 Jun
01 Jul

01 Sep
01 Oct
01 Nov
01 Dec
01 Jan

01 Mar

01 May
01 Jun
01 Jul

01 Sep
01 Oct
01 Nov
01 Dec
01 Jan
2008-09 2009-10 2010-11
Year
Note: 1) Reverse repo is positive and repo is negative. 2) The second LAF (SLAF) is usually being conducted on Reporting Fridays with effect from
May 8, 2009. As a part of liquidity easing measures, SLAF on a daily basis is temporarily being conducted till January 28, 2011.

average daily absorption of around"! 33,000 crore (announced on 27 July). The liquidity conditions
in May 2010 ( Table 4.14 and Figure 4.13). improved in August 2010 (mainly on account of large
pre-scheduled public debt redemptions on 28 July
4.52 During the second quarter, July-September,
2010), and the average daily net injection of liquidity
of 2010-11, the liquidity conditions generally declined to around"! 1000 crore during the month.
remained in deficit mode. On 2 July 2010, the RBI After a brief period of surplus liquidity (from end-
hiked the repo and reverse repo rates by 25 bps August to early September 2010), the liquidity
each to 5.50 per cent and 4.0 per cent respectively. conditions again switched to injection mode as
With the persistence of deficit liquidity conditions, liquidity migrated to Government account with the
the Bank extended the liquidity-easing measures RBI on account of quarterly advance tax outflows.
introduced earlier. The SCBs were permitted to avail On the basis of assessment of the macroeconomic
of additional liquidity support under the LAF to the situation, the RBI increased the repo rate and reverse
extent of up to 0.5 per cent of their NDTL2. The repo rate by 25 bps and 50 bps respectively in the
SLAF on a daily basis was also extended till 16 mid-quarter monetary policy review (announced on
July 2010. On an assessment of the prevailing 16 September 2010). The liquidity conditions
overall liquidity conditions and with a view to remained tight in the second half of September 2010
providing flexibility to SCBs in liquidity management, as the surplus cash balances of the Centre started
the RBI further extended the SLAF on a daily basis building up, and the average daily net outstanding
till 30 July 2010. The average daily liquidity injection liquidity injection was around"! 24,000 crore during
under the LAF remained at around"! 47,000 crore the month.
during July 2010. In view of the evolving inflationary 4.53 The liquidity conditions tightened further in
scenario, the RBI raised the repo rate and reverse October 2010 on account of increase in Government
repo rate further by 25 bps and 50 bps, to 5.75 per surplus balances and currency in circulation due to
cent and 4.50 per cent respectively in the First festive season demand. The average daily net
Quarter Review of Monetary Policy 2010-11 outstanding liquidity injection was around"! 62,000

2
For any shortfall in maintenance of the SLR arising out of availment of this facility, banks were allowed se ek waiver of penal
interest.

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Figure 4.14 Market stabilisation scheme
300

250 Actuals
! thousand crores

200 Limits

150

100

50

0
Feb

Feb

Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2007-08 2008-09 2009-10 2010-11
Year

crore for the entire October 2010. However, the net on shortfall in maintenance of the SLR to the extent
liquidity injection crossed"! 1,00,000 crore on 29 of 1 per cent of NDTL for availing of additional liquidity
October 2010. In order to ease the frictional liquidity support under the LAF), to remain in force till 16
pressure, the RBI announced certain temporary December 2010. The average daily net liquidity
measures, namely conduct of special SLAF on 29 injection during the month was around" ! 99,300
October and 1 November 2010, conduct of a special crore. The liquidity conditions have remained in high
two-day repo auction under the LAF on 30 October deficit so far in December 2010 (till 20 December)
2010, and waiver of penal interest on shortfall in as huge quarterly advance tax payments have
maintenance of SLR (on 30-31October) to the extent increased the liquidity stress in the system. The
of 1 per cent of NDTL for availing of additional liquidity RBI conducted purchase of Government securities
support under the LAF. The RBI extended these through auction as part of its OMOs for an aggregate
liquidity-easing measures further and conducted amount of"!12,000 crore each on 9 December 2010
SLAF on all days during 1-4 November 2010 and and 15 December 2010; and accepted an aggregate
extended the waiver of penal interest on shortfall in amount of" ! 10,120 crore and" !11,706 crore
maintenance of SLR ( to the extent of 1 per cent of respectively in the auctions. The average daily net
NDTL) for availing of additional liquidity support under outstanding liquidity injection was around"! 1,10,000
the LAF till 7 November 2010. To contain inflation crore during 1-20 December 2010.
and anchor inflationary expectations, the RBI
increased the repo and reverse repo rates by 25 bps 4.54 While the overall liquidity in the system has
each in the Second Quarter Review of Monetary remained in deficit consistent with the policy stance,
Policy on 2 November 2010. Consistent with the the extent of tightness has been beyond the comfort
stance of monetary policy and based on the level of the RBI. The RBI decided to (i) reduce the
assessment of prevailing and evolving liquidity SLR of SCBs from 25 per cent of their NDTL to 24
conditions, the RBI conducted purchase of per cent with effect from 18 December 2010;(ii)
government securities under its OMOs for an conduct OMO auctions for purchase of Government
aggregate amount of"! 12,000 crore on 4 November securities for an aggregate amount of"!48,000 crore
2010 and accepted an aggregate amount of"! 8352 in the next one month. These two measures are
crore in that auction. The high deficit liquidity expected to inject liquidity of the order of"! 48,000
conditions continued in November 2010 with the crore on an enduring basis. The reduction of the SLR
persistence of high Government balances and rise will free securities and once banks can borrow at
in currency in circulation. On 9 November 2010, the the LAF window with these excess SLR securities,
RBI has re-introduced liquidity-easing measures borrowers can shift from costlier sources to the LAF
(SLAF on a daily basis, the waiver of penal interest window ( Figure 4.14 and Table 4.15).

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Table 4.15 : Call money market


Call Turnover Call Rate LAF MSS
(! crore) (per cent)^ (! crore)# (! crore)*
2009-10
Mar.2009 23,818 4.17 33,360 88,077
Apr.2009 21,820 3.28 1,01,561 75,146
May2009 19,037 3.17 1,25,728 45,955
Jun.2009 17,921 3.21 1,23,400 27,140
Jul.2009 14,394 3.21 1,30,891 22,159
Aug.2009 15,137 3.22 1,28,275 19,804
Sep.2009 16,118 3.31 1,21,083 18,773
Oct.2009 15,776 3.17 1,01,675 18,773
Nov-09 13,516 3.19 1,01,719 18,773
Dec.2009 13,302 3.24 68,522 18,773
Jan.2010 12,822 3.23 81,027 9944
Feb.2010 13,618 3.17 78,661 7737
2010-11
Mar.2010 17,624 3.51 37,640 3987
Apr.2010 16,374 3.49 57,150 2737
May2010 16,786 3.83 32,798 922
Jun.2010 14,258 5.16 -47,347 317
Jul.2010 18,954 5.54 -46,653 254
Aug.2010 15,916 5.17 -1048 0
Sep.2010 17,212 5.50 -24,155 0
Oct.2010 17,840 6.39 -61,658 0
Nov.2010 17,730 6.81 -99,311 0
Source : RBI.
Notes : ^ : Average of daily weighted call rate. * : Average of weekly outstanding MSS.
# : Average daily absorption under LAF.

+QR4T' +P1Z4S half of the month reflecting the onset of high deficit
liquidity conditions. The average call rate increased
4.55 The money market generally remained orderly
to 5.40 per cent in the second quarter (Table 4.15).
during 2010-11. At the commencement of the
The call rate has mostly remained above the upper
financial year 2010-11, the call rate mostly remained
bound of the corridor in the third quarter of 2010-11
around the lower bound of the informal LAF corridor
so far, reflecting the increased liquidity stress in
up to May 2010. With the tightening of liquidity
the system. The average call rate was 6.59 per cent
conditions since end-May 2010, reflecting migration
in the third quarter of 2010-11 (till 20 December 2010)
of liquidity to the Central Government account with
(Figure 4.15).
the RBI on account of 3G auction/ advance tax
payments, the call rate firmed up. The average daily 4.56 The rates in the collateralized segments have
call rate for the first quarter was at 4.16 per cent. It continued to move in tandem with the call rate, albeit
hovered around the upper bound of the LAF corridor below it, so far during 2010-11. The weighted average
till July 2010 as deficit liquidity conditions persisted interest rate in the collateralized segment of the
due to the high Central Government cash balances. money market increased to 5.20 per cent during
The call rate declined towards the end of August the second quarter from 3.97 per cent in the first
and early September with the change in liquidity quarter of 2010-11. Transaction volumes in the
conditions. However, it again firmed up from the collateralized borrowing and lending obligation
middle of September 2010 and breached the upper (CBLO) and market repo segments remained high
bound of the informal LAF corridor in the second during this period, reflecting active market

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #+&
Figure 4.15 Movement of money market rates
8
7 Market repo
(Non-RBI)
6
5 Call money
Per cent

4
CBLO
3
2 Reverse
1 repo rate
0 Repo rate
Feb

Feb
Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov
2008-09 2009-10 2010-11
Year

conditions. Banks continued to remain the major discount rate (WADR) of aggregate CP issuances
group of borrowers in the collateralized segments increased from 6.29 per cent at the end of March
whereas mutual funds (MFs) remained the major 2010 to 7.82 per cent at the end of September 2010,
group of lenders of funds in these segments. The and reached 12.22 per cent at the end of November
collateralized segment of the money market 2010.The shares of ‘leasing and finance companies’,
continued to remain the dominant segment,
‘manufacturing companies’, and ‘other financial
accounting for more than 80 per cent of the total
institutions’ in total outstanding CPs were at around
volume so far during the year.
50 per cent, 39 per cent, and 11 per cent respectively
Certificates of Deposit (CDs) at the end of November 2010 (Table 4.16).
4.57 Though the average gross issuance of CDs
was high during 2010-11 so far, the amount of CDs Treasury Bills (T-Bills)
outstanding declined, indicating decline in net
issuances. The amount of outstanding CDs issued 4.59 T-Bills issuances during the year 2010-11
by SCBs declined marginally from"! 3,41,054 crore were modulated according to the cash management
at the end of March 2010 to"! 3,32,982 crore at requirements of the Government as well as evolving
the end of November 2010. The outstanding amount market conditions. The notified amounts for
constituted 7.45 per cent (as on 19 November 2010) competitive auctions of T-Bills were reduced during
of aggregate deposits of CD-issuing banks with the first two quarters of the fiscal year. The
significant inter-bank variation. During April- outstanding stock of T- Bills went down from
November 2010, the average issuance was of the ! 1,34,500 crore on 31 March 2010 to"! 1,26,269
order of around" ! 22,000 crore as compared to crore on 31 December 2010, after taking into
around"!11,000 crore during the same period of account a rise in non-competitive allotment. The
the last financial year. The effective interest rate in primary market yields for T-Bills of different tenors
respect of aggregate CD issuances increased from
(91 days, 182 days, and 364 days) moved up
6.07 per cent at the end of March 2010 to 8.16 per
during the year largely influenced by the liquidity
cent as on 19 November 2010.
conditions and monetary policy action by the RBI.
Commercial Paper (CP) The yield behaviour during 2010-11 vis-à-vis 2009-
4.58 During 2010-11 so far, the commercial paper 10 is shown in Figures 4.16, 4.17, and 4.18.
(CP) market has also picked up and the size of
Cash Management
fortnightly issuance increased significantly. The
outstanding amount of CP issued by corporates has 4.60 During the year, a new short-term instrument,
shown an increasing trend from"! 75,506 crore at named cash management bill (CMB), was
the end of March 2010 to"!1,12,003 crore at the introduced in May 2010. CMBs are non-standard,
end of September 2010 and"! 1,17,793 crore at the discounted instruments issued for maturities of less
end of November 2010. The weighted average than 91 days, to meet the temporary cash-flow

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Table 4.16 : Activity in money market segments


(! crore)

Average daily volume Commercial Certificates of


(one leg) paper deposit
Year/ Call Market CBLO Total Money Term Out- WADR Out- EIR
month repo market money stand- (per- stand- (per-
rate^ ing cent) ing cent)
(per
cent)

Apr.2009 10910 20545 43958 75413 2.41 332 52881 6.29 210954 6.48
May2009 9518 22449 48505 80472 2.34 338 60740 5.75 218437 6.2
Jun.2009 8960 21694 53553 84207 2.69 335 68721 5 221491 4.9
Jul.2009 7197 20254 46501 73952 2.83 389 79582 4.71 240395 4.96
Aug.2009 7569 23305 57099 87973 2.62 461 83026 5.05 232522 4.91
Sep.2009 8059 27978 62388 98425 2.73 381 79228 5.04 216691 5.3
Oct.2009 7888 23444 58313 89645 2.70 225 98835 5.06 227227 4.70
Nov.2009 6758 22529 54875 84162 2.87 191 103915 5.17 245101 4.86
Dec.2009 6651 20500 55338 82489 2.91 289 90305 5.40 248440 4.92
Jan.2010 6411 14565 50571 71547 2.97 404 91564 4.80 282284 5.65
Feb.2010 6809 19821 63645 90275 2.95 151 97000 4.99 309390 6.15
Mar.2010 8812 19150 60006 87968 3.22 393 75506 6.29 341054 6.07
Apr.2010 8187 20319 50891 79397 3.03 345 98769 5.37 336807 5.56
May2010 8393 17610 42274 68277 3.72 338 109039 6.85 340343 5.17
Jun.2010 7129 9481 31113 47723 5.22 447 99792 6.82 321589 6.37
Jul.2010 9477 12011 29102 50590 5.33 385 112704 6.93 324810 6.69
Aug.2010 7958 15553 45181 68692 5.05 281 126549 7.32 341616 7.17
Sep.2010 8606 15927 53223 77756 5.29 617 112003 7.82 337322 7.34
Oct.2010 8920 14401 43831 67152 5.96 712 149620 12.15 343353 7.67
Nov.2010 8865 9967 32961 51793 6.31 415 117793 12.22 332982 8.16
Source: RBI.
Notes: ^ Average of daily weighted call rate.

Figure 4.16 Cut-off yields in the auctions of 91-day T-bills


8
7 2010-11
Cut-off yields

6
(per cent)

5 2009-10
4
3
2
Feb
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

Figure 4.17 Cut-off yields in the auctions of 182-day T-bills


8
7 2010-11
Cut-off yields

6
(per cent)

5 2009-10
4
3
2
Feb
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar

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2*&",3'4$5'6#$,74*-'64$48,%,$7 #+(
Figure 4.18 Cut-off yields in the auctions of 364-day T-bills
8
7 2010-11
Cut-off yields

6
(per cent)

5 2009-10
4
3
2

Feb
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Mar
mismatches of the Government. During 2010-11, smooth and non-disruptive manner. During the year,
CMBs were issued twice in May 2010 for an the Government undertook buy-back operations
aggregate amount of"!12,000 crore, with a maturity whereby securities worth"!11,767 crore were bought
of five and four weeks, respectively. back.
4.63 During 2010-11 (up to 31 December 2010),
Central Government Borrowing
gross market borrowings raised through dated
4.61 The Union Budget 2010-11 placed the net securities by the Central Government wereRs
market borrowings (through dated securities) 3,84,000 crore (net" !2,98,342 crore) as against
requirement of the Central Government at"! 3,45,010 !3,83,000 crore (excluding issuances under the
crore as against" ! 3,97,957 crore raised during MSS) (net" ! 3,46,911 crore) raised during the
the previous year. Including repayments of" ! corresponding period of the previous year. The
1,12,133 crore, gross market borrowings were weighted average maturity of dated securities
estimated at"! 4,57,143 crore (as compared to"! issued during the year (up to 31 December 2010)
4,51,000 crore raised in the previous year, was moderately higher at 11.54 years as compared
including MSS de-sequestering of"! 33,000 crore). to 11.15 years for issues during the corresponding
The actual issuances during the first half of the period of the previous year. The weighted average
current year amounted to" ! 2,84,000 crore (as yield of dated securities during 2010-11(up to 31
against i