2.1 | The overall economic performance during 1999-2000 remained robust. The real GDP | growth of 6.4 per cent, although a shade lower than that of 6.8 per cent in 1998-99, was in line with the average rate for the period 1992-93 to 1999-2000 (Appendix Table II.1). The slowdown in the growth of agriculture and allied activities from 7.2 per cent in 1998-99 to 1.3 per cent in 1999-2000 was compensated by a strong increase in industrial growth from 3.7 per cent to 7.5 per cent and an improvement in the services sector's growth from 8.0 per cent to 8.7 per cent. A number of manufacturing industries staged a recovery, with growth rates in 1999-2000 higher than those in the preceding two years. The growth of the services sector was driven by the higher rates of expansion of 'construction', 'financing, insurance, real estate and business services' segment, especially computer software. Both industry and services showed improvement in 1999-2000 over their respective average growth rates of 7.2 per cent and 7.7 per cent during 1992-93 to 1999-2000. | | | | 2.2 | Quarterly real GDP growth picked up steadily from 5.7 per cent in the second quarter to | 7.2 per cent in the fourth quarter of 1999-2000 (Appendix Table II.2 and Chart II.1). The growth in industry and services rose from 6.6 per cent and 6.2 per cent in the second quarter, respectively, to 9.2 per cent and 10.5 per cent in the fourth quarter. On the other hand, growth in agriculture and allied activities dropped from 3.5 per cent to -1.3 per cent during the same period. In contrast, in 1998-99, the real GDP growth had peaked at 8.3 per cent in the second quarter before moving down to 7.2 per cent in the fourth quarter. While there had been a slowdown in industry and services in the last two quarters, gross value added in agriculture and allied activities had recorded a steady acceleration from 4.3 per cent in the first quarter to 10.8 per cent in the fourth quarter in 1998-99. The quarterly movements in real GDP growth over the period 1997-98 to 1999-2000 indicate that while agricultural growth has shown sharp fluctuations, industry has experienced a clear upturn since the fourth quarter of 1998-99. The quarterly growth of services sector has remained fairly robust, averaging 8.6 per cent over the past three years. | | | 
|
Box II.1 | | | The Leading Sector of the Economy | | | The development process of an economy entails the transformation of agrarian economies first into industrial economies and then into economies characterised by the predominance of the services sector. Similar insights can be found in the Lewis model where the dynamics of growth is traced in terms of shifting labour from agriculture to industry. The approach underlying such a shift is also in line with stages-of-growth theories. During each stage of growth, a particular sector serves as an engine of growth and therefore becomes the leading sector of the economy. Cross-country experience suggests that during the course of development of an economy, the leading sector shifts successively from agriculture to industry and then to services, although in many economies the shift to services has been more rapid than suggested in the literature. | | | The structural shift in favour of the services sector in the Indian economy in recent years bears out the cross-country experience regarding the secular pattern of growth. Though the sectoral composition and growth of GDP originating in the services sector experienced a quantum leap in the 1990s, the trend was nonetheless visible since the early 1980s. The growth of the services sector during the 1990s turned out to be higher than that of the agricultural and industrial sectors and provided a basis for a higher trend growth. The growth impulse emanating from the services sector imparted stability to a higher trajectory of GDP growth in the 1990s notwithstanding episodes of fluctuating agricultural performance. The structural shift of the Indian economy towards the services sector is consistent with the recent world-wide growth dynamics in an environment of increasing marketisation and globalisation on the one hand, and the growth of sunrise services sector, on the other. Moreover, consumption demand of households has been changing in favour of services and the supply response has also been towards greater competition. Endogenous sources of productivity change are also tilting the growth patterns in favour of the services sector. | | | The services sector constitutes diverse sub-sectors (including substantial value added and skill intensive segments) like 'transport, storage and communication', 'financing, insurance, real estate and business services', and 'community, social and personal services'. The sub-sector, 'financing, insurance, real estate and business services' recorded the fastest growth as well as the highest share in GDP among the various sub-sectors. Within this sub-sector, the segment, 'banking and insurance' was the leading contributor reflecting perhaps the emergence of a strong link between financial liberalisation and growth. 'Trade, hotels, transport, storage and communication' was another sub-sector that registered quantum growth in the recent years. While there had only been a marginal rise in the share of GDP from 'public administration and defence', its growth rate in the 1990s turned out to be lower by 2 percentage points than that of the 1980s. | | | The emergence of services as the leading sector of the economy in the recent years has generated growing interest in estimation procedures relating to GDP originating from the services sector. In the current series of national accounts, which takes 1993-94 as the base year, the scope and compilation details of various constituent sectors of services has been expanded. For example, the scope of communication services and trade has been broadened to cover private sector as well. However, the absence of reliable benchmark estimates and performance indicators for the private corporate sector remains a major limitation. | | | The expansion of the services sector has important implications for productivity, employment, welfare, income distribution, trade and for the design and conduct of macroeconomic policies. First, the relatively high growth of services would generally be supported on the supply side by productivity gains in agriculture and industry due to diffusion of technical progress and innovations especially through the use of information technology and computers; on the demand side, there would be shift in real expenditure from manufacturing to services. Secondly, the rising share of services indicates that productivity gains in this sector would have an important bearing on the overall productivity growth of the economy. As large part of services is non-tradable, policy initiatives need to be directed towards increasing competition in this sector. Finally, the growing share of services in real economic activity has important implications for future fiscal policy regime. | | | References |
1. | Central Statistical Organisation (CSO), (1999), New Series on National Accounts Statistics (Base Year 1993-94), New Delhi. | | | | 2. | Clark Colin, (1957), The Conditions of Economic Progress, London, Macmillan. | | | | 3. | Kuznets, Simon, (1966), Modern Economic Growth: Rate, Structure and Spread, New Haven, Yale University Press. | | | | 4. | Rostow, W.W., (1960), The Stages of Economic Growth, Cambridge, Cambridge University Press. |
2.3 | While the share of services in real GDP has increased from 47.9 per cent in 1994-95 to | 52.3 per cent in 1999-2000, its relative contribution to growth has moved up even more sharply from 46.5 per cent to 69.1 per cent, mainly attributable to the improved performance of 'trade, hotels and restaurants', 'transport, storage and communication' and 'financing, insurance, real estate and business services' (Box II.1). During the period 1990-91 through 1999-2000, there was growing evidence of intersectoral linkages pointing to an upsurge of industry-related services. In terms of aggregate demand, the basic stimulus to growth emerged from consumption rather than investment. This may be seen from the behaviour of real final consumption expenditure vis-a-vis real gross investment. During the period 1994-95 through 1998-99, the average relative contribution of real final consumption expenditure to growth of GDP at constant market prices at 68.7 per cent stood much higher than that of real gross investment at 34.0 per cent. This has important implications for the long-term sustainability of growth. There are, however, indications that growth impulses in recent years have emerged from productivity increases in the economy. A distinct improvement in the total factor productivity at industry levels found by several studies in India is supported by the decline in the incremental capital output ratio (ICOR)1 for the economy as a whole from 4.4 in 1990-91 to 3.4 in 1998-99. Productivity of the services sector moved up sharply, reflecting its low capital intensity, and the presence of highly professional and technically well trained labour. The greater thrust on infrastructure development, coupled with a build-up of capacity in the 1990s is expected to slow down the productivity in the short-run but lead to efficiency gains in the long run associated with forward and backward linkages related with these projects. | | | | 2.4 | The growth experience of the 1990s raises issues relating to the potential output growth, | the output gap and implications for monetary policy. Studies on the recent growth dynamics and structural shifts indicate that the estimates of potential output growth vary widely (Box II.2). |
Box II.2 | | | Estimating Potential Output and Output Gap | | | 'Potential output' and 'output gap' provide useful information on the nature, size and amplitude of the cyclical fluctuations in the real economic activity. Potential output represents the 'capacity' output of the economy as is represented by the steady-state level that is associated with the long-run supply curve under full employment conditions. Output gap is derived as the deviation of the actual from the potential output. | | | Potential output can be estimated by following any of the three methods - the time-series method, the unobserved components method and the technique of structural modelling. The most commonly used are the detrending methods which attempt to decompose time series into permanent and cyclical components through filters, such as those provided by Beveridge and Nelson (1981) and Hodrick and Prescott (1997). Hodrick-Prescott (HP) filter, first developed in 1981, has become the most popular approach to estimating output gaps for its simplicity and statistical properties. The unobserved component method seeks to estimate unobserved variables such as the potential output and the non-accelerating inflation rate of unemployment (NAIRU), using information from observed variables. This method takes the form of a state-space representation in which the unobserved state variable - the potential output - is a function of the observed variables such as output, unemployment and inflation. Structural modelling takes recourse to explicit relationships based on economic theory to measure output gap. Currently, the Structural Vector Autoregression (SVAR) is the most commonly employed approach, though production functions, aggregate demand models and multivariate system models are also used. | | | Some central banks have in recent years begun to take cognisance of the empirical estimates of potential output and output gap in their reaction functions, which generate policy/instrument settings to fine-tune their monetary policies to cyclical considerations. | | | While HP filter provides a useful way for detrending, it has its limitations too. The most cited deficiency is the arbitrary choice of the parameter (viz., l). In most empirical works related to real business cycles, the choice has been for l=100 for annual frequencies and l=1600 for monthly frequencies. However, mechanical detrending based on HP filter can lead to spurious cycles. The HP filtered series also suffers from high end-sample biases. More recently, there is a growing awareness that indicators of aggregate capacity utilisation such as the NAIRU or the output gap are measured with considerable margins of uncertainty. Formulating monetary policy under output gap uncertainty using instrument rules, such as the Taylor rule or constrained discretion, poses considerable challenge for monetary authorities. Notwithstanding these limitations, estimates of potential output and output gap using univariate or multivariate HP filters or alternative unobserved components and structural methods have provided useful signals to practitioners of policy. | | | The output gap is a useful key in gauging future inflation. A positive gap with actual output above (below) its potential leads to overheating (slowdown) of the economy. It is also important to note that in the recent years the economy has been experiencing frequent agricultural shocks with the actual output fluctuating by a large degree from the trend output. Monetary policy reaction to these shocks needs to assess the nature, amplitude and duration of agricultural supply cycles. Moreover, there is also evidence of productivity shocks in the economy which could be in the nature of either one time effects or dynamic improvements in the technical efficiency of various sectors. These factors have significant implications for the potential output growth in the economy although given the present limited information, it is difficult to capture their exact quantitative impact on the estimates of potential output. | | | Recent exercises conducted in the Indian context through various methodological approaches such as time series techniques, the balanced (optimal) growth and production function approaches have estimated the potential growth rate of the Indian economy to be in the range of 6-10 per cent. | | | References |
1. | Beveridge, S. and C. R. Nelson (1981), ';A New Approach to Decomposition of Economic Time Series into Permanent and Cyclical Components with particular Attention to Measurement of Business Cycles';, Journal of Monetary Economics, 7. | | | | 2. | Cerra, Valerie and Sweta Chaman Saxena (2000), ';Alternative Methods of Estimating Output Gap: An Application to Sweden';, IMF Working Paper, WP/00/59. | | | | 3. | Dhal, S (1999), ';Potential Growth in India: Viable Alternatives to Time Series Approaches';, Reserve Bank of India Occasional Papers, 20(3). | | | | 4. | _____ (1999), ';Estimating Optimum Growth Rate for the Indian Economy: A Dynamic Macroeconomic Model';, Reserve Bank of India Occasional Papers, 20(3). | | | | 5. | Donde, K. and Mridul Saggar (1999), ';Potential Output and Output gap: A Review';, Reserve Bank of India Occasional Papers, 20(3). | | | | 6. | Hodrick, Robert J. And Edward C. Prescott (1997), ';Postwar U.S. Business Cycles: An Empirical Investigation';, Journal of Money, Credit and Banking, 29(1). |
Saving and Capital Formation |
2.5 | The rate of gross domestic saving, as per the quick estimates of the Central Statistical | Organisation, is estimated at 22.3 per cent in 1998-99, down from 24.7 per cent in 1997-98 (Appendix Table II.3). At the level estimated for 1998-99, the gross domestic saving rate showed a fall of 3.2 percentage points from the peak rate of 25.5 per cent in 1995-96. The decline in the saving rate in 1998-99 was observed across all the three sectors, viz., public, private corporate and household. Fiscal slippages and large deficits in the revenue account of government administration brought down the public sector saving rate from 1.4 per cent in 1997-98 to a very negligible level in 1998-99. The saving rate of the private corporate sector declined from 4.3 per cent in 1997-98 to 3.8 per cent in 1998-99. Household saving rate also recorded a fall from 19.0 per cent in 1997-98 to 18.5 per cent in 1998-99. | | | | 2.6 | The 1990s was characterised by an improvement in the household financial saving rate | from 9.3 per cent in 1990-91 to 10.9 per cent in 1998-99 with a peak rate of 12.0 per cent in 1994-95. On the other hand, a drop in the rate of household physical saving from 11.2 per cent of GDP to 7.6 per cent led to a fall in the overall household saving from 20.5 per cent in 1990-91 to 18.5 per cent in 1998-99 (Table 2.1). The structural phenomenon of financial saving outstripping the physical saving in most years of the 1990s could be attributed to the increased financial intermediation, widening and deepening of the financial system with a large menu of available financial assets as well as the improvement in relative rates of return on financial assets. | | | | 2.7 | The instrument-wise position of household financial saving attests to the dominance of | deposits in the household sector portfolio, its share in total financial saving increasing to 41.8 per cent in 1998-99 from 33.3 per cent in 1990-91 (Appendix Table II.4). The other major portfolio choice of the households has been provident and pension funds whose share at 22.7 per cent in 1998-99 moved up from 18.9 per cent in 1990-91. The share of each of the remaining instruments, with the sole exception of shares and debentures, has hovered around 10.0 per cent of gross financial saving of households during the 1990s. | | | | 2.8 | On the basis of the latest tentative information available with the Reserve Bank, the rate of | household financial saving is estimated at 10.6 per cent in 1999-2000 as against 10.8 per cent in 1998-99. An interesting characteristic was the sharp increase in holdings of assets in the form of shares and debentures. | | | | 2.9 | The investment rate moved down in tandem with the saving rate. The rate of nominal | Gross Capital Formation (GCF) declined from 23.4 per cent in 1997-98 to 21.8 per cent in 1998-99 (Appendix Table II.3). All the constituent sectors revealed reduction in the rates of capital formation. The rate of Gross Domestic Capital Formation (GDCF), i.e., GCF adjusted for errors and omissions, was placed at 23.4 per cent in 1998-99 against 26.2 per cent in 1997-98. The average share of net capital inflow from abroad in the investment rate stayed around 5.7 per cent (or 1.5 per cent of GDP) during the 1990s as compared with 8.8 per cent (or 2.0 per cent of GDP) during the 1980s. Given the relatively low dependence on foreign saving, the primary impetus to investment has come from domestic saving (Box II.3). |
Table 2.1: Gross Domestic Saving and Household Saving Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Item
| 1998-99
| 1997-98
| 1996-97
| 1995-96
| 1994-95
| 1993-94
| 1992-93
| 1991-92
| 1990-91
|
|
| 1
| 2
| 3
| 4
| 5
| 6
| 7
| 8
| 9
| 10
| 1. | Household Saving | 18.5 | 19.0 | 17.1 | 18.5 | 19.8 | 18.4 | 17.7 | 17.7 | 20.5 | | | | | | | | | | | | | | | | 1.1. | Financial Saving | 10.9 | 10.4 | 10.4 | 8.9 | 12.0 | 11.0 | 9.3 | 10.1 | 9.3 | | | | | | | | | | | | | | | | 1.2. | Physical Saving | 7.6 | 8.6 | 6.7 | 9.6 | 7.8 | 7.4 | 8.4 | 7.7 | 11.2 | | | | | | | | | | | | | | 2.
| Gross Domestic Saving
| 22.3
| 24.7
| 23.3
| 25.5
| 25.0
| 22.5
| 22.0
| 22.9
| 24.3
|
Note: | 1. | Figures are as percentage of GDP at current market prices. | | | | | | | 2. | Figures up to 1992-93 and from 1993-94 to 1998-99 are as per the 1980-81 series and the 1993-94 series of National Accounts Statistics, respectively. | | | | | Source:Central Statistical Organisation. |
Box II.3 | | | Saving-Investment Gap | | | An economic entity would have a net deficit in its external transactions when its expenditure exceeds its income or when it saves less than it invests. At an economy-wide level, this indicates the relationship between a country's external current account balance and its domestic saving and investment. Since the determinants of saving (income/wealth, rate of return) differ broadly from that of investment (profitability, risk), they are likely to differ ex ante. In a closed economy, domestic saving and domestic investment must be equal ex post, i.e., a rise in saving is invariably reflected in a concomitant rise in investment. However, in an open economy, such ex post equality may not hold good, as each country's saving would ideally flow to that part of the world which offers relatively high rates of return. Thus, the increase in domestic saving in an open economy framework may not necessarily result in higher domestic investment and growth, but would be reflected in a larger current account surplus. | | | Whether a decline in the domestic saving rate should lead to an increase in the saving-investment gap depends on the response of investment. However, if the reduction in the domestic saving rate translates into lower investment rate, the constraint on growth shifts to the saving rate, while capital inflow is independently influenced by conditions in domestic and international capital market. There could thus exist a low correlation between domestic saving and investment rates among developed countries assuming that international capital markets are well integrated. However, contrary to the expectations, high and significant correlation between investment and saving was found using data for a cross section of OECD countries, suggesting imperfect international capital mobility. One implication of this is that investment rates tend to move along with the trends in saving performance and capital inflow has a limited influence on an economy's growth potential. These findings are also buttressed by others for various cross section and time series samples of developed countries. In a developing economy's context, however, capital flows can play a significant role in boosting domestic investment, given the unutilised production potential. A sustained flow of capital would at the same time require sound macro fundamentals including the growth of domestic saving. Evidence also suggests that factors like growth, demographic structure, relative prices, taxes, government behaviour, productivity shocks and other variables might affect saving and investment performance producing a spurious correlation between them. | | | Gross Domestic Capital Formation (GDCF) has always outstripped Gross Domestic Saving (GDS) in India. The implied dependence on foreign savings (i.e., saving-GDCF gap) was lower in the 1990s as compared to that in the 1980s, indicating an improvement in current account deficit during the 1990s and a commensurate decline in the dependence on foreign saving. Sector wise analysis of saving-investment gaps on the other hand, indicates that the household sector experienced a steady surplus. While both the public and private corporate sectors were in deficit during the 1980s and 1990s, the saving-investment gap of the public sector was higher than that of the private corporate sector. | | | References |
1. | Feldstein, M. and Charles Horioka (1980), ';Domestic Saving and international Capital Inflows';, The Economic Journal, June. | | | | 2. | Taylor, A.M., (1996), ';International Capital Mobility in History : The Saving-Investment Relationship';, National Bureau of Economic Research Working Paper No.5743, September. |
PRODUCTION TRENDS | | | Agriculture |
2.10 | After having staged a remarkable turnaround during 1998-99, agricultural production | suffered some setback during 1999-2000. The crop production index (with base: triennium ending 1981-82 = 100) recorded a decline of 1.3 per cent in 1999-2000 in sharp contrast to a robust growth of 8.2 per cent during the previous year (Appendix Table II.5). However, the output of rice at 88.3 million tonnes and wheat at 74.3 million tonnes registered their record levels. The quantum of foodgrains production increased to 205.9 million tonnes in 1999-2000 from the earlier level of 203.0 million tonnes in 1998-99. There was, on the other hand, a sharp decline in the production of pulses and coarse cereals (Table 2.2). In the non-foodgrains segment, major crops such as oilseeds - particularly groundnut - cotton and tea registered declines in output over their respective levels in the previous year, while sugarcane, jute and mesta recorded a rise in production. Sugarcane output, which has been increasing continuously since 1996-97, has scaled a new peak in 1999-2000. Non-foodgrains output, which had been smoothly increasing in the first half of the 1990s, witnessed a certain degree of fluctuation in the second half of the decade. | | | | 2.11 | The 1990s witnessed considerable fluctuations in agricultural output, with four years | recording a decline in production and the decade ending on a subdued note, yielding an annual trend growth rate of 2.2 per cent as against 3.1 per cent during the 1980s, on the basis of agricultural production index with base: triennium ending 1981-82=100 (Chart II.2). |
Table 2.2: Agricultural Production |
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|
|
| (Million tonnes)
| Crop
|
| 1999-2000A
| 1998-99
| 1997-98
|
| 1
| 2
| 3
| 4
| All crops: Annual | | | | Growth Rate+ (per cent) | -1.3E | 8.2E | -6.1 | Foodgrains | 205.9 | 203.0 | 192.3 | | | Rice | 88.3 | 86.0 | 82.5 | | | Wheat | 74.3 | 70.8 | 66.3 | | | Coarse Cereals | 30.4 | 31.5 | 30.4 | | | Pulses | 13.1 | 14.8 | 13.0 | Non-Foodgrains | | | | | | Oilseeds++ | 21.2 | 25.2 | 21.3 | | | Of which : Groundnut | 5.6 | 9.2 | 7.4 | | | Sugarcane | 309.3 | 295.7 | 279.5 | | | Cotton @ | 12.0 | 12.2 | 10.9 | | | Jute and Mesta# | 10.6 | 9.7 | 11.0 | | | Tea* | 805.6 | 870.4 | 810.6 |
| Coffee*
| 292.0
| 265.0
| 228.0
|
E | Estimated. | A | Advance estimates as on June 29, 2000. | + | Based on the Index of Agricultural Production with | | | base: triennium ending 1981-82=100. | ++ | For nine oilseeds out of eleven in all. | @ | Million bales of 170 kg. each. | # | Million bales of 180 kg. each. | * | Million kg. and data for tea on a calendar year basis. |
|
2.12 | Season-wise, the kharif foodgrains production showed a modest rise of 0.5 per cent to | 103.9 million tonnes in 1999-2000 from 103.4 million tonnes in 1998-99. The rabi foodgrains output attained a record level of production at 102.0 million tonnes to register 2.3 per cent growth over the previous year. The record production of rabi foodgrains was facilitated by the new peak attained in wheat output at 74.3 million tonnes. Rice and wheat output scaled new highs, while pulses and oilseeds declined from their respective peaks in 1998-99. The fall in production of coarse cereals (by 1.1 million tonnes) and pulses (by 1.7 million tonnes) was more than compensated by the rise in output of rice (by 2.3 million tonnes) and wheat (by 3.5 million tonnes). The increased rice output is attributable to the record production in West Bengal and Punjab, while the peak level of wheat production is attributable to the record yield levels attained in Punjab and Haryana despite the fall in the area under wheat and drought conditions in some wheat-producing areas of Rajasthan and Madhya Pradesh. The production of pulses witnessed a fall to 13.1 million tonnes in 1999-2000 from 14.8 million tonnes in 1998-99, i.e., a decline of 11.8 per cent. Coarse cereals declined on account of adverse weather conditions in major producing states, viz., Gujarat, Maharashtra, Rajasthan, Andhra Pradesh and Madhya Pradesh. | | | | 2.13 | The index of non-foodgrains crops (with base: triennium ending 1981-82=100) declined by | 4.6 per cent during 1999-2000. Production of nine oilseeds is estimated to have declined on account of a fall in the groundnut crop reflecting severe drought conditions in Gujarat. Almost all the other major oilseeds recorded declines in output during the year, except for linseed. While sugarcane output posted a record level, cotton production suffered marginally due to adverse climatic conditions and diversion of area under cotton to paddy in Punjab. Production of jute and mesta and coffee, however, increased while production of tea fell. | | | | 2.14 | During 1999-2000, total procurement of foodgrains reached a new peak, recording an | increase of 27.0 per cent over that of 24.2 million tonnes in 1998-99 (Appendix Table II.6). The total off-take of rice and wheat during 1999-2000 was moderately high at 21.9 million tonnes compared with 20.7 million tonnes in the previous year. The rise may be attributed to higher off-take under the Open Market Sales Scheme (OMSS), even though the off-take under Targeted Public Distribution System (TPDS) fell by 14.7 per cent. Under the TPDS, introduced in June 1997, a dual pricing system is operative whereby consumers below poverty line (BPL) are supplied with a limited quantity of foodgrains (20 kg. per month per family) at prices which are almost one-half of the central issue price (CIP) fixed for the consumers above poverty line (APL). While off-take by consumers under the BPL category is restricted by quantity stipulation, that for APL consumers is limited by the price. During 1999-2000, the fractional decrease in the off-take under BPL category was accompanied by a substantial fall in the off-take under APL category (20.7 per cent). This decline was compensated through a substantial rise in OMSS and some increase in off-take through Other Welfare Schemes (OWS). The sharp rise in procurement of rice and wheat coupled with a moderate growth in off-take raised the stock of foodgrains to 28.0 million tonnes at the end of March 2000, from 21.7 million tonnes at the end of March 1999. It is important to recognise that foodgrains stock has remained well above the buffer stock norms during 1999-2000, raising the issue of the optimal level of stock (Box II.4). |
Box II.4 | | | Optimal Level of Buffer Stock | | | Buffer stocking operations in India have been in practice since the Fourth Five Year Plan (1969-74). Their basic objectives have been to insulate food availability from the vagaries of monsoon and thereby to stabilise prices and farm incomes, and contain interregional disparities in the consumption profiles. Buffer stock of foodgrains with public agencies comprise base level stock (lying in storage over various depots in small quantities, or in transit and not available for issue) and food security stock (intended to fill the gap between procurement and distribution in a bad year). Operational stock is maintained for month-to-month distribution. Government sets the norms for optimum stock levels for the four quarters of a year, on the basis of several factors such as procurement season, lean periods and off-take in preceding years. These norms have been progressively raised since the mid-1970s ( Table 2.3). | | | Notwithstanding the increase in instability in production, the yields in the post-Green Revolution period have been significantly high. Concurrently, public stock of foodgrains has also shown impressive growth over time. The average annual procurement of rice and wheat by the Government agencies increased to 23.3 million tonnes (or 16.2 per cent of total production) during the 1990s from 16.4 million tonnes (or 15.7 per cent of total production) during the 1980s. The level of stock stood at 28.0 million tonnes as at the end of 1999-2000 as against 15.8 million tonnes at the end of 1990-91. The growing level of buffer stock has added to the fiscal burden by raising the level of food subsidy in the Union budget from Rs.2,450 crore in 1990-91 to Rs.9,200 crore in 1999-2000 reflecting the rising cost of procurement, storage and distribution operations. Since 1998-99, stock levels have remained higher than the norms for each quarter. | | | In view of the current steep rise in buffer stock, an issue has arisen about what could be the optimal level of such stock for the Indian economy. A few estimates that exist for India relate to either the 1970s or the 1980s and no reliable estimates exist for the more recent period. For example, Ray (1987) estimated the optimal level of stock at around 15 to 18 million tonnes. However, he found that buffer stock operations can moderate the excess of price and farm income fluctuations only when the expected growth rates in demand and supply are equal and instability emanates mainly from fluctuating output. Applying the methodology used for fixing public buffer stock norms, Krishnaji (1988) estimated that 13 million tonnes of buffer stock of foodgrains are required for a population of 750 million to ensure food security against an unforeseen shortage in any given year. His estimate was based on a net per capita mean production of 440 gm. per day with a standard deviation of about 30 gm. Assuming that the underlying distribution of foodgrains production is normal, the provision of buffer stock equivalent to 1.6 times the standard deviation from the trend line would provide an adequate cushion against an abnormal shortfall, since the chance of a larger than the suggested deviation is only 5 per cent. Applying the same methodology, the optimal buffer stock for a population of 991 million in 1999 could be higher by 2.5-3.5 million tonnes than the norms currently in operation. |
Table 2.3: Buffer Stock Norms |
|
|
|
|
| (Million Tonnes)
| Date
| Fourth Plan
| 1975
| 1981
| 1992
| 1998
| 1
| 2
| 3
| 4
| 5
| 6
| April 1 | 7.0 | 15.5-15.8 | 16.5 | 14.5 | 15.8 | | | | | | | | July 1 | 7.0 | 20.2-20.8 | 21.4 | 22.3 | 24.3 | | | | | | | | October 1 | 7.0 | 17.5-18.0 | 17.8 | 16.6 | 18.1 | | | | | | | | January 1
| 7.0
| 16.8-17.5
| 20.1
| 15.4
| 16.8
|
| | The estimates of optimal buffer stock are generally made from the food security angle, which is the most important objective of buffer stocking operation. Buffer stock also involves a fiscal cost in the form of food subsidies. While stock piling escalates the costs, associated benefits occur in terms of an increase in saving in the form of physical inventory of commodities. Further, estimation of optimal buffer stock needs to take into account the new developments such as growing liberalisation of agricultural trade, decentralisation and privatisation of food operations and development of the futures market in foodgrains. These factors could have significant implications for the level of optimal buffer stock in India although their empirical evaluation poses a difficult challenge in estimation. | | | References |
1. | Government of India, (1997), Report of the Fourth Technical Group on Buffer Stocking Policy of Foodgrains, Department of Food and Civil Supplies, Ministry of Food and Consumer Affairs. | | | | 2. | Krishnaji, N. (1988), 'Foodgrains Stocks and Prices', in Amiya K. Bagchi (ed.) Economy, Society and Polity, Oxford University Press, New Delhi. | | | | 3. | Ray, S.K. (1987), 'Stabilisation Through Food Stock Operations', Journal of Quantitative Economics, Vol. III, No. 1. |
2.15 | Procurement of wheat during the first quarter of 2000-01 reached to a record level of 16.2 | million tonnes as compared with 14.1 million tonnes procured during the corresponding quarter of the previous year. The procurement of rice during the same period at 2.0 million tonnes was marginally higher than that of 1.8 million tonnes during the corresponding quarter of 1999-2000. The sharp increase in procurement was due to the bumper wheat crop coupled with the enhancement of Minimum Support Price (MSP). However, the total off-take of rice and wheat at 3.3 million tonnes during April-June 2000 was lower by 17.6 per cent than that of 4.0 million tonnes during the corresponding period of the previous year. The record procurement coupled with the lower off-take resulted in accumulation of stock with the public sector agencies. The stock of rice and wheat, at the end of June 2000 stood at an unprecedented high of 42.3 million tonnes (32.4 million tonnes a year ago) ruling much above the minimum buffer stock norm of 24.3 million tonnes for July 1, 2000. | | | | INDUSTRY | | | | Overall Performance | | | | 2.16 | Industrial production recovered from a subdued performance in 1998-99 and exhibited a | turnaround during 1999-2000, mainly attributable to, inter alia, increased exports, higher credit availability, a low inflation rate, a stable rupee and improved business sentiment. The Index of Industrial Production (IIP) increased by 8.1 per cent during 1999-2000 as compared with the rise of 3.8 per cent during the previous year (Appendix Table II.7 and Chart II.3). The recovery was driven by a strong improvement in the manufacturing sector's performance which has a weight of 79.36 per cent in the general index. Manufacturing output recorded a significantly higher growth of 9.2 per cent during 1999-2000 than 4.1 per cent in the previous year. The IIP grew by 5.4 per cent in first quarter of 2000-01 as compared with 5.7 per cent in the corresponding period of the previous year. The manufacturing sector recorded a lower growth of 5.5 per cent in the first quarter of 2000-01 than 6.7 per cent in the first quarter of 1999-2000. | | | 
| | | 
| | | | Manufacturing Sector | | | | 2.17 | There has been a broad-based recovery in the manufacturing sector in 1999-2000 | (Appendix Table II.8). Twelve of the seventeen groups at the two-digit level industrial classification showed positive growth during 1999-2000 (Chart II.4). During 1999-2000, nine major industry groups (55.96 per cent weight in IIP) registered accelerated growth rates, three groups (9.01 per cent weight in IIP) posted decelerated growth and the remaining five groups (14.39 per cent weight in IIP) recorded declines. The pattern of growth also showed some variation. Some of the industry groups which had shown accelerated growth in 1998-99 registered declines/slow down in 1999-2000. Notable among these were metal products and parts and the group rubber, plastic, petroleum and coal products. The industry groups which performed exceedingly well in 1999-2000, were those that had not performed well in the preceding year. Nevertheless, the number of groups which have shown acceleration have not only increased from seven to nine, but their combined weights in IIP have also doubled to 56 per cent in 1999-2000 from 28 per cent in 1998-99. | | | | 2.18 | The analysis of growth rates of output of major industry groups for the period 1994-95 to | 1999-2000, for which the new series of IIP is available, shows that five groups, viz., (i) beverages, tobacco and related products, (ii) wool, silk and man-made fibre textiles, (iii) paper and paper products and printing, publishing and allied industries, (iv) basic chemicals and chemical products (except products of petroleum and coal), and (v) non-metallic mineral products have consistently witnessed growth rates above 5 per cent for at least 5 out of 6 years (Appendix Table II.9). In the first quarter of 2000-01, however, the growth of these industry groups except the chemicals group decelerated below 5 per cent. | | | | Use-based Classification | | | | 2.19 | The use-based classification of industrial output indicates a pattern of growth wherein | intermediate goods led the recovery showing a growth of 15.4 per cent during 1999-2000 as against 5.9 per cent during 1998-99, while capital goods recorded a major slowdown to 5.4 per cent from 11.5 per cent (Appendix Table II.10 and Chart II.5). The latter reflects sluggish investment demand. On the other hand, basic goods and consumer goods sectors registered a moderate though higher growth of 5.1 per cent and 5.4 per cent, respectively, during 1999-2000 as compared with 1.5 per cent and 1.9 per cent during the preceding year. Within the consumer goods sector, the production of consumer durables accelerated sharply to 13.3 per cent from 4.6 per cent in the previous year. The contribution of the two leading sectors, viz., intermediate goods sector (weight being 26.44 per cent in the IIP) and basic goods sector (weight being 35.51 per cent) increased to 53.5 per cent and 20.7 per cent, respectively, during 1999-2000 from 43.6 per cent and 13.0 per cent during 1998-99. The contribution of the consumer goods sector (weight being 28.36 per cent) improved to 18.7 per cent during 1999-2000 from 14.3 per cent in 1998-99. | | | | 
| | | | 2.20 | The slump in the capital goods sector's growth brought down its share in overall IIP | growth to 6.7 per cent during 1999-2000 from 28.8 per cent during 1998-99. The experience since 1992-93 reveals that excepting in three years (1994-95, 1996-97 and 1998-99), growth in capital goods production remained lower than the overall industrial growth. Although the weight of the capital goods sector in the IIP is relatively low (9.69 per cent), it has crucial importance as a leading sector with substantial forward linkage. Any deceleration of output of this sector would be reflected on the growth of production capacity and future prospect of industrial growth. Since 1992-93, import substitutes have also been a major source of supplement to domestic supply of capital goods output (Table 2.4). | | | | 2.21 | During April-June 2000-01, basic goods and consumer goods sectors registered higher | growth rates of 5.5 per cent and 8.5 per cent, respectively, in comparison with 3.3 per cent and 2.1 per cent respectively during the corresponding period of the previous year. However, capital goods sector showed no growth in April-June 2000-01 as against 10.6 per cent in April-June 1999-2000. Intermediate goods sector also registered a lower growth of 4.0 per cent in April-June 2000-01 than 10.5 per cent during April-June 1999-2000. |
Table 2.4: Trends in the Growth of IIP and Production and Import of Capital Goods |
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| (Per cent)
| Year | IIP | Capital | Capital | | | | Goods | Goods |
|
| Production
| Imports
| 1
| 2
| 3
| 4
| 1992-93 | 2.3 | - 0.1 | 7.1 | 1993-94 | 6.0 | - 4.1 | 37.8 | 1994-95 | 8.9 | 9.2 | 22.4 | 1995-96 | 13.1 | 5.4 | 35.2 | 1996-97 | 6.1 | 11.4 | - 4.0 | 1997-98 | 6.6 | 5.8 | - 1.3 | 1998-99 | 3.8 | 11.5 | 2.7 | 1999-2000P | 8.1 | 5.4 | - 19.8 | Annual Average
| 6.9
| 5.6
| 10.0
|
2.22 | There has been a marked improvement in the performance of the infrastructure sector | during 1999-2000 as the composite index of six infrastructure industries (weight being 26.68 per cent of IIP) grew at a rate of 8.7 per cent as against 2.8 per cent in 1998-99. Petroleum refinery products, steel and cement achieved noteworthy growth rates of 25.2 per cent, 13.6 per cent and 14.0 per cent, respectively, in 1999-2000 as compared with 5.2 per cent, 1.4 per cent and 5.7 per cent in 1998-99. Electricity recorded only a marginally high growth of 7.1 per cent in 1999-2000 as against 6.6 per cent in 1998-99. Coal and crude petroleum, however, recorded low and negative growth, respectively, in 1999-2000 (Appendix Table II.11). Of the ten infrastructure industries, (including those not covered in the IIP), performance of five exceeded their targets during 1999-2000 as against one during 1998-99 (Table 2.5). Telecommunications recorded a substantially high growth of 40.2 per cent during 1999-2000 as against the growth of 36.1 per cent in 1998-99. | | | | 2.23 | During the first quarter of 2000-01, the overall growth rate of infrastructure industries was | higher at 8.0 per cent as compared with 7.1 per cent in the corresponding period of the previous year. During this period, petroleum refinery products registered the highest growth of 34.5 per cent as against 15.4 per cent in the corresponding period of the previous year. Production of coal recorded a substantially high growth of 11.4 per cent during April-June 2000-01 than the decline of 3.1 per cent during April-June 1999-2000. Steel recorded a growth of 11.5 per cent on top of 12.7 per cent recorded for the first quarter of 1999-2000. However, production of crude petroleum declined by 2.5 per cent on top of a decline of 0.3 per cent in the previous year. In the case of cement production, there was a sharp deceleration in growth to 3.9 percent from 21.1 per cent in the corresponding period of the previous year. |
Table 2.5: Targets and Achievements of Infrastructure Industries |
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| Sector | Unit | 1999-2000 P
| 1998-99
| | | | | Target | Achieve- | Gap (%) | Target | Achieve- | Gap (%) |
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|
|
| ment
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| ment
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|
| 1
| 2
| 3
| 4
| 5
| 6
| 7
| 8
| 1. | Power | Billion Units | 469.00 | 480.01 | 2.3 | 450.00 | 448.37 | - 0.4 | 2. | Coal | Million Tonnes | 298.90 | 298.98 | 0.0 | 306.50 | 290.15 | - 5.3 | 3. | Finished Steel | Thousand Tonnes | 12334.00 | 11388.80 | - 7.7 | 12321.00 | 10101.30 | - 18.0 | 4. | Railways + | Million Tonnes | 450.00 | 456.31 | 1.4 | 424.00 | 420.92 | - 0.7 | 5. | Shipping @ | Million Tonnes | 258.00 | 271.87 | 5.4 | 258.00 | 251.72 | - 2.4 | 6. | Telecommunications # | Thousand Lines | 5870.00 | 6717.32 | 14.4 | 4930.00 | 4789.90 | - 2.8 | 7. | Fertilisers | Thousand Tonnes | 14412.30 | 14273.90 | - 1.0 | 13709.10 | 13620.70 | - 0.6 | 8. | Cement | Million Tonnes | 94.00 | 100.24 | 6.6 | 90.50 | 87.91 | - 2.9 | 9. | Petroleum Crude | Million Tonnes | 33.02 | 32.01 | - 3.1 | 34.72 | 32.72 | - 5.8 | 10. | Petroleum Refinery | Million Tonnes | 96.87 | 85.89 | - 11.3 | 67.86 | 68.54 | 1.0 |
| Products
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P | Provisional. | + | Revenue earning freight traffic. | @ | Cargo handled at major ports. | # | Net switching capacity added. |
Source: Ministry of Planning and Programme Implementation, Government of India. |
Industrial Recovery and its Sustainability |
2.24 | The annual trends in industrial growth showed a cyclical pattern with a general upturn | during 1992-93 to 1995-96 being followed by a downturn during the first three quarters of 1996-97. Industrial growth picked up over the next ten months; however, this could not be sustained thereafter and it was only in 1999-2000 that the industrial recovery set in. The monthly growth rate of IIP reveals that industrial growth picked up to a range of 4.7 to 11.8 per cent in 1999-2000 from -0.3 to 5 per cent in 1998-99 (Chart II.3). The financial health of firms also recorded recovery during 1999-2000; sales and gross profits of 916 non-financial public limited companies increased by 15.4 per cent and 20.8 per cent, respectively, during 1999-2000 as against 8.6 per cent and 0.8 per cent, respectively, for 1,248 such companies during 1998-99. Foreign investment flows also increased significantly during 1999-2000. The implication of the typical cyclical dynamics of industrial output is related to the issue of sustainability of industrial recovery (Box II.5). |
Box II.5 | | | Sustainability of Industrial Recovery | | | The issue of sustainability of industrial recovery needs to be analysed in a business cycle framework assessing each cycle from the points of view of its duration, amplitude, and causes. Factors like random impulses, technological innovations, investments and expectations can usher in recovery while demand and supply imbalances that emerge at a macro level can cause a slowdown. The cyclicity in industrial output in the Indian economy in the recent years seems to result from an interplay of a host of demand and supply factors, some of which are internal to the growing sophistication of the industrial sector and its structural orientation in an increasingly open environment and some to the cyclical demand pattern arising from external demand and changing dynamics of private and public demand. | | | The sustainability of the recent industrial recovery in India can be empirically examined through time series analysis and leading indicator approach. As the IIP series essentially exhibited non-stationarity, the method suggested by Beveridge and Nelson (1981) has been adopted to study the dynamics of industrial growth. After de-seasonalising the monthly data on IIP from March 1980 to March 2000, the series was decomposed into permanent and transitory components on the basis of forecast function estimated for the period April 1989 to March 2000. The permanent component of the IIP denotes the value the series would have on the long-run path in the current time period without any transitory disturbances. The behaviour of the growth rates of actual and permanent components of output over this period suggested that the permanent component has picked up at a faster rate than the actual growth rate in recent years indicating an increase in the output gap in the industrial sector ( Chart II.6). | | | The spectral density function of cyclical series showed that the duration of the upward trend could be about two years without any intervening shocks. Reform initiatives that focus on technological and institutional improvements play an important role in sustaining industrial recovery and in raising the permanent component of output. | | | 
| | | The leading indicator approach provides clues for an understanding of the stages of the current business cycle. Different countries use different leading indicators, such as the average work week, the index of overtime hours, the applications for unemployment compensation, the new companies registered, the new orders, the vendor performance, the index of consumer expectations, and such data as stock prices, money supply and prices of sensitive metals to identify the turning points of business cycle and their capability to post the beginning of a new cycle. While data limitations are serious in the Indian case, some recent research studies in the Indian context show that non-food credit and currency with the public could provide leading information on the IIP at the time of the peak of the cycle, while currency with the public and imports could be leading indicators of IIP at the time of the trough. Yet another way to pick up the future prospects is to conduct periodic surveys of business sentiment such as the NCAER's business confidence index. In its April 2000 estimates it had reported optimism regarding the prospects of a speedier recovery. However, in the July 2000 estimates, NCAER has projected a cautious outlook for the next few months. Moreover, the subdued level of investment activity as revealed by the drop in investment rates, slow-down in domestic capital goods production and fall in capital goods imports, remain a cause for concern. The lower growth of agriculture in 1999-2000 may also have an impact on effective demand for industrial goods. In the medium run, however, sustainability of industrial recovery will depend on the growth of investment demand, the supply elasticities, trading environment and strengthening of reforms to improve competitiveness. | | | References |
1. | Beveridge, Stephen and Charles Nelson, (1981), ';A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the Business Cycle';, Journal of Monetary Economics, 7. | | | | 2. | Lahiri, Kajal and Geoffrey H. Moore (1991), Leading Economic Indicators: New Approaches and Forecasting Records, Cambridge University Press, London. | | | | 3. | Mall, O.P. (1999), ';Composite Index of Leading Indicators for Business Cycles in India';, Reserve Bank of India Occasional Papers, 20(3). | | | | 4. | National Council of Applied Economic Research (1997), Business Cycle Indicators in the Indian Economy, New Delhi. | | | | 5. | Nelson, Charles and Charles Plosser, (1982), ';Trends and Random Walks in Macroeconomic Time Series: Some Evidence and Implications';, Journal of Monetary Economics, 10. | | | | 6. | Wells, John M., (1999), ';Seasonality, Leading Indicators, and Alternative Business Cycle Theories';, Applied Economics, 31. |
2.25 | The Union Budget for 2000-01 has introduced a number of initiatives to support industrial | recovery. These include increase in Foreign Institutional Investors' (FIIs) equity holding limits, simplification of tax procedures like the design of Central Value Added Tax (CENVAT), withdrawal of interest tax on financial institutions, incentives for infrastructure industries, venture capital funds, IT industries and housing, reduction of interest on small savings, etc. Further, the EXIM Policy 2000 has proposed establishment of Special Economic Zones, removal of quantitative restrictions, extension of Export Promotion Capital Goods Scheme uniformly to all sectors and to all capital goods with a view to accelerating exports. | | | | Mergers and Acquisitions (M & A) | | | | 2.26 | In a competitive environment, M & A are gaining increasing importance as a way of | improving competitiveness and allocative efficiency. This process has gained momentum since 1994 when the need for formulating a new take-over code was felt by the regulating agencies. Many firms are seriously re-examining their business portfolios and the stronger and dominant ones are restructuring their entire gamut of activities. There is now a discernible trend among promoters and established corporate groups towards consolidation of market shares, diversification into new areas, albeit in a limited way and concentration on core competencies through mergers and acquisitions. M&A deals worth over Rs. 16,000 crore were reported during 1998-99. During 1999-2000, the magnitude of M&A deals surged to around Rs.37,000 crore. The sectors which witnessed substantial mergers and open offers during the year were finance, chemicals, computer software, hotels, cement, pharmaceuticals, textiles and agricultural products. | | | | 2.27 | With the increasing scope for expansion and the rising global operations brought about by | mergers and acquisitions, the need for a sound corporate governance system in the industrial sector has become critical for gaining investor confidence. In this context, it may be noted that internationally the best practices and codes of corporate governance, evolved by the OECD and World Bank, are being widely discussed and examined with a view to adopting them at the national level. In India, the Securities and Exchange Board of India (SEBI) took the lead in appointing a Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla in May 1999 and the Committee submitted its report in February 2000 (Box II.6). The Committee recommended a number of measures relating to investor protection and greater transparency in management and disclosure in accounting practices. These are being implemented in a phased manner. |
Box II.6 | | | Corporate Governance in Industry | | | Ownership and management are generally separate in case of most of the modern corporate entities but are traditionally linked within a principal-agent framework. Shareholders, being the principal, appoint managers as their agents and the agents, in turn, are ideally accountable to the shareholders for their performance. In reality, however, there may be a conflict of interest between them. It would be generally difficult to have effective control over the management, particularly when shareholders are thinly spread and hold shares of the companies as financial assets, rather than exercise their ownership rights. On the other hand, the role of managers may get undermined in instances of concentration of ownership and large-scale cross-holdings of shares across companies thwarting competition and efficiency. Corporate governance, which is the system by which companies are directed and controlled, aims at resolving such possible conflict of interests. It specifies the distribution of rights and responsibilities among different participants in a company and spells out the rules and procedures for making decisions on the company's affairs. A sound corporate governance culture enforces better discipline upon corporate management and ensures maximum value to the shareholders, keeping in view the interests of other stakeholders, such as creditors, customers, employees and above all, the society at large. | | | The issues relating to corporate governance are many and diverse and are evolving over time and space with the changing corporate practices across nations and cultures. There has been a growing international focus on corporate governance, particularly, in the wake of the recent global economic crises involving East Asia, Japan, Russia and Latin America. Several committees have been set up in various countries to suggest ways and means to improve the corporate governance system. Notable among the reports that appeared on the subject are: (i) the Report of the Cadbury Committee of the UK, (ii) the Combined Code of the London Stock Exchange, (iii) the OECD Code on Corporate Governance, and (iv) the Blue Ribbon Committee on Corporate Governance in the USA. | | | In India, the issue of corporate governance has come up mainly in the wake of economic liberalisation and deregulation of industry and business. There has been a growing concern about good corporate governance in the corporate sector especially in the light of corporate failures, financial irregularities and lack of adequate management accountability. In the financial sector, substantial progress has been made in strengthening governance in the banks and other financial institutions by designing and implementing international prudential norms and setting up the regulatory and supervisory system. In the corporate sector, the Confederation of Indian Industry (CII) had released the Desirable Corporate Governance Code in April 1998 containing recommendations regarding the composition of the board of directors, levels of corporate disclosure, role of audit committees and other related matters and enhancing corporate transparency and responsibility. | | | The Securities and Exchange Board of India (SEBI) Committee on Corporate Governance (Chairman: Shri Kumar Mangalam Birla) submitted its final report in February 2000. The Committee has viewed the fundamental objective of corporate governance as the enhancement of shareholder value, keeping in view the interests of the other stakeholders. It has identified three key constituents of corporate governance as the shareholders, the board of directors and the management and delineated their roles, responsibilities and rights. The Committee has made wide-ranging recommendations pertaining to, inter alia, the composition of the board of directors of the company, the appointment of nominee directors by banks and financial institutions, the role of independent directors, the setting up of an audit committee and a remuneration committee, the stipulation of accounting standards and financial reporting, the levels of disclosure relating to important financial and commercial transactions and the shareholders' rights. The recommendations are being made applicable by SEBI in phases to all the listed companies, their directors, management, employees and professionals associated with such companies. The recommendations have been divided into mandatory and non-mandatory categories. | | | References |
1. | Business Sector Advisory Group on Corporate Governance (Chairman: Ira M. Millstein), (1998), Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets (a report to the OECD). | | | | 2. | Confederation of Indian Industry,(1998), Desirable Corporate Governance: A Code. | | | | 3. | Mayer, Colin, (1998), ';Corporate Governance, Competition and Performance'; in M. Balling et al. (eds), Corporate Governance, Financial Markets and Global Convergence, Kluwer Academic Publishers, Dordrecht, The Netherlands. | | | | 4. | Rangarajan, C., (1997), ';Corporate Governance - The New Paradigm';, RBI Bulletin, October. | | | | 5. | SEBI (1999), Report of the SEBI Committee on Corporate Governance, (Chairman: Shri Kumar Mangalam Birla). | | | | 6. | Talwar, S.P., (1999), ';Banking Regulation and Corporate Governance';, RBI Bulletin, July. |
2.28 | Development of the small-scale sector has been an important plank of India's industrial | policy. The various promotional policy measures adopted by the Government to strengthen the importance of this sector in the economy have enabled SSIs to increase their production by more than ten-fold and the employment to rise by over four times during the period 1973-74 to 1998-99. The total number of units in the SSI sector increased to 31.21 lakh in 1998-99 from 30.14 lakh in 1997-98 with the growth in the value of production (at current prices) of these units moving up to 13.4 per cent from 12.7 per cent. However, employment in the SSI sector has decelerated to 2.6 per cent in 1998-99 from 4.5 per cent in 1997-98. Exports from SSI have decelerated to 11.4 per cent in 1998-99 from 13.2 per cent in the preceding year. Against the target of 60 per cent credit flow to the tiny sector, the actual share of the tiny sector in the advances to SSI sector decreased from 27.0 per cent at the end of March 1998 to 20.7 per cent at the end of March 1999. The Central Government, in December 1999, redefined a SSI unit as an industrial undertaking in which investment in plant and machinery whether held on ownership terms or on lease/hire-purchase basis does not exceed Rs.10 million, as against Rs.30 million earlier. | | | | 2.29 | In the context of growing domestic and international competition, strengthening the SSI | sector through special promotional policies has assumed considerable importance. Several efforts have been made in the past to enhance the flow of credit to small-scale industries. Credit to small-scale sector constitutes a part of the priority sector credit of commercial banks. SIDBI as an apex financing institution provides refinance for various types of activities. Following the announcements made by the Union Budget 2000-01 in respect of the SSI sector, the Reserve Bank in its monetary and credit policy 2000-01 has raised the loan limit for the tiny sector from Rs.1 lakh to Rs.5 lakh for which no collateral would be required. To promote credit flow to small borrowers, the composite loan limit (for providing working capital and term loans through a single window) has been increased from Rs.5 lakh to Rs.10 lakh. Public sector banks have been advised to accelerate their programme of SSI branches to ensure that every district and SSI clusters within districts are served by at least one specialised SSI bank branch. To improve the quality of banking services, SSI branches are being asked by the Central Government to obtain ISO certification. After the announcement of a credit guarantee scheme for SSI in the previous year's Union Budget, the Government has formulated a new central scheme for this purpose and also made a provision for Rs.100 crore in the Union Budget for 2000-01. The scheme is proposed to be implemented through SIDBI and would cover loans up to Rs.10 lakh from the banking sector. The guaranteed loans would be securitised and tradable in the secondary debt market. Furthermore, under the National Equity Fund Scheme, the equity support which is provided for projects up to Rs.15 lakh has been increased to Rs.25 lakh. The operation of the Technology Development Modernisation Fund Scheme being presently administered by SIDBI has been extended by another 3 years. As announced in the Budget Speech for the year 2000-01, NABARD and SIDBI are expected to cover an additional 1 lakh Self-Help Groups (SHGs) during the current year. To give a further boost to this programme, the Reserve Bank in its monetary and credit policy for 2000-01 has proposed the creation of a micro-finance development fund at NABARD with a start-up contribution of Rs. 100 crore from the institutions concerned. This fund will provide start-up funds to micro-finance institutions and infrastructure support for training and system management and data building. | | | | 2.30 | An important challenge in the context of industrial restructuring relates to the growing | number of sick/weak units. As per the provisional data, the total number of sick/ weak units financed by scheduled commercial banks increased to 3,09,013 as at end-March 1999 from 2,24,012 as at end-March 1998. The SSI sick units constitute 99 per cent of total number of sick/weak units. They accounted for 22.2 per cent of the total outstanding bank credit, whereas the non-SSI sick/weak units, which constitute 1.0 per cent of total units, account for as high as 77.8 per cent of the outstanding bank credit. Of the total number of non-SSI sick/weak units, 84.7 per cent are in the private sector accounting for 75.9 per cent of credit. Among the non-SSI sick/weak units, the highest number of units are in the textiles sector, followed by chemicals and engineering. These three industries accounted for around 36 per cent of the non-SSI sick/weak units and over 38 per cent of the total outstanding bank credit to these units. As at the end of March 1999, there was an overall increase of 28.1 per cent in the outstanding bank credit to non-SSI sick/weak units over the previous year. |
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| 1. | The actual ICOR is computed as a ratio of real rate of GCF and growth rate of real GDP. |
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