18 ECONOMIC SURVEY 2007-2008

CHAPTER 2

Challenges, Policy Response

and Medium Term Prospects

W ith the full effects of the economic reforms

of the 1990s working through the system,
the Indian economy has moved to a higher growth
described as “the Hindu growth rate” of around 3.5
to 5.5 per cent. This followed a policy shift away
from excessive controls and restrictions on private
path. The new challenge is to maintain growth at enterprise towards gradual decontrol. The second
these levels, not to speak of raising it further to break occurred in the mid-1990s with the ushering
double digit levels. With domestic experience of in of deeper and broad based reforms at the
such high growth limited, global experience can be beginning of the decade. The step up in the GDP
useful. Historically, there have been about a dozen growth rate to 6.5 per cent in the late 1990s and
medium/large countries that have averaged a GDP further to 7.8 per cent during the Tenth Five Year
growth of 9 per cent or more for a decade. Of these Plan, with the last three years averaging over 9 per
less than half maintained an average growth of 9 cent, is evidence of the success of these policy
per cent or more for two decades. The challenges measures. If this trend persists in the medium-
of high growth have become more complex because term, the economy would average over 8.9 per cent
of increased globalization of the world economy per annum over the Eleventh Five Year Plan period
and the growing influence of global developments, (Figure 2.1). It can be seen that the slightly lower
economic as well as non-economic. Despite efforts GDP growth rate in 2007-08 (Advanced Estimates)
to accelerate the pace of infrastructure development is very much on the moving average trend and above
the demand for infrastructure services has grown the forecast line and, therefore, cannot be seen as
even faster than the supply so that the constraints a sign of a shift of the economy to a lower growth
may have become more binding. There is therefore trend. If we achieve the GDP growth target of the
heightened urgency to augment and upgrade Eleventh Five Year Plan, and step up the growth
infrastructure, both physical as well as social and, rate to 9.5 per cent in the succeeding year, the
in particular, power, roads and ports. This requires Indian economy would have averaged 9 per cent
mobilization of unprecedented amounts of capital over a decade. This achievement would put India
with macroeconomic stability, which can only among the select group of about a dozen medium-
happen if both the public and private sectors have large economies (such as China, Singapore, Japan,
the incentive and the motivation to perform at their Taiwan China, Thailand, South Korea, Portugal,
best. The former requires us to effectively address Greece and Hong Kong China) that have averaged
the persistent institutional weaknesses and a GDP growth of 9 per cent or more for at least a
implementation constraints at different levels of decade during their growth trajectory.
government in the country. The latter requires policy
2.3 On the demand side the growth
and regulations that are comprehensive but simple
acceleration has been driven by investment and
and clear and credible. This chapter identifies some
supported by private consumption. External trade,
of the major policy challenges at the macro and
in terms of the balance on goods and service trade,
sectoral level and analyses the medium-term
has played an insignificant role. This is reflected in
prospects of the economy.
the change in average contribution of the three
components between the Ninth and Tenth Five Year
SUSTAINING THE GROWTH
Plans, as discussed in Chapter 1. The economy is
MOMENTUM
likely to remain domestic demand driven in the
Growth medium term.
2.2 An analysis of the post-independence 2.4 The acceleration in growth of fixed capital
growth experience shows two statistically significant formation reflects the vast improvement in
breaks in the rate of growth of the economy. The investment climate as a result of the 1990s reforms.
first break occurred in the early 1980s when the Figure 2.2 shows that there were two spurts in
economy moved from what has been commonly fixed investment growth: the first followed the

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
19
Figure 2.1 GDP at factor cost - annual and five year moving average growth
10
9 Growth in
Growth rate (%)

GDPfc
8
7 Growth in
GDPfc- 5
6 year MA
5
GDP
4 growth-
3 forecast
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

2010-11

2011-12
Years

domestic decontrol cum import de-controls and deficit (G&S) has stabilized at around 3 per cent of
tariff reduction on capital and intermediate goods GDP at market prices. With net factor incomes
in the early 1990s. The second followed, after an (including remittances) at about 2 per cent of GDP,
adjustment period, the freeing of consumer goods the current account deficit is down to a little over 1
imports in the late 1990s. Paradoxically, the per cent of GDP. In this period capital inflows have
decision to delay lifting of quantitative restrictions spurted to an average of around 4 per cent of GDP,
(QRs) on consumer goods led to an increase in far in excess of the current account financing
effective protection on them following the reduction requirements, leading to large accumulation of
of tariffs on intermediate inputs in the early 1990s. reserves and a build of pressure on prices.
The initial negative impact of removal of control on
2.6 High GDP growth attracts foreign capital
consumer goods imports on industry as a whole
looking for profitable investment opportunities. In a
was therefore a little more severe and led to a
positive cycle this inflow will indeed find profitable
temporary slowdown of growth in the early 2000s, investment opportunities that others have missed
which was accentuated by monsoon linked and lead to even higher growth. However, if the
agriculture declines. The increase in growth opportunities do not materialize fast enough
competitiveness of the economy that was under there is pressure on the currency to appreciate,
way since 1991, however, restored the growth resulting in either an accumulation of reserves
momentum by 2003-04. (followed by monetary expansion and inflation) or
actual (nominal) appreciation or both. In the last
Managing capital inflows
two years, particularly in fiscal 2007-08, the Indian
2.5 There are two inter-related macroeconomic economy has gone through such a phase.
challenges that we face in maintaining high GDP 2.7 There are reasons to believe that the surge
growth on a sustained basis. These relate to capital in capital inflows, including FDI, will continue in the
inflows and inflation. Since 2005, India’s medium term. The fact that the capital inflows have
merchandise trade deficit has risen to over 7 per been in excess of the current account deficit despite
cent and, in the last two years, the overall trade two years of over 9 per cent growth suggests that

Figure 2.2 Growth rate of GFCF - annual and five year moving average
35
Growth rate of GFCF

30 GFCF
growth rate
25 - 5 year MA
20
(%)

GFCF
15 growth rate
10
5
0
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

Years

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20 ECONOMIC SURVEY 2007-2008

Figure 2.3 Interest rate differentials between India and USA (3 months & 1 year)
8
7 Interest
differential (%)

Differential:
Interest rate

6 3 months
5 Interest
4 Differential:
1 year
3
Trend
2 Interest
1 Differential:
3 months
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007
Trend
Interest
Differential:
Years 1 year

investors expected opportunities for profitable 2.9 The opening of the economy and the
investments to grow. At the same time, despite reduction in tariff rates since 1991, besides
movement towards convergence of Indian nominal promoting competitiveness and growth, have also
interest rates to global (US as proxy) levels (Figure provided an impetus to convergence of inflation
2.3), the short term arbitrage opportunities arising rates. Tariffs have come down from a peak rate of
from underlying policy distortions remain a distinct 150 per cent in 1990 to a peak non-agricultural rate
possibility. Thus, short term flows could continue of 10 per cent in 2007-08. Agricultural tariffs remain
to add to the total capital inflows in the medium relatively high and stable, isolating this segment of
term, making it necessary to constantly review and the economy from both the benefits and costs of
revise the macro management strategy. globalisation. The downtrend is, however, clear in
Inflation both the simple and weighted average tariff rates for
all goods (Figure 2.4). The reduction in tariffs on
2.8 Inflation management has always been a non-agricultural products has played an important
key policy concern of the Government. Traditionally, role in the convergence of Indian to global inflation
it has been a structural issue, where seasonal rates and needs to continue.
variations in production, particularly of wage goods,
along with market rigidities have resulted in a build 2.10 Figure 2.5 shows the inflation rates as
up of inflationary expectations translating local represented by the Indian and US GDP deflators for
impulses and concerns into a more widespread consumption. The trend reduction in the inflation
impact on the consumers. Of late, however, the gap has bottomed out in the last two years at
change in the structure of the economy and its around half a per cent, though the actual inflation
more globalized nature have made management in India was above this trend. The interaction between
of inflation a complex task. With rising capital high tariffs on agricultural products coupled with
inflows, various monetary policy mechanisms have the large share of food in the consumption basket
a more decisive role to play now. At the same and the slow modernisation of Indian agriculture
time, inflationary impulses from global commodity and agro-processing, coupled with the high
prices have to be tackled through the use of fiscal dependence of the population on agriculture may
and trade policy instruments. play a role in future inflation.

Figure 2.4 Basic import tariff rates: import weighted and simple average
40
35 Weighted
Tariff rate (%)

All
30
25 Simple All
20 Simple
15 Agriculture
10 Simple
5 Non-
Agriculture
1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Years
Note : 2005-06 weights are used for 2006-07 and 2007-08.

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
21
Figure 2.5 Indian and US inflation (GDP consumption deflator)
13
11 Consump-
tion
9 deflator:
Inflation (%)

7 India
5 Consump-
tion
3 deflator:US
1 Differential
-1 :India-US
-3 Trendline
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007
Years

Figure 2.6 Real interest rates: US Govt. securities and 364 day Indian treasury bills
10
8 Interest
Interest rate (%)

rate:
6 US 1yr
4 Interest
2 rate: India
364 days
0
-2 Differential:
interest
-4 rate:
Ind-US
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007
Trendline
Differential:
interest rate
Years

2.11 Economic theory suggests that the real The inflation expectations were short lived, but the
interest rates (not nominal) are the ones that investment risk perceptions seem to have dissipated
determine borrowing and lending and investment gradually and became completely normal by 2005.
and saving decisions. This would be particularly This was reflected in the sharp increase in inflows
significant in a longer time horizon. We use the from 2005-06. Thus, a further convergence of both
nominal rates and inflation shown above to derive inflation and real interest rates is possible if we
the real rate. Figure 2.6 shows the average annual liberalise and develop India's debt and currency
real interest rate, as represented by the yield at markets and remove the constraints on agriculture
auction cut-off on Indian 364 day Treasury Bills and modernization and urban land supply.
the rate on US one year Government securities. In
contrast to the convergence of nominal rates and External Sector
inflation, the gap between the real rates (Indian- 2.13 The US economy is expected to slowdown
US), after trending down till 1999-2000 shot up in in 2008, consequent to the “sub-prime crises”
2000-01 and has again trended down since then. (Box 2.1). Most projections of the world economy
2.12 Thus, this downtrend was interrupted by a suggest a moderate but not severe slowdown in
major shock in 1999-2000 and 2000-01, which raised world growth. This will impact both the demand for
the gap to a very high level, from which the India’s exports and the value of imports. The direct
downtrend continued. It may be recalled that these impact of the global growth slowdown is on the
were the years in which import controls on consumer demand for imports. This will impact all countries
goods were completely eliminated. This seems to including India, depending on the importance of the
have reduced the inflation gap as expected, but slowdown in different countries and the importance
paradoxically expanded the real interest gap. Theory of the country in our exports. Though our exports to
suggests that the rise in the real interest rates the US have already been slowing in 2006 and
could be due to the adverse impact on expectations 2007, a further slowdown may be unavoidable, but
about long-term inflation and/or risk to investment. may be relatively modest. The deceleration in world

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22 ECONOMIC SURVEY 2007-2008

imports will also lead to a deceleration in growth of markets in the short term, but will make the task
demand for commodities, including oil, and their of monetary management easier. In the longer term
international prices. While the extent of the impact the solution to excess capital inflows lies in
is uncertain, it will have a salutatory effect on the deepening productivity gains and addressing the
unit value of imports and consequently on the value root causes of the excess capital flows like interest
of imports. The balance of these two factors will differential and build-up of expectations on the rupee.
likely result in a modest increase in the goods and
services trade deficit, as long as a severe recession Fiscal issues
is avoided in the US. 2.15 A further reduction of the fiscal deficit can
2.14 The “sub-prime crisis” (Box 2.1) and the widen the space for monetary policy effectiveness.
response of the US and other developed country In the long term, a lower fiscal deficit will result in
Central Banks to it, has additional implications. a reduction in the real domestic long-term interest
There has been a renewed expansion of liquidity by rate of the economy and thus bring it closer to the
these countries and this may increase the capital world long-term rates. A reduction in the fiscal deficit
flows into India and other emerging markets. On during periods of excess inflow also reduces the
the other hand the lack of precise information on costs of any subsequent reversal of capital flows.
securitised debt and all its manifestation has Most South East Asian economies had a fiscal
increased uncertainty, reduced the credibility of surplus during a large part of their high growth period.
many developed market intermediaries and A fiscal surplus can also contribute to an increase
increased risk aversion among their investors. This in a nation’s global wealth holdings, for instance in
will tend to reduce the flows into developing China, Russia and many oil exporting countries.
countries. The slower Indian economic growth in
2.16 In the short term, it can reduce the excess
2007-08, relative to 2005-06 and 2006-07, may also
demand pressure created by the inflow of foreign
have a temporary dampening effect on capital
funds. A lower fiscal deficit means a reduced supply
inflows. On balance, the decline in capital inflows
as a proportion of GDP in 2008 is likely to be of government securities and for any given demand
modest and the remaining flows will likely take structure a higher price for Government securities
care of any expansion in current account deficit. and Treasury Bills, i.e. a lower interest rate. This
Thus the situation of excess inflows is likely to will directly reduce the interest gap with the global
remain, though the pressure on reserve rates. The Finance Commission may like to
accumulation and exchange rate appreciation is consider to what extent these considerations
likely to ease. Any reduction in excess capital flows should translate into lower FRBM targets over the
from the high levels in 2007 may affect the equity next five years and beyond.

Box 2.1 US sub-prime crisis

The sub-prime mortgage crisis is the major financial crisis of the new millennium whose origin is in the
United States (US) housing market. Subsequently, this spread to Europe and some other parts of the world.
The gradual softening of international interest rates during the last few years, coupled with relatively easy
liquidity conditions across the world, provided for increased risk appetite of investors leading to expansion
in the sub-prime market.
The word ‘sub-prime’ refers to borrowers (who are not rated as ‘prime’) and who do not have a sound track
record of repayment of loans. The risks inherent in sub-prime loans were sliced into different components
and packaged into a host of securities, referred to as asset-backed securities and collateralised debt
obligations (CDOs). Credit rating agencies had assigned risk ranks (e.g. AAA, BBB) to them to facilitate
marketability. Because of the complex nature of such new products, intermediaries such as hedge funds,
pension funds and banks, who held them in their portfolio or through SPVs, were not fully aware of the risks
involved. When interest rates rose leading to defaults in the housing sector, the value of the underlying loans
declined along with the price of these products. Institutions were saddled with illiquid and value-eroded
instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money
market as well. The policy response in the US and the Euro area has been to address the issue of
enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also
impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
India has remained relatively insulated from this crisis. The banks and financial institutions in India do not
have marked exposure to the sub-prime and related assets in matured markets. Further, India’s gradual
approach to the financial sector reforms process, with the building of appropriate safe-guards to ensure
stability, has played a positive role in keeping India immune from such shocks.

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
23
The supply side challenge use planning but also to provide connectivity,
2.17 On the supply side, the most critical drainage, sanitation, water supply and public
challenge is the availability of adequate physical transport facilities. There are a number of policy
and financial infrastructure. It is instructive to look measures, including addressing the limitations of
at infrastructure in terms of public and private goods the rent control act(s), the urban land ceiling laws
and a grey area in between - the “quasi-public and regulations and issues related to the financial
good.” This helps in identifying the most empowerment of local bodies to make them
appropriate policy response. Thus, while roads, capable of providing services befitting an urban
policing and urban development are examples of habitation of a middle-income level country, that
vital public goods, electricity is an example of a need to be urgently addressed. The provision of
private good. In rural areas the electricity public goods coupled with policy reforms can
distribution network can be treated as a quasi- energise private initiatives in development of housing
public good because of economies of scale in (including rental housing), industrial estates and
distribution. The same is true of dams, canals property development thereby impart additional
and to a limited extent of telecom, in rural areas. momentum to overall growth. The Central sector
Private and quasi-public goods infrastructure programme, Jawaharlal Nehru National Urban
requires the right policy framework and regulators Renewal Mission, and SEZs have imparted some
that encourage competition in expanding supply impetus in this direction, but the States,
at lowest cost. The telecom and civil aviation particularly poorer ones, need to do more on their
sectors, more recently the airport sector illustrate own.
the possibilities. For public goods, direct public Irrigation and agricultural support
provisioning and leveraging of resources through
special purpose vehicles (SPVs) will have to be 2.20 For agriculture, there may be at least three
the major instruments of growth. public goods and one quasi-public good, which may
be particularly lacking in poor backward regions,
Road Connectivity namely, the rule of law, all weather road connectivity,
2.18 The importance of roads in the development knowledge and information on appropriate
of the economy has received renewed attention in technologies, farming practices and marketing, and
the last decade, with the launching of the national assured irrigation. Irrigation is a major constraint
highway development project (NHDP) and the Prime on raising crop productivity. Up to March 2007, only
Minister’s Grameen Rozgar Yojana (PMGRY). While about 74 per cent of the assessed irrigation potential
there is some visible progress in the road sector of 140 million hectare has been utilized. The
in the domain of the Central Government, the same irrigation potential, however, can be increased with
is perhaps not true of some States. Given the low- technological advancement, inter-basin transfers,
skill intensity and high income multiplier effect of recharging of ground water and storage of water in
investment in this sector, there is an urgent need flood plains along the river banks. By having more
to place the highest priority on building roads to active participation of actual beneficiaries, through
specified standards, especially in the poor States Water Users Associations (WUAs), in maintenance
and regions of the country. Indeed, the medium of distribution channels, improvement in on-farm
term plan for this sector should target a network water management practices and reduction of field
of highways linking all cities in the country, a application losses of water through appropriate
network of State highways linking all towns at State pricing, efficiency of water use can be enhanced.
level and connectivity of all villages with all weather This can also increase allocation efficiency of water
district roads in every State. in terms of its application to different crops.
Research and development on crop and non-crop
Urban infrastructure agriculture and animal husbandry, including new
2.19 Urban development and renewal of existing varieties, operational methods and management
towns and cities is yet another area of infrastructure practices have traditionally been generated by
development, which is critical for meeting the Government universities and transmitted to farmers
growing demand for urban housing and business by public organisations and extension services.
premises from a rapidly expanding economy. The These need to be addressed in the Eleventh Five
public good nature of this activity is brought out Year Plan. The synergies between telecom
by the fact that the government has the connectivity, internet access, e-governance, e-
responsibility not only to carry out detailed land learning and e-marketing must be exploited.

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24 ECONOMIC SURVEY 2007-2008

Financial intermediation and long term remained moderate and it increased at a slower
debt markets pace. This could partly be due to unsatisfied
2.21 Financial intermediation refers to the demand due to domestic capacity constraints. There
process that connects individual savers to potential is considerable room to improve energy efficiency,
investors with the most productive use for resources. especially of motor vehicles, and in the generation,
While enabling the mobilisation of savings and its transmission and end-use of electricity.
translation into investment, the process mediates Commercially viable and economically attractive
the returns and risks on the investments. With technology options, in use in the developed world,
sustained economic growth in the last few decades, should be considered and adopted.
the importance and nature of financial intermediation 2.23 Improving energy efficiency and demand
the world over is undergoing dramatic transformation. side management measures like encouraging
In many countries, the share of assets held by urban mass transport are important. Sustaining
banks and insurance companies has declined and economic growth is critically dependent on
that of mutual funds, pension funds and non bank significant supply augmentation and change in the
financial institutions has increased. The relative composition of energy use. Import dependence,
importance of different financial intermediaries has for meeting the primary energy demand in the
also changed. Most of these developments in country, has been increasing over a long period
international financial markets have been mirrored since 1990-91 to 2006-07. Reducing incremental
in the Indian financial markets, but the challenge is import dependence of the country’s energy
to deepen and broaden financial sector reforms in requirement in the medium to long term entails a
India. The banking sector remains, by and large, a number of measures: (a) tapping India’s coal
government oligopoly despite the entry of private reserves with appropriate technology and reforms
players. The insurance sector still has a long way in the coal sector to increase competition, (b)
to go and FDI limits are too low. The long term debt mitigating transportation constraints on availability
market must be developed to support the financing of coal, (c) accelerating exploration of oil and gas,
of infrastructure projects during the Eleventh Five (d) fully exploiting the nuclear and hydro potential
Year Plan period. There is an urgent need for a for power generation, and (e) expediting
regime that supports predictable user charges, a programmes for energy generation through
financial system that allocates risk efficiently, and renewable and non-conventional sources. Besides,
project selection based on sound commercial and a step up of domestic production, the remaining
legal principles to ensure transparency. deficit would have to be bridged by entering into
strategic geo-political alliances to access the
Energy scenario energy assets in the region. There is a need for
2.22 It is to the credit of India’s growth process regulatory reform to implement open access in
that its energy intensity has fallen over time. In power sector to facilitate competition.
comparison to the rest of the world, particularly the Skill development
emerging economies of Brazil and China 2.24 India’s favourable demographics, with a
(Table 2.1), the use of energy per capita in India relatively young labour force, has been often cited
Table 2.1 Energy use for slected countries

ENERGY Total Use of Energy (MMTOE) Energy Use Per Capita (KGOE)
1990 2004 Change Growth (%) 1990 2004 Change Growth (%) CRW/ CRW/
1990- 1990- 1990- 1990- Total Total
2004 2004 2004 2004 1990 % 2004 %
1 2 3 4 5 6 7 8 9 11 12
Brazil 134 205 71 3.2 897 1114 217 1.7 31.1 26.5
Russian Fed. 775 642 -133 –1.2 5211 4460 -751 –0.9 1.6 1.1
India 362 573 211 3.3 426 531 105 1.5 48.6 37.4
China 867 1609 743 3.6 763 1242 479 2.6 23.1 13.7
EMU 1053 1245 192 1.3 3568 3990 422 0.9 3.1 4.2
UK 212 234 22 0.6 3686 3906 220 0.3 0.3 1.3
US 1928 2326 398 1.4 7722 7921 199 0.2 3.2 3.0
Source: World Development Indicators.
Note: MMTOE (KGOE) =million metric tons (kilo gram) of oil equivalent.
crw: use of combustible renewables and waste.

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
25
as a key factor in contributing to growth 2.25 The enormous demand for professional
acceleration and as a major strength of the education and employable skills cannot be met
economy in the coming years. Despite this, it by the public sector alone, and the entry of private
faces an emerging shortage of skills in the face of and non-government sectors such as recognised
growing demand for labour from the technology universities, education and skill development
and outsourcing sectors as well as in the semi- institutions under a professional, independent and
skilled labour intensive sectors of manufacturing credible regulatory system is essential for meeting
the requirements. More specifically, there is a need
and modern services like organised retail, civil
for appropriate legal and policy changes to allow
aviation, construction and finance. As a result,
for the setting up of private educational testing,
wage costs are rising which not only contributes
teacher certification and school/college grading
to cost push inflation, but may also end up eroding organizations with a view to improve the quality of
price advantage in some of the tradable sectors of education at all levels. There is need also to make
the economy. Besides increase in wages, the skill free the entry of “A grade” global universities (global
shortage also manifests itself as a problem of grading already exists) into India. “B” and “C” grade
retention and attrition in the fast growing knowledge global universities/colleges could be made subject
based industries as well as in important social to tighter regulation. There is a need to setup up
sector services like health and hospitality. a system of skill standardization and certification

Box 2.2 Policy Reform Options

• Coal mining: Amend Coal Mines Nationalisation Act to allow regulated private entry into coal mining.
Privatize old coal mines to improve recovery of “in-place” reserves by 5-10%, subject to a professional,
independent regulator for safety and environment issues.
• PSUs: Complete the process of selling of 5-10% equity in previously identified profit making non-navratnas.
List all unlisted public sector enterprises and sell a minimum of 10% of equity to the public. Auction all loss
making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form
of debt write-off.
• Industrial decontrol: Phase-out control on Sugar, Fertilizer, Drugs.
• Oil: Sell old oil fields to private sector for application of Improved/Enhanced Oil Recovery Techniques.
• Retail FDI: Allow a share for foreign equity in all retail trade. Allow 100 per cent foreign equity in foreign
branded, specialized retail chains (e.g. Luxury Brands, Consumer Durables, Semi-Durables).
• Insurance: Raise foreign equity share in Insurance to 49 per cent. Allow 51 per cent foreign equity in a
special category of insurance companies that provide all types of insurance (e.g. health, weather) to rural
residents and for all agricultural related activities including agro-processing.
• Banking: Allow 100 per cent FDI in Greenfield Private Rural-Agricultural Banks. Such a bank would be free
to set up any number of branches in any rural or semi-rural area. It would be free to lend to agriculture and
allied sectors, agro-processing and agro-input industries any where in the country and to any industry
located in non-urban area (negative list). Such a bank would also be free to takeover (buy out) other private
sector banks. As an incentive, such a bank could be allowed expansion into small towns when the general
FDI policy on banks will be liberalized.
• Factories act: Increase work week to 60 hours (from 48) and daily limit to 12 hours to meet seasonal
demand through overtime.
• Power: State Electricity Regulatory Commissions should notify rational, credible, cross-subsidy for open
access so that it can become a reality. Open Access should include access to electricity pillars to string a
wire. Accountability for T&D losses on this wire will be with the wire owner and not on the distribution
company that owns the towers. Permit private corporate investment in nuclear power, subject to regulation
by AERB and AEC.
• Railways: Freight Corridor: Public sector Rail Track company to own new tracks and signals. Free entry of
private and public-private partnership rail freight companies.
• Urban public transport: Public Transport (bus) systems in Metros and large cities must be run by organized
private companies that can use modern logistics and back office systems for planning routes and timings,
acquiring and analyzing data on usage densities and running an integrated people movement system. A
comprehensive system of road parking fees must be devised and introduced in metros and large congested
cities.
• Banruptcy law: Either introduce a separate section on Bankruptcy in the Company Law or introduce a new
bankruptcy law that facilitates exit of old/failed management as expeditiously as possible.

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26 ECONOMIC SURVEY 2007-2008

(6000 odd skills). In categories in which private Table 2.2 Key Deficit Indicators
(including foreign) certification and/or training
institutes already exists, they should be allowed (Per cent of GDP)
and encouraged to provide such certification and Item 2005-06 2006-072006-07 2007-08
training in India. Transfer of management control (Accounts) (BE) (RE) (BE)
of ITIs and other government training institutions Revenue Deficit 0.2 0.0 0.1 -0.3
through a bidding process focusing on the total Gross Fiscal Deficit 2.5 2.6 2.7 2.3
value of scholarship grants to be provided to poor Primary Deficit 0.2 0.2 0.4 0.1
students should be considered. The basic Source: Reserve Bank of India
commitment would be to modernize and expand Note: 1. data pertains to 28 State Governments
2. The ratios to GDP are at current market prices,
the institution according to a time bound plan. based on CSO’s 1999-2000 series.
3. Negative (-) sign indicates surplus
REFORMS AND PERFORMANCE
20 States have presented revenue surplus budgets
OF STATES in 2007-08, 15 States have budgeted for higher
GFD over the previous year. State-wise analysis of
Fiscal developments
fiscal correction indicates that non-special category
2.26 In recent years the major fiscal indicators States account for 85 per cent of the correction in
of the State Governments have witnessed the revenue account and 73 per cent of the correction
significant improvement. For the first time in about in GFD. At the same time, the fiscal position of
two decades, the State Governments have some States continues to remain weak and there
budgeted, for 2007-08, a consolidated surplus in are concerns regarding the sustainability of high
their revenue account. The ratio of gross fiscal level of debt in some of these States.
deficit (GFD) of the States to GDP has also shown
a declining trend, with the 2007-08 (BE) at 2.3 per Social development and human well-
cent. The improvement is associated in many being
cases with the enactment of Fiscal Responsibility
Legislation (FRL) by the State Governments. Other 2.29 Under the constitutional division of
measures like imposition on ceiling on guarantee, responsibility between the Centre and State
and introduction of Consolidated Sinking Fund Governments, the bulk of social services and most
(CSF) and Guarantee Redemption Fund (GRF) infrastructure services (except for telecommuni-
have also been introduced. All State/UTs cation, civil aviation, railways and major ports) lie
Governments have implemented VAT. Some States in the domain of State Governments. Thus, both
have also initiated measures to simplify the VAT the level of social sector expenditure at State level
return and others have undertaken steps to and its quality and effectiveness have a direct
evaluate its implementation. Many State bearing on human development outcomes and
Governments have taken steps for simplification overall well-being. While there has been some
and rationalization of the tax structure, which has increase in social sector spending at State level,
improved tax compliance and enforcement, and the Central Government has also stepped up its
reviewed user charges on power, water and outlays on social sectors and rural development
transport. programmes substantially, in recent years through
Centrally Sponsored Schemes. In their respective
2.27 The steps taken on the expenditure Budgets for 2007-08, several State Governments
management, include (a) outcome oriented have proposed schemes for improving education,
budgeting and use of monitorable indicators to health and employment at State level. Most States
track performance, (b) steps to contain non-plan have proposed setting up new or upgrading existing
revenue expenditure, restrict fresh recruitment and schools, colleges and universities with a view to
creation of new posts, (c) administrative reforms improve the provisioning of basic as well as
to simplify procedures and public interface, advanced education facilities to a wider section of
(d) comprehensive review of the functioning of State their respective populations. Some Governments
Public Sector Undertakings, including State have also announced employment guarantee
Electricity Boards, and (e) contributory pension schemes to cover additional districts. Others have
schemes for newly recruited staff. constituted high-powered missions to address
2.28 The marked improvement in the issues related to employment at various levels.
consolidated fiscal position (Table 2.2), however, There is much that still needs to be done in terms
does not reveal the wide inter-state variations. While of improving social sector and human development

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
27
outcomes at State level (Table 2.3 and Box 2.3) be easily managed and incentivized through the
which highlight inter state variation in important market mechanism. Initiatives such as the NREGP,
socio economic indicators. Bharat Nirman and the Right to Information Act
have to be viewed in this light. Notwithstanding
2.30 The outcomes in the health sector show
the criticism directed at the implementation gaps
significant disparities across States. A successful
that these initiatives suffer from – and all of them
policy framework to bridge outcome gaps in this
have great scope for improvement – doing away
sector would require a strategic focus on public
with them or transferring their implementation to
goods like vector borne and epidemic diseases,
market mechanisms are not responsible
public health education (including awareness about
alternatives, at least not at the current juncture of
quacks and shaman) and drainage (as flooding
India’s development.
affects everybody, whether in city or village. It would
require addressing the shortfalls in the availability 2.33 For these programmes to be successful,
of quasi-public goods like clean drinking water, it is necessary that ground level implementation
sanitation and sewerage, and garbage collection is efficient. For this, local authorities have to play
and disposal. Finally, making health insurance (a a very large role; indeed, the efficiency of these
private good) affordable to a large segment of the programmes is completely determined by the
vulnerable sections of the population. In respect of activities of the “last mile”. The Central Government
the Government health services, numerous studies can do two things – conceptualize the programmes
have highlighted the critical role of governance in and commit resources, both of which they have
improving the delivery of services to the public. already done. In addition to this, given that the
implementation is with the local authorities, the
GOVERNANCE AND PUBLIC Central Government can play an additional role,
SERVICE viz., that of ensuring that local authorities have
2.31 With many sectors of the Indian economy enough incentives to implement the programmes.
becoming globally competitive, the contrast in
Decentralization and stakeholder
performance between the corporate and government
involvement in implementation
sectors and between the State Governments in
India and the State/provincial governments in other 2.34 Decentralization in planning and
fast-growing economies such as China is implementation of programmes, based on the
becoming more visible. In fact, some observers principle of subsidiarity, is an essential supplement
have gone as far as to say that Government at the to enhance resource flow in achieving balanced
cutting edge level, where it interfaces with regional development and participation and
individuals and economic agents, is the most empowerment of the poor. Pursuing a participatory
important constraint on raising the growth rate of growth strategy not only makes the ensuing growth
the economy to 10 per cent. As substantial acceptable at the grass roots level, it fosters
resources, both public and private, are being capacity building for sustainable growth at different
mobilised to fuel the growth of the economy and tiers of local self-governments. Available information
make it more inclusive in character, there is a shows that, despite the clear Constitutional
legitimate concern that every bit of the public effort directions handed out through the 73rd and the
should count and yield better results. 74th amendments, there are wide inter-state
2.32 In a broad sense, governance can be variations in the degree of effective decentralization
broken into two levels. At an aggregative level, the achieved. Evidence suggests that the success of
purpose of governance is to provide an environment decentralized programme implementation depends
that supports and encourages private initiative in on effective transfer of functions, functionaries and
a non-discriminatory and inclusive manner. It is finances to local self-governments and creation
concerned, for instance, with laws governing and patronage of grass-roots level participatory
markets, protection of property rights and systems institutions like Grama Sabhas, people’s bodies
guaranteeing territorial integrity. At an individual for project formulation, implementation and
level, it is concerned with provision of basic monitoring, and watershed-based institutions. The
services universally to all citizens with a view to success stories of participatory project
build individual capabilities to harness implementation and devolution of plan and non-
opportunities. The fact that these services must plan funds must be systematically studied,
be provided universally often translates into a much recorded and replicated elsewhere with appropriate
greater government involvement as they may not region-specific adaptations.

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28 ECONOMIC SURVEY 2007-2008

Box 2.3 Socio-economic profile of States

Poverty

Percentage of population below poverty line is the highest in Orissa, followed by Bihar, Chhattisgarh, Jharkhand and
Madhya Pradesh. Punjab followed by Himachal Pradesh, Haryana, Kerala and Andhra Pradesh have low poverty.
Consumption

During 2004-05, compared to 30 per cent at the all-India level, 57 per cent of rural population in Orissa followed by
Chhattisgarh (55 per cent), Madhya Pradesh (47 per cent), Bihar & Jharkhand (46 per cent each) was living below the
monthly per capita expenditure (MPCE) level of Rs. 365 or about Rs. 12 per day. As against this, 57 per cent of rural
population in Kerala and 51per cent of Punjab and 47 per cent in Haryana had MPCE of at least Rs. 690. At the all-India level
this corresponds to the top 20 percentile of MPCE distribution.

During 2004-05, as compared to 30 per cent at the all-India level, 55 per cent of Bihar and 50 per cent of Orissa’s urban
population was below the MPCE level of Rs. 580 or Rs. 19 per day. As against the top 20 per cent at the all-India level,
28 per cent of Kerala’s and 27 per cent of Punjab’s urban population were having an MPCE level of at least Rs. 1,380.
Inequality

In urban areas, inequality in consumption, as measured by Lorenz Ratio is the highest in Chhattisgarh followed by Kerala,
Madhya Pradesh, Punjab and West Bengal. Inequality is low in urban Gujarat followed by Assam and Himachal Pradesh.
Inequality in rural India is lower than urban India in all major States. In rural India, inequality is the highest in Kerala, followed
by Haryana, Tamil Nadu and Maharashtra. Assam has the lowest inequality followed by Bihar, Jharkhand and Rajasthan
in rural India.
Employment

Regular employment is the major engagement of working urban households in most of the major States. About (48 per
cent) of urban households in Maharashtra followed by Haryana (47 per cent), Chhattisgarh (46 per cent), Gujarat (45 per
cent) and Punjab and Assam (44 per cent each), depend on regular employment. Percentage of self-employed households
in urban areas is higher in U.P. (49 per cent) and Bihar (47 per cent). The proportion of casual labour households was
higher in urban areas for Kerala (25 per cent) and Himachal Pradesh (24 per cent) than in other major States.

Table 2.3 Socio-economic profile of major States

Item A.P. Assam Bihar Gujarat Haryana H.P. Karnataka Kerala

Poverty and Growth related
%age of population
below p.l. ( 2004-05) 15.8 19.7 41.4 16.8 14 10 25 15
Average MPCE (2004-05)
Rural 586 543 417 596 863 798 508 1013
Urban 1019 1058 696 1115 1142 1390 1033 1291
Inadequate Food(2004-05) (% Households) 0.5 5 2.7 0.2 0.1 0 0.2 2.3
Lorenz Ratio(2004-05)
Rural 0.288 0.197 0.208 0.268 0.323 0.295 0.264 0.341
Urban 0.37 0.314 0.339 0.304 0.361 0.318 0.365 0.4
Health related
Life Expectancy at birth (2001-05)* 64.1 58.7 61.4 63.9 65.9 66.8 65.1 73.9
Infant Mortality Rates (2006) 56 67 60 53 57 50 48 15
Births assisted by a doctor/
nurse/LHV/ANM/ 74.2 31.2 30.9 64.7 54.2 50.2 71.3 99.7
other health personnel (%)
Institutional births (%) 68.6 22.7 22 54.6 39.4 45.3 66.9 99.5
Facilities at PHCs - (%)
(as on March, 2006)
With Labour Room 100 NA 13 67 71 NA 100 14
With Operation Theatre 87 NA 13 67 71 36 NA 12
With 24 Hrs. Delivery Facility 30 NA 14 5 51 NA 24 7
Education related
GER(6-14 years) (2004-05) Total 87.0 92.0 65.2 101.7 80.0 108.7 98.8 95.4
GER(14-16 years) (2004-05) Total 53.1 49.4 22.5 55.3 53.0 134.9 59.0 93.2
GER(16-18 years) (2004-05) Total 42.2 14.4 9.8 21.8 34.2 127.7 33.9 27.9
Basic Amenities related
% of Households having 88.4 38.1 27.7 89.3 91.5 98.4 89.3 91
Electricity(2005-06)
% of Households having 42.4 76.4 25.2 54.6 52.3 45.6 46.5 96
access to toilet facility (2005-06)
% of Households having safe
drinking water facilities (2001) 80.1 58.8 86.6 84.1 86.1 88.6 84.6 23.4

Source : Compiled based on the data obtained from Planning Commission, NSSO, NHP-2006, RHS-2006, Ministry of HRD,
*U.P. includes Uttarakhand.

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 CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
29

In rural areas, self-employment was more important in many of the major States. The proportion was high in UP (68 per
cent) followed by Rajasthan and Assam (66 per cent each), Himachal Pradesh (57 per cent) and MP (56 per cent).
Health

Life expectancy is highest in Kerala followed by Punjab, Maharashtra, Himachal Pradesh and Tamil Nadu. It was least in
Madhya Pradesh followed by Assam, Orissa, UP and Bihar.

As on March 2006, 100 per cent of Primary Health Centres (PHCs) had labour room in Andhra Pradesh, Karnataka and
Tamil Nadu while it was low in UP, Bihar, Kerala and MP.

As on March 2006, proportion of PHCs with operation theatres was 87 per cent in Andhra Pradesh followed by
Rajasthan (83 per cent), Maharashtra (74 per cent), Haryana (71 per cent) and Gujarat (67 per cent). It was low in UP,
West Bengal, Chhattisgarh, Kerala and Bihar.
Hunger and Inadequate Food

Prevalence of hunger as measured in months in which any member of the household had inadequate food is unusually
high in West Bengal. It is also high in Orissa, Assam and Bihar, but lower in Himachal Pradesh, Rajasthan, Haryana,
Gujarat, Karnataka and Tamil Nadu (Table 2.5).
Education

In 2004-05, Gross Enrolment Ratios (GER) for elementary education, i.e., I-VIII Class (6-14 years) was highest in Madhya
Pradesh (114.1 per cent), followed by Tamil Nadu (114 per cent) and Chhattisgarh (112.6 per cent). It was lowest in Bihar
(65.2 per cent) followed by Punjab (72.6 per cent) and Jharkhand (75.8 per cent).

GER for Secondary education (IX-X Class) was high in Himachal Pradesh (134.9 per cent) followed by Kerala (93 per
cent), and Tamil Nadu (80.7 per cent). It was lowest in Bihar (22.5 per cent), Jharkhand (26.5 per cent) and West Bengal
(41.5 per cent). For Senior Secondary level (XI-XII Class), GER was least at 2.5 per cent in Jharkhand followed by 9.8 per
cent in Bihar and highest at 127.7 per cent for Himachal Pradesh followed by 43.9 per cent in Tamil Nadu.
Basic Amenities

Himachal Pradesh, Punjab, Haryana, Kerala, Karnataka, Gujarat, Tamil Nadu and Andhra Pradesh have much larger
percentage of households having electricity than is the case in Bihar, Assam, Jharkhand, U.P. and Orissa.

Households having access to toilet facilities are high in Kerala, Assam and Punjab and low in Chhattisgarh, Jharkhand,
Bihar and Madhya Pradesh.

M.P. Maharashtra Orissa Punjab Rajasthan Tamil Nadu U.P. W. Bengal Chhattisgarh Jharkhand All-India

38.3 30.7 46.4 8.4 22.1 22.5 32.8 24.7 40.9 40.3 27.5

439.06 567.76 398.89 846.75 590.83 602.17 532.63 562.11 425.1 425.3 559
903.68 1148.27 757.31 1326.09 964.02 1079.65 857.05 1123.61 989.97 985.43 1052
1.6 0.8 5.3 0.7 0 0.3 1.5 9 2.2 0.6 1.9

0.269 0.31 0.302 0.278 0.248 0.315 0.287 0.273 0.305 0.231 0.297
0.397 0.371 0.355 0.393 0.367 0.358 0.37 0.376 0.439 0.354 0.373

57.7 66.9 59.2 69.2 61.7 66 59.8 64.6 63.2

74 35 73 44 67 37 71 38 61 49 57

37.1 70.7 46.4 68.6 43.2 93.2 29.2 45.7 44.3 28.7 48.2

29.7 66.1 38.7 52.5 32.2 90.4 22 43.1 15.7 19.2 40.7

19 68 64 39 83 100 0 44 20 NA —-
63 74 33 33 83 27 0 0 10 NA —-
NA 99 9 17 NA 19 NA 11 100 NA —-

114.1 105.7 108.5 72.6 102.7 114.0 87.0 94.7 112.6 75.8 93.5
45.7 68.9 53.7 51.5 43.9 80.7 48.9 41.5 43.9 26.5 51.7
25.3 42.3 32.9 27.9 21.6 43.9 22.9 21.1 30.4 2.5 27.8

71.4 83.5 45.4 96.3 66.1 88.6 42.8 52.5 71.4 40.2 67.9

27 53 19.3 70.8 30.8 42.9 33.1 59.5 18.7 22.6 44.5

68.4 79.8 64.2 97.6 68.2 85.6 87.8 88.5 70.5 42.6 77.9

NFHS-3, O/o RG1

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30 ECONOMIC SURVEY 2007-2008

Institutional framework for monitoring has been greatly aided by developments in

and evaluation of public programmes information technology and e-governance. The
2.35 It has often been pointed out that our Government of India has effectively implemented
planning and development process, both at the e-governance projects in some departments like
Central and State levels, suffers from lack of Department of Revenue relating to income tax,
adequate closure. The feedback loop of evaluation customs and excise, Ministry of Railways where
and assessment of our numerous plan schemes ticket reservation has become accessible and can
is often missing. As a result the corrective be made from any place in the country, the Postal
measures on most plan initiatives, if any, are few Department which initiated e-facilities like returns
and far between. Thus, while the intentions have of direct e-credit of Monthly Income Scheme to
investor’s account, dematerialization of National
been noble, the delivery systems are weak and
Savings Certificate (NSC), Kisan Vikas Patra
characterized by significant leakages and mis-
(KVP), etc. Such success stories in e-governance
targeting of the intended beneficiaries. At an
have encouraged many States to initiate their own
institutional level, particularly when there is quantum
e-governance programmes and move rapidly from
jump in the social sector expenditure in the
being an IT-aware to an IT-enabled government.
Eleventh Five Year Plan, it becomes essential
that the Central Government strengthen its capacity Conclusion
to undertake evaluation of all plan schemes and 2.37 The challenges and opportunities arise at
create a knowledge base and expertise to help two levels. It is incumbent on the Central
the State Governments in building and strengthening Government to provide a conducive investment
their respective evaluation agencies. Traditionally, climate and manage the macroeconomy to
plan monitoring has been done by States by facilitate non-inflationary growth. The Central
tracking expenditure levels achieved in relation to Government and the Planning Commission can in
the budgeted outlays. Though expenditure is an certain areas and sectors also play a leadership
important indicator of the progress of plan role in setting an agenda of policy and institutional
implementation, it does not measure the reforms that will sustain high growth for several
effectiveness of the expenditure undertaken in decades. At a second level, the States must refocus
generating the desired outcomes. It is, therefore, their efforts on the provision of public and quasi-
important to move systematically from financial public goods, some of which have been neglected
monitoring to output and outcome monitoring. by States, and improve the quality of the service
provided by these goods. As the bureaucratic
Transparency in decision making
capacities to deliver these goods and services in
2.36 The enactment of the Right to Information sufficient quantity and adequate quality are heavily
Act at the Centre and in many States has bridged constrained, they must shed other activities that
a critical gap in the public decision-making are best done by private profit and non-profit
process, ushering in greater accountability of the organisations and focus on excellence in these
public servants. This move towards greater areas. Only then can they satisfy the majority of
transparency and right to access public information their citizens and meet their legitimate aspirations.

Box 2.4 Smart Card for empowerment

A Planning Commission Working Group, in the context of the Eleventh Five Year Plan, has examined the
design and potential use of the Multi-Application Smart Cards (MASCs) System which facilitates simplification
of procedures and enhances the efficiency of Government schemes. Usefulness of the MASCs for various
Central Government schemes like, PDS, Indira Awas Yojana and National Rural Employment Guarantee
Scheme (NREGS), has been recognized. These studies could form the basis for the introduction of a Smart
Card system and a web-enabled information system, on an experimental basis.
The smart cards system will be based on unique ID, sharing of ID, multi-application and access control.
The entire system will consist of front, middle and back end. The electronic card will be the front end of
the Integrated Smart Card System. The front end is the point of delivery of the system where the smart cards
will be read and used. The middle office will be responsible for charging and updating the card periodically
(month, quarter, annual) depending on the type of information and the requirement and transfer information
from the front end to the back end and vice versa. The back end set-up will contain the computerised records,
guidelines, accounts and management information systems. The complete system would require complete
digitization of the records.

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