History of Indian Currency

Money as a means of payment consists of coins, paper money and withdrawable bank deposits. Today, credit cards and electronic cash form an important component of the payment system. For a common person though, money simply means currency and coins. This is so because in India, the payment system, especially for retail transactions still revolves around currency and coins. There is very little, however, that the common person knows about currency and coins he handles on a daily basis.
Here is an attempt to answer some of the Frequently Asked Questions on Indian Currency.
Some Basics
What is the Indian currency called?
The Indian currency is called the Indian Rupee (INR) and the coins are called paise. One Rupee consists of 100 paise.
What are the present denominations of bank notes in India?
At present, notes in India are issued in the denomination of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000. These notes are called bank notes as they are issued by the Reserve Bank of India (Reserve Bank). The printing of notes in the denominations of Re.1 and Rs.2 has been discontinued as these denominations have been coinised. However, such notes issued earlier are still in circulation. The printing of notes in the denomination of Rs.5 had also been discontinued; however, it has been decided to reintroduce these notes so as to meet the gap between the demand and supply of coins in this denomination.
What are the present available denominations of coins in India?
Coins in India are available in denominations of 10 paise, 20 paise, 25 paise, 50 paise, one rupee, two rupees and five rupees. Coins up to 50 paise are called 'small coins' and coins of Rupee one and above are called 'Rupee Coins'.
Can bank notes and coins be issued only in these denominations?
Not necessarily. The Reserve Bank can also issue notes in the denominations of one thousand rupees, five thousand rupees and ten thousand rupees, or any other denomination that the Central Government may specify. There cannot, though, be notes in denominations higher than ten thousand rupees in terms of the current provisions of the Reserve Bank of India Act, 1934. Coins can be issued up to the denomination of Rs.1000.
Currency Management
What is the role of the Reserve Bank in currency management?
The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934.
What is the role of Government of India?
The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India.
Who decides on the volume and value of bank notes to be printed and on what basis?
The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.
Who decides on the quantity of coins to be minted?
The Government of India decides upon the quantity of coins to be minted.
How does the Reserve Bank estimate the demand for bank notes?
The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models.
How does the Reserve Bank reach the currency to people?
The Reserve Bank manages the currency operations through its offices located at Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Belapur(Navi Mumbai), Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Lucknow, Mumbai (Fort), Nagpur, New Delhi, Patna and Thiruvananthapuram. These offices receive fresh notes from the note presses. Similarly, the Reserve Bank offices located at Kolkata, Hyderabad, Mumbai and New Delhi initially receive the coins from the mints. These offices then send them to the other offices of the Reserve Bank. The notes and rupee coins are stocked at the currency chests and small coins at the small coin depots. The bank branches receive the bank notes and coins from the currency chests and small coin depots for further distribution among the public.
What is a currency chest?
To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorised selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4422 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.
What is a small coin depot?
Some bank branches are also authorised to establish small coin depots to stock small coins. There are 3784 small coin depots spread throughout the country. The small coin depots also distribute small coins to other bank branches in their area of operation.
What happens when the notes and coins return from circulation?
Notes and coins returned from circulation are deposited at the offices of the Reserve Bank. The Reserve Bank then separates the notes that are fit for reissue and those which are not fit for reissue. The notes which are fit for reissue are sent back in circulation and those which are unfit for reissue are destroyed after processingshredded. The same is the case with coins. The coins withdrawn are sent to the Mints for melting.
From where can the general public obtain bank notes and coins?
Bank notes and coins can be obtained at any of the offices of the Reserve Bank and at all branches of banks maintaining currency chests and small coin depots.
Current Issues
Why are the coins and bank notes in short supply?
This is not entirely correct. It is true that till recently the demand for currency was more than their supply. The primary reason for this is that the Indian society is still predominantly cash-driven. However, at present there are no supply constraints so far as bank notes are concerned. As regards coins, Government of India are taking various steps, including importing rupee coins. The impression of coins being in short supply is also enhanced probably due to people’s preference for notes.
Is there a way to reduce dependence on cash?
Yes, once instruments such as, cheques, credit and debit cards, electronic funds transfer gain popularity, the demand for currency is expected to go down.
Meanwhile, are some steps being taken to increase the supply of bank notes and coins?
Yes, several steps have been taken to augment the supply of bank notes and coins. Some of these are:

• The existing note printing presses and the mints owned by the Government are being modernised.
• Two new currency printing presses with the state-of-the-art technology have been set up under the aegis of the Bharatiya Reserve Bank Note Mudran Ltd., a wholly owned subsidiary of the Reserve Bank.
• To bridge the demand-supply gap, the Government had, as a one-time measure, even imported bank notes.
• The production capacity of the four India Government Mints are being augmented.
• Government of India has also been importing rupee coins to supplement the supply of coins from the four mints. Till date 2 billion rupee coins have been imported.

Why are Re1, Rs.2 and Rs.5 notes not being printed?
Volume-wise, the share of such small denomination notes in the total notes in circulation was as high as 57 per cent but constituted only 7 per cent in terms of value. The average life of these notes was found to be around a year. The cost of printing and servicing these notes was, thus, not commensurate with their life. Printing of these notes was, therefore, discontinued. These denominations were, therefore, coinised. However, it has been decided that notes in the denomination of Rs.5 be re-introduced so as to meet the gap between the demand and supply of coins in this denomination.
Soiled and Mutilated Notes
What are soiled and mutilated notes?
Soiled notes are notes, which have become dirty and limp due to excessive use. Mutilated notes are notes, which are torn, disfigured, burnt, washed, eaten by white ants, etc. A double numbered note cut into two pieces but on which both the numbers are intact is now being treated as soiled note.
Can such notes be exchanged for value?
Yes. Soiled notes can be tendered at all bank branches for and exchange obtained.
How much value would one get in exchange of soiled or mutilated notes?
Full value is payable against soiled notes. Payment of exchange value of mutilated notes is governed by the Reserve Bank of India (Note Refund) Rules, 1975. These Rules have been framed under Section 28 of the Reserve Bank of India Act, 1934. The public can get value for these notes as laid down in the Rules, after adjudication. Currently, provisions exist for paying either full, half or no value as far as notes in the denomination for Rs.10 and above are concerned; as regards Re.1, Rs.2 & Rs.5, a tenderer can get either full or no value depending upon the condition of the note.
What types of notes are not eligible for payment under the Note Refund Rules?
The following notes are not payable under the Note Refund Rules.
A note which is

• less than half the area of the full note
• devoid of the major portion of the number, i.e., the prefix and three digits or four digits of the number in notes up to and inclusive of Rs.5; in respect of notes of Rs.10 and above, where this inadequacy is present at both the numbering panels.
• cancelled by any office of the Reserve Bank or against which the value has already been paid
• found to be forged
• deliberately cut, mutilated or tampered
• carrying extrinsic words or visible representation intended to convey or capable of conveying any message of a political character.

What if a note is found to be non-payable?
Non-payable notes are retained by the receiving banks and sent to the Reserve Bank where they are destroyed.
Where are soiled/mutilated notes accepted?
All banks are authorised to accept soiled notes across their counters and pay the exchange value. They are expected to offer this service even to non-customers. All public sector bank branches and currency chest branches of private sector banks are authorised to adjudicate and pay value in respect of mutilated notes, in terms of the Reserve Bank of India (Note Refund) Rules, 1975. The RBI has also authorised all commercial bank branches to treat certain notes in ‘two pieces’ as soiled notes and pay exchange value.
Features of Contemporary Bank Notes
What are the general features of bank notes currently in circulation?
Rs.10, Rs.20, Rs.50 and Rs.100 notes issued earlier and which are still in circulation contain the Ashoka Pillar watermark and Ashoka Pillar effigy. The Rs.500 notes issued earlier i.e. since 1987 bear the Ashoka Pillar watermark and the Mahatma Gandhi portrait. The Reserve Bank is now issuing bank notes in Mahatma Gandhi series. This means that the notes contain Mahatma Gandhi watermark as well as Mahatma Gandhi's portrait. The Rs.5 notes re-introduced in August 2001 also bear the Ashoka Pillar watermark and Ashoka Pillar effigy. All these notes issued by the Bank are legal tender.
Why was the change brought about?
The central banks the world over bring in some change in the design of their bank notes. This is primarily to make counterfeiting difficult. India also follows the same policy.
Are there any special features introduced in the notes of Mahatma Gandhi series?
The new Mahatma Gandhi series of notes contain several special features vis-à-vis the notes issued earlier. These are:
i) Security thread: Rs.10, Rs.20 and Rs.50 notes contain a readable but fully embedded security windowed security thread. Rs.100, Rs.500 and Rs.1000 notes contain a readable windowed security thread. This thread is partially exposed and partially embedded. When held against light, this thread can be seen as one continuous line. Other than on Rs.1000 notes, this thread contains the words 'Bharat' in the devnagri script and 'RBI' appearing alternately. The security thread of the Rs.1000 note contains the inscription 'Bharat' in the devnagri script, '1000' and 'RBI'. Notes issued earlier have a plain, non-readable fully embedded security thread.
ii) Latent Image: A vertical band behind on the right side of the Mahatma Gandhi’s portrait, which contains a latent image, showing the denominational value 20, 50, 100, 500 or 1000 as the case may be. The value can be seen only when the note is held on the palm and light allowed to fall on it at 45° ; otherwise this feature appears only as a vertical band.
iii) Microletterings: This feature appears between the vertical band and Mahatma Gandhi portrait. It contains the word ‘RBI’ in Rs.10. Notes of Rs.20 and above also contain the denominational value of the notes. This feature can be seen better under a magnifying glass.
iv) Identification mark: A special intaglio feature has been introduced on the left of the watermark window on all notes except Rs.10/- note. This feature is in different shapes for various denominations (Rs.20-Vertical Rectangle, Rs.50-Square, Rs.100-Triangle, Rs.500-Circle, Rs.1000-Diamond) and helps the visually impaired to identify the denomination.
v) Intaglio Printing: The portrait of Mahatma Gandhi, Reserve Bank seal, guarantee and promise clause, Ashoka Pillar Emblem on the left, RBI Governor's signature are printed in intaglio i.e. in raised prints in Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 notes.
vi) Fluorescence: The number panels of the notes are printed in fluorescent ink. The notes also have optical fibres. Both can be seen when the notes are exposed to ultra-violet lamp.
vii) Optically Variable Ink: The numeral 500 & 1000 on the Rs.500 [revised colour scheme of mild yellow, mauve and brown] and Rs.1000 notes are printed in Optically Variable Ink viz., a colour-shifting ink. The colour of these numerals appear green when the notes are held flat but would change to blue when the notes are held at an angle.
Forgeries
How does one differentiate between a genuine note and a forged note?
The notes on which the above features are not available can be suspected as forged notes and examined minutely.
What are the legal provisions relating to printing and circulation of forged notes?
Printing and circulation of forged notes are offences under Sections 489A to 489E of the Indian Penal Code and are punishable in the courts of law by fine or imprisonment or both, depending on the offence.
Remember: An aware public is the best safeguard against forgeries
This is an electronic document. Kindly refer to the printed brochure for the definitive version.

Currency Issues by Republic India

Throughout history, the right to Coinage and Currency and issues of sovereignty have been curiously conjoined, emotionally if not rationally; these issues stimulate debate even today.
The transition of currency management from colonial to independent India was a reasonably smooth affair. Midnight, August 15, 1947 heralded Indian independence from colonial rule. The Republic, however, was established on 26th January, 1950. During the interregnum, the Reserve Bank continued to issue the extant notes.
Government of India brought out the new design Re 1 note in 1949.

Government of India - Rupee One
Symbols for independent India had to be chosen. At the outset it was felt that the King's portrait be replaced by a portrait of Mahatma Gandhi. Designs were prepared to that effect. In the final analysis, the consensus moved to the choice of the Lion Capital at Sarnath in lieu of the Gandhi Portrait. The new design of notes were largely along earlier lines.

Rupees Ten - King's Portrait

Rupees Ten - Ashoka Pillar
In 1953, Hindi was displayed prominently on the new notes. The debate regarding the Hindi plural of Rupaya was settled in favour of Rupiye. High denomination notes (Rs 1,000, Rs. 5,000, Rs. 10,000) were reintroduced in 1954.

Rupees One Thousand - Tanjore Temple

Rupees Five Thousand - Gateway of India

Rupees Ten Thousand - Lion Capital, Ashoka Pillar
The lean period of the early sixties led to considerations of economy and the sizes of notes were reduced in 1967. In 1969 a commemorative design series in honour of the birth centenary celebrations of Mahatma Gandhi was issued depicting a seated Gandhi with the Sevagram Ashram as the backdrop.

Rupees One Hundred - Commemorative Design
Cost benefit considerations prompted the Bank to introduce Rs. 20 denomination notes in 1972 and Rs. 50 in 1975.

Rupees Twenty

Rupees Fifty
High denomination notes were once again demonetised in 1978 for the same reasons as the 1946 demonetisation. The 1980s saw a completely new set of notes issued. The motifs on these notes marked a departure form the earlier motifs. The emphasis lay on symbols of Science & Technology (Aryabhatta on the Rs 2 note), Progress (the Oil Rig on Re 1 and Farm Mechanisation on Rs 5) and a change in orientation to Indian Art forms on the Rs 20 and the Rs 10 notes. (Konark Wheel, Peacock).
Management of Currency had to cope with the rising demands of a growing economy, together with a fall in purchasing power. The Rupee 500 note was introduced in October 1987 with the portrait of Mahatma Gandhi. The water mark continued to be the Lion Capital, Ashoka Pillar.

Rupees Five Hundred
Mahatma Gandhi Series
With the advancement of reprographic techniques, traditional security features were deemed inadequate. It was necessary to introduce new features and a new 'Mahatma Gandhi Series' was introduced in 1996. A changed watermark, windowed security thread, latent image and intaglio features for the visually handicapped are amongst the new features.

Rupees Ten : Size 137 x 63 mm

Rupees Fifty : Size 147 x 73 mm

Rupees One Hundred : Size 157 x 73 mm

Rupees Five Hundred : Size 167 x 73 mm

Rupees One Thousand : Size 177 x 73 mm

Banknotes in Mahatma Gandhi Series - Security Features The Reserve Bank has the sole authority to issue bank notes in India. Reserve Bank, like other central banks the world over, changes the design of banknotes from time to time. The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996 and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 in this series. These notes contain distinct easily recognizable security features to facilitate the detection of genuine notes vis-à-vis forgeries. Security Features:  Watermark  Security Thread  Latent Image  Microlettering  Intaglio  Identification Mark  Fluorescence  Optically Variable Ink  See through Register

	Security Features on Indian Banknotes

	Watermark : The Mahatma Gandhi Series of banknotes contain the Mahatma Gandhi watermark with a light and shade effect and multi-directional lines in the watermark window.

Security thread : Rs.1000 notes introduced in October 2000 contain a readable, windowed security thread alternately visible on the obverse with the inscriptions ‘Bharat’ (in Hindi), ‘1000’ and ‘RBI’, but totally embedded on the reverse. The Rs.500 and Rs.100 notes have a security thread with similar visible features and inscription ‘Bharat’ (in Hindi), and ‘RBI’. When held against the light, the security thread on Rs.1000, Rs.500 and Rs.100 can be seen as one continuous line. The Rs.5, Rs.10, Rs.20 and Rs.50 notes contain a readable, fully embedded windowed security thread with the inscription ‘Bharat’ (in Hindi), and ‘RBI’. The security thread appears to the left of the Mahatma's portrait. Notes issued prior to the introduction of the Mahatma Gandhi Series have a plain, non-readable fully embedded security thread. Latent Image : On the obverse side of Rs.1000, Rs.500, Rs.100, Rs.50 and Rs.20 notes, a vertical band on the right side of the Mahatma Gandhi’s portrait contains a latent image showing the respective denominational value in numeral. The latent image is visible only when the note is held horizontally at eye level. Microlettering : This feature appears between the vertical band and Mahatma Gandhi portrait. It contains the word ‘RBI’ in Rs.5 and Rs.10. The notes of Rs.20 and above also contain the denominational value of the notes in microletters. This feature can be seen better under a magnifying glass. Intaglio Printing : The portrait of Mahatma Gandhi, the Reserve Bank seal, guarantee and promise clause, Ashoka Pillar Emblem on the left, RBI Governor's signature are printed in intaglio i.e. in raised prints, which  can be felt by touch, in Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 notes. Identification mark : A special feature in intaglio has been introduced on the left of the watermark window on all notes except Rs.10/- note. This feature is in different shapes for various denominations (Rs. 20-Vertical Rectangle, Rs.50-Square, Rs.100-Triangle, Rs.500-Circle, Rs.1000-Diamond) and helps the visually impaired to identify the denomination. Fluorescence : Number panels of the notes are printed in fluorescent ink. The notes also have optical fibres. Both can be seen when the notes are exposed to ultra-violet lamp as shown below. Coinage history of Republic India The Decimal Series The move towards decimalisation was afoot for over a century. However, it was in September, 1955 that the Indian Coinage Act was amended for the country to adopt a metric system for coinage. The Act came into force with effect from 1st April, 1957. The rupee remained unchanged in value and nomenclature. It, however, was now divided into 100 'Paisa' instead of 16 Annas or 64 Pice. For public recognition, the new decimal Paisa was termed 'Naya Paisa' till 1st June, 1964 when the term 'Naya' was dropped. Naya Paisa Series 1957-1964   Denomination Metal Weight Shape Size Coin Rupee One Nickel 10 gms Circular 28 mm Fifty Naye Paise Nickel 5 gms Circular 24 mm Twenty Five Naye Paise Nickel 2.5 gms Circular 19 mm Ten Naye Paise Cupro-Nickel 5 gms Eight Scalloped 23 mm (across scallops) Five Naye Paise Cupro-Nickel 4 gms Square 22 mm (across corners) Two Naye Paise Cupro-Nickel 3 gms Eight Scalloped 18 mm (across scallops) One Naya Paisa Bronze 1.5 gms Circular 16 mm With commodity prices rising in the sixties, small denomination coins which were made of bronze, nickel-brass, cupro-nickel, and Aluminium-Bronze were gradually minted in Aluminium. This change commenced with the introduction of the new hexagonal 3 paise coin. A twenty paise coin was introduced in 1968 but did not gain much popularity.  Aluminium Series 1964 onwards Denomination Metal Weight Shape Size Coin One Paisa Aluminium-Magnesium 0.75 gms Square 17 mm (Daigonal) Two Paise Aluminium-Magnesium 1 gm Scalloped 20 mm (across scallops) Three Paise Aluminium-Magnesium 1.25 gms Hexagonal 21 mm (Diagonal) Five Paise Aluminium-Magnesium 1.5 gms Square 22 mm (Diagonal) Ten Paise Aluminium-Magnesium 2.3 gms Scalloped 26 mm (across scallops) Twenty Paise Aluminium-Magnesium 2.2 gms Hexagonal 26 mm (diagonal) 24.5 mm (across flats) Over a period of time, cost benefit considerations led to the gradual discontinuance of 1, 2 and 3 paise coins in the seventies; Stainless steel coinage of 10, 25 and 50 paise, was introduced in 1988 and of one rupee in 1992. The very considerable costs of managing note issues of Re 1, Rs 2, and Rs 5 led to the gradual coinisation of these denominations in the 1990s. Contemporary Coins Denomination Metal Weight Diameter Shape Cupro-Nickel 9.00 gms 23 mm Circular Cupro-Nickel 6.00 gms 26 mm Eleven Sided Ferratic Stainless Steel 4.85 gms 25 mm Circular Ferratic Stainless Steel 3.79 gms 22 mm Circular Ferratic Stainless Steel 2.83 gms 19 mm Circular Ferratic Stainless Steel 2.00 gms 16 mm Circular Minting & Issue The Government of India has the sole right to mint coins. The responsibility for coinage vests with the Government of India in terms of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also the responsibility of the Government of India. Coins are minted at the four India Government Mints at Mumbai, Alipore(Kolkata), Saifabad(Hyderabad), Cherlapally (Hyderabad) and NOIDA (UP). The coins are issued for circulation only through the Reserve Bank in terms of the RBI Act. Denominations Coins in India are presently being issued in denominations of 10 paise, 20 paise, 25 paise, 50 paise, one rupee, two rupees and five rupees. Coins upto 50 paise are called 'small coins' and coins of Rupee one and above are called 'Rupee Coins'. Coins can be issued up to the denomination of Rs.1000 as per the Coinage Act, 1906. Distribution Coins are received from the Mints and issued into circulation through its Regional Issue offices/sub-offices of the Reserve Bank and a wide network of currency chests and coin depots maintained by banks and Government treasuries spread across the country. The RBI Issue Offices/sub-offices are located at Ahmedabad, Bangalore, Belapur (Navi Mumbai), Bhopal, Bhubaneshwar, Chandigarh, Chennai, Guwahati, Hyderabad, Jammu, Jaipur, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Patna and Thiruvananthapuram. These offices issue coins to the public directly through their counters and also send coin remittances to the currency chests and small coin depots. There are 4422 currency chest branches and 3784 small coin depots spread throughout the country. The currency chests and small coin depots distribute coins to the public, customers and other bank branches in their area of operation. The members of the public can approach the RBI offices or the above agencies for requirement of coins. Measures to improve the supply of coins The various Mints in the country have been modernised and upgraded to enhance their production capacities. Government has in the recent past, imported coins to augment the indigenous production. Notes in denomination of Rs.5 have been reintroduced to supplement the supply of coins. New initiatives for distribution Coin Dispensing Machines have been installed at select Regional Offices of the Reserve Bank on pilot basis. Dedicated Single-window counters have been opened in several of the Reserve Bank's offices for issuing coins of different denominations packed in pouches. Mobile counters are being organised by the Reserve Bank in commercial and other important areas of the town where soiled notes can be exchanged for coins.

Eurozone crisis: On the brink of chain reaction

Eurozone refers to the Economic and Monetary Union of member states of the European Union. Members of the Eurozone have adopted the Euro as their common currency and sole lender. The monetary policy of the Eurozone is laid out by the European Central Bank (ECB). Fiscal Policy, however, is the domain of individual member countries. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The roots of the ongoing economic crisis in Europe began in early 2009, as a knock-on effect from the 2008 global financial crisis, which had already claimed Iceland as a victim. Iceland was not an institutional issue for the EU, but in 2009 Eastern members of the EU not using the euro began to have balance-of-payments problems. They suffered effective devaluations of their national currencies and sought help from Brussels to resolve their mounting budget deficits. In response, the EU doubled the funds in an existing facility to address balance-of-payments problems. Among the European countries that are affected mainly by the ongoing Eurozone crisis are Portugal, Ireland, Greece and Spain (PIGS countries). Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected this time as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.

The debt crisis affecting Europe has come to a fore. Called the Sovereign debt crisis, the issue started around the beginning of 2009. By 2010 eurozone members Greece, Ireland and Portugal and some other EU countries outside the area were affected. In simplified terms Eurozone countries in question are faced with the risk of running out of money to pay back the loans that they have taken out in past. As a result the countries are being refused loans for the future. The crisis began from Greece, which amassed a huge pile of debt from years of statistical fraud in its public-accounts sector. In lay terms, debt crisis was triggered by over-borrowing. Countries borrowed beyond their means and then struggled to pay off these debts. This led to a dramatic rise in borrowing costs for these countries, worsening the problems further. What started off two years ago in Greece has now spread to Portugal, Ireland, Spain and Italy. Other European countries are also feeling vulnerable. Those lending money to these countries are charging higher interest rates since they are now seen as risky – and hence prone to default. So we have country after another country in eurozone being dubbed as not good risk, and are therefore charged more for loans via bond issues. This is very much the same as someone who has failed to pay back a past mortgage and would be refused, or charged more for a loan by a bank, in the future. European zone countries face a similar dilemma. The Euro as a common currency of countries with disparate political and fiscal policies has meant the crisis has spread across the Eurozone. If each of these countries would have had a separate currency and monetary policy, the crisis would have been localized instead of having spread across the Eurozone. With slowing GDP growth, large welfare budgets and popular opposition to measures towards curbing entitlements, the situation in Europe is extremely difficult. At present, Germany is the only large Eurozone country with a sound economy, and it cannot be expected to bail out all of Eurozone on its own.

On wrong track: When the EuroZone formed in the late 1990’s, Germany and France were the economic powers and every other country was clearly in an economically subservient position. When the poor countries of Europe wanted to build roads, fund schools, and do various other large-scale projects, they funded these activities by issuing debt in the form of government bonds. Countries that are economic powers are able to borrow this money for pretty cheap. However, countries that are not in excellent financial shape have to pay more to finance their debt by offering investors a higher yield. Economically-weak PIGS countries were paying quite a bit to be able to borrow money. By joining the EuroZone, they were magically allowed to borrow money at very close to German bond yields. So the grand idea when the EuroZone started was that these weak countries like Greece would be able to borrow money at cheap rates in order to economically develop their countries in a responsible manner. This would help them close the gap with stronger countries like Germany and France, and then all of Europe would grow more powerful. It is clearly evident now that this grand idea has failed drastically and the whole Eurozone is facing the worst economic crisis of this century. Well, of course Greece, Portugal, Spain, Italy, and Ireland borrowed money. It’s what they did with the money, and how much they borrowed that became a problem. Instead of using the money to develop strong economic infrastructure in their respective countries, they went on reckless spending sprees. These countries have spent so much money and developed such irresponsible fiscal agendas that they are now having trouble paying back all those loans. To make it worse, investors are now demanding more yields in order to hold the debt of these countries.

Euro was introduced in 1999 and the unified interest rates allowed its members to borrow heavily and recklessly. Bonds issued by southern European nations were taken to be as safe as German ones. The money created a huge boom into the real estate in PIGS countries. The US housing bubble busted in 2008 and this affected real estate business all over Europe. The big EU countries and IMF came to rescue but did not able to stop the spread to other EU countries. If Greece were to default on its 370-billion-euro debts then the European banks that lent to Greece at the height of the borrowing binge would certainly be hit especially the French banks. The budgetary deficit of Greece in the eight months to the end of August has widened to 22 per cent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece has pledged to reduce its general government deficit to about 7.5 per cent of gross domestic product this year from 10.5 per cent in 2010.

Sovereign states and large debts: First, investors start worrying that the debt may not be sustainable, concerns rise over the ability of the state to pay back capital and interests by generating budget surpluses in the future (that is, fiscal revenues in excess of expenditures). In this case, investors require higher interest rates to subscribe new public debt as a compensation for the risk of insolvency. This in turn increases the risk of insolvency as it worsens public sector balance sheets. At some point, there may no longer be an interest rate able to compensate investors for the risk of insolvency; then they just stop subscribing the public debt. This is a situation of fiscal crisis and has only two possible outcomes:

• (a) Government default followed by a renegotiation of the debt.
• (b) Monetization of the debt, which is effectively bought by the central bank. This represents an injection of money in the economy and thus generates inflation and exchange-rate depreciation.

Euro depreciating: In the last few days we have witnessed the sudden depreciation of the Euro. A possible answer is that as the financial crisis spreads to other large Eurozone countries, the risk of monetization of the public debt becomes more concrete. Even if Greece has been bailed out by other countries in the Eurozone, this would not be feasible for the much larger public debts of other debt ridden European nations. In the scenario of a widespread crisis, the possibility that the ECB will monetize the debt of weak Eurozone countries exists, and fear of the implied inflation can explain the depreciation of the euro. However, a massive monetization is an unlikely scenario, as it would eventually undermine price stability in the Eurozone and imply a substantial transfer of resources from strong to weak Eurozone countries.

Measures to curb crisis:

• (a) The 27 member states of the European Union have created the EFSF (European Financial Stabilization Mechanism), a legal instrument to preserve financial stability in Europe by providing financial assistance to Eurozone states in difficulty. The facility is jointly and severally guaranteed by the Eurozone countries’ governments.
• (b) The steps taken by ECB to reduce volatility in the financial market and improving liquidity include: (i) it began open market operations buying government and private debt securities. (ii) It announced two 3-months and one 6-month full allotment of Long Term Refinancing Operations (LTRO’s). (iii) It reactivated the dollar swap lines with Federal Reserve support.
• (c) The Euro Plus Pact: The Euro Plus Pact was adopted in March 2011 under which the countries of the EU make concrete commitments to a list of political reforms intended to improve the fiscal strength and competitiveness of each country. The Euro-Plus Pact has four broad strategic goals along with more specific strategies for addressing these goals. The four goals are: (i) Fostering competitiveness. (ii) Fostering employment. (iii) Contributing to the sustainability of public finances. (iv) Reinforcing financial stability.
• (d) Eurozone leaders agreed to extend the maturity of current bailout loans to Greece to 7.5 years, doubling the repayment deadline. They also agreed to lower the interest on their bilateral loans to Greece by 100 bps.
• (e) Euro zone leaders have agreed that the EFSF will be able to buy troubled countries’ bonds on the primary market — that is, when they are auctioned by the sovereign. The purchases will be possible only for countries which have agreed on an emergency aid programme with the euro zone, such as Greece or Ireland. Greece's parliament has passed a law to expand the powers of the European Financial Stability Facility (EFSF), which renders the euro zone's bailout fund more flexible. The EFSF increases the rescue fund's effective lending capacity to 440 billion euros ($603 billion) and allows it to lend euro zone governments money to recapitalise their banks. The fund is also empowered to provide precautionary loans to countries under attack in the markets and to buy sovereign bonds. Further, German Chancellor Angela Merkel has suggested that parts of a planned new 109-billion-euro ($148.6 billion) rescue for the debt-laden country could be reopened, depending on the outcome of the troika's audit.
• (f) Greek Prime Minister George Papandreou's Socialist Pasok party has won the parliamentary backing by 155 to 142 for a property tax to meet deficit-reduction targets required to avoid default. But the implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will protest against this decision. The property levy, to be collected via electricity bills, will provide an annual yield of 1.1 per cent of GDP. It will generate as much as 1.8 billion euros.
  The Government has announced an additional 20 per cent wage cut, on top of 15 per cent for the civil service and 25 per cent in the wider public sector. Pensions are being reduced 4 per cent on average, in addition to previous cuts of 10 per cent. A lowering of the tax-free threshold to 5,000 euros will mean higher taxes for all Greeks.

Possible solutions to the crisis:

• (a) Creation of Common European bond: If a common Euro bond is created it will allow the weaker countries to share Germany’s credit rating and hence they will be able to borrow at lower rates. However, for this, Germany would have to guarantee other countries’ debt which is highly unlikely.
• (b) ECB buys bonds of weak countries: One of the solutions to cope up with the meltdown is that ECB buys bonds of the heavily indebted Eurozone members. The ECB has earlier bought Greek, Irish and Portuguese bonds and is now buying Italian and Spanish bonds. But this is not a bottomless pit and purchases would have to stop at some point.
• (c) IMF should come to rescue Eurozone: International Monetary Fund should organize a global rescue package worth trillions of euros. Europe’s debtor nations could borrow at low rates with long maturities. Once a debt pressure is relieved, Europe could follow more pro-growth economic policies.
• (d) Developed nations can write off the debts: A solution to the ongoing eruozone crisis can be achieved if the developed nations negotiate and write down on their debts or defaults on them. Superficially, this seems a solution. But it would create other problems. Defaults would inflict huge losses on banks, insurance companies and will lead to collapse of many European banks and finally the global economy will fall into Great Recession II.
  Thus we can analyze the fact that there are no easy solutions to the crisis confronting Eurozone. However, the urgency for solid steps to confront the issue is also increasing day by day.

European crisis and the American economy: Both, the USA and the Eurozone are witnessing the economic crisis almost at the same time. The 2008 global financial crisis was triggered due to failure of the American economic system and in 2011 the world is witnessing the failure of European economic policies. The fear about the failed Eurozone economy has raised concerns about rising government deficits and debts across the globe. This has worsened the situation and has created alarms in world financial markets and expectations of recession in developed countries including the United States. Let us analyze briefly the impact of European crisis on American economy:

• (a) Impacts on US Banks: The U.S.’ gross direct exposure to European banks through loans and bonds amounts to $678 billion. This does not include less direct exposure through financial derivatives, loan guarantees and other financial connections such as credit default swaps. While a collapse of a European bank as major as Societe Generale or BNP Paribas will not have much impact on the U.S. economy, a financial contagion in Europe will, however, have a palpable impact on the U.S. and the global financial system through the loss of confidence in banks.
• (b) Euro devaluation: The European sovereign debt crisis will trigger a devaluation of the euro against the U.S. dollar, which would impact U.S. exports. Europe is the largest export market for the United States. Depreciation in the euro will make American exports to Europe more expensive, which would significantly weaken the only remaining engine of growth for U.S. economic recovery after the U.S. government ended its stimulus package.
• (c) Threat to Euro viability: The weakening of the euro versus other global currencies and spread of contagion from small European countries, such as Greece and Portugal, to the larger countries, such as Germany and France, may threaten the viability of the euro, potentially paralyzing global credit markets in a way similar to what happened after the collapse of Lehman Brothers in the United States.
• (d) Loss of wealth: The European crisis has affected U.S. capital markets other than the banking sector. It has unraveled stocks and increased fears of a new crash in the stock market. The crisis has also jolted hopes of a strong recovery in the United States. There could be a global loss of wealth, one way or the other, and the loss could be huge. Thus we can say that if the US economy is again hit by recession, this time it will definitely come from Europe and whenever it happens it may be called Great Recession II.

Implications of Eurozone crisis for Indian Economy: Any deceleration in software exports due to the Euro zone debt crisis and the poor economic conditions in the US will affect India's GDP growth. In 2009-10, the US alone accounted for 61 per cent of India's total software exports. European countries (including the UK) followed with as much as 26.5 per cent. If these two regions are the first to be hit by the recession, it is unlikely that software export revenue would remain unscathed. Moreover, over the period 2004-05 to 2009-10, services accounted for 66 per cent of the increment in India's GDP. Revenues from software services amounted to 9.4 per cent of this (excluding public administration and defence). According to balance of payment data, gross revenue from exports of software services amounted to as much as 24 per cent of the gross revenue from merchandise exports. But by and large, India is not going to be affected directly due to PIGS crisis as in 2010, Portugal and Greece had a share of about 1.3 per cent each in India's exports to the EU and Ireland had about 0.7 per cent. Italy and Spain had 11.5 per cent and 6.8 per cent respectively.

Let us now examine some potential scenarios:(a) Impact on foreign trade: First of all, the EU (excluding UK) accounts for roughly 30 per cent of the country’s merchandise foreign trade (export and import). A slowdown in Europe would naturally have a negative impact on our foreign trade and lead to loss of revenue as well as jobs in export-oriented industries. The impact of a slowdown would be much more severe in the service sector (particularly BPO and software) where trade is in India’s favour.(b) Impact on domestic economy: If the European meltdown spreads and leads to a global slowdown, this will definitely worsen India’s trade with other countries and thus hit our domestic economy directly as well as indirectly. The income of exporters will reduce drastically, unemployment will rise, etc. thus our domestic demands will fall drastically and our growth rate will have to comprise. (c) Bearish stock market: More importantly the impact of the crisis would be felt in the financial market. The first signs of this may already be visible, with the Indian markets declining by nearly 4 per cent in last week September, 2011. (d) Fall in commodity prices: In addition to decline in security markets, one can expect to see a rise in gold prices and fall in commodity prices (due to lower demand), and depreciation in currency (due to flight of capital). (e) Currency depreciation: If the Eurozone crisis hangs on for a longer time it will result in deprecation of Indian Rupees due to fligh to capital from the market. (f) Foreign remittances will suffer: Slowdown could impact the flow of remittances and NRI deposits in India. In the wake of a crisis, remittances from abroad could slow down and a significant number of expatriates might even lose jobs and move back to India, thus straining the local economy.

The impact of Eurozone meltdown will be felt seriously by emerging economies like India. In addition to the possibilities outlined above, the Indian economy could be affected in numerous other ways, as it is practically impossible to identify all the interlink-ages between India and the global economy in this day and age of increasing integration. But there is another side of the story which can also become possible. The slowdown in Europe and the USA could benefit the emerging economies due to fall in commodity prices and flow of capital from those countries to countries such as India. In order to reap fruits from the crisis the developing nations need to fasten their economic growth and change the overall climate of crisis of governance.

DTAAs : to curb black money

Basically DTAAs are those pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. In other words, the treaty is devised to ensure that the same income is not taxed twice. In a bid to curb the growing menace of black money, the Government of India has written, under revised tax treaties, some countries to freeze the assets of Indians that have not been declared in India and repatriate the money. It is important to note that India has renegotiated Double Taxation Avoidance Agreements (DTAAs) with 29 out of the 79 countries with which it has such agreements, including the US, Mozambique, Tanzania, Ethiopia, Colombia and Norway. Further, India has also involved into the process of revising DTAAs with Switzerland and Mauritius as well.

The government was amending DTAAs by inserting a clause on information regarding banking sector and also entering into tax information exchange agreements (TIEAs) with several countries, including tax havens. DTAAs have been amended (clause on banking sector has been inserted) with 40 nations and TIEA has been sealed with tax havens like Isle of Man, Bermuda and Bahamas. In absence of a clause on banking sector in DTAAs, the contracting countries were not sharing information in this regard.

The revised pacts include an article on 'Assistance in Collection of Taxes' which allows the two sides to help each other collect taxes due under their respective domestic laws. In some DTAAs, India is including "conservancy" measures, too. The measures include seizure or freezing of assets before the final judgment to ensure they are available whenever the dues are to be collected.

Abuse of DTAAs and round-tripping:

1. DTAAs are misused when many of the countries with whom we have avoidance agreements do not tax their residents in the manner we do. For example, Mauritius has exempted taxation on capital gains but India imposes. It is important to note that through Mauritius 41.9 per cent of all FDI since 1991 and bulk of the FIIs flows into India. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates. India and Mauritius entered into the DTAA way back in 1982 as part of a strategic relationship in response to the US setting up military base in Diego Garcia in the Indian Ocean.
2. The money going out of India, however, is coming back to India for investments, in what is known as "round-tripping". It has been suspected that round-tripping or routing of Indians' illicit money back into the country through the Mauritius route. But in India still we don't have sound estimates regarding round-tripping exist and for this the network of DTAAs and TIEAs to be strengthened to check such practices. And in this regard, the Government has concluded discussions for 11 TIEAs and 13 new DTAAs along with revision of provisions of 10 existing DTAAs during 2010-11. He said foreign tax division of CBDT had been strengthened and a dedicated cell for exchange of information was being set up to work on this agenda.
3. It has been suspected that a significant surge in venture capital funds coming from Mauritius in sectors like telecom and real estate, which have been subject matter of close scrutiny for money laundering cases. A total of 154 foreign venture capital investors are registered with SEBI and are permitted to invest in Indian companies and as many as 149 of these entities are based out of Mauritius, three from Singapore and two in Cyprus.
4. It has been believed that due to growing popular demand to make public of those having money in bank accounts in locations like Switzerland has also led to a large number of entities shifting their illicit wealth to Mauritius with an aim to ultimately route the funds to India.

Proposed measures:

1. The Direct Taxes Code (DTC) Bill introduced in Parliament and likely to be implemented from April 1, 2012, has proposed to override provisions of DTAAs with regard to certain overseas transactions. Basically, DTC has overriding powers in three areas: General anti-avoidance rules (GAAR), controlled financial operations and branch profit tax. At present, there is no provision in the Income-Tax Act to tax overseas or cross border transactions.
2. The newly-approved Directorate of Criminal Investigation (DCI) would collect information about persons and transactions connected with criminal activities and initiate prosecution proceedings against them. The DCI will perform functions in respect to criminal matters having any financial implication punishable as an offense under any direct tax law.
3. India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to receive relevant data on tax evasion in specific cases and to enable the agencies to take the required action.

DTAA
India signed with Tanzania and Ethiopia

With the intention of making a further leap in its relations with Africa, India recently signed double taxation avoidance agreement with Tanzania and Ethiopia. Double tax avoidance agreement is the deal between two countries by which the tax payer need to pay income tax to one country of which it dues, and by showing the certificates of income tax paid, the second country cannot ask to repay the income tax. Some transactions are like this in which one works part time to different country or work in home country to the foreign country. In such cases the Double taxation avoidance agreement works. Major terms of reference of both the Agreements: The agreement for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income, signed by India with two of Africa’s major economies consists of following major references. The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 270 days (183 days with Ethiopia). Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the scale of shares will be taxable in the country of source. The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. The Agreement will provide tax stability to the residents of all the nations and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and its African partners. With the latest agreement with Ethiopia and Tanzania, India has now formed DTAAs with 43 countries.

India and Singapore
Signed protocol to amend DTAA
Indian Government has signed a protocol, amending Double Taxation Avoidance Agreement (DTAA) with the Government of Singapore for effective exchange of information in tax matters. It has to be mentioned that both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters and it is likely to ensure greater transparency and governance. The agreed standard for exchange of information in tax matters includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on 'Exchange of Information' and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

Jayalalithaa launches Rs 750-cr health insurance scheme

A new health insurance scheme for providing free medical and surgical treatment to 1.34 crore families in Tamil Nadu was January 11 launched by the Chief Minister, Ms J. Jayalalithaa, at an annual outlay of Rs 750 crore.

Under the “Chief Minister's Comprehensive Health Insurance Scheme”, replacing the previous DMK regime's insurance cover, a family would get a health insurance cover up to Rs 1 lakh a year for four years, an official release said.

In the case of certain diseases, the insurance cover could go up to Rs 1.50 lakh. The scheme, to be implemented by public sector United India Insurance Company, would be applicable to every member of a family whose annual family income is less than Rs 72,000.

Ms Jayalalithaa handed over ID cards for the scheme to seven beneficiaries and approval letters for treatment to seven others on the occasion.

After coming to power in May, Ms Jayalalithaa had scrapped the “Chief Minister Kalaingar's Insurance Scheme” named after the DMK President, Mr M. Karunanidhi, as part of reversing DMK regime's pet projects.

Observing that the DMK Government's scheme did not benefit everyone, the release said under the earlier initiative a family was given only Rs 1 lakh total cover for a block of four years.

Furthermore, the insurance amount of Rs 1 lakh in the earlier scheme was not sufficient for treatment of life-saving and major surgeries and no provision was made for post-operative treatment, forcing the poor to borrow money for their medical treatment, the release said.

India’s forest cover falling: Study

India's forest cover has declined by 367 sq km between 2007 and 2009. While the figure may not seem alarming, it runs counter to the impression that afforestation and conservation programmes are yielding results.

The largest dip in forest cover was in the northeast which lost 550 sq km. This loss was very partially made up elsewhere, even as there was an overall negative growth in green cover. There was better news from states like Punjab, Jharkhand, Tamil Nadu and Rajasthan where social forestry projects seem to have worked to some extent.

The 2011 report of the Dehradun-based Forest Survey of India accessed by TOI has been submitted to the ministry of environment and forests (MoEF) and is to be released soon.

The news for Delhiites is not encouraging. There has been no change in the forest cover although Delhi government has been repeatedly claiming that forest areas are increasing. With civic agencies pointing to unchecked encroachments in the Ridge, the FSI report is not a surprise.

Maximum reduction in forest cover has been reported from insurgency-hit Manipur, totaling 190 sq km. Nagaland comes next with at least 146 sq km forest being lost between 2006 and 2008. The trend is equally worrying in Mizoram, Arunachal Pradesh and Meghalaya.

The last FSI report in 2009 showed forest cover in the northeast had increased from 1,69,825 sq km in 2005 to 1,70,423 sq km in 2007 -- an annual increase of 299 sq km over two years.

Citing reasons behind the sharp fall in forest cover, a retired conservator of forests said some forest areas in the region were inhabited by tribals and locals practised Jhum cultivation by clearing out huge swathes of forest areas. There was also the threat of organized wood smugglers and mafia.

But there have been some positive indicators elsewhere. Forest cover has increased by 100 sq km during these two years in Punjab, sources in the FSI said. "This is primarily because the government is pushing agro forestry activities. If satellite imagery establishes at least 10% area in an hectare is under forest, we designate it as forest cover," said an official associated with preparation of FSI reports.

Sources said that while Haryana and Himachal Pradesh reported slight increase in forest cover - 14 and 11 sq km respectively. "We expect the forest cover will be more in Haryana in the next report which will be out in 2013 considering the positive impact of Supreme Court ban on mining in Aravallis," said an official posted at FSI.

European crisis more dangerous than 2008 financial crisis: George Soros

Europe's debt crisis is more dangerous than the 2008 global financial crisis, billionaire investor George Soros said.

"We now have a crisis, which in my opinion is even more serious than the crash of 2008," Soros said on Monday at a business event in the southern Indian city of Bangalore .

"You had the institutions that were necessary to control the situation (in 2008), a functioning central bank, the Federal Reserve system, and a functioning

T reasury," he said. "In the case of the e uro, you have a European Central Bank but you don't have an European treasury. That institution is missing , " he said.

Soros, who made investment history by earning $1 billion with a bet against the British pound two decades ago, said last week that a collapse of the euro and break-up of the European Union would have catastrophic consequences for the global financial system.

He was speaking as French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared to meet to discuss ways to boost growth and improve fiscal coordination in the euro zone.

Indian Economy - Socio-economic Planning

(Planned economy is one in which the state owns (partly or wholly) and directs the economy. )While such a role is assumed by the State in almost every economy, in planned economies, it is pronounced: (for example in communist and socialist countries- former USSR and China till the 1970's.) In such a case a planned economy is referred to as command economy or centrally planned economy or command and control economy. (In command economies, state does the following

• Control all major sectors of the economy
• Legislate on their use and about the distribution of income
• State decides on what should be produced and how much; sold at what price
• Private property is not allowed)

(In a market economy, it is the opposite- state has a minimal role in the management of the economy- production, consumption and distribution decisions are predominantly left to the market.) State plays certain role in redistribution. State is called the laissez faire state here. (It is a French phrase literally meaning "Let do.")
(Indicative plan (see ahead) is one where there is a mixed economy with State and market playing significant roles to achieve targets for growth that they together set.) (It is operated under a planned economy but not command economy.)
The difference between planned economy and (command economy is that in the former there may be mixed economy and while in the latter Government owns and regulates economy to near monopolistic limit.)
(Command economies) were set up in China and USSR, mainly for rapid economic growth and social and economic justice but have been dismantled in the last two decades as (they do not create wealth sustainably and are not conducive for innovation and efficiency.) (Cuba and North Korea are still command economies.)

History of Economic Planning in India: The beginnings

India being devastated economically after more than 2 centuries of colonial exploitation resulting in chronic poverty, eradication of poverty was the driving force for the formulation of various models of growth before Independence.

(In 1944 leading businessmen and industrialists (including Sir Purshotamdas Thakurdas, JRD Tata, GD Birla and others) put forward "A Plan of Economic Development for India" -popularly known as the 'Bombay Plan".) It sawIndia's future progress based on further expansion of the textile and consumer industries already flourishing in cities like Bombay and Ahmedabad. It saw an important role the State in post-Independent India: to provide infrastructure, invest in basic industries like steel, and protect Indian industry from foreign competition.

(Visionary engineer Sir Mokshagundam Visvesvarayya. pointed to the success of Japan and insisted that 'industries and trade do not grow of themselves, but have to be willed, planned and systematically developed') - (in his book titled "Planned Economy for India"(1934)) Expert economists and businessmen were to do the planning. The goalwas poverty eradication through growth.

(The Indian National Congress established a National Planning Committee under the chairmanship of Jawaharlal Nehru.) It (1938) stated the objective of planning for development ("was to ensure an adequate standard of living for the masses, in other words, to get rid of the appalling poverty of the people"). It advocated heavy industries that were essential both to build other industries, and for Indian self- efence; heavy industries had to be in public ownership, for both redistributive and security purposes; redistribution of land away fromthe big landlords would eliminate rural poverty.

(During the 1940's, the Indian Federation of Labour published its People's Plan by MN Roy) that stressed  on employment and wage goods). (S.N. Agarwala, follower of Mahatma Gandhi published Gandhian Plan that emphasized on decentralization; agricultural development; employment; cottage industries etc.)

Planning Goals

After Independence in 1947, India launched the year plan for rapid growth. (Planning has the following long term goals).

• Growth
• Modernization
• Self-reliance and
• Social justice

(Economic growth) is the value of the goods and services produced by urban economy. It (is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP- real means adjusted to inflation.) (Growth measures quantitative increase in goods and services.)
Economic development refers to growth that includes redistributive aspects and social justice. GDP shows growth and welfare and human development aspects like education, access to basic amenities, environmental quality, freedom, or social justice. (Economic growth is necessary for development but not sufficient).
Growth is expected to [spread to all sections and regions; raise resources for the Government to spend on socio-economic priorities etc. (It takes a long time for growth to trickle down to all people and regions. Therefore, State plans for an expeditious process of inclusive growth.)
(Modernization is improvement in technology. It is driven by innovation and investment in R and D.) Education is the foundation of modernization. (The more modernized the economy, the greater the value created by it).
(Self-reliance means relying on the resources of the country and not depending on other countries and the MNCs for investment and growth.) India embarked on the goal partly due to the colonial experience and partly due to the goal of orienting growth to development and poverty eradication. (Nehru-Mahalanobis model of growth that closed Indian economy and relied on basic industries is the main plank for self-reliance.)
The term (self-reliance)  should not be confused with self-sufficiency - the former means depending on resources of the country) and avoid dependence on external flows); the latter means that the country has all the resources it needs. No country can be self-sufficient. Social justice means inclusive and equitable growth where inequalities are not steep and benefits of growth reach allrural- urban ,man-woman; caste divide and interregional divides are reduced.
While the above four are the long term goals of the planning process, each five year plan has specific objectives and priorities.

History of Planning

First Plan (1951-56)
The First Plan stressed more on agriculture, in view of large scale import of foodgrains and inflationary pressures on the economy. Other areas of emphasis were power and transport. The annual average growth rate during the First Plan was estimated as 3.61% as against a target of 2.1%. Renowned economist KN Raj, who died in 2010was one of the main architects of India's first five-year plan.
Second Plan (1956-61)
With agricultural targets of previous plan achieved, major stress was on the establishment of heavy industries. Rate of investment was targeted to increase from 7% to 11%. The Plan achieved amore than targeted growth rate of 4.32%. This Plan envisaged to give a big push to the economy so that it enters the take off stage. It was based on Nehru-Mahalanobismodel- self-reliance and basicindustry driven growth.
Third Plan (1961-66)
It tried to balance industry and agriculture. The aimof Third Plan was to establish a self sustaining economy. For the first time, India resorted to borrowing from IMF. Rupee was also devalued for the first time in 1996. India's conflict with Pakistan and repeated droughts also contributed in the failure of this Plan.
Annual Plan
As the Third Plan difficulties on the external front (war with China in 1962 and Pakistan in 1965); and the economic troubles mounted on the domestic front- inflation, floods, forex crisis- the Fourth Plan could not be started from 1966. There were three annual plans till 1969. This period is called plan holiday- that is when five year plans are not implemented. The Annual Plans were: 1966-67, 1967-68 and 1968-69.
Forth Plan (1969-74)
The main objective of this Plan was growth with stability. The Plan laid special emphasis on improving the condition of the under-privileged and weaker sections through provision of education and employment. Reducing the fluctuations in agricultural production was also a point of emphasis of this Plan. The Plan aimed at a target growth of 5.7% and the achievement against this was 3.21 %.
Fifth Plan (1974-79)
The main objective of the Plan was Growth for Social Justice. The targeted growth rate was 4.4% and we achieved 4.8%. It was cut short by the Janata Party that came to power in 1977.
Sixth Plan (1980-1985)
Removal of poverty was the foremost objective of Sixth Plan. Another area of emphasis was infrastructure, which was to be strengthened for development of both industry and agriculture. The achieved growth rate of 5.7% was more than the targeted one. Direct attack on poverty was the main stress of the Plan.
Seventh Plan (1985-90)
This Plan stressed on rapid growth in food-grains production and increase in employment opportunities. The growth rate of 5.81% achieved in this Plan was more than targeted one. The plan was more than the targeted. The plan saw the beginnings of liberalization of Indian economy. The 8th Plan could not start in 1990 due to economic crisis and political instability. There were two annual plans- plan holiday.
Eighth Plan (1992-1997)
This Plan was formulated keeping in view the process of economic reforms and restructuring of the economy. The main emphasis of this Plan were

• to stabilize the adverse balance of payment scenario sustainably.
• improvement in trade and current account deficit.
• human development asmain focus of planning.

It was indicative plan for the first time. The Plan was formulated in a way so as to manage the transition from a centrally planned economy to market led economy. The targeted annual average rate of growth of the economy during Eighth Plan was 5.6%. Against this, we achieved an average annual growth of 6.5%.
The Plan was based on Rao-Manmohan Singh model of liberalization.
Ninth Five Year Plan (1997-2002)
The salient features of the Ninth Five Year Plan are a target annual average growth rate of 6.5 per cent for the economy as a whole, and a growth rate of 3.9 per cent for agriculture sector, among others. The key strategies envisaged to realise this target rest on attaining a high investment rate of 28.2 per cent of GDP at market prices. The domestic saving rate, which determines the sustainable level of investment, is targeted at 26.1 per cent of the GDP. Care has been taken to ensure achievement of a sustainable growth path in terms of external indebtedness as well as fiscal stability, Rate of growth achieved was 5.4%
Tenth Plan (See ahead)
Growth Performance in the Five Year Plans (per cent per annum)

	Target	Actual
1. First Plan (1951-56)	2.1	3.61
2. Second Plan (1956-61)	4.5	4.32
3. Third Plan (1961-66)	5.6	3.21
4. Fourth Plan (1969-74)	5.7	4.80
5. Fifth Plan (1974-79)	4.4	5.69
6. Sixth Plan (1980-85)	5.2	5.81
7. Seventh Plan (1985-90)	5.0	6.7
8. Eighth Plan (1992-97)	5.6	5.35
9. Ninth Plan (1997-2002)	6.5	7.8%
10. Tenth Plan(2002-2007)	8%
11. Eleventh Plan( 2007-12)	8.1 (revised 2010)

The economy is expected to expand by 9% per cent in 2010-11- having achieved 8.9% real growth in the first half of 2010-2011. It may rise to 10 per cent in the terminal year of the 11th Plan. Government set an average annual growth target of 9 per cent for the 11th Plan - beginning with 8.5 per cent in the first year and closing with 10 per cent In 2011-12. The MTA document said the economy exceeded expectations in 2007-08, with a growth rate of 9 per cent, but the momentum was interrupted in 2008-09 because of the global financial crisis. Following the globalmeltdown, the growth rate slipped to 6.7 per cent in 2008-09 from over 9 per cent in the preceding three years. In the year 2009-10. the growth rate was 7.6%.

Planning Commission

(The Planning Commission was constituted in March, 1950 by a Resolution of the Government of India, and works under the overall guidance of the National Development Council). (The Planning Commission consults the Central Ministries and the State Governments while formulating Five Year Plans and Annual Plans and also oversees their implementation). (The Commission also functions as an advisory body at the apex level).
The 1950 resolution setting up the Planning Commission outlined its functions as to:

• Make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation's requirement;
• Formulate a Plan for the most effective and balanced utilisation of country's resources;
• On a determination of priorities, define the stages in which the Plan should be carried out and propose the allocation of resources for the due completion of each stage;
• Indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan;
• Determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of the Plan in all its aspects;
• Appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary; and
• Make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or on a consideration of prevailing economic conditions, current policies, measures and development programmes or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.

(The Prime Minister is the ex officio Chairman of the Planning Commission). (Deputy Chairperson enjoys the rank of a cabinet minister). (A member of the Planning Commission enjoys the rank of a Minister of State in the Union Government). Cabinet Ministers with certain important portfolios act as part-time members.
(The Deputy Chairman and the full time Members of the Planning Commission function as a composite body in the matter of detailed plan formulation. (They provide advice and guidance to the subject Divisions of the Commission in the various exercises undertaken for the formulation of Approach to the Five Year Plans, and Annual Plans). Their expert guidance is also available to the subject Divisions formonitoring and evaluating the Plan programmes, projects and schemes.
The Planning Commission functions through several technical/subject Divisions. Each Division is headed by a Senior Officer designated as Pr. Adviser/Adviser/Addl. Adviser/Jt. Secretary/Jt. Adviser.
The various Divisions in the Commission fall under two broad categories:

• General Divisions which are concerned with aspects of the entire economy; and
• Subject Divisions which are concerned with specified fields of development.

The General Divisions functioning in the Planning Commission are:

• Development Policy Division,
• Financial Resources Division, .
• International Economics Division,
• Labour, Employment andManpower Division;
• Perspective Planning Division,
• Plan Coordination Division,
• Project Appraisal and Management Division,
• Socio-Economic Research Unit,
• State Plan Division, including Multi Level Planning, Border Area Development Programme, Hill Area Development and North Eastern Region (NER), and Statistics and Surveys Division,
• Monitoring Cell.

The Subject Divisions are:

• Agriculture Division,
• Backward Classes Division,
• Communication & Information Division,
• Education Division,
• Environment and Forests Division,
• Health & Family Welfare Division,
• Housing, Urban Development & Water Supply Division,
• Industry & Minerals Division,
• Irrigation & Command Area Development Division,
• Power & Energy Division (including Rural Energy, Non-Conventional Energy Sources and Energy Policy Cell)
• Rural Development Division,
• Science & Technology Division,
• Social Welfare & Nutrition Division,
• Transport Division,
• Village & Small Industries Division, and
• Western Ghats Secretariat.

The Programme Evaluation Organisation undertakes evaluation studies to assess the impact of selected Plan Programmes / Schemes in order to provide useful feedback to planners and implementing agencies.
The Commission is a corner-stone of our federal structure, a think-tank ; helps to balance the priorities and expenditures of the Ministries of the Union Government ; throws up ideas on policies for structural and perspective changes ; and is a reservoir of research."

Relevance of Planning

There has been a national debate about the relevance of planning in the era of liberalization where the state controls and regulations are dismantled to a great extent andmarket forces are given larger role. (The investment of the government for the five year plans is also on decline). (The trend began in the 7th plan and strengthens into the Eleventh Plan).
It is true that the quantitative aspects of planning in terms of control over economy are being selectively phased out and the nature of planning process is undergoing a qualitative change. Planning is important for the following reasons in the era of liberalization

• (In a federal democracy like ours, the principal task of planning is to evolve a shared vision among not only the federal units but also among other economic agents so that the efforts of all the actors become convergent towards the national priorities, the role of planning is to develop a common policy stance for center and states. Also, (the task of federal policy coordination is central to Indian Planning). For example, the need to invite foreign investment in infrastructure areas like power need center - state coordination as the necessary legislation and administrative changes involve both.
• While the growth process can be made the responsibility of the corporate sector to a greater degree, its direction and distribution are to be steered by planned public intervention so that regional imbalances are reduced and socio economic inequities are set right. For example, `directing the growth of the large industry into the backward areas and technology intensive areas to realize national goals.
• The nature of instruments available to planners in the implementation has changed. Quantitative controls have yielded place to qualitative ones .The planning process has to focus on the need for planning for policy.
• Planning at the grass roots level that is participatory is very crucial for improving the delivery systems and proper use of the resources. The role of the government is thus to facilitate participatory planning.
• Environmental priorities are a major concern of planning is necessary for the sectors like energy, communication, transport and so on as private sector needs to be guided into the national plan.
• In the era of globalization where corporates are not expected to plan beyond the growth of a particular unit, the (role of safeguarding national interest is that of planning by the State). For example, being subjected to various discriminative trade practices by EU, USA and so on, (the Indian farmers,manufacturers and exporters have to fight sophisticated battles in the WTO for which the legal services and information and building up bargaining power are best provided by the State).

Thus, planning continues to be relevant and ever more so for the following reasons

• Federal cooperation and coordination
• Equitable growth
• Environment friendly development
• Defending national interest in the age of globalization
• Inter-sectoral balance in growth

Changing Role of Planning Commission

(From a highly centralized planning system, the Indian economy is gradually moving onwards indicative planning where hard planning is no longer undertaken). The role of the (Planning Commission) accordingly changes. The Commission concerns itself with the building of a long term strategic vision of the future and decide on priorities of nation. (It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction).

Planning Commission plays an integrative role in evolving a national plan in critical areas of human and economic development. (In the social sector, Planning Commission helps in schemes which require coordination and synergy like rural health, drinking water, rural energy needs, literacy and environment protection).

When planning in a vast federal country like India involves multiplicity of agencies, a high powered body like the PC can help in evolution of an integrated approach for better results atmuch lower costs.

In our transitional economy, (Planning Commission attempts to play a systems change role and provide consultancy within the Government for developing better systems). It has to ensure smooth management of the change and help in creating a culture of high productivity and efficiency in the Government.

In order to spread the gains of experience more widely, Planning Commission also plays an information dissemination role.

With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned.

From Planning Commission to Systems Reforms Commission

There has been a significant change in the role of the PC since its inception in 1950. In the beginning, Planning Commission was all powerful and had the final say and the veto over every aspect - related to growth and socio-economic development- of the functioning of the Union Ministries and the State Governments: The manner of raising and utilising resources; specific allocations to particular schemes and programmes; location of enterprises; expansion and reduction of capacities; application of technologies; sources of supplies; modalities of implementation; priorities, phasing, pricing, targets and timeframes; nature of the instrumentalities; qualifications and strength of personnel of organisations; staff emoluments etc.
(Since 1991, India adopted the indicative planning model, away fromthe kind of centralised planning on the Soviet model envisaged by Jawaharlal Nehru). Now Ministries and Departments, as well as the corporate entities in the private sector, enjoy a lot of functional, financial and operational autonomy.
In the era of liberalisation, the economic players should properly be left to decide for themselves what they consider to be the appropriate courses of action on the various issues coming up before them, whether they relate to policies, schemes or investments.

RBI releases Mid Quarter Monetary Policy Review

Monetary Measures

On the basis of the current macroeconomic assessment, it has been decided to:

• keep the cash reserve ratio (CRR) unchanged at 6 per cent; and
• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent and the marginal standing facility (MSF) rate at 9.5 per cent.

Introduction

Since the Reserve Bank’s Second Quarter Review (SQR) of October 25, 2011, the global economic outlook has worsened significantly. The recent European Union (EU) summit agreement did not assuage negative market sentiments, thereby increasing the likelihood of persistent financial turbulence as well as a recession in Europe. Both factors pose threats to emerging market economies (EMEs), including India. Significantly, despite these developments, crude oil prices remain elevated.

On the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.

Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation.

Global Economy

The global economic situation continues to be fragile with no credible solution as yet to the immediate  euro area sovereign debt problem. At the EU summit on December 8-9, the European leaders agreed on a new fiscal compact, involving stronger coordination of economic policies to strengthen fiscal discipline. While the agreement is necessary for medium and long-term sustainability of the euro area, its ability to resolve short-term funding pressures was questioned by markets.  Q3 euro area growth, at 0.8 per cent, was anaemic and 2012 growth is now expected to be weaker than earlier projected.  Reflecting these projections, the European Central Bank (ECB) cut its policy rate twice in the last two months, and also implemented some non-standard measures. By contrast, growth in the US in Q3 of 2011 was better than in Q2, although still substantially below trend.

Growth in EMEs is also moderating on account of sluggish growth in advanced economies and the impact of monetary tightening to contain inflation. In view of the slowing down of their economies, Brazil, Indonesia, Israel and Thailand cut their policy rates, while China cut its reserve requirements. EME currencies have also come under varying degrees of downward pressure as a result of global risk aversion and financial stress emanating from the euro area.

Domestic economy

Growth

GDP growth moderated to 6.9 per cent in Q2 of 2011-12 from 7.7 per cent in Q1 and 8.8 per cent in the corresponding quarter a year ago. The deceleration in economic activity in Q2 was mainly on account of a sharp moderation in industrial growth. On the expenditure side, investment showed a significant  slowdown. Overall, during the first half (April-September) of 2011-12, GDP growth slowed down to 7.3 per cent from 8.6 per cent last year.

Industrial performance has further deteriorated as reflected in the decline of the index of industrial production (IIP) by 5.1 per cent, y-o-y, in October 2011. This was mainly due to contraction in manufacturing and mining activities. The contraction was particularly sharp in capital goods with a y-o-y decline of 25.5 per cent, reinforcing the investment decline story emerging from the GDP numbers.

Other indicators also suggest a similar tendency, though by no means as dramatic as the IIP. The HSBC purchasing managers' index (PMI) for manufacturing suggested further moderation in growth in November 2011. However, PMI-services index recovered in November from contractionary levels in the preceding two months. Corporate margins in Q2 of 2011-12 moderated significantly as compared with their levels in Q1. The decline in margins was largely on account of higher input and interest costs. Pricing power is evidently declining.

On the food front, the progress of sowing under major rabi crops so far has been satisfactory, with area sown under foodgrains and pulses so far being broadly comparable with that of last year.

Inflation

On a y-o-y basis, headline WPI inflation moderated to 9.1 per cent in November from 9.7 per cent in October, driven largely by decline in  primary food articles inflation. Fuel group inflation went up marginally. Notably, non-food manufactured products inflation remains elevated, actually increasing to 7.9 per cent in November from 7.6 per cent in October, reflecting rising input costs. The new combined (rural and urban) consumer price index (base: 2010=100) rose further to 114.2 in October from 113.1 in September. Inflation in terms of other consumer price indices was in the range of 9.4 to 9.7 per cent in October 2011. Reassuringly, headline momentum indicators, such as the seasonally adjusted month-on-month and 3-month moving average rolling quarterly inflation rate, show continuing signs of moderation.

External sector

Merchandise exports growth decelerated sharply to an average of 13.6 per cent y-o-y in October-November from an average of 40.6 per cent in the first half of 2011-12.  However, as imports moderated less than exports, the trade deficit widened, putting pressure on the current account. This, combined with rebalancing of global portfolios by foreign institutional investors and the tendency of exporters to defer repatriating their export earnings, has led to significant pressure on the rupee.

As on December 15, 2011, the rupee had depreciated by about 17 per cent against the US dollar over its level on August 5, 2011, the day on which the US debt downgrade happened. In the face of this, several measures were taken to attract inflows. Limits on investment in government and corporate debt instruments by foreign investors were increased. The ceilings on interest rates payable on non‐resident deposits were raised. The all‐in‐cost ceiling for external commercial borrowings was increased. Further, a series of administrative measures that discourage speculative behaviour were also initiated. The Reserve Bank is closely monitoring the developments in the external sector and it will respond to the evolving situation as appropriate.

Fiscal  Situation

The central government’s key deficit indicators worsened during 2011-12 (April-October), primarily on account of a decline in revenue receipts and increase in expenditure, particularly subsidies. The fiscal deficit at 74.4 per cent of the budgeted estimate in the first seven months of 2011-12 was significantly higher than 42.6 per cent in the corresponding period last year (about 61.2 per cent if adjusted for more than budgeted spectrum proceeds received last year). The likely slippage in this year’s fiscal deficit has inflationary implications. 

Money, Credit and Liquidity Conditions

The y-o-y money supply (M3) growth moderated from 17.2 per cent at the beginning of the financial year to 16.3 per cent on December 2, 2011, although still higher than the projected trajectory of 15.5 per cent for the year. Y-o-y non-food credit growth at 17.5 per cent on December 02, 2011, however, was below the indicative projection of 18 per cent.

Consistent with the stance of monetary policy, liquidity conditions have remained in deficit during this fiscal year. However, the deficit increased significantly beginning the second week of November 2011. The average borrowings under the daily LAF increased to around ` 89,000 crore during November-December (up to December 15, 2011) from around  `49,000 crore during April-October 2011.  The Reserve Bank conducted open market operations (OMOs) on three occasions in November-December 2011 for an amount aggregating about ` 24,000 crore to ease liquidity conditions.

There are currently no significant signs of stress in the money market. The overnight call money rate is stable around the policy repo rate and liquidity facilities such as marginal standing facility (MSF) remain unutilised.  However, in view of the fact  that borrowings from the LAF are persistently above the Reserve Bank's comfort zone, further OMOs will be conducted as and when seen to be appropriate. 

Outlook

Global growth for 2011 and 2012 is now expected to be lower than earlier anticipated. Increased strains in financial markets on the back of growing concerns over euro area sovereign debt, limited monetary and fiscal policy manoeuvrability, high unemployment rates, weak housing markets and elevated oil prices are all contributory factors. These factors have also contributed to moderating growth in the EMEs. As a consequence of all-round slower growth, inflation has also started declining, both in advanced countries and EMEs. 

On the domestic front, agricultural prospects look promising on the back of expected record kharif output and satisfactory progress on rabi sowing. However, industrial activity is moderating, driven by deceleration in investment, which is a matter of serious concern. Overall, the growth momentum in the economy is clearly moderating. Further, considering the global and domestic macroeconomic situation, the downside risks to the Reserve Bank’s growth projection, as set out in the SQR, have increased significantly. 

Between the First Quarter Review (FQR) and the SQR, while non-oil commodity prices had declined significantly, the rupee too had depreciated sharply. Consequently, the headline inflation projection at 7 per cent for March 2012, as set out in the FQR, was retained in the SQR. With moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation, the inflation projection for March 2012 is retained at 7 per cent.

The Reserve Bank will make a formal numerical assessment of its growth and inflation projections for 2011-12 in the third quarter review of January 2012.

Guidance

While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.

However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.