ABM-Module: A- INDIAN ECONOMY

Salient features of Indian economy

Dominance of agriculture and heavy population pressure on agriculture: Per capita land availability is very low and per hectare labour use is very high. Agriculture sector provides livelihood tc about^.65% of Indian population, while the share of agriculture to GDP is around 17%.

Low per capita income : According to World Development Report 2007, India's per capita income was US $ 95o (as a result India falls in Middle Economies). It is 1/5oth of US per capita income.

Disparities in income distribution : As per NSSO data, 39% of rural population possesses only 5% of all rural assets while, 8% top households possess 46% of total rural assets. This shows high degree of disparity in income and wealth distribution. Over-population : India is over-populated country, next only to China with total population of about 12o cr. To maintain 16.7% of world's population, India holds only 2.42% of total land area of the world.

Unbalanced economic development : As per World Development Report 2007, 64% of total labour force depends on agriculture, 16% on industry and about 2o% on trade, transport and other services.

Lack of capital : Due to low per capita income, the savings are low in India, though in the recent years, some improvement has been observed.

Various sectors of Indian Economy

There are 3 major sectors of Indian economy i.e. agriculture, industry and services Agriculture :

The share of agriculture in GDP was 55% in 1950-51, 52% in 1960-61 and came down to around 17% in 200910. Still dependent on monsoon rain. Agriculture provides raw material to various industrial activities. Agriculture sector provides employment to around 52% of India's work force.

Issues in agriculture: India was dependant for food on other counties till 1960. Green revolution eliminated our dependence on other countries as India became self-dependent in agriculture production.

Indian agriculture is dependent on monsoon. There is low level of public investment. Yield of crop is low. There is need for 2^nd green revolution. Steps to be undertaken, include: Growth of irrigated area

Reclamation of degraded land. Improvement in water management, rain water harvesting. Extension services to reduce the knowledge gap. Diversification into high value output such as fruits, vegetable, flowers, herbs etc. Provision for adequate credit.

Industry: It accounts for about 19% share in GDP.

Central Statistical Organisation (CSO) classifies the industrial sector into 3 segments (1) Mining and quarrying (2) Manufacturing (3) Electricity, Gas and Water Supply: Micro, Small and Medium Enterprises (MSME) sector is an important segment of industry.

Issues in industry: Indian industry was working in a closed environment till 1990s. After initiation of economic reforms, it was opened for foreign investment which resulted into flow of FDI. This helped in technology upgradation.

Micro and Small enterprises (MSEs) : It is an important segment of industrial sector. As per Annual Report of Ministry of SME 2006-07, this sector contributed 39% of industrial production, 34% of industrial exports and 35% of total employment. Annual growth rate of value of output was 16.8%, of exports 20% and of employment 4.4%.

Problems faced by MSE include difficulty in getting bank finance, insistence on collateral securityAigh interest rates, lack of supportingtusiness environment etc.

Steps taken to help MSE sector : Fixing of mandatory sub-limits for loans to MSEs by banks.

Relaxation of collateral security for loans up to Rs.to lac and provision for guarantee cover from Credit

Guarantee Fund Trust for MSE up to loan of Rs.100 lac as a substitute for collateral security. Enactment of MSME Development Act 2006Enactment of Interest on Delayed Payment Act 1998

Services: It account for about 64% of GDP, This sector has gained at the expense of agriculture and industrial sector through the 1990s. The major components of this sector are Information Technology Enabled Services (IETS), Banking and Insurance, Construction and real estate, transportation and aviation etc. Issues in services sector : When services sector bypasses the industrial sector, economic growth can get distorted. Hence this sector must be°supported by proportion growth of industrial sector; otherwise growth may not remain sustainable.

Structural changes in Growth rates in various sectors of Indian Economy

Structural changes in share in GDP for various sectors of Indian Economy (in %age) 

Economy: A Brief Overview:

1.   In the first five decades of the twentieth century, the per capita GDP in India was stagnant at 0.9 per cent with population growing by about 0.8 per cent.

2.   The annual growth, averaged at around 3.5 per cent during the period 1950 to 1980.

3.   The average growth rate of the Indian economy over a period of 25 years since 1980-81 was about

6.0 per cent.

4.   The GDP growth rate has further accelerated averaging 7.2 per cent during the seven-year period 2000-01 to 2007-08, with the growth rate in the last five years (2003-04 to 2007-08) averaging 8.8 per cent.

5.   Over the years, while the GDP growth has been^-accelerating, the population growth rate has moderated, giving a sharp impetus to the growth in per capita income.

6.   The strengthening of economic activity in the recent years has been supported by a sustained increase in the gross domestic investment rates from 22.8 per cent of GDP in 2001-02 to 35.9 per cent in 2006-07. Over 95 per cent of the investment during this period was financed by domestic savings.

7.   Since independence, the inflation rate, in terms of the wholesale price index (WPI), on average basis, was above 15 per cent in only five out of fifty years and was in single-digit for thirty-six of these years. On most - occasions, high inflation was due to food or oil shortages.

8.   The inflation rate accelerated steadily from an annual average of 1.7 per cent during the 1950s to 6.4 per cent during the 1960s and further to 9.0 per cent in the 1970s before easing marginally to 8.0 per cent in the 1980s. The inflation rate declined from an average of 11.0 per cent during 1990-95 to 5.3 per cent during the second-half of 1990s.

9.   In the last quarter century, the country has developed resilience to shocks. During this period, balance of payments crisis was witnessed only once, triggered largely by the Gulf war in the early 1990s. The Indian economy, in the later years, could successfully avoid any adverse contagion impact of shocks from the East Asian Crisis, the Russian crisis during 1997-98, sanction-like-situation in post-Pokhran scenario, the border conflict during May-June 1999 and Sub-prime Crisis.

10.Despite the recent encouraging performance, the Indian economy faces several severe challenges. These relate, in particular, to poverty, education, health, environment, physical infrastructure, and fiscal issues.

Various Sectors of the Economy

Agriculture

1.              Agriculture is one of the most important sectors of Indian economy.

2.              Agriculture (including allied activities) accounted for 17 per cent of the Gross Domestic Product (GDP-at constant prices) in 2008-09 as compared to 21.7 per cent in 2003-04.

3.              Though, the share of agriculture in GDP has been declining over the years, its role remains critical as it accounts for about 52% of the employment in the country. The prosperity of the rural economy is also closely linked to agriculture and allied activities.

4.              From a nation dependent on food imports to feed its population, today India is not only self-sufficient in grain production but also has substantial food reserves.

5.              Green Revolution involved bringing additional area under cultivation, extension of irrigation facilities, the use of improved high-yielding variety of seeds, better techniques evolved through agricultural research, water management and plant protection through judicious use of fertilizers, pesticides and cropping practices. All these measures resulted in quantum increase in the production of wheat and rice.

6.              Issues regarding Indian agriculture: Indian agriculture is heavily dependent on monsoons. The monsoons play a critical role in determining whether the harvest will be rich, average, or poor. The structural weaknesses of the agriculture sector are reflected in the low level of public investment, exhaustion of the yield potential of new high yielding varieties of wheat and rice, unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system and post-harvest value addition.

There is an urgent need for second green revolution in Indian agriculture. Following steps need to be taken to achieve this objective.

•                 Doubling the rate of growth of irrigated area;

•                 Reclaiming degraded land and focusing on soil quality;

•                 Improving water management, rain water harvesting and watershed development;

•                 Bridging the knowledge gap through effective extension services;

•                 Diversifying into high value outputs, fruits, vegetables, flowers, herbs and spices, medicinal plants, bamboo, bio-diesel, but with adequate measures to ensure food security;  Providing easy access to credit at affordable rates. 

Industry:

1.           Industry accounts for 19 per cent of the GDP in 2008-09. About one-third of the industrial labour force is engaged in simple household manufacturing only. The different industry sectors of India witnessed tremendous growth over the last 20 years. This growth is attributed to the Government of India's liberal economic policy with increased FDI.

2. Central Statistical Organization (CSO) classifies the industrial sector into 3 segments: Mining and Quarrying, Manufacturing and Electricity, Gas and Water Supply.

Micro and Small Enterprises (MSEs):

1.       As per the data on micro and small enterprises (MSEs) in the Annual Report of Ministry of Micro, Small and Medium Enterprises, 2006-07, the sector accounted for around 39 per cent of total industrial production, 34 per cent of the exports in the industrial sector and around 35 per cent of total employment among units engaged in manufacturing and services.

2.       The sector registered a robust annual average growth in value of output, exports and employment at 16.8 per cent, 20.0 per cent and 4.4 per cent, respectively during the expansionary phase of 2003-07, before showing signs of slowing down in 2007-08 particularly in respect of employment growth to 2.9 per cent.

3.       Problems of MSE: The problems cited by MSE borrowers in obtaining access to bank finance are insistence on collaterals, Guarantees, limited outreach of banks, rigid approaches, high interest and other costs, complex documentation, lack of supporting business development services and so on.

4.       From the banker's point of view, the critical factors affecting credit delivery to this sector are low equity base, absence of^-marketing tie up, diversion of funds, poor management and book keeping, higher NPAs, mounting of receivables due to delay in payment of bills especially during downturn.

5.       Measures to increase flow of credit leading to almost three fold increase in the credit to this sector from public sector banks from Rs.67,600 crore as on March 31,2005 to Rs.1,90,958 crore as on March 31, 2009.

6.       The major policies in regard to credit delivery to this sector are as follows.

•         Inclusion of MSE (as per revised definition) in priority with sub limits for the micro units.

•         Stipulation that collateral should not be taken for loans up to Rs.10 lakh to MSE units.

•         Providing credit guarantee for collateral free loans from the Credit Guarantee Trust Fund administered by SIDBI.

Micro, Small And Medium Enterprises Development (MSMED) Act, 2006

•         The MSMED Act, 2006 classifies enterprises broadly into two categories, viz., (i) manufacturing enterprises; and (ii) service enterprises. These broad categories are further classified into micro enterprises, small enterprises and medium enterprise, depending upon the level of investment in plant and machinery and equipment as the case may be.

•         The existing provisions of the Interest on Delayed Payment Act, 1998 to small scale and ancillary industrial undertakings have been strengthened under the MSMED Act.

•         The Act also provides for constitution of a National Board for Micro, Small and Medium Enterprises under the chairmanship of the Union Minister for MSME, with wide representation of stakeholders.

Services:

1.   The Service Sector now accounts for about two third of India's GDP: 64 per cent in 2008-09.

2.   The rise in the service sector's share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a developed economy (in the developed economies, the industrial and service sectors contribute a major share in GDP while agriculture for a relatively lower share).

3.   However, service sector growth must be supported by proportionate growth of the industrial sector; otherwise the service sector grown will not be sustainable. In India, phenomenal growth has been noticed in selected segments like IT/ITES, telecom, banking, insurance and real estate, and civil aviation.

Highlights of the Economic Survey 2017-18 

• GDP to grow 7-7.5% in FY19; India to regain fastest growing major economy tag
• GDP growth to be 6.75% in FY2017-18
• Policy vigilance required next fiscal if high oil prices persist or stock prices correct sharply
• Policy agenda for next year -- support agriculture, privatise Air India, finish bank recapitalisation
• GST data shows 50% rise in number of indirect taxpayers
• Tax collection by states, local governments significantly lower than those in other federal countries
• Demonetisation has encouraged financial savings
• Insolvency Code being actively used to resolve NPA woes
• Retail inflation averaged 3.3% in 2017-18, lowest in last 6 fiscals
• India needs to address pendency, delays and backlogs in the appellate and judicial arenas
• Urban migration leading to feminisation of farm sector
• Rs 20,339 cr approved for interest subvention for farmers in current fiscal
• FDI in services sector rises 15% in 2017-18 on reforms
• Fiscal federalism, accountability to help avoid low equilibrium trap
• India’s external sector to remain strong on likely improvement in global trade
• Technology should be used for better enforcement of labour laws
• Swachh Bharat initiative improved sanitation coverage in rural areas from 39% in 2014 to 76% in January 2018
• Priority to social infrastructure like education, health to promote inclusive growth
• Centre, states should enhance cooperation to deal with severe air pollution
• Suvey 2017-18 in pink colour to highlight gender issues
• Indian parents often continue to have children till they have the desired number of sons

HIGHLIGHTS

GDP Growth

•        After achieving 7.2% economic growth in 2014-15, the growth in economy will be 7.6%, the fastest in the world, in the current fiscal

•        GDP growth rate for next fiscal projected in the range of 7 % to 7.75 %

•        On the domestic front, two factors – if the Seventh Pay Commission is implemented and return of normal monsoon – can boost consumption through increased spending from higher wages allowances of government workers.

•        Three downside risks - trouble in global economy could worsen the prospect of exports; contrary to expectations, oil price rise would enhance the pull from consumption; and the most serious risk is the combination of these two. Fiscal Deficit

•        2015-16 fiscal deficit, seen at 3.9% of GDP, seems achievable. 2016-17 expected to be challenging from fiscal point of view. According to IMF Fiscal deficit is expected to decline from 4.2 % of GDP in 2014-15 to 4.0 % of GDP in 2015-16

•        Credibility and optimality argue for adhering to 3.5% of GDP fiscal deficit target.

Subsidy bill to be below 2% of GDP next fiscal. Inflation

CPI inflation seen around 4.5 to 5% in 2016-17;

Expect RBI to meet 5% inflation target by March 2017; Prospect of lower oil prices over medium term likely to dampen inflationary expectations

•        7th pay commission recommendations not likely to destabilise prices; to have little impact on inflation. Current Account Deficit

•        2016/17 current account deficit has declined and seen around 1-1.5% of GDP.

•        F o r e i g n e x c h a n g e r e s e r ve s h a ve r i s e n t o U S $      3 5 1 . 5 b i l l i o n      i n e a r l y F e b , 1 6 C u r r e n c y

•        Rupee’s value must be fair, avoid strengthening; fair value can be achieved through monetary relaxation

India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment in China. Rupee’s gradual depreciation can be allowed if capital inflows are weak.

Taxes

•        Tax revenue expected to be higher than budgeted levels in 2015-16;

•        Proposes widening tax net from 5.5% of earning individuals to more than 20%;

•        The promise to reduce corporate tax to 25% from 30% should be recalled

•        Favours review and phasing out of tax exemptions; easiest way to widen the tax base not to raise exemption thresholds;

Banking & Corporate sector

•        Critical short term challenges confronting the Indian economy is the twin balance sheet problem – the impaired financial positions of the public sector banks and some corporate houses.

•        Recognition, Recapitalization, Resolution, & Reform needed to resolve Twin Balance Sheet challenge of PSBs & corporate firms.

•        Banks should value their assets as for as possible to true value(Recognition). Once Banks do so, their capital, as per the demands of the Banks, must be safeguarded via infusions of equity

(Recapitalization).

•        The underlying stressed assets in the corporate sector must be sold or rehabilitated (Resolution).

•        The future incentives for the private sector and corporates must be set right(Reform) to eschew a repetition of the problem.

•        PSU banks’ capital need at Rs 1.8 lakh crore (1.8 trillion) by FY19

•        Government could sell off certain non-financial companies to infuse capital in State-run banks;

•        Government proposes to make available 700 billion rupees via budgetary allocations during current and succeeding years in banks.

Agriculture and food management

•        India ranks first in Milk production, accounting for 18.5% of world production. India recording a growth of

6.26 % whereas World Milk production increases by 3.1%;

•        Egg and fish production has also registered an increasing trend over the years; Fertiliser subsidy should shift to direct cash transfer;

•        Agriculture sector needs a transformation to ensure sustainable livelihoods for the farmers and food security;

•        P e r c e n t a g e s h a r e            o f        h o r t i c u l t u r e       o u t p u t i n a g r i c u l t u r e i s m o r e t h a n 3 3 % . S e r v i c e s s e c t o r

•        Services sector remains the Key Driver of Economic Growth contributing almost 66.1% in 2015-16; Services sector growth in 2015-16 seen at 9.2%

•        There has been a rising trend in FDI equity inflows to the services sector in the first seven months of 2015-16 with FDI inflows growing by 74.7%.

Human Capital, education and health

•        To attain growth rate of around 8 to 10%, three-pronged strategy to be adopted by encouraging competition and investing health and education and in the process not neglecting agriculture;

•        The social infrastructure scenario in the country reflects gaps in access to education, health and housing amenities. Inclusive growth in India requires bridging gaps in educational outcomes and improved health attainments across the population.

•        The total expenditure on Social Services including Education, Health, Social Security, Nutrition, Welfare of SC/ST/OBC etc. during 2014-15 (RE) was 7 % of GDP while it was 6.5% during 2013-14.

•        The declining educational outcomes reflected in lower reading levels in both public and private sector schools are areas of concern. According to Annual Status of Education Report (ASER) 2014, there is sharp decline between 2007 to 2014 in the number of children in Standard V who can read a textbook of Standard II, in both government and private schools.

•        The Gender Parity Index (2013-14 Provisional) shows an improvement in girls’ education, with parity having been achieved between girls and boys at almost all levels of education. ‘Digital Gender Atlas for Advancing Girl’s Education in India’ was launched last year to help identify low-performing geographic pockets for girls, particularly from marginalized groups. A number of scholarship schemes to encourage enrolment and learning levels among different groups are in operation.

National Scholarship Portal, a single window system for various types of scholarship schemes administered by different Ministries/Departments has been introduced under Direct Benefit Transfer (DBT) mode. During 2015-16, about 90 lakh Minority students are to be benefited under the Pre-matric, Post-matric and Meritcum-Means scholarship schemes, while about 23.21 lakh SC students benefited under Pre-matric, 56.30 lakh under Post-matric and 3354 under the Rajiv Gandhi National Fellowship including the Top Class Education scholarship scheme are to be assisted.

The expenditure on health as a percentage of total expenditure on social services increased from 18.6% in 2013-14 to 19.3% in 2014-15 and 19.5% in 2015-16.

•        The ‘under five mortality’ has declined from 126 in 1990 to 49 in 2013. As per NFHS-4, the percentage of children fully immunized in the age group (12-23 months) is above 80 per cent in Sikkim and West Bengal. All the 12 states surveyed have more than 50 per cent children fully immunized. Similarly under Mission Indradhanush, 352 districts of the country have been covered with 20.8 lakh children and 5.8 lakh pregnant women immunized in the first phase. 17.2 lakh children and 5.1 lakh pregnant women have been immunized in the second phase and 17 lakh children and 4.8 lakh pregnant women immunized in the third phase of the Mission Indradhanush.

•        Initiatives such as Rashtriya Bal Swasthya Karyakram (RBSK) and Rashtriya Kishor Swasthya Karyakram’ (RKSK) have been launched in 2013 and 2014 respectively under the NHM to provide comprehensive health care.

•        The immunization coverage of children, health of pregnant women, declining role of public health delivery systems and the lack of adequate skilled personnel are the main challenges in the health sector at present. There are persistent regional disparities in access to housing and sanitation facilities with some States lagging behind with less than 25 per cent coverage in sanitation facilities.

•        There is a need to focus on the quality of education in both the public and private sectors. To strengthen the delivery of public health services and infrastructure facilities, both public investments and leveraging of private investments are necessary. The adoption of technology platforms and innovative models by leveraging Jan-Dhan-Aadhaar-Mobile (JAM) scheme can improve the efficiency in delivery of services.

Power sector

2014-15 marked the highest ever increase in generation capacity: 26.5 GW, much higher than the average annual addition of around 19 GW over the previous five years;

Capacity enhancements have brought down the peak electricity deficit to its lowest ever level of 2.4%; Renewables have received a major policy push. Targets have been revised from 32 Gigawatts to 175 Gigawatts by 2022; CONCLUSION:

•        For achieving double-digit growth, it is critical that India particularly overcome the development challenges through innovative models of delivery of services.

•        The development of a country is incomplete without improvement in its social infrastructure. To capitalize and leverage the advantages that India will have on the demographic front with a large segment in the productive age group, social infrastructure requires fresh impetus with focus on efficiency to improve the quality of human capital.

•        To foster education and skill development of its diverse population, including the marginalized sections, women and the differently-abled, and to provide quality health and other social services, the Government has identified the potential of technology platforms which can significantly improve efficiency in the system.

•        The Government has introduced the game changing potential of technology-enabled Direct Benefits Transfers (DBT), namely the JAM (Jan Dhan-Aadhaar-Mobile) number trinity solution, which offers exciting possibilities to effectively target public resources to those who need them the most, and include all those who have been deprived in multiple ways. The progress is already evident with overhauling of the subsidy regime and a move to Aadhaar-DBT.

•        Aadhaar seeding in the beneficiaries’ databases of six DBT schemes [(LPGDBTL- 54.96 per cent, MGNREGS - 54.10 per cent, Pradhan Mantri Jan Dhan Yojana (PMJDY) - 42.45 per cent, Public

Distribution System (Ration Card) - 38.96 per cent, National Social Assistance Programme (NSAP) 24.31 per cent and Employees’ Provident Fund (EPF) Scheme       17.55 per cent)] has risen significantly by the end of December 2015.

•        Riding on the technological platform that the Digital India Programme is expected to provide, integration of various beneficiary’ databases with Aadhaar and appropriate process re-engineering would result in substantial saving of effort, time and cost, simultaneously ensuring full traceability of flow of funds from the Government to the beneficiary. Transparency and accountability of flow of funds through technology intervention will bring in the desired educational and health outcomes for the population and pave the way for a healthy and educated India in the near future.