INDIAN ECONOMY - All Izz Well

Comparison Between India and China Economies

If the start of the year 2009 was marked by extreme risk aversion amongst the investors and entrepreneurs, the start of the year 2010 is being celebrated by return of risk appetite and normalization of risk aversion. After witnessing a one of the worst financial and credit crisis on record in the year 2008, the year 2009 was the year of governments and central bankers coordinated efforts through fiscal spending and monetary policies to revive world economy. And it seems that they have succeeded so far in their efforts. However the new growth path of the world economy will be different. US consumer – a de facto driver of world economy in last decade is unlikely to stretch further under the compulsion of financial deleveraging. A lot depends on Asia’s consumption and investment. And when it comes to Asia, comparison of growth profile of India and China is inevitable.

China’s growth in last decade was magnificent at around 10% in real terms and it is on the verge of overtaking Japan as world’s second largest economy. It has successfully created world class infrastructure and has been able to create world class factories to feed world consumption in many areas. Compare to that India’s real growth around 7% in last decade seems rather slow and infrastructure development in India is indeed poor compare to China’s infrastructure development. However in last decade, India has successfully emerged as best outsourcing destination for IT and ITES. Though China’s growth seems much stronger compare to India on surface, study of growth profile of both the countries reveals that India’s growth is much more sustainable and real in “New Normal” world economy.

Some of the positive facts about Indian economy are:

• In many respects India’ economy seems to be the natural development of a market place under the burden of bureaucracy, and incremental but slow moving changes in policies & regulations; but boosted by pent up demand, demographic profile and entrepreneurial energy existing at grass root levels. Whereas, unlike India, China is a command economy working on top-down approach.
  
• China’s growth profile is more skewed towards growth in exports and growth in investment unlike India’s growth profile which is more balanced between domestic consumption, investment and exports. In China’s case, undervalued currency and global credit boom during 2002-2007 has pushed its current account surplus to record level of 10% of GDP in 2007 meaning China has to export 10% of its output to balance its domestic demand and supply. A downturn in growth of external demand has affected its economy heavily in 2008-09 with large amount of spare capacity across many industries. On other hand, India runs current account deficit meaning its growth is domestic demand driven. Though financing a large current account deficit (as in 2008 for India) can be a cause of concern, a moderate current account deficit can be easily financed through remittance from Indians working abroad and FDI.
  
• Gross Fixed Capital Formation (GFCF) is also a cause of concerned for China. Recently GFCF to GDP has reached 50% level unseen by any other developed economy in there respecting development stage. This is because of China’s response to recent economic crisis by effecting biggest lending surge in its history (whereas in India, banks have slowed down on loan growth to remain prudent on quality of loans). Year on year, marginal return on investment in China is falling and it shows speculative nature of China’s capital spending boom in manufacturing, infrastructure and real estate sectors. Though investment in infrastructure can be sustainable or even grow due to its massive population; for manufacturing and real estate sectors, investment boom seems unsustainable. In this scenario, China might enter a phase of permanently reduced overall capital spending activity whereby consumption growth will become an upper boundary of growth. Compare that to India where GFCF is around 35% of GDP and infrastructure spends to GDP is around 4-5% (compare to 16% in China). India’s underdeveloped infrastructure is indeed a big opportunity for virtuous cycle of capital spending/absorption and savings. India’s GFCF seems more sustainable due to its high domestic consumption at around 65% of its GDP compare to China where domestic consumption is only about 40% of its GDP. In India, it is consumer demand that is driving investments and product development to fulfill latent Indian market and these investments in turn drive economic growth, employment and incomes. It is a virtuous cycle.
• The sustainability or otherwise of economic growth rate depends on pool of real savings and price signals sent to agents who use the capital. In China, availability capital is de facto controlled by the government and capital being effectively free with real interest rate running negative for some time, there is an encouragement to invest well beyond common sense resulting in misallocation of capital and creation of excess capacities. In India, story is different. India scores well on capital pricing environment and role of private sector in investment is important in India. India’s high fiscal deficit means the cost of capital will stay high. It may be negative in some senses but then those entrepreneurs seeking capital undertake only high return quality investments. In nutshell, those who are looking for return on investment, the growth in India is more remunerative than that of China.
• India has underinvested in its infrastructure in last decade. However, with return of risk appetite elsewhere in the world bodes well for India’s infrastructure development in next decade as most of the infrastructure sectors are now to open to private sector participation and private entrepreneurs have embarked huge investment in infrastructure sector. These projects can be easily funded by foreign capital (in addition to domestic savings) in search of quality and remunerative returns.
• India’s response to economic crisis of 2008 was more skewed towards fiscal measures. It is fair to say that India’s fiscal stimulus has been somewhat more successful than in many other countries. A fiscal stimulus was already underway through revised pay of government employees and rural employment guarantee schemes even before crisis became full blown. Additional stimulus through tax cuts was also demand positive. During the process, India has successfully galvanized the demand potential of its rural area. Though current level of agro commodities inflation is alarming, a mild inflation of agro products coupled with increase in government’s support prices of some agro products has actually helped rural economy due to some wealth transfer from urban to rural economy.
• One of the most exhilarating prospects for the overseas investors is India’s demographic profile. Demographic dividend that India is set to reach in next decade or two – working age population to reach almost 70% of total population by 2040 – is mouth watering as long as its policies remain market friendly. No investor can ignore the prospects of returns from youthful India.

Despite many advantages, India’s economic structure has some its own Achilles’ heel. India’s fiscal position is one of them. Total government debt (central plus state) is widely quoted at over 80% of GDP. However, against this Indian Government owns many assets, from energy resources to telecommunications licenses to power generation, distribution and transmission and roads, ports and airports. A major disinvestment program can reduce government’s fiscal strain. Only relief in India’s fiscal deficit is that the most of the government debt is held domestically and can be financed through domestic savings. And when India’s economic growth in real term is in structural uptrend along with mild inflation over longer run, current fiscal position seems tolerable to investors provided governments is determined to control fiscal deficits.

Long term food and energy security is another area where India need long term solutions to satisfy demand from its growing population, rising income level, propensity to consume due to rising aspirations and low living standards compare to developed world. However, it is rightly said that a necessity is the mother of invention. New gas discoveries on India’s eastern coast side and many more such potential area still left unexplored can solve India’s energy need partially. India has potential to become a gas based economy over a long run. Nuclear energy is another area where a lot of progress is possible in India. As far as food security is concern, due to limited availability of arable land, productivity improvement is the only way India can achieve self sufficiency in food demand. Nevertheless, even if India (along with China) is not self sufficient in food requirement, once it becomes a “Developed Economy” (say after couple of decades), then developing economies like Africa, which has sufficient resources to feed world’s food demand, can be a outsourcing destination for our food demand making a win-win situation for both India (along with China) and Africa.

India’s strengths like domestic consumption driven economy, potential to grow domestic consumption multi fold in coming decades (on back of India’s demographic profile, rising income, rising aspirations against the backdrop of low living standards, and more inclusive growth with rural economy becoming a significant driving force), investment cycle supported by growing domestic consumption and huge infrastructure development potential, entrepreneurial energy of private sector, sophisticated financial system and above all a truly democratic society makes India’s case much stronger than China when it comes to long term investment. When it comes to India, put your hand on your heart and say “All izz well”.

by,

Manish Marwah

http://www.sapphireconsultinggroup.in/economy_countries_manish.html

Indian Economy – Flies into turbulent weather

by. Manish Marwah

Recently, the Central Statistical Organization (CSO) of India pegged GDP growth for FY09 at 7.1 per cent, which would be the slowest in the last six years. Still, it looks an impressive number particularly in a year when global growth has collapsed and largest economies of the world like USA, Europe and Japan have already started experiencing a recessionary trend. For calendar year 2009, IMF has projected global GDP growth at 0.5% whereas India’s GDP growth is projected at 5.1% - still a remarkable growth when world is likely to be standstill. Resilience - the word aptly quoted by many to describe the behavior of Indian Economy. We have tried to stress test Indian Economy’s resilience under three different scenarios – Optimist, Base case and worst case.
First look at the composition of India’s GDP which is expected to reach USD 1.13 trillion mark at current price and USD 760 billion at constant price in FY09:
GDP estimates by expenditure for year 2008-09 at constant (1999-2000) price:

Source: CSO advance estimates
Domestic consumption - Things are OK On face of it, India’s economy seems to be resilient. Domestic consumption (government + private) comprising more than 67% of GDP is indeed resilient thanks to pay revisions of government employees, strong rural income growth, moderating but still strong urban incomes, high savings rate and government’s contra-cyclical efforts (to keep growth going). These components are unlikely to falter or at worst will moderate and still contribute the most to FY10 GDP growth.
Private final consumption expenditure (PFCE) - Though private industrial & service sector wage growth is moderating or in some cases contracting due to salary cuts and layoffs; rural income has grown strongly in recent years thanks to higher agro commodity prices while wages of government and public sector employees has been revised last year or is under revision. This is coupled with savings of past years will likely to keep PFCE resilient.


Government final consumption expenditure (GFCE) - Though in its interim budget, government has estimated only a modest 5.8% yoy increase in its total expenditure for FY10 (2.7% yoy increase if we exclude interest payment); new government, post election in April 2009, is likely to increase budgetary expenditure by 0.5-1% of GDP.
However macroeconomic realities of current and imminent fiscal slippages resulting (from government expenditure beyond targets) are hard to ignore. Combined fiscal deficit (Central + State + off-budget items) is likely to reach 10-11% of GDP in FY09 and likely to remain high at 8-9% of GDP in FY10. In FY10, further fiscal slippages are likely because as per budgetary estimates, corporate tax revenue is likely to grow at 10% whereas reality is that most of the experts put SENSEX companies earning growth close to zero for FY10. Government’s corporate and income tax revenue target seems to be overestimated.
Central government borrowing resulting from fiscal deficit has increased to Rs 2.6 trillion in FY09 from original budgeted Rs 1 trillion. In FY10, it is pegged at Rs 3.1 trillion. This kind of borrowings is likely to keep pressure on interest rate and can crowd out private investment, making it more difficult for Indian corporates to raise fund at reasonable rates in otherwise turbulent credit market.



Higher than expected fiscal stimulus by government @ 2% of GDP
Based on recent government estimates + new government fiscal stimulus of 1% GDP
Less than expected tax collections limiting governments ability to spend

Gross Capital Formation - A significant slowdown ahead Gross Capital Formation (GCF) consists of Gross Fixed Capital Formation (GFCF), Change is stocks and Valuables. GCF has contributed a 37.1% of GDP in FY09 (at constant price). GCF has grown at a CAGR of 13.7% during Fy01-09 period compare to GDP growth of 7.6% during the same period. During the same period, GCF has contributed 53% of GDP growth. This has resulted into a GCF/GDP ratio reaching a multi-year high.
GCF as a % of GDP, at constant price

Source: CMIE /CSO database
There are enough arguments to support increase in GCF/GDP ratio as well absolute increase in GCF over a period. Some of them are - India’s need for better infrastructure requiring huge investments in power, road, ports, irrigation, etc; increased consumption and better growth outlook mean continuous investment in new capacities; higher urbanization mean new realty projects; better service sector growth outlook (retail, IT, etc) means new offices and commercial realty projects, etc. True and valid arguments for long term, but closer look at data suggest that India has over invested in certain areas creating huge overcapacity for a next year or two.
Most notably is the GCF by manufacturing sector which has increase from 6.4% of GDP in FY01 to 14.5% in FY08, consisting of 40% of total GCF in FY08 up from 26% of GCF in FY01. Look at another analysis. Compare to a CAGR of 7.7% in GDP and a CAGR of 14.1% in GCF during FY01-08 period, machinery and equipment investments by private sector has grown at a CAGR of 20.1% and construction investment by private sector has grown at a CAGR of 26.4%. However, with growth outlook moderating or even worsening in many area of consumption, there is a possible overcapacity in manufacturing sector during FY09-11 period. Surprisingly, GCF in electricity, gas & water supply (one of the core infrastructure sector) has tracked GDP growth during FY01-08 period growing at a CAGR of 9.3%.
There is one more reason to disproportionate increase in GCF compare to GDP growth. Though, India’s saving rate is sufficient to fund capex up to 30-32% of GDP, India witnessed unprecedented amount of capital inflows during FY01-08 period thanks easy and low cost availability of capital and improved risk appetite for emerging markets like India – fueling unprecedented capex boom by Indian corporates. India received average USD 10 billion per annum in FY01-03 period and in FY08 alone received USD 100 billion. Today situation is different. Capital is scare and risk aversion has increased. Capital is flowing out of India and this may be one of the reason to expect a slow down in GCF to more sustainable 25-30% of GDP in coming years.
On Infrastructure investment front also things are not very bright. Government has estimated a total investment in various infrastructural sectors at USD 500 billion for FY08-FY12 period, but due to ongoing credit crunch many noted analysts are not expecting it to more than USD 270 billion. It means almost no growth in infra spending in FY08-10 period. There are sectors like residential and commercial real estate where yoy investment is likely to contract due to slump in realty market. There are sectors like railways and defense where GCF is still going to grow.
Change in stocksChange in stocks has grown at a CAGR of 33.4% during FY01-09 period compare to a GDP growth of 7.6% during the same period. In fact, ratio of change in stocks /GDP has increased from 0.7% in FY01 to 4% in FY09. A yoy GDP growth is 100 bps lower at 6.1 in FY09 if we exclude change in stocks. For, H2-09, yoy growth comes down to 4.7% if we exclude change in stocks.
Change in stocks as a % of GDP, at constant price



Source: CMIE and CSO
This clearly indicates a huge level of inventory across sectors and value chain. A mere de-stocking or right-stocking to 3.5% GDP in FY10 itself mean a negative contribution of 40 bps in GDP growth.

Capex holds on to previous level and some de-stocking of inventory
Capex spend and inventory level returns to normalize level
Abrupt de-stocking and new capex on hold due to deterring outlook


International trade – Export and Imports: tracking the globe India’s export has grown at a CAGR of 15.2% during FY01-09 period tacking the global growth and off-shoring opportunities whereas India’s import has grown at a CAGR of 18.5% tracking the domestic consumption and GCF growth. India’s export has grown on the backdrop of rupee appreciating from Rs 49 / USD level in 2001 to Rs 39 / USD level in 2007-08. Now rupee is back to Rs 48 / USD level and it is likely to provide some cushion to India’s exports. However, key question is – Is global demand growing? Answer seems to be No, as the world’s largest consumer – American consumer is in saving mode and is likely to save around 7-10% of it income compare to 0% savings few years back. Net result is likely to be contraction in global trade and India can not escape the reality. Rupee has weakened again the USD but so is the most of the other currencies. So, currency benefits to India is not meaningful as each country want some pie of remaining global demand to survive in the time of crisis. India’s imports will also slow – in short run due to moderating domestic demand, rupee depreciation and in long run due to India’s more self dependence of Oil and Gas due to recent discoveries.

US economy recovers from 1H-2009
Recession persist in US & Europe with some recovery from 2010
Recession in US & Europe worsen and domestic capex decline dramatically
Combining above matrixes, we arrive at FY10 GDP growth of 5.9% in optimist scenario, 3.4% in our base case scenario and just 1% in worst case scenario. Indian economy seems resilient in our optimist scenario; our base case expectation suggests that Indian economy is likely to fly into turbulent weather in FY10. Though right now we are ruling out possibility of a worst case hard lending scenario, we still prefer to remain downward bias from our base case scenario. Be prepared to ride the storm.

by Manish Marwah
www.sapphireconsultinggroup.in

Manish Marwah - Advisor and Management Consultant

Appreciation of Rupee - A Boon or Bane

Millon dollar question- one of the most popular saying, might change in future to million rupees question if this present era of rupee appreciation continued to be on roll.

Indian economy is among the fastest growing economies of the world. The appreciation of rupee against dollar will prove out to be another huge addition to its economic prosperity and growth story. However the economic epidemics like poverty, unemployment etc cannot be dealt in short run.
From 2003-08 Indian market is booming in leaps and bounds, today after china India is 2nd fastest growing economy of the world with registering a growth rate of 9%. India is a trillion dollar economy and has become world’s 12th largest economy (2008 estimate). Now major question drifting in every Indian mind is “Rupee Appreciation”. The rupee appreciated by 9.8% against the US dollar during the previous financial year between April 3 , 2007 to January 16 2008.

The rupee appreciation against US dollar over the past 12 months on year to year basis (December 2006 – December 2007) was a higher 13.2 %. The appreciation of rupee against other major currencies was much less than against the US dollar.
India witnessed 2nd highest appreciation in its currency of 8.35% between January and June 2007 after 9.28 % of Brazil among the emerging economies that are in direct competition with Indian exporters and find themselves better off due to sharp rise in rupee value, revealed by ASSOCHAM eco pulse study.
After having looked at these figures, the puzzle that floats in our mind, will the appreciation of rupee adversely affect our economic growth or it is an indicator of Indian growing economy?

What Lies Behind This Appreciation

The major reason which draws attention towards this rupee appreciation has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital inflows into India has taken variety of forms ranging from foreign direct investment (FDI) to remittances sent back home by Indian expatriates. The main impact of these flows is as follows:

FDI: India’s starring economic growth has created a large domestic market that offers promising opportunities for foreign companies. Moreover many companies rising competitiveness in many sectors has made it an attractive export base.

ECB (external commercial borrowings): Indian companies have borrowed enormous amounts of money overseas to finance investments and acquisitions at home and abroad. This borrowed money has returned to India, boosting capital inflows. In 2007-08 (april-september) external assistance (net) was placed at US $ 729 million as against US $ 386 million for the corresponding period in 2006-07 indicating a growth of 88.9%.

Foreign portfolio inflows (FII’s): India’s booming stock market embodies the confidence of the investors in the country’s corporate sector. Foreign portfolio inflows have played a key role in fuming this boom. Looking at the period of 2003-04 and 2006-07, the net annual inflow of funds by foreign institutional investors averaged US $ 8.1bn. Trends during first five months of 2007 indicate that this flood is continuing with net FII inflows amounting to US $4.6 bn. Another major source of portfolio capital inflows has been overseas equity issues of Indian companies via global depository receipts (GDR’s) & American depository receipts (ADR’s). Moreover FII’s registered in India has doubled to 1050 between March 2001 –march 2007 and now around 3,336 FII subaccounts also exist. FII equity flow has increased from $9.8 billion in 2004, $ 11 billion in 2005 to over 16 billion in 2007. The stock market has buoyed by strong corporate performance and these inflows have risen to 43% in 2007. However in mid-October RBI banned foreign investment via off shore derivatives called participatory notes (PN). These derivatives were used by foreign investors not registered in India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004 – Aug 2007 the number of FII sub accounts that issued PNs rose from 14 to 34. Many believed that motive behind such RBI measure was to improve transparency of capital inflows and that restricting inflows via PN would have little or no impact on overall inflows coming into the country.

Investment and remittances: Another major source of capital inflows has been non-resident Indians (NRI’s) investing large amounts in special bank accounts. While NRI’s emotional connection to the country of origin is part of explanation to this, the attractive interest rate offered on such deposits also provide a powerful incentive. In 2006-07 NRI deposits amounted to US$ 3.8 bn. another large source of foreign exchange inflows has been remittances from huge number of Indians working overseas temporarily. Such remittances amounted to a colossal of US $ 19.6 bn in April-December 2006, a 15% year on year increase.

Impact on Importers - The Gainers According to an industry analyst: every 10 paisa appreciation in rupee negates one dollar upward movement in international price.
Rupee appreciation brings jovial time for importers. Major imports to India are petroleum products, capital goods, chemical, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stone, fertilizers pulp, paper etc. during the periods when dollar was getting strong against rupee, when 1$ = Rs 48 importers used to pay Rs 4800 for every $100. Since the beginning of the year 2007, rupee has appreciated nearly to about 10%. With value of rupee Rs 39.35 = 1$ for every $100 importer has to pay Rs 3935 by gaining a profit of Rs 865. This gain will bring about savings in cost which can be passed on to consumers, thereby becoming immediate tool for controlling inflation.
Over 10% appreciations in domestic currencies against dollar has thrown a new M&A opportunity for India Inc which wants to reach out world by acquiring going concern on a global scale. An ASSOCHAM study of 70 deals done in the first six months of the last financial year( 2007-08) , in which Indian firms undertook buyouts worth $ 14 billion , has revealed that Indian companies would have saved Rs 6500 crore ($ 1.66 bn) just because of increase in rupee value.
Due to continuous decrease in dollar value, the US had remained the most favorite hunting ground for Indian companies. $2.9 bn valuation deals were announced with US companies in financial year 2007-08.
In terms of sector analysis steel rule the rest owing to the Tata-Corus deal. The overall valuation of M&A in steel sector was of around $5.4 bn.

Rupee appreciation is also welcomed by companies which have overseas borrowings. Significant levels of foreign currency –denominated, especially US denominated loans generate forex gains because of reduce interest payments which are occasioned by rising Indian rupee. Companies like Ranbaxy and L&T have been able to generate forex gains because they have substantial exposure to ECB’s.

Impact on Exporters -The Sufferers

With the ratio of 70:30 of imports and exports the major export destinations of India are USA, EU, Japan, Brazil and other Asian countries. Products which generate revenues from these destinations mainly compose of handicrafts, gems, jewellery, textiles, and ready made garments, chemicals and other related products. As seen for imports, if we analyze if an exporter is getting Rs 3935 now instead of Rs 4800 he is at a loss of Rs 865. This loss will lead to erosion of exporter’s profit margin and will affect their competiveness in global market.

In contradictions to the apprehensions of that there would be shrink in profit margins of exporters due to emergence of strong rupee, the latest studies of ASSOCHAM exhibit that stronger rupee will bring in rich dividends for India Inc and boost its profit margins between 12-15% in long run as exporters are brininging new technologies with cheaper imports for expanding their existing capacities.

The chamber holds that a strong rupee would reduce the cost of imports and would have some positive impact on those exporters which have large import content as witnessed from figures above. It further recommended that if companies are able to expand their capacities in rupee appreciating scenario, they would in the long run , definitely be in win-win situation as demand for Indian exports in developed countries would not slow down. The India Inc would be able to export at very competitive prices as a result of capacity building through technological advancements and increase in margins by 12-15%.
Policy Dilema
Indian policymakers are struck with difficult crisis. On one hand, the stronger rupee has benefited the economy by making imports cheaper. On the other hand due to both economic and political reasons policymakers cannot afford to ignore the problem of exporters. India‘s rapid export growth in recent years have been the major accelerator of economic growth.

If RBI intervenes to stop rupee from appreciation further , it may turned out to be a boon for export oriented units and crate more employment but at the same time this may also bring in inflationary tendency to the market. Therefore government is in dilemma of choosing between inflation and unemployment.
There is a limited extent to which RBI can intervene in the foreign exchange market in the face of large sustained capital inflows; policymakers can stem rupee appreciation substantially by easing limits on domestic firm’s overseas investments or restricting inflows – for instance, through further control on ECB’s. The RBI has already taken tentative steps in this direction making it more difficult for Indian firms to borrow in foreign currency and eliminating the exemption from ECB limits which used be previously enjoyed by real estate firms. ....

By. Manish Marwah

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Is Yield Improvement a Real Possibility?

Today it is possible to increase the yield with the combination of new sciences- based on genetically modified seeds and applying existing and traditional sciences – better use of fertilizer and improved irrigation systems. For example, in the US, new seed technologies have reduced diseases vulnerability of crops like maize and cotton. In India also us of BT cotton, a genetically modified version of cotton seed has resulted into very much improved results.

Some regions have apprehensions about the use of genetically modified varieties due to fears of unintended consequences, but most scientists so far have proven no adverse effects, even 10 years after adoption.

India’s crop yields are far below that of many regions. For example, India’s wheat yield at 2600 kg / hector is well below that of china (4100 kg / hector) and Europe (5000 kg / hector). Similarly, India’s rice yield at 3000 kg / hector is again well below that of china (6200 kg / hector), Europe (6400 kg / hector) and US (7500 kg / hector). India’s soybean yield at 870 kg / hector is far below that of Brazil (2500 kg/hector), Europe (2600 kg / hector) and US (2700 kg/hector). So, it is clearly a possibility to significantly improve crop yield in India. Honorable Minister of Agriculture Shri Sharad Pawar has also in his recent speech expressed concern over the slow pace of farm research in the country and exhorted scientists to raise productivity of crops to meet domestic demand and cut import dependence.

Long-term Measures by the Government

To counter the political implications of the poor farm growth and inflation risk, the government has planned or planning some long-term measures. The government has announced that a coordinated approach on agricultural indebtedness will be finalized in the near term to help the farming population and avert a further rural debt crisis in the country. According to the media reports, the government is likely to initiate a mega-farm loan-restructuring package covering bad and doubtful debt of about Rs300 billion (or US$7.5 billion) in the upcoming Union Budget to be announced in February 2008.

In the Union Budget (February 2007), the government increased its budgeted spending on irrigation by 54% and on Bharat Nirman program (covering rural infrastructure) by 38%. In addition, the government is targeting a net disbursement of USD 7.8 billion (0.4% of GDP) in the farm credit by the end of next year. The government is also relaxing regulations for private sector participation in agri value chain and many states have amended agri marketing acts paving way for direct transaction of private sectors with farmers. This coupled with emergence of the organized retailing is likely to be a significant catalyst for India’s farm sector growth.