INDIAN ECONOMY

Mainstream, Vol XLIX, No 9, February 19, 2011
EMERGING CHALLENGES FOR INDIAN ECONOMY IN 2011

Monday 21 February 2011

by Shahla Tabassum and T. Sadashivam

Abstract
The status of India in the world has reached a new level with every country
looking upto us as a new avatar which was never before and the good example
is the visit of the heads of the states of five permanent members of the
Security Council in the year 2010. The main reason for this changed
perspective is because of the growing Indian economy, which has withstood
the global recession, when other countries are struggling. In 2011, there
awaits a few challenges for the Indian economy. The present article will
discuss about the emerging challenges for the Indian economy in 2011 and
the various suggestions for the growth of the economy. It also highlights
certain positive outcomes of 2010.
Introduction

WE have entered 2011 with a lot of scepticism in our hearts, with India
entering its third decade of economic reforms which began in 1991 under Dr
Manmohan Singh, then as the Finance Minister now he is the Prime Minister.
The three previous Budgets of 2008-09, 2009-10 and 2010-11, were some sort
of spending-oriented Budgets. The 2008-09 one was the first Budget of the
re-elected United Progressive Alliance Government (UPA) which provided the
massive farm loan waiver scheme of Rs 60,000 crores and it also provided a
20 per cent rise in the allocation on education and a 15 per cent hike on
health. The Budgets from 2009-10 have been basically influenced by global
recession. The last Budget of 2010-11 was more focused on Plan expenditure,
and the funds were increased to 18 per cent more compared to the last
Budget. Also, more importantly, there was the four-pronged agricultural
development programme which covers (1) agricultural production, (2)
reduction in wastage of produce, (3) credit support to farmers, and (4)
thrust to the food processing sector. But what is in store in the upcoming
Budget for 2011-12, is a matter of suspense and everybody is eagerly
waiting for it.

Emerging Challenges for Indian Economy in 2011

FIRSTLY, inflation and price rise will be topping the list of threats that
can have effect on growth in the financial year 2011-12. The rising food
prices and crude oil will be two important factors for the rise of
inflation. As far as the rising crude oil prices is concerned, in 2010
global oil prices have risen 18 per cent to $ 91.5 per barrel, and the
Organisation of the Petroleum Exporting Countries [OPEC], which controls a
third of the global supplies, says crude prices could soon reach the triple-
digit mark. Such a jump, other than fuelling inflationary pressure, would
also expand India's import bill and put pressure on the rupee, and it will
also be effected by the rise of the dollar. (Sinha, Partha 2011) The
average price of the Indian basket between April and early December was at
$ 78.31, which was almost $ 10 higher than the previous fiscal's average.
There was a six-time increase in the prices of petrol and a double-fold
enhancement in the cost of diesel in 2010.

On the food prices front, the year 2010 was volatile for the food and
agriculture sector in terms of high prices of essential commodities,
vegetables, milk, tea, coffee, sugar and edible oil. One year ago Tur Dal
sold at Rs 90 per kg in retail markets. It is still at a high of Rs 70 per
kg. Moong Dal, that was Rs. 83 per kg one year ago, is also at Rs 70. Urad
Dal, which was Rs. 74 per kg a year ago, is priced at Rs 70 per kg. Sugar,
which was Rs 21 per kg two year ago and soared to Rs 50 per kg last year,
is being sold at Rs 33 per kg, but the price will not come down below Rs 21
per kg (Parsai, Gargi 2011); if we see the production of sugar in our
country, from February 2009 till now India has imported 60 lakh tonnes of
sugar to support the domestic demand which was 2.3 crore tonne. Our
domestic production of sugar was not supporting demand and supply. Even the
Finance Minister, Pranab Mukherjee, has said that the present inflation is
not because of 'base effect' but it was 'real'. The food inflation will
come down to 6.5 per cent by only March 2011.

Even the Reserve Bank of India (RBI), as a Central Bank, has hiked its key
rates six times in 2010, so as to fight inflation. The RBI, in its second
Financial Stability Report which was released in December 2010, has
expressed
concern about inflation, particularly when food inflation in India
continues to rule at elevated levels reflecting in part the structural
demand-supply mismatches resulting from, inter alia, rising income and
changing consumption patterns. (Unnikrishnan, Dinesh 2010) However, there
are different accounts and various reasons for the price rise situations,
including the gap between supply and demand, market distortions by hoarding
and high profit margins of traders and commission agents, exports, futures
trading in commodities, intermediary taxations, controls, restrictions on
movements of goods to lack of implementation of laws by State governments.
(Op. cit., Parsai, Gargi)

The inflation will result in the rise in the subsidy bill of the government
with rise in prices of diesel, kerosene, LPG and food items. For example,
in the Budget (2010-11) the Finance Minister had allocated Rs 14,000 crores
for oil subsidy, but now it has reached to Rs 34,000 crores. Also, in
November 2010, the Finance Minister asked for the gross additional spending
of Rs 44,946 crores from Parliament, out of which Rs 10,000 crores have
been sanctioned for subsidies.

Secondly, the growing population, which we thought was a problem for the
development of the country in the past, is now emerging as an asset for the
fast growing economy. The population in India is grouped into three: in the
age-group of 0-14 years there was 31.1 per cent of population, in the age-
group of 15-64 years it was 63.6 per cent of population and above the age
group of 65 years age it was 5.3 per cent of population. Thus, the majority
of the population of our country is young and can be used as a workforce
for the development of the country. There is no country in this world which
has such a huge young population; that's why many economists suggest that
by 2030 India can overtake China in economic growth, as the latter will
have more old-age population, resulting in availability of less workforce.
But, the young population will not automatically become productive, there
is need to provide skills to India's youth. Especially if we see only 12
per cent of students have access to higher education. There exist huge
deficiencies in the infra-structure, quality, and enrolment education
system in the country, which reflects in the lack of development skills
among the Indian youth. Even Planning Commission Deputy Chairman Montek
Singh Ahluwalia has rightly said: "The future economic prospects of India
at the moment look very good but it is extremely important that the scale
of higher education should expand." (The Hindu, 2010)

Thirdly, there is still a lack of financial inclusion at present, only 45
per cent Indians have access to bank accounts and there is the low ratio of
one bank branch for 16,000 people. Many people living in six lakh villages
still don't have access to banks. Here, the need for banking is more
important especially when we are seeing that in a large number of
government schemes like the Mahatma Gandhi National Rural Employment
Guarantee Act, pension schemes etc, payments could be channelled through
the banking system. Also, the surplus rural income, which was deposited in
the banks, can be converted into investment funds for the economy. The
strong financial inclusion can support a vibrant and inclusive economy.
Although in the last Budget, it was mentioned that the RBI would issue bank
licences, particularly to the already Non-Banking Financial Companies
[NBFCs], which will help in the rural areas and lead to financial
inclusion, unfortunately there was lack of consensus between banks and
industry associations, NBFCs and Microfinance Institutions [MFI] on the
various issues from permitting industrial houses or corporates into the
banking system, minimum capital requirement of the new banks and the issue
of foreign shareholding in the new banks etc.

Fourthly, the Budget of 2010-11 reiterated the commitment to introduce the
Goods and Services Tax [GST] and Direct Tax Code [DTC] by April 2011. But
it seems that at this moment it is not feasible to implement this; the DTC
is in Parliament (with the Standing Committee) and as far as the GST is
concerned, a lot of confusion prevails between the Centre and States in
terms of design, mechanisms of administration of the GST and rates of tax,
a compensation for revenue loss to the States etc. (Pinaki Chakraborty and
Lekha Chakraborty 2010) Out of the above two, the DTC is more under the
control of the Union Government and, if implemented, will help to simplify
the various tax laws, introduce moderate rates and more importantly reduce
the exemptions given in the Budget, which will overall result in the growth
in direct taxes. The GST is more dependent on the States' cooperation and
aims to create a common market in India. The various studies commissioned
by the 13th Finance Commission indicated that with the implementation of
the GST throughout the country, inefficiency in the tax system will be
removed resulting in the increase in Gross Domestic Product by almost Rs
one trillion.

Also, recently the United Nations, in its Report on The World Economic
Situation and Prospect 2011, points out that although the weaknesses of the
developed world were offset by the growth in the emerging economies, two
main challenges remain. Firstly, the dangers posed by premature fiscal
consolidation in the developing world, and secondly, the valid concerns
over the ability of the emerging world to sustain its performance,
particularly given its dependence on the developed markets. (The Hindu,
2011)

Suggestions for Growth of the Economy

IN the developing countries it is always a problem to maintain a balance
between spending and fiscal prudence. This is especially important in the
Indian context, because we want to achieve inclusive growth, and for
achieving that, we need huge spending on the part of governments for
implementing various initiatives and programmes and on some ocasion this
will go against sound public finances. Thus, a few important points must be
taken into consideration for the betterment of our economy.

Home Minister P. Chidambaram, while addressing the Southern India Chamber
of Commerce and Industry, raised the issue of deficit in the fields of
governance, regulatory and business ethics. He said the nation can't
sustain the nine per cent growth and the gains of economic reforms of the
last two decades, unless the deficit in the above fields was considered.
Sectors like power, surface transport, shipping and various other sectors
have huge yawning gaps when compared to other sectors. Thus, the huge
governance deficit in these sectors will not help the economy as all these
sectors contribute for the country's growth. There is also the need to
regulate vast sectors of the economy which are unregulated like real
estate, mining and quarrying sectors that generate huge profits and one
also the drivers of growth, but not regulated. Simultaneously there is
ethical deficit in businesses, with many of then just focusing on only
'maximising their profits', which will not be helpful to sustain growth and
make it inclusive and spread it to the interior parts of the country. (The
Indian Express 2011) Thus, there is the need to address or bridge the above
deficit for the welfare of the country.

In 2011, economic reforms need to be taken especially the infrastructure
sector. For instance, if we want to control food inflation, infrastructures
like warehouses and cold storages should be established. The 12th Five Year
Plan panel has asked the Finance Ministry to examine the possibility of
setting up several Infrastructure Debt Funds [IDFs] to fund core sector
development activities in the country, which are estimated to cost $ 1
trillion during the 12th Five Year Plan. [2012-17] Montek Singh Ahluwalia
has rightly said that 'it would be very good idea if we can have not just
one debt fund… (but) several debt funds. In order to make it possible, you
need several regulatory relaxations or modifications.'
(Source—http://www.livemint.com/2010) The private sector needs to finance
50 per cent of the total $ 1 trillion investment.
Some of the recommendations of the 13th Finance Commission should be
taken into serious consideration and implemented. The Commission has felt
that high public debt and deficit, which will impact on the spending arm of
government especially on key sectors such as education, health etc. will
need huge privatisations or aggressive privatisation programme over a
period of five years [2012-17], so as to help the government get its
finances in order. Also, it emphasises that the lower level of government
below the centre, that is, State government, local self-governments (both
urban bodies and panchayats) should be encouraged and a fiscal space for
them created.

There is need for a tight audit system for flagship schemes and improving
the delivery systems of various services. If we closely observe, around 20
of the 150 Centrally sponsored schemes account for half of the Centre's
2010-11 Plan fund of Rs 3,75,000 crores. These include the Mahatma Gandhi
National Rural Employment Guarantee Act [MNREGA], National Rural Health
Mission [NRHM], and Sarva Shiksha Abhiyan [SSA]. In these programmes there
exist an improper identification of beneficiaries, diversion of funds, weak
internal controls and poor performance evaluation as the common problems.
Thus, there is need for auditing of these programmes so as to reduce
apparent irregularities in the utilisation of funds and improve their
efficiency. (IIPA Newsletter 2010) There is also the need to improve the
delivery systems so as to provide various services to the citizens in an
easy and comfortable way, capable of reducing the interaction with
intermedive and less physical contact with government officials, that will
save lot of money for individuals and also for the government. This can be
achieved with more emphasis on implementation of various e-governance
projects throughout the country. For example, a 'Single Universal Identity
Number', provided by the 'Unique Identification Authority of India' [UIDAI]
to every individual of the country, will help in eliminating fraud and
duplicate identities, resulting in significant saving to the state
exchequer upwards of Rs 20,000 crores a year.

Positive Features of 2010

THE year 2010 will be remembered for many developments in the economic
field. The most dramatic event which took place was the revival of the
government's disinvestment process—the government owned institutions alone
mobilised Rs 49,007 crores out of a total of Rs 69,132 crores mobilisation
in the primary market, which is the highest ever in the history of the
primary market. Here, the government contributed more than 70 per cent of
mobilisation money through its three Initial Public Offers [IPOs] and six
Follow-on Public Offers [FPOs], in which Coal India's Initial Public
Offering was subscribed about 15 times and generated a demand worth Rs 2.36
lakh crores, the largest and most successful offer ever, which was closed
on October 22. The government in 2011 is planning to sell stakes in the
Indian Oil Corporation, Oil and Natural Gas Corporation and also in about
60 state-run firms.

If we talk about the sensex, the Bombay Stock Exchange closed at 20,509.09
points and in terms of absolute performances it compared quite favourably
with Brazil, Russia and China. The Foreign Institutional Investors [FIIs]
have infused net $ 28.5 billion into the Indian stock market, an all-time
high. The Non-Tax Revenue has increased higher than the Budget estimate for
the entire fiscal, basically because of higher amount realisation from
Third Generation [3G] auction of spectrum, which contributed Rs 67,000
crores, more than what the government had estimated.

On the agriculture front, there is good news, the Indian GDP in the second
quarter of 2010-11 has registered a growth rate of 8.9 per cent and the
credit for this should go to the manufacturing, trade, hotels and
restaurant sector and most importantly agricultural and allied sectors
which have grown to 4.4 per cent. The southwest monsoon this year has
helped the agriculture sector to grow; if we see the kharif output this
year it was 114.63 million tonnes which is much higher than 103 million
tonnes last year and there are also good prospects for rabi crop this year.

Conclusion

THUS, what we have seen is that there exist new emerging challenges in
2011, and these the UPA Government has to take into account, while going
ahead towards achieving an economic growth of more than eight per cent of
the GDP. Although we are the second fastest economy, still a majority of
the industrialised countries are coming out of the global recession very
slowly, and this will have some kind of impact on achieving the above
purpose. What is needed is a balanced government initiative for economic
reforms, which would comprise fiscal consolidation, reduction of fiscal
deficits and importantly hike in allocations for infrastructure, rural
development and social sectors, especially health and education, which can
go a long way in the development of the country. And the benefits of
economic growth can be equally distributed in the society, so that
everyone—from people living in the urban areas to those in the rural
areas—feel that they are also positively influenced by the economic growth
of the country. Therefore, the upcoming Budget (2011-12) could provide the
roadmap or foundation for continued growth with greater inclusion and
become a stepping stone for the future to realise social equity.

REFERENCES

1. Sinha, Partha (2011), "Inflation, Crude may derail markets", The Times
of India, December 31, Friday. Source—http: //times of
india.indiatimes.com/business/india-business/inflation-crude-may-derail-
mkts-/articleshow/7194283.cms. Accessed on 2/01/2011.

2. Parsai, Gargi (2011), "No relief from high food prices in New Year", The
Hindu, January 2, Sunday, New Delhi.

3. Unnikrishnan, Dinesh (2010), "RBI stability report shows concern over
rising inflation", Live Mint.Com-The Wall Street Journal. Source-
http://www.livemint.com/2010/12/302/5540/RBI8217s-stability-report-
s.html?atype=tp. Accessed on 3/01/2011.
4. Op. cit., Parsai, Gargi.

5. The Hindu (2010), "Expand varsities in Public, Private Sectors",
December 18, Saturday, New Delhi.

6. Pinaki Chakraborty and Lekha Chakraborty (2010), "A tight rope walk
towards Fiscal Consolidation", Yojana— A Development Monthly Magazine,
Volume 54, March, New Delhi, p. 15.

7. The Hindu (2011), "Policy Imperatives for Growth—An Editorial Article",
January 4, Tuesday, New Delhi.

8. The Indian Express (2011), "Lack of Business Ethics will render Zero
Growth", January 2, Sunday.
Source—http://expressbuzz.com/coties/Chennai/lack-of-business-ethics-will-
render-growth%e2%80%99/236182.html. Accessed on 2/01/2011.
9. Source—http://www.livemint.com/2010/12/21154754/montex-for-several-debt-
funds.html. "Montek for Several Debt Funds", Accessed on 5/01/2011.
10. IIPA Newsletter (2010), "Tight audit system for Flagship Scheme",
Indian Institute of Public Administration, Voume.LIV, No.12, December, New
Delhi, p. 8.


The authors are Doctoral Research Scholars, Department of Political
Science, School of Social Sciences, Jamia Millia Islamia, New Delhi.