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Corruption and Quality of Governance

CORRUPTION AND QUALITY OF GOVERNANCE

That India is one of the most corrupt in the world is not the news, the news is that there is no hope for any respite from this evil which is essentially an anti-poor phenomenon. According to the Transparency International, India ranks very high on the Corruption Perception Index. There are a lot of things because of which one is proud of being an Indian. However, there are a lot more for which one is ashamed of being an Indian, and corruption is one of them.

Courage, integrity and moral values of life have been major casualties in recent times. We have seen how these qualities have nose-dived to absurdly low depths. Our leaders have lost total sense of responsibilities and propriety and have misused and abused the power and authority vested in them with impunity, and with utter disregard to public interests. They have literally converted the governmental infrastructure as their personal fiefdom, resulting in series of scams and scandals. As a natural aftermath of this degradation on moral values and quality of leadership, everyday life of common citizens has become a living hell. Municipal services are heaped in corruption and inefficiency, with erratic electricity and water supply, choked and overflowing sewers, smelly drains, neglected roads and streets with potholes, and dotted with rotting garbage dumps and stinking public toilets. Standards of education in government schools and colleges have gone down and several money spinning private schools and coaching centres have mushroomed, whose sole aim is to fleece the public.

In the present economic scenario, the basic prerequisites of an efficient administrative system, conducive and growth-oriented environment and good and reliable infrastructure are not available in our governing apparatus, which are essential for a sound economy. Inefficient and inapt administration, which has no work-culture worth the name, and which is forever on holiday or holiday-mood, has caused serious overruns on development projects, resulting in losses and chronic shortages of power, roads, ports and means of communication. Family-planning programmes have failed miserably, which has led to further inadequacies of our basic facilities—education, health, housing and transport projects. Perennial shortage in our infrastructure network has stunted our industrial and commercial growth. Absence of right environments has failed the system and driven out our intellectuals to greener pastures in foreign lands, thereby causing brain-drain. Even our space programmes have been jeopardized due to flight of scientific talent. Our industrialists have also failed the nation. Inspite of prolonged protection from foreign competition, they have not developed the indigenous technology and have remained heavily dependent on outdated imported technologies to produce substandard products, most of which cannot compete in international markets either in price or in quality.

The root cause of all this is our poor work-culture and corrupt practices, which have now become endemic in our national character. The main aim of the bulk of our citizens is to make hay while the sun shines and not to worry about the nation and its plebeian designs.

Our political system has proved to be the fountain-head of corruption. During elections, help of industrial and business houses and criminal elements are invited to fund the extravagant election expenses of candidates and use muscle power to muster votes, which results in nexus between politicians, business houses and underground mafia. This nexus associates are later reimbursed through scams and scandals by siphoning off public funds.

Huge amounts received from international agencies for welfare projects are pilfered and shared among the nexus associates of the politicians in power. The bureaucracy has been made servile through carrot and stick policy. In fact, most of them have now become conduit for slush money for their political bosses, and in process have become drain into the vortex and are partners in promoting corruption. They have forgotten the legacy of courage, integrity and uprightness of their predecessors—the Indian Civil Services cadre of yore. They have forgotten that their first duty is to serve the people and not their self-interests or their political bosses.

Corruption is an anti-poor phenomenon which can only be tackled by better governance and less government. Apart from its moral and ethical dimension, corruption is the major cause of poor becoming poorer and, of course, rich getting converted into super rich or filthy and vulgar rich. In democratic set up, and in a plural economy like ours, everyone is guaranteed the right to grow to one’s potential and create wealth by all legitimate means. However, corruption of any kind deprives the common man from ‘climbing’ the next ladder and he either continues at the same or slides further down to a more pathetic condition.

Corruption is really anti-poor. 31.5% of the food grains and 36% of sugar in the Public Distribution System (PDS) gets diverted to black market. The fact is that Rs 20,000 crores is the subsidy involved in the PDS and 30% leaks to the black market, in other words, more than Rs 6,000 crores are made available for the politicians, corrupt officials of the PDS, the corrupt shopkeepers and their protectors. We can, therefore, see how, while in the name of the poor, an argument can be made for food security and subsidy. Different scams have shown the linkage between anti-national elements. 300 people died in Bombay blast in 1993 and this was made possible because RDX could be smuggled by bribing Rs 20 lakh to certain Custom officials. We can, therefore, see that corruption is anti-economic development, anti-poor and anti-national.

What is corruption and why should any government and its people fight corruption? The World Bank definition of corruption is “Use of public office for private profit”. Some or all government offices are public, and the use of these offices for ‘private profit’ by politicians, bureaucrats and the others is common in India. So much so, we have created such systems in our country that corruption has become endemic. Like Mark Twain’s statement that everyone talks about the weather but nobody seems to be able to do anything about it, the entire nation talks about corruption but nobody is able to do anything about it. Former Central Vigilance Commissioner, N. Vittal, used to compare corruption with a disease like AIDS. He felt as AIDS is the result of uncontrolled sexual behaviour, corruption is the outcome of uncontrolled financial behaviour.

The next aspect to be understood is why the government and responsible citizens must fight corruption? The straight forward answer is, because corruption is anti-poor and anti-development. The Human Development Report for South-Asia, pointed out that if India’s level of corruption could be brought down to the Scandinavian countries, its GDP will improve by 1.5 % and foreign bank investment by 12%. Anything that is anti-poor and hence anti-social must be on top of the government agenda to rectify the situation, but in a country where populism takes priority over good governance, it doesn’t find even a mention. It is often said that leaders of India have deliberately kept the people ignorant so that they won’t know how badly they are governed. The present state of anarchy has made everyday life of the citizens a living hell. They not only live in the fear of life and property, they also have to make do with inefficiency in every government department.

Perhaps, the present state of affairs can be described in the words of Mahatma Gandhi whose understanding of India and patriotism cannot be challenged. “India is a country of self-suppression and timidity”, he said. This contributes to a common man’s low expectations from anything Indian, including the administration. Many intellectuals who are painted by others ‘as full of self-loathing’, perhaps also contribute to this phenomenon—that nothing can be done to eradicate corruption and we have to resign to our destiny and fate. It is not true. Of course, a lot can be done, provided there is a will to change the present state of affairs.

Mahatma Gandhi’s dream was to see India with every face without a tear. Alas, in more than 60 years, we have not been able to meet the aspirations and objective potential of our people. Official figures indicate that at least 36% live below the austerely defined by the Planning Commission. Today, millions of our citizens do not have the elementary freedom from economic poverty, social deprivation or political tyranny. As famous Nobel Laureate Amartya Sen will like us to understand, we are only technically free but not truly free.

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Education for all

EDUCATION FOR ALL

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The gains achieved since the Education for All and Millennium Development Goals were adopted in 2000 are undeniable: great strides have been made towards universal primary education, increased participation in secondary and tertiary education and, in many countries, gender equality. More widely, there have been improvements in overcoming hunger, poverty, and child and maternal mortality.

The global financial crisis could radically change all this. Reaching the marginalized demonstrates that declining government revenue and rising unemployment now pose a serious threat to progress in all areas of human development. Government budgets are under even greater pressure and funding for education is especially vulnerable. So are poor households. Rising poverty levels mean that the challenge of meeting basic human needs is a daily struggle. Lessons from the past teach us that children are often the first to suffer—as is their chance to go to school.

Global Monitoring Report, 2010, underscores that there is a long way to travel. There are still at least 72 million children worldwide who are missing out on their right to education because of the simple fact of where they are born or who their family is. Millions of youths leave school without the skills they need to succeed in the workforce and one in six adults is denied the right to literacy.

The 2010 Report is a call to action. We must reach the marginalized. Only inclusive education systems have the potential to harness the skills needed to build the knowledge societies of the twenty-first century.

The international community needs to identify the threat to education posed by the economic crisis and the rise in global food prices. Human development indicators are deteriorating. An estimated 125 million additional people could be pushed into malnutrition and 90 million into poverty in 2010.

With poverty rising, unemployment growing and remittances diminishing, many poor and vulnerable households are being forced to cut back on education spending or withdraw their children from school. National budgets in poor countries are under pressure. Sub-Saharan Africa faces a potential loss of around US$4.6 billion annually in financing for education in 2009 and 2010, equivalent to a 10% reduction in spending per primary-school pupil.

As part of an effective response, it is need of the hour to provide sustained and predictable aid to counteract revenue losses, protect priority social spending and support progress in education.

The situation is not hopeless everywhere, though. Some countries have achieved extraordinary advances. Benin started out in 1999 with one of the world’s lowest net enrolment ratios but may now be on track for universal primary education by 2015. The share of girls out of school has declined from 58% to 54%, and the gender gap in primary education is narrowing in many countries. Between 1985–1994 and 2000–2007, the adult literacy rate increased by 10%, to its current level of 84%. The number of adult female literates has increased at a faster pace than that of males.

However, much need to be done. Malnutrition affects around 175 million young children each year and is a health and an education emergency. There were 72 million children out of school in 2007. Business as usual would leave 56 million children out of school in 2015.

Around 54% of children out of school are girls. In sub-Saharan Africa, almost 12 million girls may never enrol. In Yemen, nearly 80% of girls out of school are unlikely ever to enrol, compared with 36% of boys. Literacy remains among the most neglected of all education goals, with about 759 million adults lacking literacy skills today. Two-thirds are women.

Millions of children are leaving school without having acquired basic skills. In some countries in sub-Saharan Africa, young adults with five years of education had a 40% probability of being illiterate. In the Dominican Republic, Ecuador and Guatemala, fewer than half of grade 3 students had more than very basic reading skills. Some 1.9 million new teacher posts will be required to meet universal primary education by 2015.

The urgent international measures required include: increased concessional financial support through bilateral aid and the World Bank’s International Development Association (IDA), with a commitment to increase IDA replenishment from US$42 billion to US$60 billion; a review of the implications of the global economic downturn for the financing of development targets in advance of the 2010 Millennium Development Goals summit; an emergency pledging conference during 2010 to mobilize additional aid for education; budget monitoring to pick up early warning signs of fiscal adjustments that threaten education financing, with UNESCO coordinating an international programme to these ends; revision of the IMF’s loan conditions to ensure consistency with national poverty reduction and Education for All priorities.

Education Quality

The ultimate measure of any education system is not how many children are in school, but what – and how well – they learn. There is growing evidence that the world is moving more quickly to get children into school than to improve the quality of the education offered.

Learning achievement deficits are evident at many levels. International assessment exercises point consistently towards severe global disparities. The 2007 Trends in International Mathematics and Science Study (TIMSS) found that average students in several developing countries, including Ghana, Indonesia and Morocco, performed below the poorest-performing students in countries such as Japan and the Republic of Korea. Inequalities within countries, linked to household disadvantage and the learning environment, are also marked. The problem is not just one of relative achievement. Absolute levels of learning are desperately low in many countries.

Evidence from South and West Asia and from sub-Saharan Africa suggests that many children are failing to master basic literacy and numeracy skills, even when they complete a full cycle of primary education. Low learning achievement stems from many factors. Schools in many developing countries are in a poor state and teachers are in short supply. By 2015, the poorest countries will need to recruit some 1.9 million additional primary school teachers, including 1.2 million in sub-Saharan Africa, to create a good learning environment for all children. More equitable teacher deployment is also vital: all too often, the poorest regions and most disadvantaged schools have the fewest and least-qualified teachers. Several countries, including Brazil and Mexico, have introduced programmes targeting schools serving disadvantaged communities. Governments can also raise standards by spotting problems early, using constant monitoring and early-grade reading assessments.

Education for all Development Index (EDI)

While each of the six Education for All goals adopted in 2000 matters in its own right, the commitment undertaken by governments at the World Education Forum in Dakar was to sustain advances on all fronts. The Education for All Development Index (EDI) provides a composite measure of progress, encompassing access, equity and quality. Because of data availability constraints, it includes only the four most easily quantifiable goals, attaching an equal weight to each: (1) universal primary education, measured by the primary adjusted net enrolment ratio (ANER); (2) adult literacy, measured by the literacy rate for those aged 15 and above; (3) gender parity and equality, measured by the gender-specific EFA index (GEI), an average of the gender parity indexes of the primary and secondary gross enrolment ratios and of the adult literacy rate; (4) quality of education, measured by the survival rate to grade 5.

The EDI value for a given country is the arithmetic mean of the four proxy indicators. It falls between 0 and 1, with 1 representing full EFA achievement.

India is ranked 105 on the EDI index. On top of the list is Norway, followed by Japan and Germany.

Education Scenario of India

Literacy in India has made remarkable strides since Independence. This has been further confirmed by the results of the Census 2001. The literacy rate has increased from 18.33% in 1951 to 64.84% in 2001. This is despite the fact that during the major part of the last five decades there has been exponential growth of the population at nearly 2% per annum.

The Indian Constitution resolves to provide quality education to all and, in an effort to fulfil the educational needs of the country, specifically for the diverse societies and cultures of the country, the government has chalked out different educational categories: elementary education, secondary education, higher education, adult education, technical and vocational education. Free and compulsory education to all children up to the age of fourteen years is now a constitutional commitment in India. Despite serious handicaps of means and resources, the country has built up during the last 50 years a very large system of education, and has created a vast body of men and women equipped with a high order of scientific and technological capabilities, robust humanist and philosophical thought and creativity.

The government of India has initiated a number of programmes to achieve the goal of Universalisation of Elementary Education (UEE), from among which the Sarva Shiksha Abhiyan (SSA), launched in 2001, is the most recent one. It aimed at achieving universal elementary education of satisfactory quality by 2010. The SSA is expected to generate demand for secondary education in view of which the government of India has recently launched the Rashtriya Madhyamik Shiksha Abhiyan (RMSA) to improve universal access and quality at the Secondary and Higher Secondary stages of education.

For successful implementation of any educational programme, effective monitoring and an efficient information system are essential. While the monitoring framework for the SSA is developed separately, concerted efforts have been made towards strengthening the Educational Management Information System (EMIS) for the elementary level of education. The District Elementary Education Plans (DEEP) across the country are being developed primarily based on the data generated though the information system developed for the SSA, i.e. the District Information System for Education (DISE).

The elementary education system of India has expanded into one of the largest in the world. Number of primary schools increased from 2.15 lakhs in 1950-51 to 6.1 lakhs in 1997-98; the corresponding increase in upper primary schools was from 0.14 lakhs to 1.85 lakhs. These 8.17 lakh schools together enrolled 1,110 lakh children as compared to 192 lakh in 1951.

Universal provision of education has been substantially achieved at the primary stage (classes I-V). An estimated 95 percent of the rural population living in 8,26,000 habitations has a primary school within a walking distance of one km and about 85 percent of the rural population has an upper primary school within a walking distance of three km. More than 150 million children are currently enrolled covering around 90 percent of the children in the age group of 6-14 years. Recent surveys on literacy rates indicate a phenomenal progress in the nineties and indicate a significant rise in the literacy level.

Despite such significant achievements in the recent years, it is realized that there are serious problems of gender, regional, sectional and caste disparities in UEE. A significant proportion of children continue to drop out due to socioeconomic and cultural factors as also due to lack of adequate infrastructure, shortage of teachers and unsatisfactory quality of education provided.

The country has the dubious distinction of having the largest number of illiterates and out of school children in the world—30% of the world’s adult illiterates (300 million) and 21.87 percent of out-of-school children. At least 24 million children in the age group 6-14 are out of school of whom about 60% are girls; about 121.3 million are adult illiterates in the age group 15.35 of whom about 62 percent are women. Given the demographic pressures the numbers are likely to increase further. Universalisation of elementary education thus, poses a formidable challenge to India: the numbers of children dropping out, not attending school regularly and never enrolled are immense. Quality of education is poor; teachers are inadequately trained and have lack of motivation.

A major concern is to improve the skills and motivation of teachers, promoting the participation of communities in the running of schools and enrolling/retaining girls/working children of urban poor and children with special needs in schools. Also, in India, a large universe of working children exists such as the street children, neglected and destitute children, children of sex workers and children practising as sex workers. Many of these have been targeted through non-formal initiatives but never main-streamed. Besides, along with access and retention, the quality of education provided to them is questionable.

India has significant requirements and goals set for it, which will enable it to possess self-equipped citizens holding a key to the progress and development in all spheres. This implies that all the provisions stated in the NPE must be realized by 2025. To begin with, it is important to understand the quantitative requirements of the sector concerning issues of enrolment, school infrastructure, and teacher availability etc. Thereafter, it will be logical to analyse the scenario that will exist in the year 2025, with respect to the attainment of the requirements.

Given the requirements in purely quantitative terms it is important to understand the non-negotiables for their achievement by 2025. It will be critical to have at least a growth rate of 9-10 per cent per year in the economic sphere, necessitating the requirement for human skills, especially the research skills. There will have to be no compromise with respect to enrolment and retention of children in schools. For this there has to be 100 per cent literacy and 100 per cent enrolment at primary, secondary and technical levels. The problem of drop-outs will need to be main-streamed together with the quality of education at the primary, secondary and technical levels and for this the rural sector will have to be mobilized and encouraged in the cause of education.

Economic development of our country is built around educational development. There is considerable data which shows that education is based on economic development and vice versa. This aspect has also been realised by the community at large and education is now being considered important. This is even highlighted by the analysis of household income versus expenditure, which shows that investment in education in even the poorest households is high. People have understood the economic value of education and are now ready to invest. This is also seen in the fact that many youths are opting out of labour force and are spending larger period on education.

However, the government’s capacity to pay for education is limited. Thus, there is a need to explore private and other investments. It has been established beyond doubt that besides its social and cultural dimensions, education is also an economic and political investment yielding long-term benefits. It is not only justifiable but also desirable to focus on this investment in order to gain maximum benefit.

In terms of allocation for education, it needs to be underlined that the present 3.6 percent of GNP is less than: (a) the requirement of the education system to provide reasonable levels of quality education to all the students enrolled presently; (b) the requirements of the system to provide universal elementary education of eight years for every child of the age-group 6-14, and consequent growth in secondary and higher education, as universalisation of elementary education in a comprehensive sense, includes universal provision of resources. This implies that it will be important to raise money from private sources in order to ease pressure on public spending. This, of course, is not meant to release the State from its financial commitments, which have been substantial in India.

Along with the issue of investment, the quality issue also demands attention at all levels of education. In this context, the Research and Development area, which is extremely weak, has to be focused. This area is critical as it provides base to the planning process, links it up to the implementation and subsequently highlights areas for reform. A weak system endangers the life of the intervention, its sustainability and impact.

Linked to the overall issue of education is the sub-issue of value education. It is feared that the more we industrialize, greater will be the need for value education at all levels. Although, we have been led to believe that India’s values are the best, the western values are associated with progress, development, quick achievement, and hence are being readily imbibed by the students. It has to be understood that there is no particular set of values which guarantees success and that the societal values must match with the organizational values and hence, values such as wisdom, humility, rationality, intellectualism etc. will have to be inculcated in education at all levels. In this context, India’s cultural values will need to be integrated with education.

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Public Finance and Fiscal Developments

PUBLIC FINANCE AND FISCAL DEVELOPMENTS

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The fiscal space generated in the 2004-05 to 2007-08 period, following the Fiscal Responsibility Budget Management Act (FRBMA) mandate, mitigated on effects of global financial and economic crisis in 2008-09 through an expansionary fiscal stance to boost aggregate demand. Traditionally, assessment of public finances was confined to analysis of fiscal indicators, but the macro-economy-wide impact of the crisis underscored the importance of accounts data in tandem in such assessments.

In advanced economies, the operation of automatic stabilizers and discretionary fiscal policies pursued to obviate the adverse impact of the global financial and economic crisis was made possible by the space available and the largely cyclical nature of the fiscal deficit. In India, the rapid and significant fiscal consolidation achieved in the post-FRBMA period up to 2007-08 was indeed an important achievement that enabled greater fiscal space for a macro-economic policy stance to counteract the impact of the global economic crisis. As a proportion of the GDP, the reductions in fiscal deficit in the period 2003-04 to 2007-08 were made possible in equal measure by higher tax revenues and expenditure compression. This facilitated use of both tax and expenditure measures in the expansionary fiscal policies to boost demand. As such, the progress in fiscal consolidation in India is different from the typical models elsewhere, which are driven purely by expenditure compression.

As the impact of the crisis continued through 2009-10, the expansionary fiscal stance was continued in the Budget for 2009-10. Given the relative levels of shares of private final consumption expenditure and government consumption expenditure, such expansion could only be a short-term measure and the Medium Term Fiscal Policy Statement presented along with the Budget for 2009-10 favoured a resumption of the fiscal consolidation process, albeit a gradual one, with fiscal deficit declining to 5.5 per cent of the gross domestic product (GDP) and 4.0 per cent of the GDP in 2010-11 and 2011-12, respectively. In its report, the thirteenth Finance Commission has traced the path of fiscal consolidation for the Centre and States. The resumption of the path of fiscal prudence would complement the recovery process in the near term and lay the foundation for reviving the growth momentum in the long term.

A low and stagnant tax-GDP ratio characterized Central government revenues for a considerable period since 1990-91. This reflected in part the reform of the tax structure through lower rates in indirect taxes and the levels of the tax base. The rapid growth momentum in the post-FRBMA period helped change the composition of taxes, deepen the process of rationalization of taxes and widen the base. As a proportion of gross tax revenue, direct taxes rose from a level of 19.1 per cent in 1990-91 to reach 49.9 per cent in 2007-08; in 2008-09, they were at 55.5 per cent.

As a proportion of GDP, total expenditure fell from a level of 17.1 per cent in 2003-04 to 14.4 per cent in 2007-08, largely driven by the steep fall in capital expenditure. Total expenditure was placed at Rs 8,81,469 crore in 2008-09, which implied a growth of 23.7 per cent over 2007-08 levels and 17.4 per cent over that assumed in 2008-09. The front loading of Plan expenditure was evident in the rise in its proportion to the GDP from a level of 4.1 per cent in 2007-08 to 4.9 per cent in 2008-09. Thus, the reversal in major fiscal deficit indicators in 2008-09 and 2009-10 was a policy-driven stimulus to counter the demand slowdown.

In the post-FRBMA period (2004-05 to 2007-08), average annual/compound growth in total expenditure was 11.2 per cent, which compared favourably with the 12.2 per cent in the previous four years. Within total expenditure, growth in capital expenditure was again lower than that in revenue expenditure. Adjusting for one-off distortions in capital expenditure, like redemption of securities of the National Small Savings Fund in 2004-05 and the expenditure on acquisition of State Bank of India (SBI) shares from the Reserve Bank of India (RBI), growth in capital expenditure was more stable. While traditionally assessment of the trends in expenditure, particularly in the context of the fiscal consolidation process, had focused on the compression in terms of proportions of GDP, in view of the policy-driven expansion process it would be useful to understand the magnitude and direction of the expansion. In 2008-09 and 2009-10, the increase in total expenditure was of the order of 23.7 per cent and 43.2 per cent, respectively, over the levels in 2007-08. In 2008-09, the main components of expenditure significantly higher than their 2007-08 levels were major subsidies, social services, Plan expenditure and economic services. In 2009-10, the major components of the expansion were interest payments, defence, social services and economic services.

To an extent, rising interest payments reflect past consumption and do not contribute to current productive uses and are primarily tax financed. They are a drag on the present generation. Inter-generational equity concerns were one of the key objectives of institutionalizing the fiscal consolidation process in the form of the FRBMA. Interest payments appropriated substantial proportions of revenue receipts and the efforts in the FRBMA period were to reduce the level of deficits and incremental assumption of debt to contain the interest burden. Interest payments as a proportion of revenue receipts declined from a level of 52.1 per cent in 1998-99 to a level of 31.6 per cent in 2007-08. They were at the 35 per cent level in 2008-09 and were budgeted at 36.7 per cent in 2009-10. The rise in the levels of gross market borrowings in 2008-09 and 2009-10 has resulted in a reversal of the trend towards fall in average cost of borrowings.

The global commodity price shock (particularly in crude petroleum) that preceded the global financial crisis in 2008-09 led to a burgeoning of the subsidy bill and a sharp rise in the below-the line issuance of bonds to oil and fertilizer companies. As a proportion of GDP, major budgetary subsidies rose from 1.6 per cent in 2003-04 to 2.2 per cent in 2008-09 and were budgeted at 1.7 per cent in 2009-10. Besides, the above below-the-line issuance of oil and fertilizer bonds was of the order of 1.7 per cent of GDP in 2008-09. The Budget for 2009-10, recognizing the importance of institutional reforms, announced the intention to move towards a nutrient-based subsidy regime in respect of fertilizers and ultimately towards direct cash transfers and the setting up of an expert to advise on a viable and sustainable system of pricing for petroleum products.

Finances of State governments

Following the adoption of Fiscal Responsibility Legislations (FRLs), the combined finances of the States exhibited a faster than anticipated turnaround in 2005-06, with the level of fiscal deficit at 2.4 per cent of the GDP. There were, however, large variations amongst States, with Assam having a fiscal surplus of 0.6 per cent of the Gross State Domestic Product (GSDP) and Mizoram having a high fiscal deficit of 14.7 per cent of the GSDP in 2005-06. States combined posted a revenue surplus in 2006-07. The record of fiscal consolidation of the States combined was indeed remarkable and was facilitated by the growth in their own revenues following the successful adoption of State-level Value-Added Tax (VAT), the buoyancy in Central taxes, the higher levels of transfers and the scheme of Debt Consolidation and Waiver linked to fiscal consolidation.

In 2008-09, there was a growth of 15.3 per cent in States’ own tax revenues and 26.6 per cent in non-tax receipts. However, with higher levels of disbursements, which grew by 26 per cent, fiscal deficit went up to a level of 2.6 per cent of the GDP but was still well below the 3.0 per cent level mandated by the FRLs. With the relaxation in State-level fiscal targets to obviate the adverse impact of the global crisis, revenue deficit of 0.6 per cent of the GDP and fiscal deficit of 3.2 per cent of the GDP was budgeted in 2009-10.

The Debt Consolidation and Relief Facility (DCRF) has two components: (i) consolidation of Central loans (from the Ministry of Finance) contracted till March 31, 2004 and outstanding as on March 31, 2005 and (ii) provision of interest relief and grant of debt waiver to States based on their fiscal performance. Consolidation of Central loans has given interest relief to States. Debt waiver is granted to States based on their fiscal performance, for which an assessment is made annually. Benefits under the DCRF helped States by easing debt and interest pressures and also incentivized States to follow the path of fiscal correction.

So far, Central loans to 26 out of 28 States have been consolidated to the extent of Rs 1,13,601.1 crore. From 2005 to 2009, States have been granted debt waivers for an aggregate amount of Rs 22,039.4 crore and interest relief of Rs 18,688.5 crore.

Conclusion

Typically, the fiscal responsibility rules world over are anchored in balanced budget and debt targets with clear differences in framework across advanced economies and developing countries. In India, under the FRBMA, the rule focused on incremental assumption of liabilities. By and large this rule was adhered to in the post-FRBMA period; since 2008-09, there has been a rise in the assumption of net incremental liabilities as a result of the expansionary fiscal policy stance. As a result, with the revised GDP series (2004-05) released by the CSO, the ratio of outstanding liabilities to the GDP after falling from a level of 61.6 per cent in 2004-05 to 56.3 per cent in 2008-09, has risen marginally to 56.7 per cent in 2009-10. Internal debt, mainly market borrowings, continues to be the main component of outstanding liabilities.

The full picture of public finances and their impact on the macro-economy is best analysed through the levels of deficits in the consolidated General Government. As a proportion of the GDP, revenue receipts of the consolidated General Government rose from a level of 19.0 per cent in 2004-05 to reach a level of 21.2 per cent in 2007-08. They were budgeted at 20.5 per cent in 2009-10. With total disbursements remaining at more or less the same levels in four years ending 2007-08, the combined revenue and fiscal deficit came down. In fact, the combined levels of deficit were much lower than the levels (sum of Centre and States) mandated by the FRBMA and State-level FRLs. Reflecting the overall expansion to stimulate demand, fiscal and revenue deficit for 2009-10 is placed at 9.7 and 5.2 per cent of the GDP.

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State of India's Economy - II

STATE OF INDIA’S ECONOMY-II

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In the second half of 2008-09 there was a significant slowdown in the growth rate, following the financial crisis that hit the world in 2007. The fiscal year 2009-10, thus, began on a difficult note. There was apprehension that the slow-down will continue to affect the economy thus making 2009-10 a difficult year.

However, 2009-10 turned out to be a year of reckoning for the policy makers, who took a calculated risk by providing substantial fiscal expansion to counter the negative fallout of the global slowdown.

The downside of the fiscal stimulus was that India’s fiscal deficit increased, reaching 6.8 per cent of GDP in 2009-10. A sub-normal monsoon added to the overall uncertainty.

Despite all odds the economy, at the end of the financial year, posted a remarkable recovery, not only in terms of overall growth figures but, more importantly, in terms of certain fundamentals, which justify optimism for the Indian economy in the medium to long term.

The real turnaround came in the second quarter of 2009-10 when the economy grew by 7.9 per cent. As per the advance estimates of GDP for 2009-10, released by the Central Statistical Organisation (CSO), the economy is expected to grow at 7.2 per cent in 2009-10, with the industrial and the service sectors growing at 8.2 and 8.7 per cent respectively.

This recovery is impressive for at least three reasons. First, it has come about despite a decline of 0.2 per cent in agricultural output, which was the consequence of sub-normal monsoons. Second, it fore-shadows renewed momentum in the manufacturing sector, which had seen continuous decline in the growth rate for almost eight quarters since 2007-08. Indeed, manufacturing growth has more than doubled from 3.2 per cent in 2008-09 to 8.9 per cent in 2009-10. Third, there has been a recovery in the growth rate of gross fixed capital formation, which had declined significantly in 2008-09 as per the revised National Accounts Statistics (NAS). While the growth rates of private and government final consumption expenditure have dipped in private consumption demand, there has been a pick-up in the growth of private investment demand.

There has also been a turnaround in merchandise export growth in November 2009, which has been sustained in December 2009, after a decline nearly twelve continuous months.

The broad- based nature of the recovery created scope for a gradual rollback, in due course, of some of the measures undertaken to overcome global slowdown effects on Indian economy, so as to put the economy back on to the growth path of 9 per cent per annum.

The emergence of high double-digit food inflation during the second half of the financial year 2009-10 was a major cause of concern. On a year-on-year basis, wholesale price index (WPI) headline inflation in December 2009 was 7.3 per cent, but for food items (primary and manufactured), with a combined weight of 25.4 per cent in the WPI basket, it was 19.8 per cent. A significant part of this inflation was due to supply-side bottle-necks in some of the essential commodities, precipitated by the delayed and sub-normal southwest monsoons.

Overall GDP growth

The CSO has effected a revision in the base year from 1999-2000 to 2004-05. It includes changes on account of certain refinements in definitions of some aggregates, widening of coverage, inclusion of long-term survey results and the normal revision in certain data in respect of 2008-09. While there are no major changes in the overall growth rate of GDP at constant 2004-05 prices, except for 2007-08 where it has been revised upward from 9.0 to 9.2 per cent, there are some changes in growth rates at sectoral level and in the level estimates of GDP.

The contribution of the agriculture sector to the GDP at factor cost in 2004-05 has declined from 17.4 per cent in the old series to 15.9 per cent in the new series. Similarly, while the contribution of registered manufacturing has declined from 10.9 per cent in the old series to 9.9 per cent in the new series, that of unregistered manufacturing has increased from 4.9 to 5.4 per cent.

There is also an increase in the contribution of real estate, ownership of dwellings and business services from 8.2 per cent to 8.9 per cent.

In the case of level estimates of GDP at current prices, the difference ranges from 3.1 per cent in 2004-05 to 6 per cent in 2008-09. As a result, there are also changes in the expenditure estimates of the GDP.

The advance estimate of GDP growth at 7.2 per cent for 2009-10, falls within the range of 7 +/- 0.75 projected nearly a year ago in the Economic Survey 2008-09. With the downside risk to growth due to the delayed and sub-normal monsoons having been contained to a large extent, through the likelihood of a better-than-average rabi agricultural season, the economy responded well to the policy measures undertaken in the wake of the global financial crisis. While the GDP at factor costs at constant 2004-05 prices, is placed at Rs 44,53,064 crore, the GDP at market prices, at constant prices, is estimated at Rs 47, 67,142 crore. The corresponding figures at current prices are Rs 57,91,268 crore and Rs 61, 64,178 crore, respectively.

The recovery in GDP growth for 2009-10 is broad based. Seven out of eight sectors/sub-sectors show a growth rate of 6.5 per cent or higher. The exception is agriculture and allied sectors where the growth rate is estimated to be minus 0.2 per cent over 2008-09. Sectors, including mining and quarrying, manufacturing; and electricity, gas and water supply have significantly improved their growth rates at over 8 per cent in comparison with 2008-09.

The construction sector and trade, hotels, transport and communication have also improved their growth rates over the preceding year, though to a lesser extent. However, the growth rate of community, social and personal services has declined significantly, though it continues to be around its pre-global crisis medium-term trend growth rate.

Financing, insurance, real estate and business services have retained their growth momentum at around 10 per cent in 2009-10.

In terms of sectoral shares, the share of agriculture and allied sectors in GDP at factor cost has declined gradually from 18.9 per cent in 2004-05 to 14.6 per cent in 2009-10. During the same period, the share of industry has remained the same at about 28 per cent, while that of services has gone up from 53.2 per cent in 2004-05 to 57.2 per cent in 2009-10.

Per capita growth

The growth rates in per capita income and consumption, which are gross measures of welfare in general, have declined since 2008. This is a reflection of the slowdown in the overall GDP growth. While the growth in per capita income, measured in terms of GDP at constant market prices, has declined from a high of 8.1 per cent in 2007-08 to 3.7 per cent in 2008-09 and then recovered to 5.3 per cent in 2009-10, per capita consumption growth as captured in the private final consumption expenditure (PFCE) shows a declining trend since 2007-08 with its growth rate in 2009-10 falling to one-third of that in 2007-08. The average growth in per capita consumption over the period 2005-06 to 2009-10 was slower at 6.08 per cent than that in per capita income at 6.52 per cent. These year to year differences in growth rates can be explained by the rising savings rate and also the rise in tax collections that have been observed in some of these years.

Aggregate demand and its composition

The change in the base year, from 1999-2000 to the new base of 2004-05, has brought about significant revision in the expenditure estimates of the GDP for 2008-09. While growth of the PFCE in 2008-09 was revised upward from 2.9 per cent to 6.8 per cent, growth in government final consumption expenditure was revised downwards from over 20 per cent in 2008-09 on the old base to 16.7 per cent on the new base. In 2009-10 a growth of 4.1 per cent is expected in private final expenditure and 8.2 per cent in government final expenditure.

There is a significant decline in the growth of consumption expenditure in 2009-10. However, the overall share of consumption expenditure, both private as well as government in GDP at market prices, at constant 2004-05 prices, has declined only marginally from 70.9 per cent in 2008-09 to 69.6 per cent in 2009-10.

At the same time, the growth rate of gross fixed capital formation in 2008-09 has also undergone a revision. It was revised downward from 8.2 per cent in the earlier base to 4 per cent in the revised base for 2008-09. It is, however, estimated to grow by 5.2 per cent in 2009-10.

With growth in private expenditure on food, beverages and tobacco falling behind the overall growth in private consumption expenditure, the share of expenditure on food items has gradually been declining over the years. As per the CSO data, it was 35.3 per cent in 2008-09 as against 39.6 per cent in 2004-05. At the same time, the growth in expenditure on transport and communication and miscellaneous goods and services has been increasing, though with occasional aberrations, with the result that together they account for nearly the same share in total private consumption as the expenditure on food items.

Agriculture

Total foodgrains production in 2008-09 was estimated at 233.88 million tonnes as against 230.78 million tonnes in 2007-08 and 217.28 million tonnes in 2006-07. In the agricultural season 2009-10, the impact of the delayed and sub-normal monsoon is reflected in the production and acreage data for kharif crops. As per the first advance estimates, covering only the kharif crop, production of foodgrains is estimated at 98.83 million tonnes in 2009-10, as against the fourth advance estimates of 117.70 million tonnes for the kharif crop in 2008-09 and a target of 125.15 million tonnes for 2009-10.

Overall production of kharif cereals in 2009-10 has shown a decline of 18.51 million tonnes over 2008-09. In terms of acreage, the kharif 2009-10 season saw a decline of nearly 6.5 per cent or 46.18 lakh ha in the area covered under foodgrains. Almost the entire decline in this acreage was confined to the kharif rice crop. Some of this decline in acreage may have been made up by the increased acreage in the rabi season.

Industry and Infrastructure

The cyclical slowdown in the industrial sector, which began in 2007-08 and got compounded by the global commodity price shock and the impact of the global slowdown during the course of 2008, was arrested at the beginning of 2009-10. After the first two months of 2009-10, there were clear signs of recovery. While the CSO’s advance estimates place industrial-sector growth at 8.2 per cent, as against 3.9 per cent in 2008-09, the IIP industrial growth is estimated at 7.7 per cent for the period April-November 2009-10, significantly up from 0.6 per cent during the second half of 2008-09. The manufacturing sector, in particular, has grown at the rate of 8.9 per cent in 2009-10.

Core industries and infrastructure services, led by the robust growth momentum of telecom services and spread across power, coal and other infrastructure like ports, civil aviation and roads, have also shown signs of recovery in 2009-10. In the current fiscal, electricity generation emerged from the lacklustre growth witnessed in the previous year and equalled its performance in 2007-08. That this was achieved despite constraints imposed by the inadequate availability of coal and the dismal hydel generation scenario due to the sub-normal monsoon, attests well to its potential.

The domestic supply of crude oil remained around 34 million metric tonnes (mmt) and natural gas at about 32 billion cubic metric tonnes during the past five years. With 15 new oil and gas discoveries during 2009-10, the domestic availability is expected to improve. During 2009-10, the projected production for crude oil is 36.7 mmt, which is about 11 per cent higher than the actual crude oil production of 33.5 mmt in 2008-09.

In 2009-10, as against the stipulated target of developing about a 3,165 km of national highways under various phases of the National Highway Development Project (NHDP), the achievement up to end November 2009 has been about 1,490 km. Similarly, as against the 2009-10 target of about 9,800 km for awarding projects under various phases of the NHDP, projects totalling a length of about 1,285 km have been awarded up to end November 2009.

The service sector which has been India’s workhorse for well over a decade has continued to grow rapidly. Following the NAS classification, it comprises the sub-sectors trade, hotels, transport and communications; financing, insurance, real estate and business services; and community, social and personal services. As against a growth of 9.8 per cent in 2008-09 it grew at 8.7 per cent in 2009-10.

Savings and investments

Gross domestic savings (GDS) at current prices in 2008-09 were estimated at Rs 18,11,585 crore, amounting to 32.5 per cent of GDP at market prices as against 36.4 per cent in the previous year. The fall in the rate of GDS has mainly been due to the fall in the rates of savings of the public sector (from 5.0 per cent in 2007-08 to 1.4 per cent in 2008-09) and private corporate sector (from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09).

In respect of the household sector, the rate of saving has remained at the same level of 22.6 per cent in 2007-08 and 2008-09. The rate of GDS on the new series increased from 32.2 per cent in 2004-05 to 36.4 per cent in 2007-08 before declining to 32.5 per cent in 2009-10, as against the old series where it rose from 31.7 per cent in 2004-05 to 37.7 per cent in 2007-08.

Gross domestic capital formation (GDCF) at current prices (adjusted for errors and omissions) increased from Rs18,65,899 crore in 2007-08 to Rs19,44,328 crore in 2008-09 and at constant (2004-05) prices, it decreased from Rs16,22,226 crore in 2007- 08 to Rs15,57,757 crore in 2008-09. The rate of gross capital formation at current prices rose from 32.7 per cent in 2004-05 to 37.7 per cent in 2007-08 before declining to 34.9 per cent in 2008-09.

The sectoral investment rate is a useful indicator of the direction of new investments. While the overall growth of investment in India was in the range of 15 to 16 per cent per annum during the last few years, it plunged to -2.4 per cent in 2008-09 as a result of the external shock-led slowdown. At sectoral level, there has been a welcome rebound in the growth rate of investment in the agricultural sector, which grew at 16.5 per cent and 26.0 per cent in 2007-08 and 2008-09 respectively. This is in contrast to the growth rate of 1.4 per cent recorded in 2006-07.

Prices and Inflation

The year-on-year WPI inflation rate was fairly volatile in 2009-10. It was 1.2 per cent in March 2009 and then declined continuously to become negative during June-August 2009, assisted in part by the large statistical base effect from the previous year. It turned positive in September 2009 and accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. For March to December 2009 period WPI inflation was estimated at 8 per cent.

Year-on-year inflation in the composite food index (with a weight of 25.4 per cent) at 19.8 per cent in December 2009 was significantly higher than 8.6 per cent in previous year. In respect of food articles, inflation on year-on-year basis in December was 19.2 per cent and on fiscal-year basis (i.e. over March 2009) it was 18.3 per cent. At the same time, the composite non-food inflation within the manufactured group of the WPI (with a weight of 53.7 per cent) at 2.4 per cent in December 2009, was lower than the 6.7 per cent recorded in previous year.

A significant part of this inflation can be explained by supply-side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal south-west monsoons as well as drought-like conditions in some parts of the country. The delayed and erratic monsoons may also have prevented the seasonal decline in prices, normally seen during the period from October to March for most food articles other than wheat, from setting in. At the same time, it could be argued that excessive hype about kharif crop failure, not taking into account the comfortable situation in respect of food stocks and the possibility of an improved rabi crop, may have exacerbated inflationary expectations encouraging hoarding and resulting in a higher inflation in food items. This is supported by the estimates on shortfall in production/availability of major food items in 2009-10 for rice and wheat, as also for some other items, except pulses. In the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months.

The implicit deflator for GDP at market prices defined as the ratio of GDP at current prices to GDP at constant prices is the most comprehensive measure of inflation on annual basis, Unlike the WPI, the GDP deflator also covers prices in the services sector which now accounts for well over 55 per cent of the GDP. Overall inflation, as measured by the aggregate deflator for GDPMP, increased from 4.7 per cent in 2005-06 to 5.6 per cent in 2006-07 and then declined to 5.3 per cent in 2007-08, before rising again to 7.2 per cent in 2008-09. It has been estimated at 3.6 per cent in 2009-10 as per the advance estimates.

External-sector Developments

The global economy, led by the Asian economies especially China and India, has shown signs of recovery in fiscal 2009-10. While global trade is gradually picking up, the other indicators of economic activity such as capital flows, assets and commodity prices are more buoyant.

As per the latest data for fiscal 2009-10, exports and imports showed substantial decline during April-September (H1) of 2009-10 vis-à-vis the corresponding period in 2008-09. However, there has been improvement in the balance of payments (BoP) situation during H1 of 2009-10 over H1 of 2008-09, reflected in higher net capital inflows and lower trade deficit. The trade deficit was lower at US$ 58.2 billion during H1 (April-September) of 2009 as compared to US$ 64.4 billion in April-September 2008 mainly on account of decline in oil import.

The net invisibles surplus (invisibles receipts minus invisibles payments) stood lower at US$ 39.6 billion during April-September of 2009 as compared to US$ 48.5 billion during April-September 2008. The current account deficit increased to US $ 18.6 billion in April-September 2009, despite a lower trade deficit, as compared to US $ 15.8 billion in April-September 2008, mainly due to the lower net invisibles surplus.

Net capital flows to India at US $ 29.6 billion in April-September 2009 remained higher as compared to US $ 12.0 billion in April-September 2008. All the components, except loans and banking capital that comprise net capital flows, showed improvement during April-September 2009 from the level in the corresponding period of the previous year.

Net inward FDI into India remained buoyant at US$ 21.0 billion during April-September 2009 (US $ 20.7 billion in April-September 2008) reflecting better growth performance of the Indian economy. Due to large inward FDI, the net FDI (inward FDI minus outward FDI) was marginally higher at US$ 14.1 billion in April-September 2009, reflecting better growth performance of the Indian economy.

Portfolio investment mainly comprising foreign institutional investors’ (FIIs) investments and American depository receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $ 17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-September 2008) due to large purchases by FIIs in the Indian capital market reflecting revival in growth prospects of the economy and improvement in global investors’ sentiment.

Given the uncertain global context, the government did not fix an export target for 2009-10. Instead, the Foreign Trade Policy (FTP) 2009-14 set the objective of an annual export growth of 15 per cent with an export target of US$ 200 billion by March 2011. With the deepening of the global recession, the beginning of 2009-10 saw acceleration in the fall of export growth rate. The upwardly revised export figures for the first half of 2008-09 also contributed to the faster decline in the growth rate. While the export growth rate was a negative 22.3 per cent in April-November 2008-09, in November 2009, it became a positive 18.2 per cent after a 13-month period of negative growth. This significant turnaround is due to the low base figures in November 2008 (at $11.2 billion compared to $14.1 billion in October 2008 and $13.4 billion in December 2008). The export growth rate in November 2009 over October 2009 was marginally positive at 0.04 per cent. In December 2009 the recovery in export growth has continued with a positive year-on-year growth of 9.3 per cent and a growth of 10.7 per cent over the previous month.

During 2009-10 (April-December) import growth was a negative 23.6 per cent accompanied by a decline in both POL and non-POL imports of 29.8 per cent and 20.7 per cent respectively. Gold and silver imports registered negative growth of 7.3 per cent primarily on account of the volatility in gold prices. The continuous rise in prices of gold also dampened the demand. Non-POL non-bullion imports declined by 22.4 per cent reflecting slowdown in industrial activity and lower demand for exports. Import growth was at a positive 27.2 per cent in December 2009 due partly to the base effect and partly the 42.8 per cent increase in the growth of POL products with the pick-up in oil prices and industrial demand. Non-POL items also registered a significant growth in imports at 22.4 per cent, despite a high negative growth of gold and silver imports.

Trade deficit fell by 28.2 per cent to US$ 76.2 billion (as per customs data) in 2009-10 (April– December) from US$ 106 billion in the corresponding period of the previous year. There have been significant changes in the composition and direction of both exports and imports in this period.

During fiscal 2009-10, foreign exchange reserves increased by US$ 31.5 billion from US$ 252.0 billion in end March 2009 to US$ 283.5 billion in end December 2009. Out of the total accretion of US$ 31.5 billion, US$ 11.2 billion (35.6 per cent) was on BoP basis (i.e excluding valuation effect), because of higher inflows under FDI and portfolio investments, while accretion of US$ 20.3 billion (64.4 per cent) was on account of valuation gain due to weakness of the US dollar against major currencies.

Besides, the Reserve Bank of India (RBI) concluded the purchase of 200 metric tonnes of gold from the IMF, under the IMF’s limited gold sales programme at the cost of US$ 6.7 billion in the month of November 2009. Further, a general allocation of SDR 3,082 million (equivalent to US$ 4,821 million) and a special allocation of SDR 214.6 million (equivalent to US$ 340 million) were made to India by the IMF on August 28, 2009 and September 9, 2009, respectively.

Monetary Policy

Since the outbreak of the global financial crisis in September 2008, the RBI followed an accommodative monetary policy. In the course of 2009-10, this stance was principally geared towards supporting early recovery of the growth momentum, while facilitating the unprecedented borrowing requirement of the government to fund its fiscal deficit. The fact that the latter was managed well with nearly two-thirds of the borrowing being completed in the first half of the fiscal year not only helped in checking undue pressure on interest rates, but also created the space for the revival of private investment demand in the second half of the year.

The transmission of monetary policy measures continues to be sluggish and differential in its impact across various segments of the financial markets. The downward revisions in policy rates announced by the RBI post-September 2008 got transmitted into the money and G-Sec markets; however, the transmission was slow and lagged the in the case of the credit market. Though lending rates of all categories of banks (public, private and foreign) declined marginally from March 2009 (with benchmark prime lending rates [BPLR] of scheduled commercial banks [SCBs] having declined by 25 to 100 basis points), the decline was not sufficient to accelerate the demand for bank credit. Consequently, while borrowers turned to alternate sources of possibly cheaper finance to meet their funding needs, banks flush with liquidity parked their surplus funds under the reverse repo window.

Demand for bank credit/non-food credit remained muted during 2009-10. It was only from November 2009 that some signs of pick-up became evident. On financial-year basis (over end March), growth in non-food credit remained negative till June 2009. It picked up thereafter, only to hover between 0.0 to 1.8 per cent till mid-September 2009. Consistent growth in non-food credit was recorded only after November 2009.

Growth in sectoral deployment of gross bank credit on a year-on-year basis (as on November 20, 2010) shows that retail credit has not picked up during 2009-10. While growth in credit to agriculture remained more or less the same as on the corresponding date of the preceding year, for the other broad sectors–industry, personal loans and services—growth in credit decelerated as compared to the corresponding period of the preceding year.

Fiscal Policy Developments

The fiscal expansion undertaken by the Central government as a part of the policy response to counter the impact of the global economic slowdown in 2008-09 was continued in fiscal 2009-10. The expansion took the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. The net result was an increase in fiscal deficit from 2.6 per cent in 2007-08 to 5.9 per cent of the revised GDP (new series) in 2008-09 (provisional) and 6.5 per cent in the budget estimates for 2009-10 (as against 6.8 per cent of the GDP on the old series, reported earlier). Thus the fiscal stimulus amounted to 3.3 per cent of the GDP in 2008-09 and 3.9 per cent in 2009-10 from the level of the fiscal deficit in 2007-08.

As part of the fiscal stimulus, the government also enhanced the borrowing limits of the State governments by relaxing the targets by 100 basis points. As a result, the gross fiscal deficit of the States combined rose from 1.4 per cent of the GDP in 2007-08 to 2.6 per cent in 2008-09 (revised estimates [RE]) and was estimated at 3.2 per cent of the GDP in 2009-10 (BE).

The relative success of the fiscal stimulus in supporting effective demand, particularly the consumption demand, in 2008-09 and 2009-10 could be traced to its composition. The approach of the government was to increase the disposable income in the hands of the people, for instance by effecting reductions in indirect taxes (excise and service tax) and by expanding public expenditure on programmes like the National Rural Employment Guarantee Act (NREGA) and on rural infrastructure.

The implementation of the Sixth Pay Commission recommendations and the debt relief to farmers also contributed to this end. The fact that the approach worked is attested to by the GDP growth rate and more specifically by the growth in private consumption demand in 2008-09 and also in 2009-10 as reflected in the relevant data on the NAS new series. Consumption expenditure, by its very nature, has short lags, and affects demand quickly, with little or no effect on productivity, while productive infrastructure expenditure takes much longer to translate into effective demand. The recovery having taken root now necessitates a review of public spending. It has to be geared towards building medium-term productivity of the economy and making up for the decline in investment growth in certain sectors of the economy.

Social-sector Development

Fiscal 2009-10 saw the strengthening of several public initiatives and programmes with a view to cushioning the impact of the global slowdown on the more vulnerable segments of the population in the country. While some of these programmes were a part of the ongoing interventions to give effect to a more inclusive development strategy, there were some measures that were undertaken as a direct response to the slowdown of growth, especially in the tradable sectors of the economy. Thus emphasis in favour of higher allocation to social-sector development given in recent years continued to be reflected in the allocations under the Union Budget 2009-10. The share of Central government expenditure on social services, including rural development in total expenditure (Plan and non-Plan), increased to 19.46 per cent in 2009-10 (BE) from about 10.46 per cent in 2003-04. Similarly, expenditure on social services by general government (Centre and States combined) as a proportion of total expenditure increased from 19.9 per cent in 2004-05 to 23.8 per cent in 2009-10 (BE).

A major concern was regarding the possibility of a rise in unemployment due to the slowdown of the economy. While comprehensive employment data for the current financial year are not available, some sample surveys conducted by the Labour Bureau, Ministry of Labour and Employment, government of India, indicated job losses in the wake of the global financial crisis, which seemed to reverse in later part of 2009-10. Employment is estimated to have declined by 4.91 lakh during the third quarter (October-December) of 2008; it increased by 2.76 lakh during January-March 2009, followed by a decline of 1.31 lakh during April-June 2009, and then an increase of 4.97 lakh during the second quarter (July-September) 2009.

Under the NREGA, which is a major rural employment initiative, during the year 2009-10, 4.34 crore households were provided employment till December 2009.

Road Ahead

There are some deep changes that have taken place in India, which suggest that the economy’s fundamentals are strong. First, the rates of savings and investment have reached levels that even ten years ago would have been dismissed as a pipedream for India. On this important dimension, India is now completely a part of the world’s fast growing economies.

In 2008-09 gross domestic savings as a percentage of GDP were 32.5 per cent and gross domestic capital formation 34.9 per cent. These figures, which are a little lower than what had been achieved before the fiscal stimulus was put into place, fall comfortably within the range of figures one traditionally associated with the East Asian economies. Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak very well for India’s medium-term growth prospects. It also has to be kept in mind that as the demographic dividend begins to pay off in India, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further.

Second, the arrival of India’s corporations in the global market place, and informal indicators of the sophisticated corporate culture that many of these companies exhibit, lends to the optimistic prognosis for the economy in the medium to long run.

In the medium term it is reasonable to expect that the economy will go back to the robust growth path of around 9 per cent that it was on before the global crisis slowed it down in 2008. To begin with, there has been a revival in investment and private consumption demand, though the recovery is yet to attain the pre-2008 momentum. Second, Indian exports have recorded impressive growth in November and December 2009 and early indications of the January 2010 data on exports are also encouraging. Further, infrastructure services, including railway transport, power, telecommunications and, more recently but to a lesser extent, civil aviation, have shown a remarkable turnaround since the second quarter of 2009-10. The favourable capital market conditions with improvement in capital flows and business sentiments, as per the RBI’s business expectations survey, are also encouraging. Finally, the manufacturing sector has been showing a buoyancy in recent months that was rarely seen before. The growth rate of the index of industrial production for December 2009 was a remarkable 16.8 per cent. There is also a substantial pick-up in corporate earnings and profit margins.

Hence, going by simple calculations based on the above-mentioned variables, coupled with the fact that agriculture did have a set-back in 2009 and is only gradually getting back to the projected path, a reasonable forecast for the year 2010-11 is that the economy will improve its GDP growth by around 1 percentage point from that witnessed in 2009-10. Thus, allowing for factors beyond the reach of domestic policy-makers, such as the performance of the monsoon and rate of recovery of the global economy, the Indian GDP can be expected to grow around 8.5, with a full recovery breaching the 9 per cent mark in 2011-12.

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