The Hindu Business Line : Economic Survey 2001-02

THE Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments. Domestic output and demand conditions were adversely affected by poor performance in agriculture in the previous two years.

The global economy experienced an overall deceleration and is estimated to record an output growth of 2.4 per cent during the past year. These tendencies were exacerbated in the aftermath of the September 11 terrorist attacks in US. Consequently, export growth has suffered and industrial profitability has also been affected by the prevailing low commodity and product prices globally. Despite these constraints, growth in real GDP in 2001-02 is expected to be 5.4 per cent as estimated by the Central Statistical Organisation. This growth rate marks some recovery over the low growth of 4 per cent in 2000-01. It will also be one of the highest growth rates in the world in the current year.

The average annual growth rate during the Ninth Five-Year Plan (1997-2002) is now estimated at 5.4 per cent which is lower than the plan target of 6.5 per cent.

Although this raises new challenges for reinvigorating growth in the Tenth Five-Year Plan, the Indian growth record is one of the highest among the major economies in the world in recent years.

The overall growth of 5.4 per cent in 2001-02 is supported by a growth rate of 5.7 per cent in agriculture and allied sectors, 3.3 per cent in industry and 6.5 per cent in services.

The acceleration of the overall GDP growth rate is basically due to a significant improvement in value added in the agriculture and allied sectors from a negative growth rate of (-) 0.2 per cent in 2000-01 to 5.7 per cent in 2001-2002. There has been significant deceleration in the growth rate of industry. However, the performance of the services sector has improved moderately.

The real GDP growth rate from mining and quarrying is estimated to have declined from 3.3 per cent in 2000-01 to 1.4 per cent in 2001-02.

The growth of manufacturing has reduced from 6.7 to 3.3 per cent, while that of electricity, gas and water supply has fallen from 6.2 to 5.2 per cent and that of construction from 6.8 to 2.9 per cent over the same period. The deceleration in industrial growth may be attributable to various factors such as normal business and investment cycles, inherent adjustment lags of corporate restructuring and lack of both consumer and investment demand.

Continued high real interest rates, infrastructure constraints in power and transport and delays in establishing credible institutional and regulatory framework for private participation in some key sectors might have also dampened private investment and industrial production.

Prospects of agricultural production in 2001-02 are considered to be bright as a result of normal monsoon and relatively favourable distribution of rainfall over time and regions. Overall agricultural output is estimated to increase by nearly 7 per cent in 2001-02. Foodgrains production is expected to rise to 209 million tonnes compared with 196 million tonnes in 2000-01.

Financial and other services are doing well in the current year. However, performance of service sectors such as transport (other than railways), tourism, business and social services have been adversely affected by slowdown in both domestic and external demand.

The average annual rate of inflation in terms of the wholesale price index (WPI) increased significantly from 3.3 per cent in 1999-2000 to 7.1 per cent in 2000-01 due to a substantial rise in administered prices of petroleum products. During 2001-02, the inflation rate declined in terms of the WPI. The 52-week average inflation rate declined from 7 per cent at the beginning of 2001-02 to 4.7 per cent for the week ended January 19, 2002. The point-to-point inflation rate reached a low of 1.3 per cent by the end of January, 2002 which was the lowest in over two decades.

The inflation rate in terms of the consumer price index for industrial workers (CPI-IW) remained below 4 per cent until July 2001 and increased to 5.2 per cent in August 2001. The index displayed a downward trend during September-October, 2001. However, it increased again to 4.9 per cent in November and further to 5.2 per cent in December 2001.

The Union Budget envisaged a reduction of gross fiscal deficit as a proportion of GDP from 5.1 per cent in 2000-01 (RE) to 4.7 per cent in 2001-02 (BE). With the availability of quick estimates of national income and provisional accounts for 2000-01 and advance estimates of national income for 2001-02, revised estimates of fiscal deficit for 2000-01 and budget estimates for 2001-02 have undergone change. The gross fiscal deficit as a proportion of GDP is now estimated at 5.5 per cent for 2000-01 and 5.1 per cent for 2001-02.

As regards revenues, there are significant shortfalls in indirect taxes due to slowdown in industrial production and significant deceleration of both oil and non-oil imports. Direct tax collections are likely to be below target for the current year. There is also a shortfall in revenues from disinvestment.

India's balance of payments remained reasonably comfortable in both 2000-01 and 2001-02. The current account deficit as a percentage of GDP declined from 1.1 per cent in 1999-2000 to about 0.5 per cent in 2000-01 due to a dynamic export performance and sustained buoyancy in invisible receipts.

However, in the current year, exports have been almost stagnant and have recorded a growth of only 0.6 per cent in April-December 2001.

The exchange rate of the rupee in terms of the major currencies of the world remained reasonably stable during the year, despite occasional fluctuations caused by normal market forces of supply and demand.

Foreign exchange reserves (including gold and SDR) reached a record level of nearly $50 billion at the end of January 2002, which is equivalent to almost 10 months of estimated imports for the current year.

India's external debt situation has improved significantly in recent years as a result of effective external debt management by the Government. The external debt-GDP ratio decreased from 28.7 per cent at the end of March 1991 to 22.3 per cent at end-March 2001 and further to 21 per cent at the end of September 2001. The debt service ratio declined from a peak level of 35.3 per cent of current receipts in 1990-91 to 16.3 per cent in 2000-01. It is particularly noteworthy that for the first time, the World Bank has classified India as a less-indebted country.

Trends in GDP

According to the quick estimates of national income for 2000-01 provided by the Central Statistical Organisation on January 31, 2002, the overall GDP growth rate decelerated significantly from 6.1 per cent in 1999-2000 to 4 per cent in 2000-01. The gross value added in agriculture and allied sectors declined by 0.2 per cent in 2000-01 compared with an increase of 1.3 per cent in 1999-2000.

The GDP from agriculture alone declined by 0.4 per cent in 2000-01 compared with an increase of 1 per cent in 1999-2000. The negative growth rate of agriculture in 2000-01 was primarily due to a decline in rice production by 5.4 per cent, wheat by 10 per cent, pulses by 20.4 per cent, oilseeds by 11.2 per cent and cotton by 16.3 per cent. However, livestock, which accounts for over 26 per cent of the total value of agriculture sector, increased by 3.5 per cent and coarse cereals by 4.2 per cent in 2000-2001.

Within the industry sector, while construction showed a lower growth in 2000-01, there was marked improvement in the growth rates of manufacturing (from 4.2 per cent in 1999-00 to 6.7 per cent in 2000-01) and mining and quarrying (from 2 per cent to 3.3 per cent during the same period). The growth rate of electricity, gas and water supply remained almost invariant at around 6.2 per cent for both 1999-2000 and 2000-01.

Growth rates of services sector decelerated significantly in 2000-01. In particular, the growth rate of trade, hotels and restaurants reduced considerably from 7.3 per cent in 1999-2000 to 3.8 per cent in 2000-01, while the growth of transport, storage and communications remained almost unchanged at around 8.2 per cent during 1999-00 and 2000-01.

Financial, real estate and business services performed poorly with growth rate of only 2.9 per cent in 2000-01 compared with a growth rate of 10.6 per cent in 1999-00.

Demand factors

Consumption, savings and investment

On the demand side, real consumption growth declined from 6.5 per cent in 1999-2000 to 2.9 per cent in 2000-01. In real terms, the growth rate of private consumption reduced from 5.5 per cent in 1999-2000 to 2.2 per cent in 2000-01, that of Government consumption expenditure fell from 12 per cent to 6.5 per cent during the same period. In recent years growth in real gross domestic capital formation (GDCF) has shown instability.

The saving and investment rates in India are high as judged by the country's level of economic development. Gross domestic savings improved marginally from 23.2 per cent of GDP in 1999-2000 to 23.4 per cent of GDP in 2000-2001 as a result of better performance by household savings and private corporate savings. However, there was a steep fall in public sector savings due to an increase in the dis-savings of government administrative departments. In fact, public sector savings were negative in 1998-99, 1999-2000 and 2000-01. As a percentage of GDP, public sector savings declined from (-) 0.9 per cent in 1999-2000 to (-) 1.7 per cent in 2000-01.

Gross domestic investment at current prices declined marginally from 24.3 per cent of GDP in 1999-2000 to 24 per cent of GDP in 2000-01 mainly due to a fall in private sector investment. The rate of gross capital formation in real terms also declined from 26.7 per cent of GDP in 1999-2000 to 26.3 per cent of GDP in 2000-01 due to deceleration in the growth rates of real gross domestic capital formation in both public and private sectors.

Sustained high economic growth would require considerable improvement in investment. Given the country's limited domestic resources, it is essential to enhance further the inflows of foreign direct and portfolio investment. Enhancement of domestic investment would depend upon structural reduction in inflationary expectations and real interest rates, reduction in the fiscal deficit and further liberalisation of the domestic debt and capital markets.

India's private savings rate (comprising household and private corporate savings) is more or less comparable to those achieved by the high performing East Asian economies. However, its public savings is very low and is a major constraint on domestic resource mobilisation.

Major fiscal reforms have been undertaken for broadening the income-tax base and streamlining the excise and customs duty structures. There have also been enabling reforms in the spheres of trade and foreign investment.

Reforms in public sector enterprises are underway to reduce pressures on public finances, increase the efficiency of public sector and reduce the incremental capital output ratio (ICOR). Legal, institutional and regulatory frameworks in insurance, banking, capital markets, power, ports and telecommunications, are also being strengthened to induce private investment in infrastructure.

Supply factors: Production

Agriculture and allied sectors

After near stagnation in 1999-2000 and negative growth of 0.2 per cent in 2000-01, the agriculture sector is likely to attain a growth rate of nearly 6 per cent in 2001-02. One of the reasons for this is that spatial distribution of the monsoon rainfall in 2001 was one of the best in recent years.

This is reflected in the adequate rainfall received by seventeen districts belonging to the states of Madhya Pradesh, Rajasthan, Gujarat, Uttar Pradesh, Haryana, Kerala, Orissa, Punjab, Tamil Nadu, Chhatisgarh and Himachal Pradesh, which had suffered from deficient rainfall in the previous two years.

The foodgrains output in 2001-02 is likely to be 209.2 million tonnes, an increase of more than 13 million tonnes over the previous year. Late winter rainfall in the North-West India in February together with a long cold spell may help raise foodgrains production even to 212 million tonnes in the current year.

The downtrend in oilseeds, particularly groundnut during the preceding two years has been reversed this year and the country is likely to harvest over 21 million tonnes of oilseeds — higher by over 2 million tonnes compared with the previous year. Cotton production is expected to be higher by over 2 million bales and production of jute and mesta at 10.7 million bales is also likely to be higher than the previous year.

Industry

The significant slowdown of industrial growth witnessed in 2000-01, as measured by the Index of Industrial Production (IIP), continued with greater intensity in 2001-02. There was a distinct deceleration in growth of manufactured exports and slowdown in growth rates of core and infrastructure industries.

The sharp deceleration in overall industrial growth is due to a number of structural and cyclical factors such as normal business and investment cycles and lack of both domestic and external demand. Continued high real interest rates, infrastructure constraints, and lack of reforms in land and labour markets, might have also dampened private investment and industrial production.

Industrial slowdown has been observed across all major sectors. The manufacturing sector grew by only 2.4 per cent during April-December 2001, much lower than the 6 per cent growth registered during the same period in 2000. Similarly, electricity generation grew by only 2.7 per cent during April-December 2001 (compared with 4.8 per cent in April-December 2000) and mining and quarrying posted a growth of only 1.1 per cent during April-December 2001 (compared with 4.4 per cent in April-December 2000).

The broad-based nature of the industrial slowdown is also evident from the disaggregated sub-sectoral growth rates as reflected in the use-based classification of industrial production.

Trade

Removal of QR

The EXIM Policy announced in March 2001 has completed the process of removal of Quantitative Restrictions (QRs) on BOP grounds by dismantling restrictions on the remaining 715 items. Out of these 715 items, 342 are textile products, 147 are agricultural products including alcoholic beverages and 226 are other manufactured products including automobiles. The Policy has, however, put in place necessary mechanisms to provide a level playing field to domestic players vis-à-vis imports. These mechanisms include shifting of imports of certain products under the state trading category, making imports subject to various existing domestic regulations on health and hygiene and environment, and need for bio-security and sanitary & phyto-sanitary permit for imports of primary products of plant and animal origin. The policy has also established a monitoring mechanism to monitor imports of 300 sensitive items on a regular basis.

Doha conference

The fourth WTO Ministerial Conference was held at Doha, Qatar from November 9-14, 2001 to decide upon the future work programme of the WTO. While there were strong pressures to launch a comprehensive round of negotiations including multilateral regimes on investment, competition policy, trade facilitation, government procurement and environment, India was opposed to overburdening of the multilateral trading system with non-trade or new issues in the agenda. It felt that WTO already had a sufficiently large agenda consisting of mandated negotiations and mandated reviews and, therefore, India underlined the need for resolving the implementation issues, arising from the current agreements in a time bound manner before addressing new issues for negotiations.

India played a proactive role in the deliberations at the fourth Ministerial Conference at Doha. It wanted a genuine resolution of implementation related concerns, increased market access in agriculture, sufficient flexibility and clarity under TRIPS for public health policies and was strongly opposed to introduction of non-trade issues like labour in the agenda. It was able to ensure adoption of an agenda that emphasised not only trade but also the developmental goals and priorities of developing countries. The outcome of the Conference takes into account a number of concerns expressed by India. With the Doha Declaration laying down the agenda for the forthcoming trade talks, the focus will now shift to the work programme in WTO. India, along with other developing countries, would work to ensure that their interests and concerns are adequately taken care of in the work programme.

Tariff and Exim Policy

The existing 10 per cent surcharge on customs duties was taken off thereby bringing down the peak level of customs duties to 35 per cent. Exporters were allowed partial backloading of withdrawal of tax benefits under Section 80-HHC of the Income Tax Act. Concessions available for infrastructure by way of 10-year tax holiday were extended to the developers of Special Economic Zones (SEZs). Specific thrust was put on agricultural exports by announcing establishment of Agri-Economic Zones. A Market Access Initiative (MAI) scheme was introduced for boosting exports, under which the Government would assist the industry in research & development, market research, specific market and product studies, warehousing and retail marketing infrastructure in select countries and direct market promotion activities through media advertising and buyer- seller meets. Interest rates on export credit were rationalised by indicating them as PLR linked ceiling rates (as against specific rates). To boost exports, duty drawback rates were revised upwards and value caps under DEPB abolished for a number of export products. A special financial package was also announced for large value exports (annual exports of over Rs 100 crore) of selected products. Besides these short term measures Government also unveiled a medium term export strategy to achieve a quantum jump in exports over the next five years.

Capital account

The defence industry has been permitted FDI up to 26 per cent, subject to licensing. The dividend balancing condition for 22 consumer items was withdrawn, as was the cap on foreign investment in the power sector. International Financial Institutions like ADB, IFC, CDC etc. were allowed to invest in domestic companies through the automatic route, subject to SEBI/RBI guidelines and sector specific caps on FDI.

The Non-Banking Financial Companies (NBFCs) have been permitted to hold foreign equity up to 100 per cent in holding companies. Foreign investors have been allowed to set up 100 per cent operating subsidiaries (without any restriction on number of subsidiaries) without the condition of disinvesting a minimum of 25 per cent equity to Indian entities, subject to specified investment obligations. Joint venture NBFCs having 75 per cent, or less than75 per cent foreign investment, have also been permitted to set up subsidiaries for undertaking other NBFC activities. The automatic route has been made available to the information technology sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field. Offshore venture capital funds/companies have been allowed to invest in domestic venture capital undertakings as well as other companies through the automatic route, subject to SEBI regulations and sector specific caps on FDI. Payment of royalty upto 2 per cent on exports and 1 per cent on domestic sales have been allowed under the automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer.

External debt

The external debt-GDP ratio has been declining continuously over the years. The ratio improved from 38.7 per cent at end-March 1992 to 22.3 per cent at end-march 2001 and further to 21 per cent at the end of September 2001. The absolute level of external debt rose marginally from US $ 99.61 billion at end March, 2001 to US $ 100.38 billion at end September 2001. The share of short-term debt to total debt declined from 10.2 per cent at end March 1991 to 2.8 per cent at end September 2001. The debt service ratio declined from a peak level of 35.3 per cent of current receipts in 1990-91 to 16.3 per cent in 2000-01. The improvement has been the result of concerted and continued efforts of prudent external debt management strategy undertaken by the Government. It is particularly noteworthy that for the first time, the World Bank has classified India as a less-indebted country.

Issues and priorities

India has now gone through more than a decade of economic reforms. Beginning in 1991, the thrust of reforms was fiscal stabilisation and the initiation of major structural reforms aimed at de-regulation of the economy to induce accelerated investment, growth, employment, and hence reduction in poverty. A good number of these original objectives have been realised. GDP growth in the 1990s, after the initial year of reforms in 1991-92, was higher than that obtained in the 1980s. The external sector has been brought into balance with a comfortable balance of payments that is sustainable; foreign currency assets have risen from less than US $1 billion in 1991 to over US $45 billion today; and debt service has been brought to very comfortable levels, so that India is now internationally regarded as a "less indebted" country. Average inflation has been brought down from 10.6 per cent in 1990-91 to 1995-96 to 5 per cent in the last five years. Poverty has fallen from 36 per cent in 1993-94 to 23 to 26 per cent in 1999-2000 according to alternative estimates; and literacy has risen substantially from 52 per cent in 1991 to 65 per cent in 2001. Despite all these achievements, however, there are major challenges with respect to the sustenance of high economic growth in the years to come.

After the initial exuberance of GDP growth in the initial period of the reform process there has been an unmistakable slow down in subsequent years. Growth in industrial value added averaged 8.5 per cent per year from 1993-94 to 1996-97. This has fallen to about 4.8 per cent per year in the last four years, 1997-98 to 2000-01. Similarly, annual growth in value added in agriculture and allied sector from 1993-94 to 1996-97 averaged 4.5 per cent whereas the annual growth in the last four years has averaged only 1.2 per cent. The agricultural slowdown has taken place at least partly because of irregular and unevenly distributed monsoons during the latter period. Growth in infrastructure has also been slow, particularly in the power sector. Hence the key problem facing the economy today is the reinvigoration of economic growth in the current decade. The momentum achieved in the 1990s must not be lost. Policy initiatives and deepening of reforms are needed in each of these areas to unleash competitive forces and stimulate growth.

The slow down in economic growth has been exacerbated by the intractability of high fiscal deficits. Despite the efforts made to curtail expenditure and increase revenues, it has proved difficult to reduce the fiscal deficit below 5 per cent of GDP. The deleterious impact of such a high deficit on the economy has been made worse by similar levels of deficits being recorded by State Governments, resulting in total fiscal deficit of the central and state Governments amounting to around 10 per cent of GDP, a situation not dissimilar to that prevailing in the early 1990s. The persistence of such high fiscal deficits and the ever increasing debt service payments constrain the ability of Government at any level to undertake the necessary expenditures for productive investment for the provision of essential public services and also crowd out the more efficient private sector. Furthermore, the pressure of market borrowing by the Government has served to increase real interest rates in the economy at the cost of all other economic actors. The restoration of high economic growth would be difficult to achieve without a significant and sustained reduction in the fiscal deficit.

The Indian financial sector and capital market has served the economy well over the last few decades. While spread of banking in the country was helped greatly by the nationalisation of banks in 1969, it also stifled the competitive forces in the sector. Similarly, safe insurance products have been available to the public since the nationalisation of insurance but the deepening of the sector was slowed down. These arrangements functioned well in the controlled economy of the 1970s and the 1980s. The financial sector reforms of the 1990s, the deregulation of interest rates and the tightening of prudential regulation of banks and financial institutions have done <147,1,0>much to impart efficiency, transparency and competition on the banking industry. The introduction of new private sector banks and insurance companies has injected a degree of competition and new dynamism into the financial sector. The time is now ripe for carrying forward further financial sector reforms so that the real economy can benefit from a modernised financial sector that exhibits high productivity levels, greater diversification of the financial sector and provides a greater variety of instruments that serve more efficiently the emerging needs of the economy and the real sector for investment and production.

The key disappointment of the 1990s has been inadequate employment generation. Employment growth has slowed significantly in the 1990s relative to that in the previous decade. However, this has been accompanied by a similar slowdown in the growth of the labour force. This has resulted from the increase in the average years of schooling of new labour force entrants over the years. With the containment of expansion of the Government and the public sector as a whole, growth in organised public sector employment has been expectedly low. Higher private sector growth has indeed resulted in higher organised private sector employment growth also, but this has not been adequate in volume to compensate for the slowdown in public sector employment. A significant structural change in the Indian economy is indicated by the absolute fall in agricultural employment that has occurred for the first time. Non-farm employment growth has, however, not compensated adequately for the lack of growth in agriculture.

The recent slowdown in agricultural growth has led to a new policy focus, which places greater emphasis on agricultural diversification through various reforms like removal of licensing, stock limits and movement restrictions. This would provide a fresh impetus for value addition in agricultural products and generate additional demand for agricultural workers. A key issue for focus therefore, is the achievement of a higher growth path, which would be employment-intensive, particularly in the rural areas.

Policy reforms for growth

Fiscal issues: Revenue enhancement

The Economic Survey has laid stress on the issue of fiscal stabilisation and reforms for many years. This continues to remain the most difficult of the problems facing economic management in the country. In recognition of this problem the Government introduced the Fiscal Responsibility and Budget Management Bill in Parliament in December 2000. The Bill mandates the Government to reduce its fiscal and revenue deficits over the next 5 years to specified sustainable levels.

The combined fiscal deficit of the Central and State Governments amounted to 9.6 per cent of GDP in 2000-01, causing the combined public debt of general Government to reach 85 per cent of GDP in 2001. Considerable progress has been made over the past 10 years in the reform of the Indian tax system in all its aspects, but tax revenue receipts have remained below 10 per cent of GDP throughout the period.

As might be expected, collections from custom duties have fallen significantly as a result of the ongoing tariff reform aimed at bringing customs tariffs in line with ASEAN levels. Excise duty receipts have also not increased with the extension of the MODVAT/CENVAT system to more and more sectors, along with the slowdown in industrial growth in the past five years. Recovery in industrial growth would inject some buoyancy into excise receipts. The other source of buoyancy in excise could be the removal of exemptions that still continue and the curbing of leakages arising from the exemptions extended to small-scale industries. Thus the potential for increase in tax/GDP ratio from indirect taxes is limited. Indirect taxes in the country are excessively dependent on the industrial sector. As the growth of the industrial sector has slowed, so has the collection of indirect taxes. With structural change in the economy resulting in greater growth in the tertiary sector the importance of extending indirect taxes through the service tax to this sector assumes great importance. The state level Value Added Tax (VAT) is now to be introduced in April 2003. The much needed policy reform to extend service tax to all tertiary sector activities can then be taken up. An inter linked full scale VAT system can then be thought of. With the increasing weight of the tertiary sector in GDP its effective taxation is essential to improving the tax/GDP ratio.

Direct taxes have indeed increased over the decade from about 1.9 per cent of GDP in 1990-91 to about 3.3 per cent of GDP in 2000-01, so that their share in gross tax revenue has increased from 19 per cent to 36 per cent over the same period. The main potential for improvement in the tax/GDP ratio continues to be in the area of direct taxes, particularly that in personal income tax. An examination of the available data on income distribution in the country suggests that despite the substantial reduction in income tax rates that has taken place, compliance among non-salaried income tax payers remains low. The key tax policy and governance issue therefore relates to the enforcement of greater compliance in the personal income tax area. The introduction of the One-by-Six scheme has done much to bring increasing numbers of people with taxable incomes into the tax net. But better systems are needed to ensure improved compliance of higher income tax payers. The probability of improving the fiscal health of the country depends crucially on much greater acceleration in the collection of direct taxes.

With the essential components of tax reforms in place, the potential for increased tax revenues lies mainly in instituting more efficient tax collection methods in the country. What is required is wholesale modernisation of the tax administration which relies more on improved systems to enforce compliance rather than the traditional police methods of search, seizure and the like. This will become feasible as greater emphasis is placed on extensive use of information technology, data warehousing, data mining and analysis, and use of economic research. With the introduction of unique tax identification numbers, better coordination between different taxes would also help in enforcement.

Infrastructure

The unsatisfactory performance of the infrastructure industries during the current year is reflective of the overall slowdown prevailing in the economy.

Six core and infrastructure industries viz. electricity, crude oil, petroleum refinery products, coal, steel and cement, having a weight of 26.7 per cent in overall Index of Industrial Production (IIP) achieved an average growth rate of only 2 per cent during the first three quarters of the current year (i.e. April-December 2001) compared with 6.8 per cent during the corresponding period of the previous year. Crude oil and steel exhibited absolute decline in growth rate, while growth rates of other industries except cement, decelerated significantly during the current year. Among other infrastructure sectors, goods traffic on railways, cargo handled at major ports and new telephone connections had positive, but comparatively lower growths in the current year.

Services

During 1993-94 to 1999-2000 the service sector had achieved consistently high growth rates in the range of 7.1 per cent to 10.5 per cent. But for the first time in 2000-01, the growth rate of the service sector declined to 4.8 per cent due to poor performance by financial sector, trade hotels and restaurants, and community and social services.

The share of the services sector in the overall GDP has increased over the years. It may be mentioned here that although the service sector presently accounts for 49 per cent of GDP, there is no regular reporting system for the growth rate of the services sector because of lack of reliable data and methodology for measuring production of most of the services sectors.

Software and IT-enabled services have emerged as a niche sector for India in the global context.

The software industry was one of the fastest growing sectors in the last decade with a compound annual growth rate exceeding 50 per cent. Software service exports increased from $4.02 billion in 1999-2000 to $6.3 billion in 2000-01, thereby registering a growth of 57 per cent. India's success in the software sector can be largely attributed to the industry's ability to cultivate superior knowledge through intensive R&D efforts and the expertise in applying the knowledge in commercially viable technologies.

Employment

According to the Planning Commission, overall employment is estimated to have grown by about 1 per cent per annum during the period 1993-94 to 1999-2000, compared with a growth of 2.43 per cent per annum during the period 1987-88 to 1993-94.

Organised sector (both public and private) employment grew by 0.53 per cent per annum during 1993-94 to 1999-2000. While public sector employment experienced an absolute decline of 0.03 per cent during 1994-2000, employment in the private sector grew by 1.87 per cent during the period. The decline in the rate of growth of public sector employment can be attributed to the on-going process of restructuring in various public sector enterprises, as well as the ban on recruitment being implemented by various state departments/organisations for reducing non-plan Government expenditure.

In the younger age groups, the decline in labour force participation rates is a part of a longer term trend reflecting a shift in activity status towards education. Employment in the agricultural sector also witnessed a slow growth with the absolute number of persons employed in agriculture showing a decline for the first time.

Rural water supply

The Central allocation for the Accelerated Rural Water Supply Programme (ARWSP) was enhanced from Rs 1,960 crore in 2000-01 to Rs 1,975 crore in 2001-02. Till end January 2002, Rs 1,637 crore has been released by the Centre and Rs 1,496 crore by the States. A total of 26,803 habitations have been covered under the programme so far, involving a population of 10.5 million. The Pradhan Mantri Gramodaya Yojana (Rural Drinking Water Project) is another initiative for achievement of sustainable human development at the village level.

Fiscal developments

The lower real GDP growth of 4 per cent in 2000-01 led to the shortfall in revenue collection during 2000-01.

As per the provisional accounts released by the Controller General of Accounts (CGA), actual tax receipts (net to Centre) for 2000-01 at Rs1,35,193 crore, were lower by Rs 9,210 crore compared with the revised estimate of Rs1,44,403 crore. Non-tax receipts at Rs 55,795 crore for 2000-01 also fell short of the revised estimates by Rs 5,968 crore. The savings realised on the expenditure front however, considerably cushioned the impact of lower revenue realisation. Consequently, actual gross fiscal deficit for 2000-01 at Rs 1,14,369 crore exceeded the revised estimate by Rs 2,397 crore.

Gross fiscal deficit, as a proportion of GDP at current market prices for 2000-01 placed at 5.1 per cent in the revised estimates, is now estimated to be 5.5 per cent on the basis of provisional unaudited figures. Similarly, revenue deficit as a proportion of GDP estimated at 3.6 per cent in the revised estimates, is now estimated to be 3.9 per cent of GDP for 2000-01.

For 2001-02, the Centre's gross fiscal deficit and revenue deficit budgeted at 4.7 per cent and 3.2 per cent of GDP respectively, are now estimated at 5.1 per cent and 3.4 per cent of GDP, respectively, as per revised GDP estimates.

Customs duties

The peak level of customs tariff was reduced to 35 per cent with abolition of the 10 per cent surcharge. The Union Budget reiterated the Government's resolve to move progressively within three years to reduce the number of rates to the minimum with a peak rate of 20 per cent. Customs duties were reduced on imported inputs for information technology and telecom sectors.

Basic customs duty was raised to 70 per cent on tea, coffee, copra and coconut, and to 75 and 85 per cent on crude edible oils and refined oils, respectively. With the abolition of quantitative restrictions on imports, the customs duty on import of used cars, multi-utility vehicles and two wheelers was raised to 105 per cent. In a move intended to discourage gold smuggling, customs duty for gold was scaled down from Rs 400 per 10 gm to Rs 250 per 10 gm.

Excise duties

The excise duty structure which was rationalised to a single rate of 16 per cent CENVAT (Central Value Added tax) in 2000-01 was further improved by replacing the three special excise duty rates of 8 per cent, 16 per cent and 24 per cent by a single rate of 16 per cent. An additional levy (National Calamity Contingency Duty) was imposed on cigarettes, pan masala, biris etc. to garner resources for the National Calamity Contingency Fund. Food preparations based on fruits and vegetables were completely exempted from excise duty, while duty on aerated soft drink was reduced to 32 per cent.

Compressed natural gas, hitherto exempted from excise, was brought under the purview of excise at the rate of 8 per cent.

Excise duty on petrol was raised from 16 per cent to 32 per cent and on high-speed diesel oil from 12 per cent to 16 per cent. Further, the duties on petrol and diesel were increased to 90 per cent and 20 per cent, respectively, from the midnight of January 11/12, 2002 (the new rates of excise duty will not remain in force beyond March 31, 2002).

The coverage of service tax at the rate of 5 per cent on the value of taxable service was expanded by including fifteen new services.

Fiscal and budgetary developments

The fiscal deficit as a proportion of GDP budgeted at 4.7 per cent in 2001-2002, now stands at 5.1 per cent of GDP due to revision in the GDP estimates, compared with 5.5 per cent in 2000-01 (on the basis of provisional unaudited figures).

The revenue deficit, which reflects the excess of current expenditure over current receipts, budgeted at 3.2 per cent of GDP in 2001-02, is now re-estimated at 3.4 per cent of GDP, compared with 3.9 per cent in 2000-01. The primary deficit, (i.e. fiscal deficit net of interest payments), is budgeted at 0.2 per cent of GDP in 2001-02 (0.8 per cent).

Revenue performance

The data for gross collections of major direct and indirect taxes for the first nine months (April-December 2001) of the current year show an unsatisfactory performance. In case of direct taxes, collections from personal income tax and corporation tax at Rs 44,021 crore were lower by 1.2 per cent, compared with the robust increase of 30.8 per cent in the corresponding period of the previous year. Collections from excise and custom duties at Rs 77,224 crore during April - December 2001 posted a decline of 3.6 per cent compared with an increase of 4.9 per cent in April-December 2000.

Money supply

The year-on-year growth in broad money (M3) as on January 11, 2002 was 14.4 per cent compared with 16.6 per cent a year ago.

The sharp decline in money supply since November 16, 2001 reflects the sudden expansion in volume of broad money resulting from India Millenium Deposits with effect from the corresponding date in the previous year.

Among the various components of money supply, only currency with the public registered a higher rate of growth in the current year (till January 11, 2002) compared to the corresponding period of the previous year. As far as sources of broad money are concerned, growth in bank's investment in Government securities and the expansion in net foreign exchange assets of RBI contributed significantly to the broad money growth in the current year.

The current financial year witnessed a deceleration in the growth of net domestic assets of RBI as compared to the corresponding previous period. This was partly offset by the pronounced acceleration in the growth of net foreign exchange assets of RBI. Reserve money registered a growth of 2.6 per cent during the current financial year (till January 11, 2002) compared with 5 per cent during the corresponding previous period.

Financial developments

The process of financial sector reforms has been carried forward in the current year with particular focus on banking and financial institutions. The specific reforms undertaken include allowing banks to lend at interest rates below their respective PLRs, permission to formulate fixed rate deposit schemes offering higher interest rates to senior citizens, flexibility in the composition of working capital between cash credit and loan components, reduction in exposure limits for borrowers, revised guidelines for exposure of banks to capital market and guidelines for investment in non-SLR securities through the private placement route.

The initiatives specially aimed at strengthening the operational efficiency of banks relate to the Voluntary Retirement Scheme, abolition of the Banking Service Recruitment Boards and enlargement of the reach and scope of the electronic funds transfer facility (EFT). The measures pertaining to financial institutions included operational and regulatory issues concerning transition to universal banking, a transparent mechanism for corporate debt restructuring, coordination between banks and financial institutions, amended guidelines for Asset-Liability Management and classification and valuation of investments. As regards the non-banking financial companies (NBFCs), the major policy initiative related to reduction in the maximum interest rates on public deposits from 14 per cent to 12.5 per cent.

The current year has been characterised by measures designed to move towards a flexible interest rate regime. The reduction in the administered interest rates on contractual savings has made the interest rate regime more flexible. Reduction in the bank rate to 6.5 per cent (the lowest since May 1973) has been supplemented by reduction in the cash reserve ratio to 5.5 per cent, which has further improved liquidity in the banking system. The PLRs of five major public sector banks softened from 12-12.50 per cent in December 2000 to 11-12 per cent by December 2001. Interest rates charged by SCBs on pre-shipment and post-shipment rupee export credit were reduced by one percentage point for six months ending on March 31, 2002. The short-term interest rate represented by the yield on 91-day Treasury Bills declined by 125 basis points to 7.25 per cent between April and December 2001. At the long end of the yield curve, the secondary market yields on Government paper in the range of 10-12 years have declined from 10.05-10.41 per cent to 8.15-8.35 per cent during this period.

Bank credit, comprising food credit and non-food credit, increased at a lower rate of 10.6 per cent till January 11, 2002 compared to 14.3 per cent in the corresponding period of the previous year. Recent years have witnessed strong growth of food credit in response to the increase in the quantum as well as price of food grains procured in support of the twin objectives of food security and price support. The deceleration in the growth of non-food credit to 8.7 per cent till January 11, 2002 from 12.1 per cent during the corresponding period in the previous year mirrored the weak demand for commercial credit owing to economic slowdown, which has been aggravated by the global downturn in economic activity.

Capital and money markets

The developments in the stock market on the eve of the current financial year brought to the fore the need for further measures aimed at promoting safety, transparency and efficiency of the capital market.

The pronounced bearish sentiments in the stock market saw the Sensex falling to 3184 on April 12, 2001.

The adverse sentiments in the secondary market also affected the mobilisation of resources from the primary market. The amount raised through public and rights issues during the first nine months of the current year (Rs 3,777 crore), constituted around 90 per cent of the relatively modest amount of Rs 4,240 crore raised during the corresponding period of the previous year. Resource mobilisation through IPOs (Rs 208 crore) accounted for only 5.5 per cent of the total resource mobilisation during this period, compared to about 56.7 per cent in the corresponding period of the previous year. The low level of resource mobilisation may be attributed to the prevailing economic slowdown and preference for private placement.

External sector

International economic environment

The year 2001 experienced the deepening and reinforcing of the global economic slowdown that had begun to set in from the end of 2000. The latest projections made by the World Economic Outlook of the International Monetary Fund point to a mere 2.4 per cent growth in world output during 2001, compared to 4.7 per cent during 2000.

The growth in world trade volume is projected to decline sharply to 1 per cent during 2001, as against 12.4 per cent in 2000. Absolute declines are projected for both energy and non-fuel prices in 2001 with the decline in energy prices expected to aggravate further in 2002.

The prevailing global slowdown was accentuated further by the September 11 terrorist attacks in the US. The attacks resulted in further downward growth projections for almost all major economic regions of the world. Growth rates for the US economy have been pegged down to 1 per cent and 0.7 per cent for 2001 and 2002, respectively. Japan is likely to encounter its fourth economic recession in a decade, while economic activity is showing little signs of recovery in the Euro area. The broad-based nature of the global slowdown, the most marked in recent times, has worsened the outlook for emerging market economies, in terms of reduced capital inflows and restricted access to funds from international capital markets. Among the economies of developing Asia however, China and India are expected to remain relatively insulated from the global slowdown due to the relatively less significance of the external sector in their overall GDP.

Balance of payments

Current account

India's Balance of Payments (BoP) remained reasonably comfortable in 2000-01 and the external sector marked distinct improvements. The first half of the year witnessed some pressures on the BoP due to significant hardening of international oil prices, sharp downturn in international equity prices and successive increases in interest rates in the US and Europe.

However, the situation eased with the mobilisation of funds under the India Millennium Deposits, which reversed the declining trend in foreign exchange reserves. As a result, the BoP situation marked a turnaround during the second half of 2000-01. Overall, the current account deficit in 2000-01 narrowed to about 0.5 per cent of GDP from 1.1 per cent of GDP in 1999-00. The improvement in the current account was largely due to a more dynamic export performance, sustained buoyancy in invisible receipts reflecting sharp increases in software service exports and private transfers and the subdued non-oil import demand.

Trade deficit

Exports, on the BoP basis, grew by 19.6 per cent in US dollar terms in 2000-01, accelerating sharply from the 9.5 per cent growth in the previous year. Total imports recorded a moderate growth of 7 per cent during 2000-01, much lower than the sharp increase of 16.5 per cent in 1999-2000.

The moderate growth in imports during 2000-01 was essentially attributable to a 24.1 per cent increase in the oil import bill. Non-oil import growth, on BoP basis, remained subdued at only 2 per cent.

Reflecting the trends in exports and imports, the deficit on the trade account of BoP narrowed to $14.37 billion or 3.1 per cent of GDP in 2000-01 from $17.84 billion (4 per cent of GDP) in 1999-2000.

Net inflow of invisibles earnings at $11.79 billion covered about 82 per cent of the deficit on the trade account in 2000-01, leaving a financing gap of US $2.58 billion on the current account.

This deficit on the current account represented about 0.5 per cent of GDP, compared with the deficit of 1.1 per cent of GDP ($4.70 billion) in 1999-2000.

Infrastructure

Infrastructure being among the most cited impediments to the achievement of higher growth, it has received the highest policy attention on a continuous basis since the early 1990s. Considerable success has been achieved over these years in some sectors.

The second sector in which relative success has been achieved is the telecommunications sector.

Growth in telecommunications has been impressive right through the past decade with both the public and private sectors growing rapidly.

Significant progress has been made through the Telecommunications Regulatory Authority of India (TRAI) in clearing up a number of regulatory hurdles in the opening up of all segments of the telecommunication sectors to competition.

The success of this programme is particularly indicated by falling prices in long distance and mobile services with the introduction of competition. Once again, the success achieved in the telecommunications sector also reflects the levy of adequate user charges for the financing of investments and for operation and maintenance.

On the regulatory side, greater attention needs to be given to all the issues that will arise as a result of increasing convergence between different kinds of services. The Government has already introduced the Convergence Bill in Parliament in order to provide for an appropriate regulatory environment.

The port sector has also achieved some degree of success with new private investments coming in new container terminals and in new private minor ports. Corporatisation of port trusts has also begun.

The other infrastructure sectors such as railways, power, urban infrastructure and civil aviation need to see much greater reform before investments can be made for inducing further growth. In each case the regulatory mechanism is still inadequate, as is the provision of user charges.

Similarly, problems exist in the Railways which have suffered from non-remunerative investments over the past decade.

The benefit of introducing competition in domestic civil aviation has already been seen, through the upgradation of standards that came with the entry of new private airlines. However, progress in the improvement of airports has been grossly inadequate.

The upgradation of India's international airports is essential to attract greater tourism interest in India, the growth in which has slowed down significantly.

The current structure of air traffic and forecasts indicates that unless the major international airports in Delhi and Mumbai are significantly upgraded, capacity constraints will inhibit the growth of air traffic in the near future and hence of tourism.

As these airports are privatised, the regulatory system will also need restructuring for overseeing monopoly airports and ensuring continued upgradation in air services.

Summing up

The Indian economy responded to the economic reforms of the 1990s with a higher growth performance than in previous decades.

The economy has, therefore, shown that it is capable of achieving high growth rates in response to the implementation of appropriate economic reform policies.

Consequently, higher growth rates in the rest of the decade can indeed be achieved through further deepening of the economic reform process. Second-generation reforms have been initiated already and, as their implementation proceeds, acceleration in economic growth can be expected in the coming years.

However, the crucial issue of fiscal imbalance at both the Central and State levels needs to be addressed with some urgency in order to improve the overall health of the economy.

Economic reforms are a continuous process which need to be adjusted as the economic environment changes, both domestically and internationally. The year 2001 has been a difficult year for almost all economies of the world. World economic growth slowed down as did trade growth. The current signals are that recovery is expected in 2002.

This should help in the expansion of international trade and in the rejuvenating of Indian export growth.

As the world economy picks up, the deflationary trend experienced in the prices of commodities and manufactured products would also begin to be reversed enabling improved profitability in the Indian manufacturing sector as well.

The continued implementation of reforms along with this upturn in the economic environment is likely to help in regeneration of economic activity in the months and years to come.

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