Economics Week: Part-2

Economy of India

1. Introduction

The economy of India is the twelfth largest economy in the world by nominal value and the fourth largest by purchasing power parity (PPP). India's large service industry accounts for 56.4% of the country's GDP while the industrial and agricultural sector contribute 28% and 15.7% respectively. Agriculture is the predominant occupation in India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14%. India's per capita income (nominal) is $1032, ranked 143th in the world, while its per capita (PPP) of US$2,932 is ranked 130th.

Indian Economy Statistics(2009):

GDP: $1.242 trillion(Nominal) or $3.528 trillion(PPP)

GDP per capita: $1,032(Nominal) or $2,932(PPP)

Population below poverty line: 22%

%age of population who live in villages: 60%

Unemployment: 9.5%

Exports: $155 billion (till date in 2009)

Imports: $232 billion

2. Agriculture in India

Today, India ranks second worldwide in farm output. India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper. It also has the world's largest cattle population (281 million). It is the second largest producer of wheat, rice, sugar, groundnut and inland fish. It is the third largest producer of tobacco. India accounts for 10% of the world fruit production with first rank in the production of banana and sapota.

India has 3 harvesting seasons:

• Rabi (winter crop) :- Wheat, Barley, Gram, Mustard, etc.
• Kharif (summer crop) :- Rice, Jowar, Cotton, Bajra, etc.
• Zaid (In between Rabi and Kharif) :- Watermelon, cucumber, muskmelon, etc.

Agricultural reforms required:  

• Need for improved irrigation
• Better seeds & fertilizers
• Consolidation of land holdings
• Land reforms
• Better access to credit:- Banks need to make loan procedures simple and accessible
• Extension of marketing facilities:-Rural Marketing involves delivering manufactured or processed inputs or services to rural producers or consumers so as to soak up the huge size of the untapped rural market
• Improving water management, rain water harvesting and watershed development
• Bridging the knowledge gap through effective extension services
• Diversifying into high value outputs, fruits, vegetables, flowers, herbs and spices, medicinal plants, bamboo, bio-diesel, but with adequate measures to ensure food security.

 Microfinance:

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty. Unlike commercial loans, no collateral is required for a micro-loan and it is usually repaid within six months to a year.

Micro finance programs are funded by loans, grants, guarantees and investments from individuals, philanthropists, social investors, local banks, foundations, governments, and international institutions.

(NjoyTV note: It is a huge topic in itself which will run into pages if addressed here. So, only brief idea is provided herewith.)

NABARD

National Bank for Agriculture and Rural Development(NABARD) is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas.

Loan Waiver Scheme

India’s ambitious loan waiver scheme for small farmers was extended by nearly 20%, to more than Rs 71,000 crore from the Rs 60,000 crore announced in the budget(Feb,2009). Over 40 million indebted Indian farmers got some financial relief as the massive loan waiver scheme for small and marginal farmers officially came into effect on June 30.

Though there is some news of corruption in the implementation of this scheme too because of which most farmers had not got the expected relief. (Need to confirm this!)

Rashtriya Krishi Vikas Yojana (RKVY)

The Planning Commission in its approach paper to the Eleventh Five-Year-plan has stated that 9 per cent growth rate in GDP would be feasible during the Eleventh Plan period. However, Agriculture, that accounted for more than 30 percent of total GDP at the beginning of reforms, failed to maintain its pre-reform growth. On the contrary, it witnessed a sharp deceleration in growth after the mid-1990s.

A major cause behind the slow growth in agriculture is the consistent decrease in investments in the sector by the state governments. While public and private investments are increasing manifold in sectors such as infrastructure, similar investments are not forthcoming in Agriculture and allied sectors, leading to distress in the community of farmers, especially that of the small and marginal segment. Hence, the need for incentivising states that increase their investments in the Agriculture and allied sectors has been felt. Hence, RKVY was launched in 2007.

Basic Features of the RKVY include: Achieving 4% annual growth in the agriculture sector; To incentivise the states so as to increase public investment in Agriculture and allied sectors; To ensure that the local needs/crops/priorities are better reflected in the agricultural plans of the states; To maximize returns to the farmers in Agriculture and allied sectors; etc

3. Service Sector in India

As we have seen, Service Sector in India today accounts for more than half of India's GDP. The various sectors that combine together to constitute service industry in India are:

• Trade
• Hotels and Restaurants
• Railways
• Other Transport & Storage
• Communication (Post, Telecom)
• Banking
• Insurance
• Dwellings, Real Estate
• Business Services
• Public Administration; Defence
• Personal Services
• Community Services
• Other Services 

Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods.

Some examples: 

• 
  
  Textile manufacturing is the second largest source for employment after agriculture
• 
  
  Dharavi slum in Mumbai has gained fame for leather products
• 
  
  Tata Motors' Nano attempts to be the world's cheapest car

The boom in the services sector has been relatively "jobless". The rise in services share in GDP has not accompanied by proportionate increase in the sector's share of national employment. Some economists have also cautioned that service sector growth must be supported by proportionate growth of the industrial sector, otherwise the service sector grown will not be sustainable.

IT/ITES:

Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors contributing to one third of the total output of services in 2000. The share of India's IT industry to the country's GDP increased from 4.8 % in 2005-06 to 7% in 2008. In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world. In March 2009, annual revenues from outsourcing operations in India amounted to US$60 billion and this is expected to increase to US$225 billion by 2020.

NASSCOM: NASSCOM® is the premier trade body and the chamber of commerce of the IT-BPO industries in India. NASSCOM is a global trade body with more than 1200 members, which include both Indian and multinational companies that have a presence in India. It is a not-for-profit organization, registered under the Indian Societies Act, 1860 & headquartered is in New Delhi, India. Current president of NASSCOM is Mr Som Mittal.

NASSCOM was set up in 1988, at Mumbai to facilitate business and trade in software and services and to encourage advancement of research in software technology. Other goals include accelerating trade development efforts, improving talent supply, strengthening local infrastructure, building partnerships and driving operational excellence. It also boosts the process of Innovation; IT workforce development and enhanced cyber security.

4. Infrastructure

Says Infosys Chairman N.R. Narayana Murthy: "If our infrastructure gets delayed, our economic development, job creation, and foreign investment get delayed. Our economic agenda gets delayed—if not derailed."

The infrastructure deficit is so critical that it could prevent India from achieving the prosperity that finally seems to be within its grasp. Without reliable power and water and a modern transportation network, the chasm between India's moneyed elite and its 800 million poor will continue to widen, potentially destabilizing the country. Jagdish N. Bhagwati, a professor at Columbia University, figures gross domestic product growth would run two percentage points higher if the country had decent roads, railways, and power.

more on infrastructure coming up in Economic week part-3....

5. BSE and NSE

The Bombay Stock Exchange Limited (formerly, The Stock Exchange, Mumbai) is the oldest stock exchange in Asia and has the greatest number of listed companies in the world, with 4700 listed as of August 2007. It is located at Dalal Street, Mumbai, India. On 31 December 2007, the equity market capitalization of the companies listed on the BSE was US$ 1.79 trillion, making it the largest stock exchange in South Asia and the 12th largest in the world. Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.

BSE Sensex

BSE Sensex is a value-weighted index composed of 30 stocks that started January 1, 1986. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around fifty per cent of the market capitalization of the BSE. The base value of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.

Nifty

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around Rs 47,01,923 crore (7 August 2009) and is expected to become the biggest stock exchange in India in terms of market capitalization by 2009 end. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization.

6. Economic Liberalization

License Raj, also the Permit Raj refers to the elaborate licenses, regulations and the accompanying red tape that were required to set up and run businesses in India between 1947 and 1990. The License Raj was a result of India's decision to have a planned economy where all aspects of the economy are controlled by the state and licenses are given to a select few. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production. Because of this, by the 1980s, the country was left with: low growth rates, closure to trade and investment, a license-obsessed-restrictive state, inability to sustain social expenditures, macro instability, indeed crisis.

In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms which are referred to as Liberalization of Indian economy. In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. Liberalization has done away with the License Raj and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.

7. Subsidies in India

You must have gone through the basics of subsidies in Economics Week Part-1. Let's have a look at India specific data of subsidies. Overall, a 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. On the other hand, India spends relatively little on education, health, or infrastructure. Urgently needed infrastructure investment has been much lower than in China. According to the UNESCO, India has the lowest public expenditure on higher education per student in the world.

Example: The case of LPG

Partly because of inadequate infrastructure facilities for import, storage and handling, the government decided to throw open the LPG business to private entrepreneurs in 1993. Many players entered the field. However, their entry was constrained because of rise in international prices of LPG, ostensibly because of purchases by China and the government's inability to reduce subsidies. Several entrants withdrew having failed to exploit the willingness of consumers to make cash deposits for service connection.

In April 2002, the government announced that subsidies for all petroleum based products would be phased out except for LPG and kerosene which the government pledged would see their subsidies phased out within a 3 to 5 year period. LPG and kerosene are used as domestic cooking fuels by a large portion of the population. Also concurrently in 2002, LPG subsidies will be paid out of the government funds as opposed to APM pools and subsidies were revised upwards by Rs 67.75 per cylinder.

The issue is not resolved because subsidies will have to be removed by a future government which may not have the will to undertake that action. There are several issues of great concern for any government in India: the implication of higher petroleum prices in states far from the coast; the market’s ability to ensure adequate inventories and timely supplies to remote areas; and the protection of consumers from the effects of fluctuating prices.

8. CII

The Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 115 years ago, it is India's premier business association, with a direct membership of over 7800 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 396 national and regional sectoral associations.

CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.

Complementing this vision, CII's theme for 2009-10 is 'India@75: Economy, Infrastructure and Governance.' CII's focus this year is on revival of the Economy, fast tracking Infrastructure and improved Governance.

9. Five Year Plans

The economy of India is based in part on planning through its five-year plans, developed, executed and monitored by the Planning Commission. With the Prime Minister as the ex officio Chairman, the commission has a nominated Deputy Chairman, who has rank of a Cabinet minister. Montek Singh Ahluwalia is currently the Deputy Chairman of the Commission. The tenth plan completed its term in March 2007 and the eleventh plan is currently underway.

The Planning Commission (est. in 1950) was charged with the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. Jawaharlal Nehru was the first Chairman of the Planning Commission.

10. Below Poverty Line

Below Poverty Line is an economic benchmark and poverty threshold used by the government of India to indicate economic disadvantage and to identify individuals and households in need of government assistance and aid.

Measurement:

It is measured in two ways:

(a) Income based poverty line: The poverty line was originally fixed in terms of income/food requirements in 1978. It was stipulated that the calorie standard for a typical individual in rural areas was 2400 calorie and was 2100 calorie in urban areas. Then the cost of the grains (about 650 gms) that fulfil this normative standard was calculated. This cost was the poverty line. In 1978, it was Rs. 61.80 per person per month for rural areas and Rs. 71.30 for urban areas. In 2005-2006, it was Rs 368(rural) and 560(urban). This income is bare minimum to support the food requirements and does not provide much for the other basic essential items like health, education etc.

(b) Parameter based: In its tenth five-year plan (2002-2007) survey, BPL for rural areas was based on the degree of deprivation in respect of 13 parameters, with scores from 0-4: landholding, type of house, clothing, food security, sanitation, consumer durables, literacy status, labour force, means of livelihood, status of children, type of indebtedness, reasons for migrations, etc. The Planning Commission fixed an upper limit of 3.26 lakh for rural BPL families on the basis of simple survey. Accordingly families having less than 15 marks out of maximum 52 marks have been classified as BPL.

  

...End of Part-2...

So that was it for now. I thought that I would be able to complete this in 1 week but lot's of things are still left esp. the economy of India in comparision with major countries and the world.. So, I have decided to celebrate another week as Economics week part-3 sometime in the last week of Feb..

Till then, enjoy stuff and do write to me or post your comments here..

Courtesy:

Before ending, I can't dare to forget the resources which helped me compile this article:

Wikipedia; investopedia; T.I.M.E. GD/PI briefcase; beg.utexas.edu; answers.com; microfinanceindia.org; krishiworld.com; india.gov.in; cii.in; timesofindia.indiatimes.com; iloveindia.com; planningcommission.nic.in; nasscom.in; economictimes.com; businessweek.com; and finally google.

Coming up next: Budget 2010