Report No 19471-IN India Policies to Reduce Poverty and Accelerate Sustainable Development January 31, 2000 Poverty Reduction and Economic Management Unit South Asia Region Document of the World Bank CURRENCY Rs/ US$ Currency Official Unified Market a Prior to June 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 1997-98 37.16 1998-99 42.00 September 1999 43.54 October 1999 43.45 November 1999 43.39 Note: The Indian fiscal year runs from April 1 through March 31. Source: IMF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. a A dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Vice President Mieko Nishimizu Country Director Edwin Lim Sector Director Roberto Zagha Staff Members Sanjay Kathuria, James Hanson ii TABLE OF CONTENTS C urrency ........................................................................i Acknowledgements ....................................................................... vii Abbreviations and Acronyms ....................................................................... viii Economic Development Data ....................................................................... ix India Social Indicators ....................................................................... xi EXECUTIVE SUMMARY ....................................................................... xiii CHAPTER 1: POVERTY REDUCTION: PROGRESS AND CHALLENGES A. Overview ..................................................I B. Poverty Reduction: The long view from the 1950s to the early 1990s ...........................I C. Reduction in Poverty in the Mid-i 990s: A Mixed Picture ............................................5 D. Macroeconomic Concerns: Inflation and Agricultural Performance .............................7 E. Divergence in Poverty Reduction between States ................................................... 9 F. Summary .................................................. 10 CHAPTER 2: IMPROVING HEALTH AND EDUCATION FOR THE POOR A. Overview .......................................................... 13 B. Education and Health Outcomes in India .......................................................... 13 C. Characteristics of Education and Health Services ....................................................... 16 D. A Similar Story in Health and Education Services for the Poor ................................... 20 E. Solutions Being Found in Education and Health .......................................................... 22 F. A Way Forward: Delivering More and Better Education and Health to the Poor ......... 24 CHAPTER 3: REDUCING POVERTY FASTER: THE ROLE OF STATE FISCAL AND SECTOR REFORMS A. Overview .......................................................... 27 B. Differential Growth and Widening Disparities Among States ................................... 28 C. State-Level Reforns to Reduce Poverty .......................................................... 31 D. Cutting the States' Fiscal Deficits and Raising Their Development Spending ............ 31 E. Reforming Power and Irrigation at the State Level ...................................................... 35 F. Decentralization: Emerging Issues and The 1 l'hFinance Commission ........................ 36 CHAPTER 4: GOOD GOVERNANCE: THE BUSINESS OF GOVERNMENT A. Overview ......................................................... 41 B. Rule of law, contract enforcement, and the business environment ............................... 43 C. Improving Public Administration: Strengthening Performance Incentives and Accountability in a Downsized Civil Service ......................................................... 46 D. Sound Budgetary and Financial Management ......................................................... 47 E. Improving Public Services through Effective Decentralization .................................... 52 iii CHAPTER 5: IMPROVING INFRASTRUCTURE TO REDUCE POVERTY AND SUPPORT GROWTH A. Overview ..................................................... 57 B. India's Public Provision of Infrastructure ........................ ......... ____ ...... 58 C. Attracting Private Investment in Infrastructure - Evolving Policies ............................ 61 D. Developing Specialist Regulatory Agencies ..................................................... 64 CHAPTER 6: INCREASING THE DEMAND FOR LABOR: DEREGULATION TO INCREASE EXPORT GROWTH, AGRICULTURAL GROWTH AND LABOR MARKET FLEXIBILITY A. Overview ..................................................... 67 B. Deregulation to Increase Trade, Growth and Labor Demand ....................................... 68 C. Improving Labor Market Flexibility ..................................................... 76 D. Improving Agriculture's Contribution to Development ............................................... 79 CHAPTER 7: RAISING AND USING CAPITAL WELL: THE FINANCIAL SYSTEM AND CORPORATE GOVERNANCE A. Sound Financial System to Allocate Credit and Produce Vulnerability ....................... 83 B. Strengthening the Framework for Corporate Governance ............................................ 93 CHAPTER 8: GROWTH, MACROECONOMIC DEVELOPMENTS AND POLICIES A. Overview .97 B. Economic Growth in 1998-99 and Over the Longer Run .97 C. Inflation and Monetary Policy .101 D. Reducing the Fiscal Deficit and Realigning Government to Speed-up Development and reduce vulnerability .105 E. Balance of Payments .115 CHAPTER 9: INDIA'S DEVELOPMENT PROSPECTS .119 List of Text Tables Table 1.1 Annual Average Growth in Price Indices ....................................................................7 Table 1.2 Annual Average Growth in Wage Rates of Unskilled Agriculture Male Laborers .......................8 Table 3.1 Indian States' (14 Largest) Real per Capita Income (Rs.1980-81 prices) .................................... 29 Table 3.2 Standard Deviation of States' Per Capita Output ................................................................... 29 Table 3.3 State Poverty and Social Indicators and Their Standard Deviations ........................................... 30 Table 3.4 Main Fiscal Trends in All States (percent of GDP) ................................................................... 32 Table 3.5 Financing of All States Fiscal Deficit (percent of GDP) ............................................................. 33 Table 5.1 India - Investments in Infrastructure (percent of GDP), 1981-97 ............................................... 59 Table 6.1 India's Regulation of Agricultural Markets and Agro-Industry .................................................. 81 Table 8.1 GDP Growth (percent per year), 1981-99 ................................................................... 98 Table 8.2 India and High-Growth East Asia: A Statistical Comparison .................................................... 101 Table 8.3 Fiscal Slippage, 1998-99 .107 Table 8.4 Fiscal Deficit in the New Accounting Framework: 1990-2000 .108 Table 8.5 Change in Social and Economic Infrastructure and Interest Spending (1991/92 & 1997/98) .111 Table 8.6 Finances of Central Public Enterprises: 1990-00 .111 Table 8.7 Balance of payments (US $ Million), 1990-2001 .118 iv Boxes Box 1.1 National Sample Survey versus National Accounts .........................................................................6 Box 1.2 Reforms in India's Anti-Poverty Programs .......................................................................... 11 Box 2.1 India's District Primary Education Program .......................................................................... 17 Box 2.2 Himachal Pradesh: A Successful Experiment in Improving Primary Education ........................... 22 Box 3.1 Financing State Governments' Deficit: Borrowing and Guarantees ............................................... 33 Box 3.2 India's Experience with State Level VAT .......................................................................... 34 Box 3.3 The Growing Importance of Small Savings in State Finances ...................................................... 38 Box 4.1 Project LARGE .......................................................................... 43 Box 4.2 Public Enterprise Governance - A System that has not Delivered ............................................... 48 Box 4.3 The Effectiveness of Voice .......................................................................... 52 Box 4.4 Improving Environmental Governance .......................................................................... 53 Box 5.1 Progress in Infrastructure Provision .......................................................................... 58 Box 5.2 The Perverse Impact of Subsidies .......................................................................... 61 Box 5.3 Privatizing Distribution in Orissa .......................................................................... 63 Box 5.4 Design of Regulatory Agency Powers - Lessons from Telecoms .................................................. 66 Box 6.1 China's Exports and India's Foregone Exports .......................................................................... 69 Box 6.2 India - One of the Most Protected Countries .......................................................................... 70 Box 6.3 Recent Developments in Trade Policy .......................................................................... 72 Box 6.4 Gokaldas Exports - Constrained by SSI Reservations ................................................................... 74 Box 6.5 The Adverse Consequences of Anti-Dumping in India ........75....................................................... 75 Box 6.6 Women In the Indian Labor Market .......................................................................... 78 Box 7.1 The Narsimhan II, Khan, Gupta, and RBI Reports on the Financial Sector .................................. 84 Box 8.1 The Need to Improve India's Data .......................................................................... 104 Figures Figure 1.1 Trends in Poverty, 1950s through mid 1990s ........................................................................... 3 Figure 1.2 Rural Poverty Levels by State ...........................................................................4 Figure 1.3 Head Count Rates (Rural India) ...........................................................................9 Figure 2.1 Literacy in India, 1951-1997 .......................................................................... 14 Figure 2.2 Infant Mortality Rates in India .......................................................................... 16 Figure 4.1 India's International Ranking on Selected Governance Indicators ............................................. 42 Figure 6.1 India's Share in World Trade, REER, and Tariffs ...................................................................... 69 Figure 7.1 India M3: GDP, Deposit Rate & Inflation .......................................................................... 85 Figure 8.1 India: Inflation and Money (M3) Growth, 1994-99 ................................................................. 102 Figure 8.2 Public Sector Deficits, 1990-00 .......................................................................... 106 Figure 8.3 Central Govermment Surpluses/Deficits - Developing Countries over 20 Million Population, (Average 1987-97) .......................................................................... 107 Figure 8.4 Gross Capital Formation by Pvt. Corporate Sector and Consolidated Deficit of General Government .......................................................................... 114 Annexes Annex 4.1 Effectiveness and Efficiency of Financial Management: Selections from the Reports of CAG for 1997-98 .......................................................................... 123 Annex 4.2 Budgeting and Expenditure Management: A Suggested Reform Program ................................ 123 Annex 4.3 Effectiveness and Efficiency of Tax Administration: Systems Appraisals by the CAG ............ 124 Annex 4.4 A Suggested Reform program for Central Tax Administration ................................................. 125 Annex 5.1 Functional Characteristics of Regulatory Bodies ..................................................................... 126 v Annex 5.2 Responsibilities of Regulatory Bodies ................................................................. 127 Annex 8.1 Analyzing India's GDP Growth and The Role of Reform ........................................................ 128 Annex 8.2 Environment, Economic Growth, and Poverty ................................................................. 131 Annex 8.3 India's Progress in Privatization 1991 to 1999 ................................................................. 133 Bibliography ................................................................. 135 Annex Tables Annex Table 1.1 Poverty in India 1951-1997 (with correction for CPIAL) .149 Annex Table 2.1 India: Per Capita Income, Fertility, Infant Mortality and Literacy in Selected Years .150 Annex Table 3.1 Fiscal Deficit and Debt Stock (percent of State GDP), 14 Major States .152 Annex Table 4.1 International Comparisons of Selected Governance Indicators .153 Annex Table 4.2 Efficiency of government in delivering services .155 Annex Table 4.3 Quality, integrity and efficiency of public services delivered by public agencies . 155 Annex Table 4.4 Predictability, Responsiveness and Availability of Rules and Regulations. 156 Annex Table 4.5 Efficiency of Court System in Resolving Business Disputes .156 Annex Table 4.6 Obstacles in the Operation and Growth of Business .157 Annex Table 4.7 (a) Payment of Bribes (b) Extra Unofficial Payments to Public Officials (c) Percentage of Contract Value in Additional or Unofficial Payment to secure government contracts .158 Annex Table 4.8 Sunmmary Evaluation of Budget and Financial Management Practices .159 Annex Table 4.9 Public Financial Management (PFM): Evaluation of Outputs and Outcomes . 160 Annex Table 4.10 Variations between Budget/Revised Estimates and Actuals ....................................... 161 Annex Table 4.11 Revenue Effect of Tax Concessions ............................................... .................. 162 Annex Table 4.12 Central Tax Revenue and Buoyancy .............................................. ................... 162 Annex Table 4.13 Assessment of Tax Structure and Administration ....................................................... 163 Annex Table 4.14 Facilitation Indicators for Import Containers, Selected Countries (1998) ................... 164 Annex Table 4.15 Structure of Rural Local Government ..................................................... : 165 Annex Table 4.16 Decentralization of Local Government: A Report Card .............................................. 165 Annex Table 4.17 Expenditure and Revenue Decentralization and Financial Autonomy of Rural Local Bodies, 1996-97 ...................................... 165 Annex Table 6.1 Capital Employed per Worker in Domestic Industries Corresponding with Principal Exports and Imports, 1994-95 ...................................... 166 Annex Table 6.2 India and China: Selected Trade Indicators, 1987-96 .167 Annex Table 6.3 Coverage Ratio for Non-Tariff Barriers on Indian Imports - Weighted Average . 168 Annex Table 6.4 India's Share in World Trade, REER, and Tariffs .169 Annex Table 6.5 Share in World Exports: India and Selected Countries, 1998 .170 Annex Table 6.6 India - Tariff Structure, 1990-99 .171 Annex Table 6.7 Real Exchange Rate of India's Main Trading Partners and Competitors 1981-99 .172 Annex Table 6.8 Foreign Direct and Portfolio Investment .173 Annex Table 7.1 India: Structure of Selected Institutions of the Financial System .174 Annex Table 7.2 Indicators of Indian Banking Policy 1968-1999 .175 Annex Table 7.3 Scheduled Commercial Banks' Investments and Other Assets (End Fiscal year) .176 Annex Table 7.4 Bank Resources to Small versus Medium and Large Industries .177 Annex Table 8.1 Domestic Demand (percent of GDP at 1993/94 prices), 1981-97 .178 Annex Table 8.2 Key Interest Rates, 1994-99 .179 Annex Table 8.3 Sources of Change in Base Money, 1988-89 to 1997-98 .180 Annex Table 8.4 Imports: Customs and Non-Customs, 1996-97/1998-99 .181 Annex Table 8.5 Central Government Finances (percent of GDP), 1990-00 .182 Annex Table 8.6 Evolution of the Public Sector Deficit (Excl. Disinvestment Revenues), 1990-99 .183 Annex Table 8.7 Central Government Salary Bill and Establishment Strength: 1990-97 .184 Annex Table 8.8 State Government Finances (% GDP) .185 Annex Table 8.9 India: Finances of Central Public Enterprises .186 vi Annex Table 8.10 Year-wise/PSU-wise Details of Shares Disinvested since 1991-92 ........................... 187 Annex Table 8.11 India: Estimated Capital Inflows and Debt Stocks, 1991-92 to 1998-99 ..................... 188 Annex Table 8.12 Details of Mobilization in the Primary Market ............................................................ 189 Statistical Appendix Contents ............................................................ 193 vii ACKNOWLEDGEMENTS This Report was prepared by a team led by Sanjay Kathuria and James Hanson. They were supported by a core team of Bank staff consisting of Bala Bhaskar Naidu Kalimili, Priya Mathur, Harpinder Oberai, Farah Zahir, Shahnaz Rana, Shunalini Sarkar and Rita Soni. The Report draws upon an inter-disciplinary team, both from within the World Bank and outside. For Chapter 1, Valerie Kozel and Stephen Howes were primarily responsible; for Chapter 2, David Peters and Venita Kaul; for Chapter 3, Fahrettin Yagci; for Chapter 4, Arindam Das-Gupta; and for Chapter 5, Clive Harris. Other primary contributors include: Deepak Ahluwalia (agriculture), Benoit Blarel (agriculture), Carter Brandon (environment), Luis Constantino (decentralization), Paramita Dasgupta (state finances, small savings and general), Gaurav Datt (poverty), Edward Heneveld (education), Monica Jain (poverty), Bala Bhaskar Naidu Kalimili (macroeconomic projections, growth analysis, debt data management and analysis), Rajni Khanna (contingent liabilities), David Marsden (decentralization), Priya Mathur (environment, privatization), William McCarten (state finances), Kari Nyman (energy),Harpinder Oberai (labor markets, gender, and governance data management and analysis); Gajanand Pathmanathan (agriculture), Garry Pursell (anti-dumping), Salman Zaidi (poverty), Farah Zahir (governance, budgetary and financial management, growth analysis, public enterprises, Central and State fiscal data management and analysis). Background papers for the review were prepared by O.P. Mathur (decentralization), Shubhashish Gangopadhyay, Wilima Wadhwa and Bibek Debroy (judicial and civil service reforms), Omkar Goswami (corporate governance), and CRISIL (public enterprises). CII conducted a survey of the business environment for 210 small and large firms in all parts of India. Apart from the very useful comments of the task team members, the Report benefited from comments by Pedro Alba, Mukesh Ambani (Reliance Industries), Alok Bansal, Bhavna Bhatia, Milan Brahmbatt, Tim Callen (IMF), Shahrokh Fardoust, Edgardo Favaro, Keith Hinchcliffe, Karin Kapadia, Homi Kharas, Sandeep Mahajan, Will Martin, Smita Misra, Lucio Monari, Djamal Mostefai, Tawhid Nawaz, Martin Rama, V.J. Ravishankar, Patricia Reynolds (IMF), Panneer Selvam, Rajesh Sinha, Suresh Tendulkar, Christopher Towe (IMF), Sanjay Vani, Maj-lis Voss, Michael Walton, John Williamson, J.P. Wogart, and Adrian Wood. Peer reviewers were Kaushik Basu (Cornell University and World Bank), Philip Keefer, Ashok Lahiri (National Institute of Public Finance and Policy), Sanjay Pradhan, Helcio Tokeshi (on behalf of PREM Economic Policy). The Report also benefited from the comments of the Quality Assurance Group review team led by Gobind Nankani. Data analysis and management were done by Bala Bhaskar Naidu Kalimili, Priya Mathur, Harpinder Oberai, and Farah Zahir. Kanishka Ghoshal helped with the states' database. Bita Hadjimichael did the analysis of the customs tariff data, while Mihir Pandey and Samiran Chakrabarti provided the analysis on non-tariff barriers. It was desktop published by Shahnaz Rana, Shunalini Sarkar, and Rita Soni. Jillian Badami and Naomi Dass provided logistical support. Priya Mathur and Harpinder Oberai provided all-round contributions in getting the Report ready. The Report was discussed with the Government of India on August 10, 1999. The World Bank would like to acknowledge the comments received at the meeting as well as later, in writing, from the Ministries/Departments of Agriculture, Administrative Reforms and Public Grievances, Commerce, Consumer Affairs, Economic Affairs, Education, Family Welfare, Food and Civil Supplies, Health, Labor, Personnel, Power, Telecommunications, Social Justice and Empowerment, Statistics, Water Affairs, and Women and Child Development. The Reserve Bank of India also provided very valuable and extensive comments. The World Bank is also very grateful for the help rendered by various government agencies, including the Reserve Bank of India, the Department of Statistics, the Ministry of Finance, the Ministry of Industry, and the Directorate General of Commercial Intelligence and Statistics. Abbreviations and Acronyms viii ABBREVIATIONS AND ACRONYMS AD Anti Dumping NTB Non-Tariff Barriers BHEL Bharat Heavy Electronics Limited NTPC National Thermal Power Corporation BIFR Board for Industrial and Financial O&M Overheads and Maintenance Reconstruction OCC Oil Coordination Committee BOP Balance of Payments ONGC Oil and Natural Gas Commisssion BOT Build-Operate-Transfer PAC Public Accounts Committee BPCL Bharat Petrochemicals Limited PDS Public Distribution System CAG Comptroller and Auditor General PSE Public Sector Enterprise CD Certificate of Deposit QR Quantitative Restrictions CEO Chief Executive Officer RBI Reserve Bank of India CII Confederation of Indian Industry REER Real Effective Exchange Rate CIF Cost, Insurance and Freight RER Real Exchange Rate CPE Central Public Enterprise RIB Resurgent India Bond CPI Consumer Price Index SAIL Steel Authority of India Limited CPIAL Consumer Price Index for Agricultural SDR Special Drawing Rights Laborers SEB State Electricity Board CSO Central Statistical Organization SEBI Securities and Exchange Board of India CSS Centrally Sponsored Scheme SICA Sick Industrial Companies Act CVC Central Vigilance Commission SSI Small Scale Industry CVD Countervaling Duty TPDS Targeted Public Distribution System DOT Department of Telecommunications TRAI Telecom Regulatory Authority of India FDI Foreign Direct Investment UNCTAD United Nations Conference on Trade FII Foreign Institutional Investor and Development FIs Finance Institutions UNDP United Nations Development FOB Free on Board Programme FSU Former Soviet Union UPSEB Uttar Pradesh State Electricity Board GAIL Gas Authority of India Limited UTI Unit Trust of India GDP Gross Domestic Product VAT Value Added Tax GFCF Gross Fixed Capital Formation VDIS Voluntary Disclosure Income Scheme GNFS Goods and Non-factor Services VSNL Videsh Sanchar Nigam Limited GNP Gross National Product WMA Ways and Means Advances GOI Government of India WPI Wholesale Price Index HPCL Hindustan Petrochemicals Limited WTO World Trade Organization ICICI Industrial Credit and Investment Corporation of India IDBI Industrial Development Bank of India IFS International Financial Statistics IMF Intemational Monetary Fund IOC Indian Oil Corporation IPCL Indian Petrochemicals Limited IPP Independent Power Producers JNCP Jawaharlal Nehru Container Port JNPT Jawaharlal Nehru Port Trust KWh Kilowatt Hour MOF Ministry of Finance MTNL Mahanagar Telephone Nigam Limited MW Megawatt NAS National Accounts Statistics NBFCs Non Banking Financial Companies NCAER National Council of Applied Economic Research NFHS National Family Health Survey NGOs Non Government Organizations NIPFP National Institute of Public Finance and Policy NPA Non-Performing Assets NR (NR)D Non-Resident (Non Repatriable) Deposits NSSO National Sample Survey Organization 1x ECONOMIC DEVELOPMENT DATA GNP Per Capita (US$, 1998-99): 430' Gross Domestic Product US$ Bin GDP Annual Growth Rate (% p.a., constant prices) 1998-99 70-71- 75-76- 80-81- 85-86- 91-92- 1997-98 75-76 80-81 85-86 90-91 98-99 1998-99 GDP at Factor Cost 392 91.6 3.0 3.1 5.0 6.3 6.5 6.0 GDP at Market Prices 428 100.0 2.9 3.1 5.4 6.3 6.4 5.0 Gross Domestic Investment 102 23.8 4.6 3.1 7.0 7.4 8.5 7.7 Gross Domestic Saving 92 21.5 7.3 -0.1 10.1 7.1 4.8 8.9 Current Account Balance -3 -0.7 -- -- -- -- -- - Output, Employment and Productivity (1990-91) Value Added Labor Forceb V. A. per Worker US$ Bln. %of Tot Mill.%ofTot. US$ %ofAvg. Agriculture 89 30.8 186 66.8 480 46.1 Industry 79 27.1 36 12.7 2215 212.8 Services 122 42.1 57 20.5 2139 205.5 Total/ Average 290 100.0 279 100.0 1041 100.0 Government Finance General Government Central Government Rs. Bin. % of GDP Rs. BIn. % of GDP 98-99 T8-99 91-92-9-99 98-99 98-99 91-92-98-99 Revenue Receipts 3080 17.1 17.6 1577 8.7 9.0 Revenue Expenditures 3907 21.6 21.3 2181 12.1 1L.9 Revenue Surplus/ Deficit (-) -828 -4.6 -3.7 -605 -3.4 -2.8 Capital Expenditures 616 3.4 3.6 523 2.9 2.9 Extemal Assistance (net) d 23 0.1 0.4 9 0.1 0.4 Money, Credit, and Prices 92/93 93/94 94/95 95/96 96/97 97/98 98/99 (Rs. billion outstanding, end of period) Money and Quasi Money 3668 4344 5314 6040 7018 8272 9743 Bank Credit to Government(net) 1762 2039 2224 2578 2886 3306 3867 Bank Credit to Commercial Sector 2201 2378 2927 3446 3763 4327 4869 (percentage or index numbers) Money and Quasi Money as % of GDP 48.0 49.5 51.2 49.6 49.8 52.9 54.0 Wholesale Price Index (1981-82 = 100) 228.7 247.8 274.7 295.8 314.6 329.8 6.9 Annual Percentage Changes in: Wholesale Price Index 10.1 8.4 10.9 7.7 6.4 4.8 -97.9 BankCredittoGovemment(net) 11.4 15.7 9.1 15.9 12.0 14.5 17.0 Bank Credit to Commercial Sector 17.1 8.0 23.1 17.7 9.2 15.0 12.5 a. The per capita GNP estirnate is at market prices, using World Bank Atlas methodology. Other conversions to dollars in this table are at the prevailing average exchange rate for the period covered. b. Total Labor Force from 1991 Census. Excludes data for Assam and Jammu & Kashmir. c. Budget Estimates and Transfers between Centre and States have been netted out d. As recorded in the govemrnent budget x Balance of Payments (USS Millions) Merchandise Exports (Average 1991-92-1998-99) 1996-97 1997-99 t99S-99 USS lMiU % of'Tot. Exports of Goods & NFS 41,607 45,109 47,484 Tea 397 1.5 Merchandise, fob 34,133 35,680 34,298 Iron Ore 459 1.7 Imports ofGoods & NFS 55,696 59,297 58,565 Chemicals 2,174 8.0 Merchandise, cif 49,948 51,187 47,544 Leather&Leathexproducts 1,506 5.6 of wbich Crude Petroleum 5,222 4,278 3,350 Textiles 3,455 12.8 of which Petroleum Products 4,814 3,939 3,084 Garments 3,278 12.1 Trade Balance -14,815 -15,507 -13,246 Gems and Jewelry 4,450 16.5 Non Factor Service (net) 726 1,319 2,165 Engineering Goods 3,487 12.9 Others 7,808 28.9 Resource Balance -14,089 -14,188 -11,081 Total 27,013 100.0 Net factor Income' -3,307 -3,521 -3,544 External Debt, March 31, 1999 NetTransfers5 12,367 11,830 10,280 US$ Mill. Balance on Current Account -5,029 -5,879 -4,345 Public & Publicly Guaranteed 85,208 Private Non-Guaranteed 8,409 Foreign lnvestment 6,133 5,385 2,401 Total (including IMF and Short Term) 98,231 Official Grants and Aid 410 379 307 Net Medium & Long Term Capital 3,230 4,139 4,380 Debt Service Ratio for 1998-99 Gross Disbursements 10,627 10,256 9,952 Principal Repayments 7,397 6,117 5,572 % currTeceipts Public & Publicly Guaranteed 21.0 Other Capital Flows' -1,892 -940 -159 Private Non-Guaranteed 1.9 Non-Resident Deposits 3,350 1,125 1,742 Total (Including IMF and Short Term) 24.0 Net Transactions with IMF -975 -613 -393 IBRD/ IDA Lending, Mar 31, 1999 (US$ M) Overall Balance 6,202 4,209 4,326 IBRD IDA Change in Net Reserves -5,227 -3,596 -3,933 Outstanding and Disbursed 8,114 18,562 Gross Reserves (end of year)d 22,664 26,260 30,193 Undisbursed 3,512 4,463 Outstanding incl. Undisb. 11,626 23,024 Rate of Exchange End-Oct 1999 USS 1.00 = Rs. 43.454 a. Figures given cover all investment income (net). Major payments are interest on foreign loans and charges paid to IMF, and major receiptas is interest eamed on foreign assets. b. Figures given include workers' remittances but exclude official grant assistance which is included within official loans and grants, and non-resident deposits which are shown separately. c. Includes short-term net capital inflow, changes in reserve valuation and other itenss. d. Excluding gold. f. Total exports (commerce); net of crude petroleum exports. Sources: Union Budget Documents; RBI State Finances Reports; RBI Annual Reports; DGCI&S; World Bank Estimates. xi India Social Indicators Same region/income group Latest single year (1992-97, latest single year) South Low- 1970-75 198045 1992-97 Asia income POPULATION Total population, mid-year (millions) 613.5 765.1 962.4 1,281.3 2,035.6 Growth rate (% annual average) 2.3 2.1 1.4 1.5 1.7 Urban population (% of population) 21.3 24.3 27.4 27.0 28.4 Total ferti(ity rate (births per woman) 5.6 4.8 3.3 3.5 4.0 POVERTY (% of population) National headcount index .. .. 35.0 Urban headcount index .. .. 30.5 Rural headcount index .. .. 36.7 INCOME GNP per capita (US$) 160 260 430 Consumerpnceindex(1995=100) 21 41 117 117 122 Food price index (1995=100) .. 38 115 INCOMEICONSUMPTION DISTRIBUTION Gini index .. .. 29.7 Lowest quintile (% of income or consumption) 5.9 .. 9.2 Highest quintile (% of income or consumption) 49.4 .. 39.3 SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 0.7 0.8 1.0 Education (% of GNP) 2.7 3.5 3.4 3.0 Social security and welfare (% of GDP) .. Gross primary school enrollment rate (% of age group) Total 79 96 101 Male 94 111 110 Female 62 80 90 Access to safe water (% of population) Total 31 54 85 81 69 Urban 80 80 87 84 80 Rural 18 47 85 80 66 Immunization rate (% under 12 months) Measles .. 1 81 81 74 OPT .. 41 90 87 76 Child malnutrition (% under 5 years) .. .. 53 53 Life expectancy at birth (years) Total 50 55 63 62 59 Male 51 56 62 62 58 Female 49 55 64 63 60 Mortality Infant (per thousand live births) 132 97 71 77 82 Under 5 (per thousand live births) 206 177 88 100 118 Adult (15-59) Male (per 1,000 population) 324 261 212 219 274 Female (per 1,000 population) 353 279 202 212 255 Maternal (per 100,000 live births) .. 460 440 1999 Wodd Development Indicators CD-ROM, World Bank EXECUTIVE SUMMARY This Report is a pilot in the World Bank's new approach to country economic reports, embodying the Bank's Comprehensive Development Framework. Experience worldwide indicates that poverty reduction and sustainable development require sound macroeconomic policies, open trade relations, and increases in human and physical capital. But sustained development also requires a comprehensive framework that includes 1) good governance; 2) sound legal, incentive, and regulatory frameworks that protect property rights, enforce contracts and stimulate competitive markets, 3) a sound financial sector, adequately regulated and supervised with a basis in internationally accepted accounting and auditing standards; 4) health, education and social services that reach the poor, women and girls effectively; 5) quality infrastructure and public services to promote rural development and livable cities; and 6) policies to promote environmental and human sustainability (J. D. Wolfensohn, Address to the 1998 World Bank-IMF Annual Meetings). The World Bank's new approach to economic reports provides a medium-term perspective on these elements and on the economy's potential vulnerabilities, including those in the short-run. Given the framework's breadth, this Report's coverage is limited to the most important issues. In other areas, it points out directions for further analysis. The Report begins with a chapter on reducing poverty - the yardstick against which development is measured and the World Bank's principal concern. It is followed by a chapter on human development, which is both an indicator of poverty reduction and a way out of poverty. Chapter 3 focuses on the Indian states, which are key actors in human development and infrastructure provision, as well as in regulation and governance. Chapter 4 deals with governance issues, a major concern of the World Bank because of its links to poverty reduction and development. The next three chapters deal with ways to increase growth and its poverty reducing content through improvements in a) infrastructure; b) the incentive and regulatory framework to encourage efficiency and labor demand - a key element in poverty reduction; and c) the financial system and corporate governance. Chapter 8 deals with recent developments, the sustainability of growth and ways to reduce vulnerability to macroeconomic crises that hurt the poor. Finally, Chapter 9 provides a brief forecast of India's prospects and summarizes policies that would accelerate poverty reduction and sustained development. The Report's discussion of agriculture (in Chapter 6) - a sector critical for poverty reduction that is still of major importance for the economy - summarizes the extensive analysis in the World Bank report India: Towards Rural Development and Poverty Reduction. The unifying theme for this Report is thus accelerating poverty reduction and sustained development. Progress and Problems in Poverty Reduction Steady Progress since Independence. India is an ancient civilization with a proud history. It is one of the world's largest and most heterogeneous countries. Prior to Independence, India suffered from frequent, devastating famines and secular stagnation. Hence, poverty reduction and agriculture were central themes of India's founding fathers. Uplifting the poor and integrating them into the mainstream is a recurrent theme of India's Five Year Plans. Universal access to education is enshrined in the Constitution. India has established a wide array of anti-poverty programs and much of India's thinking on poverty has been mainstreamed internationally. India has successfully eliminated famines and severe epidemics. It has made progress in reducing poverty and in its social indicators, which at the time of Independence in 1947 were among the world's worst. Its vibrant democracy and free press have been major factors in these achievements. Poverty incidence began to decline steadily in the mid-I 970s, which roughly coincided with a rise in growth in GDP and agriculture. Since 1980, India's 5.8% p.a. trend GDP growth is the highest among xiv large countries outside East Asia. Empirical analyses suggest that agricultural growth and human development were key factors in the decline in poverty across states (Chapter 1). However, the development strategy of the 1970s and 1980s, based on an extensive system of protection, regulation, and public sector presence in the economy, and on worsening fiscal deficits in the 1980s, proved unsustainable. Quick Recovery from 1991 Crisis. The 1991 balance of payments and fiscal crisis was met by stabilization and reforms that opened-up the economy, reduced the public sector's role, and liberalized and strengthened the financial sector over the next few years. The policies generated a surprisingly quick recovery and then an unprecedented three consecutive years of 7.7% p.a. average growth, led by increases in productivity at the macroeconomic level and a booming private sector. The 3.3% p.a. agricultural growth during the 1990s has been about the same as in the 1980s and much higher than the declining rate of population growth, currently estimated at about 1.6% p.a. (Chapter 8). Improvement in social indicators, including gender related indicators, has continued in the 1990s. For example, literacy rates continue to rise and infant mortality rates continue to fall. Life expectancy at birth has increased, as have school enrollments. Gaps between male and female access to social services are diminishing. Sluggish Poverty Reduction in Recent Years. Despite the improvements in human development and the higher GDP growth in the mid-1990s, India's household sample surveys suggest that poverty reduction has been sluggish recently. In the early 1990s, poverty worsened following the stabilization (correction) of the unsustainable policies of the 1980s, a poor harvest and a decline in food availability (Tendulkar). Soon, poverty began to fall again and by 1993-94 was somewhat below the 1987 level. However, from 1993-94 until 1997 (the last available survey), improvement has been limited in the rural areas which contain over 70% of the poor. Moreover, analysis suggests that the large poor states in the north and east, containing 40% of India's population, have lagged in reducing poverty since the late 1970s (Chapters 1 and 3). The estimated slowdown in the overall reduction of poverty may merely reflect one of India's many statistical inconsistencies - the estimates of consumption and foodgrains consumption in the national accounts suggest much faster consumption growth than the sample surveys, while the surveys suggest little worsening of distribution. The need to improve the consistency and quality of these and other statistics, in order to provide a firmer basis for policy-making, is a major recommendation of this Report. Despite Achievements, Significant Challenges Ahead. More worrisome is the possibility that growth became less potent in reducing poverty in the 1990s. Further work is needed on this complex issue. Nonetheless, the characteristics of agricultural growth in the 1990s; the slowdown of growth in the poor states; and the problems of infrastructure, social services and poverty programs, especially in the poorer states which are linked to their increasing fiscal problems, poor incentive frameworks and weaknesses in governance and institutions, are all problems that may explain the lack of progress in reducing rural poverty (Chapters 1, 2, 3 and 8. Note that statements made regarding individual states or the states' GDP as a group refer to the old (1980-81 based) GDP accounts; once they are rebased, like national GDP, to the new (1993-94 based) accounts, the growth rates of states could be different from what the old accounts show, since the new GDP accounts include a much higher estimate of national agricultural output.). Agriculture's average growth has remained roughly constant since 1980 according to the new series of GDP. However, productivity growth in the sector seems to be slowing, even in the Punjab and Haryana, where some analysts suggest that environmental issues are a concern. Further, agricultural growth in some of the poorer states seems to have lagged. Public spending on agriculture has focused on subsidies, which lead to inefficiencies and environmental problems and at xv best have limited impact on poverty. The implicit and explicit subsidies have crowded-out public investment and social spending in Governments' budgets and substantially worsened the fiscal problems of states. While private investment in agriculture has increased, to some extent this reflects inefficiencies and distortions that are partly related to the subsidies, such as the purchase of pumps to reach deep aquifers and generator sets to run them when free, low quality power fails. Moreover, the limited growth in agricultural productivity may also reflect the limited deregulation, which has left many distortions in the sector. For example, the restrictions on domestic and international agricultural trade contribute to occasional, sharp transitory increases in prices, which hurt the poor (Chapters 3, 6, and 8). The poorer states have lower GDP growth, not just weak agricultural growth. Partly, of course, this reflects their structure - agriculture is a large percentage of their GDP. However, the poor states' lower growth also reflects differences in initial conditions and state-level policies. The poorer states' problems in infrastructure, human development, and, in some cases, governance, have limited their ability to take full advantage of the post-1991 reforms. Moreover, catching-up is a problem because of their increasingly severe fiscal problems - in the late 1980s the states began unsustainable increases in spending and large untargeted subsidies (explicit and implicit) that have never been adjusted, which has led to a large, costly debt build-up. Indian states are constitutionally prevented from external borrowing and limited in their domestic borrowing by the Central Government. Nonetheless, several states, including some of the poorest, now face unsustainable debt service obligations, mainly to the Central Government, which in turn had borrowed to fund these loans. Infrastructure and social spending have slowed in most states as a consequence of the high debt service particularly in the highly indebted and poorer states. The states' problems have worsened in the last two years, with the cascading down of the excessive central public sector wage settlement of 1997. (Chapters 2 and 3). Institutional weaknesses and governance issues exacerbate the lack of funds (Chapters 2 and 4). For example, not only are teacher-pupil ratios very low, teachers' absenteeism is common. Numbers working in employment programs or attending school appear to be much less in surveys than in official statistics - for example, in 1995-96, the NSS showed gross attendance ratios of 85% versus the Department of Education's gross enrolment ratio of 104%. Large fractions of the poverty funds go to administrative costs or are diverted, leaving less for the poor. For example, a study in UP suggests that under the new, targeted public distribution system much of the grain that reached the public distribution centers went to the poor, but that there was a 40% shortfall between off-take and what reached the distribution centers. (Kriesel and Zaidi). Thus despite its many achievements, India faces significant challenges and needs to take some difficult political decisions to realize its potential. Concerted policy action is needed to lift the more than 300 million poor, 34% of the population and increasingly concentrated in the poorer states, out of poverty. Better and more education and health spending is needed to provide better access for the poor, females, and other disadvantaged groups and improve basic services across the board. For example, major challenges in reducing poverty and getting India's population ready for the demands of the 21' century, are raising the literacy rate from the current 62% (50% for females); enrolling the over 30 million children, mostly poor, who are out of school; and increasing the overall average years of quality schooling. In addition, inequalities faced by women in participating fully in the political, legal and economic systems need to be addressed. The decline in infrastructure spending needs to be reversed, to increase the rate and spread of growth and to meet urban needs that will rise as the 73% of the population that still live in rural areas shift to the cities. Improvements at the state-level, particularly improved service delivery in the poorest states, will be critical in meeting these challenges. At the national level, implementation of the often discussed second phase of reforms, to complete the xvi external and internal deregulation of goods and factor markets, will speed the growth of better paying jobs. The East Asian countries, despite the recent crisis, still have a much lower poverty incidence and better social indicators than India. For example, Indonesia, which in the mid-1960s had a similar per capita income to India and which was the hardest hit by the East Asian crisis, has a literacy rate of 80% and less than 20% of its population were below the poverty line in 1998 (World Bank 1999a). Moreover, except for Indonesia, the crisis countries are rebounding surprisingly rapidly, reflecting their strong underlying base of infrastructure and human development. Potential Problems in Accelerating Poverty Reduction, Sustaining Growth. The East Asian experience of the 1970s and 1980s, and the differential experience of India's states, suggest that India needs to get back to a higher growth path, which is also more effective at reducing poverty through improved public spending and a strengthening of incentives, institutions and governance, particularly in the poorer states. To make a significant dent in poverty, growth needs to be at least maintained in India's high growth states and increased significantly in the poorer states. India's Future Growth and Poverty Reduction. India's growth of 6% in 1998-99 was one of world's best. However, it mainly reflected good harvests; all major non-agricultural sectors grew less than in 1997-98 when overall GDP growth was 5%. The reversion back to the average post-1980 growth trend during the last two years may partly reflect a sluggishness related to the shake-out of excess capacity and partly the slowing world economy. However, another important factor in slowing growth is probably the slowing of reforms, along with a worsening of the fiscal deficit and rises in tariffs - reforms that had earlier contributed to higher productivity, a higher share of world trade, and rapid growth (Chapters 6 and 8 and Annex 8.1). Also, the delivery of social services and anti-poverty programs, necessary to include India's poor in the growth process and largely a state function, would have benefited not only from higher funding but improved institutions and governance. Indeed these and other issues raised above raise concerns about maintaining even the current pace of development. Current rates of investment have supported GDP growth 5-6% p.a. in the last two years, but can continue to do so provided the productivity of resources continues to increase in the macroeconomic sense. However, the deterioration of infrastructure (Chapter 5); the slower pace of reforms (Chapters 6, 8) and the resulting uncertainty for investors; the lack of agricultural deregulation (Chapter 6); the still-low indicators of human development; and the governance and institutional issues, particularly in the social sectors (Chapters 2, 4), all pose potential problems for the growth of productivity in an economy-wide sense. Large Central and State Deficits, related to Large Explicit and Implicit Subsidies. Another major issue for sustained development is the large General Government (consolidated Central and State) deficit. India's fiscal deficit has been among the world's largest and in 1998-99 it deteriorated by roughly 2% of GDP. The consolidated public sector deficit of 9.6% of GDP in 1998-99 was not much lower than the peak of 10.9% registered in the crisis year of 1990-91. The Center's deficit deteriorated by 0.8% of GDP to 6.5% of GDP in 1998-99 (including net loans to the states) and was far higher than the 5.3% budgeted figure (all figures exclude disinvestment revenues). The current (revenue) deficit increased to 4% of GDP, the highest in the decade, meaning India is increasingly borrowing to finance current expenditure. Meanwhile, the states' combined deficit rose to 4.2% of GDP, the worst deficit ever of the states. (Chapter 8). Reflecting the recent fiscal deterioration, the ratio of Central Government debt to GDP, which fell in the mid-1990s, has now risen to about 60% of GDP, and has led to comment from the RBI (Report on Currency and Finance 1998-99, pp. V-12 to V-17). The large and rising fiscal deficit and the large public sector debt (mostly internal) raises investors' concerns xvii about macroeconomic instability and inflation (which would hurt the poor), and crowds-out private credit in the banking system. The 1999-2000 Union Budget projected a cut in the central deficit of 0.9% of GDP. Achieving this target depends on a substantial rise in tax revenue, and containing revenue expenditure growth to only 9%. Preliminary data from the first seven months of 1999-2000 suggest taxes are growing slower than projected and expenditure faster, partly because of support for and lending to the states to finance their high deficits. The Union Budget also changed the accounting treatment of the growing small saving funding of the states deficit from a Central Government loan to an item in the "National Small Savings Fund" in the Center's Public Accounts. This accounting change reduces the Center's deficit figures by about 1.3% of GDP but leaves the (consolidated) General Government fiscal deficit unchanged. It will be important to pay close attention to the policy on small savings, as the Center sets the rates and implicitly guarantees the deposits. A positive fiscal development was the sharp upward adjustment of domestic diesel prices in October 1999, an attempt to correct for the potential deficit in the oil pool; it also maintained the liberalization of the sector. The states' and the Public Enterprises' deficits are likely to suffer continued pressure from the cascading effect of the excessive central wage settlement of 1997 on wages and pensions. As noted, the interest costs of the debt have increasingly crowded-out infrastructure, maintenance, and social spending in central and state budgets. Implicit and explicit subsidies at the Center and, especially, the state levels are a major factor in the deficit. The Ministry of Finance estimated these subsidies at over 14% of GDP in 1994-95. In addition to increasing the deficit, they are distortionary, non-transparent, and at best have uncertain equity consequences, at worst they are anti-equity. While the states are directly responsible for many of the subsidies, the Center's funding of the states supports them indirectly. Another structural factor in the deficit is the tax system, with central taxes declining by over 1.5% of GDP over 1991-98. The growing services sector is inadequately taxed and agriculture, part of the state tax base, remains outside the system. The tax base has been widened recently, but nonetheless remains fairly narrow, with under 15 million tax payers. As various experts have noted, the approach to sharing of taxation revenues, the lack of a full fledged VAT (including services), and the failure of the states to tax agriculture have complicated fiscal decentralization and generated tax-based inefficiencies (Chapters 3 and 4). Expenditure management and efficiency could be improved, as recognized in the last two finance ministers' calls for an Expenditure Reforms Commission. The civil service is large. Many public enterprises continue to operate at low efficiency in areas where the private sector could function more effectively and generate more taxable revenues. Comfortable BOP but Domestic Policies Continue to Constrain Competitiveness. In contrast to the fiscal situation, India's balance of payments (BOP) remains comfortable. In 1998-99, the balance of payments strengthened substantially, with the current account deficit improving to 1% of GDP. This improvement reflected the low oil prices that prevailed for much of the year and a $4 billion drop in non-customs imports that reduced imports by over 7%. However exports also declined, by 4% in dollar terms, reflecting not only weak markets but a loss of share of world markets for the second consecutive year. Regarding the capital account, the Resurgent India Bond raised $4.2 billion despite the turmoil in international markets. However, foreign direct investment declined and portfolio flows turned negative. The net impact of these developments was a rise of about $3.9 billion in international reserves (including SDRs and IMF reserves but not gold), to a comfortable end-fiscal year level of $30.2 billion (7.6 months of imports, and comfortably larger than potential short term claims). The projection for 1999-2000 is a slight widening of the current account deficit, to 1.4% of GDP, reflecting continued high oil prices. On the capital account, increases in portfolio investment (despite the continued low levels of private capital flows worldwide) and "other" capital inflows which appear strong thus far in 1999, will offset a decline in net long-term borrowings after the one-time Resurgent xviii India Bond issue in 1998-99. These inflows will finance much of the larger deficit and permit some increase in reserves, although the reserve cover is likely to decline marginally to 7.2 months of imports (Chapters 8 and 9). The external debt situation remains comfortable, and the external debt to GDP ratio as well as the debt to current receipts ratio have fallen steadily since 1992-93. A large proportion of external debt is to multilateral and bilateral lenders and/or is long-term. Careful monitoring by the Government and changes in the underlying economic factors have led to a substantial fall in short-term debt, from over $8.5 billion (10% of external debt) in 1991 to an estimated $4.3 billion (4.4%) in March 1999. The fundamentals of India's slow export growth lie in the lack of further tariff reform, high infrastructure and transactions costs, and continued domestic regulations such as small-scale sector reservation and labor laws that reduce India's comparative advantage in labor intensive products and, consequently, the demand for labor. As a result, India may find it difficult to take advantage of the next upsurge in world trade and the international agreement to phase out textile and garment quotas by 2005, and is not well-prepared for greater competition that will arise from the elimination of remaining quantitative restrictions on imports no later than April 2001 (of which half, mainly the special import license restrictions, are due to go by April 2000). Indeed, India already faces growing competition from a recovering East Asia. A bright spot in the current account is the rapid growth of computer service exports, which do not suffer from the anti-export biases mentioned above, but even they may be hurt if telecom infrastructure lags. Financial System Remains a Concern. The public sector-dominated financial system is another major issue impinging on sustained growth and, indirectly, poverty reduction. The financial sector mobilizes substantial resources but still invests a large part of them in the government debt, in the case of banks about 40% of deposits. This pattern of asset holding by the financial sector does reduce India's susceptibility to financial crises but it also reduces credit availability to the private sector. From a macro-economic standpoint, these large holdings levels of debt are simply the reflection of the long history of high fiscal deficits and the need for someone to hold the resulting debt; funds can be made available to the private sector at reasonable cost only as the public debt declines relative to GDP. A second factor raising the cost of private sector credit is non-performing assets. Non-performing assets are a low fraction of total bank assets (3% net of provisions) or GDP (under 2%), but are large relative to lending to the private sector (or to bank capital). The large NPAs in turn require large provisions, another factor pushing up real lending rates. Regulation and supervision have improved substantially since the 1980s and are largely up to international standards, but they remain well below the steady evolution of international best practices. The payments system continues to lag international standards, according to participants in the sector. The capital markets are deep for a low- income country and improvements have been made - notably the set up of the electronic National Stock Exchange and the creation of a depository that has reduced transactions costs by dematerializing an increasing number of shares. Nonetheless, transparency needs improvement, notably in the activities of the dominant Unit Trust of India and in settlements, to help avoid payments crises such as hit the Bombay Stock Exchange in June 1998. More fundamentally, accounting, auditing, and corporate governance also could benefit from improvement to make India a more attractive to domestic and foreign investors (Chapter 7). Legal and Environmental Issues. Enforcement of property rights and contracts are increasingly identified by analysts as critical institutional elements in development. Clarity and security of property and land rights and timely recourse to an efficient legal system are important not only to investors but to sustainable increases in living standards for the poor. Surveys indicate a respect for India's adherence to the rule of law and the independence and quality of the judiciary. However, the appellation "justice delayed is justice denied" is a critical concern, particularly for the poor. The xix enornous case backlog and the legal processes can delay decisions 10-20 years. These delays add to the problems of the poor in obtaining protection from the legal system. All these problems, as well as the bankruptcy and liquidation processes, raise credit costs, increase non-performing assets (Chapters 4 and 7), hinder good credit allocation and limit the ability of the poor to use their limited real assets effectively. Finally, the environmental dimension needs to be kept in mind. The Finance Ministry's 1998-99 Economic Survey farsightedly included a chapter on environment, which points out the disproportionate burden of environmental and resource degradation on the poor, a concern which this Report shares. As noted above, environmental degradation and unsustainable usage of resources, encouraged by subsidies and unclear property rights, may be a factor in slowing agricultural growth in some states and a limitation on improvements in the quality of life generally. Often the poor suffer from the environmental problems associated with unclear allocation of property rights to clean air, water, etc. The human sustainability of the cities is threatened by water and air pollution, which partly reflects distortionary pricing and partly lack of funding for public infrastructure (Chapter 8 and Annex 8.2). A Second Wave of Reforms to Reduce Poverty Faster All recent Governments have discussed the need for a second wave of reforms to launch India onto a higher growth path that reduces poverty faster. However, as noted, reforms have slowed, creating some uncertainty among investors. Many excellent suggestions for reformn are contained in such reports as the Hussain Committee on Small-scale Sector Reservation, the Rakesh Mohan Committee on Infrastructure, the Tenth Finance Commission on intergovernmental finances, the Fifth Pay Commission on downsizing the civil service, the Tarapore Committee on the capital account and its implications for the macroeconomic framework, the Narasimham Committees on the financial sector, the Disinvestment Commission reports, recent Economic Surveys, RBI Annual Reports, and the 1999 Export-Import Policy. In addition to these contributions, the comprehensive framework outlined above may provide some assistance. While a basic consensus on the need for the Second Wave of Reforms has emerged, for example in the programs of the two major political parties, it needs to be translated into substantive action. Broadly speaking the reforms would be most effective to the extent they reduce the risk of macroeconomic instability, increase the access of the poor to human development, improve governance and reduce distortions and improve the demand for labor. Poorer states in particular will need to enact these refonns to overcome the initial lags and accelerate development. Perhaps the most effective, cross-cutting reform would be cuts in the explicit and implicit subsidies together with privatization in power and irrigation to raise the current low collections of user charges (that represents a major part of the implicit subsidies). Cutting the subsidies would cut the fiscal deficit and thereby reduce risks of macroeconomic instability and the crowding-out of private borrowers; it would free up public funds for social and infrastructure spending to help the poor and speed growth; it would encourage private sector interest in infrastructure; it would reduce distortions and environmental degradation; and it would probably improve equity (Box 5.2 and Chapter 8). In the petroleum sector, the link that was established between domestic and international prices with the September 1997 liberalization has been an important factor in cutting subsidies, and needs to be sustained. Another policy to reduce subsidies that could be enhanced further is the increasing use of cesses on fuels to fund road infrastructure. Obviously, state governments will play a major part in cutting power and irrigation subsidies. There have been welcome movements toward reform in some states, including some of the poorer states such as Andhra Pradesh, Haryana, Orissa and UP. However, state governments are not always prepared to embark on the reform path. In this context, xx increasing emphasis on states' performance in Central Government transfers, increasing the proportion that states borrow directly from markets, and without central guarantees (and reducing State borrowings from the Center), and limiting the states' ability to ease their hard budget constraint, such as reducing access to high cost small-savings and limiting guarantees, would provide important incentives for reform. A welcome development along these lines is the recent use of Memorandums of Understanding to encourage fiscal discipline between the Ministry of Finance and states that receive extraordinary financing to ease the impact of the recent hefty pay revision. And, issues of links between Center-State finance and state performance appropriately form part of the Eleventh Finance Commission's terms of reference. Realigning Central and State Governments to focus on core public activities would have high social payoffs. Basic education and health and infrastructure need better and more public spending to reduce poverty and speed growth. Withdrawal of Government from non-core activities through faster privatization (not just sales of minority shares) in manufacturing and service sectors, e.g. airlines and hotels, and increased private sector participation in infrastructure, would permit a downsizing, upgrading and focusing of Government and the civil service on truly public sector activities. It would also increase the current low returns on capital invested in these areas and raise taxable revenues. It also is worth noting that the current lack of attention and investment in these sectors is reducing their salability. The improvements in the budgets from reduced explicit and implicit subsidies and higher taxes from the formerly public enterprises would permit much needed increases in spending on infrastructure and basic human development at the Center and state level. At the state-level, the states mentioned above are embarking on much needed realignments of Government in varying degrees and sectors. Better and more spending on health and education. Faster poverty reduction cannot be accomplished without improving the delivery of health and education services. This will involve more effective spending on elementary education and basic health systems, with better targeting on improving the quality and quantity of services to the poor and with more public funding to address the unfinished agenda. The effectiveness of public education and health services in poverty reduction can be improved by focussing on meeting consumer needs and the holistic needs of children, realigning the role of the state toward primary education and health, and making efforts to encourage improvements in and better use of private education and health services. Governance could be improved in a variety of ways. In the public sector, tax structure and collection, and expenditure management would benefit from improvement. Effective decentralization - including improving of state and local institutional capacity and greater "voice", a more efficient sharing of the tax base across different levels of government, and closer links of costs, revenues and service delivery - would improve governance, outcomes and inclusion of the poor (Chapter 4). This is particularly the case in primary health and education delivery that impacts heavily on the opportunities for the poor to escape poverty. In this regard, it is worth noting that India's decentralization to the third tier of rural and urban local bodies already has a firm legal basis in the 73rd and 74t1h Constitutional Amendments (1992). Effective decentralization and greater deregulation would help to reduce corruption, a mounting concern of Central and state governments, as would improving public administration and procedures, incentives and disincentives, and accountability (Chapter 6). The legal system would benefit from a reduction in delays and disincentives to frivolous litigation and appeals, which would make legal remedies more accessible to the poor and help reduce the non-performning assets that burden the financial system and drive up borrowing costs. The state governments also need to enforce property rights and law and order, to provide an attractive environment for investment. Completion of the deregulation of goods and factor markets, notably through deregulation of agriculture, articulation of a time-bound tariff-reduction program, completion of the WTO xxi commitments, and development of a less negotiated/more rules-based treatment of foreign direct investment, would stimulate poverty reduction through higher, more labor using growth. It would also help get India ready to take advantage of the pickup in the world economy and the increased competition, domestic and international that is developing. Further deregulation of labor markets and the small scale sector would increase the demand for labor (Chapter 6). In the financial system, India needs to speed up judicial resolution of cases and debt recovery and improve the bankruptcy and liquidation procedures. Accounting and auditing and financial system regulation and supervision, though much improved since the 1980s, need to move much closer to the steadily improving best international practices, especially as the financial system becomes more privatized and links increase with the international economy (Chapter 7). The RBI also needs to deal more rapidly with weak banks and prevent their non-performing assets from increasing. Lending to the private sector needs to improve, which will depend on a reduced fiscal deficit (to reduce crowding out) and better incentives to lend and collect, including privatization of banks. The payments system lags improvements elsewhere in the financial sector and would benefit from some quick improvements. Finally, more transparency , such as making the massive Unit Trust of India's activities more transparent, reducing settlement times in the capital market, and improving accounting, auditing and corporate governance, as laid out in the draft Companies Bill, 1998, would help reduce vulnerability and improve the allocation of scarce capital. (Chapter 7). Improved infrastructure provision, both public and private, would help accelerate growth. The currently inadequate provision of high quality, reliable, and reasonably priced infrastructure services represents a major barrier to continued growth of the economy and services to the poor, and to the diffusion of the benefits of liberalization. The development of infrastructure needs an effective delineation of responsibilities between the regulator and the policy-maker, and the creation of independent regulators within a broader restructuring of the sectors. In many sectors, privatization and greater reliance on competition could improve service delivery in many areas. Above all, infrastructure improvement will depend on the removal of the implicit and explicit subsidies and a move to remunerative user charges (Chapter 5). Circumstances Propitious for Reforms and Acceleration of Growth Events at the end of 1999 seem favorable to the initiation of the second wave of reforms. The Central Government that took office in October 1999 has already made progress by passing legislation to open up insurance (the Insurance Regulatory and Development Authority Bill), liberalizing foreign exchange regulation (the Foreign Exchange Management Bill), allowing trading in derivatives (the Securities Contract Regulation (Amendment) Bill), and protecting trade marks (the Trademarks Bill). The Government enjoys a more comfortable majority than the previous one which will permit it to move forward more easily on subsidy-cuts (as it demonstrated by implementing a 40% diesel price hike in October, in spite of pressures for rollback), government realignment, and reform. At the state- level, reforming governments received electoral support and non-reforming governments seem to have lost support. Some of the poorer and most indebted state governments - such as Uttar Pradesh - are embarking on a path of comprehensive reforms, similar to the economic restructuring launched by the Government of Andhra Pradesh (that was re-elected in October 1999). These reform efforts are aimed at (a) restructuring state-level expenditure and improving governance so as to maximize the outcomes achieved by public spending and private investments in the state; and (b) enhancing the revenue base through tax policy and administrative reforms and improved cost recovery from publicly provided non-merit goods and services. These developments suggest that the chances of real reform happening are much brighter than they have been in the past; if these do occur, then, as this Report suggests, growth could accelerate to the 7.5% and higher levels of the mid 1 990s. India would then have a real opportunity to reduce poverty substantially in the new millennium. xxii Issues for Further Analysis In several places in the Report, gaps in the knowledge base and in country experience have been identified as issues deserving further analysis and research. Work on these and related issues will be important to reducing poverty in India. Some of the issues are fundamental and involve cross-cutting work in various areas, and often these are the most important issues. These include: * improving the delivery of social services to the poor; * the links between growth, poverty reduction, and governance, especially at the state-level; * the nature, causes and cures of urban poverty; Other issues involve examination and comparison of policy options, based on experience within India and internationally. These include: * possible policy paths for deeper restructuring of government at all levels, to help "right-structure and, as necessary, right-size" the state in India; * decentralization experiences that will be most effective in improving the quality and effectiveness of the decentralization process in the Indian context (including studies of states' devolution of revenue and taxing powers to local governments to decentralize services); * possible paths to fiscal adjustment at the central and state level, taking into account the linkage between fiscal deficits, growth, and poverty reduction, and drawing on international experiences; * approaches to corporate restructuring, public and private, and the constraints imposed by the labor market, drawing on international experience; * possible paths to privatization of banks, while decreasing the vulnerability of the banking system through regulation and supervision that approaches best practices and improvements in accounting, auditing and corporate governance; * further ways to strengthen institutions and modalities for delivery and repayments of micro-credits and agricultural loans; * options before India in the next round of trade negotiations; * linkages between trade, growth, employment and education. Finally, as noted in various places in the Report, a key issue for policy-making is Improvement in the quality and consistency of various statistics. CHAPTER 1 POVERTY REDUCTION: PROGRESS AND CHALLENGES Reducing poverty and providi.g for minimum needs is the ultimate yardstick against wiich development should be judged. These goals have been major concerns of India's Governments since Independence in 1947. Experience suggests that reducing poverty requires coordinated macroeconomic and sectoral efforts and reforms. High rates of economic growth, especially in agriculture, have contributed to rapid decreases in poverty incidence in India and elsewhere. Enabling conditions also matter - good infrastructure, a well-educated and mobile labor force, effective institutions, and a stable political and social environment. Conversely, low levels of education and ill-health, exacerbated by social and structural barriers, reduce the opportunities for escaping poverty and improving the quality of life. Low incomes and inadequate safety nets leave persons vulnerable, particularly women and children. The importance of these factors explains Indian states 'differential success in reducing poverty. A. Overview 1.1 Since the mid-1970s, India's growth rate has risen, poverty has declined, and social indicators have improved - literacy and enrollments have risen, morbidity and mortality have declined, and the gender gap has narrowed. Despite this progress, India's poverty situation remains a serious concern: in 1993-94, every third person in India still lived in conditions of absolute poverty (Datt 1997), meaning India had 50% more poor than all of Sub-Saharan Africa. In the social sectors, India's indicators remain below comparator countries and even some African countries (See Annex Table 4.1). Moreover, recently released National Sample Survey data suggest that poverty has declined only marginally since the early 1990s, despite the period of high growth in the mid-1990s. 1.2 What factors are behind the slowdown in poverty reduction? This chapter looks at the evidence and some economic factors that may explain the slowdown; human development/social sector issues are discussed in the next chapter. Although much more research is needed on the slowdown in poverty reduction, some hypotheses have emerged. First, the slowing of poverty reduction may be partly a statistical artifact - the National Accounts suggest a faster growth of consumption and cereal availability than the household surveys. The differences between the surveys and the National Accounts suggest a need for better statistics, a theme that echoes throughout this report (See Box 8.1). A second and more worrisome possibility is that growth, including agricultural growth which was previously identified as a major factor in reducing poverty, has become less effective in reducing poverty in the 1 990s (World Bank 1 999b). Third, while some of the better-off states have exhibited rapid growth and reduced poverty, most of the poorer states have increasingly lagged. If these poor states were to grow faster, poverty would fall more quickly. Their lagging performance probably reflects not only lags in infrastructure and human development, but also these states' relatively weaker property rights and governance (Chapter 4 discusses governance issues in India). In addition, the poorer states' fiscal problems, related to distortionary and non-transparent subsidies, poor expenditure management, low (and declining) shares of spending on social and physical capital, and ineffective spending on basic services and anti-poverty programs certainly contributed to limiting these states' growth and poverty reduction (Chapter 3 focuses on differences in state growth and fiscal management). B. Poverty Reduction: The long view from the 1950s to the early 1990s 1.3 The Record. Since Independence, Indian governments have accorded great importance to poverty reduction. All the Five-Year Plans have had poverty reduction as a major goal. To measure its success in achieving this goal, the Government commissioned a series of household surveys on poverty, 2 beginning in 1951. These surveys provide an unparalleled record of a developing country's efforts to reduce poverty.! 1.4 India has reduced the percentage of population living in poverty since the 1970s, but progress has been uneven over time and across states and the number of poor has continued to rise, albeit at a slower rate. From the early 1950s to the mid-1970s, poverty rates fluctuated without a clear trend, as shown in Figure 1.12 (See also Annex Table 1.1 and Ravallion and Datt 1996a). In 1951-55, the average head count index of poverty was 53% , about the same as in 1970-74. Then, from 1973-74 to the mid-1980s, poverty incidence declined fairly steadily from its earlier range- from 54% in 1973-74 to 38% in 1986- 87, a decline of about 2% p.a. Poverty reduction slowed in the late 1980s, probably due to poor weather conditions and the downturn in agricultural production, but the public distribution system and anti- poverty programs kept poverty from rising as it had in such circumstances in the past. Poverty incidence dropped sharply in 1990, for reasons that are not altogether clear, and whatever contribution the macroeconomic situation made was clearly unsustainable. In 1991-92, a transitory worsening of poverty incidence occurred with the 1991 balance of payments crisis, decline in growth and stabilization measures. However, the increased poverty incidence was also related to other factors - poor harvests, limited agricultural imports, and large agriculture procurement in the following year that kept food prices high - and there may be statistical questions related to the small samples in those years3 and the price indices used to deflate the expenditure data (Tendulkar; Datt and Ravallion 1998; Dubey and Gangopadhyay). By 1993-94 the incidence of poverty had fallen to 35%. This was well below the 53% of the early 1970s, but only slightly below the 38% achieved in 1987-884 1.5 India also reduced the depth and severity of poverty even faster than the poverty rate (the headcount ratio).' Thus, the decline of poverty was not simply a process whereby a segment of the population which had previously been located just below the poverty line was able to lift itself above the line, while the remaining poor were left unaffected. Rather, the process through which poverty was being reduced also improved the consumption of those far below the poverty line. 1.6 Despite these successes, over 310 million people were living in poverty in 1993-94- 50% more than the poor in Sub-Saharan Africa. Moreover, some comparator countries seem to have been more successful than India in reducing poverty. For example, Indonesia reduced poverty from the 70% range 'Between 1951 and 1997, the National Sample Survey Organization (NSSO) has undertaken 38 national household surveys that have obtained reasonably comparable consumer expenditure infonmation. 2 The numbers discussed in the text and shown in Figure 1.1 refer to the so-called head count index; other poverty measures show similar pattems. India's official measure of poverty is a head count index based on the food-energy method. The poverty line is the monthly per capita expenditure in 1973-74 all-India prices of Rs. 49 in rural areas and Rs. 57 in urban areas, with people below this expenditure considered poor. These expenditures correspond to a total household expenditure estimated as sufficient to provide 2400 calories daily in rural areas and 2100 calories daily in urban areas, plus some basic non-food items. This Report, and other recent World Bank reports on poverty in India, use the poverty line as refined by the 1993 Planning Commission Expert Group on Estimation of the Proportion of the Poor, but use slightly different price indices. The resulting figures are slightly lower than the Expert Group's in 1993-94 (for a full discussion including issues in poverty measurement in India, see Annex I in World Bank 1997a and other works cited therein). 3 Some have suggested that the NSS figures are subject to error because of the limited size of the recent annual rounds. The NSS 51s', 52nd, and 53rd rounds sampled approximately 40,000 households for the consumption module of the survey. Experiments with questionnaire design reduced the comparable sample to an estimated 20,000 households at the all-India level, but some simulations show that this is estimated to give an acceptable confidence interval of only +/- I percentage point in the poverty estimate. The "quinquennial" surveys, most recently 1993-94 and 1987-88, are much larger, with about 115,000 households. 4Between the 1987-88 and 1993-94 surveys, urban poverty dropped 6 percentage points, while rural poverty declined only 2.5 percentage points. This compares to a typical drop in rural poverty of about 5 percentage points over quinquennial periods in the seventies and eighties (See World Bank 1997a). However, Dubey and Gangopadhyay, using a somewhat different poverty line and a price index adjusted to reflect the changing pattern of the poors' consumption basket, suggest that rural poverty dropped about as fast between 1987-88 and 1993-94 as between quinquennials in the 1970s and 1980s. 5 This is reflected in the improvement in the poverty gap and squared poverty gap index. 3 in the early 1970s to below 10% in the early 1990s; even after the East Asian crisis, Indonesia's poverty was still less than 20% (World Bank 1999a). Figure 1.1: Trends in Poverty, 1950s through mid 1990s 70 70 65 65 60 6 55 5 245-4 40-4 35 - Rural -- ----Urban Nabona J 35 30- - -30 25 , L25 ~~~~~~~~~~~-5 -5 25 -: 45 Z ,ES e75 75 4 5 75 75 7 75 -5 75 7 ° X°0a0:° 1.7 Poverty in India remains predominately rural: three out of every four poor persons live in rural areas. Changes in urban and rural poverty followed a similar path over most of the last twenty five years, wvith progress actually more rapid in rural India through the seventies and eighties. By 1990, urban and rural poverty rates had nearly converged; an unusual pattern compared to other South Asian countries. In the early 1990s, poverty rose faster in the rural than the urban areas, and then did not decline as rapidly. 1.8 A wide disparity in poverty across Indian states and their uneven progress in poverty reduction is a key feature of the evolution of poverty in India. In most cases, better-off states remained relatively affluent and reduced poverty, while poorer states remained poor and made less progress in poverty reduction, but there are also cases where poorer states made maj'or progress in poverty reduction and growth - see Figure 1.2, where the states are listed from left to right by the incidence of rural poverty in the early 1990s. In Kerala, for example, rural poverty declined at 2.4 % p.a. between the early 1970s and early 1 990s. Other states where poverty incidence fell substantially (as a percentage of the original level) include West Bengal, Andhra Pradesh, Orissa, and, to a lesser extent, Gujarat and Tamil Nadu. Notably poor performers include Bihar and Uttar Pradesh. The stronger performing states typically managed to reduce poverty at a rate of 1.5% to 2.0% p.a. Poor performners rarely averaged above 0.5% per annum. It should be noted that the states' poverty rankings vary with alternative indicators. However, Bihar, Madhya Pradesh, and Uttar Pradesh generally have among the highest rates of poverty whichever index is used; Kerala, Haryana and Punjab have the least (See Chapters 2 and 3, UNDP 1999; World Bank 1997a). It is also important to note that the sample sizes in some of the states are small, implying a large error of estimate in theiT figures. Finally, it is important to note that there exist large disparities in poverty within the states (Dreze and Srinivasan). 1.9 Factors in Reducing Poverty from the 1970s to the early 1990s. The historical evidence, across countries, in hIndia over time, and across Indian states suggests that the major factors in reducing poverty are a) faster growth, particularly agricultuTal growth that raises agricultural wages and tends to depress the (relative) price of food, b) lower inflation, c) infrastructure (See Chapter 5), and d) human 4 resource development, notably female literacy 6 (See Chapter 2). Most anti-poverty programs seem to have had little sustained impact on poverty reduction, though they certainly eased the impact of the 1987 drought. Rural to urban migration also seems to have played only a small role. (For further discussion of these issues see Datt 1997; Ravallion and Datt 1996a and 1996b; World Bank 1997a and 1998b and works cited therein.) Figure 1.2: Rural Poverty Levels by State 80.0 l 0.0 Regarding *Aheroleofgro,verage I990-94 uDeGline from Average 197i-7c > 60.0 -~50.0 I4 40.0 ~C 30.0- r 20.0- 10.0 0.0 c up from he 3.5% ate thatchaatrie h c outyioh eryyas dcomoiino h hne in poverty (in the Natona copeSre)it rwhcmonn o encnupin n cumulativedclin in povrt an hnenditiuinol13 (Dt197.Teposesdef iC_ d) '- -t C respectively, co coaivl evndsrbtooonoefradeeoigcuty - d ) C co CZ 1.10 Regarding the role of growth, India's sustained decline in poverty began as GDP growth picked up from the 3.5% rate that characterized the country in the early years. A decomposition of the changes in poverty (in the National Sample Survey) into a growth component (of mean consumption) and a distribution component shows that the rise in growth in mean consumption accounts for about 87% of the cumulative decline in poverty and changes in distribution only 13% (Datt 1997). The opposite side of the coin is that the Surveys suggest that inequality was not increased much by higher growth- according to the National Sample Surveys, the Gini coefficients of expenditure rose (worsened) by about 10% from 1974 to 1978 in both rural and urban areas, and since then have remained fairly close to 0.29 and 0.35 respectively, a relatively even distribution of income for a developing Country. 1.11 Different rates of agricultural growth and increases in rural wages were major factors which led to different levels as well as rates of decline of poverty across Indian states (Ravallion and Dart 1 996b). Green revolution technology, irrigation and infrastructure were associated with rising rural wages and increased rural non-farm employment, such as in Punjab and Haryana which had the highest GDP per capita up to the early 1990s (and continue to be among the top five states in 1996-97). Growth in the urbanized part of the economy was less significant in reducing poverty across states, reflecting the capital intensive, import-substituting nature of India's industrial development, its requirements for skilled rather than unskilled labor, and labor market regulations that limited the growth of fonnal sector employment (See Chapter 6). These factors limited the impact of urban growth on labor demand and kept the proportion of urban population relatively small (around 27%), so that its proportionate impact was low. The human resource approach to poverty reduction across hindian states is exemplified by Kerala, which expor-ted relatively skilled labor intemationally and benefited from remittances, even though its GDP 6 In statistical work, factors c and d are sometimes proxied by development spending. 7 Of course, there are the standard issues that a) the Gini coefficient is not a good measure of distribution and b) consumer surveys do not capture well the increases in consumption and income of the higher income population. 5 growth was not particularly rapid. A variety of intemational evidence supports the contribution of human development to poverty reduction. 1.12 Finally, inflation had a negative effect on poverty. Higher inflation in India is often associated with poor harvests and a relative rise in the price of food. The poor are doubly hit, as their consumption is largely food, and their wages (and demand for labor and income) rise less than prices in years of poor harvests. In addition, there is the traditional macroeconomic argument that the inflation tax hits the poor hardest because relatively more of their assets are held in the form of currency (See Chapter 8). International evidence supports the importance of a stable macroeconomic environment for growth and poverty reduction, for example in East Asia (World Bank 1993). C. Reduction in Poverty in the Mid-1990s: A Mixed Picture 1.13 In the mid- 1990s, the decline in poverty slowed sharply, particularly in rural areas, according to recently available National Sample Survey (NSS) data for the periods July 1994 to June 1995, July 1995 to June 1996 and January to December 1997 (See Figure 1.1 and Annex Table 1.1). An estimated 34% of the population was still below the poverty line in 1997 compared to 35% in 1993/94. During the mid- 1990s, GDP growth exceeded 7.5% p.a. and agricultural growth seems to have remained high (See Chapter 6), while social sector indicators such as literacy and infant mortality improved (See Chapter 2). 1.14 What changed in the mid-1990s to undermine the strong relationship found before the 1990s between poverty reduction, growth and social indicators? As discussed below, the lack of decline in poverty may well be a statistical artifact. However, a closer examination of recent developments also raises concerns regarding inflation, the changing role of agricultural growth, and, more fundamentally, a lack of progress in reducing poverty in the poor states. 1.15 Inconsistencies in Statistics raise questions about how much of the slower poverty reduction is a statistical artifact. The recent NSS surveys cover a much smaller number of households than the larger quinquennial surveys, the most recent of which was held in 1993-94, but are still large enough to be statistically accurate (See footnote 3). A more serious problem is the increasingly large discrepancy between the NSS and the National Accounts. The NSS shows not only that poverty did not decline much in the mid-1990s, but that mean per capita consumption, a key determinant of poverty reduction according to various analyses, did not rise very much. Thus, according to the NSS, poverty stagnated not because inequality increased, but because of slow growth. However, the NSS per capita consumption figures are an increasingly smaller fraction of estimated consumption in the National Accounts8 - from 77% in 1970-71 to only 66% in the 1997, as shown in Box 1.1. Applying the NSS estimate of the distribution to the consumption figures in the National Accounts results in poverty falling in the nineties as well as the eighties (See Box 1.1). Moreover, the National Accounts consumption estimate is itself a declining fraction of total GDP: from 65% in 1988-89 to 57% in 1997-98. This fall is explained almost fully by a rise in the statistical discrepancy - the difference between expenditure and production estimates of GDP - from around zero at the end-eighties to around 10% nowadays (See also Box 8.1). Hence consumption in the National Accounts may itself be underestimated. 1.16 The differences between the NSS and National Accounts in consumption are reflected also in discrepancies with respect to food consumption. In particular, the National Accounts show rising per capita cereal availability, whereas the NSS shows declining per capita cereal consumption (Box 1.1). In theory, these two should be approximately equal. 8 Private consumption is estimated independently in the Indian National Accounts, as are public and private investment, exports, imports, and government consumption, and an explicit estimate is made of the difference between estimates of national expenditure and production, as is done in some developing countries. See GOI (1998a) and Box 8.1. The mere existence of a substantial difference between NSS and NAS is neither surprising nor a cause for alarm; what is worrying is the growing discrepancy between the two sets of estimates. 6 1.17 One possible explanation for the growing difference between consumption in the NSS and the National Accounts might be a failure of the NSS to capture the consumption gains of high-income households. The NSS shows only a marginal worsening of income distribution. But if the surveys are failing to capture substantial gains accruing to rich households, they could be underestimating the rise in both mean consumption and inequality. Under-reporting of rich consumers is a common problem for household surveys. However, the estimated increase in availability of cereals (from the National Accounts) is consistent with a fairly constant income distribution and falling poverty- increased demand for cereals comes mainly from rises in income among lower income families - and goes against the hypothesis that it is the "missing rich" which explain the difference between the NSS and the National Accounts. Box 1.1: National Sample Survey (NSS) versus National Accounts (NA) NSS and NA Consumption estimates are getting further apart Ratio of NSS to NA per capita Consumption 0.85 _ 0.75 0.65 - 0 co (D a) N 10 0 N N N (0 c 0 c 0 c 0 0) 0) 0) 0) 0) 0 ) 0 0) _ ) C) 0) - Poverty Stagnated, or Did It? NA All India Readcount Ratio (%) NSS 20 45 1 40 15 3 -30 25 10 + NSS { 2 5 20 Al Food Consumption Declined, or Did it? Per Capita Cereal Consumption/Availability 175 170 216.5 160 155 150 ¢ 150 ~ .. +Net Availability (NA) 145 NSSConsumption 140 (0 co 0 0( ) 0 0 (0 N Notes: The above poverty estimates are World Bank calculations, based on NSS and NA data. The first figure uses the NA figures for private consumption and Bank estimates of annual India population levels. The "NA" poverty estimates use the NSS distribution (and poverty lines) but adjust the survey consumption levels by the ratio of NA to NSS mean consumption. Cereal availability equals net production plus net imports minus changes in public stocks, and so should approximate consumption. 7 1.18 One final source of evidence in this regard is the NCAER Market Information Survey of Households (MISH). This provides annual information on self-reported income from a sample of 18,000 households, slightly smaller than the NSS annual sample size. The income poverty line set by NCAER in defining its "low income group" is rather high compared to the poverty lines used with the NSS consumption data, but shows a clear downward trend in poverty in both rural and urban areas. MISH also surveys a larger set of households on possession of standard durable items (watches, televisions, etc), something which NSS does not inquire about in its annual rounds, and MISH finds consistent increases in ownership levels over time, even among low-income households. 1.19 In sum, the National Accounts data (and the NCAER data) suggest that strong growth occurred in the 1990s and that the NSS under-estimates consumption growth and consequently poverty reduction; while the NSS data suggest that not only did poverty stagnate but that the National Accounts over- estimate consumption growth. Choosing between these two hypotheses, or variants involving changes in income distribution, is not easy, and well beyond the scope of this Report. With discrepancies such as these, the only conclusion that can be made confidently is that India's statistical architecture, once a model for other developing countries, needs more consistency checks (See Box 8.1). D. Macroeconomic Concerns: Inflation and Agricultural Performance 1.20 Although statistical issues clearly exist, differences between the 1980s and the 1990s in terms of inflation and agricultural performance do give some credence to the slowdown in poverty reduction. Other things being equal, higher inflation tends to increase poverty (that is, with the same real growth rate, higher inflation is associated with greater poverty), as noted above, and average inflation was higher in the 1990s than in the 1980s (See Table 1.1). Research has shown the poor to be particularly susceptible to increases in the relative price of food (Datt and Ravallion 1997), and here the increase was even larger in the 1990s compared to the 1980s. The large increase in food-grain prices was a particular factor and reflects large increases in procurement and issue prices associated with the Public Distribution System in the early 1990s. As discussed in Chapter 8, recent Indian governments have targeted lower inflation because of its negative impact on the poor, and have had some success. However, transitory shocks in food prices, such as at the end of 1998, related both to poor harvests and the rigid, still-highly regulated food distribution system, continue to cause transitory increases in inflation. Table 1.1 Annual Average Growth in Price Indices Wholesale Price Index (1981-82 = 100) CPIAL WPI Foodgrains Rice Wheat Pulses (1960-61=100) 80/1-90/1 6.9% 6.4% 5.6% 5.7% 11.2% 6.9% 90/1-97/8 8.8% 10.4% 10.2% 9.5% 11.4% 9.7% 93/4-97/8 7.3% 8.9% 8.3% 7.7% 9.7% 9.6% Note: WPI indices for food grains (but not overall WPI) from 1982-83. 1.21 Differences in Agricultural Performance in the 1980s and 1990s are also an issue. As noted above, agricultural growth was a major factor in reducing poverty in India in the 1980s. Rural growth was rapid, broad-based, and labor-intensive, leading to a reduction in poverty in the 1970s and 1980s. Production of oilseeds, and dairy and poultry products grew remarkably, and the adoption of scale- neutral, high-yield technology spread agricultural growth to the lagging rain-fed and highly populated Eastern regions. Real wages were pushed up by the increase in labor demand and the productivity increases that lowered costs. 8 1.22 The rate of agricultural growth in the 1990s was similar to the 1980s, according to the new National Accounts,9 albeit with continued year-to-year volatility. However, the growth of real daily wages in rural areas - a key link between agricultural growth and poverty reduction according to the analysis of the 1980s - slowed in the 1990s (See Table 1.2), suggesting that agricultural growth in the 1990s may have been less poverty reducing. Among the possible explanations for the slower growth in wages are: a) slower growth of demand for agricultural labor in the 1990s, associated with the new crops that account for the continued high agricultural growth in the new National Accounts; b) a slowdown in productivity growth in agriculture, possibly related to environmental issues and the need for private investment, such as generation sets, to make up for poorly performing public infrastructure (See Chand, World Bank 1999b, and references cited therein); and c) a less well distributed agricultural growth, with the Eastern states, where poverty is concentrated, suffering a slowdown.'° The latter two explanations are in turn related to the public sector's approach to agriculture, with its continued focus on providing implicit and explicit subsidies, which contribute to inefficiency and have uncertain distributional consequences, rather than on public investment and technological upgrading; its increasing fiscal constraints that have led to a decline in public infrastructure investment; and its continued regulation of the agricultural sector in contrast to the deregulation of the urban sector (See the discussions in Chapter 3 and 6, which summarize World Bank 1999b). Clearly, further analysis is needed, particularly once the state GDP accounts are fully re-based. Whatever the conclusion, a reduction in implicit and explicit subsidies, a refocusing of the public sector on poverty-alleviating spending, and a deregulation of agriculture would all probably improve the impact of agriculture on poverty reduction. Table 1.2 Annual Average Growth in Wage Rates of Unskilled Agricultural Male Laborers Nominal Real 80/1-90/1 12.0% 4.6% 90/1-97/8 12.2% 2.4% 93/4-97/8 12.7% 2.5% 80/1-97/8 12.1% 3.2% Note: (i) CPIAL used to deflate nominal wages. (ii) Exponential trend growth rates were calculated using OLS 1.23 Analysis also suggests that off-farm employment is an important means of escaping poverty in rural India. Unfortunately, India's recent high GDP growth does not appear to have created more off- farm employment opportunities for the rural poor. In some regions, employment in agriculture actually increased in the nineties. Recent work (Gupta 1999) documents a rise in the proportion of workers who are self-employed or in casual wage employment in the 1 990s, and a fall in regular, salaried employment. Two factors are responsible for the sluggish response in the non-farm sector: not only are there distortions 9 The new, re-based, 1993-94 National Accounts estimate a higher level of GDP than the old, 1980-81 based National Accounts (see footnote 1, Chapter 8 for a full discussion). Agricultural GDP is 8% higher in 1993-94 in the new accounts than in the old accounts. Moreover, the post-1993-94 agricultural growth rates in the new National Accounts series are over 1% p.a. higher than in the old series. The new agricultural GDP data, which are available only from 1993-94 onward, include a higher estimate of many non-traditional agricultural products than the earlier series and track the growth of those products after 1993-94. Presumably these estimates are more relevant for comparisons of recent income and consumer spending on agricultural products than the old series. Statistically speaking, the trend growth rates of agriculture in the 1990s and the 1980s are not significantly different, using regressions with the new GDP series growth rates for the years from 1993-94 onward. However, there is a significant fall in the agricultural growth rate in the 1990s using the old, 1980-81 base data, which are available through 1996-97. '1 It should be noted that much of this analysis, particularly the inter-state comparisons, is largely based on the old National Accounts (1980-81 base), which as noted in footnote 9, show a much slower overall growth of agricultural GDP than the new National Accounts (1993-94 base). 9 in the agriculture sector, but there remain important distortionary policies in the non-farm sector, for example, small-scale reservation, over-regulation of markets and agro-industry, etc. (See Chapter 6 and World Bank 1999b). Removing distortions and improving infrastructure, social sector delivery and the legal framework could help to unleash a substantial round of labor-intensive growth in the rural non-farm economy. E. Divergence in Poverty Reduction between States 1.24 Since the mid-1970s, a number of states have managed to reduce poverty, while in some low income states, notably Bihar and Uttar Pradesh, growth and poverty reduction have lagged. This differential performance appears to have increased in the 1990s. Figure 1.3 shows a growing regional rural poverty differential between India's five lowest income states (Bihar, Uttar Pradesh, Madhya Pradesh, Orissa, and Rajasthan) and the rest of India's 13 largest states, using state-by-state poverty figures."1 It is likely that urban poverty shows, if anything, an even greater increase in the differential. Figure 1.3 suggests that rates of rural poverty reduction began to diverge in the late 1970s: while both groups of states evidenced a steady decline in rural poverty incidence, the rate of progress in the 5 northern and eastern states was somewhat slower in the late 1970s. The divergence increased in the nineties as poverty stopped falling in the low-income states. By 1997, the gap in poverty incidence between the two groups of states had reached nearly 18 percentage points, and poverty incidence in the low-income states was over 50% higher than poverty in other large states (the 1993-94 gap, based on the quinquennial 50 round, was estimated at 20 percentage points). By way of comparison, in the 1980s, the gap was 7-8 percentage points. Figure 1.3: Head Count Rates (Rural India) Head Oount Index Head Count Index 80 80 70 70 80 60 50 50 40 -40 30 - $-Group 1: Andhra Pradesh, Gujarat, Kamataka, Kerala, Maharashtra, Tamil Nad, W Bengal, and Punjab30 - Group 2: Bihar, Madhya Pradesh, Orssa, Rajasthan, and Uttar Pradesh 20 - 20 0S 0 3- co 0) CD t> EC a) 0 - Cn w R) 2' X- E) 0 - ON E ) CC CO S C O C C C D CO CD E 7 - - CC C O C O 09 0C ) E C -, C C C ~ = 0 C C - co - a, CO - V3-s - - - - - - - 1.25 What explains this large cross-state differential in poverty reduction? Partly it reflects lower growth in the poor states. Most of the states that began the 1970s with relatively low per capita GDP had ' Due to limitations in sample size and data availability, this analysis involves poverty estimates for only India's 13 largest states, namely, West Bengal, Punjab and Haryana, Maharashtra, Rajasthan, Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Kamataka, Kerala, Gujarat, Orissa, Uttar Pradesh, and Bihar. The five poorest states are selected on the basis of 1980-81 per capita income as per Table 3.1. The differential would have been even greater if Rajasthan had been excluded. See Datt and Ravallion (1998) for details on state-level estimation procedures. 10 slower growth in GDP and its three main components - agriculture, industry and services - than the middle and higher income states, as discussed in detail in Chapter 3 and the references cited therein.'2 The poor states also generally have the worst human resource indicators. Infrastructure is recognized as a particular problem in the poor states. The differentials in private GDP growth and public investment in infrastructure and human capital partly reflect weak legal and regulatory frameworks for business; and problems of governance, law and order, and weak institutional capacity more generally (See, for example, Business India 1998). Finally, the lagging states, despite allocations of central funds that favored them in per capita terms because of their low per capita incomes, suffered from fiscal problems. This was particularly the case in the 1990s, because their lack of fiscal adjustment and increased debt service payments coincided with a decline in overall central grants and loans to the states and rise in interest costs. These fiscal problems led the states to reduce their capital and human resource spending as a percentage of GDP (See Chapters 3 and 8 and World Bank 1998a). F. Summary 1.26 India reduced poverty substantially since the mid-1970s, as growth rose and human development indicators improved (See Chapter 2). In the mid- 1 990s, growth increased sharply and human development indicators continued to improve. Yet poverty rates, even in the urban areas, declined only marginally. The inconsistencies between the National Accounts and the National Sample Surveys that are used to measure poverty suggest that this may be a statistical artifact. Partly the slowdown may also be explained by the higher average inflation in the 1990s compared to the 1980s, especially the more rapid increase in food prices. There are also concerns that the pattern of agricultural growth is producing less of a rise in labor demand/fall in poverty than in the past. More fundamentally, while some states were able to take advantage of the stabilization and reforms to speed up growth and poverty reduction, others increasingly lagged, due to poor governance, infrastructure, lack of human development, lack of fiscal adjustment and compression of development spending (See Chapter 3). The higher growth has brought down poverty reduction in some states, but the poorer states in particular need to undertake reforms that would lead to faster growth and poverty reduction. 1.27 Should the recent developments be taken as evidence that stabilization and reforms have worked against the poor? We would argue not. First, there continues to be some reduction in poverty, particularly in the urban areas and in some states. Second, and more importantly, the issue is not reforms and stabilization, which were clearly needed to correct an unsustainable situation, but incomplete, and partial reforms. In particular, it is generally agreed that agriculture, which may have lost its impetus in reducing poverty, remains the least reformed, most distorted sector. Lack of reforms of labor and product markets limit both the rate of growth and its labor intensity (Chapter 6). Reforrn of India's anti-poverty programs is now underway, but has taken place too recently for the benefits to show up in faster poverty reduction - moreover further institutional and governance improvements will be needed to make the programs fully effective (Box 1.2). Institutional and governance issues also arise in social sector services (See Chapter 2). Finally, at the state level, differences in governance and fiscal adjustment have led to differences in human development, infrastructure and private investment that contribute to the differences in growth and poverty reduction across the states. Further analysis is clearly needed on the determinants of poverty reduction, including issues relating to urban poverty. 12 One might argue that the NSS Survey's finding of minimal change in income distribution is inconsistent with the observation that some of the poorer states are growing more slowly than the other states. The differences between the NSS estimates and the National Accounts data also hold at the state-level, since the total state-level GDP (production estimates) has remained a relatively constant fraction of national GDP. However, another explanation is that a minimal change in the aggregate Gini coefficient can occur, even if some of the poorer states grow relatively slowly, other poor states and the middle income states grow relatively rapidly and the initially high income states grow relatively slowly, which seems to be the case (See Chapter 3). More importantly, it has to be recognized that interstate disparities typically account for only a small fraction of total inequality - about 10% - so that even large changes in these disparities will have only a small impact on total inequality. 11 1.28 Against this backdrop, there is a concem that poverty reduction will continue to stagnate unless a second phase of reforms occurs. These concems are the subject of the remainder of this Report. Successive chapters examine: the social sectors (Chapter 2), issues of state performance (Chapter 3), governance (Chapter 4), infrastructure (Chapter 5), labor demand and related sectoral issues (Chapter 6), the financial sector (Chapter 7), and macroeconomic policies (Chapter 8). Finally, Chapter 9 looks at future prospects and summarizes the key requirements for sustained poverty reduction and growth. Box 1.2: Reforms in India's Anti-Poverty Programs India's anti-poverty programs (APPs) are mainly run by the central government. They amount to some 6-7% of total GOI budgetary expenditure, or 1% of GDP. Even accounting for inflation, they have been growing at 10% per annum since 1992-93. There are three main types of APPs: rural works, self-employment, and food subsidy programs. All three have been subject to reform in recent years. The food subsidy programs make up about 55% of total APP spending. By far the largest food subsidy program is the Public Distribution System (PDS), which was explicitly targeted towards the poor at the national level in 1997 and renamed the Targeted PDS (TPDS). Recent research in UP (Kriesel and Zaidi 1999) has shown impressive performance in targeting: the poor were found to be four times as likely as the non-poor to purchase subsidized food-grains through TPDS. The self-employment programs make up only about 5% of total APP spending, but have received a lot of publicity, most of it bad, on account of the poor performance of the Integrated Rural Development Program (IRDP). This year IRDP was scrapped, along with five other small self-employment programs, all of which were replaced by a single program - the Swarnjayanti Gram Swarozgar Yojana (SGSY). Not only is this rationalization very welcome, but the new program seems to be better designed. It basically replaces subsidized lending to individuals under IRDP by subsidized lending to self-help groups. Group lending has the advantage of peer-group pressure leading to higher repayment rates, and has demonstrated its potential for success in India as well as many other countries. The rural works programs account for about one-third of APP spending. There are two main schemes, the EAS (Employment Assurance Scheme) and the JRY (Jawahar Rozgar Yojana) now renamed the JGSY (Jawahar Gram Samridhi Yojana). The EAS is continuing as an employment-generation scheme, but with better targeting to poorer states and districts. The JRY, which was an employment-generation scheme, has now been redesigned in two aspects. First, it will be exclusively implemented by the Gram Panchayats, or village local governments. Second, its main focus now is on infrastructure development, with employment generation relegated to a secondary objective. The thinking behind this is that JRY was failing both to develop durable assets and, due to poor targeting and abuse, to provide employment to the poor. While no one can argue with the need for more and better rural infrastructure, there is now a real need to reform the EAS as the burden of providing a rural safety net now falls mainly on it. The rationalization and better targeting underlying the above reforms are both big steps forward. All the programs are also giving a greater role to rural local government for implementation and for beneficiary selection and monitoring. The reforms also lay stress on transparency, making information about the programs public at the village level, and on the importance of physical, financial, and social audits. While these reforms are very welcome, there is still a long way to go on the ground. The same research in UP which showed good targeting of the TPDS also found that only 40% of the grain allocated to the state actually reached the intended beneficiaries: 20% was simply not lifted from central storage facilities, and the remaining 40% was unaccounted for. To reduce leakages and abuse, and to promote the new guidelines on transparency, access to information and accountability, the central govemment could make participation by state and local govemments in the APPs conditional on good performance. CHAPTER 2 IMPROVING HEALTH AND EDUCATION FOR THE POOR A. Overview 2.1 In India, as elsewhere, social outcomes both embody poverty and represent a way out of poverty. Malnutrition, poor health, a lack of learning opportunities, and limited choices are defining characteristics of poverty. Good education, health, nutrition, and low fertility help reduce poverty by increasing opportunities to generate income. By the same token, an improved standard of living leads to gains in health and education, freeing people from the trap of ignorance and exposure to disease. There are also positive connections between health and education. Education empowers people to use information better to make healthy behavioral choices; healthy people are more likely to attend school or go to work, and can learn and work more effectively. Unfortunately, the more common experience is that costs of illness keep people in poverty, and poor quality education limits their opportunities to escape poverty. 2.2 Progress in the social sectors is both a vital yardstick of and a key element in the reduction of poverty. In India, there are Constitutional and oft-stated government commitments to ensuring basic education and health services. India has shown substantial improvements in education and health outcomes over the last decade (in this Report, health is defined to include health, nutrition and population, but does not focus on important health-related areas such as sanitation and water supply). Nonetheless, indicators continue to suggest surprisingly low levels of literacy and school enrollments, and surprisingly high levels of infant mortality, maternal mortality and malnutrition, relative to China and Indonesia, or even other low-income countries. Within India, inter- and intra-state disparities are large. The poor, rural women, disabled, and people belonging to scheduled tribes and castes stand out as the most vulnerable sections of society. In particular, the indicators suggest substantial problems in the same large states where poverty is high (See Chapter 1). It probably will be difficult to reduce poverty substantially in the future without major improvements in spending on and delivery of health and education services in these States. 2.3 The delivery of public services in health and education is fraught with problems related to limited accountability for performance, low management and worker incentives, inadequate materials and equipment for effective health care and education, demands for payment for supposedly free public services, and poor targeting of services and subsidies at the poor. Because of these problems, private delivery of health and education is expanding rapidly, to the public in general and even to the poor. 2.4 The sections that follow describe the issues in more detail. First, both the health and education sectors are examined in terms of their outcomes. Then, the infrastructure, human and financial resources, and institutional issues that are common to both sectors are described. The chapter ends with ideas on how the problems identified can be overcome so that the government's commitment to effective health and education services for everyone, especially for the poor, can be fulfilled. The main proposals are: * Spend more effectively on elementary education and basic health systems, with better targeting to the poor, and with more public funding to address the unfinished agenda; * Focus public education and health services on meeting consumer needs; * Realign the role of the state to focus on primary education and health and make efforts to upgrade private education and health services and to use them effectively; * Focus on meeting the holistic needs of children. B. Education and Health Outcomes in India 2.5 Education. In India, as elsewhere, greater coverage and more effective elementary education in grades 1-8 would be the education sector's most significant contribution toward alleviating poverty. 14 Average educational attainment has improved in India; however, India still lags behind comparator countries in average educational attainment, particularly among the poor. Studies of education consistently suggest large benefits from achieving a critical minimum level of education across the population. This indicates that mass expansion of primary education to raise India's currently low educational participation levels (averaging about 2 years) to 4-5 years of primary education per worker would have high economic and social pay-offs. The pay-offs would be particularly high for the poor, less than 20 percent of whom currently complete all eight primary grades. 2.6 A major indication of India's recent progress in education is the significant rise in literacy rates within the last decade. From 1991 to 1997 the overall literacy rate increased from 52% to 64%, rising from 64% to 73% for males, and from 39% to 50% for females, according to the NSS. Progress is still slow but the number of illiterates (aged seven years and above), which had actually risen from 1981 to 1991, appears to have begun to decline in the 1990s (See Figure 2.1). Among the states, some of the poorest, for example Uttar Pradesh, Bihar, Rajasthan, registered significant improvements in literacy albeit from low bases (See Annex Table 2.1). In most of these states, female literacy rose even faster than overall literacy Figure 2.1: Literacy in India, 1951-1997 450 N u m b e r of illite ra te s 70 400~~~~~ _ _ t er a cy R a t e _ _6 40 0 35 0~~~~~~~~~~~~~~~~~~~~~6 5 0 30 2 200 40 05 1 0 50 __ _ _ __ _ _ 1050 1555 16 0 1 96 5 1097 0 15975 10680 1 9085 1950 1509 2 000 2.7 Although India has raised literacy rates, it still has a long way to go. Many countries, including China and Indonesia, have overtaken India in literacy rates. For example, China had problems of illiteracy in 1950 that were similar to India's at the time. Today, China has virtually eliminated illiteracy in the younger age groups (Dreze and Loh). Indonesia has achieved 85% literacy, with a female literacy rate of 80%. If India's literacy rate continues to grow at the current rate of 2.75% p.a., it will still take 16 years before India catches up with Sri Lanka's current literacy rate of 90%, and even then about 120 million persons will still be illiterate! 2.8 Gross enrollment ratios have also improved, reaching 90% at the primary stage, with girls' enrollment reported to be 73% (NCERT 1998). It is worth noting that this figure is significantly lower than the figures reported by the Ministry of Education, which are based on enrollment figures submitted by the districts and which are the basis for comparing achievements with plan targets and providing budgetary support - another example of inconsistencies in Indian data that complicate policy making. Despite the improvement, 33 million children in the 6-11 age group are still out of school. The NSS also suggests that 7.8% of girls and 6.9% of boys in the 6-11 age group are in the work force, mostly in rural areas (GOI 1997d). 15 2.9 Children of poor families are less likely to be enrolled in school, which is a major factor behind the low enrollment rates. The poverty gap in enrollment is large; the enrollment rate is 25 percentage points lower for the poorest households (annual per capita income of less than Rs. 3000) than for the richest households (with annual per capita income of Rs. 10000 and above). And, the drop-out rate for the poorest households is about 4 times that of the richest ones. A major deterrent to school enrollment among the poor is its high cost. Parents need to spend about Rs. 318 per year per child, besides the opportunity cost to the family that rises with the child's age (PROBE). The few empirical studies of leaming achievement also suggest that primary-level learning achievement is low, and that it varies from state to state and with the background of the child. Low income children in the north and east are particularly worse off (for example, see Filmer and Prichett). 2.10 Health outcomes have also improved but have a long way to go, particularly among the poor. Between 1970 and 1993, life expectancy at birth increased from 50 to 61 years, infant mortality decreased from 137 to 74 per 1,000 live births. India no longer faces famines and severe epidemics which kept life expectancy barely over 30 years at Independence. On the demographic front, the conditions prevailing at the time when the national family planning program was launched in 1951, have changed radically. By 1992, fertility had declined to 3.6 births per woman compared to 6.0 about four decades ago. There have also been some remarkable successes related to specific diseases in recent years. The number of leprosy cases has fallen from 1.7 million in 1992 to 0.5 million in 1999, and polio has been nearly eliminated. Despite these improvements, India's health outcomes remain significantly below that of the East Asian "miracle" economies, even after their recent crisis; and below many African countries (See Annex Table 4.1). 2.11 Nutrition is a particular problem area; India has a high percentage of malnutrition and some segments of the population have among the highest levels of malnutrition in the world. Weaning children and women are particularly affected. There have been only modest declines in the levels of severe and moderate malnutrition in children in the last 20 years, so that over half (53%) of the children below four years continue to be moderately or severely malnourished (Indian Institute of Population Sciences). Only Bangladesh has higher levels. Micronutrient deficiency is also widespread. For example, a nationwide survey found that 87% of pregnant women are anemic, largely due to iron deficiency (Indian Council of Medical Research). The economic losses due to malnutrition are estimated to cost India at least $10 billion every year (World Bank 1998d). 2.12 The poor suffer particularly from health problems. For example, in 1992-93, compared to the richest 20% of Indians, the poorest quintile had about 2.5 times the infant mortality and under five mortality rates, double the fertility rates, and nearly 75% higher rates of child malnutrition (World Bank 1 999d). 2.13 The reduction in infant mortality seems to have slowed during the 1990s (See Figure 2.2). Infant mortality is a gross indicator responding to many underlying causes, and therefore the explanation is not straight-forward. One possible explanation is the slowdown in poverty reduction (See Chapter 1); another is the impact of the stubbornly high levels of disease and malnutrition, and poor sanitation and water supply, particularly in the poorer states. 2.14 In 1997, infant mortality rates were as high as 96 per 1,000 live births in Orissa, 94 per 1,000 live births in Madhya Pradesh, and 85 per 1,000 live births in Uttar Pradesh and Rajasthan (GOI 1998d). At the other end of the spectrum, Kerala had a remarkably low rate of 12 deaths per 1,000 live births, followed by Maharashtra (47), Punjab (51), Tamil Nadu and Karnataka (53). The gaps between states are increasing, as better-off states such as Maharashtra, Karnataka, and West Bengal have shown the most rapid declines in infant mortality in the 1990s (See Annex Table 2.1). There are also large differences between districts within states, with the worst-off districts found in states with the poorest overall mortality rates. Urban areas consistently have better health outcomes than rural areas, although these 16 figures probably do not fully reflect the situation of the urban and peri-urban slums where in-out migration is high and the settlements have not been legalized. Figure 2.2: Infant Mortality Rates in India 120 110 100 90 60 60 0 LO~ CD 0) a) 0) 0 0) a) CD Source: GOI, Registrar General 1998. 2.15 India's health programs need to improve their services for females. One indicator of the problem is that India's ratio of females to males is below one- 927 females to 1,000 males. In the rest of the world outside Asia, the biological advantage of females results in a higher proportion of females to males. This gender disparity suggests a need to make India's health care, nutrition, and social rights of women more equitable. The largest gender disparities are found in the northem states, notably Haryana and Punjab, despite their being two of the most prosperous states. Among Indian States, only Kerala has a female to male ratio above one. The relative neglect of women's health is also reflected in poor reproductive health indicators: matemal mortality is estimated at over 430 deaths per 100,000 live births in India, compared to an average of 350 among low and middle income countries. 2.16 Health and education outcomes are related. In the context of infant growth and infant and matemal malnutrition, research has demonstrated that the early years of a child's life are critical for cognitive and psycho-social development (Young). Child development is deternined not only by the nutritional status of the infant, but is also affected by the total, synergistic impact of health and nutritional factors and the quality of social interactions and stimulation received from the environment. Children who experience early growth failure are more likely to delay enrollment in school. Protein energy malnutrition, temporary hunger and micronutrient deprivation adversely affect leaming achievement. Under-nutrition is also found to have a greater impact on poor children's cognitive development than on development of children who are not poor (World Bank 1998b). Infants growing up in poverty, and particularly in environments lacking in stimulation, therefore face problems such as stunted physical and mental development which sets the stage for poor educational and developmental outcomes such as low academic achievement, high drop-out rate, functional illiteracy and overall lack of productivity in the workforce. Early childhood development programs have proved to be effective in compensating for these critical deficiencies (Kaul et al). Although India has one of the largest centrally sponsored integrated child development programs, which has been in operation since 1975, its limited impact on child development indicators remains a cause of concem. C. Characteristics of Education and Health Services 2.17 India's social services are facing major challenges. A growing population, industrialization, and a globalizing economy that places a premium on inforrmation and technology, are stretching the capacity of India's education system to deliver relevant and effective services. Yet enormous tasks remain: getting 33 million children from poor families into primary schools, increasing the retention rate so more children 17 finish primary grades, and upgrading the average quality of the schooling received (see the discussion in World Bank 1997c). In health, the country is undergoing an epidemiological transition. There continue to be high rates of communicable diseases, malnutrition and maternal andperinatal illnesses, representing a large unfinished agenda that predominantly affects the poor. There are also growing rates of non- cornimunicable diseases, while rapid urbanization is resulting in new health problems. New diseases, notably AIDS, are placing greater strains on society and the health of the poor in particular. Even though the social sectors are changing dramatically, the role played by the public sector has changed little. In this section, the major challenges for health and education services are outlined according to issues of public infrastructure, workforce, financing, institutional issues, public-private partnerships, and the implications of these issues for the poor. Each of these can build on recent positive developments in both education and health. 2.18 Elementary education in India has seen two positive developments in the past decade. First, elementary education has been brought to the fore as a priority issue, starting with the Jomtien Conference on Education for All (1990). Elementary education has begun to get an unprecedented amount of attention and importance both in terms of political and public discourse. Secondly, with a series of externally funded and centrally-sponsored projects including the District Primary Education Program (See Box 2.1), it has seen a great deal of innovation and experimentation aimed at qualitative improvement of the services offered by the system including partnerships with some NGOs. Some specific examples are the decentralization and empowerment of local government (for example, Madhya Pradesh, Andhra Pradesh, Rajasthan and Uttar Pradesh), guaranteed provision of education in response to local demand in currently unserved or under-served areas (for example, Madhya Pradesh), use of local para-teachers (for example, Rajasthan, Madhya Pradesh and Andhra Pradesh), incentive schemes for under-privileged groups and the Non-Formal Education Scheme, and pedagogical and management innovations under the District Primary Education Program. Although such examples of successful practices have been documented, the larger system continues to raise challenges and concerns related to quality and management. Box 2.1: India's District Primary Education Program The District Primary Education Program (DPEP) has been designed to enhance government efforts to provide basic education to all children in the age group 6 to II years with a focus on girls, marginalized communities (Scheduled Castes and Scheduled Tribes), children with disabilities and working children. The program supports interventions for i) expanding access to primary school or its equivalent for all children, ii) increasing retention and improving student learning achievement levels and iii) enhancing capacity of the district and sub-district, state and national institutions for effective management of primary education. The program covers at present 149 districts (including the Uttar Pradesh Basic Education Projects) in 14 major states of India. Initial reviews of the program indicate a significant reduction in gender disparity in enrollment. Also, the rate of enrollment is higher in project districts as compared to the non-project districts. 2.19 There have also been a number of positive developments in health. New technical paradigms are being introduced for the control of leprosy, cataract blindness, malaria, tuberculosis, and reproductive health. Some states (for example, Tamil Nadu) are re-organizing pharmaceutical supply systems to improve access, safety, costs and rational use of drugs. Under the leadership of the Ministry of Health and Family Welfare, the issue of health communications, which have long been fragmentary and stressing awareness-raising over changing behaviors, is being addressed more strategically. Decentralization efforts are improving the accountability of public sector health services in some states (for example, Kerala and West Bengal), and other states are focussing efforts on improving services to under-served tribal areas (for example, Orissa, Madhya Pradesh, and Maharashtra). Governments are beginning to recognize the existence of the private sector (such as Andhra Pradesh, Kamataka, Maharashtra and Rajasthan), and are collaborating with them more effectively in, for example, contracting services, sharing information, and developing standards for quality. 18 2.20 Institutional Arrangements and Issues in the Public Sector. Education and health are joint responsibilities of the Central and State Govemments, with funds for them provided by both levels of govemment (see below) and delivery of services largely a state responsibility. In education, the system is changing dramatically as the Panchayati Raj Institutions at district, sub-district and village levels are beginning to function within the framework of the 73rd and 74" Constitutional Amendments (See Chapters 3 and 4). This devolution of responsibility is expected to improve education by generating more community support, more school-level responsibility for effective instruction and a decentralized resource support. But it is also likely to lead to increased uncertainty as states decide on what responsibilities will be transferred to these institutions. The shifts in responsibility need to be accompanied by planning and training to ensure effective financing and management at the decentralized levels. Altematives like using para-teachers instead of regular teachers oT small altemative schools with local community involvement need careful evaluation. At the same time, care will be needed to ensure that decentralization is not stifled by new regulations. Effective use of the media to educate the community on their rights and responsibilities emerges as a priority. 2.21 In health, the existing fiscal and administrative set-up is complex, hindering effective financing and accountability for decentralized management of health facilities and deterring effective coordination across the health, population and nutrition sectors. The center-state financial transfer mechanism, and the three separate structures for the Health, Family Welfare and Women and Child Development Departments are ineffective in providing essential inputs, correcting inequities between states, strengthening decentralized management, and monitoring program performance. Greater field-level coordination and integration of nutrition services with health and family welfare is important to improve the health status of the mother and child. Strengthening sanitation and water supply interventions will also be critical. 2.22 Public education and health involve enormous infrastructure and bureaucracies, and are spread thinly across the massive country. Day-to-day management of services of this size, not to speak of training and upgrading, is a major task, even at the state level. Schools and health facilities are often in disrepair, poorly equipped (schools often lack water and sanitary facilities), and under-supplied, reflecting poor use and low levels of health and education spending (see below), and their bias toward salaries and new construction rather than maintenance (See Chapter 5). Absenteeism of teachers and doctors and medical staff is common, particularly in rural areas. Partly due to these conditions, the middle and lower level health facilities are often under-utilized and actual school attendance is low, while the quality of health services and education suffers. At the same time, tertiary hospitals are overcrowded and the numbers of classrooms and teachers have not kept pace with the growth of the school-age population- it is estimated that 1 million (40%) more classrooms and 0.6 million (33%) more teachers would be needed to enroll the entire 6-10 age group. Currently, there is an average of 49 students per teacher in India (59 per teacher in Bihar and Uttar Pradesh); this is much higher than, for example, Indonesia, which in 1993, had 21 students per teacher spread fairly evenly across the provinces (World Bank 1996b). 2.23 Public Sector Financing of Health and Education are Low by International Standards. In education, the central and state government expenditures in 1996-97 were equal to 4.0% of GDP for all levels of education, or 13.4% of total govemment revenue expenditures, which is somewhat below the average of 17.5% for all low-income countries (UNDP 1993). In the 1999-2000 budget, the central govemment's plan expenditures on education are 6.6% of its total plan expenditures and its overall expenditure on education is 2.5% of its overall expenditures. While the Central Govemment's share is a relatively small part of overall govemment spending in education (14.6% in 1996-97), most of the expenditures are used to create and sustain new programs, giving the Central Govemment a greater influence over the system's evolution than its expenditure share might suggest. State expenditures, as a share of GSDP, are somewhat below peak levels and vary considerably across states. For example, in 1995-96, state education spending ranged from 3-7% of GSDP in the major states; and ranged from 16- 29% as a share of total state expenditure. 19 2.24 In the distribution of general government expenditure among educational levels, elementary education (which benefits the poor the most) receives, per student, a much smaller level of funding and subsidy, compared to secondary and tertiary education (NIPFP, GOI 1997b). The funds going to elementary education have been roughly constant at 1.5-1.6% of GDP. The composition of expenditures in elementary education is, however, unbalanced. Recent studies indicate that salaries account for roughly 97% of education department expenditures in lower primary schooling and 96% in upper primary schooling while only 0.2% of GDP is spent on the other components. 2.25 The need to broaden the coverage of elementary education among the poor and improve its quality, including the targeted goal of universalizing elementary education, means more funding is needed. In the past few years the Central and State Governments have indicated their intent to increase public spending on education to 6% of GDP during the Ninth Plan. The States are likely to have to provide most of this funding. Given the importance of elementary education in reducing poverty and the states' current fiscal problems, they will need to reduce implicit and explicit subsidies and find new revenues (See chapter 3). The Central Government will also need to expand its role in elementary education in view of the low level of resources that many state governments devote to primary education and the large number of children not enrolled in schools. There is also a need to build, in states and districts, the capacity to plan and manage education more effectively and the need for research to identify more cost-effective strategies. These options for center and state governments will have to be considered in the broader context of administrative decentralization and changing center-state fiscal relationships. 2.26 In health, India's public spending is very low: an estimated 1.2% of its GDP. This figure places India among the lowest quintile of countries, and on a per capita basis, is far less than the amount recommended to provide basic services by the World Development Report 1993. In terms of maternal and child care, India's spending per capita is one-third less than the recommended amount. Public spending on preventive and promotive primary care services has not kept up with the growth of demand for services, particularly for people below the poverty line. India also lags in addressing the determinants of good health that lie outside the health system, such as in water and sanitation, nutrition, and education. For example, at 0.5% of GNP, India spends far less on nutrition programs than what is needed to reduce the high rates of malnutrition. 2.27 The States cover close to three-fourths of the public funding for the health sector (excluding central grants to the states). They mainly finance primary health-care facilities, hospitals, and aspects of disease control programs. Central spending emphasizes family welfare, nutrition and disease control programs. Capital investment is shared equally by the center and the states. Within the health sector, resource allocation in the public sector has also been skewed in the past in favor of tertiary care services relative to the needs at the primary and secondary levels, but again in some states, there have been some improvements in this area. Much of health spending is absorbed by salary costs, and the recurrent budgets for operations and maintenance are chronically under-funded. 2.28 Despite the states' deteriorating fiscal situation, some states have managed to increase the resources for health and initiated systemic changes (for example, Andhra Pradesh, Karnataka and West Bengal). However, in general, the same recommendations apply to health spending as education. In general, public sector health spending is significantly lower in the poorer states, where health outcomes are also poorer. Although the mechanisms used by the Central Govemment to fund health programs at the state-level have the potential to reduce disparities in resources among states, and even within states, these mechanisms, as currently operated, have not overcome inter-state inequities, and in some cases even exacerbated them. 2.29 The Private Sector's Role in Education and Health. In education, the total private spending (excluding overseas education) is estimated at about one-third of the total education expenditure. Private spending on elementary education generally takes one of three forms: a) schools which cater to the lower- income groups charge very low fees and provide students with little more than basic literacy - such 20 schools are generally not recognized or aided by local governments; b) schools that cater to middle- income groups charge higher fees and are aided; and c) elite schools that charge very high fees and cater to an exclusive minority of the upper middle class and above. Private spending on elementary education is expanding rapidly because of: a) the inability of the public system to deliver; and b) parental ability to pay. In Uttar Pradesh, 36% of school-going children were enrolled in private schools. In other northern states, the proportion ranges from 5% to 11%. The recent PROBE study indicated that even poor families and disadvantaged communities are making great sacrifices to send children to private schools, with one- fifth coming from families involved in casual labor and one-half from scheduled caste or backward caste groups. Parents see private schooling as being more accountable and demonstrating higher levels of teaching activity, particularly in terms of instruction in English. 2.30 Although private spending is being encouraged by the Central and State Governments to complement their own efforts, private schools are unlikely to improve the education of the poor directly, because they remain outside the reach of the vast majority of the poor. Other public/private issues are the absence of adequate information and regulations on private school quality (PROBE), the possible shift of the more articulate/education-oriented parents to private schools leaving less pressure on the public system, and the possible divisive pattern of differences in schooling. These issues are, of course, classic ones in the public/private school debate. Another aspect is the possibility of greater reliance on public finance/private provision of services as discussed in the next section. 2.31 Although India's public spending on health is low, overall health spending is high because of private spending. Private spending on health (including out-of-pocket expenditures at public facilities) is four times public spending, i.e. about 80% of health spending in India, which is one of the highest proportions of private expenditure on health in the world (World Bank 1997d). As a result, India's overall expenditures on health are about 6% of GDP, among the highest in the region. There are large inter-state variations in private financing and provision. For example the lowest proportion of private hospital care is found in rural Orissa and West Bengal (9% and 18% of hospitalizations respectively), compared to over 75% in rural Andhra Pradesh and Bihar (GOI 1998d). 2.32 Despite the high levels of spending on health, reflecting high private spending, India's health indicators are relatively poor. For the poor in India, health indicators are particularly dire. The private health sector as currently organized is unlikely to improve the health and nutritional status of the poor substantially. Private spending and delivery neglect "public goods" or inequality-reducing characteristics of key preventive and promotive health services such as immunization, ante-natal care, infectious disease control, and hospital care for the poor, as well as services in poor areas. The private sector remains virtually unregulated and has widely variable quality of care. The private sector includes highly trained allopathic specialists and services, and a significant number of practitioners of Indian systems of medicine. Yet the largest type of health practitioners are completely unqualified. Despite a significant not-for-profit presence, much of the private sector is dominated by profit motives, often resulting in over- medication, inappropriate use of technology, and over-charging of patients. These problems are particularly great for the poor, who lack information on the quality of care and have a hard time paying for private care. On the other hand, as in education, the failings of the public sector health services are leading to rising demand for private services (See GOI 1 999g). The public sector has an important role to play in enhancing the effectiveness and access to individual health services, and in developing and implementing comprehensive policies addressing private financing and delivery. D. A Similar Story in Health and Education Services for the Poor 2.33 The poor are often not reaping benefits from public health and education services and education and health costs are enormous burdens for the poor. For education, the direct cost, even for public schools and even ignoring the opportunity cost, is nearly prohibitive for a poor family. For example, in Bihar, the State with the lowest per capita household expenditure on education, the percentage of total household expenditure incurred on elementary education is 7.3% for the lowest income group (less than 21 Rs. 3000 per annum). In Kerala, which has the highest household education expenditure, the figure is 21.4% (NCAER 1994). Of course, these costs are a lower fraction of higher income groups' spending. Disaggregation of education expenditure into components reveals that school uniforms, books, and stationery absorb the major part of the total expenditure. In some States like Assam and West Bengal, private coaching and transport also contribute substantially to the expenditure. Thus, elementary education becomes a major financial burden, particularly for poor households with several children of school-going age. According to the NFHS data (1993-94) the probability of children in an Indian village being in school increases by 11% if they belong to the second rather than the poorest quintile, and increases with each level of household wealth (Lanjouw and Ravallion). Similarly, school attendance is lowest in the poorest quintiles compared to the wealthiest quintile in all states, with the largest gaps between rich and poor found in Bihar, Punjab, and Rajasthan, and the lowest in Kerala and the north- eastern states (Filmer and Prichett). 2.34 The availability of a school increases enrollment, but only by about 4%. The mere presence of a school in a village does not guarantee quality education. Poor parents are more likely to withdraw their children from school (rather than transfer them to other schools) in situations where teachers are often absent, or the quality of teaching is poor. Also, research in low-literacy districts in eight states demonstrates that schools catering to a larger concentration of disadvantaged and scheduled tribe students have much poorer facilities (such as pukka buildings, furniture and equipment and instructional aids, World Bank 1997c) and fewer number of teachers compared with other schools. Empirical estimates of community-specific effects show that both village and district averages of parents' education and wealth are important determinants of school attendance and achievements. Improving the quality of education is, therefore, not just a requirement for children already in school but a powerful lever for increasing enrollments of the poor. 2.35 Health care also absorbs a lot of poor families' incomes but often the spending and the public health services do not yield much benefit. On an average, households spend 5-7% of their income on health, though rural households below the poverty line spend 12-19% of their income on health (NCAER 1996). The poor also benefit less from health services. Compared to the richest 20% of Indians, the poorest quintile was half as likely to use modem contraception; less than one third as likely to have antenatal care during pregnancy and one sixth as likely to have a delivery by a medically trained health worker; poor children were a third as likely to be immunized for measles, and more than 25% less likely to go to a health facility in the event of diarrhea or acute respiratory infection (World Bank 1 999d). The large number of private unqualified practitioners, found mostly in rural areas and urban slums, are mainly used by the poor. In this situation, health gaps between rich and poor are likely to increase. 2.36 The goal of reducing poverty in India will remain elusive as long as the poor have low utilization of preventive and curative health services (immunizations, ante-natal care, institutional deliveries, treatment for diarrhea and respiratory illnesses), poor hygienic conditions, low school enrollment and attendance, and poorer quality schools and health services. These problems are occurring despite the longstanding recognition that health and education services are a public responsibility, as enshrined in the Indian Constitution. 2.37 The rapid expansion of the private sectors in health and education is partly a result of public sector's problems in providing quality services. The considerable spending by the poor on private services demonstrates their demand for health and education. But private sector activities in these areas are not effective in providing public goods, and are beyond the scope of many of the poor. Moreover, (a) the poor are often ill-informed and have low expectations from service providers; (b) they have little or no recourse for poor quality services, because of low accountability, and (c) the public sector has not implemented appropriate policies to deal with the private sector, particularly in terms of providing information, licensing and regulation to protect and empower consumers, especially low income consumers. 22 E. Solutions Being Found in Education and Health 2.38 Education Sector Solutions. Himachal Pradesh (HP) has demonstrated the key measures are required for improving primary education: official commitment expressed in resource allocations, parental demand that their children be educated, and civic cooperation in supportimg schools (See Box 2.2). In addition, policies and strategies for developing primary education need to respond to the local environment; they must be founded on a vision for effective and appropriate education; and they need to target the most disadvantaged groups. 2.39 Even if there is political will and resources to support primary education, evidence suggests that improvements in education must emerge from the community and at the school level. They cannot be fully defined or directed from the state or national level. Current schemes - the Education Guarantee Scheme in Madhya Pradesh, Lok Jumbish and Shiksha Karmi in Rajasthan, the District Primary Education Programme (See Box 2.1) - provide excellent examples of how cost saving programs like these can be organized. The current movement towards assigning responsibility for elementary education to the Panchayati Raj Institutions provides a medium for adapting these schemes to fit the larger systemic need, if planning and management are well executed. Box 2.2: Himachal Pradesh: A Successful Experiment in Improving Primary Education In the state of Himachal Pradesh, illiteracy has plummeted from above the all-India average in 1951 to significantly below it today. A recent report on education in India investigated the reasons for this rapid decline in Himachal Pradesh and found the following "foundations of success": * Official commitment. Public policy includes an explicit commitment to the rapid expansion of education; per capita expenditures on education are twice the national average; policy also aims at reducing regional duisparities, and provides incentives for disadvantaged children to attend school. * Parental demand. Most parents take it for granted that schooling is as an essential part of every child's upbringing; parents support compulsory education for all children, girls as well as boys- and children are self-confident. * Civic cooperation. Parents are involved with their children's schools; they assist with chores and construction projects; they watch over teachers, often informally rather than through formal associations, but with great effect - even schools in remote areas, untouched by inspectors, seem to function well. The PROBE investigators found that HP's egalitarian social structure helped it make rapid strides towards the abolition of illiteracy. Equally important, however, was that public administration had fostered the conditions for parental involvement and demand for education. As parents found their demands being heard, and learnt that to seek an education for ones' children was not impossible, these demands were strengthened (rather than discouraged as has happened in many other states). HP's experience confirms that there is no magic formula for educational improvement. Rather, HP demonstrates that a sustained state govemment comnmitment to universal education needs to be complemented with public response (parental demand). - Source: PROBEA 2.40 Furthennore, successful programmes are marked by a clearly articulated vision of a well- functioning school, which incorporates expectations about children's learning and the anticipated role of teachers. The vision needs to be clear enough to allow the parents and communities to define the objectives while remaining flexible enough for them to pursue local needs. TheRishi Valley Centre and Eklavya provide examples of successful programmes. 2.41 Finally, the resources that are applied to improving primary education need to be targeted to those groups in the population who are most in need of support. This means that program designs need to include special provisions for girls, scheduled tribes, scheduled castes, children with disabilities, and working children, and with an effective component of early childhood development. These provisions need to be followed through locally with planning and implementation processes that facilitate appropriate lending. Many programs already do this, and their experience can be built on. Also, in six of the largest states - Andhra Pradesh, Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh. and West Bengal - more than half of the school-age children do not attend school. To redress this, these states, some of which are the poorest (See Chapter 3), will need more than half of all incremental spenr ding on education. 23 The Central Government has an important role to play in seeing that its resources respond to these differential needs among states, and both the Central Government and the states should consider ways to better involve private schools in meeting the demand for primary education in ways that enhance the use of public and private resources for the disadvantaged. 2.42 Health Sector Solutions. The Government of India maintains that public investments in health are critical for the sustainability of development and poverty alleviation. India's Ninth Plan (1997-2002) identifies health as one of the six priority areas, and emphasizes: integration of vertical health programs; better surveillance and control of communicable and non-communicable diseases; improved health management information systems; strengthened logistics management; and facilitation of the Panchayati Raj Institutions' involvement in health. The Central Council of Health and Family Welfare has also noted the importance of linking preventive and promotive care with selective aspects of curative care. 2.43 An emerging consensus around three broad strategies for reforming the health sector incorporates: (a) using public information more strategically to empower consumers of health care and enable people to be better providers of their own health care; (b) rejuvenating the public sector to better deliver its core services; and (c) engaging the private sector to better meet societal health goals. 2.44 Using Public Information. The use of information to improve healthy behaviors, and to enable people to better hold health services accountable to the public is a critical, but under-developed strategy. A better educated and empowered public needs to become a force for higher standards in both the public and the private sectors. A number of states have taken steps to help promote this, such as publishing standards for procedures and pricing. Several states have publicized patient's rights and responsibilities at all health facilities as an initial effort at improving public accountability in public facilities. In a number of places, community-based organizations and Panchayati Raj Institutions are also being used to hold health facilities accountable, taking on such responsibilities as improving clinic hours, reducing staff absenteeism, and organizing patient transport. The Ministry of Health and Family Welfare (MOHFW) and Department of Women and Child Development and a number of states are also beginning to make public health and nutrition information more strategic and less ad hoc, moving beyond distribution of messages to raising awareness to concentrating on changing behaviors to improve health. 2.45 Rejuvenating the Public Health Sector. The public sector needs to find ways to focus on better delivering the core functions of government, and developing a culture of performance. Core functions include not only improvements in public service provision, but also in oversight of the health sector to protect the public interest. The functions of policy development, information dissemination, regulation, mandating, and financing are under-developed. Public sector health managers and workers need different types of training, supervision support, and incentives, which are focused on achieving results and solving problems. Building leadership skills and management systems are vital, as is breaking down the structural barriers if the public sector is to function more accountably and efficiently. Better management information, and greater testing and experimentation will be needed for the Government to take the lead in anticipating and dealing with the health transition that India is undergoing, and to deliver much better services to the poor. 2.46 Some of the specific steps that could be taken include: (i) reviewing the fiscal structures and procedures in the health sector, including the roles of central, state and panchayati raj institutions financing the provision of basic inputs; (ii) developing budgeting and management tools at facilities, district, state and central levels to better plan, utilize, and monitor resources against the progress of important health outcomes; (iii) developing fiscal tools to enable greater experimentation with resource allocation, alternative financing mechanisms and with regard to choices between provision versus financing of health care services; and (iv) finding ways to share responsibilities and coordinate activities between the center and the states in the health, family welfare and nutrition areas, especially with regard to sectoral planning, health strategy and policy reform. Involving the states more intensively and collaboratively will help to solidify their commitment to the overall development policy on health, 24 population and nutrition services. Involvement of the Panchayati Raj Institutions would also address the development agenda for health much more broadly by focusing on important health outcome-related issues that are affected by water, sanitation and environmental concems. 2.47 In strengthening the management of health systems, there is an urgent need to focus on improving the quality of services. Current plans to review and redefine processes for quality assurance, including the establishment and use of functional standards for the delivery of care are positive measures. Such processes are also needed as a check to the unplanned introduction of expensive and relatively ineffective technologies, while facilitating the use of new effective approaches. Examples where technical shifts are being pursued include new therapeutic approaches in leprosy and tuberculosis control, broadening the interventions used in malaria control, and integrating management of childhood illnesses. 2.48 There are also specific steps which could directly reduce the scourge of malnutrition and poor health of small children. These include: (i) refocusing the Integrated Child Development Services Program on 0-24 month-old children, concentrating on improving quality of the services provided rather than expansion to additional community development blocks; (ii) improving targeting and monitoring of the Public Distribution System and National Mid-Day Meals Program; (iii) strengthening health worker skills relating to nutrition; and (iv) rebuilding India's institutional capacity to develop policy and undertake training, research, and advocacy. An effort to make early childhood development interventions more effective would need to focus on integrating psycho-social stimulation with the reduction of malnutrition and illness in a coherent manner. 2.49 Engaging the Private Sector. The private sector can no longer be ignored, but instead needs to be engaged as an agent to meet the basic societal goal of good health, particularly for the poor. This can, and is starting to, happen in a variety of ways, from contracting private services for various uses, to training non-governmental organizations and other private providers to deliver public programs, to initiating meaningful regulation and quality assurance measures. What is important now is to undertake studies and open a dialogue to better understand the dynamics of the private sector provision and financing in different areas of India. Another key step is to initiate joint efforts at identifying and solving problems. In some states, private providers and government have developed forums to form a common agenda for action. F. A Way Forward: Delivering More and Better Education and Health to the Poor 2.50 A renewed commitment to education and health services is required if the poor are to reap the benefits of better education and health. Building on ideas that are currently being tested is a good basis for the way forward. Moreover, there is a clear need to enhance our understanding of the factors that would improve delivery of basic health and education services, particularly to the poor. Continuing research in these areas would be a vital element in an effective poverty reduction strategy. While more spending is needed, the framework and incentives would need to change in order to make spending more effective. Four steps are proposed to improve education and health services that would contribute to reduction in poverty in all its dimensions: (a) Spend more effectively on elementary education and basic health systems, with better targeting to the poor, and with more public funding to address the unfinished agenda.' More spending in the same manner is not what is needed. The systems for resource distribution and political oversight of health and education have led to technically inefficient and inequitable allocations. Common symptoms are that funds are too thinly dispersed, salaries are crowding-out maintenance and operational costs, and capital investments are frequently located in sites that are inaccessible to the poor. Expanding the reach and quality of elementary education by re-directing government subsidies away from secondary and tertiary education towards elementary education would ensure that the poor receive the maximum benefit from government spending on education. ' For a discussion of the need for better and more spending in primary education, see World Bank (1997c). 25 (b) Focus public education and health services on meeting consumer needs, which will help improve the quality of public spending. Creative and vigorous processes are needed to generate greater demand for higher quality and more accountable education and health services. This would necessitate finding ways to increase the involvement of communities in the planning, monitoring, financing and oversight of social services, for which effective examples already exist, notably through women's self-help groups. It would also require more strategic and professional means of communicating among governments, service users and service providers about service availability, quality and costs. Carefully planned decentralization of education and health resources and accountabilities can facilitate this process, provided that these resources do not become "captured" by local elites and bureaucracies. (c) Realign the role of the state to focus on primary education and health and water and sanitation, while making efforts to upgrade private education and health services and to use them effectively. Where the government has assumed its primary role as a provider of education and health services, it may be more effective in increasing the quality and quantity of services, and in making them available to the poor, if it were also a more capable purchaser and regulator of these services from the private sector (including non-profit and for-profit sub-sectors). Experience needs to be gained in India on separating the financing and provision of social services. The relatively neglected functions of policy development, monitoring and regulation, and information provision will need to be developed in government. In any case, public sector management would need to be transformed by explicitly focussing on improved results in reaching the poor, rather than budget administration. Effective decentralization would also requires states and local governments to develop planning and management capacity, in the context of broader governance and civil service reforms. (d) Meeting holistic needs of children. India's future will depend on its children, where the greatest returns on its investment still lie. In view of the interdependent nature of health and educational needs of children, there is need to strengthen linkages among each sector, as well as to ascertain which set of interventions will be most effective. Since the process of human development is both continuous and cumulative, priority will need to be given to interventions in the earliest years of life which are critical to addressing the educational and health needs of the child in a more holistic and integrated manner. CHAPTER 3 REDUCING POVERTY FASTER: THE ROLE OF STATE FISCAL AND SECTOR REFORMS A. Overview 3.1 States in India play a key role in devising and implementing policies to reduce poverty, promote human development and stimulate growth. In addition, under the Indian Constitution, they are assigned significant responsibilities in major sectors such as agriculture, industry, infrastructure, education, health, social welfare and tax and expenditure policy at the state-level. Finally, the states' increasingly large fiscal deficits mean their fiscal policy is an important factor not only in their own performance but in India's overall fiscal sustainability (See Chapter 8). Improvement in the states' economic and fiscal management is therefore essential for rapid poverty reduction, faster growth and sustainable development. 3.2 This Chapter reviews developments in the states and suggests approaches to increase their contribution to poverty reduction. The main findings are: (a) On an average, the higher income states grew faster than other states from 1980-81 to 1996-97, with the exception of Tamil Nadu and Rajasthan. This divergent growth pattern widened the gaps in per capita income among the states, despite the Government's efforts to achieve balanced development across states. (b) Since 1991, Maharashtra, Gujarat and West Bengal in the high income states and all but one of the middle income states accelerated their growth, making the most of the Central Government's reforms because of their initial leads in governance, infrastructure, and human resources. As a result, the gap in per capita income has widened since 1991. (c) Growth slowed in the poorer states and Rajasthan after 1991. Bihar, the poorest state, actually experienced a decline in per capita income. Growth also slowed in Punjab and Haryana, the richest states in 1991. These states were probably less able to take advantage of the new opportunities created by the central government reforms because of weak governance, infrastructure and human resources, or, in the case of Punjab and Haryana, growth was restricted by the limited reforms in agriculture and issues of sustainability (See also Chapter 1). (d) The slow-growing, poor states (Bihar, Orissa, UP, and Madhya Pradesh in the 1980s) constitute about 40% of India's population. Unless these states improve their performance, it will become increasingly difficult to accelerate poverty reduction and development in India. The states improvement will have to come primarily through their own efforts, given their major roles in human development, infrastructure, and governance. The poor states have already received favorable treatment in central government transfers and loans, and further redistribution from the Center is unlikely, given their lack of performance and the Center's desire to reduce its large fiscal deficit. However, the Central govermnent could support state reforms through its own reforms to help improve governance, the civil service and the compensation system; to further improve inter-governmental fiscal relations; and to modernize the tax and industrial incentive system. (e) The states will need considerable improvements in governance, institutions, and the regulatory environment, and in their physical and social infrastructure. In turn, this will entail cuts in state public sector deficits through cuts in inefficient and, in many cases, inequitable subsidies to power, irrigation and secondary and tertiary education; increases in public infrastructure and human development 28 spending; and supporting reforms in power, irrigation, and the regulatory framework in general, in order to encourage private investment. (f) Andhra Pradesh has emerged as a leading reforming state. It has demonstrated that, with sustained political commitment, states can improve their policy environment, put their economies on a higher growth path, and narrow the disparities with the higher income states regardless of their initial conditions. Some of the lower income states (UP, Rajasthan, Madhya Pradesh) are showing increasing commitment to reforms. Successful implementation of these reforms could substantially decrease overall poverty in India. B. Differential Growth and Widening Disparities Among States 3.3 Balanced regional growth has always been an objective of successive Indian Governments and is supported by redistributive transfers to the states. Nonetheless, on average, the middle and high income states grew faster than the low income states from 1980-81 to 1996-97 (See Table 3.1).' The high income states' average growth rate per capita (3.9% p.a.) was almost twice the low-income states' (2.1%); the middle income states' average growth rate per capita (3.2%) was nearly 50% higher. 3.4 Consequently, ranking of the states by per capita income has changed only marginally since 1980-81 (See Table 3.1). The only significant changes that did take place occurred between 1980-81 and 1990-91. From 1980-81 to 1990-91, Rajasthan and Tamil Nadu realized the highest growth rates of all, 4.7% p.a. and 4.1% p.a., respectively. Rajasthan invested heavily in public infrastructure. Tamil Nadu had excellent initial conditions in terms of human resources and the irrigation sector where most of the potential investment had already been completed. Their rapid growth rates moved Rajasthan up from the low to the middle income group (from 13th to gth in ranking), and Tamil Nadu from the middle to the high income group (from 8th to 5th). 3.5 After 1991, growth differentials accentuated, with growth increasing in the high income states of Gujarat, Maharashtra and West Bengal, and in the middle income states, except Rajasthan. At the same time, growth slowed in most of the low income states, as well as in the two highest income states in 1990- 91, Punjab and Haryana. The policy environment changed significantly after 1991 with the central government's liberalization of the trade and investment regime. These reforms and other policy changes allowed the states a larger role in determining their development paths and attracting investment. Gujarat, Maharashtra and most of the middle income states were able to take greater advantage of the new conditions because of better initial conditions, governance, infrastructure, and human resources, than the low income states. Moreover, the poorest states, with the exception of Orissa, failed to improve their state-level policies to offset their initial disadvantage in attracting new investment. As a result, their growth has slowed and in Bihar, the poorest state, GDP per capita actually declined. Punjab and Haryana, with their dependence on agriculture where limited reforms occurred, also experienced slower growth. I The analysis in this chapter covers 26 States (including Delhi), except in Sections B and C, where based on the real per capita income (1980-81 prices), the 14 major states have been grouped into three categories - high income states, middle income states, and low income states, accounting for, respectively, about 30%, 30%, and 40% of the total population of the group. The states' GDP data used for the analysis is the old National Accounts, based on 19S0-SI prices and weights. The analysis will need to be revisited once the GDP data for the individual states is re-based to the 1993-94 prices and weights and with the additions to output in some of the sectors (See Chapter 8, footnote 1). However, given the changes in the National Accounts, it seems unlikely that the re-based accounts would change the conclusions much. 29 3.6 The widening growth differential naturally translates into a widening dispersion of state per capita incomes, an unusual result compared to other countries.2 As Table 3.2 shows, dispersion of average Table 3.1: Indian States' (14 Largest) Real Per Capita Income (Rs. 1980-81 prices) Per Capita Income Growth Rate (%) 1980-81 1991-92 1980-81 1980-81 Rank 1990-91 Rank 1996-97 Rank 1990-91 1996-97 1996-97 High Income States 2,385 3,269 4,377 3.2 6.1 3.9 Punjab 3,020 1 4,163 1 4,935 2 3.3 2.8 3.1 Maharashtra 2,671 2 3,826 3 5,358 1 3.7 7.4 4.4 Haryana 2,647 3 3,864 2 4,392 3 3.9 2.6 3.2 Gujarat 2,200 4 3,047 4 4,221 4 3.3 8.6 4.2 West Bengal 1,912 5 2,349 6 3,146 6 2.1 4.9 3.2 Middle Income States 1,607 2,159 2,676 3.0 4.2 3.2 Karnataka 1,690 6 2,295 7 2,988 7 3.1 3.4 3.6 Kerala 1,690 7 2,106 8 2,705 8 2.2 4.9 3.0 Tamil Nadu 1,677 8 2,514 5 3,297 5 4.1 5.2 4.3 AndhraPradesh 1,543 9 1,997 10 2,432 10 2.6 3.8 2.9 Madhya Pradesh 1,508 10 1,951 11 2,205 11 2.6 4.1 2.4 Low Income States 1,308 1,725 1,840 2.8 1.8 2.1 Uttar Pradesh 1,418 11 1,842 12 1,997 12 2.6 1.8 2.2 Orissa 1,415 12 1,555 13 1,833 13 0.9 1.5 1.6 Rajasthan 1,373 13 2,170 9 2,533 9 4.7 3.9 4.3 Bihar 1,062 14 1,374 14 1,245 14 2.6 -0.7 1.0 Average of 14 States 1,715 2,310 2,842 3.0 4.4 3.2 Note: Using the 1980-81 based GDP series Source: CSO, World Bank staff estimates Table 3.2: Standard Deviation of States' Per Capita Output (Logs of output of 14 Major States) State GDP Agriculture Industry Services 1980-81 0.29 0.33 0.37 0.33 1981-82 0.29 0.34 0.37 0.34 1982-83 0.30 0.38 0.36 0.34 1983-84 0.29 0.34 0.36 0.34 1994-85 0.30 0.33 0.36 0.34 1985-86 0.31 0.36 0.39 0.35 1986-87 0.31 0.36 0.39 0.33 1987-88 0.31 0.39 0.37 0.34 1988-89 0.31 0.37 0.37 0.33 1989-90 0.33 0.37 0.37 0.34 1990-91 0.33 0.38 0.37 0.35 1991-92 0.33 0.39 0.35 0.36 1992-93 0.36 0.40 0.39 0.37 1993-94 0.36 0.39 0.40 0.40 1994-95 0.38 0.39 0.44 0.40 1995-96 0.39 0.40 0.45 0.42 1996-97 0.40 0.44 0.45 0.42 Source: RBI, using real GDP with a 1980-81 base. 2 Widening inequality among Indian states is in sharp contrast with the evidence from other federal countries. Inter-state inequality has declined in USA, Canada, Europe, Japan, Australia, China (until 1992), and at a slow pace, Indonesia. In addition, inter-regional inequality is significantly higher in India compared to the other large federal states, with the exception of China. The standard deviation of per capita income was estimated at 0.28 in Indonesia (1993), 0.20 in USA (late 1980s), 0.15 in Japan (1980s), 0.25 in Italy (1990), 0.10 in UK (1990), and 0.51 in China (1992) against 0.40 in India (1996-97). For a more detailed discussion of interstate disparities and a literature survey on the convergence issue, see Yagci. 30 per capita real income among the 14 major states, measured by standard deviation, has increased from 0.29 in 1980-81 to 0.40 in 1996-97.3 In 1980-81, the highest state per capita income (Punjab) was 2.8 times the lowest (Bihar). This ratio increased to 4.3 in 1996-97. If the trend continues, the ratio would reach 7.5 in the next 15 years. Table 3.2 also show that dispersion has increased in all three major sectors (agriculture, industry, and services), and accelerated after 1991. 3.7 Although the share of population below the poverty line declined and human development indicators improved in all states, progress was generally faster in the fast growing states, which are mostly higher income states (See Table 3.3). The standard deviation of poverty incidence worsened slightly and the disparity in health indicators (birth rate and infant mortality) widened noticeably, although the disparities in literacy fell. Table 3.3: State Poverty and Social Indicators and Their Standard Deviations Population below the Literacyib Female Literacy Birth Rate/c Infant Mortality/d Poverty Line/a 1978 1994 Rate of 1981 1991 1997 1981 1991 1997 1981 1991 1996 1981 1991 1997 Change Maharashtra 67.8 43.5 2.7 53.5 64.9 74.0 39.6 52.3 63.0 29.8 25.2 23.2 79 59 47 Punjab* 26.9 21.6 1.4 46.4 58.5 67.0 38.4 50.4 62.0 30.2 26.3 23.5 81 56 51 Haryana - - - 41.7 55.9 65.0 25.8 40.7 52.0 35.9 30.9 28.8 101 75 68 Gujarat 39.9 33.8 1.0 49.9 61.3 68.0 36.9 48.6 57.0 34.2 2S.0 25.5 116 67 62 Tamil Nadu 54.9 34.9 2.8 52.6 62.3 70.0 39.4 51.3 60.0 27.9 9. 5 19.2 91 58 53 West Bengal 51.8 26.0 4.2 46.3 57.7 72.0 34.4 46.6 63.0 32.0 25.7 22.8 91 65 55 Karnataka 52.9 37.6 2.1 43.9 56.0 58.0 31.7 44.3 50.0 29.1 25.5 23.0 69 73 53 Kerala 53.2 29.2 3.7 78.9 89.8 93.0 73.4 86.2 90.0 24.9 17.4 17.81 37 17 12 Rajasthan 51.6 43.5 1.1 28.4 38.6 55.0 13.4 20.4 35.0 40.1 34.0 32.3 108 90 85 AndhraPradesh 47.0 29.4 2.9 34.1 44.1 54.0 23.3 32.7 43.0 30.8 24.3 22.7 86 71 63 Madhya Pradesh 63.9 44.1 2.3 32.2 44.2 56.0 18.0 28.9 41.0 38.5 34.9 32.4 142 104 94 Uttar Pradesh 46.7 40.2 0.9 31.4 41.6 56.0 16.3 25.3 41.0 38.4 36.2 34.0 150 98 85 Orissa 62.1 40.3 2.7 38.8 49.1 51.0 24.0 34.7 38.0 34.0 27.2 26.8 135 115 96 Bihar 64.8 60.4 0.4 30.3 38.5 49.0 15.8 22.9 34.0 37.2 32.0 32.1 118 73 71 Standard 0.24 0.26 - 0.27 0.23 0.17 0.45 0.38 0.27 0.13 C.220 0.19 0.34 0.44 0.49 Deviation * Data for population below poverty line for Punjab includes Haryana a/ peTcent, based on World Bank India Poverty Assessment 1997. b/ percent of population of seven years and older ci per thousand population d/ per thousand live births Source: Govemment of India, Economic Survey; Ministry of Human Resources Development, Annual Report 1997-98; World Bank Staff Estimates. 3.8 Some states, notably Kerala and West Bengal, had the fastest rates of poverty reduction over 1978-94 (See Table 3.3), faster than several more rapidly growing states. For example, in Kerala, human resource development enabled Keralites to emigrate intemationally and generate remittances that raised income and reduced poverty in ways that are not captured by Kerala's Gross State Domestic Product (GSDP) figures. However, the large poor states cannot adopt this strategy very well, given their poor levels of human development, their weak fiscal situations that limit the availability of funding for human 3As noted in Chapter 1, this result need not be inconsistent with a minimal worsening of the Gini coefficient of (spending) distribution derived from NSS data, because the middle income states grew faster than the highest income states. Also, the increase in the standard deviation of per capita incomes, though an unusual result and worrisome, is not significantly different from zero. And, of course, the NSS data refer to individuals, not average state-wide data. 31 development, and the difficulties of substantially affecting the work force in these large states by emigration, even to other states. In the case of West Bengal, land reforms and high agricultural growth over the period may have been important causal factors. Further analytical work on such issues (and the linkages between growth, poverty reduction, and governance) would help our understanding of the determinants of growth at the state level. Also, further analysis of the performance of reforming states such as Andhra Pradesh, Gujarat, and Madhya Pradesh, focusing on the links between micro-reforms and macro outcomes, would be useful. C. State-Level Reforms to Reduce Poverty 3.9 Accelerated, labor-intensive development in the states is needed to reduce poverty, particularly in the four poorest states (Bihar, UP, Orissa, and Madhya Pradesh). These states constitute almost 40% of the population and have been a heavy drag on the efforts to reduce poverty and on national economic and social development. Speeding up India's development will depend heavily on better performance in these states. 3.10 The states' improved performance will depend largely on their own efforts, given their major roles in human development, intra-state infrastructure, and the intra-state regulatory framework. The states already receive large loans and transfers from the center - Bihar and Uttar Pradesh, for example, fund only about 35% of their revenue expenditures, with 65% coming from the Center- and it is unlikely that large increases in support will be forthcoming given the need for overall fiscal prudence and the problems with many states' previous use of transfers. The Central Government can, however, provide a supportive overall framework that contributes to sustainable rapid growth in output and labor demand, including improved governance, reduced international trade restrictions, internal deregulation, improved infrastructure, a sound financial system, and fiscal and monetary prudence (See also paras. 3.31, 3.35, and chapters 4-8). 3.11 Accelerated development in the states will depend on more public and private investment to speed growth, greater efficiency in the use of investment, and improved human development. What specific state-level reforms might bring this about? In general terms, efforts will be needed to improve governance and institutions, for example, strengthening transparency, increasing accountability in service delivery, reducing opportunities for discretion, and improving expenditure management and tax administration. Physical and social infrastructure needs improvements, which will entail supporting reforms in state finances, power and irrigation, and the regulatory framework in general. Such reforms and development spending will create an investment-friendly environment to attract private capital that is needed for growth (See Govinda Rao et al). Recent state-level economic studies, undertaken with close cooperation between the state governments and the World Bank (AP, UP, Kamataka, Orissa, and Rajasthan) and NIPFP (Punjab, Haryana, Assam, Delhi, Tamil Nadu, and Kerala) have helped outline key fiscal and sector reforms in more detail. These, along with fiscal decentralization, are discussed below. D. Cutting the States' Fiscal Deficits and Raising Their Development Spending 3.12 The Weakening of State's fiscal performance in the 1990s. The states adjusted only marginally to the crisis of 1991, almost exclusively by cutting their capital and human development spending between 1990-9l and 1993-94 (See Table 3.4 and Annex Table 8.8). This pattern of adjustment raises questions about the sustainability of longer run development and poverty reduction. The states made only limited attempts to raise revenues by increasing user charges and bringing untaxed incomes into the tax net; indeed, Kurien suggests that the states engaged in competitive populism and "tax wars" to lure investment. The states also allowed their non-developmental spending to continue to rise as a percentage of GSDP. One element in the rise of revenue spending was the rise in the states' interest burden . Interest costs rose, even as the deficit declined somewhat and the states' debt stock remained 32 roughly constant, because India's financial liberalization made the true cost of state borrowing clearer. After 1994, even this marginal improvement in the states' deficit was reversed, as the Central Government, as part of its efforts to control its own fiscal deficit, cut its grants to the states and the states made minimal adjustments. 3.13 By 1997-98, the deterioration in fiscal performance of the states would have pushed the deficit back to the level of 1990-91 but for the one-time injection of VDIS revenues raised by the Center (See Table 3.4: Main Fiscal Trends in All States (percent of GDP) (Fiscal Year ending March 31) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 R.E. Total Revenue 11.5 12.1 11.9 12.0 11.8 11.2 10.8 11.3 Own Revenue Tax 5.2 5.4 5.2 5.3 5.4 5.2 5.0 5.4 Non-Tax 1.6 1.9 1.7 1.8 2.1 1.9 1.7 1.6 Central Transfers 4.6 4.8 5.0 5.0 4.3 4.1 4.1 4.3 Shared Taxes 2.5 2.5 2.7 2.6 2.4 2.4 2.5 2.6 Grants 2.2 2.3 2.3 2.4 1.9 1.7 1.6 1.8 Total Expenditure 14.7 15.0 14.7 14.4 14.4 13.8 13.5 14.6 Revenue Expenditure 12.4 13.0 12.6 12.5 12.4 11.9 12.0 12.6 Interest Payments 1.5 1.6 1.7 1.8 1.9 1.8 1.8 2.0 Education 2.7 2.6 2.5 2.5 2.4 2.4 2.3 2.5 Health and Family Welfare 0.8 0.8 0.7 0.8 0.7 0.7 0.7 0.7 Capital Expenditure (net) 2.3 2.0 2.1 1.9 2.0 1.9 1.5 2.0 Revenue Deficit 0.9 0.9 0.7 0.4 0.6 0.7 1.1 1.3 Fiscal Deficit 3.2 2.9 2.7 2.3 2.6 2.6 2.7 3.3 Debt Stock 18.7 18.6 18.4 18.3 17.8 17.4 17.2 18.2 Note : New GDPmp series is used (revised base 93-94) and for years prior to 1993-94 re-basing is done assuming a linking factor Source: RBI States Supplement 1998, CSO Table 3.5).5 In 1998-99, the states' fiscal deficit worsened to 4.2%, well above the 3.2% in 1990-91 and is likely to remain high in 1999-2000 (See Table 3.5) as the Central Government's excessive wage settlement continues to cascade down to the states (See Kurien and World Bank 1998a). Moreover, the composition of state public spending has worsened even further, with rise in revenue expenditure and the likely slowdown in development spending (See also Chapter 8). 3.14 The issue related to reform of state finances has assumed immense significance as the fiscal deficit of state governments has reached unsustainable levels. The gross fiscal deficit (GFD) to GDP ratio of all state governments touched a high of 4.2% in 1998-99 - the highest recorded in Indian fiscal history so far. The fiscal performance of individual states varied widely over the 1990s, with the most marked deterioration coming in some of the poorer states. In Uttar Pradesh, the fiscal deficit rose from 4.5% of GSDP in 1993-94 to 8.6% in 1997-98; in Bihar, from 4.0% to 6.2%; in Orissa from 5.7% to 6.3%. Of course, fiscal deterioration was not limited- to the poorer states - in Kerala the deficit deteriorated to 7.3% and in Rajasthan to 4.6%. 51n Table 3.4, VDIS revenues are not included in the 1997-98 figures (revised estimates) for state revenues. However, the actual figures, which are shown in Table 3.5, include the states' share of VDIS revenues, which reduces the fiscal deficit. See World Bank (1998a) for details on VDIS. 33 3.15 As a result of their deficits, most poorer states have become highly indebted; in Uttar Pradesh, the debt-to-GSDP ratio rose from 26% to 31%; in Bihar from 35% to 42%; and in Orissa from 41% to 43% (See Annex Table 3.1 for deficit and debt ratios of individual states). Financing these large deficits has meant increased borrowings and guarantees (See Table 3.5 and Box 3.1). These states, and the others with large deficits, are on unsustainable development paths given the high real cost of borrowing and the crowding-out of development spending by interest costs, salaries and subsidies. This is also indicated by the rising revenue deficits and their increasing share in the overall fiscal deficit. The political environment and the weak reform record in some states suggest that it will be an enonnous challenge to restore their fiscal health and strengthen the development impact of their public sectors. Table 3.5 : Financing of All States Fiscal Deficit (Percent of GDP) 1990-91 1994-95 1995-96 1996-97 1997-98 1998-99 (RE) 1999-00 (BE) Fiscal Deficit 3.2 2.6 2.5 2.7 2.9 4.2 4.0 Financing: Loans from Center 1.7 1.3 1.1 1.2 1.5 1.8 1.9 Market term loans 0.5 0.4 0.5 0.5 0.5 0.6 0.5 Others (PFs, reserves and deposits) 1.0 0.9 0.9 1.0 0.8 1.8 1.6 Memo: Revenue Deficit 0.8 0.6 0.6 1.1 1.0 2.2 2.2 GDP numbers are at the 1993-94 base. For 1998-99 GDP, revised estimates (July 1999) have been used Source: RBI Annual Report 1998/99 (Appendix 4.5 for 1997-99 figures), Supplement to RI3 Bulletin on Finances of State Govemments, CSO, World Bank Staff Estimates Box. 3.1: Financing State Governments' Deficits: Borrowing and Guarantees The States are limited in their domestic borrowing by the Central Govemment and 60% of their debt is to the Central Government. The Central Government passes on funds that it borrows on behalf of the States at its average cost of funds, which have been rising with financial liberalization. The States are constitutionally prohibited from borrowing internationally and have reasonably tight limits on overdrafts at the Reserve Bank of India. Thus the Indian States face a relatively hard budget constraint in the sense that they are unable to automatically access central bank funding, in contrast to the Argentine states whose access was a major factor in Argentina's inflation. (Brazilian states had automatic access to their own banks, and also external capital.) However, the Indian States have been able to ease the budget constraint through, in some cases, temporarily eased access to the Reserve Bank, build up of arrears to suppliers (a technique also used by State Public Enterprises), and campaigns to stimulate relatively high cost, small savings that are largely funneled back to the State that mobilizes them - another factor in rising interest costs of state debts (See Box 3.3). State Government Guarantees have also been used to circumvent the "hard budget constraint". Before 1994-95, State Public Enterprises (SPEs) were given separate borrowing allocations for each year as part of state-specific overall ceilings for SLR and market borrowing. With the removal of these limits, state guarantees given to the SPEs have become a convenient means for the states to circumvent the ceiling imposed on borrowing by the Central Government. This issue has assumed growing importance in recent years because of rapid increase in these liabilities. The volume of state guarantees increased from Rs. 403 billion in March 1992 to Rs. 796 billion in September 1997, representing a compound rate of growth of 12% a year. Total outstanding guarantees now account for about 9-10% of states' combined GSDP. Variation among states is large - as a percentage of GSDP, state guarantees range from 4% in UP to 14% in Punjab. The main reasons for the substantial increase in state govemment guarantees in recent years include: growing need for infrastructure at the state-level particularly in the power, irrigation and road sectors; and a substantial decline in central government loans to the states from 3.4% of GDP in 1995-96 to 2.2% in 1997-98. These, together with a sharp fall in grant transfers from the Central Government from 2.7% of GDP in 1993-94 to 1.9% in 1997-98, have forced the states to resort to off- budget financing of infrastructure through SPEs without making adequate provision for project-specific cost recovery. A Committee consisting of finance secretaries of a few state governments and RBI officials was formed in November 1997 to review the issues concerning state government guarantees. The Committee completed its work and published its report in February 1999 (RBI 1999b). The main recommnendations include setting ceilings on the use of guarantees with reference to NSDP, Consolidated Fund or net market borrowing of the state. Andhra Pradesh, Gujarat, and Karnataka have already established ceilings for the volume of state guarantees. Monitoring state government guarantees would be a critical element in an enhanced dialogue of the Central Government with the states on fiscal reforms. 34 3.16 State-level fiscal reforms that would correct this deteriorating situation and improve the states' development potential would include efforts to: * improving the tax system - for example, tax simplification, introduction of VAT (See Box 3.2), introduction of taxes on agricultural incomes and land; * reforming public enterprises - including private service provision, privatization, closure, retrenchment and re-deployment; * re-prioritizing spending - increased social sector and infrastructure spending, consolidation of the numerous welfare programs, better targeting of social subsidies, downsizing and upgrading the civil service; and * improving cost recovery - particularly in power and irrigation, sectors that are key to the reform process (See below). Such measures would reduce the fiscal deficit to a sustainable level, encourage private investment, and ensure that the states' public sectors contribute substantially to poverty reduction and development. In fact, fiscal crisis has spurred some of the poor and most indebted state governments - such as Uttar Pradesh - to embark on the path of comprehensive reforms, similar to the economic restructuring program launched by the Govemment of Andhra Pradesh. The reform efforts of these states are aimed at (a) restructuring state-level expenditure and improving governance so as to maximize the outcomes achieved by public spending and private investments in the state; and (b) enhance the revenue base through tax policy and administrative reforms and improved cost recovery from publicly provided non- merit goods and services. Box 3.2: India's Experience with State-Level VAT Maharashtra is the only Indian state to adopt a (partial) VAT in 1995. It was recently repealed because of taxpayers' resistance and revenue loss. Reviews indicate that such implementation problems owed to inadequate design and preparation for VAT. VAT has been successfully implemented in over 100 countries including some federal systems with state-level VAT. The main weaknesses of Maharashtra VAT included: (a) adopting one kind of VAT (the credit invoice method, where sellers receive a rebate on VAT paid by input suppliers on showing supporting invoices) up to the manufacturing gate, and another kind of VAT (the subtraction method, under which the amount of VAT on a transaction need not be stated on the associated invoice) to cover wholesale and retail trade. The different kinds of documentation required for the two methods resulted in Maharashtra losing the opportunity to have an unbroken record of the chain of sales and purchases from the manufacturing to the retail stage. Yet, the key to achieving effective VAT compliance rests on the ability of the tax administration to cross-check records from one stage against the other; (b) adopting a subtraction VAT with more than one rate (Maharashtra had three rates), which is regarded as a fundamental design flaw and can lead to anomalous VAT computations; (c) the decision not to abolish the many tax holidays and tax deferrals when the VAT was adopted narrowed the base considerably and likely encouraged over-invoicing; (d) introduction of VAT by grafting of VAT features on the existing laws and administrative system; and (e) most damaging, the lack of adequate attention to staff and taxpayer education and strengthening the tax administration. Andhra Pradesh and Madhya Pradesh have adopted a different approach. Utilizing technical assistance, they are preparing legislation for a full-fledged VAT and emphasizing administrative renewal and staff and taxpayer education. The Central Govemment could support the more efficient taxation approach of VAT by itself moving to a national VAT. While there has been a decision to introduce VAT in all States by April 2001, preparations for that event are behind schedule. 3.17 A number of reform initiatives that are under the responsibility of the Central Government would help improve the general policy environment for all the states. They include: agricultural reforms (such as reduction in distortionary subsidies, improved pattern of public spending, deregulation of the sector and rural finance, and empowerment of the poor through participation); elimination of small-scale industry reservation; removal of barriers to inter-state trade; providing leadership and incentives in politically sensitive measures such as elimination of industrial incentives by the state governments, harmonization of state taxes, improvement in cost recovery and the regulatory framework, and introduction of civil service and compensation reforms; and improvement in decentralization (See below) and rationalizing and modernizing inter-governmental fiscal relations (See next paragraph). Unless 35 supportive measures are taken in the poorer states, this second wave of reforms by the Central Government would continue benefiting mainly the higher income states. 3.18 Recently, the Center has been attempting to help the states embark on the path to fiscal rectitude, in response to their plea for extraordinary financing to manage the impact of the recent hefty pay revision, in line with the award of the Fifth Central Pay Commission for the federal-level services. The Central Government has signed Memoranda of Understanding (MoUs) with 9 states so far, whereby extraordinary short-term advances have been made by the Central Government in return for fiscal reform by the states. These efforts are a welcome complement to the efforts already underway on the part of some reforming states. E. Reforming Power and Irrigation at the State-Level 3.19 Power and irrigation sector reforms would be the center-piece of the reform strategy in the states. Explicit and implicit subsidies (mainly to farmers) are the highest in these sectors - for example, they amounted to about 5% of GSDP in AP in 1997. The subsidies are not only costly, but also induce inefficiencies, such as overpumping of aquifers, and have unclear distributional impacts. Without reforms and improved cost recovery, it will be difficult to encourage private provision of power or better use of the canals. Therefore, improvement in cost recovery in these sectors on a sustained basis and sector restructuring, are essential to restore sustained growth (particularly in agriculture) and sustainable state finances. 3.20 The power sector in almost all the states faces a twin crisis: severe power shortages and heavy financial losses to the State Electricity Boards (SEBs), arising mainly from theft and provision of almost free power to farmers. These subsidies are a major element in the deterioration of state finances. De- politicization of tariffs and management of the utilities, and restoration of creditworthiness in the sector are essential to attract private funds to reduce the acute power shortages in the sector. The needed reforms would typically involve separation of the generation, transmission, and distribution activities of the SEBs, setting up new independent companies operated commercially under the Companies Act to carry out these activities, privatization of distribution business, setting up an autonomous Electricity Regulatory Authority to establish and regulate tariffs, and enacting legislation to enable implementation of these reforms (See Chapter 5). 3.21 Effective expansion of irrigation is key to ensuring sustained agricultural growth and reducing rural poverty. The states normally allocate large public funds for the development of canal irrigation network. However, the benefits of these investments are not fully realized, because these funds are thinly spread over too many new projects, leading to substantial time and cost over-run. In addition, Operations & Maintenance (O&M) activities are severely under-funded. The resulting deterioration of the network adversely affects the efficiency of the irrigation system. The main irrigation sector reforms would include: adequate budgetary provisions for O&M expenditure, substantial improvement in cost recovery, greater participatory involvement of farmers in irrigation systems management through constitution of Water Users' Associations (WUAs), transfer of revenue collection and O&M responsibility to WUAs, and improvement in the institutional and legal system. Encouraging private sector participation in infrastructure through creation of a supportive legal and policy environment and improvement in delivery of social services by strengthening institutions and training staff is also a priority reform area. It is important for the state governments to create an enabling environment that attracts fresh investments and improves private sector participation in the states' development process. Without these sector reforms, both fiscal sustainability and accelerated growth would be very difficult to achieve. 3.22 Andhra Pradesh has emerged as the leading reforming state in the past three years, gaining considerable attention in India and abroad, and generating a strong demonstration affect amongst many 36 other states in India. It has launched a comprehensive reform program, which covers state finances (civil service downsizing, subsidy reduction, reprioritization of expenditure, and a proposed adoption of VAT), public enterprise reform (privatization, closure of unviable companies, and employee downsizing with a supporting safety-net program), power (unbundling of APSEB, setting up a Regulatory Authority to determine tariffs, and privatization of distribution), and irrigation (improving cost recovery, increasing allocations for O&M, establishment of over 11,000 WUAs, and transfer of O&M responsibility to the same). So far, the reforms have been implemented effectively. The fiscal deficit has been brought down from 3.8% of GSDP in 1994-95 to 3.0% in 1997-98. The business community has reacted positively to these initiatives and AP has become one of the leading states in attracting new local and foreign investment. AP has demonstrated that, with sustained political commitment, states can improve their policy environment, embark on a path to higher growth and narrow the disparities with the higher income states regardless of their initial conditions. 3.23 Orissa is the pioneering state in power sector reform - it has served as an example for other states, and in particular for Haryana and A-P. It has recently sold off 49% of its thermal power generating company - the first privatization of its kind in India and the largest by a state - and has also privatized majority stakes in its distribution companies (See Box 5.3). Orissa also has a reasonable record in public enterprise reform and private participation in the mining industry and infrastructure. 3.24 Other states showing an increasing commitment to reform include Haryana (power sector) and Gujarat (public enterprise reform, private sector participation in infrastructure). Rajasthan, UP, and Madhya Pradesh are also considering fiscal and sector reforms to improve their finances and promote growth. UP has also initiated work to improve governance and address environmental issues in the state. A worrisome development is the policy back-tracking in Punjab and Maharashtra: Punjab started providing farmers with free power and water and Maharashtra promised free power to farmers. These developments make it politically more difficult to improve cost recovery in these sectors in other states. F. Decentralization: Emerging Issues and the 11 Finance Commission 3.25 Given its economic, demographic, and social diversity, India has developed a three-tier structure of government (Center, states, and local authorities) to promote political involvement, accountability, effective service delivery, and regional balance. States have considerable fiscal autonomy under the Constitution, but until recently, central planning and the dominance of national parties in national politics limited the full realization of decentralization. 3.26 Since 1991, three developments have initiated a process of further devolution of powers from the Center to the lower levels of govemment. First, opening of the activities previously reserved for the public sector, elimination of industrial licensing by the Central Govemment, and weakening of central planning, have created an environment in which state govemments assume larger responsibilities to define their development policies and to attract private investment in their respective territories. Second, weakening of the national parties has led to multi-party coalition govemments at the Center, enabling smaller regional parties to participate in these coalitions and have a strong influence on national politics. Third, the Constitution Amendment Acts (73rd and 47th) in 1992 provided a strong legal basis for strengthening the local governments. 3.27 Fiscal federalism. The Constitution specifies the expenditure responsibility of the Central Government and state govemments in three lists defining central powers, state powers, and concurrent powers where both levels of govemment can exercise authority. Expenditures under states' responsibility include public health and sanitation, water supply, agriculture and irrigation, and road transport. Expenditure on education, social security, and supply of electric power is under joint responsibility with the Central Government. The Constitution also specifies the taxation powers of the Central Govermnent 37 and the state governments. The states' list includes land revenue and agricultural income tax, state sales tax, state excise duty on alcoholic beverages, and taxes on motor vehicles. 3.28 While the states collect about 37% of the consolidated government revenue, they account for about 60% of the consolidated government expenditure net of state interest and central transfers. The states incur about 87% of total expenditure on social services and 59% on economic services. The resulting vertical fiscal gap is financed by grants from the center and borrowing as limited by the Central Government (See above). There is a wide gap in the states' self-finance, ranging from Gujarat's 76% to Uttar Pradesh and Bihar's 35-36%. 3.29 A Finance Commission, which is appointed every five years, recommends how the proceeds of taxes collected by the Central Government should be shared with the states, how this should be divided amongst the states, and how to distribute grants-in-aid to the states. In the past, the size of these transfers has been largely determined by the need to fill the gap between the entire or non-plan "current-account" revenues and expenditures of the states, based on five-year projections. The Planning Commission, in consultation with the states, determines direct central govemment support (a mixture of loans and grants) for projects in states' development plans and the distribution of development grants from the center to the states. Most transfers by the Planning Commission to the states are block transfers composed of loans and grants. Official development assistance to the states is passed on to the states at the same terms as regular transfers, with full additionality since 1992. The Central Government also provides conditional matching grants for Centrally Sponsored Schemes (CSS) which are cost-shared programs. Regional balance is a key consideration in determining the transfers under these three mechanisms. 3.30 This system has a number of positive features. It provides a transparent rule-based framework, which makes states' own revenue and transfers from the Center predictable. As discussed above, by subjecting state borrowings to central government approval and precluding access to external finance, it also imposes a relatively hard budget constraint on the states. However, the system also provides perverse incentives for the states to increase the size of their development plans and the current expenditure without adequate regard to expenditure priority, debt sustainability, and resource mobilization. 3.31 The main weaknesses of the system include the following: (a) the "gap filling" approach, adopted traditionally by the Finance Commission, in determining the grant awards, undermines fiscal discipline because it is not guided by the fiscal capacity of the states, and encourages states to run revenue deficits; (b) the block transfers by the Planning Commission in aid of state plans have an inherent bias in favor of new projects which crowd out expenditure for the maintenance of the public assets; (c) provision of central financing for wage components of new programs for the first five years from inception encourages an unsustainable "ballooning" of state civil services; (d) proliferation of centrally sponsored schemes (over 180 programs equivalent to 1.3% of GDP) with their high administrative overhead costs and rigid eligibility criteria, undermines effectiveness and distorts state priorities; (e) the high cost small savings mechanism, which has recently grown to be equivalent to 1.2% of GDP, far outstripping the financing contribution of market loans at 0.6% of GDP (See Box 3.3); (f) market borrowings arranged by RBI with a single interest rate for all states constitutes a barrier to the development of a competitive market for sub-national debt with state-specific risk premia leading to market-based fiscal discipline; 38 (g) borrowing ceilings for individual states are not determined with reference to state-specific debt sustainability analysis; and (h) occasional central govemment loan forgiveness and refinancing without conditionality creates the expectations of future debt relief which undermines financial discipline amongst states. 3.32 Many of these weaknesses are acknowledged by the Central Government in the Ninth Plan. Under the theme of co-operative federalism, the Ninth Plan proposed to move with the states to a more flexible approach to transfer, design and the coordination of development strategies. Specifically, it proposed that the National Development Council suggest changes in the grant-loan formula while also considering the question of inter-state distribution of central assistance among states. The Ninth Plan also proposes to remove the bias in favor of large plans by de-linking the size of plan from the level of central assistance to the states. This proposal, if fully implemented, would make a welcome reduction in the distinction between plan and non-plan expenditures. However, there is little sign that these proposals will be adopted soon. Box 3.3.: The Growing Importance of Small Savings in State Finances Small savings in India comprise ten financial instruments run by the post offices and public sector banks and amount to 1.6% of GDP (in 1999-00). Prior to the Budget for 1999-2000, 75% of the net collections from small savings used to be transferred from the Consolidated Fund of the Central Government to the state govemments/union territories (UTs) in which the savings originate, in the form of non-plan loans. These loans are offered at 13.5% rate of interest for a tenure of 25 years, with State govemments enjoying a 5-year moratorium. Apart from the tax foregone on these tax-saving zero-risk financial instruments, small saving collections cost the Central Govemment about 17-18% (which includes administrative/transaction costs, commission charges to the wide network of agents). Despite the fact that these are high-cost funds, States have been increasingly resorting to these loans in the absence of improved efforts at raising own tax revenues. In fact, most States oppose efforts to lower interest rates on small savings, essentially due to the fear of an adverse impact on mobilization. Following interest rate deregulation of time deposits with banks, increased risk perception attached to competing deposit takers and a fall in stock market returns in recent years (except 1999), there has been a substantial jump in small savings as part of the capital receipts of the govemment. In the past, the non-plan loans offered to state govemments in lieu of small savings collections used to be part of expenditure of the Central Govemment, adding to the already high fiscal deficit of the Center. Largely based on the recommendations of the R.V.Gupta Committee Report, 1998, the Union Budget for 1999-2000 proposed a change in the accounting framework for small savings (See RBI Annual Report, 1998-99, Box IV. 1). Accordingly: (i) small savings collections will be credited to the National Small Savings Fund (NSSF) in the Public Accounts, and not the Consolidated Fund; (ii) all withdrawals of small savings by the depositors would be made out of the accumulation to the NSSF; (iii) the balance in the NSSF would be utilized to make investments in "special securities" of the Central and state govemments; (iv) the interest eamed on these govemment securities will constitute the income of the NSSF while the servicing cost and management cost of small savings will be the expenditure of the Fund; (v) these "special securities" thus issued will add to the respective govemment's intemal debt. The changes thus effected are mere changes in accounting, leaving the basic issues unchanged, and simply shift the debt burden from Central to state govemment books. On the other hand, the recent rise in small savings collections has increased the urgency of reform, since small savings, alongwith govemment guarantees (see Box 3.1), are avenues of partial escape from the relatively hard budget constraint established for the states by the GOI and are an increasingly important source of internal debt. The hard budget constraint could be restored by delinking small savings from going to the states where it is collected, while continuing to permit states to have access to the savings pool. Other measures would need to address the high cost of this instrument, such as freeing up the interest rate, and dropping the tax concession. It would also help to make explicit or do away with the implicit GOI guarantee on this instrument. 3.33 Fiscal decentralization needs to match the on-going devolution of powers with fiscal resources to enable local governments to spend on public goods and services they are responsible for. The Central Government intends to increase its dialogue with the states on fiscal refori and Plan implementation and devote more attention to periodic fiscal surveillance and implementation of agreed commitments by the states. It is thought that a more intense dialogue within the spirit of co-operative federalism will encourage better accountability and commitment of state govemments to their constituents. This new 39 initiative, which involves policy conditionality by the Central Government for their resource transfers to the states, is a welcome development and a good initial step towards rationalizing and modernizing the system of inter-governmental transfers. 3.34 Another positive development is the terms of reference of the Eleventh Finance Commission (EFC), which is currently deliberating. In the past, Finance Commissions were discouraged from examining transfers other than the ones they award. But the terms of reference of the EFC explicitly enjoins it to " review the finances of the Union and the states and suggest ways and means to ... restore budgetary balance and maintain macroeconomic stability". Complying with this request will require it to take a comprehensive look at all aspects of the transfer system including those overseen by the Planning Commission and particularly the debt and deficit sustainability position of highly indebted states. 3.35 Much scope exists for additional reform. Further liberalization of banking and financial markets would provide an opportunity for the creation of a competitive market for state government securities. But meaningful reform is unlikely to occur unless financial institutions are free to reject the debt issues of financially weak states, and the Central Government rejects the implicit full guarantees against default and establishes a transparent set of rules for highly indebted states (perhaps with an element of co- insurance or partial guarantees). The states are ill-served by the still high-cost small savings system (See Box.3.3). Other policy options which could be considered include: (a) consolidating centrally sponsored schemes to reduce administrative costs and partly converting them into block funds; (b) clarifying the constitutional assignment of indirect taxes, and the exchange or rental of taxing powers to permit the implementation of a dual VAT; and (c) designing new financial institutions or market structures to intermediate the borrowings of state governments so that they can finance their increasing infrastructure needs without creating moral hazard problems for the Central Government. (A start could be made by increasing the proportion that states borrow directly from markets, without Central guarantees). 3.36 Decentralization to Local Authorities (See also Section E in Chapter 4). The 73rd and 74th Constitutional Amendments provide the local authorities with legal status as directly elected bodies and eliminate state governments' earlier discretion in determnining the tenure and structure of these lower level bodies. This is a major step towards strengthening of local governments, improving governance at the state-level, transferring larger responsibilities to panchayats and municipalities, and making them accountable to their electorate. These amendments also make a specific provision for the representation of women and other disadvantaged groups in the elected bodies in order to ensure greater participation of these sections of local communities. 3.37 Unlike for state governments, the Constitution does not specify any expenditure/functional responsibility or revenue powers to panchayats and municipalities but contains indicative areas which could be considered appropriate for devolution. Determination of these responsibilities and powers is left entirely to state governments. Given the economic, demographic and social diversity, this approach allows the state govemments to design a structure which would better fit local needs, under the guiding principles set out in the 73rd and 74th Amendments. 3.38 Panchayats' own revenues are small, and do not cover more than 5-10% of their expenditure (65- 70% in the case of municipalities). Therefore, they rely heavily on transfers from the state government. Local governments, with the exception of municipal corporations, also have no borrowing powers. The 1999 Union Budget sought to increase the reliance on and devolution of resources to Gram Panchayats for several key public services, including primary health care, primary education and rural employment schemes. However, the overall weak financial conditions of most states clearly complicates the devolution of resources from them to the local governments. Recognizing the need for stability, predictability and transparency in the state-local government fiscal relations, the 73rd and 74th Amendments provide for the setting up of a finance commission in every state to make recommendations 40 regarding the devolution of expenditure responsibilities, tax powers, and the principles for determining grants-in-aid to the local bodies. This provision provides a unique opportunity to restructure the existing state-local fiscal relations in order to impart enough flexibility to meet the Tapidly changing local needs and responsibilities. The finance commissions have been constituted, and their recommendations have been submitted in a number of states. However, the state governments have been slow to accept and implement these recommendations and to take steps to enable local bodies to execute the newly devolved functions. Recent assessments show steady progress in states such as Karnataka, Gujarat, Maharashtra, West Bengal, Kerala and Madhya Pradesh in devolution of powers to the local governments. In some cases, states are experimenting with different or additional levels of rural government. In other states, progress has been slow - while the necessary legal framework has been created, clear expenditure responsibilities, adequate tax powers, and a transparent system of fiscal transfers from the state governments to local bodies have not yet been established. CHAPTER 4 GOOD GOVERNANCE: THE BUSINESS OF GOVERNMENT A. Overview 4.1 Good governance is a necessity for development and poverty reduction, not a luxury. Various studies suggest that good governance is a major contributor to development, while people living in ineffective or venal states suffer from a lack of economic and social development' Key institutional and capacity elements of good governance are a comprehensive legal framework defended by an impartial and competent judicial system, an accountable, open and transparent executive decision-making coupled with a capable, flexible and efficient bureaucracy and strong civil society participation. Good governance ensures effective property rights and contract enforcement without excessively restrictive and arbitrary regulatory structures, and the delivery of an appropriate mix and quality of public services, with the inclusion of the poor and women, and without corruption. Good corporate governance (an issue dealt with in Chapter 7) is necessary for efficient allocation and use of resources within a more transparent framework, and so helps to promote private investment. Concern with these issues has mounted after the recent experience of East Asia. 4.2 Weak or arbitrary property rights and contract enforcement are important factors in underdevelopment, according to Nobel Prize winner Douglas North; they deter saving and investment, especially foreign investment that is particularly handicapped in an opaque legal system The poor are hurt, not only by lower investment and growth of labor demand, but because they cannot count on speedy, low-cost enforcement of their contracts and protection of their property, for example, prevention of illegal evictions. Excessive limits on contracts and poor enforcement are likely to end up hurting the poor, for example, by limiting credit access and employment growth (See Chapter 6). Corruption weakens contract enforcement and property rights and is anti-poor. Opportunities for corruption increase with the number and complexity of rules, licenses, taxes, and subsidies which set up conflicting property rights and require complicated resolutions; liberalization, by decreasing the scope of controls, reduces the opportunity for and gains from corruption, provided competition is strong.3 4.3 The capacity to formulate good policies and efficient public service delivery are obviously critical for development and poverty reduction. An efficient, uncorrupt bureaucracy is a key factor and it tends to encourage investment (Mauro 1995). Efficiency of public services is particularly important for the poor, who depend on public services, such as primary education and health, to improve their lot and mitigate the risks they face. Non-transparent budgeting and spending, widespread subsidies, and corruption are likely to lower the efficiency and equity of public spending. Lack of accountability and properly directed incentives and disincentives in the government and civil service mean that such problems are likely to remain unresolved and responses to crises will be weak. International and Domestic Survey Assessments 4.4 While governance is clearly a critical development issue, its evaluation is complex and methods to do so are still in their infancy. The approach taken here is to evaluate procedural quality by comparing countries based on various survey metrics and results by key service outcomes. Since much of the data are from opinion surveys, often based on perceptions, and since they reflect differing cultural and legal milieux, they are subjective in nature and cannot be taken as definitive. In terms of such indicators from l See for example, North (1981, 1990), Olson (1996), Olson et al, Mauro (1995), Knack and Keefer, Easterly and Levine, Sala-i- Martin, Campos and Nugent 2 Mauro's recent empirical study finds that corruption has a significant negative impact on the investment rate. 3See M. Ahluwalia (1997) for a discussion. 42 international sources, India fares about average among developing countries on govemance though it ranks well below industrial countries (See Figure 4.1 and Annex Table 4.1). India's strong democratic traditions, free press, independent judiciary and high caliber civil service are key strengths in governance. Figure 41: India's Intemational Ranking on Selected Govemance Indicators (unweighted averages, scaled relative to India 1.00 i.e. worse than India is below the line) * Developing Countries 2.5 2.0 India 0 a Selected large countnes 2.0 - | Southeast Asia 1.5 0 | Dl ; Im 1 :M1 [ s s 0 .UE Sout Asia (excl. India) El Industrial Countries (UK, US only) Govemment Rule of Law S General Public Public Finance Outcomes Effecbveness and Business Administranon stability Environment 4.5 These assessments are, however, not uniformly supported by surveys of domestic business (See Annex Tables 4.2 - 4.7).4 According to the survey done in 1999, over 50% of domestic business firms see the government as inefficient. Of the different areas covered in the survey, telephone services, which have been liberalized to some degree (See Chapters 5 and 6), have the highest efficiency rating next to the armed forces (See Annex Table 4.3). Health, legislative services and roads are worse with 49% to 68% of respondents rating services as inefficient to some degree. This survey also highlights business concern about the uncertainty surrounding legislation and the regulatory framework, despite its predictability having increased during the past 3 years (See Annex Table 4.4). Although India's judicial and legal machinery ranks above the 50th percentile in the international cross-section, and is generally trusted by businesses, 64% of domestic firms find the court system expensive and 88% find it slow (See Annex Table 4.5). Next to inflation, the surveyed domestic firms consider labor regulation, corruption, poor infrastructure and policy instability as the most serious obstacles to operations and growth (See Annex Table 4.6). An encouraging sign is that the survey finds an improvement in overall government performance during the past 3 years with the improvement in the availability of telephone services standing out. 4.6 India's "outcomes" tend to be worse than the evaluations of its governance processes, particularly in public service delivery, which suggests implementation problems (See Annex Table 4.1). Over the last 20 years, India has done relatively well in achieving growth, achieving higher rates than all but the high-performing countries in East Asia. However, this growth has not been sufficient to reduce the number of people living below the poverty line (43% in 1983, 34.4% in 1997, See Annex Table 1.1), and also the measured reduction has slowed recently (See Chapter 1). Less widely acknowledged is India's limited improvement in education, health, and gender equity. While improvements have occurred, performance in these areas is still low (See Annex Table 4.1), such as in the case of education despite its enshrinement in the constitution. Indeed, according to these indicators, performance has been worse than 4The discussion in this section is based on a survey of 210 finns carried out by the CII and supported by the World Bank as part of its World Business Environment Survey (1998-99). An earlier survey of 53 firms, based on an abridged version of the 1999 questionnaire, was carried out by the World Bank in 1996 for the World Development Report (1997). 43 even some of the late starting and severely constrained countries in sub-Saharan Africa. Analysis is limited by weak data - for example, official enrollment figures, on which funding allocations are based, show gross enrollments of well over 100%, but surveys of education typically show enrollments well below 100% (See Box 8.1). Also, India's share of trade in GDP is low, compared even to other large countries such as China (See Annex Table 4.1), which reflects not only high levels of protection but red tape and weak infrastructure (See Chapter 5), as well as reported payments to customs officials (See Annex Table 4.7). These low levels of trade reduce India's benefits from international specialization and intemational competition, weakening the push to cut costs and improve quality for consumers and business. On the other hand, India's financial system is well developed for a low income country (See Chapter 7). 4.7 The remainder of this chapter discusses some important areas where improvement of govemance is likely to have a substantial payoff. To bring about improvements in property rights, contract enforcement and the business environment, key reforms include an improved legal structure, more efficient judicial management and reduced corruption. Problems with the legal structure are illustrated by drawing on important examples from bankruptcy and labor laws while the impact of judicial delays is illustrated by examining problems of debt recovery. Next, the discussion tums to public administration, and examines how it might be improved through a better incentive framework for the civil service. An important sectoral issue, management of Public Sector Enterprises is also discussed here (See Box 4.2). Improvements in budgetary and financial management, institutional arrangements to ensure accountability and tax administration reforms are then examined. Finally, the prospects for decentralization of services as a way to improve service delivery are examined. The important area of weak governance at the level of the states has already been dealt with in Chapter 3, and problems of inappropriate regulation or over-regulation in key sectors such as banking, financial markets and corporate governance are discussed in detail in Chapter 7, and intemational trade in Chapter 6. Box. 4.1 Project LARGE A research project on Legal Adjustments and Reforms for Globalizing the Economy (LARGE) was initiated in December 1993. This project was taken up under the Ministry of Finance/UNDP umbrella, with initial involvement of the National Law School of India, Bangalore. LARGE's mandate was to examine economic and commercial legislation in India in order to make it more market-friendly, with a focus on central govemment legislation in the first phase (Dec 1993 - Dec 1997). There were around 3000 Central Acts to consider and around 450 dealt with economic and commercial decision-making, directly or indirectly. The first phase of LARGE, which brought out thirty Policy Papers (some of which incorporate draft bills) and four books, largely addressed issues relating to the relevance of particular legal provisions in the light of reforms; any possible conflict or overlap with other legislation; resolution of such conflicts, if any; technical amendments necessary to prevent unintended loopholes; judicial interpretations running counter to the broad objectives of the law; level of transaction costs associated with any particular piece of legislation; enforceability and user-friendliness of laws; comparable legislation in other countries, especially developing countries. Several seminars to disseminate the results of research work as well as to increase the interface between lawyers and economists were held. Broadly, the work covered labor and-land markets, the financial sector, the environment, direct and indirect taxation, intellectual property rights and some assorted areas. The second phase of LARGE is expected to examine critical areas not dealt with in the first stage focussing on (i) state government legislation, with emphasis on laws relating to land, labor and the environment; (ii) administrative law reform (government orders, rules and regulations, etc); (iii) alternative dispute resolution; (iv) reform of the court system (Limitation Act, the Evidence Act or the Code of Civil Procedure); and (v) competition policy for infrastructure sectors (historically been public sector monopolies). B. Rule of law, contract enforcement, and the business environment 4.8 India performs reasonably well in preserving the rule of law and protecting property rights in a 1995 cross-country comparison (See Figure 4.1 and Annex Table 4.1). However, ratings of the business environment by Business Environment and Risk Intelligence, Transparency International (for 1998), and from the International Country Risk Guide are less satisfactory. A major issue is actual contract 44 enforceability, which presumably includes the problems in debt recovery and executing collateral that many banking institutions cite as a major factor in non-performing assets (See Chapter 7). 4.9 As many reports have highlighted, there are several key weaknesses in India's legal framework that are inhibiting the process of economic change (See Debroy et al 1999, World Bank 1998a, and Box 4.1). These slow down industrial and corporate restructuring and contribute to corporate mis-governance (See Chapter 7 for a detailed discussion), are onerous for small-scale industry (which does not have the capacity to deal with excessive regulatory and disclosure requirements), and leave room for subjective interpretation and could hence lead to harassment and corruption. There is recognition of at least some of these deficiencies in the legislative agenda that has been put forward to successive Parliaments - while the Urban Land Ceiling Regulation Act was repealed and some important laws such as the Insurance Regulatory and Development Authority Bill, Foreign Exchange Management (Fema) Bill, the Securities Contract Regulation (Amendment) Bill on derivatives trading, and Trademarks Bill were passed in 1999, many others were pending, such as the Patents Bill, Prevention of Money Laundering Bill (both referred to Select Committees), recovery of debts bill etc. Other key reform areas, especially labor laws and key aspects of company law (See Chapter 6) are, however, still under discussion. 4.10 Turning to judicial management proper, India's judiciary is respected for its integrity and sagacity, but the issue of 'Justice delayed is justice denied" is a major one, much worse than in the quasi- judicial BIFR proceedings. As noted above, these points are borne out in the survey of Indian firm's perception of the court system's efficiency. With 28 million cases pending and mounting arrears, it can take up to 20 years before a decision is obtained and enforced, putfing judgements beyond the reach of the poor. Important causes of delays are under-supply of judicial resources, under-equipped courts, socially under-priced court services; cumbersome court procedures, perverse incentives to prolong litigation; and a vast body of non-transparent laws. Over 3,000 Central statutes and 10 times that many statutes exist in the different states, many of them archaic and serving no purpose. This does not take into account the vast volume of subsidiary and administrative laws of which no estimate is available.5 Nor does this take into account the conflicting definitions and often incomprehensible language in which the law is written, leading to the need for judicial clarification. Specific problems include: Factors Contributing to Delays * Inadequate number of judges; for instance, there are 10 judges per million persons in India compared to between 41 and 107 judges per million persons in Australia, Britain, Canada, and the United States. Given the backlog of cases, at least a 50% increase in the sanctioned strength of judges in the 18 High Courts and the Supreme Court will be needed to keep abreast of the workload. Furthermore, the large number of vacant posts will need to be filled. The situation in the lower courts is even worse. * Overuse of oral arguments and limited use of written briefs and ex-parte judgements. * Utilization of sitting rather than retired judges by the government for purposes other than adjudication, for example, to head Commissions of Enquiry. * Procedures for admission of cases and writs which bend over backward not to deny almost anyone a hearing, leading once again to excessive litigation. * Easy procedural avenues to delay court decisions (such as through adjourned hearings) which result in no costs to the responsible party even though the cost to the opposing party (due to the delay), the court (due to lost time) and society at large (due to continuing congestion) are considerable. * Multiple appeals against lower courts. 5 Recently, the Government has begun reviewing its administrative laws. A Commission to Review Administrative Laws submitted its report in September 1998. It recommended "action" in respect of over 1700 statutes. A follow up Standing Committee submitted a report on implementation of the Commission's recommendations in June 1999. 45 * Failure to computerize and automate routine judicial procedures and court records to speed them up, and to reduce the opportunities for petty corruption among court functionaries (for example, in allotting dates for hearings or in tampering with court records). * Failures to reduce/bypass the backlog through alternative dispute resolution systems: arbitration, mediation or conciliation techniques have not been well developed. Arbitration has typically led to judicial appeal (The Arbitration and Conciliation Act, 1996 may help). Also, the implementation of The Debt Tribunal Act, 1993 experienced numerous delays and as yet has had only minimal success. The innovative Lok Adalats have taken root only in some states and government agencies and even they have failed to bring about an overall decrease in judicial delay. Adverse Incentive Structures * Limited accountability and enforcement of sanctions against non-performance by judges leading to absenteeism and short workdays in many cases. * Court fee schedules which have remained unchanged for decades leading to under-pricing of judicial services and consequent overuse. * Incentive systems for government servants making it the major litigator in civil suits (being involved in over 60% of suits very often as the plaintiff or appellant) without regard to either its own or citizen's costs. In fact, cases in which the government is both the plaintiff and the defendant are far from rare. Once admitted, there are implicit pressures for government suits to be appealed, lest the original suit appear meritless. * Lawyer's fees based on hours spent in case preparation and court appearances rather than results, giving them the incentive to prolong judicial proceedings. 4.11 The outcome of slow judicial proceedings is inefficiency in the business environment. For example, a study examining 1,849 companies that were in the process of liquidation in High Courts shows that in 59% of these cases the procedure took more than 10 years and, in 32% of the cases, more than 20 years. The result is that the value gets stripped by promoters and their middle-men, leaving little for unpaid workers or secured creditors. This reflects insensitivity to the cost of time, and the distinction between sale proceeds and their distribution. The liquidation process is full of arcane legalities which, among other things, includes the preparation of audited accounts that go back several decades. A weak legal and judicial mechanism for debt recovery has been a traditional source of high non-performing assets (See Chapter 7 for details). 4.12 To reform the system, a multi-pronged strategy is needed to ease supply bottlenecks, decrease incentives for frivolous or prolonged cases by changes in fee structures, and limit admission. Such a strategy has been spelt out by the National Task Force on Judicial Reforms, which submitted its report in November, 1996. A high-powered body could be constituted to oversee the time-bound implementation of the Task Force's recommendations. These recommendations could be extended to various tribunals and not just courts. In addition, internal government incentives to penalize officials for filing meritless cases or appeals and speeding-up of the government program to simplify laws, repeal redundant laws, and replace outdated laws with new ones, for example, the new Company Law (See Chapter 7), would help. 4.13 Corruption is another major problem weakening the rule of law, affecting particularly the business environment, and is a rising concern of the Central and state governments. India's Prime Minister devoted a substantial part of his address on the 50th Anniversary of Independence to the problem of corruption and measures to address it. Transparency International's 1998 survey of international businesses' perceptions ranks India worse than China and other Asian countries, and somewhat worse than other large countries (See Annex Table 4.1), though its earlier surveys ranked India better than China. The 1995 Global Competitiveness Report also ranked India somewhat higher than China (See Annex Table 4.1). In the survey of local businessmen, 83% reported paying bribes in transactions 46 ranging from customs, taxes and licenses, to infrastructure connections and govemment contracts. 91% of the respondents say the payments were less than 10% of the contract value, but 2% said they paid more than 25%. These results suggest that an important cause of unsatisfactory development outcomes and business dissatisfaction with government services, may be corruption. 4.14 Reducing corruption is not easy, particularly once it becomes "part of the system". A three- pronged approach encompasses most of the recommended policies: * Reducing opportunities for corruption by deregulation and privatization, placing greater reliance on competition to ensure low prices and good quality. * Improving incentives for good performance and disincentives for corrupt practices in government. * Improving administrative procedures to reduce the opportunity for corruption by increasing accountability, transparency and the role of citizen's voice. The Central Government has taken an initiative to get Citizen's Charters framed by various Ministries/Departments/Organizations. The Center has framed 61 such Charters and six states/UTs have framed about 93. The following sections discuss the last two parts of the above approach, and Chapter 6 discusses issues of deregulation and improving competition. C. Improving Public Administration: Strengthening Performance Incentives and Accountability in a Downsized Civil Service 4.15 Successful public administration reform needs to be based on a vision redefining the role of the public sector in the economy (See Chapters 2,3,5 and 8), and a change in the corporate culture of public administration. Since the early 1980s, a number of countries, such as the UK, US, Australia, New Zealand and Canada have launched a series of innovative reforms aimed at enhancing the productivity of the public service and improving its client focus and responsiveness. These reforms are now being pursued, in whole or in part, in a variety of other nations, ranging from Chile to Mongolia.6 4.16 The success of public administration will also depend on the quality of the civil service and its accountability. The initial capacity of India's civil service is among the highest anywhere, with meritocratic recruitment, a very high level of competition in civil service examinations (under 1% of applicants qualified in recent years for the higher services) and a mix of technically and non-technically educated entrants (See Das). Technical capability and occupational demands are reasonably matched within the three All-India Services and 50 functionally specialized Central or State Services given the existing training facilities.7 Yet India's civil services, the principal "face" of the government to the public and responsible for implementing government programs, must shoulder some of the responsibility for dissatisfaction with government's performance in providing a sound business environment, curbing corruption, and providing public services. The problem is not initial capability but institutional deficiencies. Non-transparency, limited accountability, low salaries, and inadequate performance appraisal weaken the civil service's administration, as do the standard problems of political interference in specific situations and government's widespread and intricate interventions that delay actions, create unwarranted power and provide opportunities for corruption. Numerous government commissions have pointed out the particular problems of the civil service and made recommendations to tackle them, most recently the Fifth Pay Commission;9 recommendations that have largely been ignored. 4.17 In particular the following recommendations of the Fifth Pay Commission would substantially improve civil service and public administration: 6 For a discussion, see for example, OECD (1997). 7Except, in certain cases, for the generalist Indian Administrative Service; See Das. s For example, see Das, Yugandhar, Godbole. 9 For listing and discussion see the works by Das or Yugandhar cited above and Khanna. 47 * A multi-pronged approach to employment reduction in Central Government targeting a 30% reduction over a 10-year period. Contrary to this recommendation and despite the modest measure abolishing 4 secretary level posts announced by the Finance Minister in his 1999 Budget speech, central employment is expected to grow by 1.5% in the current fiscal year, resulting in a projected increase in staff expenditure of 10.5% over 1998-99 (RE). * Restructuring and "rightsizing" central government services by decentralizing functions to states and local government, by converting departmental undertakings such as the Indian Railways into public undertakings, and by entrusting certain functions to NGOs, cooperatives and autonomous bodies. * Doing away with arbitrary and frequent transfers of bureaucrats, particularly those in All-India Services at the state-level by laying down minimum tenures for posts and the need to clear all premature transfers through a Civil Services Board, to be constituted for this purpose. The Annual Confidential Report (ACR), arbitrary transfers and sale of posts are alleged by many observers to be the main means of subverting or circumventing the civil service, leading to corruption"' * Restructuring performance appraisal to make the current ACR system more effective and open, coupled with a 5-yearly high-level review of "Group A" officers to decide whether the officer should undergo compulsory premature retirement or not. * Increased transparency by passing a Right to Information Act and corresponding revision of the Official Secrets Act. 4.18 In addition, a closer link between performance and promotions or pay increases, improved procedures to ensure individual accountability for lapses and improved enforcement of sanctions are needed." More broadly, a simplification and liberalization of excessive restrictions, along with privatization, would reduce red-tape and the scope for corruption. In addition, it would permit a downsizing of the civil services and a focus on fewer, truly public activities, where better delivery could be demanded. All these measures would be far more effective if they were conducted within the framework of a clearly defined and articulated vision for the reform of the public sector. D. Sound Budgetary and Financial Management 4.19 India's ranking on its budgetary processes and efficiency and equity of revenues and expenditures in international comparisons is fairly high. However, in terms of the more general category of management of public finances, India ranks much lower, an appraisal that is borne out by India's high fiscal deficit, where India ranks among the worst 10% of countries in the world; its high level of implicit and explicit subsidies that have negative efficiency effects and at best uncertain equity effects; and its tax system, which still has a limited base, and a heavy dependence on customs and excises (See Annex Table 4.2 and World Bank 1996a and 1998a). 4.20 An institutional framework conducive to overall fiscal discipline is one in which (i) there is a comprehensive annual budget of the government with few off-budget expenditures and sources of revenue; (ii) limited earnarking; (iii) expenditures are planned in a medium-term (2 to 5 year) framework based on consistent macroeconomic forecasts to allow forward planning; (iv) there is a hard budget constraint on expenditure dictated by revenue availability; (v) there is a framework to reconcile actual outlays with the budget and impose sanctions for over-spending and (where this implies inadequate service delivery) under-spending; and (vi) the budget process is transparent, with accurate and timely information on the budgeted and actual revenue and expenditure being published, and open to public scrutiny. 4.21 In India, not all of these requirements are met. First, future revenue and expenditure implications, even for long-term capital projects are not reported or taken into account in the budget. Instead of 10 See the works by Das and Godbole cited above and also Wade. l For a possible strategy to strengthen enforcement, see Narasimnhan. 48 revenue availability dictating expenditure ceilings, revenue and expenditure budgets are separate exercises, with Additional Resource Mobilization (ARM) measures decided on if projected resources fail to meet expenditure projections. Second, the states are only engaged in short-term cash management with no medium-term perspective or framework; unlike the Central Govemment (where there is a Controller ofAccounts), the states continue to depend on the Comptroller and Auditor General (CAG) of Box 4.2 :Public Enterprise Governance - A System that has not Delivered Although public enterprises are part of the public sector, they are also commercial, for-profit organizations, and increasingly, are expected to operate more independently and without support from the govemment budget. Where private firms are allowed to compete with public firms, public sector enterprises (PSEs) have generally come out second-best. This is not surprising, since while liberalization has eliminated many of the constraints on the private sector, the public sector remains shackled. PSEs have higher average costs than comparable private sector companies, arising mainly from their structure of fixed costs, particularly employee costs. Another major difference is in the corporate govemance structure. Shareholders of private companies are direct beneficiaries of profitable performance and, hence, their representatives have incentives to monitor management to maximize profit. In contrast, PSEs do not have a substantial body of informed private shareholders whose income depends upon the performance of these companies. PSEs are also subject to demands to carry out many 'social' activities, whose efficiency and impact on profits are not well monitored. Government shareholding in PSEs is exercised by MPs (Members of Parliament), Ministers, and civil servants. A sample survey of Parliamentary questions regarding PSEs shows that commercial viability, profitability, cost minimization, and optimal investment decisions only rarely reveal themselves as concerns. Civil servants, next in the hierarchy of shareholders' representatives, are typically process oriented and risk averse, whereas firms have to be result oriented, and this creates an inconsistency between the organizational forms of governments and those of modem financial and industrial entities. These non- commercial objectives of shareholders' representatives result in loss of motivation for most chief executives of PSEs, who quickly adopt the line of least resistance - loss-making plants are neither down-sized nor closed, wages are not linked to productivity, and redundant workers are not retrenched. Above all this sits Article 12 of the Constitution of India, which defines 'the State' as "the Government and Parliament of India and the Government and Legislature of each of the states and all local or other authorities within the territory of India or under the control of the Government of India". Since most PSEs have more than 50% government ownership, they fall under the ambit of 'the State'. This has affected PSEs in several adverse ways: * All PSEs are constitutionally expected to achieve a wide variety of non-commercial objectives which are imposed by the Ministries and Parliament. * PSEs are subject to an annual audit by the Comptroller and Accountant General (CAG) in addition to the audit by the statutory auditor. Owing to repeated allegations of financial impropriety by the CAG, PSE managers tend to be conservative and, for example in the case of purchases and tenders, tend to choose the lowest bid even if quality is poorer. In this case, PSE managers know that propriety dominates profitability. * There exist constraints on appointment of senior management personnel, which can only be made through the Public Enterprise Selection Board (PESB) and, thereafter, clearance from the Department of Personnel, the Home Ministry, and, in many instances, by the Office of the Prime Minister. This has led to delays, non-appointment of CEOs and executive directors, and excessive emphasis on seniority - which means very few CEOs can enjoy their full term. * Since PSEs are parts of 'the State', they are subject to writ petitions to the Supreme Court under Article 32, and High Courts under Article 226 of the Constitution. * Again by virtue of being considered as servants of 'the State', managers of PSEs are often subjected to criminal investigation by the Chief Vigilance Commissioner and the Central Bureau of Investigation. * 'State' status limits managers from down-sizing plants, retrenching or re-deploying employees. * Finally, the directors of PSEs have little autonomy in finalizing any large investment decisions (approved by the Planning Commission). Under these circumstances, it seems unlikely that a PSE can achieve better governance standards and yet remain under majority govemment control. The experiments with MoUs have by and large failed. Improving govemance and thus performance of PSEs is the most important argument for privatization of all but strategic PSEs to below 50% (as the Budget speech of 1998 stated, to 26%). In fact, Dr.Vijay Kelkar, the then Finance Secretary, declared in a recent speech (Pune Spring Lecture, May 1999) that in his opinion "the only strategic public sector enterprises should be those dealing with atomic energy, space and defense" and that PSEs in other areas should be privatized. With the resultant freeing up of both human and financial resources, the Govemment can then improve on its core business of providing basic social and physical infrastructure. India, both to prepare their accounts as well as to audit them. Furthermore, instead of sanctions, additional, post-budget expenditures, which impact adversely on the fiscal deficit, are incorporated in 49 three supplementary budgets, one in each parliamentary session. Last, instead of transparency, published government accounts never permit actual aggregate expenditures to be determined12 4.22 Given the overall budget, the next stage is allocation of resources in accordance with strategic priorities. To achieve this, (i) important stakeholders should be consulted during budget planning; (ii) allocations should reflect strategic priorities, and (iii) implementing agencies or spending ministries should have the capability and freedom to manage their allocations effectively, with little need for further consultation with the Ministry of Finance (MoF). Accountability for spending can be ensured by (iv) the existence of a system of reporting service delivery outcomes, such as zero-base or performance budgeting and an evaluation of end-of-year outputs achieved, both of which are integral to the budget formulation process. Transparency is facilitated further through (v) institutional channels through which stakeholder groups can voice their concerns about budget allocations and their level of satisfaction with outcomes. 4.23 In India, there is ex-ante rather than ex-post control of expenditure by line agencies through the institution of Financial Advisors in each department who report both to their own departments and to the Ministry of Finance; and the performance budgeting system for reporting of outputs and outcomes is divorced from financial reporting and budget preparation. A strength of the budgetary process is, however, the extensive feedback from stakeholder groups in newspapers and television after the budget is presented for legislative scrutiny. 4.24 Given departmental allocations, operational efficiency and effectiveness crucially requires accountability. This encompasses (i) fixing individual responsibility for delivery of defined service outputs; (ii) personnel policies linked to performance, with performance being measured by actual outputs in relation to prescribed service delivery standards and preset targets; (iii) independent internal and external, financial and performance auditing with mechanisms for effective corrective or disciplinary action based on audit findings; and (iv) "customer" satisfaction surveys. Transparency requires (v) publication of program performance reports and (vi) feedback mechanisms to elicit client feedback on the quality of services provided. Aside from internal and external auditing, the institutional framework for service delivery in India meets none of these standards and, for example, sanctions linked to poor performance, or program modifications based on client feedback are sporadic, at best. 4.25 The result of deficiencies in expenditure management in India (See Annex Tables 4.8 and 4.9) are that aggregate fiscal discipline is severely lacking, with inefficient allocation of budgetary resources to competing needs; lack of incentives for efficient service delivery; and limited transparency and accountability. This has led to: * The continued existence of implicit and explicit subsidies and heads of expenditure many of which are not transparently identified in the budget."3 If these are identified, they are not evaluated in terms of their return to society;14 and where evaluated are found to yield poor returns5 (See Annex 4.1); * Leakage and misuse of budgetary resources facilitated by poor expenditure control, and lack of accountability and corruption, according to the Comptroller and Auditor General (CAG) (See Annex 4.1). * Non-transparent budgets with budget estimates understating actual expenditures, the extent of understatement having increased in recent years, and, conversely, revised estimates overstating expenditures (See Annex Table 4.10). 12 For a description of infirmities in the Finance Accounts see Das-Gupta (1999a). 13 For example, exemptions under Section 10 of the IT Act, value of perquisites to government servants, and intra-public sector litigation. 14 For example, income tax exemptions, excise and customs duty exemptions, and export subsidies. 15 For example, the Public Distribution System; the Integrated Rural Development Programme; fertilizer subsidy; and poor cost recovery (10.3%) in power, irrigation, higher education and tertiary health. 50 * Borrowing requirements and the fiscal deficit being grossly underestimated in the budgets (See Annex Table 4.10). * Arbitrary across-the-board budget cuts or cutting of peripheral expenditures during budget preparation or later in the year. * Unrealistic development budgets with several departments failing to utilize allocations in recent years, leading to actual development spending falling short of targets, while, at the same time, expenditure management focuses on spending of appropriations rather than on efficient and effective service delivery (manifested in the "March rush" to spend allocations). * Financial outlays that are based on unrealistic or outdated cost norms unrelated to the cost of services or delivery targets. * Poor maintenance in the case of capital projects and premature acquisition of capital goods and consumables leading to wasteful expenditure as identified by the CAG (See Annex 4.1). * Fraud and misappropriation of funds that occasionally come to light during audit, which however, has only selective coverage as identified by the CAG (See Annex 4. 1). 4.26 To improve budgetary and expenditure management it would be desirable to constitute the Expenditure Reforms Commission announced by the Finance Minister's 1999-2000 Budget speech. To promote efficiency and effectiveness in government expenditure, thoroughgoing reform of the budget and financial management process is needed at the aggregate level, at the sectoral allocation level and at the level of program implementation and service delivery. Key principles are: (i) improved transparency through reforms in accounts and budget presentation and linking of expenditures to physical outcomes in the budget; (ii) effective action to reduce employment and downsize departmnents that provide services outside the core competencies of the government; (iii) increased autonomy for line agencies in expenditure management and a switch from ex-ante control of expenditure to ex-post accountability; (iv) improved incentives for effectiveness and efficiency through individual accountability and also positive incentives for individual contributions to increased efficiency. A reform program that the Commission might consider is suggested in Annex 4.2. 4.27 Improving Accountability: Increasing the Effectiveness of the Audit Mechanism. Independent audits by the CAG are a major institutional mechanism to ensure accountablity of the executive. The reports of the CAG are tabled in Parliament and are scrutinized by its Public Accounts Committee (PAC). Yet, this admirable institution too has been unable to curb mismanagement of expenditure: * The CAG audit focuses mainly on financial irregularities and while systems or performance appraisals are carried out, these fall short of management audits and do not indicate how management can be strengthened. Also, physical inspection is rarely undertaken. * There is no effective system to establish individual accountability for lapses pointed out by the CAG. The problem stems, in part, from the nature of program management since individual responsibility is not easy to establish under existing management procedures. * Responsibility for lapses and fraud are divided among three offices - the CAG, the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI). There is limited cooperation between the three offices, so that a coordinated examination of errors is made difficult, and only in relatively few cases is specific accountability established and sanctioned 16 Recently, the CBI was brought within the purview of the CVC through the CVC Ordinance, as an attempt to try to redress the above problem. * The PACs scrutinize only a few of the CAG's reports and furthermore, have a tenure of one year only. 16 Further discussion is in Narasimhan (1997). 51 * States have withdrawn over Rs. 850 billion from their Consolidated Funds over what was budgeted over the last two decades without accounting for it. If spending exceeds the budgeted amount, governments are supposed to 'regularize excess spending' by the PAC . While Article 205 of the Constitution directs state governments to clear excess spending before their legislatures, this process is being bypassed through the system of regularization by the PAC. * Besides "Action Taken Notes" that Ministries must submit to the CAG on audit observations, there is no effective system of follow-up to ensure corrective management action. Even for Action Taken Notes, responses by Ministries are delayed or not given. This absence of effective enforcement and a long-term perspective in accountability procedures means that, in practice, individual accountability for lapses is seldom established and sanctioned, and poor expenditure administration persists year after year. 4.28 Improving Tax Administration. Broader based, efficiently administered taxes are also an essential part of sound financial management. Tax reform in the 1990s has focused mainly on tax structure reforms, and within this, largely on rate reform. Though some progress has been made, most notably the curtailing of the power to issue exemption notifications in the 1999 Budget, widespread exemptions persist and new ones have been introduced in every budget in the 1990's (See Annex Table 4.11) with no mechanism in place to evaluate their economic benefits and render the cost to the exchequer of these implicit subsidies transparent.'7 Progress in implementing administrative reform and institutional restructuring, as recommended by the Tax Reforms Committee (TRC) has been neglected (See Annex Table 4.12). Institutional reform to broaden the tax base, improve Central-State tax powers and tax- sharing, and the structure and administration of state taxes (discussed earlier in Chapter 3) would be highly desirable. 4.29 In the 1990's, though the corporation tax has shown robust growth and the personal income tax has performed almost as well, there has been a marked decline in the performance of both customs and excise duties (See Annex Table 4.12). The performance of customs duty can largely be attributed to the lowering of customs duties in line with the liberalization program and recently the drop in oil imports, which account for 20% of customs revenues. The performance of the central excise has shown a secular decline since the 1970's, which the recent rationalization of excise duty rates (continued in the Budget of 1999-2000) and limited base broadening, via removal of exemptions and the introduction of a service tax, has been unable to reverse. 4.30 Regarding tax concessions, assessment of the benefits to society from the resulting revenue sacrifice is difficult as the necessary information is not readily available. To enable assessment of the benefits from revenue sacrificed the Government should, as a first step, begin compiling data on tax expenditures as part of its budget to increase transparency and to assist in the evaluation of their returns. Studies by research units of tax departments, based on samples of assessees, should also be conducted to assess the benefits from tax concessions. The Government should ensure that removal of exemptions are taken up in its next Budget, in accordance with the recommendations of the Committee to examine exemptions announced by the Finance Minister in his 1999-2000 Budget speech. 4.31 In tax (including customs) administration, while there has been some success in simplifying procedures, decreasing the incidence of non-filing and increasing automation, institutional and organizational reform still lag behind. The effectiveness of several procedural reforms is, however, questionable (See Annex Table 4.13 and Annex 4.3). 17 Misuse of these concessions is documented by the CAG in some cases and there is anecdotal evidence of misuse, for example, of the backward area allowance (by attributing production to dummy factories in backward areas) and the concession for charitable contributions. Data to permit an assessment of returns in rupees of revenue sacrificed are not readily available, though some studies evaluating specific concessions exist. 52 4.32 An important example of the adverse impact of poor tax administration procedures is the increased transactions costs borne by exporters and importers due primarily to cumbersome customs procedures (other sources of transactions costs, albeit less serious, are reviewed in Chapter 5). Indicative evidence shows (See Annex Table 4.14) that customs clearance time for imports in India varies from 48- 120 hours, more than for comparable countries such as Indonesia (48-96 hours), Argentina (3 hours), Mexico (12-24 hours), and considerably more than best practice of 15-25 minutes (Singapore). Also, India insists on 100% inspection, while many other countries inspect on a sample basis. Reduced delays are essential for India's competitiveness in today's time-sensitive markets. 4.33 The most important pending reform is implementing TRC recommendations for minimum tenure of Chairmen and members of tax boards and autonomy and control over expenditure allocations and personnel matters within their departments. Other administrative reforms that could be considered are outlined in Annex 4.4. E. Improving Public Services through Effective Decentralization 4.34 Decentralization is becoming a standard remedy for improving public service delivery, especially to the poor. With service providers closer to recipients, it is argued that recipient's "voice" will be better heard and service adapted to local conditions, thereby improving delivery (See Box 4.3). Of course, inherent in this argument are the issues of providing non-public goods through the market, by the private sector, rather than by the public sector, and the possibility of providing even public services privately but financed by the government - for example a voucher system for private schools such as used in Chile. Another issue is the extent to which "voice", as well as efficiency of delivery/use, is reduced by delinking service provision from taxes and user charges - an issue that experience suggests is important in India. Finally the success of decentralization depends on the enhancement of capacity at the lower levels of government and a strong institutional framework not subject to "capture" by the local elite. Box 4.3: The Effectiveness of Voice In 1993, the Public Affairs Centre, a non-government organization in Bangalore surveyed 807 randomly selected households "to obtain systematic feedback on the public's experience with different (govemment) service providers and on their assessment of the adequacy and quality of the services". Among the major findings were that "the level of public satisfaction with the performance of service providers in Bangalore is uniformly low...", and that "Corruption is widespread in most agencies and has no doubt contributed to the severity of public dissatisfaction". The "report card" on public services drawn up on the basis of the survey was given wide publicity, to govemment service agencies, the press and citizen's groups. In follow-up activity, the news media, which had given prominent coverage to the report card ran several public service investigations. The report card was also replicated in other cities in India. In a follow-up survey of "100 persons drawn from citizens groups" conducted in 1997: * 69% of respondents felt that public pressure had resulted in improved services; * 54% felt that the public agencies were more responsive to citizen problems than three years ago; * 49% felt that there was increased sharing of information by public agencies; * 47% felt that the behavior of staff in public agencies had improved as a result of public pressure; * 29% felt that corruption had declined though 46% felt that corruption had not. Source: Paul (1995). 4.35 India has made a promising beginning in decentralization following the 73rd and 74th amendments to the Constitution. However, decentralization is far from complete and cracks are already beginning to surface in the evolving systems of fiscal and functional decentralization, although strengthening the generally weak management capacity of the over 220,000 local govemments (See Annex Table 4.15) to ensure adequate service delivery, and the setting up of accountability institutions has barely begun. Therefore, the overall picture is one of incomplete institutional development and inadequate capacity building (See Annex Table 4.16). Consequently the proposal in the 1999 Union Budget to increase the reliance on and devolution of resources to Gram Panchayats for several key public 53 services, including primary health care, primary education and rural employment schemes needs to be accompanied by effective steps to improve the management capacity of local government. Another area where decentralization, along with improved transparency, can help, is environmental management (See Box 4.4). 4.36 The Constitutional and legal framework of decentralization in India now consists of a three-tier structure of government; local, state and federal. At the local level, there are Panchayats at the village, block and district levels, and three grades of municipalities depending on pre-determined factors such as Box 4.4: Improving Environmental Governance In efforts to improve environmental management in India, govemance and public sector institutional weaknesses are the fundamental weak links, not the financial cost of environmental protection. Both inadequate environmental policies and poor enforcement prevent India from capturing the high net economic benefits available from environmentally friendly efficiency gains and policy reforms. For example, an important part of such policy reforms would actually be a reduced financial burden of the public sector in environmental management - through increased user fees to be collected from the beneficiaries of clean water supply, sanitation, and solid waste services, and an explicit shifting of the cost of pollution control to private polluters (See also Chapter 8). In addition, improved govemance would reduce environment-related public interest litigation, hence reducing the burden on the courts. To improve environmental governance, the priority focus areas are improved information disclosure and transparency, due judicial process, and decentralization. Both improved information and the decentralization of the monitoring and compliance functions to the state and local levels invite the participation of the private sector, NGOs, and communities. This in turn improves the accountability of the state and local regulators - where results can be measured on the ground. More than at the central level, state-level environmental and judicial authorities operate in close proximity to managers of infrastructure and industrial investments, to land-use planners, to health officials, and to the affected urban (in the case of pollution impacts) and rural (in the case of most natural resource use) stakeholders. Hence, a process of decentralization and transparency are highly correlated with improved govemance by the various government agencies whose actions impact on the environment. Similarly, institutional strengthening efforts in environmental management, therefore, have the greatest impact at the state-level. population, functions and the economic base. Additional features include: an institutional framework in the form of District Planning Committees (DPCs) and Metropolitan Planning Committees (MCPs) for purposes of planning and development at local levels; rights of the State Legislature to determine the functional and fiscal powers of local bodies; incentives to states in the form of XIth and XIIth Schedules to enlarge the functional space of local bodies; and mandatory State Finance Commissions (SFCs) to make recommendations for the finances of local bodies and State-local fiscal relations. Several problems remain in the effectiveness of decentralization: * Local Government's own revenue receipts constitute a very small proportion of total government revenues. In 1991-92, revenue raised by municipalities amounted to 4.6% of the revenue raised by the Central Government and 8.05% of the revenues raised by the state governments. Currently, own revenue resources of gram panchayats are extremely weak. * Local government's own revenues meet only a part of their recurrent expenditure. In the case of Panchayats, for which the data base is fragmentary, it is estimated that own revenues cover no more than 5-10% of the expenditure making them almost wholly dependent on the state governments (See Annex Table 4.17). For municipalities, the average proportion of expenditure covered by own revenues ranges between 65-70%. * The administration of local taxes is unsatisfactory and reflected in poor collection to demand ratios, inability of local governments to periodically adjust the property valuation tax rates and user charges to inflation, as also the high cost of administration and enforcement. In the case of property taxes, which is the principal source of revenue for municipalities in non-octroi levying states, the collection to demand ratio is likely to be, on average, no more than 40-45%. Few Panchayats and Municipalities have taken steps to build property valuation records and to adjust them to market prices, despite legal powers being available. Similarly, user charges (including license fee, fines and permits) which have a large potential are barely used. 54 * Local governments, by and large, do not have the autonomy to choose the tax rates, these being either laid down by the state governments or approved by them. * Except for municipal corporations, local governments have no borrowing powers and are wholly dependent on the state governments for capital loans. The borrowing powers of municipal governments are govemed by The Local Authorities Loans Act, 1914, which require them to borrow with the previous sanction of the State Government. * Many "conformity acts" enacted by different states to give effect to the Constitutional Amendments seek to restrict the autonomy of the local governments, particularly Panchayats, with provisions that are possibly at odds with the Amendments. Several State Acts treat Panchayats as agents of the state government instead of self-goveming bodies; devolution of functions shows wide differences and, furthernore, most states have retained the power to amend or withdraw functions, in some cases by executive order; and in several states functions either overlap with the State Government or there is joint control. * Few conformity acts specify adequate audit and accountability mechanisms, a matter which has, however, been dealt with by some State Finance Commissions (SFCs). The existing accounting procedures and audit arrangements of the Panchayati Raj Institutions are inadequate. The staff available to the village Panchayats is lacking in number and ability to maintain accounts, and the strength of the departmental audit staff is not enough to conduct audit, given the large number of local bodies. The 73rd Amendment to the Constitution envisages supervision of the Panchayats by public audit (gram sabha) through information sharing and open discussion. While widespread success of public audits has not been established as yet (the rural population may not be familiar with accounting methods to detect misappropriation), there are a few cases where this has worked. 4.37 The states' weak financial status clearly complicates the devolution of resources from them to local bodies, and subsidies at the state-level reduce the resources available to provide services in general, whether or not through the Panchayats. This has affected the approaches followed by the different SFCs, which are not uniform. While they have, largely, recommended continuation of the status quo in taxing powers of states and local bodies, with SFCs' recommending greater local flexibility in setting tax rates, four different approaches exist for purposes of revenue-sharing: creation of a divisible pool of state resources; assigning pre-determined shares of state taxes to local bodies; fixed transfers; and allocation of a portion of shared central taxes to local bodies. Furthermore, the wide variation in recommendations concerning grants-in-aid, from maintaining the status quo to greater use of various specific purpose grants, does not include increased reliance on general purpose grants. A weakness in most SFC reports is that these have been drafted without SFCs having access to clear descriptions of the functional jurisdiction and service provision responsibilities of local bodies partly on account of the nature of conformity acts. This situation would be improved by: * A review of legislation and SFC reports in different states to highlight infirmities; * A re-examination of the scope for enhancing financial powers of municipal corporations and District Panchayats such as through bond issues (as in Ahmedabad); * Making available technical assistance to local government to devise sound local government systems based, perhaps, on promising models like the Mayor-in-Council system in West Bengal and the rural local government system in Kerala. * Providing technical assistance to local government for project design, costing and planning such as through a recent NGO initiative in Kerala. * Strengthening communication between local government and local self-help and civil society groups. 55 4.38 Clearly, there are several gaps in our understanding of the risks posed by decentralization. Further study of decentralization experiences, both positive and negative, would be a vital building block in improving the quality and effectiveness of the decentralization process. CHAPTER 5 IMPROVING INFRASTRUCTURE TO REDUCE POVERTY AND SUPPORT GROWTH A. Overview 5.1 Improved Infrastructure would help India's Poverty Reduction and Growth Substantially. Sixty-two percent of the respondents to the 1999 CII survey rated India's infrastructure as a hindrance, with roads rated the worst among all public goods and services. However, the overall rating of infrastructure, notably telephone availability and roads, seems to have improved since 1996 (See Annex Tables 4.3 and 4.6). Intemational investors also rank India's infrastructure very low - the 1998 Global Competitiveness Report of the World Economic Forum rated India 53rd out of the 53 countries surveyed in the context of infrastructure. Household connections to power and water are limited, telephone-density is among the world's lowest, and transportation services do not meet the needs of an increasingly mobile population. Moreover, as growth proceeds, exports (and imports) increase, and urbanization rises from its currently low level (25%), even larger infrastructure needs will develop for transport networks and urban infrastructure, to transport goods and provide a livable urban environment for their citizens. In 1996, the Mohan Committee estimated that a 45% increase in infrastructure investment would be desirable as well as feasible macro-economically (Vol. I, p. 4; Vol. II, pp. 44-50). 5.2 The poor quality of India's infrastructure services (See Box 5.1) reduces growth directly, hindering specialization, continuous process industries, and firms that depend on good quality water and power. Poor quality transport facilities raise transport costs and contribute to uncertain delivery times, forcing businesses to hold large inventories and reducing the attractiveness of India's exports to foreign buyers. Safety problems in transport (See Mohan Committee, Vol. III, p. 142) and health problems related to water availability represent major issues in the economy. Businesses in India routinely provide their own utility services, in the form of captive power and water facilities, to offset the poor quality of public service. However, this duplication of investment increases the capital intensity of India's growth. And the small private facilities are less efficient than what could theoretically be achieved with well maintained, high quality, larger-scale works providing service through effective transportation and distribution networks. 5.3 Poverty reduction would benefit from increases in infrastructure, as shown by the experience of Punjab and Haryana, as well as various statistical studies.' Improved infrastructure will be needed to allow the hinterland, such as Uttar Pradesh and Bihar, to benefit from liberalization, along with the coastal areas.2 A major expansion in the availability of safe water would improve health among the poor greatly. Finally, construction of infrastructure would increase labor demand, given the labor intensity of construction. However, experience suggests that attempts to increase labor employment through public works programs typically do not provide good quality infrastructure without substantial capital and managerial inputs. 5.4 Infrastructure investment in India would thus yield large benefits, both in terms of supporting higher growth, improving the lot of the poor and the population generally, and yielding high rates of return.3 Without such investment, growth could well slow and become increasingly concentrated in coastal areas and states with good infrastructure. 'See for example, Ravallion and Datt (1996a), Rao et al, and Lall. 2See Chapter 3, and Bajpai and Sachs. 'Various studies suggest that the returns to infrastructure are very high (See World Bank 1994, p. 15, for a summary of some studies). Criticism of aggregate estimates of infrastructure's productivity suggest that the historically estimated returns are inordinately high, and there is little evidence that additional investment would yield such retums. Some authors have tried to 58 Box 5.1: Progress in Infrastructure Provision Telecommunications. The waiting list for a connection is higher now than at the start of the decade, at over 2.8 million, around 20% of the present number of lines. Only 50.1% of villages had public telephone service by end March 1998 (GOI 1999e). India's growth in the number of mainlines is slow compared to the growth achieved in China. Telephone density in India (at 1.72%) is below that of the neighboring Asian countries such as Thailand (11.4%), China (7.3%) and Indonesia (2.9%) (TRAI). Power. India-wide, the shortfall in meeting demand is conservatively estimated as 11% for regular and 18% for peak energy demand (GOI 1997c), although the variation amongst the states is substantial. In order to cope with irregular supply, and also in part due to the high tariffs levied on industrial consumers to cross-subsidize agricultural and residential consumers, industry has increasingly relied on captive generation. The SEBs have become a chronic financial drain upon the govemment budget because of inadequate and unbalanced tariffs, high levels of power theft, non-payment and non-collection of bills, and inefficiency. Urban Water. Of 27 Asian cities with populations over I million, India's four largest cities are ranked amongst the five worst cities in terms of water availability hours per day. Physical losses are typically high, despite low pressures, ranging from 25% to over 50%. Low pressures and intermittent supplies allow back-syphonage and contamination. Every year about 1.5 million children under the age of five die in India because of water-bome diseases. The lack of availability of water affects the urban poor disproportionately. In Delhi, for example, even though the official per capita water supply is about 200 liters per day, about 30% of the city's 9 million people have access to less than 25 liters per day. Ports. By Govemment estimates, the current capacity at the major ports is over-stretched. Total tonnage handled during 1997-98 was 251 million tons, as against capacity of 217 million tons (Ministry of Surface Transport). India's ports have struggled to keep up with the increase in demand. The total costs of moving a container through a terminal are on average 70% to 80% higher than those in Japan and in the US, where labor costs are much higher. Productivity at container terminals in JNPT is less than half that of Colombo. Extemal trade procedures, in particular customs, also play a part in reducing overall port productivity, with customs clearance taking on average 3 or 4 days (See Chapter 4). Roads. Private road projects are being constructed in India, with successful examples so far being largely limited to toll bridges and bypasses in urban or semi-urban areas. Expansion of national highways through private funding is being pursued, with the Govemment also considering a form of shadow-tolling with little traffic risk to the private investors/operators. However, the development of the road network will require public funding, for both maintenance and capital expendirures. To this end, the last two budgets announced measures to increase resources for the roads sector through levies on fuel. The 1998 budget cess of Re. I per liter on petrol is to be used for National Highways, while 40% of the 1999 budget cess of Re. t per liter on diesel is to be used for roads, mainly for highway expansion rather than maintenance. B. India's Public Provision of Infrastructure 5.5 India relied almost completely on public sector provision of infrastructure until the early 1990s. For example, power (except for some auto-generation and limited private distribution), railways, roads and telecoms were all public sector monopolies' The trend towards private sector provision of infrastructure, in particular power, telecoms, ports and airports, gained momentum worldwide in the 1980s. This trend was precipitated by the recognized failings of the public sector in this area, as well as technological developments which enhanced the possibilities for competition, especially in telecoms and power. Recognizing the need to attract more investment in infrastructure, India opened that sector to private investment as part of the country's 1991 reform program. The success of the Government in attracting private investment, and the evolving policy response, are assessed in the following section. It has to be recognized, however, that a large part of India's infrastructure needs will continue to be provided by the public sector. For example, private investment may contribute to the expansion of the roads sector, but public sector will have to continue to fund this area. 5.6 Public sector spending on infrastructure has fallen from about 3.5% in the first half of the 1980s, and 4% in the latter half of the 1980s, to about 3% currently (See Table 5.1). Electricity, gas and water investments have fallen by about 0.8% of GDP since the late 1980s/1990s. For the 8th Plan covering 1992-1997, actual spending on power was only 80% of the planned, and the increase in public capacity respond to these criticisms by noting that historical aggregate estimates are based on the initial estimates in infrastructure networks - which is what applies to developing countries like India. On the other hand, say, duplicating road or railroad networks in developing countries would not yield very great returns. 4See Mohan ComMittee, Vol. III, pp. 54-55, 100, 141. 59 generation was only 14,992 MW compared to the planned 27,728 MW.5 Railway investment has fallen about 0.3% of GDP while other transport (including roads) has remained a low 0.3% of GDP. Only communications investment has shown an increase in the 1990s, of about 0.3% of GDP. Table 5.1: India - Infrastructure and Other Investments (% of GDP) 1981182 1985186 1991192 1992193 1995196 1996197 1997198 Gross Domestic Investment 23.1(13.4) 23.5 (13.0) 21.0 (12.4) 22.0 (13.6) 24.0 (16.7) 21.4 (14.7) 22.4 (15.5) Infrastructure 4.8 (1.4) 4.8 (1.2) 5.4 (1.4) 5.2 (1.6) 4.2 (1.0) 4.4 (1.5) 4.6 (1.6) Electricity, Gas, Water Supply 2.5 (0.4) 2.6 (0.2) 2.9 (0.3) 2.6 (0.5) 2.0 (0.2) 1.8 (0.2) 2.0 (0.2) Railways 0.6 (0.0) 0.6 (0.0) 0.5 (0.0) 0.6 (0.0) 0.4 (0.0) 0.4 (0.0) 0.3 (0.0) Other Transport 1.3(1.0) 1.2(0.9) 1.4(1.0) 1.3(1.0) 1.4(1.1) 1.4(1.2) 1.3(1.1) Communications 0.3 (0.0) 0.4 (0.0) 0.5 (0.1) 0.7 (0.1) 0.4 (0.0) 0.7 (0.1) 0.9 (0.3) Other 18.4 (12.0) 18.8(11.8) 15.6 (10.9) 16.8(12.1) 19.9(15.7) 17.0 (13.2) 17.9(13.9) Memo: GDPmp (Rs. billion at current prices) 1728.1 2836.6 6671.6 7635.6 12179.6 14098.5 15635.52 Note: Private sector investment within parentheses. Source: National Accounts Statistics. 5.7 Moreover, it is geneTally recognized that maintenance expenditures are too low. In power, low maintenance partly explains plant load factors and plant availability that are well below international standards,6 although there has been some improvement in these areas. In roads, the neglect of maintenance is very costly, particularly given the deterioration caused by increased traffic and heavy loads - World Bank (1988) estimated that, in 85 countries, an erosion of $45 billion in road assets occurred that could have been avoided at a cost of $12 billion in maintenance. For India, even in 1988, inadequate road expenditure and maintenance is estimated to have cost the country at least Rs. 30 billion 7 per year in excess wear and tear of vehicles, accidents, fuel costs, etc.7, and this figure can only have gone up with the major increase in traffic volumes thereafter. 5.8 High explicit and implicit subsidies and low user charges limit internally generated resources and is a major factor in the slowdown in public infrastructure investment. In power, for example, average revenues are only about 80% of costs,8 reflecting low collections9 and subsidies to agriculture and small consumers. Agriculture and domestic consumers pay, respectively, Rs. 0.21 and Rs. 0.91 per KWh on average, with free power or flat fees prevailing for agriculture in many states. The supply cost of power is estimated at Rs. 1.86 per KWh (Parikh, p. 121); moreover, this average cost is understated because it reflects a low rate of return, 3%, which is substantially below the cost of capital in India. India's average power tariff is also very low by international standards, which are typically equivalent to Rs. 2.5-3.0 per KWh. The low user charges generate heavy losses for most SEBs - the average rate of return was estimated at -14% in 1996-97. Even while charging much higher tariffs to 5Compared to original targets, the percentage shortfall in transmission was nearly as great; however, targets for transmission capacity were scaled down as the shortfall in generation capacity became clear (M. Ahluwalia 1998). 6Another factor is high ash, low quality coal. 7According to a road users' cost study quoted in Kathuria (1996), p. 375. 'See Mohan Committee, M. Ahluwalia (1998), Parikh. 9Low collections reflect power theft, distribution losses and increasing payment delays. In UP, for example, receivables from the sale of power have been increasing from about 6 months sales in 1990-91 to nearly 12 months sales in 1996-97; of these receivables, nearly 40% are accounted for by the public sector. 60 industrial customers, the SEBs are unable to cover costs, let alone generate intemal surpluses to finance investment. Hence they have been unable to invest and have, in fact, become an enormous burden on the state governments' budgets and have run up large arrears with the central government enterprises such as Coal India and National Thermal Power Corporation (NTPC).i0 5.9 The situation in the other sectors is similar. The States have also allowed irrigation charges to decline sharply in real terms. States' typical charges for water are far less than delivery cost; in Punjab, for example, drinking water is free. This encourages water losses in a water-scarce country. In roads, central and state governments traditionally finance construction and maintenance; there is no tradition of tolls even on major highways (tolls are charged only for major bridges to recoup construction costs). While road-related taxes (road tax, registration tax, taxes on fuels and vehicles, etc.) yield 2.1% of GDP, lack of earmarking means that only 48% of these are used for roads. Only in ports and telecommunications have user charges generated substantial internal funds for financing investment (M. Ahluwalia 1998).11 5.10 Increased public spending on infrastructure, as well as increased private provision, will be needed to meet India's infrastructure needs well into the 21St century. As private spending grows in some areas, in response to improvements in the regulatory framework (see the next section for a discussion of current developments in key sectors), public sector spending can be realigned. And, public spending will be particularly needed in sectors where private interest is low, where there are substantial externalities, where difficulties exist in closely linking charges to services, or where there are strategic or distributional considerations. Even in these cases, the problems of limiting access, and lost time and safety considerations of toll plazas (as demonstrated by the problems of octroi taxes) suggest alternative approaches such as shadow tolling and payments to operators for construction and maintenance out of a 'Road Fund', which the Government is considering. Other examples are urban infrastructure - such as roads, flyovers, storm drains, solid waste disposal, provision of basic needs for water and sanitation - rural roads, and infrastructure in strategic areas of the country.'2 Even in these cases, the infrastructure could be constructed and maintained by the private sector, while being funded by government contracts that provide appropriate incentives for timely delivery and good quality services. 5.11 A drastic reduction of implicit and explicit subsidies, including cross subsidies (See also Chapters 3 and 8), is a key to funding the needed increase in infrastructure, as well as improving the efficiency and distributional aspects of infrastructure (See Box 5.2). For example, according to the Mohan Committee, the biggest barrier to efficient use of power by consumers is the SEB pricing policy that extends unsustainable levels of subsidies to large consumer segments (Vol. III, p. 65). These subsidies include not only low prices but also flat fees and lack of peak load pricing. Funding for roads, public and private, could be increased by further increasing the cess paid by consumers on petrol and diesel fuel for road construction, a step that was begun in the last two budgetsi13 Water charges could be raised to remunerative levels, and include a fee for sanitary disposal of water. A number of countries link assessments for local taxes to improvements in, for example, availability of water and disposal of sewerage networks. Irrigation operations and maintenance charges could also be raised. Any subsidies that remain should be limited, clearly specified and targeted (for example, basic water requirements), and 10See Chapters 3 and 8, and Mohan Cormnittee, Vol. II, p. 72. "Telecommunications tariffs currently contain a substantial cross subsidy from long distance to local users. However, TRAI has taken steps to reduce the cross subsidy through its 1999 Tariff Order, taking into account the liberalization of long distance services and the impact this will have on DOT's ability to subsidize local rates from this sector. 12In some cases , for example urban roads, particularly for access to the city center, a mixture of high tech and low tech user charges may be applied, not only to pay for construction and maintenance, but to relieve congestion. Parikh, chapter 6, summarizes many of these approaches. 13The funds collected by the 1998 and 1999 cesses have not yet flowed to the road sector - for this to happen, an executive decision by the Ministry of Finance is needed. In this context, suitable enabling legislation on the lines of the Maharashtra State Road Fund would help. 61 paid for by the government rather than through cross subsidies. The long history and political sensitivity of subsidies in India suggests a need to accompany subsidy reduction with a clear linkage between use and cost (which may be facilitated by privatization and decentralization), an emphasis on the unsustainable nature of the current approach that leaves infrastructure funding to "someone else", and an improvement in quality of supply. Box 5.2: The Perverse Impact of Subsidies Subsidies as applied in India are distortionary, have hindered private provision of services, and have non-transparent distributional effects. In terms of inefficiencies, the power subsidies encourage over-pumping of aquifers, reduce the availability of aquifers for drinking water, and, in a macroeconomic sense, encourage production of water- intensive crops in a country where water is scarce. The implicit subsidy in the failure to distinguish between peak and non-peak tariffs increases pressures to overbuild capacity - the World Bank estimated in 1991 that various measures to reduce peak usage could reduce peak generation requirements by about 12% over a 10 year period. Since part of the power subsidy comes from not covering operations and maintenance, outages are frequent (reducing utilization) and users that require good quality power are forced to invest in low efficiency generation sets. Since power subsidies are partly financed by higher charges to industrial users, they are encouraged to self-generate power, which is less efficient than generation in large-scale power plants, but less costly to them because of a) the inflation of charges to them by cross subsidies, and b) outages. Subsidies in canal user charges have led to lack of operations and maintenance spending, and correspondingly an overly rapid deterioration of the capital. In addition, lack of maintenance contributes to waterlogging and salination of soils. The subsidies' distributional effects may contribute to inequalities and are far from clear. The beneficiaries of the subsidies may or may not have higher incomes than the taxpayers. Moreover, a part of many "subsidies" (for example, in power and water) reflects "non-technical" losses, and another part reflects the abilities of firms and individuals to define themselves as part of the subsidized group. Thus, the incidence of the subsidy is almost impossible to define. In addition, subsidies to one group of users is partly covered by other users in the same sector (either as a cross subsidy or as deterioration of the service they receive). This is a politically easy way to fund the subsidy but has unclear distributional consequences and little support on efficiency or equity grounds in tax theory. In the case of power, the poorest are involuntarily paying for power supply to the richer people. Since State Electricity Boards (SEBs) are not allowed to charge realistic tariffs, their accumulated deficits are at least partly serviced by deducting their dues from the Central Plan assistance to the states. The impact of this reduced central assistance as well as the direct state subsidies to power is that the poorest in India, who typically do not have access to power, are involuntarily and indirectly (by not receiving adequate supply of basic services like health and primary education) made to pay for the cost of power services to richer segments within society. 5.12 The linkage between reducing subsidies and increased public funding is clear. But reduced subsidies are also critical to efficient private provision of services. Prices that do not cover costs carry the clear implication of political interference in providers' cost recovery, which generates risk for providers. To offset such risks, private providers often demand guarantees that, unless carefully specified, can reduce their incentives to evaluate projects, perform effectively, and take appropriate risks, and can therefore take away much of the benefits associated with private service providers. C. Attracting Private Investment in Infrastructure - Evolving Policies 5.13 Recognizing the need to attract more investment into infrastructure, as part of the 1991 reform program, India opened the infrastructure sectors to private investment. Progress in increasing private participation in infrastructure has, however, been slow. While fiscal pressures meant that public investment in infrastructure declined from 4% of GDP in 1991-92 to 3% in 1997-98, the anticipated private sector investment has not been realized with it rising from 1.4% to only 1.6% over the same period, so that overall infrastructure investment declined (See Table 5.1). Indians still largely receive infrastructure services - such as electricity, telecommunications, ports and water - through public entities, which are usually part of a government department and, relatively infrequently, a corporatized entity operated on commercial lines. 5.14 The full potential of the private sector in meeting India's pressing infrastructure needs is as yet largely untapped. With relatively few exceptions, principally in the power sector in Orissa, there has been little in the way of privatization of existing companies. Both central and state governments have 62 perceived the private sector's role largely in constructing new facilities - for example, IPPs and greenfield port sites; or in establishing new companies competing with public operators - as in the case of the telecommunications sector. However, this largely neglects the pToductivity and efficiency gains that could be obtained via private management and ownership, under an appropriate regulatory regime, and with competition introduced wherever possible, and which would go some way towards relieving the present infrastructure constraints. 5.15 Telecommunications. This sector witnessed some of the first attempts to introduce the private sector into service provision. Although there are over 1 million cellular subscribers, and the first private basic service providers have begun network roll-out, the impact of the private sector has been substantially less than anticipated. The main reason for the slow network roll-out is the high level of license fees payments, which are difficult to sustain under present market conditions. Most of the licenses were bid for by the private sector, and represent a combination of genuine overestimation and deliberate overbidding in the hope of renegotiating the fee at a later date. 5.16 The New Telecom Policy, released in March 1999 represents a substantial move by the Government to further modernize the Indian telecommunications sector. Under this, the Government has now publicly committed to the corporatization of DOT, introduce competition into long distance services and expand competition in basic and cellular services. It also addresses some of the implications of convergence. The Govemment has also taken steps to pernit the existing license holders in basic and cellular operations to migrate to a revenue-sharing scheme which will be more compatible with the revenues that can be generated from the sector. The next stages of reform will increasingly involve competition between publicly-owned service providers and private companies for the more profitable long distance and, eventually, international services. A successful opening of the sector will require the development and enforcement of the rules of the game (for example, interconnection) by a party which faces no conflict of interest. Recent moves by the Government, including the commitment in the new policy to a strong and independent regulator, have strengthened the regulator, but the overall policy and regulatory framework still allows for ad hoc policy interventions by the Government in some of the details of the rules of the game. In the context of interconnection, it should be noted that the New Telecom Policy states that the Telecom Regulatory Authority of India (TRAI) will be involved only as arbitrator in disputes between the policy-maker and the licensee, when international practice is more for the policy-maker to state the general principles underlying interconnection pricing and let the regulator, along with the service providers, handle the detailed issues. Moreover, although the policy recognizes the principle of Universal Service Obligation (USO), it is not clear why DOT should be refunded any cellular license fees it pays (as proposed by the policy), as opposed to being reimbursed for its USO. 5.17 Power. Government attention initially focussed on private investment in generation. The fundamental sector problems - high levels of losses due to theft, and heavily subsidized tariffs to agricultural and, to a lesser extent, residential consumers - were unchanged. Faced with buyers who were largely bankrupt, relatively few IPP developers have been able to obtain financing for their projects. As of June 1999, 3000 MW of privately-financed IPPs, selling to SEBs, had been commissioned, with a similar level of capacity presently under construction. Implementation difficulties - related to signing bankable fuel supply and transportation contracts - have also slowed down some projects which had received central government counter-guarantees. 5.18 Far reaching power sector reform is being attempted by a number of states. This involves divestiture of existing assets to private operators in combination with establishment of a regulatory framework for the sector which will allow the recovery of cost-based prices. Orissa has been the pioneer in these efforts. Legislation was enacted in 1995 to create the Orissa Electricity Regulatory Commission and corporatize the Orissa State Electricity Board, Gridco, which is responsible for transmission and distribution. An existing state-owned corporation, the Orissa Power Generation Company, has since been the subject of a successful divestiture, with 49% of the equitybeing sold to AES, the highest bidder. More significantly, the Government has recently completed the privatization of the distribution business of 63 Gridco (See Box 5.3). Gridco will continue as the bulk transmission entity, and will in the transition period also be the bulk purchaser (single-buyer) of power on behalf of the distribution companies operating in the state, a situation which will be reviewed, at a later date, by the Regulatory Commission. The states of Haryana and Andhra Pradesh have enacted and made effective reform legislation similar to that developed in Orissa. Under their respective reform acts, they have restructured (unbundled) their power sector and established their regulatory commissions. The legislative assemblies in the states of Uttar Pradesh, Rajasthan and Karnataka have enacted similar reform legislation, expected to become effective by April 2000. Reform programs in all these five states include distribution privatization, and some of them are expected to move very actively in this area during the year 2000. 5.19 At the national level, the Government unbundled its utilities in 1993, by consolidating the transmission activities of several central and joint sector generators into a separate transmission company, the Power Grid Corporation of India Ltd. (POWERGRID). India opened the power transmission sector for private investment under The Electricity Laws (Amendment) Act, 1998. POWERGRID is preparing the first projects for implementation by independent power transmission companies, to be contracted through competitive bidding processes. The Act also provides for state-level transmission utilities to similarly contract private transmission. Following the September 1999 national elections, the Government is reviewing and accelerating its disinvestment plans. In the power sector, POWERGRID and the National Thermal Power Corporation (NTPC) have been identified as possible candidates. Were the state power reform process more advanced and spread across India, the Government could create a competitive wholesale power market and at the same time realize high privatization proceeds by selling off NTPC, plant by plant, through competitive bidding processes. 4 Box 5.3: Privatizing Distribution in Orissa In July 1997, Gridco, the utility responsible for transmission and distribution services in Orissa, decided to offer the entire distribution business in the State (divided into four zones) for privatization simultaneously, instead of sequentially, as envisaged earlier. The Orissa Government and Gridco decided to offer majority stake and management control to strategic investors. Eleven consortia, including some major international utilities and leading Indian power companies, were prequalified to bid for 51% of the shares in each of the distribution companies. Bids from three consortia - Bombay Suburban Electricity Supply Ltd. (BSES), Grasim Industries/Singapore Power consortium, and Tata Electric Companies (TEC)NViridian Group PLC consortium - were received for three out of the four zones in January 1999. BSES emerged as the successful bidder for all the three zones; majority equity and management control in these distribution companies have been transferred to it, generating disinvestment proceeds of Rs. 1.2 billion for 5 1% of the equity in the three companies, representing a premium of 50% over book value. The Government of Orissa has recently completed the sale of 51% of equity in the fourth zone to AES. 5.20 Water. This sector has not seen, as yet, any privately-financed projects of a substantial size reach financial closure, although the Tirrupur project, supplying water predominantly to industrial customers, is nearing this point. All projects attempted thus far have been bulk supply projects. Where these are selling to a municipality or a board, the main concern of potential investors is the ability of the purchaser to pay for the services to be supplied; where these are selling to industrial consumers who have the ability to pay for the services, additional complications arise such as the requirement to provide water at subsidized rates to residential consumers located near the project. 14 Government disinvesting its equity in NTPC to below 50% would obviously lead to NTPC becoming a private company, which at 18,000 MW and growing, would remain in the foreseeable future a dominating force in the sector, and as such, would probably make any future plans to introduce more advanced competitive wholesale power markets very difficult to implement successfully. While plant-by-plant privatization would avoid this potential risk, it does raise some additional caveats: (a) if private shareholders have a say, they could complicate the restructuring of the system; (b) unless plant-by-plant privatization sees a change in management, efficiency gains will be minimal; and (c) even plant-by-plant sales to private management may need some voluntary staff reduction before sale. 64 5.21 The poor operational performance of this sector shows strong parallels with the power sector. The current emphasis upon bulk supply facilities financed by the private sector and selling either to a public body or to industrial consumers also mirrors the initial emphasis upon IPPs in the power sector. The provision of urban water supply in India suffers because of the lack of a commercial orientation. The private sector can, under an appropriate regulatory framework, provide the management expertise and incentives to reduce losses and expand service. However, India has yet to embark upon the introduction of private management in this area. The appropriate strategy for doing this will have to combine tariff increases with improvements in service standards and water availability - the latter in some cases requiring substantial investments. 5.22 Management contracts may be a possible entry point. However, without full management control, the ability to shed workers and to provide incentives for good perfornance, such contracts are unlikely to produce the substantial improvements in operating performance that would come from more substantial forms of private sector participation such as leasing or concessioning. If the private sector is to be responsible for investments, then the issue of cost recovery needs to be addressed. If price increases have to be phased in over time so that they match more closely the improvements in water availability and quality, and to provide a transition from the very low present levels, there may be a need for phased and targeted government support. The strategies adopted need to take account of two additional factors: (i) provision of a policy framework where informal water providers can continue to provide services to the poor; and (ii) addressing of water resource and allocation issues, particularly in the water-deficient areas of India. 5.23 Transport. In ports, toll roads, and airports, privately-financed facilities are being constructed and commissioned. However, in ports and airports, thus far, the focus has been largely on the creation of new facilities rather than privatizing operations at existing facilities. The government envisions demand growth for port services of around 200 million tons, with estimated throughput of around 415 million tons in 2001-02. It is therefore planning to add 122 million tons of port capacity over the Ninth Plan period (1997-2002). Approximately 45 million tons, or around one-third of capacity, is expected from the private sector, in addition to 31 million tons from captive schemes " In the case of airports, the Government has announced that it is planning to lease out operations at four major airports to the private sector. The successful commissioning of the Cochin airport represents a landmark for private investment in this sector. 5.24 Privately-financed toll roads are now under operation, with more being commissioned in India. Thus far, these have been relatively small facilities such as bridges and bypasses, although larger projects are coming on stream. However, these projects typically have extensive recourse to the public sector, with debt being largely guaranteed by the concessioning public authority. It would be expected that a successful program of projects would see a reduction in the risk being borne by the public sector. Without a reduction in the liabilities being borne by the public sector, the benefits of obtaining private investment will be diluted. (Nevertheless, for the expansion of national highways, the Government is also considering an approach whereby the private sector faces little demand risk in that it would be paid shadow toll revenues that would largely be independent of the volume of traffic using the road). As far as the expansion and maintenance of the road network is concerned, it will continue to be largely funded through public resources. D. Developing Specialist Regulatory Agencies 5.25 Specialist regulatory agencies now exist in three infrastructure sectors within the, economy - telecommunications, power and ports.16 The actions of regulatory agencies, such as the TRAI and the '5Capacity increases are expected at the major ports of JNPT, Kandla, Mormugao, New Mangalore, Mumbai, Chennai and Paradip. '61n other sectors such as gas, airports and water, economic regulation continues to be exercised through govemment departments and public sector service providers. 65 Orissa Electricity Regulatory Commission, to date, have already introduced enhanced scrutiny of the performance of existing public sector service providers, and transparency in the prevailing tariff structure17. However, the experience of regulatory bodies thus far provides certain lessons about the political economy of regulation within India, and the design of regulatory bodies to ensure that they can effectively fulfil their mandate as independent regulators. In particular, it shows the need to have an effective delineation of responsibilities between the regulator and the policy-maker and to place the creation of an independent regulator within a broader restructuring of the sector (See Box 5.4). 5.26 Power - Creating Genuinely Independent Regulators. The Electricity Regulatory Commissions Act 1998 provides for the establishment of State Electricity Regulatory Commissions. The moves by a number of states, including Delhi, Madhya Pradesh, Maharashtra, Tamil Nadu and West Bengal, to establish regulatory agencies following the Act are welcome initiatives. However, most of these state commissions are established by notification of the state government, rather than through legislation, and can be eliminated via de-notification. They also have a relatively limited range of powers, although again, more can be granted by notification by the state government. In contrast, the regulatory commissions in Orissa and Haryana, for example, enjoy greater security, as, being created by legislation, they cannot be eliminated by de-notification; they have a broad range of powers over and above tariff-setting, including licensing, regulation of the quality of service, and dispute resolution (See Annexes 5.1 and 5.2). Insulating the regulator from political pressures by establishing their independence will be extremely important given that the price regulatory mechanism grants a relatively high degree of discretion to the regulator. 5.27 The Electricity Regulatory Commissions Act, 1998, also provided for the establishment of the Central Electricity Regulatory Commission (CERC), to promote competition, efficiency and economy in the electricity industry. The tariffs of central generating companies, the tariffs of other generators with a composite scheme for generation and sale of electricity in more than one state, the transmission of energy by POWERGRID and the inter-state transmission of electricity, including tariffs, are within its regulatory mandate (see Annex 5.1 and 5.2). CERC has started its operations in an impressive manner. Among its major outputs are: (a) the order on the Indian Electricity Grid Code in October 1999, following preparations by POWERGRID and hearings by the Commission; and (b) and a consultation paper on bulk electricity tariffs in September 1999, followed by extensive regional consultations in September- November 1999. CERC expects to issue its order on bulk power tariff principles by early 2000, including an innovative frequency-linked power pool for unscheduled interchange. The new bulk power tariffs and the pool are expected to help improve the operational discipline in the regional grids and promote power trading. 5.28 Regulators Alone will Not Solve the Problem. It is also clear that the creation of an effective and independent regulator alone will not transform an inefficient or loss-making company or sector. Regulation is an imperfect alternative to competition, where the latter can be introduced, since a government department or board has little concern about bottom lines and the parameters set by regulators to achieve efficiency. In the power sector, this means that the privatization of distribution, where the losses due to theft and mismanagement are so pronounced, is key to turning the sector around and meeting consumers' needs. In telecommunications, DOT's present status as a government department handicaps it in its role as service provider, giving it little mobility to counter competition or to innovate to meet emerging demands. Corporatization would be an essential first step in giving it more freedom. In the ports sector, the separation of operations from public statutory activities in the major ports will be an essential first step. The introduction of competition within ports, either from different 17The tariff rulings issued by both of these bodies have come at the end of substantial interaction and discussion with the consumers, service providers and Government. 66 terminals or services such as stevedoring, will be key in ensuring that consumers get better deals for port services. Box 5.4: Design of Regulatory Agency Powers - Lessons from Telecoms Experience of the telecom sector in India shows the advantage of clearly demarcating the responsibilities of the regulator and the policy maker. Under the Act that established it, TRAI enjoys a range of powers that are comparable to those held by regulatory bodies in a number of dynamic telecommunications markets. Its responsibilities include recommending the need for and timing of the introduction of new service providers and recommending the terms and conditions of licenses. It is also charged with effective inter-connection between service providers, and regulating revenue-sharing arrangements. Four cases have been filed with the High Court which center over the extent to which TRAI can intervene in issues between the DOT and a service provider. In addition, DOT has moved that TRAI cannot hear any disputes involving DOT, given that the latter acts in a policy-making role. The High Court, on a single bench ruling, has upheld DOT's granting of a license to MTNL to enter the Mumbai and Delhi cellular markets, arguing that DOT is not obliged to seek TRAI's recommendation on the entry of new service providers, and that any such recommendations would not be binding. The High Court has also ruled that TRAI has no role in the dispute between the license holder and the licensor in the case regarding provision of Intemet services. High Court rulings, which are the subject of appeal in a higher court, thus far, suggest that TRAI has relatively limited power in disputes between license holders and the licensor, and in the grant of licenses. There are concems that the former has implications for TRAI's role in interconnection, since these arrangements are specified as part of the license agreement. These tensions have arisen largely because of DOT's multiple roles as service provider, policy-maker and, on behalf of the President of India, licensor of its private sector competitors. Controversy following TRAI's 1999 Tariff Order has highlighted the issue of whether, under its establishing legislation, TRAI is adequately protected from political interference. TRAI's first Tariff Order of March 9, 1999 mandated a substantial rebalancing of tariffs, reducing long distance and international call charges and increasing the cost of rentals and local calls. Subsequent to the tariff order, the Minister for Communications directed TRAI to suspend implementation of tariffs for the time being. In the final analysis, the Government respected TRAI's pricing order, with DOT facing the lowered price caps on long distance charges, and rural connections priced at the previous, lower rates, as allowed for in the TRAI order. Although the fact that TRAI's pricing order was respected has strengthened the regulator, the possibility exists that in the future the Govemment could use its powers to issue policy directives to overtum TRAI's orders. CHAPTER 6 INCREASING THE DEMAND FOR LABOR: DEREGULATION TO INCREASE EXPORT GROWTH, AGRICULTURAL GROWTH AND LABOR MARKET FLEXIBILITY A. Overview 6.1 Sustained poverty reduction depends on rapid growth in both quantity and quality of labor demand. In turn, rapid growth in labor demand depends on rapid output growth. There is a strong association between output growth and rising real wages in agriculture and manufacturing (See, for example, World Bank 1995c for cross-country evidence). Economic growth has also promoted labor shifts from low productivity, informal and self-employment in agriculture and services, to higher productivity, higher wage, formal employment in industry and services (for cross-country evidence, see Figure 2.3 in World Bank 1995c). Of course, broad-based human development, inclusive of females, is needed to maximize the impact of rapid growth in output and labor demand on poverty reduction, as well as to sustain rapid growth. These relationships are illustrated in the rapidly growing East and Southeast Asian economies, where poverty fell sharply and labor incomes rose rapidly, as education became more widespread (World Bank 1993; World Bank 1996b discusses Indonesia in detail). The recent crisis in Southeast Asia, although painful, was small relative to the long history of benefits from growth, and left the vast stock of infrastructure and education in place. Moreover, since the crisis, growth has rebounded surprisingly fast in most of these countries. 6.2 Poverty reduction also depends on the labor intensity of growth - a sustained increase in labor demand per unit of GDP. Little additional labor demand comes from capital-intensive growth fostered by protection of inefficient industries and subsidized investment. Moreover, such a development strategy eventually slows investment and growth because of the limited size of the domestic market and the lack of competitive pressure to upgrade capital (See World Bank 1998a, and Bhagwati). At the same time, such a strategy forces consumers to buy low quality/high cost goods, and producers of potential exports to use high cost inputs. Such concerns were major factors in India's reforms in the early 1990s. However (i) tariff and non-tariff barriers in India still remain very high, making it one of the most protected economies in the world; (ii) labor market flexibility in the organized sector remains low and has discouraged the creation of formal employment, while the dominant unorganized sector remains outside the purview of labor legislation that regulates work standards and social security benefits to workers; and (iii) agriculture, which employs 62% of the workforce, remains the least deregulated sector in the economy and subject to inefficient and unsustainable public spending. These factors contribute to constraining the growth of labor demand. 6.3 Thus, from the standpoint of poverty reduction, a key issue is the combined effect of growth and its labor intensity. In that regard, labor demand is unlikely to be stimulated by specific policies supporting labor, such as those favoring small-scale industry or workers in the formal sector, when the overall incentive and regulatory framework encourages capital-intensive growth. A more effective approach to reduce poverty and increase labor demand in general is likely to be a deregulated, general incentive framework that encourages economy-wide growth and makes the best use of India's abundant labor. 6.4 Along these lines, this Chapter examines how India can use further deregulation to increase growth in labor demand and output in three key areas: * Encouraging more exports, and imports, as a percentage of GDP, since India's exports tend to be more labor-intensive than import substituting industries; * Increasing labor market flexibility to stimulate the general growth of labor demand, and 68 Increasing growth in the agricultural and rural sector, which still provides incomes for 73% of the population. B. Deregulation to Increase Trade, Growth and Labor Demand 6.5 Despite improvements, India's trade and industrial policies continue to impose a heavy cost in terms of slower export growth that feeds back into slower growth in labor demand, output and productivity. This section discusses how increased export growth, with its consequent benefits in terms of poverty reduction and higher growth, will depend on a second phase of reforms that includes reducing protection, reducing bureaucratic transaction costs and logistic delays for exporters, eliminating small- scale industry reservation, and improving the environment for Foreign Direct Investment (FDI). 6.6 Trade, Growth and Employment. Increased trade is positively related to growth according to numerous studies that use a variety of methodologies.! Moreover, international trade also increases the demand for labor in areas where it is best able to compete internationally and raises real wages in the manufacturing sector (See Figure 8.1 in World Bank 1995c). Increases in exports and imports shift resources into industries where productivity is higher (measured at world prices), thus generating a higher national output. In addition, higher exports allow firms to exploit economies of scale. Higher exports and imports encourage competition and innovation; together with foreign direct investment, they encourage technology transfer, all of which contribute to a sustained increase in growth. The East and Southeast Asian countries provide an example of the benefits associated with rapid export growth. Moreover, it is worth noting that their export growth reflects a massive shift in the nature of exports - from primary products, to labor-intensive manufactures, to high-tech and capital goods (Yeats 1999) - a steady progression up the technology ladder that was associated with a steady rise in labor demand for an increasingly educated labor force. 6.7 India's Limited Use of Trade Benefits. The share of trade in India's GDP has been low, less than half of Southeast Asia's in the 1980s,2 or even China's (See Box 6.1).3 Between 1977 and 1986, India's share of world exports declined from 0.61% to 0.47%, and did not recover to its 1977 level until 1996. It lost market share in major products to East Asian countries. In some products (including jewelry), where its share rose, others, including Pakistan and Bangladesh, did better (Srinivasan, and Kathuria and Taneja). This perfornance reflected India's well-known, severe anti-trade bias in tariffs, quotas, licenses, etc. Nonetheless, India's main export industries - textiles, leather, metal products and "other" manufactures demonstrated the benefits of exporting. Over the periods 1973-83 and 1984-93, these industries exhibited rising labor productivity, capital deepening, and falling unit labor costs which were accompanied by a rise in the rate of growth of employment and wages (Gangopadhyay and Wadhwa 1998). The performance of these industries suggests that export markets provide the scope for rapid, employment-intensive industrial expansion. More generally, India's export industries are more labor- intensive than its import industries (See Annex Table 6.1), as well as more productive (See para. 6.11). These facts suggest that an expansion of India's exports (and imports) would increase output and labor demand. 6.8 India's 1990-91 balance of payments crisis led to major reductions in tariffs, licensing, and trade- related bureaucratic procedures, and to a substantial exchange rate devaluation, all of which increased export growth sharply. From 1992 to 1996, India's share of world exports increased every year (See Figure 6.1). Export growth (in dollars) averaged 15.3% p.a., similar to Southeast Asia's (Indonesia, Malaysia, Philippines and Thailand) 15.8%. These years coincided with a sharp rise in total (aggregate) l See, for example, Bajpai and Sachs; GOI (1999e); Stiglitz; and Srinivasan, which summarizes recent studies. 2 In 1985, India's trade to GDP ratio was 15%, compared with Indonesia's 44%, Thailand's 49% and Philippines' 46%. 3In fact, as a share of PPP GDP, India's trade was only 4.5% in 1996 (World Development Indicators), since India's PPP GDP is much higher than the nominal dollar value of its GDP. 69 Box 6.1: China's Exports and India's Foregone Exports Trade has been a key element in growth even for a country as large as China. China's exports of goods and services grew from 6.3% of GDP in 1980 to 21.0% of GDP in 1996 and total trade reached nearly 40% of GDP, thus contributing increasingly to its very impressive GDP growth of 10% p.a. over this period. In contrast, India's exports of goods and services grew from 6.5% to only 11.6% of GDP over 1980-96, while average GDP growth was 5.8 % p.a. (See also Annex Table 6.2). India did not take advantage of long periods of world trade growth, such as in the 1970s. Although India was one of the largest developing country exporters in the 1950s, its share of world exports steadily declined and it was overtaken by the fast-growing East Asian economies in export markets. It is interesting to make a very crude assessment of India's foregone opportunities. India and China started out at roughly the same level of exports, with competition existing between them in many exports (See Kathuria and Taneja, and Srinivasan). Thus, China's exports can be used as a rough proxy for India's potential export level. In just one labor-intensive product, garments (comprising about 14 % of India's exports), India's total exports were $4.6 billion in 1996, compared with $25 billion for China. If the two countries had maintained the same share of exports (that is, India and China had split their current sales evenly), then India's garment exports would be about $15 billion. Thus, India a anti-trade polices contributed to a potential loss of$10 billion of exports in one product alone (equal to over 25% of current exports). This translates into millions of lost jobs and opportunities to make a real impact on poverty. The same would be true for many other Indian exports, which are largely labor- intensive (See Annex Table 6.1). factor productivity (See Chapter 8 and Annex 8.1), as would have been predicted by the analyses noted earlier. In 1997, India's share of world trade declined (marginally) for the first time in six years, and the decline continued in 1998. This decline coincided with a slowdown in GDP growth and a fall in total (aggregate) factor productivity. Despite the prior major reductions in protection, in 1997, India was still one of the most protected countries in the world (See Box 6.2). And in 1997 and 1998, tariff protection rose (See Figure 6.1) - tariffs were raised across the board (except for petroleum) by 3 percentage points in September 1997, and the 1998 Budget imposed an additional duty of 4 percentage points (which translated into about a 6 percentage point increase in the average tariff, since the duty is levied on the c.i.f. price including all tariffs; See World Bank 1998a for a discussion). QRs remained roughly constant in 1997 and 1998 (See Annex Table 6.3). The average annual real exchange rate for 1998 was about the same as in 1993, with some depreciation occurring after July 1997 (See Figure 6.1 and Annex Table 6.4). Figure 6.1: India's Share in World Trade, REER, and Tariffs Share in world 180 merchandise exports (%) (Right Axis) 0.65 160 140 0.60 120 REER Index (1990=100) 0.55 100 (Left Axis) 80 t ,+ 0.50 60 j - _,Average tariff (%) (Left Axis) 40 - -' 1 40~~~~~~~~~~~~~~04 20 0.40 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: IMP for REER, WTO for trade, World Bank for tariffs. 6.9 Getting Exports Back on Track. Radelet et al conclude that with a proper policy environment, South Asian export growth and GDP growth could increase to the rates achieved in East Asia. With only a 0.61% share in world exports in 1998, Indian exports could keep growing faster than world trade for some time, as the East Asian countries have done in the past and some, such as China and Korea, continue to do even today (See Annex Table 6.5). What policies would India need to get back to a sustained high export growth that increases labor demand? The best way would be to create an overall environment for export growth. This will ensure that India makes best use of its abundant labor resources. Since a high 70 export growth rate and share of exports in GDP also means a high import growth rate and share of imports in GDP, it will also ensure that firms, including domestically-oriented firms, face competition from the world market, thereby encouraging them to improve product quality and innovate. Finally, it will ensure that firms can invest with a view towards the export market. One-shot policy changes only induce temporary boosts in exports. Schemes to offset the anti-export bias of high protection, typically, work poorly and fail to generate the general benefits of competition and export-oriented investment because of their complexity, fears of withdrawal on the part of investors, and potential leakages in the benefits. Box 6.2: India - One of the Most Protected Countries Despite liberalization, India's tariff and non-tariff protection remain higher than almost all large countries. Even the 1999-00 reduction in the coverage of QRs, to 28% of output, leaves India's QRs higher than those of most countries in 1990-93. Average Tariff Rates, 1998 40 (Countries over 20 million) 3 t 30_ 25 20 r T 1 ! I ti C' t = 0 0 w '0 °0 <°< 0 r- C -_ ' - O rit c E - . E o in c Source: UNCTAD TRAINS Database. Percentage of products covered by non-tariff barriers 100 Average 1990-93 (Countries over 20 million) 90 80T 70 60 Iii 50 401 30 201 10 fO| II !C La, M I *, 5 I- , A X1 E r z c a" z -~~~U .g I _ r Source: UNCTAD TRAINS Database from WDI S97 'WorldBankstaffestimates Moreover, such schemes are susceptible to charges that they are export subsidies - even if that is not the case - as has been happening over the last year, and invite retaliatory action. Thus, the best policy is to create an environment where an export policy is not needed, as the Commerce Minister stated in his 71 EXIM Policy speech on March 31, 1999 ( "...EXIM Policy by itself cannot achieve a very high export growth rate..."). Many of the issues raised below are echoed in the Minister's speech. 6.10 Specifically, action along the following lines will help reduce the anti-export bias and thereby increase exports on a more sustained basis than in the past: * Reducing protection to low and uniform levels and limiting anti-dumping - a new form of protection; * Maintaining an exchange rate that supports export competitiveness; * Reducing the bureaucratic, transaction costs bome by exporters; * Reducing logistic and infrastructural delays; * Providing a more hospitable environment for foreign direct investment. * Eliminating product reservation for small-scale industry; and * Increasing labor market flexibility. These issues are discussed below and in the next two sections, in more detail 6.11 Reducing Tariff Protection to Relatively Low and Uniform Levels. Tariffs have been increased over the last two years, and anti-dumping (which also protects inefficiency) is on the rise (See Boxes 6.3 and 6.5). High protection hurts exports by making import substitution more profitable than exports, diverting scarce resources to import substitution, making inputs for exports more expensive, and keeping the exchange rate relatively appreciated. Rapid export growth requires low protection and rapid import growth, so that more of the scarce labor, capital and other factors of production can move out of import-substitution and into exports. Moreover, this policy makes imported inputs available cheaply and subjects domestic producers of inputs for exports to the discipline of import competition. Rapid export and import growth raises output, as well as labor demand, since the factors of production can produce more output, valued at world prices, in exporting industries than in import-competing ones. For example, the effective rate of protection on the secondary sector (mainly industry) was 47.6% in 1998-99, implying that on average, the use of land, labor and capital in the secondary industry was 47.6% less efficient than in the production of exports (NCAER 1999). Also, by allowing more imports, a reduction in protection increases the demand for foreign exchange and, therefore, leads to a depreciation of the exchange rate, which has a positive impact on exports. An exchange rate appreciated by high tariffs keeps both exports and imports low, and thus sacrifices much of the gains from trade. Apart from this, there is great administrative merit in moving to relatively low and uniform protection, since it reduces incentives for classification disputes and bribery. In addition, low tariffs make duty exemption schemes redundant, which would greatly reduce transaction costs for exporters. Simplification of duties would also call for substitution of the complex and non-transparent system of basic duty, surcharge and special additional duty by a simple and single rate of duty.4 6.12 The 1999 EXIM policy reduced quantitative barriers significantly, and the remaining restrictions are to be eliminated (except for 533 out of 10220 items on environmental, security and religious grounds) by April 2001 (See Box 6.3). The 1999 reduction in import restrictions saw the QR coverage ratio (See Annex Table 6.3) falling to 28% in 1999-00 from 38% in 1998-99, and 88% in 1988-895. Until such time as the QRs are eliminated, the high level of QRs - particularly in agricultural products, textiles and some consumer goods - provides unlimited protection to investments and constrains efficient investment decisions. QRs are particularly costly because they impose no limit on cost/quality differences and, thus, 4 See World Bank (1998a). The imposition of the special additional duty in 1998-99 and its special exemptions have led to greater opacity rather than transparency in the duty structure. 5 These calculations involve aggregation by simple arithmetic mean (Method 1). On the basis of value-added weights, the QR coverage is 22% in 1999-00, compared with 61% in 1998-99. The large drop is on account of substantial declines in sectors, such as "other" crops, sugarcane, and milk and products, which have a large weight in the 1989-90 input-output table. 72 allow even more protection to inefficiency over time than tariffs. By switching fairly quickly to tariff- based protection and gradually reducing it in a pre-defined way, India could reduce the degree of domestic inefficiency, ease the adjustment process, and capture some of the benefits, that currently go to producers, in terms of increased revenue. Box 6.3: Recent Developments in Trade Policy The EXIM Policy announced on March 31, 1999, has heralded the second generation of reforms by announcing an accelerated phase-out of QRs. Of the 2714 items notified under the BOP cover by the Indian Govemment (not including items excluded on safety, environmental and security considerations), as many as 1285 items (892 in the 1999 Policy) have been moved to the free list of imports, as against 1146 in the phase-out schedule agreed to in the WTO, and another 685 items (414 in the 1999 Policy) have been put on the SIL list. 1429 items now remain on the restricted list (685 SIL, 744 restricted/canalized). This policy move is extremely desirable on the grounds of efficiency, revenue generation, and export promotion. Protection by QRs gives unlimited protection, unlike tariffs which define the upper limit of protection and inefficiency that a country is willing to live with. To the extent that actual imports increase, customs revenue will also go up. As mentioned earlier, this will also depreciate the exchange rate and improve export prospects. Nonetheless, the US preferred a faster phase-out of QRs, and obtained a dispute panel ruling in the WTO in its favor. In December 1999, India and the US reached an agreement to phase-out QRs on the remaining 1429 items by April 2001 (714 of which will be removed by April 2000), ahead of the originally agreed date of April 2003. Other steps in the EXIM Policy include recognition of service exports' potential by treating service exports on par with merchandise. Steps not taken, but mentioned by the Commerce Minister as needed for export growth, include removal of export restrictions on agricultural and processed goods. Unlike QRs, tariff protection has not declined in the last few years. Average (unweighted) tariffs at 39.6% in 1999-00 are about the same as in 1995-96 (See Annex Table 6.6). Tariffs declined quickly after the 1990-91 level of 128%, slowed down after 1995-96, and reversed since September 1997 (World Bank 1998a). As a result of the 1999-00 Budget proposals, which replaced the special duty of 5% with a surcharge on basic duty of 10%, and retained the non-transparent special additional duty of 4%, the total duty remained almost unchanged (unweighted tariff declined from 40.2% in 1998-99 to 39.6% in 1999-00, but tariffs weighted by 1995-96 imports rose from 29.7 to 30.2%). Positive aspects of the Budget proposals include a decline in the dispersion of tariffs (which reduces classification disputes and makes for less distorted production incentives), and a reduction in the peak rate. But the negative consequences of high tariffs remain, as outlined in para. 6. 11. Indian tariffs remain amongst the highest in the world (World Bank 1998a). Announcing a clearly articulated tariff reduction schedule as part of the second generation of reforms will reduce investor uncertainty and the tariff-hopping type FDI (which, along with domestic investors, can later create pressure against tariff reform). 6.13 Exchange Rates. Previous export booms, notably during 1986-90 and 1993-96, have been associated with depreciation of the REER. Roberts and Tybout indicate that sustained export growth depends on an exchange rate that maintains export profitability, as well as a commercial policy that is not biased against exports. In this context, reducing the fiscal deficit is important. A high deficit leads to higher interest rates, higher inflows of capital, which keeps the exchange rate relatively appreciated. While there has been some depreciation since July 1997, the rupee's REER in September 1999 was more appreciated than in 1993 (See Annex Table 6.7). Moreover, India's exchange rate has appreciated against some of its potentially strongest competitors, such as Indonesia, Malaysia, Thailand and Korea. From a longer run standpoint, however, continuous depreciation faster than domestic inflation is likely to feed back into accelerating inflation, and is therefore not a panacea to sluggish exports. In the long-run, increases in productivity are the only way to bring about sustained increases in export growth. 6.14 Reducing the bureaucratic, transaction costs bome by exporters is a daunting task, given the complexity of the regulations, their multiple origins (revenue protection, foreign exchange control), their interaction with other elements such as cargo logistics and customs procedures (See para. 4.32 for evidence), and widespread entrenched vested interests.6 A reduction of transaction costs would need to address customs clearance procedures for both imports and exports, as well as duty- and tax-free access to imported inputs, which could be based on a modern systems approach relying on self-compliance (tax payers), risk analysis and management (customs), supported by periodic ex-post audits of records. 6 See Maxwell and Export-Import Bank of India. Both the Commerce and Finance Ministries have voiced their concern about the impact of high transaction costs on exports. The Finance Minister has set up a Committee headed by the Revenue Secretary to suggest measures to reduce high transaction costs in foreign trade licensing, tax procedures and the banking system. 73 Electronic Document Interchange (EDI) techniques could be used aggressively to lock in simplified procedures, automate routine procedures, and minimize face-to-face contacts. 6.15 Reducing logistic and infrastructural delays is essential for India's competitiveness in today's time-sensitive markets. The simplification of cargo handling and customs procedures is one part of the solution. This should be accompanied by the privatization of port management, the adoption of a landlord port approach - where the port authority owns the land and basic infrastructure and leases it out to operators - and finally the full privatization of the ports. Data for containerized sea freight in Mumbai suggests that dwell time for imports could be from 10- 19 days (and it is worse in all other ports except for JNCP), which is far more than the best practice of less than 30 hours. Apart from JNCP, which is starting operations, no major International Container Line (ICL) has scheduled stops in India, so that container cargo has to be shipped via feeder lines to either Singapore or Sri Lanka, which means further delays. 6.16 Providing a More Hospitable Environment for FDI. By discriminating between core and non- core FDI, India's access to global production networks and intra-firm trade was severely restricted. In 1995, for example, almost one-third of world exports were accounted for by foreign affiliates. US data, if extrapolated to the rest of the world, suggests that more than a third of world exports are between affiliated firms. A recent econometric study for 52 countries suggests that there is a positive and significant correlation between FDI and manufactured export performance (UNCTAD 1999, pp. 246-47). In China, foreign affiliates' share in total exports rose from 17% in 1991 to 41% in 1997. In India, foreign affiliates have played a much smaller role - in 1996, FDI inflows accounted for only 2.9% of GFCF in India against China's 17.0%, and the FDI stock to GDP ratios were 2.6% and 24.7%, respectively (UNCTAD 1999, p. 232 and UJNCTAD 1998, pp. 6, 204, 394, 408). This has meant that India has lost out on potential labor-intensive and other exports, as well as opportunities for far greater spread of technology and, thus, increase in productivity.7 6.17 FDI is also deterred by the very poor state of infrastructure (including ports, roads, phones and power) where India ranked the lowest among 53 countries in the 1998 Global Competitiveness Report. Apart from infrastructure, post-approval implementation in India remains slow, which deters investment and the conversion of approvals into inflows. Other deterrents to FDI in India are its rigid labor laws and poor industrial relations (See paras. 6.25-6.31). India is attempting to tackle some of these problems, for example, by seeking to attract FDI in infrastructure. However, the expected changes in infrastructure regulation have been slow in coming (See Chapter 5), which has been a factor in the worrisome slowdown in FDI (See Annex Table 6.8). 6.18 Unshackling the Small-Scale Sector. The Small-Scale Industry (SSI) sector successfully produces labor-intensive export items, and provides the second highest employment after agriculture (roughly 50 million in 1996-97). In 1997-98, there were over 3 million SSI units in India which accounted for about 40% of the total production of the manufacturing sector, 35% of exports and 80% of additional employment in manufacturing (16.8 million people) (RBI 1998a, Kapur Committee). However, in trying to promote the growth of SSI firms, Indian policy has not had the desired effect, and instead has given rise to a number of negative outcomes. 6.19 The Abid Husain Committee Report and the Commerce Minister's speech have argued for the phase-out of reservation for the SSI sector. Reservation has led to capacity fragmentation, and sub- 7 Of course, the benefits of FDI can be fully realized only if domestic markets are competitive, protection levels low and quantitative restrictions non-existent, and if subsidies and incentives are transparent and small. In the absence of these, foreign firms may indulge in 'tariff-hopping' type FDI, tum rent-seekers (and often do a better job of that) and could even join the protectionist lobby. One instance is provided by the car firm Maruti-Suzuki. Granted early access to the domestic market two decades ago, Maruti quickly went on to dominate the market, facing little domestic or import competition (imports are subject to strict quantitative restrictions). Since the mid-1990s, and especially since 1998, it has faced increasing domestic competition, forcing it to slash prices of its largest selling model, and introduce newer models at a much faster pace than hitherto, which has been highly beneficial for the consumer. 74 optimal production scales in many cases, and reduced exports and, hence, employment. Many key export products for India such as garments, shoes and leather products, and potentially key ones like toys are on the reserved list. This, along with labor rigidity, has been a major export constraint for India and allowed China, for example, to outperform India in these sectors. In spite of de-reservation of a few products (such as seed drills, reapers, some agricultural machinery and sole leather crowbars) in February 1999, recent policy moves have been against the spirit of liberalization. As feared in the World Bank's 1998 Macroeconomic Update, the Cabinet in February 1999 decided to lower the investment ceiling for small- scale industry from Rs. 30 million to Rs. 10 million (notified by the Government in December 1999), which will constrain further the already constrained firns. Moreover, the latest EXIM policy announced on March 31, 1999, has added about 159 items to the existing list of about 563 items that were on the reserved list but also freely importable (making a total of 722 out of a total of about 1040 reserved items that are freely importable), further skewing the playing field against large domestic firms - while large domestic firms continue to be barred, large foreign firms will enter via imports and compete with small Indian firms, which is both inequitable and inefficient. This inequity adds to the already powerful case for de-reservation, which is now essential if India is to successfully compete in both the export and domestic markets (See Box 6.4; and Box 5 in World Bank 1998a). Box 6.4: Gokaldas Exports - Constrained by SSI Reservation The Bangalore-based Gokaldas Exports group is the largest exporter of garments in India. During 1997, the flagship company of the group, Gokaldas Exports, exported garments worth Rs. 657 million while exports of another major group company, Unique Creations, were even higher at Rs. 781 million. Unlike a number of medium and large Indian garment exporters, Gokaldas Exports depends entirely on in-house manufacturing and does not sub-contract production to smaller units. It manufactures standard products like shirts, trousers, shorts, jackets, coats, parkas, rainwear and suits, using assembly-line factory systems of production. Its factories are equipped with imported, power-operated sewing machines and other modem special equipment that transforms assembly line production into state-of-the-art manufacturing. The group also has strong in-house computer-aided design capabilities (assisted by foreign designers who are enlisted to develop patterims and contemporary styles). Given the large magnitude of its investments in manufacturing, Gokaldas is able to skirt small-scale reservation of the garments sector only because of its high export-orientation. Till 1993, large units could enter this sector only if they undertook an export obligation of 75% of new or additional production - this was reduced to 50% in 1993 (though this was constrained by the requirement that at least half had to be exported to non-quota countries). While this has enabled Gokaldas to expand production and exports, Gokaldas' director, Mr. Rajindra Hinduja, says that he and his top officials have had to spend a great deal of time and effort in Delhi to fulfil the onerous procedures and formalities required to get such exemptions based on export commitments. Over the years, the group has set up as many as 32 manufacturing units (employing, in total, over 15000 workers) for many of which it has had to get such exemptions. Several of these factories are dedicated to producing only customer-specific garments of leading foreign clothing companies all year through. According to Mr. Hinduja, Gokaldas may have missed several export opportunities because of the hassles involved in getting such approvals. In the case of smaller orders, it is not even worthwhile for the company to invest a great deal of time and effort in seeking exemptions. Further, large foreign importers are put off by the fact that Indian companies have to get special permissions before they can commit large and regular export orders - this affects their perception of the reliability of Indian suppliers and their ability to deliver on time. While Gokaldas is now a large company and has significant influence in Delhi, other Indian companies which wish to get exemptions face a more difficult and harassing task. In general, Mr. Hinduja feels that SSI reservation seriously handicaps Indian garment exporters in facing competition from large modem units in countries like China (or even Bangladesh). Source: Field Study by Uday Sekhar 6.20 Getting Indian Industry Ready for the Phase-Out of QRs and the Multi-Fiber Arrangement (MFA). As part of its WTO commitments, India has agreed to phase-out all quantitative restrictions on imports (except those imposed on strategic or environmental grounds) by April 2001, and on half by April 2000 (See Box 6.3). The Agreement on Textiles and Clothing (as the MFA is now called) is scheduled to end in 2005. Is industry ready for the increased competitive pressure, domestically and internationally, that this will entail? There are a very wide variety of industries that are very competitive, and can hold their own in any market. But there are many, such as some of the capital-intensive, continuous process industries, that may be less able to compete with imports (Kathuria 1995). With trade liberalization, there is bound to be some restructuring of industry, with resources being drawn away from import-substituting 75 Box 6.5: The Adverse Consequences of Anti-dumping in India There has been a striking increase in the use of anti-dumping in India, which can have serious adverse consequences (see below). Prior to reforms in 1991, import licensing and high tariffs meant that anti-dumping was redundant. Even after trade reforms, the rupee depreciation shielded domestic industry from widespread import competition, and strong growth of demand meant that imports were not growing at the expense of domestic industry. With the slowdown in industry (growth declined from 12.2% in 1995-96 to 6%, 5.9% and 4.7%, respectively, in the next three years), appreciation of the real exchange rate, and decline in world prices, particularly after the East Asian crisis, the pressure for protection began to increase. Between 1992-93, when the first three anti-dumping cases were initiated, and mid-1997, 21 cases were initiated in India. The pace increased markedly thereafter, and between mid-1997 and March 1999, 33 cases had been initiated, and in 1998 a separate Directorate General of Anti-dumping was established. The most targeted country has been China, followed by Japan, South Korea and the US. Anti-dumping duties, which come on top of normal import duties, are currently being applied to a wide range of intermediate materials and inputs, including basic steel, petrochemicals, other chemicals, synthetic rubber, synthetic fibers, and industrial sewing needles. As experience in other countries has shown, AD can have serious adverse consequences for India: * First, the foreign firms penalized by the anti-dumping cases are almost always (as in other countries) those that are most competitive and have the largest and/or fastest growing market shares. This in turn signals other exporters to charge "reasonable" prices or also face anti-dumping actions, and results in a real terms-of-trade loss to India. For a number of products, AD duties have first been imposed on imports from firms in one or a few countries, and then, later, a new case has been initiated and AD duties imposed on imports from firms in selected other countries. * Second, the anti-dumping cases have greatly increased the (already high) protection of industries producing important and widely used intermediate materials (such as basic steel, petrochemicals, other chemicals, synthetic rubber, and synthetic fibers). * Finally, AD duty, or protection to a single industry in general, implies the adoption of a producer viewpoint, neglecting both user industries as well as consumers. It is also often the case that AD can reinforce market power - in India, in many of the products on which AD duties have been imposed, there were just one or two producers. It can also set in motion a chain of demands for increased protection, as industries that have to face increased input prices arising from AD duties find themselves becoming less competitive. For example, the imposition of AD duties as well as floor prices and the resultant rise in landed prices on HR coils in November 1998 has resulted in protests by the directly affected CR coil industry, and will also feed into higher costs for a wide range of other steel-using industries. More generally, increased protection and prices of intermediates increases the production costs of consumer goods just as India is rapidly phasing out QRs, and will provide arguments and pressures for higher tariffs. In India, as in other countries, the use of anti-dumping is justified by arguing that it is needed to deal with predatory pricing by foreign firms, which otherwise will undercut and drive Indian firms out of business, and then raise their prices and exploit Indian buyers. Detailed studies of anti-dumping cases in other countries (See Finger 1993, 1998) have shown that the alleged dumping firms have almost never had sufficient market power to eventually raise their prices, even supposing their alleged dumping would cause the firms in the importing country to close. The existence of such market power is also quite implausible in the Indian cases. In a number of these, imports were coming from 20 or more countries, and in others, even though fewer supplying countries were involved, some of these were very large (USA, China) with a number of strongly competing domestic firms. The AD cases already decided in India and the potential for unrestricted anti-dumping to undermine the liberalization of the trade regime that has been achieved so far, suggest a review of current AD policies. Else, the momentum of AD would add significantly to the anti-export bias that already exists. The present impetus of anti-dumping could be stopped or slowed in a variety of ways (See discussion in Finger 1998, pp.14-16, and in Finger 1993): * Using the safeguards provisions as the main safety valve for responding to protectionist pressures and maintaining it as a temporary, short term tariff- based instrument to provide extra protection to firms while they adjust. * Incorporating a buyer/consumer interest in the AD and safeguards laws and requiring cases to be decided on the basis of the overall economic costs and benefits of imposing duties. * Explicitly including an anti-trust type filter in the AD law, which would make predatory pricing and the likelihood of subsequent market power a precondition for the imposition of AD measures. to exporting industries. Domestic rigidities and policy distortions need to be phased out to enable domestic industry to compete more effectively. As discussed earlier, these would include the need to deal with labor markets, small-scale reservation, and tariff and non-tariff barriers. Unless these are dealt with expeditiously, Indian firms will increasingly have to compete with imports that are not subject to such constraints (as we have seen, exports are also similarly constrained). 6.21 For example, textiles and garments, one of India's most important industries, faces several opportunities as well as threats. Opportunities will open up as developing country exports will no longer 76 be subject to quotas after 2005. However, this also means that the most competitive suppliers will ease out those who had survived only because of the quotas. India stands to make substantial gains provided it creates the right policy environment8- including dereservation of garments for exclusive SSI production, a flexible labor policy with safeguards, removal of policy bias against synthetic fibers, automatic approval of FDI in garments upto 51% foreign equity (See paras. 6.9-6.20). On the other hand, slow/lack of action on these issues could mean not only a loss of export markets, but also increasing import penetration in the textiles and garments industry. 6.22 The pressure is already being felt. Partly because of having to cope with continuing domestic policy distortions in the face of increasing competition, Indian firms have successfully lobbied for a significant increase in the use of anti-dumping (See Box 6.5). 6.23 More importantly, a response that deals with India's own structural policies will yield greater dividends than one which seeks to fine-tune the AD system. A system that responds to the increasing competition from imports (as QRs and, presumably, tariffs decline) by trying to create an environment for quicker and more flexible responses - by, for example, making labor laws less rigid, improving bankruptcy and foreclosure, and not bailing out industries or sectors that are in trouble - should in the longer run make the economy less vulnerable to competition. Of course, these responses will have to be accompanied by a much improved system of re-training, lay-off compensation schemes (see below), and so on, to take care of the sectors that will be affected. On the other hand, a response that involves substantial use of protection, will, as seen above, increase the anti-export bias and reduce exports, render related industries less competitive, induce retaliatory protection amongst trading partners, and eventually lead to a higher cost and more vulnerable economy. 6.24 In this context, further analytical work on options before India in the next round of trade negotiations would help India make more informed and strategic choices. Policy-making would also benefit from further analysis of the linkages between growth, exports and imports, labor demand, and education. C. Improving Labor Market Flexibility 6.25 Any strategy to improve the condition of the poor hinges on improving the labor market, since income from work and quality of work are the main determinants of the living conditions of the poor (World Bank 1995c). India is endowed with an abundant and technologically skilled (especially engineers and scientists) labor force, and is ranked first among 53 countries for both these criteria in the Global Competitiveness Report (GCR) 1998. However, India's labor market is ranked 45th for degree of labor market flexibility in the GCR 1998. Rigidities include rigidities in the deployment of human resources, in work practices and in wages. Various studies suggest that such rigidities constrain the effective redeployment of labor during the process of adjustment to changes in demand and technology, and more importantly, act as a disincentive towards future employment creation, i.e. there appears to be a tradeoff between creating better paying, low turnover jobs and the overall creation of good jobs (See for example, Fallon and Lucas; OECD Jobs Study; International Labour Organization). The industrial relations scenario, as reflected by mandays lost due to strikes and lockouts, has been confrontational as compared to intemational standards. However, industrial relations have been improving significantly- mandays lost fell from an average 28.6 million p.a. over 1989-92 to 17.1 million p.a. in the post-reform period of 1993-98. 6.26 Current Labor Regulations Impede the Growth of Formal Employment. Only about 9% of India's workforce is in the organized sector, and the remaining 91% is in the unorganized sector. Of course, to a large extent this reflects the still high share of agriculture (62% in 1993-94) in the workforce, owing partly to the low growth in manufacturing employment. However, even in manufacturing, formal s See Pigato et al and references therein for the gains from the MFA abolition, and Kathuria and Bhardwaj for the industry analysis. 77 sector employment is only 25% of the workforce. In the private manufacturing sector, formnal sector employment is even lower, at 15.5% of the workforce. 6.27 This segmentation of labor can be explained by the pattern of growth in which domestic regulation and protection from imports encouraged increasingly capital intensive industries (See Gangopadhyay and Wadhwa), while labor legislation (see below) and public sector employment gave employment protection and relatively high wages to the few employed in the formal sector. In addition, labor mobility across sectors has been hindered by the pension system in the formal sector- generally speaking pensions are not mobile across jobs and many years of work are needed before an employee becomes eligible for a pension. 6.28 Employment growth in the organized sector was only 1.6% p.a. during 1981-91 and industrial sickness increased even as manufacturing output was rising rapidly (Anant).9 The employment elasticity for the organized manufacturing sector during 1981 to 1991 was only 0.09 (0.14 for 1981-97) and 0.30 for the organized sector as a whole (0.23 for 1981-97). Over the period 1991-95 the growth rate of formal employment dropped even lower, to 0.6% p.a. While the most recent period partly reflects the cyclical slowdown and recovery, the developments over the whole period are in large part explained by the low flexibility of labor use and the consequent reluctance of employers to create formal employment. This is borne out by an industry survey, which identifies labor regulation as the second highest obstacle to the operation and growth of business (Annex Table 4.6) and discussions with industrialists.10 6.29 The other side of the rigid, high-cost organized labor market was a low-cost unorganized sector with a flexible, unorganized labor market which absorbed the growth of labor. Average labor intensity in unregistered manufacturing increased from an average of 59.3% over 1988-89 to 1990-91 to 62.4% over 1993-94 to 1995-96 (See World Bank 1998a, Annex Table 12). Hence, had labor markets functioned more flexibly, pensions been more mobile, and legislation been more conducive, the organized sector might have occupied a more prominent share of the workforce. Formal sector employees might have grown more rapidly and been more mobile, and the benefits of more formal employment shared across a larger number of employees, including women, who have been unable to participate fully in the labor market (See Box 6.6). All this means that while India's comparative advantage lies in labor-intensive products, labor laws and procedures militate against efficient use of that advantage. 6.30 Labor Legislation. The main rigidities in the labor laws include a very wide scope for initiating industrial disputes (which can be initiated on the basis of "interests" rather than "rights"), long procedures for settlement of industrial disputes, inflexible provisions relating to change in conditions of service (instead of being part of the collective bargaining process), and provisions enabling government interventions in areas such as lay off, retrenchment and closures." This legislative framework impedes large scale industrial restructuring, relocation or exit, and even the relocation of labor within an enterprise and often even in the same city/town. In the private sector, these rigidities are circumvented by the setting up of smaller units which are beyond the purview of labor legislation, or the increasing use of contract labor, which further increases the divergence between the organized and unorganized sectors. Future policies aimed at strengthening voluntary arbitration, conciliation, collective bargaining (by 9 One important reason for industrial sickness is believed to be the poor link between wages and productivity (Anant and Goswami). 10 Mr. Mukesh Ambani, Vice-Chairman of Reliance Industries, India's largest private sector company, recently declared in a meeting with World Bank staff that Reliance could increase its textile and garments business ten-fold, from its current $0.5 billion to $5 billion - provided labor laws, which he considered the single biggest barrier to India's industrial growth, were eased. 1 l The main legislation covering employment security are the Industrial Disputes Act 1947 (provides for settlement of disputes in cases of termination) and the Industrial Employment Act 1946 (sets rights and obligations of employees and employers relating to service rules). Industrial sickness is dealt under the framework provided by the Industrial Disputes Act 1947 (and the 1976 Amendment), the Companies Act 1956 and the Sick Industries Companies Act 1985. 78 allowing recognized representative trade unions),'2 and promoting tripartite dialogue, will reduce disputes and litigation. Also, the implementation of labor laws, in particular labor welfare laws, results in the "Inspector Raj" syndrome, which affects small scale industries disproportionately. For example, small- scale industries are constrained by excessive regulatory burdens and disclosure requirements - 80% therefore operate without incorporating (World Bank 1998a). A key impact of not incorporating is that it forecloses access to formal credit markets including capital markets. Box 6.6: Women in the Indian Labor Market Women are a particularly vulnerable segment of Indian society. While females represented 32.4% of the labor force in 1993-94 (33.9% in 1977-78), their labor force participation rate was about half of that of males (28.8% for females and 55.6% for males). The female labor force grew at 1.8% p.a. between 1977-78 and 1993-94 (2.2% p.a. for males). Whereas the low female participation rate is partially due to the statistical invisibility of women's work (housekeeping, tending cattle, etc), there is evidence that they face discrimination in the labor market. For example, while the recorded rate of unemployment for females (at 1.8% in 1993-94) is lower than that for males (2.6%), this conceals large female underemployment (87.8% of the subsidiary workers, i.e those working for only a small part of the reference period, or "discouraged' workers, were women in 1993-94). Furthermore, the quality of female employment is lower than that of males. A large proportion of females are employed in the agricultural sector (74.5% of total females in 1993-94, compared to 56.9% of total males), and as casual labor. In 1997, only 16.4% of total organized labor was female (14% of the public sector and 22% of the private sector). Females also eam lower wages than males in similar occupations (for example, they earned 71% of the daily wage earned by males in casual agricultural labor). The above features are partly a result of inequalities in educational attainment. The average number of years of schooling for females was 2.3 in 1993-94 (1.5 in 1983), about half that of males (4.3 in 1993-94 and 3.3 in 1983). Inequalities are also present in the political systems (the 33% women's reservation in local govemments is not utilized), the legislative framework (for example, equal rights of inheritance in property rights laws are not enforced; in Andhra Pradesh, legislation has been passed to enable land titles to be given solely to women, with good results), and the credit market (women lack the collateral needed to raise loans). As a result, women are largely poorer than men in India. Any strategy targeted to poverty reduction in India will necessarily have to redress the constraints faced by women in participating fully in the political, legal and economic systems. Sources: Ghosh; GOI 1999e. 6.31 As many as 165 labor legislations exist in India, including 47 Central Acts (Debroy 1997), and substantial need exists for harmonizing and rationalizing them. For example, as the Acts have evolved, definitional variations have developed in concepts such as employee, workman, wages, factory and industry. The term "wage" has been defined in 11 different ways in as many labor laws. The greater part of labor legislation is in the Concurrent List of the Seventh Schedule of Article 246 of the Indian Constitution, giving both Central and State Governments the power to legislate for items that are on this list. State-level amendments were actively introduced, for example, by West Bengal, Andhra Pradesh, Maharashtra, Gujarat and Madhya Pradesh.'3 Differences among states also arise in the institutional framework14 and the industrial relations scenario.15 However, state governments are required to refer 12 Under the Trade Unions Act 1926, a minimum of 7 employees can form and register a trade union - this results in a multiplicity of trade unions. In addition, though the Industrial Disputes Act 1947 refers to the tern "recognized union", this is not defined - hence, employers only recognize the majority union for the purpose of collective bargaining. 13 Special provisions have been incorporated by States in the Trade Unions Act 1926 (for example Gujarat, Madhya Pradesh, Maharashtra, Orissa, Uttar Pradesh and West Bengal) and Industrial Disputes Act 1947 (for example Andhra Pradesh, Karnataka, Kerala, Gujarat, Maharashtra, Madhya Pradesh and West Bengal)(Venkata Ratnam). Wage protection under the Minimum Wages Act 1948 covers 79 job categories in Orissa, while only 8 in Manipur (Anant). In addition, the range of minimum wages varies from the highest in Maharashtra to almost none in Haryana. 14 In Kerala, Industrial Relations Commissions operate in industries such as plantations, and various welfare funds are in place for unorganized workers. In Maharashtra and West Bengal, special employment guarantee schemes have been implemented, while welfare schemes are available in Tamil Nadu. The Rajastan Roadways has a profit-sharing scheme with its employees and Rajastan has a renewal fund for redeployment of sick industries employees. 15 For example, while politically affiliated unions are common in West Bengal and independent enterprise level unions are widespread in Maharashtra, most industries in Karnataka (particularly in Banglore) are union-free. As central legislation provides for trade union registration, but not recognition, Andhra Pradesh has been using the secret ballot system for recognition, and Orissa and West Bengal have recently introduced this system through legislation. 79 their amendments to legislations to the Center for the assent of the President of the Indian Union. This procedure has been slow, and proposals submitted by Tamil Nadu and Andhra Pradesh a few years ago, for example, have still not been processed. To bypass this process, some states have substituted the term "appropriate government" with "state government' in The Industrial Disputes Act 1947. Furthermore, it is difficult to gauge a true picture of the labor situation in the states, as over half the states do not submit even the statutory returns (such as number of registered unions) to the Labor Bureau. 6.32 Reducing child labor is an area where efficient labor legislation must be complemented by effective economic measures. India already has well-framed child labor laws (though there is a lack of harmony in the definition of "child"). However, 11 million children were working according to the 1991 census. Moreover, this figure may well be an an underestimate - a study by the Indian Operations Research Group quotes a figure four times larger. India ranks 52nd out of 53 countries in relation to the perception as to whether child labor is strictly prohibited (Global Competitiveness Report 1998). While income poverty reduction provides the most sustainable solution to eliminate child labor, policies to improve the health status of working children and broaden educational opportunities are also needed. Improving the quality of education will help stimulate the demand for education, thus diverting children from work. In addition, expanded production of labor-intensive products based on reduction in protection, increasing FDI, dereservation etc (See paras 6.5-6.23) will increase the demand for labor endowed with basic education, and, in turn, increase the opportunity cost of child labor. Concomitantly, the proper enforcement of domestic child labor laws will contribute to reducing the demand for child labor. D. Improving Agriculture's Contribution to Developmen 6.33 Agricultural growth has been a major factor in reducing poverty (See Chapter 1 and references therein). Over the 1990s agricultural GDP trend growth of 3.3% p.a. was (statistically) similar to the 1980s, according to the new National Accounts; and food-grains production 2.6% p.a. (both well in excess of (declining) population growth, estimated at 1.6% p.a. (GOI 1999b), although still subject to substantial year-to-year volatility).16 Yet rural poverty declined much less in the 1990s as compared to the 1980s. 6.34 Two elements may partly explain agriculture's limited impact on poverty in the 1990s, and raise questions about the sustainability of current agricultural growth unless policy changes occur. First, the overall picture conceals an agricultural slowdown in the northern and eastern states, which has probably contributed to their slow reduction in poverty. Second, the pace and pattern of technological change in agriculture may have changed. There are some indications that agricultural productivity growth has begun to slow. These changes are both related to the inefficiencies in, and unsustainability of, the current pattern of public spending in agriculture, and to the limited reform in agriculture (See World Bank 1999b for a fuller discussion of these issues and what follows; note that much of the analysis of regional growth and technical progress is based on the old GDP Accounts, which showed a slowing of agricultural GDP growth). 6.35 Broadly speaking, the public policy approach to agriculture, particularly in the 1990s, has been to subsidize power, water and fertilizer inputs, implicitly or explicitly, in order to keep down the increases in food price, including the costs of the massive public distribution system that is used by many of the non- 16 Both trend growth rates are calculated using time series regressions, starting in 1978 to avoid beginning in a trough or boom year. The regressions were calculated by using the new National Accounts for 1993-94 onward, and calculating a corresponding figure for pre-1993-94 GDP in agriculture by applying the growth rates from the old National Accounts to the new base. No statistically significant break exists between the 1980s and the 1990s, although growth seems less variable in the 1990s than the 1980s, which included a major drought of 1987. Both point-to-point and trend growth rate estimates are highly sensitive to starting and ending points. Note that the old Accounts do show a statistically significant decline in agricultural GDP growth (though not food-grains) in the 1990s. The difference reflects the inclusion of new agricultural products in the new, 1993-94 based, Accounts. 80 poor. The equity, efficiency, and sustainability of the current approach remains an open question. The subsidies also have unclear impacts on income distribution and the demand for labor. The boost in output from subsidy-stimulated use of fertilizer, pesticides and water may partly be coming at the expense of deterioration in the aquifers and soil - an environmentally unsustainable approach that may partly explain the rising costs and slowing growth and productivity in agriculture, notably in Punjab and Haryana (See, for example, Chand). Moreover, the limits on public finance (See Chapters 3 and 8) have meant that subsidies have, in effect a) "crowded-out" public agricultural investment in roads and irrigation and expenditure on technological upgrading, b) limited maintenance on canals and roads, and c) contributed to the low quality of rural power. These problems are particularly severe in the poorest states. Although private investment in agriculture has grown, this is partly a substitute for lower public investment and deteriorating quality of public services, in some cases involving macroeconomic inefficiencies (such as private investment in generating sets). At the same time, power capacity is underutilized because of poor distribution and maintenance, and excessive use of capital on the farms encouraged by low-cost credit (Binswanger and Khandakar). The Center's and states' fiscal problems suggest that the subsidies cannot continue to grow, and the rural capital and technological basis for growth will be limited by the past pattern of spending. 6.36 In addition, agriculture has seen much less reform than the other sectors. While overall reforms related to the exchange rate and industrial protection have helped, agriculture is still constrained by central and state regulations that limit price movement and intra-state trade, public procurement, and canalization of trade (See Table 6.1 below). For example, simply allowing greater private trade in products would help reduce price fluctuations; more general reforms would improve the productivity of labor and land-use and stimulate agricultural exports. Removal of small-scale reservation would help the growth of domestic agro-industry, which in some cases is now facing increased competition from larger size offshore producers as a result of lower protection. Cotton and textile policies effectively tax cotton producers by 15%, and oilseed policies effectively tax oilseed producers by 30% (World Bank 1997f, 1 999b). 6.37 Future agricultural growth could be speeded by policy and institutional reform in the sector, namely a) an improved pattern of spending and a reduction in distortionary subsidies; b) deregulation of the sector and of rural finance, with a greater role for the private sector in credit and termination of the use of credit subsidy as a transfer mechanism; and c) empowerment of the poor by improving their access to land and common resources, increasing their control over services and infrastructure in rural areas, and improved safety nets. 6.38 The above-mentioned policy reforms would help reduce poverty. For example, increased public spending on rural roads, agricultural technology improvement, rural education, safety nets, and irrigation would all help reduce poverty (IFPRI). Growth in the rural non-farm sector would also benefit from improved infrastructure (roads, power, communications) and social services. More efficient and competitive markets can deliver better prices and greater market opportunities to farmers, without raising consumer prices, that would help farmers offset the impact of cuts in subsidies. Better markets together with futures markets and eased restrictions on commodity movements and private participation in intemational trade can help reduce price fluctuations. 6.39 Poverty reduction will also be enhanced by empowerment of the poor - shift from top-down, centralized management to bottom-up, demand-driven participatory processes for the provision of rural infrastructure and support services. Numerous successful individual programs (including World Bank financed projects) in rural water supply, minor irrigation, watershed development and joint forest management are demonstrating the benefits of such a strategic shift. A wider adoption of this principle, particularly in the numerous Government safety net programs (such as JRY, EAS and MWS) would help such programs better meet their primary goal of poverty alleviation. 81 Table 6.1: India's Regulation of Agricultural markets & Agro-Industry Rice Wheat Sugar Oilseeds Cotton & Dairy Textile Central Government: FCI/TPDS (pan seasonal & territorial price) /(/ 11f 11/ - - - Dual markets //% 1/1 /1/ - Forced Procurement (levy) /1/ - /// EssentialCommoditiesAct /1 /1/ 111 /1/ (/1) Selective Credit Controls (RBI) (/V/) (//) 1/ (/11) (/1) Size Reservation (SSI) - - /1 // Barriers to Entry - - (/I/) - - /// Administered Prices (sugarcane, ginning) - - 11/ - (//) Ban on forward & futures markets I/ /1 V (/1/) (1/) Health safety legislation & enforcement - - // // - / State Governments: Movement controls // I/ / I/ /VI Storage Controls /1 11 11 1/ I/ Regulated markets management %/ 1/ - 11 - Control on Cooperatives - - 1/ - 1 1/ Non-unitary & multi-point taxation / / / 1 Source: World Bank Note: The number of '/" indicates the intensity of the inefficiencies imposed by the corresponding policy or regulation. "(/)" means either lifted or recently repealed. 6.40 Another area where policy and institutional reforms are required to better meet the needs and aspirations of the poor is in policies related to the management of forest resources. The Government needs to rethink its role in downstream production and marketing where the private sector, including community interest groups, could be brought in much more effectively. Instead the policy focus should be more on the management of externalities and provision of public goods, the definition and enforcement of property rights, resolution of conflicts, and improving the access of the poor to natural resources of importance to them (particularly non-timber forest products). CHAPTER 7 RAISING AND USING CAPITAL WELL: THE FINANCIAL SYSTEM AND CORPORATE GOVERNANCE 7.1 Capital is scarce in India and other developing countries. Mobilization of investible resources at reasonable cost, their allocation in a manner that yields the best combination of risk and retum, and efficient management of these resources are critical issues in growth and poverty reduction. All countries' financial systems play a key role in mobilizing and allocating resources for the private sector, as well as raising resources for the public sector. Corporate governance and information play key roles in the allocation and efficient use of resources. Finally, the financial sector and corporate governance play key roles in the vulnerability of the economy to economic crises, as evidenced by recent developments in Southeast Asia. This Chapter looks at ways to improve India's financial and corporate systems' allocation and use of resources and ways to reduce vulnerability. The next chapter continues this discussion with regard to the public sector's use of resources and reducing macroeconomic vulnerabilities. 7.2 India's deep financial system has undergone significant reform and improvement in prudential regulation and supervision since the early 1990s, though much remains to be done as indicated by various recent Government committees (See Box 7.1). India's financial system resisted contagion from the East Asian crisis because of limited foreign exchange exposure in the financial institutions andcorporates and the financial institutions' large public sector debt holdings (See also Chapter 8). Despite the improvements, the financial system could be a constraint to renewed 7% p.a. growth. India mobilizes resources very well but much of the resources are absorbed by public sector borrowings. These borrowings increasingly finance public consumption and push up the cost of funds to and "crowd out" the private sector. Although banks have low ratios of non-performing assets (largely because of the high share of public debt in the system), the still-highNPAs on lending to the private sector (advances) pushes up the cost of funds and suggests the allocation of funds could be improved. And, the capital markets and non-banks are unlikely to provide as much finance as they did in the recent past. A second wave of reform, taking off from the recommendations of the second Narasimham committee (henceforth Narasimham II; see Box 7.1 for a summary of its recommendations as well as those of other recent committees on financial reforms), would ease the finance constraint and reduce the economy's potential vulnerability to financial sector problems. Key areas are: * a better legal and judicial framework for debt recovery, * a reduced public sector deficit to reduce crowding-out in the financial system, * further tightening of regulation and supervision to reach best international practices, * greater private ownership and management under the improved regulatory framework, to increase incentives for better lending and collection, and * an improved payments system. Capital markets would benefit from continuation of the improvements in transactions and settlement practices and, especially, from a shift toward fully-funded pensions that would provide long-term fumds for development as well as good retirement incomes. A. Sound Financial System to Allocate Credit and Reduce Vulnerability 7.3 Resource Mobilization. India has a "deep" financial sector (See Annex Table 7.1 for the structure of the system). Broad money (M3)1 is over 50% of GDP and capital markets are large (See ' M3 includes currency with the public and demand deposits with the banking system plus 'other' deposits with the RBI (Ml), plus time deposits with the banking system. 84 paras. 7.29-7.30). As early as the mid-1980s financial depth was similar to middle income countnes (World Bank 1989). This mobilization reflected high private saving rates, avoidance of high inflation, and a massive bank branch network.2 However, M3:GDP growth temporarily stopped after 1987. Box 7.1: The Narasimham II, Khan, Gupta, and RBI Reports on the Financial Sector The Narasimham I Committee Report, in 1991, along with other reports issued at that time, provided an outline for reform of India's financial system. ln 1998, the Narasimham II Committee Report on banking, the Khan Committee Report on harmonizing banks and development finance institutions, and the Gupta Committee Report on rural credit, along with the 1997 Tarapore Committee on capital account convertibility, suggested approaches for broadening and deepening reforms in the financial system. In 1999, RBI issued a report on the role of banks and development banks, which suggested that a gradual, orderly move toward universal banking might take place, as the institutions consider appropriate (RBI 1999a)- Narasimham I's recommendations followed best practices of the period, focusing on reduced controls on interest rate and credit allocation; tougher capital requirements, supervision, and classification of non-performing assets; and easing entry, including that of foreign banks. The implementation of many of these recommendations and the worldwide problems with public sector banking and bank crises mean that there is a new set of challenges. Narasimham 11 brings to bear the best current practices to these issues. Appropriately, it focuses, even more than the last Report, on upgrading banks' performance through improved incentives for prudent behavior rather than by relying solely on regulation and supervision. Narasiniham II's major recommendations along these lines are: * Reduce Government and RBI equity stake in banks to 33%, by market sales that dilute Government ownership. * Separate RBI from its role in bank boards. * Raise bank capital to 9% of risk-weighted assets by 2000 and 10% by 2002; mark-to-market and give govemment securities a 5% "risk weight" to begin to deal with their interest rate risk. Give open foreign exchange positions a 100% risk weight (that is, 8% of the open position would have to be matched by capital, up from the current, separate 5% requirement). * Reduce NPAs sharply; tighten definitions, avoid further recapitalization by the Government; any "hiving off' of NPAs to new institutions should involve major operational restructuring to prevent the problem's recurrence; closure of weak banks that cannot be revived, with safeguarding of depositors' and employees' interests. (A high-level committee has recently submitted recommendations to the Government on the issue of NPAs in weak banks.) * Give banks (that have gone to the market) more autonomy in bank management and pay-setting, lengthen terms for top managers, restructure and develop voluntary retirement schemes as appropriate, upgrade staff and computerize faster; improve risk management; improve disclosure. * Leave deposit insurance coverage as is, but move to risk-based premia. The Khan Committee's principal recommendation was a move toward universal banking, with a progressive elimination of the boundary between banks and the development finance institutions. Narasimham 11 also supported this convergence. Both committees noted the need for harmonization of the cash reserve and statutory liquidity requirements over time. The Khan Committee also recommended lowering the CRR (as did the Tarapore Committee) and abolishing the SLR. Both the Khan Committee and Narasimham II called for improvement in the legal framework for loan recovery. The Gupta Report, and the Khan and Narasimham II Committees have recommended further deregulation of priority sector lending. The Gupta Report has recommended allowing banks to set interest rates on agricultural loans and speeding up the credit process by allowing branches to approve most loans. It also recommended replacing the priority sector lending target with a system of annual targets. 7.4 The ratio of M3 to GDP began to rise once again in 1992, as stabilization and financial liberalization (which gradually freed interest rates, reduced directed credit to the Government and tightened regulation and supervision, see Reddy, Narasimham Committee 1991, 1998 and Annex Table 7.2 for a discussion) took hold. The stock market and new issues also picked up dramatically (See para. 7.29). However, the M3:GDP ratio has grown less rapidly since 1992 (2.4% p.a.) than in 1980 to 1987 (3.2% p.a.). Probably, part of this slower growth reflects the growth of less-regulated corporate deposits3 2 Banks' branches grew rapidly in the 1970s and early 1980s, then slowed. Branches numbered about 64,000 in 1998. 3India traditionally permitted non-financial companies to take deposits from the public, as a way around the high costs of bank borrowing. The amounts are limited to 25% of the company's paid-up capital and free reserves and are not covered by deposit insurance. Many large companies are, in effect, small financial intermediaries, raising funds from the public (and the financial system) and on-lending to suppliers. As competition heats up and bankruptcy becomes more likely, pressures may develop for the Government to guarantee corporate deposits. However, the Government has so far refused to extend deposit guarantees to "sick" companies and non-bank financial corporations. 85 and, especially, non-bank financial corporations (NBFCs) that provided increased housing and consumer credit, a growth that slowed recently following problems in the NBFCs.4 Figure 7.1: India M3:GDP, 40 Deposit Rate & Inflation 60 M3/GDP M3+NBFCs % of GDP 35 ......-... ,_^ < ...... - ~50 g 30 Ave. M3/GDP, 1987-92 2 4 c 25 4X X 20 Interest Rate { 30 Inflation (CPI) 1 yr. Deposit\ 19 15-\ \ 2 20 10 : 0 0 MU t o Ic Co CO dO CD co 7.5 Large Government Debt Holdings Crowd-out Private Credit. The public sector absorbs much of the funds mobilized by the financial system. Commercial banks hold over 45% of their deposits in Government debt and the Cash Reserve Ratio (CRR). In fact, banks hold more government liabilities now than in the late 1980s (as a fraction of GDP or deposits), despite the cuts in CRR and SLR; correspondingly, banking sector credit to the private sector has been limited (See Annex Tables 7.2 and 7.3). NBFCs, regional rural banks (RRBs), development banks, insurance companies, and provident funds are also required to hold much of their portfolios in government debt, and their liquidity ratios remain high. Moreover, much of the bond market consists of government debt bought in the primary market by the financial intermediaries and held to maturity. 7.6 The financial intermediaries' large Government debt holdings mostly reflect a macroeconomic constraint: "someone" must hold this debt, and absorb the increases generated by the still-high public sector deficits.5 In addition, financial intermediaries, including insurance companies, pension funds and In 1997 a major non-bank financial corporation failed and deposit outflows hit the sector. Appropriately, the Government refused to provide deposit insurance ex-post and RBI limited weak NBFCs' deposit taking and required them to wind up activities. In January 1998, RBI announced a new framework for regulating NBFCs, which retains the minimum capital of Rs. 2,500,000, requires NBFCs accepting public deposits to undergo the full range of supervision, links the maximum level of deposits to the NBFC's rating and limits the deposit rate to 16%. About 9000 companies that applied for NBFC status met the minimum capital requirement - of those only about 800 were considered eligible for receiving deposits, compared with about 10,000 at end 1996. 5 Another factor in the large holdings of public sector debt is the use of (non-marketable) government debt to recapitalize the banks over the last few years The stock of these securities was equal to about 1% of GDP in 1998-99 (See Chapter 8). Although provision of capital in this form spread out the fiscal cost of recapitalization over time, it also means that the recapitalization did not increase the availability of funds for new private investment. Another factor is the elimination in the 1990s of liabilities of non-government entities, mostly public enterprises, from eligibility for the Statutory Liquidity Requirement, and their replacement by Government debt. Such liabilities represented 11.2% of banks' "selected assets" in 1989-90, but only 4.3% today (See Annex Table 7.3). Yet another factor, in the rise of banks' holdings of public debt is the sharp drop in RBI's holdings (as a 86 provident funds, are attracted to public sector debt by a number of factors, including higher interest rates on it than in the 1980s,6 low capital and priority sector requirements, low transactions costs, easy justification as an asset choice in case of any investigation; and lack of credit risk- a factor that partly explains why Indian banks were less hard hit than East Asian banks. These factors generate a "safe lending bias" and increase the demand for Government debt relative to private sector debt. The demand is particularly great when there is pressure to reduce NPAs, as for example occurred recently in the case of Regional Rural Banks (RRBs). However, it is important to note that this "safe lending bias" affects the relative terms on which financial institutions hold Government debt voluntarily. It remains true that "someone" must hold the large Government debt, be it either the public, in which case they would deposit less in financial institutions, or the financial institutions, whether because of requirements that implicitly tax financial intermediation (as in the 1980s) or the attractions described above (as in the 1990s). Correspondingly, private sector credit is crowded-out, as discussed in Chapter 8 and World Bank 1998a. If, for example, banks or provident funds were to suddenly invest more in corporate debt and equity, then someone else would have to hold the public sector debt they sell (or do not buy). Thus, increased credit for sustained, private sector-led growth can only come if the government reduces its borrowings/deficit. 7.7 Bank Performance and Non-performing Assets have improved substantially since the early 1990s, but remain short of best practices. NPAs, at end 1998-99, were about 6% of total assets and 3% net of provisions' for the commercial banks; the public banks which still account for over 80% of commercial bank assets have slightly higher figures (RBI 1999e). The public banks' NPA figures reflect the limited growth of NPAs after 1993, when the tightening of regulation revealed gross NPAs of 11.8% of assets, and the substantial increase in provisioning begun in 1993. The private and foreign banks have lower NPAs than the public banks but their performance has deteriorated somewhat over the last two years. The development banks'9 portfolio have a higher ratio of net NPAs to assets than the commercial banks (9.9% on average) and their portfolios deteriorated in 1998-99, even after some restructuring (RBI, 1999e). The small regional rural banks (RR1Bs) and cooperative "banks"10 have much higher NPAs than commercial banks although RRBs have improved somewhat recently. For the banking system as a whole, reported gross NPAs are probably less than 3% of GDP, a fairly low figure. Of course, in all countries NPA figures depend on the accounting and supervisory standards and are backward-looking, which means they have proved to be lower bounds when a crisis occurs. 7.8 Other standard indicators of bank performance show improvements. Capital is up, with the large recapitalizations of public banks from 1992 to 1999, 8 public banks' raising capital in the market, and capital increases from retained earnings. At the end of March 1999, 26 of 27 public banks and 99 of 105 commercial banks met or exceeded the 8% Basle capital adequacy guideline; over 70% of both public and private banks exceeded 10% (RBI 1999e). Profits after provisioning are low however, and declined from about 0.8% of assets in 1997-98, to 0.5% of assets in 1998-99, reflecting provisions of nearly 1% of assets (RBI 1999e). % of GDP) since the early 1990s, as RBI reduced its role as financier of the Government and built up its international reserves (See Chapter 8). 6 Interest rates on public sector debt were raised in the latter part of the 1980s to reduce the burden of the statutory liquidity requirement. With liberalization, the shift to auctions of govemment debt and the reductions in the liquidity requirement further increased rates on public sector debt. 7For example, banks' investments (in government or corporate bonds) are considered as investments rather than lending, and so do not attract priority sector lending requirements, which are set at 40% of lending. s Settlements on and write-offs of NPAs are made difficult by Indian laws and public bank managers tend to avoid these actions to avoid any possible political problems or accusations of favoritism. The result is that NPAs stay on the books while provisions are built up, and remain on the books even after full provisioning, increasing gross NPAs. 9 As used here, the development banks include IDBI, ICICI, and IFCI. '° Cooperative "banks" often operate like transfer agencies for government funds, and have very high arrears. 87 7.9 India's on-going industrial slowdown largely affected the private banks and the development banks, while the public banks have reduced their NPA ratios slightly. The development banks grew fairly rapidly in recent years and they have large exposure to some of the industries that are undergoing a shakeout of excess capacity (See Chapter 8). They already restructured some loans to the steel industry in 1999." 7.10 More importantly, from a long term-perspective, India's capital and NPA ratios are substantially improved by the large holdings of (performing) govemment debt.'2 Because government debt has a low risk weight,'3 risk weighted assets are only about half of total assets. In turn, this means that public banks' actual capital is not much larger than their net non-performing assets. 7.11 Similarly, with so much government debt in the portfolio, the quality of Indian banks' lending is better measured by the ratio of NPAs to credit (advances in Indian terminology) rather than NPAs to assets. India's public banks' gross NPAs were 15.9% of credit and 8.1% net of provisions in March 1999. Private and foreign banks have lower ratios - NPAs to assets was 5.8% for "old" private sector banks, 2.3% for "new" private banks and 2.9% for foreign banks in March 1999. The figures for foreign and new private banks reflect the low NPAs typical of new banks. As noted above NPA ratios of the private banks rose in 1998-99. Finally, RRBs' NPAs were 33% of outstanding credits in March 1998 (RBI 1999e). 7.12 Improving Credit Delivery/Reducing Vulnerability. NPAs tie up substantial credit in unproductive activities and raise the cost of credit - the current average rates of provisioning alone (about 1% of assets) can increase the cost of credit by 1-2 percentage points.'4 Moreover, the foregoing analysis suggests any increase in lending to the private sector will require a) much more capital (as the average risk weight of the portfolio increases), and b) runs the risk of increased NPAs and macroeconomic vulnerability unless substantial improvements occur in lending and collection. Such improvements will depend on action in three areas: * improving the legal and judicial framework for debt recovery, * reducing the burden of priority sector lending further, and * improving the incentives for sound banking, which in turn will involve both a greater private sector role and improved regulation and supervision, key areas for a second wave of reform, that build on Narasimham II's recommendations. 7.13 Improving the legal and judicial framework. Weak legal and judicial support for loan recoveries is identified by bankers and Narasimham II as a major factor in NPAs. Although most loans are collateralized, a judgement to "execute" collateral may take 10 years and then may prove difficult to ' In March 1999, IDBI announced loans of Rs. 10.8 billion to 6 steel companies for completion of on-going projects, conditional on promoters' up-front infusion of new equity equal to 1/3 of the new loans, return of funds to the projects that had been diverted to other activities in the group, the right to convert the loan to equity at par, and improvements in management, corporate governance and auditing. ICICI is considering a new loan to some of the firms. 12 Govemment debt is considered fully performing. However, RBI, in 1998, announced that Govemment guaranteed debt which fails to meet income recognition standards should not be accrued as income and provisions on state government guaranteed debt should be made over a period of four years beginning in 2000 (Reddy). 13 In its October 1998 Credit Policy, RBI announced that Govemment/approved securities will carry a risk weight of 2.5%, with effect from the year ending March 31, 2000; an additional weight of 20% on investments in the Government guaranteed securities of Government undertakings which do not form a part of the market borrowing program will also be introduced with effect from the financial year 2000-200 1. 14 The degree to which provisions increase the cost of credit depends on a) whether the banks include the provisioning costs in all decisions to buy assets (-) or only advances (+), b) the degree of competition from banks with low NPAs (-), and c) the willingness of shareholders, notably the Govemment for the public banks, to accept low returns on equity (-). 88 enforce (RBI 1999c).'5 Once a company is declared sick, it can escape legal demands for repayment for some time and collateral can be diverted. These difficulties in the legal framework, as well as the current recession, may explain the rising NPAs and weakening profits in some of the private and foreign banks. The set-up of specialized debt tribunals, as recommended by Narasimham I was intended to speed up judgements and bypass the log-jam in the courts (See Chapter 4). However, a recent RBI review emphasized the need for substantial improvement in the tribunals; as of June 1997, only about 9% of cases had been decided, and less than Rs. 2 billion of the Rs. 89 billion involved had been recovered (RBI 1999c).16 7.14 Setting up additional tribunals, as was done following the proposals in the last two Budget speeches, will reduce some of the problems. However, action is also needed to clarify and streamline procedures. Even with the new tribunals, the backlog of cases is overwhelming and the possibility of filing an appeal contradicts the objective of quick settlements - one possibility would be to reduce incentives for frivolous appeals by imposing additional penalties for the loser of the appeal. Action is also needed to improve the process and shorten the time during which a company can remain sick, and to improve the implementation of procedures for protecting priority creditors rights.17 Finally, as discussed in Section B, bankruptcy and liquidation laws need improvement. 7.15 Priority sector lending, which remains 40% of credits, has about a 35% higher NPA rate than non-priority lending."8 Direct agricultural lending is a particular problem. 9'20 Political pressures, targets for priority sector lending, use of credit to offset poor harvests, etc., have led to loans to uncreditworthy borrowers and easing of lending standards (See M. Ahluwalia 1997). At the same time, the credits' use has often not led to increases in the productive capacity of the economy'21 The burden of priority sector credits on the banks has been reduced by the rise in interest rates on them and the widened eligibility of credits for priority status. Nonetheless, the "safe lending bias" noted above is leading to a shift towards govermment debt, safe corporate bonds, and to other investments such as stocks (which RBI has permitted up to 5% of capital), which do not carry priority sector obligations (Seepara. 7.6, and Annex Tables 7.3 and 7.4). 7.16 Better lending to the current priority sectors, as opposed to political transfers, could be stimulated by a further reduction in political interference, improved legal remedies for recovery, and better 1 Of course, banks typically do not wish to takeover collateral. However, their inability to do so as a last resort increases their dependence on relationships for obtaining debt service and can pressure them to send good money after bad in hopes of eventual payment. 16 Implementation of the Debt Tribunal Act, 1993 was delayed by legal challenges, one of which is pending in the Supreme Court, and administrative problems. 17 The slow resolution partly relates to the understaffing and slow resolution in the Board for Industrial and Financial Reconstruction, and the often-stated political problems of dealing with the staff of sick firms, although given the delays in settlement, most of the firms' worker have actually found other activities. Another, unstated, factor may be the unwillingness to sell off the sick finns' valuable land assets, because they would depress land prices. '8 Priority sector lending of the public banks accounted for 47.8% of NPAs on credit at end 1998 (RBI 1998a, p. 27) and were about 40% of credits, yielding the estimated NPA rate of 19; by similar calculation, the NPA rate for non-priority lending was 13.9%. 19 For example, public sector banks recovered only 60% of direct agricultural lending (that is, excluding loans to NABARD, Infrastructure Rural Development Fund, etc.), and 30% of IRDP loans in 1993-95 (RBI 1996, pp. 35, 37). 20 Partly, the better performance of private and foreign banks on NPAs may reflect their lower direct agricultural lending. Because of their more limited branch network they are permitted to satisfy more of their priority sector agricultural lending through lending to NABARD, and through loans to small-scale industry. Moreover, foreign banks have a 32%, rather than 40%, priority sector requirement of which export credits account for 10 percentage points. 21 Studies suggest that the directed credit had little impact on agricultural growth and was a poor substitute for the physical inputs needed for growth; rather much of the credit seems to have gone to increase the capital intensity of production (See, for example, Binswanger and Khandakar). Regarding lending to small-scale industry, as with agriculture, those firms that accessed low cost credit seem to have used it to adopt more capital-intensive tecmhnology, rather than expand and increase employment (See, for example, Sandesara, Suri). 89 incentives for sound banking, including a greater private presence. This is particularly the case in the rural sector. Subsidies on priority sector lending should be made explicitly through the budget, not implicitly through credit. Crop insurance and employment schemes, rather than credit, should be the main instruments of disaster relief. More fundamentally, changes in the approach to agricultural lending and micro credits is needed. For small-scale agricultural and rural lending, institutions like theGrameen Bank, that are beginning to be formed in India (for example the SEWA program) can play a more important role. For larger loans, the success in providing credits, as opposed to subsidies, will depend on incentives to make sound loans and collect, as for example the "credit desa" program of Bank Rakyat Indonesia where repayment rates have remained over 95% despite the economic crisis. Either model is likely to require much higher interest rates than the prime rate (SeeYaron et al 1994 and 1997, and World Bank 1999b) Further investigation is needed of ways to strengthen institutions and improve the vehicles for micro-credits and agricultural loans, and ensuring their repayment. 7.17 A particular priority sector credit issue is the explicit or implicit inclusion of infrastructure finance. Generally speaking the arguments against directed credit are well known, in terms of diverting credit from/implicitly taxing other sectors. In the particular case of infrastructure, neither India's banks nor development banks have much experience in evaluating such projects and their rapid expansion into these areas are likely to increase NPAs, as well as expose the banks to a major term transformation risk.2 Moreover, problems with private sector infrastructure may relate more to the "bankability" related to issues in the regulatory framework and cost recovery (See Chapter 5). Channeling more credit to infrastructure would not resolve these problems, only transfer their cost to the banks or the guarantor of the credits. 7.18 Improving Incentives, Regulation & Supervision. Priority sector lending is, however, far from the whole explanation of high NPAs - NPAs on non-priority lending are estimated at about 14%, well in excess of best practices. Another factor in NPAs, suggested by experience around the world, is probably the system of incentives for sound lending and recovery, particularly in the public banks, including the regulatory & supervisory framework. Worldwide experience suggests that inappropriate incentives make it difficult for public sector financial institutions to carry out good lending and collection practices. Public sector employees have less stake in sound lending and collection than private sector employees. Pressures exist to lend for non-market objectives and to go easy on collections. Directors and the owner - the Government - seem unable to obtain reasonable rates of return on capital or even to maintain capital. In addition, there is limited market discipline because of the government's implicit guarantee.24 Moreover, when public banks dominate the system, regulation and supervision often becomes aimed mainly at malfeasance and ensuring directives are fulfilled, since additional profits from high-risk high-return lending do not recur legally to the institution or its employees25 Of course, private banking has its own problems, as good accounting, auditing and frequent reporting are needed to increase market discipline. Private banks may choose high-risk high-return loans, reflecting fractional banking, low capital and limited liability, and with market discipline limited by deposit insurance and inherent limits on information. Thus, regulation and supervision of private banking is needed not only to reduce malfeasance, including non-arms length lending, but also to limit imprudent behavior. 22 Such risks can be transferred to the borrowers through variable rate lending; however, the possibility of bankruptcy limits the transferability of the risk. 23 See footnote 18. 24 Illustrating this point is worldwide tendency for depositors to switch from private to public banks in times of financial crisis, despite public banks' typically inferior balance sheets. 25 It is generally agreed that the moral hazard for imprudent lending increases when equity stakes drop in banks, an examnple being the US Saving and Loan Crisis. This is also a concem for public banks when they perform badly - managers may act imprudently in hopes of offsetting bad performance. 90 7.19 Despite India's major steps in improving bank performance and regulation and supervision (See Reddy), the foregoing considerations, recognized by Narasimham II and the Government, suggest a second wave of reform is needed, particularly in 3 areas: * Dealing with the stock of NPAs and large new ones without creating incentives for poor performance, * Going beyond international norms to reach best practice in regulation and supervision, and * Privatization to improve incentives. 7.20 Dealing with NPAs. Net NPAs in the public banks remain a burden and, as noted above, are similar to capital. Moreover, in some cases, for example Indian Bank, large new NPAs have developed. Dealing with the stock of NPAs will depend on the government's political will to recover loans, in spite of the current industrial recession, and putting greater pressure on the banks to resolve NPAs without exception. The government will need to assess the likelihood of collection and settlement on a bank-by- bank basis, reward banks that exceed the targets, and put in new capital as needed. General principles for settlements will be needed, to protect management from accusations of favoritism. 7.21 Leaving collection of NPAs to the individual banks in this way is likely to result in greater reduction of NPAs and less cost to the government26 than transferring them to a general asset reconstruction fund. The announcement of such a general fund will itself generate incentives for more NPAs, as bankers try to clean their balance sheets and debtors switch to what they are likely to perceive to be an easier regime, based on their experience with the Board of Industrial and Financial Reconstruction (BIFR). Any transfer of loans and collateral will be subject to errors and legal challenge. Debtors will not even have the incentive to pay for maintaining relations with their bankers. Finally, the success of such a fund will depend on taking the best work-out specialists from the institutions. General asset reconstruction funds typically have been used only in general crises, they have only worked well when fairly draconian measures were taken to collect and execute collateral, and the fund was wound up quickly, for example the US Resolution Trust Corporation. A further problem with a general fund, suggested by the experience with the BIFR, would be its likely long life, and the negative incentives generated to bank managers for sound lending and collection by the possibility of additional transfers of NPAs to a long-lived fund. 7.22 Regarding banks that generate large new NPAs, better regulation and supervision, and quicker government action may provide some help. For example, US regulatory authorities intervene in banks well before all their capital is lost. However, regulation and supervision can only be a second line of defense and cannot prevent all failures. Moreover, some of the regulatory-based incentives to prudent private banking may even work perversely for public banks; for example, higher capital requirements may be treated simply as low cost funds by public banks unless the managers can be held responsible for returns on capital. The standard remedy for weak public banks - transferring management - has some effect, but it remains difficult to provide either strong incentives to the staff or market discipline through the providers of funds. One option for public banks that continually perform poorly is to turn them into narrow banks, holding only government debt, and gradually wind them down (Tarapore 1997, 1998, 1999). This approach would limit new losses, and could be a non-monetary incentive to other banks to avoid large NPAs, lest they too become narrow banks. 7.23 Regulation and supervision has improved substantially, to largely reach international norms in areas like the 8% capital requirement (RBI has mandated 9% by 2000), Basle Core Principles of Banking 26 The cost to the Govemment will depend only on the success of collection, and not on whether the NPAs are in the banks or a general asset reconstruction fund. By transferring the NPAs to the fund at par, the true costs can be obscured and additional capital for the banks will be unnecessary. However, to provide the banks with actual new capital, as opposed to the non- marketable securities that have been used for past recapitalizations, the fund will have to be actually capitalized and its losses on less than par recoveries will have to be paid by writing down its capital. 91 Supervision, etc.27 Market pressure has also been increased through competition with the licensing of 9 new Indian banks and 22 new foreign banks since 1992, and the reduction of limits on competition such as mandatory consortium lending and the restrictions on switching banks and multiple banking relationships. 7.24 The issue now is to move to best practices, which will be especially desirable in the context of further privatization. Particular issues are: 1) removing the various current exclusions from the 180 day rule for recognition of income? and moving to a 90 day rule, as practiced in countries like Argentina and Chile; 2) further increasing provisions, including raising the specific provisions that currently are lower than most countries, and increasing the recently instituted general provision of 0.25% as a cushion against general portfolio deterioration or shocks; and 3) increasing capital to 10%, as recommended by Narasimham II. In addition, it would be desirable to use specific additional capital requirements on potentially risky activities such as the recent imposition of a 100% weight on foreign exchange positions. In addition, a) the current high exposure limits (as percentages of capital) 9 should be reduced substantially, including the exposure on infrastructure projects, b) rules on lending to director-related activities should be tightened, and c) the minimum capital (less than $ 25 million for banks, $60,000 for non-banks) should be raised substantially to encourage economies of scale (risk reduction) and scope, and be in the form of cash or government securities. Finally, the issue of quicker sanctions for non-complying banks needs to be addressed - public and private banks have been allowed to operate for some time with low capital. Best practice suggests quick intervention is needed to reduce the risk of additional losses. 7.25 In supervision, one issue is how to move from analysis on an historic basis to a forward-looking basis, which will include an evaluation of how the credit and risk management systems are being used. This change will require significant upgrading of the supervisory capacity and, in the current environment, it may be difficult to retain supervisors who can carry out such functions effectively. The licensing procedure needs to be more transparent and include a discussion of the applicants intended activities and formal background checks. More fundamentally, RBI will need to continually re-examine the appropriateness of its guidelines for risk management. Finally, accounting and auditing standards, while much improved and moving towards intemational standards (Reddy), would require greater improvement to reach best practices. An important accounting issue is the consolidation of firms and banks activities. Another issue is fragmentation of the accounting industry, which raises the issue of the franchise value of providing sound reports. 7.26 Privatization, under a sound regulatory and supervisory system can provide incentives for better credit allocation and injections of much needed capital, as recognized by Narasimham II. However, significant political will is needed to a) induce the Government and the managers to give up their highly concentrated power to allocate credit under the current arrangements ,' b) carry out the legal changes needed for even gradual privatization through the market, and c) use the more effective approach of strategic sales . 27 In terms of regulation, India increased the capital requirement to 9% (by March 2000), moved toward recognition of NPAs after 180 days, increased provisioning, is gradually imposing mark-to-market on securities, introduced systems of credit, foreign exchange and risk management, and increased information requirements (including data on NPAs). In supervision, a CAMEL system has been introduced to better identify weak banks, on site inspections have improved, and India fully complies with 14 of the Basle Core Principles of supervision, and is implementing its compliance with the 11 others, which mainly relate to procedures for licensing of banks, implementation of risk management in the banks and its evaluation, and consolidation of accounts and the sharing of infornation on them, both intemally and internationally. See Reddy for more details. 28 These inclusions include an almost automatic exception for an additional 30 days, exceptions related to agricultural harvest cycles, and exceptions related to delays in project completions that particularly benefit development banks. 29 Currently, limits are 25% of capital to a single borrower, 50% to a group of related borrowers, and an additional 10% for infrastructure projects. 30 Depending on the bank, Chairmen and Managing Director personally approve all loans exceeding about $ 7.5 million, with General Managers responsible for loans between $ 2.5 million and S 7.5 million and Assistant General Managers for loans between $ 2.5 million and about $ 600,000. 92 7.27 Currently, eight public banks have sold shares and further sales by them would begin to approach the lower legal bound on Government ownership. But, lack of new capital for growth, the higher new requirements mandated by RBI and NPAs write-offs will strap the performance of these banks. Banks are already trying to meet their capital needs by the risky approach of selling each other subordinated debt. Raising new capital solely through the market could easily mean more than 50% of equity would be publicly held, requiring changes in the Banking Companies and State Bank of India Acts that would face major parliamentary opposition. Moreover, many factors make even the best banks' attractiveness to the market unclear - the partially divested banks' share prices have lagged the indices, representation of private shareholders on bank boards is still under implementation, banking has become a much more competitive activity, and banks' actual capital is not much larger thanunprovisioned NPAs. The status of bank staff (currently treated as 'de-facto' civil servants), if the government were a large minority shareholder, would also be an issue. Finally, even if Government shareholdings were reduced to 33%, as recommended by Narasimham II, the Government's position as dominant shareholder could allow it to run the bank effectively. These considerations suggest that sales to strategic shareholders would not be much more difficult than the gradual privatization recommended by Narasimham II, and could yield more revenue from the sale, as well as more efficiency. Whatever the method chosen, it is likely that the government will need to resolve issues of staffing through voluntary retirement packages, and to inject more capital to write-off unprovisioned NPAs, as in the privatization case of Philippines National Bank concluded recently. Further analytical work exploring possible paths to privatization of banks, while decreasing the vulnerability of the banking system through regulation and supervision that approached best practices and improvements in accounting, auditing and corporate governance, could help the privatization process in India. 7.28 Payments System. The payments system affects everybody - individuals, enterprises, financial institutions, and government agencies. While the RBI has been taking steps to improve it, the system still lags international standards as well as developments in the rest of the financial sector. Some of the problems include delays between the receipt of payment instruction and the completion of payment; reconciliation problems, sometimes remaining unsolved for months and even years; risk exposure due to delay in the finality of settlement, which could lead to systemic risk; low security level of the systems, which may facilitate fraud. Improvements in these areas would lead to a more stable financial system and faster developments in financial markets, which are heavily dependent on the payments system. 7.29 Capital Markets. India has one of the largest stock markets in the developing world, with more companies listed than in the US and market capitalization about 36% of GDP. The market was a major source of funding for companies in the mid-90s and boomed with the inflows from opening up to foreign institutional investors (FIls). There were also major improvements in transparency, with the computer- based National Stock Exchange (opened in 1994) now accounting for about 60% of trading31 and SEBI's requiring that shares in the major indices be "dematerialized" in the depository, in order to ease settlement and verification problems. For most of 1998 the market was in decline, reflecting the slowdown of industry and capital inflows, the major settlerhent/payments problem in the Bombay Stock Exchange, in June 1998, and then, in the latter part of 1998, the redemption problems of Unit Trust of India (UTI, the Government-run mutual fund) over concerns that its guarantee of high returns could not be met. Many of the new issues of the mid- 1 990s have not only collapsed in price (a problem that also occurred in the US after its new issue boom), but are also minimally traded and have difficulty in meeting the exchanges' requirements for information. However, the stock market has picked up in 1999. The 1999 Union Budget reduced taxes on equity-based mutual funds, including UTI. The Budget also proposed injecting additional funds into UTI.32 Although the market has rebounded after the 1999-2000 Budget speech, it 31 The 15 regional stock exchanges have announced their intention to move to linked, computer based trading. 32 The proposal was to invest Rs. 48.1 billion in UTI securities, which UTI would use to buy back Government of India bonds. With the market reacting positively to the Budget announcements, the Govemment has put in a lower amount of Rs. 33 billion. 93 remains true that new foreign flows are unlikely to match the increase that occurred when the market was first opened, and new issues are likely to be scrutinized more carefully than in the past. 7.30 The capital market would benefit from increased transparency in UTI's activities, given its magnitude relative to the market and the numerous private placements it accepts. A critical issue is eliminating UTI's guarantee of retums, given the Government's revealed political difficulties in denying responsibility for UTI's performance. Further improvements in the settlement process, with the ultimate aim of gradually shortening settlement to five days after transactions, would avoid the necessity of trying to harmonize settlement dates and reduce the pressures that currently arise from the bunching of settlements. More importantly it would improve transparency and reduce the risk of non-settlement and payments crisis which have hit the equity markets from time to time. More fundamentally, accounting and auditing need significant improvement, as discussed below, to encourage investment in the market. 7.31 The bond market is also large; it would be large even for a middle-income country (World Bank 1995a). It includes an active primary market for public and private debt, although public debt (notably government dated securities) dominates the market. The secondary market is, however, much less active, reflecting the financial intermediaries' tendency to hold government bonds to meet liquidity requirements, apart from holding these instruments to maturity. The bond market could be enhanced by RBI's taking a less active role in setting rates in the primary market, moving to the dematerialized depository system used for stocks, and harmonizing stamp taxes across states, as is the case for stocks. A really major growth in the.capital market would occur if the private and public pension system moves towards fully- funding, under appropriate regulation and supervision. This would raise demand for longer term debt substantially. Fully funded pensions, linked to individual employees, would also reduce problems of vesting and allow pensions to move with workers, improving labor's mobility (para. 6.27). The public sector would be a major area to implement more fully funded pensions. However, this would increase the measured fiscal deficit (as opposed to the implicit contingent liability that now exists), because the govemment would have to contribute to funding current workers' pensions as well as pay pensions to existing retirees. B. Strengthening the Framework for Corporate Governance. 7.32 Corporate Governance refers to the procedures and rules, explicit and implicit, that provide the incentive framework for companies to attract financial and human capital, perform efficiently and avoid corruption (World Bank 1999f). The crisis in East Asia has highlighted the importance of corporate and financial governance systems supportive of market processes and competition - and the huge costs stemming from the weakness of such institutions. Most macroeconomists failed to appreciate that the devil could also be in the micro. In an era of instantly mobile global capital flows, East Asia has shown how macroeconomic collapse can be exacerbated by systemic failure of corporate govemance- excessive corporate leveraging, poor financial disclosure, misallocation of corporate funds, bad banking practices, unregulated capital markets, and absence of expeditious bankruptcy procedures. With investors in emerging markets becoming more cautious, good corporate govemance will be critical to attracting foreign investment. For India, it also will be vital in bringing back the small investor into the capital market, whose confidence has been shaken by scams and vanishing companies. 7.33 Corporate governance has received some public attention in India in recent years. The Confederation of Indian Industry (CII), published a voluntary code of govemance (Desirable Corporate Governance: A Code, 1998). The Working Group on the Companies Act incorporated more stringent disclosure and fiduciary standards as well as more streamlined liquidation procedures in the draft Companies Bill, 1998. However, the Bill is yet to be presented to Parliament. The current standards of corporate governance would need substantial improvement to reach the best international practices. In what follows, five key issues/concerns relating to private corporate govemance are considered; govemance of public enterprises is also briefly analyzed. 94 7.34 First, the quality of financial and non-financial disclosures mandated by law, while stronger than almost all East Asian countries, many developing countries and even many countries in continental Europe, needs strengthening. Consolidation of corporate groups' financial statements to eliminate misleading reporting of intra-group transactions, needs to be mandated by law. On other issues, the CII code recommends that large listed companies have Audit Committees to supervise the company's audit procedures; domestic public disclosure be the same as for ADR and GDR issues; and SEBI mandate a corporate governance compliance certificate along with the annual report. In addition to this, best practices suggest voluntary disclosures beyond those mandated by the Companies Act. For example, few Indian companies give information on debt composition, economic value added, foreign currency management, etc. Related issues, noted in Section A, are improvement of accounting and auditing, and the small size of most accounting firms, which means franchise values for establishing a record of sound accounting and auditing are likely to be low. 7.35 Second, oversight 33 is limited in most publicly listed companies. Currently, most boards of listed companies are dominated by management or "gray outsiders",34 and stockholder representation is limited. Moreover, the Companies Act allows persons to hold up to 20 directorships (the US average is 3.5, the CII code recommends no more than 10), which is far too many if the directors are to play an informed, active role. Also, non-executive directors are often not given adequate corporate information. 7.36 Third, banks and other financial intermediaries have not been able to exercise effective corporate governance and assertion of their rights as major debt and equity holders. Nominee directors of financial intermediaries, who are neither rewarded for good monitoring nor punished for non-performance, have little personal incentive to monitor their companies, and to demand accountability, disclosure or transparency. Adding to this is a long-standing practice of financial intermediaries to support the existing management except in extreme circumstances, making the stability of existing management a virtue by itself, which could be at odds with the objectives of greater transparency, cleaner practices and higher shareholder value. Supporting existing management implies not questioning managerial decisions, not suggesting ways in which the company can improve its profits, and more or less going along with every board resolution in a way which the management desires. Although nominee directors are generally becoming more assertive and demanding, it remains true that they are not very vocal until a company is in trouble. Another problem of nominee directors, often admitted by the chief executives of financial intermediaries, is that they do not have enough senior staff who can properly discharge their obligations as good corporate governors. All this means that the institutions which, in theory, could play a proactive role in corporate govemance (as in the case of German lead banks), have been preoccupied with issues that are not at the heart of maximizing corporate and shareholder value. But the real solution needs to recognize that in the long run, it will be difficult to strengthen corporate governance when banks, financial institutions, and the major mutual funds remain under control of the Government. These institutions are not sufficiently concerned about adverse income and wealth consequences arising out of wrong decisions and inaction; their poor incentive structures do not reward performance and punish non- performance; and, most of all, they remain highly susceptible to pulls and pressures from various ministries that have little to do with commercial accountability, and which often destroy the bottom-line. Therefore, a stable environment for good corporate governance probably requires the government to become a minority shareholder in the financial institutions. 7.37 Fourth, although the quality, transparency, fairness, and efficiency of the capital market and the rules that govem corporate takeovers have improved substantially, procedural issues remain. There are no longer restrictions on transferability of shares in the Companies Act - barriers that were used in the 33 The extent to which corporate boards exercise fiduciary responsibilities to maximize long term shareholder value. 34 'Gray outsiders' are family members of executive directors, attomeys who represent the company, investment or commercial bankers who have close financial relationship with the company, long term consultants, or directors who have substantial business dealings with the company. 95 1970s and 1980s to entrench promoters in management despite small shareholdings. Moreover, the SEBI Takeover Code has made takeovers far more transparent, and offers a much fairer deal to minority shareholders, while RBI has allowed banks to fund takeovers. These are substantial improvements compared to the past. However, there are still a few procedural problems. The most important of these has to do with jurisdiction. On the one hand, SEBI is supposed to have jurisdiction on all capital market matters for listed companies. Yet, the Company Law Board and Ministry of Finance have the powers to overrule. In addition, SEBI is not empowered to give legally binding decisions, and to impose penalties and punishment. Ideally, the Ministry of Finance should not be the appellate authority, since it is an executive wing of the Government. Instead, the appeal should be heard by a division bench of the High Court. In spite of many improvements, the present division of authority can prove to be detrimental to takeovers as more complex bids become common. 7.38 Fifth, India's bankruptcy and liquidation laws and procedures, are inadequate, time-consuming, and contribute to corporate misgovemance. Poor protection of creditors' rights allows companies to reallocate funds to highly risky investments (since management fears neither attachment nor bankruptcy); it raises the cost of credit; it debases the disciplining role of debt; and it risks the health of the financial sector. In India, bankruptcy reorganization of large industrial companies is governed by the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), and the process is directed and supervised by a quasi-judicial authority called the Board for Industrial and Financial Reconstruction (BIFR). The system could be improved by: * Early detection. The current recognition of financial distress as erosion of net worth rather than 'mere' debt default reduces the probability of a successful turnaround. Between July 1987 and November 1998, only 11% of the 1954 cases that BIFR has considered 'maintainable' are no longer sick. e Speedier and streamlined procedures. Currently, the mean delay in arriving at a decision in BIFR exceeds 2 years. Delays are caused by tedious quasi-judicial procedures that confer additional bargaining power to company management at the expense of secured and senior creditors. i Reduced rights for debtor in possession. Neither SICA nor BIFR recognize that incumbent management always has a great informational advantage compared to outside creditors, and allow existing management to run a bankrupt company during the period of reorganization. Studies of companies under BIFR show that, in the final reorganization decision, secured creditors had to make large write-offs on their exposure, while management and shareholders did not. * Adherence to priority creditor rule. BIFR procedures violate the principal of senior debt priority by often rewarding incumbent management and old shareholders (despite net worth being negative) at the expense of fully secured creditors. The Sick Industrial Companies Bill, 1998, recognized these problems and proposed a more market- determined bankruptcy system. But it has not been passed in Parliament. 7.39 Liquidation poses even more problems than bankruptcy. As discussed in Chapter 4 (See para. 4.10), most liquidation cases take between one to two decades, reflecting a complex and arcane legal process, and results in a system that favors promoters at the expense of workers and secured creditors. 7.40 The Draft Companies Bill, 1998, and the Report of the Working Group on the Companies Act suggested new liquidation procedures that were transparent, time bound, and reflected the view that rapid sale of productive assets is good not only to settle the dues of workers and creditors, but also for the economy. Unfortunately, as stated, the Companies Bill remains outside Parliament. CHAPTER 8 GROWTH, MACROECONOMIC DEVELOPMENTS AND POLICIES A. Overview 8.1 India's trend growth of 5.8% p.a. since 1980 is the highest outside Southeast and East Asia among large developing countries. However, despite this relatively high growth, poverty incidence is still 34% (World Bank estimate, see Annex Table 1.1) and India's economic structure remains relatively unchanged. By comparison, even after the Southeast Asian crisis, Korea, Thailand and Indonesia have substantially higher per capita incomes and social indicators, and considerably lower poverty than India, although the countries had similar per capita incomes in the 1960s. The experience of Southeast Asia suggests that India needs sustained, higher, more labor-using, outward-oriented growth, coupled with improved social service delivery, in order to reduce poverty. 8.2 Moreover, the sustainability and vulnerability of India's current approach to development are a concern. Substantial reformns in the early 1990s led to high growth. More recently, however, growth has declined while reforms have slowed and in some cases reversed, for example, tariffs and the fiscal deficit. The key agricultural sector remains highly regulated (See Chapter 6). Export growth, which could provide more employment, has slowed, not only because of the slowing world economy but also because policy is reducing the profitability of producing exports compared to import substitutes and the deteriorating infrastructure. These issues raise questions about India's ability to take advantage of the next upswing in world growth, the domestic opening up under agreements with the WTO and the end of the Multi-fiber Arrangement. Agricultural and urban growth face environmental problems. The General Government deficit (as a percentage of GDP) worsened in 1998-99, back to about the level of 1990-91, raising concems over macroeconomic instability that could hurt the poor and limiting private investment by keeping real interest rates high and crowding-out. Within governments' budgets, consumption spending, which is increasingly financed by borrowing, is crowding-out critically needed social and infrastructure spending (See also Chapter 3). Large implicit and explicit subsidies and inefficient public enterprises deter private sector-led development and contribute to inequalities and inefficiencies, and raise questions about the sustainability of agricultural growth that is so critical for poverty reduction. 8.3 A rapid reduction in India's poverty and increased growth will depend on a second wave of reform, as all recent governments have recognized. As discussed in the previous chapters, reducing poverty and increasing development will depend on a comprehensive framework that improves access of the poor to education and health services, improves infrastructure, and provides good governance, transparency, a sound legal and judiciary system, a strong financial system, and human and environmental sustainability. As discussed in this and the previous chapter, sustained development will also critically depend upon continued sound macroeconomic policy, namely: * greater openness to trade, to encourage more efficient resource use and increase labor demand, and • sounder public finance, namely reduced subsidies and deficits and the realignment of government away from non-core public sector activities and consumption spending and towards more and better infrastructure and basic social services. B. Economic Growth in 1998-99 and over the Longer Run 8.4 In 1998-99, India's GDP grew 6%, one of the highest growth rates in the world, and up from 5% in 1997-98, according to the new National Accounts.' Agriculture accounted for all of the rise in 1 All 1998-99 figures are revised estimates. All GDP related figures in this chapter from 1993-94 onward are based on the new National Accounts except, as noted, when it is necessary to make comparisons with pre- 1993-94 data. The growth rates in the new National Accounts are somewhat higher than the old. Moreover, there is an absolute difference in the new and the old (nominal) estimate in 1993-94 of 9.0%, correspondingly reducing the ratios of most items to GDP, such as budget figures, 98 GDP growth, growing 7.6% compared to -1.0% in 1997-98. Growth in all other major sectors declined in 1998-99 (See Table 8.1). This pattem, and other recent developments, suggest that India's growth and poverty reduction continue to depend heavily on good monsoons and harvests, albeit less than in the 1970s and 1980s (See Chapter 1 and D. Ahluwalia). This dependence, coupled with the inefficiencies and unsustainability in rural public spending, the limited reformns in agriculture, and the potential environmental problems related to water and heavy fertilizer use, raise concerns about the sustainability of current growth and poverty reduction (See Chapters 1 and 6, and World Bank 1 999b). Table 8.1: GDP Growth 1981 - 1999 (Percent Per Year) 1981-90 Avg. 1990-91 1991-92 1992.93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99" GDPfc 5.7 5.4 0.8 5.3 6.2 7.8 7.6 7.8 5.0 6.0 Agriculture and allied 3.6 3.8 -2.3 6.0 3.7 5.4 0.2 9.4 -1.0 7.6 Industry 7.1 7.6 -0.7 4.0 6.1 9.3 12.2 6.0 5.9 4.1 Mining & Quarrying 8.5 10.7 3.7 1.1 1.7 9.2 7.4 1.2 2.7 -2.0 Manufacturing 7.6 6.0 -3.6 4.1 8.5 10.6 15.0 7.7 6.8 5.2 Electricity, Gas, & Water 8.8 6.5 9.6 8.4 6.3 9.3 6.7 5.7 6.6 6.3 Construction 4.9 11.6 2.2 3.4 0.9 5.3 8.2 2.9 4.1 2.1 Services 6.7 5.2 4.1 5.4 8.0 8.5 9.8 8.0 8.2 6.2 a. Quick estimates. b. Revised estimates. Notes: 1. Based on the new seres with 1993-94 as the base year. 2. Figures for 1981 to 1992 are staff estimates. Source: Central Statistical Organization, National Accounts Statistics 1998 and Quick Estimates 1999. 8.5 Manufacturing growth slowed for the third consecutive year in 1998-99, to 5.2% compared to 6.8% in 1997-98. Partly the slowdown reflects a shake-out and consolidation in capital-intensive sectors like autos, steel, cement, synthetic fibers, etc. Another factor may be the difficulties of the non-bank financial sector (See Chapter 7), which had been a major source of consumer and housing finance in the boom years. Domestically, large capacity increases have come on line; internationally, competition has increased, notably from East Asia in steel. In autos, these pressures have led to lower prices and greater model choice that have benefited consumers while putting pressure on older models like theMaruti 800. In steel, in contrast, protection has been increased for investment projects that were undertaken despite worldwide excess capacity. The steel industry is now suffering from large losses and many firms have already required financial restructuring (See Chapter 7). Moreover, the protection-induced rise in steel prices will hurt consumers and worsen the intemational competitiveness of Indian users of steel. The case investment, and trade, by about 8.0%. This difference in the new Accounts reflects a re-basing to 1993-94 prices and sectoral value added coefficients, plus the inclusion of some new products; the old National Accounts series was based on 1980-81 prices and value added coefficients. The largest absolute sectoral differences between the old and the new series are in agriculture (8% higher than the old National Accounts estimates in 1993-94), real estate, including owner-occupied housing (10%) and trade (13%). The fishing and mining sectors are also much larger in percentage terms in the 1993-94 based series, but their small absolute size means they contribute little to the difference in overall GDP between the old and new figures. Since the CSO has not yet revised the pre-1993-94 GDP figures, this Report re-estimates them by applying the old growth rates to the new 1993-94 figures, which leaves the pre-1993-94 year-to-year growth rates unchanged. 99 of steel represents one reversion to the inefficient approach of the 1980s, in which scarce capital was allocated to internationally uncompetitive, capital-intensive industries that required protection and did not generate much employment. Similar concerns exist regarding the projected expansions in petrochemicals and refining. 8.6 Another factor in manufacturing's slower growth was the further slowdown in India's exports in 1998-99, reflecting not only the slowdown in world trade but also the further loss in India's share of world exports after 1996 (See Chapter 6). From the standpoint of demand, without sustained higher export profitability and growth, Indian businesses are likely to invest only enough to supply a domestic market that can be expected to grow at about the post-1980 trend rate of 5.8% p.a., thereby making 5-6% growth a self-fulfilling prophecy (Bhagwati, World Bank 1998a). From the supply side, a more open economy - more exports and imports - is needed to encourage better resource use, faster productivity growth and higher labor demand. 8.7 From a longer-term perspective, India's post-1980 trend growth rate of 5.8% p.a. is the highest outside Southeast and East Asia among countries with over 20 million population. During the 1990s, India rebounded rapidly from the 1990-91 balance of payments crisis, returned to the post-1980 trend growth rate in 1992-93 and 1993-94, then, led by surging private sector production and investment, achieved an unprecedented 7.7% p.a. average growth. However, in 1997-98 and 1998-99, average growth fell back to the post-1980s trend and is below the (statistically) significant rise in growth that occurred from 1993-94 to 1996-97 (See Annex 8.1). 8.8 The years of rapid growth were associated with both greater factor productivity in a macroeconomic sense (See the discussion in Annex 8.1) and a higher investment rate, which was also encouraged by liberalization. The increase in productivity probably reflects three factors. First, more efficient use of resources was encouraged by the greater openness to trade. Liberalization increased incentives to export and import substantially, raising the share of both exports and imports in output. In a relative sense, resources shifted out of industries competing with imports and into exports, where they are more productive in a macroeconomic sense. Estimates suggest that on average, the productivity of land, labor, and capital in exports is over 47.6% more than in secondary industry' and that exports use more labor than imports (See Annex Table 6.1). Second, increased competition probably raised the firm- level efficiency of resource use. Third, the rise in productivity also probably reflects better and more efficient use of capital, also associated with greater openness. Protection on capital goods was reduced and foreign direct investment rose dramatically, while domestic private sector investment rose to an annual average of 16.5% of GDP (old series) over 1993-96, as compared to an average of 14.6% in the previous 5 years (See also Annex Table 8.1). A possible indicator of India's increased productivity, in the macroeconomic sense, was the rapid growth of exports and increased market share from 1992 to 1996, despite the slow growth of and intense competition in world markets in products that India exports (World Bank 1998a). 8.9 Correspondingly, the recent slowdown in growth may be explained, at least partly, by exhaustion of the benefits of the first stage of reform and the slowdown, and in some cases reversal, of reforms (World Bank 1998a, Chapter 6). In particular, as India has raised protection in the last two years, it has lost market share in world exports (See Chapter 6), and exports and imports have declined as a percentage of GDP. Private and foreign investment remain higher than in the past. However, more protection encourages domestically-oriented investment, lowers job creation and output growth, and correspondingly makes the development process less sustainable, as Brazil's example in the 1960s and 1970s suggests3 2 The effective rate of protection in secondary industry is about 47.6%. In other words, the average "margin" available to pay for land, labor and capital in the secondary sector is 47.6% more than to produce a unit of exports. Thus, switching to export production would produce 47.6% more output (valued at world prices) with the same resources. 3 From 1957 to 1977, Brazil was a "miracle" economy, with growth over 7% p.a. The oil price shocks and the debt crisis exposed the fundamental unsustainability of this growth. Not only was there macroeconomic instability that manifested itself in 100 8.10 From a longer run perspective, India's 5.8% p.a. average growth is a relatively good performance; however, it must also be recognized that 20 years of growth at this rate has not changed India much. For example, 73% of the population still live in rural areas; poverty has declined, from 43% in 1983 to 34% in 1997 (See Annex Table 1.1), but the incidence of poverty remains high even in the rapidly growing states. 8.11 The example of the rapidly growing East Asian economies, as well as the cross-sectional analysis of Indian states (See Chapter 3) suggests that sustained, faster, labor-using growth, along with inclusive education and health services, will contribute to reducing poverty (See Table 8.2 and Annex Table 4.1). India, Indonesia, Korea, and Thailand all had similar per capita GDPs (in $ terms) in the late 1960s (See IMF, International Financial Statistics). However, the Asian "miracle" economies grew faster than India from the late 1960s to the mid-1990s, particularly in the 1970s. Their fast growth reduced poverty dramatically with little worsening of the income distribution (World Bank 1993). The recent crisis, though serious, did reduce the South and East Asian economies' lead over India but, except for Indonesia, these countries are recovering surprisingly rapidly. Even Indonesia, the country hardest-hit by the crisis, had a poverty incidence below 20% in 1998 (World Bank 1999a). Generally speaking, East Asia's growth was associated with higher investment rates and higher, and greater increases in the average education of the labor force than India. East Asia also had a much greater degree of outward-orientation than India, which, through the gains from trade, extemal competition, and access to imported technology, tended to ensure more productive use of capital and greater growth of labor demand in the macro-economic sense. Part of Indonesia's growth reflects the shift of females from informal, rural labor to formal labor in the export-oriented sector (World Bank 1996b). 8.12 The comparison with East Asia suggests that India needs higher, more labor-intensive growth, and improved social sector delivery to reduce poverty faster. Key elements in increasing growth and reducing poverty will be a) further reduction in India's still-high protection, in order to encourage greater labor demand, more efficient use of resources, and greater productivity growth through greater international specialization and competition; b) liberalization of intemal markets, particularly agriculture and labor markets;4 c) improved infrastructure to improve the links between domestic and international markets and spread the impacts of liberalization throughout the country; and d) widespread improvement of social services (See Chapters 2, 5 and 6 for discussions of policies along these lines). 8.13 Moreover, even India's current growth rates may be difficult to sustain without significant changes. One concem is the possible slowdown in total factor productivity growth in agriculture, associated with possible environmental problems (See Chapter 6 and Annex 8.2). Also, environmental degradation arising from inefficient and distortionary energy, water and fertilizer subsidies adversely affects the economy's capacity to grow (See Annex 8.2 for a fuller discussion of the relationship between environment, economic growth and poverty). A second concern is the apparent slowdown in growth in the poorer states (See Chapter 3). Continuance of these trends would slow the growth of overall factor severe inflation and balance of payments deficits, but also Brazil's improvement in education was one of the lowest among large developing countries. Resource allocation followed an inefficient, forced import substitution model, with protection and subsidies shifting resources into high-cost, capital-intensive sectors (the contribution of these sectors was over-estimated in GDP because their contribution to output was not adjusted downward to reflect their higher prices compared to imported goods). Despite foreign direct investment in many of these sectors, productivity growth in import substitution was actually less than in the economy as a whole. The limited employment produced by these industries along with the low levels of primary education resulted in one of the most unequal distributions of income in the world. See Coes and works cited there. 4 "In East Asia, more than elsewhere, govemments resisted the temptation to intervene in the labor market to counter outcomes unpalatable in the short run or to particular group.... A relatively high level of efficiency in the allocation of labor was achieved by allowing wages and employment to be determined largely by the interaction of those supplying and those demanding labor services, rather than by the govemment legislation, public sector leadership, or union pressure. ... In East Asia, wages were pulled up by increases in the demand for labor, whereas elsewhere there was a greater tendency for wages to be pushed up artificially." (World Bank, 1993, p. 266). It is also worth noting that the rapidity of growth in labor force demand reduced the impact of limits on labor force flexibility in East Asia. See also the discussion in Chapter 6. 101 productivity and the rise in incomes, as well as push up the relative price of agriculture from the cost side, to the detriment of poor consumers. Table 8.2: India and High Growth East Asia: A Statistical Comparison GDP Per Capita 1997 National GDP Openessl a Investment Rate/ b Literacy Rate) c PPP $ Current S 199611970 199611970 199711977 1970 1997 1970 1996 1970 1997 Growth Rate p.a. Growth Rate p.a. (Female) (Female) India 1510 451 3.4 4.7 5.2 7.2 17.8 14.6 22.9 33.6 62.0 (18.1) (50.0) China 3120 745 5.9/c 10.51d 10.4/e 11.2/e 35.4 28.3ff 33.8 51.7 82.9 (35.8) (74.5) Indonesia 3490 1079 5.6 6.9 6.4 22.9 44.1 13.6 31.8 56.3 85.0 (44.0) (79.5) Korea 13580 9623 8.1 8.4 7.8 32.2 63.6 23.0 35.0 86.6 97.2 (79.8) (95.5) Malaysia 8190 4544 6.3 7.3 7.1 77.8 159.7 17.7 42.4 58.3 85.6 (46.1) (81.0) Thailand 6690 1959 6.5 7.5 7.3 28.4 77.3 23.7 35.6 80.0 94.7 (72.7) (92.8) a. Openess equals total trade (exports.imports) as share of GDP. b. Gross fixed investment as a share of GDP. c. Figures in the brackets are female literacy rates. d. Data pertains to 1978-1996. e. Data pertains to 1978-1997 f. Data pertains to 1979. Sources: IMF, Internatonal Financial Statstics; Wortd Bank, World Development Indicators. 8.14 Macroeconomic stability and vulnerability to internal and external developments are also important issues in sustaining India's growth. India's still-large fiscal deficit and the increasing use of borrowing to finance public sector consumption, notably inefficient subsides that often probably increase inequality, raise concerns. The rest of this chapter discusses India's commitment to macroeconomic stability, areas of potential vulnerability and policies to reduce these problems. C. Inflation and Monetary Policy 8.15 Recent Inflation history illustrates both India's still-high dependence on good harvests, which is magnified by the rigid food distribution system and controlled agricultural trade, and India's continued commitment to keep inflation under double digits. The Wholesale Price Index (WPI) based inflation (year on year) was 4.8% in March 1999, down from 5.3% in March 1998, and dropped further to less than 3% in October 1999. Consumer Price Indices for Industrial Workers (CPI-IW) rose from 8.3% in March 1998 to 8.9% in March 1999, but dropped sharply to 0.9% in October 1999. These numbers do not reveal the sharp intra-year variations during 1998-99. Earlier, between June and October 1998, WPI inflation exceeded 8%, while CPI inflation rose to as much as 18-20% in October-November 1998, following poor harvests and lack of imports. Specifically, there were sharp rises in the (wholesale) prices of onions (247% from November 1997 to November 1998), potatoes (157%), mustard oil (103%) and chillies (70%), and, more importantly, rice (13%) and other cooking oils (about 30%). Beginning in December 1998, food prices actually fell as the good "winter" harvest brought inflation down to low levels. Indeed, onion prices fell so far that exports were allowed to resume. The transitory rises in food prices hit the poor hard, particularly the urban poor. A more elastic agricultural distribution system, with greater private participation, better futures markets, and liberalized imports (World Bank 1999b) would help reduce the structural problem of temporary rises in prices from harvest shortfalls. In fact, price variations over the last four years have largely reflected variations in primary articles and fuel - "core inflation", as represented by the WPI for manufactured products, has been relatively steady. (Between 1995-96 and 102 1998-99, the WPI at end March was 5%, 4.9%, 4% and 3.7% respectively. Similar rates for primary articles were 5.4%, 7%, 5.5% and 7.8%, and for fuel and power 3.7%, 16.9%, 11.4% and 1.7% respectively). 8.16 Over the last few years, inflation has trended downward, although the decline has been erratic (See Fig. 8.1) because of supply shocks to food prices. It is also important to note that the price data as well as other data, need substantial improvement (See Box 8.1). The weights in the CPI are outdated, and the WPI includes numerous items whose prices have not changed recently. Figure 8.1 India: Inflation and Money (M3) Growth 1994 - 1999 Money Growth Ave. CPI Infl.= 8.9% 25 25 >> 20 Ave. M3 Growth 1984 -1999 = 17.5 % 20 .6 15 15 C 0 i 0 K t 0 o oo 08 o. 0. <> o a\i 'E cr- t t0 On 00 s o0 o0 00 Q O C :>0a > >zn 8.17 India has consistently tried to keep inflation below double digits, by tightening monetary policy when inflation exceeded 10%, most recently in 1995-96. The recognition of the vulnerability of the poor to inflation (See Chapter 1), reiterated in Prime Minister Vajpayee's Lucknow statement (February 3, 1999) that "Inflation is the single biggest enemy of the poor", explains Indian policymakers' commendable commitment. Higher inflation increases relative price variability, as worldwide experience shows, and India's poor lack the resources to offset even a temporary rise in the relative prices of the necessities they consume. Experience worldwide also suggests that the inflation tax is regressive, because the poor hold much of their assets in currency, and currency bears the brunt of the inflation tax. Hence, maintenance of low inflation is a key anti-poverty measure. 8.18 Broadly speaking, monetary policy has been well-managed recently, given the increasingly complex environment, but the continued large fiscal deficit places limits on central bank independence. In 1998-99, broad money (M3)s growth continued the rise that began in 1996-97, and reached 12-month growth rates of 19-21% from August 1998 to February 1999. However, in March 1999, the 12-month growth of money slowed to 18.4%, somewhat higher than the 15-year average of 17.5% p.a. In the first five months of 1999-2000, M3 growth remained above 18% until August 1999, when it slowed to 17%. 8.19 The pattern of money growth within 1998-99 reflected a) the repatriation of the Resurgent India Bond (RIB) proceeds, b) the resumption of RBI's role as residual financier of the rising Government deficit, and c) year-end foreign exchange inflows and RBI's net sales of government debt. The Resurgent India Bond eased credit for the private sector, although much of the repatriations ended up in holdings of Government debt through reserve and liquidity requirements and banks' voluntary purchases of government debt. In 1998-99, RBI's holdings of Government debt rose 12.9%, faster than 8.8% in 1997- sM3 includes currency with the public and demand deposits with the banking system plus 'other' deposits with the RBI (MI), plus time deposits with the banking system. 103 98. The growth of RBI credit to Government was particularly rapid from June to November 1998, representing absorption of deficit-induced Government debt that the banks and other buyers were unwilling to buy at interest rates that RBI and the Government considered appropriate. Money growth was also rapid, in the 19-21% range, from August 1998 to February 1999. However, credit growth slowed in March 1999, when RBI claims on Government actually declined by nearly 3%, which contributed to slowing down of money growth. Also in March 1999, following the Budget Speech and the Finance Minister's expression of hopes that monetary policy would "do its part", the RBI cut the Bank Rate and repo rates and lowered the (cash) reserve requirement to 10.5%. This led to a small reduction in public banks' lending rates.6 8.20 In the April 1999 monetary policy statement, the RBI reaffirmed its commitment to low inflation. Effective May 8, 1999, the CRR was further reduced to 10%, which enhanced the lendable resources of banks. In the first five months of 1999-2000 (compared with end-March 1999), RBI credit to the Government actually declined by 1.2% (in the same period of 1998-99, it had increased 4.1%), while banks' credit to the commercial sector showed a pickup of 2% (in the same period of 1998-99, it showed no increase). 8.21 Lending and deposit rates drifted downward in 1998-99, but money market and government securities' rates, by and large, rose over the year (See Annex Table 8.2). Lending rates of major public sector banks, which are more sensitive to RBI's Bank Rate and government policy, declined from 14% in March 1998 to about 12% in April 1999, following the cut in the Bank Rate from 10.5% to 9% in April 1998, and to 8% in March 1999. On the other hand, short-term rates such as the call money and 91 day treasury bill rate, sensitive to monetary interventions and the foreign exchange market, moved in a general upward direction. Also, longer-term yields on government securities, both in the primary and secondary markets, moved up over the year, reflecting market sentiment and the large and growing volume of central government borrowing. Such large government borrowing, along with large non- performing loans, crowds out the private sector and puts a floor on real interest rates that the private sector has to pay (See Chapter 7). Since June 1999, rates seem to have been tending upward again (See RBI 1999e). 8.22 Monetary policy-making is increasingly complicated by India's more open economy, as well as domestic financial liberalization.7 Some examples illustrate the growing importance of international factors in monetary developments: a) since August 1997, an important objective of monetary policy has been to limit excessive pressures on the exchange rate, even though this required transitory increases in interest rates during a period when manufacturing growth was falling,- b) the 1998-99 growth of money was boosted by the RIB sale and year-end capital inflows; c) variations in base money are increasingly linked to variations in international reserves and, from time to time there has been an offsetting movement between reserves and RBI domestic claims, characteristic of open economies (See Annex Table 8.3). This 6 Also, small saving rates were reduced on January I and March 20, 1 999,with the cuts ranging from 0.5-1 .0 percentage points. 7As shown in Figure 7. 1, Non-Bank Financial Corporations (NBFCs) grew sharply after financial liberalization, providing credit and contributing to a slower than usual rise in the M3-GDP ratio (the demand for M3 did not rise as fast as expected because of demand for NBFC deposits) that made it difficult to target monetary tightness. Then, in early 1997, problems began in the NBFCs, and the demand for their deposits shifted to components of M3, at least at the margin. This contributed to a faster rise in the ratio of M3 to GDP than in the recent past. Again, monetary targeting was complicated, particularly in the context of the problems associated with the East Asian crisis and the rising fiscal deficit. Thus, while M3 was growing fast because of the switch-back from NBFC deposits, overall credit growth (including credit from NBFCs) was not growing as fast. In other words, the varying growth of NBFCs contributed to instability in the M3 to GDP relationship. Kannan, Vasudevan, and Mohanty and Mitra discuss problems of monetary targeting in the Indian context (See also RBI 1999d, Boxes 111.1, 111.2 and 111.3). 8 To limit pressure on the exchange rate, which had depreciated from Rs. 36.4 per $ in August 1997 to Rs. 40 per $ in January 1998, the RBI raised the repo rate (from 9% to 11%) and increased the cash reserve ratio (from 10% to 10.5%), despite slower industrial growth. Exchange market pressures emerged again, particularly after the nuclear explosions in May 1998, which further depreciated the exchange rate to about Rs. 43 per $ by mid-August 1998. However, with the inflow of $4.2 billion from the RIB and a further rise in the cash reserve requirement to 11% in August, the rupee appreciated slightly to stabilize at about Rs. 42.5 per $ from end-August 1998 until March 1999. 104 changed empirical relationship suggests that India may increasingly face what Obstfeld calls the "open economy trilemma"- it is difficult to carTy out an independent monetary policy while maintaining an exchange rate target when the capital account is (even partially) open. Of course, India's large international reserves (over $30 billion), low short-term debt, and limitations on capital flows leave it Box 8.1: The Need to Improve India's Data India has a long tradition of good statistics and statisticians. India was one of the first developing countries to undertake regular household surveys, beginning in 1951, in order to track poverty reduction and household living standards. Recently, India has begun to publish much more economic and social data with a much shorter lag. For example, much of RBI and Commerce data are available on the Internet (although there is a longer lag on RBI data on trade, and this needs to be improved, see below) , the WPI is available with a minimal lag, and the various RBI reports show banking developments, including non-performing assets, in much greater detail. India is compliant with the Special Data Dissemination Standards of the IMF, and has begun publishing quarterly GDP estimates, as well as monthly fiscal accounts for the Central Government. Over time, however, the usefulness of Indian statistics for policy-making has declined. The economy's increased complexity and liberalization have complicated data collection, as has occurred in many countries. In many cases, however, India's data problems also reflect limited use of new methods and lack of efforts to achieve consistency between different data collecting agencies. The resulting data problems also complicate policy-making. For example, in the area of poverty, the consumption (and food-grains consumption) estimates in the NSSO sample surveys and the National Accounts have increasingly diverged (See Chapter 1), and consumption in the National Accounts may itself be underestimated (see below), making it hard to say whether poverty has declined or stagnated. It is difficult to say how well programs to improve school enrollments are proceeding, when official figures for gross enrollment ratio are higher than the NSS figures for gross attendance ratio, especially for classes I-V, where the difference is about 20% (GOI 1998b). Similarly, unofficial sample surveys suggest much less participation in employment schemes than official data relating to employment generated by such schemes. Anti-poverty and anti-inflation policies are complicated by the lack of a good indicator of inflation. The CPI is based on outdated weights, including those for some food ite,ms that have declined in the household's market basket (simply shifting to more up-to- date weights makes a major difference in estimates of poverty changes, see Dubey and Gangopadhyay). The WPI includes a large number of goods that have shown no increase in prices for some time. Not surprisingly, there are substantial differences in inflation estimates from year to year. Some of the problems are sought to be addressed in the revised, 1993-94 base, WPI. A CPI revision exercise has also begun. The National Accounts have been updated and re-based recently for the years 1993-94 onward. Such re-basing is appropriate to take into account the economy's changed structure and India does it every ten years or so. The new National Accounts appropriately reflect new types of agricultural production, rises in owner-occupied housing and trade (See footnote 1). The State National Accounts now need to be re-based as well. The old National Accounts series was well coordinated between estimates of state GDP and national GDP - national GDP has remained a fairly constant 15% larger than the sum of state GDP estimates for the 14 largest states, but until the State Accounts are re-based, that link will be broken. The re-basing of the state data is particularly important given the major difference between the old and the new estimates of agricultural production, which is important in most states. Second, the pre-1993-94 GDP data need to be "officially" re-based. As part of that re-basing it may be possible to resolve the increasing "residual" in the old National Accounts estimates between production and expenditure estimates of GDP (6.5% of GDP in 1995-96). The direct estimates of investment by type and sector were about 2% of GDP less than the estimates derived from the equality with saving (this divergence is part of the divergence between production and expenditure based estimates of GDP); in the 1980s, the divergence was about the same size but of the opposite sign. Moreover, the estimates of "household" investment varied substantially from year to year. The residuals are much smaller in the new National Accounts, but the prior years remain a problem and efforts will be needed to ensure the gap does not widen again. Regarding specific sectors, the estimates of GDP in the key agricultural sector are based on combining yield and acreage estimates, both of which could be subject to large errors - it might be possible to use satellite estimations at least as a check. The industrial production index, the responsibility of the Ministry of Planning and Program Implementation, shows large month-to- month swings in individual industries that make it difficult to interpret the direction of this increasingly important sector. Hopefully the new index, re-based to 1993-94, will resolve some of these problems. Finally, in trade, RBI estimates of imports have typically exceeded customs estimates - in 1996-97 and 1997-98, they exceeded by 23-25% (around $10 billion), but in 1998-99 the gap fell to S 5.7 billion (See Annex Table 8.4). Less than a third of this seems to be explainable by the shift of gold and silver imports into customs data following the liberalization of such imports in October 1997. These examples suggest that major efforts are needed, not only to publish data quickly but to improve its quality and consistency, both intemally and with other data sets, supported by analytical work. This would make the large amounts of data being collected more useful to policy-makers and the public. Another, more fundamental problem, on which there is wide agreement, lies at the stage of primary data collection itself, and will need to be corrected in order to create a lasting solution. 105 with a fair degree of monetary independence from international developments. Nonetheless, monetary policy is likely to be increasingly affected by external objectives and developments. Correspondingly, unless the authorities adopt a free floating regime, RBI's ability to finance the government will be increasingly reduced. D. Reducing the Fiscal Deficit and Realigning Government to Speed-up Development and Reduce Vulnerability 8.23 Overview of Fiscal Developments. India's General Government deficit (consolidated center and states excluding disinvestment revenues)9 worsened nearly 2%Io of GDP in 1998-99 (See Figure 8.2), and it had previously been among the world's largest (See Figure 8.3)." The General Government deficit of 9% of GDP in 1998-99 is the same as the crisis year of 1990-91; the public sector deficit is slightly lower than in 1990-91, but only because of improvement in public enterprise finances (See paras. 8.38 - 8.45) and the oil pool. The revenue deficit, at 6.2% of GDP, is substantially higher than the crisis year of 1990-91. For 1999-2000, the Central Budget has targeted fiscal deficit reduction to 4.0% of GDP, but these targets have proved optimistic in the two previous Budgets. Inthe first seven months of 1999-2000, preliminary figures suggest that revenues are somewhat less than projected and expenditures are more. Even if the Budget targets are reached, the Center's deficit will be no lower than in 1996-97 (on the same accounting basis). Moreover, the states' and public enterprises' deficits are likely to continue to be high because of the continued effects of the excessive central government wage settlement of 1997-98 on their wage bills and pension costs. 8.24 The high deficits have several adverse effects. They crowd-out private sector borrowing, keep interest rates higher than they would otherwise be, raise risks of macro-economic instability, and crowd- out public development spending within government budgets because of the high interest cost of the large stock of government debt. Hence, the high fiscal deficits represent a risk to the development process and its sustainability. This is especially true given the link between the deficit and the large inefficient, inequitable subsidies (implicit and explicit) and the pattern of public spending and revenue (consumption) deficits. A major reduction in the central and state government deficits, to reduce crowding-out and private sector borrowing costs, by reducing subsidies, by privatization, and by realigning government to focus on infrastructure and basic social sector spending, is critical to India's sustained development. 8.25 The 1998-99 central government deficit was 6.5% of GDP excluding disinvestment capital revenues (provisional figure including post-budget revisions in revenues and expenditures, see Table 8.3).12 This represented a large slippage compared to the Budget target of 5.3%. The deficit was also 0.8% of GDP worse than 1997-98, which in turn was 1.0% of GDP worse than 1996-97. For 1998-99, the current (revenue) deficit deteriorated to 4.0% of GDP, the worst in the nineties, continuing the long- run trend of increased government dissaving/borrowing to finance consumption. Of the slippage compared to Budget, revenue shortfalls accounted for 0.6 percentage points of GDP while an expenditure overrun accounted for 0.6 percentage points (See Table 8.3). 9 Speaking broadly, capital revenues from disinvestment reduce state assets and are not sustainable; they are more like a financing item than tax revenue. '0AII the figures in this section have been rounded-off and therefore may not match with the figures in the graphs and tables. "Comparison of public sector deficits is complicated by the differing role of public enterprises across countries. Government deficits are more easy to compare, since they include more similar activities across countries, plus government contributions to public enterprise losses that private enterprises would be expected to cover. Different degrees of federalism affect the location of the deficit, but not the size of the General Government deficit. The IMF's International Financial Statistics provide easily accessible data on central government deficits (which, for India and other countries where the central government intermediates borrowing by the states, includes much of the state deficits). These data show that India's government deficit averaged 6.2% of GDP between 1986 and 1997, topped only by Brazil, Pakistan, and Nigeria, among countries with over 20 million population. Two of these countries suffered macroeconomic crises recently. See also Figure 8.3 and World Bank 1998a. 12 All ratios are relative to the new GDP; the deficit was 7.2% of the old GDP in 1998-99. 106 8.26 Regarding revenues (See Annex Table 8.5),'3 collection of custom duties fell short of target by 11% because of the slowdown in imports, with petroleum imports' taxes especially reduced by the fall in international oil prices. Excise duties, corporate taxes and income taxes fell short of Budget targets by about 3.3%, reflecting the slow-down in industrial growth. However, compared to 1997-98 realizations, corporate tax collections in 1998-99 rose substantially in rupee terms, despite the on-going recession, suggesting improvements in tax administration (See Chapter 4). The main items in the expenditure overrun were small savings loans to states (0.5% of GDP more than budgeted), "other" spending (0.1%) and subsidies (0.1%). Non-defense capital spending was only 0.5% of GDP, lower than budgeted but about the same as in 1997-98. 8.27 From a longer term perspective, India's deficit reduction was largely confined to the first two years after the crisis, and much of the reduction came from reductions in capital expenditures. The revenue deficit has increased since 1990-91, from 3.2% to 4.0% of GDP in 1998-99, meaning that the Government is increasingly borrowing to finance consumption. The Central Government responded to the 1991 crisis initially by cutting expenditures on non-food, non-fertilizer subsidies and loans to the states and public enterprises'4 (as percentages of GDP, see Annex Tables 8.5 and 8.6). The jump in the deficit in 1993-94 was mainly corrected by further cuts in capital spending and grants to the states. In addition, wage costs were allowed to decline relative to GDP and the number of central government employees declined about 4% until 1996-97 (See Annex Table 8.7). However, wage costs since then have been pushed up substantially by a pay settlement in 1997-98 that was well in excess of Pay Commission recommendations. In addition the pay settlement rejected the Pay Commission's Figure 8.2: Public Sector Deficits 1990-2000 % GDP (excl. disinvestnent revenues) % GDP 1 2 1 2 T 10.9 Non-financial Public SectorDeficit I10 _9 \91 9.6 9.2 I 10 6 S~~~~~~~~-.7t 6. 61~~~~~~~~~~~~~~~~ 6 8 7 . .0r 80 0 4 _ Exc l. Sma = G04 0) 1 4~.4 6. 6 5.7 Stt6ot *(E O~~~~~a a, I, . , 00 . I Notes: 1. For Center, the 1998-99 figures are Provisional Actuals (adjusted for actual tax returns and expenditures). 2. General Govemnment Fiscal Deficit =Central Fiscal Deficit (excluding divestment revenues), plus State Government Deficit and excludes net lending from the Center to States. 3. Non -financial Public Sector Deficit includes General Government Deficit, oil pool balance and market-financed central public enterprise deficit (on-lending from Central Government to central public enterpnises is netted out). Source: Budget Documents, RB! Bulletins ,RBlIAnnual Report(l1998-99). 13 Details of revenues and expenditures are only available as revised estimates, not the provisional actuals. Unless otherwise stated, comparisons in this paragraph are between the 1998-99 Budget and the revised estimates. '4The public enterprises switched to borrowing on their own account, albeit controlled by the Central Government and with an implicit central government guarantee. 107 recommendations to reduce staff by 30% over 10 years and eliminate positions that had remained unfilled for some time. Between 1991-92 and 1998-99, revenue expenditures remained unchanged around 12.0% of GDP (of which interest payments rose from 4% to 4.3% of GDP). Meanwhile, capital expenditure declined from 1.7% to 0.9% of GDP over the same period. Figure 8.3: Central Government Surpluses/Deficits Developing Countries Over 20 million Population, (Average 1987-1997) 3.0 T % ofGDP A 2.0 -1.0 -1.0 _ o8T f -2.0 -4.0 -4.0 -5.0 , S r I ~~~ . ~ ~ w -6.0~- Source: IFS, International Financial Statistics. Table 8.3 Fiscal Slippage 1998-99 Budget % Revised % Actuals(P) % Rs. Bln GDP Rs. Bln GDP Rs. Bln GDP Revenue 1620 (9.0) 1577 (8.7) 1505 (8.3) Tax revenue (net) 1169 (6.5) 1095 (6.1) 1051 (5.8) Non-tax Revenue 451 (2.5) 481 (2.7) 454 (2.5) Revenue expenditure 2101 (11.6) 2181 (12.1) 2162 (12.0) Interest payments 750 (4.2) 773 (4.3) 786 (4.4) Subsidies 220 (1.2) 247 (1.4) 219 (1.2) Defense 308 (1.7) 310 (1.7) 306 (1.7) Capital expenditure 216 (1.2) 169 (0.9) 169 (0.9) Net lending 263 (1.5) 353 (2.0) 356 (2.0) Disinvestment in PEs 50 (0.3) 90 (0.5) 59 (0.3) Gross Fiscal Deficit /a 911 (5.3) 1037 (6.2) 1123 (6.5) / a: Refers to World Bank definition (P): Refers to Provisional Estimates Source: World Bank estimates based on Comptroller General and Ministry of Finance data 8.28 Over the last two years, the Oil Pool Account (administered by the Oil Coordination Committee, OCC, and excluded from the Central Government accounts)15 has been a major factor in tightening the 15 In Annex Table 8.6, the Central fiscal deficit has been defined both without the oil pool deficit (as the Government does), and with the oil pool deficit. 108 public sector fiscal accounts. The oil pool account represents the Government's obligation to compensate oil companies for the difference between their revenues from domestic sales and the cost of oil internationally; the companies typically finance the difference and, from time-to-time, the Government has retired its debt to them. Domestic oil prices were liberalized in September 1997 by moving them closer to prevailing international prices and providing for future adjustments in line with international prices. Following this policy change, the Oil Pool ran a surplus in 1997-98 and 1998-99, a development that was helped by the drop in world oil prices.'6 However, beginning around the middle of 1999, the Oil Pool once again began to run a (flow) deficit, as a result of the rise in intemational oil prices and delays in increases in domestic prices, particularly of diesel. On October 5, 1999, the Government raised diesel prices sharply, in an attempt to correct for the potential deficit in the oil pool. 8.29 The 1999-00 Central Government Budget projects a deficit reduction of 0.9% of GDP, and also includes an accounting change that switches the States' 75% share of small saving deposits (1.2% of GDP in 1999-00) from a loan by the Center to a loan from a "National Small Savings Fund" in the Public Accounts, thereby producing a projected central deficit of 4% of GDP (See Table 8.4). This Budget target will be difficult to achieve; it is based mainly on a projected rise of nearly 0.7 percentage point of GDP in tax revenues over (actual) realizations in 1998-99 (See Annex Table 8.5). Moreover, the projected deficit reduction will only get the Center's deficit back to its level in 1996-97 (defined correspondingly, according to the new definition). And, although the different accounting treatment of small savings reduces the Central Government's deficit, it has no effect either on the central plus state government (General Government) deficit or the consolidated public sector deficit. In the absence of improved efforts at raising own tax revenues, most state governments are likely to continue their dependence on the high cost small savings to fund their increasing deficits. 7 Thus, future policy towards small savings will be a very important element in the evolution of states' fiscal deficits (See Box 3.3). Table 84: Fbscal Defidt in the New Accmuning Framework: 1990 00 (Ps Bilwn at Gef PIihe=) 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 Pmv. BE A=Ws Centr (olddefibmon) 446.3 363.4 401.7 602.6 583.9 612.8 667.3 889.4 1122.8 1050.8 Less te's Sre of Net Smll Savwings 70.3 54.8 42.6 50.0 96.8 99.9 106.7 150.6 237.9 250.0 C2ente(revdefinition) 376.1 308.6 359.1 552.6 487.2 512.9 560.6 738.8 8K4.9 800.8 Nknu: (%UlG) Cntr (old deinifion) 7.7 5.4 5.3 6.9 5.6 5.0 4.7 5.7 6.2 5.2 LessStat'sshareofnetSnallSavings 1.2 0.8 0.6 0.6 0.9 0.8 0.8 1.0 1.3 1.2 Cente (mwdefimiion) 6.5 4.6 4.7 6.3 4.7 4.2 4.0 4.7 4.9 4.0 Sxvw:ee&4i Dlaen, Ca,lve- Gen fAlx=% A+ y Fmnc 8.30 The 1999-2000 Budget rationalized customs tariffs, leaving the average unweighted tariff roughly constant but reducing the disparities in effective protection (See Chapter 6). It also rationalized excise taxes from 11 rates to 3 rates plus two surcharges (which maintained the highest rates at 30% and 40% respectively), and imposed 10% surcharges on the top two personal income tax rates and the corporate tax rate. It also included a Re. I per liter cess on high speed diesel (raising Rs. 50 billion), half earmarked for rural and social development, and the other half, plus the Re.l imposed last fiscal year, to go to central '6The surplus has been used to pay down most of the accumulated deficit on the account (which confusingly is also sometimes referred to as the deficit of the OCC). The (public) oil companies had financed this accumulated deficit by borrowing until September 1997, when the Central Government issued debt in the amount of the accumulated deficit to the companies. " Although in some sense, the new treatment of small savings is a decentralization measure, as recommended by the Gupta committee, the Budget approach does not deal with the ultimate liability for the debt, or how interest rates will be set, or the disposition of the interest differential (about 2 percentage points) between the earnings of small savers and the higher on-lending rate charged by the Center to the states, which will determine whether the change would be neutral, or benefit the states at some cost to the Center. 109 and state highways and the railways. The Budget also made some tax changes that benefited mutual funds, housing, and mergers and acquisitions, including allowing carry-forward of allowances for losses. 8.31 Nominal revenue expenditures by the Central Government were projected to rise only 9% on a comparable basis. Non-defense capital expenditure was projected to rise slightly faster than GDP, but would still reach only 0.6% of GDP. Total defense spending (including capital spending) was projected to remain a constant 2.3% of GDP, which is much lower than the 3.1 % average for 118 low-and middle- income countries in 1995 (World Bank 1998c). Explicit subsidies were projected to decline by 0.2% of GDP, back to the level of 1997-98, as a result of the rises in PDS prices to the non-poor and fertilizer prices announced in January. However, some of this projected decline was offset by the post-budget rollback of some of the price increases in fertilizer, as is evident from the recent provisional estimates. Finally, it is worth noting that the reported figures for the public sector deficit do not include the recapitalization of the public banks, which has averaged about 0.25% of GDP each year since 1992-93, nor any funds for the Unit Trust of India in 1999-2000. This funding is treated as an exchange of assets in the capital budget, which affects the revenue and expenditure budget only as debt service is paid on the bonds that have been given to the institutions. Finally, an unrecognized contingent liability is the Government's guarantee of most of the foreign exchange risk on the 1998 Resurgent India Bonds (See also footnote 28). 8.32 Post-Budget developments suggest that it may be hard to reach the deficit target. Preliminary estimates through October 1999 suggest that revenues are less and expenditures are sharply higher compared to the same period last year. Some of the increase in the expenditures is due to support and lending for the states in the form of advances of tax revenue in return for fiscal reform in the states. (See Chapter 3 for details on these recent Memoranda of Understanding (MoUs) signed between the Center and select State governments). Also, some unprogrammed expenditures related to Kargil have been incurred. 8.33 Unsustainable State Finances Keep the General Government Deficit High and Reduce Social and Infrastructure Spending that is Critical to Poverty Reduction. The states' deficit in 1998- 99 widened even more than that of the Center, to 4.2% of GDP (See Annex Table 8.8), and is projected to be as high as the Center's deficit (under the new accounting for small savings) in 1999-2000 (See Figure 8.2). The states' deficit in 1998-99 was the highest in India's fiscal history. The magnitude of the states' deficit indicates that the states can no longer be neglected from the standpoint of macroeconomic instability. Much of the state governments' recent and projected deterioration reflects the cascading down of the Central Government's excessive 1997-98 wage increase - the widening of the states' deficit is largely due to the deterioration in the revenue deficit. However, the wage increase has only intensified an underlying problem. But for the one-time transfer of VDIS revenues in 1997-98, the states' deficit would have been higher than in 1990-91. 8.34 The states' fiscal crisis/lack of adjustment reflects their continuation of large, inefficiency- inducing subsidies, implicit and explicit, in power, water, transport and secondary and tertiary education (See also Chapters 2 and 3). User charges are low, collections are weak, and costs are inflated by overstaffing and inefficiencies in the state public enterprises. In power, average revenues are only about 80% of costs (M. Ahluwalia 1998), reflecting low collections'8 and inefficiency-inducing subsidies to agriculture and small consumers. For example, in Uttar Pradesh (UP) the burden of the power subsidies can be seen in a net flow of funds to the UP State Electricity Board (UPSEB) of 5.6% of UP's revenues in 1996-97, and loans - loans that are in perpetuity and on which no interest is being paid - to the UPSEB equivalent to 42% of UP's debt. Regarding the other sectors, the states have also allowed irrigation charges to decline sharply in real terns. States' typical charges for water are far less than the delivery cost. Secondary and university education charges are far less than costs (NIPFP, GOI 1997b). 18 Low collections reflect power theft, distribution losses and increasing payment delays (see footnote 9, Chapter 5). 110 8.35 Subsidies encourage inefficiency. For example, they contribute to over-exploitation of ground water, water-logging, and soil erosion. Lack of funds reduces needed operations and maintenance. Because the power tariffs are not related to peak use, they require increased spending on capacity to meet demand and, because the lack of such capacity and lack of maintenance leads to load-shedding and poor quality power, they encourage purchases of generators as well. The fertilizer subsidies encourage use of an inefficient combination of nitrous, potassic and phosphatic fertilizers. Moreover, the subsidies have not even fulfilled their distribution objectives and may in fact contribute to inequalities, since they are subject to capture by the better-off. In higher education they go mostly to the better-off (See Kurien). In fertilizer, they may now go largely to the firm, not the farms (See Gulati). Subsidies in rural power may go to better-off farmers who can then sell the water drawn by use of free power to others. Moreover, part of the subsidies are in the form of/ascribed to "non-technical losses" in power and water or to those who are able to define themselves as part of the subsidized group. Finally, the subsidy is also partly paid through higher charges to other producers, who in turn factor it into the costs of the products they sell. Hence the incidence of the subsidies is in fact almost impossible to estimate (See also Box 5.2). 8.36 The States have also not Improved their Tax Base. Although state tax revenues have grown about as fast as income (more buoyant than central revenues), the states' approach to taxes induces inefficiency, and their revenue base is limited, in part because of the states' unwillingness to tax agricultural incomes,19 in part due to the difficulties of setting up a value added tax that would be harmonized with the Central Government's MODVAT (See Box 3.2). The states have thus fallen back on sales taxes and various fees that cascade into higher production costs and weaken India's international competitiveness, compared to a VAT system. 8.37 Perhaps most importantly, the states' fiscal crisis severely weakens the fight against poverty, by limiting their social and infrastructure spending. States are responsible for over 90% of economic infrastructure and social service spending under India's federal system. They have slowed this spending, relative to GDP, as their subsidies have risen, transfers and loans from the Center have declined, and interest costs of their rising deficits have ballooned (See Annex Table 8.8 and Table 8.5) in order to meet what is a relatively hard budget constraint.20 High cost small savings, which are now nearly twice the annual market borrowing for the states, represent one way around the budget constraint; another is state guarantees, which have mounted and which RBI has now proposed be limited (See Chapter 3, Box 3.1 and Box 3.3). 8.38 Non-financial central public enterprises' performance has improved since the early 1990s, mainly reflecting developments in petroleum and telecoms; the other enterprises have been allowed to languish. The Central Public Enterprises' (CPEs) combined deficit has declined to about 1.3% of GDP in 1998-99 and a projected 1.5% in 1999-2000, from about 3.0% in 1990-91 (See Table 8.6). 8.39 This decline reflects two factors: a) the steady fall of public enterprise investment as a percentage of GDP from about 4.8% in 1990-91 to about 3.4% currently and b) the growing importance of the petroleum and telecoms public enterprises that now account for 45% of (Plan) investment by the CPEs and an even larger 68% share in internal resource generation by CPEs (See Annex Table 8.9). These two 19 India's Federal Constitution divides the country's taxing powers. Customs are a central revenue, income and indirect taxes were ceded to the Center when the country was formed with part of the proceeds reverting to the states as determnined by the Finance Commissions every 5 years. States can levy (state-level) excise and sales taxes and have the sole constitutional right to tax agriculture. 20 The States' borrowings are largely limited by the Center's loans to them and the Center's allocation of a share of the market borrowings that qualify for the statutory liquidity requirement. Ways and Means advances from RBI must be cleared in 10 days, although some states, notably Bihar, have often exceeded this limit. The borrowing constraint is judicious; in some Latin American countries, state deficits financed through access to the central bank were a major factor in inflation. Although market discipline might provide an incentive for better state perfornance, it would be difficult to exert in the Indian context because of the central government's unwillingness to allow a state to go bankrupt, and the large role that public financial institutions would play in the purchase of any state bonds. ill groups of enterprises dominate the CPEs and, correspondingly, the CPEs are now financed largely with intemally generated funds and go to the market for the remainder.1 The declining investment of the other CPEs accounts for most of the decline in CPEs' investment, and even that is increasingly financed through the market in one way or another - central govemment loans to public enterprises (and support for losses) have dropped sharply as a percentage of GDP. Table 8.5: Change in Social & Economic Infrastructure and Interest Spending (1991/92 & 1997/98) (Change in percentage points of GSDP; Brackets indicate deterioration) States Social Economic' Interest Payment Andhra Pradesh -(0.4) 0.0 (0.6) Bihar 1.63 -(0. 1) (1.1) Gujarat -(1.0) -(1.2) (0.1) Haryana -(0.1) -(0.5) (0.2) Karnataka 0.5 -(1.5) (0.3) Kerala 0.7 0.3 (0.5) Maharashtra -(3.6) -(0.6) (0.6) Madhya Pradesh 0.8 0.1 (0.0) Orissa 0.2 -(0.7) (0.7) Punjab -(0.3) -(0.9) (2.3) Rajasthan 0.5 -(1.8) (1.0) Tamilnadu -(0.6) 0.6 (0.5) Uttar Pradesh 0.5 -(0.7) (1.0) West Bengal 0.0 1.0 (0.7) 14 States Average -(0.1) -(0.4) (0.7) Refers to total expenditure on health and education. 2 Refers to sum of capital outlay and (gross) loans to power, irrigation and transport. 3 The positive increase reflects a strong rise in current spending in Education in the revised estimate of 1997-98. Note: 1997-98 is Revised Estimate Source: RBI Bulletin various issues Table 8.6 :Finances of Central Public Enterprises: 1990-00 (In Billions of Rupees) 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 RE BE A. Net intemal resources 107.2 120.1 161.3 188.5 241.5 290.8 252.5 279.7 335.1 386.1 B. Plan expenditure 280.5 294.2 366.6 438.9 485.9 521.8 542.5 549.6 578.0 681.6 C. Overall balance (B-C) 173.3 174.1 205.3 250.4 244.3 231.0 290.0 269.9 242.8 295.4 Memo: % GDPmp CPE deficit 3.0 2.6 2.7 2.9 2.4 1.9 2.1 1.7 1.3 1.5 CPE investment 4.8 4.4 4.8 5.0 4.7 4.3 3.8 3.5 3.2 3.4 Source: Budget Documents 8.40 The CPEs had long been sheltered from competition by reservation of products for them and by protection from intemational competition. The removal of the reservation and the cuts in protection, along with increased autonomy and pressures for performance have led to increased efficiency in some sectors. Pricing has come closer to covering costs, notably with the movements toward intemational prices in the petroleum sector - fertilizer represents the major remaining central public enterprise 21 These figures neglect the Oil Pool Account discussed above. 112 subsidy.22 Nonetheless, the developments in the petroleum and telecoms public sector enterprises described above partly reflect their residual regulatory advantage. In telecoms, cuts in costs and more realistic pricing have increased access to funding and allowed a substantial improvement in service (See Chapter 4's discussion of the survey of businessmen and M. Ahluwalia 1998). 8.41 Although the return on capital employed in CPEs has been pushed up to about 8% before taxes (GOI, Public Enterprises Survey, various issues), it is 3-5% below the interest paid on government bonds, implying a massive implicit economic loss, including a loss of taxes, to the country on the capital invested in public enterprises over the years. Moreover, the high returns in petroleum and telecoms boost the average rate of return of CPEs substantially; manufacturing plants and nearly half of all public enterprises are unprofitable (GOI, Public Enterprises Survey, various issues). Of course, the public enterprises' low profitability has been attributed to their attempt to carry out non-economic objectives, often at the behest of the Government. However, the efficiency with which these social activities are carried out, the contribution to the public welfare, and their impact on firms' returns is neither transparent nor well- monitored. And, public enterprises, staffed by de facto civil servants cannot easily down-size or close- down when demand for their production falls. 8.42 The need to reduce the burden of the public enterprises and the possibility of realizing capital revenues from their sale has been recognized by all of the recent Governments. Since 1991, Government has been divesting minority stakes in CPEs through the stock market (See Annex Table 8.10), but that process appears to have slowed. The Disinvestment Commission, which was set up in 1996, and whose term has now lapsed, has submitted twelve reports to the Government but, as its reports have pointed out, most of its recommendations have yet to be implemented- in the first eleven reports, strategic sales or trade sales or partial equity sales or closure have been recommended in 41 cases, but only 13 of these recommendations have been even partially implemented (See Annex 8.3 for an analysis of India's progress in privatization). 8.43 The benefits from the sales are thus far largely limited to the capital revenues and the improvements in transparency in making the companies ready for disinvestment. Generally speaking, the new shareholders are passive investors and are not represented on the companies' boards. Moreover, the arrangements for dealing with possible problems in these companies, such as the handling of new injections of funds, are unclear. Experience worldwide suggests that a shift from public to private management will raise efficiency and returns on capital while reducing the burden on the Government by reducing transfers, debt relief and capital injections to the companies, and increasing their tax payments (Galal et al, Megginson et al, World Bank 1995b). This holds true when domestic and international competition exists to protect consumers and stimulate innovation, and it is also true in many sectors once thought to be natural monopolies, such as power generation and distribution. 8.44 Both the 1998 and 1999 Budget speeches declare the Government's intention to move ahead on privatization of CPEs. However, progress has been slow (See Annex 8.3), and continues to be motivated largely by capital revenue considerations, rather than reducing costs and improving quality of goods and services, reflecting political difficulties in full disinvestment. In the run-up to the 1999-2000 Budget, the Government raised disinvestment revenues by encouraging the public oil companies to buy some of each others' capital, an approach that simply transferred funds from the enterprises to the Center. 8.45 Several key issues on privatization face the Government. One, the weak enterprises, which can expect little loan/equity support from either the Government or the market, are unable to invest enough, and are thus getting weaker, and hence more difficult to sell off, over time. Delays would mean lower revenues to Government, and more difficult restructuring decisions by the new owners. Two, privatization issues are even more serious for state-level public enterprises, since state governments are in even less of a position to continue supporting loss-making units (some states, such as Andhra Pradesh, Gujarat, and Orissa in its power distribution, have made progress in privatization, see Chapter 3). Three, 22 See the discussion in Gulati for an analysis of the impact of the subsidy and its incidence. 113 it is unlikely that public enterprise governance can improve much while Government remains a majority owner - the "Navratna" experiments have not worked (See Box 4.2). Indeed, the experience of firms such as Maruti (49.8% Government, 50.2% Suzuki, 0.2% employees)23 might make the private sector hesitant to invest in firms where Government has more than a 26% stake (which is enough to block key resolutions), especially when the dominant financial sector institutions, which will also hold shares, are government-owned. 8.46 Reducing the Public Sector Deficit to Reduce the Risk of Macroeconomic Instability and the Crowding-Out of Private Investment, and to Improve the Sustainability of the Growth Rate. The large public sector deficit raises three concerns. One is the so-called "debt trap " - high real interest rates associated with large public borrowings will generate a cumulative rise in the ratio of public debt to GDP - a risk pointed out by RBI in various Annual Reports, and most recently in its 1998-99 Report on Currency and Finance (...the present level of the Government sector debt is not consistent with the medium-term sustainability offiscal policies... p. V-13). Prior to the financial reforms that began in the early 1990s, increasing financial repression limited the interest cost of the growing public debt by directing increasing credit to the public sector at low cost, crowding-out credit to the private sector and taxing financial intermediation. With financial liberalization, the true interest cost of the high deficit became clearer - the interest costs of the central and state governments have risen by over 1% of GDP since 1990-91. Nonetheless, up to 1996-97, there was a fall in Government's debt to GDP ratio, belying the debt trap worries. This reflected the lower average deficit since 1991-92 (even taking into account the higher interest payments), and the fall in the external debt ratio, because declining external borrowing and favorable exchange rate movements more than offset the depreciation of the rupee. However, the ratio of central government debt (including small savings) to GDP now appears to be rising; it has already risen from 58% in 1996-97 to about 60% of GDP in 1997-98 and 1998-99 (See Statistical Appendix Table 4.12), which the Maastricht Treaty in Europe considers a limit for macroeconomic stability. The ratio of total debt servicing (interest plus principal repayments) to current revenues is estimated to have risen from 116% in 1997-98 to 123% in 1998-99, as new debt on harder terms has replaced old debt that was contracted on softer terms. Moreover, govemments are extending increasing guarantees, with state guarantees up 23% in the last two years (See RBI 1999b and Chapter 3). 8.47 Investors and rating agencies, since the 1980s debt crisis, have a concern that govemments might resort to inflation or unsustainableforeign borrowing to finance high fiscal deficits and cut the burden of large domestic fixed interest debt, for one reason or another. India has one of the highest fiscal deficits in the world. In 1991, it suffered a run on its meager international reserves, in the context of a high deficit and despite its closed capital account. More recently, Brazil and Pakistan, two of the three major countries with fiscal deficits as high as India's (World Bank 1998a), suffered attacks on their fixed exchange rate. As noted above, India has traditionally maintained macro-stability, which along with its large international reserves and limits on capital mobility, limits risks of such attacks. Nonetheless, investors' concerns will tend to increase the international risk premia and lower the bond ratings that India faces,24 keeping real interest costs up, even if macro-stability is maintained. 8.48 India's large fiscal deficits and public debt stock also crowd-out private sector investment, by raising interest rates above what they otherwise would be and reducing the amount of funds available for 23 There have been differences in the past between the Government and Suzuki Motor Company over Maruti's debt-equity structure, the appointment of senior management, and the pace of expansion. Maruti is by far India's largest car manufacturer, but its pre-eminence in the Indian market is threatened by new and agile entrants from the private sector, both domestic and multinational. 24 Moody's lowered India's rating from Baa3 (investment grade) to Ba2 (speculative) in June 1998, following the Budget and the imposition of sanctions on multilateral lending after India and Pakistan's nuclear explosions. Standard & Poor's lowered its rating from BB+ (speculative) to BB (speculative) in October 1998 (GOI 1999e, p. 90). 114 the private sector.25'26 A simple regression suggests that the reduction in the consolidated public sector deficit in the early 1990s was accompanied by at least a one-for-one increase in corporate investment (See also World Bank 1998a, pp. 8 and 9; and RBI 1997, pp. 76 and 86), which was the engine of the three high growth years. Of course, these empirical results not only reflect the lower central government deficit after 1992-93, which reduced the ratio of public debt to GDP, but also the liberalization and the large inflow of foreign funds - FIHs, GDRs, and liberalized offshore corporate borrowing in 1994-95 to 1996- 97. In 1997-98, however, the rising fiscal deficit has pushed up the debt to GDP ratio, while the escape valve of external flows has become narrower (See Annex Table 8.11), and is likely to remain so given extemal circumstances. In this environment, even a constant fiscal deficit (as a percentage of GDP) is likely to put more upward pressures on real interest rates and "crowd-out" more private investment than in the past. 8.49 Reducing the Deficit by Cutting Implicit and Explicit Subsidies. Much of the reduction in the deficit could be achieved by reducing the large implicit and explicit subsidies, which the Finance Ministry estimated at 14.4% of GDP in 1994-95. Some progress has been made, notably in petroleum products (a central subject), and to a much lesser extent in power, irrigation, fertilizer (Center and States). However, much more effort is needed, particularly in the states since most of the explicit and even more of the implicit subsidies are in their domain. Without action in the states to reduce subsidies (their deficit now matches that of the Center, see para. 8.29), the General Government deficit will remain a key problem area (See below). As noted, these subsidies and cross-subsidies have had negative effects on efficiency, unclear distributional implications, and have hindered private provision of services (See discussion above, Box 5.2 and M. Ahluwalia 1998). Figure 8.4: Gross Capital Formation by Pvt. Corp. Sector and Consolidated Deficit of Gen. Govt. (incl. OCC, excl. disinvt.) 10 95/96 97/98 8-_ 96/97 GCF = 18.8 - 1.7DEF R2 = 0.74 7 94/95 ~~~~~~t =5.28 6 - 92/93 93/94 5- ~~~~~~~91 / 9 86/87 5 4 --88/89 99 _ I + 87/88 \ ~~~~~~~ ~ ~~~~~90/91 1 3 6 7 8 9 10 I1 Consolidated Deficit 25 As noted above, financial repression, such as prevailed in India in the 1980s, crowds out private sector borrowing by fiat, and pushes up the interest rate to the marginal private borrower, without raising the rates that the public sector pays for its funds. Moreover, the increasingly high rates that private borrowers have to pay, in order to ration the increasingly limited amount of credit they receive, stimulate demands for protection from high interest rates through directed credit, reducing the productivity of credit allocation to the private sector and, often, having unclear distributional effects. 26 In addition to this crowding-out in financial markets, public sector production, financed by borrowing, supplies outputs that, in many cases, could be provided more effectively by the private sector, thus reflecting a crowding-out in goods and services markets. 115 8.50 In addition, the deficit could be lowered by further efforts at broadening the tax base and improving tax administration, and civil service reform (See Chapter 3) and greater reliance on the private sector, including privatization that would enhance the productivity of investment, reduce the need for public transfers and guarantees to fund investment and generate higher tax revenues. Gains could also be made through better expenditure management, which links spending to well-defined objectives and results (See Chapter 3). 8.51 Realigning Government and Creating Conditions for Reducing the State and Central Deficits. India's sustained development would be furthered by a reduction in the General Government deficit similar to 1992-93, combined with government realignrment that relies more on the private sector and focuses on basic human development services, infrastructure, and maintenance of competition and legal and regulatory frameworks to make the market work better. In not doing so as part of the reforms over the 1990s, India has lost an opportunity to grow faster (since private sector investment is more efficient), to reduce poverty faster, and to make higher growth more sustainable. 8.52 Center and State Reforms. Some states, notably Andhra Pradesh, Haryana, and Orissa, are initiating reforms with more realistic user charges, turning over irrigation to water-user groups, and privatization of power distribution in various stages. However, others, such as Punjab and Maharashtra, are unfortunately making unsustainable cuts in user charges and taxes in a bid for political popularity. The Center could play a catalytic role in improving the policy environment in states, by providing leadership in areas like civil service and public sector reform, and improving inter-governmental fiscal relations. The Center is already doing some of this and the 1I" Finance Commission has been given a broader-than-usual mandate to "review the state of the Finances of the Union and the states, and suggest ways and means to restore budgetary balance and macroeconomic stability." This is a welcome move away from the past, gap-filling approach, which had discouraged own tax collection efforts by the states, to a more normative approach to tax sharing (an approach raised by the 9h Finance Commission) that would reduce the disincentives for improved state tax collections inherent in gap-filling exercises. The Central Government has signed MoUs with 9 States so far, whereby extraordinary short-term advances have been made by the Central Government in return for fiscal reform by the states. The multiple centrally-sponsored schemes could be consolidated to reduce bureaucracy, and at least partly converted into block grants, and the distinction between plan and non-plan expenditures reduced, as has often been recommended. Also, the Finance Minister's recent proposal to move towards a full VAT system would permit states to 'piggy back' on this fairly efficient tax and reduce theirdistortionary sales taxes. Another major issue which will require substantial analysis is the states ' devolution of revenue and taxing powers to local (panchayat) governments to decentralize services (See Chapter 3). 8.53 Much more analysis is needed on the "how" of realigning government. In this context, a study of the possible paths to fiscal adjustment, taking into account the linkages between fiscal deficits, growth, and poverty reduction, and drawing on international experience, would be useful. E. Balance of Payments 8.54 India managed to limit the contagion from the East Asian crisis, as did many countries. In India's case, much of the insulation came from the limited short-term external debt of its banks and corporations, and its limited capital account convertibility; portfolio investment also declined much less rapidly in India than in East Asia, and has rebounded back in calendar 1999. Moreover, India's banks are less exposed to losses than East Asian banks, because of their large holdings of government debt (See Chapter 7). The pressures on India's exchange rate after the East Asian crisis were adeptly managed by RBI, but the rupee has become somewhat appreciated with the recent decline of the Euro, as well as relative to East Asian competitors in third markets (See footnote 8 and Annex Table 6.7). 8.55 India's vulnerability to balance of payments problems, thus, seems less as compared to East Asian countries, or its neighbor Pakistan. Although it did suffer a balance of payments crisis in 1991, when the capital account was even more closed than today, it has much less short-term exposure than East 116 Asia did, and very large external reserves. Nonetheless, there are some structural concerns in the balance of payments, notably the dependence on remittances, the large excess of imports over exports that will tend to increase the current account deficit once imports resume their growth, and, above all, the slowdown in exports. 8.56 Generally speaking, the external environment facing India has worsened over the last two years, with the slowing of international trade and capital flows, as well as the sanctions following India's nuclear tests (for a discussion of prospects in 1999-2000, see Chapter 9). The bright spots have been falling oil prices, until recently, and rising demand for software exports. At the same time, the trade reforms, which increased India's gains from international trade and investment (See Annex 8.1), have slowed and in some cases even been reversed (See Chapter 6). Despite these problems, the current account deficit fell to about 1.0% of GDP in 1998-99, from 1.4% in 1997-98, because of the fall in oil prices and the drop in non-customs imports (See Annex Table 8.4), while reserves increased by $3.9 billion, buoyed by the $4.2 billion proceeds of the RIBs (See Table 8.7). 8.57 Merchandise export growth was negative (-3.9%) in 1998-99 (although turned positive since January 1999). This continues the slowdown in export growth that began in 1996-97. Partly, this decline reflects the slow growth of world trade. However, India has lost market share for the second consecutive year (See Annex Table 6.4). If India had maintained its 1996 share of world exports (0.63% in April- March 1996-97), its exports would have been higher by 1.3% ($ 0.43 billion). 8.58 Merchandise imports declined 7.1% in 1998-99, compared with a 4.6% growth in 1997-98. This decline reflects a) falling oil prices for a second consecutive year - oil imports fell 21.2%, and if oil prices had not fallen, the oil import bill would have been similar to 1997-98; and b) a massive decline in non-customs imports (which include ships, aircraft, oil rigs, and defense equipment), which fell by about $4 billion or 41.4%. Gold and silver imports, which were liberalized in October 1997, grew by about $1.7 billion27 or 54.6% (See Annex Table 8.4). Finally non-oil, non-gold customs imports rose only 1.2% (See Annex Table 8.4), reflecting the slow industrial growth, with much of the increase coming from imports related to projects that were moving to completion. 8.59 Computer service exports have been a bright spot after 1997-98. Software exports continued to grow rapidly, although that partly reflects demands from the Y2K problem and the Euro conversion - sustained growth depends on improved telecommunications and access to low cost hardware, as well as continued freedom from red tape. Remittances declined slightly, to about $10.3 billion. 8.60 The current account deficit declined to 1.0% of GDP ($4.3 billion), reflecting the trade deficit's decline (to 3.0% of GDP) and the continued strong service exports. 8.61 The capital account, in 1998-99, ended up with a surplus much larger than the current account deficit despite the sanctions and worldwide loss of confidence in emerging markets. In August 1998, India mobilized $4.2 billion through the retail sale of RIBs (5 year maturity, 7.75% in US dollars, in units of $1000, with the guarantee of the Government), to Non-Resident Indians, which boosted reserves. Although the sale was intended not only to offset the sanctions but also to generate resources for infrastructure, the cash reserve and statutory liquidity requirements absorbed about 35% of it, and banks temporarily invested much of the remainder in government debt 5 8.62 Other types of capital inflows slowed, continuing the slowdown that began in 1997-98 (in Table 8.7, RIB proceeds are included in long-term borrowing). The slowdown reflected the tightening 27 After liberalization in October 1997, gold and silver imports were recorded as part of customs imports, as opposed to earlier, when they were imported under the baggage route. The Ministry of Finance's Economic Survey 1998-99 estimates that about 90% of gold was imported under the customs route in April-October 1998, as opposed to only 15% in April-October 1997. 28 The foreign currency interest rate on the bond was relatively low, especially given the turmoil in world capital markets at the time of sale. However, on proceeds that were used to buy govemment debt, the Govemment effectively paid the rupee rate for foreign currency, because of its foreign exchange guarantee. 117 international capital market facing developing countries, the sanctions on India, the completion of investors' portfolio adjustment to the partial liberalization of India's capital account, and investors' expectations about India's prospects. Of particular concern is the decline in foreign direct investment to about $2.5 billion, down from $3.6 billion in 1997-98, although this figure is still far higher than in the 1980s and early 1990s. 8.63 Portfolio capital outflows occurred in May and June 1998 as foreign institutional investors withdrew $413 million following the sanctions, the Budget and the downgrading byMoody's.29 Smaller portfolio outflows occurred for most of the rest of 1998 - surprisingly, there was little additional outflow after either the default on Russian bonds or Brazil's devaluation. However, portfolio inflows turned positive in calendar 1999, and were as high as $511 million in March 1999 alone. For 1998-99 as a whole, there was a marginal outflow of $68 million dollars. Aid-related flows slowed as a result of the sanctions. External commercial borrowings slowed in gross terms over the year and dropped to almost zero in net terms, with some firms taking advantage of the discount on Indian debt abroad to buy back their bonds; other firms allowed their external commercial borrowing authorizations to lapse because of their potentially high cost. 8.64 The government responded agilely to the pressures on the currency over the year, by allowing the exchange rate to depreciate, selling some reserves to limit the depreciation, and tightening monetary policy.30 Then, in March 1999, the Budget's cuts in taxes on the capital market and the moves toward resolving the Unit Trust's problems brought some capital inflows. It appears that banks also brought back substantial funds at the end of March. 8.65 Gross foreign exchange reserves (comprising foreign currency assets, SDRs and reserve position in the Fund) rose by $3.9 billion during 1998-99 to reach $30.2 billion (nearly 7.6 months of imports) at end-March 1999; reserves reached $33.2 billion including gold. In terms of "volatility cover", reserves were about 169% of potential short- term claims - recorded short-term debt, trade credit, and the book value of portfolio investment 31 (which, when translated into dollars, is worth far less than the book value of the investments, owing to depreciation of the rupee; another shock absorber is the likely decline in the stock market if FlIs choose to liquidate their investments together)2 8.66 After peaking in 1992-93 at 34.2%, India's external debt to GDP ratio has fallen steadily to 22.4% in 1997-98, and has increased marginally to 23% in 1998-99.33 The debt service ratio has similarly declined. Careful monitoring by the Government and changes in the underlying economic factors have meant that the short-term debt has declined substantially, from over $8.5 billion (10% of external debt) in 1991 to $4.3 billion (4.4%) in March 1999. The concessional element in debt is also declining, and was 37.9% at the end of March 1999 (See GOI 1999f for a fuller discussion). 8.67 Developments in April-October 1999: Merchandise export growth turned positive in April- October 1999 (10.0% dollar value increase over corresponding period). Merchandise import growth over the same period also turned positive (7.5%) stemming mainly from rising international oil prices leading to a greater than 50% increase in oil imports; non-oil imports rose only marginally (0.3%) (DGCI&S data). Declining FDI inflows (to $1.09 billion from $1.43 billion in April-September 1998) continued to remain a concern, but portfolio inflows, at $1.35 billion, recorded a significant turnaround. Foreign exchange reserves (including gold, Fund reserves and SDRs) rose to $34.5 billion by October. 29 Standard and Poor's and the Japanese Bond Research Institute also downgraded India's long-term foreign currency rating in October 1998. 30 See footnote 8. 31 Total portfolio investment until March 1999 was $8.7 billion (RBI), not including $6.8 billion worth of GDRs raised by Indian firms in foreign stock markets. GDR investment would impact India's reserves only if it was converted into the underlying Indian stock, and then repatriated (in dollars). 32 Recent data shows that portfolio investment increased to $16.8 billion in September 1999. 33 Data is from the World Bank's Debt Reporting System, and the numbers are slightly different from those of the Govemment of India. 118 Table 8.7: Balance of Payments, 1990-2001 (US$ billion) Actuals --- Projected------------ 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Total exports of GNFS 23.0 23.3 23.6 27.9 33.0 39.7 41.6 45.1 47.5 50.7 55.3 60.0 Mercbandise(FOB) 18.5 18.3 18.9 22.7 26.9 32.3 34.1 35.7 34.3 37.0 40.8 45.0 Non-factor services 4.6 5.0 4.7 5.3 6.1 7.3 7.5 9.4 13.2 13.7 14.5 15.0 Total imports of GNFS 31.5 24.9 27.9 31.5 41.4 51.2 55.7 59.3 58.6 64.9 71.5 79.0 Merchandise (CIF) 27.9 21.1 24.3 26.7 35.9 43.7 48.9 51.2 47.5 53.4 59.0 65.8 Oil Imports 6.0 5.4 6.1 5.8 5.9 7.5 10.0 8.2 6.4 10.8 10.0 10.1 Non-Oil Imports 21.9 15.7 18.2 21.0 30.0 36.1 38.9 43.0 41.1 42.6 49.0 55.7 Non-factor services 3.6 3.8 3.6 4.7 5.5 7.5 6.7 8.1 11.0 11.5 12.5 13.2 Resourcebalance -8.5 -1.6 -4.3 -3.5 -8.4 -11.6 -14.1 -14.2 -11.1 -14.1 -16.2 -18.9 Net factor income -3.8 -3.8 -3.4 -3.3 -3.4 -3.2 -3.3 -3.5 -3.5 -3.1 -3.1 -3.4 Factor receipts 0.4 0.2 0.4 0.4 0.9 1.4 1.1 1.6 1.9 2.2 2.3 2.4 Factorpayments 4.1 4.1 3.8 3.7 4.3 4.6 4.4 5.1 5.5 5.2 5.5 5.8 Interest (scheduled)' 4.0 3.5 3.5 3.5 4.1 4.3 4.0 4.5 4.8 4.5 4.5 4.6 of which interestpayments aon NRI 1.3 1.0 0.9 0.9 1.0 1.2 1.6 1.8 1.7 1.8 1.9 2.0 Other factorpaymentsb 0.2 0.5 0.3 0.1 0.2 0.3 0.4 0.6 0.7 0.8 0.9 1.2 Netprivate current transfers 2.1 3.8 3.9 5.3 8.1 8.5 12.4 11.8 10.3 10.6 11.0 11.9 Current receipts 2.1 3.8 3.9 5.3 8.1 8.5 12.4 11.9 10.3 10.6 11.1 12.0 of whichworkersremittances 1.7 3.5 3.4 4.4 7.5 7.2 11.7 11.7 9.4 9.7 10.0 10.9 Currentpayments 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.1 0.1 Current account balance -10.1 -1.6 -3.9 -1.5 -3.8 -6.3 -5.0 -5.9 -4.3 -6.6 -8.4 -10.4 Official capital grants 0.5 0.5 0.4 0.4 0.4 0.3 0.4 0.4 0.3 0.3 0.3 0.3 Foreign investments 0.1 0.1 0.6 4.2 5.1 4.9 6.1 5.4 2.4 5.5 6.5 6.8 Direct foreign investments 0.1 0.1 0.3 0.6 1.3 2.1 2.8 3.6 2.5 2.5 3.5 3.8 Portfolio investments 0.0 0.0 0.2 3.6 3.8 2.7 3.3 1.8 -0.1 3.0 3.0 3.0 Netlong-termborrowing 4.8 3.5 2.6 2.7 1.7 2.4 6.6 5.3 6.1 0.5 0.8 4.8 Disbursements (net ofNRI)' 7.6 7.5 4.5 6.4 7.3 7.2 10.6 10.3 10.0 8.2 7.5 9.8 Repayments (scheduled)' 4.4 4.2 3.8 4.9 5.8 5.9 7.4 6.1 5.6 9.2 8.2 6.5 Otherlong-term inflows(net)' 1.5 0.3 2.0 1.2 0.2 1.1 3.4 1.1 1.7 1.5 1.5 1.5 Othercapital flows 1.8 0.1 0.1 2.9 3.3 -3.4 -1.9 -0.9 -0.2 2.5 1.6 -1.3 Netsshort-termcapital 1.1 -0.5 -1.1 -0.8 0.4 0.0 0.8 -0.1 -2.7 n.a. n.a. n.a. Errors and omissions 1.9 1.9 2.0 4.7 3.9 -2.5 -2.0 -0.1 3.4 n.a. n.a. n.a. Capital flows n.e.i.d -1.2 -1.2 -0.9 -1.1 -1.0 -1.0 -0.7 -0.8 -0.8 -0.7 -0.6 -0.6 Changes in net international reserves' 3.0 -2.6 0.3 -8.5 -6.8 2.0 -6.2 -4.2 -4.3 -2.2 -0.8 -0.2 IMF (net) 1.2 0.8 1.3 0.2 -1.1 -1.7 -1.0 -0.6 -0.4 -0.3 0.0 0.0 Change in Gross Reserves 1.8 -3.4 -1.0 -8.7 -5.7 3.7 -5.2 -3.6 -3.9 -2.0 -0.8 -0.2 Memorandum items: Current AccountBalance / GDP -3.1 -0.6 -1.5 -0.5 -1.1 -1.7 -1.3 -1.4 -1.0 -1.4 -1.7 -1.9 GrossForeignExchangeReserves' 2.3 5.7 6.7 15.5 21.2 17.4 22.7 26.3 30.2 32.2 33.0 33.2 in months of imports (goods) 1.0 3.3 3.3 6.9 7.1 4.8 5.6 6.2 7.6 7.2 6.7 6.1 ExtemalDebt(percentofGDP) 25.9 31.4 34.2 33.8 31.0 25.9 23.5 22.4 23.0 22.0 21.0 20.2 DebtService(%oftotalcurrentCreceipts) 32.1 28.8 27.6 24.8 26.1 27.3 21.7 21.2 17.3 18.3 15.4 14.9 a. World Bank Debt Reporting System (DRS). Includes Resurgent India Bonds for 1998-99 ($ 4.2 billion). b. Includes interest on military debt to the FSU, returns on foreign investments and discrepancies between DRS and RBI data. c. Net flows in NRI deposit schemes, except the non-repatriable NR(NR)D Scheme. d. Servicing of the Russia debt e. (-) = indicates increase in assets. f Includes foreign currency assets, SDRs and IMF reserves. Source: Government of India; RBI; Ministry of Commerce; World Bank Staff estmates. CHAPTER 9 INDIA'S DEVELOPMENT PROSPECTS 9.1 Short-run prospects continue to depend heavily on the agriculture sector, both in terms of GDP growth and inflation. Even if agricultural output remains high, agricultural growth is likely to decline relative to the boom year of 1998-99, when record rabi and total food grain harvests produced a sectoral growth of 7.6%. Other sectors will probably continue trend growth. Industrial growth may pick-up due to the normal winding down of industrial sluggishness and higher consumption from the good agricultural harvests and the state government wage increases of 1998-99. On the other hand, public investment is likely to fall, especially in the states, given their fiscal pressures. Moreover, even if the new Central Government manages to meet its budget targets (which will be difficult owing to the unforeseen defense expenditure), crowding-out is likely to continue to dampen corporate investment. Uncertainty about the .pace of reforms and limited profitability of exports will also inhibit corporate investment. And, on the supply side, lack of new reforms over the last few years suggests that a major increase in macroeconomic productivity, similar to that in the mid 1990s (Annex 8.1), is unlikely. Hence, a reasonable projection is that GDP growth in 1999-2000 will be similar to the long run trend (1979-1998) growth of 5.8%, assuming no acceleration of reforms. The large 1998-99 harvests also are likely to limit any price increases, so inflation should remain under control, i.e. under 5% for the wholesale price index as well as for the consumer price index. 9.2 India's balance of payments (BOP) will continue to be comfortable in 1999-2000, in spite of the current account deficit widening slightly, and coverage of imports declining somewhat, to 7.2 months of goods imports from 7.6 months for 1998-99. Export performance deteriorated over 1997 and 1998, with India losing export market share. Although export growth has picked up in 1999, except for the 1999 EXIM policy's reduction of quantitative restrictions, little has been done to improve the incentives for exports or the pressures that will make India internationally competitive - labor market rigidities and small-scale industry reservation remain a burden and higher tariffs and increased anti-dumping actions have probably increased protection for the inefficient. From a longer run perspective, India has not prepared itself to take advantage of an upsurge in world export demand, nor is it ready for the increasing competition that declining protection would engender (quantitative restrictions have to be phased out by 2001), nor the end of the Multi-Fiber Arrangement in 2005. Increases in international oil prices have raised the oil import bill by over 50% in the first seven months of 1999-00. Any increase in growth in the non-agricultural economy will eventually increase demand for imports. And it is unlikely that there will be further declines in the difference between the RBI and Customs imports. Hence, the likely outcome is a widening of the merchandise trade deficit to $16.4 billion and the current account deficit to 1.4% of GDP or $6.6 billion (1% of GDP in 1998-99, see Table 8.6). 9.3 On the capital account, increases in portfolio investment and "other" capital inflows (Table 8.6), which appear strong thus far in 1999, will offset a decline in net long-term borrowings after the one-time rise from the Resurgent India Bond. Hence, reserves will continue to increase in 1999-2000, although less than in 1998-99, so that the reserve cover, in terms of imports, is likely to decline slightly. In 1998- 99, India financed its current account deficit and increased reserves by $3.9 billion, largely through its $4.2 billion Resurgent India Bond (RIB) issue. Other sources of capital were limited, with both public and publicly guaranteed borrowings (other than the RIB) and private borrowings minimal, no major offshore privatizations and a net withdrawal of funds by Foreign Institutional Investors. More worrisome was the decline in direct foreign investment to $2.5 billion (though this is still a large figure compared to the early 1990s). For 1999-2000, international capital flows may remain low worldwide. Although there has been a substantial pickup in flows into India, this may partly reflect a response to the Budget measures that reduced taxes on the capital market. FDI is likely to continue to remain close to last year's levels. The composition of foreign investment has also shifted toward more volatile portfolio investment. (In 1996-97, $5.4 billion of foreign investment had 67% FDI, while a similar amount of investment in 120 1999-2000 is likely to have less than 50% FDI). On the debt side, there seems little reason to expect India's private offshore borrowing to increase. Companies, on comparing the likely relative cost of funds, have been allowing their approvals for external commercial borrowing to lapse. Finally, the effect of the sanctions on new donor projects may begin to slow down disbursements of bilateral and multilateral funds. 9.4 Reserves will continue to be comfortable. By the end of March 1999, foreign exchange reserves were $30.2 billion, including $29.5 billion in foreign exchange assets and $0.7 billion in SDRs and IMF reserves (equivalent to 7.6 months of imports) and rose further to $31.3 billion by end-September 1999 (including gold, reserves were $34.5 billion). The size of these reserves relative to India's low short term foreign currency obligations and foreign portfolio investment, along with India's capital controls, limit the risk of a currency crisis. 9.5 The longer term challenge is faster poverty reduction and development - the Indian Government's traditional concerns. Although India's growth has been among the fastest in the world and poverty has fallen in the last twenty years, the poor still number over 300 million, more than in all of Sub- Saharan Africa. And, despite the growth, little has changed structurally: trade remains a much smaller percentage of GDP East Asia countries including China, almost 73% of the people living in rural areas, and social indicators, despite improvement, still low. India's human development and per capita consumption has not risen nearly as fast as in East Asia, even taking into account East Asia's recent crisis. 9.6 And if changes do not occur, even current rates of growth may slip. Current rates of investment have supported an average 5.5% growth in the last two years and should be able to do so in the future, provided productivity continues to grow at the same rate in the aggregate. However, the large fiscal deficits continue to worry external investors, crowd out private investment and, within the public sector budgets, displace much needed public development expenditure. The infrastructure gap is increasing, especially considering the additional urban infrastructure needed to keep pace with urbanization and reduce urban environmental problems. Agricultural growth and productivity in agriculture may be slipping, as a result of limited reforms, the focus of public spending on subsidies rather than infrastructure, and environmental issues in some areas. The poorest states are particularly subject to these problems, and in some cases have governance problems - unless they can resolve these problems and speed up their growth, then their large weight in the nation may pull down the overall average reduction in poverty and the rate of development. Hence, reforms are particularly critical in the poorest states, where 40% of the population live and which have lagged in the upswing in growth and the accompanying poverty reduction. 9.7 A Second Wave of Reforms will be needed to achieve this poverty-reducing growth and banish the risk of a slowdown including macroeconomic, structural policy reform, governance and institutional concerns, as highlighted in previous chapters and the Executive Summary. That reforms can lead to higher growth is shown in Annex 8.1, where post-1991 reforms supported a significant addition to growth of 1.8% p.a. in the mid 1990s. Reforms leading to higher growth would be accompanied by more favorable BOP indicators, such as higher growth of exports and imports, and more capital inflows, including FDI. 9.8 The last few months of 1999 have heralded changes favorable to the initiation of the second wave of reforms, both at the Center as well as the States. The new Central Government installed in October 1999 has passed important economic legislation, such as opening up insurance and liberalizing foreign exchange regulation. Also, since the Government enjoys a more comfortable majority than the previous one, it is better placed to carry out subsidy cuts, government realignment, and other reform. At the state- level, reforming governments attracted more electoral support than non-reforming governments. If reforms along the lines suggested in this Report as well as in official documents and committee reports are indeed implemented, then India has a real opportunity to speed up sustainable growth and reduce poverty substantially in the new millennium. z; 123 Annex 4.1: Effectiveness and Efficiency of Financial Management: Selections from the Reports of the CAG for 1997-98 I. Unutilized balances of grants or appropriations of Rs. 10 billion, some of which has persisted annually for the past 5 years. 2. "Hasty purchase" of electronic voting machines costing Rs. 735 million, which were lying unutilized for the past 8 years. 3. No tangible improvement resulting from the Rs. 4.1 billion spent during 1992-97 under the "Production and distribution of seeds and crop development scheme" due to use of older varieties and sub-standard seeds. 4. 45% of the Rs. 23 billion under the Member of Parliament Local Area Development Programme remained unutilized. Much of the spending was on inadmissable items or schemes, and without obtaining clearance from the MPs. 5. Large unutilized balances from funds released to State and District govemments and other implementing agencies including sums retained in Personal Ledger Accounts, Civil Deposits, etc., in a performance audit of five schemes; large amounts diverted to other schemes and unauthorized items. 6. 90% of the Rs. 18.9 billion spent from the National Renewal Fund was on voluntary retirement schemes, making the scheme "a non-starter". 7. Total spending of Rs.30.7 billion on the Main Battle Tank development project against an estimate of Rs. 1.6 billion. A 14 year ( and still growing) delay in the completion of the 24 year old project. Annex 4.2: Budgeting and Expenditure Management: A Suggested Reform Program Regarding aggregate fiscal discipline * A multi-year expenditure framework; * A budget procedure with revenue budgeting and revenue policy setting before expenditure budgeting; * Removal of the Plan/Non-plan categorization as suggested by several experts; * Clearly defined expenditure caps, if possible through a Constitutional amendment; * Creation of a contingency fund under the control of the MoF (different from the Contingency Fund of India) from which genuine unforseen expenditure increases can be met; * A budget circular incorporating expenditure ceilings for departments; * Introduction of zero-base budgeting as announced by the Finance Minister and eventual revision of Demands for Grants by a document giving past outputs and linking realistically costed current and projected outputs to multi-year expenditure estimates. Strict zero-base budgeting as introduced in the United States may not appropriate in te Indian context especially for development programmes not directly executed by the center. However, the principal of (i) linking past outcomes to current expenditure proposals and (ii) evaluating the social return and/or prioritization of expenditure proposals is important. * Improved cash management to permit eventual emulation of "just in time" inventory management, through positive and negative incentives to line ministry PAs to improve disbursement forecasts; Regarding strategic allocation of expenditures * effective individual accountability and sanctions (or rewards if merited) for overspending or overbudgeting and for underspending; * development and tracking of program-wise output performance indicators in the budgets as is currently done in annual reports of some departments and ministries; * positive incentives for efficiency improving reforms rather than pursuit of fortuitous savings; • enhanced public involvement of stakeholder groups earlier in the budget formulation and post-budget stages; Regarding effective and efficient service delivery * Improved control of disbursements to on-spending agencies through the use of contractual positive incentives and negative sanctions (rather than ex ante controls) and a reporting system providing information on both financial expenditure and physical progress; * Improved intemal audit capabilities and strengthening the role of extemal oversight to enable long term pursuit of management improvements where weaknesses are identified by extemal audit review; * Stepped up implementation of computerization of accounts down to the program implementation level; * The introduction of client satisfaction surveys, conducted by independent central and local agencies for each govemment program and feedback from client surveys to ministry budget allocations. Regarding implementation of the reform program * Setting up of a high powered reform management body to oversee implementation and deal with teething problems. 124 Annex 4.3: Effectiveness and Efficiency of Tax Administration: Systems Appraisals by the CAG Implementation of invoice based system for MODVAT credit. This system, introduced for registered dealers and manufacturers in 1994-95, was evaluated in 1996 for transactions up to September 1995. Among the deficiencies found in administration were: (i) issue of registration certificates to dealers without proper business premises in 12% of cases checked; (ii) No tax recovery action for invoices issued by dealers whose registration had been cancelled; (iii) Incorrect or incomplete invoices or invoices not signed by authorised signatories in over 82% of cases checked; (iv) Undervaluation of goods in invoices in about 15% of cases; (v) MODVAT credit allowed against invalid documents in 15% of cases checked. 2. MODVAT capital goods scheme: Improper credit was allowed before capital goods were installed and, in other cases, on goods that did not qualify for capital goods treatment. In 8% of cases checked in 1997, credit was allowed before installation; in 65% of cases MODVAT credit was incorrectly given; in 36% of cases interest on collections not transferred to the treasury was not charged; and the authorities failed to "deface" many invoices on which duty had been claimed, opening the possibility of their being fraudulently used a second time. 3. 100% Export Oriented Units: This customs duty incentive scheme, introduced in 1980, allows for 100% exemption of customs duties for capital goods imported by units achieving a minimum value addition and exporting all their output. However, the verification of value addition and export compliance was under the Ministry of Commerce, leading to the need for coordination between it and Customs, which, expectedly, did not work efficiently. Consequently, a large number of cases came to light during audit where customs exemptions were granted but where value addition and export stipulations were not met. This example illustrates both the administrative complexity of export incentives and possible limits on export gains that result from them. 4. Export processing zones: This scheme was audited in 1997. Of the functioning units examined, 28% failed to achieve their export and value addition obligations even after 5 years. Regarding units that had closed down, 27% failed to meet their export obligations before shutting down, but foregone customs duty was not subsequently recovered. The CAG also conclude that the scheme was unviable and failed to achieve its objectives. While there may be debate about the method of assessment the CAG used, they also point out that no assessment of this scheme had yet been made by the Commerce Ministry. 5. Income tax summary assessment: All income and corporation tax returns filed are supposed to be assessed summarily by the administration and a small fraction of summarily assessed returns are then subjected to in-depth scrutiny. The summary assessment scheme was examined by the CAG in 1996-97. They found that the percentage of retums remaining to be summarily assessed at year end increased from 16.5% in 1992-93 to 23.6% in 1994-95 due to the sharp increase in workload per assessing officer. This situation is likely to have since become worse due to the increased volume of filed returns by the growing number of assessees and the wider filing requirements for assessees. Furthermore, the total extra revenue from assessment during these three years amounted to only Rs 62.3 crore, or 0.1% of total tax collections. The CAG also found on test checking about 1% of filed returns, that the department failed to detect numerous errors resulting in a tax loss of Rs 192.3 crore from checked cases alone. Many of these errors were due to the failure of assessing officers to follow prescribed procedures. Consequently, the CAG recommended stepped up efforts to computerize summary assessment and a review of summary assessment procedures. 6. The presumptive tax for small businesses: Under this scheme a tax of Rs 1000 was to be paid by specified businesses with turnover of between Rs 300,000 and 500,000. The scheme was examined in 1997 by the Audit. The CAG found that this scheme was not being implemented uniformly, with, in some cases, Commissioners having direct responsibility for the scheme. The major strategy to "attract" taxpayers was via publicity campaigns on which about Rs I crore was spent. The result of this was, for example, about Rs 31 crore in tax in 1995-96 from 223,000 taxpayers. This number of taxpayers was far below the target of 15 million taxpayers of the scheme. There were no enforcement actions taken against assessees filing retums under this scheme. The CAG found several cases of taxpayers using the scheme despite being ineligible, due to a large turnover or their status (e.g. professionals). The CAG also found discrepancies between tax figures entered by the computer center and tax payments recorded at the zonal accounting office raising the possibility of misappropriation of taxes paid. 7. Penalty, interest and prosecution for direct taxes: The efficiency of assessing officers in levying these extra dues was assessed by the CAG in 1996. The review found: many cases of overpayment, underpayment, non-levy or underassessment of interest; low and declining disposal of penalties initiated; failure by assessing officers to record why they had failed to levy (discretionary) penalties in several cases, despite being required to do so; delays in launching prosecutions of up to 8 years; an acquittal rate in prosecutions of 53%; and incomplete or defective maintenance of records. 8. Functioning of internal audit in direct tax administration: Intemal audits are conducted by a special wing of the income tax department to catch and correct mistakes in assessment and improve the quality of assessment. The CAG found, in 1997, that these objectives were not being achieved. It also found an absence of audit planning (which is required); poor manpower management and frequent staff transfers contrary to instructions; an outdated audit manual which had not been revised since 1987; and large arrears (77%) in assessing officers following up audit objections. With respect to an earlier appraisal of the internal audit wing conducted in 1989, the CAG concluded that "the current review does not show any improvement in the working of Internal Audit over the last review". 125 Annex 4.4: A Suggested Reform Program for Central Tax Administration Basic Organizational Reforms * Minimum tenure of Chairmen and members of tax Boards * Autonomy and control over expenditure allocations and personnel matters within their departments. * Budgets for tax administration with revenue budgets linked to measured revenue and equity performance and capital budgets linked to long range strategic plans in the medium term. * Legislative amendments to remove the statutory powers of assessing officers and, instead, vesting powers in the Board Chairmen with subordinates having only delegated powers to facilitate further functional specialization, especially at the level of field offices. Improving performance assessment and accountability * Improved reporting of administrative data to enable tax administration performance to be assessed. * A thoroughly revamped system of performance evaluation with performance based pay linked to it and implementation of TRC recommendations for interim rewards. * Strengthening the role of the CAG by a greater focus on management improvements and strengthening the existing system of legislative review to permit ongoing monitoring of administrative measures to correct weaknesses. Improved cooperation between audit and vigilance agencies and better reporting in these areas. * Legislation to introduce a tax ombudsman. * Strengthening the role of the public in providing feedback and monitoring of tax administration. Procedural and management reforms * Decreasing opportunities for direct contact between tax officials and taxpayers and making certain procedures, such as the levy of interest and penalty, non-discretionary. * Refocusing computerization plans of tax departments with external technical assistance and stepping up the pace of introduction by setting up of a high powered change management unit. * Improving the selection of cases for post clearance checks in customs. * Introduction of a receipts lottery to increase compliance by small business. * A review and reform of appeals procedures, including the structure of fees, cost awards and filing of appeals by tax departments. * Improved cooperation between direct and indirect tax administrations starting with the use of common taxpayer identification numbers. 0 Review and strengthening of regulations and codes of conduct goveming tax professionals and clearing agent 126 Annex 5.1 Functional Characteristics of Regulatory Bodies Appointment and Removal of Funding Consultative Process Appeal of Decisions, Relation to Commissioners Government Policy. Telecom Appointment by Central Presently funded through Central Art. 11: "The Authority shall ensure High Court. Regulatory Government. Government Budget. transparency...". Consultative Review on Central Govemment can issue Authority of India Removal: Central Government, Provision to charge fees, establish methodologies and proposals (e.g. recent policy directives, and can decide following recommendation of Telecom Regulatory Authority of tariff-setting exercise) whether an issue constitutes dismissal by Supreme Court. India General Fund to meet policy. expenses. Central Selection committee established by Consolidated Fund of India Central Advisory Committee. High Court. Electricity Central Govemment. Central Govemment can issue Regulatory Removal: President of India, Art. 37: Commission shall ensure policy directives, and can decide Commission following recomrnendation of transparency. whether an issue constitutes dismissal by Supreme Court. policy. Orissa Electricity Selection committee constituted by State Consolidated Fund Commission Advisory Committee. High Court for appeal on question Regulatory State Govemment. Public tariff hearings. of law. Commission (also Removal: State Govemment, Consultative paper on tariff approach. State Govemment can issue Haryana and following report by judge of High policy directives. Central Andhra Pradesh) Court of Orissa. Electricity Authority resolves disputes between OERC and State Govemment over what constitutes policy. State Electricity Selection committee appointed by State Consolidated Fund State Advisory Committee. High Court. Regulatory State Govemment. State Govemment can issue Commission, by Removal: Govemor, following Art. 37: Commission shall ensure policy directives, and can decide notification recommendation of dismissal by transparency. whether an issue constitutes following 1998 High Court. policy. Act. Tariff Authority Appointed and removed by Central Central Govemment, through Public tariff hearings, public consultations on Central Govemment has right to for Major Ports Govemment. Ministry of Surface Transport tariff principles (although there are no require Authority to charge specific legislative clauses relating to this). certain rates. Central Govemment can suspend Authority on notification in Official Gazette. 127 Annex 5.2 Responsibilities of Regulatory Bodies Pricing Licensing Dispute Resolution Other Telecom Regulatory Notify tariffs for all Recommend need, timing, terms Settle disputes Ensure effective compliance with universal service Authority of India telecommunications scrvices. and conditions of new service between service obligations. providers. providers, and Render advice to Government on telecommunications. Regulate revenue sharing between Rccommend revocation of license. between them and Protect consumers' interests. service providers, technical aspects Ensure compliance of terms and consumers. Facilitate competition and efficiency in the sector. of inter-connection. conditions of license. Maintain register of interconnect agreements. Monitor quality of service, conduct periodical surveys of this. Central Electricity Generation: plant owned or Inter-state transmission entities Settle disputes Promote competition, efficiency and economy. Regulatory controlled by Central Govemment; (under the amendment to the 1948 between generators Associate with environmental agencies to develop Commission or selling to more than one state. Electricity Supply Act passed in and/or transmitters environmental regulations for the sector. 1998). which come under its Inter-state transmission. tariff regulation purview. Frame guidelines for tariff-setting by SERCs. Orissa Electricity Regulation of prices charged by Licensing of entities involved in Settle disputes Promote efficiency, economy and safety. Regulatory licensees. transmission and distribution of between licensees. Promote competition and progressively involve the Commission (also power. private sector. Haryana and Regulation of quality of service of Collect relevant data, forecast demand, require Andhra Pradesh) licensees. licensees to formulate required plans in coordination with others. State Electricity Determine rates for By notification of State By notification of State Promote competition, efficiency and economy. Regulatory wholesale, bulk, grid and Government. Government: Commission retail; use of Issue licenses. Settle disputes By notification of State Government: (following 1998 Act) transmission facilities. Regulate workings of licensees, between licensees Regulate investment approval in sector. and exit and entry into industry. and/or utilities. Regulate operation of power system. Regulate power purchase and Require licensees to formulate Set and enforce service and safety standards for sector. procurement process of plans for meeting state electricity Promote privatization. transmission and distribution needs, including power purchase Coordinate with environmental agencies to develop utilities, for in-state sources. schemes. environmental standards. Tariff Authority for Set tariffs at all Major Ports, Major Ports including for private licensees at ports. 128 Annex 8.1: Analyzing India's GDP Growth and the Role of Reform One simple way to analyze India's recent GDP growth is Lucas' supply-side model (Lucas). This model of growth explains the current level of GDP by a trend growth rate and allows for any tendency for the economy to return to the trend rate of growth by also including a lagged term. The statistical estimation for the period 1979-80 to 1998-99 yields: Log (GDP(T)) = 3.7 + 0.581 Log (GDP(T-1)) + 0.0234 (Time Trend) (t-statistic) (1.99) (2.7) (1.99) This yields a trend growth rate of 5.75% p.a. for the period 1979-80 to 1998-99 2 After the 1990-91 crisis, India experienced a period of rapid growth. In the Lucas Model, growth would be higher after a recession, given the tendency for the economy to return to trend, so the interesting question is whether the growth was higher than would come from only a normal rebound, and whether there was a fall-back from these years of growth to the old growth path. To investigate this question, a second equation is estimated using an additional time trend for the years 1993-94 to 1996-97. This additional time trend allows the growth rate of GDP to exceed the basic growth path for those years and then allows the growth path to remain above the basic growth path, paralleling it, in 1997-98 and 1998- 99 : Log(GDP(T)) = 5.8 + 0.35 Log (GDP(T-1)) + 0.034 (Time Trend) + 0.012 (Trend '93-94 to '96-97) (t- statistic) ( 1.66) (3.04) (2.47) The additional trend turns out to be strongly significant, adding 1.8% p.a. to growth annually over 1993-94 to 1996-97. In other words, growth was faster than the "normal" rebound from a recession, and the economy shifted upward to a new growth path, parallel to the old, after the rapid growth of 1993-94 to 1996-97. Looking beyond simple time series analysis of GDP, both higher investment and higher "macroeconomic" productivity account for the jump in growth over 1994-95 to 1996-97, according to the standard Harrod-Domar growth model. India's real rate of gross investment averaged 27.1% of GDP over 1994-95 to 1996-97, about 10% higher than in the previous 5 years and 23% higher than over 1984- 85 to 1988-89 (1980-81 base data). The growth rate over 1994-95 to 1996-97 was about 65% higher than in the previous 5 years, and 33% higher than over 1984-85 to88-89. Hence, part of India's higher growth seems to have come from higher productivity of capital, and labor, in a macroeconomic sense - better use of capacity, better use of resources and more productive new investment. Other investment series suggest the increase in investment was less and, correspondingly, the increase in productivity even greater. ' The GDP series with 1993-94 base is used; to estimate GDP in the years before 1993-94, the old GDP figures are multiplied by the ratio of the new to old GDP in 1993-94. 2 The equation yields a logarithnic trend growth = (0.0234/(1-0.58))= 0.05587, equivalent to 5.75% p.a. 3The additional time trend takes the value 1, 2, 3, and 4, respectively, for the four years 1993-94 to 1996-97; 0 for all years prior to 1993-94; and 4,4 for 1997-98 and 1998-99. The year 1993-94 is included in the "reform" years to avoid biasing the results toward the impact of reform, as it is known that growth was high in 1994-95 to 1996-97. The reason for the use of the same value for the dummy in 1996-97, 1997-98 and 1998-99 is that reforms slowed, and so the additional impact on the trend growth disappeared; hence, the new growth path parallels the basic growth path, but at a higher level, that is, a higher constant which is modeled by a larger, constant " time dummy". 4 India's GDP accounts contain two estimates of investment figures. The ones discussed in the text include inventories and the error in estimating investment in the National Accounts - the difference between direct estimates of investments by type made by the public sector, the private corporate sector, and households (which varies substantially from year to year) and what is implied by estimates of domestic and foreign saving. Estimates of investment either (a) excluding the error, that is, using only investment that can be directly identified by investor 129 The standard Solow model/total factor productivity calculation provides a more sophisticated accounting for the sources of growth; it also suggests that increased productivity played a major role in the boom. The Solow model is based on the idea of an underlying aggregate production function, or at least constant elasticities of output with respect to capital, labor and other inputs, which may include an augmentation for quality improvement (Jorgensen and Griliches). There are, of course, well known criticisms of this model in tenns of the theoretical issue of calculating an aggregate capital stock figure. India estimates an aggregate capital stock figure through a fairly careful use of the permanent inventory method, that is, applying estimated depreciation rates to the various types of fixed investments (necessarily excluding the statistical error). Labor force growth may be estimated from estimates of (declining) population growth and slowly rising participation rates. As shown in the following Table, the capital stock grows 4.9% p. a. on average and 6.2% p.a. in the boom years, while labor grows 2.3% p.a. on average and 2% p.a. in the boom years. Use of output elasticities of 0.65/0.756 would suggest, as in the other approaches, a clear increase in the estimated total productivity in the boom years. Further analysis could obviously be done on the role of higher human capital in the labor force. Analysis might also be done of individual sectors; for example, substantial work exists on agriculture (See references cited in World Bank 1999b); I. Ahluwalia analyzes growth in some industrial sub-sectors. The boom of the mid-1990s thus seems to reflect a clear upward shift using three different approaches to explaining GDP growth, a much larger unexplained "residual" in Solow's terminology. What might explain this upward shift? Correcting for possible underestimates of labor growth or increased labor quality (education) would not reduce the residual much - increased labor force utilization (an underestimate of labor participation) might add one or two percentage points to labor force growth over the boom period, but that would add only marginally to the part of growth explained by the included factors, given the low output elasticity of labor. The stock of education in the employed labor force and type of goods, or (b) of fixed investrient, that is, excluding estimated changes in inventories, yield similar or lower increases in investment in the boom period and, correspondingly, similar or higher increases in productivity. % GDP % GDP % GDP % Increase in the % Increase in the '94-95 to '96-97 '89-90 to '93-94 '84-85 to '88-89 Boom Years Boom Years versus '89 to '93 versus '84 to '88 Investment 27.1 24.7 22.0 9.8 23.0 Investment excl. 25.8 23.5 23.1 10/1 12.2 Estimated Error Fixed Investment 23.6 22.4 21.0 5.4 12.3 Source: National Accounts. 5 Recent work (CSO) suggests that participation rates of labor force in the population increased marginally and at a decreasing rate between 1987-88 and 1993-94. This is because positive factors (the labor force is still growing faster than population, because the slowdown in population growth affects the working age population only with a lag, but this difference is narrowing because the slower population growth in the past is now beginning to affect the growth of working age population) slightly outweigh negative factors (there has been a slow shift from rural to urban areas and females in urban areas tend to have lower participation rates than rural areas). This gradual change in participation rates was extrapolated for the period 1980-81 to 1997-98. 6 The 65%/75% output elasticity of capital, 35%/25% output elasticity of labor reflects the underlying assumption that aggregate production is characterized by constant returns to scale. Typically it is hard to separate statistically estimates of TFP, non-constant retums to scale and variations in output elasticities. The output elasticities used here appear reasonable by international standards. Indian data suggest that the share of labor is about 38%, which, under well known assumptions, is equal to the output elasticity of labor. Attempts to estimate output elasticities directly with regression equations were not very successful - at least in part reflecting the data characteristics: the "statistically noisy" GDP series, the estimation errors in GDP and investment, and the "smoothness" of a labor force series derived from interpolation between a few points. 130 changes slowly; it might be increased if more educated females were drawn into the labor force or workers with higher than average education returned to India, but again the impact of this is likely to be small. The higher productivity certainly does not reflect a rise in capacity utilization arising from higher aggregate demand based on government spending - although higher government deficits may account for other, briefer episodes of rapid Indian growth, the government deficit was roughly constant and much lower on average in the boom years than in the previous five years. To some extent the boom is partly explained by better than average harvests, especially in 1996-97; but overall this added less than 0.5% p.a. to output directly. Higher private investment partly explains the higher growth in that it provided an increase in demand, but that begs the question of why investment rose. Estimates of Growth of Capital, Labor and Total Factor Productivity(TFP) 1979-80 tol997-98 1994-95 tol996-97 Average Growth of Capital Stock ('80-81 prices) 4.9 6.2 Average Growth of Labor Force 2.3 2.0 Average Growth of GDP ('80-81 prices) 5.5 7.5 TFP (residual) with Capital Elasticity = 0.75 1.3 2.4 TFP (residual) with Capital Elasticity = 0.65 1.5 2.8 Source: World Bank estimates. The impact of reform, perhaps, provides the most consistent explanation of the increase in growth and productivity, an endogenous explanation for the rise in private investment, and an explanation of why the growth slowed. First, the reforms encouraged investment by opening up opportunities for profitable investment and reducing taxes on it. Second, rising foreign direct investment and imports of capital goods, encouraged by deregulation, suggest that not only was there an increase in new vintage capital, but that the new vintage was even more productive than usual. Third, the refonns encouraged a shift of resources toward exports, which increases the productivity of resources. The estimated effective rates of protection in industry suggest that primary inputs in exports are, on average, 47.6% more productive than in import-substituting industry (See Chapter 6). Hence, a switch of resources into exports and out of imports - a rise in the ratio of trade to GDP such as actually occurred - can generate substantial increases in output.7 The reforms not only allowed India to take advantage of a booming export market, they led to an increase in India's share in world markets (See Chapter 6). Finally, the reforms encouraged an increase in private construction, that provided more productive employment to many workers. The same set of explanations applies to the slowing of the boom. Although investment remained fairly high after 1996-97, exports slowed as cuts in protection stopped and world trade slowed. In 1997, India lost its share in world markets for the first time since 1991. Without further reallocation of resources, growth in total productivity slowed. Added to this explanation is the slowing of agriculture in 1997-98, and the development of excess capacity in industries like steel, cement and autos, reflecting large new investments and a slowing of finance from non-bank financial corporations. This excess capacity could not be utilized to increase exports because overseas sales had become unprofitable. This explanation suggests that a second phase of reforms will be needed to re-stimulate growth. Of course, from a longer term perspective, the gains from reallocating resources will always be exhausted. In the longer term, per capita income growth depends on investment in steadily improving capital goods and improvement in the capacity of the labor force. The comparative experience of East Asia and India suggests that competitive pressure from overseas is an important factor in this process (See Chapter 6). 7 Some recent work in the US suggests that, partly, this reflects exporting firms' more efficient use of resources. 131 Annex 8.2: Environment, Economic Growth, and Poverty In India as elsewhere, there exist strong linkages between economic growth and the environment. Growth, associated with large-scale industrialization, spread of transport and communications, and urbanization, exerts pressure on the environment in the form of pollution and depletion of natural resources. Environmental degradation, in turn, adversely affects the economy's capacity to grow, because growth relies on the sustainable productivity of natural resources and the health of the population. 'Sustainable development' is development that does not harm the prospects for maintaining or improving living standards in the future. There exist strong linkages between poverty and the environment. While the poorest segments of a population generate less pollution than do the rest through higher levels of consumption, energy use, and vehicle ownership, the poor do contribute significantly to rural resource degradation (land, forestry, fisheries) because of their greater use of these resources to meet their need for food, fuel, fodder, and medicines. In addition, the poor bear a disproportionate burden of the costs imposed by environmental degradation, and this contributes to their further impoverishment (lTNDP, Human Development Report 1998; GOI, Economic Survey 1998-99). First, the poor are more vulnerable to the health effects of pollution due to their inadequate. nutrition, poor access to health care, and owing to where they live (particularly in urban slums that often have the worst air, water, and solid waste problems). Second, the poor are more immediately affected by degradation of natural resources because of their greater reliance on them to meet basic needs. India faces the full range of environmental problems, from water pollution, air pollution, and solid and toxic wastes, to soil degradation, deforestation, wetland and biodiversity loss. It was estimated that, in 1995, the total costs arising from such environmental problems amounted to $ 9.7 billion on average, or 4.5% of GDP (GOI, State of the Environment Report 1999). Overall, the most significant problem, as measured by its economic impact, is that of widespread water pollution and lack of sanitation. According to the above-mentioned estimate of environmental damage in India, health costs due to water degradation amounted to $5.7 billion in 1995. Air pollution is serious in both urban and rural India, although for different reasons. The health impact of rural indoor air pollution, attributable to the heavy use of bio-fuels in poorly ventilated houses, exceeds even the health impacts of high levels of urban ambient air pollution, attributable to transport, industry, energy, and refuse burning. Overall, in 1996, air pollution was responsible for an estimated 673,000 deaths in India, of which 589,000 were due to indoor pollution (UNDP, Human Development Report 1998). On the resource side, soil degradation is a major problem: out of the total geographical area of 329 million hectares, nearly half can be considered degraded (GOI, Economic Survey 1998-99). Forests, in India, are also under pressure: in 1991, only 23.4% of the total geographic area comprised recorded forest area, and only 19.5% comprised actual forest cover (GOI, Statistical Abstract of India 1997), as against the target of 33% stipulated by the National Forest Policy, 1988. The biodiversity of India is also under threat as is evident from the fact that the list of threatened species in 1996 included 75 mammals, 73 birds, 16 reptiles, 3 amphibians, and 1236 higher plants (World Bank, World Development Indicators 1999). The above discussion points to the urgent need to act in order to protect the environment. The following steps would help: The negative link between econowic growth and the environment can be weakened by encouraging efficient use of resources across all sectors. Energy subsidies encourage excess fuel and electricity use with associated pollution impacts at all stages of the energy and power chain. Water subsidies encourage excess water use, with resulting groundwater depletion and land water-logging or salinity. Fertilizer and pesticide subsidies lead to excess use and run-off of agricultural chemicals. Reduction of such explicit or implicit subsidies would help to reduce these negative environmental effects, while also improving the financial health of the supplying entities, and encouraging private 132 sector participation (See Chapter 5). In the industrial sector, a competitive and open investment and trade environment encourages private investors to adopt more efficient, and therefore more environmentally-sound, technologies. * Regarding the link between poverty and the environment, four types of measures are required to mitigate the disproportionate burden of environmental degradation borne by the poor: first, those that allow more efficient resource use by the rural poor, such as research, education, and awareness of more sustainable resource-based production techniques; second, measures that encourage rural non- farm income reduce rural dependence on the resource base through higher and more inclusive growth; third, public health infrastructure investments, particularly in safe drinking water and sanitation (See Chapter 2); and fourth, measures to increase public awareness of the magnitude of the indoor air pollution problem to help stimulate demand in rural and urban households for modem forms of energy and altemative stove or kitchen designs. * The environmental policy framework needs to be strengthened. In most cases, environmental degradation occurs because environmental costs are external to the market, and policies do not exist to intemalize those costs. Not only should environmental fines or taxes being paid by polluters (such as polluting firms and vehicle owners) be higher, but certain commodity prices, such as diesel fuel, should be raised to intemalize the public health damages associated with its use (See Box below). * Environmental regulations cannot be effective without proper enforcement. However, as is recognized by the Economic Survey 1998-99, enforcement is hampered by the weak enforcement capabilities of environmental institutions, and the lack of accurate information on which to base both monitoring and compliance. Furthermore, greater decentralization of the monitoring and compliance functions to the state and local levels, along with greater public participation in protecting the environment, would significantly improve both (See also Box 4.4). Petrol and Diesel Prices Distorted relative prices of petrol and diesel have created perverse incentives to encourage diesel use, which have negative economic and environmental implications. In 1997, the ratio of the price of petrol to diesel was 2.4 in India, compared to 1. I in Canada, 1.5 in Germany, 1.3 in Mexico and 1.7 in Japan (See Table below). The justification for keeping relative diesel prices low has traditionally been that it is used in the agricultural sector for irrigation pumps, and for public and commercial transport. However, it is now known that per liter of use, diesel is more polluting and toxic for human health than petrol. In addition, standards for both diesel fuel and vehicle emissions (especially particulates, sulfur, and aromatics) are lax in India, but an even bigger problem is enforcement. The undesirable effect of the fuel price distortion has been to encourage a rapid growth in urban diesel use. Fiscal measures, such as increasing diesel prices or a differential excise on diesel cars, can correct the bias. For example, in Sweden, a high annual tax on diesel cars was effective in bringing down the number of diesel cars to only 2 % of total cars. Such pricing and taxation measures, combined with an improved vehicle emissions program, could reduce pollution and also add to the exchequer. Recent upward revisions in diesel prices (April and October 1999), maintained despite pressures for rollback the second time, have brought the ratio of petrol to diesel down to 1.73 (Delhi retail price), which though still high, is moving in the right direction. International Comparisons of Diesel and Petrol Prices Country Automative Diesel for Commercial Use Regular Leaded Gasoline Ratio Petrol Prices/ Diesel Prices (S per liter) ($ per liter) 1987 1991 1997 1987 1991 1997 1987 1991 1997 India 0.280 0.247 0.289 0.601 0.603 0.690 2.15 2.44 2.39 Thailand 0.245 0.311 0.303 0.318 0.362 - 1.30 1.16 - Japan* 0.500 0.556 0.518 0.837 0.914 0.863 1.67 1.64 1.67 Mexico* 0.146 0.189 0.294 0.187 0.342 0.388 1.28 1.81 1.32 Gernany* 0.454 0.574 0.622 0.536 0.767 0.935 1.18 1.34 1.50 Canada* 0.350 0.492 0.402 0.373 0.507 0.428 1.07 1.03 1.06 * gasoline prices refer to regular unleaded Source: Energy Prices & Taxes, Quarterly Statistics, Third Quarter 1998, International Energy Agency Source: Center for Science and Environment, New Delhi; Intemational Energy Agency. 133 Annex 8.3: India's Progress in privatization 1991 to 1999 The New Industrial Policy announced in July 1991 envisaged disinvestment of a part of government share-holding in selected PSEs with the objective of raising resources, encouraging wider public participation, and improving the performance of PSEs by subjecting them to stock market discipline. Accordingly, during the period March 1991 through March 1998, a part of government share- holding in 39 enterprises out of the 240 non-departmental central public enterprises has been divested (See Annex Table 8.10). As of March 1998, a total amount of Rs.1 12.57 bn has been realized through 11 rounds of disinvestment (GOI, Public Enterprises Survey 1997-98). However, in none of the cases has government share-holding been reduced to less than 51% through disinvestment. In 20 of the 39 cases, disinvestment has been less than 10%, and in 10 cases, it has been less than 5%. Further, the process of sales seems to have slowed down since March 1995, with sales exceeding 2% of govemment holding numbering only 5 in 1995-96, 7 in 1996-97, and 1 in 1997-98, as opposed to 10 in 1994-95 and a high of 26 in 1991-92. The same trend is also discernible if one examines the disinvestment proceeds, which amounted to only Rs. 3.62 bn in 1995-96, Rs. 4.55 bn in 1996-97, and Rs. 9.06 bn in 1997-98, after a high of Rs. 50.78 bn in 1994-95 (GOI, MOF, Annual Report 1998-99). In 1998-99, however, the disinvestment proceeds seem to have picked up once again with the amount realized equal toRs. 53.71 bn against the budget target of Rs. 50 bn. But the fact is that the greater part of the 1998-99 disinvestment proceeds have come from an equity swap between 3 oil PSEs - IOC, ONGC, and GAIL - a move which had an adverse impact on the market capitalization of these enterprises. The Government was able to raise only about Rs. 11.87 bn through market disinvestment in CONCOR, GAIL, and VSNL. Moreover, the Government failed to act on its Budget 1998-99 promises of disinvestment in IOC (which was slated for February 1999, reportedly due to low prices of the scrip on the secondary market at that time), reducing government shareholding in Indian Airlines to 49% over the next 3 years and to 26% in non- strategic PSEs. Buoyed by its success in 'exceeding' the 1998-99 target, the Government has doubled the disinvestment target to Rs. 100 bn for 1999-00. To that end, the Government raised Rs. 0.75 bn through disinvestment in VSNL in September, which brought down its share to 52.97% in that enterprise. To advise the Government on the extent, mode, and timing of disinvestment in PSEs, the Disinvestment Commission was set up in August 1996. The Commission's role was diluted in January 1998 with removal of its powers to monitor and supervise the overall disinvestment process. The term of the Commission expired on November 30, 1999. The Commission submitted its 12th Report to the Government in August 1999 and, with that, it completed examination of the 58 of the 64PSEs referred to it by the Government (in the case of the other 6 PSEs, there are jurisdictional problems as they were already under reference to the BIFR before they were referred to the Disinvestment Commission). In its first 11 Reports, which contain recommendations on 53 of the 64 PSEs referred to it, the Commission had suggested trade sales in 8 cases, strategic sales in 24 cases, partial equity sales in 5 cases, closure/sale of assets in 4 cases, and no disinvestment/deferred disinvestment in 12 cases. However, these recommendations were implemented or are being implemented in only 13 cases. The Commission also recommended setting up of a 'Disinvestment Fund' out of the proceeds of share sales, to restructurePSEs and fund voluntary retirements, in order to make disinvestment easier. Though such a Fund was set up in September 1996, it is not operational till date. The Commission has also made a number of recommendations on corporate governance, notably graded increases in autonomy for PSEs, depending on their performance. Till March 1998, the Government had granted enhanced autonomy to 11 selected PSEs - IOC, IPCL, ONGC, BPCL, HPCL, NTPC, SAIL, VSNL, BHEL, GAIL, and MTNL - referred to as "Navratnas"; it had also granted operational, financial, and managerial autonomy to 97 other profit-making enterprises referred to as "Mini-Ratnas". The Government has also begun to follow up on the Commission's recommendations to include non-official part-time Directors in the Board of Directors, to modify MoUs to allow better evaluation of performance, and to grant greater autonomy in investments. However, The Government has not acted on the Commission's recommendations to provide for election of Directors to represent 134 minority shareholders and election of employee representatives on the Board of Directors in proportion to employee share-holding, to bring salaries of top management in line with industry, to give greater autonomy to PSEs in determining their product prices, to set up an independent institution - the Pre- investigation Board - to evaluate instances of malfeasance in PSEs, to enable PSEs to set up investors relation group to deal with investor queries, and to make the Public Enterprise Selection Board more broad-based and to allow it greater autonomy in selecting CEOs and other functional directors. Besides, as long as the Govemment continues to retain over 51% of the capital, the PSE and its employees will remain subject to the legal framework as government employees. 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(A 64 149 Annex Table 1.1 Poverty in India 1951 -1997 (with correction for CPIAL) (Poverty line = Rs. 49 per capita per month at Oct 73 -Jun 74 rural prices) NSS Survey Period Headcount Index Poverty Gap Index Squared Poverty Gap Index Round Rural Urban National Rural Urban National Rural Urban National 3 Aug51-Nov52 47.37 3546 45.31 16.05 11.14 15.20 7.53 4.82 7.06 4 Apr 52-Sep 52 43.87 36.71 42.63 14.64 10.91 13.99 6.71 4.41 6.31 5 Dec 52-Mar 53 48.21 40.14 46.80 16.29 13.25 15.76 7.56 5.96 7.28 6 May53-Sep53 54.13 42.77 52.15 19.03 13.83 18.12 9.12 6.29 8.62 7 Oct53-Mar54 61.29 49.92 59.30 21.95 17.24 21.12 10.26 7.74 9.82 8 Jul 54-Mar55 64.24 46.19 61.07 25.04 15.76 23.41 12.50 7.02 11.54 9 May 55-Nov 55 51.83 43.92 50.44 18.44 14.65 17.78 8.80 6.40 8.38 10 Dec 55-May 56 48.34 43.15 47.43 15.65 13.34 15.24 6.71 5.41 6.48 11 Aug 56-Feb 57 58.86 51.45 57.55 19.45 18.16 19.22 8.50 8.51 8.50 12 Mar57-Aug57 62.11 48.88 59.77 21.69 16.31 20.73 10.01 7.25 9.52 13 Sep 57-May 58 55.16 47.75 53.84 19.01 15.95 18.47 8.78 7.00 8.46 14 Jul 58-Jun 59 53.26 44.76 51.75 17.74 13.75 17.03 7.88 5.87 7.52 15 Jul 59-Jun 60 50.89 49.17 50.58 15.29 15.83 15.39 6.13 6.75 6.24 16 Jul 60-Aug 61 45.40 44.65 45.27 13.60 13.84 13.64 5.53 5.83 5.59 17 Sep61-Jul62 47.20 43.55 46.54 13.60 13.79 13.64 5.31 6.05 5.45 18 Feb63-Jan64 48.53 44.83 47.85 13.88 13.29 13.77 5.49 5.17 5.43 19 Jul 64-Jun 65 53.66 48.78 52.75 16.08 15.24 15.93 6.60 6.38 6.56 20 Jul 65-Jun 66 57.60 52.90 56.71 17.97 16.82 17.75 7.60 6.98 7.49 21 Jul 66-Jun 67 64.30 52.24 62.00 22.01 16.81 21.02 10.01 7.19 9.47 22 Jul 67-Jun 68 63.67 52.91 61.60 21.80 16.93 20.86 9,85 7.22 9.35 23 Jul 68-Jun 69 59.00 49.29 57.11 18.96 15.54 18.29 8.17 6.54 7.85 24 Jul 69-Jun 70 57.61 47.16 55.56 18.24 14.32 17.47 7.73 5.86 7.36 25 Jul 70-Jun 71 54.84 44.98 52.88 16.55 13.35 15.91 6.80 5.35 6.51 27 Oct 72-Sep 73 55.36 45.67 53.37 17.35 13.46 16.55 7.33 5.26 6.90 28 Oct73-Jun 74 55.72 47.96 54.10 17.18 13.60 16.43 7.13 5.22 6.73 32 Jul 77-Jun 78 50.60 40.50 48.36 15.03 11.69 14.28 6.06 4.53 5.72 38 Jan 83-Dec 83 45.31 35.65 43.00 12.65 9.52 11.90 4.84 3.56 4.53 42 Jul 86-Jun 87 38.81 34.29 37.69 10.01 9.10 9.79 3.70 3.40 3.63 43 Jul 87-Jun 88 39.23 36.20 38.47 9.28 9.12 9.24 2.98 3.06 3.00 44 Jul 88-Jun 89 39.06 36.60 38.44 9.50 9.54 9.51 3.29 3.29 3.29 45 Jul 89-Jun 90 34.30 33.40 34.07 7.80 8.51 7.98 2.58 3.04 2.69 46 Jul 90-Jun 91 36.43 32.76 35.49 8.64 8.51 8.61 2.93 312 2.98 47 Jul 91-Dec 91 37.42 33.23 36.34 8.29 8.24 8.28 2.68 2.90 2.74 48 Jan 92-Dec 92 43.47 33.73 40.93 10.88 8.82 10.35 3.81 3.19 3.65 50 Jul 93-Jun 94 36.66 30.51 35.04 8.39 7.41 8.13 2.79 2.42 2.69 51 Jul 94-Jun 95 39.75 33.50 38.40 8.89 838 .. 2.90 2.80 52 Jul 95-Jun 96 37.46 28.04 35.00 8.31 6.78 .. 2.64 2.22 53 Jan 97-Dec 97 35.69 29.99 34.40 8.39 7.77 .. 2.83 2.73 Note: All poverty measures are expressed as percentage. Source: Daft, 1997 and 1999 150 Annex Table 2.1 India: Per Capita Income, Fertility, Infant Mortality and Literacy in Selected Years Year State Indicators 1975 1980 1985 1990 1995 1997* All India Per Capita Income - 1808.1 2072.3 2528.9 2980.2 3146.8 Total Fertility Rate 4.9 4.4 4.3 3.8 3.5 - Infant Mortality Rate 140 114 97 80 74 71 Literacy Rate - 44 - 52 59 62 Andhra Pradesh Per Capita Income - 1544.2 1723.5 1994.6 2362.0 2450.2 Total Fertility Rate 4.6 3.8 3.7 3.1 2.3 - Infant Mortality Rate 123 92 83 70 63 63 Literacy Rate - 36 - 44 51 54 Assam Per Capita Income - 1407.8 1617.6 1695.4 1800.1 1824.9 Total Fertility Rate 4.1 4.0 4.1 3.4 2.2 - InfantMortalityRate 144 103 111 76 76 76 Literacy Rate - - 53 - 75 Bihar Per Capita Income - 1061.4 1227.2 1373.8 1247.5 1289.5 Total Fertility Rate - - 5.4 4.8 4.5 - Infant Mortality Rate - - 106 75 73 71 Literacy Rate - 32 - 38 44 49 Gujarat Per Capita Income - 2197.3 2513.4 3050.0 3820.4 4189.2 Total Fertility Rate 5.1 4.7 3.9 3.4 3.2 - InfantMortalityRate 154 113 98 72 62 62 Literacy Rate - 52 - 61 56 68 Haryana Per Capita Income - 2647.9 3217.6 3861.9 4033.3 4335.9 Total Fertility Rate 5.8 5.2 4.6 3.8 3.7 - Infant Mortality Rate 114 103 85 69 69 68 Literacy Rate - 44 - 56 62 65 Himachal Pradesh Per Capita Income - 1868.5 1990.7 2509.0 2650.7 - Total Ferblity Rate 4.3 4.0 3.6 3.1 2.7 - Infant Mortality Rate 115 87 84 68 61 63 Literacy Rate 51 - 64 71 77 Jammu & Kashmir Per Capita Income - - - - - - Total Fertility Rate 4.7 4.4 4.5 - Infant Mortality Rate 68 72 86 70 - Literacy Rate - - - - - 59 Kamataka Per Capita Income - 1686.6 1857.8 2297.9 2837.2 2935.9 Total Fertility Rate 3.7 3.5 3.6 3.2 2.7 - Infant Mortatty Rate 80 71 69 70 62 53 Literacy Rate - 46 - 56 57 58 Kerala Per Capita Income - 1693.8 1748.6 2109.0 2620.3 2725.4 Total Fertility Rate 3.4 3.0 2.4 1.9 1.8 - Infant Mortality Rate 54 40 31 17 15 12 Literacy Rate - 82 - 90 91 93 (continued) 151 Year State Indicators 1975 1980 1985 1990 1995 199P Madhya Pradesh Per Capita Income - 1507.6 1594.2 1948.8 2079.4 2170.4 Total Fertility Rate 6.0 5.2 4.6 4.8 4.2 Infant Mortality Rate 151 142 122 111 99 94 Literacy Rate - - 34 44 52 56 Maharashtra Per Capita Income - 2675.5 2956.0 3819.2 5101.7 5395.9 Total Fertility Rate 4.3 3.7 3.5 3.2 2.9 Infant Mortality Rate 92 75 68 58 55 47 Literacy Rate - 56 - 65 72 74 Orssa Per Capita Income - 1417.2 1566.2 1553.0 1837.3 1851.7 Total Fertility Rate 4.6 4.1 3.8 3.5 3.3 Infant Mortality Rate 149 143 132 122 103 96 Literacy Rate - 41 - 49 - 51 Punjab PerCapita Income - 3017.7 3640.3 4161.0 4695.9 4929.4 Total Fertility Rate 4.7 4.0 3.5 3.2 2.9 Infant Mortality Rate 98 89 71 61 54 51 Literacy Rate - 48 - 59 66 67 Rajasthan Per Capita Income - 1368.2 1522.5 2172.3 2238.4 2486.5 Total Fertility Rate 5.4 5.6 5.5 4.5 4.4 Infant Mortality Rate 155 105 108 84 86 85 Literacy Rate - 30 - 39 48 55 Tamil Nadu Per Capita Income - 1679.8 2054.9 2512.6 3140.5 3249.3 Total Fertility Rate 3.8 3.4 2.2 2.3 2.2 Infant Mortality Rate 112 93 81 59 54 53 Literacy Rate - 54 63 66 70 UttarPradesh Per Capita Income - 1416.4 1541.6 1842.7 1837.8 1932.1 Total Fertility Rate 6.6 5.9 5.6 5.2 5.0 Infant Mortality Rate 198 159 142 99 86 85 Literacy Rate - 33 - 42 50 56 West Bengal Per Capita Income - 1913.4 2081.8 2345.5 2944.1 3122.4 Total Fertility Rate - - 3.7 3.4 2.8 Infant Mortality Rate - - 74 63 58 55 Literacy Rate - 49 - 58 66 72 For per capita income, the data pertains to the year 1996. Notes: 1. Per capita income is in 1980-81 rupees; in 1996, per cap income forAll India in current prices was Rs. 12182.7 (US $ 343.8), and in terms of PPP (Purchasing Power Parity) was US $ 1467.8 (calculated using a conversion factor of 8.3 from the World Development Indicators). 2. Total fertility is the expected number of children a woman would bear in her lifetime with the prevailing age-specific fertility rate. 3. Infant mortality is expressed per thousand live births. 4. Uteracy rate is percentage of persons over 7 years of age who can read and wnte a simple sentence in any language with understanding. 1980 data is collected during 1981; 1990 during 1991; and 1995 during 1995-96. Source: Registrar Genemal of India, Sample Registration System; National Sample Survey Organization; Central Statistical Organization (CSO); CSO, Working fonre estimates:1993-94, a methodological note. 152 Annex Table 3.1 Fiscal Deficit and Debt Stock: 14 Major States (Percent of State GDP*) Average 1991.92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Average 1985-90 R.E. B.E. 1991.97 Maharashtra Fiscal deficit 3.2 2.2 2.8 2.1 2.3 2.8 2.9 2.4 3.3 2.5 Debt 16.7 15.5 14.0 13.2 12.9 12.3 12.9 13.2 15.0 13.4 Punjab Fiscal deficit 5.8 4.8 4.8 4,8 5.0 3.4 3.2 4.3 4.6 4.3 Debt 30.9 34.6 36.0 33.9 34.3 34.0 33.3 32.5 35.0 34.1 Haryana Fiscal deficit 3.0 2.3 2.6 2.3 2.2 3.6 3.3 2.7 5.8 2.7 Debt 21.8 19.5 20.6 20.1 19.3 20.9 19.4 19.8 23.5 20.0 Gujarat Fiscal deficit 4.8 6.1 2.9 1.2 2.2 2.9 3.3 3.3 2.4 3.1 Debt 21.4 23.1 19.5 19.2 16.5 18.3 17.8 17.9 17.2 18.9 WestBengal Fiscal deficit 2.8 2.8 2.3 3.4 3.3 3.9 4.3 5.6 4.3 3.7 Debt 21.7 22,2 22.8 22.8 21.9 22.4 23.2 25.1 26.5 22.9 Kamataka Fiscal deficit 3.4 3.0 4.2 3.3 3.4 2.9 3.4 2.4 2.9 3.2 Debt 20.7 17.7 18.6 19.1 19.6 19.4 20.0 20.1 19.8 19.2 Kerala Fiscal deficRi 4.7 4.6 3.7 4.2 4.1 4.3 4.6 7.3 4.5 4.7 Debt 29.3 29.6 29.6 32.0 32.7 33.7 34.2 34.8 29.8 32.4 Tamnil Nadu Fiscal deficit 3.0 3.5 4.1 2.6 2.5 1.9 3.1 3.1 4.7 3.0 Debt 16.8 17.7 18.0 18.0 18.4 18.6 18.2 18.8 20.0 18.2 Andhra Pradesh Fiscal deficit 3.2 2.7 3.6 3.4 3.8 3.4 3.5 3.0 2.9 3.3 Debt 21.5 19.0 20.8 20.6 20.8 21.1 20.9 21.5 22.9 20.7 Madhya Pradesh Fiscal deficit 3.6 3.0 2.4 2.2 2.9 3.0 3.0 3.2 4.6 2.8 Debt 23.6 23.3 22.5 21.4 21.5 22.3 22.2 22.6 25.4 22.3 ULfarPradesh Fiscal deficit 4.5 4.4 5.2 4.0 4.5 4.3 5.1 8.6 7.2 5.2 Debt 26.4 27.3 28.4 29.0 29.5 29.7 29.3 30.9 32,4 29.2 Onssa Fiscal deficit 5.5 6.5 4.9 5.2 5.7 5.8 6.9 6.3 9.4 5.9 Debt 36.6 37.6 40.5 40.2 39.0 39.0 45.9 45.8 48.9 41.2 Rajasthan Fiscal deficit 4.7 3.4 4.3 5.2 5.1 6.7 5.3 4.9 6.2 5.0 Debt 33.5 28.4 27.4 30.5 29.3 31.5 30.1 31.9 33.8 29.9 Bihar Fiscal deficit 3.8 5.5 4.2 3.6 3.2 3.8 2.0 6.2 8.2 4.1 Debt 33.1 36.6 38.2 36.8 36.5 40.2 40.0 42.0 38.6 38.6 The GSDP seres for individual States pertains to the old base (1980-81), as itis not available at the new base (1993-94). Note: 'Debf refers to the stock of outstanding debt at end-March. Source: RBI, Supplement to the RBI BulletIn on finances of state govemments, vanous issues; World Bank staff esfimates. 153 Annex Table 4.1: IntermatIonal Comparisons of Selected Governance Indicators India Dv. Sdected larp econoreds Southeast Asia South Industrial Full Sample Dev. Coun. %i rank In % raik In Score Coun. Chin Brasl Mexico Poland South Indonesia Thailand Asia' countties Sample Confidencelnt. (95%) Sarnpe Sample sample' devcoun. score Africa (excl. lndia) U.K. U.S. Ave. lower upper Size Size 1. Govermancelndicutor 1995, ScaleO (lowest) - 6 (hioeat) Average rank 51 65 - - - - - - - - - - - - - - I) Govemnmeet Effectiveneses and Stabilty - 44' 3 3.7' Socioecononic CondiGons (ICRG) 54 71 2.5 2.2 3.5 3.0 2.5 2.5 2.5 2.0 2.5 2.8 5.0 4.0 2.7 2.5 2.9 130 97 Insftu8ionalstabiliy(GCR) 31 56 4.3 4.1 4.4 5.2 3.5 4.1 3.5 4.0 3.8 5.0 5.2 5.7 4.8 4.6 5.0 53 32 Government Stabdity(ICRG) 2 4 5 3.5 4,8 5.5 5.0 5.0 5.0 5.5 4.5 4.5 4.8 5.5 4.5 4.9 4.8 5.0 130 97 II) Rule of Law and Business Environment 65 - 3.1 * - - - - - Law and Order 58 71 4.0 3.7 5.0 2.0 3.0 5.0 2.0 3.0 5.0 3.0 6.0 6.0 4.1 3.9 4.3 130 97 Property Rights and Rule-based Governance (CPIA) 3 79 79 - 35 3.5 (avg.)- 3.3 (avg.)* 3.1' - - - - - 135 Contract Enforceability(BERI) ' 40 70 3.0 2.9 3.0 2.4 - 3.0 3.8 2.7 3.5 2.4 5.3 5.3 Natsonalizason risk(BERI) 30 63 3.3 3.2 2.9 2.7 - 3.0 4.5 3.6 3.9 2.6 4.4 5.0 InfrastructureQualily(BERI) n 40 63 2.6 2.6 2.4 2.3 - 1.5 4.7 2.3 3.0 2.3 4.1 4.8 3.2 2.9 3.4 130 97 Corrupbon and Irregular Payments 37 43 2.4 2.0 2.5 2.9 2.7 3.6 3.7 1.4 2.0 2.9 5.3 4.6 4.4 . Corrupbon, 1990 (higherscale means le6s)(TI) 7 22 22 1.7 - 2.1 2.4 2.0 2.8 3.1 1.2 1.8 2.7 5.2 4.5 4.9 4.4 5.4 85 Corrupton (ICRG) 74 74 3.0 2.8 2.0 3.0 3.0 5.0 4.0 1.0 2.0 3.0 5.0 4.0 - - - - 97 InegularPaymnsu (higherscalemeansless)(GCR) 3 18 34 2.5 2.9 3.3 3.2 3.1 2.9 3.9 2.1 2.2 - 5.6 5.3 4.0 3.6 4.3 58 32 iv) General Public Admtnistradon . 73' . 2.7' . . - . . . . . . . - Bureaucracy Quality (ICRG) 9 02 97 4.5 2.9 3.0 3.0 4.5 4.5 4.5 3.0 3.0 3.0 6.0 6.0 3.6 3.3 3.9 130 Strength of civil service (GCR) 10 59 91 4.5 3.5 3.6 4.3 3.8 3.4 3.4 4.0 4.5 - 5.5 5.3 4.4 4.1 4.6 58 32 ExposuretnPolitcallnterference(WCR) 16 30 1.3 1.5 - 1.2 1.4 1.2 1,4 1.6 1.4 - 3.0 2.4 2.0 1.9 2.5 45 17 Accountabiityof the Public Service (CPIA) 71 72 . 2.9 3.5 (avg.)' 4.1 (avg.)' 2.5' * 2.9 2.7 3.0 136 135 v) Public Finance - 73' 3.1' - - - - - . . . . . . . Quality of Budget and PuhOc InvestbentProcess (CPIA) 2 9 91 3.1 4.1 (avg)* 3.9 (avg)' 3.1' - - 3.1 3.0 3.3 136 135 EfficiencyandEquiyofPub8cExpend0ures(CPIA) 3 70 79 - 3.1 3.8(avg.)- 3.9 (avg.)' 3.0' - - 3.1 3.0 3.2 136 135 Efficiency and Equity ofRevenue Mobilizason (CPIA) 1 71 71 - 3.2 4.2 (avg.)' 3.6 (avg.)' 3.0' - 3.2 3.1 3.4 136 135 ManagementofPubic Finances (WCY) 33 53 3.1 2.8 3.5 4.5 3.7 2.6 2.7 2.5 1,2 - 4.1 4.6 3.5 3.1 3.8 46 19 11. Outcome Indicatrs CenlralGovtBudge1Surplus/Deficdt(%o1GDP)(1997) 21 21 -5.2 -2.4 -1.6 -6.1 -0.2 -2.2 -5.8 1.2 2.4 -4.3 -5.3 -1.6 -2.1 -3.2 -1.1 72 53 Kenya tsotswana Ngeina Pop.belowthe poverty line (St below $1 per day) 5(1800-95) ' . 52.5 22.2 23.6 14.9 6.6 23.7 11.8 2.0 22.0 . - 50.2 33.0 31.1 InlantMortmlayRate(per1,000livebirths)(1996) - 32 65 52 33 36 32 12 49 49 34 66 6 7 57 56 78 152 Prevalence ofchld malnutriion(190)-96) * - - 66.0 - 10.0 7.0 14.0 - 9.0 40.0 13.0 48.8 - - 23.0 21.0 35.0 Illiteracy, 1995 (% ofadults 15-) 28 48.0 32.6 10.5 16.7 10.4 - 18.2 16.2 6.2 51.6 - - 21.9 30.0 42.9 97 Materna l ffASityraitnofeIDO,ODOfivebilths)(1990-96) e _ 437 - 115 160 110 10 230 390 290 080 9 12 650 250 1000 lHiteracy rale, adutfermnle (% offernales 15-)(1995) - 26 62.3 39.6 27.3 16.8 12.6 - 18.3 22.0 8.4 62.3 - - 30.0 40.0 53.0 98 Trad, exportsandimports(%oGDP, PPP)(1996) - 3 4.5 20.0 7.1 10.2 26.1 285 20.7 13.6 31.3 11.0 46.3 19.4 108 Uquid liabhoites(M3)as%ofGDP(196) - 77 49.3 37.8 112.2 27.2 27.9 37.2 57.7 52.5 79.5 40.7 - 61.4 112 Average Credi Rang (1997) "6 - 59.0 46.7 68.0 55.8 59.3 65.1 62.7 82.3 66.0 42.4 89.8 91.0 154 Indla Dev. Selected large economies Southeast Asia South Industrial Full Sample Dev. Coun. % rank in % rank in Score Coun. China Brazil Mexico Poland South Indonesia Thailand Asia' countries Sample Confidence Int.(%l Sample Sample sample dev. coun.b score Africa (excl. India) U.K. U.S. Ave. lower upper Size Size Memo: GNP per capita, PPP (1995) 23 29 1580 3609 3330 6340 7660 6000 7450 3310 6700 1498 19960 28020 6859 5566 8049 132 106 General Govt. Expenditure (%ofGDP) 33 61 30.1 27.0 11.7 33.8 14.1 52.2 52.7 17.0 16.2 - 53.7 41.3 41.7 35.9 47.6 45.0 18 * regional averages; Southeast Asia includes Indonesia, Thailand, Malaysia and Philippines; South Asia includes Bangladesh, Maldives, Nepal, Pakistan and Sn Lanka *percentile rank excluding South Asia, 100 signifies best blow and middie income countries 'unweighted average dre-scaled for Figure 4.1 using the formula: 6-{[ri+absoluie(min(xj. .x")jlrmax(;.. .x.).xabsolute(min(x;...x,))j} 'data are for most recent year available 'general public satisfacton/dissatisfaction with the govemment's economic policies; socioeconomic factors are idenUfted which have the greatest political impact for the country being assessed 2govemment's ability to carry out its declared program(s) and its ability to stay in office nextent to which prvate economic activityis facilitated by a rule-based govemance structure 4degnse to which contractual agreements are honored and complications presented by language and mentality differences 5measues 'expropration for no compensation' and 'preferential treatment for nationals' 'facilities for and ease of communication between headquarters and the operaton, and within the country, and the quality of transportation, BERI 7perceptions of degree ofcormupbon as seen by business people 'degre of irregular payments in business and official transactions 7mechanism for recruitment and training and autonomy of bureaucracy from political pressure and &the strength and expertise of the civil service to avoid drastic interuptions in govt. service during political instability 'the degree to which accountability Is ensured through audits, inspections etc, conf ict ff Interest regulations for public servants are enforced, civil service promotion and recruitment are merit-based, 2degree to which public expenditure and investment priorities are established by systematic and objective critera; whether systems ensure that expenditures match budgetallocations 'efficiency of expenditure balance between and within sectors, and between publicly and privately provided services "tax structure (degree of distortionary taxes), revenue collection, tax administration 5at 1985 prices, adjusted for purchasing power parity 6 average of ICRG, Institulional Investors, Euromoney ratings Sources: World Development indicators 199811999, Worid Bank; Yearbook of Labour Statistics 1998, Intemational Labour Organisation; ICRG,lntemational Country Risk Guide database; 'Structural trends in India's Manufactured Export Performance:lntemational Comparsons, S. Lall; BERI, Business Environment Risk Intelligence database; IRIS, Center for Institutional Reform and the Informal Sector database; WCY, World Compeitiveness Yearbook; GCR, Global Competiliveness Reporl; CPIA, Country Policy Institution Indicators of the Worid Bank; TI, Transparency Intemational, 1998 155 Annex Table 4.2 Efficiency of government in delivering services (percentage of respondents rating services under different categories) Very Efficient Mostly Mostly Inefficient Very Average Index* efficient efficient inefficient inefficient Score Score 6 5 4 3 2 1 - - Central govt. now 1 10 33 33 14 9 3.24 100.0 Central govt.3 yrs ago 0 7 29 39 14 11 3.07 94.8 Regionalgovt now 6 8 27 31 17 11 3.22 99.4 Regional govt 3 years ago 2 6 25 31 19 17 2.90 89.5 General govemment in 1996 as per 1996 survey 3.21 99.1 General government in 1986 as per 1996 survey 2.35 72.5 *Index: Average Score of Row as a percentage of Average score for 'Central Govemment now'. Source: World Bank-Cil survey of 210 private sector firms, 1999 and World Bank Survey of 53 prvate sector firms, 1996. Annex Table 4.3. Quality, integrity and efficiency of public services delivered by public agencies (percentage of respondents rating services under different categories) Rank Very Good Slightly Slightly Bad Very Average Good Good Bad Bad Score Score 6 5 4 3 2 1 i Armed Forces 24 44 23 2 5 2 4.74 2 Telephone 3 41 30 15 9 2 4.08 (a) Price 6 36 28 15 10 5 3.98 (3.64*) (b) Availability 18 46 27 6 2 1 4.69 (2.72*) 3 Judiciary/Courts 8 39 25 9 16 3 4.05 4 Income Tax Department 3 38 28 18 9 4 3.96 5 Water Supply 4 35 31 17 8 5 3.95 6 Education ServiceslSchools 5 29 31 17 14 4 3.82 7 Customs Service 3 29 28 19 16 5 3.69 (2.85) 8 Electric Power Co 4 32 23 17 15 9 3.66 9 Police 3 25 31 21 12 8 3.62 10 Excise Dept. 2 28 28 17 18 7 3.58 State Sales Tax Dept 2 28 27 19 17 7 3.58 Central Govt. 5 26 29 13 15 12 3.57 (3.21) 11 Public Health Care 3 19 29 18 18 13 3.32 (2.00) Parliament 5 16 19 21 20 19 3.08 12 Roads, PWD 1 16 15 21 31 16 2.87 (1.98) Source: World Bank-CII survey of 210 prvate sector firms, 1999. Average scores in parentheses are from the World Bank Survey of 53 firms, 1996, except for those marked with an asterisk (*). 156 Table 4.4 Predictability, Responsiveness and Availability of Rules and Regulations (percentage of respondent ratings under different categories) Strongly Agree Slightly Slightly Disagree Strongly Average Average Agree Agree Disagree Disagree Score, Score, 1999 1996 Score 6 5 4 3 2 1 Predictability of govemment rules and 2 7 46 29 12 4 3.46 3.38 regulations: Now Predictability of govemment rules and 2 4 35 33 21 5 3.18 - regulations: 3 years ago Predictability of policy changes in the annual 2 3 45 33 9 8 3.32 NA central budget Advance information to firms about the 0 18 11 35 25 11 3.00 3.49 changes affecting them Taking into account concems voiced by 2 17 15 47 11 8 3.28 3.66 business or business associations Easy availability of information on laws and 10 31 32 18 5 4 4.11 NA regulations Source: Worid Bank-Cu survey of 210 private sector firms, 1999 and World Bank Survey of 53 private sector firms, 1996. Annex Table 4.5 Efficiency of court system in resolving business disputes (percentage of respondent ratings under different categories) Strongly Mostly Tend to Tend to Mostly Strongly Average Agree Agree Agree Disagree Disagree disagree Score Score 6 5 4 3 2 1 Fair and Impartial 23 40 15 16 4 2 4.56 HonesVUncorrupt 13 38 19 18 6 6 4.16 Capable of enforcing decisions 19 19 17 23 17 5 3.85 Consistent 7 26 25 21 15 6 3.71 Affordable 10 16 10 26 24 14 3.20 Quick 5 3 4 18 32 38 2.17 Confident that legal system will uphold contracts and property rights in business disputes: Now 20 37 26 8 7 2 4.49 3yearsago 18 34 25 11 8 4 4.31 Source: World Bank-CIl survey of 210 private sectorfirms, 1999. 157 Annex Table 4.6 Obstacles in the operation and growth of business (percentage of respondents rating obstacles under different categories) 1999 Obstacles in the operation and growth None Moderate + Average, Average, 1996 Rank of business major 1999 survey 1996 survey Rank 1 Inflation 7 68 4.12 3.72 6 2 Labor regulation 12 64 4.03 3.96 4 3 Corruption 7 60 3.97 4.40 3 4 Infrastructure 11 62 3.95 5.09 1 5 Policy instability/uncertainty 6 57 3.95 3.38 8 6 Financing 23 52 3.57 3.69 7 7 Customs administration 14 50 3.52 4.42* 2 8 Customs duties 16 49 3.45 4.42* 2 9 Income tax administration 20 41 3.18 4.42t 2 10 Income taxes 18 39 3.12 4.42t 2 11 Othertaxes 17 38 3.12 4.42t 2 12 Environmental regulations 24 40 3.07 3.24 11 13 Foreign currency/exchange regulations 24 35 3.02 3.89 5 14 Import restrictions 33 31 2.77 3.26 10 15 Functioning of judiciary 35 29 2.67 NA NA 16 Street crime/theft/disorder 29 23 2.65 NA NA 17 Business Licensing 42 26 2.52 3.30 9 18 Organized crime 34 22 2.52 NA NA ': 1996 World bank Survey score for "tax regulation and/or high taxes": 4.42. Score: None =0, Minor obstacle=2, Moderate=4, Major=6 Source: World Bank-Cil survey of 210 private sector firms, 1999 and World Bank Survey of 53 private sector firms, 1996. 158 Annex Table 4.7 (a) Payment of Bribes (percentage of respondent ratings in different categories) Always Usually Frequently Sometimes Seldom Never Average Average Score Score 1999 1996 It is common to pay irregular 15 19 21 28 6 11 3.24 3.00 additional payments to get things done Score 1 2 3 4 5 6 - - It is known in advance how much 2 17 16 43 16 8 3.30 3.60 the additional payment is Score 6 5 4 3 2 1 - - If a firm pays the required 12 36 28 18 - 5 4.29 3.47 "additional payment the service is usually delivered Score 6 5 4 3 - 2 - - (b) Extra unofficial payments to public officials Electricity/Telephone 16 17 12 21 10 24 3.64 Connections Licenses/Permits 14 15 14 28 16 13 3.56 IncometaxOfficials 18 13 14 31 10 14 3.44 Customs Officials 16 23 10 22 15 14 3.39 Government Contracts 11 24 15 24 17 9 3.39 (c) Percentage of contract value in additional or unofficial payment to secure government contracts Percentage of contract value 0 0-1 2-9 10-17 18-25 25+ Average Percentage of respondents 22 15 54 4 3 2 4.80 Source: World Bank-CII survey of 210 prvate sector firms, 1999 and World Bank Survey of 53 private sector firms, 1996. 159 Annex Table 4.8 Summary Evaluation of Budget and Financial Management Practices I-Inadequate 5-Adequate 10-Excellent Budget: Comprehensive 7 Based on reliable data and estimates 2 Has medium-term perspective I Linked to macroeconomic policy 2 Links planning & resource allocation 7 Capital and recurrent expenditure well integrated 2 Links between policy and resources are transparent 4 Trade-offs within spending constraints 2 Effectively controls spending aggregates 1 Is implemented as initially authorized 5 Is adopted on a timely basis 3 Controls items of expenditure 3 Provides incentives for efficiency 1 Uses performance measures 1 Financial Management: Based on accounting standards 7 Efficient cash management 5 Timely disbursement of budgeted funds 3 Accountability for expenditure I Intemal control systems 3 Audit of expenditure (professional, timely reporting) 7 BudgeVAccounting is consistent 8 Procurement is transparent and competitive 7 i60 Annex Table 4.9 _____ _____ ____ Public Financial Management (PFM): Evaluation of Outwuts and Outcomes* _______ ______ Aggregate Fiscal Discipline Strategic Prioritization Operatioinal Effectiveness and Efficiency PFM Outputs PFM Outpuomes ___________- PFM Outputs PFM Outcomes InstitLtional * Medium term expenditure Revenue/ Budgetary planning Expenditures matched Relative line agency o Efficient service Arrangements framework? NO Expenditure consultative with to strategic goals? NO autonomy? NO Delivery? NO * Hard budget constraint? NO target achieved? stakeholders? PARTIY * Comprehensive budget? NO Strategic targets linked LARGELY to allocations? PARILY * Line agency allocation discretion? NO Accountability 0 Ex post reconciliation of Limited agenicy ' Outcomes reported? Clear responsibility for Internal and external audit? expenditures? YES overspending? NO SOME mismatch? NO YES a Sanctions for agency over-or o Ex post evaluation of a Personnel policies under-spending? NO results? LIMITED performance based? NO (INSTEAD, EX ANTE . Service delivery CONTROL) standards? SOME * Sanctions applied? NO * Customer satisfaction surveys? FEW Transparency . Publication of budget and fiscal * Adequate Stakeholder * Outcome performance * Program performance results? YES, PARTLY voice mechanisms? NO published? SOME publicized? SOME a Client voice mechanisms? FEW 161 Annex Table 4.10 Variations between BudgeVRevised Estimates and Actuals 1991192-1993194 1994195- 1997198 Average Variation (%) Average Variation (%) Actuals as % of Actuals as % of Actuals as % of Actuals as % of Budget Revised Budget Revised Budget Revised Budget Revised Revenue receipts 93.5 97.7 7.4 2.6 100.3 98.9 9.5 2.9 Tax revenue, Gross 93.8 97.8 8.4 2.8 100.8 99.6 7.4 2.6 Nontax Revenue 104.4 99.3 1.8 2.5 100.7 97.6 4.5 1.2 Capital receipts 108.5 94.7 17.0 2.8 104.3 97.6 16.9 6.7 Recoveries of loans 99.1 97.1 6.7 4.7 98.3 91.7 6,0 5.0 Disinvestment 66.2 58.5 94.2 105.5 39.7 93.8 147.4 12.8 Borrowings and other liabilities 115.1 96.6 27.1 2.8 111.4 98.4 16.3 7.5 Total receipts 99.5 96.5 3.3 2.5 101.6 98.5 5.7 3.0 Non-plan expenditure 104.2 99.9 4.8 1.7 103.5 99.3 4.6 0.9 On revenue account 104.8 99.5 2.5 1.4 101.4 99.4 2.4 1.1 Oncapitalaccount 103.0 102.5 19.0 6.8 117.1 98.4 17.9 1.4 Plan expenditure 100.5 95.5 7.6 3.8 99.3 96.8 5.6 1.1 On revenue account 99.3 92.9 10.1 4.0 97.9 97.0 3.1 1.2 On capital account 102.0 98.0 5.8 5.1 102.0 96.5 12.7 1.2 Total expenditure 103.1 98.5 4.7 0.2 102.2 98.6 3.0 0.9 Revenue expenditure 103.6 98.1 2.5 0.4 100.7 98.9 2.3 1.1 Capital Expenditure 102.2 99.8 11.4 0.9 108.1 97.5 6.2 0.4 Revenue deficit 145.6 100.8 24.4 8.9 107.4 100.6 29.2 12.7 Fiscal Deficit 125.4 102.8 27.3 6.5 113.1 99.3 13.5 5.9 162 Annex Table 4.11 Revenue Effect of Tax Concessions (a): Major Deductions from Income Tax under Chapter VI-A and VIII of the Income Tax Act (Company and Non-Company assessees) 1989-90 1994-95 Tax Loss (%) 19.62 17.74 Effective Tax Rate on Gross Income (%) 18.94 17.86 Effective Tax Rate Loss Due to Chapter VI-A and VIII Deductions (percentage points) 4.62 3.85 (b): Customs exemptions 1992-93 1995-96 1996-97 Exemptions Duty forgone New notific- Duty forgone New notific- Duty forgone New (Rs cr) ations (Rs cr) ations (Rs cr) notific- ations 4 export promotion schemes NA -- 8023 - 9189 Other exemption notifications (total) 5081 415 2019 313 1113& 222 Total (% of collections) 21.5 27.8 23.7& Note: Data on income tax concessions for 1990-91 through 1993-94 were either incomplete or not available. Data for all assessees includes other categories of non-company assessees but may be biased due to non-random sampling. &: Incomplete coverage Source: All India Income Tax Statistics, various years and Reports of the CAG, 1997, 1998. Annex Table 4.12 Central Tax Revenue and Buoyancy (a) Revenue as a percentage of Non-Agricultural GDP at Factor Cost Average for Financial Years Gross Tax Revenue Corporation Tax Personal Income Customs Excise Tax Duties Duties 1989-90to1991-92 14.08 1.41 1.36 4.87 6.00 1994-95 to 1998-99RE 12.00 1.84 1.63 3.66 4.37 1999-2000BE 11.62 2.03 1.77 3.31 4.20 (b) Buoyancy of Central Taxes with respect to Non-Agricultural Gross Domestic Product Average for Financial Years Gross Tax Revenue Corporation Personal Income Tax Customs Duties Excise Duties Tax 1989-90 to 1991-92 0.926 1.346 1.050 0.743 0.888 1994-95 to 1998-99RE 0.880 1.324 1.086 0.795 0.702 1999-2000BE 1.313 0.995 1.724 1.260 1.384 Notes: 1.To estmate NAGDP for 1998-99, the rate of real growth in agriculture is assumed to be 5.3% and the rate of real growth of NAGDP is assumed to be 5.8%. Inflabon rates are assumed the same. 2.To estimate NAGDP for 1999-2000, the nominal rate of growth is assumed to be higher than nominal GDP growth by the same percent (about 1 %) as it was in the previous period. Source: Budget Documents and Economic Survey, GOI. 163 Annex Table 4.13 Assessment of Tax Structure and Administration Pre-reform Recent years Recent to pre-reform Index (Over 100 implies improvement in recent years) I. Performance Tax Structure Revenue adequacy. Level (Tax/NAGDP) 14.08 12.00 88 Trend (NAGDP buoyancy) 0.93 0.88 95 Revenue stability (CV of buoyancy) 0.23 0.31 54 Revenue predictability (actuals/budget ratio) 8.40 7.40 113 Vertical balance: (ratio of centre's revenue adequacy to states') 1.24 1.24 100 Economic neutrality 1 (rates) Personal inoome tax 16.80 11.71 143 Corporation tax 35.43 27.34 130 Excise dutes 9.31 8.38 111 Import dutes 41 27 143 Aggregate score 131 Economic neutrality 2 (concessions) Income tax: Individuals 3.98 2.24 178 Companies 11.17 7.43 150 Import Duties: 21.5 27.8 77 Aggregate score 121 Equity (share of direct taxes) 19.7 29.6 150 Simplicity Laws are simpler# Certainty(business survey; 1= Very Good; 6 =VeryBad) 3.77 3.61 104 Sectoral balance Exclusion of agriculture continues 100 unchanged Tax Administration Administrative effectiveness: Income tax compliance 39.4 49.0 124 Collection arrears (% of collections) 36.8* 47.5 77 Administrative efficiency Business survey (1= Very Good; 6 = Very Bad) NA 3.1 NA Business survey (Index of ease of dealing with tax departments in 1998-99 compared to 100 102.2 102.2 three years ago) Collection cost to society per rupee of revenue # NA NA NA Administrative corruption Business survey (% paying bribes sometimes, 'frequently', 'usually or'always to NA 74 NA income tax or customs officials) II. Capacitv Comparing Pre-reform and Current Status Extemal constraints Some improvement, poor Capacity of supporting institutions (appeals, courts) Some deterioration, inadequate Capacity of supporting institutions (tax professionals) Insufficient information Policy research capacity No change, inadequate Administrative capacity 1(training and skills) No change, adequate Administrative capacity 2 (pay and career prospects) Some deterioration, inadequate Administrative capacity 3 (automaton) Some improvement, poor 1II. Institutions Adequacy of extemal controls No change, poor Participation No change, poor Institutonal flexibility 1 (tax policy inertia) No change, inadequate Institutional flexibility 2 (funcUonal and financial autonomy) No change, poor Clarity of mission No change, inadequate Adequacy of intemal controls No change, poor Contestability No change, inadequate Adequate tax laws Some improvement, inadequate Administratve incentves 1 (performance linked budget) No change, poor Administrative incentives 2 Some deterioration, poor (performance based remuneraton) Administrative organizaton 1(Number of tax agencies) No change, adequate Administratve organizaton 2 (Functional organizaton) No change, inadequate Intemal rules No change, inadequate Non-compliance penalties No change, adequate Error preventon No change, inadequate 164 t} Pre-reform: 1989-90 to 1991-92 where data are available; recent years 1994-95 to 1997-98/1998-99 where available. Full details are in the background note. 'The index is the ratio of recent to pre-reform indicators or its inverse so that a higher value represents improvement. The ratio is calculated before rounding. #: While adequate quantitative data are not available, this is suggested by the number of direct tax (second) appeals and judicial references declining over the period for which data are available. Furthermore, while indirect tax appeals data are not always reported, the number of customs and excise exemptons has been substantially reduced which should decrease appeals. Pertains to the period 1992-93 to 1994-95. Pre-reform figures are not readily available. ## Collecion costs given in the central budget amount to under 2% of tax collectons. However, these figures are incomplete and underestimate true costs (as elaborated on in the background note). Annex Table 4.14 Facilitation Indicators for Import Containers, Selected Countries (1998) Country Dwelling Time in Ports Custom Clearance Time Physical Inspection (%) India 10/25 days 48-120 hours 100% Pakistan - 48-120 hours 100% Argentina 4/5 days 3 hours 30% Indonesia 48-96 hours 100% Korea 48-72 hours 100% Malaysia 8-24 hours Sample basis Mexico 12-24 hours Sample basis Thailand 48-72 hours 100% Singapore 15-25 hours Sample basis < 5% Poland 7 days 24-48 hours 100% 165 Annex Table 4.15 Structure of Rural Local Government State Village Panchayats Block Level _ Dis.rict Level Andhra Pradesh 20244 1100 22 Arunachaf Pradesh 1158 79 12 Assam 2486 199 23 Bihar 11653 589 52 Goa 183 --- 2 Gujarat 13256 183 19 Haryana 5958 110 16 Himachal Pradesh 2921 72 12 Kamataka 5641 175 20 Kerala 990 152 14 Madhya Pradesh 30922 459 45 Maharashtra 26894 297 29 Manipur 166 9 3 Punjab 11591 136 14 Rajasthan 9185 237 31 Sikkim 148 --- 4 Tamil Nadu 12787 387 22 Tripura 525 16 3 Uttar Pradesh 58605 901 66 Union Territories 177 7 7 Note: Meghalaya, Mizoram and Nagaland are not covered by the 73rd Constitutional Amendment. Legislation in conformity with the 73rd Amendment has yet to be taken up in Delhi which, accordingly, has no Panchayats. Source: Mathur 1999 Annex Table 4.16 Decentralization to Local Government: A Report Card Performance Capaciiy Institution Building Policy Formulation * Largely unassessed * Inadequate e Limited autonomy * Incomplete functional and fiscal devolution a Wide inter-Stale differences Accountability * Unassessed except in * Negligible * Inadequate or absent externa selected cities (Box 1) accountability provisions Service delivery and Revenue * Poor where assessed a Very D Overlapping jurisdictions Collection * Some improvement in Inadequate . Limited involvement of civil society selected cities (Box 1) except in selected cities (Box 1) and States Annex Table 4.17 Expenditure and Revenue Decentralization and Financial Autonomy of Rural Local Bodies, 1996-97 State Local Govt to State Govt Local Govt to State Govt Own Local Revenue to Local Expenditure Expenditure Ratio (%) Revenue Ratio (%) Ratio % Punjab 13.1 5 8 52.0 Rajasthan 9.4 5.2 3.1 Source: Oommen (1998) quoted in Mathur (1999). 166 Annex Table 6.1 Capital Employed per Worker in Domestic Industries Corresponding with Principal Exports and Imports, 1994-95 I. Principal Exports Economic Survey Classification Corresponding ASI Classification CapitallEmployee (Rs. '000) Average capital/employee, Exports 132 Labor Intensive 1. Agricultural and allied products Food products 105 Beverages 38 2. Ores and Minerals (excl. coal) n.c. 3. Manufactured Goods 3.1. Textile fabrics and manufactures Textile Products 74 Wool and Silk Textiles 26 3.1.1. Cotton yarn, fabrics, made-ups Cotton Textiles 117 3.2. Coir yarn and manufactures n.c. 3.3 Jute manuf. incl. yarn Jute textiles 30 3.4 Leather and leather manufactures Leather and leather products 76 3.5 Handicrafts n.c. 3.5.1. Gems and Jewellery n. c. 3.6 Machinery, transport and metal manuf. Machinery other than transport 170 Transport equipment and parts 156 Metal products 137 Average Capifal/employee - laborintensive 93 Capital Intensive 1. Manufactured Products 1.1 Chemicals and allied products Chemicals and chemical products 526 2. Mineral Fuels and Lubricants (incl. coal) n.c. Average Capital/employee - capital intensive 526 It. Principal Imports Economic Survey Classification Corresponding ASI Classification CapitallEmployee (Rs. '000) Average capital/employee, Imports 362 Labor Intensive 1. Capital Goods 1.1 Transportequipment Transport Equipment and Parts 156 1.2 Manufactures of metals Metal products 137 1.3 Non-electrical machinery Machinery other than transport 170 1.4 Electrical machinery Machinery other than transport 170 Average Capital/employee - labor intensive 158 Capital Intensive 1. Food and live animals n.c. 2. Raw materials and intermediate manuf. 2.1. Cashewnuts n.c. 2.2. Crude rubber Rubber, petroleum and coal products 403 2.3. Fibres n.c. 2.4. Petroleum, oil and lubricants Rubber, petroleum and coal products 403 2.5. Animals and vegetable oils and fats n.c. 2.6. Fertilizer and chemical products Chemicals and chemical products 526 2.7. Pulp and waste paper n.c. 2.8. Paper, paper board and manufactures Paper and paper products 318 2.9. Non-metallic mineral manufactures Non-metallic mineral products 276 2.10 Iron and steel Basic metals and alloys 714 2.11 Non-ferrous metals Basic metals and alloys 714 Average Capital/employee - capital intensive 479 n.c . - not classified Notes: 1 . For the purpose of this exercise, labor intensive industries have been defined as those where Fixed Capital per Employee < Rs. 200, 000. 2. The classification of principal exports and im ports is from the Economic Survey 1 998-99; capital per employee figures are from the ASI for corresponding categories (ASI categories not included in the table above are electricity, other manufacturing industries, repair of capital goods, repair services, wood and wood products, water works, gas and steam, cold storage and non-conventional energy). 167 Annex Table 6.2 India and China: Selected Trade Indicators, 1987-96 1987 1991 1996 India China India China India China India China Structure of Exports (WDI) Manufactured Exports (% of Merchandise Exports) 66.42 58 25 72.04 75.72 73.55' 84 36 High-Technology Exports (% of Merchandise Exports) 6.22 12.38 9.23 '3.09 10.09' 2114 Total Exports (goods & services) in Sbn (WDI) 16.22 39.17 23.29 65.90 43.86 171.68 (1969, IFS) (2.03) (2.31) (1978, IFS) (6.67) (9.96) Trade(% of GDP) (1980, WDI) 16.62 12.90 15.19 27.09 19.15 29.59 27.09 39.88 Exportspercapita($perperson) (1980,WB) 16.41 12.92 20.27 33.63 26.87 53C9 44.15 141.17 Selected Exports Commodities, Share in World Exports in percent (UNCTAD) Total Exports 0.55 1.80 0.55 2.23 0.69 3.10 Fish and Preparations 1.69 3.02 1 71 3.47 2.55 6.49 Rice 8.42 6.03 7.58 3.75 13.77 1.72 Nuts, Coco, Brazil, Cashew 48.80 0.81 39.98 0.46 40 15 0.20 Coffee, Tea, Cocoa, Spices 4.75 2.57 4.23 2.79 3.52 2.04 Coffee 2.13 004 1.84 0.01 342 0.06 Tea 23.19 18.35 21.07 16.31 16.55 16.45 Spices 16.64 4 94 10.35 7.23 14 95 12.38 Iron Ore, etc., excl. Pyrtes 12.66 0.00 7.55 0.00 6.12 0.00 Iron and Steel 0.13 0.59 0.34 1 64 0.76 2.94 Manufactures 0.50 1.42 0.54 2 28 0.65 3.45 Chemicals 0.27 1.10 0.54 1.36 0 67 1.91 Leather, Dressed Fur etc. 7.11 0.90 4.77 1.41 2.82 3.80 Leatheretc. Manufactures 13.17 0.37 8.26 1.31 5 35 7 86 Textile Yam, Fabric etc. 2.10 7.77 2.22 7.60 3.12 8.29 Gold, Silverware, Jewellry 0.74 1.37 2.14 1.80 2.93 6.11 Basic Manufactures 1.28 2.38 1.24 2.81 157 3 79 Machines, Transport Equipment 0.10 0.46 0.11 1.15 0.14 168 Misc. Manufactured Goods 0.72 3.20 0.85 5.27 1.05 9.51 Clothing 2.13 7.19 2.49 11.12 301 16.39 Real Jewelry, Gold, Silver 0.85 1.52 2.44 1.51 3.08 5 89 Precious Metal Jewelry 0.99 1.09 2.84 115 3.41 5.66 Jewelry NES 0.03 7.26 0.09 6.20 0.10 20.29 Imitation Jewellry 0.23 0.65 0.22 3.78 1.22 8.61 Textile Fibres 0.57 8.41 0 74 5.59 1.98 2 97 Petroleum and Products 0.40 3.21 019 1.77 0.18 141 Iron and Steel Scrap 0.03 0.42 0 04 0.17 0.11 0 16 Goods not classified by kind 0.44 5.51 0.35 0.99 044 0.17 FDI Inflows (% of Gross Fixed Capital Formation) 0.30b 2.90 0.40' 7.40' 2.90 17.00 FDI Stock(% of GDP) 0.50d 1.50, 0.50' 4.80' 2.60 24.70 Data for 1995. bAnnual average, 1986-9 1. ' Data for 1992. dData for 1985. ' Data for 1990. Source: UNCTAD, Comtrade Database; Word Bank, Wornd Development indicators 1998; United Nauons, World Investrnent Report 1998. 168 Annex Table 6.3 Coverage Ratio for Non-Tariff Barriers on Indian Imports -Weighted Average 198 -89 1995-96 1997-98 1998-99 1999-00 Method 2 Method 1 Method 2 Method 1 Method 2 Method 1 Method 2 Method 1 Method 2 Average all sectors 95.21 56.80 65.51 62.20 64.03 60.85 62.16 23.25 24.24 Activity Based 1 Primary 99.96 64.12 74.79 76.06 76.22 73.17 74.95 56.58 57.41 2 Secondary 87.43 42.00 46.11 34.19 39.42 32.06 36.30 23.41 27.71 Industry Based 1 Food, beverages and tobacco 100.00 74.47 74.47 65.67 66.92 63.06 63.98 46.58 47.95 2 Textles and leather 100.00 47.06 56.02 48.33 54.88 47.44 53.37 39.30 45.07 3 Wood, cork and products 100.00 41.99 41.99 24.03 34.48 20.00 26.41 2.87 5.74 4 Paper and printing 100.00 39.01 42.27 25.82 30.90 22.03 26.93 17.76 22.54 5 Chemicals, petrol and coal 97.54 32.29 38.09 22.52 30.74 20.77 26.24 12.57 15.45 6 Non-metallic minerals 98.25 76.48 76.48 46.32 50.52 40.41 47.04 19.05 36.28 7 Basic metal industries 53.37 13.21 13.76 14.46 15.05 11.87 15.85 9.03 11.41 8 Metal products and machinery 80.11 37.93 40.70 29.73 34.55 27.93 31.57 21.17 25.03 9 Other Manufacturing 78.48 46.44 53.61 30.56 37.28 27.39 29.76 17.19 21.53 10 Agriculture 100.00 67.10 78.43 80.07 80.23 76.93 78.87 59.00 59.88 11 Mining 99.44 27.71 30.19 27.09 27.09 27.09 27.09 26.97 27.09 Use Based 1 Consumer Non-durables 100.00 63.98 74.69 74.71 75.65 73.51 74.07 55.33 56.19 2 Consumerdurables 84.34 52.75 58.20 40.18 46.77 37.26 41.56 27.03 32.80 3 Intermediate goods 98.45 44.78 47.24 39.21 42.02 37.69 39.71 28.00 33.53 4 Basic goods 70.34 25.17 28.65 19.28 22.72 17.63 23.23 11.56 16.09 5 Capital goods 74.12 22.77 23.97 16.93 20.29 15.97 18.26 12.16 13.81 Notes: 1. In Method 1, Special lmport License (SiLs) have been given a weight of 50 percent, and all other non-tariff barriers a weight of 100 percent. 2. In Method 2, all non-tariff barrers have been assigned an equal weight of 1i0 percent Source: National Council ofApplied Econoric Research (NCAER). Coverage Ratio for Non-Tariff Barriers on Indian Imports - Sim ple Average 1988-89 1995-96 1997-98 1998-99 1999-00 Method 2 Method 1 Method 2 Method I Method 2 Method 1 Method 2 Method 1 Method 2 Average all sectors 91.63 44.47 50.31 39.93 44.76 38.07 41.95 28.31 32.60 Activity Based 1 Prmary 99.79 44.63 54.32 49.52 51.19 49.07 51.00 41.64 44.07 2 Secondary 89.37 44.40 48.43 35.44 41.74 32.91 37.72 22.05 27.23 Industry Based 1 Food, beverages and tobacco 100.00 74.46 74.46 69.83 70.70 65.42 65.93 42.90 44.57 2 Textiles and leather 100.00 52.88 61.46 51.11 59.25 50.19 57.69 39.99 49.18 3 Wood, cork and products 100.00 55.81 55.81 33.54 50.84 26.64 37.04 5.42 10.85 4 Paper and printing 100.00 39.58 42.50 26.00 30.27 22.23 26.23 16.77 20.58 5 Chemicals, petrol and coal 95.54 35.33 42.77 22.71 33.71 20.04 26.13 11.27 14.55 6 Non-metallic minerals 98.81 76.35 47.03 48.94 38.27 42.47 29.80 11.16 15.33 7 Basic metal industries 53.74 16.13 16.55 17.07 17.52 15.73 20.86 7.79 9.23 8 Metal products and machinery 80.83 35.59 37.81 26.87 31.10 24.97 28.35 18.63 23.12 9 Other Manufacturing 78.49 45.39 51.64 35.13 42.58 34.51 39.26 19.80 26.48 10Agriculture 100.00 60.15 74.43 69.80 72.30 69.12 72.01 58.05 61.62 11 Mining 99.38 13.60 14.10 8.97 8.97 8.97 8.97 8.84 8.97 Use Based 1 Consumer Non-durables 100.00 58.60 68.05 60.23 64.91 58.19 62.51 45.27 49.59 2 Consumerdurables 88.20 45.29 56.19 39.09 47.50 36.99 43.18 26.68 34.19 3 Intermediate goods 96.84 38.45 35.67 28.87 29.24 26.48 24.08 14.35 18.50 4 Basic goods 79.44 30.52 34.88 20.22 24.39 19.63 25.88 11.41 15.31 5 Capital goods 75.19 26.52 28.28 19.27 22.39 18.33 20.60 13.61 16.17 Notes: 1. in Method 1, Special Import License (SILs) have been given a weight of 50 percent, and all other non-tariff barriers a weight of 100 percent 2. In Method 2, all non-tariff barriers have been assigned an equal weight of 600 percent. Source: NCAER. 169 Annex Table 6.4 India's Share in World Trade, REER, and Tariffs Year Merchandise Exports (US$ billion) Share in World Average Tariff ( % )2 REERb India World Merchandise Exports (%) 1990=o1o 1985 9.14 1872.00 0.488 - 60.27 1986 9.40 2046.40 0.459 - 70.90 1987 11.30 2401.40 0.470 - 75.82 1988 13.33 2742.00 0.486 - 83.88 1989 15.85 2981.50 0.531 - 92.09 1990 17.98 3395.30 0.529 127.7 102.33 1991 17.66 3489.10 0.506 127.6 124.30 1992 19.56 3730.20 0.524 94.0 139.85 1993 21.55 3877.30 0.556 71.0 139.09 1994 25.08 4260.00 0.589 55.0 135.65 1995 30.76 5122.90 0.601 40.8 142.13 1996 33.05 5352.30 0.618 38.6 138.39 1997 34.25 5534.90 0.619 34.4 130.54 1998 33.05 5450.00 0.606 40.2 138.13 Data forliscal year April-March. b Real Effectve Exchange Rate, based on IMF's Informaton Notice System (INS) methodology. Note: Tariffs before 1990 were in excess of 100%. The mean tariff for 1999-00 is 39.6 %. Source: World Bank Staff Eshmates; IMF, IFS Yearbook 1998 and IFS Bulletns February 19991April 1999. 170 Annex Table 6.5 Share in World Exports: India and Selected Countries, 1998 Value of Exports ($US billion) Share in World Exports (%) 1996 1997 1998 1996 1997 1998 World 5352.30 5534.90 5450.00 100.00 100.00 100.00 India 33.05 34.25 33.05 0.62 0.62 0.61 China, Mainland 151.20 182.88 183.59 2.82 3.30 3.37 China, Hong Kong 180.75 188.06 173.99 3.38 3.40 3.19 Brazil 47.75 52.99 51.12 0.89 0.96 0.94 Argentina 23.81 26.37 25.23 0.44 0,48 0.46 Korea 129.72 136.16 133.22 2.42 2.46 2.44 Malaysia 78.33 78.74 73.30 1.46 1.42 1.35 Pakistan 9.33 8.73 8.50 0.17 0.16 0.16 Tanzania 0.76 0.72 0.67 0.01 0.01 0.01 Turkey 23.22 26.25 25.94 0.43 0.47 0.48 Kenya 2.07 2.05 1.99 uS 625.07 688.70 682.50 11.68 12.44 12.52 Canada 201.63 214.42 214.33 3.77 3.87 3.93 Source: IMF, IFS, various issues. 171 Annex Table 6.6 India - Tanff Structure, 1990-99 (In Percent) < - - -Mean - -> < - -Imporit Vaghted Average- Sector '90-91 '92-93 '93-94 '94-95 '95-96 %97 '97-98 '98-99 '99-00 '99-91 '92-93 '93-94 '94-95 '95-96 '96-97 '97-90 %99 '99-00 Mole Economry 128 94 71 55 40.8 3806 34.4 40.2 39.6 87 64 47 33 27.2 24.6 25.4 29.7 30.2 (41) (34) (30) (25) (19) (19) (14.0) (15.3) (14.0) Agricutural Products 106 59 39 31 25.1 25.6 24.6 29.6 29.2 70 30 25 17 14.9 14.7 14 16.1 17.7 (48) (49) (39) (30) (24.9) (21.1) (17.7) (18.8) (16.6) Mining n.a n.a 71 48 30 24.8 24.4 29.4 26.6 n.a n.a. 33 31 27.6 22 21.9 19.5 17.7 (24) (25) (15.6) (11.9) (11.9) (12.3) (12.1) Consumergoods 142 92 76 59 45.4 45.4 39.8 45.9 42.9 164 144 33 48 43.1 39 33.8 39.3 32.4 (33) (42) (36) (33) (26) (27.1) (20.5) (20.7) (18.9) Intenrediategoods 133 104 77 59 43,7 38.8 34.7 40.7 41.2 117 55 40 31 25 21.9 26.1 31.5 31.9 (42) (25) (22) (17) (1a3) (13.2 (10.3) (11.1) (10.5) Capital goods 109 85 50 42 33.1 33.8 29.7 35.3 35.3 97 76 50 38 Z3.7 28.8 24.7 30.1 32.2 (32) (26) (24) (20) (124) (122) (9.4) (10.2) (8.Z n.a NotAvailable. Notes: 1. Standard deviations are in parentheses. In 1990-91 and 1992-93, nriing is inruded in intemrnediates. 2. The tota custons duty is calcuated as the srin of tie banic custons duty, a sndharge of 10%onbaic stonds duty, and The soPecat addiftiona duty. The specia addiforat duty is leved on tie vaLue ofiroirts as ed as tebasic duty vae, tie , srcharge value, ad the addif onal duty value. 3. Figurnesftcr 1997-98 iicLde the 3%spedi duty inosed in Septenber 1997. Source: Wod Bank StaffEst : thesrates are based on he 1997-98,1998&99,1999-2 DOeditons of te Easy eeanaren Cueston Tariff, Academy of Bunteens Studies. Mean Tariff Rates (%),1990-99 150 100 50 1990-91 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 II Agricultural Products Consumer goods + Whole Economy The Impact of the Four Percent Special Additional Duty, 1999-00 Sector Customs Duty (%) Total Customs Duty (%/6) Difference (Basic+Surcharge) (Basic+Surcharge+Special Additional) (Percentage points) Whole Economy 34 39.6 5.6 Agricultural Products 24.6 29.2 4.6 Mining 21.7 26.6 4.9 Manufacturing 34.7 40.4 5.7 Consumer goods 37.1 42.9 5.8 Intermediate goods 35.7 41.2 5.5 Capital goods 29.4 35.3 5.9 o. 0 ;3 Z a EF 1~S CO , Q C .0 S c if F5 o.o o o 0o - - - - - - - - - - - - ('C '1C ° 0 os m A. z o o- -o -o - - - - ooooooo- - __Xf T~~~~~ 22 01 55 = o aC4 ° o°o°o°oE E0°o 0 °o C nt ) os - - - - - - - e- -0 e e _03: D 2. EF o t> g ° t° oo °M-0 ° O 0 6 W@ 0 0, 92 0 a oo 0000 o-' 0e -' o o o o - C 00o 0o 0- o 6 0 ( 0 o 0 Oot o O O O O C _ 0 0 0 0 0 0 Q W_ono< A< oC 0 0 0 0 0 0 0-' 0o-i 0 0 - - . o, - oo=i n8o 00 O _ .0C-OZ D 0 _.0-0 >- 0 0O - 0 0 .0- J: N J °. °0a0 NC.0 _ 0- 0 0 0_ 0 0 0 , 0,, t Co 0 _0 _ ' _ _ _ _ _ _ _ o _ o0-. - -' _ o o 0 0 0 -'0 -A o0 0 o o- -o - - -' -' -' -' -. o o__ 0 0 0 0 0 000°CC 0 CA 400 0 -.4M ) a w° nS ~~~~~- 0 4 0 - 0 08 E0( o 0_So Sa E 173 Annex Table 6.8 Foreign Direct and Portfolio Investment (USS million) April - August 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 Direct Investment Foreign Direct Investment 129 315 586 1314 2144 2821 3557 2462 1265 993 Portfolio Investment 4 244 3567 3824 2748 3312 1828 -61 -489 1190 Foreign Institutional Investment 0 1 1665 1503 2009 1926 979 -390 -558 1108 Euro4ssues/GDR 0 240 1520 2082 683 1366 645 270 15 0 Others a 4 3 382 239 56 20 204 59 54 82 Total Direct and Portfolio Investment 133 559 4153 5138 4892 6133 5385 2401 776 2183 Memo: Foreign Currency Convertible Bonds (FCCB) b 0 0 914 34 - - - - - - Floabng Rate Notes (FRN) 0 0 0 167 - -- Includes NRI portfolio investments, offshore funds, and others. bFCCBs is treated as commercial borrowing before convension into equity. Source. Reserve Bank of India; Ministry of Finance, Economic Survey, 1996-97. 174 Annex Table 7.1 India: Structure of Selected Institutions of the Financial System End March 1998 No. of No. of Deposits Loans, Adv. Assets Assets Assets Institutions Offices (Rs.bill.) & Inv. (Rs.bill.) (Rs.bill) (% total) VI GDP) A. BANKING SYSTEM 1. Reserve Bank of India 1 - - - 2623.0 13.0 16.8 1.1 IssueDepartment - - 929.46V 1485.5 7.3 9.5 1.2 Banking Department - - 651.2 624.5 1137.5 5.6 7.3 2. Commercial Banks 301 64276 6662.3 6205.1 8252.9 40.8 52.8 2.1 Scheduled Comm. Banksb 300 64267 6662.3 6205.1 8252.9 40.8 52.8 2.1.1 Public Sector Banks 27 44958 5317.3 4870.1 6491.9 32.1 41.5 2.1.1.1 State Bank Group 8 13204 1736.0 1702.7 2327.5 11.5 14.9 2.1.1.2 Na6onalized Banks 19 31754 3581.3 3167.4 4164.4 20.6 26.6 2.1.2 Regional Rural Banks 196 14471 221.1 237.9 297.5 1.5 1.9 2.1.3 Prvate Sector Banks 34 4661 695.2 620.4 810.6 4.0 5.2 21.4 Foreign Banks 42 177 428.7 476.7 652.9 3.2 4.2 2.2 Non-Sched. Comm. Banks' 1 9 B. NON-BANK SYSTEM - - 3089.8 3654.0 18.1 23.4 1. Financial Insttutions 1.1 IDBI 1 - - 483.9 599.6 3.0 3.8 1.2 ICICI 1 - - 366.7 459.2 2.3 2.9 1.3 IFCI 1 - - 190.2 214.7 1.1 1.4 1.4 LIC & GIC 2 - - 1085.1 1292.6 6.4 8.3 1.5SFCs 18 - - 115.3 145.8 0.7 0.9 1.6 EXIM Bank 1 - - 45.2 52.3 0.3 0.3 1.7 UTI 1 - - 550.4 638.1 3.2 4.1 1.8 NABARD I - - 233.0 252.1 1.2 1.6 1.9 HDFOd 96A 99.3 0.5 0.6 2. Non-Banking Sector 13971 - 3571.5 2.1 Non-Fin.Companies 2376 - 2238.70 2.2 Fin. Companies (NBFCs) 10122 - 1166.40 2.3 Misc. and Residual 1473 - 166.50 - - - C. CAPITAL MARKET' 1 - - - 5603.3 27.7 35.8 Total: - - - - 20232.7 100.0 129.4 Excludes foreign securites. bDeposits, Loans etc. are based on Balance Sheetdata, No. of Offices are based on Quarteity Handout (Banking Stafstcs). Balance sheet data not available for End March 1998. dFigures from HDFC balance sheet as at March 31 5 1998. End March 1997. Stock Market Capitalisation, BSE (higher no. of secunibes, but lower trading volume than NSE, with a stock market cap. of Rs 4815bn at end March 1998). Source: Reserve Bank of India (R81); RBI, Report on Currency and Finance 1997-98; RBI, Report on Trends and Progress in Banking 1997-98. 175 Annex Table 7.2 Indicators of Indian Banking Policy 1968-1999: The Deposit Rate, Loan CeilingtMinimum Rate, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) in Selected Years Year Month Deposit Rate (1 year) Loan Ceiling Rateb Loan Minimum Rateb CRR SLR (end) (% p.a.) (% p a.) (% p.a.) (% of deposits) (% of deposits) 1968 Dec. n.a. 95C - 3.0 25.0' 1974 Dec. 8.0 d 12.5 4.0 32.0 1978 Dec. 6.0 15.0 12.5 6.0 34.0 1982 Dec. 8.0 19.5 9 7.0 35.0 1986 Dec. 8.5 17.5 - 9.0k 37.0 1990 Dec. 9.0 h 16.0h 15.0 38.5 1991 Dec. 12.0 - 19.0 15.0 38.5 1992 Dec. not exceeding 12.0 - 19.0 15.0 30.0 1993 Dec. not exceeding 10.0 - 17.0 14.0 25.0D 1994 Jun. not exceeding 10.0 - 14.0 14.5 25.0 Dec. not exceeding 10.0 - free' 15.0 25.0 1995 Jun. not exceeding 12.0 - free 15.0 25.0 Dec. not exceeding 12.0 - free 14.0 25.0 1996 Jun. not exceeding 12.0 - free 13.0 25.0 Dec. free- free 11.0 25.0 1997 Jun. free - free 10.0 25.0 Dec. free - free 10.0 25.0 1998 Jun. free - free 10.0 25.0 Dec. free - free 11.0 25.0 1999 Jun. free - free 10.0 25.0 Dec. free - free 9.0 25.0 n,a. Not available. a Freed from July 1996. Key lending rates as prescribed by RBI for all commercial banks including SBI. Ceiling on the lending rates of the Indian scheduled banks with DTL (Demand and Time Liabilities) of Rs. 50 cr. and all the foreign scheduled banks was introduced with effect from September 25, 1964, d Effec6ive January 21, 1970, the ceiling on the lending rates was withdrawn. ' Ceiling on the lending rateswas re-introducedw.e.f. March 15,1976 -16.5%, inclusiveof the7%tax on interestincome of banks, forbanks with DTL of over Rs. 50 cr., one percentage point higher for banks with DTL between Rs. 25 cr. and Rs. 50 cr., and no ceiling on banks with DTL of less than Rs. 25 cr. Effective March 1, 1978, with aboli6on of the 7% tax, the maximum lending rate chargeable by banks was reduced to 15% for banks with DTL of over Rs. 25 cr and 16% for those with DTL of less than Rs. 25 cr. Includes the 7% tax on interest income of banks (re-introduced in 1980); effect ve March 2, 1981, a uniform maximum lending rate for all banks irrespective of their size was fixed. General minimum lending rate was abolished from March 2, 1981; wherever ceiling rates are prescribed, the rate for the preceding advance is treated as floor rate for that category. Effecfive October 1988 ceiling rate abolished and minimum rate imposed. Freed from October 1994. Incremental CRR of 10 per cent on increase in Net Demand and Time Liabilities (NDTL) over the level as on January 14, 1977; withdrawn with effect from October 31, 1980. k Incremental CRR of 10 per cent of NDTL over the level of November 11, 1983; withdrawn in July 1, 1989. Incremental CRR of 10 per cent of NDTL over the level of May 3, 1991; discontinued with effect from April 17, 1992. Legal minimum. Source: RBI, Report on Currency and Finance, various issues; RBI, RBI Annual Report, various issues. 176 Annex Table 7.3 Scheduled Commercial Banks Investments and Other Assets (End Fiscal Year) (Rupees Billion) 1995-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Selected Assets 1036.3 1225.1 1407.5 1684.8 1963.8 2226.1 2599.0 2995.1 3584.1 4380.9 5041.9 5614.1 6614.2 7216.5 Balances vith RBI 110.5 143.8 176.6 213.8 234.6 238.6 341.8 285.4 477.6 600.3 506.7 498.5 577.0 635.5 SLR eligible lnvestments 305.5 385.8 465.0 548.6 643.7 750.7 902.0 1056.6 1325.2 1492.5 1647.8 1905.1 2187.1 2541.2 Govemnmentsecunites 190.5 248.5 305.2 358.2 422.9 500.0 627.3 759.5 1012.0 1176.9 1322.3 1588.9 1869.6 2227.4 Otherappmved securities 115.1 137.4 159.9 188.5 220.8 250.7 274.7 297.1 313.2 315.7 325.6 316.2 317.5 313.7 Other assets 59.5 62.4 60.5 77.2 70.9 73.9 99.4 133.4 137.1 172.5 196.8 232.4 278.5 379.8 Otherlnvestnnents - - - - - - - - 150.4 194.1 330.8 - Bankcredit 560.7 633.1 705.4 847.2 1014.5 1163.0 1255.9 1519.8 1644.2 2115.6 2540.2 2784.0 3240.8 3660.0 Total Uabilities 979.8 1163.9 1337.1 1601.6 1882.4 2155.7 2523.7 2993.3 3507.1 4356.7 4a54.7 5625.4 6791.3 8191.5 Liabilities to others 920.3 1099.8 1269.4 1506.7 1799.9 2056.0 2447.6 2865.6 3376.1 4129.3 4629.7 5407.9 6464.4 7716.8 Labilitiesto the banking systerm 50.0 51.2 50.2 59.8 58.5 64.9 70.3 111.5 112.8 153.3 176.5 211.9 322.9 445.7 BorrovvingsfromnRBI 9.5 12.9 17.5 35.3 24.0 34.9 5.8 16.2 18.1 74.2 48.5 5.6 4.0 28.9 % of Total Liabilities Balances vith RBI and SLR eligible investnents 42.5 45.5 48.0 47.5 46.7 45.9 49.3 44.8 51.4 48.0 44.4 42.7 40.7 38.8 Other Investnents - - - - - - - - - 3.1 3.5 4.9 Bank Credit 57.2 54.4 52.8 52.9 53.9 53.9 49.8 50.8 46.9 48.6 52.3 49.5 47.7 44.7 Memo: 7otal assets - - - - - - - - 4351.0 5148.9 5991.5 6729.8 7954.1 9509.0 - Not Available. Sourwe: RBI, Reporton Currency and Finance, various issues; RBI, Repolt on Trend and Progress of3anking in India, various Issues. 177 Annex Table 7.4 Bank Resources to Small versus Medium and Large Industries (Rupees Billion) Oustanding as on Mar.93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar.99 1.Gross Bank Credit 1471.4 1568.6 1969.9 2318.6 2589.9 3002.8 3420.1 2.Creditto Industry (metium and large) 586.4 578.7 746.7 930.5 1026.0 1175.3 1305.2 3.1nvestments in bonds etc. 0.0 0.0 0.0 149.9 194.1 330.8 469.2 4.Resources to industry (medium and large)(2+3) 586.4 578.7 746.7 1080.4 1220.2 1506.1 1774.3 5.Creditto SSI 200.3 226.2 276.4 318.8 359.4 436.0 484.8 6. Investment in Gov. secunties 71.5 230.8 283.5 348.0 472.0 574.9 669.0 in excess of SLR requirements Ratios (%): i) Credit to Industry (medium and large)l 39.9 36.9 37.9 40.1 39.6 39.1 38.2 Gross Bank Credit ii) Resources to Industry(medium and 39.9 36.9 37.9 43.8 43.8 45.2 45.6 large) I (Gross Bank Credit+ Investments in bonds etc.) iii) Creditto SSI / Gross Bank Credit 13.6 14.4 14.0 13.8 13.9 14.5 14.2 iv) Credit to SSI / Resources to Industry 34.2 39.1 37.0 29.5 29.5 28.9 27.3 (medium and large) v) Inv. in Govt securities in excess of 4.9 14.7 14.4 15.0 18.2 19.1 19.6 SLR requirements/ Gross Bank Credit vi) (Resources to Industry [medium 328.5 357.9 372.8 448.0 470.8 477.3 504.0 and large] + Inv in Govt. securbes in excess of SLR) / Credit to SSI vii) Credit/Deposit ratio 56.6 52.2 54.7 58.6 55.1 53.5 51.7 Memo (%): Actual Investment*l Deposit Rabio 39.3 42.1 38.6 38.0 37.7 36.1 35.7 SLR (effectve) 35.6 32.5 29.3 28.0 26.5 25.0 25.0 Investments in Govemment and approved securities Source: RBI, Report on Currency and Finance, various issues. 178 Annex Table 8.1 Domestic Demand, 1981-97 (Percent of GDPmp at 1993194 Prices) 1981-91' 1990-91 1991.92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Total Consumpton Expenditure 78.3 (4.8) 76.0 (3.7) 76.7 (1.4) 75.7 (3.9) 75.7 (4.9) 75.1 (7.2) 75.0 (7.6) 75.1 (7.5) 76.17 (6.4) GovemmentFinalConsumpton 11.1 (7.2) 11.2 (3.3) 11.0 (-0.6) 10.8 (3.3) 11.0 (6.4) 11.0 (7.7) 11,7 (15.1) 12.1 (11.3) 13.77 (19.4) Private Final Consumption (CSO) 67.2 (4.5) 64.8 (3.8) 65.7 (1.8) 64.8 (4.0) 64.7 (4.7) 64.2 (7.1) 63.3 (6.6) 63.0 (6.8) 62.40 (3.9) Gross Capital Formaton 23.2 (5.9) 24.1 (12.2) 21.4 (-11.0) 22.8 (12.4) 20.8 (4.5) 23.1 (19.9) 25.5 (19.6) 23.5 (-1.3) 24.10 (7.7) Gross Fixed Capital Formaton 21.1 (6.8) 21.5 (9.9) 20.5 (4.0) 20.8 (7.0) 20.9 (5.5) 21.6 (11.3) 23.8 (18.9) 23.6 (6.3) 23.60 (5.2) Public Sector 10.0 (4.3) 2.6 (4.6) 2.7 (2.0) 2.3 (-7.2) 7.8 (252.6) 8.6 (16.5) 7.5 (-6.4) 6.5 (4.0) 6.77 (8.6) Private Sector 3.8 (7.7) 3.9 (13.6) 3.5 (-3.1) 3.9 (17.5) 13.1 (247.9) 13.0 (7.0) 16.3 (35.6) 17.0 (12.0) 16.83 (3.9) Change in Stocks 2.1 2.7 0.9 2.0 -0.2 1.5 1.8 (29.0) -0.1 0.50 Domestic Demand 101.5 (5.1) 100.1 (5.7) 98.1 (-1.6) 98.5 (5.8) 96.4 2.76 98.2 (9.9) 100.5 (10.6) 98.6 (5.2) 100.27 (6.7) Memo: Gross Domestic Savings 20.5 22.0 21.6 21.6 19.5 20.4 22.4 19.6 20.0 Public Savings 2.7 0.9 1.8 1.4 0.5 1.5 1.9 1.5 1.0 Household Financial 7.6 18.0 16.9 18.1 10.8 11.6 8.2 9.8 10.3 Private Corporate Sector 2.1 2.6 3.0 2.6 3.4 3.4 4.8 4.1 3.8 Average of 1981-82 throurgh 1991-92. Note: Real growth rate in parentheses. Source: Central Statstical Organizabon, Nabonal Accounts Statstcs 1998 and Quick Estmates 1999. 179 Annex Table 8.2 Key Interest Rates, 1994.99 Call Money Treasury Bills 2 YTM (%) of Govt- Prime Maximum IDBI Bank Exchange 6-month Inflation Rate 364-day 91-day Dated Securites Lending Term Deposit Rate7 Ratea Rate Forward (Mumbai) (10 yr. Maturity)3 Rate4 Rate' (Rs.1$)' Premia'° 1994-95 June 6.7 10.0 8.8 - 15.00 10.0 14.5 12.0 31.4 - 11.8 September 15.3 9.4 9.1 15.00 10.0 14.5 12.0 31.4 - 8.9 December 9.7 9.8 10.3 - 14.00 10.0 13.5 12.0 31.4 - 11.2 March 13.7 11.9 12.0 - 15.00 11.0 15.0 12.0 31.7 - 10.6 1995-96 June 14.4 12.6 12.6 - 15.50 12.0 15.5 12.0 31.4 - 9.1 September 12.1 12.9 12.7 - 15.50 12.0 15.5 12.0 33.3 - 8.9 December 16.8 13.0 13.0 - 18.50 12.0 16.0 12.0 35.0 - 6.4 March 16.3 13.1 13.0 16.50 12.0' 16.0 12.0 34.4 22.7 5.1 1996-97 June 10.9 13.0 12.4 - 16.50 12.0 16.0 12.0 35.0 10.7 4.5 September 8.4 126 10.2 - 15.50-16.50 120 17.0 12.0 35.7 8.7 6.5 December 8.1 10.3 8.2 - 14.50-15.00 11.0 16.5 12.0 35.8 7.6 7.5 March 3.7 10.1 8.0 - 14.50-15.00 10.0 16.5 12.0 35.9 6.7 7.1 1997-98 June 5.2 9.0 7.0 12.6 13.50-14.50 8.0 15.0 10.0 35.8 3.6 5.7 September 6.7 8.5 6.9 11.9 13.50 8.0 14.5 10.0 36.4 6.0 3.8 December 8.2 8.0 7.2 11.2 12.50-13.00 Free 13.5 9.0 39.2 8.0 4.5 March 8.8 8.0 7.3 12.1 14.00 Free 14.5 10.5 39.5 7.1 5.0 1998.99 June - 8.0 7.3 12.1 12.75-13.00 Fnee 14.0 9.0 42.2 9.7 7.5 September - 9.6 10.0 12.3 12.75-13.00 Free 14.0 9.0 42.5 7.4 8.5 December - 10.5 9.8 12.2 12.75-13.00 Free 14.0 9.0 42.6 7.1 6.3 March - 10.1 8.7 12.0 12.00-13.00 Fnee 13.5 8.0 42.4 6.6 5.0 1999-00 June - 10.3 9.2 - 12.00 Free 13.5 8.0 43.1 5.3 3.1 September - 10.3 9.5 - 12.00-12.50 Free 13.5 8.0 43.5 5.6 2.5 October - 10.3 9.5 - 12.00-12.50 Free 13.5 8.0 43.5 5.2 2.6 = Not available. Call money rate of major commercial banks, average for the month. 2 Implicityield aticut-off price (for the last aucton in the month). 364-day Treasury Bills were introduced in Apil 1992, and are sold through penodic auctons. Since January 1993, 91-day Treasury Bils are being periodically auctioned. Earierthey weresold on tap at 4.6%. 182 day treasury bills were reintroduced in the credit policy of April 29, 1998. Penod averages prevailing in the secondary market 4Relates to5major public sector banks. Since October 18,1994, lending rates of scheduled commercial banks were freed for credit limits ofover Rs. 200,000; at 13.5% per an and upto Rs. 200,000; and at 12% credi limits upto Rs. 25,000. Interest rates on domestic term deposits with a maturty of 30 days and upto one year are prescribed at' not exceeding Bank Rate minus 2 perecentage points per annum'. Effective October 22,1997, banks are free to fix their own interest rates on domesfic term deposits of 30 days and over. Minimum perod of maturty for term deposits was reduced from 30 days to 15 days in the credit policy of Aprl 29, 1998. The deposit rate for March 1996 is the ceiling rate for maturity of 46 days and up to 2 years. Effective July 2,1996, banks were free to determine term deposit rates for maturty penod above one year. The rate for March 1997 is the ceiling rate for maturty of 30 days and up to one year. Medium-term lending rate. The bank rate was reduced to 11% in Aprl 1997 and 10 percent in June 1997. The rate was further brought down to 9%/. in the busy season credit policy of October 1997. On January 16,1998, the bank rate was increased byasharp 200 basis points to 11%. The bank rate was reduced to 10.5% on March 18, and to 9%on Aprl 29, 1998. Perod average rate as given in the Intematonal Financial Sleetics (IFS). 'e Relates to the U.S. $ (% per annum). Wholesale price index, annual increase, point-io-point. Note: Unless otherarse specified, interest ratestyields are those prevailing at the end of the month. Source: RBI, R81 Monthly Bulletin, various issues; RBI, RBI Weekly Bulletin; RBI, RBI Annual Report; IMF, IFS. 180 Annex Table 8.3 Sources of Change in Base Money, 1988-89 to 1997-98 (Rupees Billion) '88-89 '89-90 '90-91 '91-92 '92-93 '93-94 '94-96 '996 '96-97 '97-98 '98-99 Changein BaseMoney 95 146 102 117 113 279 306 252 55 264 328 Sources of Change: RBI Claims 113 153 177 12 82 -33 102 286 -127 130 143 Net Foreign Exchange Assets, adj.a 6 10 46 39 2 3 61 42 105 95 Currency 1 1 1 1 1 2 4 1 4 4 4 Net Non-Monetary Liabilities adj.a -13 -86 59 -9 308 197 -97 136 25 86 Memo: MoneyBaseatYear-end. 630 776 878 995 1108 1387 1693 1945 2000 2264 2592 a Adjustment refers to adjustment of the change in net foreign exchange assets by removing the impact of the change in the value of the Rupee against foreign currendes. Specifically, the increase in the net foreign exchange assets were computed by multiplying the difference in the stock of net foreign exchange assets (RBI), by the exchange rate at the end of the first year. The difference between this figure and the RBI's figure for the change in net foreign exchange assets was added to the RBI's figure for the change in NNML. Source: RBI; World Bank estimates. 181 Annex Table 8A Imports: Customs and Non-Customs, 1996-9711998-99 Customs (DGCI&S) Non-Customs b Total Imports' Total Oil, Gold & Silver' Non-oil, non-gold $US bn Growth $US bn Growth $US bn Growth $US bn Growth $US bn Growth $US bn Growth (%) (%) (%) (%) (%) (%) 1996-97 Aprl-June 9.3 - 2.3 - - - - - 3.2 - 12.5 July-Sep. 8.9 - 2.1 - - - - - 2.8 - 11.7 Oct.-Dec. 9.9 - 2.6 - - - - - 2.2 - 12.1 Jan.-March 11.0 - 2.6 - - - - - 1.7 - 12.7 Apr-March 39.1 - 10.0 - 1.0 - 28.1 - 9.8 - 48.9 1997-98 April-June 10.0 7.7 2.1 -10.5 0.2 - 7.7 - 2.8 -11.4 12.8 6.7 July-Sep. 9.8 9.9 1.9 -11.7 0.2 - 7.7 - 1.9 -31.9 11.7 3.7 Oct.-Dec. 10.6 7.1 2.1 -19.5 0.7 - 7.8 - 2.7 20.1 13.3 10.6 Jan.-March 11.0 0.0 1.6 -37.6 1.5 - 7.9 - 2.4 44.9 13.4 6.6 Apr-March 41.5 6.0 8.2 -18.4 3.2* - 30.2 - 9.7 -1.2 51.2 6.9 1998-99 Aprl-June 10.5 5.1 1.3 -35.9 1.4 604.5 7.8 0.7 2.0 -27.6 12.5 -2.2 July-Sep. 10.9 11.5 1.6 -14.3 1.1 336.7 8.2 7.3 1.2 -35.9 12.1 1.9 Oct.-Dec. 10.3 -3.0 1.5 -27.6 1.3 90.9 7.5 .4.4 1.4 -48.8 11.7 -13.6 Jan.-March 10.1 -8.0 1.5 -10.3 1.0 -30.9 7.6 -3.1 1.1 -54.6 11.2 -16.3 Apr-March 41.9 0.9 6.4 *21.2 4.9 54.6 30.5 1.2 5.7 -41.4 47.5 -7.1 ; In addition, $2.7 billion worth of gold and silverwas imported through the baggage route. The quarterly hgures do not add up to the annual figures owing to the differences in the exchange rate used for the purpose of conversion, and a lag between the revision of quarterly and annual data as reported by the RBI. b Difference between Total imports and Customs (DGCI&S). I Merchandise imports Source: DGCI&S; RBI, RBI Monthly Bulletn, March 1999. 182 Annex Table 8.5 Central Government Finances, 1990-00 (Percent of GDP) 90.91 91-92 92.93 93-94 94-95 95-96 96-97 97-98 98-99 98-99 99-00 R.E. Actuals' B.E. A. Revenue 9.5 9.9 9.7 8.6 8.8 9.0 9.0 8.6 87 8.3 9.0 Tax Revenue (Gross) 9.9 10.1 9.8 8.6 8.9 9.1 9.1 8.9 8.2 8.0 8.7 Corporation Tax 0.9 1.2 1.2 1.1 1.3 1.4 1.3 1.3 1.5 1.4 1.5 Income Tax 0.9 1.0 1.0 1.0 1.2 1.3 1.3 1.3 1.2 1.1 1.3 of which: VDIS - - - - - - - 0.6 - - - Excise Duties 4.2 4.2 4.0 3.6 3.6 3.3 3.2 3.1 2.9 2.9 3.2 Customs 3.6 3.3 3.1 2.5 2.6 2.9 3.0 2.6 2.4 2.3 2.5 Other 0.3 0.4 0.4 0.3 0.2 0.3 0.3 0.7 0.2 0.2 0.2 Less: States' Share 2.5 2.6 2.7 2.5 2.4 2.4 2.5 2.8 2.2 2.2 2.2 Tax Revenue (Net) 7.4 7.5 7.1 6.1 6.5 6.7 6.6 6.1 6.1 5.8 6.5 Non-tax Revenue 2.1 2.4 2.6 2.5 2.3 2.3 2.3 2.4 2.7 2.5 2.5 (Interest Receipts) 1.5 1.6 1.6 1.7 1.5 1.5 1.6 1 6 1.7 1.5 1.6 B. Revenue Expenditure 12.7 12.3 12.1 12.3 11.8 11.5 11.3 11.5 12.1 12.0 11.7 Interest Payments 3.7 4.0 4.1 4.2 4.2 4.1 4.2 4.2 4.3 4.4 4.4 Subsidies 2.1 1.8 1.6 1.5 1.2 1.1 1.1 1.2 1.4 1.2 1.2 Food 0.4 0.4 0.4 0.6 0.5 0.4 0.4 0.5 0.5 0.5 0.4 Fertilizer 0.8 0.8 0.8 0.5 0.6 0.6 0.4 0.5 0.4 0.4 0.4 Others 0.9 0.6 0.4 0.3 0.2 0.1 0.3 0.3 0.5 0.3 0.3 Defense 1.9 1.7 1.6 1.7 1.6 1.5 1.5 1.7 1.7 1.7 1.7 Grants to States 2.3 2.4 2.3 2.4 1.9 1.7 1.6 1.9 1.4 1.4 1.5 Other 2.7 2.5 2.6 2.5 2.8 3.0 2.8 2.5 3.3 3.3 3.0 C. Capital Expenditure 2.1 1.7 1.8 1.5 1.4 1.1 0.9 1.0 0.9 0.9 1.1 Of which: Social Services 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.1 0.1 Economic Services 0.8 0.9 0.6 0.6 0.6 0.4 0.3 0.4 0.4 0.4 0.5 D. Gross Loans 3.6 2.8 2.3 2.5 2.3 2.0 2.1 2.3 2 6 2.5 2.5 Of which: to States and UTs 2.5 2.0 1.7 1.7 1.8 2.0 2.1 1.9 2.3 2.2 2.1 E. Recovery of Loans 1.0 0.9 0.8 0.7 0.6 0.5 0.5 0.5 0.6 0.6 0.5 F. Net Lending (D-E) 2.4 1.8 1.3 1.6 1.7 1.5 1.5 1.7 2.0 2.0 1.9 G. Disinvestment in PEs 0.0 0.5 0.3 0.0 0.5 0.0 0.0 0.1 0.5 0.3 0.5 H. Gross Fiscal Deficit (B+C+F-A.G)-GOI old def. 7.7 5.5 5.3 6.9 5.6 5.0 4.7 5.7 5.7 6.2 5.2 I. Gross Fiscal Deficit (H-K)-GOI new def. 6.5 4.6 4.7 6.3 4.7 4.2 4.0 4.7 4 4 4.9 4.0 J. Gross Fiscal Deficit (H+G)- WB def. 7.7 5.9 5.5 6.9 6.1 5.1 4.8 5.7 5.2 6.5 5.7 Memo: Net Small Savings (K+L) 1.6 1.0 0.7 1.0 1.6 1.0 1.1 1.6 1.6 1.6 1.6 K. States share 1.2 0.8 0.6 0.6 0.9 0.8 0.8 1.0 1.3 1.3 1.2 L. Center's Share 0.4 0.2 0.2 0.5 0.7 0.2 0.3 0.6 0.3 0.3 0.4 M. Revenue Deficit (B-A+G) 3.2 2.9 2.7 3.7 3.5 2.5 2.3 3.0 3.8 4.0 3.2 * The figures are provisional actuals (adjusted for actual tax retums and expenditures). Components on taxes and expenditures are estimated. Note: B.E. = Budget Estimates; R.E. = Revised Estimates; VDIS = Voluntary Disclosure of Income Scheme ; GOI = Govemment of ondia WB = World Bank. Source: Govemment of India, Budget Documents; Staff estimates. 183 Annex Table 8.6 Evolution of the Public Sector Deficite, 1990-99 (Percent of GDP) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998.992 1999-00 B.E. Central Govemment Fiscal Deficit 7.7 5.9 5.5 6.9 6.1 5.1 4.8 5.7 6.5 5.7 Primary Deficit4 4.0 1.9 1.5 2.7 1.9 1.0 0.5 1.5 2.2 1.3 Revenue Deficite 3.2 2.9 2.7 3.7 3.5 2.5 2.3 3.0 4.0 3.2 State Government Fiscal Deficit 3.1 2.7 2.7 2.4 2.6 2.5 2.7 2.9 4.2 4.0 Prmary Deficit 1.6 1.1 1.0 0.6 0.7 0.7 0.8 1.2 2.4 2.2 Revenue Deficit 0.8 0.7 0.7 0.5 0.6 0.6 1.1 1.0 2.2 2.2 General Govemment Fiscal Deficits 9.0 7.2 7.2 8.1 7.3 6.4 6.2 7.1 9.0 8.0 Pnmary Deficit 4.7 2.5 2.4 3.2 2.3 1.5 1.2 2.3 4.0 2.9 Revenue Deficit 4.0 3.6 3.4 4.2 4.1 3.1 3.4 4.0 6.2 5.4 Non-financial Public Sector Fiscal Deficit7 10.9 9.2 9.1 10.2 8.8 7.9 8.4 8.0 9.6 9.2 As defined by the Worid Bank, unless otherwise specified. 2 Provisional actuals (adjusted for actual tax revenue and expenditure) for Center and Revised esutmates for the States, 3Govemment of India definition of Fiscal Deficit excluding disinvestment revenues. 4Foscal deficit minus interest payments. 5Exdudes disinvestment proceeds from revenues. 3General Govemment Fiscal Deficit = Central Fiscal deficit (excluding disinvestment revenues), State Govemment Deficit, and excludes net lending trom the Center to States. Non-financial Public Sector Deficit includes General Govemment Deficit, oil pool balance end market-financed central public enterprise deficit (on-lending from Central Govemment to central public enterprses is netted out). Source: Govemment of India, Budget Documents; RBI, Annual Report and Supplement to RBI Bulletn on finances of the state govemments, vanous issues; Staff estimates. 184 Annex Table 8.7 Central Government Salary Bill and Establishment Strength : 1990-1997 (Rs. Billion at Current Prices) 1990-91 1991-92 1992.93 1993-94 1994-95 1995-96 1996-97 1997-98 A. Civil Salary and Allowances (as in the Budget) 107.43 114.68 134.62 152.09 165.48 187.84 198.42 266.88 Railway Salaries andAllowances 48.62 54.86 59.17 73.37 79.85 87.51 81.33 108.62 Post and Telecommunicatons 19.48 21.91 24.35 27.91 30.77 36.48 42.06 48.27 B. Civil Salary and Allowances (excl. Railways and P&T) 39.33 37.91 50.56 50.81 54.86 63.85 75.03 109.99 C. Defence Salary and Allowances 37.85 40.09 45.89 50.62 55.80 63.38 71.59 98.10 Total Salary Bill (A+C) 145.28 154.77 180.51 202.71 221.28 251.22 270.01 364.98 Pensions 5.00 5.52 6.85 8.12 9.34 11.09 14.25 19.50 Memo: %GOP Civil Salary and Allowances (as in the Budget) 1.9 1.7 1.8 1.7 1.6 1.5 1.4 1.7 Civil Salary and Allowances (excl. Railways and P&T) 0.7 0.6 0.7 0.6 0.5 0.5 0.5 0.7 Defence Salary and Allowances 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.6 Total Salary Bill 2.5 2.3 2.4 2.3 2.1 2.1 1.9 2.3 Pensions 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Establishment Strength ( in Millions, as on March 1) 4.1 4.1 4.1 4.0 3.8 3.8 3.8 3.9 Note: P&T = Postal and Telegraph. Source: Govemment ot India, Budget Documents. 185 Annex Table 8.8 State Government Finances (% GDP*) 1980-81 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 R.E. B.E. Revenuereceipts 11.1 11.6 12.2 11.9 12.0 11.8 11.3 10.8 11.7 10.8 Tax revenue 7.1 7.7 7.9 7.9 7.8 7.8 7.6 8.9 8.2 7.7 State own taxes 4.5 5.2 5.4 5.2 5.3 5.4 5.2 5.0 5.6 5.6 State share in central taxes 2.6 2.5 2.6 2.7 2.5 2.4 2.4 2.5 2.6 2.2 Non-tax revenue 4.0 3.9 4.3 4.0 4.2 4.0 3.6 3.3 3.5 3.1 Of which: Grants from centre 1.8 2.3 2.4 2.3 2.4 1.9 1.7 1.6 1.9 1.5 Revenueexpenditure[A+B+Cl 10.1 12.4 12.9 12.6 12.5 12.4 11.9 12.0 12.6 12.7 A. Developmental (1+2) 7.1 8.4 8.8 8.3 8.1 7.6 7.3 7.5 7.7 7.1 1. Social services 4.0 4.8 4.7 4.5 4.4 4.3 4.4 4.3 4.7 4.4 2. Economic services 3.1 3.6 4.1 38 3.6 3.3 2.9 3.3 3.1 2.7 8. Non-developmental 2.8 3.8 4.0 4.1 4.3 4.7 4.4 4.3 4.6 5.4 Of which: Interestpayments 1.0 1.5 1.6 1.7 1.8 1.9 1.8 1.8 2.0 2.0 To centre 0.6 0.9 1.0 1.0 1.1 1.1 1.1 1.1 1.2 1.2 To others 0.4 0.6 0.7 0.7 0.7 0.8 0.7 0.7 0.8 0.8 C.Transfertolocalbodies 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.2 Netcurrentbalance 1.0 -0.8 -0.7 -0.7 -0.5 -0.6 -0.6 -1,1 -0.9 -1.9 Capitalexpenditue[A+1B+Cl 3.5 2.3 2.0 2.1 1.9 2.0 1.9 1.5 2.0 1.9 A. Developmental (1+2) 2.1 1.5 1.5 1.4 1.4 1.6 1.5 1.2 1.5 1.3 1. Social services 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 2. Economic services 1 9 1.3 1.2 1.1 1.2 1.4 1.2 1.0 1.2 1.1 B. Non-developmental 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 C. Loans and advances (net) 1.4 0.7 0.5 0.7 0.5 0.3 0.4 0.3 0.5 0.5 Gross fiscal deficit 2.6 3.1 2.7 2.7 2.4 2.6 2.5 2.7 2.9 3.8 Financed by instrument: Market loans 0.2 0.4 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.5 Loans from centre (Net) 0.8 1.7 1.4 1.1 1.1 1.3 1.1 1.2 1.4 1.8 Small savings & Provident funds 0.2 0.5 0.4 0.5 0.5 0.5 0.4 0.4 0.5 0.6 Other 1.3 0.4 0.4 0.6 0.3 0.4 0.5 0.6 0.5 0.9 Memo: Primary Deficit 1.5 1.6 1.1 1.0 0.6 0.7 0.7 0.8 0.9 1.8 Total Debt Outstanding 17.6 20.6 20.5 20.2 19.8 17.8 17.4 17.2 18.2 18.6 Net Transfer to States as a Percent of GDP % GDP 9 5 7- 6 5 4 2 0 | g Ta Share Transfers jj Grants to States u Net Loans to States Refers to the revised GDP series with 1993-94 as the base. The figures prior to 1993-94 have been rebased using a linking factor. Note: RE. = Revised Estimate; B.E. = Budget Estimate. Source: RBI, Report on Currency and Finance and RBI Bulletin, vanous issues; Worid Bank staff estimates. 186 Annex Table 8.9 India: Finances of Central Public Enterprises (Rupees Billion) 1990191 1991192 1992193 1993194 1994195 1995196 1996197 1997198 1998199 1999-00 RE BE Net Internal Resources (NIR) 107.2 120.1 161.3 188.5 241.5 290.8 252.5 279.7 335.1 386.1 of which: Petroleum 27.2 26.3 54.8 45.5 76.6 91.4 56.5 57.4 101.8 107.6 Telecommunicabons 24.9 26.6 31.8 42.5 53.0 78.3 78.3 101.2 126.6 145.9 Railways 21.6 21.3 28.1 43.4 42.4 44.2 44.0 34.2 34.8 41.6 Chemicals and Fertilisers 4.1 3.1 5.3 7.5 7.8 18.2 16.4 19.8 15.3 13.6 Power 3.5 6.1 2.6 5.6 10.4 11.1 7.9 7.0 6.3 12.0 Plan Expenditure 280.5 294.2 366.6 438.9 485.9 521.8 542.5 549.6 578.0 681.6 of which: Petroleum 42.7 41.4 84.6 110.9 109.5 117.5 114.0 115.6 123.8 121.2 Telecommunications 31.1 36.5 50.7 64.7 75.4 98.3 100.8 111.4 134.9 167.9 Overall Balance -173.3 -174.1 -205.3 -250.4 -244.3 -231.0 -290.0 -269.9 -242.8 -295.5 Financing: 173.3 174.1 205.3 250.4 244.3 231.0 290.0 269.9 242.8 295.5 Extemal (net) 25.5 18.5 37.5 41.4 49.8 41.9 91.8 42.8 43.7 54.5 Domestic 147.8 155.6 167.9 209.0 194.6 189.1 198.2 227.1 199.1 241.0 Budget support 76.0 69.2 65.8 74.5 82.0 64.2 68.4 75.5 75.8 86.4 Loans 24.8 27.4 24.0 40.7 36.1 32.2 29.6 25.5 21.6 28.8 Equity 51.2 41.8 41.7 33.8 45.9 32.0 38.8 50.1 54.2 57.5 Bonds 49.3 57.2 62.9 62.4 72.3 77.9 84.4 94.9 89.2 109.8 Other 22.5 29.2 39.2 72.2 40.2 47.0 45.4 56.6 34.1 44.9 Memo (%): CPE deficitl I GDP' -3.0 -2.6 -2.7 -2.9 -2.4 -1.9 -2.1 -1.7 -1.3 -1.5 CPE deficit I GDP2 -2.6 -2.2 -2.1 -1.9 -1.8 -1.5 -1.5 -1.3 -1.2 -1.3 Plan Exp.l GDP 4.8 4.4 4.8 5.0 4.7 4.3 3.8 3.5 3.2 3.4 NIR/GDP 1.9 1.8 2.1 2.1 2.3 2.4 1.8 1.8 1.9 1.9 Budget Support (plan + nonplan) GDP 1.5 1.2 0.9 0.9 0.9 0.6 0.6 0.6 0.5 0.5 Share of Petroleum and Telecom in Plan Exp. 26.3 26.5 36.9 40.0 38.1 41.3 39.6 41.3 44.8 42.4 Share of Petroleum and Telecom in NIR 48.6 44.1 53.6 46.7 53.6 58.3 53.4 56.7 68.1 65.7 Non-Plan loans to CPEs (Rs. Billion) 10.7 7.6 6.0 7.8 9.1 11.8 14.6 15.8 18.5 17.4 1 Refers to the deficit of all Central Public Enterprses. 2 Refers to the CPE deficit excluding Petroleum and Telecom. Note: RE - Revised Estimate; BE = Budget Estimate. Source: Union Budget 1999-2000. 187 Annex Table 8.10 Year-wise/PSU-wise Details of Shares Disinvested Since 1991 -92 S.No. Name of the PSE Percent of Central Government Holding ( End March) 1991 1992 1993 1994 1995 1996 1997 1998 1 Andrew Yule 72.3 62.8 62.8 62.8 62.8 62.8 62.8- 62.8' 2 Bharat Earthmovers Ltd. 100.0 80.0 80.0 80.0 75.0 75.0 60.8 60.8 3 Bharat Electronics Ltd. 100.0 80.0 80.0 80.0 75.9 75.9 75.9 75.9 4 Bharat Heavy Electncals Ltd. 100.0 80.0 79.5 79.5 68.5 67.7 67.7 67.7 5 Bharat Petroleum Corpn. Ltd. 100.0 80.0 70.0 70.0 70.0 66.2 66.2 66.2 6 Bongaigaon Refinenes & Petro. Ltd. 100.0 80.0 74.6 74.6 74.6 74.5 74.5 74.5 7 CMC Ltd. 100.0 83.5 83.5 83.5 83.3 83.3 83.3 83.3 8 Cochin Refinenes Ltd. 61.1 55.0 55.0 55.0 55.0 55.0 55.0- 55.0' 9 Dredging Corpn. Ltd. 100.0 98.6 98.6 98.6 98.6 98.6 98.6 98.6 10 Fert. & Chem. (Travancore) Ltd 100.0 98.5 98.3 98.3 98.3 98.3 97.4- 97.4' 11 HMTLtd. 100.0 95.1 90.3 90.3 90.3 90.3 91.6 91.6 12 Hindustan Cables Ltd. 100.0 96.4 98.0 96.4 96.4 96.0 99.0 99.0 13 Hindustan Copper Ltd. 100.0 100.0 98.9 98.9 98.9 98.9 99.0 98.8 14 Hindustan Organic Chemicals Ltd. 100.0 80.0 80.0 80.0 80.0 80.0 58.6 58.6 15 Hindustan Petroleum Corpn. Ltd. 100.0 80.0 69.9 69.7 63.0 60.1 51.0 51.1 16 Hindustan Photofilms Mfg. Co. Ltd. 100.0 87.5 87.5 87.5 87.5 87.5 90.1 90.1 17 Hindustan Zinc Ltd. 100.0 80.1 75.9 75.9 75.1 75.1 75.9 75.9 18 Indian Petrochemicals Corpn. Ltd. 100.0 80.0 80.0 80.0 80.0 80.0 60.0 60.0 19 Indian Railway Const. Co.Ltd. 100.0 99.7 99.7 99.7 99.7 99.7 99.7 99.7 20 Indian Telephone Industries Ltd 100.0 80.1 78.2 78.2 78.1 77.0 76.7' 76.7' 21 Madras Refinenes Ltd. 84.6 67.7 67.7 67.7 67.7 67.7 53.8' 53.8' 22 Mahanagar Telephone Nigam Ltd. 100.0 80.0 80.0 80.0 67.2 65.7 65.7 56.2 23 Minerals & Metals Trading Corpn. 100.0 99.4 99.4 99.4 99.3 99.3 99.3 99.3 24 National Aluminium Co. Ltd. 100.0 97.3 87.2 87.2 87.2 87.2 87.2 87.2 25 National Fertilizers Ltd. 100.0 97.7 97.7 97.7 97.7 97.7 97.7 97.7 26 National Minerals Dev. Corpn Ltd. 100.0 100.0 98.4 98.4 98.4 98.4 96.4* 96.4' 27 Neyveli Lignite Corporation 100.0 95.4 94.0 94.0 94.0 94.0 94.0 94.0 28 Rashtrya Chemicals & Fertilizers 100,0 94.4 92.5 92.5 92.5 92.5 92.5 93.0 29 Shipping corpn. of India 100.0 81.5 81.5 81.5 80.1 80.1 80.1 80.1 30 State Trading Corpn. 100.0 92.0 91.0 91.0 91.0 91.0 91.0 91.0 31 SteelAuthorityofIndiaLtd. 100.0 95.0 89.5 89.5 89.4 88.9 85.8 85.8 32 Videsh Sanchar Nigam Ltd. 100.0 85.0 85.0 85.0 85.0 82.0 67.0 67.0 33 Container Corporation of India 100.0 100.0 100.0 100.0 80.0 76.9 76.9 76.9 34 Indian Oil Corporabon 99.9 99.9 99,9 99.9 96.0 91.2 91.1* 91.1* 35 Oil & Natural Gas Corporation 100.0 100.0 100,0 100.0 98.0 96.1 96.1 96.1 36 Engineers India Ltd. 100.0 100.0 100.0 100.0 94.0 94,0 94.0 94.0 37 Gas Authorty of India Ltd. 100.0 100.0 100.0 100.0 96.6 96.6 96.6 97.0 38 Indian Toursm & Dev. Corp. 100.0 100.0 100.0 100.0 90,0 90.0 90.0 90.0 39 Kudermukh Iron & Ore Company Ltd. 100.0 100.0 100.0 100.0 99.0 99.0 99.0 99.0 The balance equity is held by state govemments/other collaborators. Note: 1999 not available. Source: Public Enterpnses Survey, various issues. 188 Annex Table 8.11 India: Estimated Capital Inflows and Debt Stocks',1 991-92 to 1998-99 (US $ Billion) Average Annual Inflows Debt Oustanding as of 1991-92 1994-95 March'91 March'94 March'98 March'99 to to 1993-94 1996-97 1997-98 1998-99P External Debt' 91.2 94.5 94.3 98.2 Public & Publicly Guaranteedb 3.5 -1.4 0.5 1.0 60.9 71.2 71.4 72.4 NRIForeignCurency&RPB 0.8 -0.6 0.9 4.2 10.2 12.7 12.0 16.1 NRI Rupees' 0.6 1.7 1.5 1.1 3.6 5.3 11.9 13.0 Private Medium & Long-Term 0.1 1.9 1.8 -3.7 1.5 1.8 10.3 6.6 Short-Term -1.6 1.0 -1.7 -0.7 8.5 3.6 5.0 4.3 Non-Debt Flows FDI 0.3 2.0 3.6 2.4 - - - - Portfolio from Foreign Institutional Investors 0.6 1.8 1.8 -0.4 GDRs & Offshore 0.7 1.5 0.8 0.3 TotWa Debt and Non-Debt 5.8 7.4 4.7 5.3 Memo: Errors and Omissions -0.1 0.2 0.2 0.3 Current Aocount Deficit 1.8 5.0 5.9 4.3 - Not availabe. Projected. ' Differencesin srtcks of pubic and publicyguaranteed debtamenDtequal t tDhe sums offows because of exchange rate changes. b Includes IMF; excludes NRI foreig currency deposits -beginning in 1992-93, new NRI deposits had no explicil govemment guarantees. ' Padnofttheserupee depost, which ae non-repatriable, anenot included in the extemal debt statiutics; therefore, the sub-tems may not add-up to the total. Source: Extemal Debt, Wodd Banl NRI Deposits and Non-debt Flows, RBt Annual Report 1989. 189 Annex Table 8.12 Details of Mobilisation in the Primary Market 1994-95 1995-96 1996-97 1997-98 1998.99P No of Amount No of Amount No of Amount No of Amount No of Amount Issues (Rs. bil.) Issues (Rs. bil.) Issues (Rs. bil.) Issues (Rs. bil.) Issues (Rs. Bil.) Non-ovemment Public Limited Companies 1678 264.2 1670 161.2 842 104.2 102 31.4 48 50.1 Public Sector Undertakings (PSU bonds) 15 30.7 22 22.9 16 33.9 19 29.8 8 9.8 Government Companies (Equities + Bonds) 7 8.9 2 10.0 3 6.5 1 0.4 - - Banking /Financial Institutions 2 4.3 6 34.7 6 43.5 4 14.8 3 43.5 Total 1702 308.0 1700 228.8 867 188.1 126 76.4 59 103.4 Memo: Euro/FCCB Issues 31 67.4 5 130 16 55.9 7 40.1 3 11.5 UTI 18 86.1 34 -63.1 40 -30.4 79 28.8* 84 1.7- OtherMutualFunds 36 26.6 39 4.8 47 10.1 58 11.3 82 29.2 Provisional. - Not available. Net sales value with premium under all domestc schemes, includes re-investment sales. Note: In case of PSU Bonds, the cumulative data are based on the details as and when made available to RBI by PSUs. PSU bonds include private placements. Source: Reserve Bank of India. CONTENTS I. National Accounts A 1.1(a) National Accounts Summary, (Rs billion at current prices) .......................................................... 195 Al.I (b) National Accounts Summary, (Rs billion at 1993-94 prices) ........................................................1 96 A 1.2 (a) Gross Domestic Product at Factor Cost - By Industry of Origin, (Rs billion at current prices) .... 197 A1.2 (b) Gross Domestic Product at Factor Cost - By Industry of Origin, (Rs billion at 1993-94 prices).. 198 A1.2 (c) Implicit Price Deflators for GDP at Factor Cost, (1993-94 = 100) ................................................ 199 A1.3 Gross Savings and Investment, (Rs billion) ..................................................................... 200 Al.4 Disposable Income and Its Use, (Rs billion at current prices) ....................................................... 201 A1.5(a) Gross Domestic Investment by Industry of Origin, (Rs billion at current prices) ......................... 202 A1.5(b) Gross Domestic Investment by Industry of Origin, (Rs billion at 1993-94 prices) ...................... 203 A 1.5(c) Implicit Deflators by Industry of Use, (1993-94 = 100) ...................... .................................... 204 Al .6(a) Gross Domestic Investment in Public Sector, (Rs billion at current prices) .................................. 205 Al.6(b) Gross Domestic Investment in Public Sector, (Rs billion at 1993-94 prices) ............................... 206 II. Balance of payments - Current Accounts A2.1 Balance of Payments, (US$ million at current price) ..................................................................... 207 A2.2 (a) Merchandise Exports, (US$ million at current price) ................................................................... 208 A2.2 (b) Merchandise Exports, (US$ million at 1980-81 price) ................................................................. 209 A2.2 (c) Export Unit Value Indices, (US$ terms, 1980-81 = 100) .............................................................. 210 A2.3 (a) Merchandise Imports, (US$ million at current price) ................................................................... 211 A2.3 (b) Merchandise Imports, (US$ million at 1980-81 price) ................................................................. 212 A2.3 (c) Import Unit Value Indices, (US$ terms, 1980-81 = 100) .............................................................. 213 A2.4 Invisibles on Current Account, (US$ million) ..................................................................... 214 A2.5 Decomposition of Recent Export Growth, (US$ million at current prices - annual averages) ...... 215 II. Balance of payments - Capital Accounts A3.1 (a) External Debt Summary: Debt Outstanding and Disbursed, (US$ million at current price) ) ...... 216 A3.1 (b) External Debt Summary: Disbursements, (US$ million at current price) ) ...................... ........... 217 A3.1 (c) External Debt Summary: Principal Repayments, (US$ million at current price) ........................ 218 A3.1 (d) External Debt Summary: Net Flows, (US$ million at current price) .......................................... 219 A3.1 (e) External Debt Summary: Interest Payments, (US$ million at current price),.. ............................ 220 A3.2 External Reserves (US$ million at current prices) ) ..................................................................... 221 IV. Public Finance A4.1 Central Govermment Finances Sunmmary, (Rs billion at current prices) .. ..................................... 222 A4.2 Budgetary Classification of Central Government Finances, (Rs billion at current prices) ............ 223 A4.3 Budgetary Classification of State Government Finances, (Rs billion at current prices) .............. 224 A4.4 Budgetary Classification of General Governm ent Finances, (Rs billion at current prices) ........... 225 A4.5 Tax Revenue - Center and States, (Rs billion at current prices) ................................................... 226 A4.6 Non-Tax Revenue - Center and States, (Rs billion at current prices) ............................................ 227 A4.7 Revenue Expenditure of the Center and States, (Rs billion at current prices) .............................. 228 A4.8 Revenue Expenditure of the Center and States, (Rs billion at current prices) ............................. 229 A4.9 Capital Expenditure - Center and States, (Rs billion at current prices) ........................................ 230 A4.10 Transfers between Center and States, (Rs billion at current prices) ............................................ 231 A4.11 Explicit Subsidies in the Central Government Budget, (Rs billion at current prices) ................... 232 A4.12 Outstanding Debt of Central Government, (Rs billion at current prices) .. ................................... 233 A4.13 Outstanding Debt of State Government, (Rs billion at current prices) ........................................ 234 A4.14 Outstanding Debt of Central and State Governments, (Rs billion at current prices) ................... 235 A4.15 (a) Projected and Actual Plan Outlays by Sectors, (Rs billion at current prices) ............................... 236 A4.15 (b) Projected and Actual Plan Outlays by Sectors, (Rs billion, annual averages at 1980-81 prices) .237 A4.15 (c) Projected and Actual Plan Outlays by Sectors, (percent distribution and achievement rates) ..... 238 V. Money and Credit A5.1 Money Supply and Sources of Change, (Rs billion)) ......................................................... 239 A5.2 Base Money Supply and Sources of Change, (Rs billion) ......................................................... 240 A5.3 Selected Monetary Policy Instruments) ......................................................... 241 A5.4 Structure of Short-term and Long-term Interest Rates, (percent per annum) ............................... 242 A5.5 Sectoral Deployment of Gross Bank Credit, (Rs billion - change during year) ............................ 243 VI. Agriculture, Industry, Transport, Energy and Prices A6.1 Production of Major Crops) ............................................................... 244 A6,2 Irrigated Area Under different Crops, (million hectares) .............................................................. 245 A6.3 Yield Per Hectare of Major Crops, (kgs. per hectare) ............................................................... 246 A6.4 Net Availability, Procurement and Public Distribution of Foodgrains, (million tons) ................ 247 A6.5a New Index of Industrial Production, (1993-94 = 100) ............................................................... 248 A6.5b Index of Industrial Production, (1980-81 = 100, Old Series) ........................................................ 249 A6.6 Production, Imports and Consumption of Fertilizers, (000 nutrient tons) .................................... 250 A6.7 Indian Railways: Freight and Passenger Traffic) ............................................................... 251 A6.8 Petroleum Summary: Commodity Balance of Petroleum and Products, (million tons) ............... 252 A6.9 Generation, Consumption and Capacity of Electricity, (000' GWH) ........................................... 253 A6.10 New Index Numbers of Wholesale Prices - by Years, (Base 1981-82 = 100) ............................. 254 A6. 11 Consumer Price Index Numbers for Industrial Workers, Urban Non-Manual Employees and Agricultural Laborers) .255 It 00. t-t 0 n) Statistical Appendix 195 Table Al.1 (a) National Accounts Sunumary (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 GDPfc 3214.86 3845.67 4455.78 5209.77 6027.01 6877.52 7990.77 9434.08 11032.38 12852.59 14266.70 Agriculture and allied 999.72 1234.62 1375.33 1602.66 1871.15 2091.67 2424.38 2840.42 3127.91 3760.91 3921.34 Industry 844.46 1010.05 1207.18 1411.47 1553.66 1798.12 2058.00 2475.42 2997.92 3352.69 3727.24 Mining and Quarrying 83.00 107.87 120.76 138.06 149.98 170.91 197.02 223.94 245.88 272.09 293.77 Manufacturing 523.53 623.16 764.47 883.99 955.52 1100.71 1266.97 1550.16 1920.70 2152.93 2398.63 Construction 174.96 205.42 234.32 284.29 320.35 364.60 404.33 463.69 554.63 629.13 676.63 Electricity 62.98 73.60 87.64 105.13 127.80 161.90 189.68 237.63 276.71 298.54 358.21 Services 1370.68 1601.00 1873.26 2195.64 2602.21 2987.73 3508.39 4118.24 4906.55 5738.99 6618.12 Net Indirect Taxes 389.23 435.33 485.46 582.87 644.63 758.09 778.75 944.34 1147.25 1245.90 1368.82 GDPmp 3604.09 4281.00 4941.23 5792.64 6671.65 7635.61 8769.52 10378.42 12179.63 14098.49 15635.52 Resource Gap (M-X) 85.93 124.93 112.19 151.79 39.01 125.43 110.46 265.23 386.69 500.17 527.20 Imports(g+nfs) 296.23 388.59 465.46 565.11 610.00 808.31 987.25 1301.08 1713.70 1977.25 2203.37 Exports (g+nfs) 210.31 263.66 353.28 413.32 570.99 682.88 876.78 1035.85 1327.01 1477.08 1676.17 Total Expenditure 3690.02 4405.93 5053.42 5944.43 6710.66 7761.04 8879.98 10643.65 12566.32 14598.66 16162.72 Consumption 2899.67 3388.35 3890.36 4517.92 5232.30 5970.39 7058.98 8263.01 9446.53 11334.96 12509.17 GeneralGov't 437.11 506.54 580.09 661.17 743.36 841.14 962.40 1071.69 1270.24 1440.49 1738.64 Private 2462.56 2881.81 3310.28 3856.75 4488.94 5129.25 6096.58 7191.32 8176.29 9894.47 10770.53 Investment 790.35 1017.58 1163.06 1426.51 1478.36 1790.65 1821.00 2380.64 3119.79 3263.70 3653.55 FixedInvestment 757.96 899.43 1079.03 1301.91 1433.13 1667.82 1834.18 2224.59 2901.13 3270.90 3578.36 Change in Stocks 32.39 118.15 84.04 124.61 45.22 122.82 -13.18 156.05 218.66 -7.20 75.19 Domestic Savings 704.42 892.65 1050.87 1274.72 1439.35 1665.22 1710.54 2115.41 2733.10 2763.53 3126.35 Net Factor Income -8.59 -15.29 -13.29 -64.36 -81.50 -89.79 -98.35 -100.70 -97.54 -104.27 -107.91 CurrentTransfers 34.99 38.42 38.01 37.14 92.75 112.11 165.18 254.11 284.63 439.04 439.58 National Savings 730.82 915.78 1075.59 1247.49 1450.60 1687.54 1777.36 2268.83 2920.19 3098.30 3458.02 Foreign Savings 59.53 101.79 87.47 182.00 40.16 112.43 47.88 118.75 209.31 178.53 218.45 GDP per capita (Rs.) 4573.72 5318.02 6011.23 6904.22 7793.98 8756.43 9842.33 11429.98 13138.76 14950.68 16303.98 Per capitaprivate consumption 3125.08 3579.89 4027.10 4596.84 5244.09 5882.16 6842.41 7919.95 8820.16 10492.55 11231.00 Average Exchange Rates: Rupees per US $ 12.97 14.48 16.66 17.95 24.52 28.95 31.37 31.40 33.46 35.50 37.16 Rupees per SDR' 17.12 19.26 21.37 24.85 33.43 37.14 43.89 45.79 50.48 50.89 51.22 Memo Items: Priv. Consumption (CSO) 2547.39 2944.54 3297.88 3778.71 4378.84 4949.20 5672.39 6604.60 7573.84 8862.30 9604.01 Population (mill) 788.00 805.00 822.00 839.00 856.00 872.00 891.00 908.00 927.00 943.00 959.00 Notes: 1. Data prior to 1993-94 is estimated using the old series growth rates. 2. Exports, Imports, Foreign Savings, Net Factor Income and Capital Transfers numbers are used from the BOP. Source: CSO, National Accounts Statistics 1998, Ouick Estimates 1999 and World Bank Staff Estimates. 196 Stalistical Appendix Table Al. I (b) National Accounts Summary (Rs. billion at 1993-94 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 GDPfc 5691.12 6297.22 6731.33 7092.20 7150.01 7526.15 7990.77 8610.64 9264.12 9989.78 10491.91 Agriculture and allied 1837.27 2135.04 2173.45 2255.24 2204.29 2337.50 2424.38 2555.22 2560.96 2801.79 2774.18 Industry 1452.54 1587.93 1744.76 1877.59 1864.77 1940.14 2058.00 2249.02 2523.90 2676.09 2834.44 Mining and Quarrying 135.21 155.49 166.86 184.68 191.49 193.68 197.02 215.11 231.08 233.93 240.18 Manufacturing 901.84 981.59 1097.24 1163.54 1121.23 1167.49 1266.97 1400.95 1611.01 1734.43 1851.80 Registered 558.89 618.36 704.19 739.51 722.59 745.31 830.77 938.40 1082.00 1168.36 1261.33 Unregistered 342.95 363.23 393.05 424.03 398.64 422.18 436.20 462.55 529.01 566.07 590.47 Construction 299.93 323.15 339.65 379.22 387.48 400.55 404.33 425.60 460.54 473.82 493.13 Electricity 115.56 127.71 141.01 150.15 164.58 178.41 189.68 207.36 221.27 233.91 249.33 Services 2401.32 2574.25 2813.12 2959.37 3080.95 3248.51 3508.39 3806.40 4179.26 4511.90 4883.29 NetlndirectTaxes 685.10 711.75 738.30 800.28 775.88 829.36 778.75 852.71 958.73 974.55 1018.23 GDPmp 6376.23 7008.97 7469.63 7892.48 7925.89 8355.51 8769.52 9463.35 10222.85 10964.33 11510.14 Terms ofTrade Effect 9.68 40.82 32.49 -25.13 -15.50 -15.52 0.00 -23.18 -176.47 -198.41 -124.72 Gross Domestic Income 6385.91 7049.79 7502.12 7867.36 7910.39 8339.99 8769.52 9440.17 10046.38 10765.92 11385.42 ResourceGap(M-X) 217.17 307.30 231.10 203.22 32.41 122.39 110.46 213.26 138.78 190.55 286.13 Imports(g+nfs) 715.35 828.92 824.04 850.12 749.17 888.72 987.25 1159.88 1397.11 1537.61 1717.09 Capacitytoimport 507.86 562.44 625.43 621.78 701.26 750.82 876.78 923.44 1081.85 1148.65 1306.24 [Exports (g+nfs)] 498.18 521.62 592.94 646.90 716.76 766.33 876.78 946.62 1258.32 1347.07 1430.96 Total Expenditure 660308 7357.09 7733.23 8070.58 7942.80 8462.38 8879.98 9653.43 10185.16 10956.47 11671.55 Consumption 5203.11 5696.10 6035.15 6164.75 6246.44 6556.25 7058.98 7470.43 7574.43 8380.22 8897.65 General Govt 765.33 806.13 851.62 880.13 875.16 904.44 962.40 1036.88 1193.05 1327.85 1585.14 Private 4437.79 4889.98 5183.53 5284.62 5371.28 5651.80 6096.58 6433.55 6381.38 7052.37 7312.51 Investment 1399.97 1660.99 1698.08 1905.83 1696.37 1906.13 1821.00 2183.00 2610.73 2576.25 2773.90 Fixed Investment 1324.24 1417.54 1540.60 1693.32 1625.54 1738.73 1834.18 2041.52 2428.26 2582.38 2716.53 Change in Stocks 75.73 243.45 157.48 212.51 70.82 167.40 -13.18 141.48 182.47 -6.13 57.37 Domestic Savings 1260.52 1490.56 1608.14 1730.65 1703.63 1815.70 1710.54 1918.61 2215.21 2074.06 2257.62 Net Factor Income -20.75 -32.61 -23.53 -96.83 -100.09 -98.72 -98.35 -89.77 -79.52 -81.08 -84.09 Current Transfers 84.49 81.96 67.29 55.86 113.92 123.26 165.18 226.53 232.05 341.42 342.57 National Savings 1324.27 1539.91 1651.90 1689.69 1717.45 1840.24 1777.36 2055.37 2367.74 2334.40 2516.10 Foreign Savings 153.43 257.96 187.35 244.18 18.59 97.84 43.64 76.50 -13.74 -69.79 27.65 GDP per capita (Rs.) 2463.01 2650.25 2766.02 2863.38 2818.40 2916.65 9842.33 10422.19 11027.89 11627.07 12002.23 Percapitaprivateconsumption 5631.71 6074.51 6306.00 6298.72 6274.86 6481.43 6842.41 7085.41 6883.91 7478.65 7625.14 Rupee Deflators (1993-94=100): GDPmp 56.52 61.08 66.15 73.39 84.18 91.38 100.00 109.67 119.14 128.59 135.84 Imports(g+nfs) 41.41 46.88 56.49 66.47 81.42 90.95 100.00 112.17 122.66 128.59 128.32 Exports(g+nfs) 42.22 50.55 59.58 63.89 79.66 89.11 100.00 109.43 105.46 109.65 117.14 Total Expenditure 55.88 59.89 65.35 73.66 84.49 91.71 100.00 110.26 123.38 133.24 138.48 Govt Consumption 57.11 62.84 68.12 75.12 84.94 93.00 100.00 103.36 106.47 108.48 109.68 Priv. Consumption 55.49 58.93 63.86 72.98 83.57 90.75 100.00 111.78 128.13 140.30 147.29 Fixed Investment 57.24 63.45 70.04 76.88 88.16 95.92 100.00 108.97 119.47 126.66 131.73 Total Investment 56.45 61.26 68.49 74.85 87.15 93.94 100.00 109.05 119.50 126.68 131.71 Notes: I. Data prior to 1993-94 is estimated using the old series growth rates. 2. Exports, Imports, Foreign Savings, Net Factor Income and Capital Transfers numbers are used from the BOP. Source: CSO, National Accounts Statistics 1998. Ouick Estimates 1999 and World Bank Staff Estimates. Statistical Appendix 197 Table AI.2 (a) Gross Domestic Product at Factor Cost - By Industry of Origin (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 999.72 1234.62 1375.33 1602.66 1871.15 2091.67 2424.38 2840.42 3127.91 3760.91 3921.34 Agriculture 903.26 1125.93 1248.62 1461.85 1722.90 1924.19 2231.48 2612.39 2876.97 3475.01 3595.86 Forestry & Logging 64.17 70.92 81.25 86.01 87.14 91.96 102.16 117.04 123.65 135.35 144.69 Fishing 32.29 37.78 45,46 54.80 61.10 75.52 90.74 110.99 127.29 150.55 180.79 Industry Sector 844.46 1010.05 1207.18 1411.47 1553.66 1798.12 2058.00 2475.42 2997.92 3352.69 3727.24 Mining & Quarrying 83.00 107.87 120.76 138.06 149.98 170.91 197.02 223.94 245.88 272.09 293.77 Manufacturing 523.53 623.16 764.47 883.99 955.52 1100.71 1266.97 1550.16 1920.70 2152.93 2398.63 Registered 329.40 399.38 494.69 568.17 622.27 704.60 830.77 1035.75 1281.75 1443.33 1616.74 Unregistered 194.13 223.78 269.77 315.82 333.25 396.11 436.20 514.41 638.95 709.60 781.89 Electricity,Gas &Water 62.98 73.60 87.64 105.13 127.80 161.90 189.68 237.63 276.71 298.54 358.21 Construction 174.96 205.42 234.32 284.29 320.35 364.60 404.33 463.69 554.63 629.13 676.63 Services Sector 1370.68 1601.00 1873.26 2195.64 2602.21 2987.73 3508.39 4118.24 4906.55 5738.99 6618.12 Transport, Storage & Com. 205.72 246.53 286.31 350.20 423.53 505.21 579.90 686.39 777.93 923.67 1079.03 Railways 43.56 47.51 55.75 64.33 73.42 84.46 96.48 112.03 125.80 132.56 147.49 Other Transport 128.88 157.42 183.84 230.62 284.49 339.45 383.14 448.54 501.58 610.51 719.21 Storage 3.39 3.57 4.15 4.76 5.10 5.59 6.08 7.38 8.45 9.28 9.95 Communication 29.90 38.03 42.57 50.49 60.53 75.72 94.20 118.44 142.10 171.32 202.38 Trade, Hotelsetc. 435.19 512.06 599.11 700.72 801.77 937.21 1109.95 1356.12 1648.66 1970.80 2218.10 Banking& Insurance 106.56 128.27 163.82 201.74 282.25 298.66 416.65 500.98 658.85 770.13 879.56 Real Estate etc. 276.69 301.70 334.28 361.92 397.19 435.11 479.18 525.57 574.77 620.98 672.51 Public Admin & Defence 193.60 224.99 260.32 292.42 339.15 391.03 430.94 480.09 565.87 646.42 832.77 Other Services 152.91 187.46 229.42 288.64 358.32 420.49 491.77 569.09 680.47 806.99 936.15 GDPatFactorCost 3214.86 3845.67 4455.78 5209.77 6027.01 6877.52 7990.77 9434.08 11032.38 12852.59 14266.70 Note: Data prior to 1993-94 is estimated using the old series growth Tates. Source: CSO, National Accounts Statistics 1998 Quick Estimates 1999 and World Bank StaffEstimates. 198 Statistical Appeitdix Table A 1.2 (b) Gross Domestic Product at Factor Cost - By Industry of Origin (Rs. billion at 1993-94 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 1837.27 2135.04 2173.45 2255.24 2204.29 2337.50 2424.38 2555.22 2560.96 2801.79 2774,18 Agriculture 1671.46 1966.06 1987.37 2069.59 2015.53 2148.85 2231.48 2350.60 2348.42 2574.78 2541.48 Forestry&Logging 105.88 104.25 113.29 110.10 109.32 104.61 102.16 106.52 108.08 111.83 115.71 Fishing 59.93 64.73 72.79 75.55 79.43 84.04 90.74 98.10 104.46 115.18 116.99 Industry Sector 1452.54 1587.93 1744.76 1877.59 1864.77 1940.14 2058.00 2249.02 2523.90 2676.09 2834.44 Mining&Quarrying 135.21 155.49 166.86 184.68 191.49 193.68 197.02 215.11 231.08 233.93 240.18 Manufacturing 901.84 981.59 1097.24 1163.54 1121.23 1167.49 1266.97 1400.95 1611.01 1734.43 1851.80 Registered 558.89 618.36 704.19 739.51 722.59 745.31 830.77 938.40 1082.00 1168.36 1261.33 Unregistered 342.95 363.23 393.05 424.03 398.64 422.18 436.20 462.55 529.01 566.07 590.47 Electricity,Gas &Water 315.56 127.71 141.01 150.15 164.58 178.41 189.68 207.36 221.27 233.91 249.33 Construction 299.93 323.15 339.65 379.22 387.48 400.55 404.33 425.60 460.54 473.82 493.13 Services Sector 2401.32 2574.25 2813.12 2959.37 3080.95 3248.51 3508.39 3806.40 4179.26 4511.90 4883.29 Transport, Storage & Com. 412.91 437.23 474.35 496.53 524.50 549.65 579.90 631.18 687.88 749.56 798.19 Railways 87.09 86.20 89.68 92.67 98.25 97.14 96.48 98.46 106.47 111.89 115.21 OtherTransport 260.18 282.24 311.71 326.33 343.87 361.70 383.14 417.06 445.13 478.95 501.44 Storage 5.55 5.39 5.59 5.82 5.75 5.92 6.08 6.21 6.52 6.46 6.55 Communication 60.09 63.39 67.38 71.71 76.63 84.90 94.20 109.45 129.76 152.26 174.99 Trade, Hotels etc. 782.52 839.38 905.64 954.06 962.93 1028.47 1109.95 1275.32 1438.58 1559.54 1643.55 Banking& Insurance 185.60 216.30 257.59 280.17 328.78 347.69 416.65 451.90 513.43 580.94 658.14 Real Estate etc. 391.28 404.54 418.62 435.02 448.82 463.61 479.18 494.19 510.95 524.81 540.00 Public Admin & Defence 335.00 357.03 387.13 391.07 399.42 420.13 430.94 436.20 466.35 487.36 586.31 Other Services 294.01 319.77 369.78 402.53 416.50 438.95 491.77 517.61 562.07 609.69 657.10 GDP at Factor Cost 5691.12 6297.22 6731.33 7092.20 7150.01 7526.15 7990.77 8610.64 9264.12 9989.78 10491.91 Note: Data prior to 1993-94 is estimated using the old series growth rates. Source: CSO, National Accounts Statistics 1998. Quick Estimates 1999 and World Bank Staff Estimates. Statistical Appendix 199 Table A 1.2 (c) Implicit Price Deflators for GDP at Factor Cost (1993-94=100) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 54.41 57.83 63.28 71.06 84.89 89.48 100.00 111.16 122.14 134.23 141.35 Agriculture 54.04 57.27 62.83 70.63 85.48 89.54 100.00 111.14 122.51 134.96 141.49 Forestry & Logging 60.60 68.03 71.72 78.12 79.71 87.91 100.00 109.88 114.41 121.03 125.05 Fishing 53.89 58.36 62.46 72.54 76.92 89.86 100.00 113.14 121.86 130.71 154.53 Industry Sector 58.14 63.61 69.19 75.17 83.32 92.68 100.00 110.07 118.78 125.28 131.50 Mining & Quarrying 61.39 69.37 72.37 74.75 78.33 88.24 100.00 104.10 106.40 116.31 122.31 Manufacturing 58.05 63.49 69.67 75.97 85.22 94.28 100.00 110.65 119.22 124.13 129.53 Registered 58.94 64.59 70.25 76.83 86.12 94.54 100.00 110.37 118.46 123.53 128.18 Unregistered 56.61 61.61 68.64 74.48 83.60 93.83 100.00 111.21 120.78 125.36 132.42 Electricity,Gas &Water 54.50 57.63 62.15 70.02 77.65 90.74 100.00 114.60 125.06 127.63 143.67 Construction 58.33 63.57 68.99 74.97 82.68 91.03 100.00 108.95 120.43 132.78 137.21 Services Sector 57.08 62.19 66.59 74.19 84.46 91.97 100.00 108.19 117.40 127.20 135.53 Transport, Storage & Com. 49.82 56.38 60.36 70.53 80.75 91.91 100.00 108.75 113.09 123.23 135.18 Railways 50.02 55.11 62.16 69.42 74.73 86.94 100.00 113.78 118.16 118.47 128.02 OtherTransport 49.53 55.77 58.98 70.67 82.73 93.85 100.00 107.55 112.68 127.47 143.43 Storage 60.99 66.22 74.21 81.74 88.62 94.47 100.00 118.84 129.60 143.65 151.91 Communication 49.75 59.99 63.19 70.42 78.99 89.19 100.00 108.21 109.51 112.52 115.65 Trade, Hotels etc. 55.61 61.00 66.15 73.45 83.26 91.13 100.00 106.34 114.60 126.37 134.96 Banking & Insurance 57.41 59.30 63.60 72.01 85.85 85.90 100.00 110.86 128.32 132.57 133.64 Real Estate etc. 70.72 74.58 79.85 83.20 88.50 93.85 100.00 106.35 112.49 118.32 124.54 Public Admin & Defence 57.79 63.02 67.24 74.78 84.91 93.07 100.00 110.06 121.34 132.64 142.04 Other Services 52.01 58.62 62.04 71.71 86.03 95.80 100.00 109.95 121.06 132.36 142.47 GDPatFactorCost 56.49 61.07 66.19 73.46 84.29 91.38 100.00 109.56 119.09 128.66 135.98 Source: Derived from Tables 1.2(a) and 1.2(b). 200 Statistical Appendix Table Al.3 Gross Savings and Investment (Rs. billion) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 (At cwrrent prices) GROSS NATIONAL SAVINGS 730.82 915.7S 1075.59 1247.49 1450.60 16S7.54 1777.36 2268.83 2920.19 3098.30 3458.02 Households 600.32 751.05 884.12 1042.79 1130.41 1382.29 1434.92 1759.93 2108.61 2300.94 2705.15 Private corporate sector 58.27 83.72 117.24 150.35 201.31 197.60 296.67 350.28 582.63 584.68 588.87 Publicsector 72.23 81.01 74.23 54.36 118.88 107.65 45.77 158.62 228.95 212.68 164.00 Foreign Savings 59.53 101.79 87.47 182.00 40.16 112.43 47.88 118.75 209.31 178.53 218.45 GROSS DOMESTIC iNVESTMENT 790.35 1017.58 1163.06 1426.51 1478.36 1790.65 1821.00 2380.64 3119.79 3263.70 3653.55 Change in stocks 32.39 118.15 84.04 124.61 45.22 122.82 -13.18 156.05 218.66 -7.20 75.19 GROSSFI.XEDCAPITALFORMATION 757.96 899.43 1079.03 1301.91 1433.13 1667.82 1834.18 2224.59 2901.13 3270.90 3578.36 By Type of Asset: Construction 373.67 445.11 515.21 627.57 718.42 812.79 871.92 1006.54 1214.78 1332.21 1415.01 Machinery & Equipment 384.29 454.32 563.82 674.34 714.71 855.04 962.26 1218.05 1686.35 1938.69 2163.35 By Sector: Public sector 352.04 405.96 446.65 510.95 598.13 612.18 687.90 887.82 912.34 923.97 1068.56 Private sector 376.23 458.03 589.13 738.28 777.66 987.40 1146.28 1336.77 1988.79 2346.93 2509.80 GDPmpatcurrentprices 3604.09 4281.00 4941.23 5792.64 6671.65 7635.61 8769.52 10378.42 12179.63 14098.49 15635.52 (At 1993-94 prices) GROSS DOMESTIC INVESTMENT 1399.97 1660.99 1698.08 1905.83 1696.37 1906.13 1821.00 2183.00 2610.73 2576.25 2773.90 Change in Stocks 75.73 243.45 157.48 212.51 70.82 167.40 -13.18 141.48 182.47 -6.13 57.37 GROSS FIXED CAPITAL FORMATION 1324.24 1417.54 1540.60 1693.32 1625.54 1738.73 1834.18 2041.52 2428.26 2582.38 2716.53 By Type of Asset: Construction 150.45 164.23 170.69 187.57 191.91 197.49 871.92 922.81 991.26 1003.99 996.25 Machinery&Equipment 1173.79 1253.31 1369.91 1505.75 1433.63 1541.24 962.26 1118.71 1437.00 1578.39 1720.28 By Sector: Public sector 186.60 195.39 196.51 206.01 210.12 195.08 687.90 815.01 762.79 717.02 778.90 Privatesector 212.95 232.31 268.32 304.90 280.34 329.53 1146.28 1226.51 1665.47 1865.36 1937.63 Notes: I. Data prior to 1993-94 is estimated using the old series growth rates. 2. Exports, Imports, Foreign Savings, Net Factor Income and Capital Transfers numbers are used from the BOP. Source: CSO, National Accounts Statistics 1998 Quick Estimates 1999 and World Bank Staff Estmates. Statistical Appendix 201 Table Al1.4 Disposable Income and Its Uses (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 GDPmp 3604.09 4281.00 4941.23 5792.64 6671.65 7635.61 8769.52 10378.42 12179.63 14098.49 15635.52 NetFactor Income from abroad -8.59 -15.29 -13.29 -64.36 -81.50 -89.79 -98.35 -100.70 -97.54 -104.27 -107.91 Other current transfers 34.99 38.42 38.01 37.14 92.75 112.11 165.18 254.11 284.63 439.04 439.58 Disposable income 3630.49 4304.13 4965.95 5765.41 6682.90 7657.93 8836.34 10531.84 12366.72 14433.26 15967.19 Private disposable income 3121.15 3716.58 4311.63 5049.88 5820.66 6709.14 7828.17 9301.53 10867.53 12780.09 14064.55 Public disposable income 509.34 587.55 654.32 715.53 862.24 948.79 1008.17 1230.31 1499.19 1653.17 1902.64 Gross National Savings 730.82 915.78 1075.59 1247.49 1450.60 1687.54 1777.36 2268.83 2920.19 3098.30 3458.02 Private savings 658.59 834.77 1001.36 1193.13 1331.72 1579.89 1731.59 2110.21 2691.24 2885.62 3294.02 Public savings 72.23 81.01 74.23 54.36 118.88 107.65 45.77 158.62 228.95 212.68 164.00 Final Consumption 2899.67 3388.35 3890.36 4517.92 5232.30 5970.39 7058.98 8263.01 9446.53 11334.96 12509.17 Pnvate Consumption 2462.56 2881.81 3310.28 3856.75 4488.94 5129.25 6096.58 7191.32 8176.29 9894.47 10770.53 PublicConsumption 437.11 506.54 580.09 661.17 743.36 841.14 962.40 1071.69 1270.24 1440.49 1738.64 Notes: 1. Data prior to 1993-94 is estimated using the old series growth rates. 2. Exports, Imports, Foreign Savings, Net Factor Income and Capital Transfers numbers are used from the BOP. Source: CSO, National Account Statistics 1998, QuickEstimates l999 and World Bank StaffEstimates. 202 Statislical Appendix Table A ].5 (a) Gross Domestic Investment by Industry of Origin (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 86.19 93.77 104.41 120.77 138.79 170.01 175.71 220.29 264.06 290.44 327.14 Agriculture 78.27 84.56 93.54 108.16 124.93 155.02 158.45 199.93 239.42 262.96 297.00 Forestry & Logging 2.56 2.95 3.81 4.56 4.43 4.51 4.74 5.02 6.26 7.06 7.33 Fishing 5.36 6.26 7.06 8.05 9.43 10.48 12.52 15.34 18.38 20.42 22.81 Industry Sector 333.51 475.41 459.18 549.40 580.56 773.40 851.88 1138.83 1663.95 1633.33 1952.66 Mining & Quarrying 42.16 47.88 63.02 66.24 63.34 65.83 65.34 158.47 116.98 69.53 79.00 Manufacturing 170.86 298.59 248.62 310.95 303.02 484.38 527.68 727.61 1263.37 1256.44 1510.68 Registered 166.92 334.85 241.09 314.73 313.66 531.25 419.32 614.20 1081.04 1057.74 1293.19 Unregistered 51.29 59.46 75.89 85.69 78.64 104.82 108.36 113.41 182.33 198.70 217.49 Electricity,Gas&Water 107.92 117.46 128.37 149.81 196.50 197.42 230.71 223.54 237.76 260.47 309.27 Construction 12.57 11.49 19.17 22.40 17.71 25.77 28.15 29.21 45.84 46.89 53.71 Services Sector 338.46 396.69 495.39 620.06 680.44 736.55 747.62 954.94 999.44 1089.74 1225.55 Transport, Storage &Com. 82.46 109.23 131.78 147.08 165.77 203.41 248.58 306.23 268.74 360.88 403.21 Railways 21.52 26.37 26.43 30.78 33.17 49.19 55.81 49.92 52.10 59.39 53.57 Other Transport 44.09 58.07 73.82 83.45 96.04 97.56 127.17 135.66 165.59 195.96 206.72 Storage 0.79 0.77 0.89 0.70 0.46 0.50 0.99 1.28 0.92 1.04 1.12 Communication 16.07 24.02 30.64 32.15 36.09 56.17 64.61 119.37 50.13 104.49 141.80 Trade, Hotels etc. 18.23 3.16 59.74 93.81 80.10 32.10 57.50 71.55 86.34 87.30 101.13 Banking& Insurance 15.27 21.79 24.42 31.93 51.52 48.92 71.14 121.64 151.33 119.49 124.91 Real Estate etc. 85.43 96.31 111.95 139.73 159.54 184.05 205.33 225.04 242.42 261.16 281.00 Public Admin & Defence 55.14 62.31 55.84 75.21 82.36 95.28 106.44 148.93 159.49 166.80 202.58 OtherServices 81.92 103.89 111.65 132.30 141.15 172.79 58.63 81.55 91.12 94.'1 112.72 Gross Domestic Investment 758:17 965.88 1058.97 1290.23 1399.80 1679.95 1775.21 2314.06 2927.45 3013.51 3505.35 Memo Items: Gross Domestic Investment 796.51 1010.25 1194.41 1543.88 1506.72 1761.06 1963.79 2634.15 3143.40 3616.87 3873.77 Errors & Omissions -6.17 7.33 -31.34 -117.37 -28.37 29.59 -142.79 -253.51 -23.61 -353.17 -220.22 Gross Domestic lnvestment 790.35 1017.58 1163.06 1426.51 1478.36 1790.65 1821.00 2380.64 3119.79 3263.70 3653.55 (unadjusted) b a. Refers to CSO's savings-based estimate of investment. b. Refers to Gross Capital Formation unadjusted for errors and omissions, which is CSO's direct estimate of investment based on physical flows. Note: Data prior to 1993-94 is estimated using the old series growth rates. Source: CSO, National Accounts Statistics 1998 Quick Estmates 1999 and World Bank Staff Estimates. Stalislical Appendix 203 Table A 1.5 (b) Gross Domestic Investment by Industry of Origin (Rs. billion at 1993-94 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 151.15 149.72 151.71 160.78 164.83 185.51 175.71 200.38 219.52 220.52 232.72 Agriculture 139.02 136.88 137.10 144.69 148.94 169.19 158.45 182.14 199.44 199.02 209.95 Forestry & Logging 4.82 4.90 5.87 6.53 5.44 4.90 4.74 4.51 5.05 5.04 4.76 Fishing 7.31 7.95 8.74 9.57 10.45 11.42 12.52 13.73 15.03 16.46 18.01 Industry Sector 459.15 581.37 558.86 629.69 622.30 789.20 851.88 1043.47 1400.37 1302.32 1504.02 Mining & Quarrying 79.57 83.29 97.85 93.01 77.83 72.70 65.34 145.76 98.45 51.89 55.55 Manufacturing 170.86 298.59 248.62 310.95 303.02 484.38 527.68 667.11 1064.59 1010.35 1178.52 Registered 295.34 559.41 350.17 421.94 361.24 578.34 419.32 561.60 909.90 851.50 1012.21 Unregistered 88.00 94.23 111.44 115.33 88.00 113.22 108.36 105.51 154.69 158.85 166.31 Electricity,Gas &Water 186.86 180.54 184.21 196.31 221.23 205.27 230.71 204.24 198.71 202.38 228.02 Construction 21.86 18.95 28.18 29.42 20.22 26.85 28.15 26.36 38.62 37.70 41.93 Services Sector 692.81 816.93 820.24 934.80 828.58 828.20 747.62 880.11 839.16 863.56 922.20 Transport, Storage&Com. 140.79 166.26 180.22 185.03 182.59 211.16 248.58 283.11 233.14 296.63 318.34 Railways 35.67 39.47 34.89 37.48 35.42 51.01 55.81 46.72 45.50 49.33 42.90 Other Transport 75.02 87.35 99.82 103.60 105.67 100.67 127.17 126.93 144.53 163.02 165.70 Storage 1.16 1.02 1.19 0.92 0.44 0.44 0.99 1.19 0.77 0.82 0.83 Communication 28.95 38.41 44.32 43.04 41.06 59.03 64.61 108.27 42.34 83.46 108.91 Trade, Hotelsetc. 31.22 -1.56 89.78 135.09 98.09 28.69 57.50 65.34 68.96 66.04 71.71 Banking&Insurance 26.45 34.11 34.44 41.35 58.62 51.06 71.14 112.10 128.03 96.38 97.72 Real Estate etc. 135.69 143.11 156.76 184.55 185.55 200.62 205.33 208.03 200.52 203.53 208.25 PublicAdmin&Defence 97.39 101.86 82.06 100.76 96.22 102.78 106.44 135.90 131.94 126.69 143.30 Other Services 261.27 373.16 276.98 288.02 207.49 233.90 58.63 75.63 76.57 74.29 82.88 Gross Domestic Investment 1303.10 1548.03 1530.80 1725.27 1615.71 1802.91 1775.21 2123.96 2459.05 2386.40 2658.94 Memo Items: Gross Domestic Investment 1409.98 1647.97 1741.88 2057.84 1727.78 1873.86 1963.79 2415.65 2630.49 2855.08 2941.08 Errors & Omissions -992.12 -1152.20 -1235.04 -1488.99 -1221.45 -1305.16 -142.79 -232.65 -19.76 -278.83 -167.18 Gross Domestic Investment 1399.97 1660.99 1698.08 1905.83 1696.37 1906.13 1821.00 2183.00 2610.73 2576.25 2773.90 (unadjusted) b a. Refers to CSO's savings-based estmate of investment. b. Refers to Gross Capital Formation unadjusted for errors and omissions, which is CSO's direct estimate of investment based on physical flows. Note: Data prior to 1993-94 is estimated using the old series growth rates. Source: CSO, National Accounts Statistics 1998. Quick Estimates 1999 and World Bank Staff Estimates. 204 Statistical Appendix Table A ].5 (c) Investment Deflators by Industry of Use (1993-94=100) 1987-8 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 57.03 62.63 68.82 75.11 84.21 91.64 100.00 109.94 120.29 131.71 140.57 Agriculture 56.30 61.78 68.23 74.75 83.88 91.62 100.00 109.77 120.05 132.13 141.46 Forestry&Logging 53.14 60.26 64.94 69.86 81.44 92.13 100.00 111.31 123.96 140.08 153.99 Fishing 73.31 78.74 80.75 84.16 90.25 91.74 100.00 111.73 122.29 124.06 126.65 IndustrySector 72.64 81.77 82.16 87.25 93.29 98.00 100.00 109.14 118.82 125.42 129.83 Mining&Quarrying 52.98 57.48 64.41 71.22 81.38 90.55 100.00 108.72 118.82 133.99 142.21 Manufacturing 100.00 100.00 100.00 100.00 100.00 100.00 100.00 109.07 118.67 124.36 128.18 Registered 56.52 59.86 68.85 74.59 86.83 91.86 100.00 109.37 118.81 124.22 127.76 Unregistered 58.29 63.10 68.10 74.30 89.36 92.58 100.00 107.49 117.87 125.09 130.77 Electricity,Gas&Water 57.76 65.06 69.69 76.32 88.82 96.17 100.00 109.45 119.65 128.70 135.63 Construction 57.50 60.63 68.01 76.12 87.57 95.99 100.00 110.81 118.69 124.38 128.09 ServicesSector 48.85 48.56 60.40 66.33 82.12 88.93 100.00 108.50 119.10 126.19 132.89 Transport,Storage&Com. 58.57 65.70 73.12 79.49 90.79 96.33 100.00 108.17 115.27 121.66 126.66 Railways 60.34 66.81 75.76 82.13 93.65 96.42 100.00 106.85 114.51 120.39 124.87 Other Transport 58.77 66.48 73.95 80.56 90.89 96.91 100.00 106.88 114.57 120.21 124.76 Storage 67.89 74.97 74.40 75.62 104.71 111.54 100.00 107.56 119.48 126.83 134.94 Communication 55.51 62.54 69.14 74.70 87.91 95.15 100.00 110.25 118.40 125.20 130.20 Trade,Hotelsetc. 58.41 -202.13 66.54 69.44 81.66 111.88 100.00 109.50 125.20 132.19 141.03 Banking& Insurance 57.75 63.89 70.91 77.23 87.88 95.82 100.00 108.51 118.20 123.98 127.82 Real Estate etc. 62.96 67.30 71.42 75.71 85.98 91.74 100.00 108.18 120.90 128.32 134.93 Public Admin & Defence 56.62 61.17 68.05 74.65 85.60 92.70 100.00 109.59 120.88 131.66 141.37 Other Services 31.35 27.84 40.31 45.93 68.02 73.87 100.00 107.83 119.00 126.68 136.00 GrossDomesticInvestment 58.18 62.39 69.18 74.78 86.64 93.18 100.00 108.95 119.05 126.28 131.83 Memo Items: Gross Domestic Investment' 56.49 61.30 68.57 75.02 87.21 93.98 100.00 109.05 119.50 126.68 131.71 Gross Domestic Investment 56.45 61.26 68.49 74.85 87.15 93.94 100.00 109.05 119.50 126.68 131.71 (unadjusted) b a. Refers to CSO's savings-based estimate of investment. b. Refers to Gross Capital Formation unadjusted for errors and omissions, which is CSO's direct estimate of investment based on physical flows. Source: Derived from Tables 1.5(a) and 1.5(b). Statistical Appendix 205 Table Al.6 (a) Gross Domestic Investment in Public Sector (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 33.02 34.41 33.53 36.27 36.52 41.73 49.18 60.31 65.80 67.78 76.26 Agriculture 30.56 31.61 29.88 31.92 32.29 37.47 44.67 55.57 59.89 61.12 69.33 Forestry & Logging 2.42 2.78 3.62 4.33 4.20 4.25 4.48 4.74 5.90 6.66 6.92 Fishing 0.04 0.02 0.03 0.02 0.03 0.01 0.03 0.00 0.01 0.00 0.01 Industry Sector 192.84 204.32 235.48 277.65 324.88 309.66 298.88 420.56 458.92 447.16 488.22 Mining&Quarrying 40.96 47.59 62.46 65.04 61.92 63.76 63.36 148.16 110.97 65.70 72.92 Manufacturing 50.73 51.72 54.66 71.45 85.08 82.98 48.92 68.58 126.81 142.15 135.26 Electricity,Gas&Water 98.81 105.62 117.55 137.69 174.10 158.41 178.96 195.88 214.63 231.45 272.03 Construction 2.34 -0.61 0.81 3.47 3.78 4.51 7.64 7.94 6.51 7.86 8.01 Services Sector 110.62 161.93 194.76 216.87 214.03 287.40 359.54 403.28 373.19 423.04 523.21 Transport, Storage & Com. 46.40 61.51 75.93 79.59 92.17 123.72 159.75 159.12 172.53 179.32 195.86 Railways 21.52 26.37 26.43 30.78 33.17 49.19 55.81 49.92 52.11 59.39 53.57 Other Transport 10.12 13.49 21.87 19.74 26.68 24.37 45.80 37.10 33.81 32.20 40.64 Storage 0.46 0.27 0.36 0.46 0.20 0.17 0.64 0.55 0.27 0.43 0.52 Communication 14.30 21.38 27.27 28.61 32.12 49.99 57.50 71.55 86.34 87.30 101.13 Trade, Hotels etc. -22.61 -2.98 17.48 14.54 -16.67 12.74 34.78 21.29 -38.81 -15.35 16.81 Banking & Insurance 9.49 14.82 16.99 17.98 23.59 18.04 19.72 25.84 32.44 36.36 41.27 Real Estate etc. 6.63 7.49 7.24 6.09 8.56 10.08 10.66 12.65 14.13 16.38 20.20 Public Admin & Defence 55.14 62.31 55.84 75.21 82.36 95.28 106.44 148.93 159.49 166.80 202.58 Other Services 15.56 18.79 21.28 23.46 24.02 27.55 15.89 20.40 21.20 23.92 30.14 Gross Domestic Investment 336.47 400.65 463.77 530.79 575.43 638.80 707.60 884.15 897.91 937.98 1087.69 Note: Data prior to 1993-94 is estimated using the old series growth rates. Source: CSO, National Accounts Statistics 1998, Quick Estimates 1999 and World Bank Staff Estimates. 206 Statistical AppendLx Table A 1.6 (b) Gross Domestic Investment in Public Sector (Rs. billion at 1993-94 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Agricultural Sector 15.76 14.82 13.01 13.15 11.35 45.73 49.18 53.97 52.55 48.23 48.66 Agriculture 14.58 13.62 11.56 11.54 10.02 41.11 44.67 49.70 47.76 43.47 44.16 Forestry & Logging 1.16 1.19 1.43 1.60 1.32 4.60 4.48 4.26 4.78 4.76 4.50 Fishing 0.02 0.01 0.02 0.01 0.01 0.03 0.03 0.01 0.01 0.00 0.00 Industry Sector 347.32 336.86 353.31 376.81 379.00 332.15 298.88 386.91 384.20 349.57 361.74 Mining&Quarrying 77.40 81.24 97.22 91.38 76.16 70.22 63.36 136.23 93.24 48.86 50.81 Manufacturing 89.74 84.57 78.33 96.04 98.49 90.45 48.92 64.01 109.01 115.07 105.84 Electricity,Gas&Water 172.54 163.41 170.11 181.75 196.71 163.84 178.96 179.37 176.54 179.54 199.15 Construction 7.64 7.64 7.64 7.64 7.64 7.64 7.64 7.30 5.41 6.10 5.94 Services Sector 219.33 282.03 311.56 319.15 268.02 298.09 359.54 370.91 314.19 330.17 383.25 Transport, Storage & Com. 79.42 94.15 104.71 100.64 101.23 128.52 159.75 147.19 143.93 141.96 146.73 Railways 35.67 39.47 34.89 37.48 35.42 51.01 55.81 46.72 45.50 49.33 42.90 Other Transport 17.35 20.18 29.90 24.26 29.12 24.84 45.80 34.61 29.25 26.25 31.74 Storage 0.64 0.32 0.48 0.61 0.16 0.13 0.64 0.52 0.22 0.34 0.38 Communication 25.76 34.19 39.44 38.30 36.54 52.54 57.50 65.34 68.96 66.04 71.71 Trade, Hotels etc. -39.67 -5.30 26.10 19.63 -20.31 13.60 34.78 19.26 -32.49 -12.06 12.65 Banking & Insurance 16.25 22.91 23.50 22.85 26.38 18.64 19.72 24.11 27.89 29.83 32.92 RealEstateetc. 10.66 11.26 10.17 8.01 9.98 10.85 10.66 11.80 11.79 12.93 15.22 Public Admin & Defence 97.39 101.86 82.06 100.76 96.22 102.78 106.44 135.90 131.94 126.69 143.30 Other Services 55.27 57.14 65.02 67.25 54.52 23.70 15.89 18.78 17.69 18.69 22.31 Gross Domestic lnvestment 582.41 633.71 677.88 709.11 658.37 675.97 707.60 811.79 750.94 727.97 793.65 Note: Data prior to 1993-94 is estimated using the old series growth rates. Source: CSO, National Accounts Statistics 1998, Quick Estimates 1999 and World Bank Staff Estimates. Statistical Appendix 207 Table A2.1 Balance of Payments (US$ million at current prices) 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 ExportsofGoodsandNon-FactorServices 18213 21201 23028 23288 23585 27947 32990 39657 41607 45109 47484 Merchandise(fob) 14257 16955 18477 18266 18869 22683 26855 32311 34133 35680 34298 Non-factorServices 3956 4246 4551 5022 4716 5264 6135 7346 7474 9429 13186 Imports of Goods and Non-Factor Services 26843 27934 31485 24879 27917 31468 41437 51213 55696 59297 58565 Merchandise(cif) 23618 24411 27914 21064 24316 26739 35904 43670 48948 51187 47544 Non-factor Services 3225 3523 3571 3815 3601 4729 5533 7543 6748 8110 11021 Trade Balance -9361 -7456 -9437 -2798 -5447 -4056 -9049 -11359 -14815 -15507 -13246 NonfactorServicesBalance 731 723 980 1207 I11S 535 602 -197 726 1319 2165 Resource Balance -8630 -6733 -8457 -1591 -4332 -3521 -8447 -11556 -14089 -14188 -11081 Net Factor Income -1056 -798 -3752 -3830 -3423 -3270 -3428 -3205 -3307 -3521 -3544 FactoT Service Receipts 397 936 368 221 376 395 S86 1429 1073 1561 1935 Factor Service Payments' 1453 1734 4120 4051 3799 3665 4314 4634 4380 5082 5479 Net Current Transfers 2654 2281 2069 3783 3872 5265 8093 8506 12367 11830 10280 Transfer Receipts 2670 2297 2083 3798 3884 5287 8112 8539 12435 11875 10341 TransferPayments 16 16 14 IS 12 22 19 33 68 45 61 Current Account Balance -7032 -5249 -10140 -1638 -3883 -1526 -3782 -6255 -5029 -5879 4345 Foreign Investment 287 350 103 133 559 4153 5138 4892 6133 5385 2401 DirectForeignInvestment 287 350 97 129 315 586 1314 2144 2821 3557 2462 Portfolio Investment 0 0 6 4 244 3567 3824 2748 3312 1828 -61 Official Grant Aid 406 500 462 460 363 368 416 345 410 379 307 Net Medium & Long-Term Capital 4976 5474 4801 3543 2642 2660 1745 2409 6580 5264 6122 Gross Disbursements 3732 4273 7649 7499 4489 6389 7343 - 7185 10627 10256 9952 Principal Repayments 1084 1094 4384 4246 3848 4934 5770 5879 7397 6117 5572 CapitalFlowsNEI -1374 -1992 1789 100 58 2885 3310 -3399 -1892 -940 -159 Net Short-Term Capital 941 334 1075 -515 -1079 -769 393 49 838 -96 -2714 Others b 141 167 1907 1855 2015 4707 3900 -2496 -2003 -77 3357 Capital flows n.e.i.' -2456 -2492 -1193 -1240 -878 -1053 -983 -952 -727 -767 -802 Overall Balance -2737 -917 -2985 2598 -261 8540 6827 -2008 6202 4209 4326 Net lMF Credit 1306 67 1214 786 1288 187 -1143 -1715 -975 -613 -393 Change in Reserves (Excl. Gold) 1432 850 1771 -3384 -1027 -8727 -5684 3723 -5227 -3596 -3933 (- = increase) Memorandum Items: NRldeposits(net)(Us$million) 2328 2295 1536 290 2001 1205 172 1103 3350 1125 1742 End of Year Gross Reserves (Exci. Gold) (US$ mill.) 4959 4109 2338 5722 6749 15476 21160 17437 22664 26260 30193 ReservesinMonthsoflImports 2.5 2.0 1.0 3.3 3.3 6.9 7.1 4.8 5.6 6.2 7.6 Current Account Balance / GDP -2.4% -1.8% -3.1% -0.6% -1.5% -0.5% -1.1% -1.7% -1.3% -1.4% -1.0% Debt Service Rato 27.9% 28.5% 32.1% 28.8% 27.6% 24.8% 26.1% 27.3% 21.7% 21.2% 17.3% Note: Interest payments, disbursements and extemal debt data is from the World Bank Debt Reporting System. a. Includes interest on military debt to FSU and retums on foreign investments. b. Residual item including reserve valuation changes, rupee trade imbalance, etc. c. Corresponds to bilateral balance or servicing of the Russia debt from 1990-91 onwards. d. As proportion of gross current receipts (GNFS exports + factor receipts + current transfer receipts). Source: Govemment of India; Reserve :tanK of India; Ministry of Commerce; Ministry of Finance, Economic Survey various issues; World Bank Staffestimates. 208 Statistical Appendix Table A2.2 (a) Merchandise Exports (US$ million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Primary Exports 3161 3243 3883 4324 4132 3874 4916 5214 7257 8035 7665 6850 Fish 411 435 412 535 589 602 813 1126 1010 1129 1208 1039 Rice 261 229 256 257 308 337 410 384 1365 894 907 1474 Cashews 243 191 221 249 276 259 334 397 370 362 379 383 Coffee 202 203 208 140 135 130 174 335 449 402 456 405 Tea 463 421 550 596 494 337 338 311 350 292 505 547 Spices 260 190 170 133 161 136 181 195 237 339 379 384 Iron Ore 427 465 557 584 585 381 438 413 514 481 476 380 OtherPrimary 893 1110 1508 1829 1584 1692 2227 2052 2961 4137 3355 2237 Manufactured Exports 8928 10727 12730 13821 13733 14663 17322 21417 24538 25434 27348 26817 Chemicals 618 890 1287 1176 1591 1378 1813 2434 2358 2689 2649 2482 LeatherManufactures 964 1051 1170 1449 1276 1278 1300 1611 1730 1606 1631 1620 Textiles 1407 1312 1598 2266 2164 2153 2536 3297 3829 4755 4893 4011 Garments 1403 1452 1936 2235 2211 2394 2586 3282 3674 3753 3877 4446 Gems &Jewellery 2015 3034 3178 2923 2753 3072 3995 4500 5273 4753 5347 5906 Engineering Goods 1141 1558 1967 2157 2246 2458 3023 3486 4389 4052 4436 3805 Petroleum Products 500 349 418 522 417 476 398 439 454 482 353 89 Other Manufactures 879 1081 1176 1092 1074 1453 1672 2367 2830 3344 4161 4460 TOTAL EXPORTS (Commerce)b 12089 13970 16613 18145 17865 18537 22238 26631 31795 33469 35013 33667 Statistical Discrepancy 557 287 342 332 401 332 445 224 516 664 667 631 TOTAL EXPORTS (B.O.P.) 12646 14257 16955 18477 18266 18869 22683 26855 32311 34133 35680 34298 a. Including unclassified exports. b. Net of crude petroleum exports. Source: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance. Economic Survey, various issues; World Bank Staff estimates. Statistical Appendix 209 Table A2.2 (b) Merchandise Exports (USS million at 1980-81 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Primary Exports 3097 3218 3983 4496 4365 4527 5714 5273 8166 8157 7417 Fish 354 386 424 480 570 570 679 778 766 860 860 Rice 152 137 165 197 265 227 300 348 1919 981 900 Cashews 228 202 266 305 288 344 404 440 389 387 419 Coffee 317 291 437 339 343 445 447 453 560 480 474 Tea 479 450 487 463 503 390 361 353 373 325 450 Spices 114 122 115 110 115 104 174 136 148 191 188 Iron Ore 461 541 578 530 490 344 431 428 530 457 472 Other Primary 993 1089 1512 2073 1791 2104 2918 2337 3480 4477 3654 Manufactured Exports 8411 9180 10414 11299 12673 14137 15905 18406 23096 25420 27000 Chemicals 542 847 1182 1584 2156 1333 1724 2268 2801 3405 4110 Leather Manufactures 899 957 961 979 956 1070 1151 1412 1527 1186 1459 Textiles 1074 915 1122 1329 1872 2512 2266 2868 3266 5482 5895 Garments 1142 1136 1485 1640 1758 1822 1806 2176 2514 3045 2825 Gems & Jewellery 1602 2081 1908 1573 1645 2081 2639 2982 3625 3562 3877 Engineering Goods 1390 1728 2220 2470 2513 3228 3878 4455 7019 6622 6887 Petroleum Products 985 694 784 917 980 1241 1346 1086 1146 1055 986 Other Manufactures a 778 823 752 808 793 850 1095 1158 1199 1063 961 TOTAL EXPORTS (Commerce)b 11508 12398 14397 15795 17039 18664 21619 23679 31262 33578 34417 Statistical Discrepancy 530 255 297 289 382 334 433 199 507 666 656 TOTAL EXPORTS (B.O.P.) 12038 12653 14694 16084 17421 18998 22052 23878 31769 34244 35073 a. Including unclassified exports. b. Net of crude petroleum exports. Source: Ministry of Commerce (D.G.C.I,S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staffestimates. 210 Statistical Appendix Table A2.2 (c) Export Unit Value Indices (USS terms: 1980-81 = 100) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Primary Exports 102.1 100.8 97.5 96.2 94.7 85.6 86.0 98.9 88.9 98.5 103.3 Fish 116.1 112.7 97.2 111.5 103.2 105.6 119.9 144.8 131.8 131.3 140.4 Rice 172.2 167.5 155.6 130.5 116.4 148.7 136.8 110.4 71.1 91.1 100.9 Cashews 106.3 94.6 82.9 81.7 95.6 75.1 82.8 90.2 95.1 93.7 90.4 Coffee 63.7 69.8 47.7 41.4 39.5 29.2 39.0 74.1 80.2 83.6 96.2 Tea 96.8 93.4 113.0 128.9 98.2 86.6 93.5 88.0 93.7 90.0 112.1 Spices 228.1 155.3 147.3 121.4 139.3 130.4 104.0 142.9 160.7 177.1 201.4 IronOre 92.7 85.9 96.4 110.2 119.5 110.9 101.5 96.6 97.0 105.2 101.0 Other Primary 90.0 102.0 99.8 88.2 88.4 80.4 76.3 87.8 85.1 92.4 91.8 Manufactured Exports 106.2 116.8 122.2 122.3 108.4 103.7 108.9 116.4 106.2 100.1 101.3 Chemicals 114.0 105.1 108.9 74.3 73.8 103.4 105.2 107.3 84.2 79.0 64.5 Leather Manufactures 107.3 109.8 121.7 147.9 133.4 119.4 112.9 114.0 113.3 135.4 111.8 Textiles 131.1 143.4 142.4 170.6 115.6 85.7 111.9 114.9 117.3 86.7 83.0 Garments 122.9 127.8 130.4 136.3 125.8 131.4 143.1 150.8 146.2 123.3 137.2 Gems & Jewellery 125.8 145.8 166.6 185.9 167.4 147.6 151.4 150.9 145.5 133.4 137.9 Engineering Goods 82.1 90.2 88.6 87.4 89.4 76.2 78.0 78.3 62.5 61.2 64.4 Petroleum Products 50.8 50.3 53.4 57.0 42.5 38.4 29.5 40.5 39.6 45.7 35.8 Other Manufactures a 113.1 131.3 156.2 135.2 135.5 171.1 152.7 204.5 236.1 314.7 433.1 TOTALEXPORTS(Conuerce)5 105.0 112.7 115.4 114.9 104.9 99.3 102.9 112.5 101.7 99.7 101.7 a. Including unclassified exports. b. Net of crude petroleum exports. Source: Ministry of Comrnerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. Statistical Appendix 211 Table A2.3 (a) Merchandise Imports (US$ million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Food 1292 1203 714 690 426 702 550 1464 1295 1536 1845 2543 Foodgrains 25 437 227 102 71 334 93 29 24 137 292 233 Edible Oils 709 503 127 182 101 58 53 199 676 825 744 1696 Others 557 263 361 407 254 311 404 1236 595 574 809 614 OtherConsumerGoods 600 700 800 851 637 782 680 790 1075 859 1135 1157 P.O.L 3118 3009 3768 6028 5364 6100 5754 5928 7526 10036 8217 6435 Crude Petroleuma 2395 1891 2455 3409 3189 3691 3407 3285 3442 5222 4278 3350 Petroleum Products 723 1047 1313 2619 2175 2409 2347 2643 4084 4814 3939 3084 Capital Goods b 5064 4803 5288 5836 4256 4532 6243 7638 10330 9923 9796 9122 Intermediate: PRIMARY 2997 3800 4488 4653 3821 4554 4533 4296 5599 6321 6840 6720 Fertilizer Raw Material 243 301 329 348 311 279 194 288 301 226 273 287 Gems 1538 1984 2546 2082 1968 2443 2634 1630 2105 2925 3343 3763 Other 1217 1515 1613 2222 1543 1832 1705 2378 3193 3171 3225 2671 Intermediate: MANUFACTURES 4085 5982 6161 6015 4907 5211 5541 8537 10850 10456 13651 15882 Fertilizer Manufactures 145 340 741 636 645 698 632 764 1381 686 844 787 Iron&Steel 1018 1335 1383 1178 799 779 795 1164 1446 1371 1343 1135 Non-Ferrous Metals 493 536 753 614 341 395 479 718 904 1106 920 671 Others 2429 3771 3284 3588 3112 3339 3635 5974 7120 7294 10543 13288 TOTAL IMPORTS (Commerce)' 17156 19497 21219 24073 19411 21882 23301 28654 36675 39132 41484 41858 Statistical Discrepancy 2660 4121 3192 3841 1653 2434 3438 7250 6995 9816 9703 5686 TOTALIMPORTSa 19816 23618 24411 27914 21064 24316 26739 35904 43670 48948 51187 47544 a. Net of crude oil exports. b. 1987-88 onwards Capital Goods includes Project Goods. Source: Ministry of Commnerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. 212 Statistical Appendix Table A2.3 (b) Merchandise Imports (US$ million at 1980-81 prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Food 1710 1968 865 807 446 1015 612 1344 1125 1550 1991 Foodgrains 35 1021 310 126 .77 662 165 33 27 272 574 EdibleOils 980 539 160 259 111 51 56 171 522 697 556 Others 695 409 395 422 258 302 391 1140 576 581 861 OtherConsumerGoods 513 555 643 647 475 559 482 535 763 639 886 P.O.L 5944 6734 7272 8287 9409 11757 12131 11679 13483 15319 15277 Crude Petroleum ' 4630 4651 5089 5405 6264 7660 8128 7825 9033 10264 10236 Petroleum Products 1314 2083 2183 2882 3145 4097 4003 3854 4449 5055 5042 CapitalGoodsb 4203 3702 4142 4314 3081 3146 4304 5027 7132 7168 7432 Intermediate: PRIMARY 2419 2841 3363 3314 2660 3076 3074 2779 3781 4463 5053 FertilizerRawMaterial 161 178 157 174 152 147 121 177 172 117 135 Gems 1262 1511 1965 1521 1408 1676 1795 1060 1437 2088 2507 Other 996 1151 1242 1619 1101 1253 1158 1543 2173 2258 2411 Intermediate: MANUFACTURES 3529 4728 5057 4792 3858 4199 4320 5982 7828 7694 10318 FertihzerManufactures 320 472 876 808 830 1116 981 904 1392 710 914 Iron & Steel 874 1275 1162 937 622 581 589 824 1074 1065 1096 Non-Ferrous Metals 540 553 775 599 326 362 436 624 824 1054 922 Others 1795 2428 2244 2448 2080 2140 2314 3630 4539 4864 7385 TOTAL IMPORTS (Commerce)' 18318 20528 21342 22161 19929 23751 24924 27346 34112 36833 40957 Statistical Discrepancy 2840 4339 3210 3536 1697 2642 3678 6919 6506 9240 9580 TOTALIMPORTSa 21158 24867 24552 25697 21626 26392 28602 34265 40618 46073 50537 a. Net of crude oil exports. b. 1987-88 onwards Capital Goods includes Project Goods. Source: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. Statistical Appendix 213 Table A2.3 (c) Import Unit Value Indices (USS Terms: 1980-81 = 100) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Food 75.5 61.1 82.6 85.5 95.5 69.2 89.9 109.0 115.1 99.1 92.7 Foodgrains 72.0 42.8 73.1 80.3 91.9 50.4 56.0 89.3 90.1 50.3 50.8 EdibleOils 72.4 93.4 79.3 70.2 90.9 114.0 94.5 116.5 129.4 118.4 133.8 Others 80.2 64.5 91.4 96.5 98.6 102.8 103.5 108.4 103.3 98.8 94.0 OtherConsumerGoods 117.1 126.1 124.5 131.5 134.3 140.0 141.0 147.7 140.8 134.6 128.1 P.O.L 52.5 44.7 51.8 72.7 57.0 51.9 47.4 50.8 55.8 65.5 53.8 Crude Petroleum 51.7 40.7 48.2 63.1 50.9 48.2 41.9 42.0 38.1 50.9 41.8 Petroleum Products 55.0 50.3 60.1 90.9 69.1 58.8 58.6 68.6 91.8 95.2 78.1 Capital Goods 120.5 129.7 127.7 135.3 138.1 144.1 145.0 151.9 144.8 138.4 131.8 Intermediate: PRIMARY 123.9 133.8 133.4 140.4 143.6 148.1 147.5 154.6 148.1 141.6 135.4 Fertilizer Raw Matenal 150.7 168.7 209.6 199.8 204.7 190.1 160.8 163.3 175.4 192.5 202.2 Gems 121.9 131.3 129.6 136.9 139.8 145.8 146.8 153.7 146.5 140.1 133.4 Other 122.2 131.6 129.9 137.3 140.2 146.2 147.2 154.2 147.0 140.5 133.7 Intermediate: MANUFACTURES 115.7 126.5 121.8 125.5 127.2 124.1 128.3 142.7 138.6 135.9 132.3 Fertilizer Manufactures 45.3 72.0 84.6 78.6 77.7 62.5 64.4 84.5 99.2 96.5 92.3 Iron & Steel 116.5 104.7 119.0 125.8 128.4 133.9 134.8 141.2 134.6 128.7 122.5 Non-Ferrous Metals 91.3 96.9 97.1 102.5 104.6 109.1 109.9 115.1 109.7 104.9 99.8 Others 135.3 155.3 146.3 146.5 149.6 156.0 157.1 164.6 156.9 149.9 142.8 TOTAL IMPORTS (Commerce) 93.7 95.0 99.4 108.6 97.4 92.1 93.5 104.8 107.5 106.2 101.3 Source: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance. Economic Survey, various issues; World Bank Staff estimates. 214 Statistical Appendix Table A2.4 Invisibles on Current Account (US$ million) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 GROSS RECEIPTS 6741 7023 7479 7002 9041 8976 10946 15133 17314 20982 22865 25462 Non-Factor Services 3571 3956 4246 4551 5022 4716 5264 6135 7346 7474 9429 13186 of which: Transport 680 898 907 983 939 982 1433 1696 2011 1953 1836 1925 Travel 1431 1419 1433 1456 1977 2098 2222 2365 2713 2878 2914 2993 Others 1460 1639 1906 2112 2106 1636 1609 2074 2622 2643 4679 8268 Factor Income 446 397 936 368 221 376 395 886 1429 1073 1561 1935 CurrentTransfersa 2724 2670 2297 2083 3798 3884 5287 8112 8539 12435 11875 10341 GROSS PAYMENTS 4161 4694 5273 7705 7881 7412 8416 9866 12210 11196 13237 16561 Non-Factor Services 3027 3225 3523 3571 3815 3601 4729 5533 7543 6748 8110 11021 of which: Transportb 870 1027 1115 1093 1289 1485 1765 1863 2169 2394 2522 2680 Travel 376 405 403 392 465 385 497 818 1167 858 1437 1743 Others 1781 1793 2005 2086 2061 1731 2467 2852 4207 3496 4151 6598 FactorIncome 1108 1453 1734 4120 4051 3799 3665 4314 4634 4380 5082 5479 Current Transfers 26 16 16 14 15 12 22 19 33 68 45 61 NETRECEIPTS 2580 2329 2206 -703 1160 1564 2530 5267 5104 9786 9628 8901 Non-Factor Services 544 731 723 980 1207 1115 535 602 -197 726 1319 2165 of which: Transport -190 -129 -208 -110 -350 -503 -332 -167 -158 -441 -686 -755 Travel 1055 1014 1030 1064 1512 1713 1725 1547 1546 2020 1477 1250 Others -321 -154 -99 26 45 -95 -858 -778 -1585 -853 528 1670 Factor Income -662 -1056 -798 -3752 -3830 -3423 -3270 -3428 -3205 -3307 -3521 -3544 CurrentTransfers 2698 2654 2281 2069 3783 3872 5265 8093 8506 12367 11830 10280 a. Excluding foreign grants, and including the Bhopal settlement in 1988-89. b. Excluding freight included in c.i.f value of merchandise imports. Source: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. Statistical Appendix 215 Table A2.5 Decomposition of Recent Export Growth (US$ million at current prices - annual averages) 1985-86 1991-92 Increase Contribution to 90-91 to 98-99 to Growth (%) Manufactured Exports 9717 21409 11692 82.5 Consumption goods 6227 12689 6462 45.6 Leather 997 1506 509 3.6 Gemns (gross) 2333 4450 2116 14.9 Garments 1490 3278 1788 12.6 Textiles 1406 3455 2048 14.4 Investment goods a 1415 3487 2072 14.6 Intermediate goods 2076 5233 3158 22.3 Chemicals 806 2174 1369 9.7 Petroleum Prod. 421 388 -33 -0.2 Others b 849 2670 1822 12.8 Primary Exports 3507 5993 2486 17.5 Fish 425 939 515 3.6 Rice 220 760 540 3.8 Cashews 224 345 121 0.9 Coffee 200 311 110 0.8 Tea 499 397 -102 -0.7 Spices 200 252 52 0.4 Iron Ore 489 459 -30 -0.2 Other Primary 1251 2531 1280 9.0 TOTAL EXPORTS (Customs) c 13225 27402 14177 100.0 Discrepancy 478 485 7 TOTAL EXPORTS (BOP) c 13703 27887 14184 Memo: Gems (Net) d 630 1849 1218 a. Refers to engineering goods. b. Including unclassified exports. c. Total exports, f.o.b., net of crude oil. d. Exports less imports of gems and jewellery. Source: Ministry of Commerce, (D.G.C.I.S.); Reserve Bank of India. 216 Statistical Appendix Table A3.1 (a) External Debt Summary: Debt Outstanding and Disbursed (USS million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A. Public & Publicly Guar. LT 44174 50073 64789 71062 73355 77921 83906 87480 80346 78049 79402 85206 1. Official Creditors 30356 31180 43648 48383 49446 52987 55856 61997 57112 54541 52165 54168 a. Multilateral 16588 18061 19664 21768 23964 26130 27826 31486 30048 29332 29391 30521 aa. of which IBRD 4661 5590 6615 7685 8459 9067 9870 11120 9849 8768 8138 7993 ab. of which IDA 11615 12019 12521 13312 14203 15339 15978 17666 17499 17616 17912 18562 b.Bilateral 13768 13119 23984 26615 25482 26857 28029 30511 27065 25209 22775 23647 2. Private Creditors 13818 18893 21140 22679 23909 24934 28050 25483 23234 23509 27236 31038 a. Commercial Banks 10459 12899 14694 16130 16025 17006 18727 14588 13412 16061 18758 20950 b. Suppliers Credits 715 632 539 434 455 817 1211 1017 875 1197 946 956 c. Bonds (including IDB) 1214 1785 2412 2638 4102 4021 3832 3740 3257 1364 3407 6002 d.OtherPrivate 1430 3576 3496 3477 3328 3090 4281 6139 5691 4887 4126 3130 B. PrivateNon-Guaranteed LT 1652 1473 1551 1488 1545 1205 1770 6427 6618 7382 9208 8409 C. Total LT DOD (A+B) 45827 51546 66340 72550 74901 79126 85676 93907 86964 85431 88610 93615 D. Use of lMFCredit 4023 2573 1566 2623 3451 4799 5040 4312 2374 1313 664 288 E. Short-Term Debt 5673 6358 7501 8544 7070 6340 3626 4264 5049 6726 5046 4329 F. Total External Debt (C+D+E) 55522 60477 75407 83717 85421 90264 94342 102483 94387 93470 94320 98232 Memo items: Total NRI Deposits 8616 10482 12368 13953 12676 14258 14498 14661 13894 14785 14105 14543 RupeeDebttoFSU .. .. 11021 12847 10420 10616 10084 9624 8233 7511 5874 4731 External Debt (% ofGDP) 20.0 20.5 25.4 25.9 31.4 34.2 33.8 31.0 25.9 23.5 22.4 22.9 .. Not available. Source: World Bank, DRS data. Statistical Appendix 217 Table A3.l (b) External Debt Summary: Disbursements (USS million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A. Public&PubliclyGuar. LT 6921 10155 7009 6376 6896 7105 7361 6685 5961 5897 7193 9801 1. Official Creditors 3618 3635 3553 3572 4364 4160 3645 3334 2828 3040 3708 4464 a. Multilateral 2269 2625 2105 2210 2758 2424 2084 2230 1942 2234 2021 2040 aa. IBRD 1295 1716 1445 1219 1231 852 1216 741 589 686 542 534 ab. IDA 917 755 566 762 953 1186 669 966 729 906 830 866 b. Bilateral 1349 1010 1447 1361 1606 1736 1561 1104 886 806 1687 2424 2. Private Creditors 3303 6520 3457 2804 2532 2945 3716 3351 3133 2857 3485 5336 a. Commercial banks 2968 3361 2623 1983 504 2145 1545 870 1719 1698 903 1961 b. Suppliers Credits 5 16 3 7 78 415 466 213 71 449 2 141 c. Bonds (including IDB) 116 679 705 427 1619 0 0 0 86 275 2109 2775 d. OtherPrivate 213 2463 126 387 332 384 1705 2267 1258 436 471 459 B. Private Non-Guaranteed LT 348 175 240 214 309 254 1060 867 1179 785 1886 500 C. Total LT Disbursements (A+B) 7269 10330 7249 6590 7204 7358 8421 7552 7140 6682 9079 10301 D. IMF 0 0 0 1754 1233 1623 323 0 0 0 0 0 E. Net Short-Term Capital 727 685 1143 1043 -1474 -730 -2714 638 785 1677 838 0 F. Total Disbursements (C+D+E) 7269 10330 7249 8344 8437 8982 8744 7552 7140 6682 9079 10301 Source: World Bank, DRS data. 218 Statistical Appendix Table A3.1 (c) External Debt Summary: Principal Repayments (US$ million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A.Public&PubliclyGuar.LT 1604 1665 1569 2332 2569 2947 3538 5021 6764 6405 6645 6285 1. Official Creditors 1120 990 1064 1238 1469 1618 1890 2365 3876 2856 4114 3487 a. Multilateral 508 397 467 609 703 838 1000 1102 1513 1218 1217 1295 aa. of which IBRD 430 303 352 472 527 634 758 827 943 840 820 842 ab. of which IDA 69 81 98 114 141 155 174 194 226 234 250 288 b. Bilateral 612 593 597 629 766 780 890 1263 2364 1638 2897 2192 2.PrivateCreditors 485 675 505 1094 1101 1329 1647 2656 2888 3549 2531 2797 a. Commercial Banks 284 363 213 250 293 438 666 1054 1796 1484 1160 836 b.SuppliersCredits 98 96 98 113 58 73 IIl 472 143 131 240 150 d. Bonds (including 1DB) 6 14 27 280 239 206 338 404 311 1242 2 264 c.OtherPrivate 97 202 167 452 511 612 532 726 637 692 1130 1548 B. Private Non-Guaranteed LT 290 280 322 318 273 306 495 123 156 240 293 292 C. Total LT Repayments (A+B) 1894 1944 1891 2651 2842 3253 4033 5144 6920 6645 6938 6576 D.lMFRepayments 1082 1210 1008 726 460 334 134 1174 1719 972 613 390 E.TotalLTRepayments(C+D) 2976 3155 2899 3376 3302 3587 4167 6318 8639 7618 7551 6966 Source: World Bank, DRS data. Statistical Appendix 219 Table A3. I (d) External Debt Summary: Net Flows (US$ million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A. Public & Publicly Guar. LT 5316 8490 5440 4044 4327 4158 3823 1664 -803 -508 548 3516 1. Official Creditors 2498 2645 2489 2334 2895 2542 1755 969 -1048 184 -406 977 a. Multilateral 1761 2228 1638 1601 2055 1586 1084 1128 429 1016 804 745 aa. of whichlBRD 865 1414 1093 747 704 218 458 -86 -354 -154 -278 -308 ab. of which IDA 848 675 468 648 812 1031 495 772 503 672 580 578 b. Bilateral 737 417 850 732 840 956 671 -159 -1478 -832 -1210 232 2. PrivateCreditors 2818 5845 2952 1710 1431 1616 2069 695 245 -692 954 2539 a.CommercialBanks 2684 2999 2410 1733 211 1707 879 -184 -77 214 -257 1125 b. Suppliers Credits -93 -80 -95 -106 20 342 355 -259 -72 318 -238 -9 c. Bonds (including IDB) 110 665 678 147 1380 -206 -338 -404 -225 -967 2107 2511 d.OtherPrivate 117 2261 -41 -65 -179 -228 1173 1541 621 -256 -659 -1089 B. Private Non-Guaranteed LT 59 -104 -82 -104 36 -52 565 744 1023 545 1593 208 C. Total LT Repayments (A+B) 5375 8386 5358 3939 4362 4105 4388 2408 220 37 2141 3725 D. Net IMF Credit -1082 -1210 -1008 1028 773 1289 189 -1174 -1719 -972 -613 -390 E.NetShortDebtFlows 727 685 1143 1043 -1474 -730 -2714 638 785 1677 838 0 F. Total Net Flows (C+D+E) 4293 7175 4350 4968 5135 5395 4577 1234 -1499 -936 1528 3335 Memo item: Total NRINet Flows 1992 2328 2295 1536 290 2001 1205 172 1103 3350 1125 1742 Source: Derived from Tables 3.1(b) and 3.1(c). 220 Statistical Appendix Table A3.1 (e) External Debt Summary: Interest Payments (US$ million at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A. Public&PubliclyGuar. LT 1837 1993 3162 3647 3403 3317 3400 3702 3813 3584 4292 4300 1. Official Creditors 810 940 1351 1497 1512 1631 1674 1846 1867 1680 1599 1553 a. Multilateral 479 581 640 738 796 899 940 1014 1061 966 907 887 aa. ofwhichlBRD 378 474 529 615 643 709 721 768 770 674 590 536 ab. ofwhich IDA 98 98 90 97 101 109 114 121 131 130 131 135 b. Bilateral 331 360 711 759 717 732 733 832 806 714 693 667 2.PrivateCreditors 1027 1053 1811 2150 1891 1685 1727 1856 1946 1904 2692 2746 a. Commercial Banks 778 787 1518 1751 1426 1200 1206 1159 1263 886 2212 2297 b. Suppliers Credits 67 61 53 43 31 31 55 108 68 65 90 61 c.Bonds(includinglDB) 79 104 143 182 196 230 258 221 183 572 99 118 d. Other Private 103 100 96 174 238 224 208 368 432 381 291 270 B.PrivateNon-GuaranteedLT 147 127 140 135 126 123 139 391 531 426 173 467 C. Total LT Interest (A+B) 1985 2120 3302 3782 3529 3440 3539 4093 4344 4010 4465 4767 D. IMF Service Charges 297 233 184 134 203 271 271 228 182 87 50 25 E. Interest Paid on ST Debt 429 437 570 899 826 399 367 312 385 268 349 327 F. Total lnterestPaid (C+D+E) 2710 2790 4056 4815 4559 4110 4178 4633 4911 4365 4864 5118 Memo item: Total NRIl nterest Payments 715 609 1076 1282 1036 918 905 1046 1247 1627 1807 1719 Source: World Bank, DRS data. Statistical Appendix 221 Table A3.2 Extemal Reserves (US$ million) Reserve Reserves Reserves Foreign Position excluding including Use of Net Exchange SDRs in the Fund Gold Gold' Gold IMF Credit Reserves 1980-81 5850 603 405 6858 370 7228 327 6901 1981-82 3582 473 405 4460 335 4795 964 3831 1982-83 4281 291 393 4965 324 5289 2876 2413 1983-84 5099 230 518 5847 320 6167 4150 2017 1984-85 5482 145 483 6110 325 6435 3932 2503 1985-86 5972 131 554 6657 417 7074 4290 2784 1986-87 5924 179 626 6729 471 7200 4291 2909 1987-88 5618 97 676 6391 508 6899 3653 3246 1988-89 4226 103 630 4959 473 5432 2364 3068 1989-90 3368 107 634 4109 487 4596 1493 3103 1990-91 2236 102 -- 2338 3496 5834 2623 3211 1991-92 5631 90 1 5722 3499 9221 3451 5770 1992-93 6434 18 297 6749 3380 10129 4798 5331 1993-94 15068 108 300 15476 4078 19554 5040 14514 1994-95 20809 19 332 21160 4370 25530 4312 21218 1995-96 17044 82 311 17436 4561 21997 2374 19623 1996-97 22367 2 295 22664 4054 26718 1313 25405 1997-98 25975 1 284 26260 3391 29651 664 28987 1998-99 29522 8 663 30193 2417 32610 563 32047 End of the Month 1995 March 20809 19 332 21160 3810 24970 4312 20658 June 19601 95 334 20030 3778 23808 3933 19875 September 19064 49 320 19433 3713 23146 3377 19768 December 17467 139 316 17922 3614 21536 2923 18612 1996 March 17044 82 311 17436 3810 21246 2374 18872 June 17526 128 307 17961 3778 21739 2079 19660 September 18433 57 306 18796 3713 22509 1755 20754 December 19742 122 306 20170 3614 23784 1560 22224 1997 March 22367 2 295 22664 3386 26050 1313 24737 June 25404 3 295 25702 3300 29002 1144 27858 September 25697 30 290 26017 3129 29146 946 28200 December 24324 77 287 24688 2880 27568 796 26772 1998 March 25975 1 284 26260 2497 28757 664 28093 June 23933 81 283 24297 2472 26769 563 26206 September 26184 14 292 26490 2405 28895 480 28415 December 26958 83 300 27341 2492 29833 401 29432 1999 March 29522 8 663 30193 2417 32610 288 32322 June 30559 8 653 31212 2307 33519 206 33313 -- Not available. Note: IMF Credit refers to Use of IMF credit within the General Resources Account (GRA) excluding Trust Fund, Structural Adjustment Facility (SAF), and Enhanced Structural Adjustmnent Facility (ESAF) loans. a. Valued at 35 SDR's per fine troy ounce. Source: IMF, International Financial Statistics, various issues. 222 Statistical Appendix Table A4.1 Central Govemment Finances Summary (Rs billion at current prices) 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 B.E. R.E. B.E. Revenuea 660.30 741.28 754.53 910.83 1101.30 1262.79 1339.02 1619.94 1576.65 1828.40 Tax Revenue 500.69 540.44 534.49 674.54 819.39 937.01 956.73 1168.57 1095.37 1323.65 Customs 222.57 237.76 221.93 267.89 357.57 428.51 401.93 481.48 426.00 503.69 Union Excise5 160.17 163.67 172.24 210.64 221.76 234.63 255.16 307.82 285.35 363.57 Income Taxb 16.27 18.31 13.46 34.68 43.16 47.15 52.76 69.84 69.02 99.23 Corporate Tax 78.53 88.99 100.60 138.22 164.87 185.67 200.16 265.50 271.00 308.50 Other 23.15 31.71 26.26 23.11 32.03 41.05 46.72 43.93 44.00 48.66 Non-Tax Revenue 159.61 200.84 220.04 236.29 281.91 325.78 382.29 451.37 481.28 504.75 Interest Receipts 109.33 124.87 150.62 157.97 184.19 221.06 253.23 279.54 305.45 330.34 Other 19.90 56.36 69.90 27.54 94.10 100.92 119.94 121.83 85.83 74.41 Expenditure' 1053.93 1162.62 1356.62 1543.94 1717.70 1934.67 2237.50 25S0.19 2704.08 2729.17 Non-Plan Expenditure 804.53 859.58 981.91 1133.61 1319.01 1474.73 1729.91 1959.25 2135.41 2070.04 Interest Payments 265.63 310.35 366.95 440.49 500.31 594.78 656.37 750.00 772.48 880.00 Defense 163.47 175.82 218.45 232.45 268.56 295.05 352.78 412.00 412.00 456.94 Subsidies 122.53 119.95 126.82 129.32 133.72 163.64 194.87 220.25 246.83 238.38 Other Non-Plan Expenditure 252.90 253.47 269.69 331.35 416.42 421.26 525.89 577.00 704.10 494.72 Plan Expenditure 309.61 366.60 436.62 473.78 463.74 535.34 590.77 720.02 683.71 770.00 Less: Recovery of Loans 60.21 63.56 61.91 63.45 65.05 75.40 83.18 99.08 115.04 110.87 Disinvestment of PSEs 30.38 19.61 -0.48 50.78 3.62 3.80 9.12 50.00 90.00 100.00 Gross Fiscal Deficit 363.41 401.74 602.57 582.33 612.79 668.10 889.38 910.26 1037.44 1049.56 Financed by: ReserveBankoflndia(net)' 59.04 21.75 2.60 21.30 198.55 19.34 n..a. 37.95 n.a. n.a. MarketableSecurities (net)f 114.22 181.80 381.14 188.80 319.23 289.52 301.38f 258.24 344.25f 344.25f Other Domestic Borrowing (net) 135.94 144.99 168.09 320.77 91.83 329.36 878.47 590.70 1028.34 1041.11 Extemal Borrowing (net) 54.21 53.19 50.74 51.46 3.18 29.87 10.91 23.37 9.10 8.45 Memo: GDPmp 6671.65 7635.61 8769.52 10378.42 12179.63 14098.49 15635.52 17883.72 17755.56 20025.00 Fiscal Deficit / GDP 5.4 5.3 6.9 5.6 5.0 4.7 5.7 5.1 5.8 5.2 Revenue / GDP 9.9 9.7 8.6 8.8 9.0 9.0 8.6 9.1 8.9 9.1 Expenditure/GDP 15.8 15.2 15.5 14.9 14.1 13.7 14.3 14.4 15.2 13.6 BE = Budget estimates; RE = Revised estimates. Notes: a. Including sale of public assets (disinvestment). b. Net of states' share. c. Net of loan recoveries. d. GOI changed its definition of Gross Fiscal Deficit (excl. the states share of small savings) from 1999-00. For the sake of consistency the change is not refl e. Monetized deficit (equal to net RBI credit to Central Govemment). f. T-Bills and dated securities, excluding those issued to RBI. g. Includes RBI (net) figure. Source: Ministry of Finance, Union budget documents and World Bank Staff Estimates.. Statistical Appendix 223 Table A4.2 Budgetary Classificationi of Central Government Finances (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 B.E. R.E. B E. Revenue receipts 370.37 435.91 499.96 549.54 660.30 741.28 754.53 910.83 1101.30 1262.79 1339.02 1619.94 1576.65 1828.40 Tax revenue 280.15 337.51 383.49 429.78 500.69 540.44 534.49 674.54 819.39 937.01 956.73 1168.57 1095.37 1323.65 Noni-tax reveniue 90.22 98.40 116.47 119.76 159.61 200.84 220.04 236.29 281.91 325.78 382.29 451.37 481.28 504.75 ofsvhich: Iitterest from states 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 130.02 151.63 180.32 183.59 212.83 0.00 Revenue expenditure (A+B+C+D) 461.75 541.06 642.07 735.15 823.08 927.02 1081.69 1221.11 1398.62 1589.34 1803.52 2100.63 2181.39 2369.88 A. Developteiital 114.25 140.36 184.15 196.01 198.17 208.60 243.68 301.50 355.92 399.53 460.09 544.65 592.23 589.27 1. Social services 19.35 22.43 24.99 27.53 30.57 34.30 40.97 47.43 66.29 84.23 105.64 139.63 135.77 147.06 2. Economic services 94.90 117.93 159.17 168.48 167.60 174.30 202.71 254.07 289.63 315.30 354.45 405.03 456.45 442.21 B. Non-developmental 244.59 287.69 335.47 391.00 450.34 521.58 613.17 708.20 816.78 942.77 1100.88 1257.23 1313.68 1445.01 Defence services 88.60 95.58 101.94 108.74 114.42 121.09 149.77 164.26 188.41 209.97 261.75 308.40 310.13 334.64 Interestpayments 112.36 142.61 177.57 214.71 265.63 310.35 366.95 440.49 500.31 594.78 656.37 750.00 772.48 880.00 C. Grants-in-aid and contributions 93.49 102.08 109.36 134.39 159.53 180.54 211.11 204.83 218.28 238.17 232.27 287.84 263.11 323.23 ofwlhich: Grants to states 91.36 100.15 86.44 132.02 157.00 178.30 208.30 200.47 212.87 231.57 297.38 275.30 249.41 308.66 D. Revenue expenditure ofUTs 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 7.63 8.86 10.28 10.91 12.37 12.37 Net current balance -91.38 -105.15 -142.11 -185.61 -162.78 -185.74 -327.16 -310.28 -297.32 -326.55 -464.50 -480.69 -604.74 -541.48 Capital expenditure (A+B+C+D) 179.07 204.08 237.18 260.88 231.01 235.60 274.93 322.82 319.09 345.35 434.00 479.57 522.69 608.08 A. Developmental 56.67 60.03 70.95 69.23 58.26 73.82 55.60 73.96 50.49 46.82 73.33 1i4.21 80.33 105.08 1. Social services 2.80 3.51 3.21 2.47 2.39 2.59 3.32 7.26 5.48 6.58 6.04 10.51 10.14 11.48 2. Economic services 53.86 56.52 67.74 66.77 55.87 71.23 52.28 66.70 45.01 40.24 67.28 103.71 70.19 141.70 B. Non-developmental 33.39 40.76 45.27 49.56 52.32 58.88 73.92 72.51 88.26 93.29 99.74 115.43 111.84 135.65 ofwhich: Defence services 31.08 37.83 42.22 45.52 49.05 54.73 68.67 68.19 80.15 85.08 91.04 103.60 101.87 122 30 C.CapitalexpenditureofUTs 2.88 1.76 1.87 2.68 3.42 3.50 2.78 2.44 2.24 1.84 2.19 3.10 3.03 3.27 D. Loans and advances (net) 86.13 101.53 119.09 139.40 117.01 99.41 142.63 173.91 178.10 203.40 258.74 246.82 327.50 364.08 to States& UTs 58.51 67.30 79.55 98.69 94.18 86.97 100.72 143.13 148.37 175.71 233.36 212.11 301.90 326.64 to Others 27.62 34.23 39.55 40.71 22.83 12.44 41.92 30.78 29.73 27.68 25.39 34.71 25.60 37.44 Disinvesttnentof equity in PSEs 0.00 0.00 0.00 0.00 30.38 19.61 -0.48 50.78 3.62 3.80 9.12 50.00 90.00 100.00 Gross fiscal deficit (GOI Defn.) 270.45 309.22 379.30 446.50 363.41 401.74 602.57 582.33 612.79 668.10 889.38 910.26 1037.44 1049.56 Financed by instruments Market loans 58.62 84.18 74.04 80.01 75.10 36.76 289.28 203.26 330.87 200.12 324.99 559.31 649.11 672.18 Small savings 39.11 58.35 85.75 91.04 66.40 57.17 91.00 165.78 127.90 152.57 244.97 216.40 290.00 330.00 Provident funds 52.74 71.12 90.86 89.37 79.56 87.55 93.58 102.65 75.56 84.97 88.63 148.45 145.88 164.60 Externalloans 28.93 24.60 25.95 31.81 54.21 53.19 50.74 51.46 3.18 29.87 10.91 23.37 9.10 8.45 Treasury bills 56.52 62.44 109.11 117.69 68.87 117.73 119.82 -2.68 114.63 127.28 651.98 0.00 0.00 0.00 Other 34.53 8.53 -6.41 36.58 19.27 49.33 -41.85 61.86 -39.35 73.28 -432.10 -37.27 -56.65 -125.67 BE = Budget estimates, RE = Revised estimates. Note: GOI changed its definifion of Gross Fiscal Deficit (excl. the states share of small savings) from 1999-00. FoT the sake of consistency the year 1999-00 does not reflect this change Source: MinistryofFinance, Unionbudgetdocuments; DepartmentofExpeuditure, FinanceAccounts;WorldBankStaffEstimates. 224 Statistical Appendix Table A4.3 Budgetary Classification of State Govemment Finances (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1997-98 1998-99 B.E. R.E. B.E. Revenuereceipts 448.00 507.09 568.08 673.19 813.59 911.04 1050.65 1222.82 1373.45 1528.62 1718.35 1830.97 1947.92 Tax revenue 289.20 330.70 392.27 448.80 529.53 603.90 686.66 805.75 931.63 1061.63 1249.10 1285.21 1395.56 Direct tax 19.85 24.13 30.06 33.75 39.59 42.28 49.73 70.05 81.10 84.30 105.58 101.19 120.96 Indirect tax 173.37 199.88 229.89 269.70 317.98 356.40 414.51 487.29 557.55 626.72 740.98 748.40 882.97 State share in central taxes 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.40 292.98 350.61 435.48 408.54 391.63 Non-tax revenue 158.80 176.38 175.81 224.39 284.06 307.14 363.99 417.07 441.82 466.99 469.25 545.76 552.36 of which: Grants from centre 91.36 100.15 86.44 132.02 157.00 178.30 208.30 200.47 212.87 231.57 230.27 302.41 275.30 Revenue expenditure [A+B+C] 451.54 522.96 602.53 717.73 861.86 962.05 1093.76 1284.40 1450.04 1689.50 1915.51 1967.19 2294.95 A. Developmental (1+2) 318.20 362.37 407.81 488.55 585.05 634.65 708.38 786.37 892.76 1061.54 1112.44 1210.92 1289.85 1. Social services 177.06 205.74 240.17 279.62 310.92 345.65 389.61 449.02 536.07 603.28 682.82 729.78 800.99 2. Economic services 141.14 156.63 167.64 208.92 274.13 288.99 3t8.78 33736 356.69 458.26 429.61 481.13 488.86 B. Non-developmental 128.44 155.06 188.69 221.34 266.66 315.06 373.67 484.99 541.97 608.64 775.98 724.56 968.92 of which: Interestpayments 48.98 59.33 71.86 86.55 109.44 132.10 158.00 192.02 219.32 255.76 310.89 312.35 364.17 Tocentre 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 130.02 151.63 180.32 183.59 212.83 To others 17.40 21.63 27.62 34.81 44.23 54.56 62.47 80.19 89.30 104.13 130.57 128.77 151.34 C. Other expenditure' 4.91 5.53 6.03 7.84 10.16 12.35 11.71 13.03 15.31 19.32 27.10 31.71 36.18 Net current balance -3.55 -15.87 -34.45 -44.54 -48.27 -51.01 -43.11 -61.58 -76.59 -160.88 -197.16 -136.22 -347.03 Capital expenditure [A+B+C] 101.31 98.66 117.52 134.78 132.49 157.77 167.84 206.19 232.25 213.31 303.57 314.13 339.36 A. Developmental (1+2) 64.29 68.53 77.28 89.61 98.61 103.44 120.51 169.31 178.37 168.27 216.20 229.75 235.58 1. Social services 10.74 11.28 11.71 12.57 16.47 16.64 18.31 23.04 26.21 29.73 44.63 41.52 46.04 2. Economic services 53.55 57.25 65.57 77.03 82.14 86.80 102.21 146.27 152.16 138.55 171.58 188.24 189.54 B. Non-developmental 2.26 2.25 2.36 2.63 2.34 3.10 3.99 4.20 6.57 7.12 8.80 9.83 10.59 C. Loans and advances (net) 34.77 27.88 37.88 42.55 31.54 51.22 43.33 32.68 47.30 37.91 78.56 74.55 93.20 Gross fiscal deficit 104.85 114.53 151.96 179.32 180.77 208.78 210.95 267.77 308.84 374.19 500.73 450.35 686.40 Financed by instrument: Market loans 18.01 22.46 25.95 25.60 33.10 38.50 42.28 41.05 64.04 65.19 76.15 77.27 89.36 Loans from centre (Net) 58.31 67.07 79.30 98.39 93.75 86.60 99.01 137.61 139.98 167.40 175.08 213.66 323.80 Small savings & irovident funds 16.28 20.01 23.07 30.69 29.09 36.22 43.30 47.79 49.02 53.75 73.94 77.48 111.23 Other 12.26 4.98 23.65 24.63 24.82 47.45 26.36 41.33 55.81 87.85 175.56 81.94 162.02 Note: BE = Budget estimates; RE = Revised estimates. a. Other expenditure include compensation and assignments to local bodies and panchayat raj institutions and reserve with the finance department. Source: Ministry of Finance, Union budget documents; Reserve Bank of India, RBI bulletins on state finances, World Bank Staff Estimates. Statistical Appendix 225 Table A4.4 Budgetary Classification of General Government Finances (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 /a/ B.E. Revenue receipts 695.43 805.15 937.36 1038.97 1251.67 1396.48 1501.35 1821.35 2131.86 2408.21 2689.51 3079.73 Taxrevenue 569.35 668.21 775.76 878.58 1030.22 1144.34 1221.15 1480.29 1751.02 1998.63 2241.94 2564.13 Non tax revenue 126.08 136.94 161.60 160.39 221.45 252.13 280.20 341.06 380.84 409.58 447.57 515.59 Revenue expenditure [A+B+C+D] 790.35 926.17 1113.92 1269.12 1462.73 1633.23 1871.62 2193.21 2505.77 2895.64 3371.20 3907.45 A. Developmental 432.44 502.73 591.96 684.56 783.22 843.24 952.06 1087.87 1248.68 1461.07 1671.01 1834.50 1. Social services 196.40 228.17 265.15 307.16 341.49 379.95 430.58 496.45 602.36 687.51 835.42 940.62 2. Economic services 236.04 274.55 326.80 377.40 441.72 463.29 521.48 591.42 646.32 773.56 835.59 893.89 B. Non-developmental 341.45 405.05 479.92 560.60 651.78 759.10 891.30 1081.36 1228.73 1399.78 1647.37 2013.33 C. Revenue disbursements of UTs 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 7.63 8.86 10.28 10.91 D. Other expenditureb 7.04 7.46 28.95 10.21 12.68 14.59 14.53 17.39 20.72 25.92 42.54 48.71 Net current balance -94.93 -121.02 -176.56 -230.15 -211.05 -236.75 -370.28 -371.87 -373.91 -487.43 -681.69 -827.72 Capital expenditure [A+B+C+D] 222.07 235.66 275.40 297.27 269.76 306.77 343.76 391.40 411.37 391.26 524.19 615.67 A. Developmental (1+2) 120.95 128.56 148.23 158.84 156.87 177.26 176.11 243.28 228.86 215.09 303.08 349.79 1. Social services 13.54 14.79 14.92 15.04 18.86 19.23 21.63 30.30 31.69 36.31 47.56 56.54 2. Economic services 107.41 113.76 133.31 143.80 138.00 158.03 154.49 212.97 197.17 178.79 255.52 293.25 B. Non-Developmental 35.65 43.01 47.63 52.19 54.67 61.98 77.90 76.71 94.84 100.41 109.57 126.02 C. Loans andadvances(net) 62.59 62.33 77.67 83.56 54.79 64.03 86.96 68.98 85.43 73.91 109.36 136.75 D. Capital disbursementsofUTs 2.88 1.76 1.87 2.68 3.42 3.50 2.78 2.44 2.24 1.84 2.19 3.10 DisinvestmentofequitiesinPSEs. 0.00 0.00 0.00 0.00 30.38 19.61 -0.48 50.78 3.62 3.80 9.12 50.00 Gross fiscal deficit 316.99 356.68 451.96 527.42 450.43 523.91 714.51 712.49 781.65 874.89 1196.76 1393.39 Financed by Instrument: Market Loans 76.63 106.64 99.99 105.61 108.20 75.26 331.56 244.31 394.91 265.31 402.26 648.67 Small Savings 39.11 58.35 85.75 91.04 66.40 57.17 91.00 165.78 127.90 152.57 244.97 216.40 Provident Funds 69.02 91.13 113.93 120.06 108.65 123.77 136.88 150.44 124.58 138.72 166.11 259.68 External Loans 28.93 24.60 25.95 31.81 54.21 53.19 50.74 51.46 3.18 29.87 10.91 23.37 Treasury Bills 56.52 62.44 109.11 117.69 68.87 117.73 119.82 -2.68 114.63 127.28 651.98 0.00 Other 46.79 13.52 17.24 61.21 44.09 96.79 -15.49 103.19 16.46 161.13 -279.47 245.28 BE = Budget estimates; RE = Revised estimates. Notes: a. Actuals for centre and revised estimates for states. b. Other expenditure include compensation and assignments to local bodies and panchayat raj institutions and Teserve with the finance department. Source: Union Budget Documents; RBI bulletin on state finances; World Bank Staff Estimates. 226 Statistical Appendix Table A4.5 Tax Revenue - Center and States (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98' 1998-99 1998-99 1999-00 B.E. R.E. BE. Centrai Government A.Grosstaxrevenue 376.66 444.74 516.36 575.76 673.61 746.37 757.44 922.94 1112.37 1287.62 1392.21 1577.11 1487.00 1768.60 Corporation tax 34.33 44.07 47.29 53.35 78.53 88.99 100.60 138.22 164.87 185.67 200.16 265.50 271.00 308.50 Taxeson income 31.92 42.41 50.04 53.71 67.31 78.88 91.15 120.25 156.03 182.31 263.78 209.30 214.00 269.10 Custnos 137.02 158.05 180.36 206.44 222.57 237.76 221.93 267.89 357.57 428.51 401.93 481.48 426.00 503.69 Union Excise Duties 164.26 188.41 224.06 245.14 281.10 308.32 316.97 373.47 401.87 450.08 479.62 576.90 532.00 638.65 Other 9.13 11.S0 14.61 17.12 24.10 32.42 26.79 23.11 32.03 41.05 46.72 43.93 44.00 48.66 B. States Share ofTax Revenue 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.40 292.98 350.61 435.48 408.54 408.54 391.63 IncomeTax 25.89 27.49 39.22 41.21 51.04 60.57 77.69 85.57 112.87 135.16 211.02 139.46 144.98 169.87 Estate Duty 0.06 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Union Excise Duties 70.03 79.19 93.10 104.14 120.93 144.65 144.73 162.83 180.11 215.45 224.46 269.08 246.65 275.08 C. Assignments ofUT taxes to 0.53 0.54 0.55 0.63 0.95 0.71 0.53 0.00 0.00 0.00 0.00 0.00 0.00 0.00 local bodies Tax Revenue (net) [A-B-C] 280.15 337.51 383.49 429.78 500.69 540.44 534.49 674.54 819.39 937.01 956.73 1168.57 1095.37 1323.65 State Government States own Tax Revenue 193.22 224.01 259.95 303.45 357.56 398.68 464.24 557.35 638.65 711.02 849.59 1003.93 ... ... DirectTax 19.85 24.13 30.06 33.75 39.59 42.28 49.73 70.05 81.10 84.30 101.19 120.96 Taxesonincome 2.70 3.12 4.53 6.34 6A5 6.02 6.50 7.17 8.35 10.11 10.80 12.35 ... ... Land revenue 4.48 5.94 6.90 6.07 6.36 6.17 7.32 11.41 13.26 10.74 13.49 16.56 ... ... Stamps and registration fees 12.54 14.86 18.45 21.12 26.54 29.78 35.55 50.91 58.98 62.67 76.15 91.19 ... ... Other 0.13 0.21 0.19 0.22 0.24 0.31 0.36 0.56 0.52 0.79 0.75 0.86 ... ... Indirect Tax 173.37 199.88 229.89 269.70 317.98 356.40 414.51 487.29 557.55 626.72 748.40 882.97 ... ... SalesTax 111.85 131.22 150.60 176.67 210.64 233.49 276.38 331.54 354.77 439.27 513.75 596.44 State excise 28.67 30.81 38.64 47.95 54.39 62.65 71.06 77.47 85.16 88.05 113.38 136.29 Taxes on Vehicles 11.75 12.90 14.15 15.66 18.37 21.94 25.83 30.81 37.26 41.17 49.45 58.41 Other 21.09 24.96 26.49 29.41 34.58 38.32 41.25 47.47 80.35 58.22 71.82 91.83 ... ... States Share of Central Taxes 95.90 106.69 132.32 145.35 171.97 205.22 222.42 248.40 292.98 350.61 435.62 391.63 ... ... Tax revenue retained by states 289.20 330.70 392.27 448.80 529.53 603.90 686.66 805.75 931.63 1061.63 1285.21 1395.56 Not available. a. Actuals for Central Govemment and Revised Estimates for States. Sourme: Ministry of Finance, Union budget documents; Reserve Bank of India, 1BI bulletins on state finances;World Bank StaffEstimates. Statistical Appenidix 227 Table A4 6 Non-Tax Revenue - Center and States (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98' 1998-99 1998-99 1999-00 B.E. R.E. B.E. Central Government Non-taxrevenue 9022 9840 116.47 11976 15961 20084 22004 236.29 28191 32578 382.29 45137 48128 504.75 Interest receipts 57.55 6981 84.66 8730 109.33 124.87 15062 157.97 184 19 221 06 25323 279.54 30545 330.34 fromstategovetnmnts 31.58 37.70 4424 5174 6522 77.54 9553 111.83 13002 151.63 17807 21283 21870 25899 Dividends and profits 6.05 4.75 7.16 7.74 10.58 2493 24.48 27.16 3248 38.54 51.81 7373 75.37 9483 Othertgeneralservices 3.37 395 4.05 5.06 5.72 1014 10.46 1187 12.42 13.00 16.61 1637 1962 18.51 Social services 0 60 0.80 0 57 0.65 0.90 0 79 101 0.95 1.09 1.26 1 45 1.55 1.60 1 61 Economic services 1273 8.93 5.45 860 2146 17.86 1326 1860 3245 33.17 43.09 6342 65.15 4536 Grants-in-aidandcontributions 492 6.00 754 586 9.47 919 993 1038 11.38 11 90 10.18 1054 8.12 7.15 Other 500 416 704 4.55 2.15 1306 1028 936 7.90 6.85 592 622 597 695 State Government States onan Non-tax revenue 6744 76.24 89.37 92.37 127.06 128 84 155 69 216.60 228 95 235 43 243.35 277 05 Interest receipts 19 47 23.87 26.34 24 03 53 20 3938 47.25 53.65 57 92 81.71 71.45 6880 General smices 754 9.51 11.40 1913 1728 18.44 2947 72.22 7718 53.28 6149 6908 Social services 5.04 5.73 6.76 5.86 7.74 8.48 912 9.65 10.95 12.00 1411 1546 Economic services 35 12 3664 4459 43.01 48.39 61 48 69.21 80.35 81.86 86.77 95 14 122.49 Forestry and wild life 1067 10.08 11.96 11 37 12.71 12.72 14 94 1640 16.57 15.94 16.82 19.34 Industries 9 11 12.08 14.31 12.23 15.37 23 17 25.09 3051 35.67 3741 41 91 52.26 Oter Economic Services 1533 14.48 18.32 19.41 20.31 25.59 29.19 33.44 2962 33.42 3642 5089 Other 028 0.49 028 0.34 045 106 063 0.74 1.03 167 1.16 122 Grntts from centre 91 36 100.15 86.44 132.02 15700 178.30 20830 20047 212.87 231.57 30241 275.30 Non-taxrcvenueresainedbystates 15880 176.38 17581 224.39 284.06 307.14 36399 417.07 44182 466.99 54576 552.36 Not available Note: BE = Budget estimates; RE Revised estimates. Source: Ministry of Finance, Union budge documents; Reserve Bank of India, RBI bulletins on state finance; World Bank Staff Estimates. 228 Statistical Appendix Table A4.7 Revenue Expenditure of the Central Government (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 B.E. R.E. B.E. Revenueexpenditure(A+B+C+D) 461.75 541.06 642.07 735.15 823.08 927.02 1081.69 1221.11 1398.62 1589.34 1803.52 2100.63 2181.39 2369.88 A. Developmental 114.25 140.36 184.15 196.01 198.17 208.60 243.68 301.50 355.92 399.53 460.09 544.65 592.23 589.27 I. Social services 19.35 22.43 24.99 27.53 30.57 34.30 40.97 47.43 66.29 84.23 105.64 139.63 135.77 147.06 Education,Sports,ArtanldCulture 10.13 11.12 11.41 12.74 13.72 14.97 18.37 22.30 29.70 33.14 44.39 56.78 60.36 61.20 Health and Family welfare 2.67 3.11 3.48 3.97 4.50 5.59 6.47 7.82 8.33 10.54 13.36 20.01 18.70 23.01 Information and Broadcasting 2.10 2.36 3.23 3.60 4.43 4.61 4.15 5.08 5.49 6.36 7.41 8.48 9.72 10.15 Water supply and Sanitation 0.13 0.51 0.78 0.93 0.64 0.63 0.84 0.84 3.80 3.17 4.80 6.06 5.88 6.61 Labour and labour welfare 1.64 2.43 2.64 2.78 3.00 3.29 5.11 4.14 4.88 5.50 5.59 7.52 7.20 8.75 Social security and welfare 1.92 1.96 2.36 2.25 2.81 3.44 3.71 4.47 8.73 10.41 10.74 17.66 13.22 15.23 Other 0.76 0.94 1.09 1.27 1.47 1.77 2.33 2.77 5.36 15.10 19.35 23.12 20.69 22.11 2. Economicservices 94.90 117.93 159.17 168.48 167.60 174.30 202.71 254.07 289.63 315.30 354.45 405.03 456.45 442.21 Agriculture and allied services 5.55 7.45 7.75 22.92 19.25 21.26 11.11 16.92 13.45 13.67 19.52 26.48 23.87 29.99 FertilizerSubsidy 21.64 32.01 45.42 43.89 51.85 61.36 51.94 57.69 67.35 75.78 99.18 99.83 113.88 132.50 Food Subsidy 20.00 22.00 24.76 24.50 28.50 28.00 55.37 51.00 53.77 60.66 75.00 90.00 87.00 82.00 Export Subsidy 9.62 13.86 20.14 27.42 17.58 8.18 6.65 6.58 3.18 3.97 4.20 5.00 5.75 6.30 Irrigation and Flood Control 0.76 0.85 0.81 0.89 1.20 1.07 1.69 1.35 1.64 1.99 2.16 2.80 2.72 2.80 Rural Development 3.13 3.61 3.70 3.77 3.57 4.06 16.25 41.56 56.29 44.35 49.02 53.73 51.62 49.69 SpecialAreasProgrammes 0.06 0.05 0.07 0.12 0.19 0.17 0.20 7.92 7.87 8.13 9.42 11.27 9.72 12.64 Energy 3.94 5.59 6.90 7.49 5.37 2.67 5.48 3.97 5.48 7.42 141.06 13.29 12.36 15.22 Industry and Minerals 13.57 12.20 17.96 12.26 12.03 17.98 17.93 12.88 17.20 29.82 21.75 20.94 23.54 2126 Transpon and Communications 6.06 6.79 15.62 8.05 9.19 9.68 14.45 17.80 20.44 22.59 28.85 13.07 37.63 36.60 Science, Technology and Environment 7.57 9.34 10.40 11.27 12.87 13.68 15.86 17.20 18.76 21.92 26.27 30.46 30.06 33.27 GeneralEconomicServices 2.99 4.18 5.62 5.90 6.00 6.20 5.78 19.19 24.20 25.00 -121.99 38.16 58.30 19.95 B.Non-developmental 244.59 287.69 335.47 391.00 450.34 521.58 613.17 708.20 816.78 942.77 1100.88 1257.23 1313.68 1445.01 Defenceservices 88.60 95.58 101.94 108.74 114.42 121.09 149.77 164.26 188.41 209.97 261.75 308.40 310.13 334.64 Interest payments 112.36 142.61 177.57 214.71 265.63 310.35 366.95 440.49 500.31 594.78 656.37 750.00 772.48 880.00 on Internal Debt 55.14 69.13 82.73 96.22 109.09 129.89 154.83 193.91 233.64 264.97 314.29 382.60 394.39 459.72 onExtemnalDebt 9.77 12.42 14.94 17.78 25.69 34.51 37.92 41.10 39.02 52.28 41.46 41.92 42.73 41.84 on Small Savings, PFs. etc. 44.90 58.01 75.73 96.37 124.20 138.83 168.42 198.91 220.64 268.39 290.19 293.40 305.41 363.89 Other 2.56 3.06 4.17 4.34 6.66 7.12 5.78 6.57 7.01 9.13 10.43 32.08 29.95 14.56 AdministrativeServices 15.32 17.91 20.71 25.24 27.98 37.83 38.27 42.14 48.48 58.20 72.00 82.24 86.11 87.96 Fiscal Services 10.94 11.00 12.78 12.12 17.69 20.48 21.37 23.55 25.90 25.49 33.32 35.04 35.72 32.12 Pensions and misc. services 17.37 20.60 22.46 30.19 24.63 31.84 36.80 37.76 53.67 54.34 77.44 81.55 109.24 110.29 C.Grants-in-aidandcontributions 93.49 102.09 109.36 134.39 159.53 180.54 211.11 204.83 218.28 238.17 232.27 287.84 263.11 323.23 GrantstoStateGovernments 91.36 100.15 86.44 132.02 157.00 178.30 208.30 200.47 212.87 231.57 297.38 275.30 249.41 308.66 a. Non Plan 19.80 24.11 2.69 42.19 45.16 31.77 27.22 24.79 58.62 60.95 89.81 63.57 40.78 76.96 b. State Plan Schemes 34.43 35.59 36.00 38.78 56.51 79.76 102.39 107.93 86.71 104.10 140.39 124.13 132.73 136.13 c. Central and Centrally sponsored 37.14 40.46 47.75 51.05 5532 66.78 78.69 67.75 67.54 66.51 67.18 87.60 75.90 95.56 schemes GrantsatoUTs.andOthers 2.13 1.93 22.92 2.37 2.53 2.24 2.81 4.36 5.42 6.60 10.83 12.53 13.70 14.57 D.RevenueDisbursmentsofUTs(net) 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 7.63 8.86 1028 10.91 12.37 12.37 Memo ltems- Total Subsidies 59.80 7732 104.74 121.58 122.53 119.95 126.82 129.32 133.72 163.64 194.87 22025 246.83 238.38 Major Subsidies 51.26 67.87 90.32 95.81 97.93 94.15 107.64 115.27 124.30 140.41 182.38 198.83 210.63 224.40 Other Subsidies 8.54 9.45 14.42 25.77 24.60 25.80 19.18 14.05 9.42 23.23 12.49 21A2 36.20 13.98 Rural EmploymentProgramme 14.10 12.44 21.00 20.00 18.17 25A6 39.06 46.75 46.42 34.95 38.58 40.85 40.50 37.95 of which: 2awaharRojgarYojana 0.00 0.00 20.96 20.00 18.17 25.26 33.06 35.35 28.73 16.55 19.53 20.95 20.60 20.95 Note: BE = Budget estimates; RE = Revised estimates. Source: Ministry of Finance, Union budget documents; Deparment of Expenditure, Finance Accounts; World Bank StaffEstimates. Statistical Appendix 229 Table A4.8 Revenue Expenditure of State Govemnments (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1997-98 1998-99 B.E. R.E. B.E. Revenue expenditure (A+B+C) 451.54 522.96 602.53 717.73 861.86 962.05 1093.76 1284.40 1450.04 1689.50 1915.51 1967.19 2294.95 A. Developmental(1+2) 318.20 362.37 407.81 488.55 585.05 634.65 708.38 786.37 892.76 1061.54 1112.44 1210.92 1289.85 1. Social services 177.06 205.74 240.17 279.62 310.92 345.65 389.61 449.02 536.07 603.28 682.82 729.78 800.99 Education, Sports, Artand Culture. 90.10 109.43 135.71 155.28 170.77 192.61 215.94 249.77 289.11 330.64 370.37 389.22 441.51 HealthandFamily Welfare. 30.53 34.77 39.64 45.86 50.54 56.62 66.69 74.29 84.79 94.30 108.17 112.87 126.76 Watersupply and Sanitation 13.22 13.94 14.77 16.38 18.45 20.95 24.24 29.80 31.41 36.68 41.78 46.79 50.15 Welfare of SC, ST and BCs 11.84 13.18 14.69 17.90 20.71 23.01 25.70 30.12 33.95 38.96 49.19 51.59 53.17 Social security and welfare 8.23 9.70 11.07 13.62 14.77 16.63 18.65 21.44 45.83 26.97 54.84 37.27 39.24 Other 23.13 24.72 24.29 30.59 35.68 35.83 38.38 43.60 50.98 75.72 58.48 92.05 90.17 2. Economic services 141.14 156.63 167.64 208.92 274.13 288.99 318.78 337.36 356.69 458.26 429.61 481.13 488.86 Agriculture andAllied Services 38.98 42.65 48.29 62.67 69.81 84.34 88.93 90.64 99.32 108.31 112.78 119.17 129.14 Crop Husbandry 9.59 11.06 12.65 16.97 20.82 29.37 29.12 28.88 27.36 30.85 31.84 33.17 34.84 Food Storage and Warehousing 1.20 1.23 1.56 1.88 2.38 4.16 3.81 4.36 8.39 7.41 7.28 8.97 8.50 Forestryand WildLife 8.69 9.46 10.28 11.75 13.42 14.90 15.74 17.22 18.75 21.37 23.15 24.30 29.67 Other 19.50 20.90 23.80 32.06 33.19 35.91 40.25 40.19 44.82 48.68 50.51 52.73 56.13 Rural Development 32.20 36.54 28.27 46.75 52.87 63.62 72.77 67.79 65.70 75.28 101.49 106.28 112.63 SpecialAreasProgrammes 2.35 3.09 3.54 3.57 4.11 3.96 4.88 4.96 5.76 6.97 10.02 10.38 10.46 Inigation and Flood Control 27.75 33.19 33.94 34.56 41.40 48.68 54.28 64.44 71.47 79.79 81.95 83.00 88.27 Energy 9.14 7.74 10.92 9.89 50.30 26.15 31.68 29.89 31.83 95.52 25.91 60.44 34.59 IndustryandMinerals 7.33 8.69 12.17 11.65 12.71 13.56 14.18 16.85 19.60 21.55 21.89 23.92 22.43 TransportandCommnunications 16.01 17.35 19.22 23.36 27.59 31.28 35.12 37.55 44.44 49.25 50.00 51.78 58.88 Science, Technology and Environm 0.24 0.23 0.26 0.29 0.36 0.39 0.53 0.53 0.54 0.75 1.16 0.96 1.68 General Economic Services 7.14 7.15 11.02 16.18 14.98 17.01 16.40 22.68 17.83 20.83 24.41 25.19 30.79 B. Non-Developmental 128.44 155.06 188.69 221.34 266.66 315.06 373.67 484.99 541.97 608.64 775.98 724.56 968.92 Interest Payments 48.98 59.33 71.86 86.55 109.44 132.10 158.00 192.02 219.32 255.76 310.89 312.35 364.17 Onloansfromthecentre 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 130.02 151.63 178.07 212.83 218.70 On the Intemal Debt 8.95 10.42 13.41 15.68 21.70 24.67 27.77 31.41 42.60 48.68 58.45 69.40 83.23 On Small Savings, PFs. 7.63 10.58 12.70 17.03 21.17 24.73 30.87 31.27 38.88 40.69 54.10 58.25 68.12 Other 4.51 5.41 6.34 7.76 1.36 11.71 11.28 28.86 18.49 27.95 18.02 1.12 -0.01 Adrninistrative Services 44.18 50.31 59.74 70.18 78.10 93.44 104.73 116.64 133.91 149.50 220.33 178.43 321.22 Pensions and Miscellaneous Services 17.58 23.92 29.31 35.93 44.79 52.72 69.99 119.27 128.34 135.15 170.18 149.51 195.13 Other 13.99 16.72 22.96 23.01 34.33 30.24 33.51 45.72 49.74 55.03 58.33 69.48 70.98 C. Other expendiure' 4.91 5.53 6.03 7.84 10.16 12.35 11.71 13.03 15.31 19.32 27.10 31.71 36.18 Note: BE = Budget estimates; RE = Revised estirnates. a. Other expenditure include compensation and assignments to local bodies and panchayat raj institutions and reserve with the finance department Source: Reserve Bank of India, RBI bulletins on state finances; World Bank Staff Estimates.. 230 Sanisfical Appendix Table A4.9 Capital Experditure: Center and States (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98' 1998-99 1998-99 1999-00 B.E. R.E. B.E. Central Govemmcnt Capital expenditure [A+B.C+D] 179.07 20408 23718 26088 23101 235.60 274.93 32282 31909 34535 43400 47957 52269 60808 A. Developmental (1+2) 5667 60.03 70.95 69.23 58.26 73.82 55.60 7396 5049 46.82 7333 114.21 8033 105 08 I Social services 2.80 351 321 247 239 259 3.32 7.26 5.48 658 6.04 10.51 10.14 1148 iducationt Sports Artelc 0.05 0.13 0.08 006 004 0.05 006 2.25 0.14 013 0.13 0.22 0 14 0.23 HealthandFamily welfare 0.19 015 0.20 0.00 0.20 0.07 0.03 0.69 0.12 055 026 028 0.26 020 Housing 0.75 0.99 0.98 l11 1.26 1.78 1.87 186 2.37 240 299 4.15 4.28 6.14 Information and Broadcasting 1.74 1.71 178 1.06 0.35 0.07 0.24 0.25 0 47 0.53 0.50 0 74 0.54 0 93 Other 0.08 0.52 018 0.24 0.53 062 1.12 223 2.39 2.97 218 511 491 3.99 2. Economic services 53.86 5652 67.74 6677 55.87 71t23 5229 6670 4501 4024 6728 103.71 70 19 141.70 Agriculture and allied 0.54 0.55 0 45 0 45 0 49 0.47 0.48 2.93 3.60 3 34 3.35 4.68 3.33 2 45 Energy 18.46 19.03 26.07 27.09 19.91 16.21 17.69 22 68 20.58 11.05 19 16 21.18 21.58 2137 Industy and Mineals 14.07 1310 11.52 771 6.70 8.82 9.87 804 6.32 4.49 722 7.12 6.42 831 Transport& Communications 1840 21.51 26 15 26.45 24.72 3381 19.45 22.14 20.61 27.19 37.68 4911 42.10 51.14 General Economic Services 0.65 0 00 1.26 2 52 2 57 9.07 1.58 6.96 -10.68 -10 76 -2.90 16 86 -7.13 51.97 Other 1.75 2.31 228 2.56 1.48 2.85 321 4.14 459 493 277 476 388 646 B Non-devlopmental 33.39 40.76 45 27 49.56 52.32 58.88 73 92 72.51 88 26 93 29 99 74 115 43 111.84 135 65 Defence Services 31.08 37 83 42.22 45.52 49 05 54.73 68.67 69.19 0 15 95 08 91.04 103.60 101.87 122 30 Other 2.32 2.93 305 404 327 414 524 432 811 820 8.71 1184 9.97 1335 C. Capital E.pnditureoftUTs 289 176 1.87 268 3.42 3.50 2.78 2.44 2.24 1.84 219 3.10 3.03 327 D. LoansandAdvances (Net) 86.13 101.53 11909 13940 11701 99.41 14263 173.91 17810 203.40 25874 246.82 327.50 36408 To State Govemments & UTs. 585i 6730 7955 9869 9418 9697 100.72 143.13 149.37 175.71 23336 212.11 301.90 32664 To Others 27.62 34.23 39.55 40.71 22.83 1244 41.92 30.78 29.73 2768 25.39 34.71 2560 3744 State Government Capiralexpenditurc[A*BEC] 101.31 98.66 11752 13478 13249 15777 16784 206.19 23225 213.31 314 13 339.36 A Developmental (1+2) 64.29 68.53 77.28 99.61 98961 103.44 12051 169.31 178.37 168.27 22975 235.53 1. Social Services 10.74 1129 1171 12.57 16.47 16.64 18.31 2304 2621 2973 4152 46.04 Education, Sports, An etc. 1.29 1 68 2.64 2.84 2.78 3 02 3.14 3.97 4 54 5 04 6 65 5 22 Health and Family welfare 1.89 2.04 1 94 2.37 2.76 2 63 2.90 3.24 3 60 3.99 5.89 6 79 Water supply and Sanitation 4.00 4.04 3.37 3 54 4 99 5 49 6.77 9.94 8096 10.26 12 98 1792 Housing 2.11 1.90 199 1.82 2.09 1.9 2.01 2.65 3.59 307 5 12 5.06 Other 1.45 1.63 1.87 200 306 362 3.57 4.24 543 736 108S 1104 2 Economic Services 53 55 5725 6557 77.03 9214 9690 10221 14627 152.16 13955 10924 189.54 Agriculture and allied 2.17 2.69 5.91 6.11 9.32 7.85 7.26 S82 7.96 306 12.94 14.45 Imgation and Flood control 29.66 3266 32.91 3656 39.52 42.93 49.68 59.62 65.87 68.98 03.96 83.13 Transport 943 10.27 11.59 1342 13.92 15.90 20.47 24.20 2891 34.02 4071 50,14 Other 1228 tt.63 t5,16 20.94 21.38 20.13 24.0 54.64 49.53 32.50 50.72 41 81 B. Non-developmental 2.26 2.25 2.36 2.63 2.34 3.10 399 4.20 6.57 7 12 9.83 1059 C. Loans and advances(Net) 34.77 27.88 37.88 42.55 31.54 51.22 43.33 32.68 47.30 37.91 74.55 93.20 .. Not available. Note: BE = Budget estimates; RE = Revised estimates. a. Actuals for the center and revised estimates for the statea Actuals for the center and reised estimates for the states. Source: Ministy of Finance Union budget documents; Reserve Bank of India RBI bulletins on state finances; World Bank Staff Estimates. Statistical Appendix 231 Table A4.10 Transfers between Center and States (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 B.E. R.E. B.E. States shareincentraltaxes 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.40 292.98 350.61 435.48 408.54 391.63 444.95 Unionexciseduties 70.03 79.19 93.10 104.14 120.93 144.65 144.73 162.83 180.11 215.45 224.46 269.08 246.65 275.00 Incometax 25.89 27.49 39.22 41.21 51.04 60.57 77.69 85.57 112.87 135.16 211.02 139.46 144.98 16987 Estate duty 0.06 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Grants to States 91.36 100.15 86.44 132.02 157.00 178.30 208.30 200.47 212.87 231.57 297.38 275.30 249.41 300.66 Non-plan grants 19.80 24.11 2.69 42.19 45.16 31.77 27.22 24.79 58.62 60.95 89.81 63.57 40.78 76.96 Stateplanschemes 34.43 35.59 36.00 38.78 56.51 79.76 102.39 107.93 86.71 104.10 140.39 124.13 132.73 136.13 Cenoal and Centrally sponsored 37.14 40.46 47.75 51.05 55.32 66.78 78.69 67.75 67.54 66.51 67.18 87.60 75.90 95.56 schemes Loansto States & UTs 86.98 99.15 109.16 135.66 123.30 121.41 139.85 188.04 192.96 230.50 293.68 291.17 384.03 413.75 Loan Repayments by States andUTs 28.47 31.85 29.62 36.97 29.12 34.44 39.13 44.91 44.58 54.79 60.32 79.06 82.13 87.11 InterestPaymentsby States 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 130.02 151.63 178.07 212.83 218.70 258.99 NETTRANSFER (Center to States) 214.28 236.43 254.07 324.32 357.93 392.94 435.91 480.17 524.20 606.26 788.15 683.12 724.24 821.26 Note: BE = Budget estimates; RE = Revised estimates. Source. Union budget documents; RBI bulletins on state finances: Finance Accounts; World Bank StaffEstimates. 232 Statistical Appendix Table A4. 11 Explicit Subsidies in the Central Government Budget (Rs. billion at cuTrent prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00 B.E. R.E. B.E. A. MaiorSubsidies 51.26 67.87 90.32 95.81 97.93 94.15 107.64 115.27 124.30 140.41 182.38 198.83 210.63 224.40 1. Food 20.00 22.00 24.76 24.50 28.50 28.00 55.37 51.00 53.77 60.66 75.00 90.00 87.00 82.00 2. Indegenious Fertilizers 20.50 30.00 37.71 37.30 35.00 48.00 38.00 40.75 43.00 47.43 66.00 60.00 73.60 80.00 3. Imported Fertilizers 1.14 2.01 7.71 6.59 13.00 9.96 7.62 11.66 19.35 11.63 7.22 9.83 2.38 7.50 4. Other Fertilizer Subsidy 0.00 0.00 0.00 0.00 3.85 3.40 6.32 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5. Export Promotion and 9.62 13.86 20.14 27.42 17.58 8.18 6.65 6.58 3.18 3.97 4.20 5.00 5.75 6.30 Market Development. 6. Sale ofdecontrolled fertilise ... ... ... ... ... . ... 5.28 5.00 16.72 25.96 30.00 37.90 45.00 with concession to farmers B. Debt Teliefto farmers ... ... ... 15.02 14.25 15.00 5.00 3.41 3.41 0.00 0.00 0.00 0.00 0.00 C. Other Subsidies 8.54 9.45 14.42 10.75 10.35 10.81 14.18 10.64 11.77 23.23 12.49 21.42 36.20 13.98 7. Railways 1.74 2.07 2.33 2.83 3.12 3.53 4.12 4.20 4.18 4.66 5.26 6.28 6.18 7.10 8. Mill-made cloth 0.23 0.27 0.10 0.10 0.15 0.15 0.16 0.00 0.01 0.00 0.00 0.00 0.00 0.00 9. Handloom Cloth 1.24 1.46 1.81 1.85 1.87 1.61 1.74 1.48 1.43 0.98 0.64 0.46 0.42 0.40 10. Import/Export of Sugar. 0.05 0.40 0.00 - 0.00 0.00 0.00 0.00 1.00 0.00 0.20 0.30 1.05 0.50 Edible Oils etc. 11. Interest Subsidies 3.93 4.06 8.81 3.79 3.16 1.13 1.13 0.76 0.34 12.22 0.78 0.39 14.36 0.73 12. OtherSubsidies 1.35 1.19 1.37 2.18 2.05 0.99 1.86 4.20 4.81 5.44 5.61 13.99 14.19 5.25 TOTAL - Subsidies 59.80 77.32 104.74 121.58 122.53 119.95 126.82 129.32 133.72 163.64 194.87 220.25 246.83 238.38 Not available. Note: BE = Budget estimnates; RE Revised estimates. Source: Minstry of Finance, Union Budget Documents. Statistical Appendix 233 Table 4.12 Outstanding Debt of Central Government 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99' (Rs. Billion at current prices) 1. To Reserve Bank of India 884.44 943.48 965.23 967.83 989.13 1187.68 1227.73 1362.95 a.Treasurybills 49.80 61.59 167.17 244.43 252.35 350.11 451.42 6.27 b. CGSecurities 174.50 171.47 86.43 33.11 34.47 152.24 66.66 319.77 c. Special securities 671.02 720.46 720.46 720.46 720.46 720.46 720.46 1028.65 d. Other liabilities -10.88 -10.04 -8.83 -30.17 -18.15 -35.13 -10.81 8.26 2.Tocommercialbanks 388.13 460.46 531.12 795.85 945.88 1090.50 1314.39 1562.12 a. Treasury bills 0.10 0.11 3.06 0.72 0.00 0.00 0.00 0.00 b. CG Securities 388.03 460.35 528.06 795.13 945.88 1090.50 1314.39 1562.12 To Banking system 1272.57 1403.94 1496.35 1763.68 1935.01 2278.18 2542.12 2925.07 3.To Private Sector 673.32 829.72 1134.96 1573.72 1952.69 2083.98 2444.52 2894.06 a. Small savings 501.00 557.55 601.28 672.85 817.10 917.86 1039.28 1253.61 b. Others 1056.76 1215.65 1498.91 1868.71 2124.72 2353.80 2632.97 3004.31 4. External debt (DRS) 914.26 1215.43 1553.92 1670.83 1880.87 1904.48 1940.95 2245.32 2443.29 5. Total Outstanding Debt 3744.59 4392.57 5150.46 5976.07 6757.70 7454.31 8155.32 9427.40 10642.94 (% of GDPmp) ReserveBankoflndia 15.3 14.1 12.6 11.0 9.5 9.8 8.7 8.7 Commercial banks 6.7 6.9 7.0 9.1 9.1 9.0 9.3 10.0 Small savings 8.6 8.4 7.9 7.7 7.9 7.5 7.4 8.0 Others 18.2 18.2 19.6 21.3 20.5 19.3. 18.7 19.2 Extemal Debt (from DRS) 15.8 18.2 20.4 19.1 18.1 15.6 13.8 14.4 Totaloutstandingdebt 64.6 65.8 67.5 68.1 65.1 61.2 57.8 60.3 59.0 (% of total outstandinE debtA Reserve Bank of India 28.1 26.6 24.0 20.3 18.4 19.6 18.2 17.6 Commercialbanks 12.3 13.0 13.2 16.7 17.6 18.0 19.5 20.2 Small savings 15.9 15.7 15.0 14.1 15.2 15.1 15.4 16.2 Others 33.6 34.3 37.3 39.1 39.4 38.8 39.0 38.8 Extemal Debt (from DRS) 15.8 18.2 20.4 19.1 18.1 15.6 13.8 14.4 Total outstanding debt 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Memo Items: Extemal debt (US$ billion) from DRS 46.60 46.95 49.76 53.26 59.71 55.48 54.11 56.84 57.58 Extemal debt fromDRS (Rs. Billion) 914.26 1215.43 1553.92 1670.83 1880.87 1904.48 1940.95 2245.32 2443.29 Extemal Debt (from budget) 315.25 369.48 422.69 473.45 509.28 512.49 542.39 553.32 559. 60 a. Provisional. Note: End of year stocks are used to calculated outstanding debt and External Debt as shown in the central budget. Source: RBI, Report on Cunrencv and Finance, various issues; Ministry of Finance, Union Budget & Indian Economic Statistics (Public Finance); Ministry of Finance, Economic SuTvev, various issues; World Bank Staff estimates. 234 StatisticaL Appendix Table A4. 13 Outstanding Debt of State Government (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-9] 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97' 1997-98' I. To Reserve Bank of India 9.90 14.14 16.70 20.90 17.50 19.26 25.17 25.65 25.81 19.52 20.00 2.To commercial banks 75.37 89.92 100.83 125.32 182.01 246.77 250.33 263.53 273.79 330.00 392.20 a. SG Securities 69.47 85.02 103.49 122.90 150.12 171.82 195.09 227.97 301.34 363.21 431.66 b. Others 5.90 4.90 -2.66 2.42 31.89 74.95 55.24 35.56 -27.55 -33.21 -39.47 To Banking System (1)+(2) 85.27 104.06 117.53 146.22 199.51 266.03 275.50 289.18 299.60 349.52 412.20 3.To Private Sector 130.75 164.07 201.30 237.11 254.24 252.46 328.78 448.73 557.86 649.49 763.53 a. Provident Fund 95.83 115.85 138.91 169.61 198.70 234.92 278.22 326.01 375.02 437.24 511.18 b. Others 34.92 48.22 62.39 67.50 55.54 17.54 50.56 122.72 182.84 212.25 252.35 4.To Central Govt. (a-b-c) 483.69 542.06 623.41 719.56 809.63 903.29 996.49 1107.36 1264.80 1455.69 1672.20 a. Loans from Center 495.34 562.22 641.39 741.17 834.90 924.12 1019.45 1167.05 1315.06 1505.69 1722.20 b. States' holding of Trs.Bill 8.88 17.38 15.18 18.80 24.95 20.83 22.96 59.69 50.26 50.00 50.00 c. States holding of CG Sec. 2.77 2.78 2.80 2.81 0.32 0.00 0.00 0.00 0.00 0.00 0.00 5. Total outstanding debt 699.71 810.20 942.24 1102.89 1263.38 1421.78 1600.77 1845.27 2122.26 2454.70 2847.93 n.a. Not available. Note: End of year stocks are used to calcualte outstanding debt. a. Provisional. Source: RBI, Report on Currency and Finance, various issues; Ministry of Finance, Union Budget & Indian Economic.Statistics (Public Finance); Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. Statistical Appendix 235 Table A4.14 Outstanding Debt of Central and State Governments (Rs. billion at current prices) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97' 1997-98' 1. To Reserve Bank of India 526.87 596.14 736.83 905.34 960.98 984.49 993.00 1014.78 1213.49 1247.25 1382.95 a. Center 516.97 582.00 720.13 884.44 943.48 965.23 967.83 989.13 1187.68 1227.73 1362.95 b. State 9.90 14.14 16.70 20.90 17.50 19.26 25.17 25.65 25.81 19.52 20.00 2.To commercial banks 316.83 377.58 434.68 513.45 642.47 777.89 1046.18 1209.41 1364.29 1644.39 1954.32 a. Center 241.46 287.66 333.85 388.13 460.46 531.12 795.85 945.88 1090.50 1314.39 1562.12 b. State 75.37 89.92 100.83 125.32 182.01 246.77 250.33 263.53 273.79 330.00 392.20 To Banking System(1)+(2) 843.70 973.72 1171.51 1418.79 1603.45 1762.38 2039.18 2224.19 2577.78 2891.64 3337.27 3.ToPrivateSector 1072.40 1294.35 1509.86 1751.65 1976.89 2311.00 2824.41 3271.17 3729.00 4221.74 4921.45 a. Small savings 283.58 338.33 417.91 501.00 557.55 601.28 672.85 817.10 917.86 1039.28 1253.61 b. Others 788.82 956.02 1091.95 1250.65 1419.34 1709.72 2151.57 2454.07 2811.14 3182.46 3667.84 4. External Debt 232.23 257.46 283.43 315.25 369.48 422.69 473.45 509.28 512.49 542.39 552.42 5. Total outstanding debt 2148.33 2525.53 2964.80 3485.69 3949.83 4496.07 5337.04 6004.64 6819.26 7655.77 8811.14 LoanstoStatesfromCenter 495.34 562.22 641.39 741.17 834.90 924.12 1019.45 1167.05 1315.06 1505.69 1722.20 Note: End of year stocks are used to calculated outstanding debt and External Debt as shown in the central budget. a. Provisional. Source: RBI, Report on Currency and Finance, various issues; Ministry of Finance, Union Budget & Indian Economic Statistics (Public Finance); Ministry of Finance, Economic Survev, various issues; World Bank Staff estimates. 236 Statistical Appendix Table A4.15(a) Projected and Actual Plan Outlays by Sectors (Rs. billion) Eighth Plan Annual Plans (92-93 - 96-97) 92-93 93-94 94-95 95-96 96-97 97-98 98-99 Projected Actuals Actuals Actuals Actuals Revised Revised Proj. A Agriculture & Allied Programs 636.43 105.91 126.60 157.12 154.60 165.41 172.24 97.46 Agriculture 224.67 42.16 42.64 53.50 50.85 63.26 62.22 38.64 Rural Development 344.25 50.91 70.33 87.17 99.67 97.89 101.63 58.82 Special Area Program 67.50 12.84 13.64 16.45 4.08 4.26 8.40 0.00 B Irrigation & Flood Control 325.25 47.05 53.71 61.04 72.45 85.58 106.38 3.75 Minor Irrigation 59.77 9.95 10.48 11.85 ... ... ... ... Major Irrigation 224.15 30.47 35.71 41.59 ... ... ... ... Flood Control 16.23 3.30 3.66 3.08 ... ... ... ... Command Area Development 25.10 3.33 3.85 4.52 ... C Industry and Minerals 469.22 74.44 84.81 90.88 108.08 122.80 125.22 115.51 Village & Small Scale 63.34 9.95 11.52 15.12 17.94 16.68 17.28 9.92 Large & Medium Industries 405.88 64.49 73.29 75.76 90.14 106.12 107.95 105.59 D Energy 1155.61 202.90 269.09 274.82 268.93 296.15 325.69 300.82 Power 795.89 121.57 147.73 163.46 165.11 165.32 187.37 109.06 Petroleum 240.00 56.98 95.89 86.44 81.24 105.28 109.15 147.33 Coal 105.07 22.77 22.93 22.39 19.48 19.32 23.29 37.17 E Transport 559.26 106.63 119.77 120.97 137.67 188.96 186.40 161.86 Railways 272.02 61.62 59.01 54.72 63.35 83.00 84.03 95.00 Roads & Road Transport 169.52 28.48 32.49 38.44 ... ... ... Ports&Shipping 76.14 7.28 16.20 13.13 ... ... ... ... Civil Aviation 40.83 8.82 11.46 14.44 ... ... ... ... F Communication & Broadcasting 289.66 51.51 62.02 72.74 86.26 100.77 111.44 148.78 G Science&Technology. 90.42 9.30 11.53 14.07 17.65 19.35 21.18 27.66 H SocialServices 751.55 113.23 140.16 174.09 208.48 278.65 309.39 183.10 Education 196.00 26.19 31.47 35.66 53.56 73.46 82.08 45.67 Health & Family Welfare 140.76 22.22 26.13 33.11 36.73 41.47 49.04 36.84 Housing&Urban Development 105.50 14.42 21.47 20.81 28.92 56.16 61.21 39.05 Water Supply & Sanitation 167.11 22.84 27.20 32.60 ... ... ... ... Other Social Services 142.19 27.55 33.89 51.92 ... ... I Others 63.60 17.56 13.11 15.94 19.68 34.21 38.34 12.94 J TOTAL 4341.00 728.52 880.81 981.67 1073.80 1291.89 1396.26 1051.87 ... Not available. Note: The Plan totals are at base year prices for projections and at current prices for actuals. a. Covers Major and Minor ports, Shipping, Lighthouses and Inland Water. Source: Planning Commission. Statistical Appendix 237 Table A4.15(b) Projected and Actual Plan Outlays by Sectors (Annual averages at constant 1980-81 prices - Rs. billion) Eighth Plan (92-93 - 96-97) 92-93 93-94 94-95 95-96 96-97 97-98 97-98 98-99 Projected Actuals Actuals Actuals Actuals Revised Proj. Revised Proj. A Agriculture & Allied Programs 46.0 38.3 42.5 49.5 44.7 43.6 43.9 41.2 21.2 Agriculture 16.2 15.2 14.3 16.9 14.7 16.7 15.9 14.9 8.4 Rural Development 24.9 18.4 23.6 27.5 28.8 25.8 23.7 24.3 12.8 Special Area Program 4.9 4.6 4.6 5.2 1.2 1.1 4.3 2.0 0.0 B Irrigation & Flood Control 23.5 17.0 18.0 19.2 20.9 22.6 17.9 25.4 0.8 Minor Irrigation 4.3 3.6 3.5 3.7 ... ... 0.0 ... ... Majorlrrigation 16.2 11.0 12.0 13.1 ... ... 0.0 ... ... Flood Control 1.2 1.2 1.2 1.0 ... ... 0.0 ... ... Command Area Development 1.8 1.2 1.3 1.4 ... ... 0.0 ... ... C Industry and Minerals 33.9 26.9 28.4 28.6 31.2 32.4 33.2 30.0 25.1 Village & Small Scale 4.6 3.6 3.9 4.8 5.2 4.4 4.5 4.1 2.2 Large & Medium Industries 29.3 23.3 24.6 23.9 26.0 28.0 28.7 25.8 23.0 D Energy 83.5 73.3 90.2 86.6 77.7 78.1 84.3 77.9 65.4 Power 57.5 43.9 49.5 51.5 47.7 43.6 46.9 44.8 23.7 Petroleum 17.4 20.6 32.2 27.2 23.5 27.8 28.6 26.1 32.0 Coal 7.6 8.2 7.7 7.1 5.6 5.1 7.7 5.6 8.1 E Transport 40.4 38.5 40.2 38.1 39.8 49.8 43.3 44.6 35.2 Railways 19.7 22.3 19.8 17.2 18.3 21.9 18.4 20.1 20.7 Roads & Road Transport 12.3 10.3 10.9 12.1 ... ... 0.0 ... ... Ports & Shippinga 5.5 2.6 5.4 4.1 ... ... 0.0 ... ... Civil Aviation 3.0 3.2 3.8 4.5 ... ... 0.0 ... ... F Conmmunication & Broadcasting 20.9 18.6 20.8 22.9 24.9 26.6 19.9 26.7 32.4 G Science&Technology 6.5 3.4 3.9 4.4 5.1 5.1 4.2 5.1 6.0 H Social Services 54.3 40.9 47.0 54.8 60.2 73.5 53.6 74.0 39.8 Education 14.2 9.5 10.6 11.2 15.5 19.4 12.8 19.6 9.9 Health & Family Welfare 10.2 8.0 8.8 10.4 10.6 10.9 9.0 11.7 8.0 Housing & Urban Development 7.6 5.2 7.2 6.6 8.4 14.8 8.7 14.6 8.5 Water Supply & Sanitation 12.1 8.3 9.1 10.3 ... ... 0.0 ... ... Other Social Services 10.3 10.0 11.4 16.4 ... ... 0.0 ... ... I Others 4.6 6.3 4.4 5.0 5.7 9.0 7.4 9.2 2.8 J TOTAL 313.8 263.4 295.4 309.3 310.2 340.6 307.6 334.0 228.7 Memo Item: Investment Deflator 276.6 276.6 298.2 317.4 346.2 379.3 418.1 418.1 459.9 ... Not available. a. Covers Major and Minor ports, Shipping, Lighthouses and Inland Water. Source: Planning Commission. 238 Statistical Appendix Table A4.15(c) Projected and Actual Plan Outlays by Sectors (percentage distribution and achievement rates) Seventh Plan Annual Plans Eighth Plan Eigth Plan (85-86 - 89-90) 90-91 91-92 (92-93 - 96-97) 92-93 93-94 94-95 95-96 96-97 97-98 % Achieve- Achieve- Achieve- % Achieve- Achieve- Achieve- Achieve- Achieve- Achieve- share' ment mentb ment share' ment ment ment ment ment ment A Agriculture&AlliedPrograms 12.4 111.1 93.4 90.1 14.7 101.6 112.6 113.4 88.3 82.2 93.8 Agriculture 5.8 95.3 89.6 86.1 5.2 89.5 84.0 92.9 79.8 86.7 93.4 Rural Development 4.9 134.2 96.5 93.2 7.9 112.2 143.8 132.3 105.9 90.0 102.4 Special Area Program 1.6 97.0 95.1 93.4 1.6 108.8 107.2 109.1 23.8 21.8 47.2 B Irrigation & Flood Control 9.4 76.6 96.7 90.1 7.5 95.4 101.0 98.0 102.3 104.5 142.3 MinorIrrigation 1.6 89.2 94.5 87.1 1.4 91.4 89.4 91.6 MajorIrrigation 6.4 74.7 99.3 91.8 5.2 97.4 105.9 101.7 Flood Control 0.5 78.2 84.3 91.6 0.4 91.7 94.2 85.0 Commnand Area Development 0.9 67.2 91.0 81.9 0.6 93.0 99.7 93.0 C IndustryandMinerals 12.3 103.1 75.4 76.2 10.8 75.3 79.6 75.1 78.9 80.8 90.2 Village & Small Scale 1.5 92.5 89.2 79.3 1.5 86.0 92.3 110.2 103.3 81.5 92.5 Large & Medium Industries 10.8 104.7 73.6 75.7 9.3 73.9 77.9 70.7 75.3 80.6 89.9 D Energy 30.6 87.9 90.6 92.6 26.6 86.1 105.9 83.5 74.9 76.7 92.4 Power 19.0 86.6 91.3 106.1 18.3 81.4 91.7 93.5 82.0 76.9 95.5 Petroleum 7.2 97.7 94.7 67.9 5.5 94.1 146.9 70.5 65.4 80.5 91.4 Coal 4.1 75.4 81.1 67.8 2.4 94.7 88.5 77.3 64.2 55.0 72.6 E Transport 12.8 101.6 86.8 93.9 12.9 90.7 94.5 81.5 84.7 95.3 103.0 Railways 6.9 105.1 97.9 101.3 6.3 108.1 96.0 74.5 81.3 98.4 109.2 Roads&RoadTransport 4.0 92.2 97.9 91.2 3.9 97.8 103.5 104.1 Ports & Shipping' 1.3 88.3 37.5 62.0 1.8 35.5 73.3 64.3 Civil Aviation 0.4 196.3 61.7 124.2 0.9 84.0 101.2 84.0 F Communication&Broadcasting 3.4 126.8 92.2 92.3 6.7 105.3 117.7 109.4 109.9 110.5 133.9 G Science&Technology 1.4 96.2 85.0 84.7 2.1 93.8 107.9 100.4 112.8 101.2 121.4 H Social Services 16.4 88.1 100.3 91.5 17.3 88.1 101.2 106.0 105.9 113.5 138.1 Education 3.5 94.4 93.3 91.2 4.5 88.9 99.1 92.1 111.6 125.4 153.5 Health& Family Welfare 3.6 82.7 104.6 100.7 3.2 96.3 105.1 107.5 103.7 100.8 130.6 Housing & Urban Development 2.4 89.6 128.2 77.3 2.4 71.7 99.0 85.2 98.6 141.2 168.7 Water Supply & Sanitation 3.6 85.2 95.9 89.3 3.8 96.6 106.6 104.0 Other Social Services 3.3 89.4 90.8 96.6 3.3 85.6 97.7 133.2 i Others 1.3 187.3 86.1 70.2 1.5 119.6 82.9 73.8 69.7 101.5 124.7 J TOTAL 100.0 96.1 90.2 89.5 100.0 90.2 101.2 92.1 87.8 91.7 108.6 Note: Derived from Table 4.15(b). a. Percentage share in total plan outlay. b. Actual outlay as a percentage of target outlay for the Plan. c. Covers Major and Minor ports, Shipping, Lighthouses and Inland Water. Source: Planning Commission. Swatislical Appendix 239 Table A5. 1 Money Supply and Sources of Change, 1985-86 - 1998-99 (Rs. billion) 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 BROAD MONEY SUPPLY (M3) 2002.41 2309.48 2658.28 3170.49 3668.25 4344.07 5314.26 6040.07 7018.48 8272.09 9743.28 NarrowMoneySupply(MI) 711.01 810.58 928.92 1144.06 1240.66 1507.78 1922.57 2148.35 2406.15 2674.81 3041.98 Currency with Public 380.71 463.00 530.48 610.98 682.73 823.01 1006.81 1182.58 1320.87 1460.04 1701.19 Deposit Money (total) 323.40 341.60 391.70 524.23 544.80 659.52 881.93 932.33 1053.34 1179.36 1302.67 Time Deposits with Banks 1291.40 1498.90 1729.36 2026.43 2427.59 2836.29 3391.69 3891.72 4612.33 5597.28 6701.30 SOURCES OF CHANGE Net BankDomestic Credit 2300.36 2688.57 3119.62 3462.56 3963.73 4416.92 5151.42 6024.26 6649.27 7633.30 8736.14 To Govemment . 973.73 1171.53 1401.93 1582.63 1762.38 2039.18 2224.19 2577.78 2886.20 3305.92 3866.72 From Reserve Bank oflndia (RBI) 596.15 736.83 888.48 940.16 984.49 993.00 1014.78 1213.49 1241.81 1351.60 1525.39 From OtherBanks 377.58 434.70 513.45 642.47 777.89 1046.18 1209.41 1364.29 1644.39 1954.32 2341.33 To Commercial Sector 1326.63 1517.04 1717.69 1879.93 2201.35 2377.74 2927.23 3446.48 3763.07 4327.38 4869.42 From Reserve Bank of India 55.24 63.49 63.42 72.60 62.20 64.45 65.93 68.55 62.47 81.86 122.26 From Other Banks 1271.39 1453.55 1654.27 1807.33 2139.15 2313.29 2861.30 3377.93 3700.60 4245.52 4747.16 NetForeignExchangeAssets 68.00 66.51 105.81 212.26 244.43 546.12 790.32 821.41 1054.96 1265.69 1486.33 of Banking Sector Govemments Currency Liabilities 14.75 15.55 16.21 17.04 18.24 19.90 23.79 25.03 29.18 33.52 37.05 to the Public NetNon-Monetary Liabilities 380.70 461.15 583.36 521.37 558.15 638.87 651.27 830.63 714.93 660.42 516.24 of Reserve Bank of India 169.36 175.36 270.22 274.15 282.46 260.37 293.58 322.96 351.83 432.82 604.64 ofOtherBanks 211.34 285.79 313.14 247.22 275.69 378.50 357.69 507.67 363.10 227.60 -88.40 Broad Money Supply (M3) 2002.41 2309.48 2658.28 3170.49 3668.25 4344.07 5314.26 6040.07 7018.48 8272.09 9743.28 GDP at market prices 4281.00 4941.23 5792.64 6671.65 7635.61 8769.52 10378.42 12179.63 14098.49 15635.52 18048.59 Note: 1998-99 figures are as of March 31 on the basis of the closure of govemment accounts. Source: Ministry of Finance, Economic Survey, various issues; Reserve Bank of India, RBI Bulletin (Weekly Statistical Supplement). 240 Statiszical AppendLx Table A5.2 Base Money Supply and SouTces of Change, 1985-86 - 1998-99 (Rs. billion) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 3993-94 1994-95 1995-96 1996-97 1997-98 1998-99 TOTAL BASE MONEY SUPPLY 534.90 629.59 775.91 877.79 995.05 1107.79 1386.71 1692.S2 1944.57 1999.S5 2264.02 2592.20 Currency with Public 335.59 380.71 463.00 530.48 610.98 682.73 823.01 1006.81 1182.58 1320.87 1460.04 1701.19 Other Deposits with RBI 3.97 6.94 5.98 6.74 8.85 13.13 25.25 33.83 33.44 31.94 35.41 38.12 Cash with Banks 15.63 19.72 19.86 22.34 26.40 30.53 30.94 40.00 43.11 51.30 50.51 55.86 Bank Deposits with RBI 179.71 222.22 287.07 318.23 348.82 381.40 507.51 612.18 685.44 595.74 718.06 797.03 SOURCES OF CHANGE RBIClaims 609.18 722.18 875.03 1051.97 1063.78 1145.54 1112.96 1215.41 1501.59 1374.33 1504.42 1647.65 On Govemment (net) 526.87 596.15 736.83 888.48 940.16 984.49 993.00 1014.78 1213.49 1241.81 1351.60 1525.39 On Banks 44.41 70.79 74.71 100.07 51.02 98.85 55.51 134.70 219.55 70.05 70.96 0.00 On Commercial Sector 37.90 55.24 63.49 63.42 72.60 62.20 64.45 65.93 68.55 62.47 81.86 122.26 NetForeignExchangeAssets 54.17 62.02 60.69 79.83 188.38 226.47 514.22 747.20 740.92 948.17 1158.90 1379.54 of RBI Governments Currency Liabilities 13.80 14.75 15.55 16.21 17.04 18.24 19.90 23.79 25.03 29.18 33.52 37.05 to the Public NetNon-MonetaryLiabilities 142.25 169.36 175.36 270.22 274.15 282.46 260.37 293.58 322.96 351.83 432.82 604.64 of Reserve Bank of India Note: 1998-99 figures are as of March 31 on the basis of the closure of govemrnment accounts. Source: Ministry of Finance, Economic Survev, various issues; Reserve Bank of India, RBI Bulletin (Weekly Statistical Supplement). Statistical Appendix 241 Table A5.3 Selected Monetary Policy Instruments Bank Minimum Statutory Rate Cash Reserve' Liquidityb Year & Month Ratio Ratio 1985 June 8 10 9.0 36.5 July 6 10 9.0 37.0 1987 February 28 10 9.5 37.0 April 25 10 9.5 37.5 October224 10 10.0 37.5 1988 JanuaTy32 10 10.0 38.0 July 2 100 10.5 38.0 July130 1 0 11.0 38.0 1989 July 1 10 15.0 38.0 1990 September 22 100 15.0 38.5 1991 July 4 1 3 15.0 38.5 October 9 122 15.0 38.5 1992 April 1 12 15.0 30.0 1993 April 17 12 14.5 30.0 May 15 12 14.0 30.0 September117 12 14.0 25.0 1994 June1I 1 12 14.5 25.0 July 9 12 14.8 25.0 August 6 12 15.0 25.0 1995 November I 1 12 14.5 25.0 December 9 122 14.0 25.0 1996 April 27 12 13.5 25.0 May111 12 13.0 25.0 July 6 12 12.0 25.0 October226 12 11.5 25.0 November 9 12 11.0 25.0 1997 January 4 1 2 10.5 25.0 January 18 12 10.0 25.0 April116 1 1 10.0 25.0 June226 1 0 10.0 25.0 October 22 9 10.0 25.0 October225 9 9.8 25.0 November222 9 9.5 25.0 December 6 9 10.0 25.0 1998 January117 11 10.5 25.0 March118 1 1 10.5 25.0 March228 1 1 10.3 25.0 April 2 10 10.3 25.0 April11I 10 10.0 25.0 April 29 9 10.0 25.0 1999 March 1 8 10.5 25.0 May 8 8 10. 25.0 Note: Dates given are those on which the announced measures take effect. a. Minimum cash rTeseves to be deposited with the RBI as % of net demand and time liabilities (NDTL). b. The ratido of liquid assets, exclusive of those under (a), to aggregate demand and time liabilities upto March 28, 1985 and net demand and time liabilities with effect from March 29, 1985. Sources: Reserve Bank of India, Report of the Committee to Review the Working of the Monetary System, 1985; Reserve Bank of India, Annual Retport various issues. 242 Statistical Appendix Table A5.4 Structure of Short-term and Long-tern Interest Rates (percent per annum) 19S0-S1 1985-S6 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 A. SHORT-TERM RATES ReserveBankRate 9.0 10.0 10.0 12.0 12.0 12.0 12.0 12.0 12.0 10.5 8.0 Treasury Bills: 91-day- 46 4.6 4.6 4.6 88-10.7 7.1-11.1 7.2-11.9 11.4-13.0 6.9- 12.97 5.7-7.3 7.16-10.05 I82-day 10.0-101 8.8-10.1 7.8-8.4 364-day 9.9-10.3 10.0-11.4 9.4-11.9 12.1-13.2 10.1-13.1 8.0-9.4 7.97-10.72 CallMooeyRate(Bombay) 7.1 10.0 11.5 196 14.4 7.0 9.4 17.7 7.8 8.7 0.0 Commercial Bank Rates: MaximumDepositRate 100 11.0 11.0 13.0 11.0 10.0 11.0 12.0 100 Free Free Minimum Lending Rate 13.5 n.a. 16.0 19.0 17.0 14.0 Free Free Free Free Free B. LONG-TERM RATES II.D.B.I.PrimeLendingRate 14.0 14.0 14.0-150 18.0-20.0 170-19.0 14.5-17.5 15.0 16.D-19.0 16.2 13.3 13.5 Company Deposit Rates:' Private Sector Companies' (i) I year 9.0-13.5 10.0-15.0 10.5-14.0 10.5-15.0 12.0-15.0 12 0-14.0 13.0-14.0 12.0-15.0 13.0-15.0 9.5-15.0 11.00-15.00 (ii) 2years 10.0-14.5 12.0-15.0 12.0-14.0 12.0-15.0 13.0-15.0 130-14.0 14.0-15.0 13.0-15.0 14.0-15.0 10.5-15.0 12.00-15.00 (iii) 3years 13.0-15.5 13.0-15.0 13.5-14.0 14.0-15.0 15.0 14.0 14.0-15.0 14.0-15.0 15.0 11.5-15.0 11.50-15.00 Public Sector Companies (i) I year 11.0 11.5-12.0 10.5-12.0 10.5-15.0 13.0 12.0-15.0 12.0-15.0 13.0-15.0 13.0-15.0 13.0-15.0 9.00-15.00 (ii) 2 years 12.0 12.0-13.0 11.5-13.0 11.5-15.0 14.0 13.0-15.0 13.0-15.0 14.0-15.0 13.0-15.0 14.0-15.0 10.00-15.00 (iii) 3 years 13.5 13.5-14.5 13.0-14.0 13.0-15.0 150 14.0-15.0 14.0-150 15.0 14.0-15.0 15.0 11.00-15.00 AverageYield-Ordinary Shares 5.9 3.2 2.6 2.1 1.7 2.2 1.8 3.1 4.2 5.2 6.5 Redemption Yield - Govemment of India Securities (i) Short-term (1-5years) 4.7-6.0 5.4-9.8 7.0-21.7 S.4-26.3 9.1-23.8 11.9-12.9 9.8-13.8 6.0-14.3 5.2-16.2 5.5-17.7 4.45-17.13 (ii) Medium-term(5-15 years) 5.8-6.8 6 5-9.5 9.4-12.7 9.5-13.4 9.5-14.8 12.7-13.3 11.3-13.9 5.8-14.1 5.8- 14.4 5.2-14.0 5.75-13.74 (iii)Long-term (abovelSyears) 6.4-7.5 8.4-11.5 10.9-12.0 9.9-12.4 88-12.5 129-13.4 11.8-13.5 11.8-13.0 9.0-14.2 9.0-13.2 7.00-13.04 Note: Data for 1998-99 is preliminary. s. Effective 8 January, 1993. a new auction system for 91-day Treasury Bills was introduced. b. Effective 22 April, 1992, a single maximum deposit rate has been for deposits of various maturities. Earlier different rates were prescribed for different deposit maturities. c. Deposits accepted from the public. d. Well-established private seor companies. Source: Reserve Bank of India, Report on Currency and Finance various issues. Statistical Appendix 243 Table A5.5 Sectoral Deployment of Gross Bank Credit (Rs billion - change during year) Apr-Oct 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 97-98 98-99 Gross Bank Credit 76.91 154.68 169.43 153.48 79.86 211.34 97.18 401.28 348.75 271.31 412.92 33.46 126.38 Public Food Procurement Credit -29.14 -14.21 12.37 25.00 1.64 20.73 41.64 13.68 -24.84 -21.94 48.88 26.16 42.43 GrossNon-FoodCredit 106.05 168.89 157.06 128.48 78.22 190.61 55.54 387.60 373.59 293.25 364.04 7.30 83.95 Priority Sectors 40.20 51.49 61.64 25.32 25.10 44.07 40.48 102.81 91.68 115.51 146.27 33.55 39.24 Agriculture 14.39 19.41 25.76 2.24 14.07 18.06 12.45 27.75 30.61 43.98 34.27 14.76 17.50 Small Scale Industries 17.12 23.15 24.08 16.38 9.69 1.76 25.91 50.21 42.46 40.60 75.64 3.95 5.92 Other Priority Sectors 8.69 8.93 11.80 6.70 1.34 7.25 2.12 24.85 18.61 30.93 36.36 14.84 15.82 Industry (Medium &Large) 37.97 70.32 60.87 62.46 25.82 115.46 -7.71 168.07 183.81 95.51 149.26 -11.42 22.93 Wholesale Trade (other than foodprocurement) 5.18 11.69 7.05 4.38 2.44 8.15 3.61 24.19 22.31 3.60 8.77 -9.52 -0.61 Other Sectors 22.70 35.39 27.60 36.32 24.86 22.93 19.16 92.53 75.79 78.63 59.74 -5.31 22.39 Export Credit (included in Gross Non-Food Credit) 7.71 22.24 21.04 9.41 11.08 50.62 17.30 79.65 45.39 4.18 39.39 -11.66 -10.56 Priority Sector advances as percent of netbankcredit 44.10 43.20 42.40 39.20 38.70 35.10 35.30 33.30 32.10 0.65 0.29 a. In the last month of each period, advances include Participation Certificates. Source: Ministry of Finance, Economic Survey, various issues. 244 Statistical Appendix Table A6.1 Production of Major Crops 1980-81 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Total Foodgrains 129.6 140.4 169.9 171.0 176.4 168.4 179.5 184.3 191.5 180.4 199.4 192.4 202.5 Kharif 77.6 74.6 95.6 101.0 99.4 91.6 101.5 100.4 101.1 95.1 103.9 101.1 102.6 Rabi 51.9 65.8 74.3 70.0 77.0 76.8 78.0 83.9 90.4 85.3 95.5 91.3 99.9 Total Cereals 119.0 129.4 156.1 158.2 162.1 156.4 166.6 170.9 177.5 168.1 185.2 179.4 186.7 Kharif 73.9 70.2 90.0 95.5 94.0 87.2 95.8 95.0 96.4 90.5 98.4 96.8 96.6 Rabi 45.1 59.2 66.1 62.7 68.1 69.2 70.8 75.9 81.1 77.6 86.8 82.6 90.1 Rice 53.6 56.9 70.5 73.6 74.3 74.7 72.9 80.3 81.8 77.0 81.7 82.3 84.7 Kharif 50.1 49.0 63.4 65.9 66.3 66.4 65.3 70.7 72.6 67.9 71.3 71.6 71.8 Rabi 3.5 7.8 7.1 7.7 8.0 8.3 7.6 9.6 9.2 9.1 10.4 10.7 12.9 Wheat 36.3 46.2 54.1 49.8 55.1 55.7 57.2 59.8 65.8 62.1 69.4 65.9 71.0 Barley(Jowar) 10.4 12.2 10.2 12.9 11.7 8.1 12.8 11.4 9.0 9.3 10.9 8.0 8.5 Kharif 7.5 8.6 7.1 9.2 8.3 5.7 9.4 7.3 5.9 5.6 7.0 - 5.0 5.3 Rabi 2.9 3.6 3.1 3.7 3.4 2.4 3.4 4.1 3.1 3.7 3.9 3.0 3.2 Maize 7.0 5.7 8.2 9.7 9.0 8.1 10.0 9.6 8.9 9.5 10.8 10.9 10.8 Bajra 5.3 3.3 7.8 6.6 6.9 4.7 8.9 5.0 7.2 5.4 7.9 7.7 6.9 Total Pulses 10.6 11.0 13.8 12.8 14.3 12.0 12.8 13.3 14.0 12.3 14.2 13.1 15.9 Kharif 3.8 4.4 5.6 5.5 5.4 4.4 5.6 5.4 4.7 4.6 5.5 4.4 6.1 Rabi 6.8 6.6 8.2 7.3 8.9 7.6 7.2 7.9 9.4 7.7 8.7 8.7 9.8 Gram 4.3 3.6 5.1 4.2 5.4 4.1 4.4 5.0 6.4 5.0 5.6 6.1 6.6 Tur 2.0 2.3 2.7 2.7 2.4 2.1 2.3 2.7 2.1 2.3 2.7 1.9 2.7 TotalOilseeeds 9.4 12.6 18.0 16.9 18.6 18.6 20.1 21.5 21.3 22.1 24.4 22.0 25.7 Kharif 5.0 6.4 10.5 9.6 9.8 9.3 12.0 12.3 11.9 13.1 14.4 14.5 16.3 Rabi 4.4 6.2 7.5 7.3 8.8 9.3 8.1 9.2 9.4 9.0 10.0 7.5 9.4 Groundnut 5.0 5.8 9.7 8.1 7.5 7.1 8.6 7.8 8.1 7.6 8.6 7.8 9.0 Kharif 3.7 4.2 7.5 6.1 5.1 5.0 6.7 5.7 6.1 6.1 6.9 6.1 7.1 Rabi 1.3 1.7 2.2 2.0 2.4 2.1 1.9 2.1 2.0 1.5 1.7 1.7 1.9 Rapeseed & Mustard 2.3 3.4 4.4 4.1 5.2 5.9 4.8 5.3 5.8 6.0 6.7 4.7 6.1 Sugarcane 154.2 196.7 203.0 225.6 241.0 254.0 228.0 229.7 275.5 281.1 277.6 276.3 290.7 Cotton 7.0 6.4 8.7 11.4 9.8 9.7 11.4 10.7 11.9 12.9 14.2 11.1 12.8 Jute & Mesta 8.2 6.8 7.9 8.3 9.2 10.3 8.6 8.4 9.1 8.8 11.1 11.1 9.8 Jute 6.5 5.8 6.7 7.1 7.9 8.9 7.5 7.3 8.0 7.7 10.0 10.0 8.9 Mesta 1.7 1.0 1.2 1.2 1.3 1.4 1.1 1.1 1.1 1.1 1.2 1.1 0.9 Potato 9.7 14.1 14.9 14.8 15.2 16.4 15.2 17.4 17.4 18.8 24.2 17.6 22.2 Note: Units of measurement of all commodities is million tonnes, except in the case of cotton, jute and mesta where production is in tenns of millions of bales. Figures for 1997-98 are provisional. a. Includes groundnuts, rapeseeds and mustard, sesame, linseed, castorseed, nigerseed, safflower, sunflower and soybean. Source: Ministry of Finance, Economic Survey, various issues. Statistical Appendix 245 Table A6.2 Irrigated Area Under Different Crops (mnillion hectares) 1980-81 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 Total Foodgrains 37.8 40.1 40.4 41.8 40.5 43.9 44.3 44.9 45.8 46.9 48.3 49.9 49.7 Total Cereals 35.8 38.4 38.3 39.5 38.4 41.8 41.9 42.3 43.4 44.4 45.6 46.8 46.7 Rice 16.4 17.7 17.7 18.1 17.0 19.1 19.4 19.4 20.2 20.1 20.7 21.4 21.5 Jowar 0.8 0.7 0.7 0.8 0.8 0.8 0.9 0.8 0.8 0.8 0.8 0.8 0.8 Bajra 0.6 0.6 0.6 0.7 0.8 0.6 0.7 0.5 0.7 0.6 0.7 0.6 0.6 Maize 1.2 1.0 1.1 1.3 1.2 1.2 1.2 1.2 1.3 1.3 1.4 1.3 1.4 Wheat 15.6 17.5 17.3 17.7 17.8 19.1 18.8 19.5 19.6 20.8 21.4 22.0 21.7 Barley 0.9 0.6 0.7 0.6 0.6 0.6 0.5 0.5 0.6 0.6 0.5 0.6 0.5 Total Pulses 2.0 1.8 2.1 2.3 2.0 2.2 2.3 2.6 2.4 2.5 2.6 3.1 3.1 Other Crops Oilseeds 2:3 3.5 3.4 3.4 4.3 5.0 5.2 5.8 6.8 6.4 6.5 6.8 7.3 Coonon 2.1 1.9 2.3 2.2 2.1 2.4 2.6 2.5 2.6 2.7 2.6 2.7 3.1 Sugarcane 2.4 2.6 2.6 2.8 3.0 3.0 3.1 3.4 3.6 3.5 3.3 3.6 3.9 a. Oilseeds include groundnuts, rapeseed and mustard, linseed, sesame, and others. Source: Ministry of Finance, Economic Survey, various issues. 246 Statistical Appendix Table A6.3 Yield Per Hectare of Major Crops (kgs. per hectare) 1980-81 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-98 TotalFoodgrains 1023 1173 1331 1349 1380 1382 1457 1501 1548 1491 1614 1551 1611 Kharif 933 996 1166. 1241 1231 1174 1302 1324 1341 1292 1379 1362 1387 Rabi 1195 1468 1628 1544 1635 1751 1725 1787 1864 1799 1980 1832 1931 Total Cereals 1142 1315 1493 1530 1571 1574 1654 1701 1763 1703 1831 1772 1836 Kharif 1015 1082 1270 1366 1357 1305 1440 1465 1486 1428 1523 1519 1518 Rabi 1434 1763 1964 1875 2010 2126 2068 2132 2260 2195 2376 2201 2365 Rice 1336 1465 1689 1745 1740 1751 1744 1888 1911 1797 1882 1895 1905 Kharif 1303 1368 1627 1677 1670 1676 1676 1807 1841 1721 1793 1810 1792 Rabi 2071 2640 2548 2678 2671 2720 2720 2816 2731 2678 2856 2770 2935 Wheat 1630 2002 2244 2121 2281 2394 2327 2380 2559 2483 2679 2470 2596 Barley (Jowar) 660 762 697 869 814 655 982 898 779 823 956 727 833 Kharif 737 892 789 1053 969 757 1230 1065 988 996 1214 933 1021 Rabi 520 568 550 604 582 496 632 704 555 650 696 528 639 Maize 1159 1029 1395 1632 1518 1376 1676 1602 1448 1595 1720 1721 1785 Bajra 458 378 646 610 658 465 836 521 700 577 788 792 732 Total Pulses 473 515 598 549 578 533 573 598 610 552 635 572 661 Kharif 361 435 504 480 471 393 495 492 351 448 512 415 586 Rabi 571 587 686 616 672 672 654 701 589 640 747 706 718 Gram 657 629 753 652 712 739 684 783 853 700 813 812 790 Tur 689 685 779 763 673 588 652 762 644 670 756 563 750 Total Oilseeds a 532 629 824 742 771 719 797 799 843 851 926 840 948 Kharif 492 559 805 691 698 604 804 759 797 835 902 937 996 Rabi 588 720 851 822 872 886 786 860 910 876 963 699 877 Groundnut 736 855 1132 930 904 818 1049 941 .1027 1007 1138 1078 1176 Kharif 629 737 1066 824 751 687 969 813 913 928 1076 997 1083 Rabi 1444 1425 1442 1532 1611 1501 1473 1624 1650 1529 1490 1512 1471 Rapeseed&Mustard 560 748 906 831 904 895 776 847 950 916 1017 667 894 Sugarcane 57844 60000 61000 65000 65000 66000 64000 67000 71000 68000 66000 70000 69288 Cotton 152 168 202 252 225 216 257 249 257 242 265 213 240 Jute&Mesta 1130 1274 1540 1646 1634 1662 1658 1713 1760 1712 1818 1795 1730 Jute 1245 1496 1748 1879 1833 1837 1857 1907 1949 1875 1998 1960 1812 Mesta 828 680 909 956 988 1019 955 1008 1023 1078 1030 1019 992 Potato 13256 16000 16000 16000 16000 16000 15000 17000 16000 17000 19000 14600 17800 Note: Figures for 1997-98 are provisional. a. Includes groundnuts, rapeseeds and mustard, sesame, linseed, castorseed, nigerseed, safflower, sunflower and soybean. Source: Ministry of Finance, Economic Surve, various issues. Statistical Appendix 247 Table A6.4 Net Availability, Procurement and Public Distribution of Foodgrains (million tonnes) 1980-81 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Net Production 113.4 125.5 122.8 148.7 149.7 154.3 147.3 157.5 161.2 167.6 157.9 174.5 168.0 Net Imports 0.7 -0.2 3.8 1.2 1.3 -0.1 -0.4 3.1 1.1 0.4 -1.2 1.0 2.2 Change in Govemment Stocks -0.2 -9.5 -4.6 2.6 6.2 -4.4 -1.5 10.8 7.5 -1.8 -8.5 -1.7 6.2 NetAvailability 114.3 134.8 130.8 147.2 144.8 158.6 148.4 149.8 154.8 169.8 165.2 177.2 164.0 Procurement 13.0 15.7 14.1 18.9 24.0 19.6 17.9 28.1 26.0 22.6 19.6 22.5 25.4 Public Distribution 13.0 18.7 18.6 16.4 16.0 20.8 18.8 16.4 14.0 15.3 18.3 17.5 20.0 Note: Production figures relate to agricultural year. Figures for procurement and public distribution relate to calendar years. Source: Ministry of Finance, Economic Survey, various issues. 248 Statistical Appendix Table A6.5a New Index of Industrial Production (1993-94=100) 1997-98 1998-99 over over Weight 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1996-97 1997-98 General Index 100.0 100.0 108.4 122.3 129.1 137.6 143.1 6.6 4.0 Mining and Quarrying 10.5 100.0 107.6 117.9 115.6 122.4 120.3 5.9 -1.7 Electricity Generated 10.2 100.0 108.5 117.3 122.0 130.0 138.4 6.6 6.5 Manufacturing Index 79.4 100.0 108.5 123.5 131.8 140.6 146.7 6.7 4.3 Foodproducts 9.1 100.0 121.6 129.8 134.3 133.8 134.6 Beverages, tobacco, etc. 2.4 100.0 103.0 116.7 132.4 158.1 178.3 19.4 12.8 Cottontextiles 5.5 100.0 99.1 109.5 122.7 125.6 115.9 2.4 -7.7 Jute textiles 2.3 0.0 114.5 131.3 145.1 172.0 176.8 18.5 2.8 Textile products 0.6 100.0 95.1 102.4 97.8 114.3 106.0 16.9 -7.3 Wood&woodproducts 2.5 100.0 98.5 133.7 146.3 158.7 153.1 8.5 -3.5 Paper&paperproducts 2.7 100.0 99.3 123.2 131.9 128.5 121.0 -2.6 -5.8 Leather&leatherproducts 2.7 100.0 108.6 125.5 136.9 146.4 169.7 6.9 15.9 Rubber, plastic &petroleumprod. 1.1 100.0 86.8 99.1 108.4 110.8 119.8 2.2 8.1 Chemical&cheTnicalproducts 5.7 100.0 107.7 116.1 118.4 124.6 138.7 5.2 11.3 Non-metallicniineralproducts 14.0 100.0 105.3 117.2 122.7 140.5 149.4 14.5 6.3 Basic metal & alloy products 4.4 100.0 108.0 131.7 141.9 161.4 174.5 13.7 8.1 Metal products 7.5 100.0 113.1 131.0 139.8 143.5 140.5 2.6 -2.1 Machinery & machine tools 2.8 100.0 104.7 100.6 110.9 120.2 141.4 8.4 17.6 TranspoTtequipment 9.6 100.0 112.8 134.7 141.7 149.5 151.7 5.5 1.5 Miscellaneous products 4.0 100.0 113.2 132.8 149.9 153.8 177.6 2.6 15.5 Note: Figures for 1997-98 are provisional. Source: CSO, IIP Division. Statistical Appendix 249 Table A6.5b Index of Industrial Production (1980-81=100, Old Series) 1996-97 1997-98 over over Weight 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1995-96 1996-97 General Index 100.0 166.4 180.9 196.4 212.6 213.9 218.9 232.0 253.8 284.5 304.7 317.5 7.1 4.2 MiningandQuarrying 11.5 184.6 199.1 211.6 221.2 222.5 223.7 231.5 248.9 267.3 268.1 281.2 0.3 4.9 ElectricityGenerated 11.4 181.0 198.2 219.7 236.8 257.0 269.9 290.0 314.7 340.1 353.4 377.4 3.9 6.8 Manufacturing Index 77.1 161.5 175.6 190.7 207.8 206.2 210.7 223.5 245.4 278.8 303.0 313.9 8.7 3.6 Food products 5.3 139.0 148.5 150.9 169.8 178.0 175.3 160.0 181.6 207.0 214.1 208.9 Beverages,tobacco,etc. 1.6 84.9 92.1 103.0 104.8 107.3 113.7 137.8 134.8 160.9 184.6 193.4 14.7 4.8 Cottontextiles 12.3 111.2 107.8 112.3 126.6 139.0 150.1 160.5 155.8 173.1 191.7 202.2 10.7 5.5 Jute textiles 2.0 91.0 101.9 97.4 101.6 90.8 87.0 103.2 91.4 93.6 95.8 104.1 2.3 8.7 Textle products 0.8 91.7 134.2 151.7 103.2 97.2 75.8 73.4 78.6 89.7 95.5 88.9 6.5 -6.9 Wood&woodproducts 0.5 161.7 171.7 176.0 197.2 185.0 190.5 199.3 205.5 240.8 232.9 208.9 -3.3 -10.3 Paper&paperproducts 3.2 166.3 171.3 181.5 198.0 203.0 210.9 224.8 258.1 286.7 311.4 335.3 8.6 7.7 Leather&leatherproducts 0.5 185.5 177.4 188.3 194.3 181.3 187.7 204.3 211.9 227.3 231.9 229.3 2.0 -1.1 Rubber.plastic&petroleumprod. 4.0 155.1 168.3 173.5 174.0 172.0 174.6 176.4 193.2 211.1 215.8 236.9 2.2 9.8 Chemical & chemical products 12.5 200.9 233.4 247.6 254.1 261.2 276.9 297.9 307.4 332.3 348.0 357.0 4.7 2.6 Non-metallic mineral products 3.0 158.1 184.6 189.9 193.1 205.2 208.9 218.5 236.0 264.5 286.2 320.9 8.2 12.1 Basicmetal&alloyproducts 9.8 135.6 144.9 143.7 158.8 167.8 168.4 224.2 214.6 225.7 303.6 316.0 34.5 4.1 Metal products 2.3 129.6 133.5 142.6 143.1 133.1 124.6 126.5 148.8 173.8 177.1 178.7 1.9 0.9 Machinery & machine tools 6.2 139.2 161.2 171.9 186.9 183.3 181.1 189.2 228.2 274.3 279.5 281.2 1.9 0.6 Electrical machinery 5.8 335.2 346.0 459.2 563.6 493.7 483.6 460.1 460.1 460.1 460.1 460.1 0.0 0.0 Transport equipment 6.4 151.9 171.3 181.1 192.5 191.1 200.6 211.2 239.1 297.9 354.5 329.7 19.0 -7.0 Miscellaneous products 0.9 272.1 306.3 333.2 321.8 269.9 281.3 267.0 269.7 300.7 283.2 299.4 -5.8 5.7 Note: Figures for 1997-98 are provisional. Source: CSO, IIP Division. 250 Statistical Appendix Table A6.6 Production, Imports and Consumption of Fertilizers (000' nutrient tons) NitTogenous' Phosphatic b Potassic Total (Apr-MaT) Production Imports Consumption Production Imports Consumption Imports Consumption Production Imports Consumption 1980-81 2163.9 1510.2 3678.1 841.5 452.1 1213.6 796.8 623.9 3005.4 2759.1 5515.6 1981-82 3143.3 1055.1 4068.7 950.0 343.2 1322.9 643.8 676.2 4093.3 2042.1 6067.8 1982-83 3429.7 424.6 4242.5 983.7 63.4 1432.7 643.7 726.3 4413.4 1131.7 6401.5 1983-84 3491.5 656.1 5204.4 1064.1 142.6 1730.3 556.4 775.4 4555.6 1355.1 7710.1 1984-85 3917.3 2008.6 5486.1 1317.9 745.2 1886.4 871.0 838.5 5235.2 3624.8 8211.0 1985-86 4328.0 1680.0 5661.0 1428.0 816.0 2005.0 903.0 808.0 5756.0 3399.0 8474.0 1986-87 5410.0 1103.0 5716.0 1660.0 255.0 2079.0 952.0 850.0 7070.0 2310.0 8645.0 1987-88 5466.0 175.0 5717.0 1665.0 0.0 2187.0 809.0 880.0 7131.0 984.0 8784.0 1988-89 6712.0 219.0 7251.0 2252.0 407.0 2721.0 982.0 1068.0 8964.0 1608.0 11040.0 1989-90 6747.0 523.0 7386.0 1796.0 .. 3014.0 1280.0 1168.0 8543.0 3114.0 11568.0 1990-91 6993.0 414.0 7997.0 2052.0 1311.0 3221.0 1328.0 1328.0 9045.0 2758.0 12546.0 1991-92 7301.0 566.0 8046.0 2562.0 1016.0 3321.0 1236.0 1361.0 9863.0 2769.0 12728.0 1992-93 7430.0 1160.0 8426.0 2306.0 967.0 2842.0 1082.0 884.0 9736.0 2988.0 12152.0 1993-94 7231.0 1564.0 8789.0 1816.0 687.0 2669.0 880.0 908.0 9047.0 3166.0 12366.0 1994-95 7948.0 1476.0 9507.0 2493.0 722.0 2932.0 1109.0 d 1125.0 10438.0 2965.0 13564.0 1995-96 8777.0 1938.0 9823.0 2558.0 380.0 2898.0 1423.0 1156.0 11335.0 3955.0 13877.0 1996-97 8599.0 1155.0 10302.0 2556.0 246.0 2977.0 613.0 1029.0 11155.0 1975.0 14308.0 1997-98' 10086.0 1362.0 10900.0 2976.0 672.0 3915.0 1140.0 1373.0 13062.0 3174.0 16188.0 1998-99' 10426.0 549.0 12273.0 2998.0 748.0 4411.0 832.0 1487.0 13424.0 2165.0 18171.0 --Not available. a. Excludes nitrogen meant fos non-agricultural purposes. b. Excludes data in respect of bonemeal and rockphosphate. c. Anticipated. d. Incorporates import of Urea in nutrient terms, the only controlled fertiliser imported on Government account. Source: The Fertilizer Association of India, Fertilizer Statistics, various issues; Ministry of Finance, Economic Survey, various issues.- Statistical Appendix 251 Table A6.7 Indian Railways: Freight and Passenger Traffic Passenger Traffic Revenue Earning Freight Traffic Non-Suburban Suburban a Originating Net tons- Average Passenger Passenger- Average Passenger Passenger- Average tonnage kilometers lead originating kilometers lead originating kilometers lead Year (mln.tons) (million) (kilometers) (million) (million) (kilometers) (million) (million) (kilometers) 1980-81 195.9 147652 754 1613 167472 103.9 2000 41086 20.5 1981-82 221.2 164253 743 1640 176822 107.8 2064 43965 21.3 1982-83 228.8 167781 733 1626 181142 111.4 2029 45789 22.6 1983-84 230.1 168849 734 1491 180808 121.3 1834 42127 23.0 1984-85 236.4 172632 730 1449 182318 125.8 1884 44264 23.5 1985-86 258.5 196600 760 1549 195175 126.0 1884 45439 24.1 1986-87 277.8 214100 771 1610 208057 129.0 1970 48411 24.6 1987-88 290.2 222528 767 1637 217632 133.0 2171 51859 23.9 1988-89 302.1 222374 736 1495 211819 141.6 2022 52023 25.7 1989-90 310.0 229602 741 1544 226045 76.9 2129 54933 25.8 1990-91 318.4 235785 741 1599 236066 147.6 2281 59724 26.2 1991-92 338.0 250238 740 1637 251174 153.4 2436 63543 26.1 1992-93 350.1 252388 721 1467 239655 163.3 2298 60547 26.4 1993-94 358.7 252411 704 1406 233200 165.9 2318 63147 27.2 1994-95 373.0 259810 697 1451 243798 168.0 2359 63275 26.8 1995-96 390.7 270489 692 1534 268708 175.2 2527 73651 29.1 1996-97 409.0 277567 679 1575 280470 178.1 2641 77104 29.2 1997-98 429.4 284249 662 1691 301053 178.0 2727 79475 29.1 1998-99 424.0 282374 666 1767 312668 176.9 2827 82915 29.3 Note: Figures for 1998-99 are revised estimates. a. Passengers booked between stations within the suburban areas of Bombay; from 1988/89 onwards suburban passenger traffic include Metro Railway, Calcutta. Source: Ministry of Railways, Railway Budget. 252 Statistical Appendix Table A6.8 Petroleum SummaTy Commodity Balance of Petroleum and Petroleum Products (million tons) 1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97' 1997-98' 1997-98 A. CRUDE PETROLEUM lRefinery Throughput 25.8 42.9 45.7 47.7 48.8 51.9 51.8 51.4 53.5 54.3 56.5 58.7 62.9 65.1 0.0 2.Domestc Production 10.5 30.2 30.5 30.4 32.0 34.1 33.0 30.4 27.0 27.0 32.2 35.2 32.9 33.9 0.0 (a)On-shore 5.5 9.4 9.9 10.2 10.9 12.4 11.8 11.4 11.2 11.6 12.0 11.9 11.4 11.5 0.0 (b) Off-shore 5.0 20.8 20.6 20.2 21.1 21.7 21.2 19.0 15.8 15.4 20.2 23.3 21.5 22.4 0.0 3.rnpoils 16.2 15.1 15.5 18.0 17.8 19.5 20.7 24.0 29.2 30.8 27.3 27.3 33.9 34.4 0.0 4.Exports - 0.5 - - - - - - - - - - - 0.0 5.Net Imports (3-4) 16.2 14.6 15.5 18.0 17.8 19.5 20.7 24.0 29.2 30.8 27.3 27.3 33.9 34.4 0.0 B. PRODUCTS l.Domestic Consumptionb 30.9 40.8 43A 46.4 50.1 54.1 55.0 57.0 58.9 60.8 67.4 74.7 79.2 84.5 0.0 of which: (a) Naphtha 2.3 3.1 3.2 2.9 3.4 3.4 3.4 3.5 3.4 3.2 3.4 3.7 4.0 4.7 0.0 (b) Kerosene 4.2 6.2 6.6 7.2 7.7 8.2 8.4 8.4 8.5 8.7 9.0 9.3 9.6 9.9 0.0 (c) High Speed Diesel 10.3 14.9 16.0 17.7 18.8 20.7 21.1 22.7 24.3 25.9 28.3 32.3 35.0 36.2 0.0 (d) Fuel oils 7.5 7.9 7.9 8.1 8.5 8.8 9.0 9.2 9.3 9.1 9.9 10.7 10.8 11.0 0.0 2.Domestic Production 24.1 39.9 42.8 44.7 45.7 48.7 48.6 48.3 50.4 51.1 52.9 55.1 59.0 61.3 0.0 (a) Naphtha 2.1 5.0 5.6 5.5 5.4 5.2 4.9 4.5 4.6 4.7 5.7 6.0 6.1 6.1 0.0 (b) Kerosene 2.4 4.0 4.9 5.1 5.2 5.7 5.5 5.3 5.2 5.3 5.3 5.3 6.2 6.7 0.0 (c)HighSpeedDiesel 7.4 14.6 15.5 16.3 16.7 17.7 17.2 17.4 18.3 18.8 19.6 20.7 22.2 23.4 0.0 (d) Fuel oils 6.1 8.0 8.0 8.5 8.9 9.0 9.4 9.6 10.4 10.3 9.8 9.6 10.3 11.1 0.0 3.Imports 7.3 3.9 3.1 3.9 6.5 6.6 8.7 9.4 11.3 12.1 14.0 20.3 20.3 19.5 0.0 4.Exports' - 2.0 2.5 3.4 2.3 2.6 2.6 2.9 3.7 4,0 3.3 3.4 3.2 2.9 0.0 5.Net Imports 7.3 1.9 0.6 0.5 4.2 4.0 6.1 6.5 7.6 8.1 10.7 -3.4 17.1 16.6 0.0 - Not available. a. Provisional. b. Excludes refinery fuel consumption. c. Excludes supplies of POL products to Nepal. Source: Ministry of Finance, Economic Survey. various issues. Statistical Appenidix 253 Table A6.9 Generation, Consumption and Capacity of Electricity (000 GWH) 1980-81 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 ' 1997-98 A. GENERATION OF ELECTRICITY BY SOURCE AND REGION I. Thermaib Northern 13.69 37.74 41.24 48.82 52.13 60.44 66.17 71.45 72.45 81.76 85.99 88.30 Westem 25.37 61.80 63.39 73.08 76.95 84.33 88.50 96.27 102.92 115.75 120.97 127.78 Southem 9.22 28.07 30.53 34.03 35.76 40.39 44.31 51.03 54.80 65.19 71.24 75.47 Eastern 12.53 20.77 21.40 21.55 20.39 22.40 24.56 28.36 30.54 34.67 37.62 42.53 North-Eastern 0.50 1.24 1.15 1.22 1.31 1.19 1.23 1.08 1.42 1.95 2.10 2.02 All-India 61.30 149.61 157.71 178.70 186.55 208.75 224.77 248.19 262.13 299.32 317.92 336.10 2. Hydro Northern 15.08 20.86 23.57 25.01 27.16 27.21 25.45 24.34 30.24 29.26 29.01 30.96 Westem 7.81 5.06 7.54 6.87 8.31 8.16 7.27 8.72 10.30 7.55 7.84 8.29 Southem 20.28 17.35 21.64 24.54 29.17 29.63 30.70 30.72 35.05 28.43 25.14 28.81 Eastem 2.96 3.19 3.76 4.11 5.34 5.87 4.52 4.48 5.26 5.51 4.97 4.40 North-Eastem 0.41 0.97 1.36 1.58 1.66 1.89 1.93 2.20 1.86 1.83 1.94 2.02 All-India 46.54 47.44 57.87 62.12 71.64 72.76 69.87 70.46 82.71 72.58 68.90 74.48 3. Nuclear Northem 1.23 1.39 1.87 1.73 2.16 1.66 2.77 1.50 1.34 2.75 2.82 3.91 Westem 1.77 1.61 1.90 1.55 1.90 1.71 1.97 2.43 1.88 3.82 4.26 4.24 Southem .. 2.04 2.05 1.35 2.07 2.16 1.98 1.39 2.43 1.41 1.99 1.89 All-India 3.00 5.04 5.82 4.63 6.14 5.53 6.72 5.32 5.65 7.98 9.07 10.04 4. Utilities-All India(I +2+ 3) 110.84 202.09 221.40 245.44 264.33 287.03 301.36 323.97 350.49 379.88 395.89 420.62 5. Self-Generation in Industry 8.42 16.89 19.91 23.23 25.11 28.60 31.35 32.28 35.07 38.16 40.99 43.75 and Railways 6. Total-All India(4+5) 119.26 218.98 241.31 268.66 289.44 315.63 332.71 356.25 385.56 418.04 436.88 464.37 B. CONSUMPTION OF ELECTRICITY BY SECTORS I. Mining&Manufacturing' 55.35 82.97 92.05 100.40 105.38 110.62 116.17 121.38 129.83 137.13 140.87 2. Transport 2.31 3.62 3.77 4.07 4.11 4.52 5.07 5.62 5.89 6.22 6.62 3. Domestic 9.25 22.12 24.77 29.58 31.98 35.85 39.72 43.34 47.92 51.74 55.27 4. Agriculture 14.49 35.27 38.88 44.06 50.32 58.56 63.33 70.70 79.30 85.73 84.02 5. Others 8.30 15.42 17.02 17.01 19.74 21.42 22.38 24.41 26.40 28.65 30.16 6. Total 89.70 159.40 176.49 195.12 211.53 230.97 246.67 265.45 289.34 309.47 316.94 C. INSTALLED CAPACITY (000' MW) Utilities Thernal 17.6 35.6 39.7 43.8 45.8 48.1 50.7 54.3 58.1 60.1 61.0 64.0 Hydro 11.8 17.3 17.8 18.3 18.8 19.2 19.6 20.4 20.8 21.0 21.7 22.0 Nuclear 0.9 1.3 1.5 1.5 1.5 1.8 2.0 2.0 2.2 2.2 2.2 2.2 Total 30.3 54.2 59.0 63.6 66.1 69.1 72.3 76.7 81.1 83.3 84.9 88.2 Non-Utilities 3.1 6.3 7.5 8.2 8.6 9.3 10.1 10.2 11.1 11.9 12.1 12.9 a. Provisional Data. b. Includes steam, diesel, wind and gas. c. Includes industrial power from utilities plus net generation in the non-utilities. Source: Central Electricity Authority, Power Data Bank & Informnation Directorate. 254 Statistical Appendix Table A6. I0 New Index Numbers of Wholesale Prices - by Years (Base 1981-82=100) Weights 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 percent change TOTAL FOOD ARTICLES 17.386 161.1 177.1 179.3 200.6 241.1 271.0 284.4 312.7 335.7 375.1 388.0 440.9 13.6 Food Grains 7.917 141.3 161.8 165.4 179.2 216.4 242.4 260.8 293.2 313.0 353.8 362.7 392.7 8.3 OtherFood 9.469 177.7 189.9 190.9 218.5 261.8 294.9 304.2 329.0 354.7 392.8 409.1 481.3 17.6 rNDUSTRIAL RAW MAT. 14.909 142.8 140.3 145.3 166.6 191.7 192.2 211.8 248.7 267.3 273.9 283.0 307.0 8.5 Non-Food Articles 10.081 163.0 160.2 166.0 194.2 229.2 228.7 249.1 299.0 321.7 329.8 340.5 376.4 10.5 Minerals 4.828 100.5 98.5 102.2 109.0 113.5 116.1 133.9 143.6 157.5 157.3 162.9 162.1 -0.5 FUEL,POWER&LUB. 10.663 143.3 151.2 156.6 175.8 199.0 227.1 262.4 280.4 285.4 324.2 365.7 3813 4.3 MANUF. PRODUCTS 57.042 138.5 151.5 168.6 182.8 203.4 225.6 243.2 268.8 293.1 305.0 317.5 332.0 4.6 Food Products 10.143 140.5 147.8 165.4 181.7 206.3 223.8 246.7 270.5 278.8 297.3 321.3 344.6 7.3 Beverage & Tobacco 2.149 155.0 180.7 207.7 242.1 265.7 293.7 306.6 342.1 373.9 392.9 442.0 482.7 9.2 Textiles 11.545 126.6 139.6 158.2 171.2 188.3 200.7 219.9 256.8 294.6 304.1 310.3 320.3 3.2 Chemicals and 7.355 131.9 135.8 140.0 147.9 168.4 192.6 207.8 232.6 249.9 259.3 269.3 281.8 4.6 Chemical Products Basic metals and 7.632 149.7 176.4 205.6 219.9 234.8 256.6 276.6 300.5 329.0 339.6 348.8 353.1 1.2 Products Machineryaand 6.268 132.3 150.8 166.2 180.2 208.3 230.6 237.9 262.8 282.8 295.0 299.4 304.7 1.8 Machine Tools Transport EqpL 2.705 135.5 148.9 166.2 181.3 202.5 218.1 223.8 238.5 254.5 265.9 274.9 285.8 4.0 ALL COMMODITIES 100.0 143.5 154.2 165.7 182.7 207.8 228.7 247.8 274.7 295.8 314.6 329.8 352.4 6.9 Memo Items: Administered Prices: Petroleumcrudeandnaturalgas 4.3 93.5 89.1 91.8 99.6 101.0 102.7 120.7 129.1 130.2 132.1 138.1 135.8 -1.7 Petroleumproducts (Mineral oils) 6.7 126.3 129.2 129.7 154.7 179.6 204.1 223.6 235.0 235.2 270.1 301.0 306.8 1.9 Coal mining 1.3 183.0 212.3 231.8 232.8 249.9 301.2 346.4 364.0 368.1 416.8 489.0 503.3 2.9 Electricity 2.7 166.7 176.6 187.7 200.9 222.8 249.0 318.3 352.6 369.7 413.2 466.5 506.4 8.6 Urea N-content 1.0 111.5 99.6 99.0 99.0 125.2 127.4 126.6 148.6 153.6 155.2 169.8 173.0 1.9 Decontrolled Prices: Iron and Steel 2.4 143.4 163.8 188.8 201.5 212.6 233.0 252.7 270.5 290.8 305.5 315.8 319.5 1.2 Fertilizers 1.7 107.6 98.9 99.1 99.1 123.9 160.8 181.6 196.6 210.7 211.9 223.5 227.4 1.7 Superphosphate 0.1 123.0 110.7 119.6 119.6 150.1 278.7 350.7 343.1 367.1 375.9 379.4 386.5 1.9 Ammonium phosphate 0.1 100.3 96.5 96.5 96.5 121.1 232.8 304.4 304.4 304.4 304.4 304.4 344.0 13.0 Lubricants 0.5 123.9 148.3 152.2 182.1 226.5 275.5 330.0 337.9 342.6 385.6 401.9 420.9 4.7 Note: This WPI series based 1981-82 was introduced as of July 1989. Data for 1998-99 are provisional. a. Refers to percent change in fiscal year 1998-99 over 1997-98. Source: Ministry of Industry, Office of the Economic Adviser. Statistical Appendix 255 Table A6.11 Consumer Price Index Numbers for Industrial Workers, Urban Non-Manual Employees and Agricultural Laborers Urban Non-Manual Agricultural Year Industrial Workers Employees Laborers "' (April-March) Food Index General Index (1994-85=100) General Index (1982=100) (1982=100) (1960-61=100) 1989-90 177.0 173.0 145.0 746.0 1990-91 199.0 193.0 161.0 803.0 1991-92 230.0 219.0 183.0 958.0 1992-93 254.0 240.0 202.0 1076.0 1993-94 272.0 258.0 216.0 1114.0 1994-95 297.0 279.0 232.0 1204.0 1995-96 337.0 313.0 259.0 234.0 1996-97 369.0 342.0 283.0 256.0 1997-98 388.0 366.0 302.0 269.0 1998-99 .. 414.0 337.0 294.0 Average of weeks 1996 March 339 319 264 1395.9 June 361 333 274 247.0 September 372 344 274 259.0 December 380 350 289 263.0 1997 March 373 351 291 262.0 June 376 355 295 259.0 September 383 361 301 263.0 December 396 372 307 265.0 1998 March 401 380 312 284.0 June 432 399 326 282.0 September 456 420 340 297.0 December .. 429 345 305.0 1999 March .. 414 340 296.0 Percentage Change in Index over the corresponding month of previous year 1996 March 9.0 8.9 8.2 7.4 June 9.1 8.8 7.9 September 7.8 8.5 5.0 December 10.5 10.4 10.3 1997 Marcb 10.0 10.0 10.2 June 4.2 6.6 7.7 4.9 September 3.0 4.9 9.9 1.5 December 4.2 6.3 612 0.8 1998 March 7.5 8.3 7.2 8.4 June 14.9 12.4 10.5 8.9 September 19.1 16.3 13.0 12.9 December -- 15.3 12.4 15.1 1998 March - 8.9 9.0 4.2 -Not available. a. Indices relate to Agricultural Years (June-July) b. Earlier base of 1960-61 was discontinued w.e.fNovember 1987. Source: Ministry of Labor, Labor Bureau, Sinla; Central Statistical Organization; Ministry of Finance, Economic Survey, various issues; CMIE, Monthly Review of the Indian Economy.