10th year plan

TENTH FIVE YEAR PLAN : 2002-07

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FOREWORD

I have a vision of an India free of poverty, illiteracy and homelessness – free of regional, social andgender disparities – with modern physical and social infrastructure – and a healthy and sustainableenvironment. Above all, an India which stands tall and proud in the comity of nations, confident in hercapability to face all possible challenges. In short, I dream of an India which is counted among the ranksof developed nations before the end of the second decade of this new century.

The most pressing challenge facing us in the coming years will be to provide every Indian with theopportunity to realize his or her full creative potential. Demographic trends indicate that the rate of growthof our working age population during the next ten years will be the highest we have ever experienced, andunless we achieve a significant improvement in the pace of creation of work opportunities, there will be anincrease in the level of unemployment. Such a situation cannot be allowed to materialize.

Unemployment not only entails high human costs, it can also lead to serious social disruption, andput enormous strain on the fabric of our society. More importantly, the youth of our country is our mostvaluable resource and there can be no greater shame than to let it go waste for the lack of will anddetermination. Future generations will not forgive us for opportunities lost. We have, therefore, made acommitment to the young people of this country that our economy will generate one crore work opportunitieseach year for the next ten years so that their talents and potentials are utilized for the benefit of the Nation.

These dreams cannot be realized without rapid growth and development. We must, therefore, exploreevery conceivable way to accelerate the rate of growth of the economy. We must collectively show thefirm resolve to actualize the latent potentialities of our great country, putting behind all doubts and differences.

Planning has been one of the pillars of our approach to economic development since independence,and has stood us in good stead. Planning is not a static concept, and each of our Plans has reflected thechanging imperatives of the times. The Tenth Plan carries forward this tradition.

While working out the road-map we need to follow to realize my vision of doubling the per capitaincome of our country and providing one crore work opportunities in the next ten years, the PlanningCommission has firmly kept in view the ongoing process of transition to a market economy. The changingrole of the Government and its relationship with the private sector, forms the cornerstone of the Plan.

There are four dimensions of this transformation that I consider to be of critical importance, whichneed to be guided at the highest political level.

First and foremost is the centrality of good governance to the development process. The best policiesand programmes can flounder on the rock of poor governance and shortcomings in implementation. TheTenth Plan document has highlighted this issue by focusing on governance and implementation in asignificant manner. We need to bring about dramatic improvements in the functioning of our administrative,judicial and internal security systems in order to foster a dynamic and vibrant market economy.

Second, over the years, we have created numerous barriers to inter-state, and even intra-state, tradeand commerce. Creation of a common economic space is one of the basic advantages of nationhood. Allover the world, countries are coming together for this purpose, but we have continued to maintain anderect barriers. We must reverse this process decisively.

Third, we have inherited from the past a wide range of controls and restrictions on entrepreneurialinitiatives, which have retarded the emergence of an investor-friendly climate in the country. We must

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shed the mind-set of shortages that had given birth to this regime of pervasive controls, and create anenvironment which welcomes entrepreneurship with open arms.

Finally, effective delivery of basic social services to our people cannot be ensured unless the institutionsthat are charged with these functions are made accountable to the people themselves. For this it isnecessary to empower the Panchayati Raj Institutions by transferring to them both functions and resources.The PRIs must become the cutting edge of our three-tier political structure and the focal point of democraticdecentralization.

The unanimous adoption of the Tenth Five Year Plan by the National Development Council is anaffirmation of our collective belief in the potential of our country and the extent to which we share acommon vision of our future. I congratulate the Deputy Chairman, Members and officials of the PlanningCommission for having done a commendable job in shaping and giving substance to this shared vision. Iwould like to express my appreciation for the contribution made by a wide cross-section of our politicalleadership, representatives of civil society, academics, industrialists, and individuals from various walks oflife, in this truly National effort. The process of Plan formulation encapsulates our deep commitment todemocracy and the consultative process that form the core of our National ethos.

It is, however, important that we effectively communicate the goals, strategies and tasks of the TenthPlan to the various constituencies of our diverse society, without whose support we cannot hope to moveahead rapidly. We need to generate enthusiasm about the Plan and its targets among our people, especiallyour youth. We can achieve these ambitious targets only when we are able to make development apeople’s movement, and the Tenth Plan a people’s Plan. I seek the cooperation of all political parties,social organizations, voluntary agencies and the media in this important endeavour.

(Atal Bihari Vajpayee)Prime Minister of India, and

Chairman, Planning Commission

New DelhiDecember 21, 2002

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PLANNING COMMISSION

1. Shri Atal Bihari Vajpayee - ChairmanPrime Minister

2. Shri K.C. Pant - Deputy Chairman

3. Shri Jaswant Singh - MemberMinister of Finance

4. Shri Yashwant Sinha - MemberMinister of External Affairs

5. Smt. Vasundhara Raje - MemberMinister of State for Planning & Ex-OfficioProgramme Implementation

6. Dr. S.P. Gupta - Member

7. Dr. D.N. Tewari - Member

8. Dr. K. Venkatasubramanian - Member

9. Shri Som Pal - Member

10. Shri Kamaluddin Ahmed - Member

11. Shri N.K. Singh - Member


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The Tenth Five Year Plan marks the return of visionary planning to India after a long interregnumof cautious optimism. During the past two decades, India has no doubt been one of the ten fastestgrowing economies in the world, but we cannot be content with that. The Tenth Plan aims to take thecountry even further ahead, potentially to become the fastest growing country by the end of the Planperiod. It calls for us to stretch beyond our immediate capabilities and set targets which are inconsonance with our needs and the evident aspirations of our people.

The tone was set by the Prime Minister two years ago when he asked the Planning Commissionto examine the feasibility of doubling the per capita income of the country in ten years and of providing100 million work opportunities over the same period. The timing was significant. The country wasalready in the middle of what has proved to be an extended period of industrial stagnation, andweather-related agricultural failure had reemerged after nine years of normal monsoons. Theinternational economy too was not performing well. The euphoria generated by the 7 per cent plusgrowth rates of the mid-1990s had, therefore, all but evaporated, and there was a perceptible lack ofnational self-confidence. In such a context, it would have been prudent to set one’s sight relativelylow and seek refuge in “ground realities” – an oft-repeated euphemism for caution bordering onpessimism.

The very fact that the Prime Minister chose to go against the tide of popular sentiment andassert confidence in the growth potential of our economy was sufficient to reinvigorate the planningsystem in its widest sense. The process of introspection and search for the hidden sources ofgrowth began with a series of consultation meetings with a wide range of experts and stake-holders.It was most heartening to find that almost everyone we interacted with firmly believed that the PrimeMinister’s vision was attainable, but that it would necessitate fundamental changes in the way we didthings. This broad-based intellectual endorsement led to a more detailed search for the possiblesources of growth in the Indian economy.

The process culminated in the Approach Paper to the Tenth Plan, which was presented to theNational Development Council (NDC) for approval in September 2001. It was suggested that althoughthe objective of doubling the per capita income was feasible in the ten year time frame, it may bepreferable to settle for an intermediate target of 8 per cent per annum average growth rate for theTenth Plan period, with a further acceleration during the Eleventh Plan. The Approach Paper madeit clear that the task would not be an easy one, and that full political commitment at all levels wouldbe necessary for its fulfillment. It did not in any way gloss over the wide range of reforms coveringpolicies, procedures and institutions which would have to be implemented and the difficult decisionsthat would have to be taken.

In approving the Approach Paper to the Tenth Plan, the NDC also adopted a set of quantifiableand monitorable targets which would enable us to focus on accelerating growth, not only as an endin itself but also as the means to achieve success in other dimensions such as poverty reduction,employment creation and improvement in certain critical indicators of the quality of life. These includehealth, environment and education indicators. This was a path-breaking decision. Although suchobjectives have been mentioned in earlier Plans, in no case were specific targets set. As a result,these were viewed as being desirable, but not essential; which diluted the importance accorded tothem.

Armed with the NDC mandate, the Planning Commission embarked upon the herculean task ofpreparing the Tenth Plan document. Most people do not appreciate the magnitude of the effort that

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goes into the preparation of an Indian Five Year Plan. The process of Plan preparation reflects ourdemocratic tradition. The degree of involvement of and range of consultations with various constituentsof our society that have gone into the making of the Plan is probably unparalleled in the world. Wehave involved Central Ministries and State Governments fully in this process. Academics, subjectexperts, civil society organisations, trade unions and industrialists have been involved at variousstages of preparing the Plan in order to take full advantage of their expertise and ideas.

The Tenth Plan document contains a number of unique features which have been dictated bythe targets set and the strategy that has been evolved to attain them. Much that could be left unsaidwhen considering only incremental progress needs to be explicitly brought out when dramaticimprovements are envisaged. The essential message of the Plan is that a business-as-usual approachwill not deliver the goods – urgent action has to be taken on a wide range of issues across a largenumber of sectors if the Tenth Plan targets are to be achieved.

The first unique feature of the Plan is its explicit recognition that the Indian economy is in aphase where the growth process alone will not to be able to provide adequate work opportunities forthe emerging work-force, let alone reduce the back-log of unemployment. Even at an average annualgrowth rate of 8 per cent, the economy is likely to generate 30 million work opportunities during theTenth Plan period as compared to the estimated 35 million people who will be added to the workforce. It, therefore, becomes necessary to devise suitable strategies which can accelerate the paceof work creation by modulating the growth process itself.

Considerable work has gone into this issue in the Planning Commission, and it is felt that thereare a number of sectors and economic activities which have the potential to increase labour absorptionsignificantly with the right kind of policy and programme interventions. By and large, the strategyrelies on encouraging individual entrepreneurship and self-employment. It is recognised, however,that the skills required for these activities are not adequately provided by our existing education andtraining system. Special focus must, therefore, be laid on vocational education in order to ensurethat there is consistency between the demand for and supply of skills.

Second, although the issue of regional balance has been an integral component of almost everyfive-year plan, there has been perceptible increase in regional imbalances over the years. We havealso been conscious of the fact that national targets do not necessarily translate into balanced regionaldevelopment. The potentials and constraints that exist at the state-level vary significantly. Therefore,for the first time, we have broken down the national targets to the state-level in consultation withState governments. The Tenth Plan contains a separate volume on States as a reflection of theimportance we place on the role of the States in our development process.

We hope that this will enable the States to better focus their own development plans by morecareful consideration of the sectoral pattern of growth and its regional dispersion within the State. Inorder to facilitate this process, the Planning Commission is preparing a series of State DevelopmentReports, which will take stock of the capabilities of each State and develop appropriate strategies.We have also proposed a number of initiatives for reducing both inter-state and intra-state imbalances.In particular, we believe that the States need to be incentivised in order to carry out the requisitereform agenda, and several steps have been proposed in this direction.

Third, we believe that improvement in the quality of governance forms the essential ingredientfor success. Administrative and judicial efficiency is central to the functioning of a vibrant marketeconomy, and people’s welfare is largely determined by the efficiency of public delivery mechanisms.The best plan cannot compensate for poor implementation. Bringing about transparency,


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accountability and efficiency in all our public institutions is the key to unlocking the potential of ourcountry and to sustained social development.

Fortunately, all over the country, people have begun to demonstrate that by working collectivelythey can make a tremendous difference not only to their own lives, but also in the manner that publicinstitutions function. There are any number of examples that can be held up from different fields,such as self-help groups (SHGs), pani panchayats, village education committees, local healthcommittees, joint forest management committees, etc. Such civil society impulses need to beencouraged and nurtured by the government so that development eventually becomes a people’smovement and not merely an exercise in State paternalism.

We have, therefore, prepared a separate chapter on the issues of governance and implementation.We believe that this must be brought into the centre-stage of public discourse on development. Wehave also recently brought out a compendium on State government initiatives and civil societyresponses which have resulted in significant improvements in governance, entitled – “SuccessfulGovernance Initiatives and Best Practices – Experiences from Indian States”. We hope that this willbe a trend-setter in encouraging experience-sharing between our States.

Fourth, although our country has been subjected to natural disasters from time to time, thesehave never been adequately factored into our planning process. By and large, we have taken theapproach that these events are transient in nature and, therefore, can be addressed as and whenthey arise. The experience of recent years, however, suggests that even episodic shocks can disruptthe development process quite substantially unless contingency plans are already in place and fiscaland monetary policies can be adjusted with sufficient flexibility. Therefore, disaster managementmust be integrated into our planning framework so that growth and development can progress withoutmajor disruption even in the face of adverse events. As a start, the Tenth Plan includes a chapter ondisaster management, although its full integration with planning may yet take some time.

Fifth, a persistent complaint voiced by State governments, civil society organisations andnumerous other entities has been about the lack of complete information on the wide range ofprogrammes and schemes undertaken by Central Ministries and Departments. It has been said thatmany useful development interventions have not had the desired impact simply on account of lack ofinformation. In order to address this grievance, the Tenth Plan document contains a detailed listingof all on-going and proposed Plan programmes and schemes of every Central Ministry and Department,along with the indicative resources. It is hoped that this information will enable our various partnersin development to identify the Central government initiative that best suits their needs.

Finally, in addition to the focus on sectoral investments and on schemes and programmes,which has been integral to every Plan, the Tenth Plan lays out the policy and institutional reformsthat are required for each sector, both at the Centre and in the States. In other words, the full reformagenda that is considered to be essential for attaining the targets set in the Plan is encapsulated inone comprehensive chapter. Although the rationale and logic of each of these measures are detailedin various parts of the Plan, it has been felt that the magnitude of the efforts required is such thatthere should be no ambiguity about the actions that are expected from the various arms of thegovernment.

Given the ambitious targets that have been set for the Tenth Plan, a few words on the strategicapproach that has been adopted may be in order. Achieving the 8 per cent annual growth target willno doubt require a significant increase in our savings and investment rates, but perhaps by not asmuch as may be commonly believed. Detailed analysis has revealed that there is substantial excess

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capacity in some of the sectors of the economy, and, therefore, it should be possible to increaseoutput without a commensurate increase in investible resources. This, along with improvements inefficiency and better sectoral focus, should lead to a drop in the incremental capital-output ratio(ICOR) for the Tenth Plan period. It should be mentioned, however, that we have been fairlyconservative in this regard, and the ICOR was even lower during the Eighth Plan period than whathas been assumed for the Tenth.

Bringing unutilised capacities into production requires action along two broad fronts. The first isto revive aggregate demand in the economy, especially through stimulating investment activity. Webelieve that at the present time, public investment in infrastructure will “crowd in” private investments.Therefore, during the first two years of the Plan, the burden of industrial revival will have to becarried by public investment, with private investment taking the lead role in the latter years. This willrequire strengthening of the institutional capacity to undertake public investment, which has erodedto some extent in recent years. Furthermore, we need to simplify the rules, regulations and procedureswhich unnecessarily hamper private investment activity in the country, so that private initiative canplay its required role in due course. Every Ministry and State government needs to focus on theseissues so that early action can be taken to bring about policy and procedural reforms.

The second source of productive potential is the huge stock of capital assets that are locked upeither in the form of incomplete projects or due to legal and procedural restrictions on the transfer ofassets. Bringing these into productive use will require, on the one hand, emphasis on completion ofon-going projects, especially in the public sector, and creating the legal framework for quick transferof assets, on the other.

Even with the projected decline in the ICOR, it will be necessary to raise the savings rate of theeconomy quite substantially. In the recent past, private savings have grown more or less steadilysince the early 1990s. However, public savings turned sharply negative from 1998-99 onwards.This must be corrected; and from 2004-05 onwards, we must aim at achieving positive and growingpublic savings. Unless this can be brought about, the growth process will be hampered by inadequacyof resources.

It will be noticed that the fiscal stance of government, both at the Centre and in the States, iscentral to the strategy proposed for attainment of the growth target. However, it is equally importantto recognise that the nature of the fiscal stance has to exhibit a significant shift within the Plan perioditself. During the initial years, it has to focus primarily on the task of industrial revival through increasedpublic investment in infrastructure, even if it is at the cost of some delay in fiscal correction. In thelatter years, however, it has to steadily augment its role in providing investible resources for theeconomy by a sustained reduction in the revenue deficit. This transition requires a carefully crafted,and yet flexible, medium-term fiscal plan for the Centre and every State, which will be one of themajor challenges facing policy makers in the coming years.

The other major challenge lies in creating the conditions for vibrant and dynamic private activityin practically every sector of the economy. There are numerous barriers to the free expression ofentrepreneurial energies in the country; some of which are in the Centre and some in the States. Inparticular, our agricultural sector is hamstrung by a plethora of controls which prevent our farmersfrom realising the full value of their efforts. We have brought about considerable reforms in theindustrial arena over the past decade, but the agricultural sector continues to be governed byregulations which were framed during an era of shortages. This must change.

In our opinion, the rural sector holds the key to our future growth efforts. It is home to 70% ofour people and nearly 80% of our poor. Thus it offers the greatest potential for widespread


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development. Apart from the removal of needless controls, the two main areas of focus should beconnectivity and water management in all parts of the country. In particular, we need to pay attentionto the regeneration and revival of old irrigation systems and projects. In the dry land areas of thecountry, appropriate watershed development is critical. We need to bring wastelands and degradedlands into productive use, either under crops or agro-forestry, and to improve credit flows to ourfarmers through innovative methods. There is also need to change our strategic and policy approachto agricultural development, away from subsidies towards creating rural infrastructure. Technologicalinterventions are essential to improve agricultural productivity and to widen the range of products.Institutional structures governing rural activities also need to be reformed and strengthened.

Even for the non-agricultural sectors, there are a number of critical reforms which are still pending,and which need to be implemented as soon as possible. For instance, construction is one of themost labour-intensive sectors and needs to be vigorously promoted, but it too has been hamstrungby excessive controls on land use and poor urban management practices. In order for urbandevelopment and the construction activity to gain momentum synergistically, significant changes inland use policies and municipal functioning will have to take place.

The power sector can potentially be a serious constraint on our growth process. During theEighth and Ninth Plans we were able to achieve less than half the targeted capacity addition mainlydue to the infirmities of the State Electricity Boards. We need to make vigorous efforts to completethe restructuring of our power sector so that the ambitious targets that we have set for the Tenth Planare realised. The pace of investment in the power sector cannot be accelerated unless there issignificant improvement in profitability and internal resource generation. The financial condition ofthe State Electricity Boards not only limits their own ability to invest, but also discourages privateinvestments.

In so far as the social sectors are concerned, one of the most important decisions that hasbeen taken in recent years is to provide universal elementary education, and indeed to make it aright. We must, however, bear in mind that the turn-out from elementary education would be lookingfor further training in order to access the job market. We must, therefore, begin the process ofstrengthening the secondary stream, including vocational education and training, and also ourinstitutions of higher learning.

One of the most disturbing facts about the current situation is the prevalence of under-nutritionamong a large segment of our people despite sufficient availability of food in the country. Thevulnerable groups, particularly women and children and people living in remote areas, need specialattention to meet their dietary requirements. In addition, the primary health system needs to becomemore sensitive to the specific requirements of different parts of our country both in terms of differencesin disease incidence and in the nature of medical care.

Some of the measures that we feel are necessary for meeting the Plan objectives no doubtinvolve taking hard decisions, but I am certain that with appropriate coordination between the Centreand the States, and with cooperation of all political parties, we can achieve the targets that we haveset for ourselves and thereby meet the aspirations of our people. We need to constantly keep beforeour eyes the vision of India that we hope to create by the end of the Plan. An India where every childhas had 5 years of education. Where every village is electrified and has access to drinking water.Where every family can dream of having a roof over its head. Where the country is crisscrossed byhigh quality road and rail networks. Where every Indian knows that he is in control over his owndestiny.

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India is in the midst of transforming an agrarian economy into a modern multi-dimensionaleconomic power-house and a traditional stratified society into an egalitarian society throughconsultative politics. It is inevitable that such rapid social, economic, technological and politicaldevelopment of one billion people would generate turbulence. Yet it is essential that this turbulencebe managed and confined within limits that preserve the social fabric and permit the nation’stransformation to continue apace. Our Five Year Plans are a central component of this process inthat they lay out a vision which we can all share and work towards in a spirit of cooperation andresolve. It is my earnest hope that the Tenth Five Year Plan will fulfill this purpose.

(K. C. Pant)Deputy Chairman

Planning CommissionNew DelhiDecember 21, 2002

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1.1 The Tenth Five Year Plan, covering theperiod 2002-03 to 2006-07, represents but anotherstep in the evolution of development planning inIndia. In the 55 years that have passed since ourIndependence, the challenges, the imperatives andthe capabilities of the nation have undergoneprofound changes. The planning methodologieshave attempted to keep pace with the emergingrequirements and to guide the economy throughthe vicissitudes of national and global events, withgreater or lesser success. The Tenth Plan carrieson this tradition in the context of the objectiverealities of Indian economic life as they aremanifested today.

1.2 The single-most important feature of ourpost-colonial experience is that the people of Indiahave conclusively demonstrated their ability to forgea nation united despite its diversity, and to pursuedevelopment within the framework of a functioning,vibrant and pluralistic democracy. In this process,democratic institutions have put down firm roots,which continue to gain strength and spread. Thedegree of democratisation that has been achievedin the political sphere is, however, not matched byits progress on the economic front. There are stilltoo many controls and restrictions on individualinitiatives, and many of our developmental institu-tions continue to exhibit paternalistic behaviour,which today has become anachronistic. For thecountry to attain its full economic potential, and forthe poorest and weakest to shape their destinyaccording to their own desires, it requires a compre-hensive reappraisal not only of our developmentstrategy, but also of the institutional structures thatguide the development process. This is the taskthat the Tenth Plan has set for itself.

THE PERSPECTIVE

1.3 The last decade of the 20th century hasseen a visible shift in the focus of development

planning from the mere expansion of production ofgoods and services, and the consequent growth ofper capita income, to planning for enhancement ofhuman well being. The notion of human well beingitself is more broadly conceived to include not onlyconsumption of goods and services in general butmore specifically to ensure that the basic materialrequirements of all sections of the population,especially those below the poverty line, are met andthat they have access to basic social services suchas health and education. Specific focus on thesedimensions of social development is necessarybecause experience shows that economic pros-perity, measured in terms of per capita income,alone does not always ensure enrichment in qualityof life, as reflected, for instance, in the social indica-tors on health, longevity, literacy and environmentalsustainability. The latter must be valued asoutcomes that are socially desirable in themselves,and hence made direct objectives of any develop-ment process. They are also valuable inputs insustaining the development process in the longerrun. In addition to social development measures,in terms of access to social services, an equitabledevelopment process must provide expandingopportunities for advancement to all sections of thepopulation. Equality of outcomes may not be afeasible goal of social justice but equality ofopportunity is a goal for which we must all strive.

1.4 The development process must thereforebe viewed in terms of the efficiency with which ituses an economy’s productive capacities, involvingboth physical and human resources, to attain thedesired economic and social ends (and not justmaterial attainment). To this end, it is absolutelyessential to build up the economy’s productivepotential through high rates of growth, without whichwe cannot hope to provide expanding levels ofconsumption for the population. However, while thisis a necessary condition, it is not sufficient in itself.It becomes imperative, therefore, to pursue a

CHAPTER 1

PERSPECTIVE, OBJECTIVES AND STRATEGY

TENTH FIVE YEAR PLAN 2002-07

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development strategy that builds on a policy focusfor exploiting synergies between economic growth,desirable social attainments and growing opportu-nities for all. Such a strategy must have at its hearta commitment to widen and deepen the participationof people in all decisions governing economic andsocial development.

1.5 The Tenth Five Year Plan (2002-07) hasbeen prepared against a backdrop of highexpectations arising from some aspects of therecent performance. GDP growth in the post-reforms period has improved from an average ofabout 5.7 per cent in the 1980s to an average ofabout 6.1 per cent in the Eighth and Ninth Planperiods, making India one of the ten fastest growingcountries in the world. Encouraging progress hasalso been made in other dimensions. The percent-age of the population in poverty has continued todecline, even if not as much as was targeted.Population growth has decelerated below 2 per centfor the first time in four decades. Literacy hasincreased from 52 per cent in 1991 to 65 per centin 2001 and the improvement is evident in all States.Sectors such as software services and IT enabledservices have emerged as new sources of strength,creating confidence about India’s potential to becompetitive in the world economy.

1.6 These positive developments are, how-ever, clouded by other features which give causefor concern. The economy is currently in a decele-rating phase and urgent steps are needed to arrestthe deceleration and restore momentum. Thisreversal is all the more difficult because it has totake place in an environment where the worldeconomy is slowing down. There are severalaspects of development where progress has beenclearly disappointing. Growth in the 1990s hasgenerated less employment than was expected.The infant mortality rate has stagnated at around70 per 1000 for the last several years. As many as60 per cent of rural households and about 20 percent of urban households do not have a powerconnection. Only 60 per cent of urban householdshave access to drinking water in their homes, andfar fewer have latrines inside the house. Thesituation in this regard is much worse in the rural

areas. Land and forest degradation and over-exploitation of groundwater is seriously threateningsustainability of rural livelihoods and foodproduction. Pollution in the cities is on the increase.

1.7 All of these issues, among many others,will have to be tackled during the coming years,and the strategies and programmes for doing soare discussed at the appropriate places in this Plandocument. However, there are a few which are ofcritical concern, and which need to be highlightedright at the outset.

1.8 First and foremost, it needs to be empha-sised that the Tenth Plan straddles a cusp in theevolution of our demographic structure. Althoughthe growth rate of population in the country hasdeclined to below 2 per cent during the decade ofthe Nineties, and is expected to decline even furtherduring the next decade, the growth rate of thepopulation in the working age group of 15 to 60years will continue to accelerate before it turns downtowards the end of this decade. This pattern of thegrowth rate of the working age population,exceeding the overall population growth rate, wasin evidence during the 1990s as well, and it isfortunate that the country has not faced a seriousunemployment problem as yet. The significantreduction in the labour force participation ratesbetween 1993-94 and 1999-2000 has ensured thatthe pace of creation of work opportunities has nearlyabsorbed the accretions to the labour force, at leastin the aggregate. It would not, however, be prudentto assume that participation rates will continue todecline in the future, since there are at least twopossibly contradictory forces in operation. On theone hand, the increasing trend in the average yearsof education will reduce the rate of addition to thelabour force; while, on the other, greater workforceparticipation by women will tend to increase it.Although the recent data seems to suggest thatwomen are withdrawing from the workforce,particularly in rural areas, it is not obvious that thisis entirely a voluntary phenomenon. It may simplyreflect the non-availability of appropriate workopportunities. With economic growth, improvedconnectivity and higher female literacy, the situationcan, and indeed should, change dramatically.


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1.9 There is, therefore, every likelihood thatthe labour force will increase faster than theeconomy’s current ability to provide gainful anddecent work opportunities. During the 1980s andthe early part of the 1990s, the average growth rateof employment has been above 2 per cent perannum, which has dropped to only 1.1 per cent inthe latter part of the 1990s. Therefore, if these pasttrends in work creation continue into the future, thecountry faces the possibility of adding at least halfa percentage point of the labour force – that is nearly2 million young people – to the ranks of theunemployed each year. By the end of the TenthPlan, open unemployment, measured on the usualprincipal and subsidiary status (UPSS) basis, couldthen be as high as 5 per cent, or even higher, ascompared to around 2.8 per cent at present. Sucha situation is clearly insupportable. Unemploymentnot only entails high human costs, but also imposessignificant costs on society in terms of social unrestand deterioration of law and order.

1.10 The effects of underemployment anddisguised unemployment are at least as perniciousas those of open unemployment. The compositeincidence of unemployment and underemployment,as captured by the current daily status (CDS) basis,presently stands at nearly 9 per cent of the labourforce and at almost 13 per cent for the youth.Recent evidence suggests that the incidence ofunderemployment among rural males has actuallyrisen during the mid- to late-1990s, which is a matterof grave concern indeed. On the basis of pasttrends, the composite measure of unemploymentis likely to rise to an average of 11 per cent by theend of the Tenth Plan, and 15 to 16 per cent for theyouth. The principal cause of this problem is thesteadily worsening land-man ratio and the continueddependence of a high proportion of the populationon agriculture. Indeed, in absolute terms, thenumber of people dependant on agriculture hasactually increased. But this is not the only reason.The failure to significantly improve the intensity ofland use in large tracts of the country is alsoresponsible for a high degree of seasonality both inagriculture and in all other activities that are linkedto it. Over the perspective period, it is expectedthat the land available for agriculture will actually

reduce, partly due to the need for increasing forestcover in the country for environmental reasons, andpartly to the expanding need of land for non-agricultural purposes. Under such circumstances,the extent of underemployment can rise alarminglyunless measures are taken to either increase theintensity of land use through increased irrigationand watershed development or to shift a significantproportion of the labour force out of agriculture tonon-agricultural activities, or both.

1.11 The trends noticeable in the availability ofagricultural land lead naturally to the issue of foodsecurity in the country. This has been a centraltheme of Indian planning right since its inception,and particularly after the experience of the faminesof 1965-66. In recent years, however, it appearsthat food security in the traditional sense of the term– i.e. calorific requirement – may no longer be sucha pressing problem. Although per capita availabilityof food grains has not risen very sharply, thereappears to have been a distinct shift in consumptionpatterns away from food grains towards other formsof food. This change partly reflects the changes thathave taken place in the age structure and occupa-tional patterns of the population, and partly the effectof higher incomes leading to consumption of a morediversified basket of food products. The evidencethat exists of pervasive under-nutrition in our popu-lation, particularly among children and women,suggests that this shift in consumption patterns isdesirable and needs to be encouraged. Never-theless, care must be taken to ensure that theavailability of staples is not allowed to drop beyonda point. Moreover, the relatively short shelf life ofmost non-cereal food products requires that thestorage structures in the country are reoriented tokeep pace with the desired change in the productcomposition.

1.12 A related issue is the environmentaldegradation that has taken place in the country andwhich threatens both our nutritional security andhealth. Urban pollution is already having seriouseffects on the health status of the people, and it isfeared that unless measures are taken immediately,pollution related disease burden could go upalarmingly. In the rural areas, land and water


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degradation have reached alarming proportions,and at current trends, will lead to unsustainability inagricultural production and forest cover. It isestimated that more than 45 per cent of India’sgeographical area is already affected by serioussoil erosion and this proportion is increasing yearby year. An even more pressing problem is that ofwater availability. Already, substantial parts of thecountry are experiencing water stress, both in termsof quantity and quality. It is felt that unless urgentmeasures are taken, water, for both drinking andirrigation purposes, may become the single mostimportant problem by the end of the decade. Aparticularly disturbing aspect of our present watermanagement policies is the almost complete neglectof the origins and catchment areas of our rivers,both major and minor. Unless considerably greaterattention is paid to this issue, it is feared that manyof our rivers may cease to exist, with disastrousconsequences for the economy and ecology.

1.13 Ecological issues, unfortunately, have notbeen adequately incorporated into our developmentstrategy, despite the fact that there has long beenrecognition of the importance of environmental andecological factors in Indian planning and policy. Thebiological wealth of the nation has not been nurturedand utilised for the welfare of both our people andhumanity at large to the extent it should have. Altho-ugh India has been a signatory to all internationaltreaties and conventions on ecology and bio-diversity, and has enacted several laws on theseissues, there is evidence that bio-diversity loss iscontinuing apace. Much of the problems are nodoubt attributable to lack of resources, but possiblymore is due to an inadequacy of emphasis and poorgovernance.

1.14 The limitations that are placed by land andwater availability on agricultural output andemployment necessitate careful consideration of thealternatives. It is becoming increasingly clear thatthe solutions would have to be found by increasingproductivity in agriculture, including agro-forestry,horticulture, animal husbandry and fisheries, andby creating employment opportunities in otheractivities. In both cases, it has now become neces-sary to significantly enhance the education and skill

levels of our workforce. An important step in thisdirection has been taken by recognising thatelementary education should be treated as the rightof every citizen. It is now necessary to ensure thatthis recognition is translated to appropriate action.This step alone will no doubt contribute to a largeextent in increasing the opportunities that can beaccessed by the poor. But it is not enough. Theskill requirements of modern agriculture and of mostalternative occupations demand more specialisedtraining than is usually imparted in the standardschool curriculum, including the vocational streamat the secondary level. Unless such skills areimparted, the possibility exists that the growthprocess may be constrained not so much by theavailability of capital but by the availability ofappropriate skills. Since much of the new workopportunities will continue to involve physical labour,it is important to emphasise the dignity of labourwithin the educational system itself.

1.15 Recent evidence suggests that the genderbias that exists in the Indian social system is morepersistent than was earlier believed. The unexpec-ted decline in the sex ratio of those below the ageof six years, that has emerged from the 2001census, is a particularly disturbing manifestation ofthis. It is also conceivable that the decline inwomen’s labour force participation rates is a reflec-tion of this bias. Unless such trends are reverseddecisively within the next decade, the efforts towardssocial and demographic transition and improvingthe quality of life of people are likely to prove lessthan effective. It is, therefore, imperative that thedevelopment process must include gender equityas an integral component of the broader strategy.

1.16 Economic and social development of thecountry must also take full cognisance of thegrowing regional imbalances in practically allindicators. Not only have the per capita incomes inthe various States of the Union started divergingrapidly during the past decade, the disparities insocial attainments also appear to be persistent, asbrought out by the National Human DevelopmentReport 2001. These trends indicate a growingpolarisation of the country, which can have anextremely damaging effect on national unity and


5

harmony. There is also evidence that protectionistand ‘beggar-my-neighbour’ behaviour is becomingincreasingly more prevalent among the States. Ina context where the country as a whole is in theprocess of fostering greater integration with the restof the world, such behaviour is fraught with seriousdangers.

1.17 There are two additional issues whichhave traditionally not been a part of Indian planning,but which today demand integration into the broaderplanning framework. First, notions of nationalsecurity today are broader than merely that ofdefence or military preparedness. The two mostcritical aspects of this wider view are energy andfood security. Although the performance of theagricultural sector has obviated the urgency of thelatter quite considerably, it cannot be totally takenfor granted. Energy security is another matteraltogether. India’s high level of dependency onexternal energy sources, and the vulnerability of itssupply routes will have to be factored into anyplanning for the energy sector. Similar consi-derations, albeit to a lesser extent, apply to thetransport and communication sectors, which arecritical for modern-day military operations. Thesecond issue relates to disaster management. Untilnow, disasters have been treated as being inheren-tly episodic in nature, and therefore to be addressedonly as and when they occur. This is clearly nolonger adequate. The consequences of globalclimate change on the frequency of cyclones,droughts and floods are more in evidence todaythan before. Disaster management, if not disasterrelief, must therefore form an integral element ofnational planning. Even for disaster relief, themacro-economic stance that should be taken hasto be informed by the needs of growth anddevelopment.

1.18 Finally, our democratic traditions demandthat the people do not merely remain as beneficia-ries of our growth and development plans, but seethemselves as active participants and arbiters oftheir own destiny. The conditions are alreadypropitious in that the unorganised sector in Indiahas been performing strongly in recent years anddisplaying entrepreneurial dynamism of a signifi-

cantly higher order than the organised. In particular,the success of micro-credit programmes throughself-help groups has been most encouraging. Thepotential that can be unleashed by the removal ofthe various barriers to individual initiatives that havebeen erected over the years, is considerable.

1.19 The Prime Minister has set the stage forformulation of the Tenth Five Year Plan by articu-lating a vision in which the per capita income is tobe doubled within the next ten years. A target ofcreating 100 million employment opportunities overthe next ten years has also been announced by thePrime Minister. The purpose of the Tenth Plan is togive shape to this vision keeping in mind theconstraints and potentialities that have beendiscussed earlier. Since the Tenth Plan is only thefirst phase of the ten-year road map, it is felt thatthe Prime Minister’s vision can be realised throughtargeting a growth rate of 8 per cent during the TenthPlan period and 9.3 per cent during the EleventhPlan, and by focusing attention on the growth ofemployment intensive sectors. Since there aresignificant lags in the process of creation of capa-cities and their being brought into production, theTenth Plan will have to consciously take into accountthe pipeline investments that would be necessaryto accelerate the growth during the Eleventh Planperiod. This fact increases the investmentrequirements and also lends a degree of urgencyin taking the appropriate policy steps.

OBJECTIVES OF THE TENTH PLAN

1.20 Traditionally, the level of per capita incomehas been regarded as a summary indicator of theeconomic well being of the country, and growthtargets have therefore focused on growth in percapita income or per capita GDP. The PrimeMinister’s vision has been the basis for setting thetarget in this regard, not only for the Tenth Planperiod, but for all of the next ten years.

1.21 The Approach Paper had proposed thatthe Tenth Plan should aim at an indicative target of8 per cent average GDP growth for the period 2002-07. It is certainly an ambitious target, especially inview of the fact that GDP growth has decelerated


6

to below 6 per cent at present. Even if thedeceleration is viewed as a short-term phenomenon,the medium-term performance of the economy overthe past several years suggests that thedemonstrated growth potential is only about 6.5 percent. The proposed 8 per cent growth targettherefore involves an increase of at least 1.5percentage points over the recent medium term per-formance, which is substantial. Nevertheless, theNational Development Council (NDC) affirmed itsfaith in the latent potentialities of the Indian economyby approving the 8 per cent growth target for theTenth Plan period.

1.22 The Approach Paper also recognised thateconomic growth cannot be the only objective ofnational planning and indeed, over the years,development objectives are being defined not justin terms of increases in GDP or per capita incomebut more broadly in terms of enhancement of humanwell being. To reflect the importance of thesedimensions in development planning, the Tenth Planidentifies specific and monitorable targets for a fewkey indicators of human development. The NDChas approved that, in addition to the 8 per centgrowth target, other targets as given in Box 1.1should also be considered as being central to theattainment of the objectives of the Plan:

1.23 These targets reflect the concern thateconomic growth alone may not lead to the attain-

ment of long-run sustainability and of adequateimprovement in social justice. Earlier Plans have hadmany of these issues as objectives, but in no casewere specific targets set. As a result, these wereviewed in terms of being desirable but not essential.Thus a ‘best endeavour’ approach was usuallyadopted in this regard. In the Tenth Plan, however,these targets are considered to be as central to theplanning framework as the growth objective.

1.24 The targets mandated by the NDC at thetime of approval of the Approach Paper to the TenthFive Year Plan are, by and large, consistent withthe 8 percent growth target either through directlinkages that exist or through the resources thatare generated by the growth process for moreintensive public interventions. At the time offormulation of the Approach Paper, these linkageshad been assessed on the basis of economy-wideaggregative trends observed in the past, and it wasfelt that achievement of even these targets wouldrequire concerted efforts. Subsequently, moredetailed study and analysis by the PlanningCommission have revealed that it may be possibleto record even better achievement as far asemployment generation and poverty reduction areconcerned. The Report of the Special Group onTargeting 10 Million Employment Opportunities PerYear, which was constituted to deliberate upon thePrime Minister’s vision, indicated that withappropriate sectoral focus and directed

BOX 1.1

MONITORABLE TARGETS FOR THE TENTH PLAN AND BEYOND

• Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage points by 2012;

• Providing gainful and high-quality employment at least to addition to the labour force over theTenth Plan period;

• All children in school by 2003; all children to complete 5 years of schooling by 2007;

• Reduction in gender gaps in literacy and wage rates by at least 50 per cent by 2007;• Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2 per cent;• Increase in Literacy rates to 75 per cent within the Plan period;• Reduction of Infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28 by 2012;• Reduction of Maternal mortality ratio (MMR) to 2 per 1000 live births by 2007 and to 1 by 2012;

• Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012;• All villages to have sustained access to potable drinking water within the Plan period;• Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.


7

interventions, it would be possible to generatesubstantially more employment opportunities thanarising merely out of the growth process, not onlyto take care of the additions to the labour force, butalso to reduce the backlog of unemployment.Similarly, internal exercises carried out in thePlanning Commission revealed that the state-wisebreak down of the aggregate growth target, whichseeks to redress regional imbalances, could leadto even faster reduction in the poverty rate than theassessment made on the basis of the aggregativetrends. The Tenth Plan, therefore, seeks to achievetargets in these two areas which go beyond thoseset by the NDC in the Approach Paper. (Box 1.2).

THE DEVELOPMENT STRATEGY

1.25 The Tenth Plan provides an opportunity,at the start of the new millennium, to build upon thegains of the past and also to address the weak-nesses that have emerged. There is growingimpatience in the country at the fact that a largenumber of our people continue to live in abjectpoverty and there are alarming gaps in socialattainments even after five decades of planning.To meet this challenge squarely, the Tenth Plan mustlearn from past experience. It must strengthen whathas worked well, and at the same time also avoidrepeating past mistakes. There must be willingnessto modify policies and institutions based on pastexperience, keeping in mind the changes that havetaken place in the Indian economy and in the restof the world.

1.26 An important aspect of the redefinition ofstrategy that is needed relates to the role ofgovernment. This redefinition is necessary both atthe Central Government level and also at StateGovernment level. It is now generally recognisedthat government in the past tended to take on toomany responsibilities, imposing severe strains onits limited financial and administrative capabilitiesand also stifling individual initiative. An all-pervasiveGovernment role may have been necessary at astage where private sector capabilities wereundeveloped, but the situation has changeddramatically in this respect. India now has a strongand vibrant private sector. The public sector is muchless dominant than it used to be in many criticalsectors and its relative position is likely to declinefurther as Government ownership in many existingpublic sector organisations is expected to declinesubstantially. It is clear that industrial growth infuture will depend largely upon the performance ofthe private sector and our policies must thereforeprovide an environment which is conducive to suchgrowth.

1.27 This is not to say that government has norole to play, or only a minimalist role, in promotingdevelopment. On the contrary, Government has avery important role indeed, but a different one fromthat envisaged in the past. There are many areas,e.g. the social sectors, where its role will clearlyhave to expand. There are other areas, e.g. infra-structure development, where gaps are large and

BOX 1.2EMPLOYMENT GENERATION AND POVERTY

REDUCTION : CAN WE DO BETTER?

The current back-log of unemployment at around9 per cent, equivalent to 35 million persons, istoo high, and every effort needs to be made tonot only arrest the rising trend, but to actuallyreduce it during the Tenth Plan period itself. ThePrime Minister’s vision of creating 100 millionemployment opportunities over the next ten yearsis taken as the basis for targeting the creation of50 million employment opportunities during thenext five years, which is about 14 million higherthan the target mandated in the Approach Paperon the basis of additions to labour force duringthe Plan period. If this target is achieved, theunemployment rate is likely to decline significantlyto 5 per cent by the end of the Tenth Plan.

Similarly, the mandated reductions in the povertyrate of 5 percentage points during the Tenth Planand another 10 percentage points during theEleventh Plan, as stipulated in the ApproachPaper, will still leave more than 11 per cent of thepopulation, or about 130 million people, belowthe poverty line in 2012. Every effort, therefore,needs to be made to reduce the poverty rate evenfaster. It is estimated that with a proper sectoraland regional focus, it may be possible to reducethe poverty rate by nearly 7 percentage pointsover the Tenth Plan period if the growth target of8 per cent is achieved through the state-wisebreak down that has been drawn up inconsultation with the States.


8

the private sector cannot be expected to step insignificantly. In these areas, the role of Governmentmay have to be expanded and restructured. It willhave to expand in some areas of infrastructuredevelopment which are unlikely to attract privateinvestment, e.g. rural infrastructure and roaddevelopment. In others, e.g. telecommunications,power, ports, etc., the private sector can play a muchgreater role, provided an appropriate policy frame-work is in place. Here, the role of the governmentneeds to change to facilitate such investment asmuch as possible while still remaining a public sectorservice provider for quite some time. In all theseareas, the role of the government as a regulatorensuring a fair deal for consumers, transparencyand accountability, and a level playing field is alsoextremely important.

1.28 With the growing importance of the privatesector in economic matters, and the consequentincrease in the sensitivity of the economy to businesscycle fluctuations, both the role and the manner ofmacro-economic management demand a reappraisal.Greater flexibility in fiscal and monetary policies hasnow become necessary to ensure that the economyis consistently maintained on the feasible growth path.While there has certainly been considerableimprovement in the flexibility and sophistication ofmonetary and exchange rate management in thecountry, the same cannot be said about the conductof fiscal policies, which remain rooted in outmodedbudgetary procedures. In recent years it has becomeevident that there are circumstances in whichmonetary policy alone is ineffective to addressmacroeconomic developments, and a more sensitivefiscal policy is essential. It is, therefore, imperativethat a reformulation of the fiscal management systembe undertaken expeditiously to make it moreappropriate for the changed context.

1.29 The Indian Central Plans have traditionallyfocused on setting only national targets. However,recent experiences suggest that the performanceof different States varies considerably, and cogni-sance has to be taken of this issue. For example,although the economy as a whole has accelerated,the growth rates of different States have divergedand some of the poorest States have actually seena deceleration in growth. It is important to recognisethat the sharp increase in the growth rate andsignificant improvement in the social indicators that

are being contemplated for the Tenth Plan will bepossible only if there is a corresponding improve-ment in the performance of the relatively laggardStates. Indeed, if the higher targets are sought tobe achieved simultaneously with the slow progress,as observed in the past, in some of the mostpopulous States, it would necessarily imply a verylarge increase in inter-State inequality, with seriousconsequences for regional balance and nationalharmony.

1.30 In order to emphasise the importance ofensuring a balanced development for all States, theTenth Plan includes a State-wise break-up of thebroad developmental targets, including targets forgrowth rates and social development, which areconsistent with the national targets. These State-specific targets take into account the needs,potentialities and constraints present in each Stateand the scope for improvement in their performance,given these constraints. It needs to be emphasisedthat these State-wise targets are not meant to be asubstitute for or to over-ride the process of StatePlan formulation. They are more in the nature ofindicative guidelines for facilitating planning in theStates. It is an unfortunate fact that many States ofthe Union have de-emphasised the planningprocess and have allowed their planning systemsto degenerate. As a result, many State Plans arenot based on any rigorous and analytically meaning-ful appraisal of resources and capabilities or of thestrategies that can be used to accelerate thedevelopment process. National targets are oftenuncritically adopted as State targets, thereby leadingto a dysjunction between the planned and thepossible.

1.31 It is hoped that the presentation of State-wise targets in the national Plan will serve as acatalyst to reinvigorate planning at the State level.There are two dimensions to this. First, the veryrecognition of the diversities that exist in the countryshould lead to a similar recognition at the sub-Statelevel. Different districts within a State are at differentlevels of development and have different capabili-ties. A State Plan will, therefore, have to recognisethese differences, and ensure that the State-wisetargets set in the State Plan are consistent with whatis planned at the district level. This will requirecareful consideration of the sectoral pattern ofgrowth and its regional dispersion within the State.


9

It will also focus attention on the nature of reformsthat will have to be implemented at the State levelto achieve the growth targets set for the States.Secondly, a statement of the comparative positionof the various States in different dimensions ofdevelopment is in itself an important method forencouraging introspection, leading hopefully toeffective benchmarking for future progress. Muchhas been said about the value of experience-sharingand best practice adoption, but these are contingentupon recognition of the possibilities that exist.

1.32 The objective of creating a commoneconomic space within the country, which is anessential element of nationhood, depends criticallyupon the recognition of commonality of interests bythe States. This need has gained urgency asexternal barriers to trade and commerce are in theprocess of being brought down. Unfortunately, therehas been an increasing tendency on the part of anumber of States to increase the barriers to internaltrade. Such measures are specifically barred bythe Constitution, and it is the responsibility of theCentral Government to ensure that no policy, whichhas the effect of abridgement of inter-State tradeand commerce, is permitted by the exercise ofArticle 307 of the Constitution.

1.33 It is important to re-emphasise that theequity related objectives of the Plan, which areextremely important, are intimately linked to thegrowth objective, and attainment of one may notbe possible without the attainment of the other. Forexample, high rates of growth are essential if wewant to ensure sufficient expansion of sustainablegainful employment opportunities for our expandinglabour force, and a sufficient increase in the incomesof the poor and the disadvantaged. However, thisis not just a one-way relationship. It is also true thathigh growth rates may not be sustainable if theyare not accompanied by a dispersion of purchasingpower which can provide the demand needed tosupport the increase in output without having to relyexcessively on external markets. The inherent risksand possible consequences of such excessivedependence have become evident from the expe-riences of the East Asian and Latin American crises.External markets are certainly an extremely impor-tant source of demand, and we would emphasisethat they need to be tapped much more aggressivelyfor many sectors. However, given the size of the

BOX 1.3STRATEGY FOR EQUITY AND SOCIAL

JUSTICE

• Agricultural development must be viewed asa core element of the Plan, since growth inthis sector is likely to lead to the widest spreadof benefits especially to the rural poor. Thefirst generation of reforms concentrated on theindustrial economy and reforms in theagricultural sector were neglected. This mustchange in the Tenth Plan.

• The growth strategy of the Tenth Plan mustensure rapid growth of those sectors which aremost likely to create gainful employmentopportunities and deal with the policyconstraints which discourage growth of emp-loyment. Particular attention must be paid tothe policy environment influencing a widerange of sectors which have a large employ-ment potential. These include sectors suchas agriculture in its extended sense, cons-truction, tourism, transport, SSI, retailing, IT-and communication-enabled services, and arange of other new services which also needto be promoted through supportive policies.

• There will be a continuing need to supplementthe impact of growth with special programmesaimed at special target groups which may notbenefit sufficiently from the normal growthprocess. Such programmes have long beenpart of our development strategy and they willhave to continue in the Tenth Plan as well.However, it is important to ensure that theyare effective in achieving their objectives.

economy and the present relative size of exports,much of the demand needed to support highgrowth will have to come from the domesticeconomy itself.

1.34 Although growth has strong direct poverty-reducing effects, the frictions and rigidities in theIndian economy can make these processes lesseffective, and the Tenth Plan must therefore beformulated in a manner, which explicitly addressesthe need to ensure equity and social justice. A three-pronged strategy for attaining equity and socialjustice along with high rates of growth is proposedfor the Tenth Plan period (see Box 1.3)


10

Feasibility of 8 per cent Growth

1.35 At an aggregate level, any acceleration ingrowth requires some combination of an increasein gross domestic fixed capital formation and anincrease in efficiency of resource use. The latterrequires policies, which will increase the productivityof existing resources as well as the efficiency ofnew investment. There can be little doubt that Indiacannot hope to achieve an 8 per cent growth, relyingentirely, or even largely, on increased investment.With the average incremental capital output ratio(ICOR) in the Eighth and Ninth Plan periodamounting to around 4.0, the investment increaseneeded to achieve a 1.5 percentage point increasein growth is 6 percentage points. While some partof this could come from an increase in foreign directinvestments, it is unrealistic to expect this sourceto contribute more than 1 to 1.5 percentage points.This means that if the entire acceleration in growthhas to come from additional investment with anICOR of 4.0, it would be necessary to increase theinvestment ratio by 4.5 and 5 percentage points ofGDP, which would have to be mobilised throughadditional domestic savings. An increase of thisorder in the average rate of domestic savings overthe next five years may not be feasible. A substantialpart of the additional growth must, therefore, comefrom increased efficiency and tapping hiddenpotentialities in the economy.

1.36 The principal reason why 8 per centgrowth may be feasible in the Tenth Plan is that thescope for realising improvements in efficiency is verylarge, both in the public sector and in the privatesector. However, this improvement in efficiency canonly be realised if policies are adopted which ensuresuch improvement. The Tenth Plan must thereforegive high priority to identifying efficiency enhancingpolicies both at the macro level and also at thesectoral level. These policies will often involve aradical break from past practices and eveninstitutional arrangements. In many cases they willinvolve policy decisions, which can easily becomecontroversial given the compulsions of competitivepolitics. The Tenth Plan can only succeed in achie-ving the targeted 8 per cent growth if sufficientpolitical will is mobilised and a minimum consensus

achieved which will enable significant progress tobe made in critical areas. If this is not possible thengrowth will be correspondingly lower.

1.37 There is sufficient evidence to suggestthat there may be a considerable stock of existingcapital assets, which are either lying idle or havenever been used to their full potential. Bringingsuch assets into full productive use can certainlyreduce the resource requirements quitedramatically. The first major area of idle capacityis in public infrastructural investment, which hasbeen caused by the tendency to launch too manyprojects without the requisite financial provision ormanagement capability, leading to a tardy pace ofcompletion and sometimes even abandonment.Such problems are endemic in sectors such aspower, roads, railways and irrigation, but areprobably present in other sectors as well. It ispresent as much in central investments as in theState sector. Since completion of such projectsand upgradation of existing capital assets willalmost invariably be more cost-efficient than startingnew projects, it will require a moratorium onlaunching new projects until at least a minimumnumber of partially completed projects are broughtto completion. There is, however, no reason tobelieve that the existing set of projects necessarilyrepresent the most desirable or optimum choice ofoptions; therefore, some reprioritisation on soundeconomic principles becomes necessary.

1.38 The second area of idle capacity stock is inthe public sector enterprises where financial andmanagerial problems have prevented adequateinvestment in balancing and/or upgradation, leadingto inadequate utilisation of the capital assets or to thelack of market competitiveness. Prolonged periodsof insufficient maintenance expenditures also havesimilar effects. Mere infusion of fresh funds is unlikelyto solve this problem since the roots of the malaisego deeper, and usually lie in the domain of policiesand excessive interference in the management ofthese enterprises. Measures to unlock such potentialcapacities through institutional change can yield richdividends to the economy. Operational autonomy ofpublic enterprises has been discussed, and evenattempted in some cases, for many years now; butusually to no avail. Privatisation of non-strategic public


11

enterprises thus appears to hold the best alternativepromise in this regard.

1.39 The third area is in the private sector itself,which accounts for the bulk of the economy andwhere efficiency is vital. Much depends here onthe policy framework. A comprehensive review isneeded of policies in different areas to identifyconstraints to efficiency and optimal utilisation ofresources. The Tenth Plan will have to addressthese issues in a comprehensive manner. However,an over-arching problem is the legal and proceduralhurdles, which prevent the transfer of capital assetsfrom non-performing companies to those that wouldutilise them better. Even if such transfers areeffected, the time-lag is usually so substantial thatmuch of the effective value of the capital stock iseroded. This problem also has implications for thewillingness of lenders to advance funds tocompanies. Solution to such problems will requirelegal and procedural changes for facilitating quicktransfer of productive assets so that their idle timeis minimised. In particular, bankruptcy andforeclosure laws need to be instituted and mademore effective.

1.40 Therefore, in order to take advantage ofwhatever idle capital stock that exists in theeconomy today for accelerating the growth rate inthe Tenth Plan, there are at least three categoriesof measures as indicated in Box 1.4, that wouldneed to be taken immediately.

Detailing such measures forms a core element ofthe Tenth Plan, and these would need to beaccepted at all concerned levels of the Government,both at the centre and in the States.

1.41 Most infrastructure and industrial invest-ments in India take an unconscionable time to comeon stream. Much of this arises from the investor-unfriendly laws and non-transparent procedures andclearances that have to be gone through prior toeven launching the project, but hurdles can alsocome up in the course of execution. As a conse-quence, the gestation lags get lengthened andleaves investible resources locked up for extendedperiods. One of the reasons why the servicessectors have performed much better than theindustrial sector in India is that such impedimentsare less in their case, though not entirely absent.The solution to this problem would have to be soughtin identifying and removing unnecessary hurdles tothe investment activity.

1.42 Reduction in gestation lags of industrialand infrastructural investments, and indeed in alleconomic activities, through removal of policy andprocedural barriers is of the highest importance,since it is central not only to reducing ICORs, butalso to unshackling entrepreneurial energies.Although various Governments from time to timehave announced ‘single window clearance’procedures and ‘investor assistance cells’, theyhave rarely been effective. The primary reason forthis is that the problem lies not in inadequatecoordination, but in fragmented and often arbitraryexercise of the various powers of Government,vested in a number of functionaries at different levelsthrough a complex system of delegation of powers.It is compounded by the fact that neither are therules and regulations governing entry and operationtransparent, nor are they justiciable. Rationalisationof these various rules, notifying them in a comp-rehensive and transparent manner, assigningaccountability of each functionary, and providingadministrative and legal recourse in case of malafidedilatoriness will be necessary to address thisproblem. These are issues in governance, and areaddressed in some detail in the Tenth Plan.

Box 1.4

Measures to Reduce Idle Capital Stock

• Full emphasis to be placed on completion ofpartially completed or on-going projects andupgradation of existing capital assets beforestarting new projects.

• Rapid privatisation of Public SectorEnterprises (PSEs), particularly those, whichare working well below capacity.

• Legal and procedural changes for facilitatingquick transfer of assets, including suchmeasures as repeal of Sick IndustrialCompanies (Special Provision) Act (SICA),introduction of a bankruptcy law, facilitatingforeclosure, accelerating judicial processes,etc:


12

1.43 The efficiency and productivity of variouseconomic activities in India are well below theinternational standards. Although this is partly onaccount of the technological gaps that exist, it isalso because of the structural infirmities of theeconomy. As for example, the average level ofinventory holdings in India (which is estimated tobe around four months of output) is orders ofmagnitude higher than in other countries of the world(around one month), which results in a large amountof investible resources being kept in reserve forcontingencies rather than being put to productiveuse. The causes of this problem are many, and liein poor transport infrastructure which complicateslogistics management, an inadequate insurancesystem, and of course in outmoded methods ofmanagement, just to name a few. Although theadvent of Information Technology has helped tosome extent, there is a considerable way to gobefore international standards are attained.

1.44 Finally, the existence of unjustifiably highcapital intensity in many sectors is also a cause ofgrave concern since these resources could havebeen applied to creating additional capacity. Thereis no doubt that this is often caused by the exces-sively rigid labour laws applied to the organisedsector, which make it more difficult for the corporateentrepreneur to rationalise labour than to dispose-off capital assets when the need arises. It also hasa deleterious effect on work ethics and discipline.As a result, the effective cost of labour to theentrepreneur can be many times the nominal wagebill. Therefore, rationalisation of labour laws andregulations, which reduce the implicit cost of labourwithout affecting the explicit, can releaseconsiderable investible resources.

1.45 However, it should not be thought thatexcessive capital intensity is caused solely by theimpact of labour laws. Overstatement of capitalcosts by promoters, with the intention of passingoff a higher proportion of the real investment costto the lenders, i.e. having a higher debt/equity ratiothan would be otherwise acceptable, is also fairlyendemic in India. This arises primarily due to theinadequate capacity of the financial sector toevaluate investment proposals, and to a lack of

information sharing between different financialinstitutions due to out-dated confidentiality rules.These issues will need to be addressed expe-ditiously.

1.46 Overstatement of capital costs is notconfined to the private sector alone. It is equallyprevalent in public investments. There are numer-ous instances where the capital cost of a publicproject is significantly higher than equivalent privateprojects and even by international comparisons.The reasons, however, are different. Poor projectmanagement, leading to time and cost over-runs,and corruption are two principal causes. Excessiveacquisition of land, over-investment in amenities foremployees and at times undue mechanisation areothers. These are again issues of institutionaldesign and governance, and solutions to these willhave to be found in that context.

The External Sector

1.47 The proposed acceleration in the growthrate cannot take place without tapping on theopportunities offered by the international economyin terms of markets, investment and technologies.But in doing so, vulnerabilities have to be identifiedand addressed. This is particularly important in viewof the emerging trends in the international economywhich suggest a period of slow-down. The UnitedStates economy, in particular will have to bemonitored carefully, since the back-wash effects ofa United States slow-down can be substantial onIndia, not only since it is our largest trading partner,but also as countries which are heavily dependenton the United States market would search foralternative export avenues.

1.48 A high rate of GDP growth will necessarilybe associated with a high rate of growth of imports.This is particularly true given the extent ofdependence on imports of energy and the limitedlikelihood of expanding domestic energy sourcesrapidly enough. Liberalisation of imports as requiredby the World Trade Organisation (WTO) will alsohave a role to play. In such a situation, sustainedhigh rates of growth of exports will be essential forkeeping the current account deficit within manage-


13

able limits. Rapid export growth of exports will alsobe necessary for aggregate demand reasons, sincea steady increase in the rate of domestic savingsimplies that the rate of domestic consumptiongrowth will be less than the rate of growth of output.Therefore, external markets will have to be soughtfor sustaining high levels of capacity utilisation.

1.49 At present, the Indian economy suffersfrom two principal infirmities in expanding its exportsrapidly – the share of tradeables in GDP has beenfalling steadily; and the tradeables sectors continueto be dominantly inward-looking. Measures forreversing these attributes are essential forsustainable growth. Unless capacities are createdin India specifically for the export market, it is unlikelythat the export growth-targets can be met. Thereare of course exceptions, but excessive relianceon a limited number of goods and services, ingeneral, exposes the economy to vulnerability.

1.50 The most effective means of encouragingoutward orientation is to lower tariffs on imports sothat the anti-export bias both in policies and mind-sets get corrected. Protection, if at all necessary,should be provided mainly through the exchangerate mechanism. In recent years there have beenperiods when the real exchange rate appreciated,but these reflect the inability of the Indian economyto absorb all available investible resources morethan any other factor. With investment demandgrowing strongly, this should not be a source ofconcern. Rationalisation of the domestic taxstructure, and the consequent simplification of theexport promotion regime, will also be necessary.

1.51 Most importantly, it is necessary to recog-nise that rapid growth and development will not bepossible without greater integration with theinternational economy. In order to make most ofthe opportunities available, it is essential that Indiaevolve a positive agenda for its future negotiationsat the WTO. Until recently, the strategy has beenlargely defensive. While this was perfectly appro-priate for an inward-looking development strategy,it is not so now. The Indian interventions at theDoha Ministerial demonstrate the much more activeand aggressive position that is being taken by India.

This approach will have to be strengthened as theprocess of globalisation gathers momentum in theIndian economy.

The Financial Sector

1.52 With the steady reduction in the share androle of the public sector in the economy, the impor-tance of activities related to financial intermediationhas increased, and will continue to do so. It isbecoming evident, however, that the organisedfinancial sector in India is either unable or unwillingto finance a range of activities that are of crucialimportance both for growth and development.Agriculture, unorganised manufacturing andservices, and various types of infrastructure areinstances of such sectors. The recent financialsector reforms have naturally focused primarily onimproving the viability and stability of financialinstitutions, without adequately addressing thisissue. It is, therefore, necessary to considermethods of encouraging the financial sector tofinance such activities without impinging on itsviability or compromising on prudential concerns.

1.53 The most important issue in this contextis the utility and effectiveness of subsidised interestrates for various purposes and segments of people.The evidence suggests that, on one hand, financialinstitutions are reluctant to give such loans andadvances since these are not in their interest; and,on the other, the benefits are systematically misusedby the powerful and the influential. Often, the actualbeneficiary ends up bearing a higher effectiveinterest rate than would be available in the normalcourse. It thus appears to be more important toensure a smooth flow of resources than providinglimited amounts with subsidy.

1.54 Finally, there is a problem of seriousshortage of long-term risk capital in India, whichwill need to be rectified if rapid growth is to beachieved. In addition, excessive reliance on debtinstruments by savers for meeting their long-termincome flow requirements places pressure on thelevel and structure of interest rates. A judicious mixbetween interest and capital gains incomes isnecessary to balance the needs of both savers and


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investors. Therefore, a widening and deepening ofthe capital market, including equity and long-termdebt, with adequate regulatory over-sight is centralto the process of a sustained growth in savings andinvestment in the country over the longer run.

Agriculture and Rural Development

1.55 The policy approach to agriculture,particularly in the 1990s, has been to secureincreased production through subsidies in inputssuch as power, water and fertiliser, rather thanthrough building new capital assets in irrigation,power and rural infrastructure. This strategy hasrun into serious difficulties. Deteriorating Statefinances have meant that subsidies have crowded-out public agricultural investment in roads andirrigation and expenditure on technologicalupgrading. Apart from the inability to create newassets, the lack of resources has eroded expen-diture on maintenance of canals and roads. Thefinancial unviability of the State Electricity Boardshas made it difficult to expand power supply inuncovered rural areas and contributed to the lowquality of rural power supply. These problems areparticularly severe in the poorer States.

1.56 The equity, efficiency, and sustainabilityof this approach are however questionable. Thesubsidies have grown in size and are now financiallyunsustainable. Some of these, as for example thefertiliser subsidy, are really subsidies to cover thehigh cost of the fertiliser industry, and need to bere-examined in the context of liberalisation. Othersubsidies, e.g. under-pricing of power and irrigation,do not improve income distribution in rural areasand may also be environmentally harmful. Excessuse of subsidised fertiliser has created an imbalancebetween N, P and K, whereas excess use of waterhas produced water logging in many areas.

1.57 It is necessary to evolve a new approachto agricultural policy, based on a careful assessmentof current constraints and possibilities. A sober andcareful assessment of resources indicates that bothland and water will be crucial constraints on theefforts to expand production in agriculture. India isalready in a situation where the extent of forest coverhas declined alarmingly. Although in recent yearsthere has been some improvement, it is a long way

from our eventual target. In such a situation thereis little possibility of increase in the cultivated areaof the country other than through reclamation ofwasteland for agriculture and forestry. Indeed,perhaps there would be an eventual decline, asurban demand and environmental imperatives leadto conversion of some agricultural land. There is,therefore, no alternative but to focus on raising theproductivity of our land and water resources in amanner, which is sustainable over the longer term.

1.58 The first, and possibly the most important,area of focus must be to raise the cropping intensityof our existing agricultural land. Climatically Indiais fortunate in that it is possible to have multiplecrops practically all over the country. The criticalproblem though is water, as water resources arealso under severe strain. Despite large investmentsin irrigation in the past, only about 40 per cent ofthe agricultural area are irrigated. The progress onthis front has slowed down considerably in recentyears, particularly in terms of major and mediumirrigation projects. Moreover, capacities of existingprojects are also getting eroded due to insufficientexpenditure on maintenance and upgradation.

1.59 Public investment in irrigation has fallensignificantly over successive Plan periods. This islargely due to resource constraints faced byGovernments both at the Centre and the States.However, resources are not the only problem.Potential irrigation projects are located in areaswhich are either very difficult or environmentallysensitive, which makes it difficult to implement them.The Tenth Plan must aim at a major revival of publicinvestment in irrigation capacity and watermanagement. Greater attention will also have tobe paid to rain water harvesting and increasing theirrigation potential through scientific watersheddevelopment and minor irrigation. There is alsoconsiderable scope to improve the efficiency of theexisting irrigation infrastructure through better andmore participative management practices.

1.60 The second priority must be the deve-lopment of other rural infrastructure that supportsnot only agriculture but all rural economic activities.A number of recent studies have indicated that therate of growth of rural incomes and reduction in ruralpoverty are strongly influenced by the provision of


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rural road connectivity. Other forms of rural infra-structure are also important, but the impact of ruralroads has a dominant bearing on widening theopportunities and alternatives available to ourpeople. Although this is an area that is in the domainof the State Governments, the Centre has takeninitiative to provide earmarked funding for asignificantly accelerated rural roads programme. Itis also necessary to reorient the poverty alleviationprogrammes in a manner that they contribute moreefficiently to the creation of rural assets, both privateand community.

1.61 The third area that needs attention is thedevelopment and dissemination of agriculturaltechnologies. Over the years India has developedan extensive system of agricultural research centresand extension services. There is reason to believe,however, that the quality of the agricultural researchefforts has weakened while the extension systemhas virtually collapsed. Strengthening of the agricul-tural research and development system, with specialemphasis on bio-technology, and a significantimprovement in the degree of sophistication in thetechnology dissemination methods are essential toachieving rapid and sustained growth in agriculturalproductivity. A radical overhaul of the extensionservices is also needed.

1.62 Finally, the true potential of Indian agricul-ture can be realised only when there is diversificationof agricultural products, both geographically andover time. The food and nutritional requirementsof the people for leading healthy lives demand awider range of food products than are presentlyconsumed on the average. For such diversificationto gain momentum, the requisite science andtechnology inputs will have to be provided alongwith appropriate supportive price policies. Most ofthe non-grain food products are, however, perish-able in nature. In order to encourage the diversi-fication through minimum wastage, considerableattention will be required to focus on post-harvesttechnologies and marketing infrastructure. It wouldalso require a reconsideration of the various rulesand regulations that govern agricultural trade, whichfrequently act against the interests of the farmersand distort their incentive structure.

1.63 Forests are natural assets and provide avariety of benefits to the economy. The recorded

forest area in the country is about 23 per cent ofthe total geographical area, but 41 per cent of thisis degraded, and hence unable to play an importantrole in environmental sustainability and in meetingthe forest produce needs of the people, industryand other sectors.

1.64 The problems and constraints in forestrydevelopment include lack of awareness aboutmultiple roles and benefits of forests; lack of linkagebetween management and livelihood security of thepeople; application of low level of technology;inadequate research and extension, weak planningcapability, wastage in harvesting and processing,market imperfections, over-emphasis on Govern-ment involvement and control, low level of people’sparticipation and NGOs involvement, lack of privatesector participation, unwanted restrictions on felling,transport and marketing of forest products grownby the people, lack of inter-sectoral coordination andweakness and conflicting roles of public forestadministration.

Industrial Policy Issues

1.65 The industrial sector will have to growaround 10 per cent to achieve the Tenth Plan targetof 8 per cent growth for GDP. This represents amajor acceleration from its past performance; thesector grew at only about 7 per cent in the Eighthand Ninth Plan periods taken together. Besides, thisacceleration has to take place in an environment,which will be significantly different from the past. Twodifferences are particularly important. First, industrywill have to face much stronger internationalcompetition, as our domestic market is now moreopen with quantitative restrictions (QRs) on importshaving been removed with effect from April 1, 2001.Second, the relative role of the public sector as adistinct entity will decline in the course of the TenthPlan as the process of disinvestment converts manyof the existing public sector enterprises fromGovernment controlled enterprises to non-Government enterprises in which Government mayhave a minority stake but the units will either becomeboard managed or managed by a strategic investor.In either case, they will not be part of the public sector.

1.66 The Tenth Plan must therefore focus oncreating an industrial policy environment in which


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private sector companies, including erstwhile publicsector companies, can become efficient and compe-titive. Some of the sources of efficiency that canbe tapped in the Tenth Plan period have beendiscussed earlier. The specific policy issues thatdeserve special attention in the context of industrialdevelopment are discussed in the followingparagraphs.

1.67 The removal of quantitative restrictionson imports is an important step in opening theeconomy to foreign competition. However, whileQRs have been removed, import protection is stillhigh. It is estimated that India’s import weightedtariffs have declined from around 90 per cent atthe start of the reforms to around 34 per cent in2001-02 but this reduced level is three timeshigher than the level prevailing in East Asia. It isnow well recognised that while industrialprotection may sometimes be needed to help aparticular sector, it tends to raise domestic costsand makes downstream industrial activityuncompetitive. The net effect is to make industryas a whole uncompetitive in world markets.Recognising this, developing countries the worldover have steadily reduced the level of protectionover the past ten years. The Government of Indiatoo has announced that India’s tariff levels willbe brought to the East Asian levels within a three-year period. This is in our view the right approachand will give Indian industry a clear indication ofthe pace at which the transition will be made.Care, however, will have to be taken to ensurethat adequate safeguards are provided to preventdumping and other forms of misuse.

1.68 A second important policy issue relates tothe need to extend industrial liberalisation, whichhas been implemented extensively at the Centrallevel, to the State level also. Industry circles frequ-ently complain that the administration of regulationsat the State level is extremely cumbersome andsubjects entrepreneurs to frequent harassment.The transactions cost imposed by this system,including costs on account of corruption spawnedby excessive regulation, are very large. What ismore, they are especially burdensome for small-scale units. Radical changes are thus needed inthese areas.

1.69 The small scale industry (SSI) has a vitalrole to play in the process of industrialisation pro-viding a vehicle for entrepreneurship to flourish anda valuable entry point for new entrepreneurs whocan start as small enterprises and then grow big.Small scale industries are also vehicles for achievinga broader regional spread of industry. Since SSIsare generally more employment intensive per unitof capital than large scale industry they are also asource of the much needed employment avenues.Khadi and village industries also have an importantrole to play, especially in promoting non-farm emp-loyment in rural areas. The Tenth Plan must ensurethat policies are supportive of the small scale sector.Liberalisation of controls and doing away withunnecessary procedures at the State level can helpin this process. Equally important is the need toensure that adequate credit is made available tothe SSI units. A proactive policy, encouraging thebanks to meet the needs of the SSI whilemaintaining all necessary banking diligence in creditappraisal, is very necessary. Procedures for creditapproval and disbursement in the public sectorbanks need to be modernized to ensure quickresponse.

1.70 The policy of reservation of certain pro-ducts for SSI also needs to be reconsidered. Whilethere is an overwhelming case for providing supportto SSIs through specialised credit access schemesand fiscal incentives, a similar case cannot be madefor reservation on economic grounds. Severalexpert committees have examined this issue andcome to the conclusion that the policy of reservationhas impeded healthy growth and export capabilityin many areas. It is often regarded as irrationalonce competition from imports is freely allowed. Forthese reasons, the expert view is that the policy ofreservation needs to be phased out in due course.While doing so, however, the effect on employmentshould be carefully considered, since the presentemployment situation is rather grim. There is alsoa need for preferential opportunity to extendinvestment limits for SSI units with immediate effect,while restricting entry of new large units until later.There must also be recognition of the fact that therelationship between the large and the small unitsis not always adverse, and that quite often there isa strong complementarity between the two. Thereare, however, a number of policy distortions, which


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obscures or even prevents the operation of suchcomplementarities. The extent of ancillarisation inIndia, although increasing in recent years, is wellbelow the potential. Policies that impede thisrelationship must be identified and removed.

1.71 Finally, it needs to be mentioned that theprincipal responsibility for achieving competitiveefficiency rests with the private enterprises them-selves. The policy environment cannot always beused as an alibi for non-performance. Recentresearch suggests that in India the main barriers toachieving international levels of efficiency areinternal to the firms, and only to a minor extent inthe policy environment. Private enterprises needto take these results to heart and engage in theintrospection that is necessary for them to overcomeand remove these internal limitations.

Social Infrastructure

1.72 Performance in the field of education isone of the most disappointing aspects of India’sdevelopmental strategy. Out of approximately 200million children in the age group 6-14 years, only120 million are in schools and net attendance inthe primary level is only 66 per cent of enrolment.This is completely unacceptable and the Tenth Planshould aim at a radical transformation in thissituation. Education for all must be one of theprimary objectives of the Tenth Plan. Assertion ofthe dignity of labour and vocationalisation ofcurricula are essential to ensure that a dysjunctiondoes not take place between the educational systemand the work place.

1.73 Mere establishment of schools and hiringof teachers will not lead to an improvement ineducation if teachers remain absent as happens inmany parts of the country, especially in rural areas.It is therefore essential that control over schoolsand teachers be transferred to local bodies whichhave a direct interest in teacher performance.States should be encouraged to implement the 73rd

and 74th Amendments of the Constitution, whichfacilitate the transfer of management of primary andupper primary schools to panchayats/local bodies.Planning, supervision and management of educa-tion would have to be through local bodies at district,block and village levels. Efforts should also be made

for social mobilisation of local communities for adultliteracy campaigns and for promotion of primaryeducation.

1.74 The University and Higher Education Sectoralso needs attention. Although the number ofuniversities has increased, and many universitiescontinue to maintain high standards of education, itis a matter of serious concern that on the whole,the expansion in quantity has been accompaniedby a fall in quality. Modernisation of syllabi, exami-nation reforms and greater attention to issues ofgovernance of universities and colleges, all requireurgent attention. Part of the problem facing univer-sities is the inadequate provision of budgetaryresources from the Government. Since budgetresources are limited, and such resources as areavailable, need to be allocated to expanding primaryeducation, it is important to recognise that theuniversities must make greater efforts tosupplement resources from the Government.

1.75 Improvement in the health status of thepopulation has been one of the major thrust areasin social development programmes of the country.This was to be achieved through improving theaccess to and utilisation of health, family welfareand nutrition services with special focus on under-served and under-privileged segments of popu-lation. Technological improvements and increasedaccess to health care have resulted in a steep fallin mortality, but the disease burden due to communi-cable diseases, non-communicable diseases,environmental pollution and nutritional problemscontinue to be high. In spite of the fact that normsfor creation of infrastructure and manpower aresimilar throughout the country, there remainsubstantial variations between States and districtswithin a State in availability and utilisation of healthcare services and health indices of the population.

1.76 There will have to be a continued commit-ment to provide essential primary health care,emergency life saving services, services under theNational disease control programmes and theNational Family Welfare programme free of cost toindividuals based on their needs and not on theirability to pay. At the same time, suitable strategieswill have to be evolved, tested and implementedfor levying and collecting charges and utilising the


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funds obtained for health care services from peopleabove poverty line.

1.77 One of the major factors responsible forpoor performance in hospitals is the absence ofpersonnel of all categories who are posted there.It is essential to ensure that that there is appropriatedelegation of powers to panchayati raj institutions(PRIs) so that there is local accountability of thepublic health care providers, and problems relatingto poor performance can be sorted out locally.

Shelter for All

1.78 The objective of the National Housing andHabitat Policy 1998 was to provide shelter to all,especially to the poor and the deprived. The policyenvisaged construction of 2 million additionalhouses annually. Of these, 1.3 million units wereto be in rural areas and 0.7 million units in urbanareas. The time has come to ensure that the goalof shelter to all is achieved by the end of theEleventh Plan. The issues and problems relatingto provision of rural and urban housing are verydifferent and hence require specific interventions.

1.79 As per the 1991 Census, the total ruralhousing shortage was 13.72 million, which includedhouseholds without shelter and those living in kutchaunserviceable houses. In addition, it was estimatedthat 10.75 million households would require housingduring the period 1991 to 2002, on account ofpopulation growth. By the end of the Eighth Plan,around 6 million units had been created. Duringthe Ninth Plan it is estimated that 4.5 million houseshave been constructed under IAY and relatedprogrammes. In addition, HUDCO has sanctionedschemes for construction of close to 6 milliondwelling units in the rural areas. Thus, the backlogleft at the end of the Ninth Plan is estimated to bearound 8 million dwelling units.

1.80 Urban housing shortage at the beginningof Tenth Plan has been assessed to be 8.89 millionunits. As much as 90 per cent of the shortfallpertains to the urban poor, and is attributable to the‘congestion’ needs of joint families, obsolescenceand replacement of old houses, upgrading of kutchahouses, and provision of housing to slum-dwellers.In urban areas, the problem becomes complex due

to two factors: the high cost of land, and the lack ofaccess to institutional credit for workers in theinformal sector, including the self-employed.Provision of affordable land requires allocation ofGovernment-owned lands, and cross-subsidizationfrom commercial properties and colonies developedfor the affluent, to those for the urban poor.

1.81 During the Tenth and Eleventh Planhousing shortage would go up further due topopulation growth, in addition to the backlog ofhousing shortage in the Ninth Plan. It would bepossible to make a more precise assessment ofthe housing shortage and requirement once detailsfor 2001 are available from the Census. However,in view of the housing shortage even on the basisof 1991 Census, a major thrust to the housingprogramme would have to be accorded in the Tenthand Eleventh Plan to meet the goal of ‘Shelter forAll’ by year 2012. For this a detailed action planwould have to be drawn up incorporating housingprogrammes of public, private and householdsectors. Nevertheless, it would be necessary toprovide free houses under IAY to the shelterlessrural poor, with some subsidy for upgradation ofkutcha houses. There is also a need to promotecredit linked housing in the rural areas for easingthe housing shortage for non-BPL families. Asregards credit for the urban poor, which is requiredeven in the programmes of slum-rehousing (ValmikiAmbedkar Awas Yojana), there is need formeasures to create institutional arrangements. Thesteps to ensure availability of credit will includestrengthening of State Housing Boards, arrangingtie-ups between self-help / thrift-and-credit groupsof urban poor and Housing Finance Institutions, andpromotion of co-operative housing schemes for thebenefit of urban poor.

Economic Infrastructure

1.82 The energy-transport infrastructure will bea major constraint on any effort to achieve asignificant acceleration in the growth of GDP duringthe Tenth Plan period. A GDP growth of around 8per cent or so will require an industrial sector growtharound 10 per cent. This will place heavy demandson the generation and distribution of electric powerand also transport sectors. Since these are non-tradable services, the necessary expansion in


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supply must come from increased domestic pro-duction. Furthermore, in a globally competitiveenvironment, the quality of these services in termsof both price and reliability are as important asavailability, and it is well known that we face seriousproblems on both counts. Unless these problemsare speedily resolved, India will neither be able toaccelerate its growth nor compete effectively in theincreasingly integrated international economy.

1.83 The power sector has been suffering fromserious problems which were identified as early asten years ago. However, no corrective action wastaken and the result is that the power sector facesan imminent crisis in almost all States. No StateElectricity Board (SEB) is recovering the full cost ofpower supplied, with the result that they makecontinuous losses on their total operations. Theselosses cannot be made good from State budgets,which are themselves under severe financial strain,and the result is that the SEBs are starved ofresources to fund expansion and typically end upeven neglecting essential maintenance. The annuallosses of SEBs at the end of the Ninth Plan areestimated at Rs. 24,000 crore, and this has led tolarge outstanding dues to Central Public SectorUndertakings (PSUs) amounting to Rs. 35,000crore.

1.84 The reasons for the huge losses of theSEBs are well known. Power tariffs do not covercosts because some segments, especially agri-culture, but also household consumers, are chargedvery low tariffs, while industry and commercial usersare overcharged. However, the overchargedsegments do not always pay the high chargesbecause theft of electricity, typically with theconnivance of the staff in the distribution segment,is very high. Only 80 per cent of the electricitycharges billed are actually collected. These seriousissues were hidden by claiming a large absorptionof electricity in agriculture which, being unmetered,enabled SEBs to claim transmission and distribution(T&D) losses of around 24 per cent. However, whenactual losses were calculated more precisely, inStates power sector reforms were being undertaken,it was found that the actual T&D loss is as high as45-50 per cent.

1.85 Operational efficiencies in generation arealso very low in some States. Overstaffing is ram-

pant. Political interference on the management ofSEBs has become the norm in most States, makingit difficult to ensure high levels of managementefficiency.

1.86 These problems were known at the startof the economic reforms and it was recognised atthe time that the public sector may not be able toinvest in the power sector to expand capacity to therequired extent. The Government therefore invitedprivate investors in power generation in the hopethat private investment would fill the gap. However,it soon became evident that significant volumes ofprivate investment cannot be attracted in anenvironment where the independent powerproducer is expected to sell power to a public sectordistributor who may not be in a position to pay forthe power purchased. The result has been that theinflow of private investment has been much belowthe targeted level. Since the financial problems ofthe SEBs have worsened over the Ninth Plan period,even this volume cannot be expected to continueunless State Governments undertake seriousreforms in the power sector, including especiallydistribution, to make the sector financially viable.

1.87 Fortunately, a consensus is beginning toemerge on what needs to be done in this area anda handful of States have started the process ofreform. However, it is important to note that theprocess will necessarily be long drawn out. Systemsthat are operating at a T&D loss of 45 per centcannot suddenly go to a 15 per cent level, which isotherwise technically feasible. And yet, unless theymake this transition, we cannot expect to provideadequate power of assured quality at a reasonableprice. The Centre will have to assist this processthrough legislative changes and finan-cial supportto the investment requirements. As States embarkon power sector reforms, it will also be necessaryto deal with the problems of the very largeoutstanding dues of SEBs and also the mediumterm restructuring of the SEBs to bring about viabilityin operations over a three to four year period.Substantial financial resources will be needed tohelp States make the transition.

1.88 The optimum mix of power generation interms of primary energy sources is an importantissue for long-term planning of the power sector.


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Over the years, the balance between thermal andhydro-electricity has shifted steadily against hydro-electricity, which now accounts for only 24 per centof total power generation whereas an ideal levelwould be much higher. Special efforts need to bemade to restore the balance. Hydro-electricity notonly avoids carbon emissions, it is also particularlywell suited to dealing with situations where thereare large peaking deficits. India has large untappedhydro resources and although there are environ-mental constraints in tapping these resources, aconcerted effort at exploiting this potential, while atthe same time protecting against environmentaldamage and ensuring fair resettlement compen-sation is definitely needed.

1.89 Atomic energy is another important sourceof electric power, which has environmental advanta-ges and is also likely to be economical in the longerrun. At present, nuclear energy accounts for only2.4 per cent of total electricity generated. This isfar too low. The Nuclear Power Corporation hasdemonstrated the capability of setting up andoperating nuclear energy power plants with highlevels of technical efficiency and safety. It isdesirable to plan for a significant expansion in thenuclear power generation capacity. An expandedprogramme would also make it possible to reducecosts of construction. This would necessarilyrequire much larger allocation of budgetary supportto this sector.

1.90 Considering India’s continental size,geography and resource endowment, it is naturalthat the Indian Railways should have a lead role inthe transport sector, not to mention other consi-derations such as greater energy efficiency, eco-friendliness and relative safety. However, IndianRailways has experienced a continuous decline inits position relative to the road transport system.Some reduction in its share in favour of roadtransport was to be expected and is in line withtrends elsewhere, but there is reason to believe thatin India this has been excessive. This has happenedprimarily because of policy distortions, which needto be corrected urgently.

1.91 The most important policy distortion is theskewed tariff policy which overcharges freightmovement in order to subsidise ordinary passenger

traffic. This is accompanied by an investmentstrategy, which has placed excessive emphasis onopening new lines for passenger traffic and notenough emphasis on expanding capacity in areaswhere there is potential commercial traffic. The netresult has been an alarming deterioration in thefinancial condition of the Railways and an inabilityto undertake the investment needed to improveRailway transport services.

1.92 The heavy cross-subsidisation of passen-ger fares cannot fully be justified on either economicor social grounds since the beneficiaries of thesubsidy are not necessarily the poor. This systemmust be phased out gradually over the Tenth Planperiod. Due consideration should be given toestablishing an independent Rail Tariff RegulatoryAuthority for tariff fixation on technical andcommercial considerations.

1.93 Greater emphasis has to be laid on comp-letion of existing projects, and a proper prioritisationof all ongoing projects has to be made to ensurethat resources are not spread too thinly acrossprojects. Capacity on the saturated high densitycorridors needs to be augmented, particularly onthe Golden Quadrilateral by undertaking doubling,opening up of alternative routes through new lines,gauge conversion etc. The programme of contain-erisation needs to be accelerated, not only topromote inter-modal transport but also as a strategyfor increasing its own market share and catering tohigh value traffic.

1.94 The Indian road network is not up to therequirement of rapid growth in an internationallycompetitive environment, in which the Indian indus-try must compete actively with other developingcountries. Improvement in the national highwaynetwork should have high priority in the Tenth Plan.Competition of the ongoing work on the GoldenQuadrilateral and the related North-South and East-West corridor projects must have top priority. Moregenerally, the existing deficiencies in the roadnetwork should receive higher priority than theextension of the network itself. In the longer run, itis necessary to plan and take preliminary action forexpressways to be built in future on those sectionswhere they can be commercially justified.


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1.95 There are a number of areas of concern,which affect the efficiency of road transport opera-tions. These include the need for reform of Stateroad transport corporations to make them moreefficient, rationalisation of road transport taxationstructure, which will support cost-effective roadtransport systems, restraining of overloading oftrucks, control of encroachments and unplannedribbon development, and promoting road safety.Particular emphasis needs, however, to be givento removing all unnecessary policy and proceduralhindrances to greater private participation in roadtransport operations, especially in rural areas, with-out compromising on road safety considerations.

1.96 Rural road connectivity is an extremelyimportant aspect of rural development. Substan-tially enhanced rural road accessibility should beachieved in the Tenth Plan by linking up villageswith all-weather roads. However, while constructingrural roads, connectivity of public health centers,schools, market centers, backward areas, tribalareas and areas of economic importance shouldbe given priority.

1.97 The civil aviation sector also needs to begiven careful consideration. As the economy movestowards higher value-added products, particularlyin agriculture, an increasing proportion of theproduce will have to move by air, both within thecountry and abroad. In addition, the more remoteand inaccessible regions of the country, such asthe North-east, can realise their true potential whensuch a transition becomes possible. The aviationpolicy and planning must, therefore, be reassessedin order to make it consistent with the emergingneeds of the economy.

1.98 Telecommunications is a crucial compo-nent of infrastructure and one that is becomingincreasingly important, given the trend ofglobalisation and the shift to a knowledge-basedeconomy. Until 1994, telecommunication serviceswere a Government monopoly. Although telecom-munications expanded fairly rapidly under thisarrangement, it was recognised that capacities mustexpand much more rapidly and competition beintroduced to improve the quality of service andencourage induction of new technology. Telecom-munications has become especially important in

recent years because of the enormous growth ofinformation technology (IT) and its potential impacton rest of the economy. India is perceived to havea special comparative advantage in informationtechnology or in IT-enabled services, both of whichdepend critically on high quality telecommunicationsinfrastructure.

1.99 The Telecommunications policy in theTenth Plan must, therefore, provide the IT andrelated sectors with world class telecommunicationsat reasonable rates. Formulating a policy for thesector faces an additional challenge because tech-nological change in telecommunication has beenespecially fast and is constantly leading to majorchanges in the structure of the telecommunicationindustry worldwide. The goal should now be toprovide a telephone on demand, anywhere in thecountry. With its technological and cost advantages,Internet telephony should be opened up. Tariffrebalancing with the objective of cost based pricing,transparency and better targeting of subsidiesshould be the guiding principles for tariffs. Conver-gence of data, voice and image transmission anduse of wide bandwidth and high speed Internetconnectivity have added new dimensions whichneed to be taken into account in the policy regime.Such convergence of services and single licenceregime is needed to optimise the utilisation ofresources with least cost of provision and encouragecompetition across the country in services andamong the service providers.

Governance Reforms

1.100 Successful implementation of develop-ment programmes requires adequate funds, appro-priate policy framework, formulation of suitable planschemes, and effective delivery machinery.However, past experiences suggest that availabilityof funds is no panacea for tackling the problems ofpoverty, backwardness and low human develop-ment in India. Funds may be necessary, but theyare not a sufficient condition; the determining factorseems to be the capability of the funding Ministries/State Governments to formulate viable schemesand of the delivery system to implement theseschemes on the ground. There are serious deficien-cies in both respects and they can be regardedbroadly as due to poor governance. These weak-


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nesses can no longer be side-stepped as merelymacro-level field problems. They need to be facedsquarely and redressed at the planning stage itself.Reform of governance therefore has to be the oneof cornerstones of the Tenth Plan.

1.101 While the functions of the State in Indiahave steadily widened, capacity to deliver hasdeclined over the years due to administrativecynicism, rising indiscipline, and a growing percep-tion that the political and bureaucratic elite viewsthe State as an arena where public office is to beused for private ends. In almost all States, peopleperceive bureaucracy as wooden, disinterested inpublic welfare, and corrupt. The issue of reform ingovernance has acquired critical dimensions, moreso in poorer States, in the light of low economicgrowth and fiscal crisis. Weak governance,manifesting itself in poor service delivery, excessiveregulation, and uncoordinated and wasteful publicexpenditure, is seen as one of the key factorsimpinging on growth and development.

1.102 There has also been less than adequatedecentralisation of the functions of Government, tothe detriment of the delivery of a number of keyservices. The spirit of the 73rd and 74th ConstitutionalAmendments has not been observed in many ofthe States. It is believed that little improvement willbe possible until such decentralisation becomeseffective, both in terms of functions and resources.But decentralisation cannot stop at the level of PRIsand urban local bodies (ULBs). The potential of civilsociety organisations, such as water users’associations or health and education committeesto name only a few, to improve delivery of servicesis vast, and advantage must be taken of thesepossibilities through appropriate devolution offunctions and authority.

1.103 In the area of civil services reform, theGovernment faces three critical challenges. It mustenhance the productivity of the civil service andmake certain that each employee is performingsocially relevant tasks. It must ensure the long-term affordability of the civil service, and it mustenforce procedures for rewarding and promoting

merit, disciplining malfunction and misconduct, tostrengthen accountability and performance quality.It has become necessary to reshape the bureau-cracy so that it perform its core public functions anddevelop new ways of ensuring that critical economicand social services are provided directly or indirectly.A new work culture will have to be evolved at alllevels of the staff. Innovation and performanceshould be encouraged and rewarded and stepsshould be taken to ensure effective devolution andcontrol of the elected bodies over the functionaries.

1.104 The issue of institutional design is notrestricted to the Government or the bureaucracyalone. Practically all mechanisms by which com-merce and intercourse take place or by whichservices are delivered to the people need to be re-examined in the light of increasing efficiency andaccountability. Corporate governance, therefore,is just as important an issue as civil service reforms,and this applies just as much to the small-scale asto the large. Consumer protection too requires theestablishment and strengthening of appropriateinstitutions, which can effectively articulate theneeds of the average consumer. Such bodies mustbe encouraged, and not seen in an adversarial roleby the Government and the private enterprise. Inaddition, reform of the cooperative system hasbecome essential to ensure that this sector playsthe role that it is capable of doing. This requires acomplete unshackling of this sector from theneedless political and bureaucratic control that itsuffers from today.

1.105 Finally, nowhere is the issue ofinstitutional reform as important as in the deliveryof law and justice. All efforts at development canflounder in the absence of peace and of law andorder. Increasing insecurity can not only retardnew investment, but actually lead to closure ofexisting activities. Similarly, it must be recognisedthat the success of a market-based economyrests critically on the sanctity of contracts andthe speed with which they can be enforced. Thisrequires both expeditious delivery of justice bythe legal system and of its enforcement by theconcerned arms of the State.

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2.1 The Tenth Five Year Plan aims atachieving an average growth rate of the GrossDomestic Product (GDP) of 8 per cent per annumover the period 2002 to 2007. It also seeks to createthe conditions for a further acceleration in the growthrate over the Eleventh Plan period (2007-12) inorder to achieve a doubling of per capita income ofthe country over the next ten years. These are nodoubt ambitious targets, but the Tenth Plan ispredicated on the belief that the country has thepotential to meet these expectations, provided thatthe appropriate policy measures and institutionalchanges are implemented expeditiously andeffectively.

2.2 Economic growth should not be seen asan end in itself. Its true importance lies in thecentral role that it plays in realising the coreobjectives of all planning and public policy, suchas providing adequate and decent workopportunities, eradicating poverty, reducingdisparities and, in general, improving the qualityof life of the people. Therefore, the growthstrategy needs to embed these concerns andwherever trade-offs are involved, to explicitlyindicate the preferred choice. Seen in this light,the growth rate is both a target and an instrument.However, it must also be recognised that thegrowth rate of the economy is probably the mostimportant summary measure of the degree ofsuccess of the development strategy andmacroeconomic management, and of the extentto which the recommended measures have beenimplemented.

2.3 The purpose of this chapter is to indicatethe targets that will have to be set for the variousmacroeconomic variables and parameters whichwould be consistent with the overall growth target.The strategies for attaining these macroeconomictargets and their implications will also be discussedin some detail.

THE CONTEXT AND THE STRATEGICAPPROACH

2.4 The 8 per cent average growth targetset for the Tenth Plan period appears ambitiouswhen juxtaposed with the growth performance ofthe economy in the very recent past. However,a more optimistic picture emerges if a longerhistorical context is considered. Table 2.1 givesthe growth performance of the Indian economy,relative to the targets set in the various Plansright since the inception of planning in India. Ascan be seen, the economy has performed betterthan the target in five of the nine previous plans,and even in the Second Plan, the gap was notlarge. As far as the Third and Fourth Plans wereconcerned, the shortfalls were largely due tosevere exogenous shocks that could not possiblyhave been predicted. The Third Plan witnessedthe drought years of 1965 and 1966, which werepossibly the worst droughts in recent history, andalso the Indo-Pakistan War of 1965. The FourthPlan experienced three consecutive years ofdrought (1971-1973) and the first oil-price shockof 1973. More importantly, it may be noted thatsince the Fourth Plan, the growth rate of theeconomy had improved steadily until the NinthPlan, when it received a set-back. Thus, there isevidence that the track record of planning in Indiais reasonably good, and indeed tends to err onthe side of caution. Moreover, the evidence alsosuggests that there has been a steadyimprovement in the growth potential of theeconomy, and no reason to believe that this trendhas actually reversed of late.

2.5 Nevertheless, the set-back suffered duringthe Ninth Plan period needs to be addressed rightat the outset. The growth rates of GDP and its broadconstituent sectors during the Eighth and the NinthPlans are presented in Table 2.2. It may be seenfrom the table that the rate of growth of GDP during

CHAPTER 2

MACROECONOMIC DIMENSIONS


24

there was a slow-down in the Indian economy aswell. The slow-down in the world economy alsoaffected the level of exports. This, coupled withlower than expected public investment as well asthe relatively poor performance in Agriculture sectorin three of the five years of the Ninth Plan, led to areduced demand for industrial goods andconsequent reduction in the growth rate in theindustrial sector. Some other developments, e.g.cyclone in Orissa, earthquake in Gujarat, Kargil war,etc., also resulted in diversion of resources frominvestment and consequent decline in the growthrates.

2.7 The rate of investment in the economyduring the Ninth Plan was 24.2 per cent of GDP atmarket prices. The investment rate during differentyears of the Ninth Plan, as can be seen from Table2.3, was in the range of 23.4 per cent and 24.6 percent. Public investment accounted for nearly 29.5per cent of total investment, the balance 70.5 percent being accounted for by private investment.

the Eighth Plan was close to 6.7 per cent per annum,which has dropped to 5.3 per cent during the NinthPlan, as per the latest estimates available from theCentral Statistical Organisation (CSO). This wasas against the target of 6.5 per cent for the NinthPlan period. The causes of this decline can betraced through the sectoral structure of the growthrates.

2.6 During the Ninth Plan, the rate of growthhas declined particularly in the agriculture andmanufacturing sectors, as compared to the EighthPlan; whereas in the services sector there has beenmarginal increase in the growth rate. Insofar asagriculture is concerned, three of the five years ofthe Ninth Plan witnessed poor performance as aresult of weather-related shocks. In this respect,the Eighth Plan had been more fortunate. Followingthe Asian crisis in 1997 and subsequent reductionin the growth rates in the other parts of the world,

2.8 The rate of savings in the economy duringthe Ninth Plan works out to 23.3 per cent of GDP.The bulk of the savings was accounted for by theprivate sector. In fact, there were dissavings in thepublic sector to the tune of (-)0.8 per cent. Withinthe private sector, the household sector and privatecorporate sector accounted for 80 per cent and 20per cent of the savings respectively. On the otherhand, within the public sector, the savings of thepublic sector undertakings (PSUs) were 3.5 per centof GDP while government savings were (-) 4.3 percent of GDP. The excess of investment oversavings resulted in a current account deficit of 0.9per cent for the Ninth Plan. This deficit was metfrom external sources.

Table 2.1:Growth Performance in The Five Year Plans

(per cent per annum)

Target Actual

1 First Plan (1951-56) 2.1 3.602 Second plan (1956-61) 4.5 4.21

3 Third Plan (1961-66) 5.6 2.72

4 Fourth plan (1969-74) 5.7 2.055 Fifth Plan (1974-79) 4.4 4.83

6 Sixth Plan (1980-85) 5.2 5.54

7 Seventh Plan (1985-90) 5.0 6.028 Eighth Plan (1992-97) 5.6 6.68

9 Ninth Plan (1997-02) 6.5 5.35Note : The growth targets for the first three plans were set

with respect to National Income. In the Fourth Plan itwas Net Domestic Product. In all Plans thereafter ithas been Gross Domestic Product at factor cost.

Table 2.3Total and Public Investment in the Ninth Plan

Total Investment Public Investment(% of GDPmp) (% of Total Investment)

1997-98 24.5 27.71998-99 23.4 30.4

1999-00 24.6 29.2

2000-01 24.3 30.02001-02 24.4 30.0

IX Plan 24.2 29.5

Table 2.2Recent Growth of the Indian Economy

(Per cent per annum)

Eighth Plan Ninth Plan

Agriculture 4.69 2.06Manufacturing 7.58 4.51

Services 7.54 7.78

Total 6.68 5.35


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2.9 For the Ninth Plan as a whole, grossinvestment was targeted at Rs. 2,171 thousandcrore (at 1996-97 prices) and public sectorinvestment was targeted at Rs. 726 thousand crore.It is estimated that for the Ninth Plan, while the actualtotal investment was Rs. 2,050 crore, i.e. a shortfallof around 5.5 per cent, the private sector exceededthe targeted investment by 2.7 per cent, but publicinvestment fell short of the targeted investment bynearly 22 per cent. Part of the investmentrequirement of the public sector was to be met fromown savings, which were targeted at Rs. 127thousand crore, while the rest of the investmentrequirement was to be met from borrowings.However, actual public savings missed the targetby a substantial margin. Instead of positive savings,the public sector ended up with dissavings ornegative savings to the tune of nearly Rs. 67thousand crore during the Ninth Plan, the indicationsof which were mentioned in the Mid-term Appraisalof the Ninth Plan. The fiscal position of both Centraland State Governments worsened on account ofthe lower than expected generation of internalresources by the public sector as well as a declinein the tax-GDP ratio. With very little scope forreducing government expenditure, there was anincrease in government borrowings. The tax-GDPratio declined from around 14.7 per cent in theEighth Five Year Plan to 14.2 per cent in the firstfour years of the Ninth Plan. On the other hand, thegovernment expenditure to GDP ratio was 23.5 percent in 1996-97. Even for the Eighth Plan as awhole, it was 24.8 per cent. It was expected to be26.7 per cent during the Ninth plan, with 28.5 percent projected for the year 2001-02. The combinedfiscal deficit of Central and State Governmentsincreased from 6.3 per cent of the GDPmp in 1996-97 to 8.7 per cent of GDPmp in 2001-02 (as per theBudget Estimates).

2.10 It may also be noted that while publicexpenditure (including larger burden of subsidies)as a ratio of GDP has increased, there has been acutback in public capital formation, especially ininfrastructure, in order to control the fiscal deficit.The presence of growing food-stocks along withrising foreign exchange reserves also point towardsa demand deficiency in the system. Furthermore,there has been a decline in bank credit to thecommercial sector and banks have been holding

SLR securities in excess of the stipulated minimumrequirement. In addition, there has been a failureof the capital market, more so in the latter half of1990s, to provide finance for domestic capitalformation.

2.11 It is thus clear that in the Ninth Plan theeconomy achieved a much lower growth rate of 5.35per cent despite higher levels of investment, i.e.24.2 per cent, as compared to the Eighth Plan, whenthe investment ratio and the growth rate were 22.4per cent and 6.5 per cent respectively. This impliedthat the incremental capital output ratios (ICOR) forthe Eighth and Ninth Plans were 3.43 and 4.53respectively. This increase in ICOR is notnecessarily a reflection of the greater inefficiencyin the economy, but could be on account of a slow-down in the demand, thus resulting in the existenceof excess capacity in the economy.

2.12 The deficit in demand was seen not onlyin the domestic sector but also in the performanceof the external sector. It may be noted that duringthe Ninth Plan, exports had increased by 5.6 percent as against the target of 11.8 per cent. On theother hand, imports had increased by 4.1 per centas against the target of 10.8 per cent. The tradedeficit for the Plan as a whole was US$ 74 billion,or an average annual trade deficit of around US$15 billion. However, despite trade deficits of suchmagnitude, the foreign exchange reservesincreased from US$ 26.4 billion in 1996-97 (i.e. thebase year of the Ninth Plan) to US$ 54.2 billion in2001-02, i.e. the base year of the Tenth Plan. Thishas been on account of large net inflow of invisiblesand foreign investment. The Ninth Plan ended witha surplus in the current account, to the tune of nearlyUS$ 1.35 billion, or around 0.3 per cent of theGDPmp.

2.13 The Tenth Plan has been preparedagainst the backdrop of the performance of theIndian economy during the Eighth and Ninth Planperiods, during which many of the commonly heldbeliefs regarding the potentialities and constraintsgoverning the operation of the economic systemhave been brought into question. Although muchof this has been covered in some detail in the NinthFive Year Plan document and the Mid-termAppraisal of the Ninth Plan, it is nevertheless useful


26

to briefly outline a few of the developments that havetaken place in the Indian economy during the pastdecade in order to lay the groundwork for themacroeconomic strategy being proposed for theTenth Plan and beyond. There are indeed fourmajor features of the experience of the immediatepast, which need to be highlighted.

2.14 First and foremost, there is now clearevidence that the growth rate of the Indian economymay no longer be constrained by the availability ofsavings or, more generally, investible resources.All previous Plans have been based on the implicit,and often explicit, assumption of a binding savingsconstraints. In other words, it has been assumedthat the demand for investible resources alwaysexceeds the supply, which implies a belief that thetotal level of investment in the economy isdetermined uniquely by the availability of savings.This assumption was questioned for the first timein the Ninth Five Year Plan, where it was pointedout that there was a strong likelihood that investmentdemand in the country may not be able to fullyabsorb the resources available. For this reason itwas proposed that public investment may have tobe increased sufficiently to make up for this lack ofprivate investment demand, if growth opportunitieswere not to be missed. Subsequent experienceduring the course of the Ninth Plan appears to haveborne out this contention.

2.15 The clearest evidence that savings orinvestible resources have not been the primarylimitation on investment in the country is given bythe persistent difference between the externalcapital inflows and the current account deficit (CAD)that has existed through much of the 1990s.Theoretically, the CAD represents the excess oftotal investment in the country over domesticsavings, while external capital flows represent theinflow of potential savings from abroad. The excessof the latter over the former is therefore an indicationof the failure of investment demand to absorbforeign savings. The position in this regard is shownin Table 2.4. It can be seen that, with the exceptionof a few years, the economy has been unable toabsorb the external resources that, have becomeavailable.

2.16 Of course, not all external capital inflowscan be treated as potential savings. There issometimes need to borrow abroad for balance ofpayments reasons. Normally, therefore, anassessment of excess savings in an economy ismeasured by the excess of voluntary capitalinflows over the CAD. Such voluntary inflowswould exclude extraordinary external finance(such as from the IMF) and much of governmentborrowings. In the Indian context, however, sucha separation is not easy to carry out. On the onehand, government borrowings from multilateral

Table 2.4Absorption of External Resources

(US$ billion)

Current Account Capital Foreign Reserves to ImportsBalance Account(Net) Investment Ratio (Months)

1990-91 -9680 7188 103 2.51

1991-92 -1178 3777 133 5.251992-93 -3526 2936 557 4.851993-94 -1158 9695 4235 8.64

1994-95 -3369 9156 4807 8.421995-96 -5910 4689 4805 5.961996-97 -4619 11412 6153 6.481997-98 -5500 10011 5390 6.88

1998-99 -4038 8260 2312 8.201999-2000 -4698 11100 5117 8.242000-01 -2579 8435 4588 8.562001-02 1351 10406 5286 11.27


27

aid agencies, such as the World Bank and theAsian Development Bank, or bilateral donors arealmost always determined ex-ante and thereforecannot be treated as involuntary or as being forbalance of payments purposes. On the otherhand, since the Indian government does notdirectly engage in sovereign external debt, somepart of its extraordinary financing can be, andsometimes is, carried out through public sectorentities, particularly the banks. During the 1990s,such financing was carried out in the early years,in order to restore the heavily depleted foreignexchange reserves after the 1991 crisis. Inaddition, the Resurgent India Bonds (RIBs) of1997 and Millennium Deposit Bonds (MDBs) of1999 could also possibly be classified in thiscategory. Despite these complexities, it isperfectly clear from the table that since 1993, bywhich time the level of foreign exchange reserveswas adequate, 'voluntary' external inflows haveconsistently exceeded the CAD in all years exceptone (1995-96), and often by a large magnitude.To further underscore this point, it may be notedthat foreign investment flows alone exceeded theCAD in six of the nine years. Thus, it can beunequivocally stated that during the Eighth andthe Ninth Plan periods, availability of investibleresources was not the primary constraint togrowth and investment in India, and that thereasons would have to be sought elsewhere.

2.17 The literature offers a number ofalternative constraints to growth and investment.In brief, there are six : (a) the foreign exchangeconstraint, or the adequate availability of foreignexchange for ensuring balance of payments(BOP) sustainabil ity ; (b) the agriculturalconstraint, which arises from the insufficiency of'wage goods', on one hand, and the lack of awidely dispersed distribution of purchasingpower, on the other; (c) the fiscal constraint, orthe availability of sufficient resources with thegovernment to meet the development objectivesin a fiscally sustainable manner; (d) theinfrastructural constraint, which arises from thelack of adequate infrastructure for sustaining ahigh level of capacity utilisation in the rest of theeconomy; (e) the financial intermediationconstraint, where weaknesses in the financialsystem prevents savings from being translated

into investment; and of course (f) the generalaggregate demand constraint in which there is abasic imbalance between the productive capacityof the economy and the level of aggregatedemand.

2.18 Although each of these constraints isconceptually distinct, it is difficult to identify whatexactly is the binding constraint with any degree ofquantitative precision on the basis of ex-post data.The reason for this is that most of these constraintseventually manifest themselves either as aninvestment rate lower than the total savings rate(inclusive of foreign savings) or a rising rate ofinflation. Nevertheless, it is important to identify atleast which are the proximate constraints, since ithas a crucial bearing on the macroeconomicstrategy and conduct of policy. From the recenteconomic experience it is evident that neither theforeign exchange constraint nor the agriculturalconstraint provides an adequate explanation, sinceboth foreign exchange reserves and food-stockshave been rising steadily and the rate of inflationhas come down significantly. All the other four are,however, candidates, and none can be excludedon a-priori grounds. Therefore, the strategy has toaddress the likelihood of each of them being acontributory factor to the lower than potential growthperformance.

2.19 The second issue that needs to behighlighted is the fact that the growth rate of theeconomy is no longer being driven entirely by thelevel of investment activity in the country. The mostcompelling proof of this assertion is available fromthe observed growth rates during the Eighth andNinth Plan periods. A statement of the year-wiseinvestment rates and the associated rates of privatesavings is given in Table 2.5. It may be seen thatthe real investment rate has been consistentlyhigher during the Ninth Plan period as compared tothe Eighth, with the exception of one year (1995-96). On the average, the Ninth Plan recorded areal investment rate of 26.3 per cent of GDP ascompared to 24.9 per cent during the Eighth Plan.Nevertheless, the rate of growth during the EighthPlan was significantly higher at 6.7 per cent perannum on the average as against 5.3 per centduring the Ninth Plan.


28

2.20 Although it is tempting to infer a dramaticfall in the efficiency of capital from these figures(Table 2.5), the real explanation lies elsewhere. Thisis the third feature which needs to be noted. It maybe seen from the second column of the table thatthe investment ratios, when measured in nominalterms, actually decline during the Ninth Five YearPlan. A further point of interest that should be notedis that in four of the five years of the Ninth Planperiod, the nominal investment rate has been at orbelow the private savings rate. This has neverhappened before in India. The inference that canbe drawn from the differential behaviour of theinvestment rate when measured in real terms andin nominal terms is that while the pace of capacitycreation in the economy actually rose during theNinth Plan period, the role of investment as acomponent of aggregate demand actually declined.As a consequence, the evidence suggests that theNinth Plan period was characterised by a steadydecline in the levels of capacity utilisation. Thisconclusion is borne out by exercises carried out inthe Planning Commission which indicate that thecapacity utilisation in a number of sectors diddecline in the Ninth Plan period, especially inmanufacturing in which the assessed level ofexcess capacity at the end of the Ninth Plan wasabout 21 per cent of the actual production.

2.21 The fourth feature of the change that hastaken place in the Indian economy over the yearsand which needs to be factored into the growthstrategy is the role of agriculture. In the past, whenthe share of agriculture in the Indian economy washigh, the growth rate of GDP was stronglyinfluenced by the growth of agriculture through itsdirect contribution to the GDP. Over the years,however, the share of agriculture in GDP has fallensignificantly and, as a result, the aggregate GDPhas become relatively less sensitive to fluctuationsin agricultural performance. This factor is of coursewell recognised, but the role of agriculture, andparticularly agricultural incomes, in influencingGDP growth indirectly through the demand sideis less well understood. Table 2.6 presents theshare of agriculture in GDP and the share of non-food consumption in rural expenditures over thelast three decades. As can be seen, while theshare of agriculture in GDP has fallen from 44 percent in 1973-74 to 27 per cent in 1999-2000, non-food expenditure has risen from 25 per cent in1973-74 to nearly 41 per cent in 1999-2000. Inother words, a 1 per cent change in the growthrate of agriculture would have affected the GDPgrowth rate by 0.44 per cent in 1973-74 but onlyby 0.27 per cent in 1999-2000. On the other hand,the indirect effects of change in agricultural growththrough the demand for non-agricultural goods andservices has actually gone up from a little under12 per cent of total aggregate demand in 1973-74to nearly 14 per cent in 1999-2000. In the future,as average agricultural incomes increase, thisindirect effect of agricultural incomes on non-agricultural growth will become progressivelystronger as the bulk of the incremental income inrural areas will be spent on non-agricultural goodsand services and not on food.

Table 2.6Role of Agriculture in Growth

(per cent)

Share of Agriculture Share of Non-food inin GDP Rural Expenditures

1973-74 44.0 25.1

1983 38.7 34.4

1993-94 32.9 36.8

1999-2000 26.9 40.6

Table 2.5Investment and Private Savings Ratios

(as % of GDPmp)Years Investment Ratios Private

Real* Nominal savings

1991-92 22.0 22.6 20.1

1992-93 22.9 23.6 20.21993-94 23.1 23.1 21.9

1994-95 26.4 26.0 23.2

1995-96 27.2 26.8 23.11996-97 25.1 24.5 21.5

1997-98 26.4 25.0 22.0

1998-99 25.4 23.0 23.01999-2000 26.7 24.3 24.1

2000-01 26.3 24.0 25.0

2001-02 26.4 24.4 25.2Eighth Plan (1992-97) 24.9 24.8 22.0

Ninth Plan (1997-02) 26.3 24.3 23.6

* at 1993-94 prices


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2.22 Keeping in mind these features of theIndian economy as they obtain at the end of theNinth Plan, the growth strategy for the Tenth Planperiod has to be decided. The most importantfeature that needs to be taken into account is theexistence of large excess capacities, especially inthe manufacturing sector. The existence of suchunused capacity presents both an opportunity anda problem for accelerating the growth in the TenthPlan. On the one hand, if much of these capacitiescan be brought into productive use, it would bepossible to accelerate the rate of growth significantlywithout a commensurate increase in the rate ofcapacity creation through fresh investment. Thus,the aggregate investment rate can be significantlylower than would have been otherwise. On the otherhand, the existence of large unutilised capacities islikely to curb the desire to invest by the privatesector. Thus, the strategy will have to be developedin a manner in which these idle capacities areprogressively brought into production during theearly years of the Plan on the basis of demandgenerated from the non-private investmentcomponents of aggregate demand, with stronggrowth of private investment driving the growthprocess in the later years.

2.23 The other major components of aggregatedemand are private consumption, publicexpenditure on goods and services, and exports.Of these three, the immediate prospects of exportgrowth cannot be relied upon due to the conditionsprevailing in the international economy. AlthoughIndia is a small country in terms of total world trade,and therefore it is possible to increase exportsthrough improvements in market share, the task willbe a difficult one. Growth in private consumptiondemand has more or less kept pace with the growthrate of per capita disposable incomes, and it wouldnot be desirable to try and push this up tooaggressively since the relatively high level of savingsof households will continue to be needed in thefuture in order to step up the rate of investment.Thus, the principal responsibility for raising the levelof aggregate demand, and thereby improvingutilisation of existing capacities, will rest primarilyon public expenditures at least in the initial years.In doing so, however, it further needs to berecognised that different components of publicexpenditure have very different multiplier effects

on the rest of the economy. The strongest effect isthrough public investment, and the weakest throughsubsidies and transfers. It is, therefore, necessaryto ensure that the growth in public expenditurecomes about mainly through increases in publicinvestment and not through a rise in current outlays,particularly on subsidies and other transfers.

2.24 It is estimated that the growth revivalfunction of public investment will have to continuefor at least the first two years of the Plan beforeprivate investment starts growing strongly enoughto take up a major portion of the growth impetus.However, it should not be thought that publicinvestment can be curtailed sharply thereafter. Itmust be remembered that private investment activityis extremely sensitive to the perceived trends inaggregate demand conditions. Since publicinvestment is an important component of aggregatedemand, abrupt reductions will inevitably lead to aloss of private investor confidence and a slow-downin the overall investment activity. Moreover, itshould also be emphasised that public investmentneeds to be made in the infrastructure sectors inorder to ensure that the availability of infrastructuralfacilities is commensurate with the demands of theeconomy. As mentioned earlier, there is evidencethat the infrastructural constraint to growth is adistinct possibility and, therefore, care should betaken to relax this constraint as expeditiously aspossible.

2.25 In stepping up the pace of publicinvestment, it is necessary to take into account twoimportant facets of the role of public investment andpublic borrowings on the economy. On the onehand, efforts to increase the share of publicexpenditure in GDP through enhanced borrowingstend to reduce private investment by pre-emptinginvestible funds and causing what is known as'crowding out'. On the other hand, as has beenargued above, private investment can be positivelyinfluenced by public investment, both through itsdemand-generating role and through creation ofinfrastructure. Thus, under certain circumstances,public investment can actually lead to 'crowding in'of private investment. An objective appraisal of theIndian economy suggests that the danger ofcrowding out is practically non-existent at thepresent time. The excess of ex ante savings over


30

investment demand implies that not only will publicborrowing not lead to an effective reduction inresources available to the private sector, but that itmay actually be necessary to absorb the excesssavings and thereby prevent the emergence ofdeflationary pressure. Over the longer run,however, as private investment demand begins togrow strongly, the danger of "crowding out" cancome into existence unless appropriate measuresare taken. It is, therefore, extremely important thatthe increase in public investment that is beingproposed during the latter half of the Plan befinanced to the extent possible throughcorresponding increases in public savings.

2.26 The need to maintain a relatively high levelof private consumption demand for non-agriculturalgoods and services demands that attention be paidto the growth and stability of rural incomes. Since65 per cent of our population lives in rural areas,the potential and prospect of sustained growth indemand through enhancement of rural incomes aresubstantial. Mention has already been made of thegrowing share of non-food consumption in ruralareas, and this process needs to be encouraged.In this context it needs to be pointed out that thestability of rural incomes is just as important as itsgrowth. High variability in agricultural productionhas the potential of introducing large cyclicalchanges in the demand for industrial products, andpossibly even to a relatively slow growth inconsumption due to the uncertainty associated withlifestyle changes. Therefore, an important corner-stone of the growth strategy of the Tenth Plan isthe need to bring about both growth and stability inrural incomes, particularly in agriculture.

GROWTH TARGETS, INVESTMENT NEEDS ANDRESOURCES

2.27 Taking into account the above factors, themacroeconomic requirements for achieving thetarget rate of growth have been projected on thebasis of the planning model that is used for suchpurposes. The parametric requirements of theeconomy are presented in Table 2.7. As can beseen, the achievement of the Tenth Plan targetshinges critically upon an expected reduction in theincremental capital output ratio from 4.53 during theNinth Plan to 3.58 in the Tenth Plan. Although thefactors, which lead to this reduction, are discussedin more detail later, it may be mentioned at this stagethat the measured ICOR was even lower during theEighth Plan period at 3.43.

2.28 It can be seen that even with this reductionin the ICOR, the investment rate will have to bestepped up by more than 4 percentage points ofGDP during the Tenth Plan period, and alsoconditions will have to be created for further increaseof nearly 8 percentage points during the EleventhPlan. In order to finance the increased investmentrequirement, the domestic savings rate is targetedto increase by 3.5 percentage points of GDP, andexternal savings, in the form of the current accountdeficit, to make up the rest. It is further expectedthat the rate of growth of imports will average morethan 17 per cent per annum during the Tenth Plan,which arises partly out of the increased demandgenerated by the higher growth rate and partly fromthe planned reduction in the average level of tariffs.A detailed analysis of import demand and otherexternal sector issues is provided in chapter 4.

Table 2.7Macro Parameters for the Tenth Plan (2002-2007)

IX Plan X Plan Post Plan

1 Domestic Savings Rate (% of GDPmp) 23.31 26.84 33.01

2 Current Account Deficit (% of GDPmp) 0.91 1.57 3.13

3 Investment Rate(% of GDPmp) 24.23 28.41 36.14

4 ICOR 4.53 3.58 3.84

5 GDP Growth Rate (% per annum) 5.35 7.93 9.40

6 Export Growth Rate(% per annum) 6.91 12.38 ******

7 Import Growth Rate(% per annum) 9.80 17.13 ******


31

Fortunately, it is expected that invisibles will continueto perform strongly and, therefore, the rate of growthof exports is determined more by supply sideconditions than by the need to fulfill an exogenouslyset balance of payments target. Therefore, exportsare expected to grow at the rate of 12.4 per cent onthe basis of the projections made.

2.29 The macroeconomic aggregates arisingfrom the Tenth Plan growth target are presented inTable 2.8. As can be seen, the size of nationalinvestment is required to rise substantially fromRs.2,507 thousand crore during the Ninth Plan toRs. 4,082 thousand crore in the Tenth Plan atconstant 2001-02 prices, i.e. by over 62 per cent.For this to be realised, investments in the economywill have to increase at an annual growth rate ofslightly above 14 per cent. This is a fairly dauntingtask, since the long-run growth rate of investmentin India has averaged around 6.5 per cent perannum. Nevertheless, there have been instanceswhen investments have grown at over 20 per cent,and hence the task is not an impossible one. Private

consumption expenditure, which is a measure ofthe economic well being of the population, isexpected to grow at a rate of 6.9 per cent per annum,which implies a per capita consumption growth ofabout 5.3 per cent per annum. At this rate, the percapita consumption level in the country will doublein about 13 years.

2.30 In order to appreciate the magnitude ofthe efforts that will be required to attain the TenthPlan growth target, it may be more instructive toexamine the macroeconomic aggregates aspercentages of GDP. This information is presentedin Table 2.9. As may be seen, the averageinvestment requirement of 28.4 per cent of GDPinvolves a sharp acceleration in the investment ratefrom 24.4 per cent in the base year to 32.3 per centin the terminal. Of this nearly 8 percentage pointsincrease, more than five would be in the privatesector and about 2.6 in the public. In order to financean increase in the investment rate of this magnitude,domestic savings would have to rise by about 6percentage points and the current account deficit

Table 2.8Macro Economic Aggregates for the Tenth Plan (2002-2007)

(Rs crore at 2001-02 prices)

IX Plan 2001-02 2006-07 X Plan

1 GDP at Factor Cost 9419756 2080255 3047183 13007735

2 GDP at Market Prices 10347259 2288281 3373828 14366893

3 Gross Domestic Savings 2412189 538111 992353 3856657of which:3a. Private 2497308 577158 922174 3793027

3b. Public -85119 -39047 70179 63630

4 Total Consumption 8125505 1789247 2449365 10783641of which:4a. Private 6759161 1464086 2041209 8907184

4b. Public 1366343 325161 408156 1876458

5 Gross Capital Formation 2506658 558684 1088506 4081670of which:5a. Private 1767214 391079 754505 28688675b. Public 739445 167605 334001 1212803

6 Public Borrowings 824563 206652 263822 1149173

7 Current Account Deficit 94470 20573 96153 2250128 Exports 912861 213964 383600 1539347

9 Imports 1145770 285742 629917 2353568


32

by nearly 2 percentage points of GDP. Over thecourse of the Tenth Plan the size of the externalsector is expected to expand substantially fromunder 27 per cent of GDP in 2001-02 to over 35 percent by the end of 2006-07.

2.31 One of the most significant features of theEighth Plan period was the sharp increase thatoccurred in domestic private savings. In theSeventh Plan, the private savings rate was 18 percent, and it was expected to improve to 19.6 percent. In actuality, however, it turned out to be around22 per cent. This upward trend in the private savingsrate continued in the Ninth Plan, albeit at a slowerpace, with the average for the period being 24.1per cent. Domestic private savings can be dividedinto two main components: (a) savings by householdsector; and (b) savings by the private corporatesector.

2.32 It may be noted that in the classificationused by the Indian statistical system, the householdsector comprises not only of households in thecommon understanding of the term, but also of allunincorporated enterprises. Thus, the savings

behaviour of the household sector is determinedboth by the level and growth of personal disposableincome, and by the profitability and share in GDPof unregistered enterprises. Much of the increasein the savings rate of this sector during the Eighthand Ninth Plans has been the consequence of ahigher growth in disposable incomes than of GDParising out of the steady reduction in the tax/GDPratio. In addition, during the Ninth Plan, the sharein GDP of the unincorporated sector has gone up.During the Tenth Plan period, however, fiscalimperatives demand that the tax/GDP ratio bestepped up significantly, which would tend to reducehousehold savings. On the other hand, the rapidincrease in incomes arising from higher growth willtend to raise it. On the balance, therefore, it isexpected that the household savings rate will tendto decline during the Tenth Plan period.

2.33 The gross savings of the private corporatesector primarily comprises the depreciation reserveand retained earnings of corporate entities. Thesavings rate of this sector, therefore, depends uponits share in GDP, its profit rate and its capital intensity.This rate has registered a steady and sustained

Table 2.9Macro Economic Aggregates for the Tenth Plan (2002-2007)

(Percent of GDPmp)

IX Plan 2001-02 2006-07 X Plan

1 Gross Domestic Savings 23.31 23.52 29.41 26.84of which:

1a. Private 24.13 25.22 27.33 26.40

1b. Public -0.82 -1.71 2.08 0.44

2 Total Consumption 78.53 78.19 72.60 75.06of which:

2a. Private 65.32 63.98 60.50 62.00

2b. Public 13.20 14.21 12.10 13.06

3 Gross Capital Formation 24.23 24.42 32.26 28.41of which:

3a. Private 17.08 17.09 22.36 19.97

3b. Public 7.15 7.32 9.90 8.44

4 Public Borrowings 7.97 9.03 7.82 8.00

5 Current Account Deficit 0.91 0.90 2.85 1.57

6 Exports of Goods & Non Factor Services 12.34 12.43 15.11 14.24

7 Imports of Goods & Non Factor Services 15.09 15.04 19.98 17.71


33

increase since the 1970s, and accelerated duringthe 1990s, particularly during the Eighth Plan. Inthe Ninth Plan, however, due to severe compressionin profit rates during the later years, the savings rateof the corporate sector has shown a decline. Duringthe Tenth Plan, as capacity utilisation in this sectorincreases and thereby improves both profitability andGDP share, it is expected that the savings rate ofthis sector will rise strongly.

2.34 The overall picture regarding themagnitude and pattern of domestic savings duringthe Tenth Plan is presented in Table 2.10. On thebasis of the savings behaviour of households andthe corporate sector as discussed above, privatesavings are projected to rise by just over 2percentage points of GDP. Thus, as can be seen,in order to meet the domestic savings rate target, afair proportion of the additional savings required willhave to come from the public sector, which wouldbe required to increase its savings rate from -0.8per cent to 0.4 per cent, i.e. an increase of over 1.2per cent of GDP. The required degree of correctionis, however, much larger. As can be seen from Table2.9, public savings has to rise from -1.7 per cent ofGDP in the base year to nearly 2.1 per cent in theterminal - a total turn around of 3.8 per cent of GDP.

2.35 It may further be seen that the overallimprovement in the public savings rate obscuresthe nature of the correction that is to be effected.The savings rate of public enterprises is actuallyexpected to decline quite significantly during theTenth Plan period. This is the result of twoconflicting forces. On the one hand, the share ofpublic enterprises in GDP is expected to declinedue to the disinvestment process; and, on the other

hand, the profitability of the remaining enterprises,particularly the State Electricity Boards, is expectedto improve. It should be noted, however, that itwas not possible to fully take into account the impactof disinvestment on the share of public enterprisesin GDP because of the uncertainties involved in theprocess, and therefore, these are only indicativecalculations. This should not create too manyproblems in the macroeconomic sense since anyadditional disinvestment will only result in a furtherdecline in the share of public enterprises, which isexactly balanced by an increase in the share of theprivate corporate sector.

2.36 The more important issue that emergesis that the government sector will be required toreduce its dissavings by nearly 2 percentage pointsof GDP over the Tenth Plan period in order to meetthe aggregate domestic savings target. In theabsence of such an improvement, it is very unlikelythat the growth target for the Plan will be achievedprimarily due to a resource constraint towards thelatter part of the Plan.

2.37 In this context, it may be desirable to brieflytouch upon the extent of foreign savings that isplanned. An average CAD of 1.6 per cent of GDPmay appear low in comparison to the potential ofthe economy to absorb larger volumes of externalresources and the observed trends in externalcapital inflows. It may, therefore, be tempting toinfer that the government savings target can berelaxed with greater recourse to external funds. Thiswould, however, be a dangerous view to take. TheTenth Plan is based upon a gradual acceleration inthe growth rate of GDP with the objective of attainingan over 9 per cent average growth during the

Table 2.10Composition of Domestic Savings

(per cent of GDPmp)

VIII th Plan IXth Plan Xth Plan

1. Public Sector Of which: 1.57 -0.82 0.44 1.1 Government Sector -1.50 -4.29 -2.41

1.2 Public Enterprises 3.06 3.47 2.85

2. Private Corporate Sector 3.95 4.90 6.103. Household Sector 18.11 19.23 20.30

4. Gross Domestic Savings 23.63 23.31 26.84


34

Eleventh Plan period. As a result, the CAD will haveto rise steadily in order to provide the necessaryresources for the growth acceleration. By the end ofthe Tenth Plan, therefore, the CAD is likely to rise to2.85 per cent of GDP, as can be seen from Table 2.9.Balance of payments sustainability considerationsdemand that at the projected rates of growth ofexports, the CAD should not exceed 3 per cent ofGDP for any length of time. Thus, by the end of thePlan period, the CAD will be approaching thesustainable maximum, and any further expansion ofthe CAD during the Plan period runs the risk of leadingto a violation of prudential considerations.

2.38 The sectoral pattern of investment and thenecessary resource flows arising out of the TenthPlan target and the sectoral projections arepresented in Table 2.11. It may be seen, despitethe considerable fiscal correction that is envisagedin the Plan, the government will still be placing aconsiderable draft on private savings. The reasonfor this is that the "borrowings" of the governmentas shown in the table includes disinvestmentproceeds, which for all practical purposes has thesame effect on investible resources available to theprivate sector as public debt. Thus, it is beingassumed that all disinvestment is made to domesticbuyers. If, however, disinvestment is made toforeigners, there will be a decrease in this figurewith a corresponding increase in the funds receivedfrom external sources. The second point to note isthat the private corporate sector is expected toreceive more than 1 per cent of GDP from externalsources. This figure contains not only the externalcommercial borrowings of Indian companies, butforeign investment as well.

2.39 The most critical, and perhaps the mostcontentious, element of the macroeconomicprojections made for the Tenth Plan is theinvestment requirement that has been specified.After the experience of the Ninth Plan, there maybe some scepticism about the possibility ofraising the growth rate of the economy by nearly2.6 percentage points with an increase in theinvestment rate of just above 4 percentage points.These figures taken in isolation would appear toindicate that the incremental capital-output ratio(ICOR) being used for the additional growth isonly about 1.6. Such an interpretation would,however, be completely wrong. It may, therefore,be desirable to spell out with some clarity thenature of the relationship between growth andinvestment that is being contemplated for theTenth Plan.

2.40 The incremental capital-output ratio(ICOR) is a summary expression for the existingtechnical conditions and structural configurationof the economy which captures the relationshipbetween investment and additional productivecapacity. The first point that needs to be madeis that the ICOR relates investment to capacityand not to output. The difference between thetwo is the level of capacity utilisation. AlthoughICORs are usually estimated by using outputdata, it is implicitly assumed that the level ofcapacity utilisation remains unchanged orappropriate corrections are made. Second, theICOR is an a-priori technical construct, and nota figure that arises in an ex-post sense. It istherefore meaningless to refer to increases ordecreases in the ICOR on the basis of short-

Table 2.11Inter-Sectoral Flow of Funds

(% of GDPmp)

Government PublicEnterprises PrivateCorporate Household Total

Gross Investment 4.64 3.80 10.37 9.60 28.41Financed by:

Own Savings -2.41 2.85 6.10 20.30 26.84

Borrowings 7.05 0.95 4.27 -10.70 1.57From:Households 6.55 0.95 3.20 -10.70 0.00

External Source 0.50 0.00 1.07 0.00 1.57


35

period changes in growth rates or investmentrates. Third, the aggregate ICOR for the wholeeconomy is a weighted average of sectoralICORs, which can be very different from sectorto sector. Indeed, for anything other thandiscursive purposes, it makes more sense toestimate ICORs at the sectoral level than for theGDP as a whole. Thus, the aggregate ICORdepends crucially upon the sectoral compositionof growth and investment. The sectoral structureof growth, in turn, depends upon a number offactors such as pattern of demand, the nature ofinter-sectoral linkages, and the possibilitiesoffered by trade. These complexities are besthandled by the use of planning models which aredesigned to capture the linkages and constraints.

2.41 Recent theoretical research suggeststhat the relationship between the investment rateand the growth rate of capacity is not constant(see Box 2.1). As a result, rates of growth thatare significantly higher than experienced in thepast require investment rates which areproportionately not as high. In addition,adjustment has to be made for the availability ofexcess capacities, which can be brought into useto raise the growth rate, which further reducesthe required investment. As has already beenmentioned, there is substantial excess capacityavailable in the Indian economy, particularly inmanufacturing, in the base year of the Tenth Plan.These factors have been taken into account whileworking out the sectoral structure of growthduring the Tenth Plan and the sectoral ICORs.This information is presented in Table 2.12. Asmay be seen, the implicit sectoral ICORs, whichhave been computed as the ratio of actualsectoral investment rates to actual sectoralgrowth rates, have varied significantly betweenthe Eighth and the Ninth Plans. Neither of thetwo sets of ICORs represents the true underlyingtechnical relations because in the Eighth Plancapacity utilisation went up sharply, while in theNinth it declined in most sectors. The ICORs forthe Tenth Plan, by and large, lie between thesetwo sets, and represent a possibly more

Box 2.1Incremental Capital Output Ratio :

An Alternative Interpretation

The Incremental Capital Output Ratio iscommonly measured as the ratio of investmentrate to growth rate for a particular period. Someof the standard assumptions in the traditionalHarrod-Domar framework of calculating ICORincluded, inter-alia, (a) the economy is on asteady growth path, (b) there is no lag betweeninvestment and setting up of additionalcapacity, i.e. investment instantaneouslytranslates into additional capacity, (c) there isa continuous full capacity utilization, (d)unchanging sectoral structure of the economy.

These are rather strong assumptions and areoften violated in real life situation. For the TenthPlan, an attempt was made to overcome someof these problems by computing the investmentrequirement of the economy based on what hasbeen termed as ‘net ICOR’. The long-term netICOR have been estimated taking into accountthe lag structure of Investment, the averagecapital output ratio and the deprecation ofcapital stocks. From this approach, it followsthat the investment requirement is lower forgrowth rates higher than the historical growthrates and vice-versa for lower growth rates.

Net ICORs were used to compute the potentialoutput of each sector. The difference betweenactual and the potential output give the slackin the system for each sector for the base year,2001-02. It was found that the slack variedacross sectors and was 8 per cent in theaggregate. Sectors with slack implied thatinvestment has already been made andcapacity had been created. This existence ofexcess capacity could be used to generatehigher output if utilised efficiently.

justifiable estimate of the true ICORs, suitablycorrected for the improved capacity utilisationthat is expected during the Tenth Plan period.


36

2.42 It should perhaps be mentioned that theICORs computed for the Tenth Plan period do notcapture the significant improvement in efficiency thatis sought to be brought about by policy andprocedural reforms, and through better governance.It is expected, therefore, that if the policy and thegovernance imperatives that have been detailed inthe Plan are carried out, there could be a furtherreduction in the ICORs.

2.43 As far as the sectoral growth rates areconcerned, specific mention needs to be made offour sectors that are critical for generating thedesired growth in employment with relatively lowcapital investment requirements. These areagriculture, construction, other transport, and otherservices. The targeted growth rate in agriculture issignificantly higher than in the Ninth Plan, but notas high as was recorded during the Eighth Plan.The reason for this is that the public investmentrate in agriculture has dropped steadily over thepast two decades and, as a result, this sectorcontinues to be sensitive to weather-relatedfluctuations. It is hoped that the strategy andmeasures detailed in the Plan will reduce thevulnerability of the sector during the course of the

Tenth Plan and set the stage for higher growth inthe future. The growth rate of the constructionsector has improved significantly during the NinthPlan, and this acceleration is expected to continueinto the Tenth. Even faster growth can possibly beachieved if the various land-related suggestionsmade in the Plan are implemented expeditiously.It is realised, however, that these are sensitiveissues, and progress may not be as rapid asdesired. The growth rate of other transport too istargeted to be significantly higher than in the NinthPlan, although not as high as in the Eighth. In thiscase as well, even faster growth can be achieved ifthe requisite policy changes permitting greaterinvolvement of the private sector are implemented.The potential of tourism has not been adequatelyharnessed by India, and it is expected that progresswill be made in this direction during the Tenth Plan.This, coupled with expected high growth rates inthe information, communication and entertainment(ICE) sectors, should lead to an acceleration in thegrowth of other services, of which these sectors area part. Finally, there are segments withinmanufacturing which are also important as far asemployment generation is concerned.Encouragement to these segments is an integral

Table 2.12Sectoral Growth Rates and ICORs

Eighth Plan Ninth Plan Tenth Plan SECTORS Growth ICOR Growth ICOR Growth ICOR

Rate (%) Rate (%) Rate (%)

1 Agriculture & Allied activities 4.69 1.59 2.06 4.05 3.97 1.99

2 Mining & Quarrying 3.59 10.74 3.81 5.44 4.30 7.99

3 Manufacturing 9.77 6.67 3.68 18.37 9.82 7.77

4 Elect, Gas& Water Supply 5.50 18.00 6.46 15.43 7.99 14.97

5 Construction 3.56 1.74 6.82 1.00 8.34 0.99

6 Trade 9.06 0.54 5.86 1.09 9.44 0.91

7 Rail Transport 1.95 27.94 4.70 9.87 5.40 14.66

8 Other Transport 8.42 4.41 5.63 6.09 7.54 5.37

9 Communication 14.31 7.25 17.14 5.28 15.00 8.33

10 Financial Services 10.21 2.23 8.93 1.35 11.69 1.56

11 Public Administration 3.91 7.82 9.21 4.09 6.43 5.45

12 Other Services 6.22 4.19 8.19 3.70 9.26 3.53

Total GDPfc 6.54 3.43 5.35 4.53 7.93 3.58


37

component of the Plan, without which the targetgrowth rate of the manufacturing sector is unlikelyto be achieved.

2.44 The sectoral structure of the Indianeconomy that will emerge from these targetedgrowth rates is shown in Table 2.13. As may beseen, despite the higher growth rate targeted foragriculture, its share in GDP is expected to fall overthis period. The sectors, which are expected torecord an increase in the share of GDP, aremanufacturing and some of the services, especiallyother services for reasons mentioned above.

2.45 The sectoral target growth rates and theestimated ICORs yield the investment requirementsof each sector for achieving the growth targets. Themain challenge facing the planning and economicadministration system of the country is to devisestrategies by which the investment programmeenvisaged in the Plan are realised. Even in thepast, when there was considerable degree ofgovernmental control over the pattern of investmentthrough a high share of public investment, on theone hand, and industrial licensing, on the other, thesectoral pattern of investment tended to besomewhat different from the planned. With thesubstantial reduction in the share of public

investment in recent years and the almost completederegulation of private investment, theuncertainties involved in determining the likelypattern of investment have increased manifold.

2.46 In the Ninth Plan, a start was made inevolving a new method of investment planning,which explicitly recognised the uncertaintiesinvolved by determining the Central Government'ssectoral investments residually from the desiredinvestment programme. It involved estimation ofthe likely pattern of private investment, assessingthe states' desired investment pattern, and thenderiving the Central investment strategy as thedifference between the desired sectoral investmentprogramme and the sum of private and Stateinvestment estimates. The advantage of thismethod of planning is that it first of all explicitlyrecognises that the Central Government bears theresidual responsibility for meeting the Planobjectives since both the private sector and theState Governments may have objectives andincentive structures which may not necessarily becoincident with the national Plan. Second, it allowsidentification of sectors that may receive excessiveor insufficient investment even after best efforts aremade in suitably reorienting the Central investmentstructure. This information gives valuable pointers

Table 2.13Sectoral Structure of GDP at factor cost

(percent)

SECTORS Ninth Plan 2001-02 2006-07 Tenth Plan

1 Agriculture & Allied Activities 25.7 24.7 20.5 22.22 Mining & Quarrying 2.4 2.3 1.9 2.1

3 Manufacturing 15.5 15.3 16.7 16.1

4 Elect, Gas & Water Supply 2.8 2.8 2.8 2.85 Construction 6.0 6.0 6.1 6.1

6 Trade 12.8 12.7 13.6 13.3

7 Rail Transport 0.9 0.9 0.8 0.88 Other Transport 4.8 4.9 4.8 4.8

9 Communication 1.4 1.7 2.3 2.1

10 Financial Services 6.2 6.3 7.5 7.011 Public Administration 6.4 6.6 6.1 6.4

12 Other Services 15.0 15.8 16.8 16.4

Total 100.0 100.0 100.0 100.0


38

to the nature of policy changes that may benecessary to alter the investment pattern of theprivate sector through the market mechanism. Thismethodology of investment planning has been foundto be very useful, and is continued in the Tenth Planas well.

2.47 Before going into the detailed exercise, afew important limitations need to be mentioned.First, although the projection of aggregative privateinvestment demand can be made with a certaindegree of confidence, the same cannot be said ofthe sectoral pattern. Since projections arenecessarily based on certain observed regularitiesin behaviour, it is difficult to make projections forsectors, which have experienced structural changesin the recent past. Since the inception of reforms,there are a number of sectors that witnessed suchregime change. Moreover, there are other sectorsin which the investment behaviour does not displayany systematic and stable behavioural pattern eventhough they may not have undergone any systemicchange. The problem becomes more acute whenthe economy has just passed through a businesscycle, which affects different sectors differently. Inthe Ninth Plan it was found that only about 77 percent of the total targeted private investment couldbe sectorally allocated on the basis of pastbehaviour. In the Tenth Plan the situation hasimproved somewhat, and it has been possible toallocate nearly 86 per cent.

2.48 Second, even the sectoral allocation ofpublic investment is not entirely deterministic. Inparticular, public investment pattern is determinedto a large extent by estimates of the internalresource generation of the various publicenterprises, both departmental and non-departmental, and the extent to which theseresources are re-deployable. These estimates arethemselves contingent not only upon theperformance of the enterprises, but also uponcertain policy decisions being taken at theappropriate time. Both of these factors are subjectto uncertainties arising partly out of marketconditions and partly out of political compulsions.Moreover, much of the resources of publicenterprises are not re-appropriable under law, sincethey form the depreciation reserve of the concernedenterprises.

2.49 Third, it must also be recognised thatthere are limitations to the extent that even thegovernment's fiscal resources can be allocated.Five Year Plans are not written on a clean slate,and each Plan has to take into account thecommitted expenditure legacies left by earlier Plans.As a consequence, only a minor part of the grossbudgetary support (GBS) allotted to a particular Plancan be used flexibly to bridge the gaps left by privateand State Government investments.

2.50 Despite these limitations, the exercise isa useful one, and its results are presented in Table2.14. As may be seen, given the limitationsmentioned above, it has not been possible to arriveat an exact balance between the sectoral investmentrequirements as emanating from the Plan modeland the deployment of the resources available withthe public and private sectors, despite the overallresource balance that has been assumed. For mostsectors, the discrepancies are not large and arewithin statistically acceptable limits.

2.51 There are, however, a few areas ofsignificant mismatch, which need to be noted anddiscussed. First and foremost, there are threesectors - Agriculture and Allied activities, Mining andQuarrying, and Construction - which apparently arelikely to receive excess investments. Such aninterpretation needs to be made with a great dealof caution, since they may reflect more the inherentlimitations of the formal planning model thananything else. There are two main limitations. First,the inter-sectoral balancing is done mainly on thebasis of past experience. As a result, sectors whichhave been under-emphasised in the past, tend alsoto receive less emphasis in the future projections.Although some corrections are made in the light ofthe objectives of the Plan, these are based onheuristics and can seriously underestimate the truelevel of correction required. This is probably thecase with both Mining and Quarrying and OtherTransport. Second, the ICORs used to estimatethe investment requirements are based on theinvestments made in the recent past, and may notfully reflect the needs of the future. This is probablytrue in the case of Agriculture, where the bulk ofthe investment in the recent past has been by theprivate sector in low capital intensive, short gestationinvestments, particularly in irrigation and


39

mechanisation. The irrigation technologies havebeen mainly extractive, such as tube-wells, and arenot sustainable unless appropriate publicinvestments are made in rain-water harvesting andrecharging of ground-water sources. Moreover, theremaining potential of major and medium irrigationhas been untapped due to inadequacy of publicinvestment. On the whole, therefore, it is felt thatthe "excess" investment that these sectors mayreceive is probably desirable to meet the Planobjectives.

2.52 As far as major shortfalls are concerned,there are four sectors, which need to be considered- the utilities sector of Electricity, Gas and WaterSupply, Communications, Financial Services, andPublic Administration and Community Services. Inthe first, although public investment, both by theCentre and the States, is proposed to be steppedup sharply as compared to the Ninth Plan, resourceconstraints place a limitation to what is possible.The gap will, therefore, have to be filled throughgreater private participation than has beenestimated. In the Ninth Plan, there was highexpectation that the private sector would come in

to generation in a big way, which was belied. Inthe Tenth Plan, however, the focus has shifted toprivatisation of distribution, which holds out betterhope for higher private investment.

2.53 As far as communication is concerned, theestimates made for private investment is probablyon the lower side due to the fact that privateparticipation in this field is of relatively recent origin,and there have been a number of teething problemsin the policy framework. Most of these have beenironed out, and there are expectations that privateinvestment will accelerate sharply during the TenthPlan and thereby bridge the differential. A similarsituation obtains in the financial sector as well, andprivate participation in insurance should improvethe investment level. It should, however, bementioned that although the bulk of the financialsector is in the public sector, it does not fall underthe purview of the public sector plan. There is someconcern that unless the ability of the public sectorbanks to increase their capital base is enhanced,there could be a problem for them to enhance theirlending ability due to capital adequacy constraints.This can be done in two ways - either through the

Table 2.14 Investment Requirements and Projected Sources

(Rs. '000 crore at 2001-02 prices)

Sectors Investment Projected Public AdditionalRequired Private Requirement

Centre State

1.Agriculture & Allied 219.6 174.0 34.0 98.2 -86.62. Mining & Quarrying 89.4 103.0 3.4 -17.0

3.Manufacturing 1476.9 1330.7 80.4 16.8 49.0

4.Electricity ,Gas & Water Supply 412.5 68.0 149.9 101.7 92.95.Construction 61.0 38.9 59.9 11.5 -49.4

6.Trade 136.6 106.0 4.5 14.4 11.6

7.Rail Transport 81.9 60.6 0.0 21.38.Other Transport 237.6 184.3 24.4 56.3 -27.4

9.Communications 296.4 74.1 91.0 0.0 131.3

10.Financial Services 151.2 26.5 0.0 124.711.Public Administration 273.1 30.6 125.7 116.8

12.Other Services 645.3 499.9 79.3 40.5 25.6

Total 4081.7 2476.1 744.1 468.7 392.8

Note : -ve sign indicates an excess of projected investment over the required


40

government increasing its equity contribution or bygreater private participation in ownership. Inprinciple, it has been decided to lower thegovernment's share-holding to 33 per cent, but littleprogress has been seen in this regard in recentyears. In view of the acceleration in the growth ratethat is being proposed for the Tenth Plan, there isconsiderable urgency in taking the necessary steps.

2.54 The investment requirement for PublicAdministration and Community Services tends tobe somewhat understated by the conventionalplanning methodology since the planning modeldoes not adequately capture the non-economicbenefits of public health and education expenditureand entirely misses both the economic and non-economic contribution of law and order and justice.It is quite clear that the transition to a fully functioningmarket economy will be retarded unless adequateprovision is made for these functions of the State.Unfortunately, fiscal constraints prevent furtherallocations in these areas, and every effort will needto be made by both the centre and the states tofind additional resources for investment, since theseare functions which cannot be taken up in the privatesector.

2.55 Finally, mention must be made of RailTransport, which too is likely to receive less thanadequate investment during the Tenth Plan. Themain problem here is the inability of the IndianRailways to raise sufficient internal resources to fundits investment needs, despite the existence ofpotential. Further subventions from the governmentwill not be possible, given the competing claims,and every effort will need to be made by the railwaysto improve internal resource generation through themeasures that have been proposed in theappropriate section of this Plan document.

REGIONAL BALANCE AND POVERTY

2.56 An important objective of the various Plansin the past has been balanced regionaldevelopment. However, the Tenth Plan differs fromthe earlier Plans in one major respect and that isthat it specifies targets for the growth rate for eachState in consultation with the state governments.As has already been mentioned, such a break-

down is necessary to ensure that there is non-trivialconsistency between the national target and theState-wise growth rates.

2.57 During the Eighth and Ninth Plan periodsthe rate of growth in the better off States (i.e. Stateswith higher per capita SDP), viz. Gujarat,Maharashtra, etc., have generally been higher thanthe States with lower level of per capita income likeBihar, Orissa and Uttar Pradesh. Such aphenomenon has resulted in higher incomedifferences in the States. According to some studies,the regional disparities tended to increase graduallyin the 1980s followed by a relatively steep increasein the early years after the reforms were launched,and a gradual increase through the 1990s. Thatdifferent States have performed differently, despitethe 'regionally unbiased' nature of economic reformsthat have been pursued, can perhaps be attributedto the fact that some of the better off States havegenerally had better governance and followedgrowth-enhancing policies more effectively thanothers. The poorer States would have to raise theirrates of growth to bridge this gap.

2.58 The achievement of rate of a growth of 8per cent during the Tenth Five Year Plan will criticallyhinge on the achievement of higher rates of growthin the GSDP vis-à-vis the growth rates achievedduring the Eighth and the Ninth Plans. It may,however, be mentioned that even if all the Statesperform as targeted, the inter-State incomedisparities are unlikely to decline. The Tenth Planaims at reversing the pace of increase in inequality,and creating the necessary pre-conditions to helpthe worse-off States to catch up. The reduction inregional disparities could perhaps follow in thesubsequent plans. Raising the growth rates is alsoimportant from the point of view of reducing thepoverty levels prevailing in the country.

2.59 As against the overall growth rate of 6.7and 5.4 per cent respectively in the Eighth and theNinth Plans for the economy as a whole, the growthrates in the Gross State Domestic Product (GSDP)of different States are given in Table 2.15. Thetargets for the Tenth Plan are also placed along-side for ease of comparison, and for giving a feelfor the magnitude of efforts that will be needed inthe different States.


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2.60 Although the aggregate growth rates areno doubt important, the real value of such an exerciselies in the broad sectoral break-up of the state-wisegrowth rates. Such a sectoral break-up necessarilyhas to be based on an appraisal of the potential ofeach State in terms of the different sectors on thebasis of the conditions that prevail at the beginning

of the Plan. As a result, it focuses attention on thedifference between the actual performance of thesector and its assessed potential. This comparisoncan lead to an understanding of the measures thatare necessary to bridge the gap. The state-wisesectoral break-down of the growth targets ispresented in Table 2.16.

Table 2.15Growth Rates in State Domestic Product in Different Plans

(percent per annum)Sl. No. State/UT Eighth Plan Ninth Plan Tenth Plan

1. Andhra Pradesh 5.4 4.6 6.82. Arunachal Pradesh 5.1 4.4 8.03. Assam 2.8 2.1 6.24. Bihar 2.2 4.0 6.25. Goa 8.9 5.5 9.26. Gujarat 12.4 4.0 10.27. Haryana 5.2 4.1 7.98. Himachal Pradesh 6.5 5.9 8.99. Jammu & Kashmir 5.0 5.2 6.310. Karnataka 6.2 7.2 10.111. Kerala 6.5 5.7 6.512. Madhya Pradesh 6.3 4.0 7.013. Maharashtra 8.9 4.7 7.414. Manipur 4.6 6.4 6.515. Meghalaya 3.8 6.2 6.316. Mizoram 5.317. Nagaland 8.9 2.6 5.618. Orissa 2.1 5.1 6.219. Punjab 4.7 4.4 6.420. Rajasthan 7.5 3.5 8.321. Sikkim 5.3 8.3 7.922. Tamil Nadu 7.0 6.3 8.023. Tripura 6.6 7.4 7.324. Uttar Pradesh 4.9 4.0 7.625. West Bengal 6.3 6.9 8.826. A & N Islands 10.3 3.7 6.627. Chandigarh 9.5 10.628 Delhi 4.3 9.4 10.629 Pondicherry 7.7 12.5 10.730 Chhattisgarh 6.131 Jharkhand 6.932 Uttaranchal 6.8Note : The growth rate for the Tenth Plan in respect of Bihar, Madhya Pradesh and Uttar Pradesh do not include Jharkhand,

Chattisgarh and Uttaranchal respectively.


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Table 2.16Statewise Growth Target for the Tenth Five Year Plan

(Annual Average in %)

States/UTs Statewise Growth Target GSDPGrowthAgriculture Industry Services

1 A&N island 1.00 10.41 7.97 6.6

2 Andhra Pradesh 3.05 8.01 8.39 6.8

3 Arunachal Pradesh 4.00 8.90 10.50 8.0

4 Assam 3.82 5.00 9.00 6.2

5 Bihar 3.75 6.00 8.00 6.2

6 Chandigarh -2.00 10.41 10.96 10.6

7 Chhattisgarh 3.00 7.50 7.00 6.1

8 Delhi -12.21 6.90 12.01 10.6

9 Goa -0.90 6.25 12.36 9.2

10 Gujarat 4.03 12.23 10.44 10.2

12 Haryana 4.07 9.56 10.33 7.9

13 Himachal Pradesh 4.55 12.49 8.26 8.9

14 J&K 4.20 5.21 8.00 6.3

11 Jharkhand 3.00 7.44 8.00 6.9

15 Karnataka 4.99 11.34 12.51 10.1

16 Kerala 3.05 5.89 8.17 6.5

17 Madhya Pradesh 4.00 7.75 9.00 7.0

18 Maharashtra 3.56 8.22 8.09 7.4

19 Manipur 3.59 8.33 7.39 6.5

20 Meghalay 4.00 6.87 7.05 6.3

21 Mizoram 2.00 4.16 6.84 5.3

22 Nagaland 4.00 7.29 5.78 5.6

23 Orissa 4.07 4.88 8.73 6.2

24 Pondicherry 1.10 13.01 9.19 10.7

25 Punjab 4.07 8.06 8.00 6.4

26 Rajastan 4.50 10.06 9.63 8.3

27 Sikkim 5.00 5.21 10.36 7.9

28 Tamil Nadu 3.54 7.37 9.77 8.0

29 Tripura 3.90 9.37 8.43 7.3

30 Uttaranchal 3.50 7.00 8.70 6.8

31 U.P 4.67 11.05 7.92 7.6

32 W.B. 5.09 9.15 10.76 8.8

All India 4.0 8.9 9.4 8.0


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2.61 Given the vast variations that exist in thecountry, the incidence of poverty has to be treatedas a region-specific issue. The overall growth ofthe economy cannot and should not be directlyrelated to poverty, since it is entirely possible thatthe growth process may by pass those regions inwhich the poor are concentrated. Therefore, themethodology of poverty assessment in the countryfocuses on the State-level incidence, and builds upthe national aggregates from these. The projectionsfor poverty, therefore, also need to take into accountthe likely growth rates of the different States of thecountry.

2.62 Consistent with the target for the growthrate of GSDP during the Tenth Five Year Plan, theState-wise incidence of poverty by the end of thePlan, i.e. 2007, has been projected, keeping in viewthe trajectory that the following variables are likelyto take.

l Per capita income of the State;

l Agriculture yield (output per hectare of food-grains) in the State;

l Per capita plan expenditure incurred by theState; and

l Poverty line of the State.

2.63 The per capita income represents theamount of resources available for consumption andis expected to be inversely related to the povertyratio. Poverty line is a summary statement of thelevel of prices in the State for a given basket ofgoods and services. Higher poverty line would beassociated with a higher poverty ratio. Thus, a highper capita income may not necessarily translate tolow poverty, if the poverty line is also high.Agriculture productivity affects poverty in a numberof ways. First, since poverty in India ispredominantly a rural phenomenon, this variablecaptures rural incomes. Furthermore, since the ruralareas are an important source of demand for urbanproducts, an increase in rural incomes would havean impact both on rural and urban poverty. Second,it is not just the level of rural incomes, which isimportant for the incidence of poverty, but itspotential distribution as well. Third, in the Indiancontext, consumer prices, both in rural and urban

areas, are driven predominantly by the price offood, which is determined by agriculturalperformance. Of course, the poverty line wouldreflect to some extent this effect, but the latter isalso sensitive to government actions in the field offood security and therefore captures an additionaleffect. It is expected that agricultural productivitywill be inversely related to poverty.

2.64 One measure to capture the effect ofgovernment actions is the per capita State planexpenditure. It is expected that this variable will beinversely related to the incidence of poverty. It hasbeen observed that the per capita GSDP growth isextremely important for poverty reduction and everyRs.1,000 increase in annual real per capita GSDPresults in 1.6 percentage point reduction in thepoverty ratio in the rural areas and 2 percentagepoints in the urban areas.

2.65 Based on econometric exercises, it isobserved that every 5 percentage point increase inreal GSDP, resulted in about 3 per cent increase inper capita terms, which would further reduce thepoverty ratios by 0.33 and 0.42 percentage pointsin rural and urban areas respectively. However, ifthe inflation rate for the basket of goods and servicesconsumed by the poor is 2.5 and 0.5 percentagepoints higher in the rural and urban areasrespectively than the general inflation rate, then theincome growth effect will be neutralised and therewill be no decrease in the poverty ratio. Anotherpoint to be noted is that the per capita State planexpenditure tends to affect poverty in both rural andurban areas and in almost equal measure.Reduction in such expenditures may seriously affectthe process of poverty eradication. Agriculturalproductivity, as expected, does reduce poverty bothin rural and urban areas, with an obviously largereffect in rural areas, and therefore, must form acentral focus of our development strategy.

2.66 Based on these exercises and certainassumptions regarding the likely growth path forthese variables during the Tenth Five Year Plan,the incidence of poverty for the year 2007 wasprojected.

l per capita gross State domestic product forthe year 2007 is estimated applying State-specific growth targets.


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l the growth in the agriculture sector would bedue only to the growth in yield.

l Per capita plan expenditure in the State forthe year 2007 has been kept fixed at 1999-2000 level.

l Poverty line is kept fixed in real terms.

2.67 The number and proportion of peopleliving below poverty is reported in Table 2.17.Given that the targeted macroeconomic andsectoral projections of the rate of growth duringthe Tenth Plan are achieved, the poverty ratio inIndia is expected to decline to about 19.2 per centin 2006-07 as compared to 36 per cent in 1993-94. However, most of the poor would beconcentrated in only a few States - Bihar, MadhyaPradesh, Orissa, Uttar Pradesh, West Bengal andthe North-Eastern States. Some pockets ofpoverty will also remain in Andhra Pradesh,Karnataka, Maharashtra and Rajasthan. With theoverall growth target of around 8 per centaccompanied by a high growth in agriculture insome of the States, the States of Haryana,Himachal Pradesh, Goa, Gujarat, Punjab,Chandigarh, Dadra and Nagar Haveli, Damanand Diu and Delhi, are likely to register negligiblelevels of poverty ratio. To take into account themigration factor from the relatively poorer Statesto these better-off states, the poverty level insome States has been kept at 2 per cent.

2.68 Finally, it should be noted that theseprojections are based on two key assumptions, otherthan the growth projections. First, it has implicitly beenassumed that the inflation rates applicable to theGSDP and the poverty line will be the same. Historicalexperience, however, suggests that this assumptionis unlikely to be valid and the inflation rate applicableto the poor is likely to be higher than that applicableto the general income. In such a situation, given theparameter estimates on these two variables, therate of decline of poverty will be less than projected.Second, per capita State plan expenditures havebeen held constant in real terms, which implies thatthe share of the State plan expenditure in GSDPwill decline rapidly over the Tenth Plan period. It isquite likely that the real per capita State planexpenditure will increase for most States. This

should lead to a faster decline in poverty in theseStates than projected.

ISSUES IN AGGREGATE DEMANDMANAGEMENT

2.69 As has already been mentioned, one ofthe key differences between the Tenth Plan andearlier Plans is the attention that needs to be broughtto bear on issues of demand management, whichhad earlier been neglected by the planning process.The Tenth Plan, however, requires a carefulbalancing between the demand and supplyprocesses of the economy if the desired pace ofacceleration of growth is to be achieved and thegrowth target met. There are a number ofuncertainties regarding the generation of adequateaggregate demand, which need to be explicitlyaddressed if proper corrective measures are to betaken.

2.70 First, as far as private consumptiondemand is concerned, by and large there is littlecause for concern since it has behaved fairlypredictably in the past and there is reason tobelieve that any major change will occur in thefuture. There is, however, one aspect, whichneeds to be highlighted. As has been mentioned,the role of the agricultural incomes in supportingthe growth and diversification of non-agriculturalgoods and services has been increasing and isexpected to continue to do so in the future as theaverage income growth in this sector will be spentmainly on non-food consumption expenditure.Nevertheless, it must be borne in mind thatincreased consumption of industrial productsfrequently involves life-style changes, and thatsuch change may not be undertaken if there arelarge uncertainties regarding the possibility ofmaintaining the altered life-style in the future. Itis, therefore, imperative that steps be taken tobring about greater stability to agriculturalincomes. Indeed, in one sense, stability may bemore important than the growth rate ofagricultural incomes. In order to do so, emphasismust be placed on reducing the vulnerability ofIndian agriculture to weather-related shocksthrough a much more intensive effort at drought-proofing, especially the rain-fed areas.


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Table 2.17Poverty Projection for 2006-07

S.No. States/UTs Rural Urban Combined%age No. of %age of No. of %age No. of

ofPoor Poor (lakh) Poor Poor (lakh) ofPoor Poor (lakh)

1. Andhra Pradesh 4.58 26.97 18.99 41.75 8.49 68.72

2. Arunachal Pradesh 37.89 3.54 4.48 0.14 29.33 3.68

3. Assam 37.89 95.36 4.48 1.78 33.33 97.14

4. Bihar 44.81 482.16 32.69 54.74 43.18 536.91

5. Goa 2.00 0.13 2.00 0.16 2.00 0.29

6. Gujarat 2.00 6.88 2.00 4.38 2.00 11.25

7. Haryana 2.00 3.30 2.00 1.51 2.00 4.81

8. Himachal Pradesh 2.00 1.18 2.00 0.14 2.00 1.32

9. Jammu & Kashmir N.A. N.A. N.A. N.A. N.A. N.A.

10. Karnataka 7.77 28.66 8.00 16.34 7.85 45.00

11. Kerala 1.63 4.03 9.34 8.01 3.61 12.04

12. Madhya Pradesh 28.73 192.07 31.77 74.46 29.52 266.54

13. Maharashtra 16.96 101.61 15.20 72.68 16.18 174.30

14. Manipur 37.89 8.10 4.48 0.27 30.52 8.37

15. Meghalaya 37.89 7.99 4.48 0.24 31.14 8.23

16. Mizoram 37.89 1.88 4.48 0.23 20.76 2.12

17. Nagaland 37.89 8.01 4.48 0.21 31.86 8.22

18. Orissa 41.72 139.12 37.46 23.57 41.04 162.69

19. Punjab 2.00 3.40 2.00 1.95 2.00 5.35

20. Rajasthan 11.09 54.41 15.42 23.44 12.11 77.86

21. Sikkim 37.89 2.08 4.48 0.03 33.78 2.12

22. Tamil Nadu 3.68 12.46 9.64 31.61 6.61 44.07

23. Tripura 37.89 10.70 4.48 0.28 31.88 10.98

24. Uttar Pradesh 24.25 373.16 26.17 111.25 24.67 484.41

25. West Bengal 21.98 137.53 8.98 22.21 18.30 159.73

26. A & N Island 3.68 0.10 9.64 0.14 5.82 0.24

27. Chandigarh 2.00 0.02 2.00 0.19 2.00 0.21

28. Dadra & Nagar Haveli 2.00 0.04 2.00 0.02 2.00 0.06

29. Daman & Diu 2.00 0.03 2.00 0.01 2.00 0.04

30. Delhi 2.00 0.19 2.00 3.18 2.00 3.38

31. Lakshadweep 1.63 0.01 9.34 0.02 4.59 0.03

32. Pondicherry 3.68 0.13 9.64 0.70 7.72 0.83

All India 21.07 1705.26 15.06 495.67 19.34 2200.94


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2.71 Strong and sustained growth of privateinvestment is at the heart of the Tenth Plan strategy,and there are a number of issues that have to beaddressed in this regard. The first point that needsto be recognised is that the Indian policy andprocedural framework continues to be excessivelyinvestor-unfriendly. This is applicable as much toinformal activities as to the corporate. There aretoo many hurdles that an entrepreneur has to clearbefore undertaking any productive activity. Evenafter doing so, he is not immune to furtherharassment by various public functionaries. Whilethere is good reason to enforce the laws of the land,this duality of control, which is exercised both atthe point of entry and during operations, iscompletely unnecessary in most instances.Therefore, it is suggested that most rules,regulations and procedures which have to becomplied with prior to investment or the entry point,should be scrapped, and greater emphasis placedon post-operation enforcement.

2.72 The corporate sector in India has notshown the kind of dynamism that had been expectedof it at the start of the reform process. No doubtthe policy and procedural rigidities mentioned abovehave contributed to this, but it is not a sufficientexplanation. The growth dynamics of privatecorporate investment in India, as assessed by thePlanning Commission, suggests that it is drivenmore by internal resource accruals than by any otherfactor. Perhaps this is a reflection of the desire ofIndian corporate promoters not to dilute ownershipcontrol, even if it involves loss of opportunities. Thislack of entrepreneurial dynamism is most disturbing,especially at a time when the government is in theprocess of privatising most public sector enterprises.It should be remembered that in many of the areaswhere the public sector dominated, non-corporateentities will simply not be able to shoulder the burdenof creating new capacities, and the onus will haveto be on the corporates. If the corporate sectordoes not fill the breach adequately, the economyruns the risk of serious imbalances emerging incertain key industries. Of course, with greater tradeopenness, this will not necessarily impede thegrowth of down-stream industries, since imports canbridge the difference between supply and demand,but valuable opportunities may be lost.

2.73 The projections made for the Tenth Planon the basis of the past behaviour of the corporatesector suggest that unless steps are taken, privateinvestment demand will fall significantly short of thetarget requirements. Removal of hurdles to theinvestment activity is clearly a crucial step, and thiswould have to be done within the first two years ofthe Tenth Plan, if it is to have the desired effectwithin the Plan period. Changes in labour laws tooare likely to help in imparting more dynamism tothis sector. It is equally important to realise thatsome of the lack of corporate dynamism, especiallyin recent years, can be traced to the huge excesscapacities that exist in a number of industries. Theprincipal responsibility for reducing this excesscapacity through increased aggregate demandduring the first two years of the Plan rests with thegovernment, which will have to engage in anaggressive fiscal policy stance.

2.74 Another method of overcoming theweaknesses observed in corporate investmentbehaviour, primarily as a complementary measure,would be to encourage foreign direct investment(FDI), especially in those areas for which Indiancorporates have shown little appetite. Indeed, it issuggested that, in the current context, the role ofFDI in boosting corporate investment demand isprobably far more important than its role as asupport to balance of payments. This changeshould get reflected in the approach taken to FDI.

2.75 As far as the private unincorporated sectoris concerned, there is fortunately no lack ofentrepreneurial dynamism. This sector has playeda key role in keeping the growth rate of the economyup when both public and corporate investmentswere stagnating. There are two important pointsthat need to be made in the context of encouragingthis sector to grow even faster, other than thegeneral point made regarding policy and proceduralbarriers to entry. First, the principal hurdle inexpansion of the investment activity in this sectorlies in its access to investible resources, especiallyfrom the formal financial sector institutions. Theavailability of long-term funds has always been aproblem, and recourse has been taken to fundsraised from the informal financial institutions. Inrecent years, even access to short-term bankfinance has become problematic as commercial


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banks have turned excessively risk-sensitive andthe brunt of this has fallen on the non-corporates.The approach proposed to address this problemhas been given in some detail later in this chapter.

2.76 The second issue relates to the nature ofcompetition faced by this sector. There is a commonperception that the main threat to the non-corporatesector comes from the corporates. While this maybe true in some cases, it is equally true that a majorvehicle for expanding the small-scale sector isancillarisation by the corporates. There are policyhurdles in expanding the scope of ancillarisation,which have been mentioned before. These needto be corrected expeditiously. More importantly, itis suggested that the real barriers to entry for newsmall-scale entrepreneurs are the existing small-scale producers. Since the small-scale unitsgenerally address a relatively small localisedmarket, they are much more sensitive to theemergence of new competitors than the corporates.As a result, incumbent small firms tend to protecttheir turfs much more aggressively. The solutionto this problem would be through an evolutionaryprocess, whereby existing small firms grow intomedium and eventually large firms, vacating spacefor new entrepreneurs. Unfortunately, in India thisprocess is severely retarded because of the natureof policy protection given to small units, whichprevents them from graduating without incurringheavy costs. This is one of the main reasons why itis proposed that the entire policy framework forsmall units should be thoroughly overhauled. Thepolicy must recognise that dynamism involves boththe growth of existing firms and emergence of newones.

2.77 The importance of public investment, bothas a component of aggregate demand and as afacilitator of private investment, has already beendiscussed. There are, however, serious concernsregarding the ability of the government to carry outpublic investment in the manner envisaged in theTenth Plan. Insofar as the Centre is concerned,the principal vehicles for undertaking publicinvestment were the central public sectorenterprises. These not only generated their ownresources through internal accruals and marketborrowings, but were also conduits through whichbudgetary resources were transformed into

investment. With the commencement of thedisinvestment and privatisation process, both theability and the willingness of these enterprises toundertake investment activities has reducedconsiderably. The net result is a situation wherenot only are budgetary resources not utilised tocreate new capacity, even the internal accruals arebeing kept in liquid form and not put into productiveuse. This is an inevitable consequence of thedisinvestment process, and should not be taken toimply that the process should be either stopped orretarded. On the contrary, the logic of the reformprocess demands that the pace of disinvestmentbe stepped up so that the currently idle resourcescan be used to create productive capacities, evenif it is by the new private ownership.

2.78 The main problem, however, lies in thefact that the Central Government has not yet createdsufficient alternative institutions through which publicinvestment can be made, especially in theinfrastructure sectors. The existing central publicinstitutions, which are actively carrying outinvestment, have physical limitations on their abilityto expand their investment programmes. It isapprehended that unless new institutional capacitiesare created in the appropriate areas, it may not bepossible for the Centre to carry out the publicinvestment programme even if the financialresources for doing so are available.

2.79 By and large, the institutional capacity ofState Governments to undertake public investmenttoday is better than that of the Centre. Althoughmany of these institutions can improve theirfunctioning quite significantly through bettergovernance systems, most of them are limited intheir activities by the availability of resources. As aresult, the overall level of public investment in thecountry may be held back by a mismatch betweenthe availability of resources and the availability ofinstitutional capacity. The Central Government islikely to have a sufficiency of resources and a lackof institutions, whereas the position of the StateGovernments would be exactly the reverse. Inrecognition of this reality, the nature of therelationship between the Centre and States will haveto undergo a change, with the Centre playing aprogressively more important role in the funding ofwhat are essentially State level public investments.


48

The modalities of this change would need to beworked out expeditiously so that unnecessaryfriction between these two arms of the Governmentdoes not take place.

2.80 There is, however, one particular area ofthe institutional capacity of the State Governmentswhich is a cause for worry. The Tenth Planenvisages not only the use of its financial resourcesbut also its food stocks for augmenting investmentin rural infrastructure. The Food for WorkProgramme is, therefore, being viewed not only asa device for bringing relief to disaster affected areas,but also as a major instrument of public investment.It is also central to the Plan for generating additionalemployment, especially for landless labour.Unfortunately, the public work structure in manyState Governments have more or less ceased toundertake public work programmes directly. Mostof them are today no better than contract awardingorganisations. The success of the Food for WorkProgramme and of the Rural EmploymentGeneration Programmes hinge critically uponrevitalising the public work systems at the State levelso that its traditional functions of design andimplementing rural public works directly is restored.Without this, it is feared that the desired level ofpublic investment may not materialise since it wouldget confined only to financial resources availablewith the Government.

2.81 Finally, in view of the importance of publicinvestment in attaining the Tenth Plan growth target,some mention needs to be made of the conduct ofmacroeconomic policy, particularly as it relates tothe expenditure side. It must be realised that publicexpenditure on goods and services, especiallypublic investment, is the only component ofaggregate demand that is not behaviourally linkedto the macroeconomic variables. These are policydecisions, and are therefore based on anappreciation of the role that such expenditures playin generating and maintaining the growthmomentum of the economy. It therefore providesa degree of stability to the economic system andforms an important component of generating therequired degree of confidence among privateinvestors. It is, thus, essential that the publicinvestment programme, once determined, shouldbe adhered to unless there are compelling reasons

to do otherwise. The Five Year Plans weredesigned essentially to subserve this objective, butover the years the significant changes that arebrought about through the Annual Plans has madethe process much less effective. In view of theproposed acceleration in growth during the TenthPlan, and the importance of public investment inthe process, a greater degree of commitment inmaintaining the required levels of public investmentis essential. For this reason, a detailed analysis ofthe likely fiscal position of the government duringthe Tenth Plan period is carried out in the nextsection in order to ensure that the public investmentneeds can be met with fiscal sustainability.

FISCAL BALANCES AND SUSTAINABILITY

2.82 Attainment of the projected growth targetof such a high magnitude, which technically restson an investment parameter of 28.4 percent, wouldrequire an equally high level of public investment,comprising investment by Central government,State governments and Public Sector Undertakings(PSUs). The declining trend in the share of publicsector in Gross Domestic Capital Formation, asexperienced in the past decade, would have to bereversed to reach a level of 9.9 per cent of GDP byend of the tenth plan from the present level of about7.3 per cent. While the magnitude of publicinvestment is crucial in bringing the desirableacceleration in the economic growth, the macroeconomic impact of these investments woulddepend on the structural pattern of publicinvestment, the extent of utilisation of capacitycreated through such investment, and reaction ofprivate sector to the fiscal position of the governmentin terms its expenditure management and revenuecollection effort.

2.83 Prudent fiscal management in this contextwould be to increase the public investment byincreasing government savings and internalresources of the public sector. This would implycompression of the consumption expenditure ofgovernment and PSUs both at the Centre and theState level, in addition to mobilisation of additionalrevenue resources. But if the investment is to beresourced by borrowing, i.e. by increased fiscaldeficit and extra budgetary resources of the PSUs,then the public sectors' draft on private savings is


49

going to be substantial, which could result incrowding out of investible resources from moreproductive use by the private sector. It is possibleto offset the crowding out effect of public investmentby allocating the resources to more productive uselike infrastructure development and capacitybuilding, which would be instrumental in promotingand sustaining private investment at the desirablelevel. More important than the crowding out effectof government borrowing is its fiscal implication interms of the outstanding debt position of theGovernment. The Ninth plan experienced aphenomenal increase in the Government Debt toGDP ratio, despite a decline in the public sectorshare in aggregate investment. The combined debtto GDP ratio of the Centre and State governmentsincreased to 72.5 per cent in 2002, from a little above56 per cent in 1997. A fresh effort to provide asubstantial step up to the public investment couldnegate the very rationale of fiscal consolidation.This needs to be considered carefully in the contextof an accelerated growth target for the Tenth plan.

2.84 At present, the public sector claims asubstantial proportion of private savings to financenot only its investment requirement, but a sizablepart of its consumption expenditure. To understandthe nature and extent of the public sectors' draft

on private savings during the Ninth plan, it wouldbe useful to examine the nature and compositionof the gross fiscal deficit of government, which isthe single major component of such draft, extrabudgetary resources (EBR) of PSUs andGovernment's disinvestments being the other twoconstituents of the public sector draft. Table 2.18presents different measures of fiscal deficit realisedduring the Ninth plan. As can be seen, gross fiscaldeficit of both the Centre and the States havedeteriorated substantially during this period with a3 percentage point increase in the combined fiscaldeficit. The difference between the fiscal deficit andthe revenue deficit is the approximate measure ofgovernment investment, which remained at anannual average of 3 per cent of GDP during theNinth plan, despite 3 percentage point increase inthe fiscal deficit of both Centre and States. Theentire increase in the government borrowing asreflected in the burgeoning fiscal deficit, is explainedby the increase in revenue deficit of the samemagnitude, which has catered to the consumptionrequirement of the Government.

2.85 As may be observed, both the Centre andthe States have witnessed significant increase intheir revenue deficit during the Ninth plan. Theimpact of the fiscal consolidation effort, initiated in

Table 2.18Measures of Deficit of the Government

(as percent of GDP)

1996-97 1997-98 1998-99 1999-2000 2000-01* 2001-02**

1 Combined Centre and States:(a) Gross Fiscal Deficit 6.8 7.7 9.3 10.1 10.2 10.0(b) Net Fiscal Deficit 5.8 6.7 8.4 9.0 9.1 9.1(b) Revenue Deficit 3.6 4.1 6.4 6.3 6.4 6.3

2 Centre:(a) Gross Fiscal Deficit 4.1 4.8 5.1 5.4 5.7 5.9(b) Revenue Deficit 2.4 3.1 3.8 3.5 3.9 4.2

3 States:(a) Gross Fiscal Deficit 2.7 2.8 4.2 4.7 4.5 4.1(b) Revenue Deficit 1.2 1.1 2.5 2.8 2.5 2.1

Note : Net Fiscal Deficit is calculated by adding gross fiscal deficit of both Centre and States and substracting there from thegross loans from centre to States and UTs

* RE for States, provisional Accounts for Centre ** BE for States and provisional Accounts for Centre


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the early 1990s, was reflected in compression ofpublic investment rather than improving the deficitposition as was expected. The initiatives to curtailGovernment expenditure led to a shortfall in publicsectors' contribution to gross domestic capitalformation, since the compulsion to maintain thepublicly provided services in the social sector madethe Government consumption expenditure rigiddownward. The position got further accentuated dueto absence of the revenue neutral impact of taxreform measures introduced during the last decade.It needs to be emphasised that the implementationof the Fifth Central Pay Commission (FCPC) awardin the first three years of the Ninth Plan and itsimplications in terms of higher fiscal deficit andresultant higher interest burden on the governmentin the subsequent years, contributed significantlyto this sudden upsurge in the revenue deficit fromthe base year level of the plan.

2.86 The interest burden, estimated aspercentage of GDP, has increased steadily duringthe Eighth Plan and the first four years of the Ninthplan for the Centre. In the terminal year of the NinthPlan, the positive impact of the reduction in interestrate is evidenced for the Centre as shown in Graph2.1. The interest liability of the Centre has increasedat an annual average rate of about 12 per centduring the Ninth plan against a 17.5 per cent annualincrease during the Eighth plan. Thus, interestpayment to GDP ratio for the Centre moved up from4.3 per cent by the end of Eighth Plan to 4.6 percent by end of Ninth Plan, reaching the peak at 4.8per cent in the year 2000-01. All the States together

seem to have suffered much more on account ofinterest payment liability, which has increased atan annual average rate of about 15 per cent and 20per cent during the Eighth and Ninth Five Year Plansrespectively. The interest burden has steadilyincreased for the States from about 1.7 per cent ofGDP in the beginning of the Eighth Plan to 2.8percent by the end of the Ninth plan. In fact, themaximum increase in the interest burden for theStates is evidenced during the Ninth plan.

2.87 The increase in the interest liability of thegovernment in the past decade can be explainedby the existence of high rates of interest as well ashuge debt stock of the government in the past,caused by an uninterrupted increase in the fiscaldeficit. The impact of successive reduction in thenominal interest rate during the last two years ofthe Ninth Plan has started showing results for theCentre, but has been more than offset by theaccumulated high cost debt of the past for theStates. To understand this problem better, it maybe interesting to examine the average rate of interestpaid on Government outstanding liability measuredby the implicit interest rate, which is different fromthe prevailing rate of interest. Graph 2.2 presentsthe implicit rate of interest for the Centre and theStates. For the Centre, the rate has increased from8.8 per cent in the year 1992-93 to 9.8 per cent inthe year 1996-97. The increasing trend in theimplicit interest rate continues for the Centre duringthe first three years of the Ninth Plan and crosses10 per cent. The last two years of the Plan witnessesa downtrend in the implicit interest rate for the


51

Centre, reflecting the impact of the reduction in thenominal interest rate, which is market determinedat present and has come down substantially.However, it is evident that the increase in the implicitinterest rate has been phenomenal for the Statesduring this period. Starting from a figure of about10 per cent in the beginning of the Eighth Plan, theaverage rate of interest paid by the States on theiroutstanding liability reached a level of more than13 per cent during the Ninth Plan. The rate has comedown to marginally less than 13 per cent for theStates in the last year of the Ninth Plan.

2.88 One interesting point to be noted here isthe difference between the implicit interest ratesapplied to Centre and the States. It is evident thatthe States are borrowing at an interest rate, whichis much higher than the interest rate paid by theCentre. The reasons for this differential interest ratepayment by the two agencies of government couldbe: (a) the varying conditions of borrowing by twolevels of government, (b) the exchange riskcoverage by the Central government and (c)difference in the composition of the debt stock.Although the premise under which the differentialinterest rate operates is appreciated, the magnitudeof this difference merits consideration. As can beseen, the gap between implicit interest rate paid bythe Centre and the States is quite high and hassteadily increased to reach about 3.8 percentagepoints by the end of Ninth Plan, from a level of about1.2 percentage points in the beginning of the EighthPlan. This would have implications for future

interest liability of the States. Given the requirementof meeting investment obligations in the Tenth Plan,interest liability of the States would be influencedby: (a) the future interest rate; (b) capacity of StateGovernments to contain fiscal deficit at amanageable level; (c) the structure and compositionof the State Governments' new borrowings; and (d)the extent to which the State Governments wouldbe in a position to swap the past high cost debt withthe currently available low cost borrowing frommarket. Going by the current trend in the financialsector reforms, it is not likely that the downturn ininterest rate would be reversed. This is one aspect,which would influence the government fiscal positionpositively, and would contribute towards gradualconvergence of the deficit to a level which issustainable.

2.89 Before detailing on the issue of fiscalcorrections that would be required during the TenthPlan, it would be appropriate to assess the resourcerequirements of the government to finance the Plan.The size of plan has to be determined by twocompelling factors: (a) the necessity to providesubstantial step-up to public investment, which isessential for maintaining the macroeconomicbalance between the government fiscal actions andtarget growth rate of the economy; and (b) the needto carry out fiscal correction by compressinggovernments' unproductive consumptionexpenditure and increasing its revenue earnings,in order to contain the revenue deficit at a level atwhich the government can generate savings to


52

finance a portion of its investment demand. Theresource flows required to meet the desired levelof investment and the allocation of investmentresponsibilities between various agents of thegovernments are presented in Table 2.19. It may beobserved that the governments' commitment to meetthe public investment target would be significant.

2.90 State Governments would require to bearabout 29 per cent of the total public investment, the

Centre having only a 15 per cent share on theinvestment outlay of the public sector. Theinclusion of Central Government support to PSUswould increase the central share in publicinvestment to 21 per cent. The public sectorundertakings as a whole would have a lowershare than in the past due to ongoingdisinvestments and privatisation in this sector.Since State governments have to play apredominant role in making investment decisions,

Table 2.19Structure of Outlays and Resources of the Public Sector

(Tenth Plan target at 2001-02 prices)

Rs. Crore Per cent of GDP

Centre Central Plan Outlay 706000 4.92 of which (a) Support to State Plans 300265 2.09 (b) Support to CPSEs 76250 0.53 (c) Support to Ministries 329485 2.29 (I) Investment 181217 1.26 (ii) Current Outlay 148268 1.03 Financed by: (a) Borrowings 678574 4.72 (b) Other Resources 27426 0.19

States State Plan Outlay 588325 4.10 of which (I) Investment 357096 2.49 (ii) Current Outlay 231229 1.61 Financed by: (a) Central Support 300265 2.09 (b) Borrowings 300951 2.10 (c) Other Resources -12891 -0.09

PSEs: Outlay/Investment 674490 4.70 Financed by: (a) Central Support 76250 0.53 (b) Savings (IR) 401240 2.79 (c) Borrowings (EBR) 197000 1.37Total Budgetary Resources 994060 6.92Total Investment : Centre +State + PSEs 1212802 8.44

Notes:(1) All Union Territories (UTs) are clubbed with the States.(2) A part of the investment outlay of the States will be towards budgetary support to State PSEs .

for investment purposes. Since this quantum is not yet known, it is being carried in the State budgets.(3) The 'borrowings' of PSEs include all market related funds including new equity issues, if any.(4) 'Other resources' of the Centre and the States include balance on current revenues (BCR),

miscellaneous capital receipts (MCR) and external grants, less non-Plan capital expenditures(5) PSEs includes both Central PSEs and State PSEs


53

particularly in infrastructure development, it isimportant to ensure that the States attainsufficient efficiency gains from investment.

2.91 The budgetary resources required tosupport the public investment plan, estimated at Rs.9,94,060 crore at constant 2001-02 prices, are tobe financed almost entirely by borrowing. The netborrowing requirement of the Centre is estimatedto be Rs.6,78,574 crore during the five-year period,implying an average borrowing of Rs.1,35,715 croreannually. This compares well with the Centre's baseyear borrowing of Rs.1,36,211 crore. States' ownborrowings requirements are estimated atRs.60,190 crore on an average per year at 2001-02 prices, in addition to loan from the Centreobtained by States as a part of Central support toStates for Plans. It has been envisaged that duringthe Tenth Plan, budgetary support to States' Planfrom the Centre would constitute about 42.5 percent of the Gross Budgetary Support to CentralPlan, estimated at Rs.7,06,000 crore at 2001-02prices. The grant and loan component of the Centralsupport to States' plan are contemplated to be inthe ratio of 50:50. After netting out the borrowing ofStates from Centre, the government as a wholewould need to raise about 6.8 per cent of GDP asborrowing during the Tenth Plan, as compared to9.1 per cent in the year 2001-02. This projection ofGovernment borrowing is based on the premise thatthere would be considerable improvement in thefiscal discipline to be followed by all the governmentagencies. The borrowings may exceed the targetlevel, unless there is significant improvement in thegovernment savings.

2.92 Throughout the Ninth Plan, governmentsavings have not only remained negative but alsoexhibited a declining trend. The measures to bringabout fiscal discipline during the Tenth Plan wouldprimarily aim at arresting the declining trend ingovernment savings by containing the revenuedeficit. The government savings, theoretically, aredirectly linked to the combined revenue deficit ofthe Central and State Governments, although thecorrespondence is not exact. The reason for thediscrepancy between the two being the non-uniformity in classification and definition used bythe two authorities namely Central StatisticalOrganisation, which measures the government

savings by using an economic classification ofgovernment expenditure, and the governmentbudget departments which provide the measure forrevenue deficit by using an accounting classification.In the absence of an exact relationship betweenrevenue deficit and Government savings, it ispossible to derive the measure for governmentsavings from the revenue deficit through theobserved relationship between the two.

2.93 It need hardly be reiterated that the idealfiscal position would be to finance governmentinvestment by increasing government savings tothe maximum possible extent. But going by thepast trend, it does not seem likely in the mediumterm, to have surplus realisation on the revenueaccount of the government. Hence, investmenthas to primarily rely on borrowing, a sizeable partof which would sti l l continue to f inanceGovernment consumption expenditure. It isimportant in this context to understand the long-term implications of continued dependence onborrowing. Conventional wisdom justifies theborrowing so long as the return from investmentfinanced by such borrowing exceeds the cost ofborrowing. But, India's public finance inheritsthe consequence of fiscal mismanagement in thepast, as reflected in the already existing highdebt/GDP ratio. Table 2.20 presents outstandingdebt position of the Centre and the States sincethe year 1992-93.

2.94 As may be seen, both the Centre and theStates experienced a declining trend in theoutstanding debt to GDP ratio during the Eighth FiveYear Plan. However, during the Ninth Plan the debtto GDP ratio increased very sharply by more than8 percentage points for the Centre and by the samemagnitude for the States. The combinedoutstanding liability of the Centre and the Statesduring the Ninth Plan increased from 56.3 per centof GDP to 72.6 per cent of GDP. An analysis of thedebt position of the Centre highlights an increasingdependence of the Central Government ondomestic borrowing, which constitutes more than95 per cent of the total debt liability of the Centre.The share of external debt in the total CentralGovernment borrowing seems to have beendeclining over time, from 5.6 per cent of GDP in theyear 1992-93 to 2.6 per cent in the year 2001-02.


54

It is worth mentioning here that the external debtcomponent of the Government's borrowing hasbeen understated to some extent, since theconversion of the past debt stock under this headfrom million dollars to rupees crore has been basedon the historical exchange rate. However, therepayment of such debt would have to be madeafter conversion at the current exchange rate. Itwould, therefore, be appropriate to assess theexternal borrowing liability of the Government at thecurrent exchange rate. Thus, a realistic assessmentof the external debt component of the totalgovernment liability evaluated at current exchangerate, would push up the ratio to more than 8.5 percent of GDP, instead of 2.6 percent as reported inthe table. The overall debt position of the CentralGovernment would also be pushed up by an equalmagnitude.

2.95 Composition of the past debt stock of theState Governments indicates a gradual reduction inthe dependency of the States on the Centre for theirborrowing requirements during the Eighth Plan.During the Ninth Plan, the share of the Centre in thetotal debt stock of the States had increased in thefirst two years and started declining thereafter. Thisdecline during the last three years of the Ninth Plancould be explained by the exclusion of the States'borrowing against small savings from the non-planaccount of the Central Government budget. Sincethe year 1999-2000 the States borrowings from theCentre mostly constitutes the loan component of thenormal Central assistance to States under Plan. Itis evident that the Central Government still remainsthe major creditor for the States, accounting for ashare of more than 40 per cent of the total debt stockof the State Governments.

Table 2.20DEBT POSITION OF THE CENTRE AND THE STATES

(Rs. Crore)

Amount outstanding at the end of March

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02(RE) (BE)

A. Centre (1+2) 401924 477968 538610 606232 675676 778294 891806 1021029 1163635 1315949

(as % of GDP) 53.7 55.6 53.2 51.0 49.4 51.1 50.7 52.9 55.7 57.5

1 Internal liabilities(a+b) 359655 430623 487682 554983 621437 722962 834552 962592 1105207 1256356

(as % of GDP) 48.1 50.1 48.2 46.7 45.4 47.5 47.5 49.9 52.9 54.9

2. External debt* 42269 47345 50928 51249 54239 55332 57254 58437 58428 59593

(as % of GDP) 5.6 5.5 5.0 4.3 4.0 3.6 3.3 3.0 2.8 2.6

B. States (1+2) 142178 160076 184528 212227 243526 281207 341978 420133 504247 591831

(as % of GDP) 19.0 18.6 18.2 17.9 17.8 18.5 19.4 21.8 24.1 25.9

1. Loans fromCentral Govt 92412 101945 116705 131506 149053 172729 203786 216194 230195 247030

(as % of GDP) 12.3 11.9 11.5 11.1 10.9 11.3 11.6 11.2 11.0 10.8

2. Other Loans 49766 58131 67823 80721 94473 108478 138192 203939 274052 344801

(as % of GDP) 6.6 6.8 6.7 6.8 6.9 7.1 7.9 10.6 13.1 15.1

of which NSSF 26416 59229 92870

(as % of GDP) 1.4 2.8 4.1

Combined Liability 451690 536099 606433 686953 770149 886772 1029998 1224968 1437687 1660750

(as % of GDP) 60.4 62.4 59.9 57.8 56.3 58.2 58.6 63.5 68.9 72.6

Note : 1. Outstanding external debt has been converted into rupees at historical exchange rate2. Combined liability is net of inter-governmental loan.

Source : Indian Public Finance Statistics, Ministry of Finance, Government of India


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2.96 The issue of long-term fiscalsustainability has been examined against thebackdrop of the existing high debt to GDP ratio.Fiscal sustainability, which measures the capacityof the Government to service and sustain its debtburden comprising the debt stock of the past andthe new borrowings, has been estimated bydrawing upon the standard formulation of Joshi &Little. The approach aims at deriving the level offiscal deficit as a percentage of GDP, which wouldstabilise the government debt to GDP ratio at theexisting level. The modification applied to thestandard formulation relates to the assumption oninterest rate. It is generally assumed that theinterest rate applied to the Government borrowingremains stable in the medium term, so that nodistinction is made between past debt stock andnew borrowings of Government, so far as interestpayment is concerned. In India, however, therehas been a significant difference between theaverage interest rate paid on existing Governmentdebt, which was about 9.9 per cent in 2000-01 forthe Central Government and has come down to 9per cent in the year 2001-02, which is themaximum rate of interest that the Centre would

pay on new borrowing.The average interest ratepaid by the State Governments on existing debtis about 12.8 per cent in the year 2001-02. Asregards new borrowings, the rate of interestapplicable to borrowings of States from the Centreis 11.5 per cent in the year 2002-03, and the costof borrowing from the market is even lower.

2.97 Table 2.21 presents the estimates ofsustainable fiscal deficit for the Centre and Statesduring the Tenth Five Year Plan. In deriving thevalues of sustainable fiscal deficit of Government,the following assumptions have been made. First,the nominal interest rate on the new debt of theCentral Government has been assumed to be inthe range of 8.5 per cent to 9.0 per cent during theTenth Plan. This would imply a real interest rate of3.5 to 4 percent, if the rate of inflation can becontained at 5 per cent on an average annually.Second, the nominal interest rate for States havebeen assumed to be about 2 percentage pointshigher than that for the Centre. Third, the annualrate of repayment of the existing debt has beenassumed to be 14.3 per cent for the Centre and8.3 per cent for the States.

Table 2.21 Fiscal Sustainability of the Tenth Plan

(Gross Fiscal Deficit (GFD) as percentage of GDP)

Sustainable Fiscal Deficit Combined Centre States

1. Scenario 1 8.6 5.2 (7.1) 3.4

2. Scenario 2 7.4 4.4 (6.2) 3.0

Fiscal Deficit (2001-02) 9.3 4.9 (5.9) 4.5NOTES: (1) The standard analysis defines fiscal sustainability as the level of fiscal deficit at which the Debt/

GDP ratio remains constant. The relevant formula is:

f =b.( g + I - rn-a.(rn - re)) + int, where:f = fiscal deficit/GDP ratiob = total government debt/GDP ratiog = growth rate of GDPI = inflation ratea = rate of repayment of existing debtre = interest rate on existing debtrn = interest rate on new debtint = interest payment on public debt/GDP ratio

(2) Scenario 1 assumes GDP growth rate at the Tenth Plan target of 8 per cent Scenario 2 assumes GDP growth rate of 6.5 per cent

(3) The GFD of the Centre is defined as net of the loans and advances to the States.

Figures in brackets are the corresponding Gross Fiscal Deficits.


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2.98 The sustainable fiscal deficit, aspresented in the table, has a direct relationshipwith the country's economic growth, and inverserelationship with the rate of interest. In otherwords, higher growth rate in the gross domesticproduct would sustain higher fiscal deficit ceterisparibus. It can be noted that the Centre andStates together are experiencing a level offiscal deficit at present, which is not at allsustainable even under an accelerated growthscenario. While the fiscal deficit position of theCentre seems to be within the sustainable limit,the States are operating at a level of fiscal deficit,which is about 1 percentage point higher thanthe sustainable limit. Thus, it is apparent fromthe fiscal sustainability analysis that the fiscalcorrection effort would need to be much moreintense at the State level than that at the Centre.It is worth mentioning here that a lower thantargeted growth would put higher pressure on theGovernment finances, since the sustainable fiscaldeficit would be much lower as indicated underScenario-2.

2.99 There are two issues worth mentioningin the context of the study on fiscal sustainability.First, The estimation of sustainable fiscal deficitis based on the assumption of a steady stategrowth path for the economy. But, the growthtarget contemplated for the Tenth Five Year Planis not based on a steady state path. The implicitassumption in the growth projection, as has beendiscussed earlier, is that the growth rate wouldgradually accelerate, and would reach more than9 per cent by the end of Tenth Plan. It may,therefore, be possible that even if the sustainablefiscal deficit is maintained, the debt to GDP ratiowould go up in the first three years of the TenthPlan and then would start converging to the baselevel ratio. Second, maintaining the debt liabilityof the Government at the base year level, whichhas already reached a very high proportion, isnot a desirable fiscal position. Although anormative assessment of the optimum debt toGDP ratio has not been attempted, it would beideal to bring down the ratio to 50 per cent forthe Centre and 25 per cent for the States. Theeffort of the Government in the long run shouldtherefore be to contain the fiscal deficit at a levelwhich is below the ceiling imposed by the

sustainability criteria for the Tenth Plan. It maybe argued that the need to reduce the fiscalnumbers to less than the prescribed ceiling mayhinder the attainment of the target growth bydisturbing the saving-investment balance. In thiscontext it would be useful to examine theprojected fiscal balance position of both theCentre and the State Governments, which havebeen arrived at under the macroeconomicconsistency framework.

2.100 Table 2.22 presents the combined deficitposition of the Centre and the States for the TenthFive Year Plan. The fiscal compulsion ofsupporting higher public investment during theTenth Plan is revealed by an overall fiscal deficitposition of 6.8 per cent of GDP for the Centreand the States combined. The gross fiscaldeficits, separately for the Centre and the States,

Table 2.22Tenth Plan Deficits and Savings of States and

Centre

(as a % of GDP)

Base Terminal TenthYear Year Plan

2001-02 2006-07 Average

States

Gross Fiscal Deficit 4.5 2.2 3.2

Revenue Deficit 2.5 0.2 1.3Centre


Revenue Deficit 4.2 2.2 2.9Combined Centre and States


Net Fiscal Deficit 9.3 5.4 6.8Revenue Deficit 6.7 2.4 4.2

Government Savings -4.7 -0.5 -2.4

IR (CPSUs & SLPEs) 3.0 2.6 2.8Pub. Savings -1.7 2.1 0.4

Note : Net Fiscal Deficit is calculated by adding gross fiscaldeficit of both Centre and States and subtractingthere from the gross loan from Centre to states.

The measures of deficit for the year 2001-02 forCentre is provisional and for states, estimated bythe Planning Commission.


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are estimated at 4.7 per cent and 3.2 per cent ofGDP on an average respectively. All theseprojected fiscal numbers are within the sustainablelimit. It is important to examine the degree of fiscalcorrection required by each level of government toachieve the desired fiscal position. The Centre andall the States together would have to cut down theircombined fiscal deficits to GDP ratio by more than4 percentage points during the Tenth Plan. TheStates would be under pressure to achieve thefiscal consolidation by reducing their fiscal deficitfrom 4.5 per cent of GDP in the base year to 2.2per cent in the terminal year of the Tenth Plan,necessitating a 2.3 percentage point decline. TheCentral Government would require to bring downits fiscal deficit by 1.5 percentage points during thePlan.

2.101 The gross fiscal deficit position of theGovernment reflects their net borrowingrequirement for the Tenth Plan. The entireborrowing does not get translated to investmentdue to a sizeable deficit on the revenue account.During the Tenth Plan it would be necessary toreduce the revenue deficit of the Governmentsubstantially so as to ensure a larger flow ofborrowed funds to the Governments' investmentexpenditure. Accordingly, the combined revenuedeficit would need to come down by 4 percentagepoints from the present level of 6.5 per cent to 2.4per cent by the end of Tenth Plan. This wouldensure substantial improvement in Governmentsavings, which would still remain negative duringthe Tenth Plan, averaging at about (-) 2.4 percentof GDP. In brief, any effort to realise the desiredlevel of government savings will requiretremendous pressure on the government tocompress the revenue expenditure to the bareminimum level.

2.102 However, the Central Government hasinstruments available to it, which have not beentaken into account in making the above calculationson fiscal sustainability. These instruments lie in thedomain of monetary policy, and need to beconsidered and applied cautiously. Nevertheless,under plausible assumptions of future needs ofsterilizing inflows of foreign exchange to preventexchange rate appreciation, an 8 per cent GDPgrowth target, and without adverse impact on theexpected level of inflation, it is likely that around1.5 per cent of GDP would be available annualy inthe later years of the Tenth Five Year Plan throughmonetary measures. To the extent that such

monetary resources would actually be accessed,needs of borrowing would be reduced.

2.103 A comparison of the projected deficits ofthe government with the fiscal sustainabilityanalysis places the Central Government at acomfortable position. The Central Governmentwould be in a position to bring down itsindebtedness by the end of Tenth Plan to amanageable level by containing the fiscal deficit atthe target level. However, the targeted fiscal deficitfor States is only marginally lower than thesustainable limit. Thus, even if all the Statestogether contain the deficit at the target level, theiroutstanding liability would be lowered onlymarginally, which may still be unmanageable.Further, the States together, have accumulated adebt stock of more than 25 per cent of GDP by theend of the Ninth plan, with wide variation of thisratio across the States. Hence, any improvementin the overall fiscal position of all the States takentogether would only be a partial success story. It isimportant to note here that the fiscal position of allthe States assessed together conceals more thanwhat it reveals. The inter-State variation in thegovernments' fiscal position is enormous.Therefore, it would be useful to look into the fiscalsustainability position of individual Statesseparately.

2.104 The State-wise sustainable fiscal deficit,as indicated in Table 2.23, ranges from about 1.7per cent of Gross State Domestic Product for Delhito more than 10 per cent for Sikkim. It is interestingto note here that higher level of sustainable fiscaldeficit for a State is associated with higherindebtedness of that State in the base year. Thus,the State's future fiscal consolidation effort wouldbe influenced to a great extent by their presentindebtedness. States with very high debt/GSDPratio would have to contain their fiscal deficit at alevel much below their prescribed sustainable limit,so as to bring down their respective outstandingliability to a manageable level. In the earlierparagraph a manageable debt to GDP ratio for theStates has been referred to be around 25 per cent.It would, therefore, be essential to look into theextent to which the existing debt to GSDP ratio ofindividual States exceeds the benchmark of 25 percent or falls short of it. In case of States where theexisting debt ratio is substantially higher than thebenchmark, the gross fiscal deficit of those Stateswould require to be reduced by equal proportion.The States enjoying a debt ratio lower than the


58

benchmark would have some scope to operate ata level of fiscal deficit higher than the target fixedby the sustainability criteria. However, it would beadvisable for these States to contain the deficit atthe prescribed sustainable limit for reasons ofprudence.

2.105 It is important to mention here that thedebt ratio of individual States are over-estimatedto some extent due to a data gap in the estimatesof GSDP, which is used as denominators forestimating such ratios. The GSDP of individual

States, which are estimated by concerned StateDirectorates of Economics and Statistics, do notadd up to the all India GDP, which is estimated bythe CSO. The gap between the two at present ismore than 9 per cent of GDP. If this gap is pro-rated to adjust the GSDP of the individual States,then debt to GSDP ratio of the individual State couldcome down from the present level.

2.106 The examination of government's fiscalsustainability position as explained highlights theextent of fiscal discipline that would have to befollowed by both Centre and the States during theTenth Plan. After examining the magnitude of fiscalcorrection required to be undertaken by the Centreand the States, it would be important to analyse thecomponent-wise projection of Government financesfor the Tenth Plan and the emerging policyimplications. Table 2.24 indicates such projection forthe Central Government. As is observed, thebudgetary support for Plan under Centralgovernment finances increases to 5.4 percent ofGDP in the terminal year of the Tenth Plan, theaverage for the Tenth Plan being estimated at 4.9per cent of GDP, compared to the base year level of4.4 percent. This step-up in the gross budget supportto Plan under Central Government finances isnecessary to support the required governmentinvestment expenditure, which is covered under planfinance. To sustain this plan size, it would beessential to cut down the growth of non-planexpenditure of the government, which mostlyconstitutes the committed liability of the government.

2.107 The single largest component of thiscommitted liability is the interest payment by thegovernment, which is determined by the past debtstock, the fiscal deficit of the previous year, and thepast and prevailing interest rates. Following financialsector reform, the interest rate is now marketdetermined and has reached a comfortable level ofabout 9 per cent for the Central Government. Costof borrowing in future is expected to decline further,at least by 0.5 percentage point. This is consistentwith the steady reduction in government borrowingsthat is being projected. It is also believed that therate of growth of private investment, necessary tosupport 8 per cent growth of GDP, will not putsignificant upward pressure on interest rates.Containing the interest liability of the government ata sustainable level would, therefore, depend uponthe attainment of a manageable fiscal deficit. It

Table 2.23 State-wise Sustainable Fiscal deficit for Tenth Plan

(as % of GSDP)

Debt/ Sustainable GFDGSDP Fiscal 2001-02

2001-02 Deficit

1 Andhra Pradesh 30.7 3.8 6.0

2 Arunachal Pradesh 69.8 8.1 8.2

3 Assam 36.9 4.3 7.9

4 Bihar 46.8 4.7 5.5

5 Delhi 11.9 1.9 1.2

6 Goa 28.1 3.8 4.4

7 Gujarat 30.6 4.5 7.5

8 Haryana 27.1 3.7 4.1

9 H. P. 75.5 11.0 14.5

10 J&K 58.5 6.1 4.6

11 Karnataka 23.7 3.5 4.3

12 Kerala 34.1 3.2 4.2

13 M.P. 27.2 3.2 4.0

14 Maharashtra 18.3 2.6 2.3

15 Manipur 48.3 4.8 7.8

16 Meghalaya 34.2 4.3 9.3

17 Mizoram 83.6 8.3 11.9

18 Nagaland 76.7 7.4 10.1

19 Orissa 58.7 7.5 7.7

20 Punjab 44.2 4.0 6.0

21 Rajasthan 41.4 5.6 5.7

22 Sikkim 76.2 10.5 3.0

23 Tamil Nadu 22.6 2.6 4.0

24 Tripura 53.9 5.3 13.7

25 U.P 36.4 6.9 4.9

26 W.B. 35.7 5.4 6.6

Note : Debt/GSDP ratio stands for the Outstanding liability ofState as percent of respective GSDP, which has beenestimated for the year 2001-02.


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should further be pointed out that, if the assumptionof a lower interest rate regime in the Tenth Planperiod is realised, then the actual growth of interestpayments is likely to be even lower than projected,since some of the relatively high-cost past debts willbe replaced by lower-cost borrowings in the future.

2.108 Expenditure to be incurred on defenceservices has been projected to be maintained atlittle over 2.5 per cent of the GDP. In the past, thiscomponent of expenditure has shown a gradualdecline both as a share of non-plan expenditureand as per cent of GDP. Another major componentof non-plan expenditure is the pay and allowancesof government employees, which has become thecentral point for discussion in the context ofadministrative and public expenditure reforms. Theestimation of Central Government finances for theTenth Plan assumes a 5 per cent annual increasein salary head. The implicit assumptions, havingpolicy implications, are: (a) reduction in the strengthof Central Government employees by 2 per cent

annually; and (b) not more than 2 per cent annualincrease in average basic salary of governmentemployees.

2.109 Other non-plan (ONP) expenditure needsto be contained at the base year level in real terms.The other non-plan expenditure constitutes pension,subsidy, administrative overheads, law, order andjustice among others. Within this group it would benecessary to provide importance to law, order andjustice. Hence, the Tenth Plan would contemplatesome increase in this expenditure in real terms. Ourprojection indicates that the pension liability of theCentral Government would increase faster than 6per cent per year during the Tenth Plan. Therefore,adjustments would have to be made in the othertwo components of ONP. Particularly, theexpenditure on subsidies has to be reducedsubstantially. Inclusion of the pension bill of theCentral Government employees and expenditure onmaintenance of law and order in the ONP head maypush this component up marginally. But the

Table 2.24Tenth Plan- Central Government Finances

(as a % of GDP at current prices)

Base year Terminal year Average 2001-02 2006-07 Tenth Plan

Budget Support to Plan 4.4 5.4 4.9

Total Non-Plan 11.3 9.9 10.7Of which

Interest payments 4.6 4.0 4.3

Defence 2.5 2.5 2.5Pay & Allowances 1.3 0.9 1.0

Other Non-Plan 2.9 2.5 2.8

Total Expenditure 15.7 15.3 15.6Gross Tax (excluding Cess) 8.2 9.9 9.4

Less: Share of States 2.4 2.9 2.7

Net Tax to Centre 5.8 7.4 7.1Non-tax Revenue 3.0 2.6 2.7

Disinvestment 0.2 0.3 0.4

Total Non-debt receipts 9.7 11.0 10.9Fiscal Deficit (new method) 5.9 4.3 4.7

Revenue deficit 4.2 2.2 2.9

Note : Net tax revenue includes cess on diesel and petroleum surcharge, which are not part of the divisible pool. Inclusion ofcess and surcharge to the gross tax would raise the ratio to 8.6 per cent, 10. 3 per cent and 9.8 per cent respectivelyfor the base year, terminal year and average of the Tenth Plan.


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annual rate, at which the non-plan expenditure otherthan interest payment, defence and governments'wage bill is expected to grow during the Tenth Plan,does not exceed 6 per cent.

2.110 Mobilisation of adequate revenueresources is crucial to any fiscal reforms initiative.The fiscal reforms initiated during the early 1990shave led to a broad-based direct tax structure, withscaling down of the peak rate and introduction ofreforms in tax administration. The reforms in indirecttax structure included reduction in the tax rates,reduction in number of slabs and introduction ofModified Value Added Tax (MODVAT)/ CentralValue Added Tax (CENVAT). The overall impacthas been revenue loss to the government duringthe decade of reforms. The gross tax revenue ofthe Central Government as per cent of GDP hasdropped from 10.3 per cent in 1991-92 to 9.5 percent in 1996-97, and further to 8.6 per cent in theyear 2001-02. The past trend and future projectionof the gross tax to GDP ratio of the CentralGovernment is presented in Graph 2.3, whichreveals a secular decline in the gross tax revenuecollection of the Central Government during theEighth and the Ninth Five Year Plans. Against thisbackdrop, it is envisaged to increase the tax revenuecollection of the Central Government to 10.3 percent of GDP by the end of the Tenth plan.

2.111 An analysis of the Central tax revenuecollection in the last decade reveals a substantialimprovement in direct tax revenues. As per cent ofGDP, direct tax collection of the Centre increasedfrom 2.4 in the base year of the Eighth plan to 2.8in the base year of the Ninth Plan, and then to 3.2in the terminal year of the Ninth plan. However,improvement in direct tax revenue has been morethan offset by a steep fall in the collection of indirecttax during the same period. The gross tax revenueunder indirect tax has declined from 7.5 per cent ofGDP in 1991-92 to 6.6 per cent in 1996-97 andfurther to 5.4 per cent in 2001-02(RevisedEstimate), a reduction by 2.8 percentage points.The declining trend in the collection of indirect taxis accounted for by a fall in both excise and customsrevenue.

2.112 Table 2.25 indicates the implicitbuoyancy of Central tax revenue for direct tax,indirect tax, Custom revenue and Excise revenue.As can be seen, reforms and innovation in taxstructure have kept direct tax buoyancy at a levelaround 1.3. However, tax reforms under customsand excise, which have lowered both the tax ratesand the number of slabs, have affected the taxbuoyancy adversely. The buoyancy has comedown to 0.7 and 0.6 during the Eighth and theNinth Plans from a level of 1.2 during the


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Eighties. The buoyancy of custom revenue hasbeen worst affected.

feasible. However, the target of increasing the taxto GDP ratio of the Central Government by morethan 1.5 percentage points would require substantialimprovement in the excise revenue and the customrevenue collection. It needs to be reiterated thatthe process of liberalisation would be irreversible inthe near future and would continue to be so duringthe Tenth Plan to scale down the import tariff.Chapter 4 on External Sector elaborates upon thepossible import tariff regime and the correspondingimport implications during the Tenth Plan. Theprojection of buoyancy under custom revenue isbased on the premise of (a) gradual reduction inthe average import tariff to about 18 per cent and(b) complete withdrawal of tariff exemptions, excepton strategic imports which are assumed to accountfor about 25 percent of such exemptions.

2.115 Equal emphasis needs to be given on theimprovement of the Central tax revenue on accountof Central excise. Introduction of CENVAT, scalingdown of excise duties and the gradual shrinking ofthe share of manufacturing sector in GDP have allcontributed to the decline in excise revenue.Exclusive dependence on the manufacturing sectorfor raising indirect tax revenue would not bedesirable in the long run. The future growth patternenvisages a faster expansion of the services sectorthan any other sector. It could be necessary toexpand and extend the tax base to the servicessector on a large scale, in order to attain a taxbuoyancy of 1.16 as projected.

2.116 It has been realised that the States haveto undergo the exercises of fiscal correction withhigher intensity. In this context, it would benecessary to examine the implications of theprojection of State Government finances duringthe Tenth Plan. Table 2.26 highlights the projectionof the major components of State Governmentfinances during the Tenth Plan. As can be seen,the budget support for Plan under State finances iscontemplated to be stepped up to 4.2 per cent ofGDP by the end of the Tenth Plan from a base yearfigure of 3.8 per cent. This is consistent with therequirement of higher public investment, envisagedto come from the States sector during the TenthPlan. It would be essential on the part of the Statesto support this Plan size through increaseddependence on their own resources, the details of

2.113 The reasons for this steep fall in theindirect tax revenue are obvious. The structural andadministrative reforms in the Indian tax systemduring the Nineties characterised by scaling downof the tax rate, reduction in number of slabs,introduction of modified value added tax system,etc, among others, were not necessarily aimed atraising revenue productivity. Rather, the purposewas to improve efficiency in production and tradeby removing market distortion. The analysis of datain the post -reform period exposes several issuesworth mentioning. First, the value of imports hasnot responded to tariff reduction in equal proportion,i.e. import elasticity with respect to tariff has notbeen very high. Second, a host of tariff exemptionsstill exists on substantial proportion of importsranging from 60 per cent to 80 per cent. Third, theexcise duty has not been structured to lead to arevenue-neutral tax system under MODVAT/CENVAT. Fourth, the tax base for excise revenue(manufacturing sector) is gradually shrinking as aproportion of GDP. Our projections of the taxbuoyancy for the Tenth plan have considered allthese issues.

2.114 The improvement in direct tax collectionwhich has been experienced despite the scalingback of income tax rates in India during the post-reform period, could be attributed to expansion inthe tax base through introduction of innovativeschemes, extension of the base for tax deductionat source and improvement in direct taxadministration etc. Continuous efforts towardsimprovement in the direct tax administration and itsre-structuring, and introduction of informationtechnology on a large scale to facilitate taxadministration are expected to further enhancerevenue collection under direct tax. Thus, attaininga buoyancy of 1.5 under direct tax appears to be

Table 2.25Buoyancy of Central Tax Revenue

Direct Indirect Custom Excise TotalTax Tax Revenue Revenue

Eighth Plan 1.3 0.7 0.9 0.6 0.9

Ninth Plan 1.3 0.6 0.1 1.0 0.8

Tenth Plan 1.5 1.1 0.96 1.16 1.26


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which are discussed in the next chapter. However,it is important to note that the States would be undertremendous pressure to compress their non-planexpenditure so as to generate more resources forfinancing Plan.

2.117 A component-wise break up of the non-plan expenditure of the States indicates that theinterest liability of the States would be increasingfor the initial years of the Tenth Plan and come downto the base year level of 2.9 per cent of GDP by theend of Tenth Plan. However, the average interestpayment to GDP ratio for the States would remainat 3 per cent. This is due to the fact that the cost ofborrowing by the States is still higher. The lendingrate of the Centre, which is the major creditor ofStates, is still 2.5 per cent higher at 11.5 per cent.In addition, States have accumulated a large stockof past debt with higher rate of interest. It would bealmost impossible for the States, in the mediumterm, to reduce the interest burden to the base yearlevel, even with the optimistic fiscal deficit positionas targeted.

2.118 The next single major item under non-planhead is the salary and wage bill of the government.It does not seem feasible for the States in the nearfuture to succeed in compressing this expenditurein real terms. States, the major public serviceprovider, would be liable to expand their socialinfrastructure base; which would necessitateexpansion of public service network and hence hikein the salary bill of the Government by more thanthat caused by inflation. It is envisaged that therewould be a net addition to the employees' strengthof the State Governments at an annual rate of 2per cent during the Tenth Plan. This along with anassumed annual inflation of 5 per cent and annualincrease in the average salary amounting to 2 percent, would compel the salary bill of the StateGovernment finances to increase at an annual rateof 9 per cent during the Tenth Plan. This is a veryoptimistic estimate so far as State Governmentfinances is concerned. The State Governmentshave to maintain utmost restraint in recruitingmanpower, which need to be guided by the conditionof governance in the individual State. It is needlessto reiterate that inter-State variation should be thehighest guiding principle in recruiting additionalemployees. However, the rate of increase in

average salary bill of all States taken together,being less than the target rate of growth in nominalterms, the salary bill as percentage of GDP wouldcome down from 3.6 per cent to 3 per cent of GDPby the end of the Tenth Plan.

2.119 It would be equally important for the Statesto raise their revenue base substantially during theTenth Five Year Plan. The projection of CentralGovernment finances envisages a 0.5 percentagepoint increase in the share of States from the grosstax revenue of the Centre as percentage of GDP.States' own tax revenue collection would also needto be raised from the base year figure of 5.9 percent of GDP to 6.6 per cent of GDP by the terminalyear of the plan. In this context, a move to a unifiedvalue-added tax (VAT) covering all goods andservices takes the highest urgency.

ISSUES IN FINANCIAL INTERMEDIATION

2.120 The Tenth Plan recognises that thefinancial system continues to play a crucial role inmobilization of the available savings and allocatingthem to the most productive uses. An efficient andmarket oriented financial system is thus acomplement to market based decision-making in thereal sector. The extent of transformation of desiredsavings into investments is largely determined bythe process of financial intermediation and theability of the financial sector to not only mobiliseresources but also to channelise them in a mannerdesired by the investors. This function becomesincreasingly more important and demanding asan economy grows in complexity. In addition, theefficiency of the financial intermediation process canalso affect the desired level of savings in theeconomy by altering the expected returns to savings.The allocation of scarce capital between competingsectors is a crucial function that has to be performedin the economy. When the financial sector performsthe allocative function efficiently, scarce capitalshould be allocated to those sectors, which havethe highest marginal productivity of capital. Efficientfinancial markets continually exert a disciplinaryeffect on enterprises and constantly monitor theutilisation of capital.

2.121 A strong and efficient financial systemwhich is widespread and functionally diversified is


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essential for providing an impetus to a competitiveeconomy for supporting higher investment levelsand increasing growth. The financial sector in Indiahas developed quite substantially in both size andsophistication during the past three decades. Thenationalisation of the commercial banks in 1969 ledto a rapid growth and spread of banking servicesall over the country. The sharp increase in financialsavings by households, during the 1970s can belargely traced to the spread of banking in theeconomy. A further fillip was given by theemergence of the non-bank financial companies(NBFCs) in hire purchase and leasing finance, andthe boom in the stock markets in the early 1990sarising out of the liberalisation of the financial sector.Despite these favourable developments, it isbecoming increasingly apparent that the financialsector in India needs to develop further and fasterif the growth rate of the economy of 8 per cent

per annum and more is to be attained during theTenth Plan and sustained thereafter.

2.122 Financial sector management and thereform process must progress in tandem with thereforms in the real sector. An important outcomeof financial sector reforms is that it contributesto greater flexibility in the factor and productmarkets. With the real sector becomingincreasingly market-driven and engulfed by acompetitive environment, there is need for amatching and dynamic response from thefinancial sector. Banks and financial institutionsare now required to not only enhance theirbusiness volumes and range of services, but alsooperate in an increasingly technologicallysophisticated environment, even while keepingabreast of developments in both the internal andinternational economy.

Table 2.26Tenth Plan State Government Finances

(as % of GDP at current prices)

2001-02 2006-07 Average Tenth Plan

States Plan Expenditure 3.8 4.2 4.1

Total Non-Plan Expenditure 13.3 11.5 12.4

Of which (a) Interest Payment 2.9 2.9 3.0

(b) Pay & Allowances 3.6 3.0 3.2

(c) Pension & other retirement benefits 1.2 1.0 1.1(d) Debt repayments 0.7 0.8 0.8

Total Expenditure 17.2 15.9 16.5

Tax Revenue 8.2 9.5 9.0Of which

(a) State Own Tax Revenue 5.9 6.6 6.3

(b) Share from Centre 2.4 2.9 2.7Non-tax Revenue 3.6 3.2 3.3

States’ own Non Tax Revenue 1.4 1.2 1.3

Total Revenue Receipts 11.8 12.7 12.3Total Revenue Expenditure 14.3 12.9 13.6

Total Non-Debt receipts 12.0 12.9 12.6

Gross Fiscal Deficit 4.5 2.2 3.2Revenue Deficit 2.5 0.2 1.3

Note : Budget figure for the year 2001-02 is estimated by the Planning Commission


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2.123 It was recognised that the financial systemitself needs to tone up its productivity and efficiencyand improve its health. Its critical nature promotedthe Government to set up Committees on theFinacial System in 1991 and on Banking SectorReforms in 1998 (Narasimham Committees) toexamine all aspects relating to the structure,organisation, functions and procedures of thefinancial system. The deliberations of the Committeewere guided by the demands that would be placedon the financial system by the economic reformstaking place in the real sectors of the economy, andby the need to introduce greater competition throughautonomy and private sector participation in thefinancial sector. Despite the fact that the bulk of thebanks were, and are likely to remain, in the publicsector, and therefore with virtually zero risk of failure,the health and financial credibility of the bankingsector was an issue of paramount importance tothe Committees.

2.124 While the first Committee focused onarresting the qualitative deterioration in thefunctioning of the financial system, the secondCommittee offered recommendations on thestrengthening of the system within the frameworkof purposive regulation and a strong and effectivelegal system. The Committees felt that the coreissue is the improvement in the quality of the banks'assets portfolios. Banks have a responsibility, asrepositories of the public's savings, to deploy themin a manner which ensures their soundness andcontributes to national wealth creation. Many ofthe measures suggested by the two Committeeshave been accepted by the Government andimplemented to a large extent.

2.125 The financial sector reform process haswitnessed the adoption of several significantmeasures since its inception to enable it to meetthe challenges of increasing deregulation andemergence of more competitive conditions. Butdespite this, some areas of concern remain to beaddressed. The main area of concern relates to theability of the financial sector in its present structureto make available investible resources to thepotential investors in the forms and tenors that willbe required by them in the coming years. In a verystylised sense, the requirement of investment fundsfor productive investment can be divided into three

broad categories - equity, long-term debt, andmedium- and short-term debt. The proportion inwhich different forms of funds are required dependson the nature of the activity and the sector in whichthe investment is proposed to be made as well ason the perceptions regarding the futuredevelopments in the financial sector. Although thereis some flexibility in these proportions, by and large,not too much variation in the debt equity ratio orthe term structure of debt appropriate for theparticular industry is either possible or desirable,from the point of view of both the lenders and theborrowers. Thus, the desired sectoral andinstitutional investment pattern in the country givesrise to a particular structure in which investible fundswould need to be made available. If the financialsector is unable to provide the funds in the threebroad categories in more or less the sameproportions as required by the demand, thepossibility is that there could simultaneously existexcess demand and excess supply in differentsegments of the financial market. In such a situation,the segment facing the highest level of excessdemand would prove to be the binding constraintto investment activity and effectively determine theactual level of investment in the economy. It istherefore entirely possible that the level of aggregateinvestment could fall short of the aggregate supplyof investible resources not because of a lack ofinvestment demand, but because of a mismatchbetween the structures of the demand for and thesupply of investment funds arising from aninadequately developed financial sector. In such asituation, the growth process could be inhibited.

2.126 Movements of funds between differentfinancial institutions and various type of instrumentstend to resolve much of these problems in anefficient and integrated financial market. Portfolioreallocation by the savers who constantly respondto differential movements in the returns to thealternative financial instruments, also facilitates freeflow of funds. Frequently, new instruments are alsodeveloped to meet specific investment needs. Evenin relatively efficient markets, aberrations can arisedue to the fact that the rates of return in financialmarkets, unlike prices in goods markets, have tobe qualified by risk factors, and are thereforesusceptible to problems arising out of asymmetricinformation and speculative behaviour. Issues of


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adverse selection and moral hazard, characteristicof imperfect information and incomplete markets,are present even in the most developed andsophisticated financial systems. The Indianfinancial sector, however, has yet to attain thisdegree of integration and maturity, and can becharacterised as a fragmented market. By andlarge, there is very little movement of fundsbetween the various segments of the Indianfinancial sector in response to the discrepanciesin the demand and supply positions. To makematters worse, most segments of the Indianfinancial sector are specialised in providing only alimited component of the investment portfolio andare either restricted from or technically incapableof addressing the demand for other components.As a result, both the quantum and pattern ofinvestment in the economy are determined primarilyby the portfolio decisions of the savers, and it wouldbe entirely fortuitous if the savings portfolio moreor less matches the desired structure of investment.

2.127 As a situation of pervasive excessdemand existed in all segments of the marketearlier, the potential mis-match between thepatterns of demand and supply of investible fundswas not of much significance. Such excess demandarose primarily out of the high level of pre-emptionof financial savings by the Government togetherwith a substantial portion of directed lending. Withthe considerable expansion and liberalisation of thefinancial markets in recent years, both throughhigher rates of savings and external capital flows,and through reduction in the pre-emptive anddirective role of the government, the problemsarising out of the non-integration of the financialsector are likely to become increasingly more acute.Unless efforts are made to identify the emergingstructure of the investment demand, particularlyfrom the private sector, and to reorient thefunctioning of the financial sector accordingly, notonly might there be a problem in attractinginvestment in those areas which are of nationalimportance, but the possibility also exists of aninadequate utilisation of investible resources,leading to a slower rate of growth than would bepotentially justified by extant savings. In addition,an excess supply of funds in one segment of thefinancial sector carries the danger that such fundsmay be used for speculative purposes in foreign

exchange, real estate or commodities, which createtheir own problems in economic management.

2.128 Private participation in economicinfrastructure sector and basic industries continuesto be of critical importance and needs to beincreased significantly. These activities tend to becharacterised by heavy investments, long gestationlags and long pay-back periods, which require thecommitment of long-term funds, both as equity andlong-term debt. In the past, since these sectors werepredominantly catered to by public investment, theneed to develop appropriate financing mechanismswas not felt. As a result, the Indian financial sectoris heavily biased towards short and medium-termdebt, whether it be the commercial banking sectoror the development finance institutions (DFIs).Unless the availability of equity and long-term debtto the private sector is increased substantially inthe coming years, the likelihood of adequate privateinvestment in these sectors appears to be remote.

2.129 The provision of equity funds isfundamental to all investment activity and its likelyavailability needs careful consideration. AlthoughIndia has a fairly well developed secondary marketin shares, the primary issues market has traditionallybeen fairly small and sluggish, except for a shortperiod of intense activity during the early and mid-1990s. One of the reasons for the slow growth inthe primary market has been the tendency for themajor corporates to rely more on internal accrualsfor providing equity funds than to diluteshareholdings through public issues. There is noreason to believe that this pattern will change in thenear future. Even foreign companies in India tendto hold their shares quite closely and therefore donot contribute in any meaningful manner to thedevelopment of the equity market. Rapid growth inthe infrastructure sectors will therefore require thatrelatively new firms enter the market by raisingsizeable equity from the public, unless the existingcorporate sector becomes considerably moreaggressive in its expansion plans. In the alternative,excessive reliance may have to be placed onattracting foreign equity inflows to bridge thisshortage.

2.130 In the recent past, equity markets havebeen rather listless with an insignificant number of


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new issues seeking funds. The small investor haslost confidence in the market, which has beenbuffeted by a series of questionable deals andscams. The mutual funds that afforded a safeconduit to the equity market for the retail investor,have been adversely affected by the lack-lustremarkets, and have been displaying dwindling netasset values (NAVs).

2.131 There have been several measures takenby the stock exchanges and SEBI to streamline thefunctioning of the markets and provide a greaterdegree of transparency to its operations. Disclosurenorms are constantly being made more stringentand investor grievance redressal machinery hasbeen geared up. Issues of insider trading, mergers,acquisitions and takeovers, share buy-backs, etc.,are being addressed and suitable guidelines issued.The bourses have adopted modern technologyincluding screen-based trading, and settlementperiods are getting shorter. These have beenpositive developments but have not been able toprevent malpractices completely.

2.132 A feature of the equity markets has beenthe narrowness of the secondary market in equitiesand the excessive influence of foreign institutionalinvestors (FIIs). The FIIs, driven by the comparativerisk perception of equity markets around the worldtended to create substantial volatility in the boursesas the attractiveness level changed. This was oftencountered by some of the domestic institutions likeUnit Trust of India (UTI) whose large-scale marketoperations enabled it to play a stabilising role. Giventhe current state of health of the UTI, such a functionwould now be beyond its capabilities.

2.133 Insofar as long-term debt is concerned,at present the Government monopolises practicallyall sources of long-term funds, such as insurance,pension and provident funds. Earlier, there wascertain logic to this in the sense that since thegovernment was practically the only investor incapital-intensive long gestation projects; its needfor such funds was of overriding importance. Withthe desired shift in investment responsibilities, it hasbecome necessary for the government to vacatesome of this space for the private sector. In addition,there is need to create conditions whereby saversare attracted towards investing in long-term debt

instruments, which are practically non-existenttoday.

2.134 The insurance sector has been animportant source of low-cost long-term funds all overthe world. This is permitted by the fact that mostinsurance companies operate in only two majorareas - risk cover and annuities - which do notrequire payment of interest or repayment of theprincipal respectively. In the Indian context,however, the insurance companies, particularly inlife insurance, also tend to act as investment fundsin the sense that they not only provide risk coverbut are also committed to repayment of the principalwith interest, although with long maturities. One ofthe reasons that this has happened is that theaverage premium charged by the insurancecompanies in India tends to be relatively high dueto obsolete and rigid actuarial practices andinefficient operations. There is a pressing need toreorient the insurance sector in India in a mannerthat it fulfills its principal mandate of providing therisk cover.

2.135 A positive development in the insurancesector has been its opening up to the domestic andforeign private sector insurance companies. Thishas led to increased competition and innovation inthis sector. The users of insurance products andservices both in the life as well as non-life segmentwould benefit from the advent of internationalpractices even though pricing of insurance productswould continue to be administered by the insuranceregulator. The process of liberalisation of theinvestment guidelines has also begun, although therate of progress in this area is significantlyconstrained by the budgetary position of the Centraland State Governments. But further deregulation,gaining from the experience of the opening up ofthe sector, would increase the flow of funds intothe sector and improve the availability of long-termfunds for industry and infrastructure.

2.136 International experience shows that animportant source of long term funds has been thevarious forms contractual savings such as pensionand provident funds. In India, although the quantumof resources available in such funds is quiteconsiderable, they have not played their legitimaterole in providing finances for growth and


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development in an adequate manner. The attitudetowards such funds in India has been excessivelyfocused on safety and security rather than onreturns. As things stand today, the responsibility ofthe management of such funds is either that of theGovernment or of the employer. This, coupled withthe regulatory framework, has led to a situationwhere such funds have been deployed only inGovernment securities or in trustee bonds, whichare generally also public debt instruments. As aresult, the returns to the employees, who are thelegitimate owners of these funds, is determinedprimarily by the interest on Government debt. In asituation where efforts are sought to be madetowards lowering the interest on public debt, suchrestrictions would reduce the returns to thesefunds. However, efforts at widening the portfolioof these funds are unlikely to be successfulunless the pattern of management andresponsibility is changed significantly. In thepresent situation, where either the Governmentor the employers, in the form of trustees, areresponsible for the deployment of these funds,risk-averse behaviour is only to be expected, andmerely enabling a more diversified portfolio maynot be of much significance. It is suggestedtherefore that in the case of organised labour,which are the groups presently covered undersuch schemes, the responsibility for managementof provident and pension funds should be vestedin associations of employees that may be deemedappropriate. Since a direct nexus would therebybe drawn between the management of thesefunds and the beneficiaries, the likelihood oftaking greater risks for higher returns would beincreased. Typically, such arrangements alsoinvolve professional asset managementcompanies that provide the expertise forobtaining the best returns for their clients. Sucharrangements also need to be encouraged. TheGovernments efforts in this direction should beredirected to providing the prudential guidelinesand supervisory functions, on one hand, and towiden the coverage of contractual savings bybringing unorganised labour also within theambit of such schemes, on the other.

2.137 As far as the creation of a debt market isconcerned, particularly for long-term debt, muchmore concerted efforts need to be made. At present,

in the absence of such a market, practically all debtinstruments are held to maturity, and this illiquidityreduces the attractiveness of debt instruments,particularly those of longer maturity. The efforts atcreating a debt market need to be revived with fullvigour. The National Stock Exchange should befurther encouraged to increase its involvement indebt instruments, as the government now issuespublic securities of appropriately low denominations.This would help to generate a healthy debt marketin the country in which not only financial institutionsbut also other companies and even individuals canparticipate. More importantly, once the interest rateon public debt instruments becomes the referencerate, it would considerably enhance the effectivenessof monetary policies in the country, and thedependence on the CRR as an instrument ofmonetary control can be reduced.

2.138 At present, much of the trading in debtinstruments in the secondary markets is confinedto government securities, treasury bills, PSU bondsand small amounts of commercial paper. Privatecorporate debt trading is negligible since there isvery little floating stock, as tradable debt issues bythe corporate sector have not found favour. Unlessan active debt market develops, the issuers in theprivate corporate sector would not feel encouragedto bring out public offerings in tradable debt. Privateplacement by corporate continues to be the principalmode of mobilising funds through the debt route.

2.139 The debt market in India lackstransparency and the settlement system needs tobe improved. It is necessary to develop a nation-wide debt market for all debt securities including allgovernment bonds and treasury bills. For this, aninfrastructure for trading, clearing and settlement,similar to the one obtaining in the equity market, isessential. Such a mechanism would enable theformation of a unified debt market, catering toparticipants of various sizes. An active and deepmarket in government securities is a pre-conditionfor the system to throw up a dependable benchmarkyield rate.

2.140 Until the secondary debt market becomessufficiently active so as to be able to absorb debtinstruments of various maturities, there is a casefor the Central Government to move its debt


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portfolio towards the shorter end of the maturityspectrum, which would increase the liquidity in thedebt market. This would be consistent with therecommendation for the Centre to vacate morespace in SLR placements in favour of States andPSEs. Since there is an integral relationshipbetween the emergence of the treasury bill rate asa credible instrument of monetary policy and thereduction in the CRR, it is suggested that the banksshould be permitted to utilise a part of the CRRfunds for investment in the secondary T-bill marketonce the institutional arrangements have beenestablished, instead of depositing these with theRBI. Over time, these funds can be graduallyreleased for more diversified investment, therebyachieving the target CRR level in a phased manner.The government can also utilise the debt of PSEsheld by it both to activate the debt market and toprovide investible funds for public investment. Inorder to do so, the government would have tosecuritise its loans to PSEs, which could then befloated in the market. The advantage of suchinstruments is that they not only would be relativelyrisk-free, since they are implicitly guaranteed bythe government, but would also carry interest rateswhich would be sufficiently high so as to maketrading feasible for the market-makers.

2.141 With the abandoning of the administeredinterest rate regime, the lending rates of banks havebeen freed and banks can now fix these rates onthe basis of their asset-liability mix and the desiredspread. They, however, need to announce theirprime lending rates (PLR) as well as the maximummargin or band over this rate, and the applicableinterest rates would essentially depend on their riskperception of borrower's venture. The ReserveBank of India (RBI) has recently permitted the banksto quote sub-PLR rates to deserving borrowers whocan be construed as prime risk. This concessionhas been given to banks to enable them to matchthe lower rates of interest at which prime borrowersare able to access funds from extra-bankingsources, primarily through commercial paper, non-convertible debentures and external borrowing.

2.142 In fact, these guidelines to banks haveremoved the floor from their lending rates, leavingit to the judgement of the individual banks asregards credit risk. The intention is that banks

would now have discretion and adopt a selectivelypreferential approach towards their primeborrowers while retaining the PLR plus rates fortheir normal customers. A possible danger in sub-PLR lending is that it could trigger off a competitivespiralling of interest rates downwards, with banksattempting to secure additional business. Thiswould be detrimental to the banking industry in thelong run. Further, the risk-weighted returns ofbanks would be adversely affected, therebyimpacting on their profitability and capital adequacy.

2.143 It may be true that the lending ratescontinue to be high, tending to make industryuncompetitive. However, the ability of banks toreduce their interest rates further is limited,notwithstanding the present high real interest rates.Banks are burdened with a large volume of non-performing assets (NPAs) with no returns, whichhave to be provisioned for or written off, placingconsiderable strain on their profitability. This positioncould get worse with stricter NPA norms in place inthe coming years. High NPA levels also contributeto the risk-averse nature of banks and propel themtowards the safety of investments in governmentsecurities, even though returns offered are muchlower. NPA levels can be brought down significantlyby streamlining the legal system and procedures inthe country that tend to be lender -unfriendly. Therecent ordinance promulgated on the Securitisationand Reconstruction of Financial Assets andEnforcement of Security Interest will go a long wayin allowing the banks to take control of the assetsof willful defaulters without going throughcumbersome and time-consuming litigation.

2.144 Another reason for the banks' inability toreduce lending rates is the unduly high spreadrequired for their operations. In addition to theburden of NPAs, it is the high transaction cost whichprevents reduction of spreads. With a large branchnetwork and low level of computerisation andnetworking, the efficient use of funds remains aproblem. Asset-liability mis-matches tend to getmore pronounced, which has a bearing on thebank's cost of funds. The lending rates could ofcourse be reduced by lowering the deposit rateswhile retaining the spreads. However, bank depositrates necessarily have to move in tandem with therates applicable on competing deposit schemes,like the small savings and post office deposits.


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2.145 The interest rates paid by the borrowers,however, though based on the deposit rates, arealso determined by the level of efficiency of thefinancial system. The spreads between the depositand lending rates in India are much too high byinternational standards and reflect both theconstraints faced by and the relatively low level ofefficiency in the financial intermediation system.Long-run competitiveness of the economy cannotbe ensured unless these spreads are brought downto at or near international levels. Although in recentyears there has been considerable liberalisaion ofthe banking sector, along with a tightening ofprudential norms and practices which have led toan improvement in the health of the banking sector,there are some areas of concern which need to beexamined.

2.146 The banking industry is carrying a heavyburden of non performing assets which raise thecost of bank operations and consequently thespread, and efforts need to be made to bring thesedown. However, a balance has to be drawn betweenthe reduction in NPAs, on one hand, and ensuringadequate supply of credit to the economy, on theother. Excessive pressure on banks to reduceNPAs is likely to lead to a high degree of selectivityin the credit disbursal process. As a result, it maywell be possible that the total level of credit issuedby the banking system may fall short of the levelsdictated by the growth in deposits. While this wouldno doubt reduce the level of NPAs, it would alsohave the effect of raising the average cost of creditactually disbursed. As a result, the spreads wouldbe affected by two contradictory influences and, inthe short run, it is likely that the latter effect woulddominate so that either the spreads would actuallyrise or the health of the banking sector would beadversely affected. An increase in spreads throughan increase in the lending rates would be self-defeating for the banking sector in view of the factthat the prime borrowers also have access tointernational sources of funds and are likely to switchif domestic interest rates are raised in any significantmanner, thereby raising the average level of riskexposure in the lending portfolios of banks.

2.147 There are a number of considerations,which enter into determining the effects of policyon banking spreads. First, the level of the cash

reserve ratio (CRR) that is to be maintained by theIndian banks is considerably higher than theinternational levels that are specified for prudentialreasons. While such a target for the CRR iseventually desirable for the health of the bankingsector and a reduction in the spreads, it needs tobe seen in the context of the immediate policyimperatives. A decrease in the CRR enables thebanking system to generate a higher level of creditfrom the same deposit base, which implies anincrease in the money multiplier. Thus, in view of agiven inflation target, a decrease in the CRR wouldrequire a corresponding decrease in the rate ofgrowth of base money, which would reducesignificantly the extent of seignorage available tothe Government. In view of the relatively high levelof fiscal deficits that are likely to obtain during theNinth Plan period, it does not appear desirable toreduce the potential seignorage excessively.Sharper decreases in the CRR can be brought aboutonce the fiscal deficit of the government has beenbrought to about 3.5 per cent of GDP and therevenue account comes into surplus. Secondly, withthe greater importance of monetary policy inmacroeconomic management, the CRR willcontinue to be an important instrument until suchtime as the interest rate on treasury bills and thebank rate become credible instruments of monetarycontrol. This is unlikely to happen until an activemarket in treasury bills is created and the treasurybill rate becomes a commonly accepted referencerate for the structure of interest rates in the country.

2.148 Policy intervention by the Government inthe operation of the banking system also takes placethrough the medium of the statutory liquidity ratio(SLR) where it is mandatory for the banks to holdGovernment and public sector securities. Thenegative effects of the SLR have been mitigated toa considerable extent in recent years both by areduction in the SLR from 38.5 per cent of the totalnet demand and time liabilities (NDTL) of banks to25 percent, and by having market determined ratesof interest on public debt instead of rates prescribedby the government. However, in the absence of anactive debt market in government securities, theSLR is characterised both by a certain degree ofilliquidity with the banks and an interest rate on publicdebt which is not determined in a truly competitivemarket. These factors will become increasingly more


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important during periods of relatively tight liquidity.On the whole, however, the SLR is desirable bothas a prudential measure and in view of the need togenerate debt resources for the government. Thelatter rationale will be obviated once a proper debtmarket comes into existence and thecreditworthiness of the public sector, particularlyStates and PSEs, improves adequately. It wouldbe desirable for the Centre to gradually vacate thespace for long-term debt and make these availableto the States and public sector enterprises whichhave the most pressing needs for long-term funds.

2.149 The third area that needs examination isthe directed lending for priority sectors. The rolethat priority sector lending has played in makingcredit available to sectors, which are of nationalimportance in terms of their effects on employmentand poverty alleviation, such as agriculture andsmall-scale industries, and which have strongexternalities cannot be gainsaid. The Indianeconomy is still not in a position in which the sectorswith access to organised sector credit will be ableto take care of these objectives. Since pure pricerationing in the sense of using the interest rate as asingle allocation device is neither feasible nordesirable in the presence of incomplete informationand adverse selection possibilities, and since acomprehensive portfolio balancing approach isadministratively difficult in a widely dispersedbanking network, there is a high probability thatsmaller borrowers would be systematicallydiscriminated against in terms of credit allocation.This would be contrary to the interests of both thenation and even the banking sector itself. Theinstitutional mechanism for making available creditto the priority sectors needs to be revised. Sincemost new banks do not have the capacity to eitherappraise or effectively supervise lendings in thepriority sectors, specialised institutions may haveto be developed not only on a sectoral basis butperhaps also on a regional basis. In this contextinstitutions such as National Bank for Agricultureand Rural Development (NABARD), SmallIndustries Development Bank of India (SIDBI), localarea banks (LABs), regional rural banks (RRBs)and cooperative financial institutions need to bestrengthened and professionalised, and thelinkages between themselves and with thecommercial banking sector established on a firmer

and more formal footing. It should be ensured thatwith greater autonomy and private participation inpublic sector banks, the institutional structure ofbranch networks, which are critical for effectiveimplementation of priority sector lending, is notdiluted. In the case of banks without such wide-spread infrastructure and non-bank financialinstitutions, the funds may have to be routedthrough the specialised institutions. In such casescare would have to be taken that the rate of interestpaid by the specialised institutions is no higher thanthe risk weighted interest received by the publicsector banks on their direct loans to the prioritysectors. Further, the recent tendency for inclusionof various activities under priority sector needs tobe curbed, since it tends to diffuse the focus fromthose sectors which have high externalities andwhich need to be supported in a distinct andfocused manner. Therefore, not all infrastructureshould be categorised as priority sector, but onlythose that have high social returns and long pay-back periods.

2.150 Credit to the small industrial sector, alongwith agriculture has always enjoyed special attentionboth in policy formulation and institution buildingefforts in view of their importance with regard toemployment potential, income redistribution andsupport to the balance of payments. Credit flowsto small-scale industries have been a part of prioritysector directives; but despite this, complaintscontinue regarding inadequacy of bank credit.Suggestions have been made to enhance creditflows to this sector by liberalising credit appraisalnorms. While banks and other credit institutionsneed to devise appraisal criteria to suit this sectorand be responsive to their genuine requirementsfor credit, their approach should not sacrifice soundcanons of banking prudence.

2.151 The experience of banks in small scaleindustry financing has not been wholly satisfactoryin view of the high incidence of sickness in thissector. The banks often find it difficult to monitorthe credit flows closely and diversion of the creditfunds is not often checked in time. The channelisingof bank credit through local ground level informalfinance agencies like chit funds, nidhis and moneylenders is one way of ensuring that credit deliveryis focused and diversion of funds does not take


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place. As these local finance agencies are alreadyan integral part of the community in their sphere ofinfluence, banks can benefit from their informationgathering system and their ability to recognisesignals of potential sickness and take correctivemeasures at the incipient stage.

2.152 An important area of priority sector lendinginvolves credit to the social sectors and activitieswhich may not be 'bankable' in the usual sense ofthe term, but which may have high social returns.Micro-credit is well established as an area of focusnot only in India but in a number of other countriesas well, and a number of experiments have beensuccessfully tried. It has been found that the loanservicing experience with micro-credit can be asgood or even better than credit to formal sectors if itis implemented through appropriate mechanismssuch as group lending. The experience of publicsector banks in providing credit through self-helpgroups has been excellent and this lending activityneeds to be expanded to cover a wider clientele.

2.153 Apart from directed credit, provision oflong and medium term credit to industry has alwaysbeen considered as an important element in theprocess of industrialisation. Among the largenumber of specialised institutions which were setup to provide finance to different sectors of theeconomy in the post-independence period, a well-knit structure of development financial institutions(DFIs) was set up for meeting the requirements ofmedium and long-term finance of all range ofindustrial units. Realising the significance of theseall-India and State-level financial institutions, thegovernment and RBI provided various types offinancial incentives and other supportive measures.It was accepted that these institutions would providelong-term finance to industry, as commercial bankswere not able to fill this gap in the economic growthprocess due to asset-liability mismatch fears.

2.154 To encourage investment in industry atthat time, it was decided that the DFIs shouldprovide long-term finance at interest rates, whichwere softer than those being charged by banks ontheir advances. To enable the DFIs to financeindustry at concessional rates of interest, low-costfunds were made available to them by thegovernment and RBI through bonds with

government guarantee, budgetary support etc.Banks were also not permitted to provide term loansto large industries and such loans became theexclusive domain of the DFIs.

2.155 However after the economic liberalisationand financial sector reforms were initiated, theprotection available to the DFIs was no longer there,and with it the concessional funds, thereby forcingthem to compete with the commercial banks whosecost of funds was much lower on account of theirbranch network. Furthermore, the level of NPAs ofDFIs rose considerably on account of globalcompetition faced by industrial units financed bythem due to import liberalisation and the consequentadverse effect on their profitability. Moreover, withcommercial banks now entering into term financing,the viability of DFIs suffered much more.

2.156 The changed business environmentcompelled the DFIs to re-engineer themselves andidentify new areas of operations or convertthemselves into commercial banks or universalbanks. The traditional business of DFIs of providinglong-term finance to industry and infrastructure isdwindling, as it is becoming increasingly difficult forthem to provide funds at interest rates, which arelow enough to make these long-gestation projectsviable. But the financial institutions still possessrich expertise in project appraisal systems and anin-depth knowledge of the various industrial sectors,which should be profitably utilised. Commercialbanks are yet to acquire this expertise as well asexperience in term lending.

2.157 As the creation of infrastructure facilitiesin the economy continues to be a priority, and largeindustrial projects require a heavy component ofmedium to long-term funds, it is necessary that long-term funds, which are low cost, are made availableto financing institutions. With the systems andappraisal skills already in place with DFIs, such fundsshould flow through these institutions and there is acase for SLR funds and government guaranteedbonds being provided to them. However, it must beensured that the DFIs are managed professionally withthe latest system of credit appraisal, delivery andrecovery so that NPAs are kept to the minimum.Spreading the financing over a wider spectrum ofindustrial sectors and size of industrial units wouldalso help in mitigating risk of over-exposure.


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2.158 Banks, particularly the public sector bankshave traditionally concentrated in industrial, tradeand agricultural advances and personal segmentloans have not been favoured much by them. Thistrend has changed in the last few years. Whenbanks have been aggressively enhancing theirpersonal loans portfolio by marketing housing loans,vehicle loans, educational loans etc. Of these,housing loans form the largest chunk. Earlier, bankswere not lending to the housing segment directly.Housing finance companies used to borrow frombanks and lend to the retail customer at a goodmargin. However, with sluggish industrial growth,banks have been finding profitable investmentsdifficult. Returns from government securities havegone down, not justifying the cost of funds. Thesefactors have led the banks to shift focus on thehousing loan segment, which offers good returnsand where potential NPAs are low. Theencouragement of home loans by banks coupledwith the low rates of interest at present wouldwitness a spurt in house building activity andbecome one of the drivers in the process ofdevelopment.

2.159 In addition to the above policy influenceson the performance of the banking sector, thevulnerability of financial institutions, particularlybanks, has increased on account of the much largerrange of activities that they need to undertake andfor which they may not be adequately prepared.Especially in the nationalised banking sector, eachbank is presently undertaking the full range ofbanking and other services for which they may notbe fully competent. Some of the areas where suchshortcomings are becoming increasingly apparentare project appraisal skills, particularly for non-industrial activities, treasury and portfoliomanagement skills, merchant banking skills andskills in operating in the foreign exchange andderivatives markets.

2.160 Assessing and managing a variety of risksis the core activity in banking. The whole spectrumof risk management functions has become far morecomplex in recent times as the businessenvironment in the real sector has turned moredynamic and competitive. Bankers must becompetent to assess and manage a wide varietyof risks like credit risks, market risks, interest and

foreign exchange risks, liquidity risks andoperational risks. Another factor adding to thecomplexity of managing banking business is thegrowing use of information and communicationtechnologies. These technologies are beingdeployed for developing a whole range of newerproducts and services in an increasingly competitiveenvironment, which goes beyond national borders.

2.161 There is a need to upgrade the level ofsuch skills in all segments of the financial sector,and most particularly in the nationalised banks.While formal training in these areas is necessary, itis not sufficient. In order to develop most of theseskills there has to be a considerable amount oflearning by doing experience, which can be acquiredonly gradually. In the private financial sector someof these problems have been addressed by hiringprofessionals with the requisite skills andqualifications. In the nationalised sector however,there are policy and other barriers to taking recourseto such solutions. This would put the nationalisedbanks at a disadvantage and, given the dominanceof this sector in the Indian economy, harm theinterest of their customers.

2.162 Human resource policies of public sectorbanks have to now take into consideration age andskill profiles of banking personnel and turn to theopen market for recruitment. While the voluntaryretirement scheme launched in the banking industrytwo years ago has addressed the first issue to someextent, merit-based recruitment is skill not practiced.Banks need to top up their skill base by resorting,on an ongoing basis, to lateral induction ofexperienced and skilled personnel, particularly forquick entry into new activities and areas.

2.163 One characteristic feature of theorganised financial sector in India, which is a causeof considerable concern, is the lack of free flow ofinformation within the financial system regarding thecreditworthiness of borrowers and solvency ofinstitutions. The high level of existing NPAs can insome measure be traced to this lacuna. Unlessinformation sharing and early warning systems areinstituted, the dangers to the financial system willget multiplied as the level of complexity of financialtransactions in the economy increases.


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2.164 Information management is an areawhere, globally, technology has played a very activerole and lack of readily available verifiableinformation proves to be a handicap for banks inrisk assessment. It is essential to have a broadinformation infrastructure that captures not onlyindividual and corporate information but alsotransactional information. This requires a newindustry of information service providers that woulddevelop and maintain relevant corporate andpersonal information that is easily accessible to allauthorised users. This calls for an environment thatfacilitates the collection of accurate creditinformation on a transparent basis. Banks wouldthen have an easily accessible matrix for riskassessment that will enable them to benchmark theirrisk-reward position with the rest of the system. Theformation of the Credit Information Bureau is apositive step in this direction and efforts should bemade to equip it sufficiently in order to fulfill itsdesired objective.

2.165 Finally, the liberalisation of the Indianeconomy, particularly with respect to foreigninvestment and external flow of funds, isexposing the Indian financial sector to issues thathave not been of great significance earlier. Inparticular, the Indian markets have extremelyslow operational and reaction speeds incomparison to the international market. Unlessthe speed of transaction in the Indian system isincreased significantly, it would expose the Indianfinancial institutions to vulnerabilities arising outof arbitrage and speculative behaviour. Theintroduction of modern banking and moneymanagement systems has to be of the highestpriority before further liberalisation of internationalfinancial flows can be contemplated.

2.166 Information technology and electronicfunds transfer system have emerged as the twinpillars of modern banking development. Productsoffered by banks have moved way beyondconventional banking, and access to these serviceshas become round-the-clock. Banks can now beaccessed on phone, internet and through ATMs

for most of the services required by customers.This indeed is a revolution in Indian banking butsome systemic changes are urgently required.Cyber laws and other procedures which arecommensurate with modern technology-basedbanking have to be put in place urgently andsufficient regulatory mechanism has also to beinstituted so that the fast strides in bankingautomation does not go on undesirable lines.

2.167 Corporate governance in banks andfinancial institutions has assumed greatimportance in India, and there is still some groundto cover in order to make all banking institutionssafe, sound and efficient. It is necessary thatinstitutions, which form a part of the financialsystem, have internal management, governanceand accountability structures, which measure upto the highest standards. Liberalisation andderegulation has given greater autonomy to thefinancial sector, particularly banks, in regard totheir maturity structure, interest rates and assetmanagement. Even as greater freedom impliesgreater responsibilities, there are more playersin the field today public sector banks, privatebanks, co-operatives, NBFCs, etc. where themarkets are more free but more competitive. Assome recent instances involving co-operativebanks have pointed out, contagion and systemicimplications are inevitable and here corporategovernance becomes crucial. Added to this isthe greater volatility in the inter-linked financialarchitecture where effects tend to beinstantaneous.

2.168 Some of the issues, which need to bedebated, are those of compatibility of corporategovernance with public ownership of banks andmaking the system accountable to economicinstitutions and regulators. It is essential to putappropriate mechanisms in place to enforceaccountability, asset liability management, earlywarning and prompt corrective action systems. Itis also imperative that there is complete alignmentbetween the goals of the management of the banksand the goals of shareholders.


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75

Overview

3.1. The chapter 2 of the volume has indicatedthe required level of public sector investments inthe Tenth Plan to be consistent with 8 per centgrowth of gross domestic product (GDP). Theseestimates form the basis for the minimum size ofpublic sector plan resources which are required tobe mobilised to achieve the plan objectives. Thischapter projects the public sector resources for theTenth Plan at Rs.15,92,300 crore (Rupees fifteenlakh, ninety-two thousand and three hundred crore,or approximately, Rs. 16 trillion) at 2001-02 prices.At comparable prices it amounts to an increase of67.4 per cent over the Ninth Plan realisation. Giventhe twin requirements of securing a sustainable debtburden and restricting the public sector draft onprivate savings to a reasonable limit, contributionof debt resources to the projected increase accountsfor 6.6 per cent only. Consequently, non-debtresources must contribute 93.4 per cent of theprojected increase in the Tenth Plan resources overthe Ninth Plan realization.

3.2. If the poor realisation of non-debtresources vis-à-vis the projections during the NinthPlan is anything to go by, the task of raising non-debt resources to the Tenth Plan target levels isquite difficult, although definitely not impossible.However, fiscal reforms in this regard assumecritical importance and are most crucial to attainingthe Tenth Plan targets. Reforms for raising the taxto GDP ratio, increasing user charges, compressingexpenditure on administration and establishmentand adherence to commercial principles by publicsector enterprises must attract focused attentionand generate time-bound results. This chapterreviews the Ninth Plan performance of both theCentre and States and Union Territories (UTs),projects the Tenth Plan resources, measures theincremental effort required over Ninth Planrealisation levels, proposes a set of policies for

attaining the Tenth Plan targets, and indicates theallocation of the public sector plan resources.

Resources of the Centre during the Ninth Plan

3.3. The Centre’s gross budgetary support(GBS) to the Ninth Plan was projected atRs.3,74,000 crore at 1996-97 prices includingRs.1,70,018 crore of Central assistance to theStates and UTs. With the Ninth Plan resources ofCentral Public Sector Units (CPSUs) projected atRs.2,85,379 crore, resources available for theCentral Plan was arrived at Rs.4,89,361 crore. TheNinth Plan realisation places the Centre’s GBS atRs.3,16,286 crore or 84.6 per cent of the projectedlevel. Central assistance to States’ and UTs wasrealised at Rs.1,38,394 crore or 81.4 per cent ofthe projected level. With realisation of CPSUsresources at Rs.2,28,795 crore or 80.2 per cent ofthe projected level, the resources available for theCentral Plan works out to 83.1 per cent of theprojected level or Rs.4,06,687 crore at 1996-97prices. Table 3.1 indicates the projection andrealisation of the Ninth Plan resources and itsfunding of the Centre.

3.4. The realised pattern of funding the GBSreflects a significant deterioration of non-debtcontribution vis-à-vis the Ninth Plan projections. Theshare of balance from current revenues (BCR) inGBS reduced to a negative 49.6 per cent as againsta projected share of a negative 0.7 per cent only.The realised share of borrowings therefore had toincrease to 144.1 per cent as against a projectedshare of 84.7 per cent, to bridge the BCR gap.

3.5. The 5,544 percent deterioration in BCRwas caused by stagnant level of revenue receiptsand substantial growth in non-plan revenueexpenditure (NPRE) in relation to GDP. Net Centralrevenues declined by 0.43 percentage points ofGDP from 9.23 per cent in 1996-97 to 8.80 in 2001-

CHAPTER 3

PUBLIC SECTOR PLAN : RESOURCES AND ALLOCATIONS


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02. Tax revenue (net) decreased by more than 1percentage point from 6.85 per cent in 1996-97 to5.80 per cent in 2001-02. The fall in tax revenue(net) could not be compensated by a 0.69percentage points increase in non-tax revenue from2.38 per cent to 3.07 per cent during the sameperiod. As against a 1.05 percentage points fall intax revenue (net), the gross tax revenue of theCentre fell by 1.21 percentage points from 9.41 percent in 1996-97 to 8.20 per cent in 2001-02. Thisimplied that the impact of the fall in gross Centraltax revenues on Central finances was somewhatshared with the States.

3.6. The deterioration of the gross Central taxrevenues in relation to GDP has given rise toconcern on the following issues.

l Shrinkage of the tax base, as implied byinadequate coverage of the service tax base.

l Growth in various types of tax concessions andexemptions.

l Increase in the coverage of Modified ValueAdded Tax (MODVAT) without upwardadjustment of tax rates.

l General slackening of the tax administrationleading to revenue leakage.

3.7. The NPRE grew rapidly by 1.30percentage points of GDP from 9.30 per cent in1996-97 to 10.60 per cent in 2001-02. Thebreakdown of this increase is summarised in Table3.2.

3.8. Almost 40 per cent of the increase inNPRE was due to the growth in pension and salarypayments brought about by the implementation ofthe Fifth Pay Commission’s recommendations.Along with the growth in subsidies and other NPRE,mainly comprising defence, the massivedeterioration of BCR was the outcome of thestagnant levels of Centre’s revenue receipts.Borrowings had to increase to bridge the gap, whichconsequently raised the interest burden and led tofurther increase in NPRE, resulting in still sharperdeterioration of BCR. Increase in interest paymentsaccounted for a quarter of the total growth of NPREduring the Ninth Plan.

3.9. The debt-servicing burden, as reflectedby the percentage of interest payments torevenue receipts, increased from 47.1 per centin 1996-97 to 50.5 per cent in 2001-02, underliningthe fragile sustainability of the Centre’s debtburden. The debt burden of the Centre increasedby almost 8 percentage points from 49.4 to 57.5

Table 3.1Ninth Plan Resources of the Centre

(Rs. crore at 1996-97 prices)

Sources of Funding Projection Realization % Realisation

1. Balance from current revenues -2,778 -1,56,790 -5,544.0(-0.7) (-49.6)

2. Borrowings including net MCR 3,16,760 4,55,624 143.8(84.7) (144.1)

3. Net inflow from abroad 60,018 17,452 29.1(16.0) (5.5)

4. Gross budgetary support to plan 3,74,000 3,16,286 84.6 (1 to 3) (100.0) (100.0)

5. Central assistance to States & UTs -1,70,018 -1,38,394 81.4(45.5) (43.8)

6. GBS for Central plan (4+5) 2,03,982 1,77,892 87.2

7. Resources of public sector enterprises 2,85,379 2,28,795 80.2

8. Resources for Central Plan (6+7) 4,89,361 4,06,687 83.1

Note : Figures in parentheses are percentage of Gross Budgetary Support .


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per cent of GDP during the same period. Thegross fiscal deficit of the Centre, which causedthis, grew from 4.88 per cent of GDP in 1996-97to 5.76 per cent in 2001-02, an increase of 0.88percentage points. Consequently, borrowings forfunding the GBS was 43.8 per cent above theprojected level.

3.10. The net inflow from abroad on governmentaccount, which is deployed for funding externallyaided projects (EAP) was projected to contribute16.0 per cent of the GBS in the Ninth Plan. However,its realization is placed at 29.1 per cent of the target,which reduces its realised share in plan resourcesto 5.5 per cent. The fall in net inflow from abroadhas been attributed to international sanctions,following the Pokharan nuclear tests and inadequateprovision for counterpart funding of EAP projectsthrough domestic resources.

3.11. Following from the lower realisation of theCentre’s GBS, Central assistance to the State andUT Plans also recorded a similar level ofachievement at around 81.4 per cent. Centralassistance as a percentage of GBS, which wasprojected at 45.5 per cent, declined to a level of43.8 per cent. The proportional impact of a shrinkingGBS on the quantum of Central assistance is clearlyin evidence here.

3.12. After accounting for the Centralassistance to States and UTs, the GBS left forthe Central sector Plan was projected to accountfor 41.7 per cent of the Central Plan resources.Internal and extra-budgetary resources (IEBR)of the CPSUs provided the remaining share at58.3 per cent. The realised share of IEBR in theNinth Plan is placed at 56.3 per cent indicating,

by and large, a similar deterioration as that ofGBS. In absolute terms, IEBR was realised at80.2 percent. Operational inefficiencies of theCPSUs accounted significantly for a lowerrealization of internal resources (IR).

Projection of the Tenth Plan (2002-07)Resources of the Centre

3.13. In keeping with the requirement ofstepping up public sector investments forattaining an 8 per cent GDP growth during theTenth Plan, the GBS of the Centre has beenprojected to grow from 4.33 per cent of GDP in2001-02 to 5.39 per cent in 2006-07. Thus, theTenth Plan projected average GBS stands at 4.93per cent of GDP as against the Ninth Planrealisation of 4.02 per cent.

3.14. Fiscal sustainability considerationsdemand a reduction in debt financing for funding ofGBS for the Tenth Plan. Accordingly, the grossfiscal deficit, which stood at 5.90 per cent of GDPin 2001-02 has been projected to reduce to 4.32per cent in 2006-07, obtaining a Tenth Plan averageof 4.73 per cent. The Ninth Plan average realisationhad stood at 5.82 per cent. The gross fiscal deficitis implicit in own borrowings, inclusive of netmiscellaneous capital receipts (MCR). Ownborrowings inclusive of MCR in the Tenth Plan areprojected at 4.78 per cent of GDP, down from 5.78per cent realised during the Ninth Plan. Net inflowfrom abroad, in the form of external assistance, isprojected at 0.19 per cent of GDP, slightlydiminished from 0.22 per cent realised during theNinth Plan.

3.15. The BCR is arrived at as a small negativeof 0.04 per cent of the GDP as against anegative1.98 per cent realised in the Ninth Plan.To achieve a BCR of this order, Central revenues(net) must grow from 8.80 per cent of GDP in 2001-02 to 9.98 per cent in 2006-07, an increase of 1.18percentage points. NPRE must come down from10.60 per cent of GDP in 2001-02 to 9.06 per cent,a decrease of 1.54 percentage points. Thus, animprovement of 2.72 percentage points in BCRduring the Tenth Plan is being sought mainly froma contraction of NPRE.

Table 3.2NPRE and its components of the Centre

(As a percentage of GDP)Items 1996-97 2001-02 Increase

1. Interest 4.35 4.69 0.34

2. Pension 0.37 0.64 0.273. Salary 0.48 0.76 0.28

4.Subsidies 1.13 1.33 0.20

5.Other NPRE 2.97 3.18 0.216.(Total) NPRE 9.30 10.60 1.30


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3.16. Central assistance to States and UTsduring the Tenth Plan has been projected at 42.5per cent of the Centre’s GBS. In relation to GDP,Central assistance to States and UTs is projectedat 2.09 percent in the Tenth Plan, up from 1.76per cent realised during the Ninth Plan. Afterdeducting Central assistance to States and UTs,GBS available for the Central Plan is arrived at2.82 per cent of GDP, an increase of 0.56percentage points over the Ninth Plan realizationof 2.26 per cent.

3.17. In order to meet the public sectorinvestment and savings requirements, IR of CPSUsis placed at 2.85 per cent of the GDP in the TenthPlan, up from 2.15 per cent realised during the NinthPlan. The railways and power sector CPSUs mustraise their operational efficiency to meet this target.The extra-budgetary resources (EBR) of CPSUswas projected at 0.75 per cent of the GDP, sameas the realised level obtained in the Ninth Plan.Thus, the IEBR of CPSUs is placed at 3.60 per centof GDP in the Tenth Plan.

3.18. With a GBS net of Central assistanceto State and UT plans projected at 2.79 per cent

and IEBR of CPSUs indicated at 3.60 per cent,resources available for the Central Plan arearrived at 6.39 per cent of GDP, up from 5.16per cent realized during the Ninth Plan, anincrease of 1.23 percentage points. Table 3.3indicates the resources of the Centre and itsfunding in the Tenth Plan.

3.19. The GBS of the Centre is placed atRs.7,06,000 crore at 2001-02 prices. Centralassistance to State & UT plans works out toRs.3,00,265 crore. After deducting Centralassistance to States and UTs, the GBS availablefor the Central plan is Rs.4,05,735 crore at 2001-02 prices. With an IEBR of CPSUs indicated atRs.5,15,556 crore at 2001-02 prices, totalresources available for the Central Plan isprojected at Rs.9,21,291 crore at 2001-02 prices.The Central Ministries have indicated an IEBRof Rs.4,87,448 crore, which falls short byRs.28,108 crore vis-à-vis the required IEBR. TheIEBR currently indicated by the Central Ministries,if taken in place of the projected IEBR, reducesthe Central resources for the Tenth Plan toRs.8,93,183 crore.

Table 3.3Projection of Tenth Plan Resources of the Centre


Sources of Funding Projection

1. Balance from Current Revenues -6,385(-0.9)

2. Borrowings including net MCR 6,85,185(97.0)

3. Net inflow from abroad 27,200(3.9)

4. Gross Budgetary Support to Plan(1 to 3) 7,06,000(100.0)

5. Central Assistance to States & UTs -3,00,265(42.5)

6. GBS for Central Plan (4+5) 4,05,735

7. Resources of Public Sector Enterprises 5,15,556

7.1. Internal Resources 4,09,0007.2. Extra Budgetary Resources 1,06,556

8. Resources for Central Plan (6+7) 9,21,291

Note : Figures in parentheses are percentage of GBS.


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3.20. A funding pattern as envisaged in Table3.3 is a challenging task, the extent of which couldbe gauged by comparing the Tenth Plan projectedlevels to the Ninth Plan realisation. Table 3.4indicates the Ninth Plan realization and the Tenth

Plan projection of resources of the Centre in relationto GDP.

3.21. The steps detailed in Box 3.1 will benecessary for achieving these targets.

BOX 3.1

l Comprehensive computerisation of the income tax system and universal usage of tax identificationnumbers in monetary transactions must be employed for facilitating improved enforcement of theincome-tax administration.

l The policy direction for removing unnecessary exemptions under corporate tax must continue sothat corporate income, liable to taxation, comes nearer to book profits as declared by the companies.

l The current policy of moving progressively to a truly single excise rate should continue to be pursuedwhile tightening up much more on existing exemptions, particularly those under small enterprises,all for improving tax compliance.

l The coverage of the service tax must be extended continuously under the union excise system sothat much greater tax buoyancy can be achieved through increased coverage of the economy as awhole.

l The extension of VAT at the State level must be taken up at the earliest for facilitating its integrationwith the Central VAT and bringing about harmonisation of tax rates levied by different tax jurisdictions.

l Peak customs tariff must be continuously lowered for enabling greater integration with the worldeconomy and consequently raising customs revenue through larger volumes of imports as wouldarise from expansion of international trade.

Table 3.4 Ninth Plan Realisation and Tenth Plan projection of Resources of Centre

(As a percentage of GDP)

Sources of Funding Ninth Plan realization Tenth Plan projections Increases(+)/Decreases(-)

1.Balance from Current Revenues -1.98 -0.04 (+)1.94

2.Borrowings including net MCR 5.78 4.78 (-)1.00

3. Net Inflow from Abroad 0.22 0.19 (-)0.03

4.Gross Budgetary Support to Plan 4.02 4.93 (+) 0.91

5.Central Assistance to States & UTs -1.76 -2.09 (-) 0.33

6.GBS for Central Plan (4+5) 2.26 2.84 (+) 0.57

7.Resources of Public Sector Enterprises 2.90 3.60 (+) 0.70

7.1. Internal Resources 2.15 2.85 (+) 0.70

7.2. Extra Budgetary Resources 0.75 0.75 -

8. Resources for Central Plan (6+7) 5.16 6.44 (+) 1.27


80

Resources of States and UTs during the NinthPlan (1997-2002)

3.22. The Ninth Plan resources of States andUTs were projected at Rs.3,69,839 crore at 1996-97 prices. At comparable prices, the realisation was

placed at Rs. 2,99,131 crore or 80.9 per cent of theprojected level. The realized pattern of fundinghowever, show wide divergences from the projectedlevels. Table 3.5 summarises the projection andrealisation of the Ninth Plan resources and theirsources of funding.

l User charges must be raised to cost recovery levels and made acceptable by a communicationcampaign to convince members of the general public that such a system would be in their ownoverall interest.

l The recommendation of the Expenditure Reforms Commission, on the road map provided by it forprogressive reduction in fertilizer subsidy, as also fully eliminating petroleum subsidy for reducingNPRE must be pursued.

l A change has to be made in the design of the food subsidy programme whereby a shift from the onebased on minimum support price to Food for Work Programme is taken for reducing as well aseffectively directing food subsidy.

l Curtailment in pay and allowances of the government must be pursued on a continuous basis as, inthe wake of the implementation of the Fifth pay Commission’s recommendations, downsizing hasbecome most critical to reducing NPRE.

l The operational efficiency of Indian Railways and the power sector CPSUs must be improved with aview to eventually eliminating all budgetary support and generating adequate internal resources forexpanding the transport and power facilities in the country.

Table 3.5Ninth Plan Resources of States and UTs

(Rs. crore at 1996-97 prices)Sources of Funding Projection Realisation % Realisation

1.Balance from Current Revenues 1,372 -1,06,962 -7,896.1(0.4) (-35.8)

2.Resources of Public Sector Enterprises 55,030 52,107 94.7(15.0) (17.4)

2.1. Internal Resources 14,890 -35,416 -337.9(4.1) (-11.8)

2.2. Extra-budgetary Resources 40,140 87,523 218.0(10.9) (29.2)

3.Borrowings including net MCR 1,43,419 2,15,592 150.3(38.6) (72.1)

4. States’ Own Resources (1 to 3) 1,99,821 1,60,737 80.4(54.0) (53.7)

5.Central Assistance 1,70,018 1,38,394 81.4(46.0) (46.3)

6.Aggregate Plan Resources (4 + 5) 3,69,839 2,99,131 80.9(100.0) (100.0)

Note : Figures in parentheses are percentage of aggregate plan resources.


81

3.23. As indicated in the Table, the BCRdeteriorated by 7,896.1 per cent, significantlydrawing borrowings away from plan resources.Borrowings therefore had to increase to 150.3 percent of the projected level in order to provide somesupport to plan resources. The Ninth Plan saw aconsiderable shift from non-debt to debt funding.The non-debt funding reflected by BCR, which wasprojected to contribute a small surplus realised acontribution of negative 35.8 per cent.Consequently, borrowings, which were projected tocontribute 38.6 per cent, ended up contributing 72.1per cent of the Ninth Plan resources.

3.24. Available evidence suggests thatdeterioration of BCR was a result of both revenueand expenditure related slippages. The growth inNPRE was much more than the growth in currentrevenues during the Ninth Plan period. Theimplementation of the Fifth Pay Commission’srecommendations significantly contributed to therapid growth of NPRE. In one single year, salaryand pension payments rose by almost one-third ofthe pre-Pay Commission level. The effect couldhave been largely mitigated but for the inability inreducing the staff strength. Further, interestpayments in the terminal year of the Ninth Plan roseby as much as two and a half times the base yearlevel in absolute terms, due to mobilisation of largeborrowings.

3.25. Under revenue receipts, States’ share ofCentral taxes reduced by 0.14 percentage pointsof GDP across the Ninth Plan period. This was dueto industrial recession, which could not impart muchbuoyancy to the growth in union excise revenues.Revenue losses on account of expansion in thecoverage of MODVAT without commensurateupward adjustment of tax rates has also beenargued as another reason behind the falling ratio ofthe Centre’s gross tax revenue to GDP. Own taxrevenues of States and UTs also failed to exceedthe buoyancy factor of 1. Excessive tax competitionamong States resulting in lowering of tax rates aswell as various fiscal concessions provided to attractindustrial investment were instrumental in notboosting the own tax revenues. Growth in own non-tax revenues was driven down due to the Centre’sinability to raise royalty rates on minerals. Statesand UTs also could not raise user charges

adequately on irrigation and other departmentalservices.

3.26. Contribution of the resources of Statepublic sector enterprises (SPSEs) was realised at94.7 per cent of the projected level. The realizationhowever could have significantly exceeded 100 percent had it not been for the deterioration of IR. TheIR of SPSEs, which were projected to contribute4.1 per cent of plan resources, realized acontribution of negative 11.8 per cent. Thedeterioration of almost 16 percentage points in IRwas largely funded by an increase in the contributionof EBR of PSEs. The contribution of EBR to planresources, which was projected at 10.9 per centrealised a contribution of 29.2 per cent, an increaseof almost 19 percentage points.

3.27. The deterioration in IR brings into focusthe poor performance of State Electricity Boards(SEBs), whose current costs have increasinglyfailed to be covered by current revenues.Unproductive expenditure on administration andestablishment has grown rapidly withoutcommensurate increase in user charges. Suchevents accentuate the importance of power sectorreforms, which should enable SEBs to earn at leasta minimum rate of 3 per cent on their assets.

3.28. The trebling of the contribution of EBR toplan resources vis-à-vis the Ninth Plan projections,despite a massive deterioration of IR implies animprudent use of guarantees, which States issuefor SPSEs to raise borrowings. The contingentliability embodied in the issue of guarantees is mostlikely to fall on State budgets if SPSEs do notimprove the mobilisation of internal resources. Insuch an event, the fiscal balance of States’ financescan come under severe strain.

3.29. As against a projected contribution of 38.6per cent of borrowings to plan resources, Ninth Planrealisation places it at 72.1 per cent, an increase ofalmost 34.0 percentage points. Unfortunately, sucha sizeable growth in borrowings was used tobridging the BCR gap rather than augmenting planresources. Rapid increase in borrowings also ledto an increase in public sector draft on privatesavings as is implied by growth in States’outstanding debt as a percentage of GDP from 17.8


82

per cent in the beginning to 25.9 percent at the endof the Ninth Plan. Simultaneously, a larger debtburden increasingly became unsustainable, as theaccompanying growth of interest payments was notmatched by a commensurate growth in revenues.Interest payments as a percentage of revenuereceipts increased from 16.7 per cent in thebeginning to 22.8 per cent at the end of the NinthPlan.

3.30. Central assistance to States and UTsrealised 81.4 per cent of the projected level.However, its realised contribution to plan resourcesremained the same as the projected contributionat around 54 per cent. The significance of GBS toStates and UTs Plan remained unchanged duringthe Ninth Plan period. However, a shortfall inabsolute terms underlines the growing budgetarystrain of the Centre in meeting the targets of Centralassistance.

Projection of Tenth Plan (2002-07) Resourcesof States and UTs

3.31. In keeping with the requirement ofstepping up public sector investment for attainingan 8 per cent GDP growth during the Tenth Plan,budgetary resources for the States & UTs plan hasbeen projected to grow from 3.85 per cent of GDPin 2001-02 to 4.20 per cent in 2006-07. The TenthPlan average stands at 4.10 per cent, as againstthe Ninth Plan realization of 3.14 per cent.

3.32. The fiscal sustainability of States and UTsis considerably more vulnerable than for the Centreand requires greater fiscal correction. Accordingly,the gross fiscal deficit, which stood at 4.47 per centof GDP in 2001-02 has been projected to reduce to2.19 per cent in 2006-07, obtaining a Tenth Planaverage of 3.19 per cent. The Ninth Plan averagehad stood at 3.37 per cent. The projected target ofgross fiscal deficit is implicit in own borrowingsinclusive of MCR and the loan component of Centralassistance. Own borrowings inclusive of MCR inthe Tenth Plan are arrived at 1.82 per cent of GDP,down from 2.74 per cent realised during the NinthPlan. Central assistance in the Tenth Plan is placedat 2.09 per cent of GDP, up from 1.76 per centrealized during the Ninth Plan.

3.33. BCR is arrived at 0.19 per cent of GDP.To achieve a BCR of this order, non-plan revenuereceipts must grow from 10.27 per cent of GDP in2001-02 to 11.00 per cent in 2006-07, an increaseof 0.73 percentage points. NPRE must come downfrom 12.15 per cent of GDP in 2001-02 to 10.32per cent, a decrease of 1.83 percentage points.Thus an improvement of 2.56 percentage points inBCR during the Tenth Plan is mainly sought from acontraction of NPRE.

3.34. IR and EBR of SPSEs were determined inconsultation with State Governments. The need forimproving IR, particularly of SEBs was emphasized.Accordingly, IR was projected at –0.05 per cent ofGDP for the Tenth Plan, a much improved level from–0.45 per cent realised during the Ninth Plan. After aconsidered view, which favored a reduction in thecontingent liabilities of States and UTs, EBR wasprojected at 0.63 per cent of GDP in the Tenth Plan,down from 1.11 per cent realised during the NinthPlan. Total resources of SPSEs in the Tenth Plan aretherefore projected at 0.58 per cent of GDP, slightlydiminished from 0.66 per cent realised during the NinthPlan. Table 3.6 indicates the Tenth Plan resourcesand its funding of States and UTs in the Tenth Plan.

Table 3.6Tenth Plan Projection of Resources of States and UTs

(Rs.crore at 2001-02 prices)Sources of Funding Tenth Plan

Projections

1.Balance from Current Revenues 26,578(4.0)

2.Resources of Public Sector Enterprises 82,684(12.3)

2.1. Internal Resources -7,760(-1.2)

2.2. Extra-budgetary Resources 90,444(13.5)

3.Borrowings including net MCR 2,61,482(39.0)

4. States’ Own Resources (1 to 3) 3,70,744(55.3)

5.Central Assistance 3,00,265(44.7)

6.Aggregate Plan Resources (4 + 5) 6,71,009(100.0)

Note : Figures in parentheses are percentage of aggregateplan resources.


83

3.35. Aggregate plan resources of States and UTsare arrived at Rs.6,71,009 crore at 2001-02 prices,comprising Rs.3,70,744 crore of own resources andRs.3,00,265 crore of Central assistance. Of the totalaggregate plan resources, budgetary resources areplaced at Rs.5,88,325 crore.

3.36. A funding pattern, as envisaged is ademanding task, whose extent could be gaugedby comparing the Tenth Plan projected levels toNinth Plan realization. Table 3.7 indicates the NinthPlan realisation and Tenth Plan projection ofresources of the States and UTs in relation to GDP.

3.37. The steps detailed in Box 3.2 arenecessary to achieve these targets.

3.38. The Planning Commission helddiscussions with States and UTs about projectingthe core Tenth Plan resources. The projection ofthe core Tenth Plan resources was at a level lowerthan what was required to achieve 8 per cent growthof GDP. This was due to the apprehension thatimprovement in BCR, as required under the 8 percent GDP growth scenario may not be achievable.Thus, as against a BCR of 0.20 per cent in the 8per cent growth scenario, core plan resources

BOX 3.2

l Improving tax/GDP ratio of the Centre and States/UTs through inclusion of services in the tax base,removal of tax exemptions and concessions, harmonisation of tax rates, tightening of taxadministration, and adopting an integrated VAT regime.

l Reduction of budget-based subsidies by raising user charges of departmental services, reducingexpenditure by cutting administrative and establishment cost and privatization and through Centre’sinitiative switching over to ad valorem rates of royalty on minerals.

l Reducing staff strength through adoption of a policy of net attrition and constituting a pension andamortisation fund to make committed payments like terminal benefits and debt servicing, self-financing.

l Enacting a ‘Fiscal Responsibility and Budget Management’ bill under which borrowings shall berestricted to attain a non-rising debt to GDP ratio from current levels in order to reduce the burden ofinterest payments.

l Improving internal resources of States PSUs by implementing power sector reforms and reducingthe burden of contingent liabilities on State budgets through a legislative or administrative ceiling onthe issue of State guarantees.

Table 3.7Ninth Plan Realisation and Tenth Plan Projection of Resources of States and UTs

(As a percentage of GDP)

Sources of Funding Ninth Plan Realisation Tenth Plan Projections Increases(+)/Decreases(-)

1.Balance from Current Revenues -1.36 0.20 (+)1.56

2.Resources of Public Sector Enterprises 0.66 0.58 (-) 0.08

2.1. Internal Resources -0.45 -0.05 (+) 0.40

2.2. Extra-budgetary Resources 1.11 0.63 (-) 0.48

3.Borrowings including net MCR 2.74 1.82 (-) 0.92

4. States’ Own Resources (1 to 3) 2.04 2.60 (+) 0.56

5.Central Assistance 1.76 2.09 (+) 0.33

6.Aggregate Plan Resources (4 + 5) 3.80 4.69 (+) 0.89


84

indicated its level at negative 0.11 per cent. Furtherit was also recognised that the level of Centralassistance indicated at 2.09 per cent of GDP mayalso not be available if the Centre’s GBS fails torise to the Tenth Plan projected levels.Consequently, the core plan resources arrived at aCentral assistance level of 1.80 per cent of GDP,by and large the same level realized in the NinthPlan. Table 3.8 gives a break-down of the fundingof plan resources of States and UTs under the coreplan scenario.

3.39. The core Tenth Plan resources of Statesand UTs are projected at Rs.5,90,948 crore,Rs.80,061 crore less than the level consistentwith the 8 per cent GDP growth scenario. To be

consistent with the 8 per cent growth target,States and UTs are required to raise Rs. 38,553crore of own resources and the Centre requiredto provide Rs. 41,508 crore of Central assistanceto make up for the balance. States & UTs wisedisbursement of the Central assistancecomponent of the balance, inter-alia, may haveto be linked to their respective abilities inmobilising the own resources component.

Overall Financing Pattern

3.40. Table 3.9 revisits the Ninth Plan realisationlevels of plan resources of the Centre and Statesand UTs. Total resources realised for the public

Table 3.8Core Tenth Plan Resources of States & UTs

(Rs.crore at 2001-02 prices)

Sources of Funding States UTs(1) UTs(2) Total

1.Balance from Current Revenues -37,099 21,804 - -15,295

2.Resources of Public Sector Enterprises 85,566 -2,882 - 82,6842.1. Internal Resources -4,878 -2,882 - -7,760

2.2. Extra-budgetary Resources 90,444 - - 90,444

3.Borrowings including net MCR 2,62,013 2,789 - 2,64,8024. States’ Own Resources (1 to 3) 3,10,480 21,711 - 3,32,191

5.Central Assistance 2,51,093 3,195 4,469 2,58,757

6.Aggregate Plan Resources (4 + 5) 5,61,573 24,906 4,469 5,90,948

Note : UTs(1)-With Legislature; UTs(2)-Without Legislature.

Table 3.9 Ninth Plan Realiastion of Resources for the Public Sector Plan

(Rs. crore at 1996-97 prices)Sources of Funding Centre States / UTs Total

1.Balance from Current Revenues -1,56,790 -1,06,962 -2,63,752

2.Borrowings including net MCR 4,55,624 2,15,592 6,71,2163. Net Inflow from Abroad 17,452 - 17,452

4.Centre’s GBS (1+2+3) 3,16,286 - -

5.Resources of Public Sector Enterprises 2,28,795 52,107 2,80,9025.1. Internal Resources 1,69,046 -35,416 1,33,630

5.2. Extra budgetary Resources 59,749 87,523 1,47,272

6. States’ Own Resources (1+2+5) - 1,60,737 -

7.Central Assistance to States & UTs -1,38,394 1,38,394 -

8. Resources for the Public Sector Plan (1+2+3+5+7) 4,06,687 2,99,131 7,05,818

Note : The Centre’ GBS available for the Central Plan works out to Rs.177892 crore.


85

sector’s Ninth Plan indicates the large presence ofnegative BCR, which has been bridged by asubstantially high level of borrowings. Had the BCRrealisation been in alignment with what wasprojected, the contracted borrowings would havesignificantly stepped up the resources for the publicsector plan, much higher than what was projected.In that event, the increase in overall debt burdenwould have been accompanied by a larger publicsector investment, which would have built theproductive capacities of the economy rather thanfunding the consumption expenditure of thegovernment.

3.41. Table 3.10. projects the overall resourcesfor the Tenth Plan on the presumption that thenegative BCR gap would be erased, leavingborrowings exclusively for the public sectorinvestment and not for meeting the consumptionexpenditure of the government. The projection alsorequires the public sector enterprises to substantiallyenhance their internal resources for limiting the needfor raising EBR.

Allocation of Public Sector Resource

3.42. The projected requirement of resourcesof the public sector for the Tenth Plan atRs.15,92,300 crore at 2001-02 prices comprisethe Centre’s share at Rs.9,21,291 crore and

States and UTs share at Rs.6,71,009 crore. Theresources for the Central Plan includes the GBScomponent of Rs.4,05,735 crore and the IEBRcomponent of Rs.5,15,556 crore. The IEBRcomponent as currently assessed by CentralMinistries is Rs.4,87,448 crore, which isRs.28,108 crore lower than the level consistentwith the 8 percent growth of GDP in the TenthPlan.. Thus, the resource allocation in the Centralsector amounts to Rs.8,93,183 crore, which isindicated in Annexure 3-A with details ofbudgetary support and IEBR furnished inAnnexure 3-B.

3.43. The Tenth Plan resources of the Statesand UTs are projected at Rs.6,71,009 crore at2001-02 prices. Core plan estimates, however,arrive at a resource figure of Rs.5,90,948 crore,leaving a balance of Rs.80,061 crore. Sectoralallocation in the States/UTs sector includes thecore plan resources and the Central Assistancecomponent of the balance, that is, Rs.41,508crore. This component has been allocated tocertain critical sectors identified by the PlanningCommission. The allocation of the own resourcescomponent of the balance, which is placed at Rs.38,553 crore, will have to await its actualmobilization by the States and UTs.Consequently, sectoral allocations in the States/UTs sector is arrived at Rs.6,32,456 crore. This

Table 3.10Tenth Plan Projection of Resources for the Public Sector Plan


Sources of Funding Centre States/UTs Total

1.Balance from Current Revenues -6,385 26,578 20,193

2.Borrowings including net MCR 6,85,185 2,61,482 9,46,667

3. Net Inflow from Abroad 27,200 - 27,200

4.Centre’s GBS (1+2+3) 7,06,000 - 7,06,000

5.Resources of Public Sector Enterprises 5,15,556 82,684 5,98,240

5.1. Internal Resources 4,09,000 -7,760 4,01,240

5.2. Extra budgetary Resources 1,06,556 90,444 1,97,000

6. States’ Own Resources (1+2+5) - 3,70,744 -

7.Central Assistance to States & UTs -3,00,265 3,00,265 -

8.Resources for the Public Sector Plan (1+2+3+5+7) 9,21,291 6,71,009 15,92,300

Note : The Centre’s GBS available for the Central Plan works out to Rs.4,05,735 crore.Allocations of Public Sector Resources.


86

allocation in the States/UTs sector is indicated inAnnexure 3-A with States/UTs wise core plan detailsfurnished in Annexure 3-C. Annexure 3-D indicatesthe details of Central assistance component of thebalance in the States/UTs sector.

3.44. Thus, as against the public sectorresources of Rs.15,92,300 crore for the Tenth Plan,allocations aggregate to Rs.15,25,639 crore. Table3.11 indicates the resources and allocation of thepublic sector Tenth Plan.

Table 3.11Public Sector Resources & Allocations

Tenth Plan (2002-07) (Rs. crore at 2001-02 prices)

Sources of funding Required Allocated

CENTRE1. Budgetary Support 4,05,735 4,05,7352. IEBR 5,15,556 4,87,4483. Total-Centre (1+2) 9,21,291 8,93,183

STATES & UTs4. Core Plan 5,90,948 5,90,9485. Balance (5.1+5.2) 80,061 41,5085.1 Own Resources 38,553 -5.2 Central Assistance 41,508 41,5086.Total-States & UTs (4+5) 6,71,009 6,32,456

TOTAL PUBLIC SECTOR7. Grand Total (3+6) 15,92,300 15,25,639


87

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istr

y/D

epar

tmen

tB

ud

get

ary

Su

pp

ort

IEB

RT

ota

l O

utl

ay

Nin

thT

enth

Nin

thT

enth

Nin

thT

enth

Pla

nP

lan

%P

lan

Pla

n%

Pla

nP

lan

%R

ealiz

atio

nP

roje

ctio

ns

Incr

ease

Rea

lizat

ion

Pro

ject

ion

sIn

crea

seR

ealiz

atio

nP

roje

ctio

ns

Incr

ease

1.

2.

3.4

.5

.6.

7.

8.

9.

1.A

gric

ultu

re &

Coo

pera

tion

8308

1320

058

.9-

--

8308

1320

058

.9

2.A

gric

ultu

re R

esea

rch

& E

duca

tion

2673

5368

100.

8-

--

2673

5368

100.

8

3.A

nim

al H

usba

ndry

& D

airy

ing

1027

2500

143.

4-

--

1027

2500

143.

4

4.A

gro

& R

ural

Indu

strie

s26

7529

5010

.3-

--

2675

2950

10.3

5.A

tom

ic E

nerg

y67

7121

550

218.

316

7110

820

547.

584

4232

370

283.

4

6.C

hem

ical

s &

Pet

ro-C

hem

ical

s19

130

057

.155

1627

44-5

0.3

5707

3044

-46.

7

7.Fe

rtiliz

ers

1013

1050

3.7

4474

4850

8.4

5487

5900

7.5

8.C

ivil

Avia

tion

204

400

96.1

9228

1252

835

.894

3212

928

37.1

9.C

oal

2233

1050

-53.

014

823

3054

110

6.0

1705

631

591

85.2

10.

Min

es95

012

7133

.848

7381

8768

.058

2394

5862

.4

11.

Com

mer

ce18

7645

4714

2.4

169

15-9

1.1

2045

4562

123.

1

12.

Indu

stria

l Pol

icy

& P

rom

otio

n21

1320

00-5

.3-

--

2113

2000

-5.3

13.

Info

rmat

ion

Tech

nolo

gy12

3627

1411

9.6

619

2778

348.

818

5554

9219

6.1

14.

Pos

t44

313

5020

4.7

--

-44

313

5020

4.7

15.

Tele

com

mun

icat

ions

915

1500

63.9

8643

585

484

-1.1

8735

086

984

-0.4

16.

Food

& P

ublic

Dis

tribu

tion

236

250

5.9

620

485

-21.

885

673

5-1

4.1

17.

Con

sum

er A

ffairs

5255

5.8

--

-52

555.

8

18.

Dis

inve

stm

ent

--

--

--

-0

-

19.

Dev

elop

men

t of N

orth

-Eas

tern

Reg

ion

-15

0-

--

--

150

-


89

Con

td. A

nnex

ure

: 3-B

Min

istr

y/D

epar

tmen

tB

ud

get

ary

Su

pp

ort

IEB

RT

ota

l O

utl

ay

Nin

thT

enth

Nin

thT

enth

Nin

thT

enth

Pla

nP

lan

%P

lan

Pla

n%

Pla

nP

lan

%R

ealiz

atio

nP

roje

ctio

ns

Incr

ease

Rea

lizat

ion

Pro

ject

ion

sIn

crea

seR

ealiz

atio

nP

roje

ctio

ns

Incr

ease

1.

2.

3.4

.5

.6.

7.

8.

9.

20.

Env

ironm

ent &

For

ests

3186

5945

86.5

9-

--

3186

5945

86.5

9

21.

Exte

rnal

Affa

irs18

0328

1155

.9-

--

1803

2811

55.9

22.

Eco

nom

ic A

ffairs

2931

300

-89.

8-

--

2931

300

-89.

8

23.

Exp

endi

ture

152

-86.

7-

--

152

-86.

7

24.

Rev

enue

31

-66.

7-

--

31

-66.

7

25.

Food

Pro

cess

ing

Indu

strie

s21

665

020

0.9

--

-21

665

020

0.9

26.

Hea

lth53

1492

5374

.1-

--

5314

9253

74.1

27.

Fam

ily W

elfa

re15

088

2712

579

.8-

--

1508

827

125

79.8

28.

Indi

an S

yste

ms

of M

edic

ine

& H

omeo

path

y32

277

514

0.7

--

-32

277

514

0.7

29.

Hea

vy I

ndus

try95

870

0-2

6.9

1649

1363

-17.

326

0720

63-2

0.9

30.

Pub

lic E

nter

pris

es-

50-

--

--

50-

31.

Hom

e A

ffairs

707

2000

182.

9-

--

707

2000

182.

9

32.

Ele

men

tary

Edu

catio

n &

Lite

racy

2379

230

000

26.1

--

-23

792

3000

026

.1

33.

Sec

onda

ry E

duca

tion

& H

ighe

r Edu

catio

n-

1382

5-

--

--

1382

5-

34.

Wom

en &

Chi

ld D

evel

opm

ent

6729

1378

010

4.8

--

-67

2913

780

104.

8

35.

Info

rmat

ion

& B

road

cast

ing

965

2380

146.

622

0927

5024

.531

7451

3061

.6

36.

Labo

ur51

015

0019

4.1

--

-51

015

0019

4.1

37.

Com

pany

Affa

irs1

5049

00.0

--

-1

5049

00.0

38.

Just

ice

397

700

76.3

--

-39

770

076

.3

39.

Non

-Con

vent

iona

l Ene

rgy

Sou

rces

1721

4000

132.

421

4031

6748

.038

6171

6785

.6

40.

Oce

an D

evel

opm

ent

498

1125

125.

9-

--

498

1125

125.

9


90

Con

td. A

nnex

ure

: 3-B

Min

istr

y/D

epar

tmen

tB

ud

get

ary

Su

pp

ort

IEB

RT

ota

l Ou

tlay

Nin

thT

enth

Nin

thT

enth

Nin

thT

enth

Pla

nP

lan

%P

lan

Pla

n%

Pla

nP

lan

%R

ealiz

atio

nP

roje

ctio

ns

Incr

ease

Rea

lizat

ion

Pro

ject

ion

sIn

crea

seR

ealiz

atio

nP

roje

ctio

ns

Incr

ease

1.

2.

3.4

.5

.6.

7.

8.

9.

41.

Per

sonn

el, P

ublic

Grie

vanc

es &

Pen

sion

s78

250

220.

5-

--

7825

022

0.5

42.

Pet

role

um &

Nat

ural

Gas

-

-

-

7033

810

3656

47.4

7033

810

3656

47.4

43.

Pla

nnin

g C

omm

issi

on61

434

0-4

4.6

--

-61

434

0-4

4.6

44.

Pow

er14

907

2500

067

.729

785

1183

9929

7.5

4469

214

3399

220.

9

45.

Rai

lway

s16

491

2760

067

.434

120

3300

0-3

.350

611

6060

019

.7

46.

Roa

d Tr

ansp

ort &

Hig

hway

s19

393

3500

080

.518

279

2470

035

.137

672

5970

058

.5

47.

Drin

king

Wat

er S

uppl

y80

5214

200

76.4

--

-80

5214

200

76.4

48.

Land

Res

ourc

es24

0465

2617

1.5

--

-24

0465

2617

1.5

49.

Rur

al D

evel

opm

ent

4327

356

748

31.1

--

-43

273

5674

831

.1

50.

Bio-

Tech

nolo

gy66

914

5011

6.7

--

-66

914

5011

6.7

51.

Sci

ence

& T

echn

olog

y16

3534

0010

8.0

11-

-16

4634

0010

6.6

52.

Sci

entif

ic &

Indu

stria

l Res

earc

h14

7825

7574

.2-

--

1478

2575

74.2

53.

Shi

ppin

g69

623

5023

7.6

63

50

1187

086

.93

7045

.87

1422

010

1.8

54.

Sm

all S

cale

Indu

strie

s-

2200

-66

638

4-4

2.3

666

2584

288.

0

55.

Soc

ial J

ustic

e &

Em

pow

erm

ent

5404

8530

57.8

--

-54

0485

3057

.8

56.

Spac

e70

9713

250

86.7

--

-70

9713

250

86.7

57.

Sta

tistic

s &

Pro

gram

me

Impl

emen

tatio

n21

572

523

7.2

--

-21

572

523

7.2

58.

Stee

l85

65-2

3.5

8882

1097

823

.689

6711

043

23.2

59.

Text

iles

1836

3500

90.6

4280

90.5

1878

3580

90.6

60.

Tour

ism

640

2900

353.

117

1-

-81

129

0025

7.6


91

Con

td. A

nnex

ure

: 3-B

Min

istr

y/D

epar

tmen

tB

ud

get

ary

Su

pp

ort

IEB

RT

ota

l O

utl

ay

Nin

thTe

nth

Nin

thTe

nth

Nin

thTe

nth

Pla

nP

lan

%P

lan

Pla

n%

Pla

nP

lan

%R

ealiz

atio

nPr

ojec

tions

Incr

ease

Rea

lizat

ion

Proj

ectio

nsIn

crea

seR

ealiz

atio

nPr

ojec

tions

Incr

ease

1.2.

3.

4.5.

6.

7.8.

9.

61.

Cul

ture

740

1720

132.

4 -

--

740

1720

132.

4

62.

Trib

al A

ffairs

654

1754

168.

2

-

-

-65

417

5416

8.2

63.

Urb

an D

evel

opm

ent

4754

7000

47.2

2571

5168

101.

073

2512

168

66.1

64.

Urb

an E

mpl

oym

ent &

Pov

erty

Alle

viat

ion

1150

4050

252.

286

4413

501

56.2

9794

1755

179

.2

65.

Wat

er R

esou

rces

1955

3600

84.1

-

-

-

1955

3600

84.1

66.

Yout

h Af

fairs

& S

ports

980

1825

86.2

-

-

-

980

1825

86.2

To

tal

2332

7240

5735

73.9

3142

8548

7448

55.0

954

7557

8931

8365

.0


92

Ann

exur

e : 3

-C

Ten

th P

lan

(20

02-0

7) O

utl

ays

by

Sta

tes/

UT

s(M

ajo

r H

ea

ds

of

De

ve

lop

me

nt)

(Rs.

Cro

re a

t 200

1-02

pric

es)

Se

cto

rs/S

tate

sA

nd

hra

Aru

nac

hal

As

sa

mB

ihar

Ch

att

is-

Go

aG

uja

rat

Har

yan

aH

imac

hal

J &

KJ

ha

rkh

an

dK

arn

atak

aK

eral

aP

rad

es

hP

rad

es

hg

arh

Pra

de

sh

1.2.

3.4.

5.6.

7.8.

9.10

.11

.12

.13

.

1.Ag

ricul

ture

& A

llied

Activ

ities

2333

.21

515.

3166

4.98

536.

1186

0.97

158.

3435

48.7

146

9.53

1201

.69

1507

.80

824.

8523

46.9

411

25.0

0(5

.0)

(13.

3)(8

.0)

(2.6

)(7

.8)

(4.9

)(8

.9)

(4.6

)(1

1.7)

(10.

4)(5

.6)

(5.4

)(4

.7)

2.R

ural

Dev

elop

men

t45

92.0

715

8.17

582.

6141

36.5

011

58.9

184

.50

1361

.94

305.

8543

8.16

374.

1032

72.3

322

27.7

256

9.75

(9.9

)(4

.1)

(7.0

)(1

9.7)

(10.

5)(2

.6)

(3.4

)(3

.0)

(4.3

)(2

.6)

(22.

4)(5

.1)

(2.4

)

3.Sp

ecia

l Are

a Pr

ogra

mm

e11

23.5

265

.00

56.4

040

.69

0.00

18.0

038

.30

147.

3720

.80

771.

870.

0064

0.74

100.

00(2

.4)

(1.7

)(0

.7)

(0.2

)(0

.6)

(0.1

)(1

.4)

(0.2

)(5

.3)

(1.5

)(0

.4)

4.Irr

igat

ion

& Fl

ood

Con

trol

1084

4.98

184.

3764

5.33

6016

.87

2506

.65

222.

9088

10.0

515

41.0

445

3.18

805.

7920

76.7

014

176.

5793

0.00

(23.

3)(4

.7)

(7.8

)(2

8.7)

(22.

8)(7

.0)

(22.

0)(1

5.0)

(4.4

)(5

.6)

(14.

2)(3

2.5)

(3.9

)

5.En

ergy

7141

.72

498.

1283

7.04

2735

.44

133.

2540

5.00

6018

.93

1400

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1235

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2885

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814.

0022

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535

00.0

0(1

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(12.

8)(1

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7)(1

5.0)

(13.

6)(1

2.0)

(19.

9)(5

.6)

(5.2

)(1

4.6)

6.In

dust

ry &

Min

eral

s16

55.1

176

.36

237.

0424

1.50

214.

1211

6.40

2068

.45

84.3

410

4.73

435.

6547

3.87

1452

.87

1328

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(3.6

)(2

.0)

(2.9

)(1

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(1.9

)(3

.6)

(5.2

)(0

.8)

(1.0

)(3

.0)

(3.2

)(3

.3)

(5.5

)

7.Tr

ansp

ort

3994

.19

824.

4287

9.32

1303

.12

451.

6439

2.84

1851

.39

1286

.65

1635

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1640

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1287

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4854

.44

2660

.00

(8.6

)(2

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(10.

6)(6

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2.3)

(4.6

)(1

2.5)

(15.

9)(1

1.3)

(8.8

)(1

1.1)

(11.

1)

8.C

omm

unica

tions

0.00

0.00

0.00

0.00

0.00

0.00

34.0

50.

002.

110.

000.

000.

000.

00(0

.09)

(0.0

2)

9.Sc

ienc

e, T

echn

olog

y &

11.2

04.

628.

150.

0010

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4.75

326.

018.

486.

4236

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330.

0025

.78

120.

00En

viro

nmen

t(0

.0)

(0.1

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(0.1

)(0

.1)

(0.8

)(0

.1)

(0.1

)(0

.2)

(2.3

)(0

.1)

(0.5

)

10.

Gen

eral

Eco

nom

ic S

ervi

ces

804.

8023

1.70

217.

5935

2.89

169.

1915

9.75

838.

8751

2.35

223.

7417

34.9

118

9.52

895.

6311

68.0

5(1

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(6.0

)(2

.6)

(1.7

)(1

.5)

(5.0

)(2

.1)

(5.0

)(2

.2)

(12.

0)(1

.3)

(2.1

)(4

.9)

11.

Soci

al S

ervi

ces

1363

4.04

1239

.33

4157

.11

5076

.73

5256

.15

1526

.52

1508

9.45

4311

.08

4893

.48

4016

.43

4847

.14

1418

2.98

4360

.45

(29.

2)(3

1.9)

(50.

0)(2

4.2)

(47.

8)(4

7.7)

(37.

7)(4

1.9)

(47.

5)(2

7.7)

(33.

1)(3

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2)

12.

Gen

eral

Ser

vice

s47

9.16

90.9

229

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560.

1523

8.29

111.

0020

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217.

8484

.75

290.

8251

6.69

487.

6081

38.0

0(1

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(2.7

)(2

.2)

(3.5

)(0

.1)

(2.1

)(0

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(2.0

)(3

.5)

(1.1

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3.9)

GR

AN

D T

OTA

L46

614.

0038

88.3

283

15.2

421

000.

0011

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0032

00.0

040

007.

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285.

0010

300.

0014

500.

0014

632.

7443

558.

2324

000.

00(1

00.0

)(1

00.0

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00.0

)(1

00.0

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00.0

)(1

00.0

)(1

00.0

)(1

00.0

)(1

00.0

)(1

00.0

)(1

00.0

)(1

00.0

)(1

00.0

)


93

Con

td. A

nnex

ure

: 3-C

Se

cto

rs/S

tate

sM

adh

yaM

aha-

Ma

nip

ur

Me

gh

a-

Miz

o-

Nag

a-O

ris

sa

Pu

nja

bR

ajas

than

Sik

kim

Tam

ilT

rip

ura

Utt

arP

rad

es

hra

sh

tra

laya

ram

lan

dN

adu

Pra

de

sh

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

1.Ag

ricul

ture

& A

llied

Activ

ities

1581

.52

4248

.62

113.

8629

9.60

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94

Con

td. A

nnex

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95

Annexure 3-D

Proposed Additional Allocation for the Tenth Plan


Sr. Sector States and UTs Plan AmountNo.

1. Health Improving Secondary/Tertiary Health Care 1400

2. Health Strengthening of Universities of Health Sciences 100

3. Education Access to Seondary Education in Educationally 300Backward Districts

4. Education Vocational Education Mission 650

5. Rural Development Jai Prakash Narain Rozgar Yojana 5000

6. Agriculture Grants to Agriculture Universities for 500Research and Transfer of Technology

7. Agriculture Drought Proofing 4000(a) Watershed Development(b) Wasteland Development(c) JFM(d) Agro-forestry

8. Agriculture Control of Shifting Cultivation 400

9. Tourism Development of World Heritage Sites/ Tourism Circuits 1000

10. Irrigation AIBP 5000

11. Urban Development Urban Sanitation Mission 2000

12. Planning Commission Extremist Affected Districts (RSVY) 1000

13. Roads Improvement of Riding quality of State Highways 2000

14. Power Accelerated Power Development & Reform Programme 3500

15. Special Area Programmes State Initiatives (like Post Matric Scholarships 14658for SCs, STs: EAPs etc.)

Total State/UTs Plan 41508

Note : The allocated amounts are over and above the core States/UTs Plan outlay indicated in Annexure:3-C


96

97

4.1 The acceleration in the growth rateproposed for the Tenth Plan cannot take placewithout tapping the opportunities offered by theinternational economy in terms of markets, invest-ments and technologies. The macro-economicexercises carried out in chapter 2 clearly indicatethat the demand constraints afflicting Indian industrywarrant greater focus on external sources ofdemand if growth opportunities are not to be missed.Concurrently, resource requirements and efficiencyenhancement involve larger flow of external fundsand technologies. Equally important, the inflow offoreign direct investment (FDI) has been identifiedas a critical component in raising the level ofcorporate entrepreneurial activity in the country.Thus, both demand and supply considerations forgrowth acceleration dictate a significantly higherdegree of engagement with the internationaleconomy than in the past. But in so doing,vulnerabilities have to be identified and addressed.

4.2 The twin processes of globalisation andliberalisation are shaping a new system of interna-tional economic relations in which the changingpattern of investment, production and trade, theglobal span of finance and the central role of tech-nology are dominant. The increased interaction withthe world economy is expected to be facilitated bythe overall reduction in the cost of transaction andcommunication. The accelerating pace of libera-lisation and globalisation in the world economy hasincreased opportunities for growth and develop-ment, but it has also added new complexities andrisks in the management of global interdependence.The ability of the developing countries to influencethe pace and direction of global policy initiatives isstill weak, while their vulnerability to the economicpolicy decisions taken by major developed coun-tries, and more so by major market institutions, hasincreased.

4.3 Inter-linkages between trade, investment,money and finance, services, technology, com-modity markets and the environment have, nodoubt, made policy formulation more complex. Theproblem is compounded by weak commodity mar-kets, decline in Overseas Development Assistance(ODA), heavy debt burden, uncertainties in capitalflow, and restrictions on and high costs of technologytransfer. In order to benefit from globalisation,developing countries like India will need to engagethemselves more actively in shaping the contoursof the international economic order. Passive accep-tance of and reactive adjustments to decisions madeelsewhere and on other considerations will notsuffice. India continues to play an active role invarious international organisations and multilateralfora to draw attention to important economic issues,especially in the context of developing countries.But the ambit has to be widened. In particular, thevoices of the domestic civil society and commercialinterest must not only find articulation in ourinternational positions, but they must become majoractors in the process of determining our stand.Unfortunately, the institutional mechanisms foreliciting such participation are still weak, despiteconsiderable progress in recent years. The autar-chic mind-set appears to afflict our private sectoreven more than the government. It is hoped thatthe projections for the immediate future will convincethe private sector decision-maker that enlightenedself-interest dictates not just active engagement withthe government, but also investment of resourcesin research and mutual consultations.

4.4 The importance of reforming and revita-lising the institutional structures governing ourinternational economic relations cannot be over-stressed. A defensive and status-quoist position hasto give way to a more aggressive and proactiveposition. This cannot be done without a closer

CHAPTER 4

EXTERNAL SECTOR DIMENSIONS


98

interaction between the agencies concerned withtrade and investment, including those in the privatesector, and those in charge of our external relations.Indeed, international commerce cannot any longerbe treated as a mere hand-maiden of diplomacy.Quite the opposite, in fact. Diplomacy must todaysupport, as well as sub-serve, the commercialinterests of the country. There will, undoubtedly, besituations in which political and commercial interestsmay come into conflict. Resolution of such diffe-rences will have to rank high on the political agenda.

4.5 This chapter first examines the externaleconomic situation faced by the country in theemerging global context. Detailed analyses of thestatus of balance of payments position, trade andtariff policy and important World Trade Organisation(WTO) related issues are subsequently presented.Based on the overall situation, the projections aboutvarious dimensions relating to the balance ofpayments in different scenarios that have beenmade for Tenth Plan period are also presented inthe chapter.

RECENT EVENTS IN INTERNATIONALECONOMY

4.6 During the Ninth Five Year Plan, therehave been a number of events in the internationaleconomy that have influenced the behaviouralpattern of the international economic relationshipsignificantly, especially from the Indian point of view.These include the East Asian crisis of 1997-98,global slow-down since 1999-2000, and theSeptember 11, 2001 event. Some of these areoutlined in this section.

(a) East Asian Crisis

4.7 Prior to the Ninth Five Year Plan, the EastAsian Countries were visualised as the harbingerof economic growth – their performance beingdescribed as the East Asian Miracle. The scenario,however, changed in 1997 when financial andcorporate sector weaknesses combined with macro-economic vulnerabilities sparked off a crisis. Theweakness can be explained as exposure of financialinstitutions to a variety of external threats includingdecline in asset values, market contagion, specu-lative attacks, and a reversal of capital flows. Formal

and informal currency pegs, which discouragedlenders and borrowers from hedging, contributedto the problem. Capital inflows had helped rapidcredit expansion while lowering the quality of credit,thereby leading to asset inflation. The inflated assetprices encouraged further capital inflows, lent oftenby weakly supervised non-bank financial institutions.Highly leveraged corporate sectors and largeunhedged short-term debt made the crisis riddencountries vulnerable to changes in the marketsentiments in general, and exchange rate changesin particular.

4.8 The initial priorities in dealing with the crisiswere to stabilise the financial system and to restoreconfidence in economic management. Forcefulmeasures were needed to stop bank runs, protectthe payment system, limit central bank liquiditysupport, minimise disruptions to credit flows, main-tain monetary control and stem capital outflows. Inthe crisis-ridden countries, emergency measures,such as the introduction of blanket guarantees andbank closings, were accompanied by compre-hensive bank restructuring programmes andsupported by macro-economic stabilisation policies.

4.9 India could escape the contagion becausethe management of our external sector was gover-ned by parameters indicated by the High-levelCommittee on Balance of Payments (RangarajanCommittee) such as a flexible exchange rate,sustainable current account deficit, preference tonon-debt creating resource flows, limits on thequantum, use and cost of external debt and a highlyrestrictive approach to short-term debt.

Box 4.1

Lessons learnt from the Asian Crisis

• Any currency could come under speculativeattack if its exchange rate is out of alignment withthe fundamentals for a prolonged period of time.

• Once the speculative attack is launched on anycurrency, the neighboring currencies are alsovulnerable, no matter how sound their policiesmay be.

• The overvaluation of the currency acts as acatalyst when there is a run on the currency, asall the market players base their action on theinformation that the currency is due for correction.


99

4.10 Since efficient markets cannot alwaysovercome speculative activities, it is necessary toremain ever vigilant on the performance of econo-mic parameters both on domestic and external front.Efficient micro and macro-economic management,transparency, putting in place an appropriate regu-latory framework and government’s effective andtimely intervention in case the markets dither, arenecessary measures to avoid the occurrence andimpact of such crisis in India.

(b) Global Slow-down

4.11 While the East Asian crisis was beingresolved, the prospects for global growth weakenedsignificantly, particularly during recent times due toa slow- down in the United States, a stalling recoveryin Japan, and a moderate growth in Europe and ina number of emerging market economies. Thegrowth rate of global output increased from 3.6 percent in 1999 to 4.7 per cent in 2000, but declined toaround 2.2 per cent in 2001. The projections for2002 and 2003 are 2.8 per cent and 3.7 per centrespectively (World Economic Outlook, IMF,September 2002).

4.12 In the context of the world economicoutlook, the following observations are worth noting:

• In an environment of slowing global growth,commodity prices may decline. Oil prices haveretreated from their late 2000 high though theirvolatility remains a matter of concern andcontinues very much to depend upon theproduction decisions of the Organisation ofPetroleum Exporting Countries (OPEC),though the risks may be on the downslide.

• Non-fuel prices are expected to remain broadlyunchanged; but if global demand slows downmore than expected, prices may decline,affecting adversely commodity producers,including many poor countries.

• With the possibility of oil prices declining andwage increases remaining moderate, inflationlevels are likely to stabilise. This would allowfiscal maneuvering in many countries.

• While a number of countries continue to faceserious difficulties, external and financialvulnerabilities in emerging markets have beengenerally reduced since the 1997-98 crisis, andthe shift away from soft exchange rate pegshas improved their ability to manage externalshocks.

• Over the past several years the strongexpansion in the US economy has beeninstrumental in stabilising global activity in theface of weak demand elsewhere.Unfortunately, with the recovery in Japanstalling, and its potential growth being stillmodest, the present slow-down in the US islikely to be offset by higher demand growthelsewhere. In these circumstances, therewould be greater risk of spillovers to othercountries through financial market andconfidence effects.

• Given that financial risks often tend to beunderestimated in periods of rapid expansion,lower growth could expose fragility of financialmarkets. Further, downward revision toexpectations of corporate profit growth couldintensify pressures on equity markets in theUnited States and elsewhere, with adverseeffects on wealth, investment, confidence andrisk aversion.

• In emerging markets, prospects dependcritically on maintaining investor confidence.External financing conditions have recentlydeteriorated. Given the global outlook, andcontinued economic difficulties in someemerging market countries, economies arelikely to remain volatile in the period ahead.This underscores the need to maintain prudentmacro-economic policies and to press aheadwith corporate, financial and institutionalreforms.

(c) Post September 11, 2001 Situation

4.13 Even before September 11, 2001, world’smajor economies had been witnessing a slow-down.In USA, growth rates had dropped to near-zero due


100

to weakening consumption growth, declininginvestment and reduced imports, coupled with adwindling manufacturing sector growth. Japanwitnessed deflationary pressures and Europe’sgrowth rate was slowing sharply. The events ofSeptember 11, 2001 further hit the globaleconomy at a vulnerable point when it had fewerbuffers to offer and its resilience to absorb newshocks was suspect. As a result, world tradegrowth is anticipated to decline from 12.6 per centin 2000 to (–) 0.1 per cent in 2001, 2.1 per centin 2002 and 6.1 per cent in 2003 (World EconomicOutlook, September 2002).

4.14 Insofar as India is concerned, the post-September 11 developments have affected a fewimportant sectors adversely. The Nasscom had firstestimated the software exports to grow by 52 percent during 2001-02, but the actual rate came downto only 13 per cent during the year. The civil aviationsector has also been hit, apart from fall in demand,hike in insurance costs has increased the opera-tional cost. India’s tourism industry, which serves2.6 million tourists a year, has been adverselyaffected. The flow of remittances has also declinedduring 2001-02.

4.15 Adverse external developments afterSeptember 11, and their effect on India’s financialmarkets, necessitated a quick response to provideappropriate liquidity and overall comfort to themarkets. In order to stabilise domestic financial mar-kets, the Reserve Bank of India (RBI) ensured thatinterest rates are kept stable with adequate liquidity.The RBI also undertook sale/purchase of foreignexchange as and when it was necessary to meetany unusual supply-demand gap. In view of theextraordinary circumstances in the governmentsecurities market, the RBI opened a purchasewindow for select government securities on auctionbasis. Indian companies were permitted to increasethe foreign institutional investment (FII) limit. Aspecial financial package was announced for largevalue exports of six select products, which wereinternationally competitive and had high valueaddition.

4.16 The above measures had the desiredeffect of moderating possible panic reactions and

reducing volatility in financial markets, particularlyin money, foreign exchange and governmentsecurities markets. While financial markets aregenerally stable, liquidity is adequate, and interestrate environment is favourable so far, the outturnof industrial output has been limited. This continuesto be a matter of serious concern. It is hoped thatas global markets gain back momentum after sometime, it will have a favourable impact on theinvestment climate in India as well.

4.17 The series of international disturbances,however, throw open a window of opportunities thatcan be harnessed. The interest rates have beencut several times in the USA giving an opportunityto off-load the interest burden. Excess capacityafflicts virtually every capital goods sector acrossthe globe, which presents an opportunity to importmachines and equipments at bargain prices. It maybe possible for India to attract higher FDI under thecircumstances. This is a time for the Indianmultinationals to look for cheap global acquisitions.When US companies resort to cost-cutting exer-cises, they may also resort to outsourcing, due towhich the IT-enabled services sector such as callcenters, back-office operations, transcriptions,payroll accounting services etc., will get a boost.

STATUS OF THE EXTERNAL SECTOR

4.18 During the Ninth Plan period, India’sbalance of payments position remained mostlycomfortable. The current account deficit narroweddown and on the average was 0.8 per cent of grossdomestic product (GDP), less than one half of the2.1 per cent envisaged in the plan. The growth ofexports in dollar terms during the Ninth Plan periodhas been 5.6 per cent as against the targeted growthrate of 11.8 per cent. During the same period, importgrowth has been 3.3 per cent as against the targetof 10.8 per cent. The country has withstood the EastAsian Crisis of 1997-98 and the recent global slow-down. Invisible receipts have been buoyant. Foreignexchange reserves have increased significantly toaround $ 54 billion by the end of March 2002. Theexchange rate of the Indian rupee, in terms of theUS dollar, has depreciated by 6 per cent. Theexternal value of the rupee seen in terms of real


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effective exchange rate (REER) has, however,appreciated slightly. Foreign direct investmentinflows have increased while foreign institutionalinvestments have gone down. The key indicatorsof external debt have improved considerably as aresult of better management of external debt. It issome of these trends that are discussed in greaterdetail in this section.

Exports

4.19 The Ninth Plan had envisaged a growthof 11.8 per cent per annum in exports, against whichthe actual growth was 5.6 per cent (in dollar terms)during the Ninth Plan period. Even this unsatis-factory performance was accompanied by highvolatility. Exports had recorded a negative growthof 3.9 per cent during 1998-99. The year 2000-01witnessed a high growth of 19.6 per cent butdeclined sharply to 0.05 per cent in 2001-02. TheNinth Plan had also envisaged that the export-GDPratio would be 10.4 per cent, but the likely outcomewould be lower, at around 9 per cent.

4.20 The drastic reduction in growth rate ofexports during 2001-02 was primarily due tostructural constraints operating on the demand aswell as on the supply side. The recessionarytendencies across the world affected the demandfor our exports as well. As mentioned in para 4.13,world trade in goods and services is projected to

record a negative growth of 0.1 per cent in 2001 asagainst a growth rate of 12.6 per cent during 2000.Such slow-down and contraction of world trade alsoresulted in emergence of protectionist policies bydeveloped countries in some sectors in the form ofbarriers of technical, environmental and socialstandards, affecting market access and disruptingour exports.

4.21 Movements of the exchange rate alsoaffected export performance. Major supply cons-traints that continued to hamper our exportsinclude infrastructural constraints, hightransaction costs, reservation for small scaleindustries, labour inflexibility, constraints inattracting FDI in exports sector and maintenanceof product quality.

4.22 Changes in the composition of exportsduring the Ninth Plan may be seen in Table 4.1. Itmay be observed that the share of agriculture andallied products has been declining, while that of oresand minerals has remained more or less steady.Share of manufactured goods increased during thefirst three years, but came down during the two lateryears. Share of petroleum products increasedsignificantly in 2000-01 and more so in 2001-02,while ‘others’ have shown a gradual rising trendduring the Ninth Plan period. It is important to notethat the share of processed agricultural exports andmanufactured goods must be suitably raised not

Table 4.1

Broad Composition of Exports

Percentage Share

S.No. Commodity Group 1997-98 1998-99 1999-2000 2000-01 2001-02

1. Agri.and Allied Products 18.9 18.1 15.2 13.5 13.4

2. Ores and Minerals 3.0 2.7 2.5 2.6 2.8

3. Manufactured Goods 75.8 77.7 80.7 78.0 76.1

4. Petroleum Products 1.0 0.3 0.1 4.2 4.9

5. Others 1.3 1.2 1.5 1.7 2.8

Total 100.0 100.0 100.0 100.0 100.0

Source : Directorate General of Commercial Intelligence and Statistics (DGCI&S).


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only for a sustainable balance of payments position,but also to provide adequate aggregate demand tosupport the projected growth in these sectors.

4.23 Looking at the direction of these exports,it was observed that the share of our exports to theOrganisation for Economic Cooperation and Deve-lopment (OECD) countries has been declining,especially due to decline in our share to theEuropean Union (EU) and Japan. Share of exportsto USA has increased and so has to the OPEC andLatin American countries. It has gone down in thecase of Eastern Europe, with slowing down ofexports to Russia, while shares of exports to lessdeveloped countries in Africa and Asia haveremained more or less at the same level. Exportsto ‘other’ countries have increased and need to befurther stepped up.

Imports

4.24 The Ninth Plan had envisaged a growthof 10.8 per cent per annum in imports. The actualgrowth of imports has been 3.3 per cent (in dollarterms) during the Ninth Plan period. Petroleum Oiland Lubricants (POL) imports during the Ninth Planincreased by 6.4 per cent while that of non-POL by4.9 per cent. Lower import growth of non-POL is a

reflection of the slow-down in the domestic industrialactivity. The Ninth Plan had also envisaged thatthe import-GDP ratio would be 12.2 per cent. Theactual outcome has more or less been around thetargeted level as the average for the Plan periodworks out to 12.66 per cent. The slow growth ofimports was clearly offset by the low growth rate ofGDP.

4.25 The broad composition of imports duringthe Ninth Plan can be seen in Table 4.2. It may beobserved that the share of bulk items has increasedwhile that of non-bulk items has declined. Amongstthe bulk items, share of POL increased sharply till2001, which, however, came down in 2001-02. Theshare of bulk consumption goods in imports, mainlycomprising food items, has been fluctuating accor-ding to domestic demand. Share in import of otherbulk items like rubber, pulp and paper, wood andwood products, fertilizers, metalli-ferrous ores andmetal scrap, non-ferrous metals, and iron and steeldecreased till 2000-01, although it increasedthereafter in 2001-02. Share of capital goods hasshown a consistent declining trend. Share of exportrelated items consisting of chemicals, pearls andprecious stones, cashew, textile yarn and fabric,leather, raw cotton, silk, wool and jute has remainedsteady in this period.

Table 4.2Broad Composition of Imports

Percentage Share

S.No. Commodity Group 1997-98 1998-99 1999-2000 2000-01 2001-02 (P)

1. Bulk Imports 35.7 31.2 39.6 41.2 39.6

a. Petroleum and products 19.7 15.1 25.4 31.0 27.4

b. Bulk Consumption Goods 3.6 6.0 4.9 2.9 4.0

c. Other Bulk Items 12.4 10.2 9.3 7.4 8.2

2. Non-bulk Imports 64.3 68.8 60.4 57.7 60.4

a. Capital Goods 23.6 23.7 18.0 17.7 18.2

b. Export related Items 16.7 16.8 18.4 15.9 16.1

c. Others 24.1 28.2 24.0 24.1 26.0

- Of which Gold and Silver 7.6 12.0 9.5 9.2 8.9

Source : DGCI&S.


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4.26 Looking at the direction of our majorimports, it may be observed that the OECD coun-tries, and EU in particular, was the major supplierof the import items to India, although it was decliningby the end of the Ninth Plan period. Also, share ofimports from OPEC and Russia declined while theshare of ‘others’ increased substantially. It may besuggested that the import of POL items increasedfrom this set of ‘other’ countries and away from theOPEC. The share of imports from Africa, Asia andLatin America remained more or less constant.

Trade Balance

4.27 On account of shortfalls in the exportgrowth, the trade deficit averaged an estimated 3.4per cent of GDP during the Ninth Plan, almostdouble of 1.8 per cent, envisaged in the Plan docu-ment. However, in absolute terms the trade deficithas moved within a range of $ 12.7 billion and $17.8 billion during the Ninth Plan period. In fact,this was only $ 12.7 billion in 2001-02 as against $14.8 billion in 1996-97.

Invisibles

4.28 The total invisibles receipts increased from$ 21,405 million in 1996-97 to $ 35,612 million in2001-02 (i.e. an average growth of 10.72 per cent).Total payments increased from $ 11,209 million in1996-97 to $ 21,558 million in 2001-02 (i.e. anannual growth of 13.97 per cent). Net invisiblesthus increased from $ 10,196 million in 1996-97 to$ 14,054 million in 2001-02 (i.e. a growth of 6.63per cent). There has also been buoyancy inmiscellaneous net receipts and private transfers.Invisible flows were a source of immense strengthto the current account. Miscellaneous receipts (net)increased from $ 355 million in 1997-98 to $ 3,774million in 2001-02, and similarly, net private transfersmaintained a higher level, increasing from $ 11,830million in 1997-98 to $ 12,798 million in 2000-01,but went down slightly to $ 12,125 million in 2001-02. Private transfer receipts remain augmented bythe inclusion of local redemption of non-residentdeposits since 1996-97. Private remittances accountfor the bulk of private transfer receipts. Software

service exports, included under miscellaneousreceipts of non-factor services, have emerged asthe second largest item of invisible receipts.Software service exports had grown at an annualrate of about 52.5 per cent during the five yearsending 1999-2000. The growth momentum wassustained in 2000-01, when these recorded a growthof 57 per cent from $ 4.02 billion in 1999-2000 to $6.3 billion in 2000-01.

Current Account Balance (CAB)

4.29 It is estimated that the CAB would averageabout (-) 0.8 per cent of GDP during the Ninth Plan,less than one half of 2.1 per cent envisaged in thePlan document. The balance of payments positionmay be seen in Table 4.3.

4.30 The CAB was $ (-) 5.5 billion in 1997-98,which came down to $ (-) 2.6 billion in 2000-01 andturned positive to $ 1.35 billion in 2001-02. Theimprovement in CAB was made possible largelybecause of dynamism in export performance, asustained buoyancy in invisibles, reflecting a sharpincrease in software service exports and privatetransfers, and partly due to the subdued non-oilimport demand.

Foreign Exchange Reserves

4.31 India’s foreign exchange reserves com-prise foreign currency assets of the RBI, gold heldby the RBI and special drawing rights held by theGovernment of India. Foreign exchange reservesincreased rapidly during the last decade, increasingfrom $ 5,834 million in 1990-91 to $ 42,281 millionin 2000-01. The reserves continued to increase toreach the level of $ 54,106 million by March 2002,and $ 62,021 million by mid September 2002. Theimport cover of reserves increased from 6.9 monthsin 1997-98 to 8.6 months in 2000-01 and further toalmost one year in 2001-02, which is a source ofcomfort. Besides, it provides a measure of insula-tion against unforeseen external shocks or exigentdomestic supply shortages. It also helps to satisfythe need for liquidity, which instills confidence inthe economy among international investors andfinancial markets.


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Exchange Rate Movement

4.32 The exchange rate of the rupee hasbroadly been market determined, except for

occasional counter-cyclical operations by theReserve Bank of India. The movement of exchangerate during the Ninth Plan has been as follows(Table 4.4).

Table 4.3

Balance of Payment

($ million)

S.No. Items 1997-98 1998-99 1999-2000 2000-01 2001-02

1. Exports 35,680 34,298 37,542 44,894 44,915

2. Imports 51,187 47,544 55,383 59,264 57,618

- Of which, POL 8,164 6,399 12,611 15,650 13,669

3. Trade Balance -15,507 -13,246 -17,841 -14,370 -12,703

4. Invisibles (net) 10,007 9,208 13,143 11,791 14,054

Non-factor services 1,319 2,165 4,064 2,478 4,199

Investment Income -3,521 -3,544 -3,559 -3,821 -2,728

Private Transfers 11,830 10,280 12,256 12,798 12,125

Official Transfers 379 307 382 336 384

5. Current Account Balance -5,500 -4,038 -4,698 -2,579 1,351

6. External Assistance (net) 907 820 901 427 1,117

7. Commercial Borrowing (net) @ 3,999 4,362 313 4,011 -1,144

8. IMF (net) -618 -393 -260 -26 0

9. NR Deposits (net) 1,125 960 1,540 2,317 2,754

10. Rupee Debt Service -767 -802 -711 -617 -519

11. Foreign Investment (net) Of which 5,353 2,312 5,117 4,588 5,925

i) FDI (net) 3,525 2,380 2,093 1,828 3,904

ii) FIIs 979 -390 2,135 1,847 2,021

iii) Euro equities and others 849 322 889 913

12. Other Flows (net)+ -606 608 3,940 -2,291 1,412

13. Capital Account Total (net) 9,393 7,867 10,840 8,409 9,545

14. Reserve Use (-increase) -3,893 -3,829 -6,142 -5,830 -10,896

Note : @ Figures include receipts on account of India Development Bonds in 1991-92, Resurgent India Bonds in 1998-99 andIndia Millennium Deposits in 2000-01 and related repayments, if any, in the subsequent years.

+ Include, among others, delayed export receipts and errors and omissions.Source : Reserve Bank of India (RBI).


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4.33 The exchange rate market has displayedreasonable stability, with the rupee depreciating by6.1 per cent from the annual average of Rs. 37.165per dollar in 1997-98 to Rs.47.707 in 2001-02.

4.34 The world economy experienced one ofthe worst shocks after the events of September 11,2001 in the US. Foreign exchange markets in Indiaalso became volatile as a consequence, with therupee showing a depreciation of 1.3 per cent vis-à-vis the dollar during the 10 days period of September10-20, 2001. In order to stabilise domestic financialmarkets, the RBI announced some measures duringthe period September 15-25, 2001. These mea-sures had the desired effect of moderating possible

panic reactions and reducing volatility in financialmarkets, particularly in money, foreign exchangeand government securities markets.

4.35 The exchange rate management policycontinues its focus on smoothening the excessivevolatility in the exchange rate with no fixed ratetarget, while allowing the underlying demand andsupply conditions to determine the exchange ratemovements over a period in an orderly way. TheRBI monitors closely the development in thefinancial markets at home and abroad andcoordinates the market operations with suitableregulatory measures, as considered necessary fromtime to time.

4.36 Given the movement of the exchange rateof the rupee and the domestic inflation rate relativeto important trading partners, the real effectiveexchange rate (REER) is reckoned as one of themost important determinants of the country’sexternal competitiveness. The position of the rupeein terms of REER and nominal effective exchangerate (NEER) is given in Table 4.5.

4.37 The REER was 63.81 in 1996-97, whichincreased to 67.02 in 1997-98 and declined during1998-99 and 1999-2000, thereafter increasing againduring the next two years. This shows the volatility

Table 4.4

Exchange Rate ( Rs. / $)

Year Exchange Rate Depreciation(per cent)

1997-98 37.165 4.48

1998-99 42.071 11.66

1999-00 43.333 2.91

2000-01 45.684 5.15

2001-02 47.707 4.24

Source : Reserve Bank of India.

Table 4.5Indices of Real Effective Exchange Rate (REER) and Nominal

Effective Exchange Rate (NEER) of the Indian Rupee(36- Country bilateral trade based weights)

(Base : 1985=100)

Year REER % Variation NEER %Variation

1996-97 63.81 0.3 38.97 -1.9

1997-98 67.02 5.0 40.01 2.7

1998-99 63.44 -5.3 36.34 -9.2

1999-00 63.30 -0.2 35.46 -2.4

2000-01 66.53 5.1 35.52 0.2

2001-02 (P) 68.43 2.9 35.75 0.7

Note : The indices on REER have been recalculated from April 1994 onwards using the new Wholesale Price Index (WPI)Series with base 1993-94 = 100.

Source : Reserve Bank of India.


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in the exchange rate of the rupee. This also givesan impression that it is slightly overvalued. Withthe appreciation of the dollar vis-à-vis the majorcurrencies, the rupee also appreciated in real terms.

Foreign Investment

4.38 In developing countries like India, FDI isseen as a means to supplement domestic invest-ment for achieving a higher level of economicgrowth. FDI benefits the domestic industry as wellas the consumers by providing opportunities fortechnological up-gradation, access to globalmanagerial skills and practices, optimal utilisationof human and natural resources, opening up exportmarkets and access to international quality goodsand services. Towards this end, the FDI policy hasbeen constantly reviewed, and necessary stepstaken to make India a most favorable destinationfor foreign investors.

4.39 FDI inflows depend upon a number offactors like the assurance of safe recovery of capital,regular repatriation of dividends, overall climate,exchange rate and price stability, availability of rawmaterials and other inputs, skilled manpower,infrastructural facilities and the existence of dome-stic and export markets. The government policyon FDI since 1991 has aimed at encouraging foreigninvestment, particularly in the core and infrastructuresectors. The government has permitted access tothe automatic route for FDI in most sectors, exceptfor a small negative list. The foreign investors onlyneed to inform the RBI within 30 days of bringing intheir investment, and also within 30 days of issuingof shares. Emphasis is given to foreign investmentin infrastructure sectors with 100 per cent FDI,including in power, telecom, oil refining, etc.

4.40 Foreign investment inflows increasedfrom $ 103 million in 1990-91 to $ 5,925 million in

Table 4.6

Foreign Investment Inflows

($ million)

S.No. Items 1997-98 1998-99 1999-2000 2000-01 2001-02

A Direct Investment 3,557 2,462 2,155 2,339 3,904

a) Govt. (SIA/FIPB)# 2,754 1,821 1,410 1,456 2,221

b) RBI 202 179 171 454 767

c) NRI# 241 62 84 67 35

d) Acquisition of Shares* 360 400 490 362 881

B Portfolio Investment 1,828 -61 3,026 2,760 2,021

a) GDRs/ADRs@ 645 270 768 831 477

b) FIIs ** 979 -390 2,135 1,847 1,505

c) Offshore funds and others 204 59 123 82 39

Total (A+B) 5,385 2,401 5,181 5,099 5,925

Note : * Relates to acquisition of shares of Indian companies by non-residents under Section 5 of FEMA, 1999. Data onsuch acquisitions have been included as part of FDI since January, 1996.

@ Represents the amount raised by Indian Corporate through Global Depository Receipts (GDRs) and AmericanDepository Receipts (ADRs).

** Represents fresh inflows of funds by Foreign Institutional Investors (FIIs).# SIA = Secretariat of Industrial Approval.

FIPB = Foreign Investment Promotion Board.NRI = Non-resident Indians.

Source : RBI.


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2001-02, peaking at $ 6,133 million in 1996-97.Table 4.6 shows the pattern of these inflows duringthe Ninth Plan period.

4.41 Foreign direct investment flows, afterreaching a peak of $ 3,557 million in 1997-98,declined to $ 2,339 million in 2000-01 and increasedto $ 3,904 million in 2001-02. The source anddirection of FDI remained, by and large, unchangedduring the 1990s. The bulk of FDI was channeledinto computer hardware and software, engineeringindustries, services, electronics and electricalequipment, chemical and allied products and foodand dairy products.

4.42 Foreign institutional investment inflowsincreased from a mere $ 1 million in 1992-93,reached their peak of $ 2,135 million in 1999-2000and have been at $ 1,505 million during 2001-02.The year 1998-99 witnessed FII flows to record anegative of $ 390 million. The policy regardingportfolio investment by FIIs is reviewed constantlyand major initiatives are taken, when necessary. Inthe budget of 2001-02, it was proposed to raise thelimit for portfolio investment by FIIs from the normallevel of 24 per cent of the paid-up capital of acompany to 49 per cent, subject to the approval ofthe General Body of shareholders by a specialresolution. More recently, Indian companies havebeen permitted to raise the aggregate ceiling forportfolio investment by FIIs through the secondarymarket from the normal level of 24 per cent up tothe applicable sectoral cap levels of the issuedand paid up capital of the company, subject tocompliance with the special procedure, viz.,

(a) approval by the board of directors of thecompany to the enhanced limit beyond 24 per cent,and (b) a special resolution passed by the generalbody of the company approving the enhanced limitbeyond 24 per cent.

4.43 Funds raised through GDRs/ADRsamounted to $ 831 million in 2000-01 and $ 477million in 2001-02. The Government has beenliberalising the guidelines for issue of GDRs/ADRsin a phased manner.

External Debt

4.44 India’s external debt was $ 98.14 billionat the end of March 2002 as compared to $ 93.47billion at end March 1997 and $ 93.53 billion at endMarch 1998. The stock of external debt increasedby 0.98 per cent during the Ninth Plan. The positionrelating to India’s outstanding external debt is givenin Table 4.7.

4.45 Despite marginal increase in the externaldebt stock, the country’s external debt position hasimproved in recent years. The debt-GDP ratio, whichshows the magnitude of external debt in relation todomestic output, declined from 38.7 per cent at endMarch 1992 to 22.3 per cent at end March 2001and further to 20.8 per cent at end March 2002.Similarly, the debt-service ratio that measures theability to serve debt obligations, declined from thepeak level of 35.3 per cent of current receipts in1990-91 to 17.3 per cent in 2000-01, and further to14.1 per cent by end March 2002. The short-termdebt to total debt (with maturity up to one year)

Table 4.7

India’s External Debt Outstanding (end March)

($ million)

Categories 1998 1999 2000 2001 2002 (P)

Short-Term Debt 5,046 4,274 3,933 3,480 2,746

Long-Term Debt 88,485 92,612 94,330 96,224 95,392

Total Debt 93,531 96,886 98,263 99,704 98,138

Source : RBI.


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declined from 10.2 per cent to 3.5 per cent fromend March 1991 to end March 2001 and furtherto 2.8 per cent by end March 2002. Short-termdebt to foreign currency assets has also improvedfrom a high of 382.1 per cent at end March 1991to 8.8 per cent at end March 2001. The ratiowas 5.4 per cent at end March 2002. The shareof concessional debt, which was steady around45 per cent during the first half of the 1990s,declined to 38.5 per cent at end March 1999 andfurther to 35.8 per cent at end March 2002. Indiahas the highest share of concessional debtamong the top 15 debtor countries of the world.

4.46 India’s indebtedness position vis-à-visother economies has improved. In terms of theabsolute level of debt, the position improved fromthe third largest debtor after Brazil and Mexico in1991 to the tenth in 1999, after Brazil, RussianFederation, Mexico, China, Indonesia, Argentina,Korea, Turkey and Thailand. In terms of thepresent value of external debt too, India ranksas the tenth largest debtor country. In terms ofindebtedness classification, India improved itsposition from ‘close to severely indebted’ categoryin 1991, to ‘less indebted’ bench-mark in 1999(Global Development Finance 2001, WorldBank).

4.47 The improvement in India’s externaldebt position since 1991-92 is due to a consciousdebt management policy that focused on high

growth rate of exports, keeping the maturitystructure as well as the total amount ofcommercial debt under manageable limits,limiting short-term debt, and encouraging non-debt creating financial flows. These measuresled to a sustained improvement in the externalindebtedness position of the country. Efforts arenow on to further consolidate the gains alreadymade. A number of new initiatives have beenundertaken to meet this objective. This includesincreased coverage and computerisation ofexternal debt data, better co-ordination amongagencies reporting debt statistics, pre-payments/refinancing of more expensive external debt andother measures to actively manage sovereignexternal debt of the country.

EXTERNAL SECTOR PROJECTIONS

4.48 As indicated in chapter 2, the macro-economic dimensions targeting an 8 per cent growthin GDP would lead to an increase in the investmentrate to 32.3 per cent by the year 2006-07, as againstthe present investment rate of 24.3 per cent. It isexpected that this growth rate will be achieved withimprovement in efficiency in the economy, and byincluding higher capacity utilisation. The savingsratio is expected to increase to 29.4 per cent by2006-07, as against a level of 23.5 per cent in 2001-02. For the Plan as a whole, the savings rate hasbeen targeted at 26.8 per cent. The implied currentaccount deficit, seen in terms of the gap between

Table 4.8

External Debt : Key indicators

(Percent ratio)

Items 1998 1999 2000 2001 2002 (P)

Total External Debt to GDP 24.3 23.6 22.2 22.3 20.8

Short Term Debt to Total Debt 5.4 4.4 4.0 3.5 2.8

Short Term Debt to Foreign Currency Assets 19.4 14.5 11.2 8.8 5.4

Concessional Debt as per cent to Total Debt 39.5 38.5 38.9 36.0 35.8

Source : RBI.


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investment requirement and domestic savings bythe end of the Tenth Plan, would be an estimated2.9 per cent of the GDP by 2006-07 and an average1.6 per cent for the Plan as a whole. This gap is tobe met from a combination of inflows of foreigninvestment, external commercial borrowings andother forms of external assistance. In order to lookat the behavioural side of the current account deficit,in this section we look at the projections of exports,imports and flow of invisibles. These projections arebuilt on the experiences of the Eighth and NinthPlan periods. The actual balance of paymentsoutcome will no doubt depend on developments inthe world economy and internal macro-economicbalances, but the policy stance regarding externalvariables will also have an important role to play.

4.49 On the basis of the more liberalisedbalance of payments policy to be pursued and takinginto account past trends in exports and imports aswell as other determining variables, projections havebeen made for exports and imports for the TenthFive Year Plan period.

Exports

4.50 In the Indian context, exports are still seento be primarily supply-side determined. Althoughdemand-related factors, like relative prices (includ-ing exchange-rate movements) and world incomes,are becoming progressively more important,particularly for specific export items, the dominantfactor continues to be the ability of the economy toproduce adequate volumes of exportables toaddress international markets. Analysis of the recentexport performance indicates that the share oftradables in GDP continues to exert a stronginfluence on export behaviour, with exchange ratevariations and relative prices also playing significantroles. International income levels still do not appearto matter significantly, reflecting the low share ofIndian exports in international trade.

4.51 Using the results of the analysis and takingthe projected growth in GDP and its constituentsduring the Tenth Plan period and certain assump-tions for trends in the independent variables during

the Ninth Plan period, export projections have beenmade. The results indicate that if the Tenth Plangrowth targets are met, exports are likely to increasefrom $ 44,915 million in 2001-02 to $ 80,419 millionby 2006-07. This would mean a compound growthrate of 12.4 per cent during the Tenth Plan, with anelasticity of 1.5. It needs to be noted, however, thatthese projections are based on the assumption thatthe REER will be maintained at more or less thecurrent level. Thus, some flexibility does exist inincreasing exports further with a more aggressiveexchange rate policy, if necessary.

4.52 On the basis of these projections, thesector-wise export vector has been estimated forabout 53 broad commodity groups, as may be seenin Annexure-1. The sector-wise break up is basedon shares and growth rates of these sectors duringthe Ninth Plan period. It may be observed thatfishery products, other food and beverages, textiles,readymade garments, other non-metallic minerals(including pearls, precious and semi-preciousstones), leather products, petroleum products,chemicals, iron and steel, machinery and commu-nication and electronic items are expected toconstitute the highest share of exports. At the sametime, the highest growth during the Tenth Plan isexpected in petroleum products, followed bycommunication and electronic equipments, elec-trical machinery, other non-metallic minerals,chemicals, paints, drugs and cosmetics, textiles,readymade garments, food and beverages, etc. Asfar as the projections for export of food items isconcerned, it may be mentioned that these aresubject to availability of surplus, and priority wouldbe given to domestic nutritional requirements.However, with an increase in agricultural productionof 4 per cent during the Tenth Plan and with limiteddomestic demand (due to constraints in purchasingpower), efforts would be on to increase export ofprocessed items. This could include exports ofhorticulture products, particularly processed foodsand vegetables, cashew nuts, spices, manufacturedtobacco, castor oil and oil meals, apart from dairyproducts, poultry, processed meat and other proces-sed foods and beverages. The projections foragricultural exports take these aspects into account.


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The overall growth in export of agriculture andallied products has been projected to be around 9per cent.

Imports

4.53 In India, imports are primarily demanddetermined, and are also very sensitive to changesin average tariffs. The customs tariffs have beenreduced gradually as a part of the reforms process.The average tariff duty in 1991-92 was 128 per cent,along with a very large number of separate tariffrates across commodity groups and also coupledwith many exemptions. In 1996-97, the average(total) duty rates were 38.6 per cent with a standarddeviation of 19. The highest duty rate was in theintermediate goods sector, and with substantialvariation. By 2001-02, the average import duty (total)was reduced to 37.1 per cent, which has beenfurther reduced to 33.7 per cent in 2002-03 (theaverage basic import duty is 28.9 per cent in 2002-03). While there is scope for further rationalisationof tariff structure to bring it in line with other EastAsian countries, the sensitivity of imports to the tariffrates demands that care be taken not to place unduepressure on the macro-economic balances. Itbecomes necessary, therefore, to examine theimplications of alternative tariff reform scenarios onbalance of payments.

4.54 The behaviour of aggregate import dem-and in the country is expected to be strongly drivenby domestic growth rates. In addition, the averagelevel of tariffs also exerts a strong influence.Unexpectedly, the exchange rate effects were notparticularly significant over the recent past. Apossible explanation for this is that average tariffrates in India are still too high for the exchange rateto make any material difference in the decision toundertake imports. It is expected that as tariff ratesare reduced, exchange rate movements will becomeprogressively more important.

4.55 The projection of imports during the TenthPlan period has been made on the basis of twolikely scenarios. In the first (scenario-1), the aver-age (total) tariff rate is assumed to come down tothe East Asian level of 15 per cent in the terminal

year of the Plan. In scenario-2, the indicative targetannounced by the government has been assumedto obtain, which yields an average duty rate of 18per cent in the terminal year. The time phasing ofthese two sets of tariff reductions are also different.In scenario-1, tariff reductions are assumed to followa pattern where the present average of total dutyrate is brought down from 33.7 per cent to 27 percent in the next year, then to 22 per cent and 18 percent subsequently, and finally to 15 per cent by2006-07. In scenario-2, the gradual reductionsassume 28 per cent in 2003-04, and 24 per cent,20 per cent and 18 per cent respectively by 2006-07. In both the scenarios, GDP growth has beentaken at the Plan target of 8 per cent per annum.Using the results of the analysis imports wereprojected.

4.56 In scenario-1, with tariffs reduced to 15per cent by 2006-07, total imports are likely toincrease from $ 57,618 million in 2001-02 to $1,32,058 million by 2006-07, implying an annualgrowth of 18 per cent and an elasticity of 2.3. How-ever, if tariffs are reduced only to 18 per cent, theimports are likely to reach up to $ 1,22,846 millionby 2006-07, i.e. an annual increase of 16.3 percent and an elasticity of 2.0.

4.57 The details of the sector-wise projectionsfor imports are provided in Annexure-2. Themethodology used for estimation is the same ascommodity-wise projections for exports. It isexpected that crude petroleum would continue tohave the highest share, followed by other metallic(including gold and silver) and non-metallic minerals,chemicals, machinery and transport equipments.Import of food items is projected to be relativelylow, except edible oils. The highest growth inimports during the Tenth Plan is likely to be fromcommunication and electronic equipments, followedby electrical and non-electrical machinery, edibleoils, non-metallic minor minerals, tea and coffee andleather and leather products.

Trade Balance

4.58 The trade balance, derived on the basisof the projected exports and imports under differentscenarios, is expected to increase to $ (-) 1,64,141


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million in scenario-1 and to $ (-) 1,41,352 million inscenario-2.

Invisibles

4.59 The net invisibles are projected exogen-ously and are expected to grow broadly at the rateof 11 per cent from the base position of $ 14,054million in 2001-02, comprising $ 35,612 million

receipts and $ 21,558 million payments. It isexpected that the projected net-invisibles wouldincrease to $ 23,716 million by 2006-07.

Current Account Balance

4.60 Based on the projected trade balance andthe net invisibles, the status of current accountbalance is arrived at in different scenarios and given

Table 4.9Current Account Balance during the Tenth Plan Period

($ million)

Scenario-1 : (GDP 8 % : Tariff 33.7 %, 27 %, 22 %, 18 %, 15 %)

2001-02 2006-07 Total Gr.Rate (%)

GDP 4,37,029 6,42,025 27,37,497 8.0

Exports 44,915 80,419 3,22,863 12.4

Imports 57,618 1,32,058 4,87,004 18.0

Trade Balance -12,703 -51,639 -1,64,141

Trade Balance/GDP (%) -2.9 -8.0 -6.0

Invisibles – Receipts 35,612 67,077 2,64,542 13.5

– Payments 21,558 43,361 1,67,155 15.0

Invisibles (Net) 14,054 23,716 97,387 11.0

Current Account Balance 1,351 -27,923 -66,754

Current Account/GDP (%) 0.3 -4.3 -2.4

Scenario-2 : (GDP 8 % : Tariff 33.7 %, 28 %, 24 %, 20 %, 18 %)

2001-02 2006-07 Total Gr.Rate (%)

GDP 4,37,029 6,42,025 27,37,497 8.0

Exports 44,915 80,419 3,22,863 12.4

Imports 57,618 1,22,846 4,64,215 16.3

Trade Balance -12,703 -42,427 -1,41,352

Trade Balance/GDP (%) -2.9 -6.6 -5.2

Invisibles – Receipts 35,612 67,077 2,64,542 13.5

– Payments 21,558 43,361 1,67,155 15.0

Invisibles (Net) 14,054 23,716 97,387 11.0

Current Account Balance 1,351 -18,711 -43,965

Current Account/GDP (%) 0.3 -2.9 -1.6

Note : Tariffs are total duties and include basic and special additional duty.Source : RBI for the year 2001-02.


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in Table 4.9. It may be observed that the CAB islikely to increase sharply with lowering of tariffs froman average 33.1 per cent in 2001-02 and 33.7 percent in 2002-03 (the first year of the Tenth Plan), tobring it in line with East Asian levels, i.e. to 15 percent. Reduction of tariffs to 18 per cent by 2006-07would be most consistent with this. The CAB wouldbe relatively more manageable if the tariffs arereduced to 18 per cent as may be seen from thestatus of the CAB/GDP ratios.

Capital Account

4.61 The capital account projections show thefinancing of the current account balance, as in Table

4.10, which gives the details of foreign savings.These projections for the external assistance andforeign investment during the Tenth Plan estimatesare worked out on the basis of the past trends andlikely developments in the future. In particular, therepayment of Resurgent India Bonds and the IndiaMillennium Depositories has been fully taken intoaccount.

Balance of Payments

4.62 On the basis of the current account andcapital account, the balance of payments seen interms of change in reserves, has been projectedunder the two scenarios as may be seen in Table

Table 4.10Inflow of Foreign Savings

($ million)

2001-02(P) 2006-07

External Assistance (net) 1,117 1,572

Commercial Borrowings (net) -1,114 4,400

Non-Resident Deposits (net) 2,754 2,750

Rupee Debt Service -519 -600

Foreign Direct Investment (net) 3,905 7,500

Portfolio Investment 2,020 5,600

Foreign Investment Flows (net) 5,925 13,100

Other Capital Flows (net) 1,382 1,000

Capital Account Total (net) 9,545 22,222

Debt 2,550 9,122

Source : Planning Commission (September 2001), Report of the Sub-Group on External Aid and WTO Commitments,

Table 4.11Change in Reserves under Various Scenarios

($ million)

Year Current Account Balance Capital Accountand CAB/GDP in bracket (Net) Change in Reserves

Sc-1 Sc-2 Sc-1 Sc-2

2001-02 1,351 1,351 9,545 10,896 10,896(0.3) (0.3)

2006-07 -27,923 -18,711 22,222 -5,701 3,511(-4.3) (-2.9)

Source : Derived from Table 4.9 and 4.10.


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4.11. In scenario-1, when the tariffs are broughtdown to 15 per cent, the change in reserves by2006-07 is likely to be $ (-) 5,701 million. The changein reserves is likely to be $ 3,511 million by 2006-07in scenario-2 where the tariffs are brought downless sharply to 18 per cent.

4.63 As may be observed from Table 4.11, thesustainable current account deficit and balance ofpayments situation at present are likely to besubstantially compromised if average tariffs arebrought down sharply to East Asian levels. Concer-ted effort would, of course, be required to increaseexports. Since structural changes (in terms ofchanging share of tradables and relative prices) canbe a medium to long-term option, it is the nominalexchange rate that would need to be suitablyadjusted from time to time to keep balance ofpayments under control. It is the financing of thecurrent account deficit that is important for sustaineddevelopment during the Tenth Plan. Flow of foreigninvestment into productive sectors is essential.Moreover, as has been learnt from the experiencein East Asian countries, the present trend of limitedreliance on the ‘flighty’ short-term debt needs to becontinued. Flow of foreign exchange reserves toshort-term debt and, even more so, from the short-term debt to export of goods and services, needsto be maintained at viable levels to maintainbuoyancy in the international capital markets.

TRADE AND EXCHANGE RATE POLICY

4.64 The trade regime in India till recently, hasbeen very complex, characterised by severequantitative restrictions on imports and exports, andvery high tariffs on imports. Quantitative restrictionson imports were based on a restrictive licensingpolicy and further complicated by a wide variety ofspecial import schemes. These included the importreplenishment scheme for exporters, the actual userpolicy, government purchase preference andcanalised imports for specified items throughdesignated state agencies.

4.65 It is recognised that the most importantpre-condition for creating a more open economy isto create an expanding production base of tradable

goods and services, which can not only withstandexternal competition, but also provide the surplusnecessary to ensure sufficient export earnings formeeting the import needs of the country. The secondpre-condition is to create conditions under whichthe export market becomes increasingly moreattractive, so that there is both a shift from sellingin the domestic market to exports, and developingcapacities to specifically target such export oppor-tunities. Both these conditions are inextricablyinterlinked, and involve the reduction and eventualelimination of the anti-export bias that hascharacterised the Indian economic system in thepast and continues to exist to some degree even atpresent. There are two dimensions to this. First,the incentive structure has to be re-oriented towardsinvestment in tradable goods and services and awayfrom non-tradables. Second, the relative profitabilityof exports vis-a-vis domestic sales has to beimproved. The principal instrument for achievingboth these conditions is the exchange rate, whichis discussed in some detail.

4.66 With the steady reduction of controls intrade matters, the exchange rate has emerged asa major instrument of policy. It needs to be usedfirmly but judiciously to achieve steady andsustainable growth of trade, investment andcompetitiveness. With the introduction of almostfull convertibility on the current account and alsopartial convertibility on the capital account, theexchange rate has already been made moresensitive to the demand for and supply of foreignexchange in the economy. This, however, may haveto be tempered occasionally by strategic inter-vention of the government in order to ensure thatthe imperatives of macro-economic policy are met.Since exports have a central role to play in theattainment of the Tenth Plan targets and in thepresent and future development strategy, it issuggested that the exchange rate be viewedprimarily as an instrument to affect the behaviourof exports at least until such time as the productionbase of the economy is sufficiently integrated withthe international market and exports are robustenough to withstand periodic fluctuations in theexchange rate and in international prices.


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4.67 The exchange rate not only affects thedegree of price competitiveness of domestictradables in comparison to international markets,but also determines the relative profitability oftradables vis-a-vis non-tradables in the domesticeconomy. In the present context, both the factorsare of importance, and the conduct of exchangerate policy would have to take into account thesomewhat different considerations that underlie thetwo objectives. The standard measure of domesticprices relative to international prices, the realeffective exchange rate, adjusts the nominalexchange rate by the differential rates of inflation inIndia and abroad. During the Ninth Plan, the export-weighted real effective exchange rate of the rupeehas shown considerable amplitude, combiningsharp depreciations with long periods of gradualappreciation, with the effect that at the end of theNinth Plan (2001-02) the REER was 1.4 per cent

above its level in March 1997, which implies thatthe relative price competitiveness of Indian exportson account of the exchange rate has been erodedto this extent. Matters are worse if the effect of theexchange rate on relative attractiveness of tradablesvis-a-vis non-tradables in the domestic economy isconsidered. The appropriate measure of this is notthe REER, but the nominal exchange rate adjustedonly by the domestic inflation rate. This measurehas appreciated quite substantially over the sameperiod by 35.9 per cent, as shown in Table 4.12.This behaviour of the exchange rate is notconducive to a steady move towards greater exportorientation of the economy. During the Tenth Plan,the exchange rate will need to be deliberatelydepreciated in terms of the average level of pricesin the country, which would, given the targeted rateof inflation for the Tenth Plan period, imply a nominaldepreciation in the range of 5 to 7 per cent per

Table 4.12

Indices of the Exchange Rate (Base 1997-98 = 100)

Year NEER REER WPI/NEER

Level % Change Level % Change Level % Change

1997-98 100.00 - 100.00 - 100.00 -

1998-99 90.83 -9.17 94.66 -5.34 116.65 16.65

1999-00 88.63 -2.42 94.45 -0.22 123.45 5.83

2000-01 88.78 0.17 99.27 5.10 132.06 6.98

2001-02 89.35 0.64 102.10 2.85 135.94 2.94

Note : (1) NEER = Nominal Effective Exchange Rate= w(i).e(i).e

where : w(i) = x(i)/xx(i) = exports made in the ith currencyx = total exportse(i) = index of the exchange rate of the ith

currency against $ expressed as the number ofunits of ith currency per $ 1

e = index of exchange rate of the rupee expressedas the number of units of $ to Re. 1

(2) REER = Real Effective Exchange Rate= NEER.[ w(i).P/P(i)]

where : P = Price Index for IndiaP(i) = Price Index of ith country

(3) WPI = Wholesale Price Index (domestic)Source : Economic Survey 2001-02 and Annual Report, RBI, 2001-02.


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annum under normal circumstances. Such anexchange rate strategy would, to some extent,correct the bias against tradables, by leaving therelative prices of traded and non-traded goods moreor less unchanged, and thereby facilitate the effortsat containing the secular reduction in the share oftradables in GDP. This should also automaticallylead to a depreciation of the REER in the 2 to 3 percent per annum range, assuming that the inter-national rate of inflation does not accelerate fromits usual trend rate of 3 to 4 per cent per annum,and thereby improve the price competitiveness ofIndian goods and services in the external market.

4.68 There is a point of view which holds thatthe exchange rate is not only an uncertain instru-ment of export promotion but it also has the negativeeffects of generating cost-push inflation andretarding external capital inflows, and that greaterreliance should be placed on increase in efficiencyand improvements in quality, productivity andtechnology for attaining greater internationalcompetitiveness. While it is no doubt true that inthe longer run there is no substitute for efficiency,quality, productivity and technology, these take timeto develop and may not be directly affected by publicpolicy during the short to medium run. Theseattributes are expected to develop steadily over timein the Indian economy as a normal consequence ofincreased competition and greater integration withthe international economy, and the government canplay only a facilitative role. The immediate impera-tive is to encourage a greater degree of outwardorientation through policy initiatives, for which theexchange rate is the principal instrument.

4.69 Note, however, has to be taken of thealleged negative dimensions of exchange ratedepreciation. The first argument against a policyof steady depreciation is that it is inherentlyinflationary and, when exports are either import-dependant or face low price-elasticity of demand, itmay not stimulate exports in any substantial manner.Thus, the trade-off involved in exchange ratedepreciation is between the negative effects ofacceleration in domestic inflation and a net exportexpansion effect. It is true that any effort at alteringthe relative price structure tends to be inflationary

as the various sectors of the economy attempt toprotect their relative position. This does not, how-ever, constitute a compelling argument for notmaking the effort at altering the price relatives whenit is desirable as a part of a development strategy.On the other hand, it does underline the need toadopt a stringent anti-inflationary policy stance asa complementary measure, which is in any case anintegral component of the Tenth Plan strategy.Furthermore, in the Indian context, there is ampleempirical evidence that exchange rate depreciationdoes have strong export expanding effect. Thisarises primarily out of the fact that the Indian exportbasket still has a very low share of differentiated orbranded products, which are the category of goodsthat are less price-sensitive, and the bulk of exportsrely principally on price competitiveness. Thischaracteristic of the Indian export basket is likely tocontinue to obtain in the immediate future, andemphasises the need to follow an active exchangerate policy.

4.70 It is sometimes argued that a stablenominal exchange rate is conducive to attractinggreater external capital flows, and an expectationof currency depreciation may deter such inflows bylowering the expected returns denominated inforeign currency terms. But, it should be noted thatif the exchange rate gets misaligned due to inflationand macro-economic imbalances, there will beexpectations of depreciation, and a prolonged non-adjustment of the exchange rate will only strengthensuch expectations resulting in reduced capital flowsand eventual capital flight. What is called for is theadoption of appropriate policies to maintain macro-economic balances and not any artificial peggingof the exchange rate. Furthermore, the real benefitsof foreign investment can be reaped, only whenthese investments come in, on the basis of theintrinsic strengths of and the real factors present inthe economy, rather than on the basis of the implicitcapital gains arising out of an expected appreciationof the currency. The advantage of a depreciatingcurrency is that the foreign investment that doescome in under such an expectation will not only beless speculative, but also more export-oriented inits own interest as against the greater inwardorientation of investment that relies on nominal


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exchange rate stability. The possibility of an outflowof existing portfolio investment, arising out of anexpected depreciation, adds to the urgency ofclearly signaling the future strategic approach toexchange rate management before the stock ofsuch external portfolio liabilities becomes too largeto risk any substantial net outflow.

4.71 There is, however, an issue as to whetherthe exchange rate should be depreciated graduallyor devalued sharply to attain some medium-runtarget value. If the primary emphasis of exchangerate policy is on its effect on external capital flows,then a devaluation is generally to be preferred, sinceit immediately improves the incentive to export andreduces the probability of generating expectationsof further depreciation among foreign investors.However, such a step does not generally create thecondition for a sustained shift towards greater exportorientation, particularly insofar as new investmentsare concerned. It may also require much sharperanti-inflationary measures, which may be contrac-tionary in the short run since the fiscal parametersare unlikely to improve sufficiently within the shortperiod. A more gradualist exchange rate stance,on the other hand, not only improves the relativeprofitability of exports, albeit less than a devaluation,but also affects the pattern of investment in favourof tradables in general, and exportables in particular.It would, however, require strict management interms of the collateral macro-economic policies,particularly to prevent generation of inflationaryexpectations that may accompany a process ofgradual depreciation. In view of the objectives ofthe Tenth Plan, it appears preferable to opt for thelatter strategy and address the issue of foreigninvestment through policies aimed at reducing andeventually eliminating the impediments that existat present.

4.72 In recent years, the ability of the govern-ment to determine the behaviour of the exchangerate has eroded quite significantly. Relatively largemovements of financial capital and the need formonetary restraint have constrained the extent towhich the exchange rate could be used as a policyinstrument. In order to re-establish the primacy ofthe exchange rate as an instrument of macro-

economic policy in an open economy, thegovernment has to create the conditions wherebyit can intervene in the foreign exchange markets ina meaningful way. For this, binding ceilings notonly on ECBs as at present, but also some controlon net FPI flows through taxes and otherdisincentives, appear inescapable, at least until suchtime as the Indian foreign exchange marketachieves sufficient depth and the foreign exchangereserves of the country are sufficiently large towithstand speculative pressures. Such restrictionson the inflow of FDI are, however, unnecessarysince they are normally associated with real capitalinflows, both physical and in the form of technologyand services.

4.73 Exchange rate management, however, isonly one of the instruments to affect a greaterdegree of export orientation in the economy. Tariffreforms is an important component of the efforts atincreasing competition and efficiency in the eco-nomy, and making Indian exports more competitiveboth abroad and, also, relative to import substitutesin the domestic market. As has already beenmentioned, the Tenth Plan will attempt to achieveinternational levels of tariffs, while carefully phasingout the changes, keeping in view the larger interestsof the economy and the progress made on otherfronts. This transition can be made without too muchdisruption in view of the additional protection todomestic industry that is sought to be providedthrough the process of exchange rate depreciationduring the Tenth Plan period.

DIRECT EXPORT POLICY INITIATIVES

4.74 The policy reforms have aimed at creatingan environment for achieving rapid increase inexports to make it an engine for achieving highereconomic growth. Depending on the internationalenvironment and domestic exigencies, variousexport policies have been formulated from time totime. More recently, a number of steps have beentaken to enhance the export growth. This includesreduction in transaction costs through decentra-lisation, simplification of procedures and variousother measures, which are enumerated in the EXIMPolicy 2002. Steps have been taken to promote


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exports through multilateral and bilateral initiatives,identification of thrust sectors and focus regions.Special economic zones are being set up to furtherboost the exports. Import of second hand capitalgoods, which are of less than10 year vintage, havebeen allowed. In order to encourage export ofquality/branded goods, double weightage has beenaccorded to exports made by units having ISO orequivalent status. Other measures include promo-tion of agricultural exports, market access initiative,setting up of business-cum-trade facilitation centresand trade portals, strengthening of the AdvanceLicensing Scheme, Duty Free ReplenishmentCertificate (DFRC), Duty Entitlement Pass Book(DEPB) Scheme, etc.

4.75 The EXIM Policy 2002 has removed allquantitative restrictions (QRs) on exports, exceptfor a few sensitive items retained for export throughthe State trading enterprises. The comprehensivepolicy covers the agricultural sector, cottage andhandicrafts and the small-scale sectors. Apart fromremoving restrictions on agricultural exports, it isproposed that transport assistance be madeavailable for exports of fresh and processed fruits,vegetables, floriculture items, poultry and dairyproducts, and products of wheat and rice.

4.76 Some of the sector-specific packages inthe policy include incentives for export of jewellery,leather and textiles, handicrafts, and other itemsfrom the small-scale sector. To elaborate, the pack-age includes reduction of customs duty on importof rough diamonds to zero per cent; abolition oflicensing for rough diamonds which should helpIndia to emerge as a major international center fordiamonds; reduction in value addition norms forexport of plain jewellery from 10 per cent to 7 percent; and allowing export of all mechanised un-studded jewellery at a value addition of 3 per centonly as part of the effort to achieve a quantum jumpin jewellery exports. Further, relaxations have beenmade in terms of extension of duty-free imports oftrimmings and embellishments up to 3 per cent off.o.b. value, hitherto confined to leather garmentsto all leather products; and permitting DEPB ratesfor all kinds of blended fabrics among several otherbenefits for the textile sector. The policy also marks

the launching of a new programme called, SpecialFocus on Cottage Sector and Handicrafts, keepingin view that the small scale products form 50 percent of India’s exports.

4.77 In addition to merchandise exports, thereis tremendous scope for increasing exports fromthe services sector as India has a highly skilledmanpower and a large industrial base. This is beingtapped for electronic and computer software, engi-neering consultancy, banking, insurance, tourism,etc. The Policy is geared towards nearly doublingIndia’s present exports of about $ 45 billion to morethan $ 80 billion over the Tenth Five Year Plan by2007.

4.78 It was also announced that overseasbanking units (OBUs) would be permitted to be setup in special economic zones (SEZs). These unitswould be virtually foreign branches of Indian banksbut located in India. These OBUs would be exemptfrom usual requirements of credit reserve ratio andstatutory liquidity ratio. The banks would provideaccess to SEZ Units and SEZ developers tointernational finances at international rates. Thepolicy includes various duty-neutralisation instru-ments for exports such as the Duty Entitlement PassBook. Export Promotion Capital Goods (EPCG) andall other schemes like Advance Licenses, etc., wouldcontinue along with the existing dispensation of nothaving any value caps. EPCG licenses of Rs.100crore or more will have 12 years export obligationperiod (as against 8 years earlier) with a five-yearmoratorium. A Plan scheme entitled, Market AccessInitiative (MAI) was initiated to assist industry inresearch and development, market research,warehousing and marketing infra-structure. Also,a scheme for participation of States in the exportendeavour, Assistance to States for InfrastructureDevelopment for Exports (ASIDE) is beingencouraged. Moreover, attention is being paid toaspects of grading and quality control, and scientificpackaging methods to meet international standards/specifications.

4.79 In order to promote exports to LatinAmerica, Africa and the Commonwealth of Indepen-dent States (CIS) countries, various programmes


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have so far been launched. It is expected that inaddition to the Focus: LAC programme for accele-rating trade with Latin American countries, the newprogramme called Focus: Africa would give a boostto India’s trade with the sub-Saharan African region.In order to strengthen trade ties with the CIScountries, a Focus: CIS programme would belaunched in the coming year.

4.80 A Medium-Term Export Strategy 2002-07 was announced in January 2002, with a viewto providing a road map for the export sector inthe medium term. The aim is to focus on theimport baskets of our major trading partners(USA, Japan and EU) in the context of India’sexport basket, and arrive at focus products andfocus markets for India. A total of 220 items and25 markets have been identified for specialattention based on various criteria, and indicativesector-wise strategies have been formulated.The Export Strategy 2002-07 aims to achieve 1per cent share in world exports by 2006-07, froma 0.67 per cent in 2000-01. In order to achievethis, there is a continued need to address thedomestic problem of infrastructural bottlenecksin the country, mainly relating to transportproblem and ports facilities. Further, in order toimprove the price competitiveness of our exports,provision is being made for WTO compatiblesubsidies, transport, pricing and comprehensivetax system especially for exporters, strengtheningexport oriented small-scale industries,dissemination and extension of information topotential exporters, etc. At the international level,apart from genuine trade fluctuations, restrictivetrade practices by some of the trading partnersin developed countries need to be negotiated.

4.81 Thus, in order to facilitate promotion ofexports during the Tenth Plan, there is need to givefurther impetus to the major foreign exchangeearning sectors of cottage and handicrafts, gemsand jewellery and exports from the services sector,including electronic and computer software,engineering, and consultancy. The special econo-mic zones already set up could be allowed greaterrelaxations from investment restrictions, particularlysmall scale industries reservations, foreign equity

limits, real estate, etc. These zones could be classi-fied as completely duty free enclaves for tradeoperations and be treated as ‘foreign country’ insofaras trading conditions are concerned. Relaxationsmay be given to corporate income tax and otherexcise and service taxes, and appropriate labourlaws made applicable to these enclaves.

FOREIGN INVESTMENT

4.82 The projected balance of payments (BOP)position for the Tenth Plan period given in Table 4.9indicates that the current account deficit (CAD) islikely to be 2.9 per cent of GDP by the terminalyear of the Plan (2006-07). In view of the experienceof the late 1980s during which India experiencedCADs of above 2 per cent per annum, culminatingin the crisis of 1991, there may be some appre-hensions about the sustainability of the proposedBOP scenario. On the other hand, there is a pointof view which holds that the CAD need not per sebe a matter of policy concern, and attention shouldbe restricted only to the public component of theexternal liabilities. The argument is that the privatesector can be expected to fully take into accountthe inter-temporal viability of its liabilities, bothinternal and external, and hence the privatecomponent of CAD would necessarily be self-correcting in the longer run. This is not, however, atenable position for countries whose currencies arenot reserve currencies, and certainly not for count-ries with non-convertible currencies. The reasonfor this, apart for the normal failure and default riskpresent in any commercial activity, is that theindividual private sector firm normally evaluates itsinter-temporal budget constraint in terms of thedomestic currency and not on the basis of thecurrency in which the liabilities were originallyincurred. Thus, the possibility exists that privateviability can co-exist with a running down of acountry’s foreign exchange reserves. Internationalexperience, especially the East Asian crisis,provides ample instances of such outcomes.

4.83 Prior to the economic reforms, whenforeign investment was virtually non-existent, thesustainable CAD for India was estimated to be about1.4 per cent of GDP. With the liberalisation of


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external trade and investment, this figure has risenquite sharply, since foreign investment does notcarry the same level of systemic risk as externaldebt. On the aggregate, therefore, it is felt that theCAD projections are sustainable provided that theforeign investment flows are of the requiredmagnitudes. Nevertheless, there are two factorsthat need to be taken into account. First, foreigninvestments tend to require a higher rate of returnthan the interest rate on debt over the longer run.Therefore, it would not be prudent to raise the CADtarget too much unless there is sufficient confidencein being able to maintain relatively high growth ratesof exports over an extended period. Second, adistinction has to be drawn between foreign directinvestment and foreign portfolio investment in termsof their effects on the economy.

4.84 In general, FDI is preferred to FPI, partlybecause its returns are closely linked to the perfor-mance of the real economy and partly because ittends to be less volatile than FPI. Besides, the mostimportant disadvantage of FPI flows is that it tendsto be pro-cyclical, in the sense that it comes in whenthe balance of payments (BOP) position is seen tobe strong and goes out when the BOP position isexpected to weaken. Thus, it accentuates thedirection of movement of the BOP, which can causeserious problems in macro-economic management.In the case of countries like India, where the foreignexchange markets are very thin as compared tothe international financial market, a free FPI regimecarries the danger of speculative movements, whichcan lead to serious disruption in the economy.

4.85 There is another dimension, however, tothe relative benefits of FDI over FPI which needs tobe taken into account. FDI can make up not onlyfor deficiencies in the availability of savings andforeign exchange – which is true of all external flows– but also for weaknesses in domestic entre-preneurial capacity. In other words, the role of FDIin directly stimulating investment activity in thecountry can be of great significance. This isparticularly important for India during the Tenth Planperiod since, as has been pointed out in chapter 2,there is a likelihood that corporate investmentactivity may not be dynamic enough to absorb the

available resources, particularly in those areaswhich are being vacated by the public sector. Insuch a situation, the entrepreneurial function playedby FDI can have the effect not only of bringing inadditional resources, but also leading to betterabsorption of domestic savings. On the other hand,relatively free access for FDI with restrictions onother forms of external capital may put domesticentrepreneurs at a serious disadvantage. This hasnot only to do with the access to relatively lowercost external funds, but also in terms of the competi-tion for accessing domestic finance. This disadvant-age can be bridged by FPI, which increases theliquidity available to domestically listed companies.Thus, a careful balance needs to be struck betweenthe inflows of FDI and FPI in order to ensure thatsufficient foreign entrepreneurship comes in to thecountry without “crowding out” domesticentrepreneurship. The figures for the various formsof external flows given in Table 4.10 reflect theseconsiderations.

4.86 However, it needs to be borne in mind thatthese foreign investment figures are targets and notprojections. Foreign investments, by their verynature, are supply-driven in the sense that althoughthe country can create the conditions for makingsuch investments attractive, the decision as towhether and how much to invest is made by theforeign investor. This factor is of course well recog-nised, and there is considerable discussion in thecountry regarding the creation of a conduciveenvironment for foreign investment. It would bedesirable to unequivocally state that much of thisdebate may actually miss the essential issue –namely, that an investor-friendly climate needs tobe created in the country for all investment, andnot just for foreign investors. Indeed, it is submittedthat if the investment climate in general is improved,no exclusive measures may be needed to attractforeign investors. On the other hand, if a specialand differentiated investment regime is set up forforeign investors, it may actually do more harm thangood.

4.87 Nevertheless, a certain degree of focuson foreign investors has to exist if for no otherreason than as a recognition that they would be


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treading on unfamiliar waters. There are twodimensions to this which are of particular relevance.First, potential foreign investors have to bespecifically targeted at and wooed. Although India’spresence has improved significantly in theinternational investors’ radar screen in recent years,there is still a long way to go before it can be takenfor granted. This is especially true for a number ofsectors in which India’s requirements may be atvariance with international investor perceptions.Heavy industries are a case in point, especiallythose which, until recently, were reserved for thepublic sector. Second, hand-holding operations inthe form of an effective investment facilitationmechanism is essential for companies which wouldbe making their first foray into the country.Unfamiliarity with laws, rules and procedures canbe a great deterrent, particularly in a country withsignificant regional variations in these matters.

4.88 Insofar as FPI is concerned, similarconsiderations apply. The state of the domesticcapital market is far more crucial to attracting foreigninstitutional investors than any special regime ordispensation. The focus, therefore, should be onimproving the regulatory and supervisory frameworkgoverning the domestic capital markets and ontechnological modernisation of their operations.There has already been considerable progress inthis regard, but it is still some distance away beforethe full range of financial instruments are introducedin India and innovations are expeditiously permitted.Finally, there is no reason to expect that externalinvestor confidence can be at variance with that ofthe domestic investor. Therefore, the preconditionto attracting greater FPI is the return of the domesticinvestor to the Indian capital markets.

WTO ISSUES

4.89 India is one of the founding members ofthe World Trade Organisation (WTO) and partici-pation in the WTO rule based system implies greaterstability, transparency and predictability in thegovernance of international trade. The importanceof WTO in promoting multilateral trade is beingincreasingly acknowledged. The WTO rulesenvisage non-discrimination in the form of national

treatment and most favoured nation (MFN) treat-ment to our exports in the markets of other WTOmembers. National treatment ensures that ourexports to other member countries would not bediscriminated vis-à-vis their domestic products.MFN treatment likewise ensures non-discriminationamong various members in their tariff regimes andalso other rules and regulations.

4.90 Emerging from continued discussions invarious multilateral fora, developmental issuesalong with trade related issues are being increa-singly focused at the international level. Povertyconcerns of developing countries along withdevelopment and trade policies are also being givencognisance. Need has been felt for integration oftrade policies with development strategies,increasing support to areas of finance and debtrelief, recognising the importance of technology fordevelopment, improvement in market access fordeveloping countries in sectors like textiles, clothingand agriculture, and providing better access to thedispute settlement mechanisms for these countries.The issue of abuse of the anti-dumping procedure,the problems of rules of origin criteria, technicalbarriers to trade, regional trading blocs, etc., arealso being considered at various levels in the WTO.

4.91 The Government of India has takenseveral steps to implement the policy commitmentsmade under some of the agreements, particularlyunder the Agreement on Tariffs and QuantitativeRestrictions, Agreement on Agriculture (AoA), TradeRelated Intellectual Property Rights (TRIPs), TradeRelated Investment Measures (TRIMs), GeneralAgreement on Trade in Services (GATS), apart fromothers. A strategy for tariff negotiations is, however,required. The additional ‘non-trade’ issues relatingto transparency in government procurement prac-tices, trade and competition policy, trade andenvironment, and trade and labour standards pro-posed in the Singapore and the Geneva Ministerialneed to be addressed for negotiations. The commit-ments regarding the technical barriers to trade,social agenda covering labour standards andenvironmental and phyto-sanitary issues alsorequire establishment of certain national standardsand technical regulations in a standardised andtransparent system.


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4.92 At the same time, there are some issueson which India has expressed certain reservations.These are:

• During the implementation of WTO agree-ments in the last six years, India hasexperienced certain imbalances andinequities in the WTO agreements. It isfound that some developed countries havenot fulfilled their obligations in letter andspirit of the WTO agreements, and manyof the Special and Differential Treatmentclauses, in favour of developing countries,added in various WTO agreements haveremained inoperational.

• Taking advantage of the exception clausesprovided in the WTO, most industrialisedcountries are still enforcing various regula-tions on foreign producers and suppliers.

• Extending the scope of the investmentregime in WTO beyond Trade RelatedInvestment Measures and GeneralAgreements on Trade in Services, is notappropriate.

• A multilateral framework cannot guaranteean increase in FDI inflows although itthreatens to adversely affect the qualityof the inflows.

• There are also other asymmetries present,as the WTO does not address theresponsibilities of corporations which oftenimpose trade restrictive clauses on theirsubsidiaries.

• WTO has not been able to ensure abolitionof non-trade barriers being imposed onlabour and environmental considerations,including the linkage in certain Genera-lised System of Preferences (GSP) sche-mes to these issues.

4.93 The present negotiations strategy is basedon the decisions taken at the Doha Ministerial inNovember 2001. The Doha Declaration focusedmainly on TRIPs agreement, public health, tradeand environment and the implementation relatedissues and concerns. Elaborate timetables on work

programme for current negotiations in agricultureand services and other issues have been workedout.

4.94 The Doha Conference presented mixedresults for India. India’s main concern was to speedup implementation of various agreements and toundo the imbalances and inequities present in someWTO agreements. From India’s point of view, fasterremoval of the textile quotas maintained by deve-loped countries like the USA was the most importantimplementation issue, which was, however, met withlimited success. As far as environmental issuesare concerned, the Doha declaration has mandatednegotiations to clarify WTO rules in the light ofmultilateral environmental agreements. Thesenegotiations could lead to developed countriesraising barriers against goods from developingcountries on the pretext of environmental protection.India had also reservations on starting negotiationson four new ‘non-trade’ areas, namely, multilateralinvestment, global rules on competition, transpa-rency in government procurement and trade facili-tation, i.e., framing of uniform custom’s proceduresfor clearance of goods. India could secure only atwo-year respite and the study process wouldcontinue for two more years, i.e. up to the FifthMinisterial Conference, when a decision aboutnegotiations will be taken on the basis of an explicitconsensus.

4.95 Apart from mandated negotiations inagriculture and services where the process hasalready started, negotiations on market access fornon-agricultural products is quite important for India,as reduction or elimination of tariffs, tariff peaks andtariff escalation as well as removal of non-tariffbarriers will be quite helpful in exports. India would,of course, have to make offers even though thenegotiations will be carried out under less than fullreciprocity as far as developing countries areconcerned.

4.96 The other area where action is requiredis in regard to extension of protection of geogra-phical indications to products other than wines andspirits under Article 23 of TRIPs and the relationshipbetween TRIPs and the Convention on Biological


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Diversity (CBD), and Traditional Knowledge (TK)under Article 71.1. The process of legislation inregard to geographical indications needs to becompleted. In the area of TRIPs and access tomedicine, where additional flexibility is provided inseparate ministerial declarations in terms ofcompulsory licensing and parallel imports, India canbenefit in terms of lower prices of crucial life savingdrugs and even promoting exports of pharma-ceutical products.

4.97 India and other developing countriesshould now ensure an average balance ofreciprocity in these negotiations. There is need fora continued effort to handle some of the complexissues, as per international requirements as wellas our domestic resources and other constraints,during the Tenth Five Year Plan. Some of theseissues are briefly examined here in the context ofthe text of the agreements, some of which arealready accepted and others proposed fornegotiations.

Agreement on Agriculture

4.98 The Agreement on Agriculture (AoA) aimsto have an equitable reform programme for tradein agriculture amongst the member countries, alsotaking into consideration some non-trade concernsincluding food security. It is recognised thatagriculture is a way of life in most developingeconomies. It contributes significantly to the overallGDP of these countries and employs a large propor-tion of the workforce. The policies for agriculturaldevelopment aim to increase productivity and overallproduction in the agriculture sector. Rapid growthof agriculture in these economies is essential forfood security as well as alleviation of poverty. Foodsecurity is defined by the FAO as ‘the physicaleconomic access for all people at all times forenough food for an active, healthy life with non-riskof losing such access and as such is directly connec-ted with livelihood in the developing countries’. Inthis background, the commitments made under AoAare expected to ensure that food security interestsof developing countries are primary in relation tothe disciplines of market access and domesticsupport.

4.99 The commitments under AoA mainly relateto product-specific and non-product-specific domes-tic support, market access and export subsidies.The product-specific support is related to theAggregate Measure of Support (AMS) given tofarmers in the form of subsidies for fertilizers, seeds,pesticides, credit, electricity, etc. The AMS is calcu-lated for each product receiving market support andis based on the prices prevailing in the base period1986-88. Several categories of subsidies have beenexempted from AMS calculations such as forresearch programmes, pests and disease control,training services, extension and advisory services,marketing and promotional services, and infrastruc-ture development. Apart from this so- called ‘greenbox’ areas of support, payments for productionlimiting programmes and also decoupled incomesupport was exempted.

Issues of Concern

4.100 There are a number of issues under theAoA, which are considered against the interests ofdeveloping countries like India. First of all, it relatesto minimum access for import of primary goods thatflout the basic rule of free trade promotion enshrinedunder the WTO agreement. The governmentbudgetary support for agriculture is subjected tointernational discipline. ‘Green Box’ subsidies andalso exports subsidies are required to be identifiedtransparently to be permissible, while the rest isactionable by WTO. In any case, the ‘blue box’ and‘green box’ subsidies, which are exempted fromreduction commitments, also lead to distortions intrade. This has been emphasised by developingcountries, like India, which have a majority of lowcost agricultural producers.

4.101 It has been suggested, on the basis of theexperience of implementation of the AoA, that theagreement legitimised the various trade distortingpractices of the developed countries in their favour.Further, it has even taken away the right of thedeveloping countries to give some limited exportsubsidies as otherwise provided under the Subsidiesand Countervailing Measures Agreement. Despitefulfilling their so called reduction commitments, thetotal support being given to agriculture in the OECD


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countries has gone up from $ 308 billion in the year1988 to $ 361 billion in the year 1999.

4.102 The other problem relates to distortionsemerging from inequity in domestic subsidy disci-pline due to different base positions. The developedcountries, which are heavily subsidising countries,are allowed to retain up to 80 per cent of theirsubsidies, while developing countries can subsidisetheir farmers not more than 10 per cent of the totalvalue of agricultural production. The domesticsupport by developed countries needs to be reducedsubstantially in absolute terms.

4.103 The domestic support measures relaxedfor the purpose of food security and PDS areallowed only in relation to the international marketprice and to the targeted population. This is aproblem for countries like India with high percentageof poor population and also dependent on agri-culture, where purchase of agricultural products atinternational market price is not possible withoutadverse consequences. Food security that is inter-linked with the livelihood security, is extremelyimportant for densely populated countries with alarge agrarian economy like India. These countrieswould need enough flexibility under the Agreementon Agriculture to take care of its food security, ruralemployment and livelihood concerns.

4.104 India has also argued that low incomedeveloping countries such as ours, need to addressmarket access and domestic support discipline suchthat their food requirements are basically met fromdomestic sources. The volatile international marketcan get transmitted to the domestic economy andseriously affect the prices of food grains and foodentitlement of the poor. Commodities like wheat,coarse grains, edible oils, sugar, dairy products,fruits and vegetables that are crucial for foodsecurity would need to match high levels of exportsubsidies by developed countries. It is suggestedthat for development of agriculture in developingcountries, diversification of ‘green box’ subsidiesshould be encouraged and allowed input subsidiesto crops where productivity levels are below theworld average. The negative product-specific

support may be permitted so as to be adjustedagainst non-product-specific support.

4.105 The other issue of concern relates toimplementation of changes in the tariff regime foragricultural commodities. The peak tariff on agri-cultural commodities in countries like USA, Canada,EU, Japan, Korea and the Cairns group continuesto prevail at very high rates. A study conducted bythe WTO with United Nations Conference on Tradeand Development (UNCTAD) (1997) has observedthat one-fifth of the peak tariffs of the USA, a quarterof those of EU, about 30 per cent of those of Japanand about one seventh of those of Canada exceed30 per cent. It further reports that the most importantareas for developing countries face highest tariffrates and include the major agricultural staple foods,cereals, meat, sugar, milk, butter and cheese aswell as tobacco products and cotton. In fact, thestudy suggests that tariff wedges will continue tobe significantly high on account of tariff escalation,which is a major factor preventing developingcountries from diversifying and increasing theirshare of processed agricultural exports.

4.106 In India, agricultural tariffs are much lowercompared to these countries, even though industrialand mining tariff rates still prevail much higher. Thepeak rates for agricultural commodities in developedcountries need to be negotiated. These tariff ratesare progressively being reduced to bring them inline with rates prevailing in East Asian economies.

4.107 Moreover, support packages by developedcountries under production-limiting programmes forretirement of producers, as well as resourcesemployed for production of marketable surplus inthe past is still beyond the purview of the subsidydiscipline. This needs to be re-negotiated. Also,there is the issue of import access rights byagricultural exporters of developing countries whoare restricted on grounds of phyto-sanitaryregulations in developed countries. It is importantthat scientific phyto-sanitary standards are esta-blished at the international level so as to preventprotectionist measures by developed countries onthis plea.


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4.108 Some of these concerns have been givendue cognizance at the Doha Ministerial Meet byWTO in November 2001. The Declaration commitsto comprehensive negotiations for improvement inmarket access for developing countries along withphasing out of all forms of export subsidies andother domestic support being given by developedcountries. The development needs of countries likeIndia, including food security and rural developmenthave been taken note of. The issue of trade andenvironment and the aspects impinging on agricul-ture, however, met with limited success in thenegotiations. There is continued need for negotia-tions prior to the Mexico Ministerial Meet, apart fromthe requirement of implementation by India on hercommitment from 2004.

4.109 It is important that steps are taken to reapbenefits of a liberalised trade regime throughincreased efficiency in agriculture and combatrestriction by developed countries arising fromsanitary and phyto-sanitary measures. Efficiencywould be greatly enhanced with increased invest-ments and land reforms. Also, diversification ofagricultural production into agro-foods, horticultureand floriculture products and farm products withmaintenance of international quality standards,along with application of sanitary and phyto-sanitarymeasures could help to increase exports from thissector.

Trade Related Intellectual Property Rights(TRIPs)

4.110 The agreement on Trade - Related Intell-ectual Property Rights was introduced in the WTOagreements and includes protection throughexclusive rights to provide returns for undertakinginnovation. At the same time, balance is ensuredbetween the interest of the innovator on the onehand and the users on the other. It is supposed tocontribute to the promotion of technologicalinnovation and also dissemination to the mutualadvantage of producers and users of the knowledgeand to promote social and economic welfare. Theagreement covers copyrights, trademarks, geogra-phical indications, industrial designs, patents, layout designs of integrated circuits and undisclosed

information. The implementation of TRIPs is throughprescribed laws and regulations and the membersare obliged to ensure that their laws commit effectiveaction in their infringement.

Issues of Concern

4.111 Developing countries like India, which areinvariably technology seekers, face difficulties intheir commercial dealings with technology holdersin developed countries. Apart from market imper-fections, these developing countries have inade-quate experience and skill in finalising appropriatelegal arrangements for acquisition of technology.Technology transfers of crucial scientific deve-lopments to the third world have been constraineddue to the protection given by the intellectualproperty rights.

4.112 The declaration on the TRIPs agreementand public health recognises the gravity of the publichealth problems afflicting the developing countries.The WTO members have a right to formulate theirpublic health policies. It is important also to notethat technological development of new medicinesshould be transmitted to developing countries topromote the development of manufacturingcapacities of pharmaceuticals, without restrainingpolicies on access to medications. Emphasis hasbeen on ensuring the accessibility of pharma-ceuticals and medical treatments used to treatpandemics such as HIV/AIDS, Malaria, TB, etc., aswell as their affordability for all, in accordance withinternational law.

4.113 It has been suggested that even thoughexclusive rights conferred by patents provideincentive for further investment in R&D of new andeffective medicines, the exclusive rights in case oflife-threatening diseases should be treated sepa-rately at a different level. There is need to ensureaccess to medicines for such diseases at affordablerates to the vast majority of the population,particularly in countries where the per capita incomeis low and per capita expenditure on health isabysmally small. The Doha Declaration made acategorical statement on TRIPs and public healthand emphasized the rights of WTO members to


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protect public health and to promote access tomedicines for all.

4.114 The impact of the far reaching changes inTRIPs needs to be carefully examined in regard topublic health in India as improvement in the healthstatus of the population has been one of the majorthrust areas in social development programmes ofIndia. Technological improvements and increasedaccess to health care have resulted in steep fall inmortality but disease burden due to communicablediseases and non-communicable diseases andnutritional problems continue to be high. Inspite ofthe fact that norms for creation of infrastructure andmanpower are similar throughout the country, thereare substantial differences between States anddistricts in availability and utilisation of health careservices and health indices of the population. A re-evaluation of the problem of health and impact ofthe Declaration under TRIPs needs to be done inthe Tenth Plan.

4.115 One way of increasing access to medi-cines in poor countries is through differential pricingof drugs in the developed and developing countries.Some major companies are already pricing theirproducts in such a manner. However, more wide-spread and sustainable differential pricing can bemade feasible provided a right legal, technical andpolitical environment is secured. The most impor-tant aspect is to recognise the importance ofrespecting the balance found in the negotiations ofthe TRIPs Agreement and the rights of thedeveloping countries to use the flexibility in it, inregard to compulsory licensing and parallel importsto respond to health concerns. TRIPs Agreementis also not against segmenting of the marketsthrough the prohibition of parallel imports. However,adequate provision has to be made for enhancedR&D efforts in India.

4.116 Traditional Medicine (TM) plays a crucialrole in health-care or serves the health needs of avast majority of people in developing countries.Access to ‘modern’ health care services andmedicine may be limited in developing countries.TM thus becomes the only affordable treatmentavailable to poor people and in remote communities.

The protection of TM under intellectual propertyrights (IPRs) raises some issues, the most importantbeing the extent to which it is feasible to protect theexisting IPR system. Certain aspects of TM maybe covered by patents or other IPRs. There havebeen many proposals to develop sui generissystems of protection. Such proposals are basedon the logic that if innovators in the ‘formal’ systemof innovation receive compensation through IPRs,holders of traditional knowledge should be similarlytreated.

4.117 The grant of patents on non-originalinnovations (particularly those linked to traditionalmedicines), which are based on what is already apart of the traditional knowledge of the developingworld have been causing a great concern to thedeveloping world. The governments in the thirdworld as well as members of public are rightlyconcerned about the grant of patents for non-original inventions in the traditional knowledgesystems of the developing world. At theinternational level there is a significant degree ofsupport for opposing the grant of patents on non-original inventions. In fact, a mechanism has beenproposed for disclosure of the source of origin ofbiological material used in invention and obtainingthe consent of the country of origin. At the sametime, dissemination of knowledge along with patentrights for seed diversity is crucial for developingcountries like India where such a large populationis dependent on agriculture for their livelihood. TheDoha Ministerial Declaration took cognisance ofthe compatibility between TRIPs and theconvention on bio-diversity during its review of theTRIPs agreement.

4.118 On the domestic front, it is important torecognise the need to urgently implement productpatenting in India. Detailed documentation oftraditional knowledge areas is required to beundertaken at the earliest. Measures have alreadybeen initiated for setting up of the ‘TraditionalKnowledge Digital Library’ by the Council forScientific and Industrial Research. We need toensure that when an overseas product is based onIndian resources and Indian medicinal knowledge,India’s rights must be protected. Therefore, there


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is need for a separate government body for (i)facilitating Indian patents abroad, (ii) preventingforeign companies from getting exclusive marketingrights and patents on items of Indian origin, (iii)improved information dissemination to avoidexploitation of Indian consumers particularly ofpharmaceutical products and farmers, (iv) betterdispute settlement mechanism in consultation withlawyers, scientists and historians, and (v) improvedbio-diversity through organised institutions andmonitoring of seed economy.

Trade Related Investment Measures, theMultilateral Agreement on Investment and theSingapore Issues

4.119 The agreement on Trade RelatedInvestment Measures mainly applies to trade ofgoods that take place via Transnational Corpora-tions (TNCs). The agreement aimed to protectconditions applied by an enterprise, like purchaseor use of products of domestic origin, volume orvalue of products and minimum percentage of localproduction, purchase or use of imported products,export conditions, etc. Similarly, restrictions imposedby host countries on foreign investment were alsobrought under the purview of this agreement.TRIMs does not cover foreign equity participationin industries and the issue of channeling of invest-ment to particular areas. The agreement does notcover restrictions by government using exportperformance requirements. The government isexpected to have similar trade policies for foreignand domestic companies.

4.120 The developing countries invite TNCs toaugment availability of capital and technology. The‘performance clauses’ had been added to checktheir effectiveness. This had led to conflict, as anappropriate code of conduct for TNCs and hostcountries had not been arrived at. It was againstthis background that this agreement was introducedin the WTO to combat the problem that had arisendue to large number of countries having imposedrestrictions on foreign investment and trade in goodstaking place through TNCs. However, since controlson the operations of the TNCs were required to beremoved under this agreement, it has been felt that

developing countries may not be in a position todirect their operations to critical areas requiringtechnological and financial support, withoutadversely affecting foreign exchange flows. Theimportance of FDI in developing countries cannotbe undermined but selectivity of investment flowscontinues to be relevant as may be learnt from theforeign investment policy of China (vis-à-vis policiesof some of the African and even Latin- Americancountries).

4.121 Since the establishment of the WTOcertain members have been trying to introduce non-trade issues into its agenda. At the First MinisterialConference in 1996 at Singapore, members like EUand Japan pushed the inclusion of Investment andCompetition Policy in the agenda in order to havemultilateral set of rules on these issues. At Singa-pore the developing countries, with India in the lead,managed to limit the work on Investment andCompetition Policy to the establishment of WorkingGroups on Trade and Investment and a WorkingGroup on Trade and Competition Policy. These twoissues, along with Trade Facilitation and Trans-parency in government procurement have come tobe known as Singapore issues.

4.122 The Organisation for Economic Coopera-tion and Development introduced the MultilateralAgreement on Investment to provide betteropportunities for investment by TNCs, althoughthere was no consensus on the issues. The OECDinitiative covers all direct investment transactions,whether by non-resident enterprises or by domesticenterprises under foreign control. Three funda-mental principles form the basis of the OECDinstruments, viz. right of entry and establishment,national treatment, and freedom of repatriation, bothon capital and current accounts, with the ultimateobjective of progressive liberalisation of policies tobe carried out by member countries in respect offoreign investment. It was propounded that it willprovide the requisite transparency, predictability andlegal security to foreign investment.

4.123 The Doha Ministerial Conference decidedto start negotiations on the MAI and other Singa-pore issues once a consensus (on the issue of


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negotiations) is reached in the fifth session of theMinisterial Conference. On the basis of the decision,by explicit consensus on the modalities, actualnegotiations will begin. However, a number of issuesare of concern for developing countries like India,which need to be addressed prior to actual negotia-tions. Some of these are discussed here.

Issues of Concern

4.124 This agreement has important implicationsfor the developmental objectives that the hostcountry may want to address while inviting foreigninvestment and negotiating the multilateralagreement. The developing countries feel the needfor selective and judicious intervention of thegovernment to support domestic industry andtechnology creation so as to ensure a level playingfield for domestic enterprises. These developingcountries also employ an appropriate mix of incen-tives and performance requirements for foreigninvestment to achieve specific developmentalobjectives. The responsibilities of the MNCs needto be addressed and also prevent imposition of traderestrictive clauses on their subsidiaries. It is in thisbackground that the important features of MAI needto be looked into in greater detail and view theproposed agreement of bringing the world under alegally secure, non-discriminatory and stable regimefor foreign investment. In any case, it is essentialto recognise that the multilateral framework cannotguarantee an increase in FDI inflows, although itcould impact the quality of the inflows.

4.125 The treaty seeks to adopt a compre-hensive asset-based definition of investment asopposed to the enterprises-based one, i.e., it coversall forms of assets, which are recognised and alsothe evolving forms of investment. Specifically,investment has been defined as ‘every kind of assetowned or controlled, directly or indirectly, by aninvestor’, while the investor is the natural or legalperson of a contracting party. Thus, investmentwould cover, not just equity capital, but also portfolioinvestment, debt capital, monetary and financialtransactions, and every form of tangible andintangible assets including intellectual propertyrights, licences and authorisations. It is this wide

definition of ‘investment’ that has been contested.The other major issue of concern under the MAI isregarding performance requirements and invest-ment incentives. The proposed treaty aims to gofar beyond the restrictions on performance require-ments under the TRIMs agreement of the WTO.The treaty prohibits a wide range of performancerequirements totally even if they apply equally todomestic and foreign investors.

4.126 As far as the issue of privatisation of firmsin host countries is concerned, the agreement aimsto apply national treatment and the most favourednation principle at all stages of the privatisationprocess. The agreement does not prohibit govern-ment-designated monopolies provided the rules ofnon-discrimination in their sales and purchasesprevail. The problem is regarding handling disputesettlements, particularly that relating to investor toState disputes, State to State disputes, etc. Theinvestor could have an option to file the dispute inthe national courts or international arbitration. Thiswould have implications on the rules chosen forarbitration, which could be rules operational in thehost or parent country or even other internationalbodies. At the same time, the State (of the hostcountry) would have no option but to go by thenational legal remedies. These are also contentiousissues that require negotiations.

4.127 Further, in case of the new MAI framework,it is likely that the flexibility available to us, underbilateral investment protection agreements, is takenaway. In the next two years, we need to think interms of (a) the possible impact of an MAI ondifferent sectors; (b) status of the Indian economyin regard to the relation between trade andinvestment and trade and technology transfer;(c) existence or devising of new policy instrumentsor legislation to protect certain high priority areas;(d) to ensure a level playing field for domesticindustry and (e) to provide enabling legislations torein in the multinationals when their conduct iscontrary to national objectives. This is possible inview of the emphasis in the Declaration that accountshould be taken, as appropriate, of the existingbilateral and regional arrangements in investment.In India such agreements are based on a model


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code, devised and approved after careful consi-derations.

4.128 Similarly, the issues relating to Trade andCompetition have wide ranging implications. TheWorking Group has been concentrating on princi-ples of transparency, non-discrimination andprocedural fairness and provisions for hardcorecartels. Negotiations on multilateral competitionagreement could commence after a consensus isreached after the 2003 Ministerial. There has beenconsiderable exploitation due to monopoly powerof major TNCs and the price fixation mechanism.The issue of anti-competitive pricing by TNCs andthat of mobility and tradability of factors of productionlike labour, needs to be taken up as it relates toclarification of core principles, including transpa-rency, non-discrimination and procedural fairness,and provisions on cartels. Strengthening of theinternational competition law needs to be precededby strengthening of domestic competition law andregulatory framework. India and many otherdeveloping countries are required to introduce sucha system domestically. At the same time, legalreforms in governance of factor market, particularlylabour market is essential.

4.129 As far as the proposed changes in theissue of ‘government procurement’ is concerned,greater transparency in assessment of alternativeinvestments in a fair manner would greatly enhanceefficiency and help development in the developingcountries. Fundamental changes are expected inthe Indian and world economies within the periodof the Tenth Plan where competition, productivityand efficiency will determine the place of a countryin the comity of nations. In recent times, whileanalyzing the productivity of investment, leakagesor corruption has been identified as a retardingfactor in the development process. The DohaDeclaration, focusing on transparency in govern-ment procurement seems to be backed by thisconsideration. Already there is a plurilateralagreement and a Working Group is working on thisissue. During its working, the group has identifiedand analysed a number of principles of transparencyand due process in procurement. These includedefinition and scope of government procurement,

transparencies of decisions on qualification andcontract awards, etc. Of these elements significantdifferences have remained on several key elements,including, in particular, scope and coverage of atransparency agreement and application of WTODispute Settlement Procedures to such a possibleagreement. As the discussions in the WorkingGroup on this subject have sought to tread on manymarket access related issues, developing countriesare concerned that the real intention appears to beto extend the market access in future. However,according national treatment to all tendering partiesmay not be acceptable to developing countries likeIndia, as preference would have to be given todomestic suppliers.

4.130 In India, government procurement proce-dures are in accordance with technical specificationsand no details are revealed on the system ofselection of tenders. Although there is a felt needfor following standardised and transparentprocedures, there is no unanimity on the exactimplementation and review method. In fact, it isfelt that developed countries should be preventedfrom using transparency principle as a means ofsecuring market access on grounds of social anddevelopment needs. At the same time, an improvedand transparent government procurement systemis required for our economy.

4.131 Trade facilitation came on the work progra-mme to undertake exploratory and analytical work,drawing on the work of other relevant internationalorganisations, on the simplification of trade proce-dures in order to assess the scope for WTO rulesin this area. Most of the trade facilitation proposalsrelated to customs procedures while some were alsorelated to transport, payment, insurance and otherfinancial requirements. The process of negotiationon trade facilitation is also likely to commence afterthe Mexico ministerial in 2003. The agreement isexpected to modernise and standardise customsprocedures and facilitate movement and clearanceof goods. The Doha Declaration on trade facilitationcarries the objective of Article 8 of GATT regardingthe desirability of reducing formalities in tradetransactions by reducing customs and otherprocedures and enhancing movement, release and


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clearance of goods. As the transaction cost in Indianexports are quite significant, it is essential toimplement reforms in these areas on an urgentbasis. This would help our export promotion effortsonce improved procedures are established.

4.132 Emphasis needs to be given to measuresthat ensure economic growth and development withtrade. Inclusion of these issues, taking develop-mental concerns of LDCs, should be given duecognisance which would help to streamline the flowof multilateral investments into these LDCs. Onthe one hand, it would give access to foreigninvestors in a transparent framework and get legalprotection, while, on the other, it would give greaterconfidence to the host country players to takemaximum benefit in terms of financial support andtechnological development from TNCs. The TradeRelated Committee on Investments of the WTO hasbeen monitoring the notifications for relaxation bymember countries. At the same time, negotiationson the labour market front are essential and couldensure that LDCs get improved working conditionsfor their skilled/unskilled workers abroad.

Trade and Environment and Related Issues

4.133 In line with increased international concernfor issues relating to preservation of globalenvironment, the multilateral environmentagreements (MEA) are being brought in as part ofthe agreements on international trade. A harmo-nised code of conduct is being introduced to achieveuniversal conservation of the environment, as perglobal standards. In this case an important distinc-tion has been suggested between environmentalproblems that are basically domestic, as againstthose that are inherently international in nature. Thelatter involves physical spillovers across nationalborders. It is these intrinsically internationalenvironmental problems that are related to tradeissues, although domestic environmental problemsare also related to trade through the operations oftransnational production activities. Due to theseissues, need has been felt for neutralising environ-mental externalities through use of appropriatetaxes, subsidies and transfers. As part of the DohaDeclaration, it has been mandated to have

negotiations on limited aspects of trade andenvironment, viz., relating to WTO rules and tradeobligations, procedures for exchange of informationbetween MEA and WTO, and reduction/eliminationof tariff and non-tariff barriers to environmentalgoods and services.

4.134 The multilateral Agreement on Environ-ment addresses protection of human, animal andplant life. Here, all governmental and non-govern-mental bodies that set standards are required toabide by the ‘Code of Good Practice for the Prepara-tion, Adoption and Application of Standards’, whichstates that national standards must be based oninternational norms. An exception is made wherethe international standards are ‘ineffective’ or‘inappropriate’, or where the national standards areused to pursue ‘protection of human health or safety,animal or plant life or health, or the environment’.However, it is suggested that exceptions tointernational standards must be least trade-restrictive and must be supported by availablescientific and technical information.

4.135 Additionally, the agreement aims toestablish universal risk assessment criteria in settingpesticide residue levels and other health standardsfound in environmental laws. The proposed criteriarequire that the standards for risks to human healthbe offset by balancing the economic benefits of theharmful activity. The agreement has implicationsfor maintaining appropriate labour standards,including child labour in developing countries. Theset of minimum standards proposed includefreedom of association, collective bargaining, prohi-bition of forced labour, elimination of exploitativechild labour and non-discrimination. Here the terms‘unfair’, ‘exploitation’ and ‘forced’ are not preciselydefined but reflect basic human rights and standardsto stimulate economic development in the interestof all workers and countries.

4.136 The agreement on Technical Barriers toTrade accords protection to developing countriesagainst prescriptions on technical regulations forproducts which could sometimes work asunreasonable barriers to trade. The basic principlesprescribe that the regulations should not be more


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trade restrictive than necessary to fulfill legitimateobjectives of the government based on security,health or environment. The regulations areprescribed in terms of performance of the productrather than design or descriptive characteristics andare to be non-discriminatory among members. Theagreement encourages adoption of internationalstandards. It also requires a high degree of transpa-rency in preparation and administration of technicalregulations and standards in the industrialisedcountries.

Issues of Concern

4.137 It has been felt that trade is basically aimedat exploiting markets whereas preservation ofenvironment is traditionally outside its purview.Need was felt for an objective harmonisation andsearch for compatibility between the interests of thetrading system and environmental protection.Although, steps were taken to harmonise cross-country intra-industry environmental standards,these are being questioned. A particular country’spreferred environmental choices and solutions, (sayby setting up appropriate pollution standards andtaxes) could be very different from that of anothercountry. There are differences in endowments andtechnology across countries, and different costs ofpollution abatement relative to income and consu-mption levels. Forcing the poor country to spendas much on abatement to improve its tradeprospects could reduce its welfare substantially.There is continued need to encourage and promoteimproved standards rather than have drasticsanctions.

4.138 It has been felt that no universal agree-ment on minimum labour standards can be outlinedfrom the fact that prevailing labour standards in aparticular society are lower than those of another,thereby implying that the former is engaging in‘unfair’ practices or is exploiting its labour. There isdifference in values which leads to differences inlabour standards. Also, consumers indicate theirpreferences through the market and thus changethe prevailing labour standards in their country.Using labour conditions in developing countries toimpose trade restrictions, is considered unfair and

somewhat harsh. It is felt that this does not call forimposing protectionist measures/trade sanctions bythe developed countries.

4.139 The work programme adopted at Dohaclearly indicates that negotiations on environmentwill begin soon, notwithstanding the opposition fromdeveloping countries including India. The negotia-tions on trade and environment will concentrate onthe relationship between existing WTO rules andtrade obligations contained in multilateral environ-ment agreements (MEAs) and reduction orelimination of tariffs and non-tariff barriers toenvironmental goods and services. The workprogramme of the Committee on Trade and Environ-ment will evaluate the effect of environmentalmeasures on market access, the relevant provisionsof TRIPs and labeling requirements for environ-mental purposes. These, along with the applicationof the sanitary and phyto-sanitary measures, willcreate a strict and environment friendly regimehaving far reaching impact on trade of developingcountries like India. As exports of these countriesare already affected by the application ofprecautionary principles and other environmentalmeasures including eco-labeling requirements,necessary steps would be required in upgradingquality control, consistent with the emergingenvironment regime.

4.140 The transparency requirement on groundsof market access accords the right to the developedcountries to be able to intervene in various opera-tions and regulations in developing countries. Incase a new technical regulation is introduced by amember country, public notice is required to beissued and cognisance taken of comments offeredby other members. A code of good practice forpreparation, adoption and application of standardshas been suggested to member countries and themeasures are drafted in a way to protect their tradeinterests.

4.141 On the domestic front, it is important toestablish set procedures for international anddomestic trade, taking into consideration improvedhealth and environment standards. The qualitycontrol mechanism could be strengthened as per


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requirements of our major export markets in theUS, EU and other countries. Industry could also begiven incentives for enhancing R&D expenditure todevelop environmentally sound technologies andpractices.

General Agreement on Trade in Services

4.142 GATS is the first set of multilateral legallyenforceable rules covering international trade inservices. It covers trade in services in terms of crossborder supply of services like internationaltelephony; tourism and education abroad; banking,legal advice and communication; and movementof natural persons. The GATS covers all servicesbased on a positive list, and the aim is toprogressively liberalise trade in services, within theexisting architecture of GATS. The membercountries are required to schedule specificcommitments under the agreements. The objectiveof the GATS negotiations is to achieve progressivelyhigher levels of liberalisation so as to promoteeconomic growth amongst trading partners anddevelopment of developing countries. The overallbalance of rights and obligations has beenemphasised through market access to promoteinterest of all participants. The participation ofdeveloping countries in trade and services has beengiven special priority. Focus has been on sectorsand modes of supply of export interest to thedeveloping countries.

4.143 The Council for Trade in Services (CTS)carries out an assessment of trade in services inoverall terms and on sectoral basis with referenceto the objectives of GATS. The servicesnegotiations are conducted in special sessions ofthe CTS, which in turn is required to report to theGeneral Council on a regular basis. Specificschedules of commitments by individual membercountries have been drawn out which form the basisfor the negotiations. Appropriate flexibility has beenprovided for developing country members foropening fewer sectors, liberalise fewer types oftransactions, progressively extending marketaccess in line with their development situation. Itwas decided that the process of progressiveliberalisation should be advanced in each sub-round

through bilateral, plurilateral or multilateralnegotiations directed towards increasing the generallevel of specific commitments undertaken by themembers.

4.144 The sectors inscribed in the individualschedules are required to be accorded treatmentthat is no less favourable than accorded to itsown like services and service suppliers, i.e., theschedules are subjected to ‘national treatment’.The members are allowed to modify and withdrawany commitment in its schedule at any time afterthree years have elapsed from the date on whichthe commitment came into force, after suitablynotifying to the CTS. India has indicated aschedule of specific commitments whereby thelimitations on market access and nationaltreatment is outlined. These relate toprofessional services, computer and relatedservices, R&D services, communication services,audio-visual services, construction and relatedengineering services, financial services, andother business services.

4.145 The Doha Declaration took cognisance ofthe proposals on various sectors, includingmovement of natural persons. Negotiations havebeen carried out between member countries oncommitments for services and environment,movement of natural persons, financial services,maritime transport services, basic telecommunica-tions and professional services. The Committeesare to decide on the scope for further liberalisationof these services. The Committee on ProfessionalServices is in the process of examining measuresto ensure that the qualification requirement andprocedures, technical standards and licensingrequirements do not constitute unnecessary barriersto trade.

Issues of Concern

4.146 It is the implementation of some of theseissues, which are of concern to developing countrieslike India. Movement of natural persons has beenrestricted by many of the developed countries. Indiahas the advantage in movement of professional andcomputer services, as it has a large reservoir of


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highly skilled and experienced professionals likelawyers, chartered accountants, cost accountants,company secretaries, computer and electronicsbased scientists/technicians, information tech-nology/communications, scientists/technicians,engineers, doctors, etc. The barriers to high levelof movement have constrained expansion of tradein technical and non-technical services from India.The requirement of the CTS to undertake constantconsultation and cooperation with the UN and itsspecialised agencies has been limited. Further,GATS is silent on the issue of down-market unskilledworkers like construction workers, labour, etc.There is need to negotiate trade of these servicesfor such workers going abroad. There is scope alsofor promoting greater upmarket skills for higherearnings. Further, standardisation and harmoni-sation of requisite qualifications and experience ofworkers moving to the developed countries is calledfor. Requirements of local competency or localcertification (e.g. medical boards) should not beused as non-tariff barriers.

4.147 It is important to note that, for India, thesectors where market access, particularly forprofessionals is relevant, include health, software,construction and engineering, accountancy, audio-visual, tourism and architecture. India has also toidentify the sectors where it may assume commit-ments on market access in the negotiations. At thesame time, there is need to spur active thinking onwidening our negotiating initiatives in other modes(besides the mode 4 relating to movement of naturalpersons) of delivery of services. Commercialpresence and cross-border supply are nowgradually gaining importance in terms of India’scapability.

4.148 On the domestic front, there is need for aregulatory mechanism, based on objective andtransparent criteria, so that competence and abilityto supply services is given due cognisance. Theuse of international standards needs to be furtherencouraged. There is need to improve the level ofour professional institutions so as to raise it to theinternational standards. In addition, it may bementioned that a demographic shift has beenobserved in developed countries where the ratio of

working population has witnessed a decline;therefore, supply of skilled manpower/services fromdeveloping countries to developed countries maybe negotiated suitably.

4.149 Another step needed is supplying moreinformation to service providers in foreign marketswith a view to exploiting emerging opportunities.Data and information on services is very importantfor both WTO negotiations and tapping the exportpotential for services. In this context, the Committeeon International Trade in Services set up by theDepartment of Commerce has given concretesuggestions to improve the data collection process,which require to be implemented.

4.150 It is quite evident that a defensive positionin WTO negotiations is no longer appropriate. Indiawill have to take a more proactive and aggressiveposition on a number of emerging issues byproposing its own drafts. A few areas in which suchpositions can be taken are readily identifiable:Multilateral Agreement on Investment, trade inenvironmental goods, General Agreement on Tradein Services, and even on labour standards.

REGIONAL TRADING ARRANGEMENTS

4.151 With increased globalisation, there hasbeen a proliferation of a number of regional tradingblocks for economic cooperation within regions andacross regions. There are around 15 regional blocksand an estimated 42 per cent of world trade iscarried out through the preferential trade operations.The tariff rates within these blocks are usuallysignificantly lower to the most favoured nation(MFN) rates required to be offered to all membersof the WTO. There is thus an apprehension thatIndia may be at a serious disadvantage in exportingto the dominant markets within these blocks. Itneeds to be noted, however, that the extent of dis-advantage depends upon the differential betweenthe MFN tariff rates and the preferential rate for anygiven product. In the case of most developedcountry markets, these differentials are fairly smallexcept in the case of a few products in which thereare tariff peaks, such as agricultural goods, textilesand clothing. Even in these cases, the effect may


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not be particularly substantial at present becauseof supply-side limitations on our part for mostagricultural products and the operation of the Multi-Fibre Agreement (MFA) for textiles and clothing. Inthe future, however, as our agro-export potentialimproves and the MFA gets phased out, the negativeeffects may become considerable.

4.152 It would, therefore, appear desirable thata comprehensive strategy to mitigate the effects ofregional trading arrangements be evolved. In doingso, however, it needs to be borne in mind that underthe WTO, preferential tariff areas are expected tohave a common set of tariffs such that the tariffrate on any product is equal to or less than thelowest rate prevailing in any member country priorto the formation of the block. This continues toremain relevant in the context of India joining oneor more of the existing trade blocks, even thoughthe Indian tariff rates are gradually being broughtdown to East Asian levels.

4.153 India is a member of the South AsianAssociation for Regional Cooperation (SAARC),which has very low level of intra-regional trade. Theexports from India to the SAARC region constitutearound 4.5 per cent of the total, while imports are alittle over 1 per cent. It is important to emphasisedevelopment of regional initiatives in trade andinvestment since it is crucial for building on thepotential synergies that are available in the SouthAsian region. It has been suggested that thepossible gains from liberalisation of trade within theSAARC region are substantial and with very littlerisk. The main export items from India to theSAARC countries include cotton fabrics, sugar, rice,wheat, machinery, transport equipment, drugs and

pharmaceuticals, rubber products, chemicals, steel,plastic products, etc. There is even greater potentialfor non-traded products such as power, transportand water resources. The potential of these itemsneed to be explored during the Tenth Five Year Planwith greater vigour.

4.154 During the past few years, there has beenefforts to upgrade India’s ties with the countries ofthe Association of South East Asian Nations(ASEAN). India has substantial trade with thisregion, constituting 7.9 per cent of our exports and8.5 per cent of our imports. The main items of exportin this trade include oil meals, groundnut, sugar,vegetables, wheat, rice, meat and its preparations,drugs and pharmaceuticals, plastic products, steel,machinery items, electronics, gems and jewellery,etc. The main import items are vegetable oils, woodand wood products, yarn and fabrics, electronicgoods, machinery, chemicals, etc. There is scopeto integrate software exports from India to the SouthEast Asian countries, with the expertise in thecomputer hardware, apart from support in the formof communications, roads, ports and power. Intra-regional trade arrangements with these countrieswould facilitate industrial development and tradewith the rest of the world. India should also activelyparticipate in the regional grouping of the Bangla-desh, India, Mayanmar, Sri Lanka, ThailandEconomic Cooperation (BIMSTEC) to promoteregional cooperation in trade and investment in theregion. However, the process should be initiatedcautiously in view of the fact that average tariff ratesin the ASEAN region are around 10-15 per cent,while tariffs are only expected to be brought downin India to around 18 per cent by the end of theTenth Plan.


134

Annexure 4.1Export Projections for Tenth Plan

(US $ million)

S.No. Sector 2001-02 2006-07 Total

1 Paddy & Rice 618.93 1085.09 4389.01

2 Wheat 289.01 383.76 1718.56

3 Other Cereals 74.37 98.75 442.22

4 Pulses 78.35 90.00 426.04

5 Jute 1.75 2.01 9.51

6 Cotton 6.16 7.08 33.52

7 Tea and Coffee 568.23 868.66 3691.60

8 Rubber 15.26 20.27 90.77

9 Other Crops 461.71 613.09 2745.55

10 Animal Husbandry 344.43 631.54 2514.31

11 Forestry and Logging 265.61 290.44 1401.67

12 Fishing 1357.18 2074.74 8817.12

13 Coal & Lignite 42.18 56.01 250.82

14 Iron Ore 327.60 376.32 1781.46

15 Other Metallic Minerals 137.65 200.86 868.35

16 Non Metallic Minor Minerals 369.95 491.25 2199.90

17 Sugar 515.23 863.32 3548.90

18 Edible Oils 179.52 206.21 976.20

19 Other Food & Beverages 1585.42 2656.53 10920.29

20 Cotton Textiles 2183.74 4004.04 15940.96

21 Woolen Textiles 50.04 71.34 311.08

22 Silk Textiles 267.86 381.82 1665.04

23 Art. Silk & Synthetic Fibres 406.78 579.85 2528.63

24 Jute Hemp Mesta Textiles 92.12 154.36 634.52

25 Readymade Garments 5253.59 10070.60 39474.29

26 Other Textiles 2798.52 3989.18 17396.10

27 Wood & Wood Products 33.51 56.16 230.84

28 Paper & Paper Products 255.81 339.69 1521.18

29 Leather & Leather Products 1549.53 2261.14 9775.19

30 Rubber Products 1074.88 1532.20 6681.66

31 Plastic Products 384.45 644.18 2648.07


135

32 Petroleum Products 1757.80 4550.74 16121.44

33 Fertilisers 6.23 7.15 33.86

34 Pesticides 255.13 293.06 1387.34

35 Synthetic Fibre & Resins 430.03 824.32 3231.12

36 Paints, Drugs & Cosmetics 1951.10 4082.97 15527.30

37 Other Chemicals 2134.62 4467.00 16987.75

38 Cement 77.22 110.07 479.99

39 Other Non-Metallic Minerals 6042.49 12644.80 48087.43

40 Iron & Steel 2041.90 3914.12 15342.38

41 Non-ferrous Metals 1662.82 2661.85 11123.89

42 Tractor & other Agricultural Machinery 44.39 63.27 275.93

43 Other Non-Electrical Machinery 1199.74 2299.78 9014.56

44 Electrical Machinery 961.40 2011.88 7651.05

45 Comm. & Electronic Equipment 791.30 1729.18 6479.94

46 Rail Equipment 50.41 71.86 313.38

47 Motor Vehicles 512.56 730.63 3186.16

48 Motorcycles,Scooters & Bicycles 112.63 160.55 700.15

49 Other Transport Equipment 294.39 419.64 1829.96

50 Other Manufacturing 2999.48 4275.64 18645.33

Total 44915.00 80419.00 322863.13

Annexure 4.1 Contd.


136

Annexure 4.2A

Import Projections for Tenth Plan

Scenario - 1 (GDP 8.0% ; Tariff : 33.7%, 27%, 22%, 18% & 15%)

(US $ million)


1 Paddy 0.02 0.03 0.12

2 Wheat 0.26 0.40 1.70

3 Other cereals 6.70 10.15 43.26

4 Pulses 641.29 1240.19 4846.33

5 Sugarcane 0.00 0.00 0.02

6 Jute 22.47 43.45 169.78

7 Cotton 486.62 1010.26 3852.42

8 Tea and Coffee 14.71 35.90 129.66

9 Rubber 172.13 260.82 1112.03

10 Other crops 49.34 74.76 318.74



13 Fishing 8.96 17.33 67.72

14 Coal & Lignite 1123.31 2500.97 9313.29

15 Petroleum Crude 12664.60 20046.80 86400.03

16 Iron ore 21.44 41.46 162.00



19 Sugar 21.32 44.26 168.77

20 Khandsari 0.00 0.00 0.00

21 Edible oils 1586.49 4835.25 16260.84


23 Cotton Textiles 45.67 94.81 361.56

24 Woolen Textiles 147.59 306.41 1168.42

25 Silk Textiles 146.75 304.65 1161.73




29 Other Textiles 402.30 835.21 3184.89



137



33 Rubber Products 129.87 251.15 981.44



36 Fertilisers 524.95 1115.66 4220.49

37 Pesticides 84.55 179.68 679.72



40 Other Chemicals 3649.87 9746.74 34183.70

41 Cement 2.51 5.58 20.79

42 Other Non-Metallic Minerals 356.96 832.22 3051.62

43 Iron & Steel 1396.73 2899.70 11057.43






49 Rail Equipment 13.27 27.54 105.03

50 Motor Vehicles 915.67 1900.98 7248.99




Total 57618.00 132058.00 487003.33

Annexure 4.2A Contd.


138

Annexure 4.2B

Import Projections for Tenth Plan

Scenario - 2 (GDP 8.0% ; Tariff : 33.7%, 28%, 24%, 20% & 18%)

(US $ million)


1 Paddy 0.02 0.03 0.12

2 Wheat 0.26 0.37 1.61

3 Other cereals 6.70 9.31 40.99

4 Pulses 641.29 1138.20 4583.78

5 Sugarcane 0.00 0.00 0.02

6 Jute 22.47 39.87 160.58

7 Cotton 486.62 927.17 3641.97

8 Tea and Coffee 14.71 32.95 122.45

9 Rubber 172.13 239.37 1053.52

10 Other crops 49.34 68.61 301.97



13 Fishing 8.96 15.91 64.05

14 Coal & Lignite 1123.31 2295.29 8800.43

15 Petroleum Crude 12664.60 20046.80 86400.03

16 Iron ore 21.44 38.05 153.23



19 Sugar 21.32 40.62 159.55

20 Khandsari 0.00 0.00 0.00

21 Edible oils 1586.49 4437.59 15333.70


23 Cotton Textiles 45.67 87.02 341.81

24 Woolen Textiles 147.59 281.21 1104.59

25 Silk Textiles 146.75 279.60 1098.27




29 Other Textiles 402.30 766.52 3010.91



139



33 Rubber Products 129.87 230.50 928.27



36 Fertilisers 524.95 1023.91 3989.32

37 Pesticides 84.55 164.90 642.49



40 Other Chemicals 3649.87 8945.15 32262.45

41 Cement 2.51 5.12 19.64

42 Other non-metallic Minerals 356.96 763.78 2882.69

43 Iron & Steel 1396.73 2661.22 10453.40






49 Rail Equipment 13.27 25.28 99.29

50 Motor Vehicles 915.67 1744.64 6853.00




Total 57618.00 122846.00 464214.06

Annexure 4.2B Contd.


140

141

(i) LABOUR FORCE AND EMPLOYMENTPROJECTIONS

5.1 The Approach Paper to the Tenth Plan,approved by the NDC in September 2001, prescribedprovision of gainful high-quality employment to theaddition to the labour force over the Tenth Planperiod. A subsequent assessment of unemploymentsituation in the base year of the Tenth Plan 2002showed that to clear the backlog of unemployment,35 million employment opportunities are requiredto be created. The Tenth Five Year Plan, however,aims at provision of gainful employment in excessof the addition to the labour force.

Recent Trends in Employment andUnemployment Situation

5.2 There was a slight decline in populationgrowth between the periods 1983-1993/94 and1993/94-1999/2000 from 2.0 per cent per annumto 1.9 per cent. Though growth of output in theeconomy accelerated between these two periods -from 5.2 per cent gross domestic product (GDP)growth to 6.7 per cent, the pace of employmentgrowth slowed down from 2.7 per cent to 1.07 percent as per National Sample Survey Organisation(NSSO) employment surveys (Annexures 5.1 &5.2). Slow-down in pace of employment growth, inthe nineteen nineties, is also borne out bydemographic census data - growth of main workersdecreased from 2.34 per cent to 0.81 (Annexure5.3). Similar trends in deceleration of employmentgrowth are revealed for specific segments ofemployment—growth of workers in establishmentcovered by economic census came down from 2.84per cent annum in 1980-1990 to 1.71 in 1990-1998(Annexure 5.4); employment in establishmentscovered by Employment Market Information Systemof Ministry of Labour grew at 1.20 per cent per

annum during 1983-1994 but decelerated to 0.53per cent during the next five years 1994-1999.However, the latter decline was mainly due to adecrease in employment in public sector establish-ments, whereas the private sector showed accelera-tion in the pace of growth from 0.45 per cent to1.87 per cent. (Annexure 5.5) Thus, the employmentintensity of the growth process of the Indianeconomy is coming down (Annexure 5.6).

5.3 The decrease in employment intensity ofoutput growth can be explained by either anincrease in capital intensity or increase in labourproductivity, releasing labour. Both happened partlyin this period. Incremental capital output ratio (ICOR)increased greatly and also capital substituted labour.Both suggest strategies to look for labour intensiveareas and technologies.

5.4 At micro level, the increase in productivityof labour should be reflected in higher growth ofreal wages. Some indicator of this trend is seenwhen the growth of real wages of rural casual maleworkers is seen during 1994-2000 compared to inthe preceding period 1983-1994 (Annexure 5.7).However, the rise in the real wages of casual labouronly cannot be a conclusive evidence either of anincrease in the real income or of tightening of labourmarket when the incidence of unemployment hasnot reduced, and has rather gone up. For example,unemployment rate reduced from 8.3 per cent oflabour force, measured on current daily status(CDS) basis, in 1983 to 5.99 per cent in 1993-94;however it rose to 7.32 per cent in 1999-2000.Further, youth unemployment has increasedbetween 1993-94 and 1999-2000: among ruralmales in 15-29 years age group from 9.0 per centto 11.1 per cent, and from 7.6 per cent to 10.6 percent among rural females (Annexure 5.8). In addi-tion, there are sharp variations in the unemployment

CHAPTER 5

EMPLOYMENT PERSPECTIVE


142

rate across States (Annexure 5.9). Against the allIndia average of 14.7 per cent unemploymentamong the urban male youth (15-29 years) in theyear 1999-2000, while Gujarat, Haryana, Rajasthanand Punjab have 8 to 9 per cent unemployment, itis much higher in Assam (22.4 per cent), WestBengal (23.4), Bihar (24.0) and Kerala (26.6).Moreover, the incidence of unemployment is muchhigher among the poor. In the lowest consumptionexpenditure class the unemployment rate is morethan twice the level compared to the highestexpenditure class (Annexure 5.12).

5.5 The growth of labour force deceleratedfrom 2.43 per cent to 1.31 per cent per annumbetween the periods 1983-1993/94 and 1993/94-1999/2000. However, the growth of population inthe working age group (15+) has continued toaccelerate despite the fall in growth of population,as the younger cohort grows older. The decline inthe growth of labour force, inspite of a higher growthof population in the working age group is becausea substantial part of those in the working age grouphave withdrawn from the labour force. While a partof the decline in labour force can be explained byan increase in the attendance at educationalinstitutions, it cannot be ruled out that some of thosein the working age group have withdrawn fromlabour force due to non-availability of work.

Population and Labour Force Projections

5.6 The changes in the age structure of popu-lation, given the present demographic transition ofthe Nation, are such as to lead to a much faster

growth of population in the working age group thanthe entire population, and this, given the differentparticipation rates in different age groups will leadto a faster growth of labour force as compared tothe working age population (Tables 5.1 and 5.2).

5.7 As noted earlier there was a substantialgap in the growth rates of working age populationand labour force in the period 1993/1994 - 1999/2000, leading to a sharp fall in the growth of labourforce to 1.31 per cent per annum from 2.43 per centduring the preceding period 1983 - 1993/94. ThePlanning Commission Special Group on Creationof 10 million Employment Opportunities a Year inTenth Plan noted that the causes underlying thissharp fall need to be investigated further. One viewis that withdrawal from labour force is to invest one’stime in acquiring education for better returns infuture, while the Special Group observes that thisfactor can only partially explain withdrawal fromlabour force, and suggests that lack of workopportunities can also lead to complete withdrawalfrom labour force. The decline in the rate of growthof labour force, however, is not expected to continueunabated in future. Hence the special Groupadopted the higher of the two alternative labour forcegrowth scenarios suggested by the Task Force onEmployment Opportunities. Accordingly, the Grouphas adopted a 1.8 per cent growth rate of labourforce in the Tenth Plan period (2002-07), i.e. a muchslower decline in the age-specific participation ratesin the period beyond (2007-12). Therefore, theprojections of labour force are made here on 1.8per cent growth (Table 5.3).

Table 5.1

Age Structure of Population

(age distribution in per cent; population in millions)

Age group 2001 2006 2011 2016

0 - 14 35.6 32.5 29.7 27.1

15 - 59 58.2 60.4 62.5 64.0

60 + 6.3 7.0 7.9 8.9

All age groups 100.0 100.0 100.0 100.0

Population 1,027.0 1,113.7 1,194.4 1,267.5

Source : Planning Commission


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Measurement of Employment andUnemployment

5.8 In the Ninth Plan, the calculations ofemployment and unemployment were based onUsual Principal and Subsidiary Status basis (UPSS).The Report of the Special Group has viewed thatcurrent daily status (CDS) is a better measure tocapture unemployment and underemployment, thanthe usual status, and therefore recommended theuse of CDS basis for estimation purpose.

5.9 The rationale for using CDS as measuringemployment and unemployment is the following.The Approach Paper to the Tenth Plan recommendscreation of gainful employment opportunities for theentire additions to labour force in the Tenth Planand beyond. Therefore, policies and programmesto fill the gap between requirement and availabilityof gainful employment opportunities are to beworked out. At any point of time, there is a largeunemployed and under-employed workforce i.e., nothaving any gainful employment, although by usingthe measurement on UPSS basis, several of themare declared employed. This results in over-estimation of the level of employment. To avoid this,largely, the Special Group suggested estimation ofthe extent of employment and unemployment onCDS basis.

5.10 According to the NSSO employment andunemployment survey report of 1999-2000 'Theusual status approach adopted for classification ofthe population is unable to capture the changes inthe activity pattern caused by seasonal fluctuations.But the estimate obtained by adopting the currentweekly or current daily status approaches areexpected to reflect the overall effect caused by theintermittent changes in the activity pattern duringthe year. The latter (CDS) reflects also the changes,

Table 5.2

Growth in Population and Labour Force (per cent per annum)

2002 - 2007 2007 - 2012 2012 - 2017

Population(All age groups) 1.63 1.41 1.20

Population(15 - 59 years) 2.41 2.08 1.70

Labour Force(1)(15 - 59 years) 2.42 2.15 1.78Population(15 +) 2.57 2.26 1.93

Labour Force(1)(15 +) 2.51 2.25 1.92

Note :(1) Labour force projections here are on the basis of labour force participation rate for each quinquennial age group

remaining unchanged, i.e. the changes in labour force growth in relation to population are due to changes in the agecomposition of the population.

Source : Planning Commission .

Table 5.3Increase in Labour Force and Working

Age Population

(million)

Basis of Scenario 2002-2007 2007-2012

Increase in Labour Force 35.29 40.02(Special Group)1

Increase in Working Age 55.25 55.82Population2 (15+)

Source : 1. Report of Planning Commission Special Groupon creation of 10 million Employment Oppor-tunities per year (2002)

2. Derived from Table 5.1


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which take place even during the week. The estimateof the employed based on current daily status givesaverage daily picture of employment.' Therefore theSpecial Group regarded the CDS measurement asthe most appropriate measure to have an estimateof the gap i.e., jobs to be created on gainful basis, inorder to bring out recommenda-tions as to how theycan be filled up by changes in policies andprogramme.

5.11 The NSSO Report also provides estimatesof the likely under-employment that is hidden in thenumber of the employed category, calculated bythe UPSS approach when they are compared withCDS. The activity pattern of the usual employmentduring the days within the reference week isindicated by the distribution of their activity bycurrent daily status. The relevant results for ruraland urban India are presented in Table 5.4. It isobserved that the proportion of person days of theusually employed, utilised for work, is lower forfemales as compared to the males throughout theperiod 1987-88 to 1999-2000. During 1999-2000,this proportion was estimated at about 68 per centand 79 per cent for females in the rural and urbanIndia respectively, as against 90 per cent and 94per cent for males in rural and urban Indiarespectively. If the work is not available, largeportion of the females withdraw from the labour forcerather than report themselves as unemployed. Thedistribution obtained from the 1999-2000 survey ispresented in Table 5.4.

PROJECTIONS OF EMPLOYMENTOPPORTUNITIES

5.12 As noted earlier, the employment genera-ting capacity of output growth has been seen to bereduced in recent years (Annexure 5.6). Thebaseline scenario of growth of GDP is 6.5 per cent,as indicated in the Tenth Plan Approach Paper.Annexure 5.13 gives the employment perspectiveusing these estimates. This scenario shows that onthe 'business as usual basis' (i.e., with the presentemployment elasticity) the percentage ofunemployed will grow up to 11.0 at the end of theTenth Plan, giving a total unemployed labour forceof 45.56 million person years. This picture is notacceptable on any socio-economic or politicalground. Therefore, a much higher growth rate(8 per cent) is needed for the future along withpositive policies and programmes for changing thesectoral pattern and technology in favour of labour-intensive production, if unemployment is to betackled.

5.13 The estimates of employment andunemployment of the Tenth Plan's base year (2001-02) are given in Annexure 5.14. The estimates ofunemployed for the year 2001-02 have been givenaround 34.85 million person years (defined on CDSbasis) when the unemployment rate went up around9.21 per cent. It also provides the estimates ofaddition to labour force over the Tenth Plan periodas 35.29 million person years. Thus, over the Tenth

Table 5.4Per 1000 Distribution of Person-days of Usually Employed (principal and subsidiary

status workers taken together) by their Broad Current Daily Status

Current Rural Urbandaily status

Male Female Male Female

1999-00 1993-94 1987-88 1999-00 1993-94 1987-88 1999-00 1993-94 1987-88 1999-00 1993-941987-88

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10 (11) (12) (13)

Employed 897 909 926 676 663 638 942 949 938 791 766 716

Unemployed 53 40 27 41 30 26 27 27 37 22 24 37

Not in LabourForce 51 51 47 283 306 336 31 25 25 187 210 247

All 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000

Source : NSSO


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Plan, we have to deal with the problem of creatingjob opportunities against a potential job demand ofmore than 70.14 million person years (i.e., 34.85million base period unemployment and 35.29 millionnew labour entry net of exits). Against this pers-pective, the employment objective of the ApproachPaper to the Tenth Plan has to be addressed. TheApproach Paper recommends providing gainfulemployment opportunities to all the additions in thelabour force over the five year period, and reducingsignificantly the rate of unemployment over theTenth Plan, so that by the end of the Eleventh Plan,the unemployment rate will be near zero.

5.14 The Tenth Plan visualises a substantiallyhigher growth rate of 8 per cent per annum. Thebreak-up of the aggregate growth rate is given inAnnexure 5.15. Given this growth pattern andassuming the present sectoral employment elastici-ties, an estimate has been made of the level ofemployment and unemployment over the TenthPlan. Increased employment opportunities ofaround 29.67 million person years (i.e., an increasefrom the base figure of 343.36 million to 373.03million) will be created with the help of a 8 per centper annum growth over the next five-year period.This 'business as usual' scenario means, anemployment growth of 1.7 per cent per annum asagainst a labour force growth of 1.8 per cent perannum. The result: even with as high a growth as 8per cent, the objective of providing employmentopportunities to all additions to labour force will notbe achieved; an additional 5.62 million employmentopportunities will have to be created. This, addedto the base period stock unemployment of 34.85million, will give an unemployment rate of 9.79 percent at the end of the Tenth Plan, an increase from9.21 per cent at the base. This arises largely dueto the near jobless growth character in many sectorsof the economy especially in the organised sector,and a growing capital intensity in many of theorganised sectors and even in some of theunorganised sectors including some small scaleindustries. The unemployment rate at the end ofthe Tenth Plan can even go up by a minimum one-percentage point (adding four million moreunemployment) if the labour force growth increasesto 2.0 per cent per annum 2. The answer is,

therefore, to look for a development strategy, whichwill revamp the activities in those sectors where thecomparative advantage lies in a labour-intensivenature of production. But as the economy is nowoperating under the impact of globalisation, all careshould be taken in the reallocation of activitiesbetween sectors and sub-sectors, so that everysector can meet the open market competition. Togive a simple example, without the changes in theoverall growth rate of agriculture, the sub-sectorcompositions can be changed by changing thecropping patterns and resources allocated betweenfood and non-food, from less to more labourintensive sectors. Even this strategy may not alwaysneed additional investment resources. In fact, it isoften said that a change in favour of labour intensiveactivities is accompanied by saving of capital bysubstitution of capital by labour and knowledge/technology. Specific programmes and projects areto be identified and launched, keeping this goal inview. In this effort, extensive discussions withMinistries and sector specialists have beenundergone. At present, the awareness of the needfor employment generation is generally very poorwhile formulating the plan programmes/policies.This applies to most of the concerned Ministriesand authorities. As per the findings of the SpecialGroup on Employment Generation, agriculture andallied sector activities have a very large employmentgenerating poten-tiality. This is to be achieved notnecessarily by heavy additional investment, but byreallocation of funds and choice of appropriatetechnologies. But to be sustainable under thepresent globalised system, this should be supportedby appropriate policies to increase their productivityand competitiveness, which would make themviable.

5.15 Annexures 5.14 and 5.16 present thescenario of employment generation, seperately forthose emanating from growth per se without anychange in the existing employment elasticities, i.e.implicitly assuming a 'business-as-usual' scene(with no changes in intra-sectoral composition oflabour intensity of output) and for those withselective changes in policies and programmes infavour of more labour use. The sectoral estimatesof these are given in Annexure 5.18. As Annexure

2 Table 5.3


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5.19 shows, the maximum addition to employmentgenerated from special programmes will come from(i) agriculture and allied activities, (ii) small andmedium enterprises, broad-based rural non-farmactivities and some of the social services sectorslike education and health. Besides, appropriatepolicy changes have been identified for the fastdevelopment of sectors of high labour intensity likeconstruction, tourism, communication and informa-tion technology and financial services. There aremany potential areas in the informal sectors, andespecially in the self-employment area, which canprovide high employment, and therefore should alsobe developed.

5.16 The summary Annexure 5.18 shows that,with suitable programmes and policy changes, thesame 8 per cent growth rate can generate anadditional 19.32 million person years of employmentopportunities over the Tenth Plan period, giving atotal of 50 million person years of employmentopportunities over the Tenth Plan. This recom-mended scenario will not only absorb all additionsto labour force generated over the Tenth Plan ingainful manner, but also reduce the level ofunemployment by nearly half and will eliminate itcompletely by the end of the Eleventh Plan. Thepercentage unemployed will go down from 9.21 percent to 5.11 per cent by the end of the Tenth Planand unemployment will be eliminated by the end ofthe Eleventh Plan. To summarise, nearly 20 millionperson years of employment opportunities have tobe created by selective innovative programmes andpolicies leading to a changed pattern of growth infavour of labour intensive sectors; the remaining30 million will come from the normal buoyancy ofgrowth as perceived over the recent past (1993-94to 1999-2000), giving a total of 50 million personyears over the Tenth Plan.

(ii) STRATEGIES AND POLICIES FOREMPLOYMENT GENERATION

5.17 As already noted, the Tenth Plan aims atprovision of gainful employment opportunities to theentire additions to labour force during the Tenth Planand beyond. This is an essential condition forimproving the quality of employment of an average

worker. For, if labour markets do not clear, nostrategy for improving the quality of employment islikely to succeed. In a large labour surplus situation,there may be employment of a high quality but onlyfor a select group. Hence, the first strategy toimprove the quality of employment is to increasethe aggregate demand for labour.

5.18 While a higher rate of economic growth isa necessary condition for increasing the demandfor labour, the pursuit of growth objective in isolationmay not be sufficient, at least in an immediateforeseeable future, to gainfully absorb the annualadditions to labour force. Therefore, in the short-term perspective of a Five Year Plan, growth willhave to be supplemented by increasing theemployment content of growth in order to fulfill theemployment objectives of Plan.

SECTORAL POLICY INITIATIVES FOR OPENINGUP NEW EMPLOYMENT OPPORTUNITES

5.19 There are many labour intensive sectors,where employment-generating growth can berejuvenated if right kind of sectoral policies can beput in place. An indicative list of such sectors is givenin Box 5.1.

AGRICULTURE

5.20 The food security perspective guided thesectoral policies and related programmes inagriculture during the past three decades. Thisensured rich dividends in terms of agricultural outputand food prices. Employment was an incidentalobjective. Certain agricultural crops, mainly wheatand paddy, and the parts of the country where theseare produced, benefited immensely. Wages oflabour improved at such locations. However, growthof employment in agriculture decelerated to a verylow level in the nineties. Considering the consump-tion needs of our large population, agriculturalproduction and the linked processing, distribution,trade, financial and commercial activities still havea very large potential for (i) sustaining the demandfor labour and (ii) improving the quality of employ-ment. At the sub-sector level, however, manystructural changes in the pattern of growth of agricul-ture and its forward linked activities are required.


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5.21 Having more or less achieved the objec-tives of food security, the development perspectivetowards agriculture needs to undergo a change.This is necessary for improving the growth perfor-mance of the sector as also for improving the paceof labour absorption. Most of the policy constraintsafflicting the sector have been spelt out, in detail, inthe chapter on agriculture. The two important issuesfrom the point of view of employment creation inthis sector are diversification of agriculture andremoval of control on storage, movement andmarketing of agricultural produce.

5.22 Some of the initiatives that can havesubstantial benefits towards opening up moreemployment opportunities in new areas linked withthe agriculture sector are mentioned as follows.

** Public investment in irrigation, power and roadsshould be sufficiently stepped up by reducingsubsidies on fertilizers, water and power.

** The control and regulatory measure introducedearlier in an era of food deficit on marketing,storage and movement of agricultural produce(such as Essential Commodities Act, Milk andMilk Products Control Order, canalised exportetc.) need to be reviewed.

** Private and co-operative sector participationin the marketing of agricultural produces shouldbe allowed in order to break the monopolistic/oligopolistic supply structure. Also, forwardtrading in agricultural commodities should bepermitted.

** The Minimum Support Price for foodgrains andother commodities needs to be so adjusted asto promote diversification of agriculture. Thisshould be done both in terms of geographicalcoverage and crop diversification. New areaslike pulses and oilseeds are more labour-intensive; shifting of cropping pattern in theirfavour will boost employment generation per

Box 5.1

SOME LABOUR INTENSIVE SECTORS WHICH REQUIRE POLICY INTERVENTION

** Agriculture and Allied Activities

õõ There is a need to step up public investment in agriculture. Simultaneously, bringing additionalacreage under cultivation of oilseeds and pulses by switching from cereals holds substantialpotential for employment generation. Horticulture, farm management programmes, agri-clinicsand seed production are other potential areas for employment generation.

õõ Re-generation of degraded forests, watershed development and highly labour intensive activities.õõ Wasteland Development.

õõ Development of Medicinal Plants and Energy Plantation which have high growth and employmentpotential.

õõ Minor irrigationõõ Cultivation of Bamboo and manufacturing of bamboo based products

** Food Processing

** Rural Non-Farm Activities/ Industries, including Khadi and Village Industries

** Small and Medium Enterprises

** Services Sectors

õõ Health

õõ Nutrition

õõ Education

õõ Information technology and communication


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unit of output. A higher output of these crops isalso necessary to increase the weight of theseitems in the average food consumption basket,necessary for meeting the nutritionalrequirements

Agricultural Land Use and Liberalization ofLand Laws

5.23 To increase growth in agriculture, all poli-cies for better utilisation of land and water shouldbe pursued. For example, policies on utilisation ofall types of hitherto unutilized lands, especially thecultivable and afforestable lands owned by thegovernments need to be given priority.

5.24 A back-ended, beneficiary-orientedsubsidy scheme for reclamation of degraded landslike ravines, un-levelled lands, saline, sodic, alkalineand water-logged lands, has been contemplated bythe Ministry of Agriculture at the Centre.

5.25 Some incentive for computerising landrecords and lowering the stamp duties substantiallycan avoid pseudo legal and illegal conveyancesystems as well as litigation in rural areas.

5.26 Legalising the land leasing-in and leasing-out systems and promotion of contract farmingthrough standardised contract formats enforceableon both parties will help in increasing the size ofholdings and improving the viability of agri-units.

5.27 Minor irrigation and watershed develop-ment will increase the employment-generatingcapacity of agriculture.

5.28 The semi-arid and rain fed areas of theCentral regions, which have higher potential forincreasing productivity, would be the focus ofattention in the Tenth Plan. These measuresselected for the Tenth Plan can accelerate agricul-tural growth as well as trigger growth in othersectors, besides reducing poverty.

5.29 There are better social returns in promo-ting agro-forestry models in the rain fed or semi-arid regions, which contain most of India's marginal

lands. It is in this context that we need to have a bigincentive. Similarly, tree plantations on wastelands,belonging to the poor, need to be encouraged, andthe focus on farm forestry revived. The details ofthese policies are available in a Planning Commis-sion Task Force Report on Greening India.

Research and Extension

5.30 More labour intensive crops like pulsesand oilseeds should get the benefit of research andextension services.

5.31 An important component in agriculturaldiversification is animal husbandry, including dairy-ing and poultry which hold immense promise forincreasing not only rural livelihoods, but urban aswell. A proper development of this sector will requireattention not only to technology, processing andmarketing arrangements, but also to issues ofanimal welfare.

5.32 Greater attention should be given to rainwater harvesting and increasing the irrigationpotential through scientific watershed development.These are also highly employment-intensiveactivities. Water harvesting techniques should bewidely promoted through demonstration anddissemination of benefits. Panchayats should beactively involved in such efforts.

Women in Agriculture

5.33 The NSSO survey results show that thereis high female unemployment in the rural sector.Therefore, the Tenth Plan must also focus onprogrammes for increasing the work opportunitiesand productivity of female farmers. Increasingwomen's access to productive land by regularisingleasing and share cropping of uncultivated agricul-tural land by women's groups, encouraging collec-tive efforts in bringing wastelands under cultivation,and providing policy incentives to women in lowinput subsistence agriculture will have immediatebenefits in terms of the household's food securityand women's empowerment along with additionalemployment generation.


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Agricultural Reforms and Employment

5.34 Reforms initiated in 1991 had largelybypassed the agriculture sector. The purpose ofreforms was removal of poverty, and employment-generating growth was taken to be the principalstrategy for removal of poverty. In this process, therole of the agriculture sector is crucial. A few initialsteps have been taken now, but this process willrequire close involvement of State Governments,Local Governments, Panchayats and other localauthorities. Planning will need to play a proactiverole through appropriate programmes.

5.35 Hopefully, the renewed WTO negotiations,and the new round of negotiations on agriculture,will be able to increase our exports by curbing thetrade distorting agricultural subsidies on agriculture.And increase in agricultural exports shouldcontribute to employment generation because theyare labour using, and a more rapid growth of agricul-ture would increase the demand for labour in theagriculture sector.

5.36 If the reforms are implemented success-fully, employment in non-cereal crops, and withincereals, in the labour intensive pulses and oilseedcrops, should increase. Animal husbandry, fisheries,floriculture and horticulture, and extended areas ofagriculture, have very high employment potentialsbut their growth has comparatively gone down inthe 1990s. Agricultural reforms should give a boostto such activities, and benefits of such employmentgrowth are expected to be more equitably distributedacross regions.

FOOD PROCESSING

5.37 Food processing is an important employ-ment generating activity. While India is the secondlargest producer of fruits and vegetables in theworld, its food processing industry remains under-developed. The purpose of reforms in agricultureis to increase the income of farmers, and of thosewho are employed in agriculture. Given the verylarge proportion of our farm produces that perishes,any expansion of food processing activity shouldimprove the off take on commercial terms ofagricul-tural output.

5.38 The absence of an assured electricitysupply and poor road connectivity are two of themajor constraints in the development of the foodprocessing industry. In addition to addressing thebasic infrastructural needs of power supply and roadconnectivity, certain promotional measures, fiscalas well as creation of facilities specific to the sector,need to be taken simultaneously to impart dyna-mism to the sector.

5.39 The success of food processing industryis crucially linked to a continuous food chain startingfrom farming to food processing to marketing.Corporations or modern cooperative organisationsare needed to develop the chain. Some of thespecific issues requiring attention in order to developa culture of food processing are :

** While the agriculture sector has been exemp-ted from all taxes (like excise and income tax),the agricultural produces attract a number oflevies like infrastructure cess, market cess,sales tax, mandi tax, turnover tax, inter-statetransfer regulations, etc. At the point of conver-sion, i.e., value addition, excise, income taxand other taxes are levied. The packagingmaterial used is also subject to heavy taxation.All these taxes increase the cost of foodproducts and it becomes a food/commodity forthe rich, thereby reducing its demand.

** It is necessary to facilitate contract farming withits backward and forward linkages, especiallyin the hinterland of proposed food parks, to beset up in the Tenth Plan period. This wouldenable greater value addition and consolidationof operations.

** Equally important is to provide post-harvestinfrastructural facilities in the hinterland of thefood parks, such as harvesting equipment,sorting, grading, packing, pre-cooling, washingoperation, etc. Setting up of these facilitieswould improve the level of food processing,reduce post-harvest losses, contribute to valueaddition and generate new jobs in rural areas.

** For reducing the post-harvest losses, which areestimated at Rs.50,000 crore annually, it isnecessary to take urgent steps to set up


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irradiation plants, cold storages based onvapour absorption technologies, pre-cooling,etc.

** To bring our food products at par with andconforming to international safety and qualitystandards, it would be necessary to set up anetwork of quality testing/certification labora-tories across the country.

** There is an urgent need to set up a retail chainfor distribution of standard and hygienic qualityfood products. This would help in creatingsustained demand for quality food productsfrom customers.

** Synergies between the food parks and theagriculture export zones is necessary so thatfacilities/provisions set up for one zone maybe considered for the others.

5.40 Within the Government the responsibilityfor development and promotion of the sector isscattered among different Ministries and Depart-ments. An illustrative list of such Ministries andDepartments, along with their areas of responsibilityis given in Box 5.2. Similarly, there is a multiplicityof laws and regulations governing this sector. Thereis an urgent need to harmonise the working ofdifferent Ministries, as also among the provisionsof various laws and regulations for the sector.

RURAL NON FARM ACTIVITIES/ INDUSTRIES,INCLUDING KHADI & VILLAGE INDUSTRIESHANDICRAFTS & HANDLOOMS AND SMALLAND MEDIUM ENTERPRISES, INCLUDINGSMALL-SCALE INDUSTRIES AND INFORMALSECTOR ESTABLISHMENTS

5.41 This group of activities is the main providerof employment outside the agriculture sector. Itsimportance increases with reduction of employmentopportunities in traditional agriculture. In the imme-diate future, the strength and weakness of policieshere will determine the employment scenario of thecountry, and its influence on social situation.

5.42 In each of these activities there aregovernment supported institutions, which have along experience of implementing the programmesand policies. The focus of the programmes forweaker social sections, women, unemployed youth,migrant workers, construction workers, bondedlabour, child workers and other over-exploitedworkers, is also at such economic activities. Almostall the support through plans for development ofeconomic and commercial infrastructure - micro-credit, cess driven worker welfare funds, socialsecurity/insurance for low income groups, voca-tional training, apprenticeships, rural infrastructurefor electricity, transport, and industry, in the finalanalysis, concerns these activities.

Box 5.2

** Entire post-harvest infrastructure for all agricultural, horticultural, animal husbandry operationsis under the Ministry of Agriculture

** Fruit Products Order (FPO1955) is under the Essential Commodities Act and handled by theMinistry of Food Processing Industries

** Meat and meat products, and milk products are administered by the Department of AnimalHusbandry and Dairying.

** Marine products and agriculture products exports are under the export promotion authoritieslike MPEDA, APEDA, etc, under the Ministry of Commerce

** The National Horticulture Board (NHB) under the Ministry of Agriculture

** The Directorate of Vanaspati and Oils under the Department of Food

** Sugar, edible oil, pulses, etc, also under the Department of Food


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5.43 A coherent approach to this group ofactivities can yield very large benefits in terms ofemployment and income of a majority of house-holds. There are many administrative structures thatreach these activities, but for want of a better term,all of them put together within the sweeping term'unorganised sector' , whereas what the term reallyimplies is all the non-incorporated establishments.

5.44 This sector or group is very large in termsof workforce, it responds to competition, and istherefore vibrant. These decentralised economicactivities, which are self-adjusting, contribute in nosmall measure to harmony and social stability inthe Indian polity.

5.45 In the following section further develop-ment of these economic activities is explored. Theemployment related services, and governanceissues pertaining to employment and workers of thiscategory are dealt with in the chapter 3.5 on LabourPolicy and Labour Welfare, in Volume II.

Rural Non-farm activities/industries, includingKhadi & Village Industries (KVI)

5.46 Principal planning initiatives on rural non-farm activities are taken through the Khadi andVillage Industries Commission (KVIC). The effortsneeded to further improve the effectiveness of KVICprogramme are:

** KVIC should focus at traditional artisan basedactivities because the present coverage is verysmall.

** Special initiatives by the KVIC for north easternregion, hilly and border areas.

** Involvement of Self Help Groups (SHGs) underKVI sector in order to widen the programme atthe grass root level.

** Planning process in KVIC should involve thebeneficiaries - State Khadi & Village IndustriesBoards, cooperative societies, etc.

** Cluster development approach should beadopted by KVIC so as to strengthenbackward and forward linkages.

** R&D ties should be established between theKVIC and the National Institute of Design,National Institute of Fashion Technology,Indian Institutes of Technology etc.

** An IT-based data bank of KVIC assisted unitsshould be created to facilitate research andinformation flow across KVIC establishmentsspread across the country.

** Policy support to village industries should beensured.

** A Ministry of Agro and Rural Industries asseparate from SSI has already been set up.

** The KVIC should play the role of a nodalagency for the whole village industry sector inthe country.

** The Khadi programme has social objectives,and the subsidies/concession should be consi-dered from this angle.

** Registration with the KVIC should enable a unitto avail of the same benefits as with the StateDirectorate of Industry.

** The KVIC should be given the status of anexport promotion council.

Small and Medium Enterprises

5.47 A number of high-level committees havesuggested that there should be uniform policy forall small and medium enterprises; it should notremain confined to the manufacturing sector alone,but should include all activities - trade, transport,and financial services.

5.48 Fiscal support is given to small industrybecause it is labour intensive and hence employ-ment generating. Therefore, the fiscal incentives(excise and income tax), preference in StateGovernment levies, sales taxes, excise and creditsupport, technology development and marketingsupport, should be linked with a criterion ofemployment generated.

5.49 A new 'cluster development approach'should be adopted to focus at locations, which havehigh employment intensity. There exists a number


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of programmes for the benefit of small and microenterprises. These include:

** Credit for modernisation

** Credit guarantee for tiny units without collateral

** Market development assistance throughindustry associations

** Local infrastructure development throughindustry associations

** Testing laboratories for product quality

5.50 Besides these enterprise-specific progra-mmes, the general programmes aimed at thehouseholds are:

** Housing for low-income groups

** Micro-finance

** Skill Development

** Health care

5.51 If all these programmes could be focusedat a particular cluster, the returns in terms of betterproductivity, higher income of workers and a betterquality of job will be immense. In other words, ratherthan having multiple programmes, each having aspread over a large area, the Tenth Plan mayemphasize these micro development programmesat specific clusters.

Credit for Informal Sector - Micro Credit

5.52 A major problem in all developing count-ries is that the formal banking system is ill suited tomeeting the credit needs of the informal sector. Andyet this sector accounts for the bulk of the totalemployment generated. The banking system mustbe encouraged to reach out to the enterprises inthe informal sector through innovative means. Thisis effectively what is intended by the various targetsspecified for priority sector lending by commercialbanks. However, priority sector lending has createda culture of mechanical lending in public sectorbanks in which there is little effort at credit appraisalof lendings made to priority sectors. The Narasi-mham Committee suggestion of limiting priority

sector lending to a more precisely defined targetgroup was not accepted.

5.53 Banking practices and procedures needto be reviewed to enable banks to adopt a moreproactive approach to lending for economicallyviable activities in the informal sector. Thecooperative credit structure can play a major rolein extending credit to the informal sector but it hasbecome very weak in most States.

5.54 A great deal of informal sector activitiescan be more effectively serviced by non-bankfinancing intermediaries, which are perhaps betterable to handle such intermediations, charginginterest rates, which cover the high cost of managingan inherently more risky informal sector loan. Theyare also able to enforce claims on collateral. It isnecessary to review the regulatory constraints oncommercial banks, which may prevent them fromlending to such non-bank financial intermediariesfor on lending to finance informal sector activity.

5.55 Another important mechanism throughwhich banks can meet the credit needs of theinformal sector is the self help groups (SHGs), whichprovide micro credit for informal sector activities. Apilot project linking SHGs to banks was launched in1992. It was envisaged that NGOs could help buildup capacity among the poor to organize themselvesinto SHGs and approach the banks for financing.In 1992-93, a total of 255 SHGs were linked withbanks under this project. The number had expandedto 1,21,744 as on September 30, 2000. Theprogramme has provided credit to 1.9 million poorfamilies. More than 85 per cent of the SHGs areexclusively women's groups.

5.56 The experience thus far has been veryencouraging. Recovery rates of SHGs are very high(over 90 per cent) reflecting the impact of peerpressure in ensuring loan recovery. Impact studiesof micro credit extended by SHGs show verypositive outcomes in terms of the effectiveness ofthe loans reaching the poor and in improving theirincome levels 3 . An important aspect of theprogramme is that it envisages a process ofgraduation whereby families can begin informal

3 NABARD, Mumbai (2000); Micro Finance for Rural People An Impact Evaluation


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sector activities through micro credit extended bySHGs but can, in due course, access larger amountof loans directly from the banks.

5.57 The Reserve Bank of India has taken anumber of steps to encourage bank lending to SHGsas a part of mainstream banking activity. Creditextended by commercial banks to SHGs is treatedas part of priority sector lending in order to encour-age banks to engage in this type of activity. Bankshave also been given considerable flexibility todetermine procedures and design loan products forSHGs responding to local conditions. A microfinance development fund has also been establi-shed in NABARD to give training to SHGs members,partner NGOs, banks and government agencies,

provide start up funds to micro finance institutionsand meet their initial operating deficits, and meetthe cost of formation and nurturing of SHGs. Theprogramme of providing credit to SHGs, which hasmade a good start, is a potentially important mecha-nism for expanding credit to the informal sector andshould be greatly expanded in future.

SERVICES SECTORS

Health and Nutrition Services

5.58 Access to quality health services of thepopulation at large is one of the main indicators ofsocial development. The existing facilities in theareas of health and nutrition services are highly

Source : Planning Commission (2002); Report of Special Group on Targeting Ten MillionEmployment Opportunities per year.

Box 5.3

MICRO FINANCE

The rural poor in the unorganised sector has yet not been able to come out of the clutches ofmoneylenders charging usurious interest rates. The credit needs of the rural poor are characterised bythe absence of any clear distinction between production and consumption purposes. The needs aresmall, but often arise at unpredictable times and are usually of an emergent nature. Meeting these creditneeds as and when they arise is crucial, if their dependence on unorganised credit agents is to bereduced. However, it is a fact that borrowing from informal agents is very convenient, though the termsare harsh. The credit needs of the rural poor are at present only partially met by the formal creditagencies and a majority of the rural poor continues to depend on the informal sources of credit.

A study conducted by Pricewaterhouse Coopers, a firm of Chartered Accountants, reveals thefollowing pattern of credit usage by the rural poor.

** 63 percent of total credit availed by the rural poor is used for consumption purposes.

** Only 37 percent of the total credit availed by the rural poor is for productive use.

** The overall share of organised sector in credit flow to the rural poor is around 16 per cent.

The study gave the following reasons for this distortion:

** Non-availability of credit for consumption needs from the organised sector.

** Very high transaction cost to the borrowers from the organised sector.

** Rigidity of terms and conditions for a loan from organised sector.

** Delay in sanction of loans by the organised sector.

** Very high rate of defaults under the Government Sponsored Programmes has led to reluctance onthe part of the banks to extend credit to rural poor.

Non-availability of credit from the organised sector, like commercial banks and developmental banks,limits the credit flows to the unorganised sector and accordingly limits the productivity improvement inthis sector.


154

inadequate, especially in rural areas. The implica-tions of poor health services or non-availability ofthese services at a reasonable cost can beeconomic as well. Data from NSSO indicate thatescalating cost of health services is one of thereasons for indebtedness not only among poor butalso among the middle-income group. There aresharp inter-state/inter-district variations in availabilityand utilisation of health care services. Considerableexpansion is needed to provide minimum level ofaccess to every citizen. Thus, in terms of the needfor services, this sector affords promise of immenseemployment opportunities. There is also a very largescope for more efficient use of the available infra-structure, which will enable increased use of healthservices, and associated demand for health andrelated workers.

5.59 During the Tenth Plan the effort would beto universalise access at least to primary health carefacility, not only in terms of creating physicalinfrastructure but also in terms of equipping eachhealth care centre with adequate medical and paramedical staff. The State will be required to play animportant role in providing these services at afford-able cost. However, within the Government sectorthere have been persistent gaps in manpower andinfrastructure especially at the primary health carelevel in remote, rural, tribal and urban slum areaswhere health care needs are greatest. Also, as it istoday, there exists a mismatch between personneland health infrastructure. Expansion of health facilityand its adequate manning as per the existing normswill create demand for educated and skilledmanpower for this sector.

5.60 The critical constraint of course is avail-ability of resources with the State Governments andlocal authorities. The initiatives at collection of usercharges in public services, and risk pooling throughinsurance should supplement the resources of theGovernment. New initiatives to improve the effici-ency of the public health delivery system will alsoaugment the resource base. Still, a large part ofthe health care is procured from private establish-ments. However, outside the government, thecapability to manage hospitals has remainedconfined to a few corporate groups.

5.61 On the other hand, the medical insuranceindustry has not evolved to a reasonable level ofprofessionalism, which can inspire confidenceamong the buyers of insurance. Insurance mecha-nisms, designed especially for the low-incomegroups, need to be developed. Introduction of healthcare support as a part of the social security insu-rance of workers in the unorganised sector will helpin reducing risk to the individual and also makeavailable resources for investment.

5.62 An associated issue is the need for crea-tion of facilities for training para medical staff

Education Services

5.63 Out of approximately 200 million childrenin the age group 6-14 years, only 120 million are inschools and net attendance in the primary level isonly 66 per cent of enrolment. To achieve educationfor all, the Sarva Shiksha Abhiyan has beenlaunched. The process of integrating our educa-tional system with the economic needs of the peopleand of the nation must begin at the primary schoolstage itself. Assertion of the dignity of labour andvocationalisation of curricula are essential to ensurethat a disjunction does not take place between theeducational system and the work place.

5.64 Universalising access to primary educa-tion and improvement of basic school infrastructurein the Tenth Plan would mean targeting the provisionof one teacher for every group of 40 children forprimary and upper primary schools, opening of aprimary/alternative schooling facility within one kmof every habitation, provision of free textbooks toall SC/ST children and girls at the primary and upperprimary school, management and repair of schoolbuildings through school management committees,provision of opportunities for non-formal andalternative education for out of school children inthe most backward areas and from un-reachedsegments of the population in response to localneeds and demands articulated at the grass rootlevel.

5.65 Mere establishment of schools withouthiring teachers happens in many parts of the


155

country, especially in rural areas. It is thereforeessential that control over schools and teachersbe transferred to local bodies which have a directinterest in teacher performance. States should beencouraged to implement the 73rd and 74thAmendments of the Constitution, which facilitate thetransfer of management of primary and upperprimary schools to panchayats/local bodies. Plan-ning, supervision and management of educationwould have to be through local bodies at district,block and village levels. Efforts should also be madefor social mobilisation of local communities for adultliteracy campaigns and for promotion of primaryeducation.

5.66 Laws, rules and procedures regardingfacilitation of educational institutions must bemodernised and simplified so that honest andsincere individuals and organisations can set upuniversities, colleges and schools. Controls on fees,teacher salaries, infrastructure, and staff strengthmust be replaced by a strong regulatory frame work.The regulatory system must also put the greatestemphasis on fraud detection and punishment whileletting normal individuals function more freely.

Vocational Training Services

5.67 There is a very large unmet need forimparting vocational training to the new entrants tolabour force as only about 5 per cent or so enterthe world of work with any kind of formal vocationaltraining. If the employers, the educational infra-structure and labour administration can join, this gapcan be filled.

5.68 Outturn from schools at 10+ stage has sofar been a small fraction of those in the 15 to17years age group. However, after the introduction ofcompulsory education in 6-14 years age group,which is the target in the Tenth Plan, the utilisationof youth in occupations appropriate for educatedpersons has to be considered. The educated youthcan take up better occupations than manual workor petty business. To bring them to the mainstreamof economic activities, imparting of some productionand professional skills is essential. The presentapproach is to put most of the youth through a higher

technical, medical or management educationsystem. Simultaneous with the incidence of risingunemployment among those with higher education,is also shortage of trained technicians, paramedics,accounts, insurance, legal and other commercialassistants. These requirements are met at presentby employing those who acquire the requisite skillsthrough 'hands-on' experience. And such oppor-tunities are restricted to those youth who somehowfind an entry point in a good establishment.

5.69 As part of education, vocationalisationschemes have been tried. But, these have notsucceeded because requisite equipments, andteachers, who have requisite work experience, arenot available. Moreover, as a part of school educa-tion, the vocational stream carries a lower priorityamong the students. The other approach has beenthe apprenticeship scheme, whereby educated ortrained youth can be placed in establishments.Establishments are required to pay a stipend totrainees. However, the number of seats in this hasremained rather small. Further promotion of voca-tional training as a part of entrepreneurial activitycan provide employment opportunities

Information Technology

5.70 The potential contribution of informationtechnology to employment generation is both directand indirect. The indirect impact of IT is far greaterthan the direct impact. In the USA, it is estimatedthat for every direct job created in the IT industry,three to four jobs are created by indirect ones. Thisdoes not include the non-IT jobs created by thegrowth of other sectors of the economy under thestimulus of information technology.

5.71 It is assessed that IT will contribute toapproximately 0.2 million jobs per year and aroundone million at the end of the Tenth Plan as additionaldirect employment.

5.72 The real employment potential of Informa-tion and Communication Technology (ICT) will berealised when such services support thecommunity, social and personal services requiredby the Indian masses. This is the issue of digital


156

divide, on which adequate policy attention has notso far been focussed in India. Many efforts havebeen made at at the use of ICT in education, health,nutrition, housing, real estate, banking, insuranceand other personal services, However, not all ofthem have been designed with the perspective ofa low budget consumer. The cost of research ontechnology keeps the cost high. The real purposeof planning for ICT, which is to narrow and eliminatethe digital divide, will be defeated if the issue is notconsidered in its proper perspective.

Tourism; Domestic and International

5.73 Development of tourism needs to be takenup on priority basis as India has large untappedtourism potential, which can be successfully harnes-sed for the benefit of development of areas, thathave remained underdeveloped despite beingpotential destinations of tourist attractions. Theemployment impact of development of touristdestinations can be substantial as the activity in itselfis labour intensive and also has extensive forwardand backward economic linkages.

5.74 The focus during the Tenth plan would beto encourage public-private partnership in develop-ment of tourist centres in which the governmentwould be the active facilitator and catalyst, with theultimate goal of creating world-class infrastructureand innovative products.

Housing, Real Estate Development andConstruction

5.75 The real estate development and cons-truction are linked activities and are employmentintensive too. Unfortunately, development andgrowth of housing and the real estate sector hasbeen severely constrained by outdated laws andpolices governing land development and rent controlwhich have pushed the market underground andspawned a host of undesirable practices.

5.76 The construction activities are very muchinfluenced by the real estate developments. Therecent repeal of the Land Ceiling Act, likely to befollowed by the States, to free land market will

largely boost the real estate activities. The proposedrepeal of the Rent Control Act will further encouragethe growth of this sector. In a package proposed inthe Tenth Plan to give incentives to the cities andStates for urban sector development, there hasbeen a proposal for recommending selectivefreedom to convert rural land for urban use,reduction of stamp duty on transfer of property andlaws facilitating private development of township -all of which will increase the real estate growth, andthereby generate increased demand forconstruction.

5.77 It is noticed that in the organised andmechanised segment, there has been a very lowemployment elasticity and, at this point of time, verylittle contribution to the employment generation inthis sector, whereas in the unorganised segmentemployment elasticity is very high. Butunfortunately, their wage rates are very low becauseof low productivity in this segment along with, heavyexploitation of labour by the employers in theabsence of proper legislative safeguards.

5.78 Both the large mechanised activities andthe small and medium ones have their own respec-tive roles and will survive alongside. In the area ofbridges, major irrigation and dam construction, high-rise buildings etc., the large mechanised cons-truction activities will be unavoidable. But at thesame time, in the areas like rural road building, lowcost housing, minor irrigation etc., the smallconstruction units with minimum improvement inmechanisation can serve the purpose and fulfill theneed for generating more jobs.

Road Transport and Road Construction

5.79 Transport and allied activities provideemployment to around 15 million persons. Thelargest share in this is of those engaged in transportof freight and passengers by road. It has potentialfor three to four million additional employmentopportunities during the Tenth Plan period. Withthe completion of various stretches of the NationalHighways Development Project, the traffic flows,and thereby the employment opportunities, canexpand much more than this projection.


157

5.80 The activity is highly decentralised andwork conditions are strenuous; it carries a high risk.Since the administration of this activity is with theState transport authorities, the conditions ofemploy-ment do not get any significant attention.There are however sufficient resources generatedin transport activity. Just like construction workers,the welfare measures for transport workers needattention.

Distributive and Retail Trade

5.81 The Group of activities 'trade, hotels,and restaurants' is estimated to provideemployment opportunities to around 41 millionpersons. The importance of trade in providingan outlet to newly emerging industries -processed food products, milk and milk products,khadi and village industries products, etc., hasbeen noted earlier. The large organisationsproducing consumer products and consumerdurables have established their own retail chains- as for example KVIC, National DairyDevelopment Board (NDDB), shoe industry etc.But product-specific stores have a large shareof overhead expenditure. Other large corporatefirms, which deal in group of personal toiletry,edible oil, food products, and automobiles etc.,have evolved direct arrangements with retailtrade, bypassing the wholesale trade.

5.82 Given the large employment potential,there has been a keen discussion on policiesconcerning distributive and retail trade. A better-

organised retail trade can open up a large numberof gainful employment opportunities to youth,either as self-employed or as shop managers,supervisors, and assistants. So far the organisedretail trade establishments have remainedconfined to public sector-government ownedsocieties, bazaars, and emporia. But many ofthese failed as direct financial support orpurchase price preference from Governmentreduced. The private corporate sector shouldbe encouraged to set up retail chains in smalland medium towns and metros. Requisitechanges in laws concerning rents, land use,property acquisition, and bank finance policiesmay be made so that the prime retailing activitydoes not remain confined to the property owners(also the local governments), which keeps theentry cost at exorbitant levels. In the process,the gainful and productive employment to thosewho work in shops suffers since the fixed costuses up the bulk of the resources of the newventures.

(iii) CREATION OF ADDITIONALEMPLOYMENT OPPORTUNITIES BYTAKING UP LABOUR INTENSIVEACTIVITIES

5.83 The exercises done, during the formula-tion of the Tenth Five Year Plan, have brought outthe need for developmental initiatives in certainareas. The Planning Commission's Special Groupon creation of employment opportunities hasestimated the potential for employment from these

Table 5.5

"Programme Generated" Incremental Employment over Tenth Plan

Developmental Initiative Employment Opportunities (Million)

Agriculture & Allied Activities 3.55

Greening the Country through Agro Forestry 3.50

Energy Plantation for Bio-Mass Power Generation 2.01

Rural Sectors and Small & Medium Enterprises 7.06

Education and Literacy 1.70

Employment through Information and communicationTechnology (ICT) Development 0.70

Health, Family and Child Welfare Services 0.80

Total 19.32


158

(Table 5.5).5.84 These projections have been made inconsultation with the concerned sectoral ministries.The details at the sub-sector level are given inAnnexure 5.19.

5.85 In the agriculture sector, the switching ofacreage from cereals to oilseeds and pulsesincreases the requirement for labour. The NationalWatershed Development Project for rain-fed areascreates direct employment through activities relatingto conservation and development of land and waterresources such as bunding, check dams, waterharvesting structures, nurseries, etc. The on-farmwater management is a new programme, for theeastern States, comprising installation of shallowtube wells and pump-sets, low lift irrigation,installation of diesel pump-sets and construction ofdug wells. The area under horticulture would beincreased. Agri-clinics will provide the services oftrained agricultural graduates for the purposes ofseed certification, seed production and distribution.Skilled manpower would also be required formaintenance and operation of farm machineryincluding tractors.

5.86 Ten million hectares of degraded forest isproposed to be re-generated during the Tenth Plan.India is one of the eight identified global centres forplant diversity. Projects can be taken up in medicinalplants to produce a whole range of therapeutics,food supplements, cosmetics, toiletries and nutra-ceuticals, and veterinary medicine. Substitution oftimber by bamboo is a viable alternative, though itrequires development of bamboo culture.

5.87 Production of bio-mass for energyincludes cultivation of trees, such as Casuarina,equistifolia, and bush crops such as prosopis, juli-flora, and plantation of Casuarina trees on marginalwastelands. Such plantations can support 10 to 12MW power plants. Production of bio-fuel-ethanolfrom sugarcane plantations is also suggested.

5.88 In the rural sectors, Pradhan Mantri GramSarak Yojana (PMGSY), Sampoorna GraminRozgar Yojana (SGRY), Swarnajayanti Gram Swa-rozgar Yojana (SGSY) are expected to create incre-mental employment opportunities to the extent of2.86 million. The rural employment generationprogramme of KVIC, PMRY and new initiatives atdevelopment of clusters of small and medium enter-prises are expected to create additional 4.2 millionemployment opportunities during the Tenth Plan.

5.89 Expansion of elementary education,training of teachers and manpower requirement atresource centres will create 1.7 million additionalwork employment opportunities during the TenthPlan period. Development of Information andCommunication Technology and Health and ChildCare services will enable creation of an additional1.5 million employment opportunities.

5.90 These initiatives are required for specificdevelopmental needs and, apart from two (SGRYand SGSY), these are not in the category of specialemployment programmes. The details are indicatedin the respective chapters.

5.91 The sectoral policy initiatives have beendiscussed in the earlier sections to stimulate growthof output of these sectors. On the basis of employ-ment trends observed in the past, the growth ofthese sectors, corresponding to 8 per cent GDPgrowth target of the Tenth Plan should enable acreation of 30 million additional employment oppor-tunities. But this would mean an increase in thenumber of unemployed persons. Unemploymentrate will increase from 9.2 per cent to 9.8 per centin 2002. (Annexure 5.14) The creation of additionalemployment opportunities by taking up labour inten-sive activities is therefore required to reduce theincidence of unemployment to 5.1 per cent. Prioritywill have to be given in implementing the projectsin the developmental initiatives identified above


159

Annexure 5.1

Past and Present Macro Scenario on Employment and Unemployment on CDS Basis

(Person years)

(Million) Growth per annum (%)

1983 1993-94 1999-2000 1983 to 1993-94 1993-94 to 1999-2000

ALL INDIA

Population 718.20 894.01 1003.97 2.00 1.95

Labour Force 261.33 335.97 363.33 2.43 1.31

Workforce 239.57 315.84 336.75 2.70 1.07

Unemployment Rate (%) (8.3) (5.99) (7.32)

No. of Unemployed 21.76 20.13 26.58 -0.08 4.74

RURAL

Population 546.61 658.83 727.50 1.79 1.67

Labour Force 204.18 255.38 270.39 2.15 0.96

Workforce 187.92 241.04 250.89 2.40 0.67


No. of unemployed 16.26 14.34 19.50 -1.19 5.26

URBAN

Population 171.59 234.98 276.47 3.04 2.74

Labour Force 57.15 80.60 92.95 3.33 2.40

Workforce 51.64 74.80 85.84 3.59 2.32


No. of Unemployed 5.51 5.80 7.11 0.49 3.45

Note : All estimates are on CDS (Current Daily Status basis)Figures in brackets denote percentage

Source : NSSO & Population Census


160

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161

Annexure 5.3B

Growth in Workforce for Major States 1991-2001 (Census Based)(Main Workers)

States Workforce Growth States Workforce Growth

Andhra Pradesh 0.19 Madhya Pradesh 0.47

Assam 0.13 Maharashtra 1.41

Bihar 0.72 Orissa -0.81

Gujarat 1.46 Punjab 2.53

Haryana 2.83 Rajasthan 2.28

Himachal Pradesh 1.00 Tamil Nadu 0.38

Karnataka 1.13 Uttar Pradesh 0.11

Kerala -0.08 West Bengal 1.16

All India 0.81

Source : Population Census (1991 & 2001)

Annexure 5.3A

Workforce Increase Between 1981-1991& 1991- 2001 (Census Based)

Heads 1981 1991 % growth 2001 % growth1981-91 (1991-2001)

1. Population (million) 683.33 846.30 2.16 1025.25 1.94

2. Participation Rates (%)(Main workers) 33.50 34.10 0.18 30.50 -1.11

3. Work Force (million)(Main workers) 228.92 288.59 2.34 312.70 0.81

4. Marginal Worker (%)participation Rates 3.20 3.40 0.61 8.70 9.85

5. No. of MarginalWorkers (million) 21.87 28.77 2.78 89.20 11.98

Source : Population Census (1981, 1991 & 2001)


162

Annexure 5.4

Growth of Workers - Economic Census

1980 1990 1998

Rural*

Workers (million) 24.20 32.20 38.10

Growth Rate (%) 2.88 2.15

Urban



Combined



Note : * The Rural Sector in Economic Census excludes farm sector and plantationSource : Economic Census

Annexure 5.5

Total Employment and Organised Sector Employment Growth rate (per cent p.a.)

Heads 1983 to1993-94 1993-94 to1999-2000

Total Population 2.00 1.95

Total Labour Force 2.43 1.31

Total Employment 2.70 1.07

Organised Sector Employment* 1.20 0.53

Public Sector 1.52 (-) 0.03

Private Sector 0.45 1.87

Note : * Organised Sector Employment growth rates correspond to the periods31.3.1983 to 31.3.1994 and 31.3.1994 to 31.3.1999

Source : DGE&T, Ministry of labour


163

Annexure 5.7

Growth of Average Daily Wage Earnings in Rural India (at 1993-94 prices)

(per cent per annum)

Rural Male Rural Female

1987-88 to 1993-94 to 1987-88 to 1993-94 to1993-94 1999-00 1993-94 1999-00

Public Works 1.55 3.83 1.90 5.04

Casual Labour In Agriculture 1.36 2.80 2.34 2.94

Casual Labour In Non Agriculture 1.33 3.70 1.32 5.07

Casual Labour In All Activities 0.77 3.59 1.95 3.19

Source : NSSO

Annexure 5.6

Sectoral Employment Elasticities on CDS Basis

Employment Elasticity

1983 1983 1993-94Sectors to to to

1987-88 1993-94 1999-2000

Agriculture 0.87 0.70 0.01

Minings and Quarrying 1.25 0.59 -0.41

Manufacturing 0.59 0.38 0.33

Electricity, Gas and Water Supply 0.30 0.63 -0.52

Construction 2.81 0.86 0.82

Trade, Hotels and Restaurent 0.87 0.68 0.62

Transport, Storage and Communication 0.47 0.55 0.63

Financing, Insurance, Real Estate and Business Services 0.49 0.45 0.64

Community, Social and Personal Services 0.52 0.68 -0.25

ALL 0.68 0.52 0.16

Note : Elasticity may change after adjustment of workers of Repair servicesSource : NSSO (For estimating employment growth rates) and NAS (for estimating GDP growth rates)


164

Annexure 5.8

Unemployment Rate among the Youth (15-29 years) on CDS Basis(1999-2000)

Age Groups Unemployment Rate (per cent of labour force)

(year) Male Female

Rural India15-19 13.10 12.80

(9.00) (8.30)

20-24 11.70 12.10(10.30) (8.20)

25-29 9.20 7.70(7.70) (6.50)

15-29 11.10 10.60(9.00) (7.60)

Urban India15-19 19.00 18.00

(16.20) (18.60)

20-24 17.10 25.90(17.00) (28.50)

25-29 10.30 13.10(9.30) (15.50)

15-29 14.70 19.10(13.70) (21.20)

Note : The figures in parentheses give the corresponding rates for NSS 50th Round (1993-94)Source : NSSO


165

Annexure 5.9

Current Daily Status Unemployment Rates for Each State and U.T.(1999-2000)

Unemployment Rate (per cent of labour force)

States Rural Urban

Male Female Persons Male Female Persons

1 2 3 4 5 6 7

Andhra Pradesh 8.10 8.10 8.10 7.20 8.90 7.60

Assam 6.40 12.50 7.40 9.90 21.90 11.90

Bihar 7.20 6.20 7.00 8.70 13.50 9.30

Gujarat 5.10 4.20 4.80 4.00 5.40 4.20

Haryana 5.30 1.80 4.70 4.50 4.90 4.50

Himachal Pradesh 3.40 9.00 2.40 7.00 11.90 7.80

Karnatakka 4.40 4.00 4.30 5.30 5.90 5.40

Kerala 20.00 26.10 21.70 15.50 28.20 19.10

Madhya Pradesh 4.00 3.50 3.80 7.20 5.70 7.00

Maharashtra 6.30 6.90 6.50 7.70 10.00 8.10

Orissa 7.60 5.60 7.10 9.80 8.20 9.50

Punjab 4.20 1.70 3.70 4.80 5.30 4.90

Rajasthan 3.30 1.90 2.80 4.70 3.50 4.50

Tamil Nadu 14.30 12.30 13.50 9.00 8.60 8.90

Uttar Pradesh 4.00 2.10 3.60 6.30 5.00 6.20

West Bengal 15.20 25.10 17.00 10.00 13.90 10.60

All India 7.20 7.00 7.20 7.30 9.40 7.70

Source : NSSO


166

Annexure 5.10

Current Daily Status Unemployment Rate among the Youth(Age 15-29) for Each State and U.T.

(1999-2000)(Rural)

State/U.T Unemployment Rate (per cent of labour force)

Male Female Persons

Andhra Pradesh 10.80 8.70 9.90

Assam 12.30 24.90 14.60

Bihar 11.50 8.80 11.00

Gujarat 6.80 6.40 6.70

Haryana 9.00 2.40 8.10

Himachal Pradesh 8.10 2.80 6.10

Karnatakka 6.00 5.60 5.80

Kerala 32.30 45.80 36.30

Madhya Pradesh 5.40 4.00 4.90

Maharashtra 11.30 8.90 10.40

Orissa 12.60 8.40 11.30

Punjab 8.00 3.60 7.00

Rajasthan 5.00 3.30 4.40

Tamil Nadu 19.70 15.30 18.10

Uttar Pradesh 6.80 2.00 6.10

West Bengal 23.00 39.10 26.60

All India 11.10 10.60 11.00

Source : NSSO


167

Annexure 5.11

Current Daily Status Unemployment Rate among the Youth(Age 15-29 Years) for Each State and U.T.

(1999-2000)(Urban)

State/U.T Unemployment Rate (per cent of labour force)

Male Female Persons

Andhra Pradesh 14.30 16.70 14.80

Assam 22.40 42.70 26.60

Bihar 24.00 28.00 24.40

Gujarat 8.00 11.40 8.50

Haryana 8.00 9.90 8.30

Himachal Pradesh 16.80 37.50 20.50

Karnataka 10.40 10.30 10.50

Kerala 26.60 50.40 34.30

Madhya Pradesh 14.90 12.30 14.60

Maharashtra 15.60 21.10 16.50

Orissa 26.80 20.10 25.50

Punjab 8.90 13.90 9.50

Rajasthan 8.40 10.40 8.80

Tamil Nadu 15.50 15.60 15.60

Uttar Pradesh 12.40 12.70 12.50

West Bengal 23.40 27.20 24.00

All India 14.70 19.10 15.40

Source : NSSO


168

Annexure 5.12

Unemployment Rates by Household Monthly Per Capita Expenditure Class(1999-2000)

Monthly Per Capita Expenditure Unemployment Rate (CDS)Class (Rs.) per cent of labour force

Rural Urban Rural Urban

0-225 0-300 11.31 9.61

225-255 300-350 9.62 9.67

255-300 350-425 8.12 8.20

300-340 425-500 7.46 9.20

340-380 500-575 6.56 9.20

380-420 575-665 6.18 8.63

420-570 665-775 6.48 8.19

470-525 775-915 6.14 7.18

525-615 915-1120 5.60 6.65

615-775 1120-1500 6.06 5.68

775-950 1500-1925 5.57 4.67

950 & above 1925 & above 5.25 4.10

All All 7.21 7.65

Source : NSSO Survey, 55th Round (1999-00)


169

Annexure 5.13A

Low Growth Scenario (6.5% Growth over 10th Plan Period).Projection of Employment Opportunities on CDS basis

Items Unit 1999-2000 2001-2002 2006-2007

Labour Force (1.8% per Million 363.33 378.21 413.50annum growth)

Employment Million 336.75 343.36 367.44

No. of unemployed Million 26.58 34.85 45.56

Unemployment rate Percentage 7.32 9.21 11.00

Annexure 5.13B

Low Growth Scenario with Recommended Programmes& Policy Changes on CDS basis

Items Unit 1999-2000 2001-2002 2006-2007

Labour Force Million 363.33 378.21 413.50

Employment Million 336.75 343.36 375.00

No. of unemployed Million 26.58 34.85 38.50

Unemployment rate Percentage 7.32 9.21 9.30

Note : CDS : Current Daily Status


170

Annexure 5.14

Employment Scenario from 8% Growth per annum and Extrapolated Industrial Structure

(Based on Actual Elasticity (1994-2000) -CDS & 1.8% p.a. Growth in L.F.)

Employment GrowthUnit 1999- 2001$$ 2002$$ 2007 2012 over 10th plan

2000$ per annum

Labour Force(1.8% p.a. Growth) million 363.33 371.52 378.21 413.50 451.53 1.8%

Employment ** # million 336.75 340.82 343.36 373.03 403.52 1.7%

(Unemployment Rate) (%) 7.32 8.26 9.21 9.79 10.63

No. of Unemployed million 26.58 30.70 34.85 40.47 48.01 3.0%

Note : ** Based on 8% Growth in GDP during 2002-07# Current Daily status basis$ 1999-2000 figures related to NSS 55th (July, 1999-June, 2000) Rd.

$$ Based on 5.2% GDP Growth during 2000-01 and 2001-02Source : Planning Commission


171

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172

Annexure 5.16

Employment Scenario on * 8% Growth per annum and ChangedIndustrial Structure on the basis of proposed Policy and

Programmes in the Tenth Plan

Unit 1999-2000 2001-2002 2006-2007 2011-2012 Percentageper annum

Labour Force Million 363.33 378.21 413.50 453.52 1.80

Employment Million 336.75 343.36 392.35 451.53 2.70

Unemployment Rate (%) 7.32 9.21 5.11 0.44

No. of Unemployed Million 26.58 34.85 21.15 1.99 -9.50

Note : Special Group estimates,* on CDS basis



173

Annexure 5.17

Implicit Movement in Labour Productivity (output per labour)

(Per cent per annum)

1983 to 1993-94 to Projected

1993-94 1999-2000 2001-2002 2006-2007

(A) Based on 1994-2000 Elasticities

GDP (growth) 5.20 6.70 5.20 8.00

Work Force 2.70 1.07 0.98 1.67

Employment Elasticities 0.54 0.16 0.19 0.21

Labour Productivity 2.30 5.60 4.20 6.20

(B) Based on 1994-2000 Elasticities with changes in policies and programmes

Workforce 2.70 1.07 0.98 2.70

Employment Elasticities 0.54 0.16 0.19 0.34*

Labour Productivity 2.30 5.60 4.20 5.20

Note : *Implicit employment elasticity including employment on special programmesSource :Planning Commission


174

Annexure 5.18

Estimates of Generation of Sectoral Employment Opportunities over the Tenth Plan

Increased Employment Opportunities OverSectoral Base Tenth Plan (million)

Sectors GDP Employment on Programme TotalGrowth (CDS) Estimated and Total Employment

(%) (million) Employment Policy Incremental 200710th Plan 2001-2002 Elasticities Based**

Agriculture & Allied 4.20 191.01 0.41 9.06 9.47 200.48(Including Rural activity)* 4.20 (55.63) (51.09)

Mining & Quarrying 4.70 2.21 -0.20 -0.20 2.01(0.64) (0.51)

Manufacturing & SSI 10.00 42.09 7.42 4.20 11.62 53.71Pradhan Mantri Rozgar (12.26) (13.70)Yojana (PMRY) and RuralEmployment GenerationProgramme (REGP)

Electricity, Gas & Water Supply 8.30 1.09 -0.21 -0.21 0.88(0.32) (0.22)

Constructions 8.30 16.16 6.30 6.30 22.46(4.71) (5.72)

Trade, Hotel & Restaurant 8.00 40.99 11.23 11.23 52.22(11.94) (13.28)

Transport, Storage & 10.30 14.92 5.51 5.51 20.43Communications (4.35) (5.21)

Financial Institutions, 10.00 5.32 1.93 1.93 7.25Real Estate & Business Services (1.55) (1.84)

Community Services, 7.60 29.57 -2.71 3.20 0.49 30.06Social & Personal Services (8.61) (7.64)

Sampoorna Gramin 1.29 2.09 2.09Rozgar Yojana (SGRY)

Swaranjayanti GramSwarojgar Yojana (SGSY) 0.80

Pradhan Mantri GramSadak Yojana (PMGSY) 0.77 0.77 0.77

Aggregate 8.00 343.36 29.67 19.32 48.99 392.35

Note : Brackets denote percentage composition to total.** Detailed breakup is given in Annexure 5.19.

Estimates on person years basis.Source :Planning Commission


175

Annexure 5.19

"Programme-Generated" Incremental Employment, Over the 10th plan

(million person years)

(a) Agriculture & Allied

1. Diversion to oilseeds and pulses: 0.35

2. National Watershed Development Project for Rainfed Areas (NWDPRA) 0.50

3. Horticulture 1.20

4. On Farm Management 1.255. Agriculture Clinics and Seed production 0.15

6. Training and employment of tractor drivers 0.10

------------- > 3.55(b) Greening the country through Agro Forestry

1. Joint Forest Management (JFM) 1.50

2. Development of medicinal plants 0.50

3. Bamboo Development 1.50------------- > 3.50

(c ) Energy Plantation for Biomass power Generation

1. Energy Plantation Prosopis and Casuarina 1.22

2. Ethanol (Biofuel from sugarcane plantation) 0.79------------- > 2.01

(d) Rural Sectors and SMEs

Prime Minister's Rojgar Yojana (PMRY-SSI) 1.65

Cluster Development 0.55Rural Employment Generation Programme (REGP-KVIC) 2.00

Sampoorna Gramin Rojgar Yojana (SGRY) 1.29

Pradhan Mantri Gram Sadak Yojana (PMGSY) 0.77Swarnajayanti Gram Swarojgar Yojana (SGSY) 0.80

------------- > 7.06

(e) Education and Literacy

1. Education 1.532. Mid day meals 0.06

3. DIET, BRC, CRC, Engineering Staff SPO, DPO 0.09

------------- > 1.70

Employment through ICT Development 0.70Health, Family and Child Welfare 0.80

GRAND TOTAL 19.32

Source : Report of the Special Group


176

Annexure 5.20

Employment Elasticities for the period 1993-94 to 1999-2000 & implicit over the Tenth Planby Changes in Sectoral Composition on CDS Basis

Elasticities assumed in the Tenth Plan

Sectors Growth of GDP With policy WithoutEmployment Growth Elasticities changes policy

(%) (%) 1994-2000* including changes1994-2000 1994-2000 Special

employmentprogrammes

1. Agriculture & Allied(including Rural activities) 0.02 3.10 0.006**** 0.23 0.01

2. Mining & quarrying -1.91 4.70 -0.41 -0.41 -0.41

3. Manufacturing 2.58 7.80 0.33 0.50 0.33

4. Electricity, gas and water supply -3.55 6.80 -0.52 -0.52 -0.52

5. Construction 5.21 6.30 0.82 0.82 0.82

6. Trade, hotels & restaurants 5.72 9.20 0.62 0.62 0.62

7. Transport, storage andcommunication 5.53 8.70 0.63 0.63 0.63

8. Financing, insurance, realestate and business services 5.40 8.40 0.64 0.64 0.64

9. Community, social &personal services -2.08 8.40 -0.25 0.04 -0.25

Total 1.07 6.70 0.16 0.338*** 0.21**

Note : *Based on actual observed elasticties (1994-2000)** Based on Growth and without Policy changes

*** Based on Growth and Policy changes over the 10th Plan**** Approx to 0.01


177

6.1 The issue of governance has in the recenttimes emerged at the forefront of the developmentagenda. Good governance is one of the mostcrucial factors required if the targets of the TenthPlan are to be achieved. It is also this factor, orrather lack of it, which could be the cause ofimmense disappointment and missed developmentopportunities.

6.2 Governance relates to the managementof all such processes that, in any society, definethe environment which permits and enables indivi-duals to raise their capability levels, on one hand,and provide opportunities to realise their potentialand enlarge the set of available choices, on theother. These processes, covering the political,social and economic aspects of life impact everylevel of human enterprise, be it the individual, thehousehold, the village, the region or the nationallevel. It covers the State, civil society and themarket, each of which is critical for sustaining humandevelopment. The State is responsible for creatinga conducive political, legal and economicenvironment for building individual capabilities andencouraging private initiative. The market isexpected to create opportunities for people. Civilsociety facilitates the mobilisation of public opinionand peoples’ participation in economic, social andpolitical activities.

6.3 The universally accepted features of goodgovernance are the exercise of legitimate politicalpower; and formulation and implementation ofpolicies and programmes that are equitable,transparent, non-discriminatory, socially sensitive,participatory, and above all accountable to thepeople at large. There could however be aspectsof governance that are contextually driven andgeared to address the local concerns.

6.4 Experience shows that while goodgovernance can help secure human well being andsustained development, it is equally important torecognise that poor governance could well erodethe individual capabilities, as well as institutionaland community capacities to meet the needs ofsustenance.

6.5 In India, there are a number of regions, orStates within a region, or even districts within aState, where development outcomes, in terms ofsocial indicators, do not match with the availableresources and the inherent potential of the people.States that are rich in minerals are not necessarilyindustrially developed, and those with rich cultivablelands and assured irrigation are often lagging behindin agricultural development. There are States inthe country that have been able to achieve signi-ficant gains in overall development, while othershave squandered opportunities despite their naturaladvantage and favourable initial conditions. Thereare attainments in all aspects of governance thatone could legitimately be proud of and yet thereare as many challenges to be faced. Even in Stateswhere development has been relatively better, thereare instances of loose or poor governance. Theseare manifested, for example, in:

• Poor management of economies, persis-ting fiscal imbalances, disparities in thepace and level of development acrossregions and across districts;

• Denial of basic needs of food, water andshelter to a substantial proportion of thepopulation;

• Threat to life and personal security in theface of inadequate State control on lawand order;

CHAPTER-6

GOVERNANCE AND IMPLEMENTATION


178

• Marginalisation, exclusion or even perse-cution of people on account of social,religious, castes or even gender affilia-tions;

• Lack of sensitivity, transparency andaccountability in many facets of theworking of State machinery, particularlythose that have an interface with thepublic;

• Lack of credibility – the gap between theintent and the actions – of someinstitutions in society;

• Inadequate system of incentives/disincen-tives for people (particularly for a civilservant), subversion of rules, evasion oftaxes and failure in getting timely justice;

• Existence of a significant number ofvoiceless poor with little opportunities forparticipating even in institutions of localself-governance, despite a visible move-ment towards decentralisation through thePanchayati Raj institutions; and

• Deterioration of physical environment,particularly in urban areas.

6.6 All such outcomes can be easily relatedto the failure of one or more aspects of governance- political, economic or civic. In most cases, it isequally easy to diagnose and define what could bethe ideal requirement or institutional arrangementfor addressing specific concerns. What is, however,important is the need to undertake an analysis ofchanging governance standards as against a cross-sectional study of purely static ailments in thesystem. It necessitates facing and addressingquestions such as, why is it that governance stan-dard may have declined in some places over time?Why, for instance, some States have succeeded inturning around their institutional capacities to governeffectively while others have failed?

CONCEPTUALISING GOVERNANCE – ANALTERNATIVE FRAMEWORK

6.7 A useful approach to examine the issuesof governance, whether it is restricted to political,

economic or civic governance or looked at holisti-cally, is to view the process of intermediation asinvolving a continuous interplay of three elements,each representing a specific set of deliberatearrangements. These include:

• Institutions – adopted or createdarrangements, both formal and informal,to bring about predictability, stability andefficiency in managing the social, econo-mic or political transactions in any society;(For example, the institution of Parliament,the judiciary, or the civil administration.)

• The Delivery Mechanism – including theexecutive apparatus adopted or evolvedby the institutions for imple-menting theagenda and the objectives for which thesaid institutions have been created; (Forexample law courts, hospi-tals, policestations or the Collector’s office); and

• The Supportive and SubordinateFramework of Legislations, Rules, andProcedures - for-mulated for delivering andmeeting the stated responsibilities of theconcerned institutions.

6.8 Efficient governance requires efficientinstitutions. The efficiency and effectiveness ofinstitutions, in turn, depends on their adopteddelivery mechanism and the supportive frameworkof rules and procedures, each of which has to workin harmony with the other to discharge the functionsfor which the institutions have been created. Onlythen would one expect the institutions to fulfill theirstated objectives and carry out their assignedresponsibilities in managing the affairs of the society.More importantly, with the changing context –domestic as well as global – a change in the profileand requirements of society and development, therehas to be a capacity for evolution, a continuousadaptation in each of these elements (Box 6.1). Thecase of planning institutions and policy ‘think tanks’is a good example for illustrating this point.


179

6.9 Successful implementation of develop-ment programmes requires adequate funds, appro-priate policy framework and effective institutionalcapacity to deliver. Past experience in the countryhas shown that availability of resources is nopanacea for tackling poverty, disparities and back-wardness. It is a necessary, but not a sufficientcondition. The determining factor, it turns out, isthe institutional capacity to formulate viable need-based schemes/projects with efficient deliverysystems to utilise optimally the available resources.

The case of rural development programmes in theCentral Government may be considered in thisconnection. Excessive compartmentalisation of theexecutive into Ministries/Departments has ensuredthat such programmes are not only spread over ahost of Ministries which encourages a narrowsectoral approach to conceiving, formulating andimplementing schemes, but also prevents mutualsynergies that are inherent in most social sectorprogrammes to benefit the plan initiatives. Theduplication of delivery structures and the procedural

BOX 6.1

Governance – An Alternative Model

Deliberate but AdhocChanges in Institutions

Planned/Anticipated

Changes

Changes in Global Economic

And Political Order

Unanticipated

Changes


180

hurdles invariably curtail the flow of assistance tothe targeted beneficiaries. The Mid-Term Appraisalof the Ninth Plan, for instance, points out that anamount of at least Rs. 400 billion per annum flowsfor rural development by way of Central and Stateschemes in sectors like health and family welfare;social justice and empowerment; watersheddevelopment and agriculture; tribal development;subsidies on food and kerosene; and throughschemes of rural development. This is in additionto public investment in infrastructure like roads andpower which also directly benefits the rural poor.All this is directed to about 50 million poor familieswho, on an average, are thus being allocatedroughly Rs. 8,000 per annum. This amount issufficient to buy nearly 3 kg. of foodgrain per dayat the average rate of Rs. 7.50 per kg., potentiallypermitting them to overcome their state of depri-vation significantly. The reason that this money isnot being directly transferred to the targeted poor,and is being spent on State run developmentschemes, rests on the assumption that suchinitiatives are likely to build capacities, raise incomelevels and have multiple spin-off effects in the longrun. The fact that benefits are not percolating atthe desired pace is a reflection on the governanceof these schemes.

6.10 In a general sense, the ability to effectivelytarget schemes/programmes towards the mostdeserving depends critically upon the quality ofgovernance. The better the levels of governance,the more precise can be the targeting. The corollaryof this is that in the absence of acceptable levels ofgovernance, it would be preferable to eschew tar-geted programmes in favour of more generallyapplicable schemes.

6.11 The macro-economic management of theeconomy at the Centre and in the States, in general,and that of public expenditure, in particular, alsohighlights the deficiencies in governance practicesresulting from the inertia in the relevant institutionsand their practices. An efficient macro-economicmanagement of the economy is a necessarycondition for mobilising public resources to fund thedevelopment process. It is equally important forproviding a stable economic environment for

encouraging and sustaining private enterprises.Constitutionally, the federal structure of the Indianpolity places greater responsibilities on the CentralGovernment to raise and allocate the resourcesneeded for undertaking, among others, regionallybalanced development in the country. Theseresources are allocated among the States on therecommendations of the Finance Commission – astatutory body for assessing and recommending theflow of resources to meet the non-plan or therevenue requirements of the States – and thePlanning Commission, which has been assignedthe responsibility of preparing medium-term nationalplans in consultation with the Central and StateGovernments and allocating resources to undertakeplanned activities. In the past, with the electedgovernments lasting their full terms, the tenure ofthe Government and the term of the FinanceCommission were co-terminous. With the changingpolitical environment - premature dissolution of thelower house of the Parliament, coalition govern-ments and different political parties forminggovernments in the States and at the Centre – theworking together of such institutions concurrentlyand in consonance with each other cannot be takenfor granted any more. For instance, the tenure ofthe 13th Lok Sabha, hence the Government, theTenth Five Year Plan of the country and the term ofthe award of 11th Finance Commission are onlyloosely overlapping. These developments have abearing on the macro-economic management at theCentre, as well as in the States. Institutionalchanges have to be, therefore, thought of to addressthe resulting issues and provide continuity andharmony in the working of these bodies. Similarly,there are good reasons to devise new instrumentsthat ensure continuity of basic policies on whichthere is consensus across political parties. Animportant example, in this context, is the Bill onFiscal Responsibility that binds the Government ofthe day to follow the accepted principles on fiscalconsolidation (Box 6.2). It has already beenintroduced by the Central Government in theParliament, and there are good reasons for similarbills to be introduced in the State legislatures.

6.12 Corruption is the most endemic andentrenched manifestation of poor governance in


181

Indian society, so much so that it has almost becomean accepted reality and a way of life. Theunderpinnings of this social phenomenon, whichafflicts most developed and developing societiesincluding India, have been reduced into aformulation that equates corruption with monopolypower plus discretion without accountability and lowgovernment salaries. In other words, it suggeststhat when a relatively low paid government servantenters a situation where he/she enjoys bothmonopoly and discretionary power without any orlimited accountability, he/she has an incentive torestrict his/her assigned functions and duties, andin the process, seek and charge a monopoly pricefor services rendered.

6.13 There are many public activities, given thatthe society till very recently had an administeredand a regulated economy, where institutionalarrangements are such that officials have monopoly,as well as discretionary powers vested in them. Thisincludes a range of activities involving interface withState utilities; State agencies responsible forlicensing, including motor vehicle licenses, pass-ports, trade licenses; and tendering of publiclyinstituted works. Procedural and legal hurdles thatan individual has to confront in almost everyinterface with the public authorities also compoundthe problem.

6.14 It turns out that efficient and effectivegovernance, be it the case of the executive, thejudiciary or the legislature, requires the institutions,the delivery mechanism that they adopt and theframework of supportive rules, regulations andprocedures to continuously evolve in harmony witheach other and in response to the changing context.It makes the issue of governance context specificto time and the stage of development in any society.With the acceptance of market liberalism andglobalisation, it is expected that the State yields tothe market and the civil society in many areas whereit, so far, had a direct but distortionary and inefficientpresence. It includes areas where the State, forinstance, had entered as a producer of such goodsand services that are also produced in the privatesector. It also includes the role of the State as adevelopment catalyst where, perhaps, civil societypresently has better institutional capacity. At thesame time, with the growth of markets and thepresence of an aware and sensitive civil society,many developmental functions as well as functionsthat provide stability to the social order have to beprogressively performed by the market and the civilsociety organisations. It means extension of themarket and the civil society domain at the expenseof the State in some areas. It also implies an incre-ase in the area of their respective overlaps.

Box 6.2Fiscal Responsibility Bill – 2000-01

The Central Government introduced the Fiscal Responsibility Bill in the Parliament in its Winter Session in2000. It is, presently, under examination before it is taken up in the Parliament for enactment. ThoughArticle 292 of the Constitution already provides for fiscal austerity, an explicit legislation is, perhaps,necessary in an era of coalition politics. The key features of the Bill are:

• The fiscal deficit, defined as the excess of total expenditure - including loans, net of repayments- over revenue receipts plus certain non-debt capital receipts, to be 2 per cent of the GDP by2006 from 5.1 per cent of GDP budgeted for 2000-01;

• The revenue deficit, defined as the difference between revenue receipts and revenueexpenditure, to be zero by 2006 from 3.6 per cent of GDP budgeted for 2000-01;

• Total internal and external liabilities at 50 per cent of GDP by 2011 from the present level ofabout 56 per cent of GDP;

• Prohibition of borrowings by Central Government from RBI after 2004, except under specialwell-defined circumstances; and

• Expenditure cuts, whenever there is a shortfall of revenues vis-à-vis the budgeted expenditure.


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ISSUES AND STRATEGIES FOR THE TENTHPLAN

6.15 The issue of improving governance in thecountry has to be addressed at multiple levels, inview of the current context. Government can neitherhave a completely minimalist role nor an entirelyproactive one. It has to be directed at buildingpersonal capabilities and community capacities forhuman development through all possible means.The focus has to be on creating a conduciveenvironment for growth and development in thecountry and, above all, improving the efficiency ofresource use, particularly in the public sector. Thereare, however, aspects of governance and thecontingent instruments that have to be taken up onpriority. Some of these are described below.

(i) People’s Participation: The involvement andparticipation of the people at all stages ofplanning, implementation and monitoring is apre-requisite for good governance. Very oftenplans are misplaced because they are notreflective of the actual requirements of thepeople and are not culturally and sociallysensitive to the ethos of the people for whomthey are meant. People must feel a sense ofownership of such plans/programmes andmust participate and even contribute towardsthem. The trend of expecting the governmentto do everything for them must come to an end.Programmes and schemes where peopleparticipate have been known to be much moresuccessful. This could be done by involvingthe people through PRIs, local bodies, self helpgroups, women’s groups, user groups,associations, trade unions etc.

(ii) Decentralisation: The enactment of the 73rd

& 74th Constitutional Amendment Bills, 1992has paved the way for the creation of statutoryinstitutional structures for realising the goalsof self-governance, under the Panchayati Rajand urban local bodies systems. The explicitobjective of this initiative for democraticdecentralisation of governance is to acceleratethe socio-economic development within aparticipatory framework at the grass-root level,which must be carried forward in letter and in

spirit. This has been discussed in greater detailin volume III, chapter 5.

(iii) Right to Information: To a great extent, thetask of the development administration wouldbecome easier if steps are taken to makeavailable information, as a matter of right, tothe citizens. The right to information has to bethe starting point for much of the reformsproposed. The right to information is soimportant because very often people do noteven know what programmes and schemes areavailable and what they are entitled to. Also,policy and procedural reforms can be effectiveonly when people know that such changeshave been made. The Right to Information Actmust be enacted expeditiously andimplemented in letter and in spirit.

(iv) Reforms of the Revenue System : Besidesthere being a governance aspect to the deliveryof schemes and services, resourcemobilisation should also be viewed from thegovernance perspective. Unfortunately therevenue system as evolved in India isperceived to be one of the most oppressiveand corrupt systems of government. As aresult of mal-administration and corruption inthe revenue system, not only is there a loss ofrevenue but it also encourages the people toparticipate in the black/parallel economy. It istherefore not only necessary to have reasonabletax rates, but equally important to reform thetax adminis-tration to make it more transparent,equitable, and user-friendly. There is a needfor a review of the system of rewards andpunishments and also the procedures used forthe same. The district revenue administrationalso needs to be revisited. With the passage oftime, the function of actual revenue collectionhas become minimal but what is left, are thepowers that enable the collection of revenue.These powers should be reviewed and onlythose which need to be retained should beseparately notified, clearly mentioning theauthority and the responsibility.

(v) Mobilisation of Other Resources : Animportant aspect of mobilising resources forfunding the development plans relates to


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the ability of the system to identify and tapresources. This is an area of managing publicresources and is linked to identifying andaddressing such administrative and policypractices that come in the way of effectingeconomy in the expenditure, particularly in thearea of non-developmental activities of theState. An important issue is that of thesubsidies, both direct and implicit, which areestimated to form a substantial proportion ofGDP. The definition, magnitude, utility andjustification of these subsidies merit reconsi-deration, all the more since it is the area withthe highest potential for savings. The appli-cation and targeting of these subsidies mustbe made consistent with the governance capa-bilities. Pension liability of the government isthe fastest growing component of currentexpenditure and has been dwelt on at lengthin chapter 2. At present, these liabilities areunfunded and represent a claim on the generalrevenues. There is evidence that themanagement of pension accounts leaves muchto be desired and the government may bepaying considerably more than is justified. Thenext area relates to the public provisioning ofinfrastructure services that, hitherto, has beenfunded in such a manner that the public at largehas got used to not paying economic chargesfor these services. Some of these servicesare power, water supply, irrigation, transportand, even higher education. While equityconsiderations are, no doubt, important insofaras these subsidies are concerned, it is at thesame time a fact that it is the better-off sectionsof the society that consumes such services arethe major beneficiaries. It will be a priority, inthe Tenth Plan to improve the fiscal health ofthe government, both at the Centre and at theState levels by making necessary correctionsin the subsidy and the pricing regime for publicprovisioning of services.

(vi) Civil Society : The role of civil society in thedevelopment of the nation cannot be over-stated. Several thousands of civil societyorganisations, including voluntary organisa-tions (VOs), non profit making companies,corporate bodies, cooperatives and trusts are

actively involved in economic and socialdevelopment. They have thus to be recognisedas partners in development. The strengths ofthe voluntary sector, namely their advocacyskills, organisational skills and being closer tothe people should be used to the advantage ofall concerned. During the Tenth Plan it isproposed to:

(a) involve VOs in the task of planning, andimplemention and being the interface withthe public, especially at the cutting edge;

(b) develop core competencies and profes-sionalism in the voluntary sector;

(c) broaden the base and scope of volunta-rism by encouraging its growth in Statesand regions where the same has beenweak;

(d) create an enabling environment for greaterinvolvement of the voluntary sector, espe-cially in backward areas where the Statemachinery is found wanting;

(e) review the working of the mother NGOconcept and based on that consider alter-native modalities of funding VOs, forgreater transparency and accountability;mechanisms have to be evolved forensuring that funds from public/private/external sources reach the VOs which areserving the poor and disadvantaged;

(f) build appropriate data bases, carry outdocumentation, research and dissemi-nation of innovative development modelsevolved by VOs;

(g) promote a symbiosis between VOs andPRIs so that they can complement eachother and avoid conflict, this could be doneby giving suitable representation to VOsin the planning committees of the PRIs;

(h) monitoring and evaluation, especially ofthe 11 monitorable targets of the TenthPlan; and

(i) initiate a shift towards increasing the finan-cial contribution of civil society to thedevelopment process.


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(vii) Civil Service Reforms must be aimed atimproving transparency, accountability,honesty, efficiency and sensitivity in publicadministration at all levels. The solution to theproblem of corruption has to be more systemicthan any other issue of governance. Merelyshrinking the economic role of the State byresorting to deregulation, liberalisation andprivatisation is not necessarily the solution toaddressing the problem. All such procedures,laws and regulations that breed corruption andcome in the way of efficient delivery systemwill have to be eliminated. The following aresome of the steps that will need to be taken inthis regard to improve the efficiency of thesystem.

(a) Enforcing the right to information. Thismust be the starting point and has beendescribed in point (iii) earlier.

(b) Greater transparency in policies andprocedures. The processes and the out-comes of policies, entitlements andprocedures must be transparent, widelyshared and well displayed.

(c) Minimising discretion. It is believed thatless discretion would lead to a more equit-able and less corrupt system.

(d) Those who have the authority must alsobe made accountable. Prevalent institu-tional arrangements have to be reviewedand changes made so that those vestedwith authority are also made accountable.

(e) Revamping the system of rewards andpunishments. The present system ofincentives in public life, which makes cor-ruption a high-return-low-risk activity, needto be changed. There has to be an incen-tive structure that rewards and promotesmerit, at the same time disciplines andpunishes malfunction and misconduct.Public examples will have to be made ofpeople convicted or charged for miscon-duct/corruption.

(f) Review of the functions of the Governmentand shedding of the redundant ones. Thefunctions of the Government change from

time to time. We have come a long wayfrom the days of famine management andquotas for industrial raw materials etc. Theopening up of the economy andglobalisation have brought in manychanges. It is necessary to review thesituation and identity departments andfunctions within departments that wereonce essential, but are now redundant andwould need to be done away with. A goodexample is the office of the CaneCommissioner in the Cooperative Depart-ment which has become infructuous withthe change in the cooperative law. In abid to enhance the productivity of bureau-cracy, it is important to make certain thateach employee is performing relevanttasks.

(g) Improve professionalism. The inductionof professionals/specialists into theadministrative system, on contractualappointments should be examined andsuitable policy changes made in the entrypolicy.

(h) Capacity building and training. Thesystem of pre-service and in-service capa-city building for all cadres and ranks mustcontinue where it exists and be introducedwhere it does not. Training should bedemand driven and relate to technical,managerial and information technologyrelated areas.

(i) Rightsizing the Government. It is a wellrecognised fact that the existing structureand size of the government needs areview. The Expenditure Reforms Com-mittee has reviewed a number of centraldepartments in this regard. Their deci-sions need to be implemented. Surplusstaff in the Government is a seriousproblem and corrective steps cannot bepostponed. There is need to urgentlyidentify the surplus staff, set up an effec-tive redeployment plan and a liberalsystem for exit. Recruitment policies needto be realigned in a manner so that onlyfunctional posts are filled and the other


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vacancies are either allowed to lapse orfilled through redeployment. There has tobe a two per cent reduction in the staffstrength per year, over the Tenth Planperiod. Since the expenditure on staff hasincreased to unsustainable levels, thereis a need for effecting changes in theservice conditions, at least, for the freshrecruits. A shift towards a contributorypension system for the new employeescould be a starting point. Alternative waysof carrying out a job/activity must beexamined and assigned to the Govern-ment only if considered essential.

(j) Stability of tenure. For any constructive,innovative and sustainable work to bedone, there has to be a minimum stabilityof tenure, especially of the middle andsenior level officers.

(viii) Procedural Reforms cover all aspects ofgovernment’s interface with the public. Oftenprivate initiatives, entrepreneurial energies andinnovations are snuffed out by the maze of red-tapism and procedural and legal hurdles thatcome in the way of development. Eliminationof unnecessary procedural controls and regula-tions that stifle entrepreneurial energy, breedcorruption and affect the common man will bea priority area of improving governance.Although various governments from time totime have announced ‘single window clearance’procedures and ‘investor assistance cells’, theyhave rarely been effective. The primary reasonfor this is that the problem is not only ofinadequate coordination, but also relates tofragmented and often arbitrary exercise ofvarious powers of government, vested in anumber of functionaries, through a complexsystem of delegation of authority. It iscompounded by the fact that the rules andregula-tions are seldom transparent.Rationalisation of such rules, notifying them ina compre-hensive and transparent manner,assigning responsibilities, determiningaccountability of each functionary, clearly layingdown time limits for taking decisions andproviding adminis-trative and legal recourse in

case of malafide dilatoriness will be necessaryto address this problem.

(ix) Programme/Project Formulation : One of themost common reasons for the failure ofprogrammes and schemes is the faulty andincomplete design of the programme/project/scheme. Care must be taken to formulateprogrammes, projects and schemes in a moresystematic and professional manner. Variousalternatives for achieving the same purposemust be considered and the most appropriateone selected. Programmes/projects/schemesmust have clear goals and objectives; strate-gies and action plans; and well defined deliverymechanisms. Benchmarks and indicators forreviewing and assessing the impact must becarefully determined. Responsibilities forimplementation at various stages must beclearly identified.

(x) Project Based Reform Linked Support : Oneway of improving the delivery system relatesto enhancing the scope of project basedassistance to States and developmentagencies/institutions. The recent experiencehas been that project-based assistance,particularly in the area of infrastructure – roadsand bridges, power and irrigation has beenmore effective in meeting its objectives. It isalso more amenable to monitoring and bettertargeting. Such assistance has to be essentiallyviewed as an input that meets strategic gapsin the development effort of the StateGovernments which, once met, should enablethe States to sustain their efforts. Someexamples of reform linked support are theAccelerated Irrigation Benefit Programme(AIBP), Accelerated Power Development andReform Programme (APDRP), Urban IncentiveFacility and the Rashtriya Sam Vikas Yojana(RSVY).

(xi) Synergy and Coordination between differentpublic and para-statal agencies engaged indevelopment is critical for obtaining themaximum benefit from limited resources, forminimising overheads, checking duplication ofefforts and using resources and person-power


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optimally. Moreover, excessive loading ofresponsibilities on some branches of civiladministration, for instance, the DistrictCollectorate which has been reported to beoverseeing 167 development schemes at theblock level in one instance, not only underminesthe overall institutional capacity to deliver butalso compromises on the quality of publicinterventions in what are critical areas of humandevelopment.

(xii) Monitoring : Another aspect that has a directbearing on improving the delivery system andalso the efficacy and efficiency of publicspending relates to the issue of monitoring.There is a general perception and perhapsrightly so, that in the absence of adequatemonitoring and evaluation of plan programmesand other non-plan activities, there is aconsiderable amount of wastage, leakages andspill-over of programmes over successiveplans, leading to a less than optimal use of thescarce public resources in the developmentprocess. This is on account of the fact that theexisting mechanisms for monitoring andevaluation have neither been adequately usedby the agencies responsible for implementingvarious programmes nor has there been anyvisible effort to improve and strengthen thesemechanisms over time. The Planning Commissionhas recently taken steps to address this issuein consultation with the Central Ministries. Ithas initiated a practice of holding of QuarterlyPerformance Review meetings under theconcerned Members in the PlanningCommission. The objective is to review fromtime to time the performance of the CentralMinistries’ plan programmes and schemes,both from the physical and financial points ofview, correlate the two, identify constraints andbottlenecks, and suggest remedial measures.Special attention is however to be given to thedesign and delivery mechanism of individualschemes with a view to improving theaccountability and efficacy of plan spending.Similar initiatives need to be taken by theCentral and State Governments. In order tomake monitoring focused and useful, clearlydefined indicators (inputs and output indicators)

must be identi-fied, with clear time-frames atthe project/scheme formulation stage itself.

(xiii) Rationalisation of Centrally Spon-SoredSchemes (CSSs) and Central SectorSchemes (CSs) Using Zero BasedBudgeting (ZBB): Centrally SponsoredSchemes were originally to be formulated onlywhere an important national objective such aspoverty alleviation was to be addressed, or theprogramme has a regional or inter-Statecharacter or is in the nature of pace setter, oris for the purpose of survey or research.However, the CSSs have proliferatedenormously, and in the terminal year of theNinth Plan there were as many as 360 CSSsand 2247 CSs. Many of these have similarobjectives and target the same population.Certain generic components, like information,education and communication (IEC) arerepeated in a number of schemes. This alsoleads to multiplicity of the implementingmachinery and lack of synergy andcoordination. CSSs rarely follow a projectapproach and usually do not have benchmarksor performance indicators. The Tenth Planstrategy clearly aims at improving efficiency orpublic assets and the quality of expenditure ofthe public sector through rationalisation of theCentral Sector and Centrally SponsoredSchemes by way of convergence, weeding outand transfer to the States. In the terminal yearof the Ninth Plan, the Planning Commissioncarried out a Zero Based Budgeting (ZBB)exercise for all the Central Ministries/Departments with the above purpose in mind.As a result of this exercise, of the 360 CSSs inoperation in the Ninth Plan, PlanningCommission recommended weeding out of 48schemes, merger of 161 schemes into 53schemes, and retaining the remaining 135schemes, implying a carrying forward of 188CSSs to the Tenth Plan. Similarly, of the 2247Central Sector Schemes in operation in theNinth Plan, Planning Commission recom-mended weeding out of 539 schemes, mergerof 1001 schemes into 233 schemes, and theretaining remaining 689 schemes, implying acarrying forward of 922 CSs to the Tenth Plan.


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It has been decided upon that this exercise willbe a regular feature for the PlanningCommission and the States will also beencouraged to undertake such reviews of theirschemes. Besides the above, the followingstrategies will be followed in the Tenth Plan:

(a) a new CSS will be permitted only in excep-tional circumstances. Efforts will be madeto modify existing schemes or take up theactivities in the State sector rather thanstart a new CSS.

(b) monitoring of CSs and CSSs includingtracking State-wise flow of funds andassessing physical and financial targetsunder different schemes will be essential

(c) as far as possible, all new CSSs shouldbe conditional on reforms in that sector

(d) there should be flexibility between compo-nents of a scheme; and

(e) wherever possible, the macro manage-ment or cafeteria approach should beused for a group of schemes. Thisprovides the states a basket of schemesto choose from, and selection of the sche-mes most suited to their requirements.

(xiv) Empowerment of the Marginaland theExcluded has been demonstrated, in manycases, to be among the important means toestablish countervailing forces or pressuregroups in society to resist bad governance, andcheck the deterioration in governance stan-dards and personal exploitation by others. Thevested interests in any system often havestakes in maintaining the status quo of suchunder-privileged groups. The only way to breakthese informal but deliberate and oftenstubborn arrangements is by equipping themarginalised in the society to fight for theirlegitimate rights. This requires not only legis-lative initiatives through acts of positivediscrimination, for instance, by undertakingreservation for women in the legislative bodiesat all levels, but it also requires directingexplicitly the public developmental efforts ataddressing the economic insecurities of the

targeted segments of the population. Itrequires the dissemination of information andfree access to all. Mention has been made tothe importance of the Right to Information inpara (iii) earlier. There is a need to identify asystem to ascertain whether information isreaching these groups or not. What is requiredmost of all is the capacity building of theindividuals through human developmentstrategies, involving the access to education,basic health care facilities and opportunitiesof livelihood. The media and the voluntarysector also have a very important role to playin exposing and bringing up front issues of badgovernance and graft.

(xv) Judicial Reform : There is an urgent need tobring about judicial reforms with a view tospeeding up the process of delivering justice.Alternatives to the regular delivery mechanismthrough a hierarchy of alternate courts likeFamily Courts, Lok Adalts, Nyaya Panchayatsetc., need to be resorted to more often.

(xvi) Using Information Technology (IT) forGood Governance : Electronic-governance(E-governance) is fast emerging as animportant tool for achieving good governanceespecially with regard to improving efficiency,transparency and making interface withgovernment user friendly. E-governancedenotes the application of IT to the processesof government functioning in order to bringabout better governance which has beentermed as SMART (simple, moral,accountable, responsive, and transparent).So far the emphasis has been on providingconnectivity, networking, technologyupgradation, selective delivery systems forinformation and services and a package ofsoftware solutions. In the Tenth Plan it isproposed to focus on the re-engineering ofprocedures and rules which are in fact the coreof any effective programme of E-governance.The master plan for E-governance for the TenthPlan emphasises the need for a focused visionabout the objectives of introducing E-governance. The range and standards ofdelivery to be achieved within well defined time


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frames will need to be clearly laid down. Dueattention will be given to the sustainability, inter-activity and standardisation of any E-governance activities. Resources will be raisedboth from the public and private sectors. Withinthe ambit of E-governance, it will be necessaryto develop G2G, G2C, G2B functionalities*.One of the major initiatives envisaged in the ITsector is to take IT to the masses. Creation ofsoftwares for establishing an inter-face with thediverse Indian languages used in India posesa real challenge. In the Tenth Plan theendeavour will be to develop suitable softwareand technologies to enable people to interactand use computers in local languages. Internetaccessibility and content creation in locallanguages will be promoted. Innovative andcost effective solutions, at the same time, haveto be found to make available the requiredband-width in remote and rural areas.

The Path Ahead

6.16 Good governance is perhaps the singlemost important factor in ensuring that the objectivesof the Tenth Plan are achieved. In view of the above,it will be important that all the players are on boardand that there is a realization of the need and awillingness to undertake the reforms and otherpolicy steps mentioned in para 6.15 above. Stepswill have to be taken to address issues relating toimproved people’s participation, effective decentra-

lization of governance, involvement of civil society,especially voluntary organizations and the crucialRight to Information. Civil service reforms aimedat improving transparency, accountability, efficiency,fair play and honesty; procedural reforms for public-government inter-face to rid the system ofunnecessary rules, procedural regulations andcontrols; reforms of the revenue system andmobilisation of resources; and judicial reforms witha view to hasten the process of delivery of justicewill be required to be taken up in all earnestness.Systematic and professional programme/projectformulation; project based reform linked plansupport; synergy and coordination between differentgovernment departments and agencies;rationalisation of Centrally Sponsored Schemes andCentral Schemes using Zero Based Budgeting; andmore effective monitoring and evaluation will haveto be encouraged and supported. Empowermentof the marginal and the excluded should be pursuedwith a view to equip them to act as pressure groupsto resist bad governance and check the deteriorationin governance and exploitation of the public. E-governance and IT will have to be given a big pushto increase transparency, fair play and makesystems faster and user friendly.

* G2G : Government to GovernmentG2C : Government to CitizenG2B : Government to Business

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7.1 Five Year Plan documents have, histori-cally, not included consideration of issues relatingto the management and mitigation of naturaldisasters. The traditional perception has beenlimited to the idea of “calamity relief”, which is seenessentially as a non-plan item of expenditure.However, the impact of major disasters cannot bemitigated by the provision of immediate relief alone,which is the primary focus of calamity relief efforts.Disasters can have devastating effects on theeconomy; they cause huge human and economiclosses, and can significantly set back developmentefforts of a region or a State. Two recent disasters,the Orissa Cyclone and the Gujarat Earthquake,are cases in point. With the kind of economic lossesand developmental setbacks that the country hasbeen suffering year after year, the developmentprocess needs to be sensitive towards disasterprevention and mitigation aspects. There is thusneed to look at disasters from a developmentperspective as well.

7.2 Further, although disaster management isnot generally associated with plan financing, thereare in fact a number of plan schemes in operation,such as for drought proofing, afforestation, drinkingwater, etc., which deal with the prevention andmitigation of the impact of natural disasters. Exter-nal assistance for post-disaster reconstruction andstreamlining of management structures also is apart of the Plan. A specific, centrally sponsoredscheme on disaster management also exists. ThePlan thus already has a defined role in dealing withthe subject.

7.3 Recently, expert bodies have dwelt on therole of the Planning Commission and the use ofplan funds in the context of disaster management.Suggestions have been made in this regard by theEleventh Finance Commission, and also the High

Powered Committee on Disaster Management. Anapproach on planning for safe development needsto be set out in the light of these suggestions.

7.4 This chapter reflects the considerationsoutlined above. It briefly outlines the global contextand the Indian experience of disasters, sets out theinstitutional and financial arrangements for disastermanagement and the response towards these inthe country, looks at directions for improvement,and concludes with a strategy to facilitate planningfor safe national development in the Tenth Planperiod.

THE GLOBAL CONTEXT

7.5 There has been an increase in the numberof natural disasters over the past years, and with it,increasing losses on account of urbanisation andpopulation growth, as a result of which the impactof natural disasters is now felt to a larger extent.According to the United Nations, in 2001 alone,natural disasters of medium to high range causedat least 25,000 deaths around the world, more thandouble the previous year, and economic losses ofaround US $ 36 billion. These figures would bemuch higher, if the consequences of the manysmaller and unrecorded disasters that causesignificant losses at the local community level wereto be taken into account. Devastations in theaftermath of powerful earthquakes that struckGujarat, El Salvador and Peru; floods that ravagedmany countries in Africa, Asia and elsewhere;droughts that plagued Central Asia includingAfghanistan, Africa and Central America; thecyclone in Madagascar and Orissa; and floods inBolivia are global events in recent memory.However, what is disturbing is the knowledge thatthese trends of destruction and devastation are onthe rise instead of being kept in check.

CHAPTER – 7

DISASTER MANAGEMENT:THE DEVELOPMENT PERSPECTIVE


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7.6 Natural disasters are not bound by politicalboundaries and have no social or economic consi-derations. They are borderless as they affect bothdeveloping and developed countries. They are alsomerciless, and as such the vulnerable tend to suffermore at the impact of natural disasters. Forexample, the developing countries are much moreseriously affected in terms of the loss of lives,hardship borne by population and the percentageof their GNP lost. Since 1991, two-third of the victimsof natural disasters were from developing countries,while just 2 per cent were from highly developednations. Those living in developing countries andespecially those with limited resources tend to bemore adversely affected. With the alarming rise inthe natural disasters and vulnera-bility per se, theworld community is strengthening its efforts to copewith it.

7.7 As a number of the most vulnerableregions are in India, natural disaster managementhas emerged as a high priority for the country.Going beyond the historical focus on relief andrehabilitation after the event, we now have to lookahead and plan for disaster preparedness andmitigation, in order that the periodic shocks to ourdevelopment efforts are minimized.

THE INDIAN EXPERIENCE

Regional Vulnerabilities

7.8 Physical vulnerability relates to thephysical location of people, their proximity to the

hazard zone and standards of safety maintained tocounter the effects. For instance, some people arevulnerable to flood only because they live in a floodprone area. Physical vulnerability also relates tothe technical capacity of buildings and structuresto resist the forces acting upon them during a hazardevent.

7.9 The extent to which a population is affec-ted by a calamity does not purely lie in the physicalcomponents of vulnerability, but is contextual alsoto the prevailing social and economic conditions andit’s consequential effect on human activities withina given society. Research in areas affected byearthquakes indicates that single parent families,women, handicapped people, children and the agedare particularly vulnerable social groups. The geo-physical setting with unplanned and inadequatedevelopmental activity is a cause for increasedlosses during disasters. In the case of India, thecontribution of over-population to high populationdensity, which in turn results in escalating losses,deserves to be noted. This factor sometimes tendsto be as important as physical vulnerability attributedto geography and infrastructure alone.

7.10 The continent of Asia is particularly vulner-able to disaster strikes. Between the years 1991 to2000 Asia has accounted for 83 per cent of thepopulation affected by disasters globally. While thenumber of people affected in the rest of the worldwere 1,11,159, in Asia the number was 5,54,439.1Within Asia, 24 per cent of deaths due to disastersoccur in India, on account of its size, population andvulnerability. Floods and high winds account for 60per cent of all disasters in India. While substantialprogress has been made in other sectors of humandevelopment, there is need to do more towardsmitigating the effect of disasters.

7.11 Many parts of the Indian sub-continent aresusceptible to different types of disasters owing tothe unique topographic and climatic characteristics.About 54 per cent of the sub-continent’s landmassis vulnerable to earthquakes while about 4 crorehectares is vulnerable to periodic floods. The

Box 7.1

INDIA’S KEY VULNERABILITIES

Coastal States, particularly in the East Coast andGujarat are vulnerable to cyclones.4 crore hectare land mass is vulnerable to floods.

68 per cent of net sown area is vulnerable todrought.55 per cent of total area is in Seismic Zones III - V,and vulnerable to earthquakes.Sub-Himalayan/Western Ghat is vulnerable tolandslides.

1. World Disasters Report, IFRC, 2001

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decade 1990-2000, has been one of very highdisaster losses within the country, losses in theOrissa Cyclone in 1999, and later, the GujaratEarthquake in 2001 alone amount to several thou-sand crore of Rupees, while the total expenditureon relief and reconstruction in Gujarat alone hasbeen to the tune of Rs 11,500 crore.2

7.12 Similarly, the country has suffered fourmajor earthquakes in the span of last fifty yearsalong with a series of moderate intensityearthquakes that have occurred at regular intervals.Since 1988, six earthquakes have struck differentparts of the country. These caused considerablehuman and property losses.

7.14 Disasters may also reduce availability ofnew investment, further constricting the growth ofthe region. Besides, additional pressures may beimposed on finances of the government throughinvestments in relief and rehabilitation work.

7.15 In the recent earthquake in Gujarat, morethan 14,000 lives were lost, ten lakh houses weredamaged and the asset loss has been indicated tobe worth 15,000 crore. Tables 7.2 to 7.5 give anindication of the magnitude of the damage andlosses incurred by the country in recent naturaldisasters.

7.16 The dimensions of the damage, as evidentin the tables and the diagram 7.1 emphasise thepoint that natural disasters cause major setbacksto development and it is the poorest and the weakestthat are the most vulnerable to disasters. Given thehigh frequency with which one or the other part ofthe country suffers due to disasters, mitigating theimpact of disasters must be an integral componentof our development planning and be part of ourpoverty reduction strategy.

INSTITUTIONAL ARRANGEMENTS

7.17 The country with its federal system ofGovernment has specific roles for the Central andState Governments. However, the subject ofdisaster management does not specifically find

Economic Losses Due to Disasters

7.13 Disasters lead to enormous economiclosses that are both immediate as well as long termin nature and demand additional revenues. Also,as an immediate fall-out, disasters reduce revenuesfrom the affected region due to lower levels ofeconomic activity leading to loss of direct andindirect taxes. In addition, unplanned budgetaryallocation to disaster recovery can hamperdevelopment interventions and lead to unmetdevelopmental targets.

2. As on 11-12-2000, Gujarat Earthquake : A Case Study, NCDM,2002, New Delhi

Box 7.2

Global Losses Through Natural Disasters

According to Reinsurance Company ‘MunichRe’ costs associated with natural disasters hasgone up 14 fold since the 1950s. Each year from1991 to 2000, an average of 211 million peoplewere killed or affected by natural disasters - seventimes greater than the figure for those killed oraffected by conflict. Towards the end of the 1990s,the world counted some 25 million ‘environmentalrefugees’- for the first time more people had flednatural hazards than conflict.

Source: World Disasters Report, 2001

Table 7.1

Major Earthquakes in India, 1988-2001

Date Location Magnitude

August 21,1988 Bihar-Nepal Border 6.4

October 20,1991 Uttarkashi, Uttar Pradesh 6.6

September 30, 1993 Latur- Osmanabad, 6.3Maharashtra

May 22, 1997 Jabalpur, Madhya Pradesh 6.0

March 29, 1999 Chamoli, Uttar Pradesh 6.9

January 26,2001 Bhuj, Gujarat 7.7

Source : Indian Meteorological Department and US Geological Survey


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Table 7.2

Damage due to Natural Disasters in India

Year People affected Houses & buildings, partially or Amount of property(Lakh) totally, damaged damage/loss

(Rs Crore)

1985 595.6 2,449,878 40.06

1986 550.0 2,049,277 30.74

1987 483.4 2,919,380 20.57

1988 101.5 242,533 40.63

1989 30.1 782,340 20.41

1990 31.7 1,019,930 10.71

1991 342.7 1,190,109 10.90

1992 190.9 570,969 20.05

1993 262.4 1,529,916 50.80

1994 235.3 1,051,223 10.83

1995 543.5 2,088,355 40.73

1996 549.9 2,376,693 50.43

1997 443.8 1,103,549 n.a.

1998 521.7 1,563,405 0.72

1999 501.7 3,104,064 1020.97

2000 594.34 2,736,355 800.00

2001 788.19 846,878 12000

Source : Annual Reports, NDM Division, Ministry of Agriculture

Table 7.3

Annual Damage due to Heavy Rains, Landslide and Floods

S. Year Districts Villages Population Crop Area Houses Human Cattle Estimated Estimated ofNo affected affected affected affected Damaged life loss loss value of value of Public

(No) (Lakh) (Lakh Ha.) (no.) (no.) (no.) loss to houses properties(Rs. in crore) (Rs. in crore)

1 1999 202 33,158 328.12 8.45 884,823 1,375 3,861 0.72 -

2 2000 200 29,964 416.24 34.79 2,736,355 3,048 102,121 631.25 389.72

3 2001 122 32,363 210.71 18.72 346,878 834 21,269 195.57 676.05

Source : Annual Reports, Natural Disaster Management Division, Ministry of Agriculture


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Table 7.4

Damage due to Cyclone in Orissa in October ’2000

Date of Total no Districts Villages Population Crop Area Houses Human Cattleoccurrence of districts affected affected affected affected Damaged life loss loss

(No) (Lakh) (Lakh Ha) (no.) (no.) (no.)

17-18.10.99 30 4 5,181 37.47 1.58 331,580 199 10,578

29-30.10.99 30 12 14,643 129.22 18.43 1,828,532 9,887 444,531

Source : Annual Reports, Natural Disaster Management Division, Ministry of Agriculture

Table 7.5Losses due to Droughts: 1999-2001

S.No Year Districts Villages Population Damage to Estimated Cattleaffected affected affected crops area value of population

(No) (Lakh) (Lakh Ha) damaged crops affected(Rs crore) (in lakh)

1 1999 125 - 369.88 134.22 6.44 345.60

2 2000 110 54,883 378.14 367.00 371.87 541.67

3 2001 103 22,255 88.19 67.44 NA 34.28

TOTAL 338 77,138 836.21 568.66 378.31 921.55

Source: Annual Reports, Natural Disaster Management Division, Ministry of Agriculture

Source: Central Water Commission.

Figure 7.1Cumulative Annualised

Flood Damage (Rs. in crore)


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mention in any of the three lists in the 7th Scheduleof the Indian Constitution, where subjects under theCentral and State Governments as also subjectsthat come under both are specified. On the legalfront, there is no enactment either of the Central orof any State Government to deal with themanagement of disasters of various types in acomprehensive manner.

7.18 The country has an integrated adminis-trative machinery for management of disasters atthe National, State, District and Sub-District levels.The basic responsibility of undertaking rescue, reliefand rehabilitation measures in the event of naturaldisasters, as at present, is that of the State Govern-ments concerned. The Central Government supple-ments the efforts of the States by providing financialand logistic support.

Central Level

7.19 The dimensions of response at the levelof the Central Government are determined inaccordance with the existing policy of financing reliefexpenditure and keeping in view the factors like:

(i) the gravity of a natural disaster;(ii) the scale of the relief operation necessary;

and(iii) the requirements of Central assistance for

augmenting financial resources andlogistic support at the disposal of the StateGovernment.

7.20 The Contingency Action Plan (CAP) identi-fies initiatives required to be taken by variousCentral Ministries and Public Departments in thewake of natural calamities. It sets down theprocedures and determines the focal points in theadministrative machinery to facilitate launching ofrelief and rescue operations without delay.

7.21 The Ministry of Home Affairs is the nodalMinistry for coordination of relief and response andoverall natural disaster management, and theDepartment of Agriculture & Cooperation is thenodal Ministry for drought management. Other

Ministries are assigned the responsibility of provi-ding emergency support in case of disasters thatfall in their purview as indicated in Table 7.6.

The following decision-making and standing bodiesare responsible for disaster management at theCentral level:

• Union Cabinet, headed by the Prime Minister.

• Empowered Group of Ministers, headed by theDeputy Prime Minister

• National Crisis Management Committee(NCMC), under the chairmanship of theCabinet Secretary.

• Crisis Management Group (CMG): under thechairmanship of the Central ReliefCommissioner comprising senior officers fromthe various Ministries and other concernedDepartments which reviews contingencyplans, measures required for dealing with anatural disaster, and co-ordinates the activitiesof the Central Ministries and the StateGovernments in relation to disasterpreparedness response and relief.

• Technical Organizations, such as the IndianMeteorological Department (cyclone/earth-quake), Central Water Commission (floods),

Table 7.6Ministries Responsible for Various

Categories of Disasters

Disaster Nodal Ministry

Natural Disasters Ministry of Home AffairsManagement(other than Drought)

Drought Relief Ministry of Agriculture

Air Accidents Ministry of Civil Aviation

Railway Accidents Ministry of Railways

Chemical Disasters Ministry of Environment &Forests

Biological Disasters Ministry of Health

Nuclear Disasters Department of AtomicEnergy


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Building and Material Promotion Council (cons-truction laws), Bureau of Indian Standards(norms), Defence Research & DevelopmentOrganization (nuclear/biological), DirectorateGeneral Civil Defence provide specifictechnical support to coordination of disasterresponse and management functions.

• The setting up of a National Disaster Manage-ment Authority (NDMA) is being contemplatedby the Ministry of Home Affairs as the proposedapex structure within the government for thepurpose. Amongst other major organisationalinitiatives, it is proposed to:

(a) establish a specialised and earmarkedresponse team for dealing with nuclear/biological/chemical disasters;

(b) establish search and rescue teams in eachState;

(c) strengthen communication systems in theNorth Eastern Region.

State Government

7.22 The responsibility to cope with naturaldisasters is essentially that of the State Govern-ment. The role of the Central Government issupportive in terms of supplementation of physicaland financial resources. The Chief Secretary ofthe State heads a state level committee which is inoverall charge of the relief operations in the Stateand the Relief Commissioners who are in chargeof the relief and rehabilitation measures in the wakeof natural disasters in their States function underthe overall direction and control of the state levelcommittee. In many states, Secretary, Departmentof Revenue, is also in-charge of relief. StateGovernments usually have relief manuals and thedistricts have their contingency plan that is updatedfrom time to time.

District and Local Level

7.23 The district administration is the focal pointfor implementation of all governmental plans andactivities. The actual day-to-day function of adminis-tering relief is the responsibility of the Collector/District Magistrate/Deputy Commissioner who

exercises coordinating and supervising powers overall departments at the district level. Though it maynot be a common phenomenon, there exists by andlarge in districts also a district level relief committeeconsisting of officials and non- officials.

7.24 The 73rd and 74th constitutional amend-ments recognise Panchayati Raj Institutions as‘Institutions of self- government’. The amendmenthas also laid down necessary guidelines for thestructure of their composition, powers, functions,devolution of finances, regular holding of electionsand reservation of seats for weaker sectionsincluding women. These local bodies can beeffective instruments in tackling disasters throughearly warning system, relief distribution, providingshelter to the victims, medical assistance etc.

7.25 Other than the national, state, district andlocal levels, there are various institutional stake-holders who are involved in disaster managementat various levels in the country. These include thepolice and para-military forces, civil defence andhome-guards, fire services, ex-servicemen, non-government organisations (NGOs), public andprivate sector enterprises, media and HAMoperators, all of whom have important roles to play.

Armed Forces

7.26 The Indian Armed Forces are supposedto be called upon to intervene and take on specifictasks only when the situation is beyond the capabilityof civil administration. In practice, the Armed Forcesare the core of the government’s response capacityand tend to be the first responders of the Govern-ment of India in a major disaster. Due to their abilityto organize action in adverse ground circumstances,speed of operational response and the resourcesand capabilities at their disposal, the Armed Forceshave historically played a major role in emergencysupport functions such as communications, searchand rescue operations, health and medical facilities,transportation, power, food and civil supplies, publicworks and engineering, especially in the immediateaftermath of disaster. Disaster management plansshould incorporate the role expected of them sothat the procedure for deploying them is smoothand quick.


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External Linkages

7.27 The Government of India is a member ofvarious international organisations in the field ofdisaster response and relief. While, as a policy, norequests for assistance or appeals are made to theinternational community in the event of a disaster,assistance offered suo moto is accepted. Linkagesexist with the following organisations:

a) UN Office for Coordination of Humani-tarian Affairs (UN OCHA), which has beenmade responsible by UN GeneralAssembly mandate for all internationaldisaster response.

b) United Nations Development Programme(UNDP), responsible for mitigation andprevention aspects of disaster mana-gement.

c) UN Disaster Assessment and Coordi-nation (UNDAC) System.

Streamlining Institutional Arrangements forDisaster Response

7.28 Institutional arrangements for disasterresponse are the heart of disaster managementsystems. There is no dearth of personnel, bothcivilian and military, experienced in handlingsituations arising out of natural disasters. However,there certainly is a pressing need for improvementand strengthening of existing institutional arrange-ments and systems in this regard to make the initialresponse to a disaster more effective and profes-sional. Most of the resources and expertise neededalready exist with the Government. What needs tobe streamlined is how they should be integrated,trained and deployed. Some of the areas whereimprovement is urgently needed are:

a) Integrated planning for disasters, includingthe integration of relevant Armed Forcesformations into disaster managementplanning at all levels from District to Stateand Central Government.

b) Setting up of a modern, permanentnational command centre or operations

room, with redundant communicationsand data links to all State capitals. Thenational command centre or operationsroom needs to be manned on a 24-hourbasis by professionals to cater for instantintegrated response. There needs to bea properly equipped operations room atthe State level as well.

c) Establishment of a national stand by, quickreaction team composed of experiencedprofessionals, both military and civilian,drawn from Central and State Governmentstaff to respond immediately by flying in amatter of hours an experienced responseteam to the locations when a disasterstrikes. This team can be organized andrun professionally on the same lines asthe United Nations Disaster Assessmentand Coordination (UNDAC) teams.

d) Creation of urban search and rescuecapacity at all levels, by establishing a fullyequipped Search and Rescue unit, as partof the fire service in all State capitals, withtrained staff and modern equipment suchas thermal imagers, acoustic detectiondevices etc. This is of immediate rele-vance since a major weakness exposedin the Gujarat earthquake was a lack ofspecialised urban search and rescuecapability in India.

e) Media policy geared to handling the grow-ing phenomenon of real time televisionreporting, which generates enormouspolitical pressures on a government torespond rapidly and efficiently. This needsattention since the effect is going toincrease, not decrease in future.

f) Closer interface with and better under-standing of the international system fordisaster response, and putting in place,systems for dealing with internationalassistance once it comes in e.g., customs,immigration, foreign policy implicationsetc. A greater appreciation is needed ofthe speed and automation of modern inter-national response to a natural disaster.Closer interaction is required between of


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the Ministry of External Affairs and therelevant inter-national agencies concernedwith disaster response.

g) Standard procedures for dealing withdomestic humanitarian and relief assis-tance from non-government sources.Procedures and systems need to be setout to avoid confusion and ensure bestutilisation of the assistance being offered,just as in the case of systems forinternational assistance.

h) Modern unified legislation for disastermanagement. In view of the currentdivision of responsibilities between theState and Central Government into state,central and concurrent lists, there is a needto create a body of legislation dealing withresponse to natural disasters and otheremergencies, clearly delineating responsi-bilities and powers of each entity andspecifying what powers or actions wouldneed to be triggered on declaration of adisaster by the Government of India or aState Government. This legislation shouldalso incorporate the current legislationdealing with chemical emergencies thathas been created by the Ministry ofEnvironment so that all emergencies aredealt with under one law. The legislationshould include clear definitions of whatconstitutes a disaster at a national level.

FINANCIAL ARRANGEMENTS

Financing of Relief Expenditures

7.29 The policy arrangements for meetingrelief expenditure related to natural disasters are,by and large, based on the recommendations ofsuccessive finance commissions. The two mainwindows presently open for meeting suchexpenditures are the Calamity Relief Fund (CRF)and National Calamity Contingency Fund (NCCF).The Calamity Relief Fund is used for meeting theexpenditure for providing immediate relief to thevictims of cyclone, drought, earthquake, fire, floodand hailstorm. Expenditure on restoration of

damaged capital works should ordinarily be metfrom the normal budgetary heads, except whenit is to be incurred as part of providing immediaterelief, such as restoration of drinking watersources or provision of shelters etc., orrestoration of communication links for facilitatingrelief operations. The amount of annualcontribution to the CRF of each State for each ofthe financial years 2000-01 to 2004-05 is asindicated by the Finance Commission. Of the totalcontribution indicated, the Government of Indiacontributes 75 per cent of the total yearly allocationin the form of a non-plan grant, and the balanceamount is contributed by the State Governmentconcerned. A total of Rs. 11,007.59 crore wasprovi-ded for the Calamity Relief Fund from2000-05.

7.30 Pursuant to the recommendations of theEleventh Finance Commission, apart from theCRF, a National Calamity Contingency Fund(NCCF) Scheme came into force with effect fromthe financial year 2000-01 and would be operativetill the end of the financial year 2004-05. NCCFis intended to cover natural calamities likecyclone, drought, earthquake, fire, flood andhailstorm, which are considered to be of severenature requiring expenditure by the StateGovernment in excess of the balances availablein its own Calamity Relief Fund. The assistancefrom NCCF is available only for immediate reliefand rehabilitation. Any recons-truction of assetsor restoration of damaged capital should befinanced through re-allocation of Plan funds.There is need for defining the arrangements inthis regard.

7.31 The initial corpus of the National Fundis Rs.500 crore, provided by the Government ofIndia. This fund is required to be recouped bylevy of special surcharge for a limited period oncentral taxes. An amount of about Rs.2,300 crorehas already been released to States from NCCF.A list of items and norms of expenditure forassistance chargeable to CRF/NCCF in the wakeof natural calamities is prescribed in detail fromtime to time.


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Financing of Disaster Management ThroughFive Year Plans

7.32 Although not specifically addressed in FiveYear Plan documents in the past, the Governmentof India has a long history of using funds from thePlan for mitigating natural disasters. Funds areprovided under Plan schemes i.e., various schemesof Government of India, such as for drinking water,employment generation, inputs for agriculture andflood control measures etc. There are also facilitiesfor rescheduling short-term loans taken for agricul-ture purposes upon certification by the District/Stateadministration. Central Government’s assets/infrastructure are to be repaired/rectified by therespective Ministry/Department of Government ofIndia. Besides this, at the occurrence of a calamityof great magnitude, funds flow from donors, bothlocal and international, for relief and rehabilitation,and in few cases for long-term preparedness/preventive measures. Funds for the latter purposesare also available from multilateral funding agenciessuch as the World Bank. These form part of theState Plan.

7.33 There are also a number of importantongoing schemes that specifically help reducedisaster vulnerability. Some of these are: IntegratedWasteland Development Programme (IWDP),Drought Prone Area Programme (DPAP), DesertDevelopment Programme (DDP), Flood ControlProgrammes, National Afforestation & Eco-development Programme (NA&ED), AcceleratedRural Water Supply Programme (ARWSP), CropInsurance, Sampurn Grameen Rozgar Yojana(SGRY), Food for Work etc.

Initiatives Proposed by Various BodiesRegarding Financing Under the Plan

7.34 References have recently been made tothe role of the Plan in disaster management by theHigh Power Committee (HPC) on Disaster Mana-gement, as well as by the Eleventh FinanceCommission. The HPC was constituted in 1999and submitted its Report in October 2001. The HPCtook an overview of all recent disasters (natural aswell as manmade) in the country and identified

common response and preparedness mechanismson the basis of a series of consultations with a num-ber of government, non-government, national andinternational agencies and media organisations. Animportant recommendation of the Committee wasthat at least 10 per cent of plan funds at the national,state and district levels be earmarked andapportioned for schemes which specifically addressareas such as prevention, reduction, preparednessand mitigation of disasters.

7.35 The Eleventh Finance Commission toopaid detailed attention to the issue of disaster mana-gement and, in its chapter on calamity relief, cameout with a number of recommendations, of whichthe following have a direct bearing on the Plan:

(a) Expenditure on restoration of infrastruc-ture and other capital assets, except thosethat are intrinsically connected with reliefoperations and connectivity with theaffected area and population, should bemet from the plan funds on priority basis.

(b) Medium and long-term measures bedevised by the concerned Ministries of theGovernment of India, the State Govern-ments and the Planning Commission toreduce, and if possible, eliminate, theoccurrences of these calamities byundertaking developmental works.

(c) The Planning Commission, in consultationwith the State Governments and concer-ned Ministries, should be able to identifyworks of a capital nature to prevent therecurrence of specific calamities. Theseworks may be funded under the Plan.

PLANNING FOR SAFE NATIONALDEVELOPMENT

7.36 Development programmes that go intopromoting development at the local level have beenleft to the general exercise of planning. Measuresneed also to be taken to integrate disaster mitigationefforts at the local level with the general exercise ofplanning, and a more supportive environmentcreated for initiatives towards managing of disasters


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at all levels: national, state, district and local. Thefuture blue-print for disaster management in Indiarests on the premise that in today’s society whilehazards, both natural or otherwise, are inevitable,the disasters that follow need not be so and thesociety can be prepared to cope with themeffectively whenever they occur. The need of thehour is to chalk out a multi-pronged strategy fortotal risk management, comprising prevention,preparedness, response and recovery on the onehand, and initiate development efforts aimedtowards risk reduction and mitigation, on the other.Only then can we look forward to “sustainabledevelopment.”

Disaster Prevention And PreparednessMeasures

Information and Research Network

7.37 Disaster prevention is intrinsically linkedto preventive planning. Some of the important stepsin this regard are:

(a) Introduction of a comprehensive processof vulnerability analysis and objective riskassessment.

(b) Building a robust and sound informationdatabase: A comprehensive database ofthe land use, demography, infrastructuredeveloped at the national, state and locallevels along with current information onclimate, weather and man-made struc-tures is crucial in planning, warning andassessment of disasters. In addition,resource inventories of governmental andnon-governmental systems includingpersonnel and equipment help in efficientmobilisation and optimisation of responsemeasures.

(c) Creating state-of-the-art infrastructure:The entire disaster mitigation game planmust necessarily be anchored to frontlineresearch and development in a holisticmode. State-of-the art technologies avail-able worldwide need to be made availablein India for upgradation of the disaster

management system; at the same time,dedicated research activities should beencouraged, in all frontier areas relatedto disasters like biological, space applica-tions, information technology, nuclearradiation etc., for a continuous flow of highquality basic information for sound disastermanagement planning,

(d) Establishing Linkages between all know-ledge-based institutions: A NationalDisaster Knowledge Network, tuned to thefelt needs of a multitude of users likedisaster managers, decision makers,community etc., must be developed as thenetwork of networks to cover natural,manmade and biological disasters in alltheir varied dimensions,

Capacity Building, Training & Education

7.38 Personnel involved in the exercise haveto draw upon knowledge of best practices andresources available to them. Information and train-ing on ways to better respond to and mitigatedisasters to the responders go a long way in buildingthe capacity and resilience of the country to reduceand prevent disasters. Training is an integral partof capacity building as trained personnel respondmuch better to different disasters and appreciatethe need for preventive measures. The directionsin this regard are:

(a) The multi-sectoral and multi-hazardprevention based approach to disastermanagement requires specific profes-sional inputs. Professional training indisaster management should be built intothe existing pedagogic research and edu-cation. Specialised courses for disastermanagement may be developed byuniversities and professional teachinginstitutions, and disaster managementshould be treated as a distinct academicand professional discipline, something thatthe American education system has donesuccessfully. In addition to separatediploma/degree courses in disaster mana-gement, the subject needs to be discussed


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and taught as a specific component inprofessional and specialised courses likemedicine, nursing, engineering, environ-mental sciences, architecture, and townand country planning.

(b) The focus towards preventive disastermanagement and development of anational ethos of prevention calls for anawareness generation at all levels. Anappropriate component of disaster aware-ness at the school level will help increaseawareness among children and, in manycases, parents and other family membersthrough these children. Curriculum deve-lopment with a focus towards dissemi-nation of disaster related information ona sustained basis, covering junior, middleand high schools may be worked out bythe different school boards in the country.

(c) Training facilities for government person-nel involved in disaster management areconducted at the national level by theNational Centre for Disaster Management(NCDM) at the Indian Institute of PublicAdministration, in New Delhi which func-tions as the nodal institution in the countryfor training, research and documentationof disasters. At the State level, disastermanagement cells operating within theState Administrative Training Institutes(ATIs) provide the necessary training.Presently, 24 ATIs have dedicated facul-ties. There is a need for strengtheningspecialised training, including training ofpersonnel in disaster response.

(d) Capacity building should not be limited toprofessionals and personnel involved indisaster management but should alsofocus on building the knowledge, attitudeand skills of a community to cope with theeffects of disasters. Identification andtraining of volunteers from the communitytowards first response measures as wellas mitigation measures is an urgentimperative. A programme of periodic drillsshould be introduced in vulnerable areasto enable prompt and appropriate

community response in the event of adisaster, which can help save valuablelives.

7.39 Capacity building for effective disastermanagement therefore needs to be grounded andlinked to the community and local level responderson the one hand and also to the institutionalmechanism of the State and the Nation on the other.

Community Level Initiatives

7.40 The goal of any disaster managementinitiative is to build a disaster resistant/resilient com-munity equipped with safer living and sustainablelivelihoods to serve its own development purposes.The community is also the first responder in anydisaster situation, thereby emphasising the needfor community level initiatives in managingdisasters. To encourage such initiatives, the follow-ing are required:

(a) Creating awareness through disastereducation and training and informationdissemination are necessary steps forempowering the community to cope withdisasters.

(b) Community based approach followed bymost NGOs and Community BasedOrganisations (CBOs) should beincorporated in the disaster managementsystem as an effective vehicle of com-munity participation.

(c) Within a vulnerable community, there existgroups that are more vulnerable likewomen and children, aged and infirm andphysically challenged people who needspecial care and attention especiallyduring disaster situations. Efforts arerequired for identifying such vulnerablegroups and providing special assistancein terms of evacuation, relief, aid andmedical attention to them in disastersituations.

7.41 Management of disasters should thereforebe an interface between a community effort tomitigate and prevent disasters as also an effort from


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the government machinery to buttress and supportpopular initiatives.

Strengthening of Plan Activities

7.42 Given the pervasive nature of disastersand the widespread havoc caused by some of them,planned expenditure on disaster mitigation andprevention measures in addition to the CRF isrequired. The Central Sector Scheme of NaturalDisaster Management Programmes has beenimplemented since 1993-94 by the Department ofAgriculture and Co-operation with the objective tofocus on disaster preparedness with emphasis onmitigation and preparedness measures for enhan-ced capability to reduce the adverse impact ofdisasters. The major activities undertaken withinthis scheme include the setting up of the NationalCentre for Disaster Management (NCDM) at theIndian Institute of Public Administration, creation of24 disaster management faculties in 23 states,research and consultancy services, documentationof major disaster events and forging regionalcooperation. The Eighth Plan allocation of Rs 6.30crore for this scheme was increased to Rs. 16.32crore in the Ninth Plan. Within this scheme, NCDMhas conducted over 50 training programmes,training more than 1000 people, while 24 disastermanagement centres with dedicated faculty havebeen established in the states. Over 4000 peoplehave been trained at the State level. In addition,some important publications and audio-visualtraining modules have been prepared anddocumentation of disaster events has been done.

7.43 Though limited in scope and outlays, theScheme has made an impact on the training andresearch activities in the country. Creation of facul-ties in disaster management in all 28 states isproposed to be taken up in the Tenth Plan in additionto community mobilisation, human resourcedevelopment, establishment of Control Rooms andforging international cooperation in disastermanagement. There is also an urgent need forstrengthening the disaster management pedagogyby creating disaster management faculties inuniversities, rural development institutes and otherorganisations of premier research.

7.44 Sustainability is the key word in thedevelopment process. Development activities thatdo not consider the disaster loss perspective fail tobe sustainable. The compounded costs ofdisasters relating to loss of life, loss of assets,economic activities, and cost of reconstruction ofnot only assets but of lives can scarcely be borneby any community or nation. Therefore, alldevelopment schemes in vulnerable areas shouldinclude a disaster mitigation analysis, whereby thefeasibility of a project is assessed with respect tovulnerability of the area and the mitigation measuresrequired for sustainability. Environmental protection,afforestation programmes, pollution control,construction of earthquake resistant structures etc.,should therefore have high priority within the plans.

7.45 The aim of a mitigation strategy is toreduce losses in the event of a future occurrenceof a hazard. Structural mitigation may compriseconstruction of individual disaster resistant struc-tures like retrofitted or earthquake-resistantbuildings or creation of structures whose functionis primarily disaster protection like flood controlstructures, dykes, levees, infiltration dams etc.

7.46 Mitigation measures on individual struc-tures can be achieved by design standards, buildingcodes and performance specifications. Buildingcodes, critical front-line defence for achievingstronger engineered structures, need to be drawnup in accordance with the vulnerability of the areaand implemented through appropriate techno-legalmeasures.

7.47 Mitigation measures need to be consi-dered in land use and site planning activities.Constructions in hazardous areas like flood plainsor steep soft slopes are more vulnerable todisasters. Necessary mitigation measures need tobe built into the design and costing of developmentprojects.

7.48 Insurance is a potentially important miti-gation measure in disaster-prone areas as it bringsquality in the infrastructure & consciousness and aculture of safety by its insistence on followingbuilding codes, norms, guidelines, quality materials


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in construction etc. Disaster insurance mostlyworks under the premise of ‘higher the risk higherthe premium, lesser the risk lesser the premium’,thus creating awareness towards vulnerable areasand motivating people to settle in relatively saferareas.

THE PATH AHEAD

7.49 For addressing natural calamities such asfloods and drought, there already exist a number ofplan schemes under which a lot is being done andcan be done. State Governments need to make fulluse of the existing plan schemes and give priorityto implementation of such schemes that will help inovercoming the conditions created by the calamity.In some cases this implies possible diversion of thefunds from other schemes to those schemes theimplementation of which will help meeting the situa-tion. There may also be need in a crisis situationfor certain re-appropriations/reallocations amongthe different departments.

7.50 The Planning Commission will aim atresponding quickly to the needs of the CentralMinistries/Departments/States in matters relating tothe Plan for meeting situations arising out of naturaldisasters, by enabling adjustment of schemes tomeet the requirements as far as possible. A mecha-nism will be evolved to take expeditious decisionson proposals which involve transfer of funds fromone scheme to another, or any other change whichinvolves departure from the existing schemes/pattern of assistance, new schemes and relaxationin procedures, etc. in the case of natural disasters.

7.51 As the first responder in any disastersituation, however, each State needs to build a team

of dedicated trained, skilled personnel, makeprovision for specialised equipments, efficient com-munication network, and relevant, intelligent andeasily accessible database. There is also a needto consider creation of a plan scheme in each statebasically to meet the minimum requirements forstrengthening communications and emergencycontrol rooms, thereby improving coordination andresponse to disasters. No new institutional struc-tures need be created in such a scheme.

7.52 In particular, with regard to major dis-asters, it is also necessary for disaster mitigationcomponents to be built into all development projects.In order to save larger outlays on reconstruction andrehabilitation subsequently, a mechanism wouldneed to be worked out for allowing components thatspecifically help projects coming up in highlydisaster prone areas withstand the impact of naturaldisasters as part of approved project cost forprojects financed under the Plan.

7.53 The message for the Tenth Plan is that inorder to move towards safer national development,development projects should be sensitive towardsdisaster mitigation. With the kind of economic lossesand developmental setbacks that the country hasbeen suffering year after year, it makes good eco-nomic sense to spend a little extra today in a plannedway on steps and components that can help inprevention and mitigation of disasters, than be forcedto spend many multiples more later on resto-rationand rehabilitation. The design of developmentprojects and the process of development shouldtake the aspect of disaster reduction and mitigationwithin its ambit; otherwise, the development ceasesto be sustainable and eventually causes morehardship and loss to the nation.

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POLICY IMPERATIVES

8.1 The targets that have been set for theTenth Plan, both as far as economic growth andsocial development are concerned, are no doubtambitious. However, the achievement of thesetargets is essential to realise the extent of improve-ment in the well-being and quality of life of ourpeople that is desirable. The single most pressingissue that confronts us is the prospect of rapidlyincreasing unemployment in the country and theconsequence that it can have on the social fabric.All available analysis indicates that to provide gainfulemployment to our growing labour force will not onlyrequire the economy to grow at the 8 per cent targetrate of growth, but also to achieve the sectoralconfiguration that has been outlined in earlierchapters. Achievement of these targets will requiresignificant departures from our present ways fordoing things. The necessary measures have beendiscussed in detail in the appropriate sections ofthis Plan Document. It is, nevertheless, felt neces-sary to bring together the wide range of initiativesand policy reforms that have been judged essentialfor attaining the desired results. This compilationshould prove useful if for no other reason than thatit would convey the magnitude of the tasks aheadof us. Every arm of the Government, whether atthe Centre or in the States, has to take the measuresthat fall within its jurisdiction if the overall synergiesof these various policy changes are to be fullyrealized.

8.2 The compilation is structured on the basisof the coverage that these policies have. Some ofthem affect the way the entire economic systemfunctions, while others are more limited in scope,and impinge either upon the budgetary process ofGovernment or on specific sectors. It should not,however, be thought that the order in which these

policy changes have been put indicate any kind ofprioritisation. They are all equally important sincein any integrated economic system the cross-linkages can be substantial, and quite often noteasily measurable. It is re-emphasised that thesuccess or failure of the Tenth Plan hinge criticallyupon the adoption of the policies outlined in thefollowing sections.

8.3 ECONOMY-WIDE POLICY MEASURES

Ø Simplifying laws and procedures forinvestment.

Ø Eliminating inter-state barriers to tradeand commerce.

Ø Reforming development financialinstitutions for long-term financing ofsmall and medium enterprises.

Ø Removal of Government and ReserveBank of India restrictions on financing ofstocking and trading.

Ø Repeal of Sick Industrial Companies Act,introduction and strengthening of bank-ruptcy and foreclosure laws to facilitatetransfer of assets.

Ø Calibration of the cost of borrowedfunds, for enhancing competitiveness.

Ø Reform of labour laws.

Ø The policy of disinvestment of publicsector undertakings, should be pursuedso as to enable the realisation ofRs.16,000 crore per annum, to finance theplan.

Ø The Essential Commodities Act is ananachronism in a modern competitiveeconomy. It should be repealed andreplaced by an emergency act that can

CHAPTER 8

POLICY IMPERATIVES AND PROGRAMMATIC INITIATIVES


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be applied by notification for a limitedperiod of time to a specified commodity ina specified region. There should be nodelegation of authority, to issue notifica-tions from the Centre to States.

Ø Integration of various laws applicable tofood, such as the Prevention of FoodAdulteration Act (PFA) 1955, and theWeights and Measures Act 1976 into aunified and modern Food Act. This Actshould provide for a single food regulatoryauthority for the entire food sector,including food processing.

Ø Encouraging Foreign Direct Investmentso as to achieve the annual target of US$7.5 billion.

PUBLIC FINANCES

8.4 Policy Imperatives regarding publicfinances have to be taken up at three levels, theCentral level, the State level and some policies haveto be addressed at both the Central and State levels.

8.4.1 At Central Level

Ø Comprehensive computerisation of theincome tax system and universal usageof tax identification numbers in monetarytransactions must be made mandatory forfacilitating improved enforcement of theincome-tax administration.

Ø Exemptions under corporate tax shouldbe progressively eliminated.

Ø The current policy of moving progressivelyto a truly single excise rate shouldcontinue to be pursued while tighteningup much more on existing exemptions,particularly those for small enterprises, forimproving tax compliance.

Ø The coverage of the service tax must beexpanded continuously under the unionexcise system so that much greater taxbuoyancy can be achieved throughincreased coverage of the economy as awhole.

Ø Alignment should be made of customstariff rates with average Asian rates.

Ø Exemptions and concessions thatdistort the tariff structure should beeliminated.

Ø Implementation should be ensured of therecommendations of the ExpenditureReforms Commission, for example,regarding progressive reduction in fertilizersubsidy as well as elimination of petroleumsubsidy.

Ø Food subsidy should be better targetedthrough the targeted public distributionsystem and specific programmes for thepoor like Food for Work Programme, Mid-day Meals, Nutritional Support to Pre-School Children and Women etc.

Ø Curtailment of pay and allowances billof the government must be pursued on acontinuous basis, as, in the wake of theimplementation of Fifth Pay Commission’srecommendations, downsizing hasbecome most crucial to reducing non-planrevenue expenditure.

Ø Improvement of the operational effici-ency of railways and power sector unitsand other public sector units should betargeted with a view to eventuallyeliminating all budgetary support andgenerating adequate internal resources.

8.4.2 At State Level

Ø Reduction in staff strength must bepursued through adoption of a policy ofnet attrition and constitution of a pensionand amortisation fund to make com-mitted payments like terminal benefits anddebt servicing self-financing.

Ø Reduction in expenditure on adminis-trative and establishment cost shouldbe followed-up seriously.

Ø Privatisation of State public sector unitsespecially those which are making lossesand do not serve any social or economicobjectives must be carried out.


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Ø Switching over to ad valorem rates ofroyalty on minerals through the Centre’sinitiative should be pursued.

Ø Enactment of a Fiscal Responsibilityand Budget Management Bill underwhich borrowings shall be restricted toattain a non-rising debt to GDP ratio fromcurrent levels in order to reduce theburden of interest payments.

Ø Restricting borrowings to the level ofcurrent outstanding debt to GDP ratio orlower, so as to attain a non-rising outstan-ding debt to GDP ratio, thereby reducingthe burden of interest payments, shouldbe targeted.

Ø Improvement in the internal resourcesof State’s PSUs must be aimed at, byimplementing power sector reforms andreducing the burden of contingent liabilitieson State budgets, through a legislative oradministrative ceiling on the issue of Stateguarantees.

8.4.3 At Central and State Levels

Ø The extension of Value Added Tax (VAT)to the State level must be taken up at theearliest for facilitating its integration withthe Central VAT and bringing aboutharmonisation of tax rates levied bydifferent tax jurisdictions.

Ø User charges must be raised to cost-recovery levels and made acceptable bya communication campaign to convincethe general public that such a systemwould be in their own overall interest.

Ø An improvement in the Tax/GDP ratio ofCentre and States through inclusion ofservices in the tax base, removal of taxexemptions and concessions, harmoni-sation of tax rates, tightening of taxadministration, and adopting an integratedVAT regime is urgently called for.

8.5 IMPROVING GOVERNANCE

Ø In order to have a realistic plan outlay, theconcept of core plans which take into

consideration (a) the trend of aggregateactual resource mobilisation for the StatePlan in the last three years, and (b) arealistic and conservative estimate ofresources available for financing the Plan,will be followed through the Tenth Plan.

Ø To a large extent, the task of the develop-ment administration would become easierif steps are taken to make availableinformation, as a matter of right, to thecitizens. The right to information has tobe the starting point for much of thereforms proposed.

Ø As a result of maladministration andcorruption in the revenue system, not onlyis there a loss of revenue but it alsoencourages the people to participate in theblack/parallel economy. It is thereforenecessary to undertake reforms in therevenue system, not only to havereasonable tax rates, and equallyimportantly, to reform the taxadministration in order to make it moretransparent, equitable, and user-friendly.

Ø Civil Service Reforms must be aimed atimproving transparency, accountability,honesty, efficiency and sensitivity in publicadministration at all levels. Box 8.1 givessome of the important components of CivilService Reforms.

Ø Procedural reforms to cover all aspectsof government’s interface with the publicare essential. Often private initiatives,entrepreneurial energies and innovationsare snuffed out by the maze of red-tapismand procedural and legal hurdles thatcome in the way of development.

Ø One of the most common reasons for thefailure of programmes and schemes is thefaulty and incomplete design of theprogramme/project/scheme. Care andattention must be taken to formulateprogrammes, projects and schemes ina more systematic and professionalmanner.


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Ø Project based assistance will need to beencouraged, as this will also help in impro-ving the delivery system.

Ø It is essential to strengthen the existingmechanisms for monitoring andevaluation, in order to make sure thatplans are being implemented as envisagedand the impact is also as planned.

Ø Rationalisation of Centrally SponsoredSchemes (CSSs) and Central SectorSchemes (CSs) using Zero BasedBudgeting has to be a regular exercise.(i) A new CSS will be permitted only inexceptional circumstances, only when anexisting one can not be modified. (ii) Moni-toring and tracking State-wise flow offunds and assessing physical and financialtargets under different CSSs and CSs willbe essential. (iii) As far as possible CSSs

should be conditional on reforms in thatsector. (iv) There should be flexibilitybetween components of a scheme.

Ø It is necessary to create a proper climatefor development by ensuring law andorder, a sense of security and speedyjustice.

Ø Some major initiatives envisaged in theIT sector are to take up an ambitiousprogramme of E-Governance and take ITto the masses. Creation of software forestablishing an interface with the diverseIndian languages used in India poses areal challenge. In the Tenth Plan theendeavour will be to develop suitablesoftware and technologies to enablepeople to interact and use computers inlocal languages. Internet accessibility andcontent creation in local languages willalso be promoted.

Box 8.1

Important Components of Civil Services Reforms

• The processes and the outcomes of policies, entitlements and procedures must be madetransparent, widely shared and well displayed.

• It is believed and as such should be followed, that less discretion would lead to a more equitableand less corrupt system.

• Prevalent institutional arrangements will have to be reviewed and changes made so that thosevested with authority are also made accountable.

• The present system of rewards and punishments in public life, which makes corruption a high-return-low-risk activity, needs to be changed.

• It is necessary to review the situation, and identify departments and functions within departmentsthat were once essential, but are now redundant and would need to be done away with.

• The induction of professionals/specialists into the administrative system, on contractualappointments should be examined and suitable policy changes made in the entry policy.

• Pre-service and demand driven in-service capacity building for all cadres and ranks should bemade a regular feature.

• Contributory Pension System for the new employees must be seriously considered.

• Alternative ways of carrying out a job/activity must be examined and assigned to Governmentonly if considered essential.

• Stability of tenure is essential and should be ensured for any constructive and sustainable work


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8.6 CREATING THE PRODUCTIVE BASE

Ø Currently, Power, Coal, Petroleum & Natu-ral Gas, Atomic Energy and Renewableenergy are under different ministries.Hence, presently, the energy policy istypically an aggregation of policies of thesedifferent sub-sectors rather than anintegrated perspective with a set ofpriorities for each sub-sector as is theinternational practice. During the TenthPlan it is proposed to develop an inte-grated energy policy framework. AnApex Committee on Energy with asecretariat, consisting of experts inenergy, economics, finance,management, environment, legaldisciplines will be set up, to approve policyguidelines and oversee implementation ona regular basis, considering the capitalintensive nature of investments in thissector. A key role of this committee wouldbe to manage the trade-offs in the inter-play of divergent forces among thedifferent sub-sectors, consistant with theoverall policy goals of economic efficiency,energy security, increasing access andprotecting the environment.

Ø In view of the paramount importance ofpower sector reforms, the earlier Accele-rated Power Development Programmehas been modified to include a strongreform component. Under the newAccelerated Power Development andReform Programme, it is proposed toinclude a 50 per cent investment compo-nent while the balance will constitute areform-driven incentive stream. Theincentive stream is proposed to be distri-buted to the reforming States as amatching contribution equal to thereduction in cash losses achieved bySEBs/Utilities. It is proposed to cover allurban and industrial areas in the countryunder this programme.

Ø An early enactment of the Electricity Billis imperative. The Draft Electricity Bill whichhas been introduced in Parliament, will

replace the existing three laws relating toelectricity. The new bill will open up thepower sector to allow greater competitionin each segment of the electricity value chainunder independent regulation. This is crucialfor the power sector.

Ø The Coal Mines (Nationalisation)Amendment Bill 2000 proposes to permitprivate sector participation in non-captivecoal mining by making suitable amend-ments to the Coal Mines (Nationalisation)Act, 1973. An early enactment of thislegislation is essential.

Ø An independent regulatory authoritywill be set up to ensure fair competitionand a level playing field in each segmentof the coal production and supply chain,resolution of disputes and allocation ofcoal blocks for exploration and mining.

Ø Similarly, with the dismantling of Adminis-tered Prime Mechansim (APM), anindependent regulatory mechanism willbe established for the downstream oil andnatural gas sector to ensure competitionand a level playing field in the petroleumand gas sectors.

Ø It is proposed to dismantle the holdingcompany structure of Coal India Limitedto provide autonomy to individual coalproducing companies for promoting com-petitiveness and revival/disinvestment/closure of selected coal producing PSUs.Further, to encourage competition andpromote private sector participation itis proposed to: (i) de-block coal blocksheld by the Coal India Limited; (ii) permittrading of coal by removing it from the Listof Essential Commodities; and (iii) amendthe Coal Bearing Areas (Acquisition &Development) Act, 1957. Such stepswould essentially de-regulate the sectorand permit free interplay of market forces.

Ø Dismantling and Deregulation of APMin the Oil & Natural Gas Sector is crucial.The price of all petroleum products willbecome market determined w.e.f.


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1.4.2002, with subsidy on kerosene underpublic distribution and LPG for domesticcooking to be met from the budget. Thesesubsidies will be phased out over three tofive years during the Tenth Plan.

Ø Ethanol blended petrol (5 per centgasohol) will be introduced by the end of2002, in 8 sugar-producing States and,thereafter, in the rest of the country, in aphased manner. Efforts will be made toraise the percentage of blending of ethanolwith diesel, as also ethanol with petrol.Development of bio-diesel will also beencouraged.

Ø The structure of the Indian Railways isan impediment to efficiency and innovationand also diverts attention from their mainactivity. It is therefore proposed that therailways will concentrate on provision ofrail services only and other non-coreperipherial activities will be spun-off.

Ø Simultaneously, a Railway Tariff Regula-tory Authority is required to oversee thepricing of passenger and freight trafficservices in order to make the pricingrational and transparent as alsocompetitive.

Ø Presently, there is weak accountability andpoor monitoring of maintenance ofroads. It is proposed to explore ways tocontract out maintenance activities to theprivate sector and include operation andmaintenance in construction contracts aswell.

Ø Removal of legal hurdles for entry andgrowth of private operators in the roadtransport sector is also desirable.

Ø In order to have a level playing field amongall ports and to infuse competitive pricing,tariffs could be internally determined,independently by the major ports as wellas by the minor ones. The present Regu-latory Authority (i.e. Tariff Authority forMajor Ports) could be restructured as anappellate body to take care of variousstake-holders’ interests.

Ø Early enactment of the legislation enablingthe conversion of port trusts into corpo-rate entities is another proposal in theTenth Plan.

Ø In order to exploit the full potential of thecivil aviation sector, especially in view ofthe increasingly important role of theprivate sector in providing airport infra-structure and air transport services, thereis need for a regulatory framework forthe civil aviation sector as a whole. Theregulatory body would monitor the airportcharges, quality of services and theperformance of airport infrastructure.

Ø Opening up of the Civil Aviation Sectoris necessary to overcome capacity cons-traints. International routes could beauctioned to private Indian operators andforeign airlines could be allowed to partici-pate for providing domestic air services.Foreign equity share for the domesticsector could also be increased forimproving competitive efficiency.

Ø Leasing of four metro airports to privatesector participants must be expedited.

Ø Reorganisation of the Indian Postalsystem is also in the priority list of theTenth Plan. It will be undertaken through:

• Replacement of the Indian PostalAct, 1898 by a forward lookinglegislation to facilitate the envisagedreforms, ensure convergence andadopt new technology.

• Making the Department of Post self-financing, by reviewing the policy ofblanket subsidy. Universal PostalService Obligation (UPSO) would beclearly defined and adopted., ensuringthat items under UPSO, used by thecommon people are affordable andcosts of other services are determinedon commercial lines.

• An independent regulatory authorityis envisaged to be set up which,besides other regulatory functions,would also look after tariff fixation.


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• The policy of opening of post officesis envisaged to be reviewed and,where essential, new post officeswould be opened only through re-deployment of staff.

• Extra departmental employees,which constitute about half of the workforce, would be encouraged tobecome franchisees of the Depart-ment for running outlets as privatelyowned multi-product/multi-servicecentres. A contributory pensionscheme needs to be a major elementof the strategy in this regard.

• In keeping with the times, it isproposed to give post offices/outletsa new look and run these as multi-product / multi-services centers, forwhich a comprehensive programme ofnetworking and computerisation isenvisaged.

Ø It is proposed to develop a credible roadmap for corporatization of the Depart-ment of Posts as ‘India Post’ within theTenth Plan.

Ø To achieve the targets of teledensity in linewith the objectives laid out in the NewTelecom Policy, 1999, the Telecomsector must be treated as aninfrastructure sector for the next decadeor so.

Ø With a view to ensuring optimum growthin the coming years, Government’s broadpolicy of taxes and regulation for thetelecom sector has to be promotional innature. Revenue generation should notbe a major determinant of macro policygoverning the sector. The licence feesneed to be aligned to the cost of regulationand administration of Universal ServiceObligation (USO).

Ø The policy governing spectrum alloca-tion and licencing has to be so designedthat this scarce resource is used optimally.Spectrum pricing needs to be based onrelative demand and supply over space

and time in a dynamic manner so as topromote spectrum efficient technology.

Ø The USO levy needs to be determinedand collected as a separate levy tomaintain complete transparency andaccountability. Its rate may be increasedto meet increased demands. InternetService Providers who have beenpermitted to provide internet telephonyalso need to contribute, since they are anintegral part of the communicationsnetwork.

Ø A comprehensive national hardwaredevelopment policy will be formulated byDecember, 2002, in line with our goal ofmaking India an IT super power.

Ø Inspite of opening of FM radio to theprivate sector, the benefits of this new andhigh quality broadcast service have failedto reach many rural areas. The Tenth Planproposes that local communities and non-profit organizations such as universities,NGOs etc., be allowed to set up lowpower FM community radio stations,for educational, cultural and economicdevelopment of local communities.

Ø Though the film sector has been giventhe status of an industry, financingbasically continues to be through illegaland underworld sources. The Tenth Planwould aim at putting in place a plan ofaction to ensure easy availability of fundsthrough institutional means.

8.7 SOCIAL JUSTICE

Ø A National Charter for Social Justicewill be instituted, based on the principlesof social harmony, to ensure social justiceto disadvantaged groups like scheduledcastes, scheduled tribes, other backardclasses and minorities with a view toprotecting their rights and interests.

Ø A National Policy for Empowering theTribals of India will be formulated along-with a National Plan of Action to operation-alise the same. The main objective will be


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to solve the unresolved issues and persis-ting problems of tribals and bring them onpar with the rest of society.

Ø Effective implementation of the PeopleWith Disabilities Act and Rehabilitationof Disabled during the Plan period.

Ø Early finalisation and adoption of NationalPolicy on Rehabilitation and Resettle-ment.

Ø Public Distribution System should berestricted to distribution of rice and wheat.Kerosene and sugar should be removedfrom the system. State level schemescould be evolved for distribution of coarsecereals under PDS.

Ø Minimum Support Prices should encour-age diversification of agricultural produc-tion, keeping in mind the interest ofconsumers.

Ø Food Corporation of India should inter-vene in the market by timely sales andpurchases to maintain stability in foodprices. The buffer stocking agency couldalso take resort to exports and imports offood grains, as required.

Ø Decentralised procurement and distri-bution by States should be encouraged.States could take their own decisionsregarding issue prices, and the quantumof food grains could be supplied throughPDS etc. The national food subsidy couldbe distributed among the States accordingto a prescribed formula.

8.8 INVIGORATING RURAL INDIA

Ø Regulating ground water use on asustainable basis in order to avoidindiscriminate drawal of ground water willbe a priority in the Tenth Plan, as over-exploitation of ground water is causingvarious complications like sharp fall in thewater table.

Ø The Agriculture Produce Marketing Actis to be amended for reduction of manditaxes and ending Government’s mono-poly.

Ø Integrated agriculture markets are inprivate and cooperative sectors forproviding better amenities to producers.

Ø Kisan Credit Cards are to cover allfarmers for easy and quick flow of credit,within the Tenth Plan.

Ø Central assistance for the co-operativesector will be made, conditional on theStates adopting Multi-State CooperativeAct, 1984 for functional and financialautonomy.

Ø All restrictions on agri-trading, agri-industry and exports will need to beremoved.

Ø The ban on futures contracts in allagricultural products should be lifted. Theexisting policy of pan-seasonal pricing ofwheat and rice under the Public Distri-bution System provides a dis-incentive forfuture trading. This needs to be modifiedto encourage private storage.

Ø Reforms for Agro-forestry are essentialif diversification of agriculture throughagro-forestry is to be encouraged. Therewill have to be a policy environment inwhich the farmers are assured of aremunerative price; restrictions on felling,transport and marketing of agro-forestproduces from private holdings areremoved; and ban on export of primaryand unprocessed wood products is lifted.

Ø In view of the tremendous potential of thekhadi and village industries to generateemployment in rural areas, it would beessential to make them sustainable andeconomically viable. A shift from therebate policy to Market DevelopmentAssistance is recommended for bringingin incentives for production of high qualitymarketable goods along with the processof branding products.

8.9 IMPROVING THE QUALITY OF LIFE

Ø Financing essential health care will haveto be reviewed. Initially health care services


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were provided free of cost to all ingovernment institutions. However, in viewof the demographic transition, dual diseaseburden and escalating costs, this policywill have to be modified. In the Tenth Plan,there will be continued commitment toprovide certain services, free of cost, to allviz. essential primary health care;emergency life saving services; servicesunder national disease control progra-mmes; and the national family welfareprogramme. Efforts will be made to provideother health care services at a subsidiedcost to people below poverty line. Peopleabove poverty line would have to pay usercharges for diagnostic and therapeuticservices. Health finance options fordifferent income groups will be explored.In order to encourage healthy lifestyles, ano claim bonus/adjustment of the premiumcould be incorporated, based on theprevious year’s claims.

Ø In view of the marked differences in thehealth indices, health care infrastructureand it’s utilisation, not only between Statesbut also between districts, it is imperativeto assess district-specific health,nutrition and family planning needs andplan accordingly. This is a shift from theearlier centralised planning approach.

Ø Service providers in the health, familywelfare and nutrition sectors will be givenappropriate training and reoriented, so thatthey are able to screen individuals inorder to determine their specific needs,provide for those, and carefully monitorthe impact.

Ø A National Policy and Charter forChildren will be formulated to ensureprotection of their rights as enshrined inthe Constitution and to seek partnershipwith all the concerned.

8.10 IMPARTING DYNAMISM TO INDUSTRYAND SERVICES

Ø Policy reforms for village and small scaleindustries will have to be given priority.

Ø Phased dereservation of small scaleindustries, in view of the implications ofthe WTO regime, will have to be carriedout.

Ø The approach to tourism in the Tenth Planhas shifted from a sector seen only as aforeign exchange earner to a sector havinga dynamic role in alleviating poverty andgenerating employment. An integratedinter-sectoral investment Plan for tourismto enhance the efficiency of publicinvestment in tourism will be drawn up. Itwill be necessary to remove barriers to thegrowth of tourism and leverage privateinvestment by expediting and integratingcritical policies. A regulatory frameworkfor the protection of the tourism industry,the consumer and the environment issuggested. The Tenth Plan also proposesto develop a unique brand image for India.

Ø A review of various legislations governingproperty transactions and consolidatingthem into one comprehensive law will berequired.

Ø The Urban Land (Ceiling & Regulation)Act, 1976, though repealed by the Centre,might be replicated in the various Statesthat are yet to repeal the Act, which needsto be done urgently.

Ø Amendments to the Rent Control Act willbe needed to remove the rent controller’sdraconian powers over the disposition ofthe rented property. The statutes givingthe rent controller power to virtually divestthe owners of their natural right to theirproperties should be deleted. The RentControl Act must focus on ensuring a levelplaying field in terms of rent (adjustment)negotiations and reasonable period forvacation of property.

Ø Out-dated State legislation, allowing statesto arbitrarily requisition property ‘in thepublic interest’, for questionable use,should be repealed.

Ø The Indian Stamp Act, 1899 and theIndian Registration Act, 1908 would


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need to be amended for delinking theprocess of registration from payment ofstamp duty, and to liberate the registrationprocess from the requirement of various‘no objection’ certificates.

Ø Rationalise tax rates pertaining to thereal estate sector will need to be carriedout. States should reduce stamp dutiesfrom the present range of 13-26 per centto a level of 3-5 per cent and also makethem uniform across States.

Ø The principles of law applicable tostatements made in a prospectus, shouldalso apply to sale of property. This willfacilitate institutionalisation ofconveyances (and authorised persons)that can investigate title cross-linkagesbetween municipal authorities, electricityboards, and taxation departments, landregistries and collectorates might facilitatethese through hyperlinks.

Ø Private participation in the provision ofmunicipal services must be encouragedas this would provide benefits of accessto skills required for improving urbanservices. Pricing municipal services wouldensure sufficient funds for maintenanceand expansion of municipal services.

Ø Simplification and modernization of thecurrent registration system for land/property titles is important. TheRegistration and Other Related Laws(Amendment) Act 2001 should be notifiedfor this at the earliest.

Ø A time-bound programme for auctioningof all vacant government land might bedrawn up and implemented.

Ø The Haryana model should be drawn uponto promote public as well as privatedevelopment in housing.

Ø The market conversion of rural land intourban usage within the parameters ofdefined municipal development planshould be allowed.

Ø A Regulatory Commission is to be set upfor reviewing zoning regulations on acontinuous basis.

Ø A system for deemed approval of plansfor development/re-development of realestate by the registered/authorisedarchitects operating on a self-regulatorybasis for speeding up the process ofsecuring approvals should be put in place.

Ø The Land Acquisition Act, 1894 shouldbe amended for speeding up the processof acquisition, and to delink the processof taking over possession of land from thatof determining compensation. The Actmight be modified to focus solely onacquisition of land for public goods (e.g.roads, defense) and public utilities (powerlines, irrigation dams/canals), and excludecommercial purposes such as housing.

Ø Encouragement should be given to thepension, provident fund and insurancesectors to invest in real estate.

Ø Encouragement should also be providedfor creation of Real Estate Mutual Funds/Real Estate Investment Trusts.

Ø Trade in mortgage-backed securitiesshould be promoted.

Ø The present stipulation of 100 acres forFDI in integrated townships might berelaxed to 50 acres or less, as such vastexpanse of land may not be available inurban areas. FDI in the real estate sectormay be permitted with a lock in period ofthree years and there should be norepatriation of dividend during theconstruction period in any case. Theremight not be any restriction on repatriationthereafter.

Ø A grading system should be developedamong real estate developers forpreventing fly-by-night operators.

PROGRAMMATIC INITIATIVES

8.11 Although the Tenth Plan aims at a sub-stantial enhancement in the role of the private


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sector, nevertheless the government will continueto play an important role in a number of critical areas,both as a facilitator and as a direct provider ofservices and facilities. In order to make the latterfunction more effective and in tune with theobjectives of the plan, a number of programmesand schemes are to be initiated or given a changedfocus during the Tenth Plan period. A brief summaryof some of these initiatives is given in this section.

Regional Disparities

8.12 One of the primary objectives of the TenthPlan is to strive for regional balance. The wideningregional disparities and pockets of deprivation andpoverty have been a cause for concern for sometime now. It is imperative to tackle the developmentproblems of those areas which, despite existingefforts, continue to be characterised by high poverty,low growth and poor governance, if we are to havean equitable and balanced growth.

8.13 Against this backdrop, the first NationalHuman Development Report (NHDR) was broughtout as a prelude to the Tenth Plan. It is expectedthat the NHDR will provoke debate among Statesand encourage introspection on the developmentstrategy that each State has to follow. In order totrack developments between States and of States,subsequent NHDRs will be prepared from time totime.

8.14 With a view to addressing this problem, anew initiative in the form of the ‘Rashtriya SamVikas Yojana’ (RSVY) will be operationalised inthe Tenth Plan. It aims at focused developmentalprogrammes, primarily to fill gaps, for backwardareas which would help reduce imbalances, speedup development and help these areas to overcomepoverty, besides facilitating the States to move upthe ladder of reforms.

8.15 The strategy is to assist in the develop-ment process through additional grants under theRSVY, only if the concerned State Governmentundertakes an agreed set of reforms. Developmentexperience in the Ninth Plan has shown that fundsare not the only bottleneck in the development

process. Reforms in the administrative and fiscalstructure, in policies related to the day to day life ofthe ordinary people and in the way financial andadministrative powers are delegated, will have amultiplier effect on the economies of the concernedregions. More often, it pertains to the the way inwhich existing rules and regulations are used /interpreted in the delivery of services and theworking of the local economy which perpetrates theproblem of access to services and deny equity tothe poor and under privileged. Under the RSVY itis proposed to provide funds to all the States subjectto their agreeing through a Memorandum ofAgreement (MoA), to a mutually decided set ofreforms. Each of the reforms should have objectivelyverifiable indicators/milestones and well definedtime frames.

8.16 The RSVY will be a cent per cent grant soas to act as an incentive for States to take upreforms. This would be in addition to the existingflow of funds under ongoing schemes. Release offunds will be performance based.

8.17 It is proposed to have a Special Plan ForBihar, by far one of the most backward states. Flowof funds will be conditional on implementing amutually agreed set of reforms and will be providedfor identified thrust areas, such as power, irrigation,watershed development, connectivity etc., in orderto mitigate some of the problems caused by thebifurcation of the State. The aim is to use innovativedelivery systems so that the prevailing bottlenecksin these sectors can be overcome and basicinfrastructure provided for the future developmentof the State.

8.18 There will also be a Special Plan for theKoraput, Bolangir, Kalahandi (KBK) Districts OfOrissa, another pocket of endemic poverty anddeprivation. The objective of this component is toameliorate the continuing poverty and difficult livingconditions in the KBK districts of Orissa byconcerted action in identified critical areas whichwould ensure drought proofing, and provide liveli-hood support, better health facilities as well asspecific assistance to the disadvantaged groups.The aim is to use the additional funds in a projectised


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manner so that visible results are available in thefield in a time-bound manner. Like for Bihar, fundingwould be linked to implementing a mutually agreedset of reforms.

8.19 Studies have shown that there are vastvariations not only between States but also withinStates, and between districts. One hundred mostbackward districts will be taken up under RSVY forspecial attention. It is proposed to take up 25 districtson a pilot basis in the first year i.e. 2002-03, 35 inthe next year and the remaining 40 districts in 2004-05. State Governments will be required to prepareplans for the identified districts, to include schemeswhich would help to fill critical gaps or those whichcould serve as catalysts for future development ofthe district. The district authorities would beexpected to use existing institutions, non-government organisations and innovative deliverysystems so that maximum benefit could be derivedfrom the additionality provided under this scheme.Release of funds to districts will also be contingenton them agreeing to certain administrative andprocedural conditions/reforms.

8.20 In order to provide a quality referencedocument on the development profile of States,make an inter-State comparison and help todetermine strategies for accelerating growth, thePlanning Commission initiated the practice ofpreparation of State Development Reports. It isenvisaged that these Reports, prepared incoordination with States every five years, will helpthem formulate their development agendas as wellas make inter-State comparisons.

8.21 A Best Practices Manual of SuccessfulGovernance Initiatives and Implementation isproposed to be prepared by the PlanningCommission in coordination with Human ResourceDevelopment Centre and United NationsDevelopment Programme, in order to identify andhighlight models of effective implementation anddelivery of public services in the Government sector.The manual aims at documenting success storiesfor sharing both at the national level as well asbetween State Governments.

8.22 The Planning Commission’s ProjectPreparation Facility was set up in response tothe problems of less developed States which areunable to prepare projects of the requisitestandard to attract institutional and externalfunding. It provides financial assistance forpreparation of detailed project reports byprofessional consultants to be submitted by theStates for external funding. This will help theless developed States in accessing institutionaland external resources.

AGRICULTURE AND RURAL DEVELOPMENT

8.23 Social mobilisation as a key to self-employment through Swarnjayanti GramSwarozgar Yojana (SGSY) is a new approach thatis being promoted and encouraged in the TenthPlan. The SGSY is conceived as a process-orientedprogramme for the poor with focus on formation ofself help groups (SHGs). It is a holistic programmeoperating largely through SHGs, with provision ofmicro-finance, training and capacity building.Development of infrastructure, establishment ofmarketing linkages and better monitoring and timelyevaluation are important components of theprogramme.

8.24 Assured wage employment throughSampoorna Grameen Rozgar Yojana (SGRY) for100 days in identified backward districts is anothernew strategy that is being promoted in the TenthPlan. The SGRY focuses on generation of wageemployment, creation of durable rural assets andinfrastructure and provision of food security to therural poor. The identification, selection andexecution of works under the programme would bea part of a long-term strategy for creating infra-structure, developing watersheds and droughtproofing. The programme lays emphasis onempowerment of panchayats and involvement ofwomen and weaker sections in decision-making andexecution of works.

8.25 Employment guarantee for the mostdistressed through Jai Prakash Rozgar GuaranteeYojana (JPRGY) is a new programmatic initiative


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in the Tenth plan, for providing employment gua-rantee to the unemployed in the most distresseddistricts of the country. A Task Force has beenconstituted to design and implement a programmewhich will have both wage and self employmentcomponents.

8.26 A coordinated approach to land usepolicy and development of wastelands will bea new initiative. All programmes relating toconservation, development and management ofland resources, especially schemes relating towater-sheds and wastelands development,scattered in different Departments, as well asinstitutional infrastructure relating to land in ruralareas need to be brought under the purview ofthe Department of Land Resources in the Ministryof Rural Develop-ment. Pursuant to this, it isproposed to set up the Lok Nayak Jai PrakashNarayan Land and Watershed Mission wherebyall watershed and soil conservation relatedschemes implemented by different Departmentsexcept those handled by the Ministry ofEnvironment and Forests would be brought underthe purview of the Mission.

8.27 In view of the vast tracts of waste and de-graded lands remaining unutilised, and theirimmense potential, a new scheme for Greening ofWastelands through people’s participation will betaken up in the Tenth Plan. The basic thrust of thenew initiatives would be on distribution ofGovernment wasteland to communities or landlessrural poor. The land allottees would be providedfinancial assistance for development of the waste-lands. Propagation of tree crops suitable to theagro-ecological zones, medicinal plants, bamboo,bio-fuels and plant varieties that address food andnutritional requirements of the rural poor would betaken up on these wastelands. Special focus willbe given to medicinal plants in view of the growingdemand for the same. Production of bio-fuelspecies will be encouraged since they will providea sustainable alternative to mineral fuel and helpreduce imports.

8.28 The completion or revival of old irrigationprojects/systems will be a priority as there are a

number of very old incomplete irrigation projectssome of which even date back to the pre-Fifth Planperiod. Accelerated Irrigation Benefit Programmeis also targeting completion of old projects as a firststep. Attention will be given to restoration of thepotential lost due to dilapidation of major, mediumand minor irrigation systems, especially tanks,through extension, modernisation and renovation.

8.29 Community participation in maintenanceof irrigation projects will be encouraged. Whilegovernment constructs irrigation projects, due tolack of maintenance they get silted/damaged anddo not carry the design discharge, causing problemsto tail-enders. If the community, through water usersassociations, maintains these systems, they will bemore equitably managed and also better main-tained.

8.30 Since the agriculture sector is the core ofthe Tenth Plan and the bulk of the new employmentopportunities are going to arise in this sector,improving agricultural productivity and creatingemployment opportunities in this sector arecrucial. An integrated approach will have to beadopted towards this, some pre-requisites /components are indicated in Box 8.2.

8.31 Universalisation of Joint ForestManagement (JFM) will be the main focus in theforest sector. Forest areas in the proximity ofpopulation centers/villages are reported to havedegraded faster due to indiscriminate drawal offorest produce, grazing, encroachment, etc., ascompared to forests away from habitations andlocated in inaccessible areas. The concept ofJoint Forest Management based on the principleof partnership and equity share has shownremarkable results in regeneration of degradedforests and also improving the economy of theforest dependent populace. It is proposed tocover all forest fringe villages under JFM in aphased manner during the Tenth Plan. Theformation of Forest Development Agencies ineach district as federations of JFM Committeeswould provide them technical and financialsupport.


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INDUSTRY AND SERVICES

8.32 Focussing on village, small and foodprocessing industries is seen as a key strategy,given the tremendous potential for higher growth inthis unorganised sector. To enable them to remaincompetitive in the market led economy and meetthe objectives of the Plan, the following will bestressed:

• Adequate credit from financial institutions

• Funds for technology upgradation andmodernisation

• Adequate infrastructure facilities

• Modern testing facilities and qualitycertification labs

• Modern management practices and skillupgradation

• Marketing assistance

• Level playing field at par with theorganised sector.

8.33 Revamping the Coir Industry will be apriority since the sector is projected to grow at 12per cent. Besides the normal facilities/conditionsprovided to other village and small industries, thethrust would be on product diversification,

Box 8.2

An Integrated Approach to Improvement in Agriculture Sector

• Utilising waste and degraded lands (described in more detail above)

• Macro-management approach to centrally sponsored schemes

• Improving credit flows and simplifying procedures

• Diversification of the cropping pattern by, inter-alia, cultivating medicinal and aromatic plants,bio-fuels, horticulture, agroforestry, oil-seeds, pulses, etc.

• Precision farming with a view to ensuring optimal utilization of inputs

• Organic farming

• Integrated nutrient management

• Integrated pest management using biological controls

• Improvised implements and machinery

• Contract farming

• Leasing-in and leasing-out

• Revamping the extension system by extending Krishi Vigyan Kendras, making use of print media,IT, private initiatives like agri-clinics etc.

• Use of frontier technologies especially bio-technology

• Improved storage systems and cold chains for facilitation, preservation and exports

• Conservation and upgradation of native breeds of livestock through selective breeding

• Creation of disease free zones

• Improvement of the quality of milk to meet international standards, particularly as India is now amember of the WTO.

• Extension of the ‘Operation Flood’ to uncovered, hilly and backward areas.

• Production of feed and fodder have to be increased substantially.


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development of new products, initiating tradeinformation service, R&D for coir and spreading thecoir units to non-traditional States for full utilizationof the available coir husk.

8.34 Reorienting the wool and wool productswill also be important, keeping in mind the tremen-dous scope for employment generation in thissector. It is proposed to set up a technology missionto improve productivity of wool per sheep and workout methodologies for the diversification of productsby mixing angora and pashmina wool.

8.35 World class tourist circuits and destina-tions will be developed to enhance the competitive-ness of the tourism product. Health tourism will alsobe encouraged.

8.36 A new scheme for Development of ExportInfrastructure & Allied Activities intends to establisha mechanism for seeking the involvement of the StateGovernments in the development of exportinfrastructure and allied activities through assistancelinked to export performance, which will result inconcomitant growth in the infrastructure necessaryfor promotion of exports at the State level. Under thisscheme, projects for development of complementaryinfrastructure for exports; creation of new exportpromotion industrial parks and augmentation offacilities in the existing ones, development of minorports; setting up of common facility centers for trade;equity participation in infrastructure projects includingthe setting up of Special Economic Zones projects ofnational regional importance; and activities permittedas per Export Development Fund in relation to NorthEast and Sikkim would be taken up.

8.37 Market Access Initiative is another newscheme through which it is proposed to put in placean instrument which is not only WTO compatiblebut would also mitigate the negative effects of thevarious handicaps faced by the exporters vis-à-vistheir counterparts in competing countries. The broadscope of the scheme covers identification ofprioritywise research areas relevant to trade andcommerce; sponsoring research studies; dissemi-nation and discussions on the result of such studies;trade promotion for market survey/studies;

assistance to exporters and export trade council forparticipation in international departmental storepromotion programmes, promotion of India, Indianproducts and Indian brands etc. State Governments’efforts at carrying out export potential surveys ofthe States for identified product groups would alsobe supported.

8.38 Research and Development in automo-tive industry will be implemented in partnershipwith the industry and would result in strengtheningof the testing and certification facilities in theAutomotive Industry in accordance with safety andenvironmental regulations. In addition to theupgradation of existing facilities, two new facilitiesare proposed to be set up in the Tenth Plan. Thenew testing facilities would include criticaldevelopmental facilities which are not available atpresent.

8.39 The Industrial Cluster DevelopmentScheme will identify Industrial Clusters with highgrowth potential for need-based and specificallydesigned interventions. The main emphasis of thescheme would be on making strategic interventionsin existing clusters to convert static local efficiencyinto dynamic competitiveness. Efforts will be madeto create a conducive climate for the developmentof inter-firm cooperation; promotion of innovationand collective learning; creation of suitablecustomized infrastructure support and servicenetwork; and setting up common facilities, assistingappropriate technology transfer, information sharingand quality improvement.

8.40 The Technology Upgradation Schemeaims at improving the competitiveness of the Indianindustry vis-à-vis global players. To competeeffectively, it is intended to assist/upgrade Indiancompanies to procure benchmark technology.

8.41 The Technology Upgradation FundScheme is expected to sustain and improve thetextile industry’s competitiveness and overall long-term viability. This will provide a focal point formodernisation effort through technology upgrada-tion in the industry. This initiative includes all sub-sectors of textiles like spinning, weaving, knitting,


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processing, garment making, cotton ginning andpressing and the jute sector.

8.42 The Geological Survey of India will berestructured and modernised so that it can play avital role in the search and evaluation of mineralresources on a regional scale by increasingly adop-ting modern concepts and techniques. Airborne andmarine surveys will be intensified and the synthesisand dissemination of data will be given high priorityso that the organisation can effectively act as the‘first-stop shop’ for all prospective investors, bothdomestic and foreign.

QUALITY OF LIFE

8.43 The Re-organisation of family welfarepersonnel through SWAP is an attempt at partiallyrestructuring the health system. Both the Govern-ment of India and the State Governments arefunding delivery of family welfare services. Thisdichotomy of funding comes in the way of stream-lining the functioning and also leads to delays inthe States getting reimbursements. Under theSWAP arrangement, it is proposed that theGovernmnent of India will fund all the 1.37 lakhAuxillary Nurse Midwives (ANM) in sub-centres andthe States will take over the establishment of therural family welfare centres and post partum centres.This is expected to improve the coverage of servicesin rural areas, especially in poorly performing Stateswhere lack of AMNs has been a major problem.

8.44 Improving drug safety will be a majorprogramme to improve the quality of drugs bystrengthening the drug control organisation and drugtesting laboratories. The Medicinal Plants Board setup by the Department of Indian Systems of Medicineand Homeopathy will ensure that good qualitymedicinal plants are available for Indian Systemsof Medicine drugs for both domestic and exportmarkets.

8.45 The National Nutrition Mission will beset up with the objective of reducing under-nutritionand micro-nutrient deficiencies. The Mission willcoordinate and strengthen existing programmes,promote R&D and provide relief in natural cala-mities.

8.46 Under-nourished adolescent girls willbe provided foodgrains free of cost and nutritioneducation addressed to the family, aimed at properintra-family distribution of food under a pilot projectin 51 backward districts.

8.47 A National Plan of Action for Empower-ment of Women will be prepared with a view totranslating the National Policy for Empowerment ofWomen into action. The salient features will be,identification of partners, determination of actionpoints and monitoring of its progress.

8.48 A National Commission for Children willbe set up to protect and safeguard the rights ofchildren. On the lines of the National Human RightsCommission, this Commission will investigate andredress individual complaints and grievances as wellas provide the necessary legal support and serviceswhere required.

8.49 Universalisation of the Integrated ChildDevelopment Services Scheme (ICDS) will beachieved during the Tenth Plan in all the 5652 blocksof the country. Anganwadi workers (AWW) andhelpers (AWH) who are the most visible grass-rootfunctionaries primarily for ICDS, also play animportant role in other development activities. Tosuitably compensate them and also to boost theirmorale, the honorarium of AWW and AWH has beendoubled with effect from 1.4.2002.

8.50 The Sarva Shiksha Abhiyan (SSA) andNational Literacy Mission (NLM) are two keyprogrammes to attain the goal of universalisationof elementary education and education for all. TheSSA aims at enrollment of all children in schools orother alternatives by 2003; and completion of fiveyears of primary schooling by 2007. The NLM,through it’s various programmes has to ensure thatthe neo-literates do not lapse into illiteracy.

8.51 A greater focus on secondary educationwill be one of the important priority areas of the Plan.The ‘Education for All’ programme of the SarvaShiksha Abhiyan is likely to result in total enrolmentby 2003 and universal retention and achievementat the primary level by 2010. This will result inincreased demand for secondary education. Steps


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will be taken in the Tenth Plan to set up more secon-dary schools in the government sector as well aswith the help of private trusts, religious/missionaryinstitutions and public-spirited organisations.

8.52 During the Tenth Plan it is proposed toprovide computer connectivity to 140 governmentsenior secondary schools through Vidya VahiniProgramme and upgrade the IT infrastructure atDelhi University through Gyan Vahini Programme .Later, efforts would be made to replicate theseprogrammes in other schools and colleges byinvolving the private sector.

8.53 The Vocationalisation of education inthe Tenth Plan will be a new thrust area. As a resultof the universal elementary education initiativesmentioned earlier, there are going to be a numberof middle school pass-outs. While some of thesewill pursue higher studies, there will be others whowould need vocational education instead. This willequip them better to find suitable employmentopportunities. In view of this, there is an urgentneed to formulate a clear-cut integrated policy onvocationalisation of education.

8.54 The Government will constitute a Commi-ttee on Promotion of Indian Education Abroad(COPIEA), to promote Indian education abroad andregulate the operations of Foreign EducationalInstitutions (FEIs) in India to safeguard the largernational interests and the interests of Indianstudents.

8.55 The quality of technical education in theIndian Institutes of Technology and the RegionalEngineering Colleges, other Engineering Collegesand Polytechnics will be upgraded by providingequipment and funds for new courses, anddevelopment of teaching-learning materials.Networking of institutions for on-line exchange ofinformation will also be encouraged.

8.56 The intake of IT professionals is to bedoubled by 2002 and tripled by 2003.

8.57 Sports academies will be set up in Statesin collaboration with private organisations/

corporates and State Governments in order topromote sports and nurture talents.

8.58 For the first time, a new programme forthe holistic development of adolescents will bestarted. The delivery mechanism for the programmewill be largely in collaboration with NGOs. Variouscross cutting issues like health, nutrition, alcohol/drug abuse, life skills etc., will be addressed throughthe programme. Gender sensitisation will be a primeconcern and efforts will be made to involveadolescents in nation-building activities, awarenessgeneration amongst peers on health, nutrition,family planning, HIV/AIDs, sanitation, environment,etc.

8.59 Youth Development Centres are to beset up in each of the 5000 blocks in the country.These centres will function as information techno-logy centres as well.

8.60 Digitisation of rare manuscripts will betaken up with a view to preserving rare manuscripts,including those belonging to private collections.

8.61 Urban Reforms Incentive Fund is a newinitiative whereby funds will be released to Statesfor undertaking reforms in the urban sector. Thereforms include repeal of the Urban Land CeilingAct; reform of the Rent Control legislation;rationalisation of stamp duty rates; computerisationof registration of property transactions; improvementin the system and collection efficiency of propertytaxes; levy of realistic user charges for water supplyand other services, and adopting double-entry bookkeeping in municipalities. The States are expectedto enter into a memorandum of agreement with theDepartment of Urban Employment and PovertyAlleviation, and commit to an agreed time schedulefor implementing the reform measures.

8.62 The City Challenge Fund will providefunds to meet the transitional and transaction costsof restructuring of urban civic services. The objectiveof the restructuring exercise is to improve servicequality and efficiency of services, bring down losses,raise adequate revenues, and make the projectsviable, and bankable.


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8.63 Pooled Finance Development Facilityis another new initiative to enable smaller urbanlocal bodies, which cannot individually go to thefinancial markets to raise funds through bonds, andpool their requirements of market borrowings. AState-level agency (i.e., an Urban DevelopmentCorporation) will arrange for the pooling to be done,and raise the total required funds from the market.The Facility will assist the municipal bodies toundertake required reform measures, so that theycan have the capacity to service the loans. TheFacility will also underwrite a part of the repaymentobligation, through contribution to a Debt ServiceReserve Fund, which will raise the credit rating ofthe participating ULBs and help them to get betterterms for their borrowing.

8.64 Rejuvenation of Culturally SignificantCities will assist selected cities of cultural impor-tance with grants for upgrading infrastructure andcivic amenities. These cities also attract largenumbers of pilgrims and tourists, and hence requireassistance to meet the demand on civic servicesand infrastructure.

8.65 Urban Sanitation Mission will be a newinitiative, focussing on setting up sanitary land-fillsand composting plants for urban solid waste, andimprovement of drainage in urban areas.

SOCIAL JUSTICE

8.66 A National Plan of Action will be formulatedfor survival, protection and development ofprimitive tribal groups in consultation with theState governments/Tribal Research Institutes andanthropologists/experts on the subject.

8.67 It is proposed to introduce a ComponentPlan for the Disabled in the budget of all the relatedMinistries/Departments, in order to ensure flow ofadequate financial resources to the un-reached, soas to make as many disabled as possible active,self-reliant and productive.

8.68 A Skill Development Fund (SDF) will beset up in partnership between the industry andgovernment, with major voluntary contributionscoming from the industry. The resources collected

would be utilised for creating training infrastructureat the same location where they are collected. Thepurpose is to attract resources from the beneficiariesfrom training including the employers and theemployees in the organised sector, and the tradeunions. Income tax incentives to the contributionsmade could also be considered.

8.69 A Competency based certificationsystem will be introduced. While an entrant to theorganised sector is usually skilled and thereforereceives remuneration accordingly, entrants to theunorga-nised sector, who constitute more than 90per cent of new entrants to the labour market, areusually not trained formally. They learn on-the-job.A system of testing and certification of proficiencies/skills acquired at work, albeit in the informal sectorwill be put in place which will be certified byprofessional bodies. This would greatly benefit thelabour in the unorganised sector, especially thoseinvolved in manufacturing, construction andservices.

8.70 A pension system for the unorganisedsector is another area that will be paid specialattention. The present pension system is confinedto the organised sector, which covers less than atenth of the labour force. In the unorganised sector,there are a large number of self-employed personsbut they do not have a mechanism for earning arisk-free and reasonable return on their savings forretirement. During the Tenth Plan it is proposed toprepare a self sustaining pension system for theunorganised sector. This would also facilitatepension reforms in the organised sector.

CROSS CUTTING ESSENTIALS

8.71 Science and Technology plays a crucialrole in catalysing and accelerating economic andsocial development. It has an overarching impact inalmost all sectors of the economy. It plays a lead rolein contributing to sustainable development and self-reliance. It is now becoming increasingly clear thatwhile the investments in physical infrastructure areimportant, it is the intellectual infrastructure derivedthrough innovative S& T initiatives that will give Indiaa comparative advantage. During the Tenth Five Year


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Plan, a number of time-bound programmes will betaken up. These include:

• Operationalisation of National NaturalResource Management System (NNRMS)through application of remote-sensingtechnology in developmental programmes;

• Technology development for future gene-ration launch vehicle for placing 4 ton classINSAT satellites in geo-synchronoustransfer orbit and also critical technologiesrequired for Re-useable Launch Vehicles;

• Development of all-weather, remote-sensing technology by way of RadarImaging Satellites (RISAT) with a multi-mode, multi-polarisation agile SyntheticAperture Radar;

• Application of space technology in educa-tion and health for tele-education and tele-medicine networks;

• Technology demonstration for waterdesalination for large scale desalinationof sea water and fresh water into freshpotable water;

• Development of technically feasible,economically viable and eco-friendlyirradiation technologies for farm productsthrough linkage with State agriculturaluniversities, seed corporations, ICAR andother State and Central agencies;

• Genomics research, especially, for drugtargeting against specific human patho-gens like those responsblie for pepticulcer, tuberculosis, damage to kidney andheart, and the genes responsible fordiabetes;

• Development of new generation vaccinesagainst diseases like rabies, cholera, HIV/AIDS, tuberculosis, Japanese encephalitisand malaria;

• Food and nutritional security throughenhancement of crop productivity, value-addition and genetic engineering forenhanced nutritional status;

• Exploration and exploitation of microbialwealth of India for novel compounds andbio-transformation processes;

• Development of pollution control andmonitoring systems/devices for air, waterand solid waste;

• Carcass utilisation and development ofeco-friendly leather processing tech-nologies;

• Technologies for bamboo products forgiving significant thrust to the usage ofbamboo, promote specialized products forcommercialisation and to generate goodemployment opportunities; and

• Research in the area of Nano science andtechnology for development of nano sizedceramics, water purification, drug deliverysystems, energy devices, etc.

• The Pharmaceutical Research & Develop-ment scheme is envisaged to encourageR&D in the pharmaceutical sector in amanner compatible with the country’sneeds and with particular focus ondiseases endemic or relevant to India. ADrug and Pharmaceutical Research andDevelopment Support Fund (PRDSF) isalso proposed to be set up.

• Drug and Pharmaceutical Research andDevelopment Support Fund (PRDSF) isalso proposed to be set up.

• Validation and testing of 10 new drugs andmolecules from important medicinalplants.

Ø The environment has an over-archingeffect on all aspects of economic andsocial life. Some initiatives that will betaken up in the Tenth Plan are:

• Detailed Action Plan will be drawn upfor controlling pollution in rivers andlakes.

• Optional use of natural resources, andadoption of pollution prevention andcleaner technology projects.

• Bio-diversity in ecologically sensitiveareas to be conserved.

• Setting up of an International Instituteon Science and Technology for Tropi-cal Areas to handle climate changerelated issues.


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INFRASTRUCTURE

8.72 The Nuclear Power Programme ack-nowledges that the fast breeder reactor is aprecursor to thorium based technologies for nuclearpower, in the context of moderate uranium and vastthorium resources in India. Under this programmea 40 MWe Fast Breeder Test Reactor (FBTR) hasbeen set up at Kalpakkam. With experience andexpertise gained in the successful operation ofFBTR, the Government has embarked upon thedesign, development and construction of the firstPrototype Fast Breeder Reactor(PFBR) of 500 MWecapacity. Simultaneously, an Advanced HeavyWater Reactor (AHWR) of 235 MWe is beingdeveloped by the Bhabha Atomic Research Centre(BARC, Mumbai) for demonstration of technologyto utilise thorium for electricity generation. Thesesteps are essential to the progress in Research andDevelopment on the utilisation of Thorium in India’sNuclear Power Programme.

8.73 Creating a strategic crude oil storagefacility has become essential to safeguard againstsudden oil supply disruptions under a deregulatedpost-APM scenario. A mechanism for creatingstrategic storage and its operation would have tobe evolved in the Tenth Plan.

8.74 The Coal Bed Methane (CBM) Progra-mme for exploration and production of CBM will bewidened and deepened during the Tenth Plan. Asper the initial assessment, significant productionpotential can be expected for methane production,some of which may materialise during the TenthPlan period.

8.75 Improving railway freight services willbe of paramount concern in the Tenth Plan. Therailways freight traffic continues to lose its share toroad transport. In order to maintain its share in thetotal traffic, the railways freight demand should growby at least 1 per cent for each 1 per cent growth inGDP. Improvement in the quality of roads anddeficiencies of the Indian Railways are the reasonsfor growth of capital-intensive and energy-inefficienttechnologies of moving goods and people in thecountry. To reverse this trend, it is necessary to

increase the capacity of high density corridors. Inthe Tenth Plan, it is proposed to reduce the speeddifferential between passenger and freight servicesby raising the speed of freight trains to 100 km/hour.

8.76 Construction of expressways will betaken up in the Tenth Plan. The National HighwaysDevelopment Project would improve the capacityand riding quality of our major high-density corridors.However, to cater to the increase in the traffic andto improve the mobility of both passenger and freightroad transport traffic, it is proposed to augment thecapacity of select high-density corridors by planningand constructing a network of expressways, in theprivate sector. The role of Government would berestricted to that of a facilitator.

8.77 Gateway Ports are proposed to beestablished to cater to the container traffic. A largenumber of containers that flow into India aretransshipped at neighboring ports like Colombo,Singapore and Dubai for want of adequate facilitiesin India. This causes delays and raises transactioncosts in India’s international trade. India is uniquelyplaced geographically between the high-densitytransport shipment corridors of East and West. Itis proposed to set up two major gateway ports, oneeach on the east and west coasts. These will beconnected by a rail/road bridge and equipped withefficient modern handling facilities, which would bevery advantageous to international shippingcompanies in terms of saving of time and fuel.Simultaneously, it would provide big businessopportunities for the Indian economy.

8.78 Conclusion: It must be recognised thatall planning is based on a a-priori appraisal ofemerging trends and the initial plans, programmesand schemes are a reflection of the strategy toaddress these. However, during the course of thePlan there are bound to be new developments whichmay not have been anticipated, given the fastchanging world scenario. The Plan will thereforetake cognisance of these, and may need to, andshould make appropriate changes in the contentand design of policies and plan programmes andschemes.

Documents

10th year plan