Measuring National Income

We need information on how much spending, income and output is being created in an economy over a period of time. National income data gives us this information as we see in this chapter. Measuring national income To measure how much output, spending and income has been generated in a given time period we use national income accounts. These accounts measure three things: 1. Output: i.e. the total value of the output of goods and services produced in the UK. 2. Spending: i.e. the total amount of expenditure taking place in the economy. 3. Incomes: i.e. the total income generated through production of goods and services. What is National Income? National income measures the money value of the flow of output of goods and services produced within an economy over a period of time. Measuring the level and rate of growth of national income (Y) is important to economists when they are considering: The rate of economic growth Changes over time to the average living standards of the population Changes over time to the distribution of income between different groups within the population (i.e. measuring the scale of income and wealth inequalities within society)

Consumer spending accounts for over two thirds of total spending. Consumer spending has been strong in recent years, a reflection of rising living standards and low unemployment, but this may now be coming to an end because of the

mountain of household debt Gross Domestic Product Gross Domestic Product (GDP) measures the value of output produced within the domestic boundaries of the UK over a given time period. An important point is that our GDP includes the output of foreign owned businesses that are located in the UK following foreign direct investment in the UK economy. The output of motor vehicles produced at the giant Nissan car plant on Tyne and Wear and by the many foreign owned restaurants and banks all contribute to the UK’s GDP. There are three ways of calculating GDP - all of which should sum to the same amount since the following identity must hold true: National Output = National Expenditure (Aggregate Demand) = National Income Firstly we consider total spending on goods and services produced within the economy: Nissan at Sunderland – Celebrating 20 years of production The Nissan plant at Washington, Tyne and Wear is celebrating its 20th anniversary in July 2006, the first car having rolled off the line on July 8th, 1986. In that first year of production 470 staff had a production target of 24,000 Bluebirds. Twenty years on, more than 4,200 employees produce around 310,000 Micras, C+Cs, NOTEs, Almeras and Primeras each year. That car has been followed by 4.3 million others thanks to a total investment of £2.3 billion. Production is set to rise from 310,000 per year last year to 400,000 in 2007 with the introduction of a new small 4x4, and Sunderland has been rated as Europe's most productive car factory for the last eight years. Sources: Reuters News, Sunderland Echo, July 2006 (i) The Expenditure Method of calculating GDP (aggregate demand) This is the sum of spending on UK produced goods and services measured at current market prices. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services The Income Method of calculating GDP (the Sum of Factor Incomes) Here GDP is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows: Income from people employment and in self-employment + Profits of private sector companies +

Rent income from land = Gross Domestic product (by factor income) It is important to recognise that only those incomes that are actually generated through the production of output of goods and services are included in the calculation of GDP by the income approach. We exclude from the accounts the following items: Transfer payments e.g. the state pension paid to retired people; income support paid to families on low incomes; the Jobseekers’ Allowance given to the unemployed and other forms of welfare assistance including child benefit and housing benefit. Private transfers of money from one individual to another. Income that is not registered with the Inland Revenue or Customs and Excise. Every year, billions of pounds worth of economic activity is not declared to the tax authorities. This is known as the shadow economy where goods and services are exchanged but the value of these transactions is hidden from the authorities and therefore does not show up in the official statistics!). It is impossible to be precise about the size of the shadow economy but some economists believe that between 8 – 15 per cent of national output and spending goes unrecorded by the official figures. Output Method of calculating GDP – using the concept of value added This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. Value added is the increase in the value of a product at each successive stage of the production process. We use this approach to avoid the problems of doublecounting the value of intermediate inputs. The table below shows indices of value added from various sectors of the economy in recent years. We can see from the data that manufacturing industry has seen barely any growth at all over the period from 2001-2004 whereas distribution, hotels and catering together with business services and finance have been sectors enjoying strong increases in the volume of output. These figures illustrate a process of structural change, with a continued decline in manufacturing output and jobs relative to the rest of the economy. By far the largest share of total national output (GDP) comes from our service industries. Index of Gross Value Added by selected industry for the UK Mining Manufacturin Constructio Distribution Business and g n , hotels, and services quarrying catering; and , inc oil repairs finance

2001 weights in total 57 159 249 GDP (out of 1000) 2001 100 100 100 100 100 2002 100 97 104 105 102 2003 94 97 109 108 106 2004 87 98 113 113 111 We can see from the following chart how there have been divergences in the growth achieved by the manufacturing and the service sectors of the British economy. Indeed by the middle of 2006, the index of manufacturing output was below the level achieved at the start of 2000. In contrast the service industries have enjoyed strong growth, leading to a continued process of structural change in the economy – away from traditional heavy industries towards service businesses.

& gas extraction 28 172

GDP and GNP (Gross National Product) Gross National Product (GNP) measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas.

In contrast, Gross Domestic Product (GDP) is concerned only with the factor incomes generated within the geographical boundaries of the country. So, for example, the value of the output produced by Toyota and Deutsche Telecom in the UK counts towards our GDP but some of the profits made by overseas companies with production plants here in the UK are sent back to their country of origin – adding to their GNP. GNP = GDP + Net property income from abroad (NPIA) NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from our assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK. In recent years there has been an increasing flow of direct investment into and out of the UK. Many foreign firms have set up production plants here whilst UK firms have expanded their operations overseas and become multinational organisations. The figure for net property income for the UK is strongly positive meaning that our GNP is substantially above the figure for GDP in a normal year. For other countries who have been net recipients of overseas investment (a good example is Ireland) their GDP is higher than their GNP. Measuring Real National Income When we want to measure growth in the economy we have to adjust for the effects of inflation. Real GDP measures the volume of output produced within the economy. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth. Income per capita Income per capita is a basic way of measuring the average standard of living for the inhabitants of a country. The table below is taken from the latest edition of the OECD World Factbook and measures income per head in a common currency for the year 2005, the data is adjusted for the effects of variations in living costs between countries. GDP per capita $s GDP per capita $s Luxembourg 57 704 EU (established 15 countries)28 741 United States 39 732 Germany 28 605 Norway 38 765 Italy 27 699 Ireland 35 767 Spain 25 582 Switzerland 33 678 Korea 20 907 United Kingdom 31 436 Czech Republic 18 467 Canada 31 395 Hungary 15 946 Australia 31 231 Slovak Republic 14 309

000) Total Saving 394.000) Source National Statistics Office.863 2.117.217 10.9 (In 1.5 (In P1.791.4822 (3.0) Number of Families 16.000) Average Income 148.4678 0.417.924 396. 2003 Family Income and Expenditure Survey (Final Results) Increase in total family income and expenditure seen in 2003 . 2003 FAMILY INCOME AND EXPENDITURE SURVEY Final Results Percent Philippines 2003 2000 Increase (Decrease) Total Income 2. But we are some distance behind countries such as the United States (where productivity is much higher).239 26.000) Total Expenditure 2.4 Average Expenditure 124.7 Average Saving 24.268 15.5) (In P1. And Ireland’s super-charged growth over the last twenty years means that she has now overtaken us in terms of income-based measures of standards of living.Sweden Japan France 30 361 29 664 29 554 Poland Mexico Turkey 12 647 10 059 7 687 Source: OECD World Economic Factbook.882 13.282 (7.187. 2006 edition By international standards.072 7.839 4.121 2.678.8) Gini Ratio 0.353.616 145.0 (In P1.023.250. the UK is a high-income country although we are not in the very top of the league tables for per capita incomes.335 (0.324.132.377 118. We do have an income per head that is about ten per cent higher than the average for the 15 established EU countries.939 1.

4 trillion increasing by 10. The inflation-adjusted estimates showed a decrease of 10.0 percent in average income and an 8. Thus.8 percentage point. Average expenditure increased from P118. NCR had the biggest share of the total family expenditures spent (P528 billion or 26. posting estimates higher than the national average.075) and CAR (P157.1%). Annual average income and expenditure showed upward trend • • • • Average income was estimated at P148.121. or an annual growth of 1.529).2 trillion in 2000.6 percent (P642 billion) of the total income while Caraga and ARMM posted the least with 1.616 average income in 2003 becomes P130. MIMAROPA and Northern Mindanao which reported decreases.0 percent over the P1. Total family expenditure reached P2.8 trillion in 2000. . in real terms. CALABARZON (P185.5 percent (P30 billion).377 in 2003 posting a growth rate of 4. except for NCR.0 trillion.5 percentage points.839 in 2000 to P124.616 in 2003 yielding an increase of 2.294 in 2000 prices.• • • • • • Total family income in 2003 was estimated at P2.377 spent in 2003 was worth only P109. NCR (P274. NCR got the biggest share of 26. Rising annual average income observed in regions • • Most of the regions exhibited increases in average income between 2000 and 2003 at current prices. ARMM likewise showed the least expenditure with 1. total family expenditure in 2003 was valued at P1. The P148.045) were the top four regions in terms of average income. total family income decreased by 2. Likewise. Similarly. which was higher by 13. This translates to an annual growth of 0.661).6 percent (P38 billion) each.7 percent over the three-year period.4 percent compared to the 2000 level of P145.9 percent compared to that in 2000. Adjusting for inflation.78 trillion in 2000 prices. the P124. Similarly. Central Luzon (P158.1 trillion in 2000.0 percent decline in average expenditure. total family income in 2003 was worth P2. Among regions.5 percent over the P2.7 percent compared to that in 2000. This real value of the total family expenditure decreased by 0.594 in 2000 prices when the effect of inflation was removed.

239 down by 7.4678 down by 3. Despite the decline in average saving.6 percentage points decrease in their income share. This was higher by 6.202 for the second decile and P44 for the third decile.110. Less unequal income distribution in 2003 • • The 2003 Gini coefficient was recorded at 0.0 percentage points.960.• ARMM registered the lowest average income among regions with P84. .0 percent from 0.8 percent from P26. still its income was about 21 times the income of the bottom 10 percent. P1. A lower gini coefficient indicates a movement towards a more equal or less unequal income distribution among families. Only families belonging to the high-income group.4822 in 2000. Eight of the regions registered decreases in the Gini coefficient indicating a shift towards lesser family income disparity.7 percent compared to its 2000 average income of P79.439.300 in 2000 prices. registered a 1. Relatively. NCR recorded the biggest average saving of P48. families in all regions on the average. Dissaving was observed in the first three deciles.4088 in 2003. In real terms. The positive income trend was not enough to cover the expenditure of low-income families in the first three deciles as seen in their average dissaving (income net of expenditure) of P2. average expenditure of families from the first to the ninth decile increased between 2000 and 2003 but those in the tenth decile declined by 2. Annual average saving declined in 2003 • • Average saving was measured in 2003 at P24. NCR showed the biggest decrease from 0. this 2003 average saving was equivalent to P21.121 for the first decile.4451 in 2000 to 0. Low income families drawn towards more dissavings • • • • The income decile distribution showed increasing income shares of families from the first to the ninth decile.282 in 2000. earned more than they spent.593 while Caraga got the least with P10. Although the tenth decile?s share decreased. such as those in the tenth decile.

medical care.8 percent in 2000 to 7.8 percentage point lower than the 2000 proportion of 43. Increases in expenditure share were also noted in fuel.5 percent in 2003. Meanwhile. light and water. personal care and effects. footwear & other wear.3 percent in 2003 suggesting a change in the Filipino family lifestyle of regularly eating outside the home and possibly be linked to the growth of fast food chains. higher spending on food consumed outside the home was observed as the proportion went up from 5. It is the main source of data on family income and expenditure which include. durable furniture & equipment and miscellaneous expenditures such as those for special family occasions and gifts & contributions. the share of food expenditure to total expenditure was 42.8 percent.6 percent in 2000 to 37.0 percent in 2000 to 5. the share of expenditure on housing decreased by TECHNICAL NOTES: • The 2003 Family Income and Expenditure Survey (FIES) is a nationwide survey of households undertaken every three years by the National Statistics Office (NSO). about 0.6 percent. levels of consumption by item of expenditures as well as sources of income in . The proportion of expenditure on food consumed at home went down from 38. clothing.4 percent in 2003. On the other hand. among others. In 2003.Spending pattern of Filipino families moved towards lesser food consumption expenditure • • • • • The share of family expenditure on food items continued to slide indicating a change in the spending pattern of Filipino families towards less spending on food. Families spent more on transportation and communication as these expenditures were monitored to move up from 6.

the effects of inflation have to be removed. However. The results of FIES provide information on the levels of living and disparities in income of Filipino families. In 2003. For comparability of results. with the use of the new master sample. In 2003.2004 . based on Executive Order 36. however. The country?s CPI for 2003 is estimated at 113. 2000-2003 (First Release) National accounts 22. Isabela City remained to be part of the whole Basilan province under Region IX in 2000. Isabela City.• • • • cash and in kind. the Consumer Price Index (CPI) is used to deflate the 2003 FIES estimates. Gross domestic product and gross national income. Marawi City was a separate domain under Region XII.8. Marawi City became part of ARMM together with the rest of Lanao del Sur. The sampling design of the 2003 FIES uses the 2003 Master Sample for Household Surveys. To be able to compare the 2003 FIES estimates with the 2000 FIES results in real terms. 2000 FIES estimates for Isabela City cannot be generated separately from Basilan as this city was not a domain in the sampling design used for the 2000 FIES. In this design. As such. For comparative purposes. the 2000 FIES data in this release were generated using the new regional grouping. being a separate domain was grouped under Region IX while the rest of the province of Basilan (excluding Isabela City) is grouped under ARMM. In 2000. as well as their spending patterns. the country?s 17 administrative regions were defined based on Executive Orders 36 and 131.9.

1.5 . 2000-2003 2000 2001 Current prices Mio SIT 2002 2003 1 Output. basic prices (1 minus 2) 4 Net taxes on products 5 Gross domestic product (3 plus 4) Plus: primary incomes from the rest of the world Less: primary incomes to the rest of the world 6 Gross national income 8715 9670 10749 11559 52 84 796 991 8 4 5036 5532 61496 65800 13 39 77 41 8 4 3679 4138 46001 49799 39 45 19 50 0 0 5729 6233 71437 76721 24 64 5 8 4252 4761 53144 57471 31 81 94 68 5 5 9673 1108 10883 12109 5 94 9 5 9072 1015 14326 16224 7 61 5 7 4258 4771 52800 57060 32 14 67 16 3 8 Constant 2000 prices Gross Domestic Product Of which: consumption total 4252 31 5 domestic 4403 14 1 4366 45114 46253 22 14 02 1 4443 45461 47587 91 15 84 2 Growth rates (%) Gross domestic product 3.3 2. basic prices 2 Intermediate consumption 3 Value added. Gross domestic product and gross national income.7 3.9 2.

hunting and forestry by 3.6% more than in 2002. In USD GDP 2003 amounted to 27 749 mio and 13 900 per capita.5% more than in 2002 (SIT 4 511 414 mio).2 percentage points higher than by quarterly estimate (2. the same as GDP and without agriculture.3 percentage points.• COMMENT According to the first annual estimate.3% in 2003. hunting and forestry (by 0.4% in 2002 and 99. The share of subsidies increased by 0. other taxes on . At constant 2000 prices GDP 2003 amounted to SIT 4 625 302 mio or in volume terms 2. gross value added at basic prices declined the most in agriculture. At constant 2000 prices. In nominal terms the first annual GDP figure is 0.4% higher than it was by quarterly estimation. GDP 2003 at current prices amounted to SIT 5 747 168 mio or 8.3%) and was the lowest since 1992. GDP 2002 growth rate was reduced by 0. Total gross value added at basic prices increased in volume terms by 2. gross value added in agriculture in volume terms reduced by 15. By activities. which is 25. Gross national income (GNI) 2003 amounted to SIT 5 706 016 mio and was the same as GDP 8.1% higher than a year ago.1% more than in 2002.4% more than a year ago. At the same growth rate GNI value relatively to GDP has not changed: 99.3% of GDP) and thus due to dry year reached so far the lowest level in GDP.3%. which is 4.1%. GDP 2003 amounted to EUR 24 592 mio or EUR 12 319 per capita. In the structure of primary incomes of GDP 2003 the share of compensation of employees and taxes on products has not changed in comparison with 2002. before 2.1 percentage point: now 2.4%.5%. which is the main reason of low real growth rate of the economy in 2003.5 percentage points to 2. Annual real growth 2003 rate was 0.4%. At the current exchange rate.

Exports of goods and services in volume terms increased by 3. hunting and forestry (by 0. the external trade balance contribution to GDP growth was after three years for the first time negative. INTRODUCTION 1.5% of GDP).7 percentage points. of which gross fixed capital formation by 6. at -2. non-governmental and community based organisations all have a vital role to play in meeting the challenge of poverty reduction. Kenya must mobilise all available resources and use them efficiently and effectively in the fight against poverty. imports by 6. Rather substantial increase of the share of net operating surplus in 2003 (by 1.5% of GDP).3% of GDP) was due to further deindexation of the value of fixed assets and thus lower valuation of consumption of fixed capital in corporations.2% (a year ago by 6.7% (final consumption by 2. After three years the total domestic consumption relatively to GDP for the first time increased to GDP level at current prices (in 2002 98.5%.2 percentage points. sustainable improvement in the standards of welfare of all Kenyans.1 The primary development goal for Kenya is to achieve a broad-based. In volume terms the total domestic consumption increased by 4. This will require a concerted effort to tackle the intolerably high incidence of poverty that now afflicts about half our population. Interim poverty strategy I. Poverty wastes this resource and its potential. 1.5 percentage point to 7. The share of gross mixed income of households further declined at the same amount as gross value added of agriculture.9%).production by 0. While Government has a particular responsibility for spearheading action and creating a positive framework.2 Our most precious resource is the people and their potential to work for the collective betterment of our nation.4 percentage points to 10. .7%.2 percentage points and particularly gross operating surplus by 0.7%). Therefore.3%). gross capital formation by 10. the private sector.8% (a year ago by 4.

the foundations for a broad. This will not be achieved through temporary relief programmes but only through a deliberate and long term policy to increase equity of opportunity and to ensure that all members of our society can participate fully in the socio-economic development of Kenya. the standard of living for the vast majority of the population has suffered and the level of poverty has risen alarmingly. At the same time. to improve the quality of life of the poor. low levels of education and literacy. The Strategy outlined in this paper will be used by Government as a national planning framework upon which detailed sectoral priorities. to improve governance and security.Poverty has numerous manifestations including low and unreliable income. Over the next three years. 1. necessary to devise multi-dimensional policies and interventions that will provide a permanent solution. working together with civil society and development partners. Therefore. the provision of affordable. poor health. disempowerment. 1. It will also outline the policies. the Governments immediate priority is to restore and sustain rapid economic growth in order to generate the wealth and economic expansion necessary to reduce the incidence of poverty. therefore. Over the past few years Kenya's economy has declined in per capita terms. It is. insecurity and uncertain access to justice. sustained attack on poverty and the creation of a more equitable society must be strengthened. As a result. basic services and the protection of the law. and isolation from the mainstream of socio-economic development. programmes and allocations will be developed within hard budget constraints determined by projections of economic performance.4 Kenya's Interim Poverty Reduction Strategy (IPRSP) has five basic components and policy objectives: • • • • • to facilitate sustained and rapid economic growth. and to improve equity and participation. ready access to means of production. will take a number of targeted short term measures to directly address some critical causes and manifestations of poverty. to increase the ability of the poor to raise their incomes. The poor must be provided with the means to help themselves through income earning opportunities. Government.3 A fundamental prerequisite for poverty reduction is economic growth that considerably outpaces population growth. reforms and programmes that the Government will instigate over the coming three years to .

However.1 The poor constitute slightly more than half the population of Kenya1. Eastern (57%). The bulk of them are located within the highly populated belt stretching South to South-East from Lake Victoria to the Coast which straddles the rail and road corridors. POVERTY 2.6 for non-poor) while in general rural households are larger than urban.5 million in 1997 and is now estimated to have reached some 15 million. The number of poor increased from 3. In urban areas. poor . pastoralists in ASAL areas. food poverty afflicted 38% and overall poverty 49% of the population. Women constitute the majority of the poor and also the absolute majority of Kenyans. and Coast (55%) while the lowest were Nyanza (42%) and Central (32%). 2.5 million in 1994. North Eastern and Coast Provinces have the largest poor households. According to the WMS 1994 and the Participatory Poverty Assessment (PPA) 1996. while overall poverty reached 53% of the rural population. The poor have larger families (6.2 Preliminary results of the 1997 Welfare Monitoring Survey (WMS). The poor are clustered in certain socio-economic categories that include small farmers. the physically handicapped. Nationally. 2. summarised in Table 1 of Annex 2. numbers increased to 12.7 million in 1972-3 to 11.realise the objectives described above. agricultural labourers. It is the first phase of implementing the National Poverty Eradication Plan (NPEP). According to available estimates. show that the incidence of rural food poverty was 51%. Geographically.4 members compared to 4. Three-quarters of the poor live in rural areas. the prevalence of overall poverty in 1994 was highest in North Eastern Province (58% of population). HIV/AIDS orphans and street children. The overall national incidence of poverty stood at 52%.3 The geographic distribution of poverty is illustrated in Table 3 of Annex 2. by 1997 indications are that not only had poverty increased rapidly but that its distribution had changed with Nyanza (63%) recording the highest level followed by Coast (62%) although Central still recorded the lowest incidence (31%). female-headed households.4 Major characteristics of the poor include landlessness and lack of education. casual labourers. over the past 25 years food poverty has increased more than absolute poverty. 2. unskilled and semi-skilled workers. Thereafter.

due to geographic location.women have a higher total fertility rate (rural 7. 58% urban and 56% rural poor reported that they do not seek public health care because of the unavailability of drugs.7 Regardless of poverty. In rural areas there are large disparities between geographic areas where in North Eastern and Eastern Provinces less than 30% of the poor have access to safe water compared to some 60% in Western Province.8) than non-poor women (rural 6. the non-poor earn more than two and one half times the income from cash crops and more than one and one half times the income from livestock sales. However. Dropout rates have risen. large populations living in informal settlements within the towns and cities have no access to safe water. In urban areas. Studies in Kenya show that fertility rates decline with education while the use of family planning is higher among the non-poor. gender and income. While the poor cultivate. For livestock.0 and urban 4. 2. only 12% of those in rural areas have reached secondary education while for the urban poor the figure rises to 28%. Children are also required to help at home. on average. as have disparities in access. while for girls socio-cultural factors and early marriage are significant factors. An overwhelming majority of the poor cannot afford private health care (76% rural and 81% urban) and rely on public health facilities. A further indicator of disparity is that only 37% of poor mothers gave birth in hospital compared to 58% of the non-poor mothers. 2. such as subsistence farmers (46% poor) and pastoralists (60% poor). 2. 2. The main reason for not attending school is the high cost of education. However. cultural factors and the lack of high-grade stock and poor access to markets could account for low sales among the poor.7 and urban 4. more land and have more livestock than the non-poor. the prevalence and incidence of sickness are similar for both the poor and non-poor.8 Certain occupations. 20% of the urban poor and 8% rural poor found even public health charges unaffordable. have a higher than average incidence of poverty.5 According to evidence on health status.6 Empirical evidence shows that 13% of the urban poor have never attended school at all while the comparative rural figure is 29%. although the proportion is higher for the poor. Of the poor. This pattern can be partly attributed by differences in the fertility of land and the affordability of inputs to improve productivity. over 50% of Kenya's households do not have access to safe drinking water.1). Furthermore. the response to sickness is markedly different. . Subsistence farmers account for over 50% of the total poor in Kenya.

For instance. Poverty adversely affects participation in social and political processes and denies life choices while the poor are particularly vulnerable to natural disasters. the proportion of poor female-headed households was higher than male-headed households in 1997. However. In response. Both rural and urban women in 1997 were severely affected by poverty.640). Kenya ranks highly as inequitable. meaning targeting needs to be intensified in the rural areas.11 The indicators demonstrate the depth and breadth of poverty in Kenya today and the magnitude of the challenge. 2.2. it is evident that efforts to-date have been inadequate and the growth of poverty has not been reversed.160) and Brazil (US$3. The fight against poverty. This means that women are affected more by development process and the area of residence plays a major role in poverty status of women. This income concentration is the highest amongst the 22 poorest countries and is exceeded only by Guatemala (per capita income US$1340). 69% of the active female population work as subsistence farmers compared to 43% of men. Given that subsistence farmers are among the very poor. These problems are most severe in arid and semi-arid areas where women spend a great portion of their time searching for water and fuel.10 Inequitable access to the means of production (land and capital).9 Studies in Kenya indicate that women are more vulnerable to poverty than men. In terms of income distribution. the distribution of wealth. However. 2. poverty is still pre-dominant in the rural areas for both men and women. South Africa (US$3. This is designed as an ongoing long term poverty strategy for policy and programme development RAISING INCOME OPPORTUNITIES OF THE POOR . ignorance and disease has been a major goal of Government since independence. reduced access to economic goods and services and remunerative employment are all causes of poverty. Government is mounting a new effort which will incorporate wider consultation and broader participation of various stakeholders. this relative dependence of women upon subsistence farming explains the extreme vulnerability of women. In the urban areas. The release of women's productive potential is pivotal to breaking the cycle of poverty so that they can share fully in the benefits of development and in the products of their own labour. Estimates indicate that a high proportion of wealth is concentrated in a very small proportion of the total population.

For the poor in urban centres. specifically .3 Detailed policies to increase the ability of the poor to raise their incomes are contained in the sector chapters. the service sector has grown at much higher rates than either manufacturing or agriculture while rural agricultural smallholders have. Immediate Priorities 5. increased access to employment and selfemployment in both the formal and informal sectors will be vital. not benefited to the extent of those employed in urban enterprises. in general. As femaleheaded households constitute a significant proportion of the poor. The poor in all circumstances will be ill-placed to take advantage of economic growth unless deliberate interventions are put in place to increase their opportunities and access to the resources. But with increasing population pressure on the land. national growth will not necessarily be spread evenly across all sectors of the economy and between all members of society. it is evident that poverty reduction calls for higher agricultural growth rates. Historically. skills and services required for them to rise out of the poverty trap.2 With 80% of the population and the majority of the poor living in rural areas and reliant upon small-holder agriculture and livestock production. 5. All these will require very substantial improvements in infrastructure services and a conducive legal and regulatory environment.5. often at subsistence levels. However.1 The goal to raise GDP growth to 5% per annum by the end of this strategy period and thereafter to a sustained level of 6-7% per annum will result in significant increases in national wealth. it is equally important to expand non-farm employment in the rural areas. any intervention must be gender-sensitive.

• system for agricultural produce that enables producers to maximise their returns. ports. The rehabilitation and subsequent adequate maintenance of Implementing widespread labour-intensive roads schemes. health. • all physical infrastructure. • Creating an effective agricultural advisory service that Establishing an effective and efficient private marketing provides practical. society and the environment. • • The promotion of rural non-farm employment. • Overcoming the existing shortfall in electricity supply and reduce its cost IMPROVING THE QUALITY OF LIFE 6. In all of these activities. particularly primary education. Trade Tourism and Industry and Physical Infrastructure. restrictive and outmoded laws and regulations in all the productive sectors while maintaining adequate protection for workers. They are education.Agriculture and Rural Development. Government will seek a closer working relationship with .1 The Government will focus resources on improving the provision of and access to basic social services that are most needed by the poor. and water supply. etc. particularly feeder roads. cost-effective extension to the smallholder. the following are considered the most immediate priorities for Government action: • Dismantling intrusive.. Briefly.

The following are considered the most immediate priorities in this area for Government action: • • • Increasing primary school enrolment and completion. • • Increasing the provision of portable water in poor areas and working with all communities to enable them to assume responsibility for managing and maintaining water supplies. Enabling more poor children to attend secondary school. Providing all public primary healthcare facilities with an appropriate and adequate supply of drugs. specifically. Making essential primary health care drugs and treatment affordable to the poor. and other private providers to increase the range and quality of provision. Human Resource Development and Physical Infrastructure.2 Detailed policies to improve the quality of life are contained in the sector chapters. . Immediate Priorities 6. religious organisations. urban and periurban areas: Current Government policy is to withdraw from direct involvement in the implementation and management of water schemes and instead. hand them over to communities.development NGOs. • Prepare enabling legislation for the privatisation of urban water supplies • Development of Water Supplies in rural.

The initiative is being coordinated under the Office of the President. 8. the poor . 8. self-help water supplies are potentially quick winners in poverty reduction.22 The Government recognises that there is inadequate capacity among service providers to take over the management of schemes on a large scale. and facilitate choice of technologies that are appropriate for management by communities and the other service providers.23 Government policy for urban water utilities is to involve the private sector in financing and management. There will in addition. With proper training. identified the need for a comprehensive capacity building programme which will require funding. be need to carefully plan the redeployment/retraining of Government personnel currently running the schemes through a comprehensive public sector reform programme. The Strategy has.local authorities and other service providers. Although investments in urban utilities have been substantial. Handing over also requires clearly defined mechanisms to guide the process. therefore. This will be achieved by developing a rehabilitation program with the stakeholders to enhance ownership. and a functional legal and institutional framework. To complement efforts to increase access to the poor. the Government has committed itself to promote self-help initiatives which have been in existence in the country for a long time and have had significant impact.

particularly education and health.1 To improve the quality of life. the financing and disbursement arrangements need to be more efficient than they currently are. that are most needed by the poor. and other private providers to increase the range and quality of provision. avenues for resolution to ensure fair play will be created. This implies that there is urgent need to examine the disbursing organs with a view to urgently restructure them to make them more responsive to the implementation requirements. The Government proposes to develop a community based catchment management strategy to ensure adequate quality and quantity of water to the poor. and pollution have dramatically increased.have received little attention in planning and access remains very low. In addition to arbitration and legal mechanisms. In all of these. NGOs. The Strategy proposes a sharp focus on peri-urban areas by developing models for distribution and management of WSS services and expansion of infrastructure. religious organisations. for the strategies to have meaningful impact.2 Education: After the high enrolments of the two post independence decades. Government will seek a closer working relationship with development partners. Water Resources Management The incidence of violation of water rights. conflicts. the Government will focus resources on improving the provision of and access to basic social services. 9. HUMAN RESOURCE DEVELOPMENT SECTOR 9. there has been a reversal at all levels of . However.

Textbooks will be standardized and remain relatively unchanged so that they can be utilized for longer length of time. .3 To improve access to basic education. the Government in collaboration with NGOs and other development partners will supplement communities' efforts to increase the provision of textbooks and other learning and teaching materials at primary school characterized by non-enrolment.4 Bursaries will be provided for school children from poor households to cover user charges. At the secondary school level. equity and quality of education. loans and scholarships will be provided for outstanding students from poor households targeted to specific degree programs in high demand by the economy. more day schools will be encouraged by providing science equipment and other support materials. 9. Bursaries will also be expanded with improved targeting and special emphasis on girls. This is attributed to the high cost of education worsened by the burden of cost sharing which has had a negative impact on access. At the tertiary level. and poor transition rates from one level of education to the other. high level of dropouts/low completion rates particularly among girls. The Government's highest priority will be to improve access to basic education and will start pursuing the target of Universal Primary Education (UPE) by lowering costs borne by parents. 9.

6 Other policy measures will include improvement in management and utilization of resources. In addition. rural poor and slum dwellers will be provided.5 Further. pupil teacher ratios will be revised upwards at both primary and secondary school levels in order to allow more efficient utilization of teachers.9. curriculum will be reviewed and rationalized to ensure quality and relevance. Some of the measures will include multi-grading and double shifts teaching and subsidising the poor households on examinations fees.7 In order to provide educational opportunities for children with special needs and those who are currently out of school. Specifically. increased resources targeted to AIDS orphans. child workers. This will result in reduction of the number of textbooks and range of equipment required. nomadic groups. To supplement this. 9. taught and examinable subjects will be reduced at both primary and secondary school levels. Besides. Some of the strategies will include decentralization of teacher and school management to the district/school levels supported by capacity building and more autonomy of district/school boards. parents and teachers associations and school committees. optional subjects at the secondary schools will be reduced. 9. curriculum will be developed to facilitate transition from non-formal to formal programs. At the same time. equitable distribution of teachers will be carried out. At the tertiary .

accessibility and affordability of basic health resources to the poor both geographically and technically. there is a definite commitment to enhance equity. the focus will be to shift towards rationalized degree programs which provide skills required for a modern economy. quality. Means testing and targeting of the higher education loans scheme will be improved and affirmative action put in place to increase the number of women receiving assistance. charges for treatment of certain diseases will be dropped while the waiver system will be enforced for the very poor.level.8 Health: This Interim Poverty Reduction Strategy Paper (IPRSP) for the Health Sub-Sector represents a major milestone by linking the objectives contained in the Kenya Health Policy Framework Paper (1994) and the National Health Sector Strategic Plan (1999-2004) to the MTEF.9 As reflected on the attached implementation matrix linking four core sub-sector objectives to planned strategies/activities to be implemented and monitored with given outcome indicators over the next three years. There is also commitment and budgetary allocation to implement high-priority activities within the essential package of health services with particular emphasis on women and children under 5 and to decentralise control over financial resources for non-wage recurrent items. 9. budget allocation. . 9. To improve access to the poor. and to improve accountability and transparency.

10 The most striking feature of the three year implementation plan is the proposed real shifts of financial. This will be done through .13 Population: The Government will continue its efforts to reduce the high rate of population growth from the current 2. human and other resources away from curative services to preventive/promotive/rural health services sub-votes. 9. The aim is to translate stated health policy objectives to tangible and targeted activities supported through the MTEF process to redirect health resources to those areas that provide maximum benefits to the majority of the vulnerable groups who form a big proportion of our society in line with the Poverty Reduction Strategy adopted by the Government. 9. the MOH proposes to implement HIV/AIDS control activities to achieve the objectives of preventing transmission of HIV among the population with a focus on the vulnerable groups.9. focus and budget allocation will help to stimulate a reversal of the adverse factors that have stifled economic growth and help the economy to start on a sustainable growth path and achieve increased per capita incomes. The Government has declared AIDS a National Disaster. Consistent with this. 9.11 The proposed strategy.12 Control of HIV/AIDS is central to an effective poverty reduction strategy.4 to 2 percent in the medium term.

sanitation and habitable space. with most housing facilities failing to meet minimum standards of durability. Measures to improve housing and shelter will include: promotion of lower cost housing (technology. there will be a shift towards jobs creation and improvement in the productivity of labour . best practices). Basic rights of all segments of society to work irrespective of sex. and the maximization of the utilization of labour and human resources in income generating opportunities.15 Housing and Shelter are important for improving the quality of life and housing construction itself boosts economic growth and job creation. outstrips supply. . materials.14 Labour and Employment: In order to emphasize the promotion of a productive and freely chosen employment as a priority and fundamental base for national economic and social policy. This will call for improvement in the provision of skills and knowledge for the workforce. particularly in urban areas. the stimulation of economic growth. 9. The current housing situation in both rural and urban areas is deplorable. mobilizing lower cost housing finance and development of enabling business conditions for private sector to construct affordable housing. 9. age and geographic location will be respected.expanding family planning services and improving information and education. Demand.

The National Social Security Fund (NSSF). targeting HIV/AIDS infected and affected persons.9. migration.16 Social security: The objective will be to create safety nets for the aged. strengthening the Retirement Benefits Authority and National Hospital Insurance Fund. cooperating with civil society and NGOs which are more experienced in this area. 70% of . and facilitating development of more private sector pension schemes and other long-term savings instruments. economic hardships and poverty. which caters only for those employed. workers and unemployed. unemployed. This will include finding ways to strengthen the traditional safety nets. retrenched. disabled and displaced persons and victims of other calamities. including farmers. Government will continue current efforts to restructure and reform the NSSF and take measures to cater for the poor and vulnerable groups with new and innovative approaches for dealing with social safety nets.1 Agriculture is the lifeline of 80% of Kenya's poor who live in rural areas. AGRICULTURE AND RURAL DEVELOPMENT SECTOR 10. is inadequate while traditional systems are disappearing due to the break-down of the extended family system.

it is likely to have a strong indirect effect. will have an important direct effect on poverty. power supply and market facilities. by the majority of small holder farmers. Furthermore. compared to 1.2 Agricultural growth has been well below potential in recent years due to a number of constraints. (iii) high cost of farm inputs. which Government intends to make relatively rapid efforts to ameliorate include (v) inconsistencies in policy/poor institutional and legal framework. (vi) inadequate research. (i) non availability of quality seeds and inappropriate production technologies especially for small holder farming. including . Restoring high and sustainable agricultural growth is therefore critical for alleviating poverty. especially feeder roads. inefficient extension delivery systems as well as inadequate extension services and support. Those which result partly from an accumulation of poor past policies and which will take time to remedy include.64. (iv) poor and inadequate rural infrastructure. particularly women. if achieved. Lastly. (vii) poor sequencing of the liberalisation process. consequently creating jobs and increasing income in that sector is vitally important and. (ii) lack of access to credit.Kenya's employment is in agriculture.23 in non agriculture. there are constraints which are almost entirely exogenous. Other constraints. (viii) lack of effective co-ordination of investment activities among the key stakeholders in agriculture. agricultural growth can catalyse growth in other sectors. 10. with an estimated growth multiplier of 1.

(iv) ensuring policies. (vii) protecting water catchment areas by developing forest plantations. As a result. . (iii) establishing efficient rural finance and credit supply system for smallholders and rural primary agroprocessors. (vi) facilitating long term investments in farm improvement. (v) implementing sound land use.(ix) insecurity in high potential areas and cattle rustling in some ASAL areas. To address specific problems of ASAL areas livestock marketing needs to be improved and small scale irrigation investments undertaken in poverty stricken areas. indicating an increase in rural poverty. For this to happen in a way that effectively supports poverty reduction over most of the sector. and (xi) population pressure on the natural resource base.3 The Agriculture sub-sector needs to grow at about 4-6% per annum if it is to contribute to national growth and increasing rural wealth. institutional and legal frameworks are investor friendly. and (viii) improving the governance of the co-operative sector by empowering farmers. a number of important elements need to be in place and actions to facilitate them need to be taken. many indicators of rural livelihood have been worsening. water and environmental policies. (ii) undertaking affirmative action in agriculture by facilitating participation of women. 10. These include: (i) building an effective and efficient participatory extension and technology delivery service. (x) unfavourable weather conditions and high dependence on rain fed production.

As per the advance estimates the per capita NSDP (i.6403 at constant (1993-94) prices and Rs.0 per cent at constant (1993-94) prices and by 10.79 per cent in 2002-2003 (Q) as against 4.4 The role of Government in encouraging growth in the rural sector would be redirected towards fulfilling those functions which are truly public goods.11684 at constant (1993-94) prices and Rs.1 The quick estimates of the Gross State Domestic Product (GSDP) of Assam for 2002-2003 shows that the growth of GSDP at constant (1993-94) prices has increased by 3.1.94 per cent during the year as against increase of 3.23 per cent in 2001-2002 (Provisional Estimates). At current prices the same has increased by 7.12593 at current prices during 2003-2004 while at national level the per capita income is estimated at Rs.6 per cent during 2002-2003 (Q) over the previous year in real terms while the Construction Sector in the State registered a positive growth of 16.e.44 per cent increase in 2001-2002 (P). The Primary Sector registered a negative growth of (-) 1.1. 3. In particular it would strive to provide better research/extension linkages and which are seen as the main way of supporting effective increases of smallholder maize and traditional crop production which is undertaken mainly by the rural poor.7 . Per Capita Income) of Assam is likely to attain the level of Rs. At national level the growth of GDP during 2003-2004 is expected to be 8. It would also set policies to create an enabling environment which encourages investment and trade. which would also be of direct benefit to the poor STATE INCOME The advance estimates of State Domestic Product for the year 20033.20860 at current prices during the same period.2 per cent at current prices.9 per cent at current prices as revealed from the advance estimates released by the Central Statistical Organisation.10.1 per cent at constant (1993-94) prices and 11. thereby leading to job creation.0 2004 indicate that during the year the Gross State Domestic Product (GSDP) of Assam is expected to grow by 6.

2 per cent and 7. Thus. At current prices the same was Rs.44 crore as against Rs. The growth rate at current prices in 2002-2003 was 7. The Net State Domestic Product (NSDP) of Assam in real terms i.10718 in 2000-2001.35431. the Per . As per the said estimates the Agriculture and allied sector has declined by 4.e. the Per Capita Income of Assam at constant price (1993-94) has been worked out at Rs.28262.2 at 1993-94 prices has been estimated at Rs.31720. the Gross Domestic Product (GDP) at National level at constant (1993-94) prices has grown by 4.22 crore in 2001-2002 (P) and Rs.25 per cent at current prices and 2.3 The Per Capita Net State Domestic Product (NSDP) i.11034 in 2001-2002 (P) and Rs. 3.90 crore in 2000-2001. 15670..33 crore in 2001-2002 (P).09 per cent growth witnessed in 2001-2002 (P).42 crore as against Rs. The quick estimates of GSDP of Assam in 20022003 (Q) at constant (1993-94) prices has been estimated at Rs.32872.61 crore in 2002-2003 (Q) as against Rs.32 crore in 2001-2002 (P) and Rs. mainly due to the draught conditions prevailed in the country during the aforesaid period while the Secondary and Tertiary Sectors has shown a growth of 6. 3. At current prices the same was Rs.16784.0 per cent during 2002-2003.7 per cent in Secondary Sector during the aforesaid period.29 per cent at constant (1993-94) prices.1. According to the Quick Estimates released by the Central Statistical Organization (CSO).18397.09 per cent witnessed in 2001-2002 over 2000-2001. The Tertiary Sector registered a positive growth of 6.6220 in 2002-2003 (Q) as against Rs.0 per cent.6059 in 2001-2002 (P) and Rs.6 per cent during the year. At current prices. which resulted a growth of 9.5943 in 2000-2001.29419. GSDP in 2002-2003 (Q) is estimated at Rs.1.31 crore in 2001-2002 (P).1 per cent respectively. The annual compound growth rate of NSDP during the period from 1993-94 to 2002-2003 has been worked out at 10.90 percent in 2002-2003 over 2001-2002 as against a growth of 3.19121.per cent.11755 in 2002-2003 (Q) as against Rs.e. the NSDP registered a growth of 3.14 crore in 2000-2001.80 crore in 20022003 (Q) as against Rs. Thus.16155.82 per cent in comparison to 4.

01 per cent for Tertiary Sector at current prices and 41.2 that in respect of Per Capita Income.11755 at current prices and Rs. the contribution of Primary. During the same year. 14. Assam continued to lag behind the Per Capita Income at National level in every year under reference in the table.53 per cent at current prices and 2.21 per cent and 44. The share of the entire Sectors to the total NSDP of the State during 2002-2003 (Q) .7 per cent at constant (1993-94) prices during 2002-2003 over that of previous year.95 per cent increase in 2001-2002 (P) over 2000-2001. the contribution were 41. It would be evident from Table-3.69 per cent.26 per cent and 46. The movement of GSDP and NSDP of Assam at Factor Cost by Industry of origin along with Per Capita Income at current and constant prices may be seen from the Tables at Appendix.16 per cent and 45. While in 2001-2002 (P). Another noticeable feature in this regard is that the gap between the Per Capita Income of Assam and India is widening in every subsequent years. 16.99 per cent for Secondary Sector and 44. At current prices the same recorded an increase of 6.66 per cent in 2002-2003 (Q) over 2001-2002 (P) as against the increase of 1.72 per cent. As per Quick Estimate the Per Capita Income of Assam showing an increase of 6.00 per cent for Primary Sector.6220 at constant (1993-94) prices and during the same period the Per Capita Income for the country as a whole was Rs. 14. During 2002-2003 (Q) the Per Capita Income of Assam stood at Rs. Secondary and Tertiary Sectors at constant (1993-94) prices have been found to be 38. Secondary and Tertiary Sectors to the total Net State Domestic Product of the State at current prices stands at 38. This shows the Per Capita Income of Assam and India during the period from 1980-81 to 2002-2003.4 during 2002-2003 (Q) the contribution of Primary.73 per cent respectively at constant prices.Capita Income at constant prices (1993-94) showed an increase of 2.12 per cent respectively.18912 at current prices and Rs. 15.95 per cent in 2001-2002 over 2000-2001.1.10964 at constant (1993-94) prices.06 per cent.53 per cent in 2002-2003 (Q) over 2001-2002 (P) as against 2. An analysis of the Sectoral contribution by broad groups reveals that 3.05 per cent respectively.

45 per cent to 38.34 per cent.84 per cent to 16.The Sectoral composition of the State’s economy has undergone considerable changes during 1992-93 to 2002-2003 as revealed from the movements of the SDP of the State. savings and investment the increasing trend in gross domestic savings as a proportion of GDP observed since 2001-02 continued. On the other hand.71 per cent to 45. this virtuous trend consolidated further with an increase in public sector savings from 1. The third component. namely household savings. 69. During this period.72 per cent.390 crore in 2004-05 (QE) was composed of lower dissavings of public .43 percent and 32.9 per cent – slower than the GDP growth rate – and made a negative contribution by coming down as a proportion of GDP. The contribution of Agricultural Sector to the total NSDP of the State is found to be dwindling over the years. grew at 5.69 per cent and 34. 31. the share of Primary Sector has declined from 51. with the savings ratio rising from 26. In 2004-05. The increasing share of Secondary and Tertiary Sectors is due to faster rate of development in these two Sectors in comparison to the development in the Primary Sector. 31.3). 2001-2002 (P) and 2000-2001 the share of this Sector were 30.9 per cent in 2003-04 and further to 29. The positive saving of Rs.46 per cent respectively at constant (1993-94) prices.2 per cent of GDP in 2004-05. With progress in the implementation of FRBMA.1 per cent in 2004-05 (Table 1.0 per cent of GDP in 2003-04 to 2.45 per cent respectively at current prices and 29. the share of Secondary Sector has increased from 12. During 2002-2003 (Q).16 per cent and Tertiary Sector has also increased from 35.5 per cent in 2002-03 to 28. according to the new series of national accounts. The trend in public savings had reversed from negative (1998-99 to 2002-03) to positive in 2003-04. the rise in the savings rate was contributed by two of its three components: namely public and corporate savings.12 percent over the same period. Review of Developments Consumption.60 per cent.

fell further to 62. there was an increase in the rate of GDCF or investment ( Table 1. separate from public and private. GDCF at constant prices (base: 1999-2000) as a proportion of GDP (Table 1. as a proportion of GDP. In 2004-05.2 per cent in 2003-04.2 per cent and 1.3). While consumption expenditure.6 per cent. The proportion is estimated to have grown marginally to 11.8 per cent in 2004-05 (QE). may reflect the higher prices of capital goods relative to the general . In line with the rise in the rate of gross domestic savings in 2002-03 and 2003-04. in both financial as well as physical assets.3 per cent in 2000-01 to 18.6 per cent in 200405. Government final consumption expenditure (GFCE) declined from 12.2 per cent in 2004-05.3). such expenditure continued to dominate the demand side of national income. transport and communication.2 percentage points in gross domestic savings rate between 2003-04 and 2004-05 was considerably lower than the 2.3).3 per cent in 2004-05.1 per cent in 2004-05 (Table 1. beverages and tobacco in total expenditure came down from 46. namely. The other major item of importance.9 percentage points of GDP. There has been a continuing upward momentum in the savings of the private corporate sector for three years.4 per cent in 2003-04 and 60. The lower values of the change in GDCF as a proportion of GDP at constant prices. as a proportion of PFCE.6 per cent in 2001-02 to 4. But.4 per cent in 2003-04 to 4. as a proportion of GDP. particularly in more recent years. leading to a current account surplus in BOP.9 per cent in 1999-2000 to 11. exhibited a declining trend both in public and private consumption categories. the direction of change from year to year remains unaltered.8 per cent of GDP largely bridged the savings-investment gap. a new item “valuables” covering expenditure on acquisition of precious metals and stones as a store of value has been included as a component. In the revised series data.7 per cent. of GDCF on the basis of 1993 System of National Accounts of United Nations. it increased steadily from 3. when measured as a proportion of GDP.9 per cent) to increase its share in GDP from 4. Among the various components of PFCE.8 per cent of GDP in 2004-05 (QE). respectively. A current account deficit in BOP of 0. However. Savings by the private corporate sector – reflecting the high retained earnings from their higher profits – grew rapidly (24.6 per cent in 2004-05. mainly on account of private investment growing at 19.4 percentage point rise in the previous year because of a decline in household savings. relative to GDP.2 per cent in 2003-04 to 30. surpassing the 0. The increase of 0.2 percentage point increase in the ratio of gross domestic savings to GDP. the increase in GDCF was less than the increase in savings. irrespective of the choice of constant or current prices as the weights. rose from 14.9 per cent in 2002-03. at current prices as a proportion of GDP. the share of food.6 per cent in 1999-2000 to 62. As a proportion of GDP at current prices. after declining from 64. Gross domestic investment grew from 27. GDCF increased by 2. reflecting the pick up in investment in the economy. Private final consumption expenditure (PFCE).4) is consistently lower than the corresponding proportion at current prices (Table 1.authorities and higher savings from non-departmental enterprises. of 1.8 per cent in 2000-01 to 40.

In an encouraging development. the negative contribution of external balance increased in 2004-05. This may partly reflect a process of adjustment to the rapid decline in the change in stocks as a proportion of GDP from 2.1 for the first time in recent years. indicating that on the average. the average per capita income increased faster than the poverty threshold (Table 5).5 per cent in 2001-02 and the progressive liberalization of gold and silver imports.7 per cent in GDP in 2003-04. Moreover. At constant 1999-2000 prices. there is a faster growth in inventories and valuables in the latest two years. the increase in per capita income was more than sufficient to match the increase in the cost of basic food and non-food requirements. Furthermore.price level.5 per cent of the growth in GDP at current market prices between 2000-01 and 2003-04.0 per cent in 19992000 to a low of 0. Poverty Statistics Explanatory Notes on the 2003 Poverty Estimates E. the average per capita income of the three lowest income .4 out of the overall growth of 12. The percentage point contribution of private final consumption expenditure was as much as 7. In the same year. from the demand side. with gross fixed capital formation (GFCF) growing at a lower rate than gross domestic capital formation. the composition of GDCF for 2003-04 and 2004-05 reveals a faster growth in the public component than in the private. the percentage point contribution of investment at 6. Reflecting the higher growth of imports relative to exports.1 per cent growth in GDP in 2004-05 exceeded the corresponding contribution of private final consumption expenditure at 6.5).4.2 and Table 1. PFCE contributed as much as 54. there was a change in the pattern of PFCE providing the lead (Figure 1. At the national level. the corresponding contribution of investment was 5.8 out of 13. In terms of contribution to growth of GDP at current market prices. Growth rate of average per capita income (at current prices) versus the growth rate of the poverty threshold provides an alternative way to analyze trends in poverty incidence • • Another way of validating changes in poverty incidence would be to compare the growth rate from 2000 to 2003 of the nominal average per capita income as against that of the poverty threshold. with growing technological sophistication of the production processes in the economy in general and manufacturing in particular.

This means that poor families were able to cope better despite the increase in the cost of basic necessities.groups. Thus. the decrease in the region’s overall per capita income can actually be attributed to those . although the cost of basic necessities went up faster than the overall per capita income. This contributed to the reduction in Metro Manila’s poverty incidence. Table 5 Poverty Incidence. NOMINAL Average Per Capita Income. where the country’s poor belongs.7 percentage point reduction in national poverty incidence from 2000 to 2003 is plausible. In fact. rose at a higher rate than the poverty threshold as shown in Appendix Table D . 2000 and 2003 • For NCR. and Poverty Threshold by Region. where all of the poor in the metropolis belongs. the 2. was more than sufficient to match the rising cost of basic necessities in the region. poverty incidence decreased nonetheless since the increase in the average per capita income of families in the lowest income group. thereby improving their living conditions.

Despite the faster growth in the overall per capita income as against the cost of basic commodities. For Regions IV-B. while the overall per capita income increased faster than the cost of basic commodities. that is. and for the three lowest income groups in Region IX. that is. poverty incidence dropped nonetheless since the rise in the average per capita income of families in the lower income groups. for Region VIII. A similar trend was observed in Caraga. In fact. III. the average per capita income of families went down from 2000 to 2003 for the third. That is. A closer examination of the distribution revealed that it was mainly the upper income groups that contributed to the increase in the overall per capita income of the region.• • • • • in the highest income group. V. poverty incidence increased just the same since the expansion in the average per capita income of families in the fifth income group was not enough to deal with the faster rising cost of basic necessities. CAR and ARMM. In fact. XII.02 percent) since the increase in the overall per capita income was not sufficient to cope with the rising cost of basic necessities. were more than enough to cover the increasing cost of basic requirements in the region. poverty incidence improved as the overall per capita income grew at . For the rest of the regions. improvements in the income of most families in the said income group were not enough to cope with the rising cost of basic necessities in the region. Similarly. while the cost of basic requirements grew faster than the overall per capita income. For Region XI. II. particularly those in the fourth lowest income group. the increase in the overall per capita income of the region was contributed mainly by the upper income groups. VII. VI. poverty incidence increased nonetheless due to the insufficient growth in the average per capita income of the third lowest income group. and X. Calabarzon (IV-A). by 0. fourth and fifth lowest income groups in Region IV-B. which could not have affected the estimate of poverty incidence. Regions I. poverty incidence worsened (although only by a negligible rate in the case of Region X. IX.

mainly on account of higher growth in construction.7 per cent) registered an increase of 4.0 per cent up to mid-January 2003 and rose thereafter to 6.5 per cent in agricultural output. However.5 per cent and that of industrial sector from 2.4 per cent.5 per cent for 2002-03 as compared with 4.5 per cent in 2001-02.1 per cent as against 6. the prices of manufactured products (weight: 63. 4.8 per cent in "fuel. transport and communication sectors. power.9 per cent as against an increase of 3.0 to 5. The earlier projection in the Reserve Bank?s mid-term Review of October 2002 was based on a much lower decline of 1.2 per cent in the previous year.1 per cent. This was mainly due to an upward revision in growth rates of the manufacturing. 5. Prices of primary articles (weight: 22. light and lubricants" group (weight: 14. which reflects an estimated decline in the output from agriculture and allied activities by as much as 3. The weight of such items. During 2002-03. 2002 had projected the GDP growth in the range of 5.2 per cent. Besides fuel items.7 per cent.a sufficient rate to cope with the escalating cost of basic necessities in these regions.9 per cent in the previous year.5 per cent taking into account available data on the performance of the South-West monsoon. however.9 per cent a year ago. According to these estimates. others have sharply responded to external supply shocks.6 per cent was marginally higher than envisaged earlier. as per CSO advance estimates. domestic trade and transport sectors.2 per cent) as against an increase of 3.8 per cent is. Moreover. much higher than that of 3. the steep increase in prices of oilseeds.8 per cent compared with no increase in prices in the previous year. on a point-to-point basis. the growth rate of agriculture and allied activities remained steady at 5. Similarly.5 per cent in the earlier year. per capita income of families in the lower income groups grew more rapidly than the cost of basic necessities helping them cope better Developments during 2002-03 Domestic Developments 3. real estate and business services sector at 6. the mid-term Review of Monetary and Credit Policy released on October 29. The overall growth performance of the industrial sector.e. The advance estimates for 2002-03 released by the CSO in January 2003 has placed GDP growth at 4.2 per cent to 6. For the year 2002-03.9 per cent to 3. The services sector is estimated to grow by 7. i. while some items are affected by drought conditions. sugarcane and cotton have been major items in the overall price rise in 2002-03. at 5. In the WPI basket.0 per cent) showed an increase of 5. Growth rate of the services sector was revised upwards from 6. remained below 4. The Central Statistical Organisation (CSO) recently released the latest estimates of national income for the year 2001-02.4 per cent. The annual rate of inflation as measured by variations in the wholesale price index (WPI).2 per cent by end-March 2003 mainly on account of increase in prices of non-food articles and mineral oils. there was a higher increase of 10. where prices have increased very . 5. the growth rate of real GDP in 2001-02 at 5. The CSO has also placed the growth of financing. trade.

4 per cent. 8. During 2002-03. Excluding the price increases due to such items (mineral oils.794 crore) in the previous year. On an average basis. net domestic assets of RBI declined on account of a fall in both net RBI credit to government and credit to banks and commercial sector.1.0 per cent (Rs.0 per cent (Rs.1 per cent with mergers). During 2002-03. as against an increase of 13.1. oilseeds. edible oils. the annual change in consumer price index for industrial workers (up to February 2003) was identical to the previous year at 4.263 crore) as against 15.782 crore) a year ago.40.3 per cent (Rs.94.468 crore as compared with a decline of Rs.2 per cent (Rs.7 per cent on a point-to-point basis at the end of March 2003 as compared with 1. M3 increased by 12.95. While currency in circulation rose by 12. net of mergers. The expansion in currency with the public was lower at 12. A favourable development during 2002-03 has been a sustained increase in credit flow to the commercial sector reflecting industrial recovery. bankers? deposits with RBI declined by 1. RBI?s claims on banks and commercial sector also showed a fall of Rs.659 crore) observed in the previous year.64.5 per cent last year.6.984 crore) which was well within the projected trajectory. growth in aggregate deposits of scheduled commercial banks (SCBs) at 12.0 per cent (Rs.6 per cent in the previous year. 9.144 crore) and. The incremental non-food credit-deposit ratio during 2002-03 at 79 per cent is the highest recorded over the last five years.670 crore).31. On the sources side.3 per cent as against 3.6 per cent a year ago.25.2.sharply.780 crore.1 per cent (Rs.4 per cent (Rs.3 per cent in demand deposits in 2002-03.960 crore) as compared with an increase of 11.338 crore) as compared with an increase of 15. This is indicative of the fact that a substantial part of lendable resources of banks has been deployed for productive purposes.575 crore in the previous year reflecting comfortable liquidity conditions.34. This is also borne out by the strong growth of 10.599 crore). An important feature of monetary developments during 2002-03 was the lower increase in reserve money despite a sharp increase in foreign exchange assets of RBI.2 per cent net of mergers (16. On the other hand. 7.801 crore) as compared with an increase of 3. net of mergers.175 crore. the inflation rate works out to 2.849 crore) in the previous year.1 per cent.369 crore due to net open market sales of government securities of Rs.2 per cent (Rs. oil cakes and fibres) from the basket. The increase in reserve money during 2002-03 was crore) compared with an increase of 33. net RBI credit to the Central Government actually declined by Rs.9 per cent (Rs. the growth in money supply (M3) was 15. RBI?s net foreign exchange assets rose by 35. 6.31.8 per cent (Rs.30.5 per cent (Rs. for the year as a whole was.2 per cent (Rs. non-food credit of scheduled commercial banks (SCBs) registered a high growth of 26.36. lower than that in the previous year: 3. However. works out to per cent (Rs.32.66.6 per cent (Rs. which is . however.81. The annual rate of inflation in 2002-03 as measured by the increase in WPI.302 crore) in the previous year.576 crore) as against 14. on an average basis. Among the components.24.1.7 per cent (Rs.2 per cent (Rs. was lower than that of 14.769 crore) in the previous year. Monetary and credit aggregates for the year 2002-03 reflected the impact of mergers that took place in the banking industry.9. it rose by 17. Notwithstanding RBI?s subscription to fresh government dated securities of Rs.

it did not exert undue pressure on interest rates due to decline in the demand for food credit. 12. in a mediumterm perspective. While unfavourable effects of large fiscal deficits on the interest rate scenario have not so far been evident.4.04.262 crore as compared with Rs. there was significant increase in credit to iron & steel.499 crore during 2002-03 as against an increase of Rs.1.7 per cent (Rs. global depository receipts (GDRs) and borrowings from financial institutions was at Rs.44 per cent in the previous year. As such.569 crore) as against 12. paper & paper products. fertilisers. 13. Consequently. the fiscal deficit of the Central Government for 2002-03 was Rs.082 crore in the previous year.701 crore.622 crore for 2002-03 were supplemented by additional borrowings of Rs. food processing.1.442 crore in two tranches. was also higher at 24.69.5 million tonnes on March 1. cement.15.118 crore (gross Rs. The feedback on industry-wise credit flows received from banks for 2002-03 (AprilFebruary) reveals that. it is necessary. decline in credit was observed in coal. 2003.42. all engineering. As a result of subdued procurement due to lower foodgrains production. The increase in total flow of funds from SCBs to the commercial sector during 2002-03. Though repayment of high cost debt is desirable. This amount includes Rs. crore) in the previous year. there was a decline in food credit of Rs.126 crore) was higher than the budget estimate by Rs.45.8. During 2002-03.747 crore.000 crore for the debt swap scheme mutually agreed between the Central Government and state governments towards repayment of high cost debt of States to the Centre.35. computer software. sugar.466 crore as against the budget estimate of Rs.2 million tonnes as on March 1. cotton & jute textiles. electricity.10. During 2002-03. drugs & pharmaceuticals.51. power and roads & ports. to aim at fiscal consolidation and substantially lower fiscal deficits to facilitate efficient monetary and debt management operations.442 crore.34 per cent during 2002-03 was lower by 210 basis points than that of 9. net market borrowings of the Central Government at Rs. 10.1. tobacco & tobacco products. The total flow of resources to the commercial sector. the buffer stock of foodgrains declined from 54. at a disaggregated level. including capital issues. construction. According to the revised estimates in the Union Budget. and higher off-take of foodgrains. On the other hand. large borrowings for this . reduction in CRR.8. including banks? investments in bonds/debentures/shares of public sector undertakings and private corporate sector.15. comfortable liquidity position resulting from the foreign exchange inflows and judicious debt management by RBI.mainly used for working capital requirements. other metal & metal products. the weighted average cost of government borrowings through primary issuances of dated securities at 7. 11.1. commercial paper (CP) etc.5 per cent (Rs. Although the combined slippage in the borrowings of the Centre and States was as much as Rs.1. The large buffer stock with the Government acted as a deterrent to price increase of food items as also the general price level in the wake of severe drought conditions witnessed during the year.13. telecommunications and petroleum.23.1. 2002 to 36.987 crore in the previous year. the state governments accessed the market for additional borrowings for an amount of Rs.259 crore but lower than the revised estimate by Rs.1..524 crore. The state governments? net market borrowings of Rs. gems & jewellery.

in March 2002 to 5.95.13 per cent and 6.89 per cent each by March 2003. A reduction in fiscal deficit would release resources for infrastructure and industrial financing. Fiscal consolidation will also have a favourable effect on inflationary expectations and hence on the interest rate scenario in the economy. As emphasised in various policy Statements. In terms of volume. RBI proposed that banks should build up investment fluctuation reserve (IFR) to a minimum of 5 per cent of their investment portfolio under the "held for trading" and "available for sale" categories. such a scenario exposes banks to substantial interest rate risk which has adverse implications for sustained financial stability. The discount rate of prime-rated CP (61-90 days) showed an even sharper decline by 302 basis points from 9. with the concurrence of their Boards.00 per cent between March 2002 and March 2003. It may be recalled that in January 2002. which in turn would help in realising the long-term potential of the economy. such holdings above the statutory liquidity ratio (SLR) amounted to Rs. The two-way movement in interest rates during 2002-03.974 crore in March 2003 which is much higher than the gross borrowings of the Government.1.16 per cent. it was possible to maintain adequate liquidity on account of sustained inflows of fornment borrowing. and to fully take into account the implications of changes in the monetary and external environment on their operations. The banking system already holds government securities of about 39 per cent of its net demand and time liabilities (NDTL) as against the statutory minimum requirement of 25 per cent.86 per cent by March 2003. The monetary policy stance in recent years has underlined the Reserve Bank?s commitment to maintain adequate liquidity in the market with a preference for soft interest rates to the extent the evolving situation warrants.purpose. including guarantees. The timing of issuance and pricing of the securities also become difficult. It is of utmost importance that overall borrowing requirements are kept at a reasonable level. The cut-off yields on 91day and 364-day Treasury Bills declined from 6. in addition to high level of approved market borrowings for other purposes. 16. respectively. During 2002-03. the increasing interest payments have raised concerns about the sustainability of a large public debt. and that all sovereign obligations.97 per cent in March 2002 to 5. put pressure on interest rates. In the light of their own risk assessment. are fully honoured on time. by transferring the gains realised on sale of investments within a period of five years. has confirmed that banks should in their interest take steps to build up investment fluctuation reserves in a smooth and phased manner for better risk management. Further. particularly during periods when there is a bunching of borrowing requirements for various purposes. This is evident from the fact that the call money rate declined from 6. These difficulties are compounded if there are periodic defaults by some States or their PSUs in meeting their guarantee obligations. They were also advised to make adequate provisions for unforeseen contingencies in their business plans. In addition. banks are free to build up higher percentage of IFR up to 10 per cent of their portfolio depending on the size and composition of their portfolio. overall monetary management becomes difficult when a large and growing borrowing programme of the Government puts pressure on the absorptive capacity of the market. 14. 15. An interesting development during the year has been that the interest rates in money market .02 per cent to 6.

25-8. The term deposit rates of public sector banks for maturities up to 1-year moved down from a range of 4.instruments converged to a narrow band of 5. the spread between the yields on 10-year government securities and 91-day Treasury Bills narrowed from 123 basis points in March 2002 to 32 basis points by March 2003 reflecting moderation of inflationary expectations. Since interest rates could vary in both directions. 18. The reduction in deposit rates was more pronounced for longer term deposits as the public sector banks have reduced their deposit rates above 1-year from a range of 7. Further progress in this direction could be made if banks move over to a variable interest rate structure on longer term deposits as early as possible.75 per cent in March 2002 to 5. the spread between the prime-rated CP (61-90 days) and 91-day Treasury Bills narrowed from 289 basis points in March 2002 to 11 basis points by March 2003. and vice versa when rates are moving in the opposite direction). depending on the phase of business cycle and inflationary outlook. there has been a flattening of the term structure . There was a sharper decline of 115 basis points in yield on government securities with 10-year residual maturity from 7.00-6.10 per cent in March 2002 to 5. 19. are contributing to higher costs because of relatively low productivity. The term structure of interest rates reveals a flattening of the yield curve with long-term interest rates declining more sharply than the short-term rates. banks need to reduce their operating costs over time by improving productivity and increasing their volume of lending. It is necessary to impart greater flexibility to the interest rate structure in India consistent with the underlying macroeconomic conditions.50 per cent by March 2003. As a result. which favours old deposits over new deposits when interest rates are coming down. For example. the rate for longer term deposits (over 3 years) declined by as much as 200 basis points. For example. yields on non-government bonds witnessed a sharper reduction than yields on government securities during 2002-03. There was also a distinct downward drift in secondary market yields on government securities across the maturity spectrum during the year.25-7. The yield on government securities with 1-year residual maturity declined by 60 basis points from 6. 17. In addition. a variable interest rate regime on long-term deposits does not necessarily imply lowering of the average interest rate earned by depositors over a period of time (as compared with a fixed rate regime. the spread between AAA-rated corporate bonds and the yield on government securities narrowed from about 177 basis points in March 2002 to about 87 basis points by March 2003.50 per cent in March 2002 to 4. 20.00 per cent by March 2003.00 per cent by March 2003. For example.21 per cent by March 2003.25-7.36 per cent in March 2002 to 6. This should be possible with proper upgradation of technology in areas which. While the typical short-term deposit rate (15-29 days) of the public sector banks declined by 50 basis points during 2002-03. Interestingly.0 per cent reflecting easy liquidity conditions. the risk premium on the private sector bonds has fallen sharply as measured by the yield spread between highly rated corporate paper and government securities for residual maturity of 5 years. at present. In the case of longer maturities also. and yields on such bonds are now closer to sovereign bonds than was the case earlier.5 to 6.

the Reserve Bank will continue to keep a constant watch on the domestic and external situation to conduct its monetary management and also to provide more robustness to the country?s financial architecture.0 per cent in March 1999 to 5. the weighted average call money rate has come down from over 13. In the annual policy Statement of 2002.25 per cent by March 2003. In the annual policy Statement of April 2002. has gone up from 10 to 22 between March 2002 and March 2003. bank-wise lending rates have been placed on the RBI website (http://www.5 per cent. which is the lowest rate since May 1973. It involves constant monitoring of both domestic and international indicators and fine-tuning of policies in line with the evolving conditions. 23. Accordingly.75 per cent.25 per cent by October 2002. a number of banks have reduced their spreads over PLR.0 per cent in March 2002 to per cent in August 2000 to 5. banks have reduced their prime lending rates (PLRs). External Developments . RBI had urged banks to review their spreads over PLR and reduce them wherever they were unreasonably high. The public sector banks reduced their PLRs in the range of 25-125 basis points. In recent years. September and December 2002.0 per cent by March 2003.0-12.86 per cent by March for the quarters ended June.38 per cent and 10. respectively. Though the overall monetary conditions are at present comfortable in the light of moderate inflation. private sector banks by 50-225 basis points and foreign banks by 15-325 basis points. Similarly.0-12. it is not reasonable to keep very high spreads over PLR. Changes in policy rates reflected the overall softening of interest rates as the Bank Rate has been reduced in stages from 8. The number of banks charging maximum spread of less than 4 per cent over PLR increased from 2 in March 2002 to 15 by March 2003 in the case of public sector banks.5 per cent or below. One major public sector bank has reduced the maximum spread over PLR to 2. the repo rate has been moderated from 8. 22. RBI had spelt out its intention of collecting the maximum and minimum interest rates on credit advanced by banks and place the same in public domain with a view to enhancing transparency.rbi.of deposit rates. 25. In response. Simultaneously. The PLRs of public sector banks declined from a range of 10. easy liquidity and soft interest rate environment. there has been a persistent downward trend in the interest rate structure reflecting moderation of inflationary expectations and comfortable liquidity situation. Liberalisation in the domestic economy combined with the increasing integration of the domestic markets with the international financial market poses new challenges for monetary management. from 5 to 12 in the case of private sector banks and from 12 to 14 in the case of foreign banks.0 per cent in July 2000 to 6. 24. In the present interest rate environment. 21. In consonance with lower cost of funds. The typical interest rate on 3-month and 1-year certificates of deposit (CDs) also declined from 7. The number of public sector banks whose PLR was 11. by March 2003.25 per cent and 5.5 per cent in March 2002 to 9.

Its adverse impact on the oil markets could have a negative impact on economic activity throughout the world.3 per cent in 2003. contrary to popular impression. as most of the increase is due to non-debt inflows.8 per cent). An important lesson emerging from the disturbances in the global financial market last year has been the role of sound macroeconomic policies and financial sector reforms in strengthening the resilience of the financial sector to external shocks. India?s foreign exchange reserves continued to record healthy growth during 2002-03 on account of improvement in the current account as well as strong capital and other inflows. According to the latest estimates of the International Monetary Fund (IMF). Despite adverse external developments. there is no evidence to show that available arbitrage opportunities have caused the accretion to foreign exchange reserves. For the current year 2003. 30. foreign currency assets rose by US $ 20.9 per cent in 2002 to 4. has been made without increasing the overall level of external debt. and the importance of building adequate safety nets that can withstand the effects of unexpected shocks and market uncertainties. (b) increase in other capital and (c) valuation changes in reserves. This is the highest increase recorded in a single year and has occurred despite substantial increase in the international oil prices and other unfavourable developments. It has focused on the management of volatility without a fixed rate target and the underlying demand and supply conditions are allowed to determine the exchange rate movements over a period in an orderly way. The uncertainty regarding the economic outlook. The recent experience has once again highlighted the need for developing countries to keep a continuous vigil on market developments. financial stabilisation and promoting good corporate governance to aid the long-run welfare gains. IMF has projected a growth rate of 3.3 billion from US $ 54. like lower international capital flows to developing countries during the period. in the last few years. however.2 per cent for the world economy. The growth in volume of world trade is projected to pick up from 2. Macroeconomic policies will have to continue to focus on strengthening the fundamentals of the economy. Of these.26. 31. 29. The cost of accretion to reserves has also not been found to be very significant.0 per cent as against 2. Almost the entire addition to reserves.1 billion in end-March 2002 to US $ 75. the growth rate for the world economy in 2002 was slightly higher than estimated earlier (3. Despite several unexpected . particularly on oil importing emerging markets. India?s foreign exchange reserves increased by as much as US $ 21. 28.4 billion by end-March 2003. 27. A recent study by RBI has revealed that.8 billion. In addition to increasing the effectiveness of the system. efficient regulatory environment and good disclosure norms constitute the crucial confidence-building measures for the financial sector. In this context. In recent years. It may be noted that major sources of foreign exchange reserves during the current fiscal year have been: (a) surplus in current account. remains high due to the ongoing geopolitical tensions. India?s current exchange rate policy seems to have stood the test of time. the annual policy Statements as well as mid-term Reviews have attempted to bring into sharper focus the main lessons emerging from our experience in managing the external sector during periods of external and domestic uncertainties.

India?s foreign exchange reserves are at present more than comfortable. including public sector units. and is likely to be more than offset by the return on additional reserves. in the last few years. As pointed out in previous policy Statements. and (e) reducing volatility in foreign exchange markets. cover: (a) maintaining confidence in monetary and exchange rate policies. of holding reserves. if any. deposits or as . for investment. India?s external situation has remained strong. inter alia. caution and flexibility by closely monitoring the developments in the financial markets at home and abroad. almost the whole addition to reserves has been made without increasing the overall level of external debt. The substantial growth in reserves in the recent period has generated a welcome debate regarding the costs and benefits of holding reserves. the possible variability in portfolio investment and other types of capital flows. corporates and individuals. It will co-ordinate its market operations carefully. whether real or imaginary. Taking these factors into account. 33. India?s sustained efforts to build an adequate level of foreign exchange reserves in the last few years have also been fully vindicated by recent developments. and movements in the repatriable foreign currency deposits of non-resident Indians (NRIs). it is essential to keep in view the objectives of holding reserves. (b) enhancing the capacity to intervene in forex markets. The increase in reserves largely reflects higher remittances. these economic costs are likely to be substantially higher than the net financial cost. the unanticipated pressures on the balance of payments arising out of external shocks. include: the size of the current account deficit. and has endeavoured to reflect the "liquidity risks" associated with different types of flows and other requirements. The policy for reserve management is thus judiciously built upon a host of identifiable factors and other contingencies. 32.e. In any cost-benefit analysis of holding reserves. It may also be mentioned that most of the increase in reserves in the recent period is through net purchases by RBI in the domestic forex market for which an equivalent amount of domestic currency has been released to the concerned domestic entities. which. In this context. the size of short-term liabilities (including current repayment obligations on long-term loans). The Reserve Bank will continue to follow the approach of watchfulness. (d) providing confidence to the markets that external obligations can always be met. regulatory and other measures as considered necessary from time to time. Sharp exchange rate movements can be highly disequilibrating and costly for the economy during periods of uncertainty or adverse expectations.adverse developments on the external and domestic front. It is heartening to note that recent international research on viable exchange rate strategies in emerging markets has also lent considerable support to the exchange rate policy followed by India. the overall approach to the management of India?s foreign exchange reserves in recent years has reflected the changing composition of balance of payments. inter alia. Even after taking into account foreign currency denominated NRI flows (where interest rates are linked to LIBOR). quicker repatriation of export proceeds and non-debt inflows. 34. (c) limiting external vulnerability so as to absorb shocks during times of crisis. For developing countries. The decision on the use of this counterpart domestic currency released by RBI (i. Such factors.. it is important to note that in India. the financial cost of additional reserve accretion in India in the recent period is quite low. particularly in regard to the forex market with appropriate monetary.

Flexibility in the exchange rate together with ability to intervene.9 per cent a year ago and 3. In response to this expectation. RBI has urged banks which have large exposure to such corporates to put in place a system for monitoring such unhedged external liabilities. 38. Needless to add that to the extent that this counterpart local currency is used by recipient entities for further investment in the economy. Strong foreign exchange reserves and low interest rates in the domestic markets have helped the Government to prepay certain foreign currency loans from the Asian Development Bank (ADB) amounting to US $ 1. not that of RBI.liquid assets etc. 2003. If the rupee does appreciate. Thus. the 6-month forward premia on US dollar was only 2. The total prepayment of ECBs during the last three years by corporates amounted to US $ 1. A judicious policy for management of the capital account. however.13.67 billion. there seems to be a rush to sell dollars in the forward market by exporters and other entities in anticipation of further appreciation of the rupee vis-୶is US dollar. the impact on industrial demand and growth would be favourable. observed that a noticeable portion of the corporate foreign currency commitments remain unhedged by the corporates on the basis of their perceptions of the market and these could impact their overall financial status in case of unexpected developments. In earlier policy Statements. The premia have shown considerable downward movement in recent weeks. These foreign debts were substituted with domestic debt amounting to Rs. at present.36 billion and from the World Bank amounting to US $ 1. The above transactions did not have any fiscal or monetary impact as it was a substitution of external sovereign debt with domestic sovereign debt placed with RBI. The broad principles that have guided India after the Asian crisis of 1997 are: • • • Careful monitoring and management of exchange rates without a fixed target or a pre-announced target or a band. .1 per cent (annualised rate) as compared with 5.) is the responsibility of the above mentioned entities and. 35.1 billion and the saving in the interest burden on account of the prepayment was about US $ 90 million. 36. there is also a rush to "borrow" dollars (for repayments later) and convert these into rupees now. Corporate bodies have also taken advantage of low international interest rates in prepaying a part of their external commercial borrowings (ECBs). 37.4 per cent at the beginning of January 2003. if and when necessary. 2003. the Government. A study by RBI has estimated that during AprilDecember 2002. It is. or for that matter. The sharp downward movement in forward premia has occurred because. A policy to build a higher level of foreign exchange reserves which takes into account not only anticipated current account deficit but also ?liquidity at risk? arising from unanticipated capital movements. These external loans were repaid on February 24 and 27. Considerable flexibility has been given to the corporates over a period to hedge their forex exposure in the market. corporates have prepaid ECBs amounting to US $ 595 million.000 crore by issuing securities on private placement basis to RBI. as of April 25. A related issue that has been raised recently in the media and through expert comments by market participants relates to the movement of forward market premia.

at present. and short term forex liabilities of banks in order to meet the demand for "borrowed" dollars that is arising from expectations regarding future movements in dollar-rupee exchange rate. While the demand for "borrowing" dollars for repayments later is strong. be unidirectional. While RBI will continue to operate in the spot and forward markets as per its foreign exchange management policies. in combination put pressure on the forward premia. 2003 and from 1. and/or higher inflows of foreign currency deposits should be encouraged (by increasing. This can be seen from the movement of the Euro against the US dollar from 0. This phenomenon is also reflected in banks going "short" on dollars during intra-day and inter-day foreign currency trades. however. that foreign currency exposures by corporates and others are largely hedged or covered against anticipated foreign currency earnings. inter alia. It has also led to some postponement of forward demand for dollars. This has resulted in corporates and other market participants having larger "unhedged" exposures on their future dollar obligations.0997 between March 21 and April 25. For these reasons. for example. Present unhedged exposures seem to be on account of expectations on unconstrained appreciation of rupee.25 percentage point below LIBOR). the ceiling interest rate on FCNR deposits which is. To put at rest market speculations about RBI?s stance in this regard. There is no shortage of foreign currency availability in the market. for the same reason. 41. 2002 and March 11. 40. One-way expectations of exchange rate or premia may not always be fulfilled. Movements in respect of exchange rates may not. It may be recalled that a part of the problem that many emerging economies have faced in the past has been due to excessive unhedged foreign currency exposures in a country during periods when movement in exchange rate was absent (due to fixed exchange rate policy) or currency was appreciating. it is clarified that: • • • At present. These two phenomena. there is in fact an excess supply of US dollars in both the spot and forward markets to meet all genuine transactions and investment demand by corporates.1087 to 1.9606 to 1. banks and others.0501 between March 11 and March 21. RBI is not in favour of increasing the unhedged borrowings by corporates. Similar movements have also been observed in the case of pound sterling/US dollar rate. 39.the borrowers of dollars expect to make a financial gain (as fewer rupees would be required to repay the "borrowed" dollars). 0. i. 2003. particularly in relatively thin developing country markets. . It has been suggested that banks should be permitted a higher level of foreign borrowings (over and above the present limit of 25 per cent of unimpaired Tier I capital).0501 to 1. 2003. higher incentive to sell or "borrow" dollars and lower demand for actual purchase of spot or forward dollars have. The Reserve Bank has received various suggestions from banks and other market participants to meet the demand for "borrowed" dollars. the demand by corporates and others for "purchasing" dollars in exchange for rupees in the spot and forward markets has become weaker. from 1. arising from expectations of continued rupee appreciation. it is of utmost importance.e.1087 between September 17.

such as software and buoyant inward remittances during 2002-03 (April-December). Exports in US dollar terms increased by 16.3 per cent as compared with a marginal increase of 0. Following the survey on exporters? satisfaction conducted with the help of National Council of Applied Economic Research (NCAER). Exports being an important sector of the economy. 45. The performance of India?s exports during 2002-03 has been encouraging despite the continued global slowdown.42.7 per cent during 2002-03 (April-February) as against a decline of 0. non-resident deposits and external commercial borrowing.8 billion as against a deficit of US $ 0. Pursuant to the announcement made in the Budget 2003-04 and moving further towards liberalisation of capital account. especially in the areas of outward foreign direct investment.7 per cent in the corresponding period of the previous year.8 billion during 2002-03 (April-February) from US $ 6. the trade deficit widened to US $ 7. Reports received from banks reveal that the suggestions made by NCAER have been largely complied with. banks and Export Credit Guarantee Corporation of India Ltd.5 per cent as compared with an increase of 7. non-oil imports excluding gold and silver increased by 17. Imports showed an increase of 16.0 per cent in the corresponding period of the previous year reflecting improved industrial outlook. As a result of higher imports. .5 per cent on account of steep increase in the international oil prices as against a decline of 13.7 billion in the corresponding period of the previous year. announced several important measures relating to current and capital accounts. non-oil imports showed an increase of 12. With a view to liberalising further the movement of cross-border capital flows. At a further disaggregated level.3 per cent in the corresponding period of the previous year. The Committee has so far visited 10 centres in the country from where large scale exports are taking place and had discussions with bankers to sensitise the need for bringing about improvements in the export credit delivery system. banks should continue to pursue customerfriendly export credit delivery system.0 per cent in the previous year. 46.6 per cent during 2002-03 (April-December) as compared with a lower increase of 6. resulted in the current account of the balance of payments showing a surplus of US $ 2. inward direct and portfolio investment. However.8 billion in the corresponding period of the previous year despite acceleration in exports. India would be showing a current account surplus during 2002-03 for the second year in succession. Going by current indications. a small committee was constituted with officers from RBI. RBI inter alia. RBI has also implemented the following measures: • Prepayment of ECBs under automatic route out of local resources/ market purchases allowed without any limit. The Reserve Bank has been encouraging banks to improve the export credit delivery system in order to provide timely and adequate credit to the export sector.8 per cent in the corresponding period of the previous year. 43. While oil imports registered a significant increase of 26. higher services exports. A list of measures announced subsequent to the presentation of mid-term Review of October 2002 is given in the Annex. 44.

47. the reports of the Working Groups were also put on the RBI website for wider dissemination and for inviting comments. The details of the progress made in respect of certain Working Groups constituted recently are given in an Annex to . Where necessary. by way of market purchases. up to 100 per cent of their networth. especially the banking sector and also for examining various policy issues. In recent years. In addition to periodic discussions. market participants and experts before deciding on major policy issues relating to the financial sector. the Reserve Bank has been undertaking extensive consultations with banks. several Working Groups were set up to consider proposed new measures that were likely to have wide impact on the financial sector.• Indian companies with a proven track record permitted to make overseas investment in a foreign entity engaged in any bonafide business activity. within the overall ceiling of US $ 100 million.

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