INDIA DEVELOPMENT REPORT2008

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INDIA DEVELOPMENT REPORT2008

edited by

R. RADHAKRISHNA

1

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Preface

The Indian economy has been one of the fastest growing economies of the world since 2003–4 and there are signs that it ison its way to emerging as a major economic power. At the same time it has experienced severe agrarian crises which havemanifested in farmer suicides. There has been a growing recognition among policy makers that achieving high growth isone issue, but making it pro-poor is another. In recent years, there has been a decisive shift in policy in favour of inclusivegrowth. However, it is to be seen how far policy pronouncements translate into concrete action.

The IDR series provides a comprehensive view of the contemporary problems faced by the Indian economy. The IDR2008 (the fifth in the series), prepared mostly by the faculty and researchers of the Indira Gandhi Institute of DevelopmentResearch (IGIDR), focuses on inclusive growth and carries forward the debate initiated in IDR 2004–5. It analyses issuesassociated with sustaining high growth, achieving macroeconomic stability, quality, and adequacy of higher education,employment, agrarian crisis, implications of globalization, and so on. The statistical appendices contributed by S.L. Shettyof Economic and Political Weekly Research Foundation (EPWRF), constitute a comprehensive database on the Indianeconomy. The report is lucid and written keeping the general reader in mind. The views expressed here are those of theindividual authors.

I would like to thank Sheila Bhalla, Nirmal Chandra, S.R. Hashim, Amitabh Kundu, D. Narasimha Reddy, Mihir Rakshit,V.M. Rao, C. Ravi, J.C. Sandesara, and K.K. Subramanian for acting as peer reviewers and S. Chandrasekar, Rohit Mutatkar,and Shovan Ray for their editorial support. Patrick Lewis has ably co-ordinated the production and Lavina D’Souza hasprovided considerable secretarial assistance. I am also grateful for the editorial support and help provided by Oxford Uni-versity Press, New Delhi.

R. RADHAKRISHNA

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Contents

List of Tables x

List of Figures xiii

List of Boxes xv

List of Statistical Profile xvi

List of Abbreviations xix

List of Contributors xxii

1. Overview: Growth: Achievements and Distress 1

R. Radhakrishna • S. Chandrasekhar

Performance of the Indian Economy 1Emerging Indian Economy 2Growth and Well-being 5Employment 9Agrarian Crisis 12Higher Education 13Emerging Issues in the Financial System 14India in a Globalizing World 17Concluding observations 18

2. Macroeconomic Overview 20

Manoj Panda

Introduction 20National Income Growth 20Other Macroeconomic Developments 27Asian Economic Integration 32Poverty and Distribution 34Conclusion 38

3. Crisis in Agriculture and Rural Distress in Post-Reform India 40

D. Narasimha Reddy • Srijit Mishra

Introduction 40Agrarian Structure on the Eve of Economic Reforms 41Reforms and Impact on the Farming Community in Agriculture 41Rural Distress and Farmers’ Suicides 47Reform-led Growth, Small Peasant Adjustment Cost, and The Need for State Support 50

viii CONTENTS

4. Employment and Unemployment Since the Early 1970s 54

T.N. Srinivasan

Introduction 54Trends in Employment and Unemployment Rates 56Conclusions 63

5. State of Higher Education in India 71

S.R. Hashim

Changing Perception about Value of Higher Education 72Education and Earning 74Household Expenditure on Education 75Growth of Higher Education 76Investment in Higher Education 79Using the Existing Research Infrastructure for Teaching at Higher Levels 81The Rural–Urban Gap in Education 83Summary and Conclusion 84

6. Exploring Intra Urban Differences in Economic Well-Being in India 87

S. Chandrasekhar • Tesfayi Gebreselassie

Introduction 87Data 88Extent, Distribution, and Characteristics of Slum Population 89Heterogeneity in Slum Population 91Intra Urban Differences in Economic Condition of Households 92Conclusion 95

7. Macroeconomic Policy and the Exchange Rate: Working Together 96

Ashima Goyal

Introduction 96India’s Changing Exchange Rate Regime 97Stability of Forex Markets 98Internal and External Balance 101Inflation and the Labour Market 106Structure, Monetary, and Fiscal Policy 109Conclusion 110

8. Emerging Policy Regime for Bank Credit Delivery and Tasks Ahead: A Critical Review 112

S.L. Shetty

Introduction: Importance Assigned to Finance for Development 112Post-nationalization and Post-reform Banking Developments 113Micro-credit Movement in India 124Disappointing Ground Reality After the 1990s 126More decisive evidence from AIDIS and Other Field Studies 128New Initiatives for Expanding Credit Flow to Agriculture and Other Priority Sectors 129New Policy Regime for Better Credit Delivery: Tasks Ahead 131

9. Non-Perfoming Assets in Indian Banking: Magnitude, Determinants, andImpact of Recent Policy Initiative 134

Kausik Chaudhuri • Rudra Sensarma

Introduction 134

CONTENTS ix

Literature Review 135Indian Banking System and its NPA Problem 135Prudential Norms and Regulatory Response to NPAs 138Empirical Methodology and Data 140Empirical Results 140Impact of Policy Response 142Policy Implications and Concluding Remarks 143

10. India and China: Changing Patterns of Comparative Advantage? 145

C. Veeramani

Trade Policy Reforms 146Growth of Exports 147Structure of Exports and Changing Comparative Advantages 148Conclusion and Implications 155

11. Indian Textile and Apparel Sector: Performance, Employment, and Demand 157

G. Badri Narayanan

Introduction 157Indian Textile Sector in the International Market 158India’s Organized Textile Sector: Performance and Employment 161Performance of India’s Unorganized Textile Sector 166Domestic Consumption of Textiles in India 172Conclusions 175

12. Globalization, Employment, and Labour Market Flexibility: The Case of India 178

K.V. Ramaswamy

The Issues 178Globalization and Employment 179Aggregate Employment 179Job Security Regulations: Impact on Labour Markets 180Empirical Studies 182Manufacturing Employment in India: Past Trends and the Debate 183Trade and Manufacturing Employment in India in the 1990s 183

A Statistical Profile of India’s Development 189

Tables

2.1 Average Annual Growth Rates in Real GDP 212.2 Index Number of Agricultural Production, Area, and Yield 232.3 Growth in Index Number of Industrial Production by Use-based Sectors 252.4 Savings and Capital Formation 282.5 Fiscal Parameters of Central Government 302.6 Fiscal Parameters of State Governments 302.7 Fiscal Parameters of Central and State Governments Combined 312.8 Major Foreign Trade Parameters 312.9 Direction of India’s Exports 32

2.10 HCR of Poverty for Major Indian States 352.11 Urban–Rural Differences in MPCE 37

3.1 Important Measures of Economic Liberalization in Indian Agriculture 433.2 Capital Formation and Plan Expenditure in Agriculture 443.3 Per Worker Income in Agriculture and Non-agriculture Sectors in india 453.4 Number of Poor and Undernourished Persons in Various Farm Categories in Rural India 463.5 Trends in CDR and SMR in India, 1981–2003 473.6 Age-adjusted Male SMRs in India and Selected Indian States 483.7 Age-adjusted SMRs for Male Population and Male Farmers 49

A3.1 Returns Per Hectare and Expenses as Per Cent of Value of Output, 2002–3 53

4.1 Employment Rates 584.2 Unemployment Rates 594.3 Employment Status 604.4 Labour Force Participation Rates 614.5 Within Reference Week Distribution of Labour Force, 1999–2000 624.6 Change in Employment Rate 644.7 Per 1000 Distribution of Usually Employed by Broad Groups of Industry for

Various Rounds, All India 65A4.1 Employment Rates: Number of Persons (person-days) Worked Per 1000 Persons (person-days)

According to US, CWS, and CDS Approaches for Different Rounds 69A4.2 Unemployment Rates: Number of Persons (person-days) Unemployed

Per 1000 Persons (person-days) in the Labour Force for Different Rounds 69A4.3 Employment Status: Per 1000 Distribution of Usually Employed by Status of

Employment for Different Rounds 70A4.4 Labour Force Participation Rates: Number of Persons (person-days) Employed and

Unemployed Per 1000 Persons (person-days) for Different Rounds 70

5.1 Incidence of Poverty by Landholding Groups, 1993–4 725.2 Percentage Share of Number and Area under Marginal Holdings 73

TABLES xi

5.3 Sectoral Share in GDP 745.4 Percentage Distribution of Households and Income by Education Level of the

Head of the Household 745.5 Household Income by Head’s Education and Age 755.6 Income Elasticity of Household Expenditure on Education 755.7 Per Capita Consumption Expenditure on Education by Income Group 755.8 Educated Youth in the Labour Force, Middle Level of Schooling, and Above 765.9 All India Growth of Student Enrolment (Higher Education), 1982–3 to 2001–2 77

5.10 Expenditure on Education in Five Year Plans 795.11 Growth in Public Expenditure on Education in India 79

6.1 Differences Across Slum and Non-slum Households 906.2 Variation in the Characteristics of Slum Population Residing in Different Wards of

the Same Municipal Corporation 916.3 Mean of Assets by Resident Type 936.4 Scoring Factors based on the First Principal Component and Summary Statistics 94

7.1 Depreciation or Appreciation, End December 987.2 Yearly Volatility of the Exchange Rate 987.3 Taking Account of the Trade Basket and Inflation 106

8.1 Spread of Bank Branch Network in India 1148.2 Population Group-wise C–D Ratio as per Sanction and Utilization 1158.3 Regional Scenario of C–D Ratios 1158.4 C–D Ratios for Selected States 1158.5 State-wise Classification of Districts by Size of C–D Ratios, March 2005 1168.6 District-wise Aggregate Deposits and Bank Credit for Maharashtra and Andhra Pradesh 1178.7 Number of States and UTs in Different Ranges of C–D Ratio, March 2003 1188.8 Region-wise CDR and C+I/D Ratio of Scheduled Commercial Banks 1188.9 Region-wise Credit Plus Investment Plus RIDF to Deposit Ratio 118

8.10 Outstanding Credit of SCBs Against Agriculture and SSIs 1198.11 Direct and Indirect Finance for Agriculture and Allied Activities by SCBs 1208.12 Flow of Total Institutional Credit for Agriculture by Institution 1208.13 Agency-wise Break-up of Term Credit flow 1218.14 Flow of Institutional Credit for Agriculture by Category 1228.15 Data Reported on Agricultural Advances of Public Sector Banks 1228.16 Trends in the Number of Small Borrowal vis-à-vis Other Bank Loan Accounts 1238.17 NABARD: Bank-SHG Credit Linkage Programme Cumulative Progress upto 2004–5 1258.18 Progress under SIDBI Foundation for Micro Credit (SFMC) 1258.19 Cumulative Growth in SHG-Linkage in Priority Status 1258.20 Relative Share of Borrowing of Cultivator Households from Different Sources 1298.21 Indebtedness of Farm Households Classified According to Land Possessed 129

9.1 Asset Structure of Indian Commercial Banking System 1359.2 Incidence of Gross and net NPAs of SCBs 1379.3 Cross-country Comparisons of Gross Non-performing Loans to Total Loans 1389.4 Nature and Strength of Impact of Various Factors on NPAs 1419.5 Nature and Strength of Impact of Policy Responses on NPAs 142

10.1 Average Import Tariff Rate 14610.2 Average Annual Growth Rate of Exports 14710.3 Structure of Exports by Commodity Group 149

xii TABLES

10.4 Composition of Exports by Factor Intensity 15010.5 Patterns of Comparative Advantage According to Factor Intensity 15110.6 Patterns of Comparative Advantage According to Commodity Group 15210.7 Shares of India and China in World Exports by Commodity Group 15310.8 Expansion of Trade by Products, 1980–4 to 2000–3 15310.9 Structural Change of Exports and Comparative Advantage Across Products 154

11.1 Annual Growth Rates of Textile and Apparel Exports 16111.2 Average Annual Growth Rates in the Organized Indian Textile Sector 16211.3 Trends in Some Ratios of Capital (K), Output (Y), and Employment (N) 16211.4 Trends in Effective Rates of Protection for Different Sub-sectors in the Indian Textile Sector 16311.5 Salient Features of the Organized Textile and Apparel Sector in India: Recent Trends 16511.6 Shares of Various Sub-sectors in Different Sectors, 2000–1 16611.7 Annual Average Growth Rates in Unorganized Textile Sector 16811.8 Trends in Partial Productivity Measures in Unorganized Textile Sector in India 16911.9 Growth Trends of Partial Productivity Measures in Unorganized Textile Sector in India 170

11.10 Trends in Per capita Consumption Expenditures and Shares on Clothing in Rural India 17211.11 Trends in Per Capita Consumption Expenditures and Share of Clothing in Urban India 17311.12 Indian Textile and Apparel Sector—Trends in Growth of Supply and Demand 17311.13 Trends in Excise Structure of Various Textile Staple Fibres in India, 1992–2005 17311.14 Trends in Excise Structure of Various Textile Yarns Based on Filaments and

Staple Fibres in India, 1992–2005 17411.15 Trends in Excise Structure of Various Textile Fabrics in India, 1992–2005 17411.16 Elasticities of Various Textile Commodity Groups to their Prices and Textile Expenditure 17511.17 Credit Applications that were Received and Disbursed under TUFS 176

12.1 Distribution and Growth of Non-agricultural Employment, 1994–2000 17912.2 Key Industries in Six Industry Groups 18412.3 Employment in Six Industry Groups, 2001–2 18412.4 Employment Growth Rates in Indian Manufacturing, 1989–2001 18412.5 Employment Elasticity in Indian Manufacturing by Industry 18412.6 Organized Sector Jobs by Industry, 1994–2000 18512.7 Growth of Contract Labour in Factories 18512.8 Distribution of Factories by Employment Size and Trade Orientation, 2000–1 186

Figures

1.1 All-India and Statewise Incidence of Poverty (Rural + Urban) 61.2 Percentage Share of States in All India Poor (Rural + Urban) 61.3 Index of Average Monthly Per Capita Expenditure in the Rural Sector 71.4 Incidence of Malnutrition among Children in All India and Selected States

(Rural + Urban) 91.5 Trends in Unemployment, 1987–8 to 2004–5 11

2.1 Real GDP Growth on Annual Basis and 3-year Moving Average Basis 212.2 Composition of GDP by Major Sectors (per cent) 222.3 Average Annual Growth Rates in Index Number of Agricultural Production 232.4 Gross Capital Formation in Agriculture (at 1993–4 prices) 232.5 Annual Growth in Index Number of Industrial Production 242.6 Average annual growth rate of service sectors, 2000–5 262.7 Growth in Monetary Variables (per cent) 282.8 Inflation Rate for WPI and CPI 292.9 Average Annual Growth Rate in Per Capita GSDP Across States 36

2.10 Coefficient of Variation in Per Capita GSDP among Major States 36

3.1 Indices of FBI and CPIAL 453.2 SMR for Male Farmers and Non-farmers in India, 1995–2004 48

5.1 Percentage Distribution of Households and Income 745.2 Per Household Income by Head’s Education and Age 755.3 All India Growth of Student Enrolment (Higher Education), 1982–3 to 2001–2 785.4 Expenditure on Education in Five Year Plans 795.5 Growth in Public Expenditure on Education in India 80

6.1 Share of India’s Slum Population 896.2 Distribution of Households Based on Asset Index Quantiles by Location 94

7.1 Post-reform Exchange Rates 977.2 Recent Daily Fluctuations in Spot Exchange Rates 997.3 Shrinking the Impossible Trinity 104

8.1 Trends in Agriculture Credit: Number of Borrowal Accounts 1268.2 Trends in Credit for SSI Sector: Number of Borrowal Accounts (For SCBs) 1278.3 Percentage Shares of Agriculture and SSI Credit in Total Bank Credit (By SCBs) 1278.4 Number of Small Borrowal Accounts (For SCBs) 1278.5 Prcentage Share of Credit of Small Borrowal Accounts to Total Credit (By SCBs) 128

xiv FIGURES

9.1 Gross NPAs to Gross Advances, 2001–5 Public Sector and Private Sector Banks 1369.2 Gross Non-performing Loans to Total Loans, 2001–5 138

10.1 Trends in India’s Exports, Imports, and Trade Balance 14710.2 Comparative Export Performance, 1950–2004 148

11.1 Exports of Silk and Silk Products at Constant Prices 15911.2 Exports of Wool and Wool Products at Constant Prices 15911.3 Exports of Cotton and Cotton Products at Constant Prices 15911.4 Exports of Products from Manmade Filaments at Constant Prices 15911.5 Trends in Percentage Shares of Exports of some Non-cotton

Textile Products in Total Exports from India. 16011.6 Trends in Percentage Shares of Exports of some Cotton Textile and all

Apparel Products in Total Exports from India 16011.7 Employment Trends in Non-mill Textile Sector 16411.8 Employment Trends in Different Sub-sectors of Textile Wet Processing Sector 16411.9 Employment Trends in Textile Wet Processing Sector 16511.10 Employment Trends in Sub-Sector in Textile Sector 165

Boxes

2.1 Long-term Scenarios for Asian Growth: Need for Asian Economic Integration 332.2 National Rural Employment Guarantee Act, 2005 37

5.1 Pressure of Competition for Available Seats in the Institutions of Higher Learning 725.2 Farming has Become a Risky Vocation 735.3 The Goal of Spending Six Per cent of GDP on Education 785.4 Need for Regulating Quality of Curricula and Institutions 805.5 Research Support Structures 815.6 Success Rate by Medium—UPSC Civil Services Main Examination 83

7.1 Speculation versus Hedging 997.2 Forex Markets and Central Bank Intervention 1007.3 Monetary Policy Shocks 1017.4 The Road to Full Capital Convertibility 1027.5 The impact of Monetary Policy in an EME: The Mundell–Fleming Model 1037.6 The Difference Between Indian GDP and GNP 1057.7 Strategies to Absorb Foreign Inflows 107

10.1 Major Reforms in China 14610.2 Major Reforms in India 14610.3 Contribution of FDI to Export Growth in China and India 14810.4 Market Seeking vs Export Promoting FDI 148

12.1 Introducing Flexibility: The Case of Spain 18212.2 Fixed-term Contract in Indian Industry 18512.3 Job Security Regulations in India 186

A Statistical Profile

REAL SECTOR

A1 National Income

A1.1 Key National Accounts Aggregates (at Constant Prices) 191A1.2 Gross and Net Domestic Savings by Type of Institutions (at Current Prices) 195A1.3 Gross Capital Formation by Type of Institutions at Current Prices 197A1.4 Net Capital Stock By Type of Institutions and Capital-Output Ratios 201A1.5 Rank of States in Descending order of Per Capita State Domestic Products in Real Terms

(Three-yearly Annual Averages) 203

A2 Production

A2.1 Production Trends in Major Agricultural Crops 205A2.2 Trends in Yields of Major Crops 207A2.3 Horticulture and Live Stock Production 208A2.4 Value of Output from Agriculture, Horticulture, and Livestock 209A2.5 Structural Changes in Indian Industry and Decadal Growth 211A2.6 Index of Industrial Production with Major Groups and Sub-groups 212

A3 Budgetary Transactions

A3.1 Budgetary Position of Government of India 216A3.2 Consolidated Budgetary Position of State Governments at a Glance 218

A4 Money and Banking

A4.1 Money Stock Measures 219A4.2 Selected Indicators of Scheduled Commercial Banks Operations (Year-End) (Outstandings) 220A4.3 Trends in Statewise Bank Deposits and Credit and Credit-Deposit Ratios

(For Scheduled Commertial Banks) 221A4.4 Trends in Districtwise Deposits and Credit (as per Utilisation) and Credit-Deposit Ratios 223A4.5 Distribution of Outstanding Credit of Scheduled Commercial Banks According to Occupation 224A4.6 Resources Mobilisation from the Primary Market 226

A5 Capital Market

A5.1 Trends in Resource Mobiliation by Mutual Funds 228A5.2 Trends in Resource Mobiliation by Mutual Funds 230A5.3 Trends in FII Investments 231A5.4 Business Growth of Capital Market Segment of NSE 232A5.5 Settlement Statistics of Capital Market Segment of National Stock Exchange of India (NSE’s) 233A5.6 Business Growth Of The Futures and Options Market Segment, NSE 234A5.7 Settlement Statistics In Futures and Options Segment, NSE 235A5.8 Business Growth On The WDM Segment, NSE 235

A STATISTICAL PROFILE xvii

A5.9 Business Growth and Settlement of Capital Market Segmen, BSE 236A 5.10 Secondary Market Turnover in Financial and Commodities Market 237

A6 Investment

A6.1 Trends in Total Investment and Investment Under Implementation by Industry 238A6.2 Trends in Total Investment and Investments Under Implementation by States &

Union Territories 240

A7 Prices

A7.1 Wholesale Price Index: Point-to-Point and Average Annual Variations 241A7.2 Cost of Living Indices 243

EXTERNAL SECTOR

A8 Balance of Payments

A8.1 Foreign Exchange Reserves (End Period) 246A8.2 Balance of Payments 1990–1 to 2005–6 247A8.3 Invisibles Account on Balance of Payments 251

A9 Exchange Rate

A9.1 Exchange Rate for the Indian Rupee vis-à-vis Some Select Currencies(Indian Rupee per Currency) 253

A9.2 Indices of Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER)of the Indian Rupee 255

A9.3 Weighing Diagrams for RBI’s NEERs and REERs. 256

A10 Foreign Trade

A10.1 Changing Scenerio in Foreign Trade 257A10.2 Foreign Trade with Major Trading Partners 259

A11 Foreign Investment and NRI Deposits

A11.1 Foreign Investment Inflows 260A11.2 NRI Deposits - Outstandings as at the End Period 261A11.3 FDI Inflows: Year-wise, Route-wise, Sector-wise Break-up and Country-wise Break-up 262

DEMOGRAPHY AND SOCIAL SECTOR

A12 Population

A12.1 Statewise Population 1951–2001 264A12.2 Statewise: Rural and Urban Population of India: 1951–2001 265A12.3 Statewise: Sex Ratio 266A12.4 Statewise—Literacy Rate: 1951 to 2001 267A12.5 Statewise Infant Mortality Rate: 1961, 1981, 1991, 2001, 2002, and 2003 268

A13 Human Development Indices

A13.1 Human Development Index for India by State 1981, 1991, and 2001 269A13.2 State-wise Poverty Estimation HCR 270

A14 Employment

A14.1 Total Population, Workers and Non-Workers as Per Population Censuses 271A14.2 Number of Persons Employed per 1000 Persons according to Usual Status and

Current Weekly Status Approaches 272

xviii A STATISTICAL PROFILE

A14.3 Per 1000 distribution of the Usually Employed by Status of Employment for All(Principal and Subsidiary Status Workers) 273

A14.4 Unemployment Rate 274A14.5 State-wise Labour Force and Work Force Participation Rates by Place of

Residence and Sex: 1983 to 1999–2000 275A14.6 State-wise Sectoral Distribution of Usual (Principal + Subsidiary)

Status Workers: 1983 to 1999–2000 276A14.7 State-wise Composition of Rural and Urban Usual (Principal + Subsidiary)

Status Workers: 1983 to 1999–2000 277A14.8 Trends in Number and Employment of Agricultural (excluding crop production and plantation)

and Non-Agricultural Enterprises,1980–2005 and growth 278A14.9 Percentage Distribution of Gainfully Employed Persons

( ie by usual status for all workers ie PS+SS), by Industry 282

A15 Household Indebtedness

A15.1 Household Indebtness A Profile 288

A16 International Comparison

A16.1 Development Characteristics of Some Selected Countries 290

Abbreviations

ADB Asian Development BankAFTA ASEAN Free Trade AgreementAoA Agreement on AgricultureASEAN Association of South East Asian NationsASI Annual Survey of IndustriesBSE Bombay Stock ExchangeBSR Basic Statistical ReturnsCAD Current Account DeficitCAR Capital Adequacy RatioCB Central BankC–D Credit–DepositCDR Crude Death RateCDR Corporate Debt RestructuringCDS Current Daily StatusCPI Consumer Price IndexCPIAL CPI for Agricultural LabourCRAR Capital to Risk-Weighted Assets RatioCRR Cash Reserve RatioCSO Central Statistical OrganizationCV Coefficient of VariationCWS Current Weekly StatusDFI Development Finance InstitutionDGET Directorate General of Employment and TrainingDHS Demographic Health SurveyDME Directory Manufacturing EstablishmentDRT Debt Recovery TribunalEME Emerging Market EconomyEMI Employment Market InformationEO Export OrientedES Enterprise SurveyEU European UnionEUS Employment and Unemployment SurveysFBI Farm Business IncomeFDI Foreign Direct Investmentffr Federal Fund RateFI Financial InstitutionFRBM Fiscal Responsibility and Budget ManagementFSU First Stage UnitGCC General Credit Card

xx ABBREVIATIONS

GCF Gross Capital FormationGDCF Gross Domestic Capital FormationGSP Generalized System of PreferencesHCR Head Count RatioHYV High Yielding VarietyIC Import CompetingICT Information and Communication TechnologyIGIDR Indira Gandhi Institute of Development ResearchIIT Indian Institute of TechnologyIMF International Monetary FundIT Information TechnologyJSR Job Security RegulationsKCC Kissan Credit CardLR Labour ReserveMCPS Monopoly Cotton Procurement SchemeM–F Mundell-FlemingMFA Multi-fibre AgreementMFI Microfinance InstitutionsMOF Ministry of FinanceMPCE Monthly Per Capita Consumption ExpenditureMSP Minimum Support PriceMTFR Medium Term Fiscal ReformNABARD National Bank for Agriculture and Rural DevelopmentNAFTA North American Free Trade AgreementNAS National Account StatisticsNCAER National Council for Applied Economic ResearchNCL National Commission for LabourNCRB National Crime Records BureauNDME Non-directory Manufacturing EstablishmentNEER Nominal Effective Exchange RateNFA Net Foreign AssetsNGO Non-governmental OrganizationNIC Newly Industrialized CountriesNPA Non-performing AssetNREG National Rural Employment GuaranteeNSSO National Sample Survey OrganizationNTC National Textile CorporationOAME Own Account Manufacturing EnterpriseOCR Operating Cost RatioODL Open and Distance LearningOECD Organization for Economic Co-operation and DevelopmentOEM Open Economy MacroeconomicsOGL Open General LicensingOTS One Time SettlementPC Population CensusPPP Purchasing Power ParityPSU Public Sector UnitQR Quantitative RestrictionsRBI Reserve Bank of IndiaRCA Revealed Comparative AdvantageREC Regional Engineering CollegeREER Real Effective Exchange Rate

ABBREVIATIONS xxi

RFAS Rural Finance Access SurveyRIA Regional Integration AgreementsROA Return on AssetsROW Rest of the WorldRRB Regional Rural BankRTA Regional Free Trade AgreementSAFTA South Asia Free Trade AgreementSAP Structural Adjustment ProgrammeSCB Scheduled Commercial BankSEZ Special Economic ZoneSFMC SIDBI Foundation for Micro CreditSHG Self-Help GroupSIDBI Small Industries Development Bank of IndiaSLR Statutory Liquidity RatioSME Small and Medium EnterpriseSMR Suicide Mortality RateSSI Small Scale IndustryTFP Total Factor ProductivityTFR Total Fertility RateUGC University Grants CommissionUS Usual StatusVRS Voluntary Retirement SchemeWPI Wholesale Price IndexWPR Work Force Participation RateWTO World Trade OrganizationWUA Water Users Association

List of Contributors

S. Chandrasekhar Assistant Professor, Indira Gandhi Institute of Development Research, Mumbai

Kausik Chaudhuri Associate Professor, Indira Gandhi Institute of Development Research, Mumbai

Tesfayi Gebreselassie MEASURE DHS, Macro International Inc., Calverton, MD, USA

Ashima Goyal Professor, Indira Gandhi Institute of Development Research, Mumbai

S.R. Hashim Director, Institute for Studies in Industrial Development, Delhi

Srijit Mishra Associate Professor, Indira Gandhi Institute of Development Research, Mumbai

G. Badri Narayanan Research Economist, Center for Global Trade Analysis, Purdue University, USA

Manoj Panda Professor, Indira Gandhi Institute of Development Research, Mumbai

K.V. Ramaswamy Associate Professor, Indira Gandhi Institute of Development Research, Mumbai.At present Visiting Senior Research Fellow, Institute of South Asian Studies,National University of Singapore, Singapore

D. Narasimha Reddy Professor of Economics (Rtd), University of Hyderabad. At present Visiting Professor,Institute for Human Development, Delhi

Rudra Sensarma Maxwell Fry Research Fellow in Finance Birmingham Business School, UK

S.L. Shetty Director, Economic and Political Weekly Research Foundation, Mumbai

T.N. Srinivasan Samuel J. Park, Jr Professor of Economics, Economic Growth Center, Yale University, CT,USA

C. Veeramani Assistant Professor, Indira Gandhi Institute of Development Research, Mumbai

PERFORMANCE OF THE INDIAN ECONOMY

GDP Growth

The Indian economy has emerged in recent years as one ofthe fastest growing economies of the world. The Indianmarket along with that of China is considered as one of themajor engines of growth for the global economy. Domesticfactors have led to the recent robust economic growth. Thekey factors that underpin the transition from moderate tohigh growth are the favourable supply side factors as well ascontinuous strong domestic demand. These include the sav-ings surge resulting from improvement in corporate andhousehold savings; and more importantly, high investmentrates aided by easy liquidity. The major contributors ofgrowth other than savings and investment are a spurt inexports, resurgence of the manufacturing sector, and sub-stantial flow of foreign direct investment (FDI) that hascomplemented the domestic investment. Many observersof the Indian economy argue that India can achieve a stillhigher growth rate and sustain it over a longer period.However, future growth would depend on sustaining thegrowth of investible resources, achieving widespread pro-ductivity improvement on the supply side, and maintain-ing macroeconomic stability on the demand side. In themedium term, infrastructure bottlenecks, shortage ofskilled manpower, and poor performance of agriculture willbe the major constraints to rapid growth. Sluggish agricul-tural growth will also be a major constraint in achieving

inclusive growth. There is a fear that excessive dependenceon crude oil imports—that account for about 70 per centof domestic consumption—may become a limiting factor.

There has been a significant improvement in macroeco-nomic stability. This is reflected in the lower year-to-yearvariations in the gross domestic product (GDP) growth rate;the standard deviation of growth rate of GDP is observedto be declining steadily over time. The improvement in mac-roeconomic stability could be due to macroeconomic poli-cies. While the prospects for achieving high growth are good,the prospect of maintaining macroeconomic stability mustbe rated low. The Indian economy is likely to be susceptibleto periodic shocks originating from the global economysuch as those related to global financial crises and volatilityin crude oil prices. As India moves towards full convertibil-ity of the rupee, it is likely to be vulnerable to the contagioneffect flowing from any major global financial crisis. Busi-ness expectations are governed not only by the macrofundamentals of the economy, but also by the outcomes ofthe global markets.

A distinct acceleration in GDP growth has occurred be-tween the Ninth and Tenth Plan periods that reversed thedeceleration observed between the Eighth and Ninth Plans.The annual growth rate averaged 6.5 per cent during theEighth Plan period (1992–7), slipped to 5.5 per cent duringthe Ninth Plan (1997–2002), but accelerated to 7.6 per centduring the Tenth Plan period (2002–7). The growth perfor-mance in recent years is even more impressive. The growth

OverviewGrowth: Achievements and Distress

R. Radhakrishna • S. Chandrasekhar

1

2 INDIA DEVELOPMENT REPORT

rate rose to 9 per cent in 2005–6, 9.4 per cent in 2006–7,and is projected to grow at close to 9 per cent in 2007–8.A recent assessment of the economy attributes the betterperformance to better capital utilization and a turnaroundin the total factor productivity (TFP) in manufacturingsince 2002–3, and a steady improvement in productivitygrowth in services (RBI 2007a). The long-term growth has,however, been intercepted by periodic cycles (Figure 2.1).Arguably, the recent high growth witnessed since 2003–4might be a cyclical phase—the GDP growth rate may peaksoon and then fall as was seen in the past between the twoperiods 1993–7 and 1997–2003. Concerns have been raisedabout overheating in certain sectors as manifested in thefull utilization of their capacities, rapid expansion of credit,surge in asset and commodity prices, and rising inflationrates. For instance, during the past three years, capacity uti-lization in all industries exceeded 80 per cent. And what ismore, it exceeded 90 per cent in electricity. The tight mon-etary policy being adopted reflects the need for caution.However, recent high investments may augment the capaci-ties with a lag, and to some extent relieve the pressure andrestore macroeconomic stability.

Sectoral Performance

The industrial sector GDP grew by 8 per cent in 2005–6 and11 per cent in 2006–7. The revival of industrial growth thatbegan in 2002–3 has entered the fifth consecutiveyear of high growth. The industrial sector, in which themanufacturing sector played a critical role, has become verycompetitive at home and abroad. The growth of the manu-facturing sector which was for long stuck at modestannual rates of 7 to 8 per cent, accelerated to 9.1 per cent in2005–6, and further to 12.3 per cent in 2006–7. This has beenachieved despite infrastructural bottlenecks andcompetitive pressures. The acceleration in manufacturinggrowth has been triggered by investment and consumptiondemand. Within the manufacturing sector, capital goodsproduction registered an impressive increase of 15.8 per centin 2005–6 and 18.2 per cent in 2006–7. The growing invest-ment demand was met partly through imports of capitalgoods which increased by more than 40 per cent in 2005–6and 2006–7. The high growth of capital goods productionas well as the spurt in capital goods imports was due to freshinvestment in automobiles, power equipment, metals, oil andgas, and petrochemicals (Naik 2006). Restructuring, bettercapacity utilization, and better inventory management seemto be the factors that contributed to the recovery of the capi-tal goods sector that faced stiff competition from importsin the 1990s due to a reduction in customs duties (Panda,Chapter 2). Infrastructure bottlenecks and shortage of skilledmanpower are likely to constrain the manufacturing growth.If the falling demand for consumer durables (recorded in

the recent period), persists, it may affect future overallindustrial growth (IEG 2007). Despite favourable growth ofthe global economy at about 5 per cent per annum, growthof exports started slowing down much before the recent ap-preciation of the Indian rupee. These factors may have anadverse effect on the future prospects of industrial growth.

The services sector has sustained its high growth andcontributed substantially to overall growth. In 2006–7, thissector grew by 11 per cent, slightly up from 10.3 per cent in2005–6, and contributed to 71.5 per cent of the increase inoverall GDP (RBI 2007b). Communications has been thefastest growing sub-sector of services sector. Removal ofmonopoly and adoption of cost-reducing technologiescontributed to its growth (Panda Chapter 2). Sub-sectorssuch as trade, hotels, restaurants, transport, storage, andcommunication contributed to more than one third of theoverall growth rate of GDP (RBI 2007b). There has been aspurt in the growth of travel and tourism as a result of ex-pansion in business and trading activities. Foreign touristarrivals increased from 2.65 million in 2000 to 4.43 millionin 2006 and foreign exchange earnings from $ 3.2 billion to$ 6.6 billion over the period (EPWRF 2007).

Agriculture has been experiencing deceleration since themid-nineties, with no recovery in sight (GOI 2007b). Theannual agricultural GDP increased at 2.7 per cent in 2006–7, 6 per cent in 2005–6, and was stagnant in 2004–5. In thepost-reform period, high GDP growth accompanied bylow agricultural growth has brought about a distinct shiftin the sectoral distribution of GDP, which is skewed againstagriculture. The share of agriculture in GDP declined by 10percentage points between 1993–4 and 2004–5 whereas itsshare in employment declined by 7 percentage points. Thesetrends have further worsened income disparities. In 2004–5, the share of agriculture in total workforce was 56.5 per centbut it accounted for only 20.2 per cent of total GDP. In con-trast, services constituted less than one-fourth of the totalworkforce, but accounted for more than half of GDP. Whatis even more disquieting is the fact that the ratio of workerproductivity in agriculture to that in non-agriculture de-clined from 28 per cent in 1993–4 to 20 per cent in 2004–5.Clearly, this growing disparity may bring to naught theefforts at achieving inclusive growth (Reddy and MishraChapter 3). Year-to-year fluctuations in agricultural produc-tion may not affect the aggregate growth to the same extentas in the past, but such fluctuations would put at risk thelivelihood of about 60 per cent of the population.

EMERGING INDIAN ECONOMY

Growth Projections

India’s potential GDP growth rate has been estimated to beabout 7 per cent per annum over two decades (Rodrik and

OVERVIEW 3

Subramanian 2004). Growth accounting exercises revealthat TFP contributed 21 per cent of GDP growth during1961–81, 38 per cent during 1981–91, and 40 per cent in1991–2000 (Acharya et al. 2003). Moreover, TFP accountedfor more than half of per worker GDP growth during1981–2000 (Rodrik and Subramanian 2004). Endogenousgrowth theory and evidence suggest that a number offactors—research and development, human capital, FDIwith technological spillovers, trade openness, competition,economic policies, and institutions—play a major role inincreasing TFP. Their relative contribution, however, variesacross countries and also between different growth phasesin a country. India has put in place most of the drivers ofproductivity growth. It is not clear why the contribution ofTFP to GDP growth remained the same for the 1980sand 1990s despite the introduction of economic reforms inthe 1990s. However, annual growth rate of TFP increasedmarginally from 2 to 2.6 per cent between 1980s and 1990s(Acharya et al. 2003). Little is known about the underlyingfactors of TFP growth between pre- and post-reform peri-ods. In all probability, India can better its growth, providedthe recent higher investment rate and TFP improvementare sustained.

The Planning Commission has set a growth target of 9per cent per annum for the duration of the 11th Five YearPlan starting from April 2007. The Planning Commissionestimates that the investment rate would need to be steppedup to 32 and 35.1 per cent corresponding to 8 and 9 per centgrowth targets, respectively. Higher growth rates and reduc-tion in population growth rate will imply a significant im-provement in per capita GDP growth over time. In order toachieve higher growth rates, there is a need to increase notonly the savings and investment rates but also to improveefficiency. The real challenge, however, will remain in achiev-ing a target growth rate of 4 per cent per annum set foragriculture.

Growth Drivers

India has the advantage of a relatively large size of popula-tion in the working age group. However, this advantagehas not been exploited fully so far. Some of the East Asiancountries including Japan, South Korea, and China havealready started facing the problem of lesser number ofpersons of working age to retired persons—a phenomenonbeing experienced by the developed countries. India hasyet to face this problem and hence, has the advantage ofincreasing relative proportion of working age population.If employment opportunities can be created and personsof working age are equipped with knowledge and skills,India is ideally poised to reap the benefits of demographicdividend given the bulge in the working age population.Moreover, a side effect is likely to be an increase in savings

rate and this would finance higher levels of investment (GOI2007a). These factors are favourable for achieving high GDPgrowth. There are, however, some major obstacles to beaddressed if India is to benefit from demographic advan-tages. These include widespread malnutrition and illiteracy.For example, in 2004–5, about 40 per cent of adultssuffered from chronic energy deficiency, 35 per cent ofworkers were illiterate, and 20 per cent of workers werein the households below the poverty line. These factorsunderlie the low productivity of labour.

The gross domestic savings (investment) as a percentageof GDP has increased from 23.4 per cent (24 per cent) in2000–1 to 34.3 per cent (35.1 per cent) in 2006–7. Higherlevels of investment aided by higher efficiency could rein-force the confidence in sustaining high growth. New growthsectors, beyond information technology (IT) and IT-enabledservice industries, could bolster the belief of sustainabilityof the high growth phase. An example of a sunrise sectorindustry would be tourism that has shown a double digitgrowth rate in the last three years. The emerging middleclass which is expected to increase from an estimated 220million people in 2000 to about 370 million by 2010(NCAER 2002) would expand the demand for consumergoods as also the supply of skilled labour.

The prevailing environment is conductive for the growthof the manufacturing sector. The investment boom—sup-ported by increased savings as well as increased flow ofcredit, and improvement in TFP—underlies the growth ofthe manufacturing sector. It is widely believed that Indiawill emerge as a base for global production in sectors suchas auto-components, electronic hardware, and pharmaceu-ticals (Naik 2006). In line with the optimistic predictions,the National Strategy for Manufacturing released by theNational Competition Council suggests a growth ratetarget of at least 12 to 14 per cent per annum for manufac-turing sector and an increase of its share in GDP from thepresent 17 per cent to 23 per cent by 2015.

Outward FDI from India is expected to grow rapidly asrestrictions on India’s foreign investments are relaxed bythe government. In recent years, India’s outward FDI hasbeen in the manufacturing and service sectors. Outward FDIincreased from $701 million in 2000–1 to $1.6 billion in2004–5, $4.5 billion in 2005–6, and further to $11 billion in2006–7. The numbers for the current year are expected tobe much higher. In 2005–6, 57 per cent of outward FDIwas on account of manufacturing, 6 per cent for financialservices, 20 per cent for non-financial services, and 8 percent for trading. Indian companies are acquiring compa-nies abroad, some examples being Tata Motors Limited’stakeover of Daewoo Commercial Vehicles Company(Republic of Korea), Tata Tea’s takeover of Tetley Tea (UnitedKingdom), and Tata Steel’s takeover of Corus. Outward FDI

4 INDIA DEVELOPMENT REPORT

can be utilized to reduce pressure on some scarce domesticresources if they are complemented by the products of out-ward FDI. For instance, it is argued that India can benefitfrom outward FDI in the oil fields of sub-Saharan Africaand Central Asia. The outward FDI can also contribute tothe promotion of exports.

FDI into India started increasing after the opening up ofthe economy, including relaxing of the restrictive policy to-wards FDI. It has risen substantially in recent years, from$4.3 billion in 2003–4 to $5.7 billion in 2005–6 and furtherto $19.5 billion in 2006–7. FDI inflows into India originatedmainly from Mauritius, the United States, and United King-dom and had flowed into manufacturing, financial services,banking services, IT services, and construction (RBI, Mac-roeconomic and Monetary Development in 2006–7, 24 April2007). Studies suggest that, overall macroeconomic growth,growth of domestic investment, revival of industrial growth,availability of skilled manpower, and FDI global flows con-tributed to the growth of FDI flows into India. It is perti-nent to note that the overall impact of FDI on investmentand growth depends crucially on whether it crowds out orcrowds in domestic investment, its positive externalitiesparticularly in technology, management practices etc., andlinkages with domestic industry. The East Asian experiencesuggests FDI inflows would have a positive impact oneconomic growth under a specific policy regime—whichis situation specific. Given its strong private sector andentrepreneurial base, India can gain from FDI if it flowsinto capital and knowledge intensive sectors and foreignenterprises get vertically integrated with domestic labourintensive enterprises.

Risk Factors and Constraints

Certain risk factors, however, cannot be overlooked. Thereare apprehensions about the lopsided growth patterns andthe underlying regional imbalances. During the 1990s andbeyond, inter-state inequalities in per capita state domesticproduct (SDP) worsened and the laggard states, Bihar,Orissa, and Uttar Pradesh, recorded low growth rates (Fig-ure 2.9). If these states continue to grow slow, the overallGDP growth rate will be pushed down. It is critical that ad-equate investments and credit are made available towardsmeeting the growth requirements of these backwardstates. Some of the backward states are also faced with se-vere governance problems. Concerns have also been raisedover the state of higher education and the employabilityof the graduates who are joining the workforce. While thesituation on the infrastructure front appears to be improv-ing, there is substantial scope for further improvements.Energy sufficiency remains an area of concern and the ad-verse impact of rising crude oil prices on industry cannotbe underplayed.

The declining share of consumption in aggregate demandcaused by the slowdown in the growth of domestic house-hold consumption would make effective demand suscep-tible to greater volatility since investment is prone to greaterrisks than consumption. This could push the economytowards a path of instability. Moreover, household consumerdemand—driven by growth of income, urbanization andmore importantly, tastes and changing lifestyles of the rich—has been experiencing substantial diversification, callingfor continuous adjustment by the producers. Such adjust-ments involve huge costs. Besides, the liberalization of tradeis also likely to increase producers’ risks. It is clear then thatthe domestic economy will face problems of effective de-mand associated with both demand deficiency as well asdiversification of consumer demand. To some extent,demand deficiency can be overcome by adjusting invest-ment and export components of the effective demand. It isimperative that India put in place proper instruments tofine-tune the effective demand. Increasing capital flowsas well as better integration of India’s financial marketswith the global financial markets would make the choice ofinstruments extremely difficult over time. It is importantto recognize that growth biased in favour of lower incomegroups would ensure stability since their consumptionpatterns are likely to be more stable. Such a growth processwould also revive the stagnating per capita food consump-tion that co-exists with widespread undernutrition wit-nessed in recent years.

While India can sustain high GDP growth and improveits position in the world GDP ranking, the moot question iswhether this growth would be inclusive. Inclusive growth isnot only desirable from the equity point of view, but is alsoimportant for ensuring stable growth. For inclusive growth,it is not enough to achieve high growth; nor should it meansimply income transfers through a plethora of governmentschemes. The experience, by and large, is that countrieswhich achieved rapid reduction in poverty are those whichcombined rapid growth with equity-promoting growth. Insuch a strategy, public policies influence both the distribu-tion of income and the process of income generation. Nei-ther a strategy which focuses primarily on growth nor onethat concentrates on reducing inequality through redistri-bution of assets is likely to succeed in reducing poverty.Excessive focus on redistribution while ignoring growth mayundermine the incentive system and also impose constraintson finding resources required for financing the targeted anti-poverty programmes in the absence of growth. Therefore,growth needs to be rapid enough to significantly improvethe condition of the poor. Also, for maximum impact, thereshould be an improvement in the relative position of the poor,and the share of poor in the incremental income shouldbe greater than their share in the average.

OVERVIEW 5

It is widely held that acceleration of both growth andpoverty reduction cannot be achieved without increasinggrowth rates in the laggard states such as Bihar, MadhyaPradesh, Orissa, and Uttar Pradesh. These states are alsoworse-off in terms of the non-income dimensions ofpoverty. What is even worse, the deprived social groups areconcentrated in these states. Of particular importancefor poverty reduction are policies that would increase bothagricultural productivity and rural non-farm employment.Faster growth of the rural non-farm sector can providejobs to the labour force released from agriculture. Publicintervention should be holistic and tailored to the specificand heterogeneous needs of the poor.

GROWTH AND WELL-BEING

Poverty Trends

The process of poverty reduction has been modest over thepast two decades. The incidence of poverty as measured bythe head count ratio (HCR) declined at 0.85 percentagepoint per annum during 1983–94 and at 0.7 percentagepoint per annum during 1994–2005. The decline in termsof annual compound growth rate works out to 2.3 per centand 2.4 per cent, respectively. The decline in poverty hasnot been smooth. Poverty increased during the early yearsof the 1990s, before it started declining in the latter years.The absolute number of poor declined by 5.4 millionbetween 1983 and 1993–4 and by 17.8 million between1993–4 and 2004–5. The growth process could uplift a mere23.2 million persons out of poverty over a span of two de-cades and has left an unacceptably high level of 303 millionpoor in 2004–5. The reduction in the absolute number ofpoor was slightly faster in the latter period because of lowerpopulation growth. A slow process of urbanization of pov-erty is also taking place. The number of rural poor declinedby 31.4 million between 1983 and 2005 and, in contrast,the number of urban poor increased by 8.3 million. Theworsening situation in urban areas was due to their highpopulation growth attributed to natural growth as well asrural–urban migration.

Growth and Poverty Nexus

The strength of the relationship between growth and pov-erty is usually measured by the poverty elasticity with re-spect to per capita GDP. Our estimate of poverty elasticityis in the range of –0.86 to –0.77. The trickle-down effectof growth is rather weak. Moreover, preliminary analysissuggests further weakening of the relationship in the post-reform period. This is supported by the fact that there hasbeen no significant acceleration in the process of povertyreduction during 1980–2005 despite an acceleration in thegrowth of per capita GDP. Empirical studies reveal that lack

of assets such as land, human capital, and skills constrainthe poor from participating in, and benefiting from, growth.There is now a growing consensus that the poverty reduc-tion strategy must also rely on direct measures since thepresent high growth, given its sectoral composition anddegree of inclusiveness, may not eradicate poverty com-pletely even by 2015. The National Rural Employment Guar-antee (NREG) Scheme which came into force in 2006, andis being implemented in 330 districts across the country canmake a difference to the lives of those who have thus farbeen excluded from the growth process (Panda, Chapter 2).Also relevant for poverty reduction are the programmessuch as the self-employment programmes (SwarnajayantiGram Swarozgar Yojana), rural housing for the houseless,and social assistance to the aged and disadvantaged.

What do Recent Poverty Studies Reveal?

A reading of the poverty situation in India reveals some dis-turbing facts. Issues relating to equity and growth and therate of poverty reduction in rural and urban areas have beenunder the microscope. It is disquieting that there has beenno acceleration in the pace of poverty reduction in the stateswhere it matters the most. The poorer states of Bihar,Madhya Pradesh, Orissa, and Uttar Pradesh have not ex-hibited any significant increase in the rate of reduction ofpoverty over the two periods 1983–93 and 1993–2005 (Fig-ure 1.1). Poverty has increasingly become concentrated inthese states (Figure 1.2). While 46 per cent of India’s poorlived in the states of Bihar, Madhya Pradesh, Orissa, andUttar Pradesh in 1983, over 54 per cent lived in these statesin 2004–5. Moreover, rural poverty has also becomeconcentrated in these four states which accounted for 56per cent of all-India rural poor in 1983 and 61 per centin 2004–5. These trends indicate tendencies towardseconomic apartheid. It is politically risky to ignore thisproblem as it could potentially become a source of socialconflict. North-western states (Punjab, Haryana, HimachalPradesh, and Jammu and Kashmir) had made substantialprogress in poverty reduction even by the early 1980s andtheir combined share in all-India poor was 2.7 per cent in1983; this further declined to 2.2 per cent in 2004–5. Thesestates have comparatively low rural–urban disparity in percapita expenditure (Panda, Chapter 2). Further, they hadhigher wage rate for workers engaged in agricultural opera-tions and lower gender disparity in wage rates. Contraryto expectations, the highest per capita income state ofMaharashtra had a disproportionately larger share in pov-erty which increased from 9 per cent in 1983 to 9.7 per centin 1993–4 and further to 10.4 per cent in 2004–5. It hadhigher rural–urban disparity, low wage rate for workersengaged in agricultural operations, and high gender dispar-ity in wage rates.

6 INDIA DEVELOPMENT REPORT

More than half of India’s urban poor lived in the statesof Maharashtra, Madhya Pradesh, Uttar Pradesh, and TamilNadu. The first three states also had larger shares of rural

poverty. Larger population size accompanied by higherurbanization rates as well as higher incidence of urbanpoverty explains the large share of Maharashtra in all-India

Note: Bihar, Madhya Pradesh, and Uttar Pradesh refer to the undivided states.

Source: C. Ravi, Centre for Economic and Social Studies (CESS), personal communication.

Figure 1.1: All-India and Statewise Incidence of Poverty (Rural + Urban)

Note: Bihar, Madhya Pradesh, and Uttar Pradesh refer to the undivided states.

Source: C. Ravi, Centre for Economic and Social Studies (CESS), personal communication.

Figure 1.2: Percentage Share of States in All India Poor (Rural + Urban)

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OVERVIEW 7

urban poor; and higher urbanization explains the largeshare of Tamil Nadu. Though urbanization rate waslow, the large size of the urban population as well ashigh incidence of urban poverty explains the larger shareof Uttar Pradesh and Madhya Pradesh in all-India urbanpoor.

There is no evidence for convergence in the incidence ofpoverty across the states of India. The states of Kerala,Tamil Nadu, and West Bengal achieved reduction in theincidence of poverty faster than for All India (Figure 1.1)and reduced their share of all-India poor (Figure 1.2) inboth the periods. The states of Bihar, Madhya Pradesh,Maharashtra, and Uttar Pradesh experienced slower rate ofpoverty reduction and higher share of all-India poverty inboth the periods. As expected, the coefficient of variation(CV) of poverty reveals widening inter-state inequalitiesin poverty reduction. The CV of estimates of rural povertyby state declined from 41 in 1983 to 36 in 1993–4. However,it increased to 54 in 2004–5. The CV of estimates of urbanpoverty by state increased from 32 per cent in 1983 to 46per cent in 1993–4 and further to 57 per cent in 2004–5.The reduction in inter-state inequality in rural areasbetween 1983 and 1993 could be due to the better reach ofagricultural growth during the 1980s. The wideninginequalities in the later period could be attributed tothe worsening inter-state income inequalities, growingrural–urban disparities in per capita expenditure (Figure1.3), and worsening inequalities within rural as well asurban areas.

Chronic Poverty

Chronic poor (poor persons/households who have beenpoor for a long duration) were 14 per cent of all-India ruralhouseholds and 11 per cent of all-India urban households;and comprised about half of the poor in both rural andurban areas (Radhakrishna et al. 2006, 2007) in the late1990s. The incidence of rural [urban] chronic poverty washigh in Orissa (28 [26] per cent), Uttar Pradesh (12 [18]),Madhya Pradesh (19 [25]), West Bengal (19 [6]), and Bihar(19 [19]) but low in Jammu and Kashmir (2.7 [5.6]) andPunjab (4.8 [3.2]).

The incidence of chronic poverty varied significantlyacross social and occupational groups, and is among socialgroups, the highest for scheduled castes (SCs) (21[19] percent) in rural [urban] areas. In some of the states, chronicpoverty was more of a social problem than an economicone. For example, in rural areas, the share of SCs in chroni-cally poor households was as high as 84 per cent in Punjaband 66 per cent in Haryana and the corresponding percent-ages in urban areas were 61 and 58, respectively. This sug-gests that economic instruments may not be sufficient foreradicating poverty and their efficacy tends to reduce withpoverty reduction in states with high incidence of povertyamong social groups.

The incidence of chronic poverty was higher amongrural casual labour households (19 per cent), urban casuallabour households (24 per cent), and urban self-employedhouseholds (12 per cent). It is noteworthy that in rural

Note: Madhya Pradesh refers to the undivided state.

Source: C. Ravi, Centre for Economic and Social Studies (CESS), personal communication.

Figure 1.3: Index of Average Monthly Per Capita Expenditure (1993–4 prices)in the Rural Sector (Urban = 100)

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8 INDIA DEVELOPMENT REPORT

areas, agricultural labour households accounted for 45per cent of the chronic poor households; and in urbanareas, chronic poverty was spread among self-employed andcasual labour households with self-employed householdsaccounting for 36 per cent urban chronic poor and casuallabour accounting for 29 per cent.

It is essential to recognize that the poor are heteroge-neous and the strategies for elimination of poverty shouldbe specifically designed to address the chronic poor andother poor. Safety nets have to be designed to removechronic poverty and to free this population from the mul-tiple deprivations so as to enable them to become more re-sponsive to development opportunities. These programmesmust strengthen the livelihood base and gradually makethem productive. In the case of chronic poor, externalsupport should play a major part in the beginning.

Comparison of India and China in terms ofPoverty Reduction

India’s record in poverty reduction pales before the achieve-ments of China, which has been far more effective in reduc-ing poverty. The incidence of poverty in China declined bya staggering 45 percentage points in two decades: from 53per cent in 1981 to 8 per cent in 2001 (Ravallion and Chen2004). In contrast, India could reduce poverty by a mere 17percentage points in two decades. India fares badly even onnon-income dimensions of poverty. For instance in the re-cent period, the incidence of malnutrition in India was fourtimes more than that in China, the infant as well as under-five mortality rate in 2002 was double that in China andmaternal mortality rate was ten-fold higher in India (UNDP2003). Though China managed to reduce poverty rapidly,the progress has been uneven across its regions (Ravallionand Chen 2004). In China too, there are concerns aboutwhether all sections of society have benefited equally fromthe growth process. Whether the poor benefit from eco-nomic growth or not, depends on the country’s geographicspread and the sectoral composition of growth. In India asimilar concern emerges with apprehensions over its lop-sided growth marked by its lagging agricultural sector,worsening rural urban disparity, and growing regionalimbalances. However, it is noteworthy that India faredbetter than China in achieving lower inequality. This is re-flected in the higher income shares of the bottom groups.For instance, the share of the poorest 20 per cent in income(expenditure) was 8.1 per cent in India whereas it was only5.9 per cent in China (UNDP 2003).

Non-income Poverty Dimensions

Data from the National Family Health Survey (NFHS-3)carried out in 2005–6 and District Level Household Survey

on Reproductive Health (RCH) carried out during 2002–4 show the worst forms of deprivation in India. As highas 46 per cent of children under 3 years of age (NFHS-3)and 49 per cent children under 6 years (RCH) sufferedfrom malnutrition; and 79 per cent of children fromanaemia (NFHS-3). These unfavourable child healthoutcomes could be, inter alia, attributable to failures inhealth care. For instance, 56 per cent of children werenot fully immunized and 79 per cent did not receiveVitamin-A dose in the last 6 months prior to the survey(NFHS-3). The position was equally dismal for adolescentgirls (10–19 years) and women—33 per cent of ever-married women suffered from chronic energy deficiency,58 per cent suffered from anaemia, 59 per cent deliveriesdid not take place in institutional agencies (NFHS-3),and 76 per cent of adolescent girls suffered from severeand moderate anaemia (RCH). The access of householdsto basic amenities was equally poor. According to NFHS-3, 32 per cent of households did not have electricity, 58per cent did not have piped drinking water, 55 per cent didnot have toilet facility, and 59 per cent did not live inpucca houses. These data suggest that the incidence of non-income poverty is much more alarming than the incidenceof income poverty. Studies suggest that even if incomepoverty is eliminated in India, other forms of poverty maypersist. NFHS-3 data also reveal rural–urban and intra-household inequalities in nutritional outcomes. Forexample, the incidence of chronic energy deficiency inrural (urban) women was 38.8 (19.8) per cent among ever-married women and 33.1 (17.5) per cent among men.The performance of India in terms of nutritional outcomesis worse than that of less developed African countries inrecent years (UNDP 2003).

The national averages mask the huge variations in theincidence of child malnutrition across the states of India(Figure 1.4). In 2005–6, the incidence of child malnutritionvaried among the major states from 27 per cent in Punjaband 29 per cent in Kerala and Jammu and Kashmir to 60per cent in Madhya Pradesh (NFHS-3). It is to be notedthat the nutritional status of children and adults in some ofthe middle-income states such as Kerala and Tamil Naduwas better than that in higher income states such asMaharashtra and Gujarat. This could be attributed to pub-lic interventions in the nutrition and health sectors. Factorssuch as public provision of safe drinking water and healthcare are also important determinants of nutritional well-being. Analysis of inter-household variations in child nu-trition shows that the risk of malnutrition decreases withan improvement in household income, mother’s nutritionalstatus, her education, and access to health care during childdelivery. The mother’s present nutritional status, in turn,depends on her childhood nutritional status.

OVERVIEW 9

Malnutrition is seriously retarding human developmentand is hampering further reduction in child mortality. Adultswho survived malnutrition in their childhood are lesshealthy, physically less productive, and have poor intellec-tual abilities. The economic costs of the current scale of mal-nutrition are enormous. Improvements in incomes of thepoor and supply of environmental and health services arethe long-term solutions for the eradication of malnutrition.However, in the short run, direct nutrition interventionshould be the priority.

Despite legislative orders passed in 2001, the coverage andprogress of the Integrated Child Development Scheme(ICDS) has been tardy. In response to a petition on the ‘non-implementation of the directions’ given by Supreme Courtrelating to ICDS, the Supreme Court in its order in Decem-ber 2006 issued the following directive: ‘Government ofIndia shall sanction and operationalize a minimum of 14 lakhAWCs in a phased and even manner starting forthwith andending December 2008. In doing so, the Central Govern-ment shall identify SC and ST hamlets/habitations for AWCson a priority basis. The universalisation of the ICDS involvesextending all ICDS services (supplementary nutrition,growth monitoring, nutrition and health education, immu-nization, referral and pre-school education) to every childunder the age of 6, all pregnant women and lactating moth-ers and all adolescent girls’. The Central Government hasrecently sanctioned 173 ICDS projects, 107, 274 Anganwadicentres, and 25,961 mini-Anganwadi centres. The budget-ary allocation for ICDS has been raised from Rs 4087 crorein 2006–7 to Rs 4761 crore in 2007–8. The impact of these

initiatives depends largely on reforming the delivery system.Hopefully, lessons can be drawn from the success of Keralaand Tamil Nadu in reducing the incidence of malnutrition.

Urban Slums

Projections show that over 534 million people, constituting38 per cent of India’s population are likely to be living inurban areas by 2026. Concomitant with higher levels ofurbanization would be a growth in the slum population. In-tra-urban differences (slums versus non-slums) in economicoutcomes are expected to get even more stark in the com-ing years and may become a source of urban conflicts. Ifthere is a pick up in the rate of migration it would swell theslum population further. It has been well documented thatindividuals living in the slums are worse-off in terms of non-income poverty dimensions and do not have access to manypublic services. There is growing empirical evidence lately,that suggests huge disparities in health outcomes even withinurban areas. It also shows substantial heterogeneity withinboth slums and non-slum urban areas. It is evident fromthe discussion in Chapter 6 that India has a long way to gobefore it meets the Millennium Development Goal of achiev-ing ‘a significant improvement’ in the lives of slum dwellers.

EMPLOYMENT

Employment Growth

The provision of gainful employment for all in thelabour force is essential for reducing poverty and achievinginclusive growth. Accelerating productive employment is

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Figure 1.4: Incidence of Malnutrition among Children in All India andSelected States (Rural + Urban)

10 INDIA DEVELOPMENT REPORT

important because wage income is the main source ofincome for the poor. It is well-recognized that employmentgeneration by itself is not enough to lift people out of pov-erty as poverty is widespread even among the employed.What is required is the growth of productive employment.Expansion of productive employment, employment secu-rity, and favourable working conditions are imperativefor poverty reduction. According to the regional profiledocument of the South Asian Association for Regional Co-operation (SAARC), employment growth rate should beequal to labour force growth rate in the first instance andsurpass it later (Bhalla 2007). The most favourable situa-tion for India is one in which labour demand outpaces itssupply and food supply outpaces its demand.

During the last two decades, employment expansion,more or less, kept pace with labour supply growth; bothgrew at 2 per cent per annum. Between 1983 and 1993–4,employment (by usual principal status) increased at 2.09 percent per annum and labour force at 2.02 per cent per an-num, and between 1993–4 and 2004–5, employmentincreased at 1.98 per cent per annum and labour force at2.02 per cent per annum (GOI 2007a). However, because ofcyclical behaviour, short-term growth rates deviated fromthe long-term growth rates. For example, employment(labour force) growth rate fell to 1.57 (1.60) per cent perannum from 1983 to 1999–2000, and then rose to 2.48 (2.54)per cent per annum from 1999–2000 to 2004–5. This raisesa question about the validity of inferring long-term trendsfrom short-period growth rates. However, many economistsinferred the slowdown of employment growth by compar-ing the growth rates of the two periods, viz. 1987–8 to 1993–4 and 1993–4 to 1999–2000. On the basis of a rigorouseconometric analysis, Srinivasan (Chapter 4) shows thatthere was no such slowdown in employment growth and ob-serves ‘that the pronouncements on slowdown in employ-ment growth since 1993–4 are based on inappropriatemeasurement and invalid employment elasticity analysis andthat the long-term trends in usual status and current weeklystatus employment rates do not support the same’. However,it is a fact that employment growth did not accelerate inconsonance with GDP growth. Srinivasan sees barriers toaccelerating employment growth in labour laws andregulations and suggests a reform of labour laws. It is im-portant to recognize that the real issue in the Indian contextis whether the accelerated growth generated decent work.There is a need to differentiate between effort-intensive work,associated with drudgery and long hours, and decent work.

Quality Dimension of Employment

Out of the 60.7 million workers absorbed between 1999–2000 and 2004–5, 52.3 million (86 per cent) were absorbedin the informal economy and the rest in the organized

sector (NCEUS 2007). In fact, the entire additional employ-ment in the formal sector was of informal type and didnot have employment security or social security. In thiscontext, two questions arise: What proportion of informalemployment was decent? And has it been increasing? Theavailable data show that in 1999–2000, about 65 per cent ofthe informal workers were in agriculture; 45 per cent of thenon-agricultural employment was in rural areas and mostof the informal workers did not have either employment andincome security let alone health insurance (NCEUS 2006).

There has been increasing casualization of the labourmarket without a safety net, increasing feminization of ag-ricultural labour with low wages, persistence of child labour(about 12.6 million in 2001), and increasing flow of inter-state distress rural migrant workers (for example, every year200,000 workers migrate from Bihar for livelihood). It ispertinent to note that despite the ban on child labour, itsincidence was high in hazardous activities. The conditionsof the long distance distress migrants also was bad. Theywere engaged in work associated with drudgery and longhours. They were also subject to social hostilities. For ex-ample, it is reported that in the North-eastern Assam,militants recently killed nearly 90 Hindi-speaking migrants,mostly from Bihar, some of whom migrated decadesearlier. However, migrants faced less hostility in prosperousPunjab during the green revolution period or in northernLadakh where tourism had fuelled a construction boom.Clearly, social conflict would be lower in situations wheremigrant labourers do not compete with local labourers orin situations with severe local labour shortage.

Employment Structure and Status

Over the years, there has been a slow change in the compo-sition of the workforce in rural India, with an increasingtendency to move out of the agriculture sector. The depen-dency of rural male (female) workers on agriculture declinedfrom 81 (88) per cent in 1977–8 to 71 (86) in 1993–4, andfurther to 67 (83) per cent in 2004–5. Despite the decline,India continues to have a relatively large rural populationdependent on agriculture and allied activities. In urban ar-eas, there has been a slight increase in the share of indus-trial sector in the total urban workforce from 31.6 (28.5)per cent in 1993–4 to 33.5 (32.2) per cent in 2004–5. Theshare of the tertiary sector remained almost unchangedduring the above-mentioned periods.

The employment status (self employment, regular sala-ried employment, and casual employment) has also beenchanging. In rural areas, while self-employment is on thedecline, casual employment is on the rise for both malesand females. In urban areas, for males, the relative sizes ofself-employment and casual employment have been on therise and that of regular salaried has been on the decline;

OVERVIEW 11

and in contrast, for females, regular and salaried employ-ment has been on the rise and self-employment has beenon the decline. In 2004–5, in rural areas, 58 (64) per centmale (female) usual status workers (principal plus subsid-iary) were self-employed, 33 (33) were causal labour; andin urban areas, 45 (47) per cent were self-employed and 15(17) per cent were casual labour (NSSO 2006). It is impor-tant to recognize that self-employed and casual workers whoconstitute more than 90 per cent of the rural work forceand more than 60 per cent of the urban workforce are notcovered by effective social security and are, therefore, likelyto be exposed to the risks originating from various shocks.

What is worse, employment insecurity, particularly in ruralareas, is on the rise. The National Employment GuaranteeScheme has the potential to reduce the risks associated withthe labour market and thereby contribute to the protectionof rural casual wage labour from transient poverty.

Unemployment

The unemployment situation has not improved, but amongthe four measures of unemployment, only current dailystatus (CDS) unemployment rate shows a worsening ofthe unemployment situation between 1993–4 and 2004–5(Figure 1.5).

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Figure 1.5: Trends in Unemployment, 1987–8 to 2004–5

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12 INDIA DEVELOPMENT REPORT

The CDS unemployment rate for rural males (females)increased from 5.6 (5.6) per cent in 1993–4 to 8 (8.7) percent in 2004–5 and for urban males (females) from 6.7 (7.9)per cent in 1993–4 to 7.5 (11.6) per cent in 2004–5. Althoughthe CDS unemployment rate indicates some worsening ofunemployment in the post-reform period, its long-termtrend does not reveal any worsening situation (Srinivasan,Chapter 4). It is important to note that when the employ-ment rates follow a cyclical pattern, inferences about long-term trends based on two period comparisons would bemisleading (Srinivasan, Chapter 4). Much of the debate onIndia’s progress on the employment front is based on suchtwo-period comparisons.

A high level of unemployment was evident in WestBengal, Kerala, and Tamil Nadu (NSSO reports). In urbanareas, levels of unemployment were, in general, lower thanthose observed in rural areas. Kerala and Tamil Nadu re-ported relatively higher levels of urban unemployment. Abetter measure of underemployment (invisible) would bethe percentage of currently employed persons seeking ad-ditional or alternative work. The percentage of usually em-ployed persons seeking alternative/additional work was verysignificant in 1999–2000 (19.6 per cent for males and 14.3per cent for females). The incidence of underemploymentwas widespread in both developed and backward states.

Wages

Recent studies on rural agricultural wage rates show thatthese continued to increase in the 1990s but at a reducedrate than in the 1980s (Himanshu 2005). However, non-agricultural wage rates increased at a faster rate in the 1990s(Himanshu 2005). There is a growing body of empiricalevidence which suggests that an improvement in agricul-tural wages would reduce not only rural poverty but alsourban poverty. Normally, the wage rate of the unskilled ag-ricultural labour usually acts as a reservation wage for therural non-agricultural worker and as well as for the urbanunskilled informal worker. However, improvement in agri-cultural productivity is a prerequisite for wage improvement;otherwise wage increases cannot be sustained over time.

There are substantial inter-state variations in the wagerates (in rural labour households in agricultural operations),even within a state. In 1999–2000, the male worker wagerate varied from Rs 94.52 (Kerala) to Rs 26.31 (Chhattisgarh)among major states (Rural Labour Enquiry Report 1999–2000). For female workers, the range was Rs 73.98 (Punjab)to Rs 22.31 (Orissa). In general, wage rates as well as theirgrowth rates were lower in the laggard states of Bihar,Madhya Pradesh, Orissa, and Uttar Pradesh. At the all-In-dia level, the average wage rate for female casual workerswas 60 per cent of the wage rate of male workers. Inter-state differences were higher than gender differences.

Challenges for Employment Generation

The problem of low wage rates, particularly in laggard states,lack of employment opportunities in agriculture, increas-ing casualization of employment, gender disparities in wagerates, and high levels of underemployment among thoseemployed, continue to remain formidable issues that needto be addressed. The declining employment opportunitiesin agriculture and slow employment growth in the orga-nized sector suggest that the policy focus for the promotionof employment should be on the development of the unor-ganized sector including allied activities of agriculture. Itis important to recognize the need for massive rural andperi-urban industrialization. Further, small enterprise clus-ters could emerge as hubs of economic activities. Withnecessary policy and infrastructure support, such clusterscould emerge as engines of industrial growth in the periph-eral economies. Simultaneously, efforts should be made todevelop demand based skills. NCEUS recommended that25 growth poles (cluster of clusters) be supported duringthe Eleventh Plan period. If implemented, this would facili-tate labour-intensive industrialization, with strong forward–backward linkages. However, the key tasks would remainto be capacity building and creation of effective supportsystems. It is useful to learn about the role of state and localinstitutions from some of the successful clusters in Indiasuch as the Tirupur Knitwear cluster. It would also be a chal-lenge to provide social security cover to all the unorganizedworkers, many of whom are covered neither by any formalsystem of social security nor regulation of conditions ofwork (see NCEUS 2006).

AGRARIAN CRISIS

The disquieting trends in Indian agriculture that have per-sisted since the mid-1990s include: declining profitabilityof agriculture, increasing risks, degradation of natural re-sources, steep fall in technological innovations in agricul-ture, and collapsing agricultural extension. Agriculturalgrowth has hardly been 2.2 per cent per annum, falling shortof the targeted 4 per cent growth in the Tenth Five Year Plan.The crop sector has witnessed a marked decline in its growthrate. Livestock and horticultural crops which provided thelead during the first half of the 1990s have been experienc-ing deceleration in their growth since 1995–6. The slow-down in agricultural growth has been accompanied by aslowdown in agricultural credit and in agricultural invest-ment (especially public investment)—the most powerfuldrivers of agricultural growth. Private investment in agri-culture has been increasing but could not compensate forthe fall in public investment. Growing evidence showsdeclining TFP in the 1990s. The large number of farmers’suicides reported in states such as Andhra Pradesh,

OVERVIEW 13

Karnataka, Kerala, Maharashtra, and Punjab in recent yearsis symptomatic of the deep-rooted crisis in agriculture.

The Report of the Expert Group on Agricultural Indebt-edness (GOI 2007b) has highlighted the twin dimensionsof the current widespread agricultural crisis—an agricul-tural development crisis and an agrarian crisis. The rootcause of the agricultural development crisis is the neglect ofagriculture in designing development programmes and ineffective implementation of agricultural programmes at themicro level. On the other hand, the agrarian crisis is charac-terized by the high dependence of rural population on farmincomes which are too meagre to withstand weather andprice shocks and are also vulnerable to technological risks.In addition to low growth and declining productivity, thefailure of growth in creating adequate productive employ-ment outside agriculture underlines the agrarian crisis.

There is a consensus that growth of irrigation, a majordriver of growth, has slowed down owing to a decline inpublic investment in irrigation infrastructure. Despite thefact that 40 per cent of the irrigation potential (140 millionhectares) remains untapped, only 0.8 million hectares perannum was added during the 1980s and 1990s. This is incontrast to 2.5 million hectares annual additions to irrigatedarea during the Green Revolution. Over 400 major andmedium projects were in the pipeline at