Issues and priorities
1.60 The current year is the first year of the
Tenth Five Year Plan (2002-07), which envisages an average annual growth rate of 8
percent. While the growth performance in recent years has been lower than this target,
international evidence, as well as India's own experience, demonstrate that the target is
indeed feasible. Malaysia, Republic of Korea, and Thailand, among other East Asian
countries, sustained annual growth rates at levels equal to, or higher than what India is
seeking to achieve in the Tenth Plan, for several years, before the outbreak of the East
Asian crisis. The People's Republic of China, a large country like India in terms of both
area and population, has been one of the best performers among the major economies of the
world during the 1980s and 1990s, and has been maintaining high growth (7 percent plus)
despite the recent slowdown in global economic activity. Furthermore, the acceleration in
growth in these countries from fairly modest initial levels took place rapidly, almost in
the manner of a jump-start.
1.61 The experience of India in terms of
growth acceleration is also similar to that of countries in East Asia and China. The
decadal average annual growth rate of the Indian economy, after fluctuating around 3½
percent for the decade of the 1950s, 1960s and 1970s, took a quantum leap to 5.65 percent
in the decade of the 1980s (Figure 1.3). Similarly,
after hitting a low of 1.3 percent in 1991-92 in the aftermath of the balance of payments
crisis, the annual rate of growth rapidly accelerated to around 7½ percent during 1994-95
to 1996-97 (Figure 1.4).
1.62 The drivers of change and rapid growth
acceleration have to be technology and competition, together with benchmarking to the best
international practices. India is now taking advantage of all three factors. Technology is
getting upgraded rapidly and competition in the market place has become fierce. The IT
revolution, and the vibrant IT industry in the country, have been critical factors in
making information available about state of the art technology and in bridging the
technological divide in some sectors. With quantitative restrictions on imports a thing of
the past, customs duties progressively coming down, and foreign investment - both
direct and portfolio - liberalized, integration of India into the global economy is also
progressing. Buoyant export performance, a surplus in the current account, and the strong
balance of payments position demonstrate the success of the country in this integration
process.
1.63 There is an intimate and virtuous
interaction among the drivers of change mentioned earlier. This is best illustrated by the
consumer goods, automobiles and telecommunications industries in the country. Previously
under quantitative restrictions, consumer goods can now be imported freely upon payment of
customs duty. While some foreign consumer products have appeared in shops, particularly in
up-market segments, their presence is limited. However, there has been a remarkable
improvement in the quality of domestic consumer products, with convergence towards the
best international practices.
1.64 The automobile sector, previously under a
strict licensing regime, has been a direct beneficiary of competition and technology in
the new liberal regime. Not only has automobile output grown at double digit compound
rates, but the sector has become a sizeable exporter. Major international auto-companies
now have operations in India, and are increasingly using the country as a platform for
export-oriented production. There is also a strong set of upstream firms, producing
ancillaries for, and providing design consultancy to the automobile industry. The
telecommunications sector provides another illustration of a virtuous interaction between
technology and competition. While mobile telephony is rapidly raising teledensity, price
competition between two technologies, namely Global System for Mobile (GSM) and Code
Division Multiple Access (CDMA), has yielded price benefits to the consumer.
1.65 It is vital that this virtuous
interaction among technology, competition, and benchmarking to the best international
practices is extended to agriculture. While the spectacular growth in production of
cereals has been instrumental in ensuring the country's food security, there is a need to
accelerate the trend towards growing diversification in agriculture.
1.66 The principal focus in the past five
decades was to maintain foodgrains growth abreast of population growth. India has been
successful in this regard. All the facets of agriculture policy so far have been guided
for meeting shortages as it was considered risky for a country of India's size to depend
on imports for meeting critical shortages in essential commodities like foodgrains and
sugar. However, there remain vital areas, which in the process have remained rather
neglected. India's advantage lies in owning the asset of the largest arable land area next
only to U.S.A., and ranking first in irrigated area in the world. Most importantly, the
country is characterised by a variety of agro-climatic regions that enables production of
all possible kinds of tropical, semi-tropical and temperate agriculture products. The
focus, therefore, has to shift towards improving productivity in horticultural products
that encompass a variety of fruits and vegetables, which would have a global market if
only these products are properly graded, processed, packaged and transported under fast
and modern transit systems. Value addition in horticulture, floriculture, and sericulture,
as well as in food processing can yield rich dividends to farmers and expand the scope for
quality employment. Whereas success stories have been reported in competing in the global
market for export of flowers and fruits from Maharashtra, Andhra Pradesh, and even Uttar
Pradesh, the vast potential for exports of value added horticultural products can be
realised only when there is appropriate infrastructure specific to processed agri-product
exports available in the country. There are many ports which do not have mechanical
loading facilties for fast moving products. India currently produces 145 million tonnes of
fruits and vegetables, of which less than 2 percent follow the processing route thus
depriving Indian producers of the benefits of value addition, and access to global
markets.
1.67 What is needed in addition is not only
improved seed technology and modern irrigation systems, but also processing industries
specific for various agriculture products. Unlike cereals and oilseeds, fruits and
vegetables are perishable. Cold storage is essential for their preservation. There is some
acceleration noticed in expanding cold storages in the current year. But irregular and
poor quality of power supply has been acting as a serious barrier to growth in cold
storages. The key to value addition in agriculture, and consequent income and employment
growth in rural areas, lies in building up the required infrastructure. Public-private
partnership can play a vital role in promoting this infrastructure. The earlier emphasis
on raising irrigation potential has to be renewed with greater vigour, especially through
watershed development. Access to water - potable drinking water, and ordinary water for
irrigation - is an absolute necessity and should constitute an integral part of the
strategy for rural infrastructure development.
1.68 Water will increasingly emerge as a
scarce resource. The vulnerability of Indian agriculture to monsoon failures has focused
renewed attention on how best to utilise this scarce resource. It is also time to rethink
whether the country can afford the practice of irrigation through field flooding, which is
basically wasteful, and evaluate more economic methods of irrigation. The Accelerated
Irrigation Benefits Programme (AIBP), aiming to help states in establishing irrigation
facilities through Central Loan Assistance (CLA), has assured full central assistance to
approved major and medium irrigation projects being completed within a year, under its
fast track programme from February 1, 2002. A new initiative, `Hariyali', intending to
strengthen the technical capabilities of panchayati raj institutions (PRIs) for
implementing the existing watershed development programmes like Integrated Wasteland
Development Programme (IWDP), and Drought Prone Area Programme (DPAP) — has been
launched on January 27, 2003. What is important, however, is a mechanism for more
efficient cost recovery to not only ensure adequate funds for operation and maintenance,
but also to promote a sense of user participation and water conservation.
1.69 The flow of institutional credit to
agriculture has witnessed a sharp increase of 21 percent in 2001-02 compared with 14
percent in 2000-01. This seems to have had a positive impact on capital formation in
agriculture in 2001-02. Under the Kisan Credit Card (KCC) scheme, more than Rs 64,000
crore has been sanctioned till September 2002. The scheme intends to cover all eligible
farmers by March 31, 2004, and is also extending personal insurance cover (for accidental
death, permanent disability etc.) to its beneficiaries. The National Agricultural
Insurance Scheme (NAIS), which extends to all food crops, had covered more than 20 million
farmers till rabi 2001-02. Implementation of NAIS will soon be taken over by the
Agriculture Insurance Company of India Ltd., which is now awaiting registration with the
Insurance Regulatory and Development Authority (IRDA). This new corporation, set up with
an authorised capital of Rs 1,500 crore by the General Insurance Corporation (GIC),
NABARD, and four public sector general insurance companies, also aims to cover other
rural/agricultural risks in addition to crop insurance. There is a strong case for
utilizing the services of self-help groups and other micro-credit institutions and, with
proper regulatory systems, enlisting the support of local persons with knowledge of local
conditions to efficiently lend money from banks to farmers, while reducing transactions
costs and minimizing the risk of default. Participation of private insurers in
agricultural insurance will also provide the benefits of a competitive market.
1.70 Despite the vast variety of agro-
products produced, the country's annual agro-exports are valued at less than US $ 6
billion with marine products alone accounting for 20 percent. Exploiting the country's
untapped export potential in agriculture requires removal of regulatory inefficiencies
like prohibitive food standards laid down by the Prevention of Food Adulteration Act, the
Food Products Order, the Meat Products Order and the Bureau of Indian Standards. During
the current year, the number of commodities under the Essential Commodities Act have been
reduced to eighteen. The restrictions on movement and stocking of six agricultural
products have also been removed with the objective of establishing a common market in the
country. Futures trading in agriculture has been extended to 42 commodities including
sugar and tea. However, in order to promote diversification in agriculture by enabling
producers to directly access new markets, it is essential to amend the Agricultural
Produce Marketing Committee (APMC) Act. This would, however, require urgent action on part
of States since agriculture is a State subject. The reform measures adopted in the current
year are likely to create new avenues for private investment in agriculture and lay the
foundation for value addition besides improving quality of agro-products for global
markets.
1.71 The virtuous interaction among technology
and competition in India, while benchmarking to the best international practices, will
need an enabling environment and will need to be facilitated by three factors: appropriate
social and physical infrastructure, a suitable regulatory framework and an efficient tax
system, and macro-economic stability.
1.72 Amongst the priority areas requiring
focussed attention are the elimination of illiteracy, reduction in infant and maternal
mortality rates, eradication of diseases such as malaria and polio, provision of quality
transportation facilities in the form of roads, railroads, ports and airports, reliable
and reasonably priced power supply, and safe drinking water and sanitation. There is a
need to encourage public-private partnership in promoting infrastructure to leverage
public funds, improve quality of service delivery and ensure better value for money. The
success achieved under the NHDP launched by the Prime Minister in October 1998 indicates
that there is considerable scope for new methods of financing and public-private
partnerships in this area. It is essential to build on the limited success achieved in
promoting public-private partnerships in the field of power generation, transmission and
distribution, and accelerate reforms to remove an important bottleneck on the country's
development. There is considerable scope for improving the delivery of social services,
such as health care, by promoting community and private sector participation. What is
required is a change in the paradigm of the public sector to `providing' public goods and
services, without necessarily "producing" them itself.
1.73 Considerable progress has been made in
the area of regulatory framework and a suitable tax system. For example, the Telecom
Regulatory Authority of India (TRAI), State Electricity Regulatory Commissions (SERCs),
Insurance Regulatory and Development Authority (IRDA), Securities and Exchange Board of
India (SEBI), have been functional for some time. The Competition Bill, 2001 has also been
passed by the Parliament. However, what is needed is an overhaul of the regulatory regime
in agriculture. A closely related issue is the question of labour market reforms and
small-scale industry (SSI) reservation. The country should seek to sell to the global
market consumer goods of quality, at competitive prices, produced in large-scale
establishments operating under flexible labour-markets. Furthermore, it is essential to
restructure the tax system with a move to an impersonal and efficient tax administration
with a minimum interface between the assessee and the tax official, and a system with
minimum of exemptions in the field of central excise and States sales tax, and a move to a
value added tax (VAT). The proposed move to VAT by the States from April 1, 2003 will be
an important landmark in establishing an efficient and self-enforcing domestic tax system
with minimal cascading effects. A reduction in the rate of Central Sales Tax (CST), and
its elimination over time will be important steps towards the establishment of a unified
Indian common market.
1.74 India is moving towards macro-economic
stability through the pursuit of a suitable combination of fiscal and monetary policies.
While sluggish growth suggests counter-cyclical policies, there is a need to step up
progress in the field of fiscal consolidation. The fiscal deficit, as a proportion of GDP,
has gone up from 4.1 percent in 1996-97 to 5.9 percent in 2001-02 for the Central
Government, and from 9.5 percent in 1999-2000 to 10.0 percent in 2001-02 for the general
government (i.e. consolidated Centre and States). While the rate of interest continues to
be below the rate of growth of the economy, high primary deficits (fiscal deficit less
interest payments) have led to progressive increases in both the deficit to GDP and debt
to GDP ratios. Increases in debt, with the associated high interest payments, have
resulted in pre-emption of a very large proportion of revenue receipts, both of the Centre
as well as of the States, by interest payments, wages and salaries, and pensions. Given
the indices of growth recovery already visible, without fiscal consolidation, there is a
risk that the preemption of resources by the general government will crowd out the nascent
recovery in private investment.
1.75 Fiscal consolidation requires a
two-pronged strategy of augmenting revenues and restraining expenditure. An efficient,
computerized, and impersonal tax system is critical for increasing the tax-GDP ratio. In
non-tax revenue, there is a clear need for better cost recovery through appropriate user
charges. On the expenditure front, it is critical to contain the growth of wages, salaries
and pensions. There is a need to revise the rate of interest on small savings mobilised by
the government in line with movements in market related interest rates. Any successful
expenditure rationalization and reprioritization programme must address the issue of
subsidies, through a rationalization of the prices of food, fertilizers, LPG and kerosene.
There is a need to look into the whole issue of federal fiscal transfers, including the
role of the plans, gross budgetary support for the plans, and why plan expenditure affects
the path of fiscal deficit and debt adversely, and how.
1.76 With India emerging as a surplus producer
of a number of exportable agricultural products, including foodgrains, in recent years,
efficient management of the country's food economy has become a major policy issue. The
comparative and regional advantage of some crops, has, however, been distorted by minimum
support prices (MSP) for rice and wheat, thus generating both surpluses (sugar, rice,
wheat) and shortages (oilseeds, pulses and fibres). Accumulation of large food stocks has
posed serious issues with regard to the effect of current food management policy, not only
on agricultural growth and diversification, but also on the fiscal deficit. The merits of
the MSP in achieving the objective of food security is established. So is the general
consensus that some food subsidy is absolutely essential for providing income support to
the country's poor and vulnerable. Apart from providing subsidised foodgrains to the Below
Poverty Line (BPL) population (over 30 crore), a most significant and innovative measure
to address abject poverty is the Antyodaya Anna Yojana, which enables a section of the
poorest (about 6 crore) to obtain 35 kg foodgrains per month at the low price of Rs.2/-
per kg for wheat and Rs.3/-per kg. for rice. It is important, however, to recognize that
our procurement methods have begun to seriously distort, and also eliminate the role of
private trade in foodgrains, thus aggravating the subsidy commitment of the Central
Government. There is a need to economise on buffer carrying costs, as also procurement
costs, which may be possible by involving state participation in procurement. FCI is faced
with serious diseconomies of scale, since it is now procuring and stocking almost three
times the normal volume of grains.
1.77 The last quarter of the current financial
year has seen rapid escalation of tensions in the Persian Gulf. The possibility of
hostilities breaking out in the Middle East has cast doubts over the pace of global
recovery in 2003. With global crude oil prices rising, there are serious concerns
regarding the growth prospects of emerging market economies, particularly those in
developing Asia, in the coming months. Apart from large food stocks held in the central
pool, the huge volume of foreign exchange reserves held by the country provide comfort in
an uncertain global situation. With reserves rising to more than US$73 billion, India is
now one of the top reserve-holding, emerging market economies. The country is capable of
financing higher import bills in the event of steep escalation in global oil prices or
other exogenous developments. However, a prolonged conflict in the Middle East is likely
to affect the export prospects of several economies of developing Asia, due to their heavy
dependence on the US economy. Notwithstanding a marginal compression in export prospects,
the overall growth performance of the Indian economy in the coming months is unlikely to
be seriously affected by the developments in the Gulf, due to the clear signs of revival
in domestic demand, and the resultant buoyancy imparted to domestic economic activity.
Nevertheless, there is an imperative need to address the three issues of infrastructure,
regulatory and tax reform, and fiscal consolidation, to establish the foundations of
robust growth on a sustained basis.
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