Agriculture

System of Rice
Intensification
SRI concepts and practices have continued to evolve as they are being adapted to rain-fed (unirrigated)
conditions and with transplanting being superseded by direct-seeding sometimes. The central principles
of SRI according to Cornell University are:[2]

2
 • rice field soils should be kept moist rather than continuously saturated, minimizing anaerobic
conditions, as this improves root growth and supports the growth and diversity of aerobic soil
organisms;
• rice plants should be planted singly and spaced optimally widely to permit more growth of roots
and canopy and to keep all leaves photosynthetically active; and
• rice seedlings should be transplanted when young, less than 15 days old with just two leaves,
quickly, shallow and carefully, to avoid trauma to roots and to minimize transplant shock.

Land Metrics

1. Gross Cropped Area (GCA) = Net Sown Area (NSA) + Area sown more than
once.
2. Cropping Intensity = GCA / NSA.
3. Net Irrigation Intensity = NSA Irrigated / NSA.
4. Gross Irrigation Intensity = GCA Irrigated / GCA.
5. Operational Land Holding(OLH) = Land Owned - Land Leased Out + Land
Leased In.
Classification of Farmers
1. Landless Labor: OLH = 0 hectares.
2. Marginal Farmer: OLH (0,1] hectares.
3. Small Farmer: OLH (1,2] hectares.
4. Medium Farmer: OLH (2, 10] hectares.
5. Large Farmer: OLH > 10 hectares.
1. Commercialization of Agriculture
Factors Responsible
1. £ utilitarians, their free trade policy, economic colonialization of India as it
became a raw material supplier.
2. Cash based economy encouraged by £ coupled with huge LR demand.
3. Breakdown of self-sufficiency of villages. Indian economy became closely inter-
linked and also linked with international markets. Need to balance trade of
China led to cultivation of opium.
4. Development of means of transport like railways, Suez canal.
5. Coercive practices followed by £ backed by legislations. £ capital.
Pattern of CoA
1. It was a coercive process and exploitative.

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 3. It involved regional development only. Only some pockets were suitable for
some crops.
4. The crops were cultivated keeping £ needs in mind. The cultivation of Indigo
declined after the synthetic dye came up, opium grew till 1900 then decline as
China stopped importing opium. During US civil war, cultivation of cotton was
pumped up. Wheat export began to increase to £ and it was produced in areas
in Maharastra despite not being a staple crop in the region. Bengal rice was
exported to China, SE Asia.
Q. Discuss the process of forced commercialization of agriculture under the colonial
rule. (2009, II, 20)
Impact
1. Volatility killed. Widespread poverty. Coercion. £ grip on India increased.
2. Famines, agricultural indebtedness.
3. Revolts, growth of nationalism.
2. Land Tenure System
Pre-£ System
1. Land was owned by the tiller so long as he paid revenue. The zamindar was
only a revenue collector and had no police / judiciary powers.
2. Land was not tradable mainly because (a) Consent of village community was
needed and it generally didn't come for village outsiders. (b) Pressure on land
was not so much. (c) Social factors where association with land was
considered a mark of respect.
£ System
1. PS made zamindar the LL and gave him judiciary / police powers. He could
evict a peasant @ will and often did so as pressure on land had increased
substantially. So peasant didn't make any investment in land. Zamindar also
didn't make an investment as his zamindari rights could be withdrawn on non-
payment of revenue.
2. Reckless Renting: Due to higher pressure on land and combined powers in the
hand of zamindar, he began to extract much higher LR over and above what
was payable.
3. Absentee LLism: It developed and it led to further exploitation of peasantry as
he had to pay higher rents to feed all the mouths in the revenue chain.
4. Agriculture Indebtedness: Increased due to high LR demand. Since land
couldn't be pledged as security (as the owner was zamindar), personal jewelry
and even bonded labor was pledged. The institutional credit was virtually nil.

4
 5. ~ 57% land was under PS, 38% under ryotwari and 5% under mahalwari
system.
6. tenants were of 3 types - (a) Occupancy tenants who had security of tenure,
inheritable rights and could claim compensation from LL for any improvement
on land. (b) Tenants at will, and (c) Sub tenants.
3. Land Reforms
Reforms
1. Zamindari abolition acts: All states passed anti-zamindari acts in a staggered
way and in paper zamindari was abolished. Even in Ryotwari and Mahalwari
areas, moneylender zamindars were abolished.
2. Tenancy regulation: To put a ceiling on rent payable, to make sure evictions
don't take place except as per law and in the event of eviction for personal
cultivation, at least a minimum land is left with the tenant.
3. Loan Waivers: All principal / interest dues to moneylenders were waived
4. Land ceiling: There were 2 rounds of reforms legislations - one in 50s and other
in early 70s.
5. Consolidating scattered land holdings:
Drawbacks

5
1. Land ceiling acts: There was often along delay between the introduction,
passage and notification of an Act. This delay was used by zamindars to exploit
the loopholes and evade the laws. They made benami transfers, transfered
land in the names of other members of a households, fired their tenants (the
acts had a provision that land will belong to the person cultivating it for x years).
Further, these Acts often had complicated provisions leading to inefficient
implementation. By 1992 only 2 mha land which is < 2% was declared as
surplus and distributed among 4.76 mm peasants. This is amazing in a country
where over 57% of the cultivated land was under zamindars and 38% under
ryotwari. In J&K 17.5% of total cultivated land was distributed like this, in W
Bengal 6.5% and in Assam 5%. In all other states it was negligible. West
Bengal’s share of total surplus land distributed was almost 20% of the all-India
figure although the state accounts for only about 3% of India’s land. The land
ceilings were often fixed very high. National guidelines proposed 12, 18 and 30
acres respectively for irrigated land with 2 crops, irrigated land with 1 crop and
dry land respectively. Major states like UP had 18, 27 and 45 respectively,
Bihar had 18, 25 and 45 respectively, Haryana, Maharashtra and MP had 18,
27 and 54 respectively, Rajasthan had 18, 27 and 175 respectively, Punjab had
17, 27 and 51. Only W Bengal and Kerala had it below the proposed limits.
Even today bottom 62% land holdings account for 19% of area under
cultivation while largest 6% account for 37% area.

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 2. Tenancy laws: Very difficult to implement due to failure of land ceiling acts and
consequent pressure on land. Decline in tenancy led to eviction of tenants and
rise in landless labor as it contained a provision of self cultivation of land.@ the
eve of reform ~50% of the area was under tenancy which has come down to
15% now as tenancies have gone underground. This means a loss of access to
35% to the tenants. Moreover in UP and W Bengal sharecroppers were not
even considered to be tenants! There were no provisions to check the voluntary
surrender of land. 1st FYP proposed a ceiling of 25% but Punjab, Haryana, TN
and AP (varies from 30 - 40% in these states) have not observed this limit.
Moreover it is useless. By 1992 ownership rights had been conferred upon 11
mm tenants on some 6 mha of land which is < 4% of cultivated area. Even 97%
of this land was confined to Assam, Gujarat, HP, Karnataka, Kerala,
Maharashtra and W Bengal. Its only in W Bengal and Kerala that peasants
received some meaningful benefits. W Bengal and Kerala accounted for 12%
and 23% respectively, of the total number of tenants conferred ownership rights
(or protected rights) up to 2000, despite being home to only 7% and 2.3% per
cent of India’s population respectively.
3. Zamindari abolition laws: Their biggest flaw was they could obtain land for
'personal cultivation' which was defined loosely to include personal supervision
by the zamindar or any member of his family! They were allowed to evict
tenants to get land for personal cultivation till the ceiling and in the names of
their family members beyond the ceiling.
4. Consolidation of land holdings: On the national scale only 1/3rd of the
consolidable area has been consolidated. Punjab and Haryana have been able
to complete the task. Some states have not even begun. A common complaint
is rich peasants get the best lands while small peasants get marginal lands. So
a major area rule was proposed i.e. peasant would be given the holding where
majority of his land was there. But it further led to eviction of tenants as the
landlord will find it more suited for personal cultivation.
Indirect Effects of Land Reforms
1. Reduction of absentee ownership: There are enough studies to indicate that
the quantum of absentee ownership in 70s was much less serious than in 50s.
Absentee ownership had reduced much more in unirrigated areas than in
irrigated areas. The transfer of land under the forewarning impact of tenancy
and ceiling legislation to the resident cultivators was on a much larger scale in
dry areas.
2. The greed of the big landowners was kept in check.

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 3. Collapse of feudal structure.
4. It led to increase in landless labor as former tenants were driven out.
5. Rich peasants preferred to avoid wage related disputes with the new labor and
thus preferred more mechanization.
21st Century Land Reforms - PC
1. Female empowerment.
2. Pro owner tenancy laws.
Ghatak (2007) Conclusions
1. Overall, land reforms seem to have had a negative effect on agricultural
productivity. However there is considerable variation across types of land
reforms and across states.
2. Decomposing by type of land reform, the main driver for this negative effect
seems to be land-ceiling legislation. In contrast, the effect of tenancy reform,
averaged across all states, turns out to be insignificant. However, in West
Bengal, one of the few states where tenancy laws were implemented rigorously,
the negative relationship between land reform and productivity is absent.
3. Finally, tenancy reform seems to have increased the inequality of operational
holdings in India if we exclude West Bengal, which suggests that in
anticipation of the new tenancy legislation, landlords could be engaging in
eviction of tenants in states, other than West Bengal, where tenancy reform had
been poorly implemented.
Besley Burgess (2000) Conclusions
1. Tenancy reforms are negatively correlated with agriculture productivity but help
in reducing poverty.
2. Consolidation positively affects productivity but has no impact on poverty.
3. Ceiling have no significant effect on productivity or poverty.
4. Intermediary abolition leads to poverty reduction but has no impact on
productivity.
5. Land reforms have had positive impact on agriculture wages.

Q. Evaluate the track record of land reform in India in its various aspects, bringing
out inter-state differences. How would you interpret this record? (2009, II, 60)
4. Agricultural Issues
Structural Changes in Agriculture

8
1. Contribution to GDP, Employment, PCE: Contribution of agriculture to GDP =
13% in 2011-12 (down from 30% in 1991 and 55% in 1950-51). Contribution of
agriculture to employment: 52% in 2011-12 (down from 70% in 1950-51 and
57% in 1990-91). Within the rural economy however, the share of non-
agriculture income has increased. Experience from BRICS shows that 1%
growth in agriculture is 2-3x more effective in removing poverty than a 1%
growth in other sectors. Agriculture growth has remained well below GDP
growth. From 1950-51 to 2011-12, its growth rate is 2.7%. From 1950-51 to
1980-81 the growth has been 2.3% and from 1980-81 to 2011-12 the rate has
been 3.1%. In pre GR phase (1950-51 to 1967-68) agriculture growth was
2.5% vs 3.7% overall GDP growth. During phase 1 and 2 of GR (1967-68 to
1980-81) agriculture growth was 2.4% vs 3.5% overall GDP growth. During
phase 3 (1980-81 to 1990-91) agriculture growth was 3.5% vs 5.4% overall
GDP growth. Agriculture growth was 4.8% in 8th Plan (overall GDP @ 5.7%),
2.5% in 9th (overall GDP @ 6.6%), 2.5% in 10th (overall GDP @ 7.8%) and
3.2% in 11th Plan (overall GDP @ 7.8%). Not only is it less, it is also more
volatile. The coefficient of variation in growth is 1.6 in past 1 decade which is 6x
the CV of GDP growth. Agricultural heavyweights like Punjab, UP, W Bengal
etc. have stagnated with 2-2.5% growth rates. States like Gujarat, Rajasthan
and Odisha show much higher growth rates (7-8%) since 2004-05.
2.

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3. Size of Operational Land Holdings: in 1970-71, it was 2.28 ha, in 1990-91 it
was 1.55 ha and in 2005-06 it was 1.23 ha. Proportion of marginal holdings has
increased too. Currently, 65% OHL are marginal, 18% small, 16% medium, 1%
large. In 1960-61 small + marginal households accounted for 52% of the
holdings. The combined impact of lowering income and smaller OHLs is a
diversification into allied activities like horticulture, livestock and fisheries. In
1951, the ratio of cultivating households to total rural households was 75%
which has dropped drastically. The dropped outs are now landless agricultural
labor (>50% now) or in other allied activities. One of its causes is fragmentation
of land which makes holding land economically unviable. The subdivision of
landholdings has led to a decline in average size of land holding and more
cultivators become small and marginal farmers. As economic and social forces
push more people towards the landless spectrum, their land is being bought by
large farmers who are becoming larger.
4. Changing Cropping Patterns: All major coarse grains show a decline in area
under cultivation except maize where productivity has gone up as well. Area
under pulses, fruits and vegetables and oilseeds has risen at their cost. In
terms of productivity, introduction of Bt cotton has improved productivity by 70%
since its introduction in 2002. Oilseeds and coarse cereals are other crops to
show good productivity increase. Pulses, wheat and rice however have
stagnated in productivity.

10
5. Changing Sectoral Composition: Declining relative incomes and smaller OHLs
have forced diversification into livestock, horticulture and fisheries. The relative
share of livestock in total agriculture production has gone up from 20% in 1991
to 25% in 2009-10, horticulture from 16% in 1991 to 20% in 2009-10 and
fisheries from 3% to 5%. Horticulture and livestock is going to drive the
agriculture growth in next phase given the high value of the commodities.

An interesting feature is that while marginal farmers hold higher proportion of

livestock, landless labor virtually don't own any livestock. Their livestock was
dependent on grazing in the commons and with the decline of the commons
their livestock holdings declined as well. Studies indicate that the marginal
impact of livestock growth on poverty is higher than the marginal impact of crop
cultivation.

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 6. Integration with the world: The reforms in 1991 led to liberalization of trade and
devaluation of exchange rate. As a result, agriculture got more integrated with
the world. Trade in agriculture to GDP agriculture has gone up from 5% in
1990-91 to 13% in 2010-11. In 1970s it was 3%. But this is still low compared to
overall trade's share of 50% in overall economy. Agriculture exports as a part of
total exports has also been declining from 45% in 1960-61 to 31% in 1980-81
to 8% now. Indian exports were $24 bio whereas imports were $11 bio giving a
surplus of $13 bio. Cotton, marine products, oil meals, basmati rice and sugar
are main exports. Main imports are vegetable oils, wood and pulses.
Horticulture exports were $1 bio, spices $1.4 bio (Vietnam is leader in pepper,
Guatemala in cardamom, China in chili). This has led to higher volatility in
output prices at a time when input prices are steadily increasing.
7. Changing demand patterns: With rising income, per capita demand for cereals
is going down and that for horticulture, livestock and pulses is going up. Clearly
they should be the thrust areas for future growth.
8. Growing role of private sector: Share of public investment in total agricultural
investment has gone down from 50% in 1980s to 20% now. The Green
revolution of 1960s was driven by public sector but this time the Bt Cotton and
hybrid Maize have come from private sector. Private sector is increasingly
going to contribute, so right kind of incentive and regulatory structure needs to
be framed.
9. Changes in productivity: Studies indicate that while output per hectare
increased by ~ 60% between 1050-51 to 1979-80, output per worker remained
stagnant in the same period. Similarly while in 1980s the yields in foodgrains
grew @ 2.7%, the corresponding growth in 90s was only 1.4%. Rice yields
went up from 1 tpha in 1960-61 to 1.7 tpha in 1990-91 to 2.1 tpha in 2009-10.
Wheat yields went up from 0.85 tpha in 1960-61 to 2.3 tpha in 1990-91 to 2.8
tpha in 2009-10. Pulses yields went up from 0.54 tpha in 1960-61 to 0.58 tpha
in 1990-91 to 0.63 tpha in 2009-10. Oilseeds yields went up from 0.5 tpha in
1960-61 to 0.8 tpha in 1990-91 to 1 tpha in 2009-10.
Statistics
1. Agriculture growth: 2.5% in 2011-12, 7.0% in 2010-11. In 1980s it was 3%,
in 8th Plan it was 4.8%, in 9th and 10th Plans it was 2.5%. 11th Plan had a
growth of 3.2%.
2. Food Grains: 230 MT, Rice: 100 MT, Wheat: 90 MT, Coarse cereals: 40 MT
3. Pulses: 18 MT. Area sown: target = 17 mha.
4. Cotton: 35 million bales (of 170 kg each), Jute: 11 mm bales (of 180 kg each).

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 5. Oilseeds: 30 MT.
6. Sugarcane: 350 MT.
7. Fruits: 95 MT, Vegetables: 135 MT.
Cropping Pattern
1. Rice: Productivity increased from 1.9 tpha in 2004-05 to 2.3 tpha in 2011-12.
Growth rate: 1.36% in 1990-91 to 2000-01, 1.47% from 2000-01 to 2010-11
2. Wheat: Area: 26 mha in 2004-05 to 29 mha in 2011-12. MSP increased from
Rs. 640 per quintal in 2004-05 to Rs. 1285 per quintal in 2011-12. Productivity
increased from 2.6 tpha in 2004-05 to 3 tpha in 2011-12. Major increase in
productivity in Haryana, Punjab and UP. Yield growth was 2.87% between
1990-91 to 2000-01 and 0.73% between 2000-01 to 2010-11.
3. Coarse cereals: Area: 29 mha in 2004-05 to 27 mha in 2011-12. Productivity:
1.1 tpha in 2004-05 to 1.6 tpha in 2011-12. UP, Maharashtra and Karnataka
have shown maximum increase in productivity.
4. Pulses: Area: 23 mha in 2004-05 to 25 mha in 2011-12. Productivity: 0.58 tpha
in 2004-05 to 0.63 tpha in 2011-12. MSP increased by 30%, budgetary
allocation up 4x in this period for pulses. Accelerated Pulses Production
Programme (A3P) is a part of NFSM and it seeks to promote new production
and protection technologies in 1000 clusters of 1000 ha each. It has a e-pest
surveillance programme as well to control pests and diseases.
5. Oilseeds: Area: 27 mha in 2004-05 to 27 mha in 2011-12. Productivity: 0.9 tpha
in 2004-05 to 1.2 tpha in 2011-12.
6. Sugarcane: Area: 4 mha in 2004-05 to 5 mha in 2011-12. Productivity: 70 tpha
in 2011-12.
7. Cotton: Area: 9 mha in 2004-05 to 12 mha in 2011-12. Productivity: 0.3 tpha in
2004-05 to 0.5 tpha in 2011-12.
Investment
Trends & Composition
1. GCF in agriculture to total GCF ranged between 11-14% in 1980s, 7-11% in
1990s and in last few years has been 6-8%. As a % of GDP, it was 1.9% in
1990-91 but is now 3.3%.
2. A more important indicator is GCF agriculture / GDP agriculture. This increased
form 7% in 1st FYP to 11% in 5th FYP. Since then it declined till 8th FYP to 9%.
But from 1991 onwards, a thrust has been there by government to increase
GCF agriculture and today it stands @ 21%. This partly explains the increase
in growth in 11th FYP.

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 3. Public investment's share in total agricultural investment has gone down from
50% in early 1980s to 30% in 1990-91 to 20% now. Private investment
responds better to incentive structures in agriculture and hence there is a need
to bring reforms in the incentive structure of agriculture. Public investment as a
% of agriculture GDP was 5% in 1980s and fell to 1.8% in 2000-01 but rose
again to 3.7% in 2006-07. But at the same time public investment is needed to
develop basic infrastructure which can then crowd in private investment.
Private investment is mostly undertaken in farm level and small activities and
can't replace public investment. No canals are built via PPP! Moreover only few
progressive states have benefitted from private investment and this has
increased interstate disparities.
4. Investment in agriculture R&D is only 0.3% of agriculture GDP as against 0.7%
in developing countries at large and 2-3% in developed countries. In the initial
years of GR, it increased but then stagnated in 1980s and has since fallen.
5. Agricultural credit has gone up manifolds in past decade, but it has got its own
issues.
Bharat Nirman (2005)
1. To connect al habitations with > 1000 population (500 in hills / tribal areas) with
all weather roads.
2. To create 10 mha additional irrigation potential.
3. To construct 6 mm rural houses.
4. To provide potable water to all habitations.
5. To provide electricity to all villages.
6. To connect all villages with telephone.
RIDF (1995)
1. Its objective was to provide fund to the state governments and PSUs to enable
them to complete delayed rural infrastructure projects.
2. But its resources are contributed by banks which may fall short of their PSL
targets. But they find this a better way of lending than lending directly to the
farmer and still be able to meet PSL targets and hence they have been
diverting funds to this. So RIDF is not any additional source of funding.
3. State governments have been generally reluctant to borrow from RIDF as its
rates are high. Disbursement has been only 60% so far.

Q. Analyze the recent trend of gross capital formation in agriculture. Has it, do you
think, been responsible for the sluggish growth rate in agriculture? (2011, II, 30)

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Q. "Declining public expenditure in agriculture is largely responsible for deceleration
in growth in this sector in India." Critically examine the validity of this statement.
(2010, II, 20)
Irrigation
Trends & Composition
1. Nearly 80% of public investment and 50% of private investment goes into
irrigation projects. As a result the cropping intensity has gone up from 118 in
1970-71 to 140 in 2008-09.
2. But not only is there a gap between irrigation potential (140 mha) and irrigation
potential created (110 mha) but also between irrigation potential created and
utilized (85 mha). Thus GCA irrigated has increased from 17% in 1950-51 to
45% in 2011-12. Irrigation utilized is measured on the basis of gross irrigated
area and not net irrigated area. Cultivable land is reported on the basis of net
sown area.
3. Further groundwater is a major source of irrigation which has been over-
exploited. Thus there is a need for institutional reforms, developing smaller
irrigation projects and right incentive structures. One thing which can be useful
is to separate agricultural and domestic phases in villages so as to provide
more electricity to domestic phases.
4. Small and marginal farmers vs large farmers: Area under irrigation for marginal
farmers has gone up from 40% in 1980-81 to 44% in 1990-91 and 51% in
2000-01. For small farmers it was 33% in 1980-81 to 36% in 1990-91 to 39% in
2000-01. For large farmers it was only 16% in 1980-81 to 22% in 1990-91 to
31% in 2000-01.
5. Inter state disparities: Inter state disparities in area under surface irrigation (as
a proportion of total cultivated area) are considerably lower than disparities in
the area under ground water irrigation. Moreover the proportion of area under
surface irrigation has progressively declined over the years. Due to higher
disparities in ground water irrigation and its rising share the overall irrigation
area disparities have been rising over the years. UP has highest gross irrigated
area (utilized) of 19 mha followed by Punjab (7.7 mha) and Rajasthan (7.3
mha). Punjab has highest irrigation intensity (gross irrigated area / net
cultivable land area) of 183 followed by Haryana of 148 followed by UP of 98.
Challenges

15
1. Despite large investments though, irrigated area served by canals has not
increased significantly in the past decade. A large number of major as well as
medium projects have been going on for 30–40 years without completion
whereas the normal gestation period is 15 to 20 years for major projects and 5-
10 years for medium projects. There was a spill-over of 553 projects into the
11th FYP from previous FYPs and more than half of these were started by
State governments without the approval of the PC and hence are not eligible
for central assistance. Several have run into inter-state disputes. AIBP was
launched to fund states complete the incomplete projects.
2. Gap between potential created and utilized exists in all states. One reason for
this is that irrigation potential is calculated on the basis of the volume of water
expected in the reservoir divided by a presumed depth of irrigation required for
a presumed cropping pattern. However, the total water available is often less
than assumed due to faulty project designs, faster siltation etc. There is also a
widespread tendency for those near the headworks to appropriate much larger
amount of water shifting to water-intensive crops leaving less water for tail-
enders. All these developments are encouraged by lack of co-ordination
across agencies and departments, and the inadequate or complete absence of
involvement of water users through Water User Associations (WUAs). In places
like Gujarat and AP where WUAs have been adequately empowered and
provided autonomy they have demonstrated a great sense of ownership and
the results have been positive.
3. Water scarcity will intensify in future with increase in population and demand for
food, and the current water use practices cannot be sustained over the long
run.
4. Inefficient water use in irrigation is also leading to environmental degradation
via water logging and induced salinity.
5. Interstate inequalities have risen. While in the developed regions of north and north west ~ 95% of

potential has been tapped, in NE only 25% has been tapped. In eastern and central regions it is < 50%.
6. The irrigation efficiency in the systems needs to be upgraded from the present
level of 35% to about 60% in the surface water system and from 65% to 75% in
the groundwater system. Even a rise of 5 percent irrigation efficiency can
increase the irrigation potential by 10-15 million ha.
7. New micro-irrigation technologies include drip and trickle systems, surface and
subsurface drip tapes, micro-sprinklers, sprayers, micro jets, spinners, rotors,
bubblers, etc. Despite wide promotion, only about 0.5 million ha currently are
under micro-irrigation.

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The Way Forward
1. Modern techniques such as micro-irrigation, watershed management, rainwater
harvesting and groundwater recharging.
2. The public sector has been spending funds to increase the net irrigated area
without commensurate success. This indicates the need for demand and supply
oriented reform measures. For this, a major exercise involving reform in water
demand management and in the pricing of water and power are needed.
3. Major investments in research and development that enhance water use
efficiency will be required. R&D should also happen towards growing the right
quality and type of agricultural produce. Extension services take these
technologies to the farmers need to be encouraged.
Seeds
Trends & Institutional Framework
1. The introduction of Bt seeds in maize and cotton have increased their
productivity tremendously. The difference between Green revolution of 60s and
now is that while earlier, introduction of seeds was from public sector, this time
it is private sector companies which are developing and selling seeds.
2. The organized sector (public + private) accounts for 15% of seed distribution,
rest is unorganized. Thus there is a need to protect farmers' rights as well as to
incentivize seed development.
3. The Indian seed programme largely adheres to a limited generation system for
seed multiplication in a phased manner. The system recognizes three
generations, namely breeder, foundation and certified seeds.
National Policy for Seed Development, 2011
1. In order to harmonize NPSD, 1988 with the National Seed Policy, 2002, the
former, has been revised in 2011 to streamline the procedures for import of
seeds and planting material.
2. As per the revised policy, now a small quantity of wheat or paddy seeds can be
imported into the country for trials under ICAR or on such farms which are
accredited by the ICAR. After trial and evaluation for one crop season and
satisfactory results therein, the importer can apply for bulk import of such
seeds.
3. For coarse cereals, pulses and oilseeds, trial and evaluation can also be done
on farms operated by the importer provided they follow the procedure and
protocol developed by ICAR, and is under ICAR monitoring and supervision.
Protection of Plant Varieties and Farmers' Rights Act, 2001

17
 1. The Act provides for the establishment of a sui generis system for the
protection of plant varieties and the rights of farmers on the one hand and to
encourage the development of new varieties of plants on the other.
2. Indian agriculture is dependent upon farmer-produced seed of varieties that are
both maintained and further adapted to their local growing conditions by small-
scale farmers. So India wanted to acknowledge the rights of farmers arising
from their contribution to crop conservation and development and the sharing
of their knowledge on adaptive traits. It also wanted to encourage farmer-to-
farmer exchange of new crop/plant varieties. So it evolved a sui generis system
of plant protection which allows farmers to improve and adapt the seed in order
to make it more successful in the local conditions.
3. The Act sets the requirements for plant protection as novelty, distinctness,
uniformity and stability.
4. But the farmer is entitled to save use, sow, resow, exchange, share or sell his
farm produce including seed of a protected variety. However he is unable to sell
seed that has is branded with the Breeders name.
5. The Act also contains provisions for "benefit sharing" whereby the local
communities are acknowledged as contributors of land races and farmer
varieties in the breeding of "new" plant varieties.
6. It is these extra provisions granting rights to both breeders and farmers which
makes the Indian system a sui generis method of protection. China and
Thailand are other examples of countries that do not implement a UPOV style
protection system.
7. It creates a Protection of Plant Varieties and Farmers’ Rights Authority which
registers plant varieties to protect the plant breeder's rights.
Seeds Bill, 2004
1. The Seeds Bill, 2004 aims to regulate the quality of seeds sold, and replaces
the Seeds Act, 1966. All varieties of seeds for sale have to be registered. The
seeds are required to meet certain prescribed minimum standards of
germination, physical purity and genetic purity. Transgenic varieties of seeds
can be registered only after the applicant has obtained clearance under the
Environment (Protection) Act, 1986.
2. The Bill exempts farmers from the requirement of compulsory registration.
Farmers are allowed to sow, exchange or sell their farm seeds and planting
material without having to conform to the prescribed minimum limits . However,
farmers cannot sell any seed under a brand name.

18
 3. If a registered variety of seed fails to perform to expected standards, the farmer
can claim compensation from the producer or dealer. The Bill provides for
setting up a compensation committee that shall hear and decide these
cases. But the Bill does not specify whether the committees will be set up at
the national, regional, state or district level; that decision would determine
whether farmers can easily access the compensation mechanism.
Challenges
1. There is a mismatch between the seed multiplication ratio from breeder seed
to foundation seed and from foundation seed to certified seed, which needs to
be addressed.
2. Comprehensive and authentic databases on seed production and trade in India
by public and private sectors as required under the seed and plant variety laws
need to be built up. The seed chain and the norms for quality control should be
followed without any compromises or shortcuts.
3. For horticulture crops which have a long gestation period , it is imperative to
ensure that only such varieties are imported that are suited to Indian
conditions.
4. In rainfed areas, wastage of seeds due to prolonged dry monsoon spells
immediately after sowing is a very common occurrence. In such a situation
maintaining seed diversity is important from the point of view of reducing
rainfall risks. There has to be an assured availability of a second batch of seeds
for repeat sowing. Drought resistant seeds need to be developed.
5. A number of transgenics particularly in cotton and vegetable crops, are sought
to be introduced into the country. The potential loss of production on account of
non introduction of transgenics has to be carefully balanced against the
dangers that transgenics may pose to ecology.
6. Climate change considerations have to be kept in new seeds.
7. imely delivery to farmers of high-yielding varieties requires big improvements
T

in the system that connects plant germplasm collections, plant breeding and
seed delivery. Thus increased public support in this regard is essential.
Fertilizers
Trends & Composition

19
 1. Fertilizer use has gone up ~4x from 1991 (70 kgpha to 290 kgpha in 2011-12)
but it still remains far behind China (395 kgpha) and Egypt (388 kgpha).
Currently India is an importer but it is expected to achieve self sufficiency in N
fertilizers by 2017. Focus is also on enhancing the use of Single Super
Phosphate (SSP) fertilizer which covers both for P and K. This fertilizer is not
imported at all. The NPK balance is deteriorating. So the government has
decided to move to a nutrient based subsidy regime.
2. Small and marginal farmers vs large farmers: Marginal farmers' consumption
increased from 55 kgpha in 1981-82 to 99 kgpha in 1991-92 to 175 kgpha in
2001-02. Large farmers however only used 27 kgpha in 1980-81 to 54 kgpha in
1991-92 to 68 kgpha in 2001-02. In unirrigated area, marginal farmers used 24
kgpha in 1981-82, 58 kgpha in 1991-92 and 96 kgpha in 2001-02. Large
farmers however only used 9 kgpha in 1981-82 to 19 kgpha in 1991-92 to 22
kgpha in 2001-02.

3. Very high variability has however, been observed in fertilizer consumption

among the states. While consumption is 237 kgpha in Punjab and 226 kgpha in
AP, it is 81 kgpha in MP, 58 kgpha in Odisha, 48 kgpha in Rajasthan and < 5
kgpha in some NE states.

4. Urea: consumption is 30 MT, production is 22 MT, imports are 8 MT.

Phosphorus (DAP + MOP) consumption is 14 MT, production is 4 MT, imports
are 10 MT. NPK consumption is 11 MT, production is 8 MT and imports are 3
MT.
Micro and Bio Fertilizers
1. Recently Fertilizer (Control) Order, 1985 has been revised to allow for
customized fertilizers including those fortified with micro nutrients and also bio
fertilizers.
2. Five bio-fertilizers (rhizobium, azotobacter, azospirillum, phosphate solubilizing
bacteria and mycorrhizae) and three organic fertilizers (city waste compost,
vermi-compost and castor de-oiled cake) have been included in the FCO to
facilitate their us
Fertilizer Subsidies

20
1. Overall composition: Fertilizers: ~50%, Power: ~17%, Irrigation:
~13%. Empirical studies show that marginal reduction in poverty and output
elasticity from subsidy is less than that from investment. Subsidies crowd out
the investment as well. They may also promote inefficient methods like
distorted use of fertilizers, electricity. So they should be replaced by increased
investment.
2. In 1992, government freed up P& K fertilizers. This led to a sharp increase in
their price and a deterioration in the nutrient balance (from 4:2:1 recommended
to 10:3:1 in 1996-97). Subsequently ad hoc subsidies were given on P&K as
well to restore nutrient balance. Then in 2011, nutrient based subsidy scheme
was started which is applicable to P & K fertilizers. As a result nutrient balance
has been restored to recommended levels.
3. Nutrient based subsidy means government fixing the subsidy according to the
nutrient content of the fertilizer and reimbursing the producer who sells at cost
(which is variable) - subsidy (which is fixed) @ a MRP which is ~50% of the
cost. In addition to P & K, micro nutrients carry additional subsidies. Urea MRP
is fixed by the government and private producers are not reimbursed. So
private production is a loss making venture.
4. In 2011-12, $13.5 bio of fertilizers subsidies were given (urea getting $6.5 bio
and P&K getting $7 bio). MRP to farmers covers ~50% of the cost. Budget
estimate 2012-13 put the fertilizers subsidy bill @ $12 bio with a reduction in
subsidy on decontrolled (P & K) fertilizers (urea getting $6.5 bio and P&K
getting $5.5 bio). Subsidy bill in 2010-11 was $12.5 bio with urea getting $4 bio
and P&K getting $8 bio.
5. But as a result of the subsidy deregulation the retail prices of K and P fertilizers
have gone up ~ 3x. There are also doubts over whether the subsidy is reaching
the farmers and hence the government has asked the manufacturers to furnish
cost and other data. It is argued that the P and K are almost wholly imported
but still a rise of 3x is not justified despite INR devaluation. $ prices have in fact
softened in recent months. This points to the dealers pocketing subsidies and
profits.

21
 New Urea Investment Policy, 2008 (Abhijit Sen Committee
Recommendations)
1. It was based on import parity price with provision of floor and ceiling
for determining the producer’s price of urea produced from new
investments.
2. It failed to attract much investments due to lack of any transparent
gas price pass through mechanism. Gas prices account for 80% of
the production costs.
New Urea Investment Policy, 2012
1. Its target is to attract investments worth Rs 35,000 crore to increase
domestic production by 8 MT.
2. It assures the investors of a 12 - 20% post-tax return on their capital
invested. To ensure this return, the government will cover the entire
cost of the natural gas.

Power Subsidies
1. Studies have found that state boards are able to recover only 10% of the cost
of electricity supplied to agriculture. Rajasthan + Gujarat + maharashtra
account for 50% of the total power subsidies while the southern states account
for 25%. This is possibly because they are more dependent on ground water.
2. Farmers would prefer to pay an amount for uninterrupted power rather than
having inadequate free power. Anyways the shortfall of power has to be
compensated by diesel engines which cost Rs. 12 per unit.
3. We need 'smart' subsidies - subsidies which are better targeted, differential to
keep local variations in mind (rain fed vs irrigation, small farms vs large farms),
better delivery vehicles (like debit input cards where the farmer is allotted a
total amount and he can chose the composition of subsidies himself which will
also stop overuse of vital resources like water).
Farm Mechanization
Trends & Composition
1. Farm mechanization level in India is between 30 - 40% in various agriculture
activities. Empirical studies show states with greater availability of farm power
have higher productivity.
2. Greater degree of farm mechanization is also incentivized by MGNREGS.

22
 3. In 1971-72, share of manual power (labor + animals) was 63%. In 1991-92 it
was 27%. in 2009-10 it was 13%. Power used per ha has grown from 0.4 kW in
1970-71 to 0.9 kW in 1991-92 to 1.7 kW in 2009-10 (again low compared to
China and Egypt). But growth rate of farm mechanization has been only 5%
p.a. in last 2 decades.
4. Farm mechanization has been confined only to a few peasants and in a large
way. Coupled with the fact that trend is towards smaller OHLs, farm
mechanization in India may hit a wall unless reforms are introduced.
5. As a result of reforms and institutional push, easy availability of formal financing
and capital subsidy especially on tractors propelled growth in
farm mechanization.

Farm Mechanization and Climate Change

1. Climate change has necessitated a switching over to machine assisted
resource-conservation techniques such as zero-tillage, raised-bed planting,
precision farming, drip or sprinkler irrigation, etc.
2. Farm mechanization has now become more relevant in mitigating the effect of
climate change by readjusting crop sowing schedules. For example, the climate
change-driven early onset of summers in the northern states has often resulted
in wheat yield dropping by 1.5 quintal per hectare with every one week’s delay
in its planting after mid-November. This loss can be averted by sowing wheat
early, which is possible only if the previous paddy crop is harvested
mechanically and wheat is planted with zero-till seed drills that do not
require ploughing the land.
Challenges
1. Structural issues like high procurement cost, adverse economies of scale,
lower credit worthiness, etc. have resulted in an automatic ‘exclusion’ of the
majority of small and marginal farmers in India from the benefit of farm
mechanization. As a result, farm mechanization has developed a stronger bias
towards larger land holdings (NSSO 2005).
2. Mechanizing small and non-contiguous group of lands is against ‘economies of
scale’ especially in operations like land preparation and harvesting. With
continued shrinkage in average farm size, more and more farms will fall into the
adverse category thereby making individual ownership of agricultural
machinery progressively more uneconomical.

23
 3. Moreover, farm mechanization is capital intensive and thus it remains beyond
the reach of small and marginal farmers. Custom hiring centres could have
been an alternate option. But, these centres need a minimum scale for efficient
operation as the activity is capital intensive. They also have a longer gestation
period due to lower asset utilization on account of the seasonal nature of
agriculture demand. There is a limit to which hiring centers can provide an
alternative because of uncertain climate and lack of institutional arrangements.
4. Higher risk due to ‘uncertain demand’ and ‘immature market’ has barred
seasoned business entities from entering this segment. First generation
entrepreneurs willing to establish these centres face a significant ‘entry barrier’
on account of non availability of financing either in the form of venture capital or
institutional loans. With the level of NPAs continuing to remain significant, it is
unlikely that the risk perception of financial institutions will change in the near
future. As a result, there is virtually a ‘complete market failure’ in this segment.
5. Intensive research on farm mechanization is also not adequate as it is a very
capital intensive activity.
National Mission on Agricultural Mechanization (NMAM)
1. Increasing the reach of farm mechanization to small and marginal farmers
and to the regions where availability of farm power is lower.
2. Offsetting adverse ‘economies of scale’ and ‘higher cost of ownership’ of
high value farm equipments by promoting ‘Custom Hiring Centres’ via rural
entrepreneurship’ model.
3. Passing on the benefit of hi-tech, high value and hi-productive
agricultural machinery to farmers through creation of hubs for such farm
equipments.
4. Promoting farm mechanization by creating awareness among
stakeholders through demonstration and capacity building activities; and
5. Ensuring quality control of newly-developed agricultural machinery
through performance evaluation and certification at designated testing centres
located all over the country.
Agriculture Labor

Trends
1. Cost of cultivation data shows that labor accounts for more than 40% of the
total variable cost of production in most cases.

24
 2. In 1881 landless labor numbered only 7.5 mm. In 1921 they numbered 21 mm
or 17.4% of the labor force. In 1971 they were 27% of the labor force. More
than 40% of rural work force and 25% of total work force works today as wage
earners.
3. Casualization of agriculture labor force: The proportion of labor in the
agriculture labor force has been constantly rising (from about 25% @
independence to 40% in 1991 and has stayed there since). This becomes even
worse if we consider the dropping share of agriculture in GDP.
Agriculture Wage Impact of NREGA (2009 & 2010)
1. AP: 58%.
2. Tamil Nadu: 54%.
3. Odisha: 57%.
4. Bihar: 47%.
5. UP: 72%
6. Punjab: 46%.
7. MP: 72%.
8. Chattisgarh: 72%.
9. Maharashtra: 53%.
10. J&K: 122%.
11. National: 24% (all cumulative).
Agriculture Wage Statistics
1. Long term trend: Studies showed that before 80s, real wages were almost
stagnant and in most cases were below minimum wages. Between 1983 and
1993-94 daily real wages grew @ 3.3% p.a. while between 1993-94 to 2004-05
they grew @ 2.3% p.a. only. Between 1999-00 to 2004-05 the rise was 0.6%
only. The inequalities between male and female rates has been rising.
2. During the period 2007-10, the average cumulative real farm wage rates
increased by 16.0% at the all India level. The growth was the fastest in Andhra
Pradesh (42%) and Odisha (33%), Bihar (19%) and Uttar Pradesh (20%).
3. Rural wages in Kerala were the highest in the country in the range of Rs.216-
305 during 2008-10, followed by Tamil Nadu, Andhra Pradesh and Karnataka in
that order in the Southern Region.
4. In the Northern region, Haryana recorded the highest agricultural wages in the
range of Rs.121-182 during 2008-10 period followed by Punjab in the range of
Rs 110-162, and Rajasthan in the range of Rs.105-139. West Bengal and Uttar
Pradesh followed in that order.

25
 5. SInce mid 1970s inter regional agriculture wage disparities have been
declining. This is because a relative decline in the food grain prices has had a
greater impact on the purchasing power of wage earners in lower wage areas.
Moreover agriculture labor migration, mechanization of agriculture in high wage
areas, alternate poverty and unemployment programmes etc. have had their
impact as well.
6. Due to the above factors the disparity between male and female wage rates is
also declining. This is because the adoption of farm mechanization
technologies in operations traditionally done by women has been low (because
their demand was highly seasonal and intense over a few days only).
Land Deterioration
Features
1. Out of 141 mha of cultivable land, 100 mha is degraded. Chemical degradation
accounts for 20% and water erosion for 70% of this. 20% of cultivable area is
experiencing declining fertility and 2% water logging. 3% of cultivable area is
affected by salinity.
2. Severe soil erosion is defined as 40 tonnes pha. Average soil erosion in India is
16 tonnes pha. Thus watershed management and soil conservation projects
are needed.
3. Indian soils are carbon deficient due to intensive use like removal of plant
residue for forage, removal of crop residue.
4. Global climate changes like rise in sea level, drop in ground water, decrease in
soil carbon will lead to additional infertility of soil.
Initiatives
1. Under the RKVY, many state level schemes for soil testings have been
launched and information disseminated to peasants.
Water Management
River Basin Linkage Plan
1. It consists of 2 components - (a) Himalayan Component and (b) Peninsular
Component. Bulk of water movement will be in peninsular component (80% of
175 bcm water).
2. The Himalayan Component includes mainly movement of water from Ganga
basin to western India. Water of Brahmaputra can't be tapped because it is at a
lower elevation relative to Ganga basin and Indus can't be touched due to
international treaties.
Watershed Management Projects

26
 1. India's utilizable water is 1100 bcm out of 1900 bcm of annual availability. Out
of this current demand is 650 bcm and projected demand for 2025 is 800 bcm.
Due to competition from other sectors, water availability for agriculture will
decrease. India's existing storage capacity is 250 bcm which is ~13% of
annual availability. 50 bcm storage projects are under consideration. 220 bcm
of groundwater is used for agriculture while 20 bcm for domestic and industrial
use.
2. In 2006, Parthasarathy Committee submitted its report in which it said irrigated
agriculture appears to be hitting a plateau and dry farming productivity needs to
be developed via watershed management projects. Thus the Integrated
Watershed Management Programme was modified and stress was laid on
micro projects. A target for 25 mha was set in 11th Plan which has largely been
achieved.
Dairy Sector
1. India is the largest milk producing nation (120 MT) vs 54 MT in 1990-91 and
per capita availability is 275 g/day vs 175 g/day in 1990-91. Demand for milk
will be 150 MT by 2017 and 180 MT by 2022. So milk production needs to
increase by 6 MT per annum while current growth rate of production is 4 MT
per annum.
2. Between 1980-81 to 1989-90, milk production was growing @ 5.6% p.a. while
after 1990 it has grown @ 4.2% p.a. only.
Challenges
1. Small herd size and poor productivity. Poor artificial insemination network. Low
quality bulls.
2. Neglect compared to crop production, inadequate support facilities like credit,
government attention. Encroachment on pasture lands.
3. Poor access to organized markets deprives farmers of proper price.
4. Poor veterinary setup.
Assistance to Cooperatives
1. The central sector scheme started in 1999-2000, aims at revitalizing the sick
dairy cooperative unions at the district level and cooperative federations at the
State level. The rehabilitation plan is prepared by the National Dairy
Development Board (NDDB) in consultation with the concerned State Dairy
Federation and District Milk Union. This has succeeded in pulling out many
unions from perpetual losses.
National Dairy Plan

27
 1. Phase 1: It focuses nutritional level in fodder, enrichment of straw, availability of
loans for dairy farmers, welfare schemes for dairy farmers, support to women
co-operative dairy plants and automation. It was launched in Anand and invests
$450 mm and covers 14 states. It seeks to increase productivity of milch
animals and provide better access of organized milk processing sector to dairy
farmers.
Fisheries (Blue Revolution)
1. Indian coastline is 8100 km, EEZ: 2 mm sq. km (west coast: 0.85 mm, east
coast: 0.55 mm, A&N islands: 0.6 mm), continental shelf: 0.5 mm sq. km.
Fisheries contribute 5% of agri-GDP and 0.6% of total GDP.
2. W Bengal (1.5 MT) > AP (1 MT) > Gujarat and Kerala (0.7 MT each).
3. In 2010, aquaculture production: 5 MT (3rd highest in the world), marine
production: 3 MT. Per fisherman catch = 2 T per annum. Fisheries account for
~5% of agriculture produce. Exports are $2.5 bio and growing @ 10%
p.a. Growth rate of the sector from 1980-81 to 1989-90 was 4.4% which has
slowed down to 3.8% from 1990-91.
Challenges
1. Shortage of quality and healthy fish seeds and other critical inputs.
2. Lack of resource-specific fishing vessels and reliable resource and updated
data.
3. Inadequate awareness about nutritional and economic benefits of fish.
4. Inadequate extension staff for fisheries and training for fishers and
fisheries personnel.
5. Absence of standardization and branding of fish products.
The Way Forward
1. Schemes of integrated approach for enhancing inland fish production
and productivity with forward and backward linkages.
2. Large scale adoption of culture-based capture fisheries and cage culture
in reservoirs and larger water bodies are to be taken up.
3. Sustainable exploitation of marine fishery resources especially deep sea
resources and enhancement of marine fish production through sea farming,
mariculture.
Meat & Poultry
1. Egg production was growing @ 8% between 1980-81 to 1989-90 but has
slowed down to 6% since then. Total egg production was 61 bio in 2010-11.
2. Meat production was 5 MT in 2011-12, wool production is stagnant at 42 million
kg level since 1990-91.

28
Challenges
1. Maize availability and cost since it is the largest cost head.
2. Lack of marketing intelligence.
3. Lack of veterinary network.
4. Low skilled manpower and lack of adoption of modern methods.
Measures Taken
1. One time assistance is provided to poultry farms, BPL families are given
support to start poultry farms.
2. NABARD is financing a poultry venture capital fund.
Fodder

Challenges
1. A majority of the grazing lands have either been degraded or encroached
upon restricting their availability for livestock grazing.
2. Due to increasing pressure on land for growing food grains, oil seeds, and
pulses, adequate attention has not been given to the production of fodder
crops.
3. Diversified use of agriculture residues like paper industry, packaging, etc.
widening the gap between the supply and demand for fodder.
4. Current production of improved fodder seed in the country is about 40 KT as
against the requirement of 550 KT to be cultivated on 11 mha area.
The Way Forward
1. A reliable data-base is required for assisting in realistic planning.
2. The forest department can play a major role in augmenting fodder production
in the country. The degraded forest areas, mostly under the Joint Forest
Management Committees (JFMCs), can be used for assisting growth of
indigenous fodder varieties of grasses, legumes.
3. Production of seeds of high yielding fodder varieties needs to be
increased. High yielding fodder varieties need to be introduced throughout the
country, instead of dual purpose varieties.
4. First and foremost requirement is to enhance area under fodder, which is
possible by developing commons. Improving productivity and coverage of
coarse grains and dual purpose crops in rainfed areas is the next priority. Since
the present availability of seeds of high yielding fodder varieties is severely
limited, the next priority is to promote large scale production of high yielding
fodder seeds with the help of seed growers and dairy farmers. We also need to
do a lot on effective post-harvest management interventions so as to reduce
the wastage of crop residues including its enrichment in quality.

29
Horticulture

1. From 2001-02, the land under cultivation has gone up from 16 mha to 22 mha
and productivity from 9 tonnes pha to 11.5 tonnes pha.
2. The National Horticulture Mission follows a cluster approach and provides end
to end solutions.
Spices
1. Government has established 2 spice parks in major spice growing regions (MP
and Kerala) for post harvest processing vis color sorting, cleaning, packaging,
grinding etc.

Debate: Are tenant cultivators as efficient as owner cultivators?

(a) No
1. Investment Argument: A sharecropper tenant would be unlikely to invest in the
land because (a) he would have to share the benefits with the landlord.
Similarly landlords are also unwilling to invest because the tenant will free ride
in this case. (b) his tenancy tenure is not fixed and he may be evicted in the
next year itself. Reason (a) can be overcome if there is an agreement on joint
sharing of costs as well. But reason (b) remains. And this is made even worse
due to Indian laws which favor tenant and hence makes landlord unwilling to
sign long term lease agreements. Thus there is an urgent need to reform
tenancy laws.
2. Agricultural Technology Argument: In primitive times, the technology wasn't
bent in favor of many fixed investments and labor was the key factor. So
tenancy survived. Under the new technology, the role of fixed capital is
increasing. So this will definitely bend the balance against tenancy.
(b) Yes
1. Pooling Argument: In tenancy lands, the skills and knowledge of both the
landlord and the tenant are applied and hence production better. Where cost
sharing is agreed to, the capital available is higher - at least working capital for
sure and fixed capital to some extent.
2. Agricultural Technology Argument: One way out is equipment being owned by
landlord and cost shared or rented to tenant. Another way out is the existence
of large rent market for agriculture equipment. This way fixed capital can be
paid for like working capital.

Debate: Are small farmers less productive than large farmers?

30
1. As we can see China has a lower farm size yet the productivity is double that of
India. This is a strong argument in favor of small land holdings. Agriculture
growth rate has been higher in China. Coupled with higher productivities they
have led to a much sharper decline in poverty indicating that development in
agriculture is more effective in reducing poverty.

1. Productivity per ha: NSSO data conclusively shows that the productivity per
hectare decreases with the increase in size of land holding. The productivity
per hectare decreases from Rs. 25K for farm sizes < 0.4 hectare, Rs. 19K for
farm sizes between 0.4 ha to 1 ha, Rs. 17K for farm sizes between 1 ha to 2 ha
to Rs. 8K for farm sizes > 10 ha (Source: NSSO 59th round). The reasons are
not too far to seek.
2. Irrigation: Area under irrigation for marginal farmers has gone up from 40% in
1980-81 to 44% in 1990-91 and 51% in 2000-01. For small farmers it was 33%
in 1980-81 to 36% in 1990-91 to 39% in 2000-01. For large farmers it was only
16% in 1980-81 to 22% in 1990-91 to 31% in 2000-01. (Source: Agriculture
Census)

31
3. Fertilizer Consumption: Marginal farmers' consumption increased from 55
kgpha in 1981-82 to 99 kgpha in 1991-92 to 175 kgpha in 2001-02. Large
farmers however only used 27 kgpha in 1980-81 to 54 kgpha in 1991-92 to 68
kgpha in 2001-02. In unirrigated area, marginal farmers used 24 kgpha in
1981-82, 58 kgpha in 1991-92 and 96 kgpha in 2001-02. Large farmers
however only used 9 kgpha in 1981-82 to 19 kgpha in 1991-92 to 22 kgpha in
2001-02.
4. HYV seeds: In 2001-02, 72% of marginal farmers used HYV, 68% of small
farmers used HYV while only 47% of large farmers used HYV.
5. Cropping intensity: It was 139 for marginal farmers, 128 for small farmers while
only 121 for large farmers in 2001-02.

32
33
 1. Capital Intensity Argument: Large farmers are able to employ more capital,
hence more productive.
2. Intensive Labor Argument: Small farmers are able to work harder, hence more
efficient.
3. Empirical Studies: They indicate productivity is size independent. Factors that
impact productivity are easy access to modern inputs, presence of support
infrastructure, technology and marketing systems.
Debate: Have intersectoral Terms of Trade improved for agriculture?
1. Inflation data suggests that food inflation has been higher than that of
manufactured goods inflation.
2. But this is faulty because it doesn't capture all goods and services consumed
by agriculture.
3. Economists argue that income terms of trade are more relevant.
Agricultural Reforms
Q. India urgently needs yet another green revolution by infusing modern
technologies like ICT and space technologies and strategic management
technologies and strategic management techniques to come up with demand side
pressures resulting in persistent food inflation in the economy. Do you agree? (2011,
II, 30)

Institutional Reforms
(a) Tenancy Reforms
1. Current tenancy laws impede modernization of agriculture. The number of
economically unviable landholdings is increasing. But the marginal farmers
have to stick to it and can't lease it out because of pro-tenant legislations.

34
 2. Similarly corporate houses need to get into agriculture, but they can't because
of archaic legislations on tenancy.
3. Female empowerment.
(b) Marketing Reforms
1. India's food supply chain is highly ineffective and old. There are a number of
intermediaries who add little value and exploit the peasants and consumers.
They control the mandis and are opposed to marketing reforms.
2. Peasants get only a fraction of final value. Wastage is 35-40%. MSPs are
ineffective in most states due to inadequate capacity of FCI to procure grains
as well as corruption in mandis. Storage schemes are being pursued. A PPP
scheme will create 15 MT of storage while the budget 2012-13 announced
additional storage creation of 2 MT. Additional $1 bio is allocated under Rural
Infrastructure Development Fund to storage creation. FCI has a current storage
capacity of 64 MT.
(c) Institutional Credit Reforms
1. Agricultural credit needs to be given in the name of the tiller, not the land
owner.
Technological Reforms
1. NAS laid stress on HYV seeds, fertilizers and irrigation.
2. Milk Revolution.
3. Horticulture Revolution.
Green Revolution & Capital Formation in Agriculture

Chand, Parappurathu (2012)

(a) Trends in Agriculture Growth

35
 1. The above analysis suggests that the decade before the green revolution was
characterized by a steep decline in growth in GDP-agriculture, with growth
rates plummeting from close to 3% in the decade ending (DE) 1960-61 to less
than 1% in the DE 1968-69.
2. The subsequent period witnessed a turnaround in growth with growth rates
moving in the range of 2% to 3% for a sustained period of nearly
three decades, though with occasional slumps.
3. A deceleration of growth came in the latter half of the 1990s, followed by a
quick nutshell, the growth series clearly establishes a steady increase in the
growth rate for three decades after the advent of the green revolution, followed
by a gradual tapering off and dec- line after the mid-1990s, which lasted for a
decade.
4. This was succeeded by an unambiguous turnaround in the years coinciding
with the Eleventh Five-Year Plan (2007-12).
(b) Trends in Composition of Agriculture Growth
1. Various phases can be broken down into - (a) Pre-green revolution period
(PGR). (b) Early green revolution period (EGR). (c) Period of wider technology
dissemination (WTD). (d) Period of diversification (DIV). (e) Post-reform period
(PR). (f) Period of recovery (REC)

36
1. Total fixed capital formation in agriculture moved upwards from the mid-1960s
onwards when both government and private spending increased with
the commencement of the green revolution.
2. In the initial years of this phase, it was private capital formation that received a
real impetus. However, public investment picked up in the mid- 1970s.
3. The share of public capital formation in GDP – agriculture remained in the
range of 3% to 4% throughout the 1970s, but started dipping from the mid-
1980s, falling below 2% in 1996-97 and reaching a trough at 1.87% in 2000-
01.
4. As with public investment, private investment also experienced a dip in the
early 1990s. Both declined not only in terms of share in GDP but also in
absolute terms during this period.

37
 5. This led to a perceptible slowdown in agricultural growth, It also supports the
assumption that a part of the deficit in public investment was translated into
reduced availability/use of inputs and thereby contributed to a deceleration in
output growth.
6. A plough back in investment during the middle of the first decade of this century
reversed the consumption pattern of primary inputs, as evident from a
substantial growth in certified seed distribution (22.93%), renewed consumption
of fertilizers (6.95%) and an increase in area under irrigation (2.18% growth in
gross irrigated area).

1. Initially India imported food grains from US under PL 480 program. But these
grains had strings attached, so India sought food grain self-sufficiency.
2. Earlier agricultural reforms were relied upon to bring change. But their
implementation failed and hence New Agricultural Strategy was adopted to
increase food grain production. NAS stressed on technological up gradation as
compared to agri-reforms. Stress was laid on fertilizers, irrigation, HYV seeds.
For better adoption, credit was extended to credit-worthy farmers.
Phase 1: 1966 - 72
1. Before the introduction of new seeds, CACP and FCI were setup. Then 18K
tons of new wheat seeds were imported and distributed in irrigated areas of
Punjab, haryana and UP. This was supported by provision of fertilizers, power,
water and credit @ subsidized rates.
2. The effect was an increase in foodgrain output from 75 MT in 1966-67 to 105
MT in 1971-72 and India became self sufficient in food.

38
 3. GR created a pool of high caste farmers who reaped the benefits and
increased their dominance in village affairs as well. Soon they gained political
voice and organized themselves to press for their interests (demand more
subsidies etc.).
Phase 2: 1973 - 80
1. Initial debacle: Due to hoarding etc. government decided to take over the
wholesale trade of wheat which proved to be a disaster. There were successive
droughts as well and as a combined effect wheat production actually declined.
India had to import food grains again in early 70s.
2. Increasing importance of subsidies: There was the oil shock as well.
Government increased fertilizer subsidy so as to prevent a rise in the prices of
fertilizers. Retention price scheme in urea was introduced. Non fertilizer
subsidy bill too increased from 0.5% of agriculture GDP in 1973 to 4% in 1980.
Fertilizer subsidies were 0.4% in 1980. This was 1.5% of total GDP.
3. Increasing investment in ground water irrigation and higher power subsidies: Its
share rose from 0.5% in 1960 to 20% in 1975. This was on account of private
investment in tube wells. This led to an increase in power subsidies which rose
to ~ 45% of total agriculture subsidies in early 1980s.
4. Higher productivity: The production of food grains in the decade increased @
3.1% p.a. and the yields @ 2.5% p.a.

39
 Regionwise
Growth in
1965-80 1980-1990 1990-2005 Overall
Agriculture
GSDP

All India 2.2% 3.4% 1.7% 2.4%

Northern
3.4% 3.5% 1.6% 2.8%
Region

Eastern
1.3% 3.6% 1% 1.8%
Region

Central
2.1% 3.3% 3.2% 2.7%
Region

Southern
1.8% 3.4% 0.5% 1.8%
Region

Phase 3: 1981 - 90
1. Spread and stagnation: It spread eastwards into W Bengal and Bihar which
showed an increase in yields of rice @ 5% and 3.7% respectively in 80s. But in
the original and other areas the yields stagnated resulting in a yield slowdown
in both wheat and rice.
2. Increase in input subsidies: With the slowdown in yields, input subsidies were
further increased to maintain the production. From 4.4% of agriculture GDP in
1980s they rose to 7.2% in 1991 and has stayed there since. This was 2% of
total GDP in 1990.
3. Adverse impact of government policies: Despite no direct taxes on agriculture
and explicit subsidies, the overall environment led to a deterioration in ToT for
agriculture. This was due to high indirect taxes, favorable terms and high
protection accorded to industry and also anti-export bias towards agriculture.

40
 4. Investment in R&D: Investment in agriculture R&D is only 0.3% of agriculture
GDP as against 0.7% in developing countries at large and 2-3% in developed
countries. In the initial years of GR, it increased but then stagnated in 1980s
and has since fallen.

Phase 4: 1991 - 2005

1. Improving ToT: Lowering of protection for industries led to an improvement in
ToT for agriculture from 0.9 in 1991 to 1.2 in 2000 (Gulati and Fan, 2008). This
increased the profitability of the sector and also increased investment. But still
the policies are mostly inward looking and restrict exports. But between 1999 to
2004 the ToT declined mainly as the Indian prices became more aligned to
international prices which were falling.
2. Diversification in consumption: Due to higher incomes.
3. Slowdown in productivity growth: Despite this there was a slowdown in the
yield growth in foodgrains from 2.7% in 1980s to 1.4% in 1990s. Stagnation in
public investment is believed to be an important factor for this.
4. Rainfed vs irrigated areas: The slowdown of agriculture production growth in
rainfed areas was higher than in irrigated areas. For example in Punjab where
only 3% of cultivated area is rainfed the agriculture GDP growth fell from 4% in
the 1984-85 : 1995-96 period to 2.2% in 1995-96 : 2004-05 period. In Haryana
where 17% of cultivated area is rainfed the agriculture GDP growth fell from
4.6% in the 1984-85 : 1995-96 period to 2% in 1995-96 : 2004-05 period. In
UP where 32% of cultivated area is rainfed the agriculture GDP growth fell from
2.8% in the 1984-85 : 1995-96 period to 1.9% in 1995-96 : 2004-05 period. But
in TN where 50% of cultivated area is rainfed the agriculture GDP growth fell
from 5% in the 1984-85 : 1995-96 period to -1.4% in 1995-96 : 2004-05 period.
Similarly in Gujarat where 65% of cultivated area is rainfed the agriculture GDP
growth fell from 5.1% in the 1984-85 : 1995-96 period to 0.5% in 1995-96 :
2004-05 period. In Rajasthan where 70% of cultivated area is rainfed the
agriculture GDP growth fell from 5.5% in the 1984-85 : 1995-96 period to 0.3%
in 1995-96 : 2004-05 period. Similarly in Maharashtra where 83% of cultivated
area is rainfed the agriculture GDP growth fell from 6.7% in the 1984-85 : 1995-
96 period to 0.1% in 1995-96 : 2004-05 period.

41
 5. Small and marginal farmers adopting new inputs at a higher rate than large
farmers: Area under irrigation for marginal farmers has gone up from 40% in
1980-81 to 44% in 1990-91 and 51% in 2000-01. For small farmers it was 33%
in 1980-81 to 36% in 1990-91 to 39% in 2000-01. For large farmers it was only
16% in 1980-81 to 22% in 1990-91 to 31% in 2000-01. Marginal farmers'
consumption increased from 55 kgpha in 1981-82 to 99 kgpha in 1991-92 to
175 kgpha in 2001-02. Large farmers however only used 27 kgpha in 1980-81
to 54 kgpha in 1991-92 to 68 kgpha in 2001-02. In unirrigated area, marginal
farmers used 24 kgpha in 1981-82, 58 kgpha in 1991-92 and 96 kgpha in 2001-
02. Large farmers however only used 9 kgpha in 1981-82 to 19 kgpha in 1991-
92 to 22 kgpha in 2001-02. In 2001-02, 72% of marginal farmers used HYV,
68% of small farmers used HYV while only 47% of large farmers used HYV. In
1996-97, 59% of marginal farmers used HYV, 55% of small farmers used HYV
while only 42% of large farmers used HYV. It was 139 for marginal farmers,
128 for small farmers while only 121 for large farmers in 2001-02. The same
figure was 134 for marginal, 128 for small and 116 for large in 1981-82.
Impact
1. Need for post harvest management: The new seeds have shorter maturing
period. Thus the farmers can do multi cropping. But they also need better
storage and post harvest facilities. Multi cropping potential was effectively a
land saving one and hence it made the new seeds very popular.
2. Increased inputs: The new seeds convert more nutrients into the grain. Thus
they need more fertilizers and hence more water. It was thought that due to
high input costs, specially of digging wells in dry areas their use will be
restricted by the large farmers and they will increase inequality. But empirical
studies show that in 2001-02 in unirrigated land 53% of land small and
marginal farmers used HYV seeds while only 30% of land under large farmers
used them. The corresponding figures for 1996-97 were 37% and 25%
respectively. In irrigated land, 88% of small and marginal land area was under
HYV in 2001-02 while 78% of large. The figures were 79% and 77%
respectively in 1996-97.
3. Distortion in farm ecology: Since they were heavily dependent on use of
fertilizers and water a technologically optimum mix was needed. But economic
signals may be distorted and may not reflect the technological optimum. This
may degrade the farm ecology.

42
 4. Declining use of manual power and increase in farm mechanization: The
uneven agricultural growth is also responsible for it. Areas with high labor
surplus saw a larger decline in agriculture output while areas with low labor
surplus saw a lower decline in the output. Though labor migration happened
but this also increased the farm mechanization. But overall it led to the fall in
employment elasticity of agriculture. In many places now new cost sharing
models between the tenant and land lord have come up.
5. More equity: The relative decline of food grain prices accrues more benefits to
lower segment. It has also led to food security despite lowering employment
elasticity of the sector. Moreover the benefits of new technology have accrued
more to small and marginal farmers.
6. Environmental degradation and GR: In India more than the harm done by
fertilizers and pesticides it is the degradation and deforestation of marginal and
common land which causes environmental problem. GR has reduced the
pressure on land and empirical studies suggest that deforestation is higher in
areas where penetration of new technology is low.
7. Increased commercialization of agriculture. Increased linkages with industry.
8. Degradation of soil, environmental impacts. Free oil / electricity.
Q. "The success of green revolution shows the importance of sate in agrarian
transformation." Comment. (2009, II, 20)
Farm Suicides
1. Maharastra, MP and AP account for highest number of farm suicides.
2. Factors increasing suicide likelihood are over dependence on cash crops since
their prices are much more volatile and are often rigged at global level. Cash
crops also involve higher production costs.
3. One way to reduce the suicides is to increase MSP and making it effective.
4. Government will provide 6 month loans to farmers under ISS for post-harvest
storage. Storage schemes are being pursued. A PPP scheme will create 15 MT
of storage while the budget 2012-13 announced additional storage creation of 2
MT. Additional $1 bio is allocated under Rural Infrastructure Development Fund
to storage creation.
Agriculture Insurance
National Agriculture Insurance Scheme
1. It seeks to provide insurance cover to all crops against natural calamities.
Agriculture Insurance Company was the nodal agency.
2. It covers ~25% of the farmers but it is lopsided and ~75% of the operations are
in few states only.

43
Weather Based Crop Insurance Scheme
1. It provided protection against adverse weather incidences. It settled claims in
quick time. AIC was the nodal agency.
Rashtriya Krishi Vikas Yojana (RKVY)
1. It is a $4 bio scheme and its objective is to increase investment in agriculture to
enhance production and productivity. The poor growth of agriculture over 9th
and 10th FYP was seen to be an effect of poor investment in agriculture, hence
the need to increase investment.
2. Under the RKVY, many state level schemes for soil testings have been
launched and information disseminated to peasants. BGREI, NFSM and
National Saffron Mission are a part of it.
3. It incentivizes the states to increase public investment in agriculture. It is a
comprehensive scheme and allocations are made to individual projects which
are approved if they satisfy various criteria. Up to 25% of the funds can be
used to strengthen state agriculture schemes. It seeks to draw synergies
between dairy, poultry, fisheries and agriculture.
BGREI
1. This includes block demonstrations of rice and wheat technologies in a cluster
mode approach, promoting resource conservation technologies, watershed
management activities, increased farm mechanization. The production of rice
in 7 states under the scheme has increased by 21% in last 2 years.
National Food Security Mission
1. Focus was on districts where productivity of wheat, rice, pulses, millets and
fodder was lower than national average. The aim was to increase production
there. National level aim was to increase production of rice by 10 MT
(achieved), wheat by 8 MT (13 MT achieved), pulses by 2 MT (3 MT achieved)
by 2012. It has been successful.
2. It stressed on increased farm mechanization, better inputs, seed development,
technology demonstration and deployment and marketing access. It focused on
districts where the productivity was < the state average for rice and wheat. For
pulses those districts were covered which have the potential for area expansion
and productivity enhancement in pulses.
3. Dedicated Project Management Teams (PMTs) have been provided at
district, state and national levels for implementation. Consultants are provided
at each level as a part of PMTs. National, state and district level monitoring
teams are constituted for continuous evaluation.

44
 4. Publicity campaigns are organized at the national, state and district level
through advertisements in print media, video clips on mass media, brochures,
fairs, exhibitions, street plays, etc. for popularizing the components of mission.
5. Rice: A majority of districts out of 139 covered showed consistently an increase
in yields compared to the pre-NFSM period despite drought conditions. The
number of districts recording > 20% increase in the yield were more than those
recording < 10% increase in yield.
6. Wheat: A majority of districts out of 141 covered showed consistently an
increase in yields compared to the pre-NFSM period despite drought
conditions. The number of districts recording > 10% increase in the yield were
less than those recording < 10% increase in yield.
7. Pulses: Out of 171 districts a majority consistently showed enhanced yields
despite drought conditions.
NFSM Part 2 in 12th FYP
1. It will also cover coarse crops and aim to increase production by 25 MT - 10 MT
of rice, 8 MT of wheat, 4 MT of pulses and 3 MT of coarse cereals.
2. In addition to enhancing the productivity in low productivity areas, stabilizing
the productivity gains in high producing areas is equally important. Accordingly,
in the 12th Plan it will follow location specific, target oriented strategies.
3. It will also promote cropping systems in place of promoting individual crop.
Major cropping systems such as rice-wheat, rice-pulses, maize/millets-pulses.
Crop rotation, inter-cropping will be promoted.
4. Post harvest management and R&D will receive attention.
Challenges
(a) NFSM
1. Lack of cooperation from states. Better coordination is needed with them.
2. Seed Replacement Rate (SRR) has been targeted without matching the seed
production plan in some States. This approach is bound to delay adoption of
latest improved varieties.
(b) ISOPOM
1. A large part of area under these crops is rainfed. There is very high fluctuation
in the production and productivity of oilseeds due to intermittent dry spells
in Kharif season, insect pest infestation and aberrations due to various other
factors in some areas and states.
2. The prevalence of local poor yielding varieties requires interventions. Drought,
pest and insect tolerant or resistant hybrids and varieties suitable to
different agro-climatic zones are required.

45
The Way forward
1. The future of food security is highly dependent on two important and inter-
related factors, first the ability to succeed and absorb the technology for raising
agricultural productivity, and second effecting measures to successfully adopt
to climate change. There is need for an increased, stable, low cost
environmentally sustainable food production.
2. In addition, agriculture needs to be diversified to meet the changing dietary
preference and for realizing higher income for the farmers.
3. SRR linked seed production plan should be developed for each state.
4. Approaches should be agro-climatic and region-centric.
5. Programmes should focus on dominant cropping system rather than on a single
crop. Rice, wheat and pulses-based cropping systems should be
considered. The major cropping systems include: rice-rice, rice-chickpea, rice-
wheat, wheat- chickpea and pulses-wheat. Such an approach would pay
attention to companion crops of the system rather than focusing on one crop
which in any case is dependent on the duration and practices of the other crop.
6. R&D should be encouraged.
National Mission for Sustainable Agriculture
1. It recognizes the threat climate change poses to the food security of the
country. So it seeks to transform agriculture into a climate-proof sector. It is a
part of National Action Plan on Climate Change.
2. Naturally the focus is on dry farming through the development of drought
resistant and pest resistant varieties and developing institutional capabilities. It
also includes RADP, CADP.
3. Government report says 1º C rise in temperature will lead to a fall of 6 MT in
wheat production.
Rainfed Area Development Program (RADP)
1. RADP has been introduced as a sub-scheme of RKVY during 2011-12 with
specific focus on small and marginal farmers by offering a complete package of
activities. It follows a cluster approach and seeks to mitigate the impact of
weather on agriculture.
2. In budget 2012-13, it will be merged with National MIssion on Sustainable
Agriculture.
Command Area Development Program
1. It aims to narrow down the gap between irrigation potential and irrigated area
by 10 mm hectares.
National Mission on Micro Irrigation

46
 1. It seeks to encourage use of drip and sprinkler irrigation by providing 60% aid
to marginal farmers and 50% to general farmers.
Macro Management of Agriculture
1. It is a scheme to plug the gaps in funding of various projects. Money is given to
the states.
2. The practice of allocating funds to States/UTs on a historical basis has
been replaced by a new allocation criteria based on gross cropped area and
area under small and marginal holdings.
3. The permissible ceiling for new initiatives has been increased from the
existing 10% to 20% of the allocation.
4. At least 33% of the funds have to be earmarked for small, marginal and
women farmers.
5. Active participation of the Panchayati Raj Institutions (PRIs) of all tiers
would have to be ensured in the implementation of the scheme
including review, monitoring and evaluation at district and sub-district level.
Agriculture Credit

Increasing Influence of Rural Moneylenders Despite Rising Formal Agri-

Credit
1. Moneylenders provided 70% of total rural credit in 1951. This
proportion fell to 17% in 1981 before climbing back to 30% in 2002.
2. Farmers often choose to go to moneylenders despite higher interest
rates because of more flexible repayment schedules, strict KYC
norms of banks, provision of agri-credit against the title or tenancy
agreement only and fewer restrictions on borrowing for
consumption.
3. The collapse of microfinance seems to have provided another
catalyst for the re-emergence of the moneylender.

Aggregate Agricultural Credit Numbers

1. The government has followed Doubling of Agriculture Credit Policy (DACP)
where agriculture credit has to be doubled every 3 years starting from 2003-04.
2. So far in all years, targets have been overachieved with the agriculture credit
growing from $17 bio in 2003-04 to $95 bio in 2011-12. Target for 2012-13 is
$115 bio. But a breakup of these numbers provides a different story.

47
Institutional Breakup
1. Historically cooperatives and Regional Rural Banks (RRB) have been more
suited to the needs of small and marginal farmers.
2. In 1991-92, cooperatives controlled 51% of agri-credit flow, scheduled
commercial banks 43% and RRBs 5%. in 2010-11, share of cooperatives
dropped to 16%, scheduled commercial banks to 74% and the RRBs to 10%.
Regional Imbalance
1. South India accounts for just 18.5% of Gross Cropped Area (GCA) but takes
37.5% of the agri-credit. Central India on the other hands accounts for 27% of
the GCA while agri-credit is just 13%. This was the situation in 11th 5-year Plan
and the situation has worsened from the 10th 5-year Plan.

Mistargeting
1. Cropping Intensity is the ratio of GCA to NCA. Typically small and marginal
farmers are more intensive users of land compared to the rich farmers. Again
we see regions of high cropping intensity have lower allocation of agri-credit
available.
2. Cropping holiday in AP is a tell tale sign of agriculture credit gone wrong. It is
given to absentee farmers who use it for non-agricultural purposes.
3. 67% of agricultural workforce is women but they don't have titles to land, hence
can't avail of agriculture credit.

48
Government Initiatives
1. Interest Subvention Scheme (ISS) which gives crop loans to farmers up to Rs.
1 lac and 1
year at 7% p.a. + a waiver of further 3% on the farmers with prompt repayment
history.
2. Post harvest loans for up to 6 months will be given to farmers under the same
ISS. This is to avoid distress sale. (But where will they get storage facility
from?)
3. ADWDRS, 2008 to free up bank lines to the sector.
4. For loans up to Rs.50,000 no need of the No Dues Certificate.
5. For loans up to Rs. 1 lac no need of any security.
6. Kisan Credit Cards: This helps in providing timely credit. It is like a revolving
facility, all paper work done in beginning and the farmer assigned a credit limit.
Banks are now enhancing this card to a chip based card which will be like ATM
and hold limit and usage information.
Agriculture Debt Waiver and Debt Relief Scheme, 2008
1. All loans made between 1 April 1997 and 31 March 2007 and due on
31 December 2007 and unpaid on 28 February 2008 were eligible for the
scheme.
2. So far the Government has spent Rs. 52k cr on it.
Y H Malegam Committee on Micro finance Institutions
This committee was constituted by RBI in wake of the MFI developments in AP. Its
main recommendations are:
1. MFIs to be designated as separate NBFC to be brought under RBI control.
2. A margin cap of 10% for established MFIs and 12% for small MFIs.
3. A cap of 24% on the interest chargeable.
4. A borrower can be a member of only one SHG.
5. MFIs can only charge 3 fees for increasing transparency - interest, insurance
fee, processing fee.
PDS (after 1991)

49
Trends
1. Procurement: Procurement operations of government were < 5% of agriculture
output before the GR. In 80s they rose to 10% and now they have risen to over
15%. This has reduced the fluctuations in average per capita availability of food
grains and also interstate variations.
2. Role of MSP: Higher MSPs for wheat and rice have led to benefits of
procurement accruing largely to large farmers in the surplus states for these
crops. But due to lack of FCI operations in crops other than wheat and rice and
in states other than Punjab, Haryana and UP, MSPs have proved to be largely
illusionary. MSP of wheat and rice has generally been higher than the cost of
production while that of pulses has been lower.

50
 3. Differential pricing: Before 1997 PDS was universal and followed a uniform
pricing model. But then it was switched to TPDS and BPL families were given
stock @ ~ 67% of APL. Antodaya Anna Yojana families were given ~ 50% of
BPL prices. Between 1997 to 2002, APL prices were quite close to market
prices. Hence APL offtake declined and many FPS became unviable. Now
nearly 60% of supply goes to BPL and 20% to Antodaya.
4. Food stocks: Due to lower APL offtake surplus food stocks accrued (reaching
60 MT against 20 MT norm of buffer stocks) till 2002. This increased cost of
carrying as well as food subsidy. Then prices for BPL were reduced further and
their ration increased and also exports permitted so that food stocks declined
again to below 20 MT level. Currently stocks are 80 MT.
5. Interstate variations: PDS offtake as a proportion of people living below poverty
line is less in poorer states is compared to the richer states indicating poor
functioning of PDS in these states. The 4 southern states with lower incidence
of poverty continue to lift around half of the PDS offtake.

Evaluation
1. Regularity and predictability in opening hours of the FPS helps in prevention of
diversion of quotas.
2. Reduction and rounding off of prices has helped reduced overcharging.
3. The FPS has a higher density than post offices and banks.

51
 4. PDS is working better in Southern states while in Bihar it is dysfunctional.
5. Social monitoring of the FPS can improve the system. Also paying higher
commissions to the dealer can help in reducing corruption.
6. FCI costs can be reduced by making its operations decentralized i.e.
procurement and disbursement locally.
Government Initiatives
Targeted PDS (TPDS)
1. Special cards are issued to BPL families. This scheme has been reasonably
successful.
2. State governments lift food from FCI in this scheme and the food is sanctioned
each month and lifting period is 50 days.
Antodaya Anna Yojna
1. It is targeted to poorest section of BPL families it sanctions a release of rice at
Rs. 3 per kg and wheat at Rs. 2 per kg.
PDS Reforms
1. Some states like Chattisgarh are parking the PDS services on the smart cards
like RSBY run by the central government i.e. these smart cards would double
up as ration cards. These cards will have all the entitlements and record the
disbursement for a household. This card would be swiped and also used with
thumb impression of the user on the biometric machine. This will ensure
weeding away of ghost beneficiaries. The information flow will happen directly
with a central server. This also means that the person can get his ration from
any authorized shop including the private shops. Odisha is also moving
towards smart cards.

52
National Food Security Ordinance, 2013
Features

Analysis
1. Anti-farmer & serious compromise on food security
a. Criticism: If 68% people buy wheat at such a low rate, how will the
farmers get their remunerative price? They will start cultivating
some other crop. This could lead to a serious food security issue in
the nation.
b. Truth: But if the Bill indeed leads to a larger procurement it will
compel the government to raise the MSP for grain. This will benefit
the farmers. Higher prices will encourage the farmers to cultivate
more wheat.
2. Nationalization of grain trade
a. Criticism: It will increase government procurement which will drive
out private players. Thus it will lead to nationalizing the grain trade.
b. Truth: Even without the Bill, the government is already buying about
70 million tonnes plus of grains. FSB requires only about 50 MT of
grains. So it can't be blamed for any additional procurement.
3. Fiscal deficit
a. Criticism: It will increase food subsidy and hence higher deficit.
b. Truth: FSB doesn't lead to any higher procurement. On the
contrary, it will increase the off take and would actually reduce the
subsidy (sales realization + reduced carrying costs).
4. Issue of federalism
a. Criticism: PDS is operated by states but the new bill proposes that
the Grievance Redressal Officer be under Central control. This
encroaches upon the federal character of the Union.
5. Last mile connectivity issue
a. Criticism: The last mile connectivity has been left to "local
authorities". But local authorities mean bureaucracy and the use of
the term is a colonial legacy. Instead it should have been entrusted
with local self governments.

Salient features of NFSB The salient points of the ordinance are: Up to 75

percent of the rural population and up to 50 percent of the urban population

53
subsidised prices of Rs.3, Rs.2, Re.1 per kg for rice, wheat and coarse
grains, respectively. The poorest of poor households would continue to
receive 35 kg food grain per household per month under the Antyodaya
Anna Yojna at subsidised prices of Rs.3, Rs.2 and Re.1. State-wise coverage
will be determined by the central government. The work of identification of
eligible households has been left to the states/Union Territories, which may
frame their own criteria or use Social Economic and Caste Census data, if
they so desire. There is a special focus on nutritional support to women and
children. Pregnant women and lactating mothers, besides being entitled to
nutritious meals as per the prescribed nutritional norms, will also receive
maternity benefit of at least Rs.6,000 for six months. Children in the age
group of six months to 14 years will be entitled to take home ration or hot
cooked food, as per prescribed nutritional norms. The central government
will provide funds to states/UTs, in case of short supply of food grain from
central pool. In case of non-supply of food grain or meals to entitled
persons, the concerned state/UT governments will be required to provide
such food security allowance to the beneficiaries as may be prescribed by
the central government. The central government will provide assistance to
the states towards cost of intra-state transportation, handling of food grain
and fair price shop (FPS) dealers' margin, for which norms will be
developed. The ordinance also contains provisions for reforms in the Public
Distribution System (PDS) through doorstep delivery of food grain,
application of information and communication technology (ICT) including
end-to-end computerisation, leveraging 'Aadhaar' for unique identification
of beneficiaries, diversification of commodities under the Targeted PDS
(TPDS) for effective implementation of the ordinance. The eldest woman in
the household, of 18 years of age or above, will be the head of the
household for the issue of the ration card. If the eldest woman is not
available, the eldest male member is to be the head of the household. There
will be state and district level redressal mechanism with designated officers.
The states will be allowed to use the existing machinery for District
Grievance Redressal Officer (DGRO), State Food Commission, if they so
desire, to save expenditure on establishment of new redressal set-up.
Redressal mechanism may also include call centres, helpline etc. Provisions
have also been made for disclosure of records relating to PDS, social audits
and setting up of Vigilance Committees in order to ensure transparency and
accountability. The Bill provides for penalty to be imposed on public
servants or authority, if found guilty of failing to comply with the relief

54
Food Processing (after 1991)
Trends
1. Issues: FPI has been plagued by factors such as low public investment, poor
infrastructure, inadequate credit availability and high levels of fragmentation.
2. Higher growth: The Indian food processing sector’s higher rate of growth as
compared to the agriculture growth rate is indicative of its low base,
changing life styles, tastes and higher disposable income with consumers.
3. Requirements: The sector needs huge investments in logistics. It is largely a
private sector activity but government should provide needed incentives for
faster investments.
4. Current policy framework: Most food processing enterprises have been
exempted from industrial licensing with the exception of beer and alcoholic
drinks and items reserved for the small scale sector. For foreign investment
and technology, automatic approval is given even up to 100% for a majority
of processed foods. The policy initiatives also include sale of 50 percent in the
domestic tariff area of agro-based 100 percent EOUs, zero duty EPCG
Scheme; declaration of the industry as a candidate for priority lending by
banks; interest subvention scheme @ 4% interest and opening up of mega
food parks.
5. Economic stats: Since 2004-05 while agriculture growth has been 3.3%, food
processing industry has grown @ 9.3%. However the growth in meat, fruits,
vegetables etc. is only 7.3% and in dairy products is only 6.7%. As a result the
FPI output now (2009-10) forms 12% of agriculture output as against 9% in
2004-05. Inbound FDI (from 2000-2011) has been only $2.5 bio which amounts
to < 2% of total inbound FDI. The industry employed 1.5 mm people in 2007-
08.
Scheme for Cold Chain, Value Addition and Preservation Infrastructure
1. The Scheme was approved in 2008 with an objective to provide integrated and
complete cold chain series without any break for perishables from the farm gate
to the consumer with a capacity of 10 MT.
2. The assistance under the Scheme includes financial assistance of 50% subject
to a maximum of Rs 10 crore. But so far the approved projects envisage
creating a cold chain capacity of only 0.16 MT.
Mega Food Parks Scheme (MFPS)

55
 1. It provides for a capital grant of 50% of the project cost with a ceiling of Rs 50
crore to establish food processing parks. The grant shall be utilized towards
creation of common infrastructure in the park. Such facilities are expected to
complement the processing activities of the units proposed to be set up at the
CPC in the Park.
2. Out of 30 Mega Food Parks proposed during the eleventh five year plan, the
Ministry has taken up 15 projects under the Scheme so far.
Scheme for Technology Upgradation, Establishment, Modernization of Food
Processing Industries
1. It gives financial assistance for the setting up of new food processing units as
well as technological upgradation and expansion of existing units in the country
@ 25% of the cost of plant & machinery subject to a maximum of Rs. 50 lakhs.
2. Earlier all the applications for such grants were received by the Ministry through
the State Nodal Agencies. These applications were then centrally processed
and grants disbursed directly by the Ministry. From 2007-08, the receipt of
applications, their appraisal, calculation of grant eligibility as well as
disbursement of funds has been completely decentralized. Under the new
procedure, an entrepreneur or applicant can file an application with the
neighborhood Bank branch or Financial Intuition (FI). The Bank or FIs would
then appraise the application and calculate the eligible grant amount as per the
detailed guideline given to them by the Ministry. The Banks and FIs appraise
the project and its recommendation for the release of grant is transmitted to the
Ministry through an e-portal established for this purpose. After the
recommendation and requisite documents are received from the Bank or FIs,
the Ministry sanctions the grant and transfers the funds through the e-portal
itself.
The Way Forward
1. Pricing policies also need to be changed, as linking these with the quality of the
produce or a product is the basis for fixing per unit price, just as fat content in
milk; higher protein quality/ quantity in wheat; better aroma or cooking quality in
rice and shelf life of fruits and vegetables.
2. Policy and legislation should be reformed to allow processors to purchase their
produce requirement directly from the farmers. Intermediaries in the food chain
lock value and add to the cost of the raw materials.
3. Self-help or common interest groups, producer companies on the model
of cooperatives should be encouraged to enhance the bargaining power of the
farmers and negotiate effectively with the industry.

56
4. The Town and Village Enterprises (TVEs) model of China is an excellent
example for involving surplus rural labor in industrial activity by providing them
alternative work at their doorstep. Location of food-processing units should be
strategically placed depending upon the raw material availability, labor, product
utilization and domestic and/or export marketing.
5. The processing of agricultural raw material generates a sizable amount of
utilizable byproducts, commonly termed as ‘waste’. Experimental protocols for
converting these into usable secondary or co-products are available. These
need to be developed into commercially viable technologies.

57
National Mission on
Food Processing
(NMFP)
It will include
1. Scheme for
technology up-
gradation /
establishment /
modernisation
of food
processing
industries.
2. Scheme for cold
chain, value
addition and
preservation
infrastructure.
3. Setting up/
modernization/
expansion of
slaughter
houses.
4. Scheme for
Human
Resource
Development.
5. Scheme for
promotional
activities.
6. Creating
primary
processing
centres /
collection
centres in rural
areas.

58
 of meat shops.
It will add to the
decentralization of the
government schemes
as states will have a
substantial role in it.
Objectives :
1. To promote
facilities for post-
harvest operations
including setting up
of food processing
industries.
2. To undertake
decentralization of
the schemes so far
operated by the
Ministry of Food
Processing
Industries (MoFPI)
in order to take into
account the
requirements
suitable to the local
needs.
3. To augment the
capacity of food
processors working
to upscale their
operations through
capital
infusion,
technology transfer,
skill Upgradation
and handholding
support.

59
Agricultural Prices and Marketing

60
Horticulture Trains
1. They exclusively
carry horticulture
products. Prese
ntly, one such
train runs from
Maharashtra to
Delhi, largely
carrying
bananas. The
idea was to
connect major
fruit and
vegetable-
producing
centres with the
consuming
ones. They have
special
refrigerated
containers to
exclusively
move perishable
items.
2. But, there have
been operational
difficulties like
mid-point
loading and
unloading in
such trains,
which is not
possible
currently as the
trains run non-
stop.

61
 trains just
carrying
perishable items
are not cost
effective as all
wagons need to
be full to make
the journey
profitable.
Refrigeration
needs additional
power which
drives up the
costs. So the
idea of putting a
few refrigerated
containers in
normal goods
train is being
proposed.
5. Ripening rooms
and pre-cooling
chambers need
to be installed in
the destination
and origin point
of the trains.

62
Sugar Industry
Decontrol
1. Freedom to mills
from supplying
subsidized
sugar for state-
run welfare
programmes.
2. Quota system is
also abolished
which gave
government the
authority to
decide the
amount of sugar
that was
released in the
market.
3. The sugar mills
must share 70%
of the value of
sugar and each
by-product as
cane dues
payable to the
farmers.
4. Export and
Import policy
should not be
guided by
domestic
availability.

63
Issues in Food Pricing
Policy
1. Issues with
CACP's way of
setting MSP
a. Distortion of
cropping
pattern: MSP
has been set
hugely above
cost of
production for
rice and
wheat. This
has distorted
the cropping
pattern and
huge
surpluses are
produced and
procured in
these two
crops only.

64
 than the
market
clearing
price.
2. How to correct
the distortions
a. Since the
MSPs are
already fairly
high, urea
prices should
be
decontrolled
or at least
raised. This
will also
correct the
distortion in
the fertilizers
market.
b. If the stocks
of grain are
higher than a
certain
amount,
government
should clear
it by
subsidized
domestic
sales.
3. Issues with
subsidized
domestic sales

65
66
Why has cropping
pattern not responded
to inflation in proteins?
1. Pulses are
fundamentally
different from
cereals and
require different
set of
techniques
altogether. They
require more
irrigation, more
fertilizers etc. As
such they are
more vulnerable
to vagaries of
climate and
hence riskier.
2. While the price
support in
cereals has
been backed by
procurement
operations by
the government,
pulses see no
such large scale
procurement.
Hence
government
MSPs remain
ineffective.

67
marginal lands
only and refrain
from investing in
high yielding
(but expensive)
varieties and
techniques. So
the yields have
remained
stagnant from
590 kgpha in
90s to 600
kgpha in 2000s
and 700 kgpha
in 2011-12.
Rainfed
area accounts
for 56% of total
cropped area,
48% of the area
under food
crops but 77%
of area under
pulses and 66%
of area under
oilseeds.

68
Drivers of Agriculture Prices
1. Contribution of different commodities: In last 2 years, Fruits, eggs, fish, meat
and milk have contributed more than 40% of the food inflation. Vegetables
became an important contributor during December 2010 - March 2011 and then
again between August - October 2011. Certain other commodities like sugar,
edible oils, spices have from time to time played an important role in the overall
food inflation and thus commodity specific factors also have a role to play.
Prices in India are mainly affected by domestic factors and distortions and
international prices affect only in a limited and indirect way.
2. Market distortions: Market distortions both in retail and wholesale markets.
Moreover the prices don't reflect retail prices paid since retail prices differ from
wholesale markets. Moreover, supply responses to demand hikes are usually
affected with a time lag.

3. Storage capacity: India has a total storage capacity of 110 MT out of which
public sector capacity is 75 MT, cooperative sector capacity is 15 MT and
private sector capacity is 20 MT. Only five states MP, AP, Punjab, Maharashtra,
and Haryana have more than 60% of the total storage capacity. Reasons for
low private sector response include lack of credit, long gestation period, lack of
front end marketing capabilities. PPP in infrastructure development is being
promoted through viability gap funding.
4. Changing per capita consumption trends: Between 1993-94 and 2009-10,
cereal consumption in rural areas fell by 16% and by 11% in urban areas.
Consumption of fruits and vegetables rose by 49% in rural areas and 42% in
urban areas in the same period. Consumption of milk rose by 5% in rural areas
and 10% in urban areas over the same period (between 2004-05 and 2009-10
milk consumption rose by 6% in rural areas and 5% in urban areas). In rural
areas, share of cereals in total food consumption has declined from 38% in
1993-94 to 29% in 2009-10 and in urban areas from 26% in 1993-94 to 22% in
2009-10. Pulses has remained largely unchanged between 6-7%. Milk has
increased from 15% to 16% in rural areas and from 18% to 19% in urban
areas. Edible oil has declined by about 1%/ Egg, fish and meat has gone up by
~ 1% from 5% to 6%. Share of vegetables has risen by 2% from 9% to 11%.

69
 5. Changing copping pattern: Between 2004-05 and 2009-10, cereals production
has grown @ 3.4% p.a., pulses production @ 3.5% p.a. while oilseeds @ 4.2%
p.a. While demand for cereals is increasing at a negligible rate demand for
other 2 is increasing at a faster pace. Between 2006-07 and 2010-11, area
under arhar increased by around 24% and its production by 25% (indicating flat
yield). In oilseeds however there has been a major increase in productivity. In
case of groundnut while the area increased by about 6%, the increase in
production amounted to 55%. Similarly, in case of soybean the increase in area
by 15% resulted in a production increase by 43%. The 12th FYP assumes a 4%
agriculture growth with food grains growth @ 2% and non food grains @ 6%.
6. Per capita availability: The per capita availability of some of the items such as
cereals and pulses have been declining resulting in some pressure on
their prices. In the case of fruits and vegetables, milk, egg, meat and fish,
prices have gone up despite an increase in per capita availability. This is due to
a changing pattern in the demand of the households for high value items with
increasing income levels. Per capita availability of food grains from has come
down from 510 grams per day in 1991 to 444 grams per day in 2009.
7. Rise in MSPs: In 2011-12, paddy MSP has been raised by 17% to Rs. 1250,
pulses by 33%, cotton by 10%, oilseeds between 17 - 35% and wheat by 15%.
But MSPs are largely ineffective in most states and for most crops (except rice
and wheat).
8. Rise in fuel prices: Fuel inflation has ranged around 15% levels in past 2 years
which has a feed through effect in agriculture.
9. Rise in GDP and public expenditure targeted towards poor (high income
elasticity for food among poor).
10. G-20 Initiatives: G-20 Agriculture Minister’s meet in 2011 accepted a
declaration on action plan on food price volatility. It has been decided to focus
generally on the following areas: (i)Agricultural production and productivity; (ii)
Market information and transparency; (iii) International policy coordination; (iv)
Reducing the effects of price volatility for the most vulnerable; and (v) Financial
regulation of agricultural financial markets. The concrete steps outlined to
achieve these goals are as follows: (i)International Research Initiative
for Wheat Improvement (IRIWI) (ii)Agricultural Market Information System
(AMIS); (iii) The Global Agricultural Geo-Monitoring Initiative; (iv)Rapid
Response Forum; (v)Agriculture and Food Security Risk Management Toolbox;
and (vi)Emergency Humanitarian Food Reserves.
Previous Years

70
 1. 2006-07: General inflation: 7%. Overall food inflation 13%.
2. 2007-08: General inflation: 8%. Overall food inflation 6%.
3. 2008-09: General inflation: 2%. Overall food inflation 8%.
4. 2009-10: General inflation: 10%. Overall food inflation 21%.
2010-11
1. General inflation: 10%. Overall food inflation was 10%.
2. Cereals: Was lower than general inflation and fell from 8% in APril 2010 to 3%
in December 2010 and 5% in April 2011.
3. Pulses: Was high @ 25% in April 2010 but fell through the year to reach -10%
in December 2010 and stayed @ -5% in April 2011.
4. Horticulture products: Fruit inflation remained out of control @ 20% through the
year with occasional spikes to 30-40% range. Vegetables remained sustained
@ sub 10 levels except for a very high spike in December - January period.
5. Milk: It remained high in 15 - 25% range throughout the year.
6. Eggs, meat, fish: It remained in a very high zone of 20 - 40% throughout the
year with reaching 10% level only towards April 2011.
2011-12
1. General inflation: In the 10-11% range. Overall food inflation: 10%.
2. Cereals: Substantially lower than food inflation @ 5%.
3. Pulses: Started the year around -5% but quickly rose to 10% by September
2011.
4. Horticulture products: Fruit inflation was in high 20s - 40% range in the
beginning of the year but by the middle it moderated to 10% level. Vegetable
inflation showed a sustained rise with reaching 20% levels by the middle of the
year from 10% in the beginning.
5. Milk: It remained close to 11-12% level throughout the year.
6. Eggs, meat, fish: It has remained in 10-15% range throughout the year.
APMC Act Reforms
Erstwhile APMC Act Framework
1. Each state created controlled market and trade in notified agriculture
commodities could happen only in the market. The market was managed by
APMC. But these acts differed a lot - even in their vital provisions.
2. Commodity coverage: The manner of notifying the commodities for regulation varies
from State to State. Some States like AP and HP have included all the
commodities while others regulate only a few.
3. Market Committee: Each state has an APMC to regulate the markets. In TN, only one APMC is
constituted for all the regulated markets within a district.

71
 4. Agricultural Marketing Boards: Agricultural marketing boards were established for
expeditious execution of the market development work. In some States like AP,
Odisha and TN they are advisory in nature while in Punjab, Haryana,
Rajasthan, W.B., Karnataka and Maharashtra are statutory in nature and have
powerful role.
Performance Review of Existing APMC Acts
1. Functioning of APMCs: The marketing committees do not allow the traders to
buy from the farmers outside the specified market yards which adds to the
costs. In most states regular elections to APMCs don't take place and they are
superseded by the government. In many others the bureaucrats manage them.
Their role has increasingly come about to be limited to collection of market
dues.
2. Lack of geographical coverage: Despite expansion in the number of regulated
markets, the area served per market yard is quite high. The national average is
454 sq. km. The farmers are, therefore, required to travel long distances to
reach a market place.
3. Lack of amenities in the market: Though the Acts stipulate for the provision of
some prescribed facilities and amenities in each market yard, in several
markets, the facilities/ amenities actually created are far from the prescribed
norms. With the expansion of production and lack of development in the market
there is considerable congestion, delays, corruption, cut in payments to the
farmers and poor quality control. Only ~ 7% of the total quantity sold by the
farmers is graded. Cold storage is available only for 9% of fruits and
vegetables.
4. Rural periodic markets: Apart from the primary markets, there are thousands of
smaller rural periodic markets where small and marginal farmers and livestock
owners sell their produce. Most of them don't have even the basic amenities
like sheds for shelter from sun and rain.
5. Role of rent seeking traders, commission agents etc.: They have organized
themselves into strong associations and don't let new traders enter the market
thus limiting competition.
6. High taxes: Market fee was initially envisaged to be reinvested in the
development of the market. But nothing was reinvested and total charges
became close to 15% in many states and a source of revenue for the
government. The taxes are levied @ multiple points adding to the transaction
costs.

72
 7. Exploitation of the peasant and high wastage: All the above factors mean that
farmer gets only 20 -25% of the end price and the wastage rate is high.
Review of Implementation of Market Reforms
1. Adoption of provision related to Private markets: The Model Act suggests
allows private markets managed by persons other than APMCs. Only 17 states
(AP, NE, Gujarat, Goa, HP, Karnataka, MP ( only direct purchase),
Maharashtra, Odisha (excluding paddy), Rajasthan, Jharkhand and
Uttarakhand have enabled it but rules have not been notified by all. Andhra
Pradesh has formulated rules which stipulate a license fee of Rs 50,000 and
minimum cost of Rs 10 crores for setting up of private markets. Some states
have also prescribed a minimum distance of these markets from the APMC
markets. Such stipulations severely limit the impact.
2. Provision for Direct marketing: The Model Act provides for granting licenses to
processors, exporters etc. for purchase of agricultural produce directly from farmers. Only 15
states (AP, NE, Gujarat, Goa, HP, Karnataka, MP, Maharashtra, Odisha (excluding
paddy), Rajasthan, Jharkhand and Uttarakhand have so far made this provision. But AP has
imposed a requirement of a license fee (Rs 50,000).
3. Provisions for Contract Farming: The Model Act provides for permitting contract
farming by registration of contracts with APMCs and exemption of market fee
on such purchases. 20 states have allowed it without exempting from market
fee. 11 other have allowed it with the exemption from the market fee.
Karnataka has only exempted 30% of market fee under contract farming.
Andhra Pradesh requires the buyer to render a bank guarantee for the entire
value of the contracted produce. One of the biggest concerns is that APMC,
who is the major market player, is also a registering authority for contract
farming and the arbitration process is not time bound.
4. Single Point levy of Market Fee: Only 13 States have provided provisions for
single point levy of market fee. However, the rates of market fee vary generally between 0.5%
to 2%. Many states like Punjab levy additional charges apart from the market fee.
5. Commission Agents: The Model Act stipulates prohibition of commission agents
. MP, Chattisgarh, Mizoram, Nagaland and Sikkhim have amended the Act and
made the provision, it is doubtful whether this provision will be implemented in
letter and spirit.

73
 6. Establishment of Farmers markets (Direct Sale by the Farmers): The Model Act
provides for establishment of such markets where no market fee is levied on
farmers, though some service charge may be imposed. Such markets can be
established either by the APMCs or by any person licensed by the APMC for
this purpose. However, long before the
circulation of Model Act, several States had promoted Farmers’ Market. These i
nclude Punjab and Haryana (Apni Mandi), Rajasthan (Kisan Mandi), Andhra
Pradesh (Rythu Bazar), Tamil Nadu (Uzhavar Shanthigal), Maharashtra
(Shetkari bazaar) and Odisha (Ksushak bazaar). These markets have benefitted both farmers
and consumers; but it has been noted that with lapse of time, small traders have
taken over the place of farmers in many of these markets. 17 states have made provisions in their
Act.
7. Mandatory utilization of market committee fund for market development: The
Model Act provides for application of market committee fund for promotion and
modernization of market only. Out of seventeen States, which have recently amended
their Acts, three have no such suggested provision.
8. Essential Commodities Act, 1955: State Governments often issue control
orders promulgated under the EC Act adversely affecting trading in agricultural commodities.
Due to the uncertainty private investment in large scale storage and marketing
infrastructure has been lacking. Thus is important to make a distinction between an
investor and a black marketer/hoarder in the application of the EC Act, 1955.
Alternative Marketing Models
1. SHGs: SHG based collective marketing. Viable as SHGs have come up under
NRLM. They provide economies of scale and can also obtain credit from banks.
2. Modern Terminal Markets: It works under the National Horticulture Mission. It is
a hub (main market) and spokes (collection centers) model in PPP
mode. There is a provision of equity participation by producer associations up
to 26%. This Scheme is reform linked and would be implemented in those
States who have amended their APMC Act.
3. Contract farming: The Model Act allowed the contract farming sponsor to also provide input and
technology support to the farmer. It mandated the registration of sponsoring
companies, recording of the
contract farming agreement, indemnity for securing farmers’ land and laid down a time bound
dispute resolution mechanism. Contract farming has been prevalent in various parts of
the country for commercial crops like sugarcane, cotton, tea and coffee, etc.

74
 4. ITC e-Choupal: It seeks to address the constraints faced by the farmer arising out
of small and fragmented farm holding, weak infrastructure, supply chain
intermediaries and the lack of quality and real time information. ITC has set up
small internet kiosks at the village level to provide farmers real time market
information related to prices, availability of inputs, weather data and other
matters related the farmers. Local level farmers, called ‘Sanchalak’ run
these kiosks. Online extension services are also provided. It is estimated that
ITC intervention in supply chain has permitted farmers to increase their sales
realization by 10-15%.
5. Virtual Markets: Spot exchanges and negotiable warehouse receipt system
effect physical delivery of the goods and may therefore be recognized as more
effective marketing instruments for the primary producers. Producers can
hedge their goods or take pledge loans against the warehouse receipts so that
they are not forced to resort to distress sales. However today, the spot
exchanges seem to be operating in a legal vacuum as there is no specific law
regulating them. Some States have issued licenses to Spot Exchanges as a
buyer under the existing APMC acts. There is a need for Government of India
to enact a legislation to enable spot exchanges to function on pan-India basis
without any conflict with State APMC laws.
6. Rythu Bazar: It is an initiative to create infrastructure facilities to enable farmers
to sell their products directly to consumers. Typically, a Rythu Bazar covers 10
to 15 villages. Transport facilities, online information of prices etc. are also
provided.
7. Shetkari Bazar: It is another direct marketing model. It helps small farmers with
small quantity of perishable fruit and vegetables. The Shetkari Bazars are
located in all districts and are managed by APMC from the area. The produce
brought by farmers is not levied cess. APMCs get bank credit for establishment
of the market.
New Government Initiatives
Market Research Information Network (MRIN)
1. This provides online agriculture commodities market information in the APMC
run mandis. Prices as well as stock information is given.
Grameen Bhandaran Yojana
1. It provides a subsidy of 25% of the project cost to all categories of farmers,
agriculture graduates, cooperatives and CWC/ SWCs. All other categories of
individuals companies and corporations are being given subsidy at 15% of the
project cost. Since inception 30 MT projects have been sanctioned.

75
Q. Critically evaluate the reasons for fluctuations in agricultural prices in India. What
would the components of an optimum agriculture price policy regime for India?

Food Security
Farm Subsidies
Minimum Support Prices (MSP)
Buffer Stock and Food Security
Technology Missions

Major Cropping Patterns

Irrigation Systems
Different Types
Transport and Marketing of Produce
Issues and Related Constraints
E-Technology in the Aid of Farmers

Animal Rearing
Economics

Poverty, Unemployment, Inequality

Poverty Measurement

Reasons for Recent Poverty Drop

Himanshu (2012) has questioned the comparability

of the 2004-05 and 2009-10 consumer expenditure surveys

on the grounds that 2009-10 consumption schedules included

expenditure of the government on the Mid-Day Meal

Scheme (MDMS) as a part of household expenditure – this item

of expenditure was not included in the previous quinquennial

surveys.

TN PDS grain issue: free valued at market (2012) while nominal valued at PDS prices.

76
 1. The growth acceleration certainly was a major factor.
2. There was a terms of trade shift in favor of agriculture, which began in 2004
and continued to gain strength thereafter. Over the period, my rough estimate
is that the terms of trade improvement added somewhere between 3 to 4
percentage points annually to real agricultural income growth.
3. NREGA:
a. How can the MGNREGS wage become a reservation wage when
MGNREGS schemes are mostly offered in the slack season?
b. And also, we know that the demand from workers in many states is simply
non-existent.
c. There is a difference between work being offered and work taking place. It is
correct that most MGNREGS work actually takes place during the slack
season, but that is an ex-post outcome rather than a design feature of the
scheme. By the Act, workers can demand work at any time they want, and if
15 or more persons collectively demand MGNREGS work, then it has to be
provided. Thus, there is no reason why MGNREGS cannot be used as an
effective bargaining chip.
4. Effect of Rural Growth on MSMEs
a. How is this spectacular growth rate in the MSME output related to the terms
of trade change in favour of agriculture?
b. The simple fact is that most of corporate India has not considered rural
areas as a part of their key markets, except with a few exceptions like the
fast moving consumer goods and cement sectors. As a consequence, the
upsurge in rural consumption demand triggered off by the terms of trade
change was met primarily by the MSMEs, which were in any case focused
on these markets.
Flaws in Methodology
1. Take the curious fact that poverty in Bihar declined from 53.5% of the
population in 2009-10 to 33.74% in 2011-12. This is a drop of 19.76 percentage
points. But Bihar’s poverty rate declined only marginally from 54.4% in 2004-05
to 53.5% in 2009-10, when the state had the same government in power.
2. In Mumbai and Delhi the number of poor is only 6 and 10 per cent of the total
city population respectively, whereas the slum population alone in these
districts is 53 and 30 per cent respectively. Therefore, the estimates for the
number of poor should be reworked by taking into account their deprivations
and living conditions, such as access to basic services, shelter, public health,
and education.

77
Q. Discuss Amartya Sen's poverty measure and recent advances in poverty
measurement. (2011, II, 15)
World Bank Poverty Measurement Approach
1. WB uses the consumption data to calculate the poverty head count. Where
consumption data from the national household surveys is not available but
income data is available, it scales down the income in ratio of the proportion of
consumption in the NAS data.
2. To compare the consumption level across countries, it needs estimates of price
levels. To this end, it uses the PPP estimates based on 1993 $ values. Then it
uses a line of $1.08 per day in 1993 $ PPP terms.
Defining Poverty Line
Is Poverty a Value Judgement?
1. Does poverty, like beauty, lie in the eye of the beholder? And hence any
exercise to measure poverty would be a purely subjective one.
2. Its not because even though what constitutes deprivation may vary from person
to person and time to time but at the social level there would certain minimum
acceptable living norms.
Is Poverty Determined by Public Policy?
1. It can confuse between what ought to be removed and what can be removed
immediately. But even if something can't be removed with current resources
doesn't mean its not poverty.
2. Seldom voting happens purely on this issue. Representatives are elected on a
plethora of issues.
Relative Deprivation or Absolute Deprivation?
1. It is both. It can't be purely relative because say in a depression or a famine if
everybody is relative positions haven't changed it doesn't mean poverty has not
increased. Thus relative deprivation approach supplements the absolute
deprivation.
Direct Method or Income Method?
1. They are not 2 different methods to measure the same thing but are two
different concepts of poverty altogether.
Basic Capabilities Approach (Sen and Dreze)
1. We need to identify poor on the basis of handicaps to performing certain basic
functions. These capability disadvantages can be in form of unsanitary
conditions, poor health, malnutrition. It also includes structural deprivations. For
example, women bear a disproportionate burden of poverty.

78
Basic Goods Approach
1. We should see the access to a basket of basic goods which includes health,
water etc.
Income Approach
1. Income necessary to buy a minimum basket of goods say 2400 kcal.
Hunger Criteria
1. NSS 1983, conducted an experiment by including a question addressed to the
head of the household - whether all members of the household got two square
meals a day throughout the year or not. The responses were divided in 3
categories. (i) Number of persons who were getting two square meals a day,
all the year round; (ii) Number of persons who were not getting two square
meals a day for some months of the year; and (iii) Number of persons who
were not getting two square meals a day even for some months of the
year. Seasonally hungry, i.e. category (ii) above , and chronically hungry, i.e.,
category (iii) above were added together to get a distribution of persons who go
without food at least on some occasions in the course of the year. The ratio of
such persons to total population is termed as "the hunger ratio".
2. It was found that the incidence of hunger was less than the incidence of
poverty, both in rural and in urban areas of the country. It was higher in the rural
areas (19%) than in the urban areas (7%). Finally, hunger showed even more
regional concentration than poverty. For example, the proportion of chronic
hunger varied from 40% in Bengal, 37% in Bihar rural to 0.85% in Haryana
rural and 1.6% in Punjab rural in 1983.
3. Moreover it is not free from subjectivity. For instance the size of square
meal would differ not only from person to person but also from place to
place. Very often, particularly in rural India, the head of the family, usually a
man who is the main respondent in the survey, would not be sufficiently aware
of the quantity and content of meal left for his wife and other female members
of the house.
Food Share Criteria (Engel)

79
 1. The proportion of income spent on food decreases as income increases. Using
a certain fixed proportion of expenditure on food as a dividing line, the
individuals/households could be grouped as poor or non-poor. We can take the
proportion implied by 1973-74 poverty lines as the cutoff (82.5% in rural and
78% in urban). This gives lower poverty ratios. This criterion would
also overcome certain constraints and problems associated with the estimation
of poverty, such as, the assumption of uniform calorie norms for the entire
country, the price adjustment of the poverty line, capturing the inter-State price
differentials and the problem of adjustment of NSS-based consumption
expenditure with the estimate of private consumption expenditure in
National Accounts Statistics, etc.
2. But it is difficult to arrive at a consensus as to what should be the desirable
proportion of expenditure devoted to food so as to determine the poverty cut-off
points. Here we have implicitly used the calorie intake criterion of 2400 and
2100 calories for rural and urban areas respectively with reference to the
consumption basket in 1973-74 at 1973-74 prices, uniformly for the entire
country. Though the expenditure criterion takes care of the problems
associated with the updating of poverty line (i.e., the problem of appropriate
deflators) it is unable to incorporate the inter- State price differentials. Moreover
the expenditure criterion fails in separating the influence of socio-cultural
factors on eating habits of the people which is an important factor in
determining the proportion of expenditure devoted to food.
Calorie Consumption Criteria
1. This means taking the norm of 2400 kcal for rural and 2100 kcal for urban
areas in each state individually.
2. While using a common calorie norm and relying exclusively on the NSS
household consumption survey data, this method in effect allows the poverty
line to fully reflect inter-State differences in (a) consumer preferences in respect
of food as well as of the level and pattern of non food consumption, and (b)
level in structure of prices at each point in time. It also allows fully differential
changes in the level and composition of consumption due to changes in
income and prices as well as the differential price trends across States.

80
 3. The difficulty with this measure is that it gave very high poverty ratios like 79%
in Kerala, 78% in TN, 75% in Maharashtra in 1983 and also showed an
increase in poverty from 54% in 1977-78 to 67% in 1983. So PC argued that it
was difficult to make a meaningful comparison of poverty incidence across
States at any given point of time because of inter-State variation in
the composition and quality of the consumption basket associated with the
given calorie norm.
Criticisms of poverty line approach
1. Even though based on calorie approach, the poverty line is not a true indicator
of malnourishment because of interpersonal variations in good habits.
2. The notion of absolute poverty is inadequate because relative poverty is also an
equally important.
3. The poverty line, quantified as a number is reductionist. It does not capture
important aspects of poverty — ill health, low educational attainments,
geographical isolation, ineffective access to law, powerlessness in civil society,
caste and/or gender based disadvantages, etc.
4. The poverty line provides the conceptual rationalization for looking at the poor
as a "category" to be taken care of through targeted ameliorative programmes,
ignoring structural inequalities and other factors which generate, sustain, and
reproduce poverty.
5. Poverty line derived from personal consumption patterns and levels do not take
into account items of social consumption such as basic education and health,
drinking water supply, sanitation, environmental standards, etc. in terms of
normative requirements or effective access.
6. The head-count ratio based on the poverty line does not capture the severity of
poverty in terms of the poverty deficit (total shortfall from the poverty line) or
additionally the distribution of consumption expenditure among the poor. It is
insensitive to mobility within the below poverty line group. It is also invariant to
upward and downward mobility across the poverty line so long as such mobility
takes place in equal measure.
7. In a country of India's continental size and diversity, poverty line based on
aggregation at all-India level ignores State-specific variations in consumption
patterns and/or prices.
Aggregation - How to create an index?
Sen's Axioms
According to Sen, any poverty index must satisfy the following criteria

81
 1. Focus axiom: The poverty index should be independent of the non poor
population.
2. Weak monotonicity axiom: A reduction in a poor man's income holding others
constant must increase the poverty index.
3. Impartiality axiom: The index should be same for any given ordered set of
income and should not depend on who is earning what.
4. Weak transfer axiom: The index should increase if income is transfered from a
poorer person to a less poor (but still below poverty line) and still the set of
poor people doesn't change.
5. Strong upward transfer axiom: The index should increase if income is
transfered from a poorer person to a less poor.
6. Continuity axiom: The index must vary continuously with incomes.
7. Replication invariance axiom: The index should not change if it is computed
based on an income distribution that is generated by the k fold replication of
original income distribution.
Drawbacks of Head Count Ratio (H = p/n) Index
1. It doesn't satisfy weak monotonicity axiom, weak transfer axiom and strong
transfer axiom. It can sanction a policy which takes income from the poorest of
poor and gives it to poor near the poverty line to push them up.
Drawbacks of the Poverty Gap Index
1. Poverty gap index is Gp = (1/p) * ∑(z-yi)/z where z is the poverty line and p is
the number of poor and yi is the income of the ith poor.
2. But it doesn't satisfy weak monotonicity axiom.
Sen's Index
1. Sp = H * (Gp + (1-Gp) * Ginipoor) where Sp is Sen's poverty index, Gp is the
poverty gap index, H is the head count index and Ginipoor is the Gini coefficient
of the income distribution among the poor. This works when the number of poor
is large.
2. It satisfies all the axioms.
Shorrocks - Sen - Thon (SST) Index
1. SSTp = (1/n^2) * ∑(2n - 2i + 1) . xi where xi = (z - yi) / z and is 0 for noon poor
and n is the total population. Later on it was shown that it can be viewed as a
product of H, Gp, and one plus the Gini index of the poverty gap ratios of the
population.
Poverty Alleviation Strategies
Growth Led Strategy / Trickle Down Theory

82
 1. It was popular in 1950s and 60s where high growth rate alone was considered
to be sufficient to reduce mass poverty. It was recognized that market failures
may happen but the impact of such failures was considered to be small.
Chenery and WB - Redistribution with Growth
1. By 1970s trickle down theory was anything but finished. Most economies grew
at fast rates yet there was no visible impact on poverty. Thus it was considered
necessary to attack poverty directly by devising special programmes focused
on socio economic groups identified to be poor. They recognized that poor
have not gained as they lacked productive assets and opportunities for gainful
employment - thus these programmes focussed on both. This strategy includes
(a) focusing on expanding economic opportunities for poor through enhancing
economic growth and increasing their asset base and the return on these
assets. Poverty can't be eliminated in a stagnant economy. (b) facilitating
empowerment which means strengthening the participation of poor in decision
making, eliminating their disabilities and making state more sensitive to them.
(c) enhancing security by reducing their vulnerability to various forms of
insecurity that affect their live like economic shocks, natural disasters, crop
failure, ill health etc.
2. Thus WB advocates more foreign aid, promoting global economic stability and
reducing the risk of economic crisis, opening up developed countries' markets
for the poor countries, encouraging the production of international public goods
that benefit poor people like agricultural and medical research etc. and giving
greater voice to the developing countries in international forums.
Washington Consensus
1. The impact of Chenery and WB approach was mixed. Large scale poverty
persisted and now the wisdom of desirability of large public expenditure
programmes was questioned. Instead it was emphasized to promote market
forces and trickle down was reborn.
Growth and Poverty
1. Circular causation: If we define poverty as lack of income then there is a
circular element here and a rise in income is bound to have a reducing impact
on extent of poverty. Growth is not the only or even principle means of poverty
reduction. This is because poverty need not take the form of only low incomes.
It can be reflected in various other disabilities. In particular role of education
and health is important and hence the need to expand these basic services.

83
 2. Post reforms vs pre reforms - overall rate: Rural poverty was 50% in 1993-94,
42% in 2004-05 to 34% in 2009-10. (All India poverty has declined from 45% in
1993-94 to 37% in 2004-05 to 30% in 2009-10. Urban poverty has declined
from 32% in 1993-94 to 25.7% in 2004-05 to 21% in 2009-10.) Similarly the
rural personal consumption expenditure has recorded a growth of 1.5% p.a.
(1.3% from 1994-2005 and 1.7% from 2005-10). Thus the pace of poverty
reduction has increased from 0.8% p.a. in 1993-94 to 2004-05 period to 1.2%
in the 5 years since. Estimated growth elasticity of poverty in India is ~0.8 and it
has fallen post reforms.
3. International experience: per capita income growth vs poverty reduction: A
study done over Asian countries and covering 1970s, 80s and 90s showed that
where the growth rates were high (> 3.5% p.a. per capita income) there was a
strong positive correlation between high growth and poverty reduction. In low
growth situations the correlation was very weak. In Indian case in the low
growth decade of 1970s the elasticity was 2.15, in somewhat higher growth
rate decade of 1980s the elasticity was 0.6, in still higher growth rate decade of
1990s it was 0.77 while between 1994-95 to 2004-05 it dropped to 0.13. The
1994-95 to 2004-05 period was also accompanied by a drop in employment
growth.
4. Growth pattern and poverty: International experience shows that growth in
agriculture leads to faster decline in poverty.
Employment and Poverty
1. International experience: employment growth vs poverty
reduction: Employment was found to have a higher correlation with poverty
reduction than growth in per capita income. It was found that for countries with
same per capita income growth but different employment growth, poverty
reduction was higher in case of higher employment growth. If we look at
poverty reduction rate and employment growth in India, the relationship holds.
Thus (based on PC official approach then and not Lakdawala) between 1973-
74 to 1983 employment grew @ 2.43% p.a. and poverty reduced @ 1.4% p.a.
Between 1983 and 1993-94 employment grew @ 2% p.a. and poverty reduced
by 0.8% p.a. Between 1993-94 and 2004-05 employment grew @ 1.8% and
poverty reduced @ 0.75%. But when we mix per income growth with
employment growth relationships break down.

84
 2. Poor are not always unemployed: Most poor are not unemployed. While
poverty ratio was 26% in 1999-00, poor among the employed were 29% and
poor among unemployed were only 19%. Reduction in poverty was faster in
case of unemployed than in case of employed. This is because of faults in
definition of employment in India. Moreover educated unemployed are
generally not poor.
Phase 1 (1947-91)

(b) BIMARU + Odisha + W Bengal + Jharkhand + Chattisgarh

1. Lakdawala 1973-74: Total: 59%, Rural: 61%, Urban: 51%.
2. Lakdawala 1983-84: Total: 52%, Rural: 54%, Urban: 46%.
3. Lakdawala 1993-94: Total: 42%, Rural: 44%, Urban: 34%.
4. Tendulkar 1993-94: Total: 50%, Rural: 52%, Urban: 35%.
5. Tendulkar 2004-05: Total: 44%, Rural: 47%, Urban: 32%.
6. Tendulkar 2009-10: Total: 38%, Rural: 41%, Urban: 27%.
(c) Rich + Moderately Rich States
1. Lakdawala 1973-74: Total: 53%, Rural: 54%, Urban: 50%.
2. Lakdawala 1983-84: Total: 40%, Rural: 39%, Urban: 43%.
3. Lakdawala 1993-94: Total: 30%, Rural: 28%, Urban: 36%.
4. Tendulkar 1993-94: Total: 44%, Rural: 50%, Urban: 32%.
5. Tendulkar 2004-05: Total: 32%, Rural: 38%, Urban: 23%.
6. Tendulkar 2009-10: Total: 21%, Rural: 24%, Urban: 17%.
(d) Fallen Angels
1. Lakdawala 1973-74: Total: 31%, Rural: 31%, Urban: 32%.
2. Lakdawala 1983-84: Total: 18%, Rural: 17%, Urban: 24%.
3. Lakdawala 1993-94: Total: 18%, Rural: 20%, Urban: 13%.
4. Tendulkar 1993-94: Total: 28%, Rural: 30%, Urban: 26%.
5. Tendulkar 2004-05: Total: 22%, Rural: 23%, Urban: 20%.
6. Tendulkar 2009-10: Total: 18%, Rural: 16%, Urban: 20%.
(e) All India
1. Lakdawala 1973-74: Total: 55%, Rural: 56%, Urban: 49%.
2. Lakdawala 1983-84: Total: 45%, Rural: 46%, Urban: 42%.
3. Lakdawala 1993-94: Total: 36%, Rural: 37%, Urban: 32%.
4. Tendulkar 1993-94: Total: 45%, Rural: 50%, Urban: 32%.
5. Tendulkar 2004-05: Total: 37%, Rural: 42%, Urban: 26%.
6. Tendulkar 2009-10: Total: 30%, Rural: 34%, Urban: 21%.
New 2011-12 data

85
 1. Poverty declined from 37.2% in 2004-05 to 21.9% in 2011-12 i.e. a 15% drop.
2. Pace of poverty reduction has been 2.2% a year, about three times the rate of poverty reduction
During the 11-year period 1993-94 to 2004-05, the
over 1993-94 to 2004-05.
average decline in the poverty ratio was 0.74 percentage points per year.
MPCE
1. The real MPCE increased by much more in the second period (2004-05 to
2011-12) as compared to the first (1993-94 to 2004-05). 3.4% in rural areas
and 3.7% in urban areas
2. The increase was fairly well distributed across all deciles of the population.
3. The distribution was particularly equitable in rural areas.

The most notable such case

is Bihar, so far considered worst on PDS performance. But the

86
NSS 68th round reports that 43% of Bihar households accessed

PDS cereals in 2011-12, up from only 14% in 2009-10 and less than

2% in 2004-05. This expansion, unnoticed so far, is remarkable

because it went hand in hand with two other features: Bihar

climbed to the top of the poverty reduction league in 2011-12 from

being a laggard so far. Much more signifi cantly, Bihar’s PDS grain

leakages (i e, what NSS does not capture as PDS consumption out

of offi cial offtake fi gures) reduced to about 20% in 2011-12 from

65% in 2009-10 and 97% in 2004-05.

Overall, the national percentage of households accessing

PDS cereals, that had declined from 27% in 1993-94 to 24% in 2004-05, increased to 39% in 2009-10 and further to 45% in

2011-12. Simultaneously, grain leakages which had jumped

from 28% in 1993-94 to 55% in 2004-05 reduced to 40% in

2009-10 and further to 35% in 2011-12.

The correlation across

states between access and leakage was -0.82 in 2009-10 and

-0.85 in 2011-12. Moreover, as Charts 1 and 2 show with data

for major states, leakages reduced around 1% for each 1%

increase in access.3This should help calm critics’ fears that

leakages will increase with wider access.

Although MDM transfers rose to 1.0% of MPCE in 2011-12, this

increase was relatively modest. On the other hand, PDS transfers,

which had declined from 1% of MPCE in 1993-94 to 0.9%

in 2004-05, more than doubled to 2.2% in 2011-12. Much of this

was due to the PDS revival which nearly doubled PDS access after

2004-05 as noted in Table 1, but higher unit transfers also contributed.

In fact, the latter were dominant during the drought of

2009-10 when high food infl ation caused PDS transfers to reach

2.4% of MPCE for the population as a whole and 5.2% of MPCE

for the bottom 40%. While these may not seem large amounts,

they turn out to have had signifi cant effects on poverty

offi cial poverty reduction of 7.3 percentage points in the

period from 2004-05 to 2009-10, when per capita GDP growth

87
First, that poverty reduction may have been exaggerated since

NSS had imputed MDM expenditures in 2009-10 unlike in any

previous thick round. Second, that offi cial poverty reduction

using the Tendulkar method was much larger than by the

earlier Lakdawala method, suggesting a possibly important

role of food prices which the two methods treat differently. This

implies poverty reduction of only 3.5 percentage points

between 2004-05 (without MDM) and 2009-10 (with MDM),

which is less than half the corresponding offi cial poverty reduction

of 7.3 percentage points using the Tendulkar method. The Lakdawala and Tendulkar methods have two sources of

difference: (i) use of URP distribution in the former against

mixed recall period (MRP) distribution in the latter and (ii) use

of different poverty lines. Of these, (i) is not a cause of the

lower poverty reduction with the Lakdawala method. Growth

of nominal consumer expenditure during 2004-10 was slightly

higher by URP rather than by MRP and distributional changes in

URP also favoured more poverty reduction than in MRP. On the

other hand, Lakdawala poverty lines exhibit much higher

implicit infl ation during 2004-10 (59.7% rural and 57.5% urban)

than implicit in Tendulkar poverty lines (50.6% rural and 48.5%

urban). The reason for this is that food infl ation during 2004-10

(61.4% in the Consumer Price Index for Agricultural Labourers

(CPIAL) and 63.9% in Consumer Price Index for Industrial

Workers (CPIIW)) was much higher than general infl ation (54.9%

CPIAL and 48.3% CPIIW) and because the Lakdawala method

reweights price indices to conform to 1973-74 consumption

shares. Weights assigned to food in Lakdawala (81% for rural

and 75% for urban) greatly exceed present food shares near the

poverty line (59% rural and 53% urban in 2009-10).

In particular, Tendulkar poverty lines not

only capture the different prices for PDS from non-PDS purchases

of rice, wheat, sugar and kerosene and weight these by share

of PDS purchase in total purchase; changes over time in PDS

shares are also refl ected. Unlike CPIAL and CPIIW that cover

PDS at base year weights, Tendulkar poverty lines incorporate

the large increases in PDS shares of these commodities

88
Tendulkar method measures much lower food infl ation and also

shows higher poverty reduction than if available Laspeyres

price indices had been used to update poverty lines.

However, although the Tendulkar method tracks prices

correctly, its treatment of PDS prices can be improved. Unlike

market prices, at which all consumers can buy an extra unit of

an item, PDS prices vary with entitlement, apply to limited

quantities and most benefi ciaries buy extra amounts of PDS items

at market prices. As discussed earlier, a better approach from

the welfare view is to calculate poverty lines that value PDS

items at market prices and treat as household-specifi c transfers

the difference between market cost of PDS purchases and

actual out-of-pocket expenditure on these. This procedure is also

suited to decompose the poverty impact of PDS food transfers.

the measured poverty

headcount in 2009-10 would have been 31.3%, against the offi

cial estimate of 29.8%, if MDM imputations had not been included.

10The 1.5 percentage point difference is small but not

insignifi cant as it adds up to 18 million people. There is some

merit in the offi cial decision to include in-kind transfers such

as MDM in household consumption because benefi ciaries receiving

these do consume more even though they themselves

incur no out-of-pocket expenditure. But comparability over

time requires that imputed MDM expenditures should be included

to calculate poverty in earlier years. But expansion of the MDM after 200117

caused this impact to rise to 1.3 percentage points (1.6 rural

and 0.6 urban) in 2004-05 and the 2009-10 impact was only

marginally higher at 1.4 percentage points (1.8 rural and 0.6

urban). As Table 4 shows, PDS contribution to overall 1993-2005

poverty reduction was less than 2%, so that the 1997 adoption

of TPDS, which shifted PDS focus towards targeted poverty reduction,

largely failed. But subsequent developments more than

doubled the PDS impact in 2009-10: to 3.2 percentage points on

HCR. Consequently, PDS contribution to overall

2004-10 poverty reduction (30% to HCR, 40% to PG and as

89
value of PDS for the poor when food infl ation is high

In 1993-94 there were 413

million people who were poor on the basis of out-of-pocket

consumer expenditures. Of these, 11.5 million were lifted

above the poverty line by in-kind food transfers, overwhelmingly

by the PDS (10 million). In 2004-05, the number of people who

would be poor without food transfers had risen to 417 million,

of whom 28 million were lifted above poverty by in-kind food

transfers, with PDS and MDM contributing equally. In 2009-10,

despite a severe drought, the number of people who were poor

without food transfers fell to 402 million and 55 million of

these were lifted out of poverty because of food transfers, 38

million by the PDS alone. The bottom line is that population

growth continued to erode the rather limited poverty reducing

impact of GDP growth during 1993-2010 and that PDS and

MDM, each on its own, lifted more people out of poverty in

2009-10 than income growth during the entire period. These stark results on the number of poor highlight an

important observation from Table 4: that although income

growth (i e, increase in out-of-pocket spending) is clearly the

main driver of poverty reduction, this contributed rather little

to the large acceleration in the pace of overall poverty reduction

between 1993-2005 and 2004-10. The acceleration in the

pace of HCR reduction that can be attributed to income growth

was only from 0.73 to 0.87 percentage points per annum. But this should also not entirely surprise us because 2009-10

was a severe drought year with very large intra-year food

infl ation. Estimates based on Laspeyres indices had initially

suggested that poverty levels could rise above the past trend

and hence the unusual decision taken to repeat the thick

sample NSS consumer survey in 2011-12. However, because the

Tendulkar method is sensitive to PDS, this revealed much larger

poverty reduction than expected. The decomposition above

reassigns this as the PDS effect and uses poverty lines that imply

higher infl ation than the original Tendulkar lines, thus

measuring lower growth of real out-of-pocket expenditures.

That, nonetheless, 2004-10 HCR reduction due to out-of-pocket

expenditures turns out better than the 1993-2005 trend, is

90
2011-12 survey shows a much larger reduction in poverty than

was evident in the already signifi cant acceleration between

1993-94 to 2004-05 and 2004-05 to 2009-10.

Provisional results of the decomposition using this suggest that:

(a) The HCR using MPCEMRP, which was 38.2% in 2004-05 and

33.9% in 2009-10, declined to 26.8% in 2011-12. This implies

that the out-of-pocket income component of poverty reduction

accelerated from 0.73 percentage points per annum during

1993-2005 to 1.63 percentage points per annum during 2004-12.

The 2009-10 HCR by this measure was 12.5% above trend.

(b) The impact of in-kind food transfers on HCR reduction, which

was 2.6 percentage points in 2004-05 and 4.6 percentage points

in 2009-10, increased further to 4.8 percentage points in 2011-

12. This implies that in-kind food transfers, which had lifted 28

million people above the poverty line in 2004-05 and 55 million

people in 2009-10, lifted 59 million people above the poverty line

in 2011-12.

We fi nd that the poverty reducing

impact of these food transfers has increased over time. Only

1.3% of population was lifted above poverty line as a result

of such transfers in 1993-94, but this increased to 2.6% in

2004-05 and to 4.6% in 2009-10.

1. Backward States
a. Good Performers: Odisha (25% i.e. from 57% to 32%) > Bihar (21% i.e.
from 55% to 34%) > Rajasthan (20% i.e. from 35% to 15%). These states
performed exceptionally well in reducing rural poverty.
b. Poor Performers: Jharkhand (8.34%) < Chhattisgarh (9.47%) < UP (11.6%
with 30% BPL). National average was 15.3%. MP has 32% BPL down from
49%.
2. Chattisgarh

91
 a. It registered good economic growth and had decent entitlement
programme in place, yet the state did not do well in its fight against
poverty. The state registered an above average GSDP growth rate of
8.69%, a robust 7.27% growth in agriculture and allied sector from 2005-
06 to 2011-12, and has a much talked about public distribution system in
place. Yet the state still has nearly 40% people below the poverty line,
almost double the national average.
b. Chhattisgarh may have suffered because of naxalism.
c. Economists are also of the view that in the case of Chhattisgarh, growth
numbers tend to be misleading as there are very few growth centres and
nothing much has changed in most other areas.
3. Bihar and Odisha
a. Growth: Bihar recorded the highest average growth of 11.42% between
2004-05 to 2011-12 and recorded one of the sharpest falls in poverty
levels. What helped Odisha was its impressive growth of 9.04% growth in
this period.
b. In Bihar, despite its significant per capita income growth, poverty
reduction was not reflected in the 2009-10 numbers. Also, in Odisha, the
poverty rate declined 21 per cent in 2009-10 compared to 2004-05, and
only five per cent in 2011-12 compared to 2009-10.
c. Interestingly, if you exclude Bihar from the poverty calculation at national
level, the decline in rural poverty would come down by 2 percentage
points and rural poverty decline would be less than that in urban areas.
Bihar’s data on consumption expenditure creates a serious noise factor in
the analysis.
d. Agriculture growth: What worked in Bihar’s favor was even better
agriculture growth of 15.17% during this period.
e. Migrant workers: Bihar and Odisha have been major beneficiaries of
migrant workers sending their money back home.
4. Rajasthan
a. It reaped the benefits of way above the average performance on the
agriculture front. The state’s agriculture and allied sector grew by 7.34%
from 1996-97 to 2004-05 and by 6.42% from 2005-06 to 2011-12. The
state recorded a meagre GSDP growth rate of 6.34% from 2004-05 to
2011-12, much below the national average of 8.28%.
5. Overall

92
 a. In India, so far, the growth-poverty reduction connection has remained
pretty weak. Before 2005, poverty reductions in fast growing states such
as Gujarat and Maharashtra were not significantly more than that in the
so-called BIMARU states.
b. The decline is largely because agriculture sector performed well during
fiscal year 2011 and 2012 against a drought situation in 2009. Agriculture
sector expanded by 7.9% in 2010 -11 and 3.6% in 2011-12.
6. Urban vs Rural
a. Rural better than urban. Rural to 25.8% (2011-12) from 42% (2004-05),
around 16 percentage points, as against around 12 percentage points in
urban areas - 25.7 to 13.7.
b. The cumulative effect was that overall wages rose by 29% in rural areas
between 2009-10 and 2011-12 against 23% in urban areas. This could
again be explained by the rural urban migration, as semi-skilled or
unskilled workers in the urban areas would send home higher wages back
home
Rajan Committee Report
1. Some variables are strongly correlated. eg. NSSO MPCE and
poverty ratio. This may lead to double counting.
2. It is not clear whether the variables have been normalized, else it ll
give unequal weights. eg. female literacy ratio and per capita
expenditure.
3. There is no indicator related to employment or productivity.
Incidentally, most of the earlier committees had some measure of
per worker productivity, mostly in terms of agricultural productivity
or wages.
4. For example, the right approach to measuring the deprivation of
SC/ST households would have been to use an indicator of relative
deprivation of these households. This would also have created an
incentive for state governments to channel resources towards the
developmental needs of these groups.
5. The fact that the development index correlated very strongly with
the number of districts affected by leftwing extremism in a state
shows that developmental deficit and governance deficit are two
sides of the same coin.

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94
95
Sen vs Bhagwati There are externalities in basic social sectors like health,
education, upliftment of marginalised. Markets can't take care of that. 7.
Active and sustained government intervention to even things out. Social
spending on education. On health. No nutrition. On transportation and
communication networks. On minimal safety nets. The market can take
care of the cool stuff. The public sector gets a less sexy role: getting the
basics right. That is what Drèze and Sen (and frankly, many others) are
about. Failing (7) we have just one option: 8. Sustained, crippling social
conflict, not just cutting across class lines but along any marker which
can be arrogated for the purpose: religion, caste, geography,
language.Bhagwati
1. Track model of Bhagwati
a. Successful economic development necessarily occurs in two
stages – this is a “two-track” account according to which
“Track 1” reforms are designed to increase GDP and pull up the
poor; healthcare and educational reforms belong to “Track 2”.
And that it’s only Track 1 which makes Track 2 possible.
b. Growth, therefore, would not merely pull people above the
poverty line but it would have the added beneficial effect that it
would generate revenues which could then be used to
undertake redistribution.
c. Significant redistribution in India could not have preceded
growth as there were too few rich and too many poor.
d. Sen believes that India should invest more in its social sector
outcomes to boost the productivity of its people and thereby
raise growth, Bhagwati argues that we need to focus on growth
first. Investing in health and education to improve human
capabilities is central to Sen’s scheme of things. Without such
investments, inequality will widen and the growth process itself
will falter, Sen believes.
e. Bhagwati argues that growth may raise inequality initially but
sustained growth will eventually raise enough resources for the
state to invest in social sector schemes and mitigate the
effects of the initial inequality.
Synthesis Between the Two
1. Arun Maria, Planning Commission: A focus on job creation will be
the best resolution of this debate between growth and
development. Quality jobs can help drive inclusion with growth.

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 UN Report on Indian Malnutrition
1. The number of people suffering from chronic hunger in India declined
at the fastest pace in 2011-13 since 1990-92, according to a joint
report by United Nations’ food agencies. The number declined 6.5 per
cent in 2011-13 against a reduction of 1.9 per cent in 2008-10. In
2005-07, this rate was 3.2 per cent.
2. The proportion of undernourished people in the total population also
came down to 17 per cent in 2011-13 from 18.9 per cent in 2008-10.
3. However, the report, The State of Food Insecurity in the World,
stated that if undernourishment in India continues to only decline at
this pace, this might not be sufficient to reach the Millennium
Development Goal (MDG). The MDG hunger target says the
proportion of hungry people in the total population should be halved
by 2015, with 1990 as the starting year.
4. Among the emerging developing countries, the proportion of
undernourished people remained the highest in India. In China, 11.4
per cent of the population suffered chronic hunger, followed by Brazil
(6.9 per cent) and South Africa (less than five per cent) in 2011-13.

(f) Key Trends

1. Change in overall pace: Poverty reduction during 70s, 80s and 90s @ all India
level happened at a uniform rate. Only after 2004-05 did the rate increased
significantly. This is broadly consistent with other evidence like growth of
agriculture wages, GSDP growth rates etc.

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2. Inter state differences: The post reform period has seen an increase in
divergence in the rates of poverty reduction between the rich states and the
poor states. Thus while between 1973-74 and 1993-94, as per Lakdawala, rich
states were able to reduce their poverty by 23% (from 53% in 1974-74 to 30%
in 1993-94) and poor states by 17% (from 59% in 1973-74 to 42% in 1993-94),
in the post reform period (1993-94 to 2009-10) rich states have reduced their
poverty by 23% (44% in 1993-94 to 21% in 2009-10) while poor states have
reduced it by 12% only (50% in 1993-94 to 38% in 2009-10). There is no
reversal of this trend even between 2004-05 and 2009-10. Thus poverty is
increasingly becoming concentrated in the poor states. Maharashtra had
disproportionately higher share of poverty due to higher rural urban inequalities
perpetuated by lower agriculture wages and higher gender disparities.
3. Green revolution: Fallen angels showed an overall decline of 13% in the pre
reform period (31% in 1973-74 to 18% in 1993-94) while only 10% in post
reform period (28% in 1993-94 to 18% in 2009-10). Between 1993-94 to 2009-
10 rural poverty fell by 14% (from 30% to 16%) while urban fell just by 6%
(from 26% to 20%).
4. Rural urban differences: The poverty in rural areas is declining at a faster rate
@ all India level. Between 1973-74 to 1993-94 the rural poverty rate decreased
by 19% (56% to 37%) while the urban by 17% (49% to 32%). In the post reform
period, the rural poverty rate decreased by 16% (50% to 34%) while urban by
11% (32% to 21%). The pace of convergence in rich states (26% fall in rural
poverty since 1993-94 vs 15% fall in urban poverty) is faster than the pace of
convergence in poor states (11% fall in rural poverty since 1993-94 vs 8% fall
in urban poverty).
5. Strategy differences: Green revolution based agriculture improvement did it for
fallen angels. AP and TN improved the PDS systems. W Bengal has
strengthened its panchayats. Kerala focussed on human development.
6. Concentration of urban poor: More than half of urban poor in 2004-05 lived in
Maharashtra + UP + MP + TN. This was due to high overall population as well
as higher rates of urbanization in Maharashtra and TN and high population +
high poverty rate in UP and MP.

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 7. Chronic poverty: The incidence of chronic poverty was higher in Odisha, UP,
MP, W Bengal, Bihar etc. but low in J&K, Punjab. It was also significantly higher
for SCs. In some states like Punjab 84% of chronically poor were SCs while in
Haryana it was 66%. Similarly in rural areas 45% of chronically poor were
landless labor while in urban areas 36% of chronically poor were self employed
and 29% were casual labor. Thus we need to address the social inequalities as
well and also create 'gainful' employment.
India vs China
1. Studies indicate that while between 1981 and 2001 China decreased its
poverty from 53% to 8%, India was able to reduce it only by 17%. Similarly IMR
in India is ~ 2x that of China and MMR is ~ 10x.
NAS data vs NSS data Discrepancy
Issue
1. NSS data shows a level of consumption which was close to NAS consumption
in 50s, 90% in 1968-69, 75% in late 1970s and currently it is @ 50% of NAS
consumption only. It is generally accepted that the discrepancy between
expenditure as per NSS and as per NSA is ~ 2% p.a. For instance, the overall
proportion of poor is estimated to be 57% and 53% for 1977-78 and
1983 respectively, using the unadjusted NSS distribution. This proportion falls
to 43% and 30% for 1977-78 and 1983 respectively, when the adjusted NSS
distribution is used.
Drawbacks of NSS Data
1. It reports 0 refusal rate i.e. no one refused to get interviewed. They don't report
the extent to which the willing respondents have been substituted for the
unwilling ones. It is well documented that wealthy households are less likely to
cooperate. Such an exclusion of rich will mean that more proportion of
respondents will be poor and also show less inequality and will also not capture
full growth in personal consumption.
2. But this also doesn't mean that we should rely on NAS data as PC did until
1990. This is because by multiplying each household's expenditure in NSS
data we are assuming that everybody benefitted in the same proportion by the
growth.
Drawbacks of NAS Data

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 1. Non profit organizations and owner occupied dwellings rent: It includes
consumption of non profit organizations as well under the private consumption
head. It includes imputed rent from the owner occupied dwellings. It is
estimated that together these two account for more than half of the
discrepancy.
2. Residual method of deriving private consumption: In NAS, most items under
private consumption are derived as residuals so that errors elsewhere are
reflected under consumption.
3. Old rates used in NAS data (Minhas): For example, consumption of vanaspati =
total production (adjusted for imports and exports) - consumption by
government and business. In an economy in which all vanaspati is used for
household cooking, this gives the right answer. But as the economy grows,
consumers eat more meals out, so that an increasing fraction of vanaspati is
used by commercial food suppliers. Consumer spending on these services is
derived from gross output of the services sector adjusted to a value-added
basis by deducting the value of intermediate inputs, including vanaspati. At
best, this adjustment is done using one of the rates and ratios, which means
progressive and increasing overstatement if intermediation increases with
income and if rates and ratios are infrequently adjusted. In the case of
vanaspati in India, no adjustment is made at all, so that all vanaspati used in
restaurants is counted twice, helping overstate the rate of growth of
consumption and GDP and to increase the ratio of national accounts to survey
consumption.
4. Revisions in NAS data (Sundaram and Tendulkar): Revisions in some of NAS
data are often so large as to cast doubt on the estimates in general. This is
closely related to Minhas’s concern with the outdated rates and ratios. When
the Central Statistical Office abandons a long-used ratio and new survey or
other information is collected, information based on actual data paints a
very different picture from that based on the long-used approximation.
Recall Period Adjustment
1. Based on experiments done by Mahalanobis and Sen in 1954, NSS used 30
day recall period. In the annual surveys from 1995 to 1998, it experimented
with using 7 day recall period for high frequency items and 365 day period for
low frequency items. Some households were randomly asked questions with
the new recall period and some with the old.

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 2. Using 7 day recall period for high frequency items was found to increase
reported expenditure by ~25% and thus would lower poverty ratio. Similarly
using 365 day period for high frequency items would also increase reported
expenditure as it would fatten the tail while reducing the mean (although people
on an average will recall less but those who were reporting zero consumption
in 30 days are more likely to report some consumption in 365 days). Studies
show this adjustment could remove ~ 175 mm people from below the poverty
line. The 1995 - 1998 survey experiment showed ~ 50% reduction in reported
poverty with the new recall period.
3. The experiments showed recall periods produce a vast difference but didn't
show which one is better. So NSSO launched a pilot study in the quinquennial
survey of 1999-00. 3 different reporting periods were used - 7 days, 30 days
and a gold standard of daily visit. Results showed 7 day recall period produced
23% higher reported expenditure. But when compared to daily visits data, 30
day estimates proved to be more accurate for many important commodities
including cereals. Over all commodities nothing proved superiority or inferiority
of any one method. So in the main quinquennial round each household was
asked to report on both 7 day and 30 day period while low frequency items
were shifted to 365 day. But which one and in what proportion of the two were
used is not known.
Calorie Angel Curve
1. If we take a calorie norm and try to find the minimum income which would
enable one to buy just enough calories then the resulting diet can be very
cheap but it would be very boring and not preferred by humans. Such a
mathematical solution ignores people's behavioral patterns.
2. So a better solution is to look at how people actually consume. If we plot the
actual money consumption vs actual calorie intake, we get the Angel curve.
3. It can be seen that a 7 day period will increase both reported expenditure on
food (Ef) as well as total reported expenditure (Et) by the same amount. Thus
(Ef/Et)30 day period < (Ef/Et)7 day period. So the new poverty line will be lower (i.e. at
lower total expenditure the food expenditure will meet the required calorie
threshold). But this depends on the initial ratio of (Ef/Et). In case of Indian poor,
this ratio was already so close to 1 that this adjustment will not meaningfully
lower the poverty line.

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Poverty Measurement in India
Pitambar Pant (1962)
1. He opined that to lift the bottom 20% people out of poverty, investment and
growth are not enough and transfer payments are necessary. Thus came
subsidies.
2. The poverty line in rural areas should be Rs.20 per month. For urban areas, it
should be Rs.25 per month. It excludes expenditure on health and education,
both of which are expected to be provided by the State according to the
Constitution and in the light of its other commitments.
3. It represented a broad judgement of minimum needs and was not strictly
related to nutritional requirements, although it took them into account.
Dandekar and Rath, 1971
1. They defined state of poverty as a state where a person is not able to get 2 squ
are meals per day. The definition of square meals was fixed to be 2,250 kcal pe
r day. Thus the households whose expenditure didn't provide them for food that
contained even this much amount of kcal were to be classified as poor.
2. The households under NSS data were classified into groups according to their
expenditure. Then for each state rural and urban, it was seen which group's
expenses allowed it to consume 2,250 kcal food.

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 4. The only issue was that unlike food, there was no norm for non-food item. So
the researchers took some arbitrary expenses for non-food items.
Planning Commission Task Force, 1979
1. Anchoring in calorie norms - normative approach / minimum needs approach: It
used recommendations of Nutrition Expert Group (1968) to take rural calorie
threshold @ 2400 calories per day and urban threshold @ 2100 calories per
day.
2. Behavioral approach: To work out the monetary equivalent, it used 1973-74
quinquennial NSS data. The calorie content of consumption baskets
corresponding to various per capita expenditure classes were worked out.
Rural poverty line came out @ Rs. 49 per month and Rs. 57 per month for
urban areas. Thus, the concept of poverty line used here was partly normative
and partly behavioral. Only the national lines were worked out and not the state
lines. Price indices @ state levels were used to derive corresponding state
lines.
3. Malnutrition vs poverty: This way of deriving the poverty line, while being
anchored in a 'norm' of calorie requirement, does not seek to measure the
nutritional status, and more specifically the incidence of malnourishment or
under-nourishment in the population. It focuses rather on the purchasing power
needed to meet the specific calorie intake standard with some margin for non-
food consumption needs.
Planning Commission Poverty Lines (1979-93)
1. Rural and urban lines separately calculated for all india. No separate state lines
calculated.
2. Calculations done every 5 years based on NSS surveys.
3. Calorie Norm: They are based on a calorie norm of 2400 calories per capita per
day for rural areas and 2100 calories per capita per day for urban areas. The
poverty line for the base year 1973-74 has been taken as the per capita
expenditure level at which these calorie norms have been met and
subsequently it was merely adjusted for rise in prices. These were Rs. 49 per
month in rural areas and Rs. 57 per month in urban areas.
4. Base year remained 1973-74. This was a drought year and data for only 9
months was available. Studies have shown this data underestimates poverty.
All subsequent poverty lines were linked to this number.

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 5. Price deflators: The initial basket was lost and the price deflator was applied to
the final poverty line figure directly. Initially WPI was used. Then private
consumption deflator from NAS was used till 1988. Naturally this understated
poverty since manufacturing inflation was lower than food inflation. Later it was
decided to use CPI - AL in rural areas and average of CPI - IW and CPI -
UNME for urban areas.
6. Estimating poor population in states: All India poverty lines were adjusted for
state prices via state price indices. Then data from each state from NSS was
used to determine how many households fell above the poverty line and how
many below.
7. Adjustment procedure: Because aggregate personal consumption expenditure
from NSS is different from NAS (national accounts statistics data) and NAS
expenditure is more, planning commission used to multiply NSS expenditure by
a factor (NAS aggregate / NSS aggregate) while keeping poverty line
unchanged.
8. Poverty basket remained 1973-74 basket and didn't change with time.
D T Lakdawala Committee 1993
1. State wise poverty line: The committee recommended 2400 kcal for rural and
2100 kcal limit for the urban. State-specific poverty lines were estimated as
follows. The standardised commodity basket corresponding to the poverty line
at the national level was valued at the prices prevailing in each State in the
base year, i.e., 1973-74. For updating poverty line to the current prices in a
given year, state specific consumer price-index was used with appropriate
adjustment to weightings.
2. Choice of base year for poverty basket: The committee recommended
continuation of 1973-74 basket as the poverty basket. However the
consumption preferences of households would have changed. In particular the
cereal consumption and prices both came down in relative terms (down from
47% of total consumption in 1977-78 to 38% in 1987-88 in poor rural
households and from 35% to 30% in urban poor households), but if we keep
the weights constant then we are fixing a lower poverty line. Moreover the
survey in that year was not complete (it covered only 9 months). The committee
could have used 1977-78 or 1972-73 when full year data were available.

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 3. Rural vs urban: Since 1993, PC was calculating rural and urban lines
separately for each state. While earlier the implicit difference between rural and
urban prices was 16%, after 1993 it became 40%. This seems implausible. In
some cases it threw up weird results. For example in AP the urban prices were
implied to be 70% higher than in rural areas and as a consequence the
reported urban poverty was 27% while rural poverty was mere 11%..
Economists like Deaton argue this is because PC was not measuring prices
actually paid and once we adjust for that (by taking the prices reported directly
in NSS data) the difference becomes close to 16% again.
4. Price deflators: To update the poverty line each year, they suggested CPI be
used (after adjusting the food weights to reflect the consumption of poor as in
1973-74). As argued above this lowers poverty line. However, they could have
used NSSO annual survey which cover almost 80% of the commodities.
The Suresh Tendulkar Committee 2009
(a) Features
1. Change in poverty line basket (PLB): While economy has grown, the
consumption basket of poor has remained unchanged for poverty
measurement purposes (fixed to 1973-74 basket). It uses 2004-05 as the base
year for the basket.
2. Change in NSSO recall method: He also advocated using mixed recall period
(MRP) method (recall window of 1 year for low frequency items and 30 days for
some others) since it has been used lately and refrain from frequently changing
the method. The earlier recall method used by NSSO was uniform recall period
(URP) method (uniform recall window of 30 days). In future MRP* method will
be used (recall window of 1 year for low frequency items, 30 days for some and
7 days for some food items).
3. Departure from calorie based poverty line: It argued that the nutritional status
based on NSSO data set didn't correlate well with the nutritional outcomes of
more specialized surveys (for instance some surveys reveal 42% malnutrition
and stunted cases). Also the new consumption basket of poor is no more
dominated by food expenditure. It includes manufactured goods, fuel, rent etc.
as well. So calorie approach is not suitable.

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 4. Continuity with earlier poverty line: The earlier urban poverty line was 25.7%
(URP approach). The committee decided to arrange expenditure data (MRP
approach) of urban consumers in ascending order and found the basket which
corresponded to 25.7% head count. Thus urban poverty was kept same. For
rural poverty, the same urban basket was used since it was believed that urban
consumption basket is superior to the rural basket.
5. Updating poverty line: In the sample years prices per unit can be calculated
from NSSO database itself (it contains quantity consumed as well as total
expenditure on it). Such prices can be applied on same PLB to arrive at new
poverty lines.
(b) Issues with Tendulkar Approach
1. Top-down approach: State wise rural and urban poverty lines should have been
used instead of using state price index. This is because people in different
regions may have different consumption habits.

2. NSSO methodology: NSSO's sample surveys keep on changing their

methodology. So comparison of data of 2 surveys may not give correct results.

3. Question of how to account for state assistance: If lets say state is giving cheap
food then expenditure data for people who are covered will show that a lower
expenditure is sufficient to get adequate nutrition. But this is very harsh on
people who are excluded!
4. FAO argument: While Tendulkar delinks poverty line from calorie intake (calorie
consumption based on NSSO data set was not correlated with nutritional
outcomes of other specialized surveys) as a rough check he concludes that in
urban areas the line corresponded to 1776 kcal (FAO recommendation: 1770
kcal) and in rural areas 1900 kcal (higher than FAO recommendation). FAO
norms correspond to that of sedentary work for 50 kg weight (for men) and 45
kg weight (for women). Difference between sedentary and moderates is ~ 500
kcal and between moderate and heavy is ~700 kcal. For a 60 kg man doing
moderate work average requirement is 2800 kcal. Is it assumed by PC that
poor people need to do only office work and not lift loads?
(c) Delinking from calorie intake argument given by Tendulkar

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 1. 3 health surveys are used: (i) proportion of underweight children below 5 years
(underweight defined as those whose weight-for-age was below twice the
standard deviation); (ii) proportion of men aged 15-49 years with low body
mass index – norm of low BMI being lower than 18.5; and (iii) proportion
women (excluding pregnant women and those who gave birth in the last two
months) aged 15-49 years with low BMI.
2. In the absence of objective criteria for assigning unequal weights to the three
population segments, equal weights were assigned to derive an aggregate
index of malnutrition outcome. Consequently, a simple average of the three
proportions above is taken to be an aggregate outcome indicator of
malnutrition.
3. When estimated (state/rural/urban) population from NSS is ranked according to
ascending size of food expenditure per capita, normative food expenditure per
capita is defined by that level of food expenditure per capita that corresponds
to cumulative share of population from NSS that equals the index
of malnutrition derived from NFHS- III for that state.
Deaton and Dreze - Impact of Inequality on Poverty
1. They try to decompose poverty reduction (between 1993-94 to 1999-00) into
poverty reduction due to growth assuming unchanged distribution proportions
and poverty reduction due to changes in distribution. The first they isolate by
calculating if every person's income grew @ same rate in % terms as the per
capita income then what will be the change in HCR. Second was calculated by
subtracting this from the actual reduction in HCR.
2. Naturally @ all India level growth alone with no changes in distribution would
have reduced poverty more. The dampening impact due to growing inequality
was weaker in rural India and sharper in urban India (more pronounced in MP
and Kerala) indicating sharper rise in inequalities in urban India. Indian poverty
would have been 0.7% less (1.5% less in urban areas) had there been no rise
in inequality. If we adjust for the 365 day reporting change in the questionnaire
(which lowers the mean and reduces the variance) then the urban inequality
rises further.
3. In this period the per capita availability of cereals has gone down but this
doesn't question the decline in poverty as tastes of people may be changing
towards lower cereal consumption. Moreover the effect of substitution of protein
items for cereals by the rich may offset the higher consumption of cereals by
the poor.

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 4. But the overall poverty decline in India doesn't mean it didn't increase in any
particular state or group. In states of Odisha and Assam some groups have
become poorer due to destruction of local environment. Moreover the overall
data doesn't tell us the hidden costs (the negative externalities which are
actually a cost to the society). When a worker migrates official data shows a
reduction in poverty due to higher income but doesn't show the migration costs
included like health, sanitation, congestion, family structure etc.
5. If we look at the multi dimensional nature of poverty we find that in some
indicators like decline in TFR, illiteracy rate India has done increasingly well, in
some measures like increase in agricultural wages, decline of IMR the growth
is slowing and in some measures like sex ratio @ birth it is outright declining.
Q. "By restricting the social benefits to BPL households, the poverty line will be fully
converted from a statistical benchmark to a real life social division" (Dreze). Discuss.
(2011, II, 15)
1. A person just above BPL is not any different from a person just below BPL. So
why should we treat them so unequally that someone who is just below the
poverty line is poor is a candidate for transfers and the special attention of the
World Bank, while someone who is just above it needs no help and can be
safely left to their own devices?
2. BPL based techniques generally depend on HCR which fails to satisfy the
strong upward transfer axiom.

Q. Poverty alleviation strategy of the day is moving ahead of redistribution with

growth of Chenery and World Bank and Dreze and Sen's growth mediated security
and support led security strategies to empowerment, opportunities and security lines.
Elaborate. (2011, II, 30)

Poverty Alleviation Strategies

1. Growth based: Policies can be aimed at rapid growth, via generating new and
expanding employment opportunities at a faster rate than those generating
displacement make a significant impact on sustainable poverty eradication.
2. Direct handling of poverty: Direct income-generating wage and self-
employment programmes.

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 3. Creating capabilities: Public expenditure towards providing primary health and
education services help create higher income-earning capability among the
poor households. These are important non- income dimensions of poverty.
This capability from the supply side interacts with expanding labour-demand for
better skills generated by rapid growth and thereby results in sustainable
poverty eradication at the household level.
4. Dreze and Sen approach: Growth mediated security relies upon promoting economic
growth and taking advantage of the extra resources, both in terms of private
incomes and providing a basis for public support. Support led security directly
attacks the problem through public programmes such as employment provision,
income redistribution, health care, education. Furthermore, they note that both
strategies have been successful in reducing poverty in countries as diverse as
Hong Kong, Singapore and South Korea (“growth mediated security”), and
China, Jamaica, Chile and Costa Rica (“support led security”). However, they
also note the similarities in the two strategies; namely the critical importance of
public provision for primary health care and basic education. Furthermore, if
economic growth is to improve living conditions it must be of a participatory
form which provides remunerative employment on a wide scale.
5. World bank approach: It emphasizes the importance of labour-intensive growth
and primary education and health in successful poverty alleviation. In many
respects these interventions are necessary to “make trickle-down work”.
Q. Discuss the poverty trends - both rural and urban, between 1973-74 and 2004-05
across states in terms of pace of reduction and concentration and relate them with
changes in growth rates between the pre and the post liberalization periods. (2010,
II, 60)

Q. Critically assess the Tendulkar committee's approach to measuring poverty in

India. (2010, II, 15)

Q. Recent trends show that poverty incidence in urban areas is higher than its rural
counterpart in more prosperous states. What factors, do you think, explain this?
(2010, II, 20)

Q. Carefully examine and analyze the argument that over the last 2 decades there is
an increasing divergence between the incidence of poverty based on the planning
commission's expert committee methodology and that based on calorie intakes as
obtained from the national sample surveys. (2009, II, 60)

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 1. It was based on a fixed consumption basket (based on 1973-74 pattern)
anchored in a calorie norm of 2400 kcal. They evaluated the cost of this basket
in different states (rural and urban areas) @ 1973-74 prices and adjusted for
the rise in prices (using adjusted CPI - AL and CPI - IW).
2. At first glance, this sort of updating might be seen to preserve the
original intent, and certainly, if price inflation is correctly calculated, a household
at the poverty line in India in 2009 has the same purchasing power as a
household at the poverty line when it was first drawn up in 1971. Yet people at
the same level of living purchase fewer calories now than they used to,
presumably because fewer of them are engaged in manual labor in agriculture
and so need less energy or simply changes in tastes, so that, if one were really
to believe in a fixed calorie standard, the poverty line would have to be revised
upward.
3. But such revision is something for which there is typically little political support,
in India or in the US, if only because raising the poverty line would increase
the number of people designated as poor which, in the absence of legislative
changes, would trigger additional progressive redistribution.

Q. Discuss the nature and incidence of rural poverty in India. What suggestions do
you offer to solve it? (2007, II, 20)
Unemployment
Unemployment Measurement Criteria
Prof. Raj Krishna
1. Time criterion: This refers to identifying people who had no gainful work for
more than a predefined standard.
2. Willingness criterion: This refers to counting only those who are willing to work
at the going wage rate.
3. Income criterion: This considers those persons as unemployed whose income
(or expenditure) is below a predefined 'poverty norm' generally fixed on the
basis of minimum needs.
4. Productivity criterion: This considers those people as unemployed whose
productivity is below a predefined standard.
Prof. A K Sen
1. Income aspect: It considers only the income which is derived on the condition
that one works and not otherwise.
2. Production aspect.

110
 3. Recognition aspect: All those persons who are seeking work regardless of
whether or not they already have some job should be classified as
unemployed.
Unemployment Measurement Methods
Usual Principal Status
(a) Features
1. People are asked to reveal their employment status over past 1 year and
according to principal status i.e. primary industry. He may also be engaged in
subsidiary activities to supplement his income.
2. Under UPS employment, the number of days engaged in principal activity
determines the employment status.
3. Under UPSS employment, the number of days engaged in principal +
subsidiary activities together determines the employment status.
(b) Drawbacks
1. UPSS and UPS understate employment as most people will like to be
considered employment as it enhances their social status. So it is not able to
capture disguised employment at all. Thus at max, it can give chronic
unemployment.
2. UPS/UPSS unemployment has been only 2-3% which is a joke.
3. It considers women who withdraw themselves from labor force during the slack
seasons as "not available for work" instead of considering them as
unemployed.
Weekly Status Rate
(a) Features
1. A person is asked to give the number of hours worked in past 7 days. If he has
worked even for 1 hour, he is considered employed.
(b) Drawbacks
1. While this method may measure chronic and seasonal unemployment, it fails to
measure disguised unemployment.
Current Daily Status
(a) Features
1. A person is asked to give the number of hours worked on the previous day
only. If < 1 means unemployed, if between 1 and 4, then only half unemployed
and more than 4 means fully employed. Thus it gives time rate of
unemployment. Households are surveyed uniformly throughout the year.
2. CDS unemployment is 6.6% in 2009-10 vs 8.3% in 2004-05 which is closer to
reality.

111
(b) Drawbacks
1. Even it can't fully captured disguised unemployment as even though the
productivity is very low a person is "employed" for a long time.
Trends in Unemployment

NSSO 2011 - Employment Trends in Agriculture

1. While the farmer population in India is
shrinking in absolute numbers (9 million in
past decade), the number of agricultural
laborers has been increasing and they
now outnumber the farmers.
2. Owing to the pressure of population, the
average size of land holdings is getting
more fragmented over time. Farming at
the margin, thus, is getting more unviable,
forcing small cultivators to join the
growing ranks of agricultural laborers and
also seek non-agricultural employment.

Population Anomaly in Census (Why abrupt change in employment)

1. The Census of 2001 projected India’s population for 2011 at 1,192,506,000.
According to the Census of 2011 the actual population of India that year was
1,210,569,573. Therefore the Census of 2001’s projection for 2011
underestimated the actual number by 18,063,573 (18.06 million). This is for
the year 2011.
2. It can also be safely assumed that the population projection for 1 January
2010 made by the NSSO using Census of 2001 is also an underestimate.
NSS 2011-12 on Employment
An examination of sectoral elasticities at the global level by

Kapsos (2005) showed that all the three sectors (primary, secondary

and tertiary) have experienced employment growth

during 1991-2003, though the elasticity of services employment

to gross domestic product (GDP) was nearly three times

as large as the corresponding fi gures for agriculture and

112
of structural change, as employment is being generated in

the service sector at a considerably faster rate than in the

other sectors. the service sector

was both the fastest-growing sector and the sector with the

most job-intensive growth. Indeed, for every 1 percentage

point of growth in service sector value added, employment

increased by 0.57 percentage points, while the corresponding

fi gure for agriculture and industry stood at 0.41 and 0.28 percentage

points, respectively.

INDIA:

On the positive side, there has been a shift in employment in

favour of somewhat larger enterprises (by employment). Between

2004-05 and 2009-10, there has been an increase of 5

percentage points in employment in enterprises employing 20

workers and more (from 11.8% of all non-agricultural workers

in 2005 to 17.1% in 2010), along with a decline in employment

in smaller enterprises – those employing less than six workers

from 75% to 65.6% (Mehrotra et al 2012). Further, there has

been a consistent increase since 1999-2000 onwards in regular

wage/salaried employment (from 58 million in 1999-2000 to

71.7 million in 2009-10), as opposed to casual employment or

self-employment.

During 2009-10 and 2011-12,

13 million workers withdrew out of agriculture. That is nearly

as large as the absolute decline in workers in agriculture (14

million) that occurred between 2004-05 and 2009-10. There

was no absolute decline in agricultural employment between

Independence and 2004-05, which began after 2005

Manufacturing sector employment remains a concern,

d espite rapid manufacturing-output growth. The increase by

nearly 12 million in manufacturing sector employment in the

fi rst half of the decade (2000-05) was offset by a decline of

5 million in the second half of the decade (2005-10).

113
The 18 million

i ncrease in jobs in the construction sector were offset by the 5

million decline in manufacturing sector, resulting in industrial

employment increasing by 13 million in the period 2005-10.

The 68th round data suggests that industrial employment has

increased by 15.7 million during 2010-12. The disaggregated

data for 2011-12 brings good news for India’s manufacturing

sector. It suggests that employment in manufacturing rose by

8.9 million in this two-year period, while non-manufacturing

(mostly accounted for by construction) rose by 6.8 million.

On the other hand, even though the present growth phenomenon

is termed to be service-led growth, there has been a

rather meagre increase of 4 million jobs in this sector between

2005 and 2010 when services sector grew by about 10% per

a nnum. In contrast, employment in services had grown by 18

million between 2000 and 2005. The data for 2011-12 shows

that the services employment has increased by an overwhelming

11 million in this two-year period between 2009-10 and

2011-12 – a signifi cant acceleration in job creation, compound

to the latter half of the previous decade. If we look at sub-sectors within services, traditional sources

like trade and repair are the most important contributor to employment

(Table 1). It accounts for more than one-third of the

total services employment in the economy, both at the beginning

as well as at the end of the decade. Most of the increase in

employment for the sector was accounted for by retail trade.

One would have expected that at least in the allied activities in

agriculture – horticulture, animal husbandry, forestry and

fi sheries – there would be an increase in employment. However,

it is intriguing that employment in these activities too declined

in absolute terms from 50.8 million in 2004-05 to 34.6 million

in 2009-10. Since income has been growing rapidly, and the

income elasticity of demand for eggs, milk, fi sh, fruits and

vegetables is high, the consumption of these products is

increasing. However, employment in these “allied agricultural”

activities has declined.

114
phenomenon, with reasons varying by sub-sector of noncrop

agriculture. For instance, Jha (2006) points out that a llied activity in agriculture saw decline in employment

(though an increase in value added) even in the 1990s. Since

1997, there has been an absolute decline in cattle and goat

population which suggests a reason for decline of employment

in the livestock sector. Similarly, fi sheries saw a transformation,

with marine fi sheries losing its dominance to culture fi sheries;

the latter is less labour-intensive than marine fi sheries. A

d ecline in employment in forestry could be on account of a decrease

in forest area in the country. A fi nal reason may have to

do with the increasing pressure on women’s time. Male migration

out of rural areas has continued unabated, increasing the

feminisation of crop agriculture, leaving women with less time

to rear poultry or livestock (ibid).

115
1. Overall employment trends
a. 2004-05 to 2009-10: 2.5 mm new jobs. 2009-10 to 2011-12: 13 mm new
jobs.

116
 b. Total employment has risen from 460 million in 2009-10 to 473 million in
just two years.
2. Agricultural employment trends
a. Employment in agriculture had been rising since Independence in absolute
terms.
b. It rose by 21 million during 2000-05.
c. But it fell during 2004-05 and 2009-10 by 14 million.
d. During 2009-10 and 2011-12, agricultural employment fell by 13 million,
fastest decline.
e. The share of agriculture in total employment was 60% in 1999-2000 and
fell to 53% in the 10-year period ended 2009-10. In 2011-12, the share of
agriculture in total employment stood at 49%, a four-percentage-point fall
within two years.
3. Rural employment trends
a. In 2009-10, the share of employment of agriculture for rural males was
65% but dropped to 59% in 2011-12.
b. This was made up by the increase in employment in the secondary sector
(construction, rural jobs guarantee scheme and so on) and the tertiary
sector. Their proportion rose from 19% to 22% and 18% to 19%,
respectively.
4. Services employment trends
a. Services employment, which increased by over 18 million during 2000-05,
rose by merely 3.5 million during 2005-10 even though services output
grew by about 10% per annum during the period.
b. Services sector employment has witnessed an overwhelming increase in
these two years. While it grew by merely 3.5 million during 2004-05 and
2009-10, it rose by 11 million in just two years, during 2009-10 and 2011-
12.
5. Industrial employment trends
a. During 2004-05 and 2009-10, it was the 18 million increase in
construction employment, offset by a 5 million decline in manufacturing
jobs, that resulted in an increase of 13 million jobs in the five-year period in
the industrial sector as a whole.
b. During 2009-10 and 2011-12, industrial employment (manufacturing +
non-manufacturing) grew by 14.5 million. While the break up between
manufacturing and non-manufacturing sector employment is not given for
2011-12, it is expected that it is mostly in the construction sector.

117
 c. During 2004-05 and 2009-10, manufacturing employment fell by 5 million
after having increased by 12 million in the first half of the decade.
6. Casualisation trends
a. Overall positive movement. Regular workers increased by 13 million in the
2 year period.
b. Self-employment increased by 11 million and casual workers declined by
12 million.
7. Gender trends
a. During 2000-05, 26 million females joined the workforce. More than 90%
of the incremental workforce among rural females became self-employed
in agriculture.
b. In the latter half of the decade, by contrast, while male employment
increased by 23 million, female employment declined by 21 million.
c. Even during 2009-10 and 2011-12, the female labor force participation
rate, especially for rural females, continues to fall. However, compared to a
withdrawal of 21 million females from the workforce in the second half of
the decade, there is an increase of about 1.5 million female workers,
guided by greater opportunities in urban areas, during 2010-12.
d. The number of women in India’s workforce fell from 28.7 per cent in 2004-
05 to 22.8 per cent in 2009-10, and even further to 21.9 per cent in 2011-
12, according to the latest report from National Sample Survey Office
(NSSO).
e. The proportion of women employed in agriculture dropped from 79% to
75%, while it rose from 13% to 17% in the secondary sector, the proportion
employed in the tertiary sector remained unchanged at the level of 8%.

118
Female Workforce
Participation Rate
Trends
1. India, globally,
ranks eleventh
from the bottom
in female
workforce
participation and
despite being at
the low 30% for
a long time, it
fell to 24% only
now.
2. Income
effect: as
incomes grow,
participation of
females
declines.

119
 enrollment.

Causes Behind Recent Unskilled Labor Wage Rise

1. MGNREGS is too small to be singularly

responsible for it. The utilization levels of this
scheme are low and are declining (54 days in
FY10 to only 36 days by FY13).
2. Primary checks in states such as Maharashtra
suggest that a reverse migration wave is
driving the labor shortage. A combination of
improved governance and a sharp pick-up in
GDP growth in traditional labor-supplier states
such as Bihar and Chhattisgarh is responsible.
3. The demand for higher education in labor-
supplier states contributes to labor shortage as
well. A decade ago the workers had never
seen a textbook. Today several workers have
been part of the formal education system for 4-
5 years and aspire to educate their children
even more. Most impressive gains in literacy
have been made in the traditional labor
supplier states.
4. Women’s labor participation rates have
declined as a rising number of women are now
choosing to pursue education. The fact that
women’s literacy rates are rising at a faster rate
than those of men corroborates this dynamic.

120
 1. Decline in labor force growth rate: Between 1983-84 to 1993-94 the labor force
grew @ 2.3% p.a. But between 1993-94 and 1999-00 it grew only @ 1.5% p.a.
Between 1999-00 to 2004-05 the labor force grew @ 2.85% again. One reason
given for this decline is that people are enrolling more in higher
education. NSSO 2009-10 shows that the number of young people in
higher education, and therefore, out of the workforce, has increased causing a
drop in the labour participation rate. The total number of young working-age
(15-24) people who continued in educational institutions doubled from about 30
million in 2004-05 to over 60 million in 2009-10. The result was lower
expansion of 12 mm only in labor force. But this will increase when the
educated come back in the labor force. Another view is that lack of work
opportunities is leading to a fall in labor force growth rate. This is supported by
the NSS data that participation rate for women has specially gone down form a
stable 28 - 30% range to 23%.
2. Rural vs urban: Urban labor force is increasing @ a rate of 3.33% compared to
1.66% rural labor force and 2.1% national rate. Structural unemployment is a
problem in urban areas because the skills and needs of jobs may not match so
a person may not work.

3. Male vs female: Overall male participation rate is higher than female rate.
Urban male is higher than rural male. But female rural rate is higher than
female urban rate.
4. Demographic dividend: The labour force in India is expected to increase
by 32% over the next 20 years, while it will decline by 4% in industrialized
countries and by nearly 5% in China.

Gainful Employment
1. By any standards it can be seen that the unemployment rate in India is much
lower than the poverty rate. This is because the income or productivity criteria
of employment are not considered by the government while arriving at the
employment status of a person. Given this difference, the need today is to
focus on generating gainful employment instead of just employment.
Regular Wage Employment, Self Employment and Casual Employment

121
Sector 1972-73 1983 1993-94 1999-00

Regular Wage 15 14 13 14

Self Employed 61 57 55 53

Casual Wage 23 29 32 33

1. Casualization of labor: It is clear from the above that the share of casual wage
workers is rising (from 23% in 1972-73 to 32% in 1993-94 and 33% in 1999-
00). This is coming at the cost of self employed category (from 61% in 1972-73
to 55% in 1993-94 to 53% in 1999-00) while the regular wage category has
remained the same. This suggests that agriculture is becoming unviable to
most marginal farmers and they are migrating into the casual wage sector. This
is also reflective of the increase in public constructions programmes.
2. NSSO shows vast majority of new jobs created between 2004-05 and 2009-10
was in casual employment, mainly in construction. Even in organized sector the
increase in employment has been mainly on account of informal employment of
workers.

3. How is manufacturing contributing to casualization of labor post

reforms: Increased outsourcing instead of vertical integration means a big
organized sector company is now doing less work on its own. Instead it now
depends on the unorganized sector units for supply of parts. Thus labor is
moving to the unorganized sector.
4. Labor laws.
5. Organized sector has actually shown a decrease in employment between
1993-94 to 2004-05 of -.33% p.a. while between 1983-84 to 1993-94 it grew by
1.2% p.a. Employment generation in public sector has been -0.70% in this
period compared to 1.55% between 1983-84 to 1993-94. Private sector job
creation rate has increased from 0.44% to 0.60% in this period. Total people
employed in organized sector are 28 mm in 1993-94 which fell to 27 mm in
2004-05.

6. About 95% of the new opportunities created in the 11th FYP were in
unorganized sector. Organized sector only accounts for 7% of the total
employment.

122
1. Rural vs urban: Unemployment rate in urban areas is higher than that in rural
areas. In 1983-84 the urban rate was 9.5% vs 7.9% rural (difference of 1.6%) ,
in 1993-94 it was 7.4% vs 5.6% rural (difference of 1.8%) and in 1999-2000 it
was 7.8% vs 7.1% rural (difference of 0.7%).
2. Female vs male: Female unemployment is higher than male unemployment in
urban areas vs roughly equal in rural areas. In 1983-84 the urban female
unemployment was 11% (difference of 1.8% over urban males), in 1993-94 it
was 10.5% (difference of 3.8% over urban males) and in 1999-00 it was 9.4%
(difference of 2% over urban males).
3. Education and unemployment: Unemployment rate for graduates and above
has been declining both in rural and urban areas. But in rural areas the rate is
higher indicating lack of work opportunities.
4. Overall unemployment: In 1983-84 it was 8.3%, in 1993-94 it was 6%, in 2004-
05 it was again 8.3% and in 2009-10 it was 6.6%. The fall between 1983-84
and 1993-94 was because growth rate in employment 2.6% p.a. was higher
than growth rate in labor force (2.3% p.a.). The rise from 1993-94 to 2004-05
was because the growth rate in employment was 1.9% p.a. while the growth in
labor force was 2.1% p.a. Between 2004-05 and 2009-10, the overall labour
force expanded by 12 million while 18 million job opportunities were created on
current daily status basis. Employment data of the 66th round of NSS shows
that only 2 million jobs were created between 2004 and 2009, even as the
economy grew at 8.43% annually (Aggarwal, 2011). Chandrashekhar and
Ghosh (2011) argue that there has been a dramatic deceleration in total
employment growth, from an annual rate of around 2.7% in the previous five-
year period to only 0.8% in the latest quinquennium.
5. Interstate variations: Unemployment rates were very high in Kerala, UP and
Bengal.
6. Employment growth rates: It is heavily dependent upon agriculture. For the
overall period between 1993-94 to 2004-05 it was 2% i.e. same as that in
1980s. In 70s it was 2.8%. While agriculture fell, construction and
manufacturing saw a jump (manufacturing between 1999-00 to 2004-05).
Services except the financial, business and public administration are seeing a
rise in employment generation. Urban employment growth rate has been higher
than in rural areas.

123
 Sector 1983 to 1993-94 1993-94 to 2004-05

Agriculture 1.4 0.7

Manufacturing 2.0 3.1

Construction 5.7 7.2

Trade, H+R 3.8 5.2

Other services 3.9 1.2

Overall 2.1 1.9

Falling Employment Elasticities

1993-94 to 1999-
Sectors 1983 to 1993-94
2000

Total 0.41 0.15

Agriculture 0.50 0.00

Manufacturing 0.33 0.26

Trade 0.63 0.55

Transport,
Storage, 0.49 0.69
Communications

Construction 1 1

Finance, Real
Estate, Business 0.92 0.73
Services

Community and
0.50 0.07
Personal Services

124
(a) Manufacturing
1. Although GDP from manufacturing increased at 9.5% per annum between
2004-05 and 2009-10 and there was some increase in employment in the
organized sector, NSSO suggests that overall employment in manufacturing
actually declined during this period. The implied shake-out of labour from the
unorganized sector.
2. Labor laws is not a reason because evidence shows that during the slowdown
of 1997-04 more than 1 million workers were laid off in organized sector. Even
in recent slowdown, more than 30K workers have lost their job in textiles
sector.
3. Export oriented sectors: Export oriented sectors showed a high employment
elasticity of 0.48 in 90s. Thus they should be encouraged.
4. Reasons for low manufacturing elasticity: Splintering, promotion of skill
intensive industries instead of labor intensive due to rigidity of labor laws.
5. Goldar (2009) and Chandrashekhar (2009) show that exports and domestic
demand growth has mainly favored products which are more skill and
technology intensive. Moreover the relative cost of capital to wages has also
gone down leading to substitution of capital for labor.
(b) Agriculture
1. Lewis model: Labour is moving out of agriculture as predicted by the Lewis
model, without affecting productivity in agriculture because of the prevalence
of disguised unemployment. This means that the tendency is a wholly
positive one. The problem with this argument is that the increase in non
agriculture employment is nowhere near enough to explain the dramatic decline
in agricultural employment generation. Not all the increase in such employment
may be the result of positive pull factors. Rather, it possibly reflects a distress
phenomenon.
2. Farm mechanization.
3. Changing technology and lack of credit: There is much greater use of a range
of monetized inputs, including new varieties of seed marketed by major
multinational companies. Small cultivators who take on debts (often from
informal credit sources at very high rates of interest) in order to pay for these
cash inputs find themselves in difficulty if for some reason there is crop failure
or output prices remain low. Since they have smaller seasons, large cultivators find it beneficial
to hire equipment.

125
 4. Growing concentration of land holdings: It is now clear that this period witnessed
a significant degree of concentration in terms of operated holdings (proportion
of landless farm households in rural India rose from 39% in 1993 to 41% in
2000 and number of marginal farmers increased from 19% in 1993 to 22% in
2000), which reflected changes in both ownership and tenancy patterns. Many
small and very marginal peasants lost their land during this period. It is a well
documented fact that farm productivity is inversely related to farm size. Moreover
mechanization often replaces labor in larger farms due to economies of scale.
(c) Services
1. Services growth has been led by sectors with low employment potential: In
1999-2000, share of trade, hotels and restaurant in services employment was
34% and its growth rates were 6% in 80s, 7.3% in 90s, 9.5% in 2000s. Share
of community, social and personal services in services employment was 31%
and its growth rates were 6.5% in 80s, 7% in 90s, 8% in 2000s. Share
of construction in services employment was 16% and its growth rates were
7.7% in 80s, 5% in 90s, 4.3% in 2000s. Share of transport, storage in services
employment was 8% and its growth rates were 6.3% in 80s, 7% in 90s, 8% in
2000s. Services which grew rapidly (business services, financial services,
communication) together account for < 10% of services employment.
2. Trade has not generated growth in employment intensive services: Exports in
business and communication services have gone up but services with high
employment potential like trade, hotels and restaurant, community, social and
personal services, construction services and transport have not witnessed a
rise in their exports. Trade therefore has not improved the growth of services
that have high employment elasticities. The share of hotel and transportation in
exports has declined by 8% between 2000 and 2010, share of trade,
construction and community services is negligible while major growth has been
in communication and business services.
3. Rising labor productivity contributed as well. Gordon and Gupta (2004) argue
that normal tendency is for the share of services in employment to rise faster
than their share in GDP but in India this has not been the case and shows no
such tendency even in the recent data between 2004-05 and 2009-10
(Aggarwal, 2011). This indicates continuous rise in the labor productivity in the
sector. Highest productivity is in IT and financial services sector. Thus services
sector is marked by a dualism. There is a sub segment which is high paying but
employs very less number of people and bulk is low paying but high
employment.

126
Sectoral Composition

1. There is a sharp decline in child labor and increase in school education which
has led to decline in workforce. This can be seen in declining number of people
in the workforce from 0 - 24 years of age. Enrollment figures show that people
in school in both 5 - 14 and 15 - 19 year age groups has gone up as a % of
population by 5 - 10 % points. But the number of females working is falling
even in 25+ year age group as well.

1. Pace of jobs created declined sharply between 2004-05 and 2009-10 and only
2 mm jobs were created while it was 60 mm in previous 5 years.
2. Formal employment has declined from 9% in 1999-00 to 8% in 2004-05 to 7%
in 2009-10. Even the absolute number of formal jobs has declined from 35 mm
in 1999-00 to 33 mm in 2009-10 while the informal jobs have increased from
360 mm to 430 mm. Informal employment in organized sector now stands @
7%. 84% is in unorganized sector as against 86% 10 years ago.
3. There are 2 movements taking place - (a) from agriculture into construction.
Between 2004-05 to 2009-10 agriculture lost 14 mm workers (loss in livestock
and horticulture was 16 mm!) while construction gained 18 mm workers. Share
of non agricultural employment has gone up from 44% to 47% in last 3 years.
Out of 63 mm additional jobs created in economy since 1999-00, 55 mm are
non agricultural (27 mm are construction!). (b) from informal unorganized into
informal organized. This can be seen in a decline of 8.5 mm workers in informal
unorganized and increase in 13 mm workers in informal organized between
2004-05 and 2009-10. This is also reflected as the number of workers
employed in 20+ worker firms has gone up while those employed in 6- firms
has come down.

127
 1. Agriculture: Its share was 68% in 1983, 61% in 1993 and now 52%.
2. Manufacturing: Its share was 11% in 1983 and 1993 and now 13.5%. Between
2004-05 to 2009-10, manufacturing grew @ 9.5% but overall manufacturing
employment declined mainly in the unorganized sector.
3. Construction: Its share was 2.5% in 1983, 3.5% in 1993 and now 6%. This
increase is due to projects like MGNREGS, Bharat Nirman.
4. Tourism, communications, financial sector: Their share has risen in their
share since liberalization from 12.5% in 1993 to 20.5% now. In 1983, their
share was 10.5%.
5. Focus areas: For additional job creations, PC focus is on tourism,
manufacturing, agriculture, construction and communications in that order.
6. According to Labor Bureau Survey, in 2011 the employment increased by
almost 10 mm with ~75% share in increase by IT/BPO sector followed by 10%
in metals. Export oriented units have a larger share in the increase.
Unemployment Strategies of Government

128
Phase 1: 1950 - 1972
1. Unemployment was not considered to be a major problem and it was thought
that a high growth rate (5%) coupled with some emphasis on SSI sector would
take care of employment problem. Thus the 2nd FYP noted that while the
economy has abundant labor, the considerations of size and efficiency should
not be set aside to emphasize employment.
2. But actually the economy grew just by 3.5%, employment by 2% and labor
force by 2.5% p.a. in this period. This led to the doubling of unemployed from 5
mm 1956 to 10 mm in 1972. These figures are only approximations as the
detailed data on unemployment began to be collected by NSSO only in the
quinquennial surveys from 1972-73.
Phase 2: 1972 - 1992
1. The NSS 1972-73 revealed that the unemployment rate on CDS basis was
8.4%, poverty was 54% in rural areas and 41% in urban areas. Thus the
approach to tackle unemployment went a sea change in mid 70s. The 5th FYP
(1974-79) sought to focus specially on employment intensive sectors. It also
recognized that growth alone can't tackle unemployment and we needed
dedicated employment focussed and poverty alleviation programmes.
Swarnjayanti Gram Swarozgar Yojna (SGSY)
Features
1. Integrated Rural Development Programme (IRDP) was launched in 1980 which
aimed to extend credit to create self employment in rural poor. 30% of the
beneficiaries were intended to be women but it was found out only 5% were
women.
2. Then SGSY was launched in 1999. It aims at giving credit to rural
BPL families and their Self Help Groups with focus on women.
3. It mandates 49% of benefits to be given to women and mandates that 59% of t
he SHGs formed in an administrative unit be women SHGs.
Performance
1. In the SGSY it was found 59% beneficiaries were women. But the assumption
here is that accessing credit is the one way ticket to lift above
poverty. However, these enterprises also need backward and forward linkages
to succeed, credit alone is not sufficient.
2. Nearly 95% of the SHG loans are regular in repayment and average loan per
SHG is Rs. 65,000.
Q. Examine the key elements of SGSY. What are the major problems in its
implementation? (2010, II, 20)

129
Rising Farm Wages in India - Gulati
The ‘Pull’ and ‘Push’ Factors

However, during the

2000s, there is a sort of v‐shape behavior in real farm wages, declining by 1.8
percent
p.a. during 2000‐01 to 2006‐07, and then rapidly rising by 6.8 percent p.a. during
2007‐08 to 2011‐12, and it is this later half that seems to be the result of MGNREGA
‘push’ as well as strong growth ‘pull’. international experience in developing world
does suggest that
when economies grow fast, labour moves out from agriculture to non‐agriculture
sectors, particularly construction in urban areas. This often acts as a strong
‘pull. What we know is that the share of work force engaged in Indian
agriculture declined from almost 65 percent in 1993‐94 to only about 53 percent in
2009, and that of construction increased from 3.1 percent to 9.6 percent over the
same period. The empirical results are interesting: that the growth ‘pull’ factors seem
to
have influenced more the rise in farm wages since 1990‐91 than the ‘push’ factor of
MGNREGA. Overall,
the results suggest that the ‘pull strategy’ works better than the ‘push strategy’ to
raise farm wages over longer term.
These results raise a pertinent policy issue: given fiscal constraints and high
food inflation, if there was a trade‐off between allocating resources for welfare
schemes and increasing investments with a view to raise farm wages, could the
money spent on MGNREGA (more than Rs 2 lakh crore) not be better used if it was
for investment in say rural‐urban construction, or for overall growth, or for
agrigrowth?
These investments would have raised the growth rates in these sectors, and
thereby ‘pulled’ the real farm wages through a natural process of development,
whereby wages increase broadly in line with rising labour productivity.

Within the 2000s, GDP (Construction) grew at a high rate

of 10.7 percent per annum in the first half which then slowed down marginally to 7.2
percent in the latter half. This contrasts with the negative growth in farm wages in
the first half of 2000s and high growth in latter half of 2000s, and casts doubts

130
there a long lag between growth in construction sector and rise in farm
wages? Interestingly,
Odisha has the lowest rate of growth of construction sector in 2000s but has shown
a
high growth of farm wages. Again, Gujarat (during the entire period) and Haryana (in
2000s) have shown high rates of growth of construction activity but show low
increase
in real wage rates.

The period 1992‐93 to 1996‐97 (corresponding to the Eighth Plan) showed a

rate of average annual growth of 4.8 percent per annum‐highest plan growth
experienced ever in India in agri‐GDP. But this growth decelerated to almost half for
the next ten years – 2.5 percent in the Ninth Plan (1997‐98 to 2001‐02) and 2.4
percent in Tenth Plan (2002‐03 to 2006‐07). Incidentally this deceleration coincided
with a downturn in world prices in the wake
of East Asian Crisis in 1997, which touched a trough around 2001‐02, followed by a
slow recovery in global agri‐prices from 2003 to 2005 (Gulati, 2011). This may have
led to depressed farm incomes and thereby slow or even negative growth in real
farm wages. MGNREGA is also significant with 10 percent increase in employment
generated
leading to around 0.3 – 0.5 percent increase in farm wages. The empirical results
clearly show that the impact of growth variables on real farm wages is much greater
than MGNREGA.

Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

Performance

131
1. The share of productive work in the scheme is decreasing over the years. In
2006-07, water conservation, land development and irrigation works accounted
for ~75% of the work done. In 2009-10, these heads accounted for only 54%.
2. Interstate comparison: NSSO data (2009-10) suggests that Rajasthan, TN and
HP are states where scheme is working well and the participation rate (% of
people who got work to those who wanted but didn't get) is > 80%. Participation
of women, SC, ST is nearly half the total workers. Poorer states have higher
demand for work under NREGS but most of it remains unmet due to
administrative inefficiency. If we plot share of states in rural BPL households vs
the share of states in man days of work generated under NERGA we find that
among the poor states UP, Bihar, Odisha lag behind a lot while Rajasthan has
done exceptionally well. Among the richer states, Maharashtra and AP stand
out in their implementation. Rajasthan also performed well in terms of number
of days of work provided to those who got work (76) followed by NE states
(except Assam and ~60) followed by MP, Chattisgarh, UP and Andhra (~50).
AP has been able to create an effective system due to good IT infrastructure,
Rajasthan due to active drought relief work and involvement of NGOs. In
Kerala it revolves around the women SHG model based Kudumbashree.
Jharkhand faced problems due to absence of PRIs.
3. Work created: MGNREGA has directly led to the creation of 1000 crore person-
days of work since its inception in 2006-07. In financial year 2010-11,
MGNREGA provided employment to 5.5 crore households (25% of rural
population) generating 250 crore person-days. In 2008-09, it employed 4.5 cr
households and created 215 cr man days of work. In 2006-07 it employed 2 cr
households and generated 90 cr man days of work.

132
 4. Wages: Studies showed that before 80s, real wages were almost stagnant and
in most cases were below minimum wages. Between 1983 and 1993-94 daily
real wages grew @ 3.3% p.a. while between 1993-94 to 2004-05 they grew @
2.3% p.a. only. Between 1999-00 to 2004-05 the rise was 0.6% only. The
inequalities between male and female rates has been rising. During the period
2007-10, the average cumulative real farm wage rates increased by 16.0% at
the all India level and since the launch of the scheme in 2006-07 . The growth
was the fastest in Andhra Pradesh (42%) and Odisha (33%), Bihar (19%)
and Uttar Pradesh (20%). NREGA wages were Rs. 65 in 2006-07, 75 in 2007-
08, 84 in 2008-09 and 88 in 2009-10 showing an increase of ~35% in nominal
terms.
5. Work completed: Works completed to total works taken up was 47% in 2006-07
(4 lakh out of 8.25 lakh) and has since declined to 25% in 2009-10 (6 lakh out
of 25 lakh). The decline and the consequent low rate is due to lack of dedicated
staff, lack of technical expertise. One way to ensure this is to fix a certain
proportion of total funds to be spent on professional support at the ground
level. Block cluster level technical support teams could be appointed.
Government should seriously consider a one year diploma course on NREGA.
6. Employment guarantee: National average is 48 days work per household. It is
relevant to ask whether a relatively low provision of work reflects lack of
demand or is it ineffectiveness in being able to meet the demand. In certain
states, the low number of days of work is almost certainly a reflection of the
universalization of the programme to the whole country which led to the
inclusion of districts where the demand for MGNREGA work is low (Kerala and
Punjab). But there are many states where demand was expected to be high but
which have not performed well, such as the high out-migration states of Odisha
and Bihar, as also states, such as Uttarakhand and Karnataka, which appear to
have not given the due attention to energizing MGNREGA.
CAG Findings

133
134
NREGA 2.0
1. Migrate from unskilled to skilled. Person getting 100 days will next be provided
training under NRLM.
2. Transfer of funds to PRIs. MoRD will transfer 1% of its budget of $20 bio to
PRIs for their capacity building and training.
3. NREGA wages will be aligned to minimum wages.
4. Special funds for rural sanitation. For every toilet built, 45% of estimated cost
will go from NREGA.
5. Annual CAG audit of utilization of funds. A district panel of CAs will audit the
accounts of each panchayat.
Challenges
1. The technical capacity at the local level has to be significantly enhanced. This
is in regard to planning, design and quality of works, as well as of their
maintenance. There is a clear case for establishing a pool of local ‘barefoot’
engineers/technical assistants who could be trained up.

135
 2. Delays in wage payments have emerged as the most frequently heard
complaint under MGNREGA. NSSO 2009-10 reveals only 70% in AP, 10% in
Rajasthan and 25% in MP got wages within 15 days. The major reason for
delay is that measurements of work are not being made on time, mainly due to
lack of adequate technical staff at the block level. There are also bottlenecks
in the flow of funds through the system, at times because data on the
Management Information System (MIS) is not being filled up on time. Better
use of information technology is needed. This issue if not resolved can lead to
the failure of entire scheme.
3. There is a need to involve NGOs who could support gram panchayats in
planning, implementing and conducting of social audits of MGNREGA works.
4. Thought must be given as to how the MGNREGA in conjunction with the NRLM
programme can help rural artisans.
Q. Analyze the impact of MNREGA on rural and urban wages and rural migration.
(2011, II, 20)

Q. Make a critical assessment of the National Rural Employment Guarantee Scheme

of India. (2007, II, 60)

National Rural Livelihood Mission (NRLM)

136
137
138
 1. It is a successor to SGSY and will be fully based on SHGs. It will organize and
train poor people into SHGs. Once the training is imparted, it will develop
forward and backward linkages and give them loans to start their own
enterprises.
2. The beneficiaries will be chosen by the gram panchayat. But it is to be ensured
that one woman of each poor household is included. Focus will be on women,
SC and STs.
3. Currently 30 mm women are part of it and by 2017 its target is to make the
women in every poor household its part and to take its membership to 70 mm
women. Currently southern states account for 70% of women SHGs and 80%
of the credit flow.
Inequality

139
Rajan Committee
Report

The methodology
developed by the
Committee first
allocates funds across
states based on need,
in line with
recommendations of
previous committees.
Need is based on a
simple index of (under)
development. The
index proposed here is
an average of the
following ten sub-
components: (i)
monthly per capita
consumption
expenditure, (ii)
education, (iii) health,
(iv) household
amenities, (v) poverty
rate, (vi) female
literacy, (vii) percent of
SC-ST iv population,
(viii) urbanization rate,
(viii) financial inclusion,
and (x) connectivity.
Less developed states
rank higher on the
index, and would get
larger allocations
based on the need
criteria.

140
proposes allocations
based on the index,
but with allocations
increasing more than
linearly to the most
underdeveloped
states.
Importantly, since the
index is based on
publicly available
data, there is no
element of discretion in
the allocations.
To allocate more to
underdeveloped states
with large areas but
small population, the
Committee decided to
assign 80 percent
weight to a state’s
share in population and
20 percent to the
state’s share in area in
determining the factor
by which to
multiply need.
This report however,
also takes a step
forward in trying to
draw a balance
between “needs” and
“performance”. Given
that poor
administration or weak
institutions in a

141
Q. Examine critically the economic reforms underway since 1991 with reference to
their effect on inequality, poverty reduction and vulnerability to external shocks.
(2009, II, 60)

Q. Explore the nature of tax reforms India needs to ensure "inclusive growth",
spelling out their basic components as you see them. (2009, II, 60)

National Income
Accounting
1. GDP factor cost or GDP income method = wages + rent + profit + interest.
2. GDP expenditure method or GDP output method or GDP producer prices = C +
I + G + NX.
3. GDP factor cost + indirect taxes - subsidies = GDP producer prices.
Overall Economy

142
143
Highlights: Economic Outlook 2013-14

Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister

released the document ‘Economic Outlook 2013-14’ at a Press Conference in
New Delhi today. Following are the highlights of the document:

Ø Economy to grow at 5.3% in 2013-14

· Agriculture projected to grow at 4.8% in 2013-14 as against 1.9% in 2012-

13. The early and good monsoon had a huge positive impact on sowing activity.
The reservoir position in the week ending August 29, 2013, was 29 per cent
better than the average of the last 10 years. Thus both kharif and rabi crops are
expected to be good.

· Industry (including manufacturing, mining and quarrying, electricity, gas,

water supply and construction)projected to grow at 2.7% in 2013-14 as against
2.1% in 2012-13. Manufacturing sector projected to grow at 1.5% in 2013-14 as
against 1 % in 2012-13.

· Services projected to grow at 6.6%in 2013-14 as against 7.1% in 2012-13.

· The Council expects the growth rate in 2013-14 to be higher than it was in
2012-13. Apart from the substantially improved performance of agriculture, the
other sectors of the economy will also perform better in the second half of 2013-
14 for three reasons

o The full impact of various measures taken over the last six months will be
reflected later in this year

144
Recent Steps to Push Up GrowthCabinet Committee on Investments
1. Decision on linear projects and gram sabha's consent requirement.
2. Directed coal ministry to give FSAs to 11 power projects worth Rs. 50,000
crores. This was made possible by the recent CCEA decision to allow coal
price pass through. No FSA had been signed for the past 4 years.
The Rs. 115,000 crore Infrastructure Push
1. The PM directed various ministries to roll out PPP projects in the next 6
months of identified projects worth Rs 115,000 crore. These include the
Mumbai Elevated Railway Corridor, two new locomotive projects, one
expressway project between either Delhi and Jaipur or Delhi and Ludhiana,
and two new ports, in West Bengal and Andhra Pradesh.
2. In civil aviation, these include two new international airports, at
Bhubaneswar and Imphal; 50 new small airports by the Airports Authority of
India, and eight new airports in PPP mode. Besides, airport operations and
maintenance through PPP contracts will be introduced in AAI-run airports.
3. Panel of PC, MoF & railways to finalise report in two months on financing of
Rs. 200,000 crore of stalled rail projects.
India's Civil Airplane Manufacturing Plan
1. It his expected to give a major boost to the domestic manufacturing.
2. It would largely be an indigenous effort though the engine would have to be
purchased globally.
3. It would also rope in private sector.
4. It will be financed from the proposed National Investment Fund being
created using the vast surplus of public sector units.

145
Nagraj (2013) on 2003-08 Boom

Factors Behind the 2003-08 Boom

1. World trade, dormant after the Asian financial crisis, turned around to grow
at an unprecedented rate of 16.5% annually between 2003 and 2008 –
against 3% per year in the previous six years.
2. US liberalized its rules for outsourcing contributing to the boom in the IT
sector and back office sector in financial firms which India could take
advantage of.
3. Capital flows increased tremendously largely due to easy credit conditions
and booming trade. The investment-saving gap rose to 2.3% of GDP by
2008 – compared to less than 1% in 2003. Other policies such as allowing
foreign flows in real estate, SEZ policy too fueled it.
Characteristics of the 2003-08 Boom

During the boom, the manufacturing and services sectors grew at about
10% annually, but growth was concentrated in a few industries and services; the
output growth was largely based on the private corporate sector. Domestic savings
mostly financed the investment boom, the bulk of which went into
registered manufacturing, while infrastructure’s share barely increased, despite
avowed policy commitment to the contrary. The share of
nonresidential construction expanded at the expense of residential construction.
There was practically no economy-wide growth in employment; manufacturing
employment contracted, mainly in labor-intensive industries.
1. Narrow base of output growth: Bulk of the incremental output came from a
few narrowly defined industries and services, like the automotive industry,
and telecoms and business services.
2. Private Corporate Boom: For the first time, the private corporate sector
became the economy’s investment engine - its investment rate going up
from 12% to 17% of GDP.
3. Fall in unregistered manufacturing: While the share of registered
manufacturing increased in the total GFCF, the share of unregistered
manufacturing fell during the boom years.

146
 in 2007-08, from 46.6% in 2001-02. This is an indicator of the real estate
activity.
6. Stagnation in infrastructure creation: Despite the policy
commitment, infrastructure’s share in GFCF rose merely by 2 percentage
points: from 20.2% in 2003-04 to 22.2% in 2007-08.
7. Labor Market: NSS shows that manufacturing employment declined by 3.7
million between 2004-05 and 2009-10, with women accounting for the bulk
(84% or 3.1 million out of 3.7 million) of the job losses. Most of the job
losses were in unregistered manufacturing. Registered (or factory)
manufacturing showed an increase in employment (Goldar 2011). But
unregistered manufacturing is more labor intensive and hence the overall
fall in manufacturing jobs.
8. Credit fueled asset markets and consumption: During the boom, bank credit
to the commercial sector went up at a rate much faster rate than the growth
in fixed investment. In principle, one expects the credit flow to broadly
mirror the pattern of fixed investment growth. But that does not seem to be
the case, as credit seems to have grown disproportionately faster. So,
where did the incremental credit go? Consumption and asset markets.
9. Composition of FDI: Rao and Dhar (2011) estimate that only about half of
the capital inflow during this period can be called genuine FDI that could, in
principle, bring in long-term capital with the potential of technical spillover.
Nearly 40% of the inflow consisted of PE/VC/HF and portfolio investment
that are essentially short-term funds. About 10% of the FDI represented
“round tripping”. This was due to easing of FDI norms (including reduction
of threshold to be labeled as FDI from 40% stake to 10% only).
The Way Forward
1. Reviving public infrastructure investment seems a better bet as it would
“crowd-in” private investment and demonstrate a policy commitment to
growth – perhaps the most credible measure to win the confidence of all
stakeholders.
2. The consequent rise in the fiscal deficit and inflation is likely to be self-
liquidating in the medium term as aggregate supply improves.
3. A gradual aligning of domestic energy prices with international prices would
eliminate the largest source of subsidies.

147
Pre Independence vs Post Independence Growth

Economic Growth Subramaniam Maddison

A. 1900-01 to 1946-47

Primary Sector 0.4 0.8

Secondary Sector 1.7 1.1

Tertiary Sector 1.7 0.8

National Income 1.0 0.8

Per capita income 0.2 0.04

B. 1950-51 to 2004-05

Primary Sector 2.5

Secondary Sector 5.3

Tertiary Sector 5.4

National Income 4.2

Per capita income 2.1

1980 as the Structural Divide

Statistics
1. GDP growth: 1950-51 to 1980-81: 3.5%, 1980-81 to 2004-05: 5.6%. GDP per
capita growth: 1950-51 to 1980-81: 1.4%, 1980-81 to 2004-05: 3.6%.
2. Similarly labor productivity also fell till 80s, stagnated in first half of 80s and
rebounded sharply ever since. Studies indicate that the contribution of TFPG in
total growth rose from being negligible till 80s to ~60% since then.
3. There was also a sharp decline in the variation of growth from 80s.
1950-51 to 1980-81: How does India compare with rest of the world

148
 1. Not as good as E Asia but not as bad as Africa. In fact it lied @ the world
average. After 1980-81, only China has performed better.
Why economy took off in 1980s?
1. Expansionary fiscal policies: Fiscal deficit went up from around 5% in 70s to
9% in late 80s. Public debt had risen to 60% of GDP up from 30% in early 80s.
(Ahluwalia, Tendulkar etc.) But it is not clear how can expansionary fiscal policy
explain the rise in TFPG.
2. Arvind Subramaniam says there were 3 factors - (a) Attitudinal change in
government signaling a shift in the favor of private sector. (b) These shifts and
limited policy changes were pro business rather than pro markets which helped
the incumbents. (c) These small changes elicited a large productivity response
because India was far inside its PPF. Later studies suggest that India had very
good institutions and legal framework for a country of its per capita income.
Thus a shift of policy towards business friendly could elicit a large response
(platform was already ready).
3. Deepak Nayyar explains it via (a) Expansionary fiscal policies. (b) Significant
increase in investment as a proportion of GDP (from 20% to 26%). There was
also a significant increase in the public investment starting in late 70s. Focus
began to shift from establishing manufacturing units to creating infrastructure
thereby generating positive externalities. (c) Liberalization of trade since late
70s and some deregulation efforts in 80s could have played an important role
specially the relaxations on import of capital goods and broad banding of
industries. Base was built in the past 30 years with respect to high technical
and managerial education, creating legal framework, institutions.
Growth Rate Across the Plans

149
 Growth Rate

1st FYP (1951-56) 3.7%

2nd FYP (1956-61) 4.2%

3rd FYP (1961-66) 2.8%

4th FYP (1969-74) 3.4%

5th FYP (1974-79) 5.0%

6th FYP (1980-85) 5.5%

7th FYP (1985-90) 5.8%

8th FYP (1992-97) 6.8%

9th FYP (1997-02) 5.5%

10th FYP (2002-07) 7.8%

11th FYP (2007-12) 7.8%

Pre Reform vs Post Reform Growth

1. Economic growth from 1950-51 to 1990-91 was 4.1% and from 1990-91 to
2011-12 was 6.5%.
Growth in an International Perspective (constant PPP $)Phase 1: 1951 - 65
1. Indian economy grew @ 4.11% p.a. which was slower than Latam and Asia ex
Japan and same as Africa.
Phase 2: 1966 - 80
1. Indian economy slowed down sharply to grow @ 2.9% p.a. which was way
behind any other part of the world where growth rates had in fact accelerated
from the previous period.
Phase 3: 1981 - 90
1. Indian economy grew @ 5.75% which was higher than even Asia ex Japan.
Growth rates of Latam and Africa crashed substantially to near stagnation.
Phase 4.1: 1991 - 2000
1. Indian economy is growing as fast as Asia ex Japan. Latam and Africa continue
to grow slowly.

150
 1. The study establishes that in S Asia growth has accelerated as there was a
shift towards export orientation and encouragement to private sector by
reducing controls.
Desai - Lessons from East Asian Experience
1. The high growth was a result of high rate of factor accumulation. The GFCF
remained over 30% for these economies. There was a large increase in labor
force due to rural to urban migration and a sharp increase in labor productivity.
2. Outward oriented trade strategy + growth mediated security. All of them were
open to new foreign technology. They also put great effort on rural
infrastructure development and agriculture development at the same time.
3. Close coordination between the state and the businesses to the point of
making it business friendly instead of market friendly.
4. In China the fall in share of agriculture in GDP has been more or less in line
with the fall in share of agriculture in employment unlike India.

GDP GFCF ICOR

1951-52 to 1964-
4% 11.5% 2.8
65

1965-66 to 1979-
3% 15.3% 5.1
80

1979-80 to 1990-
5.5% 20.5% 3.5
91

1991-92 to 2002-
5.5% 23% 4.1
03

2003-04 to 2007-
8.8% 30.2% 3.4
08

Phase 1 (1951-52 to 1964-65)

Patterns and Trends

151
 1. GDP growth increased from 50s to 60s but declined sharply in 70s and
increased in 80s. Large determinant in the fall in 70s and subsequent recovery
in 80s was the corresponding fall and then growth in agriculture(from 2.5% in
60s to 1.3% in 70s to 4.4% in 80s). Similarly industry dropped from 6% levels in
60s to 4.5% levels in 70s to come back to 6.5% levels in 80s. Services showed
a decline from 5% levels in 60s to 4% in 70s to 6.5% in 80s. Likewise the
productivity signified by inverse of ICOR fell sharply in 70s and recovered in
80s (ICOR went from 4.3 in 60s to 6.6 in 70s to 3.6 in 80s.
Q. Provide an analytical description of growth and change in the Indian economy
during the period from 1950-51 to 1966-67. (2009, II, 60)

Phase 2 (1965-66 to 1979-80)

Determining Factors
1. The twin droughts of 1965 and 1966 were a major shock to the economy. Food
aid prevented large scale distress but the developmental strategy was radically
altered.
2. By 1970-71, GR had stabilized and India had attained food security by any
reasonable standards. Then major policy change occurred - poverty eradication
rather than growth became the dominant consideration, banks were
nationalized, MRTP was put in place, state took over food grain wholesale
trading. Then came emergency and janta government and the policy remained
difficult for any meaningful growth.
Phase 4: 1991 -
Performance of 9th, 10th, 11th and 12th (only targets) FYP

152
 Economic 9th FYP 10th FYP 11th FYP 12th FYP
Indicator (1997-02) (2002-07) (2007-12) (2012-17)

7.8% (a) vs
GDP growth 5.5% 7.8% 9%
9% (t)

3.2% (a) vs
Agriculture 2.5% 2.5% 4%
4% (t)

Industry 3.3% 8.6% 7% 9.6%

Services 8.1% 9.5% 10% 10%

GDS 23.6% 31.4% 32% 36.2%

GFCF 23.2% 30.1% 30% 33.5%

What are the strong fundamentals of Indian economy?

1. Demographic transition: It will give us more people to work as well as increase
savings rate in future. However the main challenges are malnutrition, illiteracy
and lack of skills.
2. High savings and investment rates. Moreover because India's ICOR is ~4
which is close to the world's best, additional acceleration in growth can only
come with higher savings and investments. So we need to create an
environment to do so. For this we need fiscal consolidation (but not at the cost
of public investment), financial inclusion, structurally lower inflation (by supply
side factors). Higher CAD can also be a threat.

153
 3. Improved incentives structure. One way to ensure this is to have a more open
economy. As an economy grows although balanced growth is desirable but it is
generally not possible. Growth generates imbalances because income
elasticities of demand for different sectors varies. These imbalances get
reflected through price signals. Here foreign trade can come and help as the
economy may not be able to produce everything efficiently by itself. Typically
import substitution strategies are associated with high levels of protection and
state imposed capacity limits. Often the government fails and resource
allocation becomes inefficient. But such a thing is not possible in an export
oriented strategy as it responds to global demands and supply factors as well.
Moreover India has a comparative advantage in services which is sustainable
as an export.
4. Human capital accumulation and diffusion of new technologies. A country when
inside its PPF can grow rapidly as it moves towards the PPF. But as it gets
closer diminishing returns set in so the need is to shift the PPF out which is
possible only by new technologies and investment in human capital. Similarly
human capital can increase the quantity of labor available as it makes the labor
more productive and also generates external economies of scale.
5. TFP accelerators through network industries.
6. Improved security environment.
Drivers of Growth & Issues
1. Savings
2. Fiscal sustainability: Also the reduction shouldn't be in public investment.
3. Low and stable inflation: We need a structurally low inflation to remove
uncertainties and promote investment. Pre crises we had a low (relatively)
inflation for many years and also high growth.
4. Liberalization, proper policy and incentive environment
5. Sustainable CAD
6. Sound financial system and more inclusion
7. Raise agriculture growth
8. Raise employment in non agriculture sector: Due to fall in agriculture's share,
non agriculture employment needs to be raised by 6% p.a.
9. Infrastructure development
10. Protecting environment
11. Developing human resources
12. Improving rehabilitation practices
13. Improving governance

154
Crisis Situation in 1991
1. We ran consistently high fiscal deficits in 80s (from about 6% in the beginning
of 80s to 9% by the end). As a result, public debt had risen to 60% of GDP up
from 30% in early 80s.
2. Dependence on foreign borrowings also increased and public external debt
rose to 21% in late 80s.
Structural Changes Since 1991
1. Savings & Investment: GCF was 25% in 1996-97 and remained static till 2002-
03. Since then it began to rise and rose to 33.5% in 2005-06 and 38.1% in
2007-08 and back to 35% in 2011-12. Savings has come up from 22% in early
90s to 36.8% in 2007-08 and 32.3% in 2010-11.
2. Growth rate: India's growth rate was 5.5% in the 80s and in the post reform
period trend growth rate has been 6.9%.
3. Fiscal deficit: India was running a fiscal deficit of ~8% in 1980s which has come
down to 5.7% post reforms. But this progress masks the methods used to lower
the fiscal deficit. Revenue deficit has actually gone up from 2.6% in 80s to
2.9% post reform. Capital expenditure to total government expenditure has
fallen from 30% in 1991 to close to 20% in post reform period. As a ratio of
GDP it has come down from 5.5% to 2.5% now.
4. Prices: There has been increased divergence between WPI and CPIs because
CPIs give more weightage to food and other items of mass consumption. This
indicates that food prices have gone higher.
Structural Changes in Economy Since 2008 Crisis
1. Low savings & investment: Savings has fallen full 4.5% points from high of
36.8% in 2007-08 to 32.3% in 2010-11. After a low of 32% in 2008-09, it
seemed to recover, but fell back. The 12th Plan target for savings rate is 36.2%
which is full 4% higher. Investment rate shows a similar picture. It is nearly 3%
points below 2007-08 high and the recovery in the next year proved
unsustainable. The 12th Plan target for GCF is 37.5% (33.5% for GFCF) for a
9% GDP growth. Current GCF is 32.7% and GFCF is 29.5%. An increase of
4% is needed.

155
2. Inventory restocking led recovery: In the pre-crisis years, the growth in GFCF
was consistently between 14-16% but post crisis, it could never recover
(despite the base effect) and remained in the range of 5-7%. This shows lack of
belief in business prospects. The recovery was led by inventory restocking
which after falling by ~50% in 2008-09, rose by 60% in 2009-10 and 40% in
2010-11. But this is not sustainable. Until GFCF improves, growth can't be
sustained.
3. Higher current account deficits: Prior to the crisis years, India was running a
CAD of ~1% of GDP. But since crisis, CAD has gone up in 3-3.5% levels and
remains stubborn there. CAD in expected to be 4.5-5% in 2011-12. Indian logic
is higher CAD => higher capital generated. But this assumes that domestic
savings is independent of CAD. Higher CAD leads to lower savings since - (a)
higher consumption by households and factor shares go abroad. (b) lower
revenue collections by government. So a gap will come and CAD = capital
inflows but these capital inflows would be a result of domestic savings getting
crowded out.
4. Stable households vs falling corporates: The growth rate of personal
consumption has been around 6-8% consistently. Similarly, household savings
and investment (includes MSMEs) have remained stable @ 23% and 13% of
GDP respectively (actually investment increased from 10.8% in 2007-08). On
the other hand corporates have not been able to reach the pre-crisis zone.
Corporate savings are down from 9.4% in 2007-08 to 7.9% in 2010-11 (fall of
1.5%) and investment from 17.3% in 2007-08 to 12.1% in 2010-11 (fall of
5.2%). Government savings have gone down from 5% in 2007-08 to 1.7% in
2010-11 and investments remained stagnant @ 8.8% from 2007-08 to 2010-
11.

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Q. Write on second generation economic reforms in India. (2011, II, 15)
Why does gold remain a popular asset?
1. Financial inclusion is low in India. So when people have no access to formal
financial market, they use gold which is liquid and mortgageable. Vast majority
of Indians don't have access to organized credit.

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 2. It is an inflation hedge. Rising popularity of gold can also be seen as declining
confidence in INR.
Productivity: Trends

GDP GFCF ICOR

1951-52 to 1964-
4% 11.5% 2.8
65

1965-66 to 1979-
3% 15.3% 5.1
80

1979-80 to 1990-
5.5% 20.5% 3.5
91

1991-92 to 2002-
5.5% 23% 4.1
03

2003-04 to 2007-
8.8% 30.2% 3.4
08

Phase 1: 1950 - 65
1. The TFP growth was 2.8% in the 1st plan while in 2nd and 3rd plan it fell to
0.4% and overall it was 1.3%. The fall is attributed to higher capital intensity in
2nd and 3rd plan.
Phase 3: 1980 - 90
1. Sharp recovery in productivity: TFP growth which was -0.2% between 1966-67
to 1979-80 rose to 3.4% in 80s.

Phase 4.1: 1990s

1. It has been documented that there was a decline in TFPG between 60s and
80s (ICOR was 4.3 in 60s, 6.6 in 70s, 3.6 in 80s and 4 since). From mid 80s
there was a turnaround. But in 90s the TFPG growth declined.
Tertiary Sector
Is India getting over tertiarized?
(a) Traditional view: Chenery and Kuznets

158
 1. They said that economic growth will be associated initially by a sharp decline in
agriculture and a significant increase in industry's share and a more modest
increase in services. Its only later that the share of manufacturing becomes
stagnant or declines and services go up.
2. In the period 1950-90 , the share of India's services sector in GDP was lower
than the international norm, going by per-capita income. This was because, in
the country's then-controlled economy , a large portion of resources in the
earlier part of the period had been pre-empted by heavy industry.
3. 1950-51 to 1989-90: Agriculture down from 56% to 36%. Industry up from 16%
to 25% and services up from 28% to 39%. Thus we didn't exactly follow
Chenery and Kuznets pattern. Since 1989-90, industry has remained stagnant
and all the decline in agriculture has been cornered by services.
(b) Modern view: Kongsamut's cross country study
1. He studied more data and a later period than Chenery and Kuznets and found
that rise in services is more than what is predicted by Chenery and Kuznets.
Thus he found that share given up by agriculture goes more to services than
industry.
(c) Modern view: World Bank study

Sectoral Share
Agriculture Industry Services
(%)

Low income
24 32 45
(<$750)

Lower middle
12 40 48
income (< $3K)

Upper middle
7 33 60
income (< $9.2K)

High Income (>

2 29 70
$9.2K)

1. As the economy grows share of services grows along with a decline in share of
agriculture. The share of industry grows initially modestly and then stabilizes or
declines.

159
 2. It can be seen (table below) that India's services share is higher than the lower
middle income countries and this pace has only increased instead of
decreasing post reforms. Even the growth rate has been higher than industries
since 90s.
3. Gordon and Gupta find that in 1990, share of India’s service sector in GDP was
very close to the average share predicted by the linear relationship. However,
as a result of rapid growth of services in 1990s, by 2001, India’s moved above
the average share. They argued that at the same growth rates by 2010, the
share of services would increase to 58% and India will be an outlier, closer to
that of an upper middle income country, even though India would still belong to
the low income group. This has actually happened.

Sectoral Share
Agriculture Industry Services
(%)

1950 58 15 27

1980 38 (-20) 24 (+9) 38 (+11)

1990 33 (-25) 27 (+12) 40 (+13)

2011-12 13 27 60

Composition of India's Service Growth

160
 Share in GDP 1980s 1990s 2000s

Trade 15% 6% 7.3% 9.5%

Transport 5.5% 6.3% 7% 8%

Communicatio
3% 6% 13.5% 25%
n

Financial
8% 11.7% 12.5% 17%
Services

Business
5% 13.5% 20% 17%
Services

Community
and personal 14% 6.5% 7% 8%
services

1. Services classification: Based on international experience services can be

divided into 3 groups vis (a) Traditional services (retail and wholesale
trade, transport and storage, public administration and defence) which tend to
be slow-growing. (b) Hybrid services (education, health and social work, hotels
and restaurants , and other community, social and personal services) whose
share in GDP in economies has risen in step with per-capita income.
(c) Modern services (financial services, computer services , business services,
communications , and legal and technical services) which grow much faster
than rise in income.
2. In India, the modern group has taken off at a lower per capita level than seen in
OECD economies. Despite their small share, they have together contributed more
towards growth of GDP than manufacturing. Most of the growth is on account of
an increase in private final demand and exports.
3. Growth leaders: Business services @ ~ 20% p.a. for last two decades. Their
share has increased from 1% at the beginning of reforms to 5% now in GDP.
Communications is another winner. Financial services too have benefitted. All
these sectors are ones which benefitted from liberalization.

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 4. Growth laggards: Community services, trade, transport are the laggards which
have grown at the trend rate only.
Trends in Services Imports
1. Business services are the most important category of services imports (up from
7% in 2000-01 to 30% in 2009-10).
2. Next important components are travel and transport but their share is declining
(from 44% in 2000-01 to 35% in 2009-10).
Trends in Services Exports
1. Software exports increased from 39% of our services exports in 2000-01 to
52% in 2009-10.
2. Next important are travel and transportation but their share has declined from
34% in 2001-02 to 24% in 2009-10.
Is Services led growth sustainable?
1. Limited domestic demand argument vs export demand argument: Domestic
demand for services is limited in the absence of sufficient growth in
industry. Any attempt to expand the volume of services production beyond the
limits of domestic demand would quickly lead to deterioration in the price of
services and diminishing returns. In Indian cases studies show that higher
real growth in services has not been offset by price declines. India has a higher
share of services, and more rapid service sector growth, than China, although
the latter is richer and has grown faster over time. That suggests that services
are not simply responding to domestic demand (which would be higher in
China), but also to export opportunities.
2. Self feeding growth argument: Banga and Goldar (2004) find a positive
relationship between use of services input and industrial productivity. Their
results show that the increase in use of services in manufacturing in the 1990s
has favorably affected productivity in the manufacturing sector. In the light of
this result, they argue that India’s service sector will be successful in creating
its own demand since higher use of services in the manufacturing sector has
not only lead to higher output growth in manufacturing sector but also improved
productivity in the manufacturing sector.

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3. Law of diminishing returns argument: Kaldor (1966) argued that there will be a
negative relationship between productivity growth in the economy and the
productivity growth in the non-manufacturing sector as non manufacturing
activities subject to diminishing returns. Further, Baumol (1967) helped in
popularizing the notion that because of their labour- intensive nature, service-
sector activities cannot be made more efficient through capital accumulation,
innovation, or economies of scale.
4. Lower productivity argument: Services were considered to have
lower productivity and growth than industry. As economies became more
service oriented, their growth slows. For rich countries it is an acceptable
consequence of the higher welfare that could be achieved by a switch towards
services. But for developing countries such a trade off was thought to be
inappropriate. But India’s growth has in fact been led by services, that labour
productivity levels in services are above those in industry. The productivity
growth in service sectors in India matches productivity growth in manufacturing
sectors in China.
5. Low skilled labor argument: Services jobs in developing countries were thought
of as menial and to be performed by low skilled workers.
6. International trade in services is currently very low: Services account for ~67%
of world GDP and yet their share in international trade is very low. As
technologies improve more and more trade in services will be possible.
7. Outlook on sustainability of growth in modern services: Outsourcing by foreign companies
is bound to continue because it is a business imperative. The market for IT as
well as financial services within India remains under-penetrated too.
8. Outlook on sustainability of growth in hybrid services: Education and healthcare
both need to expand considerably in order to meet domestic demand. Sectors
like trade, education, health are yet untouched by liberalization.
9. Outlook on sustainability of growth in traditional services: Transport, hotels and
retail trade all have untapped potential. Sectors like trade, education, health are
yet untouched by liberalization.

163
10. Ability to provide employment: Many have argued that while services may
provide growth, low-cost manufacturing alone can provide adequate
employment. The vast majority of workers would not have the skills necessary
for employment in services. But low skilled jobs are coming up in services.
Several firms have set up call centres and data entry centres in the rural
areas. Financial services and communications too have shown they can
generate large numbers of relatively low- skilled jobs. Still employment elasticity
of services has greatly reduced.
11. FDI flows in services: Inflow of FDI into services sector has been biased
towards telecommunications and financial services. One of the striking features
of India’s FDI flows is the growing proportion of outward FDI from the
services sector. The share of services in total FDI outflow increased to around
45 percent in the period 1999-2003, in which non-financial services constitute
around 36%, trade is around 5% and the rest was from financial and other
services.
12. Resilience: Services now account for ~60% of GDP. In post-crisis years, even
though manufacturing and agriculture have faltered, services sector has
remained firm. In 2011-12 while manufacturing growth fell to 3.5% and
agriculture to 2.5%, services remained @ 9.3% and in 2010-11 it was 9.4%.
Traditionally primary sector gives way to secondary gives way to
manufacturing. But in India, services sector has outgrown everything else.
13. Services however, account for 147 people in rural and 582 people in urban
areas out of every 1000 employed in 2010-11. But the difference is that in
developed nations, manufacturing is low due to high labor costs (whereas they
are still cheap in India and the constraint is more of capital / technology /
institutional framework) and while in developed countries ~5% of labor force is
engaged in agriculture, in India ~52% is agriculture dependent.

164
 14. 12th FYP on services: 12th FYP says that while the services sector has been
growing fast, it alone cannot absorb the 250 million additional income-seekers
that are expected to join the workforce in the next 15 years. So manufacturing
has to become the engine of growth. To balance trade, the country’s export
basket must include a much larger volume of manufactured goods. India can't
rely on its exports of services alone to bridge the gap, since tradable
services such as IT enabled services; though growing very robustly cannot
sustain this growth. International experience shows that for manufacturing to
grow we need to have very good coordination between the policy makers and
industry. This is called 'planning as learning' as against 'planning as
allocations'. Similarly tourism and construction have great potential as well and
they are employment intensive as well.
Causes of Tertiarization
1. Income elasticity of services demand is > 1. This is because India has
developed a large middle class which was services deprived earlier. So as their
purchasing power increases they demand more services. Take for example
telecom and insurance sectors - huge untapped market lying in
them. Liberalization led to this freeing up of Indian demand for services. Till
then proportion of services in private final consumption expenditure was
growing at ~3% per decade i.e. from 8% in 1950-51 to 11% in 1960-61 to 14%
in 1970-71 to 17% in 1980-81 to 20% in 1990-91. Since then it rose to 31% in
2000-01 and 40% now.
2. Outsourcing / splintering i.e. instead of carrying services inhouse it is now more
profitable to outsource it and lower costs. Examples are activities like
marketing, advertising, data analysis etc.
3. Manufacturing needs a favorable overall environment including raw materials,
infrastructure, favorable technology, marketing and labor laws etc. India doesn't
have comparative advantage in any of these. Instead services require a market
as well as skilled human capital. This is where India's comparative advantage
lies - again thanks to huge middle class.
4. India is specializing in skill intensive industries because skilled workers and
professionals are outside the purview of trade unions.

5. In a free trade world restrictions on imports of goods are going down but
services are not yet covered. Moreover in case of many services we can't
import them, they have to be produced here.
Inter Regional Disparities in Growth

165
1. 90s - growing divergence: While the poor states (BIMARU + Odisha + W
Bengal) growth rate actually fell from 5% in 1980s to 4.8% in 90s and Punjab +
Haryana from 5.9% in 80s to 5.4% in 90s the southern and western coastal
states really took off. Their growth rate increased from 5.2% in 80s to 6.8% in
90s. Special category states grew only @ 5.6% in 90s. Thus 90s were a clear
case of increasing interstate divergence. Gini coefficient: 1980-81: 0.15, 1990-
91: 0.17, 1998-99: 0.23.
2. Last 1 decade: convergence (Pangariya): As we see the reforms had created
winners and losers among states in 90s. But as the effect spread and economic
activity picked up, the benefits began to spread in all states. While the special
category states showed an increase of 2.8% in growth rate (5.6% in 90s to
8.4% from 2004-05), BIMARU + other poor states showed an increase of 3.2%
(4.8% in 90s to 8% from 2004-05), Punjab + Haryana showed an increase of
2.7% (5.4% in 90s to 8.1% from 2004-05) the rich states showed an increase of
2.8% (from 6.8% in 90s to 9.6% from 2004-05). Only states lagging are J&K
and Assam which were hit by insurgency. On the other hand, some of the
poorest states like Rajasthan, Odisha showed highest growth rate in 2000s
except for Gujarat and Haryana.
3. Policy impact: Unlike China the regional pattern of growth was not a result of
any deliberate policy decision i..e creating SEZs only in coastal zones and so
on. On the contrary efforts to spread the growth are bearing fruits now.
4. Rich didn't get universally richer: Moreover it is not universally true that the rich
got richer. Punjab and Haryana which were among the richest states prior to
liberalization actually saw a decline in growth rates. This is because they
became rich on back of agriculture and the liberalization hasn't had as much
impact on agriculture as on industry and services. Also some poor states like
Rajasthan and MP performed well even in 90s. The performance of middle
income states was clustered around the average rate.
5. Seeds of divergence lay in pre reform period: In 1960s, per capita GSDP of top
3 rich states (Punjab + Maharashtra + Gujarat) was ~ 1.8x of bottom 4 (Bihar,
UP, MP, Odisha). In 1970s, it went up to ~2.25x and in 80s was reduced to ~2x.
Thus grave inequalities existed even before the reforms. In 90s it escalated to
~3x. The gradual liberalization in 80s meant that states could now differentiate
themselves in attracting investment and also the share of private investment
grew.

166
 6. Sectoral variation: Inter state variation in growth of primary sector is little
compared to variation in industry and services growth. This is because land
and labor is fairly distributed across the country, green revolution is quite
widespread while the industry and services require agglomeration economies
and infrastructure.
Special category states (NE + HP + Uttarakhand + J&K)
1. GSDP growth: 1994-95 to 2001-02: 5.6%, 2004-05 to 2011-12: 8.4%.
2. Fiscal deficit to GSDP: 2009-10: 3.8%.
3. Own tax revenue to GSDP: 2009-10: 4.9%, 2010-11 (BE): 4.1%.
4. Outstanding public liabilities to GSDP: 2009-10: 45%.
5. % of population in poverty: Between 2004-05 to 2009-10 overall fall of 3%
(from 28.3% to 25.3%), rural fall of 4.2% (30.4% to 26.2%) and urban rise of
2.6% (19% to 21.6%).
BIMARU States (+ Odisha + Jharkhand + Chattisgarh + W Bengal)
1. GSDP growth: 1980-81 to 1990-91: 5%, 1994-95 to 2001-02: 4.8%, 2004-05 to
2011-12: 8%.
2. Fiscal deficit to GSDP: 2009-10: 3.6%.
3. Own tax revenue to GSDP: 2009-10: 5%, 2010-11 (BE): 6.2%.
4. Outstanding public liabilities to GSDP: 2009-10: 29.5%.
5. % of population in poverty: Between 2004-05 to 2009-10, overall fall of 6.2%
(43.9% to 37.7%), rural fall of 6.7% (47.4% to 40.7%) and urban fall of 4.2%
(31.5% to 27.3%).
6. Plan expenditure to GSDP: 1980-81 to 1990-91: 6.1%, 1991-92 to 1997-98:
4.8%.
Gujarat + Maharashtra + Kerala + TN + Karnataka + AP
1. GSDP growth: 1980-81 to 1990-91: 5.2%, 1994-95 to 2001-02: 6.8%, 2004-05
to 2011-12: 9.6%.
2. Fiscal deficit to GSDP: 2009-10: 3.5%.
3. Own tax revenue to GSDP: 2009-10: 7.4%, 2010-11 (BE): 8%.
4. Outstanding public liabilities to GSDP: 2009-10: 28.3%.
5. % of population in poverty: Between 2004-05 to 2009-10 overall fall of 10.6%
(31.9% to 21.3%), rural fall of 13.1% (37.6% to 24.5%) and urban fall of 6.1%
(22.8% to 16.7%).
6. Plan expenditure to GSDP: 1980-81 to 1990-91: 5.8%, 1991-92 to 1997-98:
4.8%.

Punjab + Haryana

167
 1. GSDP growth: 1980-81 to 1990-91: 5.9%, 994-95 to 2001-02: 5.4%, 2004-05 to
2011-12: 8.1%.
2. Fiscal deficit to GSDP: 2009-10: 4%.
3. Own tax revenue to GSDP: 2009-10: 6.1%, 2010-11 (BE): 7.2%.
4. Outstanding public liabilities to GSDP: 2009-10: 26%.
5. % of population in poverty: Between 2004-05 to 2009-10 an overall fall of 4.5%
(22.4% to 17.9%), rural fall of 6.8% (23.4% to 16.5%) and urban fall of 0% (@
20.3%).
6. Plan expenditure to GSDP: 1980-81 to 1990-91: 6%, 1991-92 to 1997-98:
3.9%.

Ramaswamy on Interstate Growth Experience from 1993-94 to 2004-05

1. The richer and middle income states have grown at a faster rate than the poor
states throughout. The interstate variations only increased in 1999-00 to 2004-
05 compared to previous 5 years. Between 1999-00 to 2004-05, 2 of the
bottom 5 states vis UP and Rajasthan have witnessed impressive employment
growth. Among the middle and richer states, W Bengal, Karnataka, Haryana
and Maharashtra witnessed good growths. In the post reform period, growth
has been led by services. Its share in GDP went up from 37% to 58% but share
in employment only went up from 18.5% to 24%.
2. In the post reforms periods, employment growth in urban areas is faster than
rural areas. In the richer states the employment growth is faster than the poorer
states.
3. Diversification of state economies and impact on growth: Ramaswamy
evaluates the impact of reforms in diversifying the share of sectors in the
states' employment. He finds that all the states have shown signs of moving
towards more diversification of their economy but poorer states with less
diversified economies in the beginning of the period are diversifying at a slower
rate. Among the poorer states only Odisha shows significant diversification,
while in the middle income states only Kerala showed higher diversification. In
the richer states TN shows higher diversification while Karnataka shows lower
diversification. Then he tests if the states which were more diversified in the
beginning of the reforms grew at a faster pace. And the result was yes.

168
 4. Spatial distribution of certain sectors: Then he examines if the spatial
concentration of some sectors has increased or decreased over time. The HH
index for this can be given by ∑(si - xi)^2 where si is the share of the ith state in
the employment in the sector while xi is the share of the ith state in the overall
employment in the country. He finds while manufacturing concentration has
declined since reforms, services increased in the first sub period but decreased
subsequently. However finance, real estate and business services (including
software) have grown in spatial concentration since the reforms.
5. Sectoral dualism: organized vs unorganized: Has the gap between
manufacturing in organized and unorganized sectors increased across states?
He finds that organized sectors share in total employment is not only higher in
richer states but has also grown at a faster pace in the post reforms period
compared to the poorer states. Thus poorer states have proportionately more
low productivity jobs now. Not only this in the post reforms period the relative
labor productivity in the unorganized sector (as a proportion to the labor
productivity in the organized sector) has been going down. Coupled with the
fact that poorer states are seeing slower growth in organized manufacturing it
means their relative productivities are going down at a faster pace.
6. Labor productivity across states: Manufacturing productivities of the poorer
states are not only lower than richer states but also are declining in the post
reforms period. Similarly in the high productivity financial and business services
sector we find the same trend.
Explanations for the Growth Performance - Rising Inequality
1. Investment pattern: As can be seen public investment showed a steep decline
in 90s compared to 80s. Fall in public investment and rise in private investment
tends to accentuate the inequalities. Even in that the share of states in the plan
expenditure is falling (down from 50% in 80s to 40% in 90s). FDI in the richer
states + Delhi account for > 50% of inbound FDI while bottom 4 sates account
for just 10%.

169
 2. Resource raising capacity: The decline in tax - GDP ratio of the center in post
reforms period has meant fall in central assistance which in turn forces states
to rely on their internal resource generation capacity which varies greatly
across the states. While the rich states had own tax revenue to GSDP ratio of
8% in 2010-11 (BE), Punjab + Haryana had it @ 7.2%, BIMARU + poor states
@ 6.2% and special category states @ 4.1%. Poor states also have higher
outstanding public liabilities to GSDP (specially for special category states @
45% in 2009-10) which hampers their ability to raise resources from the
market.
Pangariya (2008): Growth Performance of New States
1. Uttarakhand (from 1.4x to 2x) and Chattisgarh (from 0.9x to 1.3x) have raced
ahead of their mother states since the time of creation in terms of per capita
income. But Jharkhand's situation has deteriorated. But now they are growing
at faster rates and in fact since 2003 their growth has been faster than the
mother state's growth.
Kumar and Subramaniam (2012)
1. Kumar and Subramaniam (2012) report four major findings, vis (i) growth
across all major states increased during 2001-09 as compared to 1993-2001,
(ii) continued divergence or rising inequality across states over the time span
2001-09 as well as 1993-2009 and 1971-2009, (iii) the faster growing and more
globalized states during 2001-07 suffered the largest setbacks during the crisis
years of 2008 and 2009, and (iv) the benefits of the demographic dividend
evident in the 1990s seem to be petering out/diminishing during the 2000s.
2. The article further reports that the magnitude of divergence has increased in
the 2000s as compared to the 1990s i.e. divergence is increasing at an
accelerating pace.
Private Final Consumption Expenditure
1. In 1971, an Indian consumer used to spend 50% of his income on food, in
2010-11 he spent 32%. While this decline indicates rise in incomes (food being
lower elasticity item), the figure of 32% is still high indicating overall poverty.
2. The expenditure on transport and communications has increased from 5% in
1971 to 20% now. This indicates rural --> urban migration.
3. Similarly the expenditure on rent, fuel and power has gone up from 6% in 1971
to 12% now. This indicates rural --> urban migration.
Savings & Investments

170
1. Savings-investment gap: GDS: 32.3% in 2010-11 and 30.4% in 2011-12 after
reaching a high of 36.8% in 2007-08. GCF is 33.7% in 2010-11 and 32.7% in
2011-12 and GFCF is 29.5% as against 32.9% in 2007-08 and 30.4% in 2010-
11. In early 90s, savings and investment rates were 23% and 24%
respectively. Private savings = 30.7% of GDP (households: 22.8%, corporates:
7.9%), private investment = 25% (households: 13, corporates: 12). This means
remaining 5.7% is the savings-investment gap for private sector. Public savings
= 1.7%, public investment = 8.8% => savings-investment gap for public sector
= -7%.
2. Financial vs physical savings: Households can save in financial assets or
physical assets (gold, land etc.). Because real rates of interest have been
negative due to financial repression, households have traditionally preferred to
save in physical assets. Only between 1983 to 1999 the financial savings
exceeded physical savings. Financial savings by households now increasingly
depend on the business environment and risk appetite. It increased from 10%
in 2004-05 to 11.5% in 2007-08, fell to 10% in 2008-09 and in the market
recovery of 2009-10 it rose to 13%. But in 2010-11 it came back to 10%.
Physical asset savings show an opposite trend declining from a high of 13.5%
in 2004-05 to a low of 10.8% in 2007-08. Then it spiked to 13.5% in 2008-09,
fell to 12.4% in following year but in 2010-11, it rose to 12.8% again.
Corporate sector and public savings are mostly in financial form. Most popular
instruments of financial savings for households are LIC, currency holdings,
PPF, bank deposits in that order. Since 1991, investments in stock market have
gone up too.
3. Public savings: Public savings reflects contra-cyclical trend as it increased from
2.3% in 2004-05 to 5% in 2007-08 and the down to 0.2% in 2009-10 and then
rise again to 1.7% in 2010-11.
4. Corporate savings: It is the private corporate sector savings and investments
which show a worrying trend. They have not been able to recover to their pre-
crisis zone in the 2 year long recovery. High of corporate savings was 9.4% in
2007-08 which is now only 7.9% in 2010-11. Investment high was 17.3% which
is now only 12.1%. The government investment has remained static while
household investment has gone up from 10% in 2007-08 to 13% in 2010-11.

171
 5. Investment: Initially investment by households > public sector > corporates.
Then due to our plans, GFCF public sector overtook all others and by 1967 it
was the highest. From 1967 onwards till 1991, household improved but
corporate sector lagged behind. Only from 1991 did corporate GCF began to
grow. In 2011-12 households was again higher than corporates.

Reasons for Substantial Rise in Savings Rate from 2001-02

1. Change: In 2001-02, GDS was 23.5% out of which households were 22%,
private sector was 3.5% and public savings were -2%. It rose to 36.5% (+13%)
in 2007-08 with households @ 21.5% (+0.5%), corporate sector @ 8.9%
(+5.5%) and public savings @ 5% (+7%). In 2010-11 it declined to overall
32.3%, households @ 22.8%, private sector @ 7.9% and public savings @
1.7%.
2. Reason for rise in private sector savings was rise in profitability and also
reduced dividend rates. Public savings grew as a result of rising taxes
(corporate tax rose from 1.9% in 2003-04 to 3.6% in 2007-08 due to rising
profitability, overall grew from 8.9% in 2003-04 to 10.7% in 2007-08) and also
FRBMA.
Long Term Trends
1. Since independence, our emphasis has been on increasing savings and capital
formation only and hence capital output ratio has been neglected traditionally.
This has led to a higher capital output ratio.
2. Our growth model has been the Lewis model i.e. increase savings, use this
increased savings for capital formation for increased savings for a further
increase in capital formation and so on.
3. We remained stuck in low growth rate for many decades and only made a
transition to an unsustainable high growth rates in 80s. Only after markets were
freed up in 90s, did we achieve sustainable high growth rate.
4. Growth rate has also been low due to the "crises" years and if we adjust for
them, the growth rate has been high. Such crises were caused by severe
drought, wars and oil shocks. But the effect of drought, wars and oil shocks
were both nullified in subsequent recoveries.

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Phase 1: 1950 - 65
1. GDS increased from 10.4% in 1950-51 to 13.9% in 1955-56 to 12.7% in 1960-
61 and 14.5% in 1965-66. This increase of 4% was split 2% in household, 0.5%
in corporates and 1.5% in public savings. Since the end of 1st FYP, the overall
GDS increased only 0.6% while public savings increased 1.4% meaning a
decline in the HH savings.
2. During this period while the overall increase in savings was modest, the
financial infrastructure was built. Also the overall savings was low due to
predominance of agriculture in the economy (Chakravarty, 1973).
3. GCF increased from 10% in 1st FYP to 14.5% in 3rd FYP. Thus the
dependence on foreign aid grew.
Phase 2: 1965 - 80
1. GDS increased from 14.5% in 1965-66 to 12.8% in 1968-69 to 23.2% in 1978-
79. The decline in late 60s was due to severe drought while the jump in 70s
can be attributed almost entirely to increase in HH savings.
2. The effect of bank nationalization can be seen that the financial savings of HH
increased from 2.2% in 1968-69 to 6.4% in 1978-79. The overall increase in
savings was also due to bank nationalization and setting up of RRBs. With the
GR, the agricultural income increased (and also became more skewed) and
this led to increase in HH savings (Krishnamurthy and Saibaba, 1981). In the
later half of 70s, apart from the above 2 factors, another contributing factor was
high inward remittances from NRIs.
3. GCF stood at 20% in 1980 (up from 14.5% in 1965) and GDS stood at 18.5%
in 1980 (up from 12.6%). During late 70s, the savings exceeded capital
formation as the higher inward remittances were not profitably invested (Shetty
and Menon, 1980).
Phase 3: 1980 - 90
1. GDS declined from 23.2% in 1978-79 to 18.4% in 1984-85 and increased back
to 22.4% in 1988-89. The decline was due to oil shock. During the 6th FYP, the
GCF also fell and mainly due to fall in HH GCF.
2. Public savings over the period however declined by 3% from 4.6% to 1.6%
reflecting worsening fiscal position. The decline in HH savings was due to
higher consumption (on consumer durables) (Chakravarty, 1990).
3. GCF was 26% in 1990 while GDS was 23%. Infrastructure investment was
6.1% of GDP.
4. This period witnessed a widening of the savings - investment gap which had to
be financed by foreign borrowings. CAD widened to 3.2% of GDP in 1990-91.

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 5. Specifically public sector borrowing gap widened from 3.7% in 70s to 8.2% in
1990-91. This led to a substantial increase in public debt. The rise of public
borrowings led to increasing financial repression with rise in SLR rates. SLR
went up from 20% in early 50s to 25% in 1964 to 34% in 1980 and 38.5% in
1990. Still due to high money growth CRR had to be continuously increased.
Phase 4: 1990 - till date

1970s 1980s 1990-91 2006-07

Fiscal Deficit 3.8% 7% 8% 4%

Revenue
- 1.7% 3.3% 2.7%
Deficit

1. In the 8th FYP, GDS increased to 25% which was made possible by increase in
HH savings to 20% and corporate savings to 4%. Public savings remained on a
downtrend.
2. In the years following the crisis till 1993-94, the HH savings actually fell from
20% in 1990-91 to 16% in 1993-94 which was due to higher consumption by
elite and middle class as they drew into their physical stock of savings (Rao,
1995).
3. Overall GCF is 32.7% in 2011-12 and GDS is 29.5%. Rising share of
manufacturing in GCF: It has gone up from 27% in 1980s to 40% in 2000s.
4. Despite the fiscal correction efforts, public savings continued to deteriorate in
90s and even turned negative in 1998-03 period due to sharp decline in
government administration savings (from 1.8% in 1990-91 to -5% in late 90s). A
major reason for this dissavings was a fall in tax revenues from 10.3% of GDP
in 1990-91 to 8.2% in 2001-02. Part of it was due to rationalization of tax
brackets and lowering of indirect taxes (their benefits show with a lag).
5. On the other hand the savings of NDEs has been rising steadily from 2.5% in
80s to 3% in 1990-91 to 3.5% in 90s to 4% in 2006-07. Similarly savings rate of
private enterprises has come up from 1% in 50s to 2% in 80s to 8% now.
6. Most of the compression in fiscal deficit since 1990-91 has been achieved by a
cut in investments. Thus while from 1991 fiscal deficit has been brought down
from 8% to 4%, revenue deficit has come down only by 0.6%. Indian
experience suggests one of the benefits to stick to fiscal consolidation as it
increases savings availability for private sector investment.

174
 7. Household savings since independence have been steadily rising - from 6.5%
in 50s to 7.5% in 60s to 11.5% in 70s to 13.5% in 80s and it was 18.5% in
1990-91. The share of financial savings in that increased till 1990-91
irrespective of the business cycles. After reforms, financial savings were 60%
of household savings during the 8th FYP. In 9th FYP recession it fell to 50%.
The it remained almost stationary in the next boom cycle (till 2008) @ 47% -
due to tremendous increase in housing loans, personal loans and loans to SSIs
(while gross household savings grew by 4.5%, liabilities rose by 3% negating
much of the increase in the savings in the boom period). Now it is only 43%
(down from 55% in 2007-08).
Sectoral Composition of GDP
1. Between 1950-51 to 1980-81, industry recorded a higher growth than services
which led to its share in GDP going up from 16% to 25%. But since then
services have outgrown and the decline in agriculture's share has been lapped
up by services. Services are now 60% of the economy while agriculture is 13%.
Industry is 27%.
2. Share in employment of services is 23.5% which is down from 24.5% in 1990-
91.
2011-12
1. Agriculture growth: 2.8% (vs 7% in 2010-11).
2. Mining & quarrying: -0.9% (vs 5% in 2010-11).
3. Manufacturing: 2.5% (vs 7.6% in 2010-11).
4. Electricity, gas and water supply: 7.9% (vs 3% in 2010-11).
5. Construction: 5.3% (vs 8% in 2010-11).
6. Financing, insurance, real estate and business services: 9.6%. (vs 10.4% in
2010-11).
7. Community, social and personal services: 5.8% (vs 4.5% in 2010-11).
8. Trade, hotels, transport and communications: 9.9% (vs 11.1% in 2010-11).
9. GDP: Rs. 82 lac crores in 2011-12 (vs Rs. 70 lac crores in 2010-11).
10. Private final consumption expenditure (@ current prices): 56% (vs 56.5% in
2010-11).
11. Government final consumption expenditure (@ current prices): 11.7% (vs
11.9% in 2010-11).
12. GFCF (@current prices): 29.5% (vs 30.4% in 2010-11).
13. Inventory investment: 3.2% (vs 3.3% in 2010-11).
14. Per capita income (current prices): Rs. 60,000. Bank deposits: 17.4%. Bank
credit: 19.3%.

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 15. RBI puts construction in services sector while CSO puts it in manufacturing.
Typically CSO is followed.
Fiscal Stability
Statistics
1. After the FRBM Act, India did well to contain the fiscal deficit and had
successively low fiscal deficit until it reached 2.5% in 2007-08. The in 2008-09
it was 6%, in 2009-10 it was 6.5%, in 2010-11 it was 5.1%, in 2011-12 it was
5.76% (against a target of 4.6%). Target for 2012-13 is 5.1%. Effective revenue
deficit target for 2012-13 is 1.8%. The consolidated fiscal deficit of the Centre
and the State governments for 2011/12 (RE) was 8.2 per cent of GDP.
Tax Statistics
1. Gross tax revenues of the center declined from 10.6% in 1990-91 to 8.5% in
1998-99 but increased from then till 2007-08.
2. Gross Tax/GDP = 10.1% in 2010-11, 10.0% in 2011-12 (10.4% estimated).
2012-13 estimates are 10.6% ( 19% growth over revised estimates of 2011-12).
Gross tax collections declined from a high of 11.9% in 2007-08 to 9.7% in
2009-10. Estimates for 2013-14 are 11.1% and 2014-15 are 11.7%.
3. Revenue receipts for center have ranged between 7-11% so far. In 2011-12,
they were 7.4%. Capital receipts have ranged between 4-7% so far. In 2011-12
they were 4.9% out of which 4.6% were borrowings.
Expenses Statistics
1. Total expenditure: 14.7% of GDP in 2012-13 (15.0% in RE 2011-12). Plan
expenditure: 5% of GDP in 2012-13. Non-Plan expenditure: 9.5% of GDP in
2012-13. Transfer to states: 3.5% of GDP (out of which tax transfers are
2.6%).
2. Central government expenditure on social sector as a % of total central
government expenditure has gone up from 13.5% in 2006-07 to 18.5% in 2011-
12. Subsidies are to be kept @ 1.6% in 2014-15.
3. Net public debt is 49% of GDP in 2011-12 which is down from 59% in 2006-07.
Estimated borrowings in 2012-13 is $96 bio. It is expected to decline to 42% in
2014-15.
Fiscal Deficit: Is it bad?

176
 1. Expenses can be of two types - revenue (ignore maintenance ones) and
capital. FD are financed by borrowings of monetization. Monetization impacts
present generation only and can lead to serious price instability and loss of
confidence in economy. Borrowings are preferred but they have to be paid out
of taxes in future. So its like taking away a piece from future generation's pie. If
this is used to create capacity which will benefit in future, it is acceptable
provided the value so enhanced is more than the burden of additional taxes. If
it is used to finance our current expenditures, it can lead to a situation where
the future merges into present and the economy becomes unsustainable like in
PIGS.
2. Even in capacity building expenditures, there can be social as well as
economic capacity building expenses. While one can't say one is bad or good
(both are essential), the idea is that the benefit created should be more than
the cost. Typically in social projects, the outcomes are not measurable and they
tend to fall victims to inefficiencies in implementation.
Q. In a supply constrained economy, how was it argued in India in the 1950s that
deficit financing would help raise the growth rate? In hindsight analyze the validity of
this view. (2010, II, 30)
GDP growth and interest rate argument
1. Interest rate should be equal to GDP growth, because that is how an economic
agent is expected to earn. So if it is less than GDP growth, public debt can be
increased and vice versa.
2. But for short period of times, it can't be said that the rate is < GDP growth rate
so government should borrow more. This is because governments borrow over
a long period and borrowings once initiated are difficult to cut back since
government projects are long term projects. Its only when the government feels
that GDP growth rate for a sustained period of time will be higher than the
current interest rates that it may chose to borrow more.
3. Sustained growth rate can be achieved on back of sustained investment only.
But if government borrows more and spends on consumption items, then it
itself will compromise investment and hence the sustainability of growth.
FRBM Act
Statistics
Year. Rev Deficit Fiscal Deficit. Rev Exp. Capital Exp.
2003-04 3.6%. 4.5%.
2005-06. 2.5%. 4.0%. 11.9%. 1.8%
2007-08. 1.1%. 2.6%. 12.0%. 2.4%

177
2008-09. 4.4%. 5.9%. 14.2%. 1.6%
2009-10. 4.6%. 6.6%
2010-11 2.1%* 5.1%
2011-12 2.85%* 5.76%
2012-13 1.8%* 5.1%
2013-14 1.0%* 4.5%
2014-15 0.0%* 3.9%
* indicates effective revenue deficit

Amendments
1. Effective Revenue Deficit: It is revenue deficit - grants to states used in capital
formation. This will be made a fiscal parameter instead of revenue
deficit. Effective RD will be eliminated by 2015, RD to be kept @ 2%.
2. 3 Year Rolling Expenditure Statements: Such statements will be laid out in the
budget. It will contain expenditure commitment of major policy changes. It will
also show contingent liabilities and provide a breakup of the grants used in
creation of capital assets.
Advantages
1. Step in right direction.
2. If revenue account is balanced, long term accumulation to debt will slowdown.
This is because (a) Government will not borrow for revenue expenditures. (b)
Interest payments are revenue expenditures and hence need to be cut down.
Debt accumulation would be to build up physical assets not to pay salaries and
interest.
3. It places a limit of 0.5% of GDP on the guarantees which governments can give
to the private sector for PPP projects. This is needed because these
guarantees may place unaccounted future burden on fiscal deficit. It also limits
additional liabilities to 9% in 2004-05 and reducing by 1% in each successive
year. It also provides for disclosure of all guarantees, assets etc.
4. It provided for prohibition of central government from borrowing from RBI after
2006-07. This would also ensure better monetary policy mechanism.
Limitations
1. It is toothless. It also doesn't prevent government from slipping items under the
line to project a fiscal deficit within bounds.

178
 2. A good law must incorporate target which are comprehensive, difficult to
override and must have substantial penalties on overriding. FRBMA doesn't
have any of these characters. Also there will not be any incentive to push
beyond the limits specified in FRBMA (since there are no advantages in doing it
and it will only mean that the next government can "free ride") and thus in any
downturn, FRBMA will be amended. Instead of such a rule, India should follow
a counter cyclical budget process. To solve the free rider problem, FRBMA
compliance should be monitored by an independent council involving major
opposition leaders as well.
3. Wisdom of fixing 3% limit? There are some studies which suggest 6% as an
appropriate limit including the recommendations of 12th Finance Commission.
The rationale is Indian household financial savings is 13%. 5% is available to
corporates, 2% in non-department undertakings leaving 6% for the
government. But this argument is weak in the sense it applies only when the
government debt is sustainable. Not when it reaches unsustainable stage.
Copied from EU? India's debt is self-held and denominated in INR. India's
savings rate is also higher which means higher capacity to absorb borrowings.
4. Wisdom of defining a hard rule for fiscal deficit at all. The limit of fiscal deficit
which an economy can tolerate varies from situation to situation.
5. It suffers from the taboo that revenue expenditures are bad. Some of them are
essential like maintenance expenses which are critical to life of project. So we
should change our accounting system.
Indian Tax Structure
1. Direct Tax / Indirect Tax = 55:45.
2. Corporate tax: 38% > Personal Income Tax: 17.6% > Excise Duty (now called
CENVAT): 17.5% > Customs Duty: 16.3% > Service Tax: 8.5%.
Q. Examine the role of indirect taxes in India's economic development. (2007, II, 20)
Centre-State Distribution
1. Only central: Custom duties, corporate tax, capital gains tax, wealth tax,
surcharges, cesses.
2. Centre levies, state collects and keeps: Stamp duties on bills of exchange,
cheques, promissory notes.
3. Centre levies, collects but state keeps: Estate duties, taxes on the stock
exchange, and a central sales tax on newspapers, inter-state consignment of
goods.
4. Shared between center and states: Income tax and excise duties.
Tax vs Surcharge

179
 1. Surcharge is a tax on tax generally imposed to reduce ≠ further. Cess is a
temporary levy on a tax for a specific objective.
Excise duty, MODVAT, CENVAT
1. Till 1986 excise duty was applied on goods before exiting factory gates but it
amounted to double taxation as both inputs and outputs were taxed.
2. In 1986 it was renamed as MODVAT and now tax paid on inputs could be
reclaimed. But this led to major compliance issues as different inputs attracted
different rates and outputs as well.
3. So in 2000, a single rate was fixed and it was renamed CENVAT.
Chellaiah Committee Recommendations, 1991
1. Income Tax: Lower the income tax and corporate tax rates. Cap corporate tax
rate @ 40% and abolish surcharges. Difference between tax on domestic and
foreign firms should be <=7.5%. Capital gains when taxed should be indexed
for inflation.
2. Wealth Tax: Tax only on non-productive assets.
3. Customs Duty: General fall in customs duty.
4. Excise Tax: Replace specific tax (fixed amount per unit) by advalorem tax.
Tax Reforms since 1991
1. Income tax, corporate tax, excise duties, custom duties etc. all rates have been
brought down.
2. In 2001, a single rate if central excise duty called CENVAT introduced.
3. Service tax introduced in 1995. VAT introduced. Now GST in pipeline.
Advalorem duties introduced.

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Goods & Services Tax
13th FC on GST
1. It should be dual levy on a common and identical base imposed
concurrently by the Centre and the States but independently to promote
cooperative federalism.
2. It should cover all the goods and services. Exemptions should be minimum
and common to the Centre and the States. Tobacco, petroleum products
and alcohol should be taxed through GST as well as an additional duty with
no input credit. Real estate sector should be integrated into GST framework
by subsuming the stamp duty.
3. GST should be structured as a destination based tax. Inter-State
transactions should be handled through a mechanism of permitting sellers
in one State to charge SGST from buyers in another State. This SGST
should be credited to the consuming State.
4. Keeping in view the compliance costs, small dealers and manufacturers
should be exempted from the purview of CGST and SGST.
5. It recommended earmarking $10 bio to fund possible losses incurred by
states over a period of 5 years. It also called for the subsumption of all
indirect taxes, cesses and surcharges levied by the centre as well as the
states into the GST.
6. No distinction being made between goods and services which would be
subject to a single rate. A minimal list of exemptions and a common
threshold criterion for the centre and the states.
7. To maintain revenue neutrality, a special provision to allow for petroleum
products to be subject to an additional levy, apart from GST.
These recommendations did not find favour with either the centre or the states
mainly for the following reasons:
1. The levy of a single rate was seen as both unrealistic as well as an attempt
to crimp the fiscal autonomy of the states.
2. The inclusion of the real estate sector and the railways in the GST tax base
was seen as not pragmatic.
115th Constitution Amendment Bill, 2011
1. It enables Parliament and state legislatures to make laws to levy GST
which will be applied on all items except a negative list. It is needed to
enable center to tax sales and enable states to tax production and services.
It excludes items like alcohol, natural gas, crude oil, petrol diesel, ATF.

181
 Council will work on consensus basis and will be a recommendatory body.
Here is a clear contradiction since one of its mandate is to decide the
goods where GST will not be applicable and also 6 such goods are already
defined in ©.
4. It also sets up a dispute resolution body to oversee non-compliance of GST
Council recommendations by centre and states. But here is a clear
contradiction.
5. But it seeks to define the GST in © itself along with the exemption list which
means that any change in future will need a © amendment. Also it allows
the panchayats and municipalities to continue to levy tax on entry and this
is seriously going to slow down and hamper the free movement of goods.
6. For GST we need uniform rates on goods and services. A 12% excise duty
at manufacturing level is not the same as a 12% service tax at retail level.

7. The states panel decided to keep petro products out of GST so that states
could levy their own taxes on them. But this would mean double taxation
since it won't be possible to claim the GST credit on the inputs and still
state taxes would have to be paid. So petroleum ministry has proposed to
include it in GST and allow states to levy additional taxes. This is the
international practice as well. Also exclusion of petroleum and alcohol
means exclusion of a large category from the tax base. It should be
included so as to prevent black money generation.
Issues Remaining in GST
1. State compensation issue: The centre has agreed to compensate states for
3 years starting from 2010-11 and has set aside Rs. 9000 crores for this in
the budget. This has helped bridge the trust deficit issue. States want a $10
bio compensation package built into the 115 CA Bill.
2. While the SGST rate may be revenue neutral at the aggregate level, States
with high tax effort may suffer a revenue loss.

182
183
Direct Tax Code
Provisions
1. Earlier domestic companies paid @ 30% and foreign @ 40%. Now foreign
companies to pay @ 30% as well but will have to pay additional 15%
branch tax on profits attributable to their permanent establishments in India.
All surcharges and cesses to be abolished. Most exemptions for corporates
have been removed except for investment linked credit (cumulative profits
up to the value of investment will be exempted) for certain sectors. Losses
can be carried forward indefinitely. Income from different businesses will be
separated.
2. MAT increased from 18.5% to 20% on book profits. Wealth tax now 1% on
assets over Rs. 1 cr as against 1% on assets over Rs. 15 lac earlier.
3. The Bill specifically taxes any income from a “controlled foreign company”
set up by Indian residents in a foreign country with the purpose of paying
lower taxes.
4. Capital gains on assets where STT was charged was as follows: Long term
(> 1 year): 0%, Short term 15%. Now it will be: Long term: 0%, Short term:
50% deduction and then tax @ marginal tax rate.
5. Capital gain on assets where STT was not charged was as follows: Long
term (>3 years): 20% with indexation benefits, Short term: marginal tax
rate. Now it will be: marginal tax rate (with indexation benefits) for both
short and long term.
6. It introduces GAAR to allow IT department to classify any arrangement as
one entered for evading taxes. It may increase compliance burden because
there are no guidelines on what situations GAAR will be implemented.

Issues: Personal Income Tax

1. Total taxpayer base: 30 mm. Out of this 97% is (0, 10 lac) and contributes
25% of total personal income tax collected, 2% is (10 lac, 20 lac) and
contributes 15% while 1% is > 20 lac and contributes ~60%.
2. So the parliamentary panel has proposed to raise the income tax
exemption limit to Rs. 3 lac so as to avoid spreading out IT department's
resources for too little.
Advanced Pricing Agreements

184
Q. Examine the progress of tax reforms in India. (2007, II, 20)
Inflation

Key Drivers of Infl ation

The rising prices of two product groups

– primary articles and fuel – were mainly

responsible for the build-up in headline

infl ation after December 2009. Whereas, on an

average basis, manufactured products recorded

an infl ation of 5.63%, it was 12.12%

and 11.46%, respectively, for primary

articles and the fuel group (Table 1). Among primary articles, in terms of

average infl ation, minerals (15.91%) were

the largest contributor, followed by nonfood

articles (12.48%) and food articles

(11.43%). In the case of the fuel group, the

rising prices of mineral oils were primarily

responsible for the high infl ation

On an average, from December

2009 to August 2013, the egg, meat, and

fi sh group has recorded the highest infl

ation rate of 17.16%, followed by milk

(11.78%), fruits and vegetables (10.84%),

foodgrains (9.11%)

The high infl ation in minerals and mineral

oils is due to factors such as fl uctuations in

global crude oil prices because of political

tensions in some parts of the world, the

pass-through of increases in global prices

of crude oil, domestic supply-side bottlenecks,

and depreciation of the rupee. But

what is perplexing is the persistence of an

upside risk to food price infl ation despite

a favourable domestic food supply situation

185
years. One of the important factors held

responsible for the spike in food infl ation

since 2008 is supply-side constraints in

the years 2008-09 and 2009-10 (Nair and

Eapen 2012). However, a look at agricultural

production from 2010-11 reveals that the food-supply situation in India

has improved considerably (Table 3, p 14).

The growth rate of output of all the

major food commodities accelerated

signifi cantly during the output cycle relevant

to the period (December 2009 to

August 2013) Hence, a

weak supply response was hardly the

cause for high food infl ation between

December 2009 and August 2013.

This turns our attention to another

key reason cited for soaring food prices –

the growing demand for high-value agriculture

products, in particular, proteinrich

food items such as pulses, milk, livestock,

and fi sh. 10. It is seen

that the share of high-value food commodities

– pulses, milk, egg, fi sh and meat

– in total monthly per capita consumer

expenditure (MPCE) on food at current

prices increased in rural and urban India

over the period from 2004-05 to 2011-12.

On the other hand, the share of sugar,

edible oils, and fruits and vegetables declined

during the same period in both the

rural and urban sectors. The percentage

points increase recorded in the expenditure

shares of pulses, milk, egg, fi sh, and

meat in 2011-12 was not only signifi cantly

different than in other periods, but also

historically high, both in rural and urban. Moreover, except pulses, the expenditure

186
registered in 2011-12 were new highs. The total MPCE on food at constant prices also increased in this period. BUt this

doesn't explain fruits and vegetables and cereal inflation. Another possible reason for stubborn

food prices is the rising cost of production

(Co P) of food commodities. With the exception of agricultural

machinery and related inputs,

the prices of various farm inputs, measured
by the WPI infl ation rate, were
subject to signifi cant increases in recent
years. As for labour
cost, a key element of farm input cost,4

the agricultural labour wage rate (in

nominal terms) grew at an average

annual rate of 20% (CACP 2013) between

2009 and 2012 (January-December).

Trends
1. Inflation in minerals has been highest followed by fuel followed by food grains
followed by manufactured products over past 2 decades. IIP in minerals has
been growing @ 4.5% and manufacturing @ 10.5% since 2004-05 based on
IIP indices. Naturally the prices of minerals will shoot up.
2. Inflation began to grow stubborn for the last 2-3 years @ 9%. Primary articles
went up the most. Since January, the fall in food inflation has led to the
narrowing between WPI and CPI. Core inflation which was 0.55% in Nov 2009
and 8.07% in April 2010 has since slowed down to 4.8%. 2 major contributors
to CPI-IW inflation is food and housing.
3. M3 growth was ~20% in pre-crisis years. since then it has been falling steadily
to 14.5% in 2011-12. Bank credit growth too has fallen secularly from 21% in
2006-07 to 14.4% in 2011-12.
4. GDP / M3 has been declining indicating higher price levels. It was 4.88 in 1951-
52 and 1.25 in 2008-09. Inflation in India is broad based.
5. Long term trend: WPI inflation measured 1.7% in 50s, 6.5% in 60s, 9% in 70s,
8% in 80s. On the other hand the volatility of π which was high in 50s lowered
down ins subsequent years. 90s saw initially a high rate of inflation in double
digits followed by a moderation which lasted till 2003-04.
6. Trend in 2000s: Overall inflation in the decade was 5.3% and fuel inflation was
8.9%. Primary articles was 6.4% and manufactured products was 4%.

187
Steps Taken to Counter Inflation
1. Increasing Food Supply: Projects were followed to Bring Green Revolution to
East India ($200 mm) and boost pulses production ($ 60 mm).
2. Agriculture Supply Chain: Farmers typically get only 20-25% of price paid by
the consumer. To improve the supply chain, amendments to Agriculture
Produce Marketing Committee Acts were proposed. Proposals for FDI in retail
were mooted. While this will reduce the price gap between consumer and
farmer, additional capacity will be created, business volume will go up and even
small retailers will benefit. Additional PDS supplies given.
3. Trade Measures: Banned futures trading, exports, permitted imports, lowered
import duty.
4. Monetary Measures: Interest rate hikes.
Q. Explain the nature and causes of inflation in India. Critically appraise the
measures adopted by the authorities to control it. (2007, II, 60)
WPI
(a) Features
1. Recently weekly reporting of WPI food and fuel was abolished. This was
because the weekly numbers were unreliable and had a tendency to be revised
upward in the final monthly WPI numbers which included manufacturing as
well. So there was a tradeoff between frequent but unreliable reporting and less
frequent but more reliable reporting.
(b) Disadvantages
1. The basket was not reflective of items consumed by end consumer.
2. Services were absent which account for 60% of Indian GDP.
Private Final Consumption Expenditure Deflator
Advantage

188
 New CPI
(a) Changes
1. The new CPI has a base year of 2010 which will be shifted to 2011-
2012 once the data for this period has been compiled. The old CPI-UNME
had a base year of 1984-1985.
2. Unlike the CPI-UNME, which focused solely on the urban non-manual
population, the new CPI provides data for urban, rural, and "combined"
populations.
3. The new CPI measures more data. The old CPI-UNME listed one index for
each of the five pricing categories (food, fuel, clothing, housing, and
miscellaneous). The new CPI, however, includes more data within each of
the five categories. For example, the "miscellaneous" category now
includes subcategories of: education, medical care, recreation,
transportation, personal care, and household requisites.
4. In addition, the new CPI provides an index for each of the 35 Indian
territories/states as well as a general all India index.
(b) Features
1. Food weight in all India is 50%, rural is 59%, urban is 37%.
CPI New vs WPI
1. There are three key differences in the composition of the two indices.
a. First, CPI-new has a much higher weight (47.6%) for food ex-tobacco
versus 24.3% in the WPI.
b. Second, fuel-related category has a lower weight of 9.5% in CPI-new
compared to 14.9% in the WPI.
c. Third, CPI-new includes services and housing, both of which are
missing from the WPI.
2. Reason for divergence
a. One is obviously higher weight of food. But it is not the sole reason.
b. There is a significant difference in the core inflation measure of the two
indices as well. Thus, while WPI-core inflation declined in March, CPI-
new core inflation edged up. CPI new's core also include services.

Inflation Measuring Techniques

1. Laspeyer's index: L = ∑(q0 . pt) / ∑(q0 . p0).

189
 3. Income index: I = ∑(qt . pt) / ∑(q0 . p0) = yt/y0.
Proof: If I > L, consumers are necessarily better off
1. I > L means ∑qt.pt > ∑q0.pt. This means that the original basket was affordable
in the current period, still the consumers are consuming a different basket. This
implies the current basket is a superior basket.
Proof: If I < P, consumers are necessarily worse off
1. I < P means ∑q0.p0 > ∑qt.p0. This means that in the original period, when the
consumers consumed q0 basket, it used to cost more than the current basket
qt. Still the consumers consumed q0. This means q0 is a superior basket and
now the consumers are forced to consume only qt.

External Account
External Account Policies: Trends

190
191
CAD
1. In 2011-12 fiscal, it was 4.2%. In 2012-13 fiscal, it was 4.8%. In Q3, it
shot up to a high of 6.7% but in Q4 it dropped to 3.6% only.
Trade Data

September

As a result, the country’s trade deficit fell to $6.76 billion, the lowest level in
two-and-a-half years. In the previous two months, exports had risen 13 per
cent and 11.64 per cent in August and July, respectively. India’s imports in
the first half of this financial year fell marginally, by 1.8 per cent, to $232.2
billion.
October
Merchandise exports in October surged an impressive 13.47% to $27.27 billion compared to $24.03

billion in the same month last fiscal. This was the fourth month in a row when exports registered a
double-digit growth and highest in last two years. Exports, then contracted in May and June this year
as well. In October, imports declined to $37.82 billion, down 14.5% over $44.24 billion. This was the
second month in a row when imports fell by double digits.Thus, the trade balance for October stood at
$10.56 billion, almost half of what it was in the same month last year at $20.21 billion

Total non-oil imports during April-October reached $171.96 billion, down 7.43% . Total oil imports till
October grew by 3.3% at $98 billion as against $94.9 billion, according to the data.

International price trends are also partly responsible. The crude oil prices fell to $103 per barrel last
week, which was the lowest in last four months. Similarly, coal prices hit a low of $76.45 a tonne this
year on July 10, but since then it has risen by 6.5%.

April - October
1. Exports: $180 bio (+6.3%). Export target for 2013-14 fiscal is $325
bio.
2. Imports: $270 bio (-3.8%).
3. Trade deficit: $90 bio. Last year it was $112 bio in this period.
2012-13

192
 Sheel (2013) on External Imbalance
1. If capital flows are currently adequate to finance CAD, this is because
of easy monetary policy, including quantitative easing which is pushing
volatile capital flows into emerging markets. This “push factor”
could change anytime.
2. Overall investment in the economy has not declined sharply. What has
declined sharply is the productivity of investment i.e. ICOR.
3. It is therefore more important to increase savings to reduce the
increasing savings-investment gap and restore the productivity of
investment, than to simply increase investment.

Phase 1: 1950 - 65
1. India's CAD increased from flat in 1st FYP to -2% in 3rd FYP. It was due to
increasing capital goods imports while having no export surplus. This led to a
decision to devalue the currency by 57%. Imports were decreasing but
exports were decreasing at a faster pace.
2. Foreign capital played an important role in capacity building. But this was
mostly state owned capital and foreign aid. India's imports in 1950s increased
at a fast pace partly as imports of food grains were needed and partly
because of capital equipment needed for industrialization. Since India didn't
have the surplus to pay for it, it relied mainly on bilateral aid programmes and
aid / soft loans by world bank. India welcomed foreign aid.
3. Self sufficiency vs self reliance: Self sufficiency means not importing
anything. Self reliance means having surplus to pay for the imports. India's
focus of planning was self reliance but it became closely entangled with self
sufficiency as surplus was not forthcoming.
Phase 2: 1965 - 80
1. India's trade policy changed to more restrictions on imports rather than
enhancing export capacity. QRs and high tariffs were used. Average import
duty collection rate went up from 20% in 1967-68 to 31% in 1979-80. Infant
industry argument was propounded.

193
 2. The wars with Pakistan in 1965 and 1971 changed the perception towards
foreign aid as US used the PL-480 programme to twist Indian policy in the
war. Efforts were made to achieve self reliance now and strict controls were
put into place for its operations. 4th FYP made self reliance an explicit
objective.
Phase 3: 1980 - 90
1. Efforts were made towards export promotion instead of import
substitution: Gradual liberalization. Positive list was replaced by a negative
list. Export subsidies were increased from 20% in 1979-80 to 25% in 1987-88
as a proportion of exports. But the slowdown in industrial countries and
strengthening of real exchange rate meant that exports didn't go up in the
first half. But a change from previous policies was that the response to slower
export growth was not to attempt to restrain imports further. The attempt was
to link imports to exports. Licenses on export industries were abolished. As a
result of these and real depreciation of exchange rate in later half, exports
began to go up. Imports too slowed down in 1st half but increased rapidly in
2nd half - specially oil imports.
2. Vague moves were made towards liberalization. A school of thought emerged
which advocated that a poor country like India can't afford to spend
resources in every field and thus foreign aid is necessary to achieve higher
growth. But the opposite school of thought was equally vocal.
Phase 4: 1990 - till date
1. Liberalized policy was put into place. FDI can happen in more markets,
ownership structures.
2. Automatic routes were provided in many sectors where the investor merely
has to notify RBI 30 days in advance from bringing the funds. Dividend
balancing requirements have been removed.
3. Role of FIPB: In normal cases it has to process in 6 months. It can even meet
the investor in person to expedite the process. It is empowered to approve
100% FDI in cases of high technology transfers.
4. As per 2004-05, apart from a negative list, automatic route within prescribed
limits is to be followed for others. Procedures for FDI were also simplified and
include things such as conversion of CBs and preference shares into equity.
5. FDI in DMIC project is being sought. Japan has promised $4.5 bio and Qatar
is interested.

194
 6. Self reliance: It is still valid as FDI can't plug all the gaps. Also the western
countries have made efforts to discourage multilateral lending and shift to
bilateral lending so as to be able to exert exclusive influence.
Current Account
Invisibles
1. It includes trade in services, remittences. India is expected to run a trade
deficit of $185 bio, invisibles surplus of $107 bio ($40 bio surplus in services
and $68 bio remittances) thereby making CAD of $78 bio or 4.2% of GDP.
Capital inflows were $67 bio in 2011-12.
2. India's trade in services in 1990-91 was 4% of GDP which is 13% in 2010-11.
Foreign Trade
New EXIM Policy, 1991
1. Projects where capital imports were required would be auto-approved if
financed via equity infusion or imports constitute < 25% of investment.
2. Trade Liberalization: Quantitative restrictions on imports of intermediates and
capital goods were removed immediately and by the turn of the century QRs
on imports of consumer goods were also removed. Our peak tariff rate has
come down from 150% in early 90s to 12% now (for non agriculture
products).
3. Shift in Export Promotion Policy: Until then focus was on specific export
promotion schemes for individual products whereas overall atmosphere was
biased against exports as INR was overvalued. This was changed to export
promotion through fixing the overall macro-economic framework. INR was
devalued and later left to market forces, convertibility was introduced in trade
account in 1993 and current account in 1994.
India's FTA Policy
1. Till late 1990s, India mainly stressed on WTO route for trade liberalization.
However, the success of FTAs elsewhere prompted a change in government
policy and FTAs and CEPAs began to be negotiated.
2. The first FTAs were the result of politico-strategic considerations. Examples
are India-Bhutan Treaty 1949, India-Nepal Treaty 1950, Bangkok Agreement
1975.
3. Next phase began when FTAs began to be signed increasingly for their
economic logic. A distinction from the earlier phase was that now broader
group of stakeholders including academia and businessmen were involved in
the negotiations. Examples are SAPTA in 1993, India-SL FTA 1998, India-
Thailand FTA 2003, BIMSTEC 2004, India-Mercosur FTA 2004, India-
Singapore CEPA 2005.

195
Foreign Trade Policy, 2009
1. 25% annual growth in exports between 2011-12 to 2013-14. Exports should
be $500 bio in 2013-14.
2. Doubling of India's share of exports into world's exports by 2020 from 1.5%
to 3%.
3. Improving export related infrastructure. SEZs and now NIMZ are being
promoted. ~400 SEZs have been notified out of which ~150 are already
exporting. SEZs employ currently ~900K and exports are ~$70 bio on an
investment of ~$40 bio. 100% FDI is automatically allowed in SEZs. However
there have been complaints about the misuse of agricultural land in SEZs.
India's SEZ Policy and Act mainly aim at providing easier business
environment for exporters and provide infrastructure. SEZs need to have net
positive cumulative fx earnings after 5 years of commencement of operations
failing which they will be liable for penal action. Exports in 2011-12 were $70
bio, 2010-11 were $60 bio, in 2009-10 were $45 bio and in 2008-09 were
$20 bio.
4. To reduce transaction cots through trade facilitation measures and other
reforms. Online application filing facility has been made available to reduce
the interaction between DGFT and traders.
5. Secure enhanced market access and new markets. Focus Market Scheme
covers 112 countries giving duty credit of 3-4% and on 41 it gives additional
1% duty credit scrip. Market Link Focus Product Scheme incentivizes high
export intensity products but having low market share in selected markets.
Q. Write in brief on SEZ and their socio-economic repercussions. (2011, II, 20)
Strategy adopted in FTP, 2009
1. Product Focus: Focus will be on Engineering Goods (target : $125
bio), Basic Chemicals ($25 bio target), Pharmaceuticals($44
bio target) and electronics ($17 bio target).
2. Market Focus: Under the Foreign Trade Policy, support for 41 new markets in
Latin America, Asia and Africa was provided. Apart from this, to preserve our
market share in old developed markets and to move up the value chain.
3. Brand Creation: To encourage quality, provide quality certification where
needed, and to promote Brand India.
4. Technology and R&D: To promote high technology sectors like
pharmaceuticals, electronics, computers, engineering etc.
2012 Supplement to FTP 2009

196
 1. Thrust on employment intensive industries. 2% interest subvention scheme
has been extended to labor intensive sectors till 2013. Hitherto the support
was only available to handlooms, handicrafts etc.
2. Encourage domestic manufacturing and reduce export dependence on
imports.
3. Promote moving up of exports in technology and value chain. 0 duty Export
Promotion Capital Goods (EPCG) scheme has been extended till 2013.
4. Continue market diversification.
5. Encourage exports from NE.
6. Promote green manufacturing.
7. Reduce transaction costs by reducing human interface and simplifying
procedures.
Trends and Patterns in Trade

As noted by Kumar and Gupta (2008),

the lack of a focused approach in identifying,

sustaining and building the country’s

competitive advantage, the concentration

of exports in low value categories

and relatively poor infl ow of foreign direct

investment (FDI), especially in exportoriented

industries are responsible for

the relatively weak performance of India’s

197
manufacturing exports.

Exports have shifted towards technologyintensive-

manufacturing exports with an

increased share of engineering goods,

petroleum products, chemical and related

products from labour-intensive traditional

sectors like textiles, gems and jewellery,

leather, jute, carpets and handicrafts. There

is scope to im -prove effi ciency of these sectors

which can contribute to enhance their

share in manufacturing exports. These

sectors are facing peculiar problems. These

include securing availability of raw material

and alter native markets for gems and jewellery, corporatisation and compliance

of environmental standards for leather,

techno logy upgrades for improved productivity,

balance between the domestic and

export requirements for jute and ways and

means to handle variations in international

demand for carpets and handicrafts.

Micro, small and medium enterprises

(MSMEs ) have made substantial contributions

to the Indian economy, and exports

from this sector have been accorded

high priority in India’s export promotion

strategy. The sector faces a number of

problems

The focus on gold and oil alone to

restrict imports tends to obscure other

important impediments which are also

structural and policy-induced. India has

the third largest coal reserves in the world,

yet it has imported substantial quantity of

coal for internal consumption and thus

198
from about 2.2% to 3.4% between 2000-01

and 2012-13. Similarly, one-third of fertiliser

consumption is imported as there was

inadequate production capacity within

India. Share of fertiliser in total imports is

still about 2%. India is also among the

larger edible-oil-consuming countries, but

it still imports edible oil from countries like

Malaysia and Indonesia for domestic consumption.

The ban on iron ore mining in

several states has meant that steel producers

have to import ore.

There has also been a

phenomenal growth in

exports of services during

the last two decades,

with service exports increasing

from $4.6 billion

to $142.3 billion; the average

annual growth rate

rising from 15% to 25%

over the two decades.

Although exports have

grown during the last

two decades they have

not kept up with the growth in imports

(e g, export/GDP increased 11 percentage

points between 1990-191 and 2011-12

whereas imports/GDP increased by 18

percentage points over the same period).

As a result, the merchandise trade

balance has worsened signifi cantly over

the last two decades, from -2.9% of GDP

in 1990-91 to an estimated -10.2% of GDP

199
had a moderating infl uence with a surplus

increasing from 0.6% of GDP in 1991-92

to 6% of GDP in 2011-12.

The ongoing current account defi cits have

been fi nanced by capital infl ows; hence

a surplus on the capital account. The

composition of fi nancial fl ows to India

has changed over time. Compared to

1990-91, when foreign direct investment

(FDI) and portfolio fl ows constituted a

small portion of the overall capital account,

in 2011-12, they are estimated to comprise

close to 60% of the capital account.

In contrast, debt fl ows are estimated

to account for about 30% in 2011-12,

compared to 80% in 1990-91 (Chari 2012).

1. Rapid Growth: India's exports in 1970s grew @ 18%, in 1980s @ 7%, in 1990s
@ 10% and in 2000s @ 20%. This has also led to India's share in world trade
going up from 0.7% in exports and 0.8% in imports in 2000 to 1.5% in exports
and 2.2% in imports in 2010. In 1991, Indian exports were 0.6% of world
exports. Exports as a % of GDP grew only slowly to reach 6% in 1990-91.
Since then they have become 17% now. Similarly imports have jumped from
9% to 27% now. FDI from nearly zero to 2% of GDP.
2. Change in Destination: Share of US and EU combined has fallen from 27% in
2000-01 to 19% in 2011-12. Share of Asian countries has gone up from 33%
in 2000-01 to 57% in 2011-12. Share of Africa and Latin America gone up
from 10% to 12%. USSR used to be a big destination for Indian agricultural
commodity exports under the Rupee-Rouble Agreement. Then USA used to
be India's largest trading partner, then UAE and from 2008-09 China is the
largest partner.
3. Increase in Services Trade: Services exports have risen faster @ 18% in
1990s and 25% in 2000s compared to 10% growth in merchandise exports in
1990s and 20% in 2000s. This has led to increase in services share in total
exports from 19% in 1993-94 to 34% in 2010-11. Manufactured goods
increased from 68% in 1988 to 76% in 1998 but declined to 63% in 2008.
200
 4. Increase in Capital Goods and Base Metals: India's traditional exports are
declining as a % of total exports. New exports coming up are in base metals
sector. Another rise is in refined petroleum products from ~2% in 1993 to
13% in 2011-12. But the crude for this is imported and the value added
component is just 15% of export value.
5. Increase in Technology and Human Capital Based Products: The share of
primary sector (including ores) in exports came down from 23% in 1993 to
15% in 2010. Share of unskilled labor intensive products came down from
30% in 1993 to 15% in 2010. The share of capital intensive products has gone
up from 25% in 1993 to 55% in 2010. Out of this, technology intensive
exports have gone up from 10% in 1993 to 20% in 2010.
6. Agricultural Exports: Agricultural exports are targeted to reach $40 bio by
2014 from current $30 bio. Basmati rice is the single largest agri-item
exported.
7. Increasing Diversification: If we use the Hirschman-Herfindahl index (H =
∑s^2) which is sum of squares of each commodity's share and adjust for the
refined petroleum export, we find that diversification of Indian exports has
increased from 1993. H Index has gone down from 0.04 in 1992-93 to 0.03 in
2010-11.
Q. Examine the challenges to export diversification and increase in export
competitiveness of India. (2011, II, 20)
Q. In view of the fresh fears of global financial crisis arising out of decelerating
credit ratings of US and sovereign debt crisis in peripheral Euro zone economies,
analyze its likely impact on India's trade and growth performance. Suggest
measures to contain it. (2011, II, 40)
Q. Bring out the broad changes in the level, composition and direction of Indian
exports and imports since liberalization in India. (2010, II, 40)
Indian Trade and H-O Theorem
1. H-O Theorem states that a country will export more of the product in which it
has a factor intensity advantage. So Indian exports of unskilled labor and
primary products should be going up.
2. But reality is that Indian exports of capital intensive including technology
intensive and human capital intensive products are going up and share of
unskilled labor and primary products is coming down.

201
 3. One reason is that advantage is relative. India's exports are going more to
developing countries now and export share to developed countries which
have capital advantage over India is decreasing. Share of Asia ex Japan has
gone up from 33% in 2001 to 57% in 2011. Share of Latam has gone up from
10% to 12% and that of developed world has come down from 27% to 19%.
4. Another reason is that policies of the government can distort 'advantages'.
Indian labor laws restrict the labor advantage and policies to promote capital
formation decrease the capital disadvantage in India.
Recent Statistics
(a) 2011-12
1. Full year exports are expected to be $300 bio (up 21%) and imports $485 bio
(up 32%) leading to a trade deficit of $185 bio.
2. Major import sectors are oil ($155 bio), gold ($60 bio), machinery ($35 bio),
electronics ($30 bio), gems & jewelry ($30 bio), coal ($20 bio), fertilizers,
steel and vegetable oils ($10 bio each). Major exports are engineering goods
($60 bio), petroleum products ($60 bio), gems & jewelry ($45 bio) , textiles &
yarn ($20 bio), pharmaceuticals ($15 bio), electronics ($10 bio).
3. Labor intensive exports: Due to the slowdown in 2011-12 labor intensive
exports have suffered the most. Handicrafts declined 23% ($200 mm) while
carpets declined 20% ($850 mm).
4. Major exporting states are Gujarat, Maharastra, Karnataka, TN and Kerela.

202
Country Comments
Current trade: $50 bio,
FTA in goods
ASEAN operationalized in 2011,
FTA in services under
negotiation.
Trade target: $3 bio by
2015. Current aid:
$300 mm. China's
current trade: $5 bio,
Myanmar FDI: $16 bio. Main
Chinese projects:
Kyaukpyu - Yunan
pipelines, railway lines,
roads.
Target: $15 bio by
2015. FTA signed -
Malaysia covers movement of
people, excludes
automobiles,
agriculture.
Current trade: $8 bio,
target: $16 bio by
2015. CEPA being
Thailand negotiated. India wants
Thai investments in
pharmaceuticals, food
processing and
infrastructure.

203
 Current trade: $60 bio,
deficit: $20 bio. Target:
$100 bio by 2015.
Indian advantage in
renewable energy, IT,
basmati rice, TV
channels. Chinese
advantage in power
plant equipment,
telecom equipment,
China pharmaceuticals. MoU
signed which agrees
on need of balanced
trade, removal of
NTTBs,
encouragement of
Indian businessmen in
Chinese fairs and
settling of trade in local
currency under BRICS.

Current trade: $20 bio

with deficit of $8 bio.
CEPA being negotiated
Indonesia - Indonesia reluctant to
open up banking and
health. Indonesian coal
pricing policies hurt
India.

Current trade: $20 bio,

target: $40 bio by
S Korea 2015. CEPA in place. S
Korea plans to invest
$1 trillion in India by
2017 and wants to sell

204
weapons and nuclear
reactors. India wants to
launch Korean
satellites.
Current trade: $15 bio
Australia with deficit of $11 bio.
Both have signed a
coal action plan.
Current trade: $12.5
bio, target: $25 bio by
2014. CEPA in place -
agriculture,
Japan automobiles kept out,
simple visas, India
gains access to
pharmaceutical
market. Japan wants
rare earths.

Current trade: $107 bio

EU which is balanced.
CEPA under
negotiation.
Current trade: $24 bio
with deficit of $3 bio.
India exports textiles
and chemicals while
imports machinery,
Germany data processing
products and
chemicals. India wants
electric vehicles and
DMIC investment from
Germany. Germany
wants pharmaceuticals

205
from India.
Current trade: $8 bio
France and stagnant. Deficit
~0.
Current trade: $5 bio.
SL Only S Asian country to
have a CEPA with India.
Current trade: $5 bio.
India imports cotton
Pakistan and cement, Pakistan
imports chemicals and
petroleum.
Nepal Current trade: $2.5 bio.
Both have a BIPA.
Bangladesh Current trade: $6 bio.
FTA being negotiated.

It seeks to sign an
Ukraine energy pact with India
and also to provide
weapons.
India seeks to invest in
pharmaceutical,
Belarus fertilizers, food
processing, IT and
power sector in
Belarus.
India seeks to invest in
Romania IT, telecom,
pharmaceutical,
agriculture.

206
 Current trade: $10 bio,
target: $20 bio by
2015. CEPA under
negotiation - India
wants to include the
Russia Eurasian Union into the
CEPA as well. India
looking for supply of
raw material while it
wants to invest in oil
and gas exploration.

Africa Current trade: $60 bio,

target: $90 bio in 2015.

Current trade: $50 bio,

US including services:
$100 bio.

Current trade: $25 bio,

deficit: $15 bio. India
exports refined petrol,
S Arabia rice and imports 27 MT
oil. S Arabia pledged to
supply 5 MT more to
make up for Iran
deficit.
India imports 17 MT
Iran from Iran and has
reduced the target to
15 MT in 2012-13.

207
 India imports 6.5 MT of
oil and 8.5 MT of gas.
Plans to increase gas
by 3 MT more. India
looking to invest in
Qatar infrastructure,
pharmaceuticals, IT,
petrochemical projects
while Qatar wants
DMIC, anchor investor
in PSUs, renewable
energy.
Current trade: $6 bio,
target: $12 bio by
Israel 2015. Israel wants to
sell its Mediterranean
gas to India.
Iraq Current trade: $10 bio,
all oil imports.
Current trade: $3 bio.
Egypt India has decided to go
ahead with Muslim
Brotherhood.

Current: $230 bio,

BRICS target: $500 bio by
2015.
Q. Write on Indo-ASEAN trade relations. (2011, II, 15)
Debate: Is the increase in exports black money coming back?
(a) Yes
1. Slowdown Argument: How can Indian exports grow at such a pace when US
and Europe are slowing down?

208
 2. Tax Heaven Argument: Indian exports to tax heavens like Bahamas have gone
up from $2 mm to $2 bio in past 2 years. Matching of Indian exports with
other countries' imports is no proof of validity.
(b) No
1. Slowdown Argument: The rise in exports is merely the base effect. If the
negative growth of 2009 had not happened, an export growth of 20% would
have led to exports of $345 bio in 2011-12 much above the target of $300
bio. Also diversification has enabled India overcome the US-Europe
slowdown. Such growth rates have been witnessed al over the world.
2. Tax Heaven Argument: Bahamas doesn't report all import numbers. WB
estimates its imports to be $12 bio against reported $2.8 bio. Anyways, Indian
exports match with the imports of other countries.
Debate: Implications of growing trade?
India's gross trade increased from 8% of GDP in 1951 to 20% in 2006 and 37% in
2004-05 to 53% in 2011-12. Is it good or bad?
(a) Good
1. Counter-Cyclical Buffer Argument: It can help cushion the impact of domestic
cycles. In times of slowdown, imports will fall whereas exports should remain
unchanged thereby help in cushioning the impact.
2. Global Coupling Argument: While global coupling argument can't be denied,
as the example of China's recovery from global financial crisis shows, (a)
capital sector linkages are more relevant , and (b) recoveries can be easier
from induced cycles if right set of policies are followed.
3. Free Trade Argument: More trade makes industries more competitive as well
as brings gains to the society.
(b) Bad
1. Counter-Cyclical Buffer Argument: The imports cushioning effect may not be
sizable because most of the imports may be used in export industries. In such
a case, they will remain rigid.
2. Global Coupling Argument: The growing trade makes economy more
dependent on external forces and may result in induced cycles. This is
specially so when most of the incremental growth is export led.
3. Free Trade Argument: More trade may lead to drastic destruction of
indigenous industries and unemployment in long run.
Capital Account
External Debt

209
 1. India's external debt is $335 bio which is ~20% of the GDP. ~75% of it is long
term, low interest debt. Debt service ratio is 4.2. Public debt is 25% of the
external debt. Commercial borrowings > NRI deposits > multilateral debt.
2. Policy followed is of borrowing long term, low interest from supra nationals,
keep all-in ceilings on ECBs and controlling end-use and NRI deposits.
3. India's external debt rose by nearly 13% to $390 billion in 2012-13, mainly due to rise in short-term trade
credit and external commercial borrowings (ECBs) in the back of high current account deficit. he high

current account deficit witnessed during 2012-13 and it's financing increasingly through debt flows
particularly by trade credit resulted in significant rise in India's external debt during 2012-13,
4. There has been sizeable rise in ECBs and rupee denominated Non-resident Indian deposits as well

External Commercial Borrowings

1. RBI specifies the all-in ceiling rate @ which corporates can borrow from
international markets. In November 2011, RBI enhanced this ceiling and also
made it mandatory for ECB proceeds raised for INR expenditure to be brought
back to India immediately.
2. ECB limits through automatic route for eligible companies was increased from
$500 mm to $750 mm.
3. FII limits in g-sec was increased from $10 bio to $ 15 bio and in corporate
bonds from $15 bio to $20 bio.
4. Power projects, airlines, toll roads, small housing projects can now raise
funding via ECB mode.
Foreign Direct Investment
Definition
1. It consists of net equity investment of foreigners in India in enterprises where
they express a lasting interest (usually through management influence) +
2. Net reinvestment of earnings and dividends +
3. Inter-corporate loans (parent lending to subsidiary).
Future FDI Reforms Needed
1. Enactment of a FDI promotion law.
2. Overhaul of FDI policy to move from broad emphasis to resolve sector
specific problems.
3. Urge states to cooperates.
4. Develop SEZs.
5. Make bank finance easily available.
Trends / Recent Reforms

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 1. India's share in global inbound FDI is increasing but still remains paltry @
<1%. Cumulative FDI (excluding remittances under RBI's NRI scheme) since
April 2000: $170 bio. FDI in 2011-12: $36 bio, $20 bio in 2010-11, $25 bio in
2009-10, $31 bio in 2008-09, $24 bio in 2007-08.
2. Source countries: Mauritius: 38%, Singapore: 10%, UK: 9%, Japan: 7%, US:
6%. (cumulative since 2000)
3. Destination sectors: Services: 19%, Telecom: 7%, Construction: 7%,
Computer software and hardware: 7%, Real estate: 7%. FDI has been
concentrated not in export sectors but in domestic consumption sector. If we
look at FI in 90s, share of services went up from 10% in first half to 28% in
second half. Now it is over 50%.
4. Destination states: Mumbai: 32%, NCR: 19%, Karnataka: 6%, TN: 5%,
Gujarat: 5%, AP: 4%. Region unknown: 25%.
5. FII: Cumulative since April 2000: $117 bio. FII in 2011-12: $17 bio, FII in 2010-
11: $29 bio, FII in 2009-10: $29 bio, FII in 2008-09: -$15 bio, FII in 2007-08:
$20 bio.
6. Outbound FDI was 60% of inbound FDI in 2011-12. Chief sectors are
manufacturing.
7. In commodities exchanges, FDI up to 26% and FII up to 23% was allowed but
through approval route. Government has made FII through automatic route
now.
8. To pay for capital goods imports, issuance of equity shares was allowed so
far. But the government has excluded the import of second hand capital
goods from this policy so as to encourage the use of clean and green
technologies.
Q. Compare the role of FDI and FII in India's economic development. Are FDIs
preferable to portfolio investments? Evaluate. (2011, II, 30)
Q. Examine the role of FDI in the Indian economy empirically. (2009, II, 20)
Debate: FII inflows: good or bad?
In 1990-91, India's Gross Capital Flows were 15% of GDP which became 54% of
GDP in 2010-11.
(a) Good
1. Efficiency Argument: They help in bringing international best practices into
domestic institutional and legal framework. To encourage FIIs, a country has
to mend its laws and institutions. They increase depth of the market, help
lower capital costs.

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 2. Law of Large Numbers Argument: Just like not all bank deposits may be
withdrawn @ the same time except for a bank run, not all FII flow will be
withdrawn @ the same time. A part of it is core.
3. Beggars can't be Choosers Argument
(b) Bad
1. Subramaniam (2007) shows that international experience suggests that
higher growths have not been associated with higher CADs. This means
dependence on foreign capital is not essential for growth. This can be
attributed to the fact that even successful developing countries have limited
absorptive capacity for foreign resources - either because their financial
markets are under developed or their economies are prone to over valuation
caused by rapid capital inflows.
2. A similar distinction can be drawn between equity and debt creating capital
inflows. While equity flows may be allowed, debt flows should be treated with
caution.
Debate: Rationale of FDI
(a) Good
1. Savings & Capital Gap: It helps to relax domestic savings gap. It provides
equity financing and additional capital.
2. Fx Gap
3. Technology Gap
4. Competition Gap
Q. Is India ready for full capital account convertibility? Assess. (2011, II, 30)
Debate: Is India ready for full convertibility?
1. In 1992 under the liberalized exchange rate management scheme
government allowed 60% of proceeds in current account to be converted @
market rate and 40% @ official rate. This was the dual exchange rate system.
2. In 1993, all trade in goods was made fully convertible and in 1994 full
convertibility was allowed for invisibles as well.
(a) Allow convertibility
1. RBI over the years has come up with many instruments to control the impact
of fx flows. One such is MSS launched in 2004 which sterilizes the fx
inflows.
(b) Don't allow convertibility

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 1. FII is speculative and brings little good for the country. It may lower down the
borrowing costs in short term but its like riding a tiger. It has to be managed
with a very delicate balance. Take the example of banks. Recourse to short
term funding may be cheaper than long term funding but still banks prefer
long term funding. Because short term funding can evaporate as Bear Sterns
and Lehman found out.
2. Higher FII means higher fx reserves have to be maintained. These fx reserves
can't be invested in India so effectively FII crowds out domestic savings and
is of little use.
3. So far we have been shielded from international crisis. Problems that plague
other banking sectors have evaded us. International experience also suggests
the same.
4. Fx flows opening will lead to sacrifice of exchange rate stability or monetary
policy independence. Asian experience post QE by fed. Sterilization costs can
be high as many Asian countries have found out.
5. Tarapore Committee said India needs CAD of <3% (currently 3.6%), inflation
of 5% (currently 8%) and fiscal deficit of 4% (currently 6%) to go for full
convertibility.
Maria Committee Recommendations on FDI in Pharmaceuticals Sector
1. In the pharmaceutical sector, 100% FDI was allowed through automatic route.
There were many takeovers of Indian companies by foreign companies since
2006 which raised eyebrows at health and commerce ministry which want the
FDI to go through government route.
2. But the Maria Committee has advised not to change the FDI regime and
instead make the Competition Commission of India more competent to
oversee these takeovers.
FDI in Retail
Context
1. Retail accounts for 14% of GDP and employs 9% of the workforce (next only
to agriculture). ~95% of it is unorganized retail. Share of organized retail in
other Asian countries is 20-25%.

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 2. It is argued that in other countries like China, Poland, Brazil organized retail is
20-25% and entire retailing sector accounts for 20-25% of the employment.
In India organized retail is low and retailing accounts for only 9% of the
employment. This means higher the organized retail, higher the employment
opportunities. This argument is flawed. It can also be the case that in other
countries, rest of the economic activities are less labor intensive and hence
the share of retail in employment is high. In India, other activities may be
more labor intensive. Also organized retail accounts for 5% of share in retail
yet employs only 1.25% of the people engaged in retailing. This clearly
indicates it is less labor intensive.
Features of the Proposal
1. A proposal has been accepted by the Cabinet to allow 51% FDI in multi brand
retail.
2. Such companies will have to invest a minimum of $100 mm out of which at
least 50% should go in back end infrastructure development like storage and
logistics.
3. They will be restricted to towns >1 mm population.
4. They will have to source 30% material from Small Enterprises (<$1 mm).
5. Retailers will have to get clearance from the Foreign Investment Promotion
Board and a license from the concerned state for every case.
Implications at WTO
1. GATT rules mandate that WTO member countries prescribe the same set of
rules to domestic and foreign companies when it comes to purchase, sale,
transport, distribution and taxation of goods.
2. Besides, TRIMS stipulates that foreign and local companies should face the
same rules on investment.
Rationale for Allowing FDI in Multi-Brand Retail
1. There are gross inefficiencies in current supply chain. The number of
intermediaries is high and investment in logistics and storage is minimal.
Though India produces 230 MT of fruits and vegetables, our total cold
storage capacity is just 25 MT. As a result there is lot of distress sale by
farmers and wastage.
2. It will help in modernizing agriculture and marketing in India by bringing new
management practices and technologies.
3. Though FDI in cold storage is 100% through automatic route, in the absence
of front end retailing, flows have been negligible so far.

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 4. Industry estimates suggest employment of one person per 350-400 sq. ft of
retail space, about 1.5 million jobs will be created in the front-end alone in the
next 5 years. Assuming that 10% extra people are required for the back-end,
the direct employment generated by the organized retail sector in India over
the coming 5 years will be close to 1.7 mm.
Rationale for enhancing FDI ceiling to 100% in single brand retail
1. In the last 5 years, under the 51% regime, FDI in this sector have been
negligible.
2. Globally, single brand retail follow a business model of 100% ownership.
FDI in Limited Liability Partnerships
1. The government has allowed FDI in LLPs in the open sectors i.e. sectors
where 100% FDI is already allowed through automatic route.
2. In case of LLPs however, the investor will have to take government approval
first.
3. Sectors like agriculture, plantation, media and real estate are not open to it.

Misc
Nuclear Reactor Types
PHWR
A pressurised heavy water reactor (PHWR) is a nuclear power reactor, commonly using
unenriched natural uranium as its fuel, that uses heavy water (deuterium oxide D2O) as
its coolant and moderator. The heavy water coolant is kept under pressure, allowing it to be heated to
higher temperatures without boiling, much as in a PWR. While heavy water is significantly more
expensive than ordinary light water, it yields greatly enhanced neutron economy, allowing the reactor to
operate without fuel enrichment facilities(mitigating the additional capital cost of the heavy water) a

Natural uranium consists of a mixture of various isotopes, primarily 238U and a much
smaller amount (about 0.72% by weight) of 235U. 238U can only be fissioned by
neutrons that are fairly energetic, about 1 MeV or above. No amount of 238U can be
made "critical", however, since it will tend to parasitically absorb more neutrons than
it releases by the fission process. 235U, on the other hand, can support a self-
sustained chain reaction, but due to the low natural abundance of 235U, natural
uranium cannot achieve criticality by itself.

215
The "trick" to making a working reactor is to slow some of the neutrons to the point where their
probability of causing nuclear fission in 235U increases to a level that permits a sustained chain reaction
in the uranium as a whole. This requires the use of a neutron moderator, which absorbs some of the
neutrons' kinetic energy, slowing them down to an energy comparable to the thermal energy of the
moderator nuclei themselves (leading to the terminology of "thermal neutrons" and "thermal reactors").
During this slowing-down process it is beneficial to physically separate the neutrons from the uranium,
since 238U nuclei have an enormous parasitic affinity for neutrons in this intermediate energy range (a
reaction known as "resonance" absorption). This is a fundamental reason for designing reactors with
discrete solid fuel separated by moderator, rather than employing a more homogeneous mixture of the
two materials.
Water makes an excellent moderator; the hydrogen atoms in the water molecules are very close in mass
to a single neutron, and the collisions thus have a very efficient momentum transfer, similar conceptually
to the collision of two billiard balls. However, in addition to being a good moderator, water is also fairly
effective at absorbing neutrons. Using water as a moderator will absorb enough neutrons that there will
be too few left over to react with the small amount of 235U in the fuel, again precluding criticality in
natural uranium. Instead, light water reactors first enhance the amount of 235U in the uranium,
producing enriched uranium, which generally contains between 3% and 5% 235U by weight (the waste
from this process is known as depleted uranium, consisting primarily of 238U). In this enriched form
there is enough 235U to react with the water-moderated neutrons to maintain criticality

One complication of this approach is the requirement to build a uranium

enrichment facility, which are generally expensive to build and operate. They also
present a nuclear proliferation concern; the same systems used to enrich the 235U
can also be used to produce much more "pure" weapons-grade material (90% or
more 235U), suitable for producing a nuclear bomb. This is not a trivial exercise by
any means, but feasible enough that enrichment facilities present a significant
nuclear proliferation risk.

An alternative solution to the problem is to use a moderator that does not absorb neutrons as readily as
water. In this case potentially all of the neutrons being released can be moderated and used in reactions
with the 235U, in which case there is enough 235U in natural uranium to sustain criticality. One such
moderator is heavy water, or deuterium-oxide.

VVER (Vodo-Vodyanoi Energetichesky Reactor)

Reactor fuel rods are fully immersed in water kept at 15 MPa of pressure so that it does not boil at
normal (220 to over 300 °C) operating temperatures. Water in the reactor serves both as a coolant and a

216
moderator which is an important safety feature. Should coolant circulation fail the neutron moderation
effect of the water diminishes, reducing reaction intensity and compensating for loss of cooling, a
condition known as negative void coefficient. Later versions of the reactors are encased in massive steel
pressure shells. Fuel is low enriched (ca. 2.4–4.4% 235U) uranium dioxide (UO2) or equivalent pressed

into pellets and assembled into fuel rods.

Primary Cooling Circuit

As stated above, water in the primary circuit is kept under constant pressure to avoid
boiling. Since the water transfers all the heat from the core and is irradiated, integrity
of this circuit is most crucial. In the circuit four subsystems can be distinguished:

1. Reactor: Water flows through fuel rod assemblies and is heated by the nuclear
chain reaction.
2. Volume compensator: To keep the water under constant but controlled
pressure, the volume compensator regulates pressure employing self-
regulation of saturated steam-water interface and by means of electrical
heating and relief valves.
3. Steam Generator: In the steam generator, heat from primary coolant water is
used to boil water in the secondary circuit.
4. Pump: The pump ensures proper circulation of the water through the circuit.
To ensure safety primary components are redundant.

Secondary Cooling Circuit

The secondary circuit also consists of different subsystems:

1. Steam Generator: Secondary water is boiled taking heat from the primary
circuit. Before entering the turbine remaining water is separated from the steam
so that the steam is dry.
2. Turbine: The expanding steam drives a turbine, which connects to an electrical
generator. The turbine is split into high and low pressure sections. To prevent
condensation (Water droplets at high speed damage the turbine blades) steam
is reheated between these sections. Reactors of the VVER-1000 type deliver 1
GW of electrical power.
3. Condenser: The steam is cooled and allowed to condense, shedding waste
heat into a cooling circuit.

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 5. Pump: The circulation pumps are each driven by their own small steam turbine.
To increase efficiency of the process, steam from the turbine is taken to reheat coolant before the
deaerator and the steam generator. Water in this circuit is not supposed to be radioactive.

Passive heat removal system

A passive heat removal system has been added to the existing active systems in the AES-92
version of the VVER-1000 used for the Koodankulam Nuclear Power Plant in India. This has been
retained for the newer VVER-1200 and future designs. The system is based on a cooling system
and water tanks built on top of the containment dome.[13]The passive systems all safety functions
for 24 hours, and core safety for 72 hours.[4]

EPR
The reactor can use 5% enriched uranium oxide fuel, reprocessed uranium fuel and 100% mixed
uranium plutonium oxide fuel.

The EPR design has several active and passive protection measures against
accidents:

• Four independent emergency cooling systems, providing the required cooling

of the decay heat that continues for 1 to 3 years after the reactor's initial
shutdown (i.e. 300% redundancy)
• Leaktight containment around the reactor
• An extra container and cooling area if a molten core manages to escape the
reactor (see containment building)
• Two-layer concrete wall with total thickness 2.6 meters, designed to withstand
impact by aeroplanes and internal overpressure

CAG Jurisdiction

The CAG’s role should be viewed in the context of our constitutional scheme under which the executive is

accountable to Parliament. CAG is an essential instrument for enforcing the accountability mechanism as the

CAG’s reports on government’s stewardship of public finance are required to be placed in Parliament and state

legislatures under Article 151 of the Constitution. To enable him to discharge this responsibility, without fear or

favour, he has been given an independent status under Article 148 analogous to that of a Supreme Court judge.

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In India we have adopted the British system of parliamentary democracy. Britain had to undergo centuries of

struggle to secure Parliament’s supremacy over the executive (monarchy), dating back to Magna Carta (1215)

and Bill of Rights (1688) and measures such as enactment of the Exchequer and the Audit Act of 1866, which

created an independent office of CAG, who would audit all government departments and make a report to

Parliament to be examined by its Public Accounts Committee (PAC). In order to strengthen parliamentary control,

the UK Audit Act was amended in 1983 and the CAG made an Officer of the House of Commons and legal

backing given to him for conducting economy, efficiency and effectiveness audit.During the 1990s, all the

advanced Commonwealth countries such as Australia and New Zealand amended their audit acts and made

provision similar to that of the UK, and made the CAG an officer of Parliament with powers to conduct an

efficiency audit of government operations. The US Government Accountability Office since its inception has been

recognised as a legislative branch agency and reports on a wide variety of subjects from federal fiscal issues and

debt control to aviation security, gun control and counterterrorism matters. In continental countries such as

France, Germany, Italy, Austria and Belgium, there is a system of audit courts, which while performing functions

of expenditure control on behalf of Parliament, enjoy wide powers and act like judicial bodies. The French Cour

des Comptes is assisted by the prosecutor general responsible for providing legal advice, and has power to

recover improperly expended public funds or cash deficits from defaulting officers.

Most democratic countries have a statutory provision of securing Parliament’s consent for appointment of the

head of the supreme audit institution (SAI). Not only Commonwealth countries such as UK, Canada and New

Zealand, but countries with such diverse political systems as the US, Germany, Japan, South Korea, South Africa

and Thailand have this requirement and the appointment of head of SAI is ratified by their legislature. This is in

recognition of the fact that SAIs have to do very delicate work, while commenting on deeds and misdeeds of the

government, a task which they can perform effectively only when they are given not only independence from the

executive but parliamentary backing as well.

Gadgil Formula
1. Special Category states were given preference. Their needs should first be met
out of the total pool of Central assistance.

2. The remaining balance of the Central assistance should be distributed among the
remaining States on the basis of the following criteria:

• 60 per cent on the basis of population;

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 • 10 per cent on the basis of per capita State income, assistance going only to
States whose per capita incomes are below the national average;
• 10 per cent on the basis of spill-over of major continuing irrigation and power
projects;
• 10 per cent for special problems of individual States.

Reasoning behind the given weights:

i. Population

In a country like India population acts as an apt measure to represent the

requirements of the people because a major portion of the population lives below the
poverty line. This proposition was also supported by the empirical data which
showed a negative correlation between population of states and their per capita
income.

ii. Tax effort

This is an important factor to measure the potential of the state as far as its own
resources are concerned. This relative measure incentivizes the states to undertake
measures to increase their own potential through various tax measures.

iii. State per capita income

A problem regarding unequal development amongst the states was faced in the
earlier plans because of larger states with their large plans were able to get a larger
share of resources from the centre. This led to increased inequalities amongst the
states. Therefore, to make the distribution fairer to the smaller states with a lesser
than national per capita average income were given extra share in the resources.

iv. Special Problems

This factor was introduced so as to provide enough resources to states to overcome

problems like droughts, famines etc. In the absence of this share, such states would
have suffered huge losses because of these problems and the implementation of
their plans could have been hindered. This was a discretionary element in the

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v. Irrigation and power projects

These projects have been in the process of implementation before the fourth plan was formulated. They
needed extra resources for the successful completion of these projects.

Modified Gadgil Formula

The formula was modified on the eve of the formulation of the Sixth Plan. The 10 percent indicator for
ongoing power and irrigation projects was dropped and the share of per capita income was increased to
20 percent, to be distributed to those states whose per capita incomes were below the national average.

Gadgil-Mukerjee formula

Criteria
Weight (%)
Population 55
Per Capita Income 25
Fiscal Management 5
Special Problems 15
Total 100

PDS (Khera and Dreze)

1. TN has a universal PDS where every household is entitled to 20 kg rice per
month. Other states like AP, HP, Kerala, Chattisgarh, Rajasthan, Odisha too
are moving towards a universal PDS. Universal PDS not only avoids costly
exclusion errors but also improves functioning since there is more public
pressure to perform. The performance pressure has only increased following
the growing divergence between the PDS prices and market prices.

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 2. Between 204-05 and 2009-10, the quantity of wheat and rice purchased per
household from PDS has gone up by 50%. The proportion of households
purchasing at least some rice and wheat has gone up from 27% in 2004-05
to 45% in 2009-10. The PDS subsidy is equivalent to Rs. 250 p.m. which is
significant for poor households.
3. PDS overall has reduced the Tendulkar poverty gap by 18% in 2009-10 but
the performance of TN is 50% reduction AP + Chattisgarh (40% each), HP
and Kerala (35% each). Rajasthan has moved towards a universal PDS only
after 2009-10. In states which cling to TPDS (UP, Bengal, MP, Jharkhand,
Bihar), PDS's impact has only been < 15%.
4. PDS also has stabilizing impact on poor by providing credible security,
improves nutritional outcomes (specially when other commodities are
included in PDS_.

Medium and Small Enterprises

Classification
1. Micro enterprises: Investment < Rs. 25 lac in manufacturing and < Rs. 10 lac
in services.
2. Small enterprises: Investment < Rs. 5 cr in manufacturing and < Rs. 2 cr in
services.
3. Medium enterprises: Investment < Rs. 10 cr in manufacturing and < Rs. 5 cr in
services.
SSI Development: 1947 - 1991
Policies Before 1991
1. Organizational structure: A cottage industries board was setup in 1947. This
ws split into 3 boards in 1st FYP vis handloom, handicraft and KVIB. Then SSI
board, coir board and silk board came up. State Director of Industries is the
nodal agency for SSIs. It operates through regional and district officers. Apart
from it Small Industries Development Organization (SIDO) and a National
Small Industries Corporation (NSIC) were setup for machinery procurement
etc.
2. Neglect in FYPs: SSIs have never received any significant share in FYPs. Their
share was 2.4% of plan outlay in 1s FYP and declined to 1% in 9th FYP.

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 3. Reservation policy: It is ad hoc and inconsistent and thus has served little
purpose. The lengthening of list is not really inclusion of more products but
just going into details. The purpose of allowing large industries captive
production of items reserved for MSEs defeats the purpose of reservation.
Currently there are only 20 items reserved for MSEs and even there large
industries can produce for > 50% exports and captive consumption.
4. Financial assistance: Schemes launched in mid 80s to provide cheap capital.
SIDBI was setup in 1989 to refinance, discount, lend directly, provide
factoring services etc.
Weakness of Government Policies
1. Government schemes are complex and time consuming. Even for a simple
assistance, MSE owners have to resort to expert opinion.
2. Large industries and MNCs are exploiting loopholes to indirectly operate in
MSE sector. They are also exploiting loopholes to obtain fiscal benefits.
3. The core issue is labor laws and policy of hire and fire is needed.
Trends
1. Overall contribution: They produce 9% of GDP (3% rural MSMEs, 6% urban
MSMEs) down from 11% in 1990-91, 60% of manufactured output, 40% of
exports (30% in 1990-91). The number of SSIs continue to grow. Currently
there are 1.5 mm registered units employing 90 mm people (4th census
2006-07 year compared to 65 mm in 3rd census 2001-02 year). Number of
unregistered units is estimated to be 25 mm. Roughly 60% are employed in
handlooms, coir and village industries while 40% in industrial units.
2. Sectoral breakup: Overall food products units employ the maximum (14%)
followed by non metallic mineral products (11%) and metal products (10%). In
rural areas non metallic mineral products generates highest (23%) followed
by food products (22%). In urban areas food products and metal products
have almost equal shares (23%). They often act as ancillaries to main plants.
3. Export breakup: Garments, leather, gems and jewelry are leading export
sectors.
4. Social contribution: They employ women, SC/STs. In NE more than 50% of
the population in some states is engaged in SSI sector. Overall out of ~ 30
mm MSMEs, 42% are owned by OBCs, 8% by SCs, 6% by STs.
5. In 1951, GoI reserved thousands of items for MSMEs. This list had to be
pruned down after liberalization and specially because of WTO
commitments.

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 6. APPL has gone up from Rs. 50,000 to Rs. 150,000 at constant prices in past 2
decades. This coupled with better technology has pushed MSMEs up in the
value chain.
Globalization and SSIs
1. Growth of public sector has declined considerably since 1991 and public
sector had been a major buyer of the SSI products.
2. Increased FDI creates not only threats but also opportunities as it depends on
outsourcing and ancillary industries.
3. Slowing growth: Growth of SSIs in 90s was lower than 80s in terms of
employment as well as output. But it could also be a result of overall industrial
slowdown. Share of SSIs today is 9% of GDP while it was 11% in 1990-91 and
9% in 1980-81.
4. SSIs don't have access to infrastructure. But after liberalization large
industries have access. So SSIs lagging.
Debate 1 Are SSIs worth it?
(a) Yes
1. Employment Argument: They employ more labor per unit of capital. Rough
numbers are in SSI, one person employed for Rs. 1.5 lac of capital vs 1 person
for Rs. 5.5 lac of capital in organized sector.
2. Capital Intensity Argument: Though capital productivity is low, SSIs use
domestic savings which are small and unlikely to be channelized into big
industries anyways. However, this argument loses its appeal in light of
increasing penetration of financial sector and ongoing financial inclusion
projects.
3. Latent Resource Argument: There may exist some creative / alternate skills in
labor which may express themselves only by the means of SSIs and would be
lost in large scale industries.
4. Forex Earner Argument: They are big forex earners and in a developing
country must be respected specially given our CAD.
5. Tax Revenue Argument: It is a myth that SSIs don't pay taxes. They are a
major source of tax revenue for the government.
6. Regional dispersion argument.
(b) No
1. Employment Argument: Though they employ more labor per unit of capital,
this labor is also less productive. But it is difficult to sustain this argument in
face of the chronic unemployment problem facing our country.

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 2. Capital Intensity Argument: Capital is scarce in our country, so it must go in
areas where its productivity is higher. But SSIs have higher capital
productivity so this argument is weakened.
Q. What is your perception of the role of small scale and cottage industries in the
present context of the Indian economy? (2009, II, 20)
Issues before MSMEs
1. Surviving in an economic slowdown as banks are not willing to lend to them.
2. Keeping pace with technological upgrades specially in industries where rate
of obsolescence is high.
3. Changing demand patterns.
Credit
The Fourth Census of MSME sector revealed that only 5.18% of the units (both registered and
unregistered) had availed of finance through institutional sources. While 2.05% had finance from
non-institutional sources, the majority of units i.e. 92.77%, had no finance or depended on self
finance.
17. This suggests that despite best efforts, the credit flow to MSMEs from the institutional sources is not
commensurate with the economic activity undertaken by the MSMEs. Banks, on their part, lend a
reasonable share of their credit to MSEs. As at the end of March 2012, the total outstanding credit
provided by all Scheduled Commercial Banks (SCBs) to the micro and small sector (MSE) stood at
Rs.5,242 billion as against Rs.4,785 billion in March 2011 and Rs. 3,623 billion in March 2010. Credit to
MSEs has, as a percentage of the Adjusted Net Bank Credit of Public Sector Banks, increased from
9.5% in 2005 to 14.8% in 2011.
Credit information about a small enterprise is not as easily available, as it is for a larger firm, and it is not
cost effective for the lender to collect information on all small enterprises. Nor have the small
enterprises adequate collaterals to offer. The lenders, therefore, either refrain from lending or load the
cost of information asymmetry into the lending rates. Another important factor is that risk assessment of
smaller enterprises requires a separate set of tool as against the conventional tools, the absence of
which is likely to dissuade banks from such lending. Further, smaller enterprises, in many instances,
revolve around a single entrepreneur- key man- and lack good succession planning which discourages
creditors to lend to such enterprises.

20. With an objective of ensuring provision of banking services in all parts of the country, banks were
advised to draw up a roadmap to provide banking services through a banking outlet in every unbanked
village having a population of over 2,000 by March 2012. The Reserve Bank advised banks that such
banking services need not necessarily be extended through a brick and mortar branch but could be
provided also through Business Correspondents with the aid of any of the various forms of Information
and Communication Technology (ICT) - based models.

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21. Further, based on the recommendations of the Working Group (Chairman: Shri V.K. Sharma,
Executive Director, RBI) constituted by the Reserve Bank of India to review the Credit Guarantee
Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the limit
for collateral free loans to the MSEs has been increased from the level of Rs. 5 lakh to Rs.10 lakh and
has been made mandatory for banks

22. Timely detection of sickness is critical for any enterprise as any delay in this regard impinges on the
revival prospects of sick, but potentially viable, units. In order to speed up the process for identification of
a unit as sick, a proposal for modifying the extant definition of sickness, in line with the
recommendations of the Working Group on Rehabilitation of sick SMEs set up by Reserve Bank of India,
is under consideration of the Government of India and the Reserve Bank of India.

23. All Scheduled Commercial Banks have also been advised to review and put in place MSE Loan
policy, Restructuring / rehabilitation policy and Non-discretionary One Time Settlement Scheme for
recovery of non-performing loans, duly approved by their Board of Directors.

24. To address the complaints received from various industry Associations/Chambers that banks are not
acknowledging their loan applications, all banks have been mandated to acknowledge all loan
applications, submitted manually or online, by their MSME borrowers and ensure that a running serial
number is recorded on the application form as well as on the acknowledgement receipt.

29. Credit ratings provide lenders with the information about borrowers’ creditworthiness and enable
them to take more efficient credit decisions. Borrowers with high credit ratings benefit by way of
favourable borrowing terms such as lower collateral requirements, reduced interest rates, simplified
lending norms and faster access to credit by banks and financial institutions. Reliable credit ratings,
thus, facilitate availability of credit more easily and at fair cost. Ratings can also serve as a powerful
self-improvement tool for SMEs and help them strengthen and fine-tune their operations. It is, however,
generally observed that a vast population of MSMEs still remains unrated. With a view to encourage
entities to get themselves rated, part reimbursement of rating fees is also being provided through
National Small Industries Corporation (NSIC).
Access to Capital
Equity:
30. Equity forms an important constituent of MSME’s financing avenues given the peculiarity of their
business model. Most MSMEs, particularly the knowledge based enterprises, which, when starting off,
have negative cash flows and no collateral and, therefore, find it difficult to access debt capital or bank
financing. Venture /Risk capital is often a more appropriate financing instrument for high-growth-potential

226
involving innovations and new technologies) to access alternative sources of capital like angel funds/risk
capital needs to be enhanced considerably to encourage and develop entrepreneurship. In the Union
Budget 2012-13 the Finance Minister has announced to set up a Rs.50 billion India Opportunities
Venture Fund with SIDBI to enhance the availability of equity to the MSME sector.

Factoring Services

Case of Handicrafts Industry

Condition
1. Handicrafts exports halved from $3.5 bio in 2007 by 2010. The projections in
2007 were for $6 bio by 2010. This sector is the second largest employer (7
mm) in rural India after agriculture. Most of the artisans are socially
marginalized sections.
2. Indian handicrafts were neglected till 1980s after which efforts were made to
increase exports. It paid off and exports steadily rose till 2007.
3. 85% of the artisans are concentrated in UP, Rajasthan, Gujarat and NE states.
Reasons
1. Lack of market diversification: Major export markets are still traditional
developed markets where growth has faltered. Handicraft industry was not
able to diversify its market base like others and hence has suffered.
Handicraft products count as a luxury product there.
2. Low productivity / Lack of capital formation: Despite lack of cultural diversity,
China's handicraft exports are more than double to that of India and is
expected to grow exponentially while India's stagnate. This is attributed to
high productivity of the industry in China.
3. Inefficient supply chain: The ultimate handicraft producer gets only minimal
of his product's worth and bulk of the rewards are creamed by intermediaries
who have no incentive to invest in the business due to the industry structure.
Government Initiatives - Post 1991
New Economic Policy, 1991
1. Institutional reforms: To provide equity participation up to 24% by other
undertakings into MSEs in order to provide capital access. To introduce
limited liability legislations for MSEs.
2. Financial reforms: To provide timely and easy loans through single window
clearance. To introduce factoring services to resolve the problem of late
payments.
3. Marketing reforms: To form cooperatives for market promotion.

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 4. Reservation reforms: To give priority to MSEs in government procurement. To
accord priority to MSEs in allocation of raw materials.
5. Technology reforms: To encourage quality certification and technology
upgrade.
SSI Policy, 2003
1. Focus remained on reservations. However, such protection was not
applicable for SEZ, EPZ or EOU.
2. Limits were upgraded for SSI protection.
Nair Committee Report on MSMEs, 2009
Public Procurement Policy for MSEs
1. Each department / PSU to earmark 20% of its total purchases from MSEs in
next 3 years. 4% will be reserved for SC / ST
MSEs. Each department will have to put the
target and achievement in its annual report and non conforming departments
will have to give reasons for their failure.
2. In any tender, the participating MSEs quoting within L1 + 15% range will be giv
en an option to match L1 and supply 20% of the order.
Budget 2012-13 Proposals
1. Loan waiver of $750 mm to textile workers.
2. Setting up of mega clusters for hand looms and power looms.
3. Setting up SME exchanges to provide capital market access to SMEs.
Credit Guarantee Trust Fund for MSEs (CGTMSE)
1. CGTMSE is owned by the Government of India and Small Industries
Development Bank of India (SIDBI).
2. In 10 years, CGTMSE has approved an amount of $8 bio in 2012. In the past 5
years, the amount of guarantees approved has been impressive. It provides
guarantees without collateral for up to Rs. 1 cr.
Credit Linked Capital Subsidy Scheme
1. This assistance is for MSEs to adopt new technologies. It is a part of PMEGP.
2. A capital subsidy of 15% of the plant value is provided on loans up to Rs. 1 cr
will be given for technology upgrade.
Cluster Development Programme
1. In the cluster approach, soft interventions (technical assistance, market
development), hard interventions (creation of tangible assets) and
infrastructure development will be undertaken in the clusters.

228
 2. In each cluster, common facility centers will be setup which will consists of
expensive tools which would be rented to the SSIs. But this is a gateway to
corruption. Better is to increase the SSI limit.
Marketing Assistance Scheme
1. Its aim is to enhance the marketing linkages of MSME to provide them a
platform for interaction with the buyers and to resolve their grievances.
2. The focus is on organizing national and international fairs.
Rajiv Gandhi Udyami Mitra Yojana (RGUMY)
1. Its aim is to provide support to people going through the government skill
development programmes.
2. A toll-free number is in operation to provide information and support.
12th Plan - The Game Changer Approach
This is in line with MSME Development Act, 2006 and National Manufacturing
Competitiveness Programme, 2009.
1. Finance: Operationalisation of SME exchanges for enabling access to equity
finance.
2. Technology: Scheme for acquisition and up-gradation of technology.
3. Infrastructure: Developing clusters and 100 Tool Rooms.
4. Marketing: Procurement policy for goods/services and B2B international
portal.
5. Skill Development: Revamped Skill Development &
Capacity Building Programme and upgrading PMEGP.
6. Institutional Structure: Strengthening of Institutions like
KVI and making regulatory framework simple.
7. An Umbrella Scheme would be setup covering individual schemes in each
subheading.
Scheme for Integrated Textile Parks
1. The government has sanctioned 21 new textiles parks for greenfield
investment under the Scheme for Integrated Textiles Parks (SITP).
2. The SITP seeks greenfield investments in the textiles parks with the objective
of setting up infrastructure for textiles industry on a PPP basis.
3. If they are started under a SEZ the provisions of that SEZ will apply else the
ITP can apply for being a SEZ.
4. The state governments will be responsible for land acquisition, water, utility
supplies etc.
International Initiatives
1. MoUs have been signed with Egypt, Botswana, Korea, Mozambique and
Indonesia in last 3 years.

229
Prime Minister Employment Generation Programme
1. It is a credit linked subsidy programme. General beneficiaries in urban areas
get 15% of project cost as margin money subsidy and 25% in rural areas.
Special category get 25% and 35% respectively.
Jute Industry
Pre-Independence
Nature & Character
1. It was localized in Bengal.
2. It was an export oriented industry. Earlier raw jute was exported and in 20th
century jute products exported to US and Germany. It was developed to serve
foreign interests.
3. India had jute handlooms, but due to colonialization of economy, they were
killed and raw jute was exported instead. In 19th late century, mills came up.
Due to rising cost of labor, £ lost their comparative advantage and mills came
up in Bengal.
4. Till WW1, bulk of the capital was £ capital which was invested through Indian
Jute Mills Association which also controlled the output to maintain high prices
and also paid low prices to the farmers. From 1920s the Indianization began
first by buying stocks and lending money, many marwaris got themselves
elected to the boards of these european managing agencies and next some
Indians like Birla themselves opened jute mills. But the industry remained a
monopoly of a few houses only.
Post-Independence
Scenario @ Independence
1. Jute producing areas went to Bangladesh, mills remained in India.
2. Most of the mills were with outdated equipment, old management style and
labor issues.
3. The state policy encouraged jute cultivation and soon area lost to Bangladesh
was made for.
Current Problems
1. Stagnation in area under cultivation. Has declined from 1961s. The production
of raw jute has remained stagnant in last 20 years as well. Jute has to be
imported from Bangladesh, Philippines.
2. Outdated technology, excess capacity, labor issues and outdated
management style. Jute industry in India is sick.
3. Challenge from synthetic products.
National Jute Policy, 2005
1. To raise jute yield per hectare.

230
 2. To increase real wages of jute workers and protect real income of jute
growers by MSPs.
Jute Technological Mission, 2006
1. To transfer technology from laboratory to land and from land to mill.
2. To develop forward marketing linkages.
3. To modernize plant and machinery.
Cotton Industry
Pre-Independence
Nature & Character
1. Regional concentration in Bombay and Ahemdabad. Raw material proximity,
industrial finance, port for import of machinery.
2. It started as a result of accumulation of capital by merchant classes indulged
in overseas trade. € managing agencies were employed. They arranged for
technologies and finances.
3. WW1 changed the picture as the import of £ goods declined and a protective
duty was also imposed. Swadesi also helped.
4. Labor remained a challenge. The importance of jobbers and support of
workers to him made his position strong. Workers were strong union. £
government's factory acts and trade union acts also increased problems.
Post-Independence
Situation @ Independence
1. It got a favorable state policy. It got customs duty protection, restrictions
were removed on internal businesses.
Current Condition
1. Mills account for 10% of the production (down from 80% @ independence),
power looms do 80% and hand looms do 10%.
2. The sector contributes 11% of the industrial production, 14% to the
manufacturing sector, 4% to the GDP, 12% to the exports and employs 18%
of the industrial sector employment.
3. Maharastra (40%) an Gujarat (35%) are the main cotton textiles producing
states.
Current Problems
1. Preferential policies towards looms and handicrafts lead to disadvantage for
mills.
2. Lack of technological upgradation, infrastructure, linkages.
3. Labor laws are issue.

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 4. Cotton price volatility: highest in past 150 years. As a result out of 287
companies listed on BSE, 122 have shown losses in 2011-12. Long staple
cotton has to be imported from Egypt. Textiles sector operates in low single
digit margins and any fluctuation in cotton prices hits them hard.
5. Erratic power supply.
Debt Restructuring Package, 2012
1. Total outstanding debt to textiles sector is $35 bio (~4% of bank's credit to
industry) out of which $7 bio will be restructured. Also a 2 year moratorium
on loan repayment is proposed.
2. Losses of cotton mills were enlarged by the volatility in cotton prices which
hit record highs in March - April 2011 before crashing as the output from
cotton producer countries including India and Pakistan rose to a record.
3. As a result of this restructuring exercise, mills will get much needed liquidity.
They would be able to increase their capacity utilization from 70-80% to 90-
95%. This would mean an increase in demand for cotton. Currently they are
buying 22 mm bales per annum (as against a production of 35 million bales
and yet we banned cotton exports!).

Woolen Industry
Current Situation
1. Punjab > Maharastra > UP.
2. India imports wool from Australia.
Silk Industry
Current Situation
1. India ranks behind China in silk production. AP > Assam > Bihar.
2. In textiles, Karnataka is the leading producer followed by W Bengal, AP, TN.

Energy
232
Central Electricity Regulatory Commission
Challenges / Shortages

1. To sustain a growth rate of 9%, we need to increase electricity potential to 5-6x

of current 200 GW and total energy by 3-4x by 2030. Current shortages are 15
GW (~ 10% of production). By 2030 country will need to import nearly 2/3 of its
energy requirements. India's net imports of energy have gone up from 129
mtoe (million tonnes oil equivalent) to 227 mtoe now and is expected to be 366
mtoe by 2017. Our current energy elasticity is 0.8 and we expect it to be ~0.72
in 12th FYP.
2. Electricity: Per capita consumption of 1200 units by 2017 entails consumption
of 1400 bio units overall. This would need installation of 75 GW of capacity in
12th Plan costing $275 bio ($125 bio in generation, $35 bio in transmission,
$60 bio in distribution, $50 bio others).
3. Oil: 250 MT by end of 12th Plan vs current imports (for domestic use) of 105
MT. Domestic crude production is 40 MT.
4. Gas: 250 mscmd vs current shortage of 50 mscmd. Current production: 120
mscmd and imports 50 mscmd. India currently imports ~ 20% of its gas
requirements which is expected go up to 30% by 2016-17 (demand: 475
mscmd).
5. Coal: 250 MT shortage by 2017 vs current 125 MT. Current demand is 650 MT
vs production of 530 MT (CIL produced 435 MT). By 2017, demand will be 975
MT (725 MT needed by power sector, 70 MT of coking coal) vs domestic supply
of 725 MT. CIL aims to produce 615 MT by 2016-17.
Current Situation
1. Total installed capacity: 200 GW. Coal: 55%, Oil & Gas: 10%. Hydro: 20%,
other renewable: 12%. Nuclear: 2.5%.
2. Plant Load Factor for Indian plants is ~72%. International standards are 90%.
3. Gas consumption by power plants is 60 mscmd (they need 80 mscmd for 90%
plant load factor). Out of this 60, only 3 mscmd gas is on long term contracts.
4. Indian coal prices are 25 - 30% of the world prices.
5. It is estimated the renewable energy (wind + small hydel + biomass) = 90 GW
by 2032. Wind is 49 GW, small hydel is 15 GW, biomass is 25 GW.

233
 7. Per capita consumption of electricity in India is ~30% of global average and
stood @ 800 units (580 kgoe) in 2010. World average is 1800 kgoe. National
Power Policy, 2005 had a target of 1000 units by 2012 which wouldn't be
achieved. Fresh target is 1250 units by 2017.
Oil & Gas

234
Kirit Parikh Committee
report
The government had
appointed an Expert Group
on ‘Viable and Sustainable
System of Pricing of
Petroleum Products’. This
Committee, chaired by Shri
Kirit S. Parikh, recently
submitted its report. Key
observations include:

§ The reduced cash surplus

of upstream public sector oil
companies restricts their
ability for exploration of
domestic fields and
acquisition of overseas
assets. Keeping oil firms
viable is in the interest of
self-sufficiency in domestic
oil production.

§ Price control, subsidies

and taxes can introduce
distortions which may not
be desirable. For example:

The higher excise duty on

petrol compared to diesel
encourages use of diesel
cars

Lower diesel prices lessen

the incentive to shift freight

235
times less diesel for every
tonne km of freight

§Control on pricing also

restricts competition.
Several oil marketing
companies, viz. Reliance
Industries, Essar Oil and
Shell India, that were not
part of the subsidy sharing
arrangement, closed down
their retail marketing
businesses across the
country.

§Petrol is largely an item of

final consumption. Its price,
therefore, has a very small
impact on inflation due to
forward linkages.

§Trucks accounted for 37%

and buses 12% of total
diesel consumption in 2008-
09. Agriculture’s share was
12%.

§The cost of diesel in

agriculture can be accounted
for by the Government
while fixing the Minimum
Support Price (MSP) for
major crops and hence an
increase should not
adversely affect farmers.

236
Drawbacks in NELP
1. Its profit sharing mechanism is based on investment multiplier i.e. the operator
is allowed to recover a multiple of his investment. This induces the operators to
show front loaded and inflated investment figures and a loss to the exchequer.
2. Out of 111 discoveries so far (40 oil and 71 gas) production has started only in
6 and India is producing 11,300 bpd of oil and 29 mscmd of gas.
Gas Pricing in India
1. There are broadly two pricing regimes for gas in the country-gas priced under
Administered Pricing Mechanism and non-APM/free market gas. This could
also be broadly divided into two categories, namely, imported Liquefied Natural
Gas and domestically produced gas.
2. While the price of LNG imported under term contracts is governed by the Sale
& Purchase Agreement between the LNG seller and the buyer, the spot
cargoes are purchased on mutually agreeable commercial terms.
3. As regards domestic gas, its pricing is governed in terms of the Production
Sharing Contract signed between the Government & the Contractor.

Government Initiatives

237
238
OIL n GAS POLICY

The government has

decided to craft a
"perfect" exploration
licensing regime which
will unify and simplify
the policies for oil and
gas, coal bed methane
and shale, and end the
current practice of
"cost recovery" which
is at the heart of the oil
ministry's raging
dispute with Reliance
IndustriesBSE 0.20 %.

Companies that are

awarded exploration
blocks will have to
share revenue from the
first day of production,
instead of the current
system of recovering
expenditure before
sharing profits with the
government.

articularly cost-
recovery, which had
led to allegations that
companies overstated
costs.

239
Rangarajan Formula
One price would be
derived from the
volume-weighted net-
back price to
producers at the
exporting country well-
head for Indian imports
for the trailing 12
months.

The other would be the

volume-weighted price
of US’s Henry Hub,
UK's NBP and Japan
Custom Cleared (on
net-back basis, since it
is an importer) prices
for the trailing 12
months.

1. NELP was launched in 1997-98 and has generated $15 bio of investment so
far (in 9 rounds). ~90 blocks have been discovered but production has started
only in 3.
2. Government has come up with gas pricing reforms.
3. An ambitious pipeline development program is in place where by 2014
additional 10,000 km of pipelines would be laid (current length 10,000 km) and
by 2017 30,000 km of pipelines with a capacity of 875 mscmd will be in place.
4. Policies for shale gas and coal bed methane gas regulations have been
prepared. CBM gas production is 4 mscmd currently.

240
Coal Bed Methane
1. It is a form of natural gas extracted from coal beds. United States, Canada, Australia have rich
deposits. It is the methane adsorbed (when a solid holds molecules of gas as a thin film on its
outer surface) into the coal. It is distinct from a typical sandstone or other conventional gas
reservoir, as it is stored within the pores of a coal block via adsorption. It is in a near-liquid state,
lining the inside of pores within the coal (called the matrix). The open fractures in the coal (called
the cleats) can also contain free gas or can be saturated with water.
2. Unlike much natural gas from conventional reservoirs, it contains very little heavier
hydrocarbons. It also contains some CO2. It is called 'sweet gas' because of its lack of hydrogen
sulfide. It presents a serious safety risk in underground coal mining operations.
3. Adsorption capacity: It is defined as the volume of gas adsorbed per unit mass of coal usually
expressed in SCF (standard cubic feet, the volume at standard pressure and temperature
conditions) gas / ton of coal. The capacity to adsorb depends on the rank and quality of coal.
4. Extraction: Coal bed methane wells often produce at lower gas rates than conventional
reservoirs, typically peaking at near 8,500 m3 per day, and can have large initial costs. The
production profiles of CBM wells are typically characterized by a "negative decline" in which the
gas production rate initially increases as the water is pumped off and gas begins to desorb and
flow. The methane adsorbed into the solid coal matrix is released when the coal seam is
depressurized. To economically retrieve reserves of methane, wells are drilled into the coal seam,
the seam is dewatered, then the methane is extracted from the seam, compressed and piped to
market. The goal is to decrease the water pressure by pumping water from the well. The
decrease in pressure allows methane to desorb from the coal and flow as a gas up the well to the
surface.
RIl KG Basin Dispute
1. According to the amended initial field development plan (IDP), RIL was to dig
and start production in 22 wells by 1 April 2011 (62 mscmd) and 31 wells by 1
April 2012 (80 mscmd). However till date it has dug only 18 wells and even
among those only 12 are under operation (rest 6 are water logged). Production
is down to 35 mscmd.
Move Away from Petro-Dollars
1. Iran and Russia settle their trade in Rouble.
2. India and Iran propose to do that in Rupee.
3. China and Qatar intend to do that in CNY now.
The Ethanol Binding Programme
1. In 2008, 5% ethanol mixing in petrol and diesel was made compulsory. In the
National Policy on Biofuels, 2008, the government envisaged blending of
biofuels in petrol and diesel up to 20% by 2017.

241
 2. However, till date the oil marketing companies have achieved only 2% ethanol
blending. The reasons for the failure are - (a) Ethanol is prepared from sugar
cane and there is shortage of sugarcane in India. Even though production is
350 MT, it is estimated that for such a blending programme needed production
is 550 MT. (b) The administered prices of ethanol in the blending programme
are a hindrance as it fetches higher price in liquor industry. (c) Government
efforts and policies are half hearted. Recently, Prime Minister's Economic
Advisory Council has questioned the very rationale behind mandatory
blending.
Recent Decision by CCEA on Ethanol Binding
1. The 5% mandatory ethanol blending as already decided in the past, should be
implemented across the country.
2. Procurement price of ethanol will be decided henceforth between OMCs and
suppliers of ethanol.
3. In case of any shortfall in domestic supply, the OMCs and chemical companies
are free to import ethanol.
Jatropha
1. The initial hopes of the crop being resilient, needing less maintenance and
resources and thus being profitable and pro poor turned out to be unfounded. It
is not possible to raise a good crop on wasteland and in unirrigated conditions.
The available varieties are low yielders and there is little post harvest
management as well. Only a small fraction of the planned area has come under
acreage so far. Moreover even official estimates indicate that to achieve a 20%
blending jatropha acreage needs to be equivalent to wheat.

Shale Gas

• Recommendations--
◦ The government should also consider the other important
recommendation of the Rangarajan Committee — of moving to a revenue-
sharing arrangement with gas producers. That will eliminate future
disputes over cost recovery, even as it discourages gold-plating of project
costs
• What is Gold plating of the projects??
At present, on the basis of the Rangarajan formula, the price for natural gas in India
for the quarter April-June 2013 comes to $6.83 per mmBtu. As per the Rangarajan

242
gas imports and also the weighted average of the price at international hubs. The
underlying principle is that the Indian producer should get a similar price what the
gas producers elsewhere are getting

Shale Gas
For
1. Shale gas has gained widespread popularity in recent years
following technological advances that make it commercially viable.
2. The most visible example is the US where shale gas production has shot up
from 0.3 trillion cubic feet in 2000 to 9.6 trillion cubic feet in 2012.
3. Cost--
a. Reduced---> gas prices to around a fourth of previous levels and even
cut wholesale electricity prices by more than half
4. Availability
a. The world's fourth largest consumer of oil and petroleum products, India
imports as much as three fourths of its oil requirements and around a
third of its gas needs.
b. Large-scale shale oil and gas production would cut trade imbalances and
the current account deficit, now causing the rupee to plummet. It would
also reduce our dependence on Middle Eastern oil.
5. Initial estimates are encouraging.
a. Technically recoverable shale oil resources are 3,800 million barrels
while that of shale gas is 96 trillion cubic feet.
b. This is about two-third of India's current oil reserves and more than double
its estimated natural gas reserves.
6. Answer to critics
a. Though critics raise questions about the environmental
consequences of the fracking technology used for producing shale gas,
apprehensions are unwarranted given that shale gas use will bring down
consumption of coal, which is the worst polluter.
b. Moreover, improvements in fracking technology over the years will also
reduce its environmental impact in the long run.
COUNTERVIEW
Environmental cost will be excessive

243
 1. There is indeed more gas stuck in shale rock blocks in India than other forms
of natural gas.
2. Some issues have been flagged by the environment ministry recently and
cannot be ignored.
3. Polluting process (groundwater)
a. Shale gas is extracted by pumping high quantities of toxic chemicals,
including the deadly hydrochloric acid and carcinogens, water and
sand into dense shale rock formations to release gas that is then
pumped to the surface. This is called fracking — or causing fractures
in the rock formations.
b. It is a process that pollutes nearby environments when the poisonous mix
of chemicals and carcinogens seeps into the groundwater. For a country
notorious for the weak implementation of environmental laws, fracking can
be extremely harmful.
4. Heavy use of water
a. A second problem is the heavy use of water in fracking and discharge
of wastewater.
b. India can ill afford to use high levels of precious water that millions across
the country thirst for.
c. Clearly there are inescapable social and environmental costs which call
into question the wisdom of exploiting shale gas.
5. Soil subsidence
a. Drilling for shale gas has been blamed for soil subsidence in Britain and is
banned in France and the Netherlands.
b. Regulation and restriction on production are not good enough arguments
because the human and environmental costs will be much too high to
proceed with exploiting shale rock. There's no evidence that India has
comprehensively explored and exploited its natural gas reserves from
conventional fields. Why don't we try this first instead of going in for fancy
and environmentally harmful technology?
1. Shale Gas is the gas trapped in the sedimentary shale rock formations. In
India, its potential sites are in Cambay (Gujarat), Assam, KG Basin, Gondwana
(in Central India), Cauveri and Indo Gangetic basins.
2. India has signed a MoU with US for shale gas exploration and development.
3. It will also be conducting first ever bids for shale gas exploration and
development.
Issues in Shale Gas Exploration

244
 1. It needs not only requires higher number of wells but also needs larger amount
of land per well. Hence total land requirement is very high.
2. Uncertainties in extraction technology and hard nature of shale beds means
only a portion of assessed reserves may eventually be recoverable.
3. It needs much more water.
4. Issue of water table contamination is there.
5. Issue of earthquakes is there.

Nuclear
Progress at NSG
India's Nuclear Liability Bill

Right to recourse

245
Under Section 17, the Act specifies three circumstances when the operator may seek recourse. Under Section
17(a), recourse may be sought when a contract in writing specifies such a right. Section 17(b) secures the right
to
recourse when a nuclear incident occurs due to a latent or patent defect in the product supplied. Section 17(c)
allows the right to recourse when a nuclear incident has resulted from a deliberate action calculated to cause
nuclear damage. The Act under Section 46 also allows claims under other laws, including torts. The Rules only
relate to the right to recourse when specifically provided under a contract, i.e. under Section 17(a).

1. India decided to amend its Civilian Liabilities for Nuclear Damage Act (popularly
called Nuclear Liability Bill). The modifications also
cap the liability of the operator at $300 mm for unlimited period.
2. The operator can claim the min (damages paid by him, value of the supplier's
contract) from the supplier.
3. The recourse period is max (period specified in the contract, period of initial
license which is 5 years).
4. The operator can claim only what is directly paid by him as compensation to th
e victims whereas the cost of nuclear damage is much more.
Kundankulam Units 3-4
1. The intergovernmental deal between India and Russia (2008) said no
retroactive application of domestic law would apply to the agreement — that
was interpreted to mean that the liability law would not apply to Kudankulam 1
& 2 power plants. India absorbed the liability leaving Russia free. The Russian
government has said the same deal should apply to KK-3 and 4 reactors.
2. The clause in the Kundankulam agreement was put there by India because of
bad history. In the 1970s, the Pokhran tests triggered a round of sanctions
against India by some countries. In 1978, the Carter government passed the
NNPA, which unilaterally abrogated the Tarapur deal, causing a historic low in
Indo-US ties. From then, the Indian stand was that international agreements
should triumph over retroactive application of domestic law. This was
maintained by New Delhi through the negotiations on the nuclear deal.
3. Therefore, when Russia insisted on the extension of the 2008 agreement on
newer Kundankulam reactors, the department of atomic energy agreed. But
this, as the PM has observed, is tantamount to giving Russia a special status,
because it is believed to go against the principle of “universal application of
law”. It could open the government to litigation from domestic suppliers who
don’t enjoy such a waiver.
International Efforts

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 1. India proposed to US to create a joint group to address any further concerns of
US.
2. France and Australia have come out in India's support as a result and Japan
too is coming.
3. Australia - 3rd largest U exporter in the world - has also come out in support of
exporting U to India.
4. Russia has offered to host the ENR technology on its soil and give the shares
to India.
Fresh Obstacles
1. Many customs unions are emerging in some of the member states like the
Eurasian Union, GCC Union etc. So there is a question that if one of the union
member is also a member of NSG then do all the export restrictions
automatically extend to the non NSG members of the union as well?
2. In 1990s Russia was cooperating with India in its civilian nuclear programme.
In 1998 when US challenged this in NSG, Russia claimed that it was doing so
under an agreement signed in 80s (when sanctions were not in place) and this
is called grandfathering. Now China is doing the same in case of Pakistan.
India's Nuclear Agreements
1. France agreed to supply reactors, technology (excluding EnR) etc.
2. Russia will build reactors, transfer technology, supply fuel to these reactors etc.
3. Mongolia will supply Uranium to India.
4. Namibia will supply Uranium and encourage Indian investments in exploration
sector in Namibia.
5. Argentina will do scientific, technical and commercial cooperation.
6. Canada will give technology and fuel
7. UK will give technology and equipment.
8. Kazhakstan will sell fuel, give joint mining rights and construct and operate
reactors.
9. S Korea will participate in reactor construction programme in India.
10. Japan was the bottleneck since the container chamber is manufactured by
Japan only. Now Japan will also likely cooperate. Post Fukishama incident,
there were announcements in Germany, Japan, Switzerland and Taiwan
regarding gradual phase out of nuclear power.
Coal
Some Reasons for Poor Performance

247
1. Of the 208 captive coal blocks allotted a production potential of 657 MT per
annum, the estimated annual production by the end of the Eleventh Plan is only
37 MT. One reason is the inadequate incentives with the States to increase
coal production.
2. The captive allocation policy provides that the new mines can't be located close
to the CIL mines. This leads to allocations in very remote areas with no
infrastructure and hence mining can't begin.
3. In many cases joint allocations of mines have been made which lead to
conflicts in terms of grade requirement etc.
4. For unexplored blocks developers require prospecting license which takes 1
year or so. Then they need forestry license which takes another 1 - 1.5 years.
Then for the development of mines an environmental clearance is needed for
which no time period is specified and it takes 2 years. If the clearances are not
obtained in time, the right holder risks forfeiture.
5. Land acquisition delays happen due to inadequate R&R policies. Also the
approval for land acquisition itself takes 1 - 1.5 years.
6. Environmental factors: ‘Go-No Go’ policy (which completely bans coal mining in
‘No Go’ areas), rehabilitation and resettlement issues and also problems in land
acquisition have played their part. In the Go - No Go policy as large
coal bearing areas were suddenly declared ‘No Go’ areas, it severely limited
the ability to expand domestic production of coal. Comprehensive
Environmental Pollution Index (CEPI) norms also prohibit mining in areas with
a high pollution index, even if the pollution was due to other industrial
sources. Underground coal mining has the potential of greatly reducing the
disturbance caused to the environment. However, current output levels from
underground mining at 60 MT only and these mines are predominantly old.
There has been very little fresh investment in underground mining.

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Coal Reforms

Coal Mines Auction

Policy
The methodology
approved by the
Government provides
for production linked
payment on rupee per
tonne basis, plus a
basic upfront payment
of 10% of the intrinsic
value of the coal block.
The intrinsic value of
coal block will be
calculated on the basis
of Net Present Value
(NPV) of the block
arrived at through
Discounted Cash Flow
(DCF) method. To
benchmark the selling
price of coal, the
international FoB price
from the public indices
like Argus/Platts will be
used by adjusting it by
15% to provide for
inland transport cost
which would give the
mine mouth price. In
order to avoid short
term volatility the
average sale price will
be calculated by taking
prices during the last 5

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sector, it has been
decided to provide for
90% discount on the
intrinsic value for tariff
based bidding. This
methodology will help
in rationalizing the
power tariff. In order to
ensure firm
commitment, there
would be an agreement
between Ministry and
the bidder to perform
agreed minimum work
programmes at all
stages. There would be
development stage
obligations in terms of
milestones to be
achieved such as
getting mining lease,
obtaining
environment/forest
clearances etc. The
bidder will have to give
performance
guarantee during the
developmental stage.
The successful bidder
will get 2 years for
exploration (for
regionally upgraded
blocks) and 5 years for
development of coal
blocks.

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Renewable Energy
Renewable Energy Efficiency Proposal
1. The government has come out with Green Rating Integrated Habitat
Assessment (GRIHA) ratings system and Energy Conservation Building Code
(ECBC) to promote energy efficient buildings.
2. While the new GRIHA and ECBC systems will be promoted in private
constructions, it is proposed that it be made mandatory for all PSU and
Government buildings.
3. The drawback however is it remains voluntary for now and is applicable only for
large commercial buildings.
Compact Fluorescent Lamp

1. Compared to general-service incandescent lamps giving the same amount of visible light but use
one-fifth to one-third energy, and last longer.
2. But they too use mercury which complicates their disposal.
Solar Energy
1. India auctioned the rights to produce 350 MW of solar
energy. The lowest bid was from a French company at $147 per Mw-hour (Rs.
7.5 per unit) which is ~30% lower than global average. Coal energy costs are
$78 and wind energy costs are $77. But some experts doubt if they can
produce at such a rate as they must have assumed that the technology will
improve in near future.
2. India plans to have 20GW of solar energy by 2022 against current 1.3 GW
under Jawahar Lal Nehru Solar Mission.
3. India's biggest solar park in Charanka in Gujarat has been commissioned with
a capacity of 200 MW and investment of $500 mm. Gujarat government has
guaranteed an offtake price of Rs. 15 per unit for first 12 years.
Hydro Energy
The Siang Project in Arunachal

251
 1. Its a $20 bio project to span over 10 years. It will produce 10 GW electricity and
would be country's largest.
2. Brahmaputra is called Tsang-po in Tibet, Siang as it enters India and
Brahmaputra later on.
3. India is building it because China is also building a project on the river in Tibet
in Metog.
4. According to the doctrine of prior appropriation, rights of first user are
respected and in its absence rights of upper riparian states.
Wind Energy
1. India has 50 GW wind energy potential though some recent studies put a
higher figure.
Electricity
1. Cost of power generation in 2011-12 was as follows: Hydro: Rs. 2.11, Thermal:
Rs. 3.05, Nuclear: Rs 2.49.
2. New thermal plants of capacity 75 GW and hydro plants of capacity 15 GW are
in pipeline. In 11th Plan, 54 GW capacity (40 GW thermal and 10 GW other
renewable was added out of which 7 GW was wind energy) was added
compared to 21 GW in 10th Plan.
3. Target for 12th Plan is 75 GW out of which renewable will be 30 GW (15 GW of
wind, 10 GW of solar, 3 GW of bio mass, 2 GW of small hydro). This will take
the share of renewable energy from current 12% to 15% by 2020. But out of
the 75 GW, 17 GW has been shelved due to lack of coal and 15 GW is running
behind the schedule and is unlikely to be completed in 12th FYP.

4. It mandatory for a specified percentage of total electricity in the country to be

generated through renewable power while nationally tradable renewable
energy credits have been introduced in the form of renewable energy
certificates.

Grid Failure
(a) 12 Point Plan
1. Adequate defense plans and protection system shall be put in place including
islanding scheme at state level. Plans should also include restoration
procedures. A contingency load shedding protocol will be worked out.
2. States to prepare long term, medium term and short term plans to procure
power.
3. Independent 3rd party audit and proper training of personnel by states.

252
 4. All discoms to adopt good operating practices and random checks will be
carried out.
(b) Reasons
1. Dropping PLFs. NTPC's PLF dropped from 92% to 85% in 2011-12 mainly due
to lack of coal and gas.
2. Discoms have no money to buy electricity (they suffer a loss on every unit
sold). But they are allowed to defer payments on the overdrawn
power. Moreover if they project a demand and fail to lift the said power, they
have to pay a penalty. So they prefer to submit low demand projections (for
which they have to pay upfront) and instead overdraw.
Power Sector Reforms

253
Amid rising losses, the
union power ministry
has formulated a
model state electricity
distribution
management
responsibility Bill,
2013, on the lines of
the Fiscal
Responsibility and
Budget Management
(FRBM) Act.

The Bill aims to provide

for responsibilities of
the state government
to ensure a financial
and operational turn
around and long term
sustainability of the
state-owned
distribution licensee.
This is to enable
adequate electricity
supply to consumers
through financial
restructuring.

The model Bill

envisages the state
government to submit
the electricity
distribution

254
measures taken in
relation to distribution,
in each financial year
during the budget
session to the
legislature. A slew of
measures would be in
the areas of long term
planning, consumer
protection, regulatory
compliance, corporate
governance and
financial restructuring.

Further, the state

government would lay
down key performance
indicators with regard
to payment of dues by
government
departments and
institutions,
distribution loss cut
trajectory, provisioning
of subsidy, energy
accounting and
auditing, improvement
in collection efficiency,
recovery of past
receivables.

Moreover, the Bill

ensures 100 per cent
metering and
consumer indexing to
be achieved within

255
Discom Reforms
1. Government refused to bail out ~$38 bio of distribution companies losses
(accumulated since 2003 and which have been financed via PSU banks and
states' subsidies). It also refused to coerce banks into lending them. Instead it
wants discoms to raise electricity prices and state governments to support
them.
2. Discoms also can't issue SLR bonds as this would set a bad example and
undermine the financial stability of the entire system.
3. Under the new package, discoms will have to mandatorily revise their tariffs
every 9 months. They will have to issue bonds for half of the accumulated
losses and government will guarantee the other half.
4. A National Electricity Fund has been setup to give interest subsidies (currently
$1.6 bio) to discoms.
5. Discoms can be improved by including modern technology and management
systems or by privatization or hiring a management company (system called
franchising).
6. Open Access Policy (where consumers are free to chose from competing
discoms) should be followed.
7. A rating system has been introduced for all discoms which is based on their
current performance as well as improvements so as to incentivize them to
perform better. Factors directly affecting commercial viability like AT&C losses,
cost coverage ratio, subsidy received etc. carry 60% weight. Compliance with
regulatory practices is given 15% weight. Modernization of technology,
management system, better audits, purchase of renewable energy etc. are
given 25% weight. Similarly negative points are earned for certain negative
traits.
Other Reforms
1. Institutional reforms: Currently the power producer has to bear the fuel price
risk as fuel costs are not included in the force majure clause. The government
has proposed to let producers pass on the fuel price rise to end consumers.
2. Supply side reforms: The coal being e-auctioned off by
CIL will be diverted to power projects that are coming up on assurances of fuel
from CIL only. This is expected to free up 45 mm tonnes.

256
 4. Capital reforms: ECB mode allowed and also withholding tax reduced from
20% to 5% on ECB interest payments.
5. Renewable energy: Discoms will have to sign minimum renewable purchase
obligations. Renewable energy certificates will start trading through power
exchanges. National solar mission envisages 20 GW of solar energy by 2020.
6. Technological reforms: Super critical and ultra critical thermal power plants to
form 60% of additional thermal capacity in 12th FYP and 100% in 13th FYP.
7. Restructured accelerated power development and reforms programme: Its an
IT and automated systems based structure applicable in urban settlements with
> 30,000 populations. Part A includes IT applications for energy auditing like
mapping of all assets, consumer grievance redressal, IT applications for meter
reading, billing, MIS and a call center. Part B includes activities to strengthen
regular distribution. It includes renovation of assets, electronic meters etc. On
successful completion it will reduce AT&C losses to 15%.
Issue of Environmental Clearances
1. Total capacity added in 11th FYP was 54 GW. 17 plants of capacity 15 GW are
stuck for want of environmental clearance for their captive coal blocks. 3 plants
of capacity 4 GW are stuck for want of environmental clearance for themselves.
27 plants of capacity 16.5 GW have got clearance from Committee for
Environmental Appraisal but have not got approval from the ministry so far.
2. The ministry noted that the 11th Five Year Plan
had projected a target of 50,000mw of additional thermal power capacity
and the total projection of power requirement for the 12th Five Year
Plan is 100,000mw. In comparison, in the past five years, up to 2011, the
environment ministry has granted environmental clearance to 210,000mw
— 60,000mw more than has been proposed until 2017.
Renewable Energy Certificates
Critical Power Plants
1. Concept of critical stage: @ 100º C, 1 bar (atmosphere pressure) water begins
to boil and its latent heat is 2200 kJ per kg. @ 100 bars, boiling takes place @
310º C and latent heat is 1300 kJ per kg. @ 220.6 bar and 374º C, water
directly turns into steam and latent heat is zero. This is called the critical
pressure and critical temperature i.e. the pressure and temperature at which
the latent heat of vaporization is zero.

257
 2. Sub critical, super critical and ultra super critical plants: Conventional power
plants operate @ 170 bar. They are subcritical power plants. Supercritical
power plants operate @ 230 - 265 bars. Ultra super critical plants operate @
300 bars and 625º C. Higher pressure and temperature leads to higher
efficiency.
Integrated Energy Policy, 2009
1. Neutral overall taxation on energy sources with only intra-energy sector tax
variations to comply with environmental goals.
2. Promoting energy efficiency via technology and competitive markets and
market determined prices. Setup a national energy fund for R&D.
3. Autonomy and accountability to energy PSUs.
4. India will pursue all available fuel options and energy types and seek to acquire
resources abroad.
Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY)
Scope and Achievements
1. An electrified village is a village where least 10% households and all important
public places are electrified. It aimed to electrify all villages and rural
households by 2012. Estimated outlay is $10 bio as against initial estimates of
$3 bio in 2005.
2. The scheme involves infrastructure construction and free connections to BPL
households and connection on demand for APL households.
3. Electrified villages are now 91% of total against 75% at the beginning of the
scheme (in 2005). Electrified households are 75% against 44% in
2005. It has created a massive rural electric infrastructure which can be levered
upon in future. Also an overwhelming majority of the households electrified are
BPL households.
Limitations
1. Inflexible approach: A top down approach and one size fits all was adopted.
2. Lack of interest from states: All states were expected to submit their plans
within 6 months but the first plans didn't arrive by 2008 and even now not all
plans are in.
3. Lack of sufficient preparation: As is evident from the fact that cost estimates
have gone up by more than 3x since the launch and still we are nowhere close
to total electrification.

258
 4. Poor quality of electricity delivery: When it started out it was stated that rural
households will be provided electricity at par with the urban households and
sufficient electricity for sustaining economic activities will be provided. This has
already been watered down to 6-8 hours (while reality is 2 hours) electricity per
day and "indirectly" aiding economic activities. Load provided is only 50 watt
against standard 250 watt.
5. Improper monitoring: Lacks social auditing like MGNREGS.
Arun Maria Committee Report on Power Equipment Import
Recommendations
1. Specifying standards including environmental for the power equipment to be
used (a proxy for non tariff barrier).
2. At present power equipment attract a customs duty of 5% (if < 1000 MW
beyond which it is free). The proposed structure is a basic duty of 5%, CVD of
12%, special additional duty of 4%.
Pros and Cons
1. In 12th FYP total funds needed in power sector are ~$230 bio. But banks are
already too exposed to the sector and are not willing to lend more. So ECB
becomes the only viable route to fund such projects. But imposition of duty will
hamper imports and thus loans from EXIM banks.
2. The domestic equipment manufacturing industry has been unable to meet the
demand in a time bound fashion. So restricting imports will be harmful.
3. But Chinese equipment are energy inefficient and require more maintenance.
Moreover Indian industry has ramped up its production capacity. Current
capacity is 20 GW p.a. as against a demand of 17 GW while additional projects
are coming up and in next 2 years it will be 40 GW. Chinese manufacturers
enjoy state subsidy as well.
4. Power equipment imports have been rising @ 28% p.a. in last 5 years and
were $12 bio in 2010-11.
Reactions
1. GE has protested against it as it will make its equipment dearer by 20% and if
EU FTA is signed, EU companies will get duty free access.
Fly Ash Utilization
1. Fly ash is classified into two types according to the type of coal used.
Anthracite and bituminous coal produces fly ash classified as class F. Class C
fly ash is produced by burning lignite or sub-bituminous coal. Class C fly ash
has self-cementing properties.

259
 2. Fly ash contains many elements and hence is useful in fertilizers. Class C can
be used in cement (it contains silica and calcium), bricks and ceramics. Fly ash
particles are almost totally spherical in shape, allowing them to flow and blend
freely in mixtures. This property make fly ash a desirable for concrete.
3. Fly ash accumulates in lungs and acts as slow poison. It is deposited on the
alveolar walls where the metals could be transferred to the blood. It contains
heavy metals and hence even wet disposal can't prevent soil pollution.
Flu Gas Desulfurization Policy
1. FGD is a technology to remove SO2 from thermal plant discharges. The most
commonly used method is wet scrubbing (SO2 is an acidic gas so the exhaust
gases are passed through a slurry of limestone or another alkali and SO2
condenses as a sulphate), spray dry (making it pass through a substance
which has the property of absorbing SO2), wet sulfuric acid process (recovering
commercial quality H2SO4 from it), SNOX desulfurization (removing SO2, NOx,
RPSM. It first removes the RPSM, then reduced NOx to N2, then oxidizes and
condenses SO2 into H2SO4).
2. Indian coal has 0.3 - 0.5% of sulphur content only and so far no FGD
technology was used. But with growth in imports (>9.5% sulphur content in
imported coal), FGD treatment will be made a part of environmental clearance.
Units with capacity > 500 MW and stations with overall capacity > 1.5 GW will
have to provide space for installation of FGD in future if required.

Health

260
Statistics

1. Birth Rate: 2.2, Death Rate: 0.6, Natural Growth Rate: 1.6. Infant Mortality: 47,
MMR: 212 per 100k, total fertility rate 2.6 (expected to decline to 2.3 by 2015).
Institutional deliveries increased from 55% in 2004-05 to 75% in 2009-10.
2. Infant mortality: It is number of deaths < 1 year age per 1000 live births.
Pneumonia is the largest cause of such deaths.

- Immunisation cover is far from being universal:-

Full immunisation in children has improved from 54.5 % in 2005 to 61 % in 2009 during the 11thPlan.
Additions to the Universal Immunization Program include Hepatitis B, Japanese Encephalitis (JE)
vaccine in endemic districts, and Pentavalent vaccine, which is a combination vaccine against
Diphtheria, Pertussis, Tetanus, Hepatitis B and Haemophilus influenza B. There has been no reported
case of polio during 2011.

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However, Immunisation cover is far from universal as envisioned in the 11thPlan, and remains
particularly low in UP (41 %), MP (43 %), Bihar (49 %), Rajasthan (54 %), Gujarat (57 %) and
Chhattisgarh (57 %), Assam (59 %) and Jharkhand (60 %).

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Government Initiatives

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