Chapter-1

Two successive years of sub-5 per cent growth is witnessed for the first time in 25 years.
The growth slowdown in the last two years was broad based, affecting in particular the industry
sector.
Inflation has eased but is still above comfort levels.
WPI inflation in food articles that averaged 12.2 per cent annually in the five years ending 2013-
14, was significantly higher than non-food inflation.
Structural constraints that are responsible for Indias sub-5% growth are.
i) Difficulties in taking quick decisions on project proposals have affected the ease of doing
business.
ii) Ill-targeted subsidies cramp the fiscal space for public investment and distort allocation of
resources.
iii) Low manufacturing base, especially of capital goods, and low value addition in
manufacturing
iv) Presence of a large informal sector and inadequate labour absorption in the formal sector.
Absence of required skills is considered an important reason.
v) Sustaining high economic growth is difficult without robust agricultural growth
vi) Issues related to significant presence of intermediaries in the different tiers of marketing,
shortage of storage and processing infrastructure, inter-state movement of agricultural
produce, etc.
Aided by favorable monsoons, the agriculture and allied sectors achieved a growth of 4.7 per
cent in 2013-14.
Share in GDP-----> Agri and allied=13.9%
Indus=14.9%
services=59.9%
In the absence of sufficiently high growth in agriculture and industry; services would be seriously
constrained to sustain growth acceleration on auto-pilot mode since many of the services are
dependent on buoyancy in the commodity-producing sectors, especially industry. Hence a
sustained recovery in the industrial sector is at the heart of a sustained growth recovery.
AGGREGATE DEMAND
Aggregate demand of the economy comprises final consumption and investment along with net
exports (exports minus imports) of merchandise and non-factor services. Aggregate demand,
measured in terms of GDP at constant (2004-05) market prices, registered a growth of 5.0 per
cent in the year 2013-14 as against 4.7 per cent in the previous year, owing mainly to higher
level of net exports.
i) Consumption= share of pvt consumption expenditure declined since 80s owing to increase
in savings by households, government consumption expenditure as a proportion of GDP has
exhibited remarkable consistency since the 1980s.
ii) Investments= Reduced private corporate investment rate is the primary reason for decline
in overall investment rate (that too in machinery and equipment segment).
The decline in cash flows of corporates could also be attributed to (a) sluggish demand
conditions, (b) weak pricing power, (c) high input cost, and (d) delays in collection of
receivables after delivery of orders.
Part of the slowdown in investment growth post 2007-08 can be attributed to policy
uncertainty emanating from difficulties in land acquisition, delayed environmental
clearances, infrastructure bottlenecks, problems in coal linkages, ban on mining in selected
areas, high global uncertainty, inflation caused partly due to high fiscal deficit, etc.
Slowdown in investment could also be explained in terms of the subdued business
environment and bleak business confidence.
Lowering nominal interest rates may provide short-term relief from interest burden
but, in the medium term, lower rates with little slack in the economy will lead to further
inflation, affecting investment adversely. Therefore structural reforms and resolving supply-
side bottlenecks are the key to incentivizing investment
iii) Net exports= Net exports in national accounts are defined as the difference between export
of goods and non-factor services and import of goods and non-factor services.
The share of exports in GDP increased from 24.0 per cent in 2012-13 to 24.8 per
cent in 2013-14, while the share of imports declined from 30.7 per cent to 28.4 per cent,
resulting in an improvement in net exports by 3.1 percentage points of GDP.
PUBLIC FINANCE
With a shortfall in tax revenues and disinvestment receipts along with higher-than-budgeted
subsidies and interest and pension payments, fiscal consolidation was mainly achieved through
reduction in expenditure from the budgeted levels.
There has been a sharp increase in total subsidies from 1.42 per cent of GDP in 2007-08 to 2.56
per cent of GDP in 2012-13, and 2.26 per cent of GDP in 2013-14 (RE)
Of the total public debt, internal debt constitutes 95.5 per cent, whereas external debt (at book
value) constitutes the remaining.
Raising the tax-GDP ratio and furtherance of subsidy reforms are essential for fiscal
consolidation.
SAVINGS
The gross savings rate fell by 6.7 percentage points of the GDP to 30.1% in 2012-13. The bulk of
the decline can be attributed to the private corporate and public sectors. While the decline in
the former owes mainly to lower growth in the industry sector and lower profit margins, lower
public savings to GDP ratio can be attributed to reduced savings of non-departmental public
enterprises and greater dis-savings of public authorities.
The savings of the household sector are the sum of financial savings and savings in physical
assets. The household savings rate had stabilized around an average of 23%
PRICES AND MONETARY MGMT.
Food inflation has been much higher than non-food inflation in 2013, the major risk arises from
sub-normal monsoons during 2014-15 on account of the El Nino effect and higher prices
of oil due to the geo-political situation in the Middle East, subsidy on agri inputs and MSP can
also increase the inflation further.
Inflation in non-food manufactured products (core inflation) remained benign throughout the
year and moderated to a four-year low of 2.9 per cent in 2013-14. This indicates that the
underlying pressures of broad-based inflation may have somewhat eased.
INTL. TRADE, EXTERNAL DEBT
Indias share in world exports and imports increased to 1.7 per cent
and 2.5 per cent respectively in 2013.
Thus the CAD moderated to US$ 32.4 billion in 2013-14 as against US$ 88.2 billion in 2012-13

PRIORITIES AND OUTLOOK FOR 2014-15
Maintaining the CAD in the range of 2-2.5 % of GDP.
Sustained and high overall economic growth is possible with the farming sector growing at
around 4 % per annum.
The European Central Banks monetary policy measures, most significantly introduction of the
negative deposit facility interest rate are expected to boost economic activity in Europe
Growth in 2014-15 is expected to remain more on the lower side of the range given above, for
the following reasons:
(i) steps undertaken to restart the investment cycle (including project clearances and
incentives given to industry) are perceived to be playing out only gradually;
(ii) the benign growth outlook in some Asian economies, particularly China;
(iii) still elevated levels of inflation that limit the scope of the RBI to reduce policy rates;
(iv) expectation of below-normal monsoons
In the monsoons for 2014-15, there are concerns about the likely occurrence of the El Nio,
when surface temperatures in the Pacific Ocean continuously rise above average for several
months which adversely affects weather in many regions. This is likely to have an impact on
Indias agriculture and consequently on food prices (70 per cent probability of occurrence of El
Nio.)
Productivity levels of rice and wheat have not risen significantly after the 1980s. While cotton
yields have shown tremendous leap over the last decade
There is need to facilitate a National Common Market for agricultural commodities with uniform
taxes in the domestic market, and to foster a long-term stable trade policy for agricultural
products.
As per IIP data, mining output contracted for the third successive year in 2013-14, declining by
0.6 per cent( Key reason behind Industrial sector deceleration)
The capital goods segment has been among the weakest performers in the manufacturing sector
For eight core industriescoal, fertilizer, electricity, crude oil, natural gas, refinery products,
steel, and cementthe average growth rate declined from 6.5 per cent during 2012-13 to 2.7
percent during in 2013-14.
Of the total 239 central infrastructure projects costing 1000 crore and above, 99 are delayed
with respect to the latest schedule and 11 have reported additional delays vis--vis the date of
completion reported in Feb, 2014
Total foreign direct investment (FDI) inflows into major infrastructure sectors registered a
growth of 22.8 per cent in 2013-14 as compared to the contraction of 60.9 per cent during 2012-
13.
Overall NPAs of the banking sector increased from 2.36 per cent of total credit advanced in
March 2011 to 3.90 per cent of total credit advanced in March 2014
The RBI in the Financial Stability Report (December 2013) identified five sectorsinfrastructure,
iron and steel, textiles, aviation and miningas stressed sectors. Public sector banks (PSBs) have
high exposures to the industry sector in general and to such stressed sectors in particular.
The FSDC decided to initiate institution-building for four new organizations:

the Resolution Corporation (RC) which will detect and deal with distressed financial firms;
the Public Debt Management Agency which will manage the domestic and overseas borrowing
for the government;
the Financial Sector Appellate Tribunal which will hear appeals against financial agencies;
and the Financial Data Management Centre which will be a database within the FSDC.

These are likely to enable a holistic view of the Indian financial system.
The expenditure on social services by the government as a percentage of GDP has increased
from 6.8 per cent in 2008-09 to 7.2 per cent in 2013-14 (BE) with expenditure on education
increasing from 2.9 per cent to 3.3 per cent and on health from 1.3 per cent to 1.4 per cent
Indias per capita carbon emissions were 1.7 metric tons in 2010, well below the world average
of 4.9 metric tonnes.

IMP. STATS
GDP= 57,41,791 Crore ( factor cost 2004-05 prices)
Growth rate=4.7%
Per Capita Net National Income(factor cost at current prices)=74,380
IIP= -0.1%
Electricity Generation(growth)=6.1%
WPI(avg)=6%
CPI-IW(avg)=9.7%
CAD= -1.7% (imports= -8.3%, export=4.1%(change))
Forex Reserves= $314.2 Billion(June, 2014)
M3(change)= 13.3%
Gross Fiscal Deficit=4.5%(of GDP)
Revenue Deficit=3.2%(of GDP)
Primary Deficit=1.2%(of GDP)
External Debt=$426 Billion