Vol. VI • No. 4 • January-March 2010

Small States – Large States With the forces favaouring a large number of smaller states gathering momentum, this study endeavours to analyse the performance of small states empirically by focusing on economic growth. - Sumita Kale and Lavesh Bhandari

India and the Global Productivity Race India’s growth story has been recognised and appreciated internationally. However, there are still a large number of issues that need immediate attention to achieve a balanced growth. - Sumit K. Majumdar

GST - A revolutionary Tax or VAT plus? The new tax called GST is a dual tax system, uniformly levied by both the Centre and the States. It is however perceived that the Centre and States are not talking about a new hassle free indirect tax system, i.e. GST but a system which is VAT Plus! - S. M. Kulkarni Message

The Bombay Chamber of Commerce and Industry Trust for Economic and Management Studies was constituted in 1996 by the Bombay Chamber of Commerce and Industry to undertake independent research activities on various economic and management issues and for providing analytical views on macro- economic scenario, industrial performance and other issues of topical interest.

The trust started publishing the quarterly magazine ‘AnalytiQue’ for the quarter October-December in the year of 1999 to serve as an effective vehicle of communication between the government, industry, economists, thinkers, management consultants and scholars. In its short journey the magazine had some trying spells and for reasons beyond our control, there has been no issue of ‘AnalytiQue’ after the issue of January-March, 2006. However, after four years, we are now determined to revive the publication in the form of a journal, while retaining its basic purpose and character. It will continue to serve members, who are drawn mainly from the world of business and commerce and will deal with contemporary economic issues while documenting some of the important developments of the Indian economy.

Bharat Doshi, President Bombay Chamber of Commerce and Industry and Trustee, Bombay Chamber of Commerce and Industry Trust for Economic and Management Studies Vol. VI • No. 4 • January-March 2010

From the Editor’s Desk Contents

India is considered to be one of the most important emerging markets in the world Special Theme today and is projected to become one of the top Small States – Large States 03 five economic nations by the year 2020. India’s - Sumita Kale and Lavesh Bhandari economic success is evidenced by its sustained India and the Global Productivity 17 GDP growth, rapid increase in industrial Race output, steady agricultural production, fast - Sumit K. Majumdar growing exports and comfortable foreign exchange reserves position. In addition, part, India has a strong and well-developed Current Affairs legal system, an organized and responsive GST - A revolutionary Tax or capital market, natural resources, skills VAT plus? 22 and professional services, and a favorable - S. M. Kulkarni geographical location in Asia; all contributing 1 factors for sustained economic development in Current Economic Senario the near future. India has emerged as a major economic player and it is no surprise that Quarterly Overview 26 there is an abiding interest in developments Selected Economic Indicators 35 taking place in the Indian economy. It is against this backdrop that we seek contributions from the business and academic community for publication in Analytique to provide analysis and views on the Indian economy and to contribute to policy making on contemporary economic and business issues. Editorial Board We offer Analytique as a research oriented but not strictly academic journal in the hope that Dr. Atindra Sen it will help our members as well as others to Ms. Manju Sood understand the emerging India better. Dr. Sugeeta Upadhyay We take this opportunity to convey our deep Ms. Piyusha Hukeri sense of gratitude to all who are and have Mr. Pravin Rane been with us as members, referees, and contributors and look forward to your continued support and Disclaimer - The articles published in Analytique do not necessarily reflect the view of the Bombay contributions. Chamber of Commerce and Industry Trust for Economic and Management Studies.

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AnalytiquePublished • Vol. and VI Printed• No. 4 by • January-MarchDr. Atindra Sen, 2010 Bombay Chamber of Commerce & Industry Trust for Economic and Management Studies, Mackinnon Mackenzie Building, Ballard Estate, Mumbai 400 001 • Tel.: (91-22) 2261 4681 • Fax: 2261 1213 • Email: [email protected] About Authors and their Contributions

This issue contains three articles on three different contemporary economic issues. In the first one while testing the hypothesis ‘Is there an economic case for smaller states’ the paper “Small States-Large states” co-authored by Sumita Kale, Chief Economist and Laveesh Bhandari, Director of Indicus Analytics concludes that provided some specific socio- economic parameters are addressed, purely economic considerations would favor the creation of smaller entities. And it is true both empirically and politically. The second article, “India and the Global Productivity Race”, written 2 by Sumit Majumder, Professor of Technology Strategy, School of Management, University of Texas at Dallas, USA, argues that India has experienced extensive growth but not intensive growth till date. While quantitatively India may have grown in output generation, in qualitative terms India’s productivity growth during the overall period has been stagnant. The third one “GST-A Revolutionary Tax or VAT Plus?” by S.M. Kulkarni, Vice President, Corporate Sales Tax Department, Mahindra and Mahindra Limited and Group Companies, considers the fact that the present indirect taxes levied by both the Centre and the States have their own problems. The paper suggests some important measures so that the new tax called Goods and Services Tax (GST) may not further lead to a VAT Plus Regime. The paper concludes a new, revolutionary tax regime should not be continuing with the old problems of the industry.

Analytique • Vol. VI • No. 4 • January-March 2010 Small States - Large States Sumita Kale Laveesh Bhandari

Introduction This paper therefore looks at the following issues: is there an economic

As forces favouring a larger number Special Theme case for smaller states? Or alternatively, of smaller states gather momentum, would the states perform better after the question of whether they indeed they break up from into smaller states? perform better needs to be answered The motivation for this paper comes empirically. We focus on economic from the new states of this decade, growth, and find that there is which have left their parent states some evidence that growth, post behind in growth rates and governance reorganisation into smaller states, is initiatives. This paper does not aim to higher. However, in each of the cases find the ‘correct’ size of a state, however of past reorganisations exogenous it makes the point that there are two factors have played an important role in countervailing forces – one, smaller enabling (or disabling) higher growth. states may do better as administration At the time of independence, in 1947, can be more responsive to local needs 3 India chose to be a federal state, and regional differences combined with with significant power to the state greater homogeneity. And two, smaller governments in response to the diversity states have access to lesser human in socio-economic conditions across capital and civil society institutions the country. Over the last 60 years, the and therefore might be susceptible number of states and their boundaries to the problem of poorer institutions has changed frequently and India now and susceptible to ‘take-over’ by non- States Small States- Large has 35 states and union territories, with desirable forces. strident demands for more still coming This paper also focuses only on in. While the first major reorganisation economic growth, not on other socio- of states was done in 1956 on linguistic economic parameters. However, since lines, the economic rationale for the most socio-economic factors that are existence of a state was extensively used to measure progress are highly debated then. However, in recent times, correlated with economic growth, this strand of thought has had little arguably, economic growth should be analysis, despite the creation of new one of the most important parameters states since the sixties.

* Sumita Kale ([email protected]) is Chief Economist at Indicus Analytics and Laveesh Bhandari (laveesh@ indicus.net) is Director of Indicus Analytics.

Analytique • Vol. VI • No. 4 • January-March 2010 to look at. That admittedly does not issues. The initial demarcation of state imply that growth is the only parameter boundaries was therefore contested, to study. with demands for reorganisation on linguistic grounds. There was Rationale behind reorganisation intense debate and though the State Reorganisation Commission set up of states in 1953 accepted the rationale of At the time of independence, India language as a basis of state composition, had more than 500 states, most of it also went into the criterion of size which were extremely small, unviable and resources in different regions to function as independent economic while forming the states. The case of entities. By 1950, these states were Telangana and Andhra illustrates these organised into 28 units, by merging tiny issues best (see Box). states into larger entities. For instance, With the State Reorganisation Act in 1948, 30 princely states occupying 1956, linguistic basis became the a combined territory of 27,000 sq benchmark for state creation. But km came together to form Himachal not without severe criticism. Dr. Pradesh. States were multi-lingual, Ambedkar’s note, ‘Thoughts on raising severe administrative and social

4 Box 1: History of Telangana and Andhra

Andhra was the first state to be delineated on a Similarly, the existing State of Andhra had no coal, purely linguistic basis in 1953 when the 16 northern but would be able to get its supplies from Singareni Telugu speaking districts were separated from Tamil- in Telangana. speaking parts of Madras State. With the formation of the State Reorganisation Commission the same Human capital was greater in Andhra state, while year, the question arose whether to merge Telangana, Telangana was revenue rich; there was therefore the Telugu speaking districts of Hyderabad state, with complementarity of resources.

Small States - Large States Small States- Large this state of Andhra to form a new state on purely Though Telangana pressed for a separate existence, linguistic grounds. Interestingly, the Commission arguing that it formed a stable and viable unit by merged the two entities giving the following reasoning itself, the Commission recommended a merger, with on economic, and not linguistic, grounds: a caveat. The advantages of a larger Andhra State were that it “Andhra and Telangana have common interests and would bring into existence a State of about 32 million we hope these interests will tend to bring the people population, with a considerable hinterland, with large closer to each other. If, however, our hopes for the water and power resources, adequate mineral wealth development of the environment and conditions and valuable raw materials. The ‘vexing problem’ congenial to the unification of the two areas do not of finding a permanent capital for Andhra would materialise and if public sentiment in Telangana be resolved by the twin cities of Hyderabad and crystallises itself against the unification of the two Secunderabad, which lay in Hyderabad state. states, Telangana will have to continue as a separate unit.” River resources would be better managed, as the development of the Krishna and Godavari rivers The Commission therefore tried to balance the more would be brought under unified control. compelling need for economically disadvantaged Telangana usually had sizeable food supply deficit Andhra to merge with Telangana with the desire during drought years, while Andhra normally had of the Telangana people to maintain separate states surplus. despite a common language.

Analytique • Vol. VI • No. 4 • January-March 2010 Linguistic States’ begins by pointing out Table 1: Proposed New States under the States Reorganisation Act 1956 “The Commission evidently thinks that the size of a state is a matter Name of Area (Sq. Population Langu- the State Miles) (Crores) age of no consequence and that the equality in the size of the status Uttar Pradesh 113,410 6.32 Hindi Bombay 151,360 4.02 Mixed constituting a federation is a Bihar 66,520 3.82 Hindi matter of no moment. Madras 50,170 3.00 Tamil This is the first and the most West Bengal 34,590 2.65 Bengali terrible error cost which the Madhya Pradesh 171,200 2.61 Hindi Andhra 64,950 2.09 Telugu commission has committed. If not Karnatak 72,730 1.90 Kanarese rectified in time, it will indeed be Punjab 58,140 1.72 Punjabi a great deal.” Rajasthan 132,300 1.60 Rajasthani Orissa 60,140 1.46 Oria The disparity in population sizes was a Kerala 14,980 1.36 Malyalam ‘fantastic’ result, bound to create huge Hyderabad 45,300 1.13 Telugu costs for the nation. Assam 89,040 0.97 Assamese Ambedkar’s opposition to the Vidarbha 36,880 0.76 Marathi Jammu and Commission’s recommendations Kashmir 92,780 0.14 Kashmiri stemmed from the imbalance of Source: BR Ambedkar ‘Thoughts on Linguistic States’, 1956. political power in the country - the large states in the north and balkanisation While he used this rule to call for 5 of the south would pit the two regions the division of Uttar Pradesh, Bihar of the country against each other. The and Madhya Pradesh, he went into solution he offered used the size of the greater detail analysing his home state state and administrative effectiveness Maharashtra with 3.3 crore Marathi- for making smaller states in the north: speaking population and an area dividing the three large states – Uttar spanning 1.74 lakh square miles – it

Pradesh, Bihar and Madhya Pradesh ‘ is a vast area and it is impossible to States Small States- Large and using the rule that ‘a population of have efficient administration by a approximately two crores which should be single State.’ According to his analysis, regarded as the standard size of population economic, industrial, educational for a State to administer effectively.’ and social inequalities in the regions As Ambedkar clarified, one language of Maharashtra make for a clear one state should be the rule, but division of the state into four parts – people with the same language can Bombay, Western (Konkan), Central divide themselves into many states – (Marathwada) and Eastern (Vidarbha). this promotes more uniform balance Ambedkar’s recommendations with of power within the country, satisfies respect to these four larger states of social needs and most importantly, course did not materialise in the early creates units that can be administered years, though the number of states and with ease, leading to better growth their boundaries changed through the performance for the nation. sixties and seventies. While the creation

Analytique • Vol. VI • No. 4 • January-March 2010 of Jharkhand, Chhattisgarh and parameters need to be available, and (d) Uttarakhand in 2000 showed that the such measures need to be available both rationale for smaller states could not be before and after the reorganisation at the suppressed, there are still, and growing, sub-state level. Indeed, none of these demands to break up Uttar Pradesh and conditions are fully met in the case of Maharashtra.1 India. However, all of these conditions are met partially to facilitate some ‘Small’ and ‘big’ are relative terms indicative analysis. and while Ambedkar put two crores as a viable population size for First, consider the criteria of major administration, with India’s current cases of state reorganisation. Post population, this would now translate independence, the organization of into more than fifty states for the states between the period 1947 and Indian Union, a political impossibility. 1950 occurred under Sardar Patel. At Is there a viable middle path? One the time hundreds of small princely suggestion is to use some combination states were very rapidly integrated into of the 77 agro-climatic regions as an 28 units. The objective, at the time, was administrative unit within the state, to ensure rapid integration of otherwise which could prove more efficient than diverse states into the Indian Union. the current system. Another could be to It was well recognized that this was ensure that a combination of criteria - not a long term solution and a more sustainable solution was essential. This minimum population of (say 5 crores) resulted in the formation of the State 6 and with some economic-cultural-social Reorganisation Commission in 1953, homegeniety (as reflected in agro- which gave its well known language climatic regions) – be used. based states’ recommendations in Indeed there can be many different 1956.2 Since the mid-sixties,3 three cases criteria that can be evolved, each of major state reorganisations have leading to a different set of new states occurred. Small States - Large States Small States- Large with differing sizes. But what has been 1966: Haryana was carved out of the empirical evidence on the states Punjab and some districts went that have been divided in the past? to Himachal Pradesh The next section briefly reviews that element. 1971: Arunachal Pradesh, Meghalaya and Mizoram were separated Economic Growth and State from the state of Assam Formation 2000: Uttaranchal (re-named Empiricism demands the following (a) Uttarakhand in 2007) created a sufficiently long enough time should from Uttar Pradesh, Jharkhand have elapsed after the reorganisation, from Bihar and Chhattisgarh (b) a number of cases of such from Madhya Pradesh reorganisation should have occurred, (c) There was also the separation of the UT measures across a range of economic, – Goa, Daman and Diu into the state socio-economic and governance of Goa and the UT of Daman and Diu.

Analytique • Vol. VI • No. 4 • January-March 2010 Thus we can at-best have three years or (spanning the older UP, MP and Bihar) five cases of reorganisations. The first from 1993-94 onwards - about 6 years criterion of a significant number of before these states came into existence. cases is therefore met only partially. Overall, therefore, we have some Second, consider the time period. evidence that can better help Apart from the cases of Punjab and understand the performance of these Assam, less than a decade has elapsed states, pre- and post-reorganisation. We after the reorganisation of UP, MP focus on only one parameter, economic and Bihar into six smaller units. But growth as measured by the NSDP or net the full benefits and costs of state-level state domestic product. reorganisations are likely to take many We seek, as much as data permits, to years to play out. Economic policies, answer four questions: administrative systems, human capital creation etc., take many years to re- • Do states grow faster after they orient and another few years to have a break away from larger states? significant impact. Moreover, data is • Do the erstwhile larger states grow also available with some gap. Having faster after the smaller unit has said that ten, years is not entirely an broken off? insignificant time period, and some • Does the overall entity grow faster insights can be obtained about the after the reorganisation? performance of these states as well. • How does this state-level 7 Third and fourth, consider the growth compare with the rest availability of the relevant measures at of the country pre- and post- the sub-state level for the period before reorganisation? and after the reorganisation. And here as well the picture is not entirely sparse. Data: A brief The various surveys of the NSSO have Ideally, all instances of major identifiers that enable the researcher reorganisation should be examined. States Small States- Large if she so desires to estimate a range of However, there are severe data socio-economic conditions over time. limitations; state income series For the Punjab and Assam cases, this published by the CSO begin only from may be difficult as the older years data 1960-61 and have missing values for do not have large enough sample sizes. new states in early years. For instance, But post 1980s the data are of decent Meghalaya and Mizoram series begin enough depth and quality to enable in 1980-81, while constant prices are measuring socio-economic performance not available for Mizoram till 1999-00. of various regions or sub-states. Himachal’s reorganisation occurred at Moreover, the CSO has also released the district level, and district level series some data on state level NDP for the are not available, Haryana’s data before six new states created in 2000. It is the reorganisation is also not available, not clear how, but state level NDP has etc. Analysis is therefore conducted been estimated for all the six entities on a case by case basis with the most

Analytique • Vol. VI • No. 4 • January-March 2010 appropriate data points available, and not performed worse than the national there are important qualifiers in each of average in terms of economic growth these.4 after their reorganisation into smaller independent entities. Punjab, Haryana and Himachal Pradesh 5 Since separate estimates of the Since the reorganisation also broadly constituent states are not available for coincided with the Green Revolution the period prior to reorganisation, the in the states of Punjab and Haryana, it available state incomes of Himachal, could be argued that the single example Haryana and Punjab (before and after of the success of Punjab should be its reorganisation) were combined to ascribed to the Green Revolution and create a single entity named Greater not to the reorganisation into smaller Punjab that could be comparable across states. time. Trend growth ten years, before But that would be fallacious. The and after 1966, was estimated using the success of the Green Revolution GSDP series created for the larger state cannot be treated as an exogenous (named as mentioned, Greater Punjab shock. Rather it could be quite and comprising of Punjab, Haryana and convincingly argued that a smaller, 6 Himachal). more homogenous Punjab, could better The table and graph below show that work with the central government indeed, the Greater Punjab region in ensuring the success of the Green 8 saw much more rapid growth after the Revolution – something that a state like reorganisation than before. Moreover, UP could not manage7. In other words, though the available data do not allow the smaller state of Punjab was better for a state-wise comparison we can able to focus its efforts towards a single comfortably argue that all three states objective of ensuring rapid increase in of Himachal, Punjab and Haryana have agriculture productivity. Small States - Large States Small States- Large Figure 1: Growth performance prior and post reorganisation

6

5

4 ent 3 Perc 2

1

0 Trend growthin10 years periodpriorto Trend growthin10 years post reorganisation reorganisation Source: CSO Punjab, Haryana and Himachal Pradesh India

Analytique • Vol. VI • No. 4 • January-March 2010 Source: Author estimates using CSO data

We do however admit that there is a only the state that we call new Assam for counter-argument - a Greater Punjab the analysis.8 may have been better able to spread Table 2: Comparison of economic the benefits of the Green Revolution. growth – Assam and India That is, the time taken for the Green Revolution to spread through Haryana Time Period Assam India 9 could have been lower had it remained Pre-reorgani- sation trend a part of the Greater Punjab. It would growth 1961-62 to 1970-71 3.8% 3.4% generally be very difficult to obtain Post Reorgani- unambiguous empirical evidence sation trend supporting or opposing the creation growth 1971-72 to 1980-81 2.7% 3.5% of smaller states because of such Post Reorgani- sation trend States Small States- Large counterfactuals. But Punjab’s story is growth 1971-72 to 1985-86 4.0% 3.8% not the only one. Source: Author estimates of annualized growth rates using CSO data. Assam As the figures show, there is some cause What we call ‘Greater’ Assam was to believe that though Assam may not reorganized into Assam, Arunachal have gained post its reorganisation, it Pradesh, Meghalaya and Mizoram in was not inordinately harmed from the 1971. For most of the smaller states, perspective of economic growth. data are not available for the years pre, or immediately post, reorganisation – Note that Assam has suffered Meghalaya and Mizoram data begin inordinately due to various law and in 1980-81, Mizoram income series at order problems throughout the constant prices begins only from 1999- seventies, eighties and even later. These 00. We therefore are constrained to use have affected its growth significantly in

Analytique • Vol. VI • No. 4 • January-March 2010 the post-reorganisation years. It would Greater Assam, pre and post be difficult to correct for the impact of reoragization. The available evidence these elements. for Assam therefore seems to indicate that though reorganisation may not It could be argued that the smaller size have boosted economic growth, it did of the state made it more difficult for not harm it either on a long term basis. the state to garner enough resources Other factors were more important. and expertise to be able to put together a more robust opposition to the various militant elements. Hence, like the The Reorganisation of 2000 - Uttar Pradesh Green Revolution should not be treated and Uttarakhand, MP and Chhattisgarh, as exogenous to the reorganisation and Bihar and Jharkhand of Punjab, the persistence (if not The CSO has been able to estimate and the emergence) of militant elements, put in the public domain NSDP data it can be argued, should not be on the new states formed in 2000 for treated as independent of the state’s the period 1993-94 onwards. Separate reorganisation in 1971. However, in state incomes have been provided later sections we argue that the presence by the CSO from 1993-94 and these and persistence of militancy in larger have been used to compare the states states, strongly indicates that greater size for a seven year period prior and post is not a good enough criteria to judge a reorganisation. Hence the numbers are states’ ability to counter militancy. 10 largely comparable, and though the time This admittedly is incomplete analysis, periods are not really adequate enough as we are unable to estimate growth to capture the pre- and post- trends, this for the smaller states that constituted is the best that is possible.

Figure 3: NSDP Growth Pre and Post Reorganization of Assam Small States - Large States Small States- Large 2,000,000 70,000,000

1,800,000 60,000,000 1,600,000

50,000,000 1,400,000

1,200,000 40,000,000

1,000,000

30,000,000 800,000

600,000 20,000,000

400,000 10,000,000 200,000

0 0 2 7 1 5 9 61-6 66-6 70-7 74-7 78-7 1960-61 19 1962-63 1963-64 1964-65 1965-66 19 1967-68 1968-69 1969-70 19 1971-72 1972-73 1973-74 19 1975-76 1976-77 1977-78 19 1979-80 1980-81

Assam GSDP (1999-00 Prices) India GDP (1999-00 Prices)

Analytique • Vol. VI • No. 4 • January-March 2010 India has shifted on a higher growth levels of the new administration. Given path around 2001 and consequently that many institutions as well as the the growth trends are about a couple administration were not functioning as of percentage points higher. Moreover desired, a smaller state, with a narrower most evidence around 2000 pointed ambit, would have made it easier for towards relatively lower growth the new administration. In other words, persisting in the northern states – and Bihar is a good case for the argument, UP, MP and Bihar were at the bottom that smaller states make it easier to of that list. govern well. The figures show quite interesting The increase in growth rates of results in the annualised growth trends: Uttarakhand, Jharkhand and 1. Of the six new states formed out Chhattisgarh can all be, to some of the three older states, five have extent due to the fact that the new grown at a rate greater than the administrations in these states could national average – MP being the better focus on the issues of relevance only exception. for them. 2. All the smaller states (Jharkhand, Moreover, in the case of both Uttarakhand, and Chhattisgarh) Uttarakhand and Chhattisgarh, the growth rates increased by a range region under consideration accounted of 4 to 6 percentage points post for a very small proportion of the reorganisation, far higher than the larger states of UP and MP – in terms 11 2 percentage point for India as a of population, land areas, as well as whole. economy. In the case of Jharkhand this was less so, as it was always a significant 3. UP and Bihar have also had part of the larger Bihar. Hence post significant increases in growth rates reorganisation, greater focus on the (about 3 and 3.7 percentage points issues at hand would enable much respectively). greater improvements in these states States Small States- Large We address Bihar’s ramped up growth of Chhattisgarh and Uttarakhand, first. Unlike in the other two cases than would be expected in Jharkhand. of MP and UP, Jharkhand was a The data reflect the same. In the case very large part of the original Bihar, of Uttarakhand and Chhattisgarh and its separation would have had a the annualized growth rates increased significant impact not only on itself, by about 6 percentage points in both but also on the new smaller Bihar. The these states in the post reorganisation last few years have seen a significant years. In Jharkhand as well there was increase in Bihar’s growth. Can Bihar’s an improvement, about 4 percentage reorganisation be given some credit to points, significant but not as large as this? We would argue that it should. the other cases. It is generally argued that Bihar’s Next consider the argument, on how improved performance in recent years much the larger state gains. In the can be ascribed to the better governance case of MP and UP, as mentioned

Analytique • Vol. VI • No. 4 • January-March 2010 earlier, the broken off states were a possibility of MP. We pursue the matter small proportion of the total. The further by studying the experiences benefits would therefore be limited. Not of the districts that form the border surprisingly, UP’s increase in growth between Chhattisgarh and the new MP was by a magnitude of 1.9 percentage in the next section. points – about similar to that observed nationally. In the case of MP however, The Case of MP - District the growth rates have further fallen – a Analysis result that is likely due to other factors, and not so much the break-up. Most states in India do not provide district level income data. Indicus has Table 3: Annualized Trend Growth pre been estimating district wise GDP and post Reorganisation of 2000 using a method quite similar to that 1993-94 to 2001-02 to Percent Point recommended by the CSO to the 2000-01 2008-09 Change post states. Broadly this requires us to re-organi- sation estimate output and/or value added India 6.2% 8.1% +2.0% at the district level using a range of UP 3.9% 5.8% +1.9% public data sources and then calibrating Uttarakhand 3.1% 9.0% +5.9% the result with the state level GSDP UP + published and updated by the CSO.9 Uttarakhand 3.8% 6.1% +2.2% MP 5.1% 4.7% - 0.4% The same methodology and data 12 Chhattisgarh 1.6% 7.9% +6.3% sources are used every year to ensure MP + comparability of results across time. Chhattisgarh 4.1% 5.6% +1.5% Bihar 4.8% 8.5% +3.7% We begin by examining the per capita Jharkhand 4.6% 8.7% +4.1% income levels at two points in time - Bihar + 2001-02, the year following the state Jharkhand 4.8% 8.6% +3.8% reorganisation, and at 2007-08, the latest year for which estimates are Small States - Large States Small States- Large From the limited data that is available, therefore we can postulate that when available. Districts that lie on the states break up, the smaller regions have border of the parent and new states the capability to work on their strengths are compared with each other – this is and correct their weaknesses in a more to analyse whether the governance has efficient and cohesive manner towards made any difference in districts that are higher growth. At the same time smaller adjacent to each other and are likely to states may also be more susceptible to have some similarities. The hypothesis other forces that can cause systemic to be checked is whether districts across disruptions. the borders started out with similar levels of development and took different We find that among all the cases growth trajectories due to different studied, there is no evidence to suggest governance modes. that breaking a state into smaller states has a directly harmful impact on the At a preliminary level, looking at economy. The exception being the per capita income, we find a clear

Analytique • Vol. VI • No. 4 • January-March 2010 case supporting our hypothesis in Conclusion Chattisgarh - Madhya Pradesh, where We find evidence that the bordering districts began with similar levels of per capita income, but the reorganisation of states in the past districts in Chhattisgarh soared way has been followed by higher economic ahead of those across the border in growth. Moreover we find that states Madhya Pradesh. that have been a small part or on the periphery of a larger entity gain much Table 4: District-level growth in border more, than states that were significant states of MP and Chhattisgarh parts of the larger states. We also argue 2001-02 that exogenous shocks (whether positive 2001-02 2007-08 to 2007-08 – like the Green Revolution, or negative – such as militancy), have a differential Per capita Per capita Annualised DDP DDP growth in impact on smaller states than larger (1999-00 (1999-00 per capita ones. prices) prices) DDP over the period However, whether all of India’s large Madhya Pradesh Border Districts: states should be broken into smaller Balaghat entities requires much more analysis Dindori – on socio-economic performance, Shahdol Sidhi 10,322 10,721 0.6% on governance, on the ability of the Chhattisgarh new states to access relevant human Border Districts: capital, on their ability to ensure that 13 Bilaspur Kawardha democratic and governance institutions Koriya can withstand forces that would like to Rajnandgaon 10,541 17,145 8.4% take-over the functioning of the states. Source: District Domestic Product of India, 2007-08. Figures are provisional. But provided these issues are addressed, Why might this have occurred? purely economic considerations would Chhattisgarh immediately in its post favour the creation of smaller entities. States Small States- Large creation years went in for significant reforms. Privatization of poorly- Increasingly it is being argued that functional PSEs, closing down of smaller states are less likely to be able non-functional entities within the to deal with the ever-growing threat of government, an emphasis on public- militancy. The examples of Punjab, private partnerships, and perhaps Assam and north-east, Jharkhand and the most important, significant road Chhattisgarh provide some evidence building activity are some examples. supporting this argument. However, This contributed in part to the initial there have been significant and surge of investments and resultant sustained militancy movements in economic growth. In other words, the other larger states as well – J&K, West problem of MP is a larger problem of Bengal, Andhra are some, but not the poor governance and not so much due only examples. Hence we do not see to its reorganisation. the threat of militancy as a convincing

Analytique • Vol. VI • No. 4 • January-March 2010 enough reason to oppose the creation of Notes smaller states. [This was initially a part of a larger piece of work that has been cannibalized in view of the recent political developments. We accept all errors Overall therefore, the case for smaller and would welcome comments. The underlying states is building up, both empirically data sheets used for the analysis can be accessed and politically. This however is not by those who are interested. We would like to sufficient to break-up large states into thank Meenakshi Chakraborty for her research assistance.] an ever-growing number of smaller states. The way forward therefore needs 1 Mayawati’s support for the dismemberment of UP into Poorvanchal (Eastern UP), Harit to be on two fronts. Pradesh or Pashchimanchal (Western UP), and Bundelkhand (Southern UP) can be First, on a long term basis, we need traced to Ambedkar’s strong views on the to strengthen democratic institutions matter. and other governance mechanisms at 2 Language was the predominant criteria for the regional level. Deepening of civil the State Reorganisation Commission, but society in various parts of India (and not the only one – economy, population, synergies between different regions, all played not just at the state level) needs to be some role. a policy objective. Second, a smoother 3 The 1960 Bombay Reorganisation Act that system that is more responsive to the created the states of Maharashtra and Gujarat demands of sub-state ambitions needs have not been included in our analysis due to paucity of data from the pre-reorganisation to be built. This system needs to take period. Our analysis therefore begins from into consideration a certain minimum the mid-sixties. 14 and maximum population size, the issue 4 Our data-set can be accessed as a separate MS of resource availability and resource Excel file. sharing, agro-climatic homogeneity 5 For Punjab, Haryana and Himachal Pradesh, and most important the wishes of the data is available to some extent from the Punjab and Himachal Pradesh Statistical people within the region for achieving Abstracts from 1950-51. However, there state-hood. This need not be considered are missing values in the series, which were intrapolated using other sources e.g Himachal

Small States - Large States Small States- Large as a one time action, rather, as and if Pradesh series for 1960s was created using demands for statehood grow a set of the 3% growth rate for the period 1961- factors should be studied, before state- 1974 given by the Planning Department, hood is granted. Government of Himachal Pradesh. 6 Trend growth is less susceptible to the end- Overall, the one major consistent result point problem, and is estimated using the logest command in MS Excel. we obtain, whether on a short or long 7 The Green Revolution in Uttar Pradesh was term basis, is that no new state has seen and has remained restricted to the western a complete unravelling of institutions districts and is not sufficient to yield higher or growth post re-organization. That growth rates for the state as a whole. Again, if should be sufficient enough evidence details of the district incomes of the state had been available for these years, it would have to not blindly oppose the formation of made for more illuminating analysis. smaller states, but to promote them on 8 And here as well there is some amount of a case by case basis. ambiguity of what the data covers. Assam NSDP series is generally available only from 1971 onwards. However we found one table

Analytique • Vol. VI • No. 4 • January-March 2010 in www.indiastat.com that shows the NSDP Patiala and East Punjab States Union for Assam for the years 1961, 1965 and (PEPSU), and Rajasthan. 1971 but it was not clear which Planning Commission document it was sourced from. The ten (nine according to ambedkar. More importantly, it was not clear whether org) Part C states included both the the NSDP figure was only for the state of new Assam or for greater Assam. We however former chief commissioners’ provinces utilize the growth figures and would welcome and princely states, and were governed corrections and additions to the data. by a chief commissioner. The chief 9 See www.indicus.net for details on the commissioner was appointed by the methodology. President of India. The Part C states included Delhi, Kutch, Himachal Appendix Pradesh, Bilaspur, Coorg, Bhopal, States Reorganisation since 1950 Manipur, Ajmer-Merwara, and Tripura. The Constitution of India, which went Jammu and Kashmir had special status into effect on January 26, 1950, made until 1957. The Andaman and Nicobar India a sovereign, democratic republic, Islands was established as a union and a union of states (replacing territory, ruled by a lieutenant governor provinces) and territories. The states appointed by the central government. would have extensive autonomy and Source: http://en.wikipedia.org/wiki/States_Reorganisation_Act complete democracy in the Union, while the Union territories would On November 1, 1956, India was be administered by the Government divided into the following states and of India. The constitution of 1950 union territories: 15 distinguished between three types of states. States: • Andhra Pradesh: Andhra was Part A states, which were the former renamed Andhra Pradesh, and governors’ provinces of British India, enlarged by the addition of the were ruled by an elected governor Telangana region of erstwhile and state legislature. The nine Part A States Small States- Large Hyderabad State. states were Assam, West Bengal, Bihar, Bombay, Madhya Pradesh (formerly • Assam Central Provinces and Berar), Madras, • Bihar Orissa, Punjab, and Uttar Pradesh • Bombay State: the state was (formerly United Provinces). enlarged by the addition of The eight Part B states were former Saurashtra and Kutch, the Marathi- princely states or groups of princely speaking districts of Nagpur states, governed by a rajpramukh, who Division of Madhya Pradesh, was often a former prince, along with and the Marathwada region of an elected legislature. The rajpramukh Hyderabad. The southernmost was appointed by the President of India. districts of Bombay were transferred The Part B states were Hyderabad, to Mysore State. (In 1960, the state Saurashtra, Mysore, Travancore-Cochin, was split into the modern states of Madhya Bharat, Vindhya Pradesh, Maharashtra and Gujarat.)

Analytique • Vol. VI • No. 4 • January-March 2010 • Jammu and Kashmir • Pondicherry • Kerala: formed by the merger of • Tripura Travancore-Cochin state with the • Manipur Malabar District of Madras State. • Madhya Pradesh: Madhya Bharat, Source: http://en.wikipedia.org/wiki/States_Reorganisation_Act Vindhya Pradesh, and Bhopal were State Date of Changes in Boun merged into Madhya Pradesh, and Creation daries in the following years the Marathi-speaking districts of Andhra Pradesh 1953 1956 1959 Nagpur Division were transferred to Arunachal Pradesh 1971 Bombay State. Assam 1951 1962 1971 • Madras State: the state was reduced Bihar 1950 1956 1968 2000 to its present boundaries by the Chhattisgarh 2000 transfer of Malabar District to the Goa 1987 Gujarat 1960 new state of Kerala. (The state was Haryana 1966 1979 renamed Tamil Nadu in 1969.) Himachal Pradesh 1966 • Mysore State: enlarged by the Jammu and addition of Coorg state and the Kashmir 1950 Jharkhand 2000 Kannada speaking districts from Karnataka 1950 1956 1968 southern Bombay state and western Kerala 1956 Hyderabad state. (The state was Madhya Pradesh 1950 1956 2000 renamed Karnataka in 1973.) Maharashtra 1950 1960 16 • Orissa: enlarged by the addition Manipur 1971 Meghalaya 1971 of 28 princely states including two Mizoram 1971 princely states of Saraikela and Nagaland 1962 Kharsawan, but later these two Orissa 1950 1960 states merged with Bihar. Punjab 1950 1956 1960 1966 • Punjab: the Patiala and East Punjab Rajasthan 1950 1956 1959 Small States - Large States Small States- Large States Union (PEPSU) was merged Sikkim 1975 Tamil Nadu 1950 1953 1959 into Punjab. Uttar Pradesh 1950 1968 1979 2000 • Rajasthan: Rajputana was renamed Uttarakhand 2000 Rajasthan, and enlarged by the West Bengal 1950 1954 1956 addition of Ajmer-Merwara state. Delhi 1950 1956 Andaman and • Uttar Pradesh Nicobar 1950 1956 • West Bengal Chandigarh 1966 Dadra and Nagar • Union territories Haveli 1961 • Andaman and Nicobar Islands Daman and Diu 1987 Lakshadweep 1956 • Delhi Pondicherry 1962 • Himachal Pradesh Source: ‘Reorganisation of states in India’, Mahendra Prasad • Lakshadweep Singh, EPW, March 15 2008, pp 70-75’. J

Analytique • Vol. VI • No. 4 • January-March 2010 I ndia and the Global Productivity Race Sumit K. Majumdar

India can be justly proud of her growth properly utilized, then further resources story, and there is no absolutely no are simply unavailable to make further doubt that the income of her residents investments and future growth has to be have risen substantially over the course based on continuous borrowings. of the last two decades. Especially in the last ten years several mega-fortunes have If India does become a nation of been made. Some have never had it so substantial borrowing, and every good! Yet, there are many millions who indication shows this to be the case, still struggle on as if nothing had ever the likely consequences are catastrophic happened. as the current United States malaise reveals. Growth without productivity is Also, has the quality of life improved growth without sustainability. in a substantially meaningful and substantive way? If money incomes That rising productivity levels is the principal growth driver is the lesson have risen, in several cases over ten 17 times, with real incomes also rising, from all of economic history. The the physical quality of life has perhaps economic history of mankind is a improved only marginally. The same history of productivity driven growth. infrastructure, the same organizations The great nations of the world reached and the same set of administrative a pre-eminent position only because of processes remain to serve a burgeoning being efficient in utilizing resources. population with rising incomes. To put it mildly, India is an extremely The massive growth spurts that Britain experienced in the first half of the 19th inefficient country. Race and the Global India Productivity century, that Germany and the United Why sing a song about efficiency? States experienced in the second half of th Efficiency means discipline and the 19 century, that Japan experienced hard work. That is so boring! Yet, from the 1950s onwards, that South productivity is the key to economic Korea is experiencing from the 1970s, performance and resource utilization and that China is experiencing from the ultimate measure of success. the 1980s have been driven by rising Productivity drives growth. If resources productivity levels. from economic activities are not

* Sumit K. Majumdar ([email protected]) is Professor of Techonology Strategy, School of Management, University of Texas at Dallas, USA.

Analytique • Vol. VI • No. 4 • January-March 2010 These countries leapfrogged all In comparison to the OECD countries, other nations in their performance. India’s industrial productivity, as Thereafter, they charged ahead in their evaluated, is just one-eighth of the abilities to increase the incomes of overall productivity levels of those their residents while simultaneously countries. Other sectors in India, such enhancing the quality of their residents’ as agriculture, education, infrastructure lives. and services are no different and are How does India fare? My research likely to be worse in comparison. compared India’s productivity relative The figure below tells the whole story. to that of OECD countries, such as the Countries are ranked from the lowest United States, the United Kingdom, to highest productivity parameter on Germany, France, Netherlands and the X scale, read from left to right. The Spain. I evaluated the manufacturing productivity measure is an average for sector, which accounts for a substantial the several years, measured on a scale portion of India’s GDP. of 0 to 1. No guesses are, I am sure, I used data from the International necessary as to where India’s position is! Monetary Fund (IMF), the Organization How may Indian performance compare for Economic Cooperation and Development over the time period as a whole. Is (OECD) and the Reserve Bank of there enhancement of the productivity India (RBI). These data were suitably parameter or is there stagnation? translated into real terms and to an 18 Relative to Commonwealth sisters, appropriate exchange rate. Thus, Australia, Britain and Canada, India comparability between countries has compares no better. been achieved.

Figure 1: Global Comparative Productive Efficiency from 1978 to 2001: How Does India Compare?

1.00 0.95 0.89 0.90 0.90 0.90 0.84 0.85 0.80 0.77 0.77 0.79 0.79 India and the Global Productivity Race and the Global India Productivity 0.80 0.73 0.75 0.68 0.70 0.66 0.65 0.60 0.55 0.47 0.50 0.45 0.37 0.40 0.32 0.35 0.30

Efficiency Parameter 0.25 0.20 0.15 0.11 0.10 0.05 0.00

Y

IN

USA

WA

INDIA

SPAIN

ITALY

KOREA

BRITA

FRANCE

SWEDEN

FINLAND

CANADA

AUSTRIA

NOR

BELGIUM

GERMANY

AUSTRALIA

NETHERLANDS Countries

Analytique • Vol. VI • No. 4 • January-March 2010 Again Figure 2 tells the story. India Korea have made mind-bogglingly 19 is not relatively badly off, in manner substantial quantities of investments of speaking, relative to her latest in their human capital, in education, nemesis: Australia. Compared to knowledge, individual and corporate her North American commonwealth capabilities. They will be the economic sister, Canada, or her European powerhouses of tomorrow, controlling commonwealth sister, United Kingdom, the contours of technology-driven Indian manufacturing productivity is growth, as well as the conversation on simply appallingly low. corporate and economic policy.

If one compares India to the newly India, on the education, knowledge, Race and the Global India Productivity emerged economic powerhouses, such individual and corporate capability as South Korea and Finland, the picture development front, stands absolutely is no different. These new economies nowhere. The investments that the started on their journey of economic Indian state and the Indian corporate development and industrialization only sector make are just a drop in the in the 1960s and the 1970s, decades ocean. after India started hers in 1947. India’s Almost all nations, of the twenty three productivity is just a fourth to a third that I analyzed for an overall period of the productivity of these countries. of thirty plus years, I am just showing Also, it is best to keep in mind that the findings from 1978 onwards, also countries such as Finland and South experienced rising levels of productivity

Analytique • Vol. VI • No. 4 • January-March 2010 20 over time. As countries have caught have grown in output generation, in up with each other, there are many qualitative terms the benefits of this instances of countries charging ahead growth has been absolutely non-existent. because of leapfrogging. But, India is simply lagging. Both government and business are singularly culpable for this state of India’s comparative productivity growth affairs, as it is ultimately the firms during the overall period was stagnant. that use the resources to generate the

India and the Global Productivity Race and the Global India Productivity Other than a small rising blip just after output within a framework defined by the 1991 liberalization, by 1994 India’s government. productivity levels had fallen back and had settled back at the levels that they India has experienced extensive growth had been in the past! but not intensive growth. As outputs have risen, inputs have risen equally fast The implications are absolutely frightful. to match the additional resource needed As other countries have become to generate the additional outputs. more efficient, India has stagnated This phenomenon has simply left no and the gap between India and the resources to be re-invested for the future. OECD countries is steadily increasing. Growth without productivity is hollow. Hence, while quantitatively India may It is growth without sustainability.

Analytique • Vol. VI • No. 4 • January-March 2010 As all other countries march ahead, India is undergoing an economic with their productivity levels consistently transformation, accompanied by rising, India remains desperately trying a social revolution along multiple to catch up. The possibilities of India dimensions, but the key institutional leapfrogging and charging ahead, leading and organizational transformations the global pack, are simply a theoretical needed, that influence productivity dream or a set of delusional ideas growth, have been completely trivial, divorced from reality. They are based on inadequate or non-existent. Yet, if these an absence of facts, insights and genuine transformations are not forthcoming, knowledge of what matters, and, most India will be condemned to be the palpably, on an ignorance of history. laggard in the world’s economic and social league tables.

J

21 India and the Global Productivity Race and the Global India Productivity

Analytique • Vol. VI • No. 4 • January-March 2010 G ST -- A Revolutionary Tax or VAT Plus ? S.M. Kulkarni

The indirect taxes presently levied by problems currently faced by industry. both the Centre and the States have The industry was excited and happy.

Current AffairsCurrent their own limitations. The Excise This new tax, called Goods & Services Duty has rates and exemption issues Tax (GST) is a dual tax system, while Service Tax has Cenvat credit uniformly levied by both the Centre and refund issues. There is neither a and the States. The key features of the separate law for Service Tax nor any proposed GST system were announced definition of services. These taxes levied as under: by the Central Government are not • Common threshold limits. comfortably settled so far. Similarly, • Single rate of tax, common to the the Value Added Tax (VAT) and the Centre & States. Central Sales Tax (CST) levied by the State Governments have their own • Very few exemptions. issues. There are still multiple rates. • Novel IGST system for interstate 22 All the states are freely deviating from supply of goods & services. the decided uniform rates and there is • Simple, uniform procedures for no legal restriction on such deviations. registrations. Many exemptions still exist. Procedures differ from state to state. The main • No deviations by the states on rates hurdle for smooth flow of credit is the of GST. CST. The CST is always a cost as no With these key features, the industry credit is available against CST paid was excited and happy as its long term by the interstate buyer and the main demand was met. As days passed, every GST -- A Revolutionary Tax or VAT Plus ? or VAT -- A RevolutionaryGST Tax concern of the industry is always the week news started appearing in the CST declaration forms. media on the implementation of GST, In this background of present indirect the discussions between the Empowered taxes levied by the Centre and the Committee (EC) of State Finance States, news flashed all over that a Ministers and the Central Government, Revolutionary Indirect Tax System various decisions taken and so on. would soon be introduced by the As months passed by, many issues Central and the State Governments emerged where there has been no which would take care of all the consensus. The richer states and the

* S.M. Kulkarni ([email protected]) is Vice President, Corporate Sales Tax Department of Mahindra and Mahindra Limited and Group Companies.

Analytique • Vol. VI • No. 4 • January-March 2010 poorer states are in disagreement on threshold limit under both CGST various issues with no matching on and the SGST including same various issues between the Centre and for the Services. The industry the States. The first discussion paper needs common thresholds both made by the Empowered Committee under CGST and SGST including (EC) covering mainly the SGST the same for the Services. If the came out with specific decisions but thresholds turn out to be different, the report published by the Central then it would be VAT plus! Revenue Department was not in • Single Rate of GST: The initial agreement with the decisions made reports said that there would be by the EC. It appears that Centre is a single rate of GST which was working only for Central GST (CGST) good news for industry as that was and the EC (States) is working for State a long pending demand. Now, the GST (SGST), without any common Central Government Report says thought and common working. there should be a single rate of GST but the EC declared in the first The industry is worried at this juncture discussion paper that the present as on all the major areas, there are VAT Rates would continue in the different views taken by the Centre and new GST Regime also. The Rates the States. The industry can very well in GST would also comprise the make out from the news items that this lower rate (at present, 4%) and the news is coming from the Centre and higher rate (at present 12.5%) while the other is from the EC. This causes 23 the exceptional rate of 1% would confusion as no combined decisions continue for precious goods. If two on proposed GST are published by rates of GST is continued to be the Centre and the EC. This may imposed then it is again a case of lead to a VAT Plus Regime and not VAT plus! a new revolutionary tax regime, thus continuing with the old problems • Very Few Exemptions: In the initial faced by industry. reports, it was contended that there would be very few exemptions I would like to support my statement under the proposed GST regime. with the following arguments: Plus ? or VAT -- A RevolutionaryGST Tax However, latest reports mention • Common Threshold Limits: In the that the exemptions under VAT initial reports, it was mentioned laws would continue to exist in the that there would be common, new GST laws also. This would threshold limits under CGST lead to lobbying by industry as all and SGST for registration of the of them would like their products dealers / companies. But now the to be taxed at the lower rate than Centre and the EC are differing the general higher rate. This would on this point. One says 1.5 crores again distort the economy. Whether for CGST, 10 lakhs for SGST industry likes it or not, there should and no decision on threshold for be very few exemptions, based on Services; the other says common social criterion only. If the large

Analytique • Vol. VI • No. 4 • January-March 2010 list of exemptions continue in the States that there would be a very proposed GST regime also, then simple procedure of Registration again it would be VAT plus! under GST laws. The smaller companies / dealers would have • Novel IGST System for interstate a Single Window Clearance supply of goods & services: The under GST. Such companies first discussion paper of the EC can apply only to the concerned came out with a novel concept of State GST authorities for both IGST i.e. Integrated GST applicable the Registrations under CGST & to interstate supply of goods & SGST. However, there is no further services with full credit available news on this even in the first against input IGST paid. IGST discussion paper published by the would be handled by the Central EC. It again points to a VAT plus Government with the help of the situation in this area also! Central Agency (clearing house). The companies will have to make • No deviations by the States on net payment to the supplying state Rates of SGST: It was mentioned only and this Central Agency would in the first discussion paper released monitor the transfer of funds by the Empowered Committee from the supplying state to the (EC) that there would be relevant consuming state as the GST is a amendments to the Constitution destination based consumption tax. of India in order to provide for 24 This IGST model suits the industry. the restrictions on the States with The industry welcomed the same regards to rates of SGST. A specific but now the model and mechanism body of the Centre & the EC was thereof is yet to be decided. The to be formed which would be EC is now considering only SGST empowered by the Constitution to be the part of IGST and CGST of India to restrict States from would not be part of it. This would deviations from the SGST rates. This lead to the similar scenario under is a major concern for the industry the present CST laws namely full since recently most of the States have CST on interstate sales of goods deviated from the decided uniform GST -- A Revolutionary Tax or VAT Plus ? or VAT -- A RevolutionaryGST Tax (may be called as IGST under new rates under VAT by increasing the regime) including on interstate rates of VAT. Till date, no specific depot / branch transfers of goods. and comprehensive decision has The final model of IGST should been taken on this serious issue by be simplified, easy to operate and the Centre and the EC. In India, common under both CGST and under the Federal system, the States SGST. Otherwise, it would again be have jurisdiction over “tax on sales a case of levy of full CST. A case of of goods”. The states are not ready VAT plus again! to forego such empowerment. • Simple procedures of Registrations Therefore, it is a critical task before under CGST & SGST: Initially, the Centre and the EC to resolve it was stated by the Centre and this issue of restrictions on the

Analytique • Vol. VI • No. 4 • January-March 2010 States under GST. Industry would from the initial stages, it would lead to not accept the new GST system much litigation. without such amendments to the The date of implementation of the GST Constitution of India which would is also an issue. The industry wants GST restrict States to deviate from the to be implemented from 1st April i.e. decided rates of SGST. Otherwise, from the first day of the new financial this would be a very clear case of year and not from the middle of the VAT plus regime! year. The Budget Speech of the Hon’ble In the light of the above observations, Finance Minister, Mr. Pranab Mukherjee it is clear that at this juncture, the has brought clarity in this regard by Centre and the States (EC) are not announcing April 1, 2011 as the target talking about a new hassle free indirect date. tax system i.e. Goods & Services Tax Both the Centre and the States should (GST) but a system which is VAT Plus! work together at a faster speed so that the new GST does not end up as “ VAT The Centre and the EC should sit Plus” and perpetuate similar concerns together at the earliest to resolve for industry that have been present in these issues. The industry expects a the VAT Regime. Also, industry should combined discussion paper on the be given a minimum six month period new GST and not separate dictates for preparation after the draft Act & issued by them. So far nothing has Rules are released. been released on levying of SGST / 25 IGST on local and interstate supply of Industry is hopeful that both services including taxation on “Works the Central Government and the Contracts and Lease transactions”. Empowered Committee of State This would also be a very critical area Finance Ministers would not hurry for industry since the States do not to implement the new Goods and have any past experience of levying Services Tax, without duly considering Service Tax. If not handled properly the industry concerns outlined above. J GST -- A Revolutionary Tax or VAT Plus ? or VAT -- A RevolutionaryGST Tax

Analytique • Vol. VI • No. 4 • January-March 2010 Q uarterly Overview

Introduction could potentially add to inflationary pressures further. Year-on-year WPI non- It is agreed that the performance of food manufacturing products (weight: five basic components of the Indian 52.2 per cent) inflation, which was economy, GDP growth, inflation, the negative (-0.4 per cent) in November external sector, financial sector and 2009, turned marginally positive (0.7 fiscal situation all confirm that the per cent) in December 2009 and rose Current Economic Scenario Current recovery is consolidating. For example, sharply thereafter to 2.8 per cent in data on industrial production currently January 2010 and further to 4.3 per available up to January 2010 show that cent in February 2010. Year-on-year fuel the uptrend is being maintained. The price inflation also surged from (-)0.8 manufacturing sector, in particular, per cent in November 2009 to 5.9 per has recorded robust growth. The sharp cent in December 2009, to 6.9 per cent acceleration in the growth of the capital in January 2010 and further to 10.2 per goods sector points to the revival of cent in February 2010. Headline WPI 26 investment activity. After contracting inflation on a year-on-year basis at 9.9 for 13 straight months, exports have per cent in February 2010 indicates, expanded since November 2009. That with rising demand side pressures, there the recovery is gaining momentum is is risk that WPI inflation may cross also evident from the sustained increase double digit in recent future. Moreover,

Quarterly Overview in bank credit and the resources raised even as food prices are showing signs by the commercial sector from non- of moderation, they remain elevated. bank sources. Even as this is happening More importantly, the rate of increase against the backdrop of improving in the prices of non-food manufactured global conditions, recent real GDP and goods has accelerated quite sharply. industrial production clearly suggest Furthermore, increasing capacity that the positive trend is predominantly utilization and rising commodity and due to domestic factors (RBI on energy prices are exerting pressure on Monetary policy measures, February, overall inflation. Taken together, these 2010). factors heighten the risks of supply-side pressures translating into a generalized On the inflation front, it has been inflationary process. stated that the inflationary pressures have accentuated and have been spilling The RBI’s Third Quarter Review over to the wider inflationary process. had mentioned that in the emergent The recent industrial production data scenario, low policy rates can complicate suggest revival of private demand, which the inflation outlook and impair

Analytique • Vol. VI • No. 4 • January-March 2010 inflationary expectations, particularly first two quarter of 2009-10 remained given the recent escalation in the prices negative on account of the significant of non-food manufactured goods. At contraction in demand. The sharp fall the macro level, besides the industrial in global commodity prices (fuel, metals and overall recovery in growth, the and food) during the second half of overall business confidence has 2008-09 worked its way to the consumer improved significantly. While capital prices in advanced economies, exerting inflows have resumed after the period further downward pressure on inflation. of net outflows in the second half of Since September 2009, CPI inflation 2008-09, there is a perception that in most advanced economies recorded India may experience surges in capital increases, yet remained significantly inflows again, because of easy global moderate. Most advanced economies, liquidity conditions and superior except Japan, registered positive CPI growth prospects of India in the global inflation in December 2009 (Table economy. 1).The recent increase in inflation in In general, on the credit flows one can the advanced economies is attributable say on the one hand bank credit itself to the base effect of sharp decline in is not moving very fast asserting the consumer prices registered a year ago and the recent increases in commodity fact that the credit growth is certainly prices. Producer Price Index(PPI) below what is expected from the GDP inflation declined sharply both in the figures, on the other hand, bank advanced as well as emerging market credit has become less important in 27 economies (EMEs). PPI inflation in the the overall flow of funds as other OECD countries continued to remain channels are opening up. However, negative(-1.0 per cent in November, in view of the increased availability of 2009).Inflation risks may be more in funds from domestic, non-bank and emerging economies, where output external sources the adjusted non-food Quarterly Overview gaps are smaller and the recovery may credit growth projection for 2009-10 be stronger. Most Central Banks in the is now reduced to 16 per cent. Based advanced economies kept their policy on this projected credit growth and rates unchanged at near zero levels to the remaining very marginal market facilitate the recovery of their economies borrowing of the government, the broad from recession or significant slowdown money growth has been estimated as in growth. Policy rates in advanced of 16.5% as on January 15,2010.The economies such as the US and Japan, deposit growth of scheduled commercial which had reached near zero levels in banks are projected to grow by 17% for 2008 were left unchanged during 2009. the coming fiscal (Third Quarter Review Policy rate acts were affected by Central of Monetary Policy 2009-10,RBI). Banks in other advanced economies such as the U.K, and Canada between On the Policy Measures March-May, 2009, with no subsequent On the global front, headline inflation changes. As inflationary pressures in major advanced economies during the started to emerge, the Reserve Bank of

Analytique • Vol. VI • No. 4 • January-March 2010 Australia has increased the policy rate recovery and improvement in measures at 50 basis points during 2009-10 so of confidence. Bank of Israel has far on the back of signs of economic increased the policy rate by a total of

Table 1: Global Inflation Indicators

Key Policy Policy Rate Changes in Policy CPI Inflation Country / Rate (As on rates (basis points) (year on year) January, 2010) Region September 08- Since end Dec-08 Dec-09 March 09 March 09 1 2 3 4 5 6 7 Developed Economies Australia Cash Rate 3.75 (-)400 50 5.0^ 1.3^ (Dec.2, 2009) Canada Overnight Rate 0.25 (-)400 (-)25 1.2 1.3^ (Apr.21, 2009) Euro area Interest Rate on 1 (-)275 (-)50 1.6 0.9 Main Refinancing (May13, 2009) Operations Japan Uncollateralised 0.1 (-)40 0 1.0* -1.9* Overnight Call (December Rate 19,2008) UK Official Bank Rate 0.5 (-)450 0 3.1 2.9 (March5,2009) US Federal Funds 0.00 to 0.25 (-)200 0 0.1 2.7 Rate (December 28 16,2008) Developing Economies Brazil Selic Rate 8.75 (-)250 (-)250 5.9 4.3 (Jul 22, 2009) India Reverse Repo Rate 3.25 (-)250 (-)25 10.4* 13.5* (Apr.21, 2009) Repo Rate 4.75 (-)400(-400) (-)25(0) Quarterly Overview (Apr.21, 2009) China Benchmark 1-year 5.31 (-)216(-300) 0(50) 1.2 1.9 Lending Rate (Dec.23, 2008) Indonesia BI rate 6.5 (-)150 (-)125 11.1 2.7 (Aug. 5, 2009) Israel Key Rate 50 (-)350 50 3.8 3.9 Korea Base Rate 2 (-)325 0 4.1 2.8 (Feb 12, 2009) Philippines Reverse Repo Rate 4 (Jul 9, 2009) (-)125 (-)75 8 4.4 Russia Refinancing rate 8.75 100 (-)425 13.3 8.8 (Dec.28, 2009) South Africa Repo Rate 7 (-)200 (-4)250 11.8* 5.8* (Aug.14, 2009) Thailand 1- day Repurchase 1.25 (-)225 (-)25 0.4 3.5 Rate (Apr.8,2009)

^Q3 * November Note: 1. For India, data on inflation pertain to CPI for Industrial Workers 2. Figures in parentheses in column (3) indicate the dates when the policy rates were last revised. 3. Figures in parentheses in column (4) and (5) indicate the variation in the cash reserve ratio during the period. Source: RBI Monthly Bulletin, February 2010.

Analytique • Vol. VI • No. 4 • January-March 2010 75 basis points since September 2009. contribution of non- food manufactured Among the other major Central Banks, products group has also started Peoples Bank of China raised the reserve to increase in recent months. The requirement ratio by 50 basis points with contribution of the fuel group, which effect from 18 January, 2010 while Bank was significantly negative since January of Russia reduced the policy rate by a 2009, showed a reversal of trend in total of 125 basis points during the third recent months and now contributes quarter of 2009-10(World Economic positively to overall inflation. The Update, IMF, January 26, 2010). inflation risk looms larger when On the domestic front, the negative viewed in the context of global price WPI inflation number in June 2009 movements. Going by the available was due to the statistical base effect and estimates the global rates of increase in was not indicative of a contraction of the prices of sugar, cereals and edible demand. It also observed that the sharp oils are now appreciably higher than decline in WPI had not brought about domestic rates (Table 2). a commensurate decline in inflationary Table 2: Key Commodity Prices- expectations. During October 2009 Global vis-a-vis Domestic the upside risk of deficient monsoon projected earlier had materialized. Item Annual Inflation Recent Trends (y-o-y, December 2009 It exacerbated the price pressures in December 2009) over March 2009 primary food items and manufactured Global India Global India food products. Although both inflation Rice 11.1 12.3 0.5 7.5 29 episodes were driven by supply side Wheat -6.3 12 -10.7 10.5 pressures, the inflation in 2008 was Raw Cotton 38.3 4.9 48.9 16.5 triggered largely by a sharp increase Oilseeds 25.3 6.7 19 8.2 in the prices of basic metals and Iron Ore -28.2 -8.6 -28.2 -18.8 minerals oil. In the current episode, Coal mining 4.3 0 34.4 0 Quarterly Overview however, price pressures are from Minerals oil 81.1 6.3 60.5 10.4 domestic sources and concentrated Edible Oils 57.3 -2.2 32.3 0.7 on food articles and food products. Oil Cakes 33.7 56.9 16.6 16.3 Sugar 96.1 54 72 37.5 The current phase of inflation in Basic Metals, 44.5 -7.3 54.9 0.7 India is driven by increases in prices Alloys and of a few commodities, sugar, oil cakes, Products# food grains, eggs, meat and fish and Iron and drugs and medicines, which have a Steel -27.6 -9.5 -19.7 0.8 combined weight of 14.8 per cent # Represented by IMF metals price index, which covers copper, aluminium, iron ore, tin, nickel, zinc, lead in overall WPI, explain a significant and uranium. part of the inflation during the recent Note: Global price increases are based on the World months. In terms of contribution to Bank and IMF primary commodity prices data. overall inflation by the major groups, At present in India, at the macro primary articles group continues to level, different indicators namely drive the overall WPI inflation, besides the Wholesale Price Index (WPI), the manufactured food products. The Consumer Price Index and the GDP

Analytique • Vol. VI • No. 4 • January-March 2010 deflator are used for measuring As is seen from Table 3, CPI numbers inflation. It goes without saying that presently compiled relate to different WPI and CPI are specific in their base years and cater to specific coverage and the weighting diagrams, segments of the population. Again, with the result that neither of them the procedures for compilation of reflects price variations for the entire price indices do not systematically economy and are restrictive measures. incorporate new products and adjust Exploring the inflation dynamics for quality improvements. This means following a purely statistical approach that indices do not reflect a true picture has limitations as it does not capture of the price behavior and effect of the behavioral structure of the economy. price fluctuations of various goods and services consumed by the population The measure of inflation used in over a period of time (National the Economic Survey released by the Statistical Commission, 2001). Ministry of Finance is the percentage difference between moving averages In December 1996, a study on CPI of the price index over the latest 12 conducted in US by an advisory months when compared with the commission, argues that this measure identical value of a year ago. As a is biased and overstated. One element thumb-rule, in the present environment, of the bias has been described as inflation of roughly 3% is considered ‘substitution bias’. It asserts the fact acceptable and inflation of 6% and that as time passes some prices rise 30 above is considered an alarming high more than others. The CPI, however, inflation episode. assumes that the market basket that households buy does not change. As a Table 3: Salient Features of the Price result the economies that households Indices obtain by substituting cheaper items for Sl. Features CPI- CPI-IW CPI-AL more expensive ones are not captured Quarterly Overview No. UNME by the index, which, as a result, shows 1 Weights allocated on First First First more inflation than households the basis of Consumer 1956-59, 1950-54, 1956-57, actually suffer. The second bias occurs Eependiture survey Latest Latest Latest 1982-83 2001 1983 as CPI ignores price changes which 2 Base year for current 1984-85 2001 1986-87 occur when customers switch between Series outlets. Third and the most difficult 3 No of Items/ 146-365 120-160 260 Commodities in the parts of price level measurement are Basket how to handle changes in the quality 4 No of Centres/ 59 76 600 of goods and services and how to deal Villages 5 Time lag of the Index 2 weeks 1 month 3 weeks with completely new items. Even if the 6 Frequency Monthly Monthly Monthly quantities of goods and services that

Note: The above-mentioned indices are being compiled in terms households purchased remained the of general standards and guidelines set by International same over time, a bias would remain if Labour Organisation (ILO) for all the member countries. The CPI-UNME is compiled and released by the Central their quality changed. Statistical Organisation (CSO) and the rest are compiled by Labour Bureau, Ministry of Labour. In India, CPI-IW measures the cost of Source: Economic Survey 2008-09, Government of India, New Delhi. living for a fixed basket representing

Analytique • Vol. VI • No. 4 • January-March 2010 the consumer behavior of one since the inception of the Reserve industrial worker and CPI (AL) that of Bank of India and assumed a very an agricultural worker. CPI (UNME) dominant role since the mid-1970s is mostly used for the purpose of and reached its limits in the 1980s regulating dearness allowance (D A) of when fiscal dominance rendered the some of the State Government, public monetary instruments rather ineffective. and private sector employee. Central It was during the early 1990s that Board of Direct Taxes also uses the this instrument was rationalized. In index for computing the advance tax consonance with reforms in financial liability of taxpayers from capital gains. markets, the central bank’s operating CPI-IW is the most well known of these procedures gradually shifted to indices as it is used for wage indexation indirect instruments of open market in government and organized sector. operations and interest rate policies. Thus, the CPI is the basis for adjusting As a consequence, the CRR which tax brackets, benefits in certain had gradually moved up from 3% in entitlement programs and some labour the early 1970s to 15% in 1991 was contracts, to account for the effects of gradually brought down to 4.5% in inflation. Hence, adjustments to the 2003.With the capital flows flooding CPI could have important implications domestic liquidity, the RBI reversed for policy makers and the public as well. its policy of reducing the CRR to a prudential limit of 3% and gradually Moreover, in India, the Cash Reserve increased the ratio to 9% in September 31 Ratio(CRR) remained an important 2008.The ratio was reduced to 5% in instrument of monetary regulation stages beginning in October 2008 and (Table 4) and credit control, ever ending in January 2009, to tide over

Table 4 - Cash Reserve Ratio and Interest Rates (per cent per annum) Quarterly Overview

2009 2010 Item / Week Ended Mar. 6 Jan. 29 Feb. 5 Feb. 12 Feb. 19 Feb. 26 Mar. 5 Cash Reserve Ratio 5 5 5 5 5.5 5.5 5.75 (per cent)* Bank Rate 6 6 6 6 6 6 6 I.D.B.I.# 10.25 10.25 10.25 10.25 10.25 10.25 10.25 Prime Lending Rate** 11.50-12.50 11.00-12.00 11.00-12.00 11.00-12.00 11.00-12.00 11.00-12.00 11.00-12.00 Deposit Rate## 7.75-9.00 6.00-7.50 6.00-7.50 6.00-7.50 6.00-7.50 6.00-7.50 6.00-7.50 Call Money Rate (Low / High)*** Borrowings 2.00/4.15 1.00/3.35 1.00/3.40 0.75/3.40 2.00/3.40 1.75/3.75 1.50/3.40 Lendings 2.00/4.15 1.00/3.35 1.00/3.40 0.75/3.40 2.00/3.40 1.75/3.75 1.50/3.40

* Cash Reserve Ratio relates to Scheduled Commercial Banks (excluding Regional Rural Banks). # Minimum Term Lending Rate (MTLR). ** Prime Lending Rate relates to five major Banks. ## Deposit Rate relates to major Banks for term deposits of more than one year maturity. *** Data cover 90-95 per cent of total transactions reported by participants. Source: RBI, Weekly Statistical Supplement.

Analytique • Vol. VI • No. 4 • January-March 2010 the liquidity crunch caused by the percentage points. If the RBI intends recent financial turmoil. In an effort to move the CRR up to the pre-crisis to tighten policy as part of an exit from level of 9%, continuing with the present accommodative policies, on 29 January trend, then the total impact on bank’s 2010, the RBI raised the ratio by 0.75 net earnings could be around Rs.5,600 percentage points to 5.75%. One crore without taking into account the advantage listed about the CRR is that secondary impact (EPWRF, Economic it does not cost either the Government and Political Weekly, February 20, or the RBI, but puts a burden only on 2010). While an assessment of such a the banking system, which is perhaps secondary impact would require a more treated as acceptable (Table 5). rigorous analysis, the impact could be substantial. In India at present, the CRR is applied uniformly across the board, even on Medium Term Outlook loss-making regional rural banks. This makes the CRR system in its existing It is in this backdrop we may recall a form very regressive, discriminatory and study based on the macroeconomic punitive for certain banks. It is expected trend prevailing up to 2007-2008 that the recent hike of CRR by 0.75% appeared in the RBI Staff Study series points to 5.75% results in immediate (Misra & Khundrakpam, 2009). That absorption of cash amount by about particular empirical study projected a 32 Rs.36,000 crore. But one way of medium term fiscal outlook (2010-15) looking at the impact of CRR on bank’s for India on the basis of the assumption earnings is to see by how much the that this medium term outlook interest spread is affected. It is estimated estimation would materialize subject to that a one percentage point increase in realization of assumptions with regard

Quarterly Overview CRR can reduce the multiplier by 0.94 to growth and inflation (Table 6).

Table 5: CRR vis-a-vis other Instruments

CRR Policy rates/ LAF MSS Certainty in absorbing liquidity In times of excess liquidity LAF is Interest cost borne by the government and release of liquidity overburdened Blunt instrument does not Policy Transmission is a suspect Large volumes can increase government discriminate borrowing costs Implicit Tax-since there is no Cost to the Central Bank when Less influence on liquidity as they return-opportunity costs to absorbing liquidity cushion repo/CBLO market and LAF banks could be high borrowings Apparent cost to government Higher interest due to MSS could or the Reserve Bank is nil attract foreign flows nullifying sterillisation impact Source: Compilation by the Economic and Political Weeklay Research Foundation.

Analytique • Vol. VI • No. 4 • January-March 2010 Table 6: Medium Term Outlook of Central Government: Gross Fiscal Deficit (GFD) under Alternative Baseline Scenario* (Per cent to GDP) Fiscal Indicators 2010-11 2011-12 2012-13 2013-14 2014-15 2010-15 average 1 234567 I. Gross Tax Revenue 13.75 14.17 14.62 15.1 15.6 14.65 a Income Tax 2.79 2.88 2.98 3.08 3.19 2.99 b Corporate Tax 4.88 5.23 5.6 6.01 6.44 5.63 c Exercise Duty 2.52 2.45 2.39 2.33 2.27 2.39 d Customs Duty 2.28 2.3 2.32 2.33 2.34 2.31 e Other Tax 1.28 1.31 1.33 1.35 1.37 1.33 II. Share of State in Central Taxes 3.64 3.76 3.87 4 4.14 3.88 III. Net Tax Revenue (I-II) 10.11 10.42 10.74 11.09 11.47 10.77 IV. Non-Tax Revenue 1.98 1.97 1.97 1.96 1.95 1.97 V. Revenue Receipts 12.08 12.39 12.71 13.06 13.42 12.73 VI. Revenue Expenditure 13.04 13.18 13.31 13.44 13.57 13.31 a Interest Payments 3.74 3.76 3.78 3.81 3.85 3.79 b Non-Interest Revenue 9.3 9.42 9.53 9.63 9.73 9.52 Expenditure c Grants to states 2.33 2.35 2.38 2.41 2.43 2.38 VII. Revenue Deficit 0.95 0.79 0.6 0.38 0.15 0.58 33 VIII. Capital Expenditure 1.55 1.71 1.9 2.12 2.35 1.92 IX. Gross Fiscal Deficit 2.5 2.5 2.5 2.5 2.5 2.5 X. Debt 63.91 64.3 64.8 65.41 66.14 64.91 XI. Interest Payments to Revenue 30.92 30.33 29.75 29.19 28.66 29.77 Receipts Quarterly Overview Note: * Assumptions: GFD = 2.5% of GDP, Growth rate 8% and Inflation rate 4%. Source: Fiscal Consolidation by Central and State Governments: The Medium Term Outlook, B.M. Misra and J.K. Khundrakpam, RBI Staff Study, Department of Economic Analysis and Policy, 2009.

Conclusion possibility of the downside risks of the Various current surveys on Indian growth and the upside risks to inflation. economy confirm that the recovery in Available data confirms the fiscal growth has proceeded broadly along correction both at the Centre and States expected lines, but the inflationary has been significant during the current pressures have intensified which appears phase of fiscal reform but the fiscal a source of growing concern. This is consolidation has been inadequate at at par with the Union Budget 2010’s least in terms of qualitative expenditure forecast on the economic growth. management, for example, achievement Which has been also optimistic about of sustainable level of debt GDP ratio the economy’s movement towards and the moderate level of fiscal deficit stabilization, but did not rule out the to mention a few.

Analytique • Vol. VI • No. 4 • January-March 2010 On the domestic front, there is clearly current situation of global oil prices a risk that as the recovery firms up, and the measures taken and to be the steep food prices will spill over taken by the Reserve Bank of India into a broader inflation process. The as a part of the policy measures. In price hike itself should be treated addition, the way the index for prices is as a threat. If it starts to spill over, it constructed may be a matter of further can spiral very quickly so the policy concern. The present methodology measures should be there to prevent either overstating or understating the spillover from happening. Recent the inflation rate, thereby distorting statistical data confirms the evidence calculations of inflations in both of inflation which is spilling over from government expenditures and income food processing to other manufacturing tax brackets and that of fiscal deficit. sectors. It is expected that inflation As a consequence, now-a-days, there will moderate from July 2010. But this is increasing support for the view moderation in inflation will depend that policy objectives would have upon several factors including the to be broader than price stability as assumption of a normal monsoon, conventionally defined. J

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Analytique • Vol. VI • No. 4 • January-March 2010 S elected Economic Indicators

Q3 of Q2 of Q1 of Q3 of Q2 of Q1 of 2009-10 2009-10 2009-10 2008-09 2008-09 2008-09 Gross Domestic Product at Constant (2004-05) Prices GDP at factor cost (Rs. Crore) 1158764 1048985 1040091 1093167 971982 979838 GDP at 2004-05 market prices (Rs. Crore) 1228201 1129182 1105641 1159298 1057115 1042528 Growth Rate (Per cent) GDP at factor cost 6 7.9 6.1 6.2 7.5 7.6 GDP at 2004-05 market prices 100 100 100 100 100 100 Private Final Consumption Expenditure 59.8 57 56.8 60.3 56.9 57.4 Government final consumption expenditure 12.5 11.1 11.2 14.1 9.2 10.3 Gross Fixed capital formation 31.7 34.1 31.7 31.6 34.8 32.7 Change in Stocks 0.7 0.7 1.3 1.3 1.4 1.4 Valuables 0.9 1 1.2 1.5 1.4 1.1 Exports 19.8 20.6 21.1 21.9 26.1 25.6 Less Imports 24.4 29.1 26.6 28.4 33.9 30.1 Discrepancies -1 4.7 3.1 -2.2 4 1.5

Source: Central Statistical Organisation, Government of India 35 Sector-wise Growth Rate at 2004-05 constant prices (per cent) Agriculture Agriculture, forestry & fishing -2.8 0.9 2.4 -1.4 2.4 3.2 Industry Mining & Quarrying 9.6 9.5 7.9 2.8 1.6 2.6 Manufacturing 14.3 9.2 3.4 1.3 5.5 5.9 Electricity, gas & water supply 4.9 7.4 6.2 4 4.3 3.3 Services Construction 8.7 6.5 7.1 3 8 7.1 Selected Economic Indicators Trade, hostels, transport & communication 10 8.5 8.1 4.4 10 10.8 Financing, institutions, real estates & 7.8 7.7 8.1 10.2 8.5 9.1 Business services Community, social & Personal services -2.2 12.7 6.8 28.7 10.4 8.7

Source: Central Statistical Organisation, Government of India Performance of Core Industries Sector-wise Growth Rate (%) in Production (Weight in IIP : 26.68%) Overall Index 5.4 4.76 4.42 1.28 3.77 4.49 Crude Oil Production 0.87 1.16 -1.27 0 -1.48 -0.14 Petroleum Refinery Products -4.2 -2.93 4.27 Coal 3.98 9.65 12.65 10.51 7.52 25.39 Electricity 4.9 7.57 6.06 2.87 3.17 1.96 Cement Production 8.47 12.64 12.12 8.84 5.17 1.1

Compilation by the Bombay Chamber of Commerce and Industry Trust: Source of Data Ministries/Departments/Organisation(s)

Analytique • Vol. VI • No. 4 • January-March 2010 INFLATION Decadal Average Decades WPI CPI-IW GDP Deflator PFCE Deflator

1971-72 to 1980-81 10.3 8.3 8.8 8.4

1981-82 to 1990-91 7.1 9 8.7 8.3

1991-92 to 2000-01 7.8 8.7 8.1 8.5

2001-02 to 2008-09 5.2 5.3 4.6 4.4

Long-term Trend

1971-72 to 2008-09 7.7 8 7.7 7.6

Source: Reserve Bank of India, Government of India.

Point to Point Rate of Growth

16.00

14.00

12.00

10.00

8.00 CPI -2008 6.00 CPI - 2009 4.00 WPI -2008 36 2.00 WPI -2009 0.00

-2.00

Note: The solid lines represent CPI and dotted lines represent WPI. The respective series of CPI & WPI has been marked with triangular and square markers. Source: Officeof the Economic Advisor,Ministryof Commerce Selected Economic Indicators Notes for Contributors General Guidelines • Analytique welcomes original articles or essays on any subject of interest related to commerce and industry such as the macro economy, industrial performance, etc. • Contributions must be no more than 8,000 words, including notes and references, accompanied by an abstract of a maximum of 150 words and in MS word. Tables should be in MS Excel format. • Contributions should be sent perferably by e-mail. All correspondence shall be in e-mail. • Papers should not have been simultaneously submitted for publication to another Journal. • Writers are requested to provide full details for correspondence: postal address, day- time phone numbers and e-mail address for our records. Only author’s affiliation and e-mail address will be published unless otherwise directed.

Analytique • Vol. VI • No. 4 • January-March 2010 About Bombay Chamber

The Bombay Chamber of Commerce and Industry is India’s premier Chamber of Commerce and Industry situated in Mumbai, the industrial, financial and commercial capital of India. Established in 1836, it is one of the oldest Chambers in the country and has a long and illustrious history of continuous service to Trade and Industry. The Chamber can boast not only of its longevity but also of its impeccable lineage. With more than 2000 prime companies as its members, the Chamber represents the cream of Indian Industry, Commerce and Services. While the name `Bombay Chamber’ conjures images of an organization representing exclusively a city-based membership, in reality it represents a wide spectrum of highly reputed and professionally run companies which are based in the city of Mumbai, but whose manufacturing facilities and commercial influence spread not only all over India but also internationally. It comes as no surprise that the Bombay Chamber’s membership represents as much as a third of the country’s GDP in the manufacturing and services sectors. The Chamber uniquely represents large and medium sized corporations, banking and financial institutions, professional consulting companies and a large number of multinationals.

Bombay Chamber of Commerce and Industry Mackinnon Mackenzie Building, Ballard Estate, Mumbai 400 001 Tel: 2261 4681, Fax: 2262 1213, E-mail: [email protected] Website: www.bombaychamber.com