CHAPTER 1

State of the Economy

T he economy has moved decisively to a higher

growth phase. Till a few years ago, there was
still a debate among informed observers about
improving public welfare. Per capita consumption
is another quantitative indicator that is useful for
judging welfare improvement. It is therefore
whether the economy had moved above the 5 to appropriate to start by looking at the changes in
6 per cent average growth seen since the 1980s. real (i.e. at constant prices) per capita income
There is now no doubt that the economy has and consumption
moved to a higher growth plane, with growth in
1.3 The pace of economic improvement has
GDP at market prices exceeding 8 per cent in
moved up considerably during the last five years
every year since 2003-04. The projected economic
(including 2007-08). The rate of growth of per capita
growth of 8.7 per cent for 2007-08 is fully in line
income as measured by per capita GDP at market
with this trend. There was an acceleration in
prices (constant 1999-2000 prices) grew by an
domestic investment and saving rates to drive
annual average rate of 3.1 per cent during the 12-
growth and provide the resources for meeting the
year period, 1980-81 to 1991-92. It accelerated
9 per cent (average) growth target of the Eleventh
marginally to 3.7 per cent per annum during the
Five-Year Plan. Macroeconomic fundamentals
next 11 years, 1992-93 to 2002-03. Since then
continue to inspire confidence and the investment
there has been a sharp acceleration in the growth
climate is full of optimism. Buoyant growth of
of per capita income, almost doubling to an average
government revenues made it possible to maintain
of 7.2 per cent per annum (2003-04 to 2007-08).
fiscal consolidation as mandated under the Fiscal
This means that average income would now double
Responsibility and Budget Management Act
in a decade, well within one generation, instead of
(FRBMA). The decisive change in growth trend
after a generation (two decades). The growth rate
also means that the economy was, perhaps, not
fully prepared for the different set of challenges of per capita income in 2007-08 is projected to be
that accompany fast growth. Inflation flared up in 7.2 per cent, the same as the average of the five
the last half of 2006-07 and was successfully years to the current year.
contained during the current year, despite a global 1.4 Per capita private final consumption
hardening of commodity prices and an upsurge in expenditure has increased in line with per capita
capital inflows. An appreciation of the rupee, a income. The growth of per capita consumption
slowdown in the consumer goods segment of accelerated from an average of 2.2 per cent per
industry and infrastructure (both physical and year during the 12 years from 1980-81 to 1991-92
social) constraints, remained of concern. Raising to 2.6 per cent per year during the next 11 years
growth to double digit will therefore require following the reforms of the 1990s. The growth
additional reforms. rate has almost doubled to 5.1 per cent per year
during the subsequent five years from 2003-04 to
Per capita income and consumption
2007-08, with the current year’s growth expected
1.2 Growth is of interest not for its own sake to be 5.3 per cent, marginally higher than the five-
but for the improvement in public welfare that it year average. The average growth of consumption
brings about. Economic growth, and in particular is slower than the average growth of income,
the growth in per capita income, is a broad primarily because of rising saving rates, though
quantitative indicator of the progress made in rising tax collection rates can also widen the gap
2 ECONOMIC SURVEY 2007-2008

Figure 1.1 Selected economic indicators

Industrial production – Foodgrains production (million tonnes)b

rate of change (per cent)a 220
20
210
16
2006-07 200
14

12 190

10
180
8
2007-08
170
6

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08(AE)
4
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Exports (US$ million)c Imports (US$ million)c

15500 35000

14000 30000
2007-08
12500 25000
2007-08
11000 20000
2006-07
9500 15000
2006-07
8000 10000
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Money supply (M3) growth – Wholesale price changes – Mar

rate of change (per cent) 52-week average inflation rate (per cent)d
25 7

23 6
2006-07
2007-08 5
22
4
21
3
20
2
19
1
18
0
17
2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

a
November 2007 (Provisional)
b
First advance estimates (Kharif only)
c
Provisional
d
Provisional average April to December, 2007

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 STATE OF THE ECONOMY 3
Figure 1.2 Growth in per capita income
9
8 Growth in
Growth rate (%)

per capita
7 income
6
5
4
3
2
1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08
Years

(during some periods). Year to year changes in 1.6 The (per capita) GDP at purchasing power
consumption also suggest that the rise in parity is conceptually a better indicator of the
consumption is a more gradual and steady relative size of the economy than the (per capita)
process, as any sharp changes in income tend to GDP at market exchange rates. There are, however,
get adjusted in the saving rate. practical difficulties in deriving GDP at PPP, and
we now have two different estimates of the PPP
Table 1.2 conversion factor for 2005. India’s GDP at PPP is
Per capita income and consumption (in 1999- estimated at US$ 5.16 trillion or US$ 3.19 trillion
2000 prices) depending on whether the old or new conversion
factor is used. In the former case, India is the
Income Consumption
third largest economy in the world after the United
Rs. Growth(%) Rs. Growth(%)
States and China, while in the latter it is the fifth
IX plan avg. 19245 3.4 12392 3.0 largest (behind Japan and Germany).
X plan avg. 24156 6.2 14677 4.3
2002-03 20996 2.2 13352 1.1 1.7 GDP at factor cost at constant 1999-2000
2003-04 22413 6.8 13918 4.2
prices is projected by the CSO to grow at 8.7 per
2004-05 23890 6.6 14413 3.6
cent in 2007-08. This represents a deceleration
2005-06 25696 7.6 15422 7.0
from the unexpectedly high growth of 9.4 per cent
2006-07 27784 8.1 16279 5.6
and 9.6 per cent, respectively, in the previous two
years. With the economy modernizing, globalizing
2007-08 29786 7.2 17145 5.3
and growing rapidly, some degree of cyclical
Income is taken as GDP at market prices.
Consumption is PFCE. fluctuation is to be expected. This was taken into
Per capita is obtained by dividing these by population. account while setting the Eleventh Five Year Plan
(2007-08 to 2011-12) growth target of 9 per cent
Economic growth (both in the approach paper and in the NDC
1.5 GDP at current market prices is projected approved plan). Given the over 9 per cent growth
at Rs. 46,93,602 crore in 2007-08 by the Central in the last two years of the Tenth Five Year Plan
Statistical Organisation (CSO) in its advance it was argued that the Eleventh Five Year Plan
estimates (AE) of Gross Domestic Product. Thus, target could be set at 10 to 11 per cent as 9 per
in the current fiscal year, the size of the Indian cent had already been achieved. Maintaining growth
economy at market exchange rate will cross US$ rate at 9 per cent will be a challenge and raising
1 trillion. At the nominal exchange rate (average of it to two digits will be an even greater one.
April-December 2007) GDP is projected to be US$
Sectoral Contribution
1.16 trillion in 2007-08. Per capita income at
nominal exchange rate is estimated at US$ 1,021. 1.8 The deceleration of growth in 2007-08 is
According to the World Bank system of generally spread across most of the sectors except
classification of countries as low income, middle electricity, community services and the composite
income and high income, India is still in the category “trade, hotels, transport &
category of low income countries. communications”. The deceleration in the growth

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4 ECONOMIC SURVEY 2007-2008

of the agriculture sector is attributed to the overall growth increased from about 9.6 per cent
slackening in the growth of rabi crops. during the Ninth Five Year Plan to about 17.7 per
Manufacturing and construction, which grew at 12 cent during the Tenth Five Year Plan.
per cent in 2006-07, decelerated by about 2.5 1.11 The growth in the services sector continued
percentage points in 2007-08. The slower growth to be broad based. Among the subsectors of
of consumer durables (as reflected in the IIP) was services, “transport and communication” has been
the most important factor in the slowdown of the fastest growing with growth averaging 15.3 per
manufacturing. Cement and steel, the key inputs cent per annum during the Tenth Five Year Plan
into construction, grew by 7.4 per cent and 6.5 period followed by “construction”. The impressive
per cent respectively, during April-November 2007- progress in the telecommunication sector and
08, down from 10.8 per cent and 11.2 per cent in higher growth in rail, road and port traffic played
the previous year,dampening the growth in the an important role in the growth of this sector.
construction sector. There was also a deceleration Besides manufacturing the two other sectors
in the growth of revenue earning freight traffic by whose contribution to growth has increased over
railways, passengers handled at airports, and bank the two plans are construction and
credit in April-November 2007-08, which formed communications. The contribution of the
the basis for the full year assessment. construction sector increased to 10.8 per cent
1.9 Growth in 2006-07 initially estimated at during the Tenth Five Year Plan from 7.5 per cent
9.2 per cent in February 2007 was revised upwards during the Ninth Five Year Plan, while that of
to 9.4 per cent in May 2007 and further to 9.6 per telecom increased to 11.4 per cent from 6 per
cent in the Quick Estimates released by the CSO cent over the two plans. The growth of “financial
on January 31, 2008. This suggests that upward services” comprising banking, insurance and
adjustments in the 2007-08 projections are possible. business services, after declining to 5.6 per cent
in 2003-04 bounced back to 8.7 per cent in 2004-
1.10 The observed growth of 7.8 per cent in
05, 11.4 per cent in 2005-06 and 13.9 per cent in
the Tenth Five Year Plan (2002-07), the highest so
2006-07. Manufacturing, construction and
far for any plan period, is only marginally short of
communication were the leading sectors in the
the target of 8 per cent. The dismal growth rate of
acceleration of growth during the Tenth Five Year
3.8 per cent during the first year of the plan was
Plan, judged by their increased contribution to
made up by an upsurge in growth in the next four
growth.
years to an average of 8.8 per cent. A notable
feature of growth during the Tenth Five Year Plan 1.12 Agricultural growth, dependent as it is on
was the resurgence of manufacturing. There was the monsoon, continued to fluctuate, though the
a sharp acceleration in the growth of manufacturing five-year period ending 2007-08 had the second
from 3.3 per cent during the Ninth Five Year Plan lowest coefficient of variation (CV) since the five
to 8.6 per cent during the Tenth Five Year Plan. years ending 1956-57. The CV for the Tenth Five
The average growth of manufacturing during the Year Plan was, however, higher than the 60- year
five years ending 2007-08 is expected to be about average. The overall growth during the Tenth Five
9.1 per cent. The contribution of manufacturing to Year Plan was 2.5 per cent, the same as in the

Table 1.3 Rate of growth of GDP at factor cost at 1999-2000 prices (per cent)

IX plan 2002-03 2003-04 2004-05 2005-06 2006-07 X plan 2007-08

Agriculture and Allied 2.5 -7.2 10.0 0.0 5.9 3.8 2.5 2.6
Mining 4.0 8.8 3.1 8.2 4.9 5.7 6.1 3.4
Manufacturing 3.3 6.8 6.6 8.7 9.0 12.0 8.6 9.4
Electricity 4.8 4.7 4.8 7.9 4.7 6.0 5.6 7.8
Construction 7.1 7.9 12.0 16.1 16.5 12.0 12.9 9.6
Trade and hotels 7.5 6.9 10.1 7.7 9.4 8.5 8.5 12.1
Transport & communican 8.9 14.1 15.3 15.6 14.6 16.6 15.3
Financing, real est, hsng 8.0 8.0 5.6 8.7 11.4 13.9 9.5 11.7
Community Services 7.7 3.9 5.4 6.9 7.2 6.9 6.1 7.0
GDP 5.5 3.8 8.5 7.5 9.4 9.6 7.8 8.7
Note: Plan period is simple average.

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 STATE OF THE ECONOMY 5
Ninth Five Year Plan. Weather induced fluctuations fixed investment, grew by an average of 14.3 per cent
considerably influenced the GDP growth for per annum during the Tenth Five Year Plan period.
agriculture. In 2002-03, the cumulative rainfall of
1.14 The relative share of private consumption
North-East and South-West monsoon was -33 per
in GDP was 60.9 per cent while gross fixed capital
cent and -19 per cent, respectively, of the long
formation had a share of 27 per cent. Though the
period averages (LPA). Similarly, in 2004-05, the
average growth of private consumption (PFCE)
cumulative rainfall was -13 per cent and -11 per
accelerated somewhat to 5.9 per cent per annum
cent from LPA for South-West and North-East
from 5 per cent, its contribution to growth of demand
monsoon, respectively. The secular decline in the
declined from 59 per cent to 46 per cent between
share of agriculture sector in GDP continued, with
the two plans. The contribution of net exports of
a decline from 24 per cent in 2001-02 to 17.5 per
goods and services to overall demand also declined
cent in 2007-08.
between the two plans to a negative 5 per cent.
Aggregate Demand Thus the external trade has had a dampening
effect on aggregate demand during the just
1.13 The most important contribution to demand
completed plan. Export growth, because of its
growth has come from investment, while the
spillover effects on productivity and efficiency, can,
external trade made negligible or negative
however, still act as a driver of growth.
contribution. The growth of GDP at market prices
accelerated from 3.8 per cent in 2002-03 to 9.7 1.15 NAS projections for 2007-08 show a
per cent in 2006-07, giving an average annual deceleration in the GDP growth at market prices
growth of 7.9 per cent for the Tenth Five Year in line with its growth at factor cost. They also
Plan. The average rate of growth of gross capital show a deceleration in the growth of consumption,
formation during the Tenth Five Year Plan has both public and private, and an acceleration in the
more than tripled to 17.3 per cent per year from rate of growth of gross fixed capital formation. The
an average growth of 5.3 per cent per annum in higher growth in the gross capital formation is
the Ninth Five Year Plan. Consequently, its projected to improve its share in GDP at market
contribution to overall demand, as measured by prices to 32.6 per cent in 2007-08 compared to a
the increase in GDP at market prices, tripled from share of 23.6 per cent in 2002-03. GDCF is
19 per cent in the Ninth Five Year Plan to 65 per projected to grow by 20 per cent and PFCE at 6.8
cent in the Tenth Five Year Plan. The most per cent in 2007-08, both of them above the average
important component of investment, namely, gross of the just completed plan.

Table 1.4 Growth of GDP at 1999-2000 market prices (per cent) – annual and plan average

IX plan 2002-03 2003-04 2004-05 2005-6 2006-07 X Plan 2007-08

GDP at market prices 5.4 3.8 8.4 8.3 9.2 9.7 7.9 8.7
Consumption (Private) 5.0 2.7 5.8 5.2 8.7 7.1 5.9 6.8
Consumption (Govt) 7.9 -0.4 2.6 2.6 5.4 6.2 3.3 5.5
Gross Capital Formation 5.3 17.0 19.9 19.5 19.4 10.9 17.3 na
Gross Fixed Capital Formation 6.4 6.6 13.7 18.9 17.4 15.1 14.3 15.7
Change in stocksa — -13.4 144.0 47.7 3.9 5.1
Exports 10.7 21.8 5.8 28.1 14.8 18.9 17.9 6.4
Imports 9.6 10.4 16.8 16.0 45.6 24.5 22.7 6.4
Contribution to growth (per cent)
Consumption (Private) 59.2 45.5 44.2 39.0 56.6 43.9 45.8 45.8
Consumption (Govt) 16.7 -1.1 3.6 3.5 6.2 6.5 3.7 6.2
Gross Capital Formation 19.4 — 59.5 65.4 64.3 37.5 65.4 na
Gross Fixed Capital Formation 25.0 40.5 38.5 56.3 51.2 45.5 46.4 55.2
Net Exports -0.1 40.5 -17.5 22.3 -51.7 -18.2 -4.9 -3.2
Relative share (per cent)
Consumption (Private) 64.4 63.6 62.1 60.3 60.0 58.6 60.9 57.6
Consumption (Govt) 12.3 11.7 11.1 10.5 10.2 9.8 10.7 9.5
Gross Capital Formation 24.0 25.0 27.7 30.6 33.4 33.8 30.1 na
Gross Fixed Capital Formation 22.7 23.6 24.7 27.1 29.2 30.6 27.0 32.6
a
Change in stocks was negative during 2001-02 hence growth rate has not been calculated.

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6 ECONOMIC SURVEY 2007-2008

Savings and investment Savings

1.16 A notable feature of the recent GDP growth 1.19 Both private and public savings have
has been a sharply rising trend in gross domestic contributed to higher overall savings. Private savings
investment and saving, with the former rising by have risen by 6.1 per cent points of GDP over the
13.1 per cent of GDP and the latter by 11.3 per Tenth Five Year Plan period while public sector
cent of GDP over five years till 2006-07. The savings increased by 5.2 per cent of GDP. Both
average investment ratio for the Tenth Five Year have increased steadily over this period, though
Plan at 31.4 per cent was higher than that for the private savings appear to have reached a plateau
Ninth Five Year Plan, while the average saving in 2005-06 (Table 1.5). The savings from the private
rate was also 31.4 per cent of GDP higher than corporate sector were particularly buoyant, while
the average ratio of 23.6 per cent during the Ninth the turnaround in public sector savings from
Five Year Plan. negative to positive from 2003-04 onwards is
1.17 The 1990s reforms transformed the heartening. The increase in private savings is due
investment climate, improved business confidence to a (more than) doubling of the rate of corporate
and generated a wave of entrepreneurial optimism. saving over the plan period. Savings of the
This has led to a gradual improvement in household sector were stable at 23 to 24 per cent
competitiveness of the entire corporate sector, a of GDP, averaging 23.7 per cent during the Tenth
resurgence in the manufacturing sector and an Five Year Plan. The physical and financial
acceleration in the rate of investment. The FRBMA components of the household savings also
mandated fiscal correction path was also helpful remained stable. With the upsurge in private
in raising the credibility of the Government with corporate and public sector savings, the share of
respect to fiscal deficits, in which India was at the the household sector in gross domestic savings
bottom of global rankings. This has improved declined from 94.3 per cent in 2001-02 to 68.4 per
perceptions about the long-term macroeconomic cent in 2006-07.
stability of the economy. Moderate tax rates,
Investment
coupled with buoyant sales growth, increased the
internal accruals of the corporate sector. The 1.20 In contrast to the increase in savings the
improved investment climate and strong macro increase in investment has been driven by private
fundamentals also led to an upsurge in foreign investment, which went up by 10.3 per cent of
direct investment. The combined effect of these GDP over the five years of the Tenth Five Year
factors was reflected in an increase in the Plan. This improvement was in turn driven by
investment rate from 25.2 per cent of GDP in the private corporate investment, which increased by
first year of the Tenth Five Year Plan to 35.9 per 9.1 per cent of GDP over these five years. Private
cent of GDP in the last year. The higher investment corporate sector investment improved from 5.4 per
was able to absorb the domestic savings and also cent of GDP in 2001-02 to 14.5 per cent in 2006-
generated an appetite for absorption of capital 07. The upsurge in private corporate investment
inflows from abroad. has been visible even to the public as a “Capex”
1.18 Gross domestic savings as a proportion boom, and that is still continuing. Household
of GDP continued to improve, rising from 26.4 per investment remained close to the plan average of
cent in 2002-03 to 34.8 per cent in 2006-07 with 12.7 per cent of GDP throughout the period, while
an average of 31.4 per cent during the Tenth Five the public sector investment increased by less
Year Plan. The savings-investment gap which than 1 per cent of GDP over the plan period.
remained positive during 2001-04 became negative 1.21 The National Accounts provide the data of
thereafter. In a modern economy, the excess of the gross domestic capital formation at constant
domestic saving over domestic investment 1999-2000 prices also. In terms of constant prices,
suggests a deflationary situation in which demand the ratio of gross investment to GDP is estimated
has not kept pace with increased capacity. Thus to have increased from 25 per cent in 2002-03 to
the reversal of the saving-investment balance 33.8 per cent in 2006-07. The gross fixed capital
should be viewed as a correction of the domestic formation accounted for more than 90 per cent of
supply-demand balance, occurring through above the investment. The ratio of fixed capital formation
normal (and welcome) increase in demand during to GDP is estimated to have increased to 30.6
2005-06 and 2006-07. per cent in 2006-07.

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 STATE OF THE ECONOMY 7
Table 1.5 Ratio of Savings and Investment to GDP (per cent at current market prices)

Ave 2001- 2002- 2003- 2004- 2005- 2006- Ave X

IX plan 02 03 04 05 06 07 Plan
Gross Domestic Savings 23.6 23.5 26.4 29.8 31.8 34.3 34.8 31.4
Public Sector -0.7 -2.0 -0.6 1.1 2.2 2.6 3.2 1.7
Private Sector 24.3 25.5 27.0 28.7 29.6 31.7 31.6 29.7
Household Sector 20.3 22.1 23.2 24.4 23.0 24.2 23.8 23.7
Financial 10.3 10.9 10.3 11.4 10.1 11.8 11.3 11.0
Physical 10.0 11.3 12.9 13.0 12.9 12.5 12.5 12.7
Corporate sector 4.0 3.4 3.9 4.4 6.6 7.5 7.8 6.0
Gross Capital formation (Investment) 24.3 22.8 25.2 28.2 32.2 35.5 35.9 31.4
Public sector 7.0 6.9 6.1 6.3 6.9 7.6 7.8 6.9
Private Sector 16.8 16.7 18.6 19.5 23.4 25.8 27.0 22.9
Corporate Sector 6.8 5.4 5.7 6.6 10.5 13.3 14.5 10.1
Household sector 10.0 11.3 12.9 13.0 12.9 12.5 12.5 12.7
Gross Fixed Capial Formation 23.1 23.6 23.8 24.9 28.4 31.0 32.5 28.1
Stocks 0.7 -0.1 0.9 0.9 1.9 2.4 2.3 1.7
Valuables 0.4 0.6 0.6 0.9 1.3 1.2 1.2 1.0
Saving Investment Gap -0.7 0.6 1.2 1.6 -0.4 -1.2 -1.1 0.0
Private 7.5 8.8 8.5 9.2 6.1 5.9 4.5 6.8
Public -7.7 -8.9 -6.7 -5.3 -4.7 -5.0 -4.5 -5.3
Note: Totals may not tally due to adjustment for errors and omissions.

Sectoral investment and ICOR manufacturing growth rate is higher than for total
GDP, which is backed by solid build up of capacity.
1.22 It is useful to examine the growth of gross
The fact that the calculated ICOR for this period
capital formation (investment) by sectors to see
at 8.9 is the second highest after electricity
how much of the sector’s growth has been
suggests that there may be some build up of
associated with expansion of capacity. Gross
capacity ahead of and in anticipation of demand.
capital formation in manufacturing grew at a
phenomenal 33.6 per cent per annum during the 1.23 The 29.7 per cent per annum growth of
Tenth Five Year Plan period, the highest growth investment in mining seems at first sight
rate of any sector. This confirms that the boom in inconsistent with the relatively low growth of GDP

Table 1.6 Components of Domestic Investment (per cent to GDP at 1999-00 market prices)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Ave X Plan

Fixed Investment 22.9 23.6 24.7 27.1 29.2 30.6 27.0
Public sector 6.4 6.2 6.4 6.2 6.7 7.2 6.5
Private Sector 16.5 17.3 18.3 20.9 22.4 23.4 20.5
Corporate Sector 5.5 5.2 6.0 9.1 11.3 12.4 8.8
Household sector 11.0 12.1 12.4 11.8 11.1 11.0 11.7
Change in Stocks -0.1 0.9 0.7 1.6 2.2 2.1 1.5
Public sector 0.4 -0.2 -0.3 0.2 0.4 0.1 0.1
Private Sector -0.5 1.1 1.1 1.4 1.7 2.0 1.4
Corporate Sector -0.3 0.5 0.6 1.2 1.5 1.7 1.1
Household Sector -0.2 0.6 0.5 0.2 0.2 0.3 0.3
Valuables 0.6 0.6 0.9 1.3 1.2 1.2 1.0
Gross Investmenta 22.2 25.0 27.7 30.6 33.4 33.8 30.1
Public Sector 6.8 6.1 6.1 6.4 7.1 7.3 6.6
Private Sector 16.1 18.4 19.4 22.3 24.2 25.4 21.9
Corporate Sector 5.2 5.7 6.5 10.3 12.8 14.1 9.9
Household sector 10.9 12.7 12.9 12.0 11.4 11.3 12.0
a
Adjusted for errors and omissions.

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8 ECONOMIC SURVEY 2007-2008

from this sector. However, given the long gestation Consumption Basket
lags in many types of mining projects, the 1.25 The National Accounts also provide data
increased investment could be a precursor of faster on disaggregated consumption expenditure of
growth in the Eleventh Five Year Plan, though the households in eight broad categories. With rising
first year growth is not encouraging. Trade & hotels, per capita consumption, simple Engel curve
with an annual growth of 26.4 per cent during the analysis would predict a decline in share of
five years of the Tenth Five Year Plan, was the consumption on food and an increase in luxuries,
third fastest investor. With its very low ICOR of which in our context include entertainment and
0.7, it can play a vital role in generating higher durable goods. Food and beverages had the lowest
employment with relatively low investment along average growth of 3.2 per cent during the Tenth
with the construction sector (with the third lowest Five Year Plan and its share declined from 48.1
ICOR). Communication, a very fast growing sector per cent in 2001-02 to 42.1 per cent in 2006-07
in terms of value added, had the lowest ICOR of (Table 1.7). The growth of transport and
0.6, confirming that competition-induced communication, education and recreation and
productivity growth has played a key role in this miscellaneous services by more than 10 per cent
reasonably well regulated sector. and the rising share of furniture, appliances and
services are also consistent with the Engel curve
1.24 The traditionally high ICOR of 16.7 for the analysis.
electricity sector re-emphasises the critical
1.26 The erratic pattern of change in
importance of efficient planning and implementation
consumption of clothing and footwear may be
of capacity building as well as efficient use of this
because the middle class households treat them
capacity and of the electricity produced from it.
as falling within a residual expenditure category.
Railways and other transport and other services
The high share of expenditure on health care,
were the remaining sectors in which GCF growth
despite a large and nominally free public health
exceeded 15 per cent (Table 1.6). Finance and
care system stretching into the villages, has been
business services, communication and agriculture
of concern, as the pattern is found even among
and allied sectors recorded significantly lower
the less well off. The decline in share to 4.4 per
growth. The ratio of gross capital formation to cent in 2006-07 after a peak of 5.2 in 2002-03
GDP averaged 31 per cent during the Tenth Five could be a positive indicator.
Year Plan. It, however, was 94.1 per cent for
electricity sector followed by manufacturing at 76.5 Inclusive growth
per cent. Trade and hotels had the lowest gross 1.27 Faster economic growth is also translating
capital formation to GDP ratio of 6.2 per cent. into more inclusive growth, both in terms of

Table 1.7 Sector Investment (1999-00 prices) and ICOR

Rate of growth of GCF GCF/ GDP ICOR

GDP Growth
2003-04 2004-05 2005-06 2006-07 X Plan X Plan X Plan X Plan
Agriculture & Allied -3.8 7.9 11.7 10.4 4.8 12.4 2.5 5.0
Mining 69.1 53.9 27.4 -2.0 29.7 37.2 6.1 6.1
Manufacturing 22.8 55.8 25.6 17.9 33.6 76.5 8.6 8.9
Electricity 22.7 -8.3 28.0 8.0 8.5 94.1 5.6 16.7
Construction 27.2 19.7 21.6 10.2 17.1 16.0 12.9 1.2
Trade & Hotels 152.7 6.0 7.6 6.7 26.4 6.2 8.5 0.7
Transport & Communication -2.6 15.0 -10.9 14.0 7.7 32.2 15.3 2.1
Railways 5.2 3.4 9.4 40.4 17.2 34.3 7.4 4.6
Other Transport 10.3 13.5 -23.4 13.2 15.3 42.6 10.4 4.1
Communication -46.4 56.7 30.6 0.9 2.3 16.5 26.5 0.6
Financial & Business Services 0.8 -11.4 17.3 5.1 1.3 31.7 9.5 3.3
Other Services 3.0 22.5 27.4 23.2 17.2 31.0 6.1 5.1
Total 12.7 22.4 19.1 14.3 15.9 31.0 7.8 4.0

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 STATE OF THE ECONOMY 9
employment generation and poverty reduction. The the poverty line has declined to 22 per cent in
Tenth Five Year Plan was formulated in the 2004-05 from 26 per cent in 1999-2000. Further,
backdrop of the concerns over jobless growth. the growth of average monthly per capita
Employment growth slowed to 1.25 per cent per expenditure at constant prices between 1993-94
annum during 1993-94 to 1999-2000 with 24 million and 2004-05 (61st Round of NSSO) also indicates
work opportunities created during this period (annual broadly similar growth across different rural and
average of 4 million). The Tenth Five Year Plan, urban income classes, though it may have been
therefore, set a target of creation of 50 million new less uniform for urban than for rural population.
opportunities on current daily status basis (CDS).
Inflation
1.28 The 61st Round of NSSO Survey found
that 47 million work opportunities were created GDP Deflators
during 1999-2000 to 2004-05, at an annual average 1.30 The implicit deflator for GDP MP and its
of 9.4 million. Employment growth accelerated to demand components is the most comprehensive
2.6 per cent during this period. The labour force, measure of inflation on an annual basis. Overall
however, grew at 2.8 per cent per year, 0.2 per inflation, as measured by the aggregate deflator
cent point faster than the workforce, resulting in for GDP MP, is projected to decline from 5.6 per
an increase in the unemployment rate to 8.3 per cent in 2006-07 to 4.1 per cent in 2007-08. Thus
cent in 2004-05 from 7.3 per cent in 1999-2000. the inflation rate is projected to be identical to
These rates based on the CDS approach are higher that in 2005-06. The counterpart of the consumer
than those obtained by the usual status and price index (CPI), the most commonly used
weekly status approaches, indicating a high degree inflation rate for monetary purposes, is the deflator
of intermittent unemployment. Unemployment rate for private final consumption expenditures (PFCE).
measured in terms of number of persons as per Inflation, according to the PFCE deflator jumped
the usual principal and subsidiary status basis from 3 per cent in 2005-06 to 5.1 per cent in
was only 2.5 per cent in 2004-05. 2006-07 and is projected to be 5.5 per cent in
1.29 The proportion of persons below the 2007-08. The projected decline in the overall
poverty line declined from around 36 per cent of inflation is therefore due to the deceleration in
the population in 1993-94 to 28 per cent in 2004- investment goods prices from 5.5 per cent growth
05 as per the uniform recall period. Based on the in 2006-07 to 4.3 per cent growth in 2007-08. This
mixed recall period, the number of persons below should have a positive effect on investment.

Table 1.8 Private Final Consumption- Annual growth and Share (in per cent)

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Food & Beverages -3.4 5.9 -1.9 4.5 1.0 7.5 4.8
Clothing & Footwear 16.8 -2.9 4.5 -2.4 4.7 12.0 3.7
Rent, Fuel & Power 2.8 2.6 2.9 3.3 7.4 3.0 3.0
Furniture,appliances,service 7.2 3.5 4.0 8.1 12.2 11.6 13.5
Medical & Health care 11.6 14.2 5.3 3.3 3.4 2.0 0.7
Transport, Communication 14.3 6.6 10.6 11.4 10.2 10.4 12.2
Education & Recreation 11.8 7.3 4.5 12.0 13.9 12.4 15.8
Others 12.2 11.4 9.8 9.5 12.4 11.7 11.3
Total Private Consumption 3.4 5.9 2.6 5.9 5.5 8.3 7.2
Share of Total (per cent)
Food & Beverages 48.1 48.1 45.9 45.3 43.4 43.1 42.1
Clothing & Footwear 6.0 5.5 5.6 5.1 5.1 5.3 5.1
Rent, Fuel & Power 11.4 11.0 11.0 10.8 11.0 10.4 10.0
Appliances 3.4 3.3 3.3 3.4 3.6 3.7 4.0
Medical & Health care 4.7 5.1 5.2 5.1 5.0 4.7 4.4
Transport 14.5 14.5 15.7 16.5 17.2 17.5 18.4
Education & Recreation 3.7 3.7 3.8 4.0 4.3 4.5 4.9
Others 8.4 8.9 9.5 9.8 10.4 10.8 11.2

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10 ECONOMIC SURVEY 2007-2008

Prices 1.33 The group “fuel and power” has, however,

1.31 Inflation as measured by the Wholesale witnessed an increase in inflation in recent months.
Price Index (WPI) rose from 4.4 per cent in 2005- An increase in the prices of coal and domestic
06 to 5.4 per cent in 2006-07 and is expected to pass through of international price increase in
return to around the 2005-06 rate for the full year crude oil to petroleum products, other than petrol
2007-08, based on the 10 months completed. The and diesel, contributed to this firming up of inflation.
composition will, however, be different, with a much At a disaggregated level, on January 19, 2008,
higher primary goods inflation, mainly because of the prices of 132 “manufactured products” with a
primary non-food prices and a lower fuel price weight of 29.7 per cent, 10 items of “fuel and
inflation because of low pass through of global oil power” with a weight of 10.1 per cent and 41
prices. The latest flare up in prices started from a “primary articles” with a weight of 6.8 per cent
trough of around 4 per cent in February-March were the same or lower than a year ago. The
2006 and (except for a short respite in July) combined weight of these 183 commodities was
continued to accelerate till it peaked in March 46.6 per cent. These commodities substantially
2007. Since then there is a declining trend till contributed to moderation in the inflation in the
December 2007. Annual headline inflation was 4.1 current year.
per cent on February 2, 2008. On February 15, 1.34 The close monitoring of prices and
2008, a hike in fuel prices was announced, which appropriate policy interventions initiated in the last
as per preliminary estimates is expected to add year and a half helped in maintaining price stability
19 basis points to the inflation rate. and reducing the impact of increase in global prices
1.32 The increase in the prices of primary on domestic consumers.
articles and mineral oils in June 2006 substantially Money supply
contributed to this firming up. It started moderating
1.35 The Reserve Bank of India’s monetary
from June 2007 onwards because of a number of
policy stance is to serve the twin objectives of
reasons: These included a rollback in the increase
managing the transition to a higher growth path
in the prices of petrol and diesel at end November
and containing inflationary pressures. For policy
2006 and mid-February 2007 to the pre-June 2006
purposes for 2007-08, the RBI assumed a real
levels, improved availability of primary articles, and
GDP growth of 8.5 per cent with inflation close to
fiscal and monetary measures. The year-on-year
5 per cent, and targeted the monetary expansion
rate of inflation declined to less than 4 per cent in
in the range of 17-17.5 per cent and credit
mid- August 2007 after a gap of 67 weeks. The
expansion in the range of 20 to 24 per cent as
overall inflation has remained below 4 per cent
consistent with envisaged growth and inflation. In
since then for 23 consecutive weeks, before inching
its mid-term review, the RBI reiterated continuation
up to 4.1 per cent in the last two weeks. Primary
of the policy stance announced in April 2007 with
articles which had contributed to substantial
an additional resolve “to be in readiness to take
increase in the inflation in 2006-07 and in the first
recourse to all possible options for maintaining
five months of the current year were also the major
stability and the growth momentum in the economy
contributors to the deceleration in the rate of
in view of the unusual heightened global uncertainties,
inflation. The inflation of primary articles declined
and the unconventional policy responses to the
from 12.2 per cent on April 7, 2007, to 3.8 per
developments in financial markets”.
cent on January 19, 2008, the lowest level since
early November 2005. There was also deceleration 1.36 Annual average growth of Money (M3)
in the prices of manufactured products from over reached a trough of 13 per cent in 2003-04 and
6 per cent in April 2007 to less than 4.5 per cent has been on an accelerating trend since then,
in the last 17 weeks (up to February 2, 2008). reaching 19.5 per cent in 2006-07. The cumulative
Table 1.9 Implicit deflators (per cent)

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

GDP MP 3.5 3.0 3.8 3.6 5.6 4.1 5.6 4.1
PFCEdm 3.5 3.2 2.9 3.6 2.8 3.0 5.1 5.5
GFCF 4.7 4.9 1.8 3.5 9.6 5.6 5.5 4.3
PFCEdm : Private Final consumption expenditure in domestic market.

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 STATE OF THE ECONOMY 11
(FY to date) increase in the stock of M3 in 2007- in April-December 2007 from 1.7 (1.2 ) per cent in
08 has also remained above the cumulative growth April-December 2006. The doubling of the real
in 2006-07 and was 13.3 per cent on January 4, interest rate may have had a moderating effect on
2008, compared to 12.2 per cent on January 5, credit demand and consequently on both inflation
2006. Thus it is difficult to relate either the annual and growth. It has also led to a widening of the
or trend rate of growth of M3 to inflation which has interest differential between domestic and global rates.
been on a down trend during this period, with two 1.39 During 2006-07, the yield on 10-year G-
cycles peaking in August 2004 and March 2007. sec hardened by 45 basis points over the level
This is perhaps because of the parallel process of observed on March 31, 2006, to reach 7.97 per cent
monetary deepening of the informal economy that on March 31, 2007. Yields moved to 8.32 per cent
is under way. The ratio of average M3 to GDP has at end-June 2007 but softened subsequently to reach
increased from 44 per cent in 1990-91 to 71 per 7.77 per cent as on January 4, 2008, which was 20
cent in 2006-07. This could be attributed to the basis points over the end-March 2007 level.
spread of banking services and the saving habit,
resulting in a rise of time deposits. The 1.40 The acceleration in reserve money growth
monetization of the economy as measured by the continued in 2007-08. The expansion in M0 (up to
ratio of average M1 to GDP has increased from 15 January 4, 2008) was 13.6 per cent compared to
per cent in 1990-91 to 21 per cent in 2006-07. 9.1 per cent during the corresponding period of
the previous year. The main driver of growth of M0
1.37 The average growth of bank credit to on financial year as well as on annual basis
commercial sector (BCCS) also reached a low of continued to be net foreign assets (NFA) of the
11.8 per cent in 2003-04 and rose in the next two RBI. NFA of the RBI expanded by 25.2 per cent
years to 28 per cent in 2005-06. However, in in the current year (39.1 per cent on annual basis)
contrast to money supply, average credit growth compared to an expansion of 15.9 per cent (26.1
slowed marginally to 26.8 per cent in 2006-07 and per cent on annual basis) during the same period
has decelerated further in 2007-08. The cumulative of the previous year. The share of NFA in the
(FY to date) increase in the credit extended by aggregate reserve money increased to 122.2 per
the banking sector to commercial sector during cent as on March 31, 2007, as against 117.4 per
2007-08 is less than in 2006-07. The cumulative cent on March 31, 2006. This ratio further increased
increase in non-food credit by January 4, 2008, to 134.7 per cent on January 4, 2008. With the
was 11.8 per cent, much slower than the 17.5 per continuing surge in capital flows during 2007-08
cent increase till the corresponding date of 2007. and the need to regulate domestic liquidity, the
This deceleration could be related to the MSS limits were revised upward four times to a
deceleration in growth of manufacturing and level of Rs. 2,50,000 crore during the year. During
construction sectors and the consequent slowdown April-December 28, 2007, liquidity absorbed under
in demand for credit. MSS was Rs. 96,742 crore with outstanding
1.38 Nominal interest rates, as measured by balances at Rs. 1,59,717 crore. The higher growth
the cut-off yield at auction on 91-day and 364-day of the monetary variables (M0 and M3), despite the
Treasury Bills have followed a pattern similar to MSS operations, generated higher liquidity in the
that of money growth. The average cut-off yield on system. Short-term liquidity variations were
364-day (91-day) Treasury Bills reached a trough addressed by RBI through the Liquidity Adjustment
of 4.7 (4.6) per cent in 2003-04 and has been Facility.
rising since then. Yields averaged 7 (6.6) per cent
Balance of payments
during 2006-07. Yields have risen further to an
average of 7.5 (7) per cent in April-December 2007 1.41 The World Economic Outlook (WEO, IMF
from 6.8 (6.3) per cent in April-December 2006. October 2007) observed that the recent
Real cut-off yields, as measured using the trailing expansionary phase in the global economy, with
12 month increase in the WPI, have lagged this average growth of 5 per cent, was the longest since
increase, by reaching a trough of -1.2 (-1.5) per the early 1970s. The WEO update on January 2008
cent in 2004-05 and rising thereafter to 1.6 (1.2) has, however, revised these estimates based on
per cent in 2006-07. The latter were marginal higher new PPP exchange rates from the 2005
than the average yield in 2005-06. Real cut-off international comparison programme (ICP). There
yields on 364 (91) day treasury bills have (more is considerable uncertainty in quantifying the
than) doubled to an average of 3.2 (2.7) per cent downside risk to global growth arising from the

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12 ECONOMIC SURVEY 2007-2008

downturn in housing market and the sub-prime inflows, foreign investment has been a relatively
mortgage market crisis in the United States. stable component, fluctuating broadly between 1
Monetary policy actions by the United States and per cent and 2 per cent of GDP during this decade.
other developed countries seem to have contained However, it seems to have shifted to a higher
its immediate impact, though more surprises in plane from 2003-04 with the average for 2003-04
the next six months cannot be ruled out. to 2006-07 roughly double that during 2000-01 to
2002-03. The relative stability of investment flows
1.42 The Indian economy has been
is primarily due to steadily rising FDI. In contrast,
progressively globalizing since the initiation of
debt flows have fluctuated much more, with net
reforms. Trade, an important dimension of global
outflows in the three years to 2003-04. The
integration, has risen steadily as a proportion of
variations in debt flows have been primarily due to
GDP. Inward FDI has taken off and there is a
lumpy repayments on government guaranteed or
surge in outward investment from a very low base,
related ECB. The ratio of debt flows to GDP was
with net FDI continuing to grow at a good pace.
on a down trend till 2003-04 and a rising trend
The surge of capital flows in 2007-08 is a third
from 2004-05. Debt flows, primarily external
indicator that testifies to the growing influence of
commercial borrowings, shot up on a net basis in
global developments on the Indian economy.
2006-07 to a level of US$ 16.2 billion. The trend
Capital flows, as a proportion of GDP, have been
in net capital flows since 2003-04, therefore, seems
on a clear uptrend during this decade. They reached
to be broadly driven by the rising ratio of debt
a high of 5.1 per cent of GDP in 2006-07 after a
flows.
below trend attainment of 3.1 per cent in 2005-06.
This is a natural outcome of the improved 1.45 The most welcome feature of increased
investment climate and recognition of robust capital flows is the 150 per cent increase in net
macroeconomic fundamentals like high growth, foreign direct investment inflows in 2006-07 to US$
relative price stability, healthy financial sector and 23 billion. The trend has continued in the current
high returns on investment. Even as the external financial year with gross FDI inflows reaching US$
environment remained conducive, the problem of 11.2 billion in the first six months. FDI inflows
managing a more open capital account with were broad-based and spread across a range of
increasing inflows and exchange rate appreciation economic activities like financial services,
surfaced. manufacturing, banking services, information
technology services and construction. With FDI
1.43 The current account has followed an outflows also increasing steadily over the last five
inverted V shaped pattern during the decade, rising years, overall net flows (FDI balance in BoP) have
to a surplus of over 2 per cent of GDP in 2003- grown at a slower rate.
04. Thereafter, it has returned close to its post-
1990s reform average, with a current account deficit 1.46 The globalization of Indian enterprises and
of 1.2 per cent in 2005-06 and 1.1 per cent of planting of the seeds for the creation of Indian
GDP in 2006-07. The net result of these two trends multinationals have taken place in the last few
has been a gradual rise in reserve accumulation years. Outward investment from India shot up to
to over 5 per cent of GDP in 2006-07. With capital US$ 14.4 billion in 2006-07 from less than US$ 2
inflows exceeding financing requirements, foreign billion in the period 2003-04. The trend continued
exchange reserve accumulation was of the order in the current year with outward investment of
of US$ 15.1 billion in 2005-06 and US$ 36.6 billion US$ 7.3 billion in April-September 2007. Net FDI
in 2006-07. Thus, the rupee faced upward pressure flows were, therefore, a modest US$ 3.9 billion
in the second half of 2006-07. Despite this, the during this period. The proportion of payments to
rupee depreciated by 2.2 per cent on an overall receipts under FDI into India was in the range of
yearly average basis. The excess of capital inflows 0.7 per cent to 0.4 per cent in 2005-06 and 2006-
has risen to 7.7 per cent of GDP in the first half 07, respectively. This indicates the lasting and
of 2007-08. Foreign exchange reserves increased stable nature of FDI flows to India.
by US$ 91.6 billion to US$ 290.8 billion on 1.47 Increased volatility in Asian and global
February 8, 2008. financial markets in 2006-07 affected the flow of
portfolio investment. Net portfolio flows became
Components of Capital Account
negative in May-July 2006 (reflecting the slump in
1.44 The composition of capital flows is also equity markets), picked up momentum in August-
changing. Among the components of capital November 2006, only to slow again in March 2007.

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 STATE OF THE ECONOMY 13
Net flows were, therefore, only US$ 7.1 billion in (G&S) trade balance, with the two having virtually
2006-07 compared to US$ 12.1 billion in 2005-06. the same pattern. The surplus from factor income
Euro equities, which were a relatively minor including remittances, which fluctuated between 2
component of portfolio flows (less than a billion per cent and 3 per cent of GDP, has helped
US dollars in the period 1997-98 to 2004-05), rose moderate the substantial deficit on the trade
to US$ 3.8 billion in 2006-07 constituting 54.3 per account. Both the trade (G&S) balance and the
cent of the total net portfolio flows. Net portfolio factor surplus improved between 2000-01 and 2003-
investment inflow was US$ 18.3 billion in April- 04 leading to an improvement of the current
September 2007, more than double the inflow account. Both reversed direction thereafter resulting
during 2006-07. Underlying these were gross in a declining trend in the current account. The
inflows of $ 83.4 billion and outflows of US$ 65.0 peak values of the three as a proportion of GDP
billion. were -0.6 per cent, 2.9 per cent and 2.3 per cent.
In the past two years the current account deficit,
1.48 The rapid accretion of reserves and
trade (G&S) deficit and factor surplus have averaged
increased pressure on the rupee, necessitated
1.15, 3.5 and 2.35 per cent of GDP, respectively.
raising the limit on the market stabilization fund.
The annualized return on the multi-currency, multi- 1.51 The trends in the goods and services trade
asset portfolio of the RBI was 4.6 per cent in deficit have in turn been largely driven by the
2006-07, indicating that the effective fiscal cost of merchandise trade deficit since 2004-05. During
sterilization may be 3.2 per cent. The fiscal costs 2000-01 to 2003-04 the merchandise trade deficit
of sterilization in 2007-08 is placed at Rs. 8,200 was around 2 per cent of GDP and the rising
crore. The search for an appropriate policy mix for services surplus resulted in an improving trend in
balancing a relatively open capital account, the overall G&S trade balance. From 2004-05 the
monetary policy independence and flexible merchandise trade balance has been deteriorating
exchange rate continues. and despite the continued rise in the services
surplus, the overall G&S balance had followed the
Current account components deteriorating trend of the former.
1.49 The current account deficit (CAD) mirrors 1.52 Private transfer receipts (mainly
the saving-investment gap in the national income remittances) shot up by 49.2 per cent in 2007-08
accounts and thus constitutes net utilized foreign (April-September) over the first half of 2006-07
savings. The challenge is to leverage foreign inflows when they had increased by 19.2 per cent.
(i.e. foreign savings and investment) to promote Investment income (net), which reflects the
growth without having the long-term consequences servicing costs on the payments side and return
of external payment imbalances. The distinction on foreign currency assets (FCA) on the receipts
between gross capital inflows and net inflows is side, grew by 60 per cent in 2007-08 (April-
useful. As the latter must equal the CAD, there is September) reflecting the burgeoning foreign
no way in which net use of foreign saving can exchange reserves. Net invisible surplus grew by
increase without an increase in the CAD. The 35.2 per cent to reach US$ 31.7 billion in 2007-
gross inflow can, however, increase to the extent 08 (April-September), equivalent of 6.1 per cent of
that it is offset by gross outflows in the form of GDP. Thus, higher invisible surplus was able to
build-up of foreign exchange reserves, reduction in moderate partly the higher and rising deficits on
government external debt or outward investment trade account. CAD was, therefore, placed at US$
by entrepreneurs. Higher gross inflows have value 10.7 billion in 2007-08 (April-September), equivalent
even if net flows do not increase to the same of 2 per cent of GDP for the half year.
extent, as they can improve competition in the
real and financial sectors, improve the quality of External trade
intermediation and the average productivity of 1.53 India’s greater integration with the world
investment, and thus raise the growth rate of the economy was reflected by the trade openness
economy. The challenge for policy is to maximize indicator, the trade to GDP ratio, which increased
these benefits while minimizing the costs of from 22.5 per cent of GDP in 2000-01 to 34.8 per
exchange rate management. cent of GDP in 2006-07. If services trade is
1.50 The rise and fall of the current account included, the increase is higher at 48 per cent of
balance (as a ratio to GDP) during this decade GDP in 2006-07 from 29.2 per cent of GDP in
has been driven largely by the goods and services 2000-01, reflecting greater degree of openness.

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14 ECONOMIC SURVEY 2007-2008

1.54 India’s merchandise exports and imports The slowdown of exports to the European Union
(in US$, on customs basis) grew by 22.6 per cent was marginal because both factors were absent.
and 24.5 per cent respectively in 2006-07, recording In contrast, there was a marginal acceleration in
the lowest gap between growth rates after 2002- manufactured exports to the rest of the world in
03. Petroleum products (59.3 per cent) and the first half of 2007-08. India’s exports of textiles,
engineering goods (38.1 per cent) were the fastest leather & manufactures and handicrafts to US
growing exports. The perceptible increase in share performed poorly in 2006-07, even though the rupee
of petroleum products in total exports reflected depreciated marginally. However, exports of all
India’s enhanced refining capacity and higher POL subcategories, including engineering goods and
prices. The rising share of engineering goods chemicals, have decelerated in the first half of
reflected improved competitiveness. The value of 2007-08. In the case of EU, the sharp deceleration
POL imports increased by 30 per cent, with volume in textiles and poor performance in handicrafts
increasing by 13.8 per cent and prices by 12.1 were substantially offset by reasonable growth in
per cent in 2006-07. Non-POL import growth at other manufactures in 2006-07 and the first half of
22.2 per cent was due to the 29.4 per cent growth 2007-08. Leather and leather manufactures exports
of gold and silver and 21.4 per cent growth of non- have performed well overall and to EU and other
POL non-bullion imports needed to meet industrial countries, while showing a decline in the case of
demand. United States. Thus, there seems to be a greater
1.55 In the first nine months of the current corelation between the demand in partner country
year, exports reached US$111 billion, nearly 70 and the bilateral exchange rate, on the one hand,
per cent of the year’s export target. During April- and India’s bilateral exports at a disaggregated
September 2007, the major drivers of export growth level, on the other, than is visible for total Indian
were petroleum products, engineering goods and exports to the world.
gems and jewellery. Machinery and instruments, 1.58 Trade with the top 12 trading partners
transport equipment and manufactures of metals increased by over 11.2 percentage points since
have sustained the growth of engineering exports. 2001-02 to 53.8 per cent of total in 2006-07. The
There was a revival of the gems and jewellery sector share of the United States, the largest trading
with export growth at 20.4 per cent for April- partner, declined by 2.5 per cent points to 9.8 per
September 2007, after a deceleration in 2006-07. cent in 2006-07 while China became the second
1.56 Imports grew by 25.9 per cent during April- largest partner in 2006-07 with its share increasing
December 2007 due to non-POL imports growth by 5.2 percentage points over the decade. China’s
of 31.9 per cent, implying strong industrial demand trade share during April-October 2007 is even
by the manufacturing sector and for export activity. higher than that of the United States by Rs. 600
The merchandise trade deficit in April-December crore.
2007 at US$ 57.8 billion was very close to the
trade deficit of US$ 59.4 billion for 2006-07 (full 1.59 India’s export of services grew by 32.1
year). Despite the large overall trade deficit, there per cent to US$ 76.2 billion in 2006-07. Software
was a large (but declining) trade surplus with the services, business services, financial services and
United States and UAE, and a small surplus with communication services were the main drivers of
the United Kingdom and Singapore (till 2006-07). growth. Commercial services exports were almost
The surplus with the first three has continued in 60 per cent of merchandise exports in 2006-07.
2007-08. The largest trade deficits are with Saudi However, services exports grew by a disappointing
Arabia, China and Switzerland. The trade deficit 8.6 per cent in April-September 2007, due to a
with China has increased further in April-September decline in value of non-software services,
2007. particularly business and communication services.

1.57 A comparison of the commodity-wise 1.60 India has continued to favour multilateral
growth of major exports to the United States, trading arrangements which are both transparent
European Union and rest of the world provides a and fair to the developing economies. After the
better idea of the impact of economic slowdown suspension of negotiations in July 2006 due to
and rupee appreciation. Manufactured exports to differences in perceptions, safeguarding the
the United States decelerated sharply in 2006-07 interests of low income and resources poor
because of demand slowdown while dollar agricultural producers along with making real gains
depreciation was an additional factor in 2007-08. in services negotiations and addressing growth

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 STATE OF THE ECONOMY 15
and development concerns in industrial tariff that investors were realising the importance of
negotiations. using intermediaries in risky markets. All the other
indicators of capital market such as market
Rupee appreciation capitalization, turnover and price-earning ratio
1.61 With the demand for foreign exchange remained strong. The commodity market also
(debit side of BOP) not keeping pace with the showed signs of expansion in terms of turnover
supply of foreign exchange (credit side of BOP), and number of transactions during the year.
the rupee appreciated by 8.9 per cent against the
Agriculture production
US dollar during the current financial year between
April 3, 2007, and February 6, 2008. The rupee 1.64 The Directorate of Economics & Statistics
appreciation against the US dollar over the past in its second advance estimates of agricultural
12 months on year-on-year basis (December 2007 production (February 7, 2007) has placed total
over December 2006) at 13.2 per cent was even foodgrains production at 219.3 million tonnes,
higher. While the rupee appreciated against other marginally higher than the 217.3 million tonnes in
major currencies as well for most parts of the 2006-07 (final estimate). While the production of
year, it was modest as compared to the rise kharif foodgrains is expected to be 5.3 million
against the US dollar. It even depreciated tonnes (4.8 per cent) higher than the production in
marginally against the Euro during the financial 2006-07, rabi production is expected to be lower
year (till February 6, 2008). by 3.3 million tonnes. The production of cereals is
expected to be 205 million tonnes as against 203.1
1.62 The appreciation of the rupee against the million tonnes in 2006-07 (final estimate). The
US dollar could be attributed to the effect of production of pulses, however, is expected to
depreciation of the US dollar against all the major remain almost at the last year’s level. The
currencies and the surge in capital flows. The production of oilseeds is also expected to increase
REER (6 currency, trade- based weights) that from 24.3 million tonnes in 2006-07 to 27.2 million
indicates the real competitiveness by factoring the tonnes in 2007-08. Similarly, the production of cash
relative price levels, after depreciating in 2006-07, crops, particularly cotton, is likely to remain buoyant.
appreciated by 7.8 per cent in April-January 2007-
08. The appreciation of the rupee vis-à-vis the 1.65 There has been a loss of dynamism in
dollar, the main invoicing currency of exports, the agriculture and allied sectors in recent years.
compared to the lower appreciation of competing A gradual degradation of natural resources through
countries coupled with the slow growth in imports overuse and inappropriate use of chemical
of major trading partners like the United States, fertilizers has affected the soil quality resulting in
affected exports of some sectors with low import stagnation in the yield levels. Public investment in
intensity. To mitigate the effect and facilitate agriculture has declined and this sector has not
adjustment, the government announced relief been able to attract private investment because of
measures to selected sectors. lower/unattractive returns. New initiatives for
extending irrigation potential have had a limited
Stock markets success during the Tenth Five Year Plan and only
1.63 Stock markets are an important instrument a little over 8 million ha could be brought under
of financial intermediation. They saw increased irrigation and only three-fourths of that could be
activity in 2007-08. Primary market issue of debt utilized. The agricultural extension system has
and equity increased along with private placement. generally not succeeded in reducing the gap
The secondary market too showed a rising trend, between crop yields that could have been obtained
notwithstanding intermittent ups and downs in the through improved practices. The Government of
stock prices responding mainly to global India has launched the National Food Security
developments. The Bombay Stock Exchange Mission and the Rashtriya Krishi Vikas Yojana to
(BSE) Sensex rose from 13,072 at end-March rejuvenate agriculture and improve farm income.
2007 to 18,048 as on February 18, 2008, while Since these programmes have only been launched
the National Stock Exchange (NSE) index Nifty in the current year, it is not possible to assess
50 rose from 3,822 to 5,277 during the same their impact. A second green revolution, particularly
period. Both the indices gave a return of around in the areas which are rain-fed, may be necessary
38 per cent during this period. The higher net to improve the income of the persons dependent
mobilization of resources by mutual funds showed on the agriculture sector.

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16 ECONOMIC SURVEY 2007-2008

Industry and infrastructure investment thus reflects the confidence in the

growth prospects of the industrial sector.
1.66 The industrial sector witnessed a
slowdown in the first nine months of the current 1.69 Accompanying the recent moderation in
financial year. The growth of 9 per cent during industrial growth, the growth performance of some
April-December 2007, when viewed against the segments of the infrastructure sector during April-
back drop of the robust growth witnessed in the December 2007-08 such as power generation and
preceding four years, suggests that there is a movement of railway freight, as also the production
certain degree of moderation in the momentum of universal intermediates like steel, cement and
of the industrial sector. The consumer durable petroleum, have shown a subdued performance.
goods sector in particular has shown a distinct In the power sector, though the planned capacity
slowdown. This is linked to the hardening of addition is unlikely to be achieved, the growth in
interest rates and therefore to the conditions capacity seen in the current year is distinctly
prevailing in the domestic credit sector. In higher than in the previous years. The movement
contrast, the capital goods industry has sustained of cargo handled by major ports and air cargo
strong growth performance during 2007-08 (April- (exports and imports) has showed improved
December). performance as compared to the corresponding
1.67 At the product group level, the moderation period last year. With increased rural penetration
in growth has been selective. Industries like of mobile telephony, the telecom sector has
chemicals, food products, leather, jute textiles, continued its strong growth.
wood products and miscellaneous manufacturing
1.70 The recent moderation in the growth of
products witnessed acceleration in growth, while
the industrial sector has raised concerns in some
basic metals, machinery and equipments, rubber,
quarters about the sustainability of the high growth
plastic and petroleum products and beverages and
of the sector. To deal with the situation emerging
tobacco recorded lower but strong growth during
from the slowdown of some export oriented sectors
April-December 2007. Other industries including
of relatively low import intensity including textiles,
textiles (except jute textiles), automotives, paper,
handicrafts, leather, etc, the Government took
non-metallic mineral products and metal products
certain measures to tide over the situation in the
slowed down visibly during the period. The
short run. But it needs to be emphasised that,
slowdown in the case of less import-intensive
over the medium term, there is little choice but to
sectors like textiles is coincident with the decline
improve productivity, even if there are issues
in the growth of exports arising from the sharp
pertaining to the exchange rate of currencies of
appreciation in the rupee vis-a-vis the dollar. Within
competing countries.
automobiles, while passenger cars, scooters and
mopeds witnessed buoyant growth, the production
Social sectors
of motor cycles and three wheelers slackened. In
a nutshell, the industrial sector has produced 1.71 As per the UNDP’s Human Development
mixed results in the current fiscal. Report (HDR) 2007, in spite of the absolute value
of the human development index (HDI) for India
1.68 The picture with regard to forward-looking
improving from 0.577 in 2000 to 0.611 in 2004 and
variables such as investment, particularly in the
further to 0.619 in 2005, the relative ranking of
corporate sector, has been encouraging. Corporate
India has not changed much.
profitability during the first half of 2007-08 on the
whole increased in the manufacturing sector except 1.72 In consonance with the commitment to
for certain groups like textiles, food products and faster social sector development under the National
beverages. Higher profits backed by sound balance Common Minimum Programme (NCMP), the
sheets were also reflected in an increase in the Central Government has launched new initiatives
planned corporate investment. The outstanding for social sector development during 2007-08.
gross bank credit to the industrial sector which Substantial progress was also made on the major
had increased (from end-March) very slowly during initiatives launched in earlier years. The new
April-August 2007 picked up in later months to initiatives include Aam Admi Bima Yojana and
touch 8.3 per cent during April-November 2007. Rastriya Swasthya Bima Yojana. The share of
These developments are also reflected in the the Central Government expenditure on social
robust growth of the capital goods sector. The services, including rural development, in total
continued buoyancy in industrial and corporate expenditure (plan and non-plan), has increased

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 STATE OF THE ECONOMY 17
from 10.97 per cent in 2001-02 to 16.42 per cent living in different countries and their respective
in 2007-08. The National Rural Health Mission contributions must be dealt with in an integrated
has successfully provided a platform for community way.
health action at all levels. Besides merger of the
1.76 India is a party to the United Nations
Departments of Health and Family Welfare in all
Framework Convention on Climate Change
States, NRHM has successfully moved towards a
(UNFCCC) and its Kyoto Protocol. The Protocol
single State and District level Health Society for
provides for three mechanisms that enable the
effective integration and convergence. Concerted
developed countries with quantified emission
efforts at decentralized planning through preparation
limitation and reduction commitments to acquire
of District Health Action Plans under NRHM has
greenhouse gas reduction credits from activities
helped in bringing about intra health sector and
outside their own boundaries at relatively lesser
inter sectoral convergence for effectiveness and
costs. These are Joint Implementation, Clean
efficiency. In all the States, specific health needs
Development Mechanism (CDM) and Emission
of the people have been articulated for local action.
Trading. Only CDM is applicable to developing
1.73 Since universalization of elementary countries like India. Under the Clean Development
education has become an important goal, it is Mechanism, a developed country would take up
also essential to push this vision forward to move greenhouse gas reduction project activities in a
towards universalization of secondary education. developing country where the costs of greenhouse
It has, therefore, been decided to launch a centrally- gas reduction project activities are usually much
sponsored scheme viz., Scheme for lower.
Universalization of Access to Secondary Education
1.77 India’s CDM potential represents a
(SUCCESS) and improvement of quality at
significant component of the global CDM market.
secondary stage during the Eleventh Five Year
As on 31 January 2008, 309 out of total 918
Plan. The main objective of the programme is to
projects registered by the CDM Executive Board
make secondary education of good quality
are from India, which so far is the highest from
available, accessible and affordable to all young
any country in the world. The Indian National CDM
students in the age group 15-16 years (classes IX
Authority has accorded Host Country Approval to
and X).
858 projects facilitating an investment of more
1.74 The ‘demographic dividend’ will manifest than Rs. 71,121 crore. These projects are in the
itself as a rise in the working age population aged sectors of energy efficiency, fuel switching,
15 to 64 years, from 62.9 per cent in 2006 to 68.4 industrial processes, municipal solid waste and
per cent in 2026. To tap this dividend, the Eleventh renewable energy. If all these projects get
Five Year Plan focuses on ensuring better delivery registered by the CDM Executive Board, they have
of healthcare, skill development and the potential to generate 448 million Certified
encouragement of labour intensive industries. Emission Reductions (CERs) by the year 2012.
Global warming and climate change 1.78 Sustained growth and resilience in the face
of shocks, such as high energy and commodity
1.75 Issues like global warming and the prices and a slow down in world growth and import
resultant climate change have gained in importance demand, have characterised the Indian economy
in international discussions. Globally, carbon in the recent years. Indeed, in terms of growth,
trading, has grown rapidly in recent years. There the fiscal period 2003-08 has been, perhaps, the
is, however, a need to balance the harmful effects best ever five year growth performance in the history
of human activity on global warming against the of independent India. Yet, there are a number of
need for poverty reduction and economic growth challenges that need to be addressed if the current
in developing and least developed countries. The growth momentum has to be sustained in the
issue of global social justice cannot be delinked coming years. Chapter 2 highlights some of these
from the issue of global public goods like the challenges, policy options and prospects for the
atmosphere. The costs and benefits to the people Indian economy.

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Table 1.1 Key indicators

2003- 2004- 2005- 2006- 2007- 2004- 2005- 2006- 2007-

04 05 06 07 08 05 06 07 08
Items Absolute values percentage change over
previous period

Gross domestic product at factor cost

(Rs. ’000 crore)
At current prices 2538 2878 3276 3790Q 4283A 13.4 13.8 15.7Q 13.0 A
At 1999-2000 prices 2223 2388 2613 2864Q 3114A 7.5 9.4 9.6Q 8.7 A
GDP at market prices
(Rs. thousand crore) 2755 3149 3580 4146Q 4694A 14.3 13.7 15.8Q 13.2 A
(at current prices)
Gross national product at factor cost
(Rs. ’000 crore)
At current prices 2520 2855 3250 3760Q 4263A 13.3 13.8 15.7Q 13.4 A
At 1999-2000 prices 2205 2367 2593 2845Q 3102A 7.3 9.6 9.7Q 9.0 A
Foodgrains production 213.2 198.4 208.6 217.3 219.3a -7.0 5.2 4.2 0.9 a
(million tonnes)
Index of industrial 189 204.8 221.5 247.1 261.4b 8.4 8.2 11.6 9.0 b
productionc
Electricity generated
(in billion kwh) 558.5 587.2 617.5 662.4 525.9b 5.1 5.2 7.3 6.6 b
Wholesale price indexd 180.3 189.5 197.2 210.4 217.4e 5.1 4.1 5.9 4.1 e
Consumer price index for
industrial workersf 504 525 551 588 620g 4.2 4.9 6.7 5.5 g
Money supply (M3) h

(Rs. thousand crore) 2005.7 2251.4 2729.5 3310.3 3750.3 i 12.3 17.0 21.3 j 22.4 i

Imports at current prices

(in Rs. crore) 3,59,108 5,01,065 6,60,409 8,40,506 6,82,088 k 39.5 31.8 27.3 11.5 p
(in US $ million) 78,150 111,516 149,167 1,85,747 1,68,803 k 42.7 33.8 24.5 25.9 p
Exports at current prices
(in Rs. crore) 2,93,367 3,75,340 4,56,418 5,71,779 4,48,377 k 27.9 21.6 25.3 7.7 p
(in US $ million) 63,843 83,535 103,092 1,26,360 1,10,965 k 30.8 23.4 22.6 21.6 p
Foreign currency assetsl
(in Rs. crore) 4,66,215 5,93,121 6,47,327 8,36,597 11,12,080m 27.2 9.1 29.2 41.7 m
(in US $ million) 1,07,448 1,35,571 1,45,108 1,91,924 2,81,183m 26.2 7.0 29.4 57.9 m
Exchange rate
(Re./US $)n 45.95 44.93 44.27 45.25 40.41o 2.3 1.5 -2.2 12.0 o

Note: Gross domestic product and Gross national product figures are at new series base 1999-2000.
Q
Quick estimates; A Advance estimates;
a
2nd advance estimates 2007-08.
b
April-December, 2007
c
Index of industrial production; (base 1993-94=100).
d
Index (with base 1993-94 = 100) at the end of fiscal year.
e
As on February 2, 2008.
f
Index (with base 1982 =100) at the end of fiscal year.
g
As on December, 2007.
h
Outstanding at the end of financial year.
i
As on January 4,2008, year-on-year growth.
j
Computed over comparable data i.e. April 1, 2005 due to 27 fortnights during 2006-07
k
April-December, 2007 (provisional).
l
Outstanding at the end of financial year.
m
At the end of February 8, 2008.
n
Percent change indicates the rate of appreciation (+)/depreciation (-) of the Rupee vis-á-vis the US Dollar.
o
Average exchange rate for April-December, 2007
p
April-December, 2007 on provisional over revised basis.