The growth rate of 8.

6 per cent during 2010-11 has been due to growth rate of

over 8 per cent in sectors of manufacturing, construction, trade, hotels,
transport and communication, financing, insurance, real estate and business
services," the government statement said.

During the current fiscal, the trade, hotel, transport and communication
sectors are projected to grow by 11 per cent, as against 9.7 per cent last fiscal,
and construction by 8 per cent, compared to 7 per cent in FY'10.

Furthermore, the finance, insurance, real estate and business services sectors
are likely to grow by 10.6 per cent this fiscal, as against 9.2 per cent last
fiscal.

However, community social and personal services are likely to witness a slow-
down in growth and register just 5.7 per cent expansion, compared to 11.8 per
cent in the year-ago period.

The global financial crisis pulled down the growth of the Indian economy to 6.8
per cent in the 2008-09 fiscal from over 9 per cent in the preceding three
years.

The advance GDP estimates are released before the end of a financial year to
enable the government to formulate various estimates for inclusion in the
Budget.

Fiscal Consolidation
18. The experience with Fiscal Responsibility and Budget
Management Act, 2003 (FRBM Act) at Centre and the corresponding
Acts at State level show that statutory fiscal consolidation targets
have a positive effect on macroeconomic management of the
economy. In the course of the year the Central Government would
introduce an amendment to the FRBM Act, laying down the fiscal
road map for the next five years.

19. The Thirteenth Finance Commission has worked out a fiscal

consolidation road map for States requiring them to eliminate revenue
deficit and achieve a fiscal deficit of 3 per cent of their respective
Gross State Domestic Product latest by 2014-15. It has also
recommended a combined States’ debt target of 24.3 per cent of
GDP to be reached during this period. The States are required to
amend or enact their FRBM Acts to conform to these
recommendations.
20. The Government has been in the process of setting-up an
independent Debt Management Office in the Finance Ministry. A
Middle Office is already operational. As a next step, I propose to
introduce the Public Debt Management Agency of India Bill in the
next financial year. Tax Reforms

21. The introduction of the Direct Taxes Code (DTC) and the
proposed Goods and Services Tax (GST) will mark a watershed.
These reforms will result in moderation of rates, simplification of laws
and better compliance.

22. As Hon'ble Members are aware, the Direct Taxes Code Bill was
introduced in Parliament in August, 2010. After receiving the report of
the Standing Committee, we shall be able to finalise the Code for its
enactment during 2011-12. This has been a pioneering effort in
participative legislation. The Code is proposed to be effective from
April 1, 2012 to allow taxpayers, practitioners and administrators to
fully understand the legislation and adjust to the revised procedures.

23. Unlike DTC, decisions on the GST have to be taken in concert

with the States with whom our dialogue has made considerable
progress in the last four years. Areas of divergence have been
narrowed. As a step towards the roll-out of GST, I propose to
introduce the Constitution Amendment Bill in this session of
Parliament. Work is also underway on drafting of the model
legislation for the Central and State GST.

24. Among the other steps that are being taken for the introduction of
GST is the establishment of a strong IT infrastructure. We have made
significant progress on the GST Network (GSTN). The key business
processes of registration, returns and payments are in advanced
stages of finalisation. The National Securities Depository Limited
(NSDL) has been selected as technology partner for incubating the
National Information Utility that will establish and operate the IT
backbone for GST. By June 2011, NSDL will set up a Pilot portal in
collaboration with eleven States prior to its roll out across the country

3. Monetary policy and the transmission of shocks

Under optimal policy, the central bank responds to all relevant predetermined variables
and shocks
to the economy. With a simple instrument rule, the central bank only responds to some
variables
of the economy. To understand how monetary policy affects the dynamics of the model,
we first
look at the impulse response functions to a stationary technology shock under optimal
policy and
under policy with the estimated instrument rule, since total factor productivity is a key
driver of
business cycles in according to the estimated model.
Figure 3.1 depicts the impulse responses to a positive stationary technology shock (one
standard
deviation) for optimal policy and for policy with the estimated instrument rule. The
impulse occurs
in quarter 0. Before quarter 0, the economy is in the steady state with Xt = 0 and Ξt−1 = 0
for
t ≤ 0 and xt = 0 and it = 0 for t ≤ −1. Under optimal policy, we use the estimated loss
function
(λy = 1.10, λ∆i = 0.37) with the trend output gap (where the output gap between output
and
trend production is used), the unconditional output gap (the gap between output and
unconditional
flexprice potential output), and the conditional output gap (the gap between output and
conditional
flexprice potential output) and plot the corresponding impulse responses. It should be
noted that
this technology shock does not affect trend output in the model (which is influenced only
by the
unit-root technology shock). The output level under flexible prices and wages, flexprice
potential
output, is of course affected by the shock.
We start by comparing the impulse responses under policies using the trend output gap
either
as a response variable (instrument rule) or as a target variable in the loss function
(optimal policy).
Even if the instrument-rule parameters and the loss-function parameters are both
estimated to
capture the historical behavior of the central bank, the responses to a stationary
technology shock
are quite different when following the instrument rule (dashed curves) or using the
quadratic loss
function (dashed-dotted curves). The figure shows that optimal policy stabilizes inflation
and the
output gap more effectively over time than the instrument rule, although optimal policy
initially
allows a larger fall of both CPI and domestic inflation when using the trend output gap in
its loss
function.