The State of the Economy
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In 2014-15, the Indian economy is poised to overcome the sub-5 per cent growth of gross domestic product (GDP) witnessed over the last two years. The growth slowdown in the last two years was broad based, affecting in particular the industry sector. Inflation too declined during this period, but continued to be above the comfort zone, owing primarily to the elevated level of food inflation. Yet, the developments on the macro stabilization front, particularly the dramatic improvement in the external economic situation with the current account def icit (CAD) declining to manageable levels after two years of worryingly high levels was the redeeming feature of 2013-14. The f iscal def icit of the Centre as a proportion of GDP also declined for the second year in a row as per the announced medium term policy stance. Reflecting the above and the expectations of a change for the better, f inancial markets have surged. Moderation in inflation would help ease the monetary policy stance and revive the conf idence of investors, and with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growth prospects in 2014-15 and beyond.
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INDIAN ECONOMY
The status of India in the world has reached a new level with every country looking upto us as a new avatar which was never before and the good example is the visit of the heads of the states of five permanent members of the Security Council in the year 2010. The main reason for this changed perspective is because of the growing Indian economy, which has withstood the global recession, when other countries are struggling. In 2011, there awaits a few challenges for the Indian economy. The present article will discuss about the emerging challenges for the Indian economy in 2011 and the various suggestions for the growth of the economy. It also highlights certain positive outcomes of 2010.
Increasing Inflation and its impact on the Indian Economy
Book of Abstracts, Jain, CMS Business School, 2022
In the past two decades, there have been many instances where the persistent increase in prices of onion, potatoes and other essential food items has led to the falling of the government in the elections; and the party assuring bringing down costs in 100 days had formed the new governments. It is generally agreed that moderate inflation is acceptable. Typically, monetary and fiscal economists opine that an acceptable moderate rate of inflation is desirable as it prevents stagnation, provides an optimistic outlook, helps mobilize resources, and boosts investment and production. In this regard, Tarapore Committee (1997) opined that 3 % inflation in India is acceptable, while Chakravarty. S Committee (1985) finds that an increase in the price of not more than 4per centt is acceptable, whereas Rangarajan. C (2012) regards 2 to 3 % of inflation as acceptable, and 5 % inflation as threshold inflation for India. RBI targeted inflation is 4 % with 2% variation on either side. Hence the acceptable range of inflation in India lies between 2% to 5 %. The continuous increase in prices or inflation causes the heart burn to majority of Indians as the Indian employment structure is tilted towards informal unorganized sector. In India, 92 % of the workforce is employed in unorganized sector. In the unorganized sector workers neither has regular tenure or receives regular or fixed wages nor is eligible for paid, sick or annual leave or for any social security benefit by the employer. ‘A high proportion of socially and economically underprivileged sections of society are concentrated in the informal economic activities’ (Report of the Committee on Unorganized Sector Statistics 2012). To name few, small and marginal farmers, landless agricultural labourers, share croppers, fishermen, those engaged in animal husbandry, beedi rolling, labeling and packing, building and construction workers, leather workers, weavers, artisans, salt workers, workers in brick kilns and stone quarries, workers in saw mills, oil mills, agricultural labourers, bonded labourers, migrant workers, contract and casual labourers, toddy tappers, scavengers, carriers of head loads, drivers of animal driven vehicles, loaders and unloaders, midwives, domestic workers, fishermen, barbers, vegetable and fruit vendors, newspaper vendors, cobblers, hamals, handicraft artisans, Handloom weavers, Lady tailors, Physically handicapped self-employed persons, Rickshaw pullers, Auto drivers, Sericulture workers, Carpenters, tannery workers, power loom workers etc come under the organized workers. India also was affected as the India economy contracted by 6.6 percent and in absolute GDP terms in 2019-20 and India’s GDP in absolute terms went behind by two years even behind the 2018-19. In the post-Independence period, India’s national income has declined in 1958, 1966, 1973 and 1980 before 2020. The largest drop being in 1980 with 5.2%. This means that 2020-21 fiscal year is the worst year in terms of economic contraction in the country’s history and much worse than the overall contraction among the emerging economies in the world The poverty rate in India as per the World Bank’s international poverty line of 1.9 dollars in PPP terms increased to 12.3 per cent in the financial year 2021 from 9 per cent in the financial year 2020. It is likely to reduce around 10 per cent in FY 2022 (World Bank (2021). The middleclass population shrink by 32 million and is expected to fall to 66 million in 2020 (Pew Research Centre 2021). The Covid-19 has further increased the inequality in India. As per the 'World Inequality Report 2022’, India is among the most unequal countries in the world, with rising poverty and an 'affluent elite. As per the report, the bottom 50 per cent of the households own only 13 per cent. The middle class owns 29.5 per cent of the total wealth as compared with the top 10 per cent holding 65 per cent and top most one per cent own 33 per cent of the total wealth in India. Increase in unemployment is another fallout due to covid-19.
Macroeconomic Challenges IN INDIA
The study of macroeconomics relates to the economic growth of a country. Although many factors contribute towards economic growth such as natural resources, human resources, capital stocks, technology, and people choice of economy, government policies also play an important role in this aspect. Therefore, it is also important for you to understand the effects of the many policies and the need to develop a better policy as this is an important aim in macroeconomics. Macroeconomic policies affect the overall performance of the economy. Two main macroeconomics policies are the financial policy or monetary policy and fiscal policy. “It is the study of the behaviour of very large economic aggregates, their relationships and their determinants… [including]… gross national and domestic product, national investment and savings, imports and exports, and the balance of overseas payments”. And macroeconomic policies refer to those policies which influence such macro aggregates. The scope of this paper is as follows. provides an overview of macroeconomic performance during the decade. recounts the macro policy responses to the principal problems or challenges which surfaced as the decade unfolded. surveys the main institutional reforms carried out in the nineties in the key dimensions of macroeconomic policy: fiscal, monetary and the exchange rate regime. concludes by outlining briefly some of the major ongoing challenges for macroeconomic policy
India 2017: Still no achhe din (good days) for the economy
In 2017 the Indian economy appeared to be on a declining trend up to Quarter 1 (Q1) 2017-18 (April-June 2017). The data for Q2 of 2017-18 (July-September 2018) – the last available at the closing of the present article – were better, but insufficient to conclude that the negative trend had been reversed. In turn, this declining trend was the result of long-term causes, going back at least to Financial Year 2012- 13, which are briefly analysed in the present article. However, its main thrust aims at analysing the two main economic reforms implemented by the Modi government - demonetisation and the Goods and Services Tax. The following analysis shows that, they, far from improving the situation, worsened it, in particular causing the contraction of the informal sector of the economy, without bringing about any development of the formal sector. As shown by a plethora of journalistic enquiries, this adversely impacted the Indian economy although, because of the way in which data on the economy are collected, at the closing of the present article the actual dimension of this negative impact was not yet visible in the official statistics. What was clear was that, in spite of Modi’s promises during the 2014 electoral campaign, job creation was lower than during the UPA governments. At the closing of the period under review, the government started to react to the worsening economic situation not only at the rhetorical level, but by taking some sensible economic decisions such as reviving the Economic Advisory Council and trying to tackle the NPA-induced crisis of the banks.
Chapter 1
The State of the Economy
In 2014-15, the Indian economy is poised to overcome the sub-5 per cent growth of gross domestic product
(GDP) witnessed over the last two years. The growth slowdown in the last two years was broad based,
affecting in particular the industry sector. Inflation too declined during this period, but continued to be
above the comfort zone, owing primarily to the elevated level of food inflation. Yet, the developments on the
macro stabilization front, particularly the dramatic improvement in the external economic situation with
the current account def icit (CAD) declining to manageable levels after two years of worryingly high levels
was the redeeming feature of 2013-14. The f iscal def icit of the Centre as a proportion of GDP also declined
for the second year in a row as per the announced medium term policy stance. Reflecting the above and the
expectations of a change for the better, f inancial markets have surged. Moderation in inflation would help
ease the monetary policy stance and revive the conf idence of investors, and with the global economy
expected to recover moderately, particularly on account of performance in some advanced economies, the
economy can look forward to better growth prospects in 2014-15 and beyond.
1.2
After achieving unprecedented growth of over 9 per cent for
three successive years between 2005-06 and 2007-08 and recovering
swiftly from the global f inancial crisis of 2008-09, the Indian
economy has been going through challenging times that
culminated in lower than 5 per cent growth of GDP at factor cost
at constant prices for two consecutive years, i.e. 2012-13 and 201314. Sub-5 per cent GDP growth for two years in succession was last
witnessed a quarter of a century ago in 1986-87 and 1987-88 (Figure
1.1). Persistent uncertainty in the global outlook, caused by the
Economic growth has slowed
due to domestic structural
and external factors. Two
successive years of sub-5 per
cent growth is witnessed for
the f irst time in 25 years.
Figure 1.1 : Growth in Real GDP
(per cent)
Source: Central Statistics Off ice (CSO)
2
Table 0.1 : Key Indicators
Data categories
1.
Growth Rate
` Crore
6477827
7784115
90097222R
101132811R
11355073PE
15.1
20.2
15.7
12.2
12.3
4918533
52475302R
54821111R
5741791PE
` Crore
4516071
%
8.6
8.9
6.7
4.5
4.7
33.7
33.7
31.3
30.1
na
Capital Formation Rate
% of GDP
36.5
36.5
35.5
34.8
na
46249
54021
61855
67839
74380
218.1
244.5
259.3
257.1
264.4 a
%
5.3
8.2
2.9
1.1
-0.1
%
6.1
5.5
8.2
4.0
6.1
`
Production
Million tonnes
b
Electricity Generation
(growth)
Prices
Inflation (WPI) (average)
%
3.8
9.6
8.9
7.4
6.0
Inf lation CPI (IW) (average)
%
12.4
10.4
8.4
10.4
9.7
External Sector
Export (in US$ terms)
% change
-3.5
40.5
21.8
-1.8
4.1
Import (in US$ terms)
% change
-5.0
28.2
32.3
0.3
-8.3
%
-2.8
-2.8
-4.2
-4.7
-1.7
US$ Billion
279.1
304.8
294.4
292.0
304.2
` /US$
47.44
45.56
47.92
54.41
60.5
Current Account Balance (CAB/GDP)
Foreign Exchange
Reservesc
Average Exchange Rated
7.
2013-14
% of GDP
Index of Industrial Production
(growth)
6.
2012-13
Savings Rate
Food grains
5.
2011-12
Growth Rate
Per Capita Net National Income
(factor cost at current prices)
4.
2010-11
%
GDP (factor cost 2004-05 prices)
3.
2009-10
GDP and Related Indicators
GDP (current market prices)
2.
Unit
Money and Credit
Broad Money (M3) (annual)
% change
16.9
16.1
13.2
13.6
13.3
Scheduled Commercial Bank Credit
% change
16.9
21.5
17
14.1
13.9
Gross Fiscal Def icit
% of GDP
6.5
4.8
5.7
4.9
4.5e
Revenue Def icit
% of GDP
5.2
3.2
4.4
3.6
3.2e
Primary Def icit
% of GDP
3.2
1.8
2.7
1.8
1.2e
n.a.
1210f
n.a.
n.a.
n.a.
Fiscal Indicators (Centre)
Population
Million
Note: na: not available. 1R: 1st Revised Estimates, 2R: 2nd Revised Estimates, PE: Provisional Estimates.
a Third advance estimates.
b The Index of Industrial Production has been revised since 2005-06 on base (2004-05=100).
c At end March.
d Average exchange rate (RBI’s reference rate).
e Fiscal indicators for 2013-14 are based on the provisional actuals.
f
Census 2011.
2
ECONOMIC SURVEY 2013-14
3
crisis in the Euro area and general slowdown in the global
economy, compounded by domestic structural constraints and
inflationary pressures, resulted in a protracted slowdown. The
slowdown is broadly in sync with trends in other emerging
economies, but relatively deeper. India’s growth declined from an
average of 8.3 per cent per annum during 2004-05 to
2011-12 to an average of 4.6 per cent in 2012-13 and 2013-14. Average
growth in the emerging markets and developing economies
including China declined from 6.8 per cent to 4.9 per cent in this
period (calendar-year basis). What is particularly worrisome is the
slowdown in manufacturing growth that averaged 0.2 per cent per
annum in 2012-13 and 2013-14.
1.3
In addition to the growth slowdown, inflation continued to
pose signif icant challenges. Although average wholesale
price index (WPI) inflation declined in 2013-14 to 6.0 per cent visà-vis 8.9 per cent in 2011-12 and 7.4 per cent in 2012-13, it is still
above comfort levels. Moreover, WPI inflation in food articles
that averaged 12.2 per cent annually in the f ive years ending
2013-14, was signif icantly higher than non-food inf lation.
Fortunately, the upward trend of inflation that played a part in
slowdown in growth, savings, investment, and consumption, appears
to have subsided.
1.4
The external sector witnessed a remarkable turnaround after
the f irst quarter of 2013-14, and the year ended with a CAD of 1.7
per cent of GDP as against 4.7 per cent in 2012-13. After plummeting
to ` 68.36 to a US dollar on 28 August 2013, triggered by the
expected taper of quantitative easing in the United States, the
rupee gradually strengthened and the year ended with the exchange
rate averaging ` 61 per US dollar in March 2014, owing to measures
taken by the government and the Reserve Bank of India (RBI).
Foreign exchange reserves increased by nearly US$ 40 billion from
US$ 275 billion in early September 2013 to US$ 314.9 billion on
20 June 2014. These developments on external account have
generated some optimism that the Indian economy is better
prepared to confront the challenges of global policy reversals,
including tapering of quantitative easing in the US. Improvement
is also observed on the f iscal front, with the f iscal deficit declining
from 5.7 per cent of GDP in 2011-12 to 4.9 per cent in 2012-13 and
4.5 per cent in 2013-14. Much of this improvement has been
achieved by reduction in expenditure rather than from increased
revenue. Nevertheless, the corrections in f iscal and current account
def icits augur well for macroeconomic stabilization.
1.5
The improvements in the twin def icits would, no doubt,
feed into a higher growth in 2014-15, but the pace of recovery may
be gradual. After reaching a low of 4.4 per cent during the last
two quarters (Q3 and Q4) of 2012-13, growth inched up to 4.7 per
cent in Q1 of 2013-14 and further to 5.2 per cent in Q2 of 2013-14,
only to decline to 4.6 per cent in the next two quarters. The fact
that this happened despite a gradual recovery in the global economy
indicates the importance of addressing the domestic structural
constraints that have engendered an undulating and gradual
recovery (Box 1.1).
THE STATE OF THE ECONOMY
Inflation has eased but is still
above comfort levels.
Improvements are visible on
the f iscal front and in the
current account balance.
Sustenance of early signs of
growth pick-up depends on
amelioration of structural
constraints.
3
4
Box 1.1 : What are structural constraints?
The impact of domestic structural factors on the current economic slowdown in India is often explained in terms
of the irreconcilability of rate of f ixed investment of around 30 per cent of GDP and sub-5 per cent growth, given
India’s demand conditions and long-term incremental capital-output ratio. Application of time series techniques
that attempt to decompose the slowdown into structural and cyclical components, have acknowledged the presence
of both, though the assignment of proportions differs (Chinoy and Aziz [2013]; IMF, WEO [2014]; Mishra [2013],
among others). The accentuation of structural constraints has been one of the factors contributing to sub-5 per
cent growth without a commensurate large decline in investment rate.
What are these structural factors? Salient among them as indicated by some studies are the following:
Diff iculties in taking quick decisions on project proposals have affected the ease of doing business. This has
resulted in considerable project delays and insuff icient complementary investments.
Ill-targeted subsidies cramp the f iscal space for public investment and distort allocation of resources.
Low manufacturing base, especially of capital goods, and low value addition in manufacturing. Manufacturing
growth and exports could be facilitated with simplif ied procedures, easy credit, and reduced transaction cost.
Presence of a large informal sector and inadequate labour absorption in the formal sector. Absence of required
skills is considered an important reason.
Sustaining high economic growth is diff icult without robust agricultural growth. Low agricultural productivity
is hampering this.
Structural factors engendering continued high food inflation need to be tackled. Issues related to signif icant
presence of intermediaries in the different tiers of marketing, shortage of storage and processing infrastructure,
inter-state movement of agricultural produce, etc. need to be addressed.
References
1. Chinoy, Sajjid Z. and Jahangir Aziz (2013), ‘Why is India’s growth at a 10-year low?’, available at
www.jpmorganmarkets.com.
2. Mishra, Prachi (2013), ‘Has India’s Growth Story Withered?’, Economic and Political Weekly, vol. XLVIII (15).
3. International Monetary Fund (IMF) (2014), World Economic Outlook (WEO), April.
SECTORAL GROWTH TRENDS
1.6
Aided by a favourable monsoons, the agriculture and allied
sectors achieved a growth of 4.7 per cent in 2013-14 (Table 1.1),
compared to its long-run average of around 3 per cent (between
1999-2000 and 2012-13). However, in some other sectors, slowdown
has been more pronounced and protracted. Mining and quarrying
Sector
Agriculture, forestry,
& f ishing
Mining & quarrying
Manufacturing
Electricity, gas, &
water supply
Construction
Trade, hotels,
transport, storage, &
communication
Financing, insurance,
real estate, & business
services
Community, social, &
personal services
GDP at factor cost
200708
2008- 2009- 2010- 2011-12
09
10
11
(2R)
Favourable monsoons helped
agricultural growth and
power generation. Slowdown
in industry continued.
2012-13 2013-14
(1R)
(PE)
5.8
0.1
0.8
8.6
5.0
1.4
4.7
3.7
10.3
8.3
2.1
4.3
4.6
5.9
11.3
6.2
6.5
8.9
5.3
0.1
7.4
8.4
-2.2
1.1
2.3
-1.4
-0.7
5.9
10.8
10.9
5.3
7.5
6.7
10.4
5.7
12.2
10.8
4.3
1.1
5.1
1.6
3.0
12.0
12.0
9.7
10.0
11.3
10.9
12.9
6.9
12.5
11.7
4.2
4.9
5.3
5.6
9.3
6.7
8.6
8.9
6.7
4.5
4.7
Table 1.1 : Growth in GDP at
Factor Cost at Constant
(2004-05) Prices
(per cent)
Source: CSO.
Note: 2R: second revised, 1R: f irst revised, PE: provisional estimate.
4
ECONOMIC SURVEY 2013-14
5
activities have decelerated since 2011-12. Two prominent components
of mining, coal and crude petroleum, have stagnated in the last
three-four years. Subsequent to an average growth of 7.1 per cent
in coal production during the four-year period 2006-07 to 2009-10,
its growth declined to an average of 1.6 per cent during the next
four years ending 2013-14. The slowdown in coal production partly
owes to regulatory issues. The compound annual growth rate
(CAGR) of crude petroleum was 1.2 per cent during 2004-05 to
2013-14. As coal and petroleum are universal intermediates, the slack
in their production impacted the economy adversely.
1.7
The last two years were particularly disappointing for the
manufacturing sector, with growth averaging 0.2 per cent per
annum. The decline has been quite broad based, as per data from
the index of industrial production (IIP). Decline in the growth
rate for basic goods continued for the third year in succession in
2013-14. Output of capital goods declined for the third year in a
row starting 2011-12. Contraction of 12.2 per cent in the consumer
durables segment was observed in 2013-14. Only intermediate and
non-durable consumer goods registered higher growth rate in 201314 vis-à-vis 2012-13. Following close to double-digit growth between
Box 1.2 : Trends in Employment
Slowdown in employment growth has been a serious concern in recent years. As per National Sample Survey
Off ice data, the number of persons in the workforce (usual status) increased from 398 million in 1999-2000 to 458
million in 2004-05, an increase of nearly 60 million (nearly equally divided between the agriculture and nonagriculture sectors) or 15 per cent in f ive years. This increased further to 473 million in 2011-12, an increase of 15
million or 3.3 per cent over a span of seven years.
There was a decline in the workforce in the agriculture and allied sector by over 36 million between 2004-05 and
2011-12. On the other hand, the number of persons in the workforce in the non-agriculture sector increased by 51
million with industry and services contributing nearly 31 million and 20 million respectively. The table below gives
the share of different sectors or the sectoral composition of the workforce (employed) by usual principal and
subsidiary status (UPSS).
Share of Major Sectors in Total Employment (per cent)
1999-2000
2004-05
2011-12
Agriculture & allied
59.9
58.5
48.9
Industry
16.4
18.2
24.3
Services
23.7
23.3
26.9
Source: Rangarajan, Seema, and Vibeesh (2014).
Decline in the share of employment in agriculture has been observed in most countries in their development
process. Within industry, the bulk of the employment increase was accounted for by construction with an increase
of nearly 25 million between 2004-05 and 2011-12. Employment increased by 6 million in the manufacturing sector.
The around 20 million increase in employment in the services sector between 2004-05 and 2011-12 was more or less
uniformly accounted for by an increase in the trade, hotels, and restaurants sector (4.7 million); transport, storage,
and communications (5.4 million); f inancing, real estate, and business services (5.3 million); and community, social,
and personal services (5 million) [Rangarajan, Seema, and Vibeesh (2014)].
In recent years there has also been a decline in the labour force and workforce participation rates of women. A
large number of analysts have ascribed this to a rapid increase in female participation in education, both in the
rural and urban areas.
Reference
Rangarajan, C., Seema, and E. M. Vibeesh (2014), ‘Developments in the Workforce between 2009-10 and 2011-12’,
Economic and Political Weekly, vol. XLIX (23).
THE STATE OF THE ECONOMY
5
6
2004-05 and 2011-12, the construction sector (that was the major
source of employment in this period, as can be seen from Box 1.2)
lost momentum in the last two years. Taken together with the
trends in capital goods, the slowdown in construction activity
reflects subdued business sentiments.
1.8
The data on manufacturing growth during the last two years
need to be interpreted with care, given the possibility of revisions
by the CSO. The initial estimates of value added in manufacturing
sector are based on the IIP, while the second and third revised
estimates are based on more detailed data from the Annual Survey
of Industries (ASI). For example, as per the National Accounts
Statistics, the growth rate of manufacturing for 2011-12 was revised
to 7.4 per cent in the second revised estimates (released in January
2014) from 2.7 per cent estimated earlier as ASI data for 2011-12
became available only in the second half of 2013.
1.9
The slowdown in services, in particular the internal trade,
transport, and storage sectors, could be attributed to the loss of
momentum in commodity-producing sectors. The moderate revival
in the global economy may have helped the growth in business
services. Bank credit grew by 14.3 per cent in 2013-14, indicating
buoyant activity in f inancial services.
1.10 The disaggregated sectoral trends may be better understood
in terms of movement in sectoral shares in GDP, as seen from
Table 1.2. The share of the agriculture and allied sectors in GDP
has been consistently declining. During the eight years between
1999-2000 and 2007-08, the share of agriculture and allied sectors
in GDP declined by 6.4 percentage points, while that of
industry and services increased by 1.9 and 4.4 percentage points
respectively.
Sector
1999-2000
Agriculture & allied
Industry
Mining & quarrying
Manufacturing
Registered manufacturing
Unregistered manufacturing
Services
Trade, hotels, transport, and
communication
Financing, insurance, real estate, and
business services
Community, social, and personal
services
2007-08
2012-13
2013-14(P)
23.2
26.8
3.0
15.0
9.2
5.8
50.0
21.2
16.8
28.7
2.5
16.1
10.7
5.4
54.4
25.9
13.9
27.3
2.0
15.8
11.2
4.5
58.8
26.9
13.9
26.1
1.9
14.9
NA
NA
59.9
26.4
14.5
16.1
19.1
20.6
14.4
12.4
12.8
12.9
Table 1.2 : Sectoral Share in GDP
(per cent)
Source: Calculated from National Accounts Statistics, CSO.
P: Provisional. NA: not available.
Note: Industry includes electricity, gas & water supply and construction sectors
that are not indicated in the table.
1.11
The mining and quarrying sector witnessed continuous
decline in GDP share for several years, indicating its inability to
cater to requirements of high growth, in the absence of
comprehensive reforms.
1.12 In the case of manufacturing, most of the gain in share
occurred during 2004-05 to 2007-08, when the sector was growing
6
ECONOMIC SURVEY 2013-14
7
at an annual average rate exceeding 10 per cent, along with robust
growth in corporate prof its, savings, and investment. Activity was
buoyant in registered manufacturing, while the share of
unregistered manufacturing remained unchanged during the four
years ending 2007-08. During 2008-09 to 2012-13, the share of
manufacturing remained roughly constant despite an increase in
share of the registered segment, as unregistered manufacturing
recorded an average annual growth of only 3.4 per cent.
1.13 The share of services has been consistently rising; more so
since 2004-05. However, the pace of expansion was not balanced.
The biggest drivers of the service sector expansion since 2004-05
were communications and banking and insurance. Robust growth
in these sectors primarily drove the expansion of the services sector
even after 2010-11. Real estate and business services also gained share.
The services that witnessed stagnation/decline in share after
2010-11 include domestic trade, hotels, and storage. The inability of
some of these employment-intensive sectors to attain sustained
momentum is one of the reasons for the less-than commensurate
growth in employment in services.
Revival of growth in services
depends on growth revival
in commodity producing
sectors. Industrial revival is
central to sustained revival in
overall growth.
1.14 In the absence of suff iciently high growth in agriculture
and industry, services would be seriously constrained to sustain
growth acceleration on auto-pilot mode since many of the services
are dependent on buoyancy in the commodity-producing sectors,
especially industry (Box 1.3).
Box 1.3 : Input flows in the economy
One of the ways to study inter-sectoral linkages is by examining the inter-industry input flow matrix. The table
below has been constructed from the latest available input-output tables (2007-08) released by the CSO.
The information, though slightly dated, could be indicative of the state of inter-sectoral linkages.
Inter-industry Input Flows in the Economy (in per cent)
Agriculture and
allied sector input
Industrial
sector input
Service
sector input
55.3
21.4
23.3
7.7
68.2
24.1
7.5
45.1
47.5
Agriculture & allied
Industry
Services
Contribution to Total Inputs in the Economy (in per cent)
Agriculture & allied
Industry
Services
11.8
59.6
28.6
Source: Internal calculations based on the CSO’s input-output tables.
The upper panel of the table implies that out of the total input requirement of the agriculture and allied sector,
55.3 per cent was contributed by the sector itself, while industry and services accounted for 21.4 per cent and
23.3 per cent respectively. More than two-thirds of the total inputs required by industry came from industry itself,
while nearly one-fourth were from the services sector. Over half the inputs for the services sector came from the
industrial and agricultural sectors. The table highlights the importance of the industrial sector in sustaining
economic activity in the services sector. As is evident from the lower panel of the table, the agricultural sector
accounted for 11.8 per cent of the total inputs employed in the economy, while the industrial and services sectors
accounted for 59.6 per cent and 28.6 per cent respectively. Hence a sustained recovery in the industrial sector is
at the heart of a sustained growth recovery.
THE STATE OF THE ECONOMY
7
8
QUARTERLY TRENDS
1.15 Quarterly GDP f igures can be helpful in detecting inflexion
points within the year (Figure 1.2). The current episode of a rather
protracted growth deceleration commenced in Q1 2011-12, while
the growth slowdown in manufacturing started in Q2 2011-12. The
slowdown in mining and quarrying became evident in Q4 2010-11
and this trend continues. Electricity, gas, and water supply
witnessed somewhat higher growth in 2013-14 vis-à-vis 2012-13,
owing mainly to higher electricity generation from hydel sources
on account of improved water availability in reservoirs.
Figure 1.2 : Quarter-wise Growth in GDP
at Factor Cost (2004-05 prices)
Source: CSO
AGGREGATE DEMAND
1.16 Aggregate demand of the economy comprises f inal consumption and investment along with net exports (exports minus imports)
of merchandise and non-factor services. In national accounting
identity, the current account balance maps the difference between
domestic savings and domestic investment, which conveys the
extent of this gap that needs to be bridged by foreign savings.
1.17 Aggregate demand, measured in terms of GDP at constant
(2004-05) market prices, registered a growth of 5.0 per cent in the
year 2013-14 as against 4.7 per cent in the previous year. The growth
in private f inal consumption, which averaged 7.8 per cent during
2003-04 to 2011-12, declined to 5.0 per cent in 2012-13 and further
to 4.8 per cent in 2013-14. In real terms, f ixed investment hardly
increased between 2011-12 and 2013-14. In terms of share of GDP,
the most striking change on the demand side during 2012-13 and
2013-14 was the precipitous decline in the gross f ixed capital
formation to GDP ratio by 2.1 percentage points. Thus, the increase
in the growth rate of aggregate demand in 2013-14 mainly owes to
higher level of net exports (reflected by a reduction in the gap
between exports and imports as can be seen in Table 1.3). The
major components of aggregate demand are analysed in the
sections that follow.
Consumption
1.18 Final consumption expenditure is estimated separately for
government and private entities. The share of f inal consumption
8
Aggregate demand recovered
mildly in 2013-14.
Item
2011-12 2012-13 2013-14
(2R)
(1R)
(PE)
(i) TFCE
Private
Government
(ii) GCF
FCF
Change in
stocks
Valuables
(iii) Exports
(iv) Less imports
68.5
57.1
11.4
35.5
31.8
68.8
57.1
11.8
34.8
30.4
68.9
57.1
11.8
NA
28.3
1.9
2.7
23.9
30.2
1.7
2.6
24.0
30.7
1.6
1.5
24.8
28.4
Source: CSO.
Note: TFCE: Total f inal consumption
expenditure, GCF: Gross capital formation,
FCF: Fixed capital formation, 2R: second
revised, 1R: f irst revised, PE: provisional
estimate.
Sum of (i) to (iv) may not be 100 on
account of discrepancies and rounding off.
Table 1.3 : Components of GDP at
Current Market Prices and Share in
GDP (per cent)
ECONOMIC SURVEY 2013-14
9
in GDP has been declining consistently since the 1950s, reflecting
mainly the decline in share of private f inal consumption
expenditure (PFCE). This is not surprising, as higher income levels
have led to higher savings by households and reduced the share of
consumption. This was also inevitable as higher investment required
for raising growth had to come from higher domestic savings given
the export pessimism that prevailed till the early 1980s. Despite
high oscillations in annual growth, government consumption
expenditure as a proportion of GDP has exhibited remarkable
consistency since the 1980s (Table 1.4).
1.19 The share of the food items, beverages, and tobacco group in
total f inal consumption in real terms declined by 9.5 percentage
points of the GDP in the nine years from 2004-05 to 2012-13.
However, in nominal terms (Table 1.5), this decline was only about
half of the decline in real terms, reflecting higher inflation for
these products during this period.
1.20 Apart from the food, beverages and tobacco group, there
was a decline in the share of gross rent, fuel, and power, medical
care and health services, and transport and communications, while
the largest increase was registered in, other miscellaneous services
comprising banking charges, legal services, business services, and
life insurance. There has been a progressive inclination towards
the consumption of services and a move away from non-durable
goods, especially food items.
Item
Food, beverages, & tobacco
Clothing & footwear
Gross rent, fuel, & power
Furniture, furnishing, appliances, & services
Medical care & health services
Transport & communication
Recreation, education, & cultural services
Personal care & effects
Personal goods n.e.c.
Other miscellaneous services
Share of private consumption
in GDP has declined in
recent years.
Item
1980s
1990s
2000s
2010-11
to
2013-14
TFCE
85.8
77.5
71.6
68.4
PFCE
74.5
65.9
60.3
56.8
GFCE
11.3
11.6
11.3
11.6
Source: CSO.
Note: Data for 2013-14 is provisional.
GFCE is government f inal consumption
expenditure, PFCE is private f inal
consumption expenditure and TFCE is
total f inal consumption expenditure.
Table 1.4 : Share of Final Consumption
in GDP at Current Market Prices
(per cent)
Ratio at current prices
2004-05
2012-13
40.0
6.6
13.8
3.4
5.0
19.3
3.0
2.7
1.6
4.7
35.2
7.2
13.1
3.9
3.6
17.4
2.5
3.8
1.8
11.5
Table 1.5 : Share of Different Categories
of Goods and Services in PFCE in
the Domestic Market
(per cent of total)
Source: CSO
Investment
1.21 Investment comprises f ixed capital formation, acquisition of
valuables, and changes in stock and inventories, adjusted for
errors and omissions. The investment rate (investment to GDP
ratio) averaged 24.5 per cent over the period 1990-91 to 2003-04
(Table 1.6). The year 2004-05 marked a break, with the rate of
investment exceeding 30 per cent for the f irst time. Between 200405 and 2012-13, the rate of investment averaged 35.4 per cent,
reaching the peak of 38.1 per cent in 2007-08. It averaged 35.3 per
cent during the higher growth phase of 2004-05 to 2007-08 and
35.5 per cent between 2008-09 and 2012-13. The investment rate of
34.8 per cent in 2012-13 is lower than these two sub-period averages.
1.22 The rate of gross f ixed investment, which accounts for the
bulk of total investment, increased signif icantly from 2004-05,
peaked in 2007-08, and generally declined thereafter. As per the
THE STATE OF THE ECONOMY
Fixed investment rate
declined steeply in 2013-14.
9
10
Item
I.
(i)
(ii)
(iii)
II.
III.
Gross f ixed capital
formation
Construction
Machinery & equipment
Public sector
Construction
Machinery & equipment
Private corporate sector
Construction
Machinery & equipment
Household sector
Construction
Machinery & equipment
Change in stocks
Valuables
IV. Total investment*
199091 to
19992000
200001 to
2003-04
2004- 2008- 2012- 201305 to
09 to
13
14
2007-08 2012-13
23.1
24.0
30.8
31.4
30.4
28.3
12.1
11.0
8.6
4.7
3.9
6.7
1.0
5.6
7.9
6.4
1.5
0.7
—
14.2
9.8
6.7
4.3
2.4
5.5
1.3
4.3
11.8
8.6
3.2
0.5
0.7
16.9
13.9
7.6
5.0
2.6
11.9
3.5
8.4
11.3
8.4
2.9
3.2
1.2
17.7
13.8
7.9
5.3
2.7
9.8
2.5
7.2
13.7
9.9
3.9
2.4
2.1
17.5
12.9
7.8
5.4
2.4
8.5
2.4
6.0
14.1
9.7
4.4
1.7
2.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.6
1.5
24.3
25.0
35.3
35.5
34.8
NA
Table 1.6 : Components of Investment as
Ratios of GDP at Current Market Prices
(per cent)
Source: Calculated from information contained in National Accounts Statistics,
CSO.
Note: * Total investment may not be equal to the sum of the three components
because of errors and omissions.
provisional estimates for 2013-14 released by the CSO, the ratio of
f ixed capital formation to GDP in 2013-14 was 2.1 percentage points
lower than in 2012-13. The ratio of valuables to GDP generally
increased, even in the period when f ixed investment declined, thus
keeping the overall rate of investment at around 35 per cent.
Changes in stocks are generally subject to wide fluctuations.
1.23 Increase in investment by the private corporate sector
explained the bulk of the increase in overall investment during
the upswing phase between 2004-05 and 2007-08. The same sector
contributed the most to the current decline in investment rate
(Table 1.7). (Box 1.4 examines the proximate causes of decline in
investment). The growth in investment by the private corporate
sector was particularly sharp during 2004-05 to 2007-08, when it
averaged 48.1 per cent annually at current prices. The rate of growth
declined to 3.4 per cent during 2008-09 to 2012-13. Public-sector
investment, which grew at an annual rate of 23.9 per cent in the
former period, also slowed subsequently. Household investment
growth, in contrast, increased from an annual average of 12.3 per
cent during 2004-05 to 2007-08 to an average of 23.5 per cent in
2008-09 to 2012-2013. These patterns of investment by institutions
are reflected in Table 1.7.
Sector
1990-91
to 19992000
2000-01
to
2003-04
2004-05
to
2007-08
2008-09
to
2012-13
2012-13
Public
8.8
6.8
8.1
8.6
8.1
Private Corporate
7.0
5.6
13.9
11.1
9.2
Household
8.0
12.1
11.9
14.1
14.8
24.3
25.0
35.3
35.5
34.8
Total investment*
Source:
Note: *
10
Reduced private corporate
investment rate is the
primary reason for decline in
overall investment rate.
Table 1.7 : Investment by Type of
Institution as a Ratio of GDP at
Current Market Prices (per cent)
CSO.
Total investment will not be equal to the sum of the three components
because of valuables and errors and omissions.
ECONOMIC SURVEY 2013-14
11
Box 1.4 : Investment Slowdown : Proximate Factors
Is it the nominal or real interest rate that explains the reduction in investment rate? A study entitled ‘Real Interest
Rate Impact on Investment and Growth- What the Empirical Evidence for India Suggests?’, by the RBI, indicates
that it is not so much the nominal but real interest rate that explains investment decisions. It is, however, argued by
some that, in recent years, investment growth has weakened despite lower real interest rates. The study highlights
that a lower real interest rate can stimulate investment and growth, provided it is not achieved via higher inflation.
The study further suggests that nominal interest rate is, however, more important than real interest rate for
investment planning at the f irm level.
The RBI study also points to the role of leverage in explaining investment decisions: ‘In a highly leveraged sector,
such as infrastructure, the required rate of return on equity may remain high but the actual return on equity will
be a function of interest costs and cash f lows outlook. If interest costs rise and expected cash flow declines,
arranging adequate equity capital flow could be diff icult, which in turn may lead to shelving of some of planned
investment projects.’ The decline in cash flows of corporates could also be attributed to (a) sluggish demand
conditions, (b) weak pricing power, (c) high input cost, and (d) delays in collection of receivables after delivery of
orders.
Part of the slowdown in investment growth post 2007-08 can be attributed to policy uncertainty emanating from
diff iculties in land acquisition, delayed environmental clearances, infrastructure bottlenecks, problems in coal
linkages, ban on mining in selected areas, etc. According to Tokuoka (2012), high and volatile inflation (partly
caused by high f iscal def icit) along with heightened global uncertainty may have resulted in slowdown in corporate
investment. Slowdown in investment could also be explained in terms of the subdued business environment and
bleak business conf idence.
Anand and Tulin (2014) suggest that while real interest rates explain aggregate investment activity better than
nominal interest rates, they account for only one quarter of the explained investment downturn. They conclude
that standard macro-f inancial variables do not fully explain the recent investment slump and increased uncertainty
along with deteriorating business conf idence have also played a key role. According to them, lowering nominal
interest rates may provide short-term relief from interest burden but, in the medium term, lower rates with little
slack in the economy will lead to further inflation, affecting investment adversely. Therefore structural reforms and
resolving supply-side bottlenecks are the key to incentivizing investment.
References
1. RBI (2013), ‘Real Interest Rate Impact on Investment and Growth — What the Empirical Evidence for India
Suggests?’ available at www.rbi.org.in.
2. Tokuoka, Kiichi (2012), ‘Does the Business Environment Affect Corporate Investment in India?’, IMF Working
Paper, WP/12/70.
3. Anand, Rahul and V. Tulin (2014), ‘Disentangling India’s Investment Slowdown’, IMF Working Paper, WP/14/47.
1.24 In the high growth phase between 2004-05 and 2007-08,
the machinery and equipment segment of f ixed investment of the
private corporate sector as a ratio of GDP nearly doubled (Table 1.6).
Similarly, the ratio of construction also registered a sharp increase.
Figure 1.3 : Gross Fixed Investment in
Private Corporate Sector and its
Components as a Ratio of GDP
Source: CSO.
THE STATE OF THE ECONOMY
11
12
The decline in f ixed investment rate in the last three-four years
can be mainly attributed to decline in the share of the machinery
and equipment segment of the private corporate sector (Figure 1.3).
1.25 The decline in the construction segment of f ixed investment
by the private corporate sector (as a ratio of GDP) has been
relatively moderate, as against that in the machinery and equipment
segment. This could be on account of the fact that the machinery
and equipment segment of investment responds relatively more
quickly to business sentiments than the construction segment. The
long gestation period for construction implies that a project once
started/shelved would take longer to stop/revive with change in
business sentiments. Investing in machinery and equipment during
slowdown may also lead to its underutilization, along with the
usual wear and tear (obsolescence). Construction activity is less
prone to these problems.
Valuables
1.26 Valuables include assets that are primarily held as store of
value. Net acquisition of valuables covers precious articles, gems
and stones, silver, gold, platinum, and gold and silver ornaments.
Change in aggregate possession of valuables may not have any
direct bearing on the productive capacity of the economy.
1.27 Acquisition of valuables has been subject to signif icant
fluctuations in recent years. Their share in GDP increased from
1.2 per cent in 2006-07 to 2.6 per cent in 2012-13 and then declined
to 1.5 per cent in 2013-14. The value of imports of gold and silver
increased from US$ 42.6 billion in 2010-11 to US$ 55.8 billion in
2012-13. In order to restore stability in the foreign exchange market
and reduce the CAD, several measures including hike in import
duties on gold and silver were announced by the government in
August 2013. These measures resulted in reduction in the combined
value of import of gold and silver by about 40 per cent in US
dollar terms, which is largely reflected in the decline in share of
valuables in the GDP.
Net exports
1.28 Net exports in national accounts are def ined as the difference
between export of goods and non-factor services and import of
goods and non-factor services. Although full-fledged recovery in
the global economy is still distant, the early signs of global economic
strengthening helped India achieve partial recovery in exports. On
the other hand, measures taken by the government and the RBI to
contain the CAD, primarily by disincentivizing the import of nonessential items, coupled with economic slowdown, helped in
reducing imports. The share of exports in GDP increased from 24.0
per cent in 2012-13 to 24.8 per cent in 2013-14, while the share of
imports declined from 30.7 per cent to 28.4 per cent, resulting in an
improvement in net exports by 3.1 percentage points of GDP.
Moderate revival of exports,
coupled with decline in
imports, helped improve net
exports.
PUBLIC FINANCE
1.29 In the aftermath of the adoption of the Fiscal Responsibility
and Budget Management (FRBM) Act, the f iscal def icit of the centre
was brought down to 2.5 per cent of GDP in 2007-08 that was below
the threshold target of 3 per cent of GDP. Fiscal balances were
12
ECONOMIC SURVEY 2013-14
13
deliberately expanded in the aftermath of the global f inancial crisis
in 2008-09 to shore up aggregate demand and raise the growth rate.
The gradual f iscal consolidation process was resumed in 2010-11. The
government unveiled a revised f iscal consolidation roadmap in
October 2012. It targeted a f iscal def icit of 4.8 per cent of GDP for
2013-14 and through a correction of 0.6 percentage point each year
thereafter, a f iscal def icit of 3.0 per cent of GDP by 2016-17.
1.30 The fiscal deficit of 4.5 per cent of GDP in 2013-14 as compared
to the budgeted target of 4.8 per cent of GDP is indicative of
continued focus on f iscal consolidation. With a shortfall in tax
revenues and disinvestment receipts along with higher-thanbudgeted subsidies and interest and pension payments, f iscal
consolidation was mainly achieved through reduction in expenditure
from the budgeted levels.
Fiscal consolidation was
achieved with lower-than
budgeted expenditure in
2013-14.
1.31 The outcome in terms of f iscal def icit of the Centre broadly
indicates that despite the macroeconomic uncertainties and elevated
global crude oil prices, f iscal targets were achieved. Raising the taxGDP ratio above the currently prevailing levels is critical for
sustaining the process of f iscal consolidation in the long run as
compression of expenditure beyond a certain minimum can be
counter-productive.
1.32 One of the major factors that has resulted in an increase in
the Centre’s f iscal def icit after 2008-09 has been the build-up in
subsidies. As per the provisional actual f igures of the Controller
General of Accounts (CGA), major subsidies amounted to ` 2,47,596
crore in 2013-14. There has been a sharp increase in total subsidies
from 1.42 per cent of GDP in 2007-08 to 2.56 per cent of GDP in
2012-13, and 2.26 per cent of GDP in 2013-14 (RE). Food subsidy has
been increasing due to the widening gap between the economic
cost of procurement by the Food Corporation of India and the central
issue prices f ixed for cereals under the public distribution system
(PDS). While there has been partial decontrol of fertilizer subsidy,
prices of urea are still sticky; similarly petrol prices have been
decontrolled and diesel prices are subjected to monthly increases of
` 0.50 per litre. The cap set on the number of subsidized LPG cylinders
per annum per family was increased from 9 to 12 from April 2014. In
addition, leakages contribute substantially to the overall increase in
subsidy burden. In the case of food subsidy, the Performance
Evaluation Report of the Planning Commission on Targeted PDS
(2005) states that for every kilogram of grains delivered to the poor,
the GOI released 2.4 kg from the central pool. This has implications
for the delivery cost of PDS foodgrains through the existing delivery
mechanism.
Raising the tax-GDP ratio
and furtherance of subsidy
reforms are essential for
f iscal consolidation.
1.33 Higher f iscal def icits usually lead to rising public debt. India’s
central government liabilities-GDP ratio declined from 61.6 per cent
in 2002-03 to 49.4 per cent in 2013-14 (RE). The reduction in this ratio
owes to higher nominal GDP growth rate vis-à-vis nominal interest
rates. Of the total public debt, internal debt constitutes 95.5 per cent,
whereas external debt (at book value) constitutes the remaining.
DOMESTIC SAVINGS
1.34 For estimation of gross domestic savings, the economy is
classif ied into three broad institutional sectors, public, private
THE STATE OF THE ECONOMY
13
14
Table 1.8 : Gross Domestic Savings Rate and its Components as Percentage of GDP at Current Market Prices
Item
Gross domestic savings
Household sector
Financial
Physical
Private corporate sector
Public sector
1990s
2000s
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Historic high*
23.0
17.7
9.6
8.0
3.6
1.6
30.6
23.1
10.8
12.3
6.3
1.2
36.8
22.4
11.6
10.8
9.4
5.0
32.0
23.6
10.1
13.5
7.4
1.0
33.7
25.2
12.0
13.2
8.4
0.2
33.7
23.1
9.9
13.2
8.0
2.6
31.3
22.8
7.0
15.8
7.3
1.2
30.1
21.9
7.1
14.8
7.1
1.2
36.8 (2007-08)
25.2 (2009-10)
12.0 (2009-10)
15.8 (2011-12)
9.4 (2007-08)
5.6 (1976-77)
Source: CSO.
Note: * The f igure in brackets is the year in which the highest rate was recorded.
corporate, and households. The savings rate increased from 29.0
per cent in 2003-04, the highest achieved till then, to
36.8 per cent in 2007-08, which still remains the historic peak
(Table 1.8).
1.35 From a high of 36.8 per cent, the gross savings rate fell by
6.7 percentage points of the GDP in 2012-13. The bulk of the decline
can be attributed to the private corporate and public sectors.
While the decline in the former owes mainly to lower growth in
the industry sector and lower prof it margins, lower public savings
to GDP ratio can be attributed to reduced savings of nondepartmental public enterprises and greater dis-savings of public
authorities. The savings of the household sector are the sum of
f inancial savings and savings in physical assets. The household
savings rate had stabilized around an average of 23 per cent of the
GDP between 2000-01 and 2006-07 and started f luctuating
thereafter. It witnessed strong compositional shifts from f inancial
to physical savings during the period 2007-08 to 2011-12. Net addition
to the physical assets of households including investment in
construction, machinery and equipment and change in stocks
constitutes the saving of households in physical assets. With a
signif icant reduction in the growth of construction activity in
2012-13, physical savings rates by households also declined. The
failure of the construction sector to pick up strongly in 2013-14,
coupled with sluggishness in machinery and equipment segment
indicates that the increase in physical savings of household in the
year may have been muted.
Savings rate has declined
signif icantly since 2007-08.
In recent years, households
tended to save more in
physical than in f inancial
assets.
1.36 Retained prof its of the private corporate sector adjusted for
non-operating surplus/ def icit plus depreciation constitutes its gross
savings, which increased sharply after 2002-03 to reach over 9 per
cent of the GDP by 2007-08. It was the signif icant and consistent
improvement in corporate prof itability that took the private
corporate sector savings rate to above 9 per cent in 2007-08 from
less than 2 per cent during the 1980s. A study by the RBI on the
Performance of Non-Governmental, Non-f inancial Companies
showed that their prof it margins deteriorated in 2012-13. This would
possibly have affected the savings of the private corporate sector.
With negative growth in manufacturing in 2013-14, the savings rate
of the private corporate sector is unlikely to have revived.
1.37 The trends in macroeconomic variables discussed above have
implications for other variables too, viz. inflation, balance of
payments, etc. These are discussed below.
14
ECONOMIC SURVEY 2013-14
15
PRICES AND MONETARY MANAGEMENT
Inflation
1.38 The average headline WPI inflation moderated to a fouryear low of around 6 per cent in 2013-14 after averaging 8.6 per
cent in the previous three years, with the contribution of the nonfood segment moderating signif icantly on the back of the fall in
global commodity prices. However the pressure from domestic food
items remained elevated. WPI inflation remained below 5 per cent
in the f irst quarter of 2013-14. However, higher inflation in
vegetables and cereals led to a spike, with headline inflation
reaching 6.6 per cent and 7.1 per cent respectively in the second
and third quarters. With some moderation in cereals inflation and
correction in vegetable prices, headline inflation declined to
5.4 per cent in the last quarter of 2013-14. Inflation in non-food
manufactured products (core inf lation) remained benign
throughout the year and moderated to a four-year low of 2.9 per
cent in 2013-14. This indicates that the underlying pressures of
broad-based inflation may have somewhat eased.
1.39 Inflation in terms of the new series of consumer price index
(CPI) (combined) remained fairly sticky at around 9-10 per cent
owing to higher food inflation in the last couple of years. However,
the headline CPI inflation started moderating after December 2013
and declined to a 25-month low of 8.0 per cent in February 2014,
following moderation in inflation for vegetables and egg, meat,
and f ish. On the other hand, CPI inflation excluding food and
fuel, remained sticky due to higher inflation in services-led
components such as medical, education, household requisites,
etc.
Major contributors to headline WPI inflation
1.40 The level of inflation and its movement across major subgroups varied signif icantly over the eight quarters up to Q4 of
2013-14. In 2013-14 inflation was chiefly conf ined to food and fuel,
which contributed nearly two-thirds of overall inflation. High
inflation in the last few years, particularly food inflation, has been
the result of structural and seasonal factors. While inflation in
food articles remained persistent, its drivers have been changing
over time. For example, cereals and protein items were the main
Food inf lation has been
much higher than non-food
inflation.
Figure 1.4 : Major Drivers of Food
Articles Inf lation
Source: Off ice of the Economic Adviser, DIPP.
THE STATE OF THE ECONOMY
15
16
contributors to food inflation in Q1 of 2013-14, while vegetables,
especially onions, pushed up food inf lation in Q2 and Q3
(Figure 1.4). Within the food group, the contribution of the
commodity sub-groups, fruits and vegetables and egg, meat and
f ish has been high. Inflation in these protein-based items is on
account of increase in share of consumption of these items arising
from growing income levels.
1.41 Food inflation partly owes to large wastage of food articles
in the supply chain owing to ineff iciencies in distribution
channels. The provisions of the State Agricultural Produce
Marketing Committee (APMC) Acts have prevented creation of
competitive conditions in the distribution of commodities and
creation of a national market for agricultural commodities. Multiple
layers of intermediation in the distribution of food articles have
also pushed up prices for consumers. It is therefore necessary to
focus on distribution channels and on reducing food wastage in
the supply chain. Signif icant investment in marketing
infrastructure, including modern warehouses, cold storages,
reefer vans, scientif ic packaging, and handling would help
strengthen distribution channels. State governments will have to
play a vital role in removing restrictive provisions in the APMC
Act and proactively promoting alternative trading options for
farmers.
1.42 Fuel inflation remained in double digits in the last three
quarters. A major reason for high inflation in fuel and power items
was the rationalization of tariff for electricity in many states, in
addition to the policy of allowing greater pass-through in diesel
prices and depreciation of the Indian rupee against the US dollar.
Outlook for Inflation
1.43 Forecasts by the IMF expect international commodity prices
to remain benign. This should help in moderation of WPI headline
inflation. However, the major risk arises from sub-normal monsoons
during 2014-15 on account of the El Nino effect and higher prices
of oil due to the geo-political situation in the Middle East. The
decisions of the government regarding subsidy on inputs for
agriculture including fertilizer and increase in the minimum
support prices (MSP) could also have an impact on food inflation.
Monetary Developments
1.44 Gradual monetary easing that had started alongside some
moderation in inflationary pressures at the beginning of 2013-14
was disrupted by the need to stabilize the foreign exchange market.
In May 2013, there were indications of tapering of quantitative
easing by the US Federal Reserve. The surge in capital outflows
that followed, resulted in sharp depreciation of the rupee. To restore
stability in the foreign exchange market, the RBI hiked interest
rates and compressed domestic money market liquidity.
1.45 Measures taken in mid-July 2013 included a 200 basis points
(bps) hike in the marginal standing facility (MSF) rate to 10.25 per
cent; cap on daily Liquidity Adjustment Fund (LAF) borrowing to
0.5 per cent of net demand and time liabilities (NDTL) of respective
banks; and a hike in the minimum daily cash reserve ratio (CRR)
16
ECONOMIC SURVEY 2013-14
17
requirement to 99 per cent from 70 per cent. Weekly auctions of
cash management bills were also conducted to drain out liquidity.
These measures raised the call rate to the level of the MSF rate,
making the latter the effective policy rate.
1.46 Following the ebbing of volatility in the foreign exchange
market, the RBI initiated normalization of the exceptional measures
in a calibrated manner since the mid-quarter review of 20 September
2013. The interest rate corridor was realigned to normal monetary
policy operations with the MSF rate being reduced in three steps
to 8.75 per cent between 20 September 2013 and 29 October 2013
even as the repo rate was increased in two steps of 25 bps each to
7.75 per cent to contain inflation and inflation expectations.
Minimum daily CRR balance maintained by banks was reduced to
95 per cent of the requirement from 99 per cent to provide banks
with the flexibility to better manage liquidity. As an additional
liquidity-enhancing measure and for developing the term money
market, the RBI introduced weekly variable-rate term repos of
7-day and 14-day tenors for an amount equivalent to 0.25 per cent
of the NDTL of the banking system.
1.47 The RBI in the Third Quarter Review of Monetary Policy on
28 January 2014 hiked the repo rate by 25 bps to 8 per cent on
account of upside risks to inflation. The move was intended to set
the economy securely on a disinflationary path. In the second
bimonthly Monetary Policy Statement 2014-15, on 3 June 2014, the
RBI kept the Policy Repo rate unchanged at 8 per cent and reduced
the statutory liquidity ratio by 50 bps from 23 per cent to 22.5 per
cent. The RBI thus expects banks to reduce their government
securities holdings, allowing them to lend more to the private
sector.
Tight monetary policy stance
was followed by RBI for
containing inf lation and
restoring stability in the
foreign exchange market.
1.48 Liquidity conditions remained tight during the f irst half of
2013-14, mainly reflecting policy intent to stabilize the foreign
exchange market. Money markets remained in orderly condition
during Q1 of 2013-14 with the call rate hovering within the corridor
set by the reverse repo and MSF rates and remaining close to the
policy (repo) rate. However the exceptional measures taken by the
RBI during July and August 2013 to contain exchange rate volatility
impacted the money market, and consequently the money market
rates exceeded the corridor.
I NTERNATIONAL T RADE , B AL ANCE
EXTERNAL DEBT
OF
P AYMENTS ,
AND
International Trade
1.49 India’s share in world exports and imports increased from
0.7 per cent and 0.8 per cent respectively in 2000 to 1.7 per cent
and 2.5 per cent respectively in 2013. There has also been marked
improvement in India’s total merchandise trade to GDP ratio from
21.8 per cent in 2000-01 to 44.1 per cent in 2013-14.
1.50 India’s merchandise exports reached US$ 312.6 billion (on
customs basis) in 2013-14, registering a growth of 4.1 per cent as
compared to a contraction of 1.8 per cent during the previous year.
In April-May 2014, exports registered a growth of 8.9 per cent over
THE STATE OF THE ECONOMY
17
18
the corresponding period of 2013. Exports of petroleum products,
engineering goods, chemicals and related products accounted for
more than half of total exports in 2013-14. The value of imports
declined by 8.3 per cent in 2013-14 as compared to 2012-13, owing
to a 12.8 per cent fall in non-oil imports. The value of imports of
petroleum, oil, and lubricants (POL) increased by 0.7 per cent in
2013-14. Imports of gold declined from 1078 tonnes in 2011-12 to
1037 tonnes in 2012-13 and further to 664 tonnes in 2013-14, on
account of several measures taken by the government. In value
terms, gold and silver imports fell by 40.1 per cent to US$ 33.4
billion in 2013-14. The sharp decline in imports and a moderate
growth in exports in 2013-14 resulted in a decline in India’s trade
def icit to US$ 137.5 billion from US$ 190.3 billion during 2012-13,
contributing to a lower CAD.
Services Trade
1.51 Services exports registered a growth of 4 per cent in 2013-14
as against 2.4 per cent in 2012-13. Surplus in services trade (net
services) has been a major source of f inancing India’s growing
merchandise trade def icit in recent years. During 2006-07 to 201213, this surplus on an average f inanced around 38 per cent of
merchandise trade def icit. While in 2012-13, net services f inanced
33.2 per cent of the merchandise trade def icit, during 2013-14, with
moderate growth in services exports and fall in their imports, net
services f inanced nearly half of merchandise trade def icit.
Balance of Payments
1.52 India’s Balance of Payments (BoP) position improved
signif icantly in 2013-14, particularly in the last three quarters. The
stress on BoP observed during 2011-12 as a fallout of the crisis in
the Euro area and inelastic domestic demand for certain key
imports continued through 2012-13 and the f irst quarter of 2013-14.
The CAD rose sharply to a high of US$ 88.2 billion (4.7 per cent of
GDP) in 2012-13, surpassing the 2011-12 level of US$ 78.2 billion.
After being at perilously unsustainable levels in 2011-12 and 2012-13,
the improvement in BoP position in 2013-14 is a relief. However,
the outcome in 2013-14 was mixed: high levels of CAD in the f irst
quarter followed by gradual correction thereafter; broadly adequate
f inancing through capital flows till May 2013; a sharp correction
in June-August 2013 followed by a surge in September-November
2013. The correction in June-August 2013 was on account of market
fears of an imminent tapering of asset purchases by the US Fed.
The subsequent surge in flows owed to the special swap windows
incentivized by the RBI for non-resident deposits and the overseas
borrowing programme of banks.
Demand slowdown and
restrictions on non-essential
imports resulted in reduced
trade def icit and lower CAD.
1.53 Widening of the CAD in 2012-13 could largely be attributed
to rise in trade def icit arising from weaker exports and relatively
stable imports. The latter owed to India’s dependence on crude
petroleum imports and elevated level of gold imports since the
onset of the global f inancial crisis. While the f inancing of the
high CAD was adequate and in line with the general trend prior
to the 2008 crisis, the inadequacy during 2011-12 and since May
2013 indicated that beyond the threshold level of CAD, f inancing
18
ECONOMIC SURVEY 2013-14
19
could be a problem. This is because the post-2008 crisis period is
characterized by excessive risk aversion, that has implications for
capital flows and the exchange rate of the rupee.
1.54 The government moved swiftly to correct the situation
through restrictions in non-essential imports like gold; custom
duty hike in gold and silver to a peak of 10 per cent; and measures
to augment capital flows through quasi-sovereign bonds and
liberalization of external commercial borrowings. The RBI also put
in place a special swap window for foreign currency non-resident
deposit (banks) and banks’ overseas borrowings, through which
US$ 34 billion was mobilized. These measures led to a turnaround
in the BoP position in the latter three quarters and for the full
f iscal 2013-14. With higher exports and lower imports, there was a
reduction in trade def icit to 7.9 per cent of GDP in 2013-14 from
10.5 per cent in 2012-13.
1.55 Out of the total reduction of US$ 48.0 billion in trade deficit
on BoP basis in 2013-14, reduction in import of gold and silver
contributed approximately 47 per cent, reduction of non-POL and
non-gold imports constituted 40 per cent, and higher exports
constituted 25 per cent. Higher POL and non-DGCI&S (Directorate
General of Commercial Intelligence and Statistics) imports
contributed negatively to the reduction to the extent of 12 per
cent in 2013-14 over 2012-13.
1.56 Net invisibles’ surplus remained stable at US$ 28-29 billion
per quarter resulting in overall net surplus of US$ 115.2 billion for
2013-14. Software services improved modestly from of US$ 63.5
billion in 2012-13 to US$ 67.0 billion in 2013-14. Non-factor services
increased from US$ 64.9 billion in 2012-13 to US$ 73.0 billion. This
was partly on account of business services turning positive with
net inflows of US$ 1.3 billion in 2013-14 as against an outflow of
US$ 1.9 billion in 2012-13. Thus the CAD moderated to US$ 32.4
billion in 2013-14 as against US$ 88.2 billion in 2012-13. The CAD
at 1.7 per cent of GDP in 2013-14, compares favourably with the
levels in the pre-2008 crisis years.
1.57 Capital flows (net) moderated sharply from US$ 92.0 billion
in 2012-13 to US$ 47.9 billion in 2013-14. This decline essentially
reflects slowdown in portfolio investment and net outflow in
‘short-term credit’ and ‘other capital’. However, there were large
variations within quarters partly due to domestic and partly to
external factors. The move to augment capital inflows through special
swap windows resulted in copious inflows of about US$ 34 billion.
Capital flows moderated, but
foreign exchange reserves
increased in 2013-14.
1.58 These inflows in tandem with the lower level of CAD led to
reserve accretion in 2013-14. Foreign exchange reserves were placed
at US$ 304.2 billion at end march 2014 as against US$ 292.0 billion
at end March 2013. Thus foreign exchange reserves in nominal
terms increased by US$ 12.2 billion as against a reserve accretion of
US$ 15.5 billion on BoP basis at end March 2014. The difference
owed to valuation loss in the non-US dollar assets held due to
cross-currency movements and the decline in gold prices. On
June 20, 2014, foreign exchange reserves stood at US$ 314.9 billion.
1.59 In 2013-14, the rupee started to depreciate in May 2013.
Depreciation was more pronounced in June and August 2013—in
THE STATE OF THE ECONOMY
19
20
excess of 5 per cent on a month-on-month basis. The average
exchange rate declined to a level of ` 63.75 per US dollar in
September 2013. Thereafter, owing to the measures taken to reduce
CAD and boost capital flows, the rupee rebounded to reach an
average level of ` 61.62 per US dollar in October 2013. Subsequently,
the rupee was range bound and stable in 2013-14. The exchange
rate thus far in 2014-15 reflects similar pattern as in the latter half
of 2013-14, with the surge in foreign institutional investment (FII)
f lows impacting the foreign exchange and equity markets
favourably; but the rupee appreciation has been limited relative to
the rise in equity indices.
External Debt
1.60 The one-off mobilization of deposits by the RBI had
implications for India’s external debt. India’s external debt stock at
end March 2013 stood at US$ 404.9 billion as against US$ 360.8
billion at end March 2012. This increased further to US$ 426.0
billion at end December 2013. India’s external debt consists
predominantly of long-term borrowings and has remained within
manageable limits owing to prudential restrictions on debt varieties
of capital inflows given large interest differentials.
PRIORITIES FOR REVIVING GROWTH
1.61 With the twin def icits reasonably under check, the
macroeconomic outcomes of slow growth and inflationary pressures
require immediate attention. Short-term stabilization apart, the
focus of policy should be on wide-ranging structural reforms to
ease supply-side constraints and sector-specif ic incentives to boost
demand. Some specif ic priorities, with the objective of restoring
growth, are outlined.
Revival of investment is crucial for raising the growth rate.
This requires acceleration in project clearances and
streamlining of implementation procedures, apart from
sector-specif ic investment policies.
Over the medium term, structural reforms that boost
productivity are crucial for sustaining higher growth.
Linked to efforts at investment revival are policies needed
for rejuvenating growth in manufacturing, which has
signif icant backward and forward linkages. Simplif ication
of tax policy and administration, repeal of archaic laws
that govern market access, expansion and entry/exit of
f irms, revamp of the dispute resolution mechanism for
commercial disputes, etc. would lend greater predictability
to policy. An environment of policy certainty, continuity,
and transparency, will help boost business sentiments
further.
Strengthening macroeconomic stability, a non-negotiable
instrument for stable and faster growth, is predicated on
f iscal discipline, manageable current account balance, and
price stability. Policy challenges include:
20
Priorities for growth revival
include: investment revival,
strengthening of macroeconomic stability, creation
of non-agricultural jobs,
strengthening of infrastructure, and boost to agricultural
development.
keeping f iscal def icit in check without compromising
on capital expenditure;
ECONOMIC SURVEY 2013-14
21
maintaining the CAD in the range of 2-2.5 per cent of
GDP. This may turn out to be challenging if non-oil
imports revive upon growth revival and oil prices
harden. Therefore, policies that help in sustained export
growth remain relevant.
stepping up efforts to further reduce inflation not only
to counter the direct macroeconomic consequences but
to provide leeway to the RBI for monetary easing and
to counter external challenges more effectively.
To harness the demographic dividend, the non-agrarian
sector must generate employment. With the agrarian sector
still employing the bulk of the workforce, policy attention
needs to be focused on the rural non-farm sector,
manufacturing sector, and labour-intensive segments of
services.
Physical and social infrastructure, both urban and rural,
that can accommodate and fuel robust growth, is central
to regaining and sustaining economic momentum.
Sustained and high overall economic growth is possible
with the farming sector growing at around 4 per cent per
annum. This requires a boost to investment and
productivity in the sector, crop protection and insurance,
and a f resh look at policies towards procurement,
marketing, transport, storage, and processing.
OUTLOOK FOR 2014-15
1.62 The descent into the present phase of sub-5 per cent growth
has been rather sharp. The interplay of structural constraints
alongside delays in project implementation, subdued domestic
sentiments, and an uncertain global milieu led to general growth
slowdown while rendering macroeconomic stabilization particularly
challenging. Inflation also remained at elevated levels. These factors
triggered risk-aversion and injected considerable uncertainty in
investment activity. The current macroeconomic situation precludes
f iscal stimulus to kick-start activity. Similarly, the task of monetary
policy calibration for growth revival has been made diff icult by
persistent inflation and further complicated by uncertainty in
international f inancial conditions and, until recently, by rupee
depreciation. Targeted measures by the government and RBI have
improved the external economic situation signif icantly, even as
India remains exposed to risk on/off sentiments of investors and to
policy shifts in advanced economies. Regaining growth momentum
requires restoration of domestic macroeconomic balance and
enhancing eff iciency. To this end, the emphasis of policy would
have to remain on f iscal consolidation and removal of structural
constraints. Though some measures have been initiated to this
end, reversion to a growth rate of around 7-8 per cent can only
occur beyond the ongoing and the next f iscal.
Despite some measures
undertaken to address
structural constraints, reversion to a growth rate of
around 7–8 per cent can only
occur beyond the ongoing
and the next f iscal.
1.63 Global economic activity is expected to strengthen in 201415 on the back of some recovery in advanced economies. The Euro
area is also expected to register a growth rate of above 1 per cent
as against contraction witnessed in 2012 and 2013 (IMF, WEO,
THE STATE OF THE ECONOMY
21
22
April 2014). The European Central Bank’s monetary policy measures,
most signif icantly introduction of the negative deposit facility
interest rate are expected to boost economic activity in Europe. In
addition, the performance of the real sector in the US (that is
likely affect the pace of taper) is a major factor that would impact
the global economic situation in 2014-15. The growth outlook for
emerging Asian economies is generally benign with some grappling
with inflation, structural bottlenecks, and external imbalances. The
slowdown in emerging economies comes at an inopportune
juncture.
1.64 Downward movement along with heightened volatility,
witnessed, for example, in f ixed investment post 2008-09 in India,
often tends to magnify the impact and transmission channels of
shocks (e.g. below-normal monsoons and/or upshot in oil prices)
and hampers build-up of positive expectations. Under such
circumstances, the Indian economy can recover only gradually with
the GDP at factor cost at constant prices expected to grow in the
range of 5.4 – 5.9 per cent in 2014-15. This assumes the revival of
growth in the industrial sector witnessed in April 2014 to continue
for the rest of the year, the generally benign outlook on oil prices
(notwithstanding the uncertainty on account of recent
developments in the Middle East), and the absence of pronounced
destabilizing shocks (including below-normal monsoons). Growth
in the above range implies a pick-up, aided by an improved external
economic situation characterized by a stable current account and
steady capital inflows, improved f iscal situation and, on the supply
side, robust electricity generation and some recovery in
manufacturing and non-government services.
With expectation of better
performance in manufacturing, improved balance of
payments situation and
modest global growth revival,
the economy is expected to
grow in the range of 5.4-5.9
per cent in 2014-15.
1.65 Growth in 2014-15 is expected to remain more on the lower
side of the range given above, for the following reasons: (i) steps
undertaken to restart the investment cycle (including project
clearances and incentives given to industry) are perceived to be
playing out only gradually; (ii) the benign growth outlook in some
Asian economies, particularly China; (iii) still elevated levels of
inflation that limit the scope of the RBI to reduce policy rates;
and (iv) expectation of below-normal monsoons. Downside risk
also emerges from prolonging of the geo-political tensions. On
the upside, such factors as institutional reform to quicken
implementation of large projects and a stronger-than-expected
recovery in major advanced economies would help the Indian
economy clock a higher rate of growth.
SECTORAL DEVELOPMENTS
1.66 In what follows, major sectoral issues and developments are
outlined. These developments have fed into the macroeconomic
scenario that has been presented in the previous sections.
Agriculture and Food Management
1.67 Substantial strides in agricultural production have been made
in the last few years. There was an increase of around 40 lakh ha
in overall area coverage under foodgrains in 2013-14 as compared to
2012-13. A record foodgrains production of 264.4 million tonnes is
estimated in 2013-14, as per the third Advance Estimates, indicating
22
The year 2013-14 witnessed
record foodgrains production.
ECONOMIC SURVEY 2013-14
23
an increase of more than 20 million tonnes over the average
production during the previous f ive years. Horticulture production
is estimated at 265 million tonnes in 2012-13 and for the f irst time
has exceeded the production of foodgrains and oilseeds.
1.68 The robustness of the agriculture and allied sector can be
attributed to the steady increase in gross capital formation (GCF) in
this sector (both public and private) as a percentage of its GDP, from
14.9 per cent in 2006-07 to 21.2 per cent in 2012-13 (2004-05 prices).
However, the share of public expenditure (comprising public
investments and input subsidies) in total GCF of the agriculture and
allied sector declined from 25 per cent in 2006-07 to 14.7 per cent
in 2012-13. Private investment as a proportion of agri-allied GDP
increased from 12.6 per cent in 2007-08 to 18.1 per cent in 2012-13.
1.69 In the monsoons for 2014-15, there are concerns about the
likely occurrence of the El Niño, when surface temperatures in the
Pacif ic Ocean continuously rise above average for several months
which adversely affects weather in many regions. This is likely to
have an impact on India’s agriculture and consequently on food
prices. With 60 per cent of the total foodgrains and oilseeds
produced being grown in the kharif season, and with just about 35
per cent of arable area being irrigated, Indian agriculture is still
largely dependent on rainfall. The south-west monsoon (from June
to September) accounts for nearly 75 per cent of total annual
rainfall in India. The forecast released in June 2014 by the IMD
indicates that there is a 71 per cent probability of a sub-normal /
def icient south-west monsoon with a 70 per cent probability of
occurrence of El Niño. However, the extent of impact of El Niño
depends on temporal and spatial distribution of rainfall. A
comparison of the rainfall distribution across 36 meteorological
subdivisions and districts upto 11 June in the last f ive years shows
that rainfall distribution is the worst this year. However, storage
position of water reservoirs is better than the last year and the
average of the last ten years.
1.70 Expansion in area and increase in MSPs of select agricultural
crops, inter alia, have resulted in higher foodgrains production.
Owing to higher procurement, there are huge stocks of foodgrains
in the central pool, which as on 1 June 2014, was 77.7 million
tonnes. The per capita net availability of foodgrains increased to
186.5 kg per year in 2013 from 162.1 kg per year in 2009 and the net
availability of edible oils from 12.7 kg per year to 15.8 kg per year.
1.71 While the production estimates highlight the continued
robustness of Indian agriculture, some concerns remain. Productivity
levels in Indian agriculture are still much lower than global
standards. Productivity levels of rice and wheat have not risen
signif icantly after the 1980s. While cotton yields have shown
tremendous leap over the last decade, largely due to the adoption
of Bt cotton; some increase is also seen in coarse cereals and pulses.
Without new technology and quality inputs, desired productivity
levels would be diff icult to achieve. Soil degradation owing to
declining eff iciency of fertilizer use and alarming reduction in the
water table, especially in Punjab and Haryana due to their cropping
pattern, are other major concerns. There is a need to review the
THE STATE OF THE ECONOMY
Productivity levels of rice
and wheat have not increased
signif icantly after the 1980s.
23
24
nutrient based subsidy (NBS) policy, which does not have urea
under its purview.
1.72 The pricing of subsidized fertilizers has resulted in their higher
usage. The recommendation of the Task Force for Direct Transfer of
Subsidy to shift to a system of direct transfer of fertilizer subsidy
to farmers in a phased manner needs to be considered. The Crop
Diversif ication Scheme has been introduced in the Punjab and
Haryana region and is expected to promote technological innovations
and encourage farmers to choose crop alternatives. The predominance
of small and marginal farms in India’s agriculture, with limited
capital availability, hampers progress of farm mechanization.
1.73 Domestic and international marketing of agricultural
commodities needs immediate attention. A plethora of government
interventions for building marketing set up has in fact created
barriers to trade. There is need to facilitate a National Common
Market for agricultural commodities with uniform taxes in the
domestic market, and to foster a long-term stable trade policy for
agricultural products.
1.74 There is need to expand the adoption of the decentralized
system of procurement for the PDS from 11 states and union
territories (UT) at present to all states. This would help save
transport costs, reduce transit losses and other leakages, increase
food availability, reduce food prices in the open market and
ultimately rein in food subsidy.
Industry and infrastructure
1.75 As per the latest GDP data, the industry sector registered a
growth of 1.0 per cent in 2012-13 that slowed further to 0.4 per
cent in 2013-14. The key reason for poor performance was
contraction in mining and deceleration in manufacturing.
Manufacturing- and mining-sector GDP declined by 0.7 per cent
and 1.4 per cent respectively in 2013-14. The underlying cause for
this has been the deceleration in investment particularly by the
private corporate sector during 2011-12 and 2012-13.
Mining output contracted for
the third successive year in
2013-14.
1.76 As per IIP data, mining output contracted for the third
successive year in 2013-14, declining by 0.6 per cent. Natural gas
production plummeted mainly owing to declining production from
the KG-6 basin. Electricity generation increased by 6.1 per cent in
2013-14 as compared to 4.0 per cent in the previous year, mainly on
account of signif icant capacity addition in recent years.
1.77 Slowdown in construction resulted in capacity underutilization in the steel and cement sectors. Steel and cement
consumption increased by 0.6 per cent and 3.0 per cent respectively
in 2013-14. The capital goods segment has been among the weakest
performers in the manufacturing sector. Its index declined by 6.0
per cent in 2012-13 and further by 3.6 per cent in 2013-14.
1.78 For eight ‘core’ industries—coal, fertilizer, electricity, crude
oil, natural gas, ref inery products, steel, and cement—the average
growth rate declined from 6.5 per cent during 2012-13 to 2.7 per
cent during in 2013-14. The moderation in growth occurred mainly
on account of contraction in natural gas and crude oil, and subdued
growth in coal, fertilizers, and ref inery products.
24
ECONOMIC SURVEY 2013-14
25
1.79 Continuing slowdown has impacted the performance of the
corporate sector. Growth of sales, particularly of the listed private
manufacturing companies, declined from 24.9 per cent in Q1 201112 to 4.5 per cent in Q3 2013-14. Capacity utilization (CU) remained
largely flat in Q3 of 2013-14. Thus, the f inished goods inventory to
sales ratio also declined in Q3 of 2013-14 over the previous quarter.
Slowdown in industry was
ref lected in lower sales
growth in the corporate
sector.
1.80 Of the total 239 central infrastructure projects costing
` 1000 crore and above, 99 are delayed with respect to the latest
schedule and 11 have reported additional delays vis-à-vis the date of
completion reported in the previous month (Flash Report for
February 2014, Ministry of Statistics and Programme
Implementation [MOSPI]). The additional delays are in the range
of 1 to 26 months in projects relating to the petroleum, power,
steel and coal sectors.
1.81 Among infrastructure services, growth in freight traff ic by
railways, cargo handled by major ports, and the civil aviation sector
(except import cargo) has been comparatively higher during 201314. In the road sector, construction of national highways by the
National Highways Authority of India (NHAI) posted negative
growth of 33 per cent during 2013-14 vis-a-vis a growth of 26.5 per
cent during 2012-13.
1.82 Gross bank credit flow to industry increased by 14.9 per cent
in 2013-14 as against 17.8 per cent in 2012-13. Credit flow to mining
remained nearly stagnant with 0.05 per cent growth during 201314. In keeping with the performance of the power sector during
2013-14, credit flow to the sector increased by 24.9 per cent.
Petroleum, chemicals and chemical products, basic metals, transport,
and all engineering sectors registered lower growth in gross bank
credit flow during 2013-14 compared to the previous year. The rate
of growth of bank credit to major infrastructure sectors moderated
from an average of 44.8 per cent in 2011-12 to 17.7 per cent in
2013-14. The telecom sector witnessed consecutive decline in the
last three years.
Growth of credit f low to
industry was lower in 2013-14.
1.83 Total foreign direct investment (FDI) inflows into major
infrastructure sectors registered a growth of 22.8 per cent in
2013-14 as compared to the contraction of 60.9 per cent during
2012-13. In recent years, services, construction, telecommunications,
computer software and hardware, drugs and pharmaceuticals,
automobile industry, power, metallurgical industries, and hotels and
tourism sectors have attracted maximum FDI inflows.
Services Sector
1.84 The services sector has emerged as the fastest growing sector
of the economy and the second fastest growing in the world, with
a CAGR of 9 per cent, behind China with a CAGR of 10.9 per cent
during the period from 2001 to 2012. Services have also contributed
substantially to foreign investment f lows, exports,
and employment. The share of the services sector in employment
increased from 19.7 per cent in 1993-94 to 26.9 per cent in 2011-12.
1.85 Like industry, services also slowed during the last two years.
The deceleration in growth was particularly sharp in the combined
category of trade, hotels & restaurants and transport, storage, and
THE STATE OF THE ECONOMY
25
26
communications. However, robust growth continued in f inancing,
insurance, real estate, and business services.
Financial Intermediation
1.86 Financial reforms are critical to the emergence of India as a
strong market economy. A well-functioning f inancial system will
support growth, f inancial inclusion and stability. The passage of
the Pension Fund Regulatory and Development Authority (PFRDA)
Act, the shift of regulatory supervision of commodity futures trading
to the Ministry of Finance, and the presentation of the Financial
Sector Legislative Reforms Commission (FSLRC) report, are some
of the major developments in 2013-14.
1.87 The Indian banking sector, which exhibited considerable
resilience in the immediate aftermath of the global f inancial crisis,
has been impacted by the global and domestic economic slowdown
over the last two years. During 2012-13, the deteriorating asset quality
of the banking sector emerged as a major concern, with gross nonperforming assets (NPAs) of banks registering a sharp increase.
Overall NPAs of the banking sector increased from 2.36 per cent of
total credit advanced in March 2011 to 3.90 per cent of total credit
advanced in March 2014 (provisional). As a consequence of the
slowdown and high levels of leverage, some industry and
infrastructure sectors, namely textiles, chemicals, iron and steel,
food processing, construction, and telecommunications, are
experiencing a rise in NPAs. The RBI in the Financial Stability
Report (December 2013) identified f ive sectors — infrastructure, iron
and steel, textiles, aviation and mining — as stressed sectors. Public
sector banks (PSBs) have high exposures to the ‘industry’ sector in
general and to such ‘stressed’ sectors in particular.
1.88 The New Pension System (NPS), now National Pension
System, was introduced for the new recruits joining government
service on or after January 2004. It represents a major reform of
Indian pension arrangements, and lays the foundation for a
sustainable solution to ageing in India by shifting to an individual
account, def ined-contribution system. Till 7 May 2014, a total of
67.41 lakh members have been enrolled under the NPS with a
corpus of ` 51,147 crore. From 1st May 2009, the NPS was opened
up for all citizens in India to join on a voluntary basis. The
Swavalamban Scheme for workers in the unorganized sector
launched in 2010, initially for three years for the benef iciaries who
enrolled themselves in 2010-11, has now been extended to f ive years
for the benef iciaries enrolled in 2010-11, 2011-12, and 2012-13 and
thus the benef its of co-contribution under the Scheme would be
available till 2016-17.
1.89 With a view to revamping f inancial-sector laws to bring
them in tune with current requirements, the government set up
the FSLRC on 24 March 2011. The Commission in its Report has
given wide-ranging recommendations, both legislative and nonlegislative, on the institutional, legal, and regulatory framework
and operational changes in the Indian f inancial sector. The draft
Indian Financial Code (IFC) that has been proposed by the FSLRC
has provisions that aim at replacing a large numers of existing
f inancial laws. The FSLRC has designed a modif ied f inancial
26
ECONOMIC SURVEY 2013-14
27
regulatory architecture, which would increase accountability by
achieving clarity of purpose for each organization and avoid
conflicts of interest. The modif ied arrangements also facilitate
achieving economies of scope and scale of related activities, for the
private sector and for the government.
1.90 In the 8th meeting of the Financial Stability and
Development Council (FSDC), held on 24 October 2013, the Council
decided that Regulators would voluntarily adopt governanceenhancing recommendations that do not require legislative changes.
This initiative has translated into a handbook on voluntary adoption
of non-legislative governance-enhancing aspects of the draft Indian
Financial Code, and a MIS statement which tracks compliance.
1.91 Implementing the IFC will also require establishing many
new organisations. The FSDC decided to initiate institutionbuilding for four new organizations: the Resolution Corporation
(RC) which will detect and deal with distressed f inancial f irms;
the Public Debt Management Agency which will manage the
domestic and overseas borrowing for the government; the Financial
Sector Appellate Tribunal which will hear appeals against f inancial
agencies; and the Financial Data Management Centre which will
be a database within the FSDC. These are likely to enable a holistic
view of the Indian f inancial system.
Human Development
1.92 India with a large and young population has a great
demographic advantage. The proportion of working-age population
is likely to increase from approximately 58 per cent in 2001 to
more than 64 per cent by 2021. While this provides opportunities,
it also poses challenges. Policymakers have to design and execute
development strategies that target this large young population.
Demographic advantage is unlikely to last indef initely. Therefore
timely action to make people healthy, educated, and adequately
skilled is of paramount importance.
1.93 According to the United Nations Human Development
Report (HDR) 2013, India with a human development index (HDI)
of 0.554 in 2012 slipped down the global ranking to 136 from 134 as
per HDR 2012. India is in the medium human development category
with countries including China, Egypt, Indonesia, South Africa,
and Vietnam having better overall HDI ranking within the same
category. The existing gap in health and education indicators in
India as compared to developed countries and many developing
countries calls for much faster spread of basic health and education.
Life expectancy at birth in India was 65.8 years in 2012, compared
to 75.1 years in Sri Lanka and 73.7 years in China. The expenditure
on social services by the government as a percentage of GDP has
increased from 6.8 per cent in 2008-09 to 7.2 per cent in 2013-14
(BE) with expenditure on education increasing from 2.9 per cent
to 3.3 per cent and on health from 1.3 per cent to 1.4 per cent.
Unless timely action is taken,
the potential for reaping the
demographic dividend is
unlikely to last indef initely.
1.94 The poverty ratio declined from 37.2 per cent in 2004-05 to
21.9 per cent in 2011-12. In absolute terms, the number of poor
declined from 407.1 million in 2004-05 to 269.3 million in 2011-12.
During 2004-05 to 2011-12, employment growth (CAGR) was only
0.5 per cent, compared to 2.8 per cent during 1999-2000 to 2004-05
THE STATE OF THE ECONOMY
27
28
as per usual status. However the unemployment rate continued to
hover around 2 per cent under usual status (principal+subsidiary).
Sustainable Development and Climate Change
1.95 Sustainable development is an imperative for achieving intergenerational equity. The business-as-usual approach to development
has entailed unsustainable consumption patterns, which is
essentially attributable to the developed countries. Anthropogenic
activities are the dominant cause for climate change. GHG emissions
grew on an average by 2.2 per cent per year between 2000 and
2010, as compared to 1.3 per cent per year between 1970 and 2000.
India’s per capita carbon emissions were 1.7 metric tons in 2010,
well below the world average of 4.9 metric tonnes.
1.96 Governments are currently working on two new agreements
on climate change and sustainable development, both of which
will be new global frameworks for action to be f inalized next year.
Following the Rio +20 mandate, the global community is working
to develop a set of Sustainable Development Goals (SDGs), possibly
to be integrated with Millennium Development Goals (MDGs)
when they end in 2015. Work is already under way and a number
of thematic focus areas for the SDGs have been identif ied.
1.97 How developed and developing countries will be treated in
the new aggrements is the most crucial aspect of the global pact.
Any future agreement should fully take into account India’s
concerns and developmental requirements. There is need to ensure
that the principles of equity and common but differentiated
responsibilities remain firmly embedded in the new deals. Historical
responsibility of developed countries and ‘equity’ in access to global
atmospheric resources should def ine commitments under the
international arrangements. The deals must ensure that developing
countries are given the required ‘carbon space’ and ‘development
space’. The issue of the means of implementation is also important.
Lack of adequate resources for SDGs and non-capitalization of the
Green Climate Fund may threaten the credibility of global
negotiations.
1.98 Sustainability has acquired prominent focus in India’s
Twelfth Five Year Plan. India reduced CO2 emissions per unit of
GDP by 20 per cent between 1990 and 2011. India’s renewable power
capacity reached 23 GW in January 2012, equivalent to nearly 12 per
cent of total power capacity. Considerable progress has been made
in implementing the National Action Plan on Climate Change
and also on the State Action Plans on Climate Change (SAPCCs.)
The SAPCCs of nine states have already been endorsed.
1.99 The cumulative costs of India’s low carbon strategies have
recently been estimated by an Expert Group at around US$ 834
billion at 2011 prices, between 2010 and 2030. This could constrain
India’s efforts, as the magnitude of resources required is very large.
Global negotiations provide an opportunity to ensure a fair division
of the earth’s resources, cooperation between rich and poor nations,
curbing wasteful consumption, switching to cleaner technologies,
and improving eff iciency in resource use. At the heart of all of
this lies a fair division of both global rights and responsibilities.
28
Signif icant reduction was
noticed in the number and
proportion of persons below
the poverty line in 2011-12.
India’s per capita carbon
emissions were 1.7 metric
tons in 2010, well below the
world average of 4.9 metric
tonnes.
New climate deals must
ensure that developing
countries are granted the
required ‘carbon space’ and
‘development space’.
ECONOMIC SURVEY 2013-14
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