A S S IG N M E N T O N

M A N A G E R IA L E C O N O M IC S

SUBMITTED TO: SUBMITTED BY:

MS.SIBY JOSEPH K. A B E Y M O N F R A NC I S
FACULTY, BIMS S 1 M B A , BIM S

SUBMITTED ON : 12/08/09
Introduction:

A unique feature of the transition of the Indian economy is that it has become the second fastest
growing economy of the world in the year 2008 - 09. In the second quarter of 2006-2008 the
GDP growth has averaged 9%. India has recorded one of the highest growth rates in the 1990s.
The target of the 10th Five Year Plan (2002-07) is 8% growth rate. According to the Central
Statistical Organization (CSO), real GDP increased by 8.1% during the first quarter of 2005-
2006 against 7.6% in the first quarter of the previous year. The Quick Estimates of Index of
Industrial Production (IIP) with base 1993-94 for the month of October 2005 have been released
by the Central Statistical Organization of the Ministry of Statistics and Programme
Implementation. The General Index stands at 221.3, which is 8.5% higher as compared to the
level in the month of October 2004.

The fundamentals of the Indian economy have become strong and stable. The macro-economic
indicators are at present the best in the history of independent India with high growth, healthy
foreign exchange reserves, and foreign investment and robust increase in exports and low
inflation and interest rates. The unique feature of Indian economy has been high growth with
stability. The Indian economy has proved its strength and resilience when there have been crisis
in other parts of the world including in Asia in recent years.
Overview: India

Capital: New Delhi

Located in South Asia, India is the seventh largest, and the second most populous country in the
world. Home to the Indus Valley civilization and known for its historic trade routes and vast
empires, India is recognized for its commercial and cultural wealth. It is the centre of
amalgamation of many religions and ethnicities which have shaped the country's diverse
culture. Colonized by the United Kingdom from early eighteenth century, India became a
modern nation state in 1947, after a struggle for independence that was remarkable for its
largely non-violent resistance and is the most populous democracy in the world today.

Geographic Coordinates: 20 00 N, 77 00 E

Border Countries: Afghanistan and Pakistan to the north-west; China, Bhutan and Nepal to the
north; Myanmar to the east; and Bangladesh to the east of West Bengal.

Coastline: 7,516.6 km encompassing the mainland, Lakshadweep Islands, and the Andaman &
Nicobar Islands

Climate: Mainly tropical in southern India but temperatures in the north range from sub-zero
degrees to 50 degrees Celsius. There are well-defined seasons in the northern region: winter
(Dec - Feb), Spring (Mar - Apr), Summer (May - Jun), Monsoons (Jul - Sep) and Autumn (Oct -
Nov).

Area: total: 3,287,590 sq km

Land: 2,973,190 sq km

Water: 314,400 sq km
Natural Resources: Coal (fourth largest reserves in the world), iron ore, manganese, mica,
bauxite, titanium ore, chromites, natural gas, diamonds, petroleum, limestone, arable land.

Land Use: arable land: 48.83 percent

Irrigated Land: 60.2 million hectares (2005-06)

Political Profile:

Political System and Government:

The 1950 Constitution provides for a parliamentary system of Government with a bicameral
parliament and three independent branches: the executive, the legislature and the judiciary. The
country has a federal structure with elected governments in States.

Administrative Divisions: 28 States and 7 Union Territories

Constitution: The Constitution of India came into force on 26th January 1950

Executive Branch: The President of India is the Head of State, while the Prime Minister is the
Head of the government and runs office with the support of the Council of Ministers who form
the Cabinet.

Legislative Branch: The Federal Legislature comprises of the Lok Sabha (House of the
People) and the Rajya Sabha (Council of States) forming both the Houses of the Parliament.

Judicial Branch: The Supreme Court of India is the apex body of the Indian legal system,
followed by other High Courts and subordinate Courts.
Chief of State: President Mrs Pratibha Patil (since 25 July 2007)

Head of Government: Prime Minister Dr Manmohan Singh (since 22 May 2009)

Demographic profile:

Population: 1,166,079,217 (July 2009 est.)

Population Growth Rate: 1.548 per cent (2009 est.)

Ethnic Groups: Indo-Aryan 72 per cent, Dravidian 25 per cent, Mongoloid and other 3 per
cent (2000)

Religions: Hindu 80.5 per cent, Muslim 13.4 per cent, Christian 2.3 per cent, Sikh 1.9 per cent,
other 1.8 per cent, unspecified 0.1 per cent (2001 census)

Languages: Apart from Hindi, which is the Official Union Language and mother tongue of 30
per cent of the people, there are 21 other official languages. English is the preferred language
for national, political, and commercial communication.

Literacy: Total population: 64.8 per cent (2001 census)

Male: 75.3 per cent

Female: 53.7 per cent

Suffrage: 18 years of age; universal

Economic Profile:

Indian Economy

India's diverse economy comprises conventional village farming as well as modern agriculture,
a wide range of modern industries and a large number of services and handicrafts. Services are
the chief source of economic growth, accounting for more than half of India's output with less
than one third of its labour force. The economy has registered an average growth rate of more
than 7 per cent since 1997, reducing poverty by about 10 per cent. India achieved 9.6 per cent
GDP growth in 2006, 9.0 per cent in 2007, and 6.6 per cent in 2008, significantly expanding
manufactures through late 2008. India's chief strength comes from its large numbers of well-
educated, skilled people, adept in the English language, helping India to become a major
exporter of software services and software workers.

According to the Economic Survey 2008-09, following are the key indicators:

GDP at Factor Cost (constant prices-1999-2000) in 2008-09: 753.61 billion

GDP at Factor Cost (current prices) in 2008-09: US$ 111,112 (revised est.)

Per Capita Income (constant prices) in 2008-09: US$ 653.13

GDP Composition by Sector:

Services: 56 per cent,

Agriculture: 18.5 per cent

Industry: 22 per cent

Forex Reserves: US$ 264.5 billion (in the week ended June 26, 2009)
Labour Force: 523.5 million (2008 est.)

Investment (gross fixed): 39 per cent of GDP (2008 est.)

Industrial Production Growth Rate: 4.8 per cent (2008 est.)

Exports: US$ 156597 million (April-February 2008-09 est.)

Exports Commodities: Mineral fuels, petroleum products, gems and jewellery, iron and steel,
organic chemicals, nuclear reactors, heavy machinery.

Export Partners: US 12.71 per cent, UAE 9.59 per cent, China 6.64 per cent, Singapore 4.52
per cent, UK 4.11 per cent (2007-08)

Currency (code): Indian rupee (INR)

Exchange Rates: Indian rupees per US dollar - 1 USD = 47.90 INR (June 30, 2009)

Fiscal Year: 1 April - 31 March

Cumulative FDI Inflows: US$ 108,863 million (August 1991 to April 2009)

Top Investing Countries: Mauritius, Singapore, U.S.A, U.K, Netherlands, Japan, Germany,
Cyprus, France and U.A.E.

Top Sectors Attracting Highest FDI Inflows: Services Sector, Computer Hardware and
Software, Telecommunications, Construction Activities & Housing and Real Estate.

Transportation in India

Airports: 454
International Airports: Ahmadabad, Amritsar, Bangalore, Chennai, Goa, Guwahati,
Hyderabad, Kochi, Kolkata, Mumbai, New Delhi, Thiruvananthapuram.

Railways: total: 63,221 km (2006)

Roadways: total: 3,316,452 km

Waterways: 14,500 km (2008)

Major Ports of Entry: Chennai, Ennore, Haldia, Kolkata, Kandla, Kochi, Mormugao,
Mumbai, New Mangalore, Paradip, Tuticorin and Vishakhapatnam.
The Structure of Government of India:

The union government, as India's central government is known, is divided into three distinct but
interrelated branches: legislative, executive, and judicial. As in the British parliamentary model,
the leadership of the executive is drawn from and responsible to the legislative body. Although
Article 50 stipulates the separation of the judiciary from the executive, the executive controls
judicial appointments and many of the conditions of work. In addition, one of the more
dramatic institutional battles in the Indian polity has been the struggle between elements
wanting to assert legislative power to amend the constitution and those favoring the judiciary's
efforts to preserve the constitution's basic structure.

The Indian Legislature

Parliament consists of a bicameral legislature, the Lok Sabha (House of the People--the lower
house) and the Rajya Sabha (Council of States--the upper house). Parliament's principal
function is to pass laws on those matters that the constitution specifies to be within its
jurisdiction. Among its constitutional powers are approval and removal of members of the
Council of Ministers, amendment of the constitution, approval of central government finances,
and delimitation of state and union territory boundaries .

The president of India has a specific authority with respect to the function of the legislative
branch . The president is authorized to convene Parliament and must give his assent to all
parliamentary bills before they become law. The president is empowered to summon Parliament
to meet, to address either house or both houses together, and to require attendance of all of its
members. The president also may send messages to either house with respect to a pending bill
or any other matter. The president addresses the first session of Parliament each year and must
give assent to all provisions in bills passed.
According to its constitution , India is a "sovereign, socialist, secular, democratic republic."
India has a federal form of government. However, the central government in India has greater
power in relation to its states, and its central government is patterned after the British
parliamentary system.

The government exercises its broad administrative powers in the name of the president, whose
duties are largely ceremonial. The president and vice president are elected indirectly for 5-year
terms by a special electoral college. Their terms are staggered, and the vice president does not
automatically become president following the death or removal from office of the president.

Real national executive power is centered in the Council of Ministers (cabinet), led by the prime
minister. The president appoints the prime minister, who is designated by legislators of the
political party or coalition commanding a parliamentary majority. The president then appoints
subordinate ministers on the advice of the prime minister.

India's bicameral parliament consists of the Rajya Sabha (Council of States) and the Lok Sabha
(House of the People). The Council of Ministers is responsible to the Lok Sabha.

The legislatures of the states and union territories elect 233 members to the Rajya Sabha, and
the president appoints another 12. The elected members of the Rajya Sabha serve 6-year terms,
with one-third up for election every 2 years. The Lok Sabha consists of 545 members; 543 are
directly elected to 5-year terms. The other two are appointed.

India's independent judicial system began under the British, and its concepts and procedures
resemble those of Anglo-Saxon countries. The Supreme Court consists of a chief justice and 25
other justices, all appointed by the president on the advice of the prime minister.
India has 28 states and 7 union territories. At the state level, some of the legislatures are
bicameral, patterned after the two houses of the national parliament. The states' chief ministers
are responsible to the legislatures in the same way the prime minister is responsible to
parliament.

Each state also has a presidentially appointed governor who may assume certain broad powers
when directed by the central government. The central government exerts greater control over
the union territories than over the states, although some territories have gained more power to
administer their own affairs. Local governments in India have less autonomy than their
counterparts in the United States. Some states are trying to revitalize the traditional village
councils, or panchayats, which aim to promote popular democratic participation at the village
level, where much of the population still lives.
The Constitution of India

It is passed by the Constituent Assembly on November 26, 1949, and came into effect on
January 26, 1950. Constitution lays down the framework of India defining fundamental political
principles, establishing the structure, procedures, powers and duties, of the government and
spells out the fundamental rights, directive principles and duties of citizens. It declares the
Union of India to be a sovereign, democratic republic, assuring its citizens of justice, equality,
and liberty.

Structure of the Constitution

The Constitution, in its current form, consists of a preamble, twenty-two parts containing three
hundred and ninety five articles, twelve schedules, ninety-four amendments, and five
appendices.

Parts

Parts are the individual chapters in the Constitution, focused in single broad field of laws,
containing articles that addresses the issues in question.

 Part I - Union and its Territory
 Part II - Citizenship.
 Part III - Fundamental Rights.
 Part IV - Directive Principles and
Fundamental Duties.
 Part V - The Union.
 Part XII - Finance, Property, Contracts and
Suits
 Part XIII - Trade and Commerce within the
territory of India
 Part XIV - Services Under the Union, the
States and Tribunals
  Part VI - The States.
 Part VII - States in the B part of the
First schedule (Repealed).
 Part VIII - The Union Territories
 Part IX - Panchayat system and
Municipalities.
 Part X - The scheduled and Tribal
Areas
 Part XI - Relations between the
Union and the States.
 Part XV - Elections
 Part XVI - Special Provisions Relating to
certain Classes.
 Part XVII - Languages
 Part XVIII - Emergency Provisions
 Part XIX - Miscellaneous
 Part XX - Amendment of the Constitution
 Part XXI - Temporary, Transitional and
Special Provisions
 Part XXII Short title, date of commencement,
Authoritative text in Hindi and Repeals.
 Part XXIII - Temporary, Transitional and
Special Provisions
 Part XXIV - Temporary, Transitional and
Special Provisions

Schedules

Schedules are lists in the Constitution that categorizes and tabulates bureaucratic activity and
policy of the Government.

 First Schedule — States and Union Territories; (lists the states and territories on of India)
 Second Schedule — Emoluments for High-Level Officials (lists the salaries of officials
holding public office, judges and Comptroller and Auditor-General of India.)
 Third Schedule — Forms of Oaths ( lists the oaths of offices for elected officials and
judges.)
 Fourth Schedule — Allocation of the number of seats in the Rajya Sabha (Council of
States - the upper house of Parliament) per State or Union Territory;
 Fifth Schedule — Provisions for the administration and control of Scheduled Areas and
Scheduled Tribes (areas and tribes needing special protection due to disadvantageous
conditions);
 Sixth Schedule — Provisions for the administration of tribal areas in Assam;
 Seventh Schedule — The Union (central government), State, and Concurrent (dual) lists
of responsibilities;
 Eighth Schedule — The Official Languages;
 Ninth Schedule — Article 31B- (land and tenure reforms; the accession of Sikkim with
India);The Courts can review this
 Tenth Schedule — Anti-Defection provisions for Members of Parliament and Members
of the State Legislatures;
 Eleventh Schedule — Panchayat
 Twelfth Schedule — Municipality (Urban Planning)
Fundamental Duties of India:

Fundamental Duties of India are guaranteed by the Constitution of India in Part IV. These
duties are identified as the moral obligations and help in promoting the spirit of patriotism and
to uphold the unity of the country. These duties are designed concerning the individuals and the
nation. However, these fundamental duties are not legally enforceable. Furthermore, the citizens
are morally obligated by the constitution to perform these duties.

The Fundamental Duties were added by the 42nd Amendment Act in 1976. Article 51-A of the
constitution provides ten Fundamental Duties of the citizen. These duties can be classified
accordingly as concerning the environment, duties towards the State and duties towards the
nation and also duties towards self. However, these are non-justiciable, incorporated only with
the purpose of promoting patriotism among citizens.

The international instruments such as the Universal Declaration of Human Rights and
International Covenant on Civil and Political Rights include reference of such duties. These
Fundamental Duties are such obligations that extend not only to the citizens, but also to the
State. According to the Fundamental Duties all citizens should respect the national symbols of
India and also the constitution. The fundamental duties of the land also aim to promote the
equality of all individuals, protect the environment and public property, to develop scientific
temper, to abjure violence, to strive towards excellence and to provide free and compulsory
education. In addition to that, the 11th Fundamental Duty, states that every citizen "who is a
parent or guardian, to provide opportunities for education to his child or, as the case may be,
ward between the age of six and fourteen years" was added by the 86th constitutional
amendment in 2002.
Fundamental duties of India include

 To abide by the Constitution and respect its ideals and institutions, the National Flag and the
National Anthem;

 To cherish and follow the noble ideals which inspired our national struggle for freedom;

 To uphold and protect the sovereignty, unity and integrity of India;

 To defend the country and render national service when called upon to do so;

 To promote harmony and the spirit of common brotherhood amongst all the people of India
transcending religious, linguistic and regional or sectional diversities; to renounce practices
derogatory to the dignity of women;

 To value and preserve the rich heritage of our composite culture;

 To protect and improve the natural environment including forests, lakes, rivers and wild life,
and to have compassion for living creatures;

 To develop the scientific temper, humanism and the spirit of inquiry and reform;

 To safeguard public property and to abjure violence;

 To strive towards excellence in all spheres of individual and collective activity so that the
nation constantly rises to higher levels of endeavor and achievement.
Indian Economy Overview

India has been one of the best performers in the world economy in recent years, but rapidly
rising inflation and the complexities of running the world’s biggest democracy are proving
challenging.

India’s economy has been one of the stars of global economics in recent years, growing 9.2% in
2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI,
rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital
market.

Like most of the world, however, India is facing testing economic times in 2008. The Reserve
Bank of India had set an inflation target of 4%, but by the middle of the year it was running at
11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed
for India’s construction boom are all playing a part.

India has to compete ever harder in the energy market place in particular and has not been as
adept at securing new fossil fuel sources as the Chinese. The Indian Government is looking at
alternatives, and has signed a wide-ranging nuclear treaty with the US, in part to gain access to
nuclear power plant technology that can reduce its oil thirst. This has proved contentious
though, leading to leftist members of the ruling coalition pulling out of the government.

As part of the fight against inflation a tighter monetary policy is expected, but this will help
slow the growth of the Indian economy still further, as domestic demand will be dampened.
External demand is also slowing, further adding to the downside risks.

The Indian stock market has fallen more than 40% in six months from its January 2008 high.
$6b of foreign funds have flowed out of the country in that period, reacting both to slowing
economic growth and perceptions that the market was over-valued.

It is not all doom and gloom, however. A growing number of investors feel that the market may
now be undervalued and are seeing this as a buying opportunity. If their optimism about the
long term health of the Indian economy is correct, then this will be a needed correction rather
than a downtrend.

The Indian government certainly hopes that is the case. It views investment in the creaking
infrastructure of the country as being a key requirement, and has ear-marked 23.8 trillion
rupees, approximately $559 billion, for infrastructure upgrades during the 11th five year plan. It
expects to fund 70% of project costs, with the other 30% being supplied by the private sector.
Ports, airports, roads and railways are all seen as vital for the Indian Economy and have been
targeted for investment.

Further hope comes from the confidence of India’s home bred companies. As well as taking
over the domestic reins, where they now account for most of the economic activity, they are
also increasingly expanding abroad. India has contributed more new members to the Forbes
Global 2000 than any other country in the last four years.
Economy of India

Currency 1 Indian Rupee (INR) ( ) = 100 Paise

Fiscal year April 1–March 31

Trade
WTO, SAFTA
organisations

Statistics

GDP $1.209 trillion (2008 est.)[1]

GDP growth 6.7% (2009)[2]

GDP per capita $1016 [3]

agriculture: 17.2%, industry: 29.1%, services: 53.7% (2008

GDP by sector
est.)

Inflation (CPI) 7.8% (CPI) (2008)

Population

below poverty 27.5% (2005)[4]

line
Labour force 523.5 million (2008 est.)

Labour force
agriculture: 60%, industry: 12%, services: 28% (2003)
by occupation

Unemployment 6.8% (2008 est.)

textiles, chemicals, food processing, steel, transportation

Main industries
equipment, cement, mining, petroleum, machinery, software

External

Exports $175.7 billion f.o.b (2008 est.)

petroleum products, textile goods, gems and jewelry,

Export goods
engineering goods, chemicals, leather manufactures

Main export US 15%, the People's Republic of China 8.7%, UAE 8.7%, UK

partners 4.4% (2007)

Imports $287.5 billion f.o.b. (2008 est.)

Import goods crude oil, machinery, gems, fertilizer, chemicals

Main import People's Republic of China 10.6%, US 7.8%, Germany 4.4%,

partners Singapore 4.4%

Public finances

Public Debt $163.8 billion (2008)

Revenues $153.5 billion (2008 est.)

Expenses $205.3 billion (2008 est.)

Recent Growth Trends in Indian Economy

India’s Economy has grown by more than 9% for three years running, and has seen a decade of
7%+ growth. This has reduced poverty by 10%, but with 60% of India’s 1.1 billion population
living off agriculture and with droughts and floods increasing, poverty alleviation is still a
major challenge.

The structural transformation that has been adopted by the national government in recent times
has reduced growth constraints and contributed greatly to the overall growth and prosperity of
the country. However there are still major issues around federal vs state bureaucracy, corruption
and tariffs that require addressing. India’s public debt is 58% of GDP according to the CIA
World Fact book, and this represents another challenge.

During this period of stable growth, the performance of the Indian service sector has been
particularly significant. The growth rate of the service sector was 11.18% in 2007 and now
contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29%
of GDP. Agriculture is 17% of the Indian economy.

Growth in the manufacturing sector has also complemented the country’s excellent growth
momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to
12% in 2006. The storage and communication sector also registered a significant growth rate of
16.64% in the same year.
Additional factors that have contributed to this robust environment are sustained in investment
and high savings rates. As far as the percentage of gross capital formation in GDP is concerned,
there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year
2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from
23.5% to 34.8% for the same period.

The Important Sectors of Indian Economy

Agriculture

More than 58% of country's population depends on agriculture, a sector producing only 22% of
GDP. The agriculture and allied sector witnessed a growth of 9.1% in 2003-04, which fell
steeply to 1.1% in the current fiscal year. Favourable monsoon facilitated an impressive growth
rate of 9.6% in 2003-04 on the back of negative growth in the preceding year. However,
deficient rainfall from the southwest monsoon is estimated to have caused a significant decline
in kharif crops production in the current year.

While looking at some of the agricultural products, one finds that India is the largest producer
of Tea, jute and jute like fibre. India is not only the largest producer but also largest consumer
of tea in the world. India accounts for around 14% of the world trade in tea. Indian tea is
exported in various forms such as bulk tea, packet tea, tea bags, instant tea etc, to more than 80
countries of the world. Among livestock cattle and buffalo are found maximum in India. Indian
total milk production is highest in the world. India has also the privilege of having the 1st rank
in total irrigated land in area terms in the world. Among cereals production, India is placed
third, having second largest production in wheat and rice and the largest production in pulses.
However, the full potential of Indian agriculture as a profitable activity hasn't been realized yet.
Agriculture upliftment will not only benefit farmers and a large section of the rural poor, but
also will give fillip to overall growth of the economy through the backward and forward
linkages of agriculture with the rest of the economy.

Priority must be given to livestock's & fisheries, horticulture, organic farming, commercial
crops and agro-processing, as these are the potential areas of high growth. Further,
rationalization of minimum support price regime and introduction of other risk- mitigation
measures, improvements in rural infrastructure are essential for sustaining high agricultural
growth. It is conceived that reforms in legislations, strengthening R&D and improvements in
post harvest management technologies will give a further boost to Indian agriculture. While
acceleration in agriculture growth to 4 - 4.5% is imperative, even with such growth rate; share
of agriculture in total GDP is likely to reduce further. Therefore, there is a need to absorb excess
agricultural labour in other sectors, notably industry. Rapid growth of agro - processing industry
close to the agricultural production centers can bring about this shift without moving people
from rural to urban areas. Also, public investment in agriculture needs to be augmented,
especially in rural infrastructure, irrigation, and agricultural research & development. Better
access to institutional credit for more farmers, is also high on priority list. The New trade policy
gives focus to agriculture and all the hurdles in Indian agriculture will be crossed gradually.

Industry

Index of industrial production which measures the overall industrial growth rate was 10.1% in
October 2004 as compared to 6.2% in October 2003. The double digit in IIP was aided by a
robust growth of 11.3% in the manufacturing sector followed by mining and quarrying and
electricity generation. But industrial production saw a decline in Dec 2004 when IIP dipped to 8
%. Thus one of the critical challenges facing Indian economic policy consists in devising
strategies for sustained industrial growth. Final phase-out of the MFA and India's conformity
with the international intellectual property system from Jan 1st Jan 2005, have been two
significant developments in the world of commerce & industry.

Textile Industry is the largest industry in terms of employment economy from the current US
$37 billion to $ 85 billion by 2010 creation of 12 million new jobs in the textile sector and
modernization & consolidation for creating a globally competitive textile industry. With the
phasing out of quota regime under MFA, from Jan 1st 2005, developing countries including
India with both textile & clothing capacity may be able to prosper.

Automobile sector has demonstrated the inherent strengths of Indian labour and capital. The
pharma industry and the IT industry are two sunrise sectors for India. Among the sectors that
have experienced the greatest transformation in India, the pharmaceutical is perhaps the most
significant.

India's WTO involvement during the last decade has encouraged our pharma companies to
adopt a strategy of R & D based innovative growth. Indian pharma exports were 14000 crore
Rupees & accounts for more than a third of the industry's turnover. Apart from manufacture of
drugs, the pharma industry offers huge for outsourcing of clinical research. A vast pool of
scientific and technical personnel & recognized expertise in medical treatment & health care are
India's strength, India can take advantages of its strength once patent protection is given to the
result of the researches. By participating in the international system of intellectual property
protection, India unlocks for herself vast opportunities in both exports as well as her potential to
become a global hub in the area of R & D based clinical research outsourcing, particularly in
the area of bio-technology. The three main sub sectors of industry viz Mining & quarrying,
manufacturing, and electricity, gas & water supply recorded growths of 5%, 8.8% and 7.1%
respectively.
Apart from infrastructure, particularly adequate and reliable power supply at reasonable cost
and transportation facilities, there is need for stepped up investment in manufacturing. Industry
needs to grow rapidly not only to boost the overall growth rate in the economy but also to
generate gainful employment for the existing unemployed, as well as the new entrants. In a
diverse range of industrial activities, several Indian firms have succeeded in getting integrated
into global production chains and realized rapid growth of exports. This experience suggests
that with appropriate scale, investment and technology, rapid industrial growth is indeed
possible.

Services

Service sector has maintained a steady growth pattern since 96-97, except into a fall in 2000-01.
Trade hotels, transport & communications have witnessed the highest growth of level 10.9% in
2004, followed by financial services (With a overall growth rate of (6.4) % and community,
social & personal services (5.9)% of all the three sectors, services have been the highest
contributor to total GDP growth rate.

While in most parts of the developed world, the services sector's share of employment rose
faster than its share of output in India there has been a relatively slow growth of jobs in the
service sector. This is primarily because of the rise in labour productivity in services in sectors
such as information technology that is dependent on skilled labour. Growth in tourism and
tourism - related services such as hotels, holds a large potential for employment generation.

IT enabled services, such as Business Process Outsourcing have been growing rapidly in the
recent past and will continue to rise. India's large number of English speaking skilled manpower
has made India a major exporter of software services and software workers. However, the
emergence of somewhat inexplicable protectionist tendencies in some developed countries is a
disturbing trend. At the same time it is important that India sees BPO in a larger perspective,
than the Internet, as India's share is just $ 3.5 billion in December 2004 compared to the global
market of US $ 178 billion. Also India outsourcing companies need to work more closely with
their customers. In the complex BPOs, customers would like to have hybrid processes to control
value. Indian companies need the right mix of domain expertise and process expertise,
further,mere knowledge of English is not sufficient; management skills are also needed.
Education for the offshoring industry needs to be given impetus too.

The beginning of New Year saw Tsunami, a worst ever disaster, which killed thousands of
people in India, Sri Lanka, Indonesia & Thailand. Many of them were international tourists. The
disaster was expected to have a negative impact on India's tourism in terms of large-scale
cancellations of tourists to India but nothing of that sort was seen. In fact, tourist arrivals in
India rose 23.5 percent in Dec 2004 and tourist arrivals crossed 3 million mark for the first time
in 2004.

Infrastructure

The road transport sector has been declared a priority and will have access to loans at favorable
conditions. The Monopoly and Restrictive Trade Practices Act (MRTP Act) was passed in order
to encourage large industry to enter the road sector.

The National Highways Act has been modified to help the reduction of tolls on national
motorways, bridges and tunnels. Calcutta's Howrah Bridge is the world's busiest with a daily
flow of 57,000 vehicles and innumerable pedestrians. Private participation in the energy sector
has been encouraged with the reduction of import duties, a five-year tax exemption for new
energy projects and a 16% return on equity.

The government is also following a new telecommunications policy that aims for the
improvement of quality to a worldwide standard and, as a result, India could emerge as a major
producer and exporter of telecommunication systems. Advantageous policies in this sector are
encouraging private and foreign participation.

India's Five Year Plans:

For the smooth functioning of any economy, planning plays an important role. The Planning
Commission has been entrusted with the responsibility of the creation, development and
execution of India's five year plans. India's five year plans are also supervised by the Planning
commission.

Currently, the 11th Five Year Plan, is underway. India's 10th Five Year Plan, ended its tenure in
the month of March, 2007.

An overview of India's Five Year Plans:

1st Five Year Plan Of India(1951 to 1956):

The 1st five year plan was presented by Jawaharlal Nehru, who was the Prime Minister during
that period. It was formulated for the execution of various plans between 1951 to 1956. The
Planning Commission was responsible for working out the plan.

Objectives of the 1st five year plan:

The primary aim of the 1st five year plan was to improve living standards of the people of
India. This could be done by making judicious use of India's natural resources. The total outlay
of the 1st five year plan was worth Rs.2,069 crore. This amount was assigned to different
sectors which included:
Industrial sector
Energy, Irrigation
Transport, Communications
Land rehabilitation
Social services
Development of agriculture and community
Miscellaneous issues The target set for the growth in the gross domestic product was
2.1percent every year. In reality, the actual achieved with regard to gross domestic product was
3.6 percent per annum. This is a clear indication of the success of the 1st five year plan.

Some important events that took place during the tenure of the 1st five year plan:

The following Irrigation projects were started during that period:

Mettur Dam
Hirakud Dam
Bhakra Dam.
The government had taken steps to rehabilitate the landless workers, whose main occupation
was agriculture. These workers were also granted fund for experimenting and undergoing
training in agricultural know how in various cooperative institutions. Soil conservation, was
also given considerable importance.
The Indian government also made considerable effort in improving posts and telegraphs,
railway services, road tracks, civil aviation.
Sufficient fund was also allocated for the industrial sector. In addition measures were taken
for the growth of the small scale industries.
2nd Five Year Plan Of India(1956 to 1961):

With India's five year plans the country has attained a more or less stable economic setup down
the years. The 1st five year plan ended in the year 1956. The 2nd five year plan was effective
from 1956 to 1961.

Objectives of the 2nd five year plan (1956 to 1961): Industries got more importance in the 2nd
five year plan. The focus was mainly on heavy industries. The Indian government boosted
manufacturing of industrial goods in the country. This was done primarily to develop the public
sector.

Mahalanobis Model:

The 2nd year five year plan, functioned on the basis of Mahalanobis model. The Mahalanobis
model was propounded by the famous Prasanta Chandra Mahalanobis in the year 1953. His
model addresses different issues pertaining to economic development.

Assumptions made by the Mahalanobis model:

According to this model, it is assumed that the economy is closed and has two segments.

1. Segment of consumption goods

2. Segment of capital goods.

Capital goods cannot be moved or are “non shiftable”.

Production is at its peak.
Depending on the availability of capital goods, investments are decided upon.
Capital is the scarce factor.
 Capital goods production is not influenced by consumer goods production. By following the
Mahalanobis model, the then government wanted that there should be optimum assignment of
the fund among the various productive segments. This was aimed with a view to achieve
maximum returns on a long term basis.

As many as five steel plants including the ones in Durgapur, Jamshedpur as well as Bhilai were
set up as per the 2nd five year plan. Hydroelectric power plants were formed during the tenure
of the 2nd five year plan. There was considerable increase in production of coal. The North
eastern part of the country, witnessed increase in the number of railway tracks.

During the term of the 2nd five year plan, Atomic Energy Commission came into being. The
Commission was established in the year 1957. During the same period, Tata Institute of
Fundamental Research was born. The institute conducted several programs to search for
talented individuals. These individuals would eventually be absorbed into programs related to
nuclear power.

3rd Five Year Plan Of India(1961 to 1966):

India's 1st and 2nd five year plans paved the way for the 3rd five year plan, the term of this plan
being from the year 1961 to 1966. Five year plans were introduced by the Indian government,
so that people could make the optimum use of the resources better their living standards.
Effective usage of the resources would eventually ensure an enhancement in output.
Main events of the 3rd five year plan (1961 to 1966):

1. 3rd five year plan laid considerable stress on the agricultural sector. However, with the short
lived Sino Indian War of 1962 India diverted its attention to the safety of the country. Again,
during the period 1965 to 1966, owing to Green Revolution, once again agriculture attracted
attention.

2. Due to the Sino Indian War, India witnessed increase in price of products. The resulting
inflation was cost push in nature. Many dams were constructed during this period. It may be
recalled, that when the 1st five year plan was tabled, construction of Hirakud dam, Mettur dam
and Bhakra dam had taken place. Along with dams, India got many fertilizer plants and cement
making plants. Abundant production of wheat took place in Punjab.

3. When the 1st five year plan was introduced people were slightly apprehensive about the
success of the plan. So, when it was discovered that the 1st and the 2nd five year plans were
successful, people pinned their hopes on the next five year plan.

4. Role of the states increased and they were given more prominence. Many primary schools
had started functioning in the village areas. Various bodies looking into matters related to
secondary education were also formed. To promote democracy, there was commencement of
the Panchayat elections.

5. There was formation of state electricity boards. The state governments were entrusted with
the responsibility of constructing roads.
Objectives of the 3rd five year plan:

In addition to the above measures and proposals, the Planning Commission aimed at the
following:
Increasing the national income by 5 percent per annum.
Making India self sufficient by increasing agricultural production. This step was taken to
ensure that India does not have to bank on others for food products.
Minimizing rate of unemployment.
Ensuring that people enjoy equal rights in the country.

4th Five Year Plan Of India(1969 to 1974):

The 4th five year plan of India also served as a stepping stone for the economic growth. The
following section will highlight the main events that had taken place under the 4th five year
plan.

Main events of the 4th five year plan(1969 to 1974):

1. India had to reform and restructure its expenditure agenda, following the attack on India in
the year 1962 and for the second time in the year 1965. India had hardly recuperated when it
was struck by drought. India also had a stint of recession. Due to recession, famine and drought,
India did not pay much heed to long term goals. Instead, it responded to the need of the hour. It
started taking measures to overcome the crisis.

2. Food grains production increased to bring about self sufficiency in production. With this
attempt, gradually a gap was created between the people of the rural areas and those of the
urban areas.
3. The need for foreign reserves was felt. This facilitated growth in exports. Import substitution
drew considerable attention. All these activities widened the industrial platform.

5th Five Year Plan Of India(1974 to 1979):

The 5th Five Year Plan commenced on 1974 and extended till 1979. Objective of the Fifth Year
Plan The objective of the 5th Five Year Plan was to increase the level of employment, reduce
poverty and to attain self sufficiency in agriculture.

Backdrop of the 5th Five Year Plan

The world economy was in a troublesome state when the fifth five year plan was chalked out.
This had a negative impact on the Indian economy. Prices in the energy and food sector
skyrocketed and as a consequence inflation became inevitable. Therefore, the priority in the
fifth five year plan was given to the food and energy sectors . In the later stages the increase in
the supply of food grains and the export of minerals and oil reserve earned quite a good amount
of foreign exchange to the Indian Economy.

Contents of the 5th Five Year Plan

The 5th Five Year Plan was laid out during a crisis period to overcome the impediments posed
by the wavering economic condition. The 5th Five Year Plan was designed in a way to meet the
needs of the time. The issues that were emphasised were:
Reducing the discrepancy between the economic development at the regional, national,
international level. It emphasized on putting the economic growth at par with each other.
Improving the agricultural condition by implementing land reform measures.
 Improving the scope of self-employment through a well integrated program.
Reducing the rate of unemployment both in the urban and the rural sectors.
Encouraging growth of the small scale industries.
Enhancing the import substitution in the spheres including chemicals, paper, mineral and
equipment industries.
Applying policies pertaining to finance and credit in the industrial sector.
Stressed on the importance of a labour intensive production technology in India.

6th Five Year Plan Of India(1980 to 1985):

6th Five Year Plan is also referred to as the Janata Government Plan and it was revolutionary
since it marked a change from the Nehruvian model of Five Year Plans. The sixth five year plan
has changed a lot of things in India. On one hand it had improved the tourism industry in India
and on the other hand it aimed at development in the Information Technology sector.

Issues within the 6th Five Year Plan

The 6th Five Year Plan started from 1980 and covered a timespan of another five years that is
till 1985. During this time the Prime Minister was Rajiv Gandhi and hence industrial
development was the emphasis of this plan. His idea about the betterment of the industrial
sector was welcomed by some and opposed by lot others specially the communist groups. Even
the workers who were more inclined towards the leftist ideology were not much convinced.
This slowed down the pace of progress.
Transport and Communication System

The transport and communication system also improved under this Plan. The National
Highways were all built during this time . Apart from the construction of new highways, the
condition of the roads were meliorated. This helped in the betterment of the traffic system in
India. During this time the Indian currency was devalued and this led to a dramatic increase in
the number of foreign travelers in India thus helping India to become a tourist destination.

New Introduction on the Economic Front

Economic Liberalization was introduced for the first time in India during this period. Ration
shops were closed because government no more produced articles at a subsidized rate. Price
control measures were no more useful. As a consequence the prices of various goods increased
leading to growth in the standard of living of the residents of India.

Measures Against Population Explosion

Family Planning was implemented for the first time in India . Family Planning helped to create
awareness among the Indians regarding population. However, this measure to control
population was not accepted across India. It was readily accepted by the people residing in the
developed areas of the country but the mass of the less developed areas refused to accept the
plan and never implemented it.

7th Five Year Plan Of India(1985 to 1989):

7th Five Year Plan which covered a time span of another five years started on 1985 and went on
till 1989. This Five Year Plan was the come back vehicle of the Indian National Congress Party
into power. The primary aim of the five year plan was to upgrade the industrial sector and
enable India to establish itself as one of the developed countries of the world. This Plan was
released under the National Development Council of India.

Objective of the 7th Five Year Plan

The objective of the 7th Five Year Plan was to generate more scope of employment for the
people of India, to produce more in terms of food which would lead to an overall increase in
productivity.

Backdrop of the 7th Five Year Plan

The 7th Five Year Plan started off on a string ground since the foundation for economic
development was laid by the 6th Five Year Plan. The Sixth Five Year Plan had already paved
the way for economic development by increasing the production in the agricultural and
industrial sector, curbing the rate of inflation and maintaining a balance in the transaction of
goods, services and money. Therefore, the 7th Five Year Plan had a strong base on which it
could built the superstructure of industrial development for the betterment of India's economic
position. This plan strove to achieve socialism and expand the production of energy.

Contents of the 7th Five Year Plan

The basic issues on which this plan put stress were:

Introduction and application of modern technology
Justice meted out to people from various social stratas
Improving the position of the weak in the Indian society
Development of agriculture
Reducing poverty in India
Assuring the essentials of food, shelter and clothing to the people
 Striving to achieve independence as per the Indian economy is concerned
Help the small as well as the large farmers to increase their productivity This time Indian
government was adamant to achieve self-sufficiency in the economic and production sector.
They endeavored to develop on the factors that ensure a persistent growth in the economy. The
rate of employment was anticipated to rise by 4% every year and the labor force was anticipated
to grow by 39 million at the end of fifth year.

Overall improvement was the aim of the 7th Five Year Plan. Therefore care was taken to
establish a harmony in all the sectors that are contained in an economy. Special care was taken
to spread education among girls, enhance telecommunication within the country. The
government of India also strove to maintain a balance in the economy and by striking a balance
within export and import.

8th Five Year Plan Of India(1992 to 1997):

8th Five Year Plan commenced on 1992 and carried on till 1997. The basic objective of this
period was the modernization of industrial sector. This plan focused on technical development.
Through this plan the reduction of deficit and foreign debt was aimed at. The rectification of
certain flawed plans and policies were also done under this five year plan. During this period
only India received a coveted opportunity to become a member of the World Trade
Organization on January 1st 1995.
Agricultural Activities During this Period

Agriculture happens to be the largest contributor to the GDP of India. In fact two third of the
work force was dependent on agriculture. Industries also made use of agricultural produce as
inputs in their production process.

Self-Sufficiency in Agricultural Production

Self-sufficiency in agricultural production was a top priority during India's eighth Five Year
Plan since most of the population depended on that. Production of food increased to 176.22
million from 51 million which was a huge leap in comparison to the previous years.

Analysis of the Eighth Five Year Plan

Plan Investment as Current Account Domestic Foreign Capital GDP Growth Per
a % of Deficit as % of Savings as a Inflow as a % of Annum(Target
GDP(Target GDP(Target rate) % of GDP(Target rate)
rate) GDP(Target rate)
rate)
7 th 22.7 2.4 20.3 1.6 5.8
Plan
8 th 23.2 1.6 21.6 1.4 5.6
Plan

From the above table it is clear that the 7th Five Year Plan targeted a GDP growth rate of 5.8%
while the 8th Five Year Plan projected a 5.6% growth rate. The achievements show that the
GDP shot up to a whopping 6.3% during the 8th Five Year Plan and to 4.3% during the 7th Five
Year Plan. Hence the 8th five year plan had overshooted its target. The target set for the current
account deficit during the 7th Five Year Plan was fixed at 2.4% while it was set at 1.6% during
8th Five Year Plan .

Results show that the 8th Five Year Plan had been more successful in this regard as the deficit
was reduced by 0.7% in the 8th Five Year Plan and by only 0.1% in the 7th Five Year Plan.
With regard to domestic savings as a percentage of GDP the 8th Five Year Plan reached 24.4%
while in the 7th Year Plan the figure was 20.2%. As far as the contribution of the export
earnings is concerned the 8th Year Plan contributed 10.1% to the GDP while the 7th Year Plan
contributed 9.9% to the GDP. The import volume as a percentage of GDP was also more during
the 8th Five Year Plan (10.9% ) compared to the 7th Five Year Plan (10.3%). In a nutshell the
8th five year Plan was more successful in meeting its objectives as compared to the previous
five year plan.

9th Five Year Plan Of India(1997 to 2002):

Like all other Five Year Plans made so far, the 9th Five Year Plan (1997-2002) is formulated,
executed and supervised by the Planning Commission.

In the Ninth Five Year Plan period from 1997 to 2002, the recorded rate of growth was merely
5.35%. However, this economic growth rate is a percentage point lesser than the GDP growth of
6.5% targeted during this period.

Evolution of the 9th Five Year Plans: Some facts

Passed after 50 years of Indian independence, the 9th Five Year Plan was formulated to act as a
tool for solving the economic and social problems existing in the country. The Plan in fact, was
born out of the government’s realization that the latent economic reserves of the country which
were still not explored, should be utilized for the overall development and benefit of the Indian
economy in the coming five years. However, this could only be done when the Indian
government offers strong support and priority to the social spheres of the country, focusing
especially on the complete elimination of poverty.

Taking into consideration the past weaknesses, the 9th Five Year Plan endeavored to formulate
fresh actions to initiate improvement in the overall economic and social sectors of the nation.
To this effort, there was mutual contribution from the general population of India as well as the
governmental agencies. This joint private and public attempt ultimately assured development of
the Indian economy.

Primary objectives of the 9th Five Year Plan:

Each and every Five Year Plan of the Indian government is formulated, keeping in mind the
fulfillment of certain objectives. The 9th Five Year Plan is no exception. The main objective of
this Plan is to achieve the following goals:
Industrialization at a rapid pace
Reduction in poverty level
Gaining self-sufficiency on local resources
Complete employment for all countrymen
Price stabilization should be initiated to hasten up the rate of growth of the Indian economy
Control the ever-increasing rate of population
Creating an independent market, for enhancing private financial investments
Promotion of social events like conservation of specific benefits for special social groups,
female empowerment, etc.
Achieving self sufficiency in food production
Generation of equal opportunities for employment and taking steps to reduce poverty
10th Five Year Plan Of India(2002 to 2007):

The 10th Five Year Plan (2002-2007) targets at a GDP growth rate of 8% per annum. Taking
note of the inabilities of the earlier Five Years Plans, especially that of the 9th Five Year Plan,
the Tenth Five Year Plan decides to take up a resolution for immediate implementation of all
the policies formulated in the past. This amounts to making appeals to the higher government
authorities, for successful completion of their campaigns associated with the rapid
implementation of all past policies.

The primary aim of the 10th Five Year Plan is to renovate the nation extensively, making it
competent enough with some of the fastest growing economies across the globe. It also intends
to initiate an economic growth of 10% on an annual basis. In fact, this decision was taken only
after the nation recorded a consistent 7% GDP growth, throughout the past decade.

The 7% growth in the Indian GDP is considered to be considerably higher that the average
growth rate of GDP in the world. This enabled the Planning Commission of India to extend the
GDP limit further and set goals, which will drive India to become one of the best industrial
countries in the world, to be clubbed and recognized with the world’s best industrialized
nations.

Like all other Five Year Plans, the 10th Five Year Plan is also devised, executed and supervised
by the Planning Commission of India.

Chief Objectives of the 10th Five Year Plan:

The Tenth Five Year Plan proposes schooling to be compulsory for children, by the year
2003.
 The mortality rate of children must be reduced to 45 per 1000 livings births and 28 per 1000
livings births by 2007 and 2012 respectively
All main rivers should be cleaned up between 2007 and 2012
Reducing the poverty ratio by at least five percentage points, by 2007
Making provision for useful and lucrative employments to the population, which are of the
best qualities
According to the Plan, it is mandatory that all infants complete at least five years in schools
by 2007.
By 2007, there should be a decrease in gender discriminations in the spheres of wage rate
and literacy, by a minimum of 50%
Taking up of extensive afforestation measures, by planting more trees and enhance the forest
and tree areas to 25% by 2007 and 33% by 2012
Ensuring persistent availability of pure drinking water in the rural areas of India, even in the
remote parts
The alarming rate at which the Indian population is growing must be checked and fixed to
16.2%, between a time frame of 2001 and 2011
The rate of literacy must be increased by at least 75%, within the tenure of the Tenth Five
Year Plan
There should be a decrease in the Maternal Mortality Ratio (MMR) to 2 per 1000 live births
by 2007. The Plan also intended to bring down the Maternal Mortality Ratio to 1 per 1000 live
birth by the year 2012.

The 10th Five year Plan of India in a nutshell:

Increasing the mobility of all the available financial resources of India, and optimizing them
as well
Setting up of a state-of-the-art infrastructure for all the existing industries in India.
Encourage the initiative of capacity building within the Indian industrial sector
 Creating a friendly, amiable and pleasant investment environment in India
Encouraging sufficient transparency in the corporate sectors of India
Introduction of reforms in the industrial sectors, which are more investor-friendly in nature

11th Five Year Plan Of India(2007 to 2012):

The eleventh plan has the following objectives:

1. Income & Poverty

o Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th
Plan in order to double per capita income by 2016-17
o Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of
benefits
o Create 70 million new work opportunities.
o Reduce educated unemployment to below 5%.
o Raise real wage rate of unskilled workers by 20 percent.
o Reduce the headcount ratio of consumption poverty by 10 percentage points.
2. Education
o Reduce dropout rates of children from elementary school from 52.2% in 2003-04
to 20% by 2011-12
o Develop minimum standards of educational attainment in elementary school, and
by regular testing monitor effectiveness of education to ensure quality
o Increase literacy rate for persons of age 7 years or more to 85%
o Lower gender gap in literacy to 10 percentage points
 o Increase the percentage of each cohort going to higher education from the present
10% to 15% by the end of the plan
3. Health
o Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live
births
o Reduce Total Fertility Rate to 2.1
o Provide clean drinking water for all by 2009 and ensure that there are no slip-backs
o Reduce malnutrition among children of age group 0-3 to half its present level
o Reduce anaemia among women and girls by 50% by the end of the plan
4. Women and Children
o Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by 2016-17
o Ensure that at least 33 percent of the direct and indirect beneficiaries of all
government schemes are women and girl children
o Ensure that all children enjoy a safe childhood, without any compulsion to work
5. Infrastructure
o Ensure electricity connection to all villages and BPL households by 2009 and
round-the-clock power.
o Ensure all-weather road connection to all habitation with population 1000 and
above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant
habitation by 2015
o Connect every village by telephone by November 2007 and provide broadband
connectivity to all villages by 2012
o Provide homestead sites to all by 2012 and step up the pace of house construction
for rural poor to cover all the poor by 2016-17
6. Environment
o Increase forest and tree cover by 5 percentage points.
o Attain WHO standards of air quality in all major cities by 2011-12.
 o Treat all urban waste water by 2011-12 to clean river waters.
o Increase energy efficiency by 20 percentage points by 2016-17.

Structure of Kerala Economy:

Service industry dominates the Kerala economy. Kerala leads many other Indian states and
territories in terms of per capita GDP (37,372 INR) and economic productivity and Kerala's
Human Development Index is the best in India. According to the Global Hunger Index 2008,
the severity of hunger situation in Kerala is "serious", which is better than the grade "alarming"
received by many Indian states. Kerala's low GDP and productivity figures juxtaposed with
higher development figures than in most Indian states — is often dubbed the "Kerala
Phenomenon" or the "Kerala Model" of development by economists, political scientists, and
sociologists. This phenomenon arises mainly from Kerala's unusually strong service
sector.[citation needed] Some describe Kerala's economy as a "democratic socialist welfare
state". Some, such as Financial Express, use the term "Money Order Economy". Kerala's
economic progress is above the national average. But relatively few major corporations and
manufacturing plants are headquartered in Kerala.

Around 30 lakh Keralaites are working abroad mainly in Persian Gulf. So the Kerala Economy
is largely depended on remittances. S. Irudaya Rajan describes the situation as "Remittances
from global capitalism are carrying the whole Kerala economy". Unemployment recently
dropped from a large 19.1% in 2003 to 9.4% in 2007. Underemployment, low employability of
youths, and a 13.5% female participation rate are chronic issues.One concern is that Kerala
government is running some of the highest deficits in India.
Agriculture : Kerala produces 96% of national output of pepper and 91% of natural rubber.
Coconut, tea, coffee, cashew, and spices — including cardamom, vanilla, cinnamon, and
nutmeg — comprise a critical agricultural sector. A key agricultural staple is rice, with some six
hundred varieties grown in Kerala's extensive paddy fields. Nevertheless, home gardens
comprise a significant portion of the agricultural sector.

Tourism : Kerala is an established tourist destination for both Indians and non-Indians alike.
Tourists mostly visit such attractions as the beaches at Kovalam, Cherai and Varkala, the hill
stations of Munnar, Nelliampathi, and Ponmudi, and national parks and wildlife sanctuaries
such as Periyar and Eravikulam National Park. The "backwaters" region — an extensive
network of interlocking rivers, lakes, and canals that center on Alleppey, Kumarakom, and
Punnamada — also see heavy tourist traffic.

Foreign Remittances : In a state of 32 million where unemployment approaches 20 percent,

one Keralite worker in six now works overseas. The largest number work in construction,
although high literacy allows some Keralites to secure office work. Foreign remittances
augment the state’s economic output by nearly 25 percent. Migrants’ families are three times as
likely as those of nonmigrants to live in superior housing, and about twice as likely to have
telephones, refrigerators and cars.

Infrastructure : Kerala has 145,704 km of roads (4.2% of India's total). This translates into
about 4.62 km of road per thousand population, compared to an all-India average of 2.59 km.
Virtually all of Kerala's villages are connected by road. Traffic in Kerala has been growing at a
rate of 10–11% every year, resulting in high traffic and pressure on the roads. Total road length
in Kerala increased by 5% between 2003-2004. The road density in Kerala is nearly four times
the national average, and is a reflection of Kerala's unique settlement patterns. India's national
highway network includes a Kerala-wide total of 1,524 km, which is only 2.6% of the national
total.

Role of Kerala in the Contribution to Development of India

The most conspicuous feature of the Indian economy is that hundreds of millions of India's
people live in conditions of appalling deprivation--in conditions of hunger, ill-health,
homelessness, illiteracy, and subject to different forms of class, caste, and gender oppression.
Among the states of India there is, as is now well-known, one state--Kerala--whose
performance in the spheres of social and economic development has been substantially better
than the others. Kerala's accomplishment shows that the well-being of the people can be
improved, and social, political, and cultural conditions transformed, even at low levels of
income, when there is appropriate public action. In Kerala, the action of mass organizations and
mass movements against social, political, and economic oppression and the policy actions of
governments have been the most important constituents of public action.

The achievements of the people of Kerala are the result of major social, economic, and political
transformations. These changes have roots in Kerala's history, but they were also, in an
important sense, achievements of public action in post-1957 Kerala (the present state of Kerala
was established in 1956, and the first government, a Communist government, took office in
1957). They were possible because there was mass literacy; because agrarian relations were
transformed; because there were important changes in the conditions of unfreedom of the
people of the oppressed castes; because of enlightened social attitudes toward girls' and
women's survival and education, and because of the public policy interventions of governments
in Kerala. All of these conditions are replicable.

Demographic Profile of Kerala

Population Of Kerala

101,841,374 (2005 Census)

Males : 60,471,420

Females : 56,369,955
Ethnic groups

The great majority of residents of Kerala are Malayali, but there are many smaller ethnic
groups. There is no dominant religion.

Muslims - 24.70% (2001 Census)

Ezhavas - 22.91%

Christians - 19.00%

Nairs - 12.88%

Scheduled Castes - 9.81%

Brahmins - 1.59%

Tribals - 1.14%

Others - 8.00%

Age structure

0-6 years: 3,793,146 or 11.91% (male 1,935,027/female 1,858,119)

0-14 years: 30.69%

15-64 years: 63.87%

65 years and over:5.44% (1991 Cen)

Population growth rate

0.94% (2005 est.)

Birth rate

17.1 births/1,000 population (2004-2007 est.)

Birth Rate was 17.1 in 1994-2001 (20.3 in 1984-1990 & 25.0 in 1974-1980) . Pathanamthitta
(14.5 in 1994-2001, 17.2 in 1984-1990 & NA in 1974-1980) had the lowest TBR and
Malappuram(22.4, 29.5 & 33.6) had the highest TBR.

Death rate

6.4 deaths/1,000 population (2006)

Net migration rate

(-)3.1 migrant(s)/1,000 population (1991 est.)

Of the emigrants from Kerala, 42.2% were Muslims, 36.6% were Hindus and 21.2% were
Christians in 1992-93. The most preferred destination was USA (37.8%), followed by UAE
(25.9%), Other Gulf countries (13.0%), Oman (11.8%), Other Countries (7.5%) and Saudi
Arabia(3.8%).
Sex ratio

Total Population : 1058 Females/1000 Males

Age 0-6 : 987 Females/1000 Males

Infant mortality rate

Total: 14.1 deaths/1,000 live births (2003-2006)

Maternal mortality rate

Total: 1.3 deaths/1,000 live births (2000)

Life expectancy at birth

Total population: 73.4 years (2003-2006)

Male: 70.2 years

Female: 76.6 years

Total fertility rate

1.70 children born/woman

In 1991, Kerala had the lowest TFR(Children born per women) in the whole of India. Hindus
had a TFR of 1.66, Christians had 1.78 and Muslims had 2.97. In 2000, the TFR was 1.73 with
Muslims having 2.28, Nairs having a TFR of 1.47 and Syrian Christians having TFR of 1.55.
TFR for Scheduled Castes was 1.52 in 1997-98 and 1.37 in 1992-93. The lowest Fertility rate
recorded anywhere in India is TFR of 1.17 for Vettuvan caste in Kerala.

Industries in Kerala

There are several factors that affect evolution of an industry in a particular region. The major
factors impacting evolution are:

 Policy proactiveness: The policy that a state government adopts towards a sector directly
affects its attractiveness for further investment. For example, the Government of Kerala
has given many concessions to the IT sector. This has prompted many IT majors like
Infosys and TCS to set up software development operations in the state.

 Availability of natural resources: Certain industries have a high dependence on

availability of natural resources. The predominance of cash crop cultivation has made the
state a leading agro processing centre.

 Capability: The growth of IT Enabled Services in the state is led by excellent

infrastructure facilities (it has the highest tele-density and two submarine cable landings)
and availability of skilled manpower (engineering colleges in the state such as National
Institute of Technology, Calicut, are among the best in the country).

Based on an assessment of the above factors, some of the industries with potential for
investment and growth in the state are illustrated below:
This is the qualitative assessment to highlight relative interest of different sectors. A case by
case analysis is necessary before investment is made.

Key industries

Agro-based and Food processing

The food processing industry has been recognised as a potential area for development of
enterprises in the state. Kerala is the largest producer of rubber, cocoa, pepper and areca nut. It
is also a leading producer of coconut and cashew. The state has a high proportion of small scale
industries engaged in processing its agricultural produce. Kerala Industrial Infrastructure
Development Corporation (KINFRA) set up a world-class food park at Kakkancherry,
Malappuram in 2002. Four units with a total investment of US$ 2.5 million have started
functioning at the park. The state is home to small scale units engaged in spice mixtures, oils,
oleoresins, cosmetics, aromatics and flavouring food & beverages. Share of food & beverages
sector in the agro-based industry accounted for 2.7 per cent of the total sales in 2003.
Coir

Coir is one of the traditional industries in the state employing 360,000 workers of which 76 per
cent are women. Allappuzha, the main centre of this industry, consists of around 10,000 tiny
and small scale enterprises. Public Sector Units (PSUs) and cooperatives (COIRFED) play a
dominant role in the state's coir industry. The Kerala State Coir Corporation and Foam Mattings
India Ltd are the two major PSUs operating in this industry. Exports of coir products from
Kerala have doubled from 30,833 tonnes in 1991-92 to 60,089 tonnes in 2002-03.

Source: Economic Review 2003

Textile and Garments

The textile sector comprising of spinning and handloom is the single largest industry in the
state. The textile industry is dominated by handlooms, which enjoy a huge production base and
account for 10 per cent of the country's exports. Total sales of the sector accounted for 1.8 per
cent of sales by industry in the state in 2003. The handloom industry dominated by cooperative
societies, accounts for 86 per cent of the looms and produces 97 per cent of the state's textiles.

Cotton yarn is the most popular product in the state followed by knitted garments and fabrics
such as cotton and wool. The textile-processing complex at Kanjikode, the International
Apparel Park at Thiruvananthapuram and the Industrial Export Park at Kochi offer walk-in-and-
manufacture environments.

Sea food and other marine products

The state contributes nearly half of the country's marine fish landing of 250,000 tonnes sardines,
shrimps, lobster, cuttlefish, squid, tuna etc. These have a high demand in the overseas markets.
Ongoing technology upgradation in the export-oriented marine product sector indicates greater
growth in the immediate future.

Chemicals

The chemicals sector accounts for 63.4 per cent of the total revenue by industry in the state.
Kochi Refineries Ltd, a highly profitable enterprise, is the main player in the sector. It has a
capacity of 7 million tonnes and provides feedstock to several ownstream projects. In addition,
a large chemicals terminal is being set up at Kochi to make imported feedstock available.

The refinery has an annual turnover of US$ 2,140 million with a net profit of US$ 198 million.
The products of the refinery include LPG, petrol, diesel, kerosene, naptha, benzene, toluene,
LSHS, furnace oil, ATF, specialty solvents, bitumen and rubberised bitumen.

IT/ITES

The state's excellent communications infrastructure coupled with its geographical location has
made it ideal for Information Technology (IT) and IT Enabled Services (ITES). The state is
known as the 'Information Gateway' of the country. Two infotech parks developed at
Thiruvananthapuram and Kochi house several software companies. Revenues from the IT sector
stood at US$ 82.6 million in 2003 and exports were to the tune of US$ 65.1 million in the same
period. The 2,750 hardware assembling units provide employment to 2,000. About 350 small
and micro software enterprises in the IT sector register a turnover of over US$ 8.3 million.
Tourism

The tourism industry in the state accounted for 6.3 per cent of the State Domestic Product in
2002-03. Tourist inflow in the state grew by over 1 1 per cent, including a rise of 6 per cent in
domestic traffic during 2002-03. The tourism industry in the state was listed among the top 100
brands among 700 Indian brands studied by Super Brands Ltd. In 2002, Kerala became the first
partner state in the World Travel and Tourism Council. Revenues from the tourism sector grew
at a CAGR of 23.6 per cent during 1998-02 and stood at US$ 145 million in 2002. The industry
provides employment to 700,000.

Exports

The state accounts for majority of rubber and coir based exports in the country. It is fast
emerging as an ITES hub. A number of international companies have set up their centres
located in the two IT parks at Thiruvananthapuram and Kochi. The principal motivation for
these companies to set up their centres in the state has been the cost advantage and the excellent
telecommunications infrastructure. Kochi has been rated second best among the 'Super 9 Indian
ITES Destinations' in a survey conducted by NASSCOM in 2002. Another survey by Business
Today and Gallup rates Thiruvanathapuram as the second 'Best Indian City to do Business In'
while Kochi has been ranked third on factual parameters.

Source: Economic Review 2003

The Technopark at Thiruvananthapuram, a 1.5 million sq ft built-up space offers reliable power
supply and excellent support facilities such as conference rooms and convention centres. The
Infopark at Kochi is an ideal destination for ITES due to its proximity to the submarine optical
cables. It offers regulated power supply, excellent telecom facilities and support functions such
as convention centres and seminar halls.

Kerala: Economic Indicators

Kerala’s economic performance has been impressive,driven by all three sectors of the economy

• The state’s GDP grew an impressive 10.3 per cent between 1999-00 and 2005-06 to reach
US$ 26.44 billion

• Tertiary sector has been the fastest growing, at a CAGR of 12.6 per cent between 1999-00 and
2005- 06, driven by sub-sectors like Trade, Hotels, Transport and Communication that grew at a
rate of 14.5 per cent in 2005-06 over the previous year

• The Secondary sector, driven by Construction registered a growth of 17 per cent in 2005-06
over the previous year

• The Primary sector share in the GSDP has been declining over the years. Mining and
Quarrying registered the highest growth rate of 12.7 per cent in 2005-06 over the previous year
Industries Reserved for the Public Sector in India

Public sector has played an important role in the industrial development of India. Before
independence there were a few public sector enterprises in India such as Railways, the Posts
and Telegraphs, the Port Trusts, the Ordinance Factories, and All India Radio etc. In the early
years of independence, capital was scarce and the entrepreneurial resource was not strong
enough. Therefore, the 1956 Industrial Policy Resolution gave primacy to the role of the State
which was directly responsible for industrial development. The public sector provided the
required thrust to the economy and developed and nurtured the human resources. During this
era public sector enterprises came to be known as the commanding heights of the Indian
economy.

In 1991, when the government decided to shift to a liberalized economy with greater reliance
upon market forces, a larger role for the private sector was envisaged. Since then the policy
thrust has been on reforms such as reduction in the scope of industrial licensing, reforms in the
Monopolies and Restrictive Trade Practices (MRTP) Act, reduction of areas reserved
exclusively for public sector, disinvestment of equity of selected public sector enterprises
(PSEs).

Central Public Sector Enterprises (CPSEs) were classified into two categories - strategic and
non-strategic. Strategic CPSEs were identified in the areas of:

 Arms & Ammunition and the allied items of defence equipments, defence air-crafts and
warships

 Atomic Energy (except in the areas related to the operation of nuclear power and
applications of radiation and radio-isotopes to agriculture, medicine and non-strategic
industries).
  Railway transport

All other public sector enterprises were considered as non-strategic. Industrial licensing by the
Central Government has been almost abolished except for a few hazardous and environmentally
sensitive industries.

List of industries reserved for the public sector and where private companies cannot enter

 Atomic energy.

 The substances specified in the scheduled to the notification of the Government of India
in the Department of Atomic Energy number S.O.212(E), dated the 15th March, 1995.

 Railway transport.

Navaratna Companies in India

Indian economy has witnessed a sea change in the industrialization. The successful Central
Public Sector Enterprises of India define the success story of Indian industrialization. Since the
post independence era, the industrialization in India got rapid expansion due to various
industrial policies and Five Yea Plans by the government of India.

Various measures and industrial polices have resulted growth and expansion of industrialization
in India. The success story of India rapid industrialization is incomplete with out the Navartna
companies.

‘Navratna’ literally means ‘nine jewels’. The Government had identified nine Public Sector
Enterprises (PSEs) in July 1997 that had comparative advantages and potential to emerge as
global giants as Navratnas. Over the years, many more CPSEs were conferred Navratna status
as they fulfilled the required criteria.

Navratna Central Public Sector Enterprises of India are:

1. Bharat Electronics Limited

2. Bharat Heavy Electricals Limited
3. Bharat Petroleum Corporation Limited
4. Coal India Limited
5. GAIL (India) Limited
6. Hindustan Aeronautics Limited
7. Hindustan Petroleum Corporation Limited
8. Indian Oil Corporation Limited
9. Mahanagar Telephone Nigam Limited
10. National Aluminium Company Limited
11. NMDC Limited
12. NTPC Limited
13. Oil & Natural Gas Corporation Limited
14. Power Finance Corporation Limited
15. Power Grid Corporation of India Limited
16. Rural Electrification Corporation Limited
17. Shipping Corporation of India Limited
18. Steel Authority of India Limited
Economic Growth of India:

GDP Growth:

India's GDP recently crossed the trillion-dollar mark for the first time and with this India has
joined the elite club of 12 countries with a trillion dollar economy. Countries that have breached
trillion-dollar GDP level in the past are he US, Japan, Germany, China, UK, France, Italy,
Spain, Canada, Brazil and Russia.

The GDP or Gross Domestic Product is the primary indicator used to gauge the health of a
country's economy. The GDP of a country is defined as the market value of all final goods and
services produced within a country in a given period of time. It is also considered the sum of
value added at every stage of production of all final goods and services produced within a
country in a given period of time. GDP is a number that expresses the worth of the output of a
country in local currency. GDP tries to capture all final goods and services that are produced
within the political and geographical frontiers of the country, thereby assuring that the final
monetary value of everything that is created in a country is represented in the GDP. GDP is
calculated for a specific period of time, usually a year or a quarter of a year.

According to the data released for the year 2006-2007, India's GDP grew at an impressive 9.2
per cent. The share of different sectors of the economy in India's GDP is as follows: Agriculture
- 18.5 per cent, Industry - 26.4 per cent, and Services - 55.1 per cent. The fact that the service
sector now accounts for more than half the GDP is a milestone in India's economic history and
takes it closer to the fundamentals of a developed economy. At the time of independence
agriculture occupied the major share of GDP while the contribution of services was relatively
very less.
The overall growth of GDP at factor cost at constant prices in 2008-09, as per revised estimates
released by the Central Statistical Organisation (CSO) (May 29, 2009) was 6.7 per cent. This is
lower than the 7 per cent projection in the Mid-Year Review 2008-09 (Economic Division,
Department of Economic Affairs (DEA), December 2008) and the advance estimate of 7.1 per
cent, released subsequently by CSO in February 2009. With the CSO drastically reducing their
estimate of GDP from agriculture (based on third advance estimates), and given that the DEA’s
7 per cent estimate assumed normal agricultural growth, it would have had to be adjusted for
any shortfall. The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent in
2008-09 nevertheless represents a deceleration from high growth of 9.0 per cent and 9.7 per
cent in 2007-08 and 2006-07 respectively

Per capita income and consumption

The per capita income in 2008-09, measured in terms of gross domestic product at constant
1999-2000 market prices, was Rs. 31,278. In 2007-08 this stood at Rs. 29,901. Per capita
consumption in 2008-09 was Rs. 17,344 as against a level of Rs. 17,097 in 2007-08. While
there has been an increase in levels of per capita income and consumption, there has been a
perceptible slowdown

in their growth rate. The growth in per capita GDP decelerated from 8.1 per cent in 2006-07 to
4.6 per cent in 2008-09, while the per capita consumption growth declined from 6.9 per cent in
2007-08 to 1.4 per cent in 2008-09.
Gross domestic savings

The growth in capital formation in recent years has been amply supported by a rise in the
savings rate. The gross domestic savings as a percentage of GDP at current market prices stood
at 37.7 per cent in 2007-08 as compared to 29.8 per cent in 2003-04. Private sector savings
dominated the total savings in 2007-08 and were at 33.2 per cent of GDP. Of this, the household
sector savings was 24.3 per cent of GDP while the private corporate sector accounted for 8.8
per cent. Savings by the public sector was 4.5 per cent of GDP. The composition of savings by
sectors as percentage of the gross domestic saving is shown below:
Globalization of the Indian economy

The structure of the Indian economy has undergone considerable change in the last decade.
These include increasing importance of external trade and of external capital flows. The
services sector has become a major part of the economy with GDP share of over 50 per cent and
the country becoming an important hub for exporting IT services. The share of merchandise
trade to GDP increased to over 35 per cent in 2007-08 from 23.7 per cent in 2003-04. If the
trade in services is included, the trade ratio is 47 per cent of GDP for 2007-08.

The rapid growth of the economy from 2003-04 to 2007-08 also made India an attractive
destination for foreign capital inflows and net capital inflows that were 1.9 per cent of GDP in
2000-01 increased to 9.2 per cent in 2007-08. Foreign portfolio investment added buoyancy to
the Indian capital markets and Indian corporates began aggressive acquisition spree overseas,
which was reflected in the high volume of outbound direct investment flows.

Another important dimension has been the high degree of external dependence on imported
energy sources, especially crude oil with the share of imported crude in domestic consumption
exceeding 75 per cent. A major change in international crude prices is therefore bound to
impact the Indian economy, as happened in early 2008-09.
Impact of global developments

The subprime crisis that surfaced around August 2007 had affected financial institutions in the
United States and Europe including the shadow banking system comprising inter alia
investment banks, hedge funds, private equity and structured investment vehicles. The collapse
of the Lehman Brothers in mid-September 2008 further aggravated the situation leading to a
crisis of confidence in the financial markets. The resulting heightened uncertainty cascaded into
a full-blown financial crisis of global dimensions that stymied prospects of an early recovery.

India could not insulate itself from the adverse developments in the international financial
markets, despite having a banking and financial system that had little to do with investments in
structured financial instruments carved out of subprime mortgages, whose failure had set off the
chain of events culminating in global crisis.

The effect on the Indian economy was not significant in the beginning. The initial effect of the
subprime crisis was, in fact, positive, as the country received accelerated Foreign Institutional
Investment (FII) flows during September 2007 to January 2008. This contributed to the debate
on “decoupling,” where it was believed that the emerging economies could remain largely
insulated from the crisis and provide an alternative engine of growth to the world economy. The
argument soon proved unfounded as the global crisis intensified and spread to the emerging
economies through capital and current account of the balance of payments (BoP). The net
portfolio flows to India soon turned negative as Foreign Institutional Investors (FIIs) rushed to
sell equity stakes in a bid to replenish overseas cash balances. This had a knock-on effect on the
stock market and the exchange rates through creating the supplydemand imbalance in the
foreign exchange market. The current account was affected mainly after September 2008
through slowdown in exports. Despite setbacks, however, the BoP situation of the country
continues to remain resilient.
The global crisis also meant that the economy experienced extreme volatility in terms of
fluctuations in stock market prices, exchange rates and inflation levels during a short duration
necessitating reversal of policy to deal with emergent situations.

Before the onset of the financial crisis, the main concern of the policymakers was excessive
capital inflows, which increased from 3.1 per cent of GDP in 2005-06 to 9.3 per cent in 2007-
08. While this led to increase in foreign exchange reserves from US$ 151.6 billion at end-
March 2006 to US$ 309.7 billion at end-March 2008, it also contributed to monetary expansion,
which fuelled liquidity growth. WPI inflation reached a trough of 3.1 per cent in October 2007,
a month before global commodity price inflation zoomed to double digits from low single
digits. The rising oil and commodity prices, contributed to a significant rise in prices, with
annual WPI peaking at 12.8 per cent in August 2008. The monetary policy stance during the
first half of 2008- 09 was therefore directed at containing the prices rise.

The policy stance of the Reserve Bank of India (RBI) in the first half of the year was oriented
towards controlling monetary expansion, in view of the apparent link between monetary
expansion and inflationary expectations partly due to the perceived liquidity overhang. In the
first six months of 2008-09, year-on-year growth of broad money was lower than the growth of
reserve money, The Government also took various fiscal and administrative measures during
the first half of 2008- 09 to rein in inflation.The key policy rates of RBI thus moved to signal a
contractionary monetary stance. The repo rate (RR) was increased by 125 basis points in three
tranches from 7.75 per cent at the beginning of April 2008 to 9.0 per cent with effect from
August 30, 2008. The reverse-repo rate (R-RR) was however left unchanged at 6.0 per cent. The
cash reserve ratio (CRR) was increased by 150 basis points in six tranches from 7.50 per cent at
the beginning of April 2008 to 9.0 per cent with effect from August 30, 2008.
Exchange rate developments

The surge in the supply of foreign currency in the domestic market led inevitably to a rise in the
price of the rupee. The rupee gradually appreciated from Rs. 46.54 per US dollar in August
2006 to Rs. 39.37 in January 2008, a movement that had begun to affect profitability and
competitiveness of the export sector. The global financial crisis however reversed the rupee
appreciation and after the end of positive shock around January 2008, rupee began a slow
decline.

A major factor, which affected the emerging economies almost simultaneously, was the
unwinding of stock positions by the FIIs to replenish cash balances abroad. The decline in rupee
became more pronounced after the fall of Lehman Brothers in September 2008, requiring RBI
intervention to reduce volatility. It is pertinent to note that a substantial part of the movement in
the rupee-US dollar rate during this period has been a reflection of the movement of the dollar
against a basket of currencies. The rupee stabilized after October 2008, with some volatility.
With signs of recovery and return of FII flows after March 2009, rupee has again been
strengthening against US dollar.

For the year as a whole, the nominal value of the rupee declined from Rs. 40.36 per US dollar in
March 2008 to Rs. 51.23 per US dollar in March 2009, reflecting a 21.2 per cent depreciation
during the fiscal 2008-09. The exchange rate was Rs. 51.20 per US dollar in March 2009. The
annual average exchange rate during 2008-09 worked out to Rs. 45.99 per US dollar compared
to Rs. 40.26 per US dollar in 2007-08.

Monetary policy developments

The outflow of foreign exchange, as a fallout of crisis, also meant tightening of liquidity
situation in the economy. To deal with the liquidity crunch and the virtual freezing of
international credit, the monetary stance underwent an abrupt change in the second half of
2008-09. The RBI responded to the emergent situation by facilitating monetary expansion
through decreases in the CRR, repo and reverserepo rates, and the statutory liquidity ratio
(SLR).The repo rate was reduced by 400 basis points in five tranches from 9.0 in August 2008
to 5.0 per cent beginning March 5, 2009. The reverse-repo rate was lowered by 250 basis points
in three tranches from 6.0 (as was prevalent in November 2008) to 3.5 per cent from March 5,
2009. The reverse-repo and repo rates were again reduced by 25 basis points each with effect
from April 21, 2009. SLR was lowered by 100 basis points from 25 per cent of net demand and
time liabilities (NDTL) to 24 per cent with effect from the fortnight beginning November 8,
2008. The CRR was lowered by 400 basis points in four tranches from 9.0 to 5.0 per cent with
effect from January 17, 2009.

The credit policy measures by the RBI broadly aimed at providing adequate liquidity to
compensate for the squeeze emanating from foreign financial markets and improving foreign
exchange liquidity. At the same time, it was necessary to ensure that the financial contagion
arising from the global financial crisis did not permeate the Indian banking system. These
measures were therefore supplemented by sector- specific credit measures for exports, housing,
micro and small enterprises and infrastructure. The monetary measures had a salutatory effect
on the liquidity situation. The weighted average call money market rate, which had crossed the
LAF corridor at several instances during the first half of 2008-09, remained within the LAF
corridor after October 2008. Since mid-2008-09, the growth in reserve money decelerated after
September 2008. The deceleration in M0 was largely on account of the decline in net foreign
exchange assets (NFA) of RBI (a major determinant of reserve money growth) due to reduced
capital inflows. On the other hand, the net domestic credit (NDC) of the RBI expanded due to
an increase in net RBI credit to the Central Government in the second half of the year. Taking
the year as a whole, broad money (M3) recorded an increase of 18.4 per cent during 2008-09, as
against 21.2 per cent in 2007-08. The money multiplier, which is the ratio of M3 to M0 was 4.3
in end-March 2008 and increased to 5.0 in December 2008.
Fiscal developments

The extraordinary situation that emerged due to the crisis had led to a sharp shrinkage in the
demand for exports. Domestic demand also had moderated considerably leading to a downturn
in industry and in the services sector as seen in the GDP growth, especially for the third and the
fourth quarters of 2008-09. The situation necessitated a fiscal response beyond the measures
enunciated in the 2008-09 Budget, the roll-out and actual outlays, however, took place in the
second half of 2008-09. These included the payout of a part of the arrears to government
employees, following the Sixth Pay Commission Report and the debt relief (farm loan waiver)
package to alleviate the debt burden of the distressed farmers. By increasing the fiscal deficit,
this expenditure, inter alia, helped to sustain domestic demand. These were supplemented by
further measures during December 2008 to February 2009 consisting of increased plan
expenditure, reduction in indirect taxes, sectorspecific measures for textiles, housing,
infrastructure, automobiles, micro and small sectors and exports and authorization to specified
financial institutions like the India Infrastructure Investment and Finance Company Limited
(IIFCL) to raise taxfree bonds to fund infrastructure projects.

With the release of provisional actual data on expenditure for the Union Government for 2008-
09 and the revised estimates of GDP at market prices for 2008-09, the fiscal deficit to GDP ratio
for 2008-09 works out to 6.2 per cent, while the revenue and primary deficit are estimated to be
4.6 per cent and 2.6 per cent respectively. Consequently, the fiscal measures taken together
provided a fiscal stimulus of about 3.5 per cent of GDP. Further, below the line items can also
be said to have contributed a stimulus of about 1.3 per cent of GDP, even though these merely
offset the effect of the increase in the prices of oil and fertilizer imports on domestic income and
demand.The revenue and expenditure sides in the Interim Budget 2009-10, which was presented
on February 16, 2009, were conditioned by the foregoing developments. Fiscal deficit for 2009-
10 was estimated to go up to 5.5 per cent of GDP, thus providing a continuing stimulus, relative
to 2008-09, of 2.8 per cent of GDP. Further tax reduction measures were announced by the
Finance Minister during the discussions. These were of the order of 0.5 per cent of the GDP.
The Finance Minister’s speech also indicated that an additional fiscal stimulus of 0.5 per cent to
1 per cent of GDP as additional plan expenditure could be considered, if needed, to offset the
shock induced declines in aggregate demand.

Apart from the measures taken to restore and revive the domestic economy, India continued to
engage actively at various international fora like the G-20 group of countries (of which India is
a member) and at the multilateral institutional mechanisms on the range of issues that arose
from the global financial crisis. At the meeting in early April 2009, leaders of G-20 countries
(including India), collectively committed themselves to take decisive, coordinated and
comprehensive action to revive growth, restore stability of the financial system, restart the
impaired credit markets and rebuild confidence in financial markets and institutions.

Credit

The intra-year changes in credit flow could be attributed to several factors. The demand for
bank credit increased sharply during April-October 2008 as companies found that external
sources of credit were drying up in the wake of the global financial crisis. There was also a
sharp increase in credit to

oil marketing companies. However, towards the latter part of 2008-09, credit growth declined
abruptly reflecting the slowdown of the economy in general and the industrial sector in
particular.Working capital requirements also came down because of a decline in commodity
prices and a drawdown of inventories by the non-financial companies. The demand for credit by
oil marketing companies also moderated. In addition, substantially lower credit expansion by
private and foreign banks muted the overall flow of bank credit during the year.

On a full year basis, bank credit growth fell from 22.3 per cent in 2007-08 to 17.3 per cent in
2008-09. Having regard to the structural rigidities associated with the money market, it was
observed that the average PLR did not show much variation. From 12.5 per cent in April 2008,
it increased to 13.9 per cent in September 2008 and thereafter declined to 12.0 per cent in
March 2009.
Balance of payments

The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs of
strain in the capital and current accounts, due to the global crisis. During the first three quarters
of 2008-09 (April-December 2008), the current account deficit (CAD) was US$ 36.5 billion
(4.1 per cent of GDP) as against US$ 15.5 billion (1.8 per cent of GDP) for the corresponding
period of 2007-08. The capital account balance declined significantly to US$ 16.09 billion (1.8
per cent of GDP) as compared to US$ 82.68 billion (9.8 per cent of GDP) during the
corresponding period in 2007-08. A positive development was higher private transfers and
software earnings and increase in non-resident deposit flows and foreign direct investment vis-
à-vis the corresponding period last year. Higher FDI flows in 2008-09 were also a reflection of
the confidence of foreign investors in the growth prospects of the Indian economy.
Together with lower crude oil prices and decline in imports, the overall impact on the balance of
payments was somewhat muted. This is reflected in reserve decline of only US$ 20.4 billion on
BoP basis (excluding valuation change) during 2008-09 (April-December 2008). The total
foreign currency assets (FCA) had declined from US$ 299.2 billion on 31.3.2008 to US$ 241.4
billion on 31.3.2009, reflecting a fall of US$ 57.8 billion. However, more than two-thirds of the
decline in FCA was due to a valuation change i.e. appreciation of US dollar against the
international currencies in which reserves are maintained. The foreign exchange reserves stood
at US$ 252 billion at end-March 2009.
Trade

The adverse effect of the global financial crisis was also felt on the export sector, first, on
account of the drying up of international financing and trade credit, followed by a fall in global
demand. During 2008-09, the growth in exports was robust till August 2008. However, in
September 2008, export growth evinced a sharp dip and turned negative in October 2008 and
remained negative till the end of the financial year. The continued decline in export growth was
due to the recessionary trends in the developed markets where the demand had plummeted. For
the year as a whole, the growth in merchandise exports during 2008-09 was 3.6 per cent in US
dollar terms and 16.9 per cent in rupee terms (compared to 28.9 per cent and 14.7 per cent
respectively in 2007-08). The large difference in growth in terms of the US dollar and in terms
of the rupee was on account of the depreciation of rupee vis-à-vis US dollar during the year.

During the period (April-February) in 2008-09, the main drivers of exports growth were
engineering goods and chemicals and related products. Petroleum products and textile exports
witnessed a positive but low growth. However, handicrafts, primary products and gems and
jewellery exports registered negative growth. The negative impact on the growth of India’s
exports becomes more evident from the fact that merchandise exports to the United States,
which was the largest market, declined by 1.6 per cent during 2008-09 (April-February). On the
other hand, merchandise exports to Asia (including ASEAN) grew by 6.9 per cent and to
Europe by 10.2 per cent during this period. India’s merchandise exports to South Asian
countries also declined by 5.2 per cent.

Import growth began to decline from October 2008 (with one month lag from the decline in
export growth) and was negative over the period January to March 2009. For the year as a
whole i.e. 2008-09, the overall import growth was subdued at 14.4 per cent in US dollar terms
and 29 per cent in rupee terms. Growth in POL and non-POL imports was 16.9 per cent and
13.2 per cent respectively (in US dollar terms). During 2008-09 (April-February) fertilizers and
edible oils registered high import growth to meet domestic demand. The growth in the imports
of POL was high in the first half of the year due to the unusually high prices but moderated in
the second half of the year. The trade deficit increased from US$ 88.5 billion (as per customs
data) in 2007-08 to US$ 119.1 billion in 2008-09.

The impact of global recession was relatively less on India’s services exports till December
2008, though the growth rate of services export moderated to 16.3 per cent during April-
December 2008-09. A negative growth in insurance and a sharp fall in the growth of travel
services was registered during this period. Software services grew at 26 per cent, while financial
services registered a robust growth of 45.7 per cent despite the global financial crisis and fall in
growth rate in world financial services exports. Business services growth was, however at a
lower rate of 3.9 per cent.

Prices

A positive fallout of decline in demand and fall in commodity prices due to the crisis was a
sharp decline in headline inflation, as indicated by the WPI, which was 0.8 per cent at end-
March 2009 on year on-year basis for all commodities. However, there has been wide variation
in the constituents of the Index, with WPI Food Index (combined) showing year-on-year
inflation of 6.8 per cent at the same point of time, which has been a cause for concern. The
average WPI inflation for 2008-09 was 8.4 per cent as against 4.7 per cent in 2007-08. There
has also been significant variation in inflation rate in terms of WPI and the Consumer Price
Indices (CPIs). Inflation rate as per Consumer Price Index for Rural Labourers (CPI-RL) was
9.7 per cent and on CPI for Industrial Workers (CPI-IW) was 8 per cent as of end-March 2009.
The average inflation on CPI-RL and CPI-IW for the year 2008-09 was 10.2 and 9.1 per cent,
respectively.

The implicit deflator for GDPMP defined as the ratio of GDP at current prices to GDP at
constant prices is the most comprehensive measure of inflation on an annual basis. Overall
inflation, as measured by the aggregate deflator for GDPMP, declined from 5.0 per cent in
2006-07 to 4.9 per cent in 2007-08 and is estimated at 6.2 per cent in 2008-09 as a result of the
higher inflation experienced during most of the year.
Summing Up:
Headline (WPI) inflation by broad commodity groups

The WPI commodity basket has three constituent commodity groups: (a) primary articles,(b)
fuel, power, light and lubricants, and (c) manufactured products, with respective weights of
22.02 per cent, 14.23 per cent and 63.75 per cent. 4.4 The inflation trends by broad commodity
groups for each of the years beginning from 2000-01 to 2008-09 are given in Table 4.1. The 52-
week averages show that inflation in 2000-01, 2004-05 and 2008-09 had been above the 6 per
cent threshold with 2008-09 recording the highest average in the current decade. In contrast,
annual inflation as on end-March 2009 recorded the lowest rate of 0.8 per cent overall and
negative inflation of 6.1 per cent in the fuel and power group. Similarly, 2006-07 and 2007-08
stand out with inflation (at end March) in primary articles in the band of 10-11 per cent, though
the 52-week average was only in the range of 5 (+)/ (-) 0.5 per cent. 4.5 Over the five-year span,
2004-05 to 2008-09, inflation remained below 7 per cent, except for two breaches. The first
breach was in the second half of 2004-05, when the price of crude oil per barrel (Brent) rose
from US$ 38 in 2004 to US$ 54 in 2005, coupled with an erratic, delayed and uneven spatially-
spread monsoon. The second breach began from March 2008, prior to the onset of the fiscal
year. Inflation, which was rising but which was in single digit up to end-May, reached double
digits from June to mid-October and remained above 8 per cent up to end-November, with the
price of crude touching US$ 147 in July 2008. On both occasions, inflation in the domestic
economy was largely due to developments in the global economy, with the prime movers being
the spurt in the prices of crude oil, minerals and metal related products, testifying to the
growing connectivity between the domestic and the world economies. In other periods,
inflationary pressures were contained below 7 per cent, facilitated not only by the liberalized
domestic and foreign trade, which served to foster greater competition, but also due to the
reduction and rationalization of the tax structure, which gave a fillip to cost efficiency.
Human Development and Gender Situation

The United Nations Development Program (UNDP) Statistical Update 2008 indicates the
human development index (HDI) for India at 0.609 in 2006, placing it at 132 out of 179
countries of the world. In terms of gender development index (GDI), India ranks 116 out of 157
countries on the basis of their GDI value with an index value of 0.591. A negative count of (-1)
for HDI rank minus GDI rank for India is indicative of almost equal status of ranking in terms
of gender development and human development. The HDI index is based on GDP per capita
(PPP), life expectancy at birth, and education as measured by adult literacy rate and gross
enrolment ratio. India’s HDI rank at 132 is lower than its per capita GDP rank of 126, largely
because of its low ranking on education. There is therefore a need for special emphasis on
policy and the institutional reforms in the education sector.
Poverty and Inclusive Growth

Incidence of poverty is estimated by the Planning Commission on the basis of the large sample
surveys on household consumer expenditure conducted by the National Sample Survey
Organisation (NSSO) on a quinquennial basis. The Uniform Recall Period (URP) Consumption
distribution data of NSS 61st Round places the poverty ratio at 28.3 per cent in rural areas, 25.7
per cent in urban areas and 27.5 per

cent for the country as a whole in 2004-05. The corresponding poverty ratios from the Mixed
Recall Period (MRP) consumption distribution data are 21.8 per cent for rural areas, 21.7 per
cent for urban areas and 21.8 per cent for the country as a whole. While the former consumption
data uses 30-day recall/ reference period for all items of consumption, the latter uses 365-day
recall/reference period for five

infrequently purchased non-food items, namely, clothing, footwear, durable goods, education
and institutional medical expenses and 30-day recall/ reference period for remaining items. The
percentage of poor in 2004-05 estimated from URP consumption distribution of NSS 61st
Round of consumer expenditure data are comparable with the poverty estimates of 1993-94
(50th Round) which was 36

per cent for the country as a whole. The percentage of poor in 2004-05 estimated from MRP
consumption distribution of NSS 61st Round of consumer expenditure data are roughly
comparable with the poverty estimates of 1999-2000 (55th Round) which was 26.1 per cent for
the country as a whole. Published estimates based on NSSO thin sample data and broadly
similar methodology for 2005-06 indicate sizeable reduction in poverty between 2004-05 and
2005-06. This reduction is

significantly higher (at 1.4 per cent or 1.6 per cent) than the trend rate of decline of 0.8 per cent
observed between 1993-94 and 2004-05 from the estimates made by the Planning Commission.
Hunger and Malnutrition

An attempt to assess the food security status and the relative position of states can often be
misleading in the absence of a clear understanding of the relationship between the notion of
hunger, poverty and malnutrition. Incidence of hunger, estimated from NSS data for 2004-05 in
terms of households having inadequate food, is seen to be only affecting a small percentage of
households at all-India level at 1.9 per cent. It also is concentrated in states like West Bengal,
Orissa and Assam though again in small dimension. Inadequacy of food is being addressed
through the public distribution system (PDS). PDS is a major state intervention to ensure food
security to people especially the poor. The Eleventh Five Year Plan has observed that PDS
seems to have failed in making foodgrain available to the poor as is evident from falling levels
of cereal consumption over the last two decades. PDS was redesigned as Targeted PDS (TPDS)
where higher rates of subsidies were given to the poor and the poorest among poor. However,
some major deficiencies were also identified in TPDS. These included high exclusion and
inclusion errors, non-viability of fair price shops, leakages and failure in price stabilization. In
this situation, it may be useful to introduce food stamps/coupons which may be valid outside the
PDS outlets once the markets get better integrated. Food coupons will allow the consumers a
wider choice. However, their value needs to be indexed to the food inflation. Multiapplication
smart cards will also enhance the efficiency of administering various schemes. In PDS system,
the smart card will reduce the incidence of bogus ration cards or diversion of foodgrains.
Leakages can also be restricted by redirecting subsidies currently under PDS to better funding
of other schemes like Mid-Day Meal scheme or the ICDS.
Central Government Finances

The significant improvement in the state of public finances in the five years ending 2007-08
owes to the macroeconomic policy frame which facilitated the implementation of some of the
key points in the fiscal reform agenda, including those articulated in the Kelkar Task Force
Reports on direct taxes, indirect taxes and the resolute adherence to the FRBMA; the emphasis
on public expenditure management with the focus on fiscal policy outcomes, a monetary policy
setting supportive of growth (by ensuring availability of credit to productive sectors of the
economy) also helped. The improvement in the state of public finances was as as a result of
reduction in the levels of expenditure and increase in revenue receipts expressed as a proportion
of GDP. With non-tax revenues remaining quite slow and hovering close to the Rs. 80,000 crore
levels since 2004-05, the buoyancy in revenue receipts is attributable to the increase in gross tax
revenues.
Government debt

One of the main objectives implicit in a rulebased fiscal framework is the levels of and
sustainability of public debt. The raison d’être of lower levels of fiscal deficit (or primary
surpluses) advocated in the orthodox stabilization models is that otherwise the levels of debt
become unsustainable raising interest rates, crowding out resources and thereby impacting
growth and inflation adversely. As a proportion of GDP, outstanding liabilities of the Central
Government (internal and external debt valued at historical exchange rates) were 63.3 per cent
in 2004-05. In the face of adherence to fiscal rules, the proportion fell to a level of 60.1 per cent
in 2007-08 and was placed at 58.9 per cent in 2008-09 (RE).
Some Additional Information About Indian Economy

Global Meltdown and its Impact on the Indian Economy

With the collapse of Lehman Brothers and other Wall Street icons, there was growing recession
which affected the US, the European Union (EU) and Japan. This was the result of large scale
defaults in the US housing market as the banks went on providing risky loans without adequate
security and the repaying capacity of the borrower. The principal source of transmission of the
crisis has been the real sector, generally referred to as the ‘Main Street’. This crisis engulfed the
United States in the form of creeping recession and this worsened the situation. As a
consequence, US demand for imports from other countries indicated a decline.

The basic cause of the crisis was largely an unregulated environment, mortgage lending to
subprime borrowers. Since the borrowers did not have adequate repaying capacity and also
because subprime borrowing had to pay two-to-three percentage points higher rate of interest
and they have a history of default, the situation became worse. But once the housing market
collapsed, the lender institutions saw their balance-sheets go into red.

Although at one time it was thought that this crisis would not affect the Indian economy, later it
was found that the Foreign Direct Investment (FDI) started drying up and this affected
investment in the Indian economy. It was, therefore, felt that the Indian economy will grow at
about seven per cent in 2008-09 and at six per cent in 2009-10. The lesson of this experience is
that India must exercise caution while liberalising its financial sector.

A redeeming feature of the current crisis is that its magnitude is much lesser than that of the
Great Depression of the 1930s when unemployment rate in the United States exceeded 25 per
cent. Currently, it stands at 6.5 per cent and is predicted to remain around eight per cent in
2009.
Impact on Indian Economy

The industries most affected by weakening demand were airlines, hotels, real estate. Besides
this, Indian exports suffered a setback and there was a setback in the production of export-
oriented sectors. The government advised the sectors of weakening demand to reduce prices. It
provided some relief by cutting down excise duties, but such simplistic solutions were doomed
to failure. Weakening demand led to producers cutting production. To reduce the impact of the
crisis, firms reduced their workforce, to reduce costs. This led to increase in unemployment but
the total impact on the economy was not very large. Industrial production and manufacturing
output declined to five per cent in the last quarter of 2008-09. Consequently, a vicious cycle of
weak demand and falling output developed in the Indian economy.

A weakening of demand in the US affected our IT and Business Process Outsourcing (BPO)
sector and the loss of opportunities for young persons seeking employment at lucrative salaries
abroad. India’s famous IT sector, which earned about $ 50 billion as annual revenue, is
expected to fall by 50 per cent of its total revenues. This would reduce the cushion to set off the
deficit in balance of trade and thus enlarge our balance of payments deficit. It has now been
estimated that sluggish demand for exports would result in a loss of 10 million jobs in the
export sector alone.

To lift the economy out of the recession the Government announced a package of Rs 35,000
crores in the first instance on December 7, 2008. The main areas to benefit were the following:

(a) Housing—A refinance facility of Rs 4000 crores was provided to the National Housing
Bank. Following this, public sector banks announced to provide small home loans seekers loans
at reduced rates to step up demand in retail housing sector.

(i) Loans up to Rs 5 lakhs: Maximum interest rate fixed at 8.5 per cent.
(ii) Loans from Rs 5-20 lakhs: Maximum interest rate at 9.25 per cent.

(iii) No processing charges to be levied on borrowers.

(iv) No penalty to be charged in case of pre-payment.

(v) Free life insurance cover for the entire outstanding amount.

This means a borrower can get a loan up to 90 per cent of the value of the house. The
government hopes to disburse Rs 15,000 to 20,000 crores under the new package.

The housing package is the core of the government’s new fiscal policy. It will give a fillip to
other sectors such as steel, cement, brick kilns etc. Besides, the small and medium industries
(SMEs) too get a boost by manufacturing all kinds of fittings and furnishings.

The success of the housing package will, however, depend on the State governments efforts to
free up surplus land so that land prices come down and the cost of housing becomes reasonable.

(b) Textiles—Due to declining orders from the world’s largest market the United States, the
textile sector has been seriously affected. An allocation of Rs 1400 crores has been made to
clear the entire backlog in the Technology Upgradation Fund (TUF) scheme.

The Apparel Export Promotion Council (AEPC) Chairman, however, said: “It is a disappointing
package. The allocation of Rs. 1,400 crores has been pending for many years and thus, it is the
payment of arrears only. There is nothing new in it. It would have been much better if more
concrete measures have been taken to reverse the downturn in the exports of readymade
garments and avoid further job losses in the textile sector.”

(c) Infrastructure—The government has been proclaiming that infrastructure is the engine of
growth. To boost the infrastructure, the India Infrastructure Finance Company Ltd. (IIFCL) has
been authorised to raise Rs 14,000 crores through tax-free bonds. These funds will be used to
finance infrastructure, more especially highways and ports. It may be mentioned that ‘refinance’
refers to the replacement of an existing debt obligation with a debt obligation bearing better
terms, meaning thereby at lower rates or a changed repayment schedule. The IIFCL will be
permitted to raise further resources by the issue of such bonds so that a public-private
partnership (PPP) programme of Rs 1,00,000 crores in the highway sector is promoted.

(d) Exports—Exports which accounted for 22 per cent of the GDP are expected to fall by 12 per
cent. The government’s fiscal package provides an interest rate subsidy of two per cent on
exports for the labour–intensive sectors such as textiles, handicrafts, leather, gems and
jewellery, but the Federation of Indian Export Organization (FIEO) felt the measures are not
enough as they will not make the exports price-competitive and, therefore, will not boost
exports. G.K. Pillai, the Commerce Secretary, has estimated a loss of 1.5 million jobs in the
export sector alone during 2008-09 on account of the $15 billion decline in the expected
exports.

(e) Small and Medium Enterprises (SMEs)—The government has announced a guarantee cover
of 50 per cent for loans between Rs 50 lakhs to Rs 1 crore for SMEs. The lockin period for
loans covered under the existing schemes will be reduced from 24 months to 18 months to
encourage banks to cover more loans under the scheme. Besides, the government will instruct
state-owned companies to ensure prompt payment of bills of SMEs so that they do not suffer on
account of delay in the payment of their bills.

In short, the fiscal package is aimed at boosting growth in exports, real estate, auto, textiles and
small and medium enterprises. The aim is to encourage growth and boost employments which
have been threatened by the recession in the world economy, more especially in the United
States.
Just within a month, the government announced another package to bail out the Indian
economy. Dr Montek Singh Ahluwalia said: “We should expect, from all global projections that
the next year (2009) is going to be a very difficult year for the global economy.”

The purpose of the new package announced on January 1, 2009 was to minimise the pain. With
this end in view, the new package included the following measures:-

1. To boost investment and spending to revive growth, the RBI cut the repo rate, which it
charges on short-term loans to banks from 6.5 per cent to 5.5 per cent and also reduced the Cash
Reserve Ratio (CRR)—the share of deposits which has to be kept with the RBI from 5.5 per
cent to five per cent.

2. To revive exports which has resulted in a contraction of industrial output, drawback benefits
have been enhanced for some exporters. Export-Import Bank also gets Rs. 5000 crores as credit
from the RBI.

3. To help the realty sector, realty companies have been allowed to borrow from overseas to
develop “integrated townships”.

4. To boost infrastructure, the India Infrastructure Finance Company Ltd. (IIFCL) has been
allowed to raise Rs 30,000 crores from tax-free bonds. Besides, Non-Banking Finance
Companies (NBFCs) need no government approval to borrow from overseas for infrastructure
projects. This will sustain the growth momentum on infrastructure.

5. To make more funds available, ceiling on foreign institutional investments (FIIs) in corporate
bonds has been increased to $ 15 billion from $ 6 billion. The purpose is to seek much bigger
FII investment.

6. To stimulate the Commercial Vehicles (CVs) sector, depreciation benefit on commercial

vehicles has been increased form 15 per cent to 50 per cent on purchases. Besides, the States
will get one-time funding from the Centre to buy buses for urban transport. In addition, public
sector banks would provide finance firms funds for commercial vehicles. It is hoped that Tata
Motors and Ashok Leyland’s sales would revive.

On February 24, 2009, the government announced a slashing down of excise duty from 10 per
cent to eight per cent—a reduction by two per cent. Since 90 per cent of the manufactured
goods attract 10 per cent excise duty, this measure is designed to reduce the prices of colour TV
sets, washing machines, refrigerators, soap, detergents, colas, cars and commercial vehicles.
Cement prices are likely to drop Rs 4-5 per bag of 50 kg while steel prices may cost Rs 500-600
per tonne less. In addition to this, the government decided to cut service tax form 12 per cent to
10 per cent—a reduction by two per cent. As a consequence, phone bills, airline tickets, credit
card charges, tour packages etc. would cost less. A two per cent reduction in service tax will
directly touch the lives of over 500 million persons by reducing monthly expenses. The entire
stimulus package of Rs 30,000 crores to boost demand in the economy and thus reduce the
impact of recession.

Commerce and Industry Minister Kamal Nath announced a small relief package of Rs 325
crores for leather, textiles, gems and jewellery on February 26, 2009.

Assessment of the Impact of the Fiscal Package

There is no doubt that the government is motivated with good intentions and is thus aiming to
spend a huge amount of Rs 1,00,000 crores for developing infrastructure in roads, ports etc.
which pose a serious handicap to growth. Besides, the aim of other measures is to boost exports
and help sectors like textiles and small and medium industries which are labour-intensive and
generate more employment.
But the success of the fiscal package will depend on the quality and speed of implementation so
that delays in implementation may not aggravate the economic recession to move into the
dangerous zone of depression.

One of the major stumbling blocks which may neutralise the positive effects of large
expenditure on infrastructure is corruption. In case corruption is not simultaneously curbed to
reasonably low levels, it may delay and reduce the much-desired effect in enlarging
infrastructure. It may result in the Indian infrastructure network being geared into a temporary
employment generation programme with much smaller impact on the economy as against the
intended objectives.

For reducing corruption, two things need to be ensured—transparency and avoidance of

arbitrariness. By cutting arbitrariness in decision-making, corruption can be curbed to a great
extent. Transparency instils confidence in the government.

Secondly, there is a need to orient the fiscal package towards inclusive growth so that the
weaker sections benefit. This would require special emphasis, for instance, on rural
infrastructure—rural roads and housing, instead of only highways and urban housing. Similarly,
a much larger expenditure on primary and secondary education, health and sanitation can also
result in a more inclusive growth process.

Thirdly, the chances of our exports increasing are very limited unless the G-3 economies,
namely, the US, EU and Japan, are able to bring about a positive shift in their growth in the near
future for which the predictions at present are not very optimistic. The World Bank has
projected the world output to grow at 0.9 per cent in 2009 as against 2.5 per cent in 2008. If
these predictions come out to be true, there is a fear of the recession in 2008 turning into a
depression in 2009. But the Indian economy is predicted to grow at about seven per cent in
2008 and about six per cent in 2009. Since the G-3 economies of the US, EU and Japan are
affected seriously by the present recession, the chances of Indian exports increasing in these
countries appear to be very dim. The natural conclusion is that the Indian economy should
concentrate on developing the domestic market. Thus, inward looking policies should be
preferred as against the outward looking approach of integrating the Indian economy to the
world economy is followed during the last decade. It is heartening that the Prime Minister
intends to insulate the Indian economy from the world economy.

Fourthly, although there is a demand for a much larger Fiscal Package to bail out the Indian
economy, there are serious limitations faced by the government because it has to fight terrorism
on the one hand and financial meltdown on the other. The government has to undertake a huge
expenditure at the Central as well as State levels to enhance security. It is difficult to precisely
estimate this expenditure at this stage since it entails larger recruitment of police and
paramilitary forces along with equipping them with the most up-to-date weapons. But there is a
massive increase in expenditure to combat terrorism, along with a fiscal package to boost the
Indian economy; there is also likely to be shortfall in tax revenues. Consequently, the Budget
deficit is bound to increase. The government will not be able to reduce the fiscal deficit to 2.5
per cent of GDP, it may increase to three to 3.5 per cent during 2008-09. But this is inevitable
and the target of reducing it according to the schedule prescribed by the Fiscal Responsibility
and Budget Management Act, has to be postponed. But the Finance Minister has not agreed to
the abolition of the FRBM Act since it would be imprudent to relax or abrogate the FRBM.

It may, however, be mentioned that the quasi fiscal deficit (the deficit left out of the Budget) is
presently estimated as six per cent of the GDP. A comprehensive view of the fiscal deficit (as
shown in the Budget and kept outside the Budget) would be in the range of nine to 9.5 per cent
of the GDP, though it may now be lower due to a very sharp decline in international crude oil
prices from $140 per barrel to about $ 40 per barrel at present. This is a welcome relief. If the
government is also able to push the fertiliser prices to lower levels which is possible in the
changed circumstances, eventually the total fiscal deficit (shown as well as kept outside the
Budget) may come down to 6.5 to seven per cent of the GDP. This is quite large but it is
inevitable in the present situation.

Conclusion:

As against the US package of $ 800 billion to bail out the US economy and the Chinese package
to $ 580 billion to salvage its economy, the Indian fiscal package of Rs 35,000 crores ($ 7.3
billion approximately) is a small measure to boost the Indian economy. It is due to this reason
that the chieftains of industry want a much bigger package to bail out the Indian economy, as
against the minuscule announced by the government.

But the plan to spend more on housing is commendable if it can be implemented in a short time
and an effective manner. The government should have transparency and avoid arbitrariness in
the implementation so that corruption can be kept within reasonable limits.

The government has been provided relief with the sharp fall in the international price of crude
oil and this should be taken advantage of in reducing expenditure to subsidise oil imports.
Additional employment generation by helping SMEs will be a step towards inclusive growth
since they are labour intensive.

The intention to create infrastructure by expanding highways and ports and to spend Rs
1,00,000 crores through the IIFCL is commendable. However, it may be more prudent to
expand rural roads and rural housing so as to promote more inclusive growth. This would
require proper planning which may take more time and does not provide immediate benefit.

It may not be possible to reduce the fiscal deficit during 2008-09 since much larger
expenditures are needed to combat terrorism and as there is recession in the Indian economy,
but international factors will influence the process. As the G-3 economies of the US, EU and
Japan pick up, the Indian economy will also benefit from their reversal of recessionary trends.
In this situation, the expectation of seven per cent growth of the GDP in 2008-09 and six per
cent in 2009-10 reflects a fairly good performance of the Indian economy.

Now that the three packages have been announced, it is high time that the policy-makers in the
Ministry of Finance, Commerce, Industry and Rural Development should get together to ensure
that the planned expenditure—budgeted and provided in the two stimulus packages—is quickly
translated into productive capacities so as to create the much-needed multiplier effect on private
investment.

It is easier to provide funds, but it is more difficult to ensure their speedy and proper utilisation.
In infrastructure, we suffer from inordinate delays and this results in cost overruns which the
nation has to bear. The huge amount of funds placed with the India Infrastructure Finance
Company Ltd (IIFCL) would require identification of new projects or expansion of the existing
projects. This is not an easy task because the IIFCL is only a funding agency and
implementation has to be carried out by other entities, may be the State governments, public
sector undertakings or private sector corporations. To upgrade the level of infrastructure
spending by a factor of two requires gigantic efforts of co-ordination between different agencies
for speedy implementation. The government should, therefore, concentrate its efforts to remove
hurdles in the path of implementation.

The package has also provided finances to the non-banking finance companies (NBFCs), but
there is serious lack of skill with the NBFCs on project appraisals and to ascertain the credit-
worthiness of the borrowers and the accompanying project risks. There has to a national
campaign for training the NBFCs in project appraisals.

Similarly, the State governments must improve the share of their implementation and co-
operate with the Central Government to improve various infrastructure projects in their domain
or in collaboration with the Centre.
Conclusion:

Indian economy has been witnessing a phenomenal growth since the last decade. The country is
still holding its ground in the midst of the current global financial crisis. The Indian economy is
the fourth largest economy of the world on the basis of Purchasing Power Parity (PPP). It is one
of the most attractive destinations for business and investment opportunities due to huge
manpower base, diversified natural resources and strong macro-economic fundamentals. Also,
the process of economic reforms initiated since 1991 has been providing an investor-friendly
environment through a liberalised policy framework spanning the whole economy.

The growth and performance of the Indian economy in the world market is explained in terms
of statistical information provided by the various economic parameters. For example, Gross
National Product (GNP), Gross Domestic product (GDP), Net National Product (NNP), per
capita income, Gross Domestic Capital Formation (GDCF), etc. are the various indicators
relating to the national income sector of the economy. They provide a wide view of the
economy including its productive power for satisfaction of human wants

Quarterly gross domestic product (GDP) at factor cost at constant (1999-2000) prices for Q3 of
2008-09 is estimated at US$ 171.24 billion, as against US$ 162.57 billion in Q3 of 2007-08,
showing a growth rate of 5.3 per cent over the corresponding quarter of previous year.

Despite the global slowdown, the Indian economy is estimated to have grown at close to 6.7 per
cent in 2008-09. The Confederation of Indian Industry (CII) pegs the GDP growth at 6.1 per
cent in 2009-10. This scenario factors in sectoral growth rates of 2.8-3 per cent, 5-5.5 per cent
and 7.5-8 per cent, respectively, for agriculture, industry and services.

A number of leading indicators, such as increase in hiring, freight movement at major ports and
encouraging data from a number of key manufacturing segments, such as steel and cement,
indicate that the downturn has bottomed out and highlight the Indian economy's resilience.
Recent indicators from leading indices, such as Nomura's Composite Leading Index (CLI),
UBS' Lead Economic Indicator (LEI) and ABN Amro' Purchasing Managers' Index (PMI), too
bear out this optimism in the Indian economy.

Meanwhile, foreign institutional investors (FIIs) turned net buyers in the Indian market in 2009.
Direct investment inflows also remain strong, prompting official expectations that foreign direct
investment (FDI) inflows in 2009 would better the realized inflows of US$ 33 billion in 2008
and touch US$ 40 billion.

According to the Asian Development Bank's (ADB) 'Asia Capital Markets Monitor' report, the
Indian equity market has emerged as the third biggest after China and Hong Kong in the
emerging Asian region, with a market capitalization of nearly US$ 600 billion.

The Economic scenario

Investor sentiment in India has improved significantly in the first quarter of 2009, according to
a survey conducted by Dutch financial services firm ING. With foreign assets growing by more
than 100 per cent annually in recent years, Indian multinational enterprises (MNEs) have
become significant investors in global business markets and India is rapidly staking a claim to
being a true global business power, according to a survey by the Indian School of Business and
the Vale Columbia Center on Sustainable International Investment.

Despite the global financial crisis, inflow of foreign capital to the country has increased sharply
in 2008-09.

 India's foreign exchange reserves increased by US$ 4.2 billion to US$ 255.9 billion for
the week ended May 8, 2009, according to figures released in the Reserve Bank of India's
(RBI) weekly statistical supplement.
 Net inflows through various non-resident Indians (NRIs) deposits surged from US$ 179
million in 2007-08 to US$ 3,999 million in 2008-09, according to the RBI.

 FDI inflows during April 2008-January 2009 stood at US$ 23.9 billion compared with
US$ 14.4 billion in the corresponding period of the previous fiscal, witnessing a growth
of 65 per cent, according to the Department of Industrial Policy & Promotion.

 FIIs have made investments of around US$ 2 billion as of May 14, 2009, including a
record single day net purchase of US$ 824.72 million on May 13, 2009, according to the
Securities and Exchange Board of India (SEBI).

 Inflation for the week ended March 7, 2009, fell to an all time low of 0.44 per cent. The
sharp fall in inflation was due to several factors including easing prices of food articles
and fuel items along with a high base effect. Currently, the inflation rate stood at 0.7 per
cent for the week ended April 25, 2009.

 The year-on-year (y-o-y) aggregate bank deposits stood at 21.2 per cent as on January 2,
2009. Bank credit touched 24 per cent (y-o-y) on January 2, 2009, as against 21.4 per
cent on January 4, 2008.

 Since October 2008, the RBI has cut the cash reserve ratio (CRR) and the repo rate by
400 basis points each. Also, the reverse repo rate has been lowered by 200 basis points.
Till April 7, 2009, the CRR had further been lowered by 50 basis points, while the repo
and reverse repo rates have been lowered by 150 basis points each.

 Exports from special economic zones (SEZs) rose 33 per cent during the year to end-
March 2009. Exports from such tax-free manufacturing hubs totalled US$ 18.16 billion
last year up from US$ 13.60 billion a year before.
The rural India growth story

The Indian growth story is spreading to the rural and semi-urban areas as well. The next phase
of growth is expected to come from rural markets with rural India accounting for almost half of
the domestic retail market, valued over US$ 300 billion. Rural India is set to witness an
economic boom, with per capita income having grown by 50 per cent over the last 10 years,
mainly on account of rising commodity prices and improved productivity. Development of
basic infrastructure, generation of employment guarantee schemes, better information services
and access to funding are also bringing prosperity to rural households.

Per Capita Income

The per capita income in real terms (at 1999-2000 prices) during 2008-09 is likely to attain a
level of US$ 528 as compared to the Quick Estimate for the year 2007-08 of US$ 500. The
growth rate in per capita income is estimated at 5.6 per cent during 2008-09, as against the
previous year's estimate of 7.6 per cent.

Advantage India

 According to the World Fact Book, India is among the world's youngest nations with a
median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC—Brazil,
Russia, India and China—countries, India is projected to stay the youngest with its
working-age population estimated to rise to 70 per cent of the total demographic by 2030,
the largest in the world. India will see 70 million new entrants to its workforce over the
next 5 years.

 India has the second largest area of arable land in the world, making it one of the world's
largest food producers—over 200 million tonnes of foodgrains are produced annually.
India is the world's largest producer of milk (100 million tonnes per annum), sugarcane
 (315 million tonnes per annum) and tea (930 million kg per annum) and the second
largest producer of rice, fruit and vegetables.

 With the largest number of listed companies - 10,000 across 23 stock exchanges, India
has the third largest investor base in the world.

 India's healthy banking system with a network of 70,000 branches is among the largest in
the world.

 According to a study by the McKinsey Global Institute (MGI), India's consumer market
will be the world's fifth largest (from twelfth) in the world by 2025 and India's middle
class will swell by over ten times from its current size of 50 million to 583 million people
by 2025.

Growth potential

 Special Economic Zones (SEZs) are set to see major investments after the straightening
out of certain regulatory tangles. The commerce department expects about 120 SEZs to
be operational by 2009-end, up from existing 87.

 According to the CII Ernst & Young report titled 'India 2012: Telecom growth continues,'
India's telecom services industry revenues are projected to reach US$ 54 billion in 2012,
up from US$ 31 billion in 2008. The Indian telecom industry registered the highest
number of subscriber additions at 15.84 million in March 2009, setting a global record.

 A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian
consumer market is likely to grow four times by 2025, which is currently valued at US$
511 billion.
  The volume of mergers and acquisitions (M&As) and group restructuring deals in India
witnessed a sharp nine times jump at US$ 2.27 billion during March 2009 against the
volume of deals in February 2009, according to a Grant Thornton report.

 India ranks among the top 12 producers of manufacturing value added (MVA)—
witnessing an increase of 12.3 per cent in its MVA output in 2005-07 as against 6.9 per
cent in 2000-05—according to the United Nations Industrial Development Organization
(UNIDO).

 In textiles, the country is ranked fourth, while in electrical machinery and apparatus it is
ranked fifth. It holds sixth position in the basic metals category; seventh in chemicals and
chemical products; 10th in leather, leather products, refined petroleum products and
nuclear fuel; twelfth in machinery and equipment and motor vehicles.

 In a development slated to enhance India's macroeconomic health as well as energy

security, Reliance Industries (RIL) has commenced natural gas production from its D-6
block in the Krishna-Godavari (KG) basin.

 India has a market value of US$ 270.98 billion in low-carbon and environmental goods &
services (LCEGS). With a 6 per cent share of the US$ 4.32 trillion global market, the
country is tied with Japan at the third position.

Challenges before Indian economy:

 Population explosion: This monster is eating up into the success of India. According to
2001 census of India, population of India in 2001 was 1,028,610,328, growing at a rate of
2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the
nation. Thus India has to control its burgeoning population.
  Poverty: As per records of National Planning Commission, 36% of the Indian population
was living Below Poverty Line in 1993-94. Though this figure has decreased in recent
times but some major steps are needed to be taken to eliminate poverty from India.

 Unemployment: The increasing population is pressing hard on economic resources as

well as job opportunities. Indian government has started various schemes such as Jawahar
Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth
(SEEUY). But these are proving to be a drop in an ocean.

 Rural urban divide: It is said that India lies in villages, even today when there is lots of
talk going about migration to cities, 70% of the Indian population still lives in villages.
There is a very stark difference in pace of rural and urban growth. Unless there isn't a
balanced development Indian economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms.
These include:

 Maintaining fiscal discipline

 Orientation of public expenditure towards sectors in which India is faring badly such as
health and education.

 Introduction of reforms in labour laws to generate more employment opportunities for the
growing population of India.

 Reorganization of agricultural sector, introduction of new technology, reducing

agriculture's dependence on monsoon by developing means of irrigation.

 Introduction of financial reforms including privatization of some public sector banks.

References

 Indian Economy by Bimal Jalan(Former RBI Governor)

 India's Economic Policy by Bimal Jalan(Former RBI Governor)
 Rural Development in India by P. Gopinandhan Pillai
 http://censusindia.gov.in/
 http://indiabudget.nic.in/es2008-09/esmain.htm
 http://india.gov.in/
 http://pib.nic.in/
 http://www.bseindia.com/
 http://www.nseindia.com/
 http://www.rbi.org.in/home.aspx
 https://www.cia.gov/
 http://www.sebi.gov.in/
 http://planningcommission.gov.in/
 http://www.kerala.gov.in/
 http://www.wikipedia.org/