High variability in agricultural output and low productivity levels are symptomatic of the widening gaps in the rural physical and social infrastructure. Rural economic infrastructure, which includes irrigation structures, agricultural research and extension, transport infrastructure, electricity, storage structures, telecommunication services and market yards directly enhances the productivity of physical resources. Social infrastructure, viz., drinking water supply systems, sanitation systems (drainage and sewerage), health care services and education improve the efficiency of human capital and also are desirable per se.

The current scenario of rural infrastructure is far from encouraging on account of the fact that only about 40 per cent of the net cultivated area is irrigated; technology adoption in agriculture is hampered by the 'weak' quality of research effort and extension systems; only about 60 per cent of our villages are connected by all-weather roads; rural markets are still inadequate and lead to delays in selling the farm produce; 100 per cent 'village electrification' is evident in only ten states with nearly 13 per cent of villages without electricity; only about 75 per cent of the rural habitations had 'full' access to drinking water supply; and rural literacy is still low.

The State Governments, vested with the jurisdiction of most of the rural infrastructure, have adopted a supply-oriented approach to 'public provision' of rural infrastructure services using budgetary resources. The Operation and Maintenance (O & M) of such investments is mostly vested with public agencies. The charges levied for the services have been low (or nil in some cases). Furthermore, the decentralisation of provision of infrastructure services to local bodies, as envisaged in the 73rd Constitutional Amendment Act 1992, is yet to be implemented by some of the States.

Key issues identified in building some of the rural infrastructure are:

• Irrigation Infrastructure – increasing public investments, higher allocation for quicker completion of ongoing projects, promoting private initiatives, encouraging users' participation in irrigation management and effective pricing of water so as to recover at least the O&M cost.

• Agricultural Research and Extension - privatisation of the agricultural extension system through the promotion of agri-clinics and agri-business centres for enhanced technology dissemination.

• Electricity - identification of feasible alternative sources of power, promoting private participation in the production and distribution, appropriate pricing and reducing the transmission and distribution (T&D) losses.

• Transport Infrastructure - connecting every village by all-weather roads through higher investments for developing roads and providing adequate funds for the operation and maintenance of all roads.

• Marketing Infrastructure - modification of the State Agricultural Produce Marketing Act to promote private initiative in providing such infrastructure.

• Storage Structures - stepping up initiatives for setting up of cold chain storage and warehousing.

Commodity futures hedge the risks faced by farmers and agricultural trade functionaries from seasonal and cyclical fluctuations in the prices of agricultural commodities. Futures markets perform the two important functions of price discovery and price risk management, facilitating rational production and distribution decisions. They act as a price barometer, helping to stabilise the amplitude of price variations and create an integrated price structure throughout the country.

Internationally, FT is allowed in a range of commodities and even in a number of non-commodities such as a weather indices and pollution permits. In some major derivative exchanges such as the Chicago Board of Trade (CboT) and the London Inter-Bank Financial Futures Exchange (LIFFE), there is a convergence of futures markets with freedom to trade in all types of derivatives. Some of the best practices followed internationally include daily clearing, margining, creation of trade guarantee fund, transparency in trade and management practices to ensure market integrity and strict monitoring and surveillance of the trade in the exchange. With the globalisation of financial markets, significant developments are taking place in the international arena in terms of electronic trading, internet based commodity exchanges and electronic communication networks (ECNs) using multiple products and combination of networks as competitors to exchanges. There are increasing alliances, often international, to compete effectively with exchanges and ECNs.

The first ever organised futures market in India evolved with the setting up of the Bombay Cotton Trade Association Limited in 1875. The Forward Contract Regulation Act (FCRA) was enacted in December 1952, providing an institutional framework for the evolution of futures markets in India. During the 1960s and 1970s, however, FT was either suspended or prohibited. The Khusro Committee (June 1980) recommended the reintroduction of futures trading in major commodities. On the recommendations of the Kabra Committee in 1993, the Government of India permitted futures trading in a large number of commodities. There are, at present, 22 exchanges in the country and all commodities have been permitted to be traded in futures. International futures markets in pepper and castor oil were developed by upgrading the existing exchanges at Kochi and Mumbai, respectively. A Multi-commodity Nationwide Exchange has also been started in Ahmedabad. There has been a good response in terms of volumes traded, price discovery and evening out of price fluctuations in 2001-02 (Chart).

Indian commodity futures markets are still at a nascent stage. They are dispersed and fragmented with small turnover and catering to separate trading communities in different regions. Apart from physical/ infrastructural constraints such as limited online trading, online surveillance and monitoring, the non-availability of a fool proof legal system of contracts relating to the warehouse receipt system is impeding the development of futures markets in India. Furthermore, the hawala markets, which have been operating since decades, trade 20-30 times the volume of official future exchanges. They are often localised, operating with low transaction costs and hence attract many speculators and small hedgers. Efforts are being made to bring informal forward trading into the ambit of the Forward Markets Commission to ensure their orderly integration with the formal marketing structure. Efforts have also been made by the Government and Forward Markets Commission to improve the infrastructure and trade practices in commodity exchanges. Some of the exchanges have been encouraged to adopt screen-based on-line trading systems and best international trade practices. Convergence of markets for commodity derivatives and security derivatives is a recommended objective, with all existing restrictions under the Essential Commodities Act (1955) removed.

Effective co-ordination and interface between the exchanges, banks and the warehousing agencies is crucial in evolving the necessary framework for a mature warehousing system based on legally enforceable contracts and supporting transferability and negotiability. There is need to calibrate proper incentive structure by minimising the stamp duties imposed by the State Governments and changing the income tax laws suitably as is being felt in several corners. Granting industry status to commodity futures can improve access for participants to institutional funds for their working capital. Participation in commodity futures market needs to be enlarged by including mutual funds, financial institutions and foreign institutional investors under appropriate regulatory supervision.

Under the market access provisions of the Agreement on Agriculture (AoA), members are required to reduce the total Aggregate Measure of Support (AMS) - by 20 per cent for the developed countries over a period of six years and 13.3 per cent for the developing countries over a period of ten years - so as to reach the AMS levels of the base period (1986-88). For most developing countries including India, however, base AMS levels were negative, while base AMS for most of the developed countries was high. Consequent upon the WTO bindings, there was some reduction in AMS. Nonetheless, the support to agriculture remains high, particularly in many of the industrialised countries. This has hindered market access for developing countries. The Doha declaration provided a fresh impetus to the negotiations on agriculture on these issues. The success of these negotiations, however, depends heavily on the willingness of major Organisation for Economic Cooperation and Development (OECD) countries to undertake trade liberalisation.

Another contentious issue is the structuring of subsidies. Export subsidies, input subsidies for fertilisers and electricity, concessional interest rates and market price support are deemed to be trade distorting by the AoA and hence are to be reduced. The organisation of subsidies in various Boxes under the AoA favours developed countries. For instance, direct payments to farmers in the USA in the form of deficiency payments are considered to be minimally trade distorting and do not attract reduction commitments. On the other hand, input and export subsidies in India are subject to reduction commitments. India is gradually reducing input subsidies, such as those on fertilisers. The USA, however, has substantially increased farm support by passing the Farm Security and Rural Investment Act in 2002.

The implementation of Sanitary and Phyto-Sanitary (SPS) and Technical Barriers to Trade (TBT) provisions of WTO are being utilised to create trade barriers for the developing countries by some of the developed countries. For instance, the official norm of WTO for aflatoxin content in groundnut of 15 parts per billion (ppb) is superceded unilaterally by the European Union’s (EU) requirement of 4 ppb. Thus, even if Indian production matches the WTO norms, the EU norm will act as a barrier to trade for Indian groundnut. Furthermore, conforming to the EU norms entails massive investments in Hazard Analysis and Critical Control Points (HACCP) methods which are highly capital intensive and automatically preclude many small exporters from developing countries. The Doha declaration makes Special and Differential (S&D) treatment for developing countries an integral part of the negotiations. India attaches the highest priority to Special and Differential (S&D) provisions and wants early discussions on such crucial issues as Sanitary and Phyto-Sanitary (SPS) and Special Safeguard Measures (SSM). In a recently held mini-Ministerial meeting in Egypt, India made a strong pitch for special window under the AoA to provide for S&D treatment by way of SSM and other such measures which would be paramount in safeguarding the interest of Indian farmers. India is of the view that if these negotiations are to progress, the high levels of ambitions in terms of market access have to be tempered and special windows in terms of effective S&D measures have to be provided.

There are sharp differences relating to the modalities to be adopted for negotiations. India, along with EU and at least 75 other countries, prefer the Uruguay Round (UR) formula of request-offer approach under which countries could adopt a wait-and-watch approach and take their decisions based on the offers made by the developed countries in the area of market access. It is felt that this approach can take care of the special needs of the developing countries. The US and the Cairns group (Australia, New Zealand, etc.), on the other hand, back the Swiss formula which calls for steeper reduction in commitments wherever the existing tariff levels are higher than the norm.

In an attempt to bridge the impasse, the chairperson of WTO Committee on Agriculture, Mr.Stuart Harbinson, prepared a Draft Paper on modalities in February 2003, which separated commodities into three categories for tariffication broadly in agreement with the Swiss proposals. The Draft Paper also proposed that the domestic support in the form of Blue Box payments –which EU liberally uses – be reduced to 50 per cent in five years. Furthermore, the aggregate support including input and price subsidies are to be cut by 60 per cent over a similar period and export subsidies are to be phased out completely in nine years. Members, however, failed to agree on the Draft Paper.

Given the present state of the negotiations under the WTO, it is believed that India should aim at improving agricultural export competitiveness vigorously to compensate for the slow progress on market access and AMS. In the interregnum, domestic agricultural production will continue to require support under a judicious mix of public policy intervention and incentives for private participation in the modernisation of Indian agriculture.

1. Deodhar, Satish Y. (2001), 'WTO Agreements on SPS and TBT : Implications for Food Quality Issues', IIM Ahmedabad Working Paper No.: 2001-04-05.

2. Government of India (2003), Press releases dated April 3, 2003 and May 1, 2003 by Ministry of Commerce and Industry, New Delhi.

3. World Trade Organisation (2003), Annual Report, Geneva

For resource-constrained developing countries like India, infrastructure financing, which is of irreversible nature, is always a key issue in designing the physical infrastructure necessary for achieving growth aspirations. In the literature, new strands regards finance is the wheels, if not the engine, of infrastructure growth. Recent models of financing infrastructure in the presence of a budget constraint for the regulator suggest that a reduction in available funds reduces the quantities produced by all types of firms and increases the interval in which there is bunching. In the absence of an equity market for infrastructure projects the need for competitive bidding has been highlighted.

Private investment worldwide in almost 2,500 infrastructure projects increased from about US $ 20 billion in 1990 to around US $ 130 billion in 1997 before falling to about US $ 60 billion in 2001. A large part of this investment was concentrated in Asia and Latin America. The share of private sector in infrastructure investment continues to be small in East Asia and much of this investment is backed by implicit or explicit government assurances. Furthermore, most East Asian economies adopted an incremental approach to private participation in infrastructure, i.e., private investment for specific projects is ring-fenced to insulate them from the existing structure of delivery.

The India Infrastructure Report (IIR) (1996) had estimated the infrastructure requirements of the Indian economy at about US $ 215 billion for the period 2001-02 to 2005-06. About 85 per cent was expected to be met through domestic financing and 15 per cent by external saving, equiproportionally divided between debt and equity. The IIR envisioned the commercialisation of infrastructure projects as a solution to the unlocking of domestic resources.

In India, financing of infrastructure is still dominated by the public sector, except in telecommunications. Budget constraints and sub-optimal pricing are the principal impediments to public investment in infrastructure. Opportunities for private sector financing in areas previously in the exclusive domain of the Government have expanded not only through the sale of equity in State enterprises but also through inviting private parties for undertaking green-field projects. The power sector was the first among the infrastructure sectors to be opened up to the private sector. Foreign equity up to 100 per cent was allowed in green-field power projects in 1993-94. The recently approved Electricity Bill, 2003 may encourage private sector financing for electricity generation as it envisages delicensing of generation of power, free permission of captive power generation, and ensures transparent policies regarding subsidies. Foreign direct investment (FDI) up to 49 per cent has been permitted in telecommunication services. External Commercial Borrowing (ECB) limits have been made flexible with an increased share of ECBs in project cost. To further encourage private financing, the telecom policy of 1999 announced a package for migration from fixed license fee to revenue sharing for existing cellular and basic service providers. The road sector has been granted industry status to facilitate borrowing on easy terms and to permit floating of bonds. Foreign equity participation up to 100 per cent is allowed in construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private sector financing by large firms in the highway sector.

The Reserve Bank has also liberalised term loan financing by banks for infrastructure with recourse to finance through funds raised by way of subordinated debt, take out financing, direct financing, investment in infrastructure bonds and guarantees. Banks have been allowed to contribute to the equity capital in infrastructure projects and lend to special purpose vehicles (SPVs) in the private sector for directly undertaking infrastructure projects. The Securities and Exchange Board of India (SEBI) has extended relaxations for public issues by infrastructure companies regarding size, pricing, mode and minimum subscription of issues.

Despite all these efforts and the setting up of a specialised Infrastructure Development Finance Company (IDFC) in 1997, private sector participation in infrastructure financing has been grossly inadequate. There is a lack of commercialisation due to inadequate reforms in the area of user charges, cross subsidisation, lack of structured financing options to mitigate the risks involved, lack of clarity in policy guidelines and underdeveloped financial and capital markets. It is necessary to improve the access of urban local bodies to the capital market to raise resources at competitive rates. Private conglomerate businesses should be preferred for undertaking infrastructure projects. By having a diversified portfolio of activities, such companies can cross-subsidise the various risks.

The experience since the late 1990s suggests that a key prerequisite for the evolution of institutional arrangements for infrastructure financing is the development of the capital market. The central issue is not the adequacy of funds but the convergence of investment horizons of ultimate savers and borrowers in the economy. This, in turn, warrants intensifying reforms in insurance and pension funds which provide a natural hedge for the risks inherent in the financing of infrastructure.

Industrial restructuring involves a suite of initiatives taken by firms to re-establish competitiveness, efficiency and profitability in the context of major changes in market trends - consumer preferences and competition technology, macroeconomic policies and the regulatory framework. Restructuring could entail changes, inter-alia, in the production structure, ownership (privatisation), labour, management and organisation, and could include divestiture, new investment, mergers and acquisitions (M&A) and alliances with ancillary industries. Restructuring differs from both rehabilitation - entailing modernisation and improvement - and expansion, which are all usually related to the same production structure. While restructuring can be welfare enhancing in the long run, it could involve a reduction in employment in the short run due to the rationalisation, consolidation or closure of inefficient units. Safety nets are, therefore, essential to take care of possible labour displacement.

In the recent period, there has been an upsurge of interest in industrial restructuring worldwide, with attention drawn to the increasing speed and scope of restructuring as well as the growing role of cross-border activities. A sizable acceleration in FDI flows both from and into OECD countries during the 1990s was accompanied by a progressive supercession of greenfield investments by cross-border M&As/international joint ventures, and the rising importance of small and medium sized enterprises (SMEs). Cross-border M&As accounted for a predominant share of FDI. The total value of M&As worldwide increased more than five times, with mega-mergers (of value more than US $1 billion) accounting for 60 per cent. Most of these mega-mergers took place among firms in the same sector, reflecting an increasing proclivity to concentrate on areas of core competence. An important issue in the context of global restructuring is that of 'hollowing out' of strategic activities (including research and development) to foreign locations.

Stylised evidence drawn from 46 developing countries, including India, indicates that the basis of industrial restructuring in these countries was the growing recognition of the need for a reduction in direct government ownership in industrial enterprises. Macroeconomic stability, market liberalisation and appropriate labour policies were factors found to have facilitated successful industrial restructuring. These country experiences underscore the significance of institutional reforms particularly the role of the government in respect of legislation and prudential regulation of the financial sector, bankruptcy legislation and its judicial enforcement, technology development and transfers, arbitration mechanisms to settle labour disputes, labour force training and dissemination of information regarding market opportunities, particularly in respect of exports.

At least a part of the pre-crisis Asian miracle is attributable to the manner in which industry in these countries adjusted to changes in the domestic and international environment. Practices, however, differed among the newly industrialised economies (NIEs). For instance, the Korean footwear industry was restructured by expanding the size of operations of firms rather than by entry of new firms. On the other hand, the Taiwanese footwear industry was restructured by shedding operations into small and medium enterprises. In general, there were three major types of responses: offshore investment, upgrading technology and new products and the flexible use of labour. The emphasis, however, varied across the countries. Singapore's industrial strategy is to upgrade its technology, given labour flexibility; while in Hong Kong the preference is not to upgrade its technology but to retain and modify labour intensive operations through the flexible use of labour.

The role of the public sector in industry has been scaled down significantly in India, as part of the structural reforms. At present, there are only six industries which require licensing and only three sectors are exclusively reserved for the public sector. FDI is allowed in all industries except for a short negative list. Initiatives have been taken to restructure and revive potentially viable PSUs and close down or sell the non-viable PSUs. The private sector has also been engaged in restructuring via refocusing on niche strategies and on areas of core competence. The Competition Act of 2002 is expected to address the adverse fall-out of M&As. Efforts to overhaul the legal and regulatory regime enabled the successful restructuring of the telecommunications sector.

A number of factors impinge upon the pace and nature of industrial restructuring in India

• rigid and obsolete labour legislation - need to amend Industrial Disputes Act and Labour Contract Act;

• Reorganisation and bankruptcy of sick units -scrapping of the Sick Industrial Companies Act and replacing of BIFR with a process in which defaulting companies are given time to work out an arrangement with creditors;

• Restrictions on the acquisition and use of land for industrial purposes - evolving the appropriate legal framework for exits through sale of land.

1. International Financial Law Review (2002), Mergers & Acquisitions Year Book 2002.
2. Organisation for Economic Cooperation and Development (2002), 'Global Industrial Restructuring'.

An important issue in the context of the structural transformation of the Indian economy is the classification of construction - whether as secondary or as tertiary activity. This has implications for the assessment of structural shifts and sectoral performance within the overall growth process. In the Economic Survey, the share of industry including construction was placed at 27.1 per cent of GDP in 2002-03, while services accounted for 50.8 per cent. On the other hand, in the Reserve Bank's Annual Reports, construction is included under services. Consequently, the share of the services works out to 56.1 per cent while that of industry to 21.8 per cent in 2002-03. The difference in classificatory practice with regard to construction produces variation in sectoral growth rates (Table).

In the Indian national accounts, construction comprises kutcha and pucca activities. The estimates of pucca construction, based on the use of construction materials such as cement, steel, bricks, timber and fixtures are prepared by the commodity flow approach, which is also adopted for computing the value added for the manufacturing sector. On the other hand, the estimates of kutcha construction undertaken with the help of freely available materials like leaves, reeds and mud are prepared by the expenditure approach which is adopted for estimation of GDP originating from the various kinds of services. If the mode of compilation is employed as a criterion, pucca construction needs to be classified under industry and kutcha construction under services. On the other hand, construction is also categorised as a part of fixed capital formation, partaking the features of industrial activity.

The debate on the classification of construction is not new. Conceptual difficulties were evident even in seminal works on the classification of the economy by type of activity with some preference expressed for including construction under services since a large part of its output consists of 'repair and maintenance work'. An intuitive bias for inclusion of construction under services is also discernible in India. Cross-country practices do not offer standards and are beset with a lack of uniformity. In some cases, construction is categorised separately without including it under any particular activity group (viz., the Singapore Monetary Authority and the European Central Bank). Construction is treated as part of industry in the national accounts statistics of several countries including the US and the UK. The United Nations Statistical Office recommends that the general scope of the index of industrial production (IIP) should include construction apart from mining, manufacturing, electricity and gas. However, due to constraints of the data availability, the present general index of industrial production compiled in India has in its scope the mining, manufacturing and electricity sector only. In the IMF's data dissemination, the coverage of industrial production indices comprises mining and quarrying, manufacturing and electricity, gas and water supply.

The growing tertiarisation of the production process and the industrialisation of services as well as the growing externalities associated with services make an analytical classification by type of activity difficult. In particular, this poses a challenge to evaluating industrial production under a broader coverage inclusive of services.

1. Central Statistical Organisation (2002), An Overview of Base Year of All-India Index of Industrial Production, Ministry of Statistics and Programme Implementation, New Delhi.

2. European Central Bank (2002), Annual Report, 2001, Germany.

3. Jalan, Bimal (1996), India's Economic Policy, Viking, Delhi.

4. Monetary Authority of Singapore (2001), Annual Report, 2000/2001.

5. Reserve Bank of India (1988), Annual Report, 1987-88.

For developing countries aspiring to accelerate growth, a saving-investment surplus appears to be a contradiction in terms. Typically, these countries plan investment rates in excess of their domestic saving rates, employing external saving to overcome the traditional resource constraints. A developing country with a saving-investment surplus is axiomatically an exporter of capital in the ex post sense and this seems to imply a disconnect with the received wisdom.

In the literature, the saving-investment balance is traditionally examined in the national accounting framework by which it is reflected in the external current account in an ex post sense. Operationalising this relationship as a target for macroeconomic policies has taken various forms: the elasticities, absorption and monetary approaches. Yet another variant is the so-called 'new' view which focuses on the optimality of saving and investment decisions in the private sector rather than the gap. Recent theoretical work, however, suggests that there is more to the national accounting relationship than the ex post identity. The inclusion of inter-temporal considerations in an open economy framework modifies the conclusions emerging from the traditional approaches, particularly the impact of terms-of-trade on saving and investment, the impact of fiscal policy and the exchange rate. A proper understanding of the inter-temporal decisions underlying saving and investment behaviour becomes crucial. The inter-temporal approach also has its limitations. For instance, a country may plan investment in excess of its saving but international credit ratings or even the concerted decision of lenders may impede its access to international financial markets. In the 1990s, developing countries, buffeted by financial crises, have made the adequacy of reserves an objective priority. Under these circumstances, external saving and even domestic saving may be employed to finance reserve adequacy, besides the planned investment.

A key issue in analysing the saving-investment relationship is that of capital mobility. If capital is freely mobile, an increase in investment need not cause any change in saving because it can be financed by net capital inflows - correlation between saving and investment is low and rates of return are equalised between countries. If saving and investment are closely correlated, capital mobility is low (Feldstein and Horioka, 1980). Subsequently, it was shown that saving and investment are jointly determined by the whole variety of influences on economic activity and so they tend to be highly correlated even if capital is freely mobile. A surprising finding in the empirical literature is that of relatively low saving-investment correlation in developing countries.

Empirical work undertaken on Indian data has yielded mixed results. High correlation between saving and investment has been found and interpreted as capital immobility. A study of the behaviour of the 'errors and omissions' in gross investment shows that the series is non-stationary and integrated of order 1, suggesting the presence of a systematic bias in the estimation of saving and investment.

The investment rate has historically stayed ahead of the domestic saving rate in India and this has been reflected in the current account deficit in the balance of payments. The stylised evidence, however, suggests at least one aberration from the national accounting relationship. In the period 1973-74, a current account surplus occurred in spite of a saving-investment gap reflecting massive inflows of workers' remittances related to the first oil shock.

Recent some empirical work conducted in the Reserve Bank on the behaviour of saving and investment finds high and significant correlation between the two, independent of the definition of investment chosen, viz., gross domestic capital formation (GDCF), gross capital formation (GCF), or gross fixed capital formation (GFCF). The saving-investment surplus of 2001-02 is preceded by a surplus over fixed capital formation since 1997-98. The release of entrepreneurial efforts and building of capacities in the flush of liberalisation in the first half of the 1990s was dampened by the downswing of the business cycle that followed. Therefore, corrections in capacity utilisation, downsizing of scale and over investment in projects and the consequent saving-investment surplus need to be evaluated inter-temporally rather than episodically. The appropriate approach is to explicitly analyse the dynamics of saving and investment decisions independently. Recent empirical estimates suggest that per capita income and financial deepening have a determining influence on saving behaviour. Important determinants of investment behaviour are real output, the real bank lending rate and public investment in services. It is the studies of this genre which will contribute to a better understanding of the underlying dynamics of the saving-investment balance in India.

1. Feldstein, Martin and Charles Horioka (1980), 'Domestic Saving and International Capital Flows', Economic Journal, Vol. 90.

2. Genberg, H. and A. Swoboda (1991), 'Saving, Investment and the Current Account', Internatiol Evidence and Policy Implications (Ed.E. Koskela and J. Paunio),Blackwell Publishers.

3. Schneider, Benu (1999),'Saving-Investment Correlations and Capital Mobility in Developing Countries with special reference to India', Indian Council for Research on International Economic Relations, Working Paper No. 48.