The State of the Indian

Economy

AKSHAT MEHROTRA
 INTRODUCTION

India has the twelfth largest economy in the world. It has Purchasing Power Parity GDP at 1.5
trillion US Dollars, with a per capita income of 4,542 US Dollars. The process of privatization in
India is continuous. Following strong economic reforms from the socialist inspired economy of a
post-independence Indian nation, the country began to develop a fast-paced economic growth, as
free market principles were initiated in 1990 for international competition and foreign
investment. India is an emerging economic power with a very large pool of human and natural
resources, and a growing large pool of skilled professionals. Economists predict that by 2020,
India will be among the leading economies of the world. According to the BRIC report, India
will be the second largest economy after china by 2043. (Source: www.ezinearticles.com)

Economic reforms brought foreign competition, led to privatization of certain public sector
industries, opened up sectors hitherto reserved for the public sector and led to an expansion in
the production of fast-moving consumer goods. (Source: www.itsena.org)

Business services (information technology, information technology enabled services, business

process outsourcing) are among the fastest growing sectors contributing to one third of the total
output of services in 2000. The growth in the IT sector is attributed to increased specialization,
and an availability of a large pool of low cost, but highly skilled, educated and fluent English-
speaking workers, on the supply side, matched on the demand side by an increased demand from
foreign consumers interested in India's service exports, or those looking to outsource their
operations. The share of India's IT industry to the country's GDP increased from 4.8 % in 2005-
06 to 7% in 2008 .In 2009, seven Indian firms were listed among the top 15 technology
outsourcing companies in the world. In March 2009, annual revenues from outsourcing
operations in India amounted to US$60 billion and this is expected to increase to US$225 billion
by 2020. (Source: www.allfreeessays.com)

The government controls Indian economy. The government's economic approach has been
partially influenced by the Socialist movement. It has a high level of control in certain areas of
the economy like foreign trade or the participation of the private sector. The World Bank classes
India as an economy with low-income. More and more investors think that the Indian market
might be undervalued and they see this as a good buying opportunity. (Source:
www.ezinearticles.com)

There is still a big difference between the rich population and the poor. One of the major issues
in India is still the level of poverty, although there has been improvement over the past few
years. Poverty is higher in the rural areas, because here people take income mostly out of
agriculture, which depends on the monsoon season and the weather in general. Lack of rain for
irrigation can lead to a minimal production of crops in certain years. The rate of new births is
also alarming. The family unit in India is usually quite large. Birth control policies, like China's
'One Child' policy, are taken into consideration in order to limit the number of people living in
poverty. (Source: www.ezinearticles.com)

A huge workforce is what characterizes the dynamic and expansive Indian economy. It is very
diverse, with a wide range of sectors: manufacturing industry, handcrafts, textiles, services and
agriculture, the last being the source of income for over 66 per cent of the population. India is in
the second largest country in the world in volume of output, from the point of view of
agriculture. In 2005, the agricultural sector contributed 18.6% to the country's GDP. There has
been a growth in the manufacturing sector from 8.98% in 2005, to 12% in 2006. (Source:
www.ezinearticles.com)

The population who speaks English keeps growing, making India more appealing to the United
Kingdom or the United States. The service sector is rapidly expanding. India now exports the
services of more and more IT professionals. There has been a real boom in the IT industry,
helping Indian economy grow at a considerable rate. In 2007, this growth rate was around 20%.
India is also expected to make considerable progress in other areas such as pharmaceuticals,
manufacturing, tourism, aviation, telecommunications or biotechnology. (Source:
www.ezinearticles.com)
 Macro Economic Statistics of India

Gross Domestic Product

The gross domestic product (GDP) is a measure of a country's overall economic output. It is the market
value of all final goods and services made within the borders of a country in a year. Calculating GDP
is extremely important has the performance of the economy is fixed by means of this method.
The results would help the country to forecast the economic progress, determine the demand and
supply, understand the buying power of the people, the per capita income, the position of the
economy in the global arena. The Indian GDP is calculated by the expenditure method.

The method of Calculating India GDP is the expenditure method, which is,

GDP = consumption + investment + (government spending) + (exports-imports)

The formula is GDP = C + I + G + (X-M)

 C stands for consumption which includes personal expenditures pertaining to food,

households, medical expenses, rent, etc
 I stands for business investment as capital which includes construction of a new mine,
purchase of machinery and equipment for a factory, purchase of software, expenditure on
new houses, buying goods and services but investments on financial products is not
included as it falls under savings
 G stands for the total government expenditures on final goods and services which
includes investment expenditure by the government, purchase of weapons for the
military, and salaries of public servants
 X stands for gross exports which includes all goods and services produced for overseas
consumption
  M stands for gross imports which includes any goods or services imported for
consumption and it should be deducted to prevent from calculating foreign supply as
domestic supply

India GDP Composition by sector is shown by the pie chart below

Agriculture=17%
Services=28.2%
Industry=54.9%

Agriculture contribution to GDP

Agriculture Growth Rate in India GDP had been growing earlier but in the last few years it is
Constantly declining. Still, the Growth Rate of Agriculture in India GDP in the share of the
country's GDP remains the biggest economic sector in the country. India GDP means the total
value of all the services and goods that are produced within the territory of
the nation within the specified time period. The country has the GDP of around US$ 1.09
trillion in 2007 and this makes the Indian economy the twelfth biggest in the whole world. The
growth rate of India GDP is 9.4% in 2006- 2007. The agricultural sector has always been an
important contributor to the India GDP. This is due to the fact that the country is mainly based
on the agriculture sector and employs around 60% of the total workforce in India. The
agricultural sector contributed around 18.6% to India GDP in 2005. Agriculture Growth Rate in
India GDP in spite of its decline in the share of the country's GDP plays a
very important role in the all round economic and social development of the country. The
Growth Rate of the Agriculture Sector in India GDP grew after independence for the government
of India placed special emphasis on the sector in its five-year plans. Further the Green revolution
took place in India and this gave a major boost to the agricultural sector for irrigation facilities,
provision of agriculture subsidies and credits, and improved technology. This in turn helped to
increase the Agriculture Growth Rate in India GDP.

Agriculture Growth Rate in India GDP has slowed down for the production in this sector has
reduced over the years. The agricultural sector has had low production due to a number of factors
such as illiteracy, insufficient finance, and inadequate marketing of agricultural products. Further
the reasons for the decline in Agriculture Growth Rate in India GDP are that in the sector the
average size of the farms is very small which in turn has resulted in low productivity. Also the
Growth Rate of the Agricultural Sector in India GDP has declined due to the fact that the sector
has not adopted modern technology and agricultural practices. Agriculture Growth Rate in India
GDP has also decreased due to the fact that the sector has insufficient irrigation facilities. As a
result of this the farmers are dependent on rainfall, which is however very unpredictable.
Agriculture Growth Rate in India GDP has declined over the years. The Indian government must
take steps to boost the agricultural sector for this in its turn will lead to the growth of Agriculture
Growth Rate in India GDP.

Services
Services Sector Growth Rate in India GDP has been very rapid in the last few years. The
Services Sector contributes the most to the Indian GDP. The Growth Rate of the Services Sector
in India GDP has risen due to several reasons and it has also given a major boost to the Indian
economy.
India gross domestic product (GDP) means the total value of all the services and goods that are
manufactured within the territory of the nation during the specified period of time. The Services
Sector contributes the most to the Indian GDP. The Sector of Services in India has the biggest
share in the country's GDP for it accounts for around 53.8% in 2005. The contribution of the
Services Sector in India GDP has increased a lot in the last few years. The Services Sector
contributed only 15% to the Indian GDP in 1950. Further the Indian Services
Sector's share in the country's GDP has increased from 43.695 in 1990- 1991 to around 51.16%
in 1998- 1999. This shows that the Services Sector in India accounts for over half of the
country's GDP. Services Sector Growth Rate in India GDP registered a significant growth over
the past few years. The Indian government must take steps in order to ensure that Services Sector
Growth Rate in India GDP continues to rise. For this will ensure the growth and prosperity of the
country's economy.

Infrastructure
Infrastructure Sector Growth Rate in India GDP has been on the rise in the last few years. The
Growth Rate of the Infrastructure Sector in India GDP has grown due to several reasons and this
in its turn has given a major boost to the country's economy. Gross domestic product (GDP)
means the total value of all the services and goods that are manufactured within the borders of
the country within the specified period of time. The Indian economy is the twelfth biggest in the
whole world for it has the GDP of US$ 1.09 trillion in 2007. The economy of India is the second
major growing economy in the whole world for it has the GDP growing at the rate of 9.4% in
2006- 2007. The Infrastructure Sector in India was after independence completely in the hands of
the public sector and this hampered the growth of this sector. India's less spending on real estate,
power; telecommunications, construction, and transportation prevented the country from
sustaining very high rates of growth. The amount that India was spending on the Infrastructure
Sector was 6% of GDP or US$ 31 billion in 2002. The contribution of the Infrastructure Sector
in the India GDP came to 3.5% in 1996- 1997 and the next year, this figure was 4.6%. The
Growth Rate of the Infrastructure Sector in India GDP increased after the Indian government
opened the sector to 100% foreign direct investment (FDI). This was done in order to boost the
Infrastructure Sector in the country. The result of opening the sector to the private sector has
been that Infrastructure Sector Growth Rate in India GDP has increased at the rate of 9%. It is
estimated that the Growth Rate of the Infrastructure Sector in India GDP will grow at the rate of
8.5% between 2006 and 2010. The biggest ongoing project in the Infrastructure Sector in India is
the Golden Quadrilateral, which is improving the main roads that connect the four cities of
Chennai, Mumbai, Delhi, and Kolkata.

Trend of India’s GDP

The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.80 percent in the last
reported quarter.

(Source: www.tradingeconomics.com)
Per Capita Income (PCI)

Per capita income (per capita national income) is the average income of the people of a country
in a particular year. It is income per head of population. It is obtained by dividing national
income of a country by its population.

Thus:

Per capita income = National income / Population

Per capita income can be calculated both at current prices as well as at constant prices. Per capita
income is generally taken as a measure of economic welfare or economic growth. It enables us
to know average income and the standard of living of the people on an average. The object of the
economic growth is to bring about an improvement in the level of living of the people which is
made possible by increase in per capita income. If periodic income were divided equally among
everyone, Per capita income is usually reported in units of currency per annum. When comparing
nations’ per capita income reflects gross national product per person, but it is also used to
compare municipalities within nations. (Source: www.wikipedia.org)

PCI of India
India's per capita income (nominal) is $1016, ranked 142th in the world. States of India have
large disparities. One of the critical problems facing India's economy is the sharp and growing
regional variations among India's different states and territories in terms of per capita income,
poverty, availability of infrastructure and socio-economic development. Although income
inequality in India is relatively small, it has been increasing of late. Wealth distribution in India
is fairly uneven, with the top 10% of income groups earning 33% of the income. Despite
significant economic progress, a quarter of the nation's population earns less than the
government-specified poverty threshold of $0.40/day. India's per capita income is not calculated
with the help of purchasing power parity (PPP) which effectively regulates conversion rates for
purchasing power of currencies. In fact per capital GDP of India is calculated by the Atlas
technique and by allotting official exchange rates for translation. (Source: www.wikipedia.org)

INFLATION RATE

Inflation is defined as a process of persistent and appreciable rise in general level of price. In
economics, the inflation rate is a measure of inflation, the rate of increase of a price index (for
example, a consumer price index). It is the percentage rate of change in price level over time.
The inflation rate is used to calculate the real interest rate, as well as real increases in wages, and
official measurements of this rate act as input variables to COLA adjustments and inflation
derivatives prices. (Source: www.wikipedia.org)

If P0 is the current average price level and P − 1 is the price level a year ago, the rate of inflation
during the year might be measured as follows:

After the year the purchasing power of a unit of money is multiplied by a factor 1 / (1 + inflation
rate).

Effects of Inflation
Effects of inflation depend upon the nature of inflation. Factors such as rate of inflation, whether
it is stable, accelerating or decelerating, whether it is anticipated or unanticipated determine the
consequences of inflation. In the context of international trade and price competitiveness, if the
domestic inflation rate is higher than the inflation rate in competing countries, then it will make
exports less competitive in the international markets and create balance of payment problems.
Inflation is a crime against the poor who experience a fall in their real incomes during a period of
sustained price rise. Inflation affects 3 main functions of economy viz. Production, Consumption
and Distribution.

Effect on production and economic growth

In economies, where labor is largely unorganized, single digit inflation will increase profitability
and therefore lead to greater investment, employment, output, income, demand and prices.

This happens because wages of unorganized laborers is not indexed to inflation, so wages will
fall overtime during inflation whether it is anticipated or not.

In case of anticipated inflation, the real wages of organized labor will also fall and may be
compensated with a time lag. The firms will gain during the intervening period between
anticipated price rise and its compensation to labor.

Thus, from the point of view of production and economic growth, single digit inflation has
positive impact.

Effect on distribution of income and wealth

The impact of inflation with regard to distribution of income and wealth is not even on all
sections of our society. Organized laborer’s salaries and wages are indexed to inflation. Debtors
become advantageous as during inflation the value of real interest may fall down and creditors
face a big disadvantage. Hence during inflation, rich become richer and poor become poorer.

Effect on consumption and economic welfare

Inflation reduces the purchasing power of money earned by the poor and their economic welfare.
The workers who do not get compensated for the increase in price rise, experience reduction in
real incomes because their nominal income remains constant for a long period. Economic
welfare depends upon consumption of goods and services. During inflation, people consume
fewer amounts of goods and services as a result the economic welfare gets affected.

India’s Inflation Rate

The inflation rate in India was last reported at 11.25 percent in July of 2010. From 1969 until
2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68
percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflation rate
refers to a general rise in prices measured against a standard level of purchasing power. The most
well known measures of Inflation are the CPI which measures consumer prices, and the GDP
deflator, which measures inflation in the whole of the domestic economy.

INTEREST RATE

Economically Interest is a fee paid on borrowed assets. It is the price paid for the use of
borrowed money, or, money earned by deposited funds. Assets that are sometimes lent with
interest include money, shares, consumer goods through hire purchase, major assets such as
aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon
the value of the assets in the same manner as upon money. (Source: www.wikipedia.org)

India’s Interest Rate

In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of
Directors. Since 2000, India's average interest rate was 5.82 percent reaching an historical high
of 14.50 percent in August of 2000 and a record low of 3.25 percent in April of 2009.

EXCHANGE RATE
Exchange rate is the value of a foreign nation’s currency in terms of the home nation’s currency.
The exchange rates between two currencies specify how much one currency is worth in terms of
the other. The foreign exchange market is one of the largest markets in the world. There are 2
types of exchange rate:

1) Spot Exchange Rate: It refers to the current exchange rate.

2) Forward Exchange Rate: It refers to an exchange rate that is quoted and traded today
but for delivery and payment on a specific future date.

Floating exchange rate (Free exchange rate)

A countrys' exchange regime where its currency is set by the foreign-exchange market through
supply and demand for that particular currency relative to other currencies. Thus, floating
exchange rates change freely and are determined by trading in the forex market rate.

Fixed exchange rate system (Pegged exchange rate)

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate
regime wherein a currency's value is matched to the value of another single currency or to a
basket of other currencies, or to another measure of value, such as gold.
A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is
pegged to. This makes trade and investments between the two countries easier and more
predictable, and is especially useful for small economies where external trade forms a large part
of their GDP.
INDIA’SEXCHANGERATE

The Indian Rupee exchange rate (USDINR) depreciated 5.44 percent during the last 12 months.
From 1973 until 2010 the USDINR exchange averaged 29.46 reaching an historical high of
51.97 in March of 2009 and a record low of 7.19 in March of 1973. The Indian Rupee spot
exchange rate specifies how much one currency, the USD, is currently worth in terms of the
other, the INR. (Source: www.tradingeconomics.com).

BALANCE OF PAYMENT

A balance of payments (BOP) sheet is an accounting record of all monetary transactions

between a country and the rest of the world. These transactions include payments for the
country's exports and imports of goods, services, and financial capital, as well as financial
transfers. The BOP summarizes international transactions for a specific period, usually a year,
and is prepared in a single currency, typically the domestic currency for the country concerned.
Sources of funds for a nation, such as exports or the receipts of loans and investments, are
recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign
countries, are recorded as a negative or deficit item. (Source: www.wikipedia.com)

When all components of the BOP sheet are included it must balance – that is, it must sum to zero
– there can be no overall surplus or deficit. For example, if a country is importing more than it
exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in
other ways – such as by funds earned from its foreign investments, by running down reserves or
by receiving loans from other countries.(source :www.wikipedia.com)

While the overall BOP sheet will always balance when all types of payments are included,
imbalances are possible on individual elements of the BOP, such as the current account. This can
result in surplus countries accumulating hoards of wealth, while deficit nations become
increasingly indebted. Historically there have been different approaches to the question of how to
correct imbalances and debate on whether they are something governments should be concerned
about. With record imbalances held up as one of the contributing factors to the financial crisis of
2007–2010, plans to address global imbalances are now high on the agenda of policy makers for
2010. (Source: www.wikipedia.com)

BALANCE OF TRADE

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the
monetary value of exports and imports of output in an economy over a certain period. It is the
relationship between a nation's imports and exports. A positive or favorable balance of trade is
known as a trade surplus if it consists of exporting more than is imported; a negative or
unfavorable balance is referred to as a trade deficit or, informally, a trade gap. The balance of
trade is sometimes divided into a goods and a services balance. (Source: www.wikipedia.com)

INDIA BALANCE OF TRADE

India reported a balance of trade deficit equivalent to 9118.0 Millions in September of 2010.
India is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather
manufactures and services. India is poor in oil resources and is currently heavily dependent on
coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems,
fertilizers and chemicals. Main trading partners are European Union, The United States, China
and UAE. This page includes: India Balance of Trade chart, historical data and news.
 MONETARY POLICY

Monetary policy is the process with which the monetary authority of a country controls
the supply of money, often targeting a rate of interest to attain a set of objectives oriented
towards the growth and stability of the economy. These goals usually include stable prices and
low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.
(Source: www.wikipedia.com)

Monetary policy rests on the relationship between the rates of interest in an economy, that is the
price at which money can be borrowed, and the total supply of money. Monetary policy uses a
variety of tools to control one or both of these, to influence outcomes like economic growth,
inflation, exchange rates with other currencies and unemployment. Where currency is under a
monopoly of issuance, or where there is a regulated system of issuing currency through banks
which are tied to a central bank, the monetary authority has the ability to alter the money supply
and thus influence the interest rate (to achieve policy goals).

Monetary policy is one of the tools that a national Government uses to influence its economy.
Using its monetary authority to control the supply and availability of money, a government
attempts to influence the overall level of economic activity in line with its political objectives.
Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic
growth, and a balance of external payments. Monetary policy is usually administered by a
Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the
United States.

Monetary policy is the process by which the government, central bank, or

monetary authority of a country controls:

1. Supply of money.

2. Availability of money in the market.

3. Cost of money or rate of interest to attain a set of objectives oriented towards the growth
and stability of the economy

Modern Monetary Policy

Modern central banking dates back to the aftermath of great depression of the 1930s.
Governments, led by the economic thinking of the great John Maynard Keynes, realized that
collapsing money supply and credit availability greatly contributed to the savagery of this
depression. This realization that money supply affected economic activity led to active
government attempts to influence money supply through "monetary policy". At this time, nations
created central banks to establish "monetary authority". This meant that rather than accepting
whatever happened to money supply, they would actively try to influence the amount of money
available. This would influence credit creation and the overall level of economic activity.

Modern monetary policy does not involve gold to a great extent. In 1968, the United States
rescinded its promise to pay in gold and effectively removed itself from the "gold standard".
Since then, it has been the job of the Federal Reserve to control the amount of money and credit
in the U.S. economy. I doing this, it wants to maintain the purchasing power of the U.S. dollar
and its comparative worth to other currencies. This might sound easy, but it is a complex task in
an information age where huge amounts of money travel in electronic signals in microseconds
around the world.
The Effectiveness of Monetary Policy

Economists debate the relevant measures of money supply. "Narrow" money supply or M1 is
currency in circulation and the currency in easily accessed cheque-in and savings accounts.
"Broader" money supply measures such as M2 and M3 include term deposits and even money
market mutual funds. Economists debate the finer points of the implementation and effectiveness
of monetary policy but one thing is obvious. At the extremes, monetary policy is a potent force.
In countries such as the Russian Republic, Poland or Brazil where the printing presses run full
tilt to pay for government operations, money supply is expanding rapidly and the currency
becomes rapidly worthless compared to goods and services it can buy. A very high level of
inflation or “hyperinflation” is the result. With 30-40% monthly inflation rates, citizens buy hard
goods as soon as they receive payment in the currency and those on fixed income have their
investments rendered worthless. At the other extreme, restrictive monetary policy has shown its
effectiveness with considerable force. Germany, which experienced hyperinflation during the
Weimar Republic and never forgot, has maintained a very stable monetary regime and resulting
low levels of inflation. When Chairman Paul Volcker of the U.S. Federal Reserve applied the
monetary brakes during the high inflation 1980s, the result was an economic downturn and a
large drop in inflation. The Bank of Canada headed by John Crow, targeted 0-3% inflation in the
early 1990s and curtailed economic activity to such an extent that Canada actually experienced
negative inflation rates in several months for the first time since the 1930s.

Without much debate, the effectiveness of monetary policy, its timing and its eventual impacts
on the economy are not obvious. That central banks attempt influence the economy through
monetary is a given. In any event, insights into monetary policy are very important to the
investor. The availability of money and credit are key considerations in the pricing of an
investment.

Types of Monetary Policy

Monetary Policy: Target Market Variable: Long Term Objective:

Inflation Targeting Interest rate on overnight A given rate of change in the CPI
debt
 Price Level Interest rate on overnight
A specific CPI number
Targeting debt

Monetary Aggregates The growth in money supply A given rate of change in the CPI

The spot price of the

Fixed Exchange Rate The spot price of the currency
currency

Low inflation as measured by the gold

Gold Standard The spot price of gold
price

Inflation Targeting
Under this policy approach the target is to keep inflation, under a particular definition such as
consumer Price index, within a desired range.

Price Level Targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year is offset
in subsequent years such that over time the price level on aggregate does not move.

Monetary Aggregates
In the 1980s, several countries used an approach based on a constant growth in the money
supply. This approach was refined to include different classes of money and credit.

Fixed Exchange Rate

This policy is based on maintaining a fixed exchange rate with a foreign currency. There are
varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed
exchange rate is with the anchor nation.

Gold Standard
The gold standard is a system in which the price of the national currency as measured in units of
gold bars and is kept constant by the daily buying and selling of base currency to other countries
and national.

GLOBAL ECONOMY

The global economy continues to recover amidst ongoing policy support and improving financial
market conditions. The recovery process is led by EMEs, especially those in Asia, as growth
remains weak in advanced economies. The global economy continues to face several challenges
such as high levels of unemployment, which are close to 10 per cent in the US and the Euro area.
Despite signs of renewed activity in manufacturing and initial improvement in retail sales, the
prospects of economic recovery in Europe are clouded by the acute fiscal strains in some
countries.

Core measures of inflation in major advanced economies are still moderating as the output gap
persists and unemployment remains high. Inflation expectations also remain well-anchored. In
contrast, core measures of inflation in EMEs, especially in Asia, have been rising. This has
prompted central banks in some EMEs to begin phasing out their accommodative monetary
policies.

DOMESTIC ECONOMY

 The Reserve Bank had projected the real GDP growth for 2009-10 at 7.5 per cent. The
advance estimates released by the Central Statistical Organization (CSO) in early
February 2010 placed the real GDP growth during 2009-10 at 7.2 per cent. The final real
GDP growth for 2009-10 may settle between 7.2 and 7.5 per cent.

 The uptrend in industrial activity continues. The index of industrial production (IIP)
recorded a growth of 17.6 per cent in December 2009, 16.7 per cent in January 2010 and
15.1 per cent in February 2010. The recovery has also become more broad-based with 14
 out of 17 industry groups recording accelerated growth during April 2009-February 2010.
The sharp pick-up in the growth of the capital goods sector, in double digits since
September 2009, points to the revival of investment activity. After a continuous decline
for eleven months, imports expanded by 2.6 per cent in November 2009, 32.4 per cent in
December 2009, 35.5 per cent in January 2010 and 66.4 per cent in February 2010. The
acceleration in non-oil imports since November 2009 further evidences recovery in
domestic demand. After contracting for twelve straight months, exports have turned
around since October 2009 reflecting revival of external demand. Various lead indicators
of service sector activity also suggest increased economic activity. On the whole, the
economic recovery, which began around the second quarter of 2009-10, has since shown
sustained improvement.

 A sharp recovery of growth during 2009-10 despite the worst south-west monsoon since
1972 attests to the resilience of the Indian economy. On the demand side, the contribution
of various components to growth in 2009-10 was as follows: private consumption (36 per
cent), government consumption (14 per cent), fixed investments (26 per cent) and net
exports (20 per cent). The monetary and fiscal stimulus measures initiated in the wake of
the global financial crisis played an important role, first in mitigating the adverse impact
from contagion and then in ensuring that the economy recovered quickly.

 However, the developments on the inflation front are worrisome. The headline inflation,
as measured by year-on-year variation in Wholesale Price Index (WPI), accelerated from
0.5 per cent in September 2009 to 9.9 per cent in March 2010, exceeding the Reserve
Bank’s baseline projection of 8.5 per cent for March 2010 set out in the Third Quarter
Review. Year-on-year WPI non-food manufactured products (weight: 52.2 per cent)
inflation, which was (-) 0.4 per cent in November 2009, turned marginally positive to 0.7
per cent in December 2009 and rose sharply thereafter to 3.3 per cent in January 2010
and further to 4.7 per cent in March 2010. Year-on-year fuel price inflation also surged
from (-) 0.7 per cent in November 2009 to 5.9 per cent in December 2009, to 8.1 per cent
in January 2010 and further to 12.7 per cent in March 2010. Despite some seasonal
moderation, food price inflation remains elevated.
 Clearly, WPI inflation is no longer driven by supply side factors alone. The contribution
of non-food items to overall WPI inflation, which was negative at (-) 0.4 per cent in
November 2009 rose sharply to 53.3 per cent by March 2010. Consumer price index
(CPI) based measures of inflation were in the range of 14.9-16.9 per cent in
January/February 2010. Thus, inflationary pressures have accentuated since the Third
Quarter Review in January 2010. What was initially a process driven by food prices has
now become more generalized.

 Growth in monetary and credit aggregates during 2009-10 remained broadly in line with
the projections set out in the Third Quarter Review in January 2010. Non-food bank
credit expanded steadily during the second half of the year. Consequently, the year-on-
year non-food credit growth recovered from its intra-year low of 10.3 per cent in October
2009 to 16.9 per cent by March 2010. The increase in bank credit was also supplemented
by higher flow of financial resources from other sources. Reserve Bank’s estimates show
that the total flow of financial resources from banks, domestic non-bank and external
sources to the commercial sector during 2009-10 at Rs.9,71,000 crore, was higher than
the amount of Rs.8,34,000 crore in the previous year.

 Scheduled commercial banks (SCBs) raised their deposit rates by 25-50 basis points
between February and April 2010 so far, signaling a reversal in the trend of reduction in
deposit rates. On the lending side, the benchmark prime lending rates (BPLRs) of SCBs
have remained unchanged since July 2009 following reductions in the range of 25-100
basis points between March and June 2009. However, data from select banks suggest that
the weighted average yield on advances, which is a proxy measure for effective lending
rates, is projected to decline from 10.8 per cent in March 2009 to 10.1 per cent by March
2010. The Base Rate system of loan pricing, which will replace the BPLR system with
effect from July 1, 2010, is expected to facilitate better pricing of loans, enhance
transparency in lending rates and improve the assessment of monetary policy
transmission.

 Financial markets functioned normally through the year. Surplus liquidity that prevailed
throughout the year declined towards the end of the year consistent with the monetary
 policy stance. The Reserve Bank absorbed about Rs.1, 00,000 crore on a daily average
basis under the liquidity adjustment facility (LAF) during the current financial year up to
February 12, 2010, i.e., before the first stage of increase in the cash reserve ratio (CRR)
came into effect. During February 27- March 31, 2010, the average daily absorption of
surplus liquidity declined to around Rs. 38,200 crore reflecting the increase in the CRR,
year-end advance tax outflows and higher credit demand from the private sector.
However, as the overall liquidity remained in surplus, overnight interest rates generally
stayed close to the lower bound of the LAF rate corridor.

 The large market borrowing by the Government put upward pressure on the yields on
government securities during 2009-10. However, this was contained by active liquidity
management by the Reserve Bank. Lower credit demand by the private sector also
cushioned the yield. Equity markets generally remained firm during the year with
intermittent corrections in line with the global pattern. Resource mobilization through
public issues increased sharply. Housing prices rebounded during 2009-10. According to
the Reserve Bank’s survey, they surpassed their pre-crisis peak levels in Mumbai.

 During 2009-10, the Central Government raised Rs.3, 98,411 crore (net) through the
market borrowing program while the state governments mobilized Rs.1, 14,883 crore
(net). This large borrowing was managed in a non-disruptive manner through a
combination of active liquidity management measures such as front-loading of the
borrowing calendar, unwinding of securities under the market stabilization scheme
(MSS) and open market operation (OMO) purchases.

 The Union Budget for 2010-11 has begun the process of fiscal consolidation by
budgeting lower fiscal deficit (5.5 per cent of GDP in 2010-11 as compared with 6.7 per
cent in 2009-10) and revenue deficit (4.0 per cent of GDP in 2010-11 as compared with
5.3 per cent in 2009-10). As a result, the net market borrowing requirement of the Central
Government in 2010-11 is budgeted lower at Rs.3, 45,010 crore as compared with that in
the previous year.
 Historically, fiscal deficits have been financed by a combination of market borrowings
and other sources. However, in 2009-10 and 2010-11, reliance on market borrowings for
financing the fiscal deficit increased in relative terms. The large market borrowing in
2009-10 was facilitated by the unwinding of MSS securities and OMO purchases, as a
result of which fresh issuance of securities constituted 63.0 per cent of the total budgeted
market borrowings. However in 2010-11, almost the entire budgeted borrowings will be
funded by fresh issuance of securities. Therefore, notwithstanding the lower budgeted net
borrowings, fresh issuance of securities in 2010-11 will be Rs.3, 42,300 crore, higher
than the corresponding figure of Rs.2, 51,000 crore last year. The large government
borrowing in 2009-10 was also facilitated by sluggish private credit demand and
comfortable liquidity conditions. However, going forward, private credit demand is
expected to pick up further. Meanwhile, inflationary pressures have also made it
imperative for the Reserve Bank to absorb surplus liquidity from the system. Thus,
managing the borrowings of the Government during 2010-11 will be a bigger challenge
than it was last year.
 The current account deficit during April-December 2009 was US$ 30 billion as compared
with US$ 28 billion for the corresponding period of 2008. Net capital inflows at US$ 42
billion were also substantially higher than US$ 7 billion in the corresponding period last
year. Consequently, on a balance of payments basis (i.e., excluding valuation effects), 
foreign exchange reserves increased by US$ 11 billion as against a decline of US$ 20
billion during the corresponding period  a year ago. Foreign exchange reserves stood at
US$ 279 billion as on March 31, 2010. The six-currency trade-based real effective
exchange rate (REER) (1993-94=100) appreciated by 15.5 per cent during 2009-10 up to
February as against 10.4 per cent depreciation in the corresponding period of the previous
year.

MONETARY POLICY TOOLS

 Bank rate policy

 o Bank rate is the minimum rate at which the central bank of a country provides
loan to the commercial bank of the country.
o Bank rate is also called discount rate because bank provides finance to the
commercial bank by rediscounting the bills of exchange.
o When general bank raises the bank rate, the commercial bank raises their lending
rates; it results in less borrowing and reduces money supply in the economy.

 Open market operation

o It means the purchase and sale of securities by central bank of the country.
o It is useful for the developed countries.
o The sale of security by the central bank leads to contraction of credit and purchase
thereof to credit expansion.

 Changing cash reserve ratio

o The banks have to keep certain amount of bank money with them as reserve
against deposit.
o The increase in the cash rate leads to the contraction of credit only when the
banks excess reserve.
o The decrease in the cash rate leads to the expansion of credit and banks tends to
make more available borrowers

FISCAL POLICY

Fiscal policy is defined as the policy under which the government uses the
instruments of public spending, taxation and public borrowing to achieve various
objective of economic policy. It is the policy which is concerned with the effects
of government expenditure, taxation, public borrowing on income, production
employment. An effective and good fiscal policy uses various fiscal agents like
expenditure, taxation and public borrowing in a proper combination so as to
 achieve the best possible results in the terms of the desired economic objective
like maintaining economic stability, high employment and accelerating economic
growth.

OBJECTIVES OF FISCAL POLICY

 To maintain economic stability

 To attain the level of full employment
 To accelerate economic growth
 To reduce inequalities of income and wealth
 To achieve price stability
 To attain external equilibrium

Stances of fiscal policy

The three possible stances of fiscal policy are neutral, expansionary and contractionary. The
definitions of these stances are as follows:

1. A neutral stance of fiscal policy implies a balanced economy. This results in large tax
revenue. (G = T, Government spending = Tax revenue).
2. An expansionary stance of fiscal policy involves government spending exceeding tax
revenue. (G > T, Government spending > Tax revenue).
 3. A contractionary fiscal policy occurs when government spending is lower than tax
revenue.(G < T, Government spending < Tax revenue)

India’s Fiscal Policy

The Indian economy was on a cyclical slowdown after a five-year record boom and there are
reasonable expectations that the economy will go for another strong growth phase after this brief
slowdown. The impact of the current global crisis on India has been significant in terms of fiscal
imbalances and the lower GDP growth rate, though India did not have direct exposure to sub-
prime assets. It also dealt a severe blow to investment sentiments and consumer confidence in the
economy. The policy response so far has been prompt in the form of monetary easing and fiscal
expansion. However, this has sharply reversed the steady fiscal improvement over the past five
years and weakened public finances considerably. This phase of fiscal expansion has to be
wound down to ensure that macroeconomic stability is not threatened and the economy does not
suffer from entrenched inflationary expectations and high capital costs, both of which will
adversely impact the potential growth rate. Thus, an exit strategy will have to be carefully
designed.

The objective of economic policy must be to maximize gains from global integration while
ensuring a reduction in poverty and inequity. Therefore, a better way of responding to the crisis
is to start the “second round of reforms” that are now overdue. The focus must now shift to
promoting private investment, which can alone sustain rapid growth. It is hoped that the
Thirteenth Finance Commission and the forthcoming budget will lay down a road map for
bringing the fiscal balance back on the track laid down by the FRBM Act.(source: ABDI
working paper series)

Economies Effect of Fiscal Policy

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to
achieve economic objectives of price stability, full employment, and economic growth.  Keynesian
economics suggests that increasing government spending and decreasing tax rates are the best ways to
stimulate aggregate demand. This can be used in times of recession or low economic activity as an
essential tool for building the framework for strong economic growth and working towards full
employment. In theory, the resulting deficits would be paid for by an expanded economy during the
boom that would follow; this was the reasoning behind the New Deal.

Governments can use a budget surplus to do two things: to slow the pace of strong economic
growth and to stabilize prices when inflation is too high. Keynesian theory posits that removing
spending from the economy will reduce levels of aggregate demand and contract the economy,
thus stabilizing prices.

Economists debate the effectiveness of fiscal stimulus. The argument mostly centers’
on crowding out, a phenomena where government borrowing leads to higher interest rates that
offset the simulative impact of spending. When the government runs a budget deficit, funds will
need to come from public borrowing (the issue of government bonds), overseas borrowing,
or monetizing the debt. When governments fund a deficit with the issuing of government bonds,
interest rates can increase across the market, because government borrowing creates higher
demand for credit in the financial markets. This causes a lower aggregate demand for goods and
services, contrary to the objective of a fiscal stimulus. Neoclassical economists generally
emphasize crowding out while Keynesians argue that fiscal policy can still be effective
especially in a liquidity trap where, they argue, crowding out is minimal.

Some classical and neoclassical economists argue that crowding out completely negatives any

fiscal stimulus; this is known as the Treasury View, which Keynesian economics rejects. The
Treasury View refers to the theoretical positions of classical economists in the British Treasury,
who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been
repeated by some neoclassical economists up to the present.

In the classical view, expansionary fiscal policy also decreases net exports, which has a
mitigating effect on national output and income. When government borrowing increases interest
rates it attracts foreign capital from foreign investors. This is because, all other things being
equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher
rate of return. In other words, companies wanting to finance projects must compete with their
government for capital so they offer higher rates of return. To purchase bonds originating from a
certain country, foreign investors must obtain that country's currency. Therefore, when foreign
capital flows into the country undergoing fiscal expansion, demand for that country's currency
increases. The increased demand causes that country's currency to appreciate. Once the currency
appreciates, goods originating from that country now cost more to foreigners than they did
before and foreign goods now cost less than they did before. Consequently, exports decrease and
imports increase.

Other possible problems with fiscal stimulus include the time lag between the implementation of
the policy and detectable effects in the economy, and inflationary effects driven by increased
demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would
have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise
would have been unemployed, there is no inflationary effect; however, if the stimulus employs a
worker who otherwise would have had a job, the stimulus is increasing labor demand while labor
supply remains fixed, leading to wage inflation and therefore price inflation.

Trade / Exim Policy

The Republic of India is the second most populous country and the world's most-populous
democracy and recently has one of the fastest economic growth rates in the world. With the
world's tenth largest military expenditures and eleventh largest economy by nominal rates or
fourth largest by purchasing power parity, India is considered to be a regional power, and a
potential global power. It is India's growing international influence that increasingly gives it a
more prominent voice in global affairs. (Source: www.wikipedia.org)

The principal objectives of the policy are as follows:

 To accelerate the country's transition to a globally oriented vibrant economy with a view to
deriving maximum benefits from expanding global market opportunities.
 To stimulate sustained economic growth by providing access to essential raw materials,
intermediates, components, consumables and capital goods required for augmenting production.
  To enhance the technological strength and efficiency of Indian agriculture, industry and services,
thereby improving their competitive strength while generating new employment opportunities,
and to encourage the attainment of internationally accepted standards of quality.
 To provide consumers' with good quality products at reasonable prices.

Practical implications are interesting. From a condition where all imports were restricted the present
policy says exports and imports are free unless specifically said. There were 1,429 items which were
subject to quantitative restrictions. The new Exim policy has taken away 714 times from this list and is
seen by many as the last step towards phasing out all quantitative restrictions.

For an average Indian this was unimaginable few years back. Now the freely importable list includes
watches, telephones, microwave ovens, audio players, coffee-makers, toothbrushes, a number of apparels
like blazers, track suits, gloves, overcoats, food items like cheese and other dairy products, and kitchen
and household fittings.

Many items in the new list will have a peak import duty of 35 per cent. This is much above the duty levels
in China and Asian countries, but is significantly lower than what it used to be in India.

The Exim policy also announced the introduction of Green Card to exporters. Manufacturer exporter
exporting more than 50% of their production with turnover over Rs.10 million and service providers
rendering services in free foreign exchange for more than 50% of their services turnover with value above
Rs.3.5 million in free foreign exchange will be issued a green card by Directorate General of Foreign
Trade. This card will entitle the holder to the following facilities: automatic licensing, automatic customs
clearance for Exports, automatic Customs clearance for Imports related to exports and LUT facility for
duty free imports.

Strategy of Foreign Trade Policy of India

 Removing government controls and creating an atmosphere of trust and transparency to

promote entrepreneurship, industrialization and trades.
 Simplification of commercial and legal procedures and bringing down transaction costs.
 Simplification of levies and duties on inputs used in export products.
 Facilitating development of India as a global hub for manufacturing, trading and services.
 Generating additional employment opportunities, particularly in semi-urban and rural
areas, and developing a series of ‘Initiatives’ for each of these sectors.
 Facilitating technological and infrastructural up gradation of all the sectors of the Indian
economy, especially through imports and thereby increasing value addition and
productivity, while attaining global standards of quality.
 Neutralizing inverted duty structures and ensuring that India's domestic sectors are not
disadvantaged.
 Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements
that India enters into in order to enhance exports.
 Up gradation of infrastructural network, both physical and virtual, related to the entire
Foreign Trade chain, to global standards.
 Revitalizing the Board of Trade by redefining its role, giving it due recognition and
inducting foreign trade experts while drafting Trade Policy.
 Involving Indian Embassies as an important member of export strategy and linking all
commercial houses at international locations through an electronic platform for real time
trade intelligence, inquiry and information dissemination.(www.slideshare.net)

AGRICULTURE POLICY

Agricultural progress is normally regarded as a prerequisite of growth of an economy,

and that is the reason that agricultural development is an essential part of the strategy of
planned economic development in India. Agriculture constitutes the backbone of Indian
 economy. It is the pace setter of economic growth in the country. The importance of the
Indian economy is clear from the following facts

 Share in National Income

 Source of employment
 Importance for industrial development
 Earner for foreign exchange
 Significance for trade and transport

Agriculture in India
Agriculture in India has a long history, dating back to ten thousand years.

Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry
and logging accounted for 16.6% of the GDP in 2007, employed 52% of the total workforce
(source: "CIA Fact book: India") and despite a steady decline of its share in the GDP, is still the
largest economic sector and plays a significant role in the overall socio-economic development
of India.

India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric
and black pepper , Coffee (source:www.wikipedia.org). It also has the world's largest cattle
population (281 million). It is the second largest producer of wheat, rice, sugar, groundnut and
inland fish. It is the third largest producer of tobacco. India accounts for 10% of the world fruit
production with first rank in the production of banana and sapota (source: www.wikipedia.org)

NATIONAL AGRICULTURE POLICY Ministry of Agriculture, Department of Agriculture &

Co-operation, Government of India

1. Agriculture is a way of life, a tradition, which, for centuries, has shaped the thought, the
outlook, the culture and the economic life of the people of India. Agriculture, therefore, is and
will continue to be central to all strategies for planned socio-economic development of the
country. Rapid growth of agriculture is essential not only to achieve self-reliance at national
level but also for household food security and to bring about equity in distribution of income and
wealth resulting in rapid reduction in poverty levels.

2. Indian agriculture has, since Independence, made rapid strides. In taking the annual food
grains production from 51 million tonnes of the early fifties to 206 million tonnes at the turn of
the century, it has contributed significantly in achieving self sufficiency in food and in avoiding
food shortages in our country. The pattern of growth of agriculture has, however, brought in its
wake, uneven development, across regions and crops as also across different sections of farming
community and is characterized by low levels of productivity and degradation of natural
resources in some areas. Capital inadequacy, lack of infrastructural support and demand side
constraints such as controls on movement, storage and sale of agricultural products, etc., have
continued to affect the economic viability of agriculture sector. Consequently, the growth of
agriculture has also tended to slacken during the nineties.

3. Agriculture has also become a relatively unrewarding profession due to generally unfavorable
price regime and low value addition, causing abandoning of farming and increasing migration
from rural areas. The situation is likely to be exacerbated further in the wake of integration of
agricultural trade in the global system, unless immediate corrective measures are taken.

4. Over 200 million Indian farmers and farm workers have been the backbone of India's
agriculture. Despite having achieved national food security the well being of the farming
community continues to be a matter of grave concern for the planners and policy makers in the
country. The establishment of an agrarian economy which ensures food and nutrition to India's
billion people, raw materials for its expanding industrial base and surpluses for exports, and a
fair and equitable reward system for the farming community for the services they provide to the
society, will be the mainstay of reforms in the agriculture sector.

5. The National Policy on Agriculture seeks to actualize the vast untapped growth potential of
Indian agriculture, strengthen rural infrastructure to support faster agricultural development,
promote value addition, accelerate the growth of agro business, create employment in rural areas,
secure a fair standard of living for the farmers and agricultural workers and their families,
discourage migration to urban areas and face the challenges arising out of economic
liberalization and globalization. Over the next two decades, it aims to attain a growth rate in
excess of 4 per cent per annum in the agriculture sector. Growth that is based on efficient use of
resources and conserves our soil, water and bio-diversity; Growth with equity, i.e., growth which
is widespread across regions and farmers; Growth that is demand driven and caters to domestic
markets and maximizes benefits from exports of agricultural products in the face of the
challenges arising from economic liberalization and globalization. Growth that is sustainable
technologically, environmentally and economically sustainable agriculture.

6. The policy will seek to promote technically sound, economically viable, environmentally non-
degrading, and socially acceptable use of country's natural resources - land, water and genetic
endowment to promote sustainable development of agriculture. Measures will be taken to
contain biotic pressures on land and to control indiscriminate diversion of agricultural lands for
non-agricultural purposes. The unutilized wastelands will be put to use for agriculture and
afforestation. Particular attention will be given for increasing cropping intensity through
multiple-cropping and inter-cropping.

7. The Government accords abiding importance to improving the quality of the country's land
and soil resources. Reclamation of degraded and fallow lands as well as problem soils will be
given high priority to optimize their productive use. Special emphasis will be laid on conserving
soils and enriching their fertility. Management of land resources on watershed basis will receive
special attention. Areas of shifting cultivation will also receive particular attention for their
sustainable development. Integrated and holistic development of rain fed areas will be promoted
by conservation of rain water by vegetative measures on watershed basis and augmentation of
biomass production through agro and farm forestry with the involvement of the watershed
community. All spatial components of a watershed, i.e. arable land, non-arable and drainage
lines will be treated as one geo-hydrological entity. Management of grazing land will receive
greater attention for augmenting availability of animal feed and fodder. A long-term perspective
plan for sustainable rain fed agriculture through watershed approach will be vigorously pursued
for development of two thirds of India's cropped area which is dependent on rains.

8. Rational utilization and conservation of the country's abundant water resources will be
promoted. Conjunctive use of surface and ground water will receive highest priority. Special
attention will be focused on water quality and the problem of receding ground-water levels in
certain areas as a result of over-exploitation of underground aquifers. Proper on-farm
management of water resources for the optimum use of irrigation potential will be promoted. Use
of in situ moisture management techniques such as mulching and use of micro overhead
pressured irrigation systems like drip and sprinkler and green house technology will be
encouraged for greater water use efficiency and improving productivity, particularly of
horticultural crops. Emphasis will be placed on promotion of water harvesting structures and
suitable water conveyance systems in the hilly and high rainfall areas for rectification of regional
imbalances. Participatory community irrigation management will be encouraged.

9. Erosion and narrowing of the base of India's plant and animal genetic resources in the last few
decades has been affecting the food security of the country. Survey and evaluation of genetic
resources and safe conservation of both indigenous and exogenously introduced genetic
variability in crop plants, animals and their wild relatives will receive particular attention. The
use of bio-technologies will be promoted for evolving plants which consume less water, are
drought resistant, pest resistant, contain more nutrition, give higher yields and are
environmentally safe. Conservation of bio-resources through their ex situ preservation in Gene
Banks, as also in situ conservation in their natural habitats through bio-diversity parks, etc., will
receive a high priority to prevent their extinction. Specific measures will also be taken to
conserve indigenous breeds facing extinction. There will be a time bound program to list,
catalogue and classify country's vast agro bio-diversity.

10. Sensitization of the farming community with the environmental concerns will receive high
priority. Balanced and conjunctive use of bio-mass, organic and inorganic fertilizers and
controlled use of agro chemicals through integrated nutrients and pest management (INM &
IPM) will be promoted to achieve the sustainable increases in agricultural production. A nation-
wide program for utilization of rural and urban garbage, farm residues and organic waste for
organic matter repletion and pollution control will be worked out.

11. Agro forestry and social forestry are prime requisites for maintenance of ecological balance
and augmentation of bio-mass production in the agricultural systems. Agro-forestry will receive
a major thrust for efficient nutrient cycling, nitrogen fixation, organic matter addition and for
improving drainage. Farmers will be encouraged to take up farm/agro-forestry for higher income
generation by evolving technology, extension and credit support packages and removing
constraints to development of agro and farm forestry. Involvement of farmers and landless
laborers will be sought in the development of pastures/forestry programmers on public
wastelands by giving financial incentives and entitlements to the usufructs of trees and pastures.

12. The history and traditional knowledge of agriculture, particularly of tribal communities,
relating to organic farming and preservation and processing of food for nutritional and medicinal
purposes is one of the oldest in the world. Concerted efforts will be made to pool, distill and
evaluate traditional practices, knowledge and wisdom and to harness them for sustainable
agricultural growth, food and nutritional security.

13. Special efforts will be made to raise the productivity and production of crops to meet the
increasing demand for food generated by unabated demographic pressures and raw materials for
expanding agro-based industries. A regionally differentiated strategy will be pursued, taking into
account the agronomic, climatic and environmental conditions to realize the full growth potential
of every region. Special attention will be given to development of new crop varieties, particularly
of food crops, with higher nutritional value through adoption of bio-technology particularly,
genetic modification, while addressing bio-safety concerns.

14. A major thrust will be given to development of rain fed and irrigated horticulture,
floriculture, roots and tubers, plantation crops, aromatic and medicinal plants, bee-keeping and
sericulture, for augmenting food supply, exports and generating employment in the rural areas.
Availability of hybrid seeds and disease-free planting materials of improved varieties, supported
by network of regional nurseries, tissue culture laboratories, seed farms will be promoted to
support systematic development of horticulture having emphasis on increased production, post-
harvest management, precision farming, bio-control of pests and quality regulation mechanism
and exports.

15. Animal husbandry and fisheries also generate wealth and employment in the agriculture
sector. Development of animal husbandry, poultry, dairying and aqua-culture will receive a high
priority in the efforts for diversifying agriculture, increasing animal protein availability in the
food basket and for generating exportable surpluses. A national livestock breeding strategy will
be evolved to meet the requirements of milk, meat, egg and livestock products and to enhance
the role of draught animals as a source of energy for farming operations and transport. Major
thrust will be on genetic up gradation of indigenous/native cattle and buffaloes using proven
semen and high quality pedigreed bulls and by expanding artificial insemination network to
provide services at the farmer's doorstep.

16. Generation and dissemination of appropriate technologies in the field of animal production as
also health care to enhance production and productivity levels will be given greater attention.
Cultivation of fodder crops and fodder trees will be encouraged to meet the feed and fodder
requirements and to improve animal nutrition and welfare. Priority attention will also be given to
improve the processing, marketing and transport facilities, with emphasis on modernization of
abattoirs, carcass utilization and value addition thereon. Since animal disease eradication and
quarantine is critical to exports, animal health system will be strengthened and disease free zones
created. The involvement of cooperatives and the private sector will be encouraged for
development of animal husbandry, poultry and dairy. Incentives for livestock and fisheries
production activities will be brought at par with incentives for crop production.

17. An integrated approach to marine and inland fisheries, designed to promote sustainable
aquaculture practices, will be adopted. Biotechnological application in the field of genetics and
breeding, harmonal applications immunology and disease control will receive particular attention
for increased aquaculture production. Development of sustainable technologies for fin and shell
fish culture as also pearl-culture, their yield optimization, harvest and post-harvest operations,
mechanization of fishing boats, strengthening of infrastructure for production of fish seed,
berthing and landing facilities for fishing vessels and development of marketing infrastructure
will be accorded high priority. Deep sea fishing industry will be developed to take advantage of
the vast potential of country's exclusive economic zone generation and transfer of technology

18. A very high priority will be accorded to evolving new location-specific and economically
viable improved varieties of agricultural and horticultural crops, livestock species and
aquaculture as also conservation and judicious use of germ plasm and other biodiversity
resources. The regionalization of agricultural research, based on identified agro-climatic zones,
will be accorded high priority. Application of frontier sciences like bio-technology, remote
sensing technologies, pre and post-harvest technologies, energy saving technologies, technology
for environmental protection through national research system as well as proprietary research
will be encouraged. The endeavour will be to build a well organized efficient and result-oriented
agriculture research and education system to introduce technological change in Indian
agriculture. Up gradation of agricultural education and its orientation towards uniformity in
education standards, women empowerment, user-orientation, vocationalization and promotion of
excellence will be the hallmark of the new policy.

19. The research and extension linkages will be strengthened to improve quality and
effectiveness of research and extension system. The extension system will be broad based and
revitalized. Innovative and decentralized institutional changes will be introduced to make the
extension system farmer-responsible and farmer-accountable. Role of Krishi Vigyan Kendras
(KVKs), Non-Governmental Organizations (NGOs), Farmers Organizations, Cooperatives,
corporate sector and para-technicians in agricultural extension will be encouraged for organizing
demand driven production systems. Development of human resources through capacity building
and skill up gradation of public extension functionaries and other extension functionaries will be
accorded a high priority. The Government will endeavour to move towards a regime of financial
sustainability of extension services through affecting in a phased manner, a more realistic cost
recovery of extension services and inputs, while simultaneously safeguarding the interests of the
poor and the vulnerable groups.

20. Mainstreaming gender concerns in agriculture will receive particular attention. Appropriate
structural, functional and institutional measures will be initiated to empower women and build
their capabilities and improve their access to inputs, technology and other farming resources,
inputs management

21. Adequate and timely supply of quality inputs such as seeds, fertilizers, plant protection
chemicals, bio-pesticides, agricultural machinery and credit at reasonable rates to farmers will be
the endeavour of the Government. Soil testing and quality testing of fertilizers and seeds will be
ensured and supply of spurious inputs will be checked. Balanced and optimum use of fertilizers
will be promoted together with use of organic manures & bio-fertilizers to optimize the
efficiency of nutrient use.

22. Development, production and distribution of improved varieties of seeds and planting
materials and strengthening and expansion of seed and plant certification system with private
sector participation will receive a high priority. A National Seed Grid will be established to
ensure supply of seeds especially to areas affected by natural calamities. The National Seeds
Corporation (NSC) and State Farms Corporation of India (SFCI) will be restructured for efficient
utilization of investment and manpower.

23. Protection to plant varieties through a sui generis legislation will be granted to encourage
research and breeding of new varieties particularly in the private sector in line with India's
obligations under TRIPS Agreement. The farmers will be allowed their traditional rights to save,
use, exchange, share and sell their farm saved seeds except as branded seeds of protected
varieties for commercial purpose. The interests of the researchers will also be safeguarded in
carrying out research on proprietary varieties to develop new varieties.

24. Integrated pest management and use of biotic agents in order to minimize the indiscriminate
and injudicious use of chemical pesticides will be the cardinal principle covering plant
protection. Selective and eco-friendly farm mechanization through appropriate technology will
be promoted, with special reference to rain fed farming to reduce arduous work and to make
agriculture efficient and competitive as also to increase crop productivity. Incentives for
Agriculture

25. The Government will endeavour to create a favorable economic environment for increasing
capital formation and farmer's own investments by removal of distortions in the incentive regime
for agriculture, improving the terms of trade with manufacturing sectors and bringing about
external and domestic market reforms, backed by rationalization of domestic tax structure. It will
seek to bestow on the agriculture sector in as many respects as possible benefits similar to those
obtaining in the manufacturing sector, such as easy availability of credit and other inputs, and
infrastructure facilities for development of agri-business industries and development of effective
delivery systems and freeing movement of agro produce.
26. Consequent upon dismantling of Quantitative Restrictions on imports as per WTO
Agreement on Agriculture, Commodity-wise strategies and arrangements for protecting the
grower from adverse impact of undue price fluctuations in world markets and for promoting
exports will be formulated. Apart from price competition, other aspects of marketing such as
quality, choice, health and bio-safety will be promoted. Exports of horticultural produce and
marine products will receive particular emphasis. A two-fold long term strategy of
diversification of agricultural produce and value addition enabling the production system to
respond to external environment and creating export demand for the commodities produced in
the country will be evolved with a view to providing the farmers incremental income from export
earnings. A favorable economic environment and supportive public management system will be
created for promotion of agricultural exports. Quarantine, both of exports and imports, will be
given particular attention so that Indian agriculture is protected from the ingress of exotic pests
and diseases.

27. In order to protect the interest of farmers in context of removal of Quantitative Restrictions,
continuous monitoring of international prices will be undertaken and appropriate tariffs
protection will be provided. Import duties on manufactured commodities used in agriculture will
be rationalized. The domestic agricultural market will be liberalized and all controls and
regulations hindering increase in farmers' income will be reviewed and abolished to ensure that
agriculturists receive prices commensurate with their efforts, investment. Restrictions on the
movement of agricultural commodities throughout the country will be progressively dismantled.

28. The structure of taxes on food grains and other commercial crops will be reviewed and
rationalized. Similarly, the excise duty on materials such as farm machinery and implements,
fertilizers, etc., used as inputs in agricultural production, post harvest storage and processing will
be reviewed. Appropriate measures will be adopted to ensure that agriculturists by and large
remain outside the regulatory and tax collection systems. Farmers will be exempted from
payment of capital gains tax on compulsory acquisition of agricultural land. Investments in
Agriculture

29. The Agriculture sector has been starved of capital. There has been a decline in the public
sector investment in the agriculture sector. Public investment for narrowing regional imbalances,
accelerating development of supportive infrastructure for agriculture and rural development
particularly rural connectivity will be stepped up. A time-bound strategy for rationalization and
transparent pricing of inputs will be formulated to encourage judicious input use and to generate
resources for agriculture. Input subsidy reforms will be pursued as a combination of price and
institutional reforms to cut down costs of these inputs for agriculture. Resource allocation regime
will be reviewed with a view to rechannelizing the available resources from support measures
towards asset formation in rural sector.

30. A conducive climate will be created through a favorable price and trade regime to promote
farmers' own investments as also investments by industries producing inputs for agriculture and
agro based industries. Private sector investments in agriculture will also be encouraged more
particularly in areas like agricultural research, human resource development, post-harvest
management and marketing.

31. Rural electrification will be given a high priority as a prime mover for agricultural
development. The quality and availability of electricity supply will be improved and the demand
of the agriculture sector will be met adequately in a reliable and cost effective manner. The use
of new and renewable sources of energy for irrigation and other agricultural purposes will also
be encouraged.

32. Bridging the gap between irrigation potential created and utilized, completion of all on-going
projects, restoration and modernization of irrigation infrastructure including drainage, evolving
and implementing an integrated plan of augmentation and management of national water
resources will receive special attention for augmenting the availability and use of irrigation
water.

33. Emphasis will be laid on development of marketing infrastructure and techniques of

preservation, storage and transportation with a view to reducing post-harvest losses and ensuring
a better return to the grower. The weekly periodic markets under the direct control of panchayat
raj institutions will be upgraded and strengthened. Direct marketing and pledge financing will be
promoted. Producers markets on the lines of Ryatu Bazars will be encouraged throughout the
width and the breadth of the country. Storage facilities for different kinds of agricultural products
will be created in the production areas or nearby places particularly in the rural areas so that the
farmers can transport their produce to these places immediately after harvest in shortest possible
time. The establishment of cold chains, provision of pre cooling facilities to farmers as a service
and cold storage in the terminal markets and improving the retail marketing arrangements in
urban areas will be given priority. Up gradation and dissemination of market intelligence will
receive particular attention.

34. Setting up of agro-processing units in the producing areas to reduce wastage, especially of
horticultural produce, increased value addition and creation of off-farm employment in rural
areas will be encouraged. Collaboration between the producer cooperatives and the corporate
sector will be encouraged to promote agro-processing industry. An inter-active coupling between
technology, economy, environment and society will be promoted for speedy development of
food and agro-processing industries and build up a substantial base for production of value added
agro-products for domestic and export markets with a strong emphasis on food safety and
quality. The Small Farmers Agro Business Consortium (SFAC) will be energized to cater to the
needs of farmer entrepreneurs and promote public and private investments in agri-business.
Institutional Structure

35. Indian agriculture is characterized by pre-dominance of small and marginal farmers.

Institutional reforms will be so pursued as to channelize their energies for achieving greater
productivity and production. The approach to rural development and land reforms will focus on
the following areas:

 Consolidation of holdings all over the country on the pattern of north western States.

 Redistribution of ceiling surplus lands and waste lands among the landless farmers,
unemployed youth with initial startup capital;

 Tenancy reforms to recognize the rights of the tenants and share croppers;

 Development of lease markets for increasing the size of the holdings by making legal
provisions for giving private lands on lease for cultivation and agri business;
 Updating and improvement of land records, computerization and issue of land pass-
books to the farmers;

 Recognition of women's rights in land. 36. The rural poor will be increasingly involved
in the implementation of land reforms with the help of Panchayati Raj Institutions,
Voluntary Groups, Social Activists and Community Leaders. 37. Private sector
participation will be promoted through contract farming and land leasing arrangements
to allow accelerated technology transfer, capital inflow and assured markets for crop
production, especially of oilseeds, cotton and horticultural crops. 38. Progressive
institutionalization of rural and farm credit will be continued for providing timely and
adequate credit to farmers. The rural credit institutions will be geared to promote
savings, investments and risk management. Particular attention will be paid to removal
of distortions in the priority sector lending by Commercial Banks for agriculture and
rural sectors. Special measures will be taken for revamping of cooperatives to remove
the institutional and financial weaknesses and evolving simplified procedure for sanction
and disbursement of agriculture credit. The endeavour will be to ensure distribution
equity in the disbursement of credit. Micro-credit will be promoted as an effective tool
for alleviating poverty. Self Help Group - Bank linkage system, suited to Indian rural
sector, will be developed as a supplementary mechanism for bringing the rural poor into
the formal banking system, thereby improving banks outreach and the credit flows to the
poor in an effective and sustainable manner. 39. The basic support to agriculture has
been provided by the cooperative sector assiduously built over the years. The
Government will provide active support for the promotion of cooperative-form of
enterprise and ensure greater autonomy and operational freedom to them to improve
their functioning.

The thrust will be on: Structural reforms for promoting greater efficiency and viability
by freeing them from excessive bureaucratic control and political interference;
 Creation of infrastructure and human resource development;

 Improvement in financial viability and organizational sustainability of cooperatives;

 Democratization of management and increased professionalism in their operations;

 Creating a viable inter-face with other grass-root Organizations.

The Legislative and regulatory framework will be appropriately amended and

strengthened to achieve these objectives risk management. Despite technological and
economic advancements, the condition of farmers continues to be unstable due to natural
calamities and price fluctuations. National Agriculture Insurance Scheme covering all
farmers and all crops throughout the country with built in provisions for insulating
farmers from financial distress caused by natural disasters and making agriculture
financially viable will be made more farmer specific and effective. Endeavour will be
made to provide a package insurance policy for the farmers, right from sowing of the
crops to post-harvest operations, including market fluctuations in the prices of
agricultural produce. In order to reduce risk in agriculture and impart greater resilience
to Indian agriculture against droughts and floods, efforts will be made for achieving
greater flood proofing of flood prone agriculture and drought proofing of rain fed
agriculture for protecting the farmers from vagaries of nature. For this purpose,
contingency agriculture planning, development of drought and flood resistant crop
varieties, watershed development programmes, drought prone areas and desert
development programmes and rural infrastructure development programmes will receive
particular attention. The Central Government will continue to discharge its responsibility
to ensure remunerative prices for agricultural produce through announcement of
Minimum Support Prices policy for major agricultural commodities. The food, nutrition
and other domestic and exports requirements of the country will be kept in view while
determining the support prices of different commodities. The price structure and trade
mechanism will be continuously reviewed to ensure a favorable economic environment
for the agriculture sector and to bring about an equitable balance between the rural and
the urban incomes. The methodology used by the Commission on Agricultural Costs &
Prices (CACP) in arriving at estimates of costs of production will be periodically
reviewed. The price structure of both inputs and outputs will be monitored to ensure
higher returns to the farmers and bring about cost effectiveness throughout the economy.
Domestic market prices will be closely monitored to prevent distress sales by the
farmers. Public and cooperative agencies undertaking marketing operations will be
strengthened. The Government will enlarge the coverage of futures markets to minimize
the wide fluctuations in commodity prices as also for hedging their risks. The endeavour
will be to cover all important agricultural products under futures trading in course of
time Management Reforms. Effective implementation of policy initiatives will call for
comprehensive reforms in the management of agriculture by the Central and the State
Governments. The Central Government will supplement/complement the State
Governments' efforts through regionally differentiated Work Plans, comprising
crop/area/target group specific interventions, formulated in an inter-active mode and
implemented in a spirit of partnership with the States. The Central Government will
move away from schematic approach to Macro-Management mode and assume a role of
advocacy, articulation and facilitation to help the States in their efforts towards achieving
accelerated agricultural development. The Government will focus on quality aspects at
all stages of farm operations from sowing to primary processing. The quality of inputs
and other support services to farmers will be improved. Quality consciousness amongst
farmers and agro processors will be created. Grading and standardization of agricultural
products will be promoted for export enhancement. Application of science and
technology in agriculture will be promoted through a regular system of interface between
S&T institutions and the users/potential users, to make the sector globally competitive.
The database for the agriculture sector will be strengthened to ensure greater reliability
of estimates and forecasting which will help in the process of planning and policy
making. Efforts will be made to significantly improve and harness latest remote sensing
and information technology to capture data, collate it, add value and disseminate it to
appropriate destinations for managing the risk and in accelerating the growth process.
The objective will be to engage in a meaningful continuous dialogue with the external
environment in the changing scenario and to have on-line and real time system of
'Agriculture on line' capacity to analyze the signals emanating from the farms and the
 markets for the benefit of the farmers. The Government of India trust that this Statement
of National Agriculture Policy will receive the fullest support of all sections of the
people and lead to sustainable development of agriculture, create gainful employment on
a self sustaining basis in rural areas, raise standards of living for the farming
communities, preserve environment and serve as a vehicle for building a resurgent
national economy. Source Ministry of Agriculture, Department of Agriculture & Co-
operation, Government of India

INDUSTRIAL POLICY

The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared,

official, total strategic effort to influence sectoral development and, thus, national industry
portfolio."These interventionist measures comprise "policies that stimulate specific activities and
promote structural change"(source: www.wikipedia.com)

Industrial policies are sector specific, unlike broader macroeconomic policies. Examples of
horizontal, economy wide policies are tightening credit or taxing capital gain, while examples of
vertical, sector-specific policies comprise protecting textiles from foreign imports or subsidizing
export industries. Free market advocates consider industrial policies as interventionist measures
typical of mixed economy countries. (Source: www.wikipedia.com)

Industrial policy of a nation is the true determinant of foreign investment as well as domestic
investment. Objective of the Industrial policy should be for bringing higher growth and
prosperity for a country.

Objectives of the Industrial Policy

 Maintaining a sustained growth in productivity.

 Enhancing gainful employment.
 Achieving optimal utilization of human resources.
 Attaining international competitiveness.
 Transforming the country into a major partner and player in the global arena.
Policy Focus 
 Deregulating Indian industry
 Allowing the industry freedom and flexibility in responding to market forces.
 Providing a policy regime that facilitates and fosters growth of Indian industry.

Following are some important policy measures announced by the Ministry of Finance,
Department of Industrial policy to pursue the above objectives.
1. Liberalization of Industrial Licensing Policy  - At present, only six industries are under
compulsory licensing mainly on account of environmental, safety and strategic
considerations. Similarly, there are only three industries reserved for the public sector.
2. Introduction of Industrial Entrepreneurs' Memorandum (IEM) Industries not requiring
compulsory licensing are to file an Industrial Entrepreneurs' Memorandum (IEM) to the
Secretariat for Industrial Assistance (SIA). No industrial approval is required for such
exempted industries. Amendments are also allowed to IEM proposals filed after 1.7.1998.
3. Liberalization of the Location Policy  A significantly amended locational policy in tune
with the liberalized licensing policy is in place. No industrial approval is required from
the Government for locations not falling within 25 kms of the periphery of cities having a
population of more than one million except for those industries where industrial licensing
is compulsory. Non-polluting industries such as electronics, computer software and
printing can be located within 25 kms of the periphery of cities with more than one
million population. Permission to other industries is granted in such locations only if they
are located in an industrial area so designated prior to 25.7.91. Zoning and land use
regulations as well as environmental legislations have to be followed.
4.  Policy for Small Scale- A differential investment limit has been adopted since 9th
October 2001 for 41 reserved items where the investment limit up to rupees five crore is
prescribed for qualifying as a small scale unit. The investment limit for tiny units is Rs.
25lakhs. 749 items are reserved for manufacture in the small scale sector. All
undertakings other than the small scale industrial undertakings engaged in the
manufacture of items reserved for manufacture in the small scale sector are required to
obtain an industrial licensed and undertake an export obligation of 50% of the annual
 production. This condition of licensing is, however, not applicable to those undertakings
operating under 100% Export Oriented Undertakings Scheme, the Export Processing
Zone (EPZ) or the Special Economic Zone Schemes (SEZs).
5. Non-Resident Indians Scheme - The general policy and facilities for Foreign Direct
Investment as available to foreign investors/company are fully applicable to NRIs as
well. In addition, Government has extended some concessions especially for NRIs and
overseas corporate bodies having more than 60% stake by the NRIs.
6. Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP )
scheme for building up strong electronics industry and with a view to enhancing export,
two schemes viz. Electronic Hardware Technology Park (EHTP) and Software
Technology Park (STP) are in operation. The Directors of STPs have powers to approved
fresh STP/EHTP proposals and also grand post-approval amendment in respect of
EHTP/STP projects as have been given to the Development Commissioners of Export
Processing Zones in the case of Export Oriented Units. All other application for setting
up projects under these schemes, are considered by the Inter-Ministerial Standing
Committee (IMSC) Chaired by Secretary (Information Technology). The IMSC is
serviced by the SIA.
7. Policy for Foreign Direct Investment (FDI) -The Department has put in place a liberal and
transparent foreign investment regime where most activities are opened to foreign
investment on automatic route without any limit on the extent of foreign ownership.
Some of the recent initiatives taken to further liberalize the FDI regime, inter alia, include
opening up of sectors such as Insurance (up to 26%); development of integrated
townships (up to 100%); defense industry (up to 26%); tea plantation (up to 100% subject
to divestment of 26% within five years to FDI); Enhancement of FDI limits in private
sector banking, allowing FDI up to 100% under the automatic route for most
manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service
Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign
investment subject to 26% divestment condition; etc. 
The Department has also strengthened investment facilitation measures through Foreign
Investment Implementation Authority (FIIA).
Source :( www.economywatch.com)
 INVESTMENT POLICY
As globalization integrates the economies of neighboring and of trading states, they are typically
forced to trade off such rules as part of a common tax, tariff and trade regime, e.g. as defined by
a free trade. Investment policy favoring local investors over global ones is typically discouraged
in such pacts, and the idea of a separate investment policy rapidly becomes a fiction or fantasy,
as real decisions reflect the real need for nations to compete for investment, even from their own
local investors.

A strong and central criticism of the new global rules, made by many in the anti-globalization
movement, is that guarantees are often available to foreign investors that are not available to
local small investors, and that capital flight is encouraged by such free trade pacts.
(Source:www.wikipedia.com)

Policy Drivers

Investment policy in many nations is tied to immigration policy, either due to a desire to
prevent human capital flight by forcing investors to keep local assets in local investments, or by
a desire to attract immigrants by offering passports in a safe haven nation, e.g. Canada, in
exchange for a substantial investment in a business that will create jobs there. A frequent
criticism of such joint immigration-investment policy is that they encourage organized crime by
providing incentive for money-laundering and safe places for "bosses" to move to when the heat
rises in their home country. (Source: www.wikipedia.com)

Foreign Investment Policy: 

The Ministry of Industry has expanded the list of industries eligible for automatic approval of
foreign investments and, in certain cases, raised the upper level of foreign ownership from 51
percent to 74 percent and further in certain cases to 100 percent. In January 1998, the RBI
announced simplified procedures for automatic FDI approvals. The announcement further
provided that Indian companies will no longer require prior clearances from the RBI for inward
remittances of foreign exchange or for the issuance of shares to foreign investors.

Facilitating Foreign Investment

In the recent budget, the finance minister announced the government's commitment to a 90-day
period for approving all foreign investments. Government officers will be assigned to larger
foreign investment proposals and will facilitate Central and State clearances in a time-bound
manner. Unlisted companies with a good 3 year track record have been permitted to raise funds
in international markets through the issue of Global Depository Receipts (GDRs) and American
Depository Receipts (ADRs).

A number of recent policy changes have reduced the discriminatory bias against
foreign firms.

 The government has amended exchange control regulations previously applicable to

companies with significant foreign participation.
 The ban against using foreign brand names/trademarks has been lifted.
 The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65
percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.
 The long-term capital gains rate for foreign companies was lowered to 20 percent; a 30
percent rate applies to domestic companies.
 The Indian Income Tax Act exempts export earnings from corporate income tax for both
Indian and foreign firms.

For instance, the Securities and Exchange Board of India (SEBI) recently formulated guidelines
to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional
Investors (FII's). These brokers can now open foreign currency-denominated or rupee accounts
for crediting inward remittances, commissions and brokerage fees.
Relaxation
The condition of dividend balancing (offsetting the outflow of foreign exchange for dividend
payments against export earnings) has been eliminated for all but 22 consumer goods industries.
A 5-year tax holiday is extended to enterprises engaged in development of infrastructural
facilities. Even without a registered office in India, foreign companies are allowed to start
multimodal transport services in India.

The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the construction
of roads/bridges. The peak custom duty rate was reduced to 50 percent from 65 percent in the
March 1995 budget. Import regime changes included enhancement of the scope of Special
Import License (SIL) programs, and the expansion of freely importable items on the Open
General License (OGL) list to include some consumer goods.

Dispute Settlement
Currently, there are no investment disputes over expropriation or nationalization. Government
demands for penalty payments for alleged overcharging by pharmaceutical companies during the
1980's could lead to de-facto expropriation of some foreign drug companies' assets in India.

In pharmaceutical sector
A committee has been named to study these longstanding disputes, but the failure of successive
governments to produce a swift and transparent resolution has led to a virtual standstill in foreign
investment in India's pharmaceutical sector. Indian courts provide adequate safeguards for the
enforcement of property and contractual rights.

MANN + HUMMEL
Brief history of the company:

The MANN+HUMMEL Group is a development partner and original equipment supplier to the
international automotive and mechanical engineering industries. The Group’s product portfolio
includes air filter systems, intake manifold systems, liquid filter systems, cabin filters and
cylinder head covers made of plastic with many integrated functions for the automotive industry,
as well as filter elements for vehicle servicing and repair. For general engineering, process
engineering and industrial manufacturing sectors the company’s product range includes
industrial filters, a series of products to reduce carbon emission levels in diesel engines,
membrane filters for water filtration, filter systems and complete lines as well as units for
conveying, dosing and drying of free flowing plastics.

With 41 locations all over the world and 11,800 employees, MANN+HUMMEL is one of the
major corporations in automotive components. In 2009 the corporation achieved a total revenue
of € 1.672 billion.

Impact of India’s Economic Situation on the company

Since the Indian Economy has come out of the slump, one can see tremendous boost in economy.
Automobile sales have increased by 20-30%, the festive season alone saw a sales of 33.88%
increase over the previous year. Mann and Hummel are the major suppliers for the top
automobile companies, the increase in sales will result growth for Mann and Hummel as well.
This in turn will boost up the industries who supply to Mann and Hummel, in short the boost will
not only impact Mann and Hummel, but also their stakeholders.
Conclusion

The Indian economy is poised to grow by double digits in the next two-three years, having
successfully weathered the impact of the global downturn. There were a number of inherent
strengths in the country's economy which can contribute to rapid growth in the future and they
should be harnessed to push up economic growth to double digits. The savings and investment
rates are high. Our youth ratio in the population is higher as compared to other countries and our
private companies have created their place at the international level and they are being
considered as good companies.

The last two years were difficult for the economy because it not only had to face global
recession, but also drought last year. Which consequently lead to infusing liquidity in the system,
the negative fall out of which was high inflation rates that eroded the purchasing power of the
people.

The fact that we have been able to rise through the crisis signifies the strength of our economy.
India's economic growth slowed down to 6.7 per cent during 2008-09 as it faced the ripple
effects of global financial mess, after three successive years of nine per cent plus growth. During
2009-10, growth recovered to 7.4 per cent, after the government provided stimulus packages to
the economy. This fiscal, the growth is targeted to further rise to 8.5 per cent.

The government had hiked investment in education and health sectors, which was necessary to
achieve high growth rate in the times to come.

Unemployment is a big problem before the country. For productive employment of youths their
skill development is necessary for which a Skill Development Mission has been launched, The
country, whose population crossed over 1.25 billion, has an estimated unemployment rate of 10.7
per cent of the working age population.

The growth of the private sector has led to a growth of the economy. By increasing public-
private partnership in developing infrastructure projects the country can achieve a lot of
potential.

Efforts are also being made to make poor, marginal farmers, socio-economically backward section
should become a partner in the country's development and this thought clearly reflects from schemes
like rural employment, loan waiver and mid day meal.

With the strengths and efforts the country has the potential to achieve a great future.