Micro-foundations of

Macroeconomic Development
2
CHAPTER

This has been a classic year of economic recovery for India. The economy remained
on the path of rapid resurgence which began in 2009-10 and has virtually returned
to the high growth path that it had achieved during 2005-08, before the global
financial crisis and economic meltdown. India’s growth story this year has been
remarkable by any standards. What makes it even more significant is that this is
happening on the heels of a year in which growth was a robust 8 per cent; so there is
no base effect to lay claims on this year’s achievement. Further, as discussed in Chapter
1, the growth prospect over the medium to long term looks excellent. However, as
often happens with strong recovery, the economy has come under strain from high
inflation. Since the growth is in real terms, the average person has the cushion of
more goods and services. Nevertheless, inflation, especially when it is centred on
food, as has been the case in recent times in India, can be a cause of considerable
distress for the common man and woman. Not surprisingly, a substantial part of
this chapter addresses the subject of inflation. Price rise is discussed both as a matter
of overall demand management and from the point of view of productivity and
marketing. The chapter also comments at some length on the efficiency of financial
intermediation. Economic analysts often treat growth and development as rooted in
economic policy alone. In reality, much depends on the social, political, and
institutional milieu. Crafting good policy entails taking proper account of this. The
chapter closes with a discussion of these extra-economic catalysts of economic
development.

INCLUSIVE GROWTH AND INFLATION So clearly there has been an easing of the overall
inflationary situation even though the recent spike
2.2 This has been a difficult year in terms of in food prices is a cause for concern and will be
inflation, even though the overall trend of inflation addressed in this and other chapters. On the other
has been downwards. Inflation peaked around March hand, the high growth that India has achieved this
and April 2010 and has since been on a downward year, when much of the industrialized world is still
trend despite a disturbing turnaround in December teetering on the brink of a possible second dip, is
2010. Inflation in India is measured by a wholesale remarkable. As always with high growth, this is also
price index (WPI) and four different consumer price a moment of opportunities. This is the time when
indices (CPIs) for various categories of consumers. we have to make sure that the economy builds up
Interestingly, measured by all five price indices, it strengths—fiscal, infrastructural and more—so that
was in single digits from October 2010. This had not only do we improve our current standard of living,
not happened since April 2009. Till September 2010, we also accumulate resources and create fiscal
for 17 months, one or the other inflation index has space for bad times that may come our way in the
been in double digits. In fact, from March 2010 to future. In short, a part of the current recovery must
July 2010 all five indices showed double-digit inflation. be stored away to build future resilience.
24 Economic Survey 2010-11
2.3 When growth is as high as it has been for India be based on the comprehensive study of available
this year, if it were the case that all segments of the statistics, the lessons of economic theory and, not
population were partaking in the growth in exactly least, judgement.
the same way, then inflation would not be a matter 2.6 Recognizing the complex nature of inflation,
of great concern. This is because the growth being with roots in domestic and international factors, the
real, everybody is better off and the inflation does Government has set up an inter-ministerial group
not take away anything from this. It is when the (IMG), under the chairmanship of the Chief Economic
average growth is unevenly distributed that we have Adviser, Ministry of Finance, to “review trends in
to worry about the worse-off and vulnerable segments overall inflation, with particular reference to primary
of society. Hypothetically it is possible that while food articles,” and “make recommendations for action
the average Indian is better off by the per capita on fiscal, monetary, administrative and other fronts.”
income growth of approximately 7 per cent per annum In the mean time, in understanding and analysing
that the country has had, some poor people are inflation, it is important to distinguish between two
actually worse off because their nominal incomes different kinds of phenomena. The first is a short-
have hardly grown and inflation has negated that term relative price rise in a couple of commodities
growth. Given India’s objective of inclusive growth, and the second is a sustained overall price increase.
this is a matter of concern. In fact, in much of standard economics, the former
2.4 According to the unit level data of the NSSO is not even called inflation. The latter, on the other
2004-05 round of monthly consumption expenditure, hand, is classic inflation and calls for standard
based on uniform recall period, the bottom quintile remedies involving monetary and fiscal policies. This
of India’s rural population devotes approximately 67% is not to deny that relative price adjustments can be
of their aggregate household expenditure on food. a contributory factor in a country’s overall inflation.
Since food price inflation during much of the year However, these two kinds of phenomena call for very
has been over 10 per cent, it is possible that some different kinds of policy interventions. To begin with
of these people are worse off, despite the high real the phenomenon of sustained overall price increase
gross domestic product growth (GDP) growth. The or inflation, it is important to note an interesting
way this has to be handled is by developing stronger connection between inclusion and inflation. While
systems of food security for the poor, more effective the Reserve Bank of India (RBI) controls the total
systems of providing cheap fertilizer to small farmers, amount of currency in the economy and the Ministry
dependable micro credit to poor households in rural of Finance, Government of India (GOI), controls the
and urban areas, and basic health support and other fiscal and revenue deficits, what is not often
such services. There are several initiatives afoot in understood is that inflation depends on overall liquidity
India right now to make sure that not only do we try in the economy, and that can be affected by the
to control inflation, we also try to put these supportive decisions and behaviour of firms, farms, corporations,
policy structures in place so that the vulnerable and ordinary citizens.
segments of India’s population are protected from 2.7 As Figure 2.1 shows, Indians continue to hold
the ravages of inflation. These policies are important a lot of their savings as cash. In rural India, around
because, though the Government aims to bring down 42 per cent of savings are held as cash. In this
inflation further, there may be reason to expect that environment, once we initiate policies for financial
in the medium term we will have to live with a little inclusion and help people open bank accounts and
higher inflation than the 3 per cent or so that we put their money in the accounts, we will be bringing
used to have in earlier years. money that was earlier lying dormant into circulation.
2.5 In designing inflation control measures it is In the old set-up where lots of Indians, especially in
important to be aware that sudden, sharp policy- rural areas, kept their savings as cash in their homes,
induced contractions in demand can cause the Government and the RBI had the freedom to
unemployment to rise. Given that India’s inflation indulge in an additional amount of spending without
data are remarkably comprehensive and are this giving rise to inflationary pressures. This is a
published on a weekly and monthly basis, whereas case of one person’s decision not to put his money
our employment statistics come out with long into circulation enabling another agent to put her
intervals and time-lag, the trade-off between inflation money into circulation without causing inflationary
and employment escapes public awareness and pressures. Once people are financially included, that
slants discourse. There is however, enough evidence is, they put away their money in banks and mutual
from around the world that, at least in the short run, funds, this money goes into circulation. Hence, the
there is a negative relation between inflation and total effective money supply in the economy goes
unemployment. This is what makes it critical for up. In this situation, even if there is no change in the
government to carefully calibrate the demand behaviour of the RBI and GOI, there will be inflationary
management measures when bringing down inflation. pressure. There is evidence from around the world
There is no known formula for doing this. This has to that monetization of the economy and the desirable

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 Micro-foundations of Macroeconomic Development 25
objective of bringing more and more people into December) broad money (M3) growth was 16.5 per
systems of modern money management contribute cent. This is not only reasonable but it is less than
to the overall pressure on prices. This is a case of the growth in the previous year, which was 17.9 per
one good development, namely, greater financial cent. Narrow money (M1) also grew less in 2010-11
inclusion, having an undesired consequence, to wit, compared to 2009-10. This year (year on year, up to
a greater inflationary propensity. This must not deter 31 December) the growth was 15.5 per cent and
us from pursuing financial inclusion since the overall last year the growth was 17.9 per cent). During this
benefit of this can be enormous. What is being year currency growth has been greater than deposit
pointed out is the need to be aware of all its fall- growth, resulting in a higher currency to deposit ratio.
outs, and take appropriate action against possible Also, during the year the growth in bank credit to
negative side effects. Government has also gone down. The demand for
2.8 An analysis of India’s recent monetary and liquidity is evident from the fact that the repo rate
liquidity conditions lends credence to the foregoing emerged as the operative policy rate, at least for
analysis. Overall money supply seems to be well most of the latter part of the calendar year 2010.
under control. In 2010-11 (year on year, up to 31 This shows that the raising of the repo rate was being

Figure 2.1 Prefered form of cash savings

by location
100
7.6 9.7
90 5.4 4.2 Others

80
Post office
Per cent of cash saving

70
45.3
Banks
60 62.6

50 Keeping at
home
40

30

20
41.7
10 23.4

0
Rural Urban
Source: National Council for Applied Economic Research–Center for Macro Consumer
Research (NCAER-CMCR), NSHIE, analysis from Rajesh Shukla (2010), How India
Earns, Spends and Saves: Unmasking the Real India, Sage Publications, New Delhi.

tolerated well by the real economy. The inflation that in India can buy with 100 dollars will typically require
occurred despite these features point to the possible 290 dollars in the US. We also know that by the
role of other non-central bank factors. time a country becomes industrialized, the PPP
2.9 The other route through which a desirable correction has to be smaller. This happens partly
because of exchange rate changes but more
change can have the adverse effect of creating
substantially because the prices of basic non-traded
inflationary pressures in an emerging economy is
goods and unskilled labour in the formerly poor
integration with the global economy and, more
country rise and partly catch up with prices in
generally, globalization. It is well-known that in poor
countries, the purchasing power parity (PPP) is low. industrialized nations.
In other words, the kind of living standard one can 2.10 The most major break for the Indian economy
achieve in a poor country with 100 dollars is occurred with the far-reaching economic reforms of
considerably higher than what one can achieve with the early 1990s. From 1994 India was clearly on a
the same money in the United States, Europe, or higher growth path than ever before. The next big
any other industrialized nation. Currently, India’s PPP step up in growth happened in 2005. If India keeps
correction factor is 2.9. In other words, what a person up the high growth rate it has had from 2005, it will

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26 Economic Survey 2010-11

mean that the real per capita income of Indians will spikes, it is important to take a longer-run view and
rise from the current level of approximately 1300 be restrained in the use of such interventions. We
dollars per annum to 10,000 dollars in 2039. Using should use each such inflationary episode to try and
the data on PPP corrections needed for countries locate and rectify the flaws in the system of
just above the 10,000 dollar benchmark, we would production and marketing.
expect India’s average dollar prices to rise (see Box
2.12 Before going into this, it is important to stress
2.1). If this happened entirely through the adjustment
that not all price increase should be met with
of prices with no change in real exchange rate, we
Government interventions. Prices rise and fall in
would have an additional 2 per cent per annum
response to changing demand and supply scenarios
inflation rate. In reality, there could be some
in the country. Prices are signals to consumers and
exchange rate adjustment as well, though cross-
producers to alter their behaviour in response to
country data suggest this is dominated by the price
exogenous changes in the economy. It is not
adjustment. If simply as a rule of thumb, we take
advisable for Government to step in and flatten out
three-fourths of this to be determined by price
all these price fluctuations. Trying to control these
adjustment, this will mean that we will, over the next
price increases by legislating price controls runs the
30 years, have an inflation rate that is 1.5 percentage
risk of prices being lower but goods vanishing from
points greater than would have been the case in the
store shelves, as happened in countries which tried
absence of this growth spurt. In the years
this strategy in the 1970s and 1980s. In other words,
immediately preceding 2003-04, from when GDP
we risk having low prices for no goods. Such a policy
growth picked up (and went even higher after 2005),
could also give rise to black markets. When an
the average annual WPI inflation was just below 3.5
unwarranted price spike occurs, the need is to see
per cent (it was 3.61 per cent in 2001-02 and 3.38
if there are defects in our marketing system, take
per cent in 2002-03). This implies that, other policies
away lessons, and put corrective measures in place
remaining unchanged, we will have an average annual
to prevent a recurrence. Some such food distribution
inflation of nearly 5 per cent during the next decade
flaws were isolated during the high inflation in
or so of the rapid growth that is widely expected to
foodgrains that occurred from November 2009 to May
occur in India. This suggests the need to revisit some
2010 and corrective measures put in place.
of our standard policies for managing inflation, and
also underlines the need to ensure that India’s growth 2.13 It can be argued that the sharp hike in the
is inclusive and that we have better designed price of vegetables seen during December 2010 and
systems for providing basic security to the vulnerable. January 2011, especially of onions, reveals defects
in our food production and marketing systems. What
2.11 Around this average inflation, there will
came to light during this period was the great
certainly be periods of price spikes and even price
difference in prices for the same product at the farm
declines for different commodities and different
gate and in city retail outlets, and also across different
classes of commodities. The year 2010-11 has been
cities and towns. On 7 January 2011, for instance,
a year of more than one such skewflationary episode.
onions were selling for ` 30 in Agra and 57.5 in Delhi;
At the beginning of the calendar year 2010 and even
for ` 35 in Nagpur and 62 in Mumbai; for ` 23 in
in the first months of the fiscal year 2010-11 inflation
Thiruvananthapuram and 60 in Dindigul. Surely with
was high for foodgrains, sugar, and pulses. During
an efficiently functioning and competitive market
the course of the year, inflation in these commodities
such price differentials could not have survived. What
stabilized, but by November there was another spike
these price differentials suggest more than anything
in prices of another set of commodities, led by
else is not so much hoarding as the cartelization of
onions, cabbage, milk, and a couple of other
trade resulting in the prevention of entry of new
products. While we are often forced to use the blunt
traders. The problem needs to be tackled using our
instrument of controlling aggregate demand in the
Competition Act 2002.
economy through monetary and fiscal instruments,
these price spikes should be treated as occasion to 2.14 When we give free rein to enforcers to check
investigate the micro structure of markets, in these practices in the market and among traders,
particular the production and distribution of goods the tendency often is to lump together a motley
from farm and factory to retail store and consumer. category of behaviour—hoarding, entry deterrence,
While political compulsions sometimes oblige and collusive price hikes—and treat them all as
Government to take short-term measures like banning malpractices to be avoided. Yet such indiscriminate
exports and changing tax rates to correct the price lumping together and punishing traders can do more

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 Micro-foundations of Macroeconomic Development 27
Box 2.1 : The Mechanics of PPP Catch-up and Increases in Price Levels
The concept of PPP catch-up inflation arises from the empirical observation that as countries grow in terms of per capita
GDP the required PPP adjustment appears to become lower (see Figure). Countries with per capita GDPs of around US$
850 to 1200 in 2009, like India, Pakistan, Nicaragua, and Vietnam, appear to have an average PPP correction of approximately
2.3.1 In comparison, countries with per capita GDPs between US$ 8500 and US$12,000, like Turkey, Uruguay, Mexico, and
Brazil, have an average PPP correction of around 1.6. It therefore appears that, as the per capita GDP of a country increases,
its PPP correction becomes smaller. This would also indicate that due to this apparent fall in the PPP correction factor, there
would be some increase in prices. For example, in 1980 Brazil had a per capita GDP of US$ 1371 with a PPP correction of
2.7. By 2009 it had a per capita GDP of US $ 8220 and a PPP correction of 1.3. India currently has an annual per capita GDP
of around US$ 1300 with a PPP correction of 2.9. If it reaches a PPP correction level of 1.6 (average PPP correction of
countries with per capita GDP US$ 8,500-12,000), over a period of around 30 years it would face an inflation of 2 per cent
per annum solely on account of this PPP adjustment (provided there is no currency appreciation).
The theoretical basis for this comes from the work of Balassa and Samuelson. As explained by Froot and Rogoff (1995), the
Balassa-Samuelson effect posits that ‘after adjusting for exchange rates, CPIs in rich countries will be high relative to those
in poor countries and that CPIs in fast-growing countries will rise relative to CPIs in slow-growing countries.’ The
underlying mechanism arises from the historical tendency wherein technological progress is faster in the traded goods
sector than the non-traded. Rising wages in the traded goods sector lead to rising wages in the entire economy. The non-
traded goods producer then needs to raise the relative
price of non-traded goods to pay the higher wages. PPP adjustment factor and
per capita GDP (2009)
Suppose we consider a basket of goods in India that
costs ` 5000 today. Given an exchange rate of ` 50 per 6
US dollar, this costs US$ 100 in India. With a PPP PPP adjustment factor
5
correction factor of 2.9, the same basket of goods would 4
cost US$ 290 in the US. If in say 30 years there is no
3
inflation in the US, and the PPP correction factor for
2
India comes down to around 1.6, the basket costing US$
290 would cost approximately US$ 181 in India. If the 1
exchange rate remains at ` 50 per US dollar, the basket 0
would cost ` 9050. This would imply a PPP catch-up
0

20

40

60

80

100

120
inflation of about 2 per cent per annum for 30 years
(compound annual growth rate--CAGR). The other Per capita GDP (2009) (in US$ thousands)
extreme possibility is that there is no inflation in India
and this adjustment occurs only because the ` 5000 basket becomes worth US$ 181 because the rupee appreciates to ` 27.6
per US dollar.
Between these two extreme alternatives, there would be other combinations involving a smaller appreciation and a lower
inflation rate. If we consider real-world examples of current middle-income countries (Table 1), very few countries appear
to have had currency appreciation as their per capita incomes increased. Brazil with its spectacular growth in per capita
GDP had a depreciating currency together with very high inflation. Poland, Uruguay, Chile, Venezuela, and Mexico also
had significant growth, lowering of the PPP factor, currency depreciation, and inflation. These examples lend some
credence to the idea of PPP catch-up due to high growth leading to high inflation in the absence of currency appreciation.
Table 1: Per capita GDPs, Currency Depreciation, Inflation and PPP Adjustment in Some Middle-income Countries.
Country Per capita Per capita Per capita Currency Average PPP PPP
GDP 1980 GDP 1990 GDP 2009 Depreciation Annual Adjustment Adjustment
(1993-2009) Inflation 1990 2009
(1993-2009)
Russia n/a n/a 8681.4 3100.7 99.7 n/a 1.7
Mexico 3291.9 3395.1 8133.9 333.7 11.3 2.1 1.7
Brazil 1371.6 3463.9 8220.4 5123.6 245.2 1.5 1.3
Turkey 2235.1 3859.5 8711.2 14,010.3 47.4 1.4 1.4
Seychelles 2793.5 6366.5 9253.0 162.7 6.1 1.6 2.6
Uruguay 3845.7 3319.2 9420.5 472.6 17.1 1.6 1.4
Libya 12,795.5 7063.1 9511.4 n/a 2.4 1.4 1.4
Chile 2492.9 2409.1 9515.9 38.8 5.3 2.0 1.5
Equatorial Guinea 143.9 294.6 9577.2 66.8 7.7 1.5 1.9
Lithuania n/a n/a 11,115.1 -42.8 35.0 n/a 1.5
Poland 1591.3 1625.2 11,302.1 72.2 10.8 3.6 1.6
Venezuela 4650.0 2481.6 11,383.0 2263.5 34.0 2.8 1.1
Latvia n/a n/a 11,465.6 -25.1 15.3 n/a 1.2
Note: Internal calculations based on International Monetary Fund (IMF) data.
Data Source: IMF, World Economic Outlook (WEO) and International Financial Statistics (IFS).
Reference: Kenneth A. Froot and Kenneth Rogoff (1995), ‘Perspectives on PPP and Long-run Real Exchange Rates’, in Gene
Grossman and Kenneth Rogoff (eds.) Handbook of International Economics, Volume 3, North Holland, Amsterdam.
1
Per capita GDP at current prices, not adjusted for PPP.

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28 Economic Survey 2010-11

harm than good. Our enforcers have to be taught to for small, new traders and farmers to bring their
distinguish between legitimate activities and genuine products to retail outlets. It is also believed that new
malpractices. Hoarding, for instance, like cholesterol, traders are deterred by incumbent traders. If this is
can be both good and bad. When ordinary citizens established, then section 3 of the Competition Act
hoard for a rainy day, they serve the useful role of 2002, can be invoked to put an end to these
evening out price fluctuations. This falls in the practices.
category of good hoarding. When Government talks
2.16 Another, and quicker, method to curtail the
in terms of setting up new warehouses and storage
margin between farm gate and retail prices is to bring
facilities, it implicitly recognizes the socially useful
in modern supply chain management systems and
function of this type of hoarding. On the other hand,
retail sellers into the picture. This will involve a lot of
when hoarding is done by large traders to deliberately
new know-how. A quick way to get at this is to allow
manipulate prices, this can be detrimental to the
foreign direct investment (FDI) in multi-product retail
economy and go against the interest of consumers.
into India. We will certainly need to have a regulatory
It is this latter kind of hoarding that we need to deter.
structure within which such foreign companies will
The important press release by the Prime Minister’s
be required to function, even if it were argued that
Office made on 13 January 2011, which led to the large organized-sector firms would be more wary of
setting up of the IMG referred to earlier, shows violating the nation’s antitrust laws. At any rate, we
awareness of the need to distinguish between are at a juncture where FDI in multi-product retail is
different kinds of hoarding stating as it does, worth considering. It could enable farmers to get
‘Government will take stringent action against higher prices and consumers to have to pay less.
hoarders and black marketers manipulating market We could, as a first step, consider limiting
prices.’ The last three qualifying words are important. international multi-product retailers to a few outlets
The same paragraph goes on to point out the need in each major city. This will prevent them from getting
to use not just our Essential Commodities Act 1955, full control of the market and, at the same time, set
but also the Competition Act 2002. an upper bound on the prices that other retailers will
2.15 The main relevance of the Competition Act be able to charge for their products. Further opening
occurs in the context of the natural propensity of up can follow depending on the success we have
established traders to prevent the entry of new with this.
traders. It was observed in an earlier paragraph how 2.17 The policy changes discussed in the preceding
the same product on the same day had vastly different paragraphs can improve our food delivery and
prices at the farm gate and at different retails distribution systems and provide great benefit to
locations. This does suggest the occurrence of entry- consumers. They can even achieve a once-and-for-
deterrence. For a policy analyst it is important to all lowering of retail prices that consumers pay. But
realize that the best antidote to these large price this in itself will not cure the risk of long-run inflation,
margins and the consequent large profits made by which refers to a sustained across-the-board price
the incumbent traders is the drive of others not increase. Sustained inflation is, in part, a by-product
currently operating in this market to make profit from of growth and financial inclusion. As discussed
the large margins. If we allow new traders to come earlier, with more people putting their savings in banks
into the market, buy where prices are low, and sell and mutual funds, the scope of the RBI and
where prices are high, the large price differentials Government to increase money and run a fiscal deficit
will vanish. So the critical question is why such new may go down. A deficit that earlier did not cause
traders and farmers do not come into the market. inflation may now do so because ordinary citizens
Though a firm answer is not possible at this stage, it are putting their money into circulation. In the parlance
seems likely that there are barriers to their entry, of economics, there may be a steady increase in
caused by the rules and regulations of the Central the velocity of circulation of money. Unfortunately,
and State governments and by deliberate barriers to there are no known formulae for how much we have
entry created by the incumbent traders. It is arguable to cut back on deficit and liquidity to counteract the
that our Agricultural Produce Market Committees fact of rising velocity. This will have to be achieved
(APMC) Act, by restricting the traders permitted to through trial and error. The secular lowering of inflation
trade through the main mandis, facilitates collusive seen through this year suggests that the moves
pricing. Also the various tolls and checks that a trader made by the RBI and Government have been in the
faces in bringing supplies into a city make it difficult right direction.

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 Micro-foundations of Macroeconomic Development 29
2.18 There is another novel dimension to inflation economy. But since each nation has a central bank,
today that puts it beyond the full control of any single we are unwittingly returning to a predicament that
nation. This has to do with globalization. As barriers we had once escaped, to wit of having multiple
between economies come down, and goods, money-creating authorities in a single economy. This
services, and capital flow more easily between has given rise to destabilizing currency competitions
nations, there is a natural tendency for each nation’s and may be a factor behind the recent increase in
monetary authority to lose some of the effectiveness inflation in emerging economies (see Table 2.1).
it earlier had. Equivalently, one nation’s monetary 2.19 It is time for the world’s major economies to
policy now has greater externalities for other nations. get together through appropriate international
In earlier times, when one country increased its agencies such as the G-20 to address this problem
money supply, it boosted demand in that nation, and have systemically important economies try and
leading to a combination of greater output and some achieve greater coordination in their monetary and
upward pressure on prices. Nowadays, it is possible fiscal policies. The global economy is beginning to
for the newly created money to flow out of the nation exhibit some troubling characteristics that need
to other countries and give rise to greater demand attending to. What we have is a variant of stagflation
there, boosting output but also creating inflationary at global level. But unlike the standard melting-pot
pressures. It was realized a long time ago that for stagflation, where the stagnation and inflation occur
one economy to have more than one central bank in the same economy, the global economy is
with money-creating rights can be destabilizing. characterized by a salad-bowl stagflation—stag in
Starting with the founding of the Bank of England in some nations, flation in others. This is probably a
1694 it gradually became the norm to have one consequence of the world becoming increasingly
central bank for one economy. With globalization boundaryless. Money creation in such a world is
and the lowering of boundaries between nations, the like pouring water on a flat surface. No matter where
world economy is gradually moving towards a single the water is poured it ends up in the same place, in
this case stimulating growth and prices in those
Table 2.1 : Cross-country Inflation over places, and not necessarily stimulating the economy
the Last Year where the money was created.
Inflation Food Inflation
MICROFINANCE, FINANCIAL PRODUCTS,
Year Year AND FINANCIAL INCLUSION
ago 2010 ago 2010
2.20 Over the last year, there has been a lot of
Argentina 7.1 11.0 * 4.7 15.8 * effort to strengthen economic inclusion. This is as it
Brazil 4.3 5.9 ** 3.3 9.2 * should be. Of the Government’s lynchpin for
China 0.6 5.1 * 3.2 11.7 * economic policy, namely ‘inclusive growth’, the
Egypt 10.7 11.6 *** 17.4 21.9 *** country has done very well on ‘growth,’ but needs to
press more on the peddle for ‘inclusion’. To do better
India 13.5 8.3 * 17.6 5.4 *
on this front we have to define this target more sharply
$
Indonesia 2.8 7.0 ** 4.7 13.2 and then pursue policies to achieve it. It was argued
Iran 7.4 12.5 * 6.6 12.1 *** in last year’s Economic Survey that one way of
Pakistan 10.5 15.5 ** 7.5 20.1 @
formalizing the inclusion target is to evaluate the
Philippines 4.3 3.0 ** 2.2 3.2 *** performance of an economy in terms of the
performance of the bottom quintile of the population.
Russia 8.8 8.8 ** - -
Thus, instead of treating the overall per capita income
Thailand 3.5 3.0 ** 0.8 6.6 ***
as a target, we should aim to enhance the growth of
Turkey 6.5 6.4 ** 9.3 7.0 ** the per capita income of the bottom 20 per cent
Ukraine 12.3 9.1 ** 7.6 13.1 @
(what is called the quintile income) of the population.
Vietnam 6.5 11.8 ** - - Such a definition would avoid the common pitfall of
Uruguay 5.9 6.9 ** 4.6 10.1 @ treating growth and equity as pulling in different
directions. Even with this clarity of definition, the
Source: International Labour Organization (ILO) question remains about how best to achieve this
Department of Statistics, World Bank, National Bureau
of Statistics of China. target? What should be the components of a policy
Notes: *November, **December, ***September, aimed at raising the standards of the marginalized
@
October, $ August. population?

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30 Economic Survey 2010-11

2.21 This Government took the view that in the large SKS Micro Finance, this sector seems to have come
agenda of inclusion, a central and in some ways of age. However, in 2010-11 the sector ran into
pivotal feature is financial inclusion. In order to achieve difficulty with reports of unfair practices by MFIs to
such inclusion, there are plans to expand India’s recover loans and some farmer suicides attributed
banking sector, enable the creation of new financial to these practices.
products and use modern technology to enable the 2.23 These developments have put the microfinance
poor to keep their savings in interest earning sector at crossroads. In regulating MFIs it has to
accounts. One of the most ambitious schemes for be recalled that they have played a major role in
achieving these is the Swabhimaan programme, drawing poor people into India’s mainstream finance
which, takes off on the idea of financial inclusion and enabling farmers to make useful investments
proposed and developed in the Rangarajan and marginal workers to start up small self-employed
Committee Report (Committee on Financial enterprises. There are approximately 30 million
Inclusion). Swabhimaan, launched on 10 February, people throughout India who have been beneficiaries
2011, is an innovative scheme to take banks to the of MFI lending. There is evidence that some of these
doorstep of the rural poor instead of the latter having people have been subjected to unfair threats to make
to go in search of banks. The idea is to have business them repay loans. Such practices must be stopped.
correspondents, or bank saathis, (who may be the However, to react to this by announcing blanket
local merchant) armed with electronic hand-held amnesties and encouraging farmers to default en
devices, which can recognize the bio-markers of bank masse will do more damage than good. Such
customers. The customers can then deposit and practices would lead to the MFI sector disappearing
draw money directly from the bank saathi, without since no MFI, whether it be a profit-making one or a
having to travel long distances to get to the nearest non-profit NGO, would want to give out loans knowing
brick and mortar bank branch. The programme will that these will not be recovered. While we must
be making use of aadhaar which will make it possible recognize that borrowers in special situations have
for individuals to establish their identities in any part the right to plead bankruptcy and not pay back, we
of India. By combining India’s strength in information need an intelligent regulatory structure which
technology with innovative ideas in banking, protects borrowers and, at the same time, allows
Swabhimaan promises to be a major catalyst for this sector to flourish. It is with this in mind that the
growth and inclusion. RBI set up a committee headed by Y.H. Malegam to
2.22 Another constituent of financial inclusion, study and advise on the microfinance sector (see
which could potentially benefit from Swabhimaan, is Box 2.2). The report will, no doubt, give rise to
the extension of the reach of micro finance. discussion, debate, and analysis. In the light of this,
Microfinance can empower the poor so that they it is worthwhile recounting some of the principles we
can move on from relying on hand-outs to being self- have to keep in mind while regulating this important
sufficient and seeing their incomes grow. For sector.
microfinance this has been a year of remarkable 2.24 The central principle of a good system of
developments. The sector has grown rapidly but it finance is a transparent contract. Hence the first
has also been mired in controversy. A micro finance and foremost principle in drafting a regulatory system
institution (MFI) can take many different forms. It for the microfinance sector is to require that the
can be a non-government organization (NGO), a non- lending MFI make the terms and conditions of the
profit non-banking financial company (NBFC), or a loan clear to the borrower. It is, for instance, well
profit-making NBFC incorporated under the Indian known that people often fail to understand the
Companies Act 1956. Following the RBI guidelines meaning of compound interest rates. A poor farmer
of 18 February 2000, MFIs have been taking bulk told that he has to pay 10 per cent interest rate per
loans from banks and on-lending to small borrowers. month tends to believe that he will be paying an
MFIs cannot take in retail deposits and to that extent interest of 120 per cent over the year. However, if the
fall in the category of NBFCs. This sector has grown 10 per cent interest rate is meant to be a compound
exponentially and on 31 March 2010, based on rate, then this works out to an interest of 214 per
returns filed with the National Bank for Agriculture cent over the year. To misunderstand this can lead
and Rural Development (NABARD) we know that there the borrower to make huge losses and the lender to
were 1659 MFIs availing a total credit of ` 13,955 make huge, unfair profits. We have seen these kinds
crore from the banking system. With the success of of phenomena even in advanced economies like the
the initial public offer (IPO) of a leading MFI, namely United States where the sub-prime home borrowers

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 Micro-foundations of Macroeconomic Development 31
Box 2.2 : Issues and Concerns of the MFI Sector : Extracts from the Report of the Sub Committee
of RBI Central Board of Directors—the Malegam Committee.
Main Recommendations*
Categorization of MFIs
 Creation of a separate category of NBFCs to be designated as NBFC-MFIs;
 NBFC-MFIs need to be companies providing financial services predominately to low income borrowers with not less than
90 per cent of total assets (other than cash and money market instruments) in the form of qualifying assets;
Terms of credit: borrowers, size and interest rate
 Borrower can be a member of only one SHG or Joint liability group;
 Limits on annual family income of borrowers recommended at ` 50,000;
 Individual ceiling on loan to single borrower recommended to be ` 25,000;
 Loans to be in small amounts with more frequent repayments than bank loans;
 The interest charged from borrowers subject to a ‘margin cap’ of 10 per cent for MFIs with loan portfolio of ` 100 crore
and 12 per cent for smaller MFIs;
 Overall interest cap on loans at 24 per cent;
 Tenure of loan to vary with loan size;
 Restrictions recommended on the extent of ‘other services’ to be provided by MFIs;
 Not more than two MFIs can lend to a single borrower.
Resources, capital structure and provisioning
 Commercial Bank lending to NBFC-MFIs to qualify as ‘priority lending’;
 Minimum net worth of 15 crore for NBFC-MFIs.
 Capital Adequacy Ratio of 15%
 All of the Net Owned Funds should be in the form of Tier I Capital.
 MFIs encouraged to issue preference capital (with a ceiling on the coupon rate to be treated as part of Tier II capital
subject to capital adequacy norms
Consumer protection, code of governance and regulatory issues
 RBI to prepare a draft customer protection code;
 Grievance redressal mechanism to be established
 MFIs to observe code of corporate governance;
 Responsibility of avoiding coercive recovery methods to rest on MFIs;
 Credit information bureau to be established;
 The Reserve Bank should have the responsibility for off-site and on-site supervision of MFIs;
 A four pillar approach comprising of MFIs, Industry associations, banks and RBI for monitoring compliance of regulations
suggested;
 NBFC-MFIs should be exempted from the provisions of the Money-Lending Acts, in view of the recommendation on
interest margin caps and increased regulation.

Note: *This is only a synoptic extract of the recommendations and not the full text.
Source: Report of the Sub-Committee of the Central Board of Directors of the Reserve Bank of India to Study Issues
and Concerns in the MFI sector, January 2011.

took on loans without understanding the terms they 2.25 At first sight an MFI charging an interest rate
were signing on to. Government has to take of 24 per cent or 30 per cent per annum may seem
measures to ensure that MFIs make the terms of extortionist since big urban borrowers manage to
contract transparent to the borrowers. This is more get money at much lower interest rates. However,
important than setting caps on interest rates and there are two arguments against this reaction. First,
other restrictions on the terms of the contract. This it has to be kept in mind that lending to many small
is not to deny that we may have to set some limits borrowers is much more costly than lending to a few
on the terms. But the economics of this is important large borrowers. Second, for a lot of these poor
to understand before we go about ring-fencing the borrowers the alternative to an MFI is not a bank or
terms of the contract. an organized-sector financial institution but the rural

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32 Economic Survey 2010-11

moneylender and such moneylenders often charge investment companies, also came under criticism.
interest rates which, on annual basis, go up to 100 It can be argued that these CDOs caused a ‘rating
per cent or even 200 per cent. Hence to place too inflation’, since in mixing and matching these
severe a cap on the maximum interest rate that an mortgages, banks made sure that each such product
MFI can charge can drive some of the poorest and making it to a certain rating category made it to just
least bankable borrowers towards even greater the edge of that category. In earlier times, ratings
extortion. agencies, such as Standard and Poor’s or Fitch,
used to rate whole companies or even nations. So
2.26 Is there then a case for having an interest when debt issued by some company was given an
rate cap or should we simply insist on transparency AA+rating, the lender knew that this company’s
of the terms of the contract, whatever those terms quality rating was somewhere in the interval from
may be? Even most industrialized nations such as AA+ to just below AAA. Once CDOs came into
the United States have usury laws which cap the vogue, investment banks started creating new assets
interest rate that a lender can charge. Recent that were deliberately aimed at certain ratings. Since
research in behavioural economics shows that human the demand for these CDOs depends on the ratings,
beings have a propensity to make inter-temporal it is not worthwhile creating tranches that lie in the
decisions badly. Over and above the old idea of middle or upper end of a ‘rating interval’. In other
discounting through time, people have an additional words, these new securities were almost invariably
propensity to value a bird in the hand clustered at the bottom cut-off of each interval. It is
disproportionately higher than all future birds in their arguable that many agents buying these assets failed
hands. Moreover, people typically tend to to take adequate account of this change that had
underestimate the pace at which compound interest occurred as a consequence of structured finance.
rates cause the repayment burden to rise over time. They were used to treating an AA+ asset as an asset
In other words, inter-temporal decision making is somewhere between the start of AA+ and below AAA.
often done in a way which is not fully in keeping with But with the arrival of CDOs that was no longer the
a person’s rational interest. This leads to a possible case. The average quality of assets in each rate
view that when a person signs onto a contract where category was invariably at the bottom end of the
the interest rate is too high, that in itself shows that interval. In other words, there was ‘rating inflation’
the person has miscalculated the repayment burden. the way some universities have had ‘grading inflation’.
This could be a justification for why consumers’ Just as happened in the early days of grade inflation,
sovereignty may have to be curtailed in the interest buyers of these assets were partly deceived. In the
of the consumer’s own true interest. For this reason, world of finance, a small mistake per asset of this
there may be a case for setting some limits to the kind can amplify into big errors and, given the
kinds of terms and conditions that go into a lending complicated interdependencies in this market among
contract including a cap on interest rates. However, lenders, the total impact can be vastly amplified, as
in figuring out the exact details of these, we have to happened in 2007 and 2008. Box 2.3 discusses some
keep in mind the two factors earlier mentioned, other reasons for rating inflation.
namely that micro lending is costly to the lender
and to many a poor borrower the alternative to an 2.28 One way of handling this is to go for greater
MFI loan is money from the informal moneylender granularity in grading as Standard and Poor’s rating
whose interest charges tend to be much higher. system specially designed for East Asian nations
does. But for India the more relevant matter right
2.27 These conceptual issues have a bearing on now is the status of new financial products like teaser
some matters that pertain to larger questions of loans. The terminology is sufficiently tainted for a
organized finance. The financial crisis that began neutral term to be of some value. We shall here refer
with the sub-prime housing mortgage market in the to loans in which the monthly repayment instalment
US and spread to other parts of the world has raised rises over time as a ‘terraced loan’. Unlike most
important questions about new financial products industrialized countries, India has had considerable
and structured finance. Teaser loans, in which the success with terraced loans. The State Bank of India
initial repayments are low but then escalate, over (SBI), for instance, came out with two different
time, to larger repayments, have come under terraced loan products—Happy Home Loan in
criticism. Collateralized debt obligations (CDOs), February 2009 and Easy and Advantage Home Loan
whereby new financial products are created by in August 2009. Both these loans hold the interest
packaging different mortgages of differing risk profiles rates fixed and below the market rate in the initial
together and sold off in slices to other finance and years. In the case of Happy Home Loan this was

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 Micro-foundations of Macroeconomic Development 33
in the US, these loans in India were not given to
Box 2.3 : Securities, Seniorities, and the sub-prime borrowers. In the case of Easy and
Lending Boom Advantage Home Loans, a borrower’s repayment
A little less than 1 per cent of all corporate bonds get an capacity and hence eligibility was worked out under
AAA rating. During the lending boom, preceding the the presumption that the person would have to pay
financial crash of 2007-09, close to 60 per cent of all asset-
from the beginning what she would actually have to
backed securities were rated AAA. What was the magic
behind these securities being rated so highly? As discussed pay from the fourth year onwards. Second, there
in the text, the ability to create packages by mixing and was a lot of effort made to keep the contracts
matching mortgages can cause some of this rating inflation. transparent so that the borrowers knew exactly what
But there are other reasons as well. The popular practice they were getting into. Given what behavioural
of creating securities of different seniority can also
contribute to this. economics has taught us, we know that this may
not always be adequate, that a borrower’s nod does
Suppose a bank sells two mortgages of ` 100 each and
not always mean that the borrower has fully
suppose each of these mortgages has a risk of default
equal to one-eighth. Further assume that the risks of the comprehended what it is that he or she is getting
two mortgages are un-correlated. Now, suppose that a into. However, especially the decision not to make
clever finance consultant advises the bank to put these these products available to the sub-prime borrowers
two mortgages together and create two new securities of
but instead to expand the choice available to
Rs100 each and sell them off to two buyers. These two
securities are, however, given different levels of seniority. borrowers with an assured capacity to replay played
The junior security will see a default if any of the mortgages a major role. The fact that this enabled many new
defaults. The senior security will incur a default only if home buyers to enter this market speaks well of the
both mortgages go into default. Note that the junior inclusiveness of the scheme, even though the sub-
security is a little worse than one of the original mortgages
because the risk of default is two-eighths. On the other prime segment was deliberately left out. This is
hand, the senior security is vastly better because it is like what enabled India’s mortgage market to remain
the original mortgage but with the risk of default reduced stable even as such markets in industrialized
to one-sixty-fourth. It is this method of exploiting the countries faltered. The basic lesson is clear. In
laws of probability and elevating certain pools of mortgages
into inflated rating categories that was among the causes
general, it is worthwhile giving banks and financial
of the lending boom. Since by mixing and matching nothing institutions the freedom to introduce new products
fundamental at aggregate level is changed, the subsequent and thereby expand the options available to
financial meltdown was all but inevitable. consumers and firms. This can enhance
References: M. Brunnermeier, (2009), ‘Deciphering the entrepreneurship and enable ordinary citizens to
Liquidity and Credit Crunch 2007-2008’, Journal of achieve a higher standard of living than would
Economic Perspectives, 23. otherwise have been possible. The important
R.G. Rajan (2010), Fault Lines: How Hidden Fractures Still restriction should be that banks and even NBFCs
Threaten The World Economy, Collins Business. should be discouraged from lending to categories of
borrowers who are clearly not in a position to take
on such debt burdens. As far as restrictions on the
fixed for the first 12 months and in the case of Easy types of products go, these should be used
and Advantage Home Loan interest was held constant minimally and with judiciousness.
and below the market rate for three years. Thereafter
the rates were expected to move to higher and floating CAPITAL FLOWS AND GEOPOLITICAL
interest rates. The response of the market to this OPTIONS
was very good. The number of loans offered in January
2.30 Overall capital flows into India this fiscal year
2009 was 18,780 with an aggregate value of ` 1499
have been greater than ever before in the country’s
crore. By November 2009 this had risen to 28,492
history. This has been caused largely by a
loans with an aggregate value of ` 3273 crore.
groundswell of money coming through the foreign
Defaults on these have been negligible and cases of
institutional investor (FII) route, in response to the
foreclosure rare. Also, these loans played a major
robust performance of the Indian economy but also
role in promoting inclusiveness. Around 90 per cent
because of low interest rates and returns in general
of the home loan borrowers were first-time home
in industrialized nations. Midway through the fiscal
buyers.
year, there was also ‘currency competition’, with
2.29 Two factors were behind the success of these China allegedly holding its exchange rate at what
terraced loans. First, despite having the shape of was believed to be a depreciated level, the US
repayment associated with conventional teaser loans responding to this and its own sluggish growth and

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34 Economic Survey 2010-11

high unemployment with two rounds of quantitative term capital bring with them. Moreover, the kind of
easing, and Japan buying up foreign exchange and apprehension that India once had about foreign
releasing yens on the market. All these moves investment and political interference is of much less
contributed to a greater flow of money our way. This concern now since it is now a much more robust
was initially a matter of concern to India. However, economy and has greater say in international political
there seems to have been no substantial appreciation matters. To attract more FDI, we will have to think in
of the nominal exchange rate of the rupee during the terms of new areas into which we may channel these
year. This is testimony to India’s growing strength investments. But more than this, the serious
and power of absorption. stumbling block to attracting FDI into India is the
2.31 This must, however, not lull us into fact that our bureaucratic machinery continues to
complacency. We will have to keep open the options be sluggish. Data released by the World Bank show
of having to take corrective measures should these that in terms of the bureaucratic efficiency for “doing
flows affect us adversely. The most important step business,” India ranks as low as 134th in the world.
in this context is to work with the G-20 countries Clearly, this is one area with scope for improvement.
and try to figure out collective decision rules whereby If we can make our bureaucratic, administrative
each country tries to intervene minimally in the flow machinery more efficient, the benefits for the
of capital and, when it does intervene, it does so economy will be enormous. There are examples of
taking into account the externalities on other nations. nations that inherited the cumbersome bureaucratic
But till such a plan of coordinated action is worked system of colonial governments but managed to
out successfully, a nation has to be prepared to adopt reform those. We can learn from those nations but,
policy measures on its own. In contemplating such interestingly, we can also learn from within our own
policy measures in India two inter-related factors have country. A simple calculation shows that if all of India
to be kept in mind. First, although there is very little adopted the best practices found in some part of
nominal appreciation of the rupee, our real exchange India, for instance in terms of facilitating the opening
rate, especially vis-a-vis the systemically important of new business, enforcing contracts, simplifying
currencies, has been on a fairly steady path of procedures to help bankrupt firms close down quickly,
appreciation. This is likely to have contributed to the it would rank 79th in terms of efficiency. In other words,
relatively slow pickup of India’s exports, even though we can improve our ranking by 55 positions simply
over the last few months these have done well. It by learning from within our own nation. This is not to
has also contributed to the large current account promote the parochialism of refusing to learn from
deficit (CAD) that the country faces. In itself this beyond our borders but to emphasize that there is a
would not be a matter of concern but, in this case, a lot that can be achieved even without that.
substantial part of the CAD is being financed by 2.33 Digressing briefly, it is worth turning to the
relatively footloose capital. One possible strategy in interesting question of the economic and
response to this is the market-based intervention of representational power of Governments. There was
buying up some of the foreign exchange coming in a comment earlier about India’s greater say in global
through this route. This will limit the amount of capital economic matters. Indeed, India’s G-20 membership
available for financing the deficit and could also is recognition of this fact. The ‘economic power’ of a
stabilize the real exchange rate. Against this, we Government is an important indicator of how much
will have to balance out the risk of inflationary say that Government has in global fora and also how
pressures generated by the rupees that will be much say it ought to have. The economic power of a
released on the market. However, it can be argued Government is a more complex idea than the
that since the rupees that will come on the market economic power of an individual. We usually measure
will be replacing other currencies, which are the latter by looking at a person’s income or wealth.
convertible and therefore fairly liquid, the inflationary Taking a cue from this, we may think of a
impact of this will not be as serious as is often Government’s power as measured by the total
presumed. It is also hoped that with India’s savings amount of revenue the Government earns and so is
rate beginning to rise, some of the pressures on the able to disburse. We may also look at the ownership
CAD will ease. of assets by a Government to get an approximate
2.32 All these policies must be complemented by idea of the permanent income of the Government.
the effort to attract more FDI into India. FDI capital However, a Government’s economic power depends
is much more stable and, therefore, does not give also on the amount of human capital available in the
rise to the kind of volatility that some forms of short- nation and so at some level available to the

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 Micro-foundations of Macroeconomic Development 35
Box 2.4 : Government Economic Power in the Post-crisis World
The economic abilities of nations and governments have always been a force to reckon with. While the process of globalization
saw government economic power supplementing the forces of the market, the global economic crisis witnessed governments
playing a crucial role in stabilizing financial markets and managing to coordinate responses in order to prop up the world
economy. Governments also play a critical role in ensuring redistributive equity and development. Motivated by the need
to develop a set of metrics to encompass this important phenomenon, an index of government economic power was
developed. The index can also be of value in deciding on the voting rights and other powers the governments of various
countries ought to have in international organizations like the IMF and the World Bank. The index has been created for 10
years (2000-09) covering 112 economies.
The index of government economic power (IGEP) endeavours to capture the ability of a government to project itself in the
international sphere. There is also a normative content to this. Since the index shows the extent of charge a government has,
it also can be used to determine how much say the Government should have in multilateral fora. The index is composed of
four variables: government revenues, foreign currency reserves, export of goods and services, and human capital. These
variables broadly capture a Government’s ability to raise resources, its creditworthiness and credibility in international
financial markets, its influence on global economic activity, and its representational strength, that is how much of the global
economy, including global manpower, it can claim to
represent. In order to ensure use of standard data, the index Fig 1: Index values
has been constructed using three widely accepted datasets;
the IFS and WEO of the IMF, and the United Nations 0.6
Development Programme’s (UNDP’s) Human 0.5

Index values
Development Index (HDI). 0.4
The 2009 results show that the top ten ranks are occupied by 0.3
(1) the United States, (2) China, (3) Japan, (4) Germany, (5) 0.2
India, (6) Russia, (7) Brazil, (8) France, (9) Italy, and (10) the 0.1
United Kingdom. In 2000 the top ten places were held by (1) 0
the United States, (2) Japan, (3) China, (4) Germany, (5) 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
France, (6) the United Kingdom, (7) Italy, (8) (Republic of)
Korea, (9) Canada, and (10) India. Among the top ranking
Year
economies some of the most dramatic rises in rank have been
Brazil’s ascent from 13th place in 2000 to 7th in 2009 and USA Japan China
India’s rise from 10th position in 2000 to 5th in 2009. Japan
was replaced by China in the second spot in 2004. The United Fig 2: Index values
Kingdom went down from 6th place in 2000 to 10th in 2008 0.14
and continued there in 2009. Canada fell from 9th in 2000 to
0.12
15th in 2008.
Index values

0.10
The changing dynamics of global economic power can be
further seen if we analyse the index values over time for some 0.08
of the larger economic entities. If we compare the three top 0.06
ranking countries of 2000, the US, Japan, and China, the US 0.04
and Japan had a slow rise in index values, except for the 0.02
slight fall in 2009. In contrast, China has risen rapidly and,
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
after surpassing Japan in 2004, has almost reached the same
level as the US in 2009 (see Figure 1). Year
On an analysis of the countries holding the 4th , 9th and 10th Germany Canada India
positions in 2000 (namely, Germany, Canada, and India),
India moves from an index value just below Canada in 2000 Fig 3: Change in GDP growth 2009 to 2010
to one very close to Germany by 2009 (Figure 2). Among the
large economies, China and India also demonstrate 12
remarkable robustness by not having lower index values in 10
2009 unlike all the other countries occupying the top ten 8
positions in 2000. 6
Percent

Interestingly, there is a strong positive correlation between 4

the growth in economic power (percentage change in index 2
value between 2000 and 2009) and the change in GDP across
0
the post-crisis period (that is between 2009 and 2010)
indicating a link between growth in economic power as -2
measured by the index and the ability to recover from the -4
crisis (Figure 3). This does not establish a direct causal
0

50

100

150

200

250

300

350

400

450

relationship between the two variables but is of descriptive

interest. Percentage change in index value (2000 to 2009)

Source: A complete description of the index of government economic power and its implications is available in a forthcoming
Economic Division, Department of Economic Affairs, Ministry of Finance, working paper: ‘The Evolving Dynamics of
Global Economic Power in the Post-crisis World: Revelations from an Index of Government Economic Power’.

Website: [Link]
36 Economic Survey 2010-11

Government. A Government’s power further depends it comes to distribution and the mitigation of poverty,
on the nation’s level of integration with the world. A Government has to be more proactive with policy
nation that is rich but largely a closed economy may interventions. However, wherever possible, the
not be of much importance to other nations and so intervention should take the form of direct transfers
not able to exercise influence in international matters. from the better-off sections to the poor, with as
On the other hand, a nation that exports and imports minimal a tampering with prices as possible. The
a lot has the power of leverage. The potential threat fact that markets are not naturally inclined to deliver
of interrupting these flows gives such a Government on equity and poverty eradication does not mean
more economic muscle than another nation that may that we should ignore the market. The laws of the
be wealthier but has negligible trade and capital links market will be there whether or not we acknowledge
with the world. Combining all these factors, an index their presence. Good policymaking entails
was created by researchers in the Economic Division recognizing and understanding these laws and
of the Ministry of Finance and is reported in the Box utilizing them to deliver on the targets that we have.
2.4. It shows, as expected, that the US Government
2.36 There are two reasons for having a system of
has the greatest economic power. This is followed,
a minimal amount of food procurement and
in descending order, by China, Japan, Germany,
distribution carried out by the State. The first is to
India, Russia, Brazil, and France. What is interesting
do with evening out foodgrain availability and price
in this story is the rapid rise in the economic power
fluctuations from one year to another. This is also
of India and, more so, China over the last decade.
related to the issue of self-sufficiency. In times of
Box 2.4 is of interest in itself since there is so much
food shortage, we do not want to rely entirely on
writing nowadays on the shifting economic base of
imports from other countries and should be able to
the world.
depend on our own stocks and supply to our
consumers. The second motive is to provide food
NEW INITIATIVES security to the poor and vulnerable. No one, no matter
2.34 The buoyant growth of the economy creates how poor, should have to suffer from food deprivation
opportunities; and it is important to seize them so and malnutrition.
that the growth becomes sustainable. There are
2.37 As far as the aim of evening out food prices
many areas with opportunities for new initiatives, and
from one year to another goes, our success has
only a few of these will be discussed here for
been moderate. Thanks to our procurement policy,
illustrative purposes. It is widely accepted outside
mainly in wheat and rice, we have not had to be held
of and within Government that we have a great
to ransom by international suppliers. However, a
distance to go in eradicating poverty and drawing
study of our food stocks shows that we have
into the mainstream of our economy segments of
continued to hold these at elevated levels in good
the population that are currently marginalized and
years and bad. Likewise, procurement has taken
live on the fringes. The first step towards this is to
place from year to year without the cyclical features
make sure that no one is deprived of basic food and
that one would expect in an effective price
all attain minimal nutritional standards. There have
stabilization system. Thus, in 2006-07 the total
been new initiatives on this front, such as the new
procurement of wheat, rice, and coarse grain was
food security bill.
34.3 million tonnes, in 2007-08 40.1 million tonnes,
2.35 At this stage, some broad principles of in 2008-09 57.7 million tonnes, and in 2009-10 57.2
economic policy are worth outlining. There is a million tonnes. Clearly, given that the last fiscal year
common presumption that markets and inclusion was one of high foodgrain price inflation, we would
are inimical to each other. The truth, however, is that, have expected lower than usual procurement and a
while markets have a natural propensity to deliver larger offloading of stored grains. But neither of these
on efficiency, they do not have any innate propensity happened. Evidently, there is ample scope for
for equity or equality. Hence it is true that for improvement in our strategy of foodgrain release.
eradicating poverty and creating a more equitable The current practice has some systemic flaws. Trying
and inclusive society, there is need for purposive to ensure that the procured food is not released at a
action by Government—Central, State, and local. price which inflicts too large a loss on Government,
The view we take is that Government should play an we have often priced it so high that there were no
enabling role vis-a-vis the market, facilitating trade, buyers. Not releasing foodgrain defeats the purpose
exchange, and enterprise. On the other hand, when of bringing down market prices.

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 Micro-foundations of Macroeconomic Development 37
2.38 This has at times led to the suggestion that that some of these are working. We must now
the state should just release this grain at near-zero endeavour to sustain the momentum.
price. At first sight, this sounds reasonable since
2.40 Returning to the food security bill, this is an
there is excess foodgrain lying in warehouses and
important move that can transform the face of poverty
even in the open and going waste. But there is a
and malnutrition in India. There has been a lot of
problem with following this seemingly obvious policy.
debate about how extensive the coverage of this
The way we run our minimum support price (MSP)
programme ought to be. What is, however, not
policy is to have a fixed price and allow farmers to
always appreciated is that the coverage of this
sell their foodgrain at that price to the Government.
programme will depend on the efficacy of the
If with the MSP policy intact, we began the practice
mechanism through which we try to distribute the
of selling off excess food in Government granaries
at near zero price, this is bound to give rise to food food. The current system of handing over cheap food
recycling. That is, traders will buy the food from the to the approximately 500,000 ration shops all over
Government at zero or near zero price and sell it India, and then requiring them to sell the it at below-
back to the Government at the MSP and again buy market price to poor households leads to large
it back; and so on. There is evidence that a certain leakages. In the current method the subsidy is
amount of food recycling happens even now. But if handed over to the ration shop and not directly to
the gap between the MSP and the release price the poor households. Studies show (see Box 2.5)
becomes sufficiently large, this problem can get that ration shopkeepers often sell off the food at the
exacerbated. Our problem of foodgrain policy cannot high market price on the open market and turn away
be corrected through piecemeal action such as the below poverty line (BPL) households or adulterate
getting the government to release food at near zero the food that the BPL households are supposed to
prices without correcting other defects in the system. receive. Clearly, if we try to make the coverage of
We need to take stock of both our release and subsidized rice and wheat wide and stick to the
procurement policies. Procurement should vary from present system of distribution, the total procurement
year to year, depending on production. Also, the will have to be large to the point of being unachievable.
windows for procurement ought to be opened up Hence the important need is to plug the seepage in
much more widely in different parts of the country. the distribution mechanism; and the more effectively
Currently outside of a few States the MSP is a purely we manage to design this, the larger we will be able
notional price as far as farmers are concerned. They to make the coverage of cheap food to our population.
know that they have the right to sell their food at that 2.41 The obvious way of doing this, and this has
price but they have no access to Government been widely discussed in the economics literature,
granaries or take-in windows where they can sell. is to give the subsidy directly to the poor households
There is also urgent need to increase storage space and allow the PDS stores to sell food at market price.
so that foodgrains do not go waste. It should be This will involve handing over smart cards or food
clear that the act of better storage, important though coupons to poor households and then giving them
it is, is not going to cure inflation. For that we have the freedom to go to any PDS or other store and buy
to develop effective strategies for releasing the food at the prevailing market price by using the
foodgrains, and the release should take place not in smart card or the coupons. In this system, a poor
large bulks, which would create monopolies but in customer is as valuable as a rich customer from the
numerous small batches. shopkeeper’s point of view, since both pay the same
2.39 On the second objective of guaranteeing food price. Also, if one shop adulterates its foodgrain
to the poor there are several initiatives and the supply, people will have the freedom to go to another
Government is currently considering a food security store and this, in turn, will mean that the incentive to
bill which will give people legal right to a certain adulterate foodgrain will go down vastly. As the
amount of basic foods. Before venturing into this, it system of Aadhaar-based identification comes into
would be well to stress what is discussed elsewhere activation, the smart card system will become
in the Survey and also in various Plan documents, portable. In other words, the poor can move from
namely, the importance of increasing agricultural one part of India to another and still be able to exercise
productivity and production. This sector used to lag their right to subsidized food. The current system
behind. But there are policies being implemented to places an effective barrier on the ability of poor people
correct this. The estimated growth of agriculture, to move location in response to better wages, since
forestry and fishing of 5.4% in 2010-11 raises hope they risk losing out on other benefits.

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38 Economic Survey 2010-11

the market at market price. This will improve targeting

Box 2.5 : Food Subsidies and Leakages and cut out corruption. It is true that the poor may
It is a part of common wisdom that a large amount of the misuse some of these subsidies on non-essentials,
subsidized foodgrain, targeted at BPL households, some but it is surely better for the poor to do so than for
APL households, and other vulnerable groups, find its way the shopkeeper to do so using the subsidy meant
to the open market, where it is sold off at a higher price than
the stipulated ration shop price. Is this true? And if so,
for the poor.
what is the extent of the pilferage? Recent research by Reetika 2.43 There are other areas where new initiatives
Khera and by Shikha Jha and Bharat Ramaswami has come
out with careful statistical estimates, where earlier we had
are likely to likely to yield large benefits for society.
to rely on guesswork. The Ministry of Food and Consumer One example of this is tourism. Given the vast
Affairs publishes monthly data on the offtake of wheat attractions in India, ranging from diverse natural
and rice under the public distribution system (PDS). The formations to historical monuments and relics going
National Sample Survey (NSS) gives data based on random
samples of the amount of PDS wheat and rice that are
back to more than two millennia, there is vast scope
actually purchased by the households. The gap between for expansion of tourism in India. Till now we have
the offtake and the amount actually reaching households not reaped more than a fraction of this possibility. In
gives a measure of pilferage or diversion from the target 2010 the total number of foreign tourists that arrived
population. Using this method, Khera shows that in 2001-
in India was 5.58 million and they brought in a foreign
02 18.2 per cent of PDS rice and 67 per cent of PDS wheat
was diverted. In other words, over 40 per cent of all grain exchange earning of ` 64,889 crore. It should be
targeted at the poor missed the poor. Jha and Ramaswamy, possible for India to get many times more inbound
using the NSS expenditure survey of 2004-05, report an tourists than it currently does. In 2007, for instance,
overall diversion of 55 per cent of the grain meant for the there were 5.1 million tourists who came to India,
poor. No matter where the exact figure lies between 40 and
55 per cent, the fact of the matter is the leakage that currently compared to 54.7 million to China and 20.1 million
takes place is far too high. Once we give a legal guarantee to Malaysia. Interestingly enough, India sends out
to people about the food that they are to receive, if we try to more outbound tourists than it gets inbound ones.
deliver on this promise using our current delivery This is fairly unusual for an emerging economy. To
mechanism, we shall have to send twice the targeted amount
of grain towards the targeted population.
exploit the huge potential that this sector has will
require investment in infrastructure and even
References: R. Khera, (2011), India’s Public Distribution improvements in our immigration and visa services.
System: Utilization and Impact, Journal of Development
But it will be unwise not to reap the large benefits
Studies, forthcoming.
that are lying unutilized in this sector.
S. Jha, and B. Ramaswami (2010), ‘How can Food
Subsidies Work Better? Answers from India and the 2.44 Another sector with scope for development
Philippines’, Asian Development Bank, Working Paper
and large potential dividend is education, both school-
No. 221.
level and higher education. India currently has a gross
enrolment ratio (GER) of 13.5 per cent in higher
2.42 The same idea carries over to other goods
education, often also called the tertiary enrolment
such as kerosene, diesel, and fertilizers. This
ratio. That is, 13.5 per cent of all those who are
Government’s policy of ensuring that these vital
aged between 18 and 23 (that is the college-going
goods reach the poor, instead of leaving it all to the
age) are actually enrolled in a college or a university.
vagaries of the market as conservative analysts would
For the United States, the figure is 81.6 per cent.
recommend, has much to commend it. But in
Even China and Malaysia over which India had a
choosing the mechanism for reaching these goods
lead a few decades ago have now crossed our GER
to the poor the same principles discussed in the
with figures of 22.1 and 29.7, respectively. India
context of foodgrains apply. As soon as we lower
currently produces close to 6000 PhDs per annum.
the price of a commodity by Government diktat, be
China, which in 1993 produced 1900 PhDs per
it for kerosene, diesel, or fertilizers, we invite
annum, now produces close over 22,000. In principle,
adulteration, pilferage, and corruption. The need,
it is possible for India to quickly double the GER
therefore, is to design mechanisms of delivery which
and reach 30 per cent within a decade from now. In
are incentive-compatible and minimize these
the long run an economy’s growth depends on the
distortions. For the most part this means that it is
quality of its citizenry and the human capital and
best not to distort prices to subsidize the poor but
innovativeness of the population. Clearly we need to
to give the subsidy to the poor directly. We may as
invest more and more intelligently in this sector.
a first step try this on one product, such as kerosene,
by handing over the subsidy to the poor in the form 2.45 One large potential of our higher education
of a smart card; and letting them buy kerosene from sector is to develop India as a hub for global

Website: [Link]
 Micro-foundations of Macroeconomic Development 39
education. Given that historically we have been very of these investments may need 5, 10, or even 15
strong in higher education and also our advantage in years to become financially viable. Banks are
the English language, it is possible for India to understandably wary of making such long-maturity
develop as a major centre for higher education where loans. The need, therefore, is to create appropriate
students come from all over the world to study. Given systems for drawing domestic and international, and
the high cost of education in industrialized nations private and public investments into infrastructure. For
(annual tuition fees in leading US universities are private money to be directed into any form of
around $40,000), it is possible for India to attract investment the critical ingredient is the reliability of
students not only from developing and emerging contracts. Having put your money into an
countries but even from the United States and other investment, can you be reasonably sure that the
industrialized nations. We can offer these students borrower will not renege? Of course, there will have
education at a price where we will cover all our costs to be clauses under which a borrower can get
and have a profit left over and they will get education legitimate bankruptcy cover, but the legal
at a price which is vastly less than what they would administrative set-up must be such as to ensure
have paid in the United States, or the Government that there is no spurious reneging on contracts. This
would have paid for them in many European is important not only for micro finance but even to
countries. The profit can then be used to expand our ensure that more money flows into infrastructural
universities and colleges for the enrolment of our investments.
own students. For all this, we need complementary
investments. There will have to be quality hostels SOCIAL BASIS OF ECONOMIC PROGRESS
and broadband internet connectivity. We will also
2.48 The foregoing analysis emphasised that in
need to tone up our bureaucratic processes. We
crafting good economic policy it is important to treat
will, for instance, need to give students visas for
the various players on the market —the policeman,
multiple years because no one will want to come to
the ration-shop owner and the ordinary citizen—as
study for two years with a one-year visa and live
reasonably self-seeking, rational agents. If these
under the uncertainty of it being extended. These
agents get the opportunity to earn some extra money
investments in infrastructure and in creating a more
with little effort, they will seize the opportunity. Hence,
efficient bureaucracy can not only boost the higher
to cut down on corruption and pilferage, we have to
education sector, but all these initial costs will be
design policies in such a way that there is no incentive
more than made up for by the high returns they will
for ordinary citizens and the enforcers of the law to
yield in the medium to long term.
cheat. Accordingly, good mechanism design is the
2.46 As just discussed, underlying both the above heart of the problem. Many a noble plan to reach out
initiatives and other developmental projects is the to the poor and increase the welfare of our citizens
need for better infrastructure. This being the eve year has fallen on hard times because of the policymakers’
of the Twelfth Five Year Plan, it is a good moment to propensity to assume that the policies are delivered
take stock of India’s infrastructural needs. As by flawlessly moral agents or perfectly- programmed
discussed elsewhere in this Survey, India has, over robots. Models based on such faulty assumptions
the last few years, made special effort to enhance are destined to fail. It is important for Indian citizens
the country’s infrastructural base. The initiatives cut to understand this because, in democracies, popular
across rural infrastructure, railways, highways, power, opinion plays an important role in promoting
and the development of our cities, small and large. progressive policies.
East Asian economies financed a lot of this through
2.49 This analysis must not be taken to imply that
public land sales implemented through well-designed
uncompromising self-seeking behaviour is innate in
auctions. There is a lesson in this for us to make
human beings. This dismal assumption, widespread
sure that such large infrastructural expansions
in some early mainstream economics, is, fortunately,
remain fiscally viable.
not true. Recent research shows that human beings
2.47 The Planning Commission is working to give have a natural propensity to cooperate, to be
a major thrust to infrastructure over the next Five trustworthy, and to be honest. They are often willing
Year Plan. To ensure that this happens, the big need to give up some personal gains in order to
is not so much a matter of bricks and mortar as of demonstrate pro-social behaviour. These qualities
finance and mechanism design. Infrastructural of honesty and trustworthiness can, however, vary
investments require long-term loans because some from one society to another and, even within one

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40 Economic Survey 2010-11

society, over time and depending on the context (see job, people may prefer to leave their homes unpainted
Box 2.6). What is increasingly recognized is that for longer stretches of time. A person lends money
successful economic development has a strong to a company with the company making a promise
correlation with these human qualities of honesty of paying a certain interest rate over the next 10
and trustworthiness. The drive for greater profit and years and then paying back the principal. In a country
greater personal ulility, devoid of these social where such contracts are not dependable and
qualities, creates a dysfunctional and chaotic society. companies are likely to renege on the contract, it is
unlikely that people will invest money in companies.
2.50 There are studies showing that societies in The bond market will flounder and companies will be
which interpersonal trust is greater are societies that able to invest less than what is optimal. In brief, a
exhibit faster economic growth. It is not difficult to modern, vibrant economy relies critically on contracts
see why this is so. A modern and efficient economy and our ability to have trust in the contracts. A part
critically depends on contracts and the ability of of the responsibility for enforcing contracts lies with
individuals to rely on these contracts. An individual the State and the Judiciary. Long-term contracts,
gives money to a painter to paint her home. If the like a mortgage for buying a house with the promise
risk is high that the painter will breach the contract of repayment over the next 20 years, necessarily
by taking the money and then doing an insignificant have to rely on the State machinery for enforcement.

Box 2.6 : Pro-Social Behaviour and Economic Development

There is a growing literature in economics arguing that pro-social behaviour, which includes altruism and trustworthiness,
is innate to human beings and, moreover, forms an essential ingredient for the efficient functioning of economies. In other
words, human beings have a natural ability to forego personal gains for the sake of other people or because that is what is
required because of a promise the person had made. This trait may well have evolutionary roots but its existence is now well
demonstrated in laboratory tests. The broad idea behind these laboratory experiments is the following. The experimenter
pairs up all the subjects in a laboratory and then asks each pair to have the following interaction. One of the two persons, call
him A, is asked to hand over if he wishes a certain amount of money (which may be called A’s investment) to B. If A refuses
to invest anything, their interaction is over, A and his partner, B, get nothing and they go home. If A invests a certain amount
of money, that is gives this to B, then the experimenter adds some more money and lets B have it all. B is then asked whether
B wants to hand a part of the total money she received back to A. In other words, B is given an opportunity to pay back to
A some of B’s gains, since B would have got nothing if A had not made the first move. In the Trust Game, once B decides how
much to give A, that is given to A, and that is the end of the interaction. (The Hold-up game is a variant of this with a slightly
different closure rule.)
In a totally selfish world, we would expect B to offer nothing to A and for A, anticipating this, not to give any money to B to
start with. However, experiments conducted all over the world with this or related games demonstrated that in a large
number of cases, the first player does give money to the second player and the second player does give back a part of her
income to the first player. Moreover, there are conditions which lead to a higher propensity among the players for this kind
of cooperative behaviour. Recently, Hodaka Morita and Maros Servatka conducted an experiment on 258 undergraduate
students at the University of Canterbury in the New Zealand Experimental Economics Laboratory, using the Hold-up game.
They found that people typically did make positive investment and the person receiving the investment did give back some
return to the investor. Moreover, if the players are initially primed so as to believe that they share a common group identity,
they tend to be more cooperative.
What is not widely recognized but deserves mention is that one of the earliest statements of the Trust Game and the critical
role of morality and trustworthiness in the efficient functioning of an economy occurred in David Hume’s 1739 classic, A
Treatise on Human Nature (Book III, Part II, section iv): ‘[The] commerce of mankind is not confin’d to the barter of
commodities, but may extend to services and actions, which we may exchange to our mutual interest and advantage. Your
corn is ripe today; mine will be so tomorrow. ‘Tis profitable for us both, that I shou’d labour with you to-day and that you
shou’d aid me tomorrow. I have no kindness for you, and know that you have as little for me. I will not therefore take pains
on your account; and shou’d I labour with you on my own account, in expectation of a return, I know I shou’d be
disappointed, and that I shou’d in vain depend on your gratitude. Here then I leave you to labour alone: You treat me in the
same manner. The seasons change; and both of us lose our harvests for want of mutual confidence and security.’
References: [Link], and J. Tirole (2006) ‘Incentives and Prosocial Behavior,’ American Economic Review 96.
T. Ellingsen and M. Johannesson (2008), ‘Pride and Prejudice’, American Economic Review 98.
[Link] and S. Gachter (2000) ‘Fairness and Retaliation’, Journal of Economic Perspectives 14.
F. Fukuyama,(1996) Trust: The Social Virtues and the Creation of Prosperity. Free Press.
H. Gintis, S. Bowles, R. Boyd, and E. Fehr (2003) ‘Explaining Altruistic Behavior in Humans’, Evolution and Human
Behavior 4.
H. Morita and M. Servatka (2011) ‘Group Identity and Relation-Specific Investment’, Mimeo: University of New
South Wales.

Website: [Link]
 Micro-foundations of Macroeconomic Development 41
However, these are not the only kinds of contracts. it is true that we do not as yet have a hard science
Economic life is full of little promises—I will supply of how to develop these cultural qualities in a
you X today, and you will pay me Y tomorrow. For population, we know that even the mere
these, it is impossible each time to bring in the understanding of the importance of certain qualities
policeman and the judge to ensure enforcement. The for promoting the economic development of a group
best enforcer of these little contracts is our word of of people, helps nurture these qualities in people.
honour and the ‘culture of honesty’ and After all, people have learnt not to smoke in a
trustworthiness. If a particular citizenry is known to crowded room even when not smoking is not in their
be trustworthy, people will be more likely to cut deals self-interest simply because they have come to
with the people of that nation and, over time, the understand that this is not in their collective interest.
nation will do better and prosper economically. These good values are then further supported in
2.51 For India to develop faster and do better as society through mechanisms of social stigma, which
an economy, it is therefore important to foster the help bring individual and social interests into
culture of honesty and trustworthiness. Thanks to alignment. So once we recognize that honesty,
the fact of this social prerequisite of economic integrity, and trustworthiness are not just good moral
development remaining unrecognized for a very long qualities in themselves but qualities which, when
time, this has not received adequate attention in the imbibed by a society, lead to economic progress
scientific literature. Fortunately, a large body of recent and human development, people will have a tendency
economics research has been stressing the to acquire these qualities; and that should help build
importance of these social and cultural factors. While a more tolerant and progressive society.

Website: [Link]
42 Economic Survey 2010-11

Fiscal Developments
and Public Finance
3
CHAPTER

The fiscal outcome in the first nine months of the current financial year remained
broadly on the consolidation track charted by the Budget. It might be recalled that the
Budget for 2010-11 had begun the process of fiscal consolidation with a partial withdrawal
of the stimulus measures as at that juncture there was clear evidence of economic
recovery. The policy stance was to continue to aid the growth momentum in the short
run to facilitate its attaining pre-crisis levels and simultaneously to address long-run
sustainability concerns. With growth reverting to pre-crisis levels in the current fiscal,
revenues remaining buoyant, and a much higher than budgeted realization in non-
tax revenues arising from telecom 3G/ BWA (third generation/broadband wireless
access) auctions, there was headroom for higher levels of expenditure at the given fiscal
deficit targets. The combined deficits of State Governments also indicated the overall
consolidation process at State level. With continued growth momentum, the prospects
for sustaining and deepening the consolidation process remain bright.

3.2 The macroeconomic impact of the global these could be partly compensated by the rise in
financial and economic crisis and the Government final consumption expenditure (GFCE)
expansionary fiscal stance was clearly visible in (Figure 3.1). As the crisis impacted the economy
the demand-side components of the national in the second half of 2008-09, movements in
income aggregates. A contraction of the aggregate quarterly estimates of the demand side of the GDP
demand was manifest in the rates of growth of provided better indication of the recovery process
private final consumption expenditure (PFCE) and and thus the Budget for 2010-11 envisaged a partial
gross capital formation in 2009-10, which had exit from the stimulus measures on the strength of
shares of 58.4 per cent and 35.4 per cent the outcome of the second quarter of 2009-10. This
respectively in 2008-09. Net indirect taxes minus response was broadly in line with the international
subsidies, an important component of the nominal practices in this regard, which had preferred fiscal
gross domestic product (GDP), also declined. The policy instruments for counteracting the adverse
lower levels of point contribution to growth from economic impact of the crisis.

Figure 3.1 Point contribution to GDP at current market prices

20
Point contribution

15 GDP
(CMP)
per cent

10
5 PFCE
0
GFCE
-5
Indirect
2005-06

2006-07

2007-08

2008-09

2009-10

tax–
subsidy

Year

Website: [Link]
 Fiscal Developments and Public Finance 43
3.3 As a proportion of the GDP (purchasing power year-on-year growth of 20.3 per cent, and was 7.8
parity [PPP]), the overall fiscal balance of the world percentage points higher than envisaged at the time
was estimated by the International Monetary Fund of Budget formulation. As proportions of the GDP
(IMF) (Fiscal Monitor 2010) to have risen from - as per the AE, budgeted fiscal and revenue deficits
0.4 per cent in 2007 to - 2.0 per cent and - 6.8 per work out to 4.8 per cent and 3.5 per cent for the
cent respectively in 2008 and 2009; it was estimated current fiscal. Thus, as proportions of the GDP, the
to have moderated to - 6.0 per cent in 2010 and recent trends in deficit indicators, post-crisis, have
projected at - 4.9 per cent in 2011. At a major been influenced to some extent by the swings in the
grouping level, advanced economies accounted for levels of aggregate demand (Table 3.1 and Figure
the bulk of the fiscal expansion. Among the emerging 3.2).
economies, India had one of the largest fiscal
expansions of the order of about 10 per cent of the Table 3.1 : Trends in Deficits of Central
GDP in both 2009 and 2010. In terms of proportions Government
of potential GDP also, the expansion was sizeable
Year Revenue Fiscal Primary Revenue
in 2009 in the case of India; it was estimated to Deficit Deficit Deficit Deficit as
have declined to - 8.7 per cent in 2010. Going per cent
forward, the Fiscal Monitor indicated that the fiscal of Fiscal
adjustment in emerging economies in general which Deficit
was driven by economic recovery in 2010 would be (As per cent of GDP)
driven by discretionary policies in 2011--a Enactment of FRBM Act
development that would be noteworthy in light of the 2003-04 3.6 4.5 0.0 79.7
fact that the discretionary impulse of the expansion
2004-05 2.4 3.9 0.0 62.3
was estimated to be small.
2005-06 2.5 4.0 0.4 63.0
3.4 In actual terms, the Budget for 2010-11 had
2006-07 1.9 3.3 -0.2 56.3
estimated the level of fiscal deficit at ` 3,81,408
crore and revenue deficit at ` 2,76,512 crore. At 2007-08 1.1 2.5 -0.9 41.4
the time of presentation of the Budget for 2010-11 it 2008-09 4.5 6.0 2.6 75.2
was envisaged that nominal GDP (GDP at current
2009-10(P) 5.1 6.3 3.1 80.7
market prices) would grow by 12.5 per cent and
was estimated at ` 69,34,700 crore. As proportions 2010-11(BE) 3.5 4.8 1.7 72.5
of the nominal GDP, fiscal and revenue deficits were Source: Union Budget documents.
estimated at 5.5 per cent and 4.0 per cent BE-Budget estimates
respectively. As per the advance estimates (AE) P: Provisional actuals (unaudited)
released by the Central Statistics Office (CSO) on FRBM : Fiscal Responsibility and Budget Management
7 February 2011, the nominal GDP for 2010-11 was Note: The ratios to GDP at current market prices are based
on the CSO’s National Accounts 2004-05 series.
placed at ` 78,77,947 crore, which represents a

Figure 3.2 Trends in deficits of Central Government

7
6 Fiscal
deficit
Per cent of GDP

5
4
3 Revenue
deficit
2
1
0 Primary
deficit
-1
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

2010-11 (BE)

Year

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44 Economic Survey 2010-11

CENTRAL GOVERNMENT FINANCES initiatives in expenditure. First, below-the-line

3.5 The key driver of the rapid fiscal consolidation issuance of bonds for financing under-recoveries
after the notification of the FRBM Rules in July 2004 of petroleum oil companies (as also other such
was the buoyancy in tax revenues. As a proportion bonds) was discontinued and all such funds were
of the GDP, gross tax revenue rose from a level of brought into the Budget as subventions booked as
9.2 per cent in 2003-04 to reach a peak level of cash expenditure. Second, the nutrient-based
11.9 per cent in 2007-08; after falling to 10.8 per subsidy policy for fertilizers was put in place. Third,
cent and 9.6 in 2008-09 and 2009-10 respectively, given the elevated levels of prices of international
it was estimated to recover to 10.8 per cent in 2010- crude petroleum, it was proposed that the level of
11 (BE) as per the then estimated levels of GDP. administered prices for domestic petroleum products
However, as a proportion of the GDP as per the would be calibrated to international prices.
advance estimates of the CSO, it is at 9.5 per cent. Budgetary developments in 2010-11
Two significant developments in the recent past in
3.7 Against the backdrop of the fast-paced
terms of the composition of taxes have been the
recovery of the economy in 2009-10 and the elevated
growth in direct tax revenues, particularly corporate
levels of food inflation as well as the
income tax, and in service tax revenues. Union excise
recommendations of the Thirteenth Finance
duties that have traditionally been the single largest
Commission (ThFC), the budget for 2010-11
revenue earner ceded place to corporate income
resumed the path of fiscal consolidation to make
tax in 2006-07. In 2009-10, owing to the fiscal economic growth more broad based and ensure
stimulus package which envisaged significant that supply-demand imbalances are managed better.
reduction in duties and a demand slowdown, union Acting on the ThFC recommendation for limiting
excise duties declined substantially. In 2010-11, with the combined public debt to GDP ratio to 68 per
partial restoration in rates and surge in demand, cent by 2014-15, the Union Budget for 2010-11
union excise duties have done exceedingly well. came up with a promise to analyse the issues in a
With continuance of high growth in corporate Status Paper, which would also unveil the roadmap
income tax and a higher than budgeted outcome in for reduction.
personal income tax in the current year, the
3.8 The Budget for 2010-11 indicated that effective
prospects of revenue-led medium-term consolidation
management of public expenditure by bringing it in
appears bright.
line with the Government’s objectives, particularly
3.6 While tax revenues provided the anchor for through proper targeting of subsidies, was a key
deepening of the fiscal consolidation process in the factor in fiscal management. The Budget for 2010-
post FRBM period (2004-05 to 2007-08), there was 11 also announced the operationalization of the
also some compression in the expenditure to GDP Nutrient Based Subsidy Policy for fertilizers effective
ratio (Table 3.2 and Figure 3.3). Average annual 1 April 2010 and indicated that the recommendations
growth in expenditure in the four-year period was of the Expert Group on a Viable and Sustainable
11.2 per cent, below the 16 per cent growth in the System of Pricing of Petroleum Products would also
nominal GDP. Besides, there were significant reform be operationalized in due course.

Figure 3.3 Receipts and expenditure of the Central Government

16.0
14.0 Revenue
expenditure
Per cent of GDP

12.0
10.0 Revenue
8.0 receipts

6.0 Capital
4.0 receipts
2.0 Capital
0 expenditure
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

2010-11 (BE)

Year

Website: [Link]
 Fiscal Developments and Public Finance 45
Table 3.2 : Receipts and Expenditure of the Central Government
2005-06 2006-07 2007-08 2008-09* 2009-10 2009-10 2010-11
(BE) (P) (BE)
` crore)
(`
1. Revenue Receipts (a+b) 347077 434387 541864 540259 614497 575458 682212
(a) Tax Revenue (net of States’ share) 270264 351182 439547 443319 474218 459444 534094
(b) Non-tax Revenue 76813 83205 102317 96940 140279 116014 148118
2. Revenue Expenditure 439376 514609 594433 793798 897232 908011 958724
of which:
(a) Interest Payments 132630 150272 171030 192204 225511 211643 248664
(b) Major Subsidies 44480 53495 67498 123581 106004 123396 109092
(c) Defence Expenditure 48211 51682 54219 73305 86879 90668 87344
3. Revenue Deficit (2-1) 92299 80222 52569 253539 282735 332553 276512
4. Capital Receipts 158661 149000 170807 343697 406341 443068 426537
of which:
(a) Recovery of Loans 10645 5893 5100 6139 4225 6204 5129
(b) Other Receipts (mainly PSU disinvestment) 1581 534 38795 566 1120 24557 40000
(c) Borrowings and Other Liabilities** 146435 142573 126912 336992 400996 412307 381408
5. Capital Expenditure 66362 68778 118238 90158 123606 110515 150025
6. Total Expenditure [2+5=6(a)+6(b)] 505738 583387 712671 883956 1020838 1018526 1108749
of which:
(a) Plan Expenditure 140638 169860 205082 275235 325149 302199 373092
(b) Non-plan Expenditure 365100 413527 507589 608721 695689 716327 735657
7. Fiscal Deficit [6-1-4(a)-4(b)] 146435 142573 126912 336992 400996 412307 381408
8. Primary Deficit [7-2(a)] 13805 -7699 -44118 144788 175485 200664 132744
(As per cent of GDP)
1. Revenue Receipts (a+b) 9.4 10.1 10.9 9.7 10.5 8.8 8.7
(a) Tax Revenue (net of States’ share) 7.3 8.2 8.8 7.9 8.1 7.0 6.8
(b) Non-tax Revenue 2.1 1.9 2.1 1.7 2.4 1.8 1.9
2. Revenue Expenditure 11.9 12.0 11.9 14.2 15.3 13.9 12.2
of which:
(a) Interest Payments 3.6 3.5 3.4 3.4 3.9 3.2 3.2
(b) Major Subsidies 1.2 1.2 1.4 2.2 1.8 1.9 1.4
(c) Defence Expenditure 1.3 1.2 1.1 1.3 1.5 1.4 1.1
3. Revenue Deficit (2-1) 2.5 1.9 1.1 4.5 4.8 5.1 3.5
4. Capital Receipts 4.3 3.5 3.4 6.2 6.9 6.8 5.4
of which:
(a) Recovery of Loans 0.3 0.1 0.1 0.1 0.1 0.1 0.1
(b) Other Receipts (mainly PSU disinvestment) 0.0 0.0 0.8 0.0 0.0 0.4 0.5
(c) Borrowings and Other Liabilities** 4.0 3.3 2.5 6.0 6.8 6.3 4.8
5. Capital Expenditure 1.8 1.6 2.4 1.6 2.1 1.7 1.9
6. Total Expenditure [2+5=6(a)+6(b)] 13.7 13.6 14.3 15.8 17.4 15.5 14.1
of which:
(a) Plan Expenditure 3.8 4.0 4.1 4.9 5.6 4.6 4.7
(b) Non-plan Expenditure 9.9 9.6 10.2 10.9 11.9 10.9 9.3
7. Fiscal Deficit [6-1-4(a)-4(b)] 4.0 3.3 2.5 6.0 6.8 6.3 4.8
8. Primary Deficit [7-2(a)] 0.4 -0.2 -0.9 2.6 3.0 3.1 1.7
Memorandum Items ` crore)
(`
(a) Interest Receipts 22032 22524 21060 20717 19174 22018 19253
(b) Non-plan Revenue Expenditure 327518 372191 420861 559024 618834 654188 643599

Source: Union Budget documents.

BE-Budget estimates P: Provisional actuals (unaudited)
* Based on provisional actuals for 2008-09.
** Does not include receipts in respect of the Market Stabilization Scheme, which will remain in the cash balance of the Central
Government and will not be used for expenditure.
Note: 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
2. The figures may not add up to the total due to rounding/approximations.

Website: [Link]
46 Economic Survey 2010-11

Revenue and capital receipts the ratios were 58.6 per cent and 39.5 per cent
respectively (Table 3.3 and Figure 3.4).
3.9 The full impact of the fiscal stimulus measures
relating to excise duty cuts and the indirect impact Direct taxes
on gross tax revenues became evident only in 2009-
10. As a proportion of the GDP, gross tax revenues 3.11 The Budget for 2010-11 carried forward the
declined from 10.8 per cent in 2008-09 to 9.6 per thrust on maintaining moderate levels of taxation
cent in 2009-10; the levels would have been even and expanding the tax base. The tax slabs under
lower in 2008-09 had the nominal GDP grown at personal income were broadened and the surcharge
trend levels. Thus the Budget for 2010-11 partially on corporate income tax was reduced from 10 per
restored the excise duties and with economic cent to 7.5 per cent. At the same time, the rate of
recovery gaining momentum envisaged a rise in minimum alternate tax was raised to 18 per cent to
the tax to GDP ratio to 10.8 per cent in the current expand the tax base and improve inter-se equity in
fiscal; this implied a year-on-year growth of 19.1 the taxation of corporates.
per cent and amounted to ` 7,46,651 crore. The
3.12 The Government had signalled its intention
restoration of excise duty levels, albeit partial, was
to consolidate and comprehensively amend the
expected to result in a year-on-year growth of 26.1
existing Income Tax Act 1961 and Wealth Tax Act
per cent in 2010-11 as against a level of 29.4 per
1957 through a single legislation, by releasing a
cent envisaged by the RE. It was also estimated
draft Direct Taxes Code (DTC) and a discussion
that revenue from customs would grow at 36.5 per
paper for public comments in August 2009. Based
cent in 2010-11. With service tax estimated to grow
on analysis of the numerous inputs received from
by 16.3 per cent to reach a level of ` 68,000 crore,
stakeholders, a revised discussion paper was
indirect taxes were estimated at ` 3,15,000 crore,
released in June 2010 followed by the introduction
implying an overall growth of 19.1 per cent in 2010-
of the Direct Taxes Code Bill 2010 in Parliament in
11 over 2009-10. Overall revenue from direct taxes
August 2010. It has now been proposed to make it
was expected to grow by 15.0 per cent in 2010-11
effective from 1 April 2012 (Box 3.1).
to reach ` 4,22,500 crore. In part, this owed to
some positive developments arising from the
Indirect taxes
economic recovery and growth in manufacturing/
industry on the one hand and the higher levels of 3.13 The Budget for 2010-11 had indicated that
exemption arising from broadening of the income the formulation of indirect tax proposals was guided
tax brackets on the other. This was reflected in the by the need to return to the path of fiscal
budget estimates of year-on-year growth of 23.2 consolidation without affecting the growth momentum
per cent in corporate income tax and decline of 1.4 of the economy and moving forward on the road to
per cent in personal income tax. The varying levels a goods and services tax (GST). There was
of growth in the different components of tax accordingly a recalibration of the rates and certain
revenues, given the levels of their relative shares in rationalization and relief measures in the Budget.
gross tax revenues, indicate changes in the
composition of taxes. 3.14 The following were the important measures
taken in the Budget for 2010-11:
3.10 At the beginning of the economic reforms
 The standard rate of excise duty (CENVAT)
process in 1991-92, the ratio of direct and indirect
taxes in gross tax revenue was 22.6 per cent and which was brought down to 8 per cent after two
74.8 per cent respectively. As part of the larger successive reductions in December 2008 and
economic reforms, the reforms in the tax structure February 2009 was increased to 10 per cent.
effected through a gradual and sequenced  Excise duty on petrol and diesel was increased
reduction in the rates of duties in both customs and by ` 1 per litre so as to restore it to pre-June
excise together with the increase in the levels of 2008 levels.
income resulted in a gradual shift in the composition
of taxes. As a result in 2004-05--the year when the  Full or partial excise duty exemptions/
FRBM regime was operationalized--the ratios of concessions available on some items were
direct and indirect taxes were 56.1 per cent and withdrawn and duty imposed on them at the
43.3 per cent of gross tax revenue; in 2009-10, rate of 4 per cent or 10 per cent.

Website: [Link]
 Fiscal Developments and Public Finance 47
Table 3.3 : Sources of Tax Revenue
2005-06 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11
(BE) (P) (BE)

` crore)
(`
Direct (a) 157557 219724 295938 319859 370000 367415 422500
Personal Income Tax 55985 75093 102644 106046 112850 122280 120566
Corporation Tax 101277 144318 192911 213395 256725 244630 301331
Indirect(b) 199348 241538 279031 269433 269477 247357 315000
Customs 65067 86327 104119 99879 98000 84244 115000
Excise 111226 117613 123611 108613 106477 104659 132000
Service Tax 23055 37598 51301 60941 65000 58454 68000
Gross Tax Revenue * 366151 473512 593147 605298 641079 626916 746651
Tax Revenue as a Percentage of Gross Tax Revenue
Direct (a) 43.0 46.4 49.9 52.8 57.7 58.6 56.6
Peronal Income Tax 15.3 15.9 17.3 17.5 17.6 19.5 16.1
Corporation Tax 27.7 30.5 32.5 35.3 40.0 39.0 40.4
Indirect(b) 54.4 51.0 47.0 44.5 42.0 39.5 42.2
Customs 17.8 18.2 17.6 16.5 15.3 13.4 15.4
Excise 30.4 24.8 20.8 17.9 16.6 16.7 17.7
Service Tax 6.3 7.9 8.6 10.1 10.1 9.3 9.1
Tax Revenue as a Percentage of Gross Domestic Product
Direct(a) 4.3 5.1 5.9 5.7 6.3 5.6 5.4
Personal Income Tax 1.5 1.7 2.1 1.9 1.9 1.9 1.5
Corporation Tax 2.7 3.4 3.9 3.8 4.4 3.7 3.8
Indirect(b) 5.4 5.6 5.6 4.8 4.6 3.8 4.0
Customs 1.8 2.0 2.1 1.8 1.7 1.3 1.5
Excise 3.0 2.7 2.5 1.9 1.8 1.6 1.7
Service Tax 0.6 0.9 1.0 1.1 1.1 0.9 0.9
Gross Tax Revenue * 9.9 11.0 11.9 10.8 10.9 9.6 9.5

Source: Union Budget documents.

BE-Budget estimates P: Provisional actuals (unaudited)
* includes Taxes referred to in (a) & (b) and Taxes of Union Territories and ‘other’ Taxes.
Note: 1. Direct Taxes also include Taxes pertaining to expenditure, interest, wealth, gift, and estate duty.
2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

Figure 3.4 Composition of gross tax revenue

45
Per cent of gross tax revenue

40 Excise
35
Customs
30
25 Corporate
tax
20
15 Personal
income tax
10
5 Service
tax
0
1990-91

1995-96

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

2010-11 (BE)

Year

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48 Economic Survey 2010-11

Box 3.1 : Direct Taxes Code (DTC)

The Direct Taxes Code Bill, 2010 introduced in Parliament, seeks to consolidate and amend the laws relating to all
direct taxes, that is income-tax, dividend distribution tax, and wealth tax so as to establish an economically efficient,
effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP
ratio. The salient features of the DTC are :
1.0 It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax
Act 1957 with a single legislation.
1.1 It simplifies the language of the legislation. The use of direct, active speech, expressing only a single point
through one sub-section and rearranging the provisions into a rational structure will assist a layperson to understand
the provisions of the DTC.
1.2 It indicates stability in direct tax rates. Currently, the rates of tax for a particular year are stipulated in the
Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill
has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed
in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is
proposed. The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent and
raises the exemption limit as well as broadens the tax slabs for personal income tax.
2.0 It strengthens taxation provisions for international transactions. In the context of a globalized economy, it has
become necessary to provide a stable framework for taxation of international transactions and global capital. This
has been reflected in the new provisions. The new provisions with regard to international taxation are:
2.1 Advance Pricing Agreements for International Transactions--This will bring in certainty in transfer-pricing
issues as any taxpayer can enter into an agreement with the tax administration, which will be valid for a period up to
five years, regarding the manner in which the taxpayer would compute arm’s length price in respect of the taxpayer’s
international transactions.
2.2 Alignment of concept of residence (of a Company) with India’s tax treaties by introduction of concept of ‘place
of effective management’ instead of ‘wholly controlled’ in India.
2.3 Controlled Foreign Company Regulations--This is a provision which will assist in taxation of profits of a foreign
company in the hands of resident share- holders who may have incorporated such a company in low tax jurisdictions
and are accumulating passive income (i.e. interest, dividends, capital gains, etc.) in the company without repatriating
the income to India.
2.4 Branch Profit Tax on Foreign Companies–-Currently, foreign companies are taxed at the rate of 42.2 per cent
(inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2 per cent (inclusive of surcharge
and cess) plus a dividend distribution tax at the rate of 16.6 per cent when they distribute dividend from accumulated
profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the
rate at 30 per cent and levying a branch profit tax (in lieu of dividend distribution tax) at the rate of 15 per cent. This
will provide tax neutrality between a branch and a subsidiary of a foreign company in India.
2.5 Taxation of assets held abroad under wealth tax—It is proposed to include certain assets of residents which are
held abroad, such as deposits in bank accounts in the case of individuals and interest in a foreign trust or in a
controlled foreign corporation. This will create a reporting requirement mechanism for assets held abroad.
3. Phasing out Profit-linked Tax Incentives and Replacing them by Investment-linked Incentives--It has been observed
that profit-linked deductions are inherently discriminatory, prone to misuse by shifting of profits from non-exempt
to exempt entity or by reporting higher profits in exempt income entity, and also lead to high level of litigation and
revenue foregone. They also impede the Government’s efforts to give a moderate tax rate to other taxpayers as the
higher taxes paid by others by implication cross-subsidize the lower tax rates of the profit-linked deduction sectors.
Such profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC.
They are being replaced by investment-linked deductions for specified sectors. Investment-linked incentives are
calibrated to the levels of creation of productive capacity and therefore are superior instruments. Profit-linked
deductions currently being availed of have been protected for the unexpired period in the DTC.
4. Rationalization of Tax Incentives for Savings--In order to focus savings incentives on long-term savings for social
security of the taxpayer during his non-working life, deduction of up to Rs 1 lakh has been provided for investments
in approved provident funds, superannuation funds, and pension funds.
5. General Anti Avoidance Rule to Curb Aggressive Tax Planning—Direct tax rates have been moderated over the
last decade and are in line with international norms. A general anti-avoidance rule assists the tax administration in
deterring aggressive tax avoidance in a globalized economy. Such general anti-avoidance rules already form a part
of the tax legislation in a number of G-20 countries.
6. Taxation of Non-profit Organizations: It is proposed to tax non-profit organizations set up for charitable purposes
on their surplus (at the rate of 15 per cent), after allowing for accumulation of a specified proportion for creation of
assets or for long-term projects, a further carry forward for receipts of the last month of the year, and also after a
basic exemption limit of Rs 1 lakh. Donations to these non-profit organizations will be eligible for tax deduction in
the hands of the donor.

Website: [Link]
 Fiscal Developments and Public Finance 49
 Excise duty on cigarettes and other tobacco  Full exemption from basic customs duty for truck
products was increased. refrigeration units for the manufacture of
 Ad-valorem component of excise duty on large refrigerated vans/trucks. Such units are
cars, multi utility vehicles, and sports utility already exempt from excise duty.
vehicles was increased from 20 per cent to  Reduction of basic customs duty from 7.5 per
22 per cent. cent to 5 per cent on specified agricultural
 Customs duty was increased on crude machinery such as paddy transplanters, laser
petroleum from nil to 5 per cent; petrol and land levellers, cotton pickers, reaper-cum-
diesel from 2.5 per cent to 7.5 per cent; and binders, straw or fodder balers, sugarcane
other specified petroleum products from 5 per harvesters, tracks used for manufacture of
cent to 10 per cent—once again to restore track-type combine harvester, etc.
these duties to pre-June 2008 levels.  Full exemption from excise duty on specified
 Customs duty on gold, silver, and platinum equipment for preservation, storage, or
increased by 50 per cent of the earlier transportation of apiary, horticultural, dairy,
applicable specific rates. poultry, aquatic and marine produce, and meat
and processing thereof.
 Eight new services were brought under the
 Exemption from service tax for transportation
service tax net to broaden the tax base. In
addition, scope of some existing taxable of cereals and pulses by road.
services was expanded.  Exemption from service tax for testing and
3.15 Fiscal concessions were given to priority/ certification of seeds.
thrust areas of the economy like agriculture, food  Concessional basic customs duty rate of 5 per
processing, renewable energy and conservation of cent on machinery items, instruments, and
energy, and infrastructure. The objective was to appliances required for initial setting up of solar
attract fresh investments in the agricultural/food power generation projects or facilities. These
processing and other related sectors like horticulture/ items are also exempt from excise duty.
apiary/diary/poultry for: (a) creation of farm to  Full exemption from basic customs duty and
market supply chains; (b) prevention of wastage of special additional customs duty for ground
produce; and (c) infusion of technology to boost source heat pump to tap geo-thermal energy.
production. In the energy sector, the aim was to
 Full exemption from excise duty on additional
reduce dependence on fossil fuels and harness the
specified raw materials for the manufacture of
new and clean sources of energy. In specific terms,
rotor blades for wind-operated electricity
the following major fiscal concessions were granted:
generators.
 Project imports status, with concessional rate
 Mono Rail Projects for urban transport granted
of basic customs duty of 5 per cent, for
installation of mechanized handling systems and project imports status with concessional rate of
5 per cent basic customs duty. Concessional
pallet racking systems in mandis or warehouses
customs duty rate of 5 per cent presently
for foodgrains and sugar along with exemption
from additional customs duty and special available up to 6 July 2010 on specified
machinery for tea, coffee, and rubber
additional customs duty . Installation and
plantations extended up to 31 March 2011.
commissioning of such systems is also exempt
from service tax. Excise duty exemption has also been
reintroduced on these items up to 31 March
 Project imports status, with concessional rate 2011.
of basic customs duty of 5 per cent, and full
 A uniform concessional rate of duty of 4 per
exemption from service tax for the initial setting
cent prescribed for parts, required for
up or substantial expansion of a cold storage,
cold room (including farm pre-coolers) for manufacture of all categories of electrical
vehicles including cars, two wheelers, and three
preservation or storage or an industrial unit for
wheelers (like ‘Soleckshaw’) subject to actual
processing of agricultural, apiary, horticultural,
dairy, poultry, aquatic and marine produce, and user condition. Such vehicles will also be
charged excise duty at the rate of 4 per cent.
meat.

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50 Economic Survey 2010-11

 Excise duty reduced from 8 per cent to 4 per from basic customs duty and CVD. Project
cent on LED lights/lighting fixtures. imports status was accorded to ‘Setting up of
Digital Head End’ with 5 per cent concessional
3.16 As regards simplification of procedures, with
basic customs duty and nil special additional
effect from 1 April 2010 small-scale industrial (SSI)
customs duty .
units were allowed to take full CENVAT credit on
capital goods in one instalment in the year of receipt  Basic customs duty on rhodium which is used
of such goods. Facility of payment of excise duty primarily for the manufacture of gold jewellery,
on quarterly basis was extended to SSI units. The was reduced from 10 per cent to 2 per cent.
relaxation from brand name restriction under the  The limit of ` 1 lakh per annum on duty-free
general SSI exemption scheme was extended to import of samples was enhanced to ` 3 lakh
plastic bottles and plastic containers used as packing per annum.
material.
 The list of exempted components, raw materials,
3.17 The following important relief and and accessories for the manufacture of sports
rationalization measures were also extended: goods was enlarged by including some
additional items.
 Varying rates of customs duty on medical
equipment were done away with and now all Collection rates
medical equipment (with some exceptions)
attracts 5 per cent basic customs duty, 4 per 3.18 Various measures like simple average tariffs,
cent countervailing duty (CVD)/excise duty, and weighted average tariffs, and tariff dispersion
nil special additional customs duty (i.e. effective indicate the levels of protection in an economy and
duty of 9.2 per cent). Parts required for the are often used for cross-country comparisons. In
manufacture and accessories of medical many emerging economies, the level of nominal
equipment were also charged 5 per cent tariffs as indicated in the schedule under the customs
concessional basic customs duty with nil special acts might be very different from the applied levels
CVD. as there are numerous exemptions. It is therefore
useful to refer to such measures as collection rates
 Prior to the Budget, umbrellas attracted 4 per
cent excise duty while umbrella parts were for understanding the inter-temporal changes within
charged 8 per cent excise duty and umbrella the country better. The collection rates have steadily
cloth was fully exempt. The rate of excise duty declined over the years. Given the fact that the rates
on umbrellas and all umbrella parts was unified include CVDs, which are not counted as protection,
at 4 per cent in the Budget. the real levels of protection in India are much smaller.
Barring chemicals, man-made fibres, metals, and
 Full exemption from excise duty was provided
capital goods, the collection rates are in single digit
on articles of bedding wholly made of quilted
(Table 3.4 and Figure 3.5).
textile materials; toy balloons made of natural
rubber; betel nut product known as ‘supari’;
Service Tax
dementholised oil, deterpenated mentha oil,
spearmint/ mentha piperita oils, and all 3.19 Since its introduction in 1994-95, service tax
intermediates and by-products of menthol. has helped widen the tax base of indirect taxes.
 Excise duty was reduced from 8 per cent to There has been an increase in the number of
4per cent on replaceable kits for all household- services over the years (Table 3.5). The Budget for
type water filters (except those operating on 2010-11 announced the following measures:
RO technology); corrugated boxes/ cartons (a) Rate of service tax was retained at 10 per
manufactured by stand-alone manufacturers; cent (which had earlier been reduced from
and latex rubber thread 12 per cent in February 2009 as part of the
 Basic customs duty was reduced from 10 per fiscal stimulus package).
cent to 5 per cent on magnetrons of up to 1000 (b) Eight new services were brought under the
kw for the manufacture of microwave ovens. service tax net:
 Promotional material like trailors of films are (i) Services of promoting, marketing, or
imported free of cost in the form of electronic
organizing of games of chance, including
promotion kits /betacams were fully exempted
lottery.

Website: [Link]
 Fiscal Developments and Public Finance 51
Table 3.4 : Collection Rates for Selected Import Groups*
(per cent)
Sl. Commodity
No. Groups 1990-91 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
(Prov.)
1. Food Products 47 22 32 23 19 4 3
2. POL 34 10 6 5 6 3 2
3. Chemicals 92 22 20 22 22 16 14
4. Man-made Fibres 83 39 34 28 30 17 22
5. Paper & Newsprint 24 7 9 10 10 8 8
6. Natural Fibres 20 11 13 12 13 6 4
7. Metals 95 26 25 24 24 17 17
8. Capital Goods 60 16 13 14 16 13 11
9. Others 20 6 5 6 6 4 4
10. Non-POL 51 12 12 12 13 9 8
11. Total 47 11 10 10 10 7 6
Source: Department of Revenue, Ministry of Finance
* Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of imports
unadjusted for exemptions, expressed in percentage.
POL-Petroleum oil and lubricants
[Link]. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar.
[Link]. 3 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber.
[Link]. 5 includes pulp and waste paper, newsprint, paperboards and manufactures, and printed books.
[Link]. 6 includes raw wool and silk.
[Link]. 7 includes iron and steel and non-ferrous metals.
[Link]. 8 includes non-electronic machinery and project imports and electrical machinery.

(ii) Health services, namely health check up (iii) Services provided for maintenance of
undertaken by hospitals or medical medical records of employees of a
establishments for the employees of business entity;
business entities and health services
(iv) Services of promoting of a ‘brand’ of
provided under health insurance
goods, services, events, business
schemes offered by insurance
companies. entity, etc.;

(The tax on these health services would be payable (v) Services of permitting commercial use
or exploitation of any event organized
only to the extent payment for such medical check-
by a person or organization;
up or preventive care or treatment, etc. is made
directly by the business entity or the insurance (vi) Services provided by electricity
company to the hospital or medical establishment); exchanges;

Figure 3.5 Collection rates for selected import groups

70
60 Capital
goods
50
Per cent

40 Total
30
20 Food
products
10
0 POL
1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

Year

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52 Economic Survey 2010-11

Table 3.5 : Service Tax-A Growing Revenue  An explanation was added in the definition
Source of the taxable service ‘Commercial Training
No. of Tax Revenue Growth or Coaching Service’ to clarify that the term
Services* Rate ` crore)
(` in per ‘commercial’ appearing in the relevant
in per cent definitions only means that such training
cent over or coaching is being provided for a
Previous
Year** consideration whether or not such training
or coaching is conducted with a profit
2004-05 75 10 14200 80.0
motive. This change was given
2005-06 78 10 23055 62.4
2006-07 93 12 37598 63.1 retrospective effect from 01.07.2003;
2007-08 100 12 51301 36.4
 In the definition of the taxable service
2008-09 106 12*** 60941 18.8
2009-10(P) 109 10 58454 -4.1 ‘Sponsorship Service’, the exclusion
2010-11 relating to sponsorship pertaining to sports
(April- was removed;
December) 117 10 44081 19.2
Source : Receipts Budget and Controller General of  In the definition of ‘Construction of Complex
Accounts. Service’, and ‘Commercial or Industrial
* Based on new entries added each year.
Construction Service’, it was provided that
** Growth for 2010-11 (April-December) is over
corresponding period previous year. unless the entire consideration for the
*** Reduced to 10 per cent w.e.f. 24-2-2009. property is paid after the completion of
P : Provisional actuals (unaudited)
construction (i.e. after issuance of
completion certificate by the competent
(vii) Services related to two types of
authority), the activity of construction would
copyrights hitherto not covered under
existing taxable service ‘Intellectual be deemed to be a taxable service provided
by the builder/promoter/developer to the
Property Right (IPR)’, namely those on
prospective buyer and the service tax
(a) cinematographic films; and (b)
sound recording; would be charged accordingly;

 Amendments were made in the definition

(viii) Special services provided by a builder,
of the taxable service ‘Renting of Immovable
etc. to prospective buyers such as
Property’ to: (i) provide explicitly that the
providing preferential location or
external or internal development of activity of ‘renting’ itself is a taxable service.
This change was given retrospective effect
complexes on extra charges.
from 1June 2007; and (ii) provide that
(c) Certain modifications were made in the renting of vacant land, where the
definition of existing taxable services to widen agreement or contract between the lessor
the scope of the levy of service tax: and lessee provides for undertaking
construction of buildings or structures on
 The scope of the taxable service ‘Air
such land for furtherance of business or
Passenger Transport Service’ expanded to commerce during the tenure of the lease,
include domestic journeys and
shall be subject to service tax;
international journeys in any class;
 The definitions of the taxable services,
 Prior to the Budget, ‘Information
‘Airport Services’, ‘Port Services’, and the
Technology (IT) Software Service’ was ‘Other Port Services’ were amended to
subject to tax only in cases where such IT
provide that (a) all services provided
software is used for furtherance of
entirely within the airport/port premises
business or commerce. The scope of the would fall under these services; and (b)
taxable service expanded to tax such
an authorization from the airport/port
service even if the service provided is used
authority would not be a precondition for
for purposes other than business or taxing these services;
commerce;

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 Fiscal Developments and Public Finance 53
 An explanation was added in the definition These conditions include that either the
of the taxable service‘ Auctioneer’s Service’ customs duty (in case of import) or excise
to clarify that the phrase ‘auction by duty (in case of domestic production) has
Government’ means an auction involving been paid on the entire amount received
sale of Government property by any from the buyer;
auctioneer and not when the Government  scope of exemption from service tax
acts as an auctioneer for sale of a private available for transport of fruits, vegetables,
property; eggs, or milk by road by a goods transport
 The definition of ‘Management of agency was expanded by including
Investment under ULIP Service’ was foodgrains and pulses in the list of exempted
amended to provide that the value of the goods;
taxable service for any year of the  Exemption from service tax was provided
operation of policy shall be the actual to Indian news agencies under ‘Online
amount charged by the insurer for Information and Database Retrieval Service’
management of funds under ULIP or the and ‘Business Auxiliary Service’ subject to
maximum amount of fund management specified conditions ;
charges fixed by the Insurance Regulatory
 Exemption from service tax for ‘Technical
and Development Authority (IRDA),
Testing and Analysis Service’ and ‘Technical
whichever is higher;
Inspection and Certification Service’
(d) Certain exemptions from service tax were provided by Central and State seed testing
provided: laboratories, and Central and State seed
certification agencies;
 Statutory taxes charged by any
 Exemption from service tax provided for
Government (including foreign
Governments, where a passenger transmission of electricity.
disembarks) on air passengers were
excluded from taxable Value for the
Tax Expenditure
purpose of levy of service tax under the 3.20 Tax expenditure statement (Statement of
Air Passenger Transport Service; revenue foregone on account of tax incentives or
preferences) was first placed before Parliament in
 Exemption was provided from service tax
on air transport of passengers for journeys the Budget for 2007-08. The estimates are somewhat
originating from the north-eastern Region; counterfactual in nature and seek to quantify the
potential revenue (including through a sampling
 Exemption from service tax was provided process) had these exemptions been not given;
to services relating to ‘Erection, assume that tax base and other conditions remain
Commissioning or Installation’ of, unaltered. Subsequently this continued to be
published every year and in the Budget for 2010-
 Mechanized Food Grain Handling
11, tax foregone on account of exemptions under
Systems, etc.;
corporate income tax for 2008-09 and 2009-10 was
 Equipment for setting up or substantial estimated at ` 66,901 crore and ` 79,554 crore
expansion of cold storage; and respectively. Accelerated depreciation, deduction
of export profits of units located in software
 Machinery/equipment for initial setting
technology parks and of export-oriented units
up or substantial expansion of units for
(EOUs) were some of the major items under such
processing of agricultural, apiary,
corporate exemptions. Tax foregone on account of
horticultural, dairy, poultry, aquatic,
exemptions under personal income tax was
marine, or meat products;
estimated at ` 33,216 crore and ` 36,186 crore
 Packaged IT software, pre-packed in retail respectively in 2008-09 and 2009-10 with deduction
packages for single use, was exempted on account of certain eligible investments and
from service tax leviable under IT Software expenditures under section 80C of the IncomeTax
Service, subject to specified conditions. Act being the main exemptions.

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54 Economic Survey 2010-11

3.21 Revenue foregone estimates in excise and expenditure, pay, and pensions. As a proportion of
customs broadly correspond to the differences in the GDP, defence expenditure and interest payments
statutory or Schedule rates of duties and the have been more or less stable. Given the committed
effective or applied rates of duties multiplied by the nature of other expenditure, the immediate and real
value assessed. Total revenue foregone in excise compression under this classification could only
for 2008-09 was estimated at ` 1,35,496 crore, of come from subsidies; hence the focus on reforms
which area-based exemptions amounted to ` 10,589 in subsidies in recent budgets. Front loading of Plan
crore. Tax expenditure is estimated to have risen to expenditure was possible in 2008-09 and 2009-10
` 1,70,765 in 2009-10 with area-based exemptions in view of the fiscal expansion to combat the adverse
accounting for only ` 5,882 crore. In customs, impact of the global crisis. Though an amount of `
revenue foregone under various exemptions was 3,25,149 crore (equivalent of 5.6 per cent of the
estimated to be of the order of ` 2,02,240 crore in GDP) was earmarked as Plan expenditure in Budget
2008-09 and ` 2,18,191 crore in 2009-10. The estimates for 2009-10, as per the provisional actual
following sectors benefited the most from such data released by the Controller General of Accounts
exemptions: crude oil and mineral oils; machinery; (CGA), plan expenditure was at ` 3,02,199 crore
diamond, gold and jewellery; edible vegetable, fruits, (equivalent of 4.6 per cent of the GDP). As per the
cereals, edible oils; chemicals and plastics; and Budget for 2010-11, plan expenditure for the current
primary metals and articles thereof. Revenue fiscal was placed at ` 3,73,092 crore, equivalent of
foregone on account of various export promotion 4.7 per cent of the GDP. (Figures 3.6 and 3.7)
schemes was estimated at ` 44,417 crore in 2008-
09 and ` 37,970 crore in 2009-10. Overall, tax Interest payments
expenditure as a proportion of aggregate tax
3.23 The levels of outstanding liabilities in end-
collection was placed at 68.6 per cent in 2008-09
March and assumption of incremental liabilities
and is estimated to have risen to 79.5 per cent in during the fiscal have a crucial bearing on the levels
2009-10.
of interest payments in a given year. Reflecting the
less than prudent fiscal management of the past,
Expenditure trends
interest payments have been growing at a steady
3.22 In a 2x2 schema of classification of public rate and appropriating about 35 per cent of the
expenditure into revenue and capital, and Plan and revenue receipts in the last five years. Given the
non-Plan, the thrust of public expenditure fact that the levels of outstanding liabilities could
management policies, particularly in terms of FRBM only come down in the medium to long term with
commitments, has been on containing non-Plan fiscal consolidation, one of the important targets of
revenue expenditure and raising the levels of Plan the FRBM framework was the progressive reduction
expenditure, preferably the capital variety. Non-Plan in assumption of incremental liabilities. Reflecting
revenue expenditure has five major components, this, as a proportion of the GDP, interest payments
namely interest payments, subsidies, defence came down from 4.5 per cent in 2003-04 to 3.4 per

Figure 3.6 Trends in Centre's revenue expenditure

400
350 Others
R thousand crore

300
250 Interest payments
200
Major subsidies
150
100 Defence
expenditure
50
0 Grants to states
and UTs
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
(Prov)

2010-11 (BE)

Year

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 Fiscal Developments and Public Finance 55
Figure 3.7 Composition of revenue expenditure
100

28.4 29.9 31.9 33.9 32.5 Others

80 35.4 37.6 37.4

60 13.4 14.0 Grants to states

Per cent

16.8 16.5 18.2 15.6 and UTs

11.9 15.5 16.1
11.4
11.0 10.0 9.1 9.2 9.1
40 12.0 10.0
11.6 10.1 Defence
10.4 11.4
15.6 13.6 11.4 expenditure
20
34.3 33.0 30.2 29.2 28.8 24.2 23.3 25.9
Major subsidies
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Year (Prov.) (BE) Interest payments

cent in 2007-08. Net of the interest payments on the Supplementary demands for grants
National Small Savings Fund (NSSF), the average
3.25 Supplementary demands for grants are placed
cost of borrowing has risen to 7.9 per cent from 7.7
before the Parliament to include all those expenditure
per cent in 2010-11 in the current fiscal reflecting
the higher levels of debt outstanding last year (Table proposals (excess or fresh or reappropriations) that
were not envisaged at the time of presentation of the
3.6 and Figure 3.8).
Budget and have to be incurred in the current year.
Subsidies Two supplementary demands for grants have so far
been presented in the current fiscal. The first batch
3.24 As a proportion of the GDP, subsidies have was approved by Parliament in August 2010
grown from 1.4 per cent in 2004-05 to 2.3 per cent
in 2008-09 (Figure 3.9). Below-the-line bonds issued Table 3.6 : Interest on Outstanding Internal
in lieu of subsidies also rose to a level of ` 1,10,510 Liabilities of Central Government
crore in 2008-09 (2 per cent of the GDP). This rise Out- Interest Average
in subsidies owes to the elevated levels of global standing on Cost of
crude oil prices and the less than full pass through Internal Internal Borrowings
of the international prices to the domestic markets Liabilities Liabilities (per cent
per annum)
and is also reflected in fertilizer subsidies as cost
of feedstock is the major cost. Following the global ` crore)
(`
financial crisis, there was a brief respite; 2004-05 1603785 105176 7.2
2005-06 1752403 111476 7.0
nevertheless global crude prices have started to
2006-07 1967870 128299 7.3
trend up. Some of the subsidies were also not
2007-08 2247104 149801 7.6
targeted properly. The Budget for 2010-11 also
2008-09* 2565991 170388 7.6
announced the intent of bringing all subsidy-related 2009-10(RE) 2902990 198797 7.7
liabilities to fiscal accounting. It was in this context 2010-11(BE) 3306626 227942 7.9
that the recent Budgets have focused on Source: Union Budget documents.
restructuring the subsidy regime in fertilizers and * Excludes ` 563 crore towards premium on account of
petroleum. As a first step, pricing of petrol (motor domestic debt buyback scheme and prepayment of
external debt.
spirit) was liberalized and a modest hike in
Note: 1. Average cost of borrowing is the percentage
administered prices of kerosene and LPG (liquefied of interest payment in year ‘ t’ to outstanding
petroleum gas) was announced. The retail selling liabilities in year ‘t-1’.
price of public distribution system (PDS) kerosene 2. Outstanding internal liabilities exclude NSSF
loans to States,with no interest liability on the
was increased by ` 3 per litre in Delhi with part of the Centre.
corresponding increase in the rest of the country 3. The figures of interest payments reported in
the earlier issues may differ as these figures
and the price of domestic LPG was increased by
are net of interest payments on NSSF paid by
` 35 per cylinder (14.2 kg) in Delhi with corresponding the Government since 1999-2000 i.e. constitution
increase in the rest of the country. of the NSSF.

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56 Economic Survey 2010-11

Figure 3.8 Interest on internal liabilities and average interest cost of borrowing
250 12
Interest on
11 internal
200

Per cent per annum

liabilities
R thousand crore

(R)
10
150
Average
9 cost of
100 borrowing
8 (%)

50
7

0 6
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)
Year

(61 grants and two appropriations) for total gross paramilitary forces (` 2,000 crore); and additional
additional expenditure of ` 68,294.3 crore, of which requirement of the PMGSY (` 3,000 crore).
those with a net cash outgo aggregated to ` 54,588.6
crore. The main items entailing cash outgo included Central Plan outlay
compensation to oil companies (` 14,000 crore); 3.26 With a higher level of gross budgetary support
additional requirement of the Pradhan Mantri Gram (GBS) of ` 2,29,163 crore and internal and extra
Sadak Yojana(PMGSY) (` 7,337.5 crore); and budgetary resources (IEBR) of Central public-sector
transfers to State and Union Territories Governments enterprises (CPSEs) of ` 1,96,427 crore, Central
(` 6,379 crore). The second batch of supplementary Plan outlay was placed at ` 4,25,590 crore for 2009-
demands for grants approved by Parliament in 10 ( revised estimates—RE). The GBS constituted
December 2010 included 56 grants and two 53.8 per cent of the total outlay. With a growth of
appropriations. Total gross additional expenditure 23.2 per cent over 2009-10 (RE), the Central Plan
approved by Parliament was ` 44,945.5 crore. This outlay now stands at ` 5,24,484 crore in the Budget
involves a net cash outgo aggregate of ` 19,812.4 for 2010-11. The outlay comprised budgetary support
crore and technical supplementary involving gross of ` 2,80,600 crore and IEBR of CPSEs of ` 2,43,884
additional expenditure, matched by savings of the crore. The broad sector-wise allocations for important
ministries/departments or by enhanced receipts/ sectors included energy (27.9 per cent); social
recoveries aggregates of ` 25,132.5 crore. The main services (24.3 per cent); transport (19.4 per cent);
items entailing cash outgo included compensation communication (3.5 per cent); rural development
to the Department of Fertilizers (` 5,000 crore) and (10.5 per cent); industry and minerals (7.4 per cent);
the Department of Food and Public Distribution (` agriculture and allied activities (2.3 per cent); and
5,000 crore); additional requirement for Central irrigation and flood control (0.1 per cent). Central

Figure 3.9 Subsidies as per cent of GDP

140 3.5
120 3.0
R thousand crore

Subsidies
Per cent of GDP

100 2.5
80 2.0
Subsidies
60 1.5 as % of
40 GDP
1.0
20 0.5
0 0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)

Year

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 Fiscal Developments and Public Finance 57
assistance to State and UT Plans in 2010-11 (BE) is and Functional Classification of the Central
placed at ` 92,492 crore, a growth of 7.5 per cent Government Budget details the impact of the
over 2009-10 (RE). operations of the Central Government on the levels
of consumption expenditure and capital formation.
Government debt Of the total expenditure of ` 10,79,985 crore in BE
3.27 In many countries, the fiscal rules also include 2010-11 (equivalent of 13.7 per cent of the GDP),
21 per cent was used up as consumption expenditure
a debt reduction target. The FRBM Rules 2004
(amounting to ` 2,24,027 crore or 2.8 per cent of
contain an incremental assumption rule for public
debt which states that ‘the Central Government shall the GDP) and 18 per cent resulted in capital
formation (amounting to ` 1,94,473 crore or 2.5
not assume additional liabilities (including external
per cent of the GDP) with the rest being accounted
debt at current exchange rate) in excess of 9 per
cent of GDP for the financial year 2004-05 and in for as transfer payments (mainly to States).The levels
of dissavings of the Government came down
each subsequent financial year, the limit of 9 per
progressively and in 2007-08 became positive
cent of GDP shall be progressively reduced by at
least one percentage point of GDP’. There is, savings; however, the fiscal expansion resulted in
the re-emergence of dissavings in 2008-09 (Table
however, no explicit rule targeting reduction in the
3.8). After briefly going up in 2008-09 to a level of
overall level of public debt. As a proportion of the
GDP, public debt could come down through limiting ` 2,53,712 crore, the dissavings of the Government
were estimated at ` 1,92,705 crore in 2010-11 (BE).
its growth relative to growth in nominal GDP or
As the gap between the level of savings and capital
through lower assumption of incremental liabilities
or retirement of debt. The ThFC had recommended formation is financed preponderantly by draft on
the other sectors of the domestic economy, the
limiting the combined debt of the Centre and States
reversal of dissavings is an imperative.
to 68 per cent of the GDP by 2014-15. The Budget
for 2010-11 announced the intent of bringing out a
Fiscal outcome
status paper giving detailed analysis of the situation
and a roadmap for curtailing overall public debt 3.30 The outcomes in terms of key fiscal indicators
within six months. A status paper was presented to were much better than was envisaged by the Budget
the Parliament on November 2010 (Box 3.2). estimates on account of the higher than estimated
revenue from telecom 3G/BWA auctions and indirect
3.28 As a proportion of the GDP, the outstanding taxes. The headroom so available facilitated
internal liabilities of the Central Government fell from
additional expenditure proposed through
a level of 58.7 per cent in 2005-06 to 51.5 per cent
supplementary demands for grants. The data on
in 2009-10 (RE). They were budgeted at 48 per Union finances for April-December 2010 released
cent of the GDP in 2010-11 (Table 3.7A and Figure
by the CGA on 31 December 2010 indicated that
3.10). There has been steady decline in the levels
the key fiscal indicators were broadly on the
till 2007-08 subsequent to the operation of the FRBM consolidation track charted by the Budget for 2010-
Act. Thereafter there has been moderation in
11. Growth in gross tax revenue in the nine months
decline following the fiscal expansion in 2008-09
of the current fiscal was 26.8 per cent (year-on-
and 2009-10; a modest deterioration is evident in year) as against a level of 17.9 per cent envisaged
2010-11 (BE) (Table 3.7B). This is also reflected in
for the fiscal by the BE. Non-tax revenues grew by
the assumption of incremental liabilities, which have
136.4 per cent in the first nine months of current
significantly gone up in the last two years. fiscal as against a level of growth of 23.7 per cent
in the corresponding period last year and 32 per
Economic and functional classification of
cent envisaged by the BE. Revenue receipts grew
the Budget
by over 50 per cent in the first nine months (Table
3.29 While analysis on the basis of fiscal indicators 3.9). In major taxes the following were the year-on-
are instructive in understanding the fiscal situation year growth rates (as against growth envisaged by
and management thereof, the macroeconomic the BE): customs 65.8 per cent (36.1 per cent);
dimensions of fiscal policies are better understood Central excise 36.5 per cent (29.4 per cent), service
though a reclassification of the fiscal magnitudes in tax 19.7 per cent (17.2 per cent); corporate income
terms of national income aggregates. The Economic tax 20.4 per cent (18.1 per cent), and personal

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58 Economic Survey 2010-11

Box 3.2 : Government Debt Report

In pursuance of the announcement made in the Budget for 2010-11 to this effect, a status paper on Government debt
was presented in November 2010. The paper made a detailed analysis of the situation and chalked out a roadmap for
reduction in overall debt as a percentage of the GDP for the General Government during the period 2010-11 to 2014-
15. The salient features of the report are detailed as follows:

 The objectives of the debt management policy are to meet Central Government’s financing need at the lowest
possible long-term borrowing costs and also to keep the total debt within sustainable limits . Additionally, it aims
at supporting development of a well-functioning and vibrant domestic bond market.

 The three important attributes of Government debt include source of financing, fixed interest nature of debt, and
long residual maturity. Of the overall Central Government debt, about 92 per cent is internal debt and 8 per cent
is external debt. Internal debt largely consists of market loans in the form of dated securities which are contracted
through auction. Most of the dated securities (97 per cent) are fixed coupon and only the balance 3 per cent are
floating rate bonds. The weighted average maturity of these dated securities is about 10 years while the weighted
average interest rate is about 7.8 per cent per annum.

 Subsequent to the Report of the ThFC which had estimated debt to GDP ratios and a roadmap for its reduction,
the CSO revised the nominal GDP significantly and as per the revised data the reduction in the levels of debt as
proportion of the GDP could be made even with higher than recommended fiscal deficits. As such, a higher than
ThFC recommended target was preferred whereby the fiscal deficit of the Centre would be reduced to 3 per cent
of the GDP by 2014-15 and accordingly debt as a proportion of the GDP would come down from 50.5 per cent in
2009-10 to 43 per cent in 2014-15.

 The outstanding debt of State Governments is estimated at 26.3 per cent of the GDP for 2009-10. However, after
netting of the liabilities on account of investments made in 14-days treasury bills of Central Government, this
comes down to 24.8 per cent of the GDP. The roadmap for States has been prepared with fiscal deficit as a
percentage of the GDP at the level recommended by the ThFC. With the foregoing assumption on fiscal deficit,
consolidated debt for State Governments is estimated to reduce from 24.8 per cent of the GDP in 2009-10 to 23.1
per cent in 2014-15.

 After factoring in the impact of Central loans to States, the consolidated debt of General Government has come
down from 79.3 per cent in 2004-05 to 68.7 per cent in 2007-08. However, it has subsequently increased during the
global economic crisis period to 71.1 per cent in 2008-09 and further to 73 per cent of the GDP in 2009-10. It may be
recalled that the 12th Finance Commission had recommended a consolidated debt for the Centre and State Governments at 74 per
cent of the GDP for the year 2009-10. Even with slippage in 2008-09 and 2009-10 on fiscal deficit targets, the overall General
Government debt at 73 per cent of the GDP in 2009-10 has remained within the recommended target.

 The suggested roadmap for consolidated General Government debt sets a target of reduction from 73 per cent of
the GDP in 2009-10 to 64.9 per cent in 2014-15. This shows a reduction of 8.1 per cent of the GDP in the consolidated
debt for the General Government.

 In the roadmap suggested for debt reduction during the period 2010-11 to 2014-15, the Government’s commitment
towards fiscal consolidation has been reiterated. With the reduction in fiscal deficit for 2010-11, the trend witnessed
in the last two years of increasing debt has been arrested. The Government has undertaken concerted efforts to reduce the
fiscal deficit gradually so as to bring down the debt as a proportion of the GDP to the pre-crisis level of 68.7 per cent by 2013-
14 and further improve to about 65 per cent of the GDP in 2014-15.

Figure 3.10 Debt GDP ratios

70
60 Total
Per cent of GDP

outstanding
50 liabilities
40
Internal
30 liabilities
20
Market
10 borrowings
0
External
debt
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)

(outstand-
ing)

Year

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 Fiscal Developments and Public Finance 59
Table 3.7A : Outstanding Liabilities of the Central Government
(end-March)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
1. Internal Liabilities # 2165902 2435880 2725394 3036132 3376325 3782553
a) Internal Debt 1389758 1544975 1808359 2028549 2337682 2736754
i) Market Borrowings 862370 972801 1092468 1326094 1734505 2079535
ii) Others 527388 572174 715891 702455 603177 657219
b) Other Internal Liabilities 776144 890905 917035 1007583 1038643 1045799
2. External Debt (Outstanding)* 94243 102716 112031 123046 139581 162045
3. Total Outstanding Liabilities (1+2) 2260145 2538596 2837425 3159178 3515906 3944598
4. Amount Due from Pakistan on Account 300 300 300 300 300 300
of Share of Pre-partition Debt
5. Net Liabilities (3-4) 2259845 2538296 2837125 3158878 3515606 3944298
(As per cent of GDP)
1. Internal Liabilities 58.7 56.7 54.7 54.4 51.5 48.0
a) Internal Debt 37.6 36.0 36.3 36.3 35.7 34.7
i) Market Borrowings 23.4 22.7 21.9 23.8 26.5 26.4
ii) Others 14.3 13.3 14.4 12.6 9.2 8.3
b) Other Internal Liabilities 21.0 20.7 18.4 18.0 15.9 13.3
2. External Debt (Outstanding)* 2.6 2.4 2.2 2.2 2.1 2.1
3. Total Outstanding Liabilities 61.2 59.1 56.9 56.6 53.7 50.1
Memorandum Items
(a) External Debt (` crore)@ 194078 201204 210083 264076 249311 272779
(as per cent of GDP) 5.3 4.7 4.2 4.7 3.8 3.5
(b) Total Outstanding Liabilities
(adjusted) (` crore) 2359980 2637084 2935477 3300208 3625636 4055332
(as per cent of GDP) 63.9 61.4 58.9 59.1 55.4 51.5
(c) Internal Liabilities(Non-RBI)(` crore)## 1969106 2217671 2471396 2687037 3041134 3447362
(as per cent of GDP) 53.3 51.6 49.6 48.1 46.4 43.8
(d) Outstanding Liabilities
(Non-RBI)(` crore)## 2163184 2418875 2681479 2951113 3290445 3720141
Outstanding Liabilities (Non-RBI)
(as per cent of GDP) 58.6 56.3 53.8 52.9 50.2 47.2
(e) Contingent Liabilities of
Central Government (` crore) 110626 109826 104872 113335 n.a. n.a.
Contingent Liabilities of
Central Government
(as per cent of GDP) 3.0 2.6 2.1 2.0 n.a. n.a.
(f) Total Assets (` crore) 1194446 1339119 1571668 1569043 1590027 1754040
Total Assets
(as per cent of GDP) 32.3 31.2 31.5 28.1 24.3 22.3
Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India.
n.a. : not available
* External debt figures represent borrowings by Central Government from external sources and are based upon
historical exchange rates.
@ Converted at year end exchange rates. For 1990-91, the rates prevailing at the end of March,1991; For 1999-2000, the
rates prevailing at the end of March, 2000 and so on.
# Internal debt includes net borrowing of ` 29,062 crore for 2005-06, ` 62,974 crore for 2006-07, ` 1,70,554 crore for
2007-08, ` 88,773 crore for 2008-09, ` 2,737 crore for 2009-10(RE) and ` 50,000 crore for 2010-11(BE) under the Market
Stabilisation Scheme.
## This includes marketable dated securities held by the RBI.
Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

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60 Economic Survey 2010-11

Table 3.7B : Incremental Net Liabilities of the Central Government*

2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)

Target as per FRBM Rules 8 7 6 5 4 3
(as per cent of GDP)
Actual ( ` crore) 265723 278451 298829 321753 356728 428692
Actual as per cent of GDP 7.2 6.5 6.0 5.8 5.4 5.4
*Incremental net liablities assumed has been compiled from data on liabilities given in Annex 3(i) of Receipts
Budget, 2010-11.

income tax 13.1 per cent (-3.6 per cent). crore posted a growth of 9.1 per cent over 2008-
09. Taking into account further accumulation of
3.31 Year-on-year growth in total expenditure in the ` 141 crore in the traffic outstandings, the gross
first nine months of the current fiscal was at 11.2 per
traffic receipts of the Railways for 2009-10 stood at
cent as against a level of 18.5 per cent in 2009-10
` 86,964 crore.
(April-December) and 8.5 per cent envisaged for the
full year by BE 2010-11. While Plan expenditure grew 3.33 Ordinary working expenses at ` 65,810 crore
by 18.9 per cent in April-December 2010-11 as during 2009-10 showed an increase of 21.1 per
against 23.0 per cent in 2009-10 (April-December), cent over the preceding year. This higher growth
non-Plan expenditure grew by 7.9 per cent as against in ordinary working expenses was primarily
16.6 per cent. As per the CGA, 84.7 per cent of the attributable to payment of the second instalment (60
gross market borrowings were completed by end of per cent) of arrears of the Sixth Central Pay
December 2010. Reflecting the above trend in revenue Commission. The total working expenses including
and expenditure, revenue deficit was placed at appropriations for Depreciation Reserve Fund and
` 1,16,309 crore, which was 42.1 per cent of its BE Pension Fund at ` 82,915 crore recorded an
and lower by 53.7 per cent than the April-December increase of 15.4 per cent over the preceding year.
2009 level. Fiscal deficit was ` 1,71,249 crore, which
came to 44.9 per cent of its BE (Table 3.10) and 3.34 Taking into account the net variation of the
represented a decline of 44.8 per cent over the miscellaneous receipts and miscellaneous
level in April-December 2009. The deficit indicators expenditure, Railways net revenue in 2009-10 was
would thus remain at targeted levels even with a ` 5,544 crore. After fully discharging the dividend
pickup in expenditure in the next three months. liability of ` 5,543 crore for the fiscal, Railways
during 2009-10 generated an excess of around
PERFORMANCE OF DEPARTMENTAL ` 1 crore. Lower growth of traffic revenues on account
of prevailing economic conditions, stiff increase in
ENTERPRISES OF THE CENTRAL
working expenses due to implementation of the Sixth
GOVERNMENT Central Pay Commission recommendations and
inflationary factors have adversely affected the
Railways
financial health of the Railways in 2009-10, which
3.32 Indian Railways achieved a freight loading is reflected in its Operating Ratio1 deteriorating to
of 887.79 million tonnes in 2009-10 with an 95.3 per cent as against 90.5 per cent in 2008-09.
incremental loading of 54.40 million tonnes over the The net revenue as a proportion of capital-at-charge
levels in 2008-09. However, freight loading during and investment from the Capital Fund for the fiscal
2009-10 fell short of the revised target by 2.2 million was 4.5 per cent.
tonnes. Consequently freight earnings at ` 58,502
crore, though registering a growth of 9.5 per cent 3.35 The Plan Outlay for 2009-10 stood at ` 39,235
over 2008-09, fell short of the revised target for crore including internally generated resources of
2009-10 by ` 214 crore. Passenger earnings ` 12,196 crore (31 per cent of the total outlay) and
(excluding other coaching earnings) during 2009- market borrowings of ` 9,323 crore by the Indian
10 were ` 23,488 crore as against ` 21,931 crore Railway Finance Corporation which also includes
in 2008-09, registering an increase of 7.1 per cent. borrowing for Rail Vikas Nigam Limited. Apart from
Overall traffic revenues for 2009-10 at ` 87,105 strengthening of the golden quadrilateral under the
1
The Operating Ratio represents the percentage of working expenses to traffic earnings.

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 Fiscal Developments and Public Finance 61
Table 3.8 : Total Expenditure and Capital Formation by the Central Government and its Financing
(As per Economic and Functional Classification of the Central Government Budget)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Expenditure 501083 570185 688908 864530 1005297 1079985
II. Gross Capital Formation out of Budgetary
Resources of Central Government 84757 87885 143892 136935 154827 194473
(i) Gross Capital Formation
by the Central Government 34450 36487 43652 51464 61190 71537
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 50307 51398 100240 85471 93637 122936
III. Gross Savings of Central Government -61431 -33918 13674 -176082 -253712 -192705
IV. Gap (II-III) 146188 121803 130218 313017 408539 387178
Financed by
a. Draft on Other Sectors of
Domestic Economy 109799 110801 118180 299208 361926 362654
(i) Domestic Capital Receipts 130687 106284 145351 246612 367507 362654
(ii) Budgetary Deficit/Draw Down of
Cash Balance -20888 4517 -27171 52596 -5581 0
b. Draft on Foreign Savings 36389 11002 12038 13809 46613 24524
(As per cent of GDP)
I. Total Expenditure 13.6 13.3 13.8 15.5 15.3 13.7
II. Gross Capital Formation out of Budgetary
Resources of Central Government 2.3 2.0 2.9 2.5 2.4 2.5
(i) Gross Capital Formation
by the Central Government 0.9 0.8 0.9 0.9 0.9 0.9
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 1.4 1.2 2.0 1.5 1.4 1.6
III. Gross Savings of Central Government -1.7 -0.8 0.3 -3.2 -3.9 -2.4
IV. Gap (II-III) 4.0 2.8 2.6 5.6 6.2 4.9
Financed by
a. Draft on Other Sectors of Domestic Economy 3.0 2.6 2.4 5.4 5.5 4.6
(i) Domestic Capital Receipts 3.5 2.5 2.9 4.4 5.6 4.6
(ii) Budgetary Deficit/Draw Down of -0.6 0.1 -0.5 0.9 -0.1 0.0
Cash Balance
b. Draft on Foreign Savings 1.0 0.3 0.2 0.2 0.7 0.3
(increase over previous year)
II. Gross Capital Formation out of Budgetary
Resources of Central Government -8.7 3.7 63.7 -4.8 13.1 25.6
Memorandum Items ` crore)
(`
1 Consumption Expenditure 116305 121609 131396 174345 226987 224027
2 Current Transfers 297267 356560 408676 543347 594989 651168
(As per cent of GDP)
1 Consumption Expenditure 3.1 2.8 2.6 3.1 3.5 2.8
2 Current Transfers 8.1 8.3 8.2 9.7 9.1 8.3
Source: Ministry of Finance, An Economic and Functional classification of the Central Government Budget-various issues.
Notes: (i) Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently
domestic capital receipts include loan repayments to the Central Government.
(ii) Consumption expenditure is the expenditure on wages and salaries and commodities and services for current use.
(iii) Interest payments, subsidies, pension etc. are treated as current transfers.
(iv) Gross capital formation and total expenditure are exclusive of loans to States’/UTs’ against States’/UTs’ share in the small
savings collection.
(v) The figures of total expenditure of the Central Government as per economic and functional classification do not tally with
figures given in the Budget documents. In the economic and functional classification, interest transferred to DCUs, loans
written off etc, are excluded from the current account. In the capital account, expenditure financed out of Railways, Posts
and Telecommunications own funds, etc. is included.
(vi) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

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62 Economic Survey 2010-11

Table 3.9 : Central Government Finances

Budget April-December Col.4 as Per cent
Estimates per cent of change
2010-11 2009-10 2010-11 2010-11 over
(BE) 2009-10
1 2 3 4 5 6
` crore)
(`
1. Revenue Receipts 682,212 389,271 584,268 85.6 50.1
Gross Tax Revenue 746,651 416,094 527,782 70.7 26.8
Tax (net to Centre) 534,094 307,591 391,148 73.2 27.2
Non Tax 148,118 81,680 193,120 130.4 136.4
2. Capital Receipts 426,537 318,269 202,584 47.5 -36.3
of which:
Recovery of Loans 5,129 3,983 8,591 167.5 115.7
Other Receipts 40,000 4,306 22,744 56.9 428.2
Borrowings and Other Liabilities 381,408 309,980 171,249 44.9 -44.8
3. Total Receipts (1+2) 1,108,749 707,540 786,852 71.0 11.2
4. Non-Plan Expenditure (a)+(b) 735,657 497,381 536,898 73.0 7.9
(a) Revenue Account 643,599 460,970 487,692 75.8 5.8
of which:
Interest Payments 248,664 130,005 146,304 58.8 12.5
Major Subsidies 108,667 96,740 94,318 86.8 -2.5
Pensions 42,840 37,465 40,210 93.9 7.3
(b) Capital Account 92,058 36,411 49,206 53.5 35.1
5. Plan Expenditure (i)+(ii) 373,092 210,159 249,954 67.0 18.9
(i) Revenue Account 315,125 179,555 212,885 67.6 18.6
(ii) Capital Account 57,967 30,604 37,069 63.9 21.1
6. Total Expenditure (4)+(5)=(a)+(b) 1,108,749 707,540 786,852 71.0 11.2
(a) Revenue Expenditure 958,724 640,525 700,577 73.1 9.4
(b) Capital Expenditure 150,025 67,015 86,275 57.5 28.7
7. Revenue Deficit 276,512 251,254 116,309 42.1 -53.7
8. Fiscal Deficit 381,408 309,980 171,249 44.9 -44.8
9. Primary Deficit 132,744 179,975 24,945 18.8 -86.1
Source: Controller General of Accounts, Ministry of Finance.

National Rail Vikas Yojana, certain important projects yielding a deficit of ` 6,641.3 crore. In the current
and land acquisition work on dedicated freight fiscal as per BE 2010-11, the gross receipts are
corridors are in progress. Railways has also started budgeted to go up to ` 6,955.5 crore and with gross
work on setting up of some mega workshops to meet and net working expenses estimated at ` 11,328.8
its rolling stock requirements. It is also modernizing crore and ` 10,892.1 crore respectively, the deficit
and upgrading its systems to augment rail services. is projected to be ` 3936.6 crore.

Department of posts 3.37 India Post is the largest Postal network in

the world and provides access to postal services at
3.36 The gross receipts of the Department of Posts affordable rates to all citizens in the country through
in 2009-10 were placed at ` 6,266.7 crore. The its vast network, which has grown from 23,344 post
gross and net working expenses during the year were offices at time of Independence to 1,54,979 post
` 13,346.9 crore and ` 12,908 crore respectively, offices as on 31 March 2010. Of the total, 1,39,173

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 Fiscal Developments and Public Finance 63
Table 3.10 : Trends in Cumulative Central Government Finance (April-December) for 2010-11
Budget April April- April- April- April- April- April- April- April-
Estimates May June July August Sept. Oct. Nov. Dec.

1. Revenue Receipts
` crore)
(` 682212 12979 44657 199810 238524 290799 398234 447625 476716 584268
Per cent to BE 1.9 6.5 29.3 35.0 42.6 58.4 65.6 69.9 85.6
2. Capital Receipts
` crore)
(` 426537 54247 102252 42398 94176 156904 139743 169810 213971 202584
3. Total Receipts
` crore)
(` 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
4. Non Plan Expenditure
` crore)
(` 735657 48206 100101 154148 222900 311249 368270 424893 479771 536898
Per cent to BE 6.6 13.6 21.0 30.3 42.3 50.1 57.8 65.2 73.0
5. Plan Expenditure
` crore)
(` 373092 19020 46808 88060 109800 136454 169707 192542 210916 249954
Per cent to BE 5.1 12.5 23.6 29.4 36.6 45.5 51.6 56.5 67.0
6. Total Expenditure
` crore)
(` 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
7. Revenue Expenditure
` crore)
(` 958724 63617 125877 210387 288599 391151 473155 542455 616874 700577
Per cent to BE 6.6 13.1 21.9 30.1 40.8 49.4 56.6 64.3 73.1
8. Revenue Deficit
` crore)
(` 276512 50638 81220 10577 50075 100352 74921 94830 140158 116309
Per cent to BE 18.3 29.4 3.8 18.1 36.3 27.1 34.3 50.7 42.1
9. Fiscal Deficit
` crore)
(` 381408 53993 100907 40196 90915 151425 133252 162336 186522 171249
Per cent to BE 14.2 26.5 10.5 23.8 39.7 34.9 42.6 48.9 44.9
Source: Controller General of Accounts, Ministry of Finance.

post offices are in rural areas and 15,797 in urban. and catering to the advertising needs of various
India Post has introduced franchisee outlets to cater entities through a single window facility. Doordarshan
to the growing demand for postal services where it as Host Broadcaster for the Commonwealth Games
is not possible to open departmental post offices. (CWG) provided the entire TV coverage of the CWG
As on 31 March 2010, 1082 franchised outlets have in HDTV format, a noteworthy achievement in the
been opened. The Department of Posts has been broadcasting sector. As Right Holder Broadcaster,
given the responsibility of disbursing wages to the Doordarshan provided customized TV coverage of
Mahatma Gandhi National Rural Employment CWG for Indian viewers besides launching an HDTV
Guarantee Scheme (MGNREGS) beneficiaries channel called DDHD to provide high quality services.
through post office savings bank accounts. Nearly Digitalization of the All India Radio network is one of
4.67 crore MGNREGS Accounts have been opened the major thrust areas of the Eleventh Plan. There is
up to October 2010 and the wages amounting to ` an approved scheme of digitalization of transmitters,
7113 crore have already been disbursed during the studios, and connectivity which, inter alia, envisages
current financial year (up to October 2010). A total digitalization of 98 studios and connectivity and 100
of ` 18,876 crore has been disbursed as wages to watts FM digital compatible transmitters at 100
MGNREGS beneficiaries through post offices since locations. Government has allocated a total ` 2,050
the inception of the scheme. crore including CWG 2010 in BE 2010-11 to cover
the resource gap in Prasar Bharati.
Broadcasting
State-level finances
3.38 Prasar Bharati, a public service broadcaster,
incurred a total expenditure of ` 2949.4 crore in 3.39 In the post-FRBMA period the performance of
2009-10 (excluding charges on account of the space combined States was impressive with fiscal deficit
segment and spectrum charges and interest and declining to 2.4 per cent of the GDP in 2005-06
depreciation costs). The total gross revenue earned and further to 1.5 per cent in 2007-08. With the
in 2009-10 was ` 1352.7 crore and the net revenue exception of 2009-10 (RE), the level of fiscal deficit
worked out to ` 1176.3 crore. Prasar Bharati has had remained below the 3 per cent of GDP mark. In
taken a number of steps to increase revenue 2010-11 (BE), it has been estimated at 2.5 per cent
generation by adopting aggressive marketing strategy of the GDP (Table 3.11 and Figure 3.11). A more

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64 Economic Survey 2010-11

noteworthy feature has been that a surplus on exemptions in central excise; widening of service
revenue account has been recorded in the three- tax base through inclusion of eight new services
year period 2007-08 and 2008-09. Revenue receipts and expansion of scope of some of the existing
grew at the rate of 17.6 per cent and 10.7 per cent ones; reduction in excise duty from 16 per cent to
for 2007-08 and 2008-09 respectively. Buoyant 10 per cent on medicines and toilet preparations
revenues of the States (as also Centre) and non-tax containing alcohol (excise duty on medicinal and
receipts combined with a moderate growth in toilet preparations is one of the taxes to be subsumed
revenue have helped in this regard. However, there under the GST); approval of a Mission Mode Project
are significant variations among States in respect for the computerization of State Commercial Tax
of these indicators. Departments.

State-level Reforms 3.42 Though considerable progress has been

made in moving towards a comprehensive GST, the
3.40 Given the exceptional circumstances of 2008- timeline of April 2011 for its introduction is not likely
09 and 2009-10, the fiscal consolidation process of to be met. This is because the convergence of views
the States was disrupted. States would be able to between the Centre and States needed for the
get back to their fiscal correction path by 2011-12, introduction of legislation for a constitutional
allowing for a year of adjustment in 2010-11. The amendment in this regard is yet to be achieved. In
stimulus packages of the Central Government as the meantime, the working groups involved in
well as those announced by individual States coupled developing the IT architecture, business processes,
with the increased transfers recommended by the and draft legislations for the effective implementation
ThFC have implications for the financial position of of GST are continuing their work. An empowered
the States in the medium term. The group under the Chairmanship of Dr Nandan
recommendations of ThFC for the period 2010-15 Nilekani, Chairman UIDAI, is working out the
are presently under implementation. The modalities for creation of a special purpose vehicle
recommendations take into account the current and (SPV) which envisages the setting up of a common
likely macroeconomic and fiscal scenarios so as to portal for the Centre and State Governments through
secure fiscal stability and adequate resource which taxpayers could interact with the two tax
availability for the Centre, the States, and the local administrations. Work is also under way to create
bodies. The higher levels of devolution of taxes and and strengthen the IT infrastructure in State
the inter-se sharing thereof together with higher VAT(value-added tax) departments so that their
levels of non-Plan grants under Article 275 of the transition to the GST becomes easier.
Constitution which include specific grants like grants
for elementary education, outcomes and
environment related grants, maintenance grants, and CONSOLIDATED GENERAL GOVERNMENT
state-specific grants are likely to bring the combined 3.43 Given the grant dependance of local bodies
deficit of the States down to the targeted levels faster. and limited availability of data, consolidated General
The borrowing ceiling for each State for the year Government finances are taken to be the
2010-11 has been fixed by the Government of India, aggregation of Union and combined State finances
keeping in view the recommendations of the ThFC after due process of netting of inter-Governmental
based on targets for fiscal deficit. Besides, the ThFC transactions. The macroeconomic impact of the
has also provided a basis for the finances of local Government’s fiscal operations is thus evaluated by
bodies through a basic grant and a performance looking at consolidated General Government
grant based on a percentage of the divisible pool of finances. As with the Centre and States individually,
the preceding year. The estimated total grant collectively also a revenue buoyancy and relatively
recommended for local bodies aggregates to ` limited growth in expenditure helped in the fiscal
87,519 crore over the award period of the ThFC. consolidation phase in the post-FRBM period up to
2007-08. In 2007-08, the gross fiscal deficit of the
3.41 In this year’s Budget, measures were also
consolidated General Government was placed at 4.1
taken to facilitate movement towards a goods and
services tax (GST). These included unification of per cent of the GDP on a cash basis (Table 3.12 and
Figure 3.12); and revenue deficit was close to zero.
rates between central excise (goods) and service
After the fiscal expansion in 2008-09 and 2009-10,
tax (services) at 10 per cent; removal of certain

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 Fiscal Developments and Public Finance 65
Table 3.11 : Receipts and Disbursements of State Governments*
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Receipts(A+B) 595,628 673,605 765,735 886,875 1,049,437 1,149,031
A. Revenue Receipts (1+2) 431,021 530,556 623,748 690,581 802,708 906,495
1. Tax Receipts 306,332 372,841 437,948 481,854 529,740 624,380
of which:
State’s Own Tax Revenue 212,307 252,548 286,546 321,351 364,997 426,014
2. Non-tax Receipts 124,690 157,714 185,799 208,727 272,968 282,114
of which:
Interest Receipts 9,380 11,825 12,637 16,594 16,782 16,331
B. Capital Receipts 164,607 143,049 141,987 196,294 246,728 242,536
of which:
Recovery of Loans & Advances 8,904 7,579 7,770 11,068 7,960 4,208
II. Total Disbursements (a+b+c) 561,682 657,280 752,324 877,747 1,073,800 1,167,404
a) Revenue 438,034 505,699 580,805 678,856 849,571 932,683
b) Capital 109,224 137,793 157,258 183,013 207,073 220,022
c) Loans and Advances 14,424 13,789 14,261 15,879 17,155 14,699
III. Revenue Deficit 7,013 -24,857 -42,943 -11,725 46,863 26,189
IV. Gross Fiscal Deficit 90,084 77,508 75,455 134,245 214,137 198,097
(As per cent of GDP)
I. Total Receipts(A+B) 16.1 15.7 15.4 15.9 16.0 14.6
A. Revenue Receipts (1+2) 11.7 12.4 12.5 12.4 12.3 11.5
1. Tax Receipts 8.3 8.7 8.8 8.6 8.1 7.9
of which:
State’s Own Tax Revenue 5.7 5.9 5.7 5.8 5.6 5.4
2. Non-tax Receipts 3.4 3.7 3.7 3.7 4.2 3.6
of which:
Interest Receipts 0.3 0.3 0.3 0.3 0.3 0.2
B. Capital Receipts 4.5 3.3 2.8 3.5 3.8 3.1
of which:
Recovery of Loans & Advances 0.2 0.2 0.2 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 15.2 15.3 15.1 15.7 16.4 14.8
a) Revenue 11.9 11.8 11.6 12.2 13.0 11.8
b) Capital 3.0 3.2 3.2 3.3 3.2 2.8
c) Loans and Advances 0.4 0.3 0.3 0.3 0.3 0.2
III. Revenue Deficit 0.2 -0.6 -0.9 -0.2 0.7 0.3
IV. Gross Fiscal Deficit 2.4 1.8 1.5 2.4 3.3 2.5
Source: Reserve Bank of India.
*: Data from 2008-09 onwards pertain to 27 State Governments.
RE: Revised Estimates.
Note: (1) Negative (-) sign indicates surplus in deficit indicators.
(2) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
(3) Capital receipts include public accounts on a net basis.
(4) Capital disbursements are exclusive of public accounts.

Figure 3.11 Revenue and fiscal deficit of states

4
Per cent of GDP

3 Gross fiscal
deficit
2
1
Revenue
0 deficit
-1
-2
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)

Year

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66 Economic Survey 2010-11

both revenue and fiscal deficits are estimated to for the economy as whole is bright with continued
decline sharply in 2010-11 (BE). Thus the outlook fiscal consolidation.

Figure 3.12 Combined (centre and states) revenue and fiscal deficit
12
Per cent of GDP

10 Gross fiscal
deficit
8
6
Revenue
4 deficit
2
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (RE)

2010-11 (BE)
Year

Table 3.12 : Receipts and Disbursements of Consolidated General Government

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Receipts (A+B) 1,014,689 1,125,252 1,329,654 1,604,238 1,885,017 2,052,774
A. Revenue Receipts (1+2) 707,054 877,075 1,061,892 1,112,877 1,250,511 1,446,332
1. Tax Receipts 576,596 724,023 877,496 925,173 994,843 1,158,475
2. Non-tax Receipts 130,458 153,052 184,396 187,704 255,668 287,857
of which:
Interest Receipts 18,735 21,744 22,584 25,462 24,774 25,120
B. Capital Receipts 307,635 248,177 267,762 491,361 634,506 606,442
of which:
a) Disinvestment Proceeds 1,590 2,440 45,750 832 26,319 43,155
b) Recovery of Loans & Advances 11,651 -773 4,682 8,935 9,505 5,520
II. Total Disbursements (a+b+c) 959,855 1,109,174 1,316,246 1,595,110 1,909,380 2,071,147
a) Revenue 806,366 932,441 1,071,518 1,354,691 1,626,434 1,749,031
b) Capital 132,585 157,316 225,803 217,476 257,787 296,787
c) Loans and Advances 20,904 19,417 18,925 22,943 25,159 25,329
III. Revenue Deficit 99,312 55,366 9,626 241,814 375,923 302,699
IV. Gross Fiscal Deficit 239,560 230,432 203,922 472,466 623,045 576,140
(As per cent of GDP)
I. Total Receipts (A+B) 27.5 26.2 26.7 28.7 28.8 26.1
A. Revenue Receipts (1+2) 19.1 20.4 21.3 19.9 19.1 18.4
1. Tax Receipts 15.6 16.9 17.6 16.6 15.2 14.7
2. Non-tax Receipts 3.5 3.6 3.7 3.4 3.9 3.7
of which:
Interest Receipts 0.5 0.5 0.5 0.5 0.4 0.3
B. Capital Receipts 8.3 5.8 5.4 8.8 9.7 7.7
of which:
a) Disinvestment Proceeds 0.0 0.1 0.9 0.0 0.4 0.5
b) Recovery of Loans & Advances 0.3 0.0 0.1 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 26.0 25.8 26.4 28.6 29.1 26.3
a) Revenue 21.8 21.7 21.5 24.3 24.8 22.2
b) Capital 3.6 3.7 4.5 3.9 3.9 3.8
c) Loans and Advances 0.6 0.5 0.4 0.4 0.4 0.3
III. Revenue Deficit 2.7 1.3 0.2 4.3 5.7 3.8
IV. Gross Fiscal Deficit 6.5 5.4 4.1 8.5 9.5 7.3
Source: Reserve Bank of India.
Note: The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

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 Fiscal Developments and Public Finance 67
THE NATURE OF FISCAL CONSOLIDATION given the very low discretionary fiscal stimuli. In the
fiscal consolidation phase in the post-FRBMA period
3.44 The impact of the global financial crisis brought
to the fore the criticality of fiscal policies in combating (2004-05 to 2007-08), there was considerable fiscal
economic shocks. With little monetary headroom in space generated that facilitated the high levels of
advanced economies and given the transmission lags expansion that India had. It is therefore instructive
in emerging market economies, fiscal policies were to analyse the nature of fiscal deficits in India through
the preferred policy instruments across the globe. their decomposition into structural and cyclical
As per international institutional research on the components (Box 3.3).
subject, advanced economies were able to put in
place large doses of fiscal stimuli as they had the
advantage of automatic stabilizers while emerging
PROSPECTS/OUTLOOK
markets, including India, had large fiscal expansion 3.45 With significant levels of reduction envisaged

Box 3.3 : Decomposition of Fiscal Deficit into Structural and Cyclical Components
The Government budget balance is basically influenced by both cyclical (temporary) and structural (permanent)
factors, entailing that change in the fiscal deficit could arise either in response to cyclical changes in output or to
structural factors. The cyclical changes in output have a transitory effect on the fiscal deficit, whereas the structural
factors have a more durable impact. A structural deficit occurs when a country generates a deficit even when the
economy of the country is operating at its full employment level. On the other hand, a cyclical deficit occurs when an
economy is not performing to its potential, for example if an economy is struggling through a recession. A structural
deficit means that a deficit will be posted regardless of how well an economy if functioning-–recession or boom.
When the economy is functioning strongly, revenue generation is higher due to more jobs, more spending, etc. but
with structural deficit the good and strong health of the economy is irrelevant--a deficit will be generated regardless.

Structural deficit could be further decomposed into three parts that is (a) fiscal drag, (b) discretionary fiscal policy
action, and (c) base year balance, to gain still more insight into the determinants of the structural deficit. Of the three
listed components, the first two are important from the point of understanding fiscal stance.

Fiscal Drag

Among the components of the structural deficit, the fiscal drag is important and normally refers to increase in
average tax rates in a progressive income tax scheme as a consequence of increase in nominal income over time--
either on account of higher levels of inflation or real GDP growth. It has been observed that fiscal drag is the
dominant contributory factor for structural deficit of Central Government balances.

Discretionary Fiscal Policy Action

On the other hand, the second component, i.e. discretionary fiscal policy actions, after remaining relatively weak up
to 2007-08, had shown increases in 2008-09 and 2009-10 which can be attributed to revenue losses due to slowdown
in the economy and duty cut together with higher expenditure to provide fiscal stimulus to sustain economic growth.

Traditional deficit indicators normally do not discriminate between these two effects, and hence fail to correctly
evaluate and portray the impact of fiscal operations on the economy as a whole. The decomposition of the budget
balance into its structural and cyclical components is obtained normally through the application of two important
methodologies, namely the IMF and Organization for Economic Cooperation and Development (OECD) methodologies.
The earlier research on the subject that had been done mostly in the pre-FRBMA period had indicated the presence
of the large structural rigidities in the composition of fiscal deficits in India and a very small cyclical component. The
preliminary findings of the study on this subject commissioned in the post-FRBMA period using OECD methodology
too have indicated continued dominance of the structural component in the budgetary balance of the Government;
this observation holds good in the decomposition of primary deficits of the Centre, combined States, and consolidated
General Government.
(Contd....

Website: [Link]
68 Economic Survey 2010-11

Box 3.3 Contd....)

Estimates of Structural and Cyclical Components of the GFD
(As per cent of GDP)
Year Structural Cyclical Gross Fiscal Year Structural Cyclical Gross Fiscal
Deficit(SD) Deficit(CD) Deficit(GFD) Deficit(SD) Deficit(CD) Deficit(GFD)

1990-91 8.0 -0.4 7.6 2000-01 5.4 0.1 5.5

1991-92 5.7 -0.3 5.4 2001-02 6.1 -0.1 6.0
1992-93 5.4 -0.2 5.2 2002-03 6.1 -0.4 5.7
1993-94 6.9 -0.1 6.8 2003-04 4.7 -0.4 4.3
1994-95 5.4 0.1 5.5 2004-05 4.2 -0.3 3.9
1995-96 4.6 0.3 4.9 2005-06 4.2 -0.3 4.0
1996-97 4.3 0.4 4.7 2006-07 3.4 -0.1 3.3
1997-98 5.3 0.3 5.7 2007-08 2.5 0.1 2.5
1998-99 5.9 0.4 6.3 2008-09 6.0 0.0 6.0
1999-2000 4.9 0.4 5.2 2009-10 6.1 0.2 6.3

Decomposition of gross fiscal deficit into structural and cyclical components

(As per cent of GDP)
9
8 Gross fiscal
deficit
7 (GFD)
Per cent of GDP

6
Structural
5 deficit
4 (SD)
3
Cyclical
2 deficit
1 (CD)
0
-1
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
Year

in the combined State Government deficit in 2010- the terminal year of the award of the ThFC, the
11 (BE) and the progress in the current fiscal in proportion of total expenditure to the GDP is to go
respect of Central Government finances, the down by 2.5 percentage points to reach 13.5 per
resumption of the process of fiscal consolidation at cent of the GDP in 2014-15 and at the same time
both Centre and State levels as also of the the proportion of tax to GDP is set to rise by 1.4
consolidated General Government has really begun percentage points to reach 12.2 per cent of the GDP
after two years of purposive expansion. With the in 2014-15. This estimated level of growth in tax
roadmap laid out by the Medium Term Fiscal Policy revenues seems likely given the recovery in the
Statement coupled with that indicated in the economy to the pre-crisis levels and the fact that it
Government Debt Report 2010, the prospects of was at the same levels before the crisis. Thus it is
extending this process to the medium term and critical to anchor expenditure reforms to realize the
beyond are bright. While the roadmap in terms of projected deficit levels. A beginning has already been
deficit indicators is important in itself, these being made with the reforms announced in subsidies, some
in the nature of derived indicators, it is useful to of which have already been implemented. Going
look at the process by which the reduction is sought forward, deepening the reform process would hold
to be achieved. The Government Debt Report 2010 the key to sustaining the fiscal consolidation
indicates that between 2010-11 (BE) and 2014-15 process.

Website: [Link]
Prices and Monetary
Management
4
CHAPTER

A s the world economy has begun to stabilize in the aftermath of the global crisis,
inflation has re-emerged as a major concern particularly in the fast- recovering
developing economies. At present, the major pressure on prices is emanating from
the food and energy sectors both at global and domestic levels. However, the risk of
its slippage into the core sector has increased and needs to be mitigated proactively.
Notwithstanding slow recovery in the advanced economies, international commodities
particularly, oil, food, industrial inputs, and metals have witnessed rising prices
towards the end of 2010. International crude prices also briefly crossed US$ 90 a
barrel in the wake of an unusually cold winter, putting pressures on the Government
to take a relook at domestic fuel prices. The renewed inflationary pressure became
evident in December 2010 as headline wholesale price index (WPI) inflation increased
to 8.4 per cent from 8.1 per cent in November 2010. However, in January 2011 it
has moderated to 8.2 per cent. In addition to fuel, metal and mineral prices are also
putting pressure on the domestic economy. Food inflation in particular has remained
stubbornly in double digits for over a year now, which has welfare costs. There is
need to remain cautious and be prepared to take proactive steps as the emerging
scenario warrants, with the objective of bringing down inflation. Going forward,
inflation is likely to moderate in line with the monetary tightening measures taken
by the Reserve Bank of India and other steps taken by the Government to address
the supply-side bottlenecks.

PRICES 4.3 Some of the important items included in the

new series basket are flowers, lemons, and crude
Main features of the new WPI series petroleum in primary articles and ice cream,
4.2 A new WPI series with 2004-05 base was canned meat, palm oil, readymade/instant food
released on 14 September 2010. A representative powder, mineral water, computer stationery, leather
commodity basket comprising 676 items has been products, scooter / motorcycle tyres, polymers,
petrochemical intermediates, granite, marble, gold
selected and weighting diagram derived for the
and silver, construction machinery, refrigerators,
new series. The total number of price quotations
computers, dish antenna, transformers, microwave
has also increased from 1918 in the old series to
ovens, communication equipment (telephone
5482 in the new series, indicating better
instruments), TV sets, VCDs, washing machines,
representation of the prices in the wholesale
and auto parts in manufactured products.
markets. Sector-wise price quotations have
increased from the old to new series from 455 to General wholesale price situation
579 in primary group and from 1391 to 4831 in the 4.4 During the first half of 2009-10, the headline
manufactured products group. A comparison of the year-on-year inflation remained significantly low at
weighting diagram and number of commodities 0.36 per cent on account of sharp increases in prices
between the old and new series for the major groups recorded in 2008-09. The second half of 2009-10
is drawn in Table 4.1.
70 Economic Survey 2010-11

Table 4.1 : Major Changes in the Weights and Commodities in the Revised WPI Series
Weights No. of Commodities
Items New Series Old Series New Series Old Series New Items
(base: (base: (base: (base: Added/
2004-05) 1993-94) 2004-05) 1993-94) Revised
All Commodities 100.00 100.00 676 435 417
Primary Articles 20.12 22.03 102 98 11
Food Articles 14.34 15.40 55 54 1
Non-Food & Minerals 5.78 6.63 47 44 10
Fuel and Power 14.91 14.23 19 19 0
Manufactured Products 64.97 63.75 555 318 406
Food Products 9.97 11.54 57 41 25
Non-Food Products 55.00 52.21 498 277 381
Source : The Office of the Economic Adviser, Ministry of Commerce and Industry.

showed increasing food prices on account of whose inflation hovered in the range of 14.7 per
unfavourable agricultural supply conditions coupled cent to 21.5 per cent and fuel which recorded
with the waning of base effect, leading to sharp inflation in the range of 10.3 per cent to 14.4 per
increase in inflation. Thereafter, the headline WPI cent. However, the inflation in manufactured
inflation reached 10.23 per cent in March 2010. products remained in the lower range of 4.5 to 6.4
per cent during the current year (Figure 4.1).
4.5 Financial year 2010-11 started with 11 per
cent headline inflation in April [Link] 2010- 4.7 The Government is committed to ensuring
11, the monsoon situation has been better than last availability of cooking fuels to the common man at
year. As per the Second Advance Estimates, affordable prices. In view of the importance of
production of foodgrains in 2010-11 is likely to be household fuels, namely kerosene and domestic
232.07 million tonnes as compared to 218.11 million liquefied petroleum gas (LPG), the Government has
tonnes last year. However, demand pressures decided that the subsidies on these products will
became visible in early 2010. be continued. The PDS Kerosene and Domestic
LPG Subsidy Scheme 2002 as well as the Freight
4.6 At disaggregate level, the price behaviour of Subsidy (for Far-flung Areas) Scheme 2002 have
three major commodities groups has been in marked been extended till 31 March 2014. However, in order
contrast to the previous year when inflation to reduce the burden of under-recoveries, it has been
remained low on account of global decline in decided to increase the retail price of public
commodity prices. From March to July 2010, distribution system (PDS) Kerosene by ` 3 per
headline inflation remained in double digits. The litre and of domestic LPG by `35 per cylinder, at
major contributors to this were primary articles Delhi, with corresponding increases in other parts

Figure 4.1 Inflationary trend in major subgroups of WPI

25
20 Primary
Inflation (per cent)

articles
15
10 Fuel &
5 power

0 Manufac-
-5 tured
products
-10
-15 All commo-
dities
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009-10 2010-11
Year

Website: [Link]
 Prices and Monetary Management 71
of the country. Prices of petrol and diesel, both at Table 4.2 : Annual Average Inflation Rate-
the refinery gate and retail level, will be market based on WPI
determined. However, it is proposed that increase (per cent)
in prices of diesel will be staggered over time to Year Primary Fuel & Manufac- All
minimize the overall impact on the poor and Articles Power tured Commo-
vulnerable. It has also been decided that in case of Products dities
a high rise and volatility in international oil prices, Weights(%) 20.12 14.91 64.97 100
Government will suitably intervene in the pricing of 2000-01 2.8 28.5 3.3 7.2
petrol and diesel. 2001-02 3.6 8.9 1.8 3.6
2002-03 3.3 5.5 2.6 3.4
Average trends in WPI inflation 2003-04 4.3 6.4 5.7 5.5
2004-05 3.7 10.1 6.3 6.5
4.8 The ten-year average of headline WPI inflation
1st 5 Years’
was around 5.3 per cent from 2000-01 to 2009-10;
Average 3.5 11.9 3.9 5.2
in this decade 2000-01, 2003-04, 2004-05, 2006-
2005-06 4.3 13.5 2.3 4.3
07, and 2008-09 had higher inflation relative to the 2006-07 9.6 6.5 5.6 6.5
decadal average. In the current financial year, the 2007-08 8.3 0.0 4.9 4.8
average inflation (April–December 2010) of 9.4 per 2008-09 11.0 11.6 6.2 8.0
cent was also much higher than the decadal rate. 2009-10 12.7 -2.1 1.8 3.6
The ten-year average inflation in fuel was around 2nd 5 Years’
8.9 per cent. The major portion of that was Average 9.2 5.9 4.1 5.5
contributed by the high inflation of 2000-01. The years Decadal
2003-04, 2004-05, 2006-07, and 2008-09 also Average 6.4 8.9 4.0 5.3
witnessed high inflation in manufactured products 2009-10
mainly on account of high prices of raw materials (Apr.-Dec.) 9.8 -5.8 0.7 1.7
such as basic metal alloys and metal products, non- 2010-11
metallic mineral products, and machinery and (Apr.-Dec.)P 18.0 12.3 5.3 9.4
machine tools. The year 2008-09 was different from Source: The Office of the Economic Adviser, Ministry
the previous three years as inflation in all the three of Commerce and Industry.
sectors remained high on account of high Note: P—Provisional
international fuel and commodity prices. The year
2009-10 was an abnormal one due to global in the revised series at 21.9 per cent in February
slowdown and unfavourable monsoon. 2010, thereafter declining to 9.4 per cent in
Notwithstanding, the average inflation was 3.6 per November 2010 and once again rising to 13.6 per
cent backed by negative inflation in fuel. In the cent in December 2010 (Table 4.3). However,
current financial year (2010-11), overall average manufactured food products exhibited a decline in
inflation from April-December 2010 at 9.4 per cent, inflation from 19.3 per cent in December 2009 to
is the highest recorded in the last ten years 0.4 per cent in December 2010. Among food items,
(Table 4.2). sharp rise in prices was observed in onions, fruits,
eggs, meat and fish, and milk. The prices of
Food Inflation in WPI foodgrains, however, remained low on the back of
4.9 The food index consists of two sub good monsoons with a year-on-year inflation of
components, namely primary food articles and -2.6 per cent in December 2010.
manufactured food products. The overall weight of
the composite food index in the WPI is 24.31 per Main drivers of food inflation
cent, comprising primary food articles with a weight 4.10 In 2010-11, inflation in primary food articles
of 14.34 per cent and manufactured food products was mainly driven by rice, vegetables, potatoes,
with a weight of 9.97 per cent. A major concern in onions, fruits, milk, eggs, meat and fish, condiments
the domestic economy has been a sharp rise in and spices, and tea. However, the WPI of
food price inflation during the year 2010-11. The WPI manufactured food products with 2004-05 base is
food inflation has moderated to 8.59 per cent in in the comfortable zone. It was 142.7 in December
December 2010 after reaching its peak of 20.22 2010 as against 142.2 in December 2009. This
per cent in February 2010. Of its two components, has marginally increased due to vanaspati oil,
primary food price inflation touched a historic high groundnut oil, sunflower oil, rice bran extraction,

Website: [Link]
72 Economic Survey 2010-11

Box 4.1: An Unexpected Surge in Food Inflation

Food inflation has been unexpectedly high in recent weeks—driven by surging prices of vegetables, fruits, dairy, oilseeds,
and spices. It was unexpected because good rainfall in 2010 was expected to bring down prices. It did: for cereals (wheat,
rice) and pulses, which together provide most of the energy and protein intake of households in India, especially of the
poor. But the surging prices of other foods caused the overall food inflation to rise. Given the critical importance of food
in India’s setting—with high rates of malnutrition and household food spending accounting for above 40 per cent of total
household expenditure (versus some 7-8 per cent in richer countries)—we disentangle in this Box the relative importance
of some competing and popular sets of explanations or factors.

(1) Rising International Prices—Demand-Supply Shocks or Generalized Commodity Surge? There was a sudden
surge in global food prices in 2006-08, which subsequently crashed with the global financial crisis. Prices, however, again
started surging since late 2009, and have now surpassed the 2008 peak—led by sugar, oils and fats, and cereals (but not
dairy and meat). What is driving this global increase? A July 2010 study (Baffes and Haniotis) looking at the previous
2006-08 price rise provides evidence that it was due to a generalized commodity price rise, especially in oil, itself caused
by a world awash with liquidity and a falling dollar. It also provides evidence that it was not, as popular explanations
would have us believe, because of (1) rising demand in emerging markets (such as China and India); (2) a shift to biofuels;
and (3) a trend rise (because price variability dominates any trend). Nevertheless, the previous 53 per cent fall in real food
prices between 1975 and 2001 was probably overdone and some adjustment was inevitable. The 2009-10 price resurgence
is very similar. Everything from a poor summer wheat harvest in Russia to the recent Australian floods, dry spell in
Argentina, Indonesian flooding, poor US maize yields, and rising demand in China and India is being blamed—but
sudden price rises of this magnitude across such a variety of food products are difficult to attribute to any specific
supply or demand problem except in the context of a generalized commodity price surge (whose solutions lie elsewhere).

FAO Annual Real Food Price Index

300
300
FAO annual
Food Price Index
(2002-04=100)

300 real food

price index
295
290
285
280
275
270
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

Food Commodity Price Indices FAO Food Price Index

Index (2002-04=100)

350
Index (2002-04=100)

200
300
250
180
200 160
150 140
100
120
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

100
2009-10 2010-11
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

Meat Dairy Cereals Oils Sugar

price index price index price index price index price index 2006 2007 2008 2009 2010

(2) Is India buffeted by rising international prices? While some spillovers of global prices to Indian markets are
inevitable, world trade in agriculture is often very thin, with large trade restriction and tariff wedges between domestic
and international prices. While domestic food prices cannot be fully insulated from global ones, local markets do differ,

Website: [Link]
 Prices and Monetary Management 73
(Box 4.1 Continued)

Wholesale price of wheat, India and Brazil Wholesale price of rice: India, Thailand and China
900
550
800
475 700

US$/ton
400
US$/ton

600
325 500
250 400
300
175
200
100

Jan 2005
Jul 2005
Jan 2006
Jul 2006
Jan 2007
Jul 2007
Jan 2008
Jul 2008
Jan 2009
Jul 2009
Jan 2010
Jul 2010
Nov 2010
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
India Brazil India Thailand China

the volatility of global prices is far greater than that of domestic prices, and India’s prices have been much more stable,
avoiding the highs and lows. Indeed, recent cereals prices have been declining in India relative to global ones.

(3) So, what caused the unexpected surge in non-cereal prices? Fundamentals versus uncompetitive markets.
One popular explanation for suddenly rising prices of vegetables, spices, dairy, and similar products is rising incomes
in India driving prices higher, as consumers are presumed to be shifting from low-value products to higher value ones
(consistent with Engel’s Law). While this may certainly be true as a general demand-side explanation, it merits deeper
examination because of two other factors: (1) the sudden spike in prices; and (2) the generally high supply elasticities
in such products that should prevent this. Instead, consistent with what is evident globally, when some unexpected
supply or demand shocks happen, it is often easier for commodity prices to spike temporarily—unrelated to
fundamentals and driven sometimes by local cartelization or other conditions such as sudden flows of speculative
capital into thin commodity futures markets. The case of onion prices is a good example of the former, and spices of
the latter. Onion prices surged from Rs 15 per kg to over Rs 80 per kg over a matter of weeks, attributed popularly
to the effects of extended rainfall and damaged crop in Nashik. However, onions are in fact grown all over India, and
the all-India market is generally well-behaved and competitive—in that local prices converge to national ones. However,
in the presence of unanticipated supply or demand shocks, local onion markets do fragment and become much more
‘ill-behaved’ and it is possible to observe sudden temporary spikes and divergence that is more consistent with local
cartelization conditions, supported by cascading entry barriers along the supply chain (including the restrictions of the
Agricultural Produce Marketing Act [APMC] and the restrictions and fees at mandis). Fundamentals, however, catch
up, as evident in onion prices crashing in recent weeks to about Rs. 25/kg at the retail level and even lower at
wholesale market. Similar conditions apply in commodity exchanges where sudden speculative activity can drive
futures prices temporarily higher—until supplies and fundamentals bring spot and hence futures prices back to
reality. Even vegetable prices (such as tomatoes), which had risen dramatically, are easing back, as supply catches up.

“Well behaved” and convergent regional series of Temporarily less "well-behaved" weekly retail
onion retail prices, Andhra Pradesh, 2006-2008
onion price movements, Northern India, Delhi
18 versus Amritsar, Dec 2009 - Dec 2010
16
70
14
60
Price: R/Kg Retail

12
R/Kg.

10 50
8
6
40
4 30
2
20
Average

2006-07

Jan 2006

Apr 2006

Jul 2006

Oct 2006

Jan 2007

Apr 2007

Jul 2007

Oct 2007

Jan 2008

Apr 2008

10
0
Viziana-garam Kakinada & Jaggaiahpet &
1
5
9
13
17
21
25
29
33
37
41
45
48

& Chittivalasa Rajahmundry Miryalguda

Tirupathi & Nizamabad & Kothagudem & Weeks

Renigunta Bodhan Palwaneha Amritsar Delhi

Website: [Link]
74 Economic Survey 2010-11

(Box 4.1 Continued)

Daily trading value futures surge for spices

200
Daily
180
trading
160 value
140 futures for
spices
R crores

120
grouped
100 together:
80 chillies,
jeera,
60
dhaniya,
40 castor,
20 turmeric
and pepper.
0
11 Oct 10

22 Oct 10

02 Nov 10

13 Nov 10

24 Nov 10

05 Dec 10

16 Dec 10

27 Dec 10

07 Jan 11

18 Jan 11
References: John Baffes and Tassos Haniotis (2010), ‘Placing the 2006/08 Commodity Price Boom into Perspective’, Policy
Research Working Paper 5371, The World Bank. Food and Agriculture Organization (FAO), Global food price monitor,
14 January 2011 and Global Information and Early Warning System (GIEWS) Country Data.

Table 4.3 : Monthly Break-up of WPI Food Inflation

(per cent)
All (A) (B) (A+B)
Commodities Food Articles Food Products Food Combined
Wt% 100 14.34 9.97 24.31
Period 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11

Apr. 0.89 11.00 8.69 20.49 8.86 9.09 8.76 16.09

May 1.21 10.60 8.91 21.37 10.12 7.09 9.37 15.85

Jun. -0.71 10.28 11.28 20.97 9.05 6.13 10.42 15.30

Jul. -0.62 10.02 12.74 18.48 8.46 7.34 11.10 14.31

Aug. 0.31 8.82 14.36 14.96 10.73 4.58 12.97 11.06

Sep. 1.09 8.93 13.92 16.29 12.08 3.62 13.21 11.49

Oct. 1.48 9.12 12.47 14.64 12.97 3.75 12.66 10.56

Nov. 4.50 7.48P 16.73 9.41P 17.94 0.57P 17.17 6.11P

Dec. 6.92 8.43P 20.76 13.55P 19.30 0.35P 20.21 8.59P

Jan. 8.53 20.19 19.16 19.80

Feb. 9.68 21.85 17.68 20.22

Mar. 10.23 20.65 15.11 18.50

Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P—Provisional.

Website: [Link]
 Prices and Monetary Management 75
Table 4.4 : Main Drivers of Food Inflation
WPI y-o-y y-o-y *Financial Financial
Inflation WC year year
inflation WC
Items Weight% Dec. Mar. Dec. Dec. Dec. Apr. Dec.
2009 2010 2010 2010 2010 Dec. 2010
2010
All Commodities 100.00 132.9 135.8 144.1 8.43 100.00 6.11 100.00
Primary Articles 20.12 162.2 165.9 188.9 16.46 47.96 13.86 55.75
Primary Food Articles 14.34 164.6 163.6 186.9 13.55 28.55 14.24 40.25
Rice 1.79 164.5 163.3 166.4 1.16 0.30 1.90 0.67
Wheat 1.12 180.8 172.8 171.6 -5.09 -0.92 -0.69 -0.16
Pulses 0.72 212.1 198.9 189.0 -10.89 -1.48 -4.98 -0.85
Vegetables 1.74 180.0 132.0 224.9 24.94 6.96 70.38 19.43
Potatoes 0.20 240.1 105.4 176.3 -26.57 -1.15 67.27 1.72
Onions 0.18 268.2 171.3 391.1 45.82 1.95 128.31 4.71
Fruits 2.11 136.0 145.6 163.8 20.44 5.23 12.50 4.62
Milk 3.24 151.0 167.2 178.5 18.21 7.95 6.76 4.41
Eggs, Meat, & Fish 2.41 164.3 172.1 195.9 19.23 6.81 13.83 6.92
Condiments & Spices 0.57 202.7 204.9 270.6 33.50 3.45 32.06 4.50
Tea 0.11 165.8 129.1 156.7 -5.49 -0.09 21.38 0.37
Manufactured Food 9.97 142.2 141.7 142.7 0.35 0.45 0.71 1.20
Sugar 1.74 185.7 183.6 167.3 -9.91 -2.85 -8.88 -3.41
Vanaspati 0.71 107.3 108.5 119.6 11.46 0.79 10.23 0.96
Oil, Groundnut 0.30 133.0 131.5 147.8 11.13 0.40 12.40 0.60
Oil, Sunflower 0.17 115.8 112.5 128.4 10.88 0.20 14.13 0.33
Rice Bran Extraction 0.09 210.3 210.4 231.2 9.94 0.17 9.89 0.23
Tea & Coffee Process 0.71 148.6 140.7 160.4 7.94 0.75 14.00 1.69
Malt Liquor 0.15 150.9 150.4 167.1 10.74 0.22 11.10 0.31
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: WC – weighted contribution.

tea and coffee process, and malt liquor. The per cent in September 2010 from 9.18 per cent in
movement of index, inflation, and their contribution April 2010.
to overall inflation among food groups, may be seen
in Table 4.4. 4.12 Main items of concern in non-food inflation
are raw cotton, raw jute, raw silk, copra, castor seed,
4.11 Core inflation is a measure of inflation that sunflower, raw rubber, copper ore, zinc, iron ore,
excludes items that face volatile price movement, cotton textiles, petrochemical intermediate, and
notably food and energy. It is, therefore, a preferred industrial machinery and machine tools. Movement
tool for framing long-term policy. Core inflation, which of index of non-food components in the WPI is
was 0.55 per cent in November 2009, reached its presented in Figure 4.2.
peak in April 2010 at 8.07 per cent (Table 4.5).
Thereafter it has moderated in response to monetary 4.13 In the fuel and power group the major
measures taken by the Reserve Bank of India (RBI). contribution to inflation is from mineral oils
However, inflation in non-food manufactured products accounting for over 90 per cent (Table 4.6).
(weight 55.00 per cent) had not increased much
and remained in the range of 5.1 to 5.9 per cent in Annual inflation as per different price indices
the current financial year. Notwithstanding, year-on- 4.14 The inflation in terms of the consumer price
year inflation in the composite non-food index index for industrial workers (CPI-IW) remained in
(weight 75.7 per cent) has increased to 8.36 per double digits from July 2009 to July 2010. The
cent in December 2010 after moderating to 7.96 inflation in terms of the CPI-AL (Agricultural

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76 Economic Survey 2010-11

Table 4.5 : Movement in WPI Non-food Inflation during 2010-11

(per cent)
Non-food Non-food Minerals Fuel & Power Core inflation Non-food
Composite Articles Manu-
Index factured
Weight 75.69 4.26 1.52 14.91 60.78 55.00
Apr.2010 9.18 18.08 34.56 13.61 8.07 5.92
May-10 8.71 14.76 25.34 14.42 7.27 5.77
Jun.2010 8.47 15.83 22.08 13.92 7.09 5.55
Jul. 2010 8.43 15.30 31.60 13.26 7.16 5.41
Aug.2010 7.97 15.81 23.77 12.55 6.77 5.21
Sep.2010 7.96 20.75 26.77 11.06 7.13 5.09
Oct.2010 8.57 25.74 29.38 11.02 7.91 5.25
Nov.2010 8.02 23.22 21.54 10.32 7.40 5.41
Dec.2010 8.36 22.31 27.69 11.19 7.60 5.34
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: Core Index= Total WPI— (Total food+ Fuel & power).

Figure 4.2 Movement of non-food WPI during 2010

Index (2004-05=100)

180
170 Primary
non-food
160 articles
150 (Wt. 4.26%)
140 Fuel &
power (Wt.
130 14.91%)
120
Manufac-
Dec 09

Jan 10

Feb 10

Mar 10

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10
tured non-
food (Wt.
55.00%)
Year
Total non-
food index
(Wt.
75.69%)

Table 4.6: Index and Contribution of Fuel and Power (disaggregated to overall inflation)
Items Weight WPI:2004-05=100 Dec.2010/Dec.2009 Dec.2010/Mar.2010
% Dec. Mar. Dec. Y-o-Y Y-o-Y FY FY
2009 2010 2010 Inflation WC Inflation WC

Fuel & Power 14.91 135.0 140.1 150.1 11.19 20.10 7.14 17.96
Coal 2.09 162.7 163.0 163.0 0.18 0.06 0.00 0.00
Mineral Oils 9.36 138.6 146.6 160.5 15.80 18.31 9.48 15.68
Electricity 3.45 108.6 108.6 114.0 4.97 1.66 4.97 2.25
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: Y-on-Y—year-on-year.
WC- Weighted Contribution

Labourers) and CPI-RL (Rural Labourers) had come down to single digit for the first time in 15
reached double digits in May 2009 and continued months (Table 4.7).
so until July 2010. Further, inflation in terms of the
CPI-AL and CPI-RL was higher than inflation based 4.15 At 9.47 per cent, inflation in the CPI-IW has
on the CPI-IW during all these months. In August substantially declined in December 2010 from its
2010, the inflation in terms of all price indices has peak of 16.22 per cent in January 2010. The CPI

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 Prices and Monetary Management 77
Table 4.7 : Year-on-Year Inflation Based on Different Consumer Price Indices
Month WPI CPI(IW) CPI(AL) CPI(RL)
(2004-05=100) (2001=100) (1986-87=100) (1986-87=100)
2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11
APR. 0.89 11.00 8.70 13.33 9.09 14.96 9.09 14.96
MAY 1.21 10.60 8.63 13.91 10.21 13.68 10.21 13.68
JUN. -0.71 10.28 9.29 13.73 11.52 13.02 11.26 13.02
JUL. -0.62 10.02 11.89 11.25 12.90 11.02 12.67 11.24
AUG. 0.31 8.82 11.72 9.88 12.89 9.65 12.67 9.66
SEP. 1.09 8.93 11.64 9.82 13.19 9.13 12.97 9.34
OCT. 1.48 9.12 11.49 9.70 13.73 8.43 13.51 8.45
NOV. 4.50 7.48P 13.51 8.33 15.65 7.14 15.65 6.95
DEC. 6.92 8.43P 14.97 9.47 17.21 7.99 16.99 8.01
JAN. 8.53 16.22 17.57 17.35
FEB. 9.68 14.86 16.45 16.45
MAR. 10.23 14.86 15.77 15.52
Average (Apr-Mar) 3.57 12.37 13.91 13.76
Source: Labour Bureau, Shimla and the Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P : Provisional.

maintained higher levels last year relative to the of relatively high inflation is concentrated in food,
WPI, mainly because of the larger weight assigned pan, supari, tobacco and intoxicants, and housing.
to food items. In consumer price indices, food items Two major contributors to high CPI-IW inflation were
contribute a weight of 46.20 per cent in the CPI-IW food and housing. The housing sector is the third
and 69.15 per cent in the CPI-AL as against 24.31 major contributor after food and the miscellaneous
per cent in the WPI. The food inflation has group, having a 15.3 per cent weight in the CPI-IW
decelerated after reaching its peak in January 2010. commodities basket. However, the average inflation
As a result CPI inflation rates have gone down (April-December 2010) was lower than in the
substantially. corresponding period last year (Table 4.8).
4.17 The non-food inflation in CPI-IW has
Disaggregated Consumer Price Inflation
increased during April-December 2010 to 11.64 per
4.16 Analysis at this level has assumed cent as against 8.78 per cent in the corresponding
importance in view of the fact that the current phase period last year. During April-December 2010, food

Table 4.8 : Quarterly Inflation Trend in CPI-IW by Major Commodity Groups (Base: 2001=100)
2009-10 2010-11
Apr.- Jul. Oct. Apr.- Apr. Jul.- Oct.- Apr. -
Weights Jun.- Sep. Dec. Dec. Jun.- Sep. Dec. Dec.

General index 100.00 8.87 11.75 13.06 11.67 13.66 10.31 9.16 10.96
Food Group 46.20 11.47 13.97 16.56 14.70 13.99 10.34 7.01 10.29
Pan, Supari, Tobacco & 2.27 7.44 8.80 7.86 8.34 12.93 12.13 11.26 12.10
Intoxicants
Fuel & Light 6.43 4.59 3.02 3.91 4.08 6.00 11.26 10.84 9.41
Housing 15.27 5.97 22.06 22.06 16.82 33.1 21.08 21.08 24.68
Clothing, Bedding & Footwear 6.57 4.14 4.38 4.22 4.34 4.51 5.51 7.05 5.70
Miscellaneous Group 23.26 7.11 5.95 4.30 6.11 5.03 4.72 5.35 5.03
Total Non-food 53.80 6.45 9.64 9.62 8.78 13.33 10.27 11.42 11.64
Source: Labour Bureau, Shimla.

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78 Economic Survey 2010-11

Figure 4.3 Onions movement in Dec 2010: state wise CPI and Y-o-Y inflation
700 180
Inflation (%)

Y-o-Y inflation (per cent)

600 Dec 10/
150 Dec 09
CPI-IW (2001=100)

500 120
CPI
Dec 09
400 90

CPI
300 60 Dec 10

200 30

100 0
Assam

Bihar

Chandigarh

Chhattisgarh

Delhi

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Kerala

Madhya Pradesh

Maharashtra

Punjab

Rajasthan

Uttar Pradesh

West Bengal

All India
inflation has declined to 10.29 per cent as unprecedented rise in inflation in the northern
compared to 14.70 per cent during the region, particularly Punjab (Figure 4.3).
corresponding period last year (Table 4.8). Inflation
in the CPI-IW has increased in December 2010 to Introduction of CPI-Urban and CPI-Rural
9.47 per cent as against 8.33 per cent in November 4.19 The Central Statistics Office (CSO) has taken
2010. Food inflation in the CPI-IW has also up a new initiative of compilation of CPI (urban), CPI
increased to 7.98 per cent in December 2010 from (rural), and CPI (rural+urban) for all States/UTs and
5.35 per cent in November 2010. all India by considering all sections of the urban
4.18 Inflation in fruits and vegetables and onions and rural population. These indices would reflect
based on the CPI-IW in December 2010 was 15.3 the true picture of price behaviour of various goods
per cent and 77.6 per cent respectively as against and services consumed by the urban and rural
22.77 per cent and 45.82 per cent respectively based population. Box 4.2 is a short note on the CPI
on the WPI. State-wise CPI-IW and year-on-year (urban), CPI (rural), and national CPI giving salient
inflation in December 2010 for onions shows features of this new series of indices.

Box 4.2 : New Series of CPI numbers

1. The CSO has taken an initiative for compilation of new series of urban, rural, and combined (rural+urban) CPI at
State/UT/all India level with increased scope and coverage.
2. CPI (rural) and CPI (urban) would be compiled for each State/UT as well as at all India level. Weighting diagrams
(consumption pattern) of the indices have been derived from the results of the National Sample Survey (NSS) 61st
round of Consumer Expenditure Survey (2004-05).
3. In urban areas, all cities/towns having population (2001 Population Census) more than 9 lakh and all state/UT
capitals not covered therein were selected purposively. In all 310 towns have been selected either on purposive or
random basis from which 1114 quotations (price schedules) are canvassed every month.
4. In rural areas, with a view to having a manageable workload and considering that the CPI (rural) would provide the
price changes for the entire rural population of the country, a total of 1183 villages have been selected at all India level.
The broad criterion of selection of villages is to have representation of all the districts within the State/UT and
therefore two villages from each district adjusted based on rural population of the State/UT have been selected
randomly from different tehsils.
5. The CSO has also decided to bring out a national CPI by merging CPI (urban) and CPI (rural) with appropriate
weights, as derived from NSS 61st round of Consumer Expenditure Survey (2004-05) data.
6. The Technical Advisory Committee on Statistics of Prices and Cost of Living (TAC on SPCL) in its 49th meeting held
on 10 November 2010 decided to take 2010(January-December) as the base year for a new CPI (urban), CPI (rural)
and CPI(rural+urban)series .Indices for January 2011 are likely to be released by February 2011.

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 Prices and Monetary Management 79
Figure 4.4 Annual trend in price indices and PFCED
170
Indices (2004-05=100)

160 PFCED
150
CPI-IW
140
130 CPI-RL
120
110
100

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

PFCED 100.0 103.4 109.9 115.4 122.8 132.9 145.9
CPI-IW 100.0 104.4 111.4 118.3 129.1 145.0 158.3
CPI-RL 100.0 103.9 111.7 119.7 131.9 150.0 163.0

Sources: Labour Bureau and CSO

Note: The PFCED for 2010-11 is based on advance estimates, CPI-IW and CPI-RL for 2010-11 are for the period
April-December 2010.

Private Final Consumption Expenditure deflator’s ability to account for such substitutions
Deflator (PFCED) makes it the preferred measure of inflation. The
CPI-RL represents rural areas, where price indices
4.20 The gross domestic product (GDP) or gross
are reigning higher than the CPI-IW in response
domestic income (GDI) is the market value of all
to improvements in purchasing power and
final goods and services produced within a country
consumption pattern on account of various
in a given period. It is often positively correlated with
the standard of living. Movement of the consumption employment generation schemes of the Government
pattern of a country can be analysed through its like the Mahatma Gandhi National Rural Employment
deflator generated by the Private Final Consumption Guarantee Scheme (MNREGS).
Expenditure (PFCE) at current prices over constant
prices base 2004-05. Annual price indices data for Global and domestic inflation
the CPI-RL, CPI-IW and PFCED from 2004-05 4.22 From April 2009 global food prices showed
onwards indicate an upward swing in the standard much lower volatility than the WPI-based domestic
of living (Figure 4.4). food inflation. However, a higher volatility was seen
4.21 Price changes may cause consumers to in international food inflation from September 2010
switch from buying one good to another. Whereas as compared to domestic food inflation in India.
the fixed basket CPI does not account for altered Costlier imports could push up domestic inflation
spending habits caused by price changes, the PFCE (Figure 4.5 and Table 4.9).

Figure 4.5 Global and domestic food inflation

40
Y-o-Y inflation (per cent)

30 Global food
inflation
20
10 Domestic
0 food
inflation
-10
-20
-30
-40
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

2008-09 2009-10 2010-11

Year

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80 Economic Survey 2010-11

Table 4.9 : Domestic and Global Y-o-Y Inflation Trend (per cent)
(base: 2004-05=100 )
Commodity Domestic Global Domestic Global Domestic Global
Dec-09 Dec-09 Mar-10 Mar-10 Dec-10 Dec-10

Agriculture 18.5 28.5 20.6 17.8 15.3 27.8

Beverages 6.5 27.8 8.2 23.0 5.3 32.4
Energy 4.6 55.4 13.8 60.1 11.2 19.7
Fats & Oils -0.7 34.6 3.3 18.2 5.0 35.4
Fertilizers 7.0 -41.7 6.2 -27.1 5.5 39.6
Food 20.2 23.8 18.5 8.5 8.6 25.3
Grains 19.5 5.0 13.2 -10.3 -2.6 25.3
Metal & Minerals -7.1 42.8 3.4 41.4 12.4 38.6
Non-fuel 7.4 27.8 9.6 23.0 7.9 32.4
Raw Materials 11.1 36.5 26.1 44.0 24.1 45.8
Timber -1.3 -9.2 8.8 -5.6 50.3 13.4
Other Raw materials 18.3 88.4 44.2 91.1 33.6 63.5
Other Food 16.3 30.7 7.0 16.9 -0.5 10.2

Sources : Pink sheet of the World Bank and the Office of the Economic Adviser, Ministry of Commerce and Industry.

4.23 A comparison of the global food inflation and The pilot study covered 5 cities, namely Bengaluru,
WPI-based domestic food inflation gives the actual Bhopal, Delhi, Kolkata, and Mumbai. Thereafter,
picture of food inflation (Table 4.9). compilation of RESIDEX has been expanded to ten
more cities, namely Ahmedabad, Faridabad,
4.24 During the current year, high inflation in food
Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow,
articles is not unique to India and is widespread.
Pune, and Surat. RESIDEX is now being updated
The domestic food price situation could get
on a quarterly basis with 2007 as base year. The
exacerbated by the increase in global food prices
latest data cover 15 cities and have been updated
because of dependency on import of some food
up to June 2010 (April – June).
items like edible oils. Current growth and inflation
trends warrant persistence with an anti-inflationary 4.27 The movement in prices of residential
monetary stance. properties has shown a mixed trend in the 15 cities
covered under the NHB RESIDEX in the first half of
Housing Price Index (NHB- RESIDEX) 2010. Residential housing prices in 10 cities have
4.25 As one of the most populous and fastest- shown an increasing trend compared to the base
growing countries in the world, India has promising year. They are Surat, Mumbai, Lucknow,
conditions for a vibrant housing market with Ahmedabad, Chennai, Pune, Kolkata, Patna,
considerable growth potential. The housing sector Faridabad and Bhopal. However, the 5 cities that
contributes more than 9 per cent of national have shown correction in prices in first half of 2010
employment. Housing finance in India, however, are Jaipur, Bengaluru, Kochi, Delhi and Hyderabad.
remains underdeveloped. The challenge in the Indian Jaipur has shown the maximum price correction in
housing market is primarily in the low and moderate residential property prices (Figure 4.6).
income segments. Though there is no lack of
demand for housing, there is shortage of credit flow. Measures to contain inflation
4.26 RESIDEX was first launched in 2007 by the 4.28 The Government monitors the price situation
National Housing Bank (NHB) to provide an index of regularly as price stability remains high on its
residential prices in India across cities and over agenda. Measures taken to contain prices of
time. Initially a pilot study was conducted with 2001 essential commodities include selective ban on
as base year during the period 2001- 05 to capture exports and futures trading in foodgrains, zero
the trend of price movements in residential property. import duty on select food items, permitting import

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 Prices and Monetary Management 81
Box 4.3 : Measures to Contain Inflation, Particularly Food Inflation
(A) Monetary Measures
As part of the monetary policy review, the RBI has taken suitable measures to moderate demand to levels consistent
with the capacity of the economy to maintain its growth without provoking price rise. It has already raised its key
policy rates several times and has narrowed the liquidity adjustment facility (LAF) corridor to reduce volatility of
rates. The economy has witnessed aggressive tightening since March 2010. As per the announcement of the RBI on
25January 2011, the repo rate and reverse repo rate are 6.5 per cent and 5.5 per cent respectively.

(B) Fiscal Measures

1. Import duties reduced to zero on rice, wheat, pulses, edible oils (crude), butter, and ghee and to 7.5 per cent on
refined and hydrogenated oils and vegetable oils;
2. Import of raw sugar allowed at zero duty under open general licence (OGL).

(C) Administrative Measures

1. Levy obligation in respect of all imported raw sugar and white/refined sugar removed.
2. Export of non-basmati rice, edible oils (except coconut oil and forest based oil) and pulses (except Kabuli chana)
banned.
3. Minimum export price (MEP) used to regulate exports of onion (at US$1200 per tonne for December 2010) and
basmati rice (at US$900 per MT);
4. Futures trading in rice, urad, and tur suspended by the Forward Market Commission.
5. Stock limit orders extended in the case of pulses, paddy, and rice up to 30 September 2011 and edible oil and
edible oilseeds up to 31March 2011.
6. Export of Onion (all varieties) not permitted with effect from 22 December 2010 until further orders.
7. Full exemption from basic custom duty, special additional duty and education cess provided to onions and
shallots with effect from 21 December 2010.
8. NAFED and NCCF to undertake sale of onions at Rs 35 per kg from their retail outlets at various locations, with
suitable budgetary support to be provided for this purpose.
9. Other measures with a wider horizon include the following:
a. A scheme to support the State Governments in the setting up of farmers’ mandis and mobile bazaars and
improve the functioning of civil supplies corporations and cooperatives will be finalized urgently.
b. The existing PDS will be suitably strengthened through computerization and other steps, including opening
more procurement windows across the country.
c. State Governments would be urged to review the APMC Acts and, in particular, consider exempting horticultural
products from their purview thereby mitigating marketing and distribution bottlenecks in this crucial sector.
State Governments will also be urged to consider waiving mandi tax, octroi, and other local levies which impede
smooth movement of essential commodities, as well as to reduce commission agent charges.
d. Investment will be encouraged in supply chains, including provisions for cold storages, which will be dovetailed
with organized retail chains for quicker and more efficient distribution of farm products, minimizing wastage.
The DIPP, Department of Food and Public Distribution, Ministry of Food Processing Industries, and the
Planning Commission will jointly work out schemes for this purpose.
e. An Inter-Ministerial Group (IMG) has been set up under the Chief Economic Adviser, Ministry of Finance, to
review the overall inflation situation, with particular reference to primary food articles. The IMG will, inter alia,
review production/ rainfall trends and build an institutional machinery to read warning signals, assess
international trends, recommend action on the fiscal, monetary, production, marketing, distribution, and
infrastructure fronts to prevent price spikes, and suggest measures to strengthen collection and analysis of
data and forecasting.
f. The Committee of Secretaries under the Cabinet Secretary will review the prices situation with individual
States, and advise the Departments concerned of the Central Government to maintain close coordination with
State agencies to get direct feedback with a view to taking suitable remedial measures on a fast track.

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82 Economic Survey 2010-11

Figure 4.6 Movement in city-wise average RESIDEX

190
2007
Index (2007=100)

170
150
2008
130
110 2009
90
2010 H-1
70
50
Surat

Pune

Patna

Mumbai

Lucknow

Kolkata

Kochi

Jaipur

Hyderabad

Faridabad

Delhi

Chennai

Bhopal

Bengaluru

Ahmedabad
of pulses and sugar by public-sector undertakings, scheduled commercial banks (SCBs) to its pre-
distribution of imported pulses and edible oils crisis level.
through the PDS, and release of higher quota of
4.30 As there were clear signs that the recovery
non-levy sugar. In addition, State Governments are
was consolidating, it was felt that the main policy
empowered to act against hoarders of food items
instruments were at levels more consistent with a
by holding in abeyance the removal of restrictions
fast recovering economy than a crisis economy
on licensing, stock limits, and movement of food
articles under the Essential Commodities Act 1955. and it was imperative therefore to carry forward
Some of the important anti-inflationary measures the process of exit from an accommodative policy
taken are given in Box 4.3. stance. Taking this consideration into account,
during 2010-11 the RBI raised the policy rates six
times whereby the repo rate under the LAF has
MONETARY DEVELOPMENTS DURING cumulatively been increased by 175 basis points
2010-11 (bps) to stand at 6.5 per cent and the reverse repo
rate by 225 bps to 5.5 per cent. The RBI has
4.29 In response to the global financial crisis moreover retained the cash reserve ratio (CRR) at
beginning mid-September 2008, the RBI adopted 6 per cent of the net demand and time liabilities
an accommodative monetary policy stance that (NDTL) of banks. Thus in 2010-11, the persistently
helped instil confidence among market participants high inflation above the comfort level of the RBI ,
and ensure that the economy recovered as quickly together with growth buoyancy, necessitated that
as possible. The Indian economy exhibited the monetary policy focus remain on containing
acceleration in the momentum of recovery during inflation and inflationary expectations.
the course of 2009-10. Despite a deficient monsoon,
4.31 The RBI indicated in its First Quarter Review
the expansionary monetary and fiscal stance
of Monetary Policy (27 July 2010) that it will now
adopted in response to the global crisis contributed
undertake mid-quarter reviews roughly at the
to the recovery. After remaining subdued during
interval of one and half months after each quarterly
the first half of the year, headline inflation spiked
review. By instituting these, it was the Bank’s
in the second half, initially driven by high food
intention to take the surprise element out of off-
prices but turning more generalized over successive
cycle actions. Accordingly, the Reserve Bank
months. In view of rising food inflation and the risk
announced the mid quarter monetary policy review
of it impinging on inflationary expectations alongside
on 16 September 2010 and 16 December 2010.
the consolidating recovery, the RBI stated a clear
shift in stance from ‘managing the crisis’ to 4.32 In 2010-11, the RBI continued its policy of
‘managing the recovery’ and announced the first maintaining adequate liquidity in the system so that
phase of exit from the expansionary monetary policy all legitimate credit requirements for productive
in its Second Quarter Review of October 2009 by purposes were met, consistent with the objective of
terminating some sector-specific facilities and price and financial stability. The management of
restoring the statutory liquidity ratio (SLR) of liquidity was achieved through appropriate use of

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 Prices and Monetary Management 83
open market operations (OMOs), the Market 4.35 The current monetary policy stance, as
Stabilization Scheme (MSS), LAF, and a slew of indicated in the Bank’s Second Quarter Review
special facilities. While the overall liquidity in the (November 2010) was as follows:
system has remained in deficit consistent with the
a. Contain inflation and anchor inflationary
policy stance, the extent of tightness has been
expectations while being prepared to respond
beyond the comfort level of the RBI of (+)/(-) 1 per to any further build-up of inflationary
cent of NDTL, mainly due to the persistence of pressures.
large Government cash balances. In addition, the
liquidity deficit has been accentuated by structural b. Maintain an interest rate regime consistent
factors such as significantly above-trend currency with price, output, and financial stability.
expansion and relatively sluggish growth in bank c. Actively manage liquidity to ensure that it
deposits even as the credit growth accelerated in remains broadly in balance, with neither a
2010-11. While the liquidity deficit improved surplus diluting monetary transmission nor
transmission of monetary policy signals with several a deficit choking off fund flows.
banks raising deposit and lending interest rates,
excessive deficits induce unpredictability in both In the same document the RBI observed that ‘based
availability and cost of funds, making it difficult for purely on current growth and inflation trends, the
the banking system to sustain credit delivery. Reserve Bank believes that the likelihood of further
rate actions in the immediate future is relatively low’.
4.33 In view of the persistent liquidity pressures, This indication of pause will not deter it from taking
the RBI in November 2010 implemented some further policy actions if required and, accordingly, it
measures such as additional liquidity support to also indicated that ‘however, in an uncertain world,
SCBs under the LAF up to 2.0 per cent of their we need to be prepared to respond appropriately to
NDTL, continuation of the second LAF (SLAF), and shocks that may emanate from either the global or
OMO purchase of Government securities. domestic environment’. In continuation of that
Subsequently in the mid quarter review, 16 announced policy, and renewed inflationary
December 2010, the RBI reduced the SLR of SCBs pressures, especially in food prices, the RBI raised
from 25 per cent of their NDTL to 24 per cent with policy rates again in January 2010 by 25 bps in
effect from 18 December 2010. Furthermore, it their Third Quarter Review.
decided to conduct OMO auctions for purchase of
government securities for an aggregate amount of Trends in Monetary Aggregates
` 48,000 crore in the next one month. It was also
4.36 During the year 2010-11, the growth rates of
clearly communicated that as the economy
reserve money (M0) and narrow money (M1)1 have
expands, it needs primary liquidity, which will have been higher as compared to the preceding year
to be provided in a manner consistent with the while broad money (M3) growth has been lower
monetary policy stance. Such provision of liquidity (Table 4.10). The moderation in growth of narrow
should not be construed as a change in the monetary and broad money is largely on account of the
policy stance since inflation continues to remain a deceleration in growth of deposits, both demand and
major concern. time (up to 3 December 2010).
4.34 To sum up, the underlying growth momentum
of the Indian economy remains strong. Even as Reseve Money (M0)
inflation has moderated, it remains significantly 4.37 During 2010-11, on a financial-year basis,
above the comfort level of the RBI. Moreover, risks M0 expanded by 8.4 per cent (up to 10 December
to inflation remain on the upside, both from domestic 2010), compared to an increase of 1.6 per cent
demand and higher global commodity prices. There during the corresponding period of the preceding
is, therefore, a need for continued vigilance on the year (Table 4.11).
inflation front against the build-up of demand-side
4.38 The net foreign assets (NFA) of the RBI
pressures. A major challenge for the RBI in recent
increased by 6.1 per cent during this period, as
times has been liquidity management. It is the RBI’s
against an increase of 1.5 per cent during the
endeavour to alleviate the liquidity pressure in a
corresponding period of the previous year. On a year-
manner consistent with the monetary policy stance
on-year basis, as on 11 December 2010, the NFA
of containing inflation and anchoring inflationary
of the RBI marginally increased by 0.6 per cent
expectations.
compared to a 6.8 per cent increase a year earlier
1
For the period up to 19 November 2010. (Figure 4.7).

Website: [Link]
84 Economic Survey 2010-11

Table 4.10 : Movement of select monetary parameters

(per cent)
Items Yearly Variation Growth rates as on December 3, 2010
2008-09 2009-10 Financial-year basis Year-on-year basis
2009-10 2010-11 2009-10 2010-11
M0 6.4 17 1.7 6.3 15.3 22.2
M1 9 18.6 5.1 3.1 18.3 16.5
M3 19.3 16.8 9.6 8.2 18.6 15.3
Source : RBI

Table 4.11 : Sources of change in reserve money

(per cent)
Growth rate
Financial-year basis Year -on-Year
Dec. 11 Dec. 10, Dec. 11 Dec. 10,
2009 2010 2009 2010
over over over over
2009-10 March 31, March 31, Dec. 12, Dec. 11
2009 2010 2008 2009

Reserve Money 17 1.6 8.4 12.8 24.8

A. Components

a) Currency in Circulation 15.7 10.8 14 17.2 19

b) Bankers’ Deposits with RBI 21 -19.6 -4.1 1.2 44.2

c) Other Deposits with RBI -31.1 -34.4 0.3 -28 5.5

B. Select Sources of Reserve Money

1. Net Foreign Exchange Assets of RBI -3.8 1.5 6.1 6.8 0.6

2. Government’s Currency Liabilities to the Public 12.1 7.7 4.4 10.6 8.6

3. Net Non-monetary Liabilities of RBI -22.3 -1.5 17.1 19.5 -7.6

Source: RBI.

Figure 4.7 Reserve money and RBI net foreign exchange assets-annual growth rate
30
25 RM
20
NFA
15
Per cent

10
5
0
-5
-10
Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009-10 2010-11
Year

Website: [Link]
 Prices and Monetary Management 85
4.39 Net RBI credit to the Central Government cent during the corresponding period of the
increased by ` 70,856 crore during the financial previous year. On a year-on-year basis, as on 3
year so far (up to 10 December 2010). This was December 2010, the growth of currency with the
mainly on account of increase in repo operations public was higher at 18.7 per cent as compared to
under the LAF and open market purchases of the 17.2 per cent a year earlier. For the same period,
Bank, partly offset by increase in the cash balances growth in demand deposits was 13.7 per cent as
of the Central Government. On a year-on-year basis, compared to 19.9 per cent a year earlier.
increase in the net RBI credit to the Central
Government, as on 10 December 2010, was Broad money (M3)
` 2,10,714 crore as against an increase of ` 98,273 4.42 Broad money (M3) supply increased by 16.8
crore a year earlier. per cent during 2009-10 which was lower than the
17.0 per cent indicative growth envisaged in the
Narrow Money (M1) Annual Policy Statement of the Reserve Bank for
4.40 Narrow money (M1) increased by 18.6 per 2009-10.
cent in 2009-10 as compared to an expansion of
4.43 The main components and sources of broad
9.0 per cent during 2008-09. During 2010-11, M1
money are indicated in Table 4.12.
growth has generally been higher than in 2009-10,
though there was significant deceleration during 4.44 Time deposits with banks during 2010-11
the latest fortnight for which data are available (i.e., grew at a lower rate of 10.1 per cent (up to 3
3 December 2010). On a financial-year basis, M1 December 2010) as compared to 11.2 per cent
increased by 3.1 per cent during the current year during the corresponding period of the previous
(up to 3 December 2010) compared to increase of year. On a year-on-year basis also, as on 3
5.1 per cent during the corresponding period of December 2010, the growth in time deposits
the previous year. On a year-on-year basis, as on moderated to 14.9 per cent from 18.7 per cent a
3 December 2010, M1 growth was 16.5 per cent as year earlier (Table 4.12).
compared to 18.3 per cent a year earlier (Figure
4.45 During the current financial year 2010-11
4.8). During the current financial year (up to 3
(up to 3 December 2010) the growth in M3 was 8.2
December 2010), currency with the public
per cent as compared to 9.6 per cent during the
expanded by 12.9 per cent (` 99,324 crore),
corresponding period of the previous year. On a
compared to an increase of 9.8 per cent (` 64,962
year-on-year basis, M3 grew by 15.3 per cent on 3
crore) during the corresponding period of the
December 2010, as against growth of 18.6 per cent
previous year.
on the corresponding date of the previous year
4.41 The other important component of M 1 , (Table 4.12 and Figure 4.9). This is lower than the
namely demand deposits with banks decreased by indicative 17.0 per cent target set in the Second
7.3 per cent during the period up to 3 December Quarter Review of the Annual Policy Statement for
2010 as against a marginal increase of 0.1 per 2010-11.

Figure 4.8 Narrow money (M1) - annual growth rate

24
22 2008-09
20
18 2009-10
16
Per cent

14 2010-11
12
10
8
6
4
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan
13 Feb
27 Feb
13 Mar
27 Mar

Website: [Link]
86 Economic Survey 2010-11

Table 4.12 : Sources of Change in Money Stock (M3)

Growth Rate
31 March 31 March 31 March 5 December 4 December
2009 2009 2010 2008 2009
to to to to to
31 March 4 December 3 December 4 December 3 December
2010 2009 2010 2009 2010
(per cent)
I. M1 (Narrow Money) 18.6 5.1 3.1 18.3 16.5
II. M3 (Broad Money) (1+2+3+4) 16.8 9.6 8.2 18.6 15.3
1. Currency with the Public 15.4 9.8 12.9 17.2 18.7
2. Demand Deposits with Banks 22.8 0.1 -7.3 19.9 13.7
3. Time Deposits with Banks 16.1 11.2 10.1 18.7 14.9
4 Other’ Deposits with RBI -31.1 -33.7 9.1 -23.1 13.4
III. Sources of Change in Money Stock (M3)
1. Net Bank Credit to Government 30.5 19.4 8.7 38.2 18.8
of which:
Other Banks’ credit to
Government 19.7 19.5 6.9 26.7 7.1
2. Bank Credit to Commercial Sector 15.9 4.8 10.3 10.5 21.9
of which:
Other Banks’ credit to
Commercial Sector 16.3 5.1 10.3 10.4 22.0
3. Net Foreign Exchange Assets of
the Banking Sector -5.2 -0.3 5.3 9.0 0.1
4. Government’s Currency
Liabilities to the Public 12.1 7.7 4.4 10.6 8.6
5. Banking Sector’s Net Non-
monetary Liabilities Other than
Time Deposits 16.0 15.1 9.9 23.4 10.8
Memo Items:
1. Money Multiplier (M3\M0) 4.85
2. Velocity of Money 1.20
3. Net Domestic Assets 25.4 13.5 9.1 22.2 20.6
4. Net Domestic Credit 20.2 9.2 9.8 18.2 20.9
Source : RBI.

Figure 4.9 Broad money (M3) - annual growth rate

24
2008-09
22
2009-10
20
Per cent

2010-11
18

16

14
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan
13 Feb
27 Feb
12 Mar
27 Mar

Website: [Link]
 Prices and Monetary Management 87
Figure 4.10 Bank credit to commercial sector - annual growth rate
30
2008-09
25
2009-10
20
Per cent

2010-11
15

10

5
13 Apr
27 Apr
11 May
25 May
08 Jun
22 Jun
06 Jul
20 Jul
03 Aug
17 Aug
31 Aug
14 Sep
28 Sep
12 Oct
26 Oct
09 Nov
23 Nov
07 Dec
21 Dec
04 Jan
18 Jan
01 Feb
15 Feb
29 Feb
14 Mar
28 Mar
4.46 Among the sources of M3, however, bank close to the indicative projection of 17 per cent,
credit to the commercial sector has been non-food credit growth at 24.4 per cent was much
accelerating since November 2009 (Figure 4.10). above the indicative projection of 20 per cent.
Credit expansion in the recent period has been
Money Multiplier rather sharp, far outpacing the expansion in
4.47 During 2009-10, the expansion in M0 was deposits. Rapid credit growth without
higher than that in M3. Accordingly, the ratio of M3 commensurate increase in deposits is not
to M0 (money multiplier) showed a decrease. At the sustainable, with banks having to rely on borrowing
end of March 2010, this ratio was 4.8, marginally from the Central bank. As a result of injection of
lower than the end-March 2009 figure of 4.11. During primary liquidity of over ` 67,000 crore through
the current financial year 2010-11, the money OMO auctions since early November 2010, the
multiplier has generally shown a decreasing trend structural liquidity deficit in the system has declined
on account of reserve money registering a higher significantly.
growth than broad money supply. As on 3 December
2010, the money multiplier was 4.9 compared to 4.49 Monetary deepening, as measured by the
5.2 on the corresponding date of the previous year ratio of average M3 to the GDP, increased from
(Figure 4.11). 43.8 per cent in 1990-91 to 83.1per cent in 2009-
10. This could be attributed to the spread of banking
Movement in other monetary indicators services in the country and development of the
4.48 While the year-on-year money supply (M3) financial sector. The monetization of the economy
growth at 16.5 per cent in December 2010 was as measured by the ratio of average M1 to the GDP

Figure 4.11 Movements in money multiplier

6.0
2008-09
5.6
2009-10
5.2
Per cent

2010-11
4.8

4.4

4.0
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Feb
13 Feb
27 Feb
12 Mar
26 Mar
31 Mar

Website: [Link]
88 Economic Survey 2010-11

Table 4.13 : Select monetary aggregates (ratios to GDP)

As per cent of GDP at Market Prices (1999-2000 base)
Currency Demand deposits Time deposits Aggregate M1 M3
with public with banks with banks deposits

1990-91 8.7 6.4 28.5 34.9 15.3 43.8

1991-92 8.8 6.9 28.8 35.7 15.9 44.7
1992-93 8.6 6.9 29.8 36.6 16 45.7
1993-94 8.8 6.6 30.3 36.9 15.7 46.1
1994-95 9.1 7.2 30.4 37.6 16.7 47.1
1995-96 9.4 6.7 29.8 36.5 16.6 46.4
1996-97 9.2 6.5 30.5 37 16.1 46.6
1997-98 9.3 6.7 33 39.7 16.3 49.2
1998-99 9.1 6.7 35.5 42.2 16 51.5
1999-00 9.5 6.8 37.7 44.5 16.4 54.1
2000-01 9.6 7.2 41.3 48.5 17 58.2
2001-02 10 7.4 44.9 52.2 17.5 62.3
2002-03 10.5 7.5 49 56.5 18.2 67.1
2003-04 10.7 7.8 48.9 56.7 18.7 67.6
2004-05* 10.4 8 47 55 18.5 65.5
2005-06* 10.3 8.8 46.8 55.6 19.3 66.1
2006-07* 10.5 9.4 48.8 58.2 20 68.9
2007-08* 10.5 9.5 52.7 62.2 20.1 72.8
2008-09* 11 9.3 57.5 66.8 20.4 77.9
2009-10* 11.4 9.7 61.9 71.5 21.2 83.1
Source : RBI.
Note:* Based on GDP data with 2004-05 as base.

Figure 4.12 Select monetary aggregates as per cent of GDP

90
Ratios to GDP (per cent)

80 Aggregate
deposits
70
60
M1
50
40 M3
30
20
10
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Year

has also shown an upward trend, albeit at a slower 15.3 per cent and it increased to 21.2 per cent in
rate, during this period. In 1990-91, this ratio was 2009-10 (Table 4.13 and Figure 4.12).

Website: [Link]
 Prices and Monetary Management 89
LIQUIDITY MANAGEMENT further build-up of inflationary pressure, the RBI
increased the repo and reverse repo rates as well
4.50 The Reserve Bank continued its active policy as CRR by 25 bps each in April 2010 in the Annual
of liquidity management through the LAF, CRR, Monetary Policy for [Link] surplus liquidity
and OMOs. During 2010-11 so far, the centre’s in the domestic market gradually declined
surplus balance with the RBI has been a key driver thereafter. A significant development was that the
of autonomous liquidity. Currency in circulation LAF window of the RBI, after remaining in surplus
has been another key determinant of autonomous mode for nearly 18 months, switched into deficit
liquidity. The LAF window of the Reserve Bank, mode towards the end of May 2010 mainly on
which remained in surplus mode for nearly 18 account of 3G (3rd generation spectrum) and BWA
months, switched into deficit mode towards end- (broadband wireless access) auctions and the
May 2010 and largely maintained the trend consequent migration of liquidity to the Central
subsequently. Government’s cash balance account with the RBI.
4.51 The liquidity conditions changed significantly In anticipation of temporary tightening of liquidity
during the first quarter of 2010-11. The gradual conditions, the RBI introduced measures allowing
moderation in volume of surplus liquidity in the SCBs to avail of additional liquidity support under
system since February 2010 reflected the the LAF to the extent of up to 0.5 per cent of their
calibrated normalization of the monetary policy by NDTL and also access to the SLAF on a daily basis
the RBI. Accordingly, the LAF remained in the for the period 28 May - 2 July 2010. The average
absorption mode, though the absorption volume daily liquidity injection under the LAF during June
declined gradually. To anchor inflation and prevent 2010 was around ` 47,000 crore in contrast to the

Table 4.14 : Liquidity management

(` crore)
Outstanding as on last Friday LAF MSS Centre’s surplus* Total
of the month
2009
January 54,605 1,08,764 -9166 1,54,203
February 59,820 1,01,991 -9603 1,52,208
March** 1485 88,077 16,219 1,05,781
April 1,08,430 70,216 -40412 1,38,234
May 1,10,685 39,890 -6114 1,44,461
June 1,31,505 22,890 12,837 1,67,232
July 1,39,690 21,063 26,440 1,87,193
August 1,53,795 18,773 45,127 2,17,695
September 1,06,115 18,773 80,775 2,05,663
October 84,450 18,773 69,391 1,72,614
November 94,070 18,773 58,460 1,71,303
December 19,785 18,773 1,03,438 1,41,996
2010
January 88,290 7737 54,111 1,50,138
February 47,430 7737 33,834 89,001
March* 990 2737 18,182 21,909
April 35,720 2737 -28,868 9589
May 6215 317 -7531 -999
June -74,795 317 76,431 1953
July 1775 0 16,688 18,463
August 11,815 0 20,054 31,869
September -30,250 0 65,477 35,227
October -1,17,660 0 86,459 -31,201
November -1,03,090 0 93,425 -9665
Note : * Excludes minimum cash balances with the RBI in case of surplus.
** Data pertain to 31March.
-ve sign under LAF indicates injection of liquidity through the LAF.
-ve sign under Centre’s surplus indicates WMA /OD (ways and means advances/overdraft).

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90 Economic Survey 2010-11

Figure 4.13 LAF reverse - repo and repo volume

200

150 FLAF

100
R thousand crores

SLAF
50

-50

-100

-150
01 Jan
01 Feb
01 Mar
01 Apr
01 May
01 Jun
01 Jul
01 Aug
01 Sep
01 Oct
01 Nov
01 Dec
01 Jan
01 Feb
01 Mar
01 Apr
01 May
01 Jun
01 Jul
01 Aug
01 Sep
01 Oct
01 Nov
01 Dec
01 Jan
2008-09 2009-10 2010-11
Year
Note: 1) Reverse repo is positive and repo is negative. 2) The second LAF (SLAF) is usually being conducted on Reporting Fridays with effect from
May 8, 2009. As a part of liquidity easing measures, SLAF on a daily basis is temporarily being conducted till January 28, 2011.

average daily absorption of around ` 33,000 crore (announced on 27 July). The liquidity conditions
in May 2010 ( Table 4.14 and Figure 4.13). improved in August 2010 (mainly on account of large
pre-scheduled public debt redemptions on 28 July
4.52 During the second quarter, July-September,
2010), and the average daily net injection of liquidity
of 2010-11, the liquidity conditions generally declined to around ` 1000 crore during the month.
remained in deficit mode. On 2 July 2010, the RBI After a brief period of surplus liquidity (from end-
hiked the repo and reverse repo rates by 25 bps August to early September 2010), the liquidity
each to 5.50 per cent and 4.0 per cent respectively. conditions again switched to injection mode as
With the persistence of deficit liquidity conditions, liquidity migrated to Government account with the
the Bank extended the liquidity-easing measures RBI on account of quarterly advance tax outflows.
introduced earlier. The SCBs were permitted to avail On the basis of assessment of the macroeconomic
of additional liquidity support under the LAF to the situation, the RBI increased the repo rate and reverse
extent of up to 0.5 per cent of their NDTL2. The repo rate by 25 bps and 50 bps respectively in the
SLAF on a daily basis was also extended till 16 mid-quarter monetary policy review (announced on
July 2010. On an assessment of the prevailing 16 September 2010). The liquidity conditions
overall liquidity conditions and with a view to remained tight in the second half of September 2010
providing flexibility to SCBs in liquidity management, as the surplus cash balances of the Centre started
the RBI further extended the SLAF on a daily basis building up, and the average daily net outstanding
till 30 July 2010. The average daily liquidity injection liquidity injection was around ` 24,000 crore during
under the LAF remained at around ` 47,000 crore the month.
during July 2010. In view of the evolving inflationary 4.53 The liquidity conditions tightened further in
scenario, the RBI raised the repo rate and reverse October 2010 on account of increase in Government
repo rate further by 25 bps and 50 bps, to 5.75 per surplus balances and currency in circulation due to
cent and 4.50 per cent respectively in the First festive season demand. The average daily net
Quarter Review of Monetary Policy 2010-11 outstanding liquidity injection was around ` 62,000

2
For any shortfall in maintenance of the SLR arising out of availment of this facility, banks were allowed se ek waiver of penal
interest.

Website: [Link]
 Prices and Monetary Management 91
Figure 4.14 Market stabilisation scheme
300

250 Actuals
R thousand crores

200 Limits

150

100

50

0
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2007-08 2008-09 2009-10 2010-11
Year

crore for the entire October 2010. However, the net on shortfall in maintenance of the SLR to the extent
liquidity injection crossed ` 1,00,000 crore on 29 of 1 per cent of NDTL for availing of additional liquidity
October 2010. In order to ease the frictional liquidity support under the LAF), to remain in force till 16
pressure, the RBI announced certain temporary December 2010. The average daily net liquidity
measures, namely conduct of special SLAF on 29 injection during the month was around ` 99,300
October and 1 November 2010, conduct of a special crore. The liquidity conditions have remained in high
two-day repo auction under the LAF on 30 October deficit so far in December 2010 (till 20 December)
2010, and waiver of penal interest on shortfall in as huge quarterly advance tax payments have
maintenance of SLR (on 30-31October) to the extent increased the liquidity stress in the system. The
of 1 per cent of NDTL for availing of additional liquidity RBI conducted purchase of Government securities
support under the LAF. The RBI extended these through auction as part of its OMOs for an aggregate
liquidity-easing measures further and conducted amount of `12,000 crore each on 9 December 2010
SLAF on all days during 1-4 November 2010 and and 15 December 2010; and accepted an aggregate
extended the waiver of penal interest on shortfall in amount of ` 10,120 crore and `11,706 crore
maintenance of SLR ( to the extent of 1 per cent of respectively in the auctions. The average daily net
NDTL) for availing of additional liquidity support under outstanding liquidity injection was around ` 1,10,000
the LAF till 7 November 2010. To contain inflation crore during 1-20 December 2010.
and anchor inflationary expectations, the RBI
increased the repo and reverse repo rates by 25 bps 4.54 While the overall liquidity in the system has
each in the Second Quarter Review of Monetary remained in deficit consistent with the policy stance,
Policy on 2 November 2010. Consistent with the the extent of tightness has been beyond the comfort
stance of monetary policy and based on the level of the RBI. The RBI decided to (i) reduce the
assessment of prevailing and evolving liquidity SLR of SCBs from 25 per cent of their NDTL to 24
conditions, the RBI conducted purchase of per cent with effect from 18 December 2010;(ii)
government securities under its OMOs for an conduct OMO auctions for purchase of Government
aggregate amount of ` 12,000 crore on 4 November securities for an aggregate amount of `48,000 crore
2010 and accepted an aggregate amount of ` 8352 in the next one month. These two measures are
crore in that auction. The high deficit liquidity expected to inject liquidity of the order of ` 48,000
conditions continued in November 2010 with the crore on an enduring basis. The reduction of the SLR
persistence of high Government balances and rise will free securities and once banks can borrow at
in currency in circulation. On 9 November 2010, the the LAF window with these excess SLR securities,
RBI has re-introduced liquidity-easing measures borrowers can shift from costlier sources to the LAF
(SLAF on a daily basis, the waiver of penal interest window ( Figure 4.14 and Table 4.15).

Website: [Link]
92 Economic Survey 2010-11

Table 4.15 : Call money market

Call Turnover Call Rate LAF MSS
(` crore) (per cent)^ (` crore)# (` crore)*
2009-10
Mar.2009 23,818 4.17 33,360 88,077
Apr.2009 21,820 3.28 1,01,561 75,146
May2009 19,037 3.17 1,25,728 45,955
Jun.2009 17,921 3.21 1,23,400 27,140
Jul.2009 14,394 3.21 1,30,891 22,159
Aug.2009 15,137 3.22 1,28,275 19,804
Sep.2009 16,118 3.31 1,21,083 18,773
Oct.2009 15,776 3.17 1,01,675 18,773
Nov-09 13,516 3.19 1,01,719 18,773
Dec.2009 13,302 3.24 68,522 18,773
Jan.2010 12,822 3.23 81,027 9944
Feb.2010 13,618 3.17 78,661 7737
2010-11
Mar.2010 17,624 3.51 37,640 3987
Apr.2010 16,374 3.49 57,150 2737
May2010 16,786 3.83 32,798 922
Jun.2010 14,258 5.16 -47,347 317
Jul.2010 18,954 5.54 -46,653 254
Aug.2010 15,916 5.17 -1048 0
Sep.2010 17,212 5.50 -24,155 0
Oct.2010 17,840 6.39 -61,658 0
Nov.2010 17,730 6.81 -99,311 0
Source : RBI.
Notes : ^ : Average of daily weighted call rate. * : Average of weekly outstanding MSS.
# : Average daily absorption under LAF.

MONEY MARKET half of the month reflecting the onset of high deficit
liquidity conditions. The average call rate increased
4.55 The money market generally remained orderly
to 5.40 per cent in the second quarter (Table 4.15).
during 2010-11. At the commencement of the
The call rate has mostly remained above the upper
financial year 2010-11, the call rate mostly remained
bound of the corridor in the third quarter of 2010-11
around the lower bound of the informal LAF corridor
so far, reflecting the increased liquidity stress in
up to May 2010. With the tightening of liquidity
the system. The average call rate was 6.59 per cent
conditions since end-May 2010, reflecting migration
in the third quarter of 2010-11 (till 20 December 2010)
of liquidity to the Central Government account with
(Figure 4.15).
the RBI on account of 3G auction/ advance tax
payments, the call rate firmed up. The average daily 4.56 The rates in the collateralized segments have
call rate for the first quarter was at 4.16 per cent. It continued to move in tandem with the call rate, albeit
hovered around the upper bound of the LAF corridor below it, so far during 2010-11. The weighted average
till July 2010 as deficit liquidity conditions persisted interest rate in the collateralized segment of the
due to the high Central Government cash balances. money market increased to 5.20 per cent during
The call rate declined towards the end of August the second quarter from 3.97 per cent in the first
and early September with the change in liquidity quarter of 2010-11. Transaction volumes in the
conditions. However, it again firmed up from the collateralized borrowing and lending obligation
middle of September 2010 and breached the upper (CBLO) and market repo segments remained high
bound of the informal LAF corridor in the second during this period, reflecting active market

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 Prices and Monetary Management 93
Figure 4.15 Movement of money market rates
8
7 Market repo
(Non-RBI)
6
5
Per cent

Call money
4
CBLO
3
2 Reverse
1 repo rate
0 Repo rate
Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov
2008-09 2009-10 2010-11
Year

conditions. Banks continued to remain the major discount rate (WADR) of aggregate CP issuances
group of borrowers in the collateralized segments increased from 6.29 per cent at the end of March
whereas mutual funds (MFs) remained the major 2010 to 7.82 per cent at the end of September 2010,
group of lenders of funds in these segments. The and reached 12.22 per cent at the end of November
collateralized segment of the money market [Link] shares of ‘leasing and finance companies’,
continued to remain the dominant segment,
‘manufacturing companies’, and ‘other financial
accounting for more than 80 per cent of the total
institutions’ in total outstanding CPs were at around
volume so far during the year.
50 per cent, 39 per cent, and 11 per cent respectively
Certificates of Deposit (CDs) at the end of November 2010 (Table 4.16).
4.57 Though the average gross issuance of CDs
was high during 2010-11 so far, the amount of CDs Treasury Bills (T-Bills)
outstanding declined, indicating decline in net
issuances. The amount of outstanding CDs issued 4.59 T-Bills issuances during the year 2010-11
by SCBs declined marginally from ` 3,41,054 crore were modulated according to the cash management
at the end of March 2010 to ` 3,32,982 crore at requirements of the Government as well as evolving
the end of November 2010. The outstanding amount market conditions. The notified amounts for
constituted 7.45 per cent (as on 19 November 2010) competitive auctions of T-Bills were reduced during
of aggregate deposits of CD-issuing banks with the first two quarters of the fiscal year. The
significant inter-bank variation. During April- outstanding stock of T- Bills went down from
November 2010, the average issuance was of the ` 1,34,500 crore on 31 March 2010 to ` 1,26,269
order of around ` 22,000 crore as compared to crore on 31 December 2010, after taking into
around `11,000 crore during the same period of account a rise in non-competitive allotment. The
the last financial year. The effective interest rate in primary market yields for T-Bills of different tenors
respect of aggregate CD issuances increased from
(91 days, 182 days, and 364 days) moved up
6.07 per cent at the end of March 2010 to 8.16 per
during the year largely influenced by the liquidity
cent as on 19 November 2010.
conditions and monetary policy action by the RBI.
Commercial Paper (CP) The yield behaviour during 2010-11 vis-à-vis 2009-
4.58 During 2010-11 so far, the commercial paper 10 is shown in Figures 4.16, 4.17, and 4.18.
(CP) market has also picked up and the size of
Cash Management
fortnightly issuance increased significantly. The
outstanding amount of CP issued by corporates has 4.60 During the year, a new short-term instrument,
shown an increasing trend from ` 75,506 crore at named cash management bill (CMB), was
the end of March 2010 to `1,12,003 crore at the introduced in May 2010. CMBs are non-standard,
end of September 2010 and ` 1,17,793 crore at the discounted instruments issued for maturities of less
end of November 2010. The weighted average than 91 days, to meet the temporary cash-flow

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94 Economic Survey 2010-11

Table 4.16 : Activity in money market segments

(` crore)

Average daily volume Commercial Certificates of

(one leg) paper deposit
Year/ Call Market CBLO Total Money Term Out- WADR Out- EIR
month repo market money stand- (per- stand- (per-
rate^ ing cent) ing cent)
(per
cent)

Apr.2009 10910 20545 43958 75413 2.41 332 52881 6.29 210954 6.48
May2009 9518 22449 48505 80472 2.34 338 60740 5.75 218437 6.2
Jun.2009 8960 21694 53553 84207 2.69 335 68721 5 221491 4.9
Jul.2009 7197 20254 46501 73952 2.83 389 79582 4.71 240395 4.96
Aug.2009 7569 23305 57099 87973 2.62 461 83026 5.05 232522 4.91
Sep.2009 8059 27978 62388 98425 2.73 381 79228 5.04 216691 5.3
Oct.2009 7888 23444 58313 89645 2.70 225 98835 5.06 227227 4.70
Nov.2009 6758 22529 54875 84162 2.87 191 103915 5.17 245101 4.86
Dec.2009 6651 20500 55338 82489 2.91 289 90305 5.40 248440 4.92
Jan.2010 6411 14565 50571 71547 2.97 404 91564 4.80 282284 5.65
Feb.2010 6809 19821 63645 90275 2.95 151 97000 4.99 309390 6.15
Mar.2010 8812 19150 60006 87968 3.22 393 75506 6.29 341054 6.07
Apr.2010 8187 20319 50891 79397 3.03 345 98769 5.37 336807 5.56
May2010 8393 17610 42274 68277 3.72 338 109039 6.85 340343 5.17
Jun.2010 7129 9481 31113 47723 5.22 447 99792 6.82 321589 6.37
Jul.2010 9477 12011 29102 50590 5.33 385 112704 6.93 324810 6.69
Aug.2010 7958 15553 45181 68692 5.05 281 126549 7.32 341616 7.17
Sep.2010 8606 15927 53223 77756 5.29 617 112003 7.82 337322 7.34
Oct.2010 8920 14401 43831 67152 5.96 712 149620 12.15 343353 7.67
Nov.2010 8865 9967 32961 51793 6.31 415 117793 12.22 332982 8.16
Source: RBI.
Notes: ^ Average of daily weighted call rate.

Figure 4.16 Cut-off yields in the auctions of 91-day T-bills

8
7 2010-11
Cut-off yields
(per cent)

6
5 2009-10
4
3
2
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Figure 4.17 Cut-off yields in the auctions of 182-day T-bills

8
7 2010-11
Cut-off yields
(per cent)

6
5 2009-10
4
3
2
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

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 Prices and Monetary Management 95
Figure 4.18 Cut-off yields in the auctions of 364-day T-bills
8
7 2010-11
Cut-off yields
(per cent)

6
5 2009-10
4
3
2
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar
mismatches of the Government. During 2010-11, smooth and non-disruptive manner. During the year,
CMBs were issued twice in May 2010 for an the Government undertook buy-back operations
aggregate amount of `12,000 crore, with a maturity whereby securities worth `11,767 crore were bought
of five and four weeks, respectively. back.
4.63 During 2010-11 (up to 31 December 2010),
Central Government Borrowing
gross market borrowings raised through dated
4.61 The Union Budget 2010-11 placed the net securities by the Central Government wereRs
market borrowings (through dated securities) 3,84,000 crore (net `2,98,342 crore) as against
requirement of the Central Government at ` 3,45,010 `3,83,000 crore (excluding issuances under the
crore as against ` 3,97,957 crore raised during MSS) (net ` 3,46,911 crore) raised during the
the previous year. Including repayments of ` corresponding period of the previous year. The
1,12,133 crore, gross market borrowings were weighted average maturity of dated securities
estimated at ` 4,57,143 crore (as compared to ` issued during the year (up to 31 December 2010)
4,51,000 crore raised in the previous year, was moderately higher at 11.54 years as compared
including MSS de-sequestering of ` 33,000 crore). to 11.15 years for issues during the corresponding
The actual issuances during the first half of the period of the previous year. The weighted average
current year amounted to ` 2,84,000 crore (as yield of dated securities during 2010-11(up to 31
against issuances of ` 2,95,000 crore, excluding December 2010) increased to 7.87 per cent from
MSS de-sequestering of `28,000 crore, during the 7.21 per cent during the corresponding period of
corresponding period of the previous year).The the previous year (Figure 4.19).
issuance calendar for dated securities released on
23 September 2010 proposed to raise ` 1,63,000 Yields on 10-year Government Securities
crore during the second half of the year, indicating a
4.64 Secondary market yields on Government
reduction of `10,000 crore from the budget estimate.
securities remained in a broad range during the year.
4.62 The gross borrowings requirement in 2010- Monetary policy, inflation concerns, and supply
11 remained high as in the previous year. The market issues were the major factors influencing yields on
borrowings programme is, however,carried out in a government securities.

Figure 4.19 Weighted average yield of primary issues of dated securities (cumulative)
8.0
2010-11
7.5
Per cent

2009-10
7.0

6.5

6.0
Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

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96 Economic Survey 2010-11

4.65 Intra-year movements in yields on Government ahead of most other economies. However, in view of
securities could be attributed to various factors. the rising food inflation and the risk of it impinging
The upward movement in the month of April 2010 on inflationary expectations, the Reserve Bank
was mainly on account of supply pressure in the embarked on the first phase of exit from the
wake of front-loading of the market borrowings expansionary monetary policy in October 2009 itself.
programme. By April 2010, available data suggested that the
recovery was firmly in place, though inflationary
4.66 In the month of May, concerns regarding high pressures accentuated. Accordingly, both repo and
fiscal deficit receded due to higher-than-budgeted reverse repo rates as well as the CRR were
collections from auction of 3G and BWA licences. increased by 25 bps each. The monetary policy
The improved sentiments drove down yields in the stance in April 2010 was guided by the following
month of May. The impact of the improved three considerations. First, the need to move in a
sentiments, however, was offset by concerns of high calibrated manner in the direction of normalizing the
inflation and policy tightening by the Reserve Bank. policy instruments in a scenario where real policy
In the third quarter of the current financial year, tight rates were still negative. Second, the need to ensure
liquidity conditions remained a major factor putting that demand-side inflation did not become
upward pressure on yields. The 10-year yield, which entrenched. Third, the need to balance the monetary
was at 7.87 per cent on 31 March 2010, went up to policy imperative of absorbing liquidity while ensuring
7.94 per cent on 31 December 2010. that credit was available to both the Government
and private sector. Significant developments took
State Government Borrowings place subsequent to the announcement of the
monetary policy in April 2010. Though recovery
4.67 Twenty-two State Governments have raised was consolidating, developments on the inflation
an aggregate amount of ` 74,104 crore on a gross front raised several concerns. The upward revision
basis up to end-December 2010 as compared to ` in administered fuel prices on 25 June 2010 was
1,00,085 crore raised by 25 State Governments also expected to influence inflation in the months
during the corresponding period of the previous year. ahead. Accordingly, the repo and reverse repo rates
The cut-off yields have ranged between 8.05 and under the LAF were increased by 25 bps each on 2
8.58 per cent as compared to 7.04 and 8.49 per July 2010. In the interests of consolidating and of
cent during the corresponding period of the previous more broad-based domestic recovery and with the
year. The weighted average yield worked out to 8.36
per cent up to end-December 2010 as compared to Table 4.17 : Revision in Policy Rates
8.02 per cent during the corresponding period of (per cent)
2009-10 and 8.11 per cent for the year as a whole. Effective Date Repo Reverse Repo CRR
The spread between the yield on State Development rate rate
Loans (SDLs) and the 10-year benchmark 2009
Government of India securities stood lower at 32-69 05.01.2009 5.50 4.00
bps up to December 2010 as compared to 45-129
17.01.2009 5.00
bps during the corresponding period of the previous
05.03.2009 5.00 3.50
year. It is expected that the calibrated strategies
21.04.2009 4.75 3.25
adopted for the market borrowings programme of
the Government of India and the State Governments 2010
would ensure its completion in a non-disruptive 13.02.2010 5.50
manner. 27.02.2010 5.75
19.03.2010 5.00 3.50

MONETARY POLICY STANCE DURING

20.04.2010 5.25 3.75

2010-11 24.04.2010 6.00

02.07.2010 5.50 4.00
4.68 The accommodative monetary policy which
27.07.2010 5.75 4.50
was pursued beginning mid-September 2008
16.09.2010 6.00 5.00
instilled confidence in market participants, mitigated
the adverse impact of the global financial crisis on 02.11.2010 6.25 5.25
the economy, and ensured that it started recovering 25.01.2011 6.50 5.50

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 Prices and Monetary Management 97
then level of consumer price inflation in double digits, economies raised concerns about the sustainability
the First Quarter Review of the RBI (July 2010) of the global turnaround whereas the Indian
upwardly revised the baseline projection of real GDP economy was operating close to the trend growth
growth for the year to 8.5 per cent and raised the rate, driven mainly by domestic factors. However,
projection for WPI inflation for March 2011 to 6.0 notwith-standing some moderation in recent
per cent (Table 4.18). Consistent with this months, headline inflation in India remained
assessment, the repo rate was increased by 25 significantly above its medium-term trend and well
bps and reverse repo by 50 bps. The monetary policy above the comfort zone of the RBI (Table 4.18).
actions were intended to moderate inflation by reining Accordingly, the RBI further increased the repo
in demand pressures and inflationary expectations, rate by 25 bps to 6.25 per cent and the reverse
maintain financial conditions conducive to sustaining repo rate also by 25 bps to 5.25 per cent on
growth, generate liquidity conditions consistent with (2 November 2010). The CRR has been retained
more effective transmission of policy actions, and unchanged at 6 per cent of the NDTL of banks.
reduce the volatility of short-term rates in a narrower
4.71 The RBI in its Third Quarter Review of the
corridor. Given the context of the changing liquidity
Monetary Policy (25 January 2011) indicated that
dynamics, particularly between surplus and deficit
its stance is shaped by four important
modes, it was proposed to set up a working group
considerations:
to review the operating procedure of the RBI’s
monetary policy, including the LAF. It was also  Inflation is clearly the dominant concern. Even
announced that mid-quarter reviews of monetary as the rate itself remains high, the reversal in
policy would be made in June, September, the direction of inflation is striking. Primary
December, and March. The changes in policy rates food articles inflation has risen again sharply.
since 2009 are brought out in Table 4.17. Non-food articles inflation and fuel inflation are
already at elevated levels. Non-food
Quarterly Reviews manufacturing inflation has remained sticky.
4.69 As decided in the First Quarter Review, on There are signs of food and fuel price increases
the basis of assessment of the macroeconomic spilling over into generalised inflation.
situation, the RBI in its Mid-Quarter Review on 16  Second, there has been a sharp rise in global
September 2010 decided to increase the repo rate commodity prices which has heightened
under the LAF by 25 bps from 5.75 per cent to 6.0 upside risks to domestic inflation.
per cent and the reverse repo rate by 50 bps from
4.5 per cent to 5.0 per cent.  Third, growth has moved close to its pre-crisis
trajectory even in the face of an uncertain global
4.70 The Second Quarter Review of Monetary recovery.
Policy for 2010-11 (released on 2 November 2010)
noted that the fragile and uneven nature of the  Fourth, the uncertainty with regard to global
recovery and large unemployment in advanced recovery has reduced.

Table 4.18: Indicative Projections of Macro Parameters for 2010-11 by the RBI
Indicative projections for growth rates (per cent)
Annual Policy First Quarter Second Quarter Third Quarter
2010-11 Review Review Review
(April 20,2010) (July 27, 2010) (November 2, 2010) (Jan. 25, 2011)

GDP growth 8.0 8.5 8.5 8.5

WPI inflation 5.5** 6.0** 5.5 7.0
Money supply growth (M3) 17.0 17.0 17.0 17.0
*Adjusted non-food credit 20.0 20.0 20.0 20.0
Notes : * Includes investment by SCBs in bonds/debenture/shares of public-sector undertakings, private
corporate sector, and CP.
** Old series.

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98 Economic Survey 2010-11

4.72 On the basis of the assessment of the has not only persisted for quite some time, but has
existing macroeconomic scenario, the RBI retained also been rather sharp. High inflation in food articles
the bank rate at 6.0 per cent and the CRR of is not unique to India, it has spiked in many other
scheduled banks at 6.0 per cent of their NDTL; countries as well. The domestic food price situation
increased the repo rate under the LAF by 25 bps could be exacerbated by the increase in global food
from 6.25 per cent to 6.5 per cent; and the reverse prices because of dependency on import of some
repo rate under the LAF by 25 bps from 5.25 per food items like edible oils. Current growth and
cent to 5.50 per cent. On the basis of an inflation trends warrant persistence with an anti-
assessment of the liquidity situation, the RBI inflationary monetary stance.
extended additional liquidity support to the SCBs 4.75 The issue of maintaining an environment
under the LAF to the extent of up to 1 per cent of where the cost and availability of credit is supportive
their NDTL, till 8 April 2011. For any shortfall in of growth momentum, while ensuring that inflation
maintenance of the SLR arising out of availment of falls back to more comfortable target levels, will be
this facility, banks were allowed to seek waiver of at the centre stage of policy consideration in the
penal interest purely as an ad hoc measure. near term. This has to be seen in the context of
more than expected inflation in the recent past,
relative stickiness of prices, especially of food, and
CHALLENGES AND OUTLOOK building of wider inflationary expectations in the
economy, even as monetary policy tools are being
4.73 Inflation is clearly the dominant concern.
used proactively to manage demand and dampen
Average headline inflation in April-December 2010-
inflationary pressures in the economy. The
11 at 9.4 per cent is the highest ever in the decadal concurrent consolidation of fiscal deficits will,
average. This is also true of annual average inflation however, be essential as it is expected to ease the
based on the WPI, for primary food articles, fuel conduct of effective monetary policy in the near
and power, and manufacturing products. During the future. The reduced fiscal deficits will permit greater
current financial year, even as the rate itself remains availability of credit to sustain growth, while tighter
uncomfortably high, the reversal in the direction of monetary policy starts to transmit its impact in
inflation in December is also striking. After some reducing inflationary pressures. The transmission
moderation between August and November 2010, of monetary policy, however, comes with a lag.
inflation rose again in December 2010 on account Inflationary pressures in the economy are also
of sharp increase in the prices of primary food emanating in part from supply-side constraints,
articles and the recent spurt in global oil prices. especially in food and other primary articles, as
Non-food manufacturing inflation has also remained well as the transmission of higher global food, oil,
sticky, reflecting buoyant demand conditions. and other commodity prices. These considerations
However, in January 2011, headline inflation has therefore are complicating the issue in the near
come down to 8.23 per cent and it is expected that term. If external commodity negative price shocks
build further, the dilemmas will become greater.
this trend may continue in the next two months.
Therefore, the policy challenge of maintaining the
4.74 Going forward, the inflation outlook will be growth momentum in the economy with price stability
shaped by the food price situation and the demand- is going to remain a key focus area for monetary
side pressures in the economy. Rise in food inflation policy and macroeconomic management.

Website: [Link]
Financial Intermediation
and Markets
5
CHAPTER

Broader and deeper financial markets will be crucial for mobilizing higher savings
and intermediating them efficiently to finance higher investment and growth. India’s
financial markets continued to gain strength in recent years, in the wake of steady
reforms since 1991. Prudent regulations and institutions protected the economy from
the recent global financial shocks. And its dynamism is a leading factor in the current
recovery.
Year-on-year non--food credit growth was up 24 per cent at the end of December 2010,
and financed many sectors more broadly (from the agriculture rebound to third
generation [3G] spectrum sales and private infrastructure projects), while the overall
credit to gross domestic product (GDP) ratio rose to about 55 per cent, continuing its
progress (but still structurally well below potential). Domestic capital markets performed
well in 2010, primary markets financing record levels, including the largest-ever initial
public offering (IPO) (for Coal India), while secondary markets reached new highs.
Record foreign inflows helped support the market. Pensions and insurance gained,
with life insurance premium growing nearly 26 per cent and penetration doubling to
5.4 per cent of GDP in 2009, from 2.3 per cent in 2000 when insurance reforms
started. Looking to the future, the twin challenges are to continue this progress on
gradual financial reform and to modernize regulations and institutions to ensure its
continued safety and stability.
The past year saw banking deposit growth slow-down, as real interest rates were
depressed, especially compared to returns in other fast-recovering asset markets (real
estate, gold, and stock markets). The priority is to considerably extend the reach of
banking to help mobilize more savings, add more depth, and more efficiently
intermediate opportunities, including those in the traditional ‘priority’ sectors. To
move ahead (1) financial inclusion needs to be accelerated as a next crucial step;
innovative solutions will be needed in this regard; (2) similar efforts are needed to
deepen domestic capital markets and the role of non-bank institutions, especially
in corporate bond and debt markets; (3) the rapid lowering of fiscal deficits is
needed to help crowd-in such developments; and (4) the Government and Reserve
Bank of India (RBI) have already begun a series of essential regulatory overhaul,
aimed at updating the modern legislation underlying financial markets, and improving
macro-prudential safeguards and institutions. We need to continue along this path.
The rest of the chapter describes this series of developments in the financial sector.

BANK CREDIT stronger industrial recovery and growth. Telecom

5.2 Bank credit that started picking up from the operators raised credit to pay for 3G/broadband
last quarter of 2009-10 continued its momentum wireless access (BWA) spectrums, which partly
during 2010-11 as well. The pickup in credit reflected contributed to stronger credit growth in the first
the improved demand conditions associated with quarter of 2010-11.

Website: [Link]
 Table 5.1 : Flow of bank credit
As on 17 December, 2010

Outstanding as in end-March Outstanding Financial Year Year-on-Year

as on so far
` crore (Percentage variation)
2008 2009 2010 17-Dec. 18-Dec. 2009- 2010- 2009- 2010-
10 09 10 11 10 11

1. Bank Credit 23,61,914 27,75,549 32,44,788 36,39,866 29,42,279 6.0 12.2 11.3 23.7
(a) Food Credit 44,399 46,211 48,489 62,521 45,037 -2.5 28.9 -13.6 38.8
(b) Non-food Credit 23,17,515 27,29,338 31,96,299 35,77,345 28,97,242 6.2 11.9 11.8 23.5

2. Aggregate Deposit 31,96,940 38,34,110 44,92,826 47,99,789 41,84,358 9.1 6.8 17.9 14.7
(a) Demand Deposits 5,24,310 5,23,085 6,45,610 5,84,713 5,25,516 0.5 -9.4 19.9 11.3
(b) Time Deposits 26,72,630 33,11,025 38,47,216 42,15,076 36,58,842 10.5 9.6 17.6 15.2

3. Investment 9,71,715 11,66,410 13,84,752 14,43,303 13,49,540 15.7 4.2 24.6 6.9
(a) Govt Securities 9,58,662 11,55,785 13,78,395 14,38,268 13,42,383 16.1 4.3 25.2 7.1
(b) Other Approved 13,053 10,625 6,358 5,035 7,156 -32.6 -20.8 -34.5 -29.6
Source : RBI.

5.3 As against an increase of 17.5 per cent in in fact above the Reserve Bank’s indicative
2008-09, growth in bank credit moderated to 16.9 projected trajectory of 20 per cent for the full
per cent in 2009-10. Non-food credit during the year as set out in the Second Quarter Review for
same period was 17.8 per cent and 17.1 per cent 2010-11 (2 November). Growth in non-food credit
respectively. During 2010-11 credit started picking so far in 2010-11 on financial-year basis was much
up in a strong way from early June 2010 and since higher at 11.9 per cent as compared to 6.2 per
then the growth in bank credit has shown a cent in the previous year and 23.5 per cent year-
continuous increasing trend. During the financial on-year basis as compared to 11.8 per cent for
year 2010-11, growth in bank credit extended by the corresponding period of the previous year.
scheduled commercial banks (SCBs) stood at 12.2 Growth in aggregate deposits so far in 2010-11
per cent as on 17 December 2010 as compared have been lower than for the corresponding period
to 6.0 per cent for the corresponding period in of the previous year (Table 5.1). The high expansion
2009-10. The year-on-year growth in bank credit in credit relative to lower growth in deposits during
as on 17 December 2010 was high at 23.7 per 2010-11 has caused increase in the credit- deposit
cent as compared to 11.3 per cent for the ratio from 72.2 per cent in end-March 2010 to
corresponding period of the previous year. It was 75.8 per cent on 17 December 2010 (Figure 5.1).

Figure 5.1 Credit deposit ratio

76
75 2007-08
74
73
Per cent

2008-09
72
71 2009-10
70
69 2010-11
68
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Fortnights
 Financial Intermediation and Markets 101
Figure 5.2 Investment deposit ratio
35
34 2007-08
33
32
Per cent

2008-09
31
30 2009-10
29
28 2010-11
27
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Fortnights

5.4 During the financial year so far, private-sector reviewed and increased their base rates. The base
banks have been faring better in terms of growth in rate of PSBs and private-sector banks changed to
credit extended as compared to public-sector banks the range of 7.60-9.00 per cent and 7.00-9.00 per
(PSBs) and foreign banks. Due to higher credit growth cent respectively in December 2010 (Table 5.2).
and tight liquidity condition, commercial banks’ Subsequent to the migration to the base rate system,
investment in Government and other approved effective 1 July 2010, we find a large degree of
securities remained low at 27.3 per cent as compared convergence of base rates as announced by banks.
to 29.2 per cent in the previous year. Consequently, Almost 60 banks with a of 97 per cent share in total
the investment-deposit ratio declined from 30.8 per bank credit have fixed the base rate in the close
cent in end-March 2010 to 30.1 per cent on 17 range of 7.00-8.50 per cent in November 2010.
December 2010 (Figure 5.2) as the investment and
deposit growth of SCBs is lower. iii. Interest Rates on Non-resident Indian
(NRI)Deposits
INTEREST RATES 5.7 The interest rates on non-resident external term
deposits (NRE) and foreign currency non-resident
i. Deposit Rates
bank account (FCNR[B]) deposits are regulated by
5.5 Domestic deposit rates of SCBs have moved RBI. At present, NRE ceiling deposit interest rate
up so far during 2010-11. Following the RBI’s raising stands at LIBOR plus 175 basis points and FCNR(B)
of the repo and reverse repo rates by 125 basis points ceiling deposit interest rate is at London Interbank
(bps) and 175 bps respectively during March- offered rate (LIBOR) plus 100 bps.
November 2010, the SCBs increased their deposit
rates by 50 bps to 200 bps. Interest rates offered iv. Interest Rate on Rupee Export Credit
by the PSBs, private-sector banks and foreign banks 5.8 The validity of the reduction in interest rate
on deposits of maturity of one to three years ceiling to 250 bps below the BPLR on pre-shipment
changed from the range of 6.00-7.25 per cent, 5.25-
rupee export credit up to 270 days and post-shipment
7.75 per cent, and 2.25-8.00 per cent respectively
rupee export credit up to 180 days was extended to
in March 2010 to the range of 7.00-8.50 per cent,
30 June 2010 from 30 April 2010. However, the RBI
7.25-9.00 per cent, and 3.00-8.00 per cent
meanwhile advised the SCBs on 9 April 2010 to
respectively in December 2010 (Table 5.2).
replace the BPLR system with a base rate system
ii. Lending Rates from 1July 2010. This necessitated changes in the
5.6 The BPL` of SCBs remained unchanged from formula in respect of interest rate on export credit.
July 2009 till end-June 2010. The base rate system Accordingly, it was decided to deregulate the interest
replaced the BPLR system with effect from 1 July rates on pre-shipment rupee export credit up to 270
2010. The base rates of PSBs, private-sector banks, days and post-shipment rupee export credit up to
and foreign banks were fixed in the range of 7.50- 180 days. Banks are, therefore, free to decide the
8.25 per cent, 7.00-8.75 per cent, and 5.50-9.00 lending rate on export credit at or above the base
per cent respectively. Subsequently, several banks rate with effect from 1 July 2010.
102 Economic Survey 2010-11

Table 5.2 : Movements in deposit and lending rates

(per cent)
Interest Rates Mar.-2009 Mar.-2010 Jun.-2010 Jul.-2010 Sep.-2010 Dec.-2010*
Term Deposit Rates
PSBs
a) Up to 1 Year 2.75-8.25 1.00-6.50 1.00-6.25 1.00-6.25 1.00-7.00 1.00-8.00
b) 1 Year up to 3 Years 8.00-9.25 6.00-7.25 6.00-7.25 6.00-7.25 6.75-7.75 7.00-8.50
c) Over 3 Years 7.50-9.00 6.50-7.75 6.50-7.75 6.50-7.75 7.00-7.75 7.00-8.75
Private-sector Banks
a) Up to 1 Year 3.00-8.75 2.00-6.50 2.00-6.50 2.00-6.50 2.50-7.25 2.50-7.60
b) 1 Year up to 3 Years 7.50-10.25 5.25-7.75 6.25-7.50 6.25-7.75 6.50-8.25 7.25-9.00
c) Over 3 Years 7.50-9.75 5.75-8.00 6.50-8.00 6.50-8.00 6.50-9.00 7.00-9.00
Foreign Banks
a) Up to 1 year 2.50-8.50 1.25-7.00 1.25-7.00 1.25-7.00 1.25-7.30 1.25-7.00
b) 1 year up to 3 years 2.50-9.50 2.25-8.00 3.00-8.00 3.00-8.00 3.00-8.00 3.00-8.00
c) Over 3 years 2.50-10.00 2.25-8.75 3.00-8.50 3.00-8.50 3.00-8.25 3.00-8.25
Source: RBI.
Notes: * As on 10 December 2010.
2. Benchmark prime lending rate (BPLR).

5.9 The Government of India decided to extend per cent in March 2010), while that to industry
interest subvention of 2 percentage points with effect (medium and large) recorded a growth of 28.9 per
from 1 April 2010 to 31 March 2011 on pre- and post- cent (as against 24.8 per cent in March 2010). Credit
shipment rupee export credit for four export sectors, to wholesale trade recorded a growth of 17.0 per
namely handicrafts, carpets, handlooms, and small cent (as against 28.1 per cent in March 2010).
and medium enterprises (SMEs) subject to the
5.11 Credit to the priority sector grew by 21.0 per
condition that the interest rate after subvention will
cent (year-on-year) in November 2010 as compared
not fall below 7 per cent, which is the rate applicable
to 17.1 per cent in March 2010. Among the priority
to a short-term crop loan under priority-sector
sub-sectors, credit to micro and small enterprises
lending. With the changeover to the base rate system,
(MSEs) (including service-sector enterprises)
the interest rates applicable to all tenors of rupee
recorded a growth of 21.5 per cent (year-on-year) in
export credit advances with effect from 1 July 2010
November 2010 as compared to 20.8 per cent in
will be at or above base rate in respect of all fresh/
March 2010. (Table 5.3).
renewed advances. Accordingly, banks may reduce
the interest rate chargeable to exporters as per the Priority-sector Lending
base rate system in the four sectors by the amount
of subvention available. If, as a consequence, the 5.12 A target of 40 per cent of adjusted net bank
interest rate charged to exporters goes below the credit (ANBC) or credit equivalent amount of off-
base rate, such lending will not be construed to be balance sheet exposures (OBE), whichever is higher,
violative of the base rate guidelines. as on 31 March of the previous year, has been
stipulated for lending to the priority sector by
domestic SCBs, both in the public and private
SECTORAL DEPLOYMENT OF CREDIT sectors Within this, sub-targets of 18 per cent and
5.10 Disaggregated data on sectoral deployment 10 per cent of ANBC or credit equivalent amount of
of gross bank credit from 47 banks accounting for OBE, whichever is higher, have been stipulated for
about 95 per cent of bank credit and non-food credit lending to agriculture and the weaker sections
available up to 19 November 2010 showed that respectively. However, to ensure that the focus of
among the major sectors, credit (year-on-year) to the banks on the direct category of agricultural
agriculture recorded a growth of 20.0 per cent (22.9 advances does not get diluted, the indirect lending

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 Financial Intermediation and Markets 103
Table 5.3 : Sectoral deployment of gross bank credit
Sl . Sector ` crore)
Outstanding as on (` % Variation
No. 27 Mar. 20 Nov. 26 Mar. 19 Nov. 26 Mar./ 27 Mar. 19 Nov.
2009 2009 2010 2010 2010 2009 2010 /
Absolute 20 Nov.
amount 2009

Gross Bank Credit (1 + 2) 26,47,368 27,56,861 30,88,569 33,71,551 4,41,201 16.7 22.3
1 Food Credit 45,544 40,645 48,562 56,248 3018 6.6 38.4
2 Non-food Gross Bank Credit (a+b+c+d) 26,01,825 27,16,216 30,40,007 33,15,303 4,38,182 16.8 22.1
a. Priority Sector 932,459 949,287 1,092,179 1,148,808 159,720 17.1 21.0
i. Agriculture & Allied
Activities 338,656 343,070 416,133 411,816 77,477 22.9 20.0
ii. Micro & Small Enterprises 309,195 335,655 373,530 407,872 64,335 20.8 21.5
iii. Other Priority Sectors 2,84,608 2,70,562 3,02,516 3,29,120 17,908 6.3 21.6
b. Industry (micro & small,
medium and large ) 8,85,393 9,69,261 11,05,051 12,49,843 2,19,658 24.8 28.9
c. Wholesale Trade
(other than food procurement) 67,425 80,922 86,357 94,702 18,932 28.1 17.0
d. Other Sectors 7,16,548 7,16,746 7,56,420 8,21,950 39,872 5.6 14.7
Of Non-food Gross Bank Credit
1 Housing (including priority-
sector housing) 2,79,365 2,91,760 3,00,929 3,27,391 21,564 7.7 12.2
2 Consumer Durables 8187 8028 8294 8928 107 1.3 11.2
3 Commercial Real Estate 92,421 88,581 92,128 1,05,479 (293) -0.3 19.1
4 Tourism, Hotels, & Restaurants 13,625 15,667 19,410 26,470 5785 42.5 69.0
5 Advances to Individuals
against Shares, Bonds, etc. 2287 2347 2863 2935 576 25.2 25.1
Source : RBI.
Note : Date the provisional & relate to select scheduled commercial banks (SCBs) which account for 95 per cent of
total bank credit extended by all SCBs.

to agriculture in excess of 4.5 per cent of ANBC or 5.15 The outstanding priority-sector advances of
credit equivalent amount of OBE, whichever is higher, PSBs increased from ` 7,24,150 crore as on the
are not reckoned for computing performance under last reporting Friday of March 2009 to ` 8,64,564
18 per cent target. However, all agricultural advances crore as on the last reporting Friday of March 2010,
under the categories ‘direct’ and ‘indirect’ are showing a growth of 19.39 per cent. Although, PSBs
reckoned in computing performance under the overall as a group had achieved the overall priority-sector
priority-sector target of 40 per cent of ANBC or credit lending target of 40 per cent of ANBC or credit
equivalent amount of OBE, whichever is higher. equivalent amount of OBE, whichever is higher, and
formed 41.68 per cent of ANBC as on the last
5.13 A target of 32 per cent of ANBC or credit
reporting Friday of March 2010, three banks,
equivalent amount of OBE, whichever is higher, has
namely State Bank of Mysore, Indian Overseas
been stipulated for lending to the priority sector by
Bank, and Industrial Development Bank of India
foreign banks having offices in India. Within the (IDBI) Ltd, out of 27 public sector banks did not
overall target of 32 per cent to be achieved by individually achieve the target.
foreign banks, the advances to MSEs and export
sectors should not be less than 10 per cent and 12 5.16 The outstanding priority-sector advances of
per cent of the ANBC or credit equivalent amount private-sector banks increased from ` 1,87,849
crore as on the last reporting Friday of March 2009
of OBE, whichever is higher, respectively.
to ` 2,15,552 crore as on the last reporting Friday
5.14 The outstanding advances granted by PSBs, of March 2010, showing a growth of 14.74 per cent.
private-sector banks, and foreign banks to the priority Although, private-sector banks as a group had
sector as on the last reporting Friday of March 2008, achieved the overall priority-sector lending target
2009, and 2010 are furnished in Table 5.4. There of 40 per cent of ANBC or credit equivalent amount
were shortfalls in the case of a few individual banks of OBE, whichever is higher, and formed 45.99 per
in the public and private sectors and foreign banks. cent of ANBC as on the last reporting Friday of

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104 Economic Survey 2010-11

Table 5.4 : Particulars of Priority-sector Advances

A. PUBLIC SECTOR BANKS (` crore)
As on the last reporting Friday of March 2008 March 2009 March 2010 (provisional)
Total Priority-sector Advances 6,10,450(44.7) 7,24,150(42.8) 8,64,564(41.7)
Total Advances to Agriculture* 2,49,397(18.3) 2,99,415(17.7) 3,70,730(17.3)
Total Advances to MSEs 1,51,137(11.1) 1,91,408(11.3) 2,78,398(13.2)
Advances to Weaker Sections 1,21,740(8.9) 1,65,829(9.8) 2,12,214(10.2)
2. PRIVATE-SECTOR BANKS
As on the Last Reporting Friday of March 2008 March 2009 March 2010(provisional)
Total Priority-sector Advances 1,64,068(47.8) 1,87,849(46.2) 2,15,552(46.0)
Total Advances to Agriculture* 58,567(17.0) 76,103(18.7) 89,769(15.6)
Total Advances to MSEs 46,912(13.7) 46,656(11.5) 64,534(13.7)
Advances to Weaker Sections 7152(2.0) 14,262(3.5) 25,690(5.5)
3. FOREIGN BANKS
As on the Last Reporting Friday of March 2008 March 2009 March 2010(provisional)
Total Priority-sector Advances 50,254(39.5) 55,483(34.3) 60,290(35.0)
Total advances to MSEs 15,489(12.2) 18,138(11.2) 21,080(12.3)
Total Export Credit (includes SSI export) 28,954(22.7) 31,511(19.4) 35,466(20.7)

Source: RBI
Note: 1. *Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBE, whichever is
higher.
2. The figures in parentheses show percentage of advances to ANBC or credit equivalent amount of OBE, whichever
is higher.

March 2010, two banks, namely Bank of Rajasthan per cent should go to micro (manufacturing)
Ltd., and State Bank of India (SBI) Commercial Bank, enterprises having investment in plant and
out of 22 private sector banks did not individually machinery up to ` 5 lakh and micro (service)
achieve the target individually. enterprises with investment in equipment up
to ` 2 lakh;
5.17 The outstanding priority-sector advances of
foreign banks increased from ` 55,415 crore as on (b) of the total advances to the MSE sector, 20
the last reporting Friday of March 2009 to ` 60,290 per cent should go to micro (manufacturing)
crore as on the last reporting Friday of March 2010, enterprises with investment in plant and
showing a growth of 8.79 per cent. Foreign banks machinery above ` 5 lakh and up to ` 25
as a group had also achieved the overall priority- lakh, and micro (service) enterprises with
sector lending target of 32 per cent of ANBC or investment in equipment above ` 2 lakh and
credit equivalent amount of OBE, whichever is up to ` 10 lakh. (Thus 60 per cent of MSE
higher, and formed 35.09 per cent of ANBC as on advances should go to micro enterprises).
the last reporting Friday of March 2010. However,
(ii) In terms of the recommendations of the Prime
two of the 28 foreign banks, namely Krung Thai
Minister’s Task Force on Micro, Small and
Bank and Oman International Bank, did not
Medium Enterprises (MSMEs) (Chairman: Shri
individually achieve the target. Table 5.4 gives figures
T. K. A. Nair) constituted by the Government of
of priority-sector advances.
India, banks were advised as follows :
5.18 In order to improve and enhance the flow
(a) to achieve a 20 per cent year-on-year
of credit to the priority sector, the following policy
growth in credit to MSEs to ensure
initiatives were taken during 2010-11:
enhanced credit flow;
(i) All SCBs were advised to ensure that:
(b) to achieve the allocation of 60 per cent of
(a) of the total advances to the MSE sector, 40 the MSE advances to micro enterprises in

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 Financial Intermediation and Markets 105
stages, namely 50 per cent in the year 2010- 18,20,870 SHGs (26.2 per cent) and savings amount
11, 55 per cent in the year 2011-12, and 60 of ` 1299 crore (21 per cent) and cooperative banks
per cent in the year 2012-13, and; with saving bank accounts of 10,79,465 SHGs (15.5
per cent) and savings amount of ` 1225 crore (19.8
(c) to achieve a 10 per cent annual growth in
per cent). The share under the Swarnajayanti Gram
number of micro-enterprise accounts.
Swarozgar Yojana (SGSY) in total savings accounts
(iii) In terms of recommendations of the Working was 16,93,910 SHGs forming 24.3 per cent of the
Group constituted by the RBI to review the Credit total SHGs having savings accounts in the banks.
Guarantee Scheme of the Credit Guarantee During the year under review, the average savings
Fund Trust for Micro and Small Enterprises per SHG with all banks marginally decreased from
(Chairman: Shri V. K. Sharma, Executive ` 9060 as on 31 March 2009 to ` 8915 as on 31
Director, RBI) banks were advised not to accept March 2010. They ranged from a high of ` 11,352
collateral security in the case of loans up to ` per SHG with cooperative banks to a low of ` 7136
10 lakh extended to units in the MSE sector. per SHG with RRBs. As on 31 March 2010, the
(iv) The limit for waiver of margin/ security share of women SHGs in total SHGs with savings
bank accounts was 53.10 lakh, i.e.76.4 per cent as
requirements for agricultural loans was
compared to last year’s share of 79.5 per cent.
enhanced from ` 50,000 to ` 1 lakh. Thus, at
present, all agricultural loans up to ` 1 lakh do 5.22 As on 31 March 2010, 48.51 lakh SHGs had
not require any collateral. outstanding bank loans of ` 28,038 crore as against
42.24 lakh SHGs with bank loans of ` 22,680 crore
MICRO FINANCE as on 31 March 2009 registering a growth of 14.8
per cent in the number of SHGs and 23.6 per cent
5.19 RBI guidelines to banks for mainstreaming
in bank loans outstanding to SHGs. These figures
micro-credit and enhancing the outreach of micro-
included 12.45 lakh SHGs (25.7 per cent) with
credit providers, inter alia, stipulated that micro-
outstanding bank loans of ` 6251 crore (22.3 per
credit extended by banks to individual borrowers
cent) under the SGSY as against 9.77 lakh SHGs
directly or through any intermediary would
with outstanding bank loan of ` 5862 crore as on
henceforth be reckoned as part of their priority-
31 March 2009. Commercial banks had the
sector lending. However, no particular model was
maximum share of outstanding bank loans to SHGs
prescribed for micro-finance and banks have been
with a share of 66.7 per cent followed by RRBs with
extended freedom to formulate their own model[s]
a share of 22.8 per cent and cooperative banks
or choose any conduit/intermediary for extending
with a share of 10.5 per cent. As on 31 March 2010,
micro-credit.
average bank loan outstanding per SHG was `
5.20 Though there are different models for 57,795 as against ` 53,689 as on 31 March 2009.
purveying micro-finance, the self-help group (SHG)- It varied from a high of ` 62,289 per SHG in the
Bank Linkage Programme has emerged as the major case of commercial banks to a low of ` 33,894 in
micro-finance programme in the country. It is being the case of cooperative banks.
implemented by commercial banks, regional rural
banks (RRBs) and cooperative banks. 5.23 On the basis of the data received from banks
by the National Bank for Agriculture and Rural
5.21 Under the SHG-Bank Linkage Programme, Development (NABARD), the gross non-performing
as on 31 March 2010, 69.53 lakh SHGs held saving assets (NPAs) in respect of bank loans to SHGs
bank accounts with total savings of ` 6199 crore as were 2.94 per cent of the bank loans outstanding to
against 61.21 lakh SHGs with savings of ` 5546 SHGs, as on 31March 2010. Table 5.5 provides
crore as on 31 March 2009. Thus, about 97 million some figures for the Programme.
families were associated with banking agencies
under the Programme. As on 31 March 2010, 5.24 The gathering momentum in the micro-finance
commercial banks had the maximum share of SHG sector has brought into focus the issue of regulating
savings with 40,52,915 SHGs (58 per cent) and the sector. A draft Micro-Financial Sector
savings amount of ` 3674 crore (59 per cent) (Development and Regulation) Bill 2010 is under
followed by RRBs with saving bank accounts of consideration of the Government.

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106 Economic Survey 2010-11

Table 5.5 : Progress of Micro-finance Programme

Year New SHGs Financed by Banks Bank Loan*
` crore)
(`
During the Year Cumulative during the Year
No.(lakh) Growth (%) No.(lakh) ` crore)
Amount (` Growth (%) Cumulative
2006-07 11.06 28.94 6570.39 12,366.49
2007-08 12.28 11.00 36.26 8849.26 35.00 16,999.90
2008-09 16.09 31.10 42.24 12,256.51 38.50 22,679.85
2009-10 15.87 (-)1.40 48.52 14,453.30 17.90 28,038.28
Source: NABARD.
Note:* Includes repeat loans to existing SHGs.

RURAL INFRASTRUCTURE The aggregate allocations have reached `

DEVELOPMENT FUND (RIDF) 1,16,000crore. Further, a separate window was
introduced in 2006-07 for funding the rural roads
5.25 The Government of India set up the RIDF in component of the Bharat Nirman Programme, with
1995 through contribution from commercial banks a cumulative allocation of ` 18,500 crore till
to the extent of their shortfall in agricultural lending. 2009-10.
The Fund has continued, with its corpus being
announced every year in the Budget. Over the 5.26 As against the total allocation of
years, coverage under the RIDF has been made ` 1,16,000crore, encompassing RIDF I to XVI,
more broad based in each tranche and, at present, sanctions aggregating ` 1,13,437 crore have been
a wide range of 31 activities under various sectors awarded to various State Governments and
is being financed. The annual allocation of funds disbursements under the Fund amounted to `
for the RIDF announced in the Union Budget has 73,687 crore up to end November 2010. The
gradually increased from ` 2000 crore in 1995–96 National Rural Roads Development Agency
(RIDF I) to ` 16,000 crore in 2010-11 (RIDF XVI). (NRRDA) was sanctioned the entire amount of
` 18,500 crore (RIDF XII to RIDF XV) and it had
fully availed of it by March 2010 (Table 5.6).
Table 5.6 : Sanctions and Disbursements 5.27 During 2010-11, the disbursement to the
under the RIDF and Bharat Nirman States amounted to ` 9649 crore till end-November
` crore)
(As on 30 November 2010) (` 2010 (Table 5.7).
Region Sanction Disburse- Disburse- Table 5.7 : Disbursements during 2010-11
ment ment
as per cent (As on 30 November 2010) (` crore)
of Sanction
Region Disbursement Achieve
South 29,912 20’502 68.54 ment (%)
West 15,567 11,697 75.14 Target Achievement

North 32,880 21,502 65.40 South 3510 1401 39.91

Central 9944 6290 63.25 West 1960 573 29.23
East 19,788 10,767 54.41 North 4550 1478 32.48
NER & Sikkim 5346 2929 54.79 Central 1440 360 25.00
Sub Total 1,13,437 73,687 64.96 East 3250 1257 38.68
BHARAT 18,500 18,500 100.00 NER & Sikkim 790 179 22.66
NIRMAN
Total 15,500 5248 33.86
Total 1,31,937 92,187 69.87 Source : NABARD.
Source: NABARD. Note: NER—north-east region.

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 Financial Intermediation and Markets 107
AGRICULTURAL CREDIT Box 5.1 : Recommendations of Task Force ‘to
Flow of Agricultural Credit look into the issue of a large number of farmers,
who had taken loans from private
5.28 As against the target of ` 3,25,000 crore for
moneylenders, not being covered under the
agricultural credit in 2009-10, the banking system
disbursed ` 3,84,514 crore to the agricultural sector,
loan waiver scheme’
thereby exceeding the target by around 18 per cent. i. Financial literacy and counselling campaigns be
Commercial banks and RRBs together extended undertaken to increase awareness among farmers
on the KCC.
credit to 77.49 lakh new farmers during 2009-10
ii. Banks be encouraged to educate their rural branch
and cooperative banks to13.43 lakh, thus taking the staff about the KCC.
total number of farmers brought newly under the iii. Banks use farmers’ cooperatives and SHG
banking system to 90.92 lakh. The total number of federations as banking correspondents to increase
agricultural loans financed as of March 2010 was outreach.
4.82 crore. The total credit flow to agriculture during iv. The coverage of new farmers in the command areas
of bank branches and new areas be ensured through
2010-11 by commercial banks, cooperative banks,
meaningful and purposeful conduct of gram sabhas
and RRBs up to September 2010 was of the order and kisan credit camps at regular intervals.
of ` 1,94,392.63 crore, amounting to 52 per cent of v. Bankers who have already been advised by the RBI
the annual target of ` 3,75,000 crore (Table 5.8). to lend without any collateral, up to Rs1 lakh per
farmer, put such advice into more widespread
practice through joint liability groups (JLGs) of tenant
Kisan Credit Card (KCC) Scheme farmers, sharecroppers, and oral lessees.
5.29 The KCC Scheme has become a widely vi. State governments exempt agricultural loan
accepted mechanism for delivery of credit to agreements from stamp duty.
farmers. The scheme now also covers borrowers vii. The KCC be technology enabled, including the
conversion to a smart card with withdrawals and
of the long-term cooperative credit structure. In order
remittances enabled at automated teller machines
to safeguard the interests of KCC holders, NABARD (ATMs), points of sale(PoS), and through hand-held
has allowed banks the discretion to opt for ‘any machines; banks need to have core banking solutions
insurance company of their choice’. The banks have (CBS) in place at the earliest, to enable technology
to benefit the farmer.
to keep in mind the guiding principles of the Personal
viii. The KCC limit be fixed for five years, based on the
Accident Insurance Scheme (PAIS), especially the banker’s assessment of total credit needs of the
premium-sharing formula and coverage, while farmer for a full year, and that the limit be operated
negotiating with insurance companies. by the borrower as and when needed, with no sub-
limits for kharif and rabi, or for stages of cultivation.
5.30 With a view to making the KCC more user- ix. Each withdrawal under the KCC be allowed to be
friendly, NABARD has enlarged its scope to cover liquidated in twelve months without the need to
term loans for agriculture and allied activities, bring the debit balances in the account to zero at
any point of time.
including a reasonable component for consumption
x. There be automatic renewal and annual increase on
needs, besides the existing facility of providing crop credit limit linked to inflation rate.

Table 5.8 : Flow of Institutional Credit to Agriculture and Allied Activities

(` crore)
Sl. No. Agency 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11*
1. Co-operative Banks** 39,786 42,480 48,258 36,762 63,492 29,450
Share (%) 22 18 19 13 17 15
2. RRB 15,223 20,435 25,312 26,724 35218 19141
Share (%) 8 9 10 9 9 10
3. Commerc-ial Banks 1,25,477 1,66,486 1,81,088 2,28,951 2,85,799 14,5801
Share (%) 70 73 71 78 74 75
Total 1,80,486 2,29,401 2,54,658 2,92,437 3,84,514 1,94,392
Source: NABARD.
Notes* Up to 30 September 2010. **Including Others.

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108 Economic Survey 2010-11

loan limit. Crop loans disbursed under the KCC Table 5.10 : Release under ADWDR
Scheme for notified crops are covered under
` crore)
(`
Rashtriya Krishi BimaYojana (National Crop
Agency Debt Debt Total
Insurance Scheme), a crop insurance scheme Waiver Relief
introduced to protect the interests of the farmer
State Cooperative 15,540.63 2062.02 17,602.65
against loss of crop yield caused by natural
A Banks
calamities, pest attacks, etc. The KCC has thus
SCARDB 3409.06 248.41 3657.47
become a single window for a comprehensive
Source: RBI credit
product. The major policy recommendations of the RRBs 6045.19 694.68 6739.87
Task Force ‘to look into the issue of a large number Total 24,994.89 3005.11 28,000.00
of farmers, who had taken loans from private Note: SCARDB—State Cooperative Agriculture and Rural
moneylenders, not being covered under the loan Development Bank.
waiver scheme’ under the chairmanship of Shri
Umesh Chandra Sarangi, constituted by the Ministry FINANCIAL PERFORMANCE OF BANKS
of Agriculture, Government of India, are given in
5.33 The consolidated balance sheet of the SCBs
Box 1.1.
in India during 2009-10 showed relatively sluggish
5.31 The banking system has issued 955.77 lakh growth performance, marked mainly by slow deposit
KCCs involving a total sanctioned credit limit of growth. The growth in profits of SCBs too was lower
` 4,37,241 crore as on 31 August 2010. The share in 2009-10 than in the previous year. Further, there
of commercial banks stood at 44.4 per cent of the was a rise in the NPA ratio of SCBs in 2009-10.
Though asset quality emerged as a concern for the
total number of cards issued by the banking sector
banking sector, its capital adequacy remained fairly
followed by cooperative banks (40.9 per cent) and
robust during the year, providing cushion for any future
RRBs (14.7 per cent). The year-wise and agency-
losses.
wise break-up of the KCCs issued is given in
Table 5.9. 5.34 The overall growth in the consolidated balance
sheet of SCBs in 2009-10 was 15.0 per cent, which
Agriculture Debt Waiver and Debt Relief was lower than the 21.1 per cent during the previous
(ADWDR) Scheme 2008 year. Moreover, the decline in growth could be seen
across all bank groups with the notable exception
5.32 NABARD is the nodal agency for
of new private-sector banks. The working results of
implementing the Scheme in respect of cooperative SCBs under different bank groups are given in Table
credit institutions and RRBs. The Bank has released 5.11.
of ` 24,994.89 crore towards debt waiver and
5.35 The major factor contributing to the slowdown
` 3005.11 crore towards debt relief claims. The
in growth of banks’ balance sheets was deposits.
agency-wise break-up of the releases under the
The growth in deposits of SCBs decelerated to
ADWDR is given in Table 5.10.

Table 5.9 : Agency-wise KCCs Issued and Amount Sanctioned

(As on 31 August 2010)
Agency Cards Issued (lakh) ` crore)
Amount Sanctioned (`
2007- 2008- 2009- 2010- Total* 2007- 2008- 2009- 2010- Total*
08 09 10 11 08 09 10 11
Co-operative Banks 20.91 13.44 17.43 12.31 391.19 19,991 8428 7606 5164 1,45,758
RRBs 17.73 14.15 19.49 6.73 140.94 8783 5648 10,132 4329 58,293
Commer-cial Banks 46.06 58.34 53.13 — 423.64 59,530 39,009 39,940 — 2,33,190
Total 84.70 85.93 90.05 19.04 955.77 88,264 53,085 57,678 9493 4,37,241
Source: NABARD
Note:*Since inception of the scheme (1998). —: Not available.

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 Financial Intermediation and Markets 109
Table 5.11 : Working Results of SCBs
Items Foreign Old pvt. sector New pvt. All SCB
PSBs banks banks sector banks
2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10

` Crore)
(`
A Income 3,15,554 3,54,876 45,216 36,341 21,572 23,649 81,360 79,405 4,63,702 4,94,271
(i) Interest Income 2,73,088 3,06,488 30,322 26,390 18,790 20,565 66,282 62,310 3,88,482 4,15,752
(ii) Other Income 42,466 48,388 14,894 9951 2782 3084 15,078 17,095 75,220 78,519
B Expenditure 2,81,182 3,15,619 37,706 31,600 19,163 21,337 72,901 68,606 4,10,952 4,37,162
(i) Interest Expended 1,93,447 2,11,940 12,819 8938 12,834 14,076 44,123 37,130 2,63,223 2,72,084
(ii) Intermediation Cost
(operating expenses) 55,504 65,991 12,298 11,102 3939 4715 17,840 17,960 89,581 99,769
(iii) Provisions and
Contingencies 32,231 37,688 12,589 11,560 2390 2545 10,937 13,516 58,147 65,310
C Operating Profit
(A - Bi - Bii) 66,604 76,945 20,098 16,301 4799 4858 19,396 24,315 1,10,897 1,22,419
D Net Profit (A-B) 34,373 39,257 7510 4741 2409 2312 8459 10,799 52,750 57,109
E Net Interest Income
(spread) (Ai - Bi) 79,642 94,548 17,503 17,452 5956 6489 22,158 25,180 1,25,258 1,43,669
F Total Assets 37,65,757 44,41,114 4,45,129 4,33,219 2,32,292 2,68,977 7,95,464 8,81,831 52,38,642 60,25,141
G Net Income(Aii + E) 1,22,108 1,42,936 32,397 27,403 8738 9573 37,236 42,275 2,00,479 2,22,188
As per cent of
Total Asset
A Income 8.38 7.99 10.16 8.39 9.29 8.79 10.23 9.00 8.85 8.20
(i) Interest Income 7.25 6.90 6.81 6.09 8.09 7.65 8.33 7.07 7.42 6.90
(ii) Other Income 1.13 1.09 3.35 2.30 1.20 1.15 1.90 1.94 1.44 1.30
B Expenditure 7.47 7.11 8.47 7.29 8.25 7.93 9.16 7.78 7.84 7.26
(i) Interest Expended 5.14 4.77 2.88 2.06 5.52 5.23 5.55 4.21 5.02 4.52
(ii) Intermediation Cost
(operating expenses) 1.47 1.49 2.76 2.56 1.70 1.75 2.24 2.04 1.71 1.66
(iii) Provisions and
Contingencies 0.86 0.85 2.83 2.67 1.03 0.95 1.37 1.53 1.11 1.08
C Operating Profit
(A - Bi - Biii) 1.77 1.73 4.52 3.76 2.07 1.81 2.44 2.76 2.12 2.03
D Net Profit (A-B) 0.91 0.88 1.69 1.09 1.04 0.86 1.06 1.22 1.01 0.95
E Net Interest Income
(spread) (Ai - Bi) 2.11 2.13 3.93 4.03 2.56 2.41 2.79 2.86 2.39 2.38

Source: RBI.

17.0 per cent in 2009-10 from 22.4 per cent in 2008- than that at the end of March 2009. There was an
09. Further, credit growth constrained by a slowdown increase in the proportion of current and savings
in deposits growth was placed at 16.6 per cent in accounts (CASA) in 2009-10 in contrast to a
2009-10 as compared to 21.1 per cent in 2008-09. declining trend noted in the recent past.
The deceleration in credit growth was accentuated
5.36 On a year-on-year basis, the major drivers
on account of an overall slowdown of the economy
of non-food bank credit in 2009-10 were industry
in the aftermath of the global financial turmoil.
and agriculture. There was considerable slowdown
However, while bank credit growth witnessed a
in the growth in personal loans and also credit to
slowdown on a year-on-year basis, bank credit in
the services sector during the year.
general and credit to industry in particular, showed
distinct signs of recovery from October 2009 5.37 The growth in investments of banks
onwards as economic recovery became more decelerated to 18.6 per cent in 2009-10 from 23.1
broad-based. The credit-deposit ratio at the end of per cent in 2008-09. Also, there were notable
March 2010 was 73.6 per cent, marginally lower changes in the investment portfolio of banks. The

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110 Economic Survey 2010-11

percentage contribution of investments in approved during 2008-09, when the global financial crisis
securities declined in 2009-10 in contrast to an intensified. However, in 2009-10, the gross NPA ratio
increase in 2008-09, which was mainly due to banks’ increased to 2.39 per cent from 2.25 per cent in
preference to park their funds in low-risk instruments 2008-09. The total amount recovered and written off
against the backdrop of prevailing global in 2009-10 was ` 49,210 crore. This was lower than
uncertainties. Consequently, the percentage the fresh NPAs added during 2009-10, which were
contribution of investments in non-SLR(statutory to the tune of ` 65,674 crore. The sectoral distribution
liquidity ratio) securities by banks showed an showed a growing proportion of priority-sector NPAs
increase in 2009-10 driven mainly by an increase in 2009-10. Among the various channels of recovery
in investments in mutual funds. available to banks for dealing with non-performing
5.38 Similar to the slowdown in growth in balance loans, the Securitization and Reconstruction of
sheets, there was a moderation in the financial Financial Assets and Enforcement of Security
performance of SCBs in 2009-10. The growth in Interest (SARFAESI) Act has been by far the most
both income and expenditure of the SCBs slowed important channel. However, in 2009-10, there was
down leading to a deceleration in the growth of a decline in the amount of NPAs recovered under
operating and net profits of SCBs. Every indicator the SARFAESI Act as a per cent of total amount of
of profitability also showed a decline in 2009-10. NPAs involved under this channel.
The most salient indicator of profitability, return on 5.42 Among bank groups, the gross NPA ratio of
assets (RoA), declined to 1.05 per cent in 2009-10 PSBs increased to 2.19 per cent in 2009-10 from
from 1.13 per cent in 2008-09. Further, return on 1.97 per cent in the previous year. The most notable
equity (RoE) too declined to 14.3 per cent in 2009- increase in NPA ratio in 2009-10 could be seen in
10 from 15.4 per cent in 2008-09. the case of foreign banks. The NPA ratio of foreign
5.39 After abstaining during 2008-09, banks banks increased to 4.29 per cent in 2009-10 from
started resorting to the capital market for raising 3.80 per cent in 2008-09.
resources in 2009-10. The resources raised from
the capital market by banks were in the form of both Technological Developments in Banks
public issues and private placement in 2009-10. 5.43 Banks in India are using information
technology (IT) not only to improve their own internal
Capital Adequacy Ratio processes but also to increase facilities and services
5.40 One of the major indicators of growing financial to their customers. Efficient use of technology has
soundness of the Indian banking system was the facilitated accurate and timely management of the
improvement in the capital to risk-weighted assets increased volumes of transactions of banks,
ratio (CRAR). The CRAR of all SCBs under Basel I consistent with a larger customer base. Of the total
framework improved to 13.6 per cent by end-March number of PSB branches, 97.8 per cent were fully
2010 from 13.2 per cent a year earlier, thus remaining computerized at the end of March 2010.
significantly above the stipulated minimum of 9.0 5.44 ATMs, particularly off-site ATMs, act as
per cent. As all commercial banks in India excluding substitutes for bank branches in offering a means of
RRBs and local area banks became Basel II anytime cash withdrawal to customers. Growth of
compliant as on 31 March 2009, it is essential to ATMs, which had generally been steadily rising in
also look at the capital adequacy position under this recent years, was observed to be 37.8 per cent in
framework. Under the Basel II framework too, the 2009-10. More importantly, the growth in off-site ATMs
CRAR of SCBs showed an increase in 2009-10; the too was comparably high at 44.6 per cent during the
CRAR improved to 14.5 per cent at the end of March year. At the end of March 2010, the percentage of
2010 from 14.0 per cent at the end of March 2009. off-site ATMs to total ATMs stood at 45.7 per cent
At the bank group level, every bank group reported for all SCBs.
CRAR, on an average, of over 13 per cent under the 5.45 Another important technological development
Basel II framework. in 2009-10 was a significant increase in the
percentage of PSB branches implementing CBS from
NPAs of the Banking Sector 79.4 per cent at the end of March 2009 to 90 per
5.41 The NPAs of SCBs emerged as a major area cent at the end of March 2010. The percentage of
of concern in 2009-10. Gross NPAs as percentage branches under CBS was much larger for the SBI
of gross advances of SCBs had remained unchanged group as compared to nationalized banks.

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 Financial Intermediation and Markets 111
5.46 With computerization in general, and CBS in Bank was raised subject to conditions, with
particular, having reached near completion, it is effect from December 8, 2008, for a period
important to leverage this technological advancement of one year. On a review, the relaxation
to look at areas beyond CBS that can help in not allowed in December 2008 to select FIs
just delivering quality and efficient services to (SIDBI, NHB and EXIM Bank) in resource
customers but also generating and managing raising norms for FIs has been co-terminated
information effectively. With regard to the second with refinance facility. Accordingly,
aspect of information management, a system of outstanding borrowings of FIs should be
receiving data from banks by the RBI in an automated within the normal prudential limit i.e. ceiling
manner without any manual intervention is under on aggregate resources at 10 times of net
examination. owned fund (NOF) and umbrella limit at one
time of NOF with effect from 31st March,
5.47 Going forward, there are a number of issues
2010.
with regard to development of banking technology
that need to be addressed. These relate to further 5.49 The guidelines regarding lending under
improvement in back office management in the form consortium arrangements/ multiple banking
of streamlining the management information system arrangements, provisioning coverage for advances,
(MIS), strengthening centralized processing, prudential norms on creation and utilization of floating
customer relationship management (CRM), and IT provisions, additional disclosures in notes to
Governance. Back office technological advancement accounts, and prudential norms on income
would help divert banks’ resources more towards recognition, asset classification and provisioning
front office management, thereby increasing the pertaining to advances—computation of NPA levels
customer focus of their services and supporting and projects under implementation—issued to banks
greater financial penetration and inclusion. have been mutatis mutandis applied to select FIs.
Further, the guidelines regarding know your customer
(KYC) norms/ anti-money laundering (ALM)
NON-BANKING FINANCIAL standards/ combating of financing of terrorism (CFT)
INSTITUTIONS (NBFIS) and sale of investments held under Held to Maturity
category issued to banks are also applicable to select
Financial Institutions (FIs)
FIs.
5.48 As at the end of March 2010, four institutions,
namely Export Import Bank of India (Exim Bank), 5.50 Resources raised by FIs during 2009-10 were
NABARD, the National Housing Bank (NHB), and considerably higher than those during the previous
the Small Industries Development Bank of India year. While the long-term resources raised witnessed
(SIDBI) were regulated by the RBI as all-India FIs. a sharp climb during 2009-10 as compared to the
In the wake of recovery in the global as well as previous year, the short-term and foreign currency
Indian economy during 2009-10, the RBI issued resources raised increased marginally. SIDBI
the following instructions to roll back the liquidity mobilized the largest amount of resources, followed
support measures initiated for FIs during 2008-09 by Exim Bank and NHB (Table 5.12).
for on-lending to housing finance companies
5.51 Total sources/deployment of funds of FIs
(HFCs)/NBFCs/micro-finance institutions (MFIs) and
increased modestly by 1.8 per cent to ` 3,02,610
exporters:
crore during 2009-10. A major part of the funds of FIs
(i) The refinance facility of ` 7,000 crore, ` was raised internally (51.8 per cent), followed by
5,000 and ` 4,000 crore for SIDBI, Exim external sources (41.9 per cent); ‘other sources’
Bank and NHB, respectively, under the formed only a small part. The funds raised from
relevant provisions of the Reserve Bank of internal sources declined by 18.9 per cent, while
India Act, 1934 sanctioned in December those from external sources rose by 38.8 per cent
2008 have been withdrawn with effect from over the year 2009-10 mainly due to recovery in the
the close of business on 31st March, 2010. global financial markets during 2009-10. A large part
(ii) The ceiling on aggregate resources raised of the funds raised was used for fresh deployments
including the funds mobilised under (56.8 per cent), followed by repayment of past
‘umbrella limit’ by SIDBI, NHB and EXIM borrowings (38.0 per cent). Other deployments

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112 Economic Survey 2010-11

Table 5.12 : Resources Mobilized by FIs

` Crore)
(`
Financial Total Resources Raised
Institutions
Long-term Short-term Foreign Currency Total Total Outstanding
(as at the
end of March)
2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2009 2010
Exim Bank 3197 8150 8905 5052 3800 5193 15,902 18,395 37,202 40,509
NABARD 4252 16 3494 12,330 - - 7746 12,346 26,867 24,922
NHB 3124 7518 16,881 10,306 - - 20,005 17,824 16,503 10,598
SIDBI 5625 13,253 8811 11,500 1361 987 15,797 25,740 24,487 30,186
Total 16,198 28,937 38,091 39,188 5161 6,180 59,450 74,3051,05,059 1,06,215
Source: Respective FIs.
Notes:-: (i) Nil/Negligible. (ii) Long-term rupee resources comprise borrowings by way of bonds/ debentures;
and short-term resources comprise commercial papers (CPs), term deposits, certificate of deposits (CDs),

including interest payments formed only a small part Table 5.13 : Pattern of Sources and
of the funds of FIs. The repayment of past Deployment of Funds of FIs*
borrowings recorded a sharp increase of 103.2 per
(Amount in ` crore)
cent, while fresh deployment registered a decline of
11.7 per cent over the year (Table 5.13). Item 2008-09 2009-10 Percentage
Variation
in 2009-10
Non-Bank Finance Companies (NBFCs)
Sources of Funds
5.52 NBFCs as a whole account for 11.2 per cent (i+ii+iii) 2,97,296 3,02,610 1.8
(100.0) (100.0)
of assets of the total financial system. With the
growing importance assigned to financial inclusion, (i) Internal 1,93,294 1,56,733 -18.9
(65.0) (51.8)
NBFCs have come to be regarded as important
(ii) External 91,314 1,26,813 38.8
financial intermediaries particularly for the small-
(30.7) (41.9)
scale and retail sectors. There are two broad