CH.

1 An Introduction to Indian
Economy
1.1 Indian economy at glance
1.2 Nature of Indian economy
(a) Pre economic reform
(b) Post economic reform
1.1 Problems of Indian economy in present scenario
1.2 Significance of the study
India has been one of the best performers in the world economy in
recent years, but rapidly rising inflation and the complexities of
running the world’s biggest democracy are proving challenging.

India’s economy has been one of the stars of global economics in recent
years, growing 9.2% in 2008 and 9.6% in 2007. Growth had been supported
by markets reforms, huge inflows of FDI, rising foreign exchange reserves,
both an IT and real estate boom, and a flourishing capital market.

Like most of the world, however, India is facing testing economic times in
2008. The Reserve Bank of India had set an inflation target of 4%, but by the
middle of the year it was running at 11%, the highest level seen for a
decade. The rising costs of oil, food and the resources needed for India’s
construction boom are all playing a part.

India has to compete ever harder in the energy market place in particular
and has not been as adept at securing new fossil fuel sources as the
Chinese. The Indian Government is looking at alternatives, and has signed a
wide-ranging nuclear treaty with the US, in part to gain access to nuclear
power plant technology that can reduce its oil thirst. This has proved
contentious though, leading to leftist members of the ruling coalition pulling
out of the government.

India has to compete ever harder in the energy market place in particular
and has not been as adept at securing new fossil fuel sources as the
Chinese. The Indian Government is looking at alternatives, and has signed a
wide-ranging nuclear treaty with the US, in part to gain access to nuclear
power plant technology that can reduce its oil thirst. This has proved
contentious though, leading to leftist members of the ruling coalition pulling
out of the government.

As part of the fight against inflation a tighter monetary policy is expected,

but this will help slow the growth of the Indian economy still further, as
domestic demand will be dampened. External demand is also slowing,
further adding to the downside risks.

The introduction of open market economy and globalization created lots of

hues and cries in various countries and among them India was an active
participant. But after the passing of a decade or more, India is regarded as
one of the fastest and rising economies in the world. However, in the initial
years of 90’s the Indian market was quite worried over the stiff contest in the
international scenario and for that reason there was a slow and gradual
process of development. But in this new millennium the Indian market is
matured than ever before and therefore has started to attain the booming
condition. This can be evident from the way the multi-national corporations
are establishing their branches in the Indian cities and others are getting
interested to follow this approach. On the other hand the opportunity of
working overseas to the present young generation has come like never
before. Even a section of them are getting acquainted with this consumerist
culture by working in 24x7 environments and are spending good many bucks
for shopping from their massive remunerations. To the estimation of
internationally acclaimed journals and magazines this is the new face of
India and the perfect representation of a burgeoning economy.

According to a report by Goldman Sachs, India can sustain an 8 percent

growth rate till 2020 and would overtake UK to become the world’s fifth-
largest economy by the middle of the next decade at this pace. The global
consultancy major said its baseline projections for India’s potential output
growth show that the economy can sustain growth rates of about 8 pc till
2020. The report forecasts that India’s gross domestic product (GDP) will
surpass Italy, France and the UK by the middle of next decade (around
2015). It will then overtake Germany, Japan and finally the US before 2050,
to emerge as the second-largest economy after China.

"As the share of the United States of America in world gross domestic
product falls from 21 to 18 per cent and that of India rises from 6 to 11 per
cent in 2008, the latter emerges as the third pole in the global economy,"
economist Arvind said in ADB India Economic Bulletin.

1.1 INDIAN ECONOMY AT GLANCE

Indian Economy has significantly grown in the recent years. Both social and
economic indicators have reflected their respective positive impact for the
development of the Economy. Indian economy has achieved what it has been
hoping for quite some time. The Feel Good Factor. Perhaps at no time
during the post-liberalization period, Indian economy has shown such kind of
optimism. It is poised to enhance its real economic growth rate by more than
two full percentage points in the current year, holding a huge reserve of
foreign exchange that is rather unprecedented, interest rates at an all time
low and inflation very much under control, increasingly robust corporate
performance, strong operational performance from the banking sector, surge
in the stock prices and a whole range of reforms right from new norms for
issuance in the primary markets to the setting up of a central listing
authority to benchmarking Indian stock exchanges with the international
best practices.

The prospects for growth in the financial year 2003-04 appear extremely
encouraging. Monsoon has been pretty good. More than 90 percent of the
gross cropped area received normal or excess rainfall. Most of the states also
received good rainfall this year raising hopes of better performance of
agriculture. Agriculture growth in the year 2003-04 is expected to leapfrog
to7.5 percent against negative growth of –3.2 percent. Industry is expected
to growth at 5.0 on top of the 6 percent growth registered in the previous
year and Services growth would maintain the tempo of around 7 percent
growth registered in the last few years

POVERTY AND SOCIAL India South Low - Income

Asia Countries

POPULATION, mid year (millions) 2004 1,079. 1,448 2338

7

Average Annual Growth, 2000-05

Population (%) 1.6% 1.7% 1.8%

Labor force 2.1% 2.1% 2.1%

Poverty In India (% of population below 29 - -
national poverty line)

Urban Population (% of total population) 29 28 30

Life expectancy at birth (years) 63 63 58

Infant mortality rate (per 1000 births) 65 66 79

Child Malnutrition (% of children under 5) 47 48 44

Acess to an improved water source 84 84 75

Illiteracy 39 41 39

Gross primary enrollment (% of school age 99 97 94

pop)

Male 107 105 101

Female 90 92 88

Some More Indicators on People

Population Growth 1.5 for the year (2003-04)

Fertility Rate (births per woman) 2.9 for the year (2002-03)

Child immunization, measles (% of 67 for the year (2002-03)

under 12 mos)

Technology and Infrastructure

Fixed lines and mobile telephones 51.9 (for the year 2002-03)
(per 1000 people)

Personal computers (per 1000 7.2 (for the year 2002-03)

people)

Internet users 16.6 million (for the year 2002-03)

Key Economic Long Term Trends

1984 1994 2003 2004

GDP (US $ billions) 206.5 322.6 600.7 694

(Average annual growth) 1984-94 1994-04 2003 2004

GDP 5.4 5.8 8.6 6.9

GDP per capita 3.3 4.1 7 5.4

Exports of goods and services 9 12.8 4.9 8

Structure Of The Economy

(% Of GDP) 1984 1994 2003 2004

Agriculture 35.2 30.4 22.8 21.2

Industry 26.2 27.1 26.4 27

Manufacturing 16.4 16.9 15.6 16.1

Services 38.7 42.5 50.7 51.8

General Information
• India is a Union of States with parliamentary system of Government
• Land area: 3.29 million square kilometers
• Capital: New Delhi
• Population: 1.4 billion (March 1, 2007)
• Climate: mainly tropical with temperature ranging from 10o – 40o C in
most parts
• Time zone: GMT + 5 1/2 hours
• Major international airports: New Delhi, Mumbai, Chennai, Kolkata,
Bangalore, Hyderabad, Thiruvananthapuram
• Major ports of entry: Chennai, Ennore, Haldia, Jawaharlal Nehru, Kolkata,
Kandla, Kochi, Mormugoa, Mumbai, New Mangalore, Paradip and Tuticorin,
Vizag.
Basic Economic Statistics
• GDP at current prices (2007-08): $ 1.16 trillion
• GDP (PPP) (2006) = US $4156 (5th largest in the world)
• GDP growth rate (2007-08) : 9%
• Exchange rate: Rs.49.77/$ (as on October 29, 2008)
• Foreign Exchange reserves: US $273.89 billion (as on 17.10.2008)
• Exports (2007-08): US $159 billion, Growth Rate: 25.8 %
• Imports (2007-08): US $239.65 billion, Growth Rate : 29%
• Foreign Direct Investment (2007-08): US $32.44
• Portfolio Investment (2007): US $17.23 billion

Investment Outlook
A number of studies in the recent past has highlighted the growing
attractiveness of India as an investment destination. According to the study
by Goldman Sachs, Indian economy is expected to continue growing at the
rate of 5% or more till 2050. Indian economy is slated to become the fourth
largest economy by 2050. Some other conclusions are listed below:

• 2nd most attractive destination - ATKEARNEY Business Confidence

Index, 2007

• India can sustain 10% growth rate-OECD Survey, 2007

• India is the second most attractive location for foreign direct

investment- UNCTAD's World Investment Report, 2008

• India will be 90% of the US economy by 2050 - Price Water House

Coopers report, March 2008

1.1 Nature of Indian economy

The Economy of India is been a center of World’s eye. It’s been most
favourite of the World because of rapid continuity of growth 9.2% in 2008
and 9.6% in 2007. Growth of India been supported by reform, foreign inflow
of investment, boom in both IT and real estate.

In general, the Indian economy is controlled by the government, and there

remains a great disparity between the rich and the poor. Ranked by the
exchange rate of the United States Dollar, the Indian economy is the twelfth
largest in the world.

In Purchasing Power Parity GDP, the figure for India was 1.5 trillion US Dollars
in 2008. The per capita income of India is 4,542 US Dollars in the context of
Purchasing Power Parity. This is primarily due to the 1.1 billion population of
India, the second largest in the world after China. In nominal terms, the
figure comes down to 1,089 US Dollars, based on 2007 figures. According to
the World Bank, India is classed as a low-income economy.

Recent trends have seen India exporting the services of a numerous

information technology (IT) professionals. IT professionals have been sought
for their expertise in software, software engineering and other financial
services. This has been possible as a result of the high skill levels of Indian IT
professionals.

Other areas where India is expected to make progress include

manufacturing, construction of ships, pharmaceuticals, aviation,
biotechnology, tourism, nanotechnology, retailing and telecommunications.
Growth rates in these sectors are expected to increase dramatically.

Over the years the Indian government has taken an economic approach that
has been influenced, in part, by the Socialist movements. The Indian national
government has maintained a high and authoritative level of control over
certain areas of the Indian economy like the participation of the private
sector, foreign direct investment, and foreign trade.

The economy of India is as diverse as it is large, with a number of major

sectors including manufacturing industries, agriculture, textiles and
handicrafts, and services. Agriculture is a major component of the Indian
economy, as over 66% of the Indian population earns its livelihood from this
area. The Nature of Indian Economy is covered with given points:-
1) Most Developing Economy: India is been world famous and star of
world’s eye because of its continuing rapid growth in recent years, growing
9.2% in 2008 and 9.6% in 2007. It is believed that its rapid speed of growth
will leave china economy too in upcoming years as china is the no. one
contender in developing race.

Its center of gravity is the economy. Economic growth is the key to a

country's success or failure, and India is fully aware that it has the potential
to create a position for itself among the world's leading nations. Though the
popular message in international media is that India is on the brink of
explosive growth and is following the path of its eastern neighbor, China,
Stratfor holds a slightly more pessimistic view of India's future. India has
grown at an average annual rate of 6 percent during the past decade and
will be able to sustain a strong level of GDP growth at rates reaching as high
as 6 percent to 8 percent in the coming decade. However, India will not be
able to reach China's current level of economic growth in the next 10 years.

On the surface, India has several factors favorable to rapid economic growth.
With a population of more than 1 billion, it has a massive and highly-
educated labor pool from which to draw its resources. In addition, India does
not face the language barrier China has, since English is prevalent
throughout the country. This significantly contributes to its fast-growing
software development sector by facilitating communication with India's
Western trading partners.

2) Mixed Economy: The economy of India is considered as a mixed

economy also. A mixed economy is an economic system that includes a
variety of public and government control, or a mixture of capitalism and
socialism.

There is not one single definition for a mixed economy, but relevant aspects
include: a degree of private economic freedom (including privately owned
industry) intermingled with centralized economic planning and government
regulation (which may include regulation of the market for environmental
concerns, social welfare or efficiency, or state ownership and management of
some of the means of production for national or social objectives).

3) Command Economy: The Economy of India is a Command or Planned

Economy. In a Command Economy or Planned Economy, the central or state
government regulates various factors of production. In fact, the government
is the final authority to take decisions regarding production, utilization of the
finished industrial products and the allocation of the revenues earned from
their distribution.

India's current government is economically focused; actually getting state

governments to implement reforms is a chore.

The Indian government's democratic structure and competing views of

India's openness to trade and investment allow the states' chief ministers to
ignore government policy reforms and pursue each political party's agenda,
which is usually designed to garner votes through populist appeals. An
important distinction to make is that while FDI is strongly sought after and
encouraged in China, it is merely approved of and often resented by state
governments in India. These differing attitudes toward reform define the
contrast between the Chinese and Indian approach to economic
development.

4) Social Economy: Over the years the Indian government has taken an
economic approach that has been influenced, in part, by the Socialist
movements. The Indian national government has maintained a high and
authoritative level of control over certain areas of the Indian economy like
the participation of the private sector, foreign direct investment, and foreign
trade.

5) Fully Liberalized Economy: Indian economy had experienced major

policy changes in early 1990s. The new economic reform, popularly known
as, Liberalization, Privatization and Globalization (LPG model) aimed at
making the Indian economy as fastest growing economy and globally
competitive. The series of reforms undertaken with respect to industrial
sector, trade as well as financial sector aimed at making the economy more
efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a
new chapter has dawned for India and her billion plus population. This period
of economic transition has had a tremendous impact on the overall economic
development of almost all major sectors of the economy, and its effects over
the last decade can hardly be overlooked. Besides, it also marks the advent
of the real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian
mindset, as it deviates from the traditional values held since Independence
in 1947, such as “self reliance” and socialistic policies of economic
development, which mainly due to the inward looking restrictive form of
governance, resulted in the isolation, overall backwardness and inefficiency
of the economy, amongst a host of other problems. This despite the fact that
India has always had the potential to be on the fast track to prosperity.

(a) Pre economic reform

Indian economy was facing a protectionist posture in that time. This is

described as under pre economic scenario. That time India was in try to
attend freedom.The Indian independence movement in 1940s, led by
Mahatma Gandhi, was based on the general dislike of anything and
everything “foreign”, especially the one originating from Britain. The public
rallies to burn imported goods were famous. There was a strong belief that
India can produce everything at home, can be “self reliant” and “self
dependent” (popularly called “Swadeshi movement”). Moreover, it was
believed by strong nationalist movement that the import of any good was
there to bring the “foreign dominance”. As a result foreign direct investment
was seen to be a curse rather than blessing or a means of attracting higher
investment. As a consequence, multi-national corporations were seen as the
exploitative entities that merely benefit from cheap labor in the country, and
were believed to be the ones that take the profits back home to better their
lavish living and conspicuous standard of living.

Naturally, it was hard to convince the policy makers that import substitution
was an expensive policy action in economic sense, even if politically it
seemed to be a “patriotic” thing to do. This “extreme nationalism” was
evident in blindly carried out economic planning process of early days.
Leftists had an influence on each economic plan which increased tariffs on
almost all imports, and economy resulted into almost “autarky” stage. The
export and import were so low that they formed less than one percent of the
total world trade. These low figures of trade were by the country that has
had roughly 15% of world population. The highest merchandise export figure
was reached in 1980 (of $919.8 million) and they declined significantly in
1981 and 1982. For 6 years in a row (from 1979 to 1985) the merchandise
exports were stagnant at roughly $700 to $800 million. The services sector
did not fair any better. While the services exports were steadily increasing in
this period the figures were less than $400.00 million. This was a period
when computer technology services were unheard of and services sector in
India was poorly developed so exports were not that attractive.
Merchandise imports were highest in 1981 (at $925.5 million) and with that
exceptional year they were steadily increasing. One can see the giant jump
in imports of merchandise in year 1974, thanks to the first oil price increase
by the OPEC. India had not found any indigenous source of oil then and was
primarily dependent upon the foreign oil. Nonetheless the total merchandise
import bill never crossed $1 billion, one of the primary reasons for that was
the tremendous tariff rates and strict quotas on major imports. In 1974, the
policy makers, when they were pointed out the tremendous increase in trade
(im) balance from $16.2 million (1973) to $160.4 million (1974), efficiently
blamed the oil price rise.

In general 1965 to 1985 was a turbulent time period. It witnessed the

stagnation of the economy as well as that of Indian trade.

(b) Post economic reform

Indian economy had experienced major policy changes in early 1990s. The
new economic reform, popularly known as, Liberalization, Privatization
and Globalization (LPG model) aimed at making the Indian economy as
fastest growing economy and globally competitive. The series of reforms
undertaken with respect to industrial sector, trade as well as financial sector
aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a
new chapter has dawned for India and her billion plus population. This period
of economic transition has had a tremendous impact on the overall economic
development of almost all major sectors of the economy, and its effects over
the last decade can hardly be overlooked. Besides, it also marks the advent
of the real integration of the Indian economy into the global economy.

Now that India is in the process of restructuring her economy, with

aspirations of elevating herself from her present desolate position in the
world, the need to speed up her economic development is even more
imperative. And having witnessed the positive role that Foreign Direct
Investment (FDI) has played in the rapid economic growth of most of the
Southeast Asian countries and most notably China, India has embarked on
an ambitious plan to emulate the successes of her neighbors to the east and
is trying to sell herself as a safe and profitable destination for FDI.
The Important Reform Measures (Step Towards
liberalization)
Indian economy was in deep crisis in July 1991, when foreign currency
reserves had plummeted to almost $1 billion; Inflation had roared to an
annual rate of 17 percent; fiscal deficit was very high and had become
unsustainable; foreign investors and NRIs had lost confidence in Indian
Economy. Capital was flying out of the country and we were close to
defaulting on loans. Along with these bottlenecks at home, many
unforeseeable changes swept the economies of nations in Western and
Eastern Europe, South East Asia, Latin America and elsewhere, around the
same time. These were the economic compulsions at home and abroad that
called for a complete overhauling of our economic policies and programs.
Major measures initiated as a part of the liberalization and globalization
strategy in the early nineties included the following:

Devaluation: The first step towards globalization was taken with the
announcement of the devaluation of Indian currency by 18-19 percent
against major currencies in the international foreign exchange market. In
fact, this measure was taken in order to resolve the BOP crisis.

Disinvestment-In order to make the process of globalization smooth,

privatization and liberalization policies are moving along as well. Under the
privatization scheme, most of the public sector undertakings have been/ are
being sold to private sector.

Dismantling of The Industrial Licensing Regime At present, only six

industries are under compulsory licensing mainly on accounting of
environmental safety and strategic considerations. A significantly amended
locational policy in tune with the liberalized licensing policy is in place. No
industrial approval is required from the government for locations not falling
within 25 kms of the periphery of cities having a population of more than one
million

Allowing Foreign Direct Investment (FDI) across a wide spectrum of

industries and encouraging non-debt flows. The Department has put in place
a liberal and transparent foreign investment regime where most activities
are opened to foreign investment on automatic route without any limit on
the extent of foreign ownership. Some of the recent initiatives taken to
further liberalize the FDI regime, inter alias, include opening up of sectors
such as Insurance (upto 26%); development of integrated townships (upto
100%); defense industry (upto 26%); tea plantation (upto 100% subject to
divestment of 26% within five years to FDI); enhancement of FDI limits in
private sector banking, allowing FDI up to 100% under the automatic route
for most manufacturing activities in SEZs; opening up B2B e-commerce;
Internet Service Providers (ISPs) without Gateways; electronic mail and voice
mail to 100% foreign investment subject to 26% divestment condition; etc.
The Department has also strengthened investment facilitation measures
through Foreign Investment Implementation Authority (FIIA).

Non Resident Indian Scheme the general policy and facilities for foreign
direct investment as available to foreign investors/ Companies are fully
applicable to NRIs as well. In addition, Government has extended some
concessions especially for NRIs and overseas corporate bodies having more
than 60% stake by NRIs

Throwing Open Industries Reserved For The Public Sector to Private

Participation. Now there are only three industries reserved for the public
sector

• Abolition of the (MRTP) Act, which necessitated prior approval for capacity
expansion.
• The removal of quantitative restrictions on imports.
• The reduction of the peak customs tarifffrom over 300 per cent prior to
the 30 per cent rate that applies now.
• Wide-ranging financial sector reformsin the banking, capital markets, and
insurance sectors, including the deregulation of interest rates, strong
regulation and supervisory systems, and the introduction of
foreign/private sector competition.

Impact of Globalization of Indian Economy

Reforms in Indian Economy over the last decade and half in the areas like
Savings, Investment and Fiscal Discipline, Industrial and Trade Policy,
Foreign Direct Investment, Agriculture, Infrastructure Development, Financial
Sector, Privatization and Social Sector Development in Health and Education
is remarkable.
Though some economic reforms were introduced by the Rajiv Gandhi
government (1985-89), it was the NarasimhaRao Government that gave a
definite shape and start to the new economic reforms of globalization in
India. Presenting the 1991-92 Budget, Finance Minister Manmohan Singh
said: “After four decades of planning for industrialization, we have now
reached a stage where we should welcome, rather fear, foreign investment.
Direct foreign investment would provide access to capital, technology and
market.”

Globalization in India had a favorable impact on the overall growth rate of

the economy. This is major improvement given that India’s growth rate in the
1970’s was very low at 3% and GDP growth in countries like Brazil,
Indonesia, Korea, and Mexico was more than twice that of India. Though
India’s average annual growth rate almost doubled in the eighties to 5.9%, it
was still lower than the growth rate in China, Korea and Indonesia. The
pickup in GDP growth has helped improve India’s global position.
Consequently India’s position in the global economy has improved from the
8th position in 1991 to 4th place in 2001; when GDP is calculated on a
purchasing power parity basis. During 1991-92 the first year of Rao’s reforms
program, The Indian economy grew by 0.9%only. However the Gross
Domestic Product (GDP) growth accelerated to 5.3 % in 1992-93, and 6.2%
1993- 94. A growth rate of above 8% was an achievement by the Indian
economy during the year 2003-04. India’s GDP growth rate can be seen from
the following graph since independence.

In the Memorandum of Economic Policies dated August 27, 1991 to the IMF,
the Finance Minister submitted in the concluding paragraph: “The
Government of India believes that the policies set forth in the Memorandum
are adequate to achieve the objectives of the program, but will take any
additional measures appropriate for this purpose. In addition, the
Government will consult with the Fund on the adoption of any measures that
may be appropriate in accordance with the policies of the Fund on such
consultations.”

The Government of India affirmed to implement the economic reforms in

consultation with the international bank and ‘in accordance’ of its policies.
Successive coalition governments from 1996 to 2004, led by the Janata Dal
and BJP, adopted faithfully the economic policy of liberalization. With
Manmohan Singh returned to power as the Prime Minister in 2004, the
economic policy initiated by him has become the lodestar of the fiscal
outlook of the government.

The Bright Side of Globalization

Due to globalization not only the GDP has increased but also the direction of
growth in the sectors has also been changed. Earlier the maximum part of
the GDP in the economy was generated from the primary sector but now the
service industry is devoting the maximum part of the GDP. The services
sector remains the growth driver of the economy with a contribution of more
than 57 per cent of GDP. India is ranked 18th among the world’s leading
exporters of services with a share of 1.3 per cent in world exports. The
services sector is expected to benefit from the ongoing liberalization of the
foreign investment regime into the sector. Software and the ITES-BPO
sectors have recorded an exponential growth in recent years. The rate of
growth of the Gross Domestic Product of India has been on the increase from
5.6 per cent during 1980-90 to seven per cent in the 1993-2001 period. In
the last four years, the annual growth rate of the GDP was impressive at 7.5
per cent (2003-04), 8.5 per cent (2004-05), nine per cent (2005-06) and 9.2
per cent (2006-07). Prime Minister Manmohan Singh is confident of having a
10 per cent growth in the GDP in the Eleventh Five Year Plan period.

(% Of GDP) 1984-85 2002-3 2003-4 2004-5

Agriculture 35.2 26.5 21.7 20.5

Industry 26.1 22.1 21.6 21.9

Services 38.7 51.4 56.7 57.6

Source: Economic Survey 2000 &2005

The foreign exchange reserves (as at the end of the financial year) were $ 39
billion (2000-01), $ 107 billion (2003-04), $ 145 billion (2005-06) and $ 180
billion (in February 2007). It is expected that India will cross the $ 200 billion
mark soon.

Foreign Direct investment inflows

The cumulative FDI inflows from 1991 to September 2006 were Rs.1, 81,566
crores (US $ 43.29 billion). The sectors attracting highest FDI inflows are
electrical equipments including computer software and electronics (18 per
cent), service sector (13 per cent), telecommunications (10 per cent),
transportation industry (nine per cent), etc. In the inflow of FDI, India has
surpassed South Korea to become the fourth largest recipient.

INVESTMENT 1990-91 2002-03 2003-04 2004-05

A.DIRECT 97 5,035 4,673 5,536

INVESTMENT

I. Equity
2,764 2,387 3,363
a) Government
(SIA/FIPB)
919 928 1,062
b) RBI
739 534 1,259
c) Acquisition of
shares

d) Equity cap. of 916 735 930

unincorporated
bodies

II. Reinvested 190 190 112

earnings

III. Other capital

1,833 1,798 1,816
B. PORTFOLIO
INVESTMENT
438 488 357
a) GDRs/ADRs

b) FIIs @

c) Off-shore
funds & others 6 979 11,377 8,909

C. TOTAL (A+B) 600 459 613

377 10,918 8,280

6 2 - 16

103 6,014 16,050 14,445

Source: Reserve Bank of India Annual Report for 2004-05

India controls at the present 45 per cent of the global outsourcing market
with an estimated income of $ 50 billion.

Foreign Trade (Export- Import)

India’s imports in 2004-05 stood at US$ 107 billion recording an increase of
35.62 percent compared with US$ 79 billion in the previous fiscal. Export
also increased by 24 percent as compared to previous year. It stood at US $
79 billion in 2004-05 compared with US $ 63 billion in the previous year. Oil
imports zoomed by 19 percent with the import bill being US $ 29.08 billion
against USD 20.59 billionin the corresponding period last year. Non-oil
imports during 2004-05 are estimated at USD 77.036 billion, which is 33.62
percent higher than previous year's imports of US $ 57.651 billion in 2003-
04.

Trade 1990-91 2002-3 2003-4 2004-5

Total Exports 18477 52719 63843 79247

Total imports 27915 61412 79149 107066

Trade -9438 -8693 -8693 -27819

Balance

Source – Reserve Bank of India Annual Report 2004-05

Thus it is found that the economic reforms in the Indian economy initiated
since July 1991 have led to fiscal consolidation, control of inflation to some
extent, increase in foreign exchange reserve and greater foreign investment
and technology towards India. This has helped the Indian economy to grow
at a faster rate. Presently more than 100 of the 500 fortune companies have
a presence in India as compared to 33 in China.

In respect of market capitalization (which takes into account the market

value of a quoted company by multiplying its current share price by the
number of shares in issue), India is in the fourth position with $ 894 billion
after the US ($ 17,000 billion), Japan ($ 4800 billion) and China ($ 1000).
India is expected to soon cross the trillion dollar mark.

As per the Forbes list for 2007, the number of billionaires of India has risen to
40 (from 36 last year)—more than those of Japan (24), China (17), France
(14) and Italy (14) this year. A press report was jubilant: “This is the richest
year for India.” The combined wealth of the Indian billionaires marked an
increase of 60 per cent from $ 106 billion in 2006 to $ 170 billion in 2007.
The 40 Indian billionaires have assets worth about Rs. 7.50 lakh crores
whereas the cumulative investment in the 91 Public Sector Undertakings by
the Central Government of India is Rs. 3.93 lakh crores only.

India Economic Reform' can be summarized as -

• Telecommunications industry– both mobile and fixed service is now open
to private sectors (even foreign investor) and as a result, the
telecommunications services are growing fast.

• Insurance industry - has been opened to private investors, both domestic

and foreign.

• Diesel oil and gas prices have undergone some increases.

• Few reductions have also been made in fertilizer and food subsidies.

• The value added tax has undergone substantial rationalization.

• The economy has registered growth at more than 6% and with full
economic stability.

• Inflation has been low and foreign exchange reserves are sufficient to
finance imports for more than 8 months.
• Rising incomes have helped bring down poverty and according to reports,
the proportion of poor in total population has declined.

The greatest change in ' India Economic Reform ' has been in the 'attitude'.
Differences on which reforms to undertake first and at what pace still exist,
but all agrees that ' India Economic Reform ' must continue. Initial fears that
changes of power at the center will retard the ' India Economic Reform '
process or even reverse it, turned futile. The task of implementing reforms in
a democracy is complex but the experience of the past decade and half
shows that change can occur. Moreover, the success of the ' India Economic
Reform ' in delivering growth and removing poverty must move forward with
less hick-up. The support for ' Post 1990 Economic Reforms in India ' is much
stronger than it was 15 years back.

1.1 Problems of Indian economy in present

scenario

As India prepares itself for becoming an economic superpower, it must

expedite socio-economic reforms and take steps for overcoming institutional
and infrastructure bottlenecks inherent in the system. Availability of both
physical and social infrastructure is central to sustainable economic growth.

Since independence Indian economy has thrived hard for improving its pace
of development. Notably in the past few years the cities in India have
undergone tremendous infrastructure up gradation but the situation in not
similar in most part of rural India. Similarly in the realm of health and
education and other human development indicators India's performance has
been far from satisfactory, showing a wide range of regional inequalities with
urban areas getting most of the benefits. In order to attain the status that
currently only a few countries in the world enjoy and to provide a more
egalitarian society to its mounting population, appropriate measures need to
be taken. Currently Indian economy is facing these challenges:
1.Population explosion.
This monster is eating up into the success of India. According to 2001
census of India, population of India in 2001 was 1,028,610,328, growing at a
rate of 2.11% approx. Such a vast population puts lots of stress on economic
infrastructure of the nation. Thus India has to control its burgeoning
population.

2. Poverty.
As per records of National Planning Commission, 36% of the Indian
population was living Below Poverty Line in 1993-94. Though this figure has
decreased in recent times but some major steps are needed to be taken to
eliminate poverty from India.

3. Unemployment.
The increasing population is pressing hard on economic resources as well as
job opportunities. Indian government has started various schemes such as
JawaharRozgarYojna, and Self Employment Scheme for Educated
Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean.

4. Rural urban divide.

It is said that India lies in villages, even today when there is lots of talk
going about migration to cities, 70% of the Indian population still lives in
villages. There is a very stark difference in pace of rural and urban growth.
Unless there isn't a balanced development Indian economy cannot grow.

5. Inflation.
Fuelled by rising wages, property prices and food prices inflation in India is
an increasing problem. Inflation is currently between 6-7%. A record 98% of
Indian firms report operating close to full capacity with economic growth of
9.2% per annum inflationary pressures is likely to increase, especially with
supply side constraints such as infrastructure. The wholesale-price index
(WPI) rose to an annualized 6.6% in January 2007.

6. Poor educational standards.

Although India has benefited from a high % of English speakers. (important
for call centre industry) there is still high levels of illiteracy amongst the
population. It is worse in rural areas and amongst women. Over 50% of
Indian women are illiterate.

7. Poor Infrastructure.
Many Indians lack basic amenities lack access to running water. Indian public
services are creaking under the strain of bureaucracy and inefficiency. Over
40% of Indian fruit rots before it reach the market; this is one example of the
supply constraints and inefficiency’s facing the Indian economy.

8. Balance of Payments deterioration.

Although India has built up large amounts of foreign currency reserves the
current account deficit has deteriorate in recent months. This deterioration is
a result of the overheating of the economy. Aggregate Supply cannot meet
Aggregate demand so consumers are sucking in imports. Excluding workers
remittances India’s current account deficit is approaching 5% of GDP

9. High levels of debt.

Buoyed by a property boom the amount of lending in India has grown by
30% in the past year. However there are concerns about the risk of such
loans. If they are dependent on rising property prices it could be problematic.
Furthermore if inflation increases further it may force the RBI to increase
interest rates. If interest rates raise substantially it will leave those indebted
facing rising interest payments and potentially reducing consumer spending
in the future

10. Inequality has risen rather than decreased.

It is hoped that economic growth would help drag the Indian poor above the
poverty line. However so far economic growth has been highly uneven
benefiting the skilled and wealthy disproportionately. Many of India’s rural
poor are yet to receive any tangible benefit from the India’s economic
growth. More than 78 million homes do not have electricity. 33% (268million)
of the population live on less than $1 per day. Furthermore with the spread
of television in Indian villages the poor are increasingly aware of the
disparity between rich and poor.
11. Large Budget Deficit.
India has one of the largest budget deficits in the developing world.
Excluding subsidies it amounts to nearly 8% of GDP. Although it is fallen a
little in the past year. It still allows little scope for increasing investment in
public services like health and education.

12. Rigid labour Laws.

As an example Firms employing more than 100 people cannot fire workers
without government permission. The effect of this is to discourage firms from
expanding to over 100 people. It also discourages foreign investment. Trades
Unions have an important political power base and governments often shy
away from tackling potentially politically sensitive labour laws.

These challenges can be overcome by the sustained and planned economic

reforms.

These include:

• Maintaining fiscal discipline

• Orientation of public expenditure towards sectors in which India is faring

badly such as health and education.

• Introduction of reforms in labour laws to generate more employment

opportunities for the growing population of India.

• Reorganization of agricultural sector, introduction of new technology,

reducing agriculture's dependence on monsoon by developing means of
irrigation.

• Introduction of financial reforms including privatization of some public

sector banks.

1.1 Significance of the study

India, located in South Asia is a large country that ranks second in the world
in terms of population and seventh in terms of geographical area. Its
civilization is very old dating back to at least 5000 years. Its greatly
diversified land includes various types of forests, broad plains, large
coastlines, tallest mountains and deserts. The people belong to different
ethnic groups and religions and they speak several languages. When
Columbus and Vasco da Gama were attempting to explore new sea routes,
India was among the richest countries in the world. It became one of the
poorest in the world by the end of thecolonial era in 1947 when India
became independent.

India as an economy is as diverse as it is large, with a number of major

sectors including manufacturing industries, agriculture, textiles and
handicrafts, and services. Agriculture is a major component of the Indian
economy, as over 66% of the Indian population earns its livelihood from this
area. India has been one of the best performers in the world economy in
recent years, but rapidly rising inflation and the complexities of running the
world’s biggest democracy are proving challenging.Indian Economy has
significantly grown in the recent years. Both social and economic indicators
have reflected their respective positive impact for the development of the
Economy.

In the Social sector the best example today is 108 million children attend
primary schools in India by making the country’s education system the
second largest in the world after China.

In the economic sector Gross Domestic Product (GDP) in nominal terms of

US$692 billion in 2004, has made the country the world’s tenth largest
economy.

Real GDP grew by 6.9 percent in 2004/05 compared to 8.5 percent a year
earlier. Prospects for real GDP growth for 2007-08 is 8 to 8.5 percent.

External position of the economy is becoming significantly stronger. Exports

have grown, especially exports of services, which grew by 105 percent in
2004-05.

Growth in services has largely been fueled by the information technology

boom in which India is emerging as a world leader.

India has a democratic and federal system of government with 29 states and
6 union territories. Like most other colonies, India greatly lagged behind
economically and socially compared to the developed world. Periodic
estimates of national income available since mid-nineteenth century indicate
that the per capita income virtually stagnated in India till independence
when world income grew several fold due to industrial and technological
revolution. A large mass of the population was living in abysmal conditions.
The national government formed after independence placed priority on
‘economic growth with social justice’. A mixed economy model with a major
role for the state in industrial production was adopted with an emphasis on
import substitution strategy. While this policy helped to lay the foundation
for industrialization and technological change, national income growth
remained low at about 3-4 per cent per annum for several decades. The
outward oriented Asian countries grew much faster during this period by
taking advantage of post-war expansion in international trade and
investment flows.

The introduction of open market economy and globalization created lots of

hues and cries in various countries and among them India was an active
participant. But after the passing of a decade or more, India is regarded as
one of the fastest and rising economies in the world. However, in the initial
years of 90’s the Indian market was quite worried over the stiff contest in the
international scenario and for that reason there was a slow and gradual
process of development. But in this new millennium the Indian market is
matured than ever before and therefore has started to attain the booming
condition. This can be evident from the way the multi-national corporations
are establishing their branches in the Indian cities and others are getting
interested to follow this approach. On the other hand the opportunity of
working overseas to the present young generation has come like never
before. Even a section of them are getting acquainted with this consumerist
culture by working in 24x7 environments and are spending good many bucks
for shopping from their massive remunerations. To the estimation of
internationally acclaimed journals and magazines this is the new face of
India and the perfect representation of a burgeoning economy.

However, the greatest strength of the Indian economy has been its wide-
ranging middle class. This is comprised of 17 million households or 90 million
people with an earning between $ 4,500 and $22,000. This has come out in
the latest study report of the National Council for Applied Economic
Research. To the expectation of this organization another 287 million
individuals are almost ready to get attached with this group of middle class.
There is an expectation that by 2010 an army of 561 million middle class
individuals will create a great influence on the increasing Indian economy.

Finally, in the wake of a balance of payments crisis in 1991, Indian policy

makers initiated a process of wide ranging economic reforms to shift to a
more market friendly trade and industrial policy regime. India was a
latecomer to economic liberalization. The economic reform process has been
steady but gradual because of a need for wide consultation and broad
consensus so necessary in a democratic society. The process of consultation
and debate has contributed to non-reversal of policies even under different
political parties that have formed the government after the reforms. Whether
and to what extent India has achieved the stated objective of higher growth
and faster poverty removal during the post-reform period has been a matter
of intense debate. These developments make India an interesting case
study.

METHODOLOGY

The aim of this analysis is to compare the performance of Indian economy

during pre-reforms period with the performance of post-reforms period and
to find out during which period the economy status were better.

The lifeblood of business and commerce in the modern world is information.

The ability to gather, analyze, evaluate, present and utilize information is
therefore is a vital skill for the manager of today.

a. PERIOD OF STUDY AND SOURCES OF DATA

For pre-reforms period the data from the year 1977-78 to the year 1990-91
have been analysed and for post-reforms period the data from 1991-92 to
2004-05 have been used.
The study is limited to a sample of top 10 investing countries e.g. Mauritius,
USA etc. and top 10 sectors e.g. electrical instruments, telecommunications
etc.

b. Data Collection

The research will be done with the help Secondary data (from internet site
and journals).

The data is collected mainly from websites, annual reports, World Bank
reports, research reports, already conducted survey analysis, database
available etc.
c. STATISTICAL TOOLS

Mean, percentage analysis, correlation and regression statistical tools have

used in this analysis. To find out year wise data interpolation and
extrapolation tools have also used in this study.

CH. 2 INDIA’S AGRICULTURE

PERFORMANCE

2.1 Pre Green Revolution

2.2 Post Green revolution

2.3 New Agricultural Policy

2.4 Performance of Agriculture

 2.5 Problems in Indian Agriculture

2.6 Indian agriculture in 2015

Agriculture (a term which encompasses farming) is the art, science or

practice of producing food, feed, fiber and many other desired goods by the
systematic raising of plants and animals. Agri is from Latin ager ("a field"),
and culture is from Latin cultura, meaning "cultivation" in the strict sense of
tillage of the soil. Thus a literal reading of the English word yields tillage of
the soil of a field. In actual usage, Agriculture denotes a broad array of
activities essential to food and material production, including all techniques
for raising and processing livestock no less than those essential to crop
planting and harvesting.

Indian agriculture began by 9000 BCE as a result of early cultivation of

plants, and domestication of crops and animals. Settled life soon followed
with implements and techniques being developed for agriculture. Double
monsoons led to two harvests being reaped in one year. Indian products
soon reached the world via existing trading networks and foreign crops were
introduced to India. Plants and animals—considered essential to their
survival by the Indians—came to be worshiped and venerated.
Agriculture is also described as the backbone of Indian economy, mainly
because of three reasons. One, agriculture constitutes largest share of
country's national income though the share has declined from 55 percent in
early 1950s to about 25 percent by the turn of the Century. Two, more than
half of India’s workforce is employed in its agriculture sector. Three, growth
of other sectors and overall economy depends on performance of agriculture
to a considerable extent. Besides, agriculture is a source of livelihood and
food security for large majority of vast population of India. Agriculture has
special significance for low income, poor and vulnerable sections of rural
society. Because of these reasons agriculture is at the core of socio
economic development and progress of Indian society, and proper policy for
agriculture sector is crucial to improve living standards and to improve
welfare of masses.

STRUCTURE OF INDIAN AGRICULRURE:

India’s agricultural area is vast with total arable and permanent cropland of
170 million hectares in 2003- 2005. It has the second largest arable area in
the world after the United States. OECD in it’s 2007 agricultural policy
monitoring report notes that Indian agriculture is dominated by a large
number of small scale holdings that are predominantly owner occupied.

The average size of holding in the late nineties was about 1.4 hectares and
continues to decline, as farms are usually divided on inheritance. Out of
India’s 116 million farmers, around 60% have less than 1 hectare and
together they farm 17% of the land. The share of medium to large farms
(above 4 hectares) is very small at just over 7% of all holdings, but these
farms account for around 40% of the land. The implication is that many of
the very small farms are subsistence holdings, with low investment and little
productivity growth.
There are 10 types of agriculture in India -

1. Shifting agriculture- is an agricultural system in which plots of land are

cultivated temporarily, then abandoned. This system often involves clearing
of a piece of land followed by several years of wood harvesting or farming,
until the soil loses fertility. Once the land becomes inadequate for crop
production, it is left to be reclaimed by natural vegetation, or sometimes
converted to a different long-term cyclical farming practice.

2. Subsistence farming - is self-sufficiency farming in which farmers grow

only enough food to feed their families.

3. Intensive agriculture - is an agricultural production system

characterized by the high inputs of capital, labour, or heavy usage of
technologies such as pesticides and chemical fertilizers relative to land area.

4. Extensive agriculture- is an agricultural production system that uses

small inputs of labour, fertilizers, and capital, relative to the land area being
farmed.

Extensive farming most commonly refers to sheep and cattle farming in

areas with low agricultural productivity, but can also refer to large-scale
growing of wheat, barley and other grain crops in areas like the Murray-
Darling Basin.

5. Commercial agriculture - The production of crops for sale, crops

intended for widespread distribution to wholesalers or retail outlets (e.g.
supermarkets). In commercial farming wheat, maize, tea, coffee, sugarcane,
cashew, rubber, banana, cotton are harvested. Commercial agriculture
includes livestock production and livestock grazing.

6. Monoculture - Monoculture is the agricultural practice of producing or

growing one single crop over a wide area. The term is also applied in several
fields. It is usually developed by extensive growing farmers.

7. Dry farming – Dry land farming is an agricultural technique for non-

irrigated cultivation of land which receives little natural rainfall.

8. Crop rotation - is the practice of growing a series of dissimilar types of

crops in the same area in sequential seasons for various benefits such as to
avoid the buildup of pathogens and pests that often occurs when one species
is continuously cropped. Crop rotation also seeks to balance the fertility
demands of various crops to avoid excessive depletion of soil nutrients.

The middle ages saw irrigation channels reach a new level of sophistication
in India and Indian crops affecting the economies of other regions of the
world under Islamic patronage. Land and water management systems were
developed with an aim of providing uniform growth. Despite some stagnation
during the later modern era the independent Republic of India was able to
develop a comprehensive agricultural program.

But with stillslow agricultural growth is a concern for policymakers as some

two-thirds of India’s people depend on rural employment for a living. Current
agricultural practices are neither economically nor environmentally
sustainable and India's yields for many agricultural commodities are low.
Poorly maintained irrigation systems and almost universal lack of good
extension services are among the factors responsible. Farmers' access to
markets is hampered by poor roads, rudimentary market infrastructure, and
excessive regulation.

2.1 Pre Green Revolution

The period from 1950/51 to mid 1960s which is also called pre green
revolution period witnessed tremendous agrarian reforms, institutional
changes and development of major irrigation projects. The intermediary
landlordism was abolished, tenant operations were given security of farming
and ownership of land. Land ceiling acts were imposed by all the states to
eliminate large sized holdings and cooperative credit institutions were
strengthened to minimise exploitation of cultivators by private money
lenders and traders (Radhakrishna 1993). Land consolidation was also
affected to reduce the number of land fragments.

Expansion of area was the main source of growth in the pre green revolution
period. The scope for area expansion diminished considerably in the green
revolution period in which growth rate in area was less than half the growth
rate in the first period. Increase in productively became the main source of
growth in crop output and there was significant acceleration in yield growth
in green revolution period. The main source of productivity increase was
technological breakthrough in wheat and rice. The country faced severe food
shortage and crisis in early 1960s which forced the policy makers to realise
that continuous reliance on food imports and aid imposes heavy costs in
terms of political pressure and economic instability (Rao 1996) and there was
a desperate search for a quick breakthrough in agricultural production.
One choice before the country was to go for spread of new seeds of high
yielding varieties (HYV) of wheat and rice which were available with CGIAR 3
institutes like CIMMYT and IRRI. Amidst a serious debate the then
Government took bold decision to go for the import and spread of HYV of
wheat and rice which involved use of fertilisers and irrigation. This marked
second phase of agriculture policy in the country. The strategy produced
quick results as there was quantum jump in yield. Consequently, wheat and
rice production in a short span of 6 years between 1965/66 and 1971/72
witnessed an increase of 30 million tonnes which is 168 percent higher than
the achievement of 15 years following 1950/51.

The biggest achievement of new agricultural strategy, also known as green

revolution technology, has been attainment of self sufficiency in foodgrains.
Since the green revolution technology involved use of modern farm inputs,
its spread led to fast growth in agro input industry. Agrarian reforms during
this period took back seat while research, extension, input supply, credit,
marketing, price support and spread of technology were the prime concern
of policy makers (Rao 1996).

Two very important institutions, namely Food Corporation of India and

Agricultural Prices Commission, were created in this period in the beginning
of green revolution period, to ensure remunerative prices to producers,
maintain reasonable prices for consumers, and to maintain buffer stock to
guard against adverse impact of year to year fluctuations in output on price
stability. These two institutions have mainly benefited rice and wheat crops
which are the major cereals and staple food for the country.

2.2 Post Green revolution

The next phase in Indian agriculture began in early 1980s. While there was
clear change in economic policy towards delicensing and deregulation in
Industry sector, agriculture policy lacked direction and was marked by
confusion. Agricultural growth accompanied by increase in real farm
incomes led to emergence of interest groups and lobbies which started
influencing farm policy in the country. There has been a considerable
increase in subsidies and support to agriculture sector during this period
while public sector spending in agriculture for infrastructure development
started showing decline in real term but investments by farmers kept on
moving on a rising trend (Mishra and Chand 1995, Chand 2001). The output
growth, which was concentrated in very narrow pockets, became broad-
based and got momentum. The rural economy started witnessing process of
diversification which resulted into fast growth in non foodgrain output like
milk, fishery, poultry,vegetables, fruits etc which accelerated growth in
agricultural GDP during the 1980s. This growth seems largely market driven.

2.3 New Agricultural Policy

The New Agricultural Policy was announced in July, 2000. The Policy aims at
a growth rate in excess of four per cent per annum in the agriculture sector,
based on efficient use of resources and conservation of soil, water and
biodiversity. It seeks to realise the growth potential of Indian agriculture,
strengthen rural infrastructure for faster agricultural development, promote
value addition, accelerate the growth of agro business, create employment
in rural areas, secure a fair standard of living for farmers and agricultural
workers and their families, discourage migration to urban areas and face the
challenges arising out of economic liberalisation and globalisation. While
aiming at four per cent annual growth rate in the agriculture sector over the
next two decades, the policy seeks to achieve growth with equity, i.e.,
growth which is wide-spread across regions and farmers.

The Policy seeks to actualise the vast untapped growth potential of Indian
agriculture, strengthen rural infrastructure to support faster agricultural
development, promote value addition, accelerate the growth of agro
business, create employment in rural areas, secure a fair standard of living
for the farmers and agricultural workers and their families, discourage
migration to urban areas and face the challenges arising out of economic
liberalization and globalisation. Over the next two decades, it aims to attain:
• A growth rate in excess of 4 per cent per annum in the agriculture sector.
• Growth that is based on efficient use of resources and conserves our soil,
water and bio-diversity;
• Growth with equity, i.e., growth which is widespread across regions and
farmers;
• Growth that is demand driven and caters to domestic markets and
maximises benefits from exports of agricultural products in the face of the
challenges arising from economic liberalization and globalisation;
• Growth that is sustainable technologically, environmentally and
economically.

Sustainable Agriculture
It seek to promote technically sound, economically viable, environmentally
non-degrading, and socially acceptable use of country's natural resources -
land, water and genetic endowment to promote sustainable development of
agriculture. Measures will be taken to contain biotic pressures on land and to
control indiscriminate diversion of agricultural lands for non-agricultural
purposes. The unutilized wastelands will be put to use for agriculture and
afforestation. Particular attention will be given for increasing cropping
intensity through multiple-cropping and inter-cropping.

The Government accords abiding importance to improving the quality of the

country's land and soil resources. Reclamation of degraded and fallow lands
as well as problem soils will be given high priority to optimize their
productive use. Special emphasis will be laid on conserving soils and
enriching their fertility. Management of land resources on watershed basis
will receive special attention. Areas of shifting cultivation will also receive
particular attention for their sustainable development. Integrated and holistic
development of rainfed areas will be promoted by conservation of rain water
by vegetative measures on watershed basis and augmentation of biomass
production through agro and farm forestry with the involvement of the
watershed community. All spatial components of a watershed, i.e. arable
land, non-arable and drainage lines will be treated as one geo-hydrological
entity. Management of grazing land will receive greater attention for
augmenting availability of animal feed and fodder. A long-term perspective
plan for sustainable rainfed agriculture through watershed approach will be
vigorously pursued for development of two thirds of India's cropped area
which is dependent on rains.
Rational utilization and conservation of the country's abundant water
resources will be promoted. Conjunctive use of surface and ground water will
receive highest priority. Special attention will be focused on water quality
and the problem of receding ground-water levels in certain areas as a result
of over-exploitation of underground aquifers. Proper on-farm management of
water resources for the optimum use of irrigation potential will be promoted.
Use of in situ moisture management techniques such as mulching and use of
micro overhead pressured irrigation systems like drip and sprinkler and
green house technology will be encouraged for greater water use efficiency
and improving productivity, particularly of horticultural crops. Emphasis will
be placed on promotion of water harvesting structures and suitable water
conveyance systems in the hilly and high rainfall areas for rectification of
regional imbalances. Participatory community irrigation management will be
encouraged.

Erosion and narrowing of the base of India's plant and animal genetic
resources in the last few decades has been affecting the food security of the
country. Survey and evaluation of genetic resources and safe conservation of
both indigenous and exogenously introduced genetic variability in crop
plants, animals and their wild relatives will receive particular attention. The
use of bio-technologies will be promoted for evolving plants which consume
less water, are drought resistant, pest resistant, contain more nutrition, give
higher yields and are environmentally safe. Conservation of bio-resources
through their ex situ preservation in Gene Banks, as also in situ conservation
in their natural habitats through bio-diversity parks, etc., will receive a high
priority to prevent their extinction. Specific measures will also be taken to
conserve indigenous breeds facing extinction. There will be a time bound
programme to list, catalogue and classify country's vast agro bio-diversity.

Sensitization of the farming community with the environmental concerns will

receive high priority. Balanced and conjunctive use of bio-mass, organic and
inorganic fertilizers and controlled use of agro chemicals through integrated
nutrients and pest management (INM & IPM) will be promoted to achieve the
sustainable increases in agricultural production. A nation-wide programme
for utilization of rural and urban garbage, farm residues and organic waste
for organic matter repletion and pollution control will be worked out.

Agro forestry and social forestry are prime requisites for maintenance of
ecological balance and augmentation of bio-mass production in the
agricultural systems. Agro-forestry will receive a major thrust for efficient
nutrient cycling, nitrogen fixation, organic matter addition and for improving
drainage. Farmers will be encouraged to take up farm/agro-forestry for
higher income generation by evolving technology, extension and credit
support packages and removing constraints to development of agro and
farm forestry. Involvement of farmers and landless labourers will be sought
in the development of pastures/forestry programmes on public wastelands
by giving financial incentives and entitlements to the usufructs of trees and
pastures.

Food and Nutritional Security

Special efforts will be made to raise the productivity and production of crops
to meet the increasing demand for food generated by unabated
demographic pressures and raw materials for expanding agro-based
industries. A regionally differentiated strategy will be pursued, taking into
account the agronomic, climatic and environmental conditions to realize the
full growth potential of every region. Special attention will be given to
development of new crop varieties, particularly of food crops, with higher
nutritional value through adoption of bio-technology particularly, genetic
modification, while addressing bio-safety concerns

Animal husbandry and fisheries also generate wealth and employment in the
agriculture sector. Development of animal husbandry, poultry, dairying and
aqua-culture will receive a high priority in the efforts for diversifying
agriculture, increasing animal protein availability in the food basket and for
generating exportable surpluses. A national livestock breeding strategy will
be evolved to meet the requirements of milk, meat, egg and livestock
products and to enhance the role of draught animals as a source of energy
for farming operations and transport. Major thrust will be on genetic
upgradation of indigenous/native cattle and buffaloes using proven semen
and high quality pedigreed bulls and by expanding artificial insemination
network to provide services at the farmer's doorstep.
Generation and dissemination of appropriate technologies in the field of
animal production as also health care to enhance production and
productivity levels will be given greater attention. Cultivation of fodder crops
and fodder trees will be encouraged to meet the feed and fodder
requirements and to improve animal nutrition and welfare. Priority attention
will also be given to improve the processing, marketing and transport
facilities, with emphasis on modernization of abattoirs, carcass utilization
and value addition thereon. Since animal disease eradication and quarantine
is critical to exports, animal health system will be strengthened and disease
free zones created. The involvement of cooperatives and the private sector
will be encouraged for development of animal husbandry, poultry and dairy.
Incentives for livestock and fisheries production activities will be brought at
par with incentives for crop production.
An integrated approach to marine and inland fisheries, designed to promote
sustainable aquaculture practices, will be adopted. Biotechnological
application in the field of genetics and breeding, harmonal applications
immunology and disease control will receive particular attention for
increased aquaculture production. Development of sustainable technologies
for fin and shell fish culture as also pearl-culture, their yield optimization,
harvest and post-harvest operations, mechanization of fishing boats,
strengthening of infrastructure for production of fish seed, berthing and
landing facilities for fishing vessels and development of marketing
infrastructure will be accorded high priority. Deep sea fishing industry will be
developed to take advantage of the vast potential of country's exclusive
economic zone.

Generation and Transfer of Technology

A very high priority will be accorded to evolving new location-specific and

economically viable improved varieties of agricultural and horticultural crops,
livestock species and aquaculture as also conservation and judicious use of
germplasm and other biodiversity resources. The regionalization of
agricultural research, based on identified agro-climatic zones, will be
accorded high priority. Application of frontier sciences like bio-technology,
remote sensing technologies, pre and post-harvest technologies, energy
saving technologies, technology for environmental protection through
national research system as well as proprietary research will be encouraged.
The endeavour will be to build a well organized, efficient and result-oriented
agriculture research and education system to introduce technological change
in Indian agriculture. Upgradation of agricultural education and its
orientation towards uniformity in education standards, women
empowerment, user-orientation, vocationalization and promotion of
excellence will be the hallmark of the new policy..

The research and extension linkages will be strengthened to improve quality

and effectiveness of research and extension system. The extension system
will be broad based and revitalized. Innovative and decentralized institutional
changes will be introduced to make the extension system farmer-responsible
and farmer-accountable. Role of KrishiVigyanKendras (KVKs), Non-
Governmental Organizations (NGOs), Farmers Organizations, Cooperatives,
corporate sector and para-technicians in agricultural extension will be
encouraged for organizing demand driven production systems. Development
of human resources through capacity building and skill upgradation of public
extension functionaries and other extension functionaries will be accorded a
high priority. The Government will endeavour to move towards a regime of
financial sustainability of extension services through affecting in a phased
manner, a more realistic cost recovery of extension services and inputs,
while simultaneously safeguarding the interests of the poor and the
vulnerable groups.

Mainstreaming gender concerns in agriculture will receive particular

attention. Appropriate structural, functional and institutional measures will
be initiated to empower women and build their capabilities and improve their
access to inputs, technology and other farming resources.

Adequate and timely supply of quality inputs such as seeds, fertilizers, plant
protection chemicals, bio-pesticides, agricultural machinery and credit at
reasonable rates to farmers will be the endeavour of the Government. Soil
testing and quality testing of fertilisers and seeds will be ensured and supply
of spurious inputs will be checked. Balanced and optimum use of fertilizers
will be promoted together with use of organic manures & bio-fertilizers to
optimize the efficiency of nutrient use.

Development, production and distribution of improved varieties of seeds and

planting materials and strengthening and expansion of seed and plant
certification system with private sector participation will receive a high
priority. A National Seed Grid will be established to ensure supply of seeds
especially to areas affected by natural calamities. The National Seeds
Corporation (NSC) and State Farms Corporation of India (SFCI) will be
restructured for efficient utilization of investment and manpower.

Protection to plant varieties through a sui generis legislation, will be granted

to encourage research and breeding of new varieties particularly in the
private sector in line with India's obligations under TRIPS Agreement. The
farmers will, however, be allowed their traditional rights to save, use,
exchange, share and sell their farm saved seeds except as branded seeds of
protected varieties for commercial purpose. The interests of the researchers
will also be safeguarded in carrying out research on proprietary varieties to
develop new varieties.

Integrated pest management and use of biotic agents in order to minimize

the indiscriminate and injudicious use of chemical pesticides will be the
cardinal principle covering plant protection. Selective and eco-friendly farm
mechanization through appropriate technology will be promoted, with special
reference to rainfed farming to reduce arduous work and to make agriculture
efficient and competitive as also to increase crop productivity.

The Government will endeavour to create a favourable economic

environment for increasing capital formation and farmer's own investments
by removal of distortions in the incentive regime for agriculture, improving
the terms of trade with manufacturing sectors and bringing about external
and domestic market reforms, backed by rationalization of domestic tax
structure. It will seek to bestow on the agriculture sector in as many respects
as possible benefits similar to those obtaining in the manufacturing sector,
such as easy availability of credit and other inputs, and infrastructure
facilities for development of agri-business industries and development of
effective delivery systems and freeing movement of agro produce.

In order to protect the interest of farmers in context of removal of

Quantitative Restrictions, continuous monitoring of international prices will
be undertaken and appropriate tariffs protection will be provided. Import
duties on manufactured commodities used in agriculture will be rationalized.
The domestic agricultural market will be liberalized and all controls and
regulations hindering increase in farmers' income will be reviewed and
abolished to ensure that agriculturists receive prices commensurate with
their efforts, investment. Restrictions on the movement of agricultural
commodities throughout the country will be progressively dismantled.

The Agriculture sector has been starved of capital. There has been a decline
in the public sector investment in the agriculture sector. Public investment
for narrowing regional imbalances, accelerating development of supportive
infrastructure for agriculture and rural development particularly rural
connectivity will be stepped up. A time-bound strategy for rationalisation and
transparent pricing of inputs will be formulated to encourage judicious input
use and to generate resources for agriculture. Input subsidy reforms will be
pursued as a combination of price and institutional reforms to cut down costs
of these inputs for agriculture. Resource allocation regime will be reviewed
with a view to rechannelizing the available resources from support measures
towards asset formation in rural sector

Rural electrification will be given a high priority as a prime mover for

agricultural development. The quality and availability of electricity supply will
be improved and the demand of the agriculture sector will be met
adequately in a reliable and cost effective manner. The use of new and
renewable sources of energy for irrigation and other agricultural purposes
will also be encouraged

Emphasis will be laid on development of marketing infrastructure and

techniques of preservation, storage and transportation with a view to
reducing post-harvest losses and ensuring a better return to the grower. The
weekly periodic markets under the direct control of panchayat raj institutions
will be upgraded and strengthened. Direct marketing and pledge financing
will be promoted. Producers markets on the lines of Ryatu Bazaars will be
encouraged throughout the width and the breadth of the country. Storage
facilities for different kinds of agricultural products will be created in the
production areas or nearby places particularly in the rural areas so that the
farmers can transport their produce to these places immediately after
harvest in shortest possible time. The establishment of cold chains, provision
of pre cooling facilities to farmers as a service and cold storage in the
terminal markets and improving the retail marketing arrangements in urban
areas will be given priority. Upgradation and dissemination of market
intelligence will receive particular attention.

Indian agriculture is characterized by pre-dominance of small and marginal

farmers. Institutional reforms will be so pursued as to channelize their
energies for achieving greater productivity and production. The approach to
rural development and land reforms will focus on the following areas:

• Consolidation of holdings all over the country on the pattern of north

western States.
• Redistribution of ceiling surplus lands and waste lands among the landless
farmers, unemployed youth with initial start up capital;
• Tenancy reforms to recognize the rights of the tenants and share
croppers;
• Development of lease markets for increasing the size of the holdings by
making legal provisions for giving private lands on lease for cultivation
and agri business;
• Updating and improvement of land records, computerization and issue of
land pass-books to the farmers; and Recognition of women's rights in
land.

The rural poor will be increasingly involved in the implementation of land

reforms with the help of Panchayati Raj Institutions, Voluntary Groups, Social
Activists and Community Leaders.

Private sector participation will be promoted through contract farming and

land leasing arrangements to allow accelerated technology transfer, capital
inflow and assured markets for crop production, especially of oilseeds, cotton
and horticultural crops.

Progressive institutionalization of rural and farm credit will be continued for

providing timely and adequate credit to farmers. The rural credit institutions
will be geared to promote savings, investments and risk management.
Particular attention will be paid to removal of distortions in the priority sector
lending by Commercial Banks for agriculture and rural sectors. Special
measures will be taken for revamping of cooperatives to remove the
institutional and financial weaknesses and evolving simplified procedure for
sanction and disbursement of agriculture credit. The endeavour will be to
ensure distribution equity in the disbursement of credit. Micro-credit will be
promoted as an effective tool for alleviating poverty. Self Help Group - Bank
linkage system, suited to Indian rural sector, will be developed as a
supplementary mechanism for bringing the rural poor into the formal
banking system, thereby improving banks outreach and the credit flows to
the poor in an effective and sustainable manner.

The basic support to agriculture has been provided by the cooperative sector
assiduously built over the years. The Government will provide active support
for the promotion of cooperative-form of enterprise and ensure greater
autonomy and operational freedom to them to improve their functioning. The
thrust will be on:

• Structural reforms for promoting greater efficiency and viability by freeing

them from excessive bureaucratic control and political interference;
• Creation of infrastructure and human resource development;
• Improvement in financial viability and organizational sustainability of
cooperatives;
• Democratisation of management and increased professionalism in their
operations; and
• Creating a viable inter-face with other grass-root Organizations.
The Legislative and regulatory framework will be appropriately amended and
strengthened to achieve these objectives.

Risk management

Despite technological and economic advancements, the condition of farmers

continues to be unstable due to natural calamities and price fluctuations.
National Agriculture Insurance Scheme covering all farmers and all crops
throughout the country with built in provisions for insulating farmers from
financial distress caused by natural disasters and making agriculture
financially viable will be made more farmer specific and effective. Endeavour
will be made to provide a package insurance policy for the farmers, right
from sowing of the crops to post-harvest operations, including market
fluctuations in the prices of agricultural produce.

In order to reduce risk in agriculture and impart greater resilience to Indian

agriculture against droughts and floods, efforts will be made for achieving
greater flood proofing of flood prone agriculture and drought proofing of
rainfed agriculture for protecting the farmers from vagaries of nature. For
this purpose, contingency agriculture planning, development of drought and
flood resistant crop varieties, watershed development programmes, drought
prone areas and desert development programmes and rural infrastructure
development programmes will receive particular attention.

The Central Government will continue to discharge its responsibility to

ensure remunerative prices for agricultural produce through announcement
of Minimum Support Prices policy for major agricultural commodities. The
food, nutrition and other domestic and exports requirements of the country
will be kept in view while determining the support prices of different
commodities. The price structure and trade mechanism will be continuously
reviewed to ensure a favourable economic environment for the agriculture
sector and to bring about an equitable balance between the rural and the
urban incomes. The methodology used by the Commission on Agricultural
Costs & Prices (CACP) in arriving at estimates of costs of production will be
periodically reviewed. The price structure of both inputs and outputs will be
monitored to ensure higher returns to the farmers and bring about cost
effectiveness throughout the economy. Domestic market prices will be
closely monitored to prevent distress sales by the farmers. Public and
cooperative agencies undertaking marketing operations will be
strengthened.
The Government will enlarge the coverage of futures markets to minimize
the wide fluctuations in commodity prices as also for hedging their risks. The
endeavour will be to cover all important agricultural products under futures
trading in course of time.

Management Reforms

Effective implementation of policy initiatives will call for comprehensive

reforms in the management of agriculture by the Central and the State
Governments. The Central Government will supplement/complement the
State Governments' efforts through regionally differentiated Work Plans,
comprising crop/area/target group specific interventions, formulated in an
inter-active mode and implemented in a spirit of partnership with the States.
The Central Government will move away from schematic approach to Macro-
Management mode and assume a role of advocacy, articulation and
facilitation to help the States in their efforts towards achieving accelerated
agricultural development.

The Government will focus on quality aspects at all stages of farm operations
from sowing to primary processing. The quality of inputs and other support
services to farmers will be improved. Quality consciousness amongst farmers
and agro processors will be created. Grading and standardization of
agricultural products will be promoted for export enhancement. Application
of science and technology in agriculture will be promoted through a regular
system of interface between S&T institutions and the users/potential users,
to make the sector globally competitive.

The database for the agriculture sector will be strengthened to ensure

greater reliability of estimates and forecasting which will help in the process
of planning and policy making. Efforts will be made to significantly improve
and harness latest remote sensing and information technology to capture
data, collate it, add value and disseminate it to appropriate destinations for
managing the risk and in accelerating the growth process. The objective will
be to engage in a meaningful continuous dialogue with the external
environment in the changing scenario and to have on-line and real time
system of 'Agriculture on line' capacity to analyze the signals emanating
from the farms and the markets for the benefit of the farmers.

The Government of India trust that this Statement of National Agriculture

Policy will receive the fullest support of all sections of the people and lead to
sustainable development of agriculture, create gainful employment on a self
sustaining basis in rural areas, raise standards of living for the farming
communities, preserve environment and serve as a vehicle for building a
resurgent national economy.

2.4 Performance of Agriculture

Agriculture is a very dominant sector of the Indian economy and accounts for
22 percent (as on September 2005) of GDP. Agriculture derives its
importance from the fact that it has vital supply and demand links with the
manufacturing sector. During the past five years agriculture sector has
witnessed spectacular advances in the production and productivity of food
grains, oilseeds, commercial crops, fruits, vegetables, food grains, poultry
and dairy.India is the second largest producer of food in the world: more than
200 million tonnes of foodgrains, 150 million tonnes of fruits and vegetables,
91 million tonnes of milk, 1.6 million tonnes of poultry meat, 417 million
livestock, and 6.05 million tonnes of fish and fish products. The Indian
agriculture has made great strides over the years. The foodgrain production
has increased more than fourfold - from 51 million tonnes in 1950-51 to 212
million tonnes during 2008-09 growing at an annual average rate of more
than 2.4 percent per annum. Further, India is the highest producer of milk in
the world. The recent trends in performance of Indian agricultural production
however present a dismal picture.

Prospects of agricultural production in 2008-2009 are considered to be bright

with near normal rainfall. The emerging areas in agriculture like horticulture,
floriculture, organic farming, genetic and engineering, food processing,
branding and packaging and future trading have high potential of growth.

Horticulture, floriculture, fishery, poultry and animal husbandry, which

account for 30 percent of production agriculture and allied sectors, are
expected to achieve a growth rate of 6 percent. Further, production of
commercial crops like jute, tea, coffee, oilseeds and sugarcane are also
expected to increase. Consequently the overall value added in the primary
sector is expected to increase by 3 percent in 2008-2009.

On the research front, the National Agriculture Research system has taken a
number of new initiatives to face the challenges of agriculture sector. The
National Agricultural Innovation project launched in association with the
World Bank assistance with an envisaged investment of 1150 crores aims at
increasing farmers income, employment, livelihood security. An Indo -US
knowledge initiative in agriculture has been launched in agriculture to
reorient the current research system and bring about a second green
revolution in India.

Agriculture has been the centre stage for India's discussion in the WTO
negotiations. In the recent WTO talks, India has shown a tough stand on
agriculture and has demanded a level playing field.

Agricultural Production and Growth in 2008-09

Prospects of agricultural production in 2008-09 are considered to be bright
with near normal rainfall. The delayed monsoon and its somewhat uneven
distribution over time and space had some limited adverse impact on the
kharif crops (sown in June-July and grown mainly under unirrigated
conditions). Coarse grains, pulses, oilseeds, cotton and plantation were
affected the most, while the impact was less on the production of rice and
sugarcane, where access to irrigation is the greatest. However, loss of Kharif
crop is expected to be more than compensated by the Rabi output. Total
food grains production is estimated to increase marginally in 2008-09.
Horticulture, floriculture fishery, poultry, and animal husbandry, which
account for 30 percent of production in agriculture and allied sectors, are
expected to achieve a growth rate of 6 percent. Production of commercial
crops like jute, tea, coffee, oilseeds and sugarcane are also expected to
increase although by a lower rate. Consequently, overall value added in the
primary sector is expected to increase by 3 percent in 2008-09.
Total foodgrains production increased from 204.6 MT in 2003-04 to 213.4 MT
in 2008-09. Output of jute and mesta and sugarcane was also higher in
2008-09than in 2007-08 and there was better performance in oilseeds and
cotton production in 2008-09 relative to 2007-08.
Foodgrains Production

(Million Tonnes)

2003- 2005- 2006- 2007-

Crop/ year 2004-05 2008-09
04 06 07 08

Rice 85.0 93.3 71.8 88.3 85.3 73.8

Wheat 69.7 72.8 65.8 72.1 72.0 -

Coarse
31.1 33.4 26.1 38.1 33.9 26.4
Cereals
 Pulses 11.1 13.4 11.1 14.9 13.4 5.0

Foodgrains
(I) Kharif 102. 1 112.1 87.2 116.9 103.3 105.3
(II) Rabi 94.7 100.8 87.6 96.6 101.3 -
Total (I+II) 196.8 212.9 174.8 213.5 204.6 -

Source: Ministry of Agriculture

Commercial Crops Production

(Million Tonnes)

2003- 2004- 2005- 2006-

Crop/year 2007-08 2008-09
04 05 06 07

Groundnut 6.4 7.0 4.1 8.2 7.0 5.9

Rapeseed & Mustard 4.2 5.1 3.9 6.2 8.4 -

Soybean 5.3 6.0 4.7 7.9 7.5 6.6

Other Oilseeds 2.5 2.6 2.1 3.0 3.2 2.1

Total nine oilseeds 18.4 20.7 14.8 25.3 26.1 14.6

Cotton* 9.5 10.0 8.6 13.9 17.0 15.9

Jute and Mesta** 10.6 11.7 11.3 11.2 10.5 10.1

Sugarcane 296.0 297.2 287.4 237.3 232.3 257.7

*Million bales of 170 kgs. Each

Source: Ministry of Agriculture

Horticulture
Acreage under horticulture-which includes fruits, vegetables, spices,
floriculture and coconut - increased to 17.8 million hectares or about 10 per
cent of gross cropped area of the country in 2008-09 from 16.3 million
hectares in 2007- 08. With a production of 164 million tonnes in 2008-09, the
sector contributed 28 per cent of GDP from agriculture. The targeted growth
rate during the tenth Plan for the sector is 8-9 per cent.
The importance of horticulture in improving the productivity of land,
generating employment, improving economic conditions of the farmers and
entrepreneurs, enhancing exports and, above all, providing nutritional
security to the people, is widely acknowledged. With fruit and vegetable
production of 49 MT and 85 MT, respectively in 2008-09, India was the
second largest producer of both fruits and vegetables in the world. For
example, India occupies first position in the production of cauliflower, second
in onion and third in cabbage.
The National Horticulture Mission (NHM) had launched in May 2005 as a
major initiative to bring about diversification in agriculture and augment
income of farmers through cultivation of high value horticultural crops. The
programme which seeks to double horticultural production by 2011 has a
target, in the 10th Plan, of bringing an additional area of 5.4 lakh hectare
under horticulture, besides taking up programmes of rejuvenation, quality
planting materials, high-tech cultivation, post harvest management,
processing and marketing. Total outlay is Rs. 2,300 crore for the Tenth Plan
and Rs. 630 crore for the financial year 2008-09.
Area and Production of Major Horticulture Crops

Crops 2005-06 2006-07 2007-08 2008-09

Productio Productio Are Productio Productio

Area Area Area
n n a n n

Fruits 3.8 45.2 4.8 49.2 5.0 53.1 5.2 57.6

Vegetables 6.1 84. 8 5.9 84.8 6.1 91.6 6.3 99.4

Spices 2.4 2.9 2.4 3.8 2.5 4.1 2.6 4.4

Plantation Crops 3.0 9.7 3.1 13.1 3.2 14.1 3.3 15.3

Flowers 0.1 0.2 0.1 0.2 0.1 0.2 0.1 0.2

Others 1.0 1.6 0.9 0.9 0.9 1.0 1.0 1.1

Total 16.3 144.4 17.2 152.8 17.8 164.1 18.6 178.1

Source: National Horticulture Board

Agri-Exports

VisheshKrishiUpajYojna (Special Agricultural Produce Sheme)

The objective of the scheme is to promote export of fruits, vegetables,
flowers, minor forest produce, dairy, poultry and their value added products
produced and processed domestically, by incentivising exporters of such
products. Exporters of such products shall be entitled for duty credit scrip
equivalent to 5 percent of the FOB value of exports for each licensing year
commencing from 1st April2005. The scrip and the items imported against it
would be transferable. Under the scheme, export of all items as given in
Appendix -37-A of handbook of procedure (Vol.1) of foreign trade policy shall
qualify for export benefits under VKUY scheme. Items that are restricted or
prohibited for export under schedule-II of the export policy in the ITC (HS)
classification of export and import items shall not be eligible for any benefits
under the scheme.
The proportion of agri-exports to total exports increased from 11.9 percent in
2007-08 to 13.2 percent in 2008-09. Major exports during April-October 2008
included marine products (US$ 773.6 million), meat and meat products (US$
291.5 million), fruits and vegetables (US$ 207.1 million) and processed food
(US$ 224. 8 million).
Agri-Imports
The import of agricultural and allied products during 2008-09 was at US$
3708.2 million as compared to US$ 3811 during 2007-08. The proportion of
agri imports to total imports came down from 4.7 percent in 2007-08 to 3.5
percent in 2008-09. Major imports during April-October 2008 included
vegetable oils (US$ 1237.3 million), raw cashew nut (US$ 287.8 million),
pulses (US$ 281.8 million) and sugar (US$ 138.7 million). Vegetable oils and
pulses are largely imported to augment domestic supplies and raw cashew is
imported for processing and re-exports, as domestic production is not
adequate to meet the demand of processing capacity installed in the
country.
Agricultural Marketing
Progress in the production of food grains, commercial crops and horticultural
products depends critically on the marketing infrastructure available to the
farmers. The number of regulated agricultural markets stood at 7,521 as on
March 31, 2008. Besides, there were 27,294 rural periodic markets, of which
about 15 percent functions under the ambit of regulation. Ministry of
Agriculture had formulated a model law on agricultural marketing in
consultation with State/UT Governments to deal with emerging trends in
agricultural marketing. This model legislation enables establishment of
private markets/ yards, direct purchase centres, consumers/ farmers markets
for direct sale, and promotion of public-private-partnership (PPP) in the
management and development of agricultural markets in the country. It also
provides for exclusive markets for onions, fruits, vegetables, and flowers.
Regulation and promotion of contract farming arrangement has also been a
part of this legislation. A provision has also been made for constitution of
State Agricultural Produce Standards Bureau for promotion of grading,
standardization and quality certification of agricultural produce. Several
state/UT governments have initiated steps for amending the Agricultural
Produce Marketing Committee (APMC) Act.
For development of marketing infrastructure, four Central Sector Schemes
have been introduced for: (i) developing a Marketing Research and
Information Network (MRIN), (ii) a scheme with 25 per cent back-ended
subsidy component for construction of rural godowns, (iii) strengthening of
agricultural marketing infrastructure, grading and standardization in those
States that have amended the APMC Act on the lines of Model Act, and (iv)
Venture Capital Assistance scheme by Small Farmers' Agri-Business
Consortium (SFAC) to promote agri-business projects. Besides, initiative has
been taken by the National Institute of Agricultural Marketing (NIAM) to
promote PPP in establishment of state of the art terminal markets for fruits,
vegetables and other perishables in important urban centres.

The Indian Agriculture Industry

The Indian Agriculture Industry is on the brink of a revolution that will
modernize the entire food chain, as the total food production in India is likely
to double in the next ten years.
As per recent studies the turnover of the total food market is approximately
Rs.250000 crores (US $ 69.4 billion) out of which value-added food products
comprise Rs.80000 crores (US $ 22.2 billion). The Government of India has
also approved proposals for joint ventures, foreign collaborations, industrial
licenses and 100% export oriented units envisaging an investment of
Rs.19100 crores (US $ 4.80 billion) out of which foreign investment is over
Rs. 9100 crores (US $ 18.2 Billion). The agricultural food industry also
assumes significance owing to India's sizable agrarian economy, which
accounts for over 35% of GDP and employs around 65 per cent of the
population. Both in terms of foreign investment and number of joint-
ventures / foreign collaborations, the consumer food segment has the top
priority. The other attractive features of the indian agro industry that have
the capacity to lure foreigners with promising benefits are the deep sea
fishing, aqua culture, milk and milk products, meat and poultry segments.
Excellent export prospects, competitive pricing of agricultural products and
standards that are internationally comparable has created trade
opportunities in the agro industry. This further has enabled the Indian
Agriculture Industry Portal to serve as a means by which every exporter and
importer of India and abroad, can fulfill their requirements and avail the
benefits of agro related buy sell trade leads and other business
opportunities.
This Indian agro industry revolution brings along the opportunities of
profitable investment and agriculture-industry-india.com provides you the
B2B platform with agro related catalogs, trade leads, exporters & importers
directory etc. that help you make your way to profit easy.
To lead yourself to the destination of profit through the Indian Agriculture
Industry, know maximum about the EXIM policy, programs & schemes, price
policy, seed policy and statistics at the Indian agro portal and harvest
benefits from India, world's second largest producer of food and a country
with a billion people. From canned, dairy, processed, frozen food to fisheries,
meat, poultry, food grains, alcoholic beverages & soft drinks, the Indian agro
industry has dainty areas to choose for business.

2.5 Problems in Indian Agriculture

India is an agricultural country. One third population depends on agriculture

sector directly or indirectly. Agriculture continues to be the mainstray of the
Indian economy. Indian agriculture contributes to the national Gross
Domestic Product is about 25 per cent. With food being the crowning need of
the mankind, much emphasis has been on commercialising agricultural
production. Hence, adequate production and even distribution of food has
lately become a high priority global concern. With the changing agricultural
scenario and global competition, there is a need of exploiting the available
resources at maximum level.
In Indian agriculture the factors like high soil productivity, supply of balanced
crop nutrients, efficient water management, improved crops, better plant
protection, post-production management for value-addition and marketing,
are responsible for higher yield as compared to most of the other countries.
In the new millennium, the challenges in Indian agricultural sector are quite
different from those met in the previous decades. The enormous pressure to
produce more food from less land with shrinking natural resources is a tough
task for the farmers. To keep up the momentum of growth a careful
economic evaluation of inputs like seeds, fertilisers, irrigation sources etc are
of considerable importance.
Agricultural incomes are lower and growing slower than incomes in other
sectors. The government has a clear imperative to seriously examine
whether existing policies are optimal.

1. Increase farmer’s access to markets.

The World Bank cites an “almost universal lack of good extension services”
to farmers as a major factor inhibiting growth. In addition to the miserable
infrastructure in many rural areas, the inability of farmers to directly access
markets has sustained the presence of a chain of middlemen through whom
most agricultural commodities must circulate before finally reaching
consumers. Many SHGs have, with great success, arranged cooperatives that
bypass such middlemen and sell directly to wholesalers. The government
should learn from the success of such initiatives and try to help streamline
the agricultural commodity supply chain.

2. Improve agricultural productivity.

In spite of the gains of the Green Revolution, Indian agriculture lags behind
in terms of technology take-up and production efficiency. Lack of access to
credit, which we discussed earlier, may be one of the factors inhibiting
farmers from investing in technology. However, the ground reality also
suggests that poor education and lack of awareness of the benefits of new
technology is also a factor. In addition, the epic and recurring issue of poor
irrigation and infrastructure is widely recognized as a drain on productivity in
many regions (Its estimated that about 10% of all agricultural production in
India is wasted due to lack of storage, transport, etc). The government
already proved itself capable of stimulating advances in agricultural
productivity with the Green Revolution. Future policies should focus on
providing incentives to farmers to adopt better production technology,
bridging the information gap that currently exists in the agricultural sector,
and remedying severe underdevelopment of irrigation and infrastructure
facilities.

3. Reconsider distortionary subsidies and other policies.

Currently, the Indian government sets a minimum support price for almost all
agricultural commodities. Farmers who produce various goods are
guaranteed the option of selling directly to the government at a price fixed in
the beginning of the season. The stated goal of this policy is to “ensuring
remunerative prices to the growers for their produce with a view to (sic)
encouraging higher investment and production.” The inherent endogeneity
of MSP policy makes a rigorous impact assessment difficult, but the
persistently low productivity growth in agriculture suggests that the MSP
policies have failed to stimulate sufficient capital investments by farmers. Its
conceivable the virtual subsidy provided by MSPs might actually dampen
incentives for technology take-up by guaranteeing a basic level of income
security. Furthermore, the existence of MSPs may encourage agricultural
production for which there is actually limited demand in private markets,
leading to unbalanced and suboptimal production choices by individual
farmers. The process by which which MSPs are set is also somewhat dubious,
and many have suggested that the current price-setting system is vulnerable
to political manipulation and lack of parity across goods. Although scrapping
MSPs would obviously expose a large number of farmers to the risk of price
shocks, it seems to me that improving farmers access to insurance products
and commodity futures markets is more sustainable and optimal way to
manage such risks.

4. Improve public education.

Even if agricultural productivity does increase, it is still likely to lag behind

the explosive IT and service sectors. However, the public education system is
clearly failing to provide rural children with the skills necessary to enter
these labor markets. This is perhaps the single biggest factor inhibiting the
transition from agriculture to service sector employment. The demand for
skilled workers in India has exploded, particularly in the service sector,
demand which many firms are finding difficult to meet domestically due to
extremely skewed distribution of human capital (something Doug discussed
in the previous post).

5. Promote non-farm entrepreneurship among farmers.

Although India’s rural poor are by and large uneducated, many of them are
capable of operating small businesses that have higher returns than
traditional agriculture. However, their ability to start such business is often
hampered by lack of access to credit and capital. In spite of the microfinance
“revolution” and government policies designed to stimulate capital flow to
the rural population (such as priority sector lending), there is still a massive
failure of credit markets to meet the demands of the rural population.
Empirical research has demonstrated that returns to capital are extremely
high in microenterprises (roughly 80% in Sri Lanka), which of course
suggests that there is tremendous potential for farmers who start operating
small businesses to supplement or replace their primary line of work.

2.6 Indian agriculture in 2015

The Indian agriculture is a goldmine for world economy. As India’s 70 percent

population is getting livelihood with Agriculture Corporation. It may be
assumed that due to the largest sector in India govt. will take some major
innovative changes in the pattern which may lead it on the peak. As per the
future assumptions some areas it can confidently estimated quantitatively
the outcome with a fair degree of accuracy, in some others it will be only
dependant on the broad direction. In still others it is unable to say with
confidence the direction that future trends will take. So the assumptions only
indicate what would be most desirable and signal the opportunities and
obstacles that will arise along the way.

Indian Agriculture scenario and output measurements as given below:

1. Production of Food grains: In the past, India has made great progress
in providing food security for its people. However the growth rate of
agriculture has decreased from 3.2 during 1985-90 (seventh plan) to 2.1
during 1997-2002 (Ninth plan). There has also been a decline in the growth
rate of food grain production from 3.22 (1960) to 1.23 (1997). Food grain
production is becoming a matter of concern again.According to a study
baseline projection for total cereal demand in 2015 would be 230 million tons
for direct human consumption.

India will have the capacity to produce more than sufficient quantities offood
to provide a healthy diet to its entire population and become a major food
exporter. Even by maintaining the moderate rates of productivity growth
achieved during the last decades, the country will be able to meet the
projected demand in all major food categories and generate a substantial
surplus of food grains. This will be happen through:

A) Cooperative farming: Some number of farmers will joint together and

do the farming using their joint available infrastructure. This will cause
optimum use of their tools and resulting into higher yield at lower price. This
farming also bring maximum use of water resources available.

B) Corporate Farming: The name 'Corporate farming', will take its shape
because it will be new concept of farming and dairying. The large Corporate
will hire the farm (On lease) and do the farming using the local farmers and
infrastructure. Corporate will introduce modern technology of farming,
therefore average yield per hectare will increase and use of water and
fertiliser will decrease.

C) Implementation of new technology: Due to effect of information

technology like computer, Internet, Phone, Mobiles, TV, and Printing media
and increase rate of literacy, farmers will understand about new technology
and will implement them, which will cause increase in total crop production
and per hectare crop yield. Farmer will also understand about the uses of
Bio-technology and will implement it in their field

D) New innovations: Indian brain will innovate new ideas and techniques to
produce more crops per hectare therefore we will be able to kiss the average
world production.

E) Establishment of Agri-clinics: As today health care centre are running,

the Agri clinics will also run in future. These clinics will test the soil and will
advice to farmer for correct ratio of ingredients of fertilizers. These clinics
will also help them for preventing crop disease, treatment of crop disease, if
any and weather forecasting. Due to these Agri-clinics:

a) There will be proper use of fertiliser.

b) Farmers will be aware of new technology

c) They can prevent and protect their crops from any disease/s.

2) Role in GDP: In 2015 total contribution of Indian Agriculture in GDP will

be 8-10% as compare to today's 18%. This will be due to rapidly growth in
Service sector.

3) Employment: Increasing prosperity in agriculture will naturally lead to

the growth of non-farm jobs in agri-industries, agro-business and other
occupations required to meet the needs of an increasingly prosperous
farming community. During the second decade of the 21st Century,
increasing domestic demand for manufactured products and services,
coupled with more rapid mechanisation of agriculture will draw in more and
morempeople to non-farm occupations. By 2015, total employment in
agriculture may fall to less than 45 per cent as compare to today's
55 percent.

Agri processing units, warehouses, Agri-Business, Research and development

in agriculture and allied services will attract rural youth for employment. This
will reduce dependance on farm jobs.

4) Organic-Farming: The life style of people is rapidly changing which is

resulting into several types of diseases. More use of fertilizer also induces
toxic elements in food grains. These things will attract people to switch over
to consumption of organic food. In next decade, the portion of organic
farming will much greater then today.

5) Farming of medicinal and other plants: Farmer will more cultivate

those crops, which can pay more to them. They will cultivate medicinals
plants like jatropha and other many more. They will also wish to cultivate
plants of fruits and vegetables instead of traditional farming.

6) Water Management: India possesses 16 per cent of the world’s

population but just 4 per cent of its water resources. Overall, at the national
level, current water resources are more than sufficient to meet the demand,
but future studies project that the supply situation could become difficult
over the next half century.

India is not too poor in water resources. What it lacks is the ability to
efficiently capture andeffectively utilise the available resources for the
maximum benefit.
Although farmer will depend on rainfall and river water for irrigation yet
Farmer will have to adopt following irrigation and water management
techniques:

a) Deep soil chiseling prior to planting,

b) Rainwater harvesting techniques

c) Proper use of fertiliser

d) Treatment of domestic and industrial water

For the past fifty years, public imagination has been stirred by
proposals to link major rivers together in a manner that would
channel surpluses from flood-prone areas into drought prone
regions, create millions of hectares of additional irrigated land,
provide an inexpensive system of inland water transport.

7) Methods to prevent losses: Following methods will be implemented for

preventing losses:

a) Agri-Clinics: This is suggested plan to increase the capacity and quality

of Indian farming output and to prevent the crop with losses due to several
types of diseases.

b) Corporate Advice: Corporate will direct interact with the farmers to

purchase crops/ Commodities. For this corporate will advice to farmer about
preventing losses through their experts.

C) Insurance: Insurance cannot prevent losses but it can reimburse the

losses which occurred due to fortuitous event. Nowadays Insurance
companies are preventing themselves to insure the crop due to high risk and
lack of high premium. But in next decade due to literacy among farmers and
extension work from government will encourage farmer to insure his crop.
Due to adoption of risk preventing measures and taking more interest of
farmer in insurance, insurance companies will show their interest in
insurance of crop. Insurance of crops, no doubt, will be a major tool for
farmer.

8) Allied Agriculture:

a) Due to change in life style, demand of dairy and dairy products will
enhance. India has largest no. of animal but per animal milk yield is very low
so in future farmer will adopt AI techniques so that they can get better
animals, which will produce more milk at lower cost. Today average milk
production per animal is less than 400 ml per animal per day but in
2015, it will be about 600 ml per animal per day.

Due to very rapid growth in dairy sector many MNCs will attract and they will
establish dairy processing unit, which will give a better price of milk to
farmer.Some corporate and another multi millionaire people will establish
large dairy farm, where they will rear highly pedigree animals. The waste
land will be used for this purpose.

b) Due to change in life style and modernization, people will attract to Non
Vegetarian, which will cause growth in rearing of goats, ship, piggery and
fisheries. Farmer and corporate will adopt modern techniques to rear these
animals.

c) Farmer will attract for honey bee and earth worm rearing because it can
give extra money to them

CH. 3 INDIAN
INDUSTRIES

3.1 Nature of industrialization

3.2 Regulation and control

3.3 MRTP ACT

3.4 FERA

3.5 FEMA
 3.6 Industrial Productivity

(a) Pre reform analysis

(b) Post reform analysis

3.7 Achievement & appraisal

3.8 Industrial performance @ 2015

“It is only when Indian ahs acquired the ability to design, fabricate and erect
its own plants without foreign assistance that it will have become a truly
advanced and industrialised country.”- Jawaharlal Nehru.

Industrialisation has a major role in the economic development of the

underdeveloped or developing economy like India. The gap in per capita
incomes between the developed and underdeveloped countries is largely
reflected in the disparity in the structure of their economies; the former are
largely industrial economies. While in the latter production is confined
predominately to agriculture.

In the process of economic development, industrial sector especially

manufacturing sector plays an important role. It has been recognized that
the share of manufacturing sector in Gross Domestic Product rises as the
economy developed. Further, it has been observed that the structural
transformation in India has made the industrial sector as remarkable growth
over the years.
Industrialisation of a developing economy provides the much needed break
through by providing productive employment to the work force that
otherwise would be either unemployed or under employed. Diversion of
these people from agriculture to other occupation can increase the
productive use of labour skills and generate higher levels of aggregate
output. The sound reason for industrialisation is that it can stabilize the
income through diversification of the productive sectors of the economy.
From an initial stage of producing goods which will be import substituting in
their nature to sophisticated industrial manufactures which because of their
high tech quality can serve as potent source of realizing higher volume of
export of manufactured goods. It thus alters the nature of the economy in
the export sector from being primary products exporting to the export
modern industrial manufactures.

Productivity plays a crucial role in the economic development of a nation. In

India also, manufacturing industries play an important role in promoting
national income and economic development.Industry Growth Rate in India
GDP came to 7.6% in 2005- 2006. In this year, the mining and quarrying
sector contributed 0.9%, the manufacturing sector contributed 9.0%, and the
water supply, gas, and electricity sector contributed 4.3%. The Growth Rate
of the Industrial Sector finally came to 9.8% in 2006- 2007. This shows that
Industry Growth Rate in India GDP has been on the rise over the last few
years.
3.1 Nature of industrialization

It’s still big debate regarding the proper pattern of industrial development
i.e. nature of industrliasation. Historically, industrial development has
preceeded in three stages. In the first stage, industrial development is
concerned with the processing of primary products: “Milling grain, extracting
oil, tanning leather, spinning vegetable fibres, preparing timber and smelting
ores. “

The second stage comprises the transformation of materials making bread

and confectionery, footwear, metal goods, cloth, furniture and paper.

The third stage consists of the manufacture of machines and other capital
equipments to be used not for the direct satisfaction of any immediate want
but in order to facilitate the future process of production.
Hoffman classified all industrial output into two categories, consumer goods
and capital goods output and classified various stages in terms of the ratio of
consumer goods output to that of capital goods output. “In stage 1 the
consumer goods industries are of overwhelming importance, their net output
being on the average five times as large as that of capital goods industries.”
This ratio is 2.5:1 in the second stage and falls to 1:1 in the third stage and
still lower in the fourth stage. Both these types of classifications emphasis
the increasing role of the capital goods industries in the economy as
industrial development takes place.

Though the general development of industry itself has proceeded from

consumer goods to the capital goods, there are many variations of this
pattern, both in terms of time taken to attain later stages and in terms of
relative importance of each of the stages. Soviet pattern of industrialization
involves a straight jump from the first to the third stage while British pattern
is that of a gradual evolution. Similarly, underdeveloped countries may also
evolve a different pattern of industrialisaiton suitable to their economic
conditions. It has been suggest that the pattern of industrialization in under-
developed countries should be guided primarily by considerations arising
from the relative scarcity of capital. Since labour is relatively plentiful and
capital scarce, the development of labour-intensive consumer goods seems
quite legitimate. However, the basic premise of this approach is
inappropriate. The problem is not how the economise the use of capital (this
has to be done as an inevitable condition) but how to increase its supply.
Since most underdeveloped countries do not produce these goods at home,
the only alternative to increasing their supplies is through import. This
depends upon the rate of growth in exports of primary commodities and
manufactured goods. As it has been pointed above, the countries are facing
an “export lag” in their exports of primary commodities. Consequently,
primary commodity exports do not seem to be a reliable source of foreign
exchange earning in order to increase the import of capital goods.

The alternative to the increase of exports of primary products from under-

developed countries would be to develop export promoting manufacturing
industries. But the main trouble is that in producing goods of this sort, say
textiles, the advanced industrial countries, themselves are likely to have an
overwhelming comparative advantage. This does not necessarily mean that
export promoting industries should not be developed; it only means that
specialization in a few industries for export is not a substitute for the growth
of a diversified domestic industry. If, however, the growth in the foreign
exchange earnings cannot be strengthened by the promotion of export
industries can release foreign exchange for imports of capital goods, Import
substitution is of two types:

(a) The substitution of home produced goods for imported goods, and

(b) The substitution of capital goods imports for consumer goods imports.

Thus, if a country cannot increase its export earnings sufficiently. It can still
increase its import of capital equipment by cutting down its imports of
consumer goods. This process of import substitution itself creates import
demand for certain ancillary goods which are needed for the production of
those consumer manufactures. We are thus faced with a problem of choice
between expansion of export- oriented industries or of import substitution
industries. The capital available for investment in an under-developed
economy being limited, the allocation of funds to an export project reduces
the scope of investment oriented towards import-substitution. If export-
oriented industries are successful in stimulating exports, they increase the
supply of foreign exchange and if import substitution is effective, it releases
foreign exchange so that the effect of these alternatives on the supply of
foreign exchange is identical. How should we decide between these two
alternatives?

Although, the effect of the development of these two types of industries on

foreign exchange is similar, yet an import- substituting industry strengthens
the economic independence of the country, while export- oriented prospects,
on the contrary, increases its dependence on the fluctuations of prices and
volume of trade in foreign markets. Therefore, in general, an import
substation project should be preferred to an export-oriented project.

To sum up, industrial developments depends on the rate of capital formation.

Supply of capital goods can be augmented either through imports or through
domestic production. Increase in the imports of capital goods depends upon
the rate of growth of exports. Since the scope for the expansion of the
exports of primary commodities is limited, export promoting manufacturing
industries may be developed or alternatively, certain import substituting
domestic industries may be developed, the effect of which will be to release
foreign exchange for the imports of capital goods, in addition, within the
current volume of imports, capital goods may be substituted in place of
consumer goods, thus, export-promoting industries, import-substituting
industries and domestic capital goods industries are not mutually exclusive
alternatives. Simultaneous development of all the three classes of industries
will prove to be the most effective strategy of industrialization. The relative
role of each in likely to vary with the particular economic circumstances of
individual countries as well as with their current phase of industrialisaiton.

STRATEGY OF INDUSTRIAL DEVELOPMENT

The development strategy adopted by the Indian planners consisted of
accelerated industrialisaiton with a base of heavy industry. Such a strategy
required development of high technological capability which, in turn,
necessitated the creation and promotion of the engineering sector in all its
phases – as for instance, strong infrastructure, advanced expertise and
appropriate production equipment. From the very inception of economic
planning in India, the engineering industry including machine-building
industry represented the core of India’s development process. The
engineering industry alone could provide the base for the industrialisaiton
thrust contemplated in Indian planning. A broad-based industrial structure
could not be sustained except on the basis of a strong, vibrant, growth-
oriented engineering sector. At the same time, the engineering industry was
encouraged to develop indigenous skills and know-how and reduce
dependence on imported technology. Above all, our planners recognized that
technological skills and expertise alone could lead to high productivity levels
and consequently to high levels of incomes. The engineering industry was,
therefore, promoted to act as a catalytic agent for over-all economic
development.

There was yet another aspect to industrial strategy adapted by our planners.
From the very beginning the planners anticipated shortage of foreign
exchange as a major constraint to the development effort. For decades,
primary commodities exported by developing countries were priced
adversely and there was no hope to fill the gap between expanding demand
and the earnings of foreign exchange. The planners, therefore, rightly
decided to develop industries to reduce demand of imports and to generate
expanding foreign exchange earnings. Of late, the inflow of remittances has
been very high. Further there has been substantial measure of import
substitution and our foreign exchange situation has improved to an extent
where it is no longer a major constraint on development. However, the
success in import substitution was achieved in some cases at an unduly high
cost.
3.2 Regulation and control

Prior to independence the ownership or control of much of the large private

industries were in the hands of managing agencies, which grew under the
British system and had access to London money markets. Thus the owners of
these managing agencies controlled a major portion of the economy, prior to
independence.

But things changed after independence. Parliament enacted a legislation to

curb the powers of managing agencies. By 1971 the government had banned
the managing agencies. The Industrial Policy Resolution declared in 1948,
clearly put forward the goal of the Government's policy with respect to
industrialization and classified them into four categories.

Those industries completely owned by the Government e.g. ordinance,

atomic energy, railways and any industry of national importance. Certain
important industries like coal, iron and steel, aircraft manufacture, ship
building, telephone, telegraphs and communications, were given the
permission to operate for ten years, at the end of which the government
would nationalize them.

A group of 18 specified industries were in control of the central government

in liaison with the state governments. The remaining industrial options were
left open to the private sector.

Industrial Development & Regulation Act 1951

The act gave complete authority to the government. This resulted in the
bureaucracy extending complete control over the industrialization of the
country.
• They controlled the authorization of capability, whereabouts and growth
of any request for manufacture of new products.
• They controlled the authorization of foreign exchange expenditure on the
import of plant and machinery.
• They controlled the authorization for the terms of international joint
ventures.
Industrial Policy In 1956
In 1956 a new policy for industrialization was initiated. All basic industries
and sensitive industries in India were under the purview of public sector
enterprises and were called as category A type of industries. In category B,
industries were a joint venture of both public and private enterprises. The
remaining industries came under category C, to be under the control of
private initiative.

The policy of 1956 for the first time recognized the contribution of small
scale industries in the growth of the Indian economy. It laid stress on rational
distribution of national income and effective utilization of resources.
Monopolies Commission -1964
The Government of India appointed a monopolies inquiry commission to
study the presence and outcomes of concentration of economic power in
private sector. The commission observed the presence of monopolistic and
restrictive practices in certain key sectors of the economy. The commission
recommended the setting up of the Monopolies and Restrictive Trade
Practices Commission.
FERA Amendment 1973
The Foreign Exchange and Regulation Act was amended in 1973.This
resulted in a tremendous shift in the foreign investment policy of the
Government of India. Foreign Investment was allowed in only those
industries that were directly into exports.

Restrictions were placed on foreign investments. International companies

could hold a maximum of 40% equity. But some industries in the field of
advanced technology were given permission for 51% foreign capital.

Industrial Policy 1973

The policy listed out the various appendix 1 industries that could be started
by large business houses so that small industries were not driven out of
business. The establishment of small and medium industries was
encouraged.
Private industries were encouraged to set up production units in rural areas
and in backward areas with a vision to give thrust for the economic
development of those areas.
Industrial Policy 1977
The focus of this industrial policy was judicious promotion of small scale and
cottage industries. The idea of District Industries Centre’s was introduced for
the first time. Small industries were encouraged to set up base in rural areas
away from the big cities.

Industrial Policy In 1980's

The first step towards liberalization was taken up in the 1980's.The

government took corrective steps to vitiate the licensing system and
encourage private entrepreneurs.

The following steps were mooted:

• Re endorsement of licenses: The scope mentioned in the licenses could be
re advocated, only if it was 25% greater than the licensed capacity.
• Broad banding and discerning de licensing (1985-86) extended to 25
industries.

Industrialization Post 1990

• Exemption from licensing for all start ups and for those with an
investment worth of Rs2.5 crores in fixed assets and a right to import up
to 30% of the total value of plant and machinery.
• Foreign equity investment was allowed up to 40%.
• Geographical restrictions and investment cap for small industries were
removed.
At the time of liberalization the Indian industries were not competitive in the
global scenario. They could not face the stiff competition from the foreign
industries; hence many industries sold their company to multinational
corporations or entered into joint ventures with foreign companies or shut
down the business.
At the same time a new wave of service industries emerged, which
positioned itself in the outsourcing segment. IT and ITE's industries
flourished providing employment to millions of graduates.

3.3MRTP (Monopolistic and Restrictive Trade

Practices Act)
The Monopolistic and Restrictive Trade Practices Act, 1969, was enacted
1. To ensure that the operation of the economic system does not result in
the concentration of economic power in hands of few,

2. To provide for the control of monopolies, and

3. To prohibit monopolistic and restrictive trade practices.

The MRTP Act extends to the whole of India except Jammu and Kashmir.
Unless the Central Government otherwise directs, this act shall not apply to:

1. Any undertaking owned or controlled by the Government Company,

2. Any undertaking owned or controlled by the Government,

3. Any undertaking owned or controlled by a corporation (not being a

company established by or under any Central, Provincial or State Act,

4. Any trade union or other association of workmen or employees formed for

their own reasonable protection as such workmen or employees,

5. Any undertaking engaged in an industry, the management of which has

been taken over by any person or body of persons under powers by the
Central Government,

6. Any undertaking owned by a co-operative society formed and registered

under any Central, Provincial or state Act,

7. Any financial institution

Restrictive Trade Practices

A restrictive trade practice is a trade practice, which

1. Prevents, distorts or restricts competition in any manner; or

2. Obstructs the flow of capital or resources into the stream of production; or

3. Which tends to bring about manipulation of prices or conditions of

delivery or effected the flow of supplies in the market of any goods or
services, imposing on the consumers unjustified cost or restrictions.

Inquiry Into Restrictive Practices

The Commission may inquire into any restrictive trade practice

1. Upon receiving a complaint from any trade association, consumer or a
registered consumer association, or

2. Upon a reference made to it by the Central or State Government or

3. Upon its own knowledge or information <

Relief Available

The commission shall if after making an inquiry it is of the opinion that the
practice is prejudicial to the pubic interest, or to the interest of any
consumer it may direct that –

1. The practice shall be discontinued or shall not be repeated;

2. The agreement relating thereto shall be void in respect of such restrictive

trade practice or shall stand modified.

3. The Commission may permit the party to any restrictive trade practice to
take steps so that it is no longer prejudicial to the public interest

However no order shall be made in respect of

1. Any agreement between buyers relating to goods which are bought by the
buyers for consumption and not for ultimate resale;

2. A trade practice which is expressly authorised by any law in force.

Unfair Trade Practices

An unfair trade practice means a trade practice, which, for the purpose of
promoting any sale, use or supply of any goods or services, adopts unfair
method, or unfair or deceptive practice.

Unfair practices may be categorised as under:

1.False Representation

The practice of making any oral or written statement or representation

which:

1. Falsely suggests that the goods are of a particular standard quality,

quantity, grade, composition, style or model;
 2. Falsely suggests that the services are of a particular standard, quantity
or grade;

3. Falsely suggests any re-built, second-hand renovated, reconditioned or

old goods as new goods;

4. Represents that the goods or services have sponsorship, approval,

performance, characteristics, accessories, uses or benefits which they
do not have;

5. Represents that the seller or the supplier has a sponsorship or

approval or affiliation which he does not have;

6. Makes a false or misleading representation concerning the need for, or

the usefulness of, any goods or services;

7. Gives any warranty or guarantee of the performance, efficacy or length

of life of the goods, that is not based on an adequate or proper test;

8. Makes to the public a representation in the form that purports to be-

○ warranty or guarantee of the goods or services,

○ a promise to replace, maintain or repair the goods until it has

achieved a specified result,

if such representation is materially misleading or there is no

reasonable prospect that such warranty, guarantee or promise will be
fulfilled

9. Materially misleads about the prices at which such goods or services

are available in the market; or

10.Gives false or misleading facts disparaging the goods, services or trade

of another person.

2. False Offer Of Bargain Price

Where an advertisement is published in a newspaper or otherwise, whereby

goods or services are offered at a bargain price when in fact there is no
intention that the same may be offered at that price, for a reasonable period
or reasonable quantity, it shall amount to an unfair trade practice.

The ‘bargain price’, for this purpose means:

 1. the price stated in the advertisement in such manner as suggests that
it is lesser than the ordinary price, or

2. the price which any person coming across the advertisement would
believe to be better than the price at which such goods are ordinarily
sold.

3.Free Gifts Offer And Prize Scheme

The unfair trade practices under this category are:

1. Offering any gifts, prizes or other items along with the goods when the
real intention is different, or

2. Creating impression that something is being offered free alongwith the

goods, when in fact the price is wholly or partly covered by the price of
the article sold, or

3. Offering some prizes to the buyers by the conduct of any contest, lottery
or game of chance or skill, with real intention to promote sales or
business.

4.Non-Compliance Of Prescribed Standards

Any sale or supply of goods, for use by consumers, knowing or having reason
to believe that the goods do not comply with the standards prescribed by
some competent authority, in relation to their performance, composition,
contents, design, construction, finishing or packing, as are necessary to
prevent or reduce the risk of injury to the person using such goods, shall
amount to an unfair trade practice.

5.Hoarding, Destruction, Etc.

Any practice that permits the hoarding or destruction of goods, or refusal to

sell the goods or provide any services, with an intention to raise the cost of
those or other similar goods or services, shall be an unfair trade practice.

6.Inquiry Into Unfair Trade Practices

The Commission may inquire into any unfair trade practice:

1. Upon receiving a complaint from any trade association, consumer or a

registered consumer association, or
2. Upon reference made to it by the Central Government or State
Government

3. Upon an application to it by the Director General or

4. Upon its own knowledge or information.

Relief Available

After making an inquiry into the unfair trade practice if the Commission is of
the opinion that the practice is prejudicial to the pubic interest, or to the
interest of any consumer it may direct that –

1. The practice shall be discontinued or shall not be repeated;

2. The agreement relating thereto shall be void in respect of such unfair

trade practice or shall stand modified.

3. Any information, statement or advertisement relating to such unfair trade

practice shall be disclosed, issued or published as may be specified

4. The Commission may permit the party to carry on any trade practice to
take steps to ensure that it is no longer prejudicial to the public interest or
to the interest of the consumer.

However no order shall be made in respect a trade practice which is

expressly authorised by any law in force.

The Commission is empowered to direct publication of corrective

advertisement and disclosure of additional information while passing orders
relating to unfair trade practices.

Monopolistic Trade Practices

A monopolistic trade practice is one, which has or is likely to have the effect
of:

1. Maintaining the prices of goods or charges for the services at an

unreasonable level by limiting, reducing or otherwise controlling the
production, supply or distribution of goods or services;

2. Unreasonably preventing or lessening competition in the production,

supply or distribution of any goods or services whether or not by adopting
unfair method or fair or deceptive practices;
3. Limiting technical development or capital investment to the common
detriment;

4. Deteriorating the quality of any goods produced, supplied or distribute;

and

5. increasing unreasonably -

○ The cost of production of any good; or

○ Charges for the provision, or maintenance,of any services; or

○ The prices for sale or resale of goods; or

○ The profits derived from the production, supply or distribution of

any goods or services.

A monopolistic trade practice is deemed to be prejudicial to the public

interest, unless it is expressly authorized under any law or the Central
Government permits to carry on any such practice.

Inquiry Into Monopolistic Trade Practices

The Commission may inquire into any monopolistic trade practice,

1. Upon a reference made to it by the Central Government or

2. Upon an application made to it by the Director General or

3. Upon it own knowledge or information

Relief Available

1. Where the inquiry by the Commission reveals that the trade practice
inquired into operates or is likely to operate against public interest, the
Central Government may pass such orders as it thinks fit to remedy or
present any mischief resulting from such trade practice.

2. On an inquiry report of the Commission, the Central Government may-

○ Prohibit the owner(s) of the concerned undertaking(s) from

continuing to indulge in a monopolistic trade practice; or
 ○ Prohibit the owner of any class of undertakings or undertakings
generally, from continuing to indulge in any monopolistic trade
practice in relation to the goods or services.

3. The Central Government may also make an order:

○ Regulating the production, storage, supply, distribution, or control

of any goods or services by an undertaking and fixing the terms of
their sale (including prices) or supply;

○ Prohibit any act or practice or commercial policy which prevents or

lessens competition in the production, storage, supply or
distribution of any goods or services;

○ Fixing standards for the goods used or produced by an undertaking;

○ Declaring unlawful the making or carrying out of the specified

agreement;

○ Requiring any party to the specified agreement to determine the

agreement within the specified time, either wholly or to specified
extent;

○ Regulating the profits which may be derived from the production,

storage, supply, distribution or control of any goods or services; or

○ Regulating the quality of any goods or services so that their

standard does not deteriorate.

Powers Of The Commission

The MRTP Commission has the following powers:

1. Power of Civil Court under the Code of Civil Procedure, with respect to:

○ Summoning and enforcing the attendance of any witness and

examining him on oath;

○ Discovery and production of any document or other material object

producible as evidence;

○ Reception of evidence on affidavits;

 ○ Requisition of any public record from any court or office.

○ Issuing any commission for examination of witness; and

○ Appearance of parties and consequence of non-appearance.

2. Proceedings before the commission are deemed as judicial proceedings

within the meaning of sections 193 and 228 of the Indian Penal Code.

3. To require any person to produce before it and to examine and keep any
books of accounts or other documents relating to the trade practice, in its
custody.

4. To require any person to furnish such information as respects the trade

practice as may be required or such other information as may be in his
possession in relation to the trade carried on by any other person.

5. To authorise any of its officers to enter and search any undertaking or

seize any books or papers, relating to an undertaking, in relation to which
the inquiry is being made, if the commission suspects tat such books or
papers are being or may be destroyed, mutilated, altered, falsified or
secreted.

Preliminary Investigation

Before making an inquiry, the Commission may order the Director General to
make a preliminary investigation into the complaint, so as to satisfy itself
that the complaint is genuine and deserves to be inquired into.

Remedies Under The Act

The remedies available under this act are -

1.Temporary Injunction

Where, during any inquiry, the commission is satisfied that any undertaking
or any person is carrying on, or is about to carry on, any monopolistic,
restrictive or unfair trade practice, which is a pre-judicial to the public
interest or the interest of any trader or class of traders generally, or of any
consumer or class of consumers, or consumers generally, the commission
may grant a temporary injunction restraining such undertaking or person
form carrying on such practice until the conclusion of inquiry or until further
orders.
2.Compensation

Where any monopolistic, restrictive or unfair trade practice has caused

damage to any Government, or trader or consumer, an application may be
made to the Commission asking for compensation, and the Commission may
award appropriate compensation.

Where any such loss or damage is caused to a number of persons having the
same interest, compensation can be claimed with the permission of the
commission, by any of them on behalf of all of them.

3.4 FERA (Foreign Exchange Regulation Act)

Foreign Exchange Regulation Act (FERA) was promulgated in 1973 and it

came into force on January 1, 1974. Section 29 of this act referred
directly to the operations of MNCs in India. According to the section,
all nonbanking foreign branches and subsidiaries with foreign
equity exceeding 40 per cent had to obtain permission to establish
new undertakings, to purchase shares in existing companies, or to
acquire wholly or partly any other company.

According to this guideline, the principle rule was that all branches of foreign
companies operating in India should convert themselves into Indian
companies with at least 60 per cent local equity participation. Furthermore,
with all subsidiaries of foreign companies should bring down the foreign
equity share to 40 per cent or less. Exempted from these rules were,
however, companies exporting a substantial part of their production, and
companies engaged in core part of their production, and companies engaged
in core sectors and priority industries, In these cases, the guidelines provided
for higher levels of foreign equity. According to Martinussen, “these
exceptions to the general rule reflected the government’s endeavours to
induce TNCs to use their superior access to global distribution and marketing
system, with a further view to improving India’s balance of payments
position. Besides, they reflected a desire on the part of the Indian
government to channel TNCs away from certain industries and into core
sectors and high priority industries. The latter included primarily basic
intermediates and capital goods, whereas the former group comprised
mainly consumer goods. As a rule, the manufacture of priority items required
sophisticated technology not available from indigenous source”.

IMPLEMENTATION OF FERA
There were substantial delays in implementing FERA. By june 1979, only
about half the companies directed to dilute the foreign holdings had carried
out the process as stipulated .most of the companies were in the process of
diluting, but 64 companies had, at that time, yet to initiate the process. Not
untili 1982, i.e., eight years after FERA came into force, did the last group of
28 companies receive final directions pursuant to the Act. Moreover, upto the
end of 1985, a total of 252 foreign controlled companies were exempted
from the general rule stipulating a maximum of 40 per cent non-resident
interest.

In regard to the companies that did not comply with FERA regulations. The
general conclusion that emerges from a review of FERA is that it did not in
any significant way restrict the expansion and activities of TNC affiliated
companies in general. In fact, “the overwhelming majority of large, well
established and experienced TNC affiliated companies were able to extract
sizeable benefits from the working of the approval system, not necessarily in
keeping with government polic. In other words, the approval system proved
ineffective as a regulatory framework in relation to resourceful TNCs that
chose to come to terms with the system.

NEW CONCESSIONS FOR FERA COMPANIES

In line with the liberalisation measures announced in the new industrial and
trade policy in 1991 and the subsequent period, the government announced
major cocncessions to FERA companies in Novermber 1991 and January
1992. On January 8,1993 the government promulgated an ordinance to
amend FERA with immediate effect. The ordinance removed FERA controls
on Indian firms setting up joint ventures abroad and allowed Indians to hold
immovable property abroad, subject to certain conditions. Important
concessions announced in November 1991. January 1992 and January 1993
were as follows:

(1) companies with foreign shareholding were allowed to increase foreign

equity to 51 per cent by remittances in foreign exchange in specified high
priority industries.
(2) Section 26, sub-section 7 which required the FERA companies to get
Reserve Bank’s permission before raising working capital or accepting
deposits was revoked.

(3) Sections 28 and 29 were revoked. This meant that FERA companies could
now use their trademarks in india and could carry on in india nay activity of a
trading. Commercial or industrial nature.

(4) Section 31 was revoked. This allowed FERA companies to deal in

immovable property in india.

(5) Section 27 which restricted indian companies setting up joint ventures

abroad and resident Indians associating themselves with or taking part in
overseas concerns was scrapped.

(6) Restrictions regarding assets held in india by non-residents were

removed.

(7) Indians were allowed to keep foreign currency upto $500 or Rs. 15,000.

(8) Import and export in gold and silver was exempted from FERA implying
that these commodities were now to be governed by Exim policy.

(9) Section 17 which conferred powers on the government to regulate uses

of imported gold and silver was deleted.

(10) Restrictions on transfers of any security from a register in India to a

register outside India were removed.

(11) Restrictions on transfers of shares by a non-resident to other non-

residents were removed.

(12) The provision allowing the government to acquire foreign securities for
purposes of strengthening foreign exchange position had never been
invoked and was unlikely to be invoked. Since this provision could cause
avoidable apprehensions and fears in foreign investors, it was deleted.

(13) Foreign nationals were exempted from obtaining prior permission under
FERA before taking up employment in India.

(14) A FERA provision which provided that the Government could direct
certain payments to be made by FERA companies in a special account, was
deleted.
The above list of concessions shows that FERA was made redundant and
efforts were made to place FERA companies at par with Indian companies. In
fact, the Union Budget, 199-99, advocated repealing FERA and replacing in
with FEMA ACT as, according to the government. FERA was out of tune with
the changing times. According to the Finance Minister, since the country has
moved to full current account convertibility and there is opening up of
foreign exchange markets and transactions. “It is no longer appropriate to
deify foreign exchange as something special and maintain a burdensome
and highly regulatory structure around this deity.” Consequently, the
government adopted FEMA in 1999. Under FEMA, the emphasis is on
‘management’ rather than ‘regulation’.

3.5 FEMA (Foreign Exchange Management

Act)

The Foreign Exchange Regulation Act of 1973 (FERA) in India was repealed
on 1 June, 2000. It was replaced by the Foreign Exchange Management Act
(FEMA), which was passed in the winter session of Parliament in 1999.
Enacted in 1973, in the backdrop of acute shortage of Foreign Exchange in
the country, FERA had a controversial 27 year stint during which many
bosses of the Indian Corporate world found themselves at the mercy of the
Enforcement Directorate (E.D.). Any offense under FERA was a criminal
offense liable to imprisonment, whereas FEMA seeks to make offenses
relating to foreign exchange civil offenses.
FEMA, which has replaced FERA, had become the need of the hour since
FERA had become incompatible with the pro-liberalisation policies of the
Government of India. FEMA has brought a new management regime of
Foreign Exchange consistent with the emerging frame work of the World
Trade Organisation (WTO). It is another matter that enactment of FEMA also
brought with it Prevention of Money Laundering Act, 2002 which came into
effect recently from 1 July, 2005 and the heat of which is yet to be felt as
“Enforcement Directorate” would be invesitigating the cases under PMLA
too.
Unlike other laws where everything is permitted unless specifically
prohibited, under FERA nothing was permitted unless specifically permitted.
Hence the tenor and tone of the Act was very drastic. It provided for
imprisonment of even a very minor offence. Under FERA, a person was
presumed guilty unless he proved himself innocent whereas under other
laws, a person is presumed innocent unless he is proven guilty.
•
Objectives and Extent of FEMA
The objective of the Act is to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of
foreign exchange market in India.
FEMA extends to the whole of India. It applies to all branches, offices and
agencies outside India owned or controlled by a person who is a resident of
India and also to any contravention there under committed outside India by
any person to whom this Act applies.
Except with the general or special permission of the Reserve Bank of India,
no person can :-
• deal in or transfer any foreign exchange or foreign security to any person
not being an authorized person;
• make any payment to or for the credit of any person resident outside
India in any manner;
• receive otherwise through an authorized person, any payment by order or
on behalf of any person resident outside India in any manner;
• reasonable restrictions for current account transactions as may be
prescribed.
Any person may sell or draw foreign exchange to or from an authorized
person for a capital account transaction. The Reserve Bank may, in
consultation with the Central Government, specify :-
• any class or classes of capital account transactions which are permissible;
• the limit up to which foreign exchange shall be admissible for such
transactions
However, the Reserve Bank cannot impose any restriction on the drawing of
foreign exchange for payments due on account of amortization of loans or
for depreciation of direct investments in the ordinary course of business.
The Reserve Bank can, by regulations, prohibit, restrict or regulate the
following :-
• transfer or issue of any foreign security by a person resident in India;
• transfer or issue of any security by a person resident outside India;
• transfer or issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India;
• any borrowing or lending in foreign exchange in whatever form or by
whatever name called;
• any borrowing or tending in rupees in whatever form or by whatever
name called between a person resident in India and a person resident
outside India;
• deposits between persons resident in India and persons resident outside
India;
• export, import or holding of currency or currency notes;
• transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India;
• acquisition or transfer of immovable property in India, other than a lease
not exceeding five years, by a person resident outside India;
• giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred
(i) By a person resident in India and owed to a person resident outside India
or
(ii) By a person resident outside India.

A person, resident in India may hold, own, transfer or invest in foreign

currency, foreign security or any immovable property situated outside India
if such currency, security or property was acquired, held or owned by such
person when he was resident outside India or inherited from a person who
was resident outside India.
A person resident outside India may hold, own, transfer or invest in Indian
currency, security or any immovable property situated in India if such
currency, security or property was acquired, held or owned by such person
when he was resident in India or inherited from a person who was resident in
India.
The Reserve Bank may, by regulation, prohibit, restrict, or regulate
establishment in India of a branch, office or other place of business by a
person resident outside India, for carrying on any activity relating to such
branch, office or other place of business. Every exporter of goods and
services must :-
• furnish to the Reserve Bank or to such other authority a declaration in
such form and in such manner as may be specified, containing true and
 correct material particulars, including the amount representing the full
export value or, if the full export value of the goods is not ascertainable at
the time of export, the value which the exporter, having regard to the
prevailing market conditions, expects to receive on the sale of the goods
in a market outside India;
• furnish to the Reserve Bank such other information as may be required by
the Reserve Bank for the purpose of ensuring the realization of the export
proceeds by such exporter.
The Reserve Bank may, for the purpose of ensuring that the full export value
of the goods or such reduced value of the goods as the Reserve Bank
determines, having regard to the prevailing market-conditions, is received
without any delay, direct any exporter to comply with such requirements as
it deems fit.
Where any amount of foreign exchange is due or has accrued to any person
resident in India, such person shall take all reasonable steps to realize and
repatriate to India such foreign exchange within such period and in such
manner as may be specified by the Reserve Bank.
Section 3: Except as provided in the FEMA Act, rules and RBI permission, no
person shall: Deal in/ transfer any forex to any person not being an
authorized person Make any payment to or for the credit of any non resident
Receive otherwise through an authorized person, any payment by order or
on behalf of any non resident Enter into any financial transaction in India as
consideration for or in association with acquisition or creation or transfer of a
right to acquire, any asset outside India by any person.
Contraventions and Penalties
If any person contravenes any provision of this Act, or contravenes any rule,
regulation, notification, direction or order issued in exercise of the powers
under this Act, or contravenes any condition subject to which an
authorization is issued by the Reserve Bank, he shall, upon adjudication, be
liable to a penalty up to thrice the sum involved in such contravention where
such amount is quantifiable, or up to two lakh rupees where the amount is
not quantifiable, and where such contravention is a continuing one, further
penalty which may extend to five thousand rupees for every day after the
first day during which the contravention continues.
Any Adjudicating Authority adjudging any contravention may, if he thinks fit
in addition to any penalty which he may impose for such contravention direct
that any currency, security or any other money or property in respect of
which the contravention has taken place shall be confiscated to the Central
Government and further direct that the foreign exchange holdings, if any, of
the persons committing the contraventions or any part thereof, shall be
brought back into India or shall be retained outside India in accordance with
the directions made in this behalf.
"Property" in respect of which contravention has taken place, shall include
deposits in a bank, where the said property is converted into such deposits,
Indian currency, where the said property is converted into that currency; and
any other property which has resulted out of the conversion of that property.
If any person fails to make full payment of the penalty imposed on him within
a period of ninety days from the date on which the notice for payment of
such penalty is served on him, he shall be liable to civil imprisonment.
Investigation
The Directorate of Enforcement investigate to prevent leakage of foreign
exchange which generally occurs through the following malpractices :
• Remittances of Indians abroad otherwise than through normal banking
channels, i.e. through compensatory payments.
• Acquisition of foreign currency illegally by person in India.
• Non-repatriation of the proceeds of the exported goods.
• Unauthorised maintenance of accounts in foreign countries.
• Under-invoicing of exports and over-invoicing of imports and any other
type of invoice manipulation.
• Siphoning off of foreign exchange against fictitious and bogus imports.
• Illegal acquisition of foreign exchange through Hawala.
• Secreting of commission abroad.
Organisational Set Up and Functions Of Enforcement Directorate
Directorate of Enforcement has to detect cases of violation and also perform
substantially adjudicatory functions to curb above malpractices.
The Enforcement Directorate, with its Headquarters at New Delhi has seven
zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and
Bangalore. The zonal offices are headed by the Deputy Directors. The
Directorate has nine sub-zonal offices at Agra, Srinagar, Jaipur, Varanasi,
Trivandrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the
Assistant Directors. The Directorate has also a Unit at Madurai, which is
headed by a Chief Enforcement Officer. Besides, there are three Special
Directors of Enforcement and one Additional Director of Enforcement.
The main functions of the Directorate are as under:
• To collect and develop intelligence relating to violation of the provisions of
Foreign Exchange Regulation Act and while working out the same,
depending upon the circumstances of the case:
• To conduct searches of suspected persons, conveyances and premises for
seizing incriminating materials (including Indian and foreign currencies
involved) and/or.
• To enquire into and investigate suspected violations of provisions of the
Foreign Exchange Management Act.
• To adjudicate cases of violations of Foreign Exchange Management Act for
levying penalties departmentally and also for confiscating the amounts
involved in contraventions;
• To realise the penalties imposed in departmental adjudication.
Procedural Provisions
For enforcing the provisions of various sections of FEMA, 1999, the officers of
Enforcement Directorate of the level of Assistant Director and above will
have to undertake the following functions
• Collection and development of intelligence/information.
• Keeping surveillance over suspects.
• Searches of persons/vehicles by provisions of Income-tax Act, 1961.
• Searches of premises as per provisions of Income-tax Act, 1961.
• Summoning of persons for giving evidence and producing of documents
as per provisions of Income-tax Act, 1961.
• Power to examine persons as per provisions of Income-tax Act,1961.
• Power to call for any information/document as per provisions of Income-
tax Act, 1961.
• Power to seize documents etc. as per provisions of Income-tax Act, 1961.
• Custody of documents as per Income-tax Act, 1961.
• Adjudication and appeals - Officers of and above the rank of Director of
Enforcement, are cases of contravention of the provisions of the Act;
these proceedings which are quasi-judicial in nature, start with the
issuance of show cause notice; in the event of cause shown by the Notice-
not being found satisfactory, further proceedings are held, vis. personal
hearing, in which the noticee has a further right to present his defence,
either in person or through any authorised representative; on conclusion
 of these proceedings, the adjudicating authority has to examine and
consider the evidence on record, in its entirety and in case the charges
not being found proved, the noticee is acquitted, and in the event of
charges being found substantiated, such penalty, as is considered
appropriate as per provisions of section 13 of the Act can be imposed,
besides confiscation of amounts involved in these contraventions.

3.6 Industrial Productivity

The Industrial i.e., manufacturing sector has now become the main
contributor to the Indian Gross Domestic Product (GDP) superseding the
agricultural sector. In industry and trade, among the important steps taken
are: abolition of import licensing except for few products, reduction in tariff
rates, abolition of industrial licensing, liberalization of restrictions on foreign
capital. It has been claimed that economic performance has improved after
reforms and that it has been so because of reforms. Accordingly, the
structure of employment has changed from concentration on agricultural
activities to manufacturing industries and from high labour intensive
industries to highly capitalintensive industries.

The structure of the Indian economy has undergone a remarkable change

after its independence in 1947. It has been transformed from an agriculture-
based economy heavily reliant on production of primary commodities for
exports, to a manufacturing sector based economy. The share of the
agriculture sector in the Gross Domestic Product (GDP) dropped from 42 per
cent in 1980’s to 32 per cent in 1990’s and decreased to 26 per cent in 2005.
On the other hand, the share of the manufacturing sector jumped from 21
per cent in 1980’s 24 per cent in1990’s and increase to 26 per cent in 2005.

In India, the import-substitution strategy and five-year plans have been the
cornerstone of development policies since 1947. However, from the view
points of growth and efficiency, these policies have not necessarily been
successful because too many regulations on the industry, trade, and finance
largely hindered the private sector’s economic activities. As a result, the
growth rate of GNP per capita during 1960 to 1979 was only 1.4 per cent.

The market reforms initiated since the mid-80s have led to the entry of quite
a few multinational firms into several Indian industries. The new entry
increases competitive conditions, which should induce local firms to replace
inefficient technologies and organizational practices through imports of
capital goods and R&D efforts (Patibandla, 2001) and in turn increase overall
industrial productivity. However if the market expands at a lower rate than
increase in capacity due to new entry. In such a case it could result in decline
in average industrial productivity as local firms operate at suboptimal scales.
On the other hand if the number of firms increase under the increasing
demand conditions without any loss of scale, the increase in the number of
firms could result in external economies at the industry level which shifts
cost curves down for all the firms (Rotenberg and Saloner, 2000). This effect
will be more dominant if firms belonging to an industry form into a dynamic
industry cluster (Patibandla and Petersen 2001). Larger number of firms
would be able to support a larger production of differentiated intermediate
goods and also increases demonstration effect of superior practices.

A major part of the reforms is opening up of the economy to international

trade: devaluation of the currency, reduction in import duties and gradual
removal of quantitative restrictions on imports. The new growth theory
shows trade openness is a significant source of long run growth for
developing economies. On one side there are static gains in resource
allocation- resources will be allocated on the basis of comparative
advantage. On the other side is the dynamic gain of learning by doing,
technological and informational externalities associated with free
international trade. International trade extends the market size and allows
firms to realize static and dynamic economies. International trade also
facilitates free flow of new ideas and technologies and reduces the idea-gap
which is a major source of spillovers and growth (Romer, 1990). This
argument is especially important for developing economies because most of
the new ideas and technologies are developed in the developed economies
and trade with them helps in realizing these dynamic gains. Imports of
differentiated intermediate and capital goods and technologies with
nonrivalrous properties improve productivity.

(a) Pre reform analysis

The productivity analysis in Pre reform period was not up to the mark what it
is being watched by us now these days. It can be divided in two phases
which are as follows :-

(1) Industrial pattern and British Government

Before the rise of the modern industrial system Indian manufactures had a
world-wide market. Indian industries not only supplied all local wants but
also enabled India to export its finished products. Indian sports consisted
chiefly of manufactures like cotton and silk fabrics, coalicoes, artistic ware,
silk and woolen cloth. The impact of the British connection and industrial
revoluation led to the decay of Indian handicrafts was not filled by the rise of
modern industry in India because of the British policy of encouraging the
import of manufactures and export of raw materials from India.

The British government in India provided discriminating protection to some

selected industries since 1923. This protection was accompanied by the most
favoured nation-clause for British goods. Despite this factor, some industries
such as cotton textiles, sugar, paper, matches and to some extent iron and
steel did makes progress. But one thing was made to foster the development
of capital goods industries. Rather the British Government put definite
hindrances and cold-shouldered their development. The main features of the
industrial pattern in India on the eve of planning (1950) were as under:

• Lop-sided pattern of industry. The Indian industrial structure reflected

a lop-sided size-pattern. The total number of persons employed in
manufacturing in mid-1956 was about 15 million. Out of this, only 3.9
million were employed in factories (defined by the Act as unit of
production employing 10 or more persons); 11.1 million were employed in
household enterprises and workshops employing less than 10 persons.
Out of total factory employment of 3.9 million persons, 1.2 million or 31
per cent were in small factories, 1.0 million or 26 per cent were in
medium factories and 1.7 million or 43 per cent were concentrated in
large factories. The peculiarity of the industrial pattern of india was the
high concentration of employment either in small factories and household
enterprises, i.e., the lowest size-group or that there was a high
concentration of employment in large factories i.e. the highest size group.
The medium size factories did not develop in India. The existence of this
lopsided industrial pattern was due to the colonial nature of our economy.
The foreign firms and those owned by big business and industrial
magnates were of a very large size coming at the top of the pyramid, and
at the bottom were a very large number of indigenous small size firms.
The lopsidedness of the industrial pattern was reflected in the absence of
the middle entrepreneurs running medium sized firms.
• Low Capital Intensity. Another feature of the Indian industrial pattern
was the prevalence of low capital Intensity. It was the result of two
factors- first, the general level of wages in India was low, and, second, the
 small size of the home market in view of the low per capital income and
the limited use of mass production (or high capital intensity) techniques
resulted in low capital per worker employed.

• Composition of manufacturing output reflects the preponderance of

consumer goods industries vis-avis producer goods industries. In 1953,
the ratio of consumer goods to producer goods worked out to be 62:38.
According to the criteria suggested by Hoffmann India seems to have
entered the second stage of industrial development. But even then, there
is no doubt that the capital-goods sector is under-developed and there is
a need for the expansion of this sector so as to ensure a rapid rate of
growth to make the ecnomy self-reliant and ultimately foster the pace of
industrialisation in the country. Only then can per capita income be
pushed up at a fast rate.
There was a structural imbalance in the industrial pattern. In case of
consumer goods, domestic supply was more than the demand. The index
of domestic supplies of consumer goods was 112 as compared to
domestic demand equal to 100. But in case of producer goods, the
domestic supplies fell short of domestic demand. The index number of
domestic supplies in relation to demand was 80. This increased our
dependence on other countries in the capital goods sector.

(2) Industrial pattern and Five- year plan

The government of India launched the process of industrialisaiton as
conscious and deliberate policy of economic growth in early fifties. The
government recognized the significant contribution industrialisaiton could
make to the development process, “as a base for the growth of the primary
sector, as a catalytic agent for the development of infra-structure, as a
stimulant to generation of technologies through R&D effort and as a growth
multiplier. The first seven five year plan comes under this chapter which are
as follows.

Industries and The First Five- Year Plan (1951-56) During the first plan
itself, no big effort was contemplated to industrialise the economy; Rather
the emphasis was to build basic services like power and irrigation so that the
process of industrialisaiton is facilitated. A total investment of about Rs. 800
crores was planned for industry, out of which investment in the public sector
was to be of the order of Rs. 94 crores only.
Actual public sector outlay was only about Rs. 57 crores and on new projects,
replacements and modernization only Rs. 340 crores was actually spent.
Thus, there were shortfalls in the investment program. Despite the fact that
the First Plan only aimed to utilize the existing capacity to the full, the
general index of industrial production recorded an increase of 39 percent
during the plan, or a compound annual growth rate of 7 per cent. This was no
mean achievement.

Industries and The second Five- Year Plan (1956-61) The second five-
year plan programme of industrialisation was based on the industrial policy
resolution of 1956 which envisaged a big expansion of the public sector. A
base of heavy industry was sought to be created. The actual investment in
the public sector on organized industry was Rs. 870 crores. Private sector
investment was Rs. 675 crores during the Second plan period- more than
envisaged in the Plan. Similarly, investment in village and small industries
was Rs. 265 crores (in both public and private sectors). Taken together, total
investment in industries was rs. 1,810 crores, i.e. 27 percent of the total
investment during the Second Plan.

The industrial pattern sought to be developed during the Second plan was
conceived in terms of the following priorities:-

• Increased production of iron and steel and of heavy engineering and

machine building industries.
• Expansion of capacity in respect of other development commodities and
producer goods such as aluminium, cement, chemical pulp, dyestuffs and
phosphatic fertilizers, and of essential drugs.
• Modernisation and re-equipment of important national industries which
have already come into existence such as jute and cotton textiles and
sugar.
• Fuller utilization of existing installed capacity in industries where there are
gaps between capacity and production.
• Expansion of capacity of consumer goods keeping in view the
requirements of common production program and the production targets
for the dcentralised sector of industry.

The second plan witnessed a major diversification of the industrial

sepectrum. It strengtheded further the programmes of development in
respect of oil exploration and coal and made a beginning with the
development of atomic energy.
Industries and The Third Five- Year Plan (1961-66)The third plan saw
the beginning of long term perspective planning as an instrument of achieve
objecting of an integrated growth of industry balanced with agriculture. With
the base created in the first two plans. The Third plan called for the
maximum rate of investment to strengthen industry, power and transport
and hasten the process of industrial and technological change.

Despite the overall under-achievement of targets the Third plan reflected the
first stage of a decade or more of intensive development leading to a self
reliant and self generating economy. Engineering industries like automobiles,
cotton textile machinery, diesel engines, electric transformers and machine
tools, advanced according to set-targets as did industries such as petroleum
products, heavy chemicals, cement etc. Mining and extractive industries also
showed considerable progress. It was the period that fairly sounds the base
of future.

Industries and The Fourth Five- Year Plan (1969-74) The fourth plan
was intended to complete industrial projects undertaken in the Third Plan. It
also aimed to enlarge capacities in export promotions and import
substitution industries.

The performance of industry was far short of even the modes targets set out
in the Fourth Plan. On an average, the growth rate in industry was around 5
percent which was much below targeted growth rate of 8 per cent envisaged
in the Plan.

Industries and The Fifth Five- Year Plan (1974-78) The fifth plan was
formulated keeping in view of objectives of self-reliance and growth with
social justice.

• Rapid growth of core sector industries by giving high priority to steel, non-
ferrous metals, fertilizers, mineral oils, coal and machine building.
• Development of industries which promise a rapid diversification and
growth of exports.
• Enlarging the production of industries supplying mass consumption goods
viz, cloth, edible oils and vanaspati, sugar, drugs, bicycles.
• Restraint on the production of inessential goods, except for exports.
• Development of small industries by reserving 124 items exclusively for
them and by initiating an intensive programme for the development of
ancillary industries as feeder industries to large-scale units.
The revised fifth plan took many bold steps such as removing the restriction
on the private sector, monopolistic undertakings and foreign concerns
seeking investment in India. With all these incentives, the average annual
industrial growth was of the order of 5.3 per cent during 1974-75 to 1977-78
– much below the target.

Industries and The Sixth Five- Year Plan (1980-85) The Sixth plan was
intended to work within the overall developmental strategy particularly with
regard to the objectives of structural diversification, modernization and self-
reliance.

The overall outlay envisaged in the Sixth plan on industry and minerals
including village industry was Rs. 22,200 crores, i.e. 22.8 per cent of the total
outlay of the Sixth Plan. Besides this, for the development of energy
programme, Rs. 4,300 crores were to be spent on petroleum and Rs. 2,870
crores on coal industry.

The growth rate was as against the target of 7% in industrial production, but
achieved was 5.5% only.

Industries and The seventh Five- Year Plan (1985-90) The seventh
plan provided for an investment of 19,710 crores in large and medium
industries and Rs. 2,750 crores for the development of village and small
industries. Total investment in the industrial sector would thus of be the
order of 22,460 crores or 12.5% of the total outlay. The main elements of the
seventh plan were:

• Rapid removal of infrastructural constraints, by placing greater emphasis

on additional availability of power through more efficient use of existing
capacity as well as step establishment of new power stations including
super thermal and nuclear plants.
• Encouragement of modernization and technological upgrading in
industries like textiles and sugar where a large number of units were set
up in the early part of the 20th century.
• Specific targets of productivity for major industries like steel, fertilizers,
non-ferrous metals, petrochemicals, paper and cement were to be set for
the plan.
• Export production was to be made in integral part of production in the
domestic economy. A special effort was to be made in selected industries
in which the country has comparative advantage and has reached a
degree of industrial maturity.
• Location of industries near the small districts towns which were not
industrialized so far would be promoted with a view to removing regional
disparities an encouraging dispersal of industries.

(b) Post reform analysis

Extensive economic reforms have been carried out in India since 1991. In
industry and trade, among the important steps taken are: abolition of import
licensing except for few products, reduction in tariff rates, abolition of
industrial licensing, liberalization of restrictions on foreign capital. It has
been claimed that economic performance has improved after reforms and
that it has been so because of reforms.

ANNUAL RATES OF GROWTH OF MANUFACTURING

Manufacturing growth rate has fluctuated in the post-reforms period – after
registering a decline in early years, growth rate picked up but decelerated in
the late 1990s. Growth has recovered since 2001-02. In fact the compound
annual rate of growth (CARG) has been 8.8 % between 2001-02 and 2007-
08.

The un-registered manufacturing sector has performed worse than its

registered counterpart. But growth behavior has been similar in the last few
years.

It being taken a longer term perspective. In terms of the level of rate of

growth attained, the entire period between 1951-52 and 2007-08 can be
classified into periods of high and low growth. The pattern of manufacturing
growth observed before 1991 was that periods of high growth were
invariably followed by periods of low growth. The experience after 1991 has
made no difference to this trend.

One of the targets of reforms has been to accelerate the growth rate
compared to the past. Taking the manufacturing sector as a whole, the
(compound annual) rate of growth between 1991-92 and 2007-08 (7.18 %) is
only marginally higher than that attained during the first three plans periods
(6.45%). The gap is even less for the registered manufacturing sector (7.58%
compared to 7.48%). In fact the growth rate during 1952-53 to 1964-65
(8.87%) and during 1980-81 to 1990-91 (8.29%) was higher than that in the
post-reforms period (between 1991-92 or 1992-93 and 2006-07).
The manufacturing sector growth has been decelerating since the early
2007. The drop is sharp particularly in the second half of 2008. From 5.76%
in June 2008, growth has declined to 4.91% in September 2008 and -0.68%
in December 2008. This may be because of the impact of the US financial
crisis. The reforms process has deliberately tried to make India more
outward-oriented. Hence such downturns are only to be expected. Home
market in India’s planning strategy was emphasized precisely to minimize
the negative influences due to economic (and political) problems in the rest
of the world.

EMPLOYMENT IN ASI FACTORY SECTOR

The White Paper issued by the Government of India in 1993 (Economic

Reforms: Two Years after and the Tasks Ahead) contended that the pattern
of industrialization will be “sufficiently labour intensive” to absorb labour and
reduce poverty. However the expectation has not materialized. The
employment situation in fact is quite dismal. Employment in the Annual
Survey of Industries factory sector did increase from 5.46 million in 1991-92
to 6.54 million in 1995-96. But since then there has been a sharp decline to
5.91 million in 2003-04. The employment figure in 2003-04 is in fact about
10% lower than what it was in 1995-96. Employment in the factory sector
has been declining despite the acceleration of the growth rate of output
since 2000-01.

EXPORTS AND IMPORTS OF MANUFACTURED GOODS

Merchandise exports have been increasing quite rapidly in recent years

Between 2001-02 and 2007-08 manufactured exports have increased at the
compound annual rate of growth (CARG) of 20%. But the share of
manufactured goods in total exports has declined from 73.6% in 1991-92 to
63.6% in 2007-08.

The growth in exports has been interpreted as a success of the reforms

process since 1991. But more than 50% of the growth of exports during
1991-92 to 2007-08 has been accounted for by engineering goods (39.1%)
and chemicals and related products (15.2%). Again within these two sectors,
the products for which exports have been expanding rapidly are primary &
semi-finished iron & steel (CARG 26.88% between 1991-92 and 2007-08),
Iron & steel bar/rods (20.85%), Machinery & instruments (18.39%), Drugs,
pharmaceuticals & fine chemicals (16.45%) etc.
These are precisely the industries which were created and developed in the
pre-reforms period through active state intervention. Consider, for example
drugs & pharmaceuticals. This industry is considered to be one of the
success stories of independent India. A conscious industrial policy worked
behind the development of the pharmaceutical industry in India. Among the
instruments used were regulation of foreign capital, promotion of indigenous
enterprises, patent reforms, public investments in manufacturing and R&D.

When discussing the impact of import liberalization and the withdrawal of the
state from industrial policy, it is important to make a distinction between
existing developed industries and the new ones which can be potentially
developed.

Import liberalization may help existing exporters, as for example in

pharmaceuticals. Access to cheaper Chinese active ingredients and
intermediates does make India more competitive. But macro-economically,
the negative influence of import liberalization must be compared with export
expansion to find out the net effect. As we will see in the next section, net
export intensity has been positive for pharmaceuticals (and few other well
developed industries in India). But for most of the other products as well as
for the corporate sector as a whole, net export intensity has been negative.
This suggests that while the rise in exports has provided a stimulus to
growth, the net expansionary impact has been negative.

But is importing liberalization the proper policy for the development of new
industries? India’s exports have been rising as we have noted above. But
India’s exports of high-technology products have been minimal as pointed
out by the September 2008 report of a Group constituted by the Prime
Minister (Measures for Ensuring Sustained Growth of the Indian
Manufacturing Sector, p. 69) (accessed from the website of the National
Manufacturing Competitiveness Council, www.nmcc.nic.in). India is ranked
quite low in the production of Advanced Technology Products (ATPs). Can
such industries be developed by passively relying on markets forces? Those
aware of how new industries have been developed in different countries will
agree with the recommendations of the Group that state intervention with
appropriate industrial policies are necessary. According to the Group,
currently about 50% of the capital goods requirements are imported. DGCI&S
export figures show that India imported capital goods worth US$ 37294
million in 2007-08 (23.5% of the India’s total imports excluding petroleum, oil
and lubricants) and the compound annual rate of growth between 1993-94
and 2007-08 has been 15%. Capital goods imported include high technology
equipments such as telecommunications and upper-end IT and electronic
hardware. Another sector with significant imports is electronic goods (12.8%
share in 2006-07). The imports of these goods increased at CARG of 25%
between 1993-94 and 2007-08.

3.7 Achievement & appraisal

The Indian industry has been in the international spotlight more than usual,
for a number of reasons. One of them is continued optimism about
liberalization of the Indian economy, which began in earnest in 1991. Also,
international access to Indian markets is poised to increase dramatically.

Indian industry has achieved what it has been hoping for quite some time.
The Feel Good Factor. Perhaps at no time during the post-liberalization
period, Indian industry has shown such kind of optimism. It is poised to
enhance its real economic growth rate by more than two full percentage
points in the current year, holding a huge reserve of foreign exchange that is
rather unprecedented, interest rates at an all time low and inflation very
much under control, increasingly robust corporate performance, strong
operational performance, surge in the stock prices and a whole range of
reforms right from new norms in the primary markets to the setting up of a
central listing authority to benchmarking Indian economy with the
international best practices.

The momentum of industrial growth has been sustained, with manufacturing

output rising strongly in the first quarter. The outlook for the industrial sector
is expected to be reinforced by the renewal of manufacturing activity, the
abiding strength of export demand and the improved environment for new
investments indicated by a surge in the production of capital goods and
nonoil imports, low interest rates and improved all round corporate
profitability.

Industrial growth numbers for the months of October, November and

December 2009 indicate that the Indian industry is coming out of the
distressed state. The upswing in the industrial growth came as a result of
upswing in the production of the manufacturing sector that accounts for 80%
of industrial output. Along with the manufacturing sector, mining and
electricity sectors were also seen to register high rates of growth.
The average growth numbers of the overall industry calculated for first four
months of 09-10 was 4.6%. This was marginally lower the average growth
posted in the corresponding period of 2008-09. The improvement in
industrial growth numbers came as a result of measures taken by the
government and RBI to support overall economic activity.

The four-month average for 2009-10 shows that among the 17

manufacturing industries, growth accelerated for 6 industry sectors namely
wool, silk and man madefibre, rubber, non metallic mineral products, basic
metals and machinery and equipment other than transport.

The core infrastructure industry sector largely remained insulated from the
economic crisis. The recent growth numbers of the six core industries
released for the period April- August 2009 were 4.8% in 2009 as against the
growth of 3.3% in the corresponding period of the previous year. Growth
mainly came from cement, coal and power sectors.

Drop in the price index of manufactured and fuel products aided to the
cooling of WPI based inflation. However, inflation in the case of food articles
remains high.

Growth of Industry: Recent Trends (in percentage)

Dec Dec
2008 2009
Weights

Industry 100 6.4 6.8

Mining 10.2 2.8 9.9

Manufacturing 79.4 6.9 6.8

Electricity 10.5 4.5 4.2

Use Based Classification

Basic 35.6 5.3 4.8

Intermediate 26.5 3.0 9.0

Capital 9.3 17.9 2.0

Consumer Goods 28.7 5.9 8.8

Consumer non Durables 23.3 3.4 5.0

Consumer Durables 5.4 13.9 19.8

The economic reform initiative in India has raised the annual growth rate to
5-6%. This has exerted pressure on the existing infrastructure that is already
saturated. It is evident that to sustain and accelerate economic growth, India
needs to build, upgrade and modernize the infrastructure urgently. However,
fund availability remains a problem with the large fiscal deficit of the Central
government.

This leads us to the second major challenge, of containing fiscal deficit by

curtailing non-productive expenditures such as interest payments on past
debt and payments towards subsidies. Tax reforms should aim at increasing
the languishing tax-GDP ratio by widening the tax net further. For instance,
the services sector has grown to account for nearly 51% of GDP but
contributes only around 4% to the tax kitty. Implementation of VAT and
speedy and disinvestment of the identified PSUs are also identified as top
two fiscal measures required to ensure sustainability of the economy in the
long run.

There has been a relative neglect of the industry sector in the reform
process, evident in a decline in the share of manufacturing in the domestic
gross capital formation in India. Further, within the industrial sector, the
share of public investment has been declining consistently. Public
investments in industry, specifically in manufacturing project (to reduce the
reliance of the output on monsoons) would be particularly significant to
sustain the economy on a higher growth path (25% of the population still rely
on industry for their livelihood and hence the sector is important from the
point of view of demand generation on a sustained basis).
 3.8 Industrial performance @ 2015

Indian industrial sector to ride high on rising industrial production as it will

account more success as it is performing with the liberalization facility.

INDUSTRY’s share in gross domestic product (GDP) is rising — up from 24%

in 2009-10 to 24.6% 2008-09. A 0.6% rise may not look very impressive, but
when considered against 9.4% GDP growth this would indicate an
improvement in industry’s relative contribution and it is possible it will count
30% in 2015.

What is significant is that, the rise in industry’s share in GDP this time was
not because of a fall in agriculture’s share but because of its own robust
performance. Industrial production has grown by a record 11.3% in 2009-10
— the highest in last decade — against a 9.4% rise in GDP.

The rise in industry’s relative contribution to GDP is important for more than
one reason. It justifies the faith of our planners as also that of the
industrialists who have been investing in a large scale in expansion of
capacity and in modernization of technologies in recent years. The rise in
industry’s share will also help restricting the fluctuation in GDP growth
caused primarily due to indifferent performance of the agricultural sector.

But more importantly, higher industrial growth will prove as a catalyst to

service sector growth. Service sector has been the main contributor to our
GDP growth in recent years and economists have warned in the past that the
growth trend of the service sector cannot be sustained unless supported by
an equally booming industrial sector.

The value addition in the service sector has largely been in areas which
themselves are dependent on the performance of the industrial sector. The
share of trade, hotels and restaurants in GDP, for example, has witnessed
sharp increase in recent years. The share of transport, storage and
communications and that of financing, insurance, real estate and business
services too has been increasing rapidly. But the growth in earnings from
trade, hotels and restaurants or, for that matter, from financing, insurance,
real estate and business can be sustained only if industrial income grows
proportionately to support their prosperity.

The good performance of the industrial sector thus, has not only improved its
own share in GDP but has paved the way for a sustained service sector
growth too. The question is: Can industry maintain its high growth trend?

The growth pattern of industry indeed, suggests that it can. The production
of goods, which forms the base of industrial growth, has all grown rapidly in
2006-07. The production of finished steel has grown by 10.9% in 2009-10
over 2009-10. Production of cement has grown by 9.1% during the same
period. Generation of electricity has increased by 7.2% against about 5% for
three consecutive years prior to 2006-07.

But what must have been more encouraging is that the production of capital
goods, which forms the base of future industrial growth, has increased
rapidly. The index of production of capital goods has grown by 18.3% in
2009-10.

The manufacturing sector in general has done well with a 12.5% rise in 2009-
10. The growth has also been far more broad-based and as many as 16 of
the 17 two-digit industry groups have recorded positive growth during 2009-
10 compared to the previous year. Jute and other vegetable textile was the
only industry group whose production has declined last year.

The production of basic metal and alloy has increased by 22.9%. The
production of transport equipment and parts has increased by 15% while the
production of machinery and equipment has grown 14.2%. But the
performance of the textile industries probably has been the most dramatic.
The production of cotton textiles, which grew by an annual compound rate of
only 2.5% during 2000-01 to 2009-10, has grown by a huge 14.8% last year.
CH. 4 SERVICE SECTOR

4.1 Pre reform analysis & Post reform analysis

4.2 contributions to GDP – employment, revenue & Taxes

4.3 Services Sector @ 2015

The service industry forms a backbone of social and economic development
of a region. It has emerged as the largest and fastest-growing sectors in the
world economy, making higher contributions to the global output and
employment. Its growth rate has been higher than that of agriculture and
manufacturing sectors. It is a large and most dynamic part of the Indian
economy both in terms of employment potential and contribution to national
income. It covers a wide range of activities, such as trading, transportation
and communication, financial, real estate and business services, as well as
community, social and personal services.

India ranks fifteenth in the services output and it provides employment to

around 23% of the total workforce in the country. The various sectors under
the Services Sector in India are construction, trade, hotels, transport,
restaurant, communication and storage, social and personal services,
community, insurance, financing, business services, and real estate.
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In line with the global trend, service sector in India has also grown rapidly in
the last decade. Its growth has in fact been higher than the growth in
agriculture and manufacturing sector. It now contributes around 51 percent
of GDP. In the trade mode, services trade has also grown at the same rate as
goods trade over the 1990s (i.e., about 6.5 per cent) and its share in total
trade has reached around 24 per cent. Growth of trade in services has also
been accompanied by growth in the share of services in total inward FDI. FDI
(approvals) into service sector constituted around 30 percent of total FDI
approvals in 2003. Interestingly, outward FDI from India has also grown
rapidly and in 2003 outward FDI stock in services constituted around 25 % of
total outbound FDI stock.

Though the growth of service sector in India is in line with the global trends,
there are two unique characteristics of India’s service sector growth. First,
the entire decline in the share of agriculture sector in GDP, i.e., from 32 % in
1990 to 22 % in 2003, has been picked up by the service sector while
manufacturing sector’s share has remained more or less the same. In
general, such a trend is mainly experienced by high-income countries and
not by developing countries. And second, in spite of the rising share of
services in GDP and trade, there has not been a corresponding rise in the
share of services in total employment. This jobless growth of India’s service
sector, with no corresponding growth in the share of manufacturing sector,
has raised doubts about its sustainability in the long run.

The most important services in the Indian economy has been health and
education. They are one of the largest and most challenging sectors and hold
a key to the country's overall progress. A strong and well-defined health care
sector helps to build a healthy and productive workforce as well as stabilise
population. The 'Ministry of Health and Family Welfare' is responsible for
implementation of various programmes in the areas of health and family
welfare, prevention and control of major communicable diseases as well as
promotion of traditional and indigenous systems of medicines. Accordingly, it
is carrying out measures like National health policy, implementing National
Rural Health Mission (NRHM) in different States, conducting surveys and
studies, etc. While, education strongly influences improvement in health,
hygiene and demographic profile. The 'Ministry of Human resource
Development' is involved in eradicating illiteracy from the country. It is
concerned with universalisation of elementary education, achieving full adult
literacy, lying down of National Policy on Education, meeting needs of
secondary and higher education for all, etc. India has achieved impressive
demographic transition owing to the decline of crude birth rate, crude death
rate, total fertility rate and infant mortality rate as well as gained high
literacy rate in the country.

There has been a 13 percent hike in the service sectors of trade, hotels,
transport and communication in India's economy as compared to the 10.4
percent rise in the previous year. The financial services that comprise of
banks, real estate, insurance, and business services witnessed a rise of 11.1
percent during 2006-07 against the 10.9 percent growth in the previous
year. Service sectors including community, social, and personal services
experienced a growth of 7.8 percent during 2006-07 as against 7.7 percent
growth in the previous year.

The service sector of India has also witnessed a remarkable rise in the global
market apart from the Indian market. It has experienced a rise of 2.7 percent
in 2006 from that of 2 percent in 2004. The broad-based services in the trade
sector have undergone a large-scale rise. A statistics concerning the growth
of India's service sectors are listed below:

• The software services in Indian economy increased by 33 percent which

registered a revenue of USD 31.4 billion

• Business services grew by 82.4 percent

• Engineering services and products exports grew by 23 percent and

earned a revenue of USD 4.9 billion

• Services concerning personal, cultural, and recreational had a growth of

96 percent

• Financial services had a rise of 88.5 percent

• Travel, transport, and insurance grew by 23 percent

The software services in Indian economy along with the export of products is
growing at a massive pace and thereby witnessed an alarming rise of 35.5
percent and reached a lumpsome amount of USD 18 billion. The IteS and
BPO sectors grew by 33.5 percent and earned a revenue of USD 8.4 billion.
The service sector of Indian economy has been the most high-powered
sector in India's economy. It has also been focusing in various investments of
late. As Indian economy is looking forward for more liberalization, sectors like
banking are on its way to loom large and occupy a more significant position
in India's economy.

Within the services sector, the share of trade, hotels and restaurants
increased from 12.52 per cent in 1990-91 to 15.68 per cent in 1998-99. The
share of transport, storage and communications has grown from 5.26 per
cent to 7.61 per cent in the years under reference. The share of
construction has remained nearly the same during the period while that of
financing, insurance, real estate and business services has risen from 10.22
per cent to 11.44 per cent.
However, to supplement the achievements and meet the shortfalls in all the
sub-sectors of the service industry, travel and tourism sector has to be
developed in a sustainable manner. Being one of the largest industries in
terms of gross revenue and foreign exchange earnings, it stimulates growth
and expansion in other economic sectors like agriculture, horticulture,
poultry, handicrafts, transportation, construction, etc. as well as gives
momentum to growth of service exports. It is a major contributor to the
national integration process of the country as well as preserver of natural
and cultural environments. The 'Ministry of Tourism' has been undertaking
several policy measures and incentives so as to boost the sector such as the
announcement of the National Tourism Policy.
The boom in the services sector has been comparatively "jobless". The rise in
services share in GDP has not accompanied by proportionate increase in the
sector's share of national employment. Some economists have also
cautioned that service sector growth must be supported by proportionate
growth of the industrial sector; otherwise the service sector grown will not be
sustainable. In the current economic scenario it looks that the boom in the
services sector is here to stay as India is fast emerging as global services
hub.

All this shows that services hold immense potential to accelerate the growth
of an economy and promote general well-being of the people. They offer
innumerable business opportunities to the investors. They have the capacity
to generate substantial employment opportunities in the economy as well as
increase its per capita income. Without them, Indian economy would not
have acquired a strong and dominating place on the world platform. Thus,
service sector is considered to be an integral part of the economy and
includes various sub-sectors spread all across the country.
The Reasons for the growth of the Services Sector contribution to
the India GDP
The contribution of the Services Sector has increased very rapidly in the
India GDP for many foreign consumers have shown interest in the country's
service exports. This is due to the fact that India has a large pool of highly
skilled, low cost, and educated workers in the country. This has made sure
that the services that are available in the country are of the best quality. The
foreign companies seeing this have started outsourcing their work to India
specially in the area of business services which includes business process
outsourcing and information technology services. This has given a major
boost to the Services Sector in India, which in its turn has made the sector
contribute more to the India GDP.

4.1 Pre reform analysis & Post reform

analysis
Benefits of Liberalization of Services

During the last three decades countries gained significantly through the
liberalisation of trade in goods. However, there was no parallel movement of
multilateral liberalization of services trade until the negotiation of the GAATS
and its entry into force in 1995. Since the services sector is the largest and
fastest-growing sector of the world economy, providing more than 60% of
global output and, in many countries, an even larger share of employment,
the lack of legal framework for international services trade was anomalous
and dangerous- anomalous because the potential benefits of services
liberalization were at least as high as in the goods sector, and dangerous
because there was no legal basis on which to resolve conflicting national
interests.

Benefits of services trade liberalisation can be summarised as follows:-

1. Economic performance: An effiicient services infrastructure is a

precondition for economic growth. Services such as telecom, banking,
insurance and transport provide basic inputs for all sectors. Without
liberalisation and open door policy leading to competition, they are
unlikely to excel in this role.

2. Development: Access to world-class services helps exporters and

producers in developing countries to capitalize their comparative
advantage.

3. Consumer savings: There is a strong evidence in many services such as

air transport and telecoms that liberalization leads to lower prices, better
quality and wider choice for consumers.

4. Faster innovation: Countries with liberalized services markets have

seen greater product and process innovation. The explosive growth of the
Internet in the US is in marked contrast to its slower take-off in many
 European countries, which have been more hesitant to embrace telecom
reform. Similar contrast can also be drawn in financial services and
information technology.

5. Greater transparency and predictability: A country's commitments in

its WTO services schedule amount to a legally binding guarantee that
foreign firms will be allowed to supply their services under stable
conditions.

6. Technology transfer: Services commitments at the WTO help to

encourage foreign direct investment (FDI). Such FDI typically brings with
it new skill management techniques and technologies that spill over into
the wider economy in various ways.

Statistics on Trade in services

Given the growing importance of trade in services, the need for reliable
information on services trade is crucial. The only source of information on
trade in services is the IMF balance of payments (BOP) statistics. However,
there are difficulties in using these statistics to study the impact of WTO
agreements on trade in services, as the framework of WTO negotiated
commitments donot match the IMF structure of statistics.

First, the General Agreement on Trade and Services (GATS) goes far beyond
the trade flow statistics and requires information on production, sales,
employment, foreign direct investment and activities of foreign affiliates for
meaningful impact analysis.

Second, GATS definition of trade in services deals with the traditional notion
of international trade, which involves transactions between residents and
non-residents. For example, under WTO definition, trade in services includes
local sales by resident foreign entities while such transactions are not
classified as trade in services according to the IMF Balance of Payments
Manual.

Third, the scheduled commitments are based largely on the UN central

product Classification (CPC). However, the available services statistics for
different countries follow the IMF BOP classifications, which are not based on
the UN-CPC.

Fourth, GATS distinguishes between four distinct modes of supply viz. (i)
cross border supply, (ii) consumption abroad, (iii) commercial presence and
(iv) presence of natural persons. Commitments under each service category
are classified according to these modes of supply, but such disaggregated
information are not available.

Efforts should be made to improve the database for trade in services and to
provide data on more disaggregated levels according to WTO classification of
trade in services.

Recommendations
India's main interest and focus area in WTO negotiations on GATS should be
to provide effective market access to its professionals and skilled labour
force and bring about symmetry in the movement of capital and labour. In
order to provide effective market access to professionals, it would be
necessary to take the following steps:-

(a) Economic Needs Test should be totally eliminated for at least in certain
specified categories. At a minimum, it should be based on transparent
and objective criteria.
(b) Social security contributions required to be made, even for temporary
movement even though they are not eligible for receiving benefits of
such contributions also affect their comparative advantage and needs to
be corrected.
(c) Administration of visa regimes may be made more transparent. Notion of
a separate GATS visa for personnel covered by horizontal and sectoral
commitments scheduled by a Member, different and less onerous from
the normal immigration visa may be considered.
(d) Specific sectoral commitments in line with requirements of developing
countries need to be taken. For this purpose, more detailed sub
classification of categories of personnel and their inclusion in
sectoral/horizontal commitments may be required.
India has comparative advantages in the following sectors, and it would be
advisable to negotiate greater market access for its professionals in these
sectors:

(a) Health
(b) Software
(c) Construction and Engineering
(d) Legal and
(e) Accountancy

India's negotiating strategy for each of these sectors may cover the following
areas:

(a) The commitments under each of the four modes of supply that India is
working to undertake in a particular sector.
(b)The commitments in each of these four modes of supply that India would
want to demand from its major trading partners.
(c) The domestic policies and regulations that have a bearing on market
access available in the sector and the proposed changes therein.

4.2 Contributions to GDP – Employment,

Revenue & Taxes
The services sector has been at the forefront of the rapid growth of the
Indian economy, contributing nearly 63 per cent of the GDP in 2007-08. The
sector has come to play an increasingly dominant role in the economy
accounting for 59.6 per cent of the overall average growth in GDP in the last
eight years between 2000-01 and 2007-08.

As per the Central Statistical Organization, the services sector has continued
to grow in the first quarter of 2009-10.

• Trade, hotels, transport and communication grew 6.1 per cent in April-
June 2009 from a year earlier.
• Financing, insurance, real estate and business services grew at 7.8 per
cent in April-June, 2009 from a year earlier.

• The software services in Indian economy increased by 33 percent which

registered a revenue of USD 31.4 billion
• Business services grew by 82.4 percent from liberlisation period.
• Engineering services and products exports grew by 23 percent and
earned a revenue of USD 4.9 billion
• Services concerning personal, cultural, and recreational had a growth of
96 percent
• Financial services had a rise of 88.5 percent
• Travel, transport, and insurance grew by 23 percent

Lead indicators suggest that the pace of expansion in the services sector
activity is likely to be sustained even in the next financial year.
• Foreign tourist arrivals (FTAs) during January to August 2009 were 3.26
million.
• Railways freight traffic increased to 833.03 million tonnes during fiscal
2008-09 from 794.21 million tonnes carried during 2007-08, an increase
of 4.89 per cent.
• Approximately 14.25 million telephone connections, including wireline and
wireless, were added during July 2009, taking the total number of
telephone connections at the end of July 2009 to 479.07 million.
• Cargo handled at major ports during April–December 2008–09 has been
391.80 MT as against 378.82 MT in the corresponding period last fiscal.
There has been a 13 percent hike in the service sectors of trade, hotels,
transport and communication in India's economy as compared to the 10.4
percent rise in the previous year. The financial services that comprise of
banks, real estate, insurance, and business services witnessed a rise of 11.1
percent during 2008-09 against the 10.9 percent growth in the previous
year. Service sectors including community, social, and personal services
experienced a growth of 7.8 percent during 2007-08 as against 7.7 percent
growth in the previous year.
The prospects for growth in the Indian services sector over the next year
continues to be robust, according to a survey by KPMG, conducted across the
BRIC (Brazil, Russia, India and China) countries in spring 2009. The survey
revealed that 31.3 per cent Indian companies saw their activity levels
improving. Around 37 per cent forecast new order growth in one year’s time,
compared with 16 per cent that anticipate a fall. Even capital expenditure at
Indian services firms is anticipated to rise in the year ahead, with 43 per cent
of companies saying they plan to increase spending on fixed assets.
Revenues are expected to grow by 31.1 per cent of firms, while 32.5 per cent
believe their profits will increase.
Further we find that increase in the share of services in GDP has not been
the same across the board for different services in India. The most important
services in terms of their share in GDP in early 1990s were trade (12%),
insurance (11%), community services (6.5%), but in 2002-03 we find that the
sectoral contributions have changed. Share of trade has increased to 14%
and community services to 8.4%. But share of insurance has declined to 7%.
Other services that have witnessed a fall in their shares in 2002-03 are
railways, real estate and dwellings.

The boom in the services sector has been relatively "jobless". The rise in
services share in GDP has not accompanied by proportionate increase in the
sector's share of national employment. Some economists have also
cautioned that service sector growth must be supported by proportionate
growth of the industrial sector, otherwise the service sector grown will not be
sustainable. In the current economic scenario it looks that the boom in the
services sector is here to stay as India is fast emerging as global services
hub.

India’s share of employment growth in the tertiary has been higher than in
manufacturing sector on Usual Principal Status (UPS) basis. In the decades of
eighties and nineties, the fall in the share in employment in agriculture
sector has been increasingly absorbed by the tertiary sector.

However, in 2004-05 compared to 1999-2000, there is a change with the fall

in employment share of the agriculture sector being absorbed both by the
manufacturing and tertiary sectors with a higher share for the former.

There can be career counseling to help young employees plan a career in a

still turbulent sector (Not everyone will be a team leader). There is no
provision for re-training for workers being laid off and there is little chance of
unemployment benefits in India. Retrenchment in this sector happens at a
larger scale usually when companies lose a few big clients as in the recent
mortgage subprime crisis or even earlier when a big computer maker of
American-origin shifted. The insecurity of being laid off leads to further
attrition. In this scenario, companies that offer skill enhancement and re-
training are likely to have a sustainable edge in human resource
management.

The number of services being taxed in India has increased progressively

from 3 in 1994-95 to about 92 in 2006-07.The services tax was imposed at
the rate of 5 percent, this has now been increased to 12 per cent. There has
also been a substantial growth in assesses base, which increased from 3,493
in 1994-95 to 7, 74,988 in 2004-05. The collection of the services tax
revenue has witnessed a substantial expansion since 1994-95, rising from
Rs. 407 crore in 1994-95 to Rs. 23,000 crore in 2005-06.

The growth in services tax collection has equally been impressive. Growth in
services tax revenue has been facilitated both by increase in rate of taxation
as well as increased number of services being taxed.

In more recent years, after recording a higher growth of 91.4 per cent in
2003-04, the growth in services tax collection has come down to 62 per cent
in 2005- 06,which is also by and large, impressive.

Further, services tax is emerging as an important component of indirect

taxes. The share of services tax in indirect taxes has increased more than
twenty-folds from a mere 0.6 per cent in 1994-95 to 13 per cent in 2005-06.

On the contrary, following the rationalization of duty structure, the share of

indirect taxes has decreased over the years. Thus, it appears that falling
share of custom duty has been amassed by the services Almost 60 per cent
of the GDP is contributed by the services sector alone. The growth in
absolute quantum of GDP and higher proportion of services sector therein
holds promise for a larger revenue generation
4.3 Services Sector @ 2015

The fact already floating in the air of "TERRITORY ECONOMIA" that service
sector has revivified the whole Indian economy by injecting life serum into it,
is ample enough to approve it as an indispensable growth component of the
Indian economy.The latest growth figures and its performance graph during
last few years reveal that it is headlong in progression to enlist itself with the
list of developed nations of the world. There has been a structural shift from
the agriculture (primary) sector to industrial (secondary) and service
(tertiary) sector like any other developed nation.

Service sector to ride high on rising industrial production because SERVICE

INDUSTRY’s share in gross domestic product (GDP) is rising — up from 24%
in 2009-10 from 24.6% last year. A 0.6% rise may not look very impressive,
but when considered against 9.4% GDP growth this would indicate an
improvement in Service industry’s relative contribution.

What is significant is that, the rise in service share in GDP this time was not
because of a fall in agriculture’s share but because of its own robust
performance. Industrial production has grown by a record 11.3% in 2006-07
— the highest in last decade — against a 9.4% rise in GDP.

The rise in Service industry’s relative contribution to GDP is important for

more than one reason. It justifies the faith of our planners as also that of the
industrialists who have been investing in a large scale in expansion of
capacity and in modernization of technologies in recent years. The rise in
Service industry’s share will also help restricting the fluctuation in GDP
growth caused primarily due to indifferent performance of the agricultural
sector.

But more importantly, higher industrial growth will prove as a catalyst to

service sector growth. Service sector has been the main contributor to our
GDP growth in recent years and economists have warned in the past that the
growth trend of the service sector cannot be sustained unless supported by
an equally booming industrial sector.

The value addition in the service sector has largely been in areas which
themselves are dependent on the performance of the industrial sector. The
share of trade, hotels and restaurants in GDP, for example, has witnessed
sharp increase in recent years. The share of transport, storage and
communications and that of financing, insurance, real estate and business
services too has been increasing rapidly. But the growth in earnings from
trade, hotels and restaurants or, for that matter, from financing, insurance,
real estate and business can be sustained only if industrial income grows
proportionately to support their prosperity.

The good performance of the industrial sector thus, has not only improved its
own share in GDP but has paved the way for a sustained service sector
growth too. The question is: Can Service industry maintain its high growth
trend?

The growth pattern of Service industry indeed, suggests that it can. The
production of goods, which forms the base of industrial growth, has all grown
rapidly in 2006-07. The production of finished steel has grown by 10.9% in
2006-07 over 2005-06. Production of cement has grown by 9.1% during the
same period. Generation of electricity has increased by 7.2% against about
5% for three consecutive years prior to 2006-07.

But what must have been more encouraging is that the production of capital
goods, which forms the base of future industrial growth, has increased
rapidly. The index of production of capital goods has grown by 18.3% in
2006-07

The manufacturing sector in general has done well with a 12.5% rise in 2006-
07. The growth has also been far more broad-based and as many as 16 of
the 17 two-digit Service industry groups have recorded positive growth
during 2006-07 compared to the previous year. Jute and other vegetable
textile was the only Service industry group whose production has declined
last year.

The production of basic metal and alloy has increased by 22.9%. The
production of transport equipment and parts has increased by 15% while the
production of machinery and equipment has grown 14.2%. But the
performance of the textile industries probably has been the most dramatic.
The production of cotton textiles, which grew by an annual compound rate of
only 2.5% during 1996-97 to 2006-07, has grown by a huge 14.8% last year.
CH. 5 SOCIAL SECTOR
5.1 Poverty – Pre and Post analysis

5.2 Literacy Rate

(a) Primary Education
(b) Higher education

5.3 Health care facilities

5.4 Per Capita Income

5.5 Growth of Social Sector

5.6 Improvement

5.7 Level of service sector @ 2015

Social sector is an important ingredient for over all development of a
country. A country needs social sector development for its overall
development. Development of social sector reveals the standard of living of
people as well as the volume and potential of human resource in a country.
Hence the analysis of economic reforms and its impact on social sector are
imperative.

Economic reforms, which has been implementing through Liberalisation,

Privatisation and Globalisation policies in India, have many critiques, the
most controversial one is, economic reforms induces inequality, which is one
of the main economical distribution problem that is faced by India. There is
no doubt about that the economic reforms has induced growth in India and
India’s consistent GDP growth is the effect of the economic reforms but it yet
to act as a cause for social development. The gap between haves and have
not’s have widened after the introduction of economic reforms. To fill up this
gap and to give a human face for economic reforms perpetuated
implementation of the social welfare schemes like National Rural
Employment Guarantee Programme, National Rural Health Mission and Sarva
Shiksha Abhiyan are the need of the hour.

The fruits of economic reforms yet to reach poor people in India. Economic
reforms is meaningful if it is benefited the society as a whole. Unless this
wouldn’t have done in the future then economic reforms would be resulted in
Growth without Equality. Translating economic growth into social sector
development needs Government policies that are aimed at broadening the
distribution of benefits of economic growth, increased public investment in
rural areas and social services.

The ultimate objective of planned development is to ensure human well -

being through sustained improvement in the quality of life of the people,
particularly the poor and the vulnerable segments of the population. In terms
of policy measures it requires emphasis on social sector development and
programmes. The development of human resources contributes to sustained
growth and productive employment. A healthy, educated and skilled
workforce can contribute more significantly and effectively to economic
development.
5.1 Poverty – Pre and Post
analysis

Poverty is defined as the lack of what is necessary for material well-being -

especially, food, health, education, shelter, land and other assets. Poverty is
a state of deprivation. In absolute terms it reflects the inability of an
individual to satisfy certain basic minimum needs for a sustained healthy and
a reasonably productive living. The proportion of population not able to
attain the specified level of expenditure is then segregated as poor (GoI
NHDR 200l). According to World Bank, “poverty is hunger, poverty is lack of
shelter. Poverty is being sick and not being able to see a doctor. Poverty is
not being able to go to school, not knowing how to read, and not being able
to speak properly. Poverty is not having a job, it is fear for the future, and it
is living from hand to mouth. Poverty is losing a child to illness brought about
by unclean water. Poverty is powerlessness, lack of freedom”.

Poverty line may be defined as an income level that is just sufficient to meet
the defined calorie norm. However households having a per capita income
less than the poverty line are identified as poor. It is expressed in terms of
an income level which is deemed to be necessary for enabling a person to
sustain a minimum level of consumption In India, headcount index is being a
key measure for poverty analysis, that is, the percentage of the population
living in households where per capita consumption is below the poverty line.
India’s Planning Commission defines poverty line based on the per capita
monthly expenditure which is officially linked to a nutritional baseline
measured in calories. A daily intake of 2400 calories per person in rural areas
and 2100 in urban areas marked as a cut-off point for poverty line. Who do
not meet these calorie norms falls below poverty line.

World Bank Estimate of Poverty

The World Bank in its country study India: Poverty, Employment, and
Social Services (1989) also made use of the same procedure as adopted
by the Planning Commission. The Poverty line is the expenditure level at
which a minimum calorie intake and indispensable non-food purchases are
assured. Poverty lines of Rs.49.1 and Rs. 56.6 per capita per month were
defined by the Planning commission for rural and urban areas for 1973-74.
The World Bank used an alternative method of estimating poverty
proportions applying a deflator series developed by the NSS and the Indian
Statistical Institute to calculate updated poverty lines (in current prices) of
Rs. 55.2 (rural) and Rs. 68.6 (urban) for 1977-78 and Rs. 89.0 (rural) and Rs.
112.2 (urban) for 1983. The World Bank also worked out the estimate of
ultra-poor recknoned of 75% of the expenditure of poverty line. On this basis
the proportion below poverty line for 1970, 1983, and 1988 has been worked
out.

Planning Commission Expert Group Report (1993)

The Planning commission constituted in September 1989 an ‘Expert Group’

to consider methodological and computational aspects of estimation of
proportion and number of poor in India. Prof. D.T. Lakdawala was the
Chairman of the Expert Group. The report of the Expert group was submitted
in July 1993.
Taking into account various considerations, the Expert Group recommended
the following criteria for determining the Poverty line:

1. The poverty line recommended by the Task Force on projection of

minimum needs and effective consumption demand, namely a monthly per
capita total expenditure of Rs. 49.09 (rural) and Rs. 56.64 (urban) rounded
respectively to Rs. 49 and 57 at all-India level at 1973-74 prices be adopted
as the base line. This was anchored in the recommended per capita daily
intake of 2,400 calories in rural areas with reference to the consumption
pattern as obtained in 1973-74. The expert group recommended that these
norms may be adopted uniformly for all states.

2. Regarding the choice of the base year, the Expert group was of the
opinion that since much systematic work has already been alone with the
base 1973-74, this base year may be continued for estimating the poverty
line.

3. For estimating state specific poverty lines, the standardized commodity

basket corresponding to poverty line at the national level should be valued
at the prices in each state in the base year, i.e., 1973-74. For updating to
generate State-specific consumer price index. For this laborers’ (rural) and
the consumer prices index for industrial workers and non-manual employees
(urban) should be used. Since prices vary between States and periods, the
procedure calls for price adjustments for interstate variations in the base
year and State-specific price movements over time.

4. For the choice of the deflator, the Expert Group come to the conclusion
that it would be most suitable to only on the disaggregated commodity
indices for Consumer Price Index for Agricultural Laborers’ (CPIAL) to update
the rural poverty line and a simple average of suitably weighted commodity
indices of consumer price index for industrial workers (CPIIW) and consumer
price index of non-manual employees (CPINM) for updating the poverty line.

The expert group estimated the proportion and number of the poor the
below the poverty line at four points covering the 14-year period 1973-74 to
1987-88. The norms for determining poverty line are given below:

Since these estimates covering a period of 14 years are based on the same
methodology, they are comparable. These estimates reveal that rural
poverty ratios have declined from 56.4 per cent in 1973-74 to 39.1 per cent
in 1987-88. As compared with this, there is a relatively smaller decline in
urban poverty ratio which has come down from 49.2 per cent in 1973-74 to
40.1 percent in 1987-88. The overall poverty ratio has, therefore, declined
from 54.9 percent in 1973-74 to 39.3 per cent in 1987-88. This implies that
during the 14 year period, poverty ratio has declined by 15.6 points in
percentage terms, or an annual average decline of about 1.2 percent.

Secondly, an important revelation of the study is that for the first time, the
urban povety ratio has been estimated to be higher than rural poverty ratio.
In absolute terms , the number of poor has risen from 60.3 million in 1973-74
to 83.3 million in 1987-88- an increase of 20 million. This is an indicator of
the growing urbanization. It also underlines the fact that on account of non-
availability of employment due to inadequate non-availability of employment
due to inadequate expansion of jobs in rural areas. The poor are pushed into
the urban areas for search of employment. It implies that the overflow of the
rural poor to the urban areas with increasing urbanization is the principal
factor accounting for an increase in urban poverty.

Thirdly, the population of the rural poor which was 261 million in 1973-74
rose to 264 million in 1977-78, but thereafter the number of rural poor
started declining and was 229 million in 1987-88. This is a healthy
development.
Fourthly, five states viz, UP, Bihar, Maharashtra, West Bengal and MP
account for 181.4 million poor in 1987-88. In relative terms, 58 percent of
the total poor in India reside in these five states. This indicates concentration
of the bulk of the poor in these states.

Fifthly, although generally there is a decline in the number of poor but

unfortunately, during 1973-74 and 1987-88 there is an absolute increase in
the number of poor in Orissa, Bihar, Maharashtra, Assam and UP. A very
distressing fact is that the number of poor in Bihar has increased from 37
million to 44 million during the 14 year period, signifying an increase by 7
million. This is an indicator of growing paupersation in Bihar and is the cause
for serious concern.

Sixthly, the states in which poverty ratio is higher than the all India figure in
1987-88 are: Orissa (55.6%), Bihar (53.4%), Tamil Nadu (45.1%). West
Bengal (44%), MP (43.4%) and UP(42%). As against them, the States which
have achieved heavy reduction in poverty are Gujarat, Kerala, Andhra
Pradesh, Haryana and Punjab.

During the period of 1987-88 to 193-94 urban poverty declined from 38.2%
to 32.4% - a fall of 5.8 per cent, but rural poverty declined by 1.8 per cent
only – from 39.1% to 37.3% . The slowdown in the reduction of poverty,
particularly in the rural sector, is a matter of serious concern for the country,
more so in view of the fact that the period was marked by the philosophy of
privatization and marketization. Since the intensive process of reforms had
continued for only three years, it would not be very appropriate to draw any
firm conclusion about economic reforms and their impact on poverty.

Economic reforms and reduction of poverty

Dr. Gaurav Datt of the World Bank in his article “Has Poverty Declined since
Economic Reforms?” has drawn the flowing conclusions:-
1. While there was a marked decline in both 1973-74 and 1986-87, there is
no sign of anything comparable thereafter.
2. For the rural sector, for the period 1973-74 and 1990-91, headcount index
of poverty declined at the annual rate of 2.7 per cent, the rate of decline
since then (i.e. in the post- reform period) is not significantly different from
zero.
3. For the urban sector, during 1973-74 and 1990-91, head count index of
poverty declined at the annual average rate of 2.2 per cent, the same trend
is continued in the post- reform period (1990-91to 1996-97) at the annual
average rate of 2.2 per cent.
4. While the urban sector seems to have continued its march of poverty
reduction in the process of growth, rural poverty reduction was choked off by
lack of rural growth
Dr. Gaurav Datt has identified stagnation in rural growth as the basic cause
of slowdown in poverty reduction. This naturally puts a question mark on the
very nature of the reform process in terms of rural welfare.

PLANING COMMISSION’S ESTIMATE OF POVERTY

Rural % Urban % Combine %
Number Number d
of of Number
Person Person of
(lakh) (lakh) Persons
(lakh)

ALL
INDIA

1973-74 2613 56.4 600 49.0 3213 54.9

1977-78 2642 53.1 647 45.2 3289 51.3

1983 2520 45.7 709 40.8 3229 44.5

1987-88 2319 39.1 752 38.2 3071 38.9

1993-94 2440 37.3 763 32.4 3203 36.0

Gaurav Datt’s Study on Poverty

Gaurav Datt States: “The trend annual rate of decline in headcount index
during 1951-52 was about 0.8% per year. Most of the gains in poverty
reduction were concentrated over the late 1970s and early 1980s. Indeed, it
was not until the early 1980s that India’s poverty measures feel appreciably
below the levels of 30 years earlier. The decline in poverty rates has
however not been very large enough or sustained enough to halt the
burgeoning ranks of the poor. With the absolute number of the poor having
increased by more than 120 million over the four decades (from 199 million
in 1951-55 to about 323 million in 1991-92), ‘garibi hatao(remove poverty)’
still remains an elusive goal.”

Poverty reduction was almost equal during pre-reforms and post-reforms

periods in percent where as the average poverty reduction was more during
pre-reforms period while comparing the post-reforms period. Poverty
reduction was at a relatively decreasing rate in the post-liberalization period,
there is unanimity among economists about a rise in inequality or relative
deprivation. The growth rate of GDP has been estimated to be higher in
1990s than that in the 1980s. The paradox of higher growth of GDP and
lower rate of poverty reduction is the direct results of the unequal
distribution of income between the rich and the marginalized sections of the
population (Datt and Sundaram 2009). India has widely heralded as a
success story for globalization. Over the past two decades the country has
moved into premier league of world economic growth; highly-technology
exports are booming and India’s emerging middle class consumers have
become a magnet for foreign investors. But overall the evidence suggests
that the pick-up in growth has not translated into a commensurate decline in
poverty. More worrying, improvements in child and mortality are slowing and
India is now off track for these MDG targets (HDR 2005).

Economists may have differences in methodology and thus their estimates

may vary in magnitude. But there is a general consensus on two things,
firstly, percentage of population below the poverty line has started decline as
a consequence of the indirect benefit of higher growth rate and also as a
result of the impact of the direct programmes of poverty alleviation. Still the
proportions of population below the Poverty line is about 37 per cent as per
the Seventh Plan which can be considered to be high. Secondly, the absolute
number of the poor has certainly increased over the years. The principal
elements of the situation are :

(1) Major chunk of the poor reside in rural areas. Among them are two
principal categories: the small farmers and the landless labourers. A little
less than half of the rural poor are land less and a little more than that are
small and marginal farmers. The two categories overlap since small farmers
also work as agricultural labourers.

(2) The major economic problem of the weaker sections in rural India is not
open unemployment, but low productivity employment.
(3) In the urban areas, the problem of poverty is an overflow of rural poverty.
Most of the poor are either self employed or are working in the non-
organized manufacturing or service sectors of the economy. The question
that is relevant here is of low paid job in case of wage employment or a low
resource base in case of the self-employed.

Another major cause of poverty is the low educational attainments of the

poor. These educational differentials are one of the main factors for
relatively lower levels of income among the poor. Poor parents are not able
to help their children reach higher educational levels.

Rural Urban

199 2001- 1999- 2001-2009

9-00 2009 00

Andhra Pradesh 15.9 11.2 38.3 26.6

Arunachal 45.0 40.0 7.7 7.5

Pradesh
45.0 40.0 7.7 7.5
Assam
58.2 44.3 34.5 32.9
Bihar
22.2 13.2 27.9 15.6
Gujarat
28.0 8.3 16.4 10.0
Haryana
30.3 7.9 9.2 4.6
Himachal Pradesh
30.3 4.0 9.2 2.0
Jammu & Kashmir
29.9 17.4 40.1 25.3
Karnataka
25.8 9.4 24.5 20.3
Kerala
40.6 37.8 48.4 38.4
Madhya Pradesh
37.9 27.7 35.2 26.8
Maharashtra
45.0 40.0 7.7 7.5
Meghalaya
45.0 40.0 7.7 7.5
Nagaland
49.7 48.0 41.6 42.8
Orissa 11.9 6.4 11.4 5.8

Punjab 26.5 13.7 30.5 19.8

Rajasthan 32.5 20.6 39.8 22.1

Tamil Nadu 42.3 31.2 35.4 30.9

Uttar Pradesh 40.8 31.9 22.4 14.9

West Bengal

1.9 0.4 16.0 9.4

Delhi

All India 37.3 27.1 32. 23.6

4
The latest report from planning commission *

5.2 Literacy Rate

The role of education in facilitating social and economic progress is well

recognized. It opens up opportunities leading to both individual and group
entitlements. Education, in its broadest sense of development of youth, is
the most crucial input for empowering people with skills and knowledge and
giving them access to productive employment in future. Improvements in
education are not only expected to enhance efficiency but also augment the
overall quality of life. The Eleventh Plan places the highest priority on
education as a central instrument for achieving rapid and inclusive growth. It
presents a comprehensive strategy for strengthening the education sector
covering all segments of the education pyramid.

Literacy in India, says UNESCO, is an indispensable means for effective

social and economic participation, contributing to human development and
poverty reduction. The right to education is also a fundamental human right.
UNESCO aims at education for all by 2015. India is one of the countries
(along with the Arab states and sub-Saharan Africa) where the literacy levels
are still below the threshold level of 75% but gigantic efforts are on to
achieve that level, efforts which have been relatively successful after India's
literacy rate grew from 42% in 1981 to 66% in 2001. More than three fourths
of the country’s male population and above half of the female population is
literate. The thrust forward for achieving at least the threshold level of
literacy represents the largest ever civil and military mobilization in the
country.

In most of the developing countries, including India, literacy has been

measured by the ‘literacy rate’, which is the percent (or, equivalently,
fraction) of the population, usually adult population. In India, the decennial
census data remain the most widely acceptable and frequently quoted
estimates of literacy. Besides, the National Sample Survey Organization
(NSSO) conducts sample surveys once in every five years, usually in between
two census years, to collect data on literacy status and other socio-economic
characteristics of the population. The estimates of literacy by the NSSO can
be viewed as the mid-term assessment of literacy in the country. The NLM
designs, implements andmonitors literacy programmes, and formulates
guidelines for literacy assessment. Several other non-governmental
bodies/organizations also carry out independent studies on assessment of
literacy. The National Family Health Surveys of the International Institute for
Population Sciences (IIPS), Mumbai provide database on a variety of
demographic and socio-economic indicators, including literacy, on the basis
of sample study of the households.

However, the definition and method of assessment of ‘literacy’ varies across

various sources such as the Census of India, NLM, NSSO and NFHS. The
definition of ‘literacy’ in the population census of India is fairly liberal. In the
census enumeration, ‘a person, who can read and write with understanding
in any language, is treated as literate. The person may or may not have
received any formal education.’ The data on literacy collected through
census enumeration is based on self-declaration of the respondent, and thus,
it classifies all individuals into only two categories, i.e. literate and illiterate.
It does not make any distinction between the ‘proximate’ and ‘isolated’
illiterates. The census data thus suffer from obvious limitations, as these are
not based on any objective measure to test the literacy status of the
respondents.

The NSSO surveys also provide useful information on the characteristics of

various types of households defined in terms of monthly per capita consumer
expenditure, main occupation, etc. by literacy status. The latest survey of
the NSSO (55th Round) was conducted in July 1999- June 2000. There was
only 7-month difference between the latest NSS (55th Round) and the
population census in 2001. The findings of the NSS (55th Round) on literacy10
are quite robust as these are not much different from that of the Census of
India, 2001 (see Table A5 in Annexure I). The National Literacy Mission
defines literacy as ‘acquiring the skills of reading, writing and arithmetic and
the ability toapply them to one’s day-to-day life.’ The definition of literacy by
the NLM goes beyond the census definition and focuses on the functional
literacy. The NFHS defines an ‘illiterate person’ as one who cannot read and
write, even if he/she may have been to school.

Over the last five decades, there has been an impressive growth in literacy in
India. In 1901, a little over 5% of Indian population was literate, which
increased to around 16% in 1950, a mere increase of 11 percentage points in
the literacy rate during the first half of the century. In the post-independence
period, the decadal growth in literacy has shown a substantial progress – i.e.
from 18.35% (5+ age group population) in 1951 to 65.38% (7+ age group
population) in 2001.

The table below shows the adult and youth literacy rates for India and some
of the neighbouring countries in 2002.

Adult Literacy Youth Literacy

Country
Rate Rate

China 91% (2009) 98.9% (2009)

India 66% (2009) 82% (2009)
Nepal 44.0% 62.7%
Pakistan 56.2% 53.9%
Sri Lanka 92.0% 98.0%
Bangladesh 41.1% 49.7%

(a) Primary Education

Elementary education, that is, classes I–VIII consisting of primary (I–V) and
upper primary (VI–VIII) is the foundation of the pyramid in the education
system and has received a major push in the Tenth Plan through the Sarva
Shiksha Abhiyan (SSA).

The literacy figures of different census years are not strictly comparable.
Since 1991 census, children in the age group 0-6 have been treated as
illiterates by definition and the 7+ age group population has been considered
for estimating the literacy rate. Prior to1991 census, the literacy rate had
been estimated taking the 5+ age group population as the denominator. The
NSSO survey covers the entire country and adopts the census definition of
literacy but takes a sample as a basis for estimation. However, in1991, the
NSSO administered tests to a sub-sample of the 15+ age group population to
verify the literacy status of those who declared themselves as literate. One
of the important outcomes of this exercise was that nearly 34% of those who
claimed ‘literate’ status had failed to qualify the test (NSSO 1995). This has
significant implications for assessing estimates of literacy rate provided in
different population censuses.

The literacy rates for population in the 7+ age group are available for the
last three censuses, and therefore, comparable for assessing the progress. In
1981, the literacy rate was 43.57% (56.58% for male and 29.76% for
female), which increased to 52.21%13 (64.13% for males and 39.29% for
females) in 1991. In 2001, almost two-thirds of India’s population (65.38%),
and around three-fourths of males (75.85%) and more than half of females
(54.16%) were literate.

Between 1981 and 2001, while the literacy rate of population increased by
21.82 percentage points, the female literacy rate went up by 24.41
percentage points. During this period, the increase in the female literacy rate
was more than the male literacy rate, which was 19.48 percentage points.
The literacy rate registered an increase of 13.17 percentage points from
1991 to 2001; the highest increase in any one-decade. Much of this
increasemay be due to the implementation of various national and state
level externally funded primary education programmes and the national
adult literacy programmes of the NLM. The increase in female literacy (14.87
percentage points) was also relatively higher than that of the male literacy
rate (11.72 percentage points) in the 1990s.

In 1951, only 12.1% of rural population and 4.87% of females in India were
literate. In 2001, rural literacy rate increased to 59.4% (71.4% for males and
46.7% for females). During 1991-2001, the increase in female literacy rate
(16.1 percentage points) in rural area was relatively more compared to that
of the male (13.5 percentage points). In urban India, only 34.59% of the
population was literate in 1951, which increased to 80.3% in 2001. The
female literacy rate was 22.33% in 1951, which increased to 73.2% in 2001.
In urban area too the growth in female literacy rate (13.2 percentage points)
was relatively faster than that of the male (5.6 percentage points) during
1991-2001. In 1951, the male-female differences in the literacy rate in rural
and urban areas were 14.15 and 23.27 percentage points respectively. In
1991, the gaps in the male-female literacy rate in rural and urban areas were
27.3 and 17.1 percentage points respectively, which came down to 24.7 and
13.5 percentage points in 2001. In 1991, rural-urban gap in literacy rate was
28.4 percentage points, which decreased to 20.9 percentage points in 2001.
In other words, while 4/5th of the urban population was literate, more than
2/5th of the rural population was illiterate in 2001.

Another notable aspect of the progress in literacy in India is that, for the first
time, the number of illiterates has gone down in absolute term. During 1991-
2001, the population of India in the 7+ age group increased by 172 million,
while around 204 million additional persons became literate. As a result, the
total number of illiterates came down from 328.88 million in 1991 to 300.14
million in 2001. During this period, the absolute number of illiterates
decreased by around 28.74 million. In 1981, India had 235.73 million literate
persons, which increased to 359.28 million in 1991 and 566.71 million in
2001. The average annual growth of literate persons was 4.30% during 1981-
91,and it was 4.66% during 1991-2001. The number of illiterates grew at an
average annual growth rate of 0.75% during 1981-91, while it declined at an
average annual growth rate of –0.91% during 1991-2001.
Major Schemes in the Tenth Plan

The Tenth Plan laid emphasis on Universalization of Elementary Education

(UEE) guided by five parameters: (i) Universal Access, (ii) Universal
Enrolment, (iii) Universal Retention, (iv) Universal Achievement, and (v)
Equity. The major schemes of elementary education sector during the Tenth
Plan included SSA, District Primary Education Programme (DPEP), National
Programme of Nutritional Support to Primary Education, commonly known as
Mid-Day Meal Scheme (MDMS), Teacher Education Scheme, and Kasturba
Gandhi Balika Vidyalaya Scheme (KGBVS). The schemes of LokJumbish and
Shiksha Karmi were completed but DPEP will extend up to November 2008.
KGBV has now been subsumed within SSA.

Sarva Shiksha Abhiyan (SSA)

SSA, the principal programme for UEE, is the culmination of all previous
endeavours and experiences in implementing various education
programmes.While each of these programmes and projects had a specific
focus—Operation Blackboard on improving physical infrastructure; DPEP on
primary education; Shiksha Karmi Project on teacher absenteeism, and
LokJumbish Project on girls’ education—SSA has been the single largest
holistic programme addressing all aspects of elementary education covering
over one million elementary schools and Education Guarantee Centre
(EGS)/Alternate and Innovative Education (AIE) Centres and about 20 crore
children.

Performance of SSA and Related Schemes in Tenth Plan

The specific goals of SSA during the Tenth Plan period were as follows:
• All children to be in regular school, EGS, AIE, or ‘Back-to-School’ camp by
2005;
• Bridging all gender and social category gaps at primary stage by 2007 and
at elementary education level by 2010;
• Universal retention by 2010;
• Focus on elementary education of satisfactory quality with emphasis on
education for life.

The Constitution of India was amended in 2002 to make elementary

education a justiciable Fundamental Right. However, 7.1 million children
being out of school and over 50% dropping out at elementary level are
matters of serious concern. SSA would, therefore,be reoriented to meet the
challenges of equity, retention, and high-quality education. This would
require a strong rights orientation within the programme. It is necessary to
consider passing appropriate legislation for this purpose. SSA would be
 restructured into a National Mission for Quality Elementary Education to
ensure minimum norms and standards for schools (both government and
private). It would address access, quality, and equity holistically though a
systems approach.

Facilities Primary Upper Primary

2004–05 2005– 2004–05

06 2005–06

Building 3.5 3.0 2.8

2.4
Toilets 51.4 44.6
16.8
Drinking water 16.3 15.1
15.3

4.7 4.8

The backlog for additional classrooms is about 6.87 lakh. Opening of about
20000 new primary schools and upgradation of about 70000 primary schools
are required.

Schools without Basic Facilities, 2005–06

(Percentages)
 (b) Higher education

There has been significant growth in higher education during the academic
year 2009-10. According to the University Grants Commission (UGC),
enrolment in various courses at all levels in universities/colleges and other
institutions of higher education in 2009-10 was 11.34 million as compared to
10.50 million in the previous year. Out of this, the number of women
students was 4.58 million constituting 40.39 per cent. There has also been a
significant expansion of central institutions of higher education in recent
years. With the increased demand for higher quality education, training of
teachers has become even more important and out of box thinking is
required to ensure adequate supply of quality teachers.

In view of the demands of rapidly changing technology and the growth of

knowledge economy, a mere higher education would be grossly inadequate
for our youth to acquire necessary skills to compete in the job market.
Therefore, a Mission for Secondary Education is essential to consolidate the
gains of SSA and to move forward in establishing a knowledge society.
The Eleventh Plan must also pay attention to the problems in the higher
education sector, where there is a need to expand the system and also to
improve quality.

The Eleventh Plan will also have to address major challenges including
bridging regional, social, and gender gaps at all levels of education.

Kasturba Gandhi Balika Vidyalaya Scheme (KGBVS)

The KGBVS was launched in July 2004 for setting up of residential schools at
upper primary level for girls, predominantly belonging to the SCs, STs, OBCs,
and minorities in EBBs. A minimum of 75% of the enrolment in KGBVS is
reserved for girls from the target groups and the remaining 25% is open for
girls belonging to the BPL category. The Tenth Plan allocation for the scheme
was Rs 427 crore.
As soon as the schools were sanctioned under KGBV, the States rented
premises and sought funds without waiting for the buildings to come up. The
targeted 750 schools (Model I—364 schools, Model II—117 schools, and
Model III—269 schools) were sanctioned between December 2004 and May
2005. By December 2006, 1039 schools were operational with a total
enrolment of 63921 girls. In February 2006, 430 schools and in March 2007
additional 1000 schools were sanctioned, raising the total to 2180 schools.
Theallotments of KGBVs to States were not in proportion to the number of
EBBs. The skewed distribution of KGBVs would be set right in the Eleventh
Plan.

NATIONAL SERVICE SCHEME (NSS)

NSS would be strengthened and expanded from 2.60 million to 5.10 million
volunteers and made more effective through qualitative improvements in the
programme activities. NSS would be extended to uncovered universities,
colleges, technical institutes, and senior secondary schools. The feasibility of
extending NSS to class IX will be examined separately. The funding pattern
would be revised from the existing 70:50 to 75:25, at par with National Cadet
Corps, for normal States and 90:10 in the case of NE States.

RAJIV GANDHI NATIONAL INSTITUTE OF YOUTH DEVELOPMENT

(RGNIYD)

RGNIYD would be developed as the apex institution with the status of

Deemed National Youth University in the country. The Institute would provide
special focus on youth leaders from PRIs and will be developed as an
International Centre of Excellence on youth development. The collaboration
of RGNIYD with the Commonwealth Youth Programme (CYP) Asia Centre,
Chandigarh, would be strengthened to enable a higher level of international
participation.

YOUTH HOSTELS

To encourage youth travel, youth hostels are envisaged at historical,

cultural, and tourist places in the country as a joint venture between the
Central and the State Governments. The construction and maintenance and
operations could be taken up in a self-sustaining manner in the
PPP/franchising mode. Some portion of the hostels could also be earmarked
with differential tariff and facilities so as to generate additional resource to
meet maintenance and up keep of the campus.

NATIONAL PROGRAMME FOR YOUTH AND ADOLESCENT

DEVELOPMENT
The programmes/schemes being funded through grant-in-aid/financial
assistance under ‘YuvaShakti Abhiyan’ for youth and adolescent
development will be restructured and placed under a single scheme namely,
‘National Programme for Youth and Adolescent Development’. Considering
increasing population of adolescents in future, Eleventh Plan recognizes
adolescents as individuals with their own rights, aspirations and concerns,
thus emphasizing a shift away from the welfare approach to a rights and
empowerment oriented approach. The thrust areas of Eleventh Plan will
consist of highlighting the need to extend coverage to adolescents in the
various schemes of the Ministry of Youth Affairs and Sports and
strengthening of the existing scheme of Financial Assistance for
Development and Empowerment of Adolescents on holistic approach.

Young learners from socially marginalized sections experience education in a

distinctly different form than those who occupy mainstream positions of
power and privilege. They face overt and covert forms of rejection in
schooling.8 The Eleventh Plan will lay special focus on disadvantaged groups
and educationally backward areas. This focus will include not only higher
resource allocation but also capacity building for preparation and
implementation of strategies based on identified needs, more intensive
monitoring and supervision, and tracking of progress. Specific measures will
include:

• Top priority in pre-primary schooling to habitations of marginalized

sections.

• Setting up additional 500 KGBVs in blocks with higher concentration of

SC, ST, OBC, and minority population.

• Special attention to districts with high SCs, STs, and minority population.
Innovative funds for SFDs to be doubled.

• Focus on improving the learning levels of SC, ST, minority children through
remedial coaching in schools and also in habitations through educated youth
of Nehru Yuva Kendra Sangathan (NYKS), NSS, Self-help Groups (SHGs), and
local nongovernmental organizations (NGOs).

• Special schools for slum children in 35 cities with million plus population.

• Special intervention for migrating children, deprived children in urban slum

areas, single parent’s children, physically challenged children, and working
children.
• Creation of capacity within the school for dealing with students lagging in
studies.

• Setting up 1000 hostels in EBBs with the resident PG teacher as the

warden to provide supplementary academic support.

• Sensitizing teachers for special care of weaker sections and CWSN.

• Intensive social mobilization in SCs, STs, OBCs, and predominantly tribal

and minority habitations through community support.

• Housing for teachers in tribal and remote habitations.

5.3 Health care facilities

Healthcare is one of India’s largest sectors, in terms of revenue and

employment, and the sector is expanding rapidly. During the 1990s, Indian
healthcare grew at a compound annual rate of 16%. Today the total value of
the sector is more than $34 billion. This translates to $34 per capita, or
roughly 6% of GDP. By 2012, India’s healthcare sector is projected to grow to
nearly $40 billion.

The private sector accounts for more than 80% of total healthcare spending
in India. Unless there is a decline in the combined federal and state
government deficit, which currently stands at roughly 9%, the opportunity
for significantly higher public health spending will be limited.

One driver of growth in the healthcare sector is India’s booming population,

currently 1.1 billion and increasing at a 2% annual rate. By 2030, India is
expected to surpass China as the world’s most populous nation. By 2050, the
population is projected to reach 1.6 billion.

This population increase is due in part to a decline in infant mortality, the

result of better healthcare facilities and the government’s emphasis on
eradicating diseases such as hepatitis and polio among infants. In addition,
life expectancy is rapidly approaching the levels of the western world. By
2025, an estimated 189 million Indians will be at least 60 years of age—triple
the number in 2004, thanks to greater affluence and better hygiene. The
growing elderly population will place an enormous burden on India’s
healthcare infrastructure.
The Indian economy, estimated at roughly $1 trillion, is growing in tandem
with the population. Goldman Sachs predicts that the Indian economy will
expand by at least 5% annually for the next 45 years and that it will be the
only emerging economy to maintain such a robust pace of growth.

Rise of disease

Another factor driving the growth of India’s healthcare sector is a rise in both
infectious and chronic degenerative diseases. While ailments such as
poliomyelitis, leprosy, and neonatal tetanus will soon be eliminated, some
communicable diseases once thought to be under control, such as dengue
fever, viral hepatitis, tuberculosis, malaria, and pneumonia, having returned
in force or have developed a stubborn resistance to drugs. This troubling
trend can be attributed in part to substandard housing, inadequate water,
sewage and waste management systems, a crumbling public health
infrastructure, and increased air travel.

In addition to battling infectious diseases, India is grappling with the

emergence of diseases such as AIDS as well as food- and water-borne
illnesses. And as Indians live more affluent lives and adopt unhealthy
western diets that are high in fat and sugar, the country is experiencing a
rise in lifestyle diseases such as hypertension, cancer, and diabetes, which is
reaching epidemic proportions (The Indian Diabetes Epidemic).

Over the next 5-10 years, lifestyle diseases are expected to grow at a faster
rate than infectious diseases in India, and to result in an increase in cost per
treatment. Wellness programs targeted at the workplace, where many
sedentary jobs are contributing to an erosion of employees’ health, could
help to reduce the rising incidence of lifestyle diseases.

Pharmaceuticals
Paralleling the rise of disease is the emergence of a robust pharmaceutical
industry in India. The Indian pharmaceutical market is one of the fastest
growing markets in the world; sales increased by 17.5% to $7.3 billion in
2006, according to IMS Health. Many factors, including a strong economy and
the country’s growing healthcare needs have contributed to the accelerated
growth, which is especially strong in the over-the-counter (OTC) market.

Overall, the domestic pharmaceutical industry is highly fragmented; more

than 10,000 firms collectively control about 70% of the market. Only three
foreign multinationals rank in the top 10 companies, as measured by sales,
and collectively they have only 11.9% of the market between them. But
many of the local players are generics producers specializing in
antiinfectives, and as the illnesses of affluence and age increase, the
demand for innovative new pharmaceuticals will rise.

The federal government uses price controls to ensure that vital drugs are
affordable to the Indian population. Under the proposed pharmaceutical
policy 2006, the government revealed its intention to raise the number of
essential drugs under price controls from 79 to nearly 354, which would
bring almost a third of the industry under price controls and adversely
impact foreign pharmaceutical firms that want to business in India.It is an
ongoing challenge to balance the commercial interests of pharmaceutical
companies with the broader social objective of curing disease and preventing
epidemics that could decimate the Indian population.

Deteriorating infrastructure
India’s healthcare infrastructure has not kept pace with the economy’s
growth. The physical infrastructure is woefully inadequate to meet today’s
healthcare demands, much less tomorrow’s. While India has several centers
of excellence in healthcare delivery, these facilities are limited in their ability
to drive healthcare standards because of the poor condition of the
infrastructure in the vast majority of the country.

Of the 15,393 hospitals in India in 2002, roughly two-thirds were public. After
years of under-funding, most public health facilities provide only basic care.
With a few exceptions, such as the All India Institute of Medical Studies
(AIIMS), public health facilities are inefficient, inadequately managed and
staffed, and have poorly maintained medical equipment.

The number of public health facilities also is inadequate. For instance, India
needs 74,150 community health centers per million population but has less
than half that number. In addition, at least 11 Indian states do not have
laboratories for testing drugs, and more than half of existing laboratories are
not properly equipped or staffed. The principal responsibility for public health
funding lies with the state governments, which provide about 80% of public
funding. The federal government contributes another 15%, mostly through
national health programs.

However, the total healthcare financing by the public sector is dwarfed by

private sector spending. In 2003, fee-charging private companies accounted
for 82% of India’s $30.5 billion expenditure on healthcare. This is an
extremely high proportion by international standards.Private firms are now
thought to provide about 60% of all outpatient care in India and as much as
40% of all in-patient care. It is estimated that nearly 70% of all hospitals and
40% of hospital beds in the country are in the private sector.

Per Lakh (100K)

Population Beds Hospitals Dispensaries

Urban 178.78 3.60 3.6

Rural 9.85 o.36 1.49

Source: Review of Health Care in India, 2005

The healthcare divide

When it comes to healthcare, there are two Indias: the country with that
provides high-quality medical care to middle-class Indians and medical
tourists, and the India in which the majority of the population lives—a
country whose residents have limited or no access to quality care. Today
only 25% of the Indian population has access to Western (allopathic)
medicine, which is practiced mainly in urban areas, where two-thirds of
India’s hospitals and health centers are located. Many of the rural poor must
rely on alternative forms of treatment, such as ayurvedic medicine, unani
and acupuncture.

The federal government has begun taking steps to improve rural healthcare.
Among other things, the government launched the National Rural Health
Mission 2005-2012 in April 2005. The aim of the Mission is to provide
effective healthcare to India’s rural population, with a focus on 18 states that
have low public health indicators and/or inadequate infrastructure. These
include Arunachal Pradesh, Assam, Bihar,Chhattisgarh, Himachal Pradesh,
Jharkhand, Jammu & Kashmir, Manipur, Mizoram, Meghalaya, Madhya
Pradesh, Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttaranchal and Uttar
Pradesh. Through the Mission, the government is working to increase the
capabilities of primary medical facilities in rural areas, and ease the burden
on to tertiary care centers in the cities, by providing equipment and training
primary care physicians in how to perform basic surgeries, such as cataract
surgery. While the rural poor are underserved, at least they can access the
limited number of government-support medical facilities that are available to
them. The urban poor fare even worse, because they cannot afford to visit
the private facilities that thrive in India’s cities.

Emerging health insurance market

In recent years, there has been a liberalization of the Indian healthcare

sector to allow for a much-needed private insurance market to emerge. Due
to liberalization and a growing middle class with increased spending power,
there has been an increase in the number of insurance policies issued in the
country. In 2001-02, 7.5 million policies were sold. By 2003-4, the number of
policies issued had increased by 37%, to 10.3 million.

The Insurance Regulatory and Development Authority (IRDA) eliminated

tariffs on general insurance as of January 1, 2007, and this move is expected
to drive additional growth of private insurance products. In the wake of
liberalization, health insurance is projected to grow to $5.75 billion by 2010,
according to a study by the New Delhi-based PHD Chamber of Commerce
and Industry. The IRDA believes that eliminating tariffs will encourage
scientific rating and adoption of better risk management practices, and lead
to independent pricing for each line of business, so that premiums will be
based on actual risks and costs. The implementation of the new policy also
will encourage the development of innovative practices and customer-
friendly options for policyholders, boosting penetration.

Removal of tariffs also will result in wider acceptance of individual health

coverage. Health insurance will make healthcare more affordable to larger
segments of the populace, boosting healthcare expenditures per household
and driving the demand for quality care. Finally, the elimination of insurance
tariffs will serve as a litmus test for further legislation, such as co-payments
and hospital accreditations, which the government plans to implement over
the next two to three years.
In the post liberalization era, some companies have been licensed to act as
third party administrators of health services. The objective is to strengthen
the health insurance industry and increase its penetration by bringing more
professionalism to claims management, facilitating cashless services to
policyholders, and reducing the claims ratio. Currently there are 25 licensed
third party administrators in the Indian health insurance industry.

In another effort to improve the insurance prospects for India, the IRDA is
focused on standardizing medical definitions to ensure consistent pricing and
products, and is providing incentives for stand-alone insurance companies.
(Currently only Star Health exists as a stand-alone health insurance
company.) In addition, government subsidies and tax incentives for health
insurance are expected to attract key players to the industry.

In response to liberalization, a large number of international private

insurance companies are moving into India and forming joint ventures. Two
prominent examples are Max New York Life, a joint venture between Max
India and New York Life, and ICICI Prudential Life Insurance, a joint venture
between the ICICI Group and UK-based Prudential plc. Some companies are
experimenting with more targeted forms of insurance coverage. For
example, ICICI Prudential is offering plans designed specifically for diabetics.
We can expect to see more innovations as the health insurance market
evolves in the coming years.

While the liberalization of the healthcare sector will increase the penetration
of insurance policies, the widespread use of health insurance in India could
take many years. One reason is that insurance companies lack the data they
need to assess health risks accurately. In addition, today’s insurance
products work on an indemnity basis—that is, they reimburse patients only
after they have paid their healthcare bills. Since many people cannot afford
such large payments, even if they are subsequently reimbursed, they will not
choose to purchase medical insurance.
5.4 Per Capita Income

As per the UNDP’s Global Human Development Report (HDR) 2009, in spite
of the absolute value of the human development index (HDI) for India
improving from 0.577 in 2005 to 0.611 in 2007 and further to 0.619 in 2009,
the relative ranking of India has not changed much. India ranks at 128
among the countries with medium human development out of 177 countries
of the world as against 126 in the previous year. In terms of Gender
Development Index (GDI), India ranks 113 out of 157 countries ranked on the
basis of their GDI value. A zero count for HDI rank minus GDI rank for India is
indicative of almost similar status of ranking in terms of gender development
and human development. At the same time, while India’s HDI rank reflects
low relative achievement in the level of human development, a negative
count of (-11) for GDP per capita (PPP US$) rank minus HDI rank is also
indicative that the country has done better in terms of per capita income
than in other components of human development. The other indicators
related to Health and Education also indicate the same. The situation
reinforces the need for greater focus on this area in our development
planning. It is this concern that is reflected in the Eleventh Plan which seeks
to reduce not only poverty but also the various kinds of disparities across
regions and communities by ensuring better access to not only basic
physical infrastructure but also health and education services to one and all.
Major Initiatives in Social Sector.

In consonance with the commitment to faster social sector development

under the National Common Minimum Programme (NCMP), the Central
Government has launched new initiatives for social sector development
during 2008-09. Substantial progress was also made on the major initiatives
launched in earlier years.

Central Government expenditure on social services and rural development

has gone up consistently over the years. The share of Central Government
expenditure on social services, including rural development in total
expenditure (plan and non-plan), has increased from 11 per cent in 2001-02
to 16.4 per cent in 2008-09 (BE). Central support for social programmes has
continued to expand in various forms although most social sector areas fall
within the purview of the States. Significant amount of programme specific
funding is available to the States through the Centrally Sponsored Schemes.
The pattern of funding for these schemes varies depending upon the priority
laid on the sector. At the same time, the objective is to make States more
and more self-reliant in supporting these schemes as is borne out by the
funding pattern proposed for Sarva Shiksha Abhiyan.

Increasing trend of expenditure on social services by the general

government (Centre and States combined) in recent years reflects the high
priority attached to these sectors. Expenditure on social sectors as a
proportion of total expenditure, after decreasing from 20.4 per cent in 2007-
08 to 19.5 per cent in 2006-07, increased steadily to 22.3 per cent in 2008-
09 (RE) and 22.5 per cent in 2009-10 (BE). Expenditure on education as a
proportion of total expenditure has increased from 9.8 per cent in 2008-09 to
10.4 per cent in 2009-10 (RE). Share of health in total expenditure has also
increased from 4.4 per cent in 2008-09 to 4.9 per cent in 2009-10 (RE).

Inter-State comparisons based upon important socio-economic indicators

bring out disparities between States in development outcomes. The
performance of States across various sub-sectors, be it poverty, health or
education related, reinforce each other.

To some extent this disparity in performance between states may be

accounted for by extraneous factors but largely can be attributed to
governance and delivery of services. This calls for a greater emphasis on
governance issues. While governance is a broader area to be tackled at
various fronts, use of e-governance is becoming an important method to
ensure better delivery and monitoring of services in different sectors
including social sectors.
5.5 Growth of Social Sector

In consonance with the commitment to faster social sector development

under the National Common Minimum Programme (NCMP), the Central
Government has launched new initiatives for social sector development
during 2008-09. Substantial progress was also made on the major initiatives
launched in earlier years.

Central Government expenditure on social services and rural development

have gone up consistently over the years. The share of Central Government
expenditure on social services, including rural development in total
expenditure (plan and non-plan), has increased from 11 per cent in 2005-06
to 16.4 per cent in 2009-10 (BE). Central support for social programmes has
continued to expand in various forms although most social sector areas fall
within the purview of the States. Significant amount of programme specific
funding is available to the States through the Centrally Sponsored Schemes.
The pattern of funding for these schemes varies depending upon the priority
laid on the sector. At the same time, the objective is to make States more
and more self-reliant in supporting these schemes as is borne out by the
funding pattern proposed for Sarva Shiksha Abhiyan.

Increasing trend of expenditure on social services by the general

government (Centre and States combined) in recent years reflects the high
priority attached to these sectors. Expenditure on social sectors as a
proportion of total expenditure, after decreasing from 20.4 per cent in 2008-
09 to 19.5 per cent in 2009-10, increased steadily to 22.3 per cent in 2086-
09 (RE) and 22.5 per cent in 2009-10 (BE). Expenditure on education as a
proportion of total expenditure has increased from 9.8 per cent in 2008-09 to
10.4 per cent in 2009-10 (RE). Share of health in total expenditure has also
increased from 4.4 per cent in 2008-09 to 4.9 per cent in 2009-10 (RE).

Inter-State comparisons based upon important socio-economic indicators

bring out disparities between States in development outcomes. The
performance of States across various sub-sectors, be it poverty, health or
education related, reinforce each other.
To some extent this disparity in performance between states may be
accounted for by extraneous factors but largely can be attributed to
governance and delivery of services. This calls for a greater emphasis on
governance issues. While governance is a broader area to be tackled at
various fronts, use of e-governance is becoming an important method to
ensure better delivery and monitoring of services in different sectors
including social sectors.

5.6 IMPROVEMENT

Despite strong growth, India lags far behind other BRIC countries in social
sector achievements, spending lowest on education and health, according to
a study by the Associated Chambers of Commerce and Industry of India
(ASSOCHAM).

The ASSOCHAM Eco Pulse (AEP) study showed that India's public expenditure
on health and education stood at 5 per cent and 9.2 percent of gross
domestic product (GDP) respectively in 2008-09 fiscal. While Brazil and
Russia spent 7.9 per cent and 5.2 per cent respectively on health in fiscal
2006, India is a notch above China with public expenditure on education
reaching 5 per cent of GDP.

In the period under review, India's mortality rate among children under five
years stood at 76 (per 1,000), the highest among the BRIC countries. In
contrast, Russia recorded lowest infant mortality rate at 16 per 1,000. China
and Brazil ranked second and third with mortality rates 24 and 20 per 1,000
respectively. While Russia, Brazil and China spend 12.9 per cent, 12.8 per
cent and 10.2 per cent respectively on education, India contributes just 9.2
per cent of GDP.

India's literacy rate of 67 per cent is the least among the BRIC countries. In
fiscal 2008, Russia with highest public expenditure on education among the
BRIC nations has almost achieved complete literacy, as its literacy rate was
99.4 per cent.

"India needs to keep its pace with other developing countries in its
social sector development, to meet the twin objectives of rapid
progress and inclusive growth. We need to invest in more quality
education and health services," ASSOCHAM president Sajjan Jindal.

These are some key areas where improvement should be done to keep social
sector updated and paced with compared to another countries specially BRIC
countries.

Increase social sector allocation

Increase in the allocation of funds for education and health as well as social
security for the unorganised sector. One of the demands put in the charter
titled "People's Budget Initiative" is that the total fund allocation for health
should be increased to three per cent of the gross domestic product and that
for education should be increased to six per cent.

CEO of international social organisation Oxfam India, Nisha Agarwal said,

"This endeavor is to unravel the complexities around budgets and make
them understandable to the lay audience. We believe the marginalised
matter and seek to redress the balance, which we find at the moment tilted
heavily in favour of the socio-economic elite."

Personnel policies

“Motivation that drives our efforts is to keep up the momentum of

scrutinising the policy priorities beyond the short period, which lasts around
the time the union budget is presented," Nisha Agarwal.

There should be a transparent and fair recruitment for Teachers, Medical

Students or even any other govt. employment facility. There should be
recruitment just to consider the competence of the candidate not on the
ground of castes.

The Salary disbursement should be timely.

Rural Social Development

Construct a governance index on the basis ofIMR, extent of immunisation,

literacy rate for women, child sex ratio, malnutrition, availability of safe
drinking water supply, electrification of rural households, percentage of girls
married below 18 years, increase in agricultural employment, number of
class I government officials prosecuted and convicted for corruption, and so
on.
Divide States in three categories: rich, poor, and the special category states,
So that the needy people should avail the profits of the government schemes
as per their need.

Panchayats (district, block, village councils)

Meetings of the Gram Sabha (fullvillage) are held rarely. But the meetings
should be commenced as often basis.

Despite excellent work by some village level panchayats, many block/district

level panchayat leaders as well as the officials see in development
programmes an opportunity to earn commissions. They seek their intention
and ruin the growth of the rural social development. It should be stopped.

Panchayats are mostly active in construction oriented schemes that require a

contractor and wage labour that do not require participation by many
hurdles, So, therefore, govt. should take some action for that.

Panchayats are not active in education, health, SHGs, watershed, pastures

and forestry programmes, which require people to come together as equals.

These were the problems with Panchayats and the given points below can
make any solution for that.

Insist on their collecting land revenue and irrigation taxes

•Link devolution with their performance & with tax collection, so that the
inflow should reach to the common people with surely easiness.

•Encourage peer review & stakeholder audit, so that the real situation should
come out. It will give a good analysis of the input and output for the
development of rural area.

•Grade panchayats, so that the Panchayats will work under the district level
authority and the rural area which needs a higher input can classified at top.

•Increase their powers and responsibilities in education, health, watershed,

and pastures

•Make village panchayats appointing authorities for education & health staff.
 5.7 Level of service sector @ 2015

As the discussion of future of the Indian social sector eventually rise or not?
It just depends on the Government. With allocation of funds by Government
are just opening new options for safeguarding and managing their
programmes, public will continue to depend on social sector only as long as
it can provide service and value that cannot be found anywhere else.

An examination of the forces shaping the industry reveals that the future will
require superior efficiency and operational excellence, while industry
leadership will be attained by those institutions most adept at harnessing
product, service and process innovation to anticipate and meet needs.
Ultimately, to deliver on these imperatives, Government will have to focus on
their core strengths-those activities in which they excel- and partner with
best-in-class specialists for everything else: achieving more by doing less.

On the surface, the competitive landscape of the social sector in 2015 will
not look much different than it does today. However, traditional approaches
to creating value through growth and efficiency will no longer be enough.
Advantages gained through acquisition, new market entry and reconfigured
offerings will be fleeting at best, while partnering and outsourcing will make
efficiency a basic requirement for all.

ELEMENTARY EDUCATION AND LITERACY

The Government places the highest priority on education as a central

instrument for achieving rapid and inclusive growth. It presents a
comprehensive strategy for strengthening the education sector covering all
segments of the education pyramid. Till 2015-

Elementary education, that is, classes I–VIII consisting of primary (I–V) and
upper primary (VI–VIII) is the foundation of the pyramid in the education
system and has received a major push in the Tenth Plan through the Sarva
Shiksha Abhiyan (SSA).

By 2015 will finish all the major challenges including bridging regional, social,
and gender gaps at all levels of education.
HEALTH AND FAMILY WELFARE

The health of a nation is an essential component of development, vital to the

nation’s economic growth and internal stability. Assuring a minimal level of
health care to the population is a critical constituent of the development
process.

By 2015 an opportunity to restructure policies to achieve a New Vision based

on faster, broad-based, and inclusive growth. One objective of the
Government is to achieve good health for people, especially the poor and the
underprivileged. In order to do this, a comprehensive approach is needed
that encompasses individual health care, public health, sanitation, clean
drinking water, access to food, and knowledge of hygiene, and feeding
practices. The Plan will facilitate convergence and development of public
health systems and services that are responsive to health needs and
aspirations of people. Importance will be given to reducing disparities in
health across regions and communities by ensuring access to affordable
health care.

Plan will give special attention to the health of marginalized groups like
adolescent girls, women of all ages, children below the age of three, older
persons, disabled, and primitive tribal groups. It will view gender as the
cross-cutting theme across all schemes.

By 2015- the major goals will achieved in the terms of Health care are –

• Reducing Maternal Mortality Ratio (MMR) to 1 per 1000 live births.

• Reducing Infant Mortality Rate (IMR) to 28 per 1000 live births.

• Reducing Total Fertility Rate (TFR) to 2.1.

• Providing clean drinking water for all by 2009 and ensuring no slip-backs.

• Reducing malnutrition among children of age group 0–3 to half its present
level.

• Reducing anaemia among women and girls by 50%.

• Raising the sex ratio for age group 0–6 to 935 by 2011–12 and 950 by
2016–17.
RURAL DEVELOPMENT

It is known that India is made significant advances towards achieving its

goals of rapid agricultural growth, improving food security, and reducing
rural poverty during the last four decades.

PANCHAYAT- By 2015, the panchayat will also reform at it level best.

Meetings of the Panchayat will commence at regular basis and will took
interest in education, rural life standard, people welfare etc. The concept of
E-PANCHAYAT will get its full identity as it is launched but not working
properly with still.
CH. 6 FOREIGN TRADES &
INVESTMENT

6.1 Indian export after LPG (1991)

6.2 Indian Import performance after LPG

6.3 Balance Payment System

6.4 Appraisal – Areas need to be special importance

Foreign Trade &Foreign direct investment is the process whereby residents
of one country (the source country) acquire ownership of assets for the
purpose of controlling the production, distribution, and other activities of a
firm in another country (the host country). The international monetary fund’s
balance of payment manual defines FDI as an investment that is made to
acquire a lasting interest in an enterprise operating in an economy other
than that of the investor. The investors’ purpose being to have an effective
voice in the management of the enterprise’. The united nations 1999 world
investment report defines FDI as ‘an investment involving a long term
relationship and reflecting a lasting interest and control of a resident entity
in one economy (foreign direct investor or parent enterprise) in an enterprise
resident in an economy other than that of the foreign direct investor ( FDI
enterprise, affiliate enterprise or foreign affiliate).

Foreign investment refers to investments made by the residents of a country

in the financial assets and production processes of another country. The
effect of foreign investment, however, varies from country to country. It can
affect the factor productivity of the recipient country and can also affect the
balance of payments. Foreign investment provides a channel through which
countries can gain access to foreign capital. It can come in two forms:
foreign direct investment (FDI) and foreign institutional investment (FII).
Foreign direct investment involves in direct production activities and is also
of a medium- to long-term nature. But foreign institutional investment is a
short-term investment, mostly in the financial markets. FII, given its short-
term nature, can have bidirectional causation with the returns of other
domestic financial markets such as money markets, stock markets, and
foreign exchange markets. Hence, understanding the determinants of FII is
very important for any emerging economy as FII exerts a larger impact on
the domestic financial markets in the short run and a real impact in the long
run. India, being a capital scarce country, has taken many measures to
attract foreign investment since the beginning of reforms in 1991.

According to the international monetary fund (IMF), foreign direct investment

(FDI) and foreign institutional investment (FII) is defined as “an investment
that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor”.

Foreign Trade &Foreign direct investment (FDI) in India has played an

important role in the development of the Indian economy. FDI in India has –
in a lot of ways – enabled India to achieve a certain degree of financial
stability, growth and development. This money has allowed India to focus on
the areas that may have needed economic attention, and address the
various problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors.
In 1998 and 1999, the Indian national government announced a number of
reforms designed to encourage FDI and present a favorable scenario for
investors.

FDI investments are permitted through financial collaborations, through

private equity or preferential allotments, by way of capital markets through
Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear,
railway, coal & lignite or mining industries.

A number of projects have been announced in areas such as electricity

generation, distribution and transmission, as well as the development of
roads and highways, with opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide

up to 100% of the financing required for the construction of bridges and
tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately
$352.5m.

Currently, FDI is allowed in financial services, including the growing credit

card business. These services include the non-banking financial services
sector. Foreign investors can buy up to 40% of the equity in private banks,
although there is condition that stipulates that these banks must be
multilateral financial organizations. Up to 45% of the shares of companies in
the global mobile personal communication by satellite services (GMPCSS)
sector can also be purchased.

By 2004, India received $5.3 billion in FDI, big growth compared to previous
years, but less than 10% of the $60.6 billion that flowed into China. Why
does India, with a stable democracy and a smoother approval process, lag so
far behind China in FDI amounts?

Although the Chinese approval process is complex, it includes both national

and regional approval in the same process.
Federal democracy is perversely an impediment for India. Local authorities
are not part of the approvals process and have their own rights, and this
often leads to projects getting bogged down in red tape and bureaucracy.
India actually receives less than half the FDI that the federal government
approves.

The government of India(GOI) has also recognized the key role of the foreign
direct investment (FDI) and foreign institutional investment (FII) in its
process of economic development, not only as an addition to its own
domestic capital but also as an important source of technology and other
global trade practices. In order to attract the required amount of foreign
direct investment (FDI) and foreign institutional investment (FII), it has
bought about a number of changes in its economic policies and has put in its
practice a liberal and more transparent foreign direct investment (FDI) and
foreign institutional investment (FII) policy with a view to attract more
foreign direct investment (FDI) and foreign institutional investment (FII)
inflows into its economy. These changes have heralded the liberalization era
of the foreign direct investment (FDI) and foreign institutional investment
(FII) policy regime into India and have brought about a structural
breakthrough in the volume of foreign direct investment (FDI) and foreign
institutional investment (FII) inflows in the economy. In this context, this
report is going to analyze the trends and patterns of foreign direct
investment (FDI) and foreign institutional investment (FII) flows into India
during the post liberalization period that is 1991 to 2007 year.

Sectors Attracting FDI& Foreign Trade

Though the services sector in India constitutes the largest share in the Gross
Domestic Product, still it has failed to some extent in attracting more funds
in the forms of investments.

Important sectors of the Indian Economy attracting more investments into

the country are as follows:
• Electrical Equipments (Including Computer Software & Electronic)
• Telecommunications (radio paging, cellular mobile, basic telephone
service)
• Transportation Industry
• Services Sector (financial & non-financial)
• Fuels (Power + Oil Refinery)
• Chemical (other than fertilizers)
• Food Processing Industries
• Drugs & Pharmaceuticals
• Cement and Gypsum Products
• Metallurgical Industries

FDI Inflows Year-Wise

Opening up of door policies adopted by the Government of India through its
new economic policies has attracted more investments in to the country.
Indian Industries have gone global and in the same direction the inflow of FDI
in to the country has increased at a faster rate.

The Inflow of FDI into the country over various years is as follows:
Amount of FDI
Year (April-March) inflows

(In US$ million)

1991-1992 (Aug-March) 167

1992-1993 393

1993-1994 654

1994-1995 1,374

1995-1996 2,141

1996-1997 2,770

1997-1998 3,682

1998-1999 3,083

1999-2000 2,439

2000-2001 2,908

2001-2002 4,222

2002-2003 3,134

2003-2004 2,634

2004-2005 3,755
 2005-2006 5,549

2006-2007 7,365

2007-2008 6,896

2008-2009 8,538

Analysis of sectors attracting highest FDI equity inflows

Cumulative Inflows %age

(from August 1991 to with
Rank March 2009) Amount in total
s Sector rupees in crore inflows

Electrical Equipments

(including computer
1. software & electronics) 36,034 18.77

Services Sector

2. (financial & non-financial) 34,238 17.84

Telecommunications

(radio paging, cellular

mobile, basic telephone
3. services) 16,691 8.7

4 Transportation Industry 15,427 8.04

Fuels

5. (power + oil refinery) 12,105 6.31

Chemicals

6. (other than fertilizers) 9,510 4.95

Construction activities

7. (including roads & highways) 6,396 3.33

8. Drugs & Pharmaceuticals 5,281 2.75

 Food Processing
9. Industries 5,143 2.68

Cement and Gypsum

10. Products 4,329 2.26

TOTAL FDI INFLOWS 2,32,041

The sectors receiving the largest shares of total FDI inflows between August
1991 and March 2009 were the electrical equipment sector and the services
sector, each accounting for 18.77 and 17.84 percent respectively. These
were followed by the telecommunications, transportation, fuels, and
chemicals sectors. The top sectors attracting FDI into India via M&A activity
were manufacturing; information; and professional, scientific, and technical
services. These sectors correspond closely with the sectors identified by the
Indian government as attracting the largest shares of FDI inflows overall.

ICT and electronics have been the largest industry recipients of Greenfield
FDI into India in recent years, but have seen the number of new Greenfield
projects plateau since 2004. Rather, the size of the projects in these
industries has increased substantially. For example, global semiconductor
manufacturers Advanced Micro Devices (AMD - United States) and
Flextronics (Singapore) have entered into separate joint ventures with
SemIndia to build semiconductor manufacturing facilities in Hyderabad. The
$3 billion AMD-SemIndia joint venture will produce semiconductor chips
which can then be used to manufacture electronic products in the
Flextronics-SemIndia $3 billion joint venture. The chip fabrication facility will
manufacture chips for cell phones, set-top boxes, personal computers, and
similar products.

The heavy industry and transport equipment sectors together attracted over
FDI of 15427 crore in Greenfield FDI projects during 1991 to 2009. The
cluster with the highest reported value during 2002–06 is heavy industry.
Projects in this sector tend to be highly capital intensive, with single projects
frequently requiring upwards of $6 billion in startup investment costs. The
largest recent examples include the POSCO and Arcelor-Mittal Steel projects,
and Vedanta Resources’ (United Kingdom) aluminum smelter project, all
planned for the state of Orissa.
6.1 Indian Export after LPG (1991)

From the middle of eighties, especially, 1991 onwards India has changed its
track from planning--public sector-regulation fundamentalism to
marketisation-privatization -liberalization regime in its development pursuits.
This has turned out to be quite a shift from inward looking policy of import
substitution towards a more outward- oriented policy of liberalization in order
to place the economy on the path of export-led growth. This U-turn could be
attributed to many factors such as liquidity crisis due to imports exceeding
exports, low global credit rating of India, disenhancement with forty years of
in-ward looking development strategy, powerful resurgence of "conservative"
economic thinking arguing in favor of liberalization high rates of inflation,
huge budget deficits and "prescriptions" of IMF and World Bank for availment
of credit facilities. The reforms initiated in the area of foreign trade sector
are rated to be the most successful of all reforms initiated since 1991.

It is in this perspective of liberalization;The study by Kishore Sharma (2000)

has identified export prices, real appreciation of Indian rupee, higher
domestic / international demand and FDI as the major determinants of
export performance. Srinivasan (2001) while recording an improvement in
export performance of India in 1990s, recognizes that India still lags behind
compared to other South East Asian Countries. ArvindVirmani (2003) in his
study of Indian economic performance during the pre-reforms and post-
reforms periods has also focused on India's external sector performance
especially export performance during the post-reforms period.

A. Exports and Gross Domestic Product

It is observed from Table 1 that, the mean growth of GDP was 6.0 percent
during the post reforms period. The mean growth of export was increased to
19.6 percent whereas the increase in import was 23.0 percent during the
post reforms period. It is observed that there is no consistency in growth rate
in the post reforms period. Similar is the case of imports. However openness
of trade has steadily increased exports during the period. It is noticed that
the share of the exports as a percentage of GDP has increased from 4.7
percent in 1990-91 to 19.9 percent as at the end of 2003-04. The mean
growth rate has increased to 16.5 percent. The results also establish that
trade openness has a positive impact on export performance in India.

B. Shifts in Composition of India's Exports

The sectoral composition of India's exports indicates that the share of

primary products in exports had declined from 23.8 percent in 1990-91 to
12.4 percent in 2003-04. On the other hand the share of manufacture goods
had increased from 71.6 percent in 1990-91 to 77.8 percent in 2003-04.
Further, the petroleum product's share in the total exports has increased to
be considerable extent in the last few years. However the total value of
exports had registered substantial increase in all the sectors during the post-
reforms period.

From the above analysis the following inferences can be drawn:

* India has adopted LPG for the last two decades. The export performance
according of CMS indicates that around 56.7% of increased exports were due
to increase in world trade. 53.5 percent of total export was due to
competitiveness.

* Indian has lost -10.2% of export market due to market distribution. Russia
was one of the most important partners of the trade in pre-reformed period.
India has lost this market in post reform.

* India's share in world trade as well as two period of time has increased.

6.2 Indian Import performance after

LPG
The year 1990-91 saw a trade deficit of $ 5,932 million as imports rose by
13.5 % against a rise of 9.2 % percent registered by exports over the year
1989-90. However, strict import restrictions were imposed in 1991-92which
led to a 19.4 per cent reduction in the value of imports and the trade deficit
declined to $ 1,546 million. However, this sharp cut-back in imports had a
decelerating effect on industrial growth on industrial growth and to reverse
this trend, massive import liberalisation measures were undertaken in 1992-
93. As a result, imports rose considerably and trade deficit touched $ 3,3,45
million in 1992-93. The next years (1993-94 to 1995-96) saw a strong
resurgence in export earnings. Although imports also increased yet the
overall situation was better and the average trade deficit during the Eighth
plan period (1992-97) was $ 3,456 million per annum- considerably less than
the trade deficit recorded in the Sixth and Seventh Plan periods. However,
during the ninth five year plan (1997-2002), there was marked deterioration.
The average trade deficit in this plan was as high as $ 8412 million. What’s
more, there was considerable year-to-year fluctuation in trade performance.
For instance, two years in this plan, 1998-99 and 2001-02, registered
negative export growth rates while two years, 1999-2000 and 2000-01
registered significant positive growth rates. 2001-02 was also very bad year
for exports as well as good for imports registered a decline in exports by 1.6
% due to weakening of global demand, poor supply response of exports due
to various domestic impediments to exports, appreciation of the rupee, etc.
Excepting the year 1999-2000 when imports increased by 17.2 percent
basically due to a sharp rise of 97.1 per cent in imports of crude oil following
hardening of international prices of crude, imports remained sluggish in the
other years of the Ninth Plan due to slackening in domestic demand following
industrial slowdown.

However, the period of the Tenth Plan was marked by considerable revival of
foreign trade. The rate of exports in this plan was consistently above 20%
per annum with the rate of growth touching 30.8 percent in 2004-05. In
2006-07, the rate of growth of exports was 22.6 per cent. The value of
exports more than doubled in this plan from $ 52,719 million in 2003-03 to $
1,26,362 million in 2006-07. But in this Tenth plan Machinery imports was
also increased considerably.
The main reasons were high international prices of crude oil. lower import
tariffs and a buoyant domestic economy which resulted in higher imports of
capital goods, industrial raw materials and intermediate goods. During the
period of Tenth Plan, imports increased by three times from $ 61,412 million
in 2002-03 to $1,85,749 million in 2006-07. Because of substantial increase
inimports, the trade deficit rose considerably. Trade deficit in 2006-07 was as
high as $ 59.39 billion. The first year of the eleventh Plan, 2007-08, saw an
unprecedented trade deficit of $ 80.64 billion which is a cause of worry. The
main reason for this was the substantial increase in oil import bill from $
57.14 billion in 2006-07 to $ 79.64 billion in 2007-08- a staggering 39.4
percent rise in a single year. The substantial increase in oil import bill was
mainly due to a hike in global crude oil prices by nearly 53 percent during
2007-08 as India meets more than 75 percent of its crude oil requirement
from imports. Outlook on export front in 2008-09 is bleak as global demand
has fallen steeply due to global meltdown.

6.3 Balance Payment System

Cumulative Current Account Balance 1980-2008 based on the IMF
data

Since independence, India's balance of payments on its current account has

been negative. Since liberalisation in the 1990s (precipitated by a balance of
payment crisis), India's exports have been consistently rising, covering
80.3% of its imports in 2002–03, up from 66.2% in 1990–91. India's growing
oil import bill is seen as the main driver behind the large current account
deficit. In 2007-08, India imported 120.1 million tonnes of crude oil, more
than 3/4th of the domestic demand, at a cost of $61.72 billion

Although India is still a net importer, since 1996–97 its overall balance of
payments (i.e., including the capital account balance) has been positive,
largely on account of increased foreign direct investment and deposits from
non-resident Indians; until this time, the overall balance was only
occasionally positive on account of external assistance and commercial
borrowings. As a result, India's foreign currency reserve s stood at $285
billion in 2008, which could be used in infrastructural development of the
country if used effectively.

Due tothe global late-2000s recession, both Indian exports and imports
declined by 29.2% and 39.2% respectively in June 2009. The steep decline
was because countries hit hardest by the global recession, such as United
States and members of the European Union, account for more than 60% of
Indian exports. However, since the decline in imports was much sharper
compared to the decline in exports, India's trade deficit reduced to $252.5
billion.

India's reliance on external assistance and commercial borrowings has

decreased since 1991–92, and since 2002–03, it has gradually been repaying
these debts. Declining interest rates and reduced borrowings decreased
India's debt service ratio to 4.5% in 2007 In India, External Commercial
Borrowings (ECBs) are being permitted by the Government for providing an
additional source of funds to Indian corporates. The Ministry of Finance
monitors and regulates these borrowings (ECBs) through ECB policy
guidelines.

Foreign direct investment in India

Share of top five investing countries in FDI inflows.

(2000–2007)

Inflows
Ran Inflows
Country (Million
k (%)
USD)

1 Mauritius 85,178 44.24%

2 United States 18,040 9.37%

United
3 15,363 7.98%
Kingdom

4 Netherlands 11,177 5.81%

 5 Singapore 9,742 5.06%

As the fourth-largest economy in the world in PPP terms, India is a preferred

destination for foreign direct investments (FDI); India has strengths in
telecommunication, information technology and other significant areas such
as auto components, chemicals, apparels, pharmaceuticals, and jewellery.
Despite a surge in foreign investments, rigid FDI policies resulted in a
significant hindrance. However, due to some positive economic reforms
aimed at deregulating the economy and stimulating foreign investment,
India has positioned itself as one of the front-runners of the rapidly growing
Asia Pacific Region. India has a large pool of skilled managerial and technical
expertise. The size of the middle-class population stands at 50 million and
represents a growing consumer market.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in
ventures. Industrial policy reforms have substantially reduced industrial
licensing requirements, removed restrictions on expansion and facilitated
easy access to foreign technology and foreign direct investment FDI. The
upward moving growth curve of the real-estate sector owes some credit to a
booming economy and liberalized FDI regime. In March 2005, the
government amended the rules to allow 100 per cent FDI in the construction
business. This automatic route has been permitted in townships, housing,
built-up infrastructure and construction development projects including
housing, commercial premises, hotels, resorts, hospitals, educational
institutions, recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in
most sectors. Fields which require relaxation in FDI restrictions include civil
aviation, construction development, industrial parks, petroleum and natural
gas, commodity exchanges, credit-information services and mining. But this
still leaves an unfinished agenda of permitting greater foreign investment in
politically sensitive areas such as insurance and retailing. FDI inflows into
India reached a record $19.5 billion in fiscal year 2006-07 (April-March),
according to the government's Secretariat for Industrial Assistance. This was
more than double the total of US$7.8bn in the previous fiscal year. The FDI
inflow for 2007-08 has been reported as $24 billion and for 2008-09it is
expected to be above $35 billion. A critical factor in determining India's
continued economic growth and realizing the potential to be an economic
superpower is going to depend on how the government can create incentives
for FDI flow across a large number of sectors in India
6.4 Appraisal – Areas need to be special
Importance

India, among the European investors, is believed to be a good investment

despite political uncertainty, bureaucratic hassles, shortages of power and
infrastructural deficiencies. India presents a vast potential for overseas
investment and is actively encouraging the entrance of foreign players into
the market. No company, of any size, aspiring to be a global player can, for
long ignore this country which is expected to become one of the top three
emerging economies.

India is the fifth largest economy in the world (ranking above France, Italy,
the United Kingdom, and Russia) and has the third largest GDP in the entire
continent of Asia. It is also the second largest among emerging nations.
(These indicators are based on purchasing power parity.) India is also one of
the few markets in the world which offers high prospects for growth and
earning potential in practically all areas of business.Yet, despite the
practically unlimited possibilities in India for overseas businesses, the world's
most populous democracy has, until fairly recently, failed to get the kind of
enthusiastic attention generated by other emerging economies such as
China.

Improved global sentiment and strong industrial output numbers in India are
increasingly attracting foreign investors’ role in the country. Other factors
being attributed to the revival in foreign direct investments (FDI) in recent
times include increasing consumer confidence.

India has been ranked at the third place in global foreign direct investments
this year, following the economic meltdown, and will continue to remain
among the top five attractive destinations for international investors during
the next two years, according to United Nations Conference on Trade and
Development (UNCTAD) in a new report on world investment prospects
titled, ‘World Investment Prospects Survey 2009-2011’.

India attracted foreign direct investment (FDI) inflows of US$ 1.74 billion
during November 2009, a 60 per cent increase over the US$ 1.08 billion
achieved in same month last year. On a cumulative basis, the FDI inflows
stood at US$ 19.38 billion in April-November 2009 compared with US$ 19.79
billion in the year-ago period. The 2009 survey of the Japan Bank for
International Cooperation conducted among Japanese investors continues to
rank India as the second most promising country for overseas business
operations, after China. According to the Minister of Commerce and Industry,
Mr. Anand Sharma, FDI equity inflows as a percentage of GDP has grown
from 0.75 per cent in 2005-06 to nearly 2.49 per cent in 2008-09. US$ 3.49
billion was poured into services sector during April-November 2009-10 and
US$ 8.34 billion FDI was pumped in by Mauritius during the same period.

India's FDI inflows touched about US$ 17.64 billion in the April-October
period this fiscal. The country has attracted foreign direct investment (FDI)
worth US$ 23.82 billion in the January-October 2009 period and October
2009 alone witnessed a 56 per cent year-on-year jump in FDI with inflows of
US$ 2.33 billion, according to the Department of Industrial Policy and
Promotion (DIPP).

The services sector comprising financial and non-financial services attracted

US$ 3.12 billion in April-October period of the current fiscal, while computer
software and hardware sector garnered about US$ 495 million in the said
period. The power and auto sectors garnered maximum rise in inflows as
against inflows in April-October 2008 period.

During the April-October period in 2009-10, Mauritius has led the investors
into India with US$ 7.6 billion worth FDI, followed by Singapore with US$ 1.34
billion and the US with US$ 1.32 billion.

The Indian retail market, which is the fifth largest retail destination globally,
has been ranked the most attractive emerging market for investment in the
retail sector by A T Kearney's annual Global Retail Development Index
(GRDI), in 2009.

Investment Scenario

Nine proposals for bringing in a total foreign investment of US$ 112.25

million were cleared in December 2009 by the government. Among those
approved is a proposal by Japan's Mitsui and Company to bring in US$ 69.83
million to establish a fully-owned subsidiary in the warehousing sector and
the setting up of a joint venture entity in the container freight stations
segment.
The others include that of Internet Global Services Ltd to invest US$ 21.42
million, a proposal by Goldman Agent Pvt Ltd to bring in US$ 19.92 million
and those of Premiere Conferencing (Ireland) and Chennai-based R K Swamy
BBDO Pvt Ltd.

Earlier, seventeen proposals involving FDI of over US$ 944.78 million were
approved by the Foreign Investment Promotion Board (FIPB) on November
20, 2009, according to an official statement. These included:

• Sistema Shyam Teleservices' proposal to issue shares worth over US$

622.79 million to The Federal Agency for State Property Management for
Russian Federation;
• Gucci's plans to pick-up 51 per cent stake in Luxury Goods Retail Ltd,
under single brand retail activity;
• Proposal of British luxury apparel brand Burberry to set up a joint venture
in India for single brand retailing. This involves an FDI inflow of US$ 3.47
million.

Further, major recent achievements include:

• Information management and storage company EMC Corporation has

committed an investment of US$ 1.5 billion in India over the next five
years as India is the fastest growing market for the company in the Asia-
Pacific region and Japan.
• The world's largest automotive component manufacturer, Bosch, plans to
invest US$ 415.19 million in India over the next three years, of which US$
103.79 million will be invested in its R&D facilities across the country.
• The Cairn-ONGC consortium has US$ 2 billion-investment and plans to
invest a further US$ 1.8 billion by 2011.
• German luxury car manufacturer, Audi, is eyeing higher sales this year
than its earlier target of 1,500 units and as part of its US$ 42.83 million
investment in India, the company will set up a new assembly line at its
Aurangabad plant to assemble the Q5 model from 2010.
• Accor Hospitality has said it will invest US$ 130 million to come up with 50
hotels in India by 2012.
• HealthHiway, an initiative by the Apollo Hospitals Group providing
software solutions for the healthcare sector, has received an investment
of US$ 4 million from Silicon Valley-based venture capital firm, Greylock
Partners.
• The German carmaker, Volkswagen, has decided to invest US$ 453.66
million more towards expansion at its Chakan plant.
• South Korean steel giant, Posco, plans to set up a galvanising plant at an
investment of US$ 907.32 million in Raigad district of Maharashtra.
• Clinton Climate Initiative (CCI), a programme of US-based William J Clinton
Foundation, has signed a memorandum of understanding (MoU) with the
Gujarat government for setting up solar parks in Gujarat and the proposed
3,000 mega watt (MW) solar power project will see an investment of over
US$ 10.28 billion.
• PepsiCo is doubling its investment in its Indian beverage business for
calendar 2009 to over US$ 220 million to increase the capacity of the
business.

Policy Initiatives

• To bolster further FDI inflows, the Minister of Commerce and Industry, Mr.
Anand Sharma, has also released a draft document that consolidates
foreign investment policy notified through previous Press Notes by the
Department of Industrial Policy and Promotion (177 to be precise) and
various Reserve Bank of India circulars, into a single regulatory
framework.
• The Finance Ministry has retained the mandatory three-year lock-in clause
for FDI in real estate sector, thereby rejecting a proposal by the
Department of Industrial Policy and Promotion (DIPP) to drop the same,
according to government sources. The ministry said that the lock-in acted
as a major deterrant to speculation and helped in shielding the real estate
sector in such times as the global meltdown in 2008, when foreign
institutional investors exited pulling out almost US$ 5 billion between
September and October.
• The government has allowed 100 per cent FDI (foreign direct investment)
in the renewable energy sector and a conducive policy has been put in
place to attract foreign companies, minister for new and renewable
energy Farooq Abdullah told Rajya Sabha.

Areas need to be special Importance

FDI is not permitted in the following industrial sectors:

• Arms and ammunition.
• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds,
copper, zinc.

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India
developed a highly protected, semi-socialist autarkic economy. Structural
and bureaucratic impediments were vigorously fostered, along with a
distrust of foreign business. Even as today the climate in India has seen a
seachange, smashing barriers and actively seeking foreign investment, many
companies still see it as a difficult market. India is rightfully quoted to be an
incomparable country and is both frustrating and challenging at the same
time. Foreign investors should be prepared to take India as it is with all of its
difficulties, contradictions and challenges.
Infrastructural hassles
The rapid economic growth of the last few years has put heavy stress on
India's infrastructural facilities. The projections of further expansion in key
areas could snap the already strained lines of transportation unless massive
programs of expansion and modernization are put in place. Problems include
power demand shortfall, port traffic capacity mismatch, poor road conditions
(only half of the country's roads are surfaced), low telephone penetration
(1.4% of population).
Indian Bureaucracy
Although the Indian government is well aware of the need for reform and is
pushing ahead in this area, business still has to deal with an inefficient and
sometimes still slow-moving bureaucracy.
Diverse Market
The Indian market is widely diverse. The country has 17 official languages, 6
major religions, and ethnic diversity as wide as all of Europe. Thus, tastes
and preferences differ greatly among sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian
market and overall economy before taking the plunge.
CH. 7 BANKING SECTOR

7.1 Pre and Post reform analysis

7.2 Current Scenario

7.3 Indian Banking @ 2015

Without a sound and effective banking system in India it cannot have a
healthy economy. The banking system of India should not only be hassle free
but it should be able to meet new challenges posed by the technology and
any other external and internal factors. For the past three decades India's
banking system has several outstanding achievements to its credit. The most
striking is its extensive reach. It is no longer confined to only metropolitans
or cosmopolitans in India. In fact, Indian banking system has reached even to
the remote corners of the country. This is one of the main reasons of India's
growth process. The government's regular policy for Indian bank since 1969
has paid rich dividends with the nationalisation of 14 major private banks of
India

For the past three decades India's banking system has several
outstandingachievements to its credit. The most striking is its extensive
reach. It is no longerconfined to only metropolitans or cosmopolitans in India.
In fact, Indian banking systemhas reached even to the remote corners of the
country. This is one of the main reasons ofIndia's growth process. The
government's regular policy for Indian bank since 1969 haspaid rich
dividends with the nationalization of 14 major private banks of India.

The banking system in India is significantly differentfrom that of other Asian

nations because of thecountry’s unique geographic, social, and
economiccharacteristics. India has a large population and landsize, a diverse
culture, and extreme disparities in income,which are marked among its
regions. There arehigh levels of illiteracy among a large percentage ofits
population but, at the same time, the country has alarge reservoir of
managerial and technologically advancedtalents. Between about 30 and 35
percent ofthe population resides in metro and urban cities and therest is
spread in several semi-urban and rural centers.The country’s economic
policy framework combinessocialistic and capitalistic features with a heavy
biastowards public sector investment. India has followedthe path of growth-
led exports rather than the “exportledgrowth” of other Asian economies,
with emphasison self-reliance through import substitution.

These features are reflected in the structure, size,and diversity of the

country’s banking and financialsector. The banking system has had to serve
the goalsof economic policies enunciated in successive fiveyeardevelopment
plans, particularly concerning equitableincome distribution, balanced
regional economicgrowth, and the reduction and elimination ofprivate sector
monopolies in trade and industry. Inorder for the banking industry to serve
as an instrumentof state policy, it was subjected to various
nationalizationschemes in different phases (1955, 1969,and 1980). As a
result, banking remained internationallyisolated (few Indian banks had
presenceabroad in international financial centers) because ofpreoccupations
with domestic priorities, especially
massive branch expansion and attracting more peopleto the system.
Moreover, the sector has been assignedthe role of providing support to other
economicsectors such as agriculture, small-scale industries, exports, and
banking activities in the developedcommercial centers (i.e., metro, urban,
and a limitednumber of semi-urban centers).The banking system’s
international isolation wasalso due to strict branch licensing controls on
foreignbanks already operating in the country as well asentry restrictions
facing new foreign banks. A criterionof reciprocity is required for any Indian
bank toopen an office abroad.These features have left the Indian banking
sectorwith weaknesses and strengths. A big challengefacing Indian banks is
how, under the current ownershipstructure, to attain operational efficiency
suitablefor modern financial intermediation. On the otherhand, it has been
relatively easy for the public sectorbanks to recapitalize, given the increases
innonperforming assets (NPAs), as their Governmentdominatedownership
structure has reduced the conflictsof interest that private banks would face.

Financial Structure
The Indian financial system comprises the followinginstitutions:
1. Commercial banks
a. Public sector
b. Private sector
c. Foreign banks
d. Cooperative institutions
(i) Urban cooperative banks
(ii) State cooperative banks
(iii) Central cooperative banks
2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)
c. State industrial development corporations(SIDCs)
3. Nonbanking financial companies (NBFCs)
4. Capital market intermediaries

About 92 percent of the country’s banking segmentis under State control

while the balance comprisesprivate sector and foreign banks. The public
sectorcommercial banks are divided into three categories.

State bank group: This consists ofthe State Bank of India (SBI) and
Associate Banksof SBI. The Reserve Bank of India (RBI) owns themajority
share of SBI and some Associate Banks ofSBI.1 SBI has 13 head offices
governed each by aboard of directors under the supervision of a
centralboard. The boards of directors and their committeeshold monthly
meetings while the executive committeeof each central board meets every
week.

Nationalized banks :In 1969, the Governmentarranged the

nationalization of 14 scheduledcommercial banks in order to expand the
branchnetwork, followed by six more in 1980. A mergerreduced the number
from 20 to 19. Nationalized banksare wholly owned by the Government,
although someof them have made public issues. In contrast to thestate bank
group, nationalized banks are centrally governed,i.e., by their respective
head offices. Thus, thereis only one board for each nationalized bank and
meetingsare less frequent (generally, once a month).The state bank group
and nationalized banks aretogether referred to as the public sector
banks(PSBs).
Regional Rural Banks (RRBs): In 1975, thestate bank group and
nationalized banks were requiredto sponsor and set up RRBs in
partnershipwith individual states to provide low-cost financingand credit
facilities to the rural masses.

Reserve Bank of India and Banking and Financial

Institutions
RBI is the banker to banks—whether commercial,cooperative, or rural. The
relationship is establishedonce the name of a bank is included in the
SecondSchedule to the Reserve Bank of India Act, 1934.

Such bank, called a scheduled bank, is entitled tofacilities of refinance from

RBI, subject to fulfillmentof the following conditions laid down in Section
42(6) of the Act, as follows:

• it must have paid-up capital and reserves of anaggregate value of not less
than an amount specifiedfrom time to time; and
• it must satisfy RBI that its affairs are not beingconducted in a manner
detrimental to the interestsof its depositors.

RBI is authorized to excludethe name of any bank from the Second

Scheduleif the bank, having been given suitable opportunityto increase the
value of paid-up capital and improvedeficiencies, goes into liquidation or
ceases tocarry on banking activities.

7.1 Pre and Post reform analysis

The scenario of Indian Banking sector in pre-reform era was contended with
2 phases:

1) Pre-Nationalization Era.
2) Nationalization Stage.

And the post reform era is the era with which we are with still it is:
3) Post Liberalization Era.

1) Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early
times. The remittance of money through Hundies, an indigenous credit
instrument, was very popular. The hundies were issued by bankers known as
Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.

The modern type of banking, however, was developed by the Agency Houses
of Calcutta and Bombay after the establishment of Rule by the East India
Company in 18th and 19th centuries.

During the early part of the 19th Century, ht volume of foreign trade was
relatively small. Later on as the trade expanded, the need for banks of the
European type was felt and the government of the East India Company took
interest in having its own bank. The government of Bengal took the initiative
and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was
established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of
Madras was also set up.

These three banks were also known as “Presidency Bank”. The Presidency
Banks had their branches in important trading centers but mostly lacked in
uniformity in their operational policies. In 1899, the Government proposed to
amalgamate these three banks in to one so that it could also function as a
Central Bank, but the Presidency Banks did not favor the idea. However, the
conditions obtaining during world war period (1914-1918) emphasized the
need for a unified banking institution, as a result of which the Imperial Bank
was set up in1921. The Imperial Bank of India acted like a Central bank and
as a banker for other banks.
The RBI (Reserve Bank of India) was established in 1935 as the Central Bank
of the Country. In 1949, the Banking Regulation act was passed and the RBI
was nationalized and acquired extensive regulatory powers over the
commercial banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank
of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey, committee of
Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation
of the Imperial Bank of India and ten others banks into a newly established
bank called the State Bank of India (SBI). The Government of India accepted
the recommendations of the committee and introduced the State Bank of
India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament
and got the president’s assent on 8th May 1955. The Act came into force on
1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the
State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of

India was “to extend banking facilities on a large scale more particularly in
the rural and semi-urban areas and to diverse other public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight
state-associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960
3. State Bank of Jaipur 1st January 1960
4. State Bank of Saurashtra 1st May 1960
5. State Bank of Patiala 1st April 1960
6. State Bank of Mysore 1st March 1960
7. State Bank of Indore 1st January 1968
8. State Bank of Travancore 1st January 1960
With effect from 1st January 1963, the State Bank of Bikaner and State Bank
of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks
State Bank of India formed the SBI Group.

The SBI Group under statutory obligations was required to open new offices
in rural and semi-urban areas and modern banking was taken to these
unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the
nationalization of 14 major scheduled Commercial Banks each having
deposits worth Rs. 50 crore and above. This was a turning point in the history
of commercial banking in India.

Later the Government Nationalized six more commercial private sector

banks with deposit liability of not less than Rs. 200 crores on 15th April 1980,
viz.
i) Andhra Bank.
ii) Corporation Bank.
iii) New Bank if India.
iv) Oriental Bank of Commerce.
v) Punjab and Sind Bank.
vi) Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities
to every corner of the country. Later in 1975, Regional Rural Banks were set
up to supplement the activities of the commercial banks and to especially
meet the credit needs of the weaker sections of the rural society.

Nationalization of banks paved way for retail banking and as a result there
has been an alt round growth in the branch network, the deposit
mobilization, credit disposals and of course employment.

The first year after nationalization witnessed the total growth in the
agricultural loans and the loans made to SSI by 87% and 48% respectively.
The overall growth in the deposits and the advances indicates the
improvement that has taken place in the banking habits of the people in the
rural and semi-urban areas where the branch network has spread. Such
credit expansion enabled the banks to achieve the goals of nationalization, it
was however, achieved at the coast of profitability of the banks.
Consequences of Nationalization:
• The quality of credit assets fell because of liberal credit extension policy.
• Political interference has been as additional malady.
• Poor appraisal involved during the loan meals conducted for credit
disbursals.
• The credit facilities extended to the priority sector at concessional rates.
• The high level of low yielding SLR investments adversely affected the
profitability of the banks.
• The rapid branch expansion has been the squeeze on profitability of
banks emanating primarily due to the increase in the fixed costs.
• There was downward trend in the quality of services and efficiency of the
banks.

3) Post-Liberalization Era:

By the beginning of 1990, the social banking goals set for the banking
industry made most of the public sector resulted in the presumption that
there was no need to look at the fundamental financial strength of this bank.
Consequently they remained undercapitalized. Revamping this structure of
the banking industry was of extreme importance, as the health of the
financial sector in particular and the economy was a whole would be
reflected by its performance.

The need for restructuring the banking industry was felt greater with the
initiation of the real sector reform process in 1992. the reforms have
enhanced the opportunities and challenges for the real sector making them
operate in a borderless global market place. However, to harness the
benefits of globalization, there should be an efficient financial sector to
support the structural reforms taking place in the real economy. Hence,
along with the reforms of the real sector, the banking sector reformation was
also addressed.

The route causes for the lackluster performance of banks, formed the
elements of the banking sector reforms. Some of the factors that led to the
dismal performance of banks were.

• Regulated interest rate structure.

• Lack of focus on profitability.
• Lack of transparency in the bank’s balance sheet.
• Lack of competition.
• Excessive regulation on organization structure and managerial resource.
• Excessive support from government.

In this context, the recommendations made by a high level committee on

financial sector, chaired by M. Narasimham, laid the foundation for the
banking sector reforms. These reforms tried to enhance the viability and
efficiency of the banking sector. The Narasimham Committee suggested that
there should be functional autonomy, flexibility in operations, dilution of
banking strangulations, reduction in reserve requirements and adequate
financial infrastructure in terms of supervision, audit and technology. The
committee further advocated introduction of prudential forms, transparency
in operations and improvement in productivity, only aimed at liberalizing the
regulatory framework, but also to keep them in time with international
standards. The emphasis shifted to efficient and prudential banking linked to
better customer care and customer services.

Private Sector Banks

Private banking in India was practiced since the begining of banking system
in India. The first private bank in India to be set up in Private Sector Banks in
India was Indus Ind Bank. It is one of the fastest growing Bank- Private Sector
Banks in India. IDBI ranks the tenth largest development bank in the world as
Private Banksin India and has promoted a world class institution in India.

The first Private Bank in India to receive an in principle approval from the
Reserve Bank of India was Housing Development Finance Corporation
Limited, to set up a bank in the private sector banks in India as part of the
RBI's liberalization of the Indian Banking Industry. It was incorporated in
August 1994 as HDFC Bank Limited with registered office in Mumbai and
commenced operations as Scheduled Commercial Bank in January 1995.

ING Vaysya, yet another Private Bank of India was incorporated in the year
1930. Bangalore has a pride of place for having the first branch inception in
the year 1934. With successive years of patronage and constantly setting
new standards in banking, ING Vaysya Bank has many credits to its account.

Entry of Private Sector Banks:

There has been a paradigm shift in mindsets both at the Government level in
the banking industry over the years since Nationalization of Banks in 1969,
particularly during the last decade (1990-2000). Having achieved the
objectives of Nationalization, the most important issue before the industry at
present is survival and growth in the environment generated by the
economic liberalization greater competition with a view to achieving higher
productivity and efficiency in January 1993 for the entry of Private Sector
banks based on the Nationalization Committee report of 1991, which
envisaged a larger role for Private Sector Banks.

The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new
bank and the shares are to be listed at stock exchange. Also the new bank
after being granted license under the Banking Regulation Act shall be
registered as a public limited company under the companies Act, 1956.

Subsequently 9 new commercial banks have been granted license to start

banking operations. The new private sector banks have been very aggressive
in business expansion and is also reporting higher profile levels taking the
advantage of technology and skilled manpower. In certain areas, these
banks have even our crossed the other group of banks including foreign
banks.

Reform measures in India were sequenced to create an enabling

environment for banks to overcome the external constraints and operate
with greater flexibility. Such measures related to dismantling of administered
structure of interest rates, removal of several preemptions in the form of
reserve requirements and credit allocation to certain sectors. Interest rate
deregulation was in stages and allowed build up of sufficient resilience in the
system. This is an important component of the reform process which has
imparted greater efficiency in resource allocation. Parallel strengthening of
prudential regulation, improved market behaviour, gradual financial opening
and, above all, the underlying improvements in macroeconomic
management helped the liberalisation process to run smooth. The interest
rates have now been largely deregulated except for certain specific classes,
these are: savings deposit accounts, non-resident Indian (NRI) deposits,
small loans up to Rs.2 lakh and export credit. Without the dismantling of the
administered interest rate structure, the rest of the financial sector reforms
could not have meant much.
As regards the policy environment on public ownership, the major share of
financial intermediation has been on account of public sector during the pre-
reform period. As a part of the reforms programme, initially there was
infusion of capital by Government in public sector banks, which was
subsequently followed by expanding the capital base with equity
participation by private investors up to a limit of 49 per cent. The share of
the public sector banks in total banking assets has come down from 90 per
cent in 1991 to around 75 per cent in 2006: a decline of about one
percentage point every year over a fifteen-year period. Diversification of
ownership, while retaining public sector character of these banks has led to
greater market accountability and improved efficiency without loss of public
confidence and safety. It is significant that the infusion of funds by
government since the initiation of reforms into the public sector banks
amounted to less than 1 per cent of India’s GDP, a figure much lower than
that for many other countries.

Another major objective of banking sector reforms has been to enhance

efficiency and productivity through increased competition. Establishment of
new banks was allowed in the private sector and foreign banks were also
permitted more liberal entry. Nine new private banks are in operation at
present, accounting for around 10-12 per cent of commercial banking assets.
Yet another step towards enhancing competition was allowing foreign direct
investment in private sector banks up to 74 per cent from all sources.
Beginning 2009, foreign banks would be allowed banking presence in India
either through establishment of subsidiaries incorporated in India or through
branches.

Impressive institutional reforms have also helped in reshaping the financial

marketplace. A high-powered Board for Financial Supervision (BFS),
constituted in 1994, exercise the powers of supervision and inspection in
relation to the banking companies, financial institutions and non-banking
companies, creating an arms-length relationship between regulation and
supervision. On similar lines, a Board for Regulation and Supervision of
Payment and Settlement Systems (BPSS) prescribes policies relating to the
regulation and supervision of all types of payment and settlement systems,
set standards for existing and future systems, authorise the payment and
settlement systems and determine criteria for membership to these systems.
The system has also progressed with the transparency and disclosure
standards as prescribed under international best practices in a phased
manner. Disclosure requirements on capital adequacy, NPLs, profitability
ratios and details of provisions and contingencies have been expanded to
include several areas such as foreign currency assets and liabilities,
movements in NPLs and lending to sensitive sectors. The range of
disclosures has gradually been increased. In view of the increased focus on
undertaking consolidated supervision of bank groups, preparation of
consolidated financial statements (CFS) has been mandated by the Reserve
Bank for all groups where the controlling entity is a bank.

The legal environment for conducting banking business has also been
strengthened. Debt recovery tribunals were part of the early reforms process
for adjudication of delinquent loans. More recently, the Securitisation Act was
enacted in 2003 to enhance protection of creditor rights. To combat the
abuse of financial system for crime-related activities, the Prevention of
Money Laundering Act was enacted in 2003 to provide the enabling legal
framework. The Negotiable Instruments (Amendments and Miscellaneous
Provisions) Act 2002 expands the erstwhile definition of 'cheque' by
introducing the concept of 'electronic money' and 'cheque truncation'. The
Credit Information Companies (Regulation) Bill 2004 has been enacted by
the Parliament which is expected to enhance the quality of credit decisions
and facilitate faster credit delivery.

7.2 Current Scenario

Currently (2009), overall, banking in India is considered as fairly mature in

terms of supply, product range and reach-even though reach in rural India
still remains a challenge for the private sector and foreign banks. Even in
terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets-as compared to other
banks in comparable economies in its region. The Reserve Bank of India is an
autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility-without any
stated exchange rate-and this has mostly been true. With the growth in the
Indian economy expected to be strong for quite some time-especially in its
services sector, the demand for banking services-especially retail banking,
mortgages and investment services are expected to be strong. M&As,
takeovers, asset sales and much more action (as it is unraveling in China)
will happen on this front in India.

Structure of the Banking Industry in Terms of Total Assets, March

2009.

Total Assets

Bank Number (Rs billion)

State Bank of India and 8 2,043.56

associates
19 3,519.05
Nationalized banks
25 444.54
Old private sector banks
9 161.13
New private sector banks
39 559.11
Foreign banks
196 190.51
Regional rural banks

Source: Reserve Bank of India.

In March 2009, the Reserve Bank of India allowed Warburg Pincus to increase
its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the
first time an investor has been allowed to hold more than 5% in a private
sector bank since the RBI announced norms in 2005 that any stake
exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector
banks (that is with the Government of Indiaholding a stake), 29 private banks
(these do not have government stake; they may be publicly listed and traded
on stock exchanges) and 31 foreign banks.
In this scenario the consolidation withinpublic sector banks (PSBs) and within
privatesector banks. Foreign banks begin to beactive in M&A, buying out
some old private andnewer private banks. Some M&A activity alsobegins to
take place between private and publicsector banks.

As a result, foreign and new private banksgrow at rates of 50 per cent, while
PSBsimprove their growth rate to 15 per cent. Theshare of the private sector
banks (includingthrough mergers with PSBs) increases to 35per cent and that
of foreign banks increases to20 per cent of total sector assets. The share
ofbanking sector value add in GDP increases toover 7.7 per cent, from
current levels of 2.5per cent. Funding this dramatic growth willrequire as
much as Rs. 600 billion in capitalover the next few years.

Evolution: Ministry ofFinance and the RBI and includes the other
relevantgovernment and regulatory entities for thebanking sectoradopt a
pro-marketstance but are cautious in liberalising theindustry. As a result of
this, some constraintsstill exist. Processes to create highly
efficientorganisations have been initiated but mostbanks are still not best-in-
class operators.Thus, while the sector emerges as an importantdriver of the
economy and wealth in 2010,it has still not come of age in comparison
todeveloped markets. Significant changes arestill required in policy and
regulation and incapability-building measures, especially bypublic sector and
old private sector banks.

In this scenario, M&A activity is driven primarilyby new private banks, which
take over someold private banks and also merge amongthemselves. As a
result, growth of these banksincreases to 35 per cent. Foreign banks
alsogrow faster at 30 per cent due to a relaxationof some regulations. The
share of private sectorbanks increases to 30 per cent of total sectorassets,
from current levels of 18 per cent,while that of foreign banks increases to
over12 per cent of total assets. The share of bankingsector value add to GDP
increases to over4.7 percent.

Stagnation: In this scenario, Ministry ofFinance and the RBI and govt.to set
restrictive conditions andmanagement is unable to execute thechanges
needed to enhance returns to shareholdersand provide quality products and
servicesto customers. As a result, growth and productivitylevels are low and
the banking sectoris unable to support a fast-growing economy.This scenario
sees limited consolidation in thesector and most banks remain sub-scale.
Newprivate sector banks continue on their growthtrajectory of 25 per cent.
There is a slowdownin PSB and old private sector bank growth. Theshare of
foreign banks remains at 7 per centof total assets. Banking sector value
add,meanwhile, is only 3.3 per cent of GDP.

Ministry ofFinancehave made co-ordinated efforts on six fronts:

• Help shape a superior industry structure in a phased manner through

“managed consolidation” and by enabling capital availability. Thiswould
create 3-4 global sized banks controlling 35-45 per cent of the market in
India; 6-8 national banks controlling 20-25 per cent of the market; 4-6
foreign banks with 15-20 per cent share in the market, and the rest being
specialist players (geographical or product/ segment focused)

• Focus strongly on “social development” by moving away from universal

directed norms to an explicit incentive-driven framework by introducing
credit guarantees and market subsidies to encourage leading public
sector, private and foreign players to leverage technology to innovate and
profitably provide banking services to lower income and rural markets.

• Create a unified regulator, distinct from the central bank of the country, in
a phased manner to overcome supervisory difficulties and reduce
compliance costs.

• Improve corporate governance primarily by increasing board

independence and accountability.

• Accelerate the creation of world class supporting infrastructure (e.g.,

payments, asset reconstruction companies (ARCs), credit bureaus, back-
office utilities) to help the banking sector focus on core activities.

• Enable labour reforms, focusing on enriching human capital, to help public

sector and old private banks become competitive.

OPPORTUNITIES AND CHALLENGES

Indian Banking had shown a significant importance in the economy. It has

seen many positivedevelopments. However, the cost of intermediation
remains high
and bank penetration is limited to only a few customersegments and
geographies. While banklending has been a significant driver of GDPgrowth
and employment, periodic instances ofthe “failure” of some weak banks
have oftenthreatened the stability of the system. Structuralweaknesses such
as a fragmented industrystructure, restrictions on capital availability
anddeployment, lack of institutional support infrastructure,restrictive labour
laws, weak corporate
governance and ineffective regulations beyondScheduled Commercial Banks
(SCBs), unless addressed, could seriously weaken the health ofthe sector.
Further, the inability of bank managements(with some notable exceptions) to
improvecapital allocation, increase the productivity oftheir service platforms
and improve the performanceethic in their organisations could
seriouslyaffect future performance. Four challengesmust be addressed
before success can beachieved.

First, the market is seeing discontinuousgrowth driven by new products and

servicesthat include opportunities in credit cards, consumerfinance and
wealth management on theretail side, and in fee-based income and
investmentbanking on the wholesale banking side.These require new skills in
sales & marketing,credit and operations.

Second, banks will nolonger enjoy windfall treasury gains that thedecade-
long secular decline in interest rates provided.This will expose the weaker
banks.

Third,with increased interest in India, competition fromforeign banks will only

intensify.

Fourth, given thedemographic shifts resulting from changes inage profile and
household income, consumerswill increasingly demand enhanced
institutionalcapabilities and service levels from banks

7.3 Indian Banking @ 2015

As the discussion of future of the Banking industry eventually raise or not? It
just depends on banks. With technology and non bank business providing
new options for safeguarding and managing their finances, customers will
continue to depend on banks only as long as banks can provide service and
value that cannot be found anywhere else.

An examination of the forces shaping the industry reveals that the future will
require superior efficiency and operational excellence from all banks, while
industry leadership will be attained by those institutions most adept at
harnessing product, service and process innovation to anticipate and meet
customer needs. Ultimately, to deliver on these imperatives, banks will have
to focus on their core strengths-those activities in which they excel- and
partner with best-in-class specialists for everything else: achieving more by
doing less.

On the surface, the competitive landscape of the banking industry in 2015

will not look much different than it does today. Mergers and acquisitions will
likely have reduced the total number of banks, especially mid-tier regional
banks, and industry specialists and non-bank banks will play a more
prominent role. But most of today’s players, including universal banks,
community banks, industry specialist banks and non-bank banks, will still be
vying to differentiate themselves in a crowded market-place. However,
traditional approaches to creating value through growth and efficiency will
no longer be enough. Advantages gained through acquisition, new market
entry and reconfigured product offerings will be fleeting at best, while
partnering and outsourcing will make efficiency a basic requirement for all.

IBM’s strategic research unit, the Institute for Business Value, recently
released a study called Banking 2015: Defining the Future of Banking.
Worldwide, total financial services revenue is predicted to experience
compound annual growth of 7.1 percent between 2000 and 2015, from $2
trillion to $5.6 trillion. In the Asia-Pacific region, IBM predicts a growth rate of
about 7.6 percent.
The study forecasts trends in banking for a unique insight into the
competitive forces that bankers will face in the next 10 years. It highlights
the emerging business and technology innovations and societal trends that
will propel and shape the industry’s transformation.
According to the survey, the five key trends that will determine market
success in 2015 are customers taking control, niche competitors, a new
workforce, regulated transparency and sharp focus on technology.
Sanjay Sharma, Corporate Head, Technology, IDBI Bank believes that
business, whether banking or otherwise, has to be customer-centric.
Agrees SharadBishnoi, Assistant Vice-president, Head, Business Process Re-
engineering Group, HDFC Bank, “Banking services require a high level of
customer engagement and understanding of the requirements for a quality
value proposition. These factors can be sustained long-term by adopting a
customer-centric business strategy.”
Similarly, transparency and accountability from regulation and compliance
are also growing. Sharma points out that banks dealing with the US
customers need to comply with international regulations such as Sarbanes-
Oxley, and the Indian ones from RBI and Clause 49.
The survey goes on to predict that market changes will pose growing
challenges for conventional banks. Sunny Banerjea, Global Banking Leader
for the IBM Institute for Business Value says, “By 2015, we will live in an
intensely customer-centric market dominated by global mega banks and
densely populated by specialist financial services providers. Technology will
also drive fundamental changes in workforce disposition, which will have
substantial follow-on effects for productivity, efficiency and profitability.
These trends are already evident but as they become entrenched, there will
be profound changes in the competitive drivers of global banking.”
Sharma feels that over time banks will focus on specialising in key segments.
The survey suggests that banks must identify target business areas. It will be
essential to maximise operational efficiency and counter nimble new market
entrants by partnering with specialist providers.
Keeping with the future trends, the study identifies a number of value-added
options for products and market innovation. These are mortgages, RFID,
service packaging and customer integration.
Says Bishnoi, “Service packaging and customer integration have started
already and I believe will only increase in future. Basic products in banking
being limited in number, added flavours and value additions are gradually
coming to the forefront. Two of the most critical aspects will be: packaging
more customised products to suit a customer need and customer integration
leading to better portfolio management—at a more granular level.”
However, Sharma feels that it is the mortgage and RFID segments which are
more promising. “Though mortgages have operational complexities they are
innovative products for customers. For instance, customers can avail of
different cash-back offers. Similarly, RFID also has great potential to leverage
business. Banks can utilise this technology to understand customers’ needs
and for issues such as customer authentication.”
According to SwarupChoudhury, Director, FSS, IBM, each bank must decide
on a strategy that fits its customers’ needs. “Banks will need special
strategies to cater to a far more discerning and controlling customer,” he
says.
He predicts, “Banking customers will demand more advocacy, personal
security and control in their banking relationships. Banks will source products
and services from many specialised and best-in-class service providers,
including independents and other banks providing white-label products and
services. They will partner actively with providers to improve their
capabilities without locking up their own capital and their ability to address
changing demand cycles.”

CH. 8 TELECOM SECTOR

8.1 Pre and Post reform analysis

8.2 Indian Telecom Sector @ 2015

 8.3 Appraisal

Today the Indian telecommunications network with over 375 Million

subscribers is
Second largest network in the world after China. India is also the fastest
growing telecommarket in the world with an addition of 9- 10 million monthly
subscribers. The teledensityof the Country has increased from 18% in 2006
to 33% in December 2008,showing a stupendous annual growth of about
50%, one of the highest in any sector ofthe Indian Economy. The Department
ofTelecommunications has been able to providestate of the art world-class
infrastructure at globally competitive tariffs and reduce thedigital divide by
extending connectivity to the unconnected areas. India has emerged as
amajor base for the telecom industry worldwide. Thus Indian telecom sector
has come along way in achieving its dream of providing affordable and
effective communicationfacilities to Indian citizens. As a result common man
today has access to this most neededfacility. The reform measures coupled
with the proactive policies of the Department ofTelecommunications have
resulted in an unprecedented growth of the telecom sector.

The thrust areas presently are:

1. Building a modern and efficient infrastructure ensuring greater
competitive environment
2. with equal opportunities and level playing field for all stakeholders.
3. Strengthening research and development for manufacturing, value added
services.
4. Efficient and transparent spectrum management
5. To accelerate broadband penetration
6. Universal service to all uncovered areas including rural areas.
7. Enabling Indian telecom companies to become global players.

Recent things to watch in Indian telecom sector are:

1. 3G and BWA auctions
2. MVNO
3. Mobile Number Portability
4. New Policy for Value Added Services
5. Market dynamics once the recently licensed new telecom operators
startrollingoutServices.
6. Increased thrust on telecom equipment manufacturing and exports.
7. Reduction in Mobile Termination Charges as the cost per line has
substantially
Reduced.
8. Due to technological advancement and increase in traffic.

India's telecom sector has shown massive upsurge in the recent years in all
respects ofindustrial growth. From the status of state monopoly with very
limited growth, it hasgrown in to the level of an industry. Telephone, whether
fixed landline or mobile, is anessential necessity for the people of India. This
changing phase was possible with theeconomic development that followed
the process of structuring the economy in thecapitalistic pattern. Removal of
restrictions on foreign capital investment and industrialde-licensing resulted
in fast growth of this sector. At present the country's telecomindustry has
achieved a growth rate of 14 per cent. Till 2000, though cellular
phonecompanies were present, fixed landlines were popular in most parts of
the country, withgovernment of India setting up the Telecom Regulatory
Authority of India, and measuresto allow new players country, the featured
products in the segment came in toprominence. Today the industry offers
services such as fixed landlines, WLL, GSM
Mobiles, CDMA and IP services to customers. Increasing competition among
playersallowed the prices drastically down by making the mobile facility
accessible to the urbanmiddle class population, and to a great extends in the
rural areas. Even for smallshopkeepers and factory workers a phone
connection is not an unreachable luxury. Majorplayers in the sector are
BSNL, MTNL, Bharti Teleservices, Hutchison Essar, BPL, Tata,Idea, etc. With
the growth of telecom services, telecom equipment and
accessoriesmanufacturing has also grown in a big way.

Indian Telecom sector, like any other industrial sector in the country, has
gone throughmany phases of growth and diversification. Starting from
telegraphic and telephonicsystems in the 19th century, the field of
telephoniccommunication has now expanded tomake use of advanced
technologies like GSM, CDMA, and WLL to the great 3GTechnology in mobile
phones. Day by day, both the Public Players and the PrivatePlayers are
putting in their resources and efforts to improve the
telecommunicationtechnology so as to give the maximum to their
customers.

Indian telecommunication Industry is one of the fastest growing telecom

market in the world. The mobile sector has grown from around 10 million
subscribers in 2002 to reach 150 million by early 2007 registering an
average growth of over 90%. The two major reasons that have fuelled this
growth are low tariffs coupled with falling handset prices.

Surprisingly, CDMA market has increased it market share upto 30% thanks to
Reliance Communication. However, across the globe, CDMA has been loosing
out numbers to popular GSM technology, contrary to the scenario in India.

The other reason that has tremendously helped the telecom Industry is the
regulatory changes and reforms that have been pushed for last 10 years by
successive Indian governments. According to Telecom Regulatory Authority
of India (TRAI) the rate of market expansion would increase with further
regulatory and structural reforms. Even though the fixed line market share
has been dropping consistently, the overall (fixed and mobile) subscribers
have risen to more than 200 million by first quarter of 2007. The telecom
reforms have allowed the foreign telecommunication companies to enter
Indian market which has still got huge potential. International telecom
companies like Vodafone have made entry into Indian market in a big way.

Currently the Indian Telecommunication market is valued at around $100

billion (Rupees 400,000 crore). Two telecom players dominate this market -
Bharti Airtel with 27% market share and Reliance Communication with 20%
along with other players like BSNL (Bharat Sanchar Nigam Limited) and
AT&T. One segment of the market that has been puzzling is broadband
Internet. Despite the manner in which the country’s Internet market has
been booming, India’s move into high-speed broadband Internet access has
been distinctly slow. And, while there appears to be considerable enthusiasm
amongst the population for the Internet itself, this has not been reflected in
broadband subscription numbers. In 2006 India witnessed a good surge in
broadband users with the total subscriber base in the country expanding by
almost 200% to just over 2 million by years end. Despite this surge,
broadband penetration in India still remains around only 0.2%; broadband
services still account for only 25% of the total Internet subscriber base, still
in itself comparatively low. So, if 70% of total population is rural, the scope
for growth in this Industry is unprecedented

The Ministry of Communications and Information Technology (MCIT) is has

veryaggressive plans to increase the pace of growth, targeting 250 million
telephonesubscribers by end-2007 and 500 million by 2010. Most of the
expansion in subscribers is set to occur in rural India. India’s rural telephone
density has been languishing at around 1.9%. The subscriber addition rate
has been strong in the last 12 months but the regulatory developments will
increase competition and thus curtail the long-term growth rates of
individual companies. The savings through the setting of tower companies
will partly go towards the higher capex and opex costs from more stringent
spectrum allocation norms for the incumbents.

The Telecommunications sector has been consistently adding more than 7

million subscribers for the last 6 months, a very healthy net addition rate
infact. All the private operators GSM as well as the CDMA operators have
been very consistent in their performance. The sector provides very strong
revenue as well as earnings visibility over the next 12 months. However the
recent regulatory developments are seem to be negative for the telecom
companies as it will increase the number operators per circle which will
intensify competition.
Major Players

There are three types of players in telecom services:

• -State owned companies (BSNL and MTNL)
• -Private Indian owned companies (Reliance Infocomm, Tata Teleservices,)
• -Foreign invested companies (Hutchison-Essar, Bharti Tele-
Ventures,Escotel, Idea Cellular, BPL Mobile, Spice Communications)

BSNL

On October 1, 2000 the Department of Telecom Operations, Government of

Indiabecame a corporation and was renamed Bharat Sanchar Nigam Limited
(BSNL).BSNL is now India’s leading Telecommunications Company and the
largest publicsector undertaking. It has a network of over 45 million lines
covering 5000 townswith over 35 million telephone connections.

The state-controlled BSNL operates basic, cellular (GSM and CDMA) mobile,
Internetand long distance services throughout India (except Delhi and
Mumbai). BSNL will beexpanding the network in line with the Tenth Five-Year
Plan (1992-97). The aim is toprovide a telephone density of 9.9 per hundred
by March 2007. BSNL, which becamethe third operator of GSM mobile
services in most circles, is now planning toovertake Bharti to become the
largest GSM operator in the country. BSNL is also thelargest operator in the
Internet market, with a share of 21 per cent of the entiresubscriber base

BHARTI

Established in 1985, Bharti has been a pioneering force in the telecom sector
withmany firsts and innovations to its credit, ranging from being the first
mobile servicein Delhi, first private basic telephone service provider in the
country, first Indiancompany to provide comprehensive telecom services
outside India in Seychelles andfirst private sector service provider to launch
National Long Distance Services inIndia. Bharti Tele-Ventures Limited was
incorporated on July 7, 1995 for promotinginvestments in
telecommunications services. Its subsidiaries operate telecomservices across
India. Bharti’s operations are broadly handled by two companies: theMobility
group, which handles the mobile services in 16 circles out of a total 23circles
across the country; and the Infotel group, which handles the NLD, ILD,
fixedline, broadband, data, and satellite-based services. Together they have
so fardeployed around 23,000 km of optical fiber cables across the country,
coupled withapproximately 1,500 nodes, and presence in around 200
locations. The group has atotal customer base of 6.45 million, of which 5.86
million are mobile and 588,000fixed line customers, as of January 31, 2004.
In mobile, Bharti’s footprint extendsacross 15 circles.

Bharti Tele-Ventures' strategic objective is “to capitalize on the growth

opportunitiesthe company believes are available in the Indian
telecommunications market andconsolidate its position to be the leading
integrated telecommunications servicesprovider in key markets in India, with
a focus on providing mobile services”.

MTNL

MTNL was set up on 1st April 1986 by the Government of India to upgrade
thequality of telecom services, expand the telecom network, introduce new
services andto raise revenue for telecom development needs of India’s key
metros – Delhi, thepolitical capital, and Mumbai, the business capital. In the
past 17 years, the companyhas taken rapid strides to emerge as India’s
leading and one of Asia’s largesttelecom operating companies. The company
has also been in the forefront of technology induction by converting 100% of
its telephone exchange network into thestate-of-the-art digital mode. The
Govt. of India currently holds 56.25% stake in thecompany. In the year 2003-
04, the company's focus would be not only consolidatingthe gains but also to
focus on new areas of enterprise such as joint ventures forprojects outside
India, entering into national long distance operation, widening thecellular
and CDMA-based WLL customer base, setting up internet and allied
serviceson an all India basis.

MTNL has over 5 million subscribers and 329,374 mobile subscribers. While
themarket for fixed wireline phones is stagnating, MTNL faces intense
competition fromthe private players—Bharti, Hutchison and Idea Cellular,
Reliance Infocomm—inmobile services. MTNL recorded sales of Rs. 60.2
billion ($1.38 billion) in the year2002-03, a decline of 5.8 per cent over the
previous year’s annual turnover of Rs. 63.92 billion.

RELIANCE INFOCOMM

Reliance is a $16 billion integrated oil exploration to refinery to power and

textilesconglomerate (Source: http://www.ril.com/newsitem2.html). It is also
an integratedtelecom service provider with licenses for mobile, fixed,
domestic long distance andinternational services. Reliance Infocomm offers a
complete range of telecomservices, covering mobile and fixed line telephony
including broadband, national andinternational long distance services, data
services and a wide range of value addedservices and applications. Reliance
IndiaMobile, the first of Infocomm's initiativeswas launched on December 28,
2002. This marked the beginning of Reliance's visionof ushering in a digital
revolution in India by becoming a major catalyst in improvingquality of life
and changing the face of India. Reliance Infocomm plans to extend itsefforts
beyond the traditional value chain to develop and deploy telecom solutions
forIndia's farmers, businesses, hospitals, government and public sector
organizations.Until recently, Reliance was permitted to provide only “limited
mobility” servicesthrough its basic services license. However, it has now
acquired a unified accesslicense for 18 circles that permits it to provide the
full range of mobile services. Ithas rolled out its CDMA mobile network and
enrolled more than 6 million subscribersin one year to become the country’s
largest mobile operator. It now wants toincrease its market share and has
recently launched pre-paid services. Havingcaptured the voice market, it
intends to attack the broadband market.

TATA TELESERVICES

Tata Teleservices is a part of the $12 billion Tata Group, which has 93
companies,
over 200,000 employees and more than 2.3 million shareholders. Tata
Teleservicesprovides basic (fixed line services), using CDMA technology in
six circles:Maharashtra (including Mumbai), New Delhi, Andhra Pradesh,
Tamil Nadu, Gujarat,and Karnataka. It has over 800,000 subscribers. It has
now migrated to unifiedaccess licenses, by paying a Rs. 5.45 billion ($120
million) fee, which enables it toprovide fully mobile services as well.

The company is also expanding its footprint, and has paid Rs. 4.17 billion
($90million) to DoT for 11 new licenses under the IUC (interconnect usage
charges)regime. The new licenses, coupled with the six circles in which it
already operates,virtually gives the CDMA mobile operator a national
footprint that is almost on parwith BSNL and Reliance Infocomm. The
company hopes to start off services in these11 new circles by August 2004.
These circles include Bihar, Haryana, HimachalPradesh, Kerala, Kolkata,
Orissa, Punjab, Rajasthan, Uttar Pradesh (East) & Westand West Bengal.

VSNL

On April 1, 1986, the Videsh Sanchar Nigam Limited (VSNL) - a wholly

Governmentowned corporation - was born as successor to OCS. The
company operates a networkof earth stations, switches, submarine cable
systems, and value added service nodesto provide a range of basic and
value added services and has a dedicated work forceof about 2000
employees. VSNL's main gateway centers are located at Mumbai, NewDelhi,
Kolkata and Chennai. The international telecommunication circuits are
derivedvia Intelsat and Inmarsat satellites and wide band submarine cable
systems e.g.FLAG, SEA-ME-WE-2 and SEA-ME-WE-3.

The company's ADRs are listed on the New York Stock Exchange and its
shares arelisted on major Stock Exchanges in India. The Indian Government
ownsapproximately 26 per cent equity, M/s PanatoneFinvest Limited as
investing vehicleof Tata Group owns 45 per cent equity and the overseas
holding (inclusive of FIIs,ADRs, Foreign Banks) is approximately 13 per cent
and the rest is owned by Indianinstitutions and the public. The company
provides international and Internet servicesas well as a host of value-added
services. Its revenues have declined from Rs. 70.89billion ($1.62 billion) in
2001-02 to Rs. 48.12 billion ($1.1 billion) in 2002-03, withvoice revenues
being the mainstay. To reverse the falling revenue trend, VSNL hasalso
started offering domestic long distance services and is launching
broadbandservices. For this, the company is investing in Tata Telservices
and is likely toacquire Tata Broadband.

HUTCH

Hutch’s presence in India dates back to late 1992, when they worked with
localpartners to establish a company licensed to provide mobile
telecommunicationsservices in Mumbai. Commercial operations began in
November 1995. Between 2000and March 2004, Hutch acquired further
operator equity interests or operatinglicences. With the completion of the
acquisition of BPL Mobile Cellular Limited inJanuary 2006, it now provides
mobile services in 16 of the 23 defined licence areasacross the country.
Hutch India has benefited from rapid and profitable growth in recent years. it
hadover 17.5 million customers by the end of June 2006.

IDEA

Indian regional operator IDEA Cellular Ltd. has a new ownership structure
and granddesigns to become a national player, but in doing so is likely to
become a thorn inthe side of Reliance Communications Ltd. IDEA operates in
eight telecom “circles,” orregions, in Western India, and has received
additional GSM licenses to expand itsnetwork into three circles in Eastern
India -- the first phase of a major expansionplan that it intends to fund
through an IPO, according to parent company Aditya BirlaGroup .

8.1 Pre and Post reform analysis

Economic reforms and liberalization have driven telecom sector through

several transmission channels of which these three categories are of major
significance. IndianTelecom Sector is going under a huge technical change. It
is attracting a lot of investors, and thus the industry dynamics is changing
rapidly. The telecom sector requires a high investment and the market is
also very competitive. The industry is forced to change under the influence
of international force, experience, technology and competition.

Year

1851 First operational land lines were laid by the government near
Calcutta (seatof British power)

1881 Telephone service introduced in India

1883 Merger with the postal system

1923 Formation of Indian Radio Telegraph Company (IRT)

1932 Merger of ETC and IRT into the Indian Radio and Cable
CommunicationCompany (IRCC)

1947 Nationalization of all foreign telecommunication companies to

form thePosts, Telephone and Telegraph (PTT), a monopoly run
by the

government's Ministry of Communications

1985 Department of Telecommunications (DOT) established, an

exclusive

provider of domestic and long-distance service that would be its

ownregulator (separate from the postal system)

1986 Conversion of DOT into two wholly government-owned

companies: theVidesh Sanchar Nigam Limited (VSNL) for
international telecommunications

1997 Telecom Regulatory Authority of India created

1999 Cellular Services are launched in India. New National Telecom

Policy isadopted.

2000 DoT becomes a corporation, BSNL

Indian telecommunications today benefits from among the most enlightened

regulation in the region, and arguably in the world. The sector, sometimes
considered the “poster-boy for economic reforms,” has been among the chief
beneficiaries of the post-1991 liberalization. Unlike electricity, for example,
where reforms have been stalled, telecommunications has generally been
seen as removed from “mass concerns,” and thus less subject to electoral
calculations. Market oriented reforms have also been facilitated by lobbying
from India’s booming technology sector, whose continued success of course
depends on the quality ofcommunications infrastructure.

Indian telecommunications, already among the most competitive markets in

the world, appears set to continue growing rapidly. While telecom
liberalization is usually associated with the post-1991 era, the seeds of
reform were actually planted in the 1980s. India, like many other countries of
the world, have adopted a gradual approach to telecom sector reform
through selective privatization and managed competition in different
segments of the telecom market. To begin with, India introduced private
competition in value-added services in 1992 followed by opening up of
cellular and basic services for local area to private competition.Competition
was also introduced in national long distance (NLD) and international long
distance (ILD) telephony at the start of the current decade.At that time, Rajiv
Gandhi proclaimed his intention of “leading India into the 21 st century,” and
carved the Department of Telecommunications (DOT) out of the Department
of Posts and Telegraph. For a time he also even considered corporatizing the
DOT, before succumbing to union pressure. In a compromise, Gandhi created
two DOT-owned corporations: Mahanagar Telephone Nigam Limited (MTNL),
to serve Delhi and Bombay, and Videsh Sanchar Nigam Limited (VSNL), to
operate international telecom services. He also introduced private capital
into the manufacturing of telecommunications equipment, which had
previously been a DOT monopoly.

It was in response to such concerns that the government in 1997 set up the
Telecom Regulatory Authority of India (TRAI), the nation’s first independent
telecom regulator. TRAI has earned a growing reputation for independence,
transparency and an increasing level of competence. It had to contend with
political interference, the incumbent’s many challenges to its authority, and
accusations of ineptitude by private players. Throughout the late 1990s,
TRAI’s authority was steadily whittled away in a number of cases, when the
courts repeatedly held that regulatory power lay with the central
government.

2000, with the passing of the TRAI Amendment Act that the regulatory body
really came into its own. Coming just a year after NTP-99, the act marks
something of a watershed moment in the history of India telecom
liberalization. It set the stage for several key events that have enabled the
vigorous competition witnessed today. Some of these events include:

• The corporatization of the DOT and the creation of a new state-owned

telecom company, Bharat Sanchar Nigam Ltd (BSNL), in 2000;
• The opening up of India’s internal long-distance market in 2000, and the
subsequent drop in long-distance rates as part of TRAI’s tariff rebalancing
exercise;
• The termination of VSNL’s monopoly over international traffic in 2002, and
the partial privatization of the company that same year, with the Tata group
assuming a 25% stake and management control;
• The gradual easing of the original duopoly licensing policy, allowing a
greater number of operators in each circle;
• The legalization, in 2002, of IP telephony (a move that many believe was
held up due to lobbying by VSNL, which feared the consequences on its
international monopoly);

The introduction in 2003 of a Calling Party Pays (CPP) system for cell phones,
despite considerable opposition (including litigation) by fixed operators;

• And, more generally, the commencement of more stringent

interconnection regulation by TRAI, which has moved from an interoperator
“negotiations-based” approach (often used by the stronger operator to
negotiate ad infinitum) to a more rules-based approach.

All of these events have created an impressive forward-momentum in Indian

Telecommunications, resulting in a vigorously competitive and fast-growing
sector. India has also suffered from its fair share of regulatory hiccups. Many
operators (mobile players in particular) still complain about the difficulties of
gaining access to the incumbent’s (BSNL) network, and the government’s
insistence on capping FDI in the telecom sector to 49% (a move made in the
name of national security) limits capital availability and thus network rollout.
In addition, ISPs, who were allowed into the market under a liberal licensing
regime in 1998, continue to hemorrhage money, and have been pleading
with the government for various forms of relief, including the provision of
unmetered phone numbers for Internet access. Despite initially impressive
results, the growth of Internet in the country has recently stalled, with only 8
million users. Broadband penetration, too, remains tiny.

Despite asymmetry in initial market endowments between public sector

incumbents and private operators, the act of opening up of the market
unleashed dynamism that was hitherto latent in the sector. This is evident
from a number of performance indicators. In terms of overall size of main
telephone lines in operation, India ranked 14th in the world in 1995. The rank
improved to 7th position in 2001.

Country No. of lines in Rank No. of lines in Ranks

1995(‘000) s 2001(‘000) (2001)
 (199
5)
USA 159,735.2 1 190,000.0 1
Japan 62,292.0 2 76,000.0 3
Germany 42,000.0 3 52,280.0 4
China 40,705.7 4 179,034.0 2
France 32,400 5 34,032.9 9
UK 29,411.4 6 34,710.0 8
Russia 25,018.9 7 35,700.0 6
Italy 24,845.0 8 27,303.0 10
Korea, Rep. 18,600.0 9 22,724.7 11
Canada 17,567.0 10 20,319.3 12
Spain 15,095.4 11 17,427.0 14
Brazil 13,263.0 12 37,430.8 5
Turkey 13,215.7 13 18,900.9 13
India 11,978.0 14 34,732.1 7

Late 2003 that the issue was finally resolved, under considerable
government pressure, when cellular operators agreed to withdraw their
many cases against the fixed-line operators. Fixed operators would in effect
be allowed to enter the mobile business; in return, the government granted
cellular players several concessions, including lower revenue-share
arrangements estimated to total over $210 million. Perhaps most notably,
the government announced its intention to adopt a “unified access licensing”
regime, which would in the future provide a single, technology-neutral
license for fixed and cellular operators. The hope is that this new license
category will prevent a repeat of the recent controversy, and allow new
technologies to enter the Indian market without requiring a wholesale rewrite
of licensing laws.

OTHER MAJOR POLICIES DUE TO REFORM

Department of Telecommunications

Until October 2000, the Department of Telecommunication (DOT) was the

authority ingranting licenses and service provision. It also operated domestic
basic telephoneservices throughout India. The policy making functions and
the service providingfunction were segregated into two different entities
during 2000.The two serviceproviding department of telecom sector were
corporatized-the department of telecomservice and the department of
telecom operation . The state owned corporation BSNLtook over all service
providing functions of these two departments.

National telecom policy, 1994

The new economic policy adopted by the Government aims at improving

India'scompetitiveness in the global market and rapid growth of exports.
Another element of the new economic policy is attracting foreign direct
investment and stimulating domesticinvestment. Telecommunication
services of world class quality are necessary for thesuccess of this policy. It
is, therefore, necessary to give the highest priority to thedevelopment of
telecom services in the country.

New telecom policy, 1999

1. Access to telecommunications is of utmost importance for achievement of

thecountry's social and economic goals. Availability of affordable and
effective
communications for the citizens is at the core of the vision and goal of
thetelecom policy.

2. Strive to provide a balance between the provision of universal service to

alluncovered areas, including the rural areas, and the provision of high-
levelservices capable of meeting the needs of the country's economy

3. Encourage development of telecommunication facilities in remote, hilly

and tribalareas of the country.

4. Create a modern and efficient telecommunications infrastructure taking

intoaccount the convergence of IT, media, telecom and consumer electronics
and
thereby propel India into becoming an IT superpower
5. Convert PCO's, wherever justified, into Public Teleinfo centers
havingmultimedia capability like ISDN services, remote database access,
government
and community information systems etc.

6. Transform in a time bound manner, the telecommunications sector to a

greatercompetitive environment in both urban and rural areas providing
equalopportunities and level playing field for all players

7. Strengthen research and development efforts in the country and provide

animpetus to build world-class manufacturing capabilities

8. Achieve efficiency and transparency in spectrum management

9. Protect defense and security interests of the country

10. Enable Indian Telecom Companies to become truly global players

Broadband Policy, 2004

Recognizing the potential of ubiquitous Broadband service in growth of GDP

and Enhancement in quality of life through societal applications including
tele-education,tele-medicine, e-governance, entertainment as well as
employment generation by way ofhigh speed access to information and web-
based communication, Government havefinalized a policy to accelerate the
growth of Broadband services.

Demand for Broadband is primarily conditioned and driven by Internet and

PC
penetration. It is recognized that the current level of Internet and Broadband
access inthe country is low as compared to many Asian countries.
Penetration of Broadband,Internet and Personal Computer (PC) in the
country was 0.02%, 0.4% and 0.8%respectively at the end of December,
2003. Currently, high speed Internet access isavailable at various speeds
from 64 kilobits per second (kbps) onwards and presently analways-on high
speed Internet access at 128 kbps is considered as ‘Broadband'. There areno
uniform standards for Broadband connectivity and various countries follow
variousstandards.

Regulatory Control

The entry of private service providers in 1992 brought with it the inevitable
need forindependent regulation. The Telecom Regulatory Authority of India
(TRAI) was thusestablished with effect from 20 February 1997 by an Act of
Parliament, called theTelecom Regulatory Authority of India Act, 1997, to
regulate telecom services, includingfixation/revision of tariffs for telecom
services, which were earlier vested in the CentralGovernment. The TRAI Act
was amended by an ordinance, effective from 24 January2000, establishing a
Telecommunications Dispute Settlement and Appellate Tribunal(TDSAT) to
take over the adjudicatory and disputes functions from TRAI. TDSAT wasset
up to adjudicate any dispute between a licensor and a licensee, between two
or more service providers, between a service provider and a group of
consumers, and to hear and dispose of appeals against any direction,
decision or order of TRAI.

Other Government Organizations in the Telecom

Sector

Besides MTNL and BSNL, other public sector undertakings in the telecom
sector are ITILimited (ITI), Telecommunications Consultants India Limited
(TCIL), Intelligent Communication Systems India Limited (ICSIL) and
Millennium Telecom Limited(MTL). ITI Limited was formed in 1948 for
manufacturing a wide range of equipment, which included electronic
switching equipment, transmission equipment and telephone instruments of
various types. TCIL was established in 1978 for providing know-how in all
fields of telecommunications at the global level. The core competence of
TCIL is in communications network projects, software support, switching and
transmission systems, cellular services, rural telecommunications and optical
fiber based backbone network. ICSIL was established in April 1987 for
manufacturing computer based communication systems and equipment. It
also provides engineering, technical andmanagement consultancy services
for computers and communication systems in Indiaand abroad. MTNL was
established in February 2000 as a wholly owned subsidiaryof MTNL for
providing internet services in the country. It is pursuing the establishmentof
broadband internet access for the corporate segment and Voice over
Internet Protocol (VOIP) telephony services throughout India with the use of
relevant technologies like Very Small Aperture Terminals (VSATs)

8.2 Indian Telecom Sector @ 2015

The Indian telecommunications industry is one of the fastest growing in the

world andIndia is projected to become the second largest telecom market
globally by 2015.

India added 113.26 million new customers in 2008, the largest globally. In
fact, in April2008, India had already overtaken the US as the second largest
wireless market. To putthis growth into perspective, the country’s cellular
base witnessed close to 50 per centgrowth in 2008, with an average 9.5
million customers added every month. According tothe Telecom Regulatory
Authority of India (TRAI), the total number of telephoneconnections (mobile
as well as fixed) had touched 385 million as of December 2008,taking the
telecom penetration to over 33 per cent. This means that one out of every
threeIndians has a telephone connection, and telecom companies expect this
pace of growth tocontinue in 2009 and further as well. "We are extremely
bullish that the growth will continue in2009. This year, the number of
additions will be in excess of 130 million," according toT.V. Ramachandran ,
Director General, Cellular Operators Association of India (COAI),an industry
body that represents all Global System for Mobile communications
(GSM)players in India.

According to CRISIL Research estimates, eight infrastructure sectors, which

include thetelecom sector, are expected to draw more than US$ 345.28
billion investment in Indiaby 2015.

With the rural India growth story unfolding, the telecom sector is likely to
seetremendous growth in India's rural and semi-urban areas in the years to
come. By 2015,India is likely to have 200 million rural telecom connections
at a penetration rate of 25per cent. And according to a report jointly released
by Confederation of Indian Industry(CII) and Ernst & Young, by 2015, rural
users will account for over 60 per cent of thetotal telecom subscriber base.

According to Business Monitor International, India is currently adding 8-10

millionMobile subscribers every month. It is estimated that by mid 2015,
around half thecountry's population will own a mobile phone. This would
translate into 612 millionmobile subscribers, accounting for a tele-density of
around 51 per cent by 2015.It is projected that the industry will generate
revenues worth US$ 43 billion in 2015.

According to a Frost & Sullivan industry analyst, by 2015, fixed line revenues
areexpected to touch US$ 12.2 billion while mobile revenues will reach US$
39.8billion inIndia. Fixed line capex is projected to be US$ 3.2 billion, and
mobile capex is likely totouch US$ 9.4 billion.

Further, according to a report by Gartner Inc., India is likely to remain the

world's secondlargest wireless market after China in terms of mobile
connections. According to recentdata released by the COAI, Indian telecom
operators added a total of 10.66 millionwireless subscribers in December
2008. Further, the total wireless subscriber base stoodat 346.89 million at
the end of December 2010.

The Indian telecommunications industry is on a growth trajectory with the

GSMoperators adding a record 9.3 million new subscribers in January 2009,
taking the totaluser base to 267.5 million, according to the data released by
COAI. However, this figuredoes not include the number of subscribers added
by Reliance Telecom.

In WiMax, India is slated to become the largest WiMAX market in the Asia-
Pacific by 2015. A recent study sees India's WiMAX subscriber base hitting 14
million by 2015 andgrowing annually at nearly 130 per cent. And
investments in WiMAX ventures are slatedto top US$ 500 million in India,
according to a report by US-based research andconsulting firm, Strategy
Analytics.

India's telecom equipment manufacturing sector is set to become one of the

largestglobally by 2015.Mobile phone production is estimated to grow at a
CAGR of 28.3 per cent from 2006 to2015, totaling 107 million handsets by
2015. Revenues are estimated to grow at a CAGRof 26.6 per cent from 2006
to 2015, touching US$ 13.6 billion.

Rural India had 76.65 million fixed and Wireless in Local Loop (WLL)
connections and551,064 Village Public Telephones (VPT) as on September
2008. Therefore, 92 per centof the villages in India have been covered by the
VPTs. The target of 80 million ruralconnections by 2015 is likely to be met
during 2008 itself. Universal Service Obligation(USO) subsidy support
scheme is also being used for sharing wireless infrastructure inrural areas
with around 18,000 towers by 2015.

As on October 17, 2008, there were 350 million mobile and fixed line
subscribers inIndia, with about 8 million subscribers being added each
month. The Union Minister forCommunications and Information Technology,
Mr A Raja, has stated that the target forthe 11th Plan period (2007-12) is 600
million phone connections with an investment ofUS$ 73 billion. Apart from
the basic telephone service, there is an enormous potential forvarious value-
added services. In fact, the real potential for telecom service growth is
stilllying untapped.

The Indian rural market is going to be the next big thing for wireless telecom
providers.With the tele-density in rural areas being still about 10 per cent
against the nationalaverage of about 21 per cent, there seems to be huge
untapped potential for mobile phonepenetration in rural India. The
government also plans an investment of US$ 2 billion,during 2008 to 2009,
for the development of around 100,000 community service centresin rural
India to provide broadband connectivity.

If past trend were any guide, it would be reasonable to hope that by 2020
India wouldcomplete transition into digital switching and transmission, VoIP,
broadband and 3G.Though there would be always a small niche market in
India, which would catch up withthe cutting age of the
technology,consolidation and expansion of evolving technologiesacross the
length and the breadth of the country will follow with a lag.

Future vision of telecom is a vision of IT. Telecom will be the springboard of

future
expansion of IT heralding in an information society. ICT will spread among
the massesand will spur innovation, entrepreneurship and growth. An
expanding domestic marketwill deepen the synergy between the domestic
and the export market and strengthenIndia’s presence in the high-value
segment of the global trade and investment. ICTbenefits will spread among
all, the rich and the poor, the young and the old, the men andthe women, the
organized and the unorganized and the government and the governed.

Mobile Telephony in India 2015

By 2015 Indian wireless telecom industry would grow to 700mn subscribers.

Most of the smallplayers would be absorbed by few large companies through
acquisition. New FDI would call forinvesting in large enterprises rather than
forming new entities. Indian market will witness presence of few large
companies providing highly varied and complex services.

Though most of the revenue would continue to come from Voice services but
Data services would also become a significant contributor to the growth of
telecom operators. Companies would try to reach remotest areas as the
urban and semi urban market would come to a state of saturation. Increasing
competition would force companies to find new ways to optimize their
current processes. Labour would become expensive and phone will become
still cheaper for labourers to buy.

High penetration of mobile telephony would make phone an essential

commodity and ‘another means of sustenance’. ‘Another means’ because,
economic growth would drive huge migration within the country. People will
go to farthest areas in search of new opportunities. The only source to
remain connected with the known ones will be through wireless
communication, asother medium of communication like internet would not
be adopted by rural household because of low literacy levels and complex
operation. Also the weary minds of working class would try to attain sense of
relaxation by talking to their family members/friends.

Remote learning will become a key area to find newer avenues of growth as
mobile phone would almost commoditize. Also government would try to
come out with policies which push remote learning as the need to gain new
knowledge across masses, is the indispensable need of a developing society.

On the other side phone manufacturers would try to optimize their cost
because of increasing expenditure on manual labour. New R&D in mobile
phone would try to address the issues of sustainability and health hazards.
Companies will spend heavily on use of innovative materials to cut down
costs and to protect ecology.

The commoditization of phone would lead to up surging of demand for

customized products and services. Phone manufacturers would try to satisfy
consumer’s wants by developing products that can be personalized
according to consumers needs whereas phone operators would provide
personalized services which can be easily altered according to the users
callinghabits.

One major area which is remained unexplored on the Indian soil is the
introduction of ‘shortcircuit’ GSM or satellite network. Phone operators have
been using the tower technology and telecom tower business is on the
upswing despite the hard hit recession. It is possible that phone
manufacturers would bring in new technology (advanced version of
/replacement of Bluetooth) where phone can sense by itself that how far the
receiver of the call is andautomatically takes decision whether call should be
taken via operator’s network or through Bluetooth/new technology.

Though the phone has already become an entertainment device, the

introduction of 3G by end of 2010 will further enhance the area of
entertainment consumption. Services like watching videos, news and gaming
would come sooner than later but people would demand more ways
ofinteraction like multiplayer gaming where people sitting at far places
compete with each other or vote through a ‘DIVISION BELL’. With the
development of houses; so called Smart Homes, phone will become an
important source to know about status of homes. Phone will become an
important checkpoint from where you can garner all the necessities which
are short of stocks.

One major characteristic of a growing economy is increased consumption.

Given the fact that Indian youth will outnumber every other country and the
middle class here is growing at rapid pace, their consumption of mobile
phones and services by them will have strong impact on the telecom
environment. One major driver of consumption is the banking scenario. A
consumption promoting banking policies can further accelerate the cycle of
growth. Though it’s hard to find the direct effect of consumption promoting
banking policies on mobile phone users but surely its impact would not be
adverse.

8.3 Appraisal
Indian telecommunication Industry is one of the fastest growing telecom
markets in the world. The mobile sector has grown from around 10 million
subscribers in 2002 to reach 150 million by early 2007 registering an
average growth of over 90% y-o-y. The two major reasons that have fuelled
this growth are low tariffs coupled with falling handset-prices.

At 110.01 million connections ' Indian Telecom Industry' is the fifth largest
and fastest growing in the world. The subscriber base has grown by 40% in
2007 and is expected to reach 250 million in 2010.

In spite of such a good contribution to our economy it needs to concern the

following issues:

CHALLENGES TO BE FACED
The challenge of the day is to search for new cost-effective ways to roll out
telecomservices in rural areas. It means one has to choose proper and
effective technology fordeployment and leverage on the use of available
infrastructure to reduce cost and time ofrole out of services. Those service
providers who create the right business would emergewinners and the rest
would remain spectators.

Connectivity of networks and cost of bandwidth are also important to

facilitatebroadband usage. Availability of local application and content is
another area of concern.Most of the content available on website as of today
is in English. The content in localand regional language will increase interest
of the local population in broadbandutilization.

The convergence of technologies and emergence of new applications is

another thrillingarea. Lot of revolution is round the corner in broadcasting
and entertainment industries.The emergence of Internet protocol TV, mobile
TV will all change the scenario in thecoming years.

Wireless technology is the future growth driver for which spectrum is the
most importantinput. The task of spectrum management in a multi user and
multi usage scenario is moredaunting and crucial than ever before.

· It would be increasingly difficult for a new entrant to lure customers, as

there isnothing extra for a new player to offer.

· Return on investment or capital employed for a late entrant would

besignificantlylower than the existing players.

· Expansion has to be done with a long sighted view for profitability. The
ones whowould have large reserves and profits would cherish and leaving
others to perish.

· It will be an era of strong regional players as every strong player will

consolidatehis position in the area he is strong by eating up smaller players
till he attains apoint from which the further consolidation becomes
economically unviable.

· Once the fixed line market is matured, mobile will crossover fixed line
market. A
mobile revolution is in the offing in India.

In summary, if the last few years in telecom were exciting, it will be even
more excitingin the coming years.

Critical Factors for Future Growth

Opportunity in rural areas: When compared to Indian metros, there is a

large gap intele-density; - 62 percent in the metros, nearly eight times higher
than 8 percent in ruralareas. To capitalize on the growing population and
disposable income in rural India,telecom operators will have to explore and
expand into ‘uncovered' geographies.

Re-examining high levies: The Indian telecom sector is one of the highest
taxed sectorsin the developing world, through levies, which comprise service
tax,revenue share,spectrum cess, and value added tax.

Bringing down operators' capex: To expand the telecom services, there

will be greaterinvestment needs in the future. Telco’s will have to engage on
active and passiveinfrastructure sharing.

Rational policy for spectrum allocation: The allocation of adequate

spectrum is anurgent requirement for new and existing operators. A clear
roadmap for future spectrumallocation has to be drawn, whether it is a 2G or
a 3G platform. Operators need to becautious in ‘bidding' and should not
overpay for spectrum as that could disturb projecteconomics.

Data revenues to provide ‘buffer': India's data revolution is going to be

fuelled by 3Gand WiMAX. For the data revolution to reach villages, low-cost
access devices,vernacular content, and community initiatives such as e-
governance need to be in place.

Enhancing skill sets: The sector will require specialist resources to support
and sustaingrowth over the next four to five years. And pressure on talent
isexpected to increasewith the deployment of 3G and WiMAX services. The
private sector will need to reorientits focus on talent development through
training schools and facilitation programs thatcater to the needs of the
telecom industry.
Impact of global economic downturn: The current financial crisis could
have a low-tomediumimpact on the telecom sector in terms of rising costs of
capital and reduction indiscretionary spending on the part of customers,
among other determinants.

The Degree of Rivalry

The intensity of rivalry, which is the most obvious of the five forces in an
industry, helps determine the extent to which the value created by an
industry will be dissipated through head-to-head competition. The most
valuable contribution of Porter's “five forces” framework in this issue may be
its suggestion that rivalry, while important, is only one of several forces that
determine industry attractiveness.

· This force is located at the centre of the diagram

· Is most likely to be high in those industries where there is a threat of
substitute products; and existing power of suppliers and buyers in the
market

Now let us understand the implication of degree of revelry in Indian telecom

sector. The dimensions of this parameter are determined by:

High Exit Barriers: In any industry, if the exit barrier is high it increases the
difficulty
of any organization to leave the industry sector. So it makes any difficult to
any willing to leave company to leave the industry. The telecom industry
suffers from high exit barriers, mainly due to its specialized equipment.
Networks and billing systems cannot really be used for much else, and their
swift obsolescence makes liquidation pretty difficult.

High Fixed Cost: The industry also suffers from high fixed cost which
makes the entry barrier also very high for the industry. It comes as no
surprise that in the capital-intensive telecom industry the biggest barrier to
entry is access to finance. To cover high fixed costs, serious contenders
typically require a lot of cash. When capital markets are generous, the threat
of competitive entrants escalates. When financing opportunities are less
readily available, the pace of entry slows. Meanwhile, ownership of a telecom
license can represent a huge barrier to entry.
· 6-7 players in each region
· 3 out of 4 BIG-Four present in each region

Very less time to gain advantage by an innovation: Every company in

this industrial sector in investing a huge amount in research and
development and marketing strategy. That is why we see any offer launched
by any company is counter attacked by other companies very soon. This
makes the industry rivalry most prominent.Eg. Caller tunes, life time card

Price wars: The price war is really very fierce in this industry. Price war in
telecom
industry has commoditized the market that branding has taken a backseat.
The Threat of New Entrants

Both potential and existing competitors influence average industry

profitability. The threat of new entrants is usually based on the market entry
barriers. They can take diverse forms and are used to prevent an influx of
firms into an industry whenever profits, adjusted for the cost of capital, rise
above zero. In contrast, entry barriers exist whenever it is difficult or not
economically feasible for an outsider to replicate the incumbents’ position.
The most common forms of entry barriers, except intrinsic physical or legal
obstacles, are as follows:

· Economies of scale: In telecom industry the economies of scale exists from

the supplier side. That is why companies try to increase their subscriber base
at drastic rate.

· Distribution channels: Distribution channels are also providing a major

determining factor. These channels are not loyal to any company and
competitors can easily access them and make out work for them.

· Customer Switching Costs: Customer switching cost is very low, as cost of

new connection is really low. And new connection offers more benefits to the
customers.

The Threat of Substitutes

The threat that substitute products pose to an industry's profitability

depends on the relative price-to-performance ratios of the different types of
products or services to which customers can turn to satisfy the same basic
need. The threat of substitution is also affected by switching costs – that is,
the costs in areas such as retraining, retooling and redesigning that are
incurred when a customer switches to a different type of product or service.
It also involves:

· Product-for-product substitution (email for mail, fax); is based on the

substitution of need;

· Generic substitution (Video suppliers compete with travel companies);

· Substitution that relates to something that people can do without
(cigarettes,
alcohol).

Now let us discuss this concept for telecom industry. The potential major
substitutes for telecom industry are as follows:

VOIP (Skype, Messenger etc.)

Online Chat
Email
Satellite phones

All of these technologies have a huge potential, though none of the above a
major threat in current scenario. So the telecom industry has to keep a close
look on these substitutes.

Buyer Power

Buyer power is one of forces that influence the appropriation of the value
created by an industry. The most important determinants of buyer power are
the size and the concentration of customers. Other factors are the extent to
which the buyers are informed and the concentration or differentiation of the
competitors. Kippenberger (1998) states that it is often useful to distinguish
potential buyer power from the buyer's willingness or incentive to use that
power, willingness that derives mainly from the “risk of failure” associated
with a product's use.

· This force is relatively high where there a few, large players in the market,
as it is
the case with retailers a grocery stores;

· Present where there is a large number of undifferentiated, small suppliers,

such as small farming businesses supplying large grocery companies;

· Low cost of switching between suppliers, such as from one fleet supplier of
trucks to another.

In the context of Indian telecom industry we can say that the following points
influence the buyer power:
Lack of differentiation among the service provider
Cut throat competition
Customer is price sensitive
Low switching costs
Number portability to have negative impact

Supplier Power

Supplier power is a mirror image of the buyer power. As a result, the analysis
of supplier power typically focuses first on the relative size and concentration
of suppliers relative to industry participants and second on the degree of
differentiation in the inputs supplied.
The ability to charge customers different prices in line with differences in the
value created for each of those buyers usually indicates that the market is
characterized by high supplier power and at the same time by low buyer
power.

In the drawback of Indian telecom industry the following should be kept in

mind:

Large number of suppliers: The industry basically has a large number of

suppliers, which helps them to choose from a lot of options. So they try to
select the best option to deliver the value to the customers and to have a
competitive advantage from their competitor.
Shared tower infrastructure: Technology has helped them to share the
tower
infrastructure. This basically helps them to reduce the initial investment a
lot.
Limited pool of skilled managers and engineers especially those well
versed in the latest.
Medium cost of switching since changing their hardware would lead to
additional cost in modifying the architecture.
Overall influence on the industry – medium.

Weakness
The weaknesses of the Indian telecom sector are as follows.
· High Cost of Infrastructure: The infrastructure cost of telecom industry is
very high.
· Low customer retention power: The customer retention power for telecom
industry is really low and the customer changes their service provider
company very soon.

Threats
The treats to the industry are the following:
· Government Policies – Government may provide licenses to many foreign
operators, which may already have pose a threat for the existing players in
the industry.
· New Technology can change the market dynamics: A lot of new
technologies are coming. Then even have the potential of changing the
entire industry dynamics or even create substitute of the telecom services
existing.
Some of the examples are follows:
Online Chat
Email
Satellite phones

CH. 9 RETAIL SECTOR

9.1 Indian Retail performance

9.2 Indian retail facts and figures

9.3 Need of Retail

9.4 Retail @ 2015

The Indian retail sector is highly fragmented with 97% of its business being
run by the unorganized retailers like the traditional family run stores and
corner stores. The organized retail however is at a very nascent stage
though attempts are being made to increase its proportion to 9-10% by the
year 2010 bringing in a huge opportunity for prospective new players. The
sector is the largest source of employment after agriculture, and has deep
penetration into rural India generating more than 10% of India's GDP.
Source: Ernst &Young, The Great Indian Retail Story, 2008.

The last few years witnessed immense growth by this sector, the key drivers
being changing consumer profile and demographics, increase in the number
of international brands available in the Indian market, economic implications
of the government increasing urbanization, credit availability, and
improvement in the infrastructure, increasing investments in technology and
real estate building a world class shopping environment for the consumers.
In order to keep pace with the increasing demand, there has been a hectic
activity in terms of entry of international labels, expansion plans, and focus
on technology, operations and processes. This has lead to more complex
relationships involving suppliers, third party distributors and retailers, which
can be dealt with the help of an efficient supply chain. A proper supply chain
will help meet the competition head-on, manage stock availability; supplier
relations, new value-added services, cost cutting and most importantly
reduce the wastage levels in fresh produce .
Large Indian players like Reliance, Ambanis, K Rahejas, Bharti AirTel, ITC and
many others are making significant investments in this sector leading to
emergence of big retailers who can bargain with suppliers to reap economies
of scale. Hence, discounting is becoming an accepted practice. Proper
infrastructure is a pre-requisite in retailing, which would help to modernize
India and facilitate rapid economic growth. This would help in efficient
delivery of goods and value-added services to the consumer making a higher
contribution to the GDP.
International retailers see India as the last retailing frontier left as the
China's retail sector is becoming saturated. However, the Indian Government
restrictions on the FDI are creating ripples among the international players
like Walmart, Tesco and many other retail giants struggling to enter Indian
markets. As of now the government has allowed only 51% FDI in the sector
to `one-brand' shops like Nike, Reebok etc. However, other international
players are taking alternative routes to enter the Indian retail market
indirectly via strategic licensing agreement, franchisee agreement and cash
and carry wholesale trading (since 100% FDI is allowed in wholesale trading).
In the past few years the whole concept of shopping has been altered in
terms of format and consumer buying behavior. With the increasing
urbanization, the Indian consumer is emerging as more trend-conscious.
There has also been a shift from price considerations to designs and quality
as there is a greater focus on looking and feeling good (apparel as well as
fitness). At the same time, the Indian consumer is not beguiled by retail
products which are high on price but commensurately low on value or
functionality. However, it can be said that the Indian consumer is a paradox,
where the discount shopper loyalty takes a backseat over price discounts.
Indians have grown richer and thus spending more on vehicles, phones and
eating out in restaurants. The spending is focused more outside the homes,
unlike in other Asian countries where consumers have tended to spend more
on personal items as they grow richer7. Spending on luxury goods have
increased twice as fast with 2/3 of India's population is under 35, consumer
demand is clearly growing. The mall mania has bought in a whole new breed
of modern retail formats across the country catering to every need of the
value-seeking Indian consumer. An average Indian would see a mall as a
perfect weekend getaway with family offering them entertainment, leisure,
food, shopping all under one roof.
Indian consumer is also witnessing some changes in its demographics with a
large working population being under the age group of 24-35, there has been
an increasing number of nuclear families, increase in working women
population and emerging opportunities in the service sector during the past
few years which has been the key growth driver of the organized retail sector
in India. The emergence of a larger middle and upper middle classes and the
substantial increase in their disposable income has changed the nature of
shopping in India from need based to lifestyle dictated. The self-employed
segment has replaced the employed salaried segment as the mainstream
market, thus resulting in an increasing consumption of productivity goods,
especially mobile phones and 2 - 4 wheeler vehicles. There is also an easier
acceptance of luxury and an increased willingness to experiment with the
mainstream fashion, resulting in an increased willingness towards
disposability and casting out from apparels to cars to mobile phones to
consumer durables. Indians spend over USD 30,000 a year (in PPP terms) on
conspicuous consumption that represents 2.8% of the entire population
(which is approx 30 million people) making it the 4 th largest economy in PPP
terms next only to USA, Japan and China .
With reference to the map of India's income class, it can be noticed that the
real driver of the Indian retail sector is the bottom 80% of the first layer and
the upper half of the second layer of the income map. This segment of about
40 million households earns USD 4,000-10,000 per household and comprises
salaried employees and self-employed professionals and is expected to grow
to 65 million households by 2010. In addition to this, facilities like credit
friendliness, availability of cheap finance and a drop in interest rates have
changed consumer markets. Capital expenditure (jewelry, homes, and cars)
has shifted to becoming redefined as consumer revenue expenditure, in
addition to consumer durables and loan credit purchases.
The structure of Indian retail is developing rapidly with shopping malls
becoming increasingly common in the large cities and development plans
being projected at 150 new shopping malls by 2008. However, the traditional
formats like hawkers, grocers and tobacconist shops continue to co-exist
with the modern formats of retailing. Modern retailing has helped the
companies to increase the consumption of their products for example: Indian
consumers would normally consume the rice sold at the nearby kiranastores
for daily use. With the introduction of organized retail, it has been noticed
that the sale of Basmati rice has gone up by four times than it was a few
years back; as a superior quality rice (Basmati) is now available at almost
the same price as the normal rice at a local kirana. Thus, the way a product
is displayed and promoted influences its sales. If the consumption continues
to grow this way it can be said that the local market would go through a
metamorphoses of a change and the local stores would soon become the
things of the past or restricted to last minute unplanned buying.
A host of traditional `brick and mortar' companies such a Tatas have entered
the retail business. With demographic changes like rising disposable incomes
and rapidly expanding middle class, the Indian retail sector is at an inflexion
point where the growth in consumption and growth of organized retailing are
taking it towards higher growth. Market liberalization and an increasingly
assertive consumer population have attracted bigger Indian and
multinational operations to make investments, but are yet to achieve
success or reach break even.
The Indian consumption pattern and preference have undergone vast
changes over the years allowing the foreign retailers to play with the psyche
of the brand conscious modern Indian, who has no qualms spending a
fortune on overhauling his wardrobe. This led to the entry of up-market
brands like Nautica and New Balance into the country to cash in on this
opportunity.
India has the youngest population in the world, with large population
between 20-34 age groups in the urban regions boosting the demand. All
these factors have tempted the foreign firms such as Walmart, Tesco and
Carrefour to enter India. India is now firmly placed on the US and UK radars
as US retailers are gradually realizing the potential of the retail and
consumer goods sector. The timing is the most important source of
competitive advantage for global and regional retailers in the globalization
race. Knowing when to enter emerging retail markets is the key to success.
AT Kearney's study on global retailing trends found that India is the least
competitive as well as least saturated of all major global markets. This
implies that there are significantly low entry barriers for players trying to
setup base here, in terms of the competitive landscape. The report further
stated that global retailers such as Walmart, Carrefour, Tesco and Casino
would take advantage of the more favourable FDI rules that are likely in India
and enter the country through partnerships with local retailers. Other
retailers such as Marks & Spencer and the Benetton Group, who operate
through a franchisee model, would most likely switch to a hybrid ownership
structure.

However, in order to achieve breakthrough growth the global retailers might

have to face some glitches in India. High taxes, poor infrastructure,
bureaucratic hurdles and high cost of real estate are some of the challenges
that overseas retailers may have to tackle in the country.

9.1 Indian Retail performance

Retail in India is still at a very early stage.India is the country having the
most unorganized retail market. Traditionally it was a family’s livelihood,
with their shop in the front and house at the back, while they run the retail
business. More than 99% retailer’s function in less than 500 square feet of
shopping space. Global retail consultants KSA Technopak have estimated
that organized retailing in India is expected to touch Rs 35,000 crore in the
year 2005-06. The Indian retail sector is estimated at around Rs 900,000
crore, of which the organized sector accounts for a mere 2 per cent
indicating a huge potential market opportunity that is lying in the waiting for
the consumer-savvy organized retailer. Purchasing power of Indian urban
consumer is growing and branded merchandise in categories like Apparels,
Cosmetics, Shoes, Watches, Beverages, Food and even Jewellery, are slowly
becoming lifestyle products that are widely accepted by the urban Indian
consumer. Indian retailers need to advantage of this growth and aiming to
grow, diversify and introduce new formats have to pay more attention to the
brand building process. The emphasis here is on retail as a brand rather than
retailers selling brands. The focus should be on branding the retail business
itself. There is no doubt that the Indian retail scene is booming. A number of
large corporate houses —Tata’s, Raheja’s, Piramals’s, Goenka’s — have
already made their foray into this arena, with beauty and health stores,
supermarkets, self-service music stores, new age book stores, every-day-
low-price stores, computers and peripherals stores, office equipment stores
and home/building construction stores. Today the organized players have
attacked every retail category. Most retail firms are companies from other
industries that are now entering the retail sector on account of its amazing
potential. There are only a handful of companies with a retail background.
One such company is Nilgiri’s from Bangalore that started as a dairy and
incorporated other areas in its business with great success. Their
achievement has led to the arrival of numerous other players, most with the
backing of large groups, but usually not with a retail background. Most new
entrants to the India retail scene are real estate groups who see their access
to and knowledge of land, location and construction as prime factors for
entering the market.
The Indian retail scene has witnessed too many players in too short a time,
crowding several categories without looking at their core competencies or
having a well thought out branding strategy.The growth rate of super market
sales has been significant in recent years because greater numbers of higher
income Indians prefer to shop at super markets due to higher standards of
hygiene and attractive ambience. With growth in income levels, Indians have
started spending more on health and beauty products. Here also small,
single-outlet retailers dominate the market. In recent years, a few retail
chains specialised products have come into the market. Although these retail
chains account for only a small share of the total market, their business is
expected to grow significantly in the future due to the growing quality
consciousness of buyers for these products .Numerous clothing and footwear
shops in shopping centres and markets operate all over India. Traditional
outlets stock a limited range of cheap and popular items; in contrast, modern
clothing and footwear stores have modern products and attractive displays
to lure customers. With rapid urbanization, and changing patterns of
consumer tastes and preferences, it is unlikely that the traditional outlets will
survive the test of time. Despite the large size of this market, very few large
and modern retailers have established specialized stores for products.

Modern retailing has entered India in form of sprawling malls and huge
complexes offering shopping, entertainment, leisure to the consumer as the
retailers experiment with a variety of formats, from discount stores to
supermarkets to hypermarkets to specialty chains. However, kiranas still
continue to score over modern formats primarily due to the convenience
factor.

New retail stores have traditionally started

operations in cities like Mumbai and Delhi where there has been an existing
base of metropolitan consumers with ready cash and global tastes. The new
perspective to this trend is that new entrants to the retail scenario should
first enter smaller cities rather than focusing entirely on the metro’s.
Spending power in India is not concentrated any more in just the 4 metros
(Delhi, Mumbai, Chennai, Kolkata). Smaller but upcoming cities like
Chandigarh, Coimbatore, Pune, Ahmedabad, Baroda, Trivandrum, Cochin,
Ludhiana, Simlaetc will fast be catching up to the metro’s in their spending
capacity.
Cities in south India have taken to the supermarket style of shopping very
eagerly and so far the maximum number of organized grocery and
department stores are in Chennai, Bangalore and Hyderabad. The north has
a long way to go to come up to par. International stores now prefer to gauge
the reaction of the public in these cities before investing heavily in a nation-
wide expansion. Milou, the Swiss children’s wear retailer, recently opened up
its first store in Chennai, bypassing Delhi and Mumbai.
Besides the urban market, India’s rural market has just started to be seen as
a viable option and companies who understand what the rural consumer
wants will grow to incredible heights. The bulk of India’s population still live
in rural areas and to be able to cater specifically to them will mean
generating tremendous amounts of business. Business, specifically retail
business must focus on the most important factor in the Indian mind-set----
Value for Money. Indian consumers are ready to pay almost any amount of
money for a product or service as long as they feel they are getting good
Value for Money. This is often misconstrued as being tight fisted or
interested in lower priced and/or lower quality products.
Global retailers have already been sourcing from India; the opening up of the
retail sector to the FDI has been fraught with political challenges. With
politicians arguing that the global retailers will put thousands of small local
players and fledging domestic chains out of business.In the past decade,
international companies entering India (Levi’s, Pepe, Tommy Hilfiger, Marks
and Spencer, Mango) have generally offered moderately priced to expensive
items. They have aimed for the upper-middle and rich classes of Indian
society. These are consumers who travel abroad often and can buy these
items overseas quite easily. Instead, international companies should be
focusing on the lower and lower-middle classes of India. This is where the
real potential is, the aspirational class of consumers who want to lead a
better lives and believe in education, hard work and absorb knowledge from
every possible angle. The phenomenal success of Big Bazaar, Pantaloons
version of Wal-Mart, is proof that there is enormous potential in providing
products and services to this class of consumers.
The only opening in the retail sector so far has been to allow 51% foreign
stakes in single brand consumer stores, private labels, high tech items/ items
requiring specialized after sales service, medical and diagnostic items and
items sourced from Indian small sector (manufactured with technology
provided by the foreign collaborations). Parties supporting the FDI suggest
that the FDI in retail should be opened in a gradual/ phased manner, such
that it can promote competition and contribute to the growth of the Indian
economy. The impact of the FDI would benefit the end user of the consumer
to a great extent and will help to generate a decent amount of employment
as more and more entrepreneurs would be coming forward to invest and
taste the new generation in retail marketing. The opening of FDI should be
designed in such a way that many sectors - including agriculture, food
processing, manufacturing, packaging and logistics would reap benefits. The
table below lists the pros and cons of allowing FDI into retail.
Indians are very curious by nature and will try everything at least once
before rejecting it. The initial success of KFC in India proved that Indians
could make a success of most new ventures entering India but rejects a
concept once they have tried and tested the offering and found nothing
worth going back for. The menu at KFC was rather boring and insipid to the
Indian consumer who is used to the innumerable combinations and
permutations of street food. For their second run in India, KFC re-thought its
menu and has been very successful marketing at specific groups within
India, like the Punjabi’s who have quite a history of loving the Chicken leg
and have made the Chandigarh outlet a huge success!
Companies entering India cannot have just one game plan to apply to the
entire country as the people, their tastes, the lifestyle, the budgets etc are
all too divergent. International entrants must enter each market specifically
focusing only on that area to be successful.
There seems to be a considerable potential for the entry or expansion of
specialized retail chains in the country. The Indian durable goods sector has
seen the entry of a large number of foreign companies during the post
liberalization period. A greater variety of consumer electronic items and
household appliances became available to the Indian customer. Intense
competition among companies to sell their brands provided a strong impetus
to the growth for retailers doing business in this sector. Increasing household
incomes due to better economic opportunities have encouraged consumer
expenditure on leisure and personal goods in the country. There are
specialized retailers for each category of products (books, music products,
etc.) in this sector. Another prominent feature of this sector is popularity of
franchising agreements between established manufacturers and retailers. A
strong impetus to the growth of retail industry is witnessed by economic
boom and driver of key trends in urban as well as rural India.
Key Trends in Urban India:
♦Retailing in India is witnessing a huge revamping exercise.
♦Estimated to be US$ 200 billion, of which organized retailing (i.e. modern
trade) makes up 3 percent or US$ 6.4 billion.
♦India is rated the fifth most attractive emerging retail market: a potential
goldmine
♦Ranked second in a Global Retail Development Index of 30 developing
countries drawn up by AT Kearney.
♦Food and apparel retailing key drivers of growth.
♦Organized retailing in India has been largely an urban phenomenon with
affluent classes and growing number of double-income households.
Key Trends in Rural India:
♦Rural markets emerging as a huge opportunity for retailers reflected in the
share of the rural market across most categories of consumption
♦ITC is experimenting with retailing through its e-Choupal and ChoupalSagar
– rural hypermarkets.

9.2 Indian retail facts and figures

India is the hottest Retail destination. It was ranked as the most attractive
retail destination among 30 emerging markets by the Annual Global Retail
Development Index (GRDI) for two years consecutively (Source: AT Karney)
India is young. 47% of its population is under 20 years of age and contributes
immensely to the growth of the Indian Retail sector.
The statistics shows that the retail sector in India is worth USD 394 billion
and is growing at the rate of 30% annually. An ICRIER study has found that
retailing ($180 billion) contributes to 10 per cent of GDP and employs 7 per
cent (21 million) of the workforce. According to AT Kearney, India is given the
top ranking as the next foreign investment destination, as markets like China
become increasingly saturated. India is the 4th largest economy as regards
GDP (in PPP terms) and is expected to rank 3rd by 2010 just behind US and
China. Over the past few years, the retail sales in India are hovering around
33-35% of GDP as compared to around 20% in the US. The table gives the
picture of India's retail trade as compared to the US and China.

Industry analysis of the Indian retail sector

Modern retailing has entered India in form of sprawling malls and huge
complexes offering shopping, entertainment, leisure to the consumer as the
retailers experiment with a variety of formats, from discount stores to
supermarkets to hypermarkets to specialty chains. However, kiranas still
continue to score over modern formats primarily due to the convenience
factor.
Source: IT Retailing
In the coming years it can be said that the hypermarket route will emerge as
the most preferred format for international retailers stepping into the
country. At present, there are 50 hypermarkets operated by four to five large
retailers spread across 67 cities catering to a population of half-a-million or
more. Estimates indicate that this sector will have the potential to absorb
many more hypermarkets in the next four to five years.

List of retailers that have come with new formats:

Retailer Current New Formats. Experimenting With

Format

Shoppers' Department Quasi-mall

Stop Store

Ebony Department Quasi-mall, smaller outlets,

Store adding food retail

Crossword Large Corner shops

 bookstore

Piramyd Department Quasi-mall, food retail

Store

Pantaloon Own brand Hypermarket

store

Subhiksha Supermarket Considering moving to self

service

Vitan Supermarket Suburban discount store

Foodworld Food Hypermarket, Foodworld express

supermarket

Globus Department Small fashion stores

Store

Bombay Aggregation of Kiranas

Bazaar

Efoodmart Aggregation of Kiranas

Metro Cash and carry

S Kumar's Discount store

Business analysis of the Indian retail sector

The size of modern retail is about US$ 8 Billion and has grown by 35% CAGR
in last five years. (KSA Technopak, June 2006). In modern retailing, a key
strategic choice is the format; retailers are coming up with various
innovative formats to provide an edge to retailers.
Most attractive developing markets for retail by region according to AT
Kearney Study:
Source: AT Kearney, GRDI 2006.
A look at the graph above shows that the Asian markets are considered
attractive for retail as per the AT Kearney's report; India is being placed on
the radar by the USA and UK. Global giants like Tesco and Walmart are
experimenting with various options to enter India. One possibility for
Walmart would be to open Sam's club wholesale business through a joint
venture and sell strictly to other retailers. This strategy skirts the issue of not
being able to sell directly to customers and establish a strong presence in
the local market. On the other hand, Tesco is planning to get into a
partnership with Home Care Retail Mart Pvt. Ltd expecting to open 50 stores
by 2010. The government is taking gradual steps in allowing the FDI into
Indian retail, when it takes the final steps the peak time will quickly pass
giving the existing players a distinct edge.

Merger and acquisition activity

Retail been witnessed a record number of M&A deals in the first half of 2006,
which were collectively worth USD 25.6 billion. A significant number of deals
have being carried out in the Indian retail sector in the past few months in
order to acquire a larger share in the growing domestic market and to
compete against the prospective global and domestic players.The table
below shows some recent deals that have taken place in the Indian retail
sector:

Year Acquired/ JV Acquirer Nature of Stake Consideration

 Company/ Target Business (US$ million)

Retail
2005 Liberty Shoes Future group 51% 3
(Footwear)

Indus - League
2005 Future group Retail clothing 68% 5
Clothing

Deccan Leisure retail

2006 Odyssey India Chronicle chain (books, 100% 14
Holdings music, toys)

Books, music,
2007 Landmark Tata Trent 74% 24
accessories

TGI Friday's (a
subsidiary of
Restaurant
2008 Bistro Hospitality Carlson 25% N/A
(Food retail)
Restaurant
World-wide)

Indus League
clothing Lingerie and 50%
Etam group,
2008 women's wear 8
(Future group France (JV)
retailing
company)

Source: PricewaterhouseCoppers, Asia-Pacific M&A bulletin

Employment opportunities in this sector

The Indian retail sector offers an economic opportunity on a massive scale
both as a global base and a domestic market. This sector yields many
positive results like generating more jobs and bringing numerous goods to
the consumers at reasonable prices. According to Ernst &Young's report `The
Great Indian Retail Story' this sector is expected to create 2 million jobs by
2010.
About 4 crore people are employed in retail trade, assuming each person
supports a family of 5, this, implies that about 20 crore people are
dependent on this sector. For a vast majority of the households, retailing is a
euphemism for a marginal existence. Modern retail formats have generated
huge employment for the young and even senior citizens and women
wanting to work part-time (even in small towns). People have greater
exposure to the technical aspects, training and also earn higher salaries
along with bonuses and incentives. With foreign companies opening
expanding in India, employees are being re-trained according to international
standards and practices that are being bought in. There is also an increase in
the number of retail management programmes and institutes. This will
bridge the gap in availability of talented professionals at the middle and
lower levels. Successful Indian retailers are creating a robust second and
third level of management by hiring aggressively for these key roles.
Talented professionals will put increased pressure on wage costs. Therefore
operating margins, especially for mid-sized retailers, are becoming a
poaching ground for international retailers once they enter India.
With private companies getting into retail, there are people employed from
diverse cultures (no room for reservations unlike government owned stores)
where there is a sense of unity in diversity. The companies are also
employing people who are physically handicapped. The next few years are
expected will see the sector offering new jobs to 50,000 young graduates
and diploma holders.

India Retail Market Statistics Review

• 720 million Indians to join consuming age by 2010
• 55% of the Indian population will be under 20 years of age by 2015
• 32% rise in urbanisation by 2008
• 10% annual growth in Retail market since 2000
• 7% of the population is engaged in retailing
• A booming US$ 300 billion retail market in India
• 5.5 retail outlets per 1000 population, highest in the world
• 25-30% annual growth in retail loans and credit cards
The size of Organised Retail in India will exceed US$22bn mark from current
level of about US$4bn with its space requirement touching over 220mn sq.
ft., by 2010, according to The Associated Chambers of Commerce and
Industry of India (ASSOCHAM). In a Paper brought out by ASSOCHAM on
`Retail Scenario in India and Its Related Issues’, it has been stated that
approx. 40mn sq. ft. is currently generating a business of about US$4bn in
organised retail.

According to the Paper, the total retailing size in India is currently estimated
at US$16bn of which organized sector accounts for only 25% market share
and remaining 75% is in the unorganized sector. Slowly and gradually, with
boom in retailing continuing, the organized retail sector in small towns
beyond metros will grow at a staggering level of 50-60% as compared to less
than 35% in the large cities purely on account of scarcity of space which is in
plenty beyond metros with reasonable land prices and without cumbersome
procedure for land acquisitions, says the Paper.

9.3 Need of Retail

The industry is facing a shortage of middle management level professionals.
Major retailers are hiring aggressively from the similar and smaller
organizations by offering better packages. They are creating various levels of
management and hiring on a spree. Some of the areas such as technology,
supply chain, distribution, logistics, marketing, product development and
research are becoming very critical for the success of the organizations. All
of these would lead to the recruitment of highly professional people who
specialize in these fields. There is also a trend for hiring hotel management
graduates, though now many retail schools are coming up, and Pantaloon
has set up links with major business schools from where it would be selecting
the right candidates.
The sector is likely to produce 2 million jobs in the coming 3 years. There
also exists a possibility that the retail sector would become a poaching
ground once a number of domestic and international players enter the
industry.
Supply Chain Management
The retail scenario is characterized by logistical challenges, constant
changes in consumer preferences and evolution of new retail formats. All this
increases the challenges faced by the industry. Various strategies are to be
implemented to improve core business processes, such as logistics,
innovation, transparency, distribution and inventory, management of point
sale (POS) data. Retail majors are under serious pressure to improve their
supply chain systems and distribution channels and reach the levels of
quality and service desired by the consumers.
Frauds in Retail
It is one of the primary challenges the companies would have to face.
Frauds, including vendor frauds, thefts, shoplifting and inaccuracy in
supervision and administration are the challenges that are difficult to handle.
This is so even after the use of security techniques, such as CCTVs and POS
systems. As the size of the sector would increase, this would increase the
number of thefts, frauds and discrepancies in the system.
Challenges with Infrastructure and Logistics
The lack of proper infrastructure and distribution channels in the country
results in inefficient processes. This is a major hindrance for retailers as a
non-efficient distribution channel is very difficult to handle and can result in
huge losses. Infrastructure does not have a strong base in India. Urbanization
and globalization are compelling companies to develop infrastructure
facilities. Transportation, including railway systems, has to be more efficient.
Highways have to meet global standards. Airport capacities and power
supply have to be enhanced. Warehouse facilities and timely distribution are
other areas of challenge. To fully utilize India's potential in retail sector,
these major obstacles have to be removed.
9.4 Retail @ 2015

Indian retail market to reach $450 bn by 2015.As organised retail evolves,

mom and pop stores will continue to remain relevant across both large and
small towns in India, said a McKinsey & Company report.
The management consulting firm’s report projected India to be a $450-billion
retail market by 2015. Further, organised retail was expected to grow from
the current 5 per cent of the total market to 14-18 per cent of the total retail
in 2015,
The report said that retail in India could be profitable but not with ‘cut and
paste’ global formats. Profitable retailers would require keeping four mantras
in mind as they explored this high-potential market, it said.
Mantra one, develop innovative formats for material differentiation for which
three decisions will be critical – where to participate in the retail value chain,
which geographies to play in and what price-points to offer. Two, craft a
customer-insight driven merchandise strategy to stimulate consumption and
lock in core customers.
Three, create an efficient retail operating platform consisting of a self-
sufficient system of suppliers, logistics providers and even loyal shoppers.
And finally, build an evolving organisation with an empowered front-end
selling team that “owns” local catchments.Thus, the greatest challenge
would be to maintain the organisation’s focus on profitability while
cultivating flexibility, the report said.
“Not all Indian households will shop in these new stores. Of the current 204
million households in India, we estimate that only about 13 million are
comfortable and have the income to patroniseorganised retail. The great
news is that this relevant consumer segment will grow five-fold from 13
million to 65 million households in the next 8 years,” said IreenaVittal,
Partner, McKinsey & Company, and co-leader of the retail practice.

Ch. 11 Indian Entertainment

Sector
 11.1 Indian Entertainment performance
11.2 India’s entertainment sector @ 2015

India’s entertainment sector has witnessed remarkable buoyancy in growth

in recent years and has consistently outpaced growth in domestic GDP. While
annual average growth in nominal GDP was 14.48% over the period 2004-08,
the entertainment sector grew by 16.6 % over this period. In the wake of the
global economic crisis, the trend has been reversed in 2008 and is expected
to continue in 2009, with the growth of the Indian entertainment sector
moderating to a larger extent relative to the overall economic activity. After
registering a growth of around 16.6% compounded annually over the period
2004-08, growth in the entertainment sector is set to decelerate to8.0% in
2009. The CAGR projection for the entertainment sector over the period
2009-13 is just 10.5% from the earlier growth rates which have been close to
20%. This has largely been influenced by a marked slowdown in the
advertising outlays with growth expected to moderate to 9.2% in 2009 after
posting a CAGR of close to 17.3% during 2004-08.

In the wake of the global economic crisis, the trendhas been kept good in
2009 and is expected tocontinue in 2010, with the growth of the Indian
E&Mindustry moderating to a larger extent relative to theoverall economic
activity.

After registering a growth of around 16.6%compounded annually over the

period 2004-08,growth in the E&M industry is set to decelerate to8.0% in
2009. The CAGR projection for the E&Mindustry over the period 2009-13 is
just 10.5% fromthe earlier growth rates which have been close to20%. This
has largely been influenced by a markedslowdown in the advertising outlays
with growthexpected to moderate to 9.2% in 2009 after posting aCAGR of
close to 17.3% during 2004-08.

Brightening Prospects: Indian Economy

The underlying factors, which brighten prospects for the Indian economy, are
many on which the Indian entertainment sector is dependent upon:

•• Strong fundamentals

India’s low dependence on exports and the buoyancy of its service sector
suggest that its revival is likely to be less dependent on global recovery and
more in line with its own structural fundamentals. Historically too, across
countries, services tend to be less affected by cyclical downturns than
manufacturing. It has been noted that in key emerging markets like China,
Indonesia and India, spending has increased by more than 5% per annum
during the global slowdown.
•• Strong GDP growth

Recent government quarterly GDP data indicates a possible early bottoming

out of the economic slowdown in India. GDP for the fourth quarter in 2008-
09, revealed that growth has stabilized April 2009. higher growth in the last
quarter of 2008-09 over the previous quarter. This was further confirmed by
OECD Composite Leading Indicators for India which showed that for the first
time in 2 years, there was a positive growth on a monthly basis in April 2009.

•• Positive investment climate:

A notable feature of India’s growth in recent years has been the rise in the
rate of investment by the corporate sector. Gross capital formation has
stepped up significantly from 25.5% in2002-03 to 39.1% in 2007-08,
highlighting the transformation of the investment climate and favorable
growth prospects for the Indian economy. India continues to retain its
position as a preferred destination for investments. It achieved a growth of
85.1% in FDI flows in2008, the highest increase across all countries as
revealed by a recent UNCTAD study which made an assessment of the
impact of the current financial and economic crisis on global flows. These
factors emphasize the fact of India being a prospective investment
destination.

•• Strong consumption spending

Private consumption has been a key factor contributing to India’s growth

story. Growth rate has increased from less than 5 % in the five-year period,
leading up to 2002-03 to nearly 7 % in the next five years. There exists
further scope to push consumption levels since household debt in India only
accounts for 15% of GDP as compared to nearly 100% in most advanced
countries. With increasing financial inclusion and softening of short interest
rates following the monetary easing steps of the RBI, consumption growth is
likely to be sustained. Two other factors point in this direction:

○○ A sharp pick up in growth was observed in the consumer durables sector,

which expanded by 16.9% in April 2009 year-on-year basis compared to a
growth of 8.2% in March 2009.
○○ Rural incomes have received a boost as a result of recent Government
measures like the NREGA (National Rural Employment Guarantee Act),
Central Government salary hikes, farm loan waivers and sustained increases
in MSP (Minimum Support Price) leading to buoyancy in rural demand in
recent years. This trend is likely to be sustained in the near future.

Brightening Prospects: Indian E&M Industry

With the likely bottoming out of the economic recession by 2010, the Indian
entertainment sector is expected to make a strong recovery. In line with this
recovery, the Indian entertainment sector is projected to grow by 11%
compounded annually over the forecast period 2009-13, well above the
global average growth of 2.7% compounded annually. Advertising
expenditure is also likely to follow a similar trend.

India is among the largest media consuming and content creating industries.
Despite this exciting profile of the Indian entertainment sector, it constitutes
only around 1% of the global industry. Despite these constraints, India
entertainment sector is expected to consolidate its position in the global
entertainment space. Some of the factors that will contribute to this growth
are:

Under-penetration and unadvertised market

Most media forms in India have penetration levels that are well below global
levels. In India, TVpenetration is close to 50% contrasted with over 90% in
markets such as US and China. Similarly,only a third of the population has
access to cable and satellite compared to over 85% in the US. The poor
penetration and advertising spends coupled with the strong appetite for
various forms of media content signals the vast underlying potential and
opportunities to unleash growth of the Indian entertainment sector in coming
years.

Rising growth of E&M and share in GDP

Strong consumption spending trends for the recreation, education and

cultural services also reflect the sector’s strong fundamentals and the
country’s strong appetite for entertainment and leisure. There has been
acceleration in growth from 11.4% in 2005-06 to 12.2% in 2007-08.
Correspondingly, the share of the sector in total private final consumption
expenditure has moved up consistently in recent years from 4% in 2003-04
to 5% in 2007-08.

Budget boosters

Union Budget 2009-10 has made some key announcements which would
benefit the entertainment sector. The Fringe Benefit Tax amounting to 20, %
which was being charged for travel, food, hotel and other expenses incurred
by the workforce engaged in outdoor shoots, has been completely
eliminated. The budget has also provided for an extension of the stimulus
package (announced in February 2009) for print media comprising waiver of
15% agency commission on DAVP advertisements and 10% increase in DAVP
rates to December 2009. It has also announced a reduction in the import
duties on LCD panels and the re-introduction of the exemption of
countervailing duties on accessories, parts and components for the
manufacturing of mobile phones for one year. However, a not-so-
encouraging announcement for the industry is an imposition of 5 % customs
duty on set top boxes for television broadcasting.

Favourable demographic trends

India’s young demographic profile (experts point to India’s `youth bulge’

lasting until 2050) with higher propensity for discretionary spending would
present unparallel opportunities for the entertainment sector. Further, the
growing level of urbanization with over 41% percent of the population living
in cities and towns by 2030 from the present level of 28% as per UNDP India
Urban Poverty Report 2009 and rising affluence levels would have a
sustainable impact on demand creation for leisure and entertainment
activities in the coming years.

11.1 Indian entertainment performance

Owing to the economic slowdown, the entertainment sector is now
witnessing subdued growth after a phase of robust growth. In 2008, the
entertainment sector recorded a growth of 10.3%, over the previous year.
The industry reached an estimated size of Rs. 563.9 billion in 2008, which
was up 10.3% from Rs. 511.3 billion in 2007. In the last five years (2004-
2008), the industry recorded a cumulative growth of 16.6% on an overall
basis. The advertising industry itself recorded a growth of11.3% over the
previous year and thus contributed an estimated Rs. 216 billion in 2008, as
compared to Rs. 194 billion in 2007. Over the period 2004-2008, the
advertising industry recorded a cumulative growth of17.3%.

The advertising industry itself recorded a growth of11.3% over the previous
year and thus contributed an estimated Rs. 216 billion in 2008, as compared
to Rs. 194 billion in 2007. Over the period 2004-2008, the advertising
industry recorded a cumulative growth of17.3%. Though different segments
of the industry grew at different rates, the highest growth over the last 4
years was recorded by one of the smallest segments by size in the industry –
internet advertising. This segment grew by 69.9% over the period 2004-08,
albeit due to a low base number in the initial year. Its share in the overall
advertising pie grew to approximately 2.3% in 2008, which was up from1.4%
in 2007. The next highest growth over the period 2004-08 was recorded by
the radio industry at36.4% – the segment growing to an estimated Rs. 8.3
billion in 2008, which was up from Rs. 6.9 billion in2007. Television industry
was the other industry which recorded a growth higher than the overall
growth of the industry over the period 2004-08, having recorded a CAGR of
17.4%. At present the TV industry is estimated at Rs. 244.7 billion, which
was, up 9.3% from Rs. 224 billion in 2007. Print media, the other large
traditional media segment apart from television and filmed entertainment,
recorded a growth of 8.7% over the previous year and is estimated at Rs.
162 billion in 2008, which is up from Rs. 149 billion in2007. Over the period
2004-2008, the print media industry recorded a compounded growth of
13.4% on an overall basis, which was significantly higher than most countries
in the world. Filmed entertainment recorded a growth of 11.5% over the
previous year and is estimated at Rs. 107 billion in 2008, which is up from
Rs. 96 billion in 2007. Over the period 2004-08, the film industry recorded a
cumulative growth of 15.6% on an overall basis. Globally, the music industry
is under-performing and the trend is reflected in India as well. The music
industry, on an overall basis, witnessed a fall of 14.1% and stands at an
estimated Rs. 6.3 billion in 2008. Though digital music has come to the
rescue of the Indian music industry, its current small size is unable to
improve the decline in the physical music sales. The animation, gaming and
VFX industry grew by 20.0% over the previous year and is estimated at Rs.
15.6 billionin 2008, which is up from Rs. 13.0 billion in 2007.

Rs. billion 2004 2005 2006 2007 2008 CAGR

2004 -
08

Television 158.5 191.2 223.9 244.7

% Change 128.7 23.2% 20.6% 17.1% 9.3% 17.4%

Filmed
Entertainment
59.9 68.1 84.5 96.0 107.0
% Change
13.7% 24.1% 13.6% 11.5% 5.6%

Print Media 109.5 128.0 149.0 162.0

% Change 97.8 12.0% 16.9% 16.4% 8.7% 13.4%

Radio 3.2 5.0 6.9 8.3

% Change 2.4 33.3% 56.3% 38.0% 20.3% 36.4%

Music 7.2 7.3 7.3 6.3

% Change 6.7 7.3% 0.8% 0.6% -14.1% -1.7%

Animation,Gamin
g and VFX
10.5 13.0 15.6
% Change
23.8% 20.0%
Out-Of-Home
Advertising
8.5 9.0 10.0 12.5 15.0
% Change
5.9% 11.1% 25.0% 20.0% 15.3%

Online Advertising 1.0 1.6 2.7 5.0

% Change 0.6 66.7% 60.0% 68.8% 85.2% 69.9%

Total E&M 356.5 438.1 511.3 563.9

Industry
304.6 17.0% 22.9% 16.7% 10.3% 16.6%
% Change

Key developments in the Indian Entertainment sector in

2008

Slowdown has impacted the Indian entertainment sector more from an

advertising standpoint than a subscription standpoint. Advertising revenues
have slowed down as a result of declining advertising bugets owing to the
economic slowdown. Comparatively, subscription revenues remained flat
except in the film industry where admissions have seen a negative growth,
due to the producer multiplex standoff.

In the last quarter of 2008, spends of the key print advertisers like realty,
banking/finance, IT/telecom and durables nosedived and some categories
totally stopped spends. The slowdown impacted the print industry more than
the television industry. However, internet advertising picked up; marketers
looking to measurability increasing internet spends manifold.

As immediate measures to tackle the impact of the global economic

downturn, entertainment sector professionals have resorted to costs
rationalization. These vary from cutting staff costs to real-estate and other
administrative costs. Advertisers, both from the entertainment sector and
others, have significantly reduced their advertisement budgets except for
FMCG and Telecom. Severe cost-cutting measures are the order of the day.
The impact on key segments is as follows:

•• Print and Magazines - A booming Indian economy, growing need for

content and government initiatives that have opened up the sector to foreign
investment are driving growth in the print media. With the literate population
on the rise, more people in rural and urban areas are reading newspapers
and magazines today. Also, there is more interest in India amongst the
global investor community. This leads to demand for more Indian content
from India. Foreign media too is evincing interest in investing in Indian
publications. And the internet today offers a new avenue to generate more
advertising revenues.

Newspapers and publications have reduced thenumber of pages to cope with

the recession. Magazines too have discontinued supplements, which were
earlier distributed free of cost with the main product. Rising newsprint costs
have added to the woes ofthe print media industry.

•• Television - In the television sector, Subscription revenues are projected

to be the key growth driver for the Indian television industry over the next
five years. Subscription revenues will increase both from the number of pay
TV homes as well as increased subscription rates. The buoyancy of the Indian
economy will drive the homes, both in rural and urban (second TV set
homes) areas to buy televisions and subscribe for the pay services. New
distribution platforms like DTH and IPTV will only increase the subscriber
base and push up the subscription revenues.

Competition among broadcasters is expected to driveprofitability drastically

downwards. In addition, funding for distribution investments is expected to
slowdown considerably and carriage fees will be pruned down considerably.
A silver lining for the television industry is that viewing hours tend to
increase in tough times as consumers stay at home and hence this may be a
good time for television to develop an unassailable lead between itself and
other media.

••Film Industry - Indians love to watch movies. And advancements in

technology are helping the Indian film industry in all the spheres – film
production, film exhibition and marketing. The industry is increasingly
getting more corporatised. Several film production, distribution and
exhibition companies are coming out with public issues. More theatres across
the country are getting upgraded to multiplexes and initiatives to set up
more digital cinema halls in the country are already underway. This will not
only improve the quality of prints and thereby make film viewing a more
pleasurable experience, but also reduce piracy of prints.

For the Indian film industry, the global economic downturn has resulted in
rationalization of costs across the spectrum of the industry. Moreover, there
is a decrease in theNumber of film releases due to shortage of funds for
completion of projects, marketing and Promotional activities. Budgets have
been scaled down for expansion plans by major corporateFilm entities and
some of the corporate have terminated several of their film projects. Most
filmBudgets planned have also been scaled down owing to de-accelerated
growth in expansion ofScreens for multiplex chains, which is resulting into
lower occupancy levels for the exhibitors andThereby lower admissions.

•• Radio Industry - The cheapest and oldest form of entertainment in the

country, which was hitherto dominated by the AIR, is going to witness a sea-
change very shortly. In 2005, the government opened up the sector to
foreign investment – and this is the key factor that will drive growth in this
sector. As many as 338 licences are being given out by the Indian
government for FM radio channels in 91 big and small towns and cities. This
deluge of radio stations will result in rising need for content and
professionals. New concepts like satellite, internet and community radio
have also begun to hit the market. Increasingly, radio is making a comeback
in the lifestyles of Indians.

The radio industry has witnessed unprecedented deceleration in the third

and fourth quarter on the back of an advertising slowdown. To battle
recession FM radio stations have cut down on broadcast hours during late
hours in smaller cities. The silver lining for the radio industry in a tough
economic environment is that advertisers are clearly seeing the benefit of
the ability of radio to deliver superior reach compared to print in a far better
cost-effective manner. Moreover, as opposed to print and television, micro-
targeting, localization and integration with BTL is also possible.

•• Music- The industry has been plagued by piracy and had been showing
very sluggish growth over the last few years, both in India and globally.
However, ‘mobile music’ and ‘licensed digital distribution’ services are
projected to fuel the recovery of the music industry the world-over. The pace
of growth in mobile music reflects the fact that consumers increasingly view
their wireless device as an entertainment medium, using those devices to
play games and listen to music, while carriers are actively promoting
ancillary services such as ringtones to boost average revenue per user.
Ringtones currently constitute the dominant component of the mobile music
market. Licensed digital distribution services are also contributing
significantly to growth in all regions.

Soaring music acquisition rights have witnessed some corrections with music
companies acquiring rights by bundling movies. In addition , a slowdown in
physical sales due to drop in consumer spending has led to an inventory
build-up for the distributors and retailers who have been returning the
physical stock of cassettes and CDs back to the music companies to optimize
their shelf space.

•• Out-Of-Home (OOH) - Outdoor media sites in India are predominantly

owned or operated by small, local players and are typically, directly
marketed by them to advertisers and advertising agencies. However, this
segment too is witnessing a sea-change with technological innovations.
Growing billboard advertising is fuelled by technologies such as light-
emitting diode (LED) video billboard. This is a segment that is seeing
interesting technological innovations across the world and is likely to evolve
in India too in the short-term.

Lack of proper accountability and measurability has resulted in this medium

being one of the worst hit amidst the slowdown. Advertising budgets have
shrunk by almost 35-40% especially in sectors such as financial services
which contributed significantly to the OOH advertising industry. The
slowdown has also resulted in a rationalization of bid prices in the market,
with some long-term properties not finding any takers and the new players
are beingforced to shut shop.

•• Animation – The disappointing performances at the box office of

manyanimation and VFX movies released in 2008 such as Jumbo, Roadside
Romeo, Lovestory 2050 has made producersmore cautious and they are
looking closely at the story and script before sanctioning financialinvestment
for animation or VFX movies amidst the slowdown.
•• Internet - Internet advertising is one of the few segments that have had
a low impact of the slowdown. The measurability factor often a subject of
wrath for the on-line medium, has turned a savior where marketers are
looking to optimize and increase their efficacy through online platforms.An
estimated 28 million Indians are currently hooked on to the internet. And this
rising number is leading to the growth of internet advertising, which today
stands at approximately INR 1 billion. The internet is being used for a variety
of reasons, besides work, such as chatting, leisure, doing transactions,
writing blogs etc. This offers a huge opportunity to marketers to sell their
products. And with broadband becoming increasingly popular, this segment
is expected to grow by leaps and bounds.

•• Live entertainment - This segment of the entertainment industry, also

known as event management, is growing at a fast and steady rate. While this
industry is still evolving, Indian event managers have clearly demonstrated
their capabilities in successfully managing several mega national and
international events over the past few years. In fact, event managers are
also developing properties around events. The growing number of corporate
awards, television and sports events are helping this sector. With rising
incomes, people are also spending more on wedding, parties and other
personal functions. However, issues like high entertainment taxes in certain
states, lack of world-class infrastructure and the unorganised nature of most
event management companies, continue to somewhat check the potential
growth in this segment of the industry.

Liberalization By The Government

Realizing the tremendous potential of Media And Entertainment sector to
grow and expand in the market, the Government of India has taken
several positive measures to stimulate the growth of the sector.
• The government has permitted up to 100 % FDI in the film industry
(subject to conditions).
• The government has allowed FDI up to 20% in the radio industry
subject to an approval from Foreign Investment Promotion Board (FIPB)
in addition to the guidelines notified by Ministry of Information and
Broadcasting.
• It has also allowed 26 % foreign equity holding in news-related print
media.
• The earlier cap of FDI in news channels was 26 per cent. The Union
 Cabinet of India has reduced it to make it at par with the FDI norms in
the print media. Investments can now be made through FIIs, NRIs and
overseas corporate bodies (OCBs).
It has allowed entry into foreign media organizations into India. This has
also led to an increase in the number of collaborations and mergers &
acquisitions in the Media And Entertainment sector. This development has
also been encouraged by the entry of large corporate players into all
segments of the industry, like Reliance Media And Entertainment entering
the industry with a bang.

The three main trends that were observed in the last year were:
• Diversification by media companies
• Increased foreign investment
• The increasing interest of the global investors in the sector.

Allowing FDI and foreign players has brought in great benefits for the Indian
Media And Entertainment industry. The liberalization has made accessible
many new and latest technologies in the sector were earlier not available to
the Indian Media And Entertainment companies. It has also seen the inflow
of more funds for the sector in the form of investments and is helping not
only to achieve international standards but to set new benchmarks for the
Media And Entertainment industry worldwide.

The liberalization has seen the entry of many foreign players and also many
joint ventures and collaborations are coming up. As a result, many new
opportunities of employment have come up for interested students and job
seekers.

Indian E&M companies going international

Reliance- Spielberg - Anil Ambani’s RelianceADA Group formalised its

association withDreamWorks Studios promoted by Hollywooddirector Steven
Spielberg and his partner StaceySnider. As part of the deal finalised in July
2009,
the two players will have a 50 per cent stake inDreamWorks and will make
movies with an initialfunding of $825 million.

BCCL - Virgin Radio UK - Radio sector’s firstout-bound investment took

place in 2008 withBennett Coleman and Company Ltd. (BCCL)acquiring
Virgin Radio Holdings from UK-basedSMG Plc for a consideration of $106
million (Rs.448 crore). Virgin Radio is a music station, whichoperates under a
FM licence in London and anAM licence in the rest of the UK.

Reliance Anil Dhirubhai Ambani Group (R-ADAG)has launched a 24-

hour FM radio station inSingapore Big Bollywood 96.3 FM that willbroadcast
Indian film music, news and otherentertainment trivia in a collaborative
venture withlocal station Media Corp. Radio.

Compact Disc India Ltd (CDIL) has teamed upwith Pele, the legendary
soccer player, to developa 3D animation feature film on the game ofsoccer.

Toonz Animation India, Gang of 7 Animationand Hyde Park Entertainment

(Ashok Amritraj’scompany) to produce the 60-80 minute featureThe Life and
Adventures of Santa Claus. Targetedat families worldwide.

Launch of new General Entertainment Channels- Four new GECs were

launched between theend of 2007 and mid-2009. These were 9X (INXGroup),
NDTV Imagine (NDTV Group), Colors(Viacom 18 Group) and Real (Miditech
Turner).

New genres of programming on televisionchannels - Long-running popular

shows on Star Plus, such as “Kyunki”, “Kasautii” and“Kahani”were phased
out. Newer shows likeBalika Vadhu, Bidayii, Big Boss 2 and Khatron Ke
Khiladi took centre stage.

Growth in niche channels - 2008 was the year oflaunching specialised

channels catering to theneeds of up-scale and urban audiences. Thesenew
niche offerings included Showbiz, NDTVLumiere, World Movies, E24, Firangi
and Topper
TV among others.

Newspaper publishers such as Dainik Bhaskar,Mint, Jagran Prakashan,

Lokmat and Pudhariamong others launched new editions during theyear.

Magazine publishing segment saw the maximum activity with launch of

several new titles suchas ‘Forbes India’,’ Open’ , ‘Career’s 360’ ,‘Technology
Review’,’ Harper’s Bazaar’ , ‘FNL’ ,‘What Women Want’ among many others.
The new season of IPL, IPL2 was termed moresuccessful than IPL1 despite
it being heldoutside India, with more afternoon matchesalongside elections –
highlighting the success ofthe concept. Numbers of viewers in IPL2
wereestimated at ~90million, significantly higher thanIPL1 of ~ 85 million.

Digitalisation initiatives in 2008

Television – The CAS (Conditional Access System) rollout is underway

in the Metros ofMumbai, Delhi, Kolkata and Chennai. In thequarter ending
31st December 2008, the STB(Set Top Box) number is 767616 in the
CASnotified areas of Delhi, Mumbai, Kolkata andChennai.

Print goes online – Almost all the Indiannewspaper and magazine groups are
now online.However, although there is a huge potential forgrowth online,
print remains the largest sourceof revenue generation for newspaper
publishers,and will continue to be so for some timeDigital music- UTV New
Media Ltd., the digitalarm of UTV announced plans to launch an exclusive
music video channel on mobile TV.

Rediff.com has gone live with its third-partyapplications on its video and
music platformRediff iShare. Jalebee Cartel streamed an entirelive
performance as part of a promotional of theiralbum Onepointnothing etc.

Stand- off between multiplex operators and film producers

One of the most recent development in the filmindustry was the first-ever
stand-off betweenmultiplex operators and film producers overrevenue share.
No new Hindi film was released inthe multiplexes since April 4, 2009 till June
2009,causing film exhibitors and distributors a reportedloss of Rs 350 crores.
As a result, almost half of the900-multiplex screens across the country had
to beclosed by the multiplex chains in order to controltheir costs. The dispute
was escalated to the PrimeMinister’s level and was finally amicably solved
after8 weeks, with a new revenue share in place. Thismoves although
adverse for the film industry worked tothe benefit of broadcasters,
homevideo industry andboosted IPL viewership.

M&A/ Investments in the E&M Industry in 2008

Television – Some of the important deals includeWalt Disney’s acquisition of

60% of UTV and StarGroup picking up 45% in Jupiter Ventures.
Film – The Reliance-Spielberg $ 825 mn. film co-production deal was one of
the biggest deals inthis space . Among other big deals, PVR Picturessigned
equity partnership agreements with ICICIVenture Funds Management
Company and JPMorgan Global Special Opportunities Group.

Radio - BCCL acquired Virgin Radio UK for Rs.448 crore. Virgin Enterprises
however retained thebrand for its own global radio strategy.

Print - Bennett Coleman acquired a 12% stake inSandesh, a Gujarati daily

which was one of thebigger deals in 2008.

Music – Some of the deals include, R-ADAG’sBig Music acquiring Kolkata-

based Prime Musicand JMD Telefilms Industries acquiring twoRajasthan
based music companies.

Internet – Investments were made in companiessuch as Burrp (Infomedia

18), Ozone Media (IDGVentures India), Examville.com (Rediff.com),Komli
(Nexus India, Draper Fisher Jurvetson andHelion Ventures) and Webnotions
(Times Internet)among others.

OOH – Among the bigger deals, Warburg Pincuspicked up around 15% in

Laqshya Media.

Deals in the Entertainment and Media Sector in 2008

In view of the global slowdown the numbers of deals have reduced in 2008.
As in earlier years, televisionremained the interest of investment for the
foreignplayers.
In 2008, one of the major deals was between AnilAmbani’s Reliance ADA
Group and DreamWorksStudios promoted by Hollywood director
StevenSpielberg . As part of the deal, the two players willhave a 50 per cent
stake in DreamWorks and willmake movies with an initial funding of $825
million(around Rs 4,125 crore.)
Other Foreign Direct Investment (FDI) inflow in the Entertainment
and Media Industry in 2008.
2008 saw the continued FDI inflow in theEntertainment and Media segment
in India. Someof the major FDI inflows in Entertainment and Mediain 2008
were into Nimbus Communication, ZeeTelefilms, Balaji Telefilms Ltd and
Times BroadbandServices, mainly routed via Mauritius. FilmedEntertainment,
Broadcasting and Print generated themost interest from Foreign investors.

Foreign Investment in 2008

Indian Foreign Acquisition Amount in Rs. % age stake

Company Investor Price
Name Million
$ million

UTV Software Walt Disney

Company
Communications 201.25 9,056.2 27.84%

Limited

NDTV NBC Universal 150.0 6,750.0 26.0%

UTV Global Walt Disney 29.75 1,338.7 15.0%

Broadcasting Ltd Company

Private Equity Deals in 2008

Investor Investee Sub-sector % age stake Investment

Value

USD million

Independent News

Service Private

Shyam Equities Pvt Limited Television 20.00% 25

Ltd
(INS), the holding

company of India

TV

Goldman Sachs
Group and

Lehman Brothers

In(bought from
Times innovative
Entertainment
Network Media OOH 8.28% 25.0

India Ltd.)

Indivision Capital Advertising and

Percept Ltd Film 10.00% 16.25

JPMorgan with Advertising and

Passport Capital Percept Ltd Film N.A. 15.00

ICICI Venture
Funds
PVR Pictures Films 20.00% 15.00
Management

Company

JP Morgan Global
Special

Opportunities
PVR Pictures Films 20.00% 15.00
Group

Warburg Pincus Laqshya Media Pvt

LLC
Ltd. OOH 15.00% 69.00

NEA Indo US Seventymm

Ventures
Services Pvt Ltd Films N.A. 12.50

FDI Inflows in the E&M Sector in 2008

Foreign Country In Rs Million In USD

Collaborator
Indian Company Name Million

Mauritius
Investment &
Nimbus Communication Mauritius 1,971.92 49.63
Ltd.
 Technology Ltd.

Various Investors 1,524.87 38.1

Zee Telefilms Ltd Asian Mauritius

Broadcasting

Balaji Telefilms Ltd FZ-LLC U.A.E 1,232.48 29.26

Nimbus Communication
Ltd
CSIBD Mauritius 910.82 22.92

D E Shaw
Composite
Amar Ujala Publication Mauritius 585 14.62
Ltd Investment

Turner Asia
Pacific Venture
Time Broadband Service U.A.E 572.3 14.18
Pvt. Ltd Ltd.

Indivision India
Partners

Crossland
Midi Tech Pvt. Ltd Investment Ltd NA 540.01 13.38

Various Investors

Worldwide Mauritius 480 11.39

Channel
Future Media (I) Ltd
Investments Ltd

Crest Communication NEA-INDOUS Mauritius 337.5 8.01

Ltd.

Zee Telefilms Ltd Venture

Capital Mauritius 254.06 6.35

Worldwide Media Ltd Clear Channel

Pacific PTE
UK 245 5.04
Ltd

Microqual Techno Pvt. South Asia

Ltd Multimedia
Mauritius 204.2 5.19
Technologies

Clear Channel Jafco Asia

Communication Technology
Singapore 192.5 4.49
India Pvt Ltd

South Asia FM Ltd Investment I Mauritius 149.24 3.49

Microqual Techno Pvt. RAK Ceramics Mauritius 122.52 3.11

Ltd

RAK Ceramics India Pvt Dubai Venture

Ltd. Ltd
U.A.E 117.6 2.75

Proposal for increasing FDI limits in the Indian E&M

Industry
Segment Existing limit Proposed limit

Teleport (Hub) 49% (FDI + FII) 74% (FDI + FII)

49% (FDI + FII) [within 49%

FDI
DTH 74% (FDI + FII)
component not to exceed
20%]

HITS No policy as on date 74% (FDI + FII)

Cable Network 49% (FDI + FII) 49% (FDI + FII)

FM Radio 20% (FDI + FII) 24% (FDI + FII)

TV Channels (News &

Current Affairs
Channels) 26% (FDI + FII) 26% (FDI + FII)
1.2 Indian entertainment sector @
2015

The Indian Media and Entertainment sector is poised to enter a golden era.
One of the largest markets in the world, the industry is seeing strong growth
and has the potential to garner US$ 200 billion by 2015. The eighth
PricewaterhouseCoopers Global Entertainment and Media Outlook have
ranked India as the fastest growing market in the world for spends in
entertainment and media in the next five years. India will be one of the key
drivers in pushing the global entertainment and media industry to US$ 2
trillion by 2011. With a compound annual growth rate (CAGR) of 18.5 per
cent, the Indian entertainment and media industry is the fastest growing in
the Asia-Pacific, says the study.
Another report by PricewaterhouseCoopers shows that revenues across the
Indian media and entertainment segment grew by 20 per cent in 2006 to
US$ 9.71 billion and the country’s overall advertising spending grew by 23
per cent to US$ 3.62 billion.
International media giants are all vying for a stake in the segment. In the
last three years, US$ 88 million of foreign direct investment (FDI) has flowed
into the sector and in 2006, 13 FDI proposals were approved by the
Government.
With rapid advancements in technology, it’s believed that convergence will
play a very crucial role in the development of the Indian entertainment and
media industry where consumers will increasingly be calling the shots in a
converged media world. Broadband access and Internet Protocol (IP) will be
the technology enablers that will evolve this new breed of consumers.
The sector’s growth is being propelled by a number of factors such as the
corporatization of the film industry, a booming television sector, a fast
growing radio sector, a growing market for print products and other
technological changes. India is ready to embrace and grow along with the
changes the industry is undergoing globally.
In the converged world of tomorrow, content and access will no longer be in
short supply. Opportunities for consumers to access and manipulate content
and services will not only be abundant, but overflowing. However, consumer
time and attention will be limited. Thus, established approaches of pushing
exclusive content through non-linear-channels or networks to mass or
segmented audiences will no longer guarantee competitive advantage.
Thus, following are the challenges and opportunities that convergence will
bring to the industry:
• Consumer needs are expanding beyond the mass media and segmented
media to ‘Lifestyle Media’, a new approach that will help consumers
maximise their limited time and attention to create a rich, personalised and
social media environment. This approach presents many opportunities for
the industry to create new avenues to generate revenue.
• Knowledge of ‘consumer activity’ rather than exclusive ownership of
content or distribution assets will become the basis for competition.
Businesses that capture ‘consumer activity’ data and use it to inform
business and advertising models will be positioned to succeed.
• Media marketplace will provide a structure to capitalise on the Lifestyle
Media opportunity. Pull-oriented media consumption models, such as a
media marketplace, in which the consumer is furnished with robust search,
research, customisation, configuration and scheduling tools will capture the
opportunity associated with Lifestyle Media better than minor modifications
to existing business practices. Participants in media market place must
collaborate on this transformation.
• Early movers in establishing media marketplaces will have a significant
advantage over late entrants because of network effects, whereby the value
of the market place increases as the number of participants increase.
• Media market places will be economically viable only if operational
efficiencies can be realised through consumer activity measurement
capabilities and supporting systems.
• Significant advancements in audience measurement technology will be
needed to capture, analyse and standardise consumer activity data across
platforms.
• Though convergence will bring uncertainty, the ability to gather rich data
on consumer activity will also lower the risks and costs associated with
testing new revenue or advertising models.

• Both content providers and advertisers will need to be more accountable

for their performance because it will now be measurable.
• While technology will make it easier to collect detailed consumer
information, privacy concerns will rise amongst consumers, regulators and
privacy advocates.
••Cinema
The Indian film industry is one of the largest in the world -- producing 1041
films, annually. It is currently worth about US$ 1.8 billion and is expected to
grow at a CAGR of 16 per cent for the next 5 years to reach US$ 3.8 billion in
2011.
Bollywood, the Hindi film industry, which commands a 40 per cent share of
the Indian film market, is gaining a global audience. Regional films too are
making an impact. A number of factors are bringing about the change. For
one, new technologies like DVDs and the Internet are ensuring that
viewership is not confined to specific areas. The country has over five million
home video and DVD subscribers and current penetration levels are
expected to grow 31 per cent, according to the 2006 PwC report.
A spurt in the number of multiplexes in the country has changed the entire
complexion of Indian films -- their budgets, the way they are made and the
audiences they are made for.
The corporatization of the film industry has also enabled it to discover new
revenue streams. Showcasing international films dubbed in local Indian
languages has helped the dubbing industry grow at 25-30 per cent over the
last five years and international films are now reaching out to wider
audiences. This is having a ripple effect -- driving growth in film
merchandising and music sales. Merchandising for "Spiderman 2," which was
dubbed in Hindi, collected over US$ 2 million in India in its first weekend, the
highest ever for a Hollywood film!
Animation and Special Effects (VFX) businesses are also waiting to grow in
India. According to the National Association of Software and Services
Companies (NASSCOM), the animation industry is growing at 25 per cent
CAGR and is expected to reach US$ 869 million by 2010 -- thanks largely to
India's creative skills, cost advantage, a growing domestic market and the
growing maturity of animation studios. A first indication of times to come is
Sony Pictures Imageworks' US$ 5 million investment in Frame flow India, the
Chennai-based animation and special effects company for back office work.
••Television
The television industry in India is currently at its prime. It has over 350
channels and is today the third largest television market in the world. It
reaches over 119 million television households, which is almost the same
size as the entire US market, but covers only about 60 per cent of the total
households in the country. Of these, about 50 million receive cable television
services. The low penetration promises a huge untapped potential for growth
in this industry.
According to PwC, the television market in India was worth US$ 3.4 billion in
revenues in 2005. With the increasing number of channels being launched,
the industry is expected to grow at a CAGR of 22 per cent to hit US$ 11.5
billion by 2011. Advertisement spending on Indian television has been
growing at 21 per cent a year and stood at US$ 1.6 billion in 2005. In fact,
television’s growth and influence in India is so large that it actually rivals the
country’s film industry. But the two segments now work together to reach
India’s hinterland in niche ways.
••Music
The Indian music industry was, until recently, completely dominated by film
music, which was an integral part of Indian films. Music rights brought in as
much as 15 per cent of a film’s earnings. That has changed now and music
videos and non-film albums are driving growth. The music sector is
estimated to be worth about US$ 193 million and is pegged to grow at 4 per
cent over the next five years.
India has now emerged as one of the world’s largest markets for mobile
music. India sells almost as much digital music as it does CDs and cassettes.
According to the Cellular Operators’ Association of India, the size of the
mobile music industry in 2006 was about US$ 115 million (including ring
tones) and is going to be around US$ 170 million by the end of 2007.
Growing at a scorching pace of 50 per cent, this segment is expected to
exceed the sales of physical music -- compact discs and cassettes. India has
over 140 million mobile phone consumers and over 6 million new
subscriptions are added each month. This means that one in five Indians will
own a phone by the end of 2007. Clearly, mobile entertainment promises to
be a new avenue for growth.
••Radio
Radio is the main source of news and entertainment for most of India --
reaching out to 99 per cent of the population. While All India Radio, the
public service broadcaster, hogs the top tier in coverage, private FM has
become the second tier and recently, the Government has opened up the
third tier -- community radio, thus providing the sector a further impetus to
grow.
The sector has been seeing strong growth and 2007 is expected to be the
year of the radio. According to industry estimates, India will have 600
stations (250 All India Radio and 350 private) in 100-odd cities, this year.
According to PwC, with this expansion, the industry is expected to grow from
US$ 111 Million to US$ 377 million by 2011 growing at 28 per cent annually.
Foreign investments to the tune of US$ 111 million are expected to flow in
the next 12 to 18 months.
••Mobile Gaming
Mobile gaming is set to register a strong growth in India even as telecom
companies are betting big on value added services to increase revenues.
According to information and technology research and advisory firm Gartner,
India and China are expected to bolster growth in the mobile gaming sector.
In the Asia-Pacific region, revenues from this segment are forecasted to
surpass US$ 1.8 billion in 2007 to reach US$ 4.6 billion in 2011.
Government Initiatives
The Union Cabinet has cleared the community radio policy allowing non-
profit organisations with a three-year track record to set up and run stations.
Marking the first time when a state government has entered the
entertainment industry, the Kerala Venture Capital Fund has acquired 40 per
cent equity in the production house Symphony Entertainment Private Ltd.
The Government allows 20 per cent FDI in FM radio and has recommended
shifting to a revenue sharing regime from the current license fee structure.
The Government changed its media policy in 2002 and relaxed foreign
ownership restrictions in the newspaper category. Today, 26 per cent foreign
equity holding in news-related print media is allowed, though editorial
management must remain Indian.

While approving the uplinking guidelines, the Union Cabinet has relaxed the
26 per cent FDI cap in news channels and brought it on par with FDI norms in
the print media by allowing investments by FIIs, NRIs and overseas corporate
bodies (OCBs) within the 26 per cent FDI ceiling.
The road ahead
Subsequent to the policies being put in place, the media industry is seeing a
slew of IPOs. Eighteen media companies will float public issues drawing
about US$ 678.7 million in 2007 marking a six-fold increase over the
previous year. Global Broadcast News (CNN-IBN) and Cinemax India have
gone public. Others in the pipeline are Sony SET, DQ Entertainment, Indian
Express Newspapers, Brahma Interactive, Broadcast Initiatives, Raj
Television Network, SRS Entertainment and 12 others which are awaiting
SEBI approval.

• UK's Financial Times has acquired a stake in the Business Standard

newspaper.

• Dow Jones owns a 26 per cent stake in The Wall Street Journal venture in
India.

• Henderson Global has acquired a 20 per cent stake in Hindustan Times.

• Software services firm Goldstone Technologies Ltd has formed an alliance

with US-based Legend Films Inc to jointly market colourization services
worldwide.

• Yash Raj Films plans to tie up with media and entertainment major --The
Walt Disney Company. The joint initiative will further strengthen Walt
Disney’s presence in the Indian media industry. It already holds 14.9 per
cent stake in the Ronnie Screwvala-promoted UTV Software
Communications and had also bought UTV’s Hindi kids channel, Hungama
in 2006.

• Foreign funds (Temasek Holdings, New Silk Route and New Vernon Private
Equity Fund) are picking up 45.31 per cent of equity in INX Media.

• The liberalisation of the media sector has played a key role in

encouraging investments in this sector. Higher investments will open up
new opportunities and will propel growth in the sector.
The Indian entertainment and media industry today has everything going for
it - be it regulations that allow foreign investment, the impetus from the
economy, the digital lifestyle and spending habits of the consumers and the
opportunities thrown open by the advancements in technology. All it has to
do is to cash in on the growth potential and the opportunities. The
government, on its part, needs to play a more active role in sorting out
policy-related impediments to growth. The industry needs to fight all
roadblocks- such as piracy- in a concerted manner, while churning out high-
quality, world class end products. The entertainment and media industry has
all that it takes to be a star performer of the Indian economy.

CH. 11

INDIAN INFORMATION
TECHNOLOGY
SECTOR

11.1 Indian IT performance

11.2 Indian IT facts and Figures

11.3 Appraisal

11.4 Indian IT @ 2015

Information technology essentially refers to the digital processing, storage

andcommunication of information of all kinds. Therefore, IT can potentially
be used in every sector of the economy. The true impact of IT on growth and
productivity continues to bea matter of debate, even in the United States,
which has been the leader and largestadopter of IT. However, there is no
doubt that the IT sector has been a dynamic one inmany developed
countries, and India has stood out as a developing country where IT, inthe
guise of software exports, has grown dramatically, despite the country’s
relatively lowlevel of income and development. An example of IT’sbroader
impact comes from thecase of so-called IT-enabled services, a broad
category covering many different kinds ofdata processing and voice
interactions that use some IT infrastructure as inputs, but donot necessarily
involve the production of IT outputs.

The sector can be classified into 4 broad categories –

IT Services, Engineering Services, ITES-BPO Services, E Business

IT Services can further be categorized into Information Services (IS)

outsourcing, packaged software support and installation, systems
integration, processing services, hardware support and installation and IT
training and education.

Engineering Services include Industrial Design, Mechanical Design,

Electronic System Design (including Chip/Board and Embedded Software
Design), Design Validation Testing, Industrialization and Prototyping.

IT Enabled Services are services that use telecom networks or the

Internet. For example, Remote Maintenance, Back Office Operations, Data
Processing, Call Centers, Business Process Outsourcing, etc.

E Business (electronic business) is carrying out business on the Internet; it

includes buying and selling, serving customers and collaborating with
business partners.

11.1 Indian IT performance

Indian IT industry is one of the world’s successful informationtechnology

industries. Its growth and development has caught theattention of the world
so much so that India is now beingidentified as the major powerhouse for
incremental developmentof computer software. The reason for this attention
is not theactual size of the industry but its rapid growth rate over thenineties
and subsequent decade.

The Indian IT industry can be mainly categorized into followingsectors –

IT services, IT enabled services and BPO, Research &Development, Software
Product and Hardware.

It has grown from US $ 150 million in 1991-92 to US $ 64 billion inyear 2008.

The industry’s contribution to India’s GDP has grownsignificantly from 1.2%
in 1999-2000 to cross 5.5% in FY08. Thesector has been growing at an
annual rate of 28% per annum.

IT Exports will account for 35% of the total exports from India.

As far as job creation out of this growth is concerned the sectorgenerated 2

million direct jobs and around 7-8 million indirectjobs.

The size of the Indian IT industry, according to NASSCOM(National

association of software and service companies), is US$64 billion as of year
2008. It has been growing with an annual rateof 28%. The Indian IT industry
can be broadly divided into twomarkets: domestic market and exports
market. The exportsmarket constitutes the largest segment accounting for
62-66% ofthe total revenue generated by the Indian IT industry.

Within the export segment, geographical diversification andmaturity in

services and operating efficiencies helped the ITservices exports to jump 28
per cent to $23.1 billion, while theBPO exports were up 30 per cent to $10.9
billion. Engineeringservices and product exports clocked revenue of $6.4
billion, anincrease of almost 29 per cent over FY07. The domestic IT
marketaccounted for 34- 38% of revenue.

The Indian hardware industry is at present estimated to be in theproportion

of 30% domestic, 1.25% exports and the remainingbeing imports. The
domestic market itself offers tremendouspotential for hardware companies,
thus having very fewcompanies venturing into hardware exports.
Market share of IT majors are as follows –
Revenue earned by Software and hardware industry since 2003- 04 to 2008-09
Direct impact of IT industry – On Indian economy.

The current and evolving role of IT/ITES industry in India’seconomy is well

established. The sector is proving to be the majorgrowth pole within the
services sector, which in turn drivesseveral economic indicators of growth in
the country.
A few key indicators of direct contribution are:

• Growing share of the country’s GDP:

The sector’s contribution to the country’s GDP has been steadilyincreasing
from a share of 1.2% in FY98 to 5.5% in FY08.

• Boosting the foreign exchange reserve of the country :

Export earnings in FY08 stood at approximately USD 40.0 billionwith a
growth of 36%.

• Employment generation:
Direct employment in the sector is expected to be 2.0 million byend of FY08,
growing at a CAGR of 26% in the last decade,making it the largest employer
in the organized private sector ofthe country.

Indirect impact of IT industry – to Indian economy

· Additional employment generation:

The indirectemployment generated, at the rate of 4 additional jobscreated in
the economy for every 1 job created in the sector,is even more socially
relevant as nearly 75% of theworkforce employed in those additional jobs
are SSC/HSC orless educated.

· Driving growth of other sectors of the economy:

Apart from contributing to the growing income of its directstakeholders
(promoters, shareholders and employees), theIT/ITES industry has had a
multiplier effect on other sectors ofthe economy with an output multiplier of
almost 2 through itsnon-wage operating expenses, capital expenditure
andconsumption spending by professionals. Study show that USD15.85
billion spent by the IT/ITES industry in the domesticeconomy in FY06
generates an additional output of USD 15.5billion.

· Encouraging balanced regional development:

By gradually spreading their business operations to smaller TierII/III cities,
the IT sector (besides generating revenue andemployment) is also assisting
in improving the supply of talentpool and development of physical and social
infrastructure,either directly by themselves or by spurring the Government
toaction.
· Fuelling the growth of PE/VC funding:
The worldwidedot com boom and growth in the IT sector kick-started
VCactivity in India which led to the creation of first generation ofIndia centric
VC funds. Other sectors, such as healthcare,manufacturing and financial
services have also benefitted fromthis phenomenon as these sectors are now
also being able toaccess this source of funding. While IT/ITES continues to be
thefavourite sector with the largest share (28%) of PE/VC funding,other
sectors now account for 72% share as compared to 34%in 2000.

· Spurring first generation entrepreneurship :

Corporate India consisted of either large family ownedbusinesses or
multinational companies till the advent of theIT/ITES industry, and it was rare
to see a first generationentrepreneur. The shift of focus from physical capital
tointellectual capital and the advent of the PE/VC fundingenabled a large
number of first generation entrepreneurs withno wealth to try their hand at
starting new enterprises. Thedemonstrated success of these entrepreneurs
created anaspiration among the middle class and spurred them to
exploittheir potential with confidence.

· Improving the product/service quality level:

The factthat IT/ITES companies cater to and compete with globalplayers has
led to their adopting the highest quality standards.This high quality of
services and products has been the driverand sustainer of growth which has
helped move India out of the“mediocrity”, low quality image and has in fact
raised the barfor other industries as well. Indian exports had
traditionallybeen restricted to low end, low-technology oriented productslike
gems and jewelleries and garments/apparels. It is with theadvent of IT/ITES
industry that the world began to recognizethat Indian products and services
could also compete and winagainst global competitors on quality
parameters. India is nowalso emerging as a research and development
centre for someof the large IT/ITES companies in the world, once
againdemonstrating that India now stands for quality.

· 30% of companies worldwide who have reached Level 5 ofCapability

Maturity Model Integration (CMMI) are Indian IT/ITESfirms and nearly 75% of
Fortune 500 and 50% of Global 2000corporations source their technology
related services fromIndia with an increasing number of MNCs outlining
theirinvestment plans for setting up R&D operationsin India.

· Front runner in practicing good corporategovernance:

The industry has been a front runner in practicing goodcorporate governance
and their commitment to infuse it intheir business activities have led to a
creating a positivepressure within the industry, as well as in other industries,
withmore and more companies adopting global standards incorporate
governance practices.

The major IT/ITES companies in India have in recent timesreceived national

and international recognition for theircorporate governance initiatives.

· Boosting the image of India in the global market:

The India IT/ITES industry has contributed to what brand ‘India’stands for in
today’s global market. While India Inc. has beenwitnessing an acquisition
spree of overseas companies inrecent years, the IT/ITES sector has led this
phenomenon withthe highest share (23%) of outbound M&A deals in 2006.
Listingof Indian IT/ITES companies in global stock exchanges, whichrequires
adherence to stringent global accounting norms, hashelped build a strong
brand of the companies and the sectoroutside India.

· Made in India software products have found widespread useacross the

world while several Indian IT/ITES firms have beenpartnering with high profile
global brands and events.

Policies for IT Industry

IT Policy in India can be divided into two distinct periods.

 From the mid-1960s through the early 1990s, policieswere aimed at

achieving technological self-sufficiencythrough state production and
regulation of private
production.

 The second period, from 1990s, saw a shift in focus toextensive

liberalization and promotion of IT industry inIndia.

Period from mid – 1960 to early 1990 furtherdivided into –

· 1960s and 1970s: Indigenization and self-sufficiency

 India was motivated to develop self-sufficiency in computersand
electronicslargely by national security concerns related toborder conflicts
with China andPakistan. The governmentcreated an Electronics Committee
to devise astrategy forachieving self-sufficiency in electronics. The main
vehiclechosen to gain access to advanced computer technology
wasnegotiation with multinationals, primarily IBM, which accountedfor 70%
of all computers installed in India from 1960 to 1972.

 In an attempt to satisfy the government’s interest indeveloping domestic

production, both IBM and the Britishowned ICL (International Computers
Limited) began to refurbishused computers in Indian plants and sell them to
Indiancustomers. IBM felt that India should evolve technologicallyfrom one
level of sophistication to the next.

 A 1966 report by the Electronics Committee objected tostep-by-step

technological evolution and recommended thatIndia should leap ahead to
the latest technologies. Thegovernment, however, failed to impose its will on
IBM due tothe company’s strong position with users and export earnings.The
government’s early attempts to regulate the IT sectorworsened the degree
of technological backwardness.

 In 1966, the responsibility for implementing the ElectronicsCommittee

report strategies was given to the Department ofDefense Supplies, with
monitoring by a new agency, theElectric Committee of India.

 In 1971, the government announced the formation of theDepartment of

Electronics (DoE) and a new ElectronicsCommission, responsible for policy
formulation and overseeingthe day to day implementation of policies.
 In 1975, the DoE was given power over the licensing ofcomputer imports.
The first step it took was the establishmentof Santa Cruz Electronics Export
Processing Zone (SEEPZ) nearBombay, followed by the creation of the state-
owned ECIL(Electronics Corporation of India Ltd.) as a national champion
inminicomputer production.

 In 1975, in a landmark development, the US computermaker, Burroughs,

entered into a joint venture with TataConsultancy Services to export
software and printers fromSEEPZ. In the same year, the government
established theComputer Maintenance Corporation (CMC) with a
legalmonopoly on the maintenance of all foreign computer systemsin the
country, reducing the advantage that IBM had withcomputer users.

 In 1978, due to increasing political pressure, IBM quit India.This was a

seminal event, illustrating the extent ofgovernment’s ability to exert its
power over multinationalcorporations and to direct the IT development in
India. Oneeffect of IBM’s departure was to open the market to a numberof
competitors, including ECIL, ICL and Tata Burroughs.
· 1980s: Partial liberalization and industry promotion

 India’s IT policies in the 1980s were aimed at modernizing anindustry

estimated to be about 15 years behind the currentfrontiers of research and
production. In a departure from theimport substitution approach of the past,
exports software andperipherals were now promoted and the import of
mainframesand supercomputers was encouraged under certain conditions.

 The new computer policy of 1984 – The new computer policyof 1984
announced by DoE (Government of India Departmentof Electronics, 1984)
was aimed at promoting themanufacturing of computers, based on the latest
technology, atprices comparable to international levels and
withprogressively increased indigenization. An important policychange was
the liberalization of imports to foster domestichardware. Duty levels were
lowered on components needed bycomputer manufacturers, and companies
producing CPUs,peripherals and subsystems were permitted liberal imports
of‘‘know-how’’ with a low excise duty.

 1986 Software Policy - Following up on the 1984 hardwarepolicy, the DoE

announced the 1986 Policy on ComputerSoftware Export, Software
Development and Training(Government of India Department of Electronics,
1986). Themain objectives of the policy were to promote the
integrateddevelopment of software in the country for domestic as well
asexport markets, to promote the use of computers as tools fordecision
making, and to promote appropriate applications thatwould catalyze
economic development software imports.

 Though India’s IT Policies have focused heavily on regulationof foreign as

well as domestic producers and on protection ofthe domestic market, the
1984 and 1986 policies consistedmostly of loosening of the existing
regulations. A number ofprograms, initiatives and institutions have been
established toimplement policy and promote various aspects of IT.

 In 1988, the National Informatics Center set up NICNET, asatellite-based

computer communication network connecting439 cities and towns to support
computerization ofgovernments at the central, state and district levels.
AComputer Aided Design project was set up with links to fivecenters, and a
Computer Aided Management Infrastructure hasbeen established with feeder
centers in four cities. A number ofprojects have been undertaken to promote
IT use in public andprivate sectors and to mobilize a favorable bias towards
its use.

 The government’s attempts to spur the development of anindigenous IT

industry have been quite successful. After the1984 Computer Policy
announcement, production shot up by100% while prices declined by 50%. A
boom in minicomputersales began when HCL dropped its prices dramatically,
startinga price war that greatly increased the affordability of PCs.

“Period from 1991 – After Liberalization in ITindustry”

During this period, the IT policy was greatly affected by changesin industrial
policy.

“In 1990, a 100% income tax exemption was extended toprofits

from software exports, and the double taxation ofsoftware imports
was eliminated.”

That’s why this period was known as –

“The Shift in Paradigm”

 Information Technology Business in India from a small sectorto a large and

growing industry. This change in status is leadingto a major shift in
paradigm.

 Several software-related promotional measures was takenduring this

period, including reductions in telecommunicationcharges for satellite links,
duty-free imports oftelecommunication equipment into EPS, and excise
dutyexemptions.

From To

IT as a sector IT as an
Industry

Providing satisfactory services to existing Adding value to sustain the

growth increase in demand

Government controlling infrastructure Government facilitating

and infrastructure &technology

IT for specialists IT for masses

Fulfilling external demand Creating internal

demand

 At the end of 1992, the DoE was reorganized to emphasizeits promotional

rather than regulatory role. It amended andupdated interventions in areas
such as training and researchand development. The Copyright Act was also
amended,confirming that raids, fines and prison sentences could be
usedagainst software pirates. Import rules were also changed,
andliberalization gathered pace for software.

 The duty for software imports was reduced to 110% in 1992,85% in 1993,
split in 1994 to 20% for applications software and65% for system software,
and then reduced to 10% for bothcategories in 1995 (Government of India
Ministry of Commerceand Industry, 1995). In April 1993, duplication of
software inIndia was permitted for the first time.

 “Software Technology Parks of India (STPI)”-

Emerged under the state initiative. STPI was created as anautonomous
organization under the DoE to provide facilities,such as duty-free import of
capital goods, income taxholidays for 10 years and high-speed data
communicationlinks.

 The year 1996 was a landmark year in the history of IT, asInternet service
was started in India by – “Videsh SancharNigam Limited” a public sector
company with greatpromise. The policy makers recognized the potential of
the Netfor a quantum leap in the knowledge-based economy. Thesubsequent
ISP policies of the Department ofTelecommunications (DOT) were very
pragmatic with free
licensing to ISPs. Setting up gateways to the Internet andlaying fibers and
cables was freely permitted for the ISPs. Taxincentives were showered on the
industry, infrastructure statuswas given, and mergers and acquisitions were
facilitated.

 India was one of the few countries to enact the IT Act in theyear 2000 to
enable digital signatures. This initiative aims toprovide the legal
infrastructure for e-commerce in India.

 The digital revolution:-IT has the potential torevolutionize the

government and is vital for the waygovernment serves the people. It offers
endless opportunitiesto bring societal transformation centered on
education,healthcare, agriculture and governance leading to
higheremployment rates, higher industrial growth, higher nationalefficiency
and productivity, and the greater empowerment ofwomen. By the use of IT,
multiple technologies can beinterwoven to realize a knowledge-propelled
society.

 With the objective to help India emerge as an Informationtechnology

super power, a task force on IT was set up in May1998. This task force
submitted 3 reports:
• Information Technology Action Plan I (Software)

• Information Technology Action Plan II (Hardware)

• Information Technology Action Plan III (Long Term NationalIT Policy)

These reports are forming a solid base for the present policydevelopment to
build India‘s InfoTech industry and proliferateuse of IT in the country. The
industry and government are nowworking together to form suitable
strategies to not only capturethis market but also add value to it.

 With a resolution to make India a global IT super power,many revisions

and additions have been made to the existingpolicy and procedures. One of
the objectives for this revision isto, “Accelerate the drive for setting up a
world class InfoInfrastructure with an extensive spread of Fiber Optic
Networks,Satcom Networks and Wireless Networks for
seamlesslyinterconnecting the Local Informatics Infrastructure (LII),National
Informatics Infrastructure (NII), and the GlobalInformatics Infrastructure (GII)
to ensure a fast nationwideonset of the INTERNET, EXTRANETs and
INTRANETs."(IT ActionPlan Part I).

 Legal framework for IT

India is also realizing the need to redesign the laws of theindustrial age to
those of the information age.For this it is essential that the National advisory
committeeworks out

(a) Industry code of practice

(b) E-commerce code for personal information protection
(c) Parents advisory group for protecting children interests.

 Many state governments are also taking initiative indeveloping suitable

fiscal incentives, infrastructure facilities,coupled with adequate pool of skilled
manpower. The state ofAndhra Pradesh was one of the first to announce a
specialpolicy for IT Enabled Services industries.

The states of Karnataka, Tamil Nadu, Maharashtra, HimachalPradesh, Delhi,

Goa, Gujarat and Orissa have also announcedspecial and attractive
initiatives. Karnataka is developing“Grameen Data Processing Centers
“around the Silicon Valleyof Bangalore in places such as Mysore. Some
stategovernments are also developing strategies for wooing largecompanies
to set up IT Enabled Services units in their states.
 Major steps that have been taken towards a strongerinfrastructure and
reduced cost base, are –

1.PSTN connectivity
2. Income Tax Exemption
3. Global Parity in Telecom Infrastructure
4. Inter-connectivity of International Call Centers/IT EnabledServices
5. Reduction intariffs for International connectivity
6. Interconnectivity across multiple networks
7. 7x24 support of DoT links
8. Reduce Delays in Provisioning of International Bandwidth
9. Scarcity of International bandwidth on Fiber
10. Build Supply Base of best knowledge worker.
11. Grameen Data Processing Centers
12. Creating the Ideal regulatory environment
13. IT Policy to encourage women entrepreneurs andemployment.

Policy applicable to Electronics HardwareIndustry are brought out

below:

Customs-

· Peak rate of basic customs duty is 10%.

· India is a signatory to the Information TechnologyAgreement (ITA-1) of the

World Trade Organization.Therefore, the basic customs duty on all the
specified 217tariff lines is 0%.· All goods required in the manufacture of ITA-1
items havebeen exempted from customs duty subject to actual
usercondition.

· Customs duty on specified raw materials and inputs used formanufacture of

electronic components and optical fibres /cables is 0%.

· Customs duty on specified capital goods used formanufacture of electronic

goods is 0%.

· Customs duty on MP3/ MP4 / MPEG4 players is 5%.

· Set top boxes (STBs) and their major parts are exemptedfrom basic
customs duty.

Central Excise-
· The mean rate of excise duty (CENVAT) is 8%.

· Microprocessors, Hard Disc Drives, Floppy Disc Drives, CDROM Drives, DVD
Drives/DVD Writers, Flash Memory andCombo-Drives are exempted from
excise duty.

· Parts, components and accessories of mobile handsetsincluding cellular

phones are exempted from excise duty.

Central Sales Tax-

· Central Sales Tax (CST) has been reduced from 3% to 2%.

11.2 Indian IT facts and Figures

The Indian IT sector is growing rapidly and it has already made its presence
felt in all parts of the world. IT has a major role in strengthening the
economic and technical foundations of India. Indian professionals are setting
up examples of their proficiency in IT, in India as well as abroad.

The success of India’s software industry on the global stage hascaptured the
imagination of Indians in a way that only cricket andhockey successes could
in the past. Indians (or people of Indianorigin) have become leaders of, as
well as contributors to, theinformation technology (IT) revolution in the
United States,reinforcing the impression that India is world class in IT. At
thesame time, India remains a developing country, with levels ofhuman
development for the masses that put it in the same leagueas sub-Saharan
Africa. From this perspective, India’s IT successrepresents the emergence of
another elite enclave, withincreased inequality the result.

IT and Development

• The IT sector can be an important source of growth for Indiaif the country
has a comparative advantage in providing certainkinds of IT-related products
and services, if the global demand forthese products and services is likely to
grow rapidly.

• If the growth of the sector has positive spillover benefits tothe rest of the
domestic economy.
• The first two of these conditions seem to be well established,though they
merit some discussion of future possibilities,particularly with respect to the
reasons for and the dynamics ofIndia’s comparative advantage in this sector.

• One of the most interesting issues, which we wish toemphasize here, is the
third condition, of spillover benefits. This isthe area where the IT sector may
be special, and not just anotherexport enclave.

The Domestic Market

• The domestic market for IT products and services is notindependent of the

export market.

• The nature of information goods in general is that theyinvolve high fixed

costs of production and low marginal costs.While customization and service
provision mitigate this property,they do not negate it.

• Reputation and experience effects, on the other hand,enhance the

importance of economies of scale and scope. Henceit is important for Indian
software firms to competesimultaneously in domestic and export markets, in
order to takeadvantage of these economies. This is true even though
theproduct-service mix that is being sold in different markets is goingto be
somewhat different.

• Since Indian software firms can compete successfullyabroad, they should

also be able to succeed in their ownbackyard. In fact, they have advantages
in the domestic market,knowing their customers better, and being closer to
them.

• On the other hand, a poor domestic infrastructure,dependence on imported

hardware, late mover disadvantages,and lack of economies of scale and
learning by doing, can allreduce or eliminate any advantage that Indian
software firmsmight have over foreign competitors.

Two mitigating factors operate on potential disadvantages ofIndian firms.

• First, some of the problems are faced by all firms,irrespective of location:
for example, entering the market fordesktop operating systems in the face of
Microsoft’s dominance isdifficult, if not impossible, for any firm anywhere in
the world.

• Second, the boundary lines between domestic and foreigncan be blurred

when multinationals have Indian subsidiaries,particularly for IT or IT-enabled
services. In such cases, the effectson the local economy are not that
different from when theseservices are provided by Indian firms. Two
differences in the caseof multinationals, however, are in profit repatriation
and thecreation of another brain drain channel, if Indian employees
ofmultinationals can be assigned to other countries.

At the level of business software and software services, therefore,

• It seems that issues for the domestic market boil down tothe same
concerns as for export markets. These are availability ofthe key inputs,
namely various types of skilled IT personnel andmanagerial and marketing
skills.

• Location and ownership are not of direct importance, but areonly proxies
for whether the IT software and services provider hasthe right combination of
people, knowledge, experience andreputation to compete successfully.

Hardware may offer additional opportunities to Indian IT firms in the

domestic market.

• In developed countries, the establishment of the PC markettook place

before the Internet took off. In a good example ofcomplementarities,
however, the growth of the Internet hasincreased the demand for PCs and
other access devices.

• Internet access is probably the most attractive use for manypotential

consumers of IT in India but Internet penetration maynot go far enough with
hardware designed for developedcountries.

• While Internet use is beginning to grow rapidly, the numberof subscribers

remains minuscule, had completed at 3.8 million inDecember 2008.
• The main reasons for this backwardness have been thegovernment long-
standing monopoly, through VSNL, of thecountry’s Internet gateways, as well
as the general poor state andhigh cost of the telecoms infrastructure.

• The removal of the VSNL monopoly in 2002 marks a processthat began a

few years earlier, with NASSCOM lobbying resultingin private ISPs being
allowed to set up their own internationalgateways starting in 2000.

• The possibility of designing and building lower-cost accesshardware in

India may represent an opportunity for the domesticIT industry.

• While India has tried to develop a domestic hardwareindustry since the

1980s, it has not succeeded in establishing anindustry that is efficient and
globally competitive.

• We note once more that Dell is a profitable companybecause it serves

targeted markets efficiently, not because itmanufactures sophisticated
components. Instead, managementand infrastructure are the key inputs that
are required.

Software companies in India improved their quality tremendouslyin the last

few years. Today they are known for the quality of theirsoftware services.
India has one of the largest numbers of qualityCertified software companies
in the world. The increasing qualityperception will help India transcend the
cost barrier and increasemargins in offshore business. There are several
quality standards,which a software company can obtain.

There are about 170 software companies in India with qualitycertification. 15

Indian companies now have the SEI CMM Level 5certification (out of 23
worldwide). Apart from global recognitionand quality assurance, government
policy also tends to befavorable to companies holding quality certificate.
According toEXIM policy software companies with ISO 9000 series
orequivalent certification are eligible for grant of Special ImportLicenses
(SILs).
Indian IT success factors review

The recruitment of engineers and IT professionals in the industry is

growing atthe Compound Annual Rate of 14.5% approximately.

In the FY08, the direct employment in the IT-ITES sector was 3.3 million
people and the indirect employment was 3 million approximately.

Trends in Salary Hikes

Along with abundant growth opportunities, IT sector is one of the highest

paying sectors. The average increase in salary in IT sector across the levels
was around 16% and the average increase in the ITeS BPO sector across the
levels was in between 16%-18% Requisites for balanced salaries -

 End to poaching

 Review of compensation according to the skills

 Developing talent in-house

 Entry of talented freshers in the industry

IT: Success Factors

 Increasing number of skilled professionals in IT.

 The demographic factor. Approximately 60% of the population of India lies

in the age group of 15-65. More than half of the population of India is below
the age of 25. So in the future, the number of working people is going to be
more than the number of dependants.
The vast academic infrastructure of India. In the year 2006, Total
Enrollment in colleges was 9.3 million and India produced 441,000 Technical
graduates.

11.3 Appraisal

The Indian IT sector is growing rapidly and it has already made its presence
felt in all parts of the world. IT has a major role in strengthening the
economic and technical foundations of India. Indian professionals are setting
up examples of their proficiency in IT, in India as well as abroad.

Indicators of the strength of India’s software export capabilities include the

depthof its base, and the breadth of its global reach. There are over 2 500
Indian softwareexporters, and while only the top five (TCS, Infosys, Wipro,
Satyam and HCL) are— or are approaching the status of — global brands,
they together account for onlyabout 35 per cent of software exports. The
United States remains by far the largestmarket for India’s software exports,
its share of India’s software exports being 63 percent, with Europe coming in
at 26 per cent, and Japan and the rest of the worldaccounting for the
remaining 11 per cent (NASSCOM, 2002a).

IT-enabled services (ITES) have shown the strongest growth in the last two
years. hey include a variety of types of service: customer call centres;
accounting services and other business process outsourcing; and GIS and
engineering services. Thus the required degree of technical sophistication of
the workforce and the level of use of IT can vary widely. In fact, these three
categories make up most of India’s ITES exports, with the first two showing
high growth and representing over 60 per cent of the total of Rs.71 billion.
Core competencies of IT Industry of India
1. Availability of Large Human Resources

Every year, approximately 19 million students are enrolled in highschools

and 10 million students in pre-graduate degree coursesacross India.
Moreover, 2.1 million graduates and 0.3 millionpostgraduates pass out of
India's non-engineering colleges. While2.5-3 percent of them find jobs in
other fields or pursue furtherstudies abroad, the rest opt for employment in
the IT industry.

2. Indian Education System

The Indian education system places strong emphasis onmathematics and

science, resulting in a large number of scienceand engineering graduates.
Mastery over quantitative conceptscoupled with English proficiency has
resulted in a skill set that hasenabled the country to take advantage of the
currentinternational demand for IT.

3. Quality Manpower

Indian programmers are known for their strong technical skillsand their
eagerness to accommodate clients. In some cases,clients outsource work to
get access to more specializedengineering talent, particularly in the area of
telecommunications.

4. Government Policies

IT is a part of government's national agenda and all policies aredriven to

achieve maximum benefit to their industry. The reformshave reduced
licensing requirements and made foreigntechnology accessible. The reforms
have also removedrestrictions on investment and made the process of
investmenteasier The government is actively promoting FDI,
investmentsfrom NRIs (Non-Resident Indians) including Overseas
CorporateBodies (OCB's) owned by the NRIs. FDI can be brought in
throughthe automatic route, based on powers accorded to the ReserveBank
of India. Till 1994, DOT was the sole provider of basictelecom services in
India.The new National Telecom Policy has opened the field for
privateparticipants. The IT Bill passed in 2000 provides a legalframework for
the recognition of electronic contracts, preventionof computer crimes,
electronic filing of documents, etcAmendments have also been proposed in
the Indian Evidence Act,Indian Penal Code and the RBI Act. The IPR law in
India.
5. Cost of Labour and resources

The comparative cost advantage that India provides in terms ofavailability of

cheap labour and resources as compared to theEuropean or US market
makes companies to outsource portion oftheir business to these destination.

6. Technological advances & Dot-Com bust

Before the dot com boom, many multinational companiesinvested a large

sum of money in laying the underline cables forinter-continental
communication. But after the dot-com bustmany of these companies went
bankrupt leaving handing downthe large network of communication lines at
dirt cheap prices.This brought down the prices of inter-continental
communicationby a large factor. With availability of new
communicationtechnologies companies find it easier to manage their
businessspread across the globe. This also provided the companies tomove a
part of their non-core business to low cost locations likeIndia and gain the
cost advantage.

With the foregoing discussion that today’s environment is conducive to

providingdomestic users their much needed Information Technology edge.
With still there are some points which should been considered as area of
consideration.

Rivalry
As the industry is still in its growth stage, there is enough roomfor expansion
for existing players and new entrants. With theentry of many multinational
companies (MNC) are opening theiroperations in India to leverage the low
cost advantage providedby India, has increased the completion ratio (CR) of
the industry.Also as there is no huge capital investment required to start
anew company, the industry see a very large numbers of small andmedium-
size companies operating in a niche market. Presence ofsuch large number
of players has made the industry as one of themost competitive industry in
the market.

Threat of Substitutes
The Indian IT industry currently enjoys a very high growth ratedue to
following advantages:

High availability of skilled labour, Availability of large Englishspeaking

population, Low cost of labour, Good governmentpolicies (like tax holidays till
2009 for IT companies & setting upof special economic promotion zones) But
there are manycountries such as China, Philippines, and many east
Europeancountries that has started to provide similar opportunities
andIndian IT industries always need to innovate and move into newsectors to
keep out the competition.

Buyer Power
Buyers in IT industry can be briefly classified into followingcategories:
institutional buyers and individual or small consumers.Institutional buyers
comprises of big and small enterprises whichoutsource part of their work or
implement an IT solution forimproving their processes. As the IT industry has
large number ofsuppliers and few entry barriers for new entrants, the buyer
has amany option to choose from thus have a large bargainingleverage.
Similarly the individual consumer enjoys options ofplenty and has large
bargaining power.

Supplier Power
As there exist many competitive suppliers in the market thesupplier has very
little or no power in this industry.

Barriers to entry
An IT company can be started with very low initial cost, furtherthe
government policies also promotes the entrepreneurs byproviding benefits in
terms of tax holidays and building SoftwareTechnology Parks. Apart from this
there is large amount ofventure capitalist who are ready to fund new start-
ups enablingthem to scale up.

Manpower availability and cost

India has more than 1,900 institutions from which about 70,000software
professionals graduate each year. This is furthersupplemented by private
training centers which coach about 40-45,000 students each year. With
many students opting for furtherstudies/ other employment streams and
several overlap betweenstudents at institutions and training centers, it is
estimated thatIndia can supply about 75,000 software professionals each
year.Despite this huge addition to the manpower base each year,
thedemand-supply situation is expected to remain tight during thenext
3years. The excess of demand over supply will further pushsalary levels
upward. Salary levels for experienced and qualifiedprofessionals are broadly
at par with developed countries. Therising cost of manpower has already
eroded India's position as acheap source of labor to a large extent. This
increases the risk oflosing business to competing countries like China and
Russia whohave cheaper labor, if they would be able to match the
qualityIndian professional’s offer. Moreover, to maintain profitability onthe
increased cost, software companies will have to increaseproductivity i.e.
maximizes revenue/profits per employee. Till thetime Indian software
companies are able to move up the valuechain to products and transcend
the cost barrier, they carry a riskof Low profitability.

Financing
Software companies require finance for setting up developmentcenters,
establishing communication links and other infrastructureand for working
capital. Traditionally, lenders have been averse toproject finance due to lack
of tangible assets as security. Therecent spurt in share prices of all the listed
software companiesreflects the confidence amongst investors. This should
enablesoftware companies to raise adequate finance in the form ofequity.
But government has to set machinery in place to providesoftware companies
with venture capital, project and leasefinance etc.

Government policies
Government policies so far have been favorable to softwarecompanies. If tax
exemption on exports is withdrawn it couldaffect software companies
adversely.

Certain policy recommendations for govt.:

1. The Government should not continue to extend tax incentives to the large
companies whoare involved in run-of-the-mill Export Oriented businesses.
Such tax incentives if theyneed to be given should be limited to companies
that can show tangible value creation fortheir clients

2. A policy to reduce the inequities between companies serving the domestic

and export sectorsshould be promulgated. This could be by way of giving
some incentives to thosecompanies that are involved in various societal
measures like e-governance, companiesinvolved in cutting edge
technologies and other identified sectors
3. Certain tax incentives could be provided to companies that are involved in
developingsoftware products for use of the local markets.

4. A comprehensive and independent study that clearly demarcates between

the various subpartsof the IT industry and their contributions to the
economy, as well the impact of variouspolicies be carried out.

5. Another study that looks at the Information Technology costs of the user
industries andcompare them with their peers in other economies should be
done to understand how variouspolicy decisions intended to benefit the
Information Technology sector impacts usercosts.

Poor government demand

In most developed countries government/public sector enterprisesconstitute

the largest consumers of IT. In India public sectorcompanies are generally
reluctant to introduce IT in a major way,as this would antagonize the trade
unions. Public sectorcompanies' policies also tend to be pro-labor. The
software sectortherefore receives negligible encouragement from the
publicsector unlike most of the leading IT countries in the world.

Availability of infrastructure

The current boom in the software sector can be sustained throughan

increase in offshore programming activity. This places specialemphasis on
availability of quality infrastructure facilities in theform of hardware/software,
power and telecom links. India'spower and telecom infrastructure is poor
compared to manydeveloping countries. On top of that power and telecom
costs areamong the highest in the world. One of the prime reasons for
thishas been the state monopoly over these sectors. The attempts
atprivatizing these institutions have not improved the situation in
asignificant manner. For software companies, investing in
telecominfrastructure is an additional overhead, which few companies willbe
able to afford.

Quality

India has gradually moved into high quality but competitive costbracket.
Currently, many of the large companies hold qualitycertificates. However,
there are various quality levels andstandards. Moreover Indian companies
need to pay moreattention to Total Quality Management and not just
Productionprocess quality.

IPR

Indian companies have to move up the value chain to becometruly global

companies. This requires a strong policy on IPR andstrict enforcement
procedures. Uniformity of IPR policies with the'target countries' will also help
Indian companies to improveexport prospects.

11.4 Indian IT @ 2015

IT industry has donea lot for the country at large, for that it does everything.
It makesenormous contributions: it generates significant incomesfor many
Indians; it has encouraged attention to technicalexcellence as a general
requirement across the board; ithas established exacting standards of
economic success inthe country; it has encouraged many bright students to
gotechnical rather than merely contemplative; and it hasinspired Indian
industrialists to face the world economy asa potentially big participant, not a
tiny little bit-player. But it can do even more, indeed insome ways, much
more. This is partly because the reachof information is so wide and all-
inclusive, but alsobecause the prosperity and commanding stature of the
ITleaders and activists give them voice, power and ability tohelp the
direction of Indian economic and socialdevelopment.”Dr. AmartyaSen,

Beyond the agricultural and industrial revolutions of the past, a broad,

multidisciplinary technology revolution is changing the country. Information
technology is already revolutionizing our lives and will continue to be aided
by breakthroughs in materials and nanotechnology.Biotechnology will
revolutionize living organisms. Materials and nanotechnology are developing
new devices with unforeseen capabilities. These technologies are affecting
our lives. They are heavily intertwined, making the technology revolution
highly multidisciplinary and accelerating progress in each area.

Technology's promise is here today and will march forward. It will have
widespread effects across the globe. Yet, the effects of the technology
revolution will not be uniform, playing out differently on the global stage
depending on acceptance, investment, and a variety of other decisions.
There will be no turning back, however, since some societies will avail
themselves of the revolution, and globalization will thus change the
environment in which each society lives. The world is in for significant
change as these advances play out on the global stage.

It’s tuff to predict the exact position of this sector in upcoming 5-10 years
because of the rapid pace of change and the sometimes unexpected
directions it may take.

Indian IT industry is riding high with rise global spending on technology

products and related services. According to the International Data
Corporation (IDC) estimates, the global spending on technology related
services reached US$ 1.58 trillion (excluding R&D and engineering) in 2009
and is expected to grow at CAGR of 7.12% to reach US$ 2.1 trillion by 2015.
Notably, IT services segment (excluding BPO) contributed around 29.8% of
the total global spending on technology products and related services in
2009.

Technology adoption by companies across sectors and rapid evolution of

technology and applications will significantly drive growth in the IT sector.
Spending on IT is expected to increase across businesses with new sectors
driving the new wave of IT growth. The increase in spending on IT sector will
be backed by the growth in offshore spending, preference towards
multivendor contracts and success of the Global Delivery Model.

International competition for dominance or even capability in cutting-

edge nanotechnology may still remain strong, but current investments and
direction indicate that India can achieve top of chart seat in this field.
Progress in nanotechnology will depend heavily on R&D investments; India
that continues to invest in nanotechnology today may lead the field
in 2015.

The success of the Global Delivery Model adopted by the global IT

companies and the increase in offshore spending by the US and European
countries would help countries like India to reap rich benefits. Noticeably, the
global offshore IT services spending are expected to reach US$29.4 bn by
2015, which grew at a CAGR of 17.5% during 2006-2010. The trend
underscores opportunities the for Indian IT companies to take significant
strides towards global offshore IT services market.

According to NASSCOM, Indian IT-ITeS exports would reach US$ 60 bn by

2015. Some key factors supporting this optimism include the growing effect
of technology-led innovation, leading the growing demand for global
sourcing; favourable policy initiatives; and gradually evolving socio-political
attitudes towards the acceptance of IT in professional and social activities.
The global IT spending is likely to be sourced through the global delivery
model, which has already opened up various avenues of outsourced services
for India.

Rapid evolution of technology and Internet applications and invasive

computing are expected to drive a rapid, quantum growth in technology
adoption by businesses and individuals. The proliferation of client devices
and end-user or end-use devices at the network end will result in the
addition of billions of devices to the network age, which in turn will drive the
need for more enterprise systems, to manage and correctly use them. The
‘Internet generation’ entering the working age population is expected to
further accelerate technology usage and adoption.

According to the IDC, the Indian IT-ITeS industry is expected to grow at a

CAGR of 15.6% to reach Rs 4,582.28 bn during 2007-2009. The sector is
expected to witness robust growth, thanks to demand from the domestic
market, which is growing steadily over the last couple of years — especially
sectors like telecom, retail, logistics and transportation, BFSI, and
manufacturing. The domestic ITeS market is expected to reach Rs 3623.38
bn by 2015, at a CAGR of 264% during 2007–2009.
CH. 12

Conclusion
Suggestion/Recommendation
Bibliography
CONCLUSION
Indian economy has been witnessing a phenomenal growth since the last
decade. After seeing a growth rate in excess of 9 per cent for the last 3
years, it is still holding its ground in the midst of the current global financial
crisis.

Pegging India's growth rate in the current year at between 7 and 8 per cent,
the Union Finance Minister, Mr P Chidambaram, has reiterated that India
would continue being the second fastest growing economy in the world
despite the ongoing global economic slowdown. Though the global financial
crisis have affected the Indian equity and foreign exchange markets, the
macroeconomic brunt of the meltdown is not much due to the overall
strength of the domestic demand and the largely domestic nature of its
investment financing.

Chidambaram has further assured that by the second half of the next fiscal,
the economy would pick up and the government’s ‘stimulus measures’ would
encourage growth and ensure "brisk” economic activities in the last few
months of this fiscal year.

Bob Buckle, an APEC Rim trade (based on rich nations) economist has stated
that with India and China posting good growth rates, the world may come
out of recession more easily.

Further, according to the International Monetary Fund’s (IMF) prediction in

October 2008, India is likely to grow at 7.8 per cent in 2008, and 6.3 per cent
in 2009.
As a measure to boost the economy and to ensure a 7 per cent growth, the
government announced an approximately US$ 6.46 billion fiscal stimulus
package, on December 7, 2008. The package entailed additional spending
and excise duty cuts for increasing consumption.

According to stock market regulator Security and Exchange Board of India

(SEBI), the Indian stocks would be the first to bounce back in the current
global financial crisis. SEBI is likely to initiate steps to limit over-leveraged
hedge funds with the aim of bringing in more solidity to the unstable market.

Leading global agencies have reiterated faith in the Indian economy.

According to Crisil, a leading rating agency, India's retail securitisation
market is better placed than the US, exhibiting more stability with few rating
downgrades. "Investors in securitised paper in India have no reason to fear
crippling losses of the kind that have hit their US counterparts," a Crisil
release said.

Further, as per a survey in Deutsch business magazine, WirtschaftsWoche, in

spite of the global financial crisis, companies from developed economies
such as Germany have shown confidence in India's economic future and are
interested in growing their business in the country. Showing faith in India's
robust future, around 94 per cent German companies plan to increase their
businesses with the subcontinent, the survey stated.

After the signing of the US-India civil nuclear deal, India will now be
partnering several countries for nuclear fuel technology projects, and this will
further boost the economy.

India and Russia signed 10 agreements in December 2008, including a pact

on civil nuclear cooperation.

Thorium Power, a US firm, and Punj Lloyd will be forming a nuclear fuel
technology joint venture (JV). The JV will offer thorium fuel technology for
light water reactors (LWR) in India.
The 2008-09 Fiscal

Subsequent to three years of plus 9 per cent growth in gross domestic

product (GDP), India's growth rate in the current year is likely to come down
to a more modest level of 7–8 per cent.

• Foreign institutional investments (FII) in India became positive in

November 2008, after net selling by them in September and October
2008 due to redemption pressures from abroad.

As per SEBI data, foreign institutional investors (FIIs) continued to flow into
India with 120 new FIIs registering themselves during September and
November 2008, since the global meltdown started in September. Even
though some FIIs had pulled out, many FIIs see long-term value in India.
Moreover, during the same period, 358 new sub-accounts were registered,
which was the highest within three months, in 2008.

• Foreign direct investment (FDI) in India from March-September 2008

increased by 137 per cent to US$ 17.21 billion, due to the inflows into
construction, real estate, services, computer hardware and software
firms. The government has also stated that the country would attract US$
35 billion of FDI in the current year to March 2009.

• In August 2008, the average inflation stood near 12.5 per cent, which fell
sharply in the third week of December, at 6.84 per cent, which was the
lowest in the last 9 months. It was lower than Reserve Bank of India’s
(RBI’s) target of 7 per cent for 2008–09.

• In the first half of the current fiscal, the money supply increased by 6.6
per cent against 8.2 per cent last year (from end of March 2008 end to
end of September 2008).

• Net bank credit to the government and commercial sector increased by

6.8 per cent and 7.8 per cent, respectively.
• Growth in net foreign exchange assets of the banks slowed to 6.0 per cent
compare to 11.0 per cent in the previous year. However, the non-
monetary liabilities went.

• The central bank pumped in more money into the banking system, cutting
CRR levels from 9.00 per cent to 5.5 per cent. Repo rate was also brought
down to 7.5 per cent from 9 per cent.

• The growth in the gross tax collection is was 25 per cent till September
2008, against 24.5 per cent in September 2007.

• Total foreign investment inflow during the first half of 2008-09 was US$
13.8 billion in September 2008.

• India’s forextotalled to US$ 251.3 billion in the first week of November

2008.

India’s cumulative value of exports for the period between April-September,

2008 was US$ 94973 million compared to US$ 72556 million. Exports during
September, 2008 added up to US$ 13748 million which was 10.4 per cent
higher than US$ 12455 million during September 2007.

The rural India growth story

The Indian growth story is spreading to the rural and semi-urban areas as
well.

In 2008, the rural market has grown at an impressive rate of 25 per cent
compared to the 7–10 per cent growth rate of the urban consumer retail
market. Further, according to international consultancy firm Celent, the rural
market will grow to a potential of US$ 1.9 billion by 2015 from the current
US$ 487 million.

The rural India success story is being replicated across a range of sectors in
the rural markets. After several global corporations like Microsoft, Intel, and
Shell, many other major multinational companies (MNCs) and domestic
players are keen to foray into the rural Indian market to capitalise on its
growing opportunities.
Further, venture capitals have started investing in technology firms focussed
in rural areas. Firms like Avishkaar India Micro Venture Capital Fund, Acumen
Fund, and Rural Innovations Network (RIN) are focussing on rural markets.

Per Capita Income

In 2007–08, India's per capita income is estimated to be around US$ 740.

Further, India's per capita income is expected to increase to US$ 2,000 by
2016-17 and US$ 4,000 by 2025. This growth rate will, consequently, propel
India into the middle-income category.

Advantage India

• According to The World Fact Book, India is among the world's youngest
nations with a median age of 25 years as compared to 43 in Japan and 36
in USA. Of the BRIC—Brazil, Russia, India and China—countries, India is
projected to stay the youngest with its working-age population estimated
to rise to 70 per cent of the total demographic by 2030 - the largest in the
world. India will see 70 million new entrants to its workforce over the next
5 years.

• India has the second largest area of arable land in the world, making it
one of the world's largest food producers - over 200 million tonnes of
foodgrains are produced annually. India is the world's largest producer of
milk (100 million tonnes per annum), sugarcane (315 million tonnes

per annum) and tea (930 million kg per annum) and the second largest
producer of rice, fruit and vegetables.

• With the largest number of listed companies - 10,000 across 23 stock

exchanges, India has the third largest investor base in the world.

• India's healthy banking system with a network of 70,000 branches is

among the largest in the world. In June 2007, the aggregate deposits of
commercial banks were about US$ 445 billion (50 per cent of GDP) and
the total bank credit stood at US$ 320 billion (36 per cent of GDP). NPA
 (non-performing assets) levels of banks in India are under 3 per cent, one
of the lowest among emerging nations.

• According to a study by the McKinsey Global Institute (MGI), India's

consumer market will be the world's fifth largest (from twelfth) in the
world by 2025 and India's middle class will swell by over ten times from
its current size of 50 million to 583 million people by 2025.

Growth potential

• Special Economic Zones (SEZs) are set to see major investments after the
straightening out of certain regulatory tangles. According to India's
Commerce Secretary, Mr G K Pillai, India has approved 513 SEZs till
August 2008, of which 250 have been notified. Investments are expected
to cross US$ 45.73 billion by December 2009, providing incremental
employment to 800,000 people. In December 2008, the government has
cleared 22 proposals for setting up Special Economic Zones (SEZs). The
proposals included a major foreign direct investment (FDI) project a by
Dubai-based developer.

• According to the CII Ernst & Young report titled 'India 2012: Telecom
growth continues,' India's telecom services industry revenues are
projected to reach US$ 54 billion in 2012, up from US$ 31 billion in 2008.
India saw a 23 per cent increase in IP (Internet Protocol) addresses with
2.6 million connections in the third-quarter ended September 2008.

• The government is planning to set up a special corpus of around US$

10.48 billion for infrastructure projects.

• According to a report by Research on International Economic Relations

(ICRIER), the retail business in India would grow at 13 per cent annually
from US$ 322 billion in 2006–07 to US$ 590 billion in 2011–12. The
unorganised Indian retail sector is expected to grow at about 10 percent
per annum to reach US$ 496 billion in 2011–12. Despite the steady
expansion of organised retailers, according to a study by Indian Council
 for Research on International Economic Relations (ICRIER), a Delhi-based
think tank.

• According to a study by Evalueserve, a global research and analytics firm,

India is likely to emerge as the next global hub for innovation and join the
club of developed nations, with the country aiming to increase its
research and development (R&D) expenditure in the coming years. India
is targetting to increase its R&D spend to two per cent of the GDP by 2012
under the 11th Five-Year Plan, from less than one per cent earlier.

• Corporate India registered US$ 3.4 billion as mergers and acquisitions

(M&As) during November 2008, as against US$ 850 million in November
2007. The figure stood at US$ 2.13 billion in October 2008.

Future perfect

The Planning Commission has ruled out any changes in the average 9 per
cent gross domestic product growth target of the 11th Five-Year-Plan,
although there might be ‘some significant reduction in growth’ next year as a
result of the global financial crisis.

India offers huge investment opportunities in various sectors and

investments are likely to pour into these sunshine sectors:

• The realty sector is likely to increase at the rate of 30 per cent annually
during the next ten years, drawing US$ 30 billion as foreign investment.

• The Indian IT market is projected to see 18 per cent growth in 2008,

touching US$ 38 billion.

• According to a McKinsey study, "The market size for the food consumption
category in India is expected to grow from US$ 155 billion in 2005 to US$
344 billion in 2025 at a compound annual growth rate of 4.1 percent."

• According to the India Retail Report 2009, compiled by research group

Images F&R Research, the Indian retail industry is likely to touch US$
390.68 billion by 2010.
• According to a McKinsey study, the Indian pharmaceutical industry is
projected to grow to US$ 25 billion by 2010 whereas the domestic market
is likely to more than triple to US$ 20 billion by 2015 from the current US$
6 billion to become one of the leading pharmaceutical markets in the next
decade.

• According to a monthly review by the Centre for Monitoring Indian

Economy (CMIE), agricultural production is likely to increase significantly
during fiscal year 2009. CMIE has projected a growth of 3.2 per cent
during fiscal year 2009, for the GDP of agriculture and allied sectors. "This
would be the fourth straight year of positive growth in agricultural
production, with the first three years clocking an average growth of 5.5
per cent," CMIE stated. The allied sectors comprising livestock, forestry
and logging, and fishing are likely to see a growth of 4.8 per cent during
fiscal year 2009.

SUGGESTIONS/RECOMMENDATIONS

These are the ten crucial stepsthat are believed India must take in order to
achieve its full potential.In the latest annual update to Growth Environment
Scores (GES), India scores below theother three BRIC nations, and is
currently ranked 110 out of a set of 181countries assigned GES scores. If
India were able to undertake the necessaryreforms, it could raise its growth
potential by as much as 2.8% per annum,placing it in a very strong position
to deliver the impressive growth outlinedin Global Economics (page 152).

There are the highlighted ten key areas where reform is needed. In all
likelihood, they arenot the only ten, but they are considered as the most
crucial:

1. Improve governance. Without better governance, delivery systems

andeffective implementation, India will find it difficult to educate its
citizens,build its infrastructure, increase agricultural productivity and ensure
that thefruits of economic growth are well established.

2. Raise educational achievement. Among more micro factors,

raisingIndia’s educational achievement is a major requirement to help
achieve thenation’s potential. According to our basic indicators, a vast
number ofIndia’s young people receive no (or only the most basic)
education. A majoreffort to boost basic education is needed. A number of
initiatives, such as acontinued expansion of Pratham and the introduction of
Teach First, forexample, should be pursued.

3. Increase quality and quantity of universities. At the other end of

thespectrum, India should also have a more defined plan to raise the
numberand the quality of top universities.

4. Control inflation. Although India has not suffered particularly

fromdramatic inflation, it is currently experiencing a rise in inflation similar
tothat seen in a number of emerging economies. We think a formal
adoptionof Inflation Targeting would be a very sensible move to help India
persuadeits huge population of the (permanent) benefits of price stability.
5. Introduce a credible fiscal policy. We also believe that India
shouldintroduce a more credible medium-term plan for fiscal policy.
Targetinglow and stable inflation is not easy if fiscal policy is poorly
maintained. Wethink it would be helpful to develop some ‘rules’ for spending
over cycles.

6. Liberalise financial markets. To improve further the macro

variableswithin the GES framework, we believe further liberalisation of
Indianfinancial markets is necessary.

7. Increase trade with Neighbours. In terms of international trade,

Indiacontinues to be much less ‘open’ than many of its other large
emergingnation colleagues, especially China. Given the significant number of
nationswith large populations on its borders, we would recommend that India
targeta major increase in trade with China, Pakistan and Bangladesh.

8. Increase agricultural productivity.Agriculture, especially in these

timesof rising prices, should be a great opportunity for India. Better specific
anddefined plans for increasing productivity in agriculture are essential,
andcould allow India to benefit from the BRIC-related global thirst for
betterqualityfood.

9. Improve infrastructure.Focus on infrastructure in India is legendary,

andtales of woe abound. Improvements are taking place, as any
foreignbusiness visitor will be aware, but the need for more is paramount.
Withoutsuch improvement, development will be limited.

10. Improve Environmental Quality.The final area where greater reforms

areneeded is the environment. Achieving greater energy efficiencies
andboosting the cleanliness of energy and water usage would increase
thelikelihood of a sustainable stronger growth path for India.
Perhaps not all these ‘action areas’ can be addressed at the same time, but
we
believe that, in coming years, progress will have to be made in all of them
ifIndia is to achieve its very exciting growth potential.

Bibliography

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2. www.apnacircle.com (weekly newsletter)
3. www.managementparadise.com
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5. www.indianeconomywatch.com
6. www.fourmtopics.com
7. www.indianmba.com
8. Indian Economy (various journals)
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