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Indian Economy
Macroeconomic Overview for 2001-2002 The Indian economy is passing
through a difficult phase caused by several unfavourable domestic and external
developments. Domestic output and demand conditions were adversely affected by
poor performance in agriculture in the previous two years. The global economy
experienced an overall deceleration and is estimated to record an output growth
of 2.4 per cent during the past year. These tendencies were exacerbated in the
aftermath of the terrorist attacks in United States in September 2001. Consequently
export growth has suffered and industrial profitability has also been affected
by the prevailing low commodity and product prices globally. Despite these constraints,
growth in real GDP in 2001-02 is expected to be 5.4 per cent as estimated by the
Central Statistical Organisation. This growth rate marks some recovery over the
low growth of 4 per cent in 2000-01. It will also be one of the highest growth
rates in the world in the current year. 1.2 The average annual growth rate
during the Ninth Five Year Plan (1997-2002) is now estimated at 5.4 per cent which
is lower than the plan target of 6.5 per cent. Although this raises new challenges
for reinvigorating growth in the Tenth Five Year Plan, the Indian growth record
is one of the highest among the major economies in the world in recent years.
The Indian economy has been resilient in the face of several external shocks during
this period such as the East Asian crisis of 1997-98, the oil price increase of
2000-01, and the most recent world economic slowdown. Domestic shocks in the shape
of an adverse security environment, natural disasters like the Orissa cyclone
and Gujarat earthquake, and two consecutive years of poor agricultural performance,
have also been faced successfully by the economy. The behavioural trends of the
key macro-economic parameters in recent years and for the last decade are provided
in Tables 1.1 and 1.2 respectively. 1.3 The overall growth of 5.4 percent
in 2001-02 is supported by a growth rate of 5.7 percent in agriculture and allied
sectors, 3.3 percent in industry and 6.5 percent in services. The acceleration
of the overall GDP growth rate is basically due to a significant improvement in
value added in the agriculture and allied sectors from a negative growth rate
of (-) 0.2 percent in 2000-01 to 5.7 per cent in 2001-2002. There has been significant
deceleration in the growth rate of industry.However, the performance of the services
sector has improved moderately. 1.4 Real GDP growth rate from mining and
quarrying is estimated to have declined from 3.3 per cent in 2000-01 to 1.4 per
cent in 2001-02. The growth of manufacturing has reduced from 6.7 to 3.3 per cent,
while that of electricity, gas and water supply has fallen from 6.2 to 5.2 per
cent and that of construction from 6.8 to 2.9 per cent over the same period. The
deceleration in industrial growth may be attributable to various factors such
as normal business and investment cycles, inherent adjustment lags of corporate
restructuring and lack of both consumer and investment demand. Continued high
real interest rates, infrastructure constraints in power and transport and delays
in establishing credible institutional and regulatory framework for private participation
in some key sectors might have also dampened private investment and industrial
production. 1.5 Prospects of agricultural production in 2001-02 are considered
to be bright as a result of normal monsoon and relatively favourable distribution
of rainfall over time and regions. Overall agricultural output is estimated to
increase by nearly 7 per cent in 2001-02. Foodgrains production is expected to
rise to 209 million tonnes compared with 196 million tonnes in 2000-01. 1.6
Financial and other services are doing well in the current year. However, performance
of certain service sectors like transport (other than railways), tourism, business
and social services have been adversely affected by slowdown in both domestic
and external demand. 1.7 The average annual rate of inflation in terms of
the Wholesale Price Index (WPI) increased significantly from 3.3 per cent in 1999-2000
to 7.1 per cent in 2000-01 due to a substantial rise in administered prices of
petroleum products. During 2001-02, the inflation rate declined in terms of the
WPI. The 52 week average inflation rate declined from 7 per cent at the beginning
of 2001-02 to 4.7 per cent for the week ended January 19, 2002. The point-to-point
inflation rate reached a low of 1.3 per cent by the end of January, 2002 which
was the lowest in over two decades.
1.8 The inflation rate in terms of the
Consumer Price Index for Industrial Workers (CPI-IW) remained below 4 per cent
until July 2001 and increased to 5.2 per cent in August 2001. The Index displayed
a downward trend during September-October, 2001. However, it increased again to
4.9 per cent in November and further to 5.2 per cent in December 2001. 1.9
The Union Budget envisaged a reduction of gross fiscal deficit as a proportion
of GDP from 5.1 per cent in 2000-01 (RE) to 4.7 per cent in 2001-02 (BE). With
the availability of quick estimates of national income and provisional accounts
for 2000-01 and advance estimates of national income for 2001-02, revised estimates
of fiscal deficit for 2000-01 and budget estimates for 2001-02 have undergone
change. The gross fiscal deficit as a proportion of GDP is now estimated at 5.5
per cent for 2000-01 and 5.1 per cent for 2001-02. As regards revenues, there
are significant shortfalls in indirect taxes due to slowdown in industrial production
and significant deceleration of both oil and non-oil imports. Direct tax collections
are likely to be below target for the current year. There is also a shortfall
in revenues from disinvestment. Disinvestment proceeds are now expected to pick
up in the coming months due to a much smoother working of the disinvestment process.
Various economy measures taken by the government for reducing non-plan and non-capital
expenditure have helped to keep the overall expenditure under control. Despite
these measures, the gross fiscal deficit of the Central government at the end
of the year is likely to exceed the budgeted target. 1.10 India's balance
of payments remained reasonably comfortable in both 2000-01 and 2001-02. The current
account deficit as a percentage of GDP declined from 1.1 per cent in 1999-2000
to about 0.5 per cent in 2000-01 due to a dynamic export performance and sustained
buoyancy in invisible receipts. However, in the current year, exports have been
almost stagnant and have recorded a growth of only 0.6 per cent in April-December
2001. An assessment of the Balance of Payments (BOP) outlook conducted jointly
by the Reserve Bank of India (RBI) and the Ministry of Finance for the current
year indicates that the current account deficit as percentage of GDP may widen
to some extent, though it will remain within 1 per cent of GDP which is quite
manageable. 1.11 The exchange rate of the rupee in terms of the major currencies
of the world remained reasonably stable during the year, despite occasional fluctuations
caused by normal market forces of supply and demand. Foreign exchange reserves
(including gold and SDR) reached a record level of nearly US$50 billion at the
end of January 2002, which is equivalent to almost 10 months of estimated imports
for the current year. 1.12 India's external debt situation has improved
significantly in recent years as a result of effective external debt management
by the Government. The external debt-GDP ratio decreased from 28.7 per cent at
the end of March 1991 to 22.3 per cent at end-March 2001 and further to 21 per
cent at the end of September 2001. The debt service ratio declined from a peak
level of 35.3 per cent of current receipts in 1990-91 to 16.3 per cent in 2000-01.
It is particularly noteworthy that for the first time, the World Bank has classified
India as a less-indebted country. Trends in GDP 1.13 According
to the Quick Estimates of National income for 2000-01 provided by the Central
Statistical Organisation on January 31, 2002, the overall GDP growth rate decelerated
significantly from 6.1 per cent in 1999-2000 to 4 per cent in 2000-01. The gross
value added in agriculture and allied sectors declined by 0.2 per cent in 2000-01
compared with an increase of 1.3 per cent in 1999-2000
1.14 The GDP from agriculture
alone declined by 0.4 per cent in 2000-01 compared with an increase of 1 per cent
in 1999-2000. The negative growth rate of agriculture in 2000-01 was primarily
due to a decline in rice production by 5.4 per cent, wheat by 10 per cent, pulses
by 20.4 per cent, oilseeds by 11.2 per cent and cotton by 16.3 per cent. However,
livestock, which accounts for over 26 per cent of the total value of agriculture
sector, increased by 3.5 per cent and coarse cereals by 4.2 per cent in 2000-2001. 1.15
Within the industry sector, while construction showed a lower growth in 2000-01,
there was marked improvement in the growth rates of manufacturing (from 4.2 per
cent in 1999-00 to 6.7 per cent in 2000-01) and mining and quarrying (from 2 per
cent to 3.3 per cent during the same period). The growth rate of electricity,
gas and water supply remained almost invariant at around 6.2 per cent for both
1999-2000 and 2000-01.
1.16 Growth rates of services sector decelerated significantly
in 2000-01. In particular, the growth rate of trade, hotels and restaurants reduced
considerably from 7.3 per cent in 1999-2000 to 3.8 per cent in 2000-01, while
the growth of transport, storage and communications remained almost unchanged
at around 8.2 per cent during 1999-00 and 2000-01. Financial, real estate and
business services performed poorly with growth rate of only 2.9 per cent in 2000-01
compared with a growth rate of 10.6 per cent in 1999-00. The unsatisfactory performance
of the financial and real estate sector was due to a negative growth rate of (-)
2.2 per cent in banking and insurance, which was in turn due to decline in the
output of the non-banking financial institutions. Community, social and personal
services also grew at a much lower rate of 6 per cent in 2000-01 compared with
11.6 per cent achieved in 1999-2000. 1.17 The advance estimates of GDP for
2001-02, made available by the CSO, indicate a higher GDP growth rate of 5.4 per
cent in the current year. The higher growth in 2001-02 is attributable to significant
improvement of growth rates in agriculture and allied, and financial, real estate
and business services sectors. However the core industry and infrastructure sectors
are expected to record much lower growth than in the previous year. Demand
Factors 1.18 On the demand side, real consumption growth declined
from 6.5 per cent in 1999-2000 to 2.9 per cent in 2000-01. In real terms, the
growth rate of private consumption reduced from 5.5 per cent in 1999-2000 to 2.2
per cent in 2000-01, that of government consumption expenditure fell from 12 per
cent to 6.5 per cent during the same period. In recent years growth in real gross
domestic capital formation (GDCF) has shown instability. The growth rate of real
GDCF recorded a significant deceleration from 15.7 per cent in 1999-2000 to 2.0
per cent in 2000-01 (Table 1.4). This to a large extent reflects volatility in
the behaviour of stocks/inventories. Growth in real gross fixed capital formation
(GFCF) has been more stable, but it also slackened from 8.6 per cent in 1999-2000
to 4.7 per cent in 2000-01 (Table 1.6). The change in stocks measured as percentage
of GDP at 1993-94 prices fell from 1.8 per cent in 1999-2000 to 1.1 per cent in
2000-01. 1.19 The saving and investment rates in India are high as judged
by the country's level of economic development. Gross domestic savings improved
marginally from 23.2 per cent of GDP in 1999-2000 to 23.4 per cent of GDP in 2000-2001
as a result of better performance by household savings and private corporate savings.
However, there was a steep fall in public sector savings due to an increase in
the dis-savings of government administrative departments. In fact, public sector
savings were negative in 1998-99, 1999-2000 and 2000-01. As a percentage of GDP,
public sector savings declined from (-) 0.9 per cent in 1999-2000 to (-) 1.7 per
cent in 2000-01 1.20 Gross domestic investment at current prices declined
marginally from 24.3 per cent of GDP in 1999-2000 to 24 per cent of GDP in 2000-01
mainly due to a fall in private sector investment.The rate of gross capital formation
in real terms also declined from 26.7 per cent of GDP in 1999-2000 to 26.3 per
cent of GDP in 2000-01 due to deceleration in the growth rates of real gross domestic
capital formation in both public and private sectors. While the real gross fixed
capital formation by the public sector increased by 10.9 per cent in 2000-01,
that by the private sector increased by only 2.4 per cent in the same year .1.21
The change in stocks of inventories decreased substantially in 2000-01 indicating
better management of supply and demand for output. As in earlier years, the rates
of domestic investment were higher than the rates of domestic savings in both
1999-2000 and 2000-01. The investment-savings gap was financed by the positive
net capital inflow from abroad, which amounted to 1.1 per cent and 0.6 per cent
of GDP respectively in 1999-2000 and 2000-01. 1.22 Due to unavailability
of data on investment for the year 2001-02, the investment trends have to be assessed
by analysing the trends in various leading indicators of investment and growth.
These trends present a mixed picture. Both domestic production and imports of
capital goods have declined considerably in the current year. Sanctions and disbursements
made by the All India Financial Institutions (AIFIs) have also reduced significantly.
On the other hand, foreign investment inflows have recorded distinct improvement
in the current year. But, most of these inflows are possibly yet to be absorbed
as fresh investments due to a build up of record level of foreign exchange reserves.
The available trends, therefore, may not indicate any significant recovery of
investment in 2001-02. 1.23 Sustained high economic growth would require
considerable improvement in investment. Given the country's limited domestic resources,
it is essential to enhance further the inflows of foreign direct and portfolio
investment. Enhancement of domestic investment would depend upon structural reduction
in inflationary expectations and real interest rates, reduction in the fiscal
deficit and further liberalisation of the domestic debt and capital markets. 1.24
India's private savings rate (comprising household and private corporate savings)
is more or less comparable to those achieved by the high performing East Asian
economies. However, its public savings is very low and is a major constraint on
domestic resource mobilisation. Government is restructuring public expenditure
to foster domestic savings, release resources for physical and social infrastructure
development and to reduce crowding out effect on private investment. 1.25
Major fiscal reforms have been undertaken for broadening the income tax base and
streamlining the excise and customs duty structures. There have also been enabling
reforms in the spheres of trade and foreign investment. Reforms in public sector
enterprises are underway to reduce pressures on public finances, increase the
efficiency of public sector and reduce the incremental capital output ratio (ICOR).
Legal, institutional and regulatory frameworks in insurance, banking, capital
markets, power, ports and telecommunications, are also being strengthened to induce
private investment in infrastructure. The Central Government Budgets for 2000-01
and 2001-02 announced various measures for further deepening of the capital markets
and the financial sector and allowing private entry in insurance. The major reforms
undertaken during 2001-02 are provided in Box 1.1. It is expected that these measures
would enhance both the savings and investment rates for the economy. Supply
Factors : Production Agriculture and allied sectors 1.26
After near stagnation in 1999-2000 and negative growth of 0.2 percent in 2000-01,
the agriculture sector is likely to attain a growth rate of nearly 6 percent in
2001-02. One of the reasons for this is that spatial distribution of the monsoon
rainfall in 2001 was one of the best in recent years. This is reflected in the
adequate rainfall received by seventeen districts belonging to the states of Madhya
Pradesh, Rajasthan, Gujarat, Uttar Pradesh, Haryana, Kerala, Orissa, Punjab, Tamil
Nadu, Chhatisgarh and Himachal Pradesh, which had suffered from deficient rainfall
in the previous two years.
1.27 The foodgrains output in 2001-02 is likely
to be 209.2 million tonnes, an increase of more than 13 million tonnes over the
previous year. Late winter rainfall in the North-West India in February together
with a long cold spell may help raise foodgrains production even to 212 million
tonnes in the current year. 1.28 The downtrend in oilseeds, particularly
groundnut during the preceding two years has been reversed this year and the country
is likely to harvest over 21 million tonnes of oilseeds - higher by over 2 million
tonnes compared with the previous year. Cotton production is expected to be higher
by over 2 million bales and production of jute and mesta at 10.7 million bales
is also likely to be higher than the previous year. 1.29 With early estimate
of foodgrains growth at 6.8 per cent, together with commercial crops exhibiting
an improved performance and other sub-sectors of agriculture like animal husbandry,
fisheries etc. maintaining steady rates of growth, the overall growth rate for
agriculture production in the current year is likely to be close to 6 per cent. Management
of the Food Economy 1.30 During 2001-02, procurement of wheat shot up
to the record level of 20.63 million tonnes, despite a decline in wheat production
to 68.46 million tonnes (a drop of 7 million tonnes) in 2000-01. Rice procurement
also reached a record high of 19.10 million tonnes during the current marketing
year (October-September 2000-01). Fresh procurement for the marketing year 2001-02
has so far fetched about 13.33 million tonnes of rice (till January 29, 2002). 1.31
The unusually high procurement of rice and wheat during the last two years has
led to accumulation of huge surplus stocks much above the minimum buffer stock
norms. As compared with the minimum norm of 8.4 million tonnes of wheat on January
1, the country had a stock of 32.4 million tonnes on January 1, 2002. Similarly,
as compared with the minimum buffer norm of 8.4 million tonnes for January 1,
the rice stock on January 1, 2002 was estimated at 25.6 million tonnes, with fresh
procurement of 13.33 million tonnes up to January adding further to the existing
stock. In January 2002, the FCI was holding 58.1 million tonnes of rice and wheat
stock, against the minimum buffer norm of 16.8 million tonnes for January. 1.32
The primary reason behind the heavy increase in procurement volumes can be traced
to the sharp increase in Minimum Support Prices (MSP) in recent years. While there
has been excessive procurement of rice and wheat, offtake of foodgrains under
the public distribution system has been low, essentially due to the narrowing
differential between the Above Poverty Line (APL) issue prices for PDS and the
open market prices. Excess procurement by the FCI due to higher MSP, mounting
stocks of foodgrains much above the levels required for food security and declining
share of procurement by private traders, have led to higher commitments for Government
subsidy. The food subsidy bill increased from Rs.2,850 crore in 1991-92 to Rs.12,010
crore in 2000-01. For 2001-02, the food subsidy is estimated at Rs.13,670 crore,
out of which Rs.5,680 crore accounts for buffer stock subsidy or the carrying
cost of the public stock of foodgrains. 1.33 Some steps to liquidate excess
stocks with FCI like open market sale of foodgrains at prices much below the economic
cost, export of foodgrains at prices below economic cost, increased BPL allocation
of foodgrains under the Targeted Public Distribution System (TPDS) and lowering
of issue prices under the TPDS for APL families, have been taken on Government
account in an attempt to reduce the carrying cost of surplus stocks. One of the
long-term measures for reducing the food subsidy bill and the carrying cost of
public stocks, taken up by some states, is decentralised procurement of foodgrains
and encouraging greater role by private traders. The system has been introduced
in the states of Uttar Pradesh, Madhya Pradesh and West Bengal while other states
are being encouraged to take it up. Industry 1.34 The significant
slowdown of industrial growth witnessed in 2000-01, as measured by the Index of
Industrial Production (IIP), continued with greater intensity in 2001-02. There
was a distinct deceleration in growth of manufactured exports and slowdown in
growth rates of core and infrastructure industries. The overall industrial growth
in terms of the IIP during April-December 2001-02 was only 2.3 per cent compared
to 5.8 per cent during the corresponding period of the previous year. In fact,
the industrial growth during the first nine months of the current year is the
lowest recorded during the last ten years. The sharp deceleration in overall industrial
growth is due to a number of structural and cyclical factors such as normal business
and investment cycles and lack of both domestic and external demand. Continued
high real interest rates, infrastructure constraints, and lack of reforms in land
and labour markets, might have also dampened private investment and industrial
production. 1.35 Industrial slowdown has been observed across all major
sectors. The manufacturing sector grew by only 2.4 percent during April-December
2001, much lower than the 6.0 percent growth registered during the same period
in 2000. Similarly, electricity generation grew by only 2.7 percent during April-December
2001 (compared with 4.8 percent in April-December 2000) and mining and quarrying
posted a growth of only 1.1 percent during April-December 2001 (compared with
4.4 percent in April-December 2000) 1.36 The broad-based nature of the industrial
slowdown is also evident from the disaggregated sub-sectoral growth rates as reflected
in the use-based classification of industrial production. Capital goods are suffering
an absolute decline in production (-4.8 per cent growth in April-December 2001).
Basic, intermediate, and consumer goods also have had much lower growth rates
in the current year than in the previous year. The only silver lining lies in
the performance of consumer durables, which are growing at a double-digit rate
(12.5 per cent in April-December 2001), despite having a lower growth than the
previous year (17.8 per cent in April-December 2000). 1.37 During the current
year, the Government announced several fiscal and other policy incentives for
engineering a revival in the industrial sector. The major fiscal measures included
rationalisation of excise duty structureto a single rate of 16 per cent CENVAT;
reduction of peak level of customs duty to 35 per cent; reduction of customs duties
on specified products used for information technology, telecommunications and
entertainment industry; and abolition of surcharges on personal and corporate
income tax rates. Other fiscal incentives included exemption of goods imported
by 100 per cent EOUs and units in FTZs and SEZs from anti-dumping and safeguard
duties; extension of Five-year Tax holiday facility to enterprises engaged in
integrated handling, transportation and storage of food-grains; and an increase
of development allowance for tea from 40 per cent to 20 per cent.
1.38 Several
far-reaching structural reform initiatives were also announced during the year.
As part of the on-going process of dereservation in the small-scale sector, fourteen
more items were dereserved from the list of items reserved for exclusive manufacture
by the small-scale sector. A Bill for abolition of the Sick Industrial Companies
(Special Provision) Act was introduced in Parliament. The Union Budget (2001-02)
proposed amendments in the Industrial Disputes Act and Contract Labour Act for
removing the existing structural rigidities in the labour market. The Budget also
proposed setting up of a National Companies Law Tribunal by amending the Companies
Act. The Bill in this regard has been introduced in Parliament. Infrastructure 1.39
The unsatisfactory performance of the infrastructure industries during the current
year is reflective of the overall slowdown prevailing in the economy. Six core
and infrastructure industries viz. electricity, crude oil, petroleum refinery
products, coal, steel and cement, having a weight of 26.7 per cent in overall
Index of Industrial Production (IIP) achieved an average growth rate of only 2
per cent during the first three quarters of the current year (i.e. April-December
2001) compared with 6.8 per cent during the corresponding period of the previous
year. Crude oil and steel exhibited absolute decline in growth rate, while growth
rates of other industries except cement, decelerated significantly during the
current year. Among other infrastructure sectors, goods traffic on railways, cargo
handled at major ports and new telephone connections had positive, but comparatively
lower growths in the current year. 1.40 Several fiscal incentives were announced
during the year for boosting investment in infrastructure projects. Ten-year tax
holiday offered to projects in core sectors like roads, highways, water-ways,
water supply, sanitation and solid waste management systems can now be availed
of during the initial twenty years. Projects in airports, ports, inland ports,
industrial parks and generation and distribution of power can now avail of ten-year
tax holidays during the initial fifteen years. The facility of five-year tax holiday
available to the telecommunication sector till March 31, 2000 was reintroduced
for units commencing their operations on or before March 31, 2003. The concessions
were extended to internet service providers and broadband networks. Tax incentives
were made available to investors providing long-term finance to enterprises engaged
in infrastructure. The Electricity Bill 2001 and the Communication Convergence
Bill 2001 were introduced in Parliament. Budgetary allocation was enhanced for
the Pradhan Mantri Gram Sadak Yojana (PMGSY) and the scheme was extended to cover
rural electrification. A Special Railway Safety Fund was created to be funded
by surcharge on passenger fares and budgetary support for supporting safety related
investment of Rs. 17, 000 crore over six years. An amount of Rs. 1,000 crore as
contribution from General Revenues was allotted to the Special Railway Safety
Fund during the year. An additional amount of Rs. 898 crore was also allotted
during the current year for completion of "last mile" projects of the
Railways. Services 1.41 During 1993-94 to 1999-2000 the service
sector had achieved consistently high growth rates in the range of 7.1 per cent
to 10.5 per cent. But for the first time in 2000-01, the growth rate of the service
sector declined to 4.8 per cent due to poor performance by financial sector, trade
hotels & restaurants, and community and social services. 1.42 The share
of the services sector in overall GDP has increased over the years. It may be
mentioned here that although the service sector presently accounts for 49 per
cent of GDP, there is no regular reporting system for the growth rate of the services
sector because of lack of reliable data and methodology for measuring production
of most of the services sectors. The Ministry of Finance in association with the
Central Statistical Organisation have initiated steps to improve the data base
for the services sectors and to proceed towards construction of an Index of Services
Production on the pattern of the Index of Industrial Production (IIP). 1.43
One of the key services that has assumed considerable significance in recent times
is insurance. The Insurance Regulatory and Development Authority (IRDA), which
was constituted on April 19, 2000, has granted certificates of registration to
ten life insurance companies and six general insurance companies, in addition
to the existing public sector Life Insurance Corporation and general insurance
companies. The IRDA has also introduced solvency margin requirements on line with
the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency
Margins of Insurers) Regulations, 2000. 1.44 The insurance sector continues
to extend social security cover to deserving groups in the economy. The Janshree
Bima Yojana scheme was launched by the LIC in June 2000 for providing social security
to groups largely comprising of persons below the poverty line. Till the end of
January 2002, 763,436 lives have been covered under the programme. The LIC has
also launched a new scheme called Krishi Shramik Samajik Suraksha Yojana on July
1, 2001 for the benefit of landless agricultural labourers in the age group of
18-50 years. The Scheme has covered 24,936 beneficiaries in 16 districts between
July 1, 2001 to February 7, 2002. The public sector general insurance companies
launched a new policy, Ashray Bima Yojana, on October 10, 2001, for extending
social security coverage to workers retrenched due to implementation of economic
restructuring measures. The public sector general insurance companies have also
introduced a scheme of personal accident insurance coverage for the Kisan Credit
Card (KCC) holders. 1.45 Public sector banks have decided to introduce
the Laghu Udhyami Credit Card (LUCC) scheme to provide simplifed and borrower
friendly credit facilities to small borrowers. This scheme would provide hassle-
free credit facility to small businessmen, retail traders, artisans, professionals,
self-employed persons and small industrial units. Interest under the scheme will
be charged at the Prime Lending Rate of the banks.
1.46 Software and IT enabled
services have emerged as a niche sector for India in the global context. The software
industry was one of the fastest growing sectors in the last decade with a compound
annual growth rate exceeding 50 per cent. Software service exports increased from
US $ 4.02 billion in 1999-2000 to US $ 6.3 billion in 2000-01, thereby registering
a growth of 57 per cent. India's success in the software sector can be largely
attributed to the industry's ability to cultivate superior knowledge through intensive
R&D efforts and the expertise in applying the knowledge in commercially viable
technologies. Social sector 1.47 Development of the country's
vast human resource potential is essential for sustaining higher levels of economic
growth and ensuring better living conditions for people. The Central support for
human resource and social sector development in the country has progressively
increased throughout the 1990s. The Central Government expenditure (plan and non-plan)
on education, health, family welfare, nutrition, sanitation, rural development,
housing, social welfare etc. has increased from Rs 9,608 crore in 1992-93 to Rs
40,205 crore in 2001-02 (BE). As a proportion of total expenditure, the combined
plan and non-plan Central expenditure on these areas increased from 8.1 per cent
in 1992-93 to 10.7 per cent in 2001-02 (BE). Similarly, as a proportion of GDP
at current market prices, the Central Government expenditure on social services
increased from 1.3 per cent in 1992-93 to 1.8 per cent in 2001-02 (BE). Population
: Census 2001 1.48 India accounts for 2.4 per cent of the world surface
area but it supports 16.7 per cent of the world population. According to the provisional
results of Census of India 2001, the population of India as on March 1, 2001 crossed
one billion and was enumerated at 1.027 billion. The decadal growth of population
at 21.34 per cent between 1991-2001 was the sharpest decline in the rate of growth
of population witnessed since independence, with the average exponential growth
rate declining from 2.14 per cent per annum during the previous decade to 1.93
per cent per annum. The declining trends indicate that the country is entering
a phase of rapidly declining fertility in its process of demographic transition.
The National Population Policy (NPP) 2000 outlines the long-term objective of
achieving a stable population by 2045, at a level consistent with the requirements
of sustainable economic growth and development. 1.49 The percentage decadal
growth of population in rural and urban areas in the decade ending 2001 was 17.9
per cent and 31.2 per cent respectively. Urban population constitutes 27.8 per
cent of the total population of the country, which is higher by 2.1 percentage
points as compared to the situation in 1991. The density of population has increased
steadily from 117 persons per sq. km. in 1951 to 324 persons per sq. km. in 2001.
The sex ratio for the country as a whole has improved from 927 females per 1000
males in 1991 to 933 females per 1000 males in 2001. Employment 1.50
According to the Planning Commission, overall employment is estimated to have
grown by about 1 per cent per annum during the period 1993-94 to 1999-2000, compared
with a growth of 2.43 per cent per annum during the period 1987-88 to 1993-94.
The decline in employment growth is associated with the lower growth of population
(1.93 per cent per annum during 1993-94 to 1999-2000 as compared with 2.10 per
cent per annum during 1987-88 to 1993-94) and labour force (1.03 per cent per
annum during 1993-94 to 1999-2000 as compared with 2.29 per cent per annum during
1987-88 to 1993-94) witnessed during this period. Organised sector (both public
and private) employment grew by 0.53 per cent per annum during 1993-94 to 1999-2000.
While public sector employment experienced an absolute decline of 0.03 per cent
during 1994-2000, employment in the private sector grew by 1.87 per cent during
the period. The decline in the rate of growth of public sector employment can
be attributed to the on-going process of restructuring in various public sector
enterprises, as well as the ban on recruitment being implemented by various state departments/organisations
for reducing non-plan Government expenditure.
1.51 In the younger age groups,
the decline in labour force participation rates is a part of a longer term trend
reflecting a shift in activity status towards education. Employment in the agricultural
sector also witnessed a slow growth with the absolute number of persons employed
in agriculture showing a decline for the first time. However, employment in sectors
like trade, construction, financial services, and transport, storage and communication
had growth rates between 5-7 per cent per annum during 1994-2000, which were much
higher than the average rate of growth of total employment during the period.
Thus, employment generation in the 1990s can be said to have undergone a structural
transformation with jobs being increasingly generated in the non-government sector. Employment
generation and poverty alleviation programmes 1.52 The Government has
continued its emphasis upon specifically designed programmes in rural and urban
areas for employment generation and poverty alleviation. In the year 2001-02 (BE),
a budgetary outlay of Rs. 9,765 crore was provided under Plan provisions for Ministry
of Rural Development for rural development, rural employment and poverty alleviation
programmes, compared to Rs. 9,270 crore in 2000-01(RE) (excluding Pradhan Mantri
Gram Sadak Yojana for which Rs. 2,500 crore was separately allotted in 2000-01
and 2001-02). The Food for Work programme was launched in February 2001 for five
months and was further extended. The programme aims at augmenting food security
through wage employment in drought affected rural areas in selected states. A
quantity of 3.01 million tonnes of foodgrains (1.90 million tonnes of rice and
1.11 million tonnes of wheat) have been allotted to 11 States under the Food for
Work Programme upto December 5, 2001. The offtake of foodgrains upto November
23, 2001 has been 2.25 million tonnes. In addition to the various on-going self-employment
programmes, the Sampoorna Grameen Rozgar Yojana (SGRY) was launched in September
2001 for providing food security and wage employment in rural areas. The scheme
is being implemented on a 75:25 cost-sharing basis by the Centre and the States.
The Shiksha Sahyog Yojana has been finalised for providing educational allowance
of Rs 100 per month to the children of BPL families for obtaining education from
the 9th-12th standard.The Pradhan Mantri Gramodaya Yojana (PMGY) launched in 2000-01
is a major initiative, which focuses on village level development in five critical
areas i.e. health, primary education, drinking water, housing, and rural roads,
with the objective of improving the quality of life of people living in rural
areas. The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in December 2000
for providing road connectivity through good all-weather roads to rural habitations
with a population of more than 1000 persons by 2003 and those with a population
of more than 500 persons by 2007. Education 1.53 The total
Central Plan allocation for education has been increased to Rs. 5,920 crore in
2001-02 (BE) from Rs. 5,450 crore in 2000-01 (BE). Elementary education has received
the highest outlay of Rs. 3,800 crore in 2001-02 (BE). The Gross Enrolment Ratio
(GER) in the country at primary level has improved significantly from 42.6 per
cent (1950-51) to 94.90 per cent (1999-2000) and that for upper primary level
from 12.7 per cent (1950-51) to 58.79 per cent (1999-2000). As per the Census
2001, overall literacy rate in the country has increased to 65 per cent from 52
per cent in 1991. There have been appreciable improvements in both male and female
literacy in rural as well as urban areas. Health 1.54 The Plan
Outlay for the Central Health Sector Schemes during 2001-02 was Rs. 1,450 crore.
This constituted an increase of 11.5 per cent over the outlay of Rs. 1,300 crore
in 2000-01. About 54 per cent of the Central Plan Outlay is devoted to centrally
sponsored disease control programmes for control of malaria, tuberculosis, leprosy,
aids, blindness etc. Substantial external assistance has also been mobilised from
various bilateral and multilateral agencies for disease control programmes.For
both the health and education sectors, an element of cost recovery through imposition
of user charges and attaining improvement in the mechanism of service delivery,
are prime concerns. Rural water supply 1.55 The Central allocation
for the Accelerated Rural Water Supply Programme (ARWSP) was enhanced from Rs.
1,960 crore in 2000-01 to Rs. 1,975 crore in 2001-02. Till end January 2002, Rs
1,637 crore has been released by the Centre and Rs 1,496 crore by the States.
A total of 26,803 habitations have been covered under the programme so far, involving
a population of 10.5 million. The Pradhan Mantri Gramodaya Yojana (Rural Drinking
Water Project) is another initiative for achievement of sustainable human development
at the village level. Fiscal Developments 1.56 The lower real
GDP growth of 4.0 per cent in 2000-01 led to the shortfall in revenue collection
during 2000-01. As per the provisional accounts released by the Controller General
of Accounts (CGA), actual tax receipts (net to Centre) for 2000-01 at Rs.1,35,193
crore, were lower by Rs.9,210 crore compared with the revised estimate of Rs.1,44,403
crore. Non-tax receipts at Rs.55,795 crore for 2000-01 also fell short of the
revised estimates by Rs.5,968 crore. The savings realised on the expenditure front
however, considerably cushioned the impact of lower revenue realisation. Consequently,
actual gross fiscal deficit for 2000-01 at Rs.1,14,369 crore exceeded the revised
estimate by Rs.2,397 crore. Gross fiscal deficit, as a proportion of GDP at current
market prices for 2000-01 placed at 5.1 per cent in the revised estimates, is
now estimated to be 5.5 per cent on the basis of provisional unaudited figures.
Similarly, revenue deficit as a proportion of GDP estimated at 3.6 per cent in
the revised estimates, is now estimated to be 3.9 per cent of GDP for 2000-01.
For 2001-02, the Centre's gross fiscal deficit and revenue deficit budgeted at
4.7 per cent and 3.2 per cent of GDP respectively, are now estimated at 5.1 per
cent and 3.4 per cent of GDP respectively as per revised GDP estimates. Fiscal
Policies Direct Taxes 1.57 The basic principles guiding
the tax proposals in the Union Budget 2001-02 were the need for revenue buoyancy,
further simplification of the tax regime and more effective tax compliance. In
the area of direct taxes, the emphasis was on retention of stability in tax rates,
widening of the tax base and rationalisation and simplification of the tax structure.
All surcharges were abolished except the Gujarat earthquake surcharge of 2 per
cent leviable on all non-corporate and corporate assesses except foreign companies. 1.58
Fiscal incentives in the form of tax holidays for development of infrastructure
were rationalized and enlarged for core sectors like roads, highways, railway
systems, water treatment and supply, irrigation, sanitation and solid waste management
system, airports, ports, inland ports and waterways, industrial parks and generation
and distribution of power. Besides, concessions by way of 10-year tax holiday
were made available for infrastructure activities for developers in Special Economic
Zones. Fiscal incentives by way of tax holiday for five years and 30 per cent
deduction of profits for the next five years were provided to enterprises engaged
in the integrated business of handling, transportation and storage of foodgrains.
Income earned by way of interest, dividends and long-term capital gains from investments
in infrastructure was made fully tax exempt and the exemption was extended to
cover guarantee commission and credit enhancement fees earned from this sector. 1.59
For providing stimulus to the growth of the capital market, the tax payable on
the distribution of dividends of domestic companies and income in respect of units
of Mutual Funds and UTI was reduced from 20 per cent to 10 per cent. Further measures
to widen the tax base and enlarge the scope of deduction at source included making
income tax at source deductible at the rate of 10 per cent for income earned through
commission or brokerage exceeding Rs.2,500 (barring transaction relating to shares
and securities). Besides, income tax at the rate of 30 per cent is to be deducted
at source from winnings from games. The One-by-Six scheme for identifying potential
taxpayers was extended to all urban areas in the country as defined by the 1991
census. Indirect Taxes 1.60 The ongoing process of reducing
rates, rationalising the tax regime, and simplifying procedures, was carried forward
in the sphere of indirect taxes. The important initiatives adopted during the
year are mentioned below: Customs Duties 1.61 The peak level
of customs tariff was reduced to 35 per cent with abolition of the 10 per cent
surcharge. The Union Budget reiterated the Government's resolve to move progressively
within three years to reduce the number of rates to the minimum with a peak rate
of 20 per cent. Customs duties were reduced on imported inputs for information
technology and telecom sectors. Basic customs duty was raised to 70 per cent on
tea, coffee, copra and coconut, and to 75 and 85 per cent on crude edible oils
and refined oils respectively. With the abolition of quantitative restrictions
on imports, the customs duty on import of used cars, multi-utility vehicles and
two wheelers was raised to 105 per cent. In a move intended to discourage gold
smuggling, customs duty for gold was scaled down from Rs.400 per ten grams to
Rs.250 per ten grams. Excise Duties
1.62 The excise duty
structure which was rationalised to a single rate of 16 per cent CENVAT (Central
Value Added tax) in 2000-01 was further improved by replacing the three special
excise duty rates of 8 per cent, 16 per cent and 24 per cent by a single rate
of 16 per cent. An additional levy (National Calamity Contingency Duty) was imposed
on cigarettes, pan masala, biris etc. to garner resources for the National Calamity
Contingency Fund. Food preparations based on fruits and vegetables were completely
exempted from excise duty, while duty on aerated soft drink was reduced to 32
per cent. Compressed natural gas, hitherto exempted from excise, was brought under
the purview of excise at the rate of 8 per cent. Excise Duty on petrol was raised
from 16 per cent to 32 per cent and on high-speed diesel oil from 12 per cent
to 16 per cent. Further, the duties on petrol and diesel were increased to 90
per cent and 20 per cent respectively from the midnight of January 11/12, 2002
(the new rates of excise duty will not remain in force beyond March 31, 2002).
The coverage of service tax at the rate of 5 per cent on the value of taxable
service was expanded by including fifteen new services. 1.63 Inadequate
fiscal adjustment continues to remain a major problem for the Indian economy.
The Central Government's fiscal situation has become more constrained in recent
years due to growing interest payments, increasing level of subsidies and long
term impact of Fifth Pay Commission recommendations, including surge in pension
payments. All these have manifested in mounting revenue deficit and erosion in
public sector savings thereby severely restraining the Government's ability to
invest in infrastructure and social sectors. Fiscal and Budgetary Developments
in 2001-02 1.64 The fiscal deficit as a proportion of GDP budgeted at
4.7 per cent in 2001-2002, now stands at 5.1 per cent of GDP due to revision in
the GDP estimates, compared with 5.5 per cent in 2000-01 (on the basis of provisional
unaudited figures). The revenue deficit, which reflects the excess of current
expenditure over current receipts, budgeted at 3.2 percent of GDP in 2001-02,
is now re-estimated at 3.4 per cent of GDP, compared with 3.9 per cent in 2000-01.
The primary deficit, (i.e. fiscal deficit net of interest payments), is budgeted
at 0.2 per cent of GDP in 2001-02 as against 0.8 per cent in 2000-01. Revenue
Performance 1.65 The data for gross collections of major direct and
indirect taxes for the first nine months (April-December 2001) of the current
year show an unsatisfactory performance. In case of direct taxes, collections
from personal income tax and corporation tax at Rs.44,021 crore were lower by
1.2 per cent, compared with the robust increase of 30.8 per cent in the corresponding
period of the previous year. Collections from excise and custom duties at Rs.77,224
crore during April-December 2001 posted a decline of 3.6 per cent compared with
an increase of 4.9 per cent in April-December 2000.
1.66 The fiscal parameters
for the first three quarters of the current year (i.e. April-December 2001) reveal
that there has been lower growth in revenue receipts and higher growth in expenditure
as compared to the corresponding period of the previous year. Revenue receipts
(net to the centre) is almost at the same level of Rs.1,32,690 crore compared
with Rs.1,32,691 crore in the corresponding period of last year. Other receipts
(mainly disinvestment receipts), estimated at Rs.280 crore against the full year
budgeted target of Rs.12,000 crore, are expected to improve significantly during
the remaining months of the current year due to smoother working of the disinvestment
process. Borrowings and other liabilities at Rs.89,014 crore indicate an increase
of 37.7 per cent over Rs.64,628 crore in the comparable period of the previous
year. Aggregate expenditure at Rs.2,33,718 crore reflects an increase of about
14 per cent over the corresponding period of the previous year. However, on account
of the general slowdown in the economy and the deceleration in industrial growth
in particular, the tax revenue (net to Centre) had declined by about 7 per cent
during April-December2001. Expenditure Management 1.67 The
Union Budget (2001-02) announced specific proposals for bringing about changes
in the composition of the Central Government's expenditure and for effecting economy
in non-plan expenditure. The Budget announced revision of user charges for certain
services provided by the Government and its agencies, moderate revision of postal
rates for containing the rising postal deficit, scrutiny of recruitment requirements
with a view to limit fresh recruitment to 1 per cent of total civilian staff strength,
enhancement of license fee for various categories of Central Government residential
accommodation, temporary suspension of LTC facility for Central Government employees
and greater use of information technology in Government's activities involving
large public interface for promoting efficiency. The Budget also announced that
all existing schemes would be subjected to zero-based budgeting and only those
schemes that were found demonstrably efficient and essential, would be retained.
Besides, centrally sponsored schemes that could be transferred to States would
be identified and the resource flows will be sought to be linked to their performance. Inflation Wholesale
Price Index (WPI) 1.68 The point to point inflation rate according to
the Wholesale Price Index (WPI) for the week ending January 19, 2002 was 1.3 per
cent, which was the lowest in the last two decades. The 52-week average inflation
rate declined from 7.0 per cent at the beginning of the year to 4.7 per cent for
the week ending January 19, 2002. 1.69 The price situation remained under
control during 2001-02. The impact of the fuel price increases announced first
during 1999-2000, and subsequently twice during 2000-01, bottomed out during the
current year, reducing inflation to below 5 per cent by September 2001. The deceleration
in prices continued through the months of October and November 2001. Inflation
was recorded at 2.21 per cent at the beginning of December 2001 (the lowest since
December 1999) and reduced further to 1.3 at the end of January 2002. 1.70
Prices for the primary products group, comprising of essential commodities for
daily use, remained moderate for much of the year and are presently estimated
to have risen by 3.0 percent for the week ending January 19, 2002. The manufactured
products group registered negligible price rise during 2001-02 reflecting the
subdued demand for manufactured products. The fuel, power, light & lubricants
subgroup, comprising mainly of energy products much of which are imported, had
experienced sharp increase in prices last year on account of the successive hikes
in administered energy prices. In contrast, during the current year, inflation
for the group remained stable and is presently 3.2 percent, as against 31.0 percent
in the previous year. Consumer Price Index-Industrial Workers (CPI-IW) 1.71
The inflation rate, as estimated by the CPI (IW), ranged between moderate to low
during the current year. The Index remained below 4 per cent till July 2001 and
rose thereafter to 5.2 per cent in August 2001. It decelerated further during
September and October and was estimated at 4.9 per cent during November 2001.
The year 2001 ended with a marginally higher inflation of 5.2 per cent in December
2001. Money Supply 1.72 The year-on-year growth in broad money
(M3) as on January 11, 2002 was 14.4 per cent compared with 16.6 per cent a year
ago. The sharp decline in money supply since November 16, 2001 reflects the sudden
expansion in volume of broad money resulting from India Millenium Deposits with
effect from the corresponding date in the previous year. Among the various components
of money supply, only currency with the public registered a higher rate of growth
in the current year (till January 11, 2002) compared to the corresponding period
of the previous year. As far as sources of broad money are concerned, growth in
bank's investment in Government securities and the expansion in net foreign exchange
assets of RBI contributed significantly to the broad money growth in the current
year. The current financial year witnessed a deceleration in the growth of net
domestic assets of RBI as compared to the corresponding previous period. This
was partly offset by the pronounced acceleration in the growth of net foreign
exchange assets of RBI. Reserve money registered a growth of 2.6 per cent during
the current financial year (till January 11, 2002) as compared with 5 per cent
during the corresponding previous period. Financial Developments 1.73
The process of financial sector reforms has been carried forward in the current
year with particular focus on banking and financial institutions. The specific
reforms undertaken include allowing banks to lend at interest rates below their
respective PLRs, permission to formulate fixed rate deposit schemes offering higher
interest rates to senior citizens, flexibility in the composition of working capital
between cash credit and loan components, reduction in exposure limits for borrowers,
revised guidelines for exposure of banks to capital market and guidelines for
investment in non-SLR securities through the private placement route. The initiatives
specially aimed at strengthening the operational efficiency of banks relate to
the Voluntary Retirement Scheme, abolition of the Banking Service Recruitment
Boards and enlargement of the reach and scope of the electronic funds transfer
facility (EFT). The measures pertaining to financial institutions included operational
and regulatory issues concerning transition to universal banking, a transparent
mechanism for corporate debt restructuring, coordination between banks and financial
institutions, amended guidelines for Asset-Liability Management and classification
and valuation of investments. As regards the non-banking financial companies (NBFCs),
the major policy initiative related to reduction in the maximum interest rates
on public deposits from 14 per cent to 12.5 per cent. 1.74 The current year
has been characterised by measures designed to move towards a flexible interest
rate regime. The reduction in the administered interest rates on contractual savings
has made the interest rate regime more flexible. Reduction in the Bank Rate to
6.5 per cent (the lowest since May 1973) has been supplemented by reduction in
the Cash Reserve Ratio to 5.5 per cent, which has further improved liquidity in
the banking system. The PLRs of five major public sector banks softened from 12.00
- 12.50 per cent in December 2000 to 11.00 - 12.00 per cent by December 2001.
Interest rates charged by SCBs on pre-shipment and post-shipment rupee export
credit were reduced by 1.0 percentage point for six months ending on March 31,
2002. The short-term interest rate represented by the yield on 91-day Treasury
Bills declined by 125 basis points to 7.25 per cent between April and December
2001. At the long end of the yield curve, the secondary market yields on Government
paper in the range of 10-12 years have declined from 10.05-10.41 per cent to 8.15-8.35
per cent during this period. 1.75 Bank credit, comprising food credit and
non-food credit, increased at a lower rate of 10.6 per cent till January 11, 2002
compared to 14.3 per cent in the corresponding period of the previous year. Recent
years have witnessed strong growth of food credit in response to the increase
in the quantum as well as price of food grains procured in support of the twin
objectives of food security and price support. The deceleration in the growth
of non-food credit to 8.7 per cent till January 11, 2002 from 12.1 per cent during
the corresponding period in the previous year mirrored the weak demand for commercial
credit owing to economic slowdown, which has been aggravated by the global downturn
in economic activity. 1.76 During April-December 2001, sanctions by All-India
Financial Institutions (AIFIs) declined by 32.1 per cent compared to an increase
of 18.3 per cent in the corresponding period of the previous year. Disbursements
by AIFIs also declined by 16.9 per cent during the same period in contrast to
an increase of 16.1 per cent last year. An analysis of financial performance of
public sector banks on the basis of key parameters shows wide inter-bank variations.
For nationalised banks, the return on assets varied from zero in the case of Dena
Bank and Indian Bank to 1.55 per cent for Corporation Bank. It was more than 0.5
per cent for six other nationalised banks. The ratio of net NPAs to net advances
ranged from 1.98 per cent for Corporation Bank to 18.37 per cent for Dena Bank.
Excluding Indian Bank with negative Capital to risk weighted asset ratio (CRAR),
the CRAR ranged from 7.73 per cent for Dena Bank to 13.40 per cent for Andhra
Bank. As regards the SBI Group, return on assets was 0.50 per cent or more for
all the banks except the State Bank of Saurashtra and the State Bank of Mysore
with return on assets at 0.18 per cent and 0.27 per cent respectively. 1.77
The RBI had introduced the One Time Settlement Scheme in July, 2000 for all sectors,
including the small scale sector, for providing a simplified, non-discretionary
and non-discriminatory mechanism for recovery of NPAs with outstanding balances
of up to Rs. 5 crore. The scheme expired on June 30, 2001. Under the revised guidelines,
27 public sector banks recovered Rs. 2,600 crore from 365,000 accounts. 1.78
A total of 20.4 million Kisan Credit Cards (KCCs) have been issued till the end
of November 2001 involving a sanctioned amount of Rs.43,390 crore. Cooperative
banks accounted for the maximum share in the cumulative issue of KCCs (66.2 per
cent), followed by SCBs (27.0 per cent) and RRBs (6.8 per cent). Capital
and Money Markets 1.79 The developments in the stock market on the eve
of the current financial year brought to the fore the need for further measures
aimed at promoting safety, transparency and efficiency of the capital market.
Accordingly, the following measures were announced in March 2001: - Intention
to corporatise stock exchanges involving segregation of ownership, management
and trading membership from each other.
- Extension of rolling settlement
to two hundred "A" category stocks in Modified Carry Forward Scheme
(MCFS), Automated Lending and Borrowing Mechanism (ALBM) and Borrowing and Lending
Securities Scheme (BLESS) by July 2, 2001.
- The formulation of legislative
changes aimed at further strengthening the provisions in the SEBI Act, 1992 for
ensuring investor protection.
1.80 The SEBI subsequently extended rolling settlement
to all scrips included in the ALBM/BLESS/or MCFS in any stock exchange or in the
BSE 200 list with effect from July 2, 2001. From December 31, 2001, all stocks
are under rolling settlement in all stock exchanges. This constitutes one of the
most far-reaching reforms in the history of India's capital market. Equally important
were the widening of the spectrum of equity derivatives to trading in options
on both indices and stocks, and to stock futures, which can perform hedging functions
hitherto performed by the deferral products. 1.81 The Union Budget (2001-02)
emphasised the need for further development of the debt market and spelt out the
main measures for this purpose, which related to setting up of the Clearing Corporation
of India Ltd (CCIL) and the Negotiated Dealing System (NDS). Other related initiatives
included extension of uniform price auction to the auction of selected dated Central
Government securities and reintroduction of floating rate Government bonds. Measures
were also announced for moving closer to a pure inter-bank call money market by
gradually phasing out non-bank participation. 1.82 Reforms in the insurance
sector commenced with the enactment of the Insurance Regulatory and Development
Authority Act 1999, which facilitated the entry of private insurance companies
into the Indian insurance market. The Insurance Regulatory and Development Authority
(IRDA) was set up on April 19, 2000 to protect the interest of the holders of
insurance policies, and to regulate, promote and ensure orderly growth of the
insurance industry. Ten life insurance companies and six general insurance companies
have been granted certificate of registration, out of which 12 companies have
commenced business. 1.83 The pronounced bearish sentiments in the stock
market saw the Sensex falling to 3184 on April 12, 2001, which implied a cumulative
fall of 36.3 per cent from 5001 at the end of March 2000. The National Stock Exchange
(NSE) Index (S&P CNX Nifty) also suffered a similar slump during this period.
The decline in equity prices in leading stock markets abroad following the terrorist
attacks on the USA on September 11, 2001 led to further squeezing of the stock
indices at home. The Sensex dropped to 2600 on September 21, 2001, registering
a fall of more than one thousand points from 3604 on the eve of the current financial
year. The measures taken by both the Government and the regulatory authorities
in the wake of the September 11 crisis, backed by improvement in investor sentiment
abroad, facilitated significant recovery in the stock market. The Sensex regained
more than 800 points to close at 3443 on December10, 2001. However, the market
again came under selling pressure, precipitated by developments following the
terrorist attack on the Indian Parliament (December 13, 2001) and the Sensex lost
around 180 points by the end of December, 2001. Stock market prospects improved
in the new year (2002)and the Sensex regained 232 points to close at 3494 on February
8, 2002. 1.84 The adverse sentiments in the secondary market also affected
the mobilisation of resources from the primary market. The amount raised through
public and rights issues during the first nine months of the current year (Rs.3,777
crore), constituted around 90 per cent of the relatively modest amount of Rs 4,240
crore raised during the corresponding period of the previous year. Resource mobilisation
through IPOs (Rs. 208 crore) accounted for only 5.5 per cent of the total resource
mobilisation during this period, compared to about 56.7 per cent in the corresponding
period of the previous year. The low level of resource mobilisation may be attributed
to the prevailing economic slowdown and preference for private placement. The
performance of UTI was badly affected by the downtrend in stock market. During
April-December 2001, the outflow of funds from UTI exceeded inflows by Rs 5,151
crore whereas during the corresponding period of the previous year, inflows exceeded
outflows by Rs. 480 crore. During April-December 2001, gross purchase of equity
by mutual funds amounted to Rs.7,489 crore, while gross sales amounted to Rs.8,762
crore thereby making net equity investment negative. 1.85 Except for September
2001, the net FII investment was positive during the first ten months of the current
year. Net FII investment amounted to US$1,295 million during April 2001-January
2002 compared to US$1,379 million during the corresponding previous period. The
uncertainty and panic resulting from the terrorist attacks on the USA led to sudden
increase in sales, which exceeded purchases by about 16 per cent. As a result
net investment by FIIs declined by US$113 million in September 2001. External
Sector International economic environment 1.86 The year
2001 experienced the deepening and reinforcing of the global economic slowdown
that had begun to set in from the end of 2000. The latest projections made by
the World Economic Outlook of the International Monetary Fund point to a mere
2.4 per cent growth in world output during 2001, compared to 4.7 per cent during
2000. The growth in world trade volume is projected to decline sharply to 1 per
cent during 2001, as against 12.4 per cent in 2000. Absolute declines are projected
for both energy and non-fuel prices in 2001 with the decline in energy prices
expected to aggravate further in 2002. 1.87 The prevailing global slowdown
was accentuated further by the terrorist attacks in the United States on September
11, 2001. The attacks resulted in further downward growth projections for almost
all major economic regions of the world. Growth rates for the US economy have
been pegged down to 1 per cent and 0.7 per cent for 2001 and 2002 respectively.
Japan is likely to encounter its fourth economic recession in a decade, while
economic activity is showing little signs of recovery in the Euro area. The broad-based
nature of the global slowdown, the most marked in recent times, has worsened the
outlook for emerging market economies, in terms of reduced capital inflows and
restricted access to funds from international capital markets. Among the economies
of developing Asia however, China and India are expected to remain relatively
insulated from the global slowdown due to the relatively less significance of
the external sector in their overall GDP. Balance of Payments Current
account 1.88 India's Balance of Payments (BOP) remained reasonably
comfortable in 2000-01 and the external sector marked distinct improvements. The
first half of the year witnessed some pressures on the BOP due to significant
hardening of international oil prices, sharp downturn in international equity
prices and successive increases in interest rates in the United States and Europe.
However, the situation eased with the mobilisation of funds under the India Millennium
Deposits, which reversed the declining trend in foreign exchange reserves. As
a result, the BOP situation marked a turnaround during the second half of 2000-01.
Overall, the current account deficit in 2000-01 narrowed to about 0.5 per cent
of GDP from 1.1 per cent of GDP in 1999-00. The improvement in the current account
was largely due to a more dynamic export performance, sustained buoyancy in invisible
receipts reflecting sharp increases in software service exports and private transfers
and the subdued non-oil import demand. Trade deficit 1.89 Exports,
on the BOP basis, grew by 19.6 per cent in US dollar terms in 2000-01, accelerating
sharply from the 9.5 percent growth in the previous year. Total imports recorded
a moderate growth of 7.0 per cent during 2000-01, much lower than the sharp increase
of 16.5 per cent in 1999-2000. The moderate growth in imports during 2000-01 was
essentially attributable to a 24.1 per cent increase in the oil import bill. Non-oil
import growth, on BOP basis, remained subdued at only 2.0 per cent. 1.90
Reflecting the trends in exports and imports, the deficit on the trade account
of BOP narrowed to US $14.37 billion or 3.1 per cent of GDP in 2000-01 from US
$17.84 billion (4.0 per cent of GDP) in 1999-2000. Net inflow of invisibles earnings
at US $11.79 billion covered about 82 per cent of the deficit on the trade account
in 2000-01, leaving a financing gap of US $2.58 billion on the current account.
This deficit on the current account represented about 0.5 per cent of GDP, compared
with the deficit of 1.1 per cent of GDP (US $4.70 billion) in 1999-2000. Capital
account 1.91 The recovery in capital flows witnessed in 1999-2000, after
the setback in 1998-99 caused by the East-Asian crisis and the economic sanctions
imposed upon India, was broadly maintained during 2000-01. Net capital inflows
(excluding IMF) in the BOP account amounted to US $9.02 billion in 2000-01, which
were lower than similar inflows of US $10.44 billion in the previous year. The
reduction in net capital inflows was mainly due to the bunching of repayments
of commercial borrowings and significant net outflows under banking capital. At
the same time, capital inflows were bolstered by the mobilisation of US $5.51
billion under the India Millennium Deposits (IMD) Scheme in October- November
2000. Fresh inflow of funds for portfolio investments in India by FIIs in 2000-01
amounted to about US $1.85 billion, which was only slightly lower than the US
$2.14 billion in 1999-2000. Net accretions to non-resident deposits during 2000-01
rose by over 50 per cent to US $2.32 billion. Gross disbursement of external assistance
at US $2.94 billion was comparable with the normal trends in recent years. Gross
borrowing on commercial terms (excluding IMD) at US $3.81 billion in 2000-01 was
higher than such normal borrowings of US $3.19 billion in the previous year. Foreign
exchange reserves 1.92 The sharp reduction in current account deficit
and the funds raised under the IMD Scheme resulted in large accumulation of official
foreign exchange reserves for the fifth year in succession during 2000-01. On
BOP basis, the reserves increased by a substantial US $5.83 billion. This was
on top of an increase of US $6.14 billion in 1999-2000 and an increase of US $4.51
billion per year, on an average, during the previous three years, i.e.1996-97
to 1998-99. BOP Projections for 2001-02 1.93 Official BOP statistics,
as compiled by the RBI for the year 2001-02, are available only for the first
half of the current year. A tentative assessment of the BOP outlook for the current
year indicates that though the current account deficit in 2001-02 might widen
to some extent, it is expected to remain within 1 per cent of GDP. The widening
of the current account deficit is mainly due to poor export performance. Merchandise
exports (in US dollar terms) remained almost stagnant with export growth of only
0.6 per cent recorded by the DGCI&S data for the first nine months of 2001-02.
On the other hand, the pressure on trade account eased significantly due to moderation
in oil import bill following softening of international oil prices after September
2001. 1.94 Net inflow of invisibles, despite larger outflows on account
of interest and dividend payments, is expected to remain broadly at last year's
level, supported by the continued buoyancy in software service exports and private
transfers. The widening of the current account deficit will, however, be more
than matched by the expected net capital inflows from normal sources, resulting
in large accretions to reserves.
1.95 During the current financial year (2001-02)
so far, the foreign currency assets of the RBI have increased by about US $7.01
billion from US $39.55 billion at end-March 2001 to US $46.56 billion at end January,
2002. Total foreign exchange reserves (including gold and SDRs) at end January,
2002 amounted to US $49.48 billion, providing cover for about 10 months of estimated
imports in 2001-02. Exchange rate developments 1.96 The exchange
rate of the rupee against the US dollar continued to be broadly market determined.
During 1999-2000, the exchange rate market displayed reasonable stability, with
the rupee depreciating by about 2.9 per cent from the annual average of Rs.42.07
per US dollar in 1998-99 to Rs.43.33 in 1999-2000. In contrast, the year 2000-01
witnessed significant downward pressure on the rupee-dollar rate from middle of
May 2000. The foreign exchange markets were affected by considerable uncertainty
with the rupee depreciating by 6.7 per cent between end-April and end-October
2000 from Rs. 43.655 per US dollar to Rs. 46.775. Since November 2000, the situation
showed large improvements with the forex markets becoming relatively stable. Overall,
the rupee depreciated against the US dollar by 5.15 per cent to Rs. 45.68 per
US dollar during 2000-01.
1.97 The world economy experienced one of its worst
shocks in recent times in the aftermath of the September 11, 2001 events in the
United States. Foreign exchange markets in India also became volatile with the
rupee depreciating by 1.3 per cent vis-a-vis the US dollar during September 10-20,
2001. Adverse external developments after September 11, 2001 and their effect
on India's financial markets, necessitated quick response for injecting liquidity
and providing overall comfort to the markets. The RBI announced several measures
for stabilizing domestic financial markets during the period September 15-25,
2001. These measures had the desired effect of moderating possible panic reactions
and reducing volatility in financial markets, particularly in money, foreign exchange
and Government securities markets. As at the end of January 2002, the exchange
rate of the rupee was Rs.48.58 per US dollar, showing a depreciation of 4.0 per
cent, compared with the rate of Rs.46.64 at the end of March 2001. Reform
initiatives in the external sector 1.98 Several measures were announced
during the year as part of the on-going reform process in the external sector.
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