INDUSTRY
The first 8 months of the current fiscal, i.e. till November 2007, witnessed a moderate slowdown in the growth of the industrial sector. The slowdown has mainly been on account of the manufacturing sector. The mining and quarrying sector grew at a faster pace, while the growth in electricity remained unchanged from April-November 2006. Nonetheless, the 9.2% growth achieved during April-November 2007 by the industrial sector, when seen against the backdrop of the robust growth during the preceding four years, suggests that the buoyancy in this sector has continued, albeit with a degree of moderation. Two important changes have occurred in the growth pattern of the use-based industrial categories during April-November 2007 compared to the corresponding period in 2006. First, capital goods have grown at an accelerated pace, over a high base attained in the previous years, which augurs well for the required industrial capacity addition. Secondly, the consumer durables basket that forms part of the Index of Industrial Production (IIP) showed a negative growth during the period, thereby forcing a visible decline in the growth of the total consumer goods basket, despite reasonable growth in the non-durables. Performance Only one out of the 17 two digit industrial group i.e. metal products & parts has recorded a negative growth during April-November 2007. Of the remaining 16 industry groups, four have registered growth of less than 5%, five have registered growth rates between 5% and 10% and four have registered growth rates between 10% and 15%. The remaining three industry groups, namely other manufacturing industries, basic metal & alloy industry and furniture& fixtures, which together accounted for 12.8% weight of the IIP, recorded growth rates in excess of 15%. Six out of the 17 two-digit industry groups, namely, food products, jute textiles, wood products, leather products, chemicals and other manufacturing, surpassed during April-November 2007 their respective growth rates in April-November 2006. During the current year, seven industry groups exceeded the overall rate of growth of manufacturing while the remaining grew at a lesser pace than the overall growth. Accordingly, substantial changes have occurred in the point contributions of different industry groups to the overall industrial growth from April-November 2006 to April-November 2007. The contribution of a product group to the total manufacturing growth is determined by the value of the index achieved by the product group, its weight and its current rate of growth. Industrial items totaling 24% of the total weight in manufacturing accounted for 72% growth of the sector during April-November 2007. Interestingly, while one segment of automobiles i.e. commercial vehicles, jeeps and passenger cars has catalyzed manufacturing growth, the slump in the production of motorcycles dampened it. Items like insulated cables/telecom cables, wood products, sugar, computer systems & their peripherals and laboratory & scientific equipments drove growth with their outstanding production performance. Prices of Manufactured Products During 2005-06 to 2007-08, the rate of growth in relative prices remained negative for food products, textiles and transport equipments, while for beverages and tobacco products, wood and wood products and non-metallic mineral products, the same has been positive during the period. Among textile products, the growth performance has been sluggish, except for jute textiles; yet their inflation levels have been mild. In the face of a near-stagnation in export growth experienced during April-September 2007, mainly on account of appreciation of rupee, price adjustments may have been attempted by the textile industry to remain internationally competitive. The RBI study of corporates has revealed that among the textile corporates, net profit to sales ratio has declined during the first half of the current fiscal. Among the six product groups exhibiting both increasing and declining relative prices in different years, the annual fluctuations were most pronounced in the case of leather and leather products. Corporate Profitability and Investment In the first half of the 2007-08 compared to first half of the 2006-07, Medical Precision has seen highest level of sales growth i.e. 37.9% with the profit growth of 33.4%. However in terms of the profitability ratio of 5.2% it is amongst the lowest. For the same period, the profit growth of Rubber is highest with 128.8% and it sale growth is 37.9%. Still it has profitability ratio of 4.6%, one of the lowest among the industries. Computer & related activities has highest level of profitability ratio i.e. 22% and it sale and profit has seen growth of 23.9% and 28.7% respectively. The analysis of the inter-temporal investment plans of the private corporate sector done by RBI, on the basis of the study of 1,054 companies which were sanctioned assistance by banks and other financial Institutions in 2006-07, brings out a bright picture. Analyzing the phasing of capital expenditure of the companies over years, the RBI study estimated that the capital expenditure envisaged for 2006-07 amounted to Rs.1,55,038 crore, which shows an increase of 60.2% over 2005-06. Further, it is estimated that the total cost of the projects of the private corporate sector which were sanctioned assistance in 2006-07 went up to Rs.2,83,440 crore (against Rs.1,31,299 crore in 2005-06). Out of this, about 34% has been planned to be spent in 2007-08. Besides this, additional capital expenditure has been envisaged from external commercial borrowings and domestic equity issuances. Foreign Direct Investment (FDI) During April-November 2007, FDI equity inflows stood at Rs. 45,098 crore (USD 11.14 billion) against Rs.33,030 crore (USD 7.23 billion) during April-September 2006, signifying a growth of 36% in terms of rupee and 54% in terms of US dollar. From April 2000 to November 2007, Mauritius remained the predominant source country for FDI to India accounting for 44.24% share of the cumulative total, followed by the United States (9.37%), the United Kingdom (7.98%) and the Netherlands (5.81%). Of the total FDI received, about 53.57% came through the automatic route of the Reserve Bank of India, while 20.15% came through the Government approval route and the rest in the form of acquisition of existing shares. Among the destinations of FDI inflows, Mumbai, New Delhi, Bangalore and Chennai maintained the first four positions in that order. In the sectoral distribution of FDI inflows, financial and non-financial services secured a growth of more than seven times during 2006-07, to secure first spot in cumulative inflows, displacing computer software and hardware. Along with services, the shares of sectors like telecommunications, construction and housing and real estate have buoyed during April-November 2007 Industrial Credit The overall industrial credit, which slackened in the first half of 2007-08, is now showing signs of recovery. During April-August 2007, the outstanding gross deployment of bank credit increased only by 2.8% from end-March 2007, while the corresponding increase stood at 8.5% during 2006. However, the gap between the rates of credit growth between April-November 2006 and April-November 2007 has substantially narrowed.
There is a strong sectoral pattern to the growth of industrial credit. Among sectors that experienced high rates of production growth during April-November 2007, credit growth also has been robust for jute textiles, leather and leather products, basic metals, and engineering goods. The slackening of the credit growth in mining and quarrying and wood products has occurred over a high base achieved by end-March 2007. Encouragingly, the outstanding credit to transport equipments group which has witnessed a slowdown in production has grown significantly from end-March 2007. Besides, the near-doubling of the rate of credit growth to infrastructure augurs well for many infrastructure dependent industrial groups and for the economy as a whole. Industrial Relations The continued decline in the number of strikes and lockouts indicates improved industrial relations. The number of strikes and lockouts, taken together, was down by 5.7% in 2006.
As per the available information, during the current year till November 2007, West Bengal experienced the maximum instances of strikes and lockouts followed by Tamil Nadu and Gujarat. Industrial disturbances were concentrated mainly in textiles, financial intermediaries (excluding insurance and pension fund), engineering and chemical industries. Industrial Sickness The Board for Industrial and Financial Reconstruction has so far received 7,158 references under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985. These references include 297 from Central and State public sector undertakings (CPSUs & SPSUs). Out of the total references received, 5,471 were registered under Section 15 of the SICA, 1,857 references were dismissed as non-maintainable under the Act, 825 rehabilitation schemes, including 13 by AAIFR/ Supreme Court, were sanctioned and 1,337 companies were recommended to be wound up. Of the 297 references for public sector undertakings, the references of 92 CPSUs and 122 SPSUs were registered up to December 31, 2007. Environmental Issues The development of a diversified industrial structure, based on a combination of large and small-scale industries, along with growing population has led to growing incidence of air, water and land degradation. Industrial effluents are a major source of water pollution. As regards solid wastes, flyash, phospho-gypsum and iron & steel slag are the main forms of solid wastes generated. Out of 2,744 industries identified under the 17 categories of polluting industries, 1,991 units have set up pollution control devices to comply with the standards, 339 units have been closed, and action has been taken against the 414 defaulting units up to June 2007. FOREIGN INVESTMENT Foreign investment has been a relatively stable component among the components of capital inflows which is the outcome of improved investment climate and recognition of robust macroeconomic fundamentals like high growth, relative price stability, healthy financial sector and high returns on investment. FDI has been the most attractive type of capital flows for emerging market economies because of its lasting nature and also because it is considered a vehicle for transformation of the domestic production process through bridging the technological gap. Inward FDI has taken off and there is a surge in outward investment from a very low base, with net FDI continuing to grow at a good pace. Steadily rising FDI has contributed largely to the relative stability of investment flows. With reform in policies, better infrastructure and a more vibrant financial sector, FDI inflows into India accelerated in 2006-07. The 150% increase in net FDI inflows in 2006-07 to USD 23 billion has been the most welcome feature of increased capital flows. The trend has continued in the current financial year with gross FDI inflows reaching USD 11.2 billion in the first six months. FDI inflows were broad-based and spread across a range of economic activities like financial services, manufacturing, banking services, information technology services and construction. With FDI outflows also increasing steadily over the last five years, overall net flows (FDI balance in BoP) have grown at a slower rate. The Net FDI flows were a modest USD 3.9 billion during April-September 2007. The proportion of payments to receipts under FDI into India was in the range of 0.7% to 0.4% in 2005-06 and 2006- 07, respectively indicating the lasting and stable nature of FDI flows to India. As a proportion of total capital flows and on a net basis, foreign investment has had a mixed trend in the post-reform period. In 2006-07, the proportion stood at 33.5%, down from 62.2% in 2005-06 with negligible growth in foreign investment, year-on-year. The proportion rose to 43.4% in the first half of 2007-08. Of the two major components of foreign investment, namely, FDI and portfolio investment comprising foreign institutional investment (FII), Euro equities and others, the latter had been a major but not so stable source of foreign investment flows in the period 1993-94 to 2005-06. As a result of the comprehensive review of the FDI policy, wide-ranging policy changes were notified in 2006, extending automatic routes, increasing equity caps, removing restrictions, simplifying procedures and extending the horizon of FDI to vistas like single brand product retailing and agriculture. Of late, several steps have been initiated to facilitate FDI inflows which, among other things, include: raising the equity cap in civil aviation; organizing Destination India events in association with CII and FICCI with a view to attract investments; activating the Foreign Investment Implementation Authority (FIIA) towards speedy resolution of investment-related problems; setting up of National Manufacturing Competitiveness Council (NMCC) to provide a continuing forum for policy dialogue to energize the growth of manufacturing; regular interactions with foreign investors through bilateral/regional/ international meets and meetings with individual investors; and making the website of the Department of Industrial Policy & Promotion (www.dipp.nic.in) more user-friendly with online chat facility. About 4,500 investment-related queries have been replied during 2007-08. During April-November 2007, Foreign Direct Investment (FDI) equity inflows stood at Rs. 45,098 crore (USD 11.14 billion) against Rs. 33,030 crore (USD 7.23 billion) during April- September 2006, signifying a growth of 36% in terms of rupee and 54% in terms of US dollar. Of the total FDI received, about 53.57% came through the automatic route of the Reserve Bank of India, while 20.15% came through the Government approval route and the rest in the form of acquisition of existing shares. Among the destinations of FDI inflows, Mumbai, New Delhi, Bangalore and Chennai maintained the first four positions in that order.
FDI in Sectors In the sectoral distribution of FDI inflows, financial and non-financial services secured a growth of more than seven times during 2006-07, to secure first spot in cumulative inflows, displacing computer software and hardware. Along with services, the shares of sectors like telecommunications, construction and housing and real estate have buoyed during April-November 2007. The Government of India now allows FDI in most infrastructure sectors to the extent of 100%. The time is ripe for the foreign strategic investors to begin to taking greater interest in project development and management activity in India. Foreign direct investment (FDI) is an important source to meet the demand for funds that are required for rapid network expansion in the telecom sector. The FDI policy provides an investor-friendly environment for the growth of the telecom sector. The total FDI equity inflows in the telecom sector from August 1991 up to July 2007 have been Rs. 20,718 crore which is 8.1% of the total FDI equity inflows into India during the period. Policy Reform Actions - Retail FDI: Allow a share for foreign equity in all retail trade. Allow 100% 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%. Allow 51% 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. The insurance sector still has a long way to go and FDI limits are too low.
The insurance sector was opened up for private participation with the enactment of the Insurance Regulatory and Development Authority Act, 1999. While permitting foreign participation in the ventures set up by the private sector, the Government restricted participation of the foreign joint venture partner through the FDI route to 26% of the paid-up equity of the insurance company. - Banking: Allow 100% 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.
Larger inflows from Foreign Institutional Investors (FIIs) in the secondary market segment has largely contributed to BSE and NSE indices scaling new peaks of 21,000 and 6,300, respectively, in January 2008. The number of registered FIIs has increased from 993 by the end of December 2006 to 1219 by the end of December 2007, registering a growth of 22.76% y-o-y. An analysis of the monthly data on net FII inflows released by the Securities and Exchange Board of India (SEBI) indicates volatility. The standard deviation of the net inflows under FII was very high (USD 2,423.4 million) in the 12 months ending December 2007. The same measure for 24 months ending December 2007 yielded a somewhat lower (USD 1,882.8 million) dispersion. Not overlooking the fact that portfolio investment flows have been volatile, there has not been any significant net outflow for the year as a whole in the post-reform period, except in 1998-99. On January 30, 2008, Foreign Direct Investment (FDI) up to 26% and FII investment up to 23% (subject to no single investor holding more than 5%) was allowed in Commodity Exchanges. Going forward, despite the possible subdued global growth, the strong fundamentals of the Indian economy in tandem with higher growth would help in sustaining the interest of foreign investors in the Indian market. AGRICULTURE Agriculture is the mainstay of Indian economy because of its high share in employment and livelihood creation notwithstanding its reduced contribution to the nation’s GDP. The share of agriculture in the GDP has registered a steady decline from 36.4% in 1982-83 to 18.5% in 2006-07. Yet this sector continues to support more than half a billion people providing employment to 52% of the workforce. Although it is an important source of raw material and demand for many industrial products, particularly fertilizers, pesticides, agricultural implements and a variety of consumer goods. Agricultural Production & Food Availability The growth in the agriculture sector is higher than the growth of population. Between 1950-51 and 2006-07, production of food-grains increased at an average annual rate of 2.5% as compared to the growth of population which averaged 2.1%. As a result, India almost became self-sufficient in food-grains. However the rate of growth of food-grains production decelerated to 1.2%, during 1990-2007, lower than annual rate of growth of population averaging 1.9%. Over a medium term, there has generally been a shortfall in the achievement of target of food-grains, pulses and oilseeds during 2000-01 to 2006-07. The actual production of food-grains on an average was 93% of the target, production for pulses was only 87.7% of target and for oilseeds 85.3% of target. Production of sugarcane and cotton, however, over-achieved their respective targets in 2005-06 and 2006-07. - Agriculture production in 2006-07 and 2007-08: The overall production of food-grains was estimated at 217.3 million tonnes in 2006-07, an increase of 4.2% over 2005-06. Compared to the target set for 2006-07, it was lower by 2.7 million tonnes i.e. decline by 1.2%. The increase in production in 2006-07 was largely because of higher production of wheat by 6.5 million tonnes (9.3%) and of pulses by 0.8 million tonnes (6%). There was a decline in production of oilseeds (3.7 million tonnes or 13%) compared to the production in 2005-06.
- Rainfall and Reservoir levels: The rainfall and availability of water for irrigation influence the crop productivity. For the country as a whole, the weighted seasonal rainfall during the south-west monsoon (June-September) 2007 was 5% higher than the long period average (LPA). Southern peninsula experienced the maximum rainfall (26% more) followed by Central India (8%) and North-East India (4%). The North-West India was deficient in rainfall by 15%. Out of 533 meteorological districts, 32% received excess rainfall, 40% normal, 24% deficient and the remaining 4% scanty rainfall. The rainfall was not uniformly distributed over time and there were significant variations relative to LPA.
- Raising agriculture production: Productivity of crops in India is not only low relative to other countries, there are considerable inter-state variations. The productivity of wheat in 2005-06 varied from a low of 1,393 kg per hectare in Maharashtra to a high of 4,179 kg in Punjab. The Steering Committee on Agriculture for the 11th Five Year Plan has observed that not only the yields differed across the States; there was a significant gap between the performance and potential as revealed by actual yield and yield with improved practices adopted by farmers.
- Support Price: Minimum Support Prices (MSPs) were revised substantially in 2007-08. Increase in the MSPs for paddy (common), wheat, moong, urad, arhar, jute in 2007-08, over the MSP for 2004-05, was 33%, 56.3%, 23.4%, 23.4%, 14.4% and 18.5%, respectively. The purchase price offered to farmers, particularly in the efficiently producing States, usually is significantly higher than the cost of production.
- Irrigation: Irrigation is one of the six components for the development of rural infrastructure under the Bharat Nirman and aims at creating the irrigation potential of 10 million hectare by 2008-09. The target under Bharat Nirman is to be met largely through the completion of ongoing major and medium irrigation projects/schemes. During 2005-06 and 2006-07, 1.68 million hectare and 1.94 million hectare of irrigation potential, respectively, is reported to have been created.
- Capital formation in Agriculture: Gross Capital Formation in agriculture relative to GDP has shown an improvement from 9.6% in 2000-01 to 12.5% in 2006-07. This, however, needs to be raised to 16% during the 11th Five Year Plan to achieve the target growth of 4% in this sector.
- Credit support to agriculture: The institutional credit flow to agriculture sector has grown at the CAGR of 30.75% in the last 5 years from Rs.69560 crore in 2002-03 to Rs.203297 crore in 2006-07. During the first eight months of fiscal 2007, the total credit stands at Rs.137760 crore.
- Kisan Credit Card (KCC): To provide adequate and timely support from the banking system to the farmers for their cultivation needs including purchase of all inputs in a flexible and cost-effective manner, a KCC Scheme was introduced in August 1988 for short- and medium-term loans. About 705.55 lakh KCCs have been issued up to November 2007.
- Rate of interest on agricultural loan: From kharif 2006-07, it was decided that the farmers would receive crop loans up to a principal amount of Rs.3 lakh at 7% rate of interest and the Government of India would provide necessary interest subvention to NABARD and banks for this purpose. This policy has been continued in 2007-08 also. For this purpose the Government has made a provision of Rs.1,677 crore in the Union Budget 2007-08.
- Revamping of cooperative credit structure: In January 2006, the Government announced a package for revival of Short-term Rural Cooperative Credit Structure involving financial assistance of Rs.13,596 crore. NABARD has been designated as the implementing agency for the purpose. So far, 21 States and 3 Union Territories have agreed to implement the package; out of which 17 States (Andhra Pradesh, Arunachal Pradesh, Bihar, Chhattisgarh, Gujrat, Haryana, Madhya Pradesh, Maharashtra, Rajasthan, Orissa, Uttarakhand, Uttar Pradesh, Tripura, Nagaland, Tamil Nadu, Punjab and West Bengal) have signed the MoU with the Government of India and NABARD.
- Agriculture insurance: The National Agricultural Insurance Scheme (NAIS) for crops has been implemented from Rabi 1999-2000 seasons with the objective of providing insurance coverage in the event of failure of any of the notified crops as a result of natural calamities, pests and diseases. The scheme is available to all the farmers (both loanee and non-loanee) irrespective of their size of holding and operates on the basis of area approach. At present, 10% subsidy in premium is available to small and marginal farmers, which is to be shared equally by the Centre and State Governments. The scheme is implemented by 23 States and 2 Union Territories. Since the inception of the scheme and until Rabi 2006-07, about 971 lakh farmers have been covered. The coverage area is 156 million hectare and the sum insured is Rs.92,618 crore. Claims to the tune of about Rs.9,855 crore have become payable against the premium income of about Rs.2,943 crore benefiting nearly 270 lakh farmers.
New Initiatives - National Food Security Mission: The Department of Agriculture & Cooperation has launched a Centrally-sponsored scheme on National Food Security Mission (NFSM) in pursuance of the resolution of the National Development Council (NDC) to increase the production of rice, wheat and pulses by 10, 8 and 2 million tonnes, respectively, over the benchmark levels of production, by the end of the 11th Five Year Plan period. The NFSM is being implemented in 305 districts of 16 States of the country. An amount of Rs.149.4 crore has been released to various States to plan and implement various interventions during 2007-08. The total outlay of NFSM is Rs.4,882.5 crore during the 11th Five Year Plan.
- Rashtriya Krishi Vikas Yojana (RKVY): The RKVY will be a State Plan Scheme and the eligibility for assistance under the scheme would depend upon the amount provided in the State budgets for agriculture and allied sectors, over and above the baseline percentage expenditure incurred on agriculture and allied sectors. The funds under the RKVY would be provided to the States as 100% grant by the Central Government. An outlay of Rs.1,500 crore has been approved for 2007-08.
- National Policy for Farmers-2007: Government of India has approved the National Policy for Farmers, 2007 taking into account the recommendations of the National Commission on Farmers and after consulting the State Governments. The National Policy for Farmers, among other things, has provided for a holistic approach to development of the farm sector.
CAPITAL AND COMMODITY MARKET This year also, like earlier year, remained strong for both the Capital and Commodity markets with macroeconomic indicators in favor. Increased participation from domestic and foreign investors drove the markets to the new highs in terms of value as well as volume transaction. Equity The stock market rode the robust economy, growth in corporate earnings, growth conducive interest rate situation improved fiscal condition and increase in the no. of market participants. The resource mobilized from primary market through equity saw a growth of 7.74% from Rs 32,672 cr in calendar year 2006 to Rs 58,722 cr in calendar year 2007. IPO constituted Rs 33,912 cr or 57.75% of the total resource mobilization through equity. The number of IPOs has increased to 100 during 2007 as compared to 75 during 2006.The mean size of the IPO was Rs 339 cr in the year 2007. The leading stock indices BSE and NSE have seen new heights crossing 21,000 and 6,300 marks for the first time on January 2008.The Sensex and Nifty grew by 47.1% (6,500 points) and 54.8% respectively. During its journey of 6,500 points in 2007, BSE had fastest journey ever from 18,000 to 19,000 that it achieved in just four trading sessions during October 2007. It further crossed the historic mark of 21,000 in an intraday trading in January 2008. Sensex has delivered a compounded annual return of 36.5% between 2003 and 2007. Even after such a god performance it lagged behind its Asian peers like SSE Composite (China) and Jakarta Composite (Indonesia) gained 97.6% and 52% respectively. Movement of BSE Sensex & NSE Nifty in 2007
The market capitalization of BSE Sensex and Nifty was Rs 28,61,341 cr and Rs 35,22,527 cr in the year-end of 2007. Ratio of market capitalization to GDP as on December 30, 2007, market capitalization (BSE 500) at USD 1,638 billion was 150% of GDP which is well comparable with the developed markets. Sensex was trading at a P/E multiple of 27 at end-December 2007 as compared to 21 at end-December 2006 and Nifty at 27.62 that is highest among the emerging markets. The Spot market witnessed a turnover of Rs 45,08,709 cr on NSE and BSE in 2007, an increase of 56.67% over 2006 while derivative segment had turnover of Rs 1,21,60,701 cr in 2007, an increase of 72.13%. NSE spot and derivatives turnover contributes 87.8% and 339% as a proportion of market capitalization of Nifty in 2007. Parallely, BSE spot and derivative turnover contributes 22% and 3% of market capitalization of BSE 500. Like 2006, this year too experienced active participation from institutional investors (FIIs and Mutual Funds). The number of FII rose to 1,219 and net investment amounts to USD 20,837 in Indian financial market in 2007 that reflects a growth of 130.72% over 2006. FII played as major participants in the domestic front with participation of 17.3% of the spot market and 9% of the derivative market. The net inflow in the mutual fund in the year 2007 was Rs 1,38,270 cr which is 30% higher than the previous year. The asset under management of mutual funds increased from Rs 3.24 lakh cr in 2006 to Rs 5.50 lakh cr in 2007. Indian economy, after four consecutive years of strong growth, is estimated to grow by 9% in the FY 08 and expected to show the same performance in the future. The stock market movement largely will depend on the various domestic and international factors. The expectations of higher corporate investment and earnings, GDP growth of over 8% for the fourth year in a row with macroeconomic stability, and Government’s commitment to carry forward the economic reforms enhance the growth prospects of developing countries will boost the investors confidence that the stock market. The only major concern that could affect the domestic scenario in short term is slowdown of US economy. Debt Government of India (GOI) securities continued to account for the major part of activity in the secondary market. In terms of market size of GOI bonds, the gross issuance of GOI dated securities in 2007 amounted to Rs 1,62, 000 cr as compared to Rs 1,47,000 cr in 2006. The year-end market capitalization of GOI securities increased by 16.51% from Rs 11,31,558 cr in 2006 to Rs. 13,18,419 cr in 2007. The interest on zero-coupon rate (higher side) on a 1-year bond has shown an upward trend, rising from 7.29% in 2006 to 8.07% in 2007 and the zero-coupon rate (higher side) on a 10-year bond has increased from 7.97% in 2006 to 8.37% in 2007. In Corporate debt market, the yield rate on corporate debt papers (with AAA rating) for five-year maturity ranged between 7.26% and 8.45% in 2005-06, 8.43% and 9.44% in 2006-07, and 9.19% and 10.80% in 2007-08 (April-December). The market capitalization of corporate bonds which was Rs. 49,155 cr at end-December 2006 rose to Rs. 68,074 cr at end-December 2007. Commodity futures market In Commodity futures market, the total volume of trade in the commodity futures market rose from Rs. 34.84 lakh crore in 2006 to Rs. 36.54 lakh crore in 2007. The daily average value of trade in the commodity exchanges improved from Rs. 3,000 crore during 2006 to more than Rs. 15,000 crore in 2007. While the commodities traded at the exchanges included major agricultural commodities, the major share of the turnover was accounted for by spices, crude oil and natural gas. INFRASTRUCTURE The Eleventh Five Year Plan envisages total investment in physical infrastructure to increase from around 5% of GDP in 2006-07 to 9% of GDP by the end of the plan period. The investment in physical infrastructure during the said period has been estimated to be about Rs. 20,02,000 crore or about USD 500 billion. Of this amount, the share of the Central Government, the State Governments and the private sector is projected at 37.16%, 32.76% and 30.07% respectively. The hefty investments would need to be financed through non-debt and debt resources of the order of Rs. 10,64,000 crore and Rs. 9,96,000 crore respectively. During 2008-09, the projected investment in infrastructure is expected to be more than Rs. 3,22,000 crore. The substantial requirement of debt resources would have to be financed through various sources including domestic bank credit, non-bank finance, pension and insurance funds and through the ECB route. Power - Electricity generation by power utilities during 2007-08 was targeted to go up by 7.2% to 710 billion KWh. The growth of power generation in April-December 2007 was lower than the targeted growth rate. The nuclear power generation in particular showed the sharpest decline during the current year in comparison to the corresponding period last year.
- The National Electricity Policy (NEP), 2005 targets a rise in per capita availability from 631 units to 1,000 units per annum by the end of 2012. To fulfill the objectives of the NEP, a capacity addition of 78,577 MW has been proposed for the Eleventh Five Year Plan.
- Based on the status of various projects, the target for 2007-08 was fixed at 12,039 MW, of which 7,263 MW has been commissioned up to January 31, 2007. It is expected that the total capacity addition during the current financial year would be 10,821.8 MW with thermal, hydro and nuclear accounting for 8,015 MW, 2,587 MW and 220 MW, respectively.
- India is endowed with an estimated hydro power potential of more than 1,50,000 MW. However, only 21.14% of the potential has been developed till date and 9.53% is being developed. The reasons for slow development include difficult and inaccessible potential sites, environmental and forest-related issues, inter–State issues, geological surprises and long gestation period.
- Private sector participation in the sector is negligible but has been increasing in the recent past. There are 10 Schemes with an installed capacity of 3991 MW under construction while 67 Schemes with an installed capacity of 18,030 MW have been allotted to private developers by States.
Telecommunications - With more than 270 million connections, India’s telecommunication network is the third largest in the world and the second largest among the emerging economies of Asia.
- Telecom tariffs which were among the highest in the world less than four years ago, have now dipped to being among the lowest. The National Long Distance (NLD) tariffs that ranged between Rs. 1.20 and Rs. 4.80 per minute in 2003 for different distances are now as low as Re. 1 per minute under One India Plan from March 1, 2006.
- Tele-density has increased from 12.7% in March 2006 to 23.9% in December 2007. Rural tele-density has increased to 7.9% with 63.68 million rural telephone connections whereas urban tele-density was 60.04% at the end of November 2007.
- The total number of telephones has increased from 76.53 million on March 31, 2004, to 272.88 million on December 31, 2007 and the targeted growth of 250 million by the end of 2007 has been achieved in the month of October 2007
- The liberalization efforts of the Government have resulted in the growth of private sector share in total telephone connections from 39.2% in 2004 to 72.4% in December 2007.
- The growth of wireless services has been phenomenal with number of wireless subscribers growing at a CAGR of 87.7% per annum since 2003. The share of wireless phones has increased from 24.3% per cent in March 2003 to 85.6% in December 2007.
- Various measures have been taken to promote broadband in the country and as a result the number of broadband subscribers grew from 2.28 million as on March 31, 2007 to 2.8 million as on December 31, 2007.
- The total FDI equity inflows in the telecom sector from August 1991 up to July 2007 have been Rs. 20,718 crore, which is 8.1% of the total FDI equity inflows into India during the period.
- It has been decided to set up Telecom Testing and Security Certification Centre (TETC) for communication security, research and monitoring. For this, companies like Alcatel and Cisco have also set up their research and development centres in India.
- As the potential of broadband services is in the growth process, it’s envisaged that Internet and broadband subscribers will increase to 40 million and 20 million by 2010.
Roads - India has one of the largest road networks in the world aggregating to about 3.34 million kilometers at present. The road network comprises 66,754 km of National Highways, 1,28,000 km of State Highways, 4,70,000 km of Major District Roads and about 26,50,000 km of Other District and Rural Roads.
- The National Highways Development Project (NHDP) - the largest highway project ever undertaken in the country is being implemented by the National Highways Authority of India (NHAI).
- Phase-I and II of the NHDP envisaged 4/6 laning of about 14,279 kilometres of National Highways at a total estimated cost of Rs. 65,000 crore. These two phases consist of the Golden Quadrilateral, the North-South & East-West Corridors, port connectivity and other projects.
- Nearly 96% works on Golden Quadrilateral have been completed by November 2007 and the North-South and East-West Corridors are expected to be completed by December 2009.
- The upgradation of 12,109 km has been approved by the Government under NHDP Phase-III at an estimated cost of Rs. 80,626 crore. In addition to this, there is a proposal for two-laning with paved shoulder for 20,000 km of National Highways under NHDP Phase-IV.
- The Government has also approved six-laning of 6,500 km of National Highways (NHs) comprising 5,700 km of Golden Quadrilateral and balance 800 km of other sections of NHs under NHDP Phase-V at a cost of Rs. 41,210 crore.
- The Government has approved construction of 1,000 km of expressways at a cost of Rs. 16,680 crore under NHDP Phase-VI and the construction of ring roads, flyovers, elevated highways, ROBs, underpasses and service roads at a cost of Rs. 16,680 crore under NHDP Phase-VII.
Ports - The country’s coastline of 7,517 km, spread over 13 States/Union territories, is studded with 12 major ports and 200 non-major ports. Of the non major ports, about 60 are handling traffic.
- The total traffic carried by both the major and minor ports during 2006-07 was estimated at around 650 MT. The 12 major ports carry about threefourths of the total traffic, with Visakhapatnam as the top traffic handler in each of the last six years.
- In 2007-08, up to October 2007, cargo handled by major ports registered growth of 13.9% against 9.5% in the corresponding seven months of 2006-07.
- There was an impressive growth of 13.9% per annum in container traffic during the five years ending 2006-07. The Jawaharlal Nehru Port (JNPT), India’s largest container port, handled roughly 3.3 million TEUs in 2006-07.
- The annual aggregate cargo handling capacity of major ports increased from 456.20 MTPA in 2005-06 to 504.75 MTPA in 2006-07, with the average turnaround time increasing marginally from 3.5 days to 3.6 days in 2006-07.
- The average output per ship berth-day improved from 9,267 tonnes in 2005-06 to 9,745 tonnes in 2006-07.
- The pre-berthing waiting time at major ports on port account, however, increased from 8.77 hours in 2005-06 to 10.05 hours in 2006-07. Significant inter-port variations in pre-berthing waiting time continued to persist.
- The average turnaround time of 3.6 days, compared with 10 hours in Hong Kong, undermines the competitiveness of Indian ports.
- The slow evacuation of cargo is leading to congestion since ports are not adequately linked to the hinterland. Thus, an efficient multi-modal system is a prerequisite for the smooth functioning of any port.
- Privatization of port facilities and services has gathered momentum in India & an enabling policy framework has already been put in place. Areas that have been opened up to the private sector on a BOT basis include construction of cargo handling berths and dry docks, container terminals and warehousing facilities and ship-repair facilities.
Airports - Airports Authority of India (AAI) has undertaken an ambitious project of modernization of 35 non-metro airports in the country.
- The work at Agra airport (Civil Enclave) has been completed and major works at 7 other airports viz. Agatti, Ahmedabad (Domestic), Amritsar, Jaipur, Nagpur, Tiruchirappalli and Udaipur are scheduled to be completed within the current financial year. It is expected that terminal buildings and associated airside works in respect of 24 airports will be completed by end-March 2009, whereas the remaining 11 airports would be completed by March 2010.
- The Kolkata and Chennai airports are proposed to be substantially upgraded by the AAI pursuant to a decision of the Committee on Infrastructure. The proposal involves construction of an integrated terminal building to handle 20 million passengers per annum and airside works at a total cost of Rs. 1,942.51 crore for completion in June 2010.
- In respect of Chennai Airport, an action plan has been approved involving expansion of international and domestic terminal building to handle additional 13 million passengers per annum and major airside works including extension of secondary runway at a total estimated cost of Rs. 1,808 crore, for completion in June 2010.
- The number of domestic and international air passengers (combined) has almost doubled between 2004 and 2007. During 2007, international and domestic passengers recorded growth of 15.6% and 32.51% respectively.
- Cargo traffic has increased by more than 45% between 2003-04 and 2006-07. During April-October 2007, international and domestic cargo recorded growth of 13% and 9.8% respectively.
- There are 14 scheduled airline operators having 334 aircraft. There are also 65 non-scheduled airlines operators who have 201 aircraft in their inventory.
- During 2007, the scheduled operators have been given permission for import of 72 aircraft. The Ministry of Civil Aviation has given its approval for import of 496 aircraft in the next five years wherein more than 250 aircraft are likely to be acquired by the scheduled operators.
Railways - Improved resource management through increased wagon load, faster turnaround time and a more rational pricing policy led to a perceptible improvement in the performance of the railways during 2005-06 and 2006-07.
- With the present growth rate in GDP of over 8%, the Indian Railways expect to carry 95 million tonnes of incremental traffic per year and about 1,100 million tonnes revenue earning freight traffic by the end of the Eleventh Five Year Plan.
- Freight and passenger traffic are the two major segments of the railways, of which the freight segment accounts for about 70% of the revenue. During April-November 2007, the total revenue earning freight traffic grew at 8.2% as compared to 9.19% during the corresponding period of the last year.
- In the process of rationalizing passenger tariff structures since 2002-03, there was a reduction of about 7% in the fares of AC first class and 4% in AC second class and a cut of 2% for AC third class.
- Accident per million train kilometer, an important index of rail safety, came down progressively from 0.55 in 2001-02 to 0.28 in 2005-06 and further to 0.23 in 2006-07. The number of consequential train accidents also came down from 415 in 2001-02 to 195 in 2006-07.
- Railways has proposed a 2,700-kilometre-long railway line project at an investment of more than Rs. 28,000 crore which consist of 1,232-km-long Eastern Corridor (from Ludhiana to Sonnagar) in Phase-I and 1,469-km long Western Corridor from Jawaharlal Nehru Port area (Mumbai to Dadri/Tughlakabad) in Phase-II.
- Currently, railways has total staff strength of 1.4 million. An amount of Rs. 10 crore has been sanctioned for implementation of an Enterprise Resource Planning covering all functions of the Human Resource Management System prevalent in the Indian Railways.
- The Indian Railway Catering and Tourism Corporation (IRCTC) is presently managing majority of catering units for the Indian Railways. So far, IRCTC has commissioned 52 Multi-Cuisine Multi Outlet Food Plaza/Fast Food Units and 454 Automatic Vending Machines (AVM) for dispensing hot and cold beverages.
- IRCTC is in the process of setting up the state-of–the-art cell kitchens on 20 major depot stations with private participation to supply quality food and beverages.
Urban infrastructure Urban infrastructure is a vital element of the Indian infrastructure scenario. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and SEZs have imparted some impetus and is a significant move to address the creaking urban infrastructure, but comprehensive planning and effective monitoring are essential to take this scheme successfully to its logical conclusion. Urban transport is one of the key elements of urban infrastructure. The major objective of urban transport initiative is to provide efficient and affordable public transport. Detailed guidelines in this regard, have been formulated for the guidance of the States and cities for both rail and road based public transport. Delhi and Kolkata have introduced Metro Rail system. The Kolkata Metro is presently under the direct control of the Ministry of Railways and the Delhi Metro is a joint venture company of the Government of India and the Government of the National Capital Territory of Delhi. The Government of West Bengal is also planning to set up an East-West Corridor metro rail project for Kolkata on the DMRC model covering a length of 13.7 km. The Bangalore Metro Rail Project, was approved by the Government of India in April, 2006 for construction over a total length of 33 km in two corridors. The first East-West Corridor is 18.1 km long and the second North-South Corridor is 14.9 km long. The project is scheduled to be completed in five years, by December 2011. The first section of 7 km will be completed by March 2010. The estimated cost of executing the project comes out to Rs. 6,395 crore. The Government of Maharashtra also got a master plan for the Mumbai Metro prepared by the Delhi Metro Rail Corporation which suggested implementation in three phases over nine corridors. To provide better public transport and ease congestion, proposals for Bus Rapid Transit System (BRTS) have been approved for Ahmedabad, Bhopal, Indore, Jaipur, Pune, Rajkot, Vijayawada and Visakhapatnam cities under JNNURM covering a total length of more than 310 km with total estimated cost of Rs. 2,740 crore, out of which the Central assistance is around Rs. 1,295 crore.
CHALLENGES & POLICY RESPONSE
Sustaining The Growth Momentum With the full effects of the economic reforms of the 1990s working through the system, the Indian economy has moved to a higher growth path. The success of economic reforms of the 1990s is evident from the step up in the GDP growth rate to 6.5 per cent in the late 1990s and further to 7.8% during the Tenth Five Year Plan, with the last three years averaging over 9%. Going forward, the new challenge is to maintain current growth rate and even raise it further to double digit levels. However, with increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic on our economy, the challenges of high growth have become more complex. Government has identified the following major challenges: -
- Managing capital inflows
High GDP growth attracts foreign capital looking for profitable investment opportunities. In a positive cycle such inflows would lead to even higher growth. However, if the growth opportunities do not materialize fast enough, then there will be pressure on the currency to appreciate, resulting in either an accumulation of reserves or currency appreciation or both. In the last two years, particularly in fiscal 2007-08, the Indian economy has gone through such a phase. Going forward, surge in capital inflows, including FDI, is expected to continue in the medium term. Thus, short term flows could continue to add to the total capital inflows in the medium term, making it necessary to constantly review and revise the macro management strategy. - Inflation
Inflation management has always been a key policy concern of the Government. Of late, the change in the structure of the economy and its more globalized nature has made management of inflation a complex task. With rising capital inflows, various monetary policy mechanisms have a more decisive role to play now. At the same time, inflationary impulses from global commodity prices have to be tackled through the use of fiscal and trade policy instruments.
- External Sector
There has been increasing concerns of slowdown in world growth which will impact the demand for India’s exports. Owing to sub-prime crises, US economy is expected to slowdown in 2008. However, slowdown is expected to be relatively modest as our exports to the US have already been slowing in 2006 and 2007.
On the positive side, the slowdown in global growth will decelerate the growth of demand for commodities, including oil, and their international prices. While the extent of the impact is uncertain, it will have a salutatory effect on the unit value of imports and consequently on the value of imports. The balance of these two factors will likely result in a modest increase in the goods and services trade deficit, as long as a severe recession is avoided in the US.
- Road Connectivity
Though, there is noticeable progress in the road infrastructure, some states are yet too see that progress. Given the low-skill intensity and high income multiplier effect of investment in this sector, there is an urgent need to place the highest priority on building roads to specified standards, especially in the poor states and regions of the country. Indeed, the medium term plan for this sector should target a network of highways linking all cities in the country, a network of State highways linking all towns at State level and connectivity of all villages with all weather district roads in every State. - Urban infrastructure
Urban development and renewal of existing towns and cities is yet another area of infrastructure development, which is critical for meeting the growing demand for urban housing and business premises from a rapidly expanding economy. The public good nature of this activity is brought out by the fact that the government has the responsibility not only to carry out detailed land use planning but also to provide connectivity, drainage, sanitation, water supply and public transport facilities. - Irrigation and agricultural support
Irrigation is a major constraint on raising crop productivity. Up to March 2007, only about 74 %of the assessed irrigation potential of 140 million hectare has been utilized. Further, the irrigation potential can be increased with technological advancement, inter-basin transfers, recharging of ground water and storage of water in flood plains along the river banks. Efficiency of water use can be enhanced by having more active participation of actual beneficiaries, through Water Users Associations (WUAs). - Financial intermediation and long term debt markets
With sustained economic growth in the last few decades, the importance and nature of financial intermediation the world over is undergoing dramatic transformation. In many countries, the share of assets held by banks and insurance companies has declined and that of mutual funds, pension funds and non bank financial institutions has increased. The relative importance of different financial intermediaries has also changed. Most of these developments in international financial markets have been mirrored in the Indian financial markets, but the challenge is to deepen and broaden financial sector reforms in India. The banking sector remains, by and large, a government oligopoly despite the entry of private players. The insurance sector still has a long way to go and FDI limits are too low. The long term debt market must be developed to support the financing of infrastructure projects during the Eleventh Five Year Plan period. There is an urgent need for a regime that supports predictable user charges, a financial system that allocates risk efficiently, and project selection based on sound commercial and legal principles to ensure transparency. - Energy scenario
Supply augmentation and change in the composition of energy use is very critical for economic growth of any country. In India, there is considerable room for improvement in energy efficiency, especially of motor vehicles, and in the generation, transmission and end-use of electricity. Commercially viable and economically attractive technology options, in use in the developed world, should be considered and adopted. - Skill development
India faces an emerging shortage of skills in the face of growing demand for labour from the technology and outsourcing sectors as well as in the semiskilled labour intensive sectors of manufacturing and modern services like organized retail, civil aviation, construction and finance. This is pushing up wages and eroding price advantage which India has.
Thus, in order to meet the burgeoning demand for professional education and employable skills entry of private and non-government sectors in education and skill development institutions should be liberalized. Further, global players should also be allowed to enter into the segment.
Reforms and Performance of States - Fiscal developments
In recent years the major fiscal indicators of the State Governments have witnessed significant improvement. For the first time in about two decades, the State Governments have budgeted, for 2007-08, a consolidated surplus in their revenue account. The ratio of gross fiscal deficit (GFD) of the States to GDP has also shown a declining trend, with the 2007-08 (BE) at 2.3 per cent.
- Social development and human well-being
In recent years, both states as well as central government have substantially stepped up outlays on social sectors and rural development. Most States have proposed setting up new or upgrading existing schools, colleges and universities with a view to improve the provisioning of basic as well as advanced education facilities to a wider section of their respective populations. Some Governments have also announced employment guarantee schemes to cover additional districts. Others have constituted high-powered missions to address issues related to employment at various levels.
Governance and Public Service - Institutional framework for monitoring and evaluation of public programmes
In India, planning and development process, both at the Central and State levels, suffers from lack of adequate closure. The evaluation and corrective measures on most plan initiatives are missing. Further, the traditional method of monitoring plans by tracking expenditure levels achieved in relation to the budgeted outlays is ineffective as it does not measure the effectiveness of the expenditure undertaken in generating the desired outcomes. It is, therefore, important to move systematically from financial monitoring to output and outcome monitoring.
- Transparency in decision making
The enactment of the Right to Information Act at the Centre and in many States has bridged a critical gap in the public decision-making process, ushering in greater accountability of the public servants. This move towards greater transparency and right to access public information has been greatly aided by developments in information technology and e-governance. The Government of India has effectively implemented e-governance projects in some departments like Department of Revenue relating to income tax, customs and excise, Ministry of Railways.
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