Indian Economy, 5th edition (138 page)

The
bottomline
is that India cannot take the external environment for granted, and has to move quickly to restore domestic balance. The government is committed to fiscal consolidation. This along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates. Lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic, and financial impediments to investment are eased.

Given such a scenario, where all the three major sectors of the economy perform better in 2013-14 as compared to 2012-13, the overall economy is expected to grow in the range of 6.1 to 6.7 per cent in 2013-14. Of course, these projections assume a normal monsoon, further moderation in inflation as expected (to induce further relaxation of the tight monetary stance), and mild recovery of global growth as anticipated. Forecasting at potential turning points is difficult, hence the relatively wide range this time.

While the current environment is difficult, the future holds promise, provided we can answer the question that is probably foremost in the minds of India’s young population:
‘Where will my job come from?’
India is creating jobs in industry but mainly in
low productivity
construction and not enough formal jobs in manufacturing, which typically are higher productivity. The high productivity service sector is also not creating enough jobs. As the number of people looking for jobs rises, both because of the population ‘dividend’ and because share of agriculture shrinks, these vulnerabilities will become important. Because good jobs are both the pathway to growth as well as the best form of inclusion, we have to think of ways of enabling their creation.

Agriculture and Food Management

Indian agriculture has performed remarkably well in terms of output growth, despite weather and price shocks in the past few years. Although agriculture, including allied activities, accounted for only
14.1
per cent of the GDP in 2011-12, its role in the country’s economy is much bigger with its share in total employment as high as
58.2
per cent according to the 2001 census. The declining share of the agriculture and allied sector in the country’s GDP is consistent with the normal development trajectory of any fast growing economy, but fast agricultural growth remains vital for jobs, incomes, and food security.

Average annual growth
of the agriculture and allied sector during the 11th Plan at
3.6
per cent fell short of the target of 4 per cent but was higher than the average annual growth of 2.5 and 2.4 per cent achieved during the Ninth and Tenth Plans respectively. An important reason for the dynamism of the agriculture sector has been a stepup in the
gross capital formation
(GCF) relative to GDP of this sector. Overall GCF in agriculture (including the allied sector), more than doubled in the last 10 years and registered an average annual growth of 8.1 per cent. During the Eleventh Plan period, foodgrains production witnessed an increasing trend, except in 2009-10. During 2011-12, total foodgrains production reached a record of
259.3
million tonnes. Better agricultural performance in the
Eleventh Plan
is a result of:

a.
farmers’ response to better prices;

b.
continued technology gains; and

c.
appropriate and timely policies coming together, e.g. increased credit at concessional rates. However, the production of 2012-13 kharif crops is likely to be adversely affected by deficiency in the south-west Monsoon and resultant acreage losses. The output for all the major crops is expected to decline.

Owing to good production of foodgrains in recent years and remunerative MSPs, even states that were traditionally not procuring sufficient foodgrains, e.g. Bihar, Madhya Pradesh, Chhattisgarh, and West Bengal showed significant increase. In recent years, the policy impetus provided by the government has also provided much required stability to agricultural exports.

India does not fare well, however, in terms of agricultural yields or productivity. Improvement in yields holds the key for India to remain self-sufficient in foodgrains. Another challenge is how to maximize agricultural income while adopting a more sustainable agricultural strategy. The concerns here are land and water degradation due to soil erosion, soil salinity, waterlogging, excessive application of nutrients, and overexploitation of water resources in some parts of the country. Better management practices for rehabilitation of degraded land and water resources hold the key. Expenditure on agricultural research also needs to be raised in the Twelfth Five Year Plan.

A
notable feature
of the Indian agricultural sector is the domination of small farmers with small landholdings. This poses a challenge for the adoption of farm mechanisation and generating productive incomes from farm operations. Land-related issues and implementation of land reforms require to be attended to on priority basis to revitalise the agriculture sector. Declining per capita availability of foodgrains is another major concern in India. For ensuring nutritional security, it is not only important to increase per capita availability of foodgrains but also to ensure the right amounts of food items in the food basket of the common man. A thrust on horticulture products and protein-rich items is required for ensuring nutritional security.

Another critical issue is supply-chain management in agricultural marketing in India. It is necessary to evolve mechanisms for linking wholesale processing, logistics, and retailing with farm production activities so as to generate enhanced efficiency, better farm prices, etc. Recently the government allowed
FDI in retail
, which can pave the way for investment in new technology and marketing of agricultural produce in India.
Areas of importance may be seen as given below
–

a.
Need for stable and consistent policies where markets play an appropriate role,

b.
Private investment in infrastructure is stepped up,

c.
The public distribution system (PDS) is revamped,

d.
Food price and food stock management improves,

e.
And a predictable trade policy is adopted for agriculture.

f.
The above-given initiatives need to be coupled with skill development and better research and development (R&D) along with improved delivery of credit, seeds, etc.

INDUSTRY AND INFRASTRUCTURE

The capital goods sector remained weak for the second consecutive year.
Negative growth
was not only experienced across the sub-sectors of the capital goods segment but was also more persistent with only two months in the last twelve months recording positive growth. The production of key capital goods such as machinery and equipment, electrical machinery, and transport segments contracted owing to deceleration in investment, a decline in new projects, and import competition. High interest rates and slower growth in household or retail credit resulted in slower growth in consumer durables.

Sluggish
industrial performance also affected corporate performance. The rate of growth of sales of the listed manufacturing companies in the private sector declined from an average of 28.8 per cent in the first quarter of 2010-11 to 11.4 per cent in the second quarter of 2012-13. Interest expenditure increased significantly. Together with a deceleration in the rate of growth of sales, the ratio of net profit to sales also declined.

The aggregate resource flow to industry, including credit disbursed by the banks and money raised in domestic and overseas market through other instruments, however, has been showing some signs for optimism. The total flow of financial resources to the commercial sector in the current financial year so far (up to 11 January 2013) has been higher compared to the corresponding period of the previous year.

The
eight core infrastructure industries
registered a growth of 3.3 per cent during April- December 2012 compared to 4.8 per cent during the same period of the previous year. The decline in growth in the current year so far is mainly on account of negative growth witnessed in the production of coal, natural gas, and fertilisers. Among infrastructure services, freight traffic by railways has been comparatively higher during the first eight months of the current year. In the road sector the National Highways Authority of India (NHAI) achieved 17.3 per cent growth in widening and strengthening of highways during April-November 2012.

A large number of major central-sector projects costing Rs. 150 crore and more are delayed with respect to their latest scheduled dates of completion. Delays in land acquisition, municipal permission, supply of materials, award of work, operational issues, etc. continue to bog down project implementation.

Service Sector

The services sector is the dominant sector in most developed economies of the world and in some developing economies such as India. The
CAGR
of the services sector GDP was
10
per cent for the period 2004-05 to 2011-12. It has clearly outgrown both the industry and agriculture sectors. In 2011-12 and 2012-13, in tune with the general moderation in the economy, the growth rate of the services sector also declined. The services sector is providing employment to more people, but employment growth is probably below the desired pace, given how productive service jobs are.

The slowdown in the rate of growth of services in 2011-12, and particularly in 2012-13, from the double-digit growth of the previous six years, contributed significantly to slowdown in the overall growth of the economy. While some slowdown could be attributed to the lower growth in agriculture and industrial activities, given the backward and forward linkages with services, lower demand from the rest of the world could also have played a part.

Financial Intermediation

The existence of well-developed and efficient financial markets is critical for achieving real economic growth. The country now has a vibrant and transparent financial market in terms of market efficiency, transparency, and price discovery process.

As far as the banking sector is concerned, the focus continues to be on reform initiatives which will facilitate the flow of credit to critical sectors of the economy including agriculture, infrastructure, micro, small and medium enterprises, housing, and export. Financial inclusion and improved accessibility of banking infrastructure remain high on the list of priorities of the government.

The performance of Indian banks during 2011-12 was conditioned to a large extent by the fragile recovery of the global financial markets as well as a challenging operational environment on the domestic front, with persistent high inflation and muted growth performance. Net profit growth of banks slowed down. Though Indian banks remained well-capitalised, concerns regarding growing NPAs persisted.

In the overall context of the evolving macroeconomic situation in the country and global financial developments, the government in close collaboration with the
RBI
and
SEBI
(Securities and Exchange Board of India) has recently taken a number of initiatives to meet the growing capital needs of the Indian economy these are –

a.
Launching of the
RGESS
(Rajiv Gandhi Equity Savings Scheme) and SME exchange;

b.
Expansion of the
QFIs
(Qualified Foreign Investors) Scheme to facilitate their access to the Indian capital market;

c.
Progressive enhancement in the quantitative limits for
FIIs’
investments in various debt categories;

d.
Allowing refinancing rupee loans through
ECB
(External Commercial Borrowing) route for Indian companies in the power sector;

e.
Reduction in the withholding tax on interest payments on ECBs, and

f.
Introducing a new ECB scheme for companies in the manufacturing and infrastructure sector.

Investment sentiment
started improving in the last few months with foreign investors reposing more confidence in the Indian economy in general and markets in particular. During the current financial year (up to 31 December 2012), the rise in the indices stood at 11.62 per cent for the Sensex and 11.51 per cent for Nifty. The economic and political developments in the Euro-zone area and United States had an impact on markets around the world including India. The temporary resolution of the ‘fiscal cliff’ in the US had a positive impact on the markets. Further, the reform measures initiated by the government recently have been received well by the markets.

Human Development

Economic growth though important cannot be an end in itself. The Twelfth Five Year Plan, with its focus on
‘Faster, More Inclusive and Sustainable Growth’
, puts the growth debate in the right perspective. The government’s targeted policies for the poor, with the prospect of fewer leakages, can help better translate outlays into outcomes.

Expenditure on
social services
by the general government (centre and states combined) has increased in recent years reflecting the higher priority given to this sector. Expenditure on social services increased considerably in the Twelfth Plan, with the education sector accounting for the largest share, followed by health. As a proportion of GDP, expenditure on social services increased from 5.9 per cent in 2007-08 to 6.8 per cent in 2010-11 and further to 7.1 per cent in 2012-13(BE).

Nevertheless, India’s expenditure on health as a per cent of GDP is lower than in many other emerging and developed countries and the share of the public sector still lower.

Poverty
has declined in the country, though precisely how poverty is measured is currently being examined. Based on the methodology suggested by the Tendulkar Committee, the percentage of people living below the poverty line in the country declined from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10. Even in absolute terms, the number of poor people declined by 52.4 million during this period. Of this, 48.1 million are rural poor and 4.3 million urban poor. Thus poverty has declined on an average by 1.5 percentage points per year between 2004-05 and 2009-10. The annual average rate of decline during the period 2004-05 to 2009-10 is twice the rate of decline during the period 1993-94 to 2004-05.