BA LLB economics 2nd notes pdf: Discuss the prospects and policy issues concerning the following areas as envisaged in the Mid Year Review of the Economy done by the Ministry of Finance
|Total non-debt receipts
The aggregate fiscal situation of States has shown a marked improvement in 2004-05 (RE) over 2003-04. The revenue deficit of the States declined to 1.4 percent of GDP in 2004-05 (RE) from 2.2 percent in 2003-04, and the fiscal deficit as a proportion of GDP declined to 3.8 percent from 4.4 percent in the same period. The budget estimates of the States for 2005-06 carry forward this fiscal consolidation process. The revenue deficit is budgeted to decline to 0.7 percent of GDP and fiscal deficit to 3.1 percent of GDP, which is very proximate to the fiscal correction goals enunciated by the TFC.
The TFC had recommended a debt consolidation and waiver scheme for States. Under the general debt relief scheme applicable to all States during the period of the award of TFC, all central loans contracted till March 31, 2004, and outstanding as of March 31, 2005, get consolidated as loans for a fresh period of 20 years payable in 20 equal annual installments at a reduced interest rate of 7.5 percent effective from the year in which the fiscal responsibility legislation is enacted by the States. TFC has estimated that this would benefit the States in the entire period of its award through lower interest payments of Rs. 21,276 crore and through relief on deferment of principal repayment of Rs. 11,929 crore. The second scheme of debt write-off under the TFC award linked to fiscal performance is calibrated in a manner that provides incentives for a self-imposed fiscal correction path on a year-on-year basis leading to the elimination of revenue deficit by 2008-09 and containing the fiscal deficit.
Improving own tax-GDP ratio is critical in sustaining fiscal reforms at the State level. Introduction of State Level Value Added Tax (VAT) is the single most significant economic reform measure at the State level in recent times. The decision to implement State-level VAT was taken at the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad consensus emerged to introduce VAT from April 1, 2005. Accordingly, 24 States/Us have introduced VAT by now. Nine States/UTs are yet to introduce VAT. These are UP Tamil Nadu, Rajasthan, Gujarat, MP, Chattisgarh, Jharkhand, Pondicherry, and Chandigarh. The Central Government is playing the role of a facilitator in this process. The smooth introduction of the VAT system and the management of the transitional problems are testimony to the commitment of the Governments to fiscal reforms. Available estimates indicate that most of the States that have graduated to the VAT have experienced higher revenues.
Following the TFC recommendation on debt relief and debt write-off, many States have started to put in place fiscal responsibility legislation and the Budget estimates of States for 2005-06 reflect this process, albeit with some regional variations. It is only through sustained fiscal consolidation that Union and State Governments could release more public funds for financing development initiatives.
Stocks of foodgrains in the Central Pool as of November 1, 2005, were 193.9 lakh tonnes, .comprising 103.4 lakh tonnes of rice and 90.5 lakh tonnes of wheat. Though the stocks were marginally below the buffer stocking norm on October 1, it is important to bear in mind that wheat stocks are normally expected to go down between October 1 and January 1. As such, the situation is comfortable. Rice procurement in the current Kharif marketing season, which commenced on October 1, had already crossed 104.5 lakh tonnes by December 2, 2005, against 95. 1 lakh tonnes in the corresponding period of the previous year. The wheat stocks are also adequate to meet the requirement under targeted PDS (TPDS) and other welfare schemes until the commencement of the next wheat procurement season on April 1, 2006. The sown area of wheat is reported to be over 6 lakh hectares more than that in the corresponding period last year, and wheat production is targeted at 76 million tonnes against the estimated 72 million tonnes achieved last year.
The Tenth Plan (2002-07) envisages 4 percent growth in agriculture to achieve the target growth rate of 8 percent for the Plan period. Against this, annual agricultural growth in the first three years has been low at 1.3 percent. The prospects for foodgrains output in 2005-06 are bright. But, the anticipated rebound in agriculture is partly because of the low base of the previous year.
The economy’s growth rate has demonstrated considerable resilience to the vagaries of the monsoon partly because of the declining share of agriculture in GDP. In spite of drought-like conditions, in 2004-05, the economy managed to grow at 6.9 percent. In the current year, as the fears of delayed and inadequate monsoon receded, forecasting agencies upgraded their forecasts of India’s GDP growth by only about 0.5 to1 percentage points. This resilience, however, conceals a lot of the shadows that monsoon-related uncertainties cast on India’s economic performance and welfare.
First, the relatively low share of agriculture (around 21 percent) in GDP grossly understates the extent (56.7 percent of the total workforce) to which the population of India depends on the sector for earning a livelihood. Second, there is an erratic rainfall-induced build-up of price pressures in both directions-in some essential commodities. Sugar and onions in recent years provide examples of such vulnerabilities.
Enhancing the growth rate in agriculture to 4 percent per annum and improving its robustness vis-a-vis the monsoon require substantial investment in irrigation and water management technologies diversification and boosting the productivity of different crops through improved seeds, and plant-care practices. The National Project for the repair, renovation, and restoration of water bodies is a bold step in the right direction. Lessons learned from the pilot scheme in 16 districts in 9 states will have to be incorporated in the future implementation of the project to improve its effectiveness. In irrigation, the emphasis should be on the completion of last-mile projects and bringing additional land under irrigation in command areas of the completed projects. A revamp of food and fertilizer subsidies, with better targeting and more efficient delivery mechanisms, will benefit agriculture by not only increasing the farmers’ share of the benefits of such subsidies but also opening up fiscal space for enhanced outlays on irrigation and rural infrastructure. With increasing per capita income, the observed tendency of a shift in demand away from cereals and in favor of high-value food products like pulses, fruits, and vegetables, dairy, fish, and poultry products is likely to continue. This changing demand pattern needs to be met by a dynamic agricultural diversification program. This in turn requires the diffusion of better technology, quality seeds, and more efficient agro practices in these alternatives, and many improved post-harvest facilities, in terms of storage, transportation, and processing, for these non-cereal agricultural products, many of which are perishable in nature.
‘Vigorous revival of commodities’ future markets will help in reducing price uncertainties in acreage allocation to alternative crops, without the compulsory need for costly government intervention in terms of Minimum Support Prices (MSP). While good progress has been made towards reviving commodities’ future markets, there is a need for greater attention to developing a strong regulatory architecture. Large increases in MSP of principal cereals, resulting in their market prices being below or equal to the MSP, tend to put open market trade in these cereals under severe strain. Too high an MSP for a particular crop leads to an excess build-up of stocks of that cereal, a high subsidy bill because of the carrying costs, and an excessive concentration on the production of this crop.
There are limits to the ability of the agriculture sector in providing gainful employment to the over 600 million people dependent on it. Poverty, inequality, and deprivation are the natural consequences of more than one-half of the population depending for their livelihoods on a sector producing only about a fifth of GDP. The process of economic development involves shifting people from the primary (agriculture) to the secondary (industry) sector, mainly manufacturing. Industrial growth, particularly that of agro-processing, needs to be maintained at double-digit rates.
In textiles, the untapped potential continues to be enormous. In the post-quota regime, exports of Indiąn textiles grew, but at only about a third of the rate registered by China. For example, export of textiles to the US from China grew at 58.5 percent during April-September 2005, while that from India grew by only 24.2 percent during April-August 2005. Removal of 30 items under the category of ‘textile products, including hosiery’ from the purview of small-scale reservation, a continuation of the Technology Upgradation Fund (TUF) Scheme with enhanced allocation and the additional benefit of 10 percent capital subsidy, reduction of customs duty on textiles machinery from 20 percent to 10 percent, and cut in excise duty from 24 percent to 16 percent on polyester filament yarn in 2005-06 are expected to have a significant positive impact. Substantial additional investment needs to flow into the textiles sector if India is to capitalize fully on the opportunities opened up n the post-quota era. This would be facilitated by reforms in labor laws and the removal of infrastructural constraints.
The steel industry has been performing satisfactorily. But there is scope for a substantial increase in domestic consumption of steel, particularly in the unexplored rural markets. Per capita, the annual consumption of steel is still only 30 kg in India, compared to 350 Kg in the developed countries and 150 kg for the world as a whole. In view of the inherent strengths of the Indian steel industry, abundant availability of iron ore and coal, low wage rate, and a mature production base, the domestic steel industry offers potential for large-scale investment. A streamlinıng of the approval process tor grant of environmental clearances will help such investments not only in the steel industry but also in the mining and quarrying sector.
In spite of the somewhat disappointing outcome in the first half, coal production still could be expected to achieve a growth rate of 6 percent in the current year, as the peak production period is yet to come. Nevertheless, compared to the overall growth of the economy, the slower growth in this vital energy input, whose price in the world market has gone up substantially in recent times, is a source of some discomfort. The existing pace of growth in coal production falls short of the existing and anticipated demand-supply gap for coal in the country. There is an urgent need for reforms in the coal sector, in terms of pricing and distribution, foreign direct investment policy, and opening of coal mining to the private sector without the restriction of captive consumption.
The near stagnancy of overall crude oil production during the Tenth Plan remains a cause for considerable concern. The main reasons for this stagnation are the natural decline in output in the aging oil fields, isolated and marginal fields of ONGC and Oil India Limited (OIL), and very few oil discoveries by ONGC and OIL. The stagnation is harmful particularly because of the time lag of 7-8 years involved in the development and exploitation of the recent gas discoveries by the private and public joint-venture companies. Given the present level of discoveries, while natural gas production is expected to show a marked improvement from 2008-09, there is very little good news on the crude oil front so far.
The coming into force of the Special Economic Zones (SEZ) Act in June 2005 constitutes a major policy initiative for not only accelerating export growth but also providing a fillip to industrial activity. The SEZ Act provides for a single-window clearance mechanism and very attractive fiscal incentives for the developers as well as manufacturers. The Act will provide confidence and stability to domestic and foreign investors and signals the Government’s commitment to the SEZ policy framework.
World Investment Report 2005 of the United Nations Conference on Trade and Development (UNCTAD) rated India as the second most attractive investment destination. Furthermore, UNCTAD’s Survey 2005-09 on research and development (R&D) related FDI, consider India the third most attractive prospective investment location, after China and the United States. During April-September 2005, the inflow of FDI into India (excluding ‘reinvested earning’ and ‘other capital’) registered a growth of 17.2 percent over the inflow during the corresponding period or the previous year, to reach the US $2.19 billion. The buoyancy in capital markets in the first half of the year was reflected in an increase in the initial public offerings (IPOs) and privately placed debt by corporates. Some private corporates also tapped the international markets. The number of capital issues (through prospectus and rights issues, private placements, and euro issues) increased from 203 valued at Rs 21,525 crore in the first half of the previous year to 340 valued at Rs. 34,915 crore in April-September 2005. The buoyancy needs to be maintained. Sustaining a growth rate of 8-10 percent with an investment rate of 26.3 percent of GDP (2003-04) will be difficult in the medium term. The incremental capital-output ratio (ICOR) in India at 3.6 is, already too low by international standards…for example, China at 5.2 and Korea at 6.2 between 2000 and 2004. The need for ądditional capital is enormous in infrastructure, industry, and agriculture. No doubt, the bulk of this investment has to be financed by domestic savings. While household savings as a proportion of GDP is likely to rise with high growth and the favorable impact of demographic dynamics, there is a need to reduce public dis-savings by eliminating revenue deficit and stimulating corporate savings by appropriate investment-friendly policies. Furthermore, there appears to be considerable scope for supplementing domestic savings by foreign savings by attracting more foreign investment.
The impact of hardening of interest rates on investment after a prolonged period of soft interest rate regime is important in this context. The real rates of interest in the country continue to be benign and moderate. Interest rate spreads continue to be high because of the slow recovery of non-performing assets and of inefficiencies in the banking system. Faster recovery of NPAs and improved efficiency can reconcile the need for remunerative rates for savers and attractive rates for borrowers. The rapid expansion in the demand for bank credit from the commercial sector in recent years could be met by the banking sector without any undue pressure on the interest rate regime because of the availability of adequate liquidity in the system, which in turn was facilitated by lower levels of banks’ investment in government and approved securities. Thus, continued fiscal consolidation will help in maintaining this virtuous trend.
Infrastructure remains the major bottleneck for the potential surge in growth in India. While India is well known for its ‘soft’ infrastructure (institutions), historically investment in ‘hard’ infrastructure (physical) has been low compared to other emerging market economies. The inherent advantages arising from the availability of soft infrastructure, a large pool of scientific manpower, enormous mineral deposits, vibrant private sector, and diversified industrial structure have been largely nullified by the absence of supportive infrastructure. Deficiencies are not just in physical infrastructure, but in social infrastructure as well. While the stock of physical infrastructure is dismally low, the quality of the existing
infrastructure also leaves much to be desired. To make things worse the incremental spending on infrastructure in India is too low for the size of the economy and its requirement: the annual expenditure on infrastructure is currently only one-seventh of China’s. In 2003, as a proportion of GDP, the spending on infrastructure in India has been estimated to be only 3.5 percent (U$21 billion) compared to 10.6 percent of GDP (US$ 150 billion) in China.
One common factor that continues to inhibit investment-both domestic and foreign is the lack of quality infrastructure. The Committee on Infrastructure, headed by the Prime Minister, has estimated investment requirements in some of the key sectors: Rs. 1,72,000 crore in the National Highways sector by 2012; Rs. 40,000 crore for Airports by 2010; and Rs. 50,000 crore for the Ports sector by 2012. A substantial share of this investment is expected to come from the private sector. It has been estimated that India has the potential to absorb US$ 150 billion of FDI in the next few years in the infrastructure sector alone. Given the constraints on expanding public investment, increasing reliance will have to be placed on PPP for bridging the investment gap. Private investment requires a policy framework that can enable an adequate rate of return and also a regulatory system that is seen to be fair by users and also by producers. For the latter, the system must be independent of government. During the past decade, economic regulation has evolved in different ways in different sectors and the Planning Commission is presently engaged, in consultation with the various stakeholders, in addressing the issue of infrastructure regulation encompassing the best international practices.