Yojana April 2014

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innovation visionEconomic growth with technological self-reliancein India: What can we infer from the evidence? Sunil ManiA number of studies have T he recent resurgence business circles that the country is identified technological in India’s economic becoming more innovative - and at development as one of growth has come in for least certain industries much discussion and the drivers of India’s debate. India is considered l The knowledge-intensity of India’s strong economic to be the second fastest overall output has expanded. growing country in the world although Currently, about 14 per cent growth. The country’s in more recent times, the rate of growth of overall NDP is composed of science and technology has declined. A number of studies have knowledge-intensive production), system has undergone identified technological development much of it from the services sector.perceptible changes over as one of the drivers of India’s strong Also of note is that growth in the economic growth. The country’s knowledge-intensive production the past twenty years science and technology system has sector surpasses that of the economy or so. In recent years, undergone perceptible changes over overall. Data show that the largest there has been much the past twenty years or so. In recent share of new companies belongsdiscussion in the popular years, there has been much discussion to knowledge-intensive sectors press about the rise in in the popular press about the rise in account and that the number of these innovation in India innovation in India. The following knowledge-intensive enterprises indicators may have precipitated this has mushroomed over the past discussion. seven years or so. This trend is corroborated by the technology l There are many instances of content of all industrial proposals innovation in the services sector, implemented since economic especially as concerns healthcare. reforms were implemented in 1991. Currently, the service sector Once again, with the exception of the accounts for two-thirds of GDP and textile industry and a few others, the both the service and manufacturing majority of new proposals emanate sectors have been performing very from technology-oriented industries well. For a very long time, Indian in areas such as chemicals, energy, policy-makers avoided using the electrical equipment and so on. explicit term of ‘innovation’ in policy documents dealing with l Foreign direct investment (FDI) technological activities. The word from India has grown. This ‘innovation’ appears in a policy has grown from just 2 million document for the first time in US $ in 1993 to about US $ 17 2008, the National Innovation in 2010-11. This includes some Act. This development reflects a high-profile technology-based broad sentiment in both policy and acquisitions abroad by Indian companies. Information on theThe author is Planning Commission Chair Professor at Centre for Development Studies, Trivandrum, Kerala. His most recent publicationsinclude Mani, Sunil and Richard R.Nelson (eds.), TRIPS Compliance, National Patent Regimes and Innovation, Evidence and Experiencefrom Developing Countries.50 YOJANA April 2014

rate of survival of these ventures per annum, compared to 15 per happening in India day in and day is unavailable, however. There had cent for world exports of these out, is making businesses better and always been insignificant amounts products. India is acknowledged better. These are not visible but have of FDI flowing from India until to have considerable technological created immense business value for the trickle became a torrent from capability in the design and global economy. about 2005 onwards. Most of manufacture of spacecrafts and is these investments have flown to now an acknowledged global leader Measuring technological technology-based ventures in the in remote sensing. According to development manufacturing sector of developed Futron’s 2011 ranking of ten entities economies. The attributes of Indian on its Space Competitiveness Index Technological development of firms, which created such capacities India ranks better than the Republic a developing country is contributed and abilities, are embedded in the of Korea, Israel or Brazil. However, by domestic technological efforts past and have emerged over a much most innovation in this area comes complemented by reliance on foreign longer period of time’. According entirely from the government sector technology imports. Domestic to the Economist (2009), the pursuit in India rather than industry. I would technological development is of technology is a powerful motive argue that the Indian government measured usually in terms of the for foreign acquisitions. Before has thwarted all attempts to create amount of financial resources that Tata Steel’s purchase of Corus, a sectoral system of innovation in is expended by firms and research Europe’s second-largest steel the aerospace industry by invoking institutes to create the technology. This producer with annual revenues a security angle. This prevents the is best captured through an analysis of country from emerging as a serious R&D expenditures. However R&D India is acknowledged to have player in the civilian aerospace investment need not always result considerable technological sector, despite possessing all the in the production of new products capability in the design and requisite ingredients. However, or processes. So to overcome this this situation is set to change now. problem of measuring only the input manufacture of spacecrafts and is Aerospace exports from India have for innovation and not outputs, trendsnow an acknowledged global leader increased manifold in recent times, in patenting are studied. Patent counts even if exports tend to be confined are a good proxy for measuring output in remote sensing. to parts or components of aircrafts. of innovations. Reliance on foreign With approximately 300 small and technology is usually measured of around £12  billion the Indian medium-sized enterprises active in in terms of the number of foreign steelmaker did not hold a single this area, India is slowly emerging as technical collaboration agreements American patent. The takeover one of the few developing countries signed between MNCs and their own bought it over 80 patents, as well as to have a high-tech industry of the almost 1 000 research staff. Thus, caliber of its aerospace industry. Domestic technological the growing number of foreign development is measured usually acquisitions of ‘active targets’, in l India has become a hub of sorts in terms of the amount of financial technological jargon, has given for generating frugal innovations: Indian companies considerable A number of what is now referred to resources that is expended by access to the technological capacity as frugal innovations have emanated firms and research institutes to of the acquired firms without their from India. Frugal innovations are having to build this up assiduously essentially stripped down versions create the technology. from scratch. The same goes for of an existing product (e.g. The mergers. Nano car, Swach water filter, affiliates and unaffiliated companies. Chotokool refrigerator) or services We first discuss the recent trends inl I n d i a h a s b e c o m e m o r e (eg. Arvind Eye Clinic, Narayana domestic technological development competitive in high-tech areas. Hrudalaya for cheap heart surgeries, and then the recent record on reliance Although manufactured exports Life Springs Hospital for cheaper on foreign technologies. are still dominated by low-tech maternal care) products, the share of high-tech Domestic technological products has doubled in the past 20 l There are also very many instances development in India years. India has become the world’s of invisible innovations which are largest exporter of IT services since between businesses (B2B). For (i) Trends in R&D 2005 and has been maintaining example, global delivery model, this leadership position since then: something that most people have Both the nominal and real growth exports of IT services stood at $ 62 taken for granted today, is one of rates of GERD have declined in India billion in 2011-12. And her exports the greatest innovations to have since liberalization of the economy of aerospace products have been helped global businesses becoming began in 1991. The country’s overall increasing at a rate of 74 per cent efficient. Process innovation, research intensity has remained virtually constant at about 0.80 perYOJANA April 2014 51

cent. In China, on the other hand, One interesting result thrown mere statistical artifice would thus notthe GERD/GDP ratio has more than up by the above analysis is that the appear to be true.doubled to 1.42 per cent. higher education sector constitutes only a fraction of R&D performed in Four industries account for the Care has to be exercised in the country, despite the fact that this lion’s share of investment in R&D withinterpreting these figures to mean sector encompasses the prestigious the pharmaceutical and automotivethat overall investment in R&D has Indian Institute of Science inaugurated industries being the biggest spendersdeclined, owing to the peculiarities in 1909, the existing eight Indian on R&D. In fact, it is sometimesof Indian research. Even now, the Institutes of Technology and a host of said that India’s national system ofgovernment accounts for over two- over 300 universities. In other words, innovation is led by the pharmaceuticalthirds of R&D performed in the country, the higher education sector in India is industry.although this share has declined over not a source of technology for industrytime. This has been accompanied by an (what about the contract research It can therefore be safely concludedincrease in R&D investment by business conducted by the IITs with industry?). that, although GERD may not haveenterprises, which now account for However, it is an important source of risen, the pharmaceutical industryabout 30 per cent, compared to just 14 human resources for the other actors in has been at the helm of a tremendousper cent in 1991. In China, business India’s national system of innovation. increase in R&D expenditure by theenterprises have come to perform as private industrial sector. Based onmuch as 71 per cent, with government Thus, the only sector performing this one indicator, the more correctresearch institutes accounting for more R&D than before is industry statement to be made is that there is notonly 19 per cent. The growing share and private companies in particular. enough evidence to show that the entireof R&D performed by the private Currently, private companies spend industrial sector in India is becomingsector is generally considered to be a approximately four times more than more innovative since 1991, but theredesirable trend, as enterprises tend to public enterprises on R&D and nearly is some evidence to show that India’stransform the results of their research three times more when compared to pharmaceutical industry certainly isinto products and processes more Government Research Institutes (GRIs).rapidly than the government sector. In other words, private enterprises in Four industries account for the India are moving towards the core of lion’s share of investment in R&D Both the nominal and real growth India’s innovation system. rates of GERD have declined in with the pharmaceutical and India since liberalization of the The veracity of this trend is automotive industries being the economy began in 1991. The sometimes questioned on the grounds biggest spenders on R&D. In fact, that business enterprises reporting it is sometimes said that India’scountry’s overall research intensity R&D expenditure to the Department national system of innovation is ledhas remained virtually constant at of Science and Technology may be by the pharmaceutical industry. tempted to exaggerate their R&D about 0.80 per cent. expenditure to gain tax incentives becoming more innovative. I propose available in India to any business to confront this proposition a bit more, According to the break up of enterprise investing in R&D. These tax but this time employing an input basedGERD , according to type of work in incentives are linked to the volume of indicator such as the number of patentsterms of basic, applied, experimental R&D performed. Hence the temptation applied for and granted.development etc., the amount devoted to overstate it. However, this suspicionto basic research has increased from would appear to be unfounded. In order (ii) Trends in patentingabout 18 per cent of the total GERD to to verify this proposition, I comparedabout 26 per cent in 2006. Government R&D investment as reported by the As noted before, number ofexpenditure on R&D in India tends Department of Science and Technology patents granted to inventors fromto focus on nuclear energy, defense, with the dataset available from the a country is taken as a quantitativespace, health and agriculture. Centre for Monitoring the Indian measure of innovation or technological Economy’s Prowess for the period development. Indian inventors can take The spillover of government 1991-2003. This comparison shows patents either in India or abroad, sayresearch to civilian use is very much that, although the level reported by the at the United States Patent and Tradelimited in the Indian context, although Department of Science and Technology Mark Office (USPTO). There has beenin more recent times, the government is higher over most of the years under a significant increase in patenting byhas made conscious efforts: to orient consideration than in early 1990S, both in India and abroad especiallyresearch more towards socio-economic the difference has tended to decrease over the last ten years or so. Howevergoals. This is slowly beginning to over time. Moreover, both series a detailed analysis of the ownershipproduce results, especially in the area have gone in a similar direction. The of these patents showed that over twoof space research: with the development argument that the increase in R&D thirds of the patenting in India and atof environmental monitoring, satellite expenditure by private companies is acommunications and so on.52 YOJANA April 2014

the USPTO is by foreign companies such as India would have tightened up while the total number of collaborationoperating from India. Attracted by to an extant that reverse engineering agreements may have increased (andcheaper human resource in science and is virtually impossible. This state of so do royalty payments per unit ofengineering and by the availability of affairs would prompt MNCs to transfer GDP), an overwhelming majoritystricter Intellectual Property Regime technology to unaffiliated companies of these transactions are intra firmbrought about by TRIPS compliance located in developing countries much transfers, namely between MNCs andof India’s patent regime, MNCs are more freely than before. Now that their affiliates in India and not betweenincreasingly performing portions of with TRIPS compliance, the IPR MNCs and unaffiliated companies.their R&D in India and taking out regimes are tightened one should seepatents based on the output of these an increase in the number of technical ConclusionsR&D activities. According to some collaboration agreements signedestimates by the Reserve Bank of between MNCs and unaffiliated We have seen that economic growthIndia, foreign companies now perform Indian companies. The period of has taken off in India, especially insomething like 20 per cent of the total TRIPS compliance coincides with the past five years. This performance a period of economic liberalization has been very lopsided, however, One of the most important where in the government had already tending to favour certain regions statements that were made relaxed the conditions under which and income groups over others. In during the discussions on TRIPS technical collaboration agreements order to make economic growth more (Agreement on Trade Related are contracted between foreign and inclusive, the government has been Intellectual Property Rights) Indian forms. Specifically, unlike placing a lot of emphasis on S&T, as compliance was that with it before, these collaboration agreements witnessed by the massive increase in the IPR regimes in developing do not go through a formal approval the budget allocation to S&T during countries such as India would process. Further, the upper limit the Eleventh Five-year Plan (2007- have tightened up to an extant that was fixed on royalty payments 2012). It is also making an effort to that reverse engineering is and technical knowhow fees was orient innovation in the government considerably raised. All these would sector more towards socio-economic virtually impossible. have a contributed to a large number of goals. licensing agreements- the traditionalindustrial R&D done in India. From mode adopted by Indian companies At the aggregate level, we havethis it may be concluded that India is towards technology importation from first put together the fragmentarynot becoming innovative but becoming developed country firms. In order toan important location for innovative check this we have compiled data on data that are now available inactivity. two different ways of looking at the the total number of collaboration volume of licensing contracts signed agreements and the share of those(iii) Trends in publications between MNCs and Indian companies. collaboration agreements in the At the aggregate level, we have first According to Thomson Reuters Web put together the fragmentary data total that does not involve anyof Science, there has been tremendous that are now available in the total equity payments.increase in India’s publication record number of collaboration agreementssince 2000. In 1998, only 16, 500 and the share of those collaboration The country has certainly madepublications emanated from India. By agreements in the total that does not2007 it had become 3000. India has involve any equity payments. The great strides in space research,one of the highest growth rates in the share of pure technical collaborationnumber of publications. India has a very agreements has been steadily coming life sciences and especially indiverse publication record in a range of down over time.areas although, as expected Chemistry biopharmaceuticals and informationand Agricultural Sciences account for This shows that MNCs are willingthe largest focus of attention. to transfer technologies to companies technology. Although domestic science in India only if their own affiliates areReliance on Foreign Technologies allowed in India. In fact this data from continues to dominate, there is also a India can be counter checked with the One of the most important source of royalty receipts received by growing presence of foreign entities instatements that were made during the US MNCs from abroad: over two thirdsdiscussions on TRIPS (Agreement on of it emanate from their own affiliates India’s technology system. The mainTrade Related Intellectual Property abroad. The argument here is thatRights) compliance was that with it the challenge facing the country will be toIPR regimes in developing countries improve both the quality and quantity of S&T personnel. Fortunately, policy- makers are seized of this problem and have taken several energetic steps to remedy the situation. The future success of India’s STI system will depend on how well they q succeed.  (E-mail : [email protected])YOJANA April 2014 53

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Economy & employment linkagesJobless Growth Artika VatsThe rise of middle class was D ata on India’s growth this, highlights the definite changeexpected to fuel the growth story for the past decade that the Indian middle class has seenof the economy through the is widely available. over the last 20-30 years. The middlemultiplier effect. According Growth rate, increase in class however generally provides to to the Market Information income, rise in savings the industry the supervisors or the and investment, FDI managers. Can one say the same Survey of Households & FII flows, everything has been growth story for the labourers, skilled conducted by NCAER, largely in the positive direction & unskilled workers with as much the demand for consumer since the policy change of early confidence? The trade union strike durables was expected to 1990s (or 1980s as some economists has also disappeared from bollywood increase significantly due mention). On the other hand wide movies and more or less also from real to the ‘rise in the size of range of data and research work is life – but has it disappeared because the Great Indian Middle also available highlighting the costs the workers are satisfied and there is Class’1. It was envisaged of globalization in terms of increasing no need to strike or is it because we that an overall increase in inequalities, social disruption, large have directly or indirectly ensured that economic activity, with the scale displacement and jobless growth. strikes do not occur inspite of immense rise of middle class, will Both these thoughts have ample dissatisfaction.ultimately benefit the poorer supporting data, empirical evidence members of the society to substantiate the arguments and Trickle Down Effect through ‘trickle down impeccable logic and articulation to make the readers agree. Herein, I The rise of middle class was effect’ would not comment on the benefits or expected to fuel the growth of the costs of reforms but focus on only one economy through the multiplier effect. aspect of it namely job creation. According to the Market Information Survey of Households conducted by The proponents of reforms have NCAER, the demand for consumer been gala about the new jobs made durables was expected to increase available due to reforms. They state significantly due to the ‘rise in the size increase in private investment is of the Great Indian Middle Class’1. It directly correlated with job creation. was envisaged that an overall increase The middle class clearly seems to be in economic activity, with the rise of satisfied with the argument. Bollywood middle class, will ultimately benefit the movies, no longer focus on a poor, poorer members of the society through hardworking guy who is unable to ‘trickle down effect’. This has been find a job due to corruption and the key logic for giving tax breaks and nepotism. These movies now reflect other benefits to businesses and higher the aspirations of the middle class – income groups. India, like most other success and richness. Assuming that globalised nations, has been offering movies are a reflection of the society, various incentives for investment. TheThe author is Assistant Professor, Maitreyi College, University of Delhi.YOJANA April 2014 55

basic premise, as stated above, is that The proportion of households with The issue at hand is therefore notinvestment drives growth which in a monthly expenditure level of Rs. restricted to India. It is a widespreadturn leads to higher income, more jobs, 5000 and above has risen sharply for phenomenon. The government needshigher earnings for government (in upper-level professionals – consisting to take these factors into account whileform of taxes), higher savings (which of doctors, engineers and lawyers, debating and finalising the policies forare further invested) and an overall among others. Fewer than one-third of the country.cycle of development. However, the such households fell into expenditurepicture actually turns out to be this rosy category of Rs. 5,000 and above Futureor not will depend on several factors in 1983, whereas nearly half of theThe incentives for private investment professional households had attained What is even more worrisome ishave increased the investment flow the expenditure level Rs. 5000 and the fact that the economic growth allin capital intensive technologies and above by 2000. In contrast, manual across the world is likely to slow downnot labour intensive technologies. The workers and artisans show hardly any substantially. The gains of the middletax incentives, subsidies, depreciation gains, and farmers and self-employed class and whatever little trickle downallowance all are solely linked to entrepreneurs show only limited impact for the lower class happenedthe amount invested and not to the gains’5. And we need to realise that might actually dwindle in the comingnumber of jobs created. However, from farmers, self employed small time years. India is now expected to growvarious examples it seems the amount entrepreneurs, manual workers, artisans at around 5 per cent as against 8-9 perof investment might not have a very constitute a very high percentage of cent a couple of years ago. The middlehigh correlation with job growth, or our population. Also, being amongst class which was expected to be the keyatleast will not suffice. In economic the economically weaker sections segment driving the economy mightterms – it can said to be a necessary of society their welfare should be not grow at a pace to be able to sustainbut not sufficient condition for ‘full amongst the key factors determining the consumerist economy.employment’. government policy. India is now expected to grow at The tax incentives, subsidies, The phenomenon of jobless around 5 per cent as against 8-9 depreciation allowance all are growth is not restricted to India. per cent a couple of years ago. The solely linked to the amount Mussie Delelegn, officer-in-charge middle class which was expectedinvested and not to the number of at UNCTAD’s New York Office to be the key segment drivingjobs created. However, from various mentioned “These countries (referring the economy might not grow at examples it seems the amount of to Least Developed Countries or LDCs) a pace to be able to sustain the investment might not have a very have gone through radical policyhigh correlation with job growth, or reforms. In the 1980s many of them consumerist economy. implemented structural adjustment atleast will not suffice. programmes. The assumption that Some might question, that largely growth would automatically translate the article says that growth has not This brings me to the very important into employment and poverty reduction helped in job creation. Then whyaspect of the growth being jobless or has not been seen.”6 should slowing down of economy‘jobless growth’. The period between be a concern. As the government2004-05 and 2009-10 saw an increase Even in the most liberal and most representatives mentioned during theof only 0.3 per cent in total workforce developed of all countries, including 2008 crisis – if jobs are being lost nowin spite of the high growth rate.4 Some the United States, similar concerns are it proves that jobs were created withliberal economists believe that we being highlighted. Herman Daly in his economic growth. Their point was toneed to wait for a ‘long term’ to see article Full Employment Versus Jobless negate the belief that the growth wasthe full positive impact of high growth Growth in The Daily News mentions jobless.rate. However, Keynesians believe ‘The Full Employment Act of 1946‘this long run is a misleading guide to declared full employment to be a major What is important to note here iscurrent affairs. In the long run we are goal of U.S. policy. Economic growth that jobless growth does not mean thatall dead!’ was then seen as the means to attain no new jobs are being created. Growth the end of full employment. Today that in jobs would refer to the net addition of Sonalde Desai, in her article relation has been inverted. Economic jobs in the market .i.e. numbers of new‘Middle Class in India’, on analysing growth has become the end, and if the jobs created less number of previouslythe NSS data has mentioned that, means to attain that end — automation, available jobs no longer available (due‘while all segments of society have off-shoring, excessive immigration — to structural changes, use of ‘better’gained over the past twenty years, the result in unemployment, well that is and more capital intensive techniques,growth is greatest among professionals the price “we” just have to pay for the closing down of ‘uncompetitive’and government officials / managers. glorified goal of growth in GDP.’7 factories due to increased competition,56 YOJANA April 2014

duty free imports, removal of subsidies not supported by the government in and otherwise, can go a long way inetc). Generally, data on the latter .i.e. the same way as attempts towards making people self employed and selfjobs lost is not maintained at all while increasing private investment and GDP reliant. Some initiatives have beendata on former .i.e. new jobs created growth. Muhammad Yunus, winner of taken by the central as well as variousis widely available. However, as 2006 Nobel Peace Price, highlights in state governments. However, a lot morementioned earlier, the period of best his book – Banker to the Poor, various needs to be done.GDP growth rate (period between examples of how a tiny sums of money2004-05 and 2009-10) saw an increase lent to the poorest of the poor helped Referencesof only 0.3 per cent in total workforce them set us small village enterprisesin spite of the high growth rate. The and pull themselves out of poverty.10 1. The Great Indian Market, Results fromself employed though had actually NCAER’s Market Information Surveydecreased. Given the total workforce of around of Households: http://www.ncaer.org/ 50 crores, and over 90 per cent of that downloads/PPT/thegreatindianmarket.How can this be addressed? in the unorganised sector, either of pdf these approaches alone might not be The UNCTAD report on LDCs, able to achieve the objective of full 2. h t t p : / / a r t i c l e s . e c o n o m i c t i m e s .2013, that highlights the challenges indiatimes.com/2013-10-24/faced by LDCs with regard to The government policies, tax news/43365770_1_greenfield-plant-employment generation mentions “In incentives etc basis the number of 600-bottles-investment-plansorder to reach the goal of creating jobs created and not basis absolutesufficient quality jobs, LDCs need 3. Amit Bhaduri, The Face you were afraidto base employment generation on investment can be one way of to see, Page 139development of productive capacities ensuring better correlation betweenthrough the investment-growth- 4. The Times of India, 22nd April 2013,employment nexus. The critical investment and job creation. http://articles.timesofindia.indiatimes.entry point for creating such nexus com/2013-04-22/india/38735264_1_is investment.8” The report therefore employment. The approach should be employment-labour-nssohighlights the importance of investment to make the country’s environmentundertaken with a consideration business friendly in a way that it is 5. Middle Class in India, Sonalde Desai,for employment generation. The easy to do business even for the small http://www.sonaldedesai.org/indian_government policies, tax incentives etc entrepreneurs and self employed. middle_class.pdfbasis the number of jobs created and Economic benefits can be linked morenot basis absolute investment can be to employment generation than to 6. Inter Press Service NewsAgency - http://one way of ensuring better correlation the absolute amount of investment. www.ipsnews.net/2013/11/jobless-between investment and job creation. Tax incentives can depend more on growth-21st-century-condition/ the number of permanent workers On the other extreme, Aseem employed than on the amount invested 7. The Daily News, Full EmploymentShrivastava and Ashish Kothari have in machinery (by way of depreciation versus jobless growth, Herman Daly:come up in their book- Churning the allowance etc). These and similar http://steadystate.org/full-employment-Earth9, with examples of how small measures can help ensure that the versus-jobless-growth/time groups, with little support from investment is more oriented towardsgovernment, have made themselves job creation. However, given that 8. U N C TA D - L e a s t D e v e l o p e dself-reliant. Examples of how the vast majority of our population Countries Report 2013 - http://unctad.opportunities of job and livelihood can still lives in villages, it is absolutely org/en/pages/PublicationWebflyer.be created through small decentralised necessary that the government support aspx?publicationid=700economic and social activities. The to village and tribal communities is alsoworry is that these activities are improved. As mentioned earlier in the 9. Churning The Earth, The making of article, there are numerous examples of Global India, 2012, Aseem Shrivastava how even slight support, both financial and Ashish Kothari, Penguin Viking 10. Banker to the Poor, Muhammad Yunus with Alan Jolis, Penguin Books India, 2007  q (E-mail :[email protected]) Macro-Economic Framework Statement 2014-15ProspectsThe World Economic Outlook (WEO) update released by the International Monetary Fund in January 2014 has revised the growthprojection for the world economy slightly upwards to 3.0 per cent and 3.7 per cent for 2013 and 2014 respectively. From 2014onwards, global growth prospects are projected to improve over the medium term at a gradual pace. In India, several reformmeasures have been undertaken including clearance of several large projects by the Cabinet Committee on Investment. Thesesteps could help in revival of investment and growth in the economy. In addition, resurgence of exports, prospects of revival inthe global economy and moderation in inflation observed recently, point to a better outlook for the Indian economy in 2014-15vis-à-vis 2013-14. Source : Statements laid before Parliament under the Fiscal Responsibility and Budget Management Act, 2003YOJANA April 2014 57

DATA ANALYSIS brief reviewInterim Budget 2014-15: What It Reveals Sona Mitra even in this period of A s the nation gears up Rs. 5.21 lakh crore (in BE); however, lean expenditure on for the general elections, the actual magnitude for the year has development projects, 2014, the final budget of fallen sharply to Rs. 4.14 lakh crore. it has been heartening the outgoing government Likewise, the total Plan Expenditure in to see that the Union was presented last month 2013-14 had been projected last year as to the 15th Lok Sabha. Rs. 5.55 lakh crore (in BE), but it has Government has With the reduction of the Fiscal Deficit now been slashed to Rs. 4.75 lakh crore gone ahead with the in 2013-14 from the earlier estimated (in RE). Similar cuts are observed for restructuring of the level of 4.8 per cent of GDP (in Budget the Non-Plan expenditure. The table 2 CSS, following the Estimates) to 4.6 per cent of GDP (in shows the declining trends in Plan and recommendations by Revised Estimates), the government Non-plan expenditure since 2004-05. the B. K. Chaturvedi continues to follow its policies of It was only during the years 2008-10 fiscal restraint. However, the ‘fiscal that expenditures were higher in order Committee. The consolidation’ has been achieved to shield the Indian economy from the government has solely on the basis of compression of global financial crisis. transferred a large part crucial development expenditure as the of the money meant for government’s poor record in stepping Such expenditure cuts, as compared the CSS to the states as up the tax-GDP ratio has persisted in to the levels projected in Budget Central Assistance to 2013-14. Estimates, have been severe in caseState Plan. This has come of a number of crucial sectors, likeas a welcome step towards The total tax revenue collected by Rural Development and Health. The strengthening the states’ Centre and States (combined) had fallen actual expenditure by the Department financial autonomy from 17.4 per cent of GDP in 2007-08 of Rural Development in 2012-13 has to 14.7 per cent of GDP in 2010-11; it been Rs. 50,187 crore, way below the has registered a rise to 17.2 per cent BE figure for that year at Rs. 73,222 of GDP in 2012-13 (BE) but it still is crore; for 2013-14, the Budget Estimate way below the average tax-GDP ratio for the Department had been pegged for BRICS countries at 22 per cent. at Rs. 74,478 crore but it has been The Gross Tax Revenue of the Centre slashed to Rs. 59,356 crore in Revised registers a decline from 10.9 per cent Estimate for this year. In health, the of GDP in 2013-14 (BE) to 10.2 per difference between the allocations and cent of GDP in 2013-14 (RE). expenditures in 2013-14 has been Rs. 6,483 crore which marks a substantial On the expenditure side, therefore, decline in centre’s share of health the government has keenly pursued a expenditure by 17.4 per cent since last policy of compression of development year’s projected figures. It is a major expenditure from the Union Budget. cut in expenditure in this crucial sector In 2012-13, the total Plan Expenditure given that the National Rural Health from Union Budget was projected to be Mission was transformed to includeThe author works with the Centre for Budget and Governance, New Delhi58 YOJANA April 2014

Table 1: Central Tax Revenue Sponsored Schemes (CSS) that had The government has transferred a and Fiscal Deficit (as % of gained a lot of importance in the past large part of the money meant for the GDP) few years reflecting the dire need for CSS to the states as Central Assistance funds in those areas of development. to State Plan. This has come as a Year Gross Central Fiscal In MGNREGA, the funds have been welcome step towards strengthening Tax Revenue Deficit stagnating at Rs. 29,213 crore in 2011- the states’ financial autonomy. Last2004-05 12 (Actuals), Rs. 30,273 crore in 2012- year’s budget promised a step towards2005-06 9.4 3.9 13 (Actuals), and Rs. 33,000 crore restructuring the CSS and providing the2006-07 9.9 4.0 in 2013-14 (Revised Estimates). The states with more flexibility in terms of2007-08 11.0 actual expenditure by the Department implementing Plan schemes.Alaudable2008-09 11.9 3.3 of Health and Family Welfare in 2012- step towards that has been an increase in2009-10 10.8 13 was Rs. 25,133 crore as compared the quantum of the Central Assistance2010-11 9.6 2.5 to the BE figure for that year at Rs. to State Plans from Rs. 1,36,254 crore2011-12 10.2 30,702 crore; for 2013-14, the Budget in 2013-14 BE to Rs. 3,38,562 in2012-13 9.9 6.0 Estimate for the Department was Rs. 2014-15 BE via the Additional Central2013-14 BE 10.2 6.5 33,278 crore but it has been slashed to Assistance component. This marked2013-14 RE 10.9 4.8 Rs. 27,531 crore in Revised Estimate increase is reflected in the budgets 10.2 for the year. Other major schemes of most Ministries and Departments 5.7 like SSA, MDM, IAY, NHM show a implementing the ‘big-bang schemes’ 4.9 decline in the revised estimates from such as the Ministries of Minority 4.8 what had been projected by the last Affairs, Tribal Affairs, Women and 4.6 budget (Table 3). child Development, Social justice and empowerment, Drinking Waterurban areas under the National Health However, even in this period of and Sanitation, Human ResourceMission. While budgetary allocations lean expenditure on development Development, Rural Development,to NHM last year were inadequate, a projects, it has been heartening to see Health and Family welfare andslash in expenditure (from Rs. 21,104 that the Union Government has gone Panchayati Raj institutions, under acrore in 2013-14 BE to Rs. 18,206 crore ahead with the restructuring of the separate head of State and UT plans.in 2013-14 RE) seems to question the CSS, following the recommendations This would lead to an enhancement ofintention of the outgoing government by the B. K. Chaturvedi Committee. internal accountability in the process oftowards universalisation of healthcare fund utilization (as these would comefacilities. under the direct purview of the CAG audit every year). The disturbing part of theexpenditure compression has been the Nonetheless, it does not yet addressnegligence of certain specific Centrally the long standing concern of the States for stepping up the share of the trulyTable 2: Plan, Non-Plan and Total expenditure (as % of GDP) untied component of funds within the Central Assistance for State Plans. Year Non-Plan Plan Expenditure Total Expenditure The magnitude of Normal Central Expenditure Assistance for State Plans (determined by the Revised Gadgil-Mukherjee2004-05 11.3 4.1 15.4 formula) still continues to be a small part of the Centre’s Gross Budgetary2005-06 9.9 3.8 13.7 Support to Plan.2006-07 9.6 4.0 13.6 Given these trends of following the roadmap for fiscal consolidation based2007-08 10.2 4.1 14.3 on expenditure compression, it is to be seen in the coming months whether2008-09 10.8 4.9 15.7 these strategies would continue to move in the same direction or follow2009-10 11.1 4.7 15.8 a reversal, both in terms of stepping up the tax-GDP ratio and granting greater2010-11 10.5 4.9 15.4 financial autonomy to the states.  q2011-12 9.9 4.6 14.5 (E-mail : [email protected])2012-13 9.9 4.1 13.92013-14 RE 9.8 4.2 14.0 Table 3: Allocations to major Centrally Sponsored Schemes (In Rs crores)Major CSS 2012-2013 2013-2014 BE 2013-14 RENational Health Mission (NHM) 20822 21104 18206Sarva Shiksha Abhiyan (SSA) 23645 27258 26608Mid Day Meal Scheme (MDM) 11500 13215 12189Integrated Child Development Scheme 15850 17700 16312(ICDS) 9024 15184 13184Indira Awas Yojana (IAY) 30273 33000 33000Mahatma Gandhi National RuralEmployment Guarantee Scheme(MGNREGA)YOJANA April 2014 59

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drug pricing health issuesThe New Drug Price Control Regime Anant Phadke S. Srinivasan A cost-based formula would T hrough a gaps like including only essential drugs reflect real increases/ Gazette  notification of in the NLEM-2011, that too restricted May 15, 2013 a new only to the dosages and presentationsdecreases in the raw material Drug Price Control Order mentioned in the NLEM-2011. In the costs and accordingly, the (DPCO) is in place. It process, it has excluded many life- price ceiling. Indeed, it ill has been welcomed in saving drugs, irrational Fixed Dose serves the manufacturer too some quarters on the grounds that it Combinations with NLEM-2011 drugs, when the raw material price will substantially reduce the prices of and medicines belonging to the same increases abnormally and the 348 medicines in the National List chemical class. This article examines the Government ’s NPPA is of Essential Medicines (NLEM). It these issues in some detail. has been claimed that some medicinesneither designed nor equipped will be cheaper by 80 per cent. But Tokenistic reduction in pricesat present to be quick enough a closer look reveals that the DPCO- to respond to the increase – 2013 has major problems and would To begin with, it is to be noted lead to regulation of only 17-18 per that the DPCO-2013 has come due there is no provision in the cent of the sales in the market and to pressure of a PIL by the All-India DPCO-2013 to do so. Again, the average reduction in prices with Drug Action Network (AIDAN) in in the absence of cost-based respect to the market leader would the Supreme Court on pharmaceuticalpricing, there is no guideline be around 6.2 per cent instead of an pricing. In its initial hearing in 2003, as to how and by how much expected reduction of at least 100 per the Supreme Court had directed the cent. Indeed, an analysis by the Public Government to consider and formulate an increase of the ceiling Health Foundation of India (PHFI) et appropriate criteria “for ensuring price will be effected in such al in a forthcoming publication reveals essential and lifesaving drugs not to that about 47 per cent of a sample of fall out of price control should be an eventuality 339 notified ceiling prices exhibit less put under price control” and further than 10 per cent decrease and 28 per directed the Government of India “to cent of the notified ceiling prices are review drugs which are essential and greater than or equal to the market life saving in nature” by May 2, 2003. leader. Government took 10 years to comply with this directive and came out with The tokenistic price-control of the tokenistic DPCO-2013. DPCO-2013 is because it has two major problems – firstly, to decide the ceiling The Supreme Court, during the prices of medicines to be brought hearing in October 2013, had said that under price control, it has abandoned the Government should continue with the Cost-Based Pricing (CBP) formula the cost-based pricing (CBP) that has and has instead, opted for market-based been used for  the 74  medicines that pricing (MBP). Secondly, it has major have been under price control since 1995. Cost-based pricing (CBP) withAnant Phadke is associated with people's science movement and people's Health Movement in the country. S. Srinivasan is Manager-Trustee of LOCOST, an NGO which produces and sells since the late 1980s, affordable quality generic medicines to non-profitorganizations in many states in India.YOJANA April 2014 61

appropriate margins for the trade, In case of atorvastatin 10 mg, estimate (by SPIC-Small and Mediumquality control, marketing, return which is used to reduce high blood Enterprises Pharmaceutical Industrieson investment, and R & D, is the cholesterol level, the price as per CBP Confederation) suggests that bigmost logical way of deciding ceiling under DPCO 1995 norms with 100 companies made excess profit, in theprices. MBP or market-based pricing per cent margin would be Rs 5.60 past 10 years, to the tune of Rs.1,01,750is not used by any Government for (see col. 4, row 13, Table 1) while crores by virtue of most drugs beingprice-control anywhere in the world. the Maximum Retail Price or MRP kept out of price control (only 74When retail prices are determined by (DPCO-2013 simple average price drugs were price controlled before theregulatory authorities for telephone/ plus 16 per cent retailer’s margin) DPCO-2013, of which only 30-35 arecell phone charges, electricity, auto-taxi would be around Rs 59.10 per 10mg. were regularly used).fare, etc., they are based on costs. Yet, This is because prices of brands reflectDPCO-2013 has adopted Market-based brand value rather than actual cost of It has been claimed that there hasPricing without giving any reason. production and as a result, pharma been a significant price reduction inAs per CBP in operation since 1995, companies earn unreasonable super medicines after DPCO-2013. Firstly,the ceiling price of medicine equals profits to the tune of 200-4000 percent. till the end of 2013, the Departmentmanufacturer's cost of production Such unreasonable profits are based of Pharmaceuticals could fix pricesplus a margin of 100 per cent. In the on questionable marketing practices for only 500 dosages of the 600 pluscurrently prevalent MBP regime of in the name of brand promotion. Table dosages (of 348 drugs) in DPCO-2013.DPCO-2013, ceiling prices of price- 1 shows that choosing Market-based Secondly, the DPCO-2013 is such thatcontrolled medicines would be the Pricing mechanism is not addressing it will reduce only the highest prices,simple average of prices of all brands the issue of what is a legitimate profit it will not affect prices of majority ofthat have more than one percent market margin: 100 per cent or 1000 per cent the brands that are below the ceilingshare. This MBP regime would merely or 4000 per cent? price. That is, it will not reduce thelegitimise the current exorbitantly high average prices. The common personprices of essential medicines.  For Leading pharmaceutical is not interested in reduction in onlyexample – companies have indulged in rapacious the maximum price, but in reduction profiteering for too long. One in prices of all excessively priced Table 1Comparison of MRP as per DPCO-2013 and as per Cost-Based Pricing (Prices in Rupees for a strip of 10 tablets)No Name of Drug and Use MRP (Ceiling Price Ceiling Price as per CBP Col 4/ Col 3 plus 16 per cent) as per (100 per cent margin as per 1.96 DPCO-2013 DPCO 1995 norms)* 6.93 3.281. Diethylcarbamazine Citrate, 50 mg, Anti-filarial 4.7 2.4 17.29 9.042. Diclofenac Sodium, 50mg, Painkiller 19.50 2.81 8.30 2.103. Metformin, 500mg Antidiabetic 15.6 4.75 6.76 2.904. Amlodipine 5 mg, Antihypertensive 30.6 1.77 12.33 1.715. Domperidone, 10mg, Antivomiting 22.60 2.5 9.05 10.556. Hydrochlorthiazide, 25 mg, Antihypertensive 16.6 2 4.00 7.607. Paracetamol, 500mg Painkiller 9.4 4.48 7.768. Glibenclamide, 5mg Antidiabetic 9.6 1.42 10.739. Amoxicillin Capsules, 500 mg Antibiotic 60.9 2110. Enalapril Maleate, 5 mg Antihypertensive 29.6 2.411. Azithromycin 500 mg Antibiotic 198.6 116.1212. Cetrizine, 10mg Antiallergic 18.10 213. Atorvastatin,10mg, Blood cholesterol lowering 59.1 5.614. Metoclopramide Tablets, 10 mg, Antivomiting agent 10.4 2.615. A l b e n d a z o l e 4 0 0 m g t a b l e t s H o o k w o r m 91.2 12 Infestation Treatment16. Diazepam tablets, 5 mg Sedative 13.2 1.717. Fluconazole - 50mg. Antifungal 78.3 7.3Data Source: For ceiling prices, NPPA website http://www.nppaindia.nic.in. Accessed in June-Sep 2013. DPCO 1995 prices of all drugs, estimated byS. Srinivasan. Please note that in the fourth column gives the price that would have been if the DPCO-1995 norms were to be used. Most of these drugswere not in the price control basket under DPCO 1995 regime.62 YOJANA April 2014

brands. Thirdly, as mentioned above, has a very high mortality, the WHO The three adjectives used by thewhen price reduction with respect to Essential Medicines list includes WHO publication in defining the CoreMarket Share Leader was examined Artesunate tablet, Inj. Artesunate, list - minimum, basic and priorityit was found that the average price Inj.Artemether and a combination are important and should be noted.reduction with respect to market leader of Artemether and Lumefantrine Secondly, it should be noted thatfor a sample of 339 dosages was a tablet. But the DPCO-2013 has only complementary list also consists ofmere 6.2 per cent. A more correct Artesunate tablets and omits the essential medicines and hence it isway of calculating price reduction is other falciparum malaria medicines quite unjustifiable and unreasonable tothe actual decrease/increase in sales altogether. exclude medicines from complementaryafter the price ceiling order. Available list from price-control.data shows that out of a total sale of a By interpreting the conceptsample of 370 formulations of DPCO- of ‘Essential Medicines’ in a Because of this minimalist2013 drugs of Rs 11233 crores, the total convenient and minimalist sense, interpretation of the concept of listdecrease in sales (at constant volume) medicines listed as ‘complementary’ of Essential medicines, in additiondue to DPCO-2013 was about Rs 1280 in the Model List of Essential to the exclusion of some life-savingcrores (about 11 per cent). This would Medicines of the World Health medicines, there are other importantbe more than made up in an year due to Organization have not been omissions: out of anti-asthmaticnatural increase in sales year on year. included in DPCO-2013. However, medicines, only salbutamol is includedAdditionally, prices of the drugs under all editions of WHO's publication of in the current NLEM. Other essentialprice control would be allowed an 'Model List' of Essential Medicines medicines like doxofylline, salmeterol,automatic increase on April 1 of every state the meaning of the core and montelukast (and other members ofyear as per the increase in Wholesale the respective class like theophylline,Price Index. complementary list and zafirlukast), belonging to other important types of anti-asthmatics, arelife-saving essential medicines The DPCO 2013 and NLEM 2011 missing from this list. Many of theseabsent do not have even ferrous sulphate plus are useful especially in life saving folic acid combination – a basic drug situations. The DPCO has violated even for the nutritional anemia prophylaxisthe letter of the above mentioned programme, under price regulation. India is now widely recognised asSupreme Court directive by excluding the country with the largest number offollowing life-saving medicines from By interpreting the concept of diabetics in the world. Diabetes is oneprice-control - ‘Essential Medicines’ in a convenient of the most important killer diseases and minimalist sense, medicines listed in India. However, only anti-diabetics While the WHO EML as ‘complementary’ in the Model List in the NLEM-2011list apart from(Essential Medicines List) of Essential Medicines of the World insulins are glibenclamide (belongingmentions  capreomycin, Health Organization have not been to the class - Sulfonylurea) andcycloserine, ethionamide, kanamycin included in DPCO-2013. However, metformin. Instead of glibenclamide,and para-aminosalicylic acid for all editions of WHO's publication of many physicians prefer glimeperide,treatment of Multi-Drug-Resistance 'Model List' of Essential Medicines another medicine from the same classTB (MDR-TB), the NLEM-2011 state the meaning of the core and of medicines, sulfonylureas, becausedoes not mention any of these. These complementary list as follows -  it has a lower risk of hypoglycemiamedicines for the MDR-TB, which (low blood sugar). But DPCO-2013carries a very high mortality, are highly The  core list  presents a list of excludes it. The prices of differentexpensive (with an estimated cost of minimum medicine needs for a brands of Glimeperide vary vastly,Rs. 8340 per month for medicines basic health care system, listing the with Amaryl 1mg being the costliestalone). According to 2011 figures, most efficacious, safe and cost effective and the most promoted brand sellingonly 6 per cent of MDR-TB cases medicines for priority conditions. at Rs 65 per 10 tablets (Oct 2012 saleswere detected and only 5 per cent were Priority conditions are selected on for preceding 12 months: Rs 32.57 cr),put on treatment under Government the basis of current and estimated future whereas if Cost-based Pricing norms ofprogramme called ‘DOTS-Plus’ public health relevance and potential DPCO 1995 were adopted, the price(Daily Observed Treatment Short) for safe and cost effective treatment. would be Rs 2 per 10 tablets, that iscourse. The WHO Model list of April almost 3000 per cent less!!2013 includes 5 rational Fixed Dose The  complementary list  presentsCombinations of anti-TB medicines. essential medicines for priority diseases, Medicines in Same Chemical ClassHowever, the NLEM-2011 and hence for which specialized diagnostic  or includedDPCO-2013 has not included any monitoring facilities, and/or specialistof these. For the treatment of severe medical care, and/or specialist training There are some medicines which‘falciparum malaria’ which also are needed. are not included in the Essential Medicine List but are chemicallyYOJANA April 2014 63

almost identical to the one included regulation. By mechanically focusing For example, Paracetamol 500in the NLEM and have only a slight only on essential drugs as listed in the mg tablets with atleast one per centtweak in the structure of the molecule. NLEM-2011, DPCO-2013 misses the market share has sales of Rs 128 crThey have hardly any advantage woods for the trees. in 13 brands – after price control 9in terms of efficacy or safety. For of these 13 brands accounting for Rsexample: lisinopril is a ‘me-too’ Among anti-hypertensives, while 105 cr sales has been affected. Thevariant of enalpril; simvastatin is enalapril, belonging to a class ‘ACE actual sales shrinkage will be Rs 7.59a ‘me-too’ variant of atorvastatin. inhibitors’ will have a price cap cr (that is Rs 105 cr would becomeThese costly ‘me-too’ variants have because it is part of the NLEM-2011, Rs 97.41 cr. at constant volume).generally been introduced in the prices of all other widely used other In contrast, sales of paracetamolmarket as ‘new medicines’ with a ACE inhibitors such as captopril, preparations of all strengths andnew patent when the patent period of fosinopril, imidapril, lisinopril, dosages plus combinations are Rsthe original molecule is getting over. perindopril, quinapril, ramipril and 2571 cr. Only Rs 105 cr sales of thisThe company then starts promoting trandolapril will be free from any figure of Rs 2571 cr, about 4 per cent,this ‘new’ medicine, which has high regulation because they are not in the stands affected as a result of DPCOmonopoly price and entices doctors NLEM-2011. Now there is a great 2013. Such examples abound into stop prescribing the ‘old’ original possibility that manufacturers, instead most other drugs in the NLEMmedicine. Since the NLEM-2011 of continuing with the production revealing the nature of tokenisticcontains only the original molecule of the much cheaper enalapril, price control effected under DPCOand none of these ‘new’ medicines would shift further to production of 2013. (Data from IMS, workingwhich belong to the same chemical Ramipril and Lisinopril. Already, sheets uploaded by NPPA, and fromclass, only the original molecule has ramipril’s sales are 3.5 times that of PHFI op.cit.)been included in the DPCO-2013. enalapril! As suggested in 2005 by the Pronab Sen Task Force, (set up to According to Government’s own The essential drugs in the list are recommend measures to make essential affidavit filed in the Supreme Court, selected on the criteria of cost, medicines affordable), to prevent such during November 2013, only 18 per safety and efficacy. This implies “migration”, all medicines of the same cent of the market of Rs 71,246 cr that other things being equal, therapeutic class should be under price is under price control. That is, a the more costlier drugs of similar control. whopping 82 per cent has slipped efficacy and safety are left out. out of the DPCO 2013 gaze. Out of This is the logic under which the The Government has no powers this covered under price control are therapeutic equivalents belonging to prevent the migration mentioned Rs 1900 cr (as combinations) and Rsto the same chemical class are left above to the production of ‘new’, ‘me 11,197 cr (single ingredient).out. But if the costlier equivalents too’ costly medicines. Concernedare left out of NLEM-2011, it makes provisions in the DPCO-2013 are According to Government’s own all the sense to put them under toothless and also will be against affidavit filed in the Supreme Court price regulation. By mechanically the right to trade (Art 14). Also, during November 2013, only 18 per focusing only on essential drugs a manufacturer already producing cent of the market of Rs 71,246 cr as listed in the NLEM-2011, DPCO- NLEM-2011 drug and its chemical 2013 misses the woods for the analogue, has to only make less of one is under price control. That is, a and more of the other to escape being whopping 82 per cent has slipped trees. named for migration. out of the DPCO 2013 gaze. Out of this covered under price control are The essential drugs in the list are Exclusion (FDCs) from Price- Rs 1900 cr (as combinations) and Rs controlselected on the criteria of cost, safety 11,197 cr (single ingredient). The list of 348 drugs in NLEM-and efficacy. This implies that other 2011 contains 333 single ingredient The same affidavit also mentions formulations plus about 15 rational the percent of market not covered bythings being equal, the more costlier Fixed Dose Combinations. Hundreds the DPCO 2013: antidiabetics (82 of other FDCs consisting of all per cent); antimalarials (86 per cent);drugs of similar efficacy and safety are kinds of combinations of two or anti-TB (81 per cent); blood related more  medicines  have escaped price (99 per cent); cardiac (71 per cent);left out. This is the logic under which control. It may be noted that in India hepatoprotectives (100 per cent); HIV in most cases, single ingredient sals related (71 per cent); Pain/analgesicsthe therapeutic equivalents belonging are much less than that of Fixed Dose (90 per cent); respiratory (94 per cent); Combinations. vitamins/minerals/nutrients (99 perto the same chemical class are left cent); and so on.out. But if the costlier equivalentsare left out of NLEM-2011, it makesall the sense to put them under price64 YOJANA April 2014

‘standard’ dosage forms under be free to hike the prices of all price- price will be effected in such anprice control controlled medicines at the same rate eventuality. as the increase in the Wholesale Price The antibiotic combination of Index (WPI) irrespective of the change Leaving out some other problemsamoxycilin with clauvulanic acid in input costs. This is irrational. It may with DPCO, we can see that theis marketed under the brand name be alright to allow increase in prices in DPCO-2013 is seriously flawed andAugmentin in tablets of several case of increase in raw materials and would allow the pharma companiesstrengths: 375mg, 625mg and conversion costs. Conversion costs to continue to fleece the people.1,000mg. Of these, only 625mg tablet form a relatively small part of the total It remains to be seen whether theis price controlled. In the top-selling price. A cost-based formula would Supreme Court gives justice to the1000 products (PharmaTrac, October reflect real increases/decreases in the people by directing the Government to2012), eight products of atorvastatin raw material costs and accordingly, adhere to Cost-Based Pricing and to use10 mg strength mentioned in NLEM, the price ceiling. Indeed, it ill serves an improved list of Essential Medicineshave a sales turnover of Rs 187.39 cr the manufacturer too when the raw for price-control.for the previous 12 months whereas material price increases abnormallyseven other products in non-standard and the Government ’s NPPA is Acknowledgments: The authorsdosages of 15mg, 20 mg, 40 mg, etc., neither designed nor equipped athave a sales of Rs 138.63 crores. In all, present to be quick enough to respond wish to thank Dr Anurag Bhargavaabout half of all dosage forms will be to the increase – there is no provisionout of price control. in the DPCO-2013 to do so. Again, of Himalayan Medical Institute, in the absence of cost-based pricing,Automatic Price Increase of Drugs there is no guideline as to how and by Dehradun, as well as Dr S.Sakthivel,under Price Control  how much an increase of the ceiling Malini Aisola and colleagues from Also, every year manufacturers will PHFI whose research findings have q been used in this article.  (E-mail : anant,[email protected] [email protected]) FORM IV(Statement about ownership and other particulars about newspaper Yojana (English) published in the first issue of every year after the last of day of February)1. Place of Publication : New Delhi2. Periodicity of its Publication : Monthly3. Printer’s Name & Nationality : Ira Joshi, Indian, Soochna Bhavan, Publications Division, New Delhi-110 003.4. Publisher’s Name, Nationality : Ira Joshi, & Address Indian, Soochna Bhavan, Publications Division, New Delhi-110 003.5. Editor’s Name, Nationality : Mrs. Shyamala Mani Iyer & Address Indian, Yojana, Publications Division Room No. 542, Yojana Bhavan, New Delhi - 110 001 6. Names and addresses of individuals : Wholly owned by Ministry of I&B who own the newspaper and partners Govt. of India, New Delhi-100 001. of shareholders holding more than one percent of the total capital I, Ira Joshi hereby declare that the particulars given above are true to the best of my knowledge and belief. Date: 01.03.2014. Sd/- (Ira Joshi) PublisherYOJANA April 2014 65

YE-294/201366 YOJANA April 2014

post-reform OPINIONIndia’s Lost Economic Transformation Kunal Sen Clearly, whether T here has been a relaxed the entry of foreign firms India can maintain significant change into the services sector were also its strong economic in the structure of the directly attributable to the growth in thegrowth in the future, Indian economy in the services sector as the share of services last six decades since in foreign direct investment increased and at the same independence. In 1955, from 10.5 per cent in the early 1990s time, have a more agriculture comprised 57 per cent of to nearly 30 per cent in the second halfequitable development output whereas in 2008, it comprised a of the decade. As a consequence of mere 19.8 per cent of output. In 1955, the entry of outward oriented foreign strategy in the manufacturing comprised 9.9 per cent direct investment into the information future is intimately of output in 2008, it comprised 15.6 per technology sector since 1992, software related to its ability cent. This was mostly due to the growth exports grew substantially at nearly to reclaim its lost in the output of the organised or formal six times than the world export of transformation from manufacturing sector, from 4.9 per services.an agriculture-based cent in 1955 to 10.6 per cent in 2008. to a manufacturing- Perhaps, the most remarkable feature Growth and Structural Change of the Indian economy’s structural based economy change has been the increase in the With respect to the manufacturing share of the service sector from 19 per sector, a distinctive feature of this sector cent of GDP in 1955 to 40.7 per cent has been its dualism – the existence of in 2008. It is well known that India’s a relatively small set of formal sector pattern of economic development has firms which have a largely protected been atypical in that the service sector workforce along with a large number has comprised a far higher share of of firms in the informal sector, where economic activity than should have workers have little access to social been the case, given India’s level of per security, employment protection and capita income. The two fastest growing other benefits (Mazumdar and Sarkar service sectors in the period 1993-2004 2008). Formal sector firms are very were business services (24.3 per cent) different from informal sector firms and communications (20.3 per cent). both in labour productivity and wages This was mostly due to the advent of paid to their employees – labour cellular technology as the government productivity in formal sector firms are opened the telecommunications sector 28 times higher than that in informal to the private sector by relinquishing its sector firms, and wages five times monopoly control over the provision higher in 2005-2006. More strikingly, of communication services (Kotwal productivity differences have been et al., 2010). Economic reforms that widening over time –labour productivity in formal sector firms was only 5The author is Professor of Development Economics in the Institute of Development Policy and Management (IDPM), University ofManchester, UK, and Professorial Fellow of the Brooks World Poverty Institute. His main research areas are economic growth, theanalysis of poverty and labor markets, international trade and finance. He has authored a number of books on the economic issues ofIndia and other developing countries.YOJANA April 2014 67

times that of informal sector firms in services has been slower in India unskilled labour employment were the1984-1985. The share of organised than China. In 1980, the employment trade and construction sectors, whichmanufacturing in GDP has increased, share of agriculture was 68.7 per cent increased their share in GDP rapidlyespecially since 1980, while the share in China which was very similar to since the early 1990s. There was alsoof unorganised manufacturing in GDP that of India, which stood at 68.1 per less evidence of labour shedding inhas remained remarkably constant over cent. However, by 2000, the share the 1990s. Non-farm employmentthe sixty years since independence at of employment in agriculture had increased strongly in 1993-2004 byaround 5 per cent of GDP. In contrast fallen to 50 per cent in China, while it 60.2 million workers as compared toto its declining importance in total remained stubbornly high at 59.3 per an increase of 35.9 million workers inmanufacturing output, the importance cent for India (Kochhar et al. 2006). 1983-1993.of the informal sector in providing The shift in employment away fromemployment in manufacturing has agriculture has been mostly towards The Transformation that Neverremained same over the time. The the services sector, which increased Wasproportion of workers in the informal its share in total employment fromsector in total manufacturing was 20 per cent in 1983 to 29 per cent The low rates of job creation in the83 per cent in 1984-95 – it declined in 2004. In contrast, the share of high growth era of the Indian economymarginally to 80 per cent in 2005- manufacturing in total employment still leave open the question: why has2006. The persistence of dualism in has hardly changed – with a small this been the case? To answer thisIndian manufacturing and the presence increase from 10.6 per cent in 1983 question, it is important to recogniseof a large low productivity (and low to 11.7 per cent in 2004. The weak that India’s pattern of growth haswage) informal sector in the face of absorption of labour by the high been atypical and has not followedsignificant and rapid economic change growth manufacturing and services the standard path that we have seenremains a matter of policy concern and sectors has implications for the other economies, especially with largemay have played a contributing role in employment creating potential of supplies of mostly unskilled labour. Allthe relatively weak effect of economic economic growth. the major Asian economies, startinggrowth on poverty reduction in India. with Japan, then Korea, Singapore, Therefore, India’s high rate of and Taiwan, and now more recently, Another distinctive feature economic growth has not been job China and Vietnam, have movedof India’s pattern of economic creating. The employment elasticity from the import substituting phases of output – the per cent increase of their economic development toThe persistence of dualism in Indian in employment for a one per cent an export-oriented developmentmanufacturing and the presence of increase in GDP - has fallen from a large low productivity (and low 0.40 in 1983-1993 to 0.29 in 1993- The low rates of job creation in wage) informal sector in the face 2004. Employment growth was 1.79 the high growth era of the Indian of significant and rapid economic per cent per annum in 1993-2004 as change remains a matter of policy compared to 1.99 per cent per annum, economy still leave open the in spite of a higher rate of economic question: why has this been the concern and may have played a growth in the 1990s as compared to case? To answer this question, it is contributing role in the relatively the 1980s. However, the overall low important to recognise that India’sweak effect of economic growth on rate of employment creation in the pattern of growth has been atypical 1990s and early 2000s masks changes and has not followed the standard poverty reduction in India. in patterns of employment creation path that we have seen other within skill categories. Perhaps, the economies, especially with largedevelopment has been the slow most relevant indicator of job creation supplies of mostly unskilled labour.movement of labour from the from a poverty reduction perspectiveagricultural to the manufacturing is the rate of employment growth strategy that witnessed in its initialand service sectors. As countries for unskilled workers. Kotwal et al years, a strong growth in the labourgrow and diversify away from (2010) find that in the 1980s, the intensive segment of the manufacturingagriculture, workers move from the fastest growing sectors hardly provided sector. In all these countries, as theirlow productivity agricultural sector to any unskilled labour employment. economies integrated more closelythe high productivity manufacturing 1In fact, many of the fastest growing with world markets, economic growthand service sectors over time, and sectors shed unskilled labour. This and structural transformation from anthe faster the movement of labour changed in the 1990s, when many agriculture based to a manufacturingfrom agriculture to other sectors, the of the fastest growing sectors used based economy went hand in hand, onehigher the rate of economic growth. unskilled labour abundantly. The most driving the other. Surplus labour wasThe reallocation of labour from important of the fast growing sectors pulled, sometimes in massive amounts,agriculture to manufacturing and from the point of view of providing from less productive agriculture to the68 YOJANA April 2014

more productive manufacturing sector, which have reduced the protection policy which prohibited the entry ofand economic growth was driven in towards the capital goods and large scale units in labour intensiveits early stages by a rapid expansion intermediate goods sectors. Tariffs in industries (Joshi 2010). Finally, theof labour-intensive manufacturing, India still remain high as compared opening up of the economy leadingmostly producing for export markets to the regional average (Athukorala to the availability of cheap capital(Krueger 1997). This was not the case 2009). In addition, as recent as 1996- goods from abroad and the increasedin India, where the labour –intensive 2000, the shares of intermediate inputs pro-competitive forces brought aboutmanufacturing sector did not become and consumer goods subject to non- by the economic reforms have led tothe engine of growth. In fact, it was the tariff barriers were as high as 28 and increased skill and capital intensity ofknowledge-intensive services sector 33 per cent respectively (Das 2003). firms, even those which were locatedwhich along with some segments of Secondly, stringent employment in the informal sector, to ward offcapital intensive manufacturing was protection legislation among the most foreign competition (Sen 2008, Rajthe engines of growth in India. But protective of formal workers in the and Sen 2012, Kathuria, Raj and Senthese sectors by their nature were not world has reduced the incentive of 2010).employment-intensive. Whatever jobs firms, especially those in the purviewthat were created outside of agriculture of employment protection legislation, In conclusion, we have noted in thiswere mostly in the low productivity to hire workers on permanent contracts article that in contrast to the previous– low wage informal services sector and pushed them towards more capital growth success stories of the developing(comprising mostly trade, hotels and intensive modes of production, than world, especially those originatingrestaurants). But this informal services warranted by existing costs of labour from Asia, India’s pattern of growthsector, by the virtue of the fact that the relative to capital. Dougherty (2008) has followed a non-standard and whatgrowth of this sector depends on the finds that for large firms (that is,growth of other sectors, cannot be the firms with 100 or more workers, India’s pattern of growth hasleading sector of growth and therefore, almost all the increase in employment followed a non-standard and whatis constrained in its capacity to absorb has been in the form of contract one could call a perverse route, andmore of the labour force in agriculture workers – workers employed through that such a growth pattern thatthan it is at present. intermediaries who do not benefit from employment protection legislation – privileges knowledge-intensive...the nature of the trade regime in while the employment of permanent services and capital-intensiveIndia is still biased towards capital- workers has decreased for these firms. manufacturing over labour- intensive manufacturing, in spite Employment protection legislation is intensive manufacturing is not in applicable to firms with 100 workers India’s long-term interests, either of reforms which have reduced or more, so this shows that labour laws from viewpoints of efficiency or the protection towards the capital have led to firms shedding regular labour in favour of temporary labour. equity. goods and intermediate goods On the other hand, the employment ofsectors. Tariffs in India still remain permanent workers increased for firms one could call a perverse route, and that high as compared to the regional with less than 100 workers. Gupta et such a growth pattern that privileges al. (2008) find that Indian states with knowledge-intensive services and average relatively inflexible labour legislation capital-intensive manufacturing over have experienced slower growth in labour-intensive manufacturing is not There has been a stagnation in labour-intensive industries and slower in India’s long-term interests, eithermanufacturing output and employment employment growth overall. Saha, from viewpoints of efficiency orover time and an increase in both the Sen and Maiti (2013) find that states equity, as it has not been built on theformal and informal segments of the with labour legislation that favour foundation of the innate comparativeservices sector in total output and the permanent workers have shown a advantage India possesses in unskilledgrowth of the informal services sector higher growth of contract workers labour intensive manufacturing, and hasin total employment. Not only has relative to regular workers. limited the poverty reducing impact ofmanufacturing stagnated as a share of economic growth (Sen 2008). Clearly,total output and total employment, the A third reason behind the jobless whether India can maintain its stronglabour-intensive segment of the formal growth in formal manufacturing economic growth in the future, and atmanufacturing sector has contracted has been infrastructural bottlenecks the same time, have a more equitableover time. (especially in access to electricity) and development strategy in the future other impediments to entrepreneurial is intimately related to its ability to Why has this happened? There growth in small firms (such as high reclaim its lost transformation from anare several reasons. Firstly, the nature costs of formalisation) along with a agriculture-based to a manufacturing-of the trade regime in India is still long history of small scale reservation based economy.biased towards capital-intensivemanufacturing, in spite of reformsYOJANA April 2014 69

Readings Continuity and Change in Contemporary Jobs in Indian Manufacturing?”European India: Politics, Economics and Society, Journal of Development Research, Vol. 24, Athukorala, P. (2009), “Export OxfordUniversity Press. No. 3, pp. 359-381.Performance in the Post Reform Era: HasIndia Regained the Lost Ground?”, in R. Kochhar, K., U. Kumar, R. Rajan, Saha, B., K. Sen and D. Maiti (2013),Jha (ed.), The Indian Economy Sixty Years A. Subramanian and I. Tokatlidis,(2006) “Trade open-ness, Labour Institutions andAfter Independence, Palgrave Macmillan, “India’s pattern of development: What Flexibilisation: Theory and Evidence fromLondon. happened, what follows?\" Journal of India”, Vol. 24, pp. 180-195. Monetary Economics, 53 (5): 981–1019. Das, D.K. (2003) Quantifying Trade Sen, K. (2008), Trade Policy, Inequality,Barriers: Has Protection Declined Krueger, A. (1997), “Trade Policy and and Performance in Indian Manufacturing,Substantially in Indian Manufacturing, Economic Development: What Have we London: Routledge Advances in SouthICRIER, Working Paper No. 105. Learned?”,American Economic Review, Asian Studies. Vol. 87, No.1, pp.1-22. Dougherty, S. (2008), “Labour Sen (2009), “What a Long, StrangeRegulation and Employment Dynamics at Mazumdar, D, and S. Sarkar (2008), Trip It’s Been: Reflections on India’sthe State level in India.” OECD Economics Globalisation, Labor Markets and Economic Growth in the TwentiethDepartment Working Papers, No. 624. Inequality in India, London: Routledge. Century”, Heidelberg Papers in South Asian and Contemporary Politics, April Gupta, P., R. Hasan and U. Kumar V. Kathuria, Raj, R.S.N. and K. Sen 2009, Paper No. 49.(2008), ”Big Reforms but Small Payoffs: (2010), Organised versus UnorganisedExplaining the Weak Record of Growth Manufacturing Performance Growth in Wood, A. and M. Calandrino (2000),and Employment in Indian Manufacturing”, the Post-Reform Period”, Economic andPaper presented in the India Policy Forum Political Weekly, Vol. X:V. No. 24, pp. “When the Other Giant Awakens: Trade and2008. 55-64. Human Resources in India”, Economic and J o s h i , V. ( 2 0 1 0 ) , “ E c o n o m i c Raj, R.S.N. and K. Sen (2012), “DidResurgence, Lopsided Reform and Jobless International Trade Destroy or Create Political Weekly, December 30, p. 4677-Growth”, in A. Heath and R. Jeffrey (eds.), 4694.  q (E-mail :[email protected]) Macro-Economic Framework Statement 2014-15Industry and ServicesThe index of industrial production (IIP) [base: 2004-05] is the leading indicator of industrial performance. Asper the IIP, industrial output growth rate was (-) 0.2 per cent during April-November 2013 as compared to 0.9per cent during the same period of the previous year. A combination of global and domestic factors has led todeceleration in the industrial output. The contraction in the growth during current year was largely because ofdecline in mining sector, capital goods, and consumer goods. Manufacturing, the dominant sector in industry,witnessed contraction of 0.6 per cent during April-November 2013 as compared to a growth of 0.9 per centin the corresponding period of the previous year. During 2012-13, manufacturing output had increased by 1.3per cent.The reasons for sluggishness in manufacturing are multiple. The rise in the policy rates, necessitated by the needto contain inflation, coupled with the bottlenecks facing large projects took toll on investments. The growthrate of gross fixed capital formation (GFCF) has been on the decline from around Q1 2010-11. Further, Indianmanufacturing has not moved up the value chain over time. Due to low level of investment in research anddevelopment (R&D), India has not seized the growing opportunities available in high and medium technologysectors in the global market such as chemicals, machinery & equipment, electronic goods, etc.Owing to the robust growth in electricity generation from hydel sources, the growth in overall electricitygeneration increased to 5.4 per cent during April-November 2013 as compared to 4.4 per cent during thesame period of the previous year. Because of structural constraints, mining sector continued to drag overallindustrial recovery with its output contracting by 2.2 per cent, compared to a contraction of 1.6 per cent inthe corresponding period of the previous year. The output of the capital goods sector contracted by 0.1 percent during April-November 2013 as compared to the contraction of 11.3 per cent during the correspondingperiod of the previous year, which indicates that deceleration in this sector may have started to bottom out.Overall manufacturing growth also suffered on account of negative spillover from the mining and capital goodssectors, lower demand for consumer durables, etc. Source : Statements laid before Parliament under the Fiscal Responsibility and Budget Management Act, 200370 YOJANA April 2014

ShodhYatraPortable stove with high efficiency V JayaprakashV Jayaprakash (43), a chulha Shastra Sahitya Parishad (KSSP- a where burning can take place at two maker from Kerala has local forum for science literature and levels. He tried over and over again improvised the portable awareness) and the low cost smokeless for many months, making and breaking stove by incorporating chulha popularised by it. The term numerous stoves in the process trying a secondary combustion ‘smokeless’ somehow caught his different passages for air movement. fascination and he discovered a new chamber for burning the interest. He got in touch with ANERT Persistence paid off finally. One fine (Agency for Non Conventional Energy morning, his attempts bore results andun-burnt bio mass and hydrocarbons. and Rural Technology- a Kerala he became successful in burning the government organisation working in firewood at two levels with completeAs a result, the thermal efficiency the field of non conventional energy) combustion and without smoke. to learn about the smokeless chulhas. He happened to attend a workshopof the stove has improved while the With time, he got sufficient knowledge organized by Kerala Shastra Sahitya and confidence to switch over to the Parishad who tested his stove andpollution has reduced. business of making chulhas. found its efficiency to be more than 30 per cent as against less than 20 per cent Coming from a lower middle class Once he made a community chulha of the smokeless chul has. He improvedbackground, V Jayaprakash was a very for a hospital and installed it at its the model further and started selling thegood student. Since his childhood, new product.he had keen interest in science and premises. While inspecting it one day,innovations. He used to participate he noticed a sudden spur of flame near The stoveregularly in science exhibitions and the chimney after about 10 minutesrepresent his school. Some of his early of operation. He was surprised and Jayprakash’s innovative stove is aprojects included using pulley to lift reported the same to the experts from double chambered efficient portableload to a certain height and a small ANERT. They explained him that the stove, used primarily for communitytoy motor-boat, which could go up observed flame was the result of the cooking. It can use coconut shell orto a certain distance and come back complete combustion of the carbon wood as a fuel.automatically. particles, which came in contact with oxygen near the top of the chimney. This portable stove is made of His childhood was spent among a This triggered his innovative mind and bricks, cement, clay, cast iron and canlot of constraints and he had to face a he started thinking of a stove model cook food upto 100 kg. The base oflot of financial problems. He recalls the bottom chamber is made of ironthat one of the incentives to attend the grill on which the fuel is kept. Belowschool was the mid-day meal scheme. the grill is an air chamber. When theThough, he passed SSLC with a first fuel burns, smoke mixed with unburntclass, he could not secure admission hydrocarbons reaches the upperin intermediate in the science stream. chamber, which has been provided withThen due to high fees, he could not air inlet holes. Complete combustionenroll in aeronautic diploma course takes place here and the combined heatas well. After passing class twelve, gets available to the cooking vesselhe went to his fathers’ work place in above the second chamber. The fuelCoimbatore and started to earn his opening has been provided at the frontliving as a daily wage labourer. The of the device and can be regulated usingidea was to make some money and shutter, which in turn, controls the flowcontinue studies. However, he lost of air. The air which flows through theall his certificates in an unfortunate opening during combustion causes anincident, which jeopardised his chances updraft when the fuel is burnt. Thisof securing an admission. A year later triggers secondary combustion as thein 1989, he returned to his home town carbon particles, which were left unand started a small fruit business. burnt, will now get burnt due to the additional air.The chicken and the stoveconnection While he was trying to settle in hisnew business, he heard about KeralaYOJANA April 2014 71

Apart from its efficiency, lower Jayaprakash has sold over hundred around 700 community chulha’s.cost and portability are also significant stoves in the last two years and hasfeatures of this stove. The combustion been getting a lot of orders from Apart from his business, he alsoefficiency is in the range of 37.67 per colleges, hospitals, and municipalities. goes to community gatherings andcent when wood is used as a fuel and He has orders for over 500 stoves shares his experiences with other people29.48 per cent when coconut shell pending with him presently. In order to as well. In 2009, he demonstrated theis used (Test report by Integrated scale up his business, he wants to set up design development and evaluationRural Technology Centre, Mandur, a production unit and is also looking for of improved biomass stove and itsPalakkad). IIT Guwahati also tested entrepreneurs interested to licence the community use in Rural Innovators Meetthe same and observed the thermal technology so that he can spend more organized by Kerala State Council forefficiency of 29.28 per cent. ANERT time in research and development. Science Technology and Environmentteam has informed that Hotel in Calicut, User feedback is of much importance (KSCSTE) at Thiruvanathapuram,using this stove, needs only 75 coconut to him as he believes that consumers Kerala. He also received Kerala Stateshells costing about Rs. 30 for cooking can provide valuable advices for the Energy Conservation Award 200840 kg rice. This is in contrast to LPG innovators. He informed that many in appreciation of the commendableoperated system, which needs 10 kg of his women customers have given achievements towards energyfuel costing about Rs. 400 for cooking him important insights from their conservation and management. NIFthe rice of same quantity. Considering experience of using this stove. One of invited him at the Innovation Exhibitionthe efficiency, cost effectiveness, them even asked him to make a two at the President House in Marchportability and unique design, NIF burner version. 2011, which he considers as the mostapplied patent (1582/CHE/2011) for memorable day of his life. He laterthis portable wooden stove in the Besides the portable wooden got a National Award in NIF’s Sixthinnovator’s name. stove, he also manufactures and sells National Award Function in 2012 at smokeless and community chulhas. the President House, New Delhi. q Nif supported the innovator under License and certificate for the same hasthe Micro Venture Innovation Fund been issued from ANERT. He has sold (E-mail : [email protected],for the commercialisation of the stove. more than 4000 smokeless chulha and www.nifindia.org)External sector Macro-Economic Framework Statement 2014-15India’s exports grew by 21.8 per cent in 2011-12 and then contracted by 1.8 per cent in 2012-13. During 2013-14 (April-December),exports were valued at US$ 230.3 billion, registering a growth of 5.9 per cent over the level of US$ 217.4 billion in 2012-13 (April-December). Value of imports during April-December 2013 was US$ 340.4 billion, showing a decline of 6.6 per cent compared withthe level of US$ 364.2 billion in the corresponding period of 2012-13. Of the total imports, POL imports accounted for US$ 125.0billion (36.7 per cent) in April-December 2013. This was 2.6 per cent higher than the level of US$ 121.8 billion in 2012-13 (April-December). Non-POL imports during 2013-14 (April-December), valued at US$ 215.4 billion, were 11.1 per cent lower than the levelof US$ 242.4 billion in 2012-13 (April-December). The better outcome in exports and lower imports led to a contraction in tradedeficit for 2013-14 (April- December) to US$ 110.0 billion from US$ 146.8 billion in 2012-13 (April-December).While data on merchandise trade are available for the period April-December 2013, most information pertaining to balance ofpayments is available only for the first half (H1) of 2013-14. The trade deficit stood at US$ 83.8 billion in H1 2013-14, as against US$91.6 billion in H1 2012-13. Net invisible earnings were placed at US$ 56.8 billion as against US$ 53.4 billion in H1 2012-13. Contractionin the trade deficit coupled with a rise in net invisibles receipts resulted in a reduction of the Current Account Deficit (CAD) to US$27.0 billion in H1 of 2013-14 vis-à-vis US$ 38.2 billion in H1 of 2012-13.Net inflows under the capital and financial account declined to US$ 15.1 billion in H1 2013-14 compared to US$ 37.3 billion in H12012-13 owing to net outflows of portfolio investment. Notwithstanding a lower CAD during H1 2013-14, there was a drawdownof foreign exchange reserves to the tune of US$ 10.7 billion as against an accretion of US$ 0.4 billion in H1 2012-13 primarily dueto a decline in net capital inflows.In 2013-14, foreign exchange reserves remained in the range of US$ 275.5 billion to US$ 293.9 billion. At the end of December2013, foreign exchange reserves stood at US$ 293.9 billion, indicating an increase of US$ 1.9 billion over the level of US$ 292 billionat end-March 2013.During April 2013 - December 2013, the monthly average exchange rate of rupee (RBI’s reference rate) was in the range of 54–64per US dollar. The daily exchange rate of the rupee breached the level of 68 per US dollar in August 2013 ( 68.36 per US dollar onAugust 28, 2013). However it recovered to 61.16 per US dollar on October 11, 2013, reflecting the impact of the measures taken tomoderate CAD and boost capital flows. On month-to-month basis, the rupee depreciated by 12.1 per cent from 54.40 per US dollarin March 2013 to 61.91 per US dollar in December 2013.India’s external debt stock stood at US$ 400.3 billion at end-September 2013, registering a decline of US$ 9 million vis-a-vis thelevel at end-March 2013. Source : Statements laid before Parliament under the Fiscal Responsibility and Budget Management Act, 200372 YOJANA April 2014

Monetary policy topical issueAn Analysis of the Urjit Patel Committee ReportOn Monetary Policy Rajeswari Sengupta Monetary policy in T he Expert Committee flows etc. Thereafter, monetary policy independent India has formed under the is designed to fulfill the multiple evolved substantially over supervision of Reserve objectives of increasing employment, the past several decades. Bank of India (RBI) closing the gap with potential output, India adopted widespread Deputy Governor, Urjit moderating inflation, stabilizing liberalization, privatization Patel released their report exchange rate and so on. and deregulation reforms to revise and strengthen the monetary in the early 1990s. During policy framework, earlier this year. This kind of a multiple indicator the post liberalization Since then, the report has been heavily approach however, lacks a nominal period running up to the discussed and debated in academic anchor or a specific target per se and present time, the RBI has and policy circles. It recommends hence it maybe argued that it is less been following a multiple a fundamental change in the way likely to be effective in achieving all indicator approach for monetary policy is conducted in India. the objectives at the same time. Suchexecuting monetary policy. In The one recommendation that has been an approach makes the monetary this approach, information the main talking point so far is the policy highly discretionary and runs is gathered on various adoption of a flexible inflation target. the risk of sending confusing signals macroeconomic indicators In this article, we attempt to analyze to market participants as well assuch as output, trade, credit, this particular recommendation of the corporations.inflation rate, exchange rate, committee against the backdrop of the current Indian economic scenario. In India, the multiple indicator capital flows etc approach of the monetary policy Monetary policy in independent worked relatively well especially India has evolved substantially between the late 1990s and late 2000s over the past several decades. India when Indian GDP was growing at a adopted widespread liberalization, healthy and robust rate of close to privatization and deregulation reforms 10 per cent or more, and inflation in the early 1990s. During the post (measured by the wholesale price liberalization period running up index or WPI) was moderate at around to the present time, the RBI has 5-6 per cent. This was also the time been following a multiple indicator when all was apparently well in the approach for executing monetary global economy which was going policy. In this approach, information through a phase of relatively low is gathered on various macroeconomic output volatility. indicators such as output, trade, credit, inflation rate, exchange rate, capital However, all of these ended with the outbreak of the Global Financial CrisisThe author is a Visiting Fellow at the Indira Gandhi Institute of Development Research (IGIDR) in Mumbai, India. Her research focuseson International Finance and Open Economy Macroeconomics, and specifically on policy-relevant, macro-financial issues of emergingmarket economies. She has recently been exploring several issues pertaining to the Indian Economy such as Evolution of the FinancialTrilemma, Financial Markets and Regulations, Monetary Policy and Capital Account Management, Systemic Risk in the financial sectoras well as Impact of Exchange Rate volatility on Indian Exports.YOJANA April 2014 73

(GFC) in 2008. In the aftermath of the effect into domestic inflation. As rising inflation might have been a directcrisis, India’s own macroeconomic domestic savings go down, and interest fall out of a discretionary approachhealth and stability started showing rates are raised to control inflation, where the reaction is triggered onlysigns of rapid deterioration. Over the investment gets hampered thereby after a problem has emerged, rather thanlast few years in the post GFC era, lowering GDP growth rate. In other a distinct and well-defined monetaryGDP growth rate has exhibited a sharp words, high and persistent inflation and policy rule that needs to be followedand dramatic decline from more than inflation expectations can destabilize under all circumstances.10 per cent to less than 5 per cent in the economy for a prolonged period ofjust 4-5 years and inflation has been time and hence need to be controlled Against this background, inunprecedentedly and persistently high as quickly as possible. principle, inflation targeting (IT) as(close to 10 per cent or more), primarily proposed by the Expert Committeedriven by sharp rises in the prices of One of the factors often cited as a seems like a reasonable strategy tofood and fuel, both of which are crucial reason for inflation becoming persistent bring down inflation quickly and in aitems in an average Indian household’s and inflationary expectations getting sustained manner and thereafter adjustconsumption basket. Retail inflation entrenched in the Indian economy in monetary policy such that inflationsince 2008 has been in the double digits the aftermath of the GFC, was the remains within the flexible target band.despite the sharp growth slowdown. slow, timid and gradual response by According to the Committee’s Report,This has also meant that inflation the authorities in the initial years. In in the short run, RBI should try andexpectations have got entrenched and India, we have almost always been pre- bring down inflation from the currentdespite successive round of hikes in occupied with the objective of raising level to 8 per cent over a period notthe policy interest rates by the RBI, GDP growth rate rather than ensuring exceeding the next 12 months, and toinflation still has not been brought price stability. During 2000-2007, the 6 per cent over a period not exceedingdown to the comfortable levels of 5-6 spectacular increase in growth rate the next 24 months “before formallyper cent. pushed up the rural wages, which adopting the recommended target of raised the demand for essential food 4 per cent inflation with a band of ±2 One of the factors often cited as items. However, the supply of these per cent”. a reason for inflation becoming items continued to be constrained by institutional bottlenecks thereby IT is a monetary policy rule that persistent and inflationary creating an inevitable demand-supply prescribes to the central bank a target expectations getting entrenched imbalance, which only worsened or a range of targets for inflation. It over time as the pre-occupation with was first adopted by New Zealand in in the Indian economy in the high growth rate camouflaged several 1990 and Chile was the first emergingaftermath of the GFC, was the slow, underlying structural issues. economy to implement it in 1991.timid and gradual response by the Since then it has become quite popular In the period immediately following authorities in the initial years. the GFC when interest rates were IT is a monetary policy rule that lowered all over the world in response prescribes to the central bank a Such persistently high inflation to a growth slow down, India followed target or a range of targets fornot only erodes the purchasing power suit as well, in addition to rolling out inflation. It was first adopted byof the common man, it also leads to a massive fiscal stimulus program, to New Zealand in 1990 and Chilelow real interest rates on savings, shield the economy from the adverse was the first emerging economy towhich in turn, reduces the incentive of external shocks. However, even when implement it in 1991. Since then ithouseholds to deposit their savings in the economy started recovering, the has become quite popular amongbanks. Domestic financial savings have stimulus was not reined in leading both developed and emergingindeed gone down from more than 12 to a sharp rise in fiscal deficit andper cent of GDP in 2007 to less than 9 neither was monetary policy tightened. economies.per cent in 2011. Consequently, during Inflation began to increase aroundthe last few years, demand for gold this time but authorities responded by among both developed and emergingas an alternative saving instrument raising interest rates with a substantial economies. Major emerging economieshas sky rocketed. This of course has lag by which time inflation had become such as Brazil, Colombia, Peru, Southadverse implications for India’s current too high. Several economists are Africa, Indonesia, Turkey and Mexicoaccount deficit that has been at an of the opinion that even then the have adopted IT.all time high over the same period response of the authorities was lessof time; it went up from less than 2 than substantial and robust and at best, The IT strategy sets out a well-per cent to more than 5 per cent of can be characterized as mild. defined framework for monetaryGDP. A higher current account deficit policy formulation and gives a clearleads to a weaker rupee, which in turn One can argue that this kind of a way forward which may be a welcomeraises the price of imported items delayed and insufficient response to change from the multiple indicatorsuch as crude oil. This has a feedback74 YOJANA April 2014

approach currently followed by the RBI policy can become more effective, of the country’s population. CPI onthat can be quite haphazard. A single interest rates can be lowered again and the other hand, assigns more than 50variable approach clearly spells out the hence investments boosted, which in per cent weight to food and fuel. Alsotarget and makes it easier for the RBI turn can help to restore the growth rate. consumers are affected by the inflationto follow a rule based monetary policy Also, improved price stability is crucial they face in the retail market, which isas opposed to the current discretionary for overall macroeconomic stability. best reflected in the CPI index.approach. Also with a proper target Moreover, the recommendation ofdeclared, market participants are likely the committee is to adopt a flexible Having argued in favor of theto get a clear signal regarding the RBI’s IT rather than a strict IT. The former recommendation so far, it is alsomonetary policy stance instead of the implies that the objective would be to important to point out that this strategyendless confusion markets suffer now, achieve the targeted inflation rate over is not going be a panacea for all ills. It isespecially before every monetary the business cycle in the medium run true that the current economic crisis haspolicy review meeting. This strategy whereas growth can continue to be the raised questions about the effectivenessis likely to bring greater transparency, focus in the short run. of IT given that it ignores asset prices.higher accountability and more clarity, Moreover in a country like India,that are important not only for financial Overall, IT reduces inflation supply side bottlenecks play a big rolemarket participants, corporations and volatility, anchors inflation in generating persistence in inflationpolicy makers at the government level expectations, brings macroeconomic and IT as a monetary policy strategybut also for the common man, who stability, helps achieve price stability, is unlikely to be able to address theseis most affected by and least hedged and also enhances the confidence of issues. Also, this strategy alone whileagainst persistently high inflation international investors in the Indian necessary, may not be sufficient torates. Furthermore for a central bank, currency. Critics may well pose the achieve its objective given the myriada primary objective ought to be price question as to whether India is ready complexities of the Indian economy thatstability and IT will help the RBI yet for IT. We may never know the make the situation unique and differentachieve this objective in a systematic actual answer to this question until from other emerging economies thatmanner. It also lends credibility to the and unless we implement the strategy have experimented with IT. There hasRBI if it is successful in maintaining and try to adhere to the announced to be corresponding corrective action ininflation at the targeted level. inflation target and what better time to other areas of the economy as well so as initiate the discussion on this given the to provide support to the central bank’s Overall, IT reduces inflation persistently high inflation that has been attempt at bringing inflation under volatility, anchors inflation plaguing the economy for a few years control. For instance, it is important now. As regards, the target rate that for the central government to practice expectations, brings has been suggested by the committee, fiscal prudence and lower fiscal deficit. macroeconomic stability, helps for the longest period of time post achieve price stability, and also liberalization inflation has been around There has to be corresponding 5-6 per cent and in view of this, the corrective action in other areas enhances the confidence of target does not seem unreasonable. of the economy as well so as to international investors in the provide support to the central Indian currency. Critics may well A crucial element of the bank’s attempt at bringing inflation pose the question as to whether recommendation of the Committee is under control. For instance, it that Consumer Price Index or CPI be India is ready yet for IT. used as a nominal anchor for targeting is important for the central inflation. Central banks in all advanced government to practice fiscal According to the critics of this and emerging economies calculate prudence and lower fiscal deficit.approach, a single-minded, exclusive inflation using the CPI. In fact, Indiafocus on inflation may reduce the is the only country in the world where A systematic fiscal consolidation byflexibility of monetary policy and the RBI does not focus primarily on the the central government can enhancedivert RBI’s attention from other CPI but on the Wholesale Price Index the effectiveness of monetary policyimportant policy objectives such as (WPI), which however does not include transmission.boosting growth, reducing currency food and fuel prices. WPI also excludesvolatility etc. However, a sustained the service sector that now contributes In other words, there are sometrajectory of low and stable inflation by more than 60 per cent of the GDP. Food obvious and clear obstacles to IT beingitself is likely to resolve several other is a crucial item in an average Indian effective in reducing the inflationissues the Indian economy is facing consumer’s daily consumption basket. rate to the targeted 4 per cent in theright now and create room for a broader Thus, a monetary policy designed medium run. In India, food prices areagenda of reforms. For instance, with predominantly on the basis of WPI is heavily influenced by factors suchinflation controlled and inflation bound to be ineffective in addressing as monsoons as well as a plethora ofexpectations stabilized, monetary inflation problems faced by majority administered prices (such as MinimumYOJANA April 2014 75

Support Prices or MSPs) and subsidies, can predict the changes in domestic the Indian people towards monetarywhich are of course outside the direct and global economic landscapes, or policy through this very approach.control of the RBI. This may limit the sudden disruptions to macroeconomicability of the central bank to affect stability owing to external shocks To conclude, in India, the efficacyinflation expectations in the current or political disturbances that have aeconomic scenario. To what extent the strong bearing on the Indian economy. of inflation targeting as recommendedRBI may succeed in bringing down It must be communicated clearlyfood inflation by using interest rate as that any deviation in future does not by the Expert Committee, will dependa policy instrument is hence debatable. automatically imply failure to maintainRecurrent food inflation cannot be upon a multitude of factors andcurbed by monetary policy alone. There are several underlyingThere are several underlying structural structural rigidities, and market policies and is not going to be merelyrigidities and market inefficiencies thatneed to be simultaneously addressed as inefficiencies that need to be a function of announcement of awell. These are some of the limitations simultaneously addressed as well.the central bank needs to be cognizant These are some of the limitations target and then changing the policyof as it discusses the merits of adoptingIT. the central bank needs to be rates to achieve the announced target. cognizant of as it discusses the Finally, even if we set aside In conjunction with a rule basedthese hindrances for the time being merits of adopting IT.and assume that adopting IT will be monetary policy strategy, it is alsoeffective in the short and medium run, price stability. Such transparency maythe real test of the recommendation be crucial to maintain the credibility important that steps be taken to createmay come in the longer run. Given the and accountability of RBI.multitude of institutional and political the necessary environment for suchfactors that add to the complexities Needless to say, the formal adoptionof the Indian economic landscape, of IT comes with a lot of responsibility a monetary policy to be effective.any failure on the part of RBI to and commitment to adhere to the targetmaintain inflation at the targeted level under all circumstances and also if it Reduction of the twin deficits i.e.can do irreparable damage to its ever has to be abandoned, to have clear,credibility. So it must be made clear concrete and credible reasons for doing current account deficit as well asat the very outset, that deviation so. Otherwise, it may do more harmfrom the target is possible as no one than good by permanently jeopardizing fiscal deficit is crucial to make the credibility of the RBI and the confidence it intends to restore among room for effective monetary policy transmission. Furthermore, given the current Indian economic scenario, broad-based reforms are urgently needed to correct the macroeconomic imbalances arising from structural rigidities and to alleviate the supply side bottlenecks. Finally, there has to be a widespread and sustained political will to provide the necessary support mechanism, for this experiment with inflation targeting to be a success q story.  (E-mail :[email protected]) Macro-Economic Framework Statement 2014-15Money, Banking and Capital MarketsThe RBI, in its Annual Monetary Policy Statement on May 3, 2013, announced a reduction in the policy repo rateby a further 25 bps from 7.50 per cent to 7.25 per cent to support growth in the face of gradual moderation ofheadline inflation. Apprehensions of likely tapering of Quantitative Easing (QE) by the US Federal Reserve inlate May 2013 triggered outflows of portfolio investment. Recognising the risks to the economy from externaldevelopments as well as taking into account the evolving growth inflation dynamics, the RBI in its First QuarterReview of July 30, 2013 kept its key policy rates unchanged. The RBI began the process of calibrated withdrawalof the exceptional liquidity measures, undertaken to tackle exchange market pressures, in the Mid-QuarterReview on September 20, 2013, noting the improvement in the external environment and also considering thenumber of measures put in place to narrow the CAD and to ease its financing. The MSF rate was reduced by 75basis points from 10.25 per cent to 9.5 per cent and the minimum daily maintenance of the CRR was reducedfrom 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013.However, the rise in inflation and the need to provide a nominal anchor to help preserve the internal value ofthe rupee, the repo rate was increased by 25 basis points to 7.5 per cent.Considering the evolving liquidity conditions, the RBI reduced the MSF rate by a further 50 basis points from 9.5per cent to 9.0 per cent on October 7, 2013. Provision of additional liquidity through term repos of 7-day and14-day tenor for a notified amount equivalent to 0.25 per cent Net Demand & Time Liabilities (NDTL) of the bank-ing system through variable rate auctions on every Friday beginning October 11, 2013 was also announced. Source : Statements laid before Parliament under the Fiscal Responsibility and Budget Management Act, 200376 YOJANA April 2014