Growth of National Income

8/9/2019 Growth of National Income

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Measuring National Income

We need information on how much spending, income and output is being createdin an economy over a period of time. National income data gives us this

information as we see in this chapter.Measuring national incomeTo measure how much output, spending and income has been generated in a giventime period we use national income accounts. These accounts measure threethings:1. Output: i.e. the total value of the output of goods and services produced in theUK.2. Spending: i.e. the total amount of expenditure taking place in the economy.3. Incomes: i.e. the total income generated through production of goods andservices.

What is National Income?National income measures the money value of the flow of output of goods andservices produced within an economy over a period of time. Measuring the leveland rate of growth of national income (Y) is important to economists when theyare considering:The rate of economic growthChanges over time to the average living standards of the populationChanges over time to the distribution of income between different groups withinthe population (i.e. measuring the scale of income and wealth inequalities within

society)

Consumer spending accounts for over two thirds of total spending. Consumerspending has been strong in recent years, a reflection of rising living standards andlow unemployment, but this may now be coming to an end because of the


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mountain of household debtGross Domestic ProductGross Domestic Product (GDP) measures the value of output produced within thedomestic boundaries of the UK over a given time period. An important point is thatour GDP includes the output of foreign owned businesses that are located in theUK following foreign direct investment in the UK economy. The output of motorvehicles produced at the giant Nissan car plant on Tyne and Wear and by the many foreignowned restaurants and banks all contribute to the UKs GDP.There are three ways of calculating GDP - all of which should sum to the sameamount since the following identity must hold true:

National Output = National Expenditure (Aggregate Demand) = National IncomeFirstly we consider total spending on goods and services produced within theeconomy:

Nissan at Sunderland Celebrating 20 years of production

The Nissan plant at Washington, Tyne and Wear is celebrating its 20th anniversary in July2006, the first car having rolled off the line on July 8th, 1986. In that first year of

production 470 staff had a production target of 24,000 Bluebirds. Twenty years on,more than 4,200 employees produce around 310,000 Micras, C+Cs, NOTEs,Almeras and Primeras each year. That car has been followed by 4.3 million othersthanks to a total investment of 2.3 billion. Production is set to rise from 310,000

per year last year to 400,000 in 2007 with the introduction of a new small 4x4, andSunderland has been rated as Europe's most productive car factory for the last eightyears.Sources: Reuters News, Sunderland Echo, July 2006(i) The Expenditure Method of calculating GDP (aggregate demand)This is the sum of spending on UK produced goods and services measured atcurrent market prices. The full equation for GDP using this approach is GDP = C +I + G + (X-M) whereC: Household spendingI: Capital Investment spendingG: Government spendingX: Exports of Goods and ServicesM: Imports of Goods and Services

The Income Method of calculating GDP (the Sum of Factor Incomes)Here GDP is the sum of the incomes earned through the production of goods andservices. The main factor incomes are as follows:Income from people employment and in self-employment+Profits of private sector companies+
http://news.bbc.co.uk/1/hi/england/wear/5159162.stmhttp://news.bbc.co.uk/1/hi/england/wear/5159162.stmhttp://news.bbc.co.uk/1/hi/england/wear/5159162.stmhttp://news.bbc.co.uk/1/hi/england/wear/5159162.stm


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Rent income from land=Gross Domestic product (by factor income)It is important to recognise that only those incomes that are actually generatedthrough the production of output of goods and services are included in thecalculation of GDP by the income approach.We exclude from the accounts the following items:Transfer payments e.g. the state pension paid to retired people; income support

paid to families on low incomes; the Jobseekers Allowance given to theunemployed and other forms of welfare assistance including child benefit andhousing benefit.Private transfers of money from one individual to another.Income that is not registered with the Inland Revenue or Customs and Excise.Every year, billions of pounds worth of economic activity is not declared to the tax

authorities. This is known as the shadow economy where goods and services areexchanged but the value of these transactions is hidden from the authorities andtherefore does not show up in the official statistics!). It is impossible to be preciseabout the size of the shadow economy but some economists believe that between 8

15 per cent of national output and spending goes unrecorded by the officialfigures.Output Method of calculating GDP using the concept of value addedThis measure of GDP adds together the value of output produced by each of the

productive sectors in the economy using the concept of value added.Value added is the increase in the value of a product at each successive stage of the

production process. We use this approach to avoid the problems of double-counting the value of intermediate inputs.The table below shows indices of value added from various sectors of the economyin recent years. We can see from the data that manufacturing industry has seen

barely any growth at all over the period from 2001-2004 whereas distribution,hotels and catering together with business services and finance have been sectorsenjoying strong increases in the volume of output. These figures illustrate a processof structural change, with a continued decline in manufacturing output and jobsrelative to the rest of the economy. By far the largest share of total national output

(GDP) comes from our service industries.Index of Gross Value Added by selected industry for the UK

Miningandquarrying, inc oil

Manufacturing

Construction

Distribution, hotels, andcatering;repairs

Businessservicesandfinance


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& gasextraction

2001 weights in totalGDP

(out of 1000)

28 172 57 159 249

2001 100 100 100 100 100

2002 100 97 104 105 102

2003 94 97 109 108 106

2004 87 98 113 113 111

We can see from the following chart how there have been divergences in thegrowth achieved by the manufacturing and the service sectors of the Britisheconomy. Indeed by the middle of 2006, the index of manufacturing output was

below the level achieved at the start of 2000.

In contrast the service industries have enjoyed strong growth, leading to acontinued process of structural change in the economy away from traditionalheavy industries towards service businesses.

GDP and GNP (Gross National Product)Gross National Product (GNP) measures the final value of output or expenditure

by UK owned factors of production whether they are located in the UK oroverseas.


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In contrast, Gross Domestic Product (GDP) is concerned only with the factorincomes generated within the geographical boundaries of the country. So, forexample, the value of the output produced by Toyota and Deutsche Telecom in theUK counts towards our GDP but some of the profits made by overseas companieswith production plants here in the UK are sent back to their country of origin adding to their GNP.GNP = GDP + Net property income from abroad (NPIA)

NPIA is the net balance of interest, profits and dividends (IPD) coming into theUK from our assets owned overseas matched against the flow of profits and otherincome from foreign owned assets located within the UK. In recent years there has

been an increasing flow of direct investment into and out of the UK. Many foreignfirms have set up production plants here whilst UK firms have expanded theiroperations overseas and become multinational organisations.The figure for net property income for the UK is strongly positive meaning that our

GNP is substantially above the figure for GDP in a normal year. For othercountries who have been net recipients of overseas investment (a good example isIreland) their GDP is higher than their GNP.Measuring Real National IncomeWhen we want to measure growth in the economy we have to adjust for the effectsof inflation.Real GDP measures the volume of output produced within the economy. Anincrease in real output means that AD has risen faster than the rate of inflation andtherefore the economy is experiencing positive growth.Income per capitaIncome per capita is a basic way of measuring the average standard of living forthe inhabitants of a country. The table below is taken from the latest edition of theOECD World Factbook and measures income per head in a common currency forthe year 2005, the data is adjusted for the effects of variations in living costs

between countries.

GDP per capita $s GDP per capita $s

Luxembourg 57 704 EU (established 15 countries)28 741

United States 39 732 Germany 28 605

Norway 38 765 Italy 27 699Ireland 35 767 Spain 25 582

Switzerland 33 678 Korea 20 907

United Kingdom 31 436 Czech Republic 18 467

Canada 31 395 Hungary 15 946

Australia 31 231 Slovak Republic 14 309


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Sweden 30 361 Poland 12 647

Japan 29 664 Mexico 10 059

France 29 554 Turkey 7 687

Source: OECD World Economic Factbook, 2006 editionBy international standards, the UK is a high-income country although we are not inthe very top of the league tables for per capita incomes. We do have an income perhead that is about ten per cent higher than the average for the 15 established EUcountries. But we are some distance behind countries such as the United States(where productivity is much higher). And Irelands super-charged growth over thelast twenty years means that she has now overtaken us in terms of income-basedmeasures of standards of living.

2003 FAMILY INCOME AND EXPENDITURE SURVEYFinal Results

Philippines 2003 2000PercentIncrease

(Decrease)

Total Income(In P1,000)

2,417,678,863 2,187,250,217 10.5

Total Expenditure(In P1,000)

2,023,353,939 1,791,132,882 13.0

Total Saving(In P1,000)

394,324,924 396,117,335 (0.5)

Average Income 148,616 145,121 2.4

Average Expenditure 124,377 118,839 4.7

Average Saving 24,239 26,282 (7.8)

Gini Ratio 0.4678 0.4822 (3.0)

Number of Families(In 1,000)

16,268 15,072 7.9

Source National Statistics Office, 2003 Family Incomeand Expenditure Survey (Final Results)

Increase in total family income and expenditure seen in 2003


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Total family income in 2003 was estimated at P2.4 trillion increasingby 10.5 percent over the P2.2 trillion in 2000.

Total family expenditure reached P2.0 trillion, which was higher by13.0 percent over the P1.8 trillion in 2000.

Adjusting for inflation, total family income in 2003 was worth P2.1trillion in 2000. Thus, in real terms, total family income decreased by2.9 percent compared to that in 2000.

Likewise, total family expenditure in 2003 was valued at P1.78 trillionin 2000 prices. This real value of the total family expendituredecreased by 0.7 percent compared to that in 2000.

Among regions, NCR got the biggest share of 26.6 percent (P642billion) of the total income while Caraga and ARMM posted the leastwith 1.6 percent (P38 billion) each.

Similarly, NCR had the biggest share of the total family expenditures

spent (P528 billion or 26.1%). ARMM likewise showed the leastexpenditure with 1.5 percent (P30 billion).

Annual average income and expenditure showed upward trend

Average income was estimated at P148,616 in 2003 yielding anincrease of 2.4 percent compared to the 2000 level of P145,121. Thistranslates to an annual growth of 0.8 percentage point.

Average expenditure increased from P118,839 in 2000 to P124,377in 2003 posting a growth rate of 4.7 percent over the three-year

period, or an annual growth of 1.5 percentage points. The P148,616 average income in 2003 becomes P130,594 in 2000

prices when the effect of inflation was removed. Similarly, theP124,377 spent in 2003 was worth only P109,294 in 2000 prices.

The inflation-adjusted estimates showed a decrease of 10.0 percentin average income and an 8.0 percent decline in averageexpenditure.

Rising annual average income observed in regions

Most of the regions exhibited increases in average income between2000 and 2003 at current prices, except for NCR, MIMAROPA andNorthern Mindanao which reported decreases.

NCR (P274,529), CALABARZON (P185,661), Central Luzon(P158,075) and CAR (P157,045) were the top four regions in terms ofaverage income, posting estimates higher than the national average.


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ARMM registered the lowest average income among regions withP84,439. This was higher by 6.7 percent compared to its 2000average income of P79,110.

Annual average saving declined in 2003

Average saving was measured in 2003 at P24,239 down by 7.8percent from P26,282 in 2000. In real terms, this 2003 averagesaving was equivalent to P21,300 in 2000 prices.

Despite the decline in average saving, families in all regions on theaverage, earned more than they spent. NCR recorded the biggestaverage saving of P48,593 while Caraga got the least with P10,960.

Low income families drawn towards more dissavings

The income decile distribution showed increasing income shares offamilies from the first to the ninth decile. Only families belonging tothe high-income group, such as those in the tenth decile, registered a1.6 percentage points decrease in their income share.

Although the tenth decile?s share decreased, still its income wasabout 21 times the income of the bottom 10 percent.

Relatively, average expenditure of families from the first to the ninthdecile increased between 2000 and 2003 but those in the tenth deciledeclined by 2.0 percentage points.

Dissaving was observed in the first three deciles. The positive incometrend was not enough to cover the expenditure of low-income familiesin the first three deciles as seen in their average dissaving (incomenet of expenditure) of P2,121 for the first decile, P1,202 for thesecond decile and P44 for the third decile.

Less unequal income distribution in 2003

The 2003 Gini coefficient was recorded at 0.4678 down by 3.0percent from 0.4822 in 2000. A lower gini coefficient indicates a

movement towards a more equal or less unequal income distributionamong families.

Eight of the regions registered decreases in the Gini coefficientindicating a shift towards lesser family income disparity. NCR showedthe biggest decrease from 0.4451 in 2000 to 0.4088 in 2003.


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Spending pattern of Filipino families moved towards lesser foodconsumption expenditure

The share of family expenditure on food items continued to slideindicating a change in the spending pattern of Filipino familiestowards less spending on food. In 2003, the share of foodexpenditure to total expenditure was 42.8 percent, about 0.8percentage point lower than the 2000 proportion of 43.6 percent.

The proportion of expenditure on food consumed at home went downfrom 38.6 percent in 2000 to 37.5 percent in 2003. On the other hand,higher spending on food consumed outside the home was observedas the proportion went up from 5.0 percent in 2000 to 5.3 percent in2003 suggesting a change in the Filipino family lifestyle of regularlyeating outside the home and possibly be linked to the growth of fast

food chains. Families spent more on transportation and communication as these

expenditures were monitored to move up from 6.8 percent in 2000 to7.4 percent in 2003.

Increases in expenditure share were also noted in fuel, light andwater, personal care and effects, clothing, footwear & other wear,medical care, durable furniture & equipment and miscellaneousexpenditures such as those for special family occasions and gifts &contributions.

Meanwhile, the share of expenditure on housing decreased by

TECHNICAL NOTES:

The 2003 Family Income and Expenditure Survey (FIES) is anationwide survey of households undertaken every three years by theNational Statistics Office (NSO). It is the main source of data onfamily income and expenditure which include, among others, levels ofconsumption by item of expenditures as well as sources of income in


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cash and in kind. The results of FIES provide information on thelevels of living and disparities in income of Filipino families, as well astheir spending patterns.

The sampling design of the 2003 FIES uses the 2003 Master Samplefor Household Surveys. In this design, the country?s 17administrative regions were defined based on Executive Orders 36and 131.

For comparability of results, the 2000 FIES data in this release weregenerated using the new regional grouping. However, 2000 FIESestimates for Isabela City cannot be generated separately fromBasilan as this city was not a domain in the sampling design used forthe 2000 FIES. As such, Isabela City remained to be part of thewhole Basilan province under Region IX in 2000. In 2003, however,based on Executive Order 36, Isabela City, being a separate domain

was grouped under Region IX while the rest of the province ofBasilan (excluding Isabela City) is grouped under ARMM.

In 2000, Marawi City was a separate domain under Region XII. In2003, with the use of the new master sample, Marawi City becamepart of ARMM together with the rest of Lanao del Sur.

To be able to compare the 2003 FIES estimates with the 2000 FIESresults in real terms, the effects of inflation have to be removed. Forcomparative purposes, the Consumer Price Index (CPI) is used todeflate the 2003 FIES estimates. The country?s CPI for 2003 is

estimated at 113.8.

Gross domestic product and gross nationalincome, 2000-2003 (First Release)National accounts

22.9.2004
http://www.stat.si/eng/tema_ekonomsko_nacionalni.asphttp://www.stat.si/eng/priporoci.asp?ID=http://www.stat.si/eng/natisni.asp?ID=327http://www.stat.si/eng/tema_ekonomsko_nacionalni.asp


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1. Gross domestic product and gross national income,2000-2003

2000 2001 2002 2003

Current prices

Mio SIT

1 Output, basic prices 871552

8

9670844

10749796

11559991

2 Intermediate consumption 503613

8

5532394

6149677

6580041

3 Value added, basic prices (1minus 2)

3679390

4138450

4600119

4979950

4 Net taxes on products 572924

623364

714375

767218

5 Gross domestic product (3plus 4)

4252315

4761815

5314494

5747168

Plus: primary incomes from the

rest of the world

9673

5

1108

94

10883

9

12109

5Less: primary incomes to therest of the world

90727

101561

143265

162247

6 Gross national income 4258323

4771148

5280067

5706016

Constant 2000 prices

Gross Domestic Product 4252

315

4366

221

45114

14

46253

02

Of which: total domesticconsumption

4403141

4443912

4546115

4758784

Growth rates (%)

Gross domestic product 3,9 2,7 3,3 2,5


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COMMENT

According to the first annual estimate, GDP 2003 at currentprices amounted to SIT 5 747 168 mio or 8.1% more than in

2002. In nominal terms the first annual GDP figure is 0.4%higher than it was by quarterly estimation. At constant 2000prices GDP 2003 amounted to SIT 4 625 302 mio or involume terms 2.5% more than in 2002 (SIT 4 511 414 mio).Annual real growth 2003 rate was 0.2 percentage pointshigher than by quarterly estimate (2.3%) and was thelowest since 1992. GDP 2002 growth rate was reduced by0.1 percentage point: now 2.3%, before 2.4%.

Gross national income (GNI) 2003 amounted to SIT 5 706016 mio and was the same as GDP 8.1% higher than a yearago. At the same growth rate GNI value relatively to GDPhas not changed: 99.4% in 2002 and 99.3% in 2003.

At the current exchange rate, GDP 2003 amounted to EUR24 592 mio or EUR 12 319 per capita, which is 4.6% morethan in 2002. In USD GDP 2003 amounted to 27 749 mioand 13 900 per capita, which is 25.4% more than a year

ago.

By activities, gross value added at basic prices declined themost in agriculture, hunting and forestry (by 0.5 percentagepoints to 2.3% of GDP) and thus due to dry year reached sofar the lowest level in GDP. At constant 2000 prices, grossvalue added in agriculture in volume terms reduced by15.4%, which is the main reason of low real growth rate ofthe economy in 2003. Total gross value added at basic

prices increased in volume terms by 2.5%, the same as GDPand without agriculture, hunting and forestry by 3.1%.

In the structure of primary incomes of GDP 2003 the shareof compensation of employees and taxes on products hasnot changed in comparison with 2002. The share ofsubsidies increased by 0.3 percentage points, other taxes on


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production by 0.2 percentage points and particularly grossoperating surplus by 0.7 percentage points. Rathersubstantial increase of the share of net operating surplus in2003 (by 1.4 percentage points to 10.3% of GDP) was due

to further deindexation of the value of fixed assets and thuslower valuation of consumption of fixed capital incorporations. The share of gross mixed income ofhouseholds further declined at the same amount as grossvalue added of agriculture, hunting and forestry (by 0.5percentage point to 7.5% of GDP).

After three years the total domestic consumption relativelyto GDP for the first time increased to GDP level at current

prices (in 2002 98.5% of GDP). In volume terms the totaldomestic consumption increased by 4.7% (final consumptionby 2.7%, gross capital formation by 10.5%, of which grossfixed capital formation by 6.3%). Exports of goods andservices in volume terms increased by 3.2% (a year ago by6.7%), imports by 6.8% (a year ago by 4.9%). Therefore,the external trade balance contribution to GDP growth wasafter three years for the first time negative, at -2.2percentage points.

Interim poverty strategy

I. INTRODUCTION

1.1 The primary development goal for Kenya is to achieve a broad-based,sustainable improvement in the standards of welfare of all Kenyans. This willrequire a concerted effort to tackle the intolerably high incidence of poverty thatnow afflicts about half our population. While Government has a particularresponsibility for spearheading action and creating a positive framework, the

private sector, non-governmental and community based organisations all have avital role to play in meeting the challenge of poverty reduction. Kenya mustmobilise all available resources and use them efficiently and effectively in the fightagainst poverty.

1.2 Our most precious resource is the people and their potential to work for thecollective betterment of our nation. Poverty wastes this resource and its potential.


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Poverty has numerous manifestations including low and unreliable income, poorhealth, low levels of education and literacy, insecurity and uncertain access to

justice, disempowerment, and isolation from the mainstream of socio-economicdevelopment. It is, therefore, necessary to devise multi-dimensional policies andinterventions that will provide a permanent solution. The poor must be providedwith the means to help themselves through income earning opportunities, readyaccess to means of production, the provision of affordable, basic services and the

protection of the law. This will not be achieved through temporary reliefprogrammes but only through a deliberate and long term policy to increase equityof opportunity and to ensure that all members of our society can participate fully inthe socio-economic development of Kenya.

1.3 A fundamental prerequisite for poverty reduction is economic growth thatconsiderably outpaces population growth. Over the past few years Kenya's

economy has declined in per capita terms. As a result, the standard of living for thevast majority of the population has suffered and the level of poverty has risenalarmingly. Therefore, the Governments immediate priority is to restore andsustain rapid economic growth in order to generate the wealth and economicexpansion necessary to reduce the incidence of poverty. Over the next three years,the foundations for a broad, sustained attack on poverty and the creation of a moreequitable society must be strengthened. At the same time, Government, workingtogether with civil society and development partners, will take a number oftargeted short term measures to directly address some critical causes andmanifestations of poverty.

1.4 Kenya's Interim Poverty Reduction Strategy (IPRSP) has five basiccomponents and policy objectives:

to facilitate sustained and rapid economic growth; to improve governance and security; to increase the ability of the poor to raise their incomes; to improve the quality of life of the poor; and to improve equity and participation.

The Strategy outlined in this paper will be used by Government as a nationalplanning framework upon which detailed sectoral priorities, programmes andallocations will be developed within hard budget constraints determined by

projections of economic performance. It will also outline the policies, reforms andprogrammes that the Government will instigate over the coming three years to


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realise the objectives described above. It is the first phase of implementing theNational Poverty Eradication Plan (NPEP).

POVERTY

2.1 The poor constitute slightly more than half the population of Kenya1. Womenconstitute the majority of the poor and also the absolute majority of Kenyans.Three-quarters of the poor live in rural areas. The bulk of them are located withinthe highly populated belt stretching South to South-East from Lake Victoria to theCoast which straddles the rail and road corridors.

2.2 Preliminary results of the 1997 Welfare Monitoring Survey (WMS),

summarised in Table 1 ofAnnex 2, show that the incidence of rural food povertywas 51%, while overall poverty reached 53% of the rural population. In urban

areas, food poverty afflicted 38% and overall poverty 49% of the population. Theoverall national incidence of poverty stood at 52%. According to availableestimates, over the past 25 years food poverty has increased more than absolute

poverty. The number of poor increased from 3.7 million in 1972-3 to 11.5 millionin 1994. Thereafter, numbers increased to 12.5 million in 1997 and is nowestimated to have reached some 15 million.

2.3 The geographic distribution of poverty is illustrated in Table 3 ofAnnex 2.According to the WMS 1994 and the Participatory Poverty Assessment (PPA)1996, the prevalence of overall poverty in 1994 was highest in North Eastern

Province (58% of population), Eastern (57%), and Coast (55%) while the lowestwere Nyanza (42%) and Central (32%). However, by 1997 indications are that notonly had poverty increased rapidly but that its distribution had changed with

Nyanza (63%) recording the highest level followed by Coast (62%) althoughCentral still recorded the lowest incidence (31%).

2.4 Major characteristics of the poor include landlessness and lack of education.The poor are clustered in certain socio-economic categories that include smallfarmers, pastoralists in ASAL areas, agricultural labourers, casual labourers,

unskilled and semi-skilled workers, female-headed households, the physicallyhandicapped, HIV/AIDS orphans and street children. The poor have larger families(6.4 members compared to 4.6 for non-poor) while in general rural households arelarger than urban. Geographically, North Eastern and Coast Provinces have thelargest poor households. Nationally, poor
http://www.imf.org/external/NP/prsp/2000/ken/01/INDEX.HTM#P40_5527%23P40_5527http://www.imf.org/external/NP/prsp/2000/ken/01/kenya.pdfhttp://www.imf.org/external/NP/prsp/2000/ken/01/kenya.pdfhttp://www.imf.org/external/NP/prsp/2000/ken/01/kenya.pdfhttp://www.imf.org/external/NP/prsp/2000/ken/01/INDEX.HTM#P40_5527%23P40_5527http://www.imf.org/external/NP/prsp/2000/ken/01/kenya.pdfhttp://www.imf.org/external/NP/prsp/2000/ken/01/kenya.pdf


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women have a higher total fertility rate (rural 7.0 and urban 4.8) than non-poorwomen (rural 6.7 and urban 4.1). Studies in Kenya show that fertility rates declinewith education while the use of family planning is higher among the non-poor.

2.5 According to evidence on health status, the prevalence and incidence ofsickness are similar for both the poor and non-poor. However, the response tosickness is markedly different. An overwhelming majority of the poor cannotafford private health care (76% rural and 81% urban) and rely on public healthfacilities. However, 20% of the urban poor and 8% rural poor found even publichealth charges unaffordable. Furthermore, 58% urban and 56% rural poor reportedthat they do not seek public health care because of the unavailability of drugs. Afurther indicator of disparity is that only 37% of poor mothers gave birth inhospital compared to 58% of the non-poor mothers.

2.6 Empirical evidence shows that 13% of the urban poor have never attendedschool at all while the comparative rural figure is 29%. Of the poor, only 12% ofthose in rural areas have reached secondary education while for the urban poor thefigure rises to 28%. Dropout rates have risen, as have disparities in access, due togeographic location, gender and income. The main reason for not attending schoolis the high cost of education. Children are also required to help at home, while forgirls socio-cultural factors and early marriage are significant factors.

2.7 Regardless of poverty, over 50% of Kenya's households do not have access tosafe drinking water, although the proportion is higher for the poor. In urban areas,

large populations living in informal settlements within the towns and cities have noaccess to safe water. In rural areas there are large disparities between geographicareas where in North Eastern and Eastern Provinces less than 30% of the poor haveaccess to safe water compared to some 60% in Western Province.

2.8 Certain occupations, such as subsistence farmers (46% poor) and pastoralists(60% poor), have a higher than average incidence of poverty. Subsistence farmersaccount for over 50% of the total poor in Kenya. While the poor cultivate, onaverage, more land and have more livestock than the non-poor, the non-poor earnmore than two and one half times the income from cash crops and more than oneand one half times the income from livestock sales. This pattern can be partlyattributed by differences in the fertility of land and the affordability of inputs toimprove productivity. For livestock, cultural factors and the lack of high-gradestock and poor access to markets could account for low sales among the poor.


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2.9 Studies in Kenya indicate that women are more vulnerable to poverty thanmen. For instance, 69% of the active female population work as subsistencefarmers compared to 43% of men. Given that subsistence farmers are among thevery poor, this relative dependence of women upon subsistence farming explainsthe extreme vulnerability of women. These problems are most severe in arid andsemi-arid areas where women spend a great portion of their time searching forwater and fuel. The release of women's productive potential is pivotal to breakingthe cycle of poverty so that they can share fully in the benefits of development andin the products of their own labour. In the urban areas, the proportion of poorfemale-headed households was higher than male-headed households in 1997. Bothrural and urban women in 1997 were severely affected by poverty. This means thatwomen are affected more by development process and the area of residence plays amajor role in poverty status of women. However, poverty is still pre-dominant inthe rural areas for both men and women, meaning targeting needs to be intensified

in the rural areas.

2.10 Inequitable access to the means of production (land and capital), thedistribution of wealth, reduced access to economic goods and services andremunerative employment are all causes of poverty. Poverty adversely affects

participation in social and political processes and denies life choices while the poorare particularly vulnerable to natural disasters. In terms of income distribution,Kenya ranks highly as inequitable. Estimates indicate that a high proportion ofwealth is concentrated in a very small proportion of the total population. Thisincome concentration is the highest amongst the 22 poorest countries and isexceeded only by Guatemala (per capita income US$1340), South Africa(US$3,160) and Brazil (US$3,640).

2.11 The indicators demonstrate the depth and breadth of poverty in Kenya todayand the magnitude of the challenge. The fight against poverty, ignorance anddisease has been a major goal of Government since independence. However, it isevident that efforts to-date have been inadequate and the growth of poverty has not

been reversed. In response, Government is mounting a new effort which willincorporate wider consultation and broader participation of various stakeholders.

This is designed as an ongoing long term poverty strategy for policy andprogramme development

RAISING INCOME OPPORTUNITIES OF THE POOR


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5.1 The goal to raise GDP growth to 5% per annum by the end of this strategy

period and thereafter to a sustained level of 6-7% per annum will result in

significant increases in national wealth. However, national growth will not

necessarily be spread evenly across all sectors of the economy and between all

members of society. Historically, the service sector has grown at much higher

rates than either manufacturing or agriculture while rural agricultural

smallholders have, in general, not benefited to the extent of those employed in

urban enterprises. The poor in all circumstances will be ill-placed to take

advantage of economic growth unless deliberate interventions are put in place

to increase their opportunities and access to the resources, skills and services

required for them to rise out of the poverty trap.

5.2 With 80% of the population and the majority of the poor living in rural

areas and reliant upon small-holder agriculture and livestock production,

often at subsistence levels, it is evident that poverty reduction calls for higher

agricultural growth rates. But with increasing population pressure on the

land, it is equally important to expand non-farm employment in the rural

areas. For the poor in urban centres, increased access to employment and self-

employment in both the formal and informal sectors will be vital. As female-

headed households constitute a significant proportion of the poor, any

intervention must be gender-sensitive. All these will require very substantial

improvements in infrastructure services and a conducive legal and regulatory

environment.

Immediate Priorities

5.3 Detailed policies to increase the ability of the poor to raise

their incomes are contained in the sector chapters, specifically


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Agriculture and Rural Development, Trade Tourism and Industry

and Physical Infrastructure. Briefly, the following are considered

the most immediate priorities for Government action:

Dismantling intrusive, restrictive and outmoded laws and

regulations in all the productive sectors while maintaining

adequate protection for workers, society and the environment;

Creating an effective agricultural advisory service that

provides practical, cost-effective extension to the smallholder;

Establishing an effective and efficient private marketingsystem for agricultural produce that enables producers to

maximise their returns;

The promotion of rural non-farm employment;

The rehabilitation and subsequent adequate maintenance of

all physical infrastructure, particularly feeder roads, ports, etc.;

Implementing widespread labour-intensive roads schemes; Overcoming the existing shortfall in electricity supply and

reduce its cost

IMPROVING THE QUALITY OF LIFE

6.1 The Government will focus resources on improving the

provision of and access to basic social services that are mostneeded by the poor. They are education, particularly primary

education, health, and water supply. In all of these activities,

Government will seek a closer working relationship with


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development NGOs, religious organisations, and other private

providers to increase the range and quality of provision.

Immediate Priorities

6.2 Detailed policies to improve the quality of life are contained in

the sector chapters, specifically, Human Resource Development

and Physical Infrastructure. The following are considered the

most immediate priorities in this area for Government action:

Increasing primary school enrolment and completion;

Enabling more poor children to attend secondary school;

Providing all public primary healthcare facilities with an

appropriate and adequate supply of drugs;

Making essential primary health care drugs and treatment

affordable to the poor;

Increasing the provision of portable water in poor areas and

working with all communities to enable them to assume

responsibility for managing and maintaining water supplies;

Prepare enabling legislation for the privatisation of urban

water supplies

Development of Water Supplies in rural, urban and peri-

urban areas: Current Government policy is to withdraw from

direct involvement in the implementation and management of

water schemes and instead, hand them over to communities,


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local authorities and other service providers. This will be achieved

by developing a rehabilitation program with the stakeholders to

enhance ownership, and facilitate choice of technologies that are

appropriate for management by communities and the other

service providers. Handing over also requires clearly defined

mechanisms to guide the process, and a functional legal and

institutional framework. To complement efforts to increase access

to the poor, the Government has committed itself to promote

self-help initiatives which have been in existence in the country

for a long time and have had significant impact. With proper

training, self-help water supplies are potentially quick winners in

poverty reduction.

8.22 The Government recognises that there is inadequate

capacity among service providers to take over the management

of schemes on a large scale. The Strategy has, therefore,identified the need for a comprehensive capacity building

programme which will require funding. There will in addition, be

need to carefully plan the redeployment/retraining of Government

personnel currently running the schemes through a

comprehensive public sector reform programme. The initiative is

being coordinated under the Office of the President.

8.23 Government policy for urban water utilities is to involve the

private sector in financing and management. Although

investments in urban utilities have been substantial, the poor


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have received little attention in planning and access remains very

low. The Strategy proposes a sharp focus on peri-urban areas by

developing models for distribution and management of WSS

services and expansion of infrastructure.

Water Resources ManagementThe incidence of violation of water rights, conflicts, and pollutionhave dramatically increased. In addition to arbitration and legalmechanisms, avenues for resolution to ensure fair play will becreated. The Government proposes to develop a communitybased catchment management strategy to ensure adequate

quality and quantity of water to the poor. However, for thestrategies to have meaningful impact, the financing anddisbursement arrangements need to be more efficient than theycurrently are. This implies that there is urgent need to examinethe disbursing organs with a view to urgently restructure them tomake them more responsive to the implementation requirements.

HUMAN RESOURCE DEVELOPMENT SECTOR

9.1 To improve the quality of life, the Government will focus

resources on improving the provision of and access to basic social

services, particularly education and health, that are most needed

by the poor. In all of these, Government will seek a closer

working relationship with development partners, NGOs, religious

organisations, and other private providers to increase the range

and quality of provision.

9.2 Education: After the high enrolments of the two post

independence decades, there has been a reversal at all levels of


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education characterized by non-enrolment, high level of drop-

outs/low completion rates particularly among girls, and poor

transition rates from one level of education to the other. This is

attributed to the high cost of education worsened by the burden

of cost sharing which has had a negative impact on access, equity

and quality of education. The Government's highest priority will

be to improve access to basic education and will start pursuing

the target of Universal Primary Education (UPE) by lowering costs

borne by parents.

9.3 To improve access to basic education, the Government in

collaboration with NGOs and other development partners will

supplement communities' efforts to increase the provision of

textbooks and other learning and teaching materials at primary

school level. At the secondary school level, more day schools will

be encouraged by providing science equipment and other supportmaterials. Textbooks will be standardized and remain relatively

unchanged so that they can be utilized for longer length of time.

9.4 Bursaries will be provided for school children from poor

households to cover user charges. Bursaries will also be

expanded with improved targeting and special emphasis on girls.

At the tertiary level, loans and scholarships will be provided for

outstanding students from poor households targeted to specific

degree programs in high demand by the economy.


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9.5 Further, curriculum will be reviewed and rationalized to

ensure quality and relevance. Specifically, taught and examinable

subjects will be reduced at both primary and secondary school

levels. In addition, optional subjects at the secondary schools will

be reduced. This will result in reduction of the number of

textbooks and range of equipment required. At the same time,

equitable distribution of teachers will be carried out.

9.6 Other policy measures will include improvement in

management and utilization of resources. Some of the strategieswill include decentralization of teacher and school management to

the district/school levels supported by capacity building and more

autonomy of district/school boards, parents and teachers

associations and school committees. Besides, pupil teacher ratios

will be revised upwards at both primary and secondary school

levels in order to allow more efficient utilization of teachers.Some of the measures will include multi-grading and double shifts

teaching and subsidising the poor households on examinations

fees.

9.7 In order to provide educational opportunities for children with

special needs and those who are currently out of school,

increased resources targeted to AIDS orphans, child workers,

nomadic groups, rural poor and slum dwellers will be provided. To

supplement this, curriculum will be developed to facilitate

transition from non-formal to formal programs. At the tertiary


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level, the focus will be to shift towards rationalized degree

programs which provide skills required for a modern economy.

Means testing and targeting of the higher education loans scheme

will be improved and affirmative action put in place to increase

the number of women receiving assistance.

9.8 Health: This Interim Poverty Reduction Strategy Paper

(IPRSP) for the Health Sub-Sector represents a major milestone

by linking the objectives contained in the Kenya Health Policy

Framework Paper (1994) and the National Health Sector StrategicPlan (1999-2004) to the MTEF, budget allocation.

9.9 As reflected on the attached implementation matrix linking

four core sub-sector objectives to planned strategies/activities to

be implemented and monitored with given outcome indicators

over the next three years, there is a definite commitment to

enhance equity, quality, accessibility and affordability of basic

health resources to the poor both geographically and technically.

There is also commitment and budgetary allocation to implement

high-priority activities within the essential package of health

services with particular emphasis on women and children under 5

and to decentralise control over financial resources for non-wage

recurrent items, and to improve accountability and transparency.

To improve access to the poor, charges for treatment of certain

diseases will be dropped while the waiver system will be enforced

for the very poor.


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9.10 The most striking feature of the three year implementation

plan is the proposed real shifts of financial, human and other

resources away from curative services to

preventive/promotive/rural health services sub-votes. The aim is

to translate stated health policy objectives to tangible and

targeted activities supported through the MTEF process to

redirect health resources to those areas that provide maximum

benefits to the majority of the vulnerable groups who form a big

proportion of our society in line with the Poverty Reduction

Strategy adopted by the Government.

9.11 The proposed strategy, focus and budget allocation will help

to stimulate a reversal of the adverse factors that have stifled

economic growth and help the economy to start on a sustainable

growth path and achieve increased per capita incomes.

9.12 Control of HIV/AIDS is central to an effective poverty

reduction strategy. The Government has declared AIDS a National

Disaster. Consistent with this, the MOH proposes to implement

HIV/AIDS control activities to achieve the objectives of

preventing transmission of HIV among the population with a

focus on the vulnerable groups.

9.13 Population: The Government will continue its efforts to

reduce the high rate of population growth from the current 2.4 to

2 percent in the medium term. This will be done through


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expanding family planning services and improving information

and education.

9.14 Labour and Employment: In order to emphasize thepromotion of a productive and freely chosen employment as a

priority and fundamental base for national economic and social

policy, there will be a shift towards jobs creation and

improvement in the productivity of labour . This will call for

improvement in the provision of skills and knowledge for the

workforce, the stimulation of economic growth, and themaximization of the utilization of labour and human resources in

income generating opportunities. Basic rights of all segments of

society to work irrespective of sex, age and geographic location

will be respected.

9.15 Housing and Shelter are important for improving the quality

of life and housing construction itself boosts economic growth and

job creation. The current housing situation in both rural and

urban areas is deplorable, with most housing facilities failing to

meet minimum standards of durability, sanitation and habitable

space. Demand, particularly in urban areas, outstrips supply.

Measures to improve housing and shelter will include: promotion

of lower cost housing (technology, materials, best practices),

mobilizing lower cost housing finance and development of

enabling business conditions for private sector to construct

affordable housing.


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9.16 Social security: The objective will be to create safety nets

for the aged, retrenched, unemployed, disabled and displaced

persons and victims of other calamities. The National Social

Security Fund (NSSF), which caters only for those employed, is

inadequate while traditional systems are disappearing due to the

break-down of the extended family system, migration, economic

hardships and poverty. Government will continue current efforts

to restructure and reform the NSSF and take measures to cater

for the poor and vulnerable groups with new and innovative

approaches for dealing with social safety nets. This will include

finding ways to strengthen the traditional safety nets; targeting

HIV/AIDS infected and affected persons; cooperating with civil

society and NGOs which are more experienced in this area;

strengthening the Retirement Benefits Authority and National

Hospital Insurance Fund; and facilitating development of more

private sector pension schemes and other long-term savings

instruments.

AGRICULTURE AND RURAL DEVELOPMENT SECTOR

10.1 Agriculture is the lifeline of 80% of Kenya's poor who live in

rural areas, including farmers, workers and unemployed. 70% of


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Kenya's employment is in agriculture, consequently creating jobs

and increasing income in that sector is vitally important and, if

achieved, will have an important direct effect on poverty.

Furthermore, agricultural growth can catalyse growth in other

sectors, with an estimated growth multiplier of 1.64, compared to

1.23 in non agriculture, it is likely to have a strong indirect effect.

Restoring high and sustainable agricultural growth is therefore

critical for alleviating poverty.

10.2 Agricultural growth has been well below potential in recentyears due to a number of constraints. Those which result partly

from an accumulation of poor past policies and which will take

time to remedy include; (i) non availability of quality seeds and

inappropriate production technologies especially for small holder

farming, (ii) lack of access to credit, by the majority of small

holder farmers, particularly women, (iii) high cost of farm inputs,(iv) poor and inadequate rural infrastructure, especially feeder

roads, power supply and market facilities. Other constraints,

which Government intends to make relatively rapid efforts to

ameliorate include (v) inconsistencies in policy/poor institutional

and legal framework, (vi) inadequate research, inefficient

extension delivery systems as well as inadequate extensionservices and support, (vii) poor sequencing of the liberalisation

process, (viii) lack of effective co-ordination of investment

activities among the key stakeholders in agriculture. Lastly, there

are constraints which are almost entirely exogenous, including


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(ix) insecurity in high potential areas and cattle rustling in some

ASAL areas, (x) unfavourable weather conditions and high

dependence on rain fed production, and (xi) population pressure

on the natural resource base. As a result, many indicators of rural

livelihood have been worsening, indicating an increase in rural

poverty.

10.3 The Agriculture sub-sector needs to grow at about 4-6%

per annum if it is to contribute to national growth and increasing

rural wealth. For this to happen in a way that effectively supportspoverty reduction over most of the sector, a number of important

elements need to be in place and actions to facilitate them need

to be taken. These include: (i) building an effective and efficient

participatory extension and technology delivery service; (ii)

undertaking affirmative action in agriculture by facilitating

participation of women; (iii) establishing efficient rural financeand credit supply system for smallholders and rural primary

agroprocessors; (iv) ensuring policies, institutional and legal

frameworks are investor friendly; (v) implementing sound land

use, water and environmental policies; (vi) facilitating long term

investments in farm improvement; (vii) protecting water

catchment areas by developing forest plantations; and (viii)improving the governance of the co-operative sector by

empowering farmers. To address specific problems of ASAL areas

livestock marketing needs to be improved and small scale

irrigation investments undertaken in poverty stricken areas.


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10.4 The role of Government in encouraging growth in the rural

sector would be redirected towards fulfilling those functions which

are truly public goods. In particular it would strive to provide

better research/extension linkages and which are seen as the

main way of supporting effective increases of smallholder maize

and traditional crop production which is undertaken mainly by the

rural poor. It would also set policies to create an enabling

environment which encourages investment and trade, thereby

leading to job creation, which would also be of direct benefit to

the poor

STATE INCOME

3.1.0

The advance estimates of State Domestic Product for the year 2003-2004 indicate that during the year the Gross State Domestic Product (GSDP)of Assam is expected to grow by 6.0 per cent at constant (1993-94) prices and

by 10.2 per cent at current prices. At national level the growth of GDP during2003-2004 is expected to be 8.1 per cent at constant (1993-94) prices and 11.9

per cent at current prices as revealed from the advance estimates released bythe Central Statistical Organisation. As per the advance estimates the percapita NSDP (i.e. Per Capita Income) of Assam is likely to attain the level ofRs.6403 at constant (1993-94) prices and Rs.12593 at current prices during2003-2004 while at national level the per capita income is estimated atRs.11684 at constant (1993-94) prices and Rs.20860 at current prices duringthe same period.

3.1.1 The quick estimates of the Gross State Domestic Product (GSDP) of

Assam for 2002-2003 shows that the growth of GSDP at constant (1993-94)prices has increased by 3.94 per cent during the year as against increase of3.23 per cent in 2001-2002 (Provisional Estimates). At current prices thesame has increased by 7.79 per cent in 2002-2003 (Q) as against 4.44 per centincrease in 2001-2002 (P). The Primary Sector registered a negative growthof (-) 1.6 per cent during 2002-2003 (Q) over the previous year in real termswhile the Construction Sector in the State registered a positive growth of 16.7


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Capita Income at constant prices (1993-94) showed an increase of 2.66 percent in 2002-2003 (Q) over 2001-2002 (P) as against the increase of 1.95 percent in 2001-2002 over 2000-2001. At current prices the same recorded anincrease of 6.53 per cent in 2002-2003 (Q) over 2001-2002 (P) as against 2.95

per cent increase in 2001-2002 (P) over 2000-2001.

This shows the Per Capita Income of Assam and India during theperiod from 1980-81 to 2002-2003.

It would be evident from Table-3.2 that in respect of Per CapitaIncome, Assam continued to lag behind the Per Capita Income at Nationallevel in every year under reference in the table. Another noticeable feature inthis regard is that the gap between the Per Capita Income of Assam and Indiais widening in every subsequent years. During 2002-2003 (Q) the Per CapitaIncome of Assam stood at Rs.11755 at current prices and Rs.6220 at constant(1993-94) prices and during the same period the Per Capita Income for thecountry as a whole was Rs.18912 at current prices and Rs.10964 at constant(1993-94) prices. As per Quick Estimate the Per Capita Income of Assamshowing an increase of 6.53 per cent at current prices and 2.7 per cent atconstant (1993-94) prices during 2002-2003 over that of previous year. Themovement of GSDP and NSDP of Assam at Factor Cost by Industry of originalong with Per Capita Income at current and constant prices may be seen fromthe Tables at Appendix.

3.1.4

An analysis of the Sectoral contribution by broad groups reveals thatduring 2002-2003 (Q) the contribution of Primary, Secondary and TertiarySectors to the total Net State Domestic Product of the State at current pricesstands at 38.72 per cent, 16.16 per cent and 45.12 per cent respectively.During the same year, the contribution of Primary, Secondary and TertiarySectors at constant (1993-94) prices have been found to be 38.69 per cent,15.26 per cent and 46.05 per cent respectively. While in 2001-2002 (P), thecontribution were 41.00 per cent for Primary Sector, 14.99 per cent for

Secondary Sector and 44.01 per cent for Tertiary Sector at current prices and41.06 per cent, 14.21 per cent and 44.73 per cent respectively at constantprices.

The share of the entire Sectors to the total NSDP of the State during2002-2003 (Q)


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The Sectoral composition of the States economy has undergoneconsiderable changes during 1992-93 to 2002-2003 as revealed from themovements of the SDP of the State. During this period, the share of PrimarySector has declined from 51.45 per cent to 38.72 per cent. On the other hand,

the share of Secondary Sector has increased from 12.84 per cent to 16.16 percent and Tertiary Sector has also increased from 35.71 per cent to 45.12percent over the same period. The increasing share of Secondary and TertiarySectors is due to faster rate of development in these two Sectors incomparison to the development in the Primary Sector.

The contribution of Agricultural Sector to the total NSDP of the Stateis found to be dwindling over the years. During 2002-2003 (Q), 2001-2002(P) and 2000-2001 the share of this Sector were 30.34 per cent, 31.69 per centand 34.45 per cent respectively at current prices and 29.60 per cent, 31.43

percent and 32.46 per cent respectively at constant (1993-94) prices.

Review of Developments

Consumption, savings and investment

the increasing trend in gross domestic savings as a proportion of GDP observed

since 2001-02 continued, according to the new series of national accounts, withthe savings ratio rising from 26.5 per cent in 2002-03 to 28.9 per cent in 2003-04

and further to 29.1 per cent in 2004-05 (Table 1.3). In 2004-05, the rise in thesavings rate was contributed by two of its three components: namely public and

corporate savings. The third component, namely household savings, grew at 5.9

per cent slower than the GDP growth rate and made a negative contributionby coming down as a proportion of GDP.

The trend in public savings had reversed from negative (1998-99 to 2002-03) to

positive in 2003-04. With progress in the implementation of FRBMA, this virtuoustrend consolidated further with an increase in public sector savings from 1.0 per

cent of GDP in 2003-04 to 2.2 per cent of GDP in 2004-05. The positive saving ofRs. 69,390 crore in 2004-05 (QE) was composed of lower dissavings of public
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authorities and higher savings from non-departmental enterprises.

Savings by the private corporate sector reflecting the high retained earningsfrom their higher profits grew rapidly (24.9 per cent) to increase its share in

GDP from 4.4 per cent in 2003-04 to 4.8 per cent in 2004-05 (QE). There has

been a continuing upward momentum in the savings of the private corporatesector for three years; as a proportion of GDP, it increased steadily from 3.6 percent in 2001-02 to 4.8 per cent of GDP in 2004-05 (QE). The increase of 0.2

percentage points in gross domestic savings rate between 2003-04 and 2004-05was considerably lower than the 2.4 percentage point rise in the previous year

because of a decline in household savings, in both financial as well as physicalassets, relative to GDP.

Private final consumption expenditure (PFCE), at current prices as a proportion ofGDP, after declining from 64.6 per cent in 1999-2000 to 62.9 per cent in 2002-03,

fell further to 62.4 per cent in 2003-04 and 60.6 per cent in 2004-05. Among thevarious components of PFCE, the share of food, beverages and tobacco in total

expenditure came down from 46.8 per cent in 2000-01 to 40.6 per cent in 2004-

05. The other major item of importance, namely, transport and communication, asa proportion of PFCE, rose from 14.3 per cent in 2000-01 to 18.2 per cent in

2004-05.

While consumption expenditure, when measured as a proportion of GDP, exhibiteda declining trend both in public and private consumption categories, such

expenditure continued to dominate the demand side of national income. As aproportion of GDP at current prices, Government final consumption expenditure

(GFCE) declined from 12.9 per cent in 1999-2000 to 11.2 per cent in 2003-04.The proportion is estimated to have grown marginally to 11.3 per cent in 2004-05.

In line with the rise in the rate of gross domestic savings in 2002-03 and 2003-04,

there was an increase in the rate of GDCF or investment ( Table 1.3). However,the increase in GDCF was less than the increase in savings, leading to a currentaccount surplus in BOP, as a proportion of GDP, of 1.2 per cent and 1.6 per cent,

respectively. In 2004-05, reflecting the pick up in investment in the economy,GDCF increased by 2.9 percentage points of GDP, surpassing the 0.2 percentage

point increase in the ratio of gross domestic savings to GDP. A current accountdeficit in BOP of 0.8 per cent of GDP largely bridged the savings-investment gap.

Gross domestic investment grew from 27.2 per cent in 2003-04 to 30.1 per cent

in 2004-05 (Table 1.3), mainly on account of private investment growing at 19.7

per cent. In the revised series data, a new item valuables covering expenditureon acquisition of precious metals and stones as a store of value has been included

as a component, separate from public and private, of GDCF on the basis of 1993System of National Accounts of United Nations.

GDCF at constant prices (base: 1999-2000) as a proportion of GDP (Table 1.4) isconsistently lower than the corresponding proportion at current prices (Table 1.3).

But, irrespective of the choice of constant or current prices as the weights, thedirection of change from year to year remains unaltered. The lower values of the

change in GDCF as a proportion of GDP at constant prices, particularly in morerecent years, may reflect the higher prices of capital goods relative to the general
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price level, with growing technological sophistication of the production processes

in the economy in general and manufacturing in particular.

At constant 1999-2000 prices, the composition of GDCF for 2003-04 and 2004-05

reveals a faster growth in the public component than in the private. Furthermore,there is a faster growth in inventories and valuables in the latest two years, with

gross fixed capital formation (GFCF) growing at a lower rate than gross domesticcapital formation. This may partly reflect a process of adjustment to the rapid

decline in the change in stocks as a proportion of GDP from 2.0 per cent in 1999-2000 to a low of 0.5 per cent in 2001-02 and the progressive liberalization of gold

and silver imports.

In terms of contribution to growth of GDP at current market prices, from the

demand side, there was a change in the pattern of PFCE providing the lead (Figure1.2 and Table 1.5). PFCE contributed as much as 54.5 per cent of the growth in

GDP at current market prices between 2000-01 and 2003-04. The percentagepoint contribution of private final consumption expenditure was as much as 7.4

out of the overall growth of 12.7 per cent in GDP in 2003-04. In the same year,

the corresponding contribution of investment was 5.4. In an encouragingdevelopment, the percentage point contribution of investment at 6.8 out of 13.1per cent growth in GDP in 2004-05 exceeded the corresponding contribution of

private final consumption expenditure at 6.1 for the first time in recent years.

Reflecting the higher growth of imports relative to exports, the negativecontribution of external balance increased in 2004-05.

Poverty Statistics

Explanatory Notes on the 2003 Poverty Estimates

E. Growth rate of average per capita income (at currentprices) versus the growth rate of the poverty thresholdprovides an alternative way to analyze trends in povertyincidence

Another way of validating changes in poverty incidencewould be to compare the growth rate from 2000 to 2003 ofthe nominal average per capita income as against that of thepoverty threshold.

At the national level, the average per capita incomeincreased faster than the poverty threshold (Table 5),indicating that on the average, the increase in per capitaincome was more than sufficient to match the increase inthe cost of basic food and non-food requirements. Moreover,the average per capita income of the three lowest income
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groups, where the countrys poor belongs, rose at a higherrate than the poverty threshold as shown in Appendix TableD . This means that poor families were able to cope betterdespite the increase in the cost of basic necessities, thereby

improving their living conditions. Thus, the 2.7 percentagepoint reduction in national poverty incidence from 2000 to2003 is plausible.

Table 5Poverty Incidence, NOMINAL Average Per Capita Income,and Poverty Threshold by Region, 2000 and 2003

For NCR, although the cost of basic necessities went upfaster than the overall per capita income, poverty incidence

decreased nonetheless since the increase in the average percapita income of families in the lowest income group, whereall of the poor in the metropolis belongs, was more thansufficient to match the rising cost of basic necessities in theregion. This contributed to the reduction in Metro Manilaspoverty incidence. In fact, the decrease in the regionsoverall per capita income can actually be attributed to those
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in the highest income group, which could not have affectedthe estimate of poverty incidence.

Similarly, for Region VIII, while the cost of basicrequirements grew faster than the overall per capita income,

poverty incidence dropped nonetheless since the rise in theaverage per capita income of families in the lower incomegroups, particularly those in the fourth lowest income group,were more than enough to cover the increasing cost of basicrequirements in the region.

For Regions IV-B, IX, and X, poverty incidence worsened(although only by a negligible rate in the case of Region X,that is, by 0.02 percent) since the increase in the overall percapita income was not sufficient to cope with the rising cost

of basic necessities. In fact, the average per capita incomeof families went down from 2000 to 2003 for the third,fourth and fifth lowest income groups in Region IV-B, andfor the three lowest income groups in Region IX.

For Region XI, while the overall per capita income increasedfaster than the cost of basic commodities, poverty incidenceincreased nonetheless due to the insufficient growth in theaverage per capita income of the third lowest income group.That is, improvements in the income of most families in the

said income group were not enough to cope with the risingcost of basic necessities in the region. In fact, the increasein the overall per capita income of the region wascontributed mainly by the upper income groups.

A similar trend was observed in Caraga. Despite the fastergrowth in the overall per capita income as against the costof basic commodities, poverty incidence increased just thesame since the expansion in the average per capita incomeof families in the fifth income group was not enough to deal

with the faster rising cost of basic necessities. A closerexamination of the distribution revealed that it was mainlythe upper income groups that contributed to the increase inthe overall per capita income of the region.

For the rest of the regions, that is, Regions I, II, III,Calabarzon (IV-A), V, VI, VII, XII, CAR and ARMM, povertyincidence improved as the overall per capita income grew at


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a sufficient rate to cope with the escalating cost of basicnecessities in these regions. Moreover, per capita income offamilies in the lower income groups grew more rapidly thanthe cost of basic necessities helping them cope better

Developments during 2002-03

Domestic Developments

3. The Central Statistical Organisation (CSO) recently released the latest estimates ofnational income for the year 2001-02. According to these estimates, the growth rate ofreal GDP in 2001-02 at 5.6 per cent was marginally higher than envisaged earlier, i.e.5.4 per cent. This was mainly due to an upward revision in growth rates of themanufacturing, trade, transport and communication sectors. Growth rate of the servicessector was revised upwards from 6.2 per cent to 6.5 per cent and that of industrial

sector from 2.9 per cent to 3.2 per cent. However, the growth rate of agriculture andallied activities remained steady at 5.7 per cent.

4. For the year 2002-03, the mid-term Review of Monetary and Credit Policy releasedon October 29, 2002 had projected the GDP growth in the range of 5.0 to 5.5 per centtaking into account available data on the performance of the South-West monsoon. Theadvance estimates for2002-03 released by the CSO in January 2003 has placed GDPgrowth at 4.4 per cent, whichreflectsan estimated decline in the outputfromagriculture and allied activities by as much as 3.1 per cent. The earlier projection in theReserve Bank?s mid-term Review of October 2002 was based on a much lower declineof 1.5 per cent in agricultural output. The overall growth performance of the industrialsector, as per CSO advance estimates, at 5.8 per cent is, however, much higher thanthat of 3.2 per cent in the previous year. The services sector is estimated to grow by 7.1per cent as against 6.5 per cent in the earlier year, mainly on account of higher growthin construction, domestic trade and transport sectors. The CSO has also placed thegrowth of financing, real estate and business services sector at 6.5 per cent for 2002-03as compared with 4.5 per cent in 2001-02.

5. The annual rate of inflation as measured by variations in the wholesale price index(WPI), on a point-to-point basis, remained below 4.0 per cent up to mid-January 2003and rose thereafter to 6.2 per cent by end-March 2003 mainly on account of increase inprices of non-food articles and mineral oils. During 2002-03, the prices of manufacturedproducts (weight: 63.7 per cent) registered an increase of 4.8 per cent compared with

no increase in prices in the previous year. Prices of primary articles (weight: 22.0 percent) showed an increase of 5.9 per cent as against an increase of 3.9 per cent in theprevious year. Similarly, there was a higher increase of 10.8 per cent in "fuel, power,light and lubricants" group (weight: 14.2 per cent) as against an increase of 3.9 per centa year ago. Besides fuel items, the steep increase in prices of oilseeds, sugarcane andcotton have been major items in the overall price rise in 2002-03. In the WPI basket,while some items are affected by drought conditions, others have sharply responded toexternal supply shocks. The weight of such items, where prices have increased very


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sharply, works out to 15.4 per cent. Excluding the price increases due to such items(mineral oils, oilseeds, edible oils, oil cakes and fibres) from the basket, the inflation rateworks out to 2.7 per cent on a point-to-point basis at the end of March 2003 ascompared with 1.5 per cent last year.

6. The annual rate of inflation in 2002-03 as measured by the increase in WPI, on an

average basis, for the year as a whole was, however, lower than that in the previousyear: 3.3 per cent as against 3.6 per cent a year ago. On an average basis, the annualchange in consumer price index for industrial workers (up to February 2003) wasidentical to the previous year at 4.1 per cent.

7. Monetary and credit aggregates for the year 2002-03 reflected the impact of mergersthat took place in the banking industry. During 2002-03, the growth in money supply(M3) was 15.0 per cent (Rs.2,24,576 crore) as against 14.2 per cent (Rs.1,86,782 crore)a year ago. However, net of mergers, M3 increased by 12.1 per cent (Rs.1,81,984 crore)which was well within the projected trajectory. Among the components, growth inaggregate deposits of scheduled commercial banks (SCBs) at 12.2 per cent net of

mergers (16.1 per cent with mergers), was lower than that of 14.6 per cent in theprevious year. The expansion in currency with the public was lower at 12.5 per cent(Rs.30,263 crore) as against 15.2 per cent (Rs.31,849 crore) in the previous year.

8. An important feature of monetary developments during 2002-03 was the lowerincrease in reserve money despite a sharp increase in foreign exchange assets of RBI.The increase in reserve money during 2002-03 was 9.2 per cent (Rs.30,960 crore) ascompared with an increase of 11.4 per cent (Rs.34,659 crore) observed in the previousyear. While currency in circulation rose by 12.5 per cent (Rs.31,338 crore) as comparedwith an increase of 15.0 per cent (Rs.32,769 crore) in the previous year, bankers?deposits with RBI declined by 1.0 per cent (Rs.801 crore) as compared with an increaseof 3.3 per cent (Rs.2,670 crore). On the sources side, RBI?s net foreign exchange

assets rose by 35.7 per cent (Rs.94,275 crore) compared with an increase of 33.9 percent (Rs.66,794 crore) in the previous year. On the other hand, net domestic assets ofRBI declined on account of a fall in both net RBI credit to government and credit tobanks and commercial sector. Notwithstanding RBI?s subscription to fresh governmentdated securities of Rs.36,175 crore, net RBI credit to the Central Government actuallydeclined by Rs.25,369 crore due to net open market sales of government securities ofRs.53,780 crore. RBI?s claims on banks and commercial sector also showed a fall ofRs.6,468 crore as compared with a decline of Rs.9,575 crore in the previous yearreflecting comfortable liquidity conditions.

9. A favourable development during 2002-03 has been a sustained increase in credit

flow to the commercial sector reflecting industrial recovery. During 2002-03, non-foodcredit of scheduled commercial banks (SCBs) registered a high growth of 26.2 per cent(Rs.1,40,144 crore) and, net of mergers, it rose by 17.8 per cent (Rs.95,599 crore), asagainst an increase of 13.6 per cent (Rs.64,302 crore) in the previous year. Theincremental non-food credit-deposit ratio during 2002-03 at 79 per cent is the highestrecorded over the last five years. This is indicative of the fact that a substantial part oflendable resources of banks has been deployed for productive purposes. This is alsoborne out by the strong growth of 10.3 per cent in demand deposits in 2002-03, which is


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mainly used for working capital requirements. The increase in total flow of funds fromSCBs to the commercial sector during 2002-03, including banks? investments inbonds/debentures/shares of public sector undertakings and private corporate sector,commercial paper (CP) etc., was also higher at 24.5 per cent (Rs.1,51,569 crore) asagainst 12.7 per cent (Rs.69,483 crore) in the previous year. The total flow of resources

to the commercial sector, including capital issues, global depository receipts (GDRs)and borrowings from financial institutions was at Rs.1,88,262 crore as compared withRs.1,42,082 crore in the previous year.

10. The feedback on industry-wise credit flows received from banks for 2002-03 (April-February) reveals that, at a disaggregated level, there was significant increase in creditto iron & steel, other metal & metal products, cotton & jute textiles, electricity, paper &paper products, fertilisers, drugs & pharmaceuticals, cement, gems & jewellery,construction, food processing, computer software, power and roads & ports. On theother hand, decline in credit was observed in coal, all engineering, sugar, tobacco &tobacco products, telecommunications and petroleum.

11. As a result of subdued procurement due to lower foodgrains production, and higheroff-take of foodgrains, the buffer stock of foodgrains declined from 54.5 million tonneson March 1, 2002 to 36.2 million tonnes as on March 1, 2003. Consequently, there wasa decline in food credit of Rs.4,499 crore during 2002-03 as against an increase ofRs.13,987 crore in the previous year. The large buffer stock with the Government actedas a deterrent to price increase of food items as also the general price level in the wakeof severe drought conditions witnessed during the year.

12. According to the revised estimates in the Union Budget, the fiscal deficit of theCentral Government for 2002-03 was Rs.1,45,466 crore as against the budget estimateof Rs.1,35,524 crore. During 2002-03, net market borrowings of the CentralGovernment at Rs.1,04,118 crore (gross Rs.1,51,126 crore) was higher than the budget

estimate by Rs.8,259 crore but lower than the revised estimate by Rs.8,747 crore. Thestate governments? net market borrowings of Rs.13,622 crore for 2002-03 weresupplemented by additional borrowings of Rs.15,442 crore. Although the combinedslippage in the borrowings of the Centre and States was as much as Rs.23,701 crore, itdid not exert undue pressure on interest rates due to decline in the demand for foodcredit, reduction in CRR, comfortable liquidity position resulting from the foreignexchange inflows and judicious debt management by RBI. As such, the weightedaverage cost of government borrowings through primary issuances of datedsecurities at 7.34 per cent during 2002-03 was lower by 210 basis points than that of9.44 per cent in the previous year. While unfavourable effects of large fiscal deficits onthe interest rate scenario have not so far been evident, it is necessary, in a medium-

term perspective, to aim at fiscal consolidation and substantially lower fiscal deficits tofacilitate efficient monetary and debt management operations.

13. During 2002-03, the state governments accessed the market for additionalborrowings for an amount of Rs.15,442 crore in two tranches. This amount includesRs.10,000 crore for the debt swap scheme mutually agreed between the CentralGovernment and state governments towards repayment of high cost debt of States tothe Centre. Though repayment of high cost debt is desirable, large borrowings for this


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purpose, in addition to high level of approved market borrowings for other purposes, putpressure on interest rates. The timing of issuance and pricing of the securities alsobecome difficult, particularly during periods when there is a bunching of borrowingrequirements for various purposes. These difficulties are compounded if there areperiodic defaults by some States or their PSUs in meeting their guarantee obligations. It

is of utmost importance that overall borrowing requirements are kept at a reasonablelevel, and that all sovereign obligations, including guarantees, are fully honoured ontime.

14. As emphasised in various policy Statements, overall monetary managementbecomes difficult when a large and growing borrowing programme of the Governmentputs pressure on the absorptive capacity of the market. The banking system alreadyholds government securities of about 39 per cent of its net demand and time liabilities(NDTL) as against the statutory minimum requirement of 25 per cent. In terms ofvolume, such holdings above the statutory liquidity ratio (SLR) amounted to Rs.1,95,974crore in March 2003 which is much higher than the gross borrowings of theGovernment. Further, such a scenario exposes banks to substantial interest rate risk

which has adverse implications for sustained financial stability. In addition, theincreasing interest payments have raised concerns about the sustainability of a largepublic debt. A reduction in fiscal deficit would release resources for infrastructure andindustrial financing, which in turn would help in realising the long-term potential of theeconomy. Fiscal consolidation will also have a favourable effect on inflationaryexpectations and hence on the interest rate scenario in the economy.

15. The two-way movement in interest rates during 2002-03, has confirmed that banksshould in their interest take steps to build up investment fluctuation reserves in asmooth and phased manner for better risk management. It may be recalled that inJanuary 2002, RBI proposed that banks should build up investment fluctuation

reserve (IFR) to a minimum of 5 per cent of their investment portfolio under the "held fortrading" and "available for sale" categories, by transferring the gains realised on sale ofinvestments within a period of five years. They were also advised to make adequateprovisions for unforeseen contingencies in their business plans, and to fully take intoaccount the implications of changes in the monetary and external environment on theiroperations. In the light of their own risk assessment, banks are free to build up higherpercentage of IFR up to 10 per cent of their portfolio depending on the size andcomposition of their portfolio, with the concurrence of their Boards.

16. The monetary policy stance in recent years has underlined the Reserve Bank?scommitment to maintain adequate liquidity in the market with a preference forsoftinterest rates to the extent the evolving situation warrants. During 2002-03, it was

possible to maintain adequate liquidity on account of sustained inflows of fornmentborrowing. This is evident from the fact that the call money rate declined from 6.97 percent in March 2002 to 5.86 per cent by March 2003. The discount rate of prime-ratedCP (61-90 days) showed an even sharper decline by 302 basis points from 9.02 percent to 6.00 per cent between March 2002 and March 2003. The cut-off yields on 91-day and 364-day Treasury Bills declined from 6.13 per cent and 6.16 per cent,respectively, in March 2002 to 5.89 per cent each by March 2003. An interestingdevelopment during the year has been that the interest rates in money market


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instruments converged to a narrow band of 5.5 to 6.0 per cent reflecting easy liquidityconditions.

17. There was also a distinct downward drift in secondary marketyields ongovernment securities across the maturity spectrum during the year. The yield ongovernment securities with 1-year residual maturity declined by 60 basis points from

6.10 per cent in March 2002 to 5.50 per cent by March 2003. There was a sharperdecline of 115 basis points in yield on government securities with 10-year residualmaturity from 7.36 per cent in March 2002 to 6.21 per cent by March 2003. The termstructure of interest rates reveals a flattening of the yield curve with long-term interestrates declining more sharply than the short-term rates. For example, the spreadbetween the yields on 10-year government securities and 91-day Treasury Billsnarrowed from 123 basis points in March 2002 to 32 basis points by March 2003reflecting moderation of inflationary expectations.

18. Interestingly, yields on non-government bonds witnessed a sharper reductionthan yields on government securities during 2002-03, and yields on such bonds are now

closer to sovereign bonds than was the case earlier. For example, the spread betweenthe prime-rated CP (61-90 days) and 91-day Treasury Bills narrowed from 289 basispoints in March 2002 to 11 basis points by March 2003. In the case of longer maturitiesalso, the risk premium on the private sector bonds has fallen sharply as measured bythe yield spread between highly rated corporate paper and government securities forresidual maturity of 5 years. For example, the spread between AAA-rated corporatebonds and the yield on government securities narrowed from about 177 basis points inMarch 2002 to about 87 basis points by March 2003.

19. It is necessary to impart greater flexibility to the interest rate structure in In

Growth of National Income

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