Note on Indian Economy

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INDIAN ECONOMY

India's diverse economy encompasses traditional village farming,modern agriculture, handicrafts, a ide range of modern industries, anda multitude of services! "ervices are the ma#or source of economicgroth, accounting for more than half of India's output ith less thanone third of its la$or force! A$out three%fifths of the or& force is inagriculture, leading the nited (rogressive Alliance )(A* governmentto articulate an economic reform program that includes developing

$asic infrastructure to improve the lives of the rural poor and $oosteconomic performance! +he government has reduced controls onforeign trade and investment! igher limits on foreign direct

investment ere permitted in a fe &ey sectors, such astelecommunications! oever, tariff spi&es in sensitive categories,including agriculture, and incremental progress on economic reformsstill hinder foreign access to India's vast and groing mar&et!(rivati-ation of government%oned industries remains stalled andcontinues to generate political de$ate. populist pressure from ithin the(A government and from its /eft 0ront allies continues to restrainneeded initiatives! +he economy has posted an average groth rate ofmore than 12 in the decade since 3441, reducing poverty $y a$out 35

percentage points! India achieved 6!72 8D( groth in 955:, and againin 9551, significantly e;panding production of manufactures! India iscapitali-ing on its large num$ers of ell%educated people s&illed in theEnglish language to $ecome a ma#or e;porter of softare services andsoftare or&ers! Economic e;pansion has helped Ne Delhi continueto ma&e progress in reducing its federal fiscal deficit! oever, stronggroth com$ined ith easy consumer credit and a real estate $oomfueled inflation concerns in 955: and 9551, leading to a series ofcentral $an& interest rate hi&es that have sloed credit groth and

eased inflation concerns! +he huge and groing population is thefundamental social, economic, and environmental pro$lem!

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GDP (purchasing power parity):

3!32 )955=*Distribution of family income - Gini in!ex:

>:!6 )955=*

"nvestment (gross fixe!): >>!42 of 8D( )9551 est!*

#u!get: revenues:

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rice, heat, oilseed, cotton, #ute, tea,sugarcane, potatoes. cattle, ater$uffalo, sheep, goats, poultry. fish

"n!ustries: te;tiles, chemicals, food processing,

steel, transportation e?uipment, cement,mining, petroleum, machinery, softare

"n!ustrial pro!uction growth rate: 6!72 )9551 est!*

&lectricity - pro!uction: ::3!: $illion &@h )9557*

&lectricity - consumption: =66!7 $illion &@h )9557*

&lectricity - exports:

:1 million &@h )9557*&lectricity - imports:

3!1:= $illion &@h )9557*

'il - pro!uction: 635,555 $$lday )9551 est!*

'il - consumption: 9!=>6 million $$lday )9557 est!*

'il - exports: >75,555 $$lday )9557 est!*

'il - imports:

9!546 million $$lday )955= est!*

'il - prove! reserves: 7!1 $illion $$l )3 Banuary 9551 est!*

atural gas - pro!uction: 96!:6 $illion cu m )9557 est!*

atural gas - consumption: >=!=1 $illion cu m )9557 est!*

atural gas - exports: 5 cu m )9557 est!*

atural gas - imports: 7!14> $illion cu m )9557*

atural gas - prove! reserves: 3!57: trillion cu m )3 Banuary 955: est!*

urrent account balance: %

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$illion f!o!$! )9551 est!*

&xports - commo!ities: petroleum products, te;tile goods, gemsand #eellery, engineering goods,chemicals, leather manufactures

&xports - partners: " 372, China 6!62, AE 6!12, =!=2 )9551*

"mports: 5!7 $illion f!o!$! )9551 est!*

"mports - commo!ities: crude oil, machinery, gems, fertili-er,chemicals

"mports - partners:

China 35!12, " 1!62, 8ermany=!72, "ingapore =!=2 )9551*

&conomic ai! - recipient:

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Decades of protectionist barriers that kept foreign businesses out, and private investors

at bay, are crumbling under Indias new economic reform policies. But the future

remains as uncertain as tomorrows value of the rupee.

If variety is the spice of life, then India is a gourmet's delight! +his young "outh Asian

giant is home to more than 455 million people, a cacophony of languages, e;tremes oflavish ealth and grinding poverty, untouched natural $eauty and landscapes devastated$y overpopulation! %bout /0 1 of the worl!2s population lives in "n!ia3

In om$ay, the capital of India's financial mar&ets, vast slums sit on some of the moste;pensive real estate in the orld! If necomers can foot the rent $ill, they are ell ontheir ay to a seat on the om$ay "toc& E;change )"E*! In 3443, India had anestimated slum population of 73!9> million ! +his formed 4/3/ 1 of the total urbanpopulation!

+he political scene is as uncertain as tomorro's value of the rupee, $ut this has not

stopped foreign investors from flooding in!

0or decades folloing the departure of the English, India &ept the door closed to foreigninvestors, striving for a &ind of 8andhian self%sufficiency or FsadeshiF that had inspiredthe Independence movement!

Policy-ma,ers favore! socialist economic planningith limited free%mar&eteering!+he infrastructure, utilities, $an&ing and other &ey industries remained under statecontrol, hile private companies moved into agriculture, industry and the production ofconsumer goods!

As 0ive Year (lans came and ent, India's economy stagnated at a groth rate of threepercent per year! +he government $orroed and spent heavily to &eep the olf from thedoor!

+he @orld an& and the IM0 agreed to $ail India out of its financial mess on thecondition that India #oin the groing roster of nations on "tructural Ad#ustment(rogrammes!

(olicy reforms encouraging foreign investment have since opened the doors to glo$alplay! +lowly but surely5 a vital economy is brea,ing through "n!ia6s ossifie!bureaucracy3In a mere five years India has leapt from a mere curiosity on the glo$aleconomic map to one of the orld's top ten emerging mar&ets!

"D"% &''. #%+"+: Deregulation an! *eform

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Without a major injection of funds into Indias infrastructure, the economy could be

on the edge of a financial crisis. In an effort to promote investment, the government

has tried to do away with comple licensing and opened the doors to the private sector.

++he private sector is sloly $eing alloed into previously reserved infrastructure

sectors li&epoer, telecommunications and petroleum! Comple; licensing has $eena$olished for industrial underta&ings e;cept in nuclear poer and defence! (ricerestrictions have $een done aay ith! Import tariffs have $een loered, $ut remainrelatively high at :7 percent!

In the deregulated financial sector, companies are no alloed to raise funds overseas!+hey can freely price pu$lic offerings of e?uity! 0oreign (ortfolio Investments have $eenpermitted into the "toc& Mar&ets!

(rivate $an&s have $een invited in! 0oreign companies ith 355 percent participationhave also $een permitted!

+he rupee is a freely floating currency ith full converti$ility on the current account!

eforms have infused fresh $lood into India's economy! Commerceand industryhavegron! Although the country still runs a hefty trade deficit, its foreign e;change reservesare healthy! Inflation has stayed $elo five percent! 0iscal deficit has $een &ept in chec&!

"D"% &''. #%+"+: &conomic +trengths an! 7ea,nesses

!ike its "sian neighbors, India has a large skilled workforce, the engine of prosperity,

but corruption and a lack of capital have put the brakes on growth.

"n!ustrial an! &conomic +trengths333

G A large pool of s&illed or&ers )go to 'la$or' lin&*

G A rapidly groing middle class ith a strong desire to consume!

G A rich natural resource $ase, especially coal, iron ore, ater, limestone and granite!

7ea,nesses333

G /ac& of Capital

G /ac& of ade?uate infrastructure

G ureaucracy and corruption

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G 0oreign currency ris&

@ithout capital India cannot invest in education, develop its natural resources, orimprove roads, ports, telecommunications, electricity generation, etc! Although thegovernment is in desperate need of funds, the dou$le deuce of corruption and

$ureaucracy has daunted potential investors! Meanhile the rupee remains unsta$leagainst other foreign currencies!

"D"% &''. #%+"+: Labor

/i&e its Asian neigh$ors, India has a large s&illed or& force, hich, unli&e other Asiannations, is protected $y politically poerful unions! oever it also has an a$undance ofhite collar or&ers!

Industry has gron enormously than&s to a large, s&illed or& force, hile salaries

remain relatively lo! In angalore, the high%technology capital, a computerprogrammer, ith s&ills matching those of his peer in the nited "tates, receives onethird the salary!

(arado;ically, the government has heavily su$sidi-ed higher education hile neglectingprimary education! +his accounts for the proportionally large num$er of professionalsli&e doctors, layers and engineers and the millions of child la$orers!

"ince education is not mandatory, parents often choose to send only one child to schoolhile the others are sent to or& to help support the family!

One third of the or& force is under the age of fourteen! /egislators have $een reluctantto criminali-e child la$or, primarily, the reasoning goes, $ecause a child's ages are anecessary contri$ution to the family's meager income!

ather than $an child la$or outright, the government has regulated it through las thatprohi$it the employment of children in so%called ha-ardous industries!

+he government and trade unions, recogni-ing that child la$or marginali-es adultor&ers, is ta&ing steps to gradually convince parents that a minimal education illimprove a child's #o$ prospects!

"D"% &''. #%+"+: igh +avings *ate

+raditionally careful ith their money, Indians have contri$uted to a high savings rate. afact that may change ith a $oom in ne consumer goods and the introduction of creditcards!

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+he Indian middle%class is as much a social and cultural elite as it is a product ofeconomic reform! @ith the flood of ne consumer goods, flooding the Indian mar&etplace, has come a hole ne class of consumers hich is transcending traditional casteand community!

Even the hum$lest households proudly display an array of previously unattaina$le goodsli&e televisions, $icycles, refrigerators and other home appliances! At the other end of theconsumer spectrum, the nouveau riche sport the latest status sym$ols, including cellulartelephones, ne cars, and a taste for estern style fast food and fashions!

+&8'*%L 'P'+"8"'

Agriculture and animal hus$andry made it possi$le for humans to live a settled life!Conse?uently, they too& to agriculture and allied activities for sustenance and in duecourse of tine, agriculture evolved into a commercial activity herein it could $e used topay ta;es and generate surpluses! "uch agriculture is referred to as surplus agriculture! Asagriculture develops and $ecomes more profita$le, manufacturing starts groing, hichis the second $iggest pillar of a sound economy! +o support all these economic activities,e re?uire different &inds of services e!g!, $an&ing, transportation, telecom, insuranceetc! +his gives rise to the tertiary or the services sector! (ut together, these three ma&e upthe $road divisions $ased on the &ind of economic activities underta&en in the economy!

3! (rimary H farming, a?uaculture, fisheries, forestry, animal hus$andry and allied

activities! In fact anything done ith the help of nature! )e;cept mining*

9! "econdary% all those activities that involve the mechani-ed production of tangi$legoods H$oth consumer and industrial and also involve value%addition along theproduction chain H cars, cement, computers, +s etc

>! +ertiary H all those economic activities hich involve the e;change of intangi$leservices ith money H education, healthcare, $an&ing, insurance etc!

@ith 155 million people dependent on agriculture for sustenance, India truly ?ualifies to$e called a farm%dominated economy! +raditionally, such pre%dominance of agriculture as

a contri$utor to national income has $een the norm in all economies across the ould!"loly, such dominance comes to $e challenged $y the other to types of activities andmanufacturing and services start groing in importance as to support the groing massof the primary activities and to derive more value from their produce, e re?uire suita$leservices! +his is ho the secondary and the tertiary sectors evolve into significantcontri$utors to total national income! +ypically, as an economy develops, the share ofthe manufacturing and the services sector continues to gro along ith a simultaneous

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fall in the agricultural pie and thus the shift in sectoral composition typically moves alongthese lines

Agriculture %%%% manufacturing %%%services

ut in a uni?ue case, India and ussia have practically $ypassed the industrial revolutionand have straightay moved from $eing a farm%dominated economy to $eing a services%dominated economy! In fact, never as the manufacturing sector even a significantcomponent of India's total groth story in the past! +his fact has got its on uni?ueimplications, hich ill $e discussed later!

Gross Domestic Pro!uctJ +he moneti-ed orth of the goods and services produced $yall these three sectors ithin the domestic confines of an economy! 0or instance, IndiaKs8D( for the year 955:%9551 is estimated to $e around e! =9 la&h crore! "implyspea&ing, it implies that India generated this much orth of goods and services in all thesectors ithin the territorial limits of India! +he monies received from a$road in the form

of factor income D''8form a part of this figure!

Gross ational Pro!uctJ Is simply 8D(L net factor income from a$road

et ational "ncomeJ 8N( H Depreciation charges

If e divide the net national income of a country $y its population i!e!

Net National Income

%%%%%%%%%%%%%%%%%%%%%

(opulation

@e get (er Capita Income, hich represents nothing $ut the average income earned $yeach citi-en of that particular country in the specified year! ut as e all &no, averagescan $e highly misleading figures $ecause they fail to capture disparities, hich are of ahuge character in our conte;t! ne?ual distri$ution of income and ealth reflects the factthat the fruits of economic groth and development have not $een re%distri$uted properlyand such disparities have, in fact, multiplied over time!

#*"sJ emem$er the ICs report +he orld sat up and too& notice three years ago

hen 8oldman "achs turned out its path $rea&ing reportDreaming With BRICs,audaciously predicting that India, China, ussia and $ra-il ould $e giant economicforces in the coming century! More surprisingly, India is cruising along on the grothsuperhighay at a pace hich ma&es the IC estimates ):!72 per annum* loo&conservative! +here ill $e more of everything H "Es, orld%class $uildings,supermar&ets, shopping malls, cars etc!

"ample this

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y 9535,

India ill produce 95 la&h cars as compared to 33 la&h today )As per auto analysts, carpurchases #ump dramatically hen per capita income touches < 3555, a figure li&ely to $eachieved around 9535*! esides, India is slated to $ecome the glo$al manufacturing hu$

for auto%components, going $y the investment planed $y glo$al auto%ma&ers in Indiaoperations

India ill produce 395 la&h to%heelers in comparison ith todayKs figure of 15 la&hs

India ill roll out 955 colour +s vis a vis todayKs figure of 335 sets

Outsourcing, currently valued at < 9> $illion, is groing at a$out >52 per annum andill generate < :5 $illion $y 9535 employing 9> la&h people

Organi-ed retail in India ill gro at a$out >12 this year alone

India ill $ecome the second $iggest manufacturer of mo$ile handsets $y 9554!

"hould e pop the $u$$ly right no @ell, no! India is a country of e;traordinarycontradictions! E;perts $elieve that several speed $rea&ers could put paid to the grandiosevision envisaged a$ove! (ro$lems areas include agriculture )groing at a meagre 9!1 2annually as a against a target of =2*, poer )huge shortfall%adding only =555 M@against the Chinese adding a mind%$oggling 96555 M@ each year*, ports )e need todou$le our handling capacity in the ne;t four years to cope ith the import%e;port trafficgroing at 972 annually*, roads )92 of total road length in India handles =52 traffic*,literacy )a$out :52*, teledensity )a$out 952* etc!

D*"9&*+ '$ G*'78

Agriculture CANNO+ ait

@ith almost P of the population dependent on this single sector and yet a turnout of onlyaround 952 of the 8D(, this is a $eleaguered sector!

(lagued $y pro$lems of heavy dependence on monsoons, lac& of credit, marginalinfrastructure etc! , it is a sector that may ell apply the $ra&es on the Indian grothstory!

Agriculture ill contri$ute even lesser in the years to come, compounding the pro$lemfurther for the simple reason that more num$er of dependents ill fight for a falling pieof the national income! It ill accelerate the trend of rural%ur$an migration, hichalready records a figure of around 6 crore annually, putting further pressure on thealready crippling ur$an infrastructure!

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In ma#or farm crops, India is among the top producers across the glo$e i!e! tea, heat,pulses, rice, vegeta$les, suagrcane etc!!An estimated 97%=5 of farm produce orth < 39$illion)re 75=55 crore* rots every year oing to lac& of proper storage space!

+he entry of private cos ill result in greater investment in farm technology!

Against having #ust 36!72 share in India's 8D(, the agriculture sector is the 'ay of life'for over :52 of the country's populations! +his spea&s of the scale of impact thatgrothde%groth in this sector has on the 'masses' in this country! And considering thatthe sector is estimated to gro $y a mere 9!12 in 0Y51 ):2 in 0Y5:*, should soundalarming $ells for policyma&ers % not #ust from the demand perspective )as loer grothleaves lesser disposa$le income in hands of the 'agri%dependents'* $ut also from thesupply side, as seen from the rise in consumer price inflation due to rising prices ofprimary food articles li&e heat, pulses, edi$le oils, fruits and vegeta$les, and condimentsand spices!

GDP agriculture: 8he growing !ivergence;

+he Economic "urvey for 0Y51 )955:%51* lays the responsi$ility of the slac&performance of the agriculture sector on Flo investment, im$alance in fertiliser use, loseeds replacement rate, a distorted incentive system and lo post%harvest value addition!F"imply put, ith every three out of five Indians directly depending on this sector, loagricultural groth has serious implications for the 'inclusiveness' of groth, as has $eenharped upon $y policyma&ers and groth 'strategists'! 0urthermore, as indicated a$ove,poor agricultural performance can complicate maintenance of price sta$ility )inflation*ith supply%side pro$lems in essential commodities of day%to%day consumption! 0orinstance, as reported $y the I, including manufactured products such as sugar and

edi$le oils, food articles contri$uted as much as 91!92 to overall inflation of :!12 asreported on 0e$ruary >, 9551!

onsoon !epen!ence5 yiel!s an! investment+he agriculture sector has not $een a$le to distance itself from the vagaries of monsoons!In fact, the survey states that deficient rainfall in the monsoon in 9559, 955= and 955:during the +enth 0ive Year (lan has led to poor agricultural groth, reduction in theshare of agriculture in 8D(, creation of inflationary pressure in some primary products,and reduction the potential groth of other sectors $y dampening demand! @e vie theseas serious hindrances for the sustaina$le groth of the Indian economy, hich is loo&ingto gro more internally and through increased investment and consumption in ruralareas!

/o yield per unit area across almost all crops has also $ecome a regular feature ofIndian agriculture! 0or e;ample, as the survey states, though India accounted for 93!62of glo$al rice production, the estimated yield per hectare in 955=%57 as less than that inorea and Bapan, and only a$out a third of that in Egypt, hich had the highest yieldlevel in the reference year! "imilarly, in heat, India, hich accounted for 392 of glo$alproduction, had average yield slightly loer than the glo$al average!

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@hile the survey also tal&s of the potential of redressing some of the root causes such aslo investment, poor ?uality seeds, and little post%harvest processing through greaterfocus on food processing and integration of the supply chain from the farm gate to theconsumer's plate, e see little happening on ground! If one ere to ta&e a loo& at thead#acent graph, hich indicates the cumulative investment of pu$lic and private sectors

in agriculture as a percentage of 8D(, there emerges a clear picture of the discriminationthat the sector )and its dependents* has suffered over the years! +he share of agriculturesector's capital formation in 8D( has declined from 9!92 in 3444%55 to 3!42 in 9557%5:!As reported $y the survey, this decline has $een partly due to stagnationfall in pu$licinvestment in irrigation!

*eflections an! outloo,As reported $y the eserve an& of India )I*, the agriculture sector in the recent yearshas $een mar&ed $y lo and volatile groth % real 8D( groth in the agricultural sectorduring the first four years of the +enth 0ive Year (lan has averaged only 92 per annumas against =2 envisaged in the (lan period )9559%51*! A &ey factor underlying this lo

and volatile groth is the stagnation in domestic production in the case of ma#or cropsli&e heat, sugar and pulses! Illustratively, the production of heat, after touching a pea&of 1: million tonnes )M+* in 3444%9555 has since then $een range%$ound at around 15M+! "imilarly, the production of pulses has not $een a$le to e;ceed the pea& of 3=!4 M+reached in 3446%44! In fact, the production of pulses at 3>!3 M+ in 9557%5: as evenloer than the levels achieved more than 37 years $ac& )3=!> M+ in 3445%43*! +hestagnation in production, in turn, can $e partly attri$uted to stagnancy in investment inthe agricultural sector )see chart a$ove*!

@e $elieve that for the Indian economy to attain groth rates of 62 )or 42 as estimated$y the government for the Eleventh 0ive Year (lan % 9551%39*, the stagnation in

production of ma#or crops and agricultural investment needs to $e reversed! +his could $edone $yJ

"tepping up investment outlays on irrigation facilities along ith focus on efficient use ofater resources

(utting in place proper ris& mitigation policies given the several ris&s that farmers facesuch as future price and monsoon conditions

aving greater focus on rural infrastructure to enhance the productivity of physicalresources, and improve supply chain management and value addition in agriculture! Inthis conte;t, the focus on rural infrastructure development under harat Nirman ill $e aelcome step

Increasing diversification and value addition in Indian agriculture considering the shift inconsumption pattern on the $ac& of ur$anisation and rising income levels

Effectively lin&ing agricultural production ith mar&eting, agro%processing and othervalue added activities

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8reater focus on agricultural research and

Intensive efforts from the financial system in terms of revitalising the rural cooperativecredit system, strengthening regional rural $an&s, providing incentives to commercial$an&s for investments in rural economy and ensuring an ade?uate and timely delivery of

credit at an appropriate price! )+he government has decided that from &harif 955:%51,farmers ould receive crop loans up to a principal amount of s > la&h at 12 rate ofinterest! As reported $y the survey, this year, the government of India is providinginterest su$sidy of 92 to pu$lic sector $an&s, regional rural $an&s and cooperative $an&son amount of short%term agriculture credit dis$ursed out of their on resources! 0urther,in order to provide relief to the farmers ho have availed of crop loans from commercial$an&s, regional rural $an&s and primary agriculture cooperatives for &harif and ra$i 9557%5:, an amount e?ual to 92 of the $orroer's interest lia$ility on principal amount up tos 3 la&h has $een credited to hisher $an& account*!

+he economic survey has stated that Fin the short%term outloo& for agricultural sector

appears $right! @ith a elcome rainfall in early 0e$ruary 9551, prospects of heat andother ra$i crops have $rightened! +here has $een a sharp increase in the area under heatith high domestic and international prices providing incentives to the farmers! +ogetherith $etter crop prospects, this augurs ell for farm income! In the medium%term, theprospects for agriculture ill $e determined $y the pace and ?uality of reforms in thissector, the a$ility to increase investment in surface irrigation, ground ater recharge ofa?uifers and restoration of ater $odies, and developing high%yielding varieties of noncereal food and cash crops!F

All said and done, e $elieve that higher groth and long%term sta$ility in theagricultural sector ill $e a factor of greater investment in irrigation )alongith

application of user charges for utilities li&e electricity and ater supply* and developmentof high%yielding variety of crops! oever, the policyma&ers' short%sightedness ofconsistently $laming the 'rain gods' for the sector's performance ill ta&e us nohere! Inthis conte;t, imagine the plight of the :52 of Indians, ho are really unli&e us @ell, didsomeone say 'inclusiveness'

As can $e seen, the share of the services sector has $een consistently going up at thee;pense of agriculture! In the past 37 years, e have seen an e;ponential rise in thenum$er and e;tent of services contri$uting significant income to the national &itty! "omeof these services hich are coming to the fore include I+ and I+e", (Os, etail,an&ing, Insurance etc! Normally, such strong groth in services presumes an e?uallystrong manufacturing sector, hich as not the case ith India! India has practically$ypassed the industrial revolution of any &ind and has straightay moved from a farm%dominated economy to a services Hdominated economy! +his &ind of trend has greatimplications for the sustaina$ility of such groth and its conse?uences for theemployment situation in India!

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As per a research study spanning the past 97 years of glo$al economic history, allcountries hich had consistently got a 352L groth rate necessarily had a strongindustrial sector! In India's case, this is hardly the scenario! "o at least historicallyspearing, e seem to $e on the rong foot! "econdly, a groing services sector doescreate #o$s, $ut to put the things in perspective, it does so only for the highly educated

and trained people! 0or instance, the much%hyped I+I+e" sector, despite contri$uting =2of India's annual 8D( and putting India on the orld map, is employing #ust 3: la&hpeople as on date! All these #o$s have to $e necessarily manned $y highly s&illed people!India, hich is facing a huge unemployment pro$lem, needs #o$s hich can offer succourto half%s&illed and illiterate people, hich is possi$le only in case of manufacturingindustries! Conse?uently, to ensure suita$le groth ith #o$ creation and povertyelimination, it is imperative that necessary steps are ta&en to ensure a vi$rant industrialsector! A case in point is China, hich is generating around half of its total 8D( frommanufacturing only! "uch an economy is sufficiently ell%e?uipped to sustain this &indof groth on a sustaina$le $asis, along ith creating meaningful #o$s for its populace!

usiness (rocess Outsourcing )(O* is one of the fastest groing segments of theInformation +echnology Ena$led "ervices )I+E"* industry in India! usiness (rocessOutsourcing refers to the delegation of one or more I+%intensive $usiness processes to ane;ternal provider that in turn ons, administers and manages the selected process $asedon defined and measura$le performance criteria!

+he trend to outsource or& is on rise in today's competitive environment! +here arenum$er of reasons $ehind the increasing trend of outsourcing! 0irstly, companies ant tofocus on mission%critical issues and are not interested in frittering aay time and energy

on non%core functions! "econdly, as $usinesses gro e;ponentially, the companies do nothave resources have resources to cope ith the groth and as a result they outsource partof their $usiness processes! +hirdly, companies may not have the $est talent and s&ills todo the #o$ themselves! /astly, converging technologies of telecommunication,information technology and media have redefined the ay e do $usiness and have madeoutsourcing possi$le!

+here are a num$er of advantages of outsourcing! Ma#or among them areJ )3* educeoverheads and free up resources, )9* Improves Efficiency, )>* Offloads non%corefunctions, )=* 8ives access to speciali-ed s&ills, )7* "aves on manpoer and trainingcosts, ):* educes operating costs, )1* Enhances tactical and strategic advantages, )6*"preads ris&s, )4* (rovides the $est ?uality services, products and people, and )35* elpsto focus scarce resources on time%critical pro#ects!

"ome of typical services and processes that are outsourced includeJ +echnical "upport"ervices, +elemar&eting "ervices, Insurance (rocessing, Data Entry "ervices Data(rocessing "ervices, Data Conversion "ervices, oo& eeping and Accounting "erviceset al!

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+he Indian (O industry is constantly groing and a lot of 0ortune 755 companies areoutsourcing services to India! +here are several reasons for India's emergence as one ofleading outsourcing destinations! India is very rich in educated and talented humanresource! India is one of the pioneers in softare development! India has a mature

industrial set up ith orld class systems! India has e;cellent technical facilities andinfrastructure for setting up call centers! +ime -one difference $eteen India andAmerica has also or&ed to the advantage of Indian (O industry! India has an 6%39hour time -one difference ith respect to the " and other developed mar&ets! Most ofthe Indian call centers servicing American customers have timings $eteen 7J>5 p!m! to4J>5 a!m! +his time -one difference allos Indian companies (Os to service Americanclients $y or&ing in the nights! /ast, $ut not the least, India has a huge pool of Englishspea&ing or&force that provides e;cellent voice $ased services at e;tremely competitivecosts resulting in huge savings for companies! "ome of the leading (O companies inIndia areJ 8E Capital, Convergys, @ipro "pectramind, @N", Dell, Da&sh e%"ervices,ICICI One"ource, and Mphasi"

"ome of the pro$lems afflicting Indian (O industry are high attrition rate, and $ac&lashin developed countries against perceived #o$ losses due to outsourcing to India! +o tac&lethe pro$lem of attrition companies are adopting measures such as good reards, $ondingprogramme, fle;i$le or&ing hours and stronger career path! As regards $ac&lash againstoutsourcing, the $ac&lash is mainly political! +here is compelling economic logic forcompanies to outsource to India and also Indian (O companies have ta&en initiativesallay fears of #o$ loss!

G*'78 v

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functional capacities, physical coordination, learning a$ility, or a$ility to adapt tochanging, physical coordination, learning a$ility, or a$ility to adapt to changingcircumstances!

esides rise in real national income, economic development ta&es into consideration the

folloingJ

+he living conditions and the general price level! It helps to assess the real purchasingpoer of the households!

+he ?uality of life hich includes education, life e;pectancy, calorie inta&e, consumptionof energy and consumption of consumer dura$les etc!

+he changes in the institutional set%up, technology etc!

Determinants of Economic 8rothJ Economic groth of a country is determined $y a

num$er of factors, among them the more important are as felloJ

)i* Natural esources )ii* Capital 0ormation )iii* Capital%Output atio

)iv* +echnological (rogress )v* Infrastructure )vi* uman esources DevelopmentJDevelopment is the process of improving the ?uality of all human lives! +hree e?uallyimportant aspects of the development are

)3* raising their incomes and consumption levels of food, medical services, education,etc! through QrelevantK economic groth

)9* creating conditions suita$le to the groth of peopleKs self%esteem through theesta$lishment of systems and institutions to promote human dignity and respect. and

)>* increasing people freedom to choose $y enlarging the choices varia$le e!g! increasingvarieties of consumer goods and services!

Demographic +ransitionJ A population cycle that is associated ith the economicdevelopment of a country! In underdeveloped countries )i!e! su$sistence agrarianeconomies*, $irth rates and death rates are $oth high, so there is very little change in theoverall population! @ith economic development )i!e! Industriali-ation*, Income (er ead$egins to rise and there is a fall in the death rate )through $etter nutrition, sanitation,

medical care, etc!*, hich $rings a$out a period of rapid population groth! +ermed asthe (opulation oom or om$, this stage is prevailing in most of the developingcountries, including India! Most of the population increase has $een $rought a$out $y asteep fall in death rate, hile the $irth rate still continues at a relatively higher level! Inthe later stages, provided economic groth is consistently greater than the increase inpopulation, income per head continues to e;pand and eventually serves to reduce the$irth rate )small families $ecome the QnormK in society as people see& to preserve their

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groing affluence*! At this point, population groth slos don and may eventuallylevel off!

Most advanced industrial countries have gone through a demographic transition of the&ind descri$ed a$ove and are today characteri-ed $y $oth lo $irth and death rates and

slo groing populations!

Developed CountryJ An economically advanced country hose economy is characteri-ed$y large industrial and service sectors, high levels of gross national product and Income(er ead!

What is poverty line#

(overty line is a construct essential to measure ho poor a country is, hich is useful inma&ing policies for development! ehind statements li&e F=5 2 Indians are poorF there is

an implicit poverty line! A common ay to define the poverty line is a $road income%$ased level, say, :5 per cent of a countryKs average income per head!

+he average Indian earns a$out < ==5, or e 34655 per year! 8oing $y the :5 2 ofincome rule, a poor Indian has an annual income of s 33655 or s 445 a month! @edra a poverty line $y calculating the RminimumK cost of living that can sustain people!0or very poor countries li&e ours, this $oils don to a nutritional re?uirementJ the cost ofminimum calories needed to &eep people alive! +his loo&s li&e a fairly foolproof method,$ut has some $uilt in glitches! 0or e;ample, calorie needs vary across genders and age! Arough average is >,555 calories daily for or&ing men. a$out 9,455 for or&ing omen!

+he national norms of a min! of 9=55 Calday and 9355 Calday for rural and ur$anareas respectively, are not ar$itrary figures, $ut have $een derived from age%se;%occupation specific nutritional norms $y using the demographic data from the 3413Census!

Is a roll call enough to count the poor#

+he simplest measure of poverty is the head count ratioJ people $elo the poverty line,divided $y the total population! +his is simply the proportion of the poor in total

population! +he C is easy to understand, $ut ma&ing policy on its $asis leads totrou$le! +hatKs $ecause the C ma&es no distinction $eteen people #ust $elo thepoverty line, and those poorer $y a longer margin!

Conse?uently, the government can sho large poverty declines $y spending #ust enoughon the least%poor to drag them a$ove the poverty line, spending nothing on the poorerfol&! Despite that, the C is IndiaKs official method to estimate poverty!

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$an we go beyond the roll call#

Certainly! Another inde;, the Income 8ap atio )I8*, gives a $etter idea of ho deeppoverty is entrenched! I8 measures ho far $elo the poverty line poor people actuallyare, divided $y the total e;penditure $y them! +hat shos ho poor the average poor

person is, ith respect to all poor people! A government that goes $y this measure toma&e policy ill target the Raverage poorK person, not the Rleast poorK one, as is thedanger ith the C!

+hatKs hy the I8 is a more useful measure than a simple roll call! No, if you too&something aay from someone ho is acutely poor and gave it to someone less poor, it iso$vious that the degree of poverty ill rise! ut neither C nor I8 can account forthis! Neither reflects changes in poverty $rought a$out $y transfers $eteen the poor andmiddle class Indians! A high proportion of India's citi-ens are in need of the $enefits ofdevelopment! +he National "ample "urvey Organi-ation )N""O* estimated that 99!372of the population as living $elo the poverty line in 955=H9557! 172 of the poor are in

rural areas )91!32 of the total rural population* ith most of them comprising dailyagers, self%employed households and landless la$ourers! >=!12 of India's poorestpopulation live on less than " < 3 a day and 14!42 live on " < 9 per day!

"ince the early 3475s, successive governments have implemented various schemes, underplanning, to alleviate poverty, that have met ith partial success! (rogrammes li&eood!or wor"and#ational Rural $mployment rogrammehave attempted to use theunemployed to generate productive assets and $uild rural infrastructure! In August 9557,the Indian parliament passed theRural $mployment &uarantee Bill, the largestprogramme of this type, in terms of cost and coverage, hich promises 355 days ofminimum age employment to every rural household in 955 of India's :55 districts! +he

?uestion of hether economic reforms have reduced poverty or not has fuelled de$atesithout generating any clear cut ansers and has also put political pressure on furthereconomic reforms, especially those involving donsi-ing of la$our and cutting donagricultural su$sidiary

/= million >obs a year; Possible?

+here is no option +o provide #o$s to a population of 35 million educated youths everyyear re?uires our 8D( to gro $y 6 per cent per annum! +here is no 'other' option

And the government seems to $e outlining its policies in order to achieve its o$#ective ofgroing the economy at a faster clip to $e a$le to provide gainful employment to a largenum$er of people! India has $een a 'different' story over the past years %% different in thesense that unli&e a general evolution of an economy from $eing agriculture%dependent, to$ecoming a manufacturing economy and then to $ecoming a services%led economy, Indiahas moved straight from $eing an agriculture%led economy to $eing services%led!

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+his is indicated in the ad#oining graph that shos the relative contri$utions ofagriculture, industries services to the 8D(! 0rom the levels of =: per cent and >6 per centof 8D(, share of agriculture and services have moved to 99 per cent and 7: per cent,respectively, in 955>%5=!

+he industrial sector's contri$ution has increased marginally from 3: per cent in 3415%13to 99 per cent in 955>%5=! And this, pro$a$ly, has $een the reason hy India's per capita8D( has $een lying lo as compared to its developing peers in Asia and /atin America!

As a matter of fact, hile India's 8D( has gron at a CA8 )Compounded Annual8roth ate* of =!1 per cent during the period 3415%13 to 955>%5=, the CA8 of percapita 8D( has $een almost half at 9!1 per cent!

Apart from an a$ove average groth in population )around 9 per cent CA8*, lac&lustre

performance of the manufacturing sector has $een the other ma#or culprit $ehind thisslo groth in per capita 8D(! +his is $ecause a large part of the 'not involved inagriculture' population is employed in the manufacturing sector here productivitygroth has $een lagging the services sector!

If one ere to ta&e a loo& at the ad#oining graph, one ould notice that the volatility inper capita 8D( trend reduced ay $ac& in the early 3465s!

+his is e;actly the time hen the Indian government laid ay for a 'pro%$usiness' policythat focused on raising the profita$ility of the esta$lished industrial and commercialesta$lishments! +his policy involved easing restrictions on capacity e;pansion for

esta$lished companies, partially removing price controls and reducing corporate ta;es)"ourceJ NE*!

oever, this policy did not encourage investments into 'innovative' techni?ues ofproduction! Not much importance as given to the opening up of the economy andalloing foreign technology and capital! And that as one of the $iggest reasons hyIndian industries did not develop into glo$al corporations! Moreover, the 'license ra#'made sure that there as not enough competition to government ("s that ere lo onthe productivity radar!

8he /@@=s change! it all

+he thrust in the form of opening up the economy and dissolving the 'license ra#' came inthe early 3445s hen India as on the verge of defaulting on its foreign lia$ilities!

+his as the time the then government initiated the 'pro%mar&et' policies of removingimpediments to mar&et access and li$erali-ing the economy!

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+he license ra# as dismantled, $arriers to trade ere slashed, foreign capital aselcomed and privatisation $egan! @hat's more, the services sector, $enefiting from thelo cost of operations and ?uality manpoer, $enefited from the easy flo of capital andla$our!

+he result %% rapidly rising proportion of services to 8D( and faster than averageimprovement in per capita 8D(! As a matter of fact, hile CA8 of per capita 8D( as5!7 per cent during the period 3415%13 to 3414%65, it rose to >!= per cent during 3414%65to 3443%49 and to =!5 per cent during 3443%49 to 955>%5=!

+o5 what next?

@hile India has managed to gro strongly in the services sector, the same )services*cannot $e relied on to provide #o$s to around 35 million people every year! @e need aclear policy on the agriculture and manufacturing fronts!

@hile Indian manufacturing companies li&e +isco, +elco, MSM, an$a;y and Dreddy's have made their mar& in the glo$al arena through their deployment of cutting%edge technologies, and competitive and high ?uality products, e need to have more ofsuch corporations if e are to come even close to China in terms of economicdevelopment!

On the agriculture front as ell, hile the government has announced certain &eymeasures li&e credit flo and improvement of irrigation facilities, a lot remains to $eseen in terms of the actual implementation! In a recent intervie, Mahesh yas of theCMIE saidJ F+he corporate sector is gearing itself up after 35 to 39 odious years ith a

reality of li$eralisation! +he reality of li$eralisation means more intense competition,hich mean loer margins, hich can only $e offset $y higher volumes!F +his statementclearly indicates that the Indian groth story seems to $e moving on the right trac&, al$eitstill aiting to attain significant momentum!

Investors in the same, i!e!, the Indian groth story, have to stay invested for the long%termto garner ade?uate returns! @hile mar&ets may have priced%in the near term groth ofIndia Inc, a staggered and selective approach to investing may still $e of great help foryou, the long%term investor!

+he mindset, actually, needs refinement

+here is no option +o provide #o$s to a population of 35 million educated youths everyyear re?uires our 8D( to gro $y 6 per cent per annum! +here is no 'other' option

And the government seems to $e outlining its policies in order to achieve its o$#ective ofgroing the economy at a faster clip to $e a$le to provide gainful employment to a large

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num$er of people! India has $een a 'different' story over the past years %% different in thesense that unli&e a general evolution of an economy from $eing agriculture%dependent, to$ecoming a manufacturing economy and then to $ecoming a services%led economy, Indiahas moved straight from $eing an agriculture%led economy to $eing services%led!

+his is indicated in the ad#oining graph that shos the relative contri$utions ofagriculture, industries services to the 8D(! 0rom the levels of =: per cent and >6 per centof 8D(, share of agriculture and services have moved to 99 per cent and 7: per cent,respectively, in 955>%5=!

+he industrial sector's contri$ution has increased marginally from 3: per cent in 3415%13to 99 per cent in 955>%5=! And this, pro$a$ly, has $een the reason hy India's per capita8D( has $een lying lo as compared to its developing peers in Asia and /atin America!

As a matter of fact, hile India's 8D( has gron at a CA8 )Compounded Annual8roth ate* of =!1 per cent during the period 3415%13 to 955>%5=, the CA8 of per

capita 8D( has $een almost half at 9!1 per cent!

Apart from an a$ove average groth in population )around 9 per cent CA8*, lac&lustreperformance of the manufacturing sector has $een the other ma#or culprit $ehind thisslo groth in per capita 8D(! +his is $ecause a large part of the 'not involved inagriculture' population is employed in the manufacturing sector here productivitygroth has $een lagging the services sector!

If one ere to ta&e a loo& at the ad#oining graph, one ould notice that the volatility in

per capita 8D( trend reduced ay $ac& in the early 3465s!

+his is e;actly the time hen the Indian government laid ay for a 'pro%$usiness' policythat focused on raising the profita$ility of the esta$lished industrial and commercialesta$lishments! +his policy involved easing restrictions on capacity e;pansion foresta$lished companies, partially removing price controls and reducing corporate ta;es)"ourceJ NE*!

oever, this policy did not encourage investments into 'innovative' techni?ues ofproduction! Not much importance as given to the opening up of the economy andalloing foreign technology and capital! And that as one of the $iggest reasons hy

Indian industries did not develop into glo$al corporations!

Moreover, the 'license ra#' made sure that there as not enough competition togovernment ("s that ere lo on the productivity radar!

8he /@@=s change! it all

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+he thrust in the form of opening up the economy and dissolving the 'license ra#' came inthe early 3445s hen India as on the verge of defaulting on its foreign lia$ilities! +hisas the time the then government initiated the 'pro%mar&et' policies of removingimpediments to mar&et access and li$erali-ing the economy!

+he license ra# as dismantled, $arriers to trade ere slashed, foreign capital aselcomed and privatisation $egan! @hat's more, the services sector, $enefiting from thelo cost of operations and ?uality manpoer, $enefited from the easy flo of capital andla$our!

+he result %% rapidly rising proportion of services to 8D( and faster than averageimprovement in per capita 8D(! As a matter of fact, hile CA8 of per capita 8D( as5!7 per cent during the period 3415%13 to 3414%65, it rose to >!= per cent during 3414%65to 3443%49 and to =!5 per cent during 3443%49 to 955>%5=!

+o5 what next?

@hile India has managed to gro strongly in the services sector, the same )services*cannot $e relied on to provide #o$s to around 35 million people every year! @e need aclear policy on the agriculture and manufacturing fronts!

@hile Indian manufacturing companies li&e +isco, +elco, MSM, an$a;y and Dreddy's have made their mar& in the glo$al arena through their deployment of cutting%edge technologies, and competitive and high ?uality products, e need to have more ofsuch corporations if e are to come even close to China in terms of economicdevelopment!

On the agriculture front as ell, hile the government has announced certain &eymeasures li&e credit flo and improvement of irrigation facilities, a lot remains to $eseen in terms of the actual implementation!

In a recent intervie, Mahesh yas of the CMIE saidJ F+he corporate sector is gearingitself up after 35 to 39 odious years ith a reality of li$eralisation! +he reality ofli$eralisation means more intense competition, hich mean loer margins, hich canonly $e offset $y higher volumes!F

+his statement clearly indicates that the Indian groth story seems to $e moving on theright trac&, al$eit still aiting to attain significant momentum!

Investors in the same, i!e!, the Indian groth story, have to stay invested for the long%termto garner ade?uate returns! @hile mar&ets may have priced%in the near term groth ofIndia Inc, a staggered and selective approach to investing may still $e of great help foryou, the long%term investor! +he mindset, actually, needs refinement

r$ani-ation levels as per 9553 census %962

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(ro#ected in 9595 %>92

Annual influ; into cities %6 crore people per year

+hestan!ar! of livingin "n!iais modest and is constantly improving! India suffers

from su$stantial poverty ith 91!72 of the population living $elo thepoverty linein955=H9557! +he single most common indicator used to ?uantify the standard of livingisthe per capitapurchasing poer parity)(((* ad#usted gross domestic product)8D(*! In955:, the per capita (((%ad#usted 8D( for Indiaas "< >,1>1! +hese figures can $ecompared to 55 million, is fast $ecoming used to @estern culture!If current trends continue,Indian per capitapurchasing poer parityill gro to $e appro;imately one third that of

the developed orld$y the middle of the 93st century! In 955:, 99 percent of Indianslived under the poverty line! India aims to eradicate poverty $y 9595!

+he standard of living in India shos large disparity! 0or e;ample, rural areas of Indiae;ist ith very $asic )or even non%e;istent* medical facilities, hile cities $oast of orldclass medical esta$lishments! "imilarly, +he very latest machinery may $e used in someconstruction pro#ects, $ut many construction or&ers or& ithout mechani-ation inmost pro#ects!

Disguise! Unemployment: A situation in hich more people are availa$le for or& thanis shon in the unemployment statistics! Married omen, some students or prematurely

retired persons may register for or& only if they $elieve opportunities are availa$le tothem! Also referred to as concealed unemployment and the Qdiscouragedwor"ere!!ect'!+his &ind of unemployment is ?uite common in rural areas and forms a significant part ofthe total unemployment statistics in India!

Disinvestment:Negative investment, hich occurs here part of the capital stoc& isdiluted $y selling it off to the general pu$lic private companies! India has em$ar&edupon a massive disinvestment e;ercise in its ("s and of late, there appears to $e a ringof sincerity to the governmentKs efforts to get rid of unprofita$le ("s and focus more oneconomic facilitation functions! "everal prominent ("s including "N/, I+DC, I(C/,ON8C, IOC, (C/, M/, Modern reads have already $een disinvested and more such

e;ercises are in the offing!

$rictional Unemployment: 0rictional unemployment arises $ecause of time lags in thefunctioning of la$our mar&ets hich are inevita$le in a free%mar&et economy. there aresearch delays involved, for e;ample in moving from one #o$ to another! 0rictionalunemployment is conceptually distinct from structural unemployment, hich results inheavy local concentration of unemployment, and of course, from unemployment arisingfrom a deficiency of demand

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