!

!
!
!
!
!
!
!
!
!
!

Companion!to!the!Indian!Economy!for!
UPSC!Civil!Services!(Main)!Examination!
2015!

TABLE&OF&CONTENTS&
!
Chapter!1!................................................................................................................................................!4!
Inclusive*Growth*and*Economic*Development*in*India*.......................................................................................*4!
Chapter!2!..............................................................................................................................................!19!
Budgeting*in*India**Process,*Evaluation*and*Innovations*...............................................................................*19!
Chapter!3!..............................................................................................................................................!31!
Cropping*Pattern*in*India**Associated*Determinants*and*Land*Use*...............................................................*31!
Chapter!4!..............................................................................................................................................!38!
Irrigation*and*Water*Security*...........................................................................................................................*38!
Chapter!5!..............................................................................................................................................!43!
Farm*Variability:*Securing*Economies*of*Scale*and*Better*Market*Access*and*Returns*...................................*43!
Chapter!6!..............................................................................................................................................!69!
The*Role*of*Subsidies*in*Indian*Agriculture*.......................................................................................................*69!
Chapter!7!..............................................................................................................................................!78!
Minimum*Support*Price*and*The*Indian*Farmer*...............................................................................................*78!
Chapter!8!..............................................................................................................................................!86!
PDS*and*Food*Security*......................................................................................................................................*86!
Chapter!9!..............................................................................................................................................!92!
Food*Processing*and*Related*Industries*in*India*...............................................................................................*92!
Chapter!10!..........................................................................................................................................!102!
Renovating*Land*Management**The*Role*of*Land*Reforms*in*Agriculture*...................................................*102!
Chapter!11!..........................................................................................................................................!116!
Industrial*Policy*and*Its*Role*in*the*Economic*Turnaround*.............................................................................*116!
Chapter!12!..........................................................................................................................................!123!
The*New*Economic*Policy*and*the*Age*of*Market*led*Growth*........................................................................*123!
Chapter!13!..........................................................................................................................................!132!
Infrastructure*in*India**Strengths,*Weaknesses*and*Recommendations*.......................................................*132!
Chapter!14!..........................................................................................................................................!141!
Recent*Initiatives*for*Augmenting*Power*Generation*in*India*........................................................................*141!
Chapter!15!..........................................................................................................................................!143!
New*Initiatives*by*Indian*Railways*in*2014*.....................................................................................................*143!

2!

!
Chapter!16!..........................................................................................................................................!145!

Recent*Initiatives*for*Development*of*the*Infrastructure*Sector*in*India*........................................................*145!
Chapter!17!..........................................................................................................................................!147!
PublicXprivate*Partnership*in*Infrastructure*...................................................................................................*147!
Chapter!18!..........................................................................................................................................!151!
Planning*in*India,*Planning*Commission*and*the*12fth*FYP*............................................................................*151!
Chapter!19!..........................................................................................................................................!170!
Planning*then*and*now*X*An*analysis*of*FYPs*in*India*.....................................................................................*170!
Chapter!20!..........................................................................................................................................!179!
Mobilization*of*Resources*and*The*Role*of*Monetary*Policy*..........................................................................*179!
Chapter!21!..........................................................................................................................................!191!
Employment*Generation*Through*Growth*and*Planning*...............................................................................*191!
Chapter!22!..........................................................................................................................................!197!
GAAR*and*Tax*Avoidance*................................................................................................................................*197!
Chapter!23!..........................................................................................................................................!198!
Currency*Volatility*in*India*..............................................................................................................................*198!
Chapter!24!..........................................................................................................................................!203!
VAT*and*GST*...................................................................................................................................................*203!
Chapter!25!..........................................................................................................................................!206!
Education*X*Policies*and*Outcomes*.................................................................................................................*206!
Chapter!26!..........................................................................................................................................!215!
Health*X*Policies*and*Outcomes*......................................................................................................................*215!
Chapter!27!..........................................................................................................................................!233!
Skill*Development*and*its*Expansion*.............................................................................................................*233!
Chapter!28!..........................................................................................................................................!241!
Population*Policy*in*India**Startegies*and*Implementation*..........................................................................*241!
Chapter!29!..........................................................................................................................................!248!
Guide*to*NCERTs*for*Economics*......................................................................................................................*248!

!
!
!
!
3!

!
Chapter!1!
Inclusive*Growth*and*Economic*
Development*in*India**
!

Introduction
! The agenda of inclusivity and sustainability has become the focus of policy framework both at
national and international level. The approach of development through "including" the general
mass is directed towards a broad based growth, shared growth, and pro-poor growth. This is the
central idea of the inclusive growth i.e. sharing of fruits of socio-economic development with all
sections of the society. Elimination of the extreme forms of poverty and participation of the
people is encouraged through the idea of inclusive growth.
! Approach paper of Eleventh five year plan of government of India has laid down the vision and
strategies for inclusive growth. The vision underlines the target of the plan as not just faster
growth but also inclusive growth. The inclusion inter alia means the equality of opportunity
for all. The vision also enumerated the following factors which are interrelated components of
the IG:
" Poverty Reduction
" Employment Generation
" Access to essential services
" Equality of opportunity
" Skill building
" Good governance
" Women empowerment
! The concept and definition of the IG is not formally illustrated anywhere in the government.
There have been some attempts to frame the subject matter related to IG.
! Economic Survey (2007-2008), for instance, presents some conceptual background of Inclusive
Growth. International agencies like UNDP and World Bank have elaborated the understanding of
IG. In-fact, the terms like inclusive growth, sustainability, good governance etc. are made
popular by the international organizations. The parameters of IG are considered differently by
different governments, organizations etc. UNDPs definition of the IG underlines production and
income as the components of IG:

4!

! IG is the process and the outcome where all groups of people have participated in the
organization of growth and have benefited equitably from it. Thus inclusive growth represents
an equation with organization on the left hand side and benefits on the right hand side.
World Bank defines the IG as follows:
! Inclusive Growth refers both to the pace and pattern of growth, which are interlinked and
must be addressed together.
! Thus, in broad sense, IG means the inclusion of all sections of society in the process of economic
development and sharing of its benefit. Therefore, IG is not only an outcome or end but a process
or a mean in itself.
Theoretical Perspective
! The IG is not formally defined in Indian Economic Planning literatures. It still lacks a sound
theoretical background. The present planning adopts a hit and trial approach towards IG. On one
side it leads to increase in economic growth rate and exclusion of the targeted beneficiary on
other side.
! The term inclusion is ambiguous in Indian context; inclusion may be through impacting the
majority of populace or by increasing the reach to select group of individuals or regions which
are excluded. Therefore, crystal clarity in understanding the rubrics of IG through a conceptual
and theoretical background is required.
Trickle down
! Trickle down theory argues that the benefits of growth would automatically trickle down to
bottom. The theory also asserts that the trickle down is a process that must be left to its natural
pace and path; and forcing it down may be unproductive. The trickle down approach has failed in
its desired effects in the socio-economic development of India. Redistributive policy is suggested
to be a part of inclusive growth development programs.
! On other side, trickle down theory in economics explains supply side of the economic growth.
According to the theory, the top income earners should be taxed less, so that investment in the
market in encouraged; and goods and prices can be made available to the consumers at low
prices. In this way, trickle down theory assumes the top-to-bottom approach in economic
development.
Welfare Economics
! Welfare economics is the branch of economics that examines the resource allocation and the
policy in terms of societal or individual costs or benefits. One of the objectives of welfare
economics it to help society better decisions that maximize its wellbeing. By adopting the
welfare economics approach, the following issues with respect to IG can be addressed:
1) Allocation of the resource as per the economic efficiency.
2) The equality of welfare gains.
3) Viability and desirability of the policy framework.

5!

4) Effect of the resource allocation on select target beneficiaries.

! The thrust of welfare economics is on efficiency and distribution. Therefore, the welfare
economics considers the system, standards and regulatory institutional mechanism as important
elements of the IG policy framework.
Bottom-up approach
! Bottom-up approach encourages participation of people in the development process.
Decentralization, local-self government and rural development are some of the common
practices under bottom-up approach. Rural governance attempts to establish whether
decentralization of governance is effective for achieving inclusive and pro-poor growth.
! The inefficiencies in the flow of essential services hinder peoples access to opportunity and
benefit of economic growth. Hence, bottom-up approach is suggested where greater
decentralization is expected to give preferences to the target population. In order to achieve a
long-term sustainable economic growth, inclusive growth is required to be fuelled from the
bottom-up instead of enforcing it from top to bottom.
Public Relation Approach to IG
! The vision of Public Relation Approach to IG is to build up Peoples Participation and ensure
Peoples Partnership in Developmental process. Mobilization and integration of masses by way
of effective communication, motivation strategies and human resource management are some of
the strategies under the approach.
! Public relation approach tends to find out the socio-psychological factors that motivate or demotivate peoples participation in the inclusive growth process. State merely acts as a catalyst
and provides a platform. Encouraging micro-level entrepreneurship in agro-industries is one of
the examples of the Public Relation Approach.
Dimensions of IG
! These are the pillars of the building block of IG, or in simple terms, these are the ideals on which
IG is based. Without these ideals, the IG remains superfluous in its merit.
Equality
! Equality of opportunity in terms of access to markets, resources, and unbiased regulatory
environment are the ends to mean of equality. In-equalities exist in various manners which are
social inequalities, rural-urban divide, regional disparities, digital divide etc. To realize the IG in
its ultimate form, equality is the most fundamental criteria. IG and equality impact each other.
! Without equality, IG cant be achieved and lack of IG may lead to in-equality in real or
perceived forms. Thus, IG and equality are mutually reinforcing. In contemporary economic
environment, gender equality has become a basic element of IG. Gender inequality is a pervasive
problem in Indian social set-up which has adverse effect on women. Although Indian economy
has progressed, the equality has retrograded at all levels whether social or economic. An OECD

6!

report has identified that inequality in India has been continuously rising which has posed policy
challenges in promotion of inclusiveness.
Good Governance
! In simple words, governance means the regulatory, monitoring or controlling process that
facilitates the delivery of the government services. Good governance results in effectiveness and
efficiency, it upholds justice in the rule of law, and accountability and it encourages popular
participation, consensus, and equality. Tenth plan defines governance in following way
! Governance relates to the management of all such processes that, in any society, define the
environment which permits and enables individuals to raise their capability levels, on one hand,
and provide opportunities to realize their potential and enlarge the set of available choices, on
the other
! Good governance is an integrated effort of state, civil society and citizens. Governance here
means not only state intervention; it is the responsibility of general mass and civil service
organizations (CSOs). Good governance is the core of essential public services. It is the
mechanism for integrating IG, public administration and accountability towards envisaged
outcome; for example, problems in poor health infrastructure may be an impediment to IG and
can often be traced back to poor governance of the Ministry of Health and Family Welfare. So,
good governance provides a common platform for all actors and adapts to sustain the socioeconomic transformation which is a pre-requisite of IG. As stated, governance is not only the
forte of state; private governance has also a remarkable role to play in taking the IG ahead. The
term, private governance here means the role of non-state actors in maintaining supply and
demand equilibrium in market. Private governance also highlights the role of private sector in
meeting the demand of capital, resource and skills required for IG.
Decentralization
! A National Council of Applied Economic Research (NCAER) argues that the decentralization
hampers inclusive growth. Empowering local self governing institutions is one of the delivery
mechanisms of the IG. 73rd and 74th amendments of the constitution are innovation in the field
of Indian Polity.
! Centre and state governments have to empower the PRIs to make them enabler of IG. In this
regard, the eleventh plan has devised a Devolution Index to be called PRI-Empowerment
Index. Without decentralization, it is a daunting task to implement the IG based policies.
Therefore, government has to devolve, delegate and decentralize the administration.
Decentralization is a bottom-up approach. Decentralization of rural governance is critical for
achieving IG.
! The present level of decentralization, institutional structure is inadequate. Inadequacy of
decentralization can be reduced by democratizing the institutions of local self-government,
adopting measures of fiscal decentralization i.e. by providing sufficient financial resources.
Apart from that the following are the deficiencies in decentralization that limit the IG potential:

7!

1)
2)
3)
4)

Lack of finance, proper institutions and delegation of roles and responsibilities.

Divergence in central and state approaches in programs and welfare schemes.
Incoherence in organization at national and state level.
Poor accountability, transparency and monitoring mechanism.

Accountability and Transparency

! Accountability is answerability towards performance of service delivery. It sets in the
responsibility towards the assigned tasks in terms of results and outcome. Accountability is
specified both in vertically and horizontally.
! The former refers to the departmental hierarchy in a government institution and the latter refers
to the autonomous agencies for checks and balances on government activities e.g. CAG, PMO
etc. Transparency is necessary for efficient delivery of essential public services; it acts as an
enabler for citizens in accessing information on demand which helps them in reinstating their
claims on government endowments and entitlements meant for them.
! Lack of accountability and transparency has earmarked the governance in India with red-tapism,
bureaucracy and corruption. Government has put efforts in multifarious manners to curb the
menace. Citizen Charter, Right To Information, Central Vigilance Commission etc. are
revolutionary efforts, in as much the poor monitoring of their implementation has put a
constraint of the efficacy of such ideas.
Sustainability
! In long term, it has been identified that, there has been a gross mismatch between the outcomes
of the Indian Economic Planning for IG with respect to environment. Although, Indian economy
has witnessed a rapid growth, there has been a decline in the environment and standard of living
of the poor.
! In the issues related to IG as discussed ahead, it has been elaborated that Liberalization,
Privatization and Globalization (LPG) has put a sheer pressure on the environment and created a
rural-urban divide. Sustainability and IG cant be achieved in isolation and they supplement each
other. Without adopting a sustainable practice in IG, the implementation of IG policies is bound
to falter. Sustainability is required at the following levels when charting out the policy
framework for IG:
" Financial Sustainability: The IG programs and projects of the government should be
financially viable. It may be noticed that excess of subsidy and lack of outcome orientation is
causing a problem of increasing fiscal deficit.
" Social Sustainability: Social sustainability means the need to maintain and sustain specific
structure and culture. This type of problem is typically prevalent in tribal areas where the
development programs for economic growth come in conflict with the cultural sentiments of
the tribal population.
" Environment Sustainability: In long-term, the environment standards must not be
jeopardized while in pursuit of IG. Excess use of fertilizer is a die-hard need of the moment,

8!

at the same time it has lead to is unique problem of depletion of soil productivity and
technology fatigue.
Models of Inclusive Growth
! IG is not the sole responsibility of the state. The goals of IG can be realized if state and non-state
actors work in tandem. There are some of the models of IG which are currently adopted by the
government, private agencies and non-government organizations. Some of the models are
discussed below:

Models'of'
Inclusive'Growth'

Financial'
Inclusion'

Inclusive'
Marke7ng!

Corporate'Social'
Responsibility'
(CSR)!

Financial Inclusion
! Department of Financial Services, Ministry of Finance has taken an initiative to extend financial
services to the large hitherto un-served population of the country to unlock its growth potential.
Financial inclusion means to include the un-banked populace into formal banking system by
providing financial services at very low cost. Rangarajan committee has defined the financial
inclusion in following manner:
! "The process of ensuring access to financial services and timely and adequate credit where
needed by vulnerable groups such as weaker sections and low income groups at an affordable
cost."
! The ministry therefore strives towards a more inclusive growth by making credit/capital
available to the poor and disadvantaged section. Expansion of banking infrastructure, opening
new branches, zero-frills bank accounts, banking correspondents (BCs) (use of services of
intermediaries in providing financial and banking services through the use of Business
Facilitators (BFs) and Business Correspondents (BCs), setting up of ultra small branches etc. are
a few of the modalities under financial inclusion strategies of the government.
! Swabhiman scheme is the running scheme under financial inclusion agenda through which
banks have provided banking facilities to over 75,000 habitations having population in excess of
2000 using various models and technologies including branchless banking through Business
Correspondents Agents (BCAs). The Business Correspondent models (Branch-Free
Banking) besides schemes like Swabhiman have the potential to realize the financial inclusion
in India in true sense of the term.

9!

Inclusive Marketing
! Market is instrumental in creating means and ends for inclusive growth. By proper marketing of
various schemes for IG can be vital in challenging the issues associated with it. Inclusive
marketing is required at all levels i.e. G2G, G2C, G2B, B2B or B2C etc. IEC (Information,
education and communication) can be adopted by the government for inclusive marketing.
! While corporate social responsibility i.e. CSR can be one of the methods adopted by the private
and public sector corporate e.g. ITC's e-choupal wherein ITC (a private sector company) has
taken an initiative for farmers through technological and financial assistance. If IG is seen as an
end of inclusive marketing as a mean, then it becomes apparent that inclusive marketing is
dedicated to add values to the livelihood of the poor, not merely treating them as a consumer of
product and services. The disadvantaged sections of the society face the challenge of making
both ends meet.
! Difficulty in accessing the markets, welfare schemes make them more vulnerable. Therefore,
Inclusive marketing is a mode of integrating the have-nots to the mainframe of development
process.
Corporate Social Responsibility (CSR)
! CSR has a prominent role in complementing the quest for IG. The private sector has been
playing a vital role in promoting IG and contributing with various initiatives. CSR has now
become a part of the corporate policy of the Indian industries. This may be because government
has provided the financial incentives to the industries which are contributing at least 2% of their
profit towards CSR. Future Group, which runs the famous retail stores by the brand Big Bazaar
have CSR a component of their company policy as the group affirms hat CSR is at the heart of
their ethos:
! At Future Group, corporate social responsibility, inclusive growth and sustainability are at the
core of our strategy and business practices. This reflects in our commitment to the community,
environment and to every stakeholder in building a stronger foundation for our long-term,
sustainable growth.
! Hindustan Unilevers Project Shakti wherein woman groups are employed as distribution
channels, Nanhi Kali, a CSR project by Mahindra and Mahindra to sponsor the education of an
underprivileged girl child are some other examples of CSR as a means of IG. Negative
repercussions of CSR must also be closely observed. CSR somehow has become a tool of
Corporate Social Opportunity (CSO) for the private sector whose ultimate motive is profit.
Strategies for Implementation
! Strategies for the implementation of IG are many. In most cases, developing a strategy is not a
problem, but implementation and monitoring. Below mentioned are some flagship approaches
towards implanting IG policies:
Resource Allocation

10!

! Without proper resource utilization, the issues of poverty, equity and development cannot be
addressed. Equitable sharing of the resources is one of the most important means to implement
the inclusive growth based policy framework. The allocation of resources should be made in a
way to benefit the general mass in short and long term. This may be through proper availability
of consumer goods, facilitating access of people, opening avenues of employment and enhancing
standards of livelihood.
! Public Distribution System (PDS) is a classic example of reinforcing IG through proper resource
allocation. PDS should be re-structured. It is important for food security. Government is reworking on the food security bill; poverty line is one of the criteria of resource allocation.

Employment Generation
! Employment is the most vital of all strategies of inclusive growth. At the same time, employment
generation is a real challenge to the government. This is because India is witnessing a
demographic transition and burden of demographic dividend. Albeit, the latest consensus has
showed that the population of India is decreasing but the population of young people entering the
labour force is continuously increasing.
! A research study carried under the aegis of Planning Commission shows that employment in
total in general and in non-agricultural sectors in particular has not been growing.
Unemployment growth in recent years has been accompanied by growth in casualization and
informalization. National Commission on Enterprises for the Unorganized Sector headed by
Arjun Sengupta recommended several measures to resolve this problem of informalization in
the employment.
Organized and un-organized employment in major sectors (million)
Major Sectors
Total
Un-organized
Organized
Employment
Employment
Employment
Agriculture
244.85(100%)
242.11(99%)
2.74(1%)
Manufacturing

50.74(100%)

34.71(69%)

16.03(31%)

NonManufacturing

48.28(100%)

30.38(63%)

17.90(37%)

Services

116.34(100%)

80.17(69%)

36.17(31%)

Total

450.22(100%)

387.38(84%)

72.84(16%)

Source: National Sample Survey Organization (NSSO)

11!

! A transition of increasing employment from unorganized to organized sector is an indication of

socio-economic development. However the condition of employment is contrary to this
transition. Indian economy is marked by the disguised employment as a large chunk of the man
force is employed in agriculture sector where there is very low marginal productivity. The table
above shows the similar trend. Employment in manufacturing, non manufacturing and services is
roughly one-third and large share of unorganized employment in the agricultural sector. For a
sustaining inclusive growth, government is required to develop policy framework for
employment generation as a top priority.
! MNREGS is a successful attempt in this regard. Poverty alleviation schemes through resource
distribution may be panacea for short term but in long term, employment generation is the only
way out. This is because resource distribution through subsidization enlarges fiscal deficit and
burden on exchequer while employment is productive in its tendency.
Skill Building and Capacity Development
! Skill deficit is a major impediment in IG. Government has created a framework for
entrepreneurship development. Employment generation may not fulfill the rising employment
demand due to large share of the population lying in the informal sector. Skill and capacity
development are therefore cornerstone. Indian government has set a target of providing skills to
500 million people by 2022. Key agencies involved are National Skill Development Council,
National Council of Vocational Training and Directorate General of Employment and Training,
other government and non-government agencies, business chambers etc.
! The government has also launched a skill development initiative scheme; Modular Employable
Schemes (MES) and Vocational Training Provider (VTP) are examples of such initiatives by the
government. Besides, the government in eleventh plan has also proposed to build a Virtual
Skill Development Resource Network, with a facility for trainees at 50000 Skill Development
Centers, through information technology and communication intervention.
! A National Skills Inventory is also created which is a database for Skills Deficiency Mapping
for employment by providing a common platform for information exchange between employers
and employment seekers.
Agriculture
! Agriculture is the central pillar of inclusive growth. It provides employment to unskilled
workforce and sustenance to the population. Average annual growth rate of agriculture and allied
sector was 3.6% during XI Plan against 2.5% and 2.4% in IX and X plans respectively.
! Although the rate has increased but at the same time rural distress, farmers suicides and debt
have also increased. Inflation, vulnerability to world commodity prices, regional disparities have
been newly emerging challenges. The policy framework of the government is in-adequate. There
is a gross mis-match on both supply side and demand side.
! Land issues, subsidies and lack of investments, Land and Water management, Technology,
Credit, Diversification and Marketing, Institutional set-up and prices are chronicle problem. Five
factors which the government needs to work out and that may unblock the agriculture growth

12!

potential are: public investment, private investment, technology, diversification and fertilizer.
Agriculture can be a mean to economic growth if the efforts are target oriented.
! Agriculture growth rate above 4% and investment in agriculture must be around 15%-20% of the
GDP. Equitable sharing of the benefits of agriculture growth between various levels of the
population pyramid is much needed. Environment friendly practices can provide the
sustainability. In addition to the targets, government must check excess of subsidies. Subsidies
over a limit are burden on exchequer and it leads to the degradation of environment.
! The choice of right technology is also a leading concern in Indian agriculture. Genetic Modified
crops are widely debated and existing technology is showing a characteristic phenomenon called
"technology fatigue" i.e. technology applied to the agriculture has failed to increase the
agricultural productivity.
! Diversification of the land between farmers and between different crops has limited the growth
prospect of agriculture. Small farmers are not able to make the most of increasing agriculture
productivity. Crops like wheat and rice are most grown due to less risk in these commodities.
Crops diversification is not practiced in Indian agriculture at a broad level because of lack of
proper infrastructure.
Issues related to IG
! Various issues are involved when it comes to IG. Some issues are quite basic which lack clarity
in vision; some are related to the lack of willingness while others may be due tithe constraints
which can be overcome in short term. Some key issues associated with IG are following:
Growth vs. Development
! Over a period since economic reforms, India's economic growth has witnessed a mixed effect on
the real development. GDP is considered the key parameter of economic growth. In reality, the
increasing GDP growth rate has not trickled down to the bottom of pyramid. A research study
carried by Indira Gandhi Institute of Development Research, an autonomous think-tank under
Reserve Bank of India find out that economic growth has "trickled down" in both rural and
urban areas; it has not been in favour of the poor. In urban areas, growth has been "antipoor."
! BPL and poor of the poor still remain marginalized. Such issues are quite fundamental in nature
as they depict the lack of clarity in the vision and strategy of the policy. It is time, to put the IG
as the central agenda of the economic growth.
Defining Poor
! Who are poor and who should be the beneficiaries of the welfare schemes? Without a proper
criterion of poverty, proper policy framework for inclusive growth cannot be developed. Efforts
have been put taking calorie values, wages etc. as criteria of defining poverty line.
! The lacuna of poverty definition also impacts the other associated areas such as employment
schemes and subsidies for the poor. All this have repercussions on inclusive growth. Government

13!

is gung-ho on the observation the reducing rate of poverty which has come down to the level of
35% but the inequality has increased at the same time.
Fiscal Deficit
! Development schemes run by the government have created a dilemma of expanding fiscal
deficit. India's current fiscal deficit situation has limited the prospect of development schemes.
India has significantly high debt to GDP ratio, balance of trade (negative) and current account
deficit (CAD). Last year's estimates were: fiscal deficit: 5.2% of GDP; CAD: USD 92 bn;
stimulus package: Rs. 1.84 lakh crore (3% of GDP).
! The government has set a target of reducing fiscal deficit to the level of 3 per cent by 2016-17.
Fiscal deficit also creates the problem of inflation which in turn makes the poor even more
vulnerable. Increasing CAD is comparatively more detrimental to IG than fiscal deficit.

Ill-effects of LPG
! Liberalization, privatization and globalization of Indian economy has ushered the poor to
vulnerability and irony. Liberalization and privatization have particularly suited to the Indian
private corporate, elites and rich. Globalization has created a question of existence in-front of
small and medium enterprises (SMEs). Have a look at the plight of the women employed in the
cotton fields of northern India.
! Now, India's share of textile industries in world trade is remarkably low. All this have limited the
growth potential and created the problem of unemployment. The malfunctioning of LPG in
Indian scenario has surmounted new issues viz. gender inequality and threat to women
empowerment.
Social-injustice
! Government is gung-ho on their efforts of reducing the poverty rate; even the UN's MDG report
affirms that Indias poverty rate is expected to fall to 22% by 2015 from 51% in 1990. At the
same time, there are other chronicle issues which have magnified over a period e.g. child
malnutrition.
! A Hunger and Malnutrition Survey 2011 revealed something shocking; in the 100 focus districts
with the poorest child development indicators, over 40 per cent of children were underweight
and almost 60 per cent stunted. Citing the report, the PM lamented: the problem of malnutrition a
matter of national shame. Rich have become richer and poor have become poorer, marginalized
are even more ignored, also poverty has concentrated more in backward classes, minority, SCs
and STs.
Infrastructure
! Infrastructure is fundamental to the economic and inclusive growth. In budgetary allocations,
Infrastructure is assigned the highest expenditure. Major proportion of this allocation goes to

14!

large projects such as power generation, freight corridors, and airports etc, while rural
infrastructure is immensely neglected. In many areas, the lack of proper infrastructure is acute.
! Major thrust of the infrastructural development of the government has been from view of
industrial development. Agriculture, for an instance, has always lacked the focus. Infrastructure
to support and facilitate backward linkages in agriculture. e.g. cold storage houses, processing
facilities, rural transport is need of the hour.
! Apart from that, the rural-urban divide in infrastructure development has become prominent. For
a case in point, Eleventh plan recognizes that: It is an irony that the phenomenal growth in the
telecom sector has also created a digital divide in terms of mobile and landline connections and
Internet and broadband connections between urban and rural India.
! The plan also highlights the dearth of rural electrification and observes that rural electrification
an important instrument to bring about inclusive growth by making electricity available to
farmers and in rural areas. 7.8 crore rural households still remain sun-electrified.

Low Technology and Innovation

! Indian economy is suffering from a technology-lag vis-a-vis developed economies and other
industrialized economies. Poor rate of technology and innovation creates a burden on capital and
resource base. India's agricultural productivity is far below to that of developed countries.
Agriculture is mainstay of the economic growth and a source to unskilled work-force
employment.
! The rapid technological development in primary activities such as agriculture creates a question
of economic duality in front of the policymakers of the country. This means, if a high rate of
technology is adopted in primary sector industry, then it may lead to high rate of unemployment,
but at the same time, without technological progress, the productivity would be less to sustain the
pressure on the economy.
! Considering this, there is an immediate requirement of technologies such as green technology,
environmentally friendly technologies and renewable energy technology etc. so that the pressure
on natural resources may be overcome. Policy makers have to address the economic duality
judiciously. Apart from that, the innovation per se is required to be a harbinger of IG which is
broad sense is termed as inclusive innovation.
! Inclusive innovation means the creation and absorption of product and services relevant to the
poor. In this case, SMEs, MSMEs and grass root innovation enabling agencies such as National
Innovation Foundation can play a decisive role. Finance, competency and infrastructure are the
foundation for inclusive innovation and enabler for IG.
Policy Approaches for Inclusive Growth
! As far as the policy framework is concerned, the government lacks a suitable policy vis--vis IG.
Nonetheless, the government has experimented with various models of IG. According to World
Banks review of Indias Development Policy, IG policy implementation is facing a dilemma of

15!

improving the delivery of core public services, and maintaining rapid growth while spreading
the benefits of this growth more widely.
! The strategy for the inclusive growth per se needs to be an integrating strategy comprising state,
market, civil societies and common man. Since independence, the government has practiced
various types of policy measures, a few are discussed ahead:
Growth oriented policy
! Indias economic planning started with growth oriented policy. First plan (1951-56) was started
with an objective of rapid and balanced growth. The second plan (1956-61) also put a thrust on
rapid growth of industrialization. More recent, eleventh five year plan (2007-12) has blended
economic growth with inclusion with an objective of Faster, Sustainable and More Inclusive
Growth. Arvind Virmani, ex-chief economic advisor to government of India has divided the
policy approaches for economic growth in following phases:
" Phase 1: 1950-1 to 1979-80 (two sub-phases: 1950 50-65 to 1966-79)
" Phase 2: 1980-81 to 1993-94 (change in policy regime, reform initiation and structural
adjustment in the economic policy.)
" Phase 3: 1994-5 onwards (Statistical significant growth break (1994-5) and rising growth
trend)
! The rate of economic growth has increased with time, particularly in phase 3, which is a result of
radical reforms during 1990s. However, it has failed to emphasize inclusive growth by creating
more jobs for low and semi-skilled workers. Growth is not equally shared and in many parts of
the country, people still remain poor and disadvantaged in significant proportion.
Direct intervention
! The direct intervention is facilitating the IG though legislation, regulation, credit facilitation and
providing livelihood security are the forms of direct intervention by the government. Now, the
orientation of administrative machinery is transformed from regulator to facilitator. Government
direct intervention from the perspective of IG now is seen in making available the requisite
social investment, establishing independent regulatory institutional mechanism, drafting
incentive based policy and encouraging entrepreneurial innovation.
! Safety nets or anti-poverty measures are the some other ways of direct intervention of the
government towards IG.
Capacity Building
! Skill development is basically capacity development. However, capacity development is not only
limited to skill building or entrepreneurial innovation. Capacity development through training of
rural development functionaries is also a mean of capacity building.
! Now, creating job and market demand is not the only criteria of capacity development.
Increasing efficiency, effectiveness, accountability and transparency are also considered the
areas under capacity building initiatives of the government.

16!

! For example, if the objective of Department of Rural Development is enhancing the livelihood
security of households in rural areas though MNREGA then capacity building for enhancing
effectiveness of Gram Sabha is one of the modalities to achieve the objective.
Welfare schemes
! Food subsidies, public distribution of essential commodities, nutrition programs, financial
support though micro finance are examples of the ways in which welfare schemes are
implemented. For different types of beneficiaries (women, children, BPL etc.) central and state
government have come with the customized welfare schemes.
! The approach in welfare schemes is to benefit the beneficiaries through optimal allocation of
resources and access to essential services. Integrated Child Development Scheme is a type of
welfare scheme with children and women as beneficiaries. It is India's flagship scheme for the
nutritional and developmental needs of children.
Public Participation
! Without public participation at different level of governance, IG remains a distant dream.
Government is encouraging the public participation in multifarious ways towards which the
common man must show an affirmative and pro-active response. SHGs promotion is a typical
example of public participation for IG. Government can provide the supporting platform for
citizen centric services, the responsibility to deliver still is of the common man. SHGs support
and promotion programs have yielded good results in South Indian states, Kerala and Andhra
Pradesh particularly.
! Kerala government supported Kudumbsree programme has been successful in women
empowerment and reducing poverty. Similar initiative of Andhra Pradesh namely Indira
Kranti Pathakam is showing a good progress in social mobilization, gender empowerment and
rural poverty reduction.
! Lastly, policy intervention takes place both at micro and macro level. Improving fiscal
discipline, trade liberalization, promoting Foreign Direct Investment, privatization, deregulation,
tax reforms, labour laws, social safety nets, public expenditure etc. are important for macro
policy measures while at the micro level, reducing inequality in income, improving public/social
infrastructure, healthcare, education, access to essential services, accountability and
transparency, women empowerment, role of civil society organizations, etc are instrument of
micro policy which needs to be re-worked.
Summary
! As discussed at the outset, the approach paper for 11th Five Year Plan acknowledges that the
economic growth has failed to be inclusive enough. The failure is a question of willingness, not
of capacity. There is no dearth of capacity to achieve the goals of IG but willingness and
shortsightedness.
! With a lot of enthusiasm, policies are framed; proper mechanism of implementation, monitoring
and accountability is the central issue of all policies directed towards IG. Strategies should be

17!

easy to implement and productive e.g. the employment generation should be made productive
and result oriented. When it comes to the BPL or the poorest of the poor, the productivity should
be outcome based and not target oriented because the targeted mass under the inclusive growth is
disadvantaged and unskilled mass.
! SME's and MSME's are labour intensive industries. Due to LPG; their share in employment has
decreased. Government must look for change in labour laws at domestic level and trade laws at
international level to safeguard the domestic interests.
! The onus of IG must be shared by all channel partners state, civil society organization (CSOs)
and citizens e.g. CSOs can work in tandem with the PRIs in rural areas to make the social
development schemes more efficient. Finally, there is a lack of convergence in policy. The
policy framework has to be transformed giving primacy to the common man.

18!

Chapter!2!
Budgeting*in*India**Process,*Evaluation*
and*Innovations**
Evolution of Budgeting
! Budgeting is the process of estimating the availability of resources and then allocating them to
various activities of an organization according to a pre-determined priority. In most cases,
approval of a budget also means the approval to various spending units to utilize the allocated
resources.
The Line Item Budget
! In the early nineteenth century, government budgeting in most countries was characterized by
weak accounting procedures, adhocism, little central control and poor monitoring and evaluation.
! In the late nineteenth century, line-item budgeting was introduced in some countries. Indeed line
item budgeting which is the most common form of budgeting in a large number of countries and
suffers from several drawbacks was a major reform initiative then. The line item budget is
defined as the budget in which the individual financial statement items are grouped by cost
centers or departments. It shows the comparison between the financial data for the past
accounting or budgeting periods and estimated figures for the current or a future period.
! In a line-item system, expenditures for the budgeted period are listed according to objects of
expenditure, or line-items. These line items include detailed ceilings on the amount a unit
would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring
that the agencies or units do not exceed the ceilings prescribed. A central authority or the
Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are
not violated.
! The line item budget approach is easy to understand and implement. It also facilitates centralized
control and fixing of authority and responsibility of the spending units. Its major disadvantage is
that it does not provide enough information to the top levels about the activities and
achievements of individual units.
! The weaknesses of the line item budgeting were sought to be remedied by introducing certain
reforms. Performance budgeting was the first such reform.
Performance Budgeting
! Unlike the traditional line item budget, a performance budget reflects the goal/objectives of the
organization and spells out performance targets. These targets are sought to be achieved through
a strategy(s). Unit costs are associated with the strategy and allocations are accordingly made for
achievement of the objectives.
! A Performance Budget gives an indication of how the funds spent are expected to give outputs
and ultimately the outcomes. However, performance budgeting has a limitation - it is not easy to

19!

arrive at standard unit costs especially in social programmes which require a multi-pronged
approach.
Zero-based Budgeting
! The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every
budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes
were made in the allocation, under zero-based budgeting every activity is evaluated each time a
budget is made and only if it is established that the activity is necessary, are funds allocated to it.
! The basic purpose of ZBB is phasing out of programmes/activities which do not have relevance
anymore. However, because of the efforts involved in preparing a zero-based budget and
institutional resistance related to personnel issues, no government ever implemented a full zerobased budget, but in modified forms the basic principles of ZBB are often used.
Programme Budgeting and Performance Budgeting
! Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was
introduced in the US Federal Government in the mid-1960s. Its core themes had much in
common with earlier strands of performance budgeting.
! Programme budgeting aimed at a system in which expenditure would be planned and controlled
by the objective. The basic building block of the system was classification of expenditure into
programmes, which meant objective-oriented classification so that programmes with common
objectives are considered together.
! PPBS went much beyond the core elements of programme budgeting and was much more than
the budgeting system. It aimed at an integrated expenditure management system, in which
systematic policy and expenditure planning would be developed and closely integrated with the
budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor
was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal
government in USA did not succeed, although the concept of performance budgeting and
programme budgeting endured.
! Many governments today use the programme budgeting label for their performance budgeting
system. As pointed out by Marc Robertson, the contemporary influence of the basic programme
budgeting idea is much wider than the continuing use of the label. It is defined in terms of its
core elements as mentioned above. Programme budgeting is an element of many contemporary
budgeting systems which aim at linking funding and results. The extent of ongoing influence of
programme budgeting is partly obscured by a wide variety of terminology used today to refer to
programme such as outcomes or output groups (Australia) and Requests for Resource
(UK)
! Programme budgeting by itself may not bring the outcome orientation. It is also difficult to make
performance targets as part of the budget formulation process unless managers at various levels
get involved in the budgeting process, involving prioritization of activities and resource
allocation on that basis.

20!

The Union of Indias Budget

! The annual statement of the outlays and tax revenues of the government of India together with
the laws and regulations that approve and support those outlays and tax revenues make up the
union budget. The union budget has two purposes:
1. To finance the activities of the union government
2. To achieve macroeconomic objectives.
! The use of the union budget to achieve macroeconomic objectives such as employment,
sustained economic growth, and price level stability is called fiscal policy.
The Institutions and Laws
! The Government is not free to tax, borrow and spend money the way it likes. Since there is a
limit to the resources the State can mobilize, the need for proper budgeting arises. Every item of
expenditure has to be well thought out and the total outlay worked out for a specific period. Also,
there must be the sanction of the people behind all these financial proposals, expressed clearly
through their chosen representatives.
! It is in this context that the Budget of the Government of India is presented before both the
Houses of Parliament every year. The Budget contains the financial statements of the
government embodying the estimated receipts and expenditure for one financial year, which at
present commences on the 1st of April every year. In other words, it is a proposal of how much
money is to be spent on what and how much of it will be contributed by whom or raised from
where during the coming year. The Budget gives estimates for the ensuing year and offers an
opportunity to the government to review and explain its financial and economic policy and
programmes besides enabling the Parliament to discuss and criticize it.
! The essential features of the financial procedure followed in India are laid down in the
Constitution which ensures the supremacy of the Lok Sabha in financial matters. Constitution
provides that no tax shall be levied or collected except by authority of Parliament and that the
President shall, in respect of every financial year, cause to be laid before both Houses, the
Annual Financial Statement.
Annual Financial Statement (AFS)
! Provided under Article 112.
! Shows estimated receipts and expenditure of the Government of India for the following year,
estimates as well as revised estimates for the current year as also expenditure for the previous
year.
! The receipts and disbursements are shown under the three parts, in which Government Accounts
are kept viz. (i) Consolidated Fund (ii) Contingency Fund and (iii) Public Account.
! Under the Constitution, Annual Financial Statement distinguishes expenditure on revenue
account from other expenditure. Government Budget, therefore, comprises Revenue Budget and
Capital Budget. The estimates of receipts and expenditure included in the Annual Financial
Statement are for the expenditure net of refunds and recoveries, as will be reflected in the
accounts.

21!

! The Constitution provides for a Consolidated Fund of India to which all revenues received by
way of loans, advances etc. are credited. The expenditures are embodied in the Budget as:
! The sums required to meet the items of expenditure described by the Constitution as those
charged on the Consolidated Fund of India.
! The sums required to meet other expenditures proposed to be made from the Consolidated Fund
of India.
! Expenditures contained in the first category can be discussed in both the Houses but are not
submitted to vote of either House. In other words, they constitute the non-votable part of the
Budget. The expenditures charged on the Consolidated Fund of India include:
" The emoluments and allowances of the President.
" The salaries and allowances of the Chairman, Deputy Chairman of the Rajya Sabha and the
Speaker and the Deputy Speaker of the Lok Sabha.
" The salary and other allowances payable to the judges of the Supreme Court
" Any other expenditure declared by the Constitution or by Parliament by law to be so charged.
! The expenditure falling in the second category are presented in the form of Demands for Grants
to the Lok Sabha and are voted by this House. The Lok Sabha has the right to assent or to refuse
any such demand or reduce the demand specified therein. No such demand shall be made except
on the recommendation of the President. Since these demands are meant to fulfill the
programmes and policies of the government, if any demand as a whole is voted down, it
tantamounts to a defeat of the government.
! The significance of the Consolidated Fund, the Contingency Fund and the Public Account as
well as the distinguishing features of Revenue and Capital Budget are given briefly below.
! The existence of the Consolidated Fund of India (CFI) flows from Article 266 of the
Constitution. All revenues received by Government, loans raised by it, and also its receipts from
recoveries of loans granted by it form the Consolidated Fund. All expenditure of Government is
incurred from the Consolidated Fund of India and no amount can be drawn from the
Consolidated Fund without authorization from Parliament.
! Article 267 of the Constitution authorizes the Contingency Fund of India which is an imprest
placed at the disposal of the President of India to facilitate Government to meet urgent
unforeseen expenditure pending authorization from Parliament. Parliamentary approval for such
unforeseen expenditure is obtained, post-facto, and an equivalent amount is drawn from the
Consolidated Fund to recoup the Contingency Fund. The corpus of the Contingency Fund as
authorized by Parliament presently stands at 50 crore.
! Moneys held by Government in Trust as in the case of Provident Funds, Small Savings
collections, income of Government set apart for expenditure on specific objects like road
development, primary education, Reserve/Special Funds etc. are kept in the Public Account.
Public Account funds do not belong to Government and have to be finally paid back to the
persons and authorities who deposited them. Parliamentary authorization for such payments is,
therefore, not required, except where amounts are withdrawn from the Consolidated Fund with
the approval of Parliament and kept in the Public Account for expenditure on specific objects, in

22!

which case, the actual expenditure on the specific object is again submitted for vote of
Parliament for drawal from the Public Account for incurring expenditure on the specific object.
Revenue Budget consists of the revenue receipts of Government (tax revenues and other
revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of
taxes and other duties levied by the Union.
The estimates of revenue receipts shown in the Annual Financial Statement take into account the
effect of various taxation proposals made in the Finance Bill. Other receipts of Government
mainly consist of interest and dividend on investments made by Government, fees, and other
receipts for services rendered by Government. Revenue expenditure is for the normal running of
Government departments and various services, interest payments on debt, subsidies, etc.
Broadly, the expenditure which does not result in creation of assets for Government of India is
treated as revenue expenditure. All grants given to State Governments/Union Territories and
other parties are also treated as revenue expenditure even though some of the grants may be used
for creation of assets.
Capital Budget consists capital receipts and capital payments. The capital receipts are loans
raised by Government from public, called market loans, borrowings by Government from
Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign
Governments and bodies, disinvestment receipts and recoveries of loans from State and Union
Territory Governments and other parties.
Capital payments consist of capital expenditure on acquisition of assets like land, buildings,
machinery, equipment, as also investments in shares, etc., and loans and advances granted by
Central Government to State and Union Territory Governments, Government companies,
Corporations and other parties.

Stages
! The procedure adopted in the Parliament while dealing with financial matters, specifically the
Budget, involves many stages:
Presentation of Budget
! The Budget is presented in two parts, namely, the Railway Budget, pertaining to railway finance
and the General Budget. The primary idea behind presenting a separate Budget for the railways
is to secure stability for the estimates by providing for an assured contribution by the railways
and also to introduce flexibility in the administration of the railway finance.
! The Budget is presented with a Budget Speech which is in two parts: Part A contains a general
economic survey of the country and Part B the taxation proposals for the ensuing financial
year. The Rules of Procedure and Conduct of Business in the Lok Sabha for Financial
Legislation are as follows:
" The Annual Financial Statement or the Statement of the Estimated Receipts and
Expenditure of the Government of India in respect of each financial year (also called 'the
Budget') is presented to the House on such day as the President may direct.

23!

" The Budget is presented to the House in such form as the Finance Minister may, after
considering the suggestions, if any, of the Estimates Committee, settle.
" There shall be no discussion of the Budget on the day on which it is presented to the House.

DEMANDS FOR GRANTS

! Article 113 of the Constitution mandates that the estimates of expenditure from the Consolidated
Fund of India included in the Annual Financial Statement and required to be voted by the Lok
Sabha are submitted in the form of Demands for Grants.
! The Demands for Grants are presented to the Lok Sabha along with the Annual Financial
Statement.
! Generally, separate demands are made for the grants proposed for each Ministry.
! Each demand contains first a statement of the total grant proposed and then a statement of the
detailed estimate under each grant divided into items.
! Demands are required to be made in the form of a motion but in practice, they are assumed to
have been moved and are proposed by the Chair to save the time of the House.
General discussion on Budget
! Subsequently, on a day appointed by the Speaker, the House is at liberty to discuss the Budget as
a whole or any question of principle involved therein, but no motion is moved nor is the Budget
submitted to the vote of the House.
! The Finance Minister has a general right of reply at the end of the discussion.
! The Speaker may, if he thinks fit, prescribe a time limit for speeches.
Voting of demands for grants
! Motions may be moved to reduce any demand for grant.
! No amendments to motions to reduce any demand for grant are permissible.
Cut motions
A motion may be moved to reduce the amount of a demand in any of the following ways:
! 'That the amount of the demand be reduced to Re.1/-' representing disapproval of the policy
underlying the demand. Such a motion shall be known as 'Disapproval of Policy Cut'. A
member giving notice of such a motion has to indicate in precise terms the particulars of the
policy which he proposes to discuss. The discussion is confined to the specific point or points
mentioned in the notice and it is open to members to advocate an alternative policy;
! 'That the amount of the demand be reduced by a specified amount' representing the
economy that can be effected. Such specified amount may be either a lump sum reduction in the
demand or omission or reduction of an item in the demand. The motion shall be known as
'Economy Cut'. The notice has indicate briefly and precisely the particular matter on which

24!

discussion is sought to be raised and speeches shall be confined to the discussion as to how
economy can be effected;
! 'That the amount of the demand be reduced by Rs.100/-' in order to ventilate a specific
grievance which is within the sphere of the responsibility of the Government of India. Such a
motion shall be known as 'Token Cut' and the discussion thereon is confined to the particular
grievance specified in the motion.
! For the sake of convenience, usually the main motion for demand and the Cut Motion relating to
it are put and discussed together in the House. Cut Motion, thus is a device to initiate the
discussion on demand for grants. After discussion, first the cut motions are disposed off and
thereafter, the demands for grants are put to vote of the House. Cut Motions are generally moved
by members from the opposition, and if carried, amount to a vote of censure against the
government.
Speaker to decide admissibility
! The Speaker decides whether a cut motion is admissible or not under the rules and may disallow
any cut motion when in his opinion it is an abuse of the right of moving cut motions or is
calculated to obstruct or prejudicially affect the procedure of the House or is in contravention of
the rules.
Notice of cut motions
! If notice of a motion to reduce any demand for grant has not been given one day previous to the
day on which the demand is under consideration, any member may object to the moving of the
motion. Such an objection generally prevails, unless the Speaker allows the motion to be made.
Vote on Account
! A motion for vote on account states the total sum required and the various amounts needed for
each Ministry and Department.
! Amendments may be moved for the reduction of the grant.
! Discussion of a general character may be allowed on the motion or any amendments.
! However, the details of the grant are not discussed further than is necessary to develop the
general points.
! In other respects, a motion for vote on account is dealt in the same way as if it were a demand for
grant.
Supplementary etc. grants and votes of credit
! Supplementary, additional, excess and exceptional grants and votes of credit are regulated by the
same procedure as is applicable in the case of demands for grants
.
Token grant

25!

! When funds to meet proposed expenditure on a new service can be made available by
reappropriation, a demand for the grant of a token sum may be submitted to the vote of the
House. If the House assents to the demand, funds may be made available.
APPROPRIATION BILL
! Under the Constitution, no money can be withdrawn from the Consolidated Fund of India
without enactment of law by the Parliament. In pursuance of this, a Bill incorporating all the
demands for Grants voted by the Lok Sabha, along with the expenditure charged on the
Consolidated Fund, is introduced in the Lok Sabha. This Bill is known as the Appropriation Bill.
The Bill, as the name suggests, intends to give legal authority to the government to appropriate
the expenditure from and out of the Consolidated Fund.
Procedure regarding Appropriation Bill
! The procedure in regard to the passage of an Appropriation Bill is the same as for any other Bill,
generally with only those modifications that the Speaker may consider necessary.
! The debate on an Appropriation Bill, however, is restricted to those matters which have not
already been raised while the relevant demands for grants were under consideration.
! No amendments can be proposed.
! After the Bill is passed by the Lok Sabha, the Speaker certifies it as a Money Bill and transmits it
to the Rajya Sabha. The latter House has no power to amend or reject the Bill, but has to give its
concurrence. The bill, thereafter, is presented to the President for his assent.
Finance Bill
! At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill
is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution,
detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the
Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. It is
accompanied by a Memorandum explaining the provisions included in it.
Procedure regarding Finance Bill
! In this rule "Finance Bill" means the Bill ordinarily introduced in each year to give effect to the
financial proposals of the Government of India for the next following financial year and includes
a Bill to give effect to supplementary financial proposals for any period.
! At any time after the introduction in the House of a Finance Bill, the Speaker may allot a day, for
the completion of all or any of the stages involved in the passage of the Bill by the House.
Thereafter, the Speaker, at the specified hour on the allotted day, forthwith puts every question
necessary to dispose of all the outstanding matters in connection with the stages for which the
day has been allotted
WEAKNESSES IN THE BUDGETARY PROCESS
Weaknesses in resource allocation and use

26!

! Many of the weaknesses in budgeting reflect the failure to address linkages between the various
functions of budgeting. The following factors contribute to budget systems and processes that
create a disabling environment for performance in the public sector, both by commission and by
omission:
" Almost exclusive focus on inputs, with performance judged largely in terms of spending no
more, or less, than appropriated in the budget;
" Input focus takes a short-term approach to budget decision making; failure to adequately take
account of longer-term costs (potential and real), and biases in the choice of policy
instruments (e.g., between capital and current spending and between spending, doing, and
regulation) because of the short-term horizon;
" A bottom-up approach to budgeting that means that even if the ultimate stance of fiscal
policy was appropriate (and increasingly after 1973 it was not) game playing by both line and
central agencies led to high transaction costs to squeeze the bottom-up bids into the
appropriate fiscal policy box;
" A tendency to budget in real terms, leading either to pressure on aggregate spending where
inflation is significant (which was often validated through supplementary appropriations) or
arbitrary cuts during budget execution with adverse consequences at the agency level;
" Cabinet decision making focused on distributing the gains from fiscal drag across new
spending proposals;
" Cabinet and/or central agencies extensively involved in micro-decision making on all aspects
of funding for ongoing policy;
" Last minute, across-the-board cuts, including during budget execution;
" Weak decision making and last-minute cuts cause unpredictability of funding for existing
government policy; this is highlighted to the centre by central budget agencies on the alert to
identify and rake back fortuitous savings;
" Strong incentives to spend everything in the budget early in the year and as quickly as
possible, since the current years spending is the starting point for the annual budget haggle
and the fear of across-the-board cuts during execution;
" Existing policy itself (as opposed to its funding) subject to very little scrutiny from one year
to the next. (This and previous point epitomize the worst dimension of incremental
budgeting);
" Poor linkages between policy and resources at the centre, between the center and line
agencies, and within line agencies because of incremental budgeting;
" A lack of clarity as to purpose and task and therefore poor information on the performance of
policies, programmes and services, and their cost because of poor linkages;
" The linking together (in association with the point above) within government departments of
policy advising, regulation, service delivery and funding and an aversion to user charging;
and
" Overall, few incentives to improve the performance of resources provided.
Specific Weaknesses in the Indian Budgetary System and Implementation

27!

" Unrealistic budget estimates

" Delay in implementation of projects
" Skewed expenditure pattern with a major portion getting spent in the last quarter of the
financial year, especially in the last month.
" Inadequate adherence to the multi-year perspective and missing line of sight between plan
and budget.
" No correlation between expenditure and actual implementation.
" Ad hoc project announcements.
" Emphasis on compliance with procedures rather than on outcomes.
" Irrational plan / non-plan distinction leads to inefficiency in resource utilization.
Budgetary Reforms
! Attempts are continuously being made to overcome as many of the shortcomings as possible. A
good example is the trend in OECD countries. The common elements of the budgetary reforms
in OECD member countries are:
Medium Term Budget Frameworks
! Medium-term budget frameworks form the basis for achieving fiscal consolidation. They need to
clearly state the governments medium term fiscal objectives in terms of high-level targets such
as the level of aggregate revenue, expenditure, deficit/surplus, and debt. They then need to
operationalize these high-level targets by establishing hard budget constraints for individual
ministries and programmes over a number of years.
Prudent Economic Assumptions
! Deviations from the forecast of the key economic assumption underlying the budget are the
governments key fiscal risk. There is no single factor more responsible for derailing fiscal
consolidation programmes than the use of incorrect economic assumptions. Great care must be
taken in making them and all key economic assumptions should be disclosed explicitly.
Sensitivity analysis should be made of what impact changes in the key economic assumptions
would have on the budget.
! Furthermore, a comparison should be made between the economic assumptions used in the
budget and what private sector forecasters are applying for the same time period where
practicable. The establishment of an independent body to recommend the economic assumptions
to be used in the budget may be considered as well. All this serves to place safeguards against
the use of unrealistic, or optimistic, economic assumptions.
Top-Down Budgeting Techniques
! Budgeting has traditionally operated on a bottom-up principle. This means that all agencies and
all ministries send requests for funding to the finance ministry. These requests greatly exceed
what they realistically believe they will get. Budgeting then consists of the Finance Ministry

28!

negotiating with these ministries and agencies until some common point is found. This bottomup system has several disadvantages to it.
1. It is very time consuming and it is essentially a game; all participants know that the initial
requests are not realistic.
2. This process has an inherent bias for increasing expenditures; all new programmes, or
expansion of existing programs, are financed by new requests; there was no system for
reallocation within spending ministries and there were no pre-set spending limits.
3. It was difficult to reflect political priorities in this system as it was a bottom-up exercise with
the budget emerging at the end of this process. This manner of budgeting is now being
abandoned and replaced with a new top-down approach to budget formulation. This has been
of great assistance in achieving fiscal consolidation.
! The starting point for the new system is for the government to make a binding political decision
as to the total level of expenditures and to divide them among individual spending ministries.
This decision is made possible by the medium-term expenditure frameworks which contain
baseline expenditure information, i.e. what the budget would look like if no new policy decisions
were made.
! The political decision is whether to increase expenditures for a high-priority area, for example
education, and to reduce expenditures, for example defence programs. Only the largest and most
significant programmes reach this level of political reallocation. The key point is that each
ministry has a pre-set limit on how much it can spend.
Relaxing Central Input Controls
! This is based on the simple premise that the heads of individual agencies are in the best position
to choose the most efficient mix of inputs to carry out the agencys activities. The end-result is
that an agency can produce the same services at less cost, or more services at the same cost. This
greatly facilitates fiscal consolidation strategies by mitigating their effects on services.
Relaxing central input controls operates at three levels.
1. The consolidation of various budget lines into a single appropriation for all operating costs
(salaries, travel, supplies, etc.).
2. The decentralization of the personnel management function.
3. The decentralization of other common service provisions, notably accommodations (buildings).
The can be seen as the public sectors version of deregulation.
An Increased Focus on Results
! An increased focus on results is a direct quid pro quo for relaxing input controls as described
above. Accountability in the public sector has traditionally been based on compliance with rules
and procedures. It didnt matter what you did as long as you observed the rules. Now, when the
public sector is deregulated, a new results-based system is needed to hold managers accountable.

29!

This is a fundamental change: holding managers accountable for what they do, not how they do
it.
Budget Transparency
! The budget is the principal policy document of government, where the governments policy
objectives are reconciled and implemented in concrete terms. Budget transparency openness
about policy intentions, formulation and implementation is therefore at the core of good
governance agenda. If we take a look at fiscal transparency in concrete terms, we can say that it
has three essential elements:
" The first is the release of budget data. The systematic and timely release of all relevant fiscal
information is what we typically associate with budget transparency. It is an absolute prerequisite, but it is not enough.
" The second element is an effective role for the legislature. It must be able to scrutinize the
budget reports and independently review them. It must be able to debate and influence
budget policy and be in a position to effectively hold the government to account. This is both
in terms of the constitutional role of the legislature and the level of resources that the
legislature has at its disposal.
" The third element is an effective role for civil society, through the media and
nongovernmental organizations. Citizens, directly or through these vehicles, must be in a
position to influence budget policy and must be in a position to hold the government to
account. In many ways, it is a similar role to that of the legislature albeit only indirectly.
Modern Financial Management Practices
! The modernization of financial management within governments made great advances during the
past ten years. The sheer scale of government means that such improvements had a material
effect on fiscal outcomes. These include the introduction of accruals, capital charges, carry-overs
of unused appropriations, and interest-bearing accounts.

30!

Chapter!3!
Cropping*Pattern*in*India**Associated*
Determinants*and*Land*Use**
INTRODUCTION
! Cropping systems of a region are decided by and large, by a number of soil and climatic
parameters which determine overall agro-ecological setting for nourishment and appropriateness
of a crop or set of crops for cultivation. Nevertheless, at farmers level, potential productivity and
monetary benefits act as guiding principles while opting for a particular crop/cropping system.
These decisions with respect to choice of crops and cropping systems are further narrowed down
under influence of several other forces related to infrastructure facilities, socio-economic factors
and technological developments, all operating interactively at micro-level. These are:
" Infrastructure facilities: Irrigation, transport, storage, trade and marketing, post-harvest
handling and processing etc.
" Socio-economic factors: Financial resource base, landownership, size and type of land
holding, household needs of food, fodder, fuel, fibre and finance, labour availability etc.
" Technological factors: Improved varieties, cultural requirements, mechanization, plant
protection, access to information, etc.
PREVALENT CROPPING SYSTEMS
Multiplicity of cropping systems has been one of the main features of Indian agriculture. This may
be attributed to following two major factors:
! Rainfed agriculture still accounts for over 92.8 million hectare or 65 per cent of cropped area. A
large diversity of cropping systems exists under rainfed and dryland areas with an overriding
practice of intercropping, due to greater risks involved in cultivating larger area under a
particular crop.
! Due to prevailing socio-economic situations (such as; dependency of large population on
agriculture, small land-holding size, very high population pressure on land resource etc.),
improving household food security has been an issue of supreme importance to many million
farmers of India, who constitute 56.15 million marginal (<1.0 hectare), 17.92 million small (1.02.0 hectare) and 13.25 million semi-medium (2.0-4.0 hectare) farm holdings, making together 90
per cent of 97.15 million operational holdings.
! An important consequence of this has been that crop production in India remained to be
considered, by and large, a subsistence rather than commercial activity. One of the typical
characteristics of subsistence farming is that most of the farmers resort to grow a number of
crops on their farm holdings, primarily to fulfill their household needs and follow the practice of

31!

rotating a particular crop combination over a period of 3-4 years interchangeably on different
farm fields.
! Subsistence farming is that most of the farmers resort to grow a number of crops on their farm
holdings, primarily to fulfill their household needs and follow the practice of rotating a particular
crop combination over a period of 3-4 years interchangeably on different farm fields.
! Under influence of all above factors, cropping systems remain dynamic in time and space,
making it difficult to precisely determine their spread using conventional methods, over a large
territory. However, it has been estimated that more than 250 double cropping systems are
followed throughout the country. Based on rationale of spread of crops in each district in the
country, 30 important cropping systems have been identified.
! These are; rice-wheat, rice-rice, rice-gram, rice-mustard, rice-groundnut, rice-sorghum, pearl
millet-gram, pearl millet-mustard, pearl millet-sorghum, cotton-wheat, cotton-gram, cottonsorghum, cotton-safflower, cotton-groundnut, maize-wheat maize-gram, sugarcane-wheat,
soybean-wheat, sorghum-sorghum, groundnut-wheat, sorghum-groundnut, groundnut-rice,
sorghum-wheat, sorghum-gram, pigeonpea-sorghum, groundnut-groundnut, sorghum-rice,
groundnut-sorghum and soybean-gram.
CROPPING SYSTEMS OF IRRIGATED ECOSYSTEM
! Depending upon the natural water resources, each region has certain area under irrigated
agriculture. But, broadly considering, two distinct irrigated ecosystems emerge. One is IndoGangetic Plain region comprising the states of Punjab, Haryana, plains of Uttar Pradesh, Bihar
and plains of Jammu & Kashmir. The other ecosystem may be carved out of coastal areas of
Andhra Pradesh and Tamil Nadu. At present51 million hectare net-cropped area is irrigated by
different sources, which constitutes about 35 per cent of net cultivated area.
! Estimates indicate that more than 56 per cent of total food grain comes from irrigated ecosystem
while progress has been considerably sluggish in rain fed agriculture which still accounts for
92.8 million hectare or 65 per cent of net area sown and contributes only 44 per cent to national
food grain production. If past trends are any indication, it may be visualized that in future also
the major gain in production, at least 80 per cent of the incremental food needs required by 2025,
has to come from irrigated ecosystem where new genotypes and intensive fertilizer use will
continue to play dominant role in enhancing crop productivity.
ISSUES IN IRRIGATED CROPPING SYSTEMS
! The major issues emerging in the irrigated cropping systems may be categorized into two groups;
i.e., general and system specific.
General Issues Resource characterization
! Adequate information is lacking on site-specific characterization of land and water resources and
climatic parameters, which is crucial for efficient land use planning and resource deployment.
Farmers Participation

32!

! To develop and improve upon existing agro technologies, it needs to be acknowledged that
involvement of farmers in conceptualization and extension of technologies is of paramount
importance. But in the past, a critical lacuna in agricultural research approach has been
inadequate effort or lack of mechanisms to build up research programmes that take into account
the experience and knowledge base that exists within the farming community.
! The farm family had never been the focal point of investigations. This top down approach of
agricultural scientists had given a poor perception of the problems that they tried to solve.
Nevertheless, it needed to be considered an integral component of cropping/farming systems
research, particularly applied aspects of it.
CROPPING SYSTEMS ORIENTED PRODUCTION TECHNOLOGY
! The past approach for agricultural research and development had been component based. It is
indeed due to this piecemeal approach, that farmers have to encounter increasingly acute
problems in managing and protecting natural resources and the environment. It has been hardly
realized that field problems to which solutions are sought are rarely amenable to solutions
through a single component/discipline oriented research.
! System oriented production research is needed to be strengthened as it is essential for
maximizing land productivity by harnessing synergies generated through various interactions in
soil-crop systems. Cropping system approach of resource management has been showing
immense potential in enhancing resource use efficiencies and pest management.
Low Water Use Efficiency
! Despite the fact that water is a precious and scarce resource, its application and use efficiencies
have been quite low. Low water use efficiency is apparently attributable to:
1. Excessive use of water due to " Improper leveling of fields coupled with improper application methods, even in
agriculturally advanced areas, and
" Faulty pricing policy for electricity and canal water leading to over irrigation.
2. Non-adoption of appropriate cropping systems. For example " Extensive cultivation of rice in sandy soils of Punjab, and
" Advancement of rice transplanting to April/May in Punjab and Haryana.
Land Degradation Problem
! Soil salinity hazards due to ground water rise and impeded natural drainage in certain canal
command areas are well known.
Indiscriminate Exploitation of Ground Water
! The excessive pumping of ground water for irrigation purposes in intensively cultivated areas of
Punjab, Haryana and Western Uttar Pradesh has caused lowering down of the ground water table
in certain pockets.

33!

! Declining water tables not only raise production costs due to higher energy requirements for
pumping water from greater depths but such rapid rates of decline spark serious questions about
the long-term sustainability of rice-wheat system itself in these areas. Contrary to this, the vast
potential of ground water in Eastern Uttar Pradesh, Bihar and adjoining areas remains untapped.
In-efficient Land Use
! Diversion of highly productive irrigated land to non-agricultural uses; such as industry, housing
etc., especially at rural-urban interface needs to be viewed seriously.
Decline in Factor Productivity
! Due to imbalance in fertilizer use, widespread deficiencies of secondary and micro-nutrients and
reduced organic matter contents of cultivated lands, a declining trend for responses to nutrients,
specially to nitrogen, in major cropping systems is being observed on farmers fields. That is, to
sustain earlier yield levels farmers need to apply higher fertilizer doses.
Imbalance in Fertilizer Use
! The problem of imbalance in fertilizer use has been accentuated on three accounts. With
intensive cropping, nutrient removal by crops from soil has far exceeded replenishment through
fertilizers and manures. This is causing negative balance of nutrients in soil. And if this trend
continues, a serious threat persists for sustainability of the major cropping systems of irrigated
areas.
! Due to continuous cereal-cereal cropping in most of the irrigated fertile lands during post green
revolution period, multiple nutrient deficiencies have emerged. The long term experiments have
clearly shown a decline inorganic carbon, nitrogen and P in cereal-cereal intensive cropping.
! Farmers have developed tendencies to use higher doses of nitrogenous fertilizers, may be
because N is comparatively cheaper than P and K. This, therefore, has resulted in widening ratios
of N:P and N:K to undesirable levels.
Build up of Diseases/Pests
! With crop intensification under high input use, serious threats of occurrence and build up of
some obnoxious pests and diseases have crept in. This factor again hinders the vertical growth
and questions are being raised about the sustainability of the environment under intensive input
use, which is otherwise needed for maximizing crop yields. Heavy infestation of Phalaris minor
in continuous rice-wheat cropping system in north westernplains is a glaring example.
Inadequate Considerations for Environmental Quality
! With a pressing need for producing more and more from less and less land resource, a serious
threat is lurking upon the environmental quality. A potential danger may be envisioned in the
form of pollution of natural water bodies and underground aquifers due to nitrate leaching and
phosphates causing irreparable harm to natural ecosystems under high fertilizer use without
improving their use efficiencies.

34!

HORTICULTURAL CROPS
! India has made a good place for itself on the Horticulture Map of the World with a total annual
production of horticultural crops touching over 1490million tones during 1999-00. The
horticultural crops cover about 9 per cent of the total area contributing about24.5 per cent of the
gross agricultural output in the country. However, the productivity of fruits and vegetables
grown in the country is low as compared to developed countries.
! The information with regard to cropping pattern in horticultural crops particularly vegetables and
tuber crops is not compiled and readily available. However, the constraints in production in these
crops and zones/states of cultivation of these crops is given briefly.
Vegetable Crops
Vegetable crops in India are grown from the sea level to the snowline. The entire country can
broadly be divided into six vegetable growing zones:
1. Temperate Zone
: Jammu & Kashmir, Himachal Pradesh, upper Uttaranchal and
Punjab, Darjeeling hill area of West Bengal, Nilgiri hills areas of
Tamil Nadu, Arunachal Pradesh and Sikkim.
2. Northwestern
: Haryana, parts of Punjab, Uttar Pradesh, Madhya Pradesh and
subtropical zone
Bihar.
3. Northeastern
: Most parts of Bihar, northern parts of West Bengal, Meghalaya,
subtropical zone
Assam and Nagaland.
4. Central tropical zone
: Gujarat, most parts of Madhya Pradesh, Maharashtra, Western part
of West Bengal, Tripura, Manipur and part of Mizoram.
5. Southern tropical zone : Andhra Pradesh, Karnataka, Tamil Nadu and part of Kerala.
6. Coastal humid tropical : Coastal areas of Kerala, Andhra Pradesh, West Bengal and Orissa.
zone
! Low productivity is the main feature of vegetable cultivation in India as farm yields of most of
the vegetables in India are much lower than the average yield of world and developed countries.
The productivity gap is more conspicuous in tomato, cabbage, onion, chilli and peas.
Preponderance of hybrid varieties and protected cultivation are mainly responsible for high
productivity in the developed countries.
Constraints in vegetables production:
1. Lack of planning in Production
2. Non-availability of seeds of improved varieties.
3. High cost of basic production elements
4. Inadequate plant protection measures and non availability of resistant varieties.
5. Weak marketing facilities
6. Transportation limits
7. Post harvest losses
8. Abiotic stresses.

35!

Tuber Crops
! Tuber crops have good potential as secondary staple food, vegetable and industrial raw material.
Many of the crops find favour with tribals as a rich source of carbohydrates. Many promising
varieties of important tuber crops have been recommended and suitable agro techniques and
plant protection measures have been standardized.
! The important crops are Potato, Sweet potato, Colocasia, Cassava and Lesser yam. These crops
except potato are grown in poor soils with less inputs and even under drought and unfavourable
conditions.
1. Potato
! For getting high production, the potato crop is required to be planted at optimum time using
proper cultural, manurial and irrigational practices. Remunerative potato based cropping systems
are also required to be developed to ensure stability of crop area and production and good returns
to the farmers. The major potato producing belts are as follows:
" Himachal Pradesh (Shimla, Lahaul spiti & Mandi).
" Punjab (Jalandhar, Hoshiarpur, Ludhiana & Patiala) and Haryana (Ambala, Kurukshetra,
Hisar, Karnal).
" Uttar Pradesh (Farrukhabad, Etawah, Mainpuri, Barabanki, Allahabad, Badaun, Moradabad,
Agra, Aligarh, Mathura, Faizabad).
" Madhya Pradesh (Sidhi, Satana, Rewa, Sarguja, Rajgarh, Sagar, Tikamgarh).
" Gujarat (Khera, Dissa, Banaskantha, Jamnagar, Baroda, Mehsana).
" Orissa (Cuttack, Dhenkamal, Puri & Sambalpur) and West Bengal.
" Maharashtra (Pune, Satara, Kolhapur, Nasik).
" Karnataka (Belgaum, Dharwad, Hassan and Kolar).
" Andhra Pradesh (Medak and Chitture).
" Tamil Nadu (Dhindigulanna, The Nilgiris).
Future Thrusts
! Due to diminishing availability of land resources, the increase in area under potato that occurred
in the past is not expected to continue. The possibility of some increase in Kharif potato areas in
the plateau regions of Bihar, Maharashtra and Karnataka exists provided suitable production
technologies are available. Increasing the cropping intensity by identifying suitable, companion
crops with potato and the development of add to the area under Rabi potato.
! For increasing the production levels from the present 15.2 million tons to 30 million tones and
the productivity from 16.2t/ha to 20 t/ha in the country there is need to pay special attention to
the problems of potato growing areas like eastern UP, North Eastern Bihar and the states of
Assam and Karnataka which have large areas under the potato crop but their productivity levels
are low.
2. Cassava

36!

! In Kerala, cassava is grown as a rainfed crop. Best planting season is April-May with the onset
of southwest monsoon. June planting is ideal for Andhra Pradesh, Assam and Jagadalpur under
rainfed conditions. Under irrigated conditions of Tamil Nadu, planting in September is found
suitable.
! Legumes are most suited inter-crop in cassava. Intercropping of blackgram in Tamil Nadu,
greengram or blackgram in Andhra Pradesh and French bean in Assam are suitable and
profitable. Bunch varieties of groundnut like TMV-2 and TMV-7 are also found to be ideal as an
inter crop in cassava.
RESEARCH GAP AND FUTURE THRUST
! Tuber crops, in general, are low priority crops and are grown in marginal fields by poor farmers.
Naturally, crop production techniques involving high inputs may not have much relevance with
the majority of farmers hence identification of stress tolerant lines with reasonable yield potential
is one of the important mandates in the crop improvement programme.
! Short duration lines with good yield potential, quality and tolerance to pests and diseases will be
very useful in a cropping system with other economically important crops.
! Tuber crops, being vegetatively propagated, the multiplication rate is very low. This coupled
with the absence of a proper seed distribution agency poses problems in the propagation and
spread of the high yielding varieties released by the state and national agencies. Lack of proper
infrastructure for virus elimination and multiplication of CMD free planting material is the real
problem which comes in the way of boosting cassava production in non-traditional areas. So, the
establishment of an effective seed production and distribution network at the national level is a
pre-requisite for boosting production of tuber crops.

37!

Chapter!4!
Irrigation*and*Water*Security!
Importance of Irrigation in India
! India is a Tropical country with varieties of climate, topography and vegetation. We have
an agrarian economy and many resources depend on the agricultural output. For maximum crop
productivity it is very essential to supply the optimum quantity of irrigation water at proper
timings. Irrigation water performs number of important function, e.g. acts as nutrient and
moisture carrier, ensures better utilization of chemical fertilizer, and maintain optimum
temperature around plant environment.
Irrigation is necessary for the following reasons:
" Scanty Rainfall
" Non-Uniform Rainfall
" Increasing Yield in Dry Farming
" To Practice Crop Rotation
" Controlled Water supply
" To wash out or dilutes salts in soil
" To cool the soil and also the atmosphere and makes more favourable environment for healthy
plant growth
Problems with excessive irrigation
The excess irrigation and unscientific use of irrigation water may give rise to the following ill
effects. The states like Punjab are experiencing ill effects of excessive irrigation as part of the
state is facing very deep water table problem and another part is facing problem of salinity. Proper
management of water is necessary for good natural resource management and sustainable yield. The
disadvantages of excessive irrigation may be listed as follows:
" Wasteful use of water
" Water logging
" Soil degradation in irrigated areas
" Contamination of water with harmful substances
" Damp climate and Ecological imbalances
" Mosquitoes breeding.
TYPES OF IRRIGATION
Conventional and recognized means of irrigation are tanks, wells and canals.

38!

Wells: Well irrigation is an important type of irrigation in India. Wells are particularly suitable for
small farms. The important well-irrigated States are Uttar Pradesh, Punjab, Tamil Nadu and
Maharashtra. In these States water-table is high, soil is soft and, therefore, wells are easily sunk.
" Tubewells are an important development in India. They are worked by electricity or diesel
oil and thus, they relieve our cattle of much of the strain. They are being quickly developed in
Uttar Pradesh, Bihar, Haryana and Punjab. This is because these have ample sub-soil water.
" Wells and tubewells account for about 48 percent of the total irrigation in India.
Tanks: Tanks are also an important and ancient source of irrigation. They are of considerable
importance in central and southern India, especially in Andhra Pradesh and Tamil Nadu. About 8
percent of the total irrigated area is irrigated by tanks.
Canals: Canals are the most important means of irrigation in the country. Some canals were
constructed by the early Hindu and Mohammedan kings. Most of the canals, however, are the
product of the British rule. At present, canals irrigate about 39 percent of total irrigated area of India.
Most of the canals of the country are found in Uttar Pradesh and Punjab. Storage canals have been
constructed in Deccan and Madhya Pradesh.
" Sources of irrigation water are either surface water direct or stored or ground water to be tapped
through bored wells using pumping system.
" Modern Irrigation may broadly be classified into Surface Irrigation and Sub-surface irrigation.

Surface Irrigation
In this type of irrigation water wets the soil surface. It can be further classified into:
1. Flow Irrigation
When water is supplied from higher level to lower level by the action of gravity then it is called flow
irrigation. The irrigation from canal water or river water is the example of flow irrigation.
Flow irrigation can be further subdivided into:

39!

(a) Perennial irrigation

(b) Flood irrigation
(a) Perennial Irrigation
! In this type of irrigation system, the water requirement for irrigation is supplied constantly and
continuously in accordance with crop requirements throughout the crop period. In this system of
irrigation, water is supplied through the storage canal head works and canal distribution system.
Perennial canal system may be further sub-divided as follows:
(1) Direct Irrigation: When irrigation is done from direct run off of a river, or by diverting the river
run off water into some canal by constructing a diversion weir or barrage across the river. For
example, Ganga Irrigation canal system.
(2) Storage Irrigation: When a dam is constructed across a river to store water during the monsoon
and the stored water is supplied in the off taking channels during periods of low flow, it is called
storage irrigation. For example, Ram Ganga dam project in UP. In coastal areas where rivers are
not perennial storage irrigation becomes a necessity. However, it is more costly and difficult to
construct.
(b) Flood Irrigation
! This kind of irrigation is sometimes called as Inundation irrigation. In this method of irrigation
soil is kept submerged and flooded with water, so as to cause thorough saturation of the land.
2. Lift Irrigation
! When water is lifted up by any manual or mechanical means such as Persian wheel, pumps, etc.
and then supplied for irrigation then it is called lift irrigation.
3. Localized irrigation
(a) Drip Irrigation
! Drip Irrigation also known as trickle irrigation, functions as its name suggests. In this system
water falls drop by drop just at the position of roots. Water is delivered at or near the root zone of
plants, drop by drop. This method can be the most water-efficient method of irrigation, if
managed properly, since evaporation and runoff are minimized.
! The drip irrigation system is particularly suited to areas where water quality is marginal,
land is steeply sloping or undulating and of poor quality, where water or labour are expensive, or
where high value crops require frequent water applications. It is more economical for orchard
crops than for other crops and vegetables since in the orchards plants as well as rows are
widely spaced. Drip irrigation limits the water supplied for consumptive use of plants. By
maintaining a minimum soil moisture in the root zone, thereby maximizing the water saving.
! A unique feature of drip irrigation is its excellent adaptability to saline water. Since the
frequency of irrigation is quite high, the plant base always remains wet which keeps the salt
concentration in the plant zone below the critical. Irrigation efficiency of a drip irrigation system

40!

is more than 90 percent. Drip irrigation usage in India is expanding rapidly. In modern
agriculture, drip irrigation is often combined with plastic mulch, further reducing evaporation,
and is also the means of delivery of fertilizer.
! The process is known as fertigation. Fertigation is the application of fertilizers, soil
amendments, or other water-soluble products through an irrigation system. In this system
fertilizer solution is distributed evenly in irrigation. The availability of nutrients is very high
therefore the efficiency is more.
Benefits of fertigation
" Increased nutrient absorption by plants
" Reduction in fertilizer and chemicals needed
" Reduced leaching to the water table
" Reduction in water usage due to the plants resulting increased root masss ability to trap and
hold water
" Application of nutrients at the precise time they are needed and at the rate they are utilized.
Disadvantages of Fertigation
" Concentration of solution decreases as fertilizer dissolves, leading to poor nutrient placement
" Results in pressure loss in main irrigation line
" Limited capacity
" Use of chemical fertilizers of low-sustainability, instead of organic fertilizers.
" Dependent on water supplys non restriction by drought rationing.
(b) Sprinkler System
! In sprinkler or overhead irrigation, water is piped to one or more central locations within the
field and distributed by overhead high-pressure sprinklers or guns. The pump unit is usually a
centrifugal pump which takes water from a source and provides adequate pressure for
delivery into the pipe system.
! Sprinkler irrigation has high efficiency. It however, varies according to climatic conditions;
60% in warm climate; 70% in moderate climate and 80% in humid or cool climate.
Sprinklers are, however, not suitable for soils which easily form a crust. The water that is
pumped through the pump pipe sprinkler system must be free of suspended sediments
Sub-surface Irrigation
In this type of irrigation, water does not wet the soil surface.
In this system of irrigation the supplied water comes directly in touch with root zone of the crops.
This system of irrigation may be employed usefully under the following conditions:
" Topography conditions of area are uniform.
" Land slope is moderate.
" The quality of irrigation water is good.
" The soil in the roof zone is permeable in nature.

41!

Sub surface irrigation may be classified into two types.

(a) Natural Sub-irrigation
! When underground irrigation can be achieved simply by natural processes without any extra
efforts it is called natural sub-Irrigation. In fact leakage water from channel, etc. goes
underground and during seepage through the sub soil, it may irrigate the crop in the lower lands.

(b) Artificial Sub-irrigation

The open jointed system of drain is artificially laid below the soil so as to supply the water to the
crop by capillary action, and then it is known as artificial sub-irrigation. This process is not
adopted in India because it is very costly.
IRRIGATION PROJECTS:
Major, Medium and Minor Irrigation Projects:
! The methods of irrigation used in India can be broadly classified into major, medium and minor
irrigation schemes. Irrigation projects having Culturable Command Area (CCA) of more than
10,000 hectares each are classified as major projects. Those having a CCA between 2,000
hectares and 10,000 hectares fall under the category of medium irrigation projects. And the
projects which have a CCA of less than 2,000 hectares are classified as minor irrigation schemes.
! For the purpose of analysis the major and the medium irrigation projects are generally grouped
together. These projects comprise a network of dams, bunds, canals and other such schemes.
Such projects require substantial financial outlay and are, therefore, constructed by the
government or any other agency which may draw financial assistance from the government and
financial institutions.
! The minor irrigation projects, on the other hand, comprise all ground water development
schemes such as dug wells, private shallow tubewells, deep public tubewells, and boring and
deepening of dugwells, and small surface water development works such as storage tanks, lift
irrigation projects, etc. Minor irrigation projects or the groundwater development schemes are
essentially people's programmes implemented primarily through individual and cooperative
efforts with finances obtained mainly through institutional sources.

!
!
!
!
42!

Chapter!5!
Farm*Variability:*Securing*Economies*of*
Scale*and*Better*Market*Access*and*Returns!
! Farm profitability is central to achieving rapid and inclusive agricultural growth. Improved
agricultural prices were an important driver in success of the Eleventh Plan. But slower growth
of demand in some major sub-sectors, combined with higher input costs due to world price
trends, could cause this driver to be more muted in Twelfth Plan unless offset by increase in
productivity.
! The reports of the Commission on Agricultural Costs and Prices show low net farm revenue for
many crops, particularly rain-fed. Diversification towards higher value crops and livestock
remains the best way not only to improve farm incomes and accelerate growth, but also to reduce
stress on natural resources which form farmers production base.
! This needs better infrastructure and emphasis on integrated farming systems, combining crops
and livestock, including small ruminants, for different location-specific endowments. This also
requires innovative institutional and contractual arrangements so that smallholders have the
requisite technology and market access.
(A) The Centrality of Smallholdings
! Small farms typify Indian agriculture and this predominance continues to increase. Agriculture
Census 200506 reported the average size of an operational holding at only 1.23 hectare, with
farms less than 2 hectares comprising 83 per cent of all holdings and 41 per cent of area. No
agricultural development Plan can be credible unless it is relevant to this vast majority of
farmers. Also, 12 per cent of rural households are now female headed with even smaller holding,
and the feminization of agriculture poses special problem.
! An important step that would help small and marginal farmers is to reform the tenancy laws.
These were originally meant to help small and marginal farmers but now operate against them.
Even limited legalization of agricultural tenancy and freeing the land lease market with proper
record of ownership and tenancy status will help such farmers. Some small farmers may lease
out land to shift to other occupations, provided they were assured that they could resume the land
if they wished. Some large farms may lease in land and even employ the small owner on his own
farm to grow specific crops under supervision.
! Moreover, a stark reality of Indias farm situation today is that while land hunger continues
unabated amongst the poor and uneducated, especially female, educated young men in richer
households are leaving agriculture. The rapid rise of wages for rural casual labour during the
Eleventh Plan period has further increased the relative cost of cultivating with hired labour.

43!

Many large and absentee owners are leaving land under-cultivated which could be leased out if
they were assured of retaining ownership.
The Eleventh Plan had set out in detail the key elements necessary to make land policy effective or
equity and efficiency. These are:
1) Modernization of land records must be both time-bound and comprehensive. Full digitization of
land records, including GIS maps, should be completed with required survey/settlement by end
of the Twelfth Plan, during which pilots should also be initiated to enable movement towards a
Torrens system in the Thirteenth Plan.
2) Although there is no strong case to change existing ceiling laws, there are several pending
implementation issues that can and should be addressed as land records are modernized.
3) Land issues in tribal areas require urgent and special attention.
4) Although no major new redistribution of agricultural land is likely, it is possible to ensure that all
rural households have at least homestead-cum-garden plots.
5) Tenancy should be legalized in a limited manner. Prescribed rents, if any, should allow a band
wide enough for rents to be contracted mutually over contract periods long enough to encourage
investment by tenants while protecting ownership rights so that landowners have incentive to
lease out land rather than keep this underutilized or fallow.
6) Small and marginal farmers, particularly women, lack adequate access to credit, extension,
insurance and markets. While every effort should be made to strengthen delivery of public
services in their favour, the intervention likely to be most potent is support to group action by
farmers themselves. It was suggested that subsidies in Government schemes give preference to
group activity.
! Most of these issues, as well as the associated matter of consolidating fragmented holdings in
course of survey/settlement, are in the State domain and progress is uneven. Ongoing efforts of
Ministry of Rural Development (particularly, Department of Land Resources) and Ministry of
Tribal Affairs also address some of these issues, although not necessarily related directly to
agriculture. However, there was little progress during the Eleventh Plan on the suggestion to
redesign schemes so that subsidies favour group activity among small and marginal farmers. In
fact, a criticism of the Eleventh Plan schemes has been that these diluted earlier specific support
for such farmers.
! Almost all the Twelfth Plan working groups set up by the Agriculture Division of Planning
Commission have strongly recommended that the Twelfth Plan should put special focus on
building capacity that encourages group formation and collective effort by small, marginal and
women farmers, rather than simply provide additional subsidy to individuals in these categories.
! Existing group activity takes many forms depending on purpose. From lower tiers of formal
cooperative structures in credit, marketing, dairy and fishery, extending to self-help groups
(SHGs), farmer clubs, joint liability groups(JLGs) and, more recently, to producer companies.
For simplicity, these can all be termed Farmer Producer Organizations (FPOs).

44!

! The Twelfth Plan Working Group on Disadvantaged Farmers, including women has provided
evidence-based assessment of the ground situation. New insecurities of tenure from urbanization
and industrialization are impacting small farms which are efficient but lack adequate access. Its
main recommendation is that a collective approach should be promoted in agriculture for small
and women farmers at all points of the value chain.
! It cites many successful examples that stretch from the Gambhira farmers collective in Gujarat,
initiated in 1953 and still going strong, to several initiatives of womens group farming in
Andhra Pradesh such as one initiated by Deccan Development Society in 1989 and another
initiated by a UNDP-GoI project in 2001and sustained since 2005 by the Andhra Pradesh Mahila
Samakhya (APMSS).
! The most recent success story is the collective farming initiative launched in 2007 under
Kudumbashree jointly by Kerala Government and NABARD. Success of these in increasing
production and empowering women point to a need for States to experiment with
1) Channelizing NGO strength in mobilizing people to encourage small holders to shift from an
individual to a group-oriented approach; and
2) Facilitating land access by groups of disadvantaged farmers with appropriate arrangement for
provision of inputs, including credit. Financing such experiments should be permissible
under RKVY.
! Since land access was the most difficult part in all the above efforts, the Working Group has
suggested that, except distribution of homesteads to the homeless which should have the highest
priority, future Government land distribution should be to groups of landless and women farmers
rather than to individuals. This could take the form of long-term lease which would expire if the
group broke down, for which it would be necessary to legalize tenancy at least for this purpose.
Moreover, an innovative suggestion of both this Working Group and the
! Working Group on Marketing is to set up Public Land Banks (PLB) at Panchayat level.
Landowners could deposit uncultivated land and receive regular payments from the PLB
varying by period of deposit and rents actually obtained with the guarantee that this deposit can
be withdrawn with suitable notice.
! The PLB could then lease out to small and women farmers or their collectives. A form of
limited tenancy aimed at fuller agricultural use of available farmland and to slow down
speculation in such land for future non-agricultural use, this idea excludes leasing to corporate
entities. However, to set up PLBs will require some initial seed capital and a clear legal
framework. If States provide the legal framework and the necessary guarantees, the seed capital
could also be permissible under RKVY.
(B) Issues in Expanding Agricultural Marketing and Processing
! A major problem facing cultivators is that they do not get remunerative prices because of
uncertainties caused by inadequate market information, unnecessary controls, lack of physical
infrastructure and price volatilityboth domestic and global. In order to provide adequate
incentives to farmers, the Twelfth Plan will have to focus on leveraging the required private
investment and also policies that make markets more efficient and competitive.

45!

! Reforming the Agricultural Produce Marketing Committee (APMC) Acts should therefore have
priority as emphasized in the Eleventh Plan and the Mid-term Appraisal. The introduction of the
Model Act in 2003 was directed towards allowing private market yards, direct buying and
selling, and also to promote and regulate contract farming in high-value agriculture with a view
to boost private sector investment in developing new regularized markets, logistics and
warehouse receipt systems, and in infrastructure(such as cold storage facilities). This is
particularly relevant for the high-value segment that is currently hostage to high post-harvest
losses and weak farm-firm linkages.
! While many States have moved towards adoption of the Model Act, actual progress has been
limited. Often the permissions given are subject to unacceptable restrictions which make them
ineffective. Vested interests in maintaining the existing mandi system intact are very strong. In
view of the slow progress, the Ministry of Agriculture set up a Committee of State Ministers incharge of agricultural marketing.
! The Committee submitted a First Report in September 2011 which has been circulated to all
States and UTs. The report calls for speedy reforms of Agricultural Produce Market
Committees (APMC) Act across different States along with time-bound development of
marketing infrastructure.
! Calling for a ten-year perspective plan to improve infrastructure of backward and forward
linkages for agriculture production and marketing, the report has suggested that agricultural
marketing be given access to priority sector lending. Thus, the process to secure necessary
amendments in APMC Acts and thus create the enabling legal environment is still ongoing. The
Twelfth Plan will need to fast track modernization of mandi infrastructure, with adequate
provision of communication and transportation and also empower small producers through their
organizations and marketing extension.
! Post-harvest losses, probably average 10 to25 per cent, being particularly high in horticulture,
livestock and fisheries. Very large investments are required in developing agricultural markets,
grading and standardization, quality certification, warehouses, cold storages and other postharvest management of produce to address this problem. Such large investments are possible
only with the participation of the private sector which, in turn,
! require freedom from controls on sales/purchase of agricultural produce, its movement, storage
and processing. Many new initiatives were taken up during the Eleventh Plan, including both
terminal markets under PublicPrivate Partnership (PPP) mode in the National Horticulture
Mission (NHM) and a model of public sector investment combined with professional
management by stakeholders as exemplified by NDDBs fruit and vegetable wholesale market at
Bengaluru and APEDAs Modern Flower Auction Houses.
! Although India ranks second in world production of fruits and vegetables, only 67 per cent of
this is processed, compared to 65 per cent in US and23 per cent in China. A well-developed food
processing industry is expected to increase farm-gate prices, reduce wastage, ensure value
addition, promote crop diversification, generate employment opportunities and boost exports.
! The private sector needs to invest much more in creation of warehousing capacity, cold storages
and supply chains. In this context, the Planning Commission had also set up a Committee on

46!

Encouraging Investments in Supply Chains including provision for cold storages for more
efficient distribution of farm produce, which submitted its report in May 2012. The Committee
has indicated that with regard to food grains, the Department of Food and Public Distribution has
initiated steps for creation of 17 million tonnes of additional storage capacity including 2 million
tonnes in the form of silos. This additional capacity is expected to take care of public sectors
warehousing requirement during the Twelfth Plan.
The Committee has recommended to exempt perishables from the purview of APMC, provide
freedom to farmers and make direct sales to aggregators and processors, introduce electronic
auction platforms for all the mandis where daily transaction is above `10 crore, and replace
licensees of APMC markets with open registration backed by bank guarantees to ensure wider
choice to growers and to prevent cartelization by traders. The Committee has recommended
encouraging large-scale private investments in the cold chain sector using PPP Model with
Viability Gap Funding besides providing budgetary support and capitalizing on schemes such as
Rural Infrastructure Development Fund (RIDF). An Inter-Ministerial Group on Cold Chain
Infrastructure and Allied Sectors has been setup by the Government to facilitate implementation
of these recommendations.
There is merit in planning part of such investment as infrastructure to reduce waste and enlarge
markets rather than wait for corporate investment in processing or retail. The extent of wastage is
not easily ascertainable and new research suggests that some of the older estimates were quite
likely exaggerated, especially if quality loss leading to lower prices is not counted as waste.
Also, the experience so far is that corporate entrants have not fared very well in the competition
with incumbent traders since existing trading margins, although high, are in fact much less than,
for example, in the USA.
However, there is no doubt that modern storage and logistics do reduce waste. If such
infrastructure also improves farm shares, social returns could exceed the private and justify
subsidies. Subsidy rates, increased recently to 2550 per cent, are now quite high and policy
should be clear on whether the goal is just capacity targets or wider market access and improved
marketing efficiency. If the latter, eligibility criteria need to be specified and also linked clearly
with marketing reform.
Social returns to subsidy will be more if access to both the infrastructure and to markets is more
open. The real test is whether these can spawn and sustain enterprise in aggregation, grading and
processing at the bottom, preferably by FPOs, but also by lead farmers and even by existing
commission agents.
The Ministry of Agriculture has proposed a RKVY window for PublicPrivate Partnership for
Integrated Agricultural Development (PPPIAD) for States to facilitate large scale integrated
projects led by private sector players with a view to aggregating farmers and integrating
agricultural supply chains. The idea is to leverage corporate interest and marketing solutions to
part-finance mobilization of expertise to form FPOs and infuse technology and capital to
enhance farm production and value addition. This is in line with views of various working
groups, and needs to be piloted. But since this will in effect be public subsidy to contract
farming, it is necessary to be clear on what should and should not be subsidized.

47!

! First, project selection should go beyond where contract farming would normally occur; that is,
give priority to proposals involving FPOs composed mainly of small and marginal farmers in
less accessible and rain-fed locations. Second, tangible assets that are property of the corporate
partner cannot be subsidized by RKVY. Only stand-alone assets of farmers or their FPOs should
be subsidized. Third, a transparent project selection mechanism will be required to rank
proposals, for example, by assigning marks based on States priorities to deliverables offered,
with outcome indicators for subsequent monitoring. If this works, it might be a game changer,
not only to form FPOs and widen farm-industry linkage but also to fast-track desirable changes
in cropping patterns.
(C) Credit and Cooperatives
! The Twelfth Plan Working Group on Institutional Finance, Cooperatives and Risk Management
has projected the demand for credit during Twelfth Plan at between `3124624 crore and
`4208454 crore, depending on the methodology used. At the higher end of these estimates, that
is, assuming agriculture growth at 4 per cent and ICOR at 4.5, the size of the credit requirement
in the Twelfth Plan period translates into about double the flow during the Eleventh Plan, that is,
`8 lakh crore per year, as against the level of `4.68 lakh crore achieved during 201011.
! This projected level of credit appears feasible in view of the Eleventh Plan achievement. As
against credit flow of `229401 crore in agriculture during 200607, the total institutional credit
flow to agriculture in 201112 was `511029 crore. But despite this very robust growth, many
issues continue to confront agricultural credit, particularly in the area of financial inclusion
necessary for ensuring inclusive growth.
! Agricultural credit continues to neglect certain sub-sectors, the flow of term lending is dwindling
and there is inordinate increase in the share of indirect finance. Credit dispensation by
institutions to small and marginal farmers has been disappointing, including by the Cooperative
Credit Structure (CCS) which has traditionally catered to relatively smaller farmers.
! On these issues, the working group has pointed to the need for more objective assessment of
credit requirements for direct and indirect financing of agriculture and also to redefine the
priority lending sectors. It has suggested updating of KCC databases with priority analysis of
KCC percentage provided to the small and marginal farmers and more intensive use of ICT
applications to track the flow of credit and transmission losses, with reference to such farmers.
Some ongoing and emerging changes appear to hold promise of triggering off better financial
inclusion for banking activity:
1) The Core Banking Platform provides seamless connectivity which, with the telecom
infrastructure, brings a new architecture to access financial services.
2) The BC model, together with mobile phones, can along with post offices provide significant
last mile connectivity.
3) Mandating payments (for example, of wages under the National Rural Employment
Guarantee Act, pension dues and so on) through formal channels, including post offices, is
helping to reach financial services to those so far not reached.

48!

4) The enormous economies of scale generated by SHG Federations (each of 150200 SHGs) is
enabling banks to give larger loans for housing and health facilities for their members. A
variety of insurance services are also being made available, including life, health, livestock
and weather insurance.
5) The UID project of the GoI with biometric identity may facilitate easier opening of bank
accounts, although this has yet to happen.
! The financial health of the Long-term Cooperative Credit Structure (LTCCS) continues to
deteriorate with accumulated losses of `5275 crore by March 2010, resulting in erosion of 59 per
cent in owned funds. A quick decision is warranted on the implementation of the revival package
for the LTCCS too on the lines of the Short-term Cooperative Credit Structure (STCCS).
(D) Farm Income Variability: Managing World Price Volatility and Climate Risk
! The Eleventh Plan document had noted that farmers are now subject to much greater risk than
what Indian farmers have been used to in the past. The frequency and severity of risks in
agriculture have increased on account of climate variability and this has been accompanied by
much greater variability of world prices and their quicker transmission into the domestic
economy. On price variability, it had recommended much greater co-ordination between MSP
and trade policies and for putting in place a system whereby tariffs on imports and exports of
farm products could be varied quickly in response to world price movements rather than having
to take recourse to outright bans which hurt both farmers and trade. On climate variability, it had
recommended going beyond current insurance measures and to put in place a tertiary mechanism
for management and assessment through climate forecasting and mapping of agricultural losses.
! World agricultural prices rose sharply during the Eleventh plan period, with inflation about 9 per
cent per annum in US dollar terms and price volatility much higher than before, accompanied by
even higher world inflation in fuels and fertilizer. It is now generally agreed that among the
several factors that contributed to this were more frequent weather shocks, policies to promote
biofuels and increased demand on commodity future markets as a result of speculation and
portfolio diversification. There is also consensus that linkage between agricultural prices and
price of oil is now very strong and may cause high volatility to persist. As compared to this,
domestic Indian agricultural prices were much less volatile and domestic prices of fuel and
fertilizer were increased much less than corresponding international prices. Indian farmers were
thus relatively better protected against both higher price volatility and higher costs. However,
this has involved repressing inflation in fuel and fertilizer and required bans on exports during
world-price spikes.
! Co-ordination between MSP and tariff policy is still very weak. For example, while other aspects
of a recent CACP suggestion for oil palm development can be met by ongoing schemes, the
proactive tariff support required is a sticking point. These will need to be addressed during the
Twelfth plan.
! On the climate side, a number of initiatives taken by the Indian Space Research Organization
(ISRO) and the India Meteorological Department (IMD) during the Eleventh Plan have
significantly improved the scope and quality both of climate data and of other remote sensing

49!

tools. Although IMDs long-range forecasts of the monsoon still have a very large margin of
error, its shorter-range products not only have greater accuracy but cover an array of agrometeorological variables with fairly high resolution. There is also much better co-ordination
today between ISRO and IMD on one hand and the Ministry of Agriculture, corresponding State
departments and NARS on the other. For example, Department of Agriculture and Cooperation
(DAC) has set up a Mahalanobis National Crop Forecasting Centre with ISRO collaboration to
augment present crop forecasts and assessment with regular remote sensing, GIS and Global
positioning System (GPS) data.
With better satellite products, an Eleventh Plan innovation was the Integrated AgroMeteorological Advisory Service (IAAS) which now issues regular weekly Agro-Met Advisory
Bulletins up to district level on field crops, horticulture and livestock. This involves agricultural
universities to collect and organize soil, crop, pest and disease information and amalgamate this
with weather forecasts to assist farmers in their decisions. Though still of very variable quality
from district to district, and limited since district is too big a unit for useful advisory, a 200910
NCAER study concluded that this brought large savings to farmers. In the Twelfth Plan, a
Gramin Krishi Mausam Seva (GKMS) will be launched to extend IAAS to block level, initially
on experimental basis. Also, IMD will implement the Monsoon Mission aimed at generating
better seasonal monsoon rainfall forecasts in different spatial ranges.
In a parallel Eleventh Plan initiative, that took advantage of IMD experience with Automatic
Weather Stations technology, Government launched a Weather Based Crop Insurance Scheme
(WBCIS) through the Agricultural Insurance Corporation (AIC). Initiated as a pilot in Kharif
2007 in 70 hoblis of Karnataka for 8 rain-fed crops, by 201011 the Scheme was being
implemented in 17 States and covered more than 67 lakh farmers growing crops on 95 lakh
hectares spread over 1010 blocks in 118 districts.
At present WBCIS has about one-third the coverage of the National Agricultural Insurance
Scheme (NAIS), the main crop-insurance vehicle. Based on results of crop-cutting experiments,
this has been in operation since 19992000. Although a useful device, especially for farmers
growing relatively risky crops, the main problem with NAIS is that it is not actuarial insurance.
Premiums for most important crops are fixed at all-India level irrespective of risk and Central
and State Governments pay for the entire excess of claims over premium received. Moreover,
being compulsory for all borrowers from banks in States where it is in force, and with relatively
few non-loanee farmers involved, it mainly insures banks against default following poor harvest.
Further, its popularity with farmers is limited since crop-cutting experiments delay claims/
payments until well after harvest and risk covered is only of yield shortfalls at the block level.
For these reasons AIC is also piloting a Modified National Agricultural Insurance Scheme
(MNAIS) since 2010 that aims to
1) Reduce the insurance unit from block to village panchayat with higher indemnity as
proportion of threshold yield,
2) Move to actuarial premiums supported by upfront subsidies instead of NAIS practice of
government paying the entire excess of claims over premium, and

50!

Extend insurance cover to situations such as failed sowing, cyclonic rains and localized
calamities, such as hailstorms and landslides. The main problem is lowering insurance unit
which although good for farmers increases the cost and effort on crop-cutting experiments
exponentially.
! As a result, the Government of India is currently implementing four schemes, that is, NAIS,
MNAIS, WBCIS and another pilot Coconut Palm Insurance Scheme (CPIS). Only NAIS is being
implemented as a full-fledged scheme and the other three are being implemented on pilot basis.
! The pilot programmes will be evaluated early in the Twelfth Plan for future revisions /
modifications to evolve a National Agricultural Insurance Programme. For this, the following
will be necessary.
! First, define what should be the core programme which Government should set up and what
should be left to companies to devise their own insurance products.
! Second, to examine the trade-off between competition and benefits of risk pooling, that is, a
centralized reinsurance system. Third, arrive at an optimum mix between weather-based
insurance and those dependent on yield measurements whether by crop-cutting experiments or
remote sensing.
Some suggestions, based mainly on the Twelfth Plan Working Group on Institutional Finance,
Cooperatives and Risk Management, are:
1) Taking as core the ongoing NAIS, modifications being made through the pilot MNAIS should be
continued. The high cost of lowering the insurance unit should be dealt with progressively in
consultation with States. Centre may share part of the cost of crop-cutting experiments in the
short-run but should shift to new technologies such as satellite imagery in the long run.
2) The issue of private-sector involvement in agricultural insurance can be creatively addressed, for
example, through a system of co-insurance under which the AIC is lead insurer (with
underwriting responsibilities and contacts with multiple agencies).
3) Weather-based insurance should continue again focused on customization and innovation such as
double trigger (weather and yield) and indexplus products, with State Governments choosing
what to subsidize. Roll-out of AWS can be demand-led and private sector also involved but with
mandatory accreditation from a competent third-party designated by Government to ensure
consistent and high-quality weather data. Further, Terrestrial Observation and Prediction
Systems (TOPS) platforms need to be pilot tested.
4) Other innovative products such as community based mutual insurance, savings-linked insurance,
a properly designed product fort contract farming arrangement and so on can help establish
insurance culture, especially if linked to FPO formation.
5) Agriculture insurance, being specialty insurance with huge Governmental intervention should be
seen more as a social instrument of the Government rather than a commercial instrument, hence
is unlikely to be effectively administered unless backed by a statute.
6) To protect non-insured farmers from extreme financial distress, Government may consider
Catastrophe Protection. A blanket Life Insurance cover could be devised for at least
small/marginal farmers (including tenant farmers)to meet liabilities to banks or other RFIs in the
unfortunate eventuality of death and to secure some financial support to families of the deceased.
3)

51!

Premia on such group/blanket insurance could be funded by Central/State Governments and

financing banks, in full or in part.
7) Crop losses arising out of natural calamities are presently compensated by Government funding
or concessions like loan/interest waivers/deferments. This practice is fraught with inefficiency,
besides crippling repayment ethics. It is, therefore, necessary that dealing with loan losses should
be internalized within the banking system through the constitution of Relief and Guarantee
Funds and Stabilization Funds (set up partly with Government funding, by diversion of subsidies
for loan repayments and so on).
AGRICULTURE RESEARCH AND EDUCATION
! Agricultural research has played a vital role in agricultural transformation and in reducing
hunger and poverty and its role in the Twelfth Plan will be crucial. The Eleventh Five Year Plan
had noted that research in the past had tended to focus mostly on increasing yield potential by
more intensive use of water and biochemical inputs, paying less attention to either the long-term
environmental impact of this approach or to methods and practices for efficient use of inputs and
natural resources. But now that limitations of this approach were evident, there appeared to be
lack of any clear agricultural research strategy or to assign definite responsibilities and priorities
the research agenda rationally.
! It had proposed that ICAR institutes undertake basic, strategic and anticipative research, focusing
particularly on problems of rain-fed agriculture, while SAUs concentrate on generating required
manpower and on applied and adaptive research to address local problems. It had emphasized
that research should shift from a commodity based approach to a farming systems approach
through convergent efforts of R&D agencies within each agro-climatic region to address local
problems identified by stakeholders, including development agencies. It had also stressed the
need to enhance spending on NARS and proposed to raise this to 1 per cent of agriculture GDP
by end of the Plan period.
! For the Twelfth Five Year Plan, the ICAR has proposed a number of new initiatives in its
manner of functioning, such as extramural funding for research, creation of funds for agriinnovations and agri-incubation and setting up of an Agriculture Technology Forecast Centre
(ATFC). To improve staff strength and quality it has proposed an Adjunct Professor Scheme,
Agriculture Sciences Pursuit for Inspired Research Excellence (ASPIRE), e-courses and more
post-doctoral fellowships. Modernization of SAU farms is also contemplated. In particular, it has
proposed the following new thrusts:
Conceived Research Platforms:
! Research consortia platforms are proposed for focused, time bound multi-disciplinary research in
areas of Agro Biodiversity Management; Genomics; Seed; Hybrids; GM Foods;
Biofortification; Plant Borers; High Value Compounds/Phytochemicals; Nanotechnology;
Diagnostics and Vaccines; Conservation Agriculture; Waste Management; Water Management;
Natural Fibre; Health Foods; Precision Farming, Farm Mechanization and Energy; Secondary
Agriculture and Agri incubators.

52!

! These will involve partnership of ICAR with R&D organizations inside and outside NARS.
Inter-departmental platforms for research in these priority areas and also capacity building in
basic sciences, remote sensing and medium range agri-advisory services will be fostered
involving CSIR, DBT, ICMR, DRDO, DST research institutes as well as general universities and
Ministries of Environment, Space and Earth Sciences.
National Agricultural Education Project:
! A National Agricultural Education Project for Systemic Improvement in Higher Agricultural
Education and Institution Development is proposed to be undertaken as an externally-funded
project to improve education quality in State Agricultural Universities.
National Agriculture Entrepreneurship Project:
! Another externally-funded project is proposed in order to build an ecosystem for nurturing
entrepreneurship development through translational research for technology commercialization,
management of technologies for commercialization, research for breakthrough technologies for
accelerated growth and higher-economic impact.
Farmer FIRST:
! In order to make technology delivery process more effective through the existing 630 Krishi
Vigyan Kendras, this new initiative will enhance farmersscientist contact through multistakeholders participation to move beyond production and productivity to privilege the complex,
diverse and risk prone reality faced by most farmers.
Student READY:
! A one-year composite programme, the Rural Entrepreneurship and Awareness Development
Yojana (READY) is proposed with the objective to develop professional skills for
entrepreneurship: knowledge through meaningful hands-on experience in project mode;
confidence through end to end approach in product development; and enterprise management
capabilities including skills for project development and execution, accountancy and national/
international marketing.
Attracting and Retaining Youth in Agriculture (ARYA):
! This initiative will be implemented with a youth-centric approach, targeting areas of agriculture
research which can be converted into viable economic enterprises and build capacities to attract
rural youth to agriculture.
NATIONAL MISSION ON EXTENSION AND TECHNOLOGY MANAGEMENT
! The extension system of State agricultural departments is the weakest link in the chain between
research and the farmer. Large number of vacancies of extension workers in the State
Agriculture Department was one of the gravest concerns expressed by the Eleventh Plan
document.

53!

! During the Eleventh Plan, efforts were initiated to improve extension services by extending
Central support to State extension reforms. This has resulted in 604 Agriculture Technology
Management Agencies (ATMAs) to be established across the country with 21000 new posts
sanctioned with Central assistance at State district and block levels.
! Also, since a continuous problem plaguing extension has been lack of organic link between the
research system and the extension machinery, R&D linkage guidelines were jointly brought out
by the DAC and ICAR and sent to all States and SAUs. The basic thrust of these guidelines were
to get ATMAs and KVKs to work together at the district level and below, keeping in view the
priorities reflected in Comprehensive District Plans. Although neither has delivered full results,
there is now much greater acceptance that things must be done together.
! Seed is also an area where NARS made much greater effort than in previous recent Plan periods.
Along with seeds, farm mechanization was also highlighted earlier as a source of the Eleventh
Plan labour productivity gains. In view of emerging labour shortages in many states, there is
demand to expand custom hiring services, as well as for new implements.
! During the Twelfth Five Year Plan it is proposed to give a co-ordinated thrust on seeds, farm
mechanization and extension through a new Mission on Extension and Technology Management.
This should also have a component to fund ICAR research platforms to find solutions to
problems thrown up by extension and requiring expertise beyond SAU.
(A) Seeds and Planting Material
! Three major yield successes during the last decade relate to cotton, maize and basmati rice.
These were driven by new seeds of which cotton and maize hybrids were mainly from private
sector while basmati rice varieties were almost entirely public. Increased adoption of hybrids in
cross-pollinated crops like cotton, maize, pearl millet and sorghum has been led largely by the
private sector, which accounts for three-fourths of hybrids developed so far in the country. But
there is discernable change in role of public sector in development of hybrids after 200102. Till
200102, private sector developed 150 hybrids of cotton compared to 15 by public sector; 67
hybrids of maize compared to three in public sector.
! In the next seven years, public sector increased its share from 8 per cent to 19 per cent in cotton,
from 4 per cent to 40 per cent in maize and from 25 per cent to 58 per cent in rice, with similar
changes in other crops. In parallel, public production of quality seeds of varieties have increased
rapidly in recent years, expanding the public share in total seed use. Production of quality seed
doubled from 140 lakh quintals in 200405 to 280 lakh quintals in 200910, contributing
significantly to the Eleventh Plan yield performance.
! Private sector accounted for 39 per cent of this seed production. Nonetheless, the ratio of quality
seed to total seed use by farmers is still much lower than norm and there is considerable scope to
raise crop productivity by raising this ratio.
! There are several pending issues regarding seeds. For example, at present there is no regulatory
mechanism to protect farmers against non-performance, say poor seed germination rate. The
Seeds Bill, 2004, introduced in Parliament in 2004, is still under consideration of the
Parliamentary Standing Committee on Agriculture. It aims to regulate the quality of seeds and

54!

planting material of all agricultural, horticultural and plantation crops to ensure availability of
true to type seeds to Indian farmers; curb the sale of spurious, poor quality seeds; protect the
rights of farmers; increase private participation in seed production, distribution and seed testing;
liberalize import of seeds and planting materials while aligning with World Trade Organization
(WTO) commitments and international standards.
Comprehensive and authentic databases on seed production and trade in India by public and
private sectors as required under the seed and plant variety laws need to be built up. The seed
chain and the norms for quality control should be followed without any compromises or
shortcuts.
At present, the public sector is responsible for most valuable germplasm while private seed
agencies concentrate on more remunerative high value seed segment. Under the circumstances,
clear protocols need to be developed for sharing precious germplasm with the private sector on
payment of royalty, while ensuring their conservation and preventing possible erosion of the
national interest in the context of international agreements on plant variety and intellectual
property rights. If this can be done, there is vast scope to expand linkages between the private
seed industry and public research institutions to take advantage of the positive aspects of both the
segments for the benefit of farmers.
ICAR needs to revisit procedures for variety identification, release and notification to cover
private and farmers varieties and also to avoid bias in favour of varieties evolved by the testing
institutions. The number of seed testing centres in the country should be expanded rapidly, if
necessary in PPP mode and with third party oversight, to reduce the time taken in assessment and
refinement of varieties and hybrids and technologies for production and protection of crops.
There is also a need for Phytosanitary certification, especially for export/ import of seeds. The
State Seed Corporations may establish at least one such certification centre in each major State.
The DAC made the present assessment of seed requirement during the Twelfth Plan for its
proposed Seed Mission with respect to some of the major crops which brings out that even
excluding requirements arising from possible shift to hybrids, seed production of varieties will
need to increase by about a third to meet the projected increase in seed replacement rates. Since
seed-production planning should be done with a long-term perspective (considering the viability
of the seed) and also to keep buffer stock of seed to meet eventualities of natural calamities that
require replanting, the actual production requirements may be higher.
To meet the seed demand for 45 major crops produced within the country and required under
diverse conditions, seed hubs need to be identified to produce seed and supply the same to the
farmers in each area. This will save cost of transportation. Public agencies will also need to
strengthen infrastructure for seed processing, storage, transportation and distribution.
Adequate availability of quality seeds is a particular challenge for farmers in rain-fed areas
where rainfall risks are high and productivity depends crucially on timely sowing within a short
rainfall window. The seed system must be capable of providing seeds of contingency or
alternative crops during prolonged dry spells. With protection of crop diversity important in rainfed areas, strengthening and improving local-seed systems and linking these to NARS is a
necessity for productivity enhancement.

55!

! An important part of the new Mission will therefore be to better integrate farmers with
production and distribution of quality seeds through, for example, seed village programmes and
by encouraging NGOs to help FPOs take up seed production. Therefore, capacity building will
be vital to success. Fodder seeds that are presently neglected and scarce will need to be
emphasized. Equally, the Mission must be enabled to convey to NARS accurate feedback from
farmers on seed suitability.
(B) Farm Machinery
! Wages have increased significantly in recent years and with labour accounting for more than 40
per cent of variable cost, many farm organizations report that shortage of labour is obstructing
operational efficiency. Animal power is also declining, with commercial banks reluctant to
extend loans for bullocks. This has naturally led to an increase in farm mechanization. However,
farm mechanization has so far been biased in favour of tractors and been concentrated in
irrigated-command areas paying little attention to the needs of farmers in dryland areas and the
scope for introducing small machines that might be useful to meet their needs.
! Considering the farm sizes and prevailing skills, farm mechanization penetration would have to
be enhanced through promotion of custom hiring models as well as individual ownership. While
draft animal power based implements and manual tools should be owned by individual farmers
(with appropriate financial incentives, for example, off season employment for animal power by
integrating some services such as manure transport with MGNREGS), expensive machinery
should be promoted thorough custom hiring. This could be done by promoting machinery service
centres involving existing FPOs or by groups of farm youth trained in machinery operation and
maintenance.
! Greater impetus is needed to develop need based and regionally differentiated farm machinery.
Ongoing efforts by NARS need to be suitably strengthened with appropriate participation of
commercial agricultural machinery manufacturers.
! Financial incentives could be linked to requirements thrown up by extension experience from
different locations or from FPO demand. The Mission should identify and convey to NARS the
critical mechanization gaps and, in particular, specific local requirements related to machinery
for soil and water conservation and gender-friendly implements.
(C) Strengthening Extension
! During the Eleventh Plan, the task of strengthening and restructuring agricultural extension was
approached through a wide mix of different initiatives. The context for this was that while public
sector extension arrangements have weakened, the number and diversity of private extension
service providers have increased in the last two decades. These include the media, NGOs,
producers associations, input agencies and agri-business companies.
! Many provide better and improved services to farmers, but their effective reach is limited and
most poor producers are served neither by public nor private sector in many distant and remote
areas.

56!

! Notwithstanding the important role being played by private sector extension, there are also
concerns with regard to wholesomeness of information, given equity and long-term implications.
! Although setting up ATMAs in almost all districts was the single most important achievement,
Agriculture 35 this went hand-in-hand with efforts to enhance quality through domain experts
and regular capacity building. Other efforts included interactive ways of information
dissemination, publicprivate partnerships and pervasive and innovative use of ICT/Mass Media.
Efforts were also made to involve agri-entrepreneurs, agri-business companies and NGO experts
to bolster public extension. Most of these efforts will have to continue in the Twelfth Plan since
extension is a continuous process. But, in view of the initial broken down condition, there are
considerable gaps even after the subsequent effort.
! For example, an evaluation of ATMAs by the Agricultural Finance Corporation in 200910
found that although 52 per cent of respondent farmers said that they gained knowledge of new
practices and technologies from this, only 25 per cent felt that this had helped to increase
production. It is perhaps time to conduct a country-wide extension census to identify extension
resources (manpower, infrastructure, expertise) available in public and private sectors.
! It is also necessary to continue with experimentation. There are number of models which have
been successfully implemented in several States and countries which can be tried as pilots by
ATMA and then expanded. Many civil society organizations have successfully experimented
with community managed extension systems with members of the local community acting as
agents of agricultural extension. In the Community Managed Sustainable Agriculture (CMSA)
model of Andhra Pradesh, members of the village community have been trained and developed
as Community Resource Persons (CRPs).
! CRPs adopt elements of sustainable and eco-friendly agricultural practices in their own farms
and are in a better position to motivate and convince other farmers than normal extension
workers. Working with agricultural scientists and extension personnel under the broad ATMA
umbrella, CRPs can help technology transfer and diffusion.
! Agricultural extension covering crops and allied sectors is primarily the responsibility of the
States and it is expected that States should drive the extension reforms process. Any national
effort in this regard can only support States efforts. Moreover, as noted by the Twelfth Plan
Working Group on Agricultural Extension, while public policy in agriculture increasingly
recognizes importance of publicprivate partnership in extension, the experience so far is that
PPPs have been the exception rather than the rule. States must adopt PPP, but this is not
substitute for strengthening the public extension system.
! Future collaboration between public and private players will have to focus more on the public
sectors ability to set standards and monitor progress so that these standards are enforced on all
players, including public extension agents, while providing institutional training and support.
! An important task of the new Mission should therefore be to consult with States so as to evolve a
standards and regulatory framework for certifying and validating extension activities by all
players, including public extension agents. MANAGE and SAMETIs should take the leading
role in driving extension reforms at the National and State levels respectively. The corporate
sector should be encouraged to involve itself in this effort and in agricultural extension in

57!

general, if only as part of their Corporate Social Responsibility (CSR). Even more important than
funding under CSR, the corporate sector can support by providing adequate extension training to
their extensive promotion network of distributors and dealers so as to meet required standards.
The Twelfth Plan Working Group on Agricultural Extension has noted that although ATMAs
exceeded targets on training, demonstrations and exposure visits, the number of farm schools set
up was well below target and that matters were lagging also on strengthening and extending
Farmer Advisory Committees at every level. Since active involvement of farmers in planning
and executing extension reforms was a key ATMA goal, the new Mission must concentrate on
this and on feedback, particularly on technology and on agricultural plans at district and lower
levels. A critical aspect of this will be ATMAKVK coordination and more intensive ICT use.
Extension services must also be gender-sensitized, and this will require joint efforts, involving
the Mahila Kisan Sashaktikaran Pariyojana component of the National Rural Livelihood Mission
(NRLM) under MoRD, the Project Directorate for Women in Agriculture of ICAR and National
Gender Resource Centre in Agriculture (NGRCA) of Ministry of Agriculture (MoA).
Further, since the present extension system does not pay adequate attention to livestock, fishery
and fodder and separate extension machinery for animal husbandry and fishery is not feasible in
many states, this function will need to be integrated with ATMA with suitable KVK and NGO
backstopping. Indeed, convergence should be a basic goal of the new Mission, both on the side
of technology dissemination and feedback as well as for planning integrated agricultural
development.
The ultimate objective of the Mission should be to upgrade ATMA from a society operating as
an adjunct to line agricultural departments to an independent entity with technical capability to
offer local solutions and deliver feedback to NARS on location specific technology needs. The
larger trends of public policy point towards decentralized governance of natural resources and
the promotion of growth with increasing emphasis on district (and lower) level planning. It is
necessary to see decentralized planning as an iterative planningdoinglearningplanning
cycle rather than as simply a onetime activity.
The challenge is to institutionalize this process and ensure that the agency facilitating planning
also has accountability in the overall outcome. ATMAs are a natural choice for such an agency
in the present context.

SUB SECTORS
(A) Horticulture
! With increasing per capita income, Indians are consuming more of fresh and processed
horticultural products indicating growing scope of horticulture by improving crop productivity
and efficiency in the value chains. The initiatives taken in the horticulture sector during the
Tenth Five Year Plan have helped in achieving high growth in production.
! During the Eleventh Five Year Plan, the growth rate of horticulture is expected to be 4.7 per
annum, slightly short of the projected 5 per cent. There has been a marked push to the expansion
in area under horticulture crops since taking up of a number of initiatives for horticulture
development through NHB, TMNE (NE) and then NHM in 200506.

58!

! However, in quest for area-expansion efforts, the states have neglected due thrust on increasing
productivity of existing orchards through technology infusion or by capital investment in
fertigation, input management, plant protection and farm mechanization.
! The area expansion programmes have also lacked the proper backward linkage with supply of
quality seed and planting material. Even where Nursery Act exists, it has not been enforced
effectively. A proper system of accreditation and rating of nurseries, with clearly defined
protocols, is the most important priority and will have to be put in place during the Twelfth Plan.
! Adequate attention to post-harvest management and market development and processing has yet
to pick up and is the weakest aspect of diversification towards high-value products resulting in
frequent and sharp fluctuations in prices of fruits and vegetables in domestic market. As
discussed earlier, marketing sector reforms implemented by States have so far not resulted in
efficient marketing of perishables, or put in place transparent system of auction and price
discovery. There are huge logistic gaps between production clusters and marketing centres, often
at long distance, and private sector investment in post-harvest management and in marketing
infrastructure has not come forward to the desired extent. There is also lack of proactive steps to
enhance export competitiveness for high-end export destinations.
! The availability of adequate regular, uninterrupted, affordable power supply for setting up
infrastructure like tissue culture labs, seed processing plants, bio control labs and post-harvest
management units like cold storages, ripening chambers and so on is a constraint which needs to
be addressed at least in and around horticulture clusters. Since horticulture operations are cost
intensive and hi-tech, horticulture growers need to be provided affordable credit with higher
ceiling and insurance against risk.
! The horticulture development missions depend on a loose set-up of Technology Support Groups
for technology inputs. This has proved inadequate. Many States do not have adequate technical
trained manpower to implement programmes. Unless State Governments fill up vacant posts and
create additional posts to provide necessary technical input, it should be deemed that they are
uninterested and the mission wound up in those States.
! During the Twelfth Five Year Plan the National Horticulture Mission will integrate the several
existing schemes in this sector and aim at holistic growth of horticulture sector, including
bamboo, through area-based regionally differentiated strategies, which include research,
technology promotion, extension, post-harvest management, processing and marketing, in
consonance with comparative advantage of each State/region and its diverse agro-climatic
features. The Mission will also facilitate marketing reforms discouraging payment of
unnecessary market levies and encouraging private investment for setting up horticulture
produce markets.
! While continuing existing efforts, and aiming at 5 per cent growth of horticulture production
during the Twelfth Plan, the main objective will be to build required capacities at State level, and
assess their seriousness, so that the horticulture development related activities can be transferred
fully to States by end of the Twelfth Plan.
! Another objective will be to improve horticulture statistics which continue to be weak, lacking
both a validated methodology for data collection of horticulture crops and adequate machinery to

59!

collect such data. Generation and dissemination of quality data can also help in averting frequent
situations of gluts and shortages and exploitation of such situations by the middlemen and
speculators.
! DAC needs to take up a one-time horticulture census with the objective of generating reliable
base line data. Further, as recommended by NSSO committee on improvement horticulture
statistics, there is need to set up an extensive network of Horticulture Information Systems (HIS)
with proper data units in all relevant districts and at State and Centre level covering all relevant
aspects. To facilitate this, at least 3 per cent of Mission funds should be earmarked for this
purpose.
(B) Food Grains and Oil Seeds
! Since cultivated land is limited, with potential for only marginal future increase through higher
cropping intensity or development of cultivable wasteland, future increase in production will
have to come mainly from yield improvement. Declining average annual growth of food grains
yields from 3.2 per cent in 1980s to 1.6 per cent in 1990s and further to only 0.6 per cent during
the Tenth Plan, taking this well below population growth, had led to widespread concern about
future food security.
! The issue was, therefore, analyzed fully with several alternatives considered and the National
Food Security Mission (NFSM) was formulated for the Eleventh Plan. This was based on an
assessment of yield gap data then available, and was focused on increasing yields in low-yield
districts using a variety of known interventions, with particular attention to availability of quality
seeds. Although this has paid off, with food grains yield growth increasing to 3.3 per cent during
the Eleventh Plan, a valid question regards continuation of NFSM is whether yield gaps are still
large?
! A committee set up under Chairmanship of Chief Minister of Haryana has recently examined the
issue and suggested continuing with the strategy to bridge the gap between real and potential
yields. The analysis of gap between potential and achieved yields presented to this committee
suggests that there is considerable potential of increasing yields even in high productivity
irrigated areas with the current technology.
! For these areas, the strategies will need to concentrate on propagation of balanced use of
fertilizers and application of micro-nutrients, water and soil-saving technology. In case of wheat,
however, there is need to step up research to develop varieties resistant to temperature. The
major yield gaps are due to management practices. Other reasons for this gap need to be
ascertained through specific studies and addressed through appropriate interventions.
! In addition to enhancing productivity of food grains in the low productivity areas, it is equally
important to stabilize the productivity gains in these areas as well as in areas where productivity
levels are comparatively high. With these issues in mind, the National Food Security Mission
(NFSM) will be revamped during the Twelfth Plan. While the Eleventh Plan approach of focused
attention on identified districts and crops in a location specific, target-oriented manner will
continue, greater attention will be put in most areas to shift from exclusive focus on individual

60!

crops to the cropping system/farming system approach. In particular, the Mission will be
extended to cover coarse cereals and fodder, in addition to wheat, rice and pulses as at present.
The Mission contemplates that promotion of package of practices in compact blocks in a hand
holding approach would not only help in enhancing the production and productivity of a region
but also help in changing mindsets of farmers due to its positive large-scale impact. This
approach will ensure inclusion of all farmers in the compact block irrespective of their size of
holding or social status and will be compatible with other efforts that encourage strengthening of
institutions, including building of farmers organizations and FPOs. The Mission will also build
upon the Eleventh Plan experience regarding conservation agriculture.
However, the main way in which NFSM will be extended during the Twelfth Plan is through
greater emphasis on strategic-area development. The two programmes that were started as
RKVY sub-components in the Eleventh Plan namely, the 60000 pulses village programme and
the intensive millets production programme will largely be shifted into NFSM. On another subcomponent of RKVYBringing Green Revolution in Eastern India (BGREI)a view will be
taken by DAC in consultation with States regarding format of its continuation during the Twelfth
Plan. Also, some additional districts in Himachal Pradesh, Uttarakhand and the north-eastern
region will be included to provide a specific thrust on food grains cultivation in hill areas.
Such restructuring of RKVY and NFSM will address the problem of bridging the existing large
gap between potential and realized rice yields in eastern States and the challenge of increasing
pulses production. Since BGREI allows components which are not part of NFSM, and since
development of the eastern region requires significant investments in power and marketing
infrastructure, the final design of how to proceed on the relative contributions of RKVY and
NFSM will need to be decided in consultation with the States. Also, since a counterpart of
expanding rice production in eastern States is to reduce rice area and resulting groundwater stress
in the North-West, a decision will have to be taken on what components of the latter effort
should be stressed in NFSM/RKVY.
Preliminary targets under the NFSM for the Twelfth Plan are enhancing production by additional
25 million tonnes of food grains consisting of 10 million tonnes of rice, 10 million tonnes of
wheat, 3 million tonnes of pulses and 2 million tonnes of millet. Also it aims to expand fodder
production to meet the demand both of green and dry fodder. In all probability, the requirement
of sufficient quantity of dual purpose feed and fodder will require raising this target to 30 million
tonnes, with additional production of coarse cereals put at 7 million tonnes. All these targets are
less than was actually achieved during the Eleventh Plan and are consistent with demand
forecasts. This would amount to targeting 22.5 per cent increase in food grains production in
the Twelfth Plan.
Another consequence of the expanded scope of NFSM will be to absorb the pulses and maize
components presently in the Integrated Scheme for Oilseeds, Oil palm, Pulses and Maize
Development. During Twelfth Five Year Plan, it is proposed to replace this scheme with a new
Mission on Oilseeds and Oil Palm which will be launched with a preliminary target to increase
the production of oilseeds by at least 4.5 per cent per annum that is, the same rate of growth as
actually achieved during the Eleventh Plan.

61!

! The core of this Mission will therefore be to continue past efforts with a clearer focus on
oilseeds. However, since production of oilseeds has not been able to match the increasing
demand of edible oils, resulting in persistence of a huge gap between demand and production of
edible oils in the country, the Mission will also aim to expand area under oil palm to realize the
latent potential of the oil palm in the country. This part of the Mission will fully consider a
proposal made recently by CACP and incorporate whatever is feasible.
Role of IT in Agriculture
! In the context of agriculture, the potential of information technology (IT) can be assessed
broadly under two heads :
a) As a tool for direct contribution to agricultural productivity and
b) As an indirect tool for empowering farmers to take informed and quality decisions which will
have positive impact on the way agriculture and allied activities are conducted.
! Precision farming, popular in developed countries, extensively uses IT to make direct
contribution to agricultural productivity. The techniques of remote sensing using satellite
technologies, geographical information systems, agronomy and soil sciences are used to increase
the agricultural output. This approach is capital intensive and useful where large tracts of land
are involved. Consequently it is more suitable for farming taken up on corporate lines.
! The indirect benefits of IT in empowering Indian farmer are significant and remains to be
exploited. The Indian farmer urgently requires timely and reliable sources of information inputs
for taking decisions. At present, the farmer depends on trickling down of decision inputs from
conventional sources which are slow and unreliable. The changing environment faced by Indian
farmers makes information not merely useful, but necessary to remain competitive.
Changing Pattern of Needs - Post WTO
! While relevant information of the required quality always had the potential of improving
efficiency in all spheres of activity of Indian farmer, the emerging scenario of a deregulated
agriculture, thanks to WTO, has brought in a need and urgency to make it an integral part of
decision making. Consequently, deploying IT as a strategic tool for the benefit of rural India has
assumed importance. Since information needs of the Indian farmers in general are documented
extensively, it is more pertinent to focus on the theme in the context of challenges raised by
WTO.
! The broad information inputs required by farmers in the new scenario can be classified as
1) Awareness Databases - those that facilitate proper understanding of the implications of the
WTO on Indian agriculture,
2) Decision Support Systems - information that facilitates farmers to make a proper SWOT
analysis to take appropriate decisions,
3) Systems that facilitate Indian farmers to forge appropriate alliances for collective benefit,
4) Information on new opportunities
5) Monitoring systems for corrective measures.

62!

1. Awareness Databases
! First and foremost, it is essential to provide unambiguous interpretation and implications of
WTO for ordinary people. The jargon and the language under various articles of WTO require to
be distilled by experts and their implications are clearly to be spelled out for all the segments of
Indian agriculture and allied activities. The implications for all the stake holders and the time
frames are to be spelt out. This is a priority item which is to be addressed immediately.
! The mandatory changes in government policies on tariffs, imports, year wise phasing of the
same, the impact on various subsidy schemes would be of concern to people. An area of
immediate concern to farmers is to get an analytical input on how his/her life is going to be
affected. Since removal of restrictions throw open Indian agricultural markets, the macro
economic situation related to foreign exchange, inflation, the current tariff structure within and
outside the country etc. and their likely impact on Indian agriculture will have a direct bearing on
the decisions of segments of Indian agriculture.
2. Decision Support Systems for farmers
! Indian farmer is cautious and usually tends to avoid risk. It is suggested that the provisions of
WTO stipulating reductions in export subsidies on farm products will make Indian exports more
competitive. It is estimated that the export potential may touch $ 1.5 billion by 2005. In order to
take advantage of the emerging order, the enterprising Indian farmer needs to be equipped with
information that facilitates undertaking a proper SWOT analysis and compare it with
conventional wisdom and satisfy himself on an appropriate course of action.
! The data on cost of cultivation, efficient agricultural practices and availability of inputs will
facilitate in assessing the strengths of indigenous products vis a vis the imports. Availability of
information on the weaknesses as evident from the adverse affect of WTO on any specific
agricultural product will help in taking the necessary corrective measures. In the emerging
scenario, competitive advantage is required to be fully exploited to improve export potential.
India is believed to have competitive advantage in areas like fruits, oil seeds, cotton, milk
products. Special thrust may be accorded to these sectors to meet international standards.
! Opportunities for specialization may lead to better export potential. Similarly, forecasts on
threats in terms of information related to cheaper imports, macro-economic conditions of other
countries are also required.
3. Systems that facilitate Indian farmers to forge appropriate alliances for collective benefit
! The size of land holdings is a major barrier in exploiting any export potential. In order to remain
competitive and derive better price realizations, it will be imperative for the farmers to come
together through cooperative alliances. It is possible to relieve the farmers of geographical
barriers by facilitating farmers to come together online and facilitate disposal of their produce at
attractive prices. Online bidding can be introduced for various agricultural product categories.
! This will require development of complicated IT systems which are to be supported by proper
bricks and mortar infrastructure and post harvest technologies, storage, etc.

63!

4. Opportunities in the new order

! It is necessary to equip Indian farmers to come together for value additions to their agricultural
output. This will get them better returns from their produce and at the same time generate new
employment opportunities in the rural sector. This will require systems to provide information to
farmers on agro processing industries, aqua culture units, animal husbandry, floriculture, etc. The
opportunities for setting up such units, procedures related to exports, the quality norms to be
adopted, packaging, etc. Are to be made available.
5. Monitoring
! Since the domestic agricultural scene is exposed to international fluctuations, it is necessary to be
vigilant to external shocks. Systems to monitor international market status, international supply demand scenario, macro economic factors, political disruptions are required to be developed.
Advance warning systems to alert the farmers are required to be developed. It is necessary to
promote monitoring cells in all major institutions related to agriculture and allied activities to
maintain data, provide periodic analytical reports and raise advance alerts.
IT and Indian Agriculture in the Future
! Technologically it is possible to develop suitable systems, as outlined in the previous sections, to
cater to the information needs of Indian farmer. User friendly systems, particularly with content
in local languages, can generate interest in the farmers and others working at the grassroots. It is
possible to create dedicated networks or harness the power of Internet to make these services are
available to all parts of the country.
! The task of creating application packages and databases to cater to complete spectrum of Indian
agriculture is a giant task. The Long Term Agriculture Policy provides an exhaustive list of all
the areas that are to be covered. This can be taken as a guiding list to evolve design and develop
suitable systems catering to each of the specified areas. Our country has the advantage of having
a large number of specialized institutions in place catering to various aspects of Indian
agriculture. These institutions can play a crucial role in designing the necessary applications &
databases and services. This will facilitate modularization of the task, better control and help in
achieving quick results. As it is, several institutions have already developed systems related to
their area of specialization.
! For quick results, it may be useful to get the applications outsourced to software companies in
India. This will facilitate quick deployment of applications and provide boost to the software
industry in India. In order to avoid duplication of efforts, it may be useful to consider promoting
a coordinating agency which will have an advisory role to play in evolving standard interface
for users, broad design and monitoring of the progress.
! In the post WTO regime, it is suggested that it is useful to focus more on some agricultural
products to maintain an unquestionable competitive advantage for exports. This will call for
urgent measures to introduce state of the art technologies such as remote sensing, geographical
information systems (GIS), bio-engineering, etc. India has made rapid strides in satellite
technologies. It is possible to effectively monitor agricultural performance using remote sensing

64!

and GIS applications. This will not only help in planning, advising and monitoring the status of
the crops but also will help in responding quickly to crop stress conditions and natural calamities.
Challenges of crop stress, soil problems, natural disasters can be tackled effectively through
these technologies. A beginning in precision farming can be encouraged in larger tracts of land in
which export potential can be tilted in our countrys favour.
! While developing these systems it is necessary to appreciate that major audience that is targeted
is not comfortable with computers. This places premium on user friendliness and it may be useful
to consider touch screen technologies to improve user comfort levels. It is often observed that
touch screen kiosks, with their intuitive approach, provide a means for quick learning and higher
participation. It is also necessary to provide as much content as possible in local languages.
! Once the required application packages & databases are in place, a major challenge is with
respect to dissemination of the information. The Krishi Vigyan Kendras, NGOs and cooperative
societies may be used to set up information kiosks. Private enterprise is also required to be drawn
into these activities. These kiosks should provide information on other areas of interest such as
education, information for which people have to travel distances such as those related to the
government, courts, etc. Facilities for email, raising queries to experts, uploading digital clips to
draw the attention of experts to location specific problems can be envisaged.
Constraints and Remedies for Effective Dissemination
Some of the major constraints delaying the spread of e-revolution to rural India are listed below:
1. Haphazard development: It is observed that some initiatives have already been made to
provide IT based services to rural community. However, duplication of efforts are witnessed as
most of the services revolve around limited subjects. Keeping in view the giant task involved, it
is necessary to form a coordination mechanism to strive for a concerted effort to support farming
community in the country. Such a coordination agency may only have advisory powers such as
user interface, broad design, delivery mechanism of the content, standards for setting up kiosks.
2. User friendliness: The success of this strategy depends on the ease with which rural population
can use the content. This will require intuitive graphics based presentation. Touch screen kiosks
are required to be set up to encourage greater participation.
3. Local languages: Regional language fonts and mechanisms for synchronization of the content
provides a challenge that needs to be met with careful planning.
4. Restrictions: Information content based on remote sensing and geographical information
systems can provide timely alerts to the farmers and also improve the efficiency of
administration. These applications can have a major impact on the farmers and help them to
appreciate the potential of information technology. However, governments map restriction
policies often threaten to stifle the optimal utilization of these tools.

65!

5. Power Supply: In most of the rural India, power supply is not available for long hours. This will
reduce the usefulness of the intended services. Since almost entire country receives sunshine for
most part of the year, it is useful to explore solar power packs for UPS as well as for supply of
power. The Ministry of Non-conventional Energy Sources may pay special attention in this area
which can be a major contributor to the growth of IT in villages.
6. Connectivity: Despite the phenomenal progress made in the recent years, the connectivity to
rural areas still requires to be improved. Reliable connectivity is a prerequisite for a successful
penetration of IT into rural areas. Many private ISPs are setting up large networks connecting
many major towns and cities. Since some of these networks pass through rural areas, it is
possible to provide connectivity to a large number of villages. Several technologies exist that can
be utilized for connecting rural areas. Cable network is a possible medium for providing the last
mile connectivity to villages.
7. Bandwidth: Even in areas where telephone and other communication services exist, the
available bandwidth is a major constraint. Since internet based rural services require substantial
use of graphics, low bandwidth is one of the major limitations in providing effective e-services to
farmers. As already stated, networks with high bandwidth are being set up by several companies
passing through rural segments which can be utilized. Until this materializes, a two pronged
strategy of storing static information at the kiosks and providing dynamic information from
remote locations can be examined. The graphic oriented content which does not change
frequently, such as, demonstration clips for farmers, can be stored on the local drives at the
kiosks and arrange for periodic updation of this information over the network during non-peak
hours. The dynamic information which changes more frequently can be accessed from remote
locations to obtain the latest status.
8. Dissemination Points: Mass deployment of information kiosks is critical for effective use of the
Internet based content and services. In order to ensure that the information kiosks are
economically feasible, it is necessary to make the proposition sustainable and viable. This
requires a major focus on a viable revenue model for such kiosks. In the new information era, the
kiosks should be designed to become electronic super markets that can, in addition to being
information sources, handle other services of use to the people living in rural areas.
! The revenue available through such sources can make a kiosk attractive for prospective
investors. The Government can provide finance facilities to unemployed rural agricultural
graduates who can be expected to have greater commitment and at the same time act as an
efficient interface for less educated rural visitors. The objective should be to transform rural
information kiosks into clicks and mortar gateway to rural India for Bricks and mortar
industry.
Some of the sources that can generate revenue for rural kiosks are:
a) Distance education - A large number of people travel substantial distances to attend educational
courses. It is possible to set up virtual class rooms right in their villages.

66!

b) Training - People living in rural areas require training and a means for upgrading their skills in
their area of work. It is possible to provide quality education right at their door steps with
facilities for online interaction with experts. For example, a village teacher or a paramedical staff
can keep abreast latest developments without disturbing his/her routine. Similarly, training can
be imparted on various aspects of agriculture such as correct practices, irrigation practices,
efficient utilization of tools used in farming such as tractors.
c) Insurance: The advent of private players into insurance has brought about advanced IT systems
that can render services over networks. The kiosks can be insurance agents for insurance firms
which, in turn, can compensate the kiosk operators for online transactions for new business as
well as maintaining the old.
d) Local Agent: Many companies have difficulty in working out logistics for their supplies to rural
outlets. A rural kiosk can act as conduit for such bricks and mortar companies. This has the
potential of transforming a rural kiosk into a profitable venture.
e) Rural Post Office: The kiosks can facilitate sending and receiving emails, facilitate chats with
experts. Several successful rural kiosks are already available in many states which run essentially
on this model.
f) e-Governance: Rural kiosks are the stepping stones for effective implementation of egovernance. Details related to central / state / local governments, formats and procedures, status
verification such as case listings in courts, filing of applications in electronic format where
admissible, etc. are some of the areas where kiosks can be of major use.
g) Online examinations: Online certification examinations are in things with many organizations
and certification agencies. Many people are forced to stay at metros to take the examinations.
Eventually it should be possible to conduct these examinations through the rural kiosks.
9. Who should take up the task? At present, several initiatives have been taken in the form of
websites / portals targeting rural India. These are at best sketchy information sources catering to
pockets of rural India. It is to be noted that strong interlinkages exist within entire rural India and
concerted and coordinated effort is required for carrying the benefits of IT to rural India. The
magnitude of the task is such that no single institution or organization can accomplish it. It is
necessary for stake holders in rural India, such as fertilizer industry, to come together to provide
adequate thrust to the effort initially.
! The fertilizer industry distributes more than 15 million tonnes of nutrients per annum in the
country involving complex production, logistics and storage operations. A small savings made
possible through better management of information upto the point of delivery to farmers can
mean significant savings. The success of e-powering Indian agriculture is high if fertilizer
industry makes a concerted and coordinated effort to set up Business to Business (B-B) market
place with dealer / cooperative networks.
! The consumer industry also benefits from efficient operations in rural India. The corporate India
may be willing to participate in a joint effort that proves beneficial to them as well as the rural
India. The Government of India may, as outlined above, initiate a coordinating agency where

67!

various stake holders can join hands to spread e-culture to rural India and at the same time
benefit from efficient operations.
Conclusion
! The Indian farmer and those who are working for their welfare need to be e-powered to face the
emerging scenario of complete or partial deregulation & reduction in government protection,
opening up of agricultural markets, fluctuations in agricultural environment and to exploit
possible opportunities for exports. The quality of rural life can also be improved by quality
information inputs which provide better decision making abilities.
! IT can play a major role in facilitating the process of transformation of rural India to meet these
challenges and to remove the fast growing digital divide.
! The rapid changes in the field of information technology makes it possible to develop and
disseminate required electronic services to rural India. The existing bottlenecks in undertaking
the tasks need to be addressed immediately. A national strategy needs to be drawn for
spearheading IT penetration to rural India. A national coordinating agency with an advisory role
can act as a catalyst in the process.
! No single institution or organization alone can succeed in the task of e-powering farmers and
rural India. At the same time, scattered and half hearted attempts cannot be successful in meeting
the objective. Industries with major stake in villages, such as fertilizer sector, should come
together to provide the initial impetus.
! The success of any IT based service to rural India hinges on evolving a proper revenue model for
the dissemination points. The clicks & mortar rural kiosks should be integrated with the bricks
& mortar industry to make them sustainable ventures by making them a business gateway to
rural India. The information kiosks can draw revenue from the industry by providing and
disseminating required services. Once these dissemination points prove to be economically
viable, the IT revolution in rural India will require no crusaders.

68!

Chapter!6!
The!Role!of!Subsidies!in!Indian!Agriculture!!
FOOD SUBSIDIES
! Food subsidies in India comprises subsidies to farmers through support prices and purchase
operations of the Food Corporation of India (FCI), consumer subsidies through the public
distribution system (PDS), and subsidies to FCI to cover all its costs. Food subsidies are mainly
on account of paddy and wheat. The rapid increase in food subsidy in recent years is attributable
to what is called the economic costs of food grains, which include the minimum support prices
paid to farmers in the Procurement process.
! Government notifies the FCI about the purchase prices of the relevant food grains that it has to
observe for the coming agricultural marketing season. These prices, known as minimum support
prices (MSP) are based on the recommendations of the Commission on Agricultural Costs and
Prices (CACP).
! In practice, the notified purchase prices have been consistently higher than the MSP
recommended by the CACP in recent years. Periodically, an official committee is set up to
recommend the volume of minimum buffer stocks to be maintained at the beginning of each
quarter for the purpose of food security. This quantum, together with the amount needed to run
the PDS, constitutes the minimum operational stocks of the FCI. However, the purchases of the
FCI are open-ended in that it has to accept all the grains that are sold to it at the declared
purchase price, and this sometimes results in mounting stocks well beyond the buffer stock
norms.
! Government from time to time fixes the central issue prices (CIP) of rice and wheat, which
together with transportation and retailers margins, determines the prices at which consumers
receive their entitlements at the fair-price outlet in the PDS system.
! A common strategy to reduce the burden of food subsidy, without affecting the interests of the
poor, is to build in specific features that target the poor. Since June 1997, the extant uniform CIP
system has been replaced by a targeted PDS (or TPDS), to provide greater subsidies to the poor.
Consumers below the poverty line (BPL) pay a lower price and receive a higher quantum of food
grains than those above the poverty line (APL).
! Despite this, there are indications that there are both inclusion and exclusion errors. Besides,
there are wide disparities in PDS penetration in different States. India is not unique in providing
either producer subsidies or consumer subsidies in the food grains sector. Several countries,
including the developed ones, provide subsidies in the area of agriculture and allied operations at
levels that are fairly high compared to that in India. In some developed countries, such subsidies
which are mainly for the producers are several times higher than that in India.
! Need for reform: some issues. The primary motivation for reform originates in the size of the

69!

food subsidy bill, even as a proportion of GDP. With escalating economic cost and poor
targeting, the food subsidy bill has reached a level that is a significant proportion of the total
government expenditure. Further, it also restrains the process of crop diversification. The main
benefits of food subsidies are the resultant food security provided to the citizens, particularly the
poor at affordable prices, and incentives to the farmers to keep food grains production at a
comfortable level.
! A key aspect of the system is the CIP and its relativity to the non-PDS price faced by those who
either do not get the benefit of the PDS, or cannot meet their entire demand from the PDS.
Although CIPs have remained unchanged for BPL families both for wheat and rice since 200001, cumulatively between 1997-98 and 2003-04, they have risen faster than the consumer price
index for agricultural labour. In recent times, there is the paradox of mounting stocks of food
grains and reported starvation deaths. Food stocks reached a peak of 63 million tonnes. In July
2002, more than two-and-a-half times the norm of 24 million tonnes. By April 2004, the stocks
were down to 20 million tonnes, still higher than the norm of 16 million tonnes for April.
! The reduction of the stocks, however, was not brought about by increased PDS off take. PDS
off-take at 20-22 million tonnes was less than the allocation in the last two years. To run the
excessive stocks down, food grains were exported by providing exporters food grains at near
BPL prices.
! Large stocks of food grains raise the subsidy bill through increased handling and carrying costs
along with the losses. Besides, withdrawing such large quantities from the market also results in
rising open market prices of food grains, neutralizing much of the consumer benefits that the
subsidy provides. There are severe regional imbalances in the operation of the entire food
subsidy scheme, as FCIs purchase operations are mainly confined to five areas Punjab,
Haryana, Western Uttar Pradesh, Andhra Pradesh and now Chhattisgarh. The implication for the
present policy of purchase is that farmers of only a few States get the entire farmers subsidy. A
large percentage of these farmers are not even poor.
The major problems
! A comprehensive analysis of food subsidies in India leads to the conclusion that a large part of
the recent problems arise from the relatively high MSPs. In recent years, with the MSPs
announced by the Government at levels higher than those recommended by the CACP,
procurement has been high and off-take low, resulting in an inevitable build-up of stocks and a
bloated food subsidy bill. The declared MSP has had several other negative fallouts. The first is
the impact on food grain prices.
! Since the issue price and the purchase price are linked, higher purchase prices result in higher
issue prices. Further, with a large part of the marketed surplus in FCI warehouses, the lower
supply exerts an upward pressure on prices in the open market. Everyone except those farmers
with marketable surpluses of food grains are affected adversely.
! Second, the high MSP combined with open-ended purchases by FCI has compounded the
problem for vibrant wholesale trade and storage with lower incidental and storage costs in food
grains.
! Third, the exclusive attention to wheat and rice has distorted the cropping pattern of farmers in

70!

favor of these two food grains alone. The higher water and fertilizer intensity of these two crops
in turn has had adverse environmental impacts.
Fourth, the concentration of FCI purchases in just two food grains and a few States has
facilitated tax exportation by some of these States. Although necessities like food grains are
normally kept outside the tax net, Punjab and Haryana have imposed taxes such as mandi fees on
the purchases of food grains.
With FCI paying such taxes, the tax gets exported to consumers in other States. Inefficiencies in
the FCI are also responsible for the subsidy bill. Since all costs of FCI are automatically
reimbursed in the extant system, there is little incentive to raise efficiency and reduce costs.
Policy imperatives. It is of paramount importance to set more realistic MSPs, particularly with
respect to wheat. To conform to its true nature, the MSP should correspond to the CACPdetermined C2 cost, which includes all cash costs and imputed cost of family labor.
Since these estimates may vary across regions, a simple average of these costs should be used as
the uniform MSP. Further, the purchase operations should not be open-ended. Before every
sowing season, procurement targets should be fixed on the basis of norms and a margin of error
of about 10 per cent. FCI should suspend purchase operations once targets are achieved.
The FCI should have the flexibility of adding to these target quantities in specific markets only in
case overall procurements fall short of the target in other markets. A system of price insurance,
similar to the Farm Income Insurance Program introduced recently on a pilot basis, may be
developed.
The scheme should be self-financing and without any subsidy obligation. This can operate in
conjunction with the purchase operations to benefit those farmers who miss out on the
opportunity of selling their surplus at the support price because of the close-ended purchase
operations. In the short run, decentralization of procurement may not be a practical option.
However, it should be pursued as a long-run objective to usher in greater efficiency in the
purchase and distribution operations, and to distribute the benefits of the price support operations
more evenly across the country.
A useful approach can be to work out the details of the scheme and announce it as soon as
possible, allowing States to join in at the time of their choice. Once the farmers of nonparticipating States appreciate the benefits of their States joining in, the political process should
ensure participation of a growing number of States.
Eventually, the FCI should act only as a coordinating agency in the matter of procurement with
important parameters like procurement prices and aggregate stock requirements provided by the
Government of India. In the meantime, the FCI should include a greater number of States in their
price-support operations. Further, the tendency for tax exportation needs to be curbed, by
appropriate legislation, if necessary. Since it is easy to identify the States that indulge in this
practice, it should also be possible to work out differential purchase prices for individual States
based on the basic price and maximum allowed tax on the price.
In order to enforce efficiency, the reimbursement of costs to FCI should be based on normative
unit costs and actual quantity involved, instead of reimbursement on actual basis. If some of the
functions of the FCI can be carried out by others, it would help to trim the unwieldy size of the

71!

FCI. For example, actual delivery of grain may be postponed at the time of purchase, and a small
mark-up on the purchase price may be allowed for this purpose. This will reduce the burden of
storage on FCI. Active participation by private traders can also relieve the burden on FCI, but
necessary institutional changes, including a revision of the concerned laws, are pre-requisites.
The responsibility for losses will have to be put squarely on the personnel above a given level,
with general cuts in staff payments and perquisites. To balance this, costs reduced below normbased ones may be retained and distributed among the staff as annual bonus or any other
mechanism deemed fit. On the distribution side, the main challenges are to improve PDS
penetration and reduce leakages. The former is the responsibility of the State governments, and
barring moral suasion, the Centre can do little under the present system. One possibility is to
introduce food coupons, which has been proposed as a possibility in Budget 2004-05. This
method has been tried in several other countries, with mixed results.
There is need for caution in its introduction because of unforeseen difficulties in administering it
at the massive scale that characterizes PDS. Only the additional subsidy given to the poor can be
tried first, while continuing with the exclusive PDS outlets. At present, the additional subsidy for
BPL families over and above that for APL is Rs. 195 per quintal on wheat and Rs. 265 per
quintal on rice.
BPL cardholders can be given coupons worth Rs. 1.95 per kg. of entitlement of wheat and Rs.
2.65 per kg. of their entitlement of rice. The poor would then pay to the PDS outlet the same
price as the APL families, but partly with coupons and partly with cash. For the PDS outlet, there
will be only one price, but it will be entitled to exchange the coupons collected for cash.
Gradually the system could be extended to any food grains seller even outside the fair price
shops.
The PDS in its present form has no self-targeting characteristics, except perhaps for the poor
quality of the grains distributed driving away the non-poor. Self-targeting can be brought in by
subsidizing coarse grains consumed generally by the poor alone.

Two other measures, which may encourage self targeting, are:

1. Locating of PDS shops in areas where the poor live, and
2. Allowing/restricting PDS grain purchases on a weekly basis rather than monthly basis. Often the
very poor cannot afford purchase of monthly requirements in one go. On the other hand,
restricting bulk purchases will discourage the not-so-needy from PDS outlets.
FERTILIZER SUBSIDIES
! The fertilizer subsidy bill has escalated from Rs 500 crore in 1980-81 to more than Rs. 6,000
crore by the mid-nineties, and further to Rs. 12,662 crore (BE) in 2004-05. The Retention Price
Scheme (RPS), which is at the root of the growing subsidy, and how much of the benefit of the
subsidy is going to farmers rather than the producers of fertilizer have been matters of some
debate in the country. Background
! In order to control the fluctuations in fertilizer prices, the Government of India regulates the
fertilizer market through the RPS. The RPS was first introduced for nitrogenous fertilizers in

72!

November 1977, and extended to complex fertilizers in February 1979. The RPS is essentially a
cost-plus approach with some norms for capacity utilization and conversion coefficients. The
plant specific retention prices
(RP) are revised every quarter so that price increases in plant inputs can be taken into account.
The retail price of fertilizers is fixed and is uniform throughout the country. The difference
between the retention price (adjusted for freight and dealers margin) and the price at which the
fertilizers are provided to the farmer is paid back to the manufacturer as subsidy.
Transportation costs are also compensated on the basis of equated freight computed on a
normative basis. It was only in the aftermath of the economic crisis of 1991 that a serious attempt
was made to reform RPS to rationalize the fertilizer subsidies. Government decontrolled the
import of complex fertilizers such as di-ammonium phosphate (DAP) and muriate of potash
(MOP) in 1992, and extended a flat-rate concession on these fertilizers. But, urea imports
continue to be restricted and canalized. Thus, flat-rate concessions are provided on imported and
indigenous fertilizers, while urea is subsidized under the RPS. Government constituted a highpowered committee to review the existing RPS and suggest a new pricing policy for urea under
the chairmanship of C. H. Hanumantha Rao in January
1997. The committee recommended a Normative Referral Price (NRP) system in place of the
RPS. In 2000, the Expenditure Reforms Commission (ERC), in its report, suggested phasing out
of the unit wise RPS in stages over a period of six years and its replacement with the groupconcession scheme.
The new urea pricing policy for the industry suggested by the ERC came into effect from April
1, 2003. The new scheme is to be implemented in three stages: the first from April 1, 2003 to
March 31, 2004; the second from April 1, 2004 to March 31, 2006. The modalities of the third
stage were to be decided after a review of the first two stages. The Group Retention Pricing
(GRP) recommended by the ERC, which had also been recommended by several other
committees in the past, was implemented with some modification with effect from April 1, 2003.
The second stage with revised norms is currently under implementation. Magnitude of fertilizer
subsidy: the beneficiaries. As a proportion of GDP, fertilizer subsidy, after expanding from 0.23
per cent in the early-1980s to a peak of 0.93 per cent in 1989-90, started to decline. It was 0.77
per cent in 1990-91, and 0.53 per cent in 1993-94. In a subsequent reversal of trend, it reached
almost 0.68 per cent in 1999-2000, but has declined since and was estimated at 0.43 per cent in
2003-04.
The relative benefit-incidence of the substantial fertilizer subsidy on the farmers and the fertilizer
industry has been a matter of some research. The difference between the hypothetical farm-gate
price of imported fertilizers and the actual price paid by the farmers on fertilizer under the RPS,
multiplied by the quantity consumed, may be taken as the fertilizer subsidy accruing to the
farmers. The balance of the total subsidy on fertilizer after deducting the portion of subsidy
accruing to farmers may be taken as the share of subsidy to the fertilizer industry.
According to this methodology, the industry share in fertilizer subsidy decreased from an
average of 75.46 per cent in the triennium ending (TE) 1983-84 to 24.38 per cent in TE 1992-93,
and further to 27.83% in TE 1995-96. A negative subsidy in this context indicates that the

73!

fertilizer industry was being implicitly taxed in TE 1995-96, with import parity prices so high
that the fertilizer industry would have made higher profits if it had sold in the international
market rather than in the domestic market under RPS. This implicit taxation of the fertilizer
industry was short-lived, and by TE 1998-99, the farmers share had declined to 90 per cent, and
further to 46 per cent by 1999-2000.
Overall, for the entire period of 1981-82 to 2002-03, the average share of the farmers in the
fertilizer subsidy was 62 per cent, with the residual 38 per cent accruing to industry. Estimates of
the Nominal Protection Coefficients (NPCs) of fertilizers for the farmers, which is the ratio of
the subsidized price paid by the farmers to the hypothetical farm gate price that they would have
paid under free-trade.
Except in 1986-87, the weighted average of NPCs of N, P and K fertilizers always remained
below unity, indicating that the farmers faced a lower (domestic) price than what they would
have paid under free trade. The trend in NPCs reveals that the weighted average NPC for the
1980s was higher than that in the 1990s, corroborating that the farmers were indeed subsidized to
a greater extent during the 1990s than they were in the 1980s.
Rationalization of fertilizer subsidy and its likely impact on urea industry. How to rationalize
fertilizer subsidy primarily revolves around rationalization of pricing of urea, the only fertilizer
under the RPS. The impact of any rationalization will depend upon two important factors:
1. Efficiency of domestic fertilizer industry and the domestic cost of production.
2. The international price of urea.
The price of urea per tonne in the international market fluctuates between a low of US$70 and a
high of US$240, and usually hovers around US$150. Given the cost structure of the 1990s, about
66, 57 and 41 per cent segment of the urea industry become economically unviable at US$140,
US$160 and US$180 per tonne, respectively.
The feedstock-wise comparison of retention prices with the import parity price suggests that in
the event of opening up of the fertilizer sector to imports, the gas-based plants would survive,
whereas the others, particularly the naphtha-based plants, would not. An important reason for the
high cost of domestic production is the dominance of naphtha or fuel-oil/low-sulphur heavy
stock as feedstock, which are more costly than natural gas.
With raw material, power and fuel constituting around 64 per cent of sales revenue of the
domestic fertilizer industry, there is need to switch to cheaper options like liquefied natural gas
(LNG) to enhance cost-efficiency. About one third of the existing urea production may become
economically unviable at an import parity price of US$180 per tonne, if existing structure of
capital costs is taken at its face value. If interest of the industry is to be kept in mind, for the sake
of self-sufficiency, an appropriate flat-rate subsidy explicit to industry may have to be given.
This will be tantamount to moving to a uniform retention price for the industry as a whole.
Phasing out of fertilizer subsidy and its likely impact on food grain production. With more than a
third of the total fertilizer subsidy benefitting the fertilizer industry, an obvious question to ask is
the impact of phasing out of the fertilizer subsidy on the output of food grains. The ERC
estimated that an increase in the farm-gate price of urea to import-parity price without an
increase in the procurement price of food grains would lead to a fall in food grains production of

74!

about 13.5 milliontonnes.

Any estimate of the adverse impact of phasing out fertilizer subsidy on food grains production is
based on the condition that other things remain the same. However, they are unlikely to remain
unchanged. First, fertilizer use and application is more dependent on technological and non-price
factors than on price or agro-economic variables. These factors include irrigation facilities,
cropping pattern, spread of high yielding varieties (HYVs), effective fertilizer distribution and
availability of credit. Irrigation is a critical factor determining the use of fertilizers, and has a
very significant impact on food grains production.
Enhancing irrigation would therefore help minimize loss of output from decontrol of fertilizer
prices. A reduction in subsidy effected through an increase in urea prices may not translate into
lower production through declines in fertilizer use, particularly if the non-price factors are made
conducive to fertilizer use. Public investment in irrigation is an effective instrument to promote
the use of fertilizers.
Second, rationalization of the urea price subsidy would have a significant salutary impact on
balanced application of N (nitrogen), P (phosphate) and K (potash). The role of balanced
nutrients cannot be overemphasized. It is possible that the increase in food grain production due
to a favourable mix of fertilizer nutrients could well be in excess of any reduction in food grain
production because of an increase in urea prices.
Third, since the procurement prices are cost-based, it is possible that an increase in procurement
prices would also partially offset the negative impact of fertilizer price increase on food grains
production. With high food grains stock with government procurement agencies in recent years,
instead of further increases in procurement prices to offset any possible urea price increase, an
alternative could be to distribute fertilizers to targeted cultivator households alone (small and
marginal) in the form of tradeable coupons.

SUBSIDY REFORMS AND CONCLUDING OBSERVATIONS

Three reasons account for the increase in the Central Government subsidies in recent years:
1. Moving the petroleum sector to a transparent system of budgetary subsidies and delay in the
announced phasing out of the subsidies on PDS kerosene and domestic LPG;
2. Increase in explicit budgetary subsidies on food and fertilizer and
3. Increase in input costs unaccompanied by any improvement in recovery rates resulting in
escalation of implicit subsidies on a variety of economic and social services.
! Operational inefficiency in the case of provision of any public good or service leads to higher
cost of production and greater subsidies. There is a wedge between subsidies that are actually
received by the users of the service and subsidies that are borne by the Government. Several
types of inefficiencies may accompany the public provision of services. Apart from direct costs
like overstaffing, poor maintenance of assets, procedural delays, and delays in taking critical
decisions, there are systemic inefficiencies.
Subsidy reforms should aim at
1. Reducing their volume relative to revenue receipts.

75!

2. Limiting these to only Merit I and Merit II categories while eliminating the non-Merit
subsidies.
3. Administering subsidies more directly to the targeted beneficiaries, thereby eliminating input
subsidies and focusing more on transfers rather than subsidies.
4. Making these subsidies transparent by showing them explicitly in the budget and
5. Avoiding multiple subsidies to serve the same policy objective.
Any subsidy restructuring has to address the issue of food subsidy. For food grains, support
prices should be kept at the C2 level recommended by the CACP. To contain operational costs,
reimbursement of expenses to the FCI should be based on normative unit costs and actual
quantities involved. With respect to PDS, the system of dual prices encourages leakages.
A uniform price policy with a system of food coupons for the BPL families needs serious
consideration. The system may be implemented in phases. In the case of fertilizer, both farmers
and fertilizer industry have been subsidized. There is a need for policy measures to reduce
subsidy to both the groups. Fertilizer subsidies should be done away with in their present form.
Urea imports should be de-canalized and a flat rate subsidy system may be introduced with two
different rates of subsidy for domestic producers and importers in the short run, and a single rate
in the medium term. Further, given the problem of domestic availability of natural gas, which is
the cheapest feedstock, the option of setting up fertilizer plants in countries where natural gas is
available in plenty may be considered. The fertilizer produced there can be shared between the
host country and India as per the agreement reached. Another reason for the mounting burden of
fertilizer subsidy is the lack of a mechanism to increase the farm-gate price of urea at regular
intervals.
A system that provides for such a periodic increase is required. Social services being associated
with strong externalities and scale economies qualify for large subsidies in comparison to
economic services. While human development is legitimately a major concern of the welfare
state, it may be necessary to reassess policies in this area at the micro level to temper this
concern with the equally legitimate concern for the burgeoning public expenditures. This is
particularly important if inadequate targeting and leakages are major problems with the
subsidies.
The economic services can be priced in varying degrees. There is scope for augmenting cost
recovery in these services. User charges should be linked to costs. Appropriate upward
adjustment of these charges would directly reduce the subsidy bill. Services need to be divided
into some broad groups, and broad norms for cost recovery need to be established for each of the
groups. A concrete plan would require fixing recovery targets in three phases:
1. Short-term (immediate increase)
2. Medium term (in a period of five years) and
3. Long term (ten or fifteen years).
The long term targets would need to be determined on the basis of desired or optimum degree of
subsidization worked out for broad groups of services. In the short term, the target should be to
recover a specified portion of the variable costs.
High costs of service provision and low or negligible recoveries through user charges are the two

76!

critical factors leading to high subsidies. Costs need to be reduced, by eliminating producer
inefficiencies. Subsidy reforms need to follow a scheme of priorities by focusing on selected
sectors, which yield maximum results. A scheme focusing on services in which there is
considerable scope for higher recovery in the non-Merit category may constitute the first step.

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
77!

Chapter!7!
Minimum!Support!Price!and!The!Indian!
Farmer!
!

The Minimum Support Price (MSP) Scheme is a scheme of the Government of India (GOI) to
safeguard the interests of the farmers. Under this Scheme the GOI declares the minimum support
Prices of various agricultural produces and assures the farmers that their agricultural produce (of
FAQ) will be purchased at the MSP, thereby preventing its distress sale. The Food Corporation of
India (FCI) acts as the Nodal Agency of the GOI.
The following factors are considered in helping determine the MSP: 1) Cost of production
2) Changes in input prices
3) Input-output price parity
4) Trends in market prices
5) Demand and supply
6) Inter-crop price parity
7) Effect on industrial cost structure
8) Effect on cost of living
9) Effect on general price level
10) International price situation
11) Parity between prices paid and prices received by the farmers.
12) Effect on issue prices and implications for subsidy
Domestic agricultural policies
Price and income support policy
! India implements various mechanisms to safeguard the interests of its farmers from rapid market
fluctuations. The most important ones are: the Minimum Support Price (MSP) for key products,
the Market Intervention Price (MIP) and Buffer Stocks Operations. In addition, at the state level,
there are regulations which limit free movement of grains across state borders, so called
zoning.
! Under the Price Support Scheme (PSS), the Commission for Agricultural Costs & Prices (CACP)
recommends the Minimum Support Prices, currently for 26 commodities: paddy, maize, coarse
cereals (jowar and bajra), pulses (arhar, moong, urad, gram, and masur), cotton, groundnuts,
sesamum, niger seed, wheat, barley, rapeseed/mustard, safflower, sunflower seed, soybean, toria,
copra, de-husked coconut (newly added), jute, sugar cane and tobacco. The Commission

78!

considers the cost of production including the cost of paid-out inputs, imputed value of family
labour and land rental. The MSPs are normally announced before the commencement of sowing
operations of the particular crop and have usually been remunerative and significantly higher
than the cost. The MSP, by definition, becomes the floor price and farmers are assured of getting
that price. Intervention takes place when market prices of the relevant commodities fall below
the MSP, resulting in procurement at the MSP by the Food Corporation of India (FCI) for
cereals, the National Agricultural Cooperative and Marketing Federation of India (NAFED) for
pulses and oilseeds, the Cotton Corporation of India and NAFED for cotton and Jute Corporation
of India for jute.
The MSPs were revised substantially in 2007/08 with the MSP for wheat price rising by onethird compared to the preceding season. For other commodities, the increase ranged from 0-1%
(tobacco and sugar cane) to 15% (barley). Newly announced prices for the 2008/09 season
suggest much more significant changes (Table 5.2). For the commodities for which the MSPs
were announced in September 2008, the increase ranges between 29% and 94%. Only for copra
and sugar cane, the MSPs are to remain at about the previous season level.
For commodities not covered by the MSPs, the government arranges for market intervention
upon specific request from the states for a specific quantity at a mutually agreed Market
Intervention Price (MIP). The losses, if any, are borne by the national government and the states
on a 50:50 basis. Horticultural and other perishable agricultural commodities can be procured at
the MIP. Interventions are carried out by NAFED and agencies designated by the state
governments concerned.
Buffer stocks of food grains are under the responsibility of the FCI. Seasonally-adjusted buffer
stock requirements (buffer norms) constitute the basis for FCI action to accelerate procurement,
turn to imports or allow for food grain exports. Between mid-2005 and early 2008, actual food
grain stocks were consistently below buffer norms, thus turning India to large imports of wheat,
in particular in 2006. In January 2008, buffer norms were at 20 million tonnes, which was 9.1%
of Indias food grain production in 2007/08, and actual stocks were at 19.2 million tonnes,
including 7.7 million tonnes of wheat and 11.5 million tonnes of rice (GOI, 2008). As Indias
procurement of rice and wheat in 2008 exceeded the buffer norms, India will be in a fairly
comfortable position with respect to availability of grains for the TPDS and even for resuming
grain exports in 2008/09.
Indias marketing policies for grains used to be based on the zoning provision whereby sale of
food grains outside a zone was prohibited. The purpose was to bottle up the grain surplus
regions and facilitate state purchase of grains at a previously announced procurement price. In
effect, zoning led to balkanization of the domestic grain market. Recent reforms include the
abolition of zones, partly through the adoption of the Agricultural Produce Marketing Committee
Act (APMC) of 2003.
The Ministry of Agriculture circulated a model APMC Act to states and suggested amendments
to the State APMC Acts so as to promote investment in marketing infrastructure, motivating the
corporate sector to undertake direct marketing and to facilitate a nationally-integrated market.
The Ministry requested that states complete the process of modification of the state-level APMC

79!

Acts by 2007/08. However, the progress made by states in reforming their agricultural markets
varies considerably.
! For instance, in Maharashtra and Uttar Pradesh, channeling of produce through the regulated
markets is still strictly enforced and the number of products for which prior permission has to be
sought before they can be traded across states (so called notified commodities) is still large at
593 in Maharashtra and 347 in Uttar Pradesh. By contrast, in Tamil Nadu, except for 15
commodities, there is no restriction on where and to whom farmers can sell their products.
! In addition, in 2006, the Food and Safety Standards Act was approved by parliament,
rationalizing the complex and overlapping web of regulations governing the processing of food
products. The government also repealed the Cess Act, thus eliminating the 0.5% cess on
agricultural and plantation exports. Further, the Department of Food and Public Distribution is
promoting the development of a negotiable warehouse receipt system to increase liquidity in
rural areas. To provide the legal framework for the warehouse receipt system, the Warehousing
(Development and Regulation) Bill has been enacted in 2008. The Forward Contracts
(Regulation) Amendment Bill was also submitted to parliament in 2006 but not yet approved. Its
main objective is to permit and regulate financial instruments that would enable the buyers and
sellers of commodities to effectively manage the risks of price fluctuation.
Input subsidies
! Input subsidies for farmers are provided primarily through subsidizing fertilizers, electricity,
irrigation water and, occasionally, seeds. In addition, commercial banks, co-operatives and
regional banks are required to provide credit to agricultural producers for input purchases at
interest rates below the market rate.
! Fertilizer subsidies are usually the most important component of budgetary support for
agricultural inputs. To encourage the use of fertilizers and to make them available to farmers at
affordable prices, prices at which fertilizers are sold to farmers are controlled by the government.
As they are lower than the cost of production, the difference is compensated to fertilizer
producers. While there were plans to disburse the fertilizer subsidy directly to farmers, this has
not been implemented due to practical difficulties.
! Under the so-called New Pricing Scheme, flat rates of subsidy are determined for various groups
of fertilizer manufacturers, depending on production methods and age of manufacturing plants.
An extra freight subsidy is paid to cover the transportation costs. Some amounts are also
budgeted each year to cover the difference between the price of imported urea and retails prices
(WTO, 2007). In 2005/06, fertilizer subsidies amounted to USD 4.1 billion and accounted for
35% of the total allocation for agricultural input subsidies. Within an overall package to support
agriculture in the 2008/09 budget, the amount foreseen for fertilizer subsidies increased to INR
309.9 billion (USD 7.8 billion), but in view of some policy announcements, the actual amount
spent might be significantly larger at perhaps INR 1 250 billion (USD 27.5 billion), which would
be INR 200 billion more than Indias defence budget (GAIN-IN8111).
! Electricity subsidies are paid from state budgets to the providers of electricity and result from the
difference in the cost of electricity provision and fixed charges paid by farmers. In most states

80!

these charges are just lump sums based on the declared horse power of irrigation pumps. These
charges do not recover cost, encourage overuse of electricity and lead to overexploitation of
ground water. In 2005/06, the electricity subsidy amounted to USD 4.5 billion and accounted for
38% of the input subsidies in that period. However, it then increased to USD 7.1 billion in
2007/08. The amount foreseen for 2008/09 is at around USD 7.6 billion.
Irrigation water subsidies are the third largest and amounted to USD 3.2 billion in 2005/06, 27%
of total amount allocated for input subsidies. The subsidy covers losses incurred by the
government irrigation systems resulting from the excess of operating costs over the gross
revenue.
Indias institutional agricultural credit system includes an extensive network of co-operative,
public sector and commercial banks, but still a large percentage of farmers, most often small
landholders, remain dependent on traditional moneylenders or other non-institutional sources of
credit. According to government data, 49% of farm households are indebted, with 58% of
outstanding loans sourced from institutional channels (including government) and 42% from
private informal moneylenders. While there is a wide range of reasons for so called agrarian
distress, high debts are among most important factors leading to large numbers of farmers
suicides in recent years.
To improve credit flows to the agriculture sector, the government initiated a number of policy
measures. One of them was the Kisan (Farmer) Credit Card (KCC) Scheme launched in 1998/99.
Under this scheme, credit cards were distributed to about 70.8 million farmers by November
2007. Currently the scheme is being extended to include a wider scope of credits and clients.
In 2006, the Government announced a package for the revival of the Short-Term Rural
Cooperative Credit Structure involving financial assistance of INR 135 billion (USD 3.23
billion). The National Bank for Agriculture and Rural Development (NABARD) has been
designated as the implementing agency for the purpose. States are required to sign a
Memorandum of Understanding with NABARD committing to implement the legal, institutional
and other reforms as envisaged in the revival package. In the crop season 2006/07, farmers were
eligible for short-term crop loans up to a principal amount of INR 300 000 (USD 7 150) at the
preferential interest rate of 7%.
The government provided an interest subsidy of 2% to NABARD and other banks. This policy
was continued in 2007/08 and the amount of INR 16.8 billion (USD 400 million) was allocated
for this purpose from the 2007/08 budget. In the 2008/09 fiscal year, the subsidy amount is to
remain roughly at the previous year level and the preferential interest rate is to remain at 7% per
annum. The target for the agricultural credit disbursement through formal agencies (banks and
co-operative credit agencies) has been set at INR 2.8 trillion (USD 70.1 billion) for 2008/09.
To address the issue of farm indebtedness, at the end of February 2008, Finance Minister
announced a massive Scheme of Debt Waiver and Debt Relief for farmers. The budgetary cost
was initially foreseen at INR 600 billion (USD 14.3 billion). In line with the announced scheme,
all loans disbursed by scheduled commercial banks, regional rural banks, and co-operative credit
institutions to small and marginal farmers (farms below two hectares) up to 31 March 2007,

81!

which were overdue as of 31 December 2007 and remained unpaid as of 29 February 2008, were
to be completely waived. This measure was to cost the government INR 500 billion.
For medium and large farmers (farms above two hectares), there would be a one-time settlement
programme for all loans that were overdue for the above period by paying 75% of the amount,
thus providing a 25% rebate. This would cost the exchequer another INR 100 billion. However,
in May 2008 the government further expanded the coverage of the scheme to include plantations,
horticulture, dairy and poultry farming as well as other agricultural loans such as taken under the
Kisan Credit Card scheme and within self-help and joint-liability groups. Therefore, the original
total of INR 600 billion was to be increased to INR 716 billion (USD 17 billion).
The implementation of the debt-relief scheme was planned to be completed by 30 June 2008 and
all bank branches would be given instructions to prepare a list of beneficiaries for display at their
respective premises. The central government would take over the debts and reimburse the banks.
The Finance Minister assured bankers that the government would take care of banks liquidity.
Farmers benefiting from the relief would be entitled to new agricultural loans from banks in
accordance with normal rules. It is expected that the scheme would cover institutional debts of
all small and marginal farmers and 60%-65% of large farmers. As the loan waiver is confined
only to loans taken from formal institutional channels, the scheme does not address the issue of
farmers' indebtedness to informal lenders.
The loan waiver scheme launched a debate in India with many observers concluding that it may
end up crippling the agricultural credit system, as happened with a similar loan waiver of 1990.
The co-operative credit sector has still not fully recovered from that move and even the
commercial banking sector became wary of disbursing crop loans for a long time after the
previous waiver. It is argued that the current scheme will destroy the discipline of any
functioning credit system. Moreover, the scheme may end up compounding, rather than
alleviating, the woes of defaulters and heavily indebted farmers, by making them eligible for
fresh credit despite their being unable to earn enough to repay their existing loans (Kaur, 2008).
There are a number of commodity-specific programmes within which the government provides
support for inputs and general services. The most important one is the National Horticultural
Mission launched in 2005/06 to stimulate horticultural production through research, adoption of
improved technologies, improved post harvest management and marketing, export promotion,
and adding value through processing. In 2008/09, the programme is to cover 340 districts in 18
states and two Union Territories at the budget cost of INR 11 billion (USD 262 million).

Crop Insurance
! The National Agricultural Insurance Scheme (NAIS) covers small-scale crop producing
farmers who can benefit from a 10% subsidy on their premium payments. The total amount of
subsidy foreseen for this scheme in the 2008/09 budget is INR 6.4 billion (USD 144 million). In
addition, the Weather-Based Crop Insurance Scheme (WBCIS) has been implemented in the
selected areas of Karnataka on a pilot basis.
! WBCIS intends to provide insurance protection to farmers against adverse incidents, such as
deficit or excess rainfall. It has the advantage of settling claims within the shortest possible time.

82!

The WBCIS is based on actuarial premium rates but to make the scheme attractive, the premium
actually charged to farmers has been restricted to at par with NAIS. WBCIS is planned to be
implemented in 2008/09 on a larger scale in selected areas of five states and the total subsidy is
planned at INR 0.5 billion (USD 12 million).
Consumer measures
! Distribution of subsidized food to poor consumers is at the core of Indias food security system.
It is operated through the Indian Targeted Public Distribution System (TPDS) and managed
by the Food Corporation of India (FCI), which is also responsible for procurement and buffer
stocks (see above). With a network of around 478 000 Fair Price Shops distributing food to about
160 million families, the TPDS is the largest distribution network of its kind in the world. Major
commodities distributed include wheat, rice, coarse grains, sugar and kerosene.
! The key instruments applied by the FCI for food management are the Minimum Support Prices
(MSPs) for procurement and the Central Issue Prices (CIPs), the rates at which the FCI
disperses food grains to states and union territories for distribution under TPDC. The difference
between the economic cost of procured commodities (in addition to the MSP, this includes state
taxes, levies, market fees, commissions, transportation and storage charges) and the issue price is
reimbursed to FCI.
! The level of subsidized prices at which wheat and rice are sold to consumers is differentiated
depending on the income of the family: highest for families above the poverty line (APL), lower
for families below the poverty line (BPL) and lowest for the poorest-of-the-poor (antyodaya anna
yojana AAY). As the MSPs have kept increasing (see above) and the issue prices have been
kept unchanged since 2002, food subsidies increased from INR 240 billion (USD 5.8 billion) in
2006/07 to INR 315 billion (USD 7.6 billion) in 2007/08, and to a budgeted INR 327 billion
(USD 8.2 billion) in 2008/09 (GAIN-IN8020, 2008).
! One additional way of supporting consumers is the relatively low VAT rate on food, typically at
4% as compared to 12.5% for other commodities. Moreover, essential commodities, such as
grains, are exempt from VAT.
Infrastructure
! To make Indias growth more inclusive and equitable, improvement of rural infrastructure has
been given a high priority. The most important programme in this respect is Bharat Nirman
which is a time-bound business plan for action in rural infrastructure over the four year period
(2005-09). The total cost of INR 1 740 billion (USD 41 billion) is to be covered by the central
government, states, external aid and market borrowing. Specific targets include:
" Irrigation - to create 10 million hectares of additional irrigation capacity.
" Rural roads - to connect all remaining habitations with population above 1 000 (500 in hilly
and tribal areas) with all weather roads.
" Rural housing - to construct 6 million houses for rural poor.
" Rural drinking water - to provide potable water to all uncovered habitations and to provide
safe water to all water-quality-affected habitations.

83!

" Rural electrification - to provide electricity to all un-electrified villages and to connect 23
million households below the poverty line.
" Rural telephony - to connect all remaining villages with a public telephone system.
! Progress in implementation of the programme is regularly posted on the website for the
programme. In the first two years of implementation (2005-07) performance was rather mixed
with a rather good progress in meeting housing targets but an important shortfall was noted in
assisting the water-quality-affected habitations (Planning Commission, 2008).
! There are several programmes focused on the provision of water for agriculture, some of them
components of Bharat Nirman. The most important one is the Accelerated Irrigation Benefit
Programme with an allocation of INR 200 billion (USD 4.8 billion) in the 2008/09 budget.
Within the Micro Irrigation Programme 0.4 million hectares is to be covered and an outlay of
INR 5 billion (USD 119 million) is foreseen in the 2008/09 budget. A Rain Area Development
Programme aims at developing agriculture in the non-irrigated areas with a budgetary allocation
of INR 3.5 billion (USD 83 million). 33. In addition, India implements a number of so called
flagship programmes targeting rural areas.
! Among them, the National Rural Employment Guarantee Programme (NREGP) is most
important. The NREGS, launched in 2005, guarantees 100 days of employment in a financial
year to any rural household whose adult members are willing to do unskilled manual work. The
programme has successively been expanded and in 2008/09 is to cover all 596 districts in the
country compared to 330 in 2007/08. The financial outlay budgeted for 2008/09 is INR 160
billion (USD 3.7 billion).
Land policies
! Indian agriculture is dominated by a large number of small-scale farms that are predominantly
occupied by their owners. The number of farms continues to increase due to the fast growing
population in the country, limited possibilities to move out of agriculture, and the law of
inheritance under which all sons and daughters are equally entitled to a share in the ancestral
property. Thus even large agricultural estates get divided and sub-divided with every generation.
In addition, existing legislation imposes ceilings on land holdings. They are differentiated
across states and range between 10 and 18 hectares for irrigated land with two crops, 10 and 30
hectares for irrigated land with one crop, and 15 and 70 hectares for dry land.
! Ceilings are of two kinds: for existing holdings, land above the limit is declared surplus and
taken over by government on payment of compensation; for future acquisitions, the upper limit
constraints the amount of land that an individual or a family may acquire with a view to
enlarging existing holdings.
! The surplus land is distributed among small farmers, tenants, land labourers or handed over to
village committees or co-operative farming societies. 35. Within this framework, the average
size of farm holdings declined from 1.4 hectares in 1995-96 to 1.3 hectares in 2000/01 (the latest
available data) and the average ranged from 7.3 hectares in Nagaland to just 0.2 hectares in
Kerala. Moreover, while the share of land operated by so called marginal farms (below 1
hectare) and small farms (1-2 hectares) tended to increase, the share of land operated by larger

84!

farms (above 10 hectares) tended to decline. These trends clearly indicate that fragmentation of
the land use pattern in India is progressing. 36.
! Although marginal and small holdings up to 4 hectares account for more than 90% of the total
number of holdings, the area operated by them is about 60% of the total. This underlines the fact
that bulk of the peasantry subsists on marginal holdings and unless the marginal farmers are
provided alternative non-agricultural employment or are employed in medium and large farms,
the chances of addressing poverty in rural India will remain bleak. 37.
! As male-dominated outmigration from rural areas and feminization of agriculture continue, there
is a need for further land reforms to make tenancy legal and to give well defined rights to
tenants and to women farmers. Measures to facilitate the leasing of land for cultivation could
help to prevent cultivated land from turning fallow due to migration of owners to urban areas.
Lack of recognized tenancy rights makes it difficult for de facto tenants to get credit from formal
sources and discourages them from investing in the land. Similarly, a woman without property
title is unable to get credit when male family members are away. 38. Over the past few years, the
policy of promoting Special Economic Zones (SEZs) has been strongly supported by the
government. The zones are expected to give a strong push to exports, employment and
investment.
! However, their creation raised the issues of displacement of farmers due to land acquisition
moves and losses of fertile agricultural land to development. Concerns over land acquisition and
displacement of farmers led to extreme violence at Nandigram (a village in West Bengal) in
March 2007. Some consider that monetary compensation for the land is not a sufficient solution
and that more general social impacts must also be taken into account and addressed adequately.
Biofuels
! India has spent about INR 410 million (USD 9.5 million) on research and development of
alternative fuels during the last three years. The Ministry of New and Renewable Energy has
been given the responsibility for preparing the national policy on bio-fuels and setting up of a
National Biofuel Development Board.
! The draft policy aims at promoting the cultivation, production and use of biofuels to partially
replace petrol and diesel for transport. The general government policy is to base the biofuel
production on waste lands and not divert land from the traditional cultivation for biofuels. India
has around 35 million hectares of waste land that can be used for production of feedstock.

85!

Chapter!8!
PDS!and!Food!Security!
! The Public Distribution System (PDS) provides subsidized food and fuel to a large number of
people in India. Of all the social safety net programs of Government of India and various State
Governments, the subsidies on food and fuel are perhaps the most important ones. Affordable
food is a source of sustenance for a large segment of the population; affordable kerosene is
extensively used for cooking and lighting by the poor.
! Given the importance of food and kerosene for sustenance, it is not surprising that these
subsidies account for a large fraction of the total subsidy expenditure of the Government of
India.
! However, deficiencies in the implementation of PDS have plagued the system. In many cases,
the true beneficiaries of these subsidies suffer due to wholesale problems such as large-scale
pilferage and diversion, and retail level problems such as duplicates and ghost beneficiaries,
wrongful exclusion and inclusion, availability and quality of the commodities, as well as Fair
Price Shop level pilferage. While implementation varies from state to state, there are a number of
areas in the PDS system which requires immediate attention.
A number of suggestions have been made over time to reform PDS. These reforms include:
1. Grassroots level transparency that include increased social audits, painting of PDS off take on
walls of the FPS shops, painting of trucks;
2. Beneficiary empowerment through the use of coupons, or technology such as smartcards, or even
direct cash transfers;
3. Monitoring the movement of goods through the use of technology, such as GPS tracking of
trucks; and
4. Increased monitoring, supervision, accountability, and transparency.
Along with the reforms suggested above, the following features also need to be accounted for in
order to attempt a comprehensive solution for deficiencies in PDS:
1. A solution that is incentive-compatible for all stakeholders, so that they benefit by participating
in the system, rather than trying to benefit through subverting the system. For example,
commission rates for FPS owners should be set to ensure that they earn adequate returns on their
investment;
2. Strengthening the public provision of the State with appropriate use of technology, to bring it on
par with best practices in the field. Strategic control needs to be retained within Government at
all times;

86!

3. A token-agnostic technology solution that can accept physical coupons, smartcards, electronic
coupons, and even facilitate direct cash transfers where different states may choose from
different solutions based on their own requirements;
4. Provide beneficiaries maximum choice:
a) Choice of location;
b) Choice of the mix of commodities;
c) Choice to purchase commodities in convenient quantities, and in any number of installments;
and
d) Choice to purchase commodities or receive a direct transfer of subsidy.
5. Aadhaar can be used in PDS to simplify a number of processes:
a) Simplification of Ration Card registration, so that beneficiaries can apply for a Ration Card
conveniently;
b) Cleaning up the beneficiary database;
c) Use of Aadhaar authentication as appropriate; and
d) State Governments can use Aadhaar Payments Bridge and Aadhaar Enabled Payments
Systems to channel subsidy funds for approved commodities to Aadhaar-enabled Bank
Accounts.
! Keeping in view the proposed National Food Security Bill it is imperative to undertake these
reforms at the earliest.
! Given the complexity, scale, and mission-critical nature of PDS operations, a dedicated
professional institution is necessary to design and operate the solution centrally. The Task Force
recommends the setting up of a National Information Utility called the Public Distribution
System Network (PDSN), which operates as a technology back-office and central system for
MoCAFPD, MoPNG, and State Governments. It will provide support in IT-intensive areas such
as development, operation and maintenance of technology, supply chain management,
transparency portal, and electronic payments. It will also provide integration with the IT systems
of other key stakeholders and other e-governance systems as they are designed over time.
! In order to achieve these outcomes, PDSN should be staffed professionally. It will promise
minimum service levels to States through Service Level Agreements, and lower costs by offering
a common customizable platform. The development of a common software solution will also
ensure that best practices and successes observed in anyone state can be rapidly deployed in all
other states.
! The Task Force recognizes that the MoCAFPD will need to undertake a number of immediate
measures to achieve end to end computerization in order to implement the orders of the Hble
Supreme Court.
! The recommendations of the Task Force will provide the basis for implementing some of the
long term institutional needs of IT-enabled reform in PDS. The recommendations should also
complement the immediate measures that the MoCAFPD will be undertaking in this regard.
! While PDSN operates the central common infrastructure, a number of customizations will have
to be performed at the state level. The IT infrastructure being put in place such as State Data
Centres and the SWAN network will need to be integrated by each participating state with

87!

PDSN. The State units of the NIC can be actively engaged by the State Governments when
PDSN is leveraged. The services of the NIC can be utilized by the State Governments while
implementing the computerization project leveraging the PDSN.
The Task Force recognizes the present efforts at computerization by different states and NIC.
The NIC has also been engaged in building a common software. The PDSN seeks to consolidate,
complement and converge these efforts. It is a value addition and offers a number of additional
modules to the states to strengthen their ongoing computerization efforts. States that already have
some computerization can enhance their capability by using selective modules from PDSN.
States that have very little or no computerization can use the entire software platform from
PDSN.
The proposed National Food Security Bill has necessitated a major advancement of IT capability
in the PDS reform which is possible though PDSN. The creation of a PDSN offers scale, speed,
cost-effectiveness, empowerment, quality, federal autonomy, possibility of asynchronous roll-out
and building of an ecosystem.
The states will also have a choice of subsidy transfer modules while partnering with the PDSN
and the linkage with Aadhaar will take place in Phase II of partnering with the PDSN. While
implementing PDSN, steps will have to be taken by each State to align their PDSN roll-out with
their existing IT investments to derive full benefits and reduce duplication.
The Task Force believes that participation of States in PDSN should be voluntary, and should not
affect existing computerization efforts. The States are undertaking a number of initiatives
regarding computerization of PDS. The recommendations of the Task Force in no way impede
the progress of these initiatives. States can opt to partner with the PDSN or can continue their
computerization efforts as before. The Department of Food and Public Distribution had
suggested that the proposed PDSN may perform the role of the separate and dedicated
institutional mechanism to be incorporated as per the orders of the Honble Supreme Court. The
Task Force deliberated the issue and recommended that PDSN proposed in this Report is a long
term solution that envisages putting in place an institutional mechanism to undertake end to end
computerization. The report in no way affects the immediate measures that need to be
undertaken by the Department as per the orders of the Honble Supreme Court since this report
primarily focuses on the long term, strategic, institutional mechanism that needs to be put in
place for an IT strategy for PDS. Further, the solution comprising of the central system at PDSN
and state level customizations should be fully aligned with the framework and guidelines of the
National e-Governance plan.
The solution will be implemented in two phases. Phase I of the solution focuses on providing
information visibility in the supply chain using the Supply Chain Management System (SCM
PDS). Phase I of the solution is not dependent upon Aadhaar. Phase II of the solution will
implement the Core Subsidy Management System (CSMS-PDS), which will leverage Aadhaar.
The States can also opt in for particular modules and solutions (like payments, fraud analytics
etc) from the PDSN while continuing with their existing efforts. The States can also customize
various parameters based on local needs such as the eligibility, type and quantity of

88!

commodities, the type of token (coupon, smartcard, electronic, mobile phone), the prices of food
and kerosene, and the form of direct subsidy transfer.
This solution, when deployed, can also help address leakages and other challenges in the PDS
due to the following reasons:
1. Creating information visibility of supply chain will reduce diversion;
2. Moving commodities at market price all the way till the sale point (or as close to the sale
point as possible) will reduce incentives for diversion;
3. Real-time fraud analytics will help in monitoring and apprehending fraud;
4. The proposed electronic Ration Card registration process will allow beneficiaries to get their
5. Ration Cards with ease;
6. Entitlement portability will put bargaining power into hands of beneficiaries, which will
make it possible for them to relocate or migrate, without worrying about losing their
government benefits;
7. Entitlement portability will also bring about competition among FPSs, due to which shops
that adulterate, or are unfriendly to the customers will eventually see lesser business; and
8. Self-service inquiries through mobile phones, a toll-free contact centre, and online account
status on the internet will empower beneficiaries, since this establishes a direct and
transparent grievance redressal channel.
The social programs of India are complex systems with millions of participants that have evolved
over the last few decades. Hundreds of millions of beneficiaries depend upon these programs for
basic sustenance. Such systems can only be reformed through systematic change management.
Eventual success will hinge upon political will, good governance, incentive-compatible solution
design, judicious use of technology, a structured transition plan, meticulous project management,
effective supervision, peoples participation, audit, and execution. The Task Force believes that
the ideal solution will involve using technology to strengthen the role of Government in public
provision, while also leveraging some of the efficiencies that the market has to offer.
The Task Force is only recommending an IT strategy for PDS reform. It does not address the
other policy initiatives that may have to be undertaken to improve the PDS functioning. The
Task Force believes that a strong, robust IT infrastructure backbone is critical for reforming the
functioning of the PDS.

Challenges faced by PDS today

Challenges
! With a network of more than 4.62 lakh fair price shops (FPS) distributing commodities worth
more than Rs 30,000 crore annually to about 180 million families, the PDS in India is perhaps
the largest distribution network of its kind in the world. However, there are huge challenges
faced by the PDS across the country.
! In 2008, an As-is study for TPDS was carried out by National Institute of Smart Government in
four states viz. Andhra Pradesh, Assam, Chhattisgarh and Delhi. The team covered various
aspects of the functional areas with the perspective of People, Process and Technology.

89!

Challenges in the following six key functional areas were studied: allocation, movement, storage,
finance, licensing and regulation of FPSs, and grievance redressal.
The challenges noted were:
Allocation
1) Non availability / delay of utilization information to the Centre from States
2) Non - availability / delay of closing balance details and updated card status at State level from
the districts, block and FPS levels.
3) Inaccurate data reporting by FPS
4) Longer time taken for allocation cycle
Movement
1) Absence of truck tracking system leading to delayed delivery, diversions, siphoning etc.
2) Non-standard transportation rates
3) Cartel formation by transporters
4) Late submission of demand drafts/cash by FPS for lifting leads to sub optimal route planning
Storage and Quality Control (QC)
1) Non-availability of stock positions in few states leads to inappropriate allocation and excess
stock buildup at intermediary storage points
2) Poor quality of packaging leads to loss of food grains
3) Extensive use of hooks leads to spillage
4) Insufficient godown capacity of intermediate storage points result in multiple shipments
5) Temperature fluctuations due to weather leads to variations in weight of food grains
6) Loss of food grains due to infestation
7) Manpower shortage leads to delay in dispatches and noncompliance to policies
Finance
1) Poor financial condition of FPS and GPSS/WCCS(in Assam)
2) Cost and time incurred on preparation of multiple DDs by FPS results in increased financial
burden on the FPS/GPSS.
Licensing and Regulation
1) Inadequate monitoring leading to diversion of stock
2) Selection of inappropriate dealer leading to malpractices
3) Lack of standard selection procedure and guidelines
4) Difficulty in identification of elapsed licenses
Grievance Redressal

90!

1) Absence of response and monitoring mechanism because of which, higher authorities are
unaware of number and status of grievances registered and thus grievances are not getting
resolved on time
2) The service level agreements for grievance redressal are not clearly defined
3) Bogus complaints result in wastage of officials time
4) Lack of integration between various complaint and registration channels leads to multiple actions
at different levels.
! Based on the above study, a scheme for computerization of TPDS operations in select districts of
four pilot States of Andhra Pradesh, Assam, Chhattisgarh and Delhi was taken up by the
Department of Food and Public Distribution.
! Apart from the challenges identified above, there remains the fundamental challenge of having
an accurate database of eligible beneficiaries. The existing databases are plagued with inclusion
and exclusion errors in identification of beneficiaries and fake ration cards.
! Choice and convenience for the beneficiary has not been adequately addressed in the present
Issues of buffer stock
Public sector food grain stocks are an important pillar of Indias food policy and food security.
These have been used to serve three important societal goals.
1. To provide space for effective implementation of minimum support price for rice and wheat
through procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any other
exigency.
3. As a source of supply for public distribution system and various other schemes to sustain food
and nutrition security particularly of economically weaker sections.
! Buffer stocks have come under frequent attack on three grounds. The level of stocks is said to be
too high in relation to the buffer stock norms which is causing huge cost in terms of storage,
interest on value of produce, and wastage.
! It is made out that price stabilization can be better achieved through trade rather than stocks and
the former is found to be much cheaper than latter. It is also argued that buffer stocks for
absorbing shocks due to production fluctuation were justified when India did not have enough
foreign exchange reserve to maintain excessive stocks held by public agencies. The problem is
not with the buffer stock per se but with our storage capacity and imprudent management of
grains.

91!

Chapter!9!
Food!Processing!and!Related!Industries!in!
India!
Food processing is the transformation of raw ingredients into food, or of food into other
forms. Food processing typically takes clean, harvested crops or butchered animal products and uses
these to produce attractive, marketable and often long shelf-life food products. E.g. - milk to butter,
cheese, ghee, or various pickles etc.
Significance
! Food processing industry is of enormous significance for India's development because of the
vital linkages and synergies that it promotes between the two pillars of our economy, industry
and agriculture. Fast growth in the food processing sector and progressive improvement in the
value addition chain are also of great importance for achieving favourable terms of trade for
Indian agriculture both in the domestic and international markets. Even more important is the
crucial contribution that an efficient food processing industry could make in the nation's food
security.
! The simple fact that the post-harvest losses are about 25 to 30 per cent in our country should
serve as an eye opener for all of us. Even marginal reductions in these losses are bound to give us
great relief on the food security front as well as improve the income levels of the farmers.
Governments intervention
! It is in this context that the Government of India has given utmost priority to developing the food
processing sector. The Government has taken a number of initiatives. The entire sector has been
deregulated and no license is required except in the case of alcoholic beverages. Automatic
approval for foreign investment up to 51 per cent is allowed.
! Even where investment is more than 51 per cent, approval is given on a case-to-case basis by the
Foreign Investment Promotion Board (FIPB). Cent per cent export-oriented units are permitted
to import raw materials and capital goods free of duty. Zero duty import is also permitted, for
capital goods. Export earnings are exempted from corporate tax. A number of State Governments
have also announced liberal fiscal benefits for the food processing industries.
! In line with this policy the Department of Food Processing Industries has launched concessional
finance schemes. The schemes cover the entire spectrum of activities involved with food
processing such as post-harvest infrastructure including cold chain, food quality and safety,
packaging, research and development and promotion of processed food.
Scheme for Infrastructure Development

92!

! To fulfill the need for creation of integrated and holistic infrastructure for food processing sector,
Ministry of Food Processing Industries (MOFPI) had launched new Schemes in 11th FYP with
strong focus on creation of modern enabling infrastructure to facilitate growth of food processing
and creation of an integrated cold chain mechanism for handling perishable produce. Under the
initiatives of MOFPI for strengthening infrastructure in agro and food processing sector.
Mega Food Parks Scheme
" Mega food parks will be setup in 12th Five year plan. Government allotted more than 1700
crores for it.
" First, a Special Purpose Vehicle (SPV) will be created to setup the Mega Food Park.
" Government gives grant of 50%of the project cost in general and 75% for North East, Hill
area, areas under integrated Tribal development plan
" Maximum of Rs 50 crore per project.
" Out of 30 Mega Food Parks proposed during the 11th five year plan, the Ministry has taken
up 15 projects under the Scheme so far. Of this, Final approval has been accorded to 8 Mega
Food Parks in the States of Andhra Pradesh, Punjab, Jharkhand, Assam, West Bengal,
Uttarakhand, Tamil Nadu and Karnataka
" In addition to these, 15 new Mega Food Parks are in the process of Government approval.
Benefits of Mega Food park
1. Will benefit 6000 farmers / producers directly and 25000-30000 farmers indirectly.
2. Will generate ~40,000 direct and indirect jobs.
3. New employment opportunities created within rural areas, It will reduce
" Rural-urban migration,
" Unplanned urbanization,
" Slums/social problems in cities
4. Will accommodate 30-40 Food Processing Industries in it.
5. Will have annual turnover of ~500 crore.
6. Will provide efficient supply chain management from farm gate to retail outlet.
7. Common facilities which will reduces operational cost
8. Farmers can utilize the Cold Storages, Ripening Chambers, and Ware houses for less wastage, no
distress sales
9. Good transportation facilities viz reefer trucks and vans.
Establishment of Cold Chain, Value addition and Preservation Infrastructure
Helps creating integrated cold chain and preservation infrastructure facilities without any break from
farm to consumer. Under this scheme, following facilities created:
1. Minimal processing centre at the farm gate level having facilities like weighing, sorting, grading,
pre-cooling, cold storage and normal storage facilities;
2. Mobile pre - cooling vans and reefer trucks;
3. Distribution hubs having facilities such as multi-purpose cold stores, variable humidity stores,
blast freezing etc.

93!

4. Food irradiation plants.

Abattoir modernization (slaughterhouse)
Features:
1. Establish new modern abattoirs
2. Modernize existing abattoirs
3. Promote scientific and hygienic slaughtering.
4. Modern technology for waste management.
5. Better by product utilization (bones, skin etc.)
6. Provide chilling facility, retail cold chain management etc.
National Centre for Cold Chain Development (NCCD)
Setup during 11th FYP, under Societies Registration Act, to do following
1. Create an enabling environment for the cold chain sector
2. help private sector involvement in cold chain sector
3. Financial assistance upto 90% to State Governments to setup/modernize/expand cold storages
and ice plants via cooperatives.
4. establish standards and protocols related to cold chain testing, verification, certification and
accreditation as per international standards
5. Provide technical assistance to Financial Institutions, Government Departments/ agencies, and
industry for selecting cold chain component e.g. refrigeration units, refrigerated transport
equipment, display cabinets, milk tanker etc.
6. HRD and technical advisory.
Scheme for Development/Strengthening of Agricultural Marketing Infrastructure, Grading
and Standardization
By Ministry of Agriculture
1. To Develop and Strengthen agricultural marketing infrastructure.
2. Facilitate private and cooperative sector investments in marketing infrastructure.
3. Provide additional agricultural marketing infrastructure to agriculture, dairy, poultry, fishery,
livestock and minor forest produce.
4. facilities for grading, standardization and quality certification of agricultural produce so
farmers can get money commensurate with the quality of their produce;
5. Introduce Negotiable warehousing receipt system
6. promote forward and future markets
7. To create general awareness and provide education and training to farmers, entrepreneurs
and market functionaries.
Dairy Schemes
Intensive Dairy Development Scheme (IDDS)
" 100 per cent grants in aid for
" Dairy processing and marketing

94!

milk equipment for bulk milk coolers, chilling centers, refrigerated tankers and cold storage
Dairy Entrepreneurship Development Scheme (DEDS)
" To encourage entrepreneurs in setting up modern dairy infrastructure for clean milk
production
" Helps in bulk milk coolers, transportation facilities including refrigerated vans, cold storage
facility.
Agri Export zone (AEZ)
In 2001, By Commerce Ministry
" Total 60 AEZs in 20 states.
" To converge the efforts of central and state governments to increase agro-exports
" AEZ concentrates on a particular produce/ product located in a geographically contiguous area
(e.g. Mango in Chittur District of Andhra) and coordinates the ongoing Central-State schemes to
cover the entire value chain from farm to the foreign consumer, including sorting, grading,
packaging, processing, exporting.
"

1. Problems faced by Agri Export Zone Government Agencies dont take ownership or
responsibility.
2. Villagers and field officers are unaware about the scheme and its conceptual framework
3. The Design of AEZ itself doesnt have project orientation.
4. Lack of coordination/ monitoring system in AEZs
5. The investment made by central and state government have not materialized into real-useful
assets on the ground.
6. Indiscreet proliferation of AEZs in certain states. WB, Maharashtra have multiple Agro
export zones while Odisha barely got one AEZ and that too in 2013,More than a decade after
the scheme was launched in 2001

95!

Vision 2015
A Vision strategy and action plan has been finalized for giving boost to growth of food
processing sector. The Vision 2015 adopted by the Ministry of Food Processing aims to achieve the
following:
1. Trebling the size of the processed food sector.
2. Increasing level of processing of perishables from 6% to 20%.
3. Value addition to increase from 20% to 35%.
4. Share in global food trade to increase from 1.5% to 3%.
5. The level of processing for fruits and vegetables is envisaged to increase to 15% in 2015.
6. The cabinet has also approved the integrated strategy for promotion of agri business and vision,
Strategy and action plan for the Food Processing Sector.
Vision Document Projections
2003-04 ($ billion)

2014-15 ($ billion)

Total food consumption

205
Processed Foods
126
274
Primary processed food
79
136
Value Added Food
48
138
Share of value added products 16%
50%
in food Production
! Indian food-Processing industry is poised for explosive growth driven by changing
demographics, growing population and rapid urbanization along with increased government
support. These factors will increase the demand for value added products and thus improve the
prospects of food - processing industry in India.
! The governments focus towards food processing industry as a priority sector will ensure policies
to support investment in this sector and attract more FDI. India with its vast pool of natural
resources and growing technical knowledge base has strong comparative advantages over other
nations.
! According to CII has estimates, food-processing sector has the potential of attracting US $33
billion of investment in 10 years and generate employment of 9 million person-days. The food
processing sector in India is clearly an attractive sector for investment and offers significant
growth potential to investors.
Conclusion
! The industry needs to adopt the latest technologies to inject greater efficiency which could
provide economies of scale and cost effectiveness. We need to introduce technologies that can
add value at a reasonable cost as the premium of processed foods over fresh fruits and vegetables
cannot be very high if a large demand is to be generated. Some of the new technologies in cold
storage system include changing the cooling system, use of prefab sandwich insulated panels,

96!

spraying potatoes with sprout suppressants and then storing them to save power and use vapor
absorption refrigeration, based on solar and bio-gas energy which has been adopted in the
advanced countries. Similar innovations have already been applied in several other areas.
! The other issue is the absence of linkages between the industry and the farmers for the raw
materials. Currently, most agro industries depend on the normal trade channel for their raw
material which often results in the industry getting only the left overs of the market. This is very
acute in the horticulture-based industry. In order to ensure that the industry gets the right quality
and quantity of raw material at the appropriate time, the most suitable method in the Indian
context appears is to procure raw material directly from the farmers through contract product.
Experiments made by some leading companies in this regard have been eminently successful.
! India has large prospects for exports of agro-products. The key to India's success, however, shall
be quality. In our endeavor to boost exports, India may been confronted with two issues, viz.,
genuine quality issues and pseudo quality issues. We need to gear up to meet both the challenges.
The concept of quality assurance has been alluded to the Indian exporters so far. Total quality
management begins not only from the first stage of manufacturing of the end product but from
stage one of production of the raw material. Most of the processed food manufactured in the
country is not of a very good quality, largely because of the use of poor raw material. Therefore,
the processors need to enter into contracted arrangements with the farmers for providing
processable varieties of raw materials and also help them to improve productivity by using the
latest agricultural technologies.
! The growth potential of India's food industry is enormous. With food being a national priority
and food habits changing rapidly towards value-added foods, the Indian food processing industry
is on the brink of a revolution that will modernize the entire food chain.
Supply Chain Management:
What is 'food supply chain management'?
! 'Supply chain management' is the term given to the system and inter-connections of
organizations, people, activities, technologies, information and resources involved in production
and distribution of a food product. It encompasses many different disciplines and logistical steps
from sourcing the right raw material and ingredients through to on-time delivery to the
consumer. The supply chain can be quite complex when dealing with food products.
From "farm to fork"
! You may have heard such terms as "farm to fork" or "paddock to plate". These terms refer to the
supply chain within the food industry in an easy to visualize way.
! Take a minute to imagine all of the people and organizations that might have been involved in
getting your breakfast to you today. The growers and producers wheat farmers if you had toast
or weetabix, dairy farmers if you had milk or yogurt and even banana growers if you had banana
chips in your muesli. Then there are the manufacturers who turn the wheat or bananas into a
breakfast product. This usually involves several stages and several manufacturers.

97!

! For example, one company might dry the bananas into chips and then sell them to the muesli
producers who then add them as a component to the finished breakfast product. The
manufacturing can be done close to where the commodity crop is grown or it can be moved
elsewhere for this, even exported to another country. Then there is the packaging company who
manufacturer the packaging material to protect the product. Along the way distributors and
transporters move the foods by road, rail, air or sea.
! Once the product arrives at the destination, it goes into the shops or marketplace for selling. The
shop can be a huge multi-national supermarket or a small outlet. The retailers promote the
product to make consumers want to buy it through advertising and marketing strategies at both
the point of sale and through advertising media, like newspapers and television channels. Finally,
the customer buys the product, takes it home and consumes it. The supply chain is now
completed.
! However, this is not necessarily the final step in the life of the product - the post-consumer stage
of waste disposal and management for all the food that goes uneaten. Approximately a quarter to
a third of all the food we buy ends up thrown out, usually because we buy more perishable food
than we need or we serve more than we can eat. This is particularly true for fresh produce with a
limited shelf life.
Elements of the supply chain
! The stages of the supply chain are now briefly outlined below in a simplified presentation. It can
be far more complicated in reality with many inter-dependencies and steps.
Food Ingredients and raw materials
! The supply chain in the food industry starts with ingredients or raw materials. Selection of the
appropriate raw materials is needed to achieve the desired end product. Suppliers are contracted
to supply materials that meet the requirements outlined on the raw material specification sheet.
There may be a number of concurrent suppliers of the same ingredient to ensure availability is
always guaranteed, especially for high volume businesses, such as in fast food restaurants.
! A traceability system allows manufacturers to trace the source and path of each ingredient or raw
material throughout the production process. This is very important if any incidences of
contamination or allergens come to light after a product has been placed on the market. Having
such safeguards in place can prevent or minimize any widespread risks to consumers.
Transport and storage
! Unless you grow your own food, all the food we consume has undergone some and probably
many forms of transport. In the simplest case, fresh vegetables may be taken to a local market.
Consumers then buy produce and drive, walk or cycle it home. This first step may be eliminated
if the produce is bought at the farm-gate, such as in the case of strawberries in the summer time,
but then it is still transported home by the customer.
! A product may be a key ingredient for another product and thus is transported to a manufacturing
site elsewhere by road, rail, sea or air. This procedure can be repeated before it is finally sold as a

98!

finished product, which again requires transport to get it to the point of sale. Transportation of
foods results in what it termed "food miles" and its economic and environmental impacts are
debated today.
! Commodity products, such as grains, can be bulk or container shipped around the world in huge
transporter ships. In bulk shipping the grain goes straight into the hold of the ship instead of
being transported in containers on board the ship. Some countries are major commodity
exporters to other parts of the world, such as Australia and Canada for wheat export and pulses.
Further on, we will see some examples of innovations and research in shipping transport.
! The storage, packaging and transport steps of the supply chain can involve many technologies,
needed to maintain product quality. Chilled or frozen distribution ("cold-chain") and modified
atmosphere environments are used for many products.
! Foods can be stored and packed in modified or controlled atmospheres. Controlled atmospheres
are useful for crops that ripen after harvest or deteriorate quickly even when stored optimally.
The gas composition is carefully monitored and a proportion of the store atmosphere is recirculated to control the carbon dioxide concentration. In modified atmospheres however the
product is held in an airtight environment and the atmosphere is changed by respiratory activity
of the fresh foods. Carbon dioxide levels can be higher than 20% and oxygen levels can be as
low as 0%. High CO2 levels are important for controlling insects and mould growth for example
in grain storage.
Food Production
! Ingredients are combined or transformed in some way during the manufacturing stage to produce
the final food product. Production can be thought of in terms of the input of raw materials that
undergo a process of transformation to produce an output, the product. Commercial food
products can have multiple ingredients or components, which themselves may have undergone
transformations, making them quite complex final products. Production can take many forms it
can be batch or continuous, on a mass-scale, or more limited in output - and can use many
specialized techniques and equipment.
! Packaging is added to the finished product. Packaging protects the food and provides the
appropriate barrier to maintain product safety, amongst other important roles. Individual
packaged products are then combined into larger consignments ready for distribution to sales
points.
Safety in the supply chain
! Safety is vitally important in food production. The result of a supply chain should be a product
that should be safe to eat. Manufacturers are forced by law to make sure of this. Risk assessment
and hazard analysis schemes are used in industry to assess potential problems before they arise.
As is true with other aspects of life, it is better to prevent a problem before it happens than to try
to correct it afterwards.
Hazard Analysis and Critical Control Points - HACCP
! The system such in food manufacturing is called Hazard Analysis and Critical Control Points or
HACCP for short. Different foods carry different risks. A risk is the likelihood of a problem or

99!

!
!

a hazard - occurring. Risk assessment in food production looks particularly at ingredients, times
and temperatures, processing methods and packaging.
There are three type of hazards defined in food production:
" Biological such as food poisoning due to bacterial contamination (e.g. salmonella), mould
growth and viral infections.
" Chemical such as that from cleaning fluids, fertilizers or paints.
" Physical such as stones, hair, fingernails, rings and bits of machinery.
In order to make a HACCP plan, each stage of the production system is first described. Any risks
associated with each stage are then identified with an explanation of why this particular problem
poses a risk. The control check is then worked out to stop the hazard or reduce the likelihood of
it happening. Finally an action plan is outlined to state what action is to be taken if the control
check shows the hazard has happened. On top of this, it is essential that effective record keeping
is maintained to document everything.
It is a good idea for the HACCP team to include people from across multi-disciplinary
competencies, including food technologists, microbiologists, packaging technologists, etc.
An example for production of a chicken and vegetable curry is given below, taken from the
'AQA Food Technology handbook'.

HACCP development plan example:

Stage
in Risk hazard
Reason why it is a risk Symptoms
production
system
Delivery
goods

of -damaged
-Out of date
-wrong
temperature
Wash
Contamination
vegetables
from dirt or
properly
chemicals
Dice Chicken Salmonella form
fillets evenly
uneven cooking

All Make food unsafe -Visual check

to eat
-Visual Check
-Use temp probe

Action to take
if
control
shows that risk
has occurred
-Reject
-Reject
-Reject

Makes food unsafe to Through Cleaning Clean again and

eat
recheck
Salmonella lives in
poultry and causes food
poisoning.
Uneven
cooking
increases
risk
of
salmonella not being
killed during cooking.

Use temp probe Reject

to check temp of Train Staff
chicken is below
5#C.
Visual check for
size.

Cook Chicken Salmonella from

Pieces
inadequate
thoroughly
cooking.

Use temp probe Cook Longer

to check temp of
chicken is 70#C
for 2 mins.
Social and environmental concerns associated with the food supply chain
! In addition to safety, timeliness and general good management practices are necessary for a
successful food supply chain. There is also growing concern around social and environmental
issues associated with the food supply chain. Some of these are discussed below.

100!

! In particular, 'food provenance' and 'food miles' have become important concerns as societies
start to consider the wider implications of producing and moving food.
! "Food provenance" refers to where the food has been grown or made, by whom, and how and
when. Many companies have developed responsible or ethical trading policies in response to this
issue. Some products carry the "fair trade" endorsement.
! "Food miles" refers to the distance between where the food is grown and where it is eaten.
Supermarkets today sell fresh fruit from South America and frozen meat from New Zealand and everything in-between! Many food products contain ingredients or components that have
traveled across the world and thus accrued many food miles.
! Transporting food burns fuel and produces greenhouse gases, which in turn causes climate
change. The CO2 produced during this process, is referred to as the 'carbon footprint' how big a
mark it makes on the environment. However, it is not as straightforward as just looking at the
miles: if the alternative to shipping naturally-ripened fresh produce over thousands of kilometers
is to produce it closer to home but in very energy-intensive greenhouses, is this better? It may be
that there are carbon-neutral greenhouses powered by renewable energy sources in the near
future which go some way towards answering this.
! In "Real insights" the public discussions at COP15 in Copenhagen on the impacts of food
production and distribution on climate change are discussed.
! On top of the environmental concerns, there is also the ethical question of taking away the
livelihoods of farmers from poorer regions of the world who grow crops for export. This
discussion falls into the concerns voiced by some groups about food sovereignty.
! As with other consumer products in the world, food products and their manufacturers are now
coming under closer scrutiny for their own carbon footprint. In the future, food products may
carry "climate-labels" but this is still generally very much under discussion.
! Of course, the alternative to foods carrying a high food mileage or intensive production practices,
is to buy locally produced products that are in season. Local markets usually sell food that has
been locally grown. (What is "local" is often down to sensible interpretations by individuals from the same village or county or further afield?)
! Organic products are also increasing in popularity and generally use less inputs (energy,
fertilizer, etc) in their production compared to conventional farming methods but may have
traveled across the world. On-line shopping has now opened up the possibility for markets and
customers to be anywhere.
! This just shows how complex the food supply chain can be with the added dimension of current
debate about climate change impacts.

101!

Chapter!10!
Renovating!Land!Management!!The!Role!
of!Land!Reforms!in!Agriculture!
! A huge disparity in land holding pattern continues to exist in the country even after four decades
of independence. A series of land reform laws have been passed by the State and Central
Governments. Though the laws are very rosy and catchy but their implementation is hope - less.
However, people working with rural poor masses of India must have an elementary knowledge
about the existing land reform measures, operating in 'the country.
Introduction
! The stigma of Indian Agriculture is the highly defective structure of its land holdings. The
measures of land reforms aim at correcting it. The term 'land reforms' involves procurement and
redistribution of large holdings of agricultural land among the small farmers and landless
agricultural labourers. It is an instrument to bring about improvements in the institutional
framework of land.
! The responsibility of land reforms is owned by the government with a view of benefiting those
who either have petty holdings or have no land at all. As big land owners are quite unlikely to
share their holdings with their landless counterparts, intervention by the government using force
of law/legislation is necessary to secure social justice for the masses.
Land Tenure
! Land tenure may be defined as the system in which land is held by an individual or the actual
tiller of the land; it determines his rights and responsibilities in connection with his holding.
Obviously, land tenure system refers to law/rules and regulations which confer ownership rights
upon an individual or actual tiller of the soil. It determines the status of the actual tiller of the
land and his relations with the state. It points out under what circumstances; the actual owner of
the land may lose his ownership right. It specifies rent to be realized from the tiller, its time and
methods. It specifies the conditions under which the actual tiller can sell or transfer his holding.
It specifies the conditions, whether a cultivator can mort - gage his land or not.
! There were a large number of land tenure systems prevalent in India in pre-independence period.
But the following three were more prevalent in different parts of the country.
1. Ryotwari system
" Under this system, every registered holder is recognized as its owner. The owner cultivator or
peasant proprietor is responsible directly to the government for the payment of land revenues

102!

and other dues. There is no intermediary between the government and the cultivator. This is
perhaps the best system of land tenure.
2. Mahalwari system
" Under this system, land is held (owned) jointly by a collective body of village. This body
collects land revenues from the owners or cultivator peasants and is responsible to the
government. This system facilitates cooperative farming to get maximum yield from land..
The main drawback with this system is that it encourages absentee landlordism.
3. Zamindari system
" In Zamindari system, there is a separation of ownership of land from its cultivators. Under
this system, one person known as zamindar owns a village and is responsible for the payment
of land revenues to the government. Now this system has been abolished.
The Need for Land Reforms
! As discussed earlier, the defects existing with Indian agrarian structure pointed out by Planning
Commission, highlighted the need for land reforms. The existing system during the beginning of
Planned Growth, Tenant got little incentive to increase his output since a large share went to the
landowner. Very small margin was left for the actual cultivator and this amount was quite
insufficient to provide for a capital investment on the land. The landlords grew richer, the
intermediaries continued to flourish, the state was deprived of its share of legitimate increase in
revenue and the cultivator tenants were in hand to mouth existence.
! In order to remove the defects with existing agrarian structure, there was need of institutional
changes in holdings. A high powered committee in 1948 with J. L. Nehru as its Chairman
recommended that all intermediaries between the tiller and the state should be eliminated and
all middlemen should be replaced by non-profit making agencies like cooperatives. The
maximum size of holdings should be fixed and the surplus land should be acquired and placed at
the disposal of the village cooperatives. Small holdings should be consolidated and steps should
be taken to prevent further fragmentation".
Objective of Land Reforms
! The basic objective of land reforms in India has been the creation of a system of peasant
proprietorship. 'Land to the tiller' has been the motto. Through the redistribution of land by
applying ceiling on land holdings, the idea has been to build up a vigorous independent peasantry
consisting of small farmers and to help these farmers class with extension of credit and
distribution facilities, largely through a network of cooperative service organization.
! The objectives of land reforms policy were set out by the planners as "the removal of such
institutional and motivational impediments to the modernization of agriculture as were innate in
the agrarian structure inherited from the past and the reduction of gross inequalities in the
agrarian economy and rural society which stemmed from unequal rights in land".
The Planning Commission gave two basic objectives of land reforms, namely.
1. Economic efficiency

103!

The agrarian reforms should help in removing all obstacles to achieve high agricultural
productivity. They should help in creating conditions for evolving as speedy as possible, an
agricultural economy with high level of efficiency.
2. Social justice
The agrarian reforms should help to eliminate all elements of exploitation and ensure social
justice within the agrarian system to provide security for the tiller of the soil and assure equality of
status and opportunity to all the sections of the rural population. In order to achieve these objectives,
the following policy measures were envisaged:
" Abolition of the prevalent intermediary system between the state and the actual tillers;
" Tenancy reforms such as conferment of ownership rights on the cultivating tenants in the
land held under their possession;
" Imposition of a ceiling on agricultural land holdings as a measure contributing to the
modernization of agriculture and to eliminate parasitic absentee landlordism;
" Rationalization of the record of rights in land so as to make the rights of tenants, share
croppers and other categories of insecure landlords;
" Consolidation of holdings with a view to making easier the application of modern techniques
of agriculture; and
" Development of co-operative farming and co - operative village management.
Progress of Land Reform Measures
! The land tenure systems which the British imposed in India, regardless of the different juridical
forms they assumed in different regions, were only variants of feudal and semi-feudal land
ownership. The British administrators altered these systems in a manner as to facilitate the
extraction of more rents from the cultivators by making the landlord, who was earlier a rent
collector, the absolute owner of land and by depriving the actual cultivators of all their traditional
rights.
! Although juristically no landlord or intermediaries were created and the settlements were made
directly with the ryot, yet the fact was that, due to prevailing inequalities in land holdings, the
bigger ryot landlords came to dominate the agrarian set up in many respects and became the
counter - parts of the landlords in zamindari areas. Like the latter, they indulged in many semifeudal forms of exploitation such as share cropping, rack renting, ejectments, forced labour,
usury, etc.
! Thus, the structure of agrarian society evolved under British rule, created a socio-economic set
up in which parasitism flourished, land concentration in the hands of a few rural rich continued
to grow, and landlessness and land hunger of the peasants mounted at an over increasing pace.
Evictions and insecurity of tenancy and rack - renting became a general phenomenon and the
cultivators were ground down by a colossal burden of indebtedness.
! Land reforms have been on the agenda of rural reconstruction since independence. Number of
land reform laws have been made by state and central government after independence. The
reforms have been undertaken along the following lines:

104!

" Abolition of zamindars and other intermediaries (jagirdars, inamdars, malgujars, etc)
between the/state and the cultivator;
" Tenancy reforms and the reconstruction of the land ownership system;
" Fixation of ceiling on holdings and distribution of surplus land among the landless;
" Reorganization of agriculture through consolidation of holding and prevention of further
fragmentation; and
" Development of co-operative farming and co-operative village management systems.
Tenancy reforms
! The first phase of land reforms (1948-55) was mainly concerned with the abolition of
intermediaries. The tenancy reform which is the integral part of land reform policy favored
neither wholesale removal of landlordism nor the wholesale abolition of tenant cultivators.
Hence, the middle course was adopted. Thus certain amendments to the existing tenancy laws
were carried out along with the legislations for the abolition of intermediaries. This extended the
scope of protection to the tenants of intermediaries particularly in areas of statutory landlord ism.
! But the owners were allowed to resume land for their personal cultivation. This led to the mass
eviction of tenants, sub-tenants and share-croppers through various legal and extra-legal actions.
In fact, a big drive to clear land of tenant occupants was started by landlords in order to obtain
maximum areas. Innumerable evictions were effected III the process of resumption of land by
landowners. But such evictions could not take place in U.P. and Union Territory of Delhi. In
fact, U.P. has the credit of having the best land reforms in India.
! To counteract this, the law makers in most of the states tried to enact or amend tenancy laws in
the following decade (1955-65) and friends plug certain glaring loopholes in the existing laws.
The major aspects incorporated in tenancy legislation in different states to protect the tenants can
be identified as follows.
1. Fixation of rents
! Before the initiation of land reform measures the tenants were required to pay one half of their
produce or more as rent to the landlords. During the first plan period, it was suggested that the
rent should not exceed 1/4th or 1/5 of the produce in any case. During the second and third plans
also this suggestion was repeated and it was suggested that the rent should be made payable in
cash. Legislation along these lines has been enacted in all the states. However; different states
have prescribed different rates of rents. For instance in Gujarat and Maharashtra the maximum
rent stands at one-sixth of the produce. In Assam, Manipur and Tripura maximum rents vary
between 1/4 and 1/5th of the gross produce. In Orissa and Bihar, 1/4th of the gross produce has
been fixed as rent. In Rajasthan, fair rent is fixed at 1/6th of the gross produce but in case of cash
rents, at twice the ' land revenue assessment.
2. Security of tenants
! It was emphasized in the first, second and third five year plans that the tenants. Should be
accorded permanent rights in the lands leased In by them subject to a limited right of resumption

105!

to be granted to land-owners. In accordance with this legislation providing for security of tenure
has been enacted in all states.
This legislation has three aims:
1. The ejectment of tenant should not take place except in accordance with the provision of law;
2. The land may be resumed by the owner only for personal cultivation; and
3. In the event of resumption, the tenant is to be assured of a minimum tenanted area in his
possession.
The legislation provided that the ejectment of tenant can take place only through order of a revenue
court. The grounds on which ejectment may be allowed include:
a) Non-payment of rent,
b) Performance of an act which is destructive or permanently injurious to land,
c) Sub - letting the land, and
d) Resumption of land for personal cultivation by the landlord.
Legislations have been passed for granting security of tenure in different states on the following
patterns.
! All tenants in possession of cultivated land, have been given full security of tenure. The land
owners have no right to resume land for personal cultivation as in V.P. and Delhi.
! In Assam, Maharashtra, Gujarat, Punjab, Rajasthan and Himachal Pradesh land owners are
permitted to resume a limited area for personal cultivation subject to the condition that a
minimum area or portion of the holding is left with the tenants.
! In West Bengal and Jammu & Kashmir, a limit has been placed on the extent of land which a
land owner may resume. But the tenant is not entitled to retain a minimum area or portion of this
holding in all cases.
Right of ownership
! Regulation of rents and security of tenure are treated as first stage in the tenancy reforms. The
ultimate goal is to confer rights of ownership on as many tenants as possible and bring them in
direct contact with the state. Legislations passed along these lines provide for bringing tenants of
non-resumable lands into direct relationship with the state in the following three ways.
1. By declaring tenants as owners; the tenants were required to pay compensation to owners in
suitable installments;
2. Through the acquisition of right of ownership by the state on payment of compensation and
transfer of ownership to tenants; and
3. By protecting the interests of sub-tenants under the tenancy laws and bringing them into
direct relation - ship with the state.
! The practice of leasing out of land is adopted by those cultivators' who do not possess required
amount of labour and capitals. Otherwise, in view of high returns from land, leasing out and
share-cropping are considered unprofitable by owner cultivators.

106!

Evaluation of tenancy reforms

! As a result of tenancy legislations in many states the tenants and sub-tenants have been brought
into direct relationship with the state. But the progress was very slow in some states due to the
following reasons.
1. The legislation has not been able to meet the objects laid down by the Planning Commission.
The fixation of statutory rent was very high in some states.
2. The term personal cultivation was defined in a loose manner. Because of this, the lands
ostensibly resumed by the land-lords on the pretext of personal cultivation are cultivated
through crop -sharing arrangements where the sharers are treated as labourers.
3. The definition of the term 'tenant' excluded the share croppers who form a vast majority of
the tenant cultivators. Thus share croppers did not get any benefit.
4. The non-availability of correct and up-to-date land '. Records have not allowed to carry out
the tenancy reforms properly.
5. The tenants can be evicted from their holdings on many grounds. This has been termed as a
continuing hang over of the feudal system.
Suggestions for improvement
The following suggestions can be considered useful in achieving the aims of tenancy reforms.
1. The resumption of land by the owner should be legal in cases where the owner cultivates the
land himself.
2. The ex-landlords who have retained excess holdings under the pretext of personal cultivation
should be brought under a ceiling limit.
3. Correct land records should be compiled and maintained so as to facilitate effective
application of tenancy land reforms.
4. There should be complete ban on letting and subletting of agricultural lands. Exception
should be allowed in cases where the owner is a widow, minor or handicapped. The real
purpose of land reforms can be served only if the cultivators get financial support from the
financial institutions for the permanent improvement of their holdings.
Ceiling on land holdings
! Ceiling on land holdings refers to the fixation of maximum size of a holding that an individual
cultivator or a household may possess. Beyond this maximum limit, all land belonging to the
landlords is taken away by the government to be redistributed among the landless labourers.
Thus the imposition of ceiling on agricultural holdings is mainly a redistribution measure.
! The idea basically is to ration the land in such a way that, above a certain level, the surplus land
is taken away from the pre - sent holders and is distributed to the landless or to the small farmers.
This will reduce the wide disparities of income and wealth found in the agrarian structure.
! The ceiling question gave rise to more debate and arguments than any other reform issue.
Legislations for ceiling on existing holding and future acquisition were enacted in most of the
states during the second plan period.

107!

The ceiling on agricultural holdings was intended to:

1. Meet the hunger of the landless;
2. Reduce the glaring inequalities in land ownership so as to pave the way for development of cooperative rural economy; and
3. Increase self employment in owned land.
! The ceiling laws were enacted and enforced actually in two phases: the earlier phase covering the
period from 1960-1972, before the national guidelines were laid down, and the later since 1972
after the adoption of guidelines. However, provisions related to ceiling laws can be analyzed
under the following heads.
Unit of application
! In the beginning some states took 'individual' as the unit of ceiling, while some others regarded
'family' as the unit. This led to widespread irregularities and big land owners started transferring
their land into pieces to their fake kiths and kins and managed to keep unduly large holdings.
! However, since 1972, after suitable corrections, the unit of land ceiling universally adopted by
all the states is family having a father, a mother and children. Parents having more than 5
children can be given a little exemption but in no way the amount of exemption will exceed
twice the prescribed limits.
Recommendations of the chief minister's conference
! In 1972, a new national policy on land ceiling was evolved on the recommendations of the chief
minister's conference. The following guidelines were laid down.
1) Taking into account the fertility of soil and other conditions, the best category of land in the
state with assured irrigation and capable of yielding atleast two crops a year the ceiling
should be fixed 10-18 acres.
2) In the case of land with assured irrigation for only one crop in a year, ceiling shall not exceed
27 acres.
3) In case of owners with different types of holdings, after converting the better categories of
land into lowest categories, the ceiling should not exceed 54 acres.
4) The unit of application should be a family of 5 members. Where the members of the family
exceed additional land may be allowed for each member in excess of 5 in such a manner that
the total area admissible to the family does not exceed twice the ceiling limit for a family of 5
members. Where both husband and wife hold land in their own names the two will have
rights in the properties within the ceiling in proportion to the value of land held by each
before the application of ceiling. Each major child is to be f treated as a separate unit for the
purpose of application of ceiling.
Consolidation of holding
! India is a land of very small, fragmented and uneconomical holdings. That is why need of
consolidating these fragmented holdings was felt in order to improve their productivity and
viability of investments. Legislations have been introduced by various state governments, on

108!

these lines. Consolidation of land is a process of rearrangement of land on the basis of existing
rights.
! Most states have not shown any enthusiasm for implementing such legislations. Only in Punjab,
Haryana and parts of U:P. this programme has made desired progress. Orissa, Bihar, H.P. etc.
have also taken up consolidation in a big way. An area of 584.72 lath hectares has so far been
consolidated all over India.
Impact of Land Reforms
The impact of land reform measures on agrarian structure of the country can be discussed
under following heads.
1. Changing over to market oriented farming
! The analysis of pre-independence patterns of land systems reveals that the agrarian and social
structure which developed under the British tended to perpetuate a back - ward and medieval
economy in a state of stagnation for decades. The forces to impede the production and
development were very active.
! In contrast to this, National Commission on Agriculture (NCA) pointed out that the essence
of present situation is that Indian agriculture is in a stage of transition from predominantly
semi-feudal type of agriculture characterized by large scale leasing of land and subsistence
farming to a commercialized agriculture and, thus, increasingly assuming the character of
market oriented farming.
2. End of feudalism
! The National Commission on Agriculture also pointed out that as a result of land reforms that
have taken place since the independence; the feudal and semi-feudal land owning classes
have lost their erstwhile domination over Indian agrarian economy as a whole. Moreover, the
decline in the semi-feudalistic relations has followed growth of agriculture on commercial
lines. However, some of the evils such as share-cropping, extraction of high rates of rents,
usury, eviction of tenants, social and caste oppression, etc. still prevail in some parts of the
country but the degree of their intensity is negligible.
3. Leasing in of land by big owners
! One of the important effects of land reforms is that, the subsistence farming is changing over
to commercial farming. In this context NCA has pointed out that under commercial tenancy,
leasing in of land by the big land owners from the small farmers takes place and such tenancy
prevails more in areas where agriculture is modernized. It is common in Punjab and other
areas where the impact of the green revolution has been appreciable. It is almost absent in the
eastern regions of the country where agriculture is far less developed and where old type of
tenancy still persists.
4. Emergence of modern entrepreneurs
! As a result of land reforms a class of modem entrepreneur farmers has emerged. These
farmers have substantial land holdings and cultivate their land through hired labour and new

109!

technology. They are drawn largely from the ranks of ex-feudal landlords, upper strata of
privileged tenants and the bigger ryots, moneylenders, merchants and various other
categories of substantial landlords.
! Besides the growth of commercial agriculture and the rise in the prices of agricultural
commodities and also improvement in techniques, have strengthened the economic position
of this class of big farmers. They are also the main beneficiaries of governmental expenditure
on agricultural development. It is this class which has been treated as the main custodian of
the 'green-revolution'.
5. Reduction of poverty
! Besides several negative impacts, land reform measures have certainly reduced the disparities
in agricultural holdings. The surplus lands of big landlords have been distributed among the
tenants and small farmers. The exploitation of tenants by the land owners has been reduced
considerably. The cultivator-owner has been given assistance by the credit institutions to
increase the productivity of their lands. The cultivator-owner has been brought in direct
contact with state. They are no longer required to share their produce with their landlords. All
these steps have led to an increase in the income of the small farmers and thus reduced
poverty in the rural areas.
6. Use of institutional credit
! Agrarian reforms have significant implications in facilitating the use of institutional credit.
The land re - form measures have influenced the working of financial institutions viz. cooperative banks, regional rural banks and commercial banks, etc.
Review of Land Reform Measures
! Though the land reform measures have been instrumental in bringing about some desirable
changes in Indian agrarian structure, yet, they have failed to secure a justice to a large section of
the rural population. The results of land reforms implemented so far have been far from
satisfactory.
Some of the glaring examples of weakness in land reform measures are listed as under.
1. There has been no uniformity in execution of land reform policies and legislations in different
states. For example, the rent to be charged from the cultivators shows a wide variation from 20
% to 50 % of the gross product.
2. Land reform measures have failed to prevent subletting and rack-renting.
3. The identification of self-cultivation was wrong which allowed the big landlords to keep large
holdings with them.
4. Ex-landlords and zamindars have showed on papers that they have been cultivating the land.
However, they get them tilled by hired labourers.
5. Eviction of tenants has occurred on a large scale out of the suspicion of land being lost and under
the guise of "voluntary surrenders".

110!

6. Administrative arrangements for enforcement and : supervision of land reforms have been fully
inadequate.
7. Records of tenants did not exist in several states and often incomplete and out of date records
were used for the implementation purposes.
8. The several states the existing provisions of security of tenure were of an interim nature and
comprehensive measures to bring tenants into direct relation with the state are yet to be adopted.
9. The rights to resumption widened the scope of ejectment.
Reasons for Low Progress of Land Reforms
! The task force on agrarian relations set up by the Planning Commission to appraise the progress
and problems of land reforms, identified the following reasons for the poor performance of land
reform measures.
1. Lack of political will
" In the context of the socio-economic conditions prevailing in the country, no tangible
progress can be expected in the field of land reforms in the absence of requisite political will.
The sad truth is that this crucial factor has been wanting. In no sphere of public activity in
our country since independence has had such a big gap between precept and practice i.e.
between policy pronouncement and actual execution.
2. Absence of pressure from below
" Except in a few scattered and localized pockets, practically all over the country, the poor
peasants and agricultural workers are passive, unorganized and inarticulate. The basic
difficulty in our situation arises from the fact that the beneficiaries of land reforms do not
constitute a homogeneous social or economic group.
3. Negative attitude of the bureaucracy
" Towards the implementation of land reforms, attitude of bureaucracy has been generally
lukewarm and indifferent. This is, of course, inevitable because, as in the case of men who
wield political power, those in the high echelons of the administration also are either big land
- owners themselves or have close nexus with big land - owners.
4. Legal hurdles
" Legal hurdles also stand in the way of land reforms. l The task force categorically states: "in
a society in which the entire weight of civil and criminal laws, judicial pronouncements and
precedents, .administrative procedure and practice is thrown on the side of the existing social
order based on the inviolability of the private property, an isolated law aiming at the
restructuring of the property relation in the rural area has little chance of success. And
whatever little chance of success was there, completely evaporated because of the loopholes
in the laws and protracted legislations".
5. Absence of correct and up-to-date land records

111!

" The absence of correct and complete land records further added a good deal of confusion. It
is because of this that no amount of legislative measures could help the tenant in the court
unless he could prove that he is the actual tenant. This he could only do if there were reliable,
and up-to-date records of tenants. The main reason for the unsatisfactory state of affairs are
a) Many of the areas in the country have never been cadastrally surveyed,
b) In some areas where cadastral surveys were done for a r long time, no resurveys have
been taken,
c) No machinery , of any kind existed for maintaining village records,
d) Even where records were kept by government officials, there is no uniform system, and
e) It has been found that even official records in many cases have not been correct.
6. Land reforms have been treated as an administrative issue
" The implementation of land reforms is not an administrative issue, it is more of a political
issue. Therefore, it is necessary to strengthen the political will for implementing land
reforms. The task force of the Planning Commission in a very forthright manner states: "it
should, however, be clearly understood that the mere setting up of an efficient administrative
machinery will not by itself lead to any substantial improvement unless the political and
economic hurdles operating against the programme are removed."
Suggestions for Improvement
The land reform measures were thoroughly reviewed by Planning Commission and other
committees. Based on their findings, National Commission on Agriculture has suggested following
measures to reinforce the implementation of land reforms.
1. Breaking of landlord-tenant nexus
" The private owner who rents out land today is undoubtedly intermediary between the tiller
and the state and, as such, does not fit into the fundamental pattern of land reforms. It is,
therefore, high time that tenancy reforms were directed towards the state of finally breaking
up the landlord-tenant nexus.
" A potent practice of agriculture i.e. landlordism should be discouraged and ultimately curbed.
Agriculture should be treated as a family occupation of the peasant-cultivator and not a
source of subsidiary unearned income. In a normal peasant-proprietor economy absentee
landlordism should find no place.
2. Restricted tenancy should be allowed
" Under the present land-man ratio existing in India, tenancy as such cannot be banned though
undesirable. Experience has shown that wherever such an overall ban has been imposed, it
has led to the emergence of concealed tenancy with all its evils.
" Hence, until such time as socio-economic development in the country bring about a radical
change in man-land ratio and create possibilities of transfer of population from the
agriculture to non-agricultural sectors on a big scale, tenancy shall have to be permitted in a
restricted form. It will have to be strictly controlled and regulated. Leasing in of land should

112!

be permitted only in case of small farmers. Leasing in of land by big landowners from small
landowners should be discouraged.
3. Effective implementation of ceiling laws
" The studies have revealed that ceiling laws have not been able to make any appreciable
break-through in reducing concentration of land in the hands of a few big farmers. These
laws are devised to achieve the objective of substantially reducing the present inequalities in
land holdings. It is, therefore, suggested that present ceiling legislations should be enforced
vigorously. For instance, it is necessary to take firm measures against fiction and benami
transfers which have been deliberately manipulated by big landowners in order to by-pass
ceiling legislations.
" The state government should conduct a proper inquiry into such transfers. If it is found that
the transfers were made purposely to evade the provisions of ceiling laws, the land so
transferred should be vested in the state after imposition of some penalty on the transferee. In
cases where fictions co-operative societies have been organized with a view to concealing the
surplus land, such co-operatives should be subjected to proper investigation. And where
many partners have been shown in a holding, but the holding as a whole is under a single
management, such cases should also be brought to lime - light and adequate actions should
be taken to undo it.
4. Control on land held by trusts and institutions
" The Planning Commission holds the view that the land possessed by trusts or institutions
used for religions, charitable or educational purposes should be brought under ceiling laws. It
would not be proper to give them a blanket exemption because a large number of such
institutions and trusts are fictions or have been deliberately created to evade ceiling laws.
" Some of them are not being used for the purpose which on paper they profess to serve.
Arable lands held by such trusts and endowments should be brought under the ceiling laws
and more ceiling should also be made applicable to forests and water areas held by such
institutions.
5. Distribution of surplus land
" There is enough force in the argument that land should be distributed. to small peasants
owning less land than the economic holding or the minimum operational holding. Some have
also argued that it is not only important to fix a ceiling on land holding, but it is also
important to fix floor so that a large number of peasants may have at least a small operational
holdings.
" But in the view of massive landlessness, a serious lack of employment opportunities and a
subsistence level of, almost half of the rural population below the poverty line, the land
should be distributed to the landless labourer to whom land, however small, is the source of
employment and relief from destitution. Hence for a long time to come a floor or ownership
cannot be applied.

113!

6. Simplification of legal procedure and administrative machinery

" The Planning Commission has observed that ceiling legislations have suffered not only
because of certain political and economic constraints but also because of a very inadequate
and inefficient administrative machinery for enforcing it. The same is true for other kinds of
land reform measures. It means that existing administrative machinery has generally failed to
prevent the evasion of effected laws and has been functioning largely in collusion with the
vested interests, especially at the village and tehsil levels.
" The existing districts civil and revenue courts cannot properly discharge those functions
being already over - burdened with other kinds of litigations. Besides, the existing system
causes unnecessary delays and makes justice very costly. It often results in dispensation of a
doubtful nature. These courts are far away from villages and the poor man is generally at a
disadvantage. Hence, the restructuring of administrative machinery is required.
7. Voluntary surrenders should not be accepted
" Voluntary surrenders have generally been used to cover up forcible and illegal eviction of
tenants. Such surrenders should not be accepted as valid unless they are certified as genuine
by an appropriate authority. In this context, the commission suggested that land surrendered
should not revert to the landowner but should vest in the state to be allotted to any other
eligible person. It can also be argued that it should revert to the owner if he possesses land
less than the ceiling limit.
8. Preparation of up-to-date land records
" Tenancy legislation cannot be properly implemented without adequate and proper land
records. Therefore, it is imperative that the preparation of land records should be given top
priority in the whole scheme of enforcement of land reforms. Tenants, tenants-at will, and
share - croppers should be promptly and properly identified and their names should be
recorded forthwith. It can, how - ever, be said that the interest of the owner should not be
ignored.
9. Ensure security of tenure
So far as the tenure is concerned, the most important requirements would be:
1. Recording the names of all the persons who hold land including share-croppers in the record of
right;
2. Ensuring that not more than the legally stipulated share of crop is taken from the share-croppers
by land owners;
3. Ensuring that no ejectment takes place either on the basis of voluntary or through other extralegal or illegal methods;
4. Ensuring inheritance to the heirs of the share-croppers on their death where law provides it; and
5. Providing supportive services including credit to share-croppers to free them from the clutches of
landowners and moneylenders.

114!

Recent Reflections
Reconciling land interests
! India Inc should welcome the Land Acquisition, Rehabilitation and Resettlement (LAAR) Bill,
now on course to becoming law. The earlier version of the Bill had several onerous and
impractical provisions. These included one that forced companies, even in cases where they
privately purchase over 100 acres in rural areas or 50 acres in urban areas, to undertake
rehabilitation and resettlement activity.
! Moreover, in cases of Government acquisition for private firms, consent from at least 80 per cent
of project affected people was mandatory. Equally irrational were the provisions that fixed
compensation at four times the market value in all rural and twice this for all urban areas
(without distinguishing between undervalued and already expensive land) and laid down that not
more than 5 per cent of irrigated multi-crop land in any district can be acquired. This would have
effectively shut out industrialization in areas such as Punjab, coastal Andhra and western Uttar
Pradesh.
! The Bill passed by the Lok Sabha corrects many of these flaws. The land size threshold for
applying R&R conditions for private land purchases has been left to the discretion of States. The
flat four times market value formula has been relaxed, with States given the flexibility to fix the
multiplier in relation to the distance from an urban centre. The market value itself would
exclude any outlier transaction that does not reflect on the actual prevailing rate.
! The percentage of irrigated farmland to be acquired for non-agricultural purposes will now also
be decided by the States which is how it should be. The informed consent provision will be
limited to only 80 per cent of actual landowners and not all affected people (sharecroppers,
farm labourers, etc). Even this proportion has been lowered to 70 per cent in the case of land
acquired for public-private-partnership projects.
! After factoring in all these dilutions, the LAAR Bill strikes a reasonable balance between our
larger economic goals and landowner rights. The latter, unlike in the past, are now aware that the
value of their agricultural land is much higher when put to a different use. Since the existing
circle rates dont capture this value, it is only fair they are paid more than the market rate.
! At the same time, fragmentation of holdings and absence of clear titles makes acquisition of
contiguous tracts a costly and time-consuming affair for private firms. This makes some form of
state involvement in land acquisition for projects, including private ones, necessary.
! The good thing about the LAAR Bill is that it provides a basic framework for such acquisitions,
without which industry simply cannot come up. However, the definition of public purpose
when applied to Government land purchases for private companies should be expanded beyond
infrastructure projects to include any manufacturing or service sector activity offering significant
employment generation potential. The law must be amended to expand the definition of public
purpose, if it is going to be truly effective.

115!

Chapter!11!
Industrial!Policy!and!Its!Role!in!the!
Economic!Turnaround!
An Overview of Industrial Policies till 1991 is as follows: The Industrial Policy 1991 is preceded by
the Industrial Policy Resolutions of 1948 & 1956 & Industrial Policy Statements of 1973, 1977 &
1980, which are in brief as follows:
Industrial Policy Resolution, 1948 The Policy aimed at outlining the approach to
Industrial growth & development. It emphasized the importance to the economy of securing a
continuous increase in production and ensuring its equitable distribution.
Industrial Policy Resolution, 1956 - Under the Policy the role of State was given more
importance as an engine for accelerating the economic growth and speeding up the
industrialization as a means of achieving a socialist pattern of society.
Industrial Policy Statement, 1973 The thrust of this Policy Statement was an
identification of high-priority industries where investment from large industrial houses and
foreign companies were permitted.
Industrial Policy Statement, 1977 - The Policy emphasized on decentralization and growth
of small scale industries
Industrial Policy Statement, 1980 - The Policy envisaged promoting competition in
domestic market, technology upgradation and modernization. The policy laid the foundation
for an increasingly competitive export based and for encouraging foreign investment in hightechnology areas.
Reforms in Industrial Policy:
The process of industrial policy reform started in 1970s.
Automatic capacity expansions were permitted during the 1970s and 1980s and a few
industries were delicensed in 1975 but this liberalization was trivial.
Systematic deregulation began in earnest in the mid-1980s.
Taxation reform mainly the conversion of multi-point excise duties into a modified valueadded tax (MODVAT) in all sectors except petroleum products, textiles and tobacco by 1990
also impacted industrial performance by reducing the taxation of inputs and the associated
distortion.
In 1985 a system of broad-banding was introduced that allowed existing license-holders to
diversify into a number of related industries without obtaining prior permission.
By 1988, the number of broad product groups that required capacity licensing by the
Government had been reduced to 27 from 77 previously.
Further, deregulation in 1993 brought this down to 18 items that were important for strategic,
environmental or social reasons or were producers of luxury items and finally to only six in
1999. All other industries were permitted to expand according to their market needs without
obtaining prior expansion or capacity clearance from the Indian Government.

116!

The New Industrial Policy (NIP) statement of 1991 introduced reforms in regulations
governing licensing, monopoly, foreign investment and small-scale sector industries and
in the role of public sector enterprises.
o Liberalization of industrial licensing and opening up industry to foreign investment
was an important part of the NIP statement of 1991. This element has progressed
fairly well as far as Central Government controls are concerned.
o Another important aspect of the reform process of the 1990s was the amendment to
the Monopolies and Restrictive Trade Practices (MRTP) Act which eliminated the
need for prior Government approval for new investment, capacity expansion and
mergers by large firms. The amended MRTP Act gave more emphasis to prevention
and control of monopolistic, restrictive and unfair trade practices, so as to provide
adequate protection to consumers.
o The reforms of 1991 reduced the role of the public sector by abolishing Schedule B
(It included 12 industries) and reducing the number of items reserved for the public
sector alone (i.e. the Schedule A industries) from 17 in 1983 to six in 1993 and finally
to four in 1999 arms and ammunition, atomic energy, minerals used in atomic
energy production and rail transport.
o The scope of Public Sector Units (PSUs) was restricted to the provision of
infrastructure services.
o Under the amended Sick Industrial Companies Act, poorly performing PSUs could be
referred to the Board for Industrial and Financial Reconstruction (BIFR) for
rehabilitation and were given prioritized allocation from the National Renewal Fund
for displaced workers. In the early 1990s, greater autonomy was given to more
efficient PSUs and some divestment of Government equity was carried out.
o Complete privatization, finally introduced in the late 1990s, made slow progress with
the first major successful privatization taking place in 2001.
o Reforms were also undertaken to encourage foreign investment and technology. The
Government had established a more liberalized foreign investment policy.
Consequent to the above changes, a separate set of policy measures were introduced for the
promotion and strengthening of Small-Scale Industries (SSIs) in August, 1991. In due course,
the sector was substantially delicensed and investment limits in plant and machinery were
increased.
Policy for Small Scale Industries: As per the MSME Act, which was notified on 29.9.2006,
industrial undertakings with an investment between Rs. 25 lakh to Rs. 5 crore are within the
Small Scale sector and between Rs. 5 crore to Rs. 10 crore are in the Medium sector. The
investment limit for Micro units is Rs. 25 lakhs. As of now, only 21 items are reserved for
manufacture exclusively in the small scale sector. All undertakings other than the small scale
sector dealing with reserved items are required to obtain an industrial licence and undertake
an export obligation of 50% of the annual production. This condition of licensing is however,
not applicable for those undertakings operating under 100% Export Oriented Undertakings
Scheme, the Export Processing Zone (EPZ) or the Special Economic Zone Scheme (SEZs).
Liberalization of the Locational Policy: Vide notification dated 14.8.2008, the requirement
of licensing for setting up of industries within 25 kms of the periphery of cities having
population of more than million for a certain class of industries has been done away with.
Non-Resident Indians Scheme : The facilities for Foreign Direct Investment as available to
foreign investors/company are fully applicable to NRIs as well. In addition, Government has
extended some concessions specially for NRIs and overseas corporate bodies having more
than 60% stake by the NRIs. These inter-alia includes

117!

(i)
(ii)

NRI/OCB investment in the real estate and housing sectors upto 100% and
(ii) NRI/OCB investment in domestic airlines sector upto 100%. NRI/OCBs are also
allowed to invest upto 100% equity on non-repatriation basis in all activities except for a
small negative list. Apart from this, NRI/OCBs are also allowed to invest on repatriation/
non-repatriation under the portfolio investment scheme.
Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP)
scheme : For building up strong electronics industry and with a view to enhancing export,
two schemes viz. Electronic Hardware Technology Park (EHTP) and Software Technology
Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be procured
free of duties.
Policy for Foreign Direct Investment (FDI) Promotion of foreign direct investment forms
an integral part of the industrial policy. The role of foreign direct investment in accelerating
economic growth is by way of infusion of capital, technology and modern management
practices. The Department has put in place a liberal and transparent foreign investment
regime where most of the industries are open to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent initiatives taken to
further liberalize the FDI regime, inter alia, include opening up of sectors such as Insurance
(upto 26%); development of integrated townships (upto 100%); defence industry (upto 26%);
tea plantation (upto 100% subject to divestment of 26% within five years to FDI);
Enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the
automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce;
Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100%
foreign investment subject to 26% divestment condition etc. The Department has also
strengthened investment facilitation measures through Foreign Investment Implementation
Authority (FIIA).
To summarize, firms operating in the Indian market in the pre-reform period (i.e., before
1991) faced barriers to entry due to Government control over private investment through the
licensing regulations, reservation of production for the public sector and lengthy and opaque
procedures for approving foreign direct investment (FDI) that were further subject to a
maximum limit of 40 per cent equity share. These restrictions on entry were gradually eased
during the 1990s. With the industrial policy reforms of 1990s, India has moved into an era of
a more competitive industrial environment in which entrepreneurs respond to market signals
rather than try to skirt around bureaucratic controls.

IMPACT OF INDUSTRIAL POLICY CHANGES

A. PRE-REFORMS PERIOD
I. Early Growth Phase: Till 1965-66
Industrial growth was rapid during the first two decades, especially during the Second Plan and the
Third Plan. The high rates of industrial growth witnessed during the period were due to:
i) Emphasis on industrialization in economic policies,
ii) The heavy industry-oriented strategy of industrialization, and the pursuit of industrial growth as
a supreme objective in the industrial policy and planning,
iii) The substantial investments made and the capacities created in industrial sector as follow-up of
the first two decisions,
iv) Growing demands for a variety of new products on the part of the consumers in urban areas and
the relatively better-off sections of the community
This period of growth has been named the period of industrial growth with regulation.

118!

II. Slowdown Phase: Decade of 1970s

Industrial growth slowed down after the Third Plan. The structural retrogression took place at two
stages:
i) Growth of basic and capital goods industries was slower than even the meager average growth in
industrial output.
ii) Where growth was moderately high, a majority of the industries belonged either directly or
indirectly to elite-oriented consumption goods sector.
A disproportionately large increase in the output of man-made fibers, beverages, perfumes and
cosmetics, commercial and office clocks, finer varieties of cloth, etc., took place. This phenomenon
emerged at the cost of allocation of investible funds for mass consumption goods. Thus, an
imbalance in the industrial structure took place.
III. Revival During the 1980s
The industrial scene underwent a change with the onset of the 1980s. Industrial growth rate moved
up during this period, and the stagnation which characterized the earlier period could be overcome.
The major factors that contributed to this turnaround can briefly be summarized as follows:
i) Liberalization of industrial policy; the process began in early 1980s, and caught up since 1985.
ii) Public investment which played a crucial role in determining the growth of Indian industry had
been at a much higher level during the 1980s than in the 1970s.
iii) There had been a noticeable improvement in the investment made by the private corporate
manufacturing sector.
iv) Increased investment in industry got corroborated by the dramatic rise in imports of capital
goods in the 1980s.
v) Rapid investment in industry was facilitated by what has come to be known as liberal fiscal
regime.
IV. Revival and Subsequent Slowdown 1994-2002
The slowdown in the rate of industrial growth during 1991-94 turned out to be only transitional, an
immediate fallout of the stabilization measures initiated by the government for the macro-economic
adjustment of the economy. It may be noted the rate of industrial growth began to accelerate in the
second half of 1993-94.
The change in trend could be accounted for by the following factors:
i) Increased government expenditure/ public investment; Government expenditure provides both
supply and demand side stimulus to growth. ii) The excise and customs duty cuts; iii) Growth in
export volumes since 1993-94; iv) Continued stability in the growth of agricultural output; v) The
release of funds from the banking system because of the sharp decline in the SLR; and (vi)
Extension of MODVAT to capital goods.
Slowdown
Industrial revival was indeed remarkable; it generated enough euphoria among industry and
government, so much. However, the rate of growth slowed down during 1996-97 and continued to
fall subsequently during 1997-2002, except for a short-lived recovery during 1999-2000.
Reasons for the slow down:
Demand Constraints
Demand constraints arose in the form of low investment demand and low consumer demand.
i)
Real investment in industry which had risen fast until 1995-96 stagnated thereafter.
ii)
Key reforms in industrial policy and privatization remained unfinished or undone.
iii)
Huge hanging investment: Hanging investment may be defined as the gap between
approved and actual FDI. Given the fear of competition from foreign investors, the

119!

domestic investors kept away or postponed their investments from such sectors where
FDI was already approved or was anticipated to come. To these may also be added global
slowdown and recession in advanced economies. These adversely affected demand for
our export industries.
Structural and Cyclical Factors
The major structural factors could be identified as follows:
(i)
The adjustment process of industry in response to increased competition in the
form of mergers and acquisitions is taking longer time than required.
(ii)
High costs and inadequate and unreliable supply of services in transport,
communications and the power sector.
(iii)
Low levels of productivity in the industry because of low volumes and inability to
reap economies of scale, outdated technology and restricted labour laws.
(iv)
Lower speculative demand for sectors like automobiles and real estate due to
expectation of lower prices and reduction of taxes and duties in the short and
medium term.
(v)
High real interest rates.
The major cyclical factors could be identified as follows:
(vi)
Periodic investment cycles, reinforced by government decision to reduce customs
duties to levels in East Asian countries by 2004, which might have deferred
investment decisions.
(vii)
Business cycles affecting demand of some cyclical industries like cement,
automobiles and steel.
(viii)
There is no pent-up demand for consumer durables.
VI. Revival and Strong Growth 2002-08
The year 2002-03 opened on a slow note. However, during 2003-04, it became increasingly
clear that strong revival was in offing. In 2004-05, and again in 2005-06 the manufacturing
sector grew at 9.1 per cent, 12.5 per cent during 2006-07 and 9.0 per cent during 2007-08.
The surge in industrial growth could be attributed to important structural changes in the
economy.
o One is the rise in the savings rate from 23.5 per cent in 2000 - 01 to 37.7 per cent in
2007-08.
o Most of this increase came from turnaround in corporate and public savings.
o Due to rise in the savings rate, the economy moved to an altogether higher investment
rate.
o The second important structural change was enhanced export competitiveness that got
reflected in the rising share of exports. The total exports (trade plus invisible
receipts/GDP) ratio rose sharply from 16.9 per cent in 2000-01 to 33.2 per cent in
2007-08. Third change in recent years is financial deepening.
o The bank assets/GDP ratio rose from 48 per cent in 2000-01 to 80 per cent in 2005-06
on the back of a surge in bank credit.
o One factor in common to these three structural changes has been lower interest rates.
The decline in interest rates helped fiscal consolidation, it boosted firms
competitiveness and led to a huge increase in retail credit. Lower interest rates were
made possible by the rise in inflows on both the current and capital accounts. In other
words, it is clear that the industrial sector responded to the buoyant demand
conditions of the economy through new capital stock additions.
o Modernization of the capital stock, reduction/rationalization of import tariffs and
other taxes, increased openness of the economy, higher FDI inflows, greater

120!

competitive pressures, increased investment in information and communication

technology, and greater financial deepening also contributed to productivity gains in
the industry.
o As a result, the industry increasingly became an important growth driver in
conjunction with the services sector. Many of the services such as trade, transport,
communication and construction are directly linked to industry.
VII. Slowdown 2008-09 Onwards
The slowdown in manufacturing over successive quarters started from the first quarter of
2007-08. This was more or less replicated by the mining sector and closely followed by
electricity
The major factors responsible for this drop in industrial production can be briefly stated as
follows:
i) Rising prices of crude oil and other commodities, particularly metals and ores had their
adverse effect on the cost side of the manufacturing sector, which in turn had an adverse effect on
the profit margins.
ii) Another key component on the cost side, namely interest costs, also increased due to
higher interest rates.
iii) In recent years, the Indian corporate sector started to raise external capital (i.e., other than
internal resources) mainly to fund its investment and this included foreign institutional sources. On
the external front, resource mobilization from American/Global Depository Receipts almost
collapsed during 2008-09 and the flow of external commercial borrowings also suffered a sharp
decline.
iv) Among the domestic sources, while private placement by non-financial institutions grew
on the strength of the resource mobilization by public sector non-financial institutions, the private
sector resource mobilization on this count declined sharply. The sharp slowdown in financing
accentuated the industrial slowdown that had already set in from the previous year.
v) With the opening up of the economy, the trade orientation of Indian manufacturing
increased over the years. The shrinkage in demand for exports that followed beginning with
September 2008 sharply dented the performance of industries with high export intensity. The impact
of the export slowdown has been particularly pronounced in sectors like textiles, leather and
transport equipment.
vi) The manufacturing sector also suffered because of a decline in the construction and real
estate affecting non-metallic minerals, wood and wood products and basic metals. These
developments fed into the domestic economy, setting off what may be termed as second round
effects that seem to have continued to the end of fiscal year 2008-09. The manufacturing demand,
therefore, witnessed double squeeze, a decline in the demand originating from exports and a decline
in domestic demand.
vii) The foregoing developments impacted the growth of profits of the manufacturing sector.
From the abridged results of a sample of manufacturing companies, it is seen that while profitability
was under strain since the third quarter of 2007-08, it came down sharply in the third quarter of
2008-09 accompanied by a sharp dip in the growth in sales.
VIII. Sharp Revival
Green shoots had began to appear in the first two quarters of 2009-10. Manufacturing output
accelerated fast during this period. This is evident from the National Accounts Statistics
(NAS) data as well as the Index of Industrial Production (IIP).
While the Central Statistical Organization (CSOs) estimates place industrial-sector growth at
8.2 per cent, as against 3.9 per cent in 2009-10, the IIP industrial growth is estimated at 7.7

121!

per cent, significantly up from 0.6 per cent during 2008-09. The manufacturing sector, in
particular, has grown at the rate of 8.9 per cent in 2009-10.
Growth in the major industrial groups has been a mixed bag. There was strong growth in
automobiles, rubber and plastic products, wool and silk textiles, wood products, chemicals
and miscellaneous manufacturing; modest growth in non-metallic mineral products; no
growth in paper, leather, food and jute textiles; and a slump in beverages and tobacco
products in 2009-10.
In terms of use-based classification, there was strong growth in consumer durables and
intermediate goods (partly aided by the base effect); moderate growth in basic and capital
goods; and sharp deceleration in consumer non-durables.
Some of the important factors contributing to growth are as follows:
i) The improvement in the cost structure of manufacturing companies seems to have catalyzed the
recovery.
ii) The strength of the recovery has been helped by the favourable base effect and mild inflation in
manufacturing articles, especially of industrial inputs.
Major contribution to this revival was made both by easy money policy pursued by the RBI and
fiscal stimuli provided by the government. However, these proved inadequate. Growth rate began to
slowdown afterwards.
The year 2011-12 recorded a slower growth; slow growth trickled down to 2012-13 also. The majorfactors responsible for this phase of industrial growth could be identified as follows:
i) Financial crisis in Euro zone dried up the demand for Indias exports to this zone.
ii) Recovery in US was slow; it failed to create demand, so that exports to this region also slowed
down.
iii) The macro-economic policies that have been pursued led to (a) increasing fiscal deficits, (b)
widening current account deficits, and (iii) higher rates of inflation. These became critical factors in
revision of macro-economic policies. Control over inflation assumed a higher priority. In view of
these, the growth rate of industrial sector slowed down.

!
!
!
!
!
!
!
!

!
122!

Chapter!12!
The!New!Economic!Policy!and!the!Age!of!
Market!led!Growth!
! Indian economic policy underwent a sea change in the year 1991. This sea change liberalized
the hitherto largely insulated economy, dismantled the regulatory apparatus, altered the
development strategy, and integrated the Indian economy with the world economy.
The Background and Reasons for Liberalization:
! Indian economy in 1990-91 entered into a period unprecedented crisis. The lack of fiscal
discipline by earlier governments, failure of monsoon and collapse of erstwhile USSR which was
Indias major trading partner brought India close to default its international commitments. As a
result the countrys credit rating was downgraded.
! The situation was worsened by the Gulf crisis which resulted in increase in oil prices in the
international market. The macroeconomic indicators of this period reached to the alarming levels
depicting the grave situation.
" The annual rate of inflation touched 17% during August 1991.
" Fiscal deficit rose to 8.4% of G.D.P.
" Current account deficit in Balance of Payment was an unsustainable $9.9 billion.
" Foreign exchange reserves of the country plummeted to the levels where they could barely
meet the countrys import bill for a week.
! It was against this backdrop that India had to borrow from IMF for balance of payment
corrections and had to adhere to the reform agenda.
! This reform agenda could be broadly categorized into two:
1) The short term stabilization program to bring economy back on its track.
2) The medium term and long term structural adjustment program to get away with the
structural rigidities and bottlenecks.
The Stabilization Program:
! The aim of this program was to control inflation and remove balance of payment deficit, thus put
house in order in short term. The program was meant to incorporate the corrective measures for
fiscal policy, monetary policy, exchange rate policy and social sector policy. The following table
shows various aspect of the stabilization program.
Aim of stabilization
S.NO Sector/ Policy
Measures Taken
program
1.
Fiscal Policy
Fiscal Consolidation and " Reduction
in
governments

123!

inflation control

Expenditure.
" Expansion in tax base.

Inflation control

" Control of Money supply by increasing

the interest rates.
" RBI was given more autonomy.
" The rupee was devalued by 23%
" The exchange rate was now governed
by market forces.
" Government announced Liberalized
Exchange Rate Management System.
" Rupee was made convertible in Current
Account.
" Cut in subsidies.
" Reduction in public expenditure for
various schemes and programs in social
sector.

2.

Monetary
Policy

3.

Exchange Rate Remove

Balance
Policy
Payment deficits

4.

Social Sector

of

Check the fiscal deficit in

such
a
manner
that
allocation
for
merit
subsidies
and
poverty
alleviation schemes were
increased.

Structural Program
! The structural reforms or macroeconomic reforms were intended to accelerate the economic
growth in the medium and long turn. This consisted of industrial policy liberalization, public
sector reforms, financial and trade policy reforms.
Industrial
Policy
liberalizati
on

Trade
Policy
Reform

Structural
Change
(or)
Macroeconomic Reform

Public
Sector
Reform

Financial
Sector
Reform

1. Industrial Policy Liberalization

124!

" The hitherto highly regulated industrial policy was liberalized. This liberalization put an end
to the high bureaucratic controls i.e. license and permit Raj. The licensing of all the industries
(except a small list) was abolished.
" Monopoly and Restrictive Trade Practice (MRTP) Act was liberalized to encourage domestic
investment in the industrial sector. Likewise to encourage foreign investment, Foreign
Exchange Regulatory Act (FERA) was amended and in its place Foreign Exchange
Management Act (FEMA) was enacted.
2. Public sector reforms
" The reforms in public sector were based on the premise that government should roll back
from the sectors which could be efficiently taken care by the private sector. So disinvestment
of governments equity in selected units was envisaged. As various public sector units were
chronically making losses and account for the large share in governments debt, another
policy option is to cut the budgetary support to such units.
3. Financial sector reforms:
" The aim of the financial sector reforms was to limit the excessive government control and to
put an end to the administered interest rate structure. Purpose was also to relieve the financial
institutions from the government pressure which undermine the quality of loans. In nut shell
the reforms in the financial sector were aimed to provide greater autonomy to the financial
institutions in terms of interest rate structure and operational matters.
4. Trade Policy reform:
" It led to major changes in the import licensing system. Except for consumer goods, all Non
Tariff barriers have been lifted. As a signatory of WTO, India is committed to gradually
dismantle the trade barriers.
Performance of Indian Economy in the post reform era:
! The performance of Indian economy in the post reform era has been mix. There are areas where
the performance has been remarkable; on the other hand in contrast to this there are areas where
the performance has been dismal.
Positive Sides of Reform
1. The economy has performed exceptionally well in terms of GDP growth. In the post reform era
the country entered into an unprecedented economic growth phase after 1991. In the recent past
the country is even targeting impressive double digit growth which seems realistic.
2. India proved to be largely unaffected by the global recession and slowdown.
3. The FDI inflow in the country has also been impressive in the post reform era. India was even
rated as the second best destination in the world after China in terms of attracting FDI. In 200809 India was able to attract $ 36 billion FDI.
4. Fiscal deficit has been brought down to manageable levels from unsustainable 7-8% in the years
1985 - 91 i.e. pre reform era.

125!

5. Service sector in India has seen an outstanding growth in the post reform era. This is particularly
true for IT and ITES sector.
6. The proportion of trade in Indias GDP has gone up in post reform era.
Negative sides of Reform
1. The macroeconomic indicators like impressive growth rates and FDI inflows have failed to
address the problems like poverty, unemployment etc.
2. Only about a million people or around 0.1% of Indias population are benefiting from
employment in Indias rapidly growing outsourcing, IT, and services industries.
3. The agriculture sector has not been able to perform well as per the expectations in the post
reform era. This become a critical factor as still more than 50% of the population is engaged in
agriculture and allied activities.
4. In various human development indices the economic reforms have failed to produce the desirable
impact. The United Nations Development Program ranked India lower based on its life
expectancy, access to education, and standard of living than many countries with comparable, or
lower, GDP per capita. India also has the worlds largest illiterate and HIV infected populations.
5. That about 20% of childrens deaths in the world and a quarter of all maternal Child birth
mortality occur in India further indicate the depth of Indias neglect of health. Even among
similar-income countries, Indias expenditures on health are woefully low, at less than 1% of the
countrys GDP.
6. The absolute poverty in the post reform era has decreased, however the relative poverty has
increased, resulting in sharp income inequalities. This has resulted in the inter-regional and inters
sectoral imbalances. About a quarter of Indias one billion-plus population, who constitute a
third of the worlds poor, continue to live in poverty.
Inflation is also another area where the reforms have failed to perform the desired result. In the
recent past the inflation in general and food inflation in particular has remained to be a cause of
serious concern.
Industrial Policy
! In 1948, immediately after Independence, Government introduced the Industrial Policy
Resolution. This outlined the approach to industrial growth and development. It emphasized the
importance to the economy of securing a continuous increase in production and ensuring its
equitable distribution. After the adoption of the Constitution and the socio-economic goals, the
Industrial Policy was comprehensively revised and adopted in 1956. To meet new challenges,
from time to time, it was modified through statements in 1973, 1977 and 1980.
! The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution of
1956 which had as its objective the acceleration of the rate of economic growth and the speeding
up of industrialization as a means of achieving a socialist pattern of society. In 1956, capital was
scarce and the base of entrepreneurship not strong enough. Hence, the 1956 Industrial Policy
Resolution gave primacy to the role of the State to assume a predominant and direct
responsibility for industrial development.

126!

! The Industrial Policy statement of 1973, inter alia, identified high-priority industries where
investment from large industrial houses and foreign companies would be permitted.
! The Industrial Policy Statement of 1977 laid emphasis on decentralization and on the role of
small-scale, tiny and cottage industries.
! The Industrial Policy Statement of 1980 focused attention on the need for promoting competition
in the domestic market, technological upgradation and modernization. The policy laid the
foundation for an increasingly competitive export based and for encouraging foreign investment
in high-technology areas. This found expression in the Sixth Five Year Plan which emphasized
the need for productivity to be the central concern in all economic and production activities.
! These policies created a climate for rapid industrial growth in the country. Thus on the eve of the
Seventh Five Year Plan, a broad-based infrastructure had been built up. Basic industries had
been established. A high degree of self-reliance in a large number of items - raw materials,
intermediates, finished goods - had been achieved. New growth centres of industrial activity had
emerged, as had a new generation of entrepreneurs. A large number of engineers, technicians and
skilled workers had also been trained.
! The Seventh Plan recognized the need to consolidate on these strengths and to take initiatives to
prepare Indian industry to respond effectively to the emerging challenges. A number of policy
and procedural changes were introduced in 1985 and 1986 aimed at increasing productivity,
reducing costs and improving quality. The accent was on opening the domestic market to
increased competition and readying our industry to stand on its own in the face of international
competition. The public sector was freed from a number of constraints and given a larger
measure of autonomy. The technological and managerial modernization of industry was pursued
as the key instrument for increasing productivity and improving our competitiveness in the
world. The net result of all these changes was that Indian industry grew by an impressive average
annual growth rate of 8.5% in the Seventh Plan period.
! Annual Plans (1990-92): Liberalization: it refers to procedural simplification, removal of
restrictions, delicensing and removal of unnecessary bureaucratic hurdles. Privatization: It refers
to opening the economy for privatization. In privatization, the areas earlier reserved for public
sector public sector were made open for private sector. The private sector was given the main
importance.
! Globalization: It refers to opening of the domestic economy for foreign enterprises. Import duties
were reduced. The average annual growth rate was 4.4% per annum.
! 8th Five Year Plan (1992-97): Private sector was given more importance. Earlier capital goods
were given priority but during this plan all industries were given equal importance. Foreign
companies were assign important role. Modernization of Industries was given importance.
Protection given to the domestic industries has been reduced to increase their efficiency. Some
areas reserved for public sector were opened for the private sector. 18.8% of total plan outlay
was allocated for the industries. Growth rate of industrial production was 6.8% per annum.
! 9th Five Year Plan (1997-2002) Private sector was given more importance. More areas were
opened for the private sector. Special efforts were made for setting up new industries in
backward areas. It was done to reduce regional imbalances. More stress was given on attracting

127!

foreign investments. The domestic economy was open for the foreign companies. Modernization
and import of capital goods were considered important for improving the efficiency of the
industrial sector.
! Companies under MRTP Act were given various concessions. E.g. such companies need not to
take special permission for mergers, diversification, expansion etc Licensing policy was
liberalized. In some industries, foreign equity participation was increased to 100%. Total
expenditure on development of large scale industries was Rs. 33,587 Crore and on the
development of small scale industries was Rs. 8,384 Crores. Growth rate of industrial production
was 5% per annum. (due to slower growth of the world economy)
! 10th Five Year Plan (2002-07) the industrial sector will have to grow at over 10% to achieve the
target of 8% growth for GDP. Special emphasis is given for the infrastructure development,
power generation, development of roads, railways, air-ports etc. it was thought that rapid
industrial growth can be achieved through improving the quality of infrastructure. Special
concessions were extended to ready-made garment industry like liberal import of capital goods;
tax-concessions etc. were extended. Apparel-parks have been established to promote the same.
To make the industry more competitive, R&D, modernization and technological up gradation
activities have been emphasized.
! Losses making public sector units have been disinvested Special concessions were given to
export oriented units in order to promote exports. Special Economic Zones have been set up for
promoting rapid industrialization of the economy. For promoting agro based industrial units,
agro export zones have been set up. For promoting leather industry, leather industry development
programmes have been undertaken. More privatization has been encouraged. The funds from
global capital market are also encouraged. Foreign investments are encouraged in the service
sector like banking, insurance etc
IMPLEMENTATION OF NIP 1991
" Contraction of Public Sector
" Liberalization of Industrial Licensing Policy: Only Five Industries are under Compulsory
Licensing
" Introduction of Industrial Entrepreneurs' Memorandum (IEM) for industries not requiring
compulsory licensing
" Liberalization of the Location Policy
" Five Year Tax Holidays to Power Generation Industries
" Increase in Lending Limit of Banks
" Amendments in SICA in 1993 and 2003
" Increase in Investment Limit of Small Enterprises
" Micro Enterprises 25 Lakh (10 Lakh)
" Small Enterprises upto 5 Crore (5 Crore)
" Medium Enterprises upto 10 Crore (5 Crore)
" MRTP act Replaced with Competition Act
" Tax Holidays for Industries in Backward Areas

128!

" Encouragement to Private Sector Participation in Infrastructure

" Reimbursement Scheme for Technology Upgradation.
" Setting up of Foreign Investment Promotion Board (FIPB)
" Permission to Raise Capital from Foreign Markets
" Encouragement to Foreign Investment
" Disinvestment of PSUs
POSITIVE IMPACT OF NIP 1991
" Increase in Production
" Removal of Bureaucratic Hurdles
" Increase in Competition
" Increase in Efficiency of Public Sector
" Increase in Foreign Investment
" Increase in Exports
" Balanced Regional Development
" Less Economic Burden on Government
CRITICISM OF NIP 1991
" Concentration of Economic power
" Increase in Unemployment
" No Evidence of Positive Effect on Productivity
" Ignore Social Objectives
" Distortion in Production Structure: Growth of Capital Goods Industries Declined
" Adverse Effect of Small Scale Industries
" Misplaced Faith in Foreign Investment
" Danger of Business Colonization.
" Personalized Relationship and Corrupt Practices still Continue
" Increase in Regional Imbalances
" ELEVENTH FIVE YEAR PLAN(2007-12)
" Strengthening Manufacturing Sector, Making Indian Industries more Competitive,
strengthening infrastructure,
" Focus On Pharmaceuticals, Auto-Components and Textiles
" Special Concessions for MSME and Labour Intensive Industries
" Emphasis on Technological Improvement
" Wider Role for Private Sector
" Flexible Labour Laws
ACHIEVEMENTS DURING PLANNING PERIOD
" Vast Network of Infrastructure Developed
" Increase in the Share of Industrial Sector in National Income: 16% to 25.9%.
" National Defense and Self independence
" Development of Public Sector

129!

" Modernization
" Increase in Foreign Collaboration
" Increase in Government Income

DEVELOPMENT OF STRONG INDUSTRIAL BASE

! 55 4.5 bn. sq. Mtrs Cloth 1545 7.9 Thousands Passenger Cars 1683 27 Lakh Tonnes Cement
14738 18 Thousand Tonnes Fertilizers 341 03 Lakh Tonnes Crude Oil 704 5.1 Bn. kwh
Electricity 552 10 Lakh Tonnes Finished Steel 2007-08 1950-51 UNITS INDUSTRIES.
WEAKNESS OF INDUSTRIAL DEVELOPMENT DURING PLANS
" Under-utilization of Capacity
" Irregular Increase in Industrial Production
" Increase in Monopoly Power
" Poor Performance of Public Sector
" Industrial Sickness
" Industrial Disputes
" Poor Quality Production
" Regional Imbalances.
Effects of Industrial Policy Changes on Industrial Growth:
! Industrial policy changes started in India in a big way from the year 1991 which marked the
beginning of economic reforms and LPG. Major changes initiated in 1991 were:
(a) Delicensing of a large number of industries.
(b) Dilution of the role of public sector
(c) Opening up foreign investment
(d) Relaxation of MRTP Act.
! Subsequent changes in industrial policy have been, by and large, extension of the above and
enactment of competition Act, FEMA, import liberalization, convertibility of rupee and further
opening up foreign investment in tune with WTO making Indian industry global.
! Industrial growth in India is measured on the basis of IIP which has nearly 80 percent weight of
the manufacturing sector. Initial euphoria of liberalization resulted in robust industrial growth in
the 8th Five Year Plan (1992-1997) during which the growth rate peaked to 13 percent in 199596.
! However, the average annual growth rate of industrial sector was only 7.3 percent during 199297, i.e. 8th Five Year Plan, which was below the annual growth rate of 8.5 percent in the prereform period of 1985-90 viz., the 7th Five Year Plan. During the Ninth Plan (1997-2002)
industrial growth rate slipped to 4.6 percent per annum but picked up to 8.2 percent per annum in
Tenth Plan. The performance of the industrial sector during 11th Plan has been modest and
below the rate achieved in the 10th plan.

130!

! Industry has failed to act as harbinger of overall GDP growth in the post reform period during
which industrial growth has been confined largely to consumer durable goods and to some extent
capital goods. It is mainly the services sector which has been the main catalyst of growth. The
share of industry in national income in 1948-49 was 17 percent which at present is only close to
22 percent which shows a very dismal growth rate and contribution of the industrial sector. The
share of manufacturing sector continues to be very low as compared to advanced nations where
this share is between 30 to 50 percent. This has prompted the government to unveil a New
National Manufacturing Policy which targets a 12-14 percent growth rate of manufacturing
sector and its share in GDP at 25 percent in 2022.
! There has been alarming slowdown of the industrial growth rate, particularly in the last five
years due to severe constraints of infrastructure and factors like virtual halt of economic reforms,
policy paralysis due to compulsion of coalition governments, widespread corruption and scams,
all of which have caused to collateral damage to the credibility of the government and its
governance.
! Industry - Environment linkages have further resulted in inordinate delays in clearance of
projects due to lack of coordination among different departments. Major determinants of
industrial growth in India are agricultural growth and rural incomes, infrastructure development
and exports. While infrastructure has been a vital bottleneck, export growth rate has slowed
down due to Euro zone crisis while agriculture continues to be uncertain.
! The post reforms period has no doubt made Indian Industry competitive due to increasing role of
foreign direct investment and enactment of Competition Act. Besides public sector has also
improved its performance as 170 out of 220 operational PSUs are profit making. It is time to
focus on fast-tracking second generation reforms like factor market reforms, legal and
institutional reforms, and governance reforms and most importantly reforms of infrastructure.

131!

Chapter!13!
Infrastructure!in!India!!Strengths,!
Weaknesses!and!Recommendations!!
ENERGY
1. Power
Current Status
! Fifth largest electricity generation capacity in the world
! Coal fired plants constitute 57% of the installed generation capacity, followed by 25% from
hydel power, 10% gas based, 3% from nuclear energy and 5% from renewable sources
! India suffers from an average energy short-fall of 7% and a peak shortfall of about 12%.
.
Impediments
" Poor financial health of the SEBs, resulting from power theft, high technical losses and free/
subsidized power, is deterring investment in generation.
" Uncertainty of fuel availability
" Indias large thermal coal reserves are not being leveraged CIL operations result in supply
shortages
Recommendations
" Establish 25-30 sites for mega projects with land acquired and with all approvals in 35 place, for
a total of 35,000 MW with an estimated investment of over $ 30 billion
" Ten year PPAs on competitive bidding on tariffs
" In energy rich States, discourage policies that impose additional charges on generation and
export of power
" Improve output of existing assets Reduce theft, Operate idle plants,
" Increase hydel peaking capacities could increase power availability by 11,000 MW
" Expedite the implementation of large Hydel projects, by review of environmental
norms/clearances, if necessary.
" Joint development of Nepals estimated potential of 80,000 MW
" Projects in the North East (e.g. Siang Hydro project in AP) and in the North (HP,
" Uttaranchal, J&K)
" Enhance Transmission capacity to facilitate flexibility of energy transfer especially on the East
North and East West corridors
" Reform distribution to energize investment in generation, by: Dividing state distcoms into
manageable-sized business units; operate on commercial lines with transitional support for predetermined period

132!

" Encouraging PPPs in distcoms based on the Delhi model.

" Ensure Regulator autonomy
2. Coal
! Given Indias large reserves of 240 billion tonnes, it is assumed that coal would be the major
source of energy, especially for power generation. Despite its vast reserves, India produces only
360 Mtpa of coal. An investment of about $30-40 billion is required over the next 10 years ($15
billion by 2010) for India to double its annual coal production apart from modernizing existing
mines and developing related infrastructure. Current visibility on investments in this sector is
less than $2.5 billion.
Impediments
" Monopoly of CIL is the largest impediment to investment in this sector.
" The dominant incumbent is not only perceived to be inefficient, but also carries a poor record of
quality, quantity and on-time delivery of coal.
" Restrictions on private and foreign investment (except for captive consumption)
Recommendations
" Carve out specified viable mining blocks from Coal India Ltd (CIL) for captive exploitation.
Alternatively, encourage the subsidiaries of CIL to induct strategic partners from leading mining
companies partners could develop existing blocks on a production share basis.
" Offer all mines that have been closed by CIL to the private sector in case there are viable
recoverable reserves.
" Adapt the NELP model for private sector participation in Coal mining by offering good quality
coal blocks for bids:
" As in NELP, award to be based on a quantitative evaluation of financial package/ bid, technical
capability, financial capability and work programme.
" Fixed Royalty payments per tonne extracted, as currently notified, to be offset against upfront
bid amount
" Institute a "use or loose" policy for all blocks, to prevent hoarding and ensure best competitive
use
" Permit 50% FDI under the automatic route
" Permit merchant sale of coal by coal mines
3. Oil & Gas
! India imports over 65% of its crude oil and almost 45% of its gas - with demand growing at 6 7% p.a. An equitable and sustainable policy regime with an independent regulator needs to be
put in place to enhance private investment and especially FDI. While the refinery segment is
expected to see large investment, areas such as gas pipelines and city gas distribution need
greater investment.

133!

Impediments
" Administered pricing mechanism resulting in distortions in pricing and unpredictable returns
" Dominance of PSUs at all points in the value chain perceived lack of a level playing field as
policies appear to favour PSU incumbents
" Restrictions on FDI/ minimum investment clauses especially in marketing
Recommendations
" Permit 100% FDI under automatic route in all segments of the value chain from Petroleum and
Natural Gas exploration to retailing without subsequent divestment of 26% or any upstream
investment criteria
" Tender and award City Gas Distribution (CGD) licenses for Local Distribution Companies to
invest in retail gas grid/ distribution networks
" Enact Petroleum and Natural Gas Board Bill and the Natural Gas Pipeline Policy Set up
Regulator speedily, thereafter
" Phase out APM subsidy for LPG and Kerosene should be funded by a surcharge on all refining
output, both in the Public as well as private sector units.
Roads
! Execution of the NHDP (National highway development project) needs to be speeded up.
Greater efforts need to be made to attract large international investors and contractors by better
outreach, offering tender blocks that are larger and with specifications that ensure long term
quality of the assets created.
! Excluding development of rural roads and the North East Road Development Project, this sector
requires investment of about $30 billion, spanning completion of NHDP projects ($15 - 18
billion), expansion of express-ways ($4-5 billion) and development of urban roads ($4-5 billion)
over the next 5 years. Based on existing plans, an investment of $20 billion seems likely.
Impediments
" The projects for road development and maintenance are too small (<=100 km) to attract major
international bidders and strategic investors
Recommendations
" Award BOT, for NHDP III, IV and parts of II, in larger blocks of at least 300-500 km stretches
rather than sub 100 km stretches so as to attract strategic investors and enable better/ faster
implementation
" Initiate an outreach programme, as for NELP, to attract international bidders/ investors
" Privatize maintenance of highways
Ports

134!

! With significant success in attracting domestic and foreign private investment, this sector should
be subject to minimal regulation/ restrictions with the focus on creating opportunities for greater
investment and competition.
! The National Maritime Development Project (NMDP) is an ambitious plan for upgradation of
Major and Minor Ports, based on which the sector will require investment of over $15-$17
billion over the next 10 years and over $8 billion in the next 5 years to grow cargo handled at 8%
p.a. Based on current plans, an investment of only about $5 billion seems likely.
Impediments
" Price controls by Tariff Authority of Major Ports (TAMP)
" Poor connectivity to road and rail; monopoly of railways/CONCOR on movement of container
traffic
Recommendations
" Complete transition of all Major Ports to landlord ports by outsourcing port activities to private
operators
" Put Minor ports up for re-bid if no development after 3 years from award.
" Convert Tariff Authority of Major Ports (TAMP) into a Regulator Free up tariff setting interventions restricted to abuse of pricing power
" Regulator to smoothen relationship between operators and landlord ports e.g. in disputes arising
out of calculation of revenue in revenue sharing model.
" Implement proposed removal of monopoly of railways/ CONCOR on movement of container
traffic.
Civil Aviation & Airports
! Rapid growth in passenger and cargo traffic can be sustained only if there is significant
improvement in aviation infrastructure. Delays in execution of green-field airports and leasing of
existing airports are unaffordable.
! Apart from green-field airports at Hyderabad, Bangalore, Navi Mumbai, Ludhiana, Pune and
Goa, the sector also requires investments in up-gradation and modernization of about 30 major
air-ports which account for over 95% of the countrys aviation traffic. The visibility of
investments currently is only about 20% of the total requirement of about $ 15 billion over the
next 5 years.
Impediments
" Lack of transparency and consistency in tender conditions and project execution
" Inordinate delay between decision to set up a green-field airport and its financial closure

Recommendations

135!

" Permit 100% FDI in green-field airports

" Invite bids for green-field airports in select cities based on demand forecasts E.g. Navi Mumbai,
NOIDA, Nagpur, Goa, and Ludhiana.
" Form SPVs for the next 10 large airports40 (mix of city and resort destinations), and privatize provide viability gap funding where required
" Ensure developers have adequate experience and develop world-class facilities for all airports
(green-field as well as up-gradation and modernization of existing)
" Modernize Air Traffic Control (ATC) systems and enhance capabilities of personnel
" Ensure airport facilities and ATC are comparable to best in class airports like Singapore, Dubai,
and Hong Kong etc.
" Remove restrictions on foreign ownership in domestic airlines Complete open skies at the
earliest (as done with the US) with all other key markets e.g. UK, Singapore no seasonal
window, no restrictions.
" Reduce cost of ATF to international levels
Tourism
! Indias annual inflow of 3.9 million foreign tourists (2005) is only a fraction of its true potential.
Being the highest employment generator per unit of investment, tourism spends have tremendous
drill down effects benefiting the economically weaker sections, semi-literate, women and rural
areas, while also harnessing and nurturing Indias natural beauty and cultural heritage.
! Infrastructure created for tourism, paid for by foreign and domestic tourists, is enjoyed by all
citizens
Impediments
" Infrastructure constraints; specifically the capacity constraints and poor quality of existing
airports and insufficient international airports
" Inadequate and poorly classified hotel stock land title and availability issues delay capacity
additions, approvals and permissions are problematic and many, hotel classification has no
international basis
Recommendations
" Designate certain areas for tourism and provide single window approvals for tourism
development
" Provide incentives (interest subsidy like TUF) to encourage investment in key components such
as hotels and resort development
" Prepare and implement a holistic Tourism Master Plan covering airport development/
international gateways, enhanced open sky policy, streamline Visa/immigration and customs
processes (bench-mark with Dubai, Singapore) and target a large scaling up in the sector
" Permit visa on arrival for key source countries USA, UK, EU, Singapore & Australia
" Remove requirements of foreigners to report at police stations (Foreigner Regional Registration
Office FRO/FRRO), at least of the above mentioned countries.

136!

Telecom
! The telecom sector is the back-bone for sustaining Indias growth momentum in services
including IT and ITeS. This sector needs to cater to the needs of over 150 million new
subscribers in addition to the existing 100 million subscribers over the next 5 years. This would
require an investment of over $20 billion. Achieving the investment goal (with a large FDI
component anticipated) is contingent on a fair and transparent long term policy regime.
Impediments
" Lack of an equitable and sustainable policy environment
" Lack of regulator independence leading to a perceived absence of a level playing field
" FDI regulations and other conditionalities seen to be detrimental to increased investment
Recommendations
" Allow 74% FDI under the automatic route without additional conditionalities
" Encourage new services (e.g. Mobile Virtual Network Operators (MVNOs)), and more efficient
utilization of existing infrastructure (e.g. through local loop unbundling), while ensuring a level
playing field and no worse-off situation for existing telecom service licensees
" Establish an equitable and sustainable spectrum policy
" Establish an equitable policy covering incumbent and private service providers operations and
growth
" Align levies and fees on telecom with international benchmarks, especially in the Asian region
" Ensure Regulator autonomy
Textiles & Garments
! Indias competitive advantages of availability of good quality cotton with highly skilled and low
cost labour need to be exploited to enable it realize a larger share of the world textile and
garments market, where it has a meager 4% share (compared to >20% for China43) despite these
advantages. The sector has a large employment potential, especially for economically weaker
sections and women
Impediments
" Inflexible labour laws that do not allow for seasonality in business or for loss of orders
constrain investment in the sector.
" Cost disadvantages to Indian manufacturers relative to other country exporters due to higher
power costs, higher domestic taxation and transaction costs as well as higher import duties by
USA/ EU on Indian textiles and garments.

Recommendations

137!

" Set-up dedicated Textile and Garment Parks/ SEZs. Provide labour flexibility in these Parks/
SEZs as the business is seasonal and fashion based.
" Sign favourable bilateral / multilateral trade agreements with the USA and EU to lower import
duties and increase competitiveness in these markets
" Reduce taxation & transaction costs:
$ Provide WTO compatible tax benefits.
$ Ensure that no excise duty needs to be paid at any point in the value chain for exports.
$ Reduce transaction costs (clearing and forwarding, brokerage etc).
$ Increase duty drawback rates (China has 13% v/s India 5%)
" Remove all items relating to textiles and garments from small scale reservation.
IT & ITES
Investment Goal
! India is the leading destination for providing IT & ITES. The industry is growing at a fast pace;
with over 25% CAGR expected in the next seven years. India needs to build upon its competitive
advantages in this sector.
Impediments
" Shortage of Human Resource - In order to sustain leadership, India requires about 2.3 million
graduates49, as against an estimated supply of only 1.8 million. An additional 500,000 suitable
graduates are needed in the next 5 years Poor Supporting Infrastructure: bottlenecks include poor
air, road, rail connectivity, poor quality of international airports, difficulties in securing land/
building clearances etc
Recommendations
" Develop Human Resources bench strength
$ Set up focused Education Zones to improve quality of higher education
$ De-centralize higher education in stages and shift to a demand based funding system
$ Pilot industry owned and Government facilitated integrated skill development and
certification programme for ITES.
" Improve overall Infrastructure
$ Develop 10-12 integrated townships with associated urban infrastructure including
international airports, roads and land development.
" Reduce barriers to trade in IT/ITES services
$ Accelerate efforts to ensure free trade in services (especially for Movement of People and
Export of Services) through trade agreements with select countries and negotiations at the
WTO.
Recent Reflections

138!

1. Lack of reforms in power sector takes toll on state utilities

! Power major NTPC BSE 1.00% says some 5,000 MW of its generation capacity is lying idle.
And the reason, in the main, is the sheer lack of reform in particular state power utilities that
remain bankrupt thanks to horrendous distribution losses even as retail tariffs remain unrevised,
often for years. The utilities have huge multi-year losses on their books, which require financial
restructuring and a sustainable tariff policy without further delay.
! But, in parallel, we need to speedily implement norms for open access in power, so that efficient
power producers can seek custom directly, for instance, in industrial hubs, and with the express
purpose of bypassing the unreformed public utilities unable to garner demand. True, several state
power utilities have reformed in recent years and revamped operations, pruning distribution
losses and raising the quality of supply, for example, in Delhi.
! The Gujarat model involving a separate feeder for agricultural connections in rural areas needs to
be nationally replicated, and early reforming states in power like Orissa and Andhra Pradesh
continue to make steady progress in utility reforms. But most state utilities remain in dire
financial straits. Hence the pressing need for transparency in power, complete with an effective
tariff policy, regular disclosure of utility accounts and summary check on commercial losses.
! In tandem, we need to boost investment in line capacity to wheel power to the demand centres,
by, say, making better use of existing infrastructure like polls and towers. Note also that due to
the lack of a national grid, the southern part of the country remains effectively cut off, which
surely needs to be addressed urgently. The bottom line is that power utility reforms brook no
delay.
2. Infrastructure solutions
! It is a truism that infrastructure is the backbone of growth. Production and distribution
bottlenecks created by deficiencies in roads, railways, power, telecom, water supply and
sewerage systems create a drag on growth in the long run. What is less appreciated though is that
infrastructure investment itself is a source of growth through stimulating demand, particularly for
steel, cement, labour and various construction-related services.
! One reason that Indias growth averaged 8 per cent in the last Five-Year Plan ended 2011-12 was
because infrastructure investments doubled to over $500 billion in this period, almost 37 per cent
of it coming from the private sector. The current India Slowdown Story is largely one of stalled
infrastructure projects. While the Government has doubled targeted infrastructure investments
for the current Plan ending 2016-17 to $1 trillion (with a private sector share of nearly 50 per
cent), the ground realities are disturbing, with even existing projects getting derailed.
! Bank loans provide a clue to the kind of problem we face. According to Reserve Bank of India
Deputy Governor K. C. Chakrabarty, the share of infrastructure in total outstanding bank credit
rose from 1.6 per cent to 13.4 per cent between March 2000 and March 2013. But of the Rs
786,045 crore of loans made to this sector, a staggering Rs 136,970 crore or 17.4 per cent have
either turned bad or been restructured. This is almost twice the overall non-performing and
restructured loan ratio for bank advances to all sectors, as data from the RBIs 2012-13 Annual
Report presented last week show.

139!

! It points to two things. First, and obviously, the problem of bad debts is far more serious in
infrastructure than other sectors. Second, a failure to resolve issues in infrastructure will not only
jeopardize overall investment and growth, but threaten the viability of the banking system itself.
! Fortunately, solutions are at hand. As Chakrabarty has rightly noted, a lack of finance has not
constrained infrastructure development. Outstanding bank credit alone to the sector has expanded
over 100 times in the last 13 years. If more than 50 per cent of projects are stuck at various levels
of implementation, it is largely thanks to regulatory hurdles such things as delays in
environment/forest clearances, land acquisition, coal linkages and revision of user
charges/tariffs. These lie wholly in the policy and administrative realm, issues only the
Government can fix. Theres no better time to do this than now on a project-to-project basis.
Resolving the infrastructure conundrum will make all the difference between sub-five and eight
per cent-plus growth, not only for the future but even the present.

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
140!

Chapter!14!
Recent!Initiatives!for!Augmenting!Power!
Generation!in!India!
1. Automatic approval for foreign direct investment
Automatic approval (Reserve Bank of India [RBI] route) for 100 per cent foreign equity is permitted in
generation, transmission and distribution, and trading in the power sector without any upper ceiling on the
quantum of investment.

The government notified its revised position on foreign direct investment (FDI) cap for power exchanges
registered under Central Electricity Regulatory Commission (CERC) Regulations 2010 as 49 per cent (26 per
cent FDI+23 per cent foreign institutional investment [FII]) through automatic route.

2. Allocation of new coal blocks to the NTPC

The National Thermal Power Corporation (NTPC) has been allocated four coal blocks (Banai, Bhalumuda,
Chandrabila, and Kudanali-Laburi) in August 2013 for power projects of 8460 MW.

3. Pass-through mechanism

The CERC/State Electricity Regulatory Commissions (SERC) have been advised to consider the request of
individual power producers in this regard as per due process on a case-by-case basis in public interest. The
appropriate commission has been requested to take immediate steps for the implementation of this decision of
the government.

4. Incorporation of PPA condition for coal block allocation

The Ministry of Coal has issued letters to independent power producers (IPP) and state governments for
incorporating the PPA condition at the time of executing mining lease with IPPs for coal block allocation so
that the benefits of low cost coal can be passed on to the consumers.

141!

5. Independent Coal Regulatory Bill

The Independent Coal Regulatory Bill has been approved by the Cabinet on 27 June 2013. The Ministry of
Coal introduced the Bill in Parliament in December 2013.

6. Third-party sampling and quality control mechanism

The Ministry of Coal/ Coal India Limited agreed to third-party sampling at loading points to address the issue
of coal quality in October 2013.

!
!
!
!
!
!
!
!
!
!
!
!
!

142!

Chapter!15!
New!Initiatives!by!Indian!Railways!in!2014!
! Linking Kashmir Valley with the Jammu region: The Pir Panjal tunnel, the longest tunnel in India,
was opened successfully, establishing a railway link between Kashmir valley and the Jammu region,
in June 2013.
! IR enters the one billion tonne select club: By achieving an originating freight loading of 1008.09
million tonnes (i.e. one billion plus) in 2012-13. Under the freight-loading strategy adopted by IR,
special focus has been given to enhancing evacuation of coal from CIL sources.
! High Speed Rail Corporation of India Limited set up: The High Speed Rail Corporation of India
(HSRC) has been launched as a subsidiary of Rail Vikas Nigam Limited. The HSRC has been set up
to develop the high speed rail corridors in India in order to run passenger trains at speeds up to 350
km per hour. It will undertake project activities such as preparation of project-related studies and
preparation of technical standards for the Mumbai-Ahmedabad corridor and any other corridor
decided by the government. It will provide support to the government in finalizing the financial and
implementation models.
! Facilitating the visually impaired: As a part of its social commitment to make IR more passengerfriendly for differently abled passengers, IR has decided to provide Braille stickers in coaches to
facilitate visually impaired passengers. It is planned to use stickers with metallic base, with printed
characters embedded on to the base. The Integral Coach Factory, a production unit of IR, has
developed the specification for integrated Braille signages in coaches, in consultation with various
blind associations, and inputs received from the Research Design and Standards Organization
(RDSO).
! Safety for women: In order to enhance the safety and security of women under the Nirbhaya Fund
Scheme set up by the Ministry of Finance, the Ministry of Railways has proposed a pilot scheme for
setting up an alert system in trains in select zones. The work was awarded to the Centre for Railway
Information Systems (CRIS) in October 2013, with a completion period of 13 months, for conducting
pilot projects in Central and Western Railways.
! Worlds First Ever 5500 HP Locomotive as a Pilot Project: IR has produced the worlds first
prototype 5500 HP diesel locomotive (WDG5), developed by Diesel Locomotive Works, Varanasi, a
production unit of IR. The locomotive will be able to achieve 100 kmph speed on level track, with
higher axle load.
! Green Initiatives: (i) The Ministry of Railways and Rail India Technical and Economic Service
(RITES) Limited have formed the Railway Energy Management Company (REMC), a JV with a
shareholding pattern of 49 and 51 per cent respectively, for undertaking IR projects related to
harnessing green energy like solar and windmill power plants, power-trading activities, transmission
lines and power evacuation planning, energy conservation initiatives, efficient coordination in power

143!

!
generation through captive power plant, and energy audits. The REMC will also facilitate faster
execution of renewable energy and energy conservation works, with the aim of generating green
power and reducing the energy bill of IR. The REMC has become functional and is working on
setting up windmill and solar power plants, with about 40 per cent subsidy from the MNRE. To begin
with, 200 railway stations, rooftops of 26 buildings, and 2000 level crossing gates will be covered.

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

144!

Chapter!16!
Recent!Initiatives!for!Development!of!the!
Infrastructure!Sector!in!India!
!

&Infrastructure&Financing&
(i) The Cabinet Committee on Investment (CCI) set up under the chairmanship of the Prime Minister
on 2 January 2013 to expedite clearances and decisions on large infrastructure projects, cleared 303
projects with aggregate investment of ` 6,95,437 crore up to end February 2014.

(ii) Infrastructure Debt Fund: The government has conceptualized infrastructure debt funds (IDF) for
sourcing long-term debt for infrastructure projects. Potential investors under IDFs may include offshore institutional investors, off-shore high networth individuals (HNIs), and other institutional
investors (insurance funds, pension funds, sovereign wealth funds, etc.). An IDF can be set up either
as a trust or as a non-banking financial company (NBFC). The income of IDFs has been exempted
from income tax. So far, two IDF-NBFCs and five IDFmutual funds (MFs) have been
operationalized.

(iii) Tax-free Bonds: The government has attempted to broaden the corporate bond market by
according tax-free status to infrastructure bonds for addressing the specific needs of infrastructure
deficit, especially in sectors such as roads, ports, airports, and power, which are essential for
economic growth in any country. During financial year 2013-14, the government has allowed issue of
tax-free bonds amounting to ` 50,000 crore, to central public sector undertakings (CPSUs), for a
period of 10, 15, and 20 years.

(iv) Municipal Borrowing: With a view to deepening the bond markets for infrastructure finance,
draft guidelines/ framework has been prepared for issuance of municipal bonds in India.

Public;Private&Partnership&Initiatives&in&India&
The Government of India is promoting public-private partnerships (PPP) as an effective tool for bringing
private-sector efficiencies in creation of economic and social infrastructure assets and for delivery of quality

145!

public services. By end March 2014 there were over 1300 projects in the infrastructure sector with a total
project cost (TPC) of ` 6,94,040 crore. These projects are at different stages of implementation, i.e. bidding,
construction, and operational.

(i) Viability Gap Funding for PPP Projects : Under the scheme for financial support to PPPs in
infrastructure (Viability Gap Funding [VGF] Scheme), 178 projects have been granted approval with
a TPC of ` 88,697 crore and VGF support of ` 16,894 crore, of which ` 1455 crore has been disbursed.

(ii) Support for Project Development of PPP Projects: The India Infrastructure Project Development
Fund (IIPDF) was launched in December 2007 to facilitate quality project development for PPP
projects and ensure transparency in procurement of consultants and projects. So far 53 projects have
been approved with IIPDF assistance.

(iii) National PPP Capacity Building Programme: The National PPP Capacity Building Programme
was launched in December 2010, and has been rolled out in 16 states and two central training
institutes, i.e. the Indian Maritime University and Lal Bahadur Shastri National Academy of
Administration. The roll-out in the respective institutes commenced in 2011-12. So far, 160 training
programmes have been conducted to train over 5000 public functionaries who deal with PPPs in their
domain.

(iv) Online toolkits for PPP projects for five sectors are available on the Department of Economic
Affairs, Ministry of Finance, website on PPPs, i.e. www.pppinindia.com. The PPP toolkit is a webbased resource that has been designed to help improve decision making for infrastructure PPPs in
India and to improve the quality of infrastructure PPPs that are implemented in India.

!
!
!
!
!
!

146!

Chapter!17!
PublicLprivate!Partnership!in!
Infrastructure!
!
The!partners!in!a!PPP,!usually!through!a!legally!binding!contract!or!some!other!mechanism,!agree!to!share!
responsibilities!related!to!implementation!and/or!operation!and!management!of!an!infrastructure!project.!
This!collaboration!or!partnership!is!built!on!the!expertise!of!each!partner!that!meets!clearly!defined!public!
needs!through!the!appropriate!allocation!of:!
!
!

Resources!

Risks!

Responsibilities,!and!

Rewards!

!
!
!

What&advantages&PPPs&may&provide?&
!
Governments!worldwide!have!increasingly!turned!to!the!private!sector!to!provide!infrastructure!services!in!
energy!and!power,!communication,!transport!and!water!sectors!that!were!once!delivered!by!the!public!
sector.!There!are!several!reasons!for!the!growing!collaboration!with!the!private!sector!in!developing!and!
providing!infrastructure!services,!which!include:!
!

Increased!efficiency!in!project!delivery,!and!operation!and!management;!!
Availability!of!additional!resources!to!meet!the!growing!needs!of!investment!in!the!sector;!and!
Access!to!advanced!technology!(both!hardware!and!software).!

Are!there!any!limitations!of!PPPs?!
!
There!are!many!important!economic,!social,!political,!legal,!and!administrative!aspects,!which!need!to!be!
carefully!assessed!before!approvals!of!PPPs!are!considered!by!the!government.!PPPs!have!various!

147!

limitations!which!should!also!be!taken!into!account!while!they!are!being!considered.!The!major!limitations!
include:!
!
!

Not!all!projects!are!feasible!(for!various!reasons:!political,!legal,!commercial!viability,!etc.).!

The!private!sector!may!not!take!interest!in!a!project!due!to!perceived!high!risks!or!may!lack!
technical,!financial!or!managerial!capacity!to!implement!the!project.!!

A!PPP!project!may!be!more!costly!unless!additional!costs!(due!to!higher!transaction!and!financing!
costs)!can!be!offSset!through!efficiency!gains.!!

Change!in!operation!and!management!control!of!an!infrastructure!asset!through!a!PPP!may!not!be!
sufficient!to!improve!its!economic!performance!unless!other!necessary!conditions!are!met.!!

These!conditions!may!include!appropriate!sector!and!market!reform,!and!change!in!operational!and!
management!practices!of!infrastructure!operation.!Often,!the!success!of!PPPs!depends!on!
regulatory!efficiency.!

&
Models&of&PPP&
!
A!wide!spectrum!of!PPP!models!has!emerged.!These!models!vary!mainly!by:!
!
!

Ownership!of!capital!assets!

Responsibility!for!investment;!!

Assumption!of!risks;!and!!

Duration!of!contract.!

!
!
!

The!PPP!models!can!be!classified!into!five!broad!categories!in!order!of!generally!(but!not!always)!increased!
involvement!and!assumption!of!risks!by!the!private!sector.!The!five!broad!categories!are:!
!

Supply!and!management!contracts!
Turnkey!contracts!!
Affermage/Lease!

148!

Concessions!!
Private!Finance!Initiative!(PFI)!and!Private!ownership.!

A!categorization!of!the!PPP!models!together!with!their!main!characteristics!is!shown!in!table!1.!While!the!
spectrum!of!models!shown!in!the!table!are!possible!as!individual!options,!combinations!are!also!possible!
such!as,!a!lease!or!(partial)!privatization!contract!for!existing!facilities!which!incorporates!provisions!for!
expansion!through!BuildSOperate!S!Transfer.!
!

!
!

!
!
!

149!

150!

Chapter!18!
Planning!in!India,!Planning!Commission!
and!the!12fth!FYP!
Major Challenges for India
" A targeted approach to bring millions of families above the poverty line.
" Generation of nearly ten millions of new employment opportunities per annum, especially for
those in the lower income groups.
" Eradication of illiteracy.
" A concerted effort to raise primary and secondary enrolment rates and minimize dropouts.
" Improved public health to reduce infant mortality and child malnutrition.
" Massive investment in power generation, telecommunications and other physical and social
infrastructure.
" Accelerated acquisition of technology capabilities to raise productivity in agriculture,
industry and services.
" Becoming a more important player in the world economy in terms of both trade and
investments.
Some Critical Policy Challenges
! Favourable macro factors are important, but they can at best create an enabling environment that
needs to be supported by specific policy initiatives in a number of areas. A comprehensive
analysis of these issues is beyond the scope of this paper although it will be part of the process
for formulating the Twelfth Plan.
! What is attempted in this section is the identification of some of the critical sectoral and policy
issues that will need to be addressed if growth is to be pushed to 9 percent or a little more in the
Twelfth Plan, and also made more inclusive and sustainable.
! Some of the items in the agenda involve completion of what is in the pipeline, but there are
several areas where new initiatives are needed.
Financing the Plan with Macroeconomic Balance
! The combined fiscal deficit of the centre and the states had expanded because of the stimulus,
and has to be brought back to sustainable levels. This process has begun, and the centres fiscal
deficit is projected to fall from 5.1 percent
! of GDP in 2010-11 to 4.6 percent in 2011-12 followed by further education of 0.5 percentage
point, per year in the next three years, to reach 3 percent by 2014-15.Adding a fiscal deficit of
around 2.5 percent for the states, the combined deficit of the centre and the states is therefore
projected at about 5.5 percent by 2014-15.

151!

! The proposed reduction in the combined deficit from 7.7 percent in 2010-11 to 5.5 percent in
2014-15 involves an improvement of 2.2 percentage points of GDP over four years. This is not
too onerous. In fact, the proposed deficit for 2014-15 would still be higher than the 4.8 percent
achieved in 2007-08, eight years earlier. However, the real challenge is that the reduction in the
fiscal deficit has to be achieved while also achieving an increase of at least around 1.5
percentage points of GDP in Plan expenditure of the centre and states combined.
! This order of increase is the minimum necessary if we are to provide adequately for the essential
requirements of education, health and public financing of critical infrastructure, including
especially in rural and other backward areas. Plan expenditure on education and health taken
together may have to be increased by about 2 percentage points of GDP and expenditure on
critical infrastructure, by at least 0.5 percent of GDP taking the total increase on these accounts
to 2.5 percentage points. If total Plan expenditure is increased by only 1.5 percentage points, it
implies a considerable moderation in the demands of other Plan schemes.
! Reducing the fiscal deficit by 2.2 percentage points, while also increasing Plan expenditure as a
ratio of GDP to around 1.5 percentage points, requires an improvement of around 3.7 percentage
points of GDP which has to be achieved through some combination of increased revenues and
reduced non-Plan expenditure, as a percentage of GDP.
! A reasonable expectation would be to aim for an increase in revenues as a percentage of GDP by
a little over 2 percentage points and a reduction in non-Plan expenditure as a percentage of GDP
by about 1.5 percentage points. As far as revenues are concerned, the aim should be to achieve
higher tax ratios without resorting to disorionary taxation. We can count on some increase in the
tax ratio on account of buoyancy, but a substantial part of the targeted improvement must come
from tax reforms.
! The most important initiative in this context is the Goods and Services Tax (GST), for which a
Constitution Amendment Bill has been introduced. The GST, once implemented, will convert the
present regime in which the central and state governments levy multiple indirect taxes separately
on different tax bases, into a more rational system with separate central and state taxes, but
applied on a common base, preferably with a single common rate (subject to a few exceptions).
! Since taxes on the input stage in each of the central and state streams will be netted out at the
next stage, the GST would be a true value added tax, contributing hugely to both economic
efficiency and revenue collection. Because implementation of the GST involves a constitutional
amendment, a successful outcome may take time, but once achieved, it will be a major
achievement.
! Progress of this legislation in Parliament will be closely watched by analysts and potential
investors and credible signs of progress will be widely welcomed. Some reduction in non-Plan
expenditure as a ratio of GDP will happen automatically if there is high growth, because
government employment is not expected to increase significantly, and no new pay commission
impact is expected in the Twelfth Plan period. However, progress in this area will also depend on
whether subsidies, which have grown in scale in both the central government and the states, can
be curtailed.
! The major subsidies in the centre are on food, fertilizers and on petroleum products, which

152!

together account for around 2 percent of GDP. State budgets also have subsidy elements, but the
major subsidy is the very large losses of the state power utilities, which has now touched
almost 1 percent of GDP.
! Food subsidies, which amount to about 0.7 percent of GDP, will be difficult to contain in view of
the commitments on National Food Security. The focus of attention for subsidy control by the
centre should therefore be on the subsidy on fuel and fertilizers. In the case of the states, the
principal focus must be on the large losses in the power sector.
! The latter reflects a combination of very substantial under pricing of electricity to farmers (with
free electricity in some cases) combined with inefficiency and competition in billing and
collection. Reducing subsidies will not be easy and a conscious effort is needed to build public
and political support for a significant reduction in inefficient and non-targeted subsidies as a
percentage of GDP, in order to finance the much needed additional Plan expenditure in health,
education and agriculture related infrastructure.
Policies for Better Agricultural Performance
! The 4 percent target for growth in agriculture, which will be missed in the Eleventh Plan, must
be achieved in the Twelfth Plan as it is critical for inclusiveness. Fortunately, this is technically
feasible as there is ample evidence that productivity per hectare can be increased by 80 percent to
100 percent for many crops in large areas by applying modern agronomic practices based on
existing technology. However, achieving these increases in productivity requires action on
several fronts, most of which lie in the domain of state governments.
! Water is a key input, and better systems of water management, including especially the ability to
control timing and quantity of water application, are critical. This must be combined with
availability of better quality seeds, and adoption by farmers of optimal levels of seed
replacement. Much greater attention also needs to be paid to soil health, focusing particularly on
micro-nutrients and carbon content. Since micronutrient deficiencies are area-specific, a system
of soil health cards issued to farmers, with periodic soil testing, must be put in place.
! Carbon content can be increased by shifting from the traditional practice of burning crop residue
to leaving it in the field. Shifting to more efficient use of water requires new practices such as
land leveling, use of drip irrigation, zero till cultivation, raised seedbed planting, and in the case
of rice, adoption of the System of Rice Intensification (SRI), etc. State governments must act on
several fronts to present a package of interventions tailored to the requirements of particular agro
climatic zones. Delivering only a few elements of the package will not produce optimal results.
! The farmer has to be persuaded of the importance of the complete package, and both physical
and knowledge inputs needed to implement the package, have to be made available. Since most
of the growth in agriculture in future will come not from food grains, but from sectors such as
horticulture, dairying and fisheries, where the produce is perishable, much greater attention
needs to be paid to the logistics of transporting produce from the farm to the consumer, with
minimum spoilage. This requires active involvement of the private sector. To facilitate such
involvement, state governments must amend the Agricultural Produce Marketing Committee
(APMC) Acts which at present prevent private sector buyers from dealing directly with

153!

producers.
There is an overwhelming case for exempting horticultural produce entirely from the APMC Act.
Much of the reluctance to make these changes reflect the operation of vested interests who
control the mandis. Establishing better road connectivity in rural areas helps market access and
the Pradhan Mantri Gram Sadak Yojana is an important intervention in this regard.
Another area for policy intervention by state governments is the reform of laws relating to
leasing of land. As holdings are subdivided and become uneconomic, very small and marginal
farmers may be better off leasing out their land to more viable farmers, while seeking paid
employment themselves. They would be more willing to do this if they felt that they could lease
out their land and get it back when they want.
Yet, leasing is not legal in some states. Where it is allowed, the law is biased towards the tenant,
whereas the need of the hour is to protect the interest of the small farmers leasing out land.
Unfortunately, despite the importance of agriculture for rural prosperity very few state
governments have taken up the challenge of bringing about the multifaceted transformation that
is needed.
There is too much focus on delivering a variety of subsidies in power, seeds, and credit, and not
enough on bringing about a change in farming practices and adoption of new technology that
would actually raise land productivity and enable farmers to become less dependent on subsidies
in the long run.

Employment Generation
! A key challenge in the Twelfth Plan is how to ensure creation of a sufficient number of
productive jobs in the non-agricultural sector to absorb the expected increase in the labour force
and also absorb surplus labour that must be shifted out of agriculture.
! The need to shift labour out of agriculture follows from the fact that productivity in agriculture is
relatively low and if agriculture is not expected to grow at more than 4 percent, the only way
labour productivity in agriculture can rise at a rate higher than 4 percent is for employment in
agriculture to shrink. This is actually necessary to reduce the present underemployment in
agriculture and a steady improvement in real wages in this sector.
! Needless to say, the proposed shift out of agriculture should occur not as distress migration, but
as a natural movement to higher paid employment in non-agricultural activity, some of which
could be in rural areas itself. Agricultural development will itself give rise to new demands for
non-agricultural services and generate employment in agriculture-related sectors such as
modernized marketing and agro processing activity. A large part of the job opportunities we need
must come from a more rapid expansion in manufacturing.
! The industrial sector was targeted to grow at an average rate 10 percent to 11 percent per year in
the Eleventh Plan, but the actual achievement is unlikely to exceed 8 percent. Most economic
simulations suggest that if the economy is to grow at 9 percent in the Twelfth Plan, and
agriculture, which now accounts for only 15 percent of GDP, is constrained to grow at 4 percent,
then services should grow at around 10 percent and industry at 11 percent. Industry must not
only grow faster than it has thus far, it must also be more able to absorb labour with relatively

154!

simple skills of the type which migrants from rural areas can acquire. Micro, small and medium
enterprises, are generally more labour absorbing, and are also potential seedbeds for innovation
and entrepreneurship.
The policy environment must encourage the growth of these industries and this does not mean
sops and subsidies. Rather, the main effort should be to provide these smaller industrial units
with first class infrastructure which includes both reliable power supply at reasonable cost, good
transport connectivity, a pool of skilled labour to draw upon and a financial sector capable of
making resources available to potentially successful entrepreneurs.
Expansion of industrial activity must also be regionally balanced since demographic projections
suggest that the growth of labour supply in future will be much greater in the northern states that
are industrially backward at present. Migration will take care of some of the regional mismatch
but there is a strong case for doing more to ensure that employment opportunities expand in
states that are expected to generate larger growth of labour.
This is best achieved by state governments paying much greater attention to the infrastructure
needs and skilled labour requirements of industry that could locate in those states. State
governments must also be more active in reducing the transactions cost of doing business and
this means making regulatory bodies, tax authorities, and utilities more business friendly.
Finally, some consideration has to be given to the long-standing issue of the need to rationalize
our labour laws to give employers more flexibility to shed labour when faced with a downturn.
This is not to advocate policies of hire and fire, but only to say that more flexibility needs to be
built into the labour laws than exist at present.

Infrastructure Development
! The Eleventh Plan recognized the importance of investing more in infrastructure sectors such as
power, roads, ports, airports, and railways, and sought to raise investment in these sectors from
about 5.6 percent of GDP in the base year of the Eleventh Plan 2006-07 to around 9 percent by
the last year, i.e., 2011-12.
! The actual achievement is likely to be around 8.5 percent, with some sectors, e g,
telecommunications, achieving higher levels of investment than projected, while others achieved
significantly less. The task begun in the Eleventh Plan has to continue in the Twelfth Plan, which
should aim at increasing the rate of investment in infrastructure to around 10.5 percent by 201718.
! This implies that investment in infrastructure, which was targeted at $500 billion in the Eleventh
Plan period, would have to increase to about $1 trillion over the Twelfth Plan period 2012-13 to
2017-18. This poses two major challenges. One is how to finance the investment needed, and the
second is how to overcome implementation hurdles, which currently delay project completion.
! As far as financing is concerned, it is clear that public sector resources will be scarce and, as
noted above, the first priority for these resources must be education and health, which are crucial
for inclusiveness and are currently underfunded. Critical infrastructure in rural areas and
backward areas is another priority.
! Both the central and state governments must therefore follow an infrastructure strategy which

155!

consists of a combination of public investment and public private partnership (PPP). Public
investment would have to be directed to areas where the private sector is unlikely to come, with
the rest of infrastructure being developed as far as possible through PPP.
! Valuable experience has been gained in this area and many of the teething problems related to
procedures for structuring PPP projects have been overcome. We need to build on this
experience and launch a renewed effort in which the role of PPP in infrastructure investment
may have to increase from around 30 percent in the Eleventh Plan to as much as 50 percent in
the Twelfth Plan.
! The second major challenge in infrastructure development relates to implementation.
Infrastructure projects are often delayed due to difficulties in land acquisition, and where land
has been acquired, due to other difficulties such as dealing with encroachments and lack of
coordination with other utilities. Projects are also held back by difficulties in obtaining forest and
environmental clearances. Protecting forests and the environment is obviously an extremely
important objective, but the current processes are often not sufficiently transparent and
predictable. However, project developers are not without blame.
! They have got used to laxity in application of environmental regulations and there is a tendency
to ignore environmental regulations or act in anticipation of clearances in the belief that such
actions can be regularized later. We need to move to a system with much greater transparency,
predictability and also tighter enforcement in future.
Reforms in the Financial Sector
! Rapid growth needs to be supported by an efficient financial system capable of mobilizing the
savings in the system and using them to support economically efficient units. By financial
system in this context we mean the whole range of institutions such as banks, non-bank finance
companies, microfinance institutions, efficient and well-regulated capital markets, mutual funds,
insurance companies, pension funds and venture capital funds, each of which has an important
role to play. In one sense, Indias financial sector can be said to be in a strong position having
benefited from a process of carefully calibrated liberalization, combined with steps to strengthen
the regulatory framework.
! The system certainly proved resilient during the global financial crisis, and this was a very strong
positive factor in maintaining growth. However, while the financial system scores high on
stability, there is room for improving the efficiency of financial intermediation and increasing
innovation, both of which are necessary. This calls for a continuation of the process of calibrated
financial reform. Stopping the process of liberalization because it was excessive liberalization
with weak regulation which produced the financial crisis in industrialized countries would be a
serious misreading of the situation.
! Several important initiatives related to financial sector reform are already in the pipeline. These
include
a) Announcement of the road map for new private sector banks and foreign investment in
banks,
b) Deregulation of the savings rate offered by banks which remains regulated, though it was

156!

recently raised from 3.5 percent to 4 percent,

c) Legislation increasing the limit on FDI in insurance from 26 percent to 49 percent,
d) Passage of the pension fund regulatory and development bill,
e) Passage of the legislation allowing shareholders to vote their equity share in banks instead of
being limited to 10 percent as at present, and
f) Passage of the company laws amendment which will modernize bankruptcy proceedings.
The creation of a vibrant and liquid corporate bond market should have particularly high priority,
especially in view of the need to finance large private investments in infrastructure. Several of
the regulatory changes recommended by various expert committees to help develop bond
markets have been implemented, but the response thus far remains limited. One reason is the
very high fiscal deficit, which effectively crowds out corporate borrowing and the fiscal
consolidation programme discussed above will clearly help. Reform of the government securities
market in terms of building institutions, introduction of technology, etc, of the kind that was seen
in the equity markets, is also necessary for the establishment of a G-sec yield curve for all
maturities against which corporate bond yields can be priced.
The creation of the Public Debt Management Office outside the RBI, which has been announced
and is in the process of being established, will be another important step as it would free the RBI
from having to perform the role of debt manager. Improved access to liquidity for primary
dealers in the bond market is another important step.
Investment policies of LIC, EPFO, etc, are very conservative at present, leading these institutions
to prefer lower yielding government debt to higher yielding corporate debt, except of the very
highest investment grade. A possible reason could be the absence of efficient mechanisms for
debt recovery in the event of default. Unlike banks, which benefit from SARFAESI, bond
holders can only have recourse to liquidation and bankruptcy procedures which are hopelessly
time consuming.
The passage of the Company Law Amendment Bill mentioned above, which contains provisions
to modernize bankruptcy proceedings, is an important step in this context. Proposals for
establishing infrastructure debt funds based on investors abroad investing in long term debt
issued by infrastructure project companies are currently being examined by the finance ministry.
The establishment of such funds would help infrastructure companies to refinance shorter term
bank debt with longer term debt while freeing banks to finance new projects. A positive decision
on this proposal would be an important signal to investors.
The size of Indian banks is another important issue. Even the largest Indian bank, the State Bank
of India, is actually quite small by global or even Asian standards. Since banks will continue to
be the source of medium-term capital in India for some time, until the capital market becomes a
credible source for corporate long-term debt, the capital of the banks has to be increased greatly
to allow larger exposures to individual projects and also to sectors. Public sector banks must
therefore have a larger capital base. This could be done by allowing them to issue additional
capital in the market and reducing government equity below 51 percent to some lower level
which would in no way reduce effective government control.
If this is not politically feasible at present, then government must be willing to increase its capital

157!

contribution paripassu with fresh issue of capital, so that the government share of equity in these
institutions remains at 51 percent.
! A more flexible policy for allowing existing private sector banks to grow more rapidly is also
urgently needed. While branch expansion is now more freely allowed, it remains linked to
opening rural branches. With the growing scope for bringing banking to the rural areas through
the system of banking correspondents, insistence on opening rural branches may not be as
necessary as it once was.
Managing the Energy Challenge
! The global supply of fossil fuels is expected to become much tighter in the years ahead, and
prices of these fuels are therefore likely to remain high, with a possible upward trend.
! Achieving high growth in this situation requires reducing the energy intensity of GDP while
simultaneously taking steps to limit dependence on imports by increasing the domestic supply of
energy from both conventional and non-conventional resources.
Reducing Energy Intensity
! Reducing the energy intensity of GDP calls for rationalizing energy prices and adopting non
price measures to improve energy efficiency.
! Action is necessary on both fronts and the agenda is large. As far as rationalization of energy
prices is concerned, our energy prices at present are significantly below world prices and unless
this is corrected, it is difficult to believe that energy efficiency can be sufficiently incentivized.
The Integrated Energy Policy, adopted by the government in 2009, endorsed the principle that
prices of imported energy inputs must be aligned with world prices, but this policy has yet to be
fully implemented. Prices of motor spirit have been successfully decontrolled. However, diesel,
which is four times larger than motor spirit, has only been decontrolled in principle.
! The decision is yet to be implemented. LPG and kerosene prices remain under administrative
control and are currently set well below global levels. It is necessary to implement diesel
decontrol as quickly as possible and to bring about aphased alignment of kerosene and LPG
prices with world prices, while at the same time protecting the poor.
! There is an understandable reluctance to raise kerosene and LPG prices because of the impact on
vulnerable groups, but it must be recognized that the subsidy implicit in the present low prices of
kerosene and LPG is completely untargeted. In the case of kerosene, it also leads to large-scale
black marketing, adulteration and criminalization.
! The best way of helping the poor to cope with higher prices of kerosene and LPG would be to
shift to a targeted direct subsidy delivered to deserving groups linked to the implementation of a
unique identification number. This option is being explored. Coal is technically not under price
control, but the nationalized coal companies have set domestic coal prices well below world
prices, even after adjusting for the lower quality of Indian coal.
! The discrepancy between domestic coal prices and much higher import prices leads to an
unwillingness on the part of power producers to import coal and keep lobbying for domestic coal
linkages. This problem would not arise if domestic coal prices are equated with import prices. If
that is not immediately feasible, the second best option is for Coal India to import coal to meet

158!

demands from the power sector, while also introducing a system of pooled pricing whereby the
higher cost of the coal it imports is absorbed in a higher price charged by Coal India for coal
supplied to all power plants based on the overall mix of domestic and imported coal.
Over time, domestic coal prices must be adjusted in time with global coal prices reducing the
need for price pooling. Electricity prices are set by supposedly independent state regulators, but
there is strong political pressure on regulators in many states to hold back price increases, even
when these are justified by economic costs.
This only leads to financial unavailability of distribution system, which is under strain in any
case. The system must be allowed to function properly so that electricity prices are not
artificially depressed, especially as coal prices are expected to rise. Rationalizing energy pricing
along the lines spelt out above will encourage energy efficiency, but prices alone will not suffice
to promote efficiency. Action on prices needs to be supported by a proactive use of non-price
mechanisms.
Regulation can be used to push major energy using industries to achieve internationally
benchmarked levels of energy efficiency. We should also resort to standard setting and labeling
for appliances, equipments, transport vehicles and buildings to encourage energy efficiency.
Standards for buildings are particularly important because India has a leap-frogging advantage in
this area since most of the commercial buildings likely to be in place by 2030 are yet to be built!
Finally, energy efficiency for the economy as a whole would be greatly helped by intra-sectoral
shifts in the transport sector that would economize on energy.
The most notable shift in this context is shifting freight from road to rail, and shifting from
private to public transport in urban areas. These shifts can be facilitated by appropriate tax and
tariff policies. In the case of the Railways, it requires a shift away from the current practice of
overcharging freight to subsidize passenger traffic. Indias passenger fare to freight tariff ratio is
20 percent of what it is in China suggesting that freight tariffs should be lowered and passenger
fares raised.
These price changes need to be supported by action to build necessary freight carrying capacity
in the Railways. The capacity has to be created urgently, in anticipation of increased financial
strength from tariff reforms. A more proactive stance is also needed to promote PPP in railways,
especially in container traffic movement.

Increasing Domestic Energy Supply

! Steps to reduce energy demand have to be accompanied by strong action on the supply side to
expand domestic production of petroleum, natural gas and also coal to avoid excessive import
dependence.
! There are a number of policy gaps that need to be addressed. Both petroleum and natural gas are
open for investment by the private sector, including foreign investment, and private sector
investors have a good record in discovery of new sources.
! However, the public sector oil companies currently bear a large part of the burden of keeping
domestic petroleum prices low, because they are not given the full benefit of high oil prices. This
reduces the potential surpluses available for investment by these companies. Rationalization of

159!

energy price as discussed above will help the domestic effort to enhance energy supply. Coal
production is constrained by the fact that the industry is nationalized, although private
investment is allowed in captive coal mines (i.e., coal mines linked to power plants or steel and
cement plants).
This window for private investment provides some flexibility and there is significant investor
interest in this area. However, looking ahead, the policy for the coal industry should be
liberalized allowing private investment in non-captive mining subject to appropriate regulation
for safety and environment standards. There are obvious political sensitivities here, but it has to
be kept in mind that what is being proposed is not privatization of Coal India but only allowing
private sector mining. On present projections of likely domestic production, we will need to
import about 250 million tonnes of coal by 2016-17. Considering that the total world trade in
coal at present is around one trillion tonnes, we should do everything possible to remove
domestic impediments to production. There cannot be any rationale for allowing private
investment in petroleum and natural gas, as we do, but not in coal.
We must also take steps to exploit the full potential of other energy sources notably nuclear,
solar and wind power. The share of these sectors is small and will remain modest in the medium
term but in the longer term they could become substantial. Expansion of nuclear power is an
important element of Indias long-term energy strategy and this has been facilitated by the recent
agreement with the Nuclear Suppliers Group which gives India access to imported uranium, and
also opens windows for other cooperation in this area.
Plans for nuclear power all over the world are being reviewed in light of the recent Japanese
experience at Fukushima, and lessons learnt will have to be incorporated in our own strategy. We
should avoid kneejerk reactions that might derail the nuclear power programme though we must
clearly recognize the need to undertake a thorough review of our safety standards and benchmark
them against evolving best practice.
India is also engaged in developing solar-based generation using both photovoltaic and thermal
solar technology and a programme has been initiated to install 20,000 MW of solar power by
2020. This programme needs to be nurtured and supported in the hope of building a substantial
domestic industry in this area. India has the potential to be a significant supplier of equipment to
other countries.
Both nuclear and solar power are more expensive than conventional thermal generation and this
means that while increased reliance on these sources will contribute to energy security, and also
mitigation of climate change, it does imply higher energy costs. Costs can be expected to come
down as technology develops further, but in the next decade at least all indications are that unit
cost of energy will rise.
The energy challenge in the Twelfth Plan is how to deal with a situation in which global energy
prices will be high and the cost of alternative energy sources will also be high. Our ability to
grow rapidly in this environment depends critically on our ability to transmit the high energy
prices to energy users in the economy, rather than keep the prices artificially low. Only then will
users be incentivized to reduce energy intensity and energy producers will have the resources
they need to expand investment in these sectors. Making this transition is not easy.

160!

! It will be argued that energy prices should not be raised in a situation where inflationary pressure
is high, but the need to control inflation is not a valid reason for holding back relative price
changes which contribute to efficiency. In fact, raising energy prices will reduce the pressure of
demand for other products and thus help moderate price pressures elsewhere. The poor certainly
need help to handle the impact of higher energy prices, but it is better to do this through an
income transfer rather than keeping energy prices artificially low.
Managing Water Resources
! Managing water scarcity in the Twelfth Plan period is in some ways even more daunting than the
challenge posed by energy.
! Indias available supply of fresh water is the same as it was 5,000 years ago, and the population
has grown and so has the GDP, with a concomitant increase in demand for water. Until recently,
official estimates showed the available supply of water to be well above total demand, albeit with
areas of regional scarcity.
! More recent studies indicate that the demand for water at present is roughly equal to supply for
the country as a whole and this near balance at a national level hides wide regional variations
with acute shortages in many parts. Since growth in GDP implies expanded water use, the water
situation can be expected to worsen rapidly. Already, there is evidence of excessive drawal of
groundwater in many parts of the country leading to lowering of the water table and increasing
salinity, which makes the water less usable for agriculture and harmful for health.
! If things are left to business as usual, the situation will worsen steadily. The Twelfth Plan must
signal the need for a radically new approach. Since water is largely a state subject, success
depends critically on the state governments. They need to act on both the supply and the demand
side.
Supply Side
! On the supply side, action is necessary on several fronts including building storage dams,
investing in watershed management to improve surface water retention and groundwater
recharge, and forcing industry to treat waste water for reuse.
! Each of these involves costs and we need to priorities between alternative investments keeping
relative costs in mind. Traditionally, most of our resources have been absorbed by large
irrigation projects. These are indeed important and need to be pursued to optimize storage,
though their implementation needs to be greatly improved. In terms of prioritization we need to
do much more on watershed management projects, which involve one-tenth of the cost per
hectare as compared to large irrigation projects, have fewer environmental problems, and
generally provide a much higher return on investment.
Demand Side
! Efforts at expanding supply are important but they will not suffice and they will have to be
accompanied by efforts on the demand side to improve efficiency of water use. About 80 percent
of Indias water use is for agriculture and it is technically feasible with better agricultural

161!

!
!

practices, to reduce water use in agriculture by 40 percent to 50 percent.

For example, the System of Rice Intensification (SRI) enables rice to be grown with much less
water than in traditional flood irrigation. However, while it requires less water, SRI requires
water to be given at the right time which calls for complementary investments in land leveling
drip irrigation, etc. Additional costs have to be allowed to pass through into the system in the
form of higher food prices.
Over the longer term, agricultural research will have to factor in the need to achieve greater
water efficiency by evolving crop varieties capable of dealing with water stress. This is
particularly important given the likely impact of climate change.
One reason why managing the water crisis is more difficult than the energy crisis is that whereas
most people recognize that energy has to be paid for, there is much less acceptance, or even
understanding, of the need to price water. Policies are often enunciated on the principle that
water is scarce and we must conserve every drop, but if water is underpriced, there is no
incentive to achieve efficiency.
Pricing of canal water in large irrigation projects is supposed to be based on the principle of
covering operation and maintenance (O&M) costs, but in most places it is priced at levels which
cover only about 15 percent of O&M costs. This eliminates any incentive to adopt less water
intensive cropping patterns in the command area, especially among upper end users. It also leads
to poor maintenance of the canal system, which in effect means that although water is severely
underpriced, farmers have no assurance that they will get the water they need at a predictable
time.
Farmers would be much better off paying higher prices for water, if this is accompanied by
greater predictability of supply of a certain quantity at a particular time.
The first step in evolving a rational water policy is to make a scientific assessment of the
available water resources in each basin in the country and then define basin specific strategies for
water management. This mapping exercise should be undertaken on a priority basis, with the
involvement of the science departments, and should be completed in the Twelfth Plan.
Rational water pricing is important and must be pursued but pricing by itself may not solve the
problem since prices would have to be set at unacceptably high levels to get anywhere close to
optimal water use. State governments would therefore be well advised to combine price
rationalization with establishment of statutory water regulators to determine water allocation for
different uses such as household needs, agriculture and industrial use. A start has been made in
some states, e g, Maharashtra and Andhra Pradesh using somewhat different approaches, but we
have a long way to go and we must learn from different experiments.
One way of incentivizing the process is to link central assistance for capital-intensive irrigation
projects to the implementation of critical regulatory reforms in this area and to undertake parallel
work on completing command area development.
A controversial issue that needs to be faced is whether a system of rational management of the
countrys water resources can be achieved without bringing in legislation that would empower
the central government to act in this area. The Constitution provides that the central government
can determine rational use of water in interstate rivers, provided Parliament passes a law for this

162!

purpose.
Regulating Groundwater
! There is also a case for revisiting the various laws in place to regulate the use of groundwater.
The present laws only provide for banning new tube wells in areas where the water table has
fallen too far. This only confers a monopoly on existing tube well owners who can pump as
much water as they wish and sell it to other farmers.
! Free power or very cheap power for agriculture provides a wholly unjustified incentive for such
activity. At the very least, state governments should consider imposing a cess on electricity for
agricultural use in all areas where the water level has sunk too low, and earmark the proceeds for
groundwater recharge.
Managing the Urban Transition
! Managing the urban transition will pose special challenges in the years ahead. India has been
slow to urbanize, but this is expected to change with faster growth.
! The urban percentage of the population is currently around 30 percent, and is expected to reach
40 percent by 2030, implying an increase in numbers from 350 million today, to around 600
million. This will require a massive expansion in urban infrastructure, especially since only
about half of those currently in urban areas are adequately served even by the current very low
standards. The resources needed to achieve this expansion in urban infrastructure are much larger
than what the cities or local urban bodies can mobilize on their own.
! Most of the revenue generated from economic activity in the country occurs in urban areas, but
the revenue generated from this activity accrues to the central or state governments, and there is
much less devolution to city governments than there should be. Cities and urban local bodies in
India also have limited capacity to raise their own resources. It is possible to generate revenue
through user charges for some services such as water, sewerage and urban transport, but a long
tradition of fixing low user charges has limited the flow of revenues from these sources.
! High land values in urban areas could be used to leverage resources to finance urban
infrastructure, particularly through PPP projects, but this opportunity has not been adequately
exploited although the recent decision of the Andhra Pradesh government to adopt the PPP route
for a metro in Hyderabad may provide a model for the future.
! Even in the industrialized world, cities have rarely financed all the infrastructure they need
themselves and national governments have contributed in various ways. The Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) introduced in the Eleventh Plan is a mechanism
for channeling resources from the centre to the states linked to specific reforms in urban
governance and finances. The results thus far are mixed, partly because of inadequate
implementation capacity at the city level and also because of reluctance to pursue reforms.
! The JNNURM initiative will have to be expanded in the Twelfth Plan but it is also true that the
cities and the states have to take on a much larger share of the burden than they do today the
former through user charges and the latter through stronger devolution of resources. Steps to
close the financing gap for urban infrastructure have to be accompanied by improved governance

163!

structures at the city level.

! The system of city government at present is such that city governments are not effectively
empowered to plan for infrastructure development. Critical decisions on the infrastructure needs
of the metropolitan cities are typically made by the state governments, which necessarily respond
to the electorate in the state as a whole.
! This has to change so that city government is in the hands of elected representatives responsible
to their local electorate.
Environment Protection and Sustainability
! A difficult issue which has to be addressed in the Twelfth Plan is how to achieve the transition to
higher growth without inflicting unacceptable damage to the environment.
! The qualification unacceptable is important since some stakeholders take an extreme position
in which no damage must be done. That would rule out an enormous range of developmental
activity, since all such activity alters the environment in some way. There is merit in taking an
uncompromising approach in certain cases, e g, tiger reserves and very select biospheres, but the
general approach must be one of balancing conflicting objectives. The threat to the environment
posed by high growth arises from many different sources. These include
a) The need to meet the energy requirements of growth and the consequent demand for coal and
hydropower, both of which could run into forest clearance problems even if we ignore for the
present the longer term effect of carbon emissions,
b) The impact of industrialization upon industrial effluents which leads to water pollution and
of gaseous and particulate emissions which lead to air pollution,
c) The effect of expanding urbanization and the consequent need to treat 100 percent of the
sewage generated instead of only 30 percent, as at present, in order to avoid damage to our
rivers and water bodies, and
d) The challenge of managing the large quantities of solid waste generated in cities in a manner
that is environmentally benign. In addition to these endogenous sources of environmental
stress, we also have to deal with external threats to the environment arising from climate
change. This will require proactive steps to increase afforestation and to harness and manage
our water resources better.
! The measures related to price rationalization in energy and water, and the various non-price
initiatives in these areas, designed to increase energy efficiency and water use efficiency are
critical for economic efficiency and will also help to moderate the environmental stress. These
measures need to be supplemented by transparent and scientifically based environmental
regulations which are strictly enforced.
! It must be emphasized that environmental protection is not cost less. The problem arises because
economic agents do not take into account the external costs of their actions, some of which fall
on future generations. Such actions must be discouraged as far as possible and the residual
damage must be repaired or compensated. This is best done by enforcing the polluter pays
principle. However, though often asserted in theory, this principle is largely ignored in practice.
Tax policies often fail to reflect this principle the total tax burden on commercial vehicles for
example is higher than on private vehicles.

164!

! The regulatory mechanisms for enforcing pollution controls in the states are also extremely
weak. We need a comprehensive review of tax policies (including state taxes) and also our
pollution control mechanisms to ensure that the total impact is environmentally benign. A new
initiative introduced in the Budget for 2010-11 is the imposition of access of 5 percent on coal
(both domestic and imported), the proceeds of which are earmarked to a separate fund to
promote green energy.
! Mechanisms of this sort can be used to meet the cost of environment protection and are justified
by the principle that the polluter must pay. Another environmentally supportive measure is the
imposition of access on electricity for agricultural use to be imposed in areas where the
groundwater has sunk too low, with the proceeds being earmarked for use in groundwater
recharge in the same area.
Market Manipulation, Crony Capitalism and Corruption
! Greater reliance upon market forces was a key element of the economic reforms and it has
yielded tangible benefits in terms of higher growth and efficiency. However, it is also seen to
have produced an increase in manipulative crony capitalism, and the corruption it brings in its
wake.
! Corruption and corporate wrongdoing is obviously not a problem unique to India. In recent years
there has been a great deal of attention internationally on corporate corruption and various types
of illegality as exemplified by high profile cases such as Enron, Worldcom, Parmalat and Bernie
Madhof.
! The financial crisis has also drawn attention to various instances of conflicts of interest and
regulatory capture which call into question the notion that markets always promote efficiency.
Rajan (2010) has drawn special attention to two areas in India which are especially vulnerable to
the charge of crony capitalism.
! These are land-related development and those areas where other scarce resources such as
minerals or spectrum are to be allocated by the government through licensing. Non-transparency
in land related issues has become a major problem which needs urgent attention. The problem
surfaces in two different types of situations.
! First, land values in the major cities are hugely inflated because of highly non-transparent
controls on land and there are large rents to be enjoyed by those who can obtain the relevant
permissions to develop land. Non-transparent mechanisms for grant of such permissions
inevitably lead to suspicion of corruption and cronyism. These areas of discretionary policy need
to be comprehensively reviewed and more transparent mechanisms put in place.
! Second, acquisition of agricultural land for industrial development and for creating infrastructure
presents many problems. Non-transparency in methods of allocating scarce resources such as
minerals and spectrum has also given rise to criticism from many quarters. Allegations of
corruption and cronyism have surfaced in both these areas, and they call for a thorough review of
existing procedures. As a general rule, competitive bidding among qualified bidders provides the
most transparent way of allocating scarce resources such as mining rights in known mineral
bearing areas or spectrum.

165!

! The absence of competitive bidding in the allocation of 2G licenses has evoked intense criticism.
In sharp contrast, the 3G auction, conducted in 2010, evoked no criticism at all, and is in fact a
model which deserves careful study. There are circumstances where competitive bidding may
not be the best method but the alternatives require very complex methods of evaluating the
choices that have to be made, that invariably bring in discretionary decision-making, which can
always become a matter of controversy ex post.
! Similar problems arise in allocating mining rights. A new Mines and Minerals Development Bill
is currently under consideration in the government which must address those issues
satisfactorily. Government procurement procedures also need to be thoroughly modernized and
made much more transparent as a means of reducing the probability of corruption and cronyism.
OECD reports show that introducing such changes cuts costs by up to 25 percent in
industrialized countries.
! Many countries have a public procurement law whereas in India government procurement is
governed by rules. The government has appointed a committee to make recommendations in this
area. Early action to modernize government procurement and make the procedures transparent,
including through the adoption of e-procurement would be a major step forward. It needs to be
kept in mind that under the Right to Information Act, all these issues are available to the public
ex post.
! There is no reason why the transparency should not be introduced ex ante.
Implementation of Government Programmes
! In addition to influencing the pace and pattern of growth, and including especially its
employment generating capacity, the strategy of inclusiveness also relies heavily on government
programmes designed to promote inclusiveness.
! Programmes for health and education are particularly important in this context, and have been
discussed earlier. In addition, there are a number of programmes which together constitute a
structure of social security and provision of direct benefit for the poor.
The most important of the other programmes relevant for inclusiveness are:
1) The supply of subsidized food grains through the PDS,
2) The Mid-Day Meal Scheme for schoolchildren,
3) The Integrated Child Development Services (ICDS) which provide nutrition and pre-school
education for the zero to six-year age group and also for adolescent girls,
4) The National Social Assistance Programme (NSAP) which provides an old age pension,
plus a pension for widows and disabled persons,
5) The Mahatma Gandhi National Rural Employment Guarantee, which provides assured
employment for 100 days at the notified minimum wage,
6) The National Rural Drinking Water Programme which aims at covering villages which do
not have an assured supply of potable water,
7) The Rajiv Gandhi grameenvidyutikaran Yojana (RGGVY) which extends electricity to all
uncovered villages and provides free connection to all BPL families, and

166!

8)

The Indira awasyojana (IAY) which provides assistance to the rural poor to build pucca
homes.

! The total provision for these programmes in 2010-11 was Rs 1,55,000 crore or about 1.9 percent
of GDP. There is broad agreement that these programmes are aimed at desirable objective but
there is a great deal of skepticism about whether these programmes are being implemented in a
manner that will ensure that these objectives are actually realized.
! Complaints of leakages, inefficiency and corruption are widespread and while these are
sometimes advanced by those who do not sympathies with the welfare objectives of the
programmes, there is no doubt that there is also a genuine problem of implementation.
! It is important to note that the central government only finances these programmes and actual
implementation is carried out by state government agencies. As one would expect, the
effectiveness of implementation varies greatly from state to state, with many examples of good
implementation but also examples of abject failures. These failures can be traced to one or all of
three problems: poor design ab initio, underfunding and poor implementation. In practice all
three are probably present to some degree.
! Problems of poor design and inadequate funding can and should be addressed by the central
government. Central government guidelines are often inflexible and not tailored to the
requirement in particular states. Furthermore, many areas involve cooperation between different
arms of government, e g, of agriculture, irrigation and rural development or the departments of
health, education and women and child development.
! Unfortunately, government typically works in silos which makes effective interdepartmental
cooperation very difficult. As far as adequacy of funding is concerned, scarcity of resources is a
genuine problem. The solution lies in better prioritization. It is much better to fully fund schemes
that are working well and squeeze other rather than spread resources thinly. However, this is
easier said than done and enforcing prioritization in this way will be a major challenge in the
Twelfth Plan.
! Improving implementation on the ground has to be a major objective in the Twelfth Plan.
Opinions vary on how this can be achieved. A committed political leadership at the state level,
working with an effective administration, can obviously make a big difference. Devolution of
decision-making and accountability to panchayati raj institutions (PRIs) is also a potential
instrument improving accountability. This is in line with the 74th Amendment which provided
for devolution of functions, finances and functionaries from the state government to the PRIs.
Some progress has been made in devolution, but most state governments have devolved
functions with very little devolution of either funds or functionaries.
! The central government can perhaps help in this area by structuring its schemes of assistance in a
way which increases the role of the PRIs. For this to work, it will also be necessary to build
capacity at the PRI level. Earmarking some portion of central funds for capacity building may be
necessary.
! Greater participation by civil society organizations promoting greater involvement of the
community, with a greater awareness of its rights, will also help. The Right to Information Act is

167!

an important new initiative which empowers civil society and individual stakeholders to hold
government at all levels accountable.
Conclusions
! As stated at the outset, the purpose of this paper was not to present firm conclusions, but rather to
pose the issues we need to address in preparing the Twelfth Plan, in the hope of provoking a
wider debate. However some broad conclusions can be drawn. The economy will enter the
Twelfth Plan period in an environment of great promise but also one that presents major
challenges.
! We have done well on the growth front, but not so well on inclusion, though it is possible that
when the data for the entire period become available, we may find that the situation is better than
currently envisaged. Much of what needs to be done to accelerate GDP growth to 9 percent or so
will be done by the private sector, but the central and state governments have a crucial role to
play in providing a policy environment that is seen as investor friendly and is supportive of
inclusive growth.
! A credible time path for bringing the fiscal deficit under firmer control must have top priority.
This must be accompanied by continued progress on reforms that are in the pipeline in many
areas, especially those that are likely to generate an early investment response. A financial sector
capable of mobilizing and deploying resources efficiently is extremely important and there are
many steps that can be taken in this area that are entirely in the domain of the central
government.
! The governments own resources have to be deployed with a clear sense of priority. In this
context, health and education and critical infrastructure development, especially in water
management and rural infrastructure, and infrastructure development in backward areas must
have top priority. For other infrastructure areas the maximum use must be made of PPPs both by
the central government and by the states. Impediments in the implementation of large projects
should be speedily removed.
! Four critical challenges facing the economy in the Twelfth Plan, which are perhaps more serious
than they were at the start of the Eleventh Plan, are the challenges of
a) Managing the energy situation,
b) Managing the water economy,
c) Addressing the problems posed by the urban transformation that is likely to occur, and
d) Ensuring protection of the environment in a manner that can facilitate rapid growth.
! Difficult choices have to be made in each of these areas and both the central government and the
states have an important role in bringing about a successful outcome. The prize, if we succeed, is
that we will have put India in the small group of countries that have achieved the transition to
sustained high growth and elimination of poverty.
! Finally, the efficiency in implementation of projects on the ground needs to be greatly improved.
Most of what needs to be done in this context rests with state governments but the central
government must find ways of improving project design, prioritizing resources to fund well
designed interventions that work, devolving resources to lower levels and helping build capacity.

168!

Evidence-based evaluation is critical for redesign and prioritization.

! We need to greatly strengthen capacities in the area and the proposed Independent Evaluation
Office which is expected to be set up during 2011-12 will be a major step in this direction.

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

169!

Chapter!19!
Planning!then!and!now!L!An!analysis!of!
FYPs!in!India!!
A question frequently asked today is whether planning has any relevance in a world of
economic liberalization and the market economy. The short answer is that it does, but not the kind of
planning we practiced in the past which derived its rationale from the belief that centralized control
on resource allocation, with extensive intervention in private sector decision making, was necessary
to achieve rapid growth.
Amartya Sens article, which is reprinted in this volume but which first appeared in the
Seminar issue on Freedom and Planning almost fifty years ago, provides a flavour of the earlier
approach. Sen argued then that planning was necessary not only to achieve distributional objectives
which he points out is a traditional and much discussed basis for state intervention but also to
achieve a high rate of growth. He recognized that the industrialized world had achieved
industrialization without planning and acknowledged that we could also follow this path, but warned
that if we did, it would take us more than a hundred years to industrialize whereas the experience of
the socialist economies showed that a much faster transition was possible with socialist planning.
The superiority of socialism in achieving rapid growth was attributed to two reasons. First,
since capitalists seek profit maximization, growth in a capitalist economy is only a by-product of this
process, and therefore need not occur at the fastest possible rate. Second, even if capitalists want to
maximize growth, they would be less efficient at doing so because individual entrepreneurs do not
have all the information necessary to achieve the best results whereas a national coordinating
planning organization would have much more information and therefore achieve better ground
outcomes.
Sen also warned that planning as practiced in India, without a really socialist economy, with
a private sector responsible for producing consumer goods and a public sector concentrating on
producer goods, was unlikely to achieve results. The model suffered from internal contradictions
the middle path, as he put it, had run out and it was necessary to take a stand on whether we really
wanted a socialist economy. The case for planning was essentially a case for more comprehensive
socialism, and was in his view a strong case, but we would need to move to a socialist economy.
Things have changed enormously in fifty years and not surprisingly attitudes to planning
have also changed. The greatest change in perceptions that has occurred since Sens Seminar article
of fifty years ago is the discrediting of the technical argument that a centralized planning system,
led by a a coordinating national planning organization would be more able to achieve faster
growth. The costs of a centralized system of decision-making, relative to a decentralized approach of
letting a hundred flowers bloom are now much better appreciated. Centralization is of course
particularly dangerous where governance is poor but even when governance is not a serious
problem, centralization is likely to be inefficient because bureaucratic decision-making, subject to
multiple levels of accountability, is inherently sluggish, rule bound and unlikely to promote risk-

170!

taking. It suffers from greater inertia being less likely to acknowledge mistakes and change course
when evidence begins to suggest that it should.
Paradoxically, democratic governments are actually much more burdened than authoritarian
regimes in this respect, because accountability in a competitive political environment often leads to
dilatory procedures designed to ensure transparency and is vulnerable to constant challenges on
grounds of bias and ill-intention. This in turn suggests that our democratic system is likely to yield a
better economic performance, if it relies on an economy with greater reliance on market forces,
rather than one subject to constant political interference.
Another important change in the plan is that the experience of the socialist countries does not
point in the same direction as it did sixty years ago. Communism collapsed first in Eastern Europe in
the late 1980s and then in the erstwhile Soviet Union in 1990. Even more directly relevant for our
circumstances is the transformation in economic policy brought about by the Communist Party of
China, especially after 1984 (later imitated by Vietnam) which suggests that the way to rapid growth
in a developing country is more likely to lie in liberalizing economic policy, embracing market
forces and encouraging the private sector rather than moving from the mixed economy to something
closer to socialism and socialist planning.
Sen proved prescient, however, in the doubts he expressed in 1959 about the effectiveness of
planning as practiced in India and his misgivings were largely borne out over the next twenty years.
Indian planning did not succeed in achieving even moderate targets of five per cent growth set in the
early five year plans. Doubts also began to be aired about whether such growth as was taking place
was reaching the poor. Prime Minister Jawaharlal Nehru himself, while introducing the Third Plan in
Parliament in August 1962, said that per capita income had increased but a legitimate query is
made. Where has this gone? He went on to observe that he could see that people were better fed and
clothed but that does not apply to everyone. Some people have hardly benefited. Some people may
even be experiencing various difficulties.
The need to focus on delivering benefits to the common man led the Indian Planning
Commission to prepare a Perspective Plan aimed at bringing everyone up to a minimum level of
living within 15 years from 1961 to 1976. The Planning Commission strategy document concluded
that because the benefits of growth do not flow equally to all sections, this objective could be
achieved for the third decile from the bottom, if the economy grew at an average rate of seven per
cent per year over the period. However, even with growth at this rate, which was judged to be
feasible, the poorest two deciles would not benefit sufficiently to reach the minimum. Special
income transfer mechanisms would be needed to bring this group to the minimum level, but this
could be managed without disrupting the growth process.
As it happened, economic performance fell well short of the seven per cent target. The
average growth rate in the period 1960 to 1980 was only 3.5 per cent per year, famously described
by the late Professor Raj Krishna as the Hindu rate of growth. Interestingly, the failure on the
growth front did not lead, as it should have, to questioning the growth strategy itself. That came
much later, though the basic weakness was precisely the one identified in Sens article an effort to
control private sector activity excessively leads to conflicting incentives. Initially, the response of
the planners was to accept the low growth performance as unavoidable and to shift the emphasis on
anti-poverty schemes. This approach had little effect on poverty.
Indias growth performance improved significantly in the 1980s when the economy grew at
an average of 5-6 per cent per year. Interestingly, this was not because we became more socialist, but
because we learnt from the experience of other countries in East Asia and started to liberalize and

171!

give greater play to the market. These trends were initiated in the mid 1980s, when the government
became much less suspicious and more supportive of the private sector. The existing framework of
controls was not dismantled, but it was administered more liberally.
A much more explicit change in policy occurred after 1991, with an explicit acceptance of
the need to bring about a systemic change, albeit in a gradualist fashion. The private sector was freed
of much of the stifling controls that had been evolved over many years in the name of planning and
rational allocation of scarce resources. Much greater room was allowed for entrepreneurs to respond
freely to market forces with greater reliance on competition to increase efficiency. The economy was
also opened gradually to foreign trade and foreign capital.
Was this a dismantling of planning? Not if one takes the view that the purpose of planning is
to put in place policies that seek to exploit the growth potential of the economy and to push it to
achieve stated developmental goals. The change in policy was a considered response and the trend
has continued despite changes in government. The new approach to policy is evident not only in the
Centre but also in the states. The results in terms of economic growth have been impressive,
comprehensively refuting the critics who argued that the changes would lead to a collapse in
performance and perpetual foreign exchange crises. The average growth rate achieved in the Tenth
Plan 2002-03 to 2006-07 was 7.6 per cent per year, marginally short of the target of eight per cent
and a very far cry from the so called Hindu rate of growth. The past four years 2004-05 to 2007-08
have seen an average growth rate of close to nine per cent.
Growth is expected to slow down in 2008-09 to around eight per cent or possibly even a little
lower and there has been much focus on this deceleration in the press. However, cyclical variations
in growth are normal and would still represent an impressive performance in a year when the world
economy is slowing down significantly. Most observers agree that India is well set on the path of
rapid growth and the Eleventh Plan target of averaging nine per cent growth per year and setting the
economy at a 10 per cent growth path by the end of the plan period is eminently achievable,
provided supportive policies outlined in the Eleventh Plan are put in place.
The record is less impressive when we focus on distributional outcomes and this is rightly a
major concern of policy today. The percentage of the population below the poverty line is falling,
but far too slowly. Child malnutrition is very high at 40 per cent in 2005-06, with micro nutrient
deficiencies being even higher. Health facilities available to the population are well below what is
needed and access to quality education is still limited, especially in rural areas. The recently
approved Eleventh Plan recognizes these deficiencies and explicitly sets its objectives in terms of
inclusive growth. The plan aims at an average growth rate of nine per cent rising to 10 per cent at
the end of the plan period. In addition, to the traditional growth target it also sets 26 other targets for
indicators of social development.
This brings us to the question what sort of planning do we need to achieve these objectives?
First we must recognize that the instruments of planning must be very different in a market economy
that is increasingly integrated with the world. We do not need to set objectives in terms of detailed
output targets emerging from multi-sector input output based models of the economy and then try to
direct private investment to meet these sub-sectoral growth projections. Sectoral balances aimed at
matching demand and supply in 200 sub-sectors used to be the staple of planning exercises in India,
but they are meaningless for sectors where the output is importable and foreign trade is liberalized
because any excess demand for a particular product can be made good by imports. The planning
problem is in effect reduced to the problem of managing the resulting balance of payments.

172!

This is one problem we have actually handled very well. The liberalization of the past fifteen
years has clearly established that it is not necessary to control imports as we used to in order to
manage the balance of payments. In fact, the complex system of import controls that was ostensibly
designed to conserve scarce foreign exchange, actually served only to provide open-ended protection
for domestic producers against foreign competition. It led to a high cost and low quality domestic
production structure, which in turn reduced Indias capacity to produce exportable quality products
at competitive prices. It also promoted extensive corruption associated with running a complex and
highly discretionary import control system.
It is worth noting that ever since we adopted import liberalization and a market driven
exchange rate in 1993 a shift that was accompanied by a cacophony of warnings that liberalization
would bring a balance of payments crisis we have actually never had a foreign exchange crisis!
The problem, if anything has been the reverse. We have had a surplus of foreign exchange and are
debating how best to use it.
Was this liberalization a dismantling of planning? Not really, unless we mistake particular
instruments of control for planning. It was in fact a recognition that good planning involves putting
in place policies that will allow the economy to perform to its full potential and a private sector
dominated economy needs to give much greater freedom to private enterprise within the framework
of a competitive economy. This is not to say that reliance on markets will take care of all objectives.
It will not take care of distributional objectives since not everyone will benefit sufficiently from
exclusive reliance on markets. It also does not take care of market failures, which warrant corrective
action. These problems need to be addressed through carefully crafted policies and programmes
involving suitably designed government intervention at multiple levels. There is also a role for
planning to sketch out a broad perspective of the economy evolving over a longer term which can be
called indicative planning.
By indicative planning, I mean defining broad national goals and objectives, and presenting
an internally consistent picture of the evolution of the economy in a manner which achieves these
national over a defined time horizon. In India, for example, if we could set the goal of achieving
some target level of per capita income over a specified period say increasing our per capita income
from $1000 today to $5000 over 20 years combined with corresponding improvements in the access
of the population to a basic minimum level of living over this period. Indicative planning can then be
used to outline broad challenges in achieving this goal.
If population growth over this period averages say 1.3 per cent per year, then GDP will have
to grow at an average rate of about 10 per cent per year for per capita income to reach $5000 in 20
years. It is a legitimate planning exercise to explore the medium to longer term implications of such
growth to identify some of the major challenges it poses.
We do not need to develop detailed multi-sector models looking for precise estimates of the
domestic production requirement of individual commodities and the inputs needed for them.
However, we do need to examine broad areas of feasibility in terms of the levels of domestic savings
and investment needed for this growth, the financial structure and investment climate which that
requires in an economy driven by the private sector and open to the world, the implications of such
growth for Indias interaction with the rest of the world, and finally the effort we need to make to
develop the technological capacity to help achieve our national objectives. If India is to become the
country with the third largest GDP in the world after China and the USA (in that order), it is relevant
to ask what is the nature and quality of our educational and scientific institutions and the interaction
between our private corporations and research and development consistent with this goal.

173!

Indicative planning can help to highlight the longer term structural changes that are likely to
arise as a consequence of such growth and the challenges they pose in terms of action to be taken
sufficiently in advance. For example, what would a 10 per cent growth, and the growth of
manufacturing of around 14 per cent per year, mean in terms of the pace of urbanization and are our
systems for urban planning capable of responding to this challenge? If our urban population over this
period increases by about 150 million, are our urban systems of government, and their financial
arrangements, capable of supporting such an expansion especially considering the enormous
improvement needed in the quality of urban infrastructure? What are the energy requirements of
such growth and can they be met from available energy sources with a modicum of assurance of
energy security? If the price of conventional energy is expected to rise sharply will this affect our
growth potential and can we take steps to minimize this effect? As pointed out earlier, we do not
need to worry about ensuring adequate sectoral supplies of most items that are importable, but we do
need to worry about tradable goods such as petroleum and coal which though importable are likely
to become globally scarce, and therefore very high priced.
Planning is also needed to ensure adequate growth in domestic capacity in the non-tradable
sector, where imports are not an option. This includes development of most basic infrastructure such
as roads, ports, airports, telecommunications, electricity and also basic urban infrastructure,
including water supply and sewerage. In all these areas, investments involve considerable resources
and long time-lags and often require government initiative and support. It is necessary to define the
tasks before the government (both Centre and the states) well in advance and to take steps now for
the future.
Indicative planning can draw attention to critical areas and identify difficult policy choices
for overall goals to be achieved, but it does not necessarily have to specify precise targets and
instruments for achieving these goals. Often its role is to draw attention to the problems, indicate a
broad direction for the solution and stimulate debate and discussion overcoming these problems, a
debate in which numerous stakeholders get involved before workable policies are implemented.
To be relevant, planning today also has to recognize that the private sector, which includes
farmers, small enterprises and organized industry, accounts for 75 per cent of total investment and
the dynamism of this sector is therefore a critical determinant of overall economic performance.
Planning in this environment has to be based on the assumption that decisions in individual firms
and farms have to be left to individual entrepreneurs and farmers. The government can play a role in
encouraging investment to flow in directions suggested by indicative planning but it cannot expect to
direct this flow through direct controls.
The instruments through which some direction is possible include fiscal incentives, special
treatment in the matter of credit from the banking system, access to external commercial borrowing
which is still controlled, and occasionally special support in providing common infrastructure.
Equally important is the need to remove impediments to private investment. While the most obvious
impediments in the shape of investment licensing requirements were removed long ago, there are
many other impediments which need to be tackled, many of which are at the level of states.
Policies relating to land availability for industry present major problems at present. It is
widely believed that land acquisition policies in the past have been unfair to those whose land is
acquired in terms of the compensation paid and also the rehabilitation required. Lack of clarity and
demonstrable transparency in this area can seriously impede the achievement of 10 per cent GDP
growth since that almost requires expanded availability of land for industrialization manufacturing
is expected to grow at around 14 per cent. It also implies a substantial increase in urbanization which

174!

also involves rational land use policy. This is an area where initiatives are needed both from the
Centre and the states since land use is a state subject.
While much of the approach to the private sector is guided by the presumption that the best
results are obtained by leaving the private sector to function in a competitive environment, this is not
a sufficient response since the activities of the private sector are not necessarily limited to areas
where competitive markets prevail or can even be created in principle. For example, there is a
potentially large role for private investment in infrastructure development. However, these sectors
also have the nature of a limited monopoly and wherever this happens, it is necessary to evolve a
policy framework which balances the private sectors need for entrepreneurial freedom and the
potential to earn reasonable profits with the consumers need to be protected from monopolistic
pricing and slippages in quality.
The Eleventh Plan emphasizes the need for PPP as a strategy for achieving the large
investments that are needed in infrastructure with the limited resources available in the public sector
by leveraging these limited resources with private investment wherever possible. A large number of
PPP initiatives have been launched in pursuance of this policy in both the Centre and the states.
Some of these involve a revenue share accruing to the public sector (e.g. in airports, ports and some
highly profitable toll roads). Others involve the government having to bear a part of the cost either
by giving a capital subsidy (as in many national highway projects) or by allowing the private sector
entrepreneur to earn profits from associated land development, as in some highway projects and
metro developments. In all these areas, governments have to play an active role to make things
happen and to make them acceptable.
There is often suspicion that the terms of a PPP concession may be too favourable to the
operator with not enough protection for the consumer. These suspicions can be overcome through
appropriately transparent concession agreements which clearly establish the obligations to be borne
by the concessionaire and there is need for a credible regulatory mechanism which can protect the
interests of consumers. Further the award of PPP concessions needs to be based on robust
competitive bidding and not on negotiated contracts to ensure that the public interest is fully
protected. As the Eleventh Plan emphasizes, the PPP strategy can only succeed if it is seen as
attracting private resources for public purposes and not diverting public resources for private
purposes. How to devise policies which produce such an outcome is a challenging task.
It is evident from the above that planning for the private sector is more in the nature of
policy planning and not planning by direction. This process cannot be made the exclusive
responsibility of a single planning agency. Policies pertaining to individual sectors where the private
sector plays an important role have to be developed through interaction with many stakeholders.
Producer representatives, consumer groups, the ministry concerned, the Finance Ministry, the
Planning Commission and the Law Ministry all play a role. Inter-ministerial interaction, rather than
hierarchical, top down planning is what is needed to convert indicative plans into policy initiatives.
One reason why the need for planning is questioned in todays environment is the belief that
planning must be limited to government decisions and liberalization should involve a drastic
reduction in the role of government. This is, however, a simplistic notion since the size of the
government measured by the share of government expenditure in GDP, is much larger in the OECD
countries than it is in India, once social security expenditure is included, as it must be. Reformers in
India as elsewhere have repeatedly emphasized that economic reforms do not imply that the role of
the government must be reduced, but only that it must be restructured. The responsibility for
planning and monitoring the performance of government in its restructured form remains large.

175!

In a market economy with a mature private sector the government does not have to engage
directly in establishing new productive units wherever the private sector can set up capacity and
function subject to the discipline of competition. However, there are a number of areas where
expansion in capacity is desperately needed and is unlikely to materialize if we rely only on the
private sector and market forces. These include investment in education and health, in rural
infrastructure, in housing for the poor and in slum development, all areas crucial for achieving
distributional outcomes and inclusion. The Eleventh Plan signals a major restructuring of plan
expenditure towards these sectors.
This restructuring is most evident in the case of education where the share of total plan
expenditure (Centre and states taken together) devoted to education has increased from 7.8 per cent
in the Tenth Plan to 19.4 per cent in the Eleventh Plan. The share of expenditure devoted to health is
also projected to increase significantly. The increases in expenditure shares for these sectors are
accommodated by a decline in plan expenditure devoted to industry and also to certain infrastructure
areas where a large part of the increase in investment needed will come from the private sector.
The shift in focus of government activity to the delivery of essential services to the aam
aadmi also means that the effectiveness of delivery depends on the state governments. If we want to
improve the functioning of schools for school-going children and of anganwadi centres for preschool children, of primary health centres and sub-centres and district hospitals, if we want to
provide drinking water to our villages and improve sanitation, and if we want to spend on land
development and water management projects that will increase income generation capacity in rural
areas, the central government can provide resources for these programmes, but the outcome depends
on the functioning of local administration, which is entirely within the domain of state governments.
It is a common complaint that plans provide resources, but implementation at the ground level is
very poor. There are two possible reasons for this. One is that the intervention itself is not designed
to achieve its results and the other is that the service providers at the ground level are not
accountable to the local community. Both are planning problems.
The issue of programme design is extremely important as we shift into areas such as
education and health where there are considerable differences of view on how a particular objective
can be best achieved and the end result is not immediately measurable. The success of a steel plant
in producing steel is more easily observed once the plant has been set up and even its cost
effectiveness relative to other technologies can be relatively easily measured. The same is not true of
a school since schools can be built and even function in the sense of having students and teachers but
they may not produce good quality education. Independent surveys conducted by organizations such
as Pratham have thrown up startling results showing that a very large percentage of children in class
V cannot read material meant to be read by children in class II and much the same holds true for
simple arithmetic.
The problem is easy to identify but it is not easy to determine how to remedy the situation. Is
our education poor because teachers appointed to these schools do not attend school or, are they too
poorly trained? Is it because the motivation level of the children is not high enough or do poor levels
of nutrition reduce learning ability? Or is it because the family circumstances of children from
poorer families militate against learning achievement? In practice it is possible that all these factors
are at work, and have to be tackled simultaneously.
Similar issues arise with regard to programme design in the area of health and nutrition. In
short, achieving results in these areas is not simply a matter of spending money or even monitoring
the implementation of schemes. Monitoring badly designed interventions does not produce results.

176!

We need to remain open to programme redesign keeping in mind the results observed with existing
programmes at the field level.
Subjecting government programmes to scientifically based evaluation should be a mandatory
part of policy planning and a pre-requisite for continued funding. We need to measure governments
contribution to development in particular areas not by the scale of expenditure in programmes in
those areas as is often the case, but by the effectiveness with which it achieves results. Such
evaluation should in turn feedback constantly in adjusting the design of programmes to impose
effectiveness. This task is especially difficult in the social sectors, where interventions have to be
designed taking account of numerous social and sociological considerations if we are to deliver end
results.
The shift in plan priorities to the social sector also poses important implementation problems
because the actual delivery of services takes place at the local level. The relevant machinery is that
of the state governments but they too have constraints. It is difficult to find doctors to fill positions in
rural areas so we have hospitals without specialists. It is difficult to enforce accountability so teacher
absenteeism in primary schools is very high. The solution usually recommended is to devolve
control over the finances and functionaries for these services to local elected bodies the panchayati
raj institutions and urban local bodies and this is currently being attempted, but the success
achieved varies from state to state.
Contrary to the image of planning involving centralized control, in fact it involves a complex
web of relationships between the central government, the state governments and the panchayati raj
institutions in which the scope for enforcing conditions is limited. The central government
increasingly provides resources to support activity in the social sectors which are in the domain of
state governments and local administrations. 3Most observers believe that the effectiveness of
delivery would be greatly increased if both finances and control over functionaries were to be
devolved downwards to panchayati raj institutions. This is generally agreed as a principle, but many
state governments are reluctant to implement it in practice. Success will also require considerable
efforts at capacity building at the local level, and constant experimentation with considerable
variation across the country reflecting region specific circumstances.
The core of the argument sketched out above is that the transition to a market economy does
not eliminate the need for planning but makes the challenge of planning very different from what
was once envisaged. It is relevant to ask what role does the Planning Commission have in the new
dispensation. One thing is clear the Planning Commission cannot be an overarching control body
setting targets for different sectors and enforcing them through some combination of public
investment and control over private investment. However, there are several distinct tasks which need
to be performed and in our system, can be performed by the Planning Commission.
One task is to prepare indicative plans which explore the feasibility of and implications of
alternative scenarios of faster growth over a longer term horizon. An important change from the past
is that the Commission no longer relies more or less exclusively on an in-house plan model. Instead,
it draws on the work of many different institutions which have evolved different types of models
with interesting differences in methodology and sectoral disaggregation. This quantitative projection
role remains highly relevant and needs to be strengthened with greater reliance on independent
research institutions.
A second task is preparing plan budgets. This involves negotiation with the ministries on
perceived needs and with the Finance Ministry on available resources. The outcome of this
negotiation is an agreed level of plan expenditure which is then distributed across competing

177!

ministries and also in part to state governments. The Planning Commission also interacts with state
governments to persuade them of the need for undertaking sufficient levels of expenditure in critical
areas such as agriculture, health, education and infrastructure. The commissions ability to affect
state government decisions is limited, but it can in principle play the role of interlocutor, advisor,
honest broker, persuader and to some extent, also incentiviser. Incentives to the state government
take the form of central government schemes in different ministries which require some contribution
from the state government thus encouraging state governments to shift their own resources.
Finally the commission must perform the task of providing a critical evaluation of policies
and their effectiveness. Ministries should obviously do this continuously and they do, but a ministry
reviewing its own policies cannot always produce an objective evaluation. A second and more
independent opinion is surely necessary. This is especially so since policy in one area often impinges
on policies in other areas and ministries are often not in a position to assess, let alone argue the case
for, the need for changes in policies in other areas. The Planning Commission is particularly well
placed to take a cross ministerial view taking account of other constraints on the economy.
Energy policy for example is a classic example where a coordinated approach is necessary.
The principles applied for one form of energy should in principle apply also to other forms of energy
and where they are different we should be able to rationalize the difference in terms of specific
characteristics. Since energy as a subject is dealt with by several different ministries (power,
petroleum, coal, atomic energy, non-conventional energy and also involves ministries such as water
resources, mining, etc.) the need for a cross-ministerial view is overwhelming.
For all these reasons, planning now has to be very different from planning then. It is in
recognition of this difference that China recently renamed the Planning Commission the National
Development and Reform Commission. We have not renamed the Planning Commission but then a
rose by any other name will smell as sweet! In practice, our system is also moving to achieve the
much more difficult task of planning for the new economic environment. It is a process that has to
rely more on persuasion than directions and has to be much more consultative than in the past.

178!

Chapter!20!
Mobilization!of!Resources!and!The!Role!of!
Monetary!Policy!
! Mobilizing is the process of assembling and organizing things for ready use or for a achieving a
collective goal. The term mobilization of resources should be seen in the same context.
Mobilization of resources means the freeing up of locked resources.
! Every country has economic resources within its territory known as domestic resources. But
often they might not be available for collective use. The percentage of resources used when
compared to the potential is often very low. For a country to grow, identification and
mobilization of its resources is necessary. It should be available for easy use and for central and
state level planning
! . So the first task here is identification of resources.
Types of Resources of India
1. Natural Resources Coal, Petroleum, Natural Gas, Water, Spectrum etc.
2. Human Resources The labour force and intellectual capacity of a nation.
! The proper utilization of these resources leads to generation of economic resources savings,
investment capital, tax etc. While mobilization of resources is considered, the mobilization of
economic resources (financial resources) should also be studied.
Mobilization of Natural Resources
! India, though a country with sufficient reserves, due to policy bottlenecks, is importing coal and
iron. This is increasing our Current Account Deficit.
Mobilization of Human Resources
! Organizing human potential for ready use is necessary for growth of India. In-fact, as country of
125 crore people, India now is eyeing more on its human resource potential. The demographic
dividend is also in favour of India.
Adding in points, the glimpse of the topic for easy understanding
" Mobilization of human resources highlights the need to empower human resources.
" Weaker sections like women, children, SC, ST, OBCetc should be brought into mainstream.
" There should be right employment opportunities for human resources, and when there is lack
of skill the job demands, there should be skill development programs.
" Utilize the demographic dividend.
" India is currently levering on its technologists engineers, doctors and scientists.

179!

Mobilization of Financial Resources

! If a country needs to grow, more goods and services should be produced. The production can be
done by government sector, private sector or in PPP mode. But for that, the economic resources
of a country should be mobilized.
! In India, despite having good savings rate, domestic investment is less. Indians are investing in
less productive assets like gold and consumer durable. If India needs to grow, there should be
more investments in agriculture, manufacturing or services.
" In India, tax collected is very less. The tax base has to be widened.
" Four factors of production - land, labour, capital and organization should come to together.
There should be an atmosphere for growth and investment.
" Organizations do not spontaneously emerge but require the mobilization of resources.
" In modern capitalistic society, these resources are more free flowing and are easier to
mobilize than in more traditional societies. Many factors impact the development of the
organization.
" Initial Resource Mix: There are various resource needs in a starting organization (technology,
labor, capital, organizational structure, societal support, legitimacy, etc.). But the right mix of
resources are not always available.
" The most important resource of an organization is its people.
" More savings and more productive investment.
How does public sector mobilize domestic resources?
1. Taxation.
2. Public revenue generation for investment in social services and infrastructure.
How does private sector mobilize domestic resources?
! The private sector mobilizes the savings of households and firms through
financial intermediaries, which allocate these resources to investment in productive activities.
Issues with mobilization of resources
! Issues with mobilization of resources include all those issues and problems highlighted in
mobilization of natural resources, human resources and financial resources.
Why is Domestic Resource Mobilization (DRM) particularly important?
! In low-income countries confronting widespread poverty, mobilizing domestic resources
is particularly challenging, which has led developing countries to rely on foreign aid, foreign
direct investment, export earnings and other external resources. Nevertheless, there are
compelling reasons to give much more emphasis to DRM.
" Greater reliance on DRM is vital to elevating economic growth, accelerating poverty
reduction and underpinning sustained development.
" High-growth economies typically save 20-30 per cent or more of their income in order to

180!

finance public and private investment.

" DRM is potentially more congruent with domestic ownership than external resources.
" Foreign aid invariably carries restrictions and conditionality.
" FDI is primarily oriented to the commercial objectives of the investor, not the principal
development priorities of the host country.
! DRM is more predictable and less volatile than aid, export earnings, or FDI.
Financial Resource Mobilization
! The saving and investment process in an economy is organized around a financial framework
that facilitates economic growth. A well designed financial system promotes growth through
effective mobilization of savings and their allocation to the most productive uses by either
following a centralized approach or a decentralized approach or a combination of both.
Typically, economies with underdeveloped capital markets adopt a centralized approach,
whereby financial intermediaries mobilize resources from savers and allocate them to borrowers.
! Traditionally, banks have played a critical role in the financial intermediation process as they are
able to deal more appropriately with transaction costs and information asymmetries in a financial
system. As financial markets develop, transaction costs and information asymmetries reduce, the
decentralized approach for guiding the saving-investment process also gains significance, and
households with surplus resources increasingly invest in capital market instruments. The
historical experience shows that virtually in all the economies, including the marketintermediated ones, banks have played a central role in resource mobilization and supporting the
growth process, and that the development of banks and other intermediaries has itself facilitated
the development of financial markets.
! The genesis of banks role in the resource mobilization process lies in firms relying critically on
external sources of finance, especially in their formative stages. In particular, banks have played
a key role in coordinating investment efforts in many economies such as Belgium, Germany,
Italy and Japan in engineering take-offs during their critical phases of development. Resource
mobilization by banks became a critical factor in their ability to act as catalysts of economic
development.
! During the take-off stages of these economies, large and powerful banks initially relied on
capital contributions from a small number of founders and thereafter as their industrial lending
portfolio grew, they took recourse to deposits as a major source of funds. With the development
of markets, borrowings also became an important source of funds for the banks.
! Historically, financial intermediation by banks has played a central role in India in supporting the
growth process by mobilizing savings, particularly after the nationalization of the 14 major
private banks in the late 1960s. Banks have been particularly instrumental in mobilizing deposits
from the household sector, the major surplus sector of the economy, which, in turn, has helped
raise the financial savings of the household sector and hence the overall saving rate.
Notwithstanding the liberalization of the financial sector and increased competition from various
other saving instruments, banks continue to play a dominant role in the financial intermediation
of the Indian economy.

181!

! The deregulation of interest rates has opened up new avenues for banks to mobilize funds at
competitive rates. Moreover, banks, by virtue of being the ultimate platform for clearing and
settlement for all financial transactions, provide accounts and resources to other sectors as also
other financial intermediaries.
! The Indian economy has witnessed robust growth performance in recent years and banks have
played a major role in providing the required amount of resources. In order to sustain the growth
process, banks would have to continue to provide funding on a large scale. In India, there exists
an enormous potential of savings in rural and semi-urban areas. Also, in India quite a large part
of domestic savings is locked up in unproductive physical assets.
! The mobilization of savings from hitherto untapped areas and conversion of physical savings
into financial savings would necessitate introduction of appropriate products to suit the demand
of savers. Banks are indeed in an ideal position to do so because of certain inherent
characteristics of deposits such as safety and liquidity.
! Apart from mobilization of deposits, banks, for meeting their resource needs, also depend on
non-deposit resources both at home and abroad. A part of non-deposit resources comes from
borrowings, which help augment the funding needs of the banks instantly. However, they also
pose a challenge in terms of their availability and management of borrowing costs, amidst
potential interest rate and exchange rate risks. Thus, an effective use of borrowings requires a
system of appropriate risk management by banks.
Emerging Issues and the Way Forward
! As the Indian experience shows, the acceleration of economic growth has been largely enabled
by the sustained increase in the level of domestic savings, expressed as proportion of GDP.
Historically, household savings have been the mainstay of the gross domestic savings of the
Indian economy. In recent years, however, there has been sharp increase in the private corporate
savings and public sector savings rates, reflecting strong growth in corporate profitability and
fiscal prudence due to the implementation of the Fiscal Responsibility and Budget Management
(FRBM) Act, 2003.
! It may, however, be noted that the improvement in corporate sector savings on account of higher
profitability was largely an outcome of the reforms pursued over the years, whereby forces of
global competition and conducive policy environment led to an improvement in productivity and
efficiency. In the years ahead, acceleration in the saving rate of the private corporate sector may
not continue at the same scale in view of the fact that the early benefits of reforms reaped by the
corporate sector, especially by deleveraging of balance sheets, may not be available at the same
scale in future (Mohan, 2008).
! Similarly, with the Central Government budgeting a revenue deficit of 1 per cent of GDP instead
of 0 per cent of GDP as stipulated under the FRBM Act for 2008-09 and further risks to fiscal
consolidation from various factors, including the expected pressures from the implementation of
the Sixth Pay Commission award, there would be limits to further increases in public sector
saving rates in the short run. Therefore, improving the household sector saving rate should
constitute the main plank for sustaining the overall domestic savings in the Indian economy.

182!

! In this regard, it may be noted that the share of financial savings (net of financial liabilities) in
total household savings has declined by almost 10 percentage points to around 47 per cent in the
current decade, reflecting higher savings in physical assets. Accordingly, a major challenge
would be to raise financial saving rate which would depend on further deepening of the financial
sector through introduction of new instruments with features catering to the household sectors
requirement consistent with their risk-return and maturity profiles as well as through the
continuation of insurance and pension reforms.
! Furthermore, another challenge would be to release resources of the household sector held in
physical assets over and above the genuine requirement for savings in various financial assets.
Although households continue to hold their financial savings mainly in the form of bank
deposits, there was a significant decline in its share in total financial savings from an average of
around 45 per cent during 1970-1984 to around 37 per cent during 1995-2005, before increasing
to 51 per cent in the last two years.
! The recovery partly reflects the aggressive efforts at mobilization of time deposits by banks from
2005-06 onwards to meet high credit demand and was partly facilitated by the Government
measure of extending tax incentives on special bank deposit schemes. The interest rate
differential between small savings/post office deposits and bank deposits, which narrowed down
initially, turned subsequently in favour of bank deposits in view of unchanged interest rates on
small savings/post office deposits, which also made the bank deposits more attractive.
! Accordingly, the sharp jump in time deposit growth reflected to an extent some switch away
from small savings, signifying only a portfolio shift and it is a moot question as to whether the
current trend would be sustained. Therefore, to sustain the recent trend in deposits, banks need to
tap hitherto untapped savings, especially in rural areas, by introducing appropriate deposit
schemes suitable to savers with various risk and return profiles.
! The current phase of high growth has been supported by a step up in the household gross
financial saving rate, which, in turn, has been led by aggressive mobilization of deposits by the
banks. It is observed that the increase in the growth rates of real GDP from 5.8 per cent during
1992-93 to 2002-03 to 8.8 per cent during 2003-04 to 2006-07 was supported by the household
gross financial saving rate increasing from 12.1 per cent of GDP to 15.6 per cent. Over the same
period, the ratio of bank deposits to household gross financial savings increased from 36.7 per
cent to 44.0 per cent.
! A sensitivity analysis based on these trends shows that raising real GDP growth by one
percentage point would require 1.2 percentage point increase in the household gross financial
saving rate (gross financial savings/nominal GDP) in the current phase of economic growth.
This, in turn, would require the ratio of bank deposits to gross financial savings to grow by 2.5
percentage point. In the light of the growing resource requirements for sustaining the high
growth momentum of the Indian economy, banks would have to reassess their traditional
strategies of resource mobilization, including from the rural sector.
Implications of Changing Pattern of Bank Deposits

183!

! Following the financial liberalization since the early 1990s, some shifts have taken place in the
ownership pattern of bank deposits. The household sectors share in aggregate deposits has
steadily declined, while the shares of the Government and corporate sectors have increased. The
decline in household sectors share reflects mainly the sharp fall in their shares in term deposits.
! The increased interests from the corporate and Government sectors reflects the favourable impact
of successive shortening of the stipulated minimum maturity of time deposits as well as the
policy of allowing banks to offer differential interest rates on wholesale term deposits. Another
notable feature in respect of time deposits has been the decline in the share of deposits of over
five years maturity across all the sectors, reflecting availability of alternative saving instruments
with attractive returns. This phenomenon is not confined to India alone and was observed in
several other countries, as was alluded to earlier.
! As the financial sector develops, the share of non-deposit saving instruments tend to increase at
the expense of bank deposits. This trend is expected to accentuate in the coming years. The
challenge, therefore, for the banks is to mobilize hitherto untapped savings and to improve their
services to not only retain their existing depositors but also attract new depositors.
! They would also have to widen their deposit base through exploring new opportunities thrown up
by the recent emphasis on inclusive growth and financial inclusion. As the growth process
strengthens and becomes more inclusive, it is expected that demand for financial products would
accelerate rapidly, necessitating a greater penetration of banking services.
Changing Demographics and Financial Services
! Banks also have to recognize the changing saving patterns associated with the changing
demographic profiles. The proportion of population in the working age group of 15-64 years is
expected to increase steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026. Accordingly,
the dependency ratio (ratio of dependent to working age population), which declined from 0.80
in 1991 to 0.73 in 2001, is expected to decline further to 0.59 by 2011 (GoI, 2008).
! The changing demographics appear to have played a role in the shift in composition of
household savings towards physical assets, especially reflecting housing demand. Accordingly,
banks would also need to devise innovative strategies of mobilizing surplus resources from a
progressively younger age profile of savers. Another noticeable feature emerging in India is that
public sector employment, which grew by an average of 1.53 per cent per annum during 19831994, declined by 0.70 per cent during 1994-2005.
! On the other hand, growth in private sector employment in the organized sector accelerated from
0.44 per cent to 0.58 per cent over the same period. With the private sector leading the growth in
organized employment, there would be an increased demand for varied financial products such
as insurance and other contractual saving instruments consistent with the changing risk-return
profiles of the working age population.
! The changing demographics and employment patterns would generate demand for a wide range
of financial services such as insurance, housing and other financial products with innovative
features. In order to reap the benefits of the changing demographics and employment patterns,
banks would have to re-orient their role as financial intermediaries beyond the traditional

184!

confines of passive deposit mobilization and lending by providing a package of financial services
as demanded by the customers. Ipso facto, the customers would be keeping their deposits with
the banks.
Rural Deposit Mobilization Need for Innovations
! Against the backdrop of a decline in the share of rural deposits in total deposits of SCBs since
the 1990s, there is a need to step up efforts to access rural savings to raise the overall deposit
mobilization of banks. Although there are many challenges, the rural sector throws up vast
opportunities for banks to reap the benefits of low cost large deposit base, which may not be
available to other financial intermediaries. The international experience provides some useful
lessons in this regard.
! The rural sector harnesses the power of providing small amounts of household savings which can
be mobilized by the banks that can be made available for productive uses to rural and agricultural
enterprises. A major challenge faced by banks in rural areas is that deposit transactions often
involve small amounts and display irregular patterns reflecting seasonality and erratic nature of
small scale income generating activities.
! In order to cater to this demand, many banks in the Philippines have adopted piggy banking
concept, whereby small locked boxes were provided to the savers to be maintained at their
homes after opening of the savings account with a minimum deposit. The keys were kept with
the banks. This allowed the clients to save small amounts on a daily basis in their boxes and
bring them to the banks when they intended to deposit their savings. This enabled reduction in
banks time on collections (USAID, 2005).
! Another major challenge lies in identifying appropriate technologies to reduce significantly the
costs of doing rural business that result from low population density and poor physical
infrastructure. While technological and management information system (MIS) solutions are
necessary to overcome this challenge, their impact on the efficiency, quality of services, bottom
lines and outreach potential of the banks need to be carefully assessed.
! For instance, local technology firms in the Philippines helped develop open source software to
meet the specific needs with multiple branches and units and the central banks data processing
and reporting requirements. This software allowed customization of the technology by the rural
banks and its flexible adjustment in tandem with additions or changes in products. It proved to be
high quality and cost effective system that improved the banks ability to quickly and efficiently
handle multiple transactions and more clients.
! Thus, although there are challenges in tapping rural savings, the international experience shows
that these challenges could be met effectively by adopting some innovative methods. The
experience of other countries with suitable adaptations can be a guide to the banks attempting to
expand their outreach in the rural sector and boost rural savings.
Competition from Other Intermediaries/Markets
! With greater avenues for the deployment of funds and the prospects for higher returns enabled by
the development of markets, investors progressively diversify their portfolios across instruments

185!

and institutions, thereby demanding financial services for management of cross-sectional risks.
This leads to a change in the nature of the demand for intermediation services, whereby investors
look beyond stable returns offered by bank deposits while parking their surplus funds. This, in
turn, leads to the emergence of a number of specialized intermediaries/markets that are able to
cater to the evolving investor requirements.
Against the backdrop of the ongoing financial innovations following the adoption of financial
liberalization in India in the early 1990s, equity market related instruments such as equity shares
and units of mutual funds have been gaining importance in view of their higher returns, albeit
with higher embedded risks. To an extent, this trend has resulted from the natural process of
financial market development, whereby new instruments gain popularity with a decline in
transactions cost and asymmetric information. By enabling investors in better assessment of riskreturn perceptions, this has widened the choices of investments.
With traditional deposit base of banks shrinking with these developments, there is a need for
them to extend their outreach to prospective depositors/investors by expanding the ambit of the
specialized financial services offered by them by repackaging and redesigning of products to suit
individual needs. Banks, however, face various constraints compared to non-banks while
diversifying their activities.
First, non-banks are able to manage their resources more effectively by having a leaner cost
structure and quickly adopting new technologies, thereby offering higher returns. Furthermore,
non-bank intermediaries such as brokerages, asset management firms and mutual funds are able
to offer specialized services like cash management and wealth management for various investors,
including high net worth individuals.
Second, unlike non-banks, banks are often subjected to various regulatory requirements such as
statutory stipulations of reserve requirements, directed lending, prudential regulations driven
provisioning requirements and limits on capital market exposures. While these measures promote
financial stability, they constrain the diversification opportunities thrown by a developing
financial system.
Third, special deposit schemes announced by the Government from time to time which offer not
only higher returns but also provide tax incentives, boost effective returns vis--vis the traditional
bank deposits, thereby constraining banks effort at deposit mobilization.
While various restrictions on banks and prudential requirements may be justifiable from the
special role banks play in the system, the policy anomaly arising out of tax benefits needs to be
removed to provide banks a level playing field.

Need for Continued Focus on Deposits

! Banks have the benefit of low cost deposit base which, to an extent, make them immune from the
day-to-day market volatilities. Thus, the core deposit base serves as a source of stored liquidity
which is durable as compared with borrowed liquidity originating from the market. Another
distinguishing feature is that while deposits rates are relatively more rigid, interest rates on
borrowing vary more flexibly in tune with the market conditions.

186!

! During periods of favourable macroeconomic conditions characterized by abundant liquidity and

low nominal rates, the low perception of financial risks often induces financial market
participants to undertake progressively higher risks. On the other hand, during periods of
turbulence caused by any unforeseen event, the resultant reassessment and repricing of risks by
investors trigger heightened uncertainties in the market and thereby expose the excessively
leveraged entities to the risk of default.
! Therefore, while accessing the market for borrowed liquidity have the benefits, the probability of
excessive leveraging associated with borrowings calls for adequate safeguards to protect the fund
base from unforeseen events. This was borne out by the Northern Rock crisis, a UK-based bank,
which had a higher share of borrowed liquidity vis--vis stored liquidity. Faced with problems in
mobilizing funds from the market due to the tightening of credit conditions, the performance of
the bank was adversely affected prompting depositors to withdraw their money in large numbers,
which ultimately resulted in a bank run.
! Banks in India have traditionally relied on deposits for their funding requirements. Their reliance
on borrowings has been insignificant. As the economy expands and the demand for funds
increases, banks at times may find their deposit resources to be insufficient for meeting the
growing demand, thereby encouraging them to raise funds by way of borrowings.
! Going by the Northern Rock experience, heavy borrowing by banks has serious implications,
especially during financial distress, and, therefore, too much reliance on borrowings needs to be
avoided. In case banks resort to such borrowings, they also need to adopt appropriate internal
risk management strategies. In particular, while the increased flexibility given to banks in India
in recent years opens up new opportunities for raising resources, the enhancement of associated
risks would demand appropriate management of their liabilities through minimizing costs along
with mitigation of risks arising from adverse movement in interest rates and exchange rates.
They need to regularly review their business strategies so that they are in a position to combine
longer term viable financing with profitability in operations.
Need for Skill Development in Banks
! Banks while gearing to face competition from non-banks and capital market instruments both at
home and abroad, which is likely to increase in future, would have to appropriately price and
package their products to remain competitive, which would demand appropriate skill
development at bank levels.
! While banks have the potential, they need to invest significantly in skill enhancement at all
levels, for developing innovative products and delivering new service modes in the face of
increased competition. Public sector banks face added challenges while attracting and retaining
new personnel in the face of rigid compensation structures in comparison with private and
foreign sector banks.
Implications for Monetary Policy
! Moving forward, resource mobilization that dovetails into the transition to the higher growth
trajectory is likely to lead to more product innovations on the part of both banks and non-banks.

187!

With the blurring of distinctions between banks and non-banks from the functional perspective
and increased substitutability of bank deposits with other saving instruments, the assessment of
monetary aggregates for drawing policy perspectives would have to be carefully undertaken.
! Furthermore, addition of new features into the financial instruments would have implications for
the conventional mode of accounting based on identifiable characteristics of money. With the
growth process strengthening and becoming more inclusive, the demand for housing, urban
services, retail and utilities is expected to be scaled up as disposable incomes grow.
! In such a scenario, it is likely that growth in bank credit and monetary aggregates might deviate,
and persistently so, from what might be expected from historical relationships and elasticities in
view of the ongoing structural changes. This raises the critical issues of clarity in reading signs
of inflation, asset prices and systemic liquidity from money/credit expansion.

Basel III norms

Basel-III is a comprehensive set of reform measures to strengthen the regulation, supervision and
risk management of the banking sector. These measures aim to:
1. Improve the banking sector's ability to absorb shocks arising from financial and economic
stress, whatever the source
2. Improve risk management and governance
3. Strengthen banks' transparency and disclosures
Main requirements under Basel-III
1. Banks to maintain a minimum 5.5% in common equity (as against 3.6% now) by March 31,
2015.
2. Banks must create a capital conservation buffer (consisting of common equity) of 2.5% by
March 31, 2018.
3. Banks should maintain a minimum overall capital adequacy ratio of 11.5% (against the
current 9%) by March 31, 2018.
Difficulties with implementing Basel-III norms
1. There are worries among certain bankers that the implementation of Basel-III proposals will
have an adverse impact on the return on equity and financial ratios.
2. There are concerns that public sector banks may not be able to grow their loans since
government-dependent lenders would not have adequate capital.
3. Critics of Basel-III norms feel that just because banks would have more capital, it does not
mean that a bank will not get into trouble. The crises may at best be postponed.
Basel III rules were too focused on problems that occurred in Europe and the US. They argued the
standards unfairly penalize trade finance and project finance, two forms of credit that are particularly
important in developing nations. This school of thought believes that the Indian banking system has
proved robust due to constant monitoring by the RBI. As per past instance, Indian Banks had carried
a huge negative net-worth for three years without any problem. As per this argument, Public Sector
banks do not need more capital.
Since Basel-III is an international norm, therefore, Indian banks, including PSB' (Public Sector
Banks) with international presence, would find it an obstacle if they are non-compliant.

188!

One of the solution proposed by policymakers is to go slow on imposing new capital adequacy
norms for PSB's as all of them do not have a foreign presence. However, the difficulty in increasing
the capital of PSB's is not because of their inability to attract investors. If investors are given
confidence, banks would be able to raise sufficient capital. But the government would have to dilute
its holding in the PSB's. It seems difficult because the government may be unwilling to let go its
majority stake in these banks. If fresh equity is to be raised without diluting the government's share,
huge budget allocations are required. As per estimates, about Rs.60000-75000 crore demands for
capital from banks could be there in the next six years. Again, it may not be easy for the government,
considering its fiscal deficit.
The government may have to work on two options. One is to ask PSB's to keep their loan portfolios
at current levels or even shrink them. But it would be a retrograde step and will affect the funds
available to industry adversely. The other is to accept a dilution of its stake, may be up to 26%.

Summing Up
! Historically, banks in India have played a central role in mobilizing and allocating resources for
supporting the growth process. The nationalization of private sector banks in 1969 marked a
turning point in the history of the banking sector in India. Large branch expansion that followed
enlarged the deposit base of banks in rural and semi-urban areas. Although another wave of
nationalization in 1980 carried forward this process, the aggressive strategies of fund
mobilization by mutual funds and NBFCs in the backdrop of buoyant capital market in the
second half of the 1980s set in process of some disintermediation of household savings. Some
deceleration in bank deposit growth was again observed during 1995-2005 in tune with the
maturing of saving preferences under a deregulated market environment.
! However, bank deposits growth accelerated significantly during 2005-2008 due to vigorous
deposit mobilization efforts by banks in the wake of strong credit off take. This was despite the
sharp growth in other instruments such as shares and units of mutual funds.
! Bank deposits have all along been the mainstay of the savings process in the Indian economy.
Although banks have played an increasingly important role in stepping up the financial savings
rate, physical savings, nevertheless, have tended to grow in tandem with the financial savings. A
major challenge, thus, is to convert unproductive physical savings into financial savings. This is
also necessary for banks as they face several challenges in realizing the full potential of deposit
mobilization in a growing economy. Bank deposits have become relatively less attractive to the
households in view of the availability of a wide menu of alternative saving instruments offering
scope of higher returns to savers.
! Furthermore, savers have also become more informed in managing risks of their portfolios
through the use of specialized services offered by other financial intermediaries. This behavior is
expected to accentuate in future. In view of the shrinking share of the household sector deposits
in total deposits, banks need to explore ways of broadening the depositor base as also provide
improved services for retaining their clientele. It is, therefore, necessary for banks to seek for
new sources of deposits.

189!

! There is an enormous potential in rural and semi-urban areas and banks need to tap these
sources. This, however, would require banks to offer customized products with features suitable
to individual risk-return requirements as well as economize on their operational costs through
diversification of activities. In this context, the recent policy emphasis on financial inclusion
offers greater scope for banks to widen their deposit base.
! Furthermore, the changing demographics and employment patterns have also thrown
opportunities for banks to expand their role by bringing the depositors with younger age profile
within their fold. The substitution of funds from banks to non-bank instruments and vice-versa
has been observed in the recent past and such trends may also occur in future. This would call for
greater care in the assessment and interpretation of monetary aggregates.

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

190!

Chapter!21!
Employment!Generation!Through!Growth!
and!Planning!
! Achieving a high rate of growth of GDP has been the focus of the Indian planning process along
with substantial employment generation for creating adequate work opportunities for the rising
labour force. Prevalence of unemployment leads to poverty entailed with numerous social
problems. In the background of this, providing employment to the labour force has been an area
of central concern in all Five Year Plans which have been according due priority to achieve this
goal. Initially the generation of employment was viewed as a part of the process of development
and not as a goal to be pursued independently of economic growth.
! The general impression was that employment growth would trickle down resulting in
improvement of employment situation. Though employment is treated as a corollary to growth,
the trends of the last two decades show that growth has not yielded desired results in the area of
employment generation. The rate of growth of employment was found to be slower than the rate
of growth of economy. In the light of that, successive plans, strategies, policies and programmes
were designed and redesigned to bring about a focus on employment generation as a specific
objective.
! The employment situation in the Indian context has not been quite impressive particularly
keeping in view the unskilled and semi-skilled work force. During 1950-70, Indian economy
grew by 3.5 per cent against the projected growth of 5 per cent .per annum.
! Employment grew by 2 per cent per annum while the growth in labor force was 2.5 per cent,
thus, resulting in overall increase in unemployment. During 1970s, 1980s, and 1990s, a number
of employment generation and poverty alleviation schemes were implemented with thrusts on
gainful employment to the people in the labour force on one hand and improvement in level of
income on the other. Some such schemes like Integrated Rural Development Programme,
National Rural Employment Programme and Mahatma Gandhi National Rural Employment
Guarantee Act (MGNREGA) etc. being presently pursued emerged as a vehicle to provide wage
employment through public works programme.
! It also saw emergence of schemes to promote self employment and entrepreneurship through
provision of assets, skills and other support to the unemployed and the poor. These steps led to
steady expansion of employment levels. However, the rate of growth of employment lagged
behind the rate of growth of labour force. A notable rising trend has been observed in
unemployment among educated youth. Another area of major concern has been the quality of
employment and level of productivity. These developments are indicative of the fact that growth
alone cannot generate sustainable and quality employment opportunities.

191!

Employment Challenges for the Twelfth Five Year Plan

! Need for correct estimates/projection of employment and unemployment at frequent intervals
correct estimation of employment and unemployment is essential for proper planning and policy
recommendation for a Five Year Plan. Normally there are three approaches (UPSS, CWS and
CDS) used in estimating employment/unemployment. Decision on the proper approach to be
followed would help in correct estimation and planning.
! The current employment/ unemployment situation should form the basis for projections for the
12th Plan period. At the same time the estimates of employment/ unemployment should be
available at frequent intervals for more effective policy interventions.
! Expand employment opportunities in the formal sector, including the Services Sector One major
challenge to be addressed for the 12th Plan period is how to increase the share of formal sector
employment opportunities. Movements and transformation of employment from informal sector
to formal sector needs to be analyzed. Incentives have to be given for expanding organized sector
employment.
! Employment interventions already initiated by the Government need to be evaluated. Service
sectors like insurance, finance and banking, tourism are going to major generator of employment
opportunities. Sector specific strategies need to be adopted generate employment opportunities.
Rigidity in labour laws is often quoted as a major constraint in augmenting organized sector
employment. However, the focus should be to promote labour market flexibility without
compromising fairness to labour.
! Expand employment opportunities especially in the manufacturing sector When any economy
grows, over a period of time the contribution of agriculture sector to GDP should decline while
that of manufacturing and services sectors should increase. Concomitant with this the share of
employment should also increase in manufacturing and services sector.
! Unfortunately, for the Indian economy although contribution to GDP from the agriculture has
declined sharply (less than 20%) but the number of people employed in agriculture continues to
be very high. Although some expansion in employment has taken place in the manufacturing and
non-manufacturing sectors, however, a large part of the same falls under informal employment.
It is necessary to have urban and rural labour market planning for shifting surplus work force
from rural areas.
! However, option for geographic targeting is limited considering the endowment of different
States. Manufacturing sector, however, would have limits in generating new employment as
more and more industries adopt capital intensive technologies. Global trends in employment
indicate that employment in service sector has increased. Hence, strategies in India must lay
emphasis on the service sector for generating more employment.
! Addressing the Issue of Productivity, both in the formal and informal sectors Increasing
employment as well as productivity is equally important. Productivity is a relationship between
output and inputs. Productivity can be measured either in terms of all factors of production
combined (total factor productivity) or in terms of labour productivity alone. In the long term,
productivity is the main determinant of income growth. Productivity gains increase real income
in the economy which can be distributed through higher wages.

192!

! Strategy for employment generation must be to augment productive employment opportunities

during the 12th Plan period both in the formal and informal sectors. Innovation would have to
play a major role for augmenting productivity.
! Address problems of specific categories gender, educated, youth, minorities, SC/ST,
differently abled people NSS data shows that female employment has declined both in rural areas
and urban areas in recent years. This is a major concern and needs to be addressed during the
12th Plan period.
! Women workers are the most vulnerable to job losses in case of any global crisis.
Unemployment among educated people is going to be a major issue during the 12th Plan period.
India is one of the few countries which have the phenomenon of educated unemployment in
large number numbers. The major reason behind this is the dearth of vocational and technical
education among youths. Similarly, the issue of promoting employment opportunities for
minorities, SC/ST and differently abled people assumes importance. Employment needs and
education provided need to be matched.
! Hence, the role of skill development programmes would occupy centre stage in any employment
strategy for the 12th Plan period. This will help in harnessing the demographic dividend. 2.6
Problems of the Working Poor Problems of the working poor need to be highlighted as there is
always the possibility of this segment to relapse into distress and unemployment unless they are
given due attention and protection.
Employment in the face Recurrent Economic Crises
! Issues of infrastructure, economies of scale and management needs to be addressed for meeting
any subsequent global economic crisis. Any global crisis is bound to have some impact on the
Indian economy as the level of international integration increases. Service sectors including IT,
tourism, civil aviation and banking and real sector involving manufacturing exports are likely to
be impacted. Downsizing in sectors like IT and finance would be common. Indian workers in
sectors with high exposure to global markets including those employing large number of women
workers have faced job cuts during the last global crisis of 2008 Civil Aviation, Textiles,
Leather, Marine Products, Gems and Jewellery.
! Employment and income should be the central focus of governments stimulus package. Priority
should be given to public spending programmes that have high multiplier effect on employment.
However, scope for fiscal stimulus to deal with such crises would be limited given the high level
of fiscal deficits at the Centre and in States. Hence, fiscal sustainability becomes a major
challenge to be tackled through effective resource generation and expenditure measures.
Recommendations
General Recommendations
! The National Employment Policy (NEP), already drafted, may be finalized at the earliest.
! Employment figures on an annual basis are a pre-requisite to enable the government to develop
effective employment planning and initiate several short term supportive measures in response to
growth fluctuations. However, the need for annual or frequent labour force surveys is more

193!

!
!
!
!
!
!
!
!

!
!
!
!

!
!

!
!
!

!
!

important for urban areas.

The best way of considering the set of working poor is to analyze the consumer expenditure data
collected in the employment-unemployment surveys.
There is a major need to strengthen self-employment and entrepreneurship programmes as it will
go a long way in resolving educated and youth unemployment problem.
Creation of a portal for employment-unemployment data on a national basis to bridge the
demand-supply gap is essential.
There is need for flexible labour laws without compromising fairness to labour.
The disconnection between industries and manpower should be addressed.
Employment needs and education provided need to match.
Labour market information cell should be established in each State.
A combination of more effective school education on the one hand, and better vocational
education and training on the other with geographic targeting of districts where the marginalized
groups (like SCs/ STs/ Muslims) are concentrated would be critical for their employability.
Backward regions/ backward States are often not getting benefits of employment schemes
hence, special emphasis of policy is required for such regions/ States.
Several support services have to be extended to the informal sector workers in order to enhance
their productivity and well-being levels.
The self-help group approach of supporting womens work has been extremely successful in
Andhra Pradesh and Kerala and needs to be replicated in other States/UTs.
Expand the scope and outreach of vocational education in secondary and higher secondary
schools, reforming the government Industrial Training Institutes (ITIs) and private Industrial
Training Centres (ITCs), raising the standard of polytechnics and improving quality of both
publicly and privately provided higher technical education. A second component of this reform is
to rapidly formulate and implement the National Qualification Framework.
The Employment Exchanges may be upgraded, computerized and be used as Vocational
Counseling Centres.
It must be realized that the employment guarantee programmes are only a short-run respite and,
therefore, from the long run point of view the growth itself has to be made more employment
intensive.
Recommendations for the Agriculture Sector
Non-crop activities like poultry, dairying, fisheries, horticulture, floriculture, animal husbandry
have scope for generating more employment.
The draft NEP has suggested that in agriculture existing policy packages need to strengthened
and new ones evolved to facilitate diversification or agricultural products and shift from on-firm
to off-firm activities. Overwhelming majority of farmers in India consist of small and marginal
farmers, for whom a strong package of support in respect of credit, inputs, technology and
marketing should be devised to enable them to realize their productive potential and enhance
their remuneration from employment.
Recommendations for the Manufacturing Sector
A structural shift in the employment composition can be possible through rural industrialization -

194!

!
!

agro-based industries and other light goods industries have to be created in the rural areas to
ensure rural diversification.
Government policy during the 12th Plan must focus on the four requirements viz. credit from
formal banking sources, support for marketing efforts, design innovation and technology
upgradation, for promotion of the traditional industries, using the cluster approach.
The small and medium sized enterprises have to grow sizably and attempts have to be made to
make them economically viable. Ensuring credit for micro, small and medium enterprises
(MSMEs) from banks and financial institutions will remain a major priority during the 12th Plan
period.
The draft NEP mentions that a sub-sectoral approach to policy making is necessary to improve
employment intensity of manufacturing. Labour intensive industries (textile products, leather
products, beverages, food products and wood products) need to be given special policy support
and incentives to grow faster. The micro and small enterprises need to be provided strong
technology and skill support through a package of extension services and training to suit their
requirements.
The draft NEP further suggests that a special package of support should be developed for small,
multi product clusters in backward areas particularly utilizing the forward and backward linkages
that could be locally realized.
National Rural Livelihood Mission has a potential roll in enhancing employment of women in
non-farm sector.
The National Manufacturing Policy 2011 has identified the following sectors that will create
large employment:
1) Textiles and Garments
2) Leather and Footwear
3) Gems and Jewellery
4) Food Processing Industries
5) Handlooms and Handicrafts.

The MSME sector

! The base for the manufacturing sectorhas also been identified for employment and enterprise
generation. The Approach Paper to the Twelfth Five Year Plan (2012-17) mentions that these
sectors need to be encouraged.
! The Approach Paper to the Twelfth Five Year Plan (2012-17) mentions that unless
manufacturing becomes an engine of growth, providing at least 100 million additional decent
jobs, it will be difficult for Indias growth to be inclusive.
! Recommendations for the Services Sector. The IT sector and IT-related services have to grow so
that they provide a major outlet to the skilled manpower of the country. Besides, they are
expected to create secondary employment in which the semi-skilled and unskilled work force can
be engaged.
! Increase productive employment in employment generating services sector like hotels, IT,
transport, financial institutions and construction sector.

195!

! The draft NEP has indicated certain sector specific policy for their faster growth and greater
employment orientation. The sectors that can be easily identified for special treatment from the
employment view point are agriculture, manufacturing, construction, retail trade, tourism and
information and communication technologies (ICT).
! The draft NEP mentions that although the construction sector has registered high employment
growth and high employment elasticity, poor quality of employment is a matter of serious
concern. Implementation of various provisions of labour regulation, minimum wages, safety and
welfare, need to be implemented. A special programme for development of skills to meet the
requirements of changing technology in the construction sector needs to be developed.
! The draft NEP further mentions that the trade sector has experienced one of the fastest growth in
employment over the past decade; and is likely to sustain this growth in coming years. The
quality of employment especially in retail trade needs improvement.
! The draft NEP also states that tourism industry has grown rapidly and so has employment in the
sector. Tourism projects that integrate local socio-economic development, through forward and
backward linkages, should be encouraged. Capacity for training tourism personnel at different
levels needs to be vastly expanded.
! The Approach Paper mentions that the potential of tourism to provide income opportunities must
be seized too. Along with construction, it is one of the largest sectors of the service industry in
India. It is capable of providing employment to a wide spectrum of job seekers from the
unskilled to the specialized, even in the remote parts of the country.
! Finally, compared to other modern sectors, a higher proportion of tourism benefits (jobs, petty
trade opportunities) accrue to women.
! The Approach Paper also mentions that construction sector provides direct/indirect employment
to about 35 million people and is expected to employ about 92 million persons by 2022. Hence,
better managed processes are required for the development and deployment 37 of human
resources for this industry.
! Considering the demand for workforce for construction, the industry and government should
further strengthen the mechanism for providing training to unskilled workers who constitute bulk
of the workforce. Such efforts need to be further expanded in order to meet the workforce
requirement of the sector.
! In order to provide a boost to the construction sector, rural irrigation programmes and major
infrastructure building programmes both in the rural and urban areas have to be initiated in a
significant way.

!
!

196!

Chapter!22!
GAAR!and!Tax!Avoidance!!
GAAR to come into effect from April 1, 2016
! Which seeks to check tax avoidance by investors routing their funds through tax havens, will
come into effect from April 1, 2016.
The salient provisions of GAAR are:
1. The provision of General Anti Avoidance Rules (GAAR) will apply to entities availing tax
benefit of at least Rs 3 crore.
2. It will apply to foreign institutional investors (FIIs) that have claimed benefits under any Double
Tax Avoidance Agreement (DTAA).
3. Investments made by a non-resident by way of offshore derivative instruments or P-Notes
through FIIs, will not be covered by the GAAR provisions.
4. Further Investments made before August 30, 2010, will not be scrutinized under GAAR, it said,
adding the provisions will apply to assessees that obtain tax benefits on or after April 1, 2015.
5. A business arrangement can be termed 'impermissible' if its main purpose is to obtain tax benefit.
Under the original GAAR proposals, the anti-tax avoidance provisions could be invoked "if one
of the purposes" was to obtain tax benefit.
6. The assessing officer has to issue a show-cause notice, with reasons, to invoke GAAR provisions
and also has to give an opportunity to an assessee to explain whether an arrangement was
'impermissible.'
! The GAAR provisions were introduced in the 2012-13 Budget by then Finance Minister Pranab
Mukherjee to check tax avoidance and were to have come into effect from April 1, 2014. The
proposal generated controversy, with investors getting apprehensive about harassment by tax
authorities. To soothe the nerves of jittery investors, Finance Minister P Chidambaram in
January announced the postponement of the implementation of Chapter X-A of the I-T Act
(dealing with GAAR) by two years to April 1, 2016.
! The notification is broadly in line with recommendations of the Parthasarathi Shome Committee,
which was set up by Prime Minister Manmohan Singh in July last year to address the concerns of
investors.

197!

Chapter!23!
Currency!Volatility!in!India!!
Causes, Impacts and Actions
! Indian currency (INR) has depreciated close to 22% in the last 1 year. In the article we will try to
study the concerns of a country facing depreciating currency, the factors that led to this
depreciation and the measures government can take to stabilize the situation. Most importantly
we will see if global economic uncertainty rides over all the other domestic factors to determine
strength of a currency especially in developing economies.
Why dont we need a depreciating INR?
! The persistent decline in rupee is a cause of concern. Depreciation leads to imports becoming
costlier which is a worry for India as it meets most of its oil demand via imports. Apart from oil,
prices of other imported commodities like metals, gold etc will also rise pushing overall inflation
higher. Even if prices of global oil and commodities decline, the Indian consumers might not
benefit as depreciation will negate the impact.
! The depreciating rupee will add further pressure on the overall domestic inflation and since India
is structurally an import intensive country, as reflected in the high and persistent current account
deficits month after month, the domestic costs will rise on account of rupee depreciation.
Exchange rate risk also drives away foreign investors which in turn depreciates the local
currency.
! Indian Rupee is currently caught in this vicious cycle; it will have to find a stable level to regain
investors confidence. The depreciating rupee has serious effects on the external debt figures of
the nation. The total external debt has increased by Rs. 2186.8 billion to Rs 16384.9 billion by
the end of November 2011.
Factors that pushed INR into the Fall
Continued Global uncertainty:
! Owing to uncertainty prevailing in Europe and slump in international market, investors prefer to
stay away from risky investments (flight to security). This has significantly affected the portfolio
investment in India.
! Credit rating agencys downgrade of India to BBB - with a negative outlook, the last of the
investment grade has not helped the cause. Any outward flow of currency or decrease in
investment will put a downward pressure on exchange rate. This Global uncertainty has
adversely impacted the domestic factors (current and capital account etc.) and caused the
depreciation of rupee.

198!

Current Account Deficit:

! While a country like China will be more than happy with a depreciating currency, the same
doesnt apply for India. China exports more than it imports, thus a depreciating currency makes
its exports cheaper in the International market, in turn making China more competitive. India on
the other hand does not enjoy this luxury, mainly because of increasing demand of oil, which
constitutes a major portion of its import basket.
! The fall of oil price to $90/barrel has helped India to fight the depreciating rupee up to some
extent but at the same time Euro zone, one of the major trading partners of India is under severe
economic crisis. This has significantly impacted Indian exports because of reduced demand.
Thus India continues to see current account deficit of around 4.3%, depleting the forex reserve
and thus depreciating INR.
Capital Account flows:
! Deficit countries need capital flows and surplus countries generate capital outflows. India needs
dollars to finance its current account deficit. Institutional investors investing in India are directly
impacted by the global market uncertainty. In 2008 India had a net outflow of $14billion of FIIs
and INR depreciated from 39 level to 52 against dollar.
! A volatile currency is never good for a foreign investor as it increases the transaction risk. Thus
the relation becomes a vicious cycle, thereby further magnifying the volatility. Though RBI has
intervened through open market operations to arrest the downfall of INR (managed float) but the
reserves of $290billion dont provide enough room to make a significant impact.
Persistent inflation:
! India has experienced high inflation, above 8%, for almost two years. If inflation becomes a
prolonged one, it leads to overall worsening of economic prospects and capital outflows and
eventual depreciation of the currency.
! The Real Effective Exchange Rate (REER) index (6 currencies - Euro, Yen, Pound Sterling, US
Dollar, Hongkong Dollar and Renminbi) has fallen by 13.84% during the last one year while the
nominal rate has depreciated by 24%. REER index measure includes the level of inflation
differences across nations; it reflects a country's competitiveness in international trade.
! Thus the trend suggests that the country's competitiveness (measured by REER) has not
improved as much as the decline in nominal exchange rate points out mainly because of increase
in domestic costs. Under normal circumstances inflation is tamed by increasing interest rates, but
since India already has high interest rates, it does not leave that option open, as it may lead to
further slowdown in growth.
Interest Rate Difference:
! Higher real interest rates generally attract foreign investment but due to slowdown in growth
there is increasing pressure on RBI to decrease the policy rates. Under such conditions foreign
investors tend to stay away from investing. This further affects the capital account flows of India
and puts a depreciating pressure on the currency.

199!

Lack of reforms:
! Key policy reforms like Direct Tax Code (DTC) and Goods and Service Tax (GST) have been in
the pipe line for years. A retrospective tax law (GAAR) has already earned a lot of flak from the
business community.
! Attempts are being made to control the subsidy bills but fiscal deficit continues to hover around
5% of GDP. The government announced FDI in retail but had to hold back amidst huge furore
from both opposition and allies. This has further made investors sentiment negative over the
Indian economy.
The rope that can pull INR out:
1. Measures By RBI:
a) Using Forex Reserves:
" RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee. But using
forex reserves poses risk also, as using them up in large quantities to prevent depreciation
may result in a deterioration of confidence in the economy's ability to meet even its shortterm external obligations.
" And not using reserves to prevent currency depreciation poses the risk that the exchange rate
will spiral out of control. Since both outcomes are undesirable, the appropriate policy
response is to find a balance. Recent data shows that RBI had indeed intervened by selling
forex reserves selectively to support Rupee.

Source:RBI
b) Raising Interest Rates:
" The rationale is to prevent sudden capital outflows and ultimately lead to higher capital
inflows. But Indias interest rates are already higher than most countries. This was done to
tame inflationary expectations. So further raising interest rates would lead to lower growth
levels.
c) Make Investments Attractive" Easing Capital Controls: RBI can take steps to increase the supply of foreign currency by
expanding market participation to support Rupee. RBI can increase the FII limit on
investment in government and corporate debt instruments. It can invite long term FDI debt
funds in infrastructure sector. The ceiling for External Commercial Borrowings can be
enhanced to allow more ECB borrowings.
2. Measures by Government:

200!

! Government should take some measures to bring FDI and create a healthy environment for
economic growth. Key policy reforms that should be initiated includes rolling of Goods and
Services Tax (GST), Direct Tax Code (DTC), FDI in aviation and retail, Companies Bill and
diesel decontrol.
! Efforts should be made to invite FDI but much more needs to be done especially after the
holdback of retail FDI and recent criticisms of policy paralysis. The government took steps
recently to loosen rules for portfolio investment in the Indian market, indicating its desire to
sustain external inflows.
! The measure to increase External Commercial Borrowings (ECB) to $10bn will help in
borrowing in dollar at a less cost. It may take similar steps to encourage FDI as well, helping
sustain external funding.
Is India the only loser?
! The ongoing euro zone crisis and declining demand in the developed nations has created riskaversion in the markets. It explains why China's growth has decelerated so acutely and also
India's. It also tells us that it is the global factor that is primarily responsible for India's economy
running into rough weather not coalition politics, lack of leadership, corruption, assembly
elections or any of the things we have been hearing about.

Source: www.global-rates.com
! Above data shows that INR is not the only currency depreciating. Except for China almost every
developing country has shown a deprecating pressure on their currency. Not everyone can be
blamed for poor monetary policy or ineffective governance.

Source: SEBI
! The FII investment data for 2012 shows that India had huge capital inflows for the first two
months and started declining only after the euro zone crisis reared its head again. This shows that
the absence of reforms alone cannot account for the sheer magnitude of the slowdown. The fact

201!

that we have had a comparable slowdown only at the peak of the subprime crisis does suggest
that external conditions must be primarily responsible this time as well.
! Through interest rate and inflation data we tried to formulate a model to calculate expected spot
rate and compared it with actual spot rates and it was found that in 2010 and 2011 these rates
were very close to each other, but in 2012 there is massive 20% difference(almost same as INR
depreciation in last year) in these rates.

Source: www.global-rates.com
! INR appreciated by 2.69%, the biggest ever single day gain on 29th June just after the
announcement of Eurozone rescue plan by the leaders of 27 European Union. All the above
mentioned reasons are a testimony to the fact that global economic factors are playing a bigger
role than any domestic economic or political condition.
! The Indian Rupee has depreciated significantly against the US Dollar marking a new risk for
Indian economy. Grim global economic outlook along with high inflation, widening current
account deficit and FII outflows have contributed to this fall.
! RBI has responded with timely interventions by selling dollars intermittently. But in times of
global uncertainty, investors prefer USD as a safe haven. To attract investments, RBI can ease
capital controls by increasing the FII limit on investment in government and corporate debt
instruments and introduce higher ceilings in ECBs.
! Government can create a stable political and economic environment. However, a lot depends on
the Global economic outlook and the future of Eurozone which will determine the future of INR.

202!

Chapter!24!
VAT!and!GST!!
VAT
VAT is a multi-point destination based system of taxation, with tax being levied on value addition at
each stage of transaction in the production/ distribution chain. The term 'value addition' implies the
increase in value of goods and services at each stage of production or transfer of goods and services.
VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer.
The main motive of VAT has been the rationalization of overall tax burden and reduction in general
price level. Thus, it seeks to help common people, traders, industrialists as well as the Government.
It is indeed a move towards more efficiency, equal competition and fairness in the taxation system.
The main benefits of implementation of VAT are:-

Minimizes tax evasion as VAT is imposed on the basis of invoice/ bill at each stage, so that
tax evaded at first stage gets caught at the next stage;
A set-off is given for input tax as well as tax paid on previous purchases;
Abolishes multiplicity of taxes, that is, taxes such as turnover tax, surcharge on sales tax,
additional surcharge, etc. are being abolished;
Replaces the existing system of inspection by a system of built-in self-assessment of VAT
liability by the dealers and manufacturers (in terms of submission of returns upon setting off
the tax credit);
Tax structure becomes simpler and more transparent;
Improves tax compliance;
Generates higher revenue growth;
Promotes competitiveness of exports; etc.

What is GST?
Goods and Services Tax(GST) is a comprehensive tax levy on manufacture, sale and consumption of
goods and services at a national level.
Through a tax credit mechanism, this tax is collected on value-added goods and services at each
stage of sale or purchase in the supply chain.

203!

The system allows the set-off of GST paid on the procurement of goods and services against the
GST which is payable on the supply of goods or services. However, the end consumer bears this tax
as he is the last person in the supply chain.
Experts say that GST is likely to improve tax collections and boost India's economic development by
breaking tax barriers between States and integrating India through a uniform tax rate.
What are the benefits of GST?
Under GST, the taxation burden will be divided equitably between manufacturing and services,
through a lower tax rate by increasing the tax base and minimizing exemptions.
It is expected to help build a transparent and corruption-free tax administration. GST will be is
levied only at the destination point, and not at various points (from manufacturing to retail outlets).
Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it
is again taxed at the retail outlet when sold.
How will it benefit the Centre and the States?
It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as
it would promote exports, raise employment and boost growth. It will divide the tax burden
equitably between manufacturing and services.
What are the benefits of GST for individuals and companies?
In the GST system, both Central and State taxes will be collected at the point of sale. Both
components (the Central and State GST) will be charged on the manufacturing cost. This will benefit
individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby
helping companies.
What type of GST is proposed for India?
India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services
Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a
transaction.
All goods and services, barring a few exceptions, will be brought into the GST base. There will be
no distinction between goods and services.
Which other nations have a similar tax structure?
Almost 140 countries have already implemented the GST. Most of the countries have a unified GST
system. Brazil and Canada follow a dual system where GST is levied by both the Union and the
State governments.
France was the first country to introduce GST system in 1954.
Will this be an extra tax?

204!

It will not be an additional tax. CGST will include central excise duty (Cenvat), service tax, and
additional duties of customs at the central level; and value-added tax, central sales tax, entertainment
tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and
services and purchase tax at the State level.
What will be the rate of GST?
The combined GST rate is being discussed by government. The rate is expected around 14-16 per
cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and
SGST rates.
Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods is
around 20 per cent.
Will goods and services cost more after this tax comes into force?
The prices are expected to fall in the long term as dealers might pass on the benefits of the reduced
tax to consumers.
Why are some States against GST; will they lose money?
The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information
technology systems and the administrative infrastructure will not be ready by April 2010 to
implement GST. States have sought assurances that their existing revenues will be protected.
The central government has offered to compensate States in case of a loss in revenues.
Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their tax
kitty. The government believes that dual GST will lead to better revenue collection for States.
However, backward and less-developed States could see a fall in tax collections. GST could see
better revenue collection for some States as the consumption of goods and services will rise.
How will GST be implemented?
The empowered committee is likely to finalize the details of GST by August. But States have to sort
out several issues like agreement on GST rates, constitutional amendments and holding talks with
industry associations. Experts feel the drafting of legislation and the implementation of law will take
time.
What are the items on which GST may not be applied?
Alcohol, tobacco, petroleum products are likely to be out of the GST regime.

!
205!

Chapter!25!
Education!L!Policies!and!Outcomes!
!
India! has! a! young! population,! and! consequently,! the! labour! force,! which! is! expected! to! increase! over! the!
next!20!years.!Whereas,!on!the!other!hand,!it!is!expected!to!decline!in!most!developed!countries!and!even!
in!China,!This!demographic!dividend!can!add!to!our!growth!potential!through!its!impact!on!the!supply!of!
labour!as!also,!via!the!falling!dependency!ratio,!on!the!rate!of!domestic!savings.!Besides,!a!young!population!
brings! with! it! the! aspirations! and! the! impatience! of! youth,! which! in! turn! can! become! strong! drivers! for!
bringing!about!change!and!innovation.!To!reap!this!demographic!dividend!we!must!ensure!that!our!younger!
citizens! come! into! the! labour! force! with! higher! levels! of! education! and! the! skills! needed! to! support! rapid!
growth.!
!

Governments&policy&
!
Governments!policy!in!the!sphere!of!education!has!been!to!expand!access!to!education!at!all!three!levels!!
elementary,!secondary!and!post!secondary!!and!also!improve!the!quality!of!education.!
!
The!four!main!priorities!for!education!policy!have!been!
!
1.!Access!to!education,!
!
2.!Equity!in!education,!
!
3.!Quality!education,!and!
!
4.!Governance.!
!
The!12th!Plan!will!continue!to!priorities!these!four!areas,!but!will!place!the!greatest!emphasis!on!improving!
learning!outcomes!at!all!levels.!

206!

POLICY&INITATIVES&
!
In! line! with! the! goal! of! nation! building,! India! has! been! committed! to! providing! free! and! compulsory!
education! to! all! children.! Towards! this! end,! Indian! Parliament! has! enacted! a! legislation! (RTE! Act,! 2009)!
making!free!and!compulsory!education!a!Right!of!every!child!in!the!age!group!6S14!years!which!has!come!
into!force!from!1st!April,!2010.!The!already!running!Sarva!Shiksha!Abhiyan!(SSA)!towards!universalization!of!
primary!education!has!been!integrated!with!RTE!Act.!
!
Rashtriya! Madhyamik! Shiksha! Abhiyan! (RMSA)! has! been! launched! recently! as! a! step! to! universalize!
secondary!education.!Simultaneously,!efforts!are!being!made!to!create!a!robust!and!vast!system!of!higher!
and!technical!education.!
!
Building!upon!the!existing!capacities!and!recognizing!the!immense!contribution!to!nation!building!that!the!
large!network!of!educational!institutions!has!made!in!the!post!independent!India;!the!country!has!embarked!
upon!a!second!phase!of!expansion!and!establishment!of!centres!of!excellence!in!higher!education.!To!this!
end!government!has!planned!to!launch!Rashtriya!UchChatar!Shiksha!Abhiyan!(RUSA)!under!the!12th!Plan.!
!
It! is! envisioned! that! strengthening! the! two! ends! of! the! spectrum,! namely,! elementary! education! and!
higher/technical! education! would! help! in! meeting! the! objectives! of! expansion,! inclusion! and! excellence! in!
education.!
!
Recent!years!have!seen!certain!important!committees!and!commissions!deliberate!on!education.!
!
National! Knowledge! Commission! (2006)! Report! on! higher! education! supports! a! strong! reform! agenda!
through!public!investment.!
!
Recently,! the! report! of! the! Committee! on! Renovation! and! Rejuvenation! of! Higher! Education! (Yashpal!
Committee)!has!recommended!!
!
Protecting! the! intellectual! autonomy! of! educational! institutions! and! the! creation! of! an! allSencompassing!
National! Commission! for! Higher! Education! and! Research! (NCHER)! to! replace! or! subsume! the! existing!
regulatory!bodies.!

207!

!
The! report! talks! about! the! concept! of! a! university! as! a! place! where! research! and! teaching! become! two!
important!pillars!of!the!creation!of!knowledge!and!should!go!together.!It!should!provide!practical!training!to!
the! people! that! should! be! based! on! new! knowledge! and! in! response! to! social! and! personal! needs.! Most!
importantly,! university! should! allow! for! the! diverse! growth! of! knowledge! and! should! not! lead! to!
fragmentation!of!knowledge.!It!is,!therefore,!recommended!that!normally,!no!single!discipline!or!specialized!
university!should!be!created.!
!

Major&interventions&by&Government&
!
Although! the! number! of! elementary! schools! has! increased! to! 13.04! lakh,! many! schools! lack! basic!
infrastructure! facilities! required! under! the! RTE! Act.! For! example,! the! retention! of! girls! in! school! remains!
difficult! given! that! over! 63%! of! rural! schools! have! no! usable! toilet! facilities! for! them.! Monitoring:! The!
National! Commission! for! Protection! of! Child! Rights! (NCPCR)! has! been! mandated! to! monitor! the!
implementation! of! this! historic! Right.! A! special! Division! within! NCPCR! will! undertake! this! huge! and!
important!task!in!the!coming!months!and!years.!A!special!toll!free!helpline!to!register!complaints!will!be!set!
up! by! NCPCR! for! this! purpose.! NCPCR! will! work! with! all! stakeholders! to! build! a! movement! to! ensure! that!
every!child!of!this!country!is!in!school!and!enabled!to!get!at!least!8!years!of!quality!education.!
!

SSA&(Sarva&Shiksha&Abhiyan)&
!
It!is!one!of!Indias!major!social!sector!flagship!programmes,!addressing!the!national!resolve!of!universalizing!
the!elementary!education!(UEE).!
!
Its!objectives!are!as!follows:!
!
!

To!provide!useful!and!relevant!elementary!education!for!all!children!in!the!age!group!of!6S14!years.!

To! bridge! the! social,! regional! and! gender! gaps! with! active! participation! of! community! in! the!
management!of!schools.!

To!encourage!enrolment!of!girls!and!teacher!training.!

Achieve!significant!enhancement!in!learning!levels!of!children!

!
!
!

208!

Features:!
!

The!programme!covers!all!states!and!UTs.!

SSA!focuses!on!girls!education!through!the!NPEGEL!(National!Programme!for!Education!of!Girls!at!
Elementary!Level)!and!KGBVs!(Kasturba!Gandhi!Balika!Vidyalayas).!

SSA! targets! the! geographical! areas! in! districts! and! blocks! with! predominance! of! SC,! ST,! OBC! and!
Minority! population! in! the! matter! of! allocation! of! funds! and! school! infrastructure! to! promote!
education! of! those! who! were! deprived! of! education! on! account! of! economic! and! social!
backwardness.!

Though! there! was! notable! success! in! expanding! capacity! and! enrolments! during! the! 11th! Plan!
period,!the!challenge!of!raising!quality!standards!still!remains.!

If! the! envisaged! convergence! of! the! MGNREGS,! TSC! and! Drinking! Water! Supply! (DWS)! Mission!
materializes,! some! of! these! infrastructural! shortcomings! could! be! mitigated.! While! bridging!
infrastructure!gaps!may!be!achievable,!it!will!be!far!more!challenging!to!bridge!learning!gaps.!

!
MidADay'Meal'Scheme'(MDMS)'
!
In!keeping!with!the!Constitutional!provisions!to!raise!the!level!of!nutrition!of!children!and!enable!them!to!
develop! in! a! healthy! manner,! the! National! Programme! of! Nutritional! Support! to! Primary! Education! (NPS
NSPE)! was! launched! as! a! CSS! in! 1995.! Commonly! referred! to! as! MDMS,! this! was! expected! to! enhance!
enrolment,!retention,!attendance!of!children!in!schools!apart!from!improving!their!nutritional!levels.!
!
Then!gradually!its!scope!was!extended!to!upper!primary!(classes!VI!to!VIII)!children!in!3,479!EBBs!in!2007!
and!since!2008!it!has!been!universalized!at!the!elementary!level!to!cover!all!government!schools!and!aided!
private!schools!and!madrasas!etc.!
!
Now!it!has!been!integrated!with!the!SSA!and!supports!governments!UEE!agenda.!It!works!two!ways!!while!
it! addresses! the! problem! of! malnutrition! among! children,! it! also! promotes! enrolment! and! attendance! in!
schools!at!elementary!level!
!
Implementation! of! MDMS! rests! with! states! and! the! central! government! provides! food! grains! free! of! cost,!
transport!assistance,!financial!assistance!for!construction!of!kitchen!and!necessary!infrastructure.!

209!

!
MDMS! is! managed! and! implemented! by! School! Management! Committees/Village! Education! Committees,!
PRIs,!and!SHGs.!It!is!not!contractorSdriven.!
!
There!are!several!concerns!in!implementation!of!the!MDMS,!namely,!
!
!
!
!
!

Wide!variations!in!enrolment,!attendance!and!actual!coverage!of!children,!

Mismatch!of!food!grains!and!cash!fund!utilization,!

Lack!of!controls!over!the!quantity!and!quality!of!meals,!

Irregular!and!uncertain!supply!of!meals,!and!

Poor!quality!of!grains!in!certain!States.!

!
In! order! to! address! these! concerns,! the! monitoring! system! under! MDMS! would! be! made! more! effective!
during!the!12th!Plan.!
!
!

Establishing!an!MIS!portal!for!effective!monitoring!and!evaluation!

An!MIS!portal!for!monitoring!of!the!scheme!has!already!been!launched.!All!the!States/UTs!are!now!
feeding! data! into! the! portal! and! annual! data! for! 2.7! lakh! schools! have! already! been! fed! into! the!
portal.!

The! MIS! would! be! integrated! with! Interactive! Voice! Response! System! (IVRS)! to! capture! the!
information!on!daily!basis!and!monitor!the!Scheme!on!real!time!basis.!

It!will!also!be!used!as!a!mechanism!for!social!audit!

!
!

Rashtriya&Madhyamik&Shiksha&Abhiyan&(RMSA)&
!

Making! secondary! education! of! good! quality! available,! accessible,! and! affordable! to! all! young!
persons!in!the!age!group!of!1516!years,!

210!

Removing!gender,!socioSeconomic,!and!disability!barriers!(i.e.!to!promote!the!inclusive!agenda),!

Making!all!secondary!schools!conform!to!prescribed!norms,!

Achieving!a!GER!(Gross!Enrolment!Ratio)!of!75!%!in!secondary!education!in!a!period!of!five!years,!i.e.!
by!2014,!

Providing!universal!access!to!secondary!level!education!by!2017!and!

Universal!retention!by!2020.!

!
!

!
!
!

CRITICAL&EVALUATION&
!

The! mean! years! of! schooling! of! the! working! population! (those! over! 15! years! old)! increased! from!
4.19!years!in!2000!to!5.12!years!in!2010.!

The!growth!of!enrolment!in!secondary!education!accelerated!from!4.3!%!per!year!during!the!1990s!
to!6.27!%!per!year!in!the!decade!ending!200910.!

Youth! literacy! increased! from! 60! %! in! 1983! to! 91! %! in! 200910! and! adult! literacy! improved! from!
64.8!%!in!2001!to!74!%!in!2011.!

The! gender! gap! in! elementary! education! has! declined! with! the! female/male! ratio! for! years! of!
education!and!literacy!reaching!over!90%!in!200910.!

Elementary&Education&
&
The!SSA!has!brought!us!close!to!the!target!of!universalization!of!primary!education!and!the!RTE!Act,!2009!
makes!eight!years!of!elementary!education!a!fundamental!right!for!all!the!children.!The!MDM!Scheme!has!
ensured!that!retention!in!schools!has!improved!greatly.!
!
However,! the! learning! outcomes! for! a! majority! of! children! continue! to! be! disappointing.! Addressing! the!
quality!issue!in!our!schools!is!critical!for!the!effective!development!of!human!capabilities!and!for!achieving!
the! objective! of! equality! of! opportunities.! The! quality! of! teachers! and,! even! more! important,! their!
motivation!and!accountability!will!need!to!be!improved.!Many!of!the!children!who!are!presently!in!school!
are! firstSgeneration! learners,! and! these! children! need! supplementary! instruction.! This! is! not! easy! due! to!

211!

shortage!of!qualified!teachers!in!many!schools!across!the!country.!New!and!innovative!approaches!such!as!
multiSgrade!learning,!which!has!been!successfully!tried!in!Tamil!Nadu,!could!be!adopted!in!such!cases.!
!

Secondary&Education&
!
The! success! of! the! SSA! has! put! pressure! on! expanding! the! capacity! of! secondary! schools! and! the! RMSA!
addresses!this!issue.!Although!there!is!considerable!focus!on!providing!secondary!school!access,!the!dropout!
rates!between!elementary!and!secondary!schools!continue!to!be!high,!and!between!the!secondary!and!post!
S! secondary! stage! they! are! even! higher.! This! is! a! particularly! serious! problem! for! girls,! who! have! to! travel!
longer!distances!to!attend!secondary!schools.!
!
Curricular! and! examination! reforms! in! secondary! schooling! would! receive! special! attention! aimed! at!
fostering!critical!thinking!and!analytical!skills,!and!preparing!students!for!further!education.!All!this!requires!
innovative!approaches,!some!of!which!are!already!in!evidence!in!certain!States.!
!

Higher&Education&
!
The!last!decade!has!also!seen!a!huge!increase!in!the!demand!for!higher!education!and!this!is!expected!to!
increase!further!as!more!children!complete!school!and!more!and!more!jobs!are!seen!to!require!higher!level!
qualifications.!However,!our!higher!education!institutions!also!suffer!from!problems!of!quality.!Too!many!of!
our!universities!are!producing!graduates!in!subjects!that!are!not!required!by!the!changing!job!market,!and!
the!quality!is!also!not!what!it!should!be.!
!

Issues&&&Challenges&
!
Despite!many!gains!during!the!11th!Plan,!education!in!India!faces!several!challenges.!
!
!S!Performance!lower!than!in!other!emerging!economies:!
!
!S!Steep!dropout!rate!
!
!S!Very!low!student!attendance!rates!
!

212!

!S!Children!from!marginalized!social!categories!continue!to!remain!out!of!school!
!
!S!While!PTR!has!improved,!there!remains!imbalance!in!their!deployment!
!
!S!Teachers!without!professional!qualifications!
!
!S!Schools!lacking!in!necessary!infrastructure!
!
!S!Very!poor!learning!outcomes!
!

12th&Plan&Strategy&for&Elementary&Education&
!
1.!Shift!from!a!projectSbased!approach!of!SSA!to!a!unified!RTESbased!governance!system!for!UEE;!
!
2.!Address!residual!access!and!equity!gaps!in!elementary!education!by!adopting!special!measures!to!ensure!
regular!attendance!of!children!in!schools!and!devising!special!strategy!to!tackle!the!problem!of!dropping!out!
before!completing!the!full!cycle!of!elementary!schooling;!
!
3.! Integrate! preSschool! education! with! primary! schooling! in! order! to! lay! a! strong! foundation! for! learning!
during!primary!school;!
!
4.! Prioritize! education! quality! with! a! systemSwide! focus! on! learning! outcomes! that! are! assessed! through!
classroomSbased!CCE!independently!measured,!monitored!and!reported!at!the!block/district/State!levels;!
!
5.!Focus!on!early!grade!supplemental!instruction!to!ensure!that!all!children!achieve!the!defined!age!S!/classS
specific!learning!levels!by!the!end!of!class!2;!
!
6.!Articulate!clear!learning!goals!that!have!to!be!achieved!by!the!end!of!each!class!or!set!of!classes.!These!
goals!should!be!understood!by!parents!and!teachers;!
!

213!

7.!Improve!teacher!training!with!an!emphasis!on!effective!pedagogy!given!the!realities!of!Indian!classrooms!
such! as! multiage,! multiSgrade! and! multiSlevel! contexts.! Also,! make! teachers! professional! development! a!
needsSdriven!process!as!opposed!to!topSdown!decision!wherein!curriculum!design!and!delivery!is!centrally!
driven;!
!
8.! Invest! in! both! topSdown! administrative! oversight! and! bottomSup! communitySdriven! monitoring! of!
schools;!
!
9.! Focus! on! strengthening! practices! of! good! governance! in! all! schools! and! related! institutions! that! ensure!
performance!based!internal!and!external!accountability!for!teachers!and!administrators!at!all!levels!and!also!
ensure!holistic!assessment!driven!development!of!schools;!
!
10.!Invest!in!strengthening!ongoing!and!continuous!fieldSbased!systems!of!academic!support!to!schools!and!
teachers!and!in!strengthening!district!and!blockSlevel!capacity!for!better!management!and!leadership;!
!
11.! Support! States! to! set! learning! goals! and! invest! in! independent! monitoring! of! outcomes,! but! provide!
States! with! substantial! autonomy! in! how! to! achieve! these! goals,! and! provide! additional! resultsSbased!
financing!to!States!who!show!the!most!improvement!in!educational!outcomes;!
!
12.! Provide! a! supportive! environment! for! evaluation! of! innovative! practices,! and! sharing! of! best! practices!
across!States!and!districts;!
!
13.!Support!States!towards!motivation,!capacity!development!and!accountability!of!community!and!parents!
for!ensuring!regular!attendance!and!quality!education;!and!
!
14.!Ensure!convergence!with!panchayats,!CBOs!and!other!sectors!at!school!level.!
!
!

!
!
!
214!

Chapter!26!
Health!L!Policies!and!Outcomes!
Like education Health is another critical dimension of human capability, and therefore needs as much greater
attention in governments development policy.

However, attainment of good health outcomes is not just a matter of providing curative care. We need to give
much greater attention to public health, which focuses on preventive healthcare, but has traditionally
suffered from neglect. We also need to focus much more on a provision of clean drinking water and
sanitation, which can make a major contribution to improved health. This was the experience in industrialized
countries over a hundred years ago, and this is also true for us today.

While the longer-term objective of Health Policy must be the provision of Universal Health Care (UHC),
whereby anyone who wants is assured of access to a well defined set of health care entitlements irrespective
of his financial status, the immediate policy objective is to follow an inclusive approach towards healthcare
that encompassed -

equitable and comprehensive individual healthcare,

improved sanitation,

clean drinking water,

nutritious food,

good feeding practices, and

development of delivery systems responsive to the needs of the people.

At the same time, since putting a UHC system in place may take time, we need to start building an
appropriate architecture towards that end.

At present, only less than 30% of outpatient and less than half of inpatient health care capacity of the country
is in the public sector, and the majority of the population relies on private health care provision which often

215!

imposes a heavy financial burden. It is, therefore, essential to expand public sector capacity in health care
especially in the rural areas

The NRHM, launched during the 10th Plan, made an important start in expanding health care facilities in
rural areas. While additional infrastructure has been created, there are large shortages of personnel, especially
specialists in rural health facilities, reflecting the fact that trained human resources in health are in short
supply and it takes many years to set up new medical colleges to train the required number of doctors.

Major&Issues:&
1. Massive shortage of healthcare professionals;

2. Over-reliance on Private healthcare, which is not affordable;

3. Neglect of public health

Major&interventions&during&the&11th&Plan&
National&Rural&Health&Mission&(NRHM):&
Launched in 2005 during the 10th Plan period, this is a major flagship programme of the government in the
health sector. It has been an important intervention to transform public health care into an accountable,
accessible and affordable system of quality services during the 11th FYP period.

It aims at inclusive health and improved access to quality healthcare for those residing in rural areas,
particularly women, children, and the poor, throughout the country with special focus on 18 states.

The mission seeks to achieve the objectives by promoting integration, decentralization, and encouraging
community participation in health programmes.

The mission covers most of the existing programmes of the MHFW under an overreaching umbrella.

216!

Rashtriya&Swasthya&Bima&Yojana&(RSBY):&
With a view to prevent indebtedness due to expenditure on health, the RSBY was launched in October 2007
to provide health insurance cover to BPL families. This has been an important step in supplementing the
efforts being made to provide quality healthcare to the poor and underprivileged population.

It is an effort to provide protection to BPL households in the unorganized sector against financial liabilities
arising out of health problems that involve hospitalization.

It provides cashless health insurance cover up to Rs 30,000 per annum per family. The premium is paid by the
Centre and state governments on a 75:25 sharing basis with the beneficiary paying only a registration fee

Janani&Suraksha&Yojana&(JSY):&
Launched to promote institutional deliveries, the scheme provides cash incentives to expectant mothers who
opt for institutional deliveries.

Pradhan&Mantri&Swasthya&Suraksha&Yojana&(PMSSY):&
The programme is envisaged to correct the imbalances in availability of affordable or reliable tertiary level
health care in the country in general and to augment facilities for quality medical education in the underserved states. This involves setting up of AIIMS like institutions and upgrading certain existing institutions
across various states.

Phase-I of PMSSY envisages establishment of six new AIIMS-like Institutions, upgradation of 13 state
government medical college institutions. Phase-II provides for the establishment of two new AIIMS-like
institutions in U.P. and WB and upgrading of 6 state government medical college institutions.

Redevelopment&of&hospitals/institutions:&
While certain hospital/medical institutions of eminence would be redeveloped, upgradation of district
hospitals is envisaged as a key intermediate strategy, till the vision of healthcare through PHCs and CHCs is
fully realized.

217!

AYUSH:&
Mainstreaming AYUSH into health services at all levels was also an important strategy for the 11th Plan.

Moreover, such interventions were also characterized by

Special attention to marginalized groups: It promised special attention to the health of marginalized groups,
such as adolescent girls, women of all ages, children below the age of three, older persons, the differentlyabled, tribals, and SCs. Gender equity was to be an overarching concern.

Focus on Public Health-related services: It recognized that health outcomes depend not just on the access to
curative healthcare, but also on strengthening public health-related services, particularly access to clean
drinking water, sanitation, and improved child-rearing practices, which in turn depend on education and
empowerment of women.

At present, Indias health care system consists of a mix of public and private sector providers of health
services. Networks of health care facilities at the primary, secondary and tertiary level, run mainly by State
Governments, provide free or very low cost medical services.

There is also an extensive private health care sector, covering the entire spectrum from individual doctors and
their clinics, to general hospitals and super specialty hospitals.

However, the system suffers from the following weaknesses.

Issues&&&Concerns&(&detailed&)&
&
- Availability of health care services public and private sectors taken together is quantitatively
inadequate due to massive shortage of healthcare professionals:-

At the start of the 11th Plan, the number of doctors per lakh of population was only 45, whereas, the desirable
number is 85 per lakh population. Similarly, the number of Nurses and Auxiliary Nurse and Midwifes
(ANMs) available was only 75 per lakh population whereas the desirable number is 255.

218!

- Affordability of health care is a serious problem for the vast majority of the population, especially in
tertiary care and due to governments over-reliance on private provision of healthcare:-

The lack of extensive and adequately funded public health services pushes large numbers of people to incur
heavy out of pocket expenditures on services purchased from the private sector. Out of pocket expenditures
arise even in public sector hospitals, since lack of medicines means that patients have to buy them. This
results in a very high financial burden on families in case of severe illness. A large fraction of the out of
pocket expenditure arises from outpatient care and purchase of medicines, which are mostly not covered even
by the existing insurance schemes. In any case, the percentage of population covered by health insurance is
very small. Moreover, the problem is likely to worsen in future.

Health care costs are expected to rise because, with rising life expectancy, a larger proportion of our
population will become vulnerable to chronic Non Communicable Diseases (NCDs), which typically require
expensive treatment. The public awareness of treatment possibilities is also increasing and which, in turn,
increases the demand for medical care

- Quality of healthcare services varies considerably in both the public and private sectors:-

Many practitioners in the private sector are actually not qualified doctors. Regulatory standards for public and
private hospitals are not adequately defined and, in any case, are ineffectively enforced.

- Public expenditure on health remains very low:-

The total expenditure on health care in India taking public, private and household out-of-pocket (OOP)
expenditure was about 4.1% of GDP in 200809, which is broadly comparable to other developing
countries, at similar levels of per capita income.

However, the public expenditure on health was only about 27 % of the total (i.e. of 4.1%) in 200809, which
is very low by any standard.

Public expenditure on Core Health (both plan and non-plan and taking the Centre and States together) was
about 0.93 % of GDP in 200708. It has increased to about 1.04 % during 201112. It needs to increase much
more over the next decade.

219!

When broader determinants of health (drinking water and sanitation, ICDS and Mid-Day Meal) are added, the
total public spending on health in 11th Plan comes to 1.97 % of GDP.

- Neglect of public health:

While there has been action on curative healthcare, there have not been adequate and effective interventions
in the sphere of public health that will include preventive healthcare, such as provision of safe drinking water
supply, improved sanitation, immunization, nutritious food, hygiene, good feeding practices etc.

- Health personnel not well-trained:-

Setting up of 6 AIIMS like institutes and upgradation of 13 medical colleges has been taken up under
PMSSY. Seventy-two State Government medical colleges have also been taken up for strengthening to
enhance their capacity for PG training. Huge gaps, however, remain in training capacity for all categories of
health personnel.

- Initiatives towards community empowerment, improving monitoring and accountability not

effective:-

Though Rogi Kalyan Samitis (RKS) are in position in most public facilities, monthly Village Health and
Nutrition Days are held in most villages, Jan Sunwais (public hearings) and Common Review Missions have
been held, yet their potential in terms of empowering communities, improving accountability and
responsiveness of public health facilities is yet to be fully realized.

- Most public health institutions are not well-equipped for conducting deliveries:-

To reduce MMR and IMR, institutional deliveries are being promoted by providing cash assistance to
pregnant women under JSY. Poor women from remote districts in Bihar, Orissa, and other states are
reportedly visiting institutions to avail JSY benefits. Though institutional deliveries have increased in rural
(39.7 to 68 %) and urban areas (79 to 85 %) over the 200509 period, low levels of full Ante-Natal care and
quality of care are areas of concern.

Except for parts of the southern states, most public health institutions are not well-equipped for conducting
deliveries at the community or even at the block levels. The beneficiaries are often asked to purchase gloves,

220!

syringes, and medicines from the market. The general view, endorsed by visits to the field, is that the health
centres and sub-divisional hospitals remain understaffed and are poorly run and maintained. A very large
number are unhygienic and incapable of catering to patient loads. Women who deliver at the health facilities
are discharged a few hours after the delivery. Sometimes, deliveries take place on the way to the health
facility or even outside the locked labour rooms. Also, lack of coordination and mutual understanding
between the ANMs and ASHAs result in the suffering of pregnant women.

- Immunization cover is far from being universal:-

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

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

- Utilization of public facilities for chronic disease remains low:-

Despite improvements in infrastructure, and personnel deployed, evaluation has reported that utilization of
public facilities for chronic disease remains low in UP, MP and Jharkhand as compared to TN reflecting poor
quality of service.

Moreover, despite efforts, lack of capacity and lack of flexibility in programmes forestall effective local level
planning and execution based on local disease priorities. Wide variation in the performance of health facilities
across states have been reported with TN topping and UP and MP at the bottom, pointing to the need for
learning from best practices within the country through state level initiatives.

Vision&for&the&future&
Today in the sphere of public health, problems are enormous. There are lessons to be learnt from the
experiences of other developing countries as also from those Indian states, Kerala and Tamil Nadu in
particular, which have taken care of health of the people a lot better than the rest of India.

221!

As far as the rest of the world is concerned, the countries that offer immediate lessons for India include China
(most importantly), Brazil, Mexico and Thailand, among others.

In the field of public health most important thing is the importance of the commitment to universal health
coverage for all, with a comprehensive vision of healthcare for the country as a whole. Brazil, Thailand and
Mexico have reached this level in recent years and transformed the reach of healthcare for their people.

Chinas experience is particularly interesting. In 1979 when China brought about economic reforms under
Mao Zedong, it reversed the earlier universalism. But it had to pay a heavy price in terms of the progress of
longevity and general health. China eventually realized this error in this denial and, from 2004, started
moving rapidly back to universal commitment (it is already 95% there). Also, China does not leave the
coverage of health in the hands of the private health insurance the state is the major player to ensure this.

Thus, based on such experiences as also on grounds of economic reasoning, i.e. the public goods character
of the health of the people, the role of asymmetric information, and the impact of inequality on the
achievement of general health in a community and a nation, it would be perhaps wiser for the government to
go about a major transformation in Indias health care system.

Such&a&transformation&may&be&achieved&in&at&least&two&respects:&
1. State must take upon itself the responsibility for direct provision of health services: - It is not to say that
there is no role at all for the private sector in health care. Most health care systems in the world do leave room
for private sector. Also, there is no denial that public accountability is lacking in the operation of the public
sector. Never-the-less, this overarching objective of ensuring access to health services and other requirements
of good health to all members of the community irrespective of their ability to pay (core principle of
universal health coverage as stated by Bhore Committee) is intrinsically a public responsibility. Further, given
the limitations of market arrangements and of private insurance in the field of healthcare, public provision of
health services has an important foundational role to play in the realization of universal health coverage.

2. There is the need to go back to basics as far as public provision of healthcare services both of preventive
and curative kind is concerned, with a renewed focus on primary health centers, village-level health
workers, preventive health measures, and other means of ensuring timely health care on a regular basis.

While RSBY, the newly established scheme of subsidized health insurance for poor households, is a humane
programme, better results can be achieved at far less cost through early and regular healthcare for all
(supplemented by providing expensive interventions if and when it is needed despite early and more
systematic medical care for all).

222!

For such measures to succeed, the need for public investment is particularly strong in a range of activities
aimed at preventing rather than curing diseases, such as immunization, sanitation, public hygiene, waste
disposal, disease surveillance, vector control, health education, food safety regulation, and so on (what is
technically called as public health).

12th&Plan&Strategy&
The 12th Plan seeks to strengthen initiatives taken in the 11th Plan to expand the reach of health care and
work towards the long term objective of establishing a system of Universal Health Coverage (UHC) in the
country. This means that each individual would have assured access to a defined essential range of medicines
and treatment at an affordable price, which should be entirely free for a large percentage of the population.

This is a process that will span several plan periods. However, a start must be made towards achieving the
long term goal immediately.

Ideally, the public health care system must be expanded to address the health needs of the vast majority of
citizens, recognizing that upper-income groups may opt for private health care. The 12th Plan will therefore
see the transformation of the NRHM into a National Health Mission (NHM), covering both rural and urban
areas. Unlike rural residents, those in urban areas have access to private health care providers, but private
health care is costly and large numbers of urban residents especially slum dwellers cannot afford it. An
important component of the NHM will be the Urban Health Initiative for the Poor, providing public sector
primary care facilities in select low-income urban areas. This will require additional resources in the public
sector from the budgets of both the Centre and the States, and cities.

Declaration of Alma-Ata
International Conference on Primary Health Care, Alma-Ata, USSR, 6-12 September 1978
The International Conference on Primary Health Care, meeting in Alma-Ata this twelfth
day of September in the year 1978, expressing the need for urgent action by all governments, all
health and development workers, and the world community to protect and promote the health of all
the people of the world, hereby makes the following
Declaration:
I The Conference strongly reaffirms that health, which is a state of complete physical, mental and
social wellbeing, and not merely the absence of disease or infirmity, is a fundamental human right
and that the attainment of the highest possible level of health is a most important world-wide social
goal whose realization requires the action of many other social and economic sectors in addition to
the health sector.

223!

II The existing gross inequality in the health status of the people particularly between developed and
developing countries as well as within countries is politically, socially and economically
unacceptable and is, therefore, of common concern to all countries.
III Economic and social development, based on a New International Economic Order, is of basic
importance to the fullest attainment of health for all and to the reduction of the gap between the
health status of the developing and developed countries. The promotion and protection of the health
of the people is essential to sustained economic and social development and contributes to a better
quality of life and to world peace.
IV The people have the right and duty to participate individually and collectively in the planning and
implementation of their health care.
V Governments have a responsibility for the health of their people which can be fulfilled
only by the provision of adequate health and social measures. A main social target of
governments, international organizations and the whole world community in the coming
decades should be the attainment by all peoples of the world by the year 2000 of a level
of health that will permit them to lead a socially and economically productive life.
Primary health care is the key to attaining this target as part of development in the spirit
of social justice.
VI Primary health care is essential health care based on practical, scientifically sound and
socially acceptable methods and technology made universally accessible to individuals and families
in the community through their full participation and at a cost that the community and country can
afford to maintain at every stage of their development in the spirit of self-reliance and selfdetermination. It forms an integral part both of the country's health system, of which it is the central
function and main focus, and of the overall social and economic development of the community. It is
the first level of contact of individuals, the family and community with the national health system
bringing health care as close as possible to where people live and work, and constitutes the first
element of a continuing health care process.
VII Primary health care:
1. reflects and evolves from the economic conditions and socio cultural and political characteristics
of the country and its communities and is based on the application of the relevant results of social,
biomedical and health services research and public health experience;
2. addresses the main health problems in the community, providing promotive, preventive, curative
and rehabilitative services accordingly;
3. includes at least: education concerning prevailing health problems and the methods of preventing
and controlling them; promotion of food supply and proper nutrition; an adequate supply of safe
water and basic sanitation; maternal and child health care, including family planning; immunization
against the major infectious diseases; prevention and control of locally endemic diseases; appropriate
treatment of common diseases and injuries; and provision of essential drugs;
4. involves, in addition to the health sector, all related sectors and aspects of national and community
development, in particular agriculture, animal husbandry, food, industry, education, housing, public
works, communications and other sectors; and demands the coordinated efforts of all those sectors;

224!

5. requires and promotes maximum community and individual self-reliance and participation in the
planning, organization, operation and control of primary health care, making fullest use of local,
national and other available resources; and to this end develops through appropriate education the
ability of communities to participate;
6. should be sustained by integrated, functional and mutually supportive referral systems, leading to
the progressive improvement of comprehensive health care for all, and giving priority to those most
in need;
7. relies, at local and referral levels, on health workers, including physicians, nurses, midwives,
auxiliaries and community workers as applicable, as well as traditional practitioners as needed,
suitably trained socially and technically to work as a health team and to respond to the expressed
health needs of the community.
VIII All governments should formulate national policies, strategies and plans of action to launch and
sustain primary health care as part of a comprehensive national health system and in coordination
with other sectors. To this end, it will be necessary to exercise political will, to mobilize the
country's resources and to use available external resources rationally.
IX All countries should cooperate in a spirit of partnership and service to ensure primary health care
for all people since the attainment of health by people in any one country directly concerns and
benefits every other country. In this context the joint WHO/UNICEF report on primary health care
constitutes a solid basis for the further development and operation of primary health care throughout
the world.

National Rural Health Mission - Background, Strategies and Challenges faced:

Background:
As a part of its socially progressive Common Minimum Programme, the UPA Government
launched the National Rural Health Mission (NRHM) in 2005.
It aimed to undertake an architectural correction of the public health system to enable it to
effectively absorb increased expenditure to provide accessible, affordable and accountable
primary health care services to poor households in remote parts of rural India.
A regional equity component required the increase in central government plan outlay be
channeled through a weighting system towards the development of health systems in
eighteen focus states with relatively poor health indicators, mostly the Empowered Action
Group (EAG) states of the central north Indian belt and the northeast region of the country .
Objectives:
NRHM is the largest primary health care programme being run in any single country.
Major objectives of NRHM include the following:

225!

to raise public spending on health, with improvements in community financing and risk
pooling;
to provide access to primary healthcare services for the rural poor, with universal access for
women and children;
to see a concomitant reduction in IMR / MMR / TFR; to prevent and control communicable
and non-communicable diseases; and
to revitalize local health traditions.

In essence, these do not differ from health plan goals adopted by India over the last sixty years.
The Missions uniqueness lies primarily in the institutional instruments used to achieve these
goals, foremost amongst which are attempts at structurally reconfiguring the public health system to
facilitate decentralization and communalization, widely accepted as beneficial trends in the
development sphere today. In recognition of the multidimensional causality of disease, to further
promote inter-sectoral convergence in services which co-determine decent health outcomes, such as
the provision of adequate food and nutrition, water, sanitation and hygiene; and to integrate
previously segregated vertical disease-specific programmes at the national, state, district and block
levels.
Strategies:
1. Creation and upgradation (on infrastructure / human resource / managerial fronts using untied
funding) of SCs, PHCs,CHCs;
2. Revitalizing and mainstreaming AYUSH; Mission Flexible Pool untied funding;
3. Janani Suraksha Yojana (JSY);
4. Accredited Social Health Activists (ASHAs);
5. Involvement of community at decentralized levels through Hospital Development Societies
(HDS) or Rogi Kalyan Samitis (RKS) / Village Health and Sanitation Committees (VHSCs);
6. Converging health, nutrition, water, sanitation and hygiene activities through District Health
Plans;
7. Integration of vertical health and family welfare programmes at national, state, district and
block levels;
8. Fostering public-private partnerships while regulating the private sector;
9. Instituting Indian Public Health Standards.
Challenges and solutions:
The NRHM has injected new hope into the health care delivery system in India.
The Infant Mortality Rate declined from 58 per thousand live births in 2005 to 47 in 2010 and
Maternal Mortality Ratio from 254 per one lakh deliveries in 2004-2006 to 212 in 2007-2009. The
Janani Suraksha Yojana registered impressive gains with 1.13 crore women benefiting during 201011. Polio has been almost eradicated from the country. The World Health Organization has decided
to take India off the list of countries with active endemic wild poliovirus transmission.
However, it continues to face diverse challenges, which need to be addressed if its goals are to be
achieved in the near future.

226!

1. Health as a State subject: The location of health in the State list rather than the concurrent
list poses major problems for service delivery. This is also compounded by the fact that the
NRHM funding is from the Centre while the implementation is by the State governments.
Health care delivery cannot be improved to provide a seamless service without the removal
of these barriers.
2. Project mode and problems: The NRHM is currently functioning as a project of the
Government of India which was due to end in 2012. Its significant contribution to improving
health care infrastructure and service delivery across the country will be frittered away if its
funding ceases with the 11th Five Year Plan (FYP).
3. The NRHM should be not only included in the 12th FYP but also be changed from its limited
term project mode to a permanent solution to India's health problems. Its status as a project
makes the integration of the NRHM with the State health care systems problematic. The
divisions run deep resulting in irrational distribution of human resource and infrastructure.
4. The inertia of the old system and the low morale and discipline of its staff continue to be
major challenges.
5. The NRHM has been able to add new infrastructure and personnel; however, its impact on
re-inventing and re-invigorating systems seems to be limited, with much more effort being
required. There is a need for a more coordinated approach which optimally utilizes resources.
6. Improving governance: A comparison of data between States and within regions and social
groups suggests marked variations in the NRHM process indicators, utilization of funds,
improvements in health care delivery, health indices and in community participation.
Regions with prior good health indices have shown marked improvements, while those with
prior poor indices have recorded much less change. This is true, despite a greater NRHM
focus on and inputs to poor-performance States. Improving governance and stewardship
within the NRHM programmes mandates general improvement in the overall governance of
States and regions.
7. Increased funding: Health care costs for the average Indian usually results in catastrophic
out-of-pocket expenditure and is a well-recognized cause of indebtedness in the country. The
total health budget for India is about 1 per cent of the country's GDP. Most developed nations
priorities health care and provide 5-10 per cent of their GDP. The 12th FYP should increase
funding for health to the tune of 2-3 per cent as promised by the Government.
8. The diversion of funds, through private health insurance schemes for the care of rare
disorders to be treated in corporate hospitals, takes away funding from the public health care
system. The injection of such money into the public system would allow for the provision of
universal health care, improve government health systems and provide for common health
conditions benefiting larger numbers.
9. Urban health: The NRHM has focused on rural health. Many parts of urban India have
similar health care needs and currently have glaring deficiencies. The National Urban Health
Mission should be accorded the same status as the NRHM. Both efforts should be
coordinated and combined into a National Health Mission.
10. Expand focus: The major focus of NRHM is on maternal and child health. While this is vital,
there is a need to expand the vision to other common general health problems. There is

227!

evidence to suggest that other crucial government programmes (e.g. blindness) have taken a
back seat.
11. Cash transfers and outcome: The NRHM currently employs process indicators to measure its
implementation. The measures used are mainly related to finance, infrastructure and
personnel. There is need to shift over to indicators of efficient functioning and examine their
impact on health outcomes. The initial high rates of mortality tend to reduce rapidly with
early inputs but require fully functional, efficient and effective systems for sustained results.
12. The Janani Suraksha Yojana, a conditional cash transfer scheme to incentivize the use of
health services to reduce maternal and neo-natal mortality among poor women, has become a
success by encouraging institutional deliveries. However, the evaluation of its success should
be based on its impact on the health outcome of the mother and baby, rather than on financial
process indicators.
13. Similarly, the diverse and difficult circumstances of medical practice across the country
mandate a differential reinforcement for health professionals. There is need for differential
payments to health care staff who work in remote situations and difficult contexts.
14. Health information and monitoring: The NRHM has provided for infrastructure, personnel
and training for Health Management Information Systems. However, these are not optimally
utilized. There is need to improve the information system as part of the process of monitoring
health indices of populations and functioning of the public health care system. The NRHM
already has a programme of community monitoring and social audit. This should be
strengthened in order to monitor the use of funds and empower local communities.
15. Social determinants and public health approaches: The goals of the NRHM clearly state the
need to impact on the social determinants of health by coordinating efforts to provide clean
water, sanitation, nutrition, housing, education and employment. It should, in conjunction
with other government programmes, work towards the reduction of poverty, social exclusion
and gender discrimination, all of which have a significant impact on health. There is need to
increase the synergy and coordination between government programmes (e.g. the Integrated
Child Development Scheme, the Mahatma Gandhi National Rural Employment Guarantee
Act, etc.) and the NRHM.
What is RSBY?
RSBY has been launched by Ministry of Labour and Employment, Government of India to provide
health insurance coverage for Below Poverty Line (BPL) families. The objective of RSBY is to
provide protection to BPL households from financial liabilities arising out of health shocks that
involve hospitalization. Beneficiaries under RSBY are entitled to hospitalization coverage up to Rs.
30,000/ - for most of the diseases that require hospitalization. Government has even fixed the
package rates for the hospitals for a large number of interventions. Pre-existing conditions are
covered from day one and there is no age limit. Coverage extends to five members of the family
which includes the head of household, spouse and up to three dependents. Beneficiaries need to pay
only Rs. 30/ - as registration fee while Central and State Government pays the premium to the
insurer selected by the State Government on the basis of a competitive bidding.
Unique Features of RSBY

228!

The RSBY scheme is not the first attempt to provide health insurance to low income workers by the
Government in India. The RSBY scheme, however, differs from these schemes in several important
ways.
Empowering the beneficiary RSBY provides the participating BPL household with freedom of
choice between public and private hospitals and makes him a potential client worth attracting on
account of the significant revenues that hospitals stand to earn through the scheme.
Business Model for all Stakeholders The scheme has been designed as a business model for a
social sector scheme with incentives built for each stakeholder. This business model design is
conducive both in terms of expansion of the scheme as well as for its long run sustainability.
Insurers The insurer is paid premium for each household enrolled for RSBY. Therefore, the
insurer has the motivation to enroll as many households as possible from the BPL list. This will
result in better coverage of targeted beneficiaries.
Hospitals A hospital has the incentive to provide treatment to large number of beneficiaries as it is
paid per beneficiary treated. Even public hospitals have the incentive to treat beneficiaries under
RSBY as the money from the insurer will flow directly to the concerned public hospital which they
can use for their own purposes. Insurers, in contrast, will monitor participating hospitals in order to
prevent unnecessary procedures or fraud resulting in excessive claims.
Intermediaries The inclusion of intermediaries such as NGOs and MFIs which have a greater
stake in assisting BPL households. The intermediaries will be paid for the services they render in
reaching out to the beneficiaries.
Government By paying only a maximum sum up to Rs. 750/ - per family per year, the
Government is able to provide access to quality health care to the below poverty line population. It
will also lead to a healthy competition between public and private providers which in turn will
improve the functioning of the public health care providers.
Information Technology (IT) Intensive For the first time IT applications are being used for
social sector scheme on such a large scale. Every beneficiary family is issued a biometric enabled
smart card containing their fingerprints and photographs. All the hospitals empanelled under RSBY
are IT enabled and connected to the server at the district level. This will ensure a smooth data flow
regarding service utilization periodically.
Safe and foolproof The use of biometric enabled smart card and a key management system makes
this scheme safe and foolproof. The key management system of RSBY ensures that the card reaches
the correct beneficiary and there remains accountability in terms of issuance of the smart card and its
usage. The biometric enabled smart card ensures that only the real beneficiary can use the smart
card.
Portability The key feature of RSBY is that a beneficiary who has been enrolled in a particular
district will be able to use his/ her smart card in any RSBY empanelled hospital across India. This
makes the scheme truly unique and beneficial to the poor families that migrate from one place to the
other. Cards can also be split for migrant workers to carry a share of the coverage with them
separately.
Cash less and Paperless transactions A beneficiary of RSBY gets cashless benefit in any of the
empanelled hospitals. He/ she only needs to carry his/ her smart card and provide verification

229!

through his/ her finger print. For participating providers it is a paperless scheme as they do not need
to send all the papers related to treatment to the insurer. They send online claims to the insurer and
get paid electronically.
Robust Monitoring and Evaluation RSBY is evolving a robust monitoring and evaluation
system. An elaborate backend data management system is being put in place which can track any
transaction across India and provide periodic analytical reports. The basic information gathered by
government and reported publicly should allow for mid-course improvements in the scheme. It may
also contribute to competition during subsequent tender processes with the insurers by disseminating
the data and reports.
Achievements of RSBY The scheme is today the worlds largest medical insurance programme
covering over 120 million poor people in the country.
Issues or Challenges:
1. Beneficiaries are often unsure of the benefits delivered by their smart - card.
2. Its a struggle to find professionals (smart-card providers, hospital personnel, data analysts,
field workers) and train them.
3. Maintaining quality of healthcare at accredited hospitals.
4. An unceasing stream of frauds.
The challenges of improving include the following:
1. Improving targeting: RSBY largely targets poor beneficiaries as identified by BPL lists.
These lists, however, are known to have several problems that also affect other entitlement
schemes. The most recent list (compiled in 2002) is outdated; To its credit, RSBY has
vigorously sought to remove those who are no longer poor from the rolls (false positives).
2. Improving the quality of care: In any insurance program, there are often countervailing forces
that affect the quantity and quality of care. In RSBY, on the one hand insurers incentives to
reduce the quantity of health services used to maximize profits from premiums collected,
which may manifest as increases in enrolment with minimal enrollee knowledge of RSBYs
benefits. On the other hand, doctors are incentivized by fee-for-service to induce demand of
unnecessary services, which are likely exacerbated by power differentials between doctors
and their poor, illiterate patients. (The power differential issue is a challenge not only for
RSBY but for any health-care program in India.) To improve quality of care, RSBY must
both better inform and educate beneficiaries and redesign provider incentives. Throughout,
RSBY should learn from its experimentation and adapt its strategies to reflect those
experiences.
3. Educating beneficiaries: Many enrollees lack knowledge of their rights and benefitson
both extremes of not knowing their benefits (from insurers not informing enrollees of their
benefits) or alternatively using unnecessary services (largely from the power differential
between doctors and patients).
4. Redesigning provider incentives: Current payments to health-care providers are made on a
fee-for-service basis, effectively incentivizing greater quantity but not quality of services
(and representing a long-run risk to RSBYs sustainability). Hence RSBY should structure its
fee schedule to incentivize prevention and primary care; move away from a fee-for-service
model by incorporating pay-for-performance measures
5. Create robust and adaptable institutions to ensure improvement: RSBYs management
information systems (MIS) represent a major shift in public health-care management in India,
as described above. RSBY management must pay greater attention to the institutional

230!

arrangements and architecture, human resources, and incentives to ensure continuous

improvement even with major leadership changes in RSBY.
6. Ensure smarter, sustainable spending: Universal health programs in all countries must control
costs and get better value for money as citizens grow wealthier and increase their demand for
health care. In India too, amidst inevitable growth in health-care expenditures, RSBY will
need to expand its benefit package to its population to meet evolving demand, all while
ensuring smart, efficient, and sustainable public spending.
Moving forward, India will need to design and implement fair priority-setting institutions to ensure
that public dollars for health are spent in the most cost-effective and equitable manner.
I.

Universal Health Coverage in India: Concept and measurement

1. What does universal health coverage mean?

a. Universal health coverage means that all people have access to the health services
they need (prevention, promotion, treatment, rehabilitation and palliative care)
without the risk of financial hardship when paying for them.
b. This requires an efficient health system that provides the entire population with
access to good quality services, health workers, medicines and technologies.
c. It also requires a financing system to protect people from financial hardship and
impoverishment from health care costs.
d. Access to health services ensures healthier people; while financial risk protection
prevents people from being pushed into poverty.
2. What is needed to achieve it?
For a community or country to achieve universal health coverage, several factors must
be in place including:
A strong, efficient, well-run health system that meets priority health needs through
people-centered integrated care by:
o informing and encouraging people to stay healthy and prevent illness;
o detecting health conditions early;
o having the capacity to treat disease; and
o helping patients with rehabilitation
o ensuring sensitive palliative care where needed.
Affordability a system for financing health services so people do not suffer
financial hardship when using them.
Availability of essential medicines and technologies to diagnose and treat medical
problems.
A sufficient capacity of well-trained, motivated health workers to provide the
services to meet patients needs based on the best available evidence.
Actions to address social determinants of health such as education, living conditions
and household income which affect peoples health and their access to services.
3. What services should be included in universal health coverage?
Essential health services (including for HIV, tuberculosis, malaria, non-communicable diseases and
mental health, sexual and reproductive health and child health) should be available to all who need
them.

231!

The priority should be to ensure access to the key interventions targeting the health Millennium
Development Goals births attended by a trained health worker, family planning, vaccinations, and
prevention and treatment of diseases such as HIV, malaria and tuberculosis while considering how
to address the growing problem of noncommunicable diseases.
4. Are the most vulnerable people covered?
In terms of financial protection, the most vulnerable people should have access to the health services
they need without restrictions. In all countries, it has been found that governments have to use
general budget revenues to meet the health costs (and/or insurance premiums) of poor and vulnerable
people.
Ensuring access to health facilities, workers and medicines in remote, rural areas is also important,
as is providing special interventions for stigmatized populations.
Universal coverage is firmly based on the WHO Constitution of 1948 declaring health a fundamental
human right and on the Health for All agenda set by the Alma-Ata declaration in 1978. Equity is
paramount. This means that countries need to track progress in providing access not just across the
national population but within different groups (e.g. by income level, sex, age, place of residence,
migrant status and ethnic origin).
5. How can we measure universal health coverage?
As universal health coverage is a combination of whether people obtain the health services they need
and financial risk protection, measurement needs to include both components. Coverage of health
services can be measured by the percentage of people receiving the services they need: for example
women in fertile age groups accessing modern methods of family planning or children immunized.
On the other hand, financial risk protection can be evaluated by a reduction in the number of families
pushed into poverty or placed under severe economic strain due to health costs. The impact of these
steps on population health and household financial wellbeing can also be measured, as can many of
the factors that make it easier to increase coverage. These include the availability of essential
medicines, for example.
6. What is the impact of universal health coverage on the population?
Universal health coverage has a direct impact on a populations health and welfare. Access and use
of health services enables people to be more productive and active contributors to their families and
communities. At the same time, financial risk protection prevents people from being pushed into
poverty when they have to pay for health services out of their own pockets.
Universal health coverage is thus a critical component of sustainable development and poverty
reduction, and a key element of any effort to reduce social inequities. Universal coverage is the
hallmark of a governments commitment to improve the wellbeing of all its citizens.

!
!
232!

Chapter!27!
Skill!Development!and!its!Expansion!
Labour&Force&Skills&and&Training&
!
Improved!training!and!skill!development!has!to!be!a!critical!part!of!the!employment!strategy.!Both!the!10th!
and! the! 11th! Plans! noted! the! large! gap! between! the! number! of! new! entrants! to! the! labour! force! and!
inadequate!availability!of!seats!in!vocational!and!professional!training!institutes.!
!
The!11th!Plan!also!identified!various!sectors!with!prospects!for!high!growth!in!output,!and!for!generation!of!
new! employment! opportunities.! Accordingly,! the! 11th! Plan! aimed,! inter! alia,! at! launching! a! National! Skill!
Development! Mission! which! would! bring! about! a! paradigm! change! in! handling! Skill! Development!
programmes!and!initiatives.!
!
The! Skill! Development! Mission! has! been! launched! to! skill! at! least! 50! million! individuals! by! the! end! of! the!
12th!Plan.!
!
Skill! development! programmes! in! the! past! have! been! run! mainly! by! the! government,! with! insufficient!
connection!with!market!demand.!To!ensure!that!skills!match!demand,!special!efforts!are!needed!to!ensure!
that! employers! and! enterprises! play! an! integral! role! in! the! conception! and! implementation! of! vocational!
training! programmes,! including! managing! Industrial! Training! Institutes! (ITIs)! and! in! the! development! of!
faculty.!
!
An!enabling!framework!is!needed!that!would!attract!private!investment!in!Vocational!Training!through!PPP.!
We!should!try!to!optimize!on!the!respective!strengths!of!the!public!and!private!sector!entities!engaged!in!
skill! development.! Mobilizing! the! required! investments,! setting! up! first! rate! ITIs,! ensuring! efficiency! in!
operations!and!management!and!enabling!postStraining!employment!will!be!the!primary!responsibilities!of!
private!sector!entities!while!the!government!will!provide!the!enabling!framework!and!the!requisite!financial!
support!especially!in!respect!of!SC,!ST,!Minorities!and!differentlySabled!persons!and!other!deprived!sections!
of!society.!
!
Subsequently,! the! Union! Cabinet! approved! a! Coordinated! Action! Plan! for! Skill! Development,! which!
envisaged!a!target!of!500!million!skilled!persons!by!2022.!
!

233!

A! threeStier! institutional! structure! consisting! of! has! been! set! up! to! take! forward! the! Skill! Development!
Mission,!which!is!as!follows:!
!
1.!The!Prime!Ministers!National!Council!on!Skill!Development,!
!
2.!The!National!Skill!Development!Coordination!Board,!and!
!
3.!The!National!Skill!Development!Corporation,!
!
National!Skill!Development!System!in!India!
!
Objectives!
!
!Create!opportunities!for!all!to!acquire!skills!throughout!life,!and!especially!for!youth,!women,!and!
disadvantaged!groups!
!
!Promote!commitment!by!all!stakeholders!to!own!skill!development!
!
!Develop!a!highSquality!skilled!workforce!relevant!to!current!and!emerging!market!needs!
!
!Enable!establishment!of!flexible!delivery!mechanisms!that!respond!to!the!characteristics!of!a!wide!
range!of!needs!of!stakeholders!
!
!Enable!effective!coordination!between!different!ministries,!the!Centre!and!states,!and!public!and!
private!providers!
!
Coverage!
!
!InstitutionSbased!skill!development!

234!

!
!
!Formal/informal!apprenticeship!and!other!training!by!enterprises!
!
!Training!for!selfSemployment/entrepreneurial!development!
!
!Adult!learning,!retraining,!and!lifeSlong!learning!
!
!NonSformal!training,!including!training!by!civil!society!organizations!
!
!ESlearning,!webSbased!learning,!and!distance!learning!

SOCIAL PROTECTION AND MGNREGA

Social protection is a broader concept and includes both protective and promotional measures.
Protective measures are those measures which are directed towards providing safety against risk and
vulnerability. Promotional measures are those measures which are aimed at increasing well-being
and livelihood conditions of the people. The policies and procedures included in social protection
involve five major kinds of activities:
i) labour market policies and programmes,
ii) social insurance programmes,
iii) social assistance,
iv) micro and area-based schemes, and
v) child protection.
In a nut shell, the social protection hovers around the promotion of economic strength, protect the
deprived, prevention to the subjects from external shocks and diminishing peoples exposure to
risks, and enhancing their capacity to protect themselves against hazards and interruption/loss of
income. On the other hand Social security is a traditional concept and includes measures aimed at
providing safety protection during risk and vulnerability against poverty, old age, disability,
sickness, orphanage etc.
The social protection legislation in India derives its strength and spirit from the Directive Principles
of the State Policy (DPSP) and the subjects enlisted in the Concurrent List. The following social
issues are mentioned in the Concurrent List (List III in the Seventh Schedule of the Constitution of
India)
Item No. 23: Social security and insurance, employment and unemployment.
Item No. 24: Welfare of Labour including conditions of work, provident funds, employers liability,
workmens compensation, invalidity and old age pension and maternity benefits.
Besides above the different articles in the constitution which relates to social security are as under:
Article 38: State to secure a social order for the promotion of welfare of the people

235!

1) The State shall strive to promote the welfare of the people by securing and protecting as
effectively as it may a social order in which justice, social, economic and political, shall inform all
the institutions of the national life.
2) The State shall, in particular, strive to minimize the inequalities in income, and endeavor to
eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also
amongst groups of people residing in different areas or engaged in different vocations.
Article 39: The state shall direct its policy towards securing that the citizens, men and women
equally, have the right to an adequate means of livelihood.
Article 41: Right to work, to education and to public assistance in certain cases
The State shall, within the limits of its economic capacity and development, make effective
provision for securing the right to work, to education and to public assistance in cases of
unemployment, old age, sickness and disablement, and in other cases of undeserved want.
Article 42: Provision for just and humane conditions of work and maternity relief
The State shall make provision for securing just and humane conditions of work and for maternity
relief.
Article 43: Living wage, etc., for workers
The State shall endeavor to secure, by suitable legislation or economic organization or in any other
way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work
ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities
and, in particular, the State shall endeavor to promote cottage industries on an individual or cooperative basis in rural areas.
Drawing from the Constitution of India and ILO Convention on Social Security, some of the
legislations that have been enacted for social security in India are as follows:
a) The Employees State Insurance Act, 1948 provides benefit to workers, in the event of sickness,
maternity and employment injury, in the form of payment of sick leave, hospitalization, etc. The
scheme provides two types of social security cover namely - (a) Medical Care and (b) Cash Benefits.
Medical care is provided to the insured persons and their family members through a vast network of
panel clinics, ESI dispensaries and hospitals generally within the vicinity of their residential areas.
The cash benefits on the other hand include Sickness benefits, Maternity benefits, Disablement
benefit, Benefits after retirement, Dependents benefits, Funeral Expenses, Rehabilitation allowance
and Standard benefits.
b) The Employees Provident Funds and Miscellaneous Provisions Act, 1952: This Act provides
for the institution of compulsory provident funds for employees in factories and other
establishments, employing 20 or more workers. Three schemes are in force under this Act: (a)
Employees Provident Fund Scheme, 1952; (b) Employees Pension Scheme, 1995, and (c)
Employees Deposit Linked Insurance Scheme, 1976.
c) Employees Provident Fund Scheme, 1952: This scheme provides for financial assistance by
allowing partial withdrawals to subscribers in situations like illness, invalidation, etc., and to finance
such of their requirements as marriage or higher education of children or construction of dwelling
house.
d) The Workmens Compensation Act, 1923: The Workmens Compensation Act is the oldest of
the social security legislations intended for the welfare of workers. This Act makes it obligatory for
the employers to provide compensation to workmen or their survivors in case of injuries and
occupational diseases sustained during the course of employment and resulting in disablement or
death.
e) The Maternity Benefit Act, 1961 provides maternity protection before and after childbirth,
through payment of wages for up to 12 weeks during the absence of maternity, of which not more
than 6 weeks before delivery and remaining period after delivery, as also certain other benefits.
f) The Payment of Gratuity Act, 1972 applies to every factory, mine, oilfield, plantation, port and
railway company and every shops or establishments having a minimum of 10 employees, and
provides for gratuity of payments at the end of service. To be eligible for gratuity the employees

236!

should have a minimum continuous service of 5 years. This Act provides for payment of a lump sum
gratuity to the employees. Under the Scheme, Gratuity is payable @ 15 days wages for every
completed year of service subject to monetary ceiling of Rs.3.50 lakh.
g) Mahatma Gandhi National Rural Employment Guarantee Act, 2005 aims at curbing
unemployment or unproductive employment in rural areas. It focuses on enhancing livelihood
security to rural people by guaranteeing productive wage employment for at least 100 days in a year.
The details of this Act has been discussed later on in this unit.
h) Unorganized Workers Social Security Act, 2008 targets at extending social security measures
to unorganized sector workers. The law aims at extending benefits to workers in informal sector
similar to that of formal sector workers. The Act broadly covers life and disability, health and
maternity benefits, old age protection, any other benefit as may be determined by the Central
Government.
i) Domestic Workers Act, 2008 aims at regulating payment and working conditions of domestic
workers and entitles every registered domestic worker to receive pension, maternity benefits and a
paid weekly leave.
Promotional social security measures include as follows:
i) Wage employment programmes such as EGS, JRY
ii) Self Employment programmes such as IRDP and SGSY, NREGA
iii) Provision of basic needs: primary education, basic health services, etc.
iv) Public Distribution System (PDS) and nutrition programmes such as Integrated
Child Development Services (ICDS) and mid-day meal schemes
v) Reducing Social Exclusion: Reservations for certain classes is part of an attempt to reduce social
exclusion.
It may be noted that some of the promotional measures listed above can also be protective
The protective measures includes
i) National Old Age Pension Scheme (NOAPS)
ii) National Family Benefit Scheme (NFBS)
iii) National Maternity Benefit Scheme (NMBS).
The promotional social security measures can be divided into different components as follows: (a)
food and nutrition security, (b) Health Security, (c) Educational Security and (d) Employment
security whereas the protective social security measures can be Indira Gandhi National Old Age
Pension Scheme (IGNOAPS), Indira Gandhi National Widow Pension Scheme (IGNWPS), Indira
Gandhi National Disability Pension Scheme (IGNDPS), National Family Benefit Scheme (NFBS)
and Annapurna.
THE MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE ACT
(MGNREGA) 2005
Objectives of the Act
i)
providing a right based 100 days employment in a year to strengthen the subsistence
livelihood support, enhancing the rural households purchasing power and capacity to
alleviate hunger; and
ii)
directing the colossus amount of wages towards creating productive and durable assets of
irrigation, drought proofing, land and water conservation, horticulture and connectivity to
general prosperous livelihood support system.
iii)
The ultimate objective was to benefit the entire community by providing employment;
raising agricultural productivity and increasing natural resource base, particularly water.
The process envisaged to attain the objectives would result in strengthening the

237!

grassroots processes of democracy and infusing transparency and accountability in

governance.

&
Features of the Programme
i)
The adult members of the rural households apply to the local panchayats seeking
registration for employment;
ii)
issue of job cards by the panchayat within 15 days from the date of application;
iii)
written application by the job card holders to the panchayat seeking employment;
iv)
issue of dated receipt of written application for employment;
v)
provision of employment within 15 days of application for work failing which
vi)
payment of unemployment allowance;
vii)
provision of work within a radius of 5 km from the village (payment of extra wages of 10
per cent, if the work provided is beyond 5 km);
viii) payment of wages as per the minimum wages act;
ix)
provision of equal wages for men and women;
x)
disbursement of wages on a weekly basis;
xi)
women should constitute one-third of the workers;
xii)
provision of facilities at the work site;
xiii) shelf of project as recommended by the Grama panchayat and approved by Zilla
parishad;
xiv) permissible works are predominantly soil and water conservation, afforestation and land
development;
xv)
wage material cost ratio should be 60 : 40 (no room for machine and contractors);
xvi) social audit has to be undertaken by the Grama Sabha;
xvii) institution of grievances redressal mechanism for ensuring responsive implementation
process; and all accounts are subject to public scrutiny resulting in accountability and
transparency of the scheme.
Critical Evaluation of the Programme
Achievements
Some of the major socio-economic achievements of NREGA which have been brought out in major
research and evaluation studies are as follows:
i) Hike in Wage Rates: One of the significant economic impacts of NREGA is its contribution
in increasing the wage rate in the rural areas which was not only low but stagnant as well. There
was also a wide gap in the male-female wage rates. The minimum wage rate of Rs. 100 as
envisioned in MGNREGA ensures payment irrespective of the sex. It increased the wage level
across the private sector benefiting both the families that could not avail MGNREGA work and
families that had completed NREGA quota of 100 -days work. It provided the poor with required
support in the labour market by not letting them below a certain level. It has increased the
bargaining power of the poor people in the labour market. The voiceless workers now can
bargain better wage
ii) Assured Income: Though MGNREGA guarantees only 100 days of employment, it has been
found that during the lean season of work, it becomes only source of assured income. The
scheme has improved the lives of the people and has brought stability and assured income to the
families that were until recently desperately poor. A study by IAMR revealed that the low
earning level of a number of beneficiaries declined and the number of households reporting
marginally higher income has increased.
iii) Transformed Spending Pattern: It has been found that there is a major shift in the
expenditure pattern in both food and non-food items. A study revealed that many households
have purchased livestock like sheep and goat.
iv) Attitudinal Shift: Other than the economic achievements, MGNREGA have also brought
many social transformations. It has impacted on the social structure of the villages. Cases have

238!

been found when land owning upper caste groups working in the farms of SC/ST households.
People are reported to have said that they will all work together as a group and not on caste basis.
It is a common sight in many of the states that petty shop owners, stone cutters, people of
different caste groups and land owners of different types (marginal, small and big) participate
and work together under MGNREGA.
v) Curb on Rural Emigration: There has been many cases of distress migration in rural areas
especially when an area was struck by drought, famine, flood or other natural calamities.
Empirical study reports that the people / beneficiaries no longer have to move places to places
looking for work. The migration has fallen sharply. The rural to urban migration reduced
drastically due to this programme.
vi) Women Empowerment: Work Participation Rate of women which has been low has
increased drastically. In many states female work participation rate surpassed mens
participation. A sense of independence and security has been perceived by many women working
under MGNREGA. Wages earned under MGNREGA has helped women pay the debt and
retrieve the pawned gold; helped them in taking care of childrens education; enabled them to
meet the day-to-day household expenses and facilitated them to save money.
vii) Strengthening of Panchayats: The functioning of MGNREGA has strengthened the Gram
Panchayat. The entire implementation process is in the hands of panchayat. Identification of
work, implementation of work, disbursement of wages and social auditing has become the
responsibility of Gram panchayat. This has provided a vast scope for strengthening Gram sabhas
and the panchayat which in turn helps building participatory democracy.
viii) Social capital created: MGNREGA has helped in creating productive assets. This provides
a great deal of opportunities for frequent interaction resulting in mutual trust and social capital.
Nurkse, the economist said that, capital starved over populated countries could build social
capital in a big way by employing the surplus labour on a variety of projects. The massive effort
in building social capital through MGNREGA could trigger higher productivity of land and
labour, diversification of agriculture and foster industrial growth. It would mitigate the sufferings
inflicted by chronic drought and flash flood.
ix) Transparency and Corruption Free Arrangements: The internalization of social audits in
MGNREGA facilitates disclosure and transparency. It is intended to identify and plug pilferages
and corruption which in turn helps building awareness and confidence in beneficiaries who learn
over the time, to become vigilant and assertive. As a result, the village people had fully
internalized their rights and entitlements. Transparency safeguards to prevent corruption in
MGNREGA is to keep muster rolls at the worksite, displaying it at the panchayat office and
reading it out in public at the time of wage payments. Employment and wage details have to be
recorded in the job cards to enable the workers to check and verify the records for themselves.
No contractors are allowed. Certain States like Andhra Pradesh have been making rapid strides
in this direction through strict record keeping, institution of social audit and payment of wages
through post offices. A survey conducted in Orissa revealed that 95 per cent of the wages paid
according to the muster-roll had actually related the labourers concerned. This is a major
achievement especially in contrast with the situations two years ago, where a similar study in the
same area had uncovered evidences of massive fraud in National Food for Works Programme.
Drawbacks
Having discussed the major achievements of MGNREGS, let us also discuss some of its drawbacks
which is largely related to the implementation process. These are:
i) Partial Fulfillment of the Objectives:
There are two major objectives of MGNREGA: i) provision of 100 days of unskilled employment in
a financial year; and ii) creation of productive and durable assets that would enhance agricultural
productivity. Between the two, the first objectives gets greater emphasis whereas the second
objective is suffering. Even social audit lays emphasis on matters related to the registration, issue of

239!

job cards, allocation of work, timely wage payment and worksite facilities rather than the utilization
of works completed, increase in production, multiplier effects of income generation, issue of
ownership, operationalization and maintenance of assets created on the public land. An alarming fact
is that during the last three and half years (till August 2009) 19.49 lakh works have been taken up,
out of which, only 2.69 lakh (13.69 per cent) works are reported to have been completed.
ii) Prolonged Delay in wage payment: The provision of the Act makes it mandatory to make the
payment within 15 days. However, studies from the field have reported a prolonged delay in the
payment of wages. The blame largely rests at the bank and post offices which are unable to handle
large mass of payment. Some other important reasons are delay in issuing payment order to the
banks and post offices by the panchayat, delay in work measurement, bottlenecks in flow of funds
and irresponsible record keeping.
iii) Inadequate Human Resource: Shortage of adequate staffs to implement the NREGS is another
drawback which is hindering its proper implementation. Currently, in many of the states,
implementation of MGNREGS has been assigned to the already overburdened administrative staff.
MGNREGS is being an additional charge, staff generally do not devote themselves.
iv) Delay in issue of job cards: MGNREGS guarantee a workers job within 15 days of application.
However, in reality, it is far from being achieved.
v) Withholding job cards: Possession of job card provides a legal entitlement and guarantee to seek
job from the Panchayat. The job card should be with the households. However, some evidence from
the field shows that the village panchayats withhold the job cards with them. This is likely to result
in non-payment of statutory minimum wages, fudging of musterrolls leading to large scale
corruption in the scheme. This sets a very bad precedent tarnishing the very image of the noble
scheme and should be nipped in the bud in order to make the scheme a success.
vi) Far from 100 days of Employment: 100 days of guaranteed employment is a statutory
requirement of the Act. However, majority of the households work only for an average of 50 days.
For instance, the average person days employed per household was less than 50 in 24 out of 34
states. This clearly shows that a lot need to be done to ensure 100 days of work to all the rural
households in all the states.
vii) Irregular Meeting of Gram Sabha: Grama Sabha has a very crucial role in implementing
MGNREGS. The preparation of projects; appraisal of projects and conducting social audit etc.
requires regular meeting of the Grama Sabha. The proper implementation either gets fudged or
delayed if the Sabha does not take an active interest.
vii) Lack of Proper Monitoring: In the era of information technology, proper monitoring is easily
facilitated. MGNREGA has developed a good management information system. However, not using
the information technology in updated manner kills the very purpose of monitoring. In a study, it is
pointed out that it is not able to raise an alert on delays in wage payments because data are normally
updated post-facto, thus undermining the very basis of monitoring.
Despite all these shortcomings, the scheme, which is described unprecedented in the history of
employment programme throughout the world, has been slowly and steadily picking up. Steps are
being taken to position the safeguard mechanism related to transparency and accountability at all
levels. The success of the scheme largely depends on the state, local bodies, and civil society
organizations.

!
!
240!

Chapter!28!
Population!Policy!in!India!!Startegies!and!
Implementation!!
The objective of socio-economic development is to improve the quality of lives of people t o
enhance their well being, opportunities and choices. India was the first country in the world to
launch a national family programme for reducing birth rates to stabilize the population at a level
consistent with the requirement of national economy in 1952. Sharp declines in death rates were not
accompanied by a similar drop in birth rates as per the programme expectations. In 1983, National
Health Policy shifted the goal post to 2000 for achieving the total fertility rate targets.
At present level, India represents 16 % of the world's population and 2.4 % of the world's land area.
India may overtake China in 2045 to become the most populous country in the world; if population
grows at the current pace. The population of India has increased nearly five times from 23 crores to
1 billion in the last century. India's current annual population growth rate can threaten resource base
of the environment and the stability of it.
Controlling the rate of population is pre-requisite for promoting inclusive and sustainable
development with equitable distribution. For this, it is required to make reproductive health care;
primary and secondary education accessible and affordable as well as basic amenities such as
sanitation, safe drinking water, and housing. Gender empowerment, employment opportunities,
transport and communications etc. have complementary effect on the development.
The National Population Policy, 2000 (NPP) was designed with a commitment towards voluntary
choice and consent of citizens in availing of reproductive health care services. The family planning
services by the govt. were administered with no enforcement or mandatory obligations in achieving
some pre-defined targets. Nonetheless, the NPP is a policy framework for advancement of goals and
priorities for the future to meet the reproductive and child health needs of Indian populace e.g. net
replacement levels of TFR by 2010. The policy is broad based to address issues of child survival,
maternal health and contraception and comprehensive package of reproductive and child health
services by government in multi-stakeholder partnership with industry, non -government sector and
civil society etc.

Objectives&of&the&NPP&

241!

1. The immediate objective of the NPP 2000 is to address the unmet needs for contraception,
health care infrastructure, and health personnel, and to provide integrated service delivery for
basic reproductive and child health care.
2. The medium-term objective is to bring the TFR to replacement levels by 2010.
3. The long-term objective is to achieve a stable population by 2045, at a level consistent with
the requirements of sustainable economic growth, social development, and environmental
protection.

Following&National&Socio;Demographic&Goals&to&be&achieved&in&each&case&by&
2010&are&formulated&to&achieve&the&objectives&above:&
a) Address the unmet needs for basic reproductive and child health services, supplies and
infrastructure.
b) Make school education up to age 14 free and compulsory, and reduce drop outs at primary
and secondary school levels to below 20 percent for both boys and girls.
c) Reduce infant mortality rate to below 30 per 1000 live births.
d) Reduce maternal mortality ratio to below 100 per 100,000 live births.
e) Achieve universal immunization of children against all vaccine preventable diseases.
f) Promote delayed marriage for girls, not earlier than age 18 and preferably after 20 years of
age.
g) Achieve 80 percent institutional deliveries and 100 percent deliveries by trained persons.
h) Achieve universal access to information/counseling, and services for fertility regulation and
contraception with a wide basket of choices.
i) Achieve 100 per cent registration of births, deaths, marriage and pregnancy.
j) Contain the spread of Acquire d Immunodeficiency Syndrome (AIDS), and promote greater
integration between the management of reproductive tract infections (RTI) and sexually
transmitted infections (STI) and the National AIDS Control Organization.

242!

k) Prevent and control communicable diseases.

l) Integrate Indian Systems of Medicine (ISM) in the provision of reproductive and child health
services, and in reaching out to households.
m) Promote vigorously the small family norm to achieve replacement levels of TFR.
n) Bring about convergence in implementation of related social sector programs so that family
welfare becomes a people centered programme.

Key&reasons&for&high&population&growth&in&India&
I. The large size of Indias population is in the reproductive age-group i.e. 58 % of total
population. This fast increase in population would continue for some more years because
high TFRs in the past have resulted in a large proportion of the population being currently in
their reproductive years. Majority of the reproductive age group has not been committed to
the small family norms. More than 45 % of the population increase is contributed by births
above two children per family.
II. Higher fertility is because of unmet need for contraception which estimated to contribute
20% of the population growth. India has 168 million eligible couples of which 54 % are
currently not effectively protected. Immediate action is required to make contraception more
widely available, accessible, and affordable. More than 74 % of the population lives in rural
areas in about 6 lakh villages. Many are with poor transport and rural infrastructure.
Reproductive health and basic health infrastructure and services do not reach the villages.
III. High wanted fertility due to the high infant mortality rate (IMR) which estimated
contribution about 20 %. Repeated child births are seen as an insurance against multiple
infant and child deaths; and high infant mortality impedes all efforts at reducing TFR.
IV. Over 50 % of girls marry below the age of 18, the minimum legal age of marriage, resulting
in a typical reproductive pattern of "too early, too frequent, too many". 33% births occur at
intervals of less than 24 months, which not only result in high MMR also results in high
IMR.

Strategy&for&implementation&of&action&plan&
1. Decentralized Planning and Implementation

243!

PRIs are an important means of decentralized planning and programme implementation in the
context of the NPP 2000. Constitution of Indias 73rd and 74th Constitutional Amendments Act,
1992, have directed PRIs to take responsibility for implementing the provisions of NPP related to
health, family welfare, and education. State govt. need to strengthen the further delegation of
administrative and financial powers to PRIs including powers of resource mobilization. As 33% of
elected panchayat seats are reserved for women, panchayats should promote a gender sensitive,
multi-sectoral agenda for population stabilization. Besides, Panchayats need to identify unmet needs
for reproductive health services, and suggest the district level committees to prepare need-based,
demand driven, socio-demographic plans at the village level. Block level institutions must identify
and provide responsive, people-centered and integrated, basic reproductive and child health care.
PRIs as the very grass root institutions have to demonstrate exemplary performance in the
compulsory registration of births, deaths, marriages, and pregnancies, universalizing the small
family norm, increasing safe deliveries. Bringing about reductions in infant and maternal mortality
and promoting compulsory education up to age 14 are also other major responsibilities of the PRIs.
2. Convergence of Service Deliveries
To make the NPP successful in long term, state govts. have to direct an integrated package of
services at village level door to door. Current health infrastructure includes 2,500 community health
centres, 25,000 primary health centres (each covering a population of 30,000), and 1.36 lakh
subcentres (each covering a population of 5,000 in the plains and 3,000 in hilly regions) is
inadequate considering the demand for services. Inadequacies in the existing health infrastructure led
to an unmet need of 30 % for contraception facilities, and widening gaps in coverage and outreach.
Health care centres are over exploited. They fail to provide services with limited personnel and
equipment to a vast number of beneficiaries.
Lack of supportive supervision, training in inter - personal communication, and motivation to work
in rural areas impede access to reproductive and child health services and contribute to poor quality
of services. Such problems are more acute particularly for remote, inaccessible, and sparsely
populated regions in the country like hilly and forested areas, desert regions and tribal areas. Govt.
with multi-stakeholders need to promote a more flexible approach, by extending basic reproductive
and child health care through mobile clinics and counseling services. Government alone cannot
make up for the inadequacies in health care infrastructure and services, in order to resolve unmet
needs and extend coverage.
3. Manpower and Logistics at village level
An increase in the number of trained birth attendants of at least two per village, is necessary to
universalize coverage and outreach of ante-natal, natal and post - natal health care. An equipped
maternity health centre in each village should be set up to serve as a delivery room with adequate

244!

midwifery kits, basic medication for essential obstetric aid, and indigenous medicines and supplies
for maternal and new born care. Programmes for safe maternity, universal immunization, child care
and oral rehydration have been combined into an Integrated Reproductive and Child Health
Programme. Integrated service delivery would facilitate the registration at village levels, of births,
deaths, marriage, and pregnancies.
Village should maintain a list of community midwives and trained birth attendants, village health
guides, panchayat sewa sahayaks, primary school teachers and aanganwadi workers to entrust
various responsibilities in the implementation of integrated service delivery. Reproductive health
services for adolescent girls and boys are especially significant in rural areas where adolescent
marriage and pregnancy are widely prevalent. Their special requirements comprise information,
counseling, population education, and making contraceptive services accessible and affordable,
providing food supplements and nutritional services through the ICDS, and enforcing the Child
Marriage Restraint Act, 1976.
4. Gender Empowerment
Women's health and nutrition is a critical determinant in socio-economic development.
Discriminatory childcare leads to malnutrition and impaired physical development of a girl child.
Proper nutrition diets in early adolescence and lack of food entitlements to the nutrition are crucial to
well-being of women and children. The positive effects of good health and nutrition on the labour
productivity of the poor are well recognized. Interventions for improving women's health and
nutrition are critical for poverty reduction. Serious pregnancy related complications results in
impaired health in early childbearing. Women's risk of premature death and disability is highest
during their reproductive years. Malnutrition, frequent pregnancies, unsafe abortions, RTI and STI
etc. keep the maternal mortality ratio in India among the highest in the world.
Maternal mortality is not merely a burden to Indian women but it is a matter of social injustice.
Maternal mortality is an indicator of disparity and inequity in access to appropriate health care and
nutrition services. Low social and economic status of girls and women limits their access to
education, good nutrition. Women in poor area cant afford to pay to pay for health care and family
planning services. Women's health and nutrition problems can be prevented through low cost
interventions designed for low income rural areas.
5. Increased Participation of Men in Planned Parenthood:
Gender inequalities in patriarchal societies ensure that men play a critical role in determining the
education and employment of family members, age at marriage, besides access to and utilization of
health, nutrition, and family welfare services for women and children. The active involvement of
men is also called for in planning families, supporting contraceptive use, helping pregnant women
stay healthy, arranging skilled care during

245!

avoiding delays in seeking care, helping after the baby is born and, finally, in being a responsible
father. More than 97% of sterilizations are tubectomies which manifests gender imbalance. Govt
must re - popularize vasectomies, in particular non scalpel vasectomy as a safe and simple procedure
focusing on men.
6. Child Health Care
High infant mortality is an indicator of poor socio-economic development; high mortality and
morbidity among infants and children below 5 years occurs on account of inadequate care, asphyxia
during birth, premature birth, low birth weight, acute respiratory infections, diarrhoea, vaccine
preventable diseases, malnutrition and deficiencies of nutrients. Govts priority is to intensify neonatal care. A National Technical Committee consisting consultants in obstetrics, pediatrics
(neonatologists), family health, medical research, public health professionals, clinical practitioners
and government representative must be set up for perinatal audit norms, developing quality
improvement activities with monitoring schedules and suggestions for facilitating provision of
continuing medical and nursing education. Implementation at the grass-roots must benefit from
current developments in the fields of perinatology and neonatology.
The baby friendly hospital initiative (BFHI) should be extended to all hospitals and clinics up to sub
centre levels in villages. Besides promoting breast-feeding and complementary feeds, the BFHI
should include updating of skills of trained birth attendants to improve new born care practices to
reduce the risks of hypothermia and infection. Universal immunization, control of childhood
diarrhoeas with oral rehydration therapies, management of acute respiratory infections, massive
doses of Vitamin A and food supplements can help in reducing infant and child mortality and
morbidity. Decline in standards, outreach and quality of routine immunization must be controlled.
7. Family Welfare Services for Under-Served Population Groups
In rural and sub-urban areas face severe problems of unmet needs for contraceptives, supplies and
equipment for integrated service delivery, mobility of health providers, patients, comprehensive
information and awareness. It is important to strengthen the cutting edge of health infrastructure at
the village, sub centre and primary health centre levels to improve facilities for referral
transportation to encourage local initiatives for ambulance services at village and block levels.
Further there is a need to increase innovative social marketing schemes for affordable products and
services for improved advocacy. More than 100 million people live in urban slums, with no access to
potable water, sanitation facilities and health care services which contributes to high infant and child
mortality. This in turn perpetuates high TFR and maternal mortality. Basic and primary health care
needs to be provided through coordination with municipal bodies for water, sanitation, waste
disposal, targeted information, and education and communication campaigns.

246!

8. Special provisions for tribal, hill area populations, displaced and migrants:
Such areas have high levels of morbidity arising from poor nutrition and low levels of literacy,
coupled with high infant, child, and maternal mortality. These areas remain under -served in the
coverage of reproductive and child health services. Such areas need special attention in terms of
basic health, and reproductive and child health services, mobile clinics, information and counseling
on infertility, regular supply of standardized medication.
9. Promote Indian Systems of Medicine and Homeopathy (ISMH)
Utilization of ISMH in basic reproductive and child health care would expand effective health care
providers, optimize utilization of local remedies and cures, and promote low cost health care.
Guidelines need to be evolved to regulate and ensure standardization, efficacy and safety of ISMH
for wider acceptability entry into national health planning.
Challenges in this regard are appropriate training, skill development in reproductive and child health
care to the institutionally qualified ISMH medical practitioners. At village levels, the services of the
ISMH "barefoot doctors", may be utilized for advocacy and counseling for distributing supplies and
equipment. ISMH practices may also be applied at village maternity centres and for ante-natal, natal
and post natal care.
10. Provisions for the older population
The elderly population is increasingly vulnerable because of lack of protection and care. Promotion
and provisions of old age health care and support is required for senior citizens. The Ministry of
Social Justice and Empowerment has adopted in January 1999 a National Policy on Older Persons to
build in geriatric health concerns in the population policy. Steps in the direction include sensitizing,
training and equipping rural and urban health centres and hospitals for providing geriatric health
care; encouraging NGOs to design and implement formal and informal schemes that make the
elderly economically self reliant.

!
!
!
!
!
247!

Chapter!29!
Guide!to!NCERTs!for!Economics!
To begin with you can start with the Economics NCERT of Class IX.
Read Chapter 1 to understand the Organization of Production, Requirement of Land, Labour and
Capital (fixed and working). While going through the chapter, ponder over the in-chapter questions.
After a thorough reading, see whether you can answer the questions given as part of Exercises
towards the end.

Once you complete the above-mentioned tasks, start with Chapter 2 People as Resource. This
would help you understand the concept of Human Resources. Try to develop an understanding about
key terms given in the chapter, like Human Capital Formation (as distinct from Physical Capital),
Economic Activities Primary, Secondary and Tertiary Sectors, Quality of Population, basic
concepts of Unemployment etc. As with the first chapter, try to answer the questions given within
the chapter as well as those given as part of the Exercises.

Chapter 3 deals with the issue of Poverty. The term Poverty has been specifically mentioned in the
UPSC syllabus. So make an earnest attempt to thoroughly understand this chapter. Try to maintain
clarity about key concepts like Social Exclusion and Vulnerability, Issues related to poverty etc.
Read the concept of Poverty Line, whether certain groups are more vulnerable to fall below the
Poverty Line, Inter-State disparities, global scenario, the Causes of Poverty, Anti-Poverty Measures
undertaken and the challenges that lie ahead. Once finished with reading the chapter, you must be
able to answer all the nine questions given as part of the Exercise.

The final chapter of this textbook is titled Food Security in India. It explains what Food Security
means, why it is needed, who are food insecure, Food Security in India, the concepts of Buffer
Stock, Public Distribution System, and Rationing, current status of PDS, Role of Cooperatives and
the like. While reading the chapter, pay special attention to the boxes. They contain some really
good pieces of information that a beginner must be thorough with. Answering the twelve questions
in the Exercise would ensure that you have thoroughly read the chapter, without missing any key
information.

When you are complete with the Class IX NCERT, move on to the Class X NCERT, which is
titled Understanding Economic Development. It has five chapters in all.

248!

The first chapter on Development will give you clarity on what development promises and whether
different people can have different development goals. Other topics like National Development,
Human Development Report, Sustainability of Development, and the like should also be understood
well.

The second chapter deals with the Sectors of the Indian Economy-Primary, Secondary and Tertiary
in detail. It also talks about the division of these into the Organized and Unorganized Sectors, as well
as Private and Private Sectors (in terms of ownership). The Exercises contain a mix of both
Objective as well as Subjective questions. Thus solving them would be pretty fruitful.

Chapter 3 titled Money and Credit talks about money as a medium of exchange, its modern forms,
loan activities of banks, different credit situations and terms of credit. Since money and banks are
something we deal with all the time, this should be fun to read as well as enriching. Moving on, it
also talks about the formal sector credit in India as well as the concept of Self-Help Groups for the
Poor.

Chapter 4 of this textbook relates Globalization to the Indian Economy. Globalization is a recurrent
theme as far as UPSC Exam questions are concerned. Lately, questions on Globalization have been
focused on its effects on a particular aspect of a nation, say economy or polity or a section of the
population, say the elderly or the women. The present chapter would give you a fairly good idea
about the basics of globalization and how it has affected the Indian economy. It also briefly deals
with the World Trade Organization.

The last chapter is on Consumer Rights. Read this to understand the rights of a consumer in a
marketplace as well as basics of Consumer Movements. The in-chapter questions as well as those
given towards the end must be thoroughly studies and an attempt must be made to answer as many
as possible.

249!