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Tuesday, February 15, 2011

Black Money Flows In Indian ECONOMY as FDI as Swiss relax rules for info exchange on foreign black money!


Black Money Flows In Indian ECONOMY as FDI as Swiss relax rules for info exchange on foreign black money!



Troubled Galaxy Destroyed Dreams, Chapter 584

Palash Biswas

http://indianholocaustmyfatherslifeandtime.blogspot.com/

http://basantipurtimes.blogspot.com/

Black Money Flows In Indian ECONOMY as FDI as Swiss relax rules for info exchange on foreign black money!In a move that could help India in its black money trail, Switzerland today relaxed norms for sharing information on secret bank accounts of overseas tax offenders by allowing varied modes of identification.The government has decided to increase vigil on all foreign direct investment (FDI) flows from Mauritius amid growing concern that black money stashed abroad by Indians is being routed back into the country through the island nation, the Economic Times said Tuesday.

India's foreign direct investment (FDI) through Mauritius, considered a tax haven, has crossed $50 billion accounting for 42 per cent of the total FDI inflows, according to the latest official data.


India has a Double Taxation Avoidance Treaty (DTAA) with Mauritius, under which the corporates registered there can choose to pay taxes in the island nation.


Experts said companies prefer to route their investment through the famous Mauritius route because of as low as three per cent effective rate of corporate tax on the foreign companies incorporated there.


Besides, an investor routing his investments through Mauritius into India does not pay capital gains tax either in India or Mauritius.


"Mauritius is an offshore financial centre. There is no provision of capital gains tax," said PWC Executive Director Akash Gupta.


According to FICCI Director General Rajiv Kumar "clear reason for bulk of the FDI coming from Mauritius is the DTAA which allows higher returns to investors... It is a good channel to use, as it gives significant savings."


It is estimated that the government may be losing Rs 2,000 crore per annum because of the "treaty shopping".


Of the total USD 121.26 billion FDI that has come between April 2000 and August 2010, Mauritius accounted for USD 50.16 billion, according to the latest official data.


Though India has a DTAA with about 75 countries like the US, UK, Japan, France, and Germany, it is Mauritius which is the most preferred route for FDI inflows because of low or zero corporate tax, an official said.


Even though India offers several exemptions and reliefs to companies on the corporation tax of 30 per cent, the effective rate in the country for the corporate is no less than 20 per cent.


After Mauritius, India received highest FDI of $11.27 billion from Singapore, $8.91 from the followed by UK ($6.15 billion) and the Netherlands ($4.96 billion), Japan ($4.53 billion), Cyprus ($4.2 billion), and Germany ($2.86 billion) since 2000.

BLACK MARKET AND THE INDIAN ECONOMY
   Uploaded by barkhaamonkar (634) on Sep 20, 2005

Statistics:
    It is said that black money in India accounts for 20 % of GDP. If this is true, then black money generated every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more than the entire budget of the government at the Centre. We have a government that spends about Rs 350,000 crore a year, most of it on itself, and asks for accounts of every paisa. On the other side, we have black money worth Rs 400,000 crore every year, which is just guesswork, and there are no accounts. This money goes into property, which is why real estate prices are so high, and of course five-star hotels. If the government could have all this money, or even a small fraction, there would be no need for revenue or fiscal deficits, and no need for huge borrowings to make two ends meet.
    How big is $ 100 billion? It is bigger than you think. It is worth Rs 500,000 crore, which makes it bigger than the central budget. It is more than twice our annual exports. It is equivalent to 30 times what Enron is supposed to have invested on its Dabhol project. It is more than what the US government is expected to pay those who have suffered from the September 11th smash. And, if you must know, it is a fifth of our annual GDP, which is itself a big figure.


Introduction:
    The CBDT is hopeful of collecting more than Rs 7,000 crore (Rs 70 billion) as income tax area, the target indicated by Finance Minister P Chidambaram for the current financial year. The board has already collected Rs 3,400 crore (Rs 34 billion) during the first six months of the current fiscal year, compared to Rs 2,700 crore (Rs 27 billion) in the same period a year earlier.
    Finance Minister P Chidambaram's Budget speech for 2004-05 shows there were only 27 million taxpayers in the country on the date of the presentation of the Budget. This indicates the tax evasion rampant in the country.
    The economy keeps growing and so does the deficit, while the revenues do not increase in the same proportion as the economy grows. There could be a number of reasons for the shortfall, which may vary from year to year like recession in the industrial sector or shortfall in agricultural production. But one factor that has been constant for the last five decades is the tax evasion. There are so many loopholes in the tax system that allows people and organizations to evade taxes with impunity. There are no reliable estimates of the extent of the tax evasion in this country. But some studies show that the size of black money has grown significantly over the past many years If this tax evasion were checked, the Finance Minister would never be faced with shortfall in tax collection and would have a very low fiscal deficit. Therefore, the Finance Minister instead of resorting to increase in tax rates or coming out with amnesty schemes should find other means to increase the revenue collection. One such way is to plug the loopholes, which encourages tax evasion. Most of the tax evasion occurs when transactions are done in cash and never recorded. This has been the experience of many countries and they have come out with measures that discourage cash transactions and encourage recorded transactions. One such mechanism has been the use of debit and credit cards combined with payment through banking mechanism. The Finance Minister should come out with such a provision, which encourages cashless transaction.
    As a first measure it may be made mandatory that all salaries above Rs 10,000 per month, both in public and in private sectors, be directly credited to individuals' accounts in their respective banks. Secondly, payments above a certain amount may also be made mandatory through debit / credit cards and through cheque or bank drafts. With electronic banking gaining importance, transfers through banking mechanism will become as easy as receiving or making payments by cash. In most of the countries the use of debit and credit cards for making and receiving payments has reached a point that for buying even one small ball pen payment is made through credit / debit card.
    Similarly, payments for the sale and purchase of immovable property, various kinds of consumer goods and services beyond a certain stipulated amount should also be made mandatory through banking channels. While doing so, the Finance Minister will not only be plugging one of the biggest loopholes leading to tax evasion but would also reduce the need for ready cash and hence the printing of currency notes on a large scale.
    The biggest chunk of black money is invested in real estate and gold. The circulation of black money in the housing sector is beyond imagination. Since the house tax is based on the current purchase price only one fourth of the money is paid by cheque and the rest in unaccounted cash. Even an honest buyer of flats / houses is forced to pay in black money if he wants to acquire one.

History:
    The period 1946-61 was one of the intense creativity. A black or parallel economy emerged both in the wake of the Second World War and the expansion of the economic activity in the post-independence period. Incentives were provided through the taxation laws to promote savings and investment; this made the tax laws more complex. Then, there was the need for larger revenues to finance the plans of economic development. Thorough investigations were, therefore, conducted into the structure of taxation not only with a view to widen the base of income tax but also to look for new taxes and to prevent tax evasion and avoidance. The Income-tax administration came under heavy strain due to the increase in the volume and complexity of its work.

Nature:
    There are two powerful ethical props for a different view than the one the court has taken.
1.    It is a plain fact that many high-earning persons evade income tax by ruthlessly exploiting the loopholes in the laws. Black money is the outcome of this practice. And neither the income tax department has mounted an effective campaign to hunt out these tax cheats, nor has the court, any court, felt provoked to order a comprehensive crackdown.
2.    The widespread ruse of doling out big money to top executives and others by describing it as reimbursement.


Constituent activities of Black Economy:
1.    Legal activities that are not reported to the tax authorities and the income which goes untaxed and unreported. For instance: it is not illegal to clean someone's house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison.
2.    Illegal activities, which needless to say, are also not reported to the state (and, therefore, not taxed).
    The money generated by these activities is largely held in foreign exchange outside the banking system or smuggled abroad (even through the local banking system).

How is it formed?
    A parallel or a black market is an illegal structure that is created in response to government intervention, which produces excess supply or demand for a product. When the price of foreign currency is set below the market-clearing rate, an excess demand is usually generated for acquiring foreign currency. The government has the choice of either devaluating the currency, or maintaining strict controls over exchange, such as setting quotas on the purchase of foreign exchange. Such currency controls are designed by governments in order to limit the use of foreign exchange in transactions. This parallel economy, or black market, emerges through the manipulation of the economic forces of supply and demand for both currency and commodities. A black market also emerges when trade and industry create an artificial situation of scarcity or glut, and in the process amass high returns on their investments by profiteering. As a result of profiteering activity, the black market generates unreported income and wealth, which escape detection by official statistics. Much of the strength of the black market can be attributed to the resale of officially allocated foreign exchange holdings and to the incentive to under invoice and smuggle exports. He argues that an increase in the black market rate, given the official exchange rate, creates an incentive for residents abroad to channel their remittances through the black market. This raises their private receipts in terms of home currency and deprives the central bank of this foreign exchange. Economists studying black market activity in developing countries advocate that it is best to keep the black market premium rate as low as possible. By influencing the determinants of the black market exchange rate, developing counties can keep the black market premium rate low and increase their official foreign exchange currency holdings.

Effects of black money on Indian Economy:
    Affects public revenues,
    Degenerates the investable surplus,
    Delimits the national productivity,
    Drains the balance of payments,
    Distorts equity and equality concepts of economic distribution.



HAWALA SCAM --- Financing Illegal Trade:
    What makes the illegal market prosper is the large amount of black money that is easily accessible to traders. Thus money can be transferred to any country of the world through the illegal money market. The existence of a massive black economy consisting of both domestic and foreign currency makes such trade possible. Illegal trade is financed either by high value precious metals like gold and silver or by liquid money through a network of unauthorised moneylenders. In the former case gold is smuggled physically and then converted into the desired currency. However gold smuggling is risky and a preferred mode is through the illegal money market. The uniqueness of this system is that there is no physical transfer of currency. This mechanism referred to as the 'hawala' in India, the 'hundi' in Bangladesh and the 'chit' fund in Sri Lanka operates on the same principles.

Advantages:
    The black economy has many more important functions:
    The black economy is a cash economy.
    It is liquid and fast.
    It increases the velocity of money.
    It injects much needed foreign exchange into the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of "we know better" institutions such as the IMF.
    It fosters economic activity and employs people.
    It encourages labour mobility and international trade. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does – and, usually, more efficiently.
    The black economy is especially important in times of economic hardships. Countries in transition are a private case of emerging economies, which are a private case of developing countries that are called (in less politically correct times) "Third World Countries". They suffer from all manner of acute economic illnesses. They lose their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.
    It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practiced by them), it adds to the wealth of the nation (black marketers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market.


Disadvantages:
    So, what is morally wrong with the black economy? The answer, in brief:
    It is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes.
    The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defense, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. This encourages them, in theory to use these resources less efficiently.
    And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word "market". Unfortunately, we all live in societies, which are regulated by bureaucracies that are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner.

Measures taken by the Government:
    In a unique drive launched a few days before the presentation of the Union Budget, the CBI has registered 36 cases against 112 government officials and others after search operations across the country in a bid to unearth black money amassed by them. The drive conducted under a team of joint directors of the agency, has reportedly been able to unearth black money amounting to lakhs of rupees, CBI sources said here today. He said simultaneous searches were carried out on 109 official and residential premises of accused or suspected persons. In these cases 21 accused / suspected persons belonged to the Union Bank of India, the Reserve Bank of India, Sikkim Bank, the United Bank of India and private firms located at Mumbai. These cases pertained to cheating, export fraud, abuse of powers and falsification of records resulting in wrongful loss to the banks and public institutions. Cases taken up for investigation were of the Anti-corruption division, the economic offences Wing and the special crimes division.
    Although the stamp duty department maintains a list of rateable value properties in Mumbai, the main concern is that in most of the cases the rates are much higher than the actual transacted rates for the actual property. However, instead of addressing these irregularities, authorities have increased the stamp duty rates!

    It is a well known fact that because of high stamp duty, buyers have been quoting their property much below the actual transacted value. This is mainly because it enables the buyers to save substantial amount on the stamp duty outgo, since stamp duty is charged on the value of the property. This practice of undervaluing property is not ethical and moreover it leads to accumulation of black money in the economy, which is not good. For instance, there are cases where builders / sellers ask up to 40 % of the transacted value of the property as black money. This gives a distorted picture of the real estate price, as there is a huge difference in the transacted price and the rate list maintained by the stamp duty authorities.

Why the Policies implemented so far are Ineffective?
    Now the Supreme Court has ordered that dearness, house rent and city compensatory allowances are income and attract tax. Theoretically, the ruling covers only the employees of the government and those of public sector undertakings and the two nationalised insurance companies since the original dispute arose from their petition. But the judgement is so general in nature that every salaried individual receiving any allowance of this nature has to pay tax on it if he or she is not already doing so. It is an old demand of those with a regular income that those payments which are compensatory in nature should be tax-free if the underlying idea is not to be perverted.

Government intends to undertake:
    The government is likely to announce a scheme to channel black money into a dedicated fund, which could be used for funding the government's social sector programme. The fund, which may be announced in the Budget for 2005-06, could be modeled on the lines of the Prime Minister's Relief Fund. Government sources said the revenue department was contemplating various other strategies. One option would be to issue bonds to raise funds for infrastructure and social sectors, which would not yield any returns in the initial few years. An official said a scheme on the lines of the Voluntary Disclosure of Income Scheme 1997, launched during P Chidambaram's previous stint as finance minister, was ruled out.

Suggestions:
    All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.
    All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.).
    All retail outlets and places of business should be required to install – over a period of 3 years – cash registers with "fiscal brains". These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources. This can be done only after the full implementation of the recommendations in the section titled "Databases and Information Gathering". (While it increases business costs – it is not likely to prevent cash or otherwise unreported transactions).
    All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licenses, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?) The computer system should constantly compare VAT records and records & statements related to other taxes in order to find discrepancies between them. Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).
    Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their original place of employment – should be equalized (of course, taking into consideration tenure, education, rank, etc.) Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea. Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions
    All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties. Many "firms" doing business in Macedonia are not even legally registered.
    A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.
    Bureaucracy should be pared down drastically. The more permits, licenses, tolls, fees and documents needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.
    To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the production process throughout a chain of value added suppliers and manufacturers. The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To ensure progress, the government should directly compensate the poor for the excess relative burden.
    Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled – except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).
    White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import license required) list, to limit the effective period of each license issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder's as well as an importer's guarantee and to require a certificate of origin. The same goes for Cooking Oil (which – when it is imported in a package – is often declared as some other good).
    Simplicity in tax laws is certainly a desirable objective. US tax laws are 5 times the size of Indian tax laws, in terms of the number of clauses! Yet, the US tax laws are considered simpler than Indian tax laws. There is only one reason - constant change, and lack of continuity, in Indian tax laws, creating uncertainty on the applicability of different tax provisions. Add to that, the multiplicity of inspectors, the voluminous records to be maintained, the limited role of computerisation, the vagueness in wordings of rules and regulations, leading to subjective interpretation, and, thereby, the uncertainties with respect to compliance - and you have a level of complexity beyond what rocket scientists ever encounter!

    Simplicity
    Stability and Continuity
    Certainty
    Reasonable tax rates
    Ease of Compliance

    Unfortunately, in the past, for checking evasion, stress had mostly been on legislative measures, forgetting that equal importance is to be given to administrative aspects. In the discussion to follow, some suggestions for checking evasion, through legislation, and for improving compliance to tax laws are being mentioned. As indicated earlier, the problems need to be tackled in two ways -- by legislation and taking effective administrative measures. Other measures for checking tax evasion through legislation could be:

    Taxing big and prosperous agriculturists' incomes and wealth.
    Introducing donee-based gift tax.
    Permitting tax officials to have power of door-to-door survey.
    Claims for losses / expenses relating to undisclosed or illegal incomes should not be recognised for tax assessments while taxing incomes from such sources.

    In countries like Belgium, Greece and France, there is provision for confiscation of personal rights like arms or driving license of persons found guilty of dealing with black money or resorting to tax evasion. Similar law should be made in India too. Such persons should also be debarred from holding any elective offices, including directorships in companies.

    More emphasis must be laid on these aspects instead of floating amnesty schemes and issuing bearer bonds. It needs to be borne in mind that such schemes merely tackle that too to a very limited extent, the problem relating to 'stock' concept in black money and do not provide solutions for checking the onslaught of black money generation -- the flop concept.


    Among administrative aspects, strict measures can only create impact. Some suggestions in this context are:

    Tax laws should permit wide publicity through media regarding persons found guilty of tax evasion.
    Social conscience needs to be aroused amongst people against tax evasion, for attaching social stigma for tax evaders and to work as sentinels for identifying black marketers and tax dodgers.
    The most important measure for checking evasion is to establish credibility of the government regarding its own integrity before exhorting persons to pay their taxes correctly.

    Some other measures, of an administrative nature, could be:
    Disentitling tax evaders / defaulters to avail of the facility of payment of taxes in the installments and getting credit facilities from banks.
    Streamlining procedure for speedy determination of tax disputes. Special courts for this need to be set up.
    Paying special attention towards training for detection of tax frauds, evasion and black money generation, including deputation of IT officers to other countries for training to tackle cross border tax evasion.
    Providing adequate security to tax officials, conducting search and surveys.
    Improving morale of the tax department officials by providing them adequate infrastructure and other facilities, by recognition of their merit and giving them the place that they deserve in the overall government set up.

Conclusion:
    There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion and black money, but no perceivable results have come. Rather, the quantum of black money in circulation has increased substantially in volume. There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. So long as cash transactions continue to be made, tax evasion will be there and black money will continue to be generated.

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Black money abroad? It's returning via FDI, P-Notes!

       

Last updated on: February 11, 2011 17:54 IST

                

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                N Chandra Mohan


The recent expos of Swiss bank account holders has rekindled a controversy regarding the amount of illegal money stashed abroad by Indians.

Political leaders have been demanding these funds be returned and even distributed to the poor.

Amazing sums like $1.4 trillion have been bandied about, even though it is well-recognised that the exact numbers are difficult to come by.

Click NEXT to read on . . .

http://www.rediff.com/business/slide-show/slide-show-1-black-money-abroad-its-returning-via-fdi-p-notes/20110211.htm

Black money to be taxable under DTC: Govt

       

Last updated on: February 9, 2011 18:16 IST

                

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Black money parked in tax havens abroad will be taxable income under the Direct Taxes Code Bill, the Centre told the Supreme Court on Wednesday, spelling out a host of measures to retrieve it.

The government also informed the apex court that it has completed negotiations for Tax Informations Exchange Agreement with 10 countries where the money is believed to have been stashed.

Click NEXT to read further. . .



2010 FDI flows may beat forecast 12 bln rupees
* Real estate, hospitality sectors on receiving end of FDI
PORT LOUIS, Jan 18 (Reuters) - Mauritius sees foreign direct investment (FDI) to the Indian Ocean island growing by 8 percent in 2011, boosted by flows into the hospitality and property sectors, an official said on Tuesday.
Prakash Maunthrooa, managing director of the Board of Investment, said FDI to Mauritius had picked up steadily since the financial downturn curbed flows in 2009. The luxury real estate sector in particular took a hammering.
Mauritius pitches itself as a bridge between Africa and Asia.
"On a conservative basis we are targeting 13 billion rupees ($428 million) of foreign direct investment this year," Maunthrooa told Reuters.
Final numbers are not in for last year, but Maunthrooa said it was possible foreign investment flows in 2010 exceeded the forecast 12 billion rupees.
Bank of Mauritius data showed that FDI worth 8.9 billion rupees flowed into the island of 1.3 million people during the first seven months of 2010. A quarter of this was ploughed into real estate and the European Union was the leading source of investment accounting for 4.2 billion rupees.
Famed for its white sand beaches and luxury spas, Mauritius is diversifying its economy away from the traditional sugar, textiles and tourism sectors into offshore banking, business outsourcing, luxury real estate and medical tourism. (Reporting by Jean Paul Arouff; Editing by Richard Lough/Ruth Pitchford)
http://af.reuters.com/article/mauritiusNews/idAFLDE70H16Y20110118

  2. I-T to check FDI from Mauritius for black money


  4. Economic Times - 16 hours ago

  5. NEW DELHI: The government has decided to increase vigil on all foreign direct investment (FDI) flows from Mauritius amid growing concern that black money ...



  8. Not routing black money into India: Mauritius


  10. Times of India - 4 Feb 2011

  11. I believe that about 44 per cent of Foreign Direct Investment (FDI) into India ... to Mauritius on any particular aspect of checking the black money flow, ...



  14. Not routing black money into India: Mauritius


  16. Oneindia - 3 Feb 2011

  17. I believe that about 44 percent of Foreign Direct Investment (FDI) into India is routedthrough Mauritius. Mechanisms are in place (to check the issueof ...

  18. Not routing black money into India: Mauritius - Daily News & Analysis

  19. all 8 news articles »



  22. FDI into southern Africa down


  24. The Southern Times - 28 Jan 2011

  25. Meanwhile, UNCTAD noted that FDI flows to developing economies in general and Africa in particular rose some 10 percent to US$525 billion during the period, ...



  28. Black money hoarders:govt starts legal action


  30. Gulf Times - 5 Feb 2011

  31. I believe that about 44% of Foreign Direct Investment (FDI) into India is routed through Mauritius. Mechanisms are in place (to check the issue of black ...

    		32. *

  33. blackmoney double taxation treaty with saarc to come into effect


  35. SamayLive - 4 Feb 2011

  36. I believe that about 44 percent of Foreign Direct Investment (FDI) into India is routedthrough Mauritius. Mechanisms are in place (to check the issueof ...

    		37. *



"Scrutiny of investment from Mauritius is being enhanced," a finance ministry official told ET. Mauritius accounts for more than 40% of all foreign direct investment flows into the country.

The income-tax department has deputed an official in Mauritius to coordinate with the government and the revenue authorities there to ascertain details of funds that have been invested in India, the official said.
The department is keen to scrutinise all FDI proposals from the island nation that go to the Foreign Investment Promotion Board for clearance. Sectors such as real estate will particularly be under the lens.

At present, only name and addresses are accepted as valid identity modes.

But the European nation would still consider as impermissible any ''fishing expeditions'' or allowing the foreign countries to trawl through Swiss bank accounts in hope of finding something of their interest.

The changes were made by the Swiss government''s finance ministry today through a revision of ''Requirements for Administrative Assistance in Tax Matters,'' an official said from Bern, Switzerland.
The Indian government is facing intense pressure from Opposition, as also courts, to act tough against those who have amassed illicit wealth in foreign countries that have strict secrecy rules.'

The Swiss Parliament is debating a treaty between India and Switzerland to pave the way for authorities here to seek details of illicit wealth stashed away by Indians in Swiss banks.

As per the existing practice, the foreign country having an information exchange-facilitating treaty with Switzerland can get help from the Swiss government after providing name and address of the suspected tax offender, as also those of the concerned bank.

As per the revision, "other means of identification should also be admissible in the future".

While Switzerland has not clarified what all ''other means'' of identification modes would be admissible for seeking information on suspected tax offenders, the Swiss Federal Department of Finance said that "identification via a bank account is also a possibility."

"... although care should be taken in these cases to ensure that a fishing expedition is not involved," the ministry said.

"Fishing expeditions continue to be impermissible," it added.

To bring this revision into effect, the administrative assistance provisions in double taxation agreements (DTAs) between Swiss and other governments would need to be revised.

In the DTA negotiations up to now, including the one with India, the name and address of not only the person but also the bank is needed in administrative assistance requests.

Besides, the ongoing parliamentary debate in Switzerland on 10 treaties, including the one with India, it has been said that "administrative assistance be permitted only if the name and address of the person and the information holder concerned are indicated in the request." .

In a move that could help India in its black money trail, Switzerland today relaxed norms for sharing information on secret bank accounts of overseas tax offenders by allowing varied modes of identification.
At present, only name and addresses are accepted as valid identity modes.
Ramkishen S Rajan and Sasidaran Gopalan question the usefulness of the government's bilateral FDI inflows data

What to make of Mauritius

Sasidaran Gopalan, Ramkishen S Rajan

Posted: Saturday, Jan 02, 2010 at 2101 hrs IST
India has become increasingly important both as a source and as a host of foreign direct investment (FDI) over the last decade. But trying to make sense of the numbers regarding FDI inflows and outflows can be quite challenging.
The data on bilateral FDI outflows is sketchy; finance ministry reports the value of aggregate FDI outflows from India and the value of approvals of FDI outflows at a bilateral level, but a consistent time series of the actual value of outflows with a country-wise breakdown isn't available in public domain. While data on actual FDI inflows is reported by the Department of Industrial Policy and Promotion at a disaggregated country level, there are serious concerns about the usefulness of bilateral FDI inflows data available in the public domain.
For example, the data on FDI inflows into India almost always shows Mauritius to be the largest source of foreign investment flows into the country. But Mauritius is widely regarded as an offshore financial centre (OFC) used by foreign investors as an intermediary to reach India, predominantly to capitalise on tax rebates. Conversely, as Indian companies become globalised, many have chosen to either use their overseas locally-incorporated subsidiaries to invest overseas or have established holding companies and/or special purpose vehicles in OFCs or other regional financial centres like Singapore or Netherlands to raise funds and invest in third countries.
Apart from such transhipping, some of the inflows from Mauritius in particular, but also from other OFCs, could also be round-tripping back to India to escape capital gains tax or for other reasons, not unlike the investments dynamics between China and Hong Kong.
Bilateral FDI data—which only captures the actual flow of funds rather than ultimate ownership—may present a rather distorted picture of the extent of linkages between India and the rest of the world. Usefulness of such data for research and policy purposes needs to be examined as it gives a misleading picture. There are serious lacunae in the way direct cross-border investment flows are reported, hence the need for alternative datasets.
In order to understand de facto linkages between India and the world, one needs to examine the data on actual ownership of the foreign investment flows coming into the country. While data on individual firms that have invested in India may be available via firm-level surveys, for a more complete picture of FDI inflows into the entire economy one needs to examine an aggregation of all such firms investing in India from different parts of the world. This would be a prohibitively costly exercise. A more feasible alternative would be to examine the data on mergers and acquisitions (M&As) made by global firms in India and Indian firms globally. Such data, tracking actual ownership of purchases and sales, is maintained by many commercial entities, unlike the data on FDI flows that is compiled by national sources.
Two basic conclusions arise. One, many acquisitions by the US and the UK have been channelled via Mauritius. Two, Indian companies have largely been using Singapore, Netherlands and OFCs as intermediaries to purchase assets overseas, primarily in the developed world and resource-rich countries. While OFCs are used as tax havens, both Singapore and Netherlands are attractive hosts for holding companies from India and elsewhere for (a) their low and simple tax rates, (b) the large number of double tax treaties between the two countries and the world, (c) use of English, (d) human capital and (e) excellent logistics plus air and sea connections. All this explains their attraction to Indian businesses eager to internationalise their operations.
Figures 2 and 3 capture data on FDI inflows (reported by the Indian government) and M&A purchases (reported by commercial entities) that have taken place in India (by source of origin) in 2000-07. A comparison reveals the above discussed inconsistencies.
It is interesting to see that most of the OFCs like Mauritius (mainly) but also Cyprus, Cayman Island and Bermuda, which comprise nearly 50% share of the total FDI inflows (as reported by government sources) do not even figure in the data on inbound M&As to India.
Focusing on the FDI data, only 18% of inflows to India have been by the US and the UK combined, while about 15% are by the non-UK European countries (mainly Netherlands, France and Germany) and about 10% by East Asia (mainly Singapore and Japan). In contrast, the M&A data on foreign acquisitions in India tell quite a different story. The US is the single largest acquirer of Indian companies (35%), followed by the UK (16%) and the rest of Europe, including Netherlands (27%) and East Asia (18%) (distributed between Japan, Singapore, Malaysia and Hong Kong). So almost all of the inbound acquisitions to India have been by the US, Europe and Asia. This appears to offer a far more informative geographical breakdown of sources of direct investment equity flows to India compared to the FDI data.
As noted, similar bilateral data on India's actual FDI outflows are not publicly available on a systematic time series basis. While approvals may not provide a fully realistic picture as not all approvals are realised, available data, at least for aggregate actual outflows, suggest that there is a reasonable degree of correlation between approved and the actual outward FDI flows from India.
Accordingly, the outward FDI approvals data ought to offer some useful insight when compared to data on India's M&A purchases overseas. It is well known that Indian businesses have been very active in overseas investments in the last few years, particularly since 2006. Anecdotal evidence and examples point to the fact that many of these investments have been in developed countries like the US, the UK and rest of Europe. Notable instances would be Tata Steel's purchase of Corus and Tata Motors' purchase of Jaguar and Land Rover in the UK, and Hindalco's acquisition of the Canadian aluminium giant Novelis.
Developed countries like the UK and the US have surprisingly small shares of India's approved outward FDI (6% each) for recent periods for which detailed data are available (2002-08) compared to Singapore (22%), the Netherlands (15%) and Mauritius and other OFCs in total (25%). So, over 50% of India's approved FDI is destined to the financial centres (regional and offshore).
Examination of M&A purchases for more or less the same period (2000-07), however, reveals quite a different picture. Canada emerges as the top host country for India's outbound acquisitions with a 34% share, followed by the US with a 24% share. While Indian companies have undertaken a number of varied purchases in the US, acquisitions in Canada have been concentrated in resources, including Novelis mentioned above. Apart from these, around 16% of India's acquisitions have been aimed at resources rich countries (Russia, Egypt, Australia and South Africa) and the rest to the UK and Europe (17%). The Tata Motors' acquisitions of Jaguar and Land Rover Brands from the UK do not show up in our data as they were done in early 2008. It is likely that an extension of the data to 2008 would see a jump up in the UK as a source of Indian outbound M&As, as would Europe in general.
One clearly has to be cautious in comparing the two sets of data (FDI versus M&A), as the M&A data excludes greenfield investments. While M&As are growing as the preferred mode of foreign entry, M&A data are not from national sources, being sourced from commercial entities, and there are questions about consistency in terms of company coverage, definitions and such. In addition, tracking transactions based on ownership is always tricky, particularly given the increasing complexity of global businesses. All this being said, the important point is that India's FDI data at a bilateral level may offer quite a misleading indication of the extent of real linkages and should be interpreted with extreme caution, a point that researchers and analysts have failed to adequately appreciate.
Ramkishen S Rajan is an associate professor at George Mason University, Virginia, US. His coauthor Sasidaran Gopalan is a research associate at the Institute of South Asian Studies (ISAS), National University of Singapore
http://www.financialexpress.com/news/what-to-make-of-mauritius/562219/0

But the European nation would still consider as impermissible any ''fishing expeditions'' or allowing the foreign countries to trawl through Swiss bank accounts in hope of finding something of their interest.
The changes were made by the Swiss government''s finance ministry today through a revision of ''Requirements for Administrative Assistance in Tax Matters,'' an official said from Bern, Switzerland.
The Indian government is facing intense pressure from Opposition, as also courts, to act tough against those who have amassed illicit wealth in foreign countries that have strict secrecy rules.
The Swiss Parliament is debating a treaty between India and Switzerland to pave the way for authorities here to seek details of illicit wealth stashed away by Indians in Swiss banks.
As per the existing practice, the foreign country having an information exchange-facilitating treaty with Switzerland can get help from the Swiss government after providing name and address of the suspected tax offender, as also those of the concerned bank.

As per the revision, "other means of identification should also be admissible in the future".

While Switzerland has not clarified what all ''other means'' of identification modes would be admissible for seeking information on suspected tax offenders, the Swiss Federal Department of Finance said that "identification via a bank account is also a possibility."

"... although care should be taken in these cases to ensure that a fishing expedition is not involved," the ministry said.

"Fishing expeditions continue to be impermissible," it added.

To bring this revision into effect, the administrative assistance provisions in double taxation agreements (DTAs) between Swiss and other governments would need to be revised.

In the DTA negotiations up to now, including the one with India, the name and address of not only the person but also the bank is needed in administrative assistance requests.

Besides, the ongoing parliamentary debate in Switzerland on 10 treaties, including the one with India, it has been said that "administrative assistance be permitted only if the name and address of the person and the information holder concerned are indicated in the request." .

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FDI from Mauritius

FDI from Mauritius to India is the highest in comparison with all the other countries that invest in India. FDI from Mauritius to India is the highest due to the special treatment of tax that is given in India to the investments that come through Mauritius.
Foreign direct investment in India:
The Indian government realized the fact that foreign direct investment plays a very crucial role in boosting the country's economy by developing the infrastructure, generating new jobs, transfer of technology, and increasing productivity.
Thus the government of India liberalized its economic policies in order to use foreign direct investment as a developmental tool. India offers several positive incentives to the foreign investors such as an abundant supply of educated workforce, low wages, and very strong economic growth in the country which has increased the middle class's power of buying.
Flow of foreign direct investment from Mauritius to India:
The first rank goes to Mauritius in terms of highest inflow of foreign direct investment to India in comparison with all the other countries that make investments in India. This is due to the fact that special tax treatment is given to all those investments that come through Mauritius to India. The total amount of FDI from Mauritius to India came to Rs. 27,891.15 crore between 1991 to 2002. The total percentage of FDI from Mauritius to India stood at 38.7% out of the total foreign direct investment in the country from 1991 to 2002.
Industries attracting FDI from Mauritius to India are:
    Electrical equipment     Gypsum and cement products     Telecommunications     Services sector that includes both non- financial and financial     Fuels
Effects of FDI from Mauritius to India:
The effects of increased flow of foreign direct investment from Mauritius to India has been that it has led to the generation of a lot of new employment opportunities, development of the sectors that have received investments, and also growth of the country's economy.
http://business.mapsofindia.com/fdi-india/investing-country/mauritius.html
Indian Budget for 2011-12 not likely to be pro-market
February 15, 2011 05:00 PM|
Munira Dongre
In the Union Budget for FY12, there are likely to be cuts in excise duty exemptions and more services may be made liable to be taxed. The government may also reduce the tax burden on the middle class, at least to a small extent

There is an agreement that while announcing this year's Budget, the three biggest challenges that the government faces are-the large deficit, high crude prices, and high inflation.

Most market watchers believe that to get government finances in order (the government is facing a fiscal deficit of 5% in FY12) the government will have to widen and deepen the tax net. There are likely to be cuts in excise duty exemptions and more services will be made liable to be taxed.

However, in a smart move, the government may reduce the tax burden on the middle class-at least to a small extent. Diesel price decontrol is unlikely in the Budget session.

The government is very aware of the perception that reforms have slowed. However, it may not do too much about this since state elections are round the corner in Tamil Nadu, Kerala, and West Bengal.

On the positive side in FY11, revenues are expected to be higher due to higher tax collections. However, expenses are expected to shoot up due to higher subsidies too-food, fertiliser, and oil. The total subsidy bill could touch about Rs2 trillion in FY11.

Certain fiscal expansions in recent years are irreversible and can only keep going higher-the main being the Pay Commission revisions and the Mahatma Gandhi National Rural Employment Guarantee Act (scheme), which is now linked to inflation.

It is unlikely that any government which is in power will find it prudent to disband the Mahatma Gandhi NREGA scheme and it is here to stay. It is India's answer to the unemployment dole or social security in Western countries. The NREGA allocation is expected to increase.

The government's borrowing in FY12 is likely to be Rs3.75 trillion-Rs4.0 trillion. This year, divestment is not likely to cushion the impact of a burgeoning expenditure account due to higher subsidies.

The government may have to go through a massive cost-cutting exercise. In any case, with the spate of scams and scandals erupting over the last 12 months, it is perceived that it will do the image of the government a lot of good if it at least announces cost-saving measures by the ministers and the bureaucracy.

An extension of the sunset clause on tax exemptions for Software Technology Parks may not happen. Excise duties on cigarettes may be hiked further, even after they have been hiked in the last two years. A few months ago it looked liked another hike was unlikely. However, such complacency is no longer there-a 7%-10% hike looks likely (it was hiked 15%-17% in the last Budget).

Excise duty may be hiked for cars. On the other hand, excise duty may be cut on food products.

In the last Budget, the government increased excise duty by 2% for passenger vehicles, two-wheelers and commercial vehicles and increased the weighted deduction for research & development from 150% to 200%. It had also reduced income tax rates, which helped drive auto sales indirectly.


Since a lot of hue and cry has been made about inflation being supply-side and mainly due to shortage (of vegetables, pulses & grains), agriculture is likely to be in sharp focus in this Budget. There has been talk that India needs a "second Green Revolution" and it is likely that the government will make allocations in that direction.

Economists have also pointed out that most of the government expenditure in the last 4-5 years has been consumption driven-subsidies, welfare schemes-but has not gone into capacity creation, which has only increased supply-side pressures, another driven of inflation.

It is likely that in this Budget, the government will finally take this criticism seriously and go big in the direction of capacity creation. In this direction, it is possible that project awarding (especially roads) will gather pace.

Within taxes, it is very likely that the government will introduce an amnesty scheme for people to come and declare their black money-this will provide an immediate shot in the arm for revenues.

For the banking & financial sector, the government could provide more tax breaks on longer tenure deposits to increase mobilisation. Banks could be allowed to raise money through infrastructure bonds-while this will be good for banks, it will be negative for Infrastructure Finance Companies.

It is possible that import duties on crude could be brought to zero from the current 5%. Capital goods manufacturers are lobbying strongly for import duties on power equipment for mega-projects. However, since this also escalates the costs of projects, it may not be implemented.

In telecom, it is possible that an import duty may be imposed on handsets to encourage local manufacturing. Service providers that provide bundled imported handsets (especially BlackBerry) could be affected. Some amount of liberalisation in Foreign Direct Investment (FDI) norms for retail could happen-especially pertaining to cold storage. FDI norms may also be liberalised for radio, direct-to-home, and cable.

In real estate, it is likely that there could be an increase in the income-tax deduction for home loans (to Rs3,00,000 from the current Rs1,50,000). It is also likely that interest subvention of 1% on loans of up to Rs1 million on property of Rs2 million will be extended by another year. There is also a slim chance that tax holidays for developing affordable housing (Section 80IB) could be reinstated.

For infra companies, in the last Budget, the government had increased the Minimum Alternate Tax rate from 15% to 18%. It had affected companies putting up projects under special purpose vehicles-this is unlikely to change in this Budget.

Market players do not expect urea to be brought under the Nutrient-Based Subsidy regime in this Budget. Nothing much is expected on the goods & services tax front either. For the Railway Budget, the market does not expect fares to go up, despite the fund crunch.


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Economy of India

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Economy of The Republic of India
Indian rupees.png
Modern Indian currency notes
Rank 11th (nominal) / 4th (PPP)
Currency 1 Indian Rupee (INR) (Indian Rupee ₹) = 100 Paise
Fiscal year Calendar year (1 April – 31 March)
Trade organizations WTO, SAFTA, G-20 and others
Statistics
GDP

$1.43 trillion (nominal: 11th; 2010)[1]

$4.00 trillion (PPP: 4th; 2010)[1]
GDP growth 8.9% (2010, Q2)[2]
GDP per capita

$1,176 (nominal: 137th; 2010)[1]

$3,290 (PPP: 127th; 2010)[1]
GDP by sector services (57%), industry (28%), agriculture (15%) (2009–10)
Inflation (CPI) 8.43% (December 2010)[3]
Population
below poverty line		 37% (2010)[4]
Gini index 36.8 (List of countries)
Labour force 478 million (2nd; 2009)
Labour force
by occupation		 agriculture (52%), industry (14%), services (34%) (2009 est.)
Unemployment 9.4% (2009–10)[5]
Main industries telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology, pharmaceuticals
Ease of Doing Business Rank 134th[6]
External
Exports $210 billion (17th; 2010)
Export goods software, petroleum products, textile goods, gems and jewellery, engineering goods, chemicals, leather manufactures
Main export partners US 12.3%, UAE 9.4%, China 9.3% (2008)
Imports $327 billion (11th; 2010)
Import goods crude oil, machinery, gems, fertiliser, chemicals
Main import partners China 11.1%, Saudi Arabia 7.5%, US 6.6%, UAE 5.1%, Iran 4.2%, Singapore 4.2%, Germany 4.2% (2008)
FDI stock $191.1 billion (23rd; 2010)
Gross external debt $237.1 billion (2010 est.)
Public finances
Public debt $758 billion (2010)[7] 55.9% of GDP
Revenues $129.8 billion (2009 est.)
Expenses $214.6 billion (2009 est.)
Economic aid $1.724 billion (2005)[8]
Credit rating 1.164 trillion (2010 est.)
Foreign reserves $300 billion (6th; Nov 2010)
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars
"Dollar" and "$" refer throughout to the US dollar.

The Economy of India is the eleventh largest in the world by nominal GDP[1] and the fourth largest by purchasing power parity (PPP).[1] The country's per capita GDP (PPP) is $3,290 (IMF, 127th) in 2010.[1] Following strong economic reforms from the socialist inspired economy of a post-independence Indian nation, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment.[9] Economists predict that by 2020, India will be among the leading economies of the world.[10]

India was under social democratic policies from 1947 to 1991. The economy was characterised by extensive regulation, protectionism, public ownership, pervasive corruption and slow growth.[11][12][13] Since 1991, continuing economic liberalisation has moved the country toward a market-based economy.[11][12] A revival of economic reforms and better economic policy in first decade of the 21st century accelerated India's economic growth rate. In recent years, Indian cities have continued to liberalise business regulations.[6] By 2008, India had established itself as the world's second-fastest growing major economy.[14] However, as a result of the financial crisis of 2007–2010, coupled with a poor monsoon, India's gross domestic product (GDP) growth rate significantly slowed to 6.7% in 2008–09, but subsequently recovered to 7.2% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period.[15] The unemployment rate for 2009–2010, according to the state Labour Bureau, was 9.4 percent nationwide, rising to 10.1 percent in rural areas, where two-thirds of the 1.2 billion population live.[5]

India's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural sector contribute 28% and 14.6% respectively.[16] Agriculture is the predominant occupation in India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14%.[17] The labour force totals half a billion workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish.[18] Major industries include telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology-enabled services and pharmaceuticals.[18] However, statistics from a 2009-10 government survey, which used a smaller sample size than earlier surveys, suggested that the share of agriculture in employment had dropped to 45.5%.[5]

Previously a closed economy, India's trade and business sector has grown fast.[11] India currently accounts for 1.5% of world trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's total trade in goods and services has reached a share of 43% of GDP in 2005–06, up from 16% in 1990–91.[19]

Contents

[hide]

[edit] History

Main articles: Economic history of India and Timeline of the economy of India

[edit] Pre-colonial period (up to 1757)

The spice trade between India and Europe was the main catalyst for the Age of Discovery.[20]

The citizens of the Indus Valley civilisation, a permanent settlement that flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and measures, made tools and weapons, and traded with other cities. Evidence of well planned streets, a drainage system and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems and the existence of a form of municipal government.[21]

Maritime trade was carried out extensively between South India and southeast and West Asia from early times until around the fourteenth century AD. Both the Malabar and Coromandel Coasts were the sites of important trading centres from as early as the first century BC, used for import and export as well as transit points between the Mediterranean region and southeast Asia.[22] Over time, traders organised themselves into associations which received state patronage. However, state patronage for overseas trade came to an end by the thirteenth century AD, when it was largely taken over by the local Jewish and Muslim communities, initially on the Malabar and subsequently on the Coromandel coast.[23] Further north, the Saurashtra and Bengal coasts played an important role in maritime trade, and the Gangetic plains and the Indus valley housed several centres of river-borne commerce. Most overland trade was carried out via the Khyber Pass connecting the Punjab region with Afghanistan and onward to the Middle East and Central Asia.[24] Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while their craftsmen received a part of the crops at harvest time for their services.[25]


Religion, especially Hinduism and the caste and the joint family systems, played an influential role in shaping economic activities.[26] The caste system functioned much like medieval European guilds, ensuring the division of labour, providing for the training of apprentices and, in some cases, allowing manufacturers to achieve narrow specialisation. For instance, in certain regions, producing each variety of cloth was the specialty of a particular sub-caste. Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon, opium and indigo were exported to Europe, the Middle East and South East Asia in return for gold and silver.[27]

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. The Mughal economy functioned on an elaborate system of coined currency, land revenue and trade. Gold, silver and copper coins were issued by the royal mints which functioned on the basis of free coinage.[28] The political stability and uniform revenue policy resulting from a centralised administration under the Mughals, coupled with a well-developed internal trade network, ensured that India, before the arrival of the British, was to a large extent economically unified, despite having a traditional agrarian economy characterised by a predominance of subsistence agriculture dependent on primitive technology.[29] After the decline of the Mughals, western, central and parts of south and north India were integrated and administered by the Maratha Empire. After the loss at the Third Battle of Panipat, the Maratha Empire disintegrated into several confederate states, and the resulting political instability and armed conflict severely affected economic life in several parts of the country, although this was compensated for to some extent by localised prosperity in the new provincial kingdoms.[30] By the end of the eighteenth century, the British East India Company entered the Indian political theatre and established its dominance over other European powers. This marked a determinative shift in India's trade, and a less powerful impact on the rest of the economy.[31]

[edit] Colonial period (1773–1947)

An aerial view of Calcutta Port taken in 1945. Calcutta, which was the economic hub of British India, saw increased industrial activity during World War II.

There is no doubt that our grievances against the British Empire had a sound basis. As the painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3% at that time, to as low as 3.8% in 1952. Indeed, at the beginning of the 20th Century, "the brightest jewel in the British Crown" was the poorest country in the world in terms of per capita income.

– Manmohan Singh[32]

Company rule in India brought a major change in the taxation and agricultural policies, which tended to promote commercialisation of agriculture with a focus on trade, resulting in decreased production of food crops, mass impoverishment and destitution of farmers, and in the short term, led to numerous famines.[33] The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, due to reduced demand and dipping employment.[34] After the removal of international restrictions by the Charter of 1813, Indian trade expanded substantially and over the long term showed an upward trend.[35] The result was a significant transfer of capital from India to England, which, due to the colonial policies of the British, led to a massive drain of revenue instead of any systematic effort at modernisation of the domestic economy.[36]

Estimates of the per capita income of India (1857–1900) as per 1948–49 prices.[37]

India's colonisation by the British created an institutional environment that, on paper, guaranteed property rights among the colonisers, encouraged free trade, and created a single currency with fixed exchange rates, standardised weights and measures and capital markets. It also established a well developed system of railways and telegraphs, a civil service that aimed to be free from political interference, a common-law and an adversarial legal system.[38] This coincided with major changes in the world economy – industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world,[39] with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labour force, and extremely inadequate infrastructure.[40]

The 1872 census revealed that 91.3% of the population of the region constituting present-day India resided in villages,[41] and urbanisation generally remained sluggish until the 1920s, due to the lack of industrialisation and absence of adequate transportation. Subsequently, the policy of discriminating protection (where certain important industries were given financial protection by the state), coupled with the Second World War, saw the development and dispersal of industries, encouraging rural-urban migration, and in particular the large port cities of Bombay, Calcutta and Madras grew rapidly. Despite this, only one-sixth of India's population lived in cities by 1951.[42]

The impact of the British rule on India's economy is a controversial topic. Leaders of the Indian independence movement and left-nationalist economic historians have blamed colonial rule for the dismal state of India's economy in its aftermath and stated that financial strength required for industrial development in Europe was derived from the wealth taken from colonies in Asia and Africa. At the same time, right-wing historians have countered that India's low economic performance was due to various sectors being in a state of growth and decline due to changes brought in by colonialism and a world that was moving towards industrialisation and economic integration.[43]

[edit] Pre-liberalisation period (1947–1991)

Compare India (orange) with South Korea (yellow). Both started from about the same income level in 1950. The graph shows GDP per capita of South Asian economies and South Korea as a percentage of the American GDP per capita.

Indian economic policy after independence was influenced by the colonial experience, which was seen by Indian leaders as exploitative, and by those leaders' exposure to democratic socialism as well as the progress achieved by the economy of the Soviet Union.[40] Domestic policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation, economic interventionism, a large public sector, business regulation, and central planning,[44] while trade and foreign investment policies were relatively liberal.[45] Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s.[46]

Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country's existence. They expected favorable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system.[47][48] The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidizing manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers.[49] The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth, because of the unfavourable comparison with growth rates in other Asian countries, especially the East Asian Tigers.[50][51]

Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture in India by increasing productivity of food as well as commercial crops, improving crop patterns and strengthening forward and backward linkages between agriculture and industry.[52] However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.[53]

[edit] Post-liberalisation period (since 1991)

Main articles: Economic liberalisation in India and Economic development in India

In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans.[54] India asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded reforms.[55]

In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj (investment, industrial and import licensing), reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.[56] Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.[57] By the turn of the 20th century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation.[58] This has been accompanied by increases in life expectancy, literacy rates and food security, although the beneficiaries have largely been urban residents.[59]

While the credit rating of India was hit by its nuclear tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's.[60] In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century.[61][62]

[edit] Sectors

[edit] Industry and services

See also: Information technology in India, Business process outsourcing in India, and Retailing in India
India has one of the world's fastest growing automobile industries.[63] Shown here is the Nano, the world's cheapest car.[64]

Industry accounts for 28% of the GDP and employ 14% of the total workforce.[17] In absolute terms, India is 12th in the world in terms of nominal factory output.[65] The Indian industrial sector underwent significantly changes as a result of the economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to privatisation of certain public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.[66] Post-liberalisation, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.[67]

Textile manufacturing is the second largest source of employment after agriculture and accounts for 20% of manufacturing output, providing employment to over 20 million people.[68] Ludhiana produces 90% of woollens in India and is known as the Manchester of India. Tirupur has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear.[69]

India is 13th in services output. The services sector provides employment to 23% of the work force and is growing quickly, with a growth rate of 7.5% in 1991–2000, up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 55% in 2007, up from 15% in 1950.[17] Information technology and business process outsourcing are among the fastest growing sectors, having a cumulative growth rate of revenue 33.6% between 1997–98 and 2002–03 and contributing to 25% of the country's total exports in 2007–08.[70] The growth in the IT sector is attributed to increased specialisation, and an availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers, on the supply side. This is matched on the demand side by an increased demand from foreign consumers interested in India's service exports, or those looking to outsource their operations. The share of the Indian IT industry in the country's GDP increased from 4.8 % in 2005–06 to 7% in 2008.[71] In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world.[72] Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo medical tourism.[73]

Organised retail supermarkets accounts for 24% of the market as of 2008.[74] Regulations prevent most foreign investment in retailing. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods from state to state, and even within states.[74]

Mining forms an important segment of the Indian economy, with the country producing 79 different minerals (excluding fuel and atomic resources) in 2009–10, including iron ore, manganese, mica, bauxite, chromite, limestone, asbestos, fluorite, gypsum, ochre, phosphorite and silica sand.[75]

[edit] Agriculture

Farmers work inside a rice field in Andhra Pradesh. India is the second largest producer of rice in the world after China,[76] and Andhra Pradesh is the second largest rice producing state in India with West Bengal being the largest.[77]
Main articles: Agriculture in India, Forestry in India, Animal husbandry in India, and Fishing in India
See also: Natural resources in India

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 15.7% of the GDP in 2009–10, employed 52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest economic sector and a significant piece of the overall socio-economic development of India.[78] Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India. However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world.[79]

India receives an average annual rainfall of 1,208 millimetres (47.6 in) and a total annual precipitation of 4000 billion cubic metres, with the total utilisable water resources, including surface and groundwater, amounting to 1123 billion cubic metres.[80] 546,820 square kilometres (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is irrigated.[81] India's inland water resources including rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly six million people in the fisheries sector. In 2008, India had the world's third largest fishing industry.[82]

India is the largest producer in the world of milk, jute and pulses, and also has the world's second largest cattle population with 175 million animals in 2008.[76] It is the second largest producer of rice, wheat, sugarcane, cotton and groundnuts, as well as the second largest fruit and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable production respectively.[76] India is also the second largest producer and the largest consumer of silk in the world, producing 77,000 million tons in 2005.[83]

[edit] Banking and finance

Main article: Finance in India
See also: Banking in India and Insurance in India

The Indian money market is classified into the organised sector, comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks, and the unorganised sector, which includes individual or family owned indigenous bankers or money lenders and non-banking financial companies.[84] The unorganised sector and microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans.[85]

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Since then, the number of bank branches has increased from 8,260 in 1969 to 72,170 in 2007 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total bank deposits increased from Indian Rupee ₹5,910 crore (US$1.28 billion) in 1970–71 to Indian Rupee ₹3,830,922 crore (US$831.31 billion) in 2008–09. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a scheduled bank.[86][87]

India's gross domestic saving in 2006–07 as a percentage of GDP stood at a high 32.7%.[88] More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold.[89] The public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.[90] Since liberalisation, the government has approved significant banking reforms. While some of these relate to nationalised banks, like encouraging mergers, reducing government interference and increasing profitability and competitiveness, other reforms have opened up the banking and insurance sectors to private and foreign players.[17][91]

[edit] Energy and power

Main article: Energy policy of India
As of 2010, India imported about 70% of its crude oil requirements.[92] Shown here is an ONGC platform at Mumbai High in the Arabian Sea, one of the few sites of domestic production.

India's oil reserves meet 25% of the country's domestic oil demand.[17][93] As of 2009, India's total proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic metres.[94] Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan.[94] India is the fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters of 2010, which had an adverse effect on its current account deficit.[92] The petroleum industry in India mostly consists of public sector companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private Indian companies in the oil sector such as Reliance Industries Limited (RIL) which operates the world's largest oil refining complex.[95]

India has the world's fifth largest wind power industry, with an installed wind power capacity of 9,587 MW. Shown here is a wind farm in Muppandal, Tamil Nadu.

As of 2010, India had an installed power generation capacity of 164,835 megawatts (MW), of which thermal power contributed 64.6%, hydroelectricity 24.7%, other sources of renewable energy 7.7%, and nuclear power 2.9%.[96] India meets most of its domestic energy demand through its 106 billion tonnes of coal reserves.[97] India is also rich in certain renewable sources of energy with significant future potential such as solar, wind and biofuels (jatropha, sugarcane). India's huge thorium reserves – about 25% of world's reserves – are expected to fuel the country's ambitious nuclear energy program in the long-run. India's dwindling uranium reserves stagnated the growth of nuclear energy in the country for many years.[98] However, the Indo-US nuclear deal has paved the way for India to import uranium from other countries.[99]

[edit] External trade and investment

Further information: Globalisation in India

[edit] Global trade relations

A map showing the global distribution of Indian exports in 2006 as a percentage of the top market (USA - $20,902,500,000).

Until the liberalisation of 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI averaged only around $200 million annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians.[100] India's exports were stagnant for the first 15 years after independence, due to general neglect of trade policy by the government of that period. Imports in the same period, due to industrialisation being nascent, consisted predominantly of machinery, raw materials and consumer goods.[101]

Since liberalisation, the value of India's international trade has increased sharply,[102] with the contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 43% in 2005–06.[19] India's major trading partners are the European Union, China, the United States and the United Arab Emirates.[103] In 2006–07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewellery, textiles and garments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver.[104] In November 2010, exports increased 22.3% year-on-year to Indian Rupee ₹85,063 crore (US$18.46 billion), while imports were up 7.5% at Indian Rupee ₹125,133 crore (US$27.15 billion). Trade deficit for the same month dropped from Indian Rupee ₹46,865 crore (US$10.17 billion) in 2009 to Indian Rupee ₹40,070 crore (US$8.7 billion) in 2010.[105]

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the WTO. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world. For instance, India has continued its opposition to the inclusion of such matters as labour and environment issues and other non-tariff barriers to trade into the WTO policies.[106]

[edit] Balance of payments

Cumulative Current Account Balance 1980–2008 based on IMF data

Since independence, India's balance of payments on its current account has been negative. Since economic liberalisation in the 1990s, precipitated by a balance of payment crisis, India's exports rose consistently, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91.[107] However, the global economic slump followed by a general deceleration in world trade saw the exports as a percentage of imports drop to 61.4% in 2008–09.[108] India's growing oil import bill is seen as the main driver behind the large current account deficit,[92] which rose to $118.7 billion, or 9.7% of GDP, in 2008–09.[109] Between January and October 2010, India imported $82.1 billion worth of crude oil.[92]

Due to the global late-2000s recession, both Indian exports and imports declined by 29.2% and 39.2% respectively in June 2009.[110] The steep decline was because countries hit hardest by the global recession, such as United States and members of the European Union, account for more than 60% of Indian exports.[111] However, since the decline in imports was much sharper compared to the decline in exports, India's trade deficit reduced to Indian Rupee ₹25,250 crore (US$5.48 billion).[110]

India's reliance on external assistance and concessional debt has decreased since liberalisation of the economy, and the debt service ratio decreased to from 35.3% in 1990–91 to 4.4% in 2008–09.[112] In India, External Commercial Borrowings (ECBs), or commercial loans from non-resident lenders, are being permitted by the Government for providing an additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates them through ECB policy guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act of 1999.[113] India's foreign exchange reserves have steadily risen from $5.8 billion in March 1991 to $283.5 billion in December 2009. [114]

[edit] Foreign direct investment in India

Share of top five investing countries in FDI inflows. (2000–2010)[115]
Rank Country Inflows
(million USD)		 Inflows (%)
1 Mauritius 50,164 42.00
2 Singapore 11,275 9.00
3 USA 8,914 7.00
4 UK 6,158 5.00
5 Netherlands 4,968 4.00

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for FDI;[116] India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region.[116] India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market.[117]

During 2000–10, the country attracted $178 billion as FDI.[118] The inordinately high investment from Mauritius is due to routing of international funds through the country given significant tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel.[119]

India's recently liberalised FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalised FDI regime. In March 2005, the government amended the rules to allow 100% FDI in the construction sector, including built-up infrastructure and construction development projects comprising housing, commercial premises, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.[120]

A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. The total FDI equity inflow into India in 2008–09 stood atIndian Rupee ₹122,919 crore (US$26.67 billion), a growth of 25% in rupee terms over the previous period.[121]. Consequently, India's FDI Policy has been changed to avail the existing oppertunities.

[edit] Currency

The RBI headquarters in Mumbai
Main articles: Indian rupee and Reserve Bank of India

The Indian rupee is the only legal tender in India, and is also accepted as legal tender in the neighbouring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee. The rupee is divided into 100 paise. The highest-denomination banknote is the 1,000 rupee note; the lowest-denomination coin in circulation is the 10 paise coin.[122] However, with effect from 30 June 2011, 50 paise will be the minimum coin accepted in the markets as all denominations below it will cease to be legal currency.[123][124] India's monetary system is managed by the Reserve Bank of India (RBI), the country's central bank.[125] Established on 1 April 1935 and nationalised in 1949, the RBI serves as the nation's monetary authority, regulator and supervisor of the monetary system, banker to the government, custodian of foreign exchange reserves, and as an issuer of currency. It is governed by a central board of directors, headed by a governor who is appointed by the Government of India.[126]

The rupee was linked to the British pound from 1927–1946 and then the U.S. dollar till 1975 through a fixed exchange rate. It was devalued in September 1975 and the system of fixed par rate was replaced with a basket of four major international currencies – the British pound, the U.S. dollar, the Japanese yen and the Deutsche mark.[127] Since 2003, the rupee has been steadily appreciating against the U.S. dollar.[128] In 2009, a rising rupee prompted the Government of India to purchase 200 tons of gold for $6.7 billion from the IMF.[129]

[edit] Income and consumption

Main article: Income in India
See also: Poverty in India
A map showing the percentage of population living under the government poverty line from 1973-74 to 1999-2000.
World map showing the Gini coefficient, a measure of income inequality. India has a Gini coefficient of 0.368.

India's gross national income per capita in 2008 was $1040.[130] Indian official estimates of the extent of poverty have been subject to debate, with concerns being raised about the methodology for the determination of the poverty line.[131][132] As of 2005, according to World Bank statistics, 75.6% of the population lives on less than $2 a day (PPP), while 41.6% of the population is living below the new international poverty line of $1.25 (PPP) per day.[133][134][135] However, data released in 2009 by the Government of India estimates the percentage of the population living below the poverty line to be 37%.[4]

Housing is modest. According to the Times of India, "a majority of Indians have per capita space equivalent to or less than a 10 feet x 10 feet room for their living, sleeping, cooking, washing and toilet needs", and "one in every three urban Indians lives in homes too cramped to exceed even the minimum requirements of a prison cell in the US."[136] The average is 103 sq ft (9.6 m2) per person in rural areas and 117 sq ft (10.9 m2) per person in urban areas.[136]

Around half of Indian children are malnourished. The proportion of underweight children is nearly double that of Sub-Saharan Africa.[137][138] However, India has not had any major famines since Independence.[139] A 2007 report by the state-run National Commission for Enterprises in the Unorganised Sector (NCEUS) found that 65% of Indians, or 750 million people, lived on less than Indian Rupee ₹20 (US$0.43) per day,[140] with most working in "informal labour sector with no job or social security, living in abject poverty."[141]

Since the early 1950s, successive governments have implemented various schemes, under planning, to alleviate poverty, that have met with partial success. All these programmes have relied upon the strategies of the Food for work programme and National Rural Employment Programme of the 1980s, which attempted to use the unemployed to generate productive assets and build rural infrastructure.[142] In August 2005, the Parliament of India, in response to the perceived failure of economic growth to gene rate employment for the rural poor, passed the Rural Employment Guarantee Bill into law, guaranteeing 100 days of minimum wage employment to every rural household in all the districts of India.[143] The question of whether economic reforms have reduced poverty has fuelled debates without generating clear-cut answers and has also increased political pressure against further economic reforms, especially those involving the downsizing of labour and cutting agricultural subsidies.[144] Recent statistics in 2010 point out that the number of high income households has crossed lower income households.[145]

[edit] Employment

See also: Indian labour law

India's labor regulations – among the most restrictive and complex in the world – have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labor regulations can attract more labor- intensive investment and create jobs for India's unemployed millions and those trapped in poor quality jobs. Given the country's momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the work force over the next decade.

– World Bank: India Country Overview 2008.[146]

Agricultural and allied sectors accounted for about 52.1% of the total workforce in 2009–10.[78] While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 7% is in the organised sector, two-thirds of which are in the public sector.[147] The NSSO survey estimated that in 2004–05, 8.3% of the population was unemployed, an increase of 2.2% over 1993 levels, with unemployment uniformly higher in urban areas and among women.[148][149] Growth of labour stagnated at around 2% for the decade between 1994–2005, about the same as that for the preceding decade.[143] Avenues for employment generation have been identified in the IT and travel and tourism sectors, which have been experiencing high annual growth rates of above 9%.[150]

Unemployment in India is characterised by chronic (disguised) unemployment. Government schemes that target eradication of both poverty and unemployment (which in recent decades has sent millions of poor and unskilled people into urban areas in search of livelihoods) attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decline in organised employment due to the decreased role of the public sector after liberalisation has further underlined the need for focusing on better education and has also put political pressure on further reforms.[151] [152] India's labour regulations are heavy even by developing country standards and analysts have urged the government to abolish or modify them in order to make the environment more conducive for employment generation.[153][154] The 11th five-year plan has also identified the need for a congenial environment to be created for employment generation, by reducing the number of permissions and other bureaucratic clearences required.[155] Further, inequalities and inadequacies in the education system have been identified as an obstacle preventing the benefits of increased employment opportunities from reaching all sectors of society.[156]

Child labour in India is a complex problem that is basically rooted in poverty, coupled with a failure of governmental policy, which has focused on subsidising higher rather than elementary education, as a result benefiting the privileged rather than the poorer sections of society.[157] The Indian government is implementing the world's largest child labour elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organisations are also involved. Special investigation cells have been set up in states to enforce existing laws banning the employment of children under 14 in hazardous industries. The allocation of the Government of India for the eradication of child labour was $21 million in 2007.[158] Public campaigns, provision of meals in school and other incentives have proven successful in increasing attendance rates in schools in some states.[159]

In 2009–10, remittances from Indian migrants overseas stood at Indian Rupee ₹250,000 crore (US$54.25 billion), the highest in the world, but their share in FDI remained low at around 1%.[160] India ranked 133th on the Ease of Doing Business Index 2010, behind countries such as China (89th), Pakistan (85th), and Nigeria (125th).[161]

[edit] Economic trends and issues

Shown here is a residential area in Mumbai.

In the revised 2007 figures, based on increased and sustaining growth, more inflows into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020, India's GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the United States (in US$) by 2043.[13] In spite of the high growth rate, the report stated that India would continue to remain a low-income country for decades to come but could be a "motor for the world economy" if it fulfills its growth potential.[13]

[edit] Agriculture

An Indian farmer
Main article: Agriculture in India

Slow agricultural growth is a concern for policymakers as some two-thirds of India's people depend on rural employment for a living. Current agricultural practices are neither economically nor environmentally sustainable and India's yields for many agricultural commodities are low. Poorly maintained irrigation systems and almost universal lack of good extension services are among the factors responsible. Farmers' access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation.

– World Bank: "India Country Overview 2008"[146]

India's population is growing faster than its ability to produce rice and wheat.[162] The low productivity in India is a result of several factors. According to the World Bank, India's large agricultural subsidies are hampering productivity-enhancing investment. While overregulation of agriculture has increased costs, price risks and uncertainty, governmental intervention in labour, land, and credit markets are hurting the market. Infrastructure and services are inadequate.[163] Further, the average size of land holdings is very small, with 70% of holdings being less than one hectare in size.[164] The partial failure of land reforms in many states, exacerbated by poorly maintained or non-existent land records, has resulted in sharecropping with cultivators lacking ownership rights, and consequently low productivity of labour.[165] Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs, illiteracy, slow progress in implementing land reforms, inadequate or inefficient finance and marketing services for farm produce and impracticality in the case of small land holdings. The allocation of water is inefficient, unsustainable and inequitable. The irrigation infrastructure is deteriorating.[163] Irrigation facilities are inadequate, as revealed by the fact that only 39% of the total cultivable land was irrigated as of 2010,[81] resulting in farmers still being dependent on rainfall, specifically the monsoon season, which is often inconsistent and unevenly distributed across the country.[166]

[edit] Corruption

Overview of the index of perception of corruption, 2010
Main article: Corruption in India

Corruption has been one of the pervasive problems affecting India. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that were largely blamed for the institutionalised corruption and inefficiency.[167] Yet, a 2005 study by Transparency International (TI) found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office.[168]

The Right to Information Act (2005) and equivalent acts in the Indian states, that require government officials to furnish information requested by citizens or face punitive action, computerisation of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances.[168] The 2010 report by TI ranks India at 87th place and states that significant setbacks were made by India in reducing corruption.[169]

The number of people employed in non-agricultural occupations in the public and private sectors. Totals are rounded. Private sector data relates to non-agriculture establishments with 10 or more employees.[142]

The current government has concluded that most spending fails to reach its intended recipients. A large, cumbersome and overworked bureaucracy also contributes to administrative inefficiency.[170] India's absence rates are one of the worst in the world; one study found that 25% of public sector teachers and 40% of public sector medical workers could not be found at the workplace.[171][172]

The Indian economy continues to face the problem of an underground economy with a 2006 estimate by the Swiss Banking Association suggesting that India topped the worldwide list for black money with almost $1,456 billion stashed in Swiss banks. This amounts to 13 times the country's total external debt.[173][174]

[edit] Education

Main article: Education in India

India has made huge progress in terms of increasing primary education attendance rate and expanding literacy to approximately two thirds of the population.[175] The right to education at elementary level has been made one of the fundamental rights under the eighty-sixth Amendment of 2002, and legislation has been enacted to further the objective of providing free education to all children.[176] However, the literacy rate of 65% is still lower than the worldwide average and the country suffers from a high dropout rate.[177] Further, there exist severe disparities in literacy rates and educational opportunities between males and females, urban and rural areas, and among different social groups.[178]

[edit] Infrastructure

See also: Transport in India, Indian Road Network, Ports in India, Electricity sector in India, States of India by installed power capacity, Water supply and sanitation in India, and Communications in India
Shown here is the Chennai Port.
Shown here is the Mumbai Pune expressway in Maharashtra.
India has built numerous new airports in recent years. Shown here is the new Terminal 1D at the Indira Gandhi International Airport in Delhi.

In the past, development of infrastructure was completely in the hands of the public sector and was plagued by slow progress, poor quality and inefficiency.[179] India's low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. This has prompted the government to partially open up infrastructure to the private sector allowing foreign investment,[142][180] and most public infrastructure, barring railways, is today constructed and maintained by private contractors, in exchange for tax and other concessions from the government.[181]

Some 600 million Indians have no electricity at all.[182] While 80% of Indian villages have at least an electricity line, just 44% of rural households have access to electricity. Some half of the electricity is stolen, compared with 3% in China. The stolen electricity amounts to 1.5% of GDP.[183][184] Transmission and distribution losses amount to around 20%, as a result of an inefficient distribution system, handled mostly by cash-strapped state-run enterprises.[185] Almost all of the electricity in India is produced by the public sector. Power outages are common, and many buy their own power generators to ensure electricity supply.[182] As of 2006–07 the electricity production was at 652.2 billion kWh, with an installed capacity of 128400 MW.[186] In 2007, electricity demand exceeded supply by 15%.[182] However, reforms brought about by the Electricity Act of 2003 caused far-reaching policy changes, including mandating the separation of generation, transmission and distribution aspects of electricity, abolishing licencing requirements in generation and opening up the sector to private players, thereby paving the way for creating a competitive market-based electricity sector.[187] Substantial improvements in water supply infrastructure, both in urban and rural areas, have taken place over the past decade, with the proportion of the population having access to safe drinking water rising from 66% in 1991 to 92% in 2001 in rural areas, and from 82% to 98% in urban areas. however, quality and availability of water supply remains a major problem even in urban India, with most cities getting water for only a few hours during the day.[188]

India has the world's third largest road network,[189] covering about 3.3 million kilometers and carrying 65% of freight and 80% of passenger traffic.[190] Container traffic is growing at 15% a year.[191] Internet use is rare; there were only 7.57 million broadband lines in India in November 2009, however it is still growing at slower rate and is expected to boom after the launch of 3G and wimax services.[192]

[edit] Economic disparities

Main articles: Economic disparities in India and Poverty in India

Lagging states need to bring more jobs to their people by creating an attractive investment destination. Reforming cumbersome regulatory procedures, improving rural connectivity, establishing law and order, creating a stable platform for natural resource investment that balances business interests with social concerns, and providing rural finance are important.

– World Bank: India Country Overview 2008[146]

Slums next to high-rise commercial buildings in Kochi. Hundreds of people, mostly comprising migrant labourers who come to the city seeking job prospects, reside in such shabby areas.[193]

One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development.[194] Six low-income states – Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Uttar Pradesh – are home to more than one third of India's population.[195] Severe disparities exist among states in terms of income, literacy rates, life expectancy and living conditions.[196]

The five-year plans, especially in the pre-liberalisation era, attempted to reduce regional disparities by encouraging industrial development in the interior regions and distributing industries across states, but the results have not been very encouraging since these measures in fact increased inefficiency and hampered effective industrial growth.[197] After liberalisation, the more advanced states are better placed to benefit from them, with infrastructure like well developed ports, urbanisation and an educated and skilled workforce which attract manufacturing and service sectors. The union and state governments of backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc., and focusing more on sectors like tourism, which although being geographically and historically determined, can become a source of growth and is faster to develop than other sectors.[198][199]

[edit] See also

India portal
Economics portal
Business and economics portal

[edit] Notes

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