Growth and Investment
The Indian economy after reporting fairly robust growth of over 9% during 2005-08, moderated to a growth of 6.7% in 2008-09 because of the global financial crisis. Because there was fiscal and monetary space, timely stimulus allowed the economy to recover fairly quickly to a growth of 8.4% in 2009-10 and 2010-11. Since then, however, the fragile global economic recovery and a number of domestic factors have led to a slowdown once again.

1.2 The slowdown in the Indian economy that began in the second quarter of 2011-12, when the growth rate declined to 6.7% from a level of 8.0% in the first quarter, continued in subsequent quarters. Growth has been in the range of 5.3-5.5% in the last three quarters (Q4 of 2011-12 to Q2 of 2012-13). The slowdown is not just confined to India. There has been a general slowdown in the global economy which has been passing through a rather prolonged phase of uncertainty. The recovery from the global crisis of 2008-09 in the advanced economies has been uneven, with a decisive resolution yet to emerge to the sovereign debt problem in the Euro zone. Having achieved a GDP growth of 5.1% in 2010, the rate of growth in the global economy declined to 3.8% in 2011 and is expected to decline further to 3.3% in 2012, as per the World Economic Outlook released by the IMF in October 2012. The rate of growth of advanced economies declined from 3.0% in 2010 to 1.6% in 2011 and is expected to decline further to 1.3% in 2012. Even the emerging economies have slowed down during this period, partly as a result of the slowdown in their export markets. China’s growth declined from 10.4% in 2010 to 9.2% in 2011 and is expected to be 7.8% in 2012. Brazil’s growth dipped from 7.5% in 2010 to 2.7% in 2011 and is expected to be 1.5% in 2012.

1.3 The growth rate of the Indian economy (measured in terms of GDP at factor cost at 2004-05 prices) was 5.4% in the first half (H1) of year 2012-13 as against 7.3% in the corresponding time period of the previous year. The growth for the full year of 2011-12 was 6.5% vis-à-vis the growth rate of 8.4% achieved in each of the previous two years i.e. 2009-10 and 2010-11. The slowdown has been all pervasive and almost all the sectors have been affected. The growth rate has been 2.1% for agriculture and allied sectors, 3.2% for industry sector and 7.0% for the services sector in the first half of 2012-13. The growth rates were 3.4%, 4.7% and 9.5%, for agriculture, industry and services, respectively in H1 of 2011-12. The growth of GDP in the first and second quarters of 2012-13 was 5.5% and 5.3% respectively (Table 1.1).

Table 1.1: Quarterly Growth in GDP (per cent)

1.4 The slowing growth rate in India during the first half of 2012-13 can be explained in terms of both global factors and domestic factors. The slowdown in growth in advanced economies and near recessionary conditions prevailing in Europe resulted not only in lower growth of international trade but also lower capital flows. The growth rate of India’s exports declined. At the same time, however, the international price of crude oil remained high. India’s trade and current account deficits widened. Turning to domestic factors, rainfall in the monsoon season of 2012-13 has been below normal, particularly in the key months of June and July. This affected sowing and resulted in a lower growth rate of agriculture and allied sectors. The Reserve Bank of India continued to follow a relatively tight monetary policy to control inflation, although there has been some relaxation in the recent months in the Statutory Liquidity Ratio (SLR) as well as Cash Reserve Requirement (CRR). The cost of borrowing remains at elevated levels and this has had an impact on investment and growth in the economy, particularly that of the industry sector. Finally, bottlenecks in project implementation have made financing more difficult and investors more cautious.

1.5 The reduction in the growth rate of the services sector in the first half of current year vis-à-vis the first half of 2011-12 was primarily due to a reduction in the growth rate of ‘Trade, hotels, transport and communications’ sector from 11.6% in H1 of 2011-12 to 4.7% in H1 of 2012-13. Within the services sector, this sub sector is the most crucial and accounts for nearly 45 to 50% of the value added of services sector. Growth in activities like trade, hotels and transport, etc. are linked with the growth of agriculture and industry sectors and a slowdown in these activities has had an adverse impact on the growth of the trade and transport sectors. In contrast, the growth of financial, business and community and social services in the first half of the current year was in fact, higher than the growth rate for these sectors in the corresponding period of 2011-12.

1.6  The sectoral composition of the GDP (in terms of its relative shares) undergoes a change depending on the relative performance of different sectors. The sectoral composition of GDP is shown in Table 1.2. The quarterly shares reflect seasonal aspects also and may not change significantly in the short run. However, the long-term trends clearly show that the share of agriculture sector has been declining. This is to be expected – agriculture declines as a share of GDP as countries grow. In India, however, the services sector became the dominant sector, without a significant increase in industrial sector. In fact, the share of the industrial sector in GDP has remained in the range of 25-29% since the late 1960s. A decline in the share of the agricultural sector has been offset by an increase in services sector since then.

1.7  The contribution of services sector to incremental growth has been significantly increasing over time. Nearly 60% of the increase in GDP is accounted for by the services sector in the last two decades. In fact, since 2008-09 the contribution of services sector in the increase in GDP has been 73% (Fig 1.1).

1.8  The growth rate in terms of GDP at market prices fell even more sharply in the first half of 2012-13. The growth declined from 7.9  per cent in H1 of 2011-12 to 3.4% in H1 of 2012-13.Almost all the major components of GDP at market prices viz. private final consumption expenditure, gross fixed capital formation, exports as well as imports declined significantly. The exception has been government final consumption expenditure that registered an increase. The sectoral composition of expenditure side of GDP is shown in Table 1.3.

1.9 The rate of growth of GDP at factor cost and at market prices have differed significantly over recent quarters. In 2008-09 and in the first two quarters of 2009-10, growth of GDP at market prices was lower than the growth of GDP at factor cost. This was largely due to the stimulus package and a decline in the ratio of taxes to GDP (indirect taxes are subtracted from GDP at market prices and subsidies are added to obtain GDP at factor cost). In the next seven quarters, the growth of GDP at market prices exceeded the growth of GDP at factor cost. In last two quarters (Q1 and Q2 of 2012-13) the growth of GDP at market prices has been lower than the growth of GDP at factor costs largely because of the increase insubsidies (Fig 1.2). Higher growth of GDP at market prices relative to the growth of GDP at factor cost has occurred in the quarters which had a positive growth of net indirect taxes and vice versa.

1.10 The share of private final consumption expenditure has generally been in the range of 55 to 60%. The share of gross fixed capital formation has been lower in the first half of 2012-13 as compared to its share in 2011-12.A detailed examination of the contribution of various components of GDP to growth (Fig 1.3) suggests a decline in the contribution of investment (gross fixed capital formation, inventories and valuables) beginning with Q2 of 2011-12.

Agriculture

1.11 Rainfall during the South West Monsoon (01st June – 30th September) in 2012 has been both erratic and uneven. It was deficient by 28% in June, 2012 and 13% in July, 2012 as compared to the respective monthly Long Period Averages (LPA). With better rainfall in August and September, the deficiency declined. During the monsoon season, the country as a whole received 819.8 mm of rainfall against a normal rainfall of 887.5 mm which represents a deviation of 8% from the LPA. (Table 1.4). At the meteorological sub-division level, 23 out of 36 met sub-divisions received excess or normal rainfall and 13 met sub-divisions received deficient rainfall. Out of 628 districts

for which rainfall data were available, 62 districts (10%) received excess rainfall, 303 (48%) received normal rainfall, 235 (37%) received deficient rainfall and 28 districts (5%) received scanty rainfall.

Agricultural Growth

1.12  As per the National Accounts Statistics, the agriculture and allied sector registered a growth of 2.1% during the first half of 2012-13 which is lower than the growth rate of 3.4% in the first half of 2011-12.

Kharif Sowing 1.13  Due to erratic and deficient rainfall, area coverage under kharif crops has declined as compared to last year (Table 1.5). Coarse cereals and pulses, grown mostly in rainfed conditions, have suffered a major decline in their area under cultivation. These accounted for nearly 83% of the total decline in area under food crops. Sugarcane, largely because it is an irrigated crop, and soyabean, however, witnessed an increase in acreage.

Agriculture Production

1.14 In 2011-12 food grain production was a record 257.4 million tonnes (4th Advance Estimates) primarily due to a good monsoon and supportive government policies. This level of production was higher by 12.7 million tonnes as compared to the previous record food grain production of 244.8 million tonnes (Final Estimates) achieved during 2010-11. It comprised 129.9 million tonnes of kharif foodgrains and 127.5 million tonnes of rabi food grains. Production of oilseeds was estimated at 30.0 million tonnes, sugarcane at 357.7 million tonnes, which is an all-time record. Production of cotton at 35.2 million bales of 170 kg each in 2011-12. In fact, the record production of rice and wheat at 104.3 million tonnes and 93.9 million tonnes, respectively largely contributed to the record production in 2011-12. First advance estimates (which cover the kharif crops) indicate a decline in production across all major crop groups (Table 1.6).

1.15 Given the limited possibility of increasing area, improvements in productivity of major agricultural crops is the only long term solution to bridge the gap between demand and supply. In fact, the country achieved significant improvements in the yield levels of major agricultural crops (Table 1.7). Notwithstanding the increase in yield levels in food crops, there still exists considerable gap between potential and actual yields even in high productivity irrigated areas with the current technology (Table 1.8). For these areas, balanced use of fertilizers and micro nutrients, and water and soil saving technology may need to be considered. In case of wheat, at national level actual average yield (2.79 t/ha) is significantly lower than the yields demonstrated on farmers' fields (3.32 t/ha) and yields under research conditions (4.2 t/ha). Much larger gaps exist in case of Bihar and Madhya Pradesh. Major yield gaps are reported to be due to deficiencies in crop management practices.

Rabi prospects

1.16 Though kharif output in 2012-13 is estimated to be lower for major agricultural crops, it is expected that this would partly be made up by higher rabi production through additional coverage under rabi crops, greater soil moisture, as well as through adequate and timely supply of inputs (fertilizers and seeds) and better extension services. Average annual growth of foodgrain production in rabi season during 2000-01 to 2011-12 at 2.7% has also been significantly higher than the growth of production during kharif season, which has averaged 1.2% only (Fig 1.4). This has been due to the dominance of irrigated wheat and rice in Rabi crops and a smaller share of area under coarse cereals.

Price Policy of Agricultural Produce

1.17 Agricultural production in the country is greatly influenced by policies such as pricing, procurement, storage, etc. The Minimum Support Prices (MSPs) for major crops have been raised substantially by the Government in 2012, in line with the objective of ensuring remunerative prices to farmers for their produce and with a view to encouraging higher investment and production in the sector (Table 1.9). This policy also resulted in higher procurement of foodgrains by Food Corporation of India (FCI) and the State agencies. The pro cured foodgrains are being made available to the consumers under the targeted public distribution system (TPDS) at central issue prices(CIPs) that are much less than the economic costs to the procuring agencies. Needless to say, this policy puts

Fig 1.4: Production of foodgrains during Kharif and Rabi seasons (Million tonnes)

substantial claims on the exchequer in the form of food subsidy provided to procuring agencies.

Procurement, Storage and Distribution

1.18 A significant proportion of marketable surplus of foodgrains is procured at the Minimum Support Price (MSP) fixed by the Government. Higher procurement prices have resulted in large build-up of stocks of rice and wheat and raise the concerns for its safe storage. The Scheme of Decentralised Procurement of foodgrains was introduced by the government in 1997-98 with a view to effecting savings in the outgo of food subsidy, enhancing the efficiency of procurement and distribution and encouraging local procurement thereby extending the benefits of MSP to local farmers. The State Governments presently undertaking decentralised procurement are West Bengal, Madhya Pradesh, Chhattisgarh, Uttarakhand, Andaman & Nicobar Islands, Odisha, Tamil Nadu, Gujarat, Karnataka and Kerala. Andhra Pradesh has agreed to adopt the DCP scheme with effect from Kharif marketing season 2012-13. Procurement of rice and wheat in different states is indicated in Table 1.10 and 1.11.

Table 1.10: State-wise Procurement of Rice for Central Pool

(Kharif Marketing Season: October-September) (Lakh tonnes)

1.19  Wheat and rice are issued from the central pool to state governments/UTs at Central Issue Prices(CIPs) for distribution under the TPDS. The CIPs of foodgrains issued under the TPDS are fixed much below their economic cost. The Central government bears subsidy burden on this account, especially for making available foodgrains at highly subsidized rates for households in the Below Poverty line (BPL) and Antodaya Anna Yojana (AAY) category (Table 1.12). The CIPs have not been revised since the year 2002, even though there have been corresponding large increases in MSP and economic cost.

1.20  Besides meeting the requirements of distribution of foodgrains under TPDS and welfare schemes, the Central Pool of food stocks is required to have sufficient quantities of rice and wheat in order to meet emergencies like drought/failure of crop and to enable open market intervention in case of sharp price increases. The minimum buffer norms for the Central Pool have been fixed by taking into consideration the seasonality in the arrival of the grains and distribution requirements. Food stocks have remained significantly higher than the buffer norms (Table 1.13). Keeping in view the comfortable stock position a liberalized approach has been adopted towards allocation of additional foodgrains under different schemes and exports.