CH.1 An Introduction to Indian Economy

1.1 Indian economy at glance1.2 Nature of Indian economy

(a) Pre economic reform(b) Post economic reform

1.3 Problems of Indian economy in present scenario1.4 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 Asia

Low - Income Countries

POPULATION, mid year (millions) 2004 1,079.7

1,448 2338

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 national poverty line)

29   -   -

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 pop)

99 97 94

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 under 12 mos)

67 for the year (2002-03)

Technology and Infrastructure

Fixed lines and mobile telephones (per 1000 people)

51.9 (for the year 2002-03)

Personal computers (per 1000 people)

7.2 (for the year 2002-03)

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 2004-5Agriculture Industry Services

35.2 26.1 38.7

26.5 22.1 51.4

21.7 21.6 56.7

20.5 21.9 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 2004-05A.DIRECT INVESTMENT I. Equity a) Government (SIA/FIPB) b) RBI c) Acquisition of shares d) Equity cap. of unincorporated bodies II. Reinvested earnings III. Other capital B. PORTFOLIO INVESTMENT a) GDRs/ADRs b) FIIs @ c) Off-shore funds & others C. TOTAL (A+B)

97

6 103

5,035

2,764

919 739

916

190

1,833

438

6 979 600 377

2 6,014

4,673

2,387

928 534

735

190

1,798

488

11,377 459 10,918

- 16,050

5,536

3,363

1,0621,259

930

112

1,816

357

8,9096138,280

1614,445

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 Total imports

Trade Balance

18477 27915

-9438

52719 61412

-8693

63843 79149

-8693

79247107066

-27819

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.

1.5 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.

1.6 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)

Crop/ year 2003-

042004-05

2005-06

2006-07

2007-08

2008-09

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 Cereals

31.1 33.4 26.1 38.1 33.9 26.4

Pulses 11.1 13.4 11.1 14.9 13.4 5.0

Foodgrains

(I) Kharif

(II) Rabi

Total (I+II)

 

102. 1

94.7

196.8

 

112.1

100.8

212.9

 

87.2

87.6

174.8

 

116.9

96.6

213.5

 

103.3

101.3

204.6

 

105.3

-

-

Source: Ministry of Agriculture

Commercial Crops Production     

              (Million Tonnes)

Crop/year 2003-04

2004-05

2005-06

2006-07

2007-08 2008-09

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. EachSource: 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

Area Production

Area Production

Area

Production

AreaProduction

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-

o warranty or guarantee of the goods or services,

o 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 -

o The cost of production of any good; or

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

o The prices for sale or resale of goods; or

o 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-

o Prohibit the owner(s) of the concerned undertaking(s) from continuing to indulge in a monopolistic trade practice; or

o 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:

o 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;

o 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;

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

o Declaring unlawful the making or carrying out of the specified agreement;

o Requiring any party to the specified agreement to determine the agreement within the specified time, either wholly or to specified extent;

o Regulating the profits which may be derived from the production, storage, supply, distribution or control of any goods or services; or

o 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:

o Summoning and enforcing the attendance of any witness and examining him on oath;

o Discovery and production of any document or other material object producible as evidence;

o Reception of evidence on affidavits;

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

o Issuing any commission for examination of witness; and

o 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.

3.7 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)

Weights Dec 2008

Dec 2009

Industry Mining Manufacturing Electricity Use Based ClassificationBasic Intermediate Capital Consumer Goods Consumer non Durables Consumer Durables

100 10.2 79.4 10.5

35.6 26.5 9.3 28.7 23.3 5.4

6.4 2.8 6.9 4.5

5.3 3.017.9 5.9 3.413.9

6.8 9.9 6.8 4.2

4.8 9.0 2.0 8.8 5.019.8

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.

0

10

20

30

40

50

60

70

80

United States

United Kingdom

MexicoRussian Federation

India BrazilChina

Services as share of GDP in 2009

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 growthDr. 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 Number of Person (lakh)

% Urban Number of Person (lakh)

% Combined Number of Persons (lakh)

%

ALL INDIA1973-74 2613 56.4 600 49.0 3213 54.91977-78 2642 53.1 647 45.2 3289 51.31983 2520 45.7 709 40.8 3229 44.51987-88 2319 39.1 752 38.2 3071 38.91993-94 2440 37.3 763 32.4 3203 36.0

Gaurav Datt’s Study on PovertyGaurav 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 1999-00

2001-2009

1999-00

2001-2009

Andhra PradeshArunachal PradeshAssamBiharGujaratHaryanaHimachal PradeshJammu & KashmirKarnatakaKeralaMadhya PradeshMaharashtraMeghalayaNagalandOrissaPunjabRajasthanTamil NaduUttar PradeshWest Bengal

Delhi

15.945.045.058.222.228.030.330.329.925.840.637.945.045.049.711.926.532.542.340.8

1.9

11.2 40.0 40.0 44.3 13.2 8.37.94.017.49.4

37.827.740.0 40.0 48.06.4

13.720.631.231.9

0.4

38.3 7.7 7.7 34.5 27.9 16.4 9.2 9.2 40.1 24.5 48.4 35.2 7.7 7.7 41.6 11.4 30.5 39.8 35.4 22.4

16.0

26.67.5 7.5

32.9 15.610.04.62.0

25.320.338.426.87.5 7.5

42.85.8

19.822.130.914.9

9.4

All India 37.3 27.1 32.4

23.6

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.

CountryAdult Literacy

RateYouth Literacy

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 PlanThe 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.

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

Facilities Primary Upper Primary

2004–05 2005–06

2004–05 2005–06

Building

Toilets

Drinking water

3.5 3.0

51.4 44.6

16.3 15.1

2.8 2.4

16.8 15.3

4.7 4.8

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 DispensariesUrbanRural

178.789.85

3.60o.36

3.61.49

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:

Year (April-March)

Amount of FDI 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

Ranks

Sector Cumulative Inflows (from August 1991 to

%age with

March 2009) Amount in rupees in crore

total inflows

1.

Electrical Equipments

(including computer software & electronics) 36,034 18.77

2.

Services Sector

(financial & non-financial) 34,238 17.84

3.

Telecommunications

(radio paging, cellular mobile, basic telephone services) 16,691 8.7

4 Transportation Industry 15,427 8.04

5.

Fuels

(power + oil refinery) 12,105 6.31

6.

Chemicals

(other than fertilizers) 9,510 4.95

7.

Construction activities

(including roads & highways) 6,396 3.33

8. Drugs & Pharmaceuticals 5,281 2.75

9.Food Processing Industries 5,143 2.68

10.Cement and Gypsum 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)

Rank

CountryInflows(Million USD)

Inflows (%)

1  Mauritius 85,178 44.24%

2  United States 18,040 9.37%

3 United Kingdom

15,363 7.98%

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 19592. State Bank of Bikaner 1st January 19603. State Bank of Jaipur 1st January 19604. State Bank of Saurashtra 1st May 19605. State Bank of Patiala 1st April 19606. State Bank of Mysore 1st March 19607. State Bank of Indore 1st January 19688. 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 15 th 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.

Private Sector Banks

Old Pvt. Sector Banks New Pvt. Sector Banks

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.

BankTotal Assets

Number (Rs billion)State Bank of India and associatesNationalized banksOld private sector banksNew private sector banksForeign banksRegional rural banks

8 2,043.5619 3,519.0525 444.549 161.1339 559.11196 190.51

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 highand 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 corporategovernance 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 isSecond 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 environment2. 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 management5. To accelerate broadband penetration6. 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 auctions2. MVNO3. Mobile Number Portability4. New Policy for Value Added Services5. 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 substantiallyReduced.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 India1883 Merger with the postal system1923 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 thegovernment's Ministry of Communications

1985 Department of Telecommunications (DOT) established, an exclusiveprovider 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 created1999 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 21st 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 1995(‘000)

Ranks (1995)

No. of lines in 2001(‘000)

Ranks (2001)

USA 159,735.2 1 190,000.0 1Japan 62,292.0 2 76,000.0 3Germany 42,000.0 3 52,280.0 4China 40,705.7 4 179,034.0 2France 32,400 5 34,032.9 9UK 29,411.4 6 34,710.0 8Russia 25,018.9 7 35,700.0 6Italy 24,845.0 8 27,303.0 10Korea, Rep. 18,600.0 9 22,724.7 11Canada 17,567.0 10 20,319.3 12Spain 15,095.4 11 17,427.0 14Brazil 13,263.0 12 37,430.8 5

Turkey 13,215.7 13 18,900.9 13India 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 effectivecommunications 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 andthereby 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, governmentand 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. Amobile 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 ChatEmailSatellite 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 isthe 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 providerCut throat competitionCustomer is price sensitiveLow 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 towerinfrastructure. 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.

WeaknessThe 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.

ThreatsThe 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 ChatEmailSatellite 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 Format

New Formats. Experimenting With

Shoppers' Stop

Department Store

Quasi-mall

Ebony Department Store

Quasi-mall, smaller outlets, adding food retail

Crossword Large bookstore

Corner shops

Piramyd Department Store

Quasi-mall, food retail

Pantaloon Own brand store

Hypermarket

Subhiksha Supermarket Considering moving to self service

Vitan Supermarket Suburban discount store

Foodworld Food supermarket

Hypermarket, Foodworld express

Globus Department Store

Small fashion stores

Bombay Bazaar

  Aggregation of Kiranas

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:

YearAcquired/ JV Company/ Target

AcquirerNature of Business

StakeConsideration

(US$ million)

2005 Liberty Shoes Future groupRetail (Footwear)

51% 3

2005Indus - League Clothing

Future group Retail clothing 68% 5

2006 Odyssey IndiaDeccan Chronicle Holdings

Leisure retail chain (books, music, toys)

100% 14

2007 Landmark Tata TrentBooks, music, accessories

74% 24

2008 Bistro Hospitality

TGI Friday's (a subsidiary of Carlson Restaurant World-wide)

Restaurant (Food retail)

25% N/A

2008

Indus League clothing

(Future group company)

Etam group, France

Lingerie and women's wear retailing

50%

(JV)8

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 CAGR2004 - 08

Television% Change 128.7

158.523.2%

191.220.6%

223.917.1%

244.79.3% 17.4%

Filmed Entertainment% Change

59.9 68.113.7%

84.524.1%

96.013.6%

107.011.5% 5.6%

Print Media% Change 97.8

109.512.0%

128.016.9%

149.016.4%

162.08.7% 13.4%

Radio% Change 2.4

3.233.3%

5.056.3%

6.938.0%

8.320.3% 36.4%

Music% Change 6.7

7.27.3%

7.30.8%

7.30.6%

6.3-14.1% -1.7%

Animation,Gaming and VFX% Change

10.5 13.023.8%

15.620.0%

Out-Of-Home Advertising% Change

8.5 9.05.9%

10.011.1%

12.525.0%

15.020.0% 15.3%

Online Advertising% Change 0.6

1.066.7%

1.660.0%

2.768.8%

5.085.2% 69.9%

Total E&M Industry% Change

304.6356.517.0%

438.122.9%

511.316.7%

563.910.3% 16.6%

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 TopperTV 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 Company Name

Foreign Investor

Acquisition Price $ million

Amount in Rs. Million

% age stake

UTV SoftwareCommunicationsLimited

Walt Disney Company 201.25 9,056.2 27.84%

NDTV NBC Universal 150.0 6,750.0 26.0%

UTV GlobalBroadcasting Ltd

Walt DisneyCompany

29.75 1,338.7 15.0%

Private Equity Deals in 2008

Investor Investee Sub-sector % age stake Investment Value USD million

Shyam Equities Pvt Ltd

Independent NewsService PrivateLimited(INS), the holdingcompany of IndiaTV

Television 20.00% 25

Goldman Sachs

Group andLehman Brothers In(bought fromEntertainment NetworkIndia Ltd.)

Times innovativeMedia OOH 8.28% 25.0

Indivision CapitalPercept Ltd

Advertising andFilm 10.00% 16.25

JPMorgan withPassport Capital Percept Ltd

Advertising andFilm N.A. 15.00

ICICI Venture FundsManagementCompany

PVR Pictures Films 20.00% 15.00

JP Morgan Global SpecialOpportunitiesGroup

PVR Pictures Films 20.00% 15.00

Warburg Pincus LLC

Laqshya Media PvtLtd. OOH 15.00% 69.00

NEA Indo US Ventures

SeventymmServices Pvt Ltd Films N.A. 12.50

FDI Inflows in the E&M Sector in 2008

Indian Company NameForeign Collaborator

Country In Rs Million In USDMillion

Nimbus Communication Ltd.

Mauritius Investment &Technology Ltd.

Mauritius 1,971.92 49.63

Zee Telefilms LtdVarious InvestorsAsian Broadcasting

Mauritius1,524.87 38.1

Balaji Telefilms Ltd FZ-LLC U.A.E 1,232.48 29.26

Nimbus Communication Ltd CSIBD Mauritius 910.82 22.92

Amar Ujala Publication Ltd

D E Shaw CompositeInvestment

Mauritius 585 14.62

Time Broadband Service Pvt. Ltd

Turner Asia Pacific VentureLtd.

U.A.E 572.3 14.18

Midi Tech Pvt. Ltd

Indivision India PartnersCrossland Investment Ltd

NA 540.01 13.38

Future Media (I) Ltd

Various InvestorsWorldwide ChannelInvestments Ltd

Mauritius 480 11.39

Crest Communication Ltd.

NEA-INDOUS Mauritius 337.5 8.01

Zee Telefilms Ltd VentureCapital Mauritius 254.06 6.35

Worldwide Media Ltd Clear Channel Pacific PTELtd

UK 245 5.04

Microqual Techno Pvt. Ltd

South Asia MultimediaTechnologies

Mauritius 204.2 5.19

Clear Channel CommunicationIndia Pvt Ltd

Jafco Asia Technology Singapore 192.5 4.49

South Asia FM Ltd Investment I Mauritius 149.24 3.49

Microqual Techno Pvt. Ltd

RAK Ceramics Mauritius 122.52 3.11

RAK Ceramics India Pvt Ltd.

Dubai Venture 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)

DTH49% (FDI + FII) [within 49% FDIcomponent not to exceed 20%]

74% (FDI + FII)

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 privateproduction.

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 freelicensing 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 connectivity2. Income Tax Exemption3. Global Parity in Telecom Infrastructure4. Inter-connectivity of International Call Centers/IT EnabledServices 5. Reduction intariffs for International connectivity6. Interconnectivity across multiple networks7. 7x24 support of DoT links8. Reduce Delays in Provisioning of International Bandwidth9. Scarcity of International bandwidth on Fiber10. Build Supply Base of best knowledge worker.11. Grameen Data Processing Centers12. Creating the Ideal regulatory environment13. 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/RecommendationBibliography

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

1. www.google.com2. www.apnacircle.com (weekly newsletter)3. www.managementparadise.com4. www.caclubindia.com (weekly newsletter)5. www.indianeconomywatch.com6. www.fourmtopics.com7. www.indianmba.com 8. Indian Economy (various journals)9. Indian Economy – KPM Sundaram, Rudradutt10. The Times of India11. Economic Times12. Business line