___ A WORLD BANI COUNTRY STUDY India Five Years of Stabilization and Reform and thle Chlallenges Ahead A WORLD BANK COUNTRY STUDY India Five Years of Stabilization and Reform and the Challenges Ahead The World Bank Washington, D.C. Copyright i 1996 The International Bank for Reconstruction and Development/ THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1996 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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The World Bank encourages dissemination of.its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. For a copy of Update describing new publications, contact the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or Publications, The World Bank, 66, avenue d'Ina, 75116 Paris, France. A catalog and ordering information are also available on the Intemet at http://www.worldbank.org. ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data India : five years of stabilization and reform and the challenges ahead. p. cm. - (A World Bank country study) "Prepared by a team led by Zoubida Allaoua"- P. vii. Includes bibliographical references. ISBN 0-8213-3838-2 1. India-Economic policy-1980. 2. India-Economic conditions-1947- I. Allaoua, Zoubida. II. World Bank. III. Series. HC435.2.1532 1996 338.954-dc2l 96-48266 CIP - 111 - TABLE OF CONTENTS ABSTRACT ............................................................... vii ACKNOWLEDGMENTS ............................................................... v.ii ABBREVIATIONS AND ACRONYMS ............................................................... ix CURRENCY ................................................................ xi ECONOMIC DEVELOPMENT DATA ............................................................... xii EXECUTIVE SUMMARY ............................................................... xvii PART I: FIVE YEARS OF STABILIZATION AND REFORM: A SUMMING UP .........................I CHAPTER 1: FROM CRISIS TO GROWTH ..................... ...........................................3 Introduction ................................................................3 Macroeconomic Developments .................................................................6 An Unexpectedly Strong Recovery ................................................................6 Inflation Declined But Monetary Management Became More Complex ...................... 11 The Extemal Accounts Improved Significantly ............................................................ 16 Fiscal Adjustment is One Area of Serious Concen ........................................... 16 Fiscal Adjustment in the 1996-97 Budget ........................................... 21 Progress in Structural Reform ........................................... 24 Perspectives From the Poor ........................................... 27 CHAPTER 2: MACROECONOMIC VULNERABILITIES AND STRUCTURAL WEAKNESSES ................................................. 33 Introduction ................................................. 33 Macroeconomic Vulnerabilities ................................................. 34 Fiscal Vulnerabilities .................................................. 34 External Account Vulnerabilities ................................................. 36 Structural Weaknesses ................................................. 37 Conclusion ................................................. 50 PART II: THE CHALLENGES AHEAD ................................................. 51 CHAPTER 3: THE CENTRALITY OF FISCAL ADJUSTMENT ................................................. 53 Introduction .................................................5 3 Extent and Nature of India's Fiscal Imbalances ................................................. 53 Essential Elements of a Fiscal Adjustment Strategy .................................................. 3 Expenditure Reform ................................................. 59 Tax Reform .................................................. 62 Restructuring Center-States Fiscal Relations .................................................. 65 Financial Sector Reforms and Capital Market Development .................................................. 67 - iv - CHAPTER 4: UNLEASHING AGRICULTURE'S GROWTH POTENTIAL ................................ 77 Overview ..................................................................... 77 Public Expenditure: Remaining Issues .................................... ................................. 79 Public Expenditure Reform ..................................................................... 84 Foreign Trade De-Regulation .................................................................... 88 Domestic Trade De-Regulation .................................................................... 90 Rural Credit Reform ..................................................................... 97 CHAPTER 5: THE ENABLING FRAMEWORK FOR PRIVATE INVESTMENT IN INFRASTRUCTURE .................................................................. 99 Introduction .............................................................. 99 Power ............................................................... 100 Private Investment in Generation .......................... .................................... 100 Private Sector Participation in Distribution .............................................................. 103 Transport .............................................................. 105 Introduction .......................................................................................... 105 Improving Competition and Efficiency .............................................................. 105 Facilitating Private Sector Investment in Fixed Transport Assets .............................. 109 Telecommunications .............................................................. 112 Introduction ............................................................... 112 Outstanding Issues .............................................................. 114 Conclusion ............................................................... 114 CHAPTER 6: EXTERNAL PROSPECTS AND FINANCING REQUIREMENTS ..................... 117 Introduction .................................................................... 117 External Economic Environment and Implications for India .................................................... 117 Prospects for Higher Growth and Exports ..................................................................... 121 Prospects for Selected Key Export Sectors ................................................................ 122 Prospects for Selected Key Service Exports ............................................................... 124 External Financing Requirements ..................................................................... 126 SELECTED REFERENCES ..................................................................... 129 ANNEXES I Methodology and Key Assumptions for Estimating Savings from Privatization ...... 131 II A Summary of the Computable General Equilibrium Model ..................................... 133 Ill Executive Summaries of Beneficiary Assessment Surveys ........................................ 135 STATISTICAL APPENDIX ..................................................................... 159 LIST OF TABLES 1.1 Growth Performance 1981-96 .........................................................89 6 .6 1.2 Index of Industrial Production, 1981-95 ..........................................................6 1.3 Change in Trade Orientation, Profitability, and Productivity since 1991, Compared to the pre-1991 Period .7 1.4 Change in Profitability, and Productivity since 1991, Compared to the pre-1991 Period ..........................................................8 1.5 Foreign Direct and Portfolio Investment ...........................................................9 1.6 Domestic Demand, 1981-95 .......................................................... 10 1.7 Selected Monetary Indicators, 1990-96 ......................................................... 12 1.8 Real Exchange Rate of India's Main Trading Partners and Competitors, 1981-96 ..................... 12 1.9 Balance of Payments, 1991-96 ......................................................... 15 1.10 Evolution of the Public Deficit, 1990-96 .......................................................... 17 1.11 Key Interest Rates, 1990-96 ......................................................... 18 1.12 Central Government Finances, 1990-97 ......................................................... 19 1.13 State-Wise Shares of Marginal and Small Farmer Holdings ....................................................... 31 2.1 Gross National Savings for Selected East Asian Countries and India, 1992; 1994 ...................... 35 2.2 Total Public Expenditure, Regional Comparison ......................................................... 35 2.3 Fiscal Balances, Consolidated Government Fiscal Deficits ........................................................ 36 2.4 Scientific and Technical Workers ......................................................... 43 2.5 International Comparison of Airport Capacity ......................................................... 46 2.6 Telecommunications Sector Indicators, 1993 ......................................................... 47 3.1 Evolution of the Public Debt Stock, 1990-96 ......................................................... 54 3.2 Interest Rates and Payments on Public Debt ......................................................... 54 3.3 International Comparison of Public Debt Stocks and Interest Payments .................................... 55 3.4 The Primary Deficit Consistent with Solvency ......................................................... 56 3.5 Fiscal Consequences of Financial Reform ......................................................... 56 3.6 Net Impact of SEB Performance on 14 State Budgets, 1991-1995 ............................................. 61 3.7 Estimated Additional Public Savings .......................................................... 65 4.1 Economy-wide Reforms are Removing the Anti-Agricultural Bias ............................................ 77 4.2 Agricultural Price Movements, A Decomposition Analysis ....................................................... 78 4.3 India Spends Twice as Much on Agriculture as East Asian Countries ........................................ 79 4.4 Growth Prospects Suffer Most Among Poor States ......................................................... 82 4.5 Improved Composition of Expenditure Could Compensate for the Removal of Input Subsidies .................................................... 84 4.6 Trade Reforms in Indian Agriculture .................................................... 88 4.7 Evaluating Alternative Policies for Raising Relative Agriculture Prices .................................... 89 4.8 Value of Output from Agriculture ..................................................... 90 4.9 Beyond Trade Policy, What are the Problems with Agricultural Markets? ................................ 90 4.10 What Causes the Problems with Agricultural Markets? .................................................... 91 6.1 Exte rnal Environment for India, 1975-2005 .................................................... 118 6.2 Sources and Growth of India's Foreign Exchange Earnings .................................................... 119 6.3 Performance of Key Export Sectors .................................................... 120 6.4 Foreign Tourism in India and Comparators .................................................... 126 - vi - LIST OF BOXES 1.1 India's Social Profile ...........................................................4 1.2 Four Stylized Facts Seem to Emerge From the States as a Result of the Central Government Stabilization and Adjustment Program ............................................... 20 1.3 The Common Minimum Program of the United Front Government ........................................... 22 1.4 Reforms in the 1996-97 Budget ................................................ 23 1.5 Capital Market Reforms Led to Improvement in Transparency, Reliability and Fairness of Transactions .................................................. 26 1.6 Did India's Macroeconomic Stabilization Increase Poverty in 1992? ........................................ 28 1.7 Selected Case Studies: The Impact of Economic Reforms on the Poor ..................................... 30 2.1 Spillover Effects of FDI .................................................. 38 2.2 Are Potato Chips More Important Than Computer Chips? .................................................. 40 2.3 The Success Story of India's Maruti Udyog .................................................. 41 2.4 Haryana's Power Crisis .................................................. 48 3.1 Welfare Consequences of Selling Public Enterprises .................................................. 60 3.2 Liquidation of Manufacturing Sick Enterprises .................................................. 61 3.3 Net Transfer of Resources from the States to the SEBs .................................................. 62 3.4 Mexican Corporate Assets Tax .................................................. 64 3.5 The States of Maharashtra and Rajasthan are Leading the Way in Sales Tax Reforms .......................... 64 3.6 Reform of States' Sales Tax .......................... 66 3.7 Benefits of an Efficient Money Market ........................... 68 4.1 Correcting for India's Large Size Reduces Significantly the Apparent Policy Bias Against Agriculture .......................................................... 78 4.2 Budgeted Subsidies to Indian Agriculture .......................................................... 80 4.3 Institutional Reforms in Karnataka's Irrigation Sector ......................................................... 86 4.4 Deficiencies in Port and Port Services Impede Agricultural Exports .......................................... 92 5.1 Multiple Efforts to Encourage and Expedite Private Investment in BOT Projects ................... 111 5.2 A Large Unmet Demand for Telecommunication Services Persists ......................................... 113 LIST OF FIGURES 2.1 Comparative Clothing Production Costs, 1995, DMlstandard minute ........................................ 42 2.2 Infrastructure Stocks and per capita GDP .......................................................... 44 2.3 Rail Road Tracks ......................................................... 46 3.1 Call Rate, Weekly High and Low ......................................................... 70 3.2 Daily Average Call Rate, July-September 1995 (DFHI) .......................................................... 70 3.3 Debt and Liquidity Management, Reserve Bank of New Zealand .............................................. 73 3.4 91 Day T-Bills ......................................................... 73 4.1 Agricultural Terms of Trade Recover from Policy Bias ......................................................... 77 4.2 Subsidies Crowd-Out Productivity-Enhancing Expenditures During the 80s ............................. 79 4.3 Capital Formation in Indian Agriculture is Declining ......................................................... 81 4.4 Irrigation Related Subsidies Dominate Agricultural Subsidies ................................................... 81 6.1 Export Market Share for India and Competitors .......................................................... 119 6.2 SITC 667 Pearls, Precious and Semi-Precious Stones ......................................................... 123 - vii - ABSTRACT The stabilization and reform measures introduced over the past five years have considerably improved India's growth prospects. Growth accelerated to over 6 percent in 1995-96 from less than one percent in 1991-92. The progressive integration of the Indian economy into the global economy with the liberalization of the investment, trade and foreign exchange regimes has improved productivity, particularly in the industrial sector, which has been growing at rates exceeding 10 percent in the last two years. In addition, the exchange rate devaluation and the reduction in the level of protection of the industrial sector have been beneficial to agriculture. Growth is now driven by exports and private investment, and is being accompanied by an increase in domestic savings. At US$2 billion in 1995-96, foreign direct investment is 15 times higher than it was before the economy was liberalized and portfolio investment has stabilized at around US$2- 3 billion--that is 10 percent of world portfolio investment in emerging markets. Inflation has declined and the external accounts have strengthened. Notwithstanding these remarkable achievements, this report, like the Government's June 1996 Common Minimum Program and the Ministry of Finance 1995-96 Economic Survey, re- emphasizes the importance of urgently addressing the remaining structural constraints to higher growth. Chief among them are: reducing the country's chronically high fiscal deficits; removing the remaining investment and trade restrictions, particularly in agriculture; averting a crisis in infrastructure; and strengthening the country's human capital base. - viii - ACKNOWLEDGMENTS This Memorandum was prepared by a team led by Zoubida Allaoua. It draws on contributions from Paul Beckerman (monetary and financial sector developments and policies); Uri Dadush, T.G. Srinivasan, Milan Brahmbhatt and Kim Murrell (India in the global economy); Xinghai Fang, IFC, (private infrastructure financing); Mona Haddad (balance of payments); Dinanath Khatkhate and Lystra Antoine (public savings); Sanjay Kathuria (recent macroeconomic developments); Valerie Kozel (beneficiary assessments); Norman Loayza (savings); William McCarten (recent fiscal developments and tax reform); Luis Serven (fiscal deficit and public sector solvency); Donald Mclsaac (insurance sector and other contractual savings institutions); Djamal Mostefai and Mohinder Gulati (impact of power subsidies on states finances); Dan Mozes (mutual funds); Martin Ravallion and Gaurav Datt (poverty); Clemencia Torres (contribution of central public enterprises to public savings), with guidance from Ahmad Galal; David Wilton (money and bond markets); Fahrettin Yagci (industrial sector performance); and Dimitri Tzanninis, IMF (current expenditure reform). The primary author of chapter 4 was Benoit Blarel drawing on contributions from Dina Umali-Deininger, Garry Pursell, Jaime Quizon and Manoj Panda. Hans Binswanger (Senior Adviser) was the lead advisor for this chapter. The primary author of Chapter 5 was Colin Bruce drawing on contributions from Joelle Chassard (legal regulatory and administrative issues in the power sector); Mohan Gopal (legal framework); Harald Hansen and Ernst-August Huning (financial, institutional, legal and regulatory issues in the transportation sector); and Hugh Lantzke (legal, regulatory and administrative issues in the telecommunications sector). Robert Burns advised on urban and general infrastructure issues. Primary statistical and computational assistance was received from Maria Almero-Siochi, Rajni Khanna and Bhaskar Naidu. Background studies for the CEM were also prepared by NCAER (impact of economic reforms on large, medium and small scale enterprises in the organized and unorganized sectors), Pullapre Balakhrishnan (savings rate in India since 1991, and economic reforms and productivity growth in India), Tata Energy Research Institute (impact of power subsidies on states finances), and Ajit Ranade and Mahendra Dev of IGIDR (public expenditure in agriculture). Beneficiary assessment surveys were carried out by Ravi Srivastava, Nisha Srivastava, Madhavi Kuckreja, N. Thangaraj, Sarthi Acharya and S.S. Gill. Financial support for these surveys was provided through a Trust fund set up by the Netherlands Government. Arrangements for missions to India were made by Padma Gopalan and Sheni Rana. Production assistance was provided by Lin Chin who was aided by Zelena Jagdeo and Naomi Dass. Uri Dadush (Division Chief) and Roberto Zagha (Lead Economist) were initial reviewers before becoming direct contributors to the report. Robert J. Anderson (Lead Economist) was reviewer for the whole report and Amarendra Bhattacharya (Economic Adviser) for chapters 2 and 3. Rui Manuel Coutinho (Acting Chief Economist for the South Asia Region) reviewed the report and provided general guidance. The document was prepared under the supervision of Luis Ernesto Derbez (Division Chief) and Roberto Zagha (Lead Economist). We gratefully acknowledge the cooperation of government officials, in particular the staff of the Department of Economic Affairs and the RBI as well as members of the private business community. The document was discussed with the Indian authorities during July 25-29, 1996. - ix - ABBREVIATIONS AND ACRONYMS AAI Airports Industry of India FCNRA Foreign Currency (Non-Resident) ADB Asian Development Bank Accounts AMT Alternative Minimum Tax FCNRB Foreign Currency (Non-Resident) APEC Asia Pacific Economic Cooperation Accounts Bank Scheme BE Budget Estimates FCON Foreign Currency (Ordinary) Non- BEL Bharat Electronics Limited Repatriable Deposit Scheme BHEL Bharat Heavy Electricals Limited FDI Foreign Direct Investment BIFR Board for Industrial and Financial Fll Foreign Institutional Investor Reconstruction FOB Freight On Board BKU Bhartiya Kisan Union FRN Foreign Rate Notes BO Butter Oil FSU Former Soviet Union BOLT Build-Operate-Lease-Transfer GATT General Agreement on Tariffs and Trade BOP Balance of Payments GDP Gross Domestic Product BOT Build-Operate-Transfer GDR Global Depository Receipts BSE Bombay Stock Exchange GIC General Insurance Company CEA Central Electricity Authority GNFS Goods and Non-factor Services CEM Country Economic Memorandum GNP Gross National Product CES Constant Elasticity of Substitution GOI Government of India CFS Container Freight Station HMT Hindustan Machine Tools CGE Computable General Equilibrium HSEB Haryana State Electricity Board CIA Central Information Agency HYV High Yielding Varieties CIF Cost Insurance and Freight ICAR Indian Council of Agricultural Research CMP Common Minimum Program ICC International Chamber of Commerce CONCOR Container Corporation of India ICD Inland Container Depot CPE Central Public Enterprises ICDS Integrated Child Development Scheme CPI Consumer Price Index iCICI Industrial Credit and Investment CPIAL Consumer Price Index for Agricultural Corporation of India Laborers ID Irrigation Departments CRR Cash Reserve Requirement IDBI Industrial Development Bank of India CSI Contractual Savings Institutions IDF Indian Development Forum CSO Central Statistical Organization IDFC Infrastructure Development Finance DAP Di-Ammonium Phosphate Company DDP Desert Development Program IFCI Industrial Financial Corporation of India DFHI Discount Finance House of India IFPRI International Food Policy Research DGCA Directorate General of Civil Aviation Institute DGCIS Directorate General of Commercial lIP Index of Industrial Production Intelligence and Statistics IMF International Monetary Fund DM Deutsche Mark INS Information Notice System DOT Department of Telecommunications IPP Independent Power Producers DPAP Drought Prone Areas Program IRBI Industrial Reconstruction Bank of India DRS Debt Reporting System IRDP Integrated Rural Development Program EAS Employment Assurance Scheme IS Import Substitution Strategy EC Essential Commodities Act ISIEC Indian Sugar and General Industries ECA Europe and Central Asia Import and Export Corporation ECB Euro-Convertible Bond ISO International Standards Organization ED Electricity Duty IT Information Technology EDI Electronic Data Information JRY Jawahar Rozgar Yojana EGF Employment Generation Fund KSA Kurt Salmon Associates EGS Employment Guarantee Scheme Kwh Kilowatt-hour EP Export Promotion Strategy LAC Latin America and the Caribbean EPF Employees Provident Fund LES Linear Expenditure System EPTD Environment and Production Technology LIBOR London Inter-Bank Offer Rate Division LIC Life Insurance Company EU European Union (formerly the EC) M&A Mergers and Acquisitions FCBOD Foreign Currency (Banks & Others) MAT Minimum Alternate Tax Deposits MFA Multifiber Agreement FCCB Foreign Currency Convertible Bonds MMF Man Made Fibers FCI Food Corporation of India MMMF Money Market Mutual Fund MMPO Milk and Milk Products Order MNA Middle East & North Africa RFC Resident Foreign Currency Account MNC Multinational Corporation RFI Regional Financial Institutions MNE Multinational Enterprises RFP Request for Proposals MODVAT Modified Value Added Tax RLDC Regional Load Dispatch Center MOF Ministry of Finance RLEGP Rural Landless Employment Guarantee MoP Muriate of Potash Program MOP Ministry of Power RPDS Revamped Public Distribution System MOST Ministry of Surface Transport RRB Rural Regional Bank MOU Memorandum of Understanding SAIL Steel Authority of India Ltd. MPBF Maximum Permissible Bank Finance SAM Social Accounting Matrix MRTP Monopolies and Restrictive Trade SAP State Advised Price Practices Act SBI State Bank of India MTM Mark to Market SC Scheduled Castes MTO Multimodal Transport services SCICI Shipping Credit and Investment MUL Maruti Udyog Limited Corporation of India MUV Manufactures Unit Value SDF Sugar Development Fund MW Megawatt SDP State Domestic Product NABARD National Bank for Rural Development SDR Special Drawing Rights NCAER National Council of Applied Economic SDS Special Deposit Scheme Research SEB State Electricity Board NEP New Economic Policy SEBI Security and Exchange Board of India NFA Net Financial Assets SEEPZ Santacruz Electronics Export Processing NGO Non-Governmental Organization Zone NHAI National Highways Authority of India SFC State Financial Corporations NHB National Housing Bank SICA Sick Industrial Companies Act NPK Nitrogen, Phosphate & Potash SIDBI Small Industries Development Bank of NPV Net Present Value India NR(NR)D Non-Resident (Non-Repatriable) Deposit SIL Special Import License Scheme SITC Standard International Trade NRER(A) Non-Resident External Rupee Account Classification NRF National Renewal Fund SLR Statutory Liquidity Requirements NRI Non-Resident Indians SMP Skim Milk Powder NRY Nehru Rozgar Yojana SPE State Public Enterprise NSE National Stock Exchange SSA Sub-Saharan Africa NSS National Sample Survey SSI Small Scale Industry NSSO National Sample Survey Organization ST Scheduled Tribes NTB Non-Tariff Barriers STCI Securities Trading Corporation of India NTPC National Thermal Power Corporation TEU Twenty-feet Equivalent Unit O&M Overhaul and Maintenance TFC Tenth Finance Commission OECD Organization for Economic Cooperation TFP Total Factor Productivity and Development TLC Total Literacy Campaign OTCEI Over-the-Counter Exchange TOT Terms of Trade P and K Phosphate and Potash TRAI Telecom Regulatory Authority of India PD Primary Dealers TRIPS Traded Intellectual Property Rights PDS Public Distribution System TRYSEM Training of Rural Youth for Self- PE/ PSE Public Enterprise/ Public Sector Employment Enterprise UNCITRAL United Nations Commission on PLF Plant Load Factor International Trade Law POL Petroleum, Oil and Lubricants UNESCO United Nations Educational, Scientific PPP Purchasing Power Parity and Cultural Organization PRI Panchayati Raj Institutions UP Uttar Pradesh PSU Public Sector Units UST United States Treasury PWD Public Works Department UT Union Territory QR Quantitative Restrictions UTI Unit Trust of India R&M Renovation and Modernization VAT Value Added Tax RBI Reserve Bank of India VSAT Very Small Aperture Terminal RBNZ Reserve Bank of New Zealand WPI Wholesale Price Index RE Revised Estimates WTO World Tourism Organization REB Regional Electricity Board WUA Water Users' Association REER Real Effective Exchange Rate - xi - CURRENCY Rs/ US$ Currency Official Unified Market& 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 April 1996 34.24 May 1996 34.99 June 1996 34.99 July 1996 35.52 Aug 1996 35.69 Note: The Indian fiscal year runs from April I 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. - xii - ECONOMIC DEVELOPMENT DATA GNP Per Capita (US$, 1994-95): 330 a Gross Domestic Product (1994-95) Annual Growth Rate (% p.a., constant prices) % of 70-71- 75-76- 80-81- 85-86- 92-93- 93-94- USS Bln GDP 75-76 80-81 85-86 90-91 93-94 94-95 GDP at Factor Cost 272.0 90.3 3.4 4.2 5.4 5.9 5.0 6.3 GDP at Market Prices 301.2 100.0 3.3 4.2 5.6 6.2 3.9 6.3 Gross Domestic Investment 69.7 23.2 5.3 3.7 5.7 9.5 -5.8 19.8 Gross National Saving 67.0 22.3 4.4 2.6 3.5 8.7 -1.1 17.2 Current Account Balance -2.7 -0.9 -- -- -- -- -- -- Output, Employment and Productivity (1990-91) Value Added Labor Force b V. A. per Worker US$ Bln. % of Tot Mill. % of Tot. US$ % of Avg. Agriculture 82.5 31.0 186.2 66.8 443 46.4 Industry 78.0 29.3 35.5 12.7 2195 230.0 Services 105.7 39.7 57.2 20.5 1849 193.7 Total/ Average 266.2 100.0 278.9 100.0 954 100.0 Government Finance General Govermnent c Central Govemment Rs. Bin % of GDP R.Bln. % of GDP 1994-95 1994-95 90-91-94-95 1994-95 1994-95 90-91-94-95 Revenue Receipts 1809.0 19.1 19.5 910.8 9.6 10.1 Revenue Expenditures 2219.0 23.5 23.5 1221.1 12.9 13.3 Revenue Surplus/ Deficit (-) -409.9 -4.3 -4.0 -310.3 -3.3 -3.2 Capital Expenditures d 337.9 3.6 4.3 266.8 2.8 3.5 Extemal Assistance (net) e 51.5 0.5 0.7 51.5 0.5 0.7 Money, Credit, and Prices 89-90 90-91 91-92 92-93 93-94 94-95 95-96p (Rs. billion outstanding, end of period) Money and Quasi Money 2309.5 2658.3 3170.5 3668.3 4344.1 5308.0 6005.0 Bank Credit to Govemment (net) 1171.5 1401.9 1582.6 1762.4 2039.2 2224.2 2626.7 Bank Credit to Commercial Sector 1517.0 1717.7 1879.9 2201.4 2377.7 2896.6 3386.4 (percentage or index numbers) Money and Quasi Money as % of GDP 50.6 49.6 51.4 52.0 54.2 56.1 54.7 Wholesale Price Index (1981-82 = 100) 165.7 182.7 207.8 228.7 247.8 274.7 295.8 Annual Percentage Changes in: Wholesale Price Index 7.4 10.3 13.7 10.1 8.4 10.9 7.7 BankCredittoGovemment(net) 20.3 19.7 12.9 11.4 15.7 9.1 18.1 Bank Creditto Commercial Sector 14.4 13.2 9.4 17.1 8.0 21.8 16.9 a. The per capita GNP estimate 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. Transfers between Centre and States have been netted out. d. All loans and advances to third parties have been-netted out. e. As recorded in the govemment budget. - xiii - Balance of Payments (USS Millions) 1992-93 1993-94 1994-95p Merchandise Exports (Average 1990-91-1994-95) Exports of Goods & NFS 23,585 28,925 34,141 Merchandise, fob 18,869 22,700 26,857 USS Mill % of Tot. Imports of Goods & NFS 26,825 29,433 39,450 Merchandise, cif 23,237 23,985 31,672 Tea 415 2.0 of which Crude Petroleum 3,711 3,468 3,428 Iron Ore 480 2.3 of which Petroleum Products 2,208 2,285 2,500 Chemicals 1,679 8.1 Trade Balance -4,368 -1,285 -4,815 Leather & Leather products 1,382 6.7 Non Factor Service (net) 1,128 777 -494 Textiles 2,483 12.0 Garments 2,542 12.3 Resource Balance -3,240 -508 -5,309 Gems and Jewelry 3,449 16.7 Engineering Goods 2,674 13.0 Net factor Incomea -3,422 -4,002 -3,905 Others 5,536 26.8 Net Transfersb 2,773 3,825 6,200 Total f 20,641 100.0 Balance on Current Account -3,889 -685 -3,014 External Debt, March 31, 1995 Foreign Investment 587 4,110 4,895 US$ Mill. Official Grants and Aid 363 370 390 Public & Publicly Guaranteed 87,880 Net Medium & Long Term Capital 1,636 1,716 278 Private Non-Guaranteed 1,709 Gross Disbursements 4,586 5,884 5,091 Total (Including IMF and Short Ter 98,990 Principal Repayments 2,949 4,169 4,814 Debt Service Ratio for 1994-95 Other Capital Flowsc -961 2,086 3,462 Non-Resident Deposits 2,001 940 847 % curr receipts Net Transactions with IMF 1,290 190 -1,174 Public & Publicly Guaranteed 19.6 Private Non-Guaranteed 1.2 Overall Balance -263 8,537 6,858 Total (Including IMF and Short Ter 25.3 Change in Net Reserves 263 -8,537 -6,858 IBRD/ IDA Lending, March 31, 1995 (USS Mill) Gross Reserves (end of year)d 6,749 15,476 21,160 IBRD IDA Rate of Exchange Outstanding and Disbursed 11,120 17,666 Undisbursed 4,227 4,663 End-March 1996e US$ 1.00 = Rs. 34.45 Outstanding incl. Undisb. 15,347 22,329 -- Not available. a. Figures given cover all investment income (net). Major payments are interest on foreign loans and charges paid to IMF, and major receipts 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 items. d. Excluding gold. e. The exchange rate was reunified at the market rate in March 1993. f Total exports (commerce); net of crude petroleum exports. - xv - India Meost Sa:mosI ewc arty NW Unit of estmae Sowh *La m_ indicator measure 1970-75 1980-t5 1989-94 Asia jacerme g, Resources and Exoenditures HUMAN RESOURCES Popubation (zre-1994) thousands 613,459 765,147 913,600 1.220.22 5 3.182.221 1.096,8 I Age dependency atio ratio 0.77 0.72 0.66 0.71 0.66 0.63 Urban % of pop. 21.3 24.3 26.5 26.0 28.3 55.9 Population gmwth rae arnnual % 2.3 20 1.7 I.S 1.7 13 Urban 3.7 3.0 2.7 3.1 3.2 2.7 Labor force thousands 260.515 329.608 394,330 528.0S 1.590.533 48e.647 Agncultuze % oflaborfvrce 70 67 64 63 67 36 Industry 13 14 16 16 14 26 Fenile 31 32 32 32 39 40 Labor participation razs4 Toul % of pop. 42 43 43 43 50 45 FeaIe C 13 14 14 29 41 36 NATURAL RESOURCES Area thou. sq. km 3,27.59 3=.7.59 3,27.59 5.133.49 40391.42 40.594.43 Density pop. per sq. km 186.60 232.74 273.21 233.41 77.44 26.66 Agncultralland %of land uaa 60.83 60.86 60.89 59.11 52.42 41.05 Change i agncultural Iand Annual % 0.47 -0.07 -0.05 m02 0.16 -138 Agncutul land underi iganon % 18.65 23.09 25.96 29.63 17.84 11.40 Forests and woodland thou. sq. kn .. 551.19 517.29 65S32 7,632.00 5.969.25 Deforestaton (net) % change. 198090 .. 0.63 - INCOME Household income Shimoftop 20%ofhouseholds %ofincome 49 41 43 -- Share of bonom 40% of househods 16 20 21 _ _ _ Shre of bottom 20% of houbolds ' 6 8 8 _ E(PENDmURE Food %ofGDP 43.6 35.3 .. Stapeas 20.6 124 .. Mau fish. milk. che. ew 6.5 7.4 .. Calw import thou. meaic tome 7.669 205 694 6.211 36.922 68.936 Food aid in cereals 1.582 304 276 1.624 8.516 5,771 Foodproductionpercapita 197- 100 94 104 115 113 115 102 Fertilizer consump'on kgra 19.3 47.0 67.5 69.7 58.5 46.3 Shim of asiculure in GDP % of GDP 36.6 29.5 26.9 26.6 27.6 14.0 Housing %ofGDP 4.4 7.1 .. ..- Average household size penons per household 5.2 5.6 . Urban ' 4.8 5.5 Fixed investmcnt:housing %ofGDP 2.3 2.8 - Fud and poer %ofGDP 2.4 2.3 Enargyconsumptionpercapats kgofoilequiv. 124 170 243 219 373 1,602 Households with clecricdzy Urban % of households _ - - - _ - Rwal _ _ Trnsportandcomm ia ioe %ofGDP 4.7 5.1 .. Fixed investmenc tansport equipment 1.4 2.3 Total road length thou. km 1.375 146 2.962 . VfVESTMENT IN IIUMAN CAPITAL HEath Populaton per physician persons 4.900 2.522 .. .. .. 3.064 PopulaIonpernUrSe 3.710 1.701 -.. Populauon per hospital bed 1.700 1.300 1371 1.675 1.034 592 Oral rchydyruion therapy (under-S) % of ases .. .. 37 37 38 Education Gross cnrollmcnt ratios Secondary % of shooi age pop. 26 37 49 45 48 63 Female 16 26 38 35 42 62 Pupil-tacherrctio: primary pupils per achr 42 58 63 61 39 Pupil-tcacher rado: secondary 21 21 26 26 20 Pupils reaching grade4 % of ohort 51 58 ..- Repeater rate: primary % of total enroUl 17 - 1 . - mliteracy % of pop. (age IS.) 66 56 4S 51 35 _ Fernale %of fen. (age I5s) .. 71 62 64 46 _ Newsta,er circulation ver thou., v. 15 26 31 26 236 World Bank Intnational Economir Department. April 1996 - xvi - India Maet Sams rqiea;usce gre' Amap Latst suugiwe er rsecent . iuitier Uvu of eurmere Sout TIw- income Indicator measUre 1970-75 198045 1.989-94 Aris ihoeme rr Priority Poverty Indicators POVERTY Upper povery line local curr. .. .. .. Headcot index 9 of pop. .. .. Lower povesy line local curr. .. .. Headcount index % of pop. .. .. ._ GNP percapiu USS 180 280 310 320 390 1,670 SHORT TERM INCOME INDICATORS Unskilled urban was local curr. . Unskilled rurl wag_s - Runal ems of ade .. 84 94 Consuaer price index 1987-100 45. 85 189 _ _ Lower income Food& - 27 __ Urban .. 83 176 Rural 17_ SOCIAL INDICATORS Public expendiure on basic soci sevices * of GDP .. .. .. Gross enrollment ios Primary % school age pop. 79 96 102 98 105 104 Male ' 94 110 113 110 112 105 Female 62 S0 91 87 98 101 Morality Infant monality per thou. live births 132 IdS 70 73 58 36 UnderS morality . - 97 106 101 47 Imuunizaona Measles % age goup _ SS.8 84.2 86.2 77.4 DFr ' 41.0 90.2 88.6 89.1- 82.0 Ghild malnutrton (under-5) ' 63.0 61,5 38.2 Life expecancy Toual uS 50 S 5 62 61 63 67 Female advantage -1.9 -0.4 1.3 1.2 2.4 6.4 Total ferdlity miue births per n 5.6 4.8 3.3 3.6 33 2.7 Matrnalm ruolity rt per 100,000 live births 460 437 - Supplementary Poverty Indicators Expenditu on social security % of toal gov't exp. . Social security cverage % econ. active pop. Access tosafewawer. tota % ofpop. 31.0 563 _ Urban ' 80.0 76.0 Rural 18.0 50.0 Access to health care ' 75.0 Population growth rate GNP per capita growth rate Development diamondb (aver6ge aus1 percent) 5 (avee annual. percent) epecnY 4 -S 2 - 707 GNP O -~ C~ -1 1 ~ l I rp g__Gross per capita enrollMclnt -2 I10 1970-75 1980-85 1989-94 1970-75 1980-S5 19S9-94 Acces to safe watr M Indiat India - Low.income - Low-conme a. See htechnicul notes, p3S7. b. The development diamond, based on four key indicators, shows the averagc level of development in the country compared with iu income group. See the intoduction - xvii - EXECUTIVE SUMMARY The Ministry's of Finance's 1995-96 Economic Survey and its July 1996 update analyze candidly and insightfully the accomplishments of five years of stabilization and reform. The new government's Common Minimum Program of June 1996 identifies the key challenges ahead: reducing the country's chronically high fiscal deficits, further liberalizing the economy, agriculture in particular, meeting the infrastructure challenge, and ensuring social justice. These documents are the point of departure of this Country Economic Memorandum (CEM). Part I sums up the achievements and shortcomings of five years of stabilization and reform. Part II outlines the challenges ahead. A Summing Up India has Fundamentally Altered Its Development Strategy India's pre-1991 planned approach to development helped the country escape from the massive illiteracy, recurrent famines, fertility rates of about 7 children per woman, and secular stagnation prevailing before Independence. However, it also led to an over-extended public sector, responsible for half of the country's gross investment, and created severe financial imbalances which are yet to be corrected. It isolated the country from the rest of the world with the result that from 2 percent in the 1950s, India's share of world trade had declined to less than half of one percent in the late 1980s. It forced Indian consumers to pay higher prices for goods of lower quality and deprived the country of the benefits of foreign direct investment and modern technology. It discouraged production for exports, created recurrent shortages of foreign exchange, and made the balance of payments extremely vulnerable to external circumstances. Most important of all, it held back the country's growth and thus the pace at which poverty could have been reduced. In June 1991, in the midst of severe fiscal and external imbalances, which had generated double-digit inflation and put the country on the verge of defaulting on its external debt obligations, a new government undertook the major task of stabilizing and liberalizing the economy. Over the past five years, reform of the investment, exchange-rate and trade regimes, of the financial sector, and of the tax system have ended four decades of planning and have initiated a quiet economic revolution. With these reforms, India has joined the growing group of countries which, starting in the 1970s and 1980s, have gradually but persistently taken measures to deregulate their domestic markets, increase their integration with the global economy, and reduce the role of government. India did not have the inflation, external debt, and social inequities so severe in Latin America--and was thus able to stabilize the economy more rapidly and at a lower social cost. Unlike former centrally planned economies in Eastern Europe and elsewhere, and while - xviii - extremely regulated, India already had an ubiquitous private sector, all the institutions of a free market economy, and a relatively well-developed financial sector. India was thus able to avoid the costly industrial and financial closures and restructuring, so frequent and so painful in most of the former socialist economies of Eastern Europe and Central Asia, and which have considerably delayed the supply response to reforms. On the other hand, the fact that India's macroeconomic problems were considerably less traumatic than in Latin America also meant that they were less palpable. Consequently, it has been much harder to reach political consensus on the need to reduce fiscal imbalances. India has adjusted its fiscal accounts much less than Latin American, East Asian and Western European countries--and fiscal imbalances remain the most important threat to India's long term growth. Similarly, India's pre-1991 trade regime yielded levels of protection considerably higher than Latin American and East Asian countries'. Even after five rounds of significant trade reforms, India's tariff and non-tariff barriers still remain among the world's highest. Likewise, before 1991, India's private sector probably was the most controlled in the non-socialist world. Thus, and in spite of five years of liberalization measures, regulation still remains a problem in important segments of the economy--the financial sector, agriculture and agro-industry in particular. In addition, in the financial sector, the public sector continues to be the major shareholder of India's largest banks, insurance companies, and contractual savings institutions-- raising questions on how truly autonomous these financial institutions can be. Finally, the development of India's human resources has been slow in comparison with countries in East Asia or Eastern Europe. Highlights of Five Years of Stabilization The economic recovery has been unexpectedly rapid and robust. Initially, growth declined sharply in response to the devaluation and contractionary fiscal and monetary policies adopted in June 1991 to address the foreign exchange crisis India was facing then. From over 5 percent in 1990-91, GDP growth declined to less than one percent in 1991-92. Then, helped by an unprecedented sequence of good monsoons, a relaxation in fiscal policies, and a strong supply-response to the reforms, growth accelerated to 5 percent in 1992-94, 6 percent in 1994-95 and 7 percent in 1995-96. With growth rates exceeding 10 percent in the last two years, the industrial recovery has been particularly strong. Because it is being driven by exports and private investment, and is being accompanied by an increase in domestic savings, the recovery has thus far not put pressure on inflation or the external accounts. However, unless pressing stabilization and reform issues are expeditiously addressed, the country may not be able to sustain this performance. Inflation has declined from the high 14-15 percent levels prevailing in 1991-92. This was achieved by generally strict monetary policies which were maintained in spite of persistently high public sector deficits, and liberalization of interest rates. Unexpectedly large capital inflows starting in late 1993 complicated monetary management in 1993-95 and caused money supply temporarily to increase at rates exceeding 20 percent and inflation to rise above 10 percent (after it had declined to below 8 percent). By early 1994, concern with the repercussions of higher - xix - inflation and loss of real exchange-rate competitiveness led the authorities to implement a pragmatic mixture of measures to slow down certain categories of capital inflows--particularly those that are easily reversible, or imply a high debt service burden. Helped by increases in US interest rates and adverse developments in emerging markets in the wake of the Mexican crisis, these measures worked well and allowed the RBI to tighten its monetary stance and inflation to decline to below 5 percent in 1996. However, in the absence of a sufficiently strong fiscal correction, this has come at the cost of high real interest rates which are a threat to the sustainability of the recovery and to the soundness of the banking system. In addition, the current rate may not be indicative of the true underlying inflation since, recent increases notwithstanding, the administered prices of some petroleum products and some food items need adjustment. The external accounts, both current and capital, have improved significantly. In response to a sharp depreciation of the real exchange rate and reduction of import tariffs, and therefore of the anti-export bias implicit in the previous trade regime, exports grew at rates in excess of 20 percent for the past three years, and prospects for 1996-97 are equally encouraging. Consequently, and in spite of the rapid growth of imports (mostly of intermediates and capital goods) of the last two years resulting from the industrial recovery, the current account deficit has remained below 2 percent of GDP--an amount well within prudential levels. Improvements in the capital account have been equally significant. At US$2 billion in 1995-96, while well below China's US$31 billion, foreign direct investment is 15 times higher than it was before the economy was liberalized and portfolio investment has stabilized at around US$2-3 billion--that is 10 percent of world portfolio investment in emerging markets, a share in line with that of China and Indonesia. These developments in the current and capital accounts led foreign exchange reserves to increase to US$17 billion, that is 5 months of imports and the debt service ratio to decline--from 30 percent of current account receipts in 1990-91 to 24 percent in 1995-96. However, meaningfulfiscal adjustment has yet to take place. With the exception of the first year of the stabilization and reform program, when its deficit was reduced from 8.3 percent of GDP in 1990-91 (with a primary deficit of 4.3 percent of GDP) to 6 percent in 1991-92, the Central Government has persistently relaxed its fiscal deficit targets. In 1995-96, at 5.9 percent of GDP (with a primary deficit of 1.1 percent of GDP), the fiscal deficit was one half percent of GDP above the 1995-96 target--and well over the 3 percent of GDP the Government set as a target at the beginning of the stabilization and reform program. There are several reasons. First, several of the structural reforms have had a relatively high fiscal cost. For example, the reduction of import tariffs and the rationalization of excises (to make the excise system more closely resemble a value added tax) came at a cost, which in some years exceeded one percent of GDP in foregone revenues. The liberalization of financial markets meant higher interest costs on Central Government debt--interest payments on the Central Government debt are close to 1 percent of GDP higher than they were five years ago. Second, political and social considerations led the Government to retain some important subsidies such as the fertilizer subsidy. While this may have reduced the social cost of the - xx - stabilization and reform program for the poor, it has cost the budget over half of a percent of GDP per year. Third, progress in reforming public enterprises has been much slower than expected. Contrary to the experience of other countries, India's fiscal adjustment did not benefit from the proceeds of privatization nor from the dividends that better managed public enterprises could have generated. The Central Government is the majority shareholder, and in some cases the sole shareholder, of 240 enterprises, about 27 large banks, and two large insurance companies. While some of these enterprises are highly profitable, most generate profits and dividends insufficient to compensate the Government for the cost of funds invested in them. Over the past five years, losses of loss-making enterprises have not declined, while profits of profit making enterprises have increased only marginally. Fourth, fiscal adjustment by the Central Government has been limited by the absence of corresponding adjustment by India's 25 states. One-fourth (about 4 percent of GDP excluding states' share of taxes collected by the Central Government) of Central Government spending is in the form of grants and loans to the states which the Central Government has found difficult to curtail. As a result, over the last five years, the states' consolidated fiscal deficit has not declined--it has hovered around 3 percent of GDP. As discussed in last year's World Bank Economic Memorandum on India, there is evidence that the current system of transfers discourages fiscal discipline because: (a) "grants-in-aid" to the states at least partly are meant to cover their current deficits and thus create incentives for increasing them; (b) transfers in the form of loans and grants authorized by the Planning Commission (set up soon after Independence with a mandate rooted in India's pursuit of a centrally planned development strategy, it has become a de-facto development bank without the prudential financial standards that typically guide such banks) are not used for their intended productive purposes and thus increase the states' debt without increasing their capacity to service it; and (c) periodic Central Government loan forgiveness and refinancing, without conditionality, have created an expectation of future debt relief. In addition, the deterioration in the states' finances is being compounded by a decline in the quality of their spending. There is growing evidence of a crisis of expenditure composition at the state level whereby resources for the provision of operations and maintenance of key infrastructure (roads, irrigation, primary education and health facilities) for which the states have responsibility are being cut to sustain less productive expenditure and subsidy programs. Highlights of Five Years of Structural Reforms The liberalization of the investment regime is nearly complete. Five years ago, investment in the most important areas of the economy was a public sector monopoly and foreign investment was discouraged--at US$150 million in the early 1990s, foreign direct investment in 900 million India was as high as in 17 million neighboring Sri Lanka. Currently, there are few areas where private investors, domestic or foreign, cannot invest and India's foreign investment regime is as investor friendly as that of the East Asian countries. In telecommunications, power and mining, it is significantly more open than that of its East Asian neighbors. With the recent - xxi - liberalization of pharmaceuticals and, in part, coal, the main areas still reserved for the public sector are insurance and railways. This progress notwithstanding, the remaining licensing restrictions mainly to protect small scale industry, including agro-industry, have considerable negative repercussions. For example, continuing regulation of the sugar industry is extremely costly while the reservation of about 800 products for small scale enterprises discourages economies of scale and adoption of modem technology. In addition, in many instances, investing in India remains difficult because of mostly state-level regulations and administrative burdens that are far from transparent and differ from state to state--and affect domestic and foreign investors alike. The trade and foreign exchange regimes have been substantially liberalized, but protection levels are still high. In June 1991, India had the most restrictive trade regime of the non-socialist world. Virtually all goods could only be imported if authorized by the Government and, with maximum tariffs over 300 percent and average (import-weighted) tariffs of 87 percent, India had the world's highest tariffs. Several rounds of trade reforms have lifted all licensing restrictions on imports of intermediate and capital goods, liberalized marginally imports of consumer goods, and reduced maximum tariffs for non-consumer goods to 40 percent and the import weighted average tariff to 22.7 percent. Tariffs for imports of capital goods have been reduced more rapidly than for other items. In parallel, the exchange-rate regime has been liberalized, and full convertibility has been established for current account transactions. This progress notwithstanding, India will need to liberalize its trade regime even further if the country is to reach the openness of its East Asian and Latin American competitors where import weighted tariffs are in the 10-15 percent range. A skillful and significant liberalization of the financial sector-but the public sector remains dominant. With a financial savings rate of 9 percent of GDP in 1990-91 (11 percent of GDP at present), India's pre-1991 policies had been successful at developing a solid deposit base, and a diversified stock of financial instruments. However, until very recently, the financial sector had been dominated by public banks which had limited discretion in allocating their lending (in 1991 as much as 63.5 percent of increases in bank deposits had to be held in cash reserve requirements and government securities, and 40 percent of the remaining had to be allocated to priority sectors designated by government) and publicly-owned insurance companies still have to hold more than half of their portfolio in government-designated securities. Prudential regulations had no real role to play in the deployment of capital and in any case were inadequate making it difficult to assess the true quality of bank portfolios or bank profits. Interest rates and financial instruments were tightly regulated, and competition was limited by restrictions on entry of new banks, insurance companies, or mutual funds. Pricing and terms of new equity issues were regulated. Because of persistently large public sector borrowing requirements and weak public banks balance sheets, the government has chosen a phased approach to liberalizing the financial sector--but this approach has been excessively gradual in the case of privatization of the public banks and deregulation of insurance companies and contractual savings institutions. Much of the reform effort has focused on establishing the institutional base required for deregulated financial - xxii - markets to operate efficiently, and in deregulating the markets themselves. In particular, prudential regulations that meet international standards have been introduced, and to improve its capacity to enforce the new prudential guidelines, the RBI created a Board of Financial Supervision which began functioning in December 1994. Several steps have been taken to develop markets in government securities, including the creation by RBI of a dealer network to operate in and provide liquidity to government security markets, followed by the approval of the first six private primary dealers in 1996. In parallel, measures have been taken to develop the Securities and Exchange Board of India's (SEBI) capacity to provide oversight regulation in India's stock markets and to increase the transparency of stock market transactions. In particular, legislation has been enacted to improve title transfers and a code for takeovers has been formulated. A new modern electronic securities exchange system, the National Stock Exchange (NSE), which allows scripless transactions, began operating in 1995. In November 1995, the government established an insurance regulatory body, to prepare the basis for eliminating the public monopoly in this sector--although a decision on this has yet to be taken. Interest rates are now market determined for most transactions and the government is committed to eliminate by 1997 its automatic access to RBI credit. However, while progress has been achieved in relaxing controls, reducing government's pre-emption of financial savings, and reestablishing the soundness of the financial system, much remains to be done. In particular, forced holdings of government debt by banks, while reduced, remain at a high 37 percent of deposits and 40 percent of banks' loan portfolios still must be allocated to designated "priority sector lending". While barriers against the entry of private banks (domestic and foreign) have been relaxed, public sector banks continue to hold around 90 percent of the sector's assets and little progress has been achieved in reducing government equity holdings in the public banks or in improving their autonomy in key areas such as staffing and pay. As a result, financial intermediation costs remain excessive and the increased autonomy of financial sector institutions also remains in doubt. The tax regime has been simplified and strengthened. Prior to 1991, India's tax base was excessively dependent on custom revenues, and was characterized by taxes with a multiplicity of high rates falling on a narrow base. Several steps have been taken to address this problem. In the 1994-95 Budget, taxes on corporate income were unified at 46 percent for widely held companies and 55 percent for branches of foreign banks. A major reform of excises was implemented to make it more closely resemble a value-added tax and address its major problems. Meanwhile, the Government extended the coverage of MODVAT (a modified value- added tax) to include manufacturing sectors thus far excluded, and, for the first time, some services. Of particular importance also were the decisions to: (a) shift most excise rates from specific to ad-valorem to increase buoyancy; (b) reduce the number of rates; and (c) simplify the system by relying on invoices for value determination. These reforms considerably simplified and modernized India's tax system and made it possible for the Central Government to focus its efforts on improving tax administration. The 1995-96 Budget further reduced peak excises and continued the emphasis on simplification, strengthened compliance, lower rates, and greater - xxiii - buoyancy. Further and significant tax reforms were introduced in the 1996-97 budget including the full incorporation of the textile sector into the VAT. The effects of five years of stabilization and reform on the poor. A key objective of India's liberalization program has been employment creation and poverty alleviation through accelerated growth. Many of the measures introduced over the past five years have brought India's development policies closer to those of East Asian countries such as Indonesia and China which have been successful in reducing the incidence of poverty in a relatively short period of time. In particular, the sharp devaluation of the rupee and the decline in the protection of manufacturing have improved the agricultural terms of trade. Also, the reduction in the anti- export bias implicit in the pre-1991 trade regime has led to a rapid expansion of labor-intensive exports--which in other countries have been a key factor in employment generation and poverty reduction. However, at the same time, there has been considerable concern on the effects that some of the stabilization and structural reform measures introduced over the past five years might have had on the living standards of the poor. In particular, there have been significant increases in the prices of key commodities such as fertilizer, rice, sugar, cotton, and gasoline. Further, increases in inflation due to rapid monetary growth in 1993-94 and 1994-95 (because of the monetization of capital inflows), and increases in the prices of key agricultural commodities (the result of higher issue prices and the delayed effect of the sharp devaluation) accentuated fears that the program of stabilization and reform might be putting an excessively high burden on the poor. The 1993-94 National Sample Survey (NSS) released in July 1996 indicates that the incidence of poverty has declined. The publication of this survey is too recent, however, for a careful analysis of its findings to be included in this CEM. It is also not possible to provide definitive answers about how poverty has evolved over the past two years since no NSS data are available as yet. For the purposes of this report, and as a very first approximation, case studies were carried out by Indian economists and social scientists, between January and March 1996, in Maharashtra, Tamil Nadu, Punjab, and Uttar Pradesh. The results of this exercise suggest that poverty is unlikely to have increased in the recent past. In addition, variables that are good predictors of poverty (such as wages for unskilled agricultural labor, agricultural production, overall growth and inflation) have evolved in a direction that suggests that the incidence of poverty might in fact have declined. This view is reinforced by the case studies results which document no noticeable decline in food consumption. However, in the absence of firm data for the last two years these results cannot be generalized. More interestingly perhaps, a strong result that also emerges from the case studies is that the existing welfare and safety net programs seem to be barely noticed by those who were being interviewed. In spite of the significant resources that the country allocates to such programs, there is little evidence that they have a palpable effect on the living standards of the poor. This may be because the newer programs (i.e., RPDS, EAS schemes, benefits for widows) have not yet reached intended beneficiaries on any significant scale. This also can be, however, an indication that the older programs have failed to reach their targeted population. Again in this - xxiv - case, only with the household survey results will it be possible to clarify the underlying reasons and-reach definitive conclusions regarding the impact of the reforms on the poor and the cost effectiveness of the various anti-poverty programs. Highlights of the 1996-97 Budget On July 22, the Minister of Finance presented to Parliament the 1996-97 budget, the first of the 13-parties United Front (UF) government. The budget takes several steps to implement the Common Minimum Program (CMP) and makes it clear that this government intends to continue the reforms started in 1991. On stabilization, the budget proposes a welcome fiscal correction of 0.9 percent of GDP. However, the measures envisaged in the budget may not be sufficient to attain this target. The 0.9 percentage point reduction is to be achieved through a 0.7 percentage points of GDP increase in revenue, and a 0.2 percentage point reduction in expenditure. Some of the assumptions underlying both the revenue and the expenditure forecasts may be overoptimistic. On the revenue side, it is assumed that sales of government equity in public enterprises will reach US$1.5 billion and that tax revenues will increase by 20 percent on account of a 14 percent increase in nominal GDP (half real growth and half inflation) and of several tax measures introduced in the budget. On the expenditure side, a 9 percent increase in provision for wages is deemed to be sufficient to accommodate wage increases stemming from the Pay Commission recommendations. Finally, defense expenditure has continued to decline relative to GDP (from 2.9 percent of GDP five years ago to 2.2 percent of GDP at present) and there may be some pressure to restore it at higher levels. At the same time, new claims have been put on the budget to increase the fertilizer subsidy (0.2 percent of GDP) and support for public enterprises (0.1 percent of GDP), expand an already existing rural infrastructure fund, strengthen the capital base of the national agricultural bank (0.1 percent of GDP), and, for a relatively small amount, recapitalize several small public banks. The budget also announces a cautious, but clear commitment to permit greater decentralization within India's federal structure by: (a) gradually transferring most centrally sponsored schemes to the control of the states; (b) proposing constitutional change to include all central taxes in the federal transfer division pool as recommended by the Tenth Finance Commission; (c) designing a Ninth Five-Year Plan which will put emphasis on decentralization of responsibility; and (d) convening a conference of Chief Ministers on center-states relations and federalism. In addition, the budget also announces the government intention to target the Public Distribution System and, potentially, other social safety nets programs, to families below the poverty line. Finally, the Minister of Finance proposed to appoint a high level Expenditure Management and Reforms Commission to submit within four months recommendations on how to improve public expenditure control and management, and proposed to place before Parliament a discussion paper on subsidies and their appropriate targeting. These are welcome initiatives that will permit a public discussion of the structural reasons for India's chronically high fiscal deficits. - xxv - On the structuralfront, except for taxation, and in spite of progress in modestly further liberalizing the trade and foreign investment regimes, the budget refrains from bold structural reform initiatives at this time while stimulating the public debate on these issues. In particular, several much discussed and awaited reforms have not taken place: (a) the end of the public sector monopoly on insurance has been postponed; (b) imports of consumer goods have not been liberalized; and (c) deregulation of agriculture has not started. Reform of the tax regime has continued. Several tax measures have been taken to continue the broadening the tax base, reduce rates and improve tax administration. This has been particularly important in the case of excises and corporate taxation. Corporate taxation has been reduced from 46 percent to 43 percent, and a new Minimum Alternate Tax has been introduced to bring into the tax net corporations that avoid paying taxes on corporate income or benefit from excessive exemptions. The long-term capital gains tax for domestic companies has been reduced to 20 percent in line with that for foreign companies. The foreign investment regime has been further liberalized by allowing portfolio investors to invest in non-listed securities, and by raising the limit of the maximum of equity they can hold in any given company. Regarding the trade regime, import tariffs have been reduced on a number of items with the result that the maximum tariff for non-consumer goods is now 40 percent. On social issues, the new government has used its first budget to signal strong commitment to poverty reduction and rural development. Besides the support to the national agricultural bank and rural infrastructure, the budget introduced several initiatives to improve the living standards of the rural poor. In particular, it provides Rs 24 billion (0.2 percent of GDP) for state-level social programs aimed at increasing the provision of safe drinking water, primary education, primary health, housing, mid-day meals for primary school children, rural roads and a strengthened public distribution system covering all below the poverty line. It also reiterates commitment to achieving 100 percent coverage of provision of safe drinking water, universalisation of primary education and basic health care, and extension of the mid-day meal program. A new initiative to mobilize additional capitalfor the development of infrastructure. The budget also announced that an Infrastructure Development Finance Company (IDFC) will be established, involving a budgetary outlay of Rs 5 billion for equity. This is to be matched by an equal contribution from the Reserve Bank of India. The IDFC is intended to play the role of direct lender, refinance institution as well as the provider of financial guarantees, that will induce private financiers to advance "long-term funds at the lowest possible market rates". The Challenges Ahead The stabilization and reform measures introduced over the past five years have considerably improved India's growth prospects. The growth performance of the last two years and preliminary indications for 1996-97 confirm this view and may suggest that the reforms have created the preconditions for India to grow at a stable 6-7 percent annual growth. This inevitably - xxvi - raises the question of whether India will be able to grow at high, East Asian rates. The answer is that strong corrective measures are necessary for this to happen. Not only is the country facing serious fiscal imbalances that the 1996-97 budget corrects only partially, but there also remains a challenging agenda of structural reforms that needs urgently to be addressed even to sustain the current growth rate, let alone exceed it. Addressing Fiscal Constraints India's persistently large fiscal imbalances have led to an increasing volume of public debt, which has been accompanied by a rising trend in real interest rates in recent years. At present, the marginal real interest rate that the Government pays on its domestic debt is close to the economy's growth rate itself. Therefore, unless fiscal imbalances and thus real interest rates are significantly reduced, India will be in a debt trap and will not be able to maintain the current mix of low inflation and relatively high growth. It is therefore not surprising that, as recognized in the Common Minimum Program, and highlighted in the last few Economic Surveys of the Ministry of Finance, and Annual Reports of the RBI, excessively large financial imbalances at the level of the Central Government, State Governments, and public enterprises are the single most important economic management issue facing the authorities. The consolidated deficit of the central government, state and public enterprises amounts to about 10 percent of GDP. This is only 2 percent of GDP below the level prevailing at the beginning of the liberalization process because the Central Government is the only part of the public sector that has adjusted its finances. Fiscal imbalances have remained basically unchanged for states and public enterprises--and their savings have in fact deteriorated. These trends are not sustainable. To stabilize public sector debt in relation to GDP, maintain inflation at below 6 percent and growth at 6-7 percent would require the consolidated public sector primary deficit to be reduced immediately by 1.5 percentage points from its 1995-96 level of 3.1 percent. If the central government were the only part of the public sector to adjust, this would mean a central governmentfiscal deficit of about 4.5 percent of GDP, that is a fiscal correction of 0.5 percent of GDP beyond what is envisaged in the 1996-97 budget. To the extent that states and public enterprises increase their financial performance and reduce their claims on the country's savings, the required fiscal adjustment is correspondingly less. However, as the financial sector is liberalized and banks have more discretion on portfolio composition, there will inevitably be pressure on real interest rates to increase--implying an increase in central government interest payments. Higher real interest rates would reduce private investment and thus growth while, if monetized, the increase in the central government interest payments would increase inflation. To avoid these two negative consequences, a further fiscal adjustment of about 1 percent of GDP is needed--making it necessary to increase the fiscal correction to 2.5 percent of GDP, implying a reduction in the central government fiscal deficit to around 3.5 percent of GDP. A more ambitious fiscal scenario is warranted and feasible, however--in which the consolidated public sector savings increase by 6 percent of GDP over the next four to five years. This would allow fiscal imbalances to be brought to sustainable levels while generating resources for critically needed public investment, and could enable growth to be sustained at 7 - xxvii - percent per year until the end of the decade before increasing possibly to over 8 percent thereafter. The essential elements of a medium-term fiscal adjustment strategy. Any significant structural fiscal consolidation will need to rely on both raising the public sector's revenue effort as well as reducing expenditure and improving its quality. Consolidation of the central government finances is likely to include the following elements: (a) a reduction-cum-retargeting of subsidies, in particular the fertilizer and food subsidy--the latter may require an overhaul of the current PDS and Food Corporation of India; (b) gradual contraction of central government employment, mainly through attrition and associated operating expenditures; (c) commercialization-cum-privatization of public enterprises, including banks and other financial institutions; and (d) improvement in public expenditure management. Improvement of State finances will likely require actions to: (a) increase recovery of expenditure on O&M for irrigation and water supply; (b) reduce power subsidies through an increase in tariffs for agricultural users and households; (c) reduce power theft and improve tariff collections; (d) reduce overstaffing; and (e) broaden the base of taxation, in particular to include agriculture-- according to the Constitution only the states can tax income generated in agriculture and, with few exceptions, most states chose not to tax it. A reduction of central government financial assistance to the states--particularly of those items on which fiscal discipline is the most difficult to enforce, such as the on-lending of deposits in the postal small-savings accounts and the different centrally sponsored expenditure schemes should also be considered, although it is not discussed here. These measures can be implemented only gradually, however, and their full effect will not begin to materialize before the end of the decade. Therefore, correcting fiscal imbalances requires further tax efforts of the kind recommended by the Chelliah Committee on tax reform--in particular, it is estimated that further reform of corporate taxation could increase tax revenue by at least one percent of GDP. Full fiscal consolidation will be difficult, however, without a restructuring of center- states fiscal relations. Expenditure responsibility assigned to state governments by the Constitution accounts for about one half of total general government expenditure. At the same time, states are assigned taxation powers that result in their collecting only one-third of total tax revenues. The difference is covered by transfers in the form of shared central revenue, grants and loans. Since a part of these transfers is determined by the states' gap, and there have been periodic write-offs; states have in practice been faced with a relatively soft budget constraint-- even though in theory state deficits are constrained by limits on borrowing imposed by the central government. More importantly perhaps, states do not face the discipline of financial markets, as the annual program of state security issues is still allocated administratively among commercial banks by the RBI. Thus, all the states borrow on the same terms, regardless of their creditworthiness. It is clear that center-state fiscal relations will need to be restructured if the states are to be encouraged to address their major problems of weak tax collections, growing wage bills, uneconomic enterprises and poor cost recovery. Similar considerations apply to the financial relationships between state and local governments. - xxviii - Addressing Structural Constraints Besides completing the reforms initiated in 1991, there also is an urgent need to extend reforms to other areas of the economy. As highlighted in the Common Minimum Program, a comprehensive reform of agricultural policies is essential to broaden the base of growth, increase agricultural productivity, and improve the living standards of India's poor--the vast majority of which live and work in the rural areas. As amply recognized in India, and reiterated in the Common Minimum Program, the inadequacy of existing infrastructure is emerging as one of India's most serious constraints to faster growth--and even a constraint to the maintenance of the current levels of growth. There is no simple response to the country's infrastructure problems--and any sensible response will have to be based on a variety of initiatives and innovations involving the financial sector, state and local governments, and the private sector. Similarly, urban reform--whereby India's cities and towns are endowed with the financial capacity to overcome chronic underinvestment in urban areas and supply critically needed urban services--is also emerging as an area for priority action. Finally, as discussed in the last two CEMs, it is urgent to accelerate the development of India's human resources by intensifying recent initiatives in the areas of primary health and primary education. Completing the reforms started in 1991. Significant measures have been taken over the last five years to liberalize the investment and trade regimes and much has been accomplished. That said, a number of steps remain to be taken in these areas. Regarding the investment regime, regulations continue to restrict investment in small scale industries because the Government has been concerned with the employment consequences of a full liberalization of the sector. While this concern is legitimate, studies in India and elsewhere suggest that small scale industries benefit more from adequate access to infrastructure, finance, and imported inputs, than protection from competition. There is also evidence that the economic costs of size limitation in agro- industry are considerable and this is likely to be the case in other industrial areas. Other restrictions such as those applying to the expansion of private banks need also to be eliminated. Regarding the trade regime, it will be important for India to continue to lower tariffs to be able to compete with the more open economies of East Asia, Latin America, and the emerging European former socialist economies, and also to provide a stronger foundation to India's growth process. At present, Indian producers continue to pay higher costs for capital goods and intermediate inputs than their competitors. In addition, important anomalies persist in the tariff structure that can only be corrected by a significant reduction of tariffs. Similarly, the elimination of import licensing restrictions on consumer goods is extremely important to protect the interests of the Indian consumers. In addition, several empirical studies show that the growth impact of foreign direct investment under high protection is smaller than that expected under more competitive conditions. In particular, because of the large size of India's markets, unless they are subject to international competition, domestic producers will have little incentive to be export-oriented and this may delay India's integration into the world market. It will be critically important to complete rapidly the financial sector reforms started in 1991. This is necessary not only to promote the efficient allocation of investments needed to - xxix - achieve higher growth, but also to strengthen the implementation of both fiscal and monetary policies and preserve macroeconomic stability. However, some of the most important remaining aspects of financial sector reform can only be implemented if fiscal consolidation is achieved because further liberalization in the presence of large public sector borrowings and consequently high interest rates could weaken the financial system--as company balance sheets deteriorate and non-performing assets of banks rise. Assuming that fiscal consolidation is achieved, four financial sector reforms are of priority. First, the restructuring of the public banks needs to be brought to its logical conclusion. This means granting these banks increased managerial autonomy over branch networks, employment and compensation issues, as well as portfolio decisions. In this context, reducing the Government's equity share in these banks below 50 percent would create strong incentives for improved bank management and profitability. This would have to go hand in hand with strengthening the Government's oversight capacity. Second, remaining controls on banks' and insurance companies' portfolios need to be phased out and forced holdings of government debt should be reduced pari-pasu with the development of markets for government debt. Third, as the fiscal deficit is reduced, it should be possible to accelerate the development of money markets by reducing the intervention of the RBI in the placement of government debt and by reducing restrictions on insurance and pensions funds investment decisions. This should make it possible to establish liquid and deep money markets which can provide the basis for benchmark interest rates, help develop financial market linkages, and support development of a corporate debt market. Fourth, the Government will need to continue strengthening prudential regulations, supervision, capital market infrastructure, and legal and regulatory framework. A delivery- versus-payment system was recently established for government securities, but further efforts are needed to create modem settlement and registration systems for corporate bond markets, while regulatory oversight needs to be made more effective. In addition, improvements in India's payments system are essential to the integration of the country's regional financial and non- financial markets, and also for better management of the country's scarce financial resources. The Chelliah Committee on tax reform produced a well conceived program of reforms for the Central Government taxes aimed at broadening the tax base, lowering rates, and streamlining the rate structure--thus providing a basis for improvements in tax administration. A part of the agenda set by this Committee has already been implemented and some of the most severe distortions of the tax system have been corrected. It should now be possible to concentrate on further enhancing the contribution of each tax and on strengthening institutional capacity in this area. In particular, it will be important to extend the base of the excise system. Exemptions have increased in recent years, and long-standing exemptions above reasonable thresholds for the small-scale industry encourage tax evasion and the inefficient fragmentation of production. Correcting this, and reducing the rates to no more than two or three could bring the excise system closer to a value added tax, and facilitate its integration with the critically needed establishment of VATs at the state level. There also is considerable scope to increase the efficiency of corporate income taxation, as well as revenues, by reducing both the rates and exemptions associated with this tax and - xxx - introducing an alternative minimum tax on gross corporate assets. The exclusion of profits arising from export sales, accelerated depreciation, fringe benefits and other tax preferences imply that a nominal rate of 46 percent (including a 15 percent surcharge) translates into an effective rate of less than 20 percent--with the result that the surge in corporate profits of the last few years has not been accompanied by corresponding increases in tax revenue. While the Minimum Alternate Tax introduced in the last budget will correct some of this, it will be unable to address under-reporting problems associated with transfer pricing and other methods of under- reporting profits. Similar considerations apply to the personal income tax. Particularly important in this regard is the exemption of agricultural income by the states--to whom the Constitution delegates its taxation. To facilitate its political acceptability, effective taxation of this income would require improved delivery of economic services and infrastructure in rural areas by local governments in the context of the on-going decentralization. Last but not least, critically important to the improvement of India's taxation system is the implementation of the recommendation of the Tenth Finance Commission to shift the base for revenue sharing from a high share of two taxes at present (personal income taxes and excises) to a lower share of total tax receipts--which would provide states more stable revenue streams while no longer influencing how the central government raises revenue. Reforming Agriculture. The performance of agriculture is central to the welfare of the over 300 million poor who live and work in rural areas. Increasing agricultural productivity has been a central objective of India's development strategy--essential to the elimination of famines, reduction of poverty, and successful industrialization. Before 1991, the two conflicting objectives of ensuring food supplies to consumers at low prices, and making production remunerative to farmers led to a complex set of policies. Farmers were penalized by: (a) the high protection granted to manufacturing which meant that they had to pay for essential machinery and inputs higher than international prices; (b) overvalued exchange rates that affected negatively the domestic terms of trade for agriculture; (c) restrictions on exports of agricultural commodities which meant that producer prices were generally below their international equivalent; and (d) an extremely complex set of domestic regulations on the trade of agricultural and agro-industrial products aimed at reducing the ability of large traders to influence domestic prices, which penalized farmers by increasing the wedge between farm gate and consumer prices. The price distortions created by these policies resulted in misallocation of resources and production patterns that did not fully correspond to the country's comparative advantage. On the other hand, farmers benefited from large public spending for infrastructure (irrigation schemes, rural roads), support services (research and extension) and subsidies (for fertilizer, credit, water and power for irrigation pumping). No country in the world spends as much on agriculture as India--over one-fourth of agricultural GDP. These policies helped agricultural growth and contributed to the eradication of once chronic famines. The results were particularly noticeable in the 1 980s when, for the first time in India's history, agriculture grew at a significantly higher rate than the population. Since 1980 agricultural growth has increased and spread across regions (to the East), crops and agricultural activities. Because it was scale neutral, and it increased real rural wages, it contributed to an important reduction in poverty. The driving - xxxi - force behind this trend was the massive subsidization of agricultural inputs, including rural credit, and the protection afforded to oilseeds at least until 1991. The exchange rate policy and the protection of the manufacturing sector prevailing until then on the other hand actually lowered agricultural prices by 25 percent in relation to the industrial and service sectors. Accelerating a trend started in the mid-1980s, the 1991 economy-wide reforms virtually eliminated the anti-agricultural bias implicit in the trade and foreign exchange regime. This, the large amount of public resources spent on agriculture (8 percent of GDP), and an unprecedented sequence of good monsoons explain the rapid growth of agriculture since 1991. However, the much needed fiscal adjustment makes it important to device a "quality" agricultural reform program to support agricultural growth that is not so demanding in terms of fiscal resources. Such a program would consist of four essential components. Thefirst would consist of fiscal measures reducing unsustainable subsidies pari-pasu with measures increasing productive public expenditure (on research, extension, roads, irrigation, and other infrastructure important for agricultural productivity). The second would consist of a comprehensive deregulation of domestic agricultural trade and agro-processing. Such deregulation would significantly reduce marketing and processing margins to the benefit of both farmers and consumers. It would increase rural incomes and accelerate productivity growth. The gains of deregulation are particularly important in the case of rice, sugar, oilseeds, cotton, and livestock. The ratification of the Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement should be an essential element of a deregulation strategy because it would improve farmers' access to productivity enhancing technologies. The third would consist of fundamental reform of the rural credit system--now decapitalized and inefficient. It should be recognized, however, that the elimination of subsidies and the deregulation of external and domestic agricultural trade could have negative distributive implications, at least during a transitional period. Therefore, the necessary fourth prong of an agriculture reform strategy consists of measures to improve the targeting of the existing subsidy programs while reducing their overall fiscal cost. The reform of agriculture is a complex and time consuming undertaking which will need careful coordination. Responsibilities for reform are spread almost equally across the central and state governments, as well as multiple agencies at both the central and state levels. Overcoming the coordination problem would require a strong, shared commitment and consensus about the objectives of the reform program. The reform of expenditure programs for agriculture will need to be underpinned by structural reforms. For, example, rehabilitation and modernization of medium and large irrigation schemes are needed to restore reliability of water delivery without which farmers will be reluctant to pay higher charges. It would also permit volumetric pricing of water and improved water management practices as recommended by the 1992 Report of the Committee on Pricing of Irrigation Water. Institutional reforms are also needed to provide the basis and necessary financial incentives for improved cost recovery as well as improved accountability in the delivery of water farmers. Tamil Nadu and Orissa have recently initiated reforms that would lead to improved cost recovery, quality of service delivery to farmers, and systems turnover to - xxxii - beneficiaries. Karnataka, in its 1995 Agricultural Policy Resolution, is proposing radically to transform institutional incentives in the irrigation sector by turning the Irrigation Departments into financially and managerially autonomous entities responsible and accountable to water users. India is facing an imminent crisis in infrastructure. An unprecedented power supply deficit, and growing freight transport congestion problems (in roads, ports, and railways), threaten to undermine the supply response to the country's stabilization and reform efforts. To address the major infrastructure needs, the 1991-96 reforms ended decades of public sector monopolies (with the exception of railways), and the government has invited the private sector to play a significant role in raising the level of infrastructure investment and the efficiency of infrastructure services. The response of the shipping industry and air transport has been strong and positive--with dramatic improvements in the quantity and quality of services. In telecommunications, private operators have been inducted in cellular services and other private services are expected to be licensed shortly. In July 1996, a bill for the creation of the independent Telecom Regulatory Authority of India (TRAI) was presented to Parliament and is awaiting approval. Significant private investments would be encouraged by the timely establishment of TRAI. However, in other critical areas such as power (except for captive capacity), roads, and ports, few private investments have been brought to closure under the new national policies. The fundamental obstacle to private sector investment in the power sector is the weak financial position of the State Electricity Boards (SEBs) which operate virtually all the country's distribution networks through which the power supplied by potential private investors would have to be sold. At this time, the SEBs are not financially viable clients for potential private power producers. The SEBs generally are prevented by their respective state government from charging commercially viable tariffs; they are not allowed to cut power from non-paying customers, and many of them are institutionally too weak to contain power theft in rural and urban areas. As a result, the SEBs' financial condition is one of the country's most serious structural constraints to the reduction of the public sector deficit. To alleviate the power supply crisis in the short-run, the government has encouraged captive plants (based on liquid hydrocarbons) where the purchaser is one or more selected industrial consumers. While this approach alleviates the short-term supply constraints, it exacerbates the financial problems of the SEBs by making them loose their best paying customers. Some states (Orissa) are beginning to address these problems through cautious tariff adjustments and through the phased privatization of distribution. But most have yet to begin meaningful power sector reform. In this context, and given growing power shortages in most states, the central government has been concerned to bring to closure at least some of the more viable independent power producers (IPPs) proposals. To that effect, it has committed itself to provide counterguarantees to selected power purchasing agreements between SEBs and IPPs, thereby adding its creditworthiness to the insufficient creditworthiness of the respective state and SEB. Since 1995 the Government has refrained from adding to its pending contracts to extend counterguarantees to IPPs because of the considerable contingent liability which these guarantees create for the Central Government. - xxxiii - In the case of highways, the international experience suggests that private investment can only be a solution in a few, albeit important, high density corridors, bridges and by-passes. Cost- effective public investment is therefore needed to improve India's road network. The National Highway Authority of India (NHA4I) has been mandated to manage the e-xpansion of the highway sector. Although it lacks the skills and finances to develop a modem capacity for highway construction and up-grading, there is considerable scope for private participation in road design, construction, and maintenance. The traditional reliance on state-level Public Work Departments (PWDs) and small labor-intensive road contractors does not provide the capacity to carry out the urgently needed construction program. Without major reforms in the way in which highway construction is designed, procured and managed, India will be unable to overcome the emerging road transport crisis and utilize the substantial funding potentially available for this purpose from multilateral and bilateral development agencies. MOST is just beginning to take steps to induct private investment into the ports-sub- sector. To date, concrete actions in support of private investment in ports have largely come from state governments. For instance, the Government of Maharashtra has sponsored techno- economic feasibility studies for developing about 30 intermediate and minor ports in the state. Similarly, the Gujarat Maritime Board has initiated such studies for the development of new ports. Thus, the private sector has preferred to deal with the minor ports under the various state governments rather than to deal with the big ports under MOST. In addition, the private sector has taken advantage of the recent deregulation of coastal shipping to set up bulk domestic shipping operations in coal, fertilizer and cement to shift cargo off the congested road and rail systems onto previously underutilized coastal shipping lines. As in the case of power, however, this is not a fully effective way of addressing the sector's problems. Several lessons have emerged from India's experience with the involvement of the private sector in infrastructure. In particular: (a) processes for selection of developers need to be predictable and based on rules that are transparent; (b) projects proposed by government to the private sector need to be preceded by high quality preparatory work covering their technical, social and environmental aspects; (c) the existence of a transparent regulatory framework is critical for the efficient induction of private operators and for the commercial operation of the projects they undertake; and (d) guarantees, counterguarantees, escrow accounts and other financial arrangements are no substitute for an adequate policy and institutional framework providing the basis for predictable revenue streams and financially viable buyers. Urban Reforms There is growing evidence that India's cities and towns are facing a crisis of serious proportions stemming from chronic underinvestment in urban areas and consequent shortages of key urban services. At the heart of the problem are the cities' weak fiscal base--eroded by state legislation imposing rent controls, limits on the amount of land an individual can hold, restrictions on land markets, and unrealistically low water charges. In some of the main cities, revenues are excessively dependent on extremely inefficient taxes which need to be eliminated--such as octroi. Thus, any program of urban reform would need to include measures to: (a) improve urban areas' use of the existing resource base (such as a better cost recovery and enforcement of existing taxes); (b) strengthen the resource base and make it more - xxxiv - efficient (such as lifting rent controls in the major cities, eliminating octroi, establishing efficient land markets with an effective system of land titling); and (c) establish a rule-based, efficient system of capital transfers to replace the present system. Such measures would provide the basis for the restoration of the finances of the country's cities and towns--and thus restore their capacity to invest in critically needed infrastructure. Over time, they would help municipalities become creditworthy borrowers, able to access capital markets and mobilize financing for critically needed investments. External Financing Requirements As of March 1995, India's US$99 billion external debt is, in net present value terms, more than twice the value of the country's exports. Based on this, the World Bank debt tables classify India, together with Indonesia and Chile as "moderately indebted". Of the world's two major credit rating agencies, only one has rated India's sovereign foreign currency debt above investment grade. In response to this, the authorities have adopted a prudent approach to the management of the capital account. Since the 1990-91 crisis, they have placed considerable emphasis on achieving a strong balance of payments position with a lower indebtedness and debt service ratio. Consistent with these objectives, and an indirect way of influencing the size of the current account deficit, the authorities have brought different degrees of liberalization to different types of capital inflows--depending on their contribution to the country's development, their potential volatility, interest cost, maturity profile, and risk sharing features. Thus, while there are virtually no restrictions on foreign direct investment, there are some on portfolio investment. In particular, although there are no limits on the total amount of investment by foreign institutional investors, there are restrictions related to the type of financial assets they can hold (for example, they cannot invest in government papers, nor can they hold more than 30 percent of their portfolio in debt papers) and to their equity holdings (they cannot hold equity positions which exceed 24 percent of a firm's total equity). Equivalent restrictions apply to Indian firms issuing equity or debt abroad. The rationale for these limitations is that while portfolio investment is attractive for the country because its servicing is not fixed and the foreign investors share the risks associated with fluctuations in domestic income and exchange rates, it does create long- term claims on the country' s foreign exchange resources. Thus, its growth needs to remain in line with the growth in India's capacity to service it--that is in line with export growth. In the case of commercial borrowing, an indicative ceiling is set annually (US$5 billion in 1995-96) and, based on published guidelines and criteria, discretionary authority is used to direct borrowing to priority areas, and to limit short-term borrowing. The authorities see full capital account liberalization as a medium-term objective, to be reached after a sustainable fiscal framework is firmly in place, and financial sector reforms are completed. They have wisely resisted the temptation to relax restrictions on external commercial borrowing over the past year as a means of relieving pressure on domestic interest rates. This would have not only diminished pressure for the urgently needed fiscal correction, but could have also stimulated a destabilizing consumption boom. - xxxv - One consequence of this self-imposed discipline is that, for the foreseeable future, India will mostly need to rely on foreign direct investment and assistance from external development agencies to meet its substantial needs for infrastructure and human resource development. Therefore, this report continues to make a case for India's sustained access to long-term development assistance, including a substantial concessional component. With a modest current account deficit of 2 percent of GDP over the next few years, India would still require total gross financing of about US$8 billion in 1995-96, and an average of about US$13 billion in each of the following four years. Over the last two years, bilateral and multilateral participants in the India Development Forum have pledged about US$6.5 billion in official assistance as a recognition of India's strong commitment to reform and poverty reduction. Over the last few years, the Government has taken several specific measures to improve the utilization of ODA: (a) advance release of funds are being made to state governments; (b) procedures for awarding contracts and procurement have been streamlined; and (c) a central Project Management Unit has been established in the Department of Economic Affairs, Ministry of Finance, for better portfolio management and project implementation. While these measures have accelerated aid disbursments, there remains scope for further improvements. In conclusion, the Bank would advise the participants of the IDF to support India's ongoing fiscal adjustment and structural reforms through long-term official development assistance for high priority public investments in physical infrastructure and human capital development. With sustained improvements in the utilization of such aid commitments and gradual recourse to debt and non-debt commercial sources, India's remaining external financing needs would be met. I PART I FIVE YEARS OF STABILIZATION AND REFORM A SUMMING UP I - 3 - n ~~~FROM CRISIS TO GROWTH INTRODUCTION India Has Fundamentally Altered Its Development Paradigm Over the four decades after Independence, India followed a planned development strategy based on extensive public ownership of commercial assets; a complex industrial licensing system; substantial protection against imports (including some of the world's highest tariffs on imports of capital goods, and a ban on imports of consumer goods); restrictions on exports; virtual prohibition of foreign investment; and extensive regulation of financial intermediation. At some point in the 1970s and early 1980s, these policies enabled the government to control the most basic business decision down to the firm level. Thus, while India's private sector has always been important and produced at least two-thirds of GDP, its activities were restricted and used for the goals of a planned development process. This development strategy helped the country escape from the massive illiteracy, recurrent famines, fertility rates of about 7 children per woman, and secular stagnation prevailing before Independence. However, it also was the source of severe financial imbalances which are yet to be corrected. It isolated the country from the rest of the world with the result that from 2 percent in the 1950s, India's share of world trade had declined to less than half of one percent in the late 1980s. It forced Indian consumers to pay higher prices for goods of lower quality and deprived the country from the benefits of foreign direct investment and modem technology. It discouraged production for exports, created recurrent shortages of foreign exchange, and made the balance of payments extremely vulnerable to external circumstances. Most important of all, it held back the country's growth and thus the pace at which poverty could have been reduced. As argued by India's own eminent economists, among them Bhagwati (1993), low productivity rather than inadequate savings explains the weak growth performance of the past decades. Throughout most of this period, macroeconomic policies were conservative and, except for a few episodes associated with unfavorable harvests or external shocks, inflation was contained to single digits. External current account deficits were modest and financed primarily by concessional aid flows. During the 1980s however, and driven by an unprecedented surge in -4- The People. India ~is a' country of striking contrasts and enormous ethnic, linguistic and cultural diversity. There are more tanr 1600 languages, nearl ~400 of which are ispoken by ~more than 200,000 people,. The dominant religion ~is 1Hindtiism.(2TOren o0f ~the poplation), which ftjho . ts cate system, has prfoundly afecte the nation's social Structur. MusIisacon for sizable ii1 percenit of the populationh, while Christians, Sikhs, Buddhists, ains and Parsis account for the balance India: ranks first in the world in terms of the number Added to Its population each year,~ currently about 16 million~ The total popuaton estimate in mid-1996 at 31 million,is second only to China, Since independence, successive govermentts hae tknsest improve the socio-ecoonomic status~ of the nation's tribal peoples and the lowest subcastes. Designated officially AS scheduled castes (SCs) and scheduled tribes (STs), these groups number over 206 mnillion (1991). STs Are scattered throug houth country, but tend to live in reatively inaccessible areas, 'including forests, hills and deserts. SCs 'areia dispersd group, vayn from predominantly rural to exclusively urban, Both groups, despit constituitional protection, far Proportionately w lsbta the population as~ a whole in areas of health, nutrition, education and iemplomet. Poverly and tradition have also produced severe gender~ ineqalhitie Despite some imnprovement, India's femnale, population~ continues to face higher malnourishment land lower levels of education than men. The sex ratio is disiitubingly~ male-biased, ait 929 female,sperl1,000males. Unlikermost counItries in. Indiw moe omnthanmndebfr h g f3.Fml lieay a~ national: problem,~ is particularly acute in rural areas, within certain state districtsl, and among11 SCIST. Generally lackintgjland,: women remain: locked out of: the formal finiancial system and are Constrained in their ability to acquire 'capital assets:or working capital. These, and other in equalities ~continuelto conlstrain attempts~ to improve labor productivity, reduce fertility, alleviate poverty and prompte accelerated~ economnic: gWth. Urban patterns~ vary widely althugh~ Maharashtra, West Bengal, TailNd and Knaaka hae Comparatively hher uran ratios than the other' states. Bombay ~(12.6 mrrillioni) and Calcuttal(11.0 million) rankamong Jhe:30 larest citiesint4he wold Nonjethless, the country has: not experienced th raid Iualurani migrto tyiaof ohr deeopinglnation.sin Asa Infc about:60'pWocent f alljodians:still ive in villages with fewer than ~5,00.0 people. Edcto,India possesses alarge pool of highly qualified manpDower,.:incIuding buins poesna,engineers and scienst of internaional ~caliber.: However,~ these. groups represent only~ a tiny: fraction of the population. As: a whole, the Country faces. uinacceptably ~highI levels of illiterc and lo le hnn acieveent. More than haf the overall populaition '0ver 15 and: two- thirds of all Women overJ 'SArc illilterate. In addition, the average, educational attainmn of the Adult lao orei6nly 2.4 years. While. most childrcn enroll at the beginninig'fpriunary schoo,more tben ~halMf of rural students drop out beforecompltng the cycle, while only: a third of females make it 'to the~ second.aIry level. Overall, About 33 percent of children~ who should be in. schol ar no-enrlle, wih a ispoporion te nmbr nationiwide comiing from the poorest households", girls,I and SC/STs Healt, There have 'been substantial .gains in health over the piast 40 years Much remains to be done. Infant mortalityvrates~ vary ~widelY by'state;:f,.o.mI 13 per thousandn inKeala'to'l10~ pe'thousand~ in Orissa. The averg forlo incecon trits (excludingiChina and India) is:91 :per thousand. Thei risk 'Of death for children under' yas'of'ag rean hg,a 12.4 percen,about 30 percent higher than'the averagerisk faced ~byte-world':s ~population '~and higher than in all reionsof the world~.... except Sub-saharan Afria. The frequency antd severity of maternal ~morbidity--400 deaths per ID00000..lie births-- is disttessing',, and comares unf~avoraby wit allbta. ml numbe ofcountris. agl preventable communicable deae accun for high shar. ~of deaths: in. the~ coulntry, curbently~ around 470 per' '100,000, :This, is'~int conftrast' to :117 per: 100,000 in China and 187 per 10,0,000 for the world as~ a~ whole. Nutrition, India: has, made :signficant improvements in fod~ Availability ~and distribution, rendering~ ifamines, even iti droughti A: thing of the, past.: However, much remains to be::done in improving nutrition withint regions and among vaiuroupS.Bytae severe: malnutrition~ is: prevalenit in Bihar, ~Utata Pradesh, Madhya Pradesh, etKer V,Ws BnAl, Oris andRajshn C n Ssj re-cord lower level,s ofi nutrienit intake thanft the~ averae for othe goups ad beo recmmnded levesinalstead locations:- ruala wel sura, eder discriminatio infood intakeo ocus n sms icrible] among youg girs in th northern sates. Overall, nearl two-tirds of children under five are mialnourished, and abouta: third& of: newborns are::oflow. birthweight. public investment, fiscal policies became more expansionary. The overall public sector deficit widened from about 9 percent of GDP at the beginning of the I 980s to 12 pprcent of GDP by the end of the decade. Expansionary aggregate demand policies combined with some improvement in productivity in response to the gradual liberalization, produced annual growth of almost 6 percent. This was unsustainable, however. By 1990-91, inflation increased to 10.3 percent, and the external current account deficit reached 3 percent of GDP (US$10 billion), with increasing reliance on short-term capital inflows to finance it. The fragility of the economic situation was exposed when India was faced with the consequences of the Middle East crisis and a period of frequent changes in government which created political uncertainty and delayed the correction of the serious internal and external imbalances. As India's credit standing in international capital markets fell sharply, access to external capital borrowing dried up and substantial amounts of private capital left the country. The result was that India had to face one of its most serious foreign exchange crisis. In June 1991, in spite of a severe squeeze on imports and emergency financing from the IMF, the World Bank, and other bilaterals, particularly Japan, with reserves at less than US$1 billion, the country was on the verge of defaulting on its external debt obligations. The new govemnment that came to power in June 1991 responded to the crisis by stabilization and reform measures intended not only to correct the unsustainable macroeconomic policies of the 1980s, but also to address long-standing constraints to higher economic growth. Over the last five years, changes of the investment, exchange-rate and trade regimes, the financial sector, and the tax system have ended four decades of development policies based on planning and have initiated a quiet economic revolution. With these reforms, India is now closer to the growing group of countries which, starting in the 1970s and 1980s, have gradually but persistently liberalized their economic policies, increased their integration with the global economy, and reduced the role of government. India did not have the inflation, external debt, and social inequities so severe as in Latin America--and was thus able to stabilize the economy more rapidly and at a lower social cost. Unlike former centrally planned economies in Eastern Europe and elsewhere in Asia, India already had an important private sector and all the institutions of a free market economy. India was thus able to avoid the costly industrial and financial closures and restructurings, so frequent and so painful in most of the former socialist economies of Europe and Central Asia, and which have considerably delayed the supply response to reforms. On the other hand, because India's macroeconomic crisis was considerably less traumatic than in Latin America, it has been much harder to reach political consensus on the need to reduce fiscal imbalances to the levels achieved for instance by Latin American, East Asian and Western European countries. And fiscal imbalances remain the single most important threat to India's long term growth. Similarly, notwithstanding five rounds of trade reforms, India's trade protection remains among the world's highest. Likewise and in spite of five years of liberalization, excessive regulation remains a problem particularly in the financial sector, agriculture and agroindustry. In addition, in the financial sector, the public sector continues to be the major shareholder of India's largest banks, insurance companies, and contractual savings institutions raising questions on how truly autonomous these institutions can be. Finally, the development of India's human resources has been slow in comparison with countries in East Asia or Eastern Europe. - 6 - MACROECONOMIC DEVELOPMENTS An Unexpectedly Strong Recovery The economic recovery has been unexpectedly rapid and robust. Initially, growth declined sharply in response to the devaluation and contractionary fiscal and monetary policies adopted in June 1991 TableL;0 r,t Pe 19146 to address the foreign e..=... exchange crisis India .DPiF 1 .....1981-90 19 0-91 92 19293 1993-94 1 4 95-96 1 996 7 5.5 5.4 0.8 5,1 5.0 ~~~~6.3 ~7.0 6. was then facing. Agricuitue 3i A- 3. -2.3 6. 33 49 . 2.3 From over 5 percent I y 6.9 7.2 -1.3.- 4,2 .3 2. 85 Minn8 Qam~Ing 7,4 10. 3. 4.1 4.3 5.0 in 1990-91, GDP M ng 7.2 6.1: 3.74437 .1 4.3 9 12.2 growth declined to Rtrd80 50 -, , 4.3 . Unregistured 6.1: 7.9 -60 6. . 1.: less than one percent EIetyii, (as., & 89 65 96 83 7 . in 1991-92. The ter recession was struction 4.4 11.6 2.2 3.3 2.3 . .: particularly severe - Not avable._ and prolonged in a. Quick estimates. manufacturing where oe:CO negative growth rates persisted in the main sectors until 1993-94 (Table 1. 1). Helped by reforms, a relaxation in fiscal policies and an unprecedented sequence of good monsoons, growth accelerated to 5 percent in 1992-94, 6 percent in 1994-95 and 7 percent in 1995-96. The industrial recovery has been especially strong, particularly for capital goods (Table 1.2) which !.:-- ITablel1.2: lndex ofInadustrial Producionk 1981.95 had experienced i-0-; 0 Z; ;; ~~~~~~~~~~~~negative growth for Weight1981-91 19.90-91 19.91- 1992-3::1993-94 11994-9 1995-96 ngtv got o Overall In- : ::d:i DiexEiSiE 100.0 7.8 8.2 0.6: 2.3 6::0 9.3 12. three successive gas, Good ~ 394 :7- 38: 6 . , 2 . Caital Gods 16. - 94 11).5-. 170 3j.4 -12.8 -0:.1 -4 .1 2453.9 2-0. years. India has a inteet diates 20.5 6.2 6.1A -0 .7 5 11. 3.17 10.3 capital goods CoasumerQooda --00.023,64 5 6.070 j01i0.40 00-01.8 1.9 4.0 8.7industry which is Dii~~~ab1es . 2.6.3,~~10 14.8~ -12.5: -0.7 16 02 38. o- . ..... . o .. . - .21.0 . 5.7 9.4 t 1.2 2.5 13 8.4: .6.6 unusually large for ~~ AprI~~~-P~~1msa~~~y. ~a country with a :$icOW (i;; - ; CSO;;. ; i j;;;E ifi; ;g;;;; iS;;::E;EW US$350 per capita income, and the severe recession it faced was an important motivation for the less stringent fiscal policies adopted in 1993-94 and 1994-95. Because it has been driven by exports, domestic and foreign private investment, and domestic savings are increasing, the economic recovery is not putting pressure on inflation or the external accounts. India's growth performance over 1991-96 is much better than that of other countries, which underwent stabilization and structural transformation. A time-series analysis (IMF, 1995) of potential GDP and output gaps further indicates that the 1991-93 recession was considerably milder than previous recessions. - 7 - Growth is being accompanied with productivity improvements. One of the main objectives of India's reform program was to make the industrial sector more efficient and increase its export orientation by dismantling bureaucratic controls over investment and production decisions, giving a greater role to entrepreneurial decision-making, and increasing competition. The available evidence suggests that these objectives are being reached. Industrial growth is being driven by positive structural changes and improvements in productivity, particularly in the industrial sector where there is a sense of a "mini-industrial revolution". In particular, in response to the increase in competition both from domestic firms and from multinationals, corporations are restructuring. Corporate attitudes and cultures are changing, domestic companies are remodeling their operations to become niche players, manufacturing partners, or strategic allies--with a view to strengthening their competitiveness. Reports on individual companies in the organized sector and surveys of firms in the organized and unorganized sectors carried out for this report indicate that restructuring is taking place along several lines. First, some firms are consolidating around core competencies and selling off units unrelated to their core activities. Second, mergers and acquisitions continue to increase in an effort to expand capacity quickly and consolidate market share. Third, a number of companies have entered into strategic partnerships, mostly with foreign companies, to acquire new technologies, management techniques, and access to outside markets. Fourth, taking advantage of the liberalization of financial markets and increased access to international capital markets, firms are reducing interest costs by retiring high-cost domestic debt. Fifth, family-owned and managed companies are changing their organizational structure and professionalizing their management. Finally, some companies are strengthening management and reducing excess labor through training programs and voluntary retirement schemes. As a result, there are clear indications of important efficiency gains. First, in response to the reduction in the anti-export bias implicit in India's pre-1991 trade and exchange rate regime, export and import intensity have increased since 1991 in most sectors (Table 1.3). Easier access to imported capital and Table 1.3 Change in Trade Orientatioo, Profltbility, and Productivity slre 1)91"l Compared to tht prc-19"I Period intermediate goods has Retum to Return to Export Import been particularly Fixed Capital Risk Capital Productivity Intensity Intensity important for this Capital Goods *e -' evolution, especially for Consumer Cyclicals +* 4. X4. : t Consumer Staples e4 t *4 newly emerging agro- Technology 4 * 4. 1 t based industries such as Note: T increase; 4'decrease; ncg no change Souree: NCAER, "Impact of Economic Reforms on Large, Medium and Small Scale Industries in the floriculture, aquaculture, Organized and Unorganized SectDe'. These results ae bad on a survey of over I.000 lage and horticulture. Second, declining mark-ups in most sectors (Table 1.4) suggests that productivity has increased--even after taking into account the influence of cyclical factors on mark-ups. One exception is transport equipment, a sector where import restrictions (particularly on automobiles) remain severe and domestic demand has grown rapidly in the recent past. However, the many new recent entries in this sector are expected to bring new technologies, increase productivity, expand capacity, strengthen competition--and thus offset the impact of cyclical factors on markups. Third, for the past two years, corporate profits have been at record levels. Results for - 8 - Table IA: Change in Profitability and Productivity since 1991 1569 non-financial companies for the Compadtotheprice-CtlRati Productivity financial year 1995-96 indicate that Electrical Machinery gross margins increased to 16.3 Non-Electrical Machinery t1. o Electronics * .e percent, up from 15.8 percent for Transport equipment t i t 1994-95 (CMIE, June 1996). The Textiles largest improvements in gross profit Chemicals **ipoeet grs !Vote: Trhe sign (4) indicates a decline and (T) an increase. margins have been experienced in (0) indicates that the estimated change is statistically significant at 5% level. such industries as cement and allied Source: P. Balakrishnan, "Economic Reforms, Competition and Productivity Growth in India: A Panel Study of Manufacturing Firms", April 1996. The products, alunimum, glass and study covers over 1,000 large companies. mineral products, hotel and transport services. There also is some evidence, however, that the increase in profits cannot be attributed to productivity gains alone. Access to finance may have played some role. In particular, firms with no access to international finance seem to report lower profits than those that could avoid high domestic interest costs. Fourth, there also is some evidence of improvements in quality. Quality improvements are obviously hard to measure. However, the cumulative number of Indian companies seeking and receiving ISO 9000 certification in recent years has risen from 8 in January 1993 to around 1,200 by May 1996 and survey results indicate that large firms are more concerned about the quality of their products now than they were prior to 1991. The results of surveys of large, medium and small enterprises in the organized and unorganized sectors conducted for this report indicate that the business community is generally supportive of the reforms implemented thus far. In particular, the surveys suggest that: (a) businesses favor the new liberalized environment despite the stiffer competition, only few are skeptical of the benefits; (b) export-oriented businesses are upbeat, they see greater potential for business expansion provided the government adopts a more consistent hands-off policy and concentrates on relieving infrastructure bottlenecks; (c) business complains of still cumbersome administtative procedures for tax returns, duty drawbacks, and other transactions with the public administration; (d) except for import-competing industries, there is a strong desire for faster trade liberalization and tariff reductions especially on raw materials, intermediates and capital goods; and (e) a large number of respondents indicated that the current power charges are too high in view of the quality of service, and expressed their willingness to pay higher rates in return for more reliable power. In general, businessmen were impatient at the slow pace at which administrative and legal reforms are proceeding. Although the reform program did not contain initially an explicit agricultural component, it created a number offavorable conditions for the sector. The stabilization and economy-wide reforms provided an environment favorable to agricultural growth as early as 1992-93 through two channels: (a) the rapid and broad-based economic recovery led to rising domestic incomes which, combined with the improved international competitiveness of primary and processed agricultural commodities (e.g., cotton textiles, oilseed meals, horticultural crops, fish products, leather goods), provided most of the needed impetus to sustain demand for a rapidly increasing supply; and (b) the virtual elimination of the bias against agriculture caused by economy-wide policies. By 1994-95, the devaluation of the rupee and the more open trade regime in manufacturing eliminated the economy-wide discrimination against agriculture which - 9- along with the successive years of good monsoons translated into an acceleration of growth from negative 2.3 percent in 1991-92 to 4.9 percent in 1994-95. The performance of the agricultural sector is discussed in detail in Chapter 4. The recovery ofprivate investment is being financed mostly by foreign direct investors and domestic savings. As indicated in Table 1.5, foreign direct investment (FDI) has doubled every year since 1991-92. In addition, FDI approvals in 1995-96 increased to US$10 billion. Assuming an average 3-4 years project implementation period, this suggests that actual flows of FDI could reach US$10 billion by the end of the decade. This would still be much less than the about US$30-40 billion of FDI seen in China in recent years. That said, the response of FDI to India's liberalization is similar to what was seen in China five years into the latter's liberalization process. Table 1.5:. Foreign Direct id Port:olio Investment '(US milio,n) 1990s91 1991-92 1992-493 1993-94 1994-95 1995-96P D:iret ¢Investmeint'" - - ' " illi 11,, i'''..- "'-' !"i" . ! g.l - ForeignDirect investment 165 150 341 620 1314 198.1 Portfolw Investment - 0- 8 92 3493 3581,- 2096 Foreign lostitutiotial Investment '0 1 1665 1503 1'92 Euro-issues/ GOR 0 0 86 1:463. 1839 204 Oers a 0 8 5 365 239 -- Total Direct ald Porfio lavtstmetitn -- 165 158 433 4113 4895 4877 Memorandum iten: FormigttCotency Conv.ctible Bonds F£CB} b o0 O 0 914 34 Floating Rate Notes (FRN) 0 0 0 0 ' 167 -- Note: p provisional. a. Includ¢s NR1 portflio investments, offshore fvnds, and oth. - b. FCCBs are treated as commercial borrowing before conversion into equity. Souree: Reserve Bank of fndia Ministry of Finance, AWQW-1=1 19"46. . Domestic savings are recovering in spite of the weak performance of public savings. After declining to 21 percent of GDP in 1992-93 and 1993-94, domestic savings increased to 24 percent of GDP in 1994-95 (CSO's quick estimates). Helped by the liberalization of the financial sector which increased the availability and attractiveness of financial instruments, households' financial savings increased from 8.7 percent of GDP in 1990-91 to 11.1 percent in 1994-95. Similarly, the rise in corporate profitability led corporate savings to rise from 2.8 percent of GDP in 1990-91 to 3.8 percent in 1994-95. However, as a result of the slow progress in fiscal adjustment, the public sector savings performance (the excess of central and state government revenues over current expenditure plus gross profits of public enterprises) continued its 1980s deteriorating trend before recovering marginally for the first time in 1994-95. After falling to a half of one-percent of GDP in 1993-94, public saving recovered to 1.7 percent of GDP in 1994-95, but is still well below levels reached in the 1970s and 1980s (Table 1.6). The recovery in private savings laid to rest an intense debate in India on the significance and reasons for the fall in the rate of households savings, physical savings in particular, seen after 1991-92. Three reasons were offered. Some blamed it on the financial liberalization which prompted an increase in the availability of consumer credit, allowing formerly credit-constrained - 10- individuals to borrow against future income and therefore consume more and save less. Others attributed it to a contraction of household-based manufacturing investment as a result of the stabilization-cum-adjustment program. Finally, others attributed it to measurement errors because the methodology to measure saving and investment in India is generally regarded as unsatisfactory. TOWl 1.6: 111011111LiC I)e.IIIaftd. 198i I -95 _____________________ ; E C(pmre.llL *;: 6 i)I' J in:,rkl.cl pi iLc.e ' IM i -'J I ' I Mp-91 19-9.3 IJJ ;-,)4 1 994-95 Iria,l;l n,, nnflikn l1.1p.ndiur' '# a a11) 71.fi .7) ; *1 1) 72.9 17' ) ' 4 5 7. (4.2 tit crnnl,:n 11LA:1 CIl M IIIII lp,I.II I,.: C 2, 1115 (323 1') 5c 11.11 3.3 If I) 1H - l.tl) P'riiaic fin;ulal uh7Imp i. 41 62 1 (3 8) 62 .1 i K) 6f1.7 (4 3 rI f 14n 2i 600 14 3 o IC .Jp:;aI I o-fliall'-m;uc '' *; '11 252 (32 2 22 i- i- 24i1 i (12 '1 21 -51 23.2 (I9.WIj * I i%*di :1p.1i I Or.ih'rli.l, 1 , xi 23 2 (9 i9-. ' 22 5 (6.9) .:I 2 a 2.! (14 Ni I'ub:l: S% l (It : '1.4 t4 A ) i 'M v(.0) 8.5 ( z . 1 :I is 83 014.i0 I'rin.lc ( orrpc.rakl: Sc:r * ! 3.9 (24.2) 5 14 'I 60 (9 4) !. 9 6.9 (.3) I ;iarl'dwi.d 0 t');E 99 (' ) I 69 -' 2I N 0 (26 1 1' . -' R1 7* (2S 3) (i,un~ 112ill .SI1dk, 2 1 2 1 0 ht I e-'. r06 I i'1:d; IDklmaud I. I , 1 '38.8 Ie -R) 4 1 ) '6h9 t50) '1I ' I) 9 ;.9 Gross Domestic Saviigs 20.5 2 6 t2 X 21 2 2 1 24 4 t0::00:fi00Hous~hel140FisnaiaI t;0 t00:t0 f t0: $04j7.6 N 7 !il I S 4 1' X IiT M PrivateCorporateSeetor :2.1: '.S 2 8 3.8 Note: Real growth rath tnhparentheses. a. Averg Of 9981-2,thrpug A991-92.~ Sourre: CentrlI ;Statistical Organiztion, _f NaX>1'1 00000 0 :t0t 0;;00:0;;00;000 00ion Acnts 0 I0000 Two other explanations are however more plausible. First, increases in savings in gold could have led to the decline in measured household savings because accumulation of gold is counted as consumption in the National Accounts. Demand for gold increased sharply from 260 tons in 1991 to 454 tons in 1992, the year in which gold imports were liberalized, amounting to about 0.8 percentage points of GDP. Given that the biggest jump in the demand for gold occurred in the first quarter of 1992, an asset portfolio shift in favor of gold may explain in part the decline in household savings in 1991-92 and to a large extent the further decline in 1992-93. This decrease and the subsequent rise in savings in 1993-94 and 1994-95 may thus be linked to the temporary character of portfolio stock adjustment following liberalization. Second, the slowdown of economic growth in 1991-92 and ensuing households' attempts at stabilizing consumption likely explain most of the decline in the domestic savings rates. In cases when a large share of the population does not have access to credit facilities, as in India, this reduction would be reflected in total household savings. In addition, the fall in household physical saving can have positive effects on resource allocation. While the shift from physical towards financial savings experienced after 1991 has been another subject of concern, this is in fact a positive development. It suggests that households' financial savings were previously constrained by the absence of financial instruments suited to their needs. And, because the range of investment opportunities offered by financial intermediation is so much greater than that offered by physical assets, the increase in - I1 - the share of savings kept in the form of financial instruments is likely to lead to better allocation of investment and thus improved growth performance. But the consistent fall in the public saving rate over the last decade continues to be a major concern. Inflation Declined but Monetary Management Became More Complex Prior to 1993-94, monetary policy, while not entirely subservient to fiscal policy, was nevertheless closely tied to it. There was no limit on government borrowing through the RBI and the interest rate on its borrowing was significantly lower than market rates. With a closed capital account, the RBI counteracted the effect of government borrowing on broad money growth through relatively high cash reserve requirements (CRR) and extremely high Statutory Liquidity Ratios (SLR). This situation changed in 1993-94. First, the financial sector reforms reduced the Central Government pre-emption of bank assets and allowed banks greater, albeit still limited, freedom in their portfolio management and interest rate policies. Second, foreign investment was liberalized, both direct and portfolio through several measures taken over 1991-93. As a result, foreign investment increased from US$0.6 billion in 1992-93 to US$4.1 billion in 1993- 94--with a sharp acceleration towards the end of 1993--and contributed to a large surplus in the capital account. While these inflows were a significant "vote of confidence" in India's macroeconomic policies and growth prospects, they posed complex macroeconomic management issues to the RBI at a time when the fiscal deficit was still high. Initially, RBI chose not to sterilize the capital inflows, and reserve and broad money grew in excess of 20 percent in 1993- 94 and 1994-95 (Table 1.7) in spite of some corrective measures taken in early 1994. This led to an increase in inflation to 11-12 percent (after it had declined to below 8 percent), and a real effective exchange rate appreciation of close to 4 percent (Table 1.8). The steps taken in early 1994 consisted of a pragmatic mixture of measures aimed at discouraging certain categories of inflows (particularly those that are easily reversible, or more expensive to service) and relieving supply pressures. First, following a procedure established at the time of the last IMF Stand-By (November 1992-May 1994), the authorities continued to set annual limits for external commercial borrowing. Second, because a large part of the inflows originated from Indian firms raising funds abroad, new guidelines in May and October 1994, established (i) a maximum of one (two) issue(s) per year per company (group of companies); (ii) required that money raised abroad be for already identified physical investment projects; and (iii) stipulated that these funds not be brought into the country until a clear use for them existed. Third, Non-Resident Indian (NRI) deposits were discouraged both to contain growth in commercial banks' liquidity base and reduce a volatile component of India's external debt. The measures included: imposition of CRR on NRI accounts, a reduction in the maximum interest rates payable on such accounts, and a phasing out of new flows into the Foreign Currency Non- Resident (FCNRA) Scheme under which the RBI bears the exchange rate risk. - 12 - Table l.'~: Selected Mlonetarn Indicators. 1990-96 (RLupees billioni lEnd-ltarrh cof each -t*srj Nib,nev segregate i kN(-9I 1991-92 1992-93 1993.94 I;;19'J l-9Q5-ri Sources oif Reserve Monev 8-8 I/Of!'.; 995 fift 'b (1i8 ''.1." IlK? (/06n 1') I69 :"('* 1943 7!/fjft~ Net RBI ;.red'A to (zc crn'mcnt 888 ' 149, 940 (44) 984 (3(q 993 (13) 101I'- C 27i) 'l02tA \ct ftlciZflCXC:flfl2ciL'Wt, tRill, 80 f/to ~~~188 tP3?~ 226 3J 514 O/n.?, .1 : 741 (-3,: 0it.n.Jr I: irett -93i !-6rj-k -13-3 (-r -13 ;. 11 /4 1t V -6- Sources of Blroad NIumnev 26548 f6O! 31710 (100, 3668 (100t' 4344 (111(J C HlIS *i"' 6005 I11Orb Nc. bank crdit tr- (ioernmnent I t6' , dt 3583- f3S,, I%72 '36, 2t'3) 41)1 22214 :9, 2027 5SJj Credit ta comnmercial s-cLr l'I8 ',53' 31180 /323 2201 ff6 i. 2372 (26)l 2x:'r r 3386i (67 \tlorciun exchange aiscb IDO .'b 2 12 r0).) 244 ,6i 526 %(42 C 79 f:J '5.4 b4 1 Menmo lItm-: \1F' IBa;C 1one% ¾ 32 -1 I \13 uII'' 0.6 '06 6 f 1( (Gru%%:h ratc.s Rtsc:itionc' 13. I1t3.4 I1 2-. 2 ...I IA NI? 15.1 19~~~~~~~~~~~~~~~~~~~~~~~~t.3 3'1 UH Norinn nl GDOP UThor c:ast ItS 15 14 (I 1.17 IXI -Not available Note: Theflow as a.percentage of the chang in base moneyor thei change in broaid money stock is inpaethse.Inrase iforeign assets. following a devaluation: are: offset by declines in: other assets Sourcc RBN. Table 1.81:Real:Exc~hange eRate of Indial'sMatin Trading -Par-tners and:Compevtitors:198,1-96 (end of priod) Export ~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~1995~ 1996 Share 1981 ~1989. 1990: 1991 1992 ~1993 1994 :1995 I I1 Inidia inus$ 09.93 1.05 1.00 1.26 1.17 1.28. 1.17V 1.21 I14.4 1.19 in SOR 0.76 0.98 1.00, 1.27 1.1 1.24 1.120 i1.28 1.25 1.22 REER 0.56 0.91 1.00 1.28 1.29 ~1.29 1.28: 1;40 ~ 1.35 1.36 Indiaes Main Market USA 20.0 1.20 1.05 1 00 1.02~ 1.0 L00~: 047 0.95~ 0.96 0.94 Japan ~~~~~~~~~~ ~~~~12.2 ~1.47 1.0 10 .8 09t.8 08 .3 074 086 GTenmany 8.08 1.i 69<: 1. 18 :1.00 1.03 1.03I 1.12 LOt 0.91: 0.0M.9 UnitedKingdom 7.2 1.~~~~~~~~~~~J56: :1.29 100 i1.02 1I6 1:16 1,07 1.4 1.03 1:.04 Belgium 5.4 1.75 1.23 ~~~~~ ~~~~~ ~~~~1.00 1.02, 1.00 1.07~i ~0.95 0.86 0.85: 0.87 Face' 2.8 1.75 211. 00~~ 1. 03 1.L01 1.08 0.98 0.88 0.90 0.89 Netherlands 2A I.6t. ~~~~~ ~~~~~ ~~1.I8 :1,00~ 3,0 1.00 10 0.99 0,90 s09 fIndia's Majin ompe&titors~ Indonesia 0.81 1,11 1M.00 10 1.06 1.06 1,00 0.95 0.97: 0.94 MaiLaysia' 10 103 1.00 :0.97 0.87 0.84 0.80 0.6s.7 0.6 Philippines .9 0.93: 1.00 084 0.74 0.75 0.61 0.59 0.64 0.v58 Thailand 1.16 110 1.0 0.99:: 1.00 0,98 0.92 10.85: 0.8M Korea 1.1~~~~~~~~~~~~~~~~L2 1.01 ~1.00 1.04 1.06 1.~07~ i 1.01 0.95 0.97 0.9 Singapore, 1.06 :11.5 100 1,08 1,10 1.1 1,0 0.96 :0,97 1::.03 HolgKong' 1.39 1.11 1.0 0.91 0.82 ~0.76 0.69:: 0.64i 0.6 .0:63 --Not available. Note: Increase .:depreciationr. a. nde ofa ewnr¶s omial xchngerat vi-a-is he .15 diidd b ths cunty'swhoesae piceindx o, i no avilale,th consumer priceindex, b. Real Effetive: ExchaneRate based on the IMs Iniformatio Notice:System (TINS)'methodology. Trade weights ar based'on trade flows~ averaged over 1980-82. :U. Ue CP..c Source: IMF, nternational Fini S sis- r.ance Statistc;Word: flnkStaff estimates. - 13 - In addition, the authorities increased the CRR and postponed the planned reduction O.'' SLR. Steps were also taken to develop the government securities market to allow it to use operi market operations to manage monetary policy more effectively. Finally, in September 1994, th6; RBI and the Treasury signed an agreement to limit and then phase out by 1997 the aAutomsri- monetization of the Treasury's cash deficits. The agreement established a ceiiing ori .he Treasury's credit line at the RBI of not more than Rs. 90 billion for any ten consecutive days - Rs. 60 million for the year as a whole. The government was to meet the balance of its bonr okving requirements by issuing securities directly in the market. These measures aimed a't monetary tightening and insulating monetary policy from deficit financing were complemented wiln measures to reduce supply pressures. These included: (i) relaxation of import restrictions or, goods that were in short supply (sugar, pulses, cotton and all major edible oils); (ii) continuatioa of FCI's open market sales of rice and wheat to dampen prices; and (iii) relaxation of import restrictions on some manufactured consumer goods and reduction in customs and excise duties. These measures, helped by increases in US interest rates and the pull back of privrtal flows from most emerging markets following the Mexican crisis, allowed the RBI to tighten its monetary stance, and hold broad money supply growth (M3) within the 15.5 percent target announced in its April 1995 Credit Policy, and inflation to decline in recent months to below 5 percent. In the absence of a strong fiscal correction this has been, however, at the cost of extremely high real interest rates, which are a threat to the sustainability of current growih and the soundness of the banking system. Further, the lower inflation rate is also due to the maintenance of unrealistically low administered prices for some food items and some petroleai products such as kerosene and diesel. The industrial recovery started in 1994-95 was helped by a monetary poncy wnle.ri reduced interest rates, easy access to domestic and foreign capital markets and a stable rupee which did not require importers and banks to cover their positions. Banks also increased he.- lending and invested voluntarily in government securities to meet their prudential requiremerrns and also because returns on these "risk" free securities were high in comparison with returns on other assets. However, since the last quarter of 1994-95, firms' sources of funds have oeen reduced to bank credit and retained earnings because of the depressed domestic stock market and the reduced access to foreign markets (itself partly the result of the measures to curb capitial inflows). As a result, demand for commercial-bank credit surged sharply making macroeconomic management more difficult. The tight monetary stance and investment recovery led to some problems in exchnange rate management. The surge in imports led by the industrial recovery put strong pressures on the rupee and, after 30 months of a quasi-fixed exchange rate, triggered some nervousness in the foreign exchange market and speculation. Importers advanced their purchases, hence increasing their demand for foreign exchange and for credit. Exporters began delaying surrender of foreign exchange, and maintained their outstanding financing positions in order to do so. Pressures or. domestic liquidity caused call money rates to reach at times highs of 38 percent during November 1995. These developments were further complicated as companies and commerciai banks with foreign-exchange exposures arising from their NRI deposits used the forward market to cover exchange-rate exposure. The forward premium rose, and soon exceeded bank deposit - 14 - rates. For enterprises able to do so, it became profitable to withdraw deposits, purchase spot foreign exchange and sell foreign exchange forward. While this may have reduced some of the pressure on the forward premium, it diminished deposit growth and intensified the pressure on the spot dollar rate. In addition, RBI's attempt to defend the rupee by withdrawing liquidity out of the system helped reinforce an already acute credit rationing situation. The absence of a secondary market for government securities meant that it was difficult for banks to sell their excess holdings of government securities. The banks limited their purchases of new government securities forcing the RBI to increasingly substitute for the market to fund the government. In 1995-96, central bank financing in the form of ad hoc T-bills, rose to 1.7 percent of GDP up from 0.2 percent of GDP the previous year, often exceeding the allowed ceiling of Rs. 90 billion over ten consecutive days under the September 1994 RBI-Treasury Agreement. The authorities took several steps toward the end of 1995 to restore equilibrium in the call and foreign exchange markets. The RBI injected funds into the call market through reserve and refinance facilities to banks against their holdings of government and other approved securities. The ceiling interest rate on new NRI rupee accounts was raised, and the CRR applicable to various classes of NRI deposits were progressively reduced or removed. A particularly important step was a tightening of the foreign-exchange surrender requirements for exporters, with a sharp increase in the interest rate on export financing past 90 days. Equally important was the dramatic increase in foreign inflows during the last quarter of 1995-96, on account of portfolio flows as well as the normal bunching of aid inflows in the last quarter of the fiscal year. The partly unexpected foreign inflows as well as the strict RBI action stabilized the rupee-dollar exchange rate at a level that corrected for the previous appreciation, and brought down the call money rate to 12.6 percent at end March 1996. With inflation under control, the RBI announced in its April 1996 Credit Policy a set of measures to ease the "liquidity crunch" and also to deepen the money and foreign exchange markets. The main measures are: (i) a further reduction in the CRR from 14 to 13 percent (and more recently 12 percent); (ii) further reductions of CRR applicable to selected NRI deposits, together with increases in the maximum allowable interest rates; (iii) a reduction of SLR on NRI deposits from 30 percent to 25 percent; (iv) a change in the formula for export credit refinance intended to reduce commercial banks' standing entitlement to this facility; and (vi) a reduction in the share of new bank credit business could receive under the "cash credit" modality, from the current 60 percent of "maximum permissible bank finance" to 40 percent; the remainder would have to come in the form of term lending. In addition, in July 1996, the RBI allowed mutual funds and corporates to operate in money markets. On the whole, the RBI's tight monetary stance offset the impact of the monetization of the deficit on inflation. It has nuanced its policy, however. Its intervention has prevented interest rates from rising further in the short-run and seriously affecting the recovery of investment and growth of the last two years. However, developments over 1995-96 show the effects of an unbalanced mix between monetary and fiscal policy that cannot be sustained over the long-term. The danger of excessively relying on monetary policy to control inflation in the - 15 - Table 1.9: Balance olPayments, 1991-96 (US$ billion) Actuals Estim. 90-91 91-92 92-93 93-94 94-95 95-96 Total exports of GNFS 23.0 23.3 23.6 28.9 34.1 40.9 Merchandise (FOB) 18.5 18.3 18.9 22.7 26.9 32.4 Non-factor services 4.6 5.0 4.7 6.2 7.3 8.4 Total imports of GNFS 31.5 24.9 26.8 29.4 39.5 47.9 Merchandise (CIF) 27.9 21.1 23.2 24.0 31.7 39.4 Non-factor services 3.6 3.8 3.6 5.4 7.8 8.5 Resource balance -8.5 -1.6 -3.2 -0.5 -5.3 -7.1 Net factor income -3.8 -3.8 -3.4 -4.0 -3.9 -4.5 Factor receipts 1.1 0.8 0.7 0.3 1.3 1.3 Factor payments 4.9 4.6 4.2 4.3 5.2 5.8 Interest (scheduled)b 4.8 4.5 4.0 4.1 4.5 4.7 of which interest payments on NRI 1.3 1.0 0.9 0.9 1.0 1.4 Other factor paymentsc 0.1 0.1 0.1 0.1 0.6 1.1 Net private current transfers 2.1 3.8 2.8 3.8 6.2 6.2 Current receipts 2.1 3.8 2.8 3.9 6.2 6.2 of which workers remittances 1.9 3.4 2.5 3.1 5.0 4.9 Current payments 0.0 0.0 0.0 0.0 0.0 0.0 Current account balance -10.1 -1.6 -3.9 -0.7 -3.0 -5.4 Official capital grants 0.5 0.5 0.4 0.4 0.4 0.3 Foreign investments 0.2 0.2 0.6 4.1 4.9 4.1 Direct foreign investments 0.2 0.2 0.3 0.6 1.3 2.0 Portfolio investments 0.0 0.0 0.2 3.5 3.6 2.1 Net long-term borrowing 2.7 4.3 1.6 1.7 0.3 0.2 Disbursements (net of NRI) 5.1 6.9 4.6 5.9 5.1 5.2 Repayments (schedulcd)b 2.4 2.6 2.9 4.2 4.8 5.0 Other long-term inflows (net) 1.5 0.3 2.0 0.9 0.8 1.4 Other capital flows 2.5 -1.0 -1.0 2.1 3.5 -2.5 Net short-term capital 1.0 -1.5 -0.7 -2.7 1.5 0.5 Capital flows n.e.i.e -1.2 -1.2 -0.9 -0.7 -1.1 -1.0 Errors and omissions 2.7 1.7 0.6 5.5 3.0 -2.0 Changes in net international reservesf 2.8 -2.6 0.3 -8.5 -6.9 1.9 IMF (net) 1.0 0.8 1.3 0.2 -1.2 -1.8 Change in Gross Reserves 1.8 -3.4 -1.0 -8.7 -5.7 3.7 Memorandum items: Current Account Balance / GDP -3.4 -0.7 -1.6 -0.3 -1.0 -1.7 Gross Foreign Exchange Reserves 2.3 5.7 6.7 15.5 21.2 17.4 in months of imports (goods) 1.0 3.3 3.5 7.7 8.0 5.3 External Debt (percent of GDP) 27.5 33.4 36.9 36.1 32.9 30,2 Debt Service (%of total current receipts) 30.1 27.0 27.0 25.6 25.3 23.8 a, Preliminary estimate based on Econoic 1995-96 update. b. Although World Bank and Govemment of India sources show similar historic total debt service data, discrepancies exist in the sahre of interest and amortization. These discrepancies are under review, c. Inclides interest on military debt to the FSU and returns on foreign investments. d. Net flows in NRI deposit schemes, except the non-repatriable NR(NR)D Scheme. e. Servicing of the Russia debt. f. (-) = indicates increase in assets. Source; Government of India; RBI; Ministry of Commerce; World Bank Staff estimates, - 16- face of a lax fiscal policy was clearly demonstrated by the events since August 1995: real interest rates will increase, negatively affecting private investment and with it the foundations for sustainable medium-term growth. Again, unless there is serious fiscal adjustment, developments over 1995-96 could be the early signs of underlying short-run demand management tensions, which could threaten the gains achieved over the past 5 years in stabilizing the economy. The External Accounts Improved Significantly In response to a sharp depreciation of the real exchange rate and reduction of import tariffs, and thus of the anti-export bias implicit in the previous trade regime, exports grew at rates in excess of 20 percent for the past three years, and prospects for 1996-97 are equally encouraging. Agricultural exports grew at almost the same rate as manufactured exports following the relaxation of restrictions on exports of agricultural commodities and favorable external markets conditions. After falling dramatically in 1991-92 (a year when strict rationing was imposed to cope with the foreign exchange crisis), and as the domestic recovery and corporate restructuring gained momentum, imports grew by 8 percent in 1992-93, 10 percent in 1993-94, and slightly over 20 percent in 1995-96, a rate that is expected to decline slightly in 1996-97. Regarding the invisibles accounts, software exports continued to grow at 25 percent a year and workers' remittances surged following the liberalization of the exchange rate and payments regime (which reduced the parallel market premium to 2 percent in 1994). Accordingly, the current account deficit declined from 3.5 percent of GDP in 1990-91 to less than 1 percent of GDP in 1994-95 and 1.6 percent of GDP for 1995-96--a very manageable level. Improvements in the capital account have been significant. At US$2-3 billion in 1994-96, foreign direct investment is about 15 times higher than it was before the economy was liberalized and portfolio investment has stabilized at around US$2-3 billion. The liberalization measures, well-known corporate names with established track records; reasonably well developed stock markets; familiar accounting and legal systems; and the potential for growth in a large market with inexpensive labor have made India a destination favored by foreign investors. India now absorbs 10 percent of the world portfolio investment in emerging markets, a share in line with that of China and Indonesia. These positive developments in the external accounts translated into comfortable levels of foreign exchange reserves--US$17 billion at present, that is five months of imports. They also led the debt service ratio to decline from 30 percent of current account receipts in 1990-91 to 24 percent in 1995-96 (Table 1.9). Fiscal Adjustment is One Area of Serious Concern With the exception of the first year of the stabilization and reform program, when its deficit was reduced from 8.3 percent of GDP (with a primary deficit of 4.3 percent of GDP) in 1990-91 to 6.1 percent in 1991-92, the Central Government has relaxed its fiscal deficit targets. In 1995-96, at 5.9 percent of GDP (with a primary deficit of 1.1 percent of GDP), the fiscal deficit was barely 2 percent of GDP below the fiscal deficit in 1991-92. Several factors explain these developments. - 17 - First, some of the Table 1.10: Evolition of the Public Deficit, 1990-96 - , , , . t~~~~~~~~~~~percent of GDP.) structural reforms have had a -1990e91 19914 1992-93 1993-94 1994-95 t995-96' relatively high fiscal cost. I Central Merriment Gros Deficoit: 8,3 6.1 5.7 75 6.3 5.9 For example, the reduction - i DeficIt 4.3 1.8 1.3 2.9 .7 1.1 of tariffs on imports and the NtPsrtya Nlefcit 5.9- 3.6 3,1 4,8 3.4 2.8 2 General Govemnment rationalization of excises GrossDefcit 10.4 8.0 7,2 8,8 7.9 8.1 came at a cost which in some Grss Primary Deficit b 5.7 2.9 2.0 3A 2.3 2.4 exceeded 1 percent of Not Primary Deficit' 6.8 4.4 3.2 4,6 3.3 3,3 years exceeded I percent of 3 Consolidated Non-financial GDP in foregone tax Public Sector The ~~~~~~ ~ross DeftiWt 12.3 9.7 8.8 11.0 9.6 9.6 revenues. The liberalization PGrsyDeficit 6.6 3.6 2,4 4.5 3.1 3. of financial markets meant MemoJItm higher interest costs on Kilincngt geeral Government(net) 2.8 0.8 0.6 0.1 0.2 1.7 public debt--interest a. 1995-96.is projected. payments on the Central b. Ciross deficit excludinggross interest payments. c. Gross defilit excluding net interest paments Government debt are close to Source: l3udget documents; kil; IMPF; and staffestimates. 1 percent of GDP higher than they were five years ago even though its total debt remained relatively constant in relation to GDP. For instance, real interest rates on 91-day T-Bills rose from negative 8 percent in 1991-92 to over 6 percent in 1995-96 (Table 1.1 1). Second, concern over the potential political and social repercussions led the government to keep costly subsidies and in some cases increase expenditure on anti-poverty programs (whose effectiveness in reaching the poor is in doubt). For instance, the fertilizer subsidy alone cost the budget over half of a percent of GDP per year. Third, reform of public enterprises has stalled. Contrary to the fiscal adjustment experience of other countries, India's fiscal adjustment process did not benefit from the proceeds of privatization nor from the dividends that a better public enterprise sector could have generated. The Central Government remains majority shareholder, and in some cases the sole shareholder, of 240 enterprises, about 27 banks, and two large insurance companies. While some of these enterprises are highly profitable, most generate profits and dividends insufficient to compensate the government for the cost of funds invested in them. In general, losses of poor performing enterprises have not declined, while profits of profit making enterprises have increased only marginally. Initially, the government planned to eliminate public enterprise budget support, protection and monopoly privileges--so that public enterprises would operate on a commercial basis as well as reduce gradually its equity holdings through sales of shares. This plan, however, has been only very partially implemented. At less than US$3 billion, proceeds from privatization have been well below what would have been potentially possible--and would have permitted the government to retire an important share of its public debt. Fourth, fiscal adjustment by the Central Government has been limited by the absence of corresponding adjustments by India's 25 states. One-fourth of Central Government spending (about 4 percent of GDP excluding about 3 percent of GDP of states' share of taxes collected by the center) is in the form of grants and loans to the states which the center has found it difficult to - 18 - Table1.11: Kay Interest*Rte4; 199"-96 Call]MoneyTesr qs Mihinmimu Maximhume Certificates Inflation5 Rate 364-day 1I82day 91-dy Lendii Depsit of : Q :: 0 X : : : Q (Mumbai):bi if; fi :i; ; i00 Q ; : ::C :f f;i tRate: Rate ] D poit: 1991-92 June 24.8 I&O0. 4.6 17.0 12.0 12.0. 16.8 12.2 September 12.8: -- . .10.0 4A6 18.5 13.0 11.5- 16.0 15.9 December : 12.7 - 410.06 :20.0 13.0 t12.5 - 17.6 14.3 Miarch :14.3 : - 9.3 4.6 19.0 1.0 12.0 - 17.0 13.6 ,1992-93 June 15.8 11.4:i -- 46 19.0 13.0 12.3-25.0 12.3 September 11.4 11.3 -- 4.6 19.0 13.10 13.0- 20.0 10.2 December 11.2 11.2 -- 4.6 i18.0 12.0 12.3- 17.5 8.4 March 13.9 11.1 -- 11.0 17.0 11.0 12.5- 16.5 7.0 1993-94 June 8.0 11.4 -- 10.1 16.0 1: 1.0 .0- 16.5 7.1 September 5.0 11.2 - 8.4 15.0 10.0 8.0 - 15.0 8.8 December 5.3 1.0 :il 7 8 15.0 10.0 7.0 - 15.0 S.8 March 4.3 10.0 -- 7.5 14.0- i15.0 MO 10 :0 7.0- 12.2 10.5 1994-95 June 6.7 10.0 -- 8.8 14.0:- 15.0 10.0 70.5 12.0 11.8 September 15.3 9. -- .9.1 14.0-15.0 :10.0 7. - 120 89 December 9.7 9.8 -- 10.3 :Freed10.0 8.0-12.0 11.2 March 13.7 11.9 -- 12.0 Free 11.0 10.0- 15.0 10.2 1995-96 June 14.4 12.6 : 12.6 Freed 12.0 11.0 - 14.5 9.2 September 12.1 12.9 --12.7 Freed 12.0 10.0 - 14.8 8.9 December 16.8 13.0 -- 13.0 Freed 12.0 -- 6.4 March 28.8 131 . - 13.0 Freed 12.0' -- 5.1 1996-97 June 11.1 13.0 -- 12.4 Freed 1162.0e 54 July : -- -- -- Freed: .. 1OC -0 -- Not available. Note: March 1996 is preliminary. a. Unless otherwise specified, interestrates/yields are those prevailing at the:end of the month. b. Call money rate ofmajor commercial banks, average for the month. c. Implicit yield at cut-offprice (for the last Atiction in the month).: 364-day Treasury 1Bills were introduced in April 1992, and are sold through periodic~ auctions. . No fresh 182-day Treasury. Bills were issued after April 16, 1992. Since January 1993, 91 -day Treasury Bills~ are being periodically auctioned. Earlierthey were sold on tap at 4.6%. d. Since October 18, 1994, lending rates of scheduled commercial banks were freed for credit limits of over Rs 200),000 at 13.5 percent per annum for credit limits over. Rs 25,000 and upto.Rs 200,000; and at 12 percent pertannum for credit limits upto and inclusive of Rs 25,000 e. Refers to rate on termf deposit. Up to April 1992 rates were fixed for different maturities Since April 1992 only a maximum deposit rate is specified. BeginningOctober :1,;01995, the;lmaximurnrate of 12 percentrefers onlyto deposits of less than htwyivars. On July:1, 1996 the maximum deposit rate for deposits upto one year has been cut to Il percent. The rate was freed for deposits above one year. f. Effective interest rate (range) of CDs of all maturities, issued :during the last fortnight of the month. g. Wholesale price index, annual increase,point-to-point. Source: RBI Monthly Bulletin,: various: issues;; Report on Currency: and Finance; Center for Monitoring Indian Economy (CMIE), Monthly Review ofthe Indian Economy, various issues. curtail. As a result, over the last five years, the states' consolidated fiscal deficit has not declined--it has hovered around 3 percent of GDP. As discussed in last year's World Bank Economic Memorandum on India, there is evidence that the current system of transfers may be discouraging fiscal discipline because: (a) at least partly, "grants-in-aid" to the states are meant to cover their current deficits and thus create incentives for increasing them; (b) transfers in the form of loans and grants authorized by the Planning Commission (set up soon after Independence with a mandate rooted in India's pursuit of a centrally planned development strategy, it has -19- Table 1.12; Central GonmentFInances, t990-97 - , - - - ' ~~(peretge of GD?)' -- , '' ~~Wtrl 'k.1 96vtow ~ ~ ~ ~ ~ ~ ~ 9697 - --91 91-92 ,l-, 93944 794-95- '. 95-96 9-967 BE RE BE A. Revenue 10.3 10.7 10.5 9.6 9.6 9.7 10.1 10.5 Tax-revenue 8.1 8.1 7.7 6.8 7.1 7.1- 1.4 7.8 Corporation tax 1.0 1.3 1.3 1.3 .IS 1.5 1.5 1.6 Income tx 1. 1.1 1.1 1.2 1.3 1.3 1.4 1.4 Excise duties 4.6 4.6 44 4.0 -9 4.1 3.8 3.8 Customs 3.9 3.6 3A4 2.8 2.8 2.8 3.2 3.6 Other 0.3 0.4 .0.5 0.3 0.2 0.2 0.2 0.3 Less: States' lare . 2.7 2.8 2.9 2.8 2.6 '2.8 2.7 2.8 Non-tax Revenue 2,2 2.6 2.9 2.8 2.5 2.5 2.7 2.7 (Interest receipts) 1.6 1.8 1.8 1.9 1.7 1.8 1.7 1.7 B. Revenue expenditure . 13.8 13.4 13.2 13.8 12.9 13.1 13.1 13.0 Interest.payments 4.0 43 4.4 4.7 4.7 5.0 4.8 4.8 Subsidies '2.3 2.0 1.7 1.6 1.4 1.2 1.3 1.3 Food 0.5 0.5 04 07 0.5 0.5 0,5 0.5 Fcrtilizer 0.8 0.8 0.9 0.6 0.6 0.5 0.6 0.7 Others 1.0 0.7 0.4 0.4 0.3 0.2 0.2 0.2 Defense 2.0 1.9 1.7 1.9 1.7 1.7 1.7 1.5 Grants to states 2.5 2.6 2.5 2.7 2.1 2.1 2.0 1.9 Wages and salaries - 2.0 1.9 1.8 1.9 1.8 1.6 1.7 1.6 Other 1.0: 0.8 1.0 1.0 1.3 1.5 1.7 1.9 C. Capital expenditute 2.3 1.9 1.8 1.7 1.6 1.4 13 1.2 Defense 0.9 0.8: 0.8 0.9 0.7 0.7 0.7 0.7 Economic Services 1.3 0.9 0.9 0.7 0.7 0.5 0.4 0.3 Othets ' 0.1 0.1 00.1 0.1 0.2 0.2 10.2 D. Gross Loans 3.7 2.9 2.4 2.6 2.5 2.0 2.3 2.2 to states and UTs 2.6 2.0 1.7 I.S 2.0 1.6 1.8 1.8 toPEse 0.7 0.6 0.4 0.6 0.5 0.4 0.4 0.4 Oters 0.5 0.3 0.2 0.2 0.0 0.1 0.1 0.1 E. Repayment of loans 1.1 1.0 0S - .8 0.7 0.6 0.7 0.6 F. Net lending (D-E) 2.6 1.9 1.4 1.8 1.8 1.4 1.6 1.7 G. Disinvestnent in PEs 0.0 0.S 03 0.0 0.6 0.7 0.1 04 Fis¢al Deficit(A-BWC+F+G) 8.4 5.9 5.7 7.7 6.1 5.5 5,9 5.0 Memo tenms 0.0 Total Expenditure (fB+C+4f) 19.7 18.1 17.4 18.0 17.0 16.5 16.8 16.4 Total Expenditure (B+C+F) 18,7 17,1 16.4 17.3 16.3 15.8 16.1 15.9 Total Revenue (A4G) 103 112 10.8 9.6 10.2 10.3 10.2 10.9 Primary lDeficit ' 44 1.6 13 3.0 1 A 0.5 1.1 0.2 Noa-interestspedlagt' 15.7 13.8 13.0: 13.4 12.3 11.5 12.0 11.6 Nole BEj budget estimhates; RE-revised estimates. a, Revenue expenditure is the budget terminotogy ftr cutrent expenditure. b. Revised Estimates (1990-91 to 193-94). c. Revised Estimatmsunless otherwise mentioned. d. Fiscal deftcit minus interst payments. e. B+uC+tminterest . - Source: Government of In-dia, Budget documents. - 20 - become a de-facto development bank without the prudential financial standards that typically guide such banks) are not used for the intended productive purposes and thus increase the states' debt without increasing their capacity to service it; and (c) periodic Central Government loan forgiveness and refinancing, without conditionality, have created the expectation of future debt relief. In addition, the deterioration in the states' finances is being compounded by a decline in the quality of their spending. There is evidence of a crisis of expenditure composition whereby resources for the provision of key infrastructure and social services (roads, irrigation, primary education, health) for which the states have responsibility is being shrank to make room for less productive expenditure programs. In particular, there is evidence of growing budgetary support for loss-making state enterprises and massive subsidies for water, irrigation, and transport undertakings. Losses of the State Electricity Boards (SEBs) alone have amounted to about 1.5 percent of GDP in 1994-95. Although several states are contemplating ambitious plans for fiscal and iBox01.2.Four Stylized Facts Seem to Emerge From regulatory reform, implementation has been the States as a Result of the Central Government slow and inadequate. On the revenue side, the Stabilization and Adjustment Program. reform measures have concentrated on partial First, theret are signiricant regional disparities. cost recovery programs in health and Wesiern states seem to be in a better riscal position education; sales tax policy and administration and are growing faster while the eastem states are s C I agging behind on both counts; Maharashtra's growth simplification to enhance revenue; enhanced W;000 and fiscal performance is short oroutstanding. availability of central loan financing by stimulating growth in small savings (Punjab); n Se thed,tse fast growing states are also those which seemh to have benefited most fromn the Central and planned irrigation cost recovery projects Goveenmt ehvindustrial atd trade liberalization since (Orissa, Kamataka). On the expenditure side, they haveWreasonably adequate infrastructure and for reforms have been initiated in the areas of PSU some, adequate human capital stock (Kerala) which . . > . . . E E g~~Afttactedinew investments to the states. restructuring with provisions for privatization t i to the states. (partial and complete), liquidation and Third, these states did streamline their investment reorganization under public control; state level :approvals procedures considerably. but infrastructaral "renewal funds" to facilitate privatization and bottleneks such as short power supply are reducing states tential to attract new investment. Indeed, for liquidation; some zero based budgeting or investment to take place, investors must first receive expenditure program review mechanisms; clearane for power use. This procedure remains formal policy statements on reform of SEB s tggg;t cumbersome and prone to rent-seeking since power . . . fE; r~~~~~~ationihgiw Wd clearance are based on non-price including provision for private participation in decisionsin dl ca b o np power generation. Orissa is leading the way in this last area. Some states are also determined WFouth, investors are working with states to .,ucircumventt infrastructural bottlenecks especially to liberalize their economy to improve their regding 0ports. Since the Central Government has finances through growth. It is clear that unless been slow in restructuring its ineflicient and highly the states improve their financial condition, the unionized central ports, investors are seeking to build e e risall 00tts:within the states. center will find it difficult to continue reducing X ortX Within thst its transfers to the states, which might compromise the center's efforts to reduce its deficit. As a result of these developments, after a decline in 1991-92, the consolidated deficit of the public sector has remained relatively stable at a high 10 percent of GDP. As discussed in more detail in Chapter 3, this is an excessively high deficit which threatens the achievements of - 21 - the last five years, constitutes a major destabilizing force to the financial sector, and may deprive the country from the high growth that the reforms of the past five years could generate. Fiscal Adjustment in the 1996-97 Budget On July 22, the Minister of Finance presented to Parliament the 1996-97 budget, the first of the 13-parties United Front (UF) government. The budget takes several steps to implement the Common Minimum Program (CMP, Box 1.3) and makes it clear that this government intends to continue the reforms started in 1991. On stabilization, the budget proposes a welcome fiscal correction of 0.9 percent of GDP. However, this correction is less than half of what would be necessary for the long run sustainability of the current mix of low inflation and relatively high growth. More seriously perhaps, the measures envisaged in the budget may not be sufficient to attain this target. The 0.9 percentage points of GDP fiscal deficit reduction is to be achieved through a 0.7 percentage points of GDP increase in revenue, and a 0.2 percentage points reduction in expenditure. Some of the assumptions underlying both the revenue and the expenditure forecasts may be overoptimistic. On the reverue side, it is assumed that sales of government equity in public enterprises will reach US$1.5 billion, and that tax revenues will increase by 20 percent on account of a 14 percent increase in nominal GDP (half real growth and half inflation) and of several tax measures introduced in the budget. On the expenditure side, a 9 percent increase in provision for wages is deemed to be sufficient to accommodate wage increases stemming from the Pay Commission recommendations. Finally, defense expenditure has continued to decline relative to GDP (from 2.9 percent of GDP five years ago to 2.2 percent of GDP at present) and there may be some pressure to restore it at higher levels. At the same time, new claims have been put on the budget to increase the fertilizer subsidy (0.2 percent of GDP), support public enterprises (0.1 percent of GDP), expand an already existing rural infrastructructure fund, strengthen the capital base of the national agricultural bank (0.1 percent of GDP), and, for a relatively small amount, recapitalize several small public banks. The budget also announces a cautious, but clear commitment to permit greater decentralization within India's federal structure by: (a) gradually transferring most centrally sponsored schemes to the control of the states; (b) proposing constitutional change to include all central taxes in the federal transfer division pool as recommended by the tenth Finance Commission; (c) designing a Ninth Five-Year Plan which will put emphasis on decentralization of responsibility; and (d) convening a conference of Chief Ministers on center-states relations and federalism. In addition, the budget also announces the government intention to target the Public Distribution System and, potentially, other social safety nets programs, to families below the poverty line. Finally, the Minister of Finance proposed to appoint a high level Expenditure Management and Reforms Commission to submit within four months recommendations on how to improve public expenditure control and management, and proposed to place before Parliament a discussion paper on subsidies and their appropriate targeting. These are welcome initiatives that will permit a public discussion of the structural reasons for India's chronrically high fiscal deficits. -22 - ~Box 1.3: The Co~mmon Minimum Program of the United Front Governmenit': India's ~general elections concluded in May 1996. None of the maornationalpartie,s :Won a ruling majoity inParliamenIt. Following1the'1 short-lied government of the Bharatiya Janata Party (BJP), a United Froflt(UF) gvernment--acoalitioni of thirteen, regional and leftist parties with divergenit ideologicalwoientations--came to power in June 1996. Shorl thereafter, on Junie 5, 1996, the UF unveiled its "ComonAPproach to Majo Policy Matters and a MinimumProgram".~ On Fiscal Manageentgt. "Highest priority"is to be givento the mnanagementofthe fiscal deficit, to bring it to bew 14~ prent of GDP. Both revenue enhancing and expenditure:reducing strategies: to be folowed. Public debti is. 'to. be retired in a phasedmiaqnene.NDne of these wvill however-..bc foallowed atnhe cost of development or investment." On Federalism. The UP Government pans to"avance the principles of political, admfinistrative and economic fiederai smt.tates- will be given greater freedomin: determining ~their own priorities in deveopmDient porm,in drawing up their stte plans,adms centrally sponsored svhemes will be transferred to State~ goverments A lugh-level committee will, be: appointe to review and update~ the recommendations Of the Sarkaria Commission: (set uip en years ago, to advis oncne-saerltions) ademine thequsionf devoluton of financial poes to the states. On the Investment and Trade Regime. Foreignl direct investmenit of at least $10 billion per year will be'needed and'can~ be absorbed., To achieve this, the Foreign Investment Promotion~Board will'be revamped,and rules:and regulationiswillbe maemr rasaett attract foreign finvestmient. A niew law will ~be maedet deal With inidustrial sickness and the Bgoardl for Itidustrial and ,financial Reconstruction Will be reVamped& The consumer courts network will be. exanded. On foreig :trade, the 4...rogrss:towards the. goal] Of bringing India's tariffs in:* aord with wIrd levels will' be mesue and calibrated". An ineedet Tarf Comissio ilb established within three months to decide on tariffidisputes and to recommend aporiatit tariffs for different prductsi and industries. i OnlInratruture.~ Investment in infrastructure will be ~increased from:the present 3.~5-4Dpercent of GDP toat least 6 pecn ntheex few years. The umulativ invetment reurmnts finfrasrcueivsmetoe h etfive yeas:are estimated tob t es US$200 billion, implying ample roomi for public, private, domestic, and foreignplyrs. Both domestic:and foreign companies will ~be encouiraged to invest in the coare and itifrastructure sectors. On Publi Enterries.: Public enterprises~ should show a "!halthy":return on capital. Public enterprises will be strengfthned and their manag-ements professionalized. ~Sick companes will' be rehabilitated b:measures: which may include, handing over, managzement: to professional groups or workers' cooperatives. ~A:Disinves~ftmetCommissi:on wifllbe establishedd to: exammne the quSti'n ofwitdrawIng the public sector from "non-core." and `non-strategic"? areas, subiect:to assurinig j'ob securityoratntiempyettomlyes Disinvestment will be donei in a transparent manner. Ont Fi'nancia Marikets Fuirther reforms wvill be carried ouit in: the financial sector to. ensure]4a greater iflow. of'domiestic and foreign funds into: infrastructure.: The~ experience gained intebnigsctr(hrrvt bans have been allowed):will bel "...pplied: to the restructuring of the insuranc industry but at the same time tublic secto copne ieLC GIC etc, ~will be~ strengthed. on Agricuture. The agriculture ~sector ". cries Outt for reforms".~ lnvestmienit in, aicultur and rural infrastructure will be increased.. All controls~ and regiulations~ in the. way of increasing. famioe wl e reviewd' imdaeyndboished where founid uneeessaiy. sICh :as th ontrol onmvmnta elas~ prcsig oagricultura produTA. Fairad rmunerative prics wilb ensured for farm produce. RuralV credit Will: be~ restructred,and the: flow of credit. to: arculture-and. Agrp-industries ~will ~be doubled within five yers Ipt suplying agencies] will: be professionalzed an ffaible be covertd infarmer-owned coopertativs Research and extension will be strengthened. Social Sectors'andPovrtyAleleiaidon. Six'percent of GD? will be earmarked :for education, of Which half for primai education. Full lieaywil beahee y20.Tergh to: fee~ and compulsory education wil be made audmnal right and be sutitbl enforced. 'Specialprogramns:will be launched to take. care of: children and the disb ledand4 terdcate child: labor Thmd-aymal schemewilel he I ipented in all states. One primary1 halth:cente willf bestablished for ever 5000 pepl.Anipvryrors will be. redesign ed for greater empoymn and ast ceto,ad to: raise the incomes of the: ver poor. Aprogram fo gantein 100dayVs ofLemploymen for eVer unmpoyd peso willbe impemnted thrugh Paehayti Raj ntiuios Access to the Public, Distributiion Systemi (PDS) will be barred fohe affluet. Specialcards will:be ient failie eo thpoetli,anesnil articlets unkder PD.S sold tottihe at half the normal u prce DS shops wil be haded over to the elctdPnhat.Oehido the'elected''membership. ~of Parliamnent and state: legislatue wVi enrsere for women:AndI so will one-third of govrnment posts.~ Suitaiblee leisltifon..will be nacted: forthis purpose, including, ~if necessary, an amendmenit to the Constituifon. - 23 - Box 1.4: Reforms in the 1996-97 Budget The budget has continued the process of reform started In 1991. In particular, it introduced several measures to open further the foreign investment regime, reform the tax system, continue the liberalization of trade, and modestly liberalize some segments of the financial sector. Foreign investment regime has been further liberalized by allowing portfolio investors to invest in non-listed companies' securities and by raising the limit of the maximum equity any Foreign Institutional Investor (FIl) can hold from 5 percent to 10 percent of share capital subject to the overall limit of 24 percent for equity held by Fls.. Several tax measures have been taken to continue to broaden the tax base, reduce rates, and improve tax administration. This has been particularly important in the case of excise and corporate taxation. Regarding excise taxes, the Finance Minister emphasized the need to move to a more transparent and simpler four-rate excise tax structure--zero, a lower rate of excise duty on goods of mass consumption, a single normal rate on all other goods, and a higher rate on luxury items in a year or two. In the meantime, the MODVAT has been extended to the textile fabrics sector with a special tax incentive package (excise and customs duties have been reduced on important inputs) to boost the sector. And excise duties were raised on several items, including all petroleum products except on LPG and kerosene, The noteworthy development for company income tax was the reduction of the surcharge on corporate tax from 15 percent to 7.5 percent and the introduction of a "Minimum Alternate Tax" (MAT) on companies' book profits to bring into the tax net some 1,000 companies currently under the zero-tax bracket or benefiting from excessive exemptions. Finally, the tax on long- term capital gains for domestic companies has been reduced from 30 percent to 20 percent to bring it in line with that for foreign companies. Regarding personal income tax, the budget has reduced the income-tax rate for the first bracket from 20 percent to 15 percent. Allowances were also granted for various deductions (interest payments on owner-occupier mortgages, health insurance, fiscal incentives for savings schemes). The budget has continued the process of trade reform by reducing further the maximum duty rate to 40 percent for non- consumer goods imports. The latter continue to be restricted and when allowed are at the maximum rate of 50 percent. A two percentage points surcharge is imposed on all imports to finance the starting capital of an infrastructure fund. In the financial sector, the budget announced that amendments to the RBI Act will be proposed to strengthen the regulatory powers of the RBI over all types of non-financial companies. New legislation was enacted to ensure transparent and secure clearing settlements while minimum capital adequacy requirements were reduced to encourage small local banks to incorporate the modern financial sector. The budget has also introduced several new initiatives to improve the living standards of the rural poor and respond to the growing infrastructure criis. These include funding for state-level social programs for the provision of safe drinking water, primary education, primary health, housing, mid-day meals for primary school children, rural roads and a strengthened public distribution system covering all below the poverty line. These are first steps towards the govemment goal of ensuring safe drinking water to 100 percent of the population and universal primary education. A 0.2 percent of GDP increase in transfers to states is envisaged in the budget to finance these initiatives. In addition, the budget provides also resources for new social programs such as the establishment of old-age homes, residential primary schools for the poor, training and production facilities for destitute women, and a public medical insurance fund to be financed through tax exempt donations--the aggregate value of all the new welfare measures proposed add up to less than Rs I billion. A new initiative to mobilize additional capitalfor the development of infrastructure. An Infrastructure Development Finance Company (IDFC) will be established, involving a budgetary outTay of Rs 5 billion for equity. This is to be matched by an equal contribution from the Reserve Bank of India. The IDFC is intended to play the role of direct lender, refinance institution as well as the provider of financial guarantees, that will induce private financiers to advance "long-term funds at the lowest possible market rates". It will also rely on the funds generated by the 2 percent surcharge on imports. - 24 - PROGRESS IN STRUCTURAL REFORM The program of structural reforms has been carefully prepared. Since June 1991, the government has appointed several committees of experts to formulate reform proposals in the different reform areas--the investment regime, trade policies, the financial sector, taxation and public enterprises. These committees' work was amply discussed with academics, industrialists, and unions, which helped build consensus (except for public enterprises where the political resistance has been considerable) around the economic reform program thus reducing the possibility of future reversals--which have plagued and some times derailed adjustment programs elsewhere in the world. It also enabled the government to assess the extent of political resistance to sensitive reforms (e.g. consumer goods imports and privatization) and thus leave them out of the initial phases to avoid derailing the whole process. This said, and while the government has been successful at changing India's economy, major challenges remain, particularly regarding the reform of the financial, agricultural, and infrastructure sectors and public enterprises. In addition, India needs to correct the effects of decades of chronic underspending in health and education, and articulate a strategy to address serious urban problems. The liberalization of the investment regime is nearly complete. Five years ago, investment in the most important areas of the economy was a public sector monopoly and foreign investment was discouraged. Even in the areas which were not a public sector monopoly, severe licensing restrictions regulated the amount of investment that private firms could undertake. Now there are few areas where private investors, domestic or foreign, cannot invest and India's foreign investment regime now compares favorably with East Asian countries. In telecommunications, power and mining it is significantly more open than that of its East Asian neighbors. With the recent liberalization of pharmaceuticals and parts of coal mining, the main areas still reserved for the public sector are insurance and railways. However, a number of costly licensing restrictions remain for selected industrial sectors, mostly agroindustry. For instance, regulations governing the sugar industry are estimated to cost the country about US$2 billion per year by 2005. The reservation of about 800 products that can only be produced by small scale enterprises has equally serious negative effects because it discourages economies of scale and adoption of modern technology. In addition, in many instances investing in India remains difficult because of numerous regulations and administrative burdens that are far from transparent and differ from state to state which affect domestic and foreign investors alike. The 1996-97 budget of July 1996 introduced further reforms (Box 1.4) to expand the set of enterprises in which foreign institutional investors can invest and, shortly after the budget was presented to Parliament, the Ministry of Industry removed licensing restrictions for 10 industries still subject to prior--approvals. While this measure may not have considerable effects--since essentially all approvals have been granted on request--it does provide a further simplification of the investment regime and sends a positive signal to domestic and foreign investors. The trade and foreign exchange regimes have been substantially liberalized, but protection levels are still high. India's pre-1991 trade regime was very restrictive. Virtually all goods could only be imported if authorized by the government and, with maximum tariffs of over 300 percent and average (import-weighted) tariffs of 87 percent, India had the world's highest tariffs. Since June 1991, several rounds of trade reforms have lifted all licensing - 25 - restrictions on imports of intermediate and capital goods, liberalized partially imports of consumer goods, and reduced maximum tariffs to 50 percent, and the import weighted average tariff to 25.2 percent. In parallel, the exchange-rate regime has been liberalized, and full convertibility has been established for current account transactions. The most recent round of tariff reform introduced in the 1996-97 budget reduced maximum tariffs for non-consumer goods to 40 percent (see Box 1.4) and the import weighted average tariff to 22.7 percent. This progress notwithstanding, India will need to liberalize its trade regime even further if the country is to reach the openness of its East Asian and Latin American competitors (where import weighted tariffs are in the 10-15 percent range) and some anomalies of the trade regime are to be eliminated (Chapter 2). Also, current licensing restrictions on consumer goods imports are significantlty more severe than in most other countries. A skillful and significant liberalization of the financial sector-but the public sector remains dominant. With a financial savings rate of 9 percent of GDP in 1990-91 (11 percent of GDP at present), India's pre-1991 policies had been successful at developing a solid deposit base, and a diversified stock of financial instruments. However, until very recently, the financial sector had been dominated by public banks which had limited discretion in allocating their lending (in 1991 as much as 63.5 percent of increases in bank deposits had to be held in cash reserve requirements and government securities, and 40 percent of the remaining had to be allocated to priority sectors designated by government) and publicly-owned insurance companies still have to hold more than half of their portfolio in government-designated securities. Prudential regulations had no real role to play in the deployment of capital and in any case were inadequate making it difficult to assess the true quality of bank portfolios or bank profits. Interest rates and financial instruments were tightly regulated, and competition was limited by restrictions on entry of new banks, insurance companies, or mutual funds. Pricing and terms of new equity issues were regulated. Because of persistently large public sector borrowing requirements and weak public banks balance sheets, the government has chosen a phased approach to liberalizing the financial sector--but this approach has been excessively gradual in the case of privatization of the public banks and deregulation of insurance companies and contractual savings institutions. Much of the reform effort has focused on establishing the institutional base required for deregulated financial markets to operate efficiently, and in deregulating the markets themselves. In particular, prudential regulations that meet international standards have been introduced, and to improve its capacity to enforce the new prudential guidelines, the RBI created a Board of Financial Supervision which began functioning in December 1994. Several steps have been taken to develop markets in government securities, including the creation by RBI of a dealer network to operate in and provide liquidity to government security markets, followed by the approval of the first six private primary dealers in 1996. In parallel, measures have been taken to develop the Securities and Exchange Board of India's (SEBI) capacity to provide oversight regulation in India's stock markets and to increase the transparency of stock market transactions. In particular, legislation has been enacted to improve title transfers and a code for takeovers has been formulated (Box 1.5). A new modern electronic securities exchange system, the National Stock Exchange (NSE), which allows scripless transactions, began operating in 1995. In November - 26 - Box 1.5: Capital Market Reforms Led to Improvement in Transparency, Reliability and Fairness of Transactions Since 1992, when SEBI became a statutory body, a number of reforms have strengthened SEBI, reinforced its autonomy, increased the transparency of stock market transactions and increased investors' iprotection. The roles and responsibilities of various market participants have been clarified, disclosure requirements in offr4 documents strengthened and the extant guidelines for bonus shares have been relaxed. Regarding primary pubUc issues,. following the recommendations of the Malegam Committee on existing disclosure requirements and issue procedures, SEBI has strengthened further disclosure standards to protect investors, introduced prudential norms and simplified issue procedures The new guidelines cover inter-alia unlisted0 companies, finance companies, enhanced transparency in the draft prospectus filed with SEBI (and simulatenously with the stock exchanges) and requirements for prospectus submi:tted to SEBI for vetting (within 21 days). The due diligence certificate by lead managers, regarding disclosures made in the offer document, has been made a part of the offer document itself for better accountability. :Companies also are required to disclose all material facts and specific risk factors associated with their projects while making public issues. Stock exchanges required to ensure that companies concerned have a valid acknowledgment card issued by SEBI. SEBI vets the offer document, to ensure that all disclosurest have been made by the company in the offer document, at the time the company applies for listing of its securities in the stock exchange. The mandatory period between the date of approval of the prospectus by the Registrar of companies and the opening of the issue has been reduced to 14 days. The stock exchanges no'w are :advised to amend. the listing agreement to ensure that a listed company furnishes annual statement to stock exchanges, showing ; variations: between financial projections and projected utilisation of funds made in the offer documents and aetuals. To reduce the cost of issue, undrwiting by issuer was made optional, subject to the condition that if an issuei was not underwritten and was not: able to collect 90 per cent of the amount offered to the public, the entire amount collected would be refunded to investors. The practice of making preferential allotment of shares at prices unrelated to the prevalingi market priecs: was stopped. and new guidelinesSwere issued:by SEBI. Finally, SEBI reconstituted governing boards of the stock exchanges,ointrOdueed capital adequacy fOOS for fbrokers and established clear rules for making the client/broker relationship more transparent, in partiOular, segregating client and broker accounts.. To improve secondary market trading and protect investors, a recently promulgated Presidential ordinance provides the legal underpinnings for the setting up of central depositories to record ownership transfer for. securities, This would remedy previous problem impeding secondary trading due to poor title transfer infrastructure. 0; The depository:systern would also enable trading to take place without stamp duties, another impediment to primary issue and trading of securites. cFurther, a code for takeovers has been formulated. The procedure for lodgment of securities for transfer 0 was considerably eased for institutions through the introduction of 'jumbo' transfer deed and consolidated payment of stamp duty. Following the recommendations of the Patel Committee on the 0carr0 forard system, SEBI. introduced a revised carry forward system subjeet to the following prudential. conditions: (i) stock exchanges would:be allowved to introduce carry forward system only with the prior permission of SSEBI and subject.to effective monitorin gand surveillance system, and infrastru4ture; (ii) the financiers funding the carry forward transactions willi not be lpermittedj to square upAtheir positions till repayment of the loan; (iii) a cap of Rs. 100 million applies to carry' forward: trarsactions' (iv) the carry forward position shall lbe disclosed to the market, scrip-wise and broker-wise by the stock exchanges at the beginning of the cary forward session; and () individuals brokers and corporates should conform to capital adequacy norms .of 3 percent and 6 percen trespectively. Regarding mutualfunds, the noteworthy reform was the inclusion of iUTI under: the regulatory jurisdiction of SEBI to level the playing field with other mutuall funds. In addition, neiw gidelines governing rules for advertising by mutual funds were issued and the requirement of] pre-vetting of advertisements Was removed. To improve the scope of investments by mutual funds, mutal funds were permitted to underwite public: issues Xand gguidelines for, investment in money market instruments were relaxed. Finally, SEBI is setting 0up4 an institutional infrastrcture to discourage inisider trading and unfair: trade practices. To achieve effective coordination between the exchanges especially oni matters,of generalAinterest, and market monitoring, an Inter- Exchange Co-ordination' Group hwould be set up. I addition the major stock exchanges lare to set up Investor Information Centers to provide information about investors' rights and obligations: and about their listed companies, 1995, the government established an insurance regulatory body, to prepare the basis for eliminating the public monopoly in this sector--although a decision on this has yet to be taken. - 27 - However, while progress has been achieved in relaxing controls, reducing government's pre-emption of financial savings, and reestablishing the soundness of the financial system, much remains to be done. Interest rates are now market determined for most transactions. The exceptions are for small loans (below Rs 200,000, that is about US$6,000 at 13.5 percent) and for the maximum rate that remains on deposits of less than 30 days (see Table 1.11). Forced holdings of government debt by banks, while reduced, remain at a high 37 percent of deposits and 40 percent of banks' loan portfolios still must be allocated to designated "priority sector lending". While barriers against the entry of private banks (domestic and foreign) have been relaxed, restrictions on the expansion of their branch network remain. And public sector banks continue to hold around 90 percent of the sector's assets and little progress has been achieved in reducing government equity holdings in the public banks or in improving their autonomy in key areas such as staffing and pay. As a result, financial intermediation costs remain excessive and the autonomy of financial sector institutions is very much in doubt. The tax regime has been simpljifed and strengthened considerably. In the 1994-95 Budget, taxes on corporate income were unified at 46 percent for widely held companies and 55 percent for branches of foreign banks. A major reform of excises was implemented to make it more closely resemble a value-added tax and address its major problems. Meanwhile, the government extended the coverage of MODVAT (a modified value-added tax) to include manufacturing sectors thus far excluded, and, for the first time, some services. Of particular importance also were the decisions to: (i) shift most excise rates from specific to ad-valorem to increase buoyancy; (ii) reduce the number of rates; and (iii) simplify the system by relying on invoices for value determination. These reforms considerably simplified and modernized India's tax system and made it possible for the Central Government to begin to focus its efforts on improving tax administration. The 1995-96 Budget further reduced peak excises. It did not reduce corporate tax rates further but it continued the emphasis on simplification, lower rates and greater buoyancy. To strengthen compliance, the authorities proposed tax deduction at source for fees for professionals, technical services and service contracts, and interest income on time deposits. Further and significant tax reforms were introduced in the 1996-97 budget (see Box 1.4) maintaining the overall direction and goals of the tax reforms initiated in the last few years. PERSPECTIVES FROM THE POOR The pillars of the government's poverty reduction strategy are accelerated and sustained labor-intensive growth, and investment in human capital development. Anti-poverty programs have a supplementary role. Although growth has accelerated over the past few years, there has been concern that some of the stabilization and structural reform measures started in 1991 might have had a negative impact on the living standards of the poor. In particular, the sharp devaluation and the fiscal stabilization measures taken in the first few years of the program led to significant increases in the prices of key commodities such as fertilizer, rice, sugar, cotton, and gasoline. This was compounded by a poor monsoon in the first year of the program which caused agricultural production to fall, while the industrial sector started a two-year relatively serious recession. Finally, results of the 1991-92 National Sample Survey suggested a shaip increase in the incidence of poverty. Although this increase is difficult to explain (Box 1.6) on - 28 - the basis of variables that are good predictors of poverty (such as wages for unskilled Box 1.6: Did India's Macroeconomic Stabilization Increase Poverty in 19929 agricultural laborers, agricultural production, e and inflation), and may be associated with The National Sample Surveys of 1990-91 and 1991-92 methodological sampling weaknesses, it indicates that the incidence of poverty increased from nonetheless generated considerable public 36 percent of the population to 41 percent: To isolate the effects on the poor of the various, economy-wide debate on the social consequences of factors, research for this report examined how India's stabilization and reform. rural poverty measures have responded in the past to changes in key economic variables such as real agricultural state domestic product (SDP) per hectare This debate has faded in the recent of sown area in the state, real non-agricultural SDP per past as evidence gathered that the economic capita, rural rate of inflation, per capita real state. program is producing positive results, that development expenditure, and reai male agricultural wage. Time-series measures of the incidence, depth many of the reforms introduced over the last and severity of ru'ral poverty were estimated using five years (particularly the devaluation of the state-level data from 19 rounds of the National Sample rupee and the decline in the protection of Survey spanning 1960-61 to 1992. These variables 'accounted for 90 percent of the variance in measured manufacturing) have improved the agricultural poverty. The model were then used. to assess what role terms of trade and thus real wages for unskilled those same variables may have played in the increase agricultural labor (such wages, after declining in poverty in 1992. A sub-set of these variables can be identified as likely channels through' which by 6 percent in 1991-92, have increased during stabilization would affect living standards of the poor. 1992-95 for the country as a whole) and that Those are real non-agricultural product per person, the reduction in the anti-export bias implicit in real state development expenditure,: the inflation rate, and the real male agricultural wage. Of course these the trade regime has led to a rapid expansion of variables are changing for other reasons, including the labor-intensive exports--which in other efTects of the crisis preceding the reformns and current countries have been a key factor in exogenous shocks (such as the effects of the bad employment generation and poverty reduction. agricultural year on real wages in agriculture). In addition, in spite of the relatively high fiscal The results indicate that the joint effect of the crisis cost of these decisions, the government has and stabilization accounted for at most 36 percent of postponed reduction insubsidiethe increase in the poverty rate in 1992, and a smaller postponed reductions in subsidies, notably for share of the increase in the depth and severity of fertilizer which have even increased in the poverty, The rest do not appear to be attributable to 1996-97 budget, and expanded some nation- the direct or indirect short-run impacts of policy changes, at least as they affected the key economic wide safety net programns--essentially a variables which matter to the poor. However, the revamped PDS, and employment and nutrition study was less successful in explaining what did in fact programs. Finally, the recent publication of account for the increase in poverty in 1992. That remains, in large part, a mystery. .One possible the 1993-94 National Sample Survey suggests explanation could be the small size of the 1991-1992 that poverty has actually declined in relation to NSS survey. the pre-l1991 period. tSource: Gaurav Datt and Martin Ravallion, "Why did poverty increase sharply after India's macroeconomic There have been questions, however, stabilization?", mimeo, Poverty and Human Resources on what has been the evolution of poverty in Division, Policy Research Department, World Bank.) the last two years. The acceleration of growth in the last two years, the sustained agricultural performance, the positive evolution of real wages for unskilled agricultural labor, and the decline in inflation would all suggest that the incidence of poverty has declined further in the last two years. But in the absence of more recent comprehensive data of the kind provided by the quinquennial surveys, it is impossible to conclude with any degree of certainty the effects on - 29 - poverty of the developments of the last two years. For the purposes of this report, however, and as very first approximations case studies were carried out by Indian economists and social scientists, between January and March 1996 in four states (Maharashtra, Tamil Nadu, Punjab, and Uttar Pradesh). While they still need to be validated by actual data, this exercise suggests that the incidence of poverty is unlikely to have increased. More interestingly perhaps, a strong result which emerged from these case studies is that the welfare and safety net programs seem to be barely noticed by those who were being interviewed. In spite of the significant resources that the country allocates to such programs, there is little evidence that they have a palpable impact on the living standards of the poor. This may be because the newer programs (i.e., RPDS, EAS schemes, benefits for widows) have not yet reached intended beneficiaries on a significant scale. This also can be, however, an indication that these programs fail to reach their targeted population. Below is a more detailed discussion of how the beneficiary assessments were conducted, and of their results (see Annex III for studies' executive summaries). The case studies (Box 1.7) were carried out in four states--Maharashtra, Tamil Nadu, Punjab, and Uttar Pradesh. One of the primary benefits of the work is that it provides very timely information on how poor people view their opportunities and living conditions at the time of inquiry. This timeliness and responsiveness comes at a cost, however: regions (and villages and individuals within villages) were chosen to be broadly representative of, e.g. certain cropping patterns, agro-climatic zones, social or ethnic groupings, and are not formally or statistically representative of the country as a whole. The case studies were designed to address two questions: first, how have the poor in India fared since 1991 and what has been the likely impact of reform and stabilization measures on their incomes and living standards; and second, how well have safety net programs--both government and non-government--worked to protect living standards of the poor. A number of general findings emerged. First, across all regions respondents in both rural and urban areas reported no dramatic changes in their standards of living following the advent of the 1991 stabilization and reform program. In fact, few respondents knew of the economic crisis in 1991 or were aware of the shift in economic policies started in 1991. Although respondents are typically aware of changes in local prices and government programs in rural areas--PDS prices and availability of goods, changes in fertilizer and other input prices, and public works programs--they seldom saw these changes as dramatic or related to a country-wide shift in economic policy. The changes mentioned were typically due to idiosyncratic or localized effects: for example, death or illness in the family, late or scant rainfall, loss of employment for a particular household member. A slightly higher share (although still few) of people in urban areas are aware-of economy-wide changes, but their knowledge tends to be fragmentary and there was no sense that they had been affected by such changes. Second, there were marked regional disparities. In richer areas with better infrastructure, natural endowments and commercially oriented agriculture (such as in Punjab or Maharashtra), cultivators were generally positive. Many people witnessed a general improvement in standards of living both in rural areas (due to the impact of high agricultural growth on real wages) and urban areas. In the rural areas, increases in producer prices were appreciated. In many regions, farmers have responded to changing market incentives by shifting - 30 - cropping patterns to more profitable or Box 1.7: 0Selected C:ase Studies :: 0less input-intensive crops (for example, T:Th Imp ct of Economic Reforms on thePoo r sunflower seeds require less water and are more resistant to disease and insects than As an alfternative, to more conventional: approaches, and in more traditional crops like sorghum). In recognition of the importance and timeliness of the issues,. a - series of aseNstudies were commissioned to seek tentative addition, some farmers are producing for tanpswers designed to address ftwo key questions: relatively new export markets (i.e. grapes * Whati has& becn the impact of recent reformsi (m;ein i p lar;tcula >trade 0domestic, and expenditure reforms) onithe expressed concern about a potential poor? ~~~~~~~~squeeze on profits due to input price Wha sAety* niet programs are6 available toi protect the poor fro :adese imp racts and ;how awlal do rtheytappear to* increases and deteriorating water supplies. S~p :E:irfrmdverse impacts~ and jhow wellf do: t hey appear tos : \00ttbe working?ti000:;0j; 000Xt ;0X00000;However, a substantial number of the more commercially oriented farmers in the -The Vcase ;,studies were' carried" out between January and case studies said that the higher input March I9.96 by Indian researchers working in four states -- Maharashi,trr,:Tam.il Nadu,:pT.njab,and UP. tTbheresearchers prices were more than offset by the used gatmixl of field techniques it--idividual interviews, increase in producer prices. As evidence fcusgroups,ntervies withcommunitys leadrs as w of increasing profits, many farmers are as secondary:sources of data, all designed to yield rapid results and toIreflect how the poor themselvestfeel that they actually applying more fertilizer rather ::,have been impacted by iecent policy changes. than less post-1991, despite significant if:n Maharahfa,case studies were based primarily on: increasesinfertilizerprices. focus group interviews carried out in Irral villages in four :dist.cts (Osnmanabad. Parbhani, Pune, and Thane) and But small and marginal farmers additional interviews carried out in Mumbai.tlndia's largest in the case studies reported less favorable commercial-curnindustrial ciy. ::The iurbanl work focused ot e t living-coditions.of fsemi and unskilled0workerst int outcomes. In general, small and marginal small-scale manufctouring, transport, construction,, and nu $ ra farmers (Table 1.13) are slower to personal services., .1h contrast, case studies for Tamil Nadu diversify or change cropping patterns and were based primarily on individual interviews (augmented by lw:group discussions) withifarmers and, otherrural workers ew report sufficient additional earnings l " Divingiin Thnavur Distict and Dhamnapuri Distrct. (cash or in-kind) to compensate for the lnterviews were ablso onducted with personstlivingkin two: rise in input prices. Interestingly, little small towns, o ne foreachdistrct (P)apajasain nThan evidence was found of small and marginal .dNnvinaarn in Dharapril. iWork: was . also undertakenw win ,abX one of lndia's$ more prosperous, cultivators being forced off their land or iagricltural;states. Individual interviews were COnducted pushed out of the market for rented or with, limers, agriculture laborers, and artisans in 10 00 :vlllages Sin 10 blocks Sin Patitala; ;;and 0Fatehgarh00 ASaib' 0 share-cropped land. One exception was dditrits.. in Waddition, group and individua interviews wereTS.- Punjab, where the case study described an lcarried ut itqth farters andiagriculture laborers in OMqr *. active land-lease market, and cited several -- dsh includingrural villagesin ahabadDistrican cases of marginal farmners who had sold G1- orldPipUDistrit. T he rural samplew as t augnented . by individual inierviews with persons living in two medium4 their land or relinquished leases in order to ::sized ities AllahabadAnd Gorakhpur.;: The urban work enter different occupations (e.g. dairying focused on poor popleworkigi one of fou occupational: *00 : e r eand agriculture laborers --but there was no i~grodups -- thel adloom.0indpoelomscr(orku)g) and construction workerts rickshaw pulerm, and domestic° evidence that this was different from what }w.orkers.(Al(habad.: Finally, afaeld study. of the: various was already happening before 1991, and i. iimpacts of -reform :measures on: veryi poor women living in 0Banda District UP, was undertaken. ;0 in could be expected in a region where commercial agriculture predominates. There were reports of stagnated or even - 31 - Table 1.13: State-Wise deteriorating living standards in some of the poorer regions, in Shares of Marginal and Small IFMarmer Holdings particular, very isolated areas (i.e. a tribal region in Thane district, (percent of total holdings) Maharashtra, parts of Bundelkhand in Southern UP). Maharashtra 57 Punjab 43 TamilNadu 88 Third, case study findings on rural wages and employment Source: Agriculture 88 are mixed. Contrary to what is suggested by wage statistics, in many at a Glance (1993). regions covered in the case studies agriculture wages seem to have just kept pace with cost of living increases since 1991 and most individuals report working the same number of days post-1 991 as pre- 199 1. There are some exceptions. For example, in several of the surveyed districts in Maharashtra, both real wages and employment are reported to have increased since 1991. A number of respondents in Tamil Nadu likewise claim that wages have risen, and, in one of the arid districts, off-farm employment levels appear to have increased as well. Contract or permanent laborers in Punjab also report rising wages as compared to 1991. In contrast, the wages of casual farm laborers in Punjab seem to have fallen in recent years. The limited work done in urban areas -- medium-to-large cities in Maharashtra and UP-- seem to reinforce the view that wages and employment movements after 1991 depend to a large extent on the relative wealth of the region and type of occupation. Secure employment is rare among the poor, with the exception of certain sectors (i.e. domestic employment) where it appears that lower monetary wages (domestic workers surveyed in UP earn on average half of other low-skill occupations) are traded for more stable employment. In prosperous Mumbai, unskilled workers in the construction sector report more competition for jobs (due to higher influx of rural workers), falling wages, and a drop in average annual days of employment. In contrast, drivers and maintenance staff in the transport sector--which has doubled in size since 1991--report a moderate increase in wages but good employment prospects. In UP, however, the most populous among the poorer states, many urban workers complained of greater job competition with stagnant or sometimes falling wages. In contrast with the ambiguous results on wages, and in contradiction to other information sources, there was little evidence of a decline in cereals consumption since 1991. Fourth, the case study findings regarding India's extensive system of social safety nets suggest the following: * The PDS is almost universally viewed as an ineffective food safety net. In most states, the price of food grains available through the PDS is on a par with prices in the market, and PDS quality is generally lower. One exception was Tamil Nadu. In addition, poor people often do not have enough cash to make the bulk (monthly) purchases required by most PDS shops. Although the RPDS has been operational for several years, none of the respondents in RPDS case study blocks reported purchasing food grains or other commodities from RPDS supply depots. - 32 - * Few villages have operating ICDS centers, another food safety net program for pre-school children. By contrast, the mid-day meals program in certain districts of UP is seen as an effective inducement to attend school, as were SC/ST scholarship programs. * With the exception of Maharashtra, Employment Assurance Schemes (EAS) and other public works programs (including the JRY) are not effective at providing employment for the poor. Those employed under the schemes typically work many fewer days than stated targets. Rural Maharashtra is an exception: casual laborers worked an average of 30 EGS days annually and 30 days on other public works programs, while farmers worked an average of 30 EGS days annually. Neither are public works initiated under the JRY, a dependable source of employment for the rural poor. Respondents in several states complained that JRY projects are given to subcontractors who hire work teams from outside the village rather than local workers and adjust their books in order to pay higher wages. * Credit schemes have an uneven history of success in rural India. Many respondents received loans through the IRDP. But these loans often did not serve their stated purpose--to increase assets and thereby raise incomes in some sustainable way--and many are not repaid. For example, in the case study for rural UP, out of 40 respondents who received IRDP assistance, only 10 report a sustained increase in income levels, 5 diverted the resources to other uses, and 25 report no income improvement. When asked what kinds of services or programs might help to make them better off, few of the respondents cite cheaper or more available credit: deeper indebtedness is not desirable. Taken in total, India's safety net programs while entailing significant fiscal costs seem not to reach their target population as suggested by these case studies. While many recipients of benefits from safety net programs are poor, many of the poorest people do not use the programs. However, these findings cannot be generalized and further study is necessary. This said, however, participants mentioned numerous examples of misuse of funds by local elites and ineffective local institutions in indentifying the poor and monitoring their access to these programs. The new programs are also problematic, for example, while many respondents are aware of the 1995-96 new social security initiatives (e.g. pensions to elderly widows, a state- level life insurance scheme for rickshaw pullers in UP), few have tried to access the programs, and of those who did, even fewer received the promised benefits--suggesting that it may be warranted to rethink of how these programs are being delivered. - 33 - v ~~MACROECONOMIC VULNERABILITIES AND - ] ~~~STRUCTURAL WEAKNESSES INTRODUCTION The stabilization and reform measures introduced over the last five years have considerably improved India's growth prospects. The growth performance of the last two years and preliminary indications for 1996-97 reinforce this view and may suggest that India is on a trajectory of a stable 6-7 percent real annual growth. This inevitably raises the question of whether India will be able to repeat the experience of its successful East Asian neighbors. The answer is that strong corrective measures are necessary to make this happen. Not only is the country facing serious fiscal imbalances that have yet to be corrected, but there also remain a number of macroeconomic vulnerabilities and structural weaknesses that need to be addressed even to sustain the current 7 percent growth rate, let alone exceed it. First, because of the public sector poor savings performance, India's savings rate is considerably lower than that of its East Asian competitors. Second, agriculture which accounts for 30 percent of GDP and 70 percent of employment is still being penalized by numerous restrictions inhibiting the trade and processing of agricultural commodities and inadequate composition of public spending for agricultural development. Third, relative to the East Asian high performing economies, India has invested relatively little in the development of the country's human resources and social indicators are thus considerably lower. Fourth, India's infrastructure bottlenecks are considerably more severe than in East Asian countries. More importantly perhaps, the resolution of India's infrastructure bottlenecks is not just a problem of resources but requires extensive institutional and regulatory reform at all levels of government. Fifth, there is growing evidence that India's cities and towns are facing a crisis of serious dimension and that urban policies and institutions are in urgent need of reform. None of these constraints can alone threaten the acceleration of private investment and growth but, taken together, they constitute a serious obstacle. Finally, as highlighted in the previous chapter, there remains an important unfinished reform agenda that needs to be brought to its logical conclusion, particularly regarding the trade regime, the tax system, and the financial sector. The central message of this report, however, is that India is in a unique position to strengthen its macroeconomy and address structural weaknesses over the next four to five years. This would not only ensure the sustainability of the current growth trends but also enable India to start to grow at rates possibly exceeding 8 percent per year by the beginning of the next decade. This chapter examines the nature and extent of India's remaining macroeconomic vulnerabilities and structural weaknesses and leads into the second part of this report which articulates possible strategies to address them. - 34 - MACROECONOMIC VULNERABILITIES Fiscal Vulnerabilities An important source of fiscal pressure is expected from the Pay Commission which will give its recommendations on civil service pay before the end of this calendar year (the last Pay Commission recommended a 20 percent increase five years ago). While the Central Government's expenditure on wages is relatively small (less than 2 percent of GDP), states' expenditure on wages has been around 4-5 percent of GDP and significant wage increases would considerably further erode their finances. In addition, salaries in public enterprises are based on pay levels in the civil service. While essential to restore the competitiveness of pay in the civil service, in the absence of offsetting measures, a significant pay increase would also weaken the finances of public enterprises. Another source of pressure is related to the repercussions of states' indebtedness on the Central Government. While in theory the states have no discretion to increase their own fiscal deficits beyond the financing authorized by the Central Government, they can do so indirectly by delaying payments to creditworthy public enterprises which in turn access financial markets. They also can delay payments to service their debt to the Central Government. States' interest payments on their debt to the Central Government alone account for 13 percent of the Central Government revenue. Thus far public enterprises and the Central Government have made no financial concessions. However, for the first time since Independence, net transfers from the Central Government to the states are on the verge of being negative. This may weaken the states' ability to comply with their financial obligations vis-a-vis the Central Government and could become one avenue whereby states' fiscal imbalances spill over to the Central Government's finances. Finally the new government has announced its intention to increase significantly public spending on primary education. This is a welcome decision. Over the last four decades the public sector emphasis to building up the country's productive potential was achieved at the cost of some neglect of human resource development. In addition, even before 1991, the states responded to their financial difficulties by reducing spending on the social sectors and on infrastructure. As discussed later in this chapter, for India to successfully compete in world markets it will be essential to accelerate the development of its human resources, an objective that will necessarily entail additional claims on public resources. In addition, there has been considerable underspending in recent years on the maintenance of existing infrastructure and on building critically needed new one. While the government is taking important steps to involve the private sector to fill India's infrastructure gaps, it is evident that the public sector will continue to have a major role in the provision of infrastructure. Therefore, unless considerable efforts are made to reduce unproductive public spending and mobilize additional resources, responding to India's urgent infrastructure and human resource development needs will exacerbate fiscal imbalances. - 35 - It will be difficult to achieve these goals, however, without a restructuring of center- states fiscal relations. Expenditure responsibility assigned to state governments by the Constitution accounts for about one half of total expenditure. At the same time, states are assigned taxation powers that result in their collecting only one-third of total tax revenues. The difference is covered by transfers in the form of shared central revenue, grants and loans. Since a part of these transfers is determined by the states' gap, and there have been periodic write-offs; states have in practice been faced with a relatively soft budget constraint--even though in theory state deficits are constrained by limits on borrowing imposed by the Central Government. More importantly perhaps, states do not face the discipline of Table 2.1: Gross National Savings for financial markets, as the annual program of state security Selected East Asian Countries and India, 1992; 1994 iSSUeS IS Still allocated adminstratively among commercial (in percent of GDP, current price) banks by the RBI. Thus, all the states borrow on the same India 1992 1994 terns, regardless of their creditworthiness. It is clear that Private 19.6 22.7 center-state fiscal relations will need to be restructured if the Totblc 21.15 244 states are to be encouraged to address their major problems Hongkong of weak tax collections, growing wage bills, uneconomic Pubivat 303 24954 enterprises and poor cost recovery. Similar considerations Public 3.5 4.5porcsrevry Total 33.8 33.9 apply to the financial relationships between state and local Indonesia oemns Private 22.9 25.2 governments. Public 7.6 6.8 Total 30.5 32.0 India needs to emulate the experience of other Korea Ptivate - 27.3 25.6 countries that have succeeded in reducing their fiscal deficits Public 7.8 9.2 and raise their public savings considerably (Table 2.1). For Total 351 34.8 instance, while public expenditure was reduced in Chile and Private 18.0 17.9 the East Asian countries between 1980 and 1990, that of Public 11.7 14.0 Total 29.7 32.8 India actually increased (Table 2.2). A central element of Philippines fiscal restructuring in Malaysia, Singapore, Thailand, Private 16.5 16.6 Public 3.0 3.0 Indonesia and Korea was the reduction of public expenditure Total 19.5 19.6 through better management of nonfinancial public Singapore Private 36.5 38.6 enterprises and reduction of subsidies and transfers. India Public 12.3 10.9 will need to make similar efforts. This will be important to Total 48.8 49.5 Thailand accelerate the country's growth rates even further and needs Private 22.6 22.1 to be given the Public 11.4 12.9 Table 2.2; Total Public Expenditure, Rigional Total 34.0 35.0 highest priority. It Comparison .Sources: Various IMF and government is encouraging (percent ofG-P) statistics. that the new Country 1980 1985 1990 India 19.4 21,9 25-6 government has made the correction of fiscal Malaysia 32.3 323 29.3 Chile 29.0 273 21.3 imbalances one of its economic management highest Indonesia 23.7 196 12.0 priorities, but it is too early to assess how this KoTea 21.5 18,5 16r8 statement of priorities will be translated into concrete Sorce World lank 196 155 actions. - 36 - Other countries' experience Table 2.3:- Fiscal Balances Consolidated Government Fiscal Deficits suggests that strong fiscal adjustment has (as % of GiDP) been central to a successful liberalization of 1986-90 1991-94 Change their economy. Table 2.3 shows that India India -11.4 -9.7 1.7 East Asia (5) -1.3 -0.1I 1.1 has adjusted its fiscal imbalances much less Latin America (4) -6.8 0.2 7.0 than other countries which often started Other South Asia (3) -9.2 -7.5 1.7 from situations much more serious than SSA (4) -6.5 -8.8 -240 India's. Note Regional Values are simple averages. East Asia: China, Indonesia, Korea, Philippines, Thailand. Latin America: Argentina, Brazil, Chile, Mexico. Othet South Asia: Bangladesh, Pakistan, Sri Lanka. MNA: External Account Vulnerabilities Algeria, Egypt, Iran. SSA. Cote d'lvoire, Kenya, Nigeria, South Africa. Souree. IMF Government Finance Statistics, World Bank Staff estimates. Notwithstanding favorable external prospects and the remarkable improvements in India's current and capital accounts, India's external accounts and debt position continue to be vulnerable in several important respects. First, while growing agricultural production is reducing the counitry's vulnerability to fluctuations in world food prices, its dependency on oil imports is increasing. Domestic production is leveling off and, current trends persisting, India's oil imporis will double to US$12 billion in the next five years. Several reasons are behind these developments. On the demand side, subsidies on petroleum products have been substantial and reached nearly US$3 billion in 1994-95 (about 1 percent of GDP). This is stimulating a growth in demand at a considerably faster pace than GDP--a trend that will continue unless subsidies are reduced. In addition, reflecting unresolved policy issues, the expanision in power supply is taking the form of imported oil- rather than domestic coal-based thermnal plants. On the supply side, potential production is thought to be significantly higher than current levels. Ihowever, private domestic and foreign investment--which is critical to achieve major increases in production--has not been forthcoming because of uncompetitive terms vis-a-vis other countries in the world. Second, fiscal adjustment in the OECD countries and consequenit reduction of multilateral and bilateral concessional development aid will increase the country's borrowing costs and make it more vulnerable to foreign interest rate shocks. Such vulnerability can only partially be offset by increased recourse to non-debt capital flows. Third, of India's US$99 billion external debt (which includes US$5 billion of short- term debt), about US$25 billion is due to be repaid in the next four years with a peak of US$8 billion in 1996-97. This is in addition to the rollover of the short-term debt and the roll-over of NRI accounts. Added to the financing requirements of the current accI int deficit, this means that over the next four years, India will need to mobilize aboult TJ5$46 billion of external finance, excluding the rollover of short-term debt and NRI accounts. These vulnerabilities are, however, tempered by India's sustained good export performance, the fact that portfolio investment in India has taken place in instruments that are costly to reverse, and lol% India's strong liquid position--US$17 billion in reserves versus short-term liabilities (irmclud fig NRI deposits with remaining maturities of less than one year) roughly about half that si ze - 37 - STRUCTURAL WEAKNESSES Consolidating the success of the lastfew years is offundamental importance if India is to emulate the performance of the East Asian countries and draw on the benefits of economic integration to achieve faster and sustainable economic growth. A comparison between India and other high performing economies, and an examination of what mattered in the success of these economies, suggest that a broad-based growth driven by labor-intensive production for exports is the best instrument for India to significantly reduce the "scourge" of poverty. This is reinforced by the 1996 World Bank "Global Economic Prospects" report which found that many of the countries that are insufficiently integrated with the world economy are among the poorest. The government has recognized this crucial link between integration and economic growth by fundamentally changing its development strategy in 1991 and made accelerating export growth a central objective of its reform program. This year's Economic Survey reinforced this view by further emphasizing the role of foreign direct investment in promoting higher growth, exports and employment. Export growth in East Asia has served two key functions. At a macroeconomic level, it allowed rapid growth in capital goods and technology imports required by high domestic investment rates without the emergence of unsustainable external sector deficits and liabilities. It also circumvented limitations imposed by the small size of domestic markets. At a microeconomic level, the need to succeed in highly competitive world markets forced local firms to raise the efficiency with which they used capital and other scarce resources. Competition in global markets exposes exporters to new products and management techniques and allows them to be efficient since it provides access to imports which were previously unavailable or which embody new technologies that can contribute to productivity gains and higher allocative efficiency. Such spillovers may account for most of the rise in developing country total factor productivity in 1971-90 (Box 2. 1). To consolidate the success of the last few years, and draw on some of India's unique strengths to accelerate exports growth, important structural weaknesses need, however, to be addressed. These are discussed in the rest of this section. Protection levels are still excessively high. Inter-alia, this may not only reduce foreign direct investment, but also its benefits. The progress of the last five years notwithstanding, India's tariffs still are among the highest in the world. It will be important for India to continue to lower tariff levels to be able to compete with the more open economies of East Asia, Latin America. and the emerging European former socialist economies, and also to provide a stronger fouindation to India's growth process. Though precise international comparisons of quantitative trade restrictions are difficult to make, it is nonetheless the case that quantitative trade restrictions had been largely eliminated in most major Latin American countries by the early 1990s while QRs in East Asian countries such as Korea, Thailand and Malaysia covered less than 5 percent of tariff lines--whereas they remain extremely important in India because virtually all imports of consumer goods are under license, and so are most agricultural imports. China was an exception to the East Asian rule with around 70 percent of imports subject to a variety of quantitative trade restrictions. Average unweighted tariffs were also high (around 40 percent) though, due to an extensive system of exemptions and rebates aimed at export promotion, actuia dutiy collection was low, around 5 percent of import value. -38 - Box 2.1:~ Spillaver Effects of FDI Ther are goodapriori ~reasons to expectMNlCstohave apositive effect in ~host countries~ whsvconormies:aren not subect:to:: major. domestic pOlic distortions.~ Recent thinking on~ the natured of MNCs srssesl teir owntership opropriear largel itanibl value-creating: assets~ such as techiological knowledge,capacity for innovation %~,Q ordsign,::production, mark eting !:management or other: skil:ls as.a. key necessary condition for their existence. In the'absence of artificial inducemen ts such as hig tradeprotetionof domestic, makWets in a forig conyismInytheeportayses whihpovide an~ inetvfoth MN:,: C:to:enter that co-untry and:allow it to offset the natural4adantage possessed::by local firmsuchas bete knowl6edeof i domesticrsurcsand: conditions And it: Is just these assets which are the basis o h sploer" technolog tranferad proucivtygansdeloIn countris seek to obtain throughFDI. Thew reerhevidence thoufgh not unequivocally, supports the. idea.that FDI)Lgenerates significant productivity gains ini host, counftries. There. is,. first, .a, large body of cross country evidence for direct: positive effects.: These occur through MN.C subsitaes havin a hgher level oflbradttl Watr productivity, than l ocal fins, through transfer of technooyo f managementand qualiy controlstandards to local supplier (the effect, of the WMart jint veture in developing a high quality componenits: industry In India~ is~ a~ good case in point, see Box 2.4),: or thriough supply~ of prvously unavailable products:to There is also considerable though not unifor evidence for av vaiety of indirect or spillover benefits, These includemr rapid spread of knowledge' about new techntologies,~ products, managemn techniusrforeg makets tourlated local businesses. They can incude spillo1 b bnfit 'of traiining of local labo and managemet and the effectt of increased competionnfrcg efficiencyimprovemens among lcal firm. Of particular interest ~for India is~ evidneta export aciity byMNs, ~which, are. a. natural: conduit for information about foreign markets, can have lartge, spillovers: o nexorts bloca firms, Acting as: a catalyst fbr'a doetic exor:industry Aitken, Hanson and Harrison ~(1994) demonstrate this effect: In the:wake of trade liberalization in :Mexco:and. citeAthe example of Bangladesh where the entryof a single Korean muitltinational in:gafrment exorts led to the: estabismen of hundreds of locally owned export firms and the creation of what ~is now the country's largest export induistr, In. one set of. regressions: a: study by Balasubaramaniam eata (1 996) Investigates: evidenice for: hypothesis that ~the~ growth enhancng efects o PD! re lager in expor oriented counhtries ~(EP) than ini impiort-substituting ~countties (IS) The study loked at 4 evloin cunris n 97-8, lasitin temino outrespusungPPo ISIstrateg uIng the World BaksWorld Development Report's:4991 clasification ~of countries as having outward or inward oriente rd eie. h td on that, aftraccoutin for Ah imact of domestic investment,: labor force grwhadexport growth, the later as ano6ther global intgaion vaible thatis epcted toDromote toechnological innovation and dynamic learning gains from.arod the impactof. FfD n U growth was substantial and statistically significanitinF Pcuties while it1:'n n onc was negligible and statistically, insgnficatin IScountrties. A sconary result was that the outputi imatof FDI was substantiafll highe than that~ of domestic Investmenit infiP coutrites~but not in IS countries. Ohr suisconsider factors influencing technology ryate an espaid byMC fiits ttheir parent companties. In the Case,,of US: MNCs affiliates operating in Mexican manufacturing a Varitofmaueofcpeiverese frm lal companies ere foundto be highly: significant. (Blomsgtrom, Kokko adZejn 1992).Theimat ofJlca rvalry in. inducing tehnooytanfrwsfound to be particularly strong, in consumer goods ind ustries, leaingto the hpthesis that"oeg mult1inationalls are:especially sensitive to the local market environment when barriers to etryin the fomof cmlxtechnoog or high capItlrequrements are low". A related study ~(Kokko: and'~ Blomstorn '1-99.5)' found that tcnlg,tasest affiliates:.of UJS MNCs: ini 33 host counrieis were moeafflected by the intnityo oesi akt coptition thnb technology ,transfer ~laws or ~regutlations, which in fact had an insignificantipact. Thus apartfrom trade lIberalization policies tha epand th scp fdmstic competition may well increase technology spillover gains frothprsnefMC. Another way to maximize benefitsfrom IvNC presence is to increae tecapacityof te economnyto: absorb spilloer gains. The previusly cite analysis by Borenzstein et al (1995) finds the imnpact of FD1 on agggregate growth to increasewt te lVe of: hw cptal nthcotext of 'the study it took a male secondar school afttanmntevlf0.45 yasFoPD! to, start having.i a positivh ffc Sinc In dia' 1985 attainment level was 1. ears (BTte and Lee,: :1994), it cnbe cnlddta 11i ni ha ad aoiieeffec onpoutvt rwh owever, it mnust have been: less pronounce tan ins sveral::East Asian Pomparator wheresecondary school attainment levels were higher such as ~Korea (3.~4),Taiwan (2.8) or Malaysia (1.8), though hihe tan inIdonesia.or:Thailand (both 0.8 years). - 39 - At present, Indian producers continue to pay higher costs for capital goods and intermediate inputs than their competitors and, because of their still high levels, important anomalies such as potential negative effective protection exist in the tariff structure that can only be corrected by a reduction of tariffs. Similarly, the elimination of import licensing restrictions on consumer goods is extremely important to protect the interests of the Indian consumers. In Argentina and Brazil the elimination of restrictions on imports of automobiles was motivated by the outdated automobile technology to which local consumers were subjected after three decades of protection granted on infant industry argument grounds--an infant that never grew. In addition, liberalizing imports of consumer goods would reduce the excess rents that are likely to be realized in a non-competitive market. High protective barriers will attract "tariff hopping" foreign direct investment, which empirical studies suggest has a smaller growth impact than that under more competitive conditions (see Box 2.1). In particular, because of the large size of India's markets, unless they are subject to international competition, domestic producers will have little incentive to improve their efficiency and produce for exports, which may delay India's integration into the world market and the associated welfare improvements. Because foreign investors, notably multinational enterprises, increasingly operate complex global production and supply networks, protection and its associated red tape reduces a country's attractiveness in these networks. This is further confirmed by the recent experience of the transition economies in Central and Eastern Europe which have undertaken major trade liberalization in recent years. The improvement in export performance of these economies is strongly associated with growth in vertical intra-industry trade with European Union firms and the latter with FDI inflows into these countries. Vertical intra-industry trade and associated FDI inflows have also been important in the experience of China and the South-East Asian Newly Industrializing Economies like Malaysia and Thailand over the past decade. In China the share of exports from enterprises with foreign investment rose from 0.3 percent of exports in 1984 to 20.4 percent in 1992. Similarly in Europe, following the accession of Portugal and Spain to the EU in the mid-1980s, FDI as a share of GDP increased from 1 percent to 3 percent of GDP for Portugal and from slightly more than 1 percent to 2.5 percent of GDP for Spain. However, liberalization of FDI--particularly in consumer goods industries--is also among the most controversial post-1991 reforms, generating debate about its potential advantages and ills. There is concern among the public that multinational enterprises (MNCs), through which most FDI is undertaken, dump obsolete technology in India, invest in "low-tech" consumer product markets with no benefit to the country, focus on "unproductive" areas like marketing or trading rather than manufacturing, are interested in short term "quick profit" investments, and exploit India's large domestic market without contributing to exports. Concerns about FDI concentrating in consumer goods or in trade and service sectors reveal significant underestimation of the contribution of these sectors to raising productivity and growth. Low productivity (particularly of public enterprises in infrastructure, financial and other services) was the main cause of India's disappointing growth performance in previous decades. Regardless of the level of technology needed for consumer goods (which in fact is rising dramatically with advances in electronics, biotechnology etc.) what matters is how far MiNCs contribute (through more competition, better management, superior technology) to raising - 40 - productivity, reducing costs, increasing 0Box 22: AreaPotato Chips IoretImportant than employment, and improving the quality and Computer Chips? ~range of products available to the population I lndia has hopes of becoming aSfoodsuperpower.Itmay 4 (Boxes 2.2 and 2.3). Similarly, domestic get: the boost it needs Ifrom Ruffles: potato chips and | trade and other sectors that provide M ; ilrcDonald's ketchup.00;;00;00;0:0 ; 0 |productive services for the rest of the AmricanT food iants recognin that Indian agrobusiness economy are of increasing importance in has lt:sof oom toi grow, esecally infood processing. economic development, and are of key IndiA Procsea minusul 1 percn of the foo it grows, compared with 70 percent for: the: U.S., Bril and importance in defining international -th Philippines. Athird of a-ll ndianwproduce is wasted competitiveness in the world economy. due to poor distributionwand storage facilities. But: Low efficiency levels in many of these Wimprovements don'ut comeceap. RabiesingIcndias sectors generate an enormous drag on the ca:paEcity to ~processfruit and vegetale to just 15ercenti ofoutputwiillrequire tinvestment of tUS$3 to US$6 productivity of the Indian economy as a illion, iacording to McKinsey & Co. Much of this whole and on the international mneywl aet oefo bod And&sI te industries, India Swill haveto competefor resources wOith competitiveness of its exports so that much o-therdeveloping markets :such as: China. India. notched more rather than less FDI in services up 0a ssmall victory last year when Franklin Farms Inc., a appears to be appropriate. Connecticut mushroom producer, chosefit over China as: a base for. growing: and procssig mushrooms.~: Franklin Farms-opted for a partnershipi with50S India's WFikfeld 0The possible ill-effects of FDI may Agro Products Ltd.d afamily-run company inthe western in fact arise in response to prevailing policy city of Pune that wa eager to tap new: technolgy and induced distortions and can best be treated markets.Frankin ist building4 hoethoses anrdu a 0 US$9 by addressing the underlying distortions severalthousand tonsinof mushrooms for Franklin to sell*. themselves. A more open trade regime, un- in th U. Tocontinue attracting foreign. compais inhibited domestic market competition and Inda'sfod idutry mst verom seerl hgh high levels of literacy are the channels 0 hurdles, including poor roads$and a rtail network dominated by mom-andl pop shops. It also must solve an through which India could benefit most image problem: Food doesn't command as muchlit: from FDI (see Box 2.1). The most attention from economic. planners as high-tech industries: dSo, And nationalists protest thzat the countrydoesn'tneed important policy issue is therefore not tbreign expertise nfood. KitRo de Boer,4 a principal at whether FDI has significant spillover or y t McKiseytiunng a common argument in favor of high other benefits for India--it does--but rather tech on its head, counters; that "potato chips are morei important thancomputear chips." nd ia'sagricultural under what circumstances it does and how otut is US$65billOn yeradacut o hr f such gains can be maximized. tht coutr'si: gross domestic vprduct. So Mr. de Boer and other experts say food processing will create many The Chelliah Committee on tax morei jobs, esecially int:rura areas, home to 70 percent: of Indians. They also: n ote that food processing0 is a reform produced a well conceived program teihology-based industry, a fact they say lndian policy of reforms for the Central Government taxes makers overlook.tPepsiCo:unit Pepsi Foodis Ltd. offers a aimed at broadening the tax base, lowering case in point. Five year ago, it: set, up a research farm in thSe northerinstateof Punjab to develop high-yield tomato rates, and streamlining the rate structure-- plants. It titiicontd farmers to grow the tomatoes, thus providing the basis for improvements helping 1,200 growerscmore thantripletheiroutput to 32 in tax administration. A large part of the metc tons an~ a cre. Partly thanks~ toPepsi's, imnprovements, Punjab'sftomato production in 9g940 agenda set by this Committee has already reached 130,000 metric tons,. up from 25,000 tons in been implemented. It should be possible - 1990.- now to concentrate on completing this SorcSe:An extract from an article by Miriam Jordan.0 agenda while improving tax administration, Reprinted by ipermission of The Wall Street ournal @I and strengthening institutional capacity in :1996 Dow Jones & Company, Inc. All rights reserved worldwide. -41 - this area. In particular, it will be Box 2.3: The Success Story of India's Maruti Udyog important to extend the base of the The 1982 establishment of Maruti Udyog Limited,(MUL), a excise system. Exemptions have joint venture between the Government of India and Suzuki increased in recent years, and long- Motor Company of Japan, was a watershed in the standing exemptions for the small-scale development of the Indian automobile industry. Since, then, industry encourage tax evasion and the car sales have: soared 16 percent a year, with MUL selling more units in :its first five years of operation than all other inefficient fragmentation of production. domestic manufacturers combined in the previous forty years. Correcting this, and reducing the rates to Productivity levels have reached nearly fifty-three cars per no more than two or three should make it employee per year, compared with five for the, next big Indian producer and twenty-three cars or trucks for General Motors, possible to make the excise system close the biggest producer in North America, and are still rising., to a value added tax, and facilitate its The company produces nearly three-quarters of the passenger integration with the critically needed cars in India and has entered foreign markets, with about 10 percent of prodtiction exported. establishment of VATs at the state level. MUL's presence also has generated significant spillover There also is considerable scope benefits for Indian industry, particularly the auto components to increase the efficiency of corporate sector. A recent study of Asian auto markets found that the company's strict quality and close collaboration with vendors income taxation, as well as revenues, by have "changed the rnarket's perception of design and quality reducing both the rates and exemptions and revolutionized the components industry through its associated with this tax. The exclusion philosophy of vendor upgradation" (Maxton 1994). MUL actively nurtured some critical component industries by of profits arising from export sales, establishing eleven joint venture companies to help push accelerated depreciation, fringe benefits quality and productivity concerns upstream. As a result about and other tax preferences imply that a 75 percent of components are now sourced from domestic suppliers, with the rest manufactured in-house or imported. nominal rate of 46 percent (including a The local content of MUL's most popular model is now 95 15 percent surcharge) translates into an percent. effective rate of less than 20 percent-- The improvements spawned by MUL have supported 22 with the result that the surge in corporate percent annual growth in the components industry since 1986 profits of the last few years has not been and led to the industry achieving US$2 billion in output and accompanied by corresponding increases US$300 million in exports in 1995. Though most exports are replacement parts for older models in industrial countries, in tax revenue. Similar considerations supplies to original equipment manufacturers are on the rise. apply to the personal income tax. For instance, Sundram Fasteners, a company in Madras, Particularly important in this regard is supplies 85 percent of General Motor's need for radiator caps in the US market. the exemption of agricultural income by the states--to whom the Constitution However, the opening of the automobile market to new entry delegates its taxation. Last but not least has created an immense challenge to Maruti, which requires quick action. The current ownership structure (50% Suzuki, critically important to the improvement 50% GOI), has, however, led to different assessment of of India's taxation system is the management and investment requirements. implementation of the recommendation of the Tenth Finance Commission to shift the base for revenue sharing from a high share of two taxes at present (personal income taxes and excises) to a lower share of total tax receipts--which would provide states with a more stable source of revenue while no longer influencing how the Central Government raises revenue. Other policy and structural weaknesses erode the competitiveness of India's exports. While India's low wages are likely to attract significant export-oriented FDI, their effect may be - 42 - considerably diminished or even negated by other characteristics such as rigid labor legislation, low literacy rates and labor productivity and other factors boosting unit costs such as the inadequacies in transport and communications infrastructure noted below. Labor Costs. Indian hourly Figure 2.1: Comparative Clothing Production Costs, 1995, labor costs for production workers in Deutsche Mark/ standard minute manufacturing are among the lowest in 0.3 . the world for the 31 countries for which 0.25 the United States Bureau of Labor Statistics calculates comparable data. 0.2 In the clothing industry, 1993 Indian hourly wage costs of US$0.27 compared with US$4.61 in Taiwan, 0.1 i US$2.71 in Korea, US$1.62 in 0.05 Hungary, US$0.71 in Thailand. They 0 are, however, in line with those in i . t, . 0 m m a China (US$0.25 per hour) whose labor * S ' force exceeds all these countries X 0 X combined. However, a recent study source. KSA, 1995,citedinMajumdar, 1996. (Majumdar, 1996) found that the actual labor cost in India's clothing industry is substantially higher than in many competitor countries after taking into account factors such as productivity and absenteeism. On this basis, Indian unit labor costs in clothing manufacture are on a par with those in Eastern Europe, around 25 percent higher than in Thailand and around two-thirds higher than in Korea or China (Figure 2.1). Indian labor markets in the industrial sector are characterized, especially in relation to East Asian countries, by exceptional inflexibility (World Bank, 1993). A complex legal regime-- some 50 major pieces of legislation covering labor welfare and dispute settlement--govern industrial relations in the organized sector where most FDI would be directed. Rules governing termination of employment and closing of an industrial establishment (exit policy) render it virtually impossible to restructure ailing public and private sector firms. Fractious industrial relations add to this inflexibility. Industrial relations have shown an improvement following the reforms compared to the late 1980s when India is estimated to have lost 20 to over 100 times more days per worker to strikes than several other East Asian countries. In 1994-95, 19.2 million mandays were lost due to strikes compared with 34.57 million in 1991-92. However, the available number of working days is still estimated to be lower than that in East Asian countries when these lost days are combined with the important level of absenteeism, a large number of holidays and customary leave entitlements. Labor market rigidities will become more costly as India integrates further in the world economy. The labor market inflexibility may limit India's ability to attract significant FDI in labor intensive manufacturing exports, a pre-requisite for growth and poverty reduction. Evidence from India and other countries indicates that restrictions affecting hiring and firing decisions increase the sunk costs associated with new investment and lead to postponement of - 43 - investment or high capital intensity. The government recognizes the inadequacy of its outward development strategy with the existing labor legislation. It is in the process of reviewing existing laws such as the Industrial Disputes Act and the Trade Unions Act, with the objective of establishing an efficient system of labor dispute settlement. Literacy. High levels of enrollment in primary and secondary education have been shown to be a key factor in sustained high levels of growth in eight East Asian export-led economies. Greater investments in human resources--especially by providing adequate nutritional levels and basic education--are essential for both generating higher rates of economic growth and reducing poverty. The average 3-4 years of schooling of India's population in the mid 1980s was comparable to the more slowly integrating developing countries (3.4 average years) and was about 3 years less than the median for the fast integrating countries (6.7 average years). In India, while primary enrollments have risen rapidly, literacy rates have not kept pace because of the high drop-out rates, particularly in rural areas and among females. While literacy has risen from 18 percent in 1951 to 52 percent in 1991, it is still much below that in the East Asian countries when they began to integrate their economies with the world market. For Korea and Thailand, literacy rates were 71 percent and 68 percent respectively in 1960. Last year's CEM discussed in detail the actions required for a significant improvement in education performance in India. But India's high number of scientists and engineers is likely to provide a comparative advantage in trade and attract FDI to certain high-skill intensive industries. While the broad educational standard of the population as a whole was low, the absolute numbers of scientists and engineers in India--around 2.5 million in 1990--was among the largest in the world (see Table 2.4). This number comprised around 0.8 percent of the labor force, higher than in Korea in 1981 (in the midst of its takeoff phase). This advantage is thus expected to provide comparative advantage in trade and an attraction to FDI in certain high-skill intensive industries such as software. Anecdotal evidence (including several interviews with business executives) suggests Table 2.4: Scientific and Ttehuical Workers Scientists and % of Tech- % of Total % of Scient. & Year Type of Country Engineers Labor -nicians Labor ('000) Labor Engin. as Data* ('000) Force ('000) Force Foree % of Total [udia 2,471 0.77 639 0.20 3,111 0.96 79.4 1990 EA China ... 9,661 1.48 1988 EA Indonesia 193 0.34 1,664 2.96 1,858 3.30 10.4 1980 ST Korea 94 0.62 1,931 12.77 2,026 13.40 4.6 1981 EA Pakistan 287 0.85 210 0.62 498 1.48 57.6 1990 EA Iran 295 2.49 171 1.45 468 3.96 63.0 1982 ST Turkey 708 3.71 163 0.85 875 4.58 80.9 1980 ST Argentina 695 6.09 245 2.15 946 8.29 73,5 1988 EA Brazil 1,362 3.08 ... 1980 ST Nigeria 22 0.07 80 0.25 102 0.32 21.7 1980 ST Japan 8,672 14.28 4,955 8.16 13,641 22.46 63.6 1987 EA *EA -=Eeononmicaly active qualified labor. *ST Stock of qualificd labor. Sourcers UNESCO Statistical Yearbook, 1992, Statistics on Science and Technology and World Bank. - 44 - that India has a unique advantage in this stock of low-cost English speaking professionals. However, this pool of high-skill professionals may not be so great an advantage for labor intensive export-oriented manufactures, the dramatic expansion of which has been so essential in the improvement of living standards in East Asia and where basic labor force skills may be of more importance. For instance, a 1993 survey of workers in textile mills targeted for restructuring found that less than 30 percent had completed primary education and 25 percent had 5-7 years of education. The Bank's 'East Asia Miracle' study notes that East Asian countries have allocated considerably more educational spending to broad-based primary and secondary level education than countries in Latin America or South Asia. The shift in Central Government resources from higher and technical education towards primary education over the period 1989-94 is a step towards redressing the imbalance. Besides addressing the above reform agenda, there are a number of other structural weaknesses that would need to be removed for India to reach a path of rapid and sustainable growth, and translate this growth to improvements in the educational and living standards of the population at large. In particular, infrastructure constraints are emerging as one of India's most serious constraint to faster growth--and even a constraint to the maintenance of the current level of growth. Resolving India's serious infrastructure bottlenecks is not going to be easy since it involves the complex issues of domestic capital market development and the establishment of an enabling framework for private investment. The former will depend on the government's ability to reduce its fiscal deficit to release resources, including those of the contractual savings institutions, for investment in high returns infrastructure projects. Contractual savings institutions are the driving force behind the mobilization of long term financial savings and the development of a long-term debt market. Besides the financing issue, encouraging private investment in infrastructure will depend to a large extent on an enabling legal, administrative and regulatory framework at the state level. This is the subject of Chapter 5 of this report. Deficiencies in transport, ports, power and telecommunications, are a major handicap for India's growth and export competitiveness. At an aggregate level, India had an infrastructure stock of a little over US$500 pefrcapitructar in ockof 199 Fig e 2 lower than0 Figure 2.2: Infrastructure Stocks and per capita GDP per capita in 1993 (Figure 2.2), lower than most Asian comparators. Two of the Infrastructure stock per capita countries which had lower infrastructure sOCoo stocks--China and Indonesia--had 20000 _- significantly higher per-capita incomes, HKO suggesting that inefficiencies in delivery of 10000 infrastructure services are also a significant K OR *_ _ problem in India. Growth in demand for all 2 000 . .. . . . . . _ transport services, substantial under- NPL P PHL investment, slow pace of technological and 1 I N skills upgrading, non-commercial pricing 500 -aCH IDN _ policies, poor maintenance, low operating 200 , , ' I ,,1I I efficiencies, low labor productivity and 500 1,000 2,000 5,000 10,000 20,000 50,000 GDP per capita, 1993 (PPP dollars) restrictive trade union practices have Sou:rce World bank, CIA. contributed to significant physical - 45 - constraints in ports, inland transport links and international aircargo capabilities. In today's highly competitive international markets, such constraints affect the ability of India to participate in the "just-in-time" global production structures established by multinational companies, to respond promptly to rapidly changing market conditions in world markets, and to participate in new export markets for long-distance services such as data processing, software programming, back-office services and customer support. Availability and quality of infrastructure services are among the most important determinants of export-oriented FDI flows because of their impact on cost competitiveness. Deficiencies in transport and telecommunications infrastructure, which are discussed in the rest of this sub-section, are an issue arising repeatedly in the evaluation of individual export sectors (see Chapter 6). India's major ports are over-crowded, poorly equipped and inefficiently laid out. Eleven ports account for over 90 percent of the country's total ports throughout. They are used beyond their capacity, with average utilization rates currently ranging from 118 to 135 percent compared with international norms of between 55 and 65 percent. This degree of congestion leads to extraordinary turnaround delays; vessels entering Bombay and Calcutta, for example, currently take five to six days to turn around. This contrasts with six to twelve hours in most other ports in the region. Lengthy delays and inadequate port services have induced carriers to charge higher freight rates from Indian ports than from other Asian ports. Demand forecasts suggest India will need additional port capacity of roughly 200 million tons by the end of the century (ADB, 1996). Current estimates place capacity at 174 million tons. However, capacity addition during the Eighth Five-Year Plan 1992-97 is expected to fall below target by 45 percent. In addition to the basic structural problems, such as insufficiently wide shipside aprons, berths with insufficient draughts, and a general lack of dockyard real estate for warehousing and expansion, inefficiencies are attributable, according to the Federation of Indian Exporter Organizations, to obsolete equipment, burdensome bureaucracy, poor management and extremely low labor productivity. The 11 major ports and 139 minor ports are all managed by the government controlled port trusts. The number of Twenty Feet Equivalent Units (TEUs) handled per crane hour in Indian ports is significantly lower than in many competitors--7 in Bombay compared to 32 in Singapore. These factors combine to increase container handling costs. A World Bank study (1994) compared Indian port handling costs to those in selected other countries, and, not counting the loss of potential exports, estimated the comparative cost disadvantage at US$80 per container for exporters and US$190 for importers. Roads. Nowhere is the contrast between high stock and low efficiency as marked as with roads. The length of paved roads per-capita is high relative to most East Asian comparators (around 1000 kilometers per million people versus around 150 in China and 550 in Thailand). But only 20 percent of paved roads are estimated to be in good condition, compared with 70 percent in Korea and 50 percent in Thailand. Road usage is growing rapidly however. Road freight grew at nearly 9 percent a year over the past 20 years, currently accounting for about 60 percent of all freight. Road travel also accounts for approximately 80 percent of India's passenger traffic. By the year 2000 these shares are expected to rise to 65 percent and 87 percent, respectively. A large proportion of the total road system is used at well over 100 percent - 46 - of its intended economic capacity. The National Highway network, with 2 percent of the total road system, carries close to 40 percent of the country's total traffic. Excessively heavy traffic directly contributes to worsening road conditions and takes a further economic toll in terms of vehicle operating costs and delays. The air transport sector is where India has made the most progress over the past five years. Reforms in the air cargo market have led to increased competition and investment and lowering of airfreight rates. Airborne import/export traffic in 1992-95 grew some 49 percent and is expected to continue to grow at an annual rate of 15-20 percent. The entry of private airlines contributed to a more than doubling in the rate of Table 2.5: Internationalt Companson growth of passenger air traffic, 12 percent per year in A AirportCapacity Airpots e Airprt per 1992-95 compared with 5 percent in the 1980s, and I millionhpop. 1o.000 k growth is expected to continue at similar or higher India 0.38 0 .11 Malaylia 5. 83 0.35 rates in the medium term. Measures taken to support Phi4ippin 3.7 0.52: development of adequate airport infrastructure include Singaporet 346 15 81 South Korea 2.5011 merging of the domestic and international airport IDonesia 2.E1 0.23 authorities and the opening to the private sector of Thailand 1.74 0.20 airport construction. Nevertheless, with the exception China 0.17 0.02 of China, airport capacity remains low relative to East Asia (Table 2.5). However, concerns about the ability of the public airline industry to compete have restricted the expansion of private activity in this area. Indian railways have been losing Figure 2.3: Rail Road Tracks freight market share to road transport despite a relatively high length of railways Kilometers of Rail Road per million persons per capita (Figure 2.3) and per square 200 LKA n KOR kilometer, and despite the problems Xool IND SAK -- -MYS-- _ associated with the road system. One l ( CHN * reason has been the low priority on 50 -0 MN - - - -_ - container cargo leading to slow and widely s0D variable delivery times. A recent World 20 SGP - Bank study indicates it takes about a 10 '0 - - quarter of the time to send a container , NPLHitKG from Madras to Northern India by truck as s | by rail. There is also a shortage of rolling stock and equipment which has also 2 _ I contributed to bottlenecks in the movement 500 1,000 2,000 p ,00e 1 0000 20,000 50,000 rGDPlperrapita,1993C(PPPdollars) 'A.of cargo. Nevertheless freight transport World_b_k__CIA. demand is expected to grow between eight to ten percent per annum in the medium term. Massive investment is needed to keep pace with these demandforecasts. Telecommunications. Table 2.6 shows India underperforming to comparable countries on a range of telecommunications sectors indicators in particular for telephone density and line faults. India has already recognized the importance of this sector in enhancing its ability to - 47 - compete by inviting private sector T Teleeommunicatioas SettrJIndicators, 1993 Tiible 2.6. eeomnetoSScRrldcltrbt9 participation. The main objectives Tlepbomne Waiting. Faulits pr include making a wide range of quality Density Period 100 lines per 100 pop (years) per year telecommunications services more India 0.89 2.5 218.0 widely available including village access EUROPE 30.85 2.9 NA to basic telephone services, at reasonable Argentina 12.2 13 12.5 Mexico 8,79 1.0 NA prices. The policy permits private Brazil 7.51 0.7 43.2 companies in India to supplement the ASIA 4.26 1.4 NA Egypt 4.26 5.8 NA services provided by DOT, but requires Thailgnd 3.71 6.5 32.2 them to maintain a balanced service AFRICA 1.6 4,9 NA China 1.47 0.8 NA coverage. This policy is expected to Philippines 1.31 9.9 10.0 promote labor-intensive exports by Pakistan 1.31 4.9 120.0 removing a large obstacle to companies si LAnka 0,9 >10 15.0 relocating to rural areas where labor Source: ITUs World Telecommunications Developormt Rqport; World costs are lower. Telecommunicatioes tndicators - 1994-96. The power deficit is chronic and the situation is rapidly deteriorating. The power supply gap has continued to increase during the Eighth Five-Year Plan. The overall energy deficit has risen from 9 to about 14 percent with the peak deficit getting close to 30 percent today. This power shortage is estimated to cost India US$2-3 billion a year at least. The factors underlying this deficit are well known. Chief among them is the inability of the sector to expand the country's power supply capacity at a pace commensurate with a rapidly growing demand. The latter is fueled by economic liberalization and industrial development as well as the low subsidized tariffs to agriculture and households. The additional capacity created during the Eighth Plan fell well short of the targets. Out of the 48,000 MW initially envisaged, approximately 18,000-19,000 MW are expected to be commissioned by end-1997. Despite government's efforts to encourage private investment in the sector, the addition of private generating capacity is unlikely to exceed few hundred megawatts by the end of the Eighth Plan period, most of it coming from distribution licensees. For the Ninth Five-Year Plan period, the government has estimated that the additional capacity required to eliminate the power deficit would be around 57,000 MW, which means investments in generation, transmission and distribution of more than US$100 billion. Given the disastrous financial situation of most, if not all, SEBs (Box 2.4), it will not be possible to mobilize the resources needed to eliminate the power shortage. The problems of the sector are too deep and far-reaching: insufficient generation, poorly maintained equipment (generation, transmission, and distribution), inadequate tariffs and revenue shortfalls, deep cross-subsidies, and widespread government interference. It is not surprising that the deep revenue shortfalls that stem from inadequate tariffs and exacerbate the sector's operational problems, also render it incapable of meeting the supply needs of its consumers. But the problems transcend the revenue shortfall; long-term improvement requires more than an increase in tariffs and a phased reduction of internal cross-subsidies. Significant, comprehensive, reform is necessary. This means restructuring the power sector at the state level, along the lines, for example, of what has been undertaken in Orissa; reconstituting the system at both the state and central levels; and reallocating responsibilities between them. There is a key or core set of changes that are required at the state - 48 - level; short of them, attempts at reform are not likely to yield long-ter-m success. Other types of measures will only be second-best initiatives with marginal and short-lived impacts (e.g., encouragement of captive generation--see Chapter 5). BOX 2.4:~ E[arvAna' P.ow Crii The veypojoe upy situation fin Hyna hireaten to serly undermin the grwth pttialof the state. System l~~~~osses are reportedatI33% butf are proabl olose to 40%, with no-eiia lose - .e,unle supply, theft adIfifrg of poe-running probably at sorme 0% The pat loidfator(P)o thrmnal plat aveages 4404 wel bel w Id'aveMrge Large oltag fluctuations co Wnydteirt lctrcleupet vr er about 27% of distrbuto trnfoer fail because of:overloading. Farmeraetoriewind irrigtion pumpsets two or. tree: times: a year. because.0of the Poor qualit of powersply neved deand has inrased from 90% to 25%/ between :1,993 ad 1996, rpeenting ta ostitothe economy..ofat ~le~astRs. ~~1.740 :crores (US$53 mitllion).~ The fInancial4losses: Of H arana State Electricity Board (HSE) have now re;ached close to :half its annual saes revenue.. I-lSEW's accusriuated] losss (boutlRs.2,800~ crrs ed the totl e investme nt (quiyadla)fo h tt genent (s2,300 crores) since the formation of th or.B eside: operaIonliefcece,rvnelsn theft of power the main factor underlying 16 eoses is the unrunrative tariff of powe sapple o S S-nelr . to agriculture, and to4 a,.lesser extent, domesticconsumers. Agriculturlslsgnraeolw7%o HSESB's ~revenuevwhileirepresenting accordig toHSEBI's Accounts, 45% of the overall consumption. Power suoppl to agiutrtiofiill rcda the quialen of50 paise/kWh which isless tAniA one-fourth: of the average. cost of suppy ycnrs,idsra ppowertaifs 2, Rsih reamong& te hihstin nia,But this heav cros-ubidization: is inufficientto. cmestfor th l.osses incure osAles, to aiclture and domestic, consumers To: cover: thie:defict, kth sate. governmednt ais been, heavilysubsidzing H BS )operations~ through cash support,~ converso ACf Jetant equity, :and forgivenless of debt: seviCe~ 4bligatiQa 0. ve the lAs yes,tile. tOta net transfersfromth state to ..E oan be coneraieystaeda aboutRs. 2,0 c*ores (US$680 mWiion0), which isequivaln tohe cost, of cstructing: a5 50-M plant about four times ~H raastota rC.Mev:enu xpendiueo -medical, pubalic health and~fail~y welfare (Rs.~544~~d coes) oreha the talepniture on-irrgatio andfloo contol: (Rs. 1, 530 crres),: and of the same ore fmantd s xedtre onducaio,srt,asancuue (Rs.2.337 crore)or the:same period.. pTis ils also to, compr to Subsidies accounted for inHSEB1's finacall accouns andthe Sates budget,(Rs.487 crores). State sup1port has been Incrasingly divet edocover cash operating exessanlddebt service obligations onlinstitutionial det eaving litl, ifanything for caial expenditure.: In 1997,~ HSE will fceacshdefci Of R.50 450 croreS, anld will niot be able tocveit cashf obligations in the absence of signifcashntftariff increasesit Under oralcircumstances, demand fo oerw.d.ieygrwa.aot~ anualyequiring new investments inl generation,~ trnmission] and distribution of about Rs, 12,0 crores (S3bIlo) iven te preen finnca distress. of the sector,, ther isnwy these rsourcestcan ~b&inobiie. .I:f nothing: were :done,1 H aynas power sector wouldl conti nut to deteriorate flirther, drain pulic :resources:and: stall the ~economic, growthof hetate altogethe.1y cotat hen Haryana reforms its poe setr, as already decided, the~ state i xetdtoraenmuscnmi :benefits. ~A roug estiate pq1s,'he netpresent value f thse beefts as leasUt R.7,2(00 cres (mre an about IUSS2 bilio) -over Wh next 20 years, owethird (fHaryna1994 grossdomesicprducll In addition to the under-investment and inefficiencies in the use of existing infrastructure stock, the engineering, administrative and construction constraints are just as binding --as the World Bank's 25 year experience with relaxing financial constraint through infrastructure lending indicates. For instance, State Public Work Departments (PWDs) and small labor-intensive road constructors, who have monopolized road planning, design and construction in India for decades, do not have the capacity to build the expressway now needed for the high density corridors. Thus, unless there is dramatic improvements in the efficiency of service delivery, - 49 - infrastructure constraints are likely to remain a significant constraint on achieving progress in global integration, and sustained rapid export growth. Finally, there is growing evidence that India's cities and towns arefacing a crisis of serious proportions stemming from chronic underinvestment in urban areas and consequent shortages of key urban services. At the heart of the problem are the cities' weak fiscal base-- eroded by state legislation imposing rent controls, limits on the amount of land an individual can hold, restrictions on land markets, and unrealistically low water charges. In some of the main cities, fiscal revenues are excessively dependent on extremely inefficient taxes which need to be eliminated--such as octroi. Thus, any program of urban reform would need to include measures to: (a) improve urban areas' use of the existing resource base (such as a better cost recovery and enforcement of existing taxes); (b) strengthen the resource base and make it more efficient (such as lifting rent controls, eliminating octroi, and establishing efficient land markets); and (c) establish a rule-based, efficient system of capital transfers to replace the present system which is discretionary and unpredictable. Such measures would provide the basis for the restoration of the finances of the country's cities and towns--and thus restore their capacity to invest in critically needed infrastructure. They also would help municipalities become creditworthy borrowers, able to access capital markets and mobilize financing for critically needed investments. It will be critically important to complete the financial sector reforms started in 1991. This is necessary not only to promote the efficient allocation of the investment needed to achieve higher growth, but also to strengthen the implementation of both fiscal and monetary policies and preserve macroeconomic stability. However, some of the remaining financial sector reforms can only be implemented if fiscal consolidation is achieved because further liberalization in the presence of large public sector borrowing requirements needs and consequently high interest rates could weaken the financial system--as companies balance sheets deteriorate and banks' non-performing assets rise. Assuming that fiscal consolidation is achieved, the priority financial sector reforms are essentially four. First, the comprehensive restructuring of the public banks which started with their recapitalization needs to be brought to its logical conclusion. This means granting banks increased managerial autonomy over branch networks, employment and compensation issues, and portfolio decisions. At the same time, the government's equity share in these banks needs to be reduced below 50 percent--which would create incentives for improved bank management and profitability. It is clear that the phase in which the development of India's financial sector could benefit from direct government ownership is long over and that in this new phase the government's most important and challenging role is in fulfilling its oversight responsibilities and in strengthening the institutional base of India's financial markets. Second, remaining controls on banks and insurance companies forced holdings of government debt need to be phased out pari-pasu with the development of markets for government debt. Third, as the fiscal deficit is reduced, it should be possible to accelerate the development of money markets by reducing the intervention of the RBI in the placement of government debt. This should make it possible to establish liquid and deep money markets which can provide the basis for benchmark interest rates, help develop financial market linkages, and support the development of a corporate - 50 - debt market. Fourth, the government will need to continue strengthening prudential regulations, supervision, and the capital market infrastructure and legal and regulatory framework. A delivery-versus-payment system was recently established for government securities, but further efforts are needed to create modem settlement and registration systems for corporate bond markets, while regulatory oversight needs to be made more effective. In addition, improvements in India's payments system are key to the integration of the country's regional financial markets, and also to the better management of the country's public debt. As noted in the government's CMP, "No strategy of economic reforms and regeneration in India can succeed without sustained and broad-based agricultural development". Agriculture accounts for 30 percent of India's GDP and 70 percent of total employment. Its performance is therefore central to the welfare of over 300 million poor who live and work in rural areas. Since Independence, increasing agricultural productivity has been a central objective of India's development strategy--essential to the elimination of famines, reduction of poverty, and successful industrialization. However, the two conflicting objectives of ensuring food products to consumers at low prices, and making production remunerative to farmers, led to an unsustainable agricultural growth pattern during the 1980s and mid-1990s which, if not corrected could erode the gains of the past decade and a half. There is therefore an urgent need to promote sustainable and rapid agricultural growth, based on a four-pronged strategy which is discussed in detail in Chapter 4. Conclusion As indicated earlier, none of these constraints can, in principle, alone threaten the acceleration of private investment, exports and growth. However, when combined together they can seriously stifle private sector investment intentions and thus hamper India's ability to draw on the benefits of global integration in improving its economic performance and welfare. India's past disappointing growth performance and poverty reduction are clear evidence of the importance of these constraints to growth. In addition, India's success in integrating global world markets will depend not only on how far macroeconomic performance and the enabling environment for private investment improve relative to its own past but will also be conditioned by the performance of other countries, an increasing number of whom are also embarked on the path of domestic reform and international integration for growth and welfare improvements. If a significant proportion of these constraints is addressed, then 8-9 percent growth rate is within reach. PART II THE CHALLENGES AHEAD - 53 - n ~~THE CENTRALITY OF FISCAL ADJUSTMENT INTRODUCTION At no point in India's recent history have circumstances been better to bring fiscal imbalances to levels consistent with sustainable higher growth. The strength of the economic recovery provides an ideal opportunity for the much needed fiscal correction. The latter combined with the expectation of a favorable external environment makes it much easier to complete the liberalization of the trade regime and that of the financial sector. More importantly, perhaps, the last five years have provided ample evidence on the extent to which India stands to gain from further stabilizing and reforming its economy and from a better integration with the world economy. There is now a broader consensus in favor of reforms. Indicative of this, the new United Front Government's first policy statement ("A Common Approach to Major Policy Matters and a Minimum Programme") proposes to continue the economic program with a focus on the areas where reforms are most urgently needed: fiscal consolidation, improvement of Center-States fiscal relations, and liberalization of agriculture. This chapter first reviews the severity of India's fiscal imbalances. Next, it articulates a strategy to reduce them. Finally, the chapter concludes by examining the importance of fiscal adjustment for the continuation of critically needed financial sector reforms. The following two chapters discuss in detail the policy and structural reforms needed for productivity growth in agriculture and greater participation of the private sector in investment and provision of infrastructure services. EXTENT AND NATURE OF INDIA'S FISCAL IMBALANCES India's persistently large fiscal imbalances raise three concerns. First, the upward trend in the interest burden on public debt threatens the sustainability of the current macroeconomic stance. In particular, it threatens the current mix of growth and inflation. Assuming that real interest rates are equal to the GDP growth rate, solvency requires that in the long-run the primary (non-interest) public sector surplus be sufficient to finance the interest service on net outstanding public sector liabilities--that is be no larger than seignorage revenues. This would avoid an explosive situation in which new debt is issued to cover the interest payments on the mounting stock of old debt. Because a large share of the public debt has been contracted at interest rates well below current ones, and this debt will take time to mature and be rolled over at the higher current rate, India is far from such a situation. However, in the absence of a serious adjustment in India's tax or spending patterns, this situation will eventually materialize forcing either inflation to increase or growth to decline. - 54 - Second, from a public finance Tbe31 vlto ttePbi etSok 909 angle, servicing the 909 91f 23 9-4 949 9-6 country's public debt 1. omtidbt70. 6 & - - - puslag claims on Goenmea9.t82 17 607 5.4A. puts large Cent~~~~~~~er 52.7 S1.2 50.~7 :::513. 1. II public resources, Stae e 68 7.0 7. 7.3: '7.2 which reduce the ~~~~~Nonfnanciat P bI' Enterrss10.6 113 10.7 - which educe he 11External debt 233 27 30. 25A5 ~23.2: 23A. govermnment's ~ GeneralGovernment 16.0 19.6 22.2 20.6: 210.6 20.3 capacity to spend on ~1~e). 11 ~.~~~* key development 1lL Tota debt: (I 4ojI) 934A . 9A - - - activities. In CenterCmen 6875 7. 7, 7. 7. addition, it also Stts . 70 7,1 ~7.3 7. - RBI 29 19 21 -. 28 -. creates a need for N~IrcaPbi uepie 50 1. 70 - higher taxation, Mpwitcmn~i which undennines Gener6fidal government deb hlby RB net) 16.7: '15.31 14.0 1. 1.. 11.6 Center ~~~~~~~~~~~16.3 5.0 13, 12.1 to'5 10.9: efficiency. In 1994- Stts04 .3.3 .3 0 & 95, the interestNoe:-otaiab. . burden of public debt b., Includes debt held by RIji absorbed 37 percentc.ElueSttshodnofetede. dV.: Exduding States!' deb to. cent of the general .INCudn debAt genra go.erment . IM external: debt minu fmrin curcy asset government's tax Sore no ugtdcm ens I, n tf etmts revenues (Tables 3.1 and 3.2). Table 3.2 linterest R ~ate ad Paymients onPublic Debt~:: 1990-91 1991-9 1992-199 993-9 1994-95 1995-96R. . nplkit Interest Rate on; Market llorrowings ~~~~~~~~~~ ~~~10. 10.49 10.4 11.3 1, 4 1 Small Savings 9.6 9.9 9.4 ~~~~~~~~~~~~~~~12.2 3. 1.2: Externa Debt .5 41 3, 31 . 2.9 2. neetRt onlNew Issues of Dated Securities I' 10 1.5 1, 31 12.G: 13.8 3. 1Meio. Itm RDI Subscriptionof Dated Securitis: 44.3: 48,2: 22.1: 4,3 16 1. Interest payet pren f(D)4.7 11:]~5.1 ~:: 53 5.4 5.6 5. Interest payments (percent ot~tota1 tax revenue) 28.8 30.2 32.5: 35.7: 36.8] 36. Interst pyment (pecentof --P)5.6 6. 64 65 . 65: b. For:i990-91 -1991-92, average of maximu n m inmu at4n e plWmnsjT g1 rminin years, wegtdaere Of cotoff yiels at Auction, exlding funding, prtions c, Fo 199596 pril-ugus apctu,ls. Third, the large fiscal imbalances pose a risk to macroeconomic stability as the financial sector is further liberalized. Since a large portion of the outstanding public debt stock carries interest rates well below current market rates, the overall interest bill will increase as these obligations mature and have to be rolled over at the higher current market rates. This - 55 - convergence of the average rate to the marginal rate will have a sizable impact on public finances. For instance, if during 1995-96, the general government's entire domestic debt stock had earned the marginal interest rate, the interest payments additional to those actually made would have amounted to roughly another 1.8 percent of GDP or, equivalently, another 10 percentage points of total tax revenues. Moreover, as restrictions on financial intermediaries' portfolios--including in particular banks' SLR ratios--are eased, the captive demand for government securities will shrink. As the momentum for growth accelerates, and competition for the available pool of savings intensifies, higher rates of return will be required for investors to hold willingly the public sector liabilities. At the current public indebtedness levels, each one- percentage point increase in the average interest rate on domestic public debt would add around 0.6 percent of GDP to the general government's interest bill. The upward trend in the interest bill on public debt places India among the top countries in terms of interest burden, both relative to GDP and to total tax revenues (Table 3.3). India's public debt burden indicators exceed those of virtually all developing countries, and particularly those of the successful East Asian countries. Only a few South Asian countries with highly indebted public sectors come closer to India in this regard. Table 3.3: International Comparison of Public Debt Stocks and Interest Payments (percentage) Total Public Debt/ Interest payments! Interest payments/ GlDP Total tax revenue GDP indien 68.2 36.8 5.6 Industrial Countries Median 68.7 13.1 3.7 South Asia d Median 74.9 33.1 5.8 East Asia e Median 43.1 7.7 1.4 Baker-15' Median 63.1 Latin America and the Caribbean g Average -- 12.0 2.G Sub-Saharan Africa h Median -- 15,0 2,1 -- Not available. a. Interest payment ratios pertain to 1993. b. Debt stock and interest payment ratios refer to the general government, data for Indian fiscal year 1994-95. c. Debt stock to GDP ratio is for the year 1994. d. Debt stock to GDP ratio is average of 1988-93, includes: Bangladesh, Nepal, Pakistan and Sri Lanka; Interest payment ratios include: Ihutan, Pakistan and Sri Lanka. e. Debt stock to GDP ratio is average of 1988-93, includes: Indonesia, Korea, Malaysia, Philippines and Thailand; interest payment ratios include: Indonesia, Rep. of Korea, Malaysia, Singapore and Thailand. f. Pertains to the year 1988; Baker-IS = fifteen heavily indebted countries: Argentina, Bolivia, Brazil, Chile, Colombia, Cote d'lvoire, Ecuador, Mexico, Morocco, Nigeria, Peru, the Philippines, Uruguay and Venezuela. g. Bahamas, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, Uruguay, and Venezuela. h. Cameroon, Madagascar, Mauritius, Namibia, South Africa, and Zambia. Source: Guidotti and Kumar (1991), Tanzi and Fanizza (1995), and Hinh Dinh (1995); World Bank data. What is the extent offiscal adjustment required to ensure sustainability? The analysis summarized in this report followed the conventional approach of computing the sustainable - 56 - primary surplus/GDP ratio--i.e., the surplus consistent with stabilizing the public debt to GDP ratio permanently at its present level. The arithmetics of sustainability show that shifting from a potentially insolvent to a solvent fiscal path implies raising permanently either the public sector primary surplus or the collection of seignorage (money printing) or both. However, the empirical analysis carried out for this report shows the maximum revenue that the government could extract from seignorage is 2.5 percent of GDP but at the cost of inflation rates of around 28 percent. By contrast, the seignorage raised at moderate Table3.4:ThePrimaryvDeficitConsistent twithSolvency, (percent of GDP) inflation level of around 4-5 Real GDP Growth Rate Real InterestRate (%.) percent (consistent with current Government inflation targets) is 4 0D7 :UI around 1.5 percent of GDP. Table 6 X 2 1.9 L5 3.4 presents the level of Note, Seignorage collection is assumed4to equal 1 5% of GDP. The calculationi are based on the following assumptions: Extermal debt/GDP, net of RBI assets -:23.2% sustainable public sector's (World bank d; d Doniestic debt/GDP, net of debt to RBI 55.A1o; Foreign real primary deficit under alternative interestate = 5.5%. Source: Staff calculations. configurations of the economy's long-run real interest rate and growth rates. For instance, if the long-run real interest rate and real growth rate coincide (at 6 percent), then the sustainable public sector's primary deficit consistent with low inflation is just equal to long-run seignorage revenues-- 1.5 percent--therefore requiring the public sector primary deficit to be reduced by at least 1.6 percentage points of GDP from its current level of 3.1 percent of GDP (see Table 1. 10). However, this fiscal retrenchment is insufficient to stabilize the public debt/GDP ratio if financial reforms are undertaken. Fiscal sustainability would then require that either revenues are raised or expenditures are cut to match the implicit revenue loss from a lower "financial repression tax". A quantitative framework was used to assess the extent of fiscal adjustment needed under different scenarios for financial sector liberalization. The results are summarized in Table 3.5. As a starting point, column 1 of Table 3.5 shows the deficit that would be consistent with an inflation of 4 percent and a long-run economic growth and real interest rates on public debt of 5.5. It is further assumed that the status quo prevails in the financial sector (i.e the SLR and CRR are maintained at their current levels). Table 3.5: iFiscal Conequences: of Financial Reform: (I) ~~~~~~~~~~~~~~~~~~~Reduction in Both iE iVS:X:EtiiidEdi;0: t tyL :0;0 Q |t i;FdiFscal : i t: Xi : i: Reduction ioi St af SI00 ::; f ;0Xt; t:0 0F bi; :t: ii Without (2) (3) (4 Financial Without Fiscal With Fiscal WithoutFiscal With Fiscal With Fiscal Rie:fin: Adjustmenustmes tmnt :Adjstn :t Adjusftventi Adjustmeot beral:lXncit6DPX: g 4.6t:; lo l; n0 12.3t (pptnt4 9 44.60 4 0 I Si dJM 7Ra v< 730. 5.6 7.0 Dositlc)b 5.5 7.0o 85 A ~T' Dpita 4.6 3.80 i4/'7 4.8 05i OverlIfleflet/GOP 7.6 12.13. 7.61. t: Decline in te averapgeSLR to 2%. b.eReductionin the MCR to 8%. : :ifc. Bothof theaiovec measums,with additional fiscal correction; S src:: Staff:calculations. - 57- The result of this exercise confirms that the urgently needed financial reform will reduce considerably the extent to which the government can finance its deficit through monetization or financial repression. Setting the target inflation rate at 4 percent implies that the maximum amount of deficit financing through seignorage revenue cannot exceed 1.5 percent. As a result, the other columns of Table 3.5 illustrate the effects of financial liberalization on fiscal deficits, inflation, and real interests. In particular, the model shows that a reduction in the SLR to 25 percent will shrink captive demand for public debt and therefore require a higher real interest rate to clear the debt market. In this case, the long-run primary deficit has to decline to 0.6 percent of GDP in order to maintain 4 percent inflation--i.e. an additional reduction of one percentage point of GDP from the benchmark primary deficit of 1.5 percent in the absence of financial reforms (column 3). In turn, column 5 in Table 3.5 indicates that to maintain low inflation, the public sector primary deficit has to decline to 1.2 percent of GDP (0.3 percent of extra adjustment with respect to the benchmark in column 1) when the CRR is reduced to 8 percent of deposits (from 13 percent). Finally, the last column in Table 3.5 illustrates the case where the SLR and CRR are both reduced at the same time. In this case, the primary deficit of 1.5 percent of GDP becomes inconsistent with a stable debt to GDP ratio at any inflation rate. Therefore, the scenario considered in the table investigates the extra fiscal adjustment needed to maintain low long-run inflation (at 4 percent) in the face of the deeper financial reform. This requires a primary deficit of 0.6 percent of GDP. In all cases, as shown in columns (3), (5), and (6) of Table 3.5, the reduction in SLR or CRR (or both) reduces intermediation margins, thus increasing the financial sector efficiency, but increases interest on public debt. The combined reduction in SLR and CRR (column 6, Table 3.5) leads to the largest decline in the financial intermediation margin (by close to two percentage points relativc to the pre-financial reform scenario, column 1). However, the reduced captive demand for public debt and the increased real interest rates on deposits lead to a rise in public debt interest rates relative to the pre-financial reform situation. These simulations illustrate the macroeconomic policy dilemmas now confronting India. Relying on financial repression to finance the public sector imbalance and postponing the remaining financial sector reforms would come at the cost of crowding out private investment and growth through its adverse effects on lending rates and credit availability. Proceeding with financial reforms but increasing the resort to deficit monetization to reduce the impact of higher interest rates on public debt--a strategy not very different from that followed in 1995-96--would, as Table 3.5 suggests, eventually lead to much higher inflation or even to outright insolvency in the long-run. Pursuing financial reforms and tightening monetary policy to counteract the effect of a lax fiscal stance on inflation would exacerbate the pressure on interest rates, increase the debt pileup, eventually demanding an even bigger fiscal correction to guarantee sustainability. Obviously, the only alternative if GDP growth is to be sustained at over 6 percent annual rate and poverty reduced is to implement a swift fiscal correction that will allow financial reform to proceed with little macroeconomic risk, raise investors' confidence in the reform process, reduce the excessively large public debt stock to lower real interest rates and free up financial resources for the rapid expansion of private investment. In this context, the extent of fiscal retrenchment should aim to reach a position ofprimary surplus by the year 2000-2001. - 58 - At a minimum to stabilize public sector debt in relation to GDP, maintain inflation at below 6 percent and growth at 6-7 percent would require the consolidated public sector primary deficit to be reduced immediately by 1.5 percentage points from its 1995-96 level of 3.1 percent (the 1995-96 Economic Survey actually proposes a slightly more ambitious target to be achieved, however, more gradually). If the central government were the only part of the public sector to adjust, this would mean a central governmentfiscal deficit of about 4.5 percent of GDP, that is a fiscal correction of 0.5 percent of GDP beyond what is envisaged in the 1996-97 budget. To the extent that states and public enterprises increase their financial performance and reduce their claims on the country's savings, the required fiscal adjustment is correspondingly less. However, as the financial sector is liberalized and banks have more discretion on portfolio composition, there will inevitably be pressure on real interest rates to increase--implying an increase in central government interest payments. Higher real interest rates would reduce private investment and thus growth while, if monetized, the increase in the central government interest payments would increase inflation. To avoid these two negative consequences, a further fiscal adjustment of about 1 percent of GDP is needed--making it necessary to increase the fiscal correction to 2.5 percent of GDP, implying a reduction in the central government fiscal deficit to around 3.5 percent of GDP. A more ambitious fiscal scenario is warranted and feasible, however--in which the consolidated public sector savings increase by 6 percent of GDP over the next four to five years. This would allow fiscal imbalances to be brought to sustainable levels while generating resources for critically needed public investment, and could enable growth to be sustained at 7 percent per year until the end of the decade before increasing possibly to over 8 percent thereafter. ESSENTIAL ELEMENTS OF A FISCAL ADJUSTMENT STRATEGY This section focuses on quantifying the increases over the short-to-medium-run (1996- 97 to 2001) in gross public savings that would be consistent with reaching a primary surplus by the year 2001 and giving enough discretion to the government to share these gross savings between deficit reduction and increase in public investment. For the Central Government, the main potential areas for fiscal adjustment are on the expenditure side: (i) reducing the size of the Central Government; (ii) removing fertilizer subsidy from the central budget and re-targeting the food subsidy; and (iii) privatizing and commercializing Central Government's PEs. Another option that could be considered but is not discussed here, because it would require a review of center-state relations is to reduce non-statutory central government transfers to the states (in the form of grants and loans) and to subject them to greater scrutiny. For the states, the areas for fiscal adjustment are: (i) improving considerably the recovery of O&M for irrigation and water; (ii) reducing power subsidies through an increase in tariffs and collection rates; and (iii) adjusting public employment. Evidently, most of these measures can only be implemented gradually (it took about 10 years for Ms. Thatcher's government to reduce by half the size of the British civil service, mostly through attrition). In addition, the state fiscal adjustment will require progress in structural reforms and change in the public sector role and modus-operandi. For example, the reduction in power subsidies is dependent on the reforms of the State Electricity Boards (SEBs) while the increase in cost recovery in irrigation requires revamping the states' irrigation departments. Therefore, in the short-run, any significant fiscal adjustment will also have to - 59 - rely on revenue raising measures--such as the readjustment of oil prices (particularly for diesel and kerosene) beyond the increases of July 1996, and the full implementation of the Chelliah Committee recommendations on tax reforms (see below). Expenditure Reform Reducing Central Government Size. A feasible strategy to control the growth of the government wage bill over the medium term could rely primarily on a temporary ban on new recruitment, which would allow natural attrition to erode the size of the civil service. About 3 percent of government (similar considerations apply to the state governments) employees are removed from the payroll each year due to retirement, resignation or death. This medium-term strategy could be implemented in two phases. During the first phase (about three years), no new recruitment would be allowed to take place to replace departing employees. Instead, vacancies would be filled only by surplus labor from elsewhere in the Central Government. New posts could still be created as long as they are filled by surplus labor in the Central Government. Unfilled vacancies for a period of, say, two years, would be abolished to bring the number of sanctioned posts closer to the true staffing needs of each department. Furthermore, the practice of hiring casual labor would have to be terminated since this could jeopardize government's efforts to control the size of its employment, given the legal requirement that casual labor be regularized after a certain period. In the second phase, which could last for the following two years, the government could adopt a simple rule of filling with new recruits only one in every two vacancies created during this period. Close adherence to the above strategy could result in a reduction in Central Government employment by nearly 12 percent (close to half a million employees from the current 4 million), resulting in a reduction in the wage bill of about 0.2 percent of GDP over the medium term. The savings on government expenditure directly linked to the reduction in the civil service could reach as much as 0.2 percent of GDP (it is estimated that 44 percent of total departmental expenditure is on wages and salaries; a large portion of the remainder consists of operating expenses directly linked to the size of government employment) raising total savings from reducing the size of the government to about 0.4 percent of GDP by the beginning of the next decade. Subsidies that do not benefit the poor could be reduced. Central Government subsidies have declined in recent years, from a total of 1.8 percent of GDP in 1990-91 to about 1.1 percent of GDP in 1995-96 (see Table 1.11). Currently, fertilizer andfood subsidies account for nearly the entire subsidy bill of the Central Government. As will be discussed in more details in Chapter 4, these subsidies are costly and poorly targeted. Total direct savings from eliminating the fertilizer subsidy would amount to about 0.6 percent of GDP. Additional savings of close to 0.1 percent of GDP could be generated by reducing support to loss-making public fertilizer plants. And gross savings from reducing FCI's operating costs and re-targeting the PDS could reach 0.2 percent of GDP. However, savings from retargeting the food subsidy might not materialize if the geographic coverage of the RPDS is expanded. In this case, the gross savings from reducing subsidies is equal to the savings on removing the fertilizer subsidy (0.7 percent of GDP). - 60 - Gains from privatization of central public enterprises. The centralBx. Welfare Consequences of:Selling Public government is the largest investment banker Enterprises in the country. It holds equity positions in 240 enterprises in virtually all sectors of the Does divestiWte imvrve domesticelfare? Who wins, ewho Iloses, and how much? One sfudyii evaluated :these. economy. The problem is that the Central questions in a sample of twelve divestiture case:studies in Government is not an efficient investment four countrites(Chile, Malaysia, Mexico. and the United banker. With few exceptions, the dividends Kingdom).g Thecases cover nine monopolies (in telecommunications, energy, airlnes, and. ports) and tireet it earns on its investment in public firms, in competitive markets 0intrucking, galing, and enterprises are lower than the interest it pays lecicity generation). They rf jhindat, iJnelevenoft the:0 on its debt. The reasons for this are well twelve cases divestture madethe world a beter place by fostering d more eicent operation I and new investmnent.: known and have to do with the fact that tThe gains in somecases were significantor unexpeted. most managers of public enterprises do not FoIrexample, productivity improved in nine of the twelve have the mandate to function on profit ycass, most dramatically in Aeroexko, the Mexican. air inenwhere itrosei by t48&percent. In others, the gains making basis. The costs to the economy are AJdidQnot necesarily1follow fomprodctivityd iprovement considerable; they include the foregone butrom increased investment. This oced in fourof0 returns that a better management of the thetve cases, doulig the number of telephone lines iAinthe ase of the Chilean phon company within four assets would yield and the consequences of years following divestiture. Moreover, the gains were insufficient investment because of their shared by Amosthof theactors involved, including buyers, financial constraints. Using a methodology government,workers, consumers, and even competitors Ths ucess did :not folwfo ivestiture, aone. developed to estimate the welfare gains and Countrie in te sample- also did a host of other thngs losses from divestiture (Box 3.1), the gains rtight. These varied: from case to case but::included accruing to the government from privatizing increasing competiton in the prodt market where. ; epossible, regulatin monopolies 6where required, and, in 50 percent of Central Government equity in m ost eass, ac ttive sale ofenterprises. Moreover, public enterprise portfolio have been divesting countriesenjoye :sound macroeconomic policyv:: estimated to amount to around 0.4 percent atheimofdvstue of GDP per year (see Annex I for detailed 5oure 99alat. al..(1994), and . Annex I description of the methodology). These estimates are conservative and offer a lower bound of the potential benefits from reforming CPEs since they include neither the departmental CPEs nor the state-owned PEs (SPEs), nor the dynamic effects on savings from efficiency gains that such reforms will bring. They also do not include the gains from liquidating the sick enterprises (Box 3.2). Gains from reducing subsidies to state public enterprises (SPEs). Two types of departmental enterprises: irrigation and power, are considered in this CEM, in view of their sizable impact on the states budgets. Water charges and cost recovery of O&M on irrigation. In 1994-95, operation and maintenance (O&M) expenditure absorbed around 5.8 percent of states non-plan expenditure. Of this, approximately 6.8 percent is recovered through water charges. This deficit is the result of a failure to adjust water charges (in line with rising O&M costs) and also to achieve high collection rates of water charges. On the assumption that the ratio of O&M expenditures to the total non- plan expenditures of state governments remains at the same level in future years as in 1994-95 and that the uncovered gap in O&M expenditures is totally eliminated, public savings should rise - 61 - by about 0.9 percent of GDP. It might go up even more if the state governments could recover a part of the capital charges. Box 3.2: Liquidation of Manufacturing Sick Enterprises The cost of delaying liquidation of these sick firrns is very high (fiscal in addition to inefficient use of a large part of India's capital-and labor force). In 1993-94 alone, the annual losses of 60 sick manufacturing PEs amounted to almost Rs.32 billion in 1994 prices (28.7 billion in current prices), that is, 1.7 times the value of their net fixed assets (NFA). An estimate is provided of the increase in domestic savings that will occur if the government were to let these enterprises exit. The liquidation scenario is compared with a "no exit" one, where the same losses are assumed to continue. As in the previous exercise, the change in domestic savings is estimated as the difference between the stream of costs and benefits with and without the reforms. [4ere, the NPV without reforms is simply the discounted value of the losses, Rs.-280 billion. The NPV with liquidation is the discounted value of the net profits before taxes minus the cost of severance payments to laid off workers. IU nder the "reformn" scenario, workers will have a severance payment equivalent to 20.months of wages each. The government takes over the liabilities and sells the assets at book value. The use of these fixed assets by the private sector yields a ratio of profits before taxes to sales of 0.085. The ratio of NFA to sales is 0.36. These numbers are based on the comparison between private and public firms in manufacturing made by 0. Goswami (1995). Three possible cases are presented depending on the criteria the government will use to decide which firms to liquidate, An erosion factor greater than I (all 60 firms will be liquidated); equal or greater than 3 (44 finns only), equal or greater than 5 (15 firms only). In the last two cases, the firns that are not liquidated are assumed to continue to incur the same losses than in 1993194. The most important conclusion from the results is that there is no justification for delaying the implementation of an exit policy. Even in the worst scenario, where the government simply closes down the firms, pays the severance payments and absorbs the liabilities of the firnms, the country as a whole will benefit, and domestic savings will increase by 0.3 percent of GDP. This is because the losses will stop. Improving State Electricity Boards (SEBs) financial performance. An extensive analysis of SEB's impact on states finances was carried out for 14 major states (Assam, Bihar, J&K and Meghalaya as well as the Union Territories were excluded for lack of data, but their impact on the overall subsidy is marginal). The impact of the SEBs' poor financial performance and their reliance on state governments' assistance can be seen from Table 3.6. The net transfer of resources from the states to the SEBs (revenue plus capital) is estimated to have reached Rs.59 billion in 1994-95, muchion higher than4 , Table 3.6. Net Impact of SEB Performan¢e on 14 Statt Budgets, 1991-95 much higher than what (poerntotGjDP) is officially reported 1991-92 1992-93 1993-94 1994-'95 '1995- 96" (Box 3.3). If the SEBs A, Revenue Accounts Revenue Receipts were financially iaterest from SEBs 0.2 0,4 0,l 0.4 02 autonomous (or if Revenue Expenditures 0.7 0.7 0.6 0.7 0.5 Subsidy OA 0.4 0.3. 0.4 0.2 states withdrew from Interest 0.3 0.3 0.3 0.3 0.2 operating their Revenue Deficit -O.S -0.3 -0.5 -0.3 .0.3 utilities), then they Capital Receipts would, on aggregate, Repayments by SEBs 0.2 0.4 0.2 0.2 0.2 release Rs. 59 billion, Capital Expen4itures - 0,5 0.9 0.6 0s5 0.5; Capital Account Deficit -0.4 -0.4 -0.4 -0.2 -0.2 about 0.6 percent of c. Total State Deficits on Acc99nt dall 4fBs -0.9 -0.8 .0.B -0.6 0.5- GDP (ignoring a. Projected. investment in capacity - 62 - . .. . . .. i i ;00000000 iX 7 77 777:777 7777 to reduce losses and improve efficiency) of . ox.3: ..Net Transfer.of Resurces from the States extra revenues which would reduce the .,",.,"".0. 0' ito the. SEBs 0: states' deficit by an equivalent amount. In Theine fl6w of: fudsroastegvrnntoa addition, the better performing SEBs would SE:sam mre acc~urate: measuire.of thedegree.to w,ihich. then be in a position to contribute positively th sEac operatiou s are amtually subsidized" by the to the states' budget through higher state, Thei figue spa for thmseIves, Compsed to a ttl: revenue isubsidy of Rs 17 billion,m FY95 dividends. In all, the states could increase reported in the latest economic survey, the net transfer their revenue by around 1.5 percent of GDP. of resources5 to the SEBs (revenue plus capital): is lestitnated to have rea¢hed Rs$59 billion, three ad a.half .times as much as what is reported: in. the EconomicR Survey as the subsidy. The revenue subsidy is only a * part of th fud flwng from ~thesas to the SEBs. ,, f t fnd fslo :l e the ta sferr ro the Achieving substantial progress overm whichincludeloansandequity. Genthe towards fiscal consolidation through SEBs' current and expected financial situation, these expenditure cuts is a medium-term solution capital transfers ought to be considered asIsubsidies the since expenditures are dominated by wages, ..,,lasprovided ,by thestates are rarely: repaid althugh subsidies, and interest payments which will the state. gvernments continue to bear the: burden of ' servicing these loans; In most states, the. losses take time to adjust. Therefore in the short- acwumulated by the...Es have alrea4 wiped out run, any fiscal adjustment will have to rely wOhatvr' t cotrib tions hayc been mrade b the at0 t i hitghly nlkelythat the SEBs willbe able, mostly on revenue raising measures which to m.ke up fbr theira4ccumurlated losses cut f'futureof puts the focus on taxation. A key objective earnings in any foreseeable future. A case in pointXis of the fiscal adjustment pursued by the Andii radshwhih hs writenoff is euit ~ Center since 1991 has been to increase total Rs~9~4btlho in AP'SES as5 subid pamts A A a similar situation eit in H h HSEBS tax to GDP ratio as a means of achieving *accumulated osses far exceed the. state govmmnt e fiscal consolidation and improving resource lto'ans and equity contributions. tWiththe SEBs'loses allocation. The Chelliah Tax Reform : :nounting *at,::.Ia faster pace evety year 'it is4 hibly unlikely that the states will ever be able to recoup their Committee proposed to: (i) decrease the i:n1vestments in the SEBs; it is therefore logical to treat share of trade taxes in total taxes; (ii) ii':tthese too as subsidy. t ft increase the share of domestic excises by transforming them into a VAT system, and (iii) increase the relative contribution of direct taxes. These objectives were to be achieved through base-broadening, rate reduction, and strengthening the capacity of the tax administration. As a result of growth and tax reforms, tax revenues of central and state governments recovered to almost 16 percent of GDP in 1995-96, after falling from 16.8 percent of GDP in 1990-91 to 15.8 percent in 1994-95. The main reasons behind the fall were due to structural reforms which had a relatively high fiscal cost (Chapter 1). Studies indicate that there is ample scope for raising the tax effort substantially. Specifically, strong revenue measures at both the center and states levels could raise the general government tax to GDP ratio by 2 percentage points of GDP by 2001- 2002. At the Central Government level, the scope for greater reliance on direct taxes (personal and corporate) has not yet been exhausted. Considerable potential exists for an increase in revenue from income tax through improvements in tax administration--as shown by the recent buoyancy of income tax revenue due to the expansion of withholding at source for fees for professionals, technical services and service contracts as well as interest on time deposits. To increase the revenue contribution of the company income tax, the government may broaden the - 63 - corporate income base through: (i) repealing company tax incentives such as deductions Box 3.4: Mexican Corporate Assets Tax for fringe benefits, the exclusion of profits Other countries, notably Mexico, faced with declining from export sales, company tax holidays, and average effective company tax rates like in India, have reducing the rate of depreciation on long- adopted atternative minimum tax on gross corporate lived assets to more closely approximate the assets to capture more taxes from ptofitable corporations. Proponents of the alternative gross rate of economic depreciation; (ii) improving assets tax regard it as a necessary "backstop' for a tax administration's capacity to deter abusive business income tax incircumstances where a country's. transfer pricing practices; (iii) abolishing the tax administration is not strong enough to properly enforce the regular tax by detecting sophisticated corporate income tax surcharge (which has accounts-based tax evasion. In other words, part of the- been reduced in this year's budget from 15 goal of the tax is to dissuade corporations from using percent to 7.5 percent) to align the top tax evasion and tax avoidance practices to reduce their percent to percent) to align the top regular tax liability below the minimunm tax liability, A corporate income tax rate with that of the top minimum tax on gross assets can be designed as a personal income tax rate at 40 percent to proxy for. a corporate income tax. Under this tax discourage tax evasion and abusive transfer design4 a business wiipay either the regular corporate tax liability or the altemative assets tax liability, pTicing practices; and (iv) adopting an whicbever is greatest. alternative minimum tax (AMT) on gross corporate assets after depreciation or net The Mexican AMTr has been highly successful. While the direct revenue from the Mexican AMT was only 0.3 worth similar to those in place in Mexico or percent of GDP in 1994, the "backstop" effwt is Argentina. An asset-based tax is easier to believed to have contributed substantially to the administer than profit based-tax because revenue performance of the basic corporate tax. A recent study indicates that, during its first year of physical assets are more difficult to under- implementation, for every Mexican Peso of assets tax report. The "Minimum Alternate Tax" generated directly, an additional 3.5 Mexican Pesos in ('MAT) introduced in the 1996-97 budget on revenue was generated under the regular corporate tax. Over time, the revenue generated directly from the book profits will achieve only some of the assets tax fell as businesses cut back on their use of results of a tax on gross assets. However, it abusive transfer pricing practices. In other words, will not address issues related with under- fewer and fewer foreign firms put themselves in a position where their regular corporate tax liability fell reporting of profits due to manipulations in below their alternative minimum assets tax liability. transfer pricing and the ability of the Indian corporate tax administration to detect The Mexican authorities also have adotpted the AMT on gross assets to overcome the distortionary impact of the: sophisticated tax evasion. regular corporate tax and hence to improve economic efficiency. The tax discourages evasion and leads to In a recent study, Rajaraman and economic efficiency by encouraging better use of Koshy (1996) find that the first-round assets. In addition, by raising the tax burden of sectors where there is a low tax presence, intersectoral tax revenue impact of introducing an AMT differences are reduced, allowing the price system to would be between Rs. 100 billion and Rs. become the main means of allocating resoures without:- 150 billion in additional revenue based on distortions arising from effective tax rates differentials. 150 billilon in additional revenue based on ---- realistic assumptions about coverage and a rate of return of between 1.6 percent and 2 percent on the book value of assets. These incremental results are equivalent to between 1.0 and 1.5 percent of GDP. In 1994-95, the actual corporate tax yield was 1.3 percent of GDP. Hence, an AMT on gross assets could increase corporate tax revenues by 72 percent. However, if AMT payments are creditable or refundable in years when the regular corporate tax exceeds the AMT, then the long-run net revenue increase from the two taxes would be much less. Some combination of the measures discussed above should be capable of generating a 25 to 50 percent increase in corporate receipts. - 64 - In addition, studies of Indian income tax performance indicate that more rigorous auditing procedures, lower marginal tax rates, and less frequent or no tax amnesties would improve compliance. At the state level, and assuming reforms in agriculture are carried through, broadening the tax base also should include taxing agricultural income (personal and corporate). According to the Constitution, only the states can tax income generated in agriculture, and with a few exceptions, most states chose not to tax agriculture. To facilitate its political acceptability, the taxation of agricultural incomes could be, at least partially, linked to the improved delivery of economic services and infrastructure in rural areas by local governments in the context of the on- going decentralization effort. This would require, however, a clear definition of the responsibilities to be delegated to the local government along with corresponding local resource mobilization power and strengthening of implementation capacity. Resource mobilization by local governments could assume a variety of forms, such as the systematic cost recovery of economic and social services, investment cost sharing arrangements with beneficiaries, and land betterment taxes. Finally, there is scope to impose indirect taxation on a wider range of goods and Box 3. The States of Mliarashtra and Rajasthan services, at the central level, by removing Led the Way in Sales X Reforms special exemptions above a reasonable In 1995,0 the: State: of Maharashtra instituted&a. .VAT for threshold for small scale industry, adopting woelmand:retail gin of lage d ith tufnover exceedin Ri 10 million with a full commodity special excise taxes for petroleum products, IS:veage. This measure apprsto have been very and extending the coverage of MODVAT to successful in, overcoming the problem] of services. Further, at the state level, the underioicing in the casa of sales by manufturers to sales ta , should be related:or non-arm's length retailers. The authorities: proposed reforms of states'sales tax should be ]have been pleased with the results to date and plan to speeded up to replace the current states' sales expand the scpe of the taxh byreducing 0thethreshold. taxes into a VAT to allow increased states O Olnetl of the str onget iar lmen favor of thie approachi, articularly when ~implemented: with feW control over their resource base. In the ratef,: is that: it vill not distortf the: relative prices faced meantime, with a view to ensuring that a :,by-consumers from the underlyng costs oflproduction.: national VAT has comprehensive coverage, a A "lrge dealers" VATwill retainthis charactersic for iEmost wholesaleandiretail transactions in aistate whileai wider range of services should be taxed either seleted commodities apprach,; which has been iadopted under MODVAT, the state VATs or by some other statts, will not: independently as at present is the case for 000000 ;000000;000 i 0 ti;000 040 0 for The,State of Rajasthan abolished its internal and:border selected services (e.g., Maharashtra). che POsts in midW1995 and this has not resulted in Maharashtra and Rajasthan (Box 3.5) have lower salesjtax revenues. This evidene could&helpdto allowed a more effective taxation of wholesale displfear of reenue losses associated widcheckpost and retail margins (Maharashtra) and abolition. eliminated internal and border check posts (Rajasthan). Finally, there is a need to build up the administrative procedures similar to those adopted in countries with full-fledged VAT systems (Box 3.6). Table 3.7 presents a summary of the additional gross public savings that could be generated by the beginning of the next decade from the strategy for fiscal consolidation outlined - 65 - in the previous section. Gross savings of 6 percentage points of GDP could be generated. This is a conservative estimate since second-order effects of the policy measures suggested here are not allowed for. It is possible that, to the extent public savings is raised through withdrawal of Table3.7: EstimatedAdditional Publie Savinp subsidies or raising irrigation charges and power (percentofGDP) tariffs, which are analogous to tax increases, private Elimination of Fertilizer Subsidy 0.7 savings might be adversely affected. In1;ndia's 50% Privatization of CPEs Portfolio O4 savings might be adversely affected. InIndias Recovery O&M on Water 0 case, the offset factor is estimated to be 0.46, so Elimination of Power Subsidy 1.5 overall domestic savings would still rise as a result Reduced Centai Govemment Employment OA of the measures proposed in this section. Broadened Tax Base 2.0 Total 5.9 Restructuring Center-States Fiscal Relations Fiscal consolidation will be difficult without a restructuring of the complex system of intergovernmental transfers to encourage the states to address issues such as weak tax collection effort, unsustainable indebtedness of states, insufficient cost recovery, inadequate provisions for non-wage operations and maintenance, and uneconomic enterprises. While some states have recently taken initiatives on their own to overcome their problems, the fiscal impact of measures adopted to date has been inadequate relative to the size of the needed fiscal adjustment. A much broader and uniform reform effort within and among states is desirable. The Tenth Finance Commission's (TFC) recommendations are a step in the right direction for the reforrn of intergovernmental fiscal relations. The TFC has proposed a number of bold and innovative measures. The recommended move towards a mandated system of sharing the total tax revenue collected by the center (the proposed ratio is 71:29 between the center and the states), would contribute towards strengthening incentives for enhanced income tax collection by the center. The TFC also recommended that in fiscal year 1995-96, the share of MODVAT excise tax revenue going to states be increased from 45 to 47.5 percent while that of income tax revenues be reduced from 88 to 77.5 percent. So far, the government only has implemented the latter two temporary measures. The priority for reform should be to implement the TFC's recommendation of sharing 29 percent of total central tax collections with the states because the change would increase the center's interest in collecting income tax and would give the states greater transfer payment stability. In the short-run, the Central Government should continue to reduce discretionary grants and loans to states, which currently amount to 3.3 percent of GDP (net of repayments). The TFC also has proposed two transparent, rule-based schemes of partial debt relief, one tied to using the proceeds of state privatization to retire debt owed to the center and the other tied to improvements in revenue account balance of a state, in a given year, relative to its performance in the three preceding years. These recommendations for "rule-based" debt relief are expected to encourage state fiscal consolidation and prepare the basis for a move towards market-based debt financing of states fiscal deficits as opposed to central control of states finances. While these "rule-based" schemes are not without their shortcoming, they deserve to be revisited by the center in its search for mechanisms which will encourage state fiscal consolidation. - 66 - Box 36: Reform of States' Sales Tax At the end of 1995, State and Union Finance Mimisters reached a broad consensus on a package of measures designed to harnonize state sales tax systems and to institute a dual value-added tax system over the medium term. Major components of the agreement are: * Establishment of uniform set of 5 floor rate with commodities in all states to be assigned to the same 5 rate categories. The floor rates would be zero, 4, 8, and 12 percent with a special category of 20 for excise- type commodities. The rate harmonization scheme would take effect from April 1, 1997. * Competition among states to give sales tax concessions as industrial incentives, which usually take the form of cumulative sales tax exemption or deferrals equal to some proportion of fixed capital investment, would also be phased out by April 1, 1997 with appropriate rules to honor existing commitments. * A decision to move to a system of destination-based state VATn might be taken after due and careful preparation. * Establishment of a Ministerial Committee of State Finance Ministers for monitoring the implementation of the agreement. Establishment of floor rates and the phasing out of incentives would deter tax rate wars which currently impose a high and increasing cost in foregone state revenue. Sales tax revenue should becomne more buoyant if this agreement holds. But, interstate competition to attract foot loose industries has recently intensified with entry of major multinationals as directiforeign investors. fIndian states have relatively little experience in assessing the optimaity of: incentives packages. Therefore states should maintain:an ongoing dialogue among themselves and the Center to ensure that appropriate strategies and standards are set and that industrial attraction taces do not become "races-to- the-bottom%. Private Indian industrialists have indicated that in deciding where to' site a unit, they are influenced more by the availability of adequate economic infrastructure, such as transport, power and skilled labor than by the promise of tax holiday. Moreover, an efficient, fair, and transparent sales tax regime is one of the best industrial incentive states could offer. A true credit-invoice VAT, rather than the hybrid VATs, which some statest have adopted, should be the medium- term goal for three reasons. First, a VAT will permit enterprises (units) to improve their operating efficiency. If the tax base is expanded to the final consumer and all input taxes are rebated, enterprises would no longer have an incentive to adopt inefficient forms of operation induced by tax minimization considerations. Second, a true VAT should reduce evasion since evasion at any point along the chain to final consumption would likely be recaptured later in the production chain. Third, the crediting of capital inputs by states would further improve growth and competitiveness. Although a harmonized interstate VAT system appears to be three to five years away, states might use the lead time to implement fundamental reforms in their sales tax administrations. For the most part, states still rely on antiquated administration and enforcement system. The foundation of a VAT or even a reformed sales tax system should be self-assessment. Experience in Latin Americamindicates that a reform package with emphasis on administrative improverents can lead to a 10 to 115 percent imnprovement in revenue generation.L A large part of this revenue enhancement can be achieved through adoption of transparent administrative procedures. The Center-States agreement envisages all states moving toward the VAT system at the same time despite the varied degree of states' administrative capabilities. However, states with the most advanced administrative capabilities and/or taxpayer compliance ability should consider moving ahead with sales tax reforms to; speed up the convergence of their systems to a VAT as Maharashtra has demonstrated. At present, the precarious condition of most state finances indicates that the first priority should be to improve revenue performance and expenditure allocation. In the long run, however, an explicit objective of the system of intergovernmental transfers could be to encourage market- based fiscal discipline. Beyond seeking to improve their own revenue collection, cost recovery for economic services and expenditure efficiency, Indian states in the foreseeable future will have few other alternatives but to achieve better access to the maturing domestic capital market (they - 67 - are constitutionally barred from borrowing abroad). To access the emerging domestic primary market, they will have to achieve substantial and sustained improvements in their finances. Last year's CEM discusses options to increase the states access to domestic capital markets. Weaknesses in the planning process should also be addressed. Reform of the Planning Commission's budgetary guidelines and procedures would encourages states to undertake structural budgetary reforms to enhance their capacity to provide or supplement the provision of infrastructure effectively and efficiently. A quick way to cut the "Gordian Knot" of state budgetary design would be to abolish the distinction between "plan" and "non-plan" expenditure as it relates to current account expenditures; so that the vital budget distinction would become that between current and capital expenditure. Under the logic of existing arrangements states have incentives to propose plan projects greatly in excess of their absorptive capacity. Consequently, many of these schemes cannot be completed as proposed and transferred resources get diverted into current expenditures. Efforts should be aimed at ensuring that borrowed resources are utilized only for such expenditure that yield a return adequate to meet the cost of borrowing. Options for reform of central plan transfers could include: (i) delinking the grant and loan components of transfers from the center to the states, and replacing the loan component of state plan assistance with specific purpose loans that are best intermediated by banks, with generous provision of technical assistance, particularly for states with weak implementation capacity; and (ii) replacing the current system of thinly spread central resources across a multitude of central schemes (covering all states and monitored by different central ministries), with a more compact set of well targeted transfers focused on the most needy states, on the attainment of minimum national standards or on activities where interstate spillover effects are great. States should have more discretion over their expenditure program and should be encouraged to experiment with program design and delivery so that India can reap the benefits of "demonstration effects" which its federal structure potentially provides. Ultimately, reforming fiscal federalism in India will have an important impact on states finances and will shape their future, perhaps much more than reforms that can be undertaken solely at the states' level. FINANCIAL SECTOR REFORMS AND CAPITAL MARKET DEVELOPMENT Besides threatening macroeconomic stability, fiscal imbalances also are a major impediment to the full liberalization of the country's financial sector and the realization of the efficiency gains associated with such liberalization. One consequence is that an efficient money market has yet to emerge in India. In its absence, the long-term end of the market cannot fully develop thus impairing the availability of finance for private sector investment with long gestation periods--such as infrastructure investment. The remaining part of this section reviews the main priority reforms needed for the creation of long-term debt markets. The first and central priority is a reduction of the fiscal imbalances. The government has chosen a very gradual approach--perhaps excessively in the areas of privatization of banks and deregulation of insurance and other contractual saving institutions--to liberalizing the financial sector. Its gradualism is based on a desire to avoid volatile and disruptive interest rates' movements which could accompany a rapid de-regulation of financial markets in the presence of - 68 - large public sector borrowing requirements as has been the experience elsewhere. Accordingly, the twin pillars of government's strategy have been to: (i) maintain existing (but gradually relaxing) controls to repress the market's ability to price risk and; (ii) encourage during this transition the emergence of o 3.7 Benefit of a Efficient M Market ;: 0Box::3.7:. Benefits tof an EMfcient Money:MUarket E|0Xj new institutions and development of skills required to manage at a later date a de- * For banks: An efficient money market improves regulated financial market. However, this liqu idity management and so lors costs. It allows banks to manage risks arising from interest rate strategy has given rise to a number of fluctuations and to manage the maturity structure 0If issues. While the gradual reforms have their assets and liabilities. And it provides a stable - encouraged a rapid increase in market source of funds in addition to deposits, I allowing.. ; al ternati vei fun dingz stfuctures an d competiti oin. t i - skills and infrastructure, the remaining a f s t a tition. controls are inhibiting market participants . For savers: An efficient money market encouragzes the: from fully benefiting from the emerging development of non-bank intermedares and . thus increases comnpetition~ for funds, leading ~ to higher. gains of a more efficient allocation of r ecturns and new, more flexible savings instruments, capital based on greater sensitivity to and pricing of risk, and lower intermediation 0. For borowers: AIconsistently liquidImoney maket i provides an effective source of long-term finance. costs. This result is cespecially useful in countries wvherel long-term debt is unavailable because otfhigh inflation::: The continued success of this or because of some other fom p of uncertainlty.0 l In risk pricn w additionr direct ,access to the market for short-term strategy (repressing rsk pr g whtalallowslargerborrowers tolower theircostof developing institutional infrastructure) funds and manage their 0short-term finding or,. will depend vitally on the speed with surpluses4more efficiently. which the government can reduce those . For other financaarkeis: An efficient money risks that it is reluctant to have the market market supports the development of both primary and price them at their true level. The most secondary securities markets. Participants canlborrow important of these risks are the market's inthe emoney market to fund their security holdings. A liquid money imarket Wis necessary for the perceptions of macro instability due to development of an effcient market in forwar d foreign the size of the fiscal deficit and the exchange and for markets in derivative instrutments. quality of banks' balance sheets. If the t . For the government A liquid money market government can move rapidly to reduce providing access to a wide rangceof buyers enablesi te these risks--to a level at which the government to achieve better pricing on its: debt Ant: government is comfortable with allowing 0 0 0 0 0 t 0 0 0 cxexcessive government : borrowineg; requirement,; government however, or a lack of coordination among fiscal,:: the market to price them--it will be able to monetary, and excha te policies wil: disrupt the complete its deregulation of financial market. markets and achieve a relatively stable . Far thecentral a Monetary control through low-cost transition. Tardiness in reducing indirect method si (treasury bill :auctions andoen these risks will, however, prolong the J market operations)> ist more effective if the moneyv increas the cost o existg market is liquid. The market response: to central ban - transition; mcrease the cost Owill b both fster and less subect to inefficiencies without necessarily reducing distortion in a liquid market.c. The .short-term.ild the potential for volatility when markets curve that isi Sa: &feature ofiquid markets is a useful are finally de-controlled.icator fo m policy. SoUrce; D. Wilton, "Money Makets tMater Atee% r a. By any criteria, the financial Gldeanc,FPD noteoNo. 27, orldi Bank, O 9t. 1994. sector continues to exhibit signs of - 69 - inefficiency. A well defined short term yield curve is missing; the money market is volatile; T- bills, government dated securities and private debt issues do not enjoy secondary liquidity; and the ability to manage portfolio risks is weak due to a lack of risk management expertise and illiquidity. In terms of further market development, two challenges stand out as priorities: * Developing a deep and stable money market capable of generating a term yield curve. The overnight rate is currently very volatile and money market maturities do not extend beyond 14 days. This inhibits funding options for banks and the development of a forward foreign exchange market. * Developing a liquid secondary market in T-bills and Dated Securities. There is little secondary trading in debt instruments, either government or private. This causes risk management problems for investors and inhibits the further development of a primary market in corporate debt. The Indian government has already undertaken policy reforms over the recent years to increase the role of the money and bond markets in macroeconomic management and financing of private sector investments. The government has led the way by deciding to progressively move away from its previous practice of financing its fiscal deficit mainly through direct instruments (such as monetization, high reserve ratios and the obligatory placement of debt at below market interest rates) toward financing through market borrowing. However, further progress in developing efficient money and debt markets is currently hindered by policy concerns about the financing of the fiscal deficit and retention of monetary control as well as the pervasiveness of publicly-owned banks with their non- commercial orientation. In making the transition to market-based financing and the development of financial markets, the authorities face many of the problems encountered by other countries engaged in the same process. In particular, financial sector reforms will increase- -at least in the transition period--government funding costs. Therefore the proposed financial reforms should be coordinated with the government fiscal consolidation program to reduce the transitional costs and risk of backtracking. The second priority is the development of the money market. Developing a stable money market and a liquid secondary debt market would require reforms in three broad areas. First, close coordination at the macroeconomic level between monetary, fiscal, and exchange rate policies. Second, better information management systems at RBI and MOF. This includes forecasting and managing government's short term cash flows and debt. Third, increased incentives for market participants to actively manage their portfolios and balance sheet risks--i.e. invest in the staff and information systems required for developing the skills to manage risk and allocate capital to market making. The money market's most serious deficiencies are its volatility and the lack of a short- term yield curve. Call rates are also not fully unified around the country varying by about 50-75 basis points for reasons discussed further below. Volatility (Figure 3.1) is caused by: (i) excessive variations in liquidity due to fluctuations in the level of excess reserves (market - 70 - participants particularly mentioned RBI's sales of Figure 3.1: Call Rate, Weekly High & Low debt during periods of low 60 liquidity as a cause of 50 volatility); and (ii) the , 'Reporting Friday' effect. 40 Weey High Every second Friday 30 T EWwklyLow (Reporting Friday) the call 20 rate falls to zero (Figure 3.2). '10 T'he Reporting Friday effect 0F l1 11^1 ;1 The Reporting Friday effect.0 Nov 25 16 Ian 6 27 17 10 31 21 12 2-Jun 23 14 4- 25 is particularly toxic to the I '4 095 Aug development of a short term yield curve. The Figure 3.2: Daily Average Call Rate, July-September 1995 (DFHI) disruption of 20 ___________________________________ liquidity every 18 second Friday 16 prevents the normal 14 pattern of short term 12 10 yield curve 8 development, that is; 6 stable call funding 2 leading to stable 30- 0'~~~~~~~~~~~~~~~~~..... .. day funding, in turn I-Jul 612 18 24 29 4 10 16 22 28 2 8 14 20 27 leading to stable 90- day funding. Reducing call market volatility and enabling a short-term yield curve to develop would require: (i) improving RBI's capacity to forecast the flows affecting the level of excess reserves; (ii) replacing the existing RBI refinance facilities with a single "passive" window better suited to controlling the reserve levels; (iii) changing the basis of calculation of the CRR either by using an average of demand and time liabilities over a fixed period rather than the position on a single day or by removing the interbank transactions from the calculation. Most countries now use averages; and there is no loss of monetary control from this; (iv) permitting two-way pricing of call money; (v) widening the range of participants allowed to both lend and borrow on the money market; and (vi) opening repurchase agreements (repos) to use by all parties subject to the requirement that no repurchase transaction be booked until source documents verifying title have been sigl ted and marked to indicate the lending party's interest in the scrip for the duration of the repo. Inability to use repos ads to the call market volatility by limiting financing options, and also redi -es demand for debt securities by reducing their liquidity. In addition, public banks have no yet seized the profit opportunities associated with treasury and risk management operatio: 3--a situation that will likely change once these skills are built and they are privatized. rhe RBI and the MOF also need to take steps to improve their ability to manage the governm nt's accounts. Improvements are needed in two main areas. First, the day-to-day managen Lent of the Central Government's account with the RBI needs to be improved. This is a - 71 - technical "payments-system" problem, which results in large measure from the sheer size and physical extension of India. Because there are so many centers in which revenue is collected and expenditure is made, the technical task of centralizing information about the standing of the government's account is unusually complex. The RBI's Committee on Technology Issues has made recommendations to improve the operations of this account, and these need to be implemented as soon as possible. Second, the Central Government needs to improve its intra- year programming and monitoring of revenue and expenditure. The MOF needs to be able to formulate a credible borrowing program over each year. This would enable other participants in the financial markets to plan their own portfolio positioning, and so help smooth the functioning of the financial markets. Broadening participation in the call money market would improve the effectiveness of monetary policy, develop the debt market; and stimulate competition in intermediation. Participation is currently limited to banks and some financial institutions. Only banks can borrow in the market. A range of participants should have access to both sides of the market-- banks, blue chips firms, pension funds, mutual funds, finance and insurance companies. Such a range of participants contributes to both liquidity and the amount of information embedded in the market's pricing of instruments. Limiting borrowing by non bank financial institutions and mutual funds raises intermediation costs and limits their demand for T-bills, government dated securities and other term instruments since they cannot access money market funds to either fund portfolio positions or to cover short-term liquidity needs. Further, limits on participation in the market reduce competition for funds. The alternative balance sheet structures that competition for money market funds makes possible will not occur, and hence the efficiency gains in intermediation that markets permit will be stifled. The third priority is the development of the Treasury Bills and long term debt market. Creating a deeper and more stable money market will contribute to the development of a secondary debt market by: (i) providing a more secure and stable funding source for debt portfolios; and (ii) by increasing the liquidity of debt instruments via use of repos. Developing greater liquidity in the T-bill market will assist the emergence of a short-term yield curve; reduce the cost to the government of the T-bill issue by improving the demand for T-bills; and allow the integration of foreign exchange, money and bond markets since the short-term yield curve directly affects the pricing of both forward foreign exchange and long-term bonds. The main policy and institutional measures required to develop India's debt markets have been extensively discussed in the policy and financial circles and a fair degree of consensus has emerged around the unfinished agenda which the authorities need to address. First, in order for government securities to provide reliable "risk-free" benchmark rates, the RBI would need to auction all such securities, on a predictable timetable, and refrain from participating in the primary market. In addition, the changes in the basis of CRR calculation would also help achieve a relatively stable and deep interbank market, and thus an interbank rate resembling LIBOR, off of which floating rate issues could be priced. Second, the current stamp duty on primary issues of debt securities and secondary market trading are high and act as a discouragement to issuance and trading. It should be reduced--as in Maharashtra and Gujarat--and made uniform across states. Although these are state level issues, they could possibly be dealt with by the center if a - 72 - booking center is set up in Delhi. Alternatively, one state could try to capture much of the business in trading of corporate debt securities by having a zero stamp duty and a highly reliable system for clearing and custody of bonds. Third, debt market regulations should be rationalized with only SEBI reviewing disclosure for such offerings to reduce transactions costs and time. Finally, trading is discouraged by poor title transfer. Smooth and secure delivery of securities and settlement of trades in an electronic environment is essential for sustained growth of the debt market. A recently promulgated Presidential ordinance provides the legal underpinning for the establishment of central depositories for securities. The depository mode of transaction in which securities would be dematerialized and transaction could be exempt from stamp duty, is a step in the right direction. However, credible and secure electronic clearing and settlement arrangements need to be implemented for corporate debt securities. In addition, the authorities have recognized the urgent importance of upgrading the nation's payments systems. The RBI is acting on the recommendations of the Committee on Technology Issues to modernize check-clearing operations. The RBI plans to extend automated check processing to smaller, fast-growing banking centers, and to take additional steps to speed inter-cities check-clearing. The inefficiency of inter-city check clearing--which can take several weeks--is a standing source of inefficiency for commercial transactions, in particular, for transactions involving international trade. To provide more timely centralized reporting of transactions involving the Central Government's RBI account and commercial-bank branches with "currency chests," the Committee recommended modernization of electronic communications systems. The Committee recommended development and implementation of electronic funds transfer systems, both for crediting and debiting operations. To tighten prudential control of public-debt transactions, the RBI has followed the Committee's recommendation to set up a "delivery-vs-payment" system for the Public Debt Office in Mumbai. The other elements of the reform agenda which are key to market development includes: (i) market making activity through the establishment of primary dealers; and (ii) deepening of the investors base through de-regulation of the investment guidelines affecting contractual savings institutions; particularly the insurance industry and pension funds. The RBI has been active in promoting the establishment of private Primary Dealers as a means of improving the primary market in T-bills and developing a secondary market. The promotion of primary dealers may be a sound strategy for India, particularly if the government considers that it cannot improve its cash and debt management systems in the short-term, while the treasury management of market participants improves rapidly. In this case, creating a network of primary dealers to intermediate between a less efficient government and a more efficient market is a viable solution. However, in the long-term, primary dealers may not be the most efficient basis for market operation for two reasons. First, if a government has a very good cash management system (made possible by computing) and a debt management plan, then the government could be able to interact directly with the market. New Zealand provides such an example. Under such circumstances, the government will be able to manage its cash flows in such a way that a stable and reliable money market exists. Such a market will enable many firms to run books in government securities without undue liquidity or interest rate risk and without the - 73 - need for recourse to RBI credit. Further, the government will be able to manage market liquidity such that there is always sufficient liquidity available to purchase its debt offerings. The government will not be selling into a market with insufficient liquidity, and so the risk of an issue failure in the absence of primary dealers with their access to RBI credit is very low. Figure 3.3: Debt and Liquidity Management (RBNZ) Finally, modern screen-based Deficit 500 information systems allow sales 400 announcements to, and bids 200 ' from, geographically dispersed loo / participants. Such a system of -100 /'3 '5'.S ' 9 10 11 13f government debt sales exists in NZS.200 New Zealand. Figure 3.3 -300 illustrates the symmetry on a 400_/ daily basis between market Suplus-500 Daily Government Cash Flow --- RBNZ Influenced Flows liquidity and Reserve Bank of -Cash Reserves New Zealand (RBNZ) debt and repo operations. Second, in the short-term the controls and distortions in the market will impair the commercial viability of primary dealers. Over last year, it would have been difficult to profitably make a market in T-bills for two reasons. The first one concerns the discount (higher yield) T- bills generally sold at a discount in the secondary market compared to the primary market. This eliminates the possibility of profitable purchase and on-sale of T-bills by primary dealers, as shown in Figure 3.4. The cut off rate in the primary market is thus not strictly market determined especially since about 70 percent of 91 day T-bills is Figmue34A 91 1DyT-EDs subscribed to by the RBI and non- 10 competitive bidders (often 05 government entities). The second 0.0 reason is that call rates were I13 1i 4 C2 7- 21 5-I 2- If 14 28 It 74 higher than 91 day and 364 day T- bills, implying that the cost of -10 9 LU financing the securities portfolio -1.5 would have been higher than the -2.0 _ yields (negative cost of carry). OSmdYR_uff(+YDK)to Development of a government- securities market therefore implies that primary issues must be made at market-determined cutoff yields which would enable the primary dealers activities to be profitable. Enabling market making to develop on a commercial basis will stimulate both the liquidity and transparency necessary for the development of benchmark rates. Contractual savings institutions (insurance companies, pension funds, and mutual funds) play an increasingly important role in the financial systems of many countries. This - 74 - trend reflects liberalization of insurance activities, privatization of pensions' provision, innovations in and growing popularity of mutual funds, and modernization of capital markets, among other things. Worldwide, contractual savings institutions dominate the securities markets. Institutional investment, particularly pension fund assets, is growing rapidly throughout the world. Chile's private pension system assets grew from a mere 1 percent of GDP following its introduction in 1981 to 26 percent in 1990. In Malaysia, the assets of the Employees Provident Fund (EPF) have grown from 18 percent of GDP in 1980 to 41 percent of GDP in 1987. In India, in 1994, the government-managed and various employer-run EPFs are estimated to have assets totaling 5.3 percent of GDP. Although the quantitative effect of contractual savings institutions on total savings is unclear, there can be little doubt that they cause a shift in favor of long-term savings that can underpin money, equity and bond markets development. India has the institutions already and their assets are sizable, but major impediments to their development as a source of long-term savings and corporate finance have been the preemptive use of these funds by the government. At present, these institutions are required to invest mainly in government debt. Contractual savings institutions in India include provident funds (both public and private), life and general insurance and mutual funds. Most are public sector institutions, operating in non-competitive sectors, and are heavily regulated and limited in their fund applications. The magnitude of their resources is significant. In 1994, combined assets of insurance companies, mutual funds, government-managed as well as private provident funds assets totaled 18.9 percent of GDP. The fourth priority is therefore to liberalize the investment guidelines imposed on insurance and pension funds. The Insurance sector is the only remaining public Monopoly in the financial sector. The insurance industry, the Life Insurance Corporation of India (LIC) and the General Insurance Corporation (GIC) of India enjoy an absolute monopoly of India's vast insurance market. The industry suffers from lack of commercial incentives which prevent the adoption of efficiency enhancing procedures in line with technological developments elsewhere in the world. In addition, investment and pricing restrictions as well as lack of incentives to manage funds' actively to enhance returns, have limited their contribution to long-term savings and development of India's private capital market. Yet, successful innovative life insurance/personal investment products in use elsewhere in the world could increase household savings in India. As a result of the recommendations of the Malhotra Committee, GIC's investment guidelines were relaxed as of April, 1995. Unlike LIC which has still to invest 75 percent of its assets in government and government-guaranteed securities, GIC is required to invest only 45 percent of its assets in government and government-guaranteed securities. Accordingly, and as recommended by the Malhotra Committee, the insurance industry should be further liberalized to help mobilize the large investment funds the industry is capable of generating, and allow these funds to be applied in and help develop the primary and secondary debt markets. This includes: (i) deregulating investment of insurance company assets to permit the development of new product types that offer better returns; (ii) apply the "prudent man" rule to insurance investment and eliminate rules requiring minimum investment in government - 75 - securities; (iii) allow individual companies to price their policies; (iv) once regulatory supervision has been improved, open up the insurance market to greater competition, including foreign admission through joint venture with local firms. A first step in opening up the market would be the privatization of the four insurance companies that make up the GIC group. In a second step, they could be allowed to create life insurance subsidiaries that would create a new market for life insurance as is the case elsewhere in the world; and (v) define new role for LIC in a new competitive environment. LIC could be dedicated to delivery of insurance services in remote areas in view of its extensive rural network and experience. To be successful, however, such a reform agenda will also need to meet retraining needs of the large labor force in this sector and design appropriate safety nets for those displaced by the new technological developments that will take place as the industry is liberalized. The regulations covering asset allocations of the Employee Provident Fund (EPF) Schemes are also very restrictive. The most striking feature of these regulations is the lack of exposure to equities and non-government debt and the use of the Special Deposit Scheme (SDS). The SDS is part of the Government Accounts. About 90 percent of the assets of the EPF are in the SDS. The SDS pays 12 percent interest on the daily balance. These asset allocation rules clearly inhibit active participation in the secondary market. While the asset allocations are very restrictive, active management of the provident schemes portfolios is prevented by investment policy guidelines established by the ministries in charge of administering the schemes. These guidelines forbid trading and stipulate the extent to which purchases can be made in the secondary market rather than the primary market. In most countries, contractual savings institutions (insurance and pension funds) have been the driving force behind the development of the long-term private bond market, since they have large needs for long-term assets with fixed returns. To stimulate such development in India, it will be necessary to allow the contractual savings institutions to invest in a broad range of private debt securities. For this, existing issuer- based guidelines would need to be phased out and replaced with guidelines based on prudential criteria allowing such institutions to invest their portfolios in securities with certain credit ratings as is common in other countries. The fifth priority is to increase competition for the management of the Pension and Mutual Funds to develop a better retail distribution network for T-bills and dated securities. Contributions under the Employee Provident Funds (EPF) are currently viewed more as a tax on labor than as savings. This is because the returns to this investment are lower than what the funds could earn elsewhere. To enhance returns, management of EPF funds should be opened to competition, with performance-linked fees to increase incentives for managers to actively manage funds. This would increase the incentives for the EPF managers to invest in private debt securities on the primary and secondary markets in order to enhance their performance. In turn, this will improve debt market liquidity. In general, contractual saving institutions are not competitively managed and have therefore no incentive to seek higher returns. In many countries, Money Market Mutual Funds (MMMF) have been very successful in increasing competition through widening access to the wholesale market for retail investors. There are no MMMFs in India. Recently, the RBI relaxed the guidelines on MMMFs to encourage their formation and allow competition to develop - 76 - between providers of MMMFs. The move to permit competition is an important step. In many countries competition from MMMFs sponsored by insurance companies and other non-bank institutions has been a powerful incentive to banks to enter the MMMF market, so bringing the distribution power of their branch networks into action. The wider the group of people who have access to wholesale markets, the more wide-spread are the gains to borrowers and savers. - 77 - X ~UNLEASHING AGRICIULTIJRE'S GROWTH POTENTIAL OVERVIEW Figure 4.1: Agricultural Terms of Trade As the 1990s began, India was Recover from Policy Bias experiencing faster agricultural growth r_(ba_erterms-of-trade) that was becoming more evenly spread across states, including rainfed regions. 110 The poverty reduction potential from 105 agriculture appears far from exhausted. 100 I I I I _ _ I _ S 95 Between 1980 and 1996, agricultural _ growth has accelerated and spread to the 85 eastern regions and rainfed areas, and real 80 rural wages improved. Together, this has 75 * .u..*..., contributed to an unprecedented decline in tZ rZ i> c_ a) 22 Q rural poverty, except during droughts and cc c cc cc0 cc economic recession. Starting in 1985-86, _ _ _ _ the terms of trade--the price of crops Source: Commission on Agricultural Costs and Prices. 1993-94 and 1994-95 relative to goods purchased from the non- data are provisional. agricultural sector--improved noticeably (Figure 4.1). The contributing factors were the depreciation of the rupee and the reduction of manufacturing protection initiated during the 1980s (Table 4.1). In addition, farmers benefited from large public spending for infrastructure, support services, and subsidies (for fertilizer, credit, water, and power for irrigation pumping), as well as the protection afforded to oilseeds at least until 1991. The objective of this chapter is to identify the conditions to sustain and accelerate further this process of more equitable agricultural growth. The economy-wide reforms contributed to the Table 4.1: Economy-Wide Reforms are Removing ' acceleration of agricultural growth. Although the the Anti-Agricultural Bias 1991 economic program did not contain an explicit (protection rate in percent) Source of the 1970/1 1985/6 1991/2 to- agricultural component, it created a number of favorable Bias: to to 1994/5 conditions for the sector. Of particular importance were Economy-wide 1984/5 1990/1 the further exchange rate devaluations and the reduction policies ...... -0.26 -0.25 -0.03 of protection of the manufacturing sector which Ag policies .... -0.04 +0.07 -0.07 eiiae h aln Tot.l ........ -030 -0.18 40.09 virtually eliminated the already falling anti-agricultural Source: Rosenblatt D., G. Pursell, A. Gupta, and B, bias (Table 4.1 and Box 4.1). Accordingly, the Blarel, 1996: "Have Economy-Wide RefomYs agricultural terms of trade improved further by around 4 Helped Indian Agriculture?" World Bank, impoved by Washington. Ipercent after deteriorating temporarily in 1992-93. This - 78 - 1 I BexBx 4.1: Correctiog for India's LargeeSize Reduces Significantly ...... teAprent jiy:Bia ~Againt Agriculture -f Thet estdmatd mild: protection of agricuture fromi agficultural price policies contrasts with earlier studies which. indCWated::much higher levels of relative price discrimiination, and deserves an explanation. The present estimates takef4 into. accunthth fakPhatni8 a, fl because of its large sizem canntexort infinite quantities of rice on the thiin rice world market: without affiecting the world price.: gnoring this'prce-depressing (or large-country) effect of Indian rice exports. would significantIly tover-etimae the extent iof price discimination imposed on rice by b ndian food policies. The 1 epresetestimates also treat wheat as non-traded recognizingthliat under free trade tits equilibrium domestic price would have remained witlwin: heimportLexport parity band for most years. Correcting for the large-country situation in rice, 1andthce non-trade status of *whet significantly lowersCthf priCe discrimination of indian agriculture sinlce itceand : wheat:alone.account for about 30% of the. dian agricultural production basket. additional improvement would have been greater but for three factors. First, a much needed realignment of prices within the agricultural sector began. In the closed trade regime for agriculture prior to 1994, changes in domestic supply and demand conditions combined with government price policies for rice, wheat, and sugarcane determined their price levels. However, as a result of changes in protection and as indicated by Table 4.2, the price of exportable and disprotected crops (rice, cotton) improved faster than the price of importables and protected crops (oilseeds, sugar, rubber). The domestic price of the non traded crops (wheat, coarse cereals) remained within the large export-import parity price band. As a result, price distortions within agriculture narrowed which 'Table 4.2:;Agricultural Price Movenints, A flecomtposition Analyis: meant that aggregate (percent change between 1990-91iad 1994-95) ma s :: :;:):a::a:: ;: :E:E::Observed. Decomposition intUrmsof: agricultural terms of Change in:real: Changeeinreal Change in real Agricultural trade did not improve domestic prce world price exchangerate policies EsArtablm: 203. -.12.8 26.416. significantly. Rice 194 -1.L7 26.4 4.0 Second, the exchange COtton 37.5 ~ -116 26.4 21.7 rate devaluation and iflnb es: 53 -4.81 26.4 -17.0 the trade Oilseeds -21.7 11.8 26.4 -61.9 uS:augarcane: .:i::0:: :sa :17.4 5.8 : 26.4 -15.8 liberalization after 6Rubbr . 16.7 25.7 26.4 -38.4 1994-95 were not PhSl~ 2. 641. fully reflected in gNoi tradcd farmgate prices ~~~Wheat: 11.9 -17.1 26.4 2.3 Coarse Cereals -5.1 :-126 26.4 -19.3 because of high marketing and AI.1C[QD0 11.9 '8,8 26.4 -6.3 Note: The interaction terni has not been pjdrwtd in fthe Decomposition. The sum of the % Schanges processing margins. including the interaction te, add-up to the obsetved change in the realdomestic price. Third, the world Sre: RosenblaitD.,i G. Pursell, A. Gupta, and , Blareatl, 1996: "Have Economy-Wide Reforms prices of agricultural Helped lIndian:Agricultuel"cNWorld Bank, Washington: commodities fell in real terms. Between 1990-91 and 1994-95, the average real US dollar price of a 13 commodities basket weighted by Indian production fell by an estimated 9 percent (Table 4.2). There was therefore less scope for domestic agricultural prices to increase in real terms. - 79 - In conclusion, the non-agricultural reforms, initiated during the 1980s and accelerated since July 1991, created a favorable environment for the agricultural sector by removing most of the anti-agricultural bias and realigning prices within agriculture by 1994-95. However, four major policy issues confront agriculture and threaten its ability to improve or even sustain this performance. First, in addition to the fiscal impact of public spending in agriculture, its composition is not supportive of a faster, more equitable and sustainable agricultural growth. Second, remaining external trade restrictions on agricultural goods imports and exports and on consumer goods imports may affect the profitability of agriculture. Third, the over-regulation of domestic trade and agro-processing industries is proving increasingly costly to the economy. Fourth, the rural financial system is not supportive of agriculture and other rural economic activities. Accordingly, the rest of this chapter discusses these challenges and suggests a strategy for reforms, which would yield substantial benefits for agriculture (including improvements in the terms of trade) and ultimately, for poverty reduction in India to which agriculture historically has made a substantial contribution. The central message of this chapter is that there is tremendous scope for unleashing the productive potential of agriculture to contribute more fully to overall faster and more equitable economic growth and this is an opportune time to reform. PUBLIC EXPENDITURE: REMAINNG PUBLic EXPENDITURE: REMAEUNG Table 43; Iidia Spends Twice as Much on Agriculture as East ISSUES Asian Countries (agriculture public expenditures expressed as a share of agricultural GDP, percentages) India Indonesia Malaysia Thbiland Public spending in agriculture militates Average 1990-1993 29.1 6.9 10.1 12.9 against growth and poverty reduction in three Memo item: important ways. First, the level of spending is Ag annual GDP growth (1980. 3.0 3.2 3.5 3.8 unsustainable from a macroeconomic 93) perspective as discussed in Chapters 1 and 2. Note: For Indonesia, figures only include central govemment Second, the current composition of public expenditures. Source: Ministry of Finance, union budget documents. Source: Government Financial Yearbook, IMF; World Development Report. World Bank. Figure 4.2: Subsidies Crowd Out spending in agriculture is not growth Productivity -Enhancing Expenditures during the 1980s Composition of Central and State Expenditures in enhancmg, particularly in the poor states. Agriculture, Rs billion (1980-81 rupees) Third, some public expenditures in agriculture are inefficient, partly because 200 of ineffective delivery mechanisms and 180 52 160 / e a design, which entail significant fiscal, economic and environmental costs. 8 = 6°0 - - 1 1 1 1 1 1 1 1 4 4 E Enhancing the sustainability of 40 public spending. India devotes I 20 considerable public resources (center and o * | | | i 1 | 1 P* || *l |1 || | state) to agriculture which totaled Rs 685 0, C? 1@1 1Y1 11 obillion (US$22 billion) in 1994-95, ro 00 X0 0 0 3> o l equivalent to 28 percent of agricultural * Subsidy 0 Prductiv-ityenhancing * Safety Nets GDP (8 percent of GDP). When I______________ - __ ___ measured as a share of agricultural GDP, Source: Ministry of Finance, Union Budget documents. India spends at least twice as much on - 80 - agriculture as some of the East Asian 0000000 Boxj 4.2: 00iBudiget:ed ->Subsi1..sSf Indan Agricuhreg l4000 economies (Table 4.3). But this much higher level of spending devoted to The Fertiizer Subsidy was 0designed to (i) stimulate agriculture in India does not translate into a inacr: Wncd us f6tiie: ease... I tuse0:;pof Xtii tuz incomease significantly higher sectoral performance, I:EE:SelgnuSaSerodcton;jfi) supot -agricu}r I, Ancomes::e by providing' cieap inputs; (iii> improve regional equit; suggesting that there is scope for significant 0and -(iv) 1achieve self-sufficie0ncy iftertizerlproduction improvements in the effectiveness and ba bsedo onth eutilizatigoniof indigenousresources. It iFs the efficiency of these outlays. difference between the retention price paid to manueturing lunits and, the onsumer price of the fertilizer, less the distributiontmargin. Restructuring public expenditure on agriculture is an area of particular -TheFod Subidy, transfre dAIto Food Corpration. of 71dka (ECD, isthe difference between C'sJ cost o f rice need and challenge. Agricultural public and wheat pocrement and disibution,and the centrall.ad expenditures can be classified into three il t;l Aissue prce.l ;:The subsIdy ensures: (i) a minum support categories according to their economic pric for rice and whteat; 4(ii-food:security through the objective: productivity growth-enhancing, maintenance of buferi stocks by FCI; (iii)ad equatet supty o:f foodrainsin :all parts:ofthe, country through the Public subsidies, and safety net programs (Figure DMstebution System ) (PUS and (iiv). the protectionof tAhe 4.2). Productivity growth-enhancing vulnerable sections sof thel population fiom increases in e x nt il a p s on :4241rte$0f ssniifodtuf$i00 0000000St;044007000000 ;0000:0400000expenditure include all pUbliC spending on Pricesof esentialfoodsuffs.economic services in agriculture and its Th0e Power Subsidwais designed to promote the adoptin 4 allied sub-sectors, and on new irrigation of :pnvate tubewells and thus promote increased . s i ..agricultural..prouction. The. powersubsidy; isetied, l1nvestments. Agricultural subsidies are the as the difference between faverage costof su-ppying explicit provisions for fertilizer, food, el0ectcityto0all 0icustomers, and the 0tariff chargedto0 credit, irrigation (the difference between agricultural customers.It issme aniprecise estimate of the ac.tua'lsubsidy to iagricultureIt under-estimates thepower0 operation and maintenance expenses and subsidy t o agrculturei sincej the cost. of supying charges recovered) and power (the ,electicitto .agriculture 0is jhigherthan Mfor othersectors. difference between average costs of Atthe:sametmime, itover¢estimates te actual budgetay Xcosts tof ithe power'subsidy.bytthe extent oftheross-; supplying electricity and tariffs charged) in s ubsidization of agriculturaldtatiffaby industrial ts, state budgets (Box 4.2). Safety net expenditures include spending on rural The IrriginSubsidy is thedifferencebetweenth development and employment programs, oper latonanntintenanc costs of thepubllicly operated irrgationi infrtructue(s e and tbewells): and water and special area programs. char. f t'ge recovered. Irrigationg:t development0 ihasi tbeen - ai 0 ; .- -central llpill:ar of ithfe inational i0agrticultural 00developmnent00:00 There is strong empirical evidence .strategy1iovernment investment n imrigation,was largeyiwtt hs concentrated, l: on] caal irtrigation developmenti until the 1::: 1970s, but Investment on groundwater l development rural infrastructure (roads, canal irrigation, be;00:tTiTh¢came increasingly importan0iheit inss sthe 1980ss and 199fti;0s.000000 and electrification), rural services he jfertilizer and food subsidiesjare0essentiallyicentrally (regulated markets and commercial banks) finaned, whereas the poweriandirrigation subsidies are and human capital (education and health) ;i primarily state financed. ;;0; ; 4 j encourage private investment and production in agriculture. Studies also indicate that non-price factors (access to irrigation, proximity to delivery points, and access to credit and high yielding varieties) have a much larger influence on fertilizer use (and hence on productivity) than price or institutional (tenure, farm size) factors. Indeed, technology development (private and public, foreign and domestic) and dissemination, rural infrastructure, irrigation, and human capital are the major - 81 - Figure 4.3: Capital Formation in Indian Agriculture is Declining determinants of (total (expressed as a share of Ag GDP) factor) productivity growth in Indian agriculture; but 16.00% ---. -- that productivity growth l 14.00% 0 t : has been on a declining trend since the mid-1980s. 6.00% .0 D Tota _1 It is therefore of 8.00% 0TotaI ~~~~~~much concern that total 6.00 Private 4.00%i= U 1 > *Rxb6c 1 capital formation in 2 00% A agriculture as a share of 0.00% Total agricultural GDP declined Z-_ _V tz C): ^ se 0 Q ; > O ifrom a peak of 14 percent C4 ¢> <° O > cn O O a) cn a) CD in 1979-80 to 8.5 percent in co 0) 0) a)0 ) 0) 0) 1992-93 where it remained until 1994-95 (Figure 4.3). --- -_ -___ -- To a large extent, this fall Source: Central Statistics Office. reflects more efficient investment in the sector. In particular, more efficient private investment in tubewell irrigation has substituted for public investment in new irrigation schemes. In spite of this healthy development, available data indicate that private capital formation has been declining again in 1993-94, and possibly in 1994-95. If maintained, this renewed decline in private capital formation in agriculture would dampen the long-term prospects for agricultural growth and poverty reduction. The renewed decline in private capital formation is consistent with the limited improvements in agricultural terms of trade identified earlier, as well as the observed decline in the productivity enhancing expenditure by the public sector. During the 1980s agricultural subsidies increased three times faster than expenditure which promote productivity growth and now dominate public spending (Figure 4.2). Since 1991, the annual rate of growth in agricultural subsidies more than halved but it remains as high as 3.6 percent per annum in real terrns. Thus, by 1994-95, close to 40 percent of total spending on agriculture was absorbed by subsidies, and another 22 percent by safety net programs. Only 38 percent of total spending went to productivity enhancing expenditure, as opposed to more than 60 Figure 4.4: Irrigation Related Subsidies Dominate percent in 1981-82. Ag. Subsidies (1994-95) Irrigation related subsidies dominate total I Fertilizer expenditure on subsidies. Power and irrigation Irng 22% subsidies account for more than half of the subsidy bill 8V0 Food in agriculture, both of which are supported by the state governments (Figure 4.4). The Central Government achieved some success in containing its agricultural Credit Power1 subsidies through the virtual elimination of the explicit 48% credit subsidy by 1994-95, a modest reduction in the fertilizer subsidy from 0.9 percent in 1990-91 to 0.6 - 82 - percent of GDP in 1995-96 and maintaining the food subsidy as a share of GDP at about 0.5 percent. The cost to the Central Government of its agricultural and rural debt relief schemes, announced in June 1990 fell from Rs 15 billion during 1990-93 to Rs 3.4 billion in 1994-95. However, continuing restrictions on interest rates for loans below Rs 200,000 are among the factors imposing a heavy toll on institutions that lend to agriculture. The fertilizer subsidy first increased by 12 percent in real terms between 1990-91 and 1992-93, and then declined by 30 percent in 1994-95. Urea prices were raised by 30 percent in August 1991 and by 20 percent in 1994. The subsidy on phosphatic and potassic fertilizers was eliminated in August 1992, while the prices of nitrogenous fertilizer prices were lowered by 10 percent. In September 1992, a flat subsidy of Rs 1000/ton was introduced for DAP and MOP fertilizers, which was raised to Rs 3000/ton for domestically produced DAP and to Rs 1500/ton for imported DAP and for MOP in July 1996. The food subsidy bill increased by close to 40 percent in real terms between 1990-91 and 1995-96, but the share of the food subsidy financing food distribution and income transfer programs (PDS, RPDS, JRY) fell from 70 percent to less than 40 percent over the same period. This has created the perception that increasingly, the food subsidy is used to support producer prices rather than transfer incomes to the poor. In 1994-95, 60 percent of the food subsidy went to finance the buffer stock, sales on the open market, or exports. With the devaluation, the government had to raise rice and wheat procurement prices because of its dominant position on the domestic market. The need to contain the food subsidy prompted the government to raise issue prices in tandem with procurement prices--at least until 1994. The burgeoning food subsidy further prompted the government to free rice exports in 1994 and allow more wheat exports. By contrast, states were much less successful in containing the subsidy on rural power which continued to expand very quickly--by 14 percent per annum in real terms between 1990- 91 and 1994-95--to reach 1.1 percent of GDP in 1994-95. States were, however, more successful in containing the irrigation subsidy in real terms (1.2 percent per annum in real terms between 1990-91 and 1994-95). This occurred, however, at the expense of the quality and reliability of water delivery in the irrigation schemes, because non-wage expenditures for O&M were cut and cost recovery did not improve. Table 4.4: Growth Prospects Sufferf most among Poor States (kcey componelts ul speniding. 1990-91 to 1994-95) The composition of public CaplnvJGSDP : improved Unchanged X.W: f.rsed expenditure in agriculture has a ExS./GS ...i Stor disproportionate negative impact on wmproved 'Maharashitra Kamataka agricultural growth prospects in poor f0 .......... states where poverty is concentrated. .. Il. +..) .... .. - - States were responsible for 56 percent No Change Tamil a O jare, of agricultural subsidies in 1994-95, Worsened Andhra Pradesh -Bha- (0.0; -03) .g0) compared to an average of 40 percent Ws Xengal .. ..t.ar :. ::: ~~~~~~~~~~West Bengal :;'.0Ua . rast during the 1980s. Poor states have a (0.00; 7) (42 04) much weaker fiscal base than their No"te: First figure in hrad.ct. rclirs t, capital investments on power and irrgation; second figure refers to social spending. rich counterparts, and so is their Source: The Tenth Finance Commission and the Fiscal Challenge Facing Indian capacity to support agricultural States; VJ. Ravishankar; World Bank, 1995. - 83 - subsidies in power and irrigation. In addition, the impact of the fiscal squeeze has fallen disproportionately on productivity enhancing expenditures--capital investments in irrigation and power, human capital investments--among the poorer states than among the richer ones (Table 4.4). Some public expenditures in agriculture are inefficient partly because of ineffective government delivery mechanisms. Some public expenditure meant to support agriculture end- up in fact benefiting non-agricultural users. This is the case of the fertilizer subsidy, 50 percent of which accrued to the fertilizer industry during most of the 1980s and early 1990s as the retention price was well above import parity levels. In the case of the irrigation subsidy, most of actual expenses end-up financing the states' irrigation departments salary and wage payments to a bureaucracy with limited accountability for the operation and maintenance of government schemes. Equivalent considerations apply to the food subsidy which accrues to the Food Corporation of India. If diversion of rural power consumption to non-agricultural uses, or large- scale diversion from the PDS are included, the estimated leakages would be even higher. The absence of targeting reduces the cost-effectiveness of agricultural input subsidies. As a result, the contribution of input subsidies in spreading the new technology and growth to the poorer states and farmers during the 1 980s, was achieved at unnecessarily high and unsustainable fiscal costs. Moreover, there is evidence that richer states and irrigated areas, crops, and sometimes farmers, captured a disproportionately high share of the major input subsidy programs for fertilizer, power, and irrigation. Agricultural subsidies contribute to costly resource misallocation and inefficiencies that often extend well beyond the agricultural sector. The fertilizer subsidy entails significant production inefficiencies at both the farm and fertilizer plant level. The (fertilizer) Price Retention Scheme provides no incentives for cost reduction and effectively rewards the inefficient fertilizer manufacturers. At the same time, the fertilizer subsidy causes serious nutrient imbalances in fertilizer application. Similarly, irrigation and rural power subsidies distort cropping patterns within India by promoting water-intensive crops like sugarcane in the relatively water-scarce areas (North-Eastern states of Punjab and Haryana, portions of Maharashtra, respectively), at the expense of the comparatively water-abundant regions of Eastern India. The power subsidy to agriculture, by contributing to significant financial losses and poor performance of SEBs, lowers the quality of delivery and results in the rationing of electricity to all customers. Further, agricultural subsidies threaten environmental sustainability by mis-pricing inputs. In the case of surface and ground-water, mis-pricing promotes their over-exploitation, raising concerns about the long-term sustainability of agricultural production. Recent official studies have estimated the area affected by waterlogging, alkalinity and salinity as ranging from 9 percent of net irrigated areas (Ministry of Irrigation, Working Group on Waterlogging, Soil Salinity and Alkalinity, 1991) to 28 percent (Eighth Five-Year Plan). Inappropriate pricing of water, and high seepage losses from poor operations and maintenance of canal networks, are the major factors behind soil degradation and deteriorating water quality. The power subsidy to private tubewells in the form of flat rate electricity charges, coupled with inadequate regulatory - 84 - and institutional mechanisms to control tubewell establishment and groundwater exploitation, also contribute to the over-exploitation of underground water resources, and other environmental problems such as salinity ingress. PUBLIC EXPENDITURE REFORM There is room to spend less but better in agriculture. Public expenditure in agriculture would need to be switched from non-targeted subsidies to growth-enhancing and targeted safety net programs. To protect the poor and reap the full economic benefits from fiscal adjustment in agriculture, some of the savings from the reduction in agricultural subsidies would need to be re- invested in agriculture and rural areas. Besides the obvious need to re-invest in the long term sources of agricultural growth, there are at least three other reasons for doing so. First, the need to compensate the poor will increase as agricultural fiscal adjustment proceeds. Reducing subsidies in agriculture would have real (but possibly transitory) negative implications on rural incomes, poverty and growth. This result has been confirmed by the results of subsidy removal simulation exercises by several general equilibrium models of the Indian economy (Table 4.5). Therefore, compensatory, short term programs that target the poor would need to accompany the removal of input subsidies. Table 4.: improved Composition of Expenditure Could Compensate for the Removal of Input Subsidies: Results ofAlternative Policy Simulations in aCGE Framework GDP Poverty g. Noii-Ag Rural Urban lnnutsubsidv removal., comined with: liTax relief - - 4f Tax relief, new irrigationinvestments earmarked (I m. ha) 4- + i -i No tax relief, new irriation investments iearnarked (1 it Injeg. --+:f i + ha) neg. + ++-i + No tax relief, increased funding of safety net programs NYote: 010iAll results are Gompared to the base policy scenario of no subsidy removal in agriculture. + poverty effect indicates reduction of poverty. - indicates increase in, pov p verty effect indicatest that the poorestrTural incomc group gains marginally, while the second and third poorest rural income groups are losing. "Taxvrelief' means that the savings'from the input: subsidy removal: are:used:to reduce the aggregatei tax:rate (i.e., both income and indirect taxes) such that the budget remains "in balance" {i.e., at the samc level as~ before the itreto) Source: Parikh,i K.S., N.S.S. Narayana, M. Panda, & A.G Kumar, 1995: Strategies for Agricultural Liberalization: Consequences for Growth, Welfare and Distribution, Indira Gandhi Institute of Development :k Research, Bombay; 00 000000 f000 00000 ;000000 0 00 ;$000000 00000 Second, India's rapidly expanding demand for food will require more and better investment, not less. With incomes growing much faster, the domestic demand for food will accelerate further, and increasingly diversify into new commodities such as livestock, horticultural products, and processed food items. Reduction in poverty will boost future demand for food even further. Capturing such growth opportunities in agriculture will require that additional resources be invested in the long term sources of agricultural growth. Third, investing in agricultural productivity growth is increasingly important for poverty reduction. Falling rice and wheat prices during the 1980s contributed significantly to the - 85 - rise in the real rural wage (goods) and therefore to the reduction in poverty. A more open trade regime, fewer biases against agriculture, fast rising domestic and external demands for Indian agricultural products, make the prospects of falling agricultural prices in real terms quite remote. Hence, productivity growth will assume even greater importance in raising real rural wages. Switching to growth-enhancing expenditure and targeted safety nets could compensate for the phased removal of input subsidies. Improving the composition of public expenditure in agriculture has the potential to avoid an agricultural recession, reduce poverty, while contributing to the overall fiscal adjustment effort. This is illustrated by the policy simulations conducted with the help of a computable general equilibrium (CGE) model of the Indian economy. This model traces the income and distribution effects of various compositions of public expenditure in agriculture. As indicated by Table 4.5, the policy simulations confirm that re-investing part of the savings from the removal of agricultural subsidies into a combination of growth-enhancing expenditure--approximated by increased public investment in irrigation-- and targeted safety net programs--approximated by increased funding of targeted food rations-- has the potential to accelerate rural growth, raise rural incomes, and simultaneously improve income distribution to the benefit of both the rural and urban poor. Rehabilitation and modernization investment, combined with volumetric pricing and institutional changes would provide the basis for efficient water use, cost recovery, and improved service delivery in canal irrigation. Rehabilitation and modernization of minor, medium and large irrigation schemes would restore the reliability of water delivery without which farmers will be reluctant to pay for higher water charges. It will also permit the introduction of volumetric pricing of water and improved water management practices as recommended by the 1992 Report of the Committee on Pricing of Irrigation Water. Institutional reforms would provide the basis and necessary financial incentives for improved cost recovery as well as improved accountability in the delivery of water services to farmers. Tamil Nadu and Orissa recently initiated reforms that would lead to improved cost recovery, quality of service delivery to farmers, and systems turnover to beneficiaries. Karnataka, in its 1995 Agricultural Policy Resolution, is proposing to radically transform institutional incentives in the irrigation sector (Box 4.3). The strategy to eliminate the power subsidy to agriculture should be based on two elements: (a) a gradual phasing over the medium term; and (b) a series of institutional innovations to improve the management of groundwater resources, and to facilitate access to groundwater irrigation by the poor and marginal farmers. A phasing of the subsidy removal is essential to give both farmers and the power industry time to adjust. In the short-run, raising rural tariffs to the recommended 50 paise/kwh with an automatic, annual adjustment to cover cost-increases would reduce the subsidy bill substantially. This would need to be complemented by policy reforms in the power industry that support the increased collection of tariffs, and the increased participation of the private sector in new, cost-effective power generation capacity and distribution networks. Recent reforms in Orissa's power industry provide such an example, and indicate that they are feasible. - 86 - Box 4.3: Institutional Reforms inXKarnataka's Irrigation Setr& Karnataka was among the first state in the country to have prepared an: Agriculture Poliey.Resotution in 1995. The resolution proposes, among other things, majo institutional reform in theirrigation, sector: .Irrigation p rtment may be igranted financial autonomy and converted intoi a corporation on the condition that it: should recover at Jleast: operaton and maihntenance expenses from the direvt obeneifearies. Also, water users' associations: (UAs) would be inolved in the management and 6 owneshp of canalt networks. Farmers would be made co-owners tofthese irrigation:structures throg issuing of 'lwalerequity shares ".; Fearmers wouldget representation. the Management Board ofirrigation Corporation, where they0 can air their Views more e*ffect:ivel This would be the e0g qingof aprocess0 to convert the irrgation wo0rks ftopsm down to bottoms up. Canal: waters0wouldAbe sold to these$ WUAs in bulk qurantiies. leaving 0the individual-specific distribution of water, asx also collection of dues thereof to these WtUAs on attractive commission basis. [excerpt from Agriculture Po icy Resolution, State Planning Board, Government ohf arnataka, 19951 Thie 0initial: steps -towards meeting some oftheset objetives? were recently taken through thetestablishment of an autonomous pulic corporation for handling irrgation activities in the Upper Krishna basin. ]This corporation, called iithe ariataka Bhagya lola itgam Ltd., will have considerably greater autonomy in taisng and deployingfi nancial resources than the state irrigation department.g It: is also expected to have a close involvement with WUJAs in water transactions. While it is: still too,early to judge the corporation's pefowrmancef initiativesf this natue ame stes in the right direction to reformn the irrigation:sector. Reforms in rural power pricing must accommodate environmental and equity considerations in an economy where water for half of the net irrigated area comes from groundwater sources. Raising power tariffs would provide the much needed price incentives for farmers to use water more efficiently and in a more sustainable fashion. However, there are limitations in using power tariffs alone in addressing environmental externalities and long term sustainability consequences of groundwater exploitation, and guiding individual decisions towards a socially optimal management of groundwater resources. Legal and regulatory changes would be required to clarify and delineate groundwater use rights, along with realistic enforcement mechanisms. At the same time, equitable access to groundwater resources and greater controls on groundwater exploitation are likely to become increasingly important with the elimination of the power subsidy. Promoting organizational innovations to foster the equitable and sustainable access to groundwater resources must accompany reforms of the rural power tariffs. A fertilizer and kerosene program could target the poor to compensate for the elimination of the fertilizer subsidy. A feasible strategy to eliminate the fertilizer subsidy could be based on two elements: a gradual phasing over the medium term and a compensatory program targeting the poor segments of the farming population. A phasing of the subsidy removal is essential to give both farmers and the fertilizer industry time to adjust (prior to possible privatization of the publicly-owned industry). In the short-run, the subsidy bill could be reduced by introducing greater transparency on the costs of production and gradually adjusting retention prices to reduce the cost-plus-rate-of-return margin. Increases in the price of urea, and elimination of the ad-hoc subsidy on phosphate and potash would also reduce the subsidy burden - 87 - in the short-run. In the medium-term, remaining quantitative restrictions and non-tariff barriers on fertilizer imports would need to be eliminated. A fixedfertilizer allowance targeted to each poor farming household would compensate them for their income loss. A simple design could make such a targeted program implementable virtually overnight. For example, the program could be established through a fertilizer stamp program with beneficiaries identified in a participatory fashion by the Panchayati Raj Institutions (PRIs). A fixed allowance, time-bound program would achieve the income transfer objective, while at the same time avoid new price distortions by providing for an infra-marginal subsidy. In addition to its positive impact on the efficiency of fertilizer use, eliminating the fertilizer subsidy would be expected to have positive consequences for agricultural labor use and the environment. The CGE simulations confirm that besides eliminating the current imbalance in nutrient application, the removal of the fertilizer subsidy will give farmers greater incentives to apply more manure which will have positive, environmental effects on soil management. Increased manure application will raise the demand for agricultural labor, in particular among women, pushing rural wages up. Shifting the use of manure from cooking and lighting purposes to soil fertility management may raise pressure on already strained sources of fuelwood, in particular for the poor households who critically depend on the open access forestry resources. Targeting the subsidization of kerosene to poor rural households would complement the removal of the fertilizer subsidy. It would give the poorer households an alternative source of energy to the manure, and help minimize the pressure on already strained sources of fuelwood. However, since kerozene can be mixed with diesel for many uses, it is important to ensure that the subsidy does not create an incentive for the adulteration of kerozene with diesel. Decentralization and institutional changes. Other measures also should be considered to improve the effectiveness and efficiency of public expenditure. Decentralization and beneficiary participation would help improve the cost effectiveness and sustainability of expenditures in rural infrastructure development. For instance, community participation and responsibility in program design and implementation would raise the cost effectiveness, social and environmental sustainability of the watershed programs. This is one of the conclusions of the 1995 Report of the Technical Committee on DPAP and DDP (1994) as well as the evaluations of the watershed programs. Improvements in agricultural research and extension would provide a tremendous boost to productivity. Pay-offs from investments in technology have been and will remain extremely large in India. India has developed a dense and strong technical capacity for technology development and dissemination. That capacity has, however, eroded over time because of inadequate policy support and poor incentives. Increased commitment to agricultural research and dissemination would need to be complemented by institutional reforms for enhancing pay- offs from existing resources. Institutional reforms to strengthen the capacity and raise the accountability of extension services are badly needed also. There is significant scope for releasing the agricultural extension staff from involvement in commercial activities that would be - 88 - more effectively performed by the private sector, farmners associations or cooperatives. Innovations and experimentation to raise the accountability and client-responsiveness of public extension services are also possible. This could include the financial and managerial decentralization of extension services to PRIs, the participatory and systematic interaction with NGOs and private sector institutions specialized in providing extension services, and the introduction of extension vouchers to farmers and rural communities. FOREIGN TRADE DE-REGULATION Prior to 1991, about 96 percent of internationally tradable agricultural production was protected by non-trade barriers (NTBs) against imports (Table 4.6). Exports of most commodities were also subject to quantitative restrictions (QRs), except long-established exports --tea, coffee, spices, jute, tobacco, castorseed, pepper, oilmeals--or those deemed to have an export potential--fruits and vegetables, and fish. Trade Status ~~~~~Expsrtabhi Imporai1bkl Imports: E port Imports Exports: Prior to June I9 I NTBs for 96 :QRs for most: NTBs for:96 percent of ag: Qs for most percent of ag commodities (rice, prd'n(care Gcere s, tsugar, tommodities prod'n (rice,ha wh whet t cotton) ojiseeds eible oils, dairy & Free for established ag. products) cxports (e.g., tea, coffee, ojiseeds meals, spices, Freefbolpulses,rawwool Siginflegat P6i1ev Cotton,:0 percent RIcc (94). Suga, 0 eret ifrpeseeds & tiu0 tariff (94)ii D0tsiw0 wh$at & wheati Edible oils, 30 ercenb tatiff sunflower (95) 11our (94) .(95), ~20 pece ttaif(96)~ Pulses tariff reduce6d fom 1o percent to 5 percent (9) 5M,0percent tariff (95)~ BO 30 percent taiff (95): NTBs for 77 QRs for most NTs fr177pcnto ag ~ Qls fr most percent of ag commodities, except rice prd'n conmmodities, ~prod' (24 pctoagexept rite (24 prod'n0), estbihdpercet f g PI stabtished n~~~~~~~~~etofabls exports~ ~ ~ ~ ~~~~~~~~epot Souce Pusel, I.and ~A. Sharma, 19.96: "Indian Trade Policies 'Since the I99l/92:Reforms", :World Barnk, Washington D.C. The 1991-92 trade reforms initially relaxed QRs on a few minor commodities. Agricultural tariffs were reduced, but remained irrelevant since import licensing and other import controls were maintained. Gradual trade reforms culminated in 1994 with the full liberalization of a few but important commodities: rice exports, and imports of most edible oils (30 percent tariff), sugar and cotton (see Table 4.6). On the import side, these foreign trade reforms reduced the share of tradable agricultural production protected by NTBs from about 93 percent in May 1992 to about 77 percent in May 1995, if it is assumed that the liberalization of edible oils amounts to a liberalization of the corresponding oilseeds. There is no equivalent estimate on the - 89- export side. However, the abolition of rice alone is a significant step, since it accounts for about 16 percent of agricultural production. Further changes have been introduced in the 1996-97 budget. These include the tariff reduction from 30 to 20 percent for edible oils imports. Three sets of reforms would improve price incentives to the agricultural sector. These are: (a) lower protection of the manufacturing sector; (b) extension of trade liberalization to additional crops; and (c) domestic de-regulation of agricultural markets and agro-processing. Simulations using a CGE model developed for the purposes of this report suggest that lower protection of the manufacturing sector would improve price incentives to the agricultural sector and make farmers better off (see Annex II). This is because farmers would have access to cheaper inputs and consumers goods (Table 4.7). Table 4.7: Evaluating Alterrative Policies for Raising Relative Agrieulture Plives Results of Alternative Policy Siimulations in a CGE Franuwork GDP Poverty Ag. Noni-Ag. Rural Urban a. Agricultural trade liberalization ++ - - + - . b. Manufacturing protection further reduced (20% tariffs + ++ + + for capital and intermediate goods; consumer good imports liberalized with 25% tarifl) c. a+b. agricultural and industrial. trade liberalization ++ + ++ d. c.with high world price scenario for rice and wheat +++ 0 + - - - e. d+fertilizer subsidy removed ++ 0 ++ - -- f£ Harmonization of relative protection between - - . . agriculture and indust (35% tariffs Note: Allresults are compared to a base policy scenario of real devaluatton, 30%h tarif; for intcntmediates and 35% for capital goods, fettilizer subsl4y bill constant in teal terms, - poverty etfect indicates worsening of poverty; + poverty effect indicates reduction of poverty. Source, Quizon, J., M. Panda, H. Binswanger.and B. Blatel fortcoming , World Bank, Washington. These improved incentives for agriculture would lead to faster sectoral growth (scenario b in Table 4.7). Real rural wages would rise as a result of improved relative agricultural prices, and faster agricultural GDP growth. In addition, the model indicates that lifting the ban on consumer goods imports would increase real incomes of all household groups in both rural and urban areas. The CGE model was also used to explore the option of protecting agriculture by raising agricultural tariffs to parity levels with manufacturing goods. The results, however, indicate that such an harmonization policy would actually hurt all households, except for the top 50 percent of rural households. This result is not surprising. An harmonization policy, by raising food prices, would hurt the vast majority of consumers in India (scenario f in Table 4.7). The World price environment is favorable to further agricultural trade liberalization. World agricultural prices, most notably rice and wheat, are currently high and likely to remain so for an additional couple of years. The combination of high world prices and high domestic stocks, provides India with a strategic opportunity to further liberalize trade and simultaneously - 90 - reduce its input subsidies (scenario e in Table 4.7). CGE simulations suggest that, with currently high rice and wheat world prices, trade liberalization in agriculture, even if combined say with fertilizer subsidy removal, would boost agricultural growth. In terms of income distribution, the top 50 percent of rural households would gain the most by benefiting from higher export prices for rice, wheat, and other crops such as cotton, fruits and vegetables. Higher food prices would hurt the rural poor, although the higher agricultural growth and accompanying higher rural wages are expected to compensate for this increase. Urban households, in particular the bottom 50 percent, would suffer an income loss, however, since food prices increase and non-agricultural GDP stagnates. The adverse impacts on the poor underscore the need for targeted, cost-effective alternatives to the PDS and other targeted safety net programs to protect the poor at least in a transitional period from the costs of subsidy removal in agriculture and further trade liberalization. Such a strategy would aim at alleviating the poor's chronic food insecurity by reducing the risks they face on both the food and labor markets. This strategy would require more funding of rural (and urban) employment guarantee programs while simultaneously improving their targeting. It would also involve developing cheaper and more effective alternatives to the Public Distribution System. DOMESTIC TRADE DE-REGULATION Domestic reforms since 1991-92 have included the de facto removal of price controls from wheat during harvest (in the surplus northwest region) through Table 4 vl ot 9ututefo uture (percent oftowa agrculture output) the lifting of informal controls on 1985-86 .1990-91 ;: 1991-9Z 1992-93 1993-94 wheat movement by private trade Ricc(:.y) 17.1 15.4 I 164 15. 16.7 Wheatil 9.2 8. 9.2 88 8.90 in February 1993. And price and (oil1se4s 6.3 10 .6 10.2 9.4 9.3 movement controls on sugar S,ugar 5.22 5.5 5.0 5.2 5.6 ,.ivestCK : 24.0 24.6 25.4 26.2 26.4 molasses were lifted by the Central Liestock Government in June 1993, although partially implemented by three states (Uttar Pradesh, Bihar, and Haryana). The discussion below of key commodities (Table 4.8) illustrates the far reaching agenda still to be tackled (Tables 4.9 and 4.10). ote:Tali 4.9Beyood rade PolicyWbafare the Problems withhn0cbltrllMairkets?.t the i of t0e robem 05000~~~~~~~~~~~( ;07 : 0 R :Wheat ;Suearl OilSeeds::7 Cothn Dairy &:: I:nadequate infrastrucWe tatsoftpt, ::f// : v=0(:/ g Ptocessinlg margins000 :t00;00t:00 00 i00;;l0;000:j:0f000K 0vx S 0 W0:;:0 / :0 iMaekdting margitist v :f0: fff f:f :::;0:fff:f: t : : / ::/; i Z f0: 0Nqtew te Snimberfof *1:4'ndkfithe iute* = th: b6if euc 000 0700 0X - 91 - Table 4.10: What Causes the Problems with Agricultural Markets? Rice Wheat Sugar Oilseeds Cotton Dairy & Poultry Feed FCI operations (levy procurement, pan /11 IVV seasonal & territorial prices, dominant player) Dual marketing system Essential Commodities Act V."/ i' V'V / I/f ,'V Milk & Milk Products Order/Licensing V VV Selective Credit Controls (RBI) /V/ I/ IV VVV Small Scale Industry Reservation V iii Sugarcane pricing/Ginning fees V V V Forward Contracts (Regulation) Act V V V'V Health safety legislations & enforcement v'v' Intellectual property rights VV V'/ State Goverments: Movement controls v" V Vy Regulated markets management V v VV V Cane Cooperative Societies {v Non-unitary & multi-point taxation i V V Note, The number of "/ indicates the intensity of the problem. Rice and Wheat. The liberalization of rice exports in October 1994 is a landmark policy change clearly beneficial to farmers. At the same time, it is also exposing the shortcomings of the current food policy. Specifically, food policies are increasingly costly to the exchequer, yet involve fewer income transfers to the poor; they do not support a more open trade regime; and are poorly equipped to deal with world price instability. Extensive government interventions in rice and wheat markets, pervasive controls and restrictions on private sector storage and movement, trade finance, milling activities explain the limited private investment in port and transport infrastructure, storage activities, and the inadequate attention to quality management on the domestic market. The price discounts currently faced by Indian exporters are significant--20 percent (about $60/mt) for common rice and about 15 percent ($26/mt) for wheat. Domestic markets need to be allowed to operate more freely to support a more effective open trade policy. In the short-run, gradual improvements could be achieved by lifting the uncertainty about the open trade regime, phasing-out the rice levy system, eliminating pan- territorial and pan-seasonal pricing, and lifting commercial restrictions on trade, storage, movement, (rice) milling and trade finance. This would induce private investment in modem storage, port equipment and facilities, and improve quality management. The development of the warehousing system together with financial product innovations would further improve the efficiency and stability of private storage operations. It would also enable FCI to experiment with sub-contracting some of its storage and transport operations to the private sector, and to pilot alternative price stabilization mechanisms. An increasingly reliable, competitive and well- performing physical market for cereals would eventually enable the introduction of futures markets and commodity derivative instruments in wheat and, possibly for rice. Such instruments, in the long-run, could provide India with powerful and more cost effective alternatives to price risk management, food security, and producer support programs. India, because of its large size, has the potential to influence the world price of rice. The extent to which India could rely on foreign trade as a cost-effective tool to complement domestic policies in meeting its food security and income support objectives needs to take this - 92 - fact into account. The optimal policy choices would depend crucially on the price-depressing (large-country) effects of India's rice exports on the world market. Answers to that question would require detailed and careful analysis. Analytical work along these lines is now being conducted in India and should be helpful in guiding government's policy decisions in the future. Illustrative and preliminary simulations conducted for purposes of this CEM would suggest that, under optimal trade policy, domestic prices would have increased very little, while imparting greater stability on the world market. India entered the export market for Dox*4.4: Deficiec ies in tt adPort Services wheat and rice at an opportune time because Impede AgriculturalFExports of high world prices. India should continue Indias agicultralexports account fora merone to use this opportunity to break into the world percent of world agriculturaln trade but commodities market by developing its own markets and such as fuitst and:getables, cereals, florculture and expgits export qualiy marinsiproductsappearto have significant export expertise, by improving ltS export quallty, lllll0Xt)jA)X;Xpotential (seePC Chapter46). Chapter 2 has already reliability of its services and supporting ':indite that the: country's major ports are over- infrastructure. Current barriers to trade-- crowded, 'poorly equipped,, and inefficiently laid out0 atnd thus impdegF agIclua exports. inadequate port infrastructure, poor quality exports--already act as an export tax, The greatest problem for expreters is the poor minimizing the need for further foreign trade distributionand storage facilities (including those at intervention in rice as well as wheat in theis is leading to wastage of 30 pecent of p r duction annually. This wasta is substantial short to medium-term (Box 4.4). because india is1the world's second largest grower of fruits and vegetles. At present, only I percent of Better access by the poor to production is commercially processed and only a few s sid o ad m o d uiooducts: are exported to fmarkets in South Asia, the subsidized food and imBproved nutrition ffffffE000000MiddleEstandlEastern Europe. However, the sector: programs which are cost effective will be isrecognized6 as potentially importat for exports,:with essential in protecting the (rural and urban) a target of US$650 million for the year 2O00. Similar problems affect rice and: wheat, and are linked to poor from higher food prices at minimum controls and restrittions on private sector marketing, fiscal costs. At the same time, reforming the trade fnance, storage and milling activities which in procurement side of the PDS for rice, wheat turn have contributed to inadequate private investment and sugar is central to the de-regulation of ztrai nprs domestic trade and agro-processing for the Marinetexports have diersified in recent years frot rice, wheat and sugarcane crops. The PDS is reliance on frozeAnshrimp and now encompass a variety of finfish and m6llusksv Export growth has not very effective in reaching the very poor. t0 rap id rising fronao perentof agrcultural and For instance, for every rupee spent in 1986- allied exportsr in theearlyei 1990gs to 27 ent int 1994- 87, less than 22 paise reached the poorest 20 95. Mechanization of the local fleethascontributed to ths' expansiom' However, inefficiencies at the ports percent of poor households in all major states. rob India of the fill economic efits of this trade S Except in those instances where state-level becausetheyhave led many vessels to tranship catches initiatives are significant, such as in Kerala, Andhra Pradesh, Karnataka, income transfers In aditiont facihtattng more efficient handling of to the poor via the PDS are negligible, and cereals, fruit and 1vegetablesandmarined products, key achieved at huge fiscal costs. Where state- investment4in .ports (aswetllas market, post-harvest, .initiatives are significant, PDS transfers hinftrctureandqualitymanagement level 1mtlatves ae slgmicant PDS ransfes - S;j000would genable thfwe eoilseeds crushing industry to beAcome can reduce the severity of poverty, but this is more itechnically efficient and competitive also achieved at huge and sometimes non- interationally. sustainable fiscal costs, in large part because - 93 - of the universal character of PDS distribution. The efficacy of the PDS in distributing food to the poor appears to have improved little since 1986-87. Regional mistargeting continues to plague the PDS and appears to be a direct reflection of the states' fiscal health and capacity to implement their own programs. In the richer states able to finance significant state-level initiatives such as Kamataka and Andhra Pradesh, available evidence indicates that non-food commodities (coarse cloth and kerosene) are at least as important as food commodities in transferring income to the poor, and are much better targeted presumably because of considerable self-targeting. The revamped PDS, introduced in 1992, is targeted to those same poor and backward regions where the EAS is implemented, and represents a first attempt at geographical targeting. Results of the beneficiary assessments surveys carried out for this report (Chapter 1) would seem to indicate that the RPDS is not reaching the very poor either. Additionally, the government may wish to experiment with alternative transfer and targeting mechanisms such as food stamps through existing systems of health and nutrition programs (ICDS), and/or through PRIs. Sugar. With the liberalization of sugar imports under zero percent tariff, the domestic sugar industry must now compete with imports. Historically, productivity growth in Indian sugar production and processing has lagged behind international levels. The dual marketing system--involving the compulsory delivery of about 35 percent of milled sugar output for the PDS at levy prices, and a "free" sugar market which absorbs the balance--is taxing domestic production relative to imports. It is also impeding productivity growth. Lack of competition between mills due to licensing restrictions, water subsidies particularly in Maharashtra, interventions such as cane societies in IJttar Pradesh, and government cane pricing further reduce the incentives for technological catch-up in the industry. In the sugar industry alone, market oriented policies would permit technological catch- up by the industry, and would result in substantial economic and welfare gains. Recent and conservative estimates of the welfare gains from productivity improvements could reach as much as US$2 billion a year by 2005. With policy changes that encourage productivity growth, India could satisfy over 90 percent of its projected consumption growth over the next decade at world competitive prices and without tariff protection. Consumers would benefit from the increased availability at constant and stable prices; productivity growth would benefit sugarcane growers-- even with input subsidies removed--and avoid taking scarce resources away from other crops. Improved profitability in sugar processing would attract the needed private capital and alleviate the need for government subsidization. Government revenues and savings would increase which would amply cover the costs of a sugar subsidy program targeted to the poor. Central to the technological catch-up by the sugar industry--from cane growers to sugar mills--is the phasing out of the dual marketing system, continued free trade, the elimination of licensing requirements, and reforming government interventions in cane pricing as indicated earlier. A government-supported subsidy program for sugar targeted to the poor would complement the phase-out of the dual marketing system. The phase-out of the dual marketing system would remove the taxation of domestic production relative to imports, and eliminate the - 94 - main source of volatility in Indian sugar production, as well as uncertainty to the sugar mills. It would be key to releasing the growth potential of one of the largest sugar industries in the world. Oilseed. Edible oils are now freely importable at 20 percent tariffs. By putting a cap on the price of edible oils, free imports greatly benefit Indian consumers who, until recently, had to pay two to three times world price levels. The need for high protection of oilseeds also has dissipated as a result of the devaluation, and the doubling in production which led to a 22 percent fall in oilseeds prices in real terms between 1990-91 and 1993-94. Imports of edible oils are creating competitive pressures for the domestic oilseed crushing industry to trim its marketing costs and crushing margins. Recent analysis shows the oilseed crushing industry and trade performing poorly in processing and marketing. Four factors explain this poor performance: (i) India's crushing industry is small-scale, technically and economically inefficient, and is characterized by a dismally low capacity utilization rate (30 percent) by any international standard; (ii) the domestic market is not adequately integrated and crushing margin risks cannot be properly covered because there are storage and movement controls, small-scale industry reservations for the two most important oilseeds, restricted access to working capital, a ban on forward and futures markets, and a non-unitary and multi-point taxation regime; (iii) port and transport infrastructure is inadequate, raising the costs of exporting oilseed meals by as much as 50 percent; and (iv) incentives for quality and food health safety are very limited resulting in significant discounts on the world market for groundnut and rapeseed meals. Shifting from successful import substitution to a modernization strategy is now needed to protect the incomes of the mostly rainfed, oilseed farmers, and sustain past production achievements. Lifting the regulatory barriers to modernization would enable the oilseed crushing industry to trim its large processing and marketing costs, and successfully compete with imports. During the modernization and restructuring process of the oilseed crushing industry, oilseed producers would need a price support mechanism. Free oilseed exports--already in place for rapeseed-mustardseed and sunflower--would provide such price support mechanism at no fiscal cost to the government. De-regulation of domestic trade and agro-processing, key investment in port, market and post-market infrastructure, improved regulations and controls on food safety and intellectual property rights, would reduce considerably marketing and processing margins and raise export earnings from oilseeds and meals considerably. Expressed in terms of oilseed farmgate prices, efficiency gains could be as high as 20 percent. Access to modern risk management instruments--technical efficiency, flexibility in sourcing raw material, forward and futures markets--would enable the crushing industry to manage its crushing margin risks, and take advantage of the 75 percent drop in oilseed production instability achieved over the last 15 years. Access to modern risk management tools is essential in an industry where crushing margin risks are an inescapable, structural feature. With the full exposure to foreign competition in oils and meals, they are now a necessity. In the - 95 - absence of standard risk management techniques, farm prices will be forced down whenever processors feel a squeeze on their processing margins. Cotton. With the liberalization of cotton imports at zero percent tariff, the poor quality management in cotton production, ginning and marketing will make it increasingly attractive for the textile mills, notably the export-oriented units, to import cotton of higher and more reliable quality rather than to rely on the domestic market. Until recently, cotton seed prices were also well above world prices, compensating cotton growers for the otherwise low cotton lint prices caused by the quantitative restrictions on cotton exports. Production shortfalls in 1994-95, caused by pests and diseases in the northern producing region, and increased domestic demand to feed the textile export boom have partly masked this phenomenon. The domestic cotton industry 's ability to compete in terms of both quality and price with imports is hampered by various government policies and regulations. Strict cotton export controls block incentives for improved quality management on the domestic market; the high protection of the yarn and textile industries from imports compounds the poor incentives for quality management in the cotton-textile industry. Restrictions on standard commercial practices--such as the movement and storage of cotton, trade finance, hedging and forward contracting, ginning fees, inadequate grading practices and facilities in regulated markets, and weaknesses in the seed industry--militate against improved marketing performance, transparency, competition and quality management. Pesticide subsidies, and weak cotton research and extension programs have also resulted in escalating pest and disease problems, which increasingly threaten both production volume as well as the quality of output. Experience in China, Mexico, and Thailand has shown that delayed action in addressing pest and disease problems could result in drastic production and economic losses. The abolition of the Multi-Fibers Agreement (MFA) represents a tremendous opportunity for growth and employment for the Indian cotton-textile industry. The growth potential in cotton production, in the context of a more liberalized environment, will rest heavily on the degree to which the sector will be allowed to operate with minimum interference from government interventions in marketing and processing, and on key public interventions in raising yields, addressing pest and disease problems, and seed quality. Recent estimates indicate that, for the South Asia region as a whole, the textile industry is likely to more than double in size in just over 10 years. And the apparel industry will more than triple in size. India has begun the process of policy reform needed to take advantage of these emerging opportunities. The agreement by India to open-up imports of textile products is one such important step. It will provide India the negotiating leverage should the US or the EU contemplate negotiations on extending the MFA quotas. The availability of imported textiles and apparel should help make the domestic industry more price competitive and meet international quality standards. Recent policy changes in the man-made fibers industry will also facilitate inter-fiber substitution, and release the much needed cotton for the more lucrative export markets. However, much more remains to be done to capture these emerging market opportunities. The historical subsidization of the textile industry by cotton growers is disappearing as a result of the free imports of edible oils, and cotton production problems. - 96 - Several policies stand in the way of making domestic cotton competitive in price and quality with imports. These include cotton and yam export quotas; over-regulation of domestic trade, ginning and the formal sector textile industry, hank-yam obligation; and high tariff barriers on imports of yarn, textile and apparel. Concerns about the future of the handloom industry should be mitigated by the tremendous employment opportunities that would arise from a highly labor-intensive industry about to at least double in size; by the realization that market niches for handloom products do not require special protection; and by the presence of less distortive policy alternatives to protect the handloom industry. In the short-run, the textile industry, notably the yarn sector, should be given the flexibility to modernize and become more competitive, while simultaneously increasing the incentives for modernization through tariff reduction on textile imports, yam export liberalization, and lower taxation of the man-made fibers industry. Domestic de- regulation in cotton marketing and ginning would permit the more efficient transmission of price and quality signals to cotton growers. Cotton export quotas should be gradually expanded, and be fully eliminated within a few years. Livestock. The devaluation of the rupee and tariffication of dairy and poultry products is bringing domestic prices down to the benefit of consumers. Growth in the dairy sector (about 6 percent per annum) has been instrumental in alleviating poverty, since small and marginal farmers own a large proportion of dairy animals. Inefficiencies in the dairy and poultry feed industry, however, hinder the capacity of these sectors to satisfy the expected future increases in domestic demand and compete with imports. Analysis shows that in India the dairy industry's processing margins are high by international standards, causing low farmgate prices. In poultry, the unreliable supply and quality of feed has resulted in catastrophic losses in several states, such as the widespread slaughter of stock due to a feed shortfall in 1992. In the dairy industry, two major policies contribute to the observed marketing and processing inefficiencies. First, the Milk and Milk Products Order (MMPO) 1992 limits entry and competition in the dairy industry, and helps maintain the inefficiencies caused by the earlier policy regime. Second, the continued state controls and subsidization of poorly performing dairy cooperatives, limit their incentives to improve efficiency. These policies, could block technological change, and thereby, hurt the industry. Poultry production and breeding are generally efficient by international standards. Inefficiencies in poultry feed manufacturing limit, however, the capacity of the poultry industry to expand and remain competitive. Poultry feed is the largest cost component in poultry production. The small scale reservation of poultry feed manufacturing hinders feed manufacturers from taking advantage of economies of scale and technological innovation which would reduce production costs and enhance the quality of feed considerably. The development of the feed industry will, therefore, be a critical determinant of growth and competitiveness of the poultry industry. In conclusion, substantial gains would result from domestic de-regulation of agriculture. The deregulation of domestic trade and agro-processing would significantly reduce - 97 - marketing and processing margins, to the benefit of both farmers and consumers, making it a win-win proposition. It would bring additional incomes to the rural areas, raise farm profitability, and promote productivity growth in agriculture. De-regulation would actively complement and support the removal of agricultural subsidies. It would enable Indian farmers to compete with their foreign competitors, and to capture rapidly expanding domestic and foreign markets. Government would also benefit from a deregulation strategy which would strengthen food security objectives, improve price stability, promote rural growth--including in rainfed areas--and facilitate the pursuit of essential public concerns such as poverty alleviation and food safety concerns. In addition, the ratification of the Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement will improve farmers' access to productivity enhancing technologies. RURAL CREDIT REFORM Reforms are needed to enable India's rural financial system to support agriculture and other rural economic activities. Estimates suggest that small farmers have little access to credit and long-term credit is highly concentrated among large farmers. Subsidized credit often is tied to particular investment, thus encouraging more capital-intensive/less labor-absorbing technologies. Credit arrangements typically are linked to specific crops and require borrowers to obtain their input supplies through the inefficient public delivery system. Guidelines set by the RBI dictate the amount of credit for individual investments in agro-processing (such as in sugar and oilseeds). Thus, the technologies in which investments are made often reflect how much credit is available (as per the RBI credit guidelines) rather than the appropriateness of the technologies. Selective credit controls, issued by the RBI, severely limit access to trade and storage credit for all major crops. They also prevent banks from offering more attractive financing terms when stocks are either hedged, or secured through warehouse receipts. Separately, the absence of credit for hedging limits the strategies for risk management. These deficiencies vis-a-vis the agricultural sector, reflect three main generic weaknesses of the overall rural financial system, namely: (a) low autonomy of rural financial institutions emanating from state ownership, micro-regulation and measurement of performance based on the achievement of credit targets to the exclusion of self-sustainability; (b) the relatively high cost--both to lenders and to the borrowers--associated with the centrally planned credit and application of concessional on-lending rates that are below market-determined rates; and (c) the low eventual recovery rate on loans. The Indian authorities began reforming the rural financial system in earnest in 1994. Steps taken to date include: (a) lowering target group lending (marginal and small farmers and rural artisans) from 100 percent to 40 percent in the case of regional rural banks; (b) allowing banks greater freedom to rationalize branches; (c) deregulating interest rates of rural cooperative banks; (d) allowing urban cooperative banks to lend to rural borrowers in contiguous areas; (e) relaxing "service area" restrictions to encourage competition and stimulate supply; and (f) applying of international prudential norms to RRBs. The RBI is also undertaking a program under which 49 RRBs are being re-capitalized and their management strengthened; another 68 RRBs were identified in December 1995 for inclusion in the program. Separately, the National - 98 - Bank for Agriculture and Rural Development (NABARD), the apex re-financing institution, has helped evolve Development Actions Plans (DAPs) for strengthening selected RRBs and cooperative banks and has entered into Memoranda of Understanding with state governments (as well as with specific cooperatives) on the operationalization of these DAPs. NABARD and banks, through NGOs, are also promoting self-help groups among the poor, which encourage savings and micro credit activities. The Common Minimum Program indicated that the United Front Government planned to double the flow of credit to agriculture and agro-industries over the next five years. The recent full-year Budget (1996-97) provides for: (a) doubling the paid-up share capital of NABARD in 1996-97; (b) establishing state-level agricultural development financial institutions (DFIs) to promote investment in commercial or high technology agriculture and allied activities such as horticulture, floriculture and agro-processing, with NABARD and state governments providing the equity for these new DFIs; (c) setting up new private local area banks which will operate in two or three contiguous districts; and (d) recapitalizing and restructuring RRBs for which another installment of Rs 2 billion (US$57 million) was allocated. A coherent strategy for increasing flows to agriculture and other rural economic activities must address issues of access to financial services by the rural population in general, as well as the financial sustainability of the RFIs. Measures are needed to encourage and facilitate an orderly re-orientation of India's rural financial system from the supply-led approach of concessional, targeted agriculture credit, to the systematic development of demand-oriented rural financial markets. Specific actions for consideration include: (a) redefining the role of the NABARD to increase its efficiency and self-sustainability in catalyzing flows to the sector through market based mechanism, and removing the conflict of interest inherent in its responsibilities as a supervisor and financier of the rural financial system; (b) deregulating the remaining lending rates; (b) relaxing credit guidelines/schemes and restrictions; (c) adopting regulatory changes to facilitate greater Regional Financial Institution (RFI) autonomy; (d) eliminating service area restrictions (while ensuring that districts remain adequately served); and (e) improving legal and other arrangements for loan recovery. - 99 - z ~THE ENABLING FRAMEWORK FOR PRIVATE INVESTMENT L ~~~~~IN INFRASTRUCTURE INTRODUCTION As highlighted in the last three Ministry of Finance's Economic Surveys, the new government Common Minimum Program (CMP), and indicated in Chapter 2, deficiencies in infrastructure and infrastructure services are a major impediment to achieving and sustaining higher economic growth in India. To address these problems, the economic program of 1991-96 ended decades of public sector monopolies in the provision of infrastructure. It assigned to the private sector a significant role in raising substantially the level of infrastructure investment and the efficiency of infrastructure services. The CMP envisages a similar role for the private sector as part of a broader effort to raise infrastructure investment from around four to six percent of GDP " ...in the next few years ...". For this to materialize, a re-examination of the enabling framework for private investment--that is the legal, administrative and regulatory framework--is needed. Last year's CEM reviewed the generic legal issues affecting not only the development of the infrastructure sector, but also that of all sectors of the economy. It highlighted that India has a well developed legal system which provides for the comprehensive protection of property and contractual rights. This system was a key instrument through which the state regulated economic transactions when the Central Government pursued a planned approach to economic development. Several economic laws were established or modified during this period to provide a basis for state intervention and administrative discretion. Now, some of these legal instruments have become impediments, given the greater role assigned to the private sector. The instruments of particular concern are: (a) company law (a proposal was submitted to the last parliament but its consideration could not be completed during that parliamentary term; the new government in its 1996-97 budget reaffirmed its commitment to reform company law by February 1997); (b) labor laws; (c) tax laws; (d) land law (including collateral; tenancy; urban land ceiling; and construction); and (e) competition laws. These are all in urgent need of reform. This chapter focuses on the progress and remaining challenges in developing the regulatory and administrative framework needed to accommodate this broader role for the private sector. On the regulatory and administrative front, suitable arrangements have been proposed in some cases and steps towards implementation are evident. But progress could be more penetrating, precipitous and prompt, not only in establishing new rules but also in generating new attitudes at operational levels to private sector involvement. This is especially true in power, ports and highways. - 100- POWER Private Investment in Generation Few private investments have been brought to closure. India is facing an unprecedented power supply deficit that could severely undermine its development prospects. Since 1991, to attract private investment, the government has gradually evolved a fundamental transformation of the policies and institutions governing the power sector. And yet very little private investment has been brought to closure under the new national policy which was adopted five years ago precisely for this purpose. The fundamental obstacle to private sector investment in the power sector is the weak financial position of the State Electricity Boards (SEBs) which operate virtually all the country's distribution networks through which the power supplied by potential private investors would have to be sold. At this time, the SEBs are not financially viable clients for potential private power producers. The SEBs generally are prevented by their respective state govermment from charging commercially viable tariffs; they are not allowed to cut power from non-paying customers, and many of them are institutionally too weak to contain power theft in rural and urban areas. As a result, the SEBs' financial condition is one of the country's most serious structural constraints to the reduction of the public sector deficit. Other impediments to private investment include lack of clarity in the private power policy (though some of the issues have been addressed in the amendments), fuel supply risks emanating from government monopoly control over coal and railway transport, lack of legally enforceable fuel supply and transportation contracts, weak financial situation of the state governments to back- stop SEBs' obligations, and lack of clarity in Central Electricity Authority's review and approval process. Widespread debate on the array of complex issues arising out of private power policy and financing of IPP projects on a limited-recourse basis, has led to a better appreciation of the concerns of developers, investors, and lenders, by the SEBs and state government. Meanwhile, the scope for private investment is enlarged. Over the last 12 months, the Ministry of Power (MOP) issued several new guidelines to complement the original policy of 1991, with a view to enlarging further the scope for private power generation. New guidelines released in October 1995 focused on private sector participation in the renovation and modernization (R&M) of existing power plants. Shortly thereafter, MOP issued a liquid fuel policy for power generation to facilitate the rapid installation of diesel engine generating (DG) units by the private sector. At the same time, MOP suggested that states facilitate the entry of captive power units into the system. This could be done by offering private investors an appropriate tariff for the purchase of surplus power by the grid and third party access for direct sale of power to the other industrial units. In another announcement in February 1996, also aimed at encouraging private investment, MOP advocated the use of barge-mounted power plants as a possible option for coastal states. Captive generation cannot tackle a fundamental problem. Because progress in reforming SEBs is very limited, the government began over the last 12 months openly to encourage captive plants where the purchaser is likely to be (but need not always be) one or more industrial customers (with possible sales of surplus power to the utility). Generally, the technology selected for this kind of plants is based on liquid hydrocarbons as primary fuel, e.g., - 101 - naphtha or fuel oil; plants are relatively small (i.e., a few megawatts); little investment in fuel handling is required at the plant site; and the construction period is normally very short (less than two years). Captive generation may be the best option available when connection to the grid is too costly for example in isolated and remote load centers. In other instances, it may at least be a short-term quick-fix option when the only alternative is no power at all. In the long run, however, captive generation cannot be considered an effective solution to the acute power shortage on the scale presently afflicting India. Power supplied through captive plants is generally costlier than that generated through large conventional power generation (particularly for base-load generation). And transportation of liquid fuels over relatively long distances and in large volumes may pose serious environmental and safety hazards. In addition, fuel may not be available domestically in the volumes required, leading to imports which may further strain the limited port and transport infrastructure. Another issue is that captive plants supply industrial consumers directly and more generally, those who can best afford high electricity tariffs. In consequence, SEBs could start losing their "best" clients, incur increasing financial losses and face even more severe liquidity problems than before. Any future structural, institutional, ownership or pricing reform may also become more difficult. For example, the financial viability of electricity distribution in an area with a large captive generation capacity might be more difficult to establish immediately as the margin of maneuver for cross-subsidization might be significantly reduced. The tariffs applicable to those consumers that have been traditionally subsidized--agricultural and domestic consumer--would have to increase more steeply than in the absence of captive generation. This would make it more difficult to involve the private sector in distribution and would correspondingly delay the much needed improvements in power supply. To further enlarge the scope for private investment, the government proposed in November 1995 to facilitate the implementation by the private sector of mega power projects. These are defined as private power generation projects with capacity of 1,000 MW or more, which supply electricity to more than one state. The premise is that, given the regional concentration of coal resources in India and the enormous difficulties of transporting coal over long distances, it is more efficient to locate power generation closer to the source of fuel supply than to the load centers. Evidently, the promotion of such projects will need to be accompanied by a significant expansion and reinforcement of the transmission infrastructure, most probably under the auspices of the Power Grid Corporation of India (Powergrid). Under the proposed framework, the Central Electricity Authority (CEA) would be responsible for identifying mega power projects. The National Thermal Power Corporation (NTPC) would carry out the feasibility studies and all related preparatory work (including site surveys, soil investigations, environmental assessments and socio-economic studies). Powergrid's responsibility would be to help with the bidding process--from the prequalification of bidders to the actual bidding process and evaluation--and facilitate the negotiation of power purchase agreements between the selected developer and the client states, and other related contracts. - 102- So far, initial preparatory work on mega power projects has been driven by government alone. But the clients will be the states (SEBs, or their successors in reforming states), and their interest in mega power projects has not yet been fully ascertained. For the government's new initiative to succeed, the potential clients of each project will have to be identified at a very early stage--and their credit worthiness ascertained--to ensure that they are closely and actively involved. To win private sector confidence, it is crucial that this aspect of the program be given priority in the promotion by MOP and associated agencies of such mega projects. In fact, it would be advisable not to issue any solicitation document--be it for the prequalification of bidders or, a fortiori, for the invitation of detailed project proposals--until the client aspect of the projects has been considered with a reasonable degree of clarity, confidence and client commitment. Another important factor that may determine the success or failure of the mega-project initiative is the degree to which greater flexibility will be provided to investors for developing coal mines. At present, even though private investment in the coal sector is permitted for captive consumption by power stations, the policy contains many restrictions that limit its scope considerably and may constrain the success of the mega project initiative. Other important issues will need to be addressed, such as the specific role of each government agency (particularly NTPC which can assume a larger role in development of such projects in view of its acknowledged expertise and Powergrid) in the development of mega projects; the availability of professional advice to guide government agencies and the client states in the preparation and negotiations of the complex contractual arrangements; and the need, in parallel, to expand significantly the infrastructure for transmission. Competitive bidding is now mandatory for new projects. Following an announcement in January 1995, competitive bidding is now required by government for all private power projects and will be administered by the states (for their purchases) and by the center (for megaprojects for example). Guidelines have been issued by MOP for carrying out competitive bidding for private power projects. In addition, to avoid delays in the installation of small private power plants, the threshold for requiring CEA's techno-economic clearance of individual proposals was raised in December 1995 from 1 billion to 4 billion rupees for generating stations being developed through a process of competitive bidding. March 31, 1996 was the deadline set by MOP for obtaining CEA's "in-principle" clearance for the further processing of projects having been developed under the Memorandum of Understanding (MOU) route. The government's decision to make competitive bidding its official policy is clearly a major step forward in the implementation of its private power development initiative. Given India's political system, the lack of competition to date has led to a public debate involving the SEBs and the state governments--accountable to the public and its elected representatives--on the terms and conditions (particularly the tariffs) under which private power proposals were approved, and whether these were the best projects available (as evidenced by a fair competition). This has led to reopening of a few project deals, significant delays in reaching financial closure, and the resulting negative effect it has had on investors' confidence. - 103 - Recent experience with MOU projects makes it all the more crucial to ensure that the government new policy on competitive bidding is implemented appropriately. The guidelines issued by MOP for screening the MOUs resulted in "in principle" clearance for about 99 projects in March 1996 (before the self imposed deadline for competitive bidding for all new projects). These guidelines have been further strengthened in July 1996 making it compulsory for the MOU holders to obtain final "techno-economic" clearance from CEA by March 1997. To succeed where MOUs have failed, competitive bidding for private power will undoubtedly need to be conducted transparently, with adequate preparation, proper expertise, and careful planning. Power plant options must be evaluated based upon their value to the system as a whole. At times this will result in the selection of baseload units, while in other instances cycling capability may be the preferred choice. Competitive solicitations must be designed to obtain the best price and quaiity proposals for the preferred option. The Notification process requires improvement. Although amendments to the Notification have made competitive bidding (based on price) possible, the process could be simplified. First, there continues to be a need for two-part tariffs based upon availability. The use of tariffs that reward plant load factor (PLF) rather than availability distort efficient system operations and are problematic for the financing of the cycling (non-baseload) units which the sector needs. If it is the intent of the Notification to provide payments for fixed charges and bonuses that are based solely upon availability, this should be clarified. Second, the Notification could be clearer on such matters as how CEA will calculate ceiling prices, to determine if proposed deviations from the norms will be acceptable. For example, how will projected inflation rates (foreign and domestic) or projected exchange rates be handled? Will the ceiling prices and project prices be normalized and then compared, or will some other comparison be made? Levelized kWh prices, incorporating the projected effects of inflation and exchange rates, should be the mode of comparison. These are not trivial issues. The absence of a broadly acceptable methodology from CEA complicates the preparation of requests for proposals (RFPs) and associated documents, the proposer's development of bid prices, and the power purchaser's evaluation process. Eventually, the Notification Should Be Phased Out. As competitive bidding proceeds, and the prices for various types of projects become known, the market will determine the appropriate ceiling price. Whatever protection is believed to be provided by calculated ceiling prices will be provided by the market, assuming that competitive bidding is carried out professionally by commercially viable purchasers. Private Sector Participation in Distribution Private sector experience, skills, andfinancing in electricity distribution are now seen as an essential ingredient for creating creditworthy, efficient utilities in India. The other ingredients include: (a) tariff reform, which includes both average tariff levels for the utility as a whole, the tariffs of each customer class, and two-part, availability-based power tariffs; (b) the incorporation of all public power sector entities under the Companies Act, at least as an interim - 104- step; and (c) the establishment of independent regulation, with an appropriate scope of responsibilities and authority. Such private sector participation in distribution can start to take place in two general ways: (a) the purchase of shares of (as well as lending to) public sector distribution companies; or (b) the operation of the distribution systems themselves, either under short-term operations' agreements or licenses. The sale of shares to the public will obviously require that the company operate commercially, and attain a sufficient degree of commercial success. Similarly, the ability of the public corporations to tap the private market for debt will also require commercial operation with returns commensurate with the risks. For private sector participation in distribution to produce long-term benefits, it must be substantial in whichever form it takes. For example, where there is private sector operation, the private companies should become licensees, with the obligation to operate, maintain, and finance the required capital investments. While there may be acceptable alternative arrangements for an interim period (such as short-term operations agreements), private sector distribution licensing, subject to the authority of an independent regulator, will be a basic requirement. Private sector participation in distribution should be accomplished within the framework of an overall sector reform plan. The main point is that problematic decisions made in isolation--such as cherry picking certain areas first--may make it both more difficult and expensive to implement a comprehensive, state-wide reform plan. It is better to analyze and then decide upon, for example, the number of disaggregated distribution areas to be created, the overall plan and sequence for offering areas to the private sector, the terms and conditions of the offering, and how these terms and conditions, including tariff setting, will be dealt with by the independent regulator. Where the private sector is invited to operate the distribution system, whether as licensee or only for short-term operations' agreements, competitive bidding should be the preferred route. The solicitation should coincide with adequate preparation of the system, which will involve, inter alia, a significant and structured effort in data collection and load research. The solicitation should allow both domestic and foreign companies to seek to qualify and, if so, to offer proposals. Obviously, foreign companies must have Indian involvement--perhaps as members of a domestic/foreign consortium--since distribution operations will require significant customer contact. Similarly, of course, Indian companies may take the lead and bring in foreign expertise or capital as part of the team. As the reforms proceed, and distribution is moved into private hands, tariff differentials among the distribution areas will be inevitable. Consumers in the same category in one distribution area will be charged differently from those in another. Each private sector company will be encouraged to utilize its skills and experience to operate and maintain the area under its control and to undertake the capital investments it believes are necessary. The result will be cost differentials among the areas which will have to be reflected in their respective tariffs. The determination of these tariffs, where there is significant reform underway, will lie with the independent regulator. - 105 - Reforms also are needed at the central level. With the implementation of a significant reform program underway in Orissa, the government now needs to be more pro-active in encouraging reform at both the state and central levels. Changes in the states will have implications for the roles of central sector agencies, particularly CEA. CEA should immediately withdraw from those functions that are not consistent with its role as regulator--that is, inter alia, from consulting, detailed design work during project techno-economic reviews, and from system operation (RLDCs and REBs)--so as not to review as a regulator the results of its own work. CEA's continuing involvement in national power system planning may be justified in the short to medium-term (in lieu of feasible alternatives), but it should be of an indicative, not prescriptive, nature. The burden of planning, project preparation, and so on, should be placed clearly on the utilities. MOP's recent decision to initiate work on power sector regulation, particularly its interface with state level regulation as it may emerge from state power sector reforms, is a welcome step in the right direction. TRANSPORT Introduction Some progress has been made recently in facilitating private investment in mobile and fixed transport infrastructure. They have included the relaxation of some customs measures; an initiative by the Chief Ministers of seven northern states to identify and remove domestic barriers to the smooth flow of goods and services; and the completion of state government-sponsored techno-economic feasibility studies for ports which could serve as the basis for private investment. Serious sector-wide concerns remain, however. They include: (a) the absence of a liability regime for the trucking industry; (b) the slow pace of meeting key requirements for efficient multimodal operations--such as redefining the liability of carriers under the Multimodal Transportation of Goods Act and further review of Customs requirements and procedures--which promise large economic benefits for India; (c) the slow pace at the center (in contrast to some state governments) in encouraging private investment in ports and port services; (d) limited efforts by Indian Railways to involve private enterprise, as an efficiency enhancing step, in maintaining its facilities, and manufacturing locomotives and other rolling stock; (e) inadequate staffing and funding at the National Highways Authority of India (NHAI), the body at the center which is mandated to manage the expansion of the highway sector, including the induction of private investment; and (f) the absence of independent regulatory bodies for ports and civil aviation. Improving Competition and Efficiency In trucking, the key issue continues to be the administrative barriers to efficiency. A recent initiative taken by the Chief Ministers of seven north Indian states--in setting up the Council for Cooperation and Regional Development--may in time lead to the dismantling of domestic barriers under their jurisdiction. Separately, extensive overhaul of vehicle insurance and carrier-liability legislation and policy is needed. In particular, several state level provisions - 106- have not been updated to match the nature of road technology and growth in commercial load- carrying capacities. Bona fide Container Freight Station (CFS)/Inland Container Depot (ICD) operators, including private operators, are now permitted to transport containers between their facility and the gateway ports, by any mode under their custodianship. Thus the Container Corporation of India (CONCOR) is making extensive use of road services tc avoid transit delays inherent in circuitous or shorter rail routes. This practice has now extended from one container depot in Indore to terminals in Hyderabad, Bangalore, Coimbatore and Ahmedabad. These developments, which also include relaxation of transit procedures, are promoting competition in road haulage and freight forwarders. A critical constraint, however, is that the coverage of the trunk road system is limited and this makes it difficult for road haulers to organize efficient container transport at competitive prices. In addition, many roads are in a state of disrepair partly because trucks exceed the axle-load limit by about 40 percent on average. Evidently, the rules regarding over-loading have to be enforced better. Further liberalization of container movement by road beyondfacilities and gateways iS desirable. In India as in the rest of the world, shippers consider trucking to be more reliable than rail. Only four percent of Europe's total freight effort is carried by a combination of road and rail transport. In North America, only 10 percent of the inter-city freight market in excess of 500 miles is intermodal. Government regulations aimed at forcing shippers to use rail generally have been counter-productive. International experience indicates that the choice of mode should be left to the shipper. Multimodal freight transport can be improved much more. The multimodal Transportation of Goods Act (1993) constitutes the legal framework for developing and promoting multimodal transport services in India. This legislation has shortcomings which have been pointed out by the International Chamber of Commerce (ICC) whose rules for the multimodal transport documentation are widely accepted for international trade-related service transactions. The principal shortcoming of the Indian multimodal transportation legislation relates to the liability regime which specifies responsibilities for cargo damage or loss. The ICC's review of the rules pointed out that some sections (13, 14, 15, and 16) impose absolute liability on the carrier beyond the scope of the Hague Visby Rules. At present, the draft amendments to improve the Act have been prepared by the Ministry of Surface Transport (MOST). They are now with the Ministry of Law for vetting before going to the parliament for approval and adoption. During the last two years, private enterprises have been allowed to set up and operate ICDs and CFS facilities. As a result, the network of ICDs and CFSs is expanding rapidly and now comprises 36 facilities, with more under development. This has contributed to an increase in inland penetration of containers from 9.7 percent in 1990-91 to about 23 percent in 1995-96; it is expected to rise to 30-35 percent by the year 2000. Meanwhile, about 100 transport and freight forwarding companies have acquired the status of MTOs. Of these, 10 are foreign companies; four of which are shipping lines. These are welcome trends since the potential for full blown intermodal service, with all its benefits, is enormous. - 107- Customs regulations have been relaxed considerably to facilitate easier and speedier movement of international cargo. Factory stuffing and stripping of International Standards Organization containers is gradually increasing. Approximately 40 to 45 percent of containers handled at inland container depots (ICDs) in Delhi and Bombay are now being house stuffed/de- stuffed. The procedural check of the goods by the Customs is now mostly confined to a random sample of 5-10 percent of the consignment, though the practice varies between various ICDs/CFSs. Still, the "green channel" facilities for export cargo introduced at some of the air cargo terminals could be extended to ICDs and CFSs. The Customs Service could increasingly make use of electronic data information (EDI) which permits advance information about all containers. This information, supplemented with database of past trends, would facilitate advance selection of containers for physical examination, thereby enabling faster clearance of containers from the terminals. Some customs procedures are still not in tune with the requirements of containerized multimodal transport. For example, even when the goods are intended for an ICD/CFS, formal permission is required from Customs for moving such containerized goods out of the port of entry. Also, the shipping lines are required to file an elaborate import application with the port authorities to obtain "Charge Nil" endorsement despite the fact that they usually have a running account with these authorities. It takes 18 signatures of various functionaries and a minimum of five days to complete this exercise, when this clearance could be given promptly based on the import manifest/sub-manifest, which in any case is required to be filed with the Customs. To further encourage seamless inter-modal transport of containers to and from quayside, customs rules could permit remanifestation of containers from the port of entry to a CFS. At present, the Customs Act only permits transshipment to a customs port notified under the Act. CFSs are not so notified and therefore, Customs does not permit such remanifestation to take place. Eliminating this restriction would enable seamless inter-modal transport of containers to and from quayside. Permission to use containers temporarily in domestic transport would also be helpful. It would save the empty positioning charges which have to be borne by the exporters and ICDs/CFSs would be less congested with a large number of empty containers. Poor coordination between linehaul transport, provided by CONCOR through Indian Railways, and the port internal railways which are under the jurisdiction of the port authorities, must also be tackled. Central to this issue is the fact that government regulations for port management (derived, for instance, from the Major Port Trusts Act and the Sea Customs Act) have not been adjusted to enable seamless intermodal transport of containers to quayside from inland origins or from there to up-country destinations. As a result, CONCOR's ability to deliver containerized cargo at specified dates is impaired. Almost all container lines serving the Indian market operate on the basis of fixed-day-of-the-week arrivals and departures in the main local ports, and they have to make fixed time connections in the Persian Gulf, in Europe and in American ports. In general, it has been difficult for Indian shippers to meet the stringent requirements of their foreign trade partners in terms of timely and reliable delivery. Pervasive lack of information about the status and location of their cargo impedes the ability of exporters to organize merchandise distribution arrangements that satisfy clients. Some of these shortcomings will be overcome as CONCOR establishes electronic data interchanges to track shipments, but - 108 - without changes in legal requirements, documentary procedures and transport modalities (including efficiency at the ports), progress will be limited. In shipping, far-reaching changes in 1993 (in the Merchant Shipping Act) have encouraged private investment in Indian-owned vessels. Foreign interests can now set up companies that own and operate ships under the Indian flag. They can also acquire up to 51 percent of the shares of existing Indian carriers. Companies can procure ships (except oil tankers and off-shore supply vessels) without going through the previous protracted procedures for approval. Restrictions on registration and mortgage of ships have been removed. The procedure for scrapping of vessels has been simplified and control on repair of ships in foreign shipyards has been relaxed. Shipping companies no longer have access to concessional finance from the government and the system of government guarantees for ship acquisition has been discontinued. However, these companies are now allowed to keep abroad a substantial proportion of revenue earnings, including proceeds from the sale of ships. They have also been allowed to raise external commercial borrowings for ship acquisitions. As a result, several shipping companies have been successful in tapping the foreign capital markets for their fund requirements. Cabotage laws have been relaxed in respect of lash barges and containers. The foreign shipping lines are now free to provide mainline/feeder container services at all the ports. The policy that permits acquisition of ships from Indian shipyards has been made transparent and costing is within competitive international prices. The Indian shipping industry has responded positively to the reforms. The time taken for acquiring ships has been substantially reduced. The fleet is now better aligned to the needs of the trade and the comparative advantage. The shipping lines are increasingly deploying their bulk fleet in cross-trade, thereby improving their bottom line. The increased service competition has brought down the container rates for export cargo to UK and Europe. Still, congestion at major ports-which may even be causing some ships to be turned away-is still a major constraint to realizing greater efficiency in shipping. Civil aviation has undergone dramatic changes. Since the repeal of the Air Corporation Act in 1994 and thereby the abolition of the state monopoly in the provision of domestic air services, private airlines have secured a market share of about 40 percent. There has been a significant increase in the overall capacity and the improvements in service quality have been substantial. The frequency of service on trunk routes has increased and a number of new destinations have been added to the air routes. While the international passenger segment has been operating in a competitive environment for several years, in 1995 several carriers increased capacity and flight frequency, and added new destinations to their schedules to capture the higher growth of international traffic. Similarly, the "open skies" policy for air cargo services has increased the availability of timely cargo capacity at competitive rates. The overall gains to the economy have been substantial, with cargo rates declining as much as 30 percent in the last two years. - 109- To complement this dramatic liberalization of civil aviation, the technical and economic regulation of the sector should be separated. Currently, the government is the policy-maker for air transport through the concerned ministry, a regulator of the industry through DGCA and a majority equity holding in Air India and Indian Airlines. The appropriate role for the government would be policy-making to promote efficient, safe and affordable air services. Facilitating Private Sector Investment in Fixed Transport Assets Indian ports face acute capacity shortages and low productivity levels. The measures required to relieve these constraints include the creation of additional capacity at the existing ports, setting up of greenfield ports, and upgrading cargo-handling technology. There is ample scope for private sector to participate in all these areas. The international experience suggests that port productivity rises with commercialization and management contracting of entire cargo- handling activity. The government is planning to commission a Comprehensive Study on Strategic Planning of ports--Vision 2020 which will address all the above issues. The Major Ports Trusts Act, 1963 empowers the Port Trusts to provide the full range of facilities and services, in respect of vessels. It enables the Trusts to authorize any person to perform such services. The Act also permits private parties to construct and provide, with their own funds, the full range of port facilities within the limits of the port or port approaches. However, it prevents the Board from leasing, farming, selling or alienating its power to levy rates under the Act, without the permission of the Government. New cryogenic terminals and petroleum-handling facilities are now being financed entirely with private capital. Mumbai Port has successfully leased ship repair and dry dock facilities to the private sector along with berthing rights, at a premium. Jawahalal Nehru Port and dry-cargo berths at Vishakhapatnam Port have invited bids for extending container terns. In Gujarat, Pipapaw a minor port is being developed as an all-weather port to handle 10 million tones of cargo every year. The major ports have identified a large portfolio of projects amounting to US $2 billion where private sector involvement is feasible. In addition, maritime state governments have identified such projects worth US$1 billion. However, techno-economic feasibility studies have to be conducted. Only recently has some action been initiated by the major ports. The state governments have, however, done better in this regard. The Government of Maharashtra has sponsored techno-economic feasibility studies for developing about 30 intermediate and minor ports in the state. Similarly, the Gujarat Maritime Board has initiated such studies for the development of new ports. The Government of Orissa is currently negotiating with a minerals and trading corporation for setting up a mega port with a capacity of about 50 million tones per year at Gopalpur to handle bulk cargo. The Ministry of Surface Transport (MOST) recently issued guidelines to the Port Trusts for private sector participation. A significant feature is that it throws open all port-related activities to private enterprise. A noticeable drawback, however, is that the prior approval of the central government is required almost at every stage of processing the proposals. This - 110- stipulation leads to significant procedural delays, defeating the very objective. The delegation of powers, both financial and administrative, to port authorities would help to quicken the reform process and also ensure faster implementation of projects. To bring about such a change, a corporate form rather than a trust would be more suited for major ports. Equally essential is establishing an independent regulatory body to take care of regulatory functions. This would require appropriate legislative amendments. In the Roads-Subsector, the legalframework for involving the private sector in the development and maintenance of national highways was created with the enactment of the National Highways (Amendment) Act, 1995. Its salient features are that: (a) the Central Government can enter into an agreement with any person to develop and maintain the whole or any part of a national highway; (b) the person is entitled to collect and retain fees fixed by the government, duly considering his investment and reasonable return; (c) the person will have powers to regulate and control traffic under Motor Vehicles Act, 1988; and (d) any encroachment or mischief on the portion of national highways will be a punishable offense. In addition, steps have been taken to encourage and expedite private investment in BOT projects (Box 5.1). Some projects have advanced to substantive preparation. These include a bypass (20 km) near Mumbai and an expressway between Bangalore and Mysore (140 km), along with development of five self-contained urban nodal centers. While international experience indicates that major questions of financial viability and affordability limit the role that privately-financed BOT operations can play in road investment, there is, however, a niche for such private investments in large bridges, railway overbridges and urban bypasses that enjoy an effective monopoly position. Some states like Maharashtra, Madhya Pradesh, Gujarat have moved in this direction while the National Highway Authority of India (NHAI) and MOST have pursued this path at the central level. Another niche for the private sector is in providing engineering services, and construction management and technology. This should be a priority area if India is to have good roads, capable of handling high volumes of traffic with higher axle loads. Speedy construction and quality output should form essential ingredients of highway projects. At the Central Government level, NHAI which is now operational, is expected to manage the expansion of the highway sector, including the induction of private investment. In June 1995, NHAI invited private sector participation, for construction and operation of 10 identified expressways, through an open tender. A private entrepreneur would be awarded the contract to undertake detailed feasibility studies for 13,000 km of expressway at his own cost. The party that carried out the study was to be awarded 30 percent of route length of the project at the toll charges indicated in the best bid. A number of bids were received. However, award of contracts for feasibility studies has not yet been finalized. The slow progress is due to the NHAI's inadequate capacity to assess the results of the feasibility studies and its reluctance to accept external technical assistance.Furthermore, NHAI requires large capital funding to acquire the required strip of land for the expressway projects to be contracted out It also needs adequately trained and experienced staff. The Airports Authority of Box 5.1: Multiple Efforts to Encourage and Expedite Private India (AAI) was established in Investment in BOT Projects April 1995 by merging the International Airports Authority and Tax Incentives. The Government of India has announced a 5-year n ational Airports Authority, an holiday for all companies that invest in infrastructure projects after National Airports Authority, with a April 1, 1995. Income-tax exemption of 30 percent would be allowed view to accelerating the integrated for a further period of 5 years. However, these incentives must be development, expansion and used by the investors within 12 years after the facility becomes operational. In addition, the financial institutions which finance modermization of the operational, transport infrastructure would be allowed to deduct 40 percent of their terminal, and cargo facilities in line income generated from such lending from their taxable income. with current international standards. Land Acquisition. Ministry of Surface Transport (40ST) proposes This sets the stage for the to acquire land for highway construction and give it to the private commercialization and partial investor unencumbered and free of cost. Private investors will be free privatization of the maj or airports also to obtain possession of land by direct negotiations. The government recognizes that the land acquisition process usually takes and the development of a a long time, Accordingly, for highway projects, it will use the landlord/coordinator role for the emergency provisions in Section 17 of the Land Acquisition Act 1894 various airport authorities similar to and take possession of land for projects pending the final settlement of compensation. This has been done for projects like the Ahmedabad that envisioned for the seaport Vadodara Expressway. authorities. Progress greatly Access toflnance. Roads have been declared as "industry." This will depend on decentralization and allow the private sector to borrow funds from banks and other local initiative. financial institutions on the same terms as an industry and the investment in road construction would get all other benefits given to The government is industrial enterprises. encouraging private sector Clearances from Sub-National Governments. NHAI, as the nodal participation in construction and point for 130T national bighway projects in India, will interact with operation of new airports using the state and local governments to help the private investor secure all BOT approach. Recently, clearances required. Funding for Preparation of Feasibility Reports. The initial cost of preparing feasibility reports will be borne by the agreements were concluded for the government, Technical Assistance. The Government of India will development of airports at Cochin make use of foreign and Indian consultants to advise on the and Bangalore and provision of implementation of BOT projects. The authorities expect that, with the help of these consultants, the time taken to prepare feasibility and additional facilities at Calicut preliminary engineering studies can be reduced. airport. The salient features of Development of Highway-related Facilities. The entrepreneur will these BOT projects are: be permitted development of highway-related facilities enroute. involvement of state governments, establishment of separate corporate Dispute Resolution. Any disputes arising from contractual estishmen sepuse orprate obligations will be settled under Indian Arbitration Act, 1940 or entities, extensive use of private lNCITRAL provisions. This provision has been made to facilitate professional services, and participation of foreign companies. Meanwhile, Indian Arbitration Act innovative methods of mobilizing is being amended to incorporate UNCITRAL provisions. funding. A tax paid by embarking international air passengers will be used to finance the facilities at Calicut. A similar method is expected to be adopted for development of airports in Rajasthan and Goa. These states have considerable potential for tourism. Since 1994 the government has initiated steps towards private investment in fuced and mobile railway assets through the build-own-lease-transfer (BOLT) scheme. In the case of - 112- BOLT projects, private consortia are allowed to build or procure a needed facility or an asset, such as an electrified line or rolling stock. The consortia own the asset for Indian Railways' use in exchange for an annual lease payment which ceases after a specified period of eight, ten or twelve years. At that time the facility reverts to ownership of Indian Railways. This mechanism has been used successfully in Germany to fund highway, rail and waterway projects associated with the reunification effort. The first three BOLT projects covering conversion of 262 km of track to broad gauge were awarded to private parties recently. Bids have also been received for procurement of rolling stock and the leasing contracts are expected to be finalized shortly. There has also been a gradual shifting of the boundary in favor of the private sector in other areas. CONCOR, which was a wholly owned subsidiary of Indian Railways, has now divested 23 percent of its equity to the public. Its Board of Directors has been reconstituted to include non-official members who are expected to help CONCOR become a market-oriented entity sensitive to customer needs. Indian railways would benefit from the involvement of private enterprise in the maintenance of its facilities. This would bring in the much-needed technological upgradation. Finally, the manufacture of locomotives and other rolling stock of Indian Railways can also be privatized. Such manufacture falls within the scope of the engineering industry which is now well-geared to undertake this job. An important step forward would be to corporatize and eventually privatize the industrial manufacturing units of Indian Railways. Several Indian Railways' workshops that manufacture rolling stock need to be modernized to enable them to manufacture products of contemporary technology. The infusion of new technology, designs and modernization of manufacturing facilities could be realized by appropriate joint ventures with the private sector. TELECOMMUNICATIONS Introduction Despite impressive growth in basic telephone services of more than 17 percent per annum over the last four years, a large unmet demand persists (Box 5.2). The Telecoms Policy and guidelines of 1994 state inter alia that the private sector (including foreign ownership up to 49 percent of equity) will be the main provider of value added services and compete in basic services with the erstwhile monopoly provider, Department of Telecommunications (DOT). Since then, strides have been made in extending the entry of private operators in all telecommunications services: Basic Telephone Services. In January 1995, DOT issued tenders requesting bids for the provision of basic telephone services in 21 separate geographic regions ("circles") throughout India. As indicated earlier, one new entrant per region will be licensed on a non-exclusive basis as a local operator to provide basic telephone services in competition with DOT. Nine operators covering 13 of the 21 service areas have been selected and were provided in early June 1996 with drafts of the licenses and interconnection agreements for comment. The -113 - operators are required to begin service within twelve months of Box 5.2: A Large Unmet Demand for Telecommunication signing the license agreement. Services Persists In Narch 1996, the number of telephone lines in India was * Cellular Mobile. The government 11.98 million, The waiting list indicated an immediate has made significant progress in unsatisfied demand of a further 2.27 million customers. In awarding licenses for cellular addition, about 75 percent of India's population lives outside urban areas. These areas are not adequately served with mobile services. There are two telephones. For instance, there are well over 200,0W villages privately owned cellular operators without access to telephone services. in each of the four main cities. In The Department of Teleommunications (DOT) has estimated addition, the government has that the total demand for telephone services by the end of the selected and issued licenses to decade would be about 40 to 50 million The investment operators for 18 of the 20 needed to meet this demand would be about $38 billion dollars, well outside the government's financing capability. In addition, remaing regions. These operators the supply constraints severely limit the provision of custom are required to begin service by business services which are desperately needed. December 1996. There is scope also for improving the quality of the existing services. Over the last five years, call completion rates have Pagng. DOT has issued lcenses improved significantly. But subscriber fault rates remain very to more than 20 different providers high, averaging around two faults per line per year (about 10 of paging services throughout India. times higher than international standards). Many telephone exchanges in outlying areas are out of order for long periods of In a first round of biddig, a time. maximum of four paging operators were selected for each of the 27 cities. In a second round, licenses were issued for the 18 territories outside the above cities. These operators have already started operations. * Value Added Services. The new Telecoms Policy liberalized the provision of value added services except for packet switching and related data services for which DOT retains a monopoly. On application to DOT and the payment of specified fees, licenses may be granted for the provision of E-Mail, Voice Mail, VSAT 64Kbs closed user group systems, Videotex Service and Video Conferencing. Private investor interest in these services is beginning to emerge. * Regulation. In July 1996, a bill for the creation of the Telecom Regulatory Authority of India (TRAI) was presented to the parliament. The proposed powers and responsibilities of the TRAI are appropriate and equip it with reasonable powers of autonomy and flexibility. The bill, which is awaiting Parliamentary approval, proposes that: * TRAI would be a statutory body comprising a Chairperson, and between two and four members; * the Chairperson shall have been a judge of the Supreme Court or Chief Justice of a Higi Court, and shall have a tenure of five years; - 114- TRAI shall have the authority to, inter alia, (i) ensure interconnectivity between service providers which is now provided by DOT and should be transferred to TRAI, (ii) ensure compliance of license conditions; (iii) regulate revenue sharing arrangements, (iv) levy fees; (v) facilitate competition and promote efficiency in the operation of telecom services; (vi) protect the interests of consumers, (vii) settle disputes between service providers; and (viii) ensure compliance of universal service obligations. One aspect requiring clarification is TRAI's responsibilities with regard to setting telecommunications tariffs. Outstanding Issues Operationalization of TRAI is criticaL For TRAI to successfully carry out its functions, early action has to be taken to appoint the apex body, and have it appoint a team of highly qualified professionals. That team will need to be formed from a variety of disciplines including law, economics, telecom, business, and finance. Within a year or so, the telecom sector in India will be the most vibrant and liberal in the world except for the USA--but unlike the USA, in India all regulatory matters will rest (appropriately) with TRAI, the sole regulator. Based on other country experience, it will take TRAI a minimum of 18 to 24 months to be adequately equipped to resolve the vast array of issues to be laid before it. Separation of policy and operations is appropriate. While regulatory functions will become the responsibility of TRAI, early action is needed to separate DOT's operational role from its policy functions so as to remove the conflict of interest and give operational staff sufficient independence in competing with the new entrants. Tariff policy is required. Quick action by the expert body set up by the government to examine tariff policy would help DOT and new private sector in structuring their roll out plans and raising funds for capital development. Tariffs and revenue sharing are critical issues which impact directly on the profitability and roll over plans of all operators. The government needs to have a long term tariff policy which addresses existing imbalances in the tariff structure. These imbalances will become critical constraints as competition within the sector evolves. It would be appropriate for TRAI to advise the government on such a policy and assist in preparing an appropriate formula which rebalances tariffs in relation to the cost of service provision. Other issues require attention. Other measures deserve urgent attention by the government to facilitate efficient growth of the sector. These include: (a) a complete revision of the existing telegraph Act and amendments to reflect current government policy and sector structure, and address modem issues such as convergence and multi-operator environments; and (b) permission for power companies, railways and others to share their long distance transmission networks with others. Conclusion Several lessons have emerged from India's experience with the involvement of the private sector in infrastructure. In particular: (a) processes for selection of developers need to be - 115 - predictable and based on rules that are transparent; (b) projects proposed by government to the private sector need to be preceded by high quality preparatory work covering their technical, social and environmental aspects; (c) the existence of a transparent regulatory framework is critical for the efficient induction of private operators and for the commercial operation of the projects they undertake; and (d) guarantees, counterguarantees, escrow accounts and other financial arrangements are no substitute for an adequate policy and institutional framework providing the basis for predictable revenue streams and financially viable buyers. 4 - 117- n ~~~~EXTERNAL PROSPECTS AND W _ _ _ ~FI NA NC I NG R EQU1JI RE ME NT S INTRODUCTION As discussed previously, the reform program has produced positive results. In particular, growth rose to 7 percent by 1995-96, outpacing the 5.9 percent average annual rate under the Eighth Plan. Growth is broad-based and more sustainable since it is led by exports and private investment and savings have increased. Nonetheless, lack of progress on fiscal adjustment poses a serious risk to macroeconomic stability while the remaining structural weaknesses are limiting improvements in productivity growth. The previous chapters have proposed an agenda of fiscal and structural reforms that could help address these issues. If implemented, it could help relieve the remaining policy and structural impediments to a private sector-led growth, and it would allow India to sustain and even gradually increase the current growth rates. This chapter focuses on how supportive the external environment is likely to be, and India's potential export growth areas. EXTERNAL ECONOMIC ENVIRONMENT AND IMPLICATIONS FOR INDIA Overview. India faces a broadly favorable external environment over the coming decade, characterized by continued moderate world inflation, low real interest rates, stable economic growth and increasing trade openness and financial integration (Table 6.1). The Bank's GEP projects a strong world growth rate, averaging 3.5 percent per year for the 1996-05 period. Among industrial countries, which take about 60 percent of India's exports, real annual growth is projected at 2.9 percent over the coming decade. Growth in the EU, India's largest industrial country market, is expected to rebound in 1996-97. Recovery is expected to strengthen in Japan where the scope for expansion is considerable. India sells only 8 percent of its exports to Japan. Despite this favorable external environment, India will need to deepen its reform program to increase its world market share. Its export markets are expected to expand at 6 percent a year, a little below world trade growth (6.3 percent over 1996-2005) mainly because of India's low penetration in the fast growing Japanese and East Asian import markets. A shift in export orientation towards East Asia could boost India's export market growth to around 7 percent. Policies implemented under the Uruguay Round should improve India's access to industrial country markets, notably for textiles and garments and for agriculture. The benefits from phase-out of the MFA in particular will be substantial. In agriculture, existing NTBs will be eliminated and replaced by tariffs and bound, tariffs on agriculture will be reduced on average - 118 - by 36 percent over a six-year period for the developed countries. Overall, average tariffs on South Asian countries' exports to the OECD should fall by more than 2 percentage points to around 6 percent while those on exports to developing countries should fall 8.5 percentage points. Over and above the Uruguay Round, the continued trend towards trade liberalization on a unilateral or regional basis--for example the movement of APEC towards free trade--will generate steady pressure for fuirther trade liberalization if India is not to fall further behind the trade policy standards being set in East Asia and other developing countries. OE1~CDP 3. 11 3 2 , .5 OECD 2.5 3.3 1.2 2.~~~~~_2 9 2.4 2. 2. Peveopin-COunr 3.8i 3. 0A 3 . 4.6 53 World Tiade: 3.7 5 4.1:,i i 9A4 Sii 7.0 ~ ii:: .1 00. mX#t 24.7 71.1 7 1.9 9. 7.16 5. ]i5.Z export Growth 3.2 10.1 ~~~~~~~~~~~~~~~~~~166 5. 15,3 10.0:::: Frie ldkaore(NOMIalU) G-SMUV ~~~~ ~~~~ ~~~~5.3 6.6 2.1 3.6 4,5 3. 2.5 oitp i-nmna 1. -36 -9.-7 -l'5.7. .2 i4.0 1.it0, NOR-fuel 6mdit prce 1. 08 29 22.2 93i -7.4 0.8 XoporktPie 59.9: ~ 4.2 -1.6 52 :3.1 0. 2.5 Impot Prce 5 .3 -2.7 69~ i30 6.7~ 1.0:LO 2.1ii: 6-month LIBOR,percelit (Real) i2.8 4.0 i~ 1.0 2.4 i: 3.3, ~ 2. 3.43 Commodities Prices. After a sharp fall in 1996-97, commodity prices are expected to remain relatively constant over 1998-2005. This may have a relatively minor effect on India's terms of trade since India's exports are dominated by manufactures whose export prices are expected to increase in dollar terms at about the same rate as those of the industrial countries manufactures' exports (2.5 percent a year over the period). More significant, however, is the oil price, a major import item whose price is not expected to fall as it did in the 1980s and early 1990s, contributing to the 1.5 percent a year terms of trade gains India experienced in 1985-90 and an estimated 5-6 percent a year gain over 199 1-93. In the absence of these windfall gains-- India's termns of trade are expected to be flat in the projection period. The external environment will therefore be both more supportive of continued reforms but more challenging in competitive terms. Whether India can exploit it to achieve stronger export performance and hence accelerated growth will depend mostly on domestic policy developments. Outlook for Export Earnings. India's real annual export growth has almost doubled since the pre-reform period (8.6 percent real growth over 1985-90), reaching an average 10.7 percent over 1991-93, and 15.6 percent over 1994-96. Despite this impressive performnance, India's penetration of world markets has not increased significantly (Figure 6. 1). India's share in world exports fell from 0.5 percent at the start of the 1980s to 0.4 percent by mid-decade before - 119- rising to 0.6 percent by 1995. Over the Figure 6.1: Export Market Share for India and Competitors same period, China's share rose from 0.9 Percontmgq percent to 3 percent while Korea's rose 3.5 India from 1 percent to 2.6 percent. If India 3.0 -------- ----- I - China deepens its reforms, it has the potential to ......... achieve the same success. On present Korea trends, India's real average export growth 2.0 - - / - Brazil is expected to stabilize around 10 percent 1 - - -- over 1996-2005. This conclusion is Mexico broadly supported by the evaluation of key 1.0 - - ------ Turkey export sectors below, results of which are o 5 summarized in Table 6.2, showing main current account revenue sources, and 0.0 1979 1981 1983 1985 1987 1989 1991 1993 Table 6.3, showing key merchandise . Source: IMF, Direction of Trade Statistics. export components. Many of the key weaknesses in integration highlighted in Chapter 2--for example the remaining anti-export bias imparted by high trade protection or the loss of competitiveness due to poor infrastructure--are the main factors expected to slow export growth. The projections on this chapter are based on the assumption that fiscal imbalances and structural weaknesses will be addressed gradually. As a result, GDP growth is kept at a little over 6 percent per year and growth in real current account revenues is expected to stabilize at 8.3 percent a year in 1996-05 from its pre-reform rate of 5.5 percent. Table 6.2: Sources and Growth of India's Foreign Exchange Earnings SharS of Current Real Anlnual Average Period Simple Average Account Revenue Growth Rate" (US$ billions) (percent) (percent) 85-90 91-93 94-96 96-05 85-90 91-93 94-96 96-05 85-90 91-93 94-96 96-05 Merchandise Exports 13.3 19.9 32.1 66.1 65.9 68.0 66.5 73.1 8.6 10.7 15.6 10.0 Non-FactorServices 3.8 5.3 8.4 15.0 19.0 18.1 17.5 17.0 3.0 7.9 12.3 6.0 Travel 1.3 2.1 6.6 7.0 -- -- 6.2 6.9 - Transport 0.S 1.4 -- -- 3.9 4.7 10.6 39.0 - Other Services 1.7 1.9 -- 8.5 6.4 -1.7 -5,3 - Factor Income 0.5 0.6 1.2 LI 2.5 2.1 2.5 1.3 .7.7 -1.3 107.6 2.3 PrivateTransfers 2.4 3.5 6.5 7.2 12.6 11.9 13.6 8.6 -3.7 20.1 22.3 -1.5 CurrentAccount Revenue 19.9 29.3 48.3 89.4 100.0 100.0 100.0 100.0 5.5 10.2 15.9 8.3 Import of Goods & NFS 24.1 27.0 47.3 89.1 6.0 7.5 18.0 8.2 MEMO: tJSCPI . ._...........______...._ .4.0 3.4 2.8 2.7 - Not available, Note: Real 1990 US$ numbers are obtained by deflating with appropriate unit value indices for export of goods and imports. For other categories, US CPI deflator has been used. a. Least squares average gtowth ratw for 85-90 and 96-05. Source: IMF Balance of Payments Statistics for historical series upto 1990, and then staff estimates. Within this total, real merchandise export growth is expected to improve only mildly to 10 percent from around 8.6 percent in the pre-reform years, supported by improvements in garment, textile and agricultural export growth. (Table 6.3). Non-factor service growth is expected to be buoyed by continued rapid growth in software exports of around 25 percent a - 120- expected to be buoyed by continued rapid growth in software exports of around 25 percent a year, but this will tend to be offset by a relatively slow growth rate for tourism, which will be constrained by poor supporting infrastructure among other factors. Workers' remittances surged in the early 1 990s for contingent "one-off" factors but in the longer term, continued weak real oil prices are likely to curb remittances at their current level of around US$4.5 billion, resulting in a small erosion in real terms over the coming decade. Given India's still relatively high level of external debt to exports, the projections maintain the current account deficit at a prudent 2 percent of GDP or so, yielding sustainable real import growth of 8 percent a year. Table 6.3, Ptrformant of. Key ExportSetorst Averag iGrowth Saei otlIda Export 197444 199 #9.i-05 1995 200857 Ms A ntrand allied 4.4 64 68.8 1 5.7 1. Textiles and garments 8.6 16.2 16A 23.6 34.2 Gemsdiad jwelry G. 15.15.4 0 160 106.6 25.2 CAhemials? 0 i i ;16.2 23.4 12 0 9.2 84 i Engineering goods (excx. auto parts). 1.5 14.4A 11.8 11.4 79 Auto parts -6.5 200 1.0 - 1.6 Leathes total 8.0 2.89 2.5 5. 1.0 Others:: Z 14.4 t113 6:5, 9 6 Tota 8.1 1 2.7 124100100.0: a. 1995 eStimate: inc-ludesi autoparts.: Source: Staff estimates.E0i0i3 f 0 i0ii00i0000 ;ii i 0000Ei0E0t0fLk0 iiiiiiii ; Private and Official Capital Flows. Official concessional aid flows are unlikely to continue on past trends. However, such factors as moderate world real interest rates, continued liberalization in developing countries and portfolio diversification in industrial countries are likely to support further significant growth in private flows over the coming decade and India stands to attract a significant share of these private flows with the shift to private financing especially of infrastructure investment. While the massive inflows of portfolio capital to India has been part of the broader flow to emerging markets in the first half of the 1990s in general, there are clearly country-specific factors at play. These include the existence of well-known corporate names with established track records; ruled-based and reasonably well developed stock markets; familiar accounting and legal systems; and the potential for growth in a large domestic market. The prospects for continued inflows are relatively favorable given continuity in macroeconomic and structural reforms and further capital market development. Sound macroeconomic policies are likely to be at even more of a premium than before as will appropriate administrative and legal framework for infrastructure investment. While there was a sharp pull back of private flows from most emerging markets in the immediate aftermath of the Mexico crisis, it was noticeable that flows recovered most quickly and substantially to those countries in East Asia and Latin America with the best performance in terms of export growth and sustainable current account deficits and equally important lower restrictions on FDI. As was discussed in Chapter 1, India's current FDI regime is as investor-friendly as that of China's or of other Asian comparators. However, comparative analysis of marginal effective tax rates on capital for FDI in manufacturing sector in India and China indicates that these marginal effective tax rates are much lower in China's Special Economic Zones and slightly less elsewhere in China - 121 - than in India. Even when basic corporate tax holdings are taken into account, Indian marginal tax burden is still higher than China's because of the impact of high import duties and state-level sales tax on the cost of capital goods (McCarten, 1996). How fast India can achieve the levels of FDI inflows of successful integrators will depend, however, on how quickly it can move to improve weaknesses in its fundamentals. The govermment has set a target of US$10 billion per year which is not implausible if the appropriate policy framework is in place. External Debt. The current account deficit is projected to increase to 2 percent of GDP by 2005, a prudent position. This would reduce India's external debt as a percent of GDP from the present 30 to 24 by the end of the decade, and 20 percent by the year 2005. As a share of current account receipts, the debt service ratio would decline from 24 percent at present to 13 percent by the end of the decade, and 11 percent by the year 2005. PROSPECTS FOR HIGHER GROWTH AND EXPORTS Accelerating growth would require a sustained and rapid growth of investment, savings and exports as the experience of the East Asian economies shows. As discussed in Chapter 2, the potential for increasing investment and exports significantly lies in India's ability to encourage more foreign investment across all sectors in the economy, correct fiscal imbalances and address key structural constraints. The experience of the East Asian economies also shows that foreign direct investment in labor-intensive export-oriented industries is the best instrument to raise growth, employment, and improve significantly the welfare of the population. This year's Government's Economic Survey has clearly emphasized the importance of higher levels of foreign direct investment both to accelerate growth and employment as well as reduce India's reliance on external debt to finance its investment needs. India can take the opportunity of a favorable external environment to deepen its macroeconomic and structural reform program. Assuming that significant progress is made in attracting foreign and domestic private investment to all areas of the economy and, in particular, infrastructure, India has the potential to accelerate its rate of economic growth from 7 percent in 1995-96 to 8 percent by the end of this decade and progressively reach 9 percent by 2005-06. Under this growth scenario, the government is assumed to pursue its outward-oriented strategy more aggressively through significant reduction in the rate of protection, including the consumer goods industries. Remaining restrictions on domestic private sector and foreign investment would be removed. As a result, openness to trade is expected to increase from 26 percent of GDP in 1996 to 45 percent of GDP in 2005 (in China this ratio is 46 percent of GDP at present) and foreign investment (FDI and portfolio investment) is expected to be significant, rising from 1.5 percent of GDP in 1996 to 2.1 percent of GDP by 2005 (in China, this is 3.5 percent of GDP at present). The implementation of structural reforms discussed in the previous chapters, including the legal, administrative and regulatory framework for private sector investment in infrastructure is expected to bring in substantial foreign investments that might surpass these estimates as India is still considered a potentially strong emerging market for foreign inflows in the future. In this respect, in addition to FDI in infrastructure, four export areas stand out as those where FDI could help India achieve its target rate of sustainable 8-9 - 122 - percent annual real growth by 2005, should the structural constraints, particularly the infrastructural bottlenecks be less binding. These are: garments and textile, diamonds, agricultural goods and software services exports. Prospects for Selected Key Export Sectors Garments, followed closely by textiles, are India's largest net foreign exchange earner. The competitiveness of the small and informal sector where the bulk of Indian garment exports are produced has attracted an influx of international clothing manufactures, including Levis, Benetton, Lacoste and Pierre Cardin. This structure is well suited to the fashion garment sector where cheap, temporary labor provides flexibility to produce small batches of garments tailored to precise customer specifications. The recent change in policy to allow large-scale units to enter the garment industry if they undertake an export obligation of 50 percent of their production will help the industry diversify its product mix. But limiting investment in fixed assets to Rs 30 million will keep out the large foreign investments that could help upgrade quality and improve technology. The extent to which India can benefit from textile and garment trade liberalization depends on its current cost competitiveness, and on its ability to increase productivity and move up the value-added chain in the medium to long term. As indicated in Figure 2.2 of Chapter 2, India's actual total labor cost in the clothing industry is substantially higher than in many competitor countries after taking into account factors such as productivity, absenteeism, management and transport costs. India's cost per standard minute is higher than in Indonesia, Thailand, China, and even Korea, based on this measure. Another constraint to more rapid garment export growth is India's concentration in cotton garments. This leads to a high degree of seasonality in demand and also keeps the value- addition lower than could be attained using synthetic fibers. Cotton garment exports amount to only about 15 percent of world clothing trade and demand growth is also slower than for man- made fiber blended garments. The price and quality of domestic synthetic fiber yarns and fabrics in India has not been internationally competitive. While imports were allowed through the licensing system, procedures were cumbersome and costly and a constraint on Indian exports of synthetic fiber garments. Improving the internal efficiency of synthetic fiber producers and fully liberalizing imports of man-made fiber fabrics could strengthen the growth potential of the industry. Given India's high quota growth rates during the phase-out of MFA, its competitive product niches and established links with retailers and importers in industrial countries, India's garment exports will remain buoyant but the potential for even higher growth will only be realized if there is a movement away from the current narrow focus on cotton fashion garments, higher productivity growth and movement up the value-added chain. Diamonds. India's emergence as the world's largest exporter of polished small diamonds is attributable to the combination of low-cost skilled labor (which makes it possible to transform small roughs at an affordable price) and fiercely competitive family owned firms with an extensive presence in the world's major diamond centers. This is a traditional craft in India, which with adequate policies could grow faster. Its share of world small diamond sales (at - 123 - wholesale prices) grew from 2 Figure 6.2: SITC 667 Pearls, Precious and Semi-Precious Stones percent in 1970 to 40 percent in Percent Share of World Exports 1994, while its share of the sector overall (SITC 667) rose from 4.5 * 79-81 E] 92-94 percent to 10 percent over the period 1979-81 to 1992-94 (Figure 6.2). Belg-Lux -. U.K. Strengths and Weaknesses. Israel . I l In the near term India faces little India competition in the small, low-quality end of the market. Other low-cost Thailand . C cutting centers such as Thailand, Hong Kong l S Russian Fed . Malaysia, Indonesia, Sri Lanka and SAfricaCU _ , i China are focusing on better quality, 0 5 10 15 20 25 30 larger roughs. Manufacturing costs Source:cen,tCOMageDE per carat are significantly higher in Source: UN, COMTRADE. Thailand ($20/carat) but lower in China ($8/carat). Diversiflcation into polishing better quality, larger stones where the per carat yield is higher is one way to increase India's world market share. This end of the business requires modem machinery (currently present in only around 10 percent of the industry) and more control over the variety of roughs it can import and re-export. Recent changes to the export-import policy go some way to achieving this control. In this market segment, India will face more direct competition from such traditional cutting and polishing centers as Tel Aviv, Antwerp and New York, where salaries and productivity are significantly higher. Another way to increase market share is to integrate cutting and polishing operations with design and manufacture of gem studded jewelry. In addition to higher value added potential this is also a way for manufacturers to market their excess inventory of small stones. In recent years the growing number of jewelry production units in the Santacruz Export Processing Zone (SEPZ) has resulted in strong export growth. However, the poor image of Indian jewelry among industrial country retailers is a constraint. Overcoming this handicap will require improving design and the range of cuts it offers and proving it has the ability to deliver customized service to retailers. Prospects. The demand for polished small diamonds is expected to be buoyant over the next decade. With respect to larger stones, India will increasingly put the traditional polishing centers at a competitive disadvantage as it upgrades its product quality and the range of cuts it can offer. Exports of gem studded jewelry are likely to increase in the coming years with the assistance of schemes such as the Indo-Argyle Diamond Council aimed at helping Indian firms develop sophisticated design skills and marketing capabilities. India's ability to diversify into this higher value-added sector will significantly bolster its export revenue prospects. Agricultural Exports. India's agricultural exports account for a mere one percent of world agricultural trade, but a few commodities--cereals, fruits and vegetables and marine products--are thought to have significant export potential and have registered rapid growth in - 124 - recent years. The policy reforms which have led to significant export of rice and wheat have been discussed in Chapter 4. Fruit and Vegetables. Though India is the world's second largest grower of fruits and vegetables only one percent of production is commercially processed and only a few products are exported to a limited number of markets in South Asia, the Middle East and Eastern Europe. This sector is now recognized as potentially important for exports, with a target of US$650 million for the year 2000. However, the greatest problems for exporters are poor distribution and storage facilities, leading to wastage of 30 percent of production annually. Upgrading of infrastructure could be speeded by "tie-ups" with foreign companies. Since 1991, US$240 million of FDI in food processing has been approved (see also Box. 2.3). However, substantial modernization is required for India to realize its potential. The Eighth Plan earmarked soft loans for cold storage, packing houses, etc. but other impediments, such as high excise duties on cooling equipment (previously 110 percent and now 30-50 percent), continue to hamper upgrading and the quality (see Box 2.2). This is also an area that could considerably benefit from the liberalization of agriculture discussed in Chapter 4. Floriculture. India also aims to play a larger role in the lucrative international cut flower market. Encouraged by substantial tax exemptions, new participants (including joint ventures with foreigners) are seeking to develop exports and over 50,000 hectares of land are now devoted to floriculture. Constraints include a need for improved greenhousing, irrigation and cooling systems, as is the introduction of higher quality flowers popular in many export markets. A number of recent initiatives are improving India's prospects, particularly tariff reforms cutting import duties on live trees, plants, flowers and bulbs from 55 percent to 10 percent, and exempting seeds and cuttings altogether. Speeding up the plant quarantine process to facilitate ease of import will also help. Agricultural reforms could have a key impact in the long term on India's ability to exploit fully these export niches because they will free the private sector from existing constraint on building and operating essential infrastructure such as cold storage and access to credit to give just a few examples. Prospects for Selected Key Service Exports Software. India's software exports growth in current dollars averaged around 30 percent a year in 1986-93 and near 50 percent a year in the past two years. A shortage of software engineers in many industrial economies coupled with a trend towards outsourcing non-core operations have been the driving forces behind the growth of the software industry in developing countries, including in India. India's software exports were primarily concentrated (80-90 percent) on contractual programming at the clients' premises--low value added functions with low entry barriers in terms of capital, marketing skills and costs. These types of exports bring a degree of technology and skills transfer and build up credibility with potential clients. However, profitability is relatively low and leads to the loss of personnel who choose to stay abroad, an important factor contributing to the slow rate of assimilation and diffusion of information technology throughout India. - 125 - The share of custom-made software for off-shore clients has grown to around 35 percent of total software exports. The increased confidence in outsourcing information technology (IT) work to Indian software finns, has been substantially helped by the installation of dedicated satellite links which make it possible to overcome India's communication bottlenecks. This has also led to a new surge of foreign investment and joint ventures into India by multinational IT groups such as Oracle, Novell and Motorola. The export of application software packages is by far the most difficult segment of the international software market to penetrate, but it is the main driving force and accounts for the largest proportion of traded software. The capital, managerial and marketing skills required are higher than in other segments of the market, and correspondingly the level of profitability and skills transfer are greater as well. Additionally, the export of products may be less vulnerable to recession and easier to sell than services, but competition is intense and advantages based on low labor costs lose their relative importance. Strengths and Weaknesses. India's main competitive advantage has been its low cost, skilled, English-speaking engineering force. Labor costs are an important component of programming--average earnings for a software engineer in the UK was £26,000; in India earnings were £1,000-2,000 a year. Similarly, many of the functions performed for off-shore clients--design, analysis, development and testing--can be completed for half the in-house costs in the UK based on a 100 person-year (200,000 hour) mainframe development project. Small Domestic Markets. One important ingredient to building a viable software export market is a strong, discriminating domestic market which provides the platform for the development of increasingly sophisticated products. Because the hardware market was highly protected until recently, India has one of the lowest concentrations of computers in the world along with one of the poorest telephone networks. The steady reduction in import tariffs on computers, peripherals, software and components as part of the liberalization program has helped generate a surge in the demand for software and hardware in the last two years. While this growth is likely to be a positive factor for the industry's long-term performance, India starts from a very low base and is years behind other developing country exporters in terms of the sophistication of its domestic market. For instance in Chile, the government has pursued an open trade regime with respect to hardware imports for at least a decade. This led to the rapid diffusion of an information-based economy and provided Chile with a sophisticated market on which to test its products. It has consequently become a major software package supplier to the fast growing markets in Latin America Prospects. With world sales exceeding US$100 billion annually, software constitutes the fastest growing segment of the information technology market. Though largely dominated by industrial country firms, opportunities for countries such as India to carve out niche segments will continue. The shift towards custom-made software for off-shore clients will help to sustain a competitive advantage in the future. Travel and Tourism. Travel and tourism could also contribute significantly to growth in non-factor services' earnings in addition to promoting low skill employment, a significant contributor to poverty reduction since the poor's main asset is their low skill labor. For this sector to grow and achieve the above objective, a major constraint needs to be removed. This is - 126- the urban land ceiling legislation and other regulatory procedures, such as zoning restrictions which hamper the growth of the industry and act as barrier to entry of potential competitors. Travel and tourism was one of the fastest growing components in the current account between 1970 and 1980 when it peaked at US$1.5 billion. With further though slower growth after 1985 tourism now represents the sixth largest export earner, accounting for close to 6 percent of current account receipts. The underlying trend in tourist arrivals in 1980-93 was unimpressive, rising only 1.7 percent per annum compared to 4.6 percent in the world as a whole (Table 6.4). India's 1.5 million visitors pale in comparison with 19 million to China in 1993, although per capita spending of close to a thousand dollars in India is nearly four times the level in China. But growth of per tourist receipts in India in 1980-93 was flat compared with 3 to 14 percent in East Asia. With under 0.4 percent of the world's tourists and 1 percent of spending, India has barely tapped its potential. Tabt 6.4: Foreign Tourism nin indita ad Comtparators 1993 Goh nP'er Touist Reeits :Hotel Touris Tourism I Hotel Tourist i -Caacti ty :: Arivals Receipts Capaity A;rivals Tourism 19,93 Growth. (1990) (000) (S m1) (84-90) (80-93) Receipts (USS) (80-93 i i i;49,068 i 1492; 1A47 5.9 1.7 2.0 997, 03 t shP9 e:::: ::03,063 101 I 150g 24.3 6.2: 2.2 149 -A. Maldives 4,062 241 146 958 12.3 17.T5 606 6.5 Nepal 4,000 254, 157 3.9 3.8 10.0 618 60:: "PAIstan 35,:500 33 1 .812-. 333: 23 SrilLanke - -10,636 391 208 1.7 0.5 3.8 531 3.4 China ~~~293,827 18,982 .4,683 25.0 13.9 a 17.8 247 I3, 1inioesla0 :1 67,;592: 3,403 3,988 45 15.4 23.9 - 1,72 73 Malaysl 4-- t:00:0:61,005 6,504 :1,876: 5.4 9.1 16.2 288 6.6: PhIlippiis 015,578: :1,246 2,122: 4O< .L8 15.7 ,703i 13.i6- Tha~~Iao4 212,389 ~ 5,761 5,014. 8.9 9.1 14. :870 49.9 W Jd 11,465,094, 512,523 307,371 3.4 4. Z 6 B .8 600 6 19 MR'G:Worl10d Touri OranzaionT (WT) ARflOOi vaious issues. EXTERNAL FINANCING REQUIREMENTS As of March 1995, India's US$99 billion external debt is, in net present value terms, more than twice the value of the country's exports. Based on this, the World Bank debt tables classify India, together with Indonesia and Chile as "moderately indebted". Of the world's two major credit rating agencies, only one has rated India's sovereign foreign currency debt above investment grade. In response to this, the authorities have adopted a prudent approach to the management of the capital account. Since the 1990-91 crisis, they have placed considerable emphasis on achieving a strong balance of payments position with a lower indebtedness and debt service ratio. Consistent with these objectives, and an indirect way of influencing the size of the current account deficit, the authorities have brought different degrees of liberalization to different types of capital inflows--depending on their contribution to the country's development, their potential volatility, interest cost, maturity profile, and risk sharing features. Thus, while there are - 127 - virtually no restrictions on foreign direct investment, there are some on portfolio investment. In particular, although there are no limits on the total amount of investment by foreign institutional investors, there are restrictions related to the type of financial assets they can hold (for example, they cannot invest in government papers, nor can they hold more than 30 percent of their portfolio in debt papers) and to their equity holdings (they cannot hold equity positions which exceed 24 percent of a firm's total equity). Equivalent restrictions apply to Indian firms issuing equity or debt abroad. The rationale for these limitations is that while portfolio investment is attractive for the country because its servicing is not fixed and the foreign investors share the risks associated with fluctuations in domestic income and exchange rates, it does create long- term claims on the country' s foreign exchange resources. Thus, its growth needs to remain in line with the growth in India's capacity to service it--that is in line with export growth. In the case of commercial borrowing, an indicative ceiling is set annually (US$5 billion in 1995-96) and, based on published guidelines and criteria, discretionary authority is used to direct borrowing to priority areas, and to limit short-term borrowing. The authorities see full capital account liberalization as a medium-term objective, to be reached after a sustainable fiscal framework is firmly in place, and financial sector reformns are completed. They have wisely resisted the temptation to relax restrictions on external commercial borrowing over the past year as a means of relieving pressure on domestic interest rates. This would have not only diminished pressure for the urgently needed fiscal correction, but could have also stimulated a destabilizing consumption boom. One consequence of this self-imposed discipline is that, for the foreseeable future, India will mostly need to rely on foreign direct investment and assistance from external development agencies to meet its substantial needs for infrastructure and human resource development. Therefore, this report continues to make a case for India's sustained access to long-term development assistance, including a substantial concessional component. With a modest current account deficit of 2 percent of GDP over the next few years, India would still require total gross financing of about US$8 billion in 1995-96, and an average of about US$13 billion in each of the following four years. Over the last two years, bilateral and multilateral participants in the India Development Forum have pledged about US$6.5 billion in official assistance as a recognition of India's strong commitment to reform and poverty reduction. Portfolio Management. Over the last few years, the Government has taken several specific measures to improve the utilization of ODA: (a) advance release of funds are being made to state governments; (b) procedures for awarding contracts and procurement have been streamlined; and (c) a central Project Management Unit has been established in the Department of Economic Affairs, Ministry of Finance, for better portfolio management and project implementation. While these measures have accelerated aid disbursments, there remains scope for further improvements. In conclusion, the Bank would advise the participants of the IDF to support India's ongoing fiscal adjustment and structural reforms through long-term official development assistance for high priority public investments in physical infrastructure and human capital development. With sustained improvements in the utilization of such aid commitments and gradual recourse to debt and non-debt commercial sources, India's remaining external financing needs would be met. I - 129- SELECTED REFERENCES Aitken, Hanson and Harrison. 1994. "Spillovers, Foreign Investment, and Export Behavior." NBER Working Paper 4967. National Bureau of Economic Research, Cambridge, Mass. Balasubramanyam, V.N., M. Salisu and David Sapsford. 1996. "Foreign Direct Investment and Growth in EP and IS Countries." The Economic Journal. 106 (January):92-105. Barr and Lee. 1994. "Sources of Economic Growth". Carnegie-Rochester Conference Series on Public Policy (U.S.) 40:1-57. Bhagwati, Jagdish. 1978. "Anatomy and Consequences of Exchange Control Regimes." Studies in International Economic Relations. Vol. 1 No. 10. National Bureau of Economic Research, Cambridge, Mass. Bhagwati, Jagdish. 1993. "India in Transition". Oxford, Clarendon Press. Blomstrom, Kokko and Zejan. 1992. "Host Country Competition and Technology Transfer by Multinationals." NBER Working Paper 4131. National Bureau of Economic Research, Cambridge, Mass. Borensztein, Eduardo; De Gregorio, Jose and Lee, Jong-Wha. 1995. "How Does Foreign Direct Investment Affect Economic Growth?". NBER Working Paper No. 5057. National Bureau of Economic Research, Cambridge, Mass. CMIE. Monthly review of the Indian Economy (various issues). CMIE. Corporate Profitability (various issues). Dinh, H.T. 1995. "Fiscal Solvency and Sustainability in Creditworthiness Analysis." mimeo. World Bank, Washington, D.C. Galal, Ahmed et al. 1994 "Welfare Consequences of Selling Public Enterprises: An Empirical Analysis: A Summary." World Bank, Washington, D.C. Government of India. The Economic Survey (various years) and 1995-96: An Update. Guidotti, P. and Kumar, M. 1991. "Domestic Public Debt of Externally Indebted Countries." IMF Occasional Paper 80. Washington, D.C. IMF. 1995. "India: Economic Reform & Growth". Washington, D.C. Kokko and Blomstrom. 1995. "Policies to Encourage Inflows of Technology Through Foreign Multinationals." World Development. Vol. 23, No. 3:459-468. Majumdar, Madhavi. 1996. "The MFA Phase-Out and EU Clothing Sourcing: Forecasts to 2005." Textile Outlook International. March 1996:31-61. - 130- McCarten, William and Tsiopoulos, Thomas. 1996. "Investment Decisions and the Tax Competitiveness of Indian Industry: A Marginal Effective Tax Rate Analysis". Background paper for 1996 CEM. Washington, D.C. Montek, Ahluwalia. 1995. "India's Economic Reforms in India: The Future of Economic Reform". Rajaraman, Indira & Koshy, T. 1996. "A Minimum Alternative Asset-Based Corporate Tax for India". Economic Polictical Weekly, XXXI:29; 1941-1952. Tanzi, V. and Fanizza, D. 1995. "Fiscal Deficits and Public Debt in Industrial Countries." IMF Working Paper 95/49. Washington, D.C. World Bank. 1993. "The East Asian Miracle: Economic Growth and Public Policy." A World Bank Policy Research Report. Washington, D.C. World Bank. 1996. "Global Economic Prospects and the Developing Countries". Washington, D.C. - 131 - ANNEX I METHODOLOGY AND KEY ASSUMPTIONS FOR ESTIMATING SAVINGS FROM PRIVATIZATION The methodology used to simulate the gains from privatizing 50 percent of the equity of the central government in public enterprises closely follows that of Galal et al. (1994). The gains from privatization are calculated as the difference between the net present value (NPV) of the social value of the firm under the actual scenario (total or quasi-total public ownership) and the net present value of the private value of the firm under the counterfactual scenario (total private ownership). NPV is calculated by discounting the stream of benefits and costs over the firm's useful lifetime. Under the counterfactual scenario, the government forgoes dividends (or gets rid of PEs losses, if the latter are unprofitable and subsidies) but gains the net sale proceeds of the privatized firms. If, as expected, the privatized firns, will be performing better than under public ownership, then there is a stream of fiscal gains resulting from future higher tax revenues. In addition, the government may gain higher dividends from the remaining enterprises that are now subject to competition and hard budget constraint. To establish the base case for the CPE sector under continued public ownership, we have made extensive use of the insights derived from the numerous analyses of the public enterprise performance by Indian (particularly 0. Goswami) and World Bank researchers and the statistical information contained in the Public Enterprise Survey. A large number of reports and articles on the performance of the PE sector in India, and the evidence from other countries confirm that, like elsewhere, public enterprises' capacity to invest remains mainly constrained by their poor financial performance and remaining government interference and that productivity is low. To estimate the gains from divestiture and from a comprehensive reform strategy for public enterprise sector, we rely on the evidence obtained from productivity improvements and investment increases after privatization in other countries. More specifically, we assume that if the government adopts a comprehensive strategy (privatization and commercialization of remaining PEs in the portfolio), privatization of 50 percent of the PE sector, for example, will increase productivity by 1.5 percent per year over the productivity obtained under continued public ownership. Furthermore, privatization will also increase annual investment above the level of investment under continued public ownership, so that after twelve years, the stock of fixed assets will be 50 percent larger than what it would have been had the firms remained fully public. The gains in productivity from privatization are assumed to be slightly lower (1.4 percent differential) when privatization takes place without any other reforms. Commercialization alone is assumed to improve productivity by 1 percent per annum and increase investment, to build after say twelve years, 20 percent more fixed assets than without any reform. Table 1.1 presents the results. -132 - Table L1I.. Increase in Public and Private Savings from Reforming CPEs Annfual Increase in domestic saving Annfual increase indomnestic vng u :to: (percent Of GDP) (percent of GDP) Govermen private setr T AL Productiiy Mor Synergies TOTAL improvement investment 25% pslvatizatin 0.7 0.6 1.2 0.5 0.6 0.1 1.2 25%priVatizatioil 0.0 0.5 0.5 0. 0,2 0.10. 50%privatizatiori 0.4 1L0 1.4 0. 0,7 0.2 1.4 i 50% 00vtizOtion 401 ~ 0.9 0.8 0.3 .4 0.1 ~ 0.8 commercialization~ 0 :.9 0.0 0. 0.50. 0.10. a.. AnnuaL flows:of additi'onal savings. Sounz~-: Staffestimates.: 4. Like with all simulations, the results depend critically on the parameters adopted. It is difficult to find agreed upon numbers on the impact of privatization. This is due in part to the fact that there has been little ex-post analysis of privatized firms. But, perhaps, more importantly, the gains from privatization crucially depend on the initial conditions of the PEs being privatized, and on how much room there is for improvement. To deal with these two problems, assumptions were deliberately on the conservative side and were supported by the evidence available from developing countries and from the Indian context. Table 1.2. presents a list of central public enterprises that could be candidates for privatization. :Tablej1.2: ~The O0tions: or aPrivttlization Stratgy of the: IndiianCPEs % Of CPEs' im portfolioldivestod Spi Coverag 25 2 years CPEs eAsy~ to privatize: All consumer goods, tourist services, iferttiies, pus somie individual firms: SAIL,: NP,MT., ~BHEL and BEL. independently of their individuafl lperformnance, all selected: finis ae i boomin :and cmetitive:sectors. 50 5 years Ambiti~~~ous: prvaizton program, ~targets mos s ectors otheConmwer saeaci, even, thouhi isreasonable toexpec thatiwithin: 5 years the aculpivaiatiodins that will tAke place will coer 50% ~only~ Of the total: ortfolio for reasonsi tol be explained ibelow,.I addition to thesctr :inuddith2% option, this statgy covers: mainly Power, Construction, Chemical anid: Phraceuticals, Entgineering, Trnsortation Equimns n ntrrses rendering servie other thntuit,(rnporain fnni telecommunications etc.). The only.iexceptions would be the activities reserved to the government such as radioactive mfinerals, oil extraction or unclear energy Broad iniscope,the timing of theiimplementatio wil vay accorin to th industry, h competitiveness of the:, makts,anidthe sale procedures'invovd! in each. transaction. ~:25% of the potfolio will be: divested over two years byfcusing oi! the comnpetitive setors: and, some large attractive enterprises, hut the rest will take longer. Privatizing publitc utilitiestkei' inet Priati i bfnon competitinveC activiies, restructuring. someindustries: like :the:oil sectorto afllo private participatio (e.g oil bpoduts will nedmr timie because they ill require regula rei orms and other aedmet to ithe crentlegal ~~framework. Hence,after five years, the goverimen~t coulddivest5.0 percent iof its portfolio after haingpu ___________ ____ nin pace the regulatr tmwr. - 133 - ANNEX II A SUMMARY OF THE COMPUTABLE GENERAL EQUILIBRIUM MODEL A Computable General Equilibrium (CGE) model of the Indian economy was built specifically for purposes of this Country Economic Memorandum. Sectors: The Computable General Equilibrium (CGE) model determines quantities and prices for 13 commodity groups or sectors: four crops (rice, wheat, other cereals, other crops), livestock, two agro-processing sectors (edible oils and sugar), six non-agricultural sectors (fertilizer, consumer goods, intermediate goods, capital goods, infrastructure --including petroleum products-- and services --including construction). In addition, there are demand and supply balances for labor (separately for rural and urban areas) and foreign exchange. Production: The domestic price clears the product markets. The crop supply and input demand equations follow the multi-market specification of Binswanger and Quizon (1986), whereby supply and demand functions are obtained from a profit function estimated using a flexible fiunctional form. Non-crop outputs (livestock, edible oils, sugar, and all non-agricultural sectors) are determined by Constant Elasticity of Substitution (CES) type of production functions with capital and labor as primary inputs. Capital and labor inputs are extracted from the 1990-91 Social Accounting Matrix (SAM). An elasticity of substitution of 0.8 between labor and capital is assumed following Subramanian (1993). Capital is assumed to be sector-specific because of the short-run nature of the model. Demand for fertilizer, draught animal and labor in crop sectors are determined from the agricultural system. Other intermediate input demands in crop sectors (e.g., infrastructure) and all intermediate input demands in non-crop sectors are assumed to be fixed proportions of output under Leontieff technology; these fixed proportions are extracted from the 1990-91 SAM. Labor Supply: The supply of labor is assumed to be responsive to the real wage, with a supply elasticity of 0.3. Both rural and urban labor markets clear to determine the rural and urban wage rates. Labor demand is determined by the production functions. At this stage, migration has not been taken into consideration because of the static nature of the model. Income Groups: Households are divided into 8 income classes: 4 income quartiles in each of rural and urban areas. Factor incomes in agriculture and non-agriculture are distributed to each quartile on the basis of a mapping matrix based on income survey data of National Council of Applied Economic Research. Different household groups save different proportions of their income and only the urban top decile is assumed to pay income tax. Consumer Demand: Consumption is modeled using the Linear Expenditure System (LES) with underlying Stone-Geary type of log-linear utility functions. The LES parameter estimates are available for the different quartile groups from a study by Radhakrishna and Ravi (1994) based - 134- on the National Sample Survey (NSS) data. Pulses, fruits and vegetables estimated demand functions are aggregated to match the category of other crops in the agricultural supply function. The estimated demand functions for milk and milk products, are aggregated with that of meat, fish and eggs to match with livestock category in the agricultural supply function. The demand for the non-food group is disaggregated into consumer goods, intermediate goods and capital goods using 1990-91 SAM consumption proportions. Trade: International trade is modeled under the Armington assumption of imperfect substitution between domestic goods and imports/exports which has by now become a standard feature of trade focused CGE models. The Armington formulation defines a composite commodity which is a CES aggregation of the amount of commodity produced domestically and the level of imports. Consumer demand for domestically produced goods and for imports are derived demand, analogous to demand for factor inputs in a conventional production function. The ratio of imports to domestic demand is then obtained as a function of the corresponding price ratio using the first order conditions. Similarly, the decomposition of domestic output between domestic supplies and exports is treated as a choice problem for producers which depends on ratios of exports and domestic prices. The nominal protection rates for agriculture and agro-processing sectors are obtained from Pursell, Gulati & Gupta (1996), and Gulati, Sharma and Kohli (1996). For manufactured products, nominal rates of protection are based on collection tariff rates. Social Accounting Matrix: The model is based around a Social Accounting Matrix (SAM) developed for the year 1990-91, reflecting the situation prior to the reform measures undertaken since June 1991. The SAM provides a consistent data base taking into account intersectoral flows as well as income-expenditure balance of various agents in the economy --i.e., the producers of the 13 commodity groups, the 8 income classes, the government and the external sector. The production and income data in the SAM are based on National Account Statistics. The input-output table for 1989-90 and the Consumption Survey of National Sample Survey for 1987-88 (with updating of the parameters to tally with available 1990-91 totals) provide the other major disaggregated data base for the construction of the SAM. Market Clearance and Closure: The overall domestic price acts as a numeraire; all other prices determined by the model are thus relative to the overall price. All sectoral domestic prices are determined by supply and demand equilibrium. The foreign exchange market has two alternative specifications. In some simulations, the exchange rate clears the market with foreign savings set at given level. In some other simulations, we examine the effect of devaluation by keeping the exchange rate exogenous and letting the foreign savings play the equilibrating role. The model follows the neoclassical closure where total capital formation (investment plus stock changes) is determined by total savings from three sources: private savings, government savings and foreign savings. - 135- ANNEX III EXECUTIVE SUMMARIES OF BENEFICIARY ASSESSMENT SURVEYS' Agricultural Reforms and the Rural Poor in Eastern Uttar Pradesh Ravi Srivastava The Impact of Agricultural Reforms on the Urban Poor: A Case Study of Eastern Uttar Pradesh Nisha Srivastava Agricultural Reforms and the Rural Poor in Bundelkhand Madhavi Kuckreja Impact of Agricultural Reforms on the Rural Poor: A Case Study of Tamil Nadu M Thangaraj Economic Reforms and the Weaker Sections: Reflections from Maharashtra Sarthi Acharya The Impact of Agriculture Reforms on the Rural Poor in Punjab S.S. Gill These executive summaries were prepared by the authors and were edited to a minimum to keep close to the authors' own assessments. - 136- AGRICULTURAL REFORMS AND THE RURAL POOR IN EASTERN UTTAR PRADESH Executive Summary Introduction. This study was carried out in two districts of Eastern Uttar Pradesh - Allahabad and Gorakhpur. In each of the districts, two Development Blocks, and two villages in each of the Blocks, were selected for focus group and small sample interviews. Most of the individual respondents were landless labourers or marginal cultivators from scheduled castes and tribes or from backward castes and nearly a quarter were women. Fieldwork was carried out for about five weeks during February-March 1996. The study focuses on the effect of agricultural reforms on the rural poor as producers, workers, or consumers. However, it was not always possible to exclude the impact of other reforms, or of changes unrelated to reforms. Knowledge of reforms and changes in living standards. Very few among the respondents, including those with some education, had any knowledge of India's economic crisis in 1991. Fewer respondents had any idea of a directional change in economic policies since then. More than two-fifths of respondents said that they did not experience any change in their standards of livings in the last five years. Among those who experienced some decline, demographic reasons predominated. But among respondents who experienced an improvement, the main reasons cited were an improvement in employment conditions, mainly as a result of out- migration, followed by improvement in agriculture. Inpact on agriculture and agriculturalproducers. Input prices have risen sharply in the post-reform period. Items singled out by respondents include fertilizers, diesel, high yielding varieties (HYV) seeds, and irrigation charges. In some cases, fertilizer application, specially the application of phosphatic and potassic fertilizers and DAP which is a basal fertilizer mixture has gone down since 1990-91. Even where fertilizer applications have remained the same, or have risen, farmers complain that the (change in) application has not kept pace with increasing requirements because of high prices. Output prices of several crops have also risen in the post-reform period, but most fanners say that they have to sell when prices are low and that, therefore, for them output prices have increased less than the increase in input prices. In any case most farmers in the region are subsistence farmers, consuming what they produce. The case is different with commercially oriented farmers who feel that profits have gone up in many cases despite increasing input costs. About two-fifths of the cultivators interviewed reported an increase in paddy, potato, gram and peas yields, while one-fifth reported a decline. There are only some local changes in the cropping pattern, reflecting shifts to labour saving, input saving, or higher value crops. In some cases, reverse shifts have also taken place reflecting adverse market conditions. Depending - 137- on the area, the main constraints which farmers face are availability of irrigation, input prices and timely availability of inputs. Employment and Wages. Most male wage workers in the study villages combine agricultural and non-agricultural labour, either locally, or in the nearby urban centres. In Gorakhpur, a large number of male labourers--nearly one-fourth in our sample migrate for employment to distant states--Punjab, Delhi, Maharashtra and Gujarat. Agricultural employment is meager. Female labourers are employed only for 2 to 3 months and have recourse to virtually no other wage employment. Male labourers get work for four to six months. Local non- agricultural employment is also only available to them for one to three months in a year. Not surprisingly, the younger members of the labour force seek work in the nearby as well as distant urban centres. It is difficult to establish whether migration has increased in post-reform years, but the households that we surveyed have a large number of very young people in the migration stream. While some distinct trends emerge over a longer time frame, most respondents do not recollect significant changes or fluctuations in agricultural or non-agricultural employment during the reform period. Except in Shankargarh Block, general agricultural (cash) wages have increased by 50 to 65 percent since 1990-91. More importantly, harvest wages--which are in kind--have also increased in tandem in the Gorakhpur Blocks. Depending on how harvest and kind wages are valuated, total wages have risen by slightly less or more than the cash wage rates. Non- agricultural urban wages are higher than the rural wages and have also increased but the orders of magnitude could be smaller. The general picture is perhaps consistent with the labourers' perception: rural wages have increased nearly in line with the cost of living. The latest regional consumer price indices for rural areas and agricultural labourers was not available to us at the time of writing, but we constructed an index using weights derived for 1990 and a typical food consumption basket for rural labour households in the sample, and rural retail prices. This shows an increase of sixty-eight percent between 1990 and 1995. Since agricultural labourers are partly insulated from the market (because of wages earned in kind), the actual increase in their food index would be less. The impression at this stage is, therefore, sustained: real wages have remained virtually stagnant since 1990-91. This contrasts with the situation in the eighties when most studies show that real wages were rising in the region. Consumption pattern and changes in consumption. Poor households in the rural areas in Eastern U.P. "eat what they get". Deficit in food produced and earned is purchased from the market or taken as loan from employers. A typical meal of the labourer/marginal farmer consists of rice or wheat bread, taken with some vegetables (potatoes), or infrequently with cheaper pulses. On many days the poorer households would simply have rice or bread with salt or chutney. About 12 percent of households interviewed were seriously deficient in food consumption, having to occasionally go without food, or "going to sleep on a half-filled stomach". Often these were single parent or single earner households (both male and female) or households with disabled individuals, but in a few cases low employment/incomes were the cause of this deficiency. Many of the poorer respondents found it difficult to specify a few items whose consumption had been affected by the price rise since 1991. "Even salt has become so - 138 - expensive", they said. But with local variations, food items whose consumption had been affected due to price increases were pulses, rice and oil. Pulse consumption has definitely declined, and the preferred pulse, Arhar or Toor (pigeon pea), has given way to cheaper pulses, mainly split peas and gram. Only in some cases, could the poorer households take recourse to animal proteins (pork, fish). On the other hand, the consumption of potatoes and vegetables had increased, both due to increased local production and market availability. Most respondents do not report changes (decline) in total cereal consumption over the period. Safety Nets. The coverage of anti-poverty programs declined in the immediate post reform period. During 1995-96, the emphasis on weaker section's housing has increased but other asset-based income generating programs are below the 1990-91 level. Total employment generation has recovered to the pre-reform level during 1995-96. While there are some cases in which asset-based programs such as the Integrated Rural Development Program (IRDP) have succeeded in raising incomes in a sustainable way, there are several cases of failure and loan diversion. The subsidy element in the programs does not reach the beneficiaries, either wholly or in part. The evidence from both the individual and group interviews also suggests that the programs have provided less cover to certain groups among the poor. From the group and individual interviews, we surmise that the employment programs have had a marginal impact on the generation of employment. The recent Employment Assurance Scheme (EAS) was in operation in three of the four Blocks surveyed by us. The days of employment generated was below stipulation and other norms such as grain payments, issue of employment cards and local hiring were not observed. In addition, employment is expected to have been generated though the Jawahar Rozgar Yojana (JRY). A small number of (mostly male) labourers were employed in public works executed under this and other schemes but the average days of employment was small. The Revamped Public Distribution System (RPDS) is operational in one of the four study Blocks, and will soon be introduced in two others. PDS shops exist in each of the village panchayats visited but new ration cards have not yet been issued. A marginal improvement in the availability of sugar and kerosene was reported, but the monthly amounts per family are small--I to 2 kg of sugar, and 2 litters of kerosene. Only one PDS shop (in the RPDS Block) lifts cereals--wheat and rice--but among those interviewed no one knew of the availability of cereals at this shop. Shop keepers say that there is no demand for cereals from the PDS in the rural areas, specially because the quality is poor, and the band of prices (PDS and open market) is very narrow. Indeed PDS prices are, for most times in the year, higher than open market prices, making the whole operation redundant. While this is correct, the argument does not hold in the RPDS Block where PDS prices are lower, even though there are seasonal variations in consumption, with the cheaper cereal being favored. The current failure of the RPDS in supplying cereals requires deeper analysis, especially since our observations are drawn from an area, where many poor households are entirely dependent on the open market for their grain requirements. Education and Health. Both study districts are now part of an intensive effort to increase schooling facilities and literacy, and special programs such as the World Bank funded - 139 - primary education project and the Total Literacy Campaign (TLC) are being implemented. In the study areas, some of the new schools are ready and have started functioning. The mid-day meal scheme is being implemented since 1995 in three of the four study Blocks in the form of a monthly incentive of 3 k.g. rice per child showing regular attendance. The implementation is uneven, but in most of the villages where this has been satisfactory, there has been a spurt in enrollments by 20-25 percent. However, a number of children are still not going to school. There are significant gender and social group disparities which require corrective measures and poor implementation of the program(s) can lead to a reversal of the situation. Parents are quite sensitive to quality differentials in schooling. In general, upper caste, marginally well off, or even poor parents giving a high priority to education prefer to send their children to private schools. In one case, however, where the government school improved, its enrollments increased and children from private schools were enrolled there, even though the mid-day meal scheme was not operational in this area. The public health system is in poor state in the study areas. People prefer to use private services, mostly of untrained doctors. Government doctors, they say, take fees and only prescribe medicines which have to be bought separately. In cases of hospitalisation, recourse is made to public hospitals. The cost of treatment is high, and respondents say that medicine prices have risen sharply in recent years. The cost of prolonged treatment has caused a severe downturn in the economic condition of some of the poorer respondents. Impact of Recent Devolution. Following the 73rd Amendment, and legislative changes in Uttar Pradesh, elections to the first two levels of the three tier panchayat structure were held in U.P. in April 1995. The U. P. legislative changes have reserved seats at all levels for scheduled castes, backward castes, and women. In three of the panchayats we visited, the Pradhans were women. Three of the Pradhans were from the scheduled castes or tribes, two were from the backward castes, and three were from the general castes. It is difficult to say whether the changes had led to any greater empowerment of the weaker sections. The major problem is that no efforts have been made for improving the capacity of the local institutions to undertake the many responsibilities being thrust on them, nor is there, as yet, any systematic devolution of developmental functions. Development Priorities. Respondents gave land, productive assets, employment, irrigation, lower input costs, flood control and better inputs (in decreasing order of importance) as their priorities for development. Few wanted assets through loans in the manner of the current schemes such as the IRDP. - 140 - THE IMPACT OF AGRICULTURAL REFORMS ON THE URBAN POOR: A CASE STUDY OF EASTERN UTTAR PRADESH EXECUTIVE SUMmARY Introduction. The present study is a survey of the impact of agricultural reforms on the urban poor and the occupational groups selected were such which could capture these impacts of the reform process. A heterogeneous sample was chosen: construction workers and rickshaw pullers to represent the first group, domestic workers to represent the second group and handloom and powerloom workers to represent the third. The survey was conducted in February- March 1996, in two districts of eastern Uttar Pradesh. The study of handloom and powerloom workers was done in Gorakhpur which has traditionally been the hub of handloom activity. The other occupational groups were surveyed in Allahabad. The study used a variety of instruments. First, in-depth interviews based on semi- structured questionnaires were carried out with individual respondents. Second, informal and unstructured group interviews and discussions were held with the respondents at their work places, in their homes and localities. Third, a diverse group of people, including employers, contractors, master weavers, traders, corporation employees, PDS shop keepers were interviewed. Finally, we visited government offices to talk to the officials and for records of recent public intervention. The major limitations of the study arise from the small number of respondents and the problem of extricating reform-related changes from demographic and other changes. The conclusions are, therefore, at best tentative. Awareness of Reforms. For the largely illiterate poor in urban areas, reforms are an unknown commodity. Apart from a small section of handloom and powerloom workers who were aware that export policies had become less restrictive, there was no awareness whatever of the reform process. It is possible that since many of the reforms had been put in place only in the last two years, the effects may not have worked their way through the economy and percolated down to the poor. Employment, Wages and Earnings. Higher numbers of rural people are seeking work in the urban areas. Respondents cite various reasons for increased influx into the urban areas: low wages in the rural areas, declining employment as a consequence of mechanisation, non payment of wages on time by landlords, and changing labour practices. Among unskilled laborers, wages in Allahabad ranged between Rs 25-30 in 1990-91. In 1995-96, average wages ranged between Rs 35-45. The increase in wages is therefore of the order of 41.8 percent. In Gorakhpur, the secondary data collected by the Statistical Office shows an average wage increase of 27.4 percent between 1991-95. Construction Workers: Our interviews with respondents among construction labourers and their employers suggests that the influx into the unskilled labour market has increased since - 141 - 1990-91, and the competition for jobs has intensified. Demand for such work may not have picked up in proportion to the increasing supply of laborers. While private expenditure in the construction sector has remained brisk, public expenditure appears to be stagnating. Although male-female jobs in construction are equally arduous, there exists a loose demarcation between them. In recent years, wages of female workers were closer to those of male workers. Where women loose out is in their access to skilled work where wages are double. While most male workers graduate to become skilled masons after a few years on the job, women never do so. Rickshaw Pullers: Evidence also suggests a sizable increase of new entrants in the rickshaw pulling profession. Mostly these are young workers, who faced with the uncertainty in the labour market take to rickshaw pulling. By all accounts, the job is extremely physically arduous and hence, not often a first choice. Number of days a rickshaw is plied may vary from 10-30 days a month but the average has increased from 160 days in a year earlier to 180 days now. Most pullers being migrants from the rural hinterland, the ebb and flow in their numbers is in consonance with the agricultural seasons. The current earnings average to Rs 54 per day net of the rental charges of Rs 15; up from net earnings of Rs 35-40 per day about five years ago, an increase of 42 percent between 1990- 91 and 1995-96. The privatisation of bus services and increase in three wheeler tempos had affected their business. Domestic Workers: A poorly paid, highly insecure and pre-dominantly female job, domestic work provides easy entry and sustenance to poor, illiterate women in urban areas. Wages are a pittance; Rs 15 per day on an average, or less than half the wages of other occupational groups surveyed. Moreover, they have risen the least in the period from 1990-91, i.e., by 20-25 percent. Clearly, cash incomes do not appear to have kept pace with the rise in prices. In most domestic worker households, income from domestic work turns out to be less than one half the total income of the household. This is so despite the fact that women put in as many, or in most cases, more hours on the job than do the men in the household. Nevertheless, it is her income that keeps the family from starvation, as the male incomes are generally frittered away in one form of addiction or another. The average income of the household worked out to Rs 1162 per month. The daily incomes of the males in the household were much higher than female incomes. This was so even when the males were solely engaged in some seasonal occupation and worked only for 8-9 months in the year. Women's incomes came to 38 percent of the total household earnings. Moreover, young girls in the family also accompany their mothers when they go out to work. This in effect pulls down the eamings per person from domestic work even lower. The work of young girls, in this profession is scarcely rewarded and truly invisible. Despite the pittance wages, despite the arduous work, the fact that the job affords women an income of their own is of immense importance to them. Handloom and Powerloom Workers. Inevitably, in the process of reform there are some who gain and some who lose. The weavers of Gorakhpur are an example of the latter. Loosening of trade restrictions and crop failures in some years have led to phenomenal increases in the - 142 - prices of yarn. Between 1989-96, prices of yarn have risen by 146 to 245 percent. The daily returns to weavers are estimated at Rs 30 to Rs 48 for wage workers and Rs 43 to Rs 84 for self- employed. Change in earnings are difficult to estimate, but given the dimensions of crisis in the industry, real earnings are unlikely to have increased and have, in all probability declined. Faced with the crisis of increasing yarn prices, weavers have adopted different strategies to cope: migration, switch to powerloom, diversification to new products, or simply 'roughing it out". Thus, nominal daily earnings of all the occupational groups studied have risen to varying extents in the post-reform period. The estimated increase over five years, roughly corresponding to the post-reform period have been approximately in the range of 20 percent to 42 percent for the various occupational groups in the sample. Does this correspond to an increase in real earnings? At the time of writing, we did not have the regional Consumer price Indices for Agricultural Labourers (CPIAL) computed by the state Directorate of Economics and Statistics. But consumer prices are estimated to have risen by about 52 percent (Oct-Dec 1995 over Oct- Dec 1990). It would thus appear that real daily earnings of the surveyed groups in the study areas have fallen in the post-reform period. The Allahabad study indicates that the increase in labour supply as a consequence of increased immigration from the countryside has a greater role to play in this compared to a slackening of demand, even though there is evidence of the latter in public sector construction activities. Consumption. By any yardstick, the consumption and living standards of the poor continue to be abysmal. Most people felt that their consumption standards had remained the same during the period under review although the consumption of pulses, milk and potatoes had reportedly declined in some households. There were some substitution effects. Rise in prices of rice had meant that inferior quality rice was substituted for better quality rice, and cheaper seasonal vegetables were substituted for pulses; the latter implying that protein intake may have reduced. Among non-food items, consumption of clothes and medicines had been affected most adversely. In order to make ends meet, most respondents regularly take credit from employers and from shop-keepers. Owning consumer durables such as black and white TV sets had become a great attraction for the urban poor. Many of the households with somewhat more stable income profiles did actually own a TV set, even if it ran without an authorised electricity connection. Safety Nets. The safety nets operational in the urban areas were weak and presented a fairly dismal picture despite the fact that these services were present in greater proximity to the urban poor. Respondents were generally aware of some of the new programs and schemes but none had availed of them. Very few had been beneficiaries of the older schemes. The PDS provides urban consumers with access to two commodities: kerosene and sugar. It does not provide any buffer against high foodgrain prices. The gap between open market and PDS prices of cereals has become inconsequential. As a result, the urban poor in the survey simply find it more expedient to purchase in the open market. By and large, the poor interviewed have not benefited from the government health infrastructure; private health care is excessively expensive, but still the preferred option. On the other hand, in education, government schools and anganwadis do fulfill a social function albeit less than satisfactorily. - 143 - Development Priorities. The development of infrastructure in urban areas would go a long way in mitigating hardships of the urban poor. Drinking water, sanitation and toilets, better roads, subsidised housing, access to welfare schemes for the genuinely needy and most importantly, more work opportunities, are some of universal demands. More specifically, each occupational group had its own priorities. The measures rickshaw pullers felt would help them are: night shelters, setting up of handpumps and rickshaw stands at key places, accident insurance, ration cards, fixing of fares indexed to the cost of living, and a check on police excesses. The rural background of construction workers and pullers came through in their other demands: lowering the prices of fertilizers, grant of patta land and availability of work in or around their villages. The major problem of most workers was indebtedness. The priorities of domestic workers are: a weekly day off, toilets in their localities, more jobs, ban on lotteries and on opening new liquor shops, shelter homes for battered women, and loans for house construction. Widows were aware of the widow pension scheme but despaired that they would be able to get it. The priorities of handloom and powerloom workers were all related to their trade: better functioning of governmental institutions such as the Intensive Handloom Development Corporation, availability of raw materials, and loans. Finally, the survey reveals a conspicuous absence of NGO intervention in Allahabad, and a very limited one in Gorakhpur. - 144- AGRICULTURAL REFORMS AND THE RURAL POOR IN BUNDELKHAND Main Findings of the Banda Case Study Executive Summary Awareness of Reforms. A majority of people in the interview sample had not heard of the New Economic Policy (NEP). Although they were aware of changes in input prices, and availability of new fertilizers and seeds, they did not connect this with changes in economic policy. None of the responses saw any linkages between NEP and changes in cropping patterns. The change in cropping patterns was attributed to the introduction of irrigation, dating back to the 1970s. Impact of Agricultural Productivity. In summary, in the absence of land redistribution in Banda District and severe shortage of irrigation facilities and other infrastructure (roads, electricity, etc), all new agricultural policies are rendered meaningless, particularly for the small farmer. Small and Marginal Farmers. In the case of small and marginal farmers, there was either negative or no impact of NEP on agricultural productivity and cropping patterns. Small farmers continue to cultivate small pockets of land, spend more on inputs, and generate little or no surplus grain to sell in the market. However, what little grain is sold does fetch a higher price. For a majority of the small farmers, the higher prices did not mean a greater net profitability. This is because the increased income is offset by greater expenditure on agriculture inputs (seeds, fertilizers, canal rates, pumping sets and tractor rental, diesel, electricity). Large Farmers. In the case of larger farmers, there has been a change in cropping patterns, productivity, and profitability. However, the cropping pattern changes (introduction of wheat and sugar cane) are attributed to the introduction of irrigation over 15 years ago, not to NEP. What can be attributed to the last five years is the greater availability and dependability of new fertilizers and seeds. However, even this was seen as a mixed blessing because a majority of farmers interviewed (both small and large) reported that the amount of chemical fertilizers required virtually double every year. With the increase in fertilizer prices, this is eating into their profits,. Overall, 6 out of 13 large farmers interviewed reported increased profitability due to higher prices of agricultural produce. Unlike small farmers, several large framers were able to buy mechanized agricultural implements, thereby saving on time and expense in the long term. Some large farmers also reported increased income from renting out this equipment. - 145 - Minor Forest Produce. The forest economy, a significant source of income for the Kol tribals in Banda, does not appear to have undergone any significant change in the last five years. Some people reported higher prices for some minor forest produce (mahua, tendu patta, chironjee). But this is an insecure source of income. Income from minor forest produce is critical for three months of the year (April, May, November). Collective rights are forked out by forest contractors, and prices are not determined in the open market, but by the state. Impact of Employment and Wages. There was no significant change in the pattern of employment after 1991. Subsistence agriculture continues to be the mainstay of the economy. Many of those engaged in subsistence agriculture also work in the wage sector, as agricultural labourers. Work was not available the year round. Only half the respondents reported full employment the year round. Some work for ten months of the year, some for eight, and others for less than eight months (i.e. are unemployed for 2 months, 4 months or more). Those who remain unemployed for 2 or more are either landless or marginal farmers. The increased mechanization of farming was cited as one reason for the reduction of agricultural wage income in the last five years. There has been no industrial development in Banda since 1991 to absorb the large numbers of rural unemployed/underemployed. There is only a marginal increase since 1991 in seasonal migration to nearby towns and cities for employment. Wages for agricultural work are low and discriminatory towards women. The respondents did, however, report an increase in absolute wages over the last five. The male/female differential remains unchanged. Another shift is the increasing cash payment for daily wage labourers, which earlier was in kind (grain). Wages for work on government rural development works continue to be more on paper and far less in practice. None of the respondents received the official rate of Rs.33 per day. The average government wage ranged from Rs.20 to Rs.30 per day. Impact on Consumption. There has been a gradual shift in food consumption in the last ten years with the introduction of wheat and rice, in addition to coarse grain (line Jowar and Bajra). In the case of landless and marginal farmers, the shift appeared to be more recent (over the last 5-7 years). A small proportion also reported the introduction of vegetable consumption. This shift did not respond to any significant increase in real income, but to the greater availability of these food items. The last five years have also witnessed an increase in the consumption of consumer items like soap, hair oil, tooth powder, and (synthetic) clothes. Consumption of alcohol and expenditure on gambling (playing the lottery) were also visibly increasing. The fact that more landless and marginal farmers reported an increase in soap/oil/clothes consumption does not mean that the larger farmers are not consuming these items. It merely indicates that for the landless/marginal it is not an increase but introduction of these items. Many had not used soap until the last five to seven years. Similarly with synthetic clothes. Does this mean that they have more disposable income now? The answer is a resounding NO. A majority of them were not assured of two square meals a day the year round. Some were in debt, and none were able to save. Obviously with the greater availability of consumer items and aggressive rural marketing, people's definition of "necessity" has undergone a significant - 146- change. A number of these consumables are now considered essential--even though what is treated as disposable income to buy these items is in fact only seasonal and subsistence earnings. During the agricultural season, the poor spend on these items, but during the lean season they often go to bed hungry. Similarly more poor households are consuming alcohol, and spending more on dowry and other marriage expenses even though they do not always have enough to eat and are frequently indebted. There was also increased expenditure on medical bills. More and more people in rural areas are seeking private doctors. This does not mean any improvement in their general health status. Most of the respondents were being manipulated into paying frees for unnecessary and sometime outrageous cures. Impact of the Rural Safety Net. The "rural safety net" has had absolutely no impact in preserving let alone improving the minimum welfare levels of the rural poor. All the safety net programs covered by this case study were functioning poorly, if at all. These included JRY, IRDP, TRYSEM, India Awas and Nirbal Awas (housing schemes), and PDS. The sole exception was the Mahila Samakhya Program (MS), a central government sponsored program aimed at women's empowerment. JRY was marked by few employment days in the year, corruption (doctoring the books to show more wage payments than were actually made), and use of sub- contractors. In addition, no durable community assets were created through JRY. Many of the respondents had worked on building Khadanja (a gravel road), year after year - since the quality is so poor that it gets swept away with every rain. None of the respondents had received IRDP loans. The housing schemes were marked by poor construction, and unjust beneficiary selection (i.e. well off people manipulating records, with the collusion of government officials, to show themselves as below poverty line). The exception to this was the housing project built by a local society, Vanangana. Here, as a result of participation by housing beneficiaries in the entire process from design to construction, there is 100 percent occupancy. It is the only government housing project in Manikpur block to have achieved this. PDS supply was erratic and ineffective. It was also market by corruption of ration shop owners. The only positive change in the last five year in the study villages was that most people now possess ration cards. Part of the credit for this goes to MS program workers who have worked on helping the poor procure cards for the last several years. Panchayati Raj can potentially play a watchdog role in ensuring proper implementation of government schemes, and beneficiary section. It has been totally ineffective. In fact the Pradhan was often cited as the chief conniver in denying the poor their due from safety net programs. - 147- IMPACT OF AGRICULTURAL REFORMS ON THE RURAL POOR: A CASE STUDY OF TAMIL NADU Executive Summary This report examines the "Impact of Agriculture Reforms on the Rural Poor". The objective of the study is to analyze the impact of agriculture reforms on landless laborers and marginal small farmers. Both official and primary data were collected for this study. A survey was conducted in two districts viz. Thanjavur and Dharmapuri in Tamil Nadu and four village in each district were selected at random for in-depth analysis. Primary data were collected from 170 farmers (80 from Thanjavur and 90 from Dharmapuri) and 145 agricultural labourers (80 from Thanjavur and 65 from Dharmapuri), in February, 1996. We have also conducted 4 individual interviews and nine group interviews with farmers and agricultural labourers to verify the survey data. Knowledge About the Economic Reforms. Most of the respondents were not aware of the economic reforms initiated since 1991. Out of 170 farmers and 145 agricultural labourers, only 24 (14 percent) farmers and 6 (4 percent) agricultural labourers were aware of the reform programs. Major changes Since 1991 (a) Prices: All respondents in both districts have said that prices of essential commodities have gone up enormously during the reform period, including the prices of commodities sold under the Public Distribution System. (b) Credit: In Thanjavur villages, out of 80 farmers, only 28 (35 percent) farmers; and in Dharmapuri villages out of 90 farmers, 27 (30 percent) said that the availability of credit facilities has improved. Credit facilities for agricultural labourers under IRDP have declined over the past five years. In Thanjavur and Dharmapuri districts, out of 80 and 65 agricultural labourers respectively, 56 and 22 said that credit facilities have declined. (c) Income: In Thanjavur district, out 80 farmers 25 (31 percent) farmers, and in Dharmapuri district out of 90 farmers, 34 (48 percnet) felt that their income have declined. Lack of credit facilities and an increase in input prices were the main reasons for decrease in the income. The incomes of many agricultural labors have increased over the reform period in rural areas of Tamil Nadu. In Thanjavur district, out of 80 agricultural labourers 55 (69 percent) stated that their income has increased. While in Dharmapuri district out of 65 respondents, 49 (75 - 148 - percent) stated that their income has increased. The main reason for the increase in income was due to increasing wage rates. Benefit From Reforms. In Thanjavur district, 34 farmers and in Dharmapuri district, 24 farmers claim to have benefited from higher farm profits and low wage rates paid to agricultural labourers. Among those who have not benefited, 46 farmers belong to Thanjavur district and 66 belong to Dharmapuri district. The higher wage rate for agricultural labourers and input prices were cited as the main reasons for not benefiting from agricultural reforms. Non-Farm Employment. Only two households out of 80 farmers' households in Thanjavur district, had members engaged in non-farm employment since 1991. In Dharmapuri district out of 90 farmers' household, 32 have non-farm employment. The main reason for higher non-farm employment in Dharmapuri district was the uncertainty of cultivation due to lack of irrigation water. Frequent crop failure and higher wages in urban areas encourage even farmers to migrate to urban areas. Agricultural laborers in rural areas historically do not work much in the non-farm sector. However this is changing in the Dharmapuri district. Out of 65 labourers households, 29 have stated that their family members have non-farm employment. In contrast, none from Thajavur district are working outside the agriculture sector. Price Change in Key Crops. Both in Thanjavur and Dharmapuri districts, all farmers have stated that production costs have increased considerably over the last five years. Safety Net Programs. A comparison of prices in the open market and in the fair price shops shows that the prices of commodities sold in the fair price shops, particularly rice, is only one-half the prices in the open market. The government is implementing several development schemes in the rural areas. These programs include employment generation, agricultural extension work for higher agricultural output. (a) Who are using these schemes? Both in Thanjavur and Dharmapuri districts, most of the respondents said that all works under the JRY programs were done by contractors. The contractors usually bring labourers from outside the village. None of the farmers from Thanjavur district have availed any employment opportunity under these schemes. Only 14 farmers in Dharmapuri have stated that they had employment, but for a few days only. In one of the Thanjavur villages, a youth organization viz. Bharathidassan Narpani Mandram (Welfare Club) sub-contracted a JRY scheme to provide employment to local people. As a result, about one-third of the labourers in Thanjavur villages have availed employment in their village. While in Dharmapuri district, only 23 (35 percent) labourers were employed through these programs. - 149 - (b) Are these schemes useful? Most of the respondents both in Thanjavur and Dharmapuri districts said that the schemes are useful in creating infrastructural facilities such as bus shelter, school buildings, community hall, etc. (c) In what way could these programs be improved? In Thanjavur district, a high proportion of respondents stated that the schemes should be implemented by the village panchayat and some suggestions that the schemes should be given to local village people. The contracting of work relating to safety net programs by the members of the political parties should be stopped. This is against the JRY manual, 1994, which clearly states that anti-poverty programs should not be given to contractors. But in practice, most of the works were done by contractors both in Thanjavur and Dharmapuri districts. - 150- ECONOMIC REFORMS AND THE WEAKER SECTIONS: REFLECTIONS FROM MAHARASHTRA Executive Summary There has been intense debate on the impact of the reforms on the poor. Lack of adequate data on a large scale with sufficient disaggregation has however not permitted to arrive at firm conclusions. This paper reports the findings of a rapid rural survey (albeit on small scale) conducted in Maharashtra, to seek tentative results on the impact of reforms on both the rural and urban poor. The field work was done in January and February, 1996. The methodology followed here consists of using a range of qualitative methods, including village meetings and focus group discussions with agricultural and non-agricultural laborers, small farmers, lorry drivers, semi-skilled factory workers, women workers, etc. (conventionally accepted to be the poor), in addition to limited individual interviews. The inquiry was conducted in the rural areas of four districts; Osmanabad (semi-arid, backward), Parbhani (cotton growing region), Pune (semi-arid but fast modernizing), and Thane (rain-fed, tribal); and in the informal sectors of Bombay city. A total of 17 villages and four low income settlements were visited for the investigation. The rural inquiry is much more detailed than that in Bombay. The findings from rural areas are reported under four broad sub-headings: earnings, production, opportunities, expenditure ratings and social conscription; and those of Bombay are separately reported. Wages, Earnings and Work Availability. The rural economy of Maharashtra is mainly agrarian and semi-arid, and the majority of the poor are engaged in wage labor in addition to work on one's own land (if they possess any), and self provisioning. It is observed that the conditions of these groups have, by and large either stayed unchanged, or marginally improved. The two principal indicators, namely the number of days work available and wages, have both improved somewhat. In specific areas migration has risen since workers prefer to travel for seeking higher wages and working conditions, while in others it has fallen because they have found more employment locally in agriculture and/or in other activities. There are, of course, regional differences; with varied changes everywhere other than in those where the tribals have subsisted in isolation. In Omanabad, the prevailing wage for unskilled manual work has been reported to be in the range Rs. 25-35 for male workers and Rs. 15-20 for females, depending on the location and type of work. Wages on large scale construction works (road, dams, other earth works) could reach up to Rs. 35-40 a day (male). In Parbhani wages are much the same as in Osmanabd, and here too there has been a marginal rise in areas near towns/main roads, though there is stagnation in the higherland over the period under reference. Wages in Pune are somewhat higher, but in Tahne, the tribals not only fetch lesser wages in absolute value, but wages were slightly lower in real terms too. - 151 - The laborers and small/marginal farmers work for about 60-70 days during June- September (almost wholly in agriculture), above 130-140 days during October-March (in mixed occupations) and about 30 days during April-June (mainly in non-agriculture). Work on one's land does not exceed 25-35 days per person since the plots are small and are often sharecropped out. Over the last 3-4 years, this 200-220 days of work in a year (all areas) has actually had a slightly higher than in previous year. Cultivation Practices. The prices of most agricultural inputs have risen over the years, both due to reductions in subsidies and general inflation. Farmers are acutely aware of the costs and prices and tend to adjust to external changes. There has thus been a shift away from crops that fetch low profits or require higher costs, towards ones that maximize profits/minimize costs. Of course these shifts have occurred as a result of emerging opportunities such as enhanced irrigation facilities and marketing channels as well. The problem of input prices rise out- stripping those of the outputs (at least when and where the farmers sell) has, however, been a constant cause of concern. In Osmanabad many farmers have shifted their cropping patterns away from pulses and groundnut in favor of sunflower to save on fertilizer costs (prices rose by 75-80 percent), and resorted to limited mechanization for saving on labor costs (which rose by 50-60 percent). In Parbhani they have increasingly preferred to sow cotton despite numerous controls and imperfections in the market (including price controls) and pest attacks. In Pune district the trends are similar to those in Osmanabad, with the difference that tomatoes and vegetables are grown because there is a market for them in the large city of Pune. A general, reduction in area under sorghum and pulses has been observed because cash crops yield a higher profit. Farmers who have been able to access irrigation, either through the underground (private effort) or surfaces (public investment), are clear gainers. The sustainability of this trend is however under question since the under ground water table is drying up. Instead, surface irrigation is increasingly being used for high water intensive crops such as sugar cane, curtailing water to other crops and/or a wider geographic region. Unlike others, this region is not semi-arid; yet it is not able to irrigate its single (paddy) crop because most of its water is harnessed and transported to meet the requirements of the Bombay metropolitan region. Consumption Practices. The staple food of people is sorghum. Its hybrid form is now universally being consumed by the poor, as the other varieties have become too expensive. The other cereals consumed are wheat and rice. The per capita consumption of cereals does not seem to have changed significantly. There has however been a general fall in the consumption of pulses and milk, and a rise in the intake of vegetables. The overall food consumption has not shown a visible rise, though limited non-food items seem to have found place in many houses. Younger people have began to opt for 'modern' goods such as tooth paste, soap, and the likes. The people interviewed have not reported an overall fall in consumption anywhere. In Osmanabad people have begun to eat a little more meat than they did earlier "because they now have access to cash." This partly compensates for the proteins foregone due to cut back on pulses. In Parbhari, edible oil and meat consumption have fallen, in addition to pulses - 152- and milk. Though vegetable consumption has risen here, it is of interest to note that people's preferences have shifted towards non-food items rather than diversifying the food basket. The communities in Pune have reported much the same. In Thane, food consumption does not seem to have been affected because most people eat what they grow: market interface is minimal. The Public Distribution System (PDS) is mainly used for sourcing sugar in Parbhani, though in Osmanabad and Pune occasional consignments of wheat and edible oil also reach. In Thane there is no PDS. People everywhere reported that the PDS is inefficient, rigid in its operations (eg. customers have to take their full month's quota for which they seldom have ready cash,) and officials are corrupt. The changing cropping pattern has so far not affected local food security since farmers grow some sorghum to meet their needs, many landless either sharecrop, thereby getting access to land and food, or gather some food during the harvesting operations. Most nevertheless buy food in off seasons, but have so far not been very adversely hit because the sorghum prices are still within their budget range. Public Service and Social compensation. Most credit schemes are still operational but many loans are not sanctioned because people who have received loans (almost all eligible) earlier have not returned them. In general instances, the projects themselves were ill-conceived, and as a result, the money was wasted. Only in Pune it was observed that banks have begun to insist that villagers vet their projects by local NGOs or village institutions for ascertaining their financial viability. Osmanabad and Pune villages showed a higher prevalence of institutional loans than Parbhani. In the latter private money lending is widely prevalent. In Thane, institutional credit was totally absent. The Employment Guarantee Scheme (EGS) is not uniformly present everywhere. In Osmanabad and Pune the EGS and its associated soil management programs are very popular, while in Parbhani such activities are relatively low (about half compared to the former on a per capita basis). In Thane they are riddled with corruption. Despite this regional disparity it is widely believed that a floor wage has been set in the state because of the EGS, except perhaps in the remote tribal belts. Children's school attendance has risen over the last few years. Nutrition in pre-schools (ICDS) is provided in most places other than in Thane. Health services though have become more expensive. Earlier the Primary health Centers provided free diagnosis as well as some medicines, but now, medicines need to be purchased. Lastly, transport (bus) services have become expensive (about 50% rise over the last 5 odd years). The Urban Informal Sector. Workers from four sectors, namely, small scale manufacturing, transport, construction and personal services, stated that job uncertainty and loss of jobs have risen and real wages have fallen over the last few years. The recent emergence of job sub-contracting and contract labor have helped cut costs for employees, but restricted the legal rights of workers. High costs of real-estate are forcing many small manufacturing units out of the city. Since workers are not always mobile, they lose their jobs. - 153 - Consumption levels have fallen in the recent times: pulses, vegetables, meat, fish and milk have all become dear and their intake reduced. Only in the case of domestic workers has consumption not been affected so much since it is not uncommon for employers to share some of their food with workers. Health services have become expensive here too. Medicines are not typically available in public hospitals. The PDS is far from satisfactory; even though it stores more than in the villages, it suffers from all the problems stated in the rural context. Unlike in the rural sector, there are no institutional sources of credit, particularly for this category of workers. People tend to borrow exclusively from private sources at very high interest rates. Children mostly attend schools, but also take up part-time jobs to supplement family income. Conclusions. Prices of many critical inputs and consumption items have risen, and certain activities have been adversely affected in the process of implementing the reforms program. In regions where opportunities have risen or successful adjustments have occurred, people have been able to ride over the problems, while in others, they have suffered. In the rural areas other than tribal, the safety nets and/or adjustment mechanisms have been functional. The reform process has scarcely reached the tribal areas and in the urban areas there are no safety nets. This inquiry suggests that the impact of the reforms process per--se has, across regions, been mixed, but has not been overtly anti-poor. - 154- THE IMPACT OF AGRICULTURE REFORMS ON THE RuRAL POOR IN PUNJAB Executive Summary Punjab is the most agriculturally advanced region in India. Modem farming methods are used, and the rural economy is highly commercialized. Commodity and labor markets are well developed, as are land lease and credit markets. Because of the high degree of commercialization, the impact of policy changes and reform measures are likely to be transmitted quickly through the rural economy. Development dynamism was rapid under the past policy framework, and the momentum has continued in the post-reform period. Because of this, it is difficult to distinguish between existing momentum and effects of the reforms. Reform Measures Affecting Agriculture. Reform measures in agriculture are primarily reflected in changes in input prices. Fertilizer prices rose sharply--if we compare 1995 prices with 1991 prices, DAP increased by 172 percent, urea by 40 percent, and zinc sulfate by 25 percent. In addition, electricity charges rose by 242 percent over 1991 levels. Land rents are rising rapidly as well: in some areas, the increase is estimated to have been on the order of 70-80 percent in 1995 as compared to 1991. Water charges for canal irrigation more than doubled during the period. However, the increases in input prices were accompanied by rising wages for agriculture laborers. Agriculture in Punjab is becoming more mechanized over time (a past trend) and home-supplied animal power is being replaced by tractors, reapers, combines, etc. All parts of the population are confronted with general increases in inflation. Particularly cited is the scarcity of essential drugs rural dispensaries and the collapse of the public education system in rural areas. Many people are forced to pay high prices for drugs and to send their children to costly private schools--further raising the basic cost of living. Reforms have also brought numerous benefits: cultivators were compensated in terms of higher procurement prices for wheat, paddy, and sugarcane, as well as rising market prices for other crops. Unfortunately, this has pushed up the price of basic foodgrains for households who are net buyers. The withdrawal of the subsidy on foodgrains supplied through the PDS has negatively affected some segments of the population more than is reflected in the total rise in the price of food items. Net consumers have also been impacted by the relatively rapid increase in the prices of pulses, edible oil, butter oil, milk, vegetables, and clothes. Coverage of the Case Studies. Patiala and Fatehgarh Sahib districts were selected for data collections for two reasons: first, they represent the dominant cropping pattern in the State - - wheat-paddy cropping. Second, the researchers had prior knowledge and contacts in the districts, which facilitated the work given the tight time constraints operating. Ten blocks within - 155 - the district were selected for sampling--seven in Patiala and three in Fatehgarh Sahib. One village was then selected within each block. Information was collected in village-level town meetings and through individual interviews. A total of 197 persons were interviewed: 109 cultivators, 67 agriculture laborers, and 21 artisans. The vast majority of these were poor, although a few medium and large cultivators were also included in the sample, primarily for purposes of comparison. Knowledge of Reform Measures. Although they had a vague feeling that something was being done by the government, a large number of both poor and nonpoor villagers were not aware of policy changes linked to the reform program as such. What they did know had been learned through state controlled media (television and radio) and through statements by political parties and groups. Most farmers were aware of changes in input prices. One group seemed particularly well-informed regarding reforms: the Bhartiya Kisan Union (BKU), Impact on agriculture activities: changes in input use and cropping patterns. A large majority of cultivators did not report any major changes in input use since 1991. Despite the increase in fertilizer prices, only 10 percent reported using less of either DAP or urea, while 24 percent had actually used more fertilizer since 1991. Some also reported an increase in the use of insecticides, pesticides, and weedicides. Increased mechanization was also evident: as compared to pre-1991, some cultivators reported that they were now using oilseed threshing machines, combine harvesters, and a machine to convert wheat straw into fodder. With the exception of decreased use of fertilizers, all of the observed changes in input use are consistent with pre- reform secular trends. Observed changes in cropping patterns are in part a function of the dynamism of a fast growing economy and in part due to reform changes. Many factors influence cropping patterns-- relative price changes can impact on profitability as can changes in the conditions of production or markets. But changes in cropping patterns can involve greater risk as well as higher potential profitability, and cultivators with a poor resource base often lack initiative for change. Some 45 percent of farmers--most belonging to the group of small and marginal cultivators--did not introduce any changes. The remaining 55 percent who did change cropping patterns and mix include all large cultivators (more than 20 acres) and many of the medium-sized cultivators (5-20 acres). Those who did make changes had previously been growing a traditional pattern of wheat, paddy, and fodder, but started growing additional crops, including pulses, vegetables, mustard, potatoes, sunflower, sugarcane, and maize. In addition, some cultivators have introduced a new crop rotation that helps to control weeds and maintain soil fertility. Dairying is the major allied activity adopted by cultivators, followed by transport, sale of skilled and unskilled labor, custom hiring, bee-keeping, tailoring, etc. Employment of Agriculture Laborers and Artisans. Three quarters of all laborers and artisans reported no change in the number of days they were employed. Of the remaining 25 percent, equal numbers reported an increase or decrease in days of employment. Note that many of the rural laborers migrate to nearby cities and towns to work in the slack agriculture season. The fact that they are working as intensively post-reform as pre-reform may be in part due to the - 156- fact that any decline in employment may simply mean less employment for migrant workers from Bihar and U.P. and steady employment for laborers from rural Punjab. Wages and Earnings. The money wages paid to laborers appear in general to have increased in real terms over the reform period. Different groups of laborers have benefited differently, however. For example, contractual/regular agricultural laborers have experienced a consistent rise in real wages since 1991. In contrast, the wages of casual laborers, who tend to be among the poorest in rural areas, have actually deteriorated slightly over the reform period, although the sharpest drop was in the early years of the reforms. Similarly with artisans, who suffered a sharp decline in real wages between 1991-92 and 1992-93, and the gradual rise in ensuing years has not been sufficient to bring their wages back to 1991 levels. One must question whether the market forces that have come to play a greater role in the post-reform period have been favorable to the poorest sections in rural Punjab. Changes in Levels and Patterns of Consumption. Respondents were asked two questions: whether they consumed more or less of certain commodities and whether certain commodities had appeared or disappeared from their consumption basket since the advent of reforms. Across the board, there was no significant drop in food grain consumption reported. Other changes did occur and these changes both in levels and patterns differed by group. For example, less than a half of all laborers and artisans said that their consumption patterns were unchanged. The remainder reported less consumption of certain items (i.e. vegetables, milk, clothing), severely reduced use of other items (i.e. liquor, butter oil, pulses) and replacement of some higher cost items with cheaper substitutes (i.e. milk was replaced by tea and sugar by gur). It is of concern that many of the items that contain either proteins or fats (for example, pulses and milk) were being consumed less frequently and in lesser amounts by the rural poor. Similarly, the majority of (poor) small and marginal farmers also reported declines in overall consumption levels and substitution of cheaper foodstuffs for more expensive commodities. In contrast, many of the larger farmers reported both more diversity in consumption patterns and higher levels of consumption. The net rise in consumption levels increased with the size of land holdings, and corresponded to overall household prosperity. Public Safety Nets and the Rural Poor. The public safety net can provide a great deal of security to the rural poor, providing it functions effectively. Evidence suggests that safety net program are functioning very unevenly in rural Punjab. For example, while many of the poor in Punjab are using the PDS, they are only able to purchase sugar (when it is available) and kerosene. In order to establish eligibility for many of the targeted programs, the Punjab government has issued yellow cards to all qualifying poor households. However, a recent study showed that only one-third of the rural poor actually have these cards. This is in part due to the partisan attitudes of the villages sarpanches in issuing the cards and in part due to laxity of the state administration; it has not issued new cards since 1982. A number of other schemes are in operation in rural Punjab: IRDP, the mid-day meals program in schools, JRY, Indira Awas Yogana, Mahila Mandel, Flood Relief, etc. But their coverage is very limited and they have not benefited the majority of the rural poor. The - 157- corruption of officials entrusted with the task of administering these programs has played havoc with existing programs. And, safety net program that are designed on the basis of all-India averages (for examples, that pay average minimum wages) are of little use in an advanced state like Punjab. The rural poor expect a larger and better role from Government in providing public safety nets. I STATISTICAL APPENDIX A - 161 - CONTENTS I. National Accounts Al.l(a) National Accounts Summary, (Rs billion at current prices) Al.l(b) National Accounts Summary, (Rs billion at 1980-81 prices) A1.2(a) Gross Domestic Product at Factor Cost - By Industry of Origin, (Rs billion at current prices) A 1.2(b) Gross Domestic Product at Factor Cost - By Industry of Origin, (Rs billion at 1980-81 prices) A1.2(c) Implicit Price Deflators for GDP at Factor Cost, (1980-81 = 100) A1.3 Gross Savings and Investment, (Rs billion) Al.4 Disposable Income and Its Use, (Rs billion at current prices) A1.5(a) Gross Domestic Investment by Industry of Origin, (Rs billion at current prices) A1.5(b) Gross Domestic Investment by Industry of Origin, (Rs billion at 1980-81 prices) Al.5(c) Investment Deflators by Industry of Use, (1980-81 = 100) A1.6(a) Gross Domestic Investment in Public Sector, (Rs billion at current prices) A1.6(b) Gross Domestic Investment in Public Sector, (Rs billion at 1980-81 prices) II. Balance of Payments - Current Accounts A2.1 Balance of Payments, (US$ million at current prices) A2.2(a) Merchandise Exports, (US$ million at current prices) A2.2(b) Merchandise Exports, (US$ million at 1980-81 prices) A2.2(c) Export Unit Value Indices, (US$ terms, 1980-81 = 100) A2.3(a) Merchandise Imports, (US$ million at current prices) A2.3(b) Merchandise Imports, (US$ million at 1980-81 prices) A2.3(c) Import Unit Value Indices, (US$ terms, 1980-81 = 100) A2.4 Invisibles on Current Account, (US$ million) A2.5 Decomposition of Recent Export Growth, (US$ million at current prices - annual averages) m. Balance of Payments - Capital Accounts A3.1(a) External Debt Summary: Debt Outstanding and Disbursed, (US$ million at current prices) A3.1(b) External Debt Summary: Disbursements, (US$ million at current prices) A3.1(c) External Debt Summary: Principal Repayments, (US$ million at current prices) A3.1(d) External Debt Summary: Net Flows, (US$ million at current prices) A3.1(e) External Debt Summary: Interest Payments, (US$ million at current prices) A3.2 External Reserves (US$ million at current prices) - 162 - IV. Public Finance A4.1 Central Government Finances Summary, (Rs billion at current prices) A4.2 Budgetary Classification of Central Government Finances, (Rs billion at current prices) A4.3 Budgetary Classification of State Government Finances, (Rs billion at current prices) A4.4 Budgetary Classification of General Government Finances, (Rs billion at current prices) A4.5 Tax Revenue - Center and States, (Rs billion at current prices) A4.6 Non-Tax Revenue - Center and States, (Rs billion at current prices) A4.7 Revenue Expenditure of the Central Government, (Rs billion at current prices) A4.8 Revenue Expenditure of State Government, (Rs billion at current prices) A4.9 Capital Expenditure - Center and States, (Rs billion at current prices) A4.10 Transfers between Center and States, (Rs billion at current prices) A4.11 Explicit Subsidies in the Central Government Budget, (Rs billion at current prices) A4.12 Outstanding Debt of Central Government, (Rs billion at current prices) A4.13 Outstanding Debt of State Government, (Rs billion at current prices) A4.14 Outstanding Debt of Central and State Governments, (Rs billion at current prices) A4.15(a) Projected and Actual Plan Outlays by Sectors, (Rs billion at current prices) A4.15(b) Projected and Actual Plan Outlays by Sectors, (Rs billion, annual averages at 1980-81 prices) A4.15(c) Projected and Actual Plan Outlays by Sectors, (percent distribution and achievement rates) V, Money and Credit A5.1 Money Supply and Sources of Change, (Rs billion) A5.2 Base Money Supply and Sources of Change, (Rs billion) A5.3 Selected Monetary Policy Instruments A5.4 Structure of Short-term and Long-term Interest Rates, (percent per annum) A5.5 Sectoral Deployment of Gross Bank Credit, (Rs billion - change during year) VI. Agriculture, Industry, Transport, Energy and Prices A6.1 Production of Major Crops A6.2 Irrigated Area Under Different Crops, (million hectares) A6.3 Yield Per Hectare of Major Crops, (kgs. per hectare) A6.4 Net Availability, Procurement and Public Distribution of Foodgrains, (million tons) A6.5 New Index of Industrial Production, (1980-81 = 100) A6.6 Production, Imports and Consumption of Fertilizers, (000' nutrient tons) A6.7 Indian Railways - Freight and Passenger Traffic A6.8 Petroleum Summary: Commodity Balance of Petroleum and Petroleum Products, (million tons) A6.9 Generation and Consumption of Electricity, (000' GWH) A6.10 New Index Numbers of Wholesale Prices - by Years, (Base 1981-82 = 100) A6. 11 Contribution of Selected Commodities to Increase in WPI in Calendar Year 1995 A6.12 Consumer Price Index Numbers for Industrial Workers, Urban Non-Manual Employees and Agricultural Laborers A6.13 Evolution of the Wholesale Price Index, 1991-96, (index and twelve months point-to- point increase) -163- Table Al.I (a) National Accounts Summary (Rs. billion at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 GDPfc 2337.99 2600.30 2948.51 3527.06 4086.62 4778.14 5527.68 6301.82 7231.03 8541.03 Agriculture 772.24 824.13 923.79 1140.73 1270.51 1480.01 1727.71 1930.45 2217.46 2659.14 Industry 658.14 737.46 838.29 1000.73 1196.93 1400.25 1540.74 1783.55 2005.25 2388.14 Mining 61.98 67.96 70.85 92.08 103.08 117.85 128.03 145.87 169.49 188.65 Manufacturing 417.75 461.66 528.65 628.63 770.76 891.60 963.05 1110.03 1234.77 1484.84 Construction 129.47 152.17 176.11 206.77 235.86 286.16 322.46 366.61 412.12 489.59 Electricity 48.94 55.67 62.68 73.25 87.23 104.64 127.20 161.04 188.87 225.06 Services 907.61 1038.71 1186.43 1385.60 1619.18 1897.88 2259.23 2587.82 3008.32 3493.75 IndirectTaxes 284.44 329.19 383.50 430.76 481.59 577.20 640.31 751.46 779.29 915.12 GDPmp 2622.43 2929.49 3332.01 3957.82 4568.21 5355.34 6167.99 7053.28 8010.32 9456.15 ResourceGap(M-X) 81.37 80.87 85.93 124.93 112.19 151.79 39.03 93.81 15.94 157.00 Imports (g+nfs) 237.67 255.25 296.23 388.59 465.46 565.11 610.00 776.69 923.40 1226.04 Exports (g+nfs) 156.30 174.37 210.31 263.66 353.28 413.32 570.97 682.88 907.46 1069.04 Total Expenditure 2703.80 3010.36 3417.94 4082.75 4680.40 5507.13 6207.02 7147.09 8026.26 9613.15 Consumption 2069.38 2331.37 2669.12 3118.64 3578.45 4155.57 4806.34 5451.61 6316.17 7423.95 General Gov't 291.74 346.25 408.43 473.31 542.03 617.79 694.59 785.96 896.78 1012.51 Private 1777.64 1985.12 2260.69 2645.33 3036.42 3537.78 4111.75 4665.65 5419.39 6411.44 Investmnent 634.42 678.99 748.82 964.11 1101.95 1351.56 1400.68 1695.48 1710.09 2189.20 Fixed Investment 542.55 620.52 721.94 856.69 1027.75 1240.04 1365.03 1587.38 1722.46 2130.64 Change in Stocks 91.87 58.47 26.88 107.42 74.20 111.52 35.65 108.10 -12.37 58.56 Domestic Savings 553.05 598.12 662.89 839.18 989.76 1199.77 1361.65 1601.67 1694.15 2032.21 Net Factor Income -19.00 -26.16 -32.06 -38.12 -48.79 -67.35 -93.90 -99.07 -125.56 -122.61 Current Transfers 27.01 29.75 34.99 38.42 38.01 37.14 92.75 80.29 120.00 194.67 National Savings 561.05 601.71 665.82 839.48 978.98 1169.55 1360.50 1582.88 1688.60 2104.27 Foreign Savings 73.37 77.28 83.00 124.63 122.97 182.01 40.18 112.60 21.49 84.93 GDPpercapita(Rs.) 3473.42 3799.60 4228.44 4916.55 5557.43 6383.00 7205.60 8088.62 . 9020.63 10460.34 Per capita private consumption 2354.49 2574.74 2868.89 3286.12 3693.94 4216.66 4803.45 5350.52 6102.91 7092.30 Average Exchange Rates: RupeesperUS$ 12.24 12.79 12.97 14.48 16.66 17.95 24.52 28.95 31.37 31.40 Rupees perSDR' 12.92 15.45 17.12 19.26 21.37 24.85 33.43 37.14 43.89 45.79 Memo Items: Priv. Consumption (CSO) 1777.58 1999.98 2240.61 2589.93 2900.72 3323.64 3851.50 4353.17 4936.02 5675.40 Population (mill) 755 771 788 805 822 839 856 872 888 904 a. Arrived at by crossing U.S. Dollar/ SDR rate with the RBI reference rate. Source: Economic Survey 1995-96. Source: CSO, National Accounts Statistics 1996. -164- Table Al.I (b) National Accounts Summary (Rs. billion at 1980-81 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 GDPfc 1565.66 1632.71 1703.22 1884.61 2014.53 2122.53 2139.83 2248.87 2360.64 2510.10 Agriculture 542.18 532.81 534.79 622.14 632.63 656.53 641.18 680.17 702.31 736.88 Industry 432.25 463.82 493.67 538.66 593.98 637.00 628.67 654.72 682.51 739.02 Mining 26.23 29.78 30.80 35.42 38.01 42.07 43.62 44.12 45.93 47.91 Manufacturing 303.20 324.45 348.18 378.65 422.85 448.63 432.00 449.89 469.33 511.48 Construction 71.83 75.37 77.77 83.79 88.07 98.33 100.47 103.75 106.15 113.64 Electricity 30.99 34.22 36.92 40.80 45.05 47.97 52.58 56.96 61.10 65.99 Services 591.23 636.08 674.76 723.81 787.92 829.00 869.98 913.98 975.82 1034.20 Indirect Taxes 200.82 219.79 237.63 248.84 259.14 279.85 272.72 290.92 278.07 294.92 GDPmp 1766.48 1852.50 1940.85 2133.45 2273.67 2402.38 2412.55 2539.79 2638.71 2805.02 Terms ofTrade Effect 17.17 24.54 14.73 23.52 22.83 8.96 7.43 12.00 11.75 17.59 Gross Domestic Income 1783.65 1877.04 1955.58 2156.97 2296.50 2411.34 2419.98 2551.79 2650.46 2822.61 ResourceGap(M-X) 62.39 62.06 55.84 71.72 53.45 61.45 12.43 27.40 4.29 38.09 Imports (g+nfs) 182.24 195.85 192.51 223.08 221.76 228.79 194.30 226.86 248.37 297.46 Capacity to import 119.85 133.80 136.67 151.36 168.31 167.34 181.87 199.46 244.09 259.37 [Exports (g+nfs)] 102.68 109.26 121.95 127.84 145.48 158.38 174.44 187.46 232.34 241.77 Total Expenditure 1846.04 1939.09 2011.42 2228.69 2349.95 2472.80 2432.42 2579.19 2654.74 2860.70 Consumption 1447.57 1537.38 1593.56 1732.92 1843.11 1903.95 1926.09 2010.49 2119.11 2219.12 General Gov't 189.24 208.49 226.60 238.68 252.15 260.59 259.25 267.77 284.14 292.62 Private 1258.33 1328.89 1366.96 1494.24 1590.96 1643.36 1666.84 1742.72 1834.97 1926.50 Investment 398.47 401.71 417.86 495.77 506.84 568.85 506.33 568.70 535.63 641.58 Fixed Investment 329.74 359.97 399.55 427.70 464.83 510.91 490.46 524.27 541.89 622.07 ChangeinStocks 68.73 41.74 18.31 68.07 42.01 57.94 15.87 44.43 -6.26 19.51 Domestic Savings 336.08 339.65 362.02 424.05 453.39 507.40 493.90 541.30 531.34 603.49 Net Factor Income -14.57 -20.07 -20.84 -21.89 -23.25 -27.27 -29.91 -28.94 -33.77 -29.75 CurrentTransfers 20.71 22.83 22.74 22.06 18.11 15.03 29.55 23.45 32.28 47.23 National Savings 342.21 342.41 363.92 424.23 448.25 495.16 493.53 535.81 529.85 620.97 Foreign Savings 56.26 59.30 53.94 71.54 58.59 73.69 12.80 32.89 5.78 20.61 GDPpercapita(Rs.) 2339.71 2402.72 2463.01 2650.25 2766.02 2863.38 2818.40 2912.60 2971.52 3102.90 Percapitaprivateconsumption 1666.67 1723.60 1734.72 1856.19 1935.48 1958.71 1947.24 1998.53 2066.41 2131.09 Rupee Deflators (1980-81=100): GDPmp 148.5 158.1 171.7 185.5 200.9 222.9 255.7 277.7 303.6 337.1 Imports(g+nfs) 130.4 130.3 153.9 174.2 209.9 247.0 313.9 342.4 371.8 412.2 Exports(g+nfs) 152.2 159.6 172.5 206.2 242.8 261.0 327.3 364.3 390.6 442.2 Total Expenditure 146.5 155.2 169.9 183.2 199.2 222.7 255.2 277.1 302.3 336.0 Govt. Consumption 154.2 166.1 180.2 198.3 215.0 237.1 267.9 293.5 315.6 346.0 Priv. Consumption 141.3 149.4 165.4 177.0 190.9 215.3 246.7 267.7 295.3 332.8 Fixed Investment 164.5 172.4 180.7 200.3 221.1 242.7 278.3 302.8 317.9 342.5 Total Investment 159.2 169.0 179.2 194.5 217.4 237.6 276.6 298.1 319.3 341.2 - Not available. Source: CSO, National Accounts Statistics 1996. -165- Table A1.2 (a) Gross Domestic Product at Factor Cost - By Industry of Origin (Rs. billion at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 772.24 824.13 923.79 1140.73 1270.51 1480.01 1727.71 1930.45 2217.46 2659.14 Agriculture 699.64 744.05 835.15 1041.03 1154.47 1351.62 1592.99 1779.10 2049.62 2451.39 Forestry & Logging 52.86 57.58 61.78 68.28 78.23 82.81 83.90 88.54 92.50 98.12 Fishing 19.74 22.50 26.86 31.42 37.81 45.58 50.82 62.81 75.34 109.63 Industry Sector 658.14 737.46 838.29 1000.73 1196.93 1400.25 1540.74 1783.55 2005.25 2388.14 Mining&Quarrying 61.98 67.96 70.85 92.08 103.08 117.85 128.03 145.87 169.49 188.65 Manufacturing 417.75 461.66 528.65 628.63 770.76 891.60 963.05 1110.03 1234.77 1484.84 Registered 258.06 282.54 322.07 390.50 483.69 555.53 608.43 688.12 765.09 902.62 Unregistered 159.69 179.12 206.58 238.13 287.07 336.07 354.62 421.91 469.68 582.22 Electricity,Gas &Water 48.94 55.67 62.68 73.25 87.23 104.64 127.20 161.04 188.87 225.06 Construction 129.47 152.17 176.11 206.77 235.86 286.16 322.46 366.61 412.12 489.59 Services Sector 907.61 1038.71 1186.43 1385.60 1619.18 1897.88 2259.23 2587.82 3008.32 3493.75 Transport, Storage& Com. 140.98 165.37 199.38 238.72 277.31 339.13 410.04 491.07 563.27 655.22 Railways 31.36 37.65 43.56 47.51 55.75 64.33 73.42 84.46 96.48 107.83 Other Transport 91.00 105.10 124.68 152.29 177.85 223 11 275.22 330.64 372.93 433.09 Storage 2.60 2.80 3.17 3.34 3.88 4.45 4.77 5.13 5.73 6.67 Communication 16.02 19.82 27.97 35.58 39.83 47.24 56.63 70.84 88.13 107.63 Trade, Hotels etc. 310.50 345.51 384.33 452.22 529.10 618.83 708.07 827.87 971.70 1146.00 Banking&Insurance 82.65 96.64 111.43 134.13 171.31 210.96 295.15 305.01 399.15 467.88 RealEstateetc. 116.17 126.45 136.13 148.43 164.46 178.06 195.41 214.07 234.89 261.65 PublicAdmin&Defence 125.11 149.33 179.48 208.58 241.33 271.09 314.41 362.50 400.05 453.09 Other Services 132.20 155.41 175.68 203.52 235.67 279.81 336.15 387.30 439.26 509.91 GDP at Factor Cost 2337.99 2600.30 2948.51 3527.06 4086.62 4778.14 5527.68 6301.82 7231.03 8541.03 Source: CSO, National Accounts Statistics 1996 -166- Table Al.2 (b) Gross Domestic Product at Factor Cost - By Industry of Origin (Rs. billion at 198081 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 542.18 532.81 534.79 622.14 632.63 656.53 641.18 680.17 702.31 736.88 Agriculture 498.55 489.95 492.58 579.40 585.68 609.91 593.98 633.35 654.93 688.51 Forestry&Logging 31.81 30.90 29.86 29.40 31.95 31.05 30.83 29.50 28.87 29.02 Fishing 11.82 11.96 12.35 13.34 15.00 15.57 16.37 17.32 18.51 19.35 Industry Sector 432.25 463.82 493.67 538.66 593.98 637.00 628.67 654.72 682.51 739.02 Mining&Quarrying 26.23 29.78 30.80 35.42 38.01 42.07 43.62 44.12 45.93 47.91 Manufacturing 303.20 324.45 348.18 378.65 422.85 448.63 432.00 449.89 469.33 511.48 Registered 184.53 195.21 209.02 231.26 263.36 276.57 270.24 278.41 290.52 314.09 Unregistered 118.67 129.24 139.16 147.39 159.49 172.06 161.76 171.48 178.81 197.39 Electricity,Gas &Water 30.99 34.22 36.92 40.80 45.05 47.97 52.58 56.96 61.10 65.99 Construction 71.83 75.37 77.77 83.79 88.07 98.33 100.47 103.75 106.15 113.64 Services Sector 591.23 636.08 674.76 723.81 787.92 829.00 869.98 913.98 975.82 1034.20 Transport,Storage&Com. 79.51 84.83 92.27 98.04 106.63 111.64 117.85 124.32 131.38 142.31 Railways 14.04 15.14 15.76 15.60 16.23 16.77 17.78 17.58 17.46 17.69 OtherTransport 53.09 56.51 62.61 67.92 75.01 78.53 82.75 87.72 92.95 100.59 Storage 1.63 1.70 1.69 1.64 1.70 1.77 1.75 1.77 1.83 1.88 Communication 10.75 11.48 12.21 12.88 13.69 14.57 15.57 17.25 19.14 22.15 Trade, Hotels etc. 196.49 208.52 218.01 233.85 252.31 265.80 268.27 286.52 310.26 334.81 Banking&Insurance 58.28 66.92 73.99 86.23 102.69 111.69 131.07 134.67 151.86 158.89 RealEstateetc. 88.80 92.24 94.72 97.93 101.34 105.31 108.65 112.23 116.00 120.48 PublicAdmin&Defence 80.16 88.07 97.04 103.42 112.14 113.28 115.70 121.70 124.99 128.75 OtherServices 87.99 95.50 98.73 104.34 112.81 121.28 128.44 134.54 141.33 148.96 GDPatFactorCost 1565.66 1632.71 1703.22 1884.61 2014.53 2122.53 2139.83 2248.87 2360.64 2510.10 Source: CSO, National Accounts Statistics 1996. -167- Table A1.2 (c) Implicit Price Deflators for GDP at Factor Cost (1980-81=100) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 142.43 154.68 172.74 183.36 200.83 225.43 269.46 283.82 315.74 360.86 Agriculture 140.33 151.86 169 55 179.67 197.12 221.61 268.19 280.90 312.95 356.04 Forestry & Logging 166.17 186.34 206.90 232.24 244.85 26670 272.14 300.14 320.40 338.11 Fishing 167.01 188.13 217.49 235.53 252.07 292 74 310.45 362.64 407.02 566.56 Industry Sector 152.26 159.00 169.81 185.78 201.51 219.82 245.08 272.41 293.81 323.15 Mining & Quarrying 236.29 228.21 230.03 259.97 271.19 280 13 293.51 330.62 369.02 393.76 Manufacturing 137.78 142.29 151.83 166.02 182.28 198.74 222.93 246.73 263.09 290.30 Registered 139.85 144 74 154.09 168.86 183.66 200.86 225.14 247.16 263.35 287.38 Unregistered 134.57 138 59 148.45 161.56 179 99 195.32 219.23 246.04 262.67 294.96 Electricity,Gas &Water 157.92 162.68 169.77 179.53 193.63 218.14 241.92 282.72 309.12 341.05 Construction 180.25 201.90 226.45 246 77 267.81 291.02 320.95 353.36 388.24 430.83 Services Sector 153.51 163.30 175.83 191.43 205.50 228.94 259.69 283.14 308.29 337.82 Transport, Storage & Com, 177.31 194.94 21608 243.49 260.07 303.77 347.93 395.00 428.73 460.42 Railways 223.36 248.68 276.40 304 55 343.50 383.60 412.94 480.43 552.58 609.55 OtherTransport 171.41 185.98 199.14 224.22 237.10 284.11 332.59 376.93 401.22 430.55 Storage 159.51 164.71 187.57 203.66 228.24 251.41 272.57 289.83 313.11 354.79 Communication 149.02 172.65 229.07 276.24 290.94 324.23 363.71 410.67 460.45 485.91 Trade,Hotelsetc. 158.02 165.70 17629 193.38 209.70 232.82 263.94 288.94 313.19 342.28 Banking & insurance 141.82 144.41 150.60 155.55 166.82 188.88 225.19 226.49 262.84 294.47 RealEstateetc. 130.82 13709 143.72 151.57 16229 169.08 179.85 190.74 202.49 217.17 PublicAdmin&Defence 156.08 169.56 184.95 201.68 215.20 239.31 271.75 297.86 320.07 351.91 OtherServices 150.24 162.73 177.94 195.05 208.91 230.71 261.72 287.87 310.80 342.31 GDPatFactorCost 149.33 159.26 173.11 187 15 202.86 225.12 258.32 280.22 306.32 340.27 Source: Derived from Tables 1.2(a) and 1.2(b). -168- Table Al.3 Gross Savings and Investment (Rs. billion) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 (At current prices) GROSSNATIONALSAVINGS 561.05 601.71 665.82 839.48 978.98 1169.55 1360.50 1582.88 1688.60 2104.27 Households 423.30 469.57 535.69 675.28 788.25 965.79 1046.72 1276.27 1368.22 1584.75 Privatecorporatesector 53.18 52.12 57.90 83.19 116.50 149.40 194.90 198.41 276.66 359.66 Publieseetor 84.57 80.02 72.23 81.01 74.23 54.36 118.88 108.20 43.72 159.86 Foreip Savings 73.37 77.28 83.00 124.63 122.97 182.01 40.18 112.60 21.49 84.93 GROSS DOMESTIC INVESTMENT 634.42 678.99 748.82 964.11 1101.95 1351.56 1400.68 1695.48 1710.09 2189.20 Change instocks 91.87 58.47 26.88 i07.42 74.20 111.52 35.65 108.10 -12.37 58.56 GROSS FIXEDCAPITAL FORMATION 542.55 620.52 721.94 856.69 1027.75 1240.04 1365.03 1587.38 1722.46 2130.64 By Type of Asset: Construction 274.53 305.73 347.87 414.45 478.92 583.63 669.32 755.07 821.15 970.25 Machinery&Equipment 268.02 314.79 374.07 442.24 548.83 656.41 695.71 832.31 901.31 1160.39 By Sector Public sector 275.01 332.54 345.71 398.66 438.62 501.76 587.37 601.00 672.01 818.28 Private sector 267.54 287.98 376.23 458.03 589.13 738.28 777.66 986.38 1050.45 1312.36 GDPmpatcurrentprices 2622.43 2929.49 3332.01 3957.82 4568.21 5355.34 6167.99 7053.28 8010.32 9456.15 (At 1980-81 prices) GROSS DOMESTIC INVESTMENT 398.47 401.71 417.86 495.77 506.84 568.85 506.33 568.70 535.63 641.58 Change in Stocks 68.73 41.74 18.31 68.07 42.01 57.94 15.87 44.43 -6.26 19.51 GROSS FIXED CAPITAL FORMATION 329.74 359.97 399.55 427.70 464.83 510.91 490.46 524.27 541.89 622.07 By Type of Asset: Construction 139.60 145.90 150.45 164.23 170.69 187.57 191.91 197.14 196.46 213.77 Machinery&Equipment 190.14 214.07 249.10 263.47 294.14 323.34 298.55 327.13 345.43 408.30 By Sector: Public sector 170.80 192.31 186.60 195.39 196.51 206.01 210.12 194.98 207.65 236.69 Private sector 158.94 167.66 212.95 232.31 268.32 304.90 280.34 329.29 334.24 385.38 Source: CSO, National Accounts Statistics 1996. -169- Table AI.4 Disposable Income and Its Uses (Rs. billion at current prices) 1985-86 1986-87 1987-88 1988-89 19S9-90 1990-91 1991-92 1992-93 1993-94 1994-95 GDPmp 2622.4 2929.5 3332.0 3957.8 4568.2 5355.3 6168.0 7053.3 8010.3 9456.2 Net Factor Income from abroad -19.0 -26.2 -32.1 -38.1 -48.8 -67.4 -93.9 -99.1 -125.6 -122.6 Other current transfers 27.0 29.8 35.0 38.4 38.0 37.1 92.8 80.3 120.0 194.7 Disposable income 2630.4 2933.1 3334.9 3958.1 4557.4 5325.1 6166.8 7034.5 8004.8 9528.2 Private disposable income 2254.1 2506.8 2854.3 3403.8 3941.2 4653.0 5353.4 6140.3 7064.3 8355.8 Public disposable income 376.3 426.3 480.7 554.3 616.3 672.2 313.5 894.2 940.5 1172.4 Gross National Savings 561.1 601.7 665.8 839.5 979.0 1169.6 1360.5 1582.9 1688.6 2104.3 Private savings 476.5 521.7 593.6 758.5 904.7 1115.2 1241.6 1474.7 1644.9 1944.4 Public savings 84.6 80.0 72.2 81.0 74.2 54.4 118.9 108.2 43.7 159.9 Final Consumption 2069.4 2331.4 2669.1 3118.6 3578.4 4155.6 4806.3 5451.6 6316.2 7423.9 PrivateConsumption 1777.6 1985.1 2260.7 2645.3 3036.4 3537.3 4111.8 4665.7 5419.4 6411.4 Public Consumption 291.7 346.3 408.4 473.3 542.0 617.8 694.6 786.0 896.8 1012.5 Source: CSO, National Accounts Statistics 1996; World Bank Staff estimates. -170- Table Al.5 (a) Gross Domestic Investment by Industry of Origin (Rs. billion at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 82.7 77.3 91.8 99.8 111.1 128.5 147.8 181.2 202.1 230.1 Agriculture 70.2 70.5 83.9 90.6 100.3 115.9 133.9 166.2 184.8 209.7 Forestry & Logging 2.0 2.4 2.6 3.0 3.8 4.6 4.4 4.5 4.8 5.0 Fishing 10.5 4.5 5.4 6.3 7.1 8.1 9.4 10.5 12.5 15.4 Industry Sector 265.6 265.6 329.2 470.8 454.0 543.4 572.8 765.2 674.6 926.3 Mining & Quarrying 40.3 44.6 42.2 47.9 63.0 66.3 63.4 65.9 64.3 153.9 Manufacturing 142.0 115.4 170.9 298.6 248.6 311.0 303.0 484.5 370.2 510.5 Registered 101.3 69.3 118.7 238.1 171.5 223.8 223.1 378.0 259.8 355.8 Unregistered 40.7 46.1 52.2 60.5 77.2 87.1 80.0 106.6 110.4 154.7 Electricity,Gas&Water 70.6 95.1 103.8 113.0 123.4 144.1 189.0 189.8 213.8 233.0 Construction 12.6 10.4 12.4 11.3 18.9 22.1 17.5 24.9 26.2 29.0 Services Sector 263.4 317.7 274.1 315.0 405.8 511.1 562.9 594.2 759.6 854.7 Transport, Storage & Com. 60.4 78.8 80.6 106.4 128.2 143.3 161.6 197.5 238.4 261.2 Railways 16.7 22.9 21.5 26.4 26.4 30.8 33.2 49.2 55.8 59.6 Other Transport 34.1 44.6 44.0 57.9 73.6 83.3 95.8 97.8 124.4 128.9 Storage 0.6 0.7 0.8 0.8 0.9 0.7 0.5 0.5 0.6 0.6 Communication 9.1 10.6 14.3 21.4 27.3 28.6 32.1 50.0 57.5 72.1 Trade, Hotels etc. 73.5 78.2 17.1 3.0 56.0 87.9 75.1 30.1 95.5 110.0 Banking & Insurance 5.5 8.7 14.8 21.1 23.6 30.9 49.8 47.3 68.2 70.5 Real Estate etc. 68.8 80.9 90.1 101.6 118.1 147.4 168.2 194.1 218.1 245.8 Public Admin &Defence 48.0 55.0 55.1 62.2 55.8 75.1 82.3 95.2 108.4 128.5 OtherServices 7.3 16.2 16.5 20.8 24.2 26.5 26.0 30.1 31.2 38.7 GrossDomesticlnvestment 611.7 660.6 695.2 885.6 971.0 1183.0 1283.5 1540.5 1636.3 2011.1 Memo Items Gross Domestic lnvestment' 581.7 611.6 764.6 969.7 1138.2 1448.5 1440.2 1631.8 1733.3 2384.1 Errors & Omissions -52.8 -67.4 15.7 5.6 36.2 96.9 39.6 -63.7 23.2 194.9 Gross Domestic Investment 634.4 679.0 748.8 964.1 1102.0 1351.6 1400.7 1695.5 1710.1 2189.2 (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: CSO, National Accounts Statistics 1996. -171- Table Al.5 (b) Gross Domestic Investment by Industry of Origin (Rs. billion at 1980-81 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 46.5 43.6 47.8 47.3 47.9 50.8 52.1 58.7 61.2 64.3 Agriculture 43.3 40.1 44.1 43.5 43.5 45.9 47.3 53.7 55.9 58.6 Forestry & Logging 1.2 1.2 1.2 1.3 1.5 1.7 1.4 1.2 1.2 1.2 Fishing 2.0 2.2 2.4 2.6 2.9 3.1 3.4 3.8 4.1 4.5 Industry Sector 174.3 158.6 192.2 258.8 220.2 242.3 218.5 276.6 223.8 283.4 Mining & Quarrying 26.5 27.2 24.3 25.5 29.9 28.4 23.8 22.2 19.6 48.2 Manufacturing 94.1 67.4 101.6 170.1 122.6 141.9 118.2 180.8 124.8 161.0 Registered 69.2 41.5 74.4 141.0 88.3 106.4 91.1 145.8 91.2 116.2 Unregistered 24.9 25.9 27.2 29.1 34.4 35.6 27.2 34.9 33.5 44.8 Electricity,Gas &Water 45.7 57.3 58.6 56.6 57.7 61.5 69.3 64.3 69.9 69.5 Construction 8.0 6.6 7.7 6.7 10.0 10.4 7.1 9.3 9.6 9.7 Services Sector 165.8 181.9 136.8 141.5 174.5 205.8 196.6 186.0 231.5 239.5 Transport, Storage & Com. 38.8 48.4 45.7 53.8 58.8 60.4 59.9 67.6 79.1 30.8 Railways 9.2 12.4 10.0 11.1 9.8 10.6 10.0 14.4 15.7 15.5 Other Transport 23.6 29.6 27.4 31.9 36.5 37.9 38.6 37.0 45.6 44.2 Storage 0.3 0.4 0.3 0.3 0.4 0.3 0.1 0.1 0.2 0.1 Communication 5.7 6.1 7.9 10.5 12.1 11.7 11.2 16.1 17.6 21.0 Trade, Hotels etc. 53.6 54.1 10.0 -0.5 28.7 43.2 31.4 9.2 34.1 35.7 Banking & Insurance 3.4 5.2 8.8 11.3 11.4 13.7 19.4 16.9 23.4 22.1 Real Estate etc. 34.4 35.9 36.6 38.6 42.3 49.7 50.0 54.1 55.7 57.7 PublicAdmin&Defence 28.2 29.8 27.4 28.7 23.1 28.4 27.1 28.9 30.2 32.7 Other Services 7.5 8.5 8.4 9.6 10.2 10.3 8.7 9.3 9.1 10.4 Gross Domestic Investment 386.5 384.1 376.8 447.6 442.6 498.9 467.2 521.4 516.5 592.1 Memo Items Gross Domestic Investment' 366.4 362.6 426.6 498.6 523.2 608.8 520.5 547.7 543.6 698.5 Effors & Omissions -32.1 -39.1 8.7 2.8 16.4 39.9 14.2 -21.0 8.0 56.9 Gross Domestic Investment 398.5 401.7 417.9 495.8 506.8 568.9 506.3 568.7 535.6 641.6 (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: CSO, National Accounts Statistics 1996. -172- Table Al.5 (c) Investment Deflators by Industry of Use (1980-81=100) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Agricultural Sector 177.9 177.6 192.2 210.9 231.9 253.2 283.5 308.6 330.3 358.0 Agriculture 162.2 175.6 190.1 208.5 230.3 252.3 283.1 309.4 330.8 358.1 Forestry & Logging 166.9 190.3 206.5 234.1 252.3 271.4 316.4 362.1 391.0 420.2 Fishing 524.5 205.9 223.3 239.8 246.0 256.4 274.9 279.7 304.4 340.6 Industry Sector 152.4 167.5 171.3 181.9 206.2 224.3 262.2 276.6 301.4 321.2 Mining&Quarrying 151.9 163.8 173.3 188.0 210.7 233.0 266.2 296.2 328.2 319.2 Manufacturing 150.9 171.2 168.2 175.6 202.7 219.1 256.4 268.1 296.8 317.1 Registered 146.4 167.1 159.5 168.9 194.3 210.5 245.0 259.2 284.8 306.3 Unregistered 163.4 177.9 192.1 207.9 224.4 244.9 294.5 305.1 329.3 345.3 Electricity,Gas&Water 154.7 166.0 177.3 199.7 213.9 234.2 272.6 295.1 305.9 335.1 Construction 157.9 157.5 160.8 169.5 190.2 212.8 244.8 267.8 273.3 299.8 Services Sector 158.9 174.6 200.4 222.7 232.6 248.3 286.3 319.4 328.2 356.9 Transport,Storage&Com. 155.9 162.6 176.3 197.8 218.2 237.2 269.6 292.2 301.5 323.1 Railways 181.9 184.5 214.3 237.4 269.1 291.8 332.7 342.6 355.3 383.7 Other Transport 144.5 150.8 160.3 181.4 201.8 219.8 248.0 2642 273.0 291.7 Storage 190.3 200.0 229.4 253.3 251.4 255.6 353.8 384.6 381.3 430.8 Communication 159.5 173.4 181.2 204.2 225.7 243.9 287.0 310.6 326.6 343.6 Trade, Hotels etc. 137.1 144.6 171.1 -592.0 194.9 203.4 239.2 327.6 280.3 308.0 Banking & lnsurance 160.2 165.8 168.3 186.2 206.7 225.1 256.1 279.3 291.7 318.7 Real Estate etc. 200.2 225.3 246.3 263.3 279.4 296.2 336.4 359.0 391.3 425.8 PublicAdmin&Defence 170.3 184.4 200.7 216.9 241.3 264.6 303.5 328.8 359.2 393.0 Other Services 97.3 191.4 198.1 216.6 236.7 256.7 297.9 323.1 343.6 373.1 Gross Domestic Investment 158.2 172.0 184.5 197.9 219.4 237.1 274.7 295.5 316.8 339.7 Memo Items GrossDomesticInvestment' 158.7 168.7 179.2 194.5 217.5 237.9 276.7 298.0 318.9 341.3 Gross Domestic Investment 159.2 169.0 179.2 194.5 217.4 237.6 276.6 298.1 319.3 341.2 (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: CSO, National Accounts Statistics 1996. -173- Table A1.6 (a) Gross Domestic Investment in Public Sector (Rs. billion at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Agricultural Sector 28.17 28.95 33.03 34.42 33.54 36.28 36.53 41.75 50.05 Agriculture 26.21 26.67 30.57 31.62 29.89 31.93 32.30 37.50 45.56 Forestry & Logging 1.93 2.23 2.42 2.78 3.62 4.33 4.20 4.23 4.47 Fishing 0.03 0.05 0.04 0.02 0.03 0.02 0.03 0.02 0.02 Industry Sector 166.28 188.05 192.84 204.32 235.48 277.65 324.88 309.12 292.68 Mining & Quarrying 38.89 42.09 40.96 47.59 62.46 65.04 61.92 63.76 62.99 Manufacturing 57.43 55.87 50.73 51.72 54.66 71.45 85.08 82.95 49.41 Electricity,Gas&Water 67.23 89.57 98.81 105.62 117.55 137.69 174.10 158.41 174.99 Construction 2.73 0.52 2.34 -0.61 0.81 3.47 3.78 4.00 5.29 Services Sector 99.72 124.42 104.72 154.91 186.64 207.58 203.96 276.22 344.76 Transport, Storage &Com. 34.28 50.78 46.40 61.50 75.92 79.58 92.16 123.75 157.55 Railways 16.70 22.88 21.52 26.37 26.43 30.78 33.17 49.20 55.81 Other Transport 8.10 16.78 10.12 13.48 21.86 19.73 26.67 24.39 43.95 Storage 0.42 0.56 0.46 0.27 0.36 0.46 0.20 0.18 0.30 Communication 9.06 10.56 14.30 21.38 27.27 28.61 32.12 49.98 57.49 Trade, Hotels etc. 1.20 -2.06 -22.61 -2.98 17.48 14.54 -16.67 12.73 32.27 Banking & Insurance 3.16 4.92 9.49 14.82 16.99 17.98 23.59 18.04 19.28 RealEstateetc. 5.08 6.51 6.70 7.57 7.32 6.16 8.66 10.19 11.25 Public Admin & Defence 48.03 55.01 55.08 62.24 55.78 75.13 82.27 95.16 108.36 Other Services 7.97 9.26 9.66 11.76 13.15 14.19 13.95 16.35 16.05 Gross Domestic Investment 294.17 341.42 330.59 393.65 455.66 521.51 565.37 627.09 687.49 Source: CSO, National Accounts Statistics 1996. -174 - Table Al.6 (b) Gross Domestic Investment in Public Sector (Rs. billion at 1980-81 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Agicutural Sector 16.37 15.44 15.76 14.82 13.01 13.13 11.43 11.82 13.17 Agiculture 15.20 14.25 14.58 13.62 11.56 11.53 10.13 10.55 11.99 Forestry&Logging 1.15 1.16 1.16 1.19 1.43 1.59 1.29 1.27 1.17 Fishing 0.02 0.03 0.02 0.01 0.02 0.01 0.01 0.00 0.01 InduslrySector 110.27 114.65 110.85 105.93 111.40 120.36 120.84 101.13 101.57 Mining&Quarrying 25.62 25.67 23.59 24.76 29.63 27.85 22.19 20.63 22.79 Manufacturing 39.65 34.68 30.36 28.60 26.49 32.49 34.18 24.82 22.05 Electricity,Gas&Watcr 43.35 53.85 55.59 52.65 54.81 58.56 63.35 54.58 55.69 Construction 1.65 0.45 1.31 -0.08 0.47 1.46 1.12 1.10 1.04 Savices Scctor 58.40 69.02 50.73 72.20 81.98 82.39 77.85 82.03 92.91 Transport, Storage & Con. 20.43 29.77 24.34 28.90 32.74 31.14 33.46 38.44 47.86 Railways 9.18 12.40 10.04 11.11 9.82 10.55 10.31 13.90 13.83 OtherTransport 5.35 10.99 6.21 7.22, 10.69 8.68 10.66 8.64 15.99 Storage 0.22 0.29 0.20 0.10 0.15 0.18 0.10 0.09 0.11 Communication 5.68 6.09 7.89 10.47 12.08 11.73 12.39 15.81 17.93 Trade, Hotels ctc. 0.62 -1.65 -14.53 -1.94 9.56 7.19 0.51 0.48 0.55 Banking & Insurance 1.95 3.02 5.71 8.05 8.26 8.03 9.31 6.61 6.69 Real Estate etc. 2.56 2.99 2.82 2.98 2.69 2.12 2.64 2.87 2.94 Public Admin & Defence 28.21 29.83 27.44 28.70 23.12 28.39 27.20 28.66 30.07 OtherServices 4.63 5.06 4.95 5.51 5.61 5.52 4.73 4.97 4.80 Grow DomesticInvcstment 185.04 199.11 177.34 192.95 206.39 215.88 210.12 194.98 207.65 Source: CSO, National Accounts Statistics 1996. -175- Table A2.1 Balance of Payment' (USS million at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 ExportsofGoodsandNon-FactorServices 12773 13637 16217 18213 21201 23028 23287 23585 28925 34141 Merchandise (fob) 9463 10420 12646 14257 16955 18477 18266 18869 22700 26857 Non-factor Services 3310 3217 3571 3956 4246 4551 5021 4716 6225 7284 Imports of Goods and Non-Factor Services 19422 19962 22843 26843 27934 31485 24879 26825 29433 39450 Merchandise (cif) 17298 17740 19816 23618 24411 27914 21064 23237 23985 31672 Non-factor Services 2124 2222 3027 3225 3523 3571 3815 3588 5448 7778 Trade Balance -7835 -7320 -7170 -9361 -7456 -9437 -2798 -4368 -1285 -4815 Nonfactor Services Balance 1186 995 544 731 723 980 1206 1128. 777 -494 Resource Balance -6649 -6325 -6626 -8630 -6733 -8457 -1592 -3240 -508 -5309 Net Factor Income -1553 -2046 -2472 -2633 -2928 -3753 -3826 -3422 -4002 -3905 Factor Service Receipts 547 501 446 397 936 1123 758 733 272 1264 Factor Service Paymentsb 2100 2547 2918 3030 3864 4876 4584 4155 4274 5169 Net Current Transfers 2207 2327 2698 2654 2281 2069 3783 2773 3825 6200 Transfer Receipts 2219 2339 2724 2670 2297 2083 3798 2784 3850 6220 Transfer Payments 12 12 26 16 16 14 15 11 25 20 Current Account Balance -5995 -6044 -6400 -8609 -7380 -10141 -1635 -3889 -685 -3014 Foreign Investment 160 208 181 287 350 165 158 587 4110 4895 Direct Foreign Investment 160 208 181 287 350 165 150 341 620 1314 Portfolio Investment 0 0 0 0 0 0 8 246 3490 3581 Official GrantAid 359 403 410 406 500 462 461 363 370 390 Net Medium & Long-Term Capital' 2120 2490 3417 3846 3074 2653 4319 1636 1716 278 Gross Disbursements 5009 6605 7304 8123 7332 6586 7178 6587 6824 5938 Principal Repayments 1310 2290 1895 1949 1963 2397 2569 2949 4169 4814 OtherLTlnflows(NRI) 1579 1825 1992 2328 2295 1536 290 2001 940 847 CapitalFlowsNEI 2588 1837 1144 1520 1320 2525 -982 -961 2086 3462 Net Short-Term Capital 686 588 727 685 1143 1043 -1474 -730 -2714 1463 Others d 474 -102 -731 141 167 -1193 -1240 -878 -745 -1050 Capitalflowsn.e.i.' 1428 1351 1148 694 10 2675 1732 647 5545 3049 Overall Balance 812 720 744 -222 158 -2799 2611 -263 8537 6858 Net MF Credit -264 -648 -1082 -1210 -1008 1028 773 1290 190 -1174 Change in Reserves (Exel. Gold) -548 -72 338 1432 850 1771 -3384 -1027 -8727 -5684 (- = increase) Memorandum Items EndofYearGross Reserves (Excl. Gold) 6657 6729 6391 4959 4109 2338 5722 6749 15476 21160 Reserves in Months of Imports 4.6 4.6 3.9 2.5 2.0 1.0 3.3 3.5 7.7 8.0 Current Account Deficit/ GDP 2.8% 2.6% 2.5% 3.1% 2.7% 3.4% 0.6% 1.6%/ 0.3% 1.0%e Debt Service Ratio f 22.7% 32.0% 29.4% 28.0% 27.6% 30.1% 26.9% 27.0%/ 25.6% 25.3% a. BOP based on revised treatment of non-custom imports as adopted by GOI from 1990-91 onwards. b. Includes interest on military debt to FSU and retums on foreign investments. c. Excluding non-resident deposits, shown below under Other LT Inflows (NRI). d. Corresponds to bilateral balance or servicing of the Russia debt from 1990-91 onwards. e. Residual item including reserve valuation changes, rupee trade imbalance, etc. f. As proportion of gross current receipts. Source: Govermment of India; Reserve Bank of India; Ministry of Commerce; Ministry of Finance, Economicurvey. various issues; World Bank Staff estimates. -176- Table A2.2 (a) Merchandise Exports (US$ million at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Primary Exports 3152 3279 3287 3254 3853 4354 4189 3935 5002 5242 Fish 334 421 411 435 412 535 588 602 813.5 1127 Rice 160 154 261 229 256 257 308 337 410.3 384 Cashews 184 256 243 191 221 249 276 259 334.1 397 Coffee 217 232 202 203 208 140 135 130 174.1 335 Tea 511 451 463 421 550 596 494 337 337.6 311 Spices 227 218 260 190 170 133 161 136 181.4 195 Iron Ore 473 428 427 465 557 584 585 381 438 413 OtherPrimary 1046 1118 1020 1121 1478 1859 1641 1753 2313 2080 Manufactured Exports 5639 6457 8797 10693 12715 13781 13773 14607 17233 21088 Chemicals 407 456 618 890 1288 1176 1591 1378 1813.2 2434 Leather Manufactures 629 721 964 1051 1170 1448 1276 1278 1299.6 1611 Textiles 860 994 1407 1312 1598 2266 2164 2153 2536.4 3297 Garments 872 1041 1403 1452 1936 2235 2211 2394 2585.9 3282 Gems & Jewellery 1228 1622 2015 3033 3179 2923 2753 3073 3995.2 4501 Engineering Goods 779 886 1141 1558 1967 2157 2246 2458 3023.3 3486 Petroleum Products 417 321 500 349 418 522 417 476 398 440 Other Manufactures' 447 416 750 1049 1159 1053 1115 1398 1582 2039 TOTAL EXPORTS (Commerce)b 8791 9736 12085 13948 16569 18136 17962 18542 22235 26330 Statistical Discrepancy 672 684 561 310 387 341 304 327 465 527 TOTAL EXPORTS (B.O.P.) 9463 10420 12646 14257 16955 18477 18266 18869 22700 26857 a. Including unclassified exports. b. Net of crude petroleum exports. S.ource: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survys various issues; World Bank Staff estimates. -177- Table A2.2 (b) Merchandise Exports (USS million at 1980-81 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Primary Exports 3078 3184 3099 3220 3986 4499 4368 4530 5619 5276 Fish 325 357 354 386 424 480 571 571 424 778 Rice 96 97 152 137 165 197 265 227 300 348 Cashews 204 236 229 202 266 305 288 344 404 441 Coffee 295 231 317 291 437 339 343 445 437 453 Tea 471 418 479 451 487 463 503 390 487 353 Spices 153 138 114 122 115 110 115 104 115 137 Iron Ore 497 468 461 541 578 530 490 344 578 428 Other Primary 1037 1239 994 1090 1513 2075 1793 2106 2874 2339 Manufactured Exports 5875 6698 8414 9184 10418 11303 12678 14142 17009 18413 Chemicals 377 463 542 847 1182 1585 2157 1333 1724 2269 LeatherManufactures 781 770 899 958 962 980 957 1071 1151 1413 Textiles 669 757 1074 915 1123 1329 1873 2513 2267 2869 Garments 837 917 1142 1137 1485 1641 1759 1823 1807 2177 Gems & Jewellery 1021 1419 1602 2082 1909 1573 1646 2082 2641 2983 Engineering Goods 952 978 1391 1728 2221 2470 2514 3229 5018 4457 Petroleum Products 535 645 986 694 784 917 980 1242 1336 1074 Other Manufactures' 704 749 777 823 752 808 793 850 2401 2245 TOTAL EXPORTS (Commerce)b 8954 9883 11513 12403 14404 15802 17046 18673 22628 23689 Statistical Discrepancy 684 695 535 275 336 298 289 329 473 474 TOTAL EXPORTS (B.O.P.) 9638 10577 12048 12679 14740 16100 17335 19001 23101 24163 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 Survy, various issues; World Bank Staff estimates. -178- Table A2.2 (c) Export Unit Value Indices (US$ terms: 1980-81 = 100) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Primary Exports 102.4 103.0 106.1 101.1 96.7 96.8 95.9 86.9 89.0 99.4 Fish 102.9 118.1 116.1 112.7 97.2 111.5 103.1 105.5 191.7 144.7 Rice 167.3 159.0 172.1 167.4 155.6 130.5 116.3 148.7 136.8 110.4 Cashews 90.2 108.6 106.3 94.5 82.9 81.7 95.8 75.1 82.7 90.1 Coffee 73.4 100.4 63.7 69.7 47.7 41.4 39.5 29.2 39.9 74.1 Tea 108.6 107.9 96.7 93.3 113.0 128.8 98.2 86.6 69.3 87.9 Spices 148.1 158.2 228.0 155.2 147.3 121.3 139.3 130.4 157.2 142.8 IronOre 95.1 91.4 92.7 85.9 96.4 110.2 119.4 110.9 75.8 96.5 Other Primary 100.8 90.3 102.6 102.9 97.7 89.6 91.5 83.2 80.5 88.9 ManufacturedExports 96.0 96.4 104.6 116.4 122.1 121.9 108.6 103.3 101.3 114.5 Chemicals 107.9 98.4 113.9 105.0 108.9 74.2 73.8 103.4 105.2 107.3 LeatherManufactures 80.6 93.6 107.2 109.8 121.7 147.9 133.4 119.3 112.9 114.0 Textiles 128.7 131.4 131.0 143.4 142.3 170.5 115.5 85.7 111.9 114.9 Garments 104.2 113.5 122.9 127.7 130.4 136.2 125.7 131.3 143.1 150.8 Gems&Jewellery 120.3 114.3 125.7 145.7 166.5 185.8 167.3 147.6 151.3 150.9 Engineering Goods 81.8 90.6 82.0 90.1 88.6 87.3 89.4 76.1 60.3 78.2 Petroleum Products 77.9 49.8 50.8 50.3 53.4 57.0 42.5 38.3 29.8 40.9 Other Manufactures 63.5 55.6 96.4 127.4 154.0 130.3 140.5 164.5 65.9 90.8 TOTAL EXPORTS (Commerce)b 98.2 98.5 105.0 112.4 115.0 114.8 105.4 99.3 98.3 111.2 StatisticalDiscrepancy 98.2 98.5 105.0 112.4 115.0 114.8 105.4 99.3 98.3 111.2 TOTAL EXPORTS (B.O.P.) 98.2 98.5 105.0 112.4 115.0 114.8 105.4 99.3 98.3 111.2 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. -179- Table A2.3 (a) Merchandise Imports (USS million at current prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Food 1321 1068 1292 1203 714 690 424 702 550 1464 Foodgrains 90 37 25 437 227 102 70 334 93 29 Edible Oils 600 479 709 503 127 182 101 58 53 199 Others 631 552 557 263 361 407 253 311 404 1236 OtherConsumerGoods 452 594 600 700 800 851 634 782 680 790 P.O.L 4054 2187 3148 2938 3766 6028 5364 5919 5753 5928 CrudePetroleum' 3013 1672 2395 1891 2455 3423 3194 3711 3468 3428 Petroleum Products 1041 515 753 1047 1311 2605 2170 2208 2285 2500 Capital Goods b 3503 5073 5064 4803 5304 5833 4233 3743 5312 6366 Intermediate: PRIMARY 2156 2474 2997 3800 4488 4653 3801 4553 4533 4296 FertilizerRawMaterial 313 218 243 301 329 348 309 279 194 288 Gems 899 1170 1538 1984 2546 2082 1957 2442 2634 1630 Other 944 1087 1217 1515 1613 2223 1534 1832 1705 2378 Intermediate: MANUFACTURES 4471 4316 4054 6053 6147 6018 5673 6183 6479 9810 Fertilizer Manufactures 860 387 132 341 737 636 645 699 632 764 Iron&Steel 1140 1134 982 1341 1383 1177 799 779 795 2438 Non-Ferrous Metals 443 324 444 544 752 614 341 395 479 941 Others 2028 2470 2496 3827 3275 3591 3888 4311 4574 5668 TOTALIMPORTS(Commerce)' 15957 15712 17156 19497 21219 24073 20128 21882 23307 28654 Statistical Discrepancy 1341 2028 2660 4121 3192 3841 936 1355 678 3018 TOTAL IMPORTS* 17298 17740 19816 23618 24411 27914 21064 23237 23985 31672 a. Net of crude oil exports. b. 1987-88 onwards Capital Goods includes Project Goods. Sowrce: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey. various issues; World Bank Staff estimates. -180- Table A2.3 (b) Merchandise Imports (US$ million at 1980-81 prices) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Food 1454 1527 1710 1968 865 807 445 1014 615 1365 Foodgrains 113 56 35 1021 310 126 77 662 165 33 Edible Oils 564 770 980 539 160 259 111 51 56 171 Others 777 701 695 409 395 422 256 302 394 1162 Other Consumer Goods 471 567 513 555 643 647 472 558 486 545 P.O.L 5240 5053 5944 6734 7272 8287 9409 11391 12067 11784 Crude Petroleum 3956 4041 4630 4651 5089 5405 6264 7637 8047 7141 Petroleum Products 1285 1012 1314 2083 2183 2882 3145 3755 4020 4642 CapitalGoodSb 3875 4703 4203 3702 4142 4311 2610 2594 3692 4269 Intermediate: PRIMARY 2461 3038 2419 2841 3363 3314 2646 3071 3099 2821 Fertilizer Raw Material 140 197 161 178 157 174 151 147 121 169 Gems 977 1127 1262 1511 1965 1521 1400 1673 1810 1080 Other 1344 1714 996 1151 1242 1619 1095 1251 1168 1572 Intermediate: MANUFACTURES 5468 4644 3529 4728 5057 4797 4335 4817 4958 6871 FertilizerManufactures 1163 813 320 472 876 808 830 1117 989 770 Iron & Steel 1319 1110 874 1275 1162 936 622 581 594 1759 Non-Ferrous Metals 642 481 540 553 775 599 325 361 440 833 Otiers 2344 2240 1795 2428 2244 2454 2557 2758 2935 3510 TOTAL IMPORTS (Commerce)' 18970 19531 18318 20528 21342 22163 19916 23446 24918 27655 Statistical Discrepancy 1594 2521 2840 4339 3210 3536 926 1452 725 2913 TOTAL IMPORTS' 20564 22052 21158 24867 24552 25699 20842 24898 25643 30568 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, EconomicSurvey, various issues; World Bank Staff estimates. -181- Table A2.3 (c) Import Unit Value Indices (US$ Terms: 1980-81 = 100) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Food 90.8 70.0 75.5 61.1 82.6 85.5 95.3 69.2 89.4 107.2 Foodgrains 79.6 66.1 72.0 42.8 73.1 80.6 91.4 50.4 56.1 89.4 EdibleOils 106.4 62.2 72.4 93.4 79.3 70.1 90.4 114.0 94.5 116.5 Others 81.1 78.8 80.2 64.5 91.4 96.4 98.6 102.9 102.6 106.4 OtherConsumerGoods 95.9 104.8 117.1 126.1 124.5 131.5 134.3 140.2 139.8 144.9 P.O.L 77.4 43.3 53.0 43.6 51.8 72.7 57.0 52.0 47.7 50.3 Crude Petroleum 76.2 41.4 51.7 40.7 48.2 63.3 51.0 48.6 43.1 48.0 Petroleum Products 81.0 50.9 57.3 50.3 60.1 90.4 69.0 58.8 56.8 53.8 Capital Goods 90.4 107.9 120.5 129.7 128.1 135.3 162.2 144.3 143.9 149.1 Intermediate: PRIMARY 87.6 81.5 123.9 133.8 133.4 140.4 143.6 148.3 146.3 152.3 FertilizerRawMaterial 223.6 110.5 150.7 168.7 209.6 200.0 204.7 190.1 160.9 170.5 Gems 92.0 103.8 121.9 131.3 129.6 136.9 139.8 146.0 145.6 150.9 Other 70.2 63.4 122.2 131.6 129.9 137.3 140.2 146.4 146.0 151.3 Intermediate: MANUFACTURES 81.8 92.9 114.9 128.0 121.6 125.4 130.9 128.3 130.7 142.8 Fertilizer Manufactures 73.9 47.6 41.3 72.3 84.2 78.7 77.7 62.5 63.9 99.2 Iron & Steel 86.4 102.1 112.3 105.2 119.0 125.7 128.4 134.1 133.7 138.6 Non-Ferrous Metals 69.0 67.5 82.3 98.3 97.0 102.5 104.7 109.3 109.0 113.0 Others 86.5 110.3 139.1 157.6 145.9 146.3 152.1 156.3 155.8 161.5 TOTAL IMPORTS (Commerce) 84.1 80.4 93.7 95.0 99.4 108.6 101.1 93.3 93.5 103.6 Statistical Discrepancy 84.1 80.4 93.7 95.0 99.4 108.6 101.1 93.3 93.5 103.6 TOTAL IMPORTS 84.1 80.4 93.7 95.0 99.4 108.6 101.1 93.3 93.5 103.6 Source: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey, various issues; World Bank Staff estimates. -182- Table A2.4 Invisibles on Current Account (US$ million) 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 GROSS RECEIPTS 6076 6057 6741 7023 7479 7757 9577 8233 10347 14768 Non-Factor Services 3310 3217 3571 3956 4246 4551 5021 4716 6225 7284 of which: Transport 494 538 680 898 907 983 939 982 2327 1460 Travel 972 1256 1431 1419 1433 1456 1977 2098 2075 2325 Others 1844 1423 1460 1639 1906 2112 2105 1636 1823 3499 Factor Income 547 501 446 397 936 1123 758 733 272 1264 Current Transfers 2219 2339 2724 2670 2297 2083 3798 2784 3850 6220 GROSS PAYMENTS 4236 4781 5971 6271 7403 8461 8414 7754 9747 12967 Non-Factor Services 2124 2222 3027 3225 3523 3571 3815 3588 5448 7778 of which: Transportb 667 585 870 1027 1115 1093 1289 1485 2250 3016 Travel 336 290 376 405 403 392 465 385 750 1205 Others 1121 1347 1781 1793 2005 2086 2061 1718 2448 3557 Factor Income 2100 2547 2918 3030 3864 4876 4584 4155 4274 5169 Current Transfers 12 12 26 16 16 14 15 1 1 25 20 NET RECEIPTS 1840 1277 770 752 76 -704 1163 479 600 1801 Non-Factor Services 1186 995 544 731 723 980 1206 1128 777 -494 of which: Transport -173 -47 -190 -129 -208 -110 -350 -503 77 -1556 Travel 636 966 1055 1014 1030 1064 1512 1713 1325 1120 Others 723 76 -321 -154 -99 26 44 -82 -625 -58 Factor Income -1553 -2046 -2472 -2633 -2928 -3753 -3826 -3422 -4002 -3905 Current Transfers 2207 2327 2698 2654 2281 2069 3783 2773 3825 6200 a. Excluding foreign grants, and including the Bhopal settlement in 1988-89. b. Excluding freight included in c.i.f value of merchandise imports. Sowrce: Ministry of Commerce (D.G.C.I.S); Reserve Bank of India; Ministry of Finance, Economic Survey. various issues; World Bank Staffestimates. -183- Table A2.5 Decomposition of Recent Export Growth (US$ million at current prices - annual averages) 1983-84 1989-90 Increase Contribution 88-89 94-95 to Growth (percent) Manufactured Exports 7039 15533 8494 87.3 Consumption goods 4592 9527 4935 50.7 Leather 730 1347 617 6.3 Gems (gross) 1699 3404 1705 17.5 Garments 1052 2441 1389 14.3 Textiles 1111 2336 1225 12.6 Investment goods 992 2556 1565 16.1 Intermediate goods 1456 3449 1994 20.5 Chemicals 515 1613 1098 11.3 Petroleum Prod. 358 445 87 0.9 Others b 582 1391 809 8.3 Prima Exports 3195 4429 1235 12.7 Fish 379 680 300 3.1 Rice 176 326 150 1.5 Cashews 195 289 94 1.0 Coffee 201 187 -14 -0.1 Tea 499 438 -61 -0.6 Spices 197 163 -34 -0.4 Iron Ore 428 493 65 0.7 Other Primary 1119 1854 735 7.6 TOTAL EXPORTS (Customs) ' 10234 19962 9728 100.0 Discrepancy 707 392 -315 TOTAL EXPORTS (BOP) 10941 20354 9413 Memo: Gems (Net) d 445 1189 744 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. -184- Table A3.1(a) External Debt Summary: Debt Outstanding and Disbursed (US$ million at current prices) 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. Public & Publicly Guar. LT 22769 24355 30284 37175 44379 48040 62775 69328 71875 77479 81668 87880 1. Official Creditors 18983 19236 22729 26396 30394 31221 43659 48429 49512 54018 56422 62553 a. Multilateral 9801 10462 12400 14268 16588 18060 19665 21768 23964 26130 27826 31485 aa. of whichlBRD 1779 1688 2396 3475 4661 5590 6614 7685 8459 9067 9870 11120 ab. of which IDA 7820 8545 9750 10529 11615 12019 12521 13312 14203 15339 15978 17666 b. Bilateral ' 9182 8774 10329 12129 13806 13161 23994 26661 25548 27888 28596 31067 2. Private Creditors 3786 5119 7555 10779 13985 16819 19116 20899 22363 23461 25245 25327 a. Commercial Banks 3228 3933 5728 7986 10934 13332 15076 16666 16576 17464 18901 18455 b. Suppliers Credits 96 466 629 805 715 632 539 434 430 588 756 1222 c.Bonds(includinglDB) 30 259 657 1117 1317 1876 2577 2948 4436 4351 4157 4134 d OtherPrivate 432 461 541 871 1019 979 924 851 921 1057 1431 1517 B.PrivateNon-GuaranteedLT 1185 1341 1497 1388 1652 1473 1551 1488 1545 1205 1770 1709 C. Total LT DOD (A+B) 23954 25696 31781 38563 46031 49513 64326 70816 73420 78684 83438 89589 D.UseoflMFCredit 4713 4456 4832 4768 4023 2573 1566 2623 3451 4799 5040 4312 E. Short-Term Debt 3338 3672 4358 4946 5673 6358 7501 8544 7070 6340 3626 5089 F. Total Extemal Debt (C+D+E) 32004 33825 40971 48277 55727 58444 73393 81982 83941 89822 92104 98990 Memo item Total NRI Deposits 2809 3265 4915 6595 8616 10482 12368 13953 12926 14523 14498 14695 a. Data have been revised from March 1990 to include military debt to the former Soviet Union amounting to about S10.0 billion as of March 1990, $11.6 billion as of March 1991, $9.2 billion as of March 1992, $9.7 billion as of March 1993, S9.2 billion as of March 1994, and $8.8 billion as of March 1995. Source: World Bank, DRS data. -185- Table A3.1(b) External Debt Summary: Disbursements (USS million at current prices) 1983-84 1984-85 1985-16 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. Public & Publicly Guar. LT 3329 3825 4506 6280 6956 7948 7092 6372 6869 6333 5764 5561 1. Official Creditors 1934 1836 2079 2265 3627 3642 3574 3570 4368 3645 3666 3426 a. Multilateral 1366 1144 1403 1314 2269 2625 2105 2210 2758 2424 2084 2230 aa. IBRD 471 291 328 641 1295 1716 1445 1219 1231 852 1216 741 of which fast-disbursing 0 0 0 0 0 0 0 0 150 100 300 0 ab. IDA 874 823 1047 656 917 755 566 762 953 1186 669 966 of which fast-disbursing 0 0 0 0 0 0 0 0 155 350 0 260 b. Bilateral 568 693 675 951 1358 1017 1469 1360 1610 1221 1582 1197 2. Private Creditors 1395 1989 2427 4015 3329 4306 3518 2802 2501 2688 2098 2134 a. Commercial banks 1244 1258 1857 3057 3030 3416 2645 2198 612 2200 1391 1358 b. Suppliers Credits 41 405 193 283 5 16 3 8 77 237 249 590 c. Bonds (including IDB) 21 232 330 359 116 679 773 586 1644 0 0 0 d. Other Private 89 94 47 316 178 195 97 10 169 251 458 187 B. Private Non-Guaranteed LT 407 450 503 325 348 175 240 214 309 254 1060 377 C. Total LT Disbursements (A+B) 3736 4275 5009 6605 7304 8123 7332 6586 7178 6587 6824 5938 D. IMF 1376 201 0 0 0 0 0 1754 1233 1623 323 0 E. Net Short-Term Capital 941 334 686 588 727 685 1143 1043 -1474 -730 -2714 1463 F. Total Disbursements (C+D+E) 6053 4810 5695 7193 8031 8808 8475 9383 6936 7480 4433 7401 Source: World Bank, DRS data. -186- Table A3.1(c) Extemal Debt Surnmary: Principal Repayments (US$ million at current prices) 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. Public & Publicly Guar. LT 825 786 947 1810 1606 1669 1641 2079 2302 2643 3674 4379 1.OfficialCreditors 602 549 656 851 1121 991 1115 1223 1467 1658 2372 2451 a. Multilateral 122 131 161 242 509 397 467 609 703 838 1000 1102 aa. of which IBRD 87 87 104 174 430 303 352 472 527 634 758 827 ab. of whichlDA 33 41 53 61 69 81 98 114 141 155 174 194 b. Bilateral 480 418 494 609 613 594 648 614 763 820 1372 1349 2. Private Creditors 223 237 291 959 485 678 526 856 836 986 1301 1928 a. Cotnmercial Banks 154 178 200 773 284 409 278 331 391 545 723 1131 b.SuppliersCredits 38 30 47 120 98 96 98 113 82 100 120 187 d. Bonds (including IDB) 2 0 0 0 6 14 27 282 244 211 343 386 e.OtherPrivate 29 29 44 66 97 159 123 130 119 130 116 224 B. Private Non-Guaranteed LT 261 305 363 480 289 280 322 318 273 306 495 435 C. Total LT Repayments (A+B) 1086 1091 1310 2290 1895 1949 1963 2397 2575 2949 4169 4814 D.IMFRepayments 70 134 264 648 1082 1210 1008 726 460 334 133 1174 E.TotalLTRepayments(C+D) 1156 1225 1574 2938 2977 3159 2971 3123 3035 3283 4302 5988 Note: Historical amortization payments of the Debt Reporting System differ from numbers of the GOI. These discrepancies are curently under review. Source: World Bank, DRS data. -187- Table A3.1(d) External Debt Summary: Net Flows (US$ million at current prices) 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. Public & Publicly Guar. LT 2504 3039 3559 4470 5350 6279 5451 4293 4567 3690 2091 112 1. Official Creditors 1332 1287 1423 1414 2506 2652 2459 2347 2901 1987 1294 976 a. Multilateral 1244 1012 1242 1072 1761 2228 1639 1602 2054 1586 1084 112S aa. of whichlBRD 384 203 224 467 865 1414 1094 747 703 219 458 -36 ab. of which IDA 841 782 994 595 848 675 468 648 812 1030 495 772 b. Bilateral 88 275 181 342 745 423 820 746 847 400 210 .152 2. PrivateCreditors 1172 1752 2136 3056 2844 3628 2992 1946 1666 1703 797 206 a. Commercial Banks 1090 1080 1657 2284 2746 3007 2367 1867 221 1655 663 227 b. Suppliers Credits 3 375 146 163 -93 -80 -95 -105 -5 137 130 402 c. Bonds (including IDB) 19 232 330 359 110 665 746 304 1400 -211 -343 -386 d. Other Private 60 65 3 250 81 36 -26 -119 49 122 342 -37 B. Private Non-Guaranteed LT 146 145 140 -155 59 -105 -82 -104 36 -53 565 -58 C. Total LT Repayments (A+B) 2650 3184 3699 4315 5409 6174 5369 4189 4602 3637 2656 1125 D. Net IMF Credit 1306 67 -264 -648 -1082 -1210 -1008 1028 773 1290 190 -1174 E. NetShort DebtFlows 941 334 686 588 727 685 1143 1043 -1474 -730 -2714 1463 F. Total Net Flows (C+D+E) 4897 3585 4121 4255 5054 5649 5504 6260 3901 4197 132 1413 MetmQo i TotalNRINetFlows 938 814 1579 1825 1992 2328 2295 1536 290 2001 940 347 Source: Derived from Tables 3.1(b) and 3.1(c). -188- Table A3.1(e) External Debt Summary: Interest Payments (USS million at current prices) 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. Public & Publicly Guar. LT 786 833 1120 1505 1845 2003 2870 3603 3322 3247 3373 3753 1. Official Creditors 432 443 558 694 812 941 1352 1492 1513 1629 1701 1845 a. Multilateral 218 239 282 388 479 581 640 738 799 899 943 1017 aa. of which IBRD 158 169 209 296 378 474 529 615 647 709 721 771 ab. of which IDA 58 68 71 91 98 98 90 97 101 109 114 121 b. Bilateral 214 204 276 306 332 360 712 754 714 730 757 828 2.PrivateCreditors 354 390 562 811 1033 1062 1518 2111 1809 1618 1672 1908 a. Commercial Banks 305 340 449 634 806 816 1240 1790 1476 1258 1193 1393 b. Suppliers Credits 8 8 48 64 67 61 53 43 31 30 37 63 c. Bonds (including IDB) 3 3 17 55 85 IlI 150 207 223 258 365 352 d. Other Private 38 39 48 58 75 74 75 70 79 71 78 99 B.PrivateNon-GuaranteedLT 130 138 154 158 147 127 140 135 126 123 138 79 C.TotalLTlnterest(A+B) 916 971 1274 1663 1992 2130 3010 3738 3448 3370 3511 3831 D. IMF Service Charges 277 374 360 317 297 233 184 134 203 271 271 228 E. Interest Paid on ST Debt 261 389 326 356 429 437 570 899 826 399 367 469 F. Total Interest Paid (C+D+E) 1454 1734 1960 2336 2718 2800 3764 4771 4478 4040 4150 4528 Memo item: TotalNRllnterestPayments 243 291 400 524 715 609 1076 1282 1036 918 905 1045 Note: Historical interest payments of the Debt Reporting System differ from numbers of the GOI. These discrepancies are currently under review. -189- Table A3.2 External Reserves (US$ million) Reserve Reserves Reserves Foreign Position excluding including Use of Net Exchange SDRs in the Fund Gold Golda 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 416 7073 4290 2783 1986-87 5924 179 626 6729 470 7199 4291 2908 1987-88 5618 97 676 6391 507 6898 3653 3246 1988-89 4226 103 630 4959 473 5432 2364 3067 1989-90 3368 107 634 4109 487 4596 1493 3102 1990-91 2236 102 -- 2338 504 2842 2623 219 1991-92 5631 90 1 5722 542 6264 3451 2812 1992-93 6434 18 297 6749 557 7306 4798 2508 1993-94 15068 108 300 15476 583 16059 5040 11019 1994-95 20809 19 332 21160 695 21855 4312 17543 1995-96 17044 82 311 17436 654 18090 2374 15715 End of the Month 1993 March 6434 18 297 6749 557 7306 4798 2508 June 6553 187 298 7038 560 7598 5102 2495 September 7629 61 302 7992 569 8561 5109 3452 December 9807 100 292 10199 551 10750 4924 5826 1994 March 15068 108 300 15476 583 16059 5040 11019 June 16372 45 308 16725 598 17323 4002 13321 September 18856 3 312 19171 606 19777 4055 15722 December 19386 2 310 19698 603 20301 4034 16267 1995 March 20809 19 332 21160 695 21855 4312 17543 June 19601 95 334 20030 702 20732 3933 16799 September 19064 49 320 19433 674 20107 3377 16729 December 17467 139 316 17922 665 18587 2923 15664 1996 March 17044 82 311 17436 654 18090 2374 15715 June 17526 128 307 17961 646 18607 2079 16527 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 Adjustment Facility (ESAF) loans. a. Valued at 35 SDR's per fine troy ounce. Source: IMF, International Financial Statistics, various issues. -190- Table A4.1 Central Government Finances Summary (Rs billion at current prices) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1995-96 1996-97 B.E. R.E. B.E. Revenue' 549.5 690.7 760.9 754.1 966.9 1077.9 1105.5 1353.5 Tax Revenue 429.8 500.7 540.4 534.5 674.5 743.7 810.9 973.1 Customs 206.4 222.6 237.8 221.9 267.9 295.0 353.5 444.4 Union Exciseb 141.0 160.2 163.7 172.2 210.6 231.3 230.2 250.7 IncomeTaxb 12.5 16.3 18.3 13.5 34.7 37.7 38.1 48.2 Corporate Tax 53.4 78.5 89.0 100.6 138.2 155.0 162.5 196.0 Other 16.5 23.2 31.7 26.3 23.1 24.8 26.5 33.8 Non-Tax Revenue 119.8 190.0 220.5 219.6 292.4 334.1 294.6 380.4 Interest Receipts 87.3 109.3 124.9 150.6 158.0 184.2 183.7 213.9 Asset Sales 0.0 30.4 19.6 -0.5 56.1 70.0 3.6 50.0 Other 32.5 50.3 76.0 69.4 78.3 79.9 107.3 116.4 Expenditurec 995.9 1053.9 1162.6 1356.6 1543.9 1654.2 1745.6 1976.1 Non-Plan Expenditure 769.3 804.5 859.6 981.9 1133.6 1236.5 1332.9 1499.7 Interest Payments 215.0 266.0 310.4 367.0 440.5 520.0 520.0 600.0 Defense 154.3 163.5 175.8 218.5 232.5 255.0 268.8 278.0 Subsidies 121.6 122.5 120.4 128.6 129.8 124.0 137.3 163.2 Other Non-Plan Expenditure 278.5 252.6 253.0 267.9 330.8 337.5 406.7 458.6 Plan Expenditure 283.7 309.6 366.6 436.6 473.8 485.0 486.8 546.9 Less: Recovery of Loans 57.1 60.2 63.6 61.9 63.5 67.3 74.1 70.5 Gross Fiscal Deficit 446.3 363.3 401.7 602.6 577.0 576.3 640.1 622.7 Financed by Reserve Bank of India (net)d 164.3 59.0 32.7 13.5 21.8 50.0 198.6 65.8 Marketable Securities (net)e 49.1 117.7 165.2 295.5 110.0 270.9 146.8 255.0 Other Domestic Borrowing (n 201.2 132.4 150.6 242.9 393.8 210.9 275.1 277.3 External Borrowing (net) 31.8 54.2 53.2 50.7 51.5 44.6 19.7 24.6 MemoQ GDPmp 5355.3 6168.0 7053.3 8010.3 9456.2 10478.9 10978.0 12603.0 Fiscal Deficit/GDP 8.3% 5.9% 5.7% 7.5% 6.1% 5.5% 5.8% 4.9% Revenue /GDP 10.3% 11.2% 10.8% 9.4% 10.2% 10.3% 10.1% 10.7% Expenditure / GDP 18.6% 17.1% 16.5% 16.9% 16.3% 15.8% 15.9% 15.7% Note: BE = Budget estimates; RE = Revised estimates. a. Including sale of public assets (disinvestment). b. Net of states' share. c. Net of loan recoveries. d. Monetized deficit (equal to net RBI credit to Central Government). e. T-Bilis and dated securities, excluding those issued to RBI. Source: Ministry of Finance, Union budget documents. -191- Table A4.2 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 1995-96 1996-97 B.E. R.E. B.E. Revenue receipts 370.37 435.91 499.96 549.54 660.30 741.28 754.53 910.83 1007.87 1101.91 1303.45 Tax revenue 280.15 337.51 383.49 429.78 500.69 540.44 534.49 674.54 743.74 810.88 973.10 Non-tax revenue 90.22 98.40 116.47 119.76 159.61 200.84 220.04 236.29 264.13 291.03 330.35 Interest from state governments 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 133.48 131.31 151.13 Revenue expenditure (A+B+C+D) 461.75 541.06 642.07 735.15 823.08 927.02 1081.69 1221.11 1363.29 1435.22 1618.20 A. Developmental 114.25 140.36 184.15 196.01 198.17 208.60 243.68 301.50 325.06 367.47 414.27 1. Social services 19.35 22.43 24.99 27.53 30.57 34.30 40.97 47.43 53.57 75.57 93.36 2. Economic services 94.90 117.93 159.17 168.48 167.60 174.30 202.71 254.07 271.49 291.90 320.91 B. Non-developmental 244.59 287.69 335.47 391.00 450.34 521.58 613.17 708.20 810.79 837.47 958.55 Defenceservices 88.60 95.58 101.94 108.74 114.42 121.09 149.77 164.26 181.46 188.35 188.55 Interest payments 112.36 142.61 177.57 214.71 265.63 310.35 366.95 440.49 520.00 520.00 600.00 C. Grants-in-aid and contributions 93.49 102.08 109.36 134.39 159.53 180.54 211.11 204.83 220.47 222.61 237.43 Grantstostategovernments 91.36 100.15 107.44 132.02 157.00 178.30 213.77 200.47 215.44 216.82 231.31 D. Revenue expenditure of UTs 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 6.97 7.66 7.95 Net current balance -91.38 -105.15 -142.11 -185.61 -162.78 -185.74 -327.16 -310.28 -355.42 -333.31 -314.75 Capital expenditure (A+B+C+D-E) 179.07 204.08 237.18 260.88 200.63 215.99 275.41 266.75 220.93 306.80 307.91 A. Developmental 56.67 60.03 70.95 69.23 58.26 73.82 55.60 73.96 59.59 43.06 47.24 1. Social services 2.80 3.51 3.21 2.47 2.39 2.59 3.32 7.26 5.49 5.57 6.41 2. Economic services 53.86 56.52 67.74 66.77 55.87 71.23 52.28 66.70 54.09 37.48 40.83 B. Non-developmental 33.39 40.76 45.27 49.56 52.32 58.88 73.92 72.51 83.88 90.34 100.87 Defence services 31.08 37.83 42.22 45.52 49.05 54.73 68.67 68.19 73.54 80.44 89.44 C. Capital expenditure of UTs 2.88 1.76 1.87 2.68 3.42 3.50 2.78 2.44 2.52 2.37 2.41 D.Loansandadvances(net) 86.13 101.53 119.09 139.40 117.01 99.41 142.63 173.91 144.94 174.60 207.40 to States & UTs 58.51 67.30 79.55 98.69 94.18 86.97 100.72 143.13 115.27 142.67 170.76 to Others 27.62 34.23 39.55 40.71 22.83 12.44 41.92 30.78 29.67 31.93 36.64 E. Disinvestment of equity in PSEs 0.00 0.00 0.00 0.00 30.38 19.61 -0.48 56.07 70.00 3.57 50.01 Gross fiscal deficit (GOI Defn.) 270.45 309.22 379.30 446.50 363.41 401.74 602.57 577.04 576.35 640.11 622.66 Finance by instruments Market loans 58.62 84.18 74.04 80.01 75.10 36.76 289.28 203.26 227.00 275.00 254.98 Small savings 39.11 58.35 85.75 91.04 66.40 57.17 91.00 165.78 80.00 135.00 140.00 Provident funds 52.74 71.12 90.86 89.37 79.56 87.55 93.58 102.65 109.64 107.13 117.98 External loans 28.93 24.60 25.95 31.81 54.21 53.19 50.74 51.46 44.56 19.69 24.61 Treasury bills 56.52 62.44 109.11 117.69 68.87 117.73 119.82 -2.68 49.99 64.77 65.78 Other 34.53 8.53 -6.41 36.58 19.27 49.33 -41.85 56.57 65.15 38.51 19.31 Note: BE = Budget estimates; RE = Revised estimates. Source: Ministry of Finance, Union budget documents; Department of Expenditure, Finance Accounts. -192- Table A4.3 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 R.E. B.E.a Revenue receipts 448.00 507.09 589.08 673.19 813.59 911.04 1056.11 1212.67 1331.77 Tax revenue 289.20 330.70 392.27 448.80 529.53 603.90 686.66 792.60 901.31 Direct tax 19.85 24.13 30.06 33.75 39.59 42.28 49.73 64.17 69.31 Indirect tax 173.37 199.88 229.89 269.70 317.98 356.40 414.51 480.00 538.12 State share in central taxes 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.43 293.88 Non-tax revenue 158.80 176.38 196.81 224.39 284.06 307.14 369.45 420.07 430.46 Grants from centre 91.36 100.15 107.44 132.02 157.00 178.30 213.77 202.63 215.44 Revenue expenditure [A+B+C] 451.54 522.96 602.53 717.73 861.86 962.05 1093.76 1310.14 1469.05 A. Developmental (1+2) 318.20 362.37 407.81 488.55 585.05 634.65 708.38 802.39 876.85 1. Social services 177.06 205.74 240.17 279.62 310.92 345.65 389.61 456.15 519.96 2. Economic services 141.14 156.63 167.64 208.92 274.13 288.99 318.78 346.24 356.89 B. Non-developmental 128.44 155.06 188.69 221.34 266.66 315.06 373.67 493.91 577.56 Interest payments 52.68 64.11 76.68 92.21 109.44 138.65 165.45 202.51 233.97 Tocentre 31.58 37.70 44.24 51.74 65.22 77.54 95.53 113.80 133.48 To others 21.10 26.41 32.44 40.47 44.23 61.11 69.92 88.71 100.49 C. Other expenditureb 4.91 5.53 6.03 7.84 10.16 12.35 11.71 13.84 14.64 Net current balance -3.55 -15.87 -13.45 -44.54 -48.27 -51.01 -37.65 -97.47 -137.28 Capital expenditure [A+B+C] 101.31 98.66 117.52 134.78 132.49 157.77 167.84 214.27 237.73 A. Developmental (1+2) 64.29 68.53 77.28 89.61 98.61 103.44 120.51 157.34 155.68 1. Social services 10.74 11.28 11.71 12.57 16.47 16.64 18.31 24.93 28.70 2. Economic services 53.55 57.25 65.57 77.03 82.14 86.80 102.21 132.41 126.97 B. Non-developmental 2.26 2.25 2.36 2.63 2.34 3.10 3.99 4.80 8.20 C. Loansandadvances (net) 34.77 27.88 37.88 42.55 31.54 51.22 43.33 52.13 73.85 Gross fiscal deficit 104.85 114.53 130.96 179.32 180.77 208.78 205.48 311.74 375.02 Finance by instrument: Market loans 18.01 22.46 25.95 25.60 33.10 38.50 42.28 51.23 65.19 Loans from centre (Net) 58.31 67.07 79.30 98.39 93.75 86.60 99.01 137.48 110.02 Small savings & Provident fund 16.28 20.01 23.07 30.69 29.09 36.22 43.30 43.96 45.44 Others 12.26 4.98 2.65 24.63 24.82 47.45 20.89 79.07 154.38 Note: BE = Budget estimates; RE = Revised estimates. a. Figure for 1994-95 includes Union Territory of Delhi. b. 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. -193- Table A4.4 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 R.E.' B.E.' Revenue receipts 695.43 805.15 937.36 1038.97 1251.67 1396.48 1501.35 1809.01 1990.72 Taxrevenue 569.35 668.21 775.76 878.58 1030.22 1144.34 1221.15 1467.11 1645.05 Non tax revenue 126.08 136.94 161.60 160.39 221.45 252.13 280.20 341.90 345.67 Revenueexpenditure [A+B+C+D] 790.35 926.17 1092.92 1269.12 1462.72 1633.23 1866.16 2218.95 2483.42 A. Developmental 432.44 502.73 591.96 684.56 783.22 843.24 952.06 1103.89 1201.91 1. Social services 196.40 228.17 265.15 307.16 341.49 379.95 430.58 503.58 573.53 2. Economic services 236.04 274.55 326.80 377.40 441.72 463.29 521.48 600.31 628.38 B. Non-developmental 341.45 405.05 479.92 560.60 651.78 759.10 891.30 1090.28 1254.87 C. Revenue disbursements of UTs 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 6.97 D. Other expenditure' 7.04 7.46 7.95 10.21 12.68 14.59 9.06 18.20 19.67 Net current balance -94.93 -121.02 -155.56 -230.15 -211.05 -236.75 -364.81 -409.94 -492.70 Capital expenditure [A+B+C+D-E 221.87 235.44 275.15 296.97 238.95 286.80 342.53 337.90 343.40 A. Developmental (1+2) 120.95 128.56 148.23 158.84 156.87 177.26 176.11 231.30 215.26 1. Social services 13.54 14.79 14.92 15.04 18.86 19.23 21.63 32.19 34.20 2. Economic services 107.41 113.76 133.31 143.80 138.00 158.03 154.49 199.11 181.07 B. Non-Developmental 35.65 43.01 47.63 52.19 54.67 61.98 77.90 77.32 92.09 C. Loans and advances (net) 62.38 62.11 77.42 83.26 54.37 63.67 85.25 82.92 103.53 D. Capital disbursements of UTs 2.88 1.76 1.87 2.68 3.42 3.50 2.78 2.44 2.52 E. Disinvestment of equities in PS 0.00 0.00 0.00 0.00 30.38 19.61 -0.48 56.07 70.00 Gross fiscal deficit 316.79 356.45 430.71 527.12 450.00 523.55 707.34 747.84 836.10 Finance by Instrument: Market Loans 76.63 106.64 99.99 105.61 108.20 75.26 331.56 254.49 292.19 Small Savings 39.11 58.35 85.75 91.04 66.40 57.17 91.00 165.78 80.00 Provident Funds 69.02 91.13 113.93 120.06 108.65 123.77 136.88 146.61 155.08 External Loans 28.93 24.60 25.95 31.81 54.21 53.19 50.74 51.46 44.56 Treasury Bills 56.52 62.44 109.11 117.69 68.87 117.73 119.82 -2.68 49.99 Other 46.58 13.29 -4.02 60.90 43.66 96.43 -22.67 132.18 214.28 Note: BE = Budget estimates; RE = Revised estimates. a. Actuals for the center and revised estimates for the states. c. 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; Dept. of Expenditure, Finance Accounts. -194- 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 1995-96 1996-97 R.E. B.E. R.E. B.E. Centra Govemment A. Gross taxrevenue 376,66 444.74 516.36 575.76 673.61 746.37 757.44 922.94 1037.62 1103.54 1321.45 Corporation tax 34.33 44.07 47.29 53.35 78.53 88.99 100.60 138.22 155.00 162.50 196.00 Taxes on income 31.92 42.41 50.04 53.71 67.31 78.88 91.15 120.25 135.00 151.00 178.43 Customs 137.02 158.05 180.36 206.44 222.57 237.76 221.93 267.89 295.00 353.52 444.35 Union Excise Duties 164.26 188.41 224.06 245.14 281.10 308.32 316.97 373.47 427.80 410.00 468.84 Other 9.13 11.80 14.61 17.12 24.10 32.42 26.79 23.11 24.82 26.52 33.83 B. States Share of Tax Revenue 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.40 293.88 292.66 348.35 IncomeTax 25.89 27.49 39.22 41.21 51.04 60.57 77.69 85.57 97.34 112.88 130.24 Estate Duty 0.06 0.01 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 93.10 104.14 120.93 144.65 144.73 162.83 196.54 179.78 218.11 C. Assignments of UT taxes to 0.53 0.54 0.55 0.63 0.95 0.71 0.53 0.00 0.00 0.00 0.00 local bodies Tax Revenue (net) [A-B-C] 280.15 337.51 383.49 429.78 500.69 540.44 534.49 674.54 743.74 810.88 973.10 State Govenment States own Tax Revenue 193.22 224.01 259.95 303.45 357.56 398.68 464.24 544.17 607.43 Direct Tax 19.85 24.13 30.06 33.75 39.59 42.28 49.73 64.17 69.31 Taxes on income 2.70 3.12 4.53 6.34 6.45 6.02 6.50 7.20 7.80 Land revenue 4.48 5.94 6.90 6.07 6.36 6.17 7.32 10.06 10.36 Stamps and registration fees 12.54 14.86 18.45 21.12 26.54 29.78 35.55 46.50 50.59 Other 0.13 0.21 0.19 0.22 0.24 0.31 0.36 0.41 0.57 Indirect Tax 173.37 199.88 229.89 269.70 317.98 356.40 414.51 480.00 538.12 Sales Tax 111.85 131.22 150.60 176.67 210.64 233.49 276.38 301.00 347.96 State excise 28.67 30.81 38.64 47.95 54.39 62.65 71.06 76.30 80.85 Taxeson Vehicles 11.75 12.90 14.15 15.66 18.37 21.94 25.83 28.24 31.22 Other 21.09 24.96 26.49 29.41 34.58 38.32 41.25 74.47 78.08 State's Share of Central Taxes 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.43 293.88 Tax revenue retained by states 289.20 330.70 392.27 448.80 529.53 603.90 686.66 792.60 901.31 Note: BE = Budget estimates; RE = Revised estimates. a. Actuals for the center and revised estimates for the states. Source: Ministry of Finance, Union budget documents; Reserve Bank of India, RBI bulletins on state finances. -195- Table A4.6 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 1995-96 1996-97 R.E.' B.E. R.E. B.E. Central Govemment Non-tax revenue 90.22 98.40 116.47 119.76 159.61 200.84 220.04 236.29 264.13 291.03 330.35 Interestreceipts 57.55 69.81 84.66 87.30 109.33 124.87 150.62 157.97 184.20 183.69 213.93 from state govemments 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 133.48 131.31 151.13 Dividends and profits 6.05 4.75 7.16 7.74 10.58 24.93 24.48 27.16 29.46 32.29 40.51 Other general services 3.37 3.95 4.05 5.06 5.72 10.14 10.46 11.87 11.01 14.83 13.53 Social services 0.60 0.80 0.57 0.65 0.90 0.79 1.01 0.95 1.44 1.36 1.40 Economic services 12.73 8.93 5.45 8.60 21.46 17.86 13.26 18.60 19.08 38.76 46.73 Grants-in-aidandcontributio 4.92 6.00 7.54 5.86 9.47 9.19 9.93 10.38 11.54 12.07 8.09 Other 5.00 4.16 7.04 4.55 2.15 13.06 10.28 9.36 7.40 8.03 6.16 State Govemment States own Non-tax revenue 67.44 76.24 89.37 92.37 127.06 128.84 155.69 217.44 215.02 Interest receipts 19.47 23.87 26.34 24.03 53.20 39.38 47.25 52.17 52.12 General services 7.54 9.51 11.40 19.13 17.28 18.44 29.47 81.35 75.01 Social services 5.04 5.73 6.76 5.86 7.74 8.48 9.12 9.76 10.58 Economic services 35.12 36.64 44.59 43.01 48.39 61.48 69.21 73.52 76.63 Forestryand wildlife 10.67 10.08 11.96 11.37 12.71 12.72 14.94 15.40 16.05 Industries 9.11 12.08 14.31 12.23 15.37 23.17 25.09 28.33 30.41 Other 15.33 14.48 18.32 19.41 20.31 25.59 29.19 29.79 30.18 Other 0.28 0.49 0.28 0.34 0.45 1.06 0.63 0.64 0.67 Grants from centre 91.36 100.15 107.44 132.02 157.00 178.30 213.77 202.63 215.44 Non-tax revenue retained byst 158.80 176.38 196.81 224.39 284.06 307.14 369.45 420.07 430.46 Note: BE = Budget estimates; RE = Revised estimates. a. Actuals for the center and revised estimates for the states. Source: Ministry of Finance, Union budget documents; Reserve Bank of India, RBI bulletins on state finances. -196- Table A4.7 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 1995-96 1996-97 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 1363.29 1435.22 1618.20 A. Developmental 114.25 140.36 184.15 196.01 198.17 208.60 243.68 301.50 325.06 367.47 414.27 1. Social services 19.35 22.43 24.99 27.53 30.57 34.30 40.97 47.43 53.57 75.57 93.36 Education, Sports, Art and Cultur 10.13 11.12 11.41 12.74 13.72 14.97 18.37 22.30 22.19 32.59 39.86 HealthandFawnilywelfare 2.67 3.11 3.48 3.97 4.50 5.59 6.47 7.82 8.96 8.91 10.55 Information and Broadcasting 2.10 2.36 3.23 3.60 4.43 4.61 4.15 5.08 4.76 5.09 5.35 Water supply and Sanitation 0.13 0.51 0.78 0.93 0.64 0.63 0.84 0.84 3.98 3.63 3.63 Labourand labourwelfare 1.64 2.43 2.64 2.78 3.00 3.29 5.11 4.14 5.07 5.73 5.88 Social security and welfare 1.92 1.96 2.36 2,25 2.81 3.44 3.71 4.47 5.43 10.32 14.43 Other 0.76 0.94 1.09 1.27 1.47 1.77 2.33 2.77 3.18 9.31 13.65 2. Economic services 94.90 117.93 159.17 168.48 167.60 174.30 202.71 254.07 271.49 291.90 320.91 Agriculture and allied services 5.55 7.45 7.75 22.92 19.25 21.26 18.73 33.86 35.35 39.26 53.75 Fertilizer Subsidy 21.64 32.01 45.42 43.89 51.85 61.36 51.94 52.41 59.00 67.35 83.72 Food Subsidy 20.00 22.00 24.76 24.50 28.50 28.00 55.37 51.00 52.50 55.00 58.84 Export Subsidy 9.62 13.86 20.14 27.42 17.58 8.18 6.65 6.58 3.15 3.15 4.60 IrrigationandFloodControl 0.76 0.85 0.81 0.89 1.20 1.07 1.68 1.35 1.77 1.59 2.20 Rural Development 3.13 3.61 3.70 3.77 3.57 4.06 16.25 41.56 57.00 53.61 48.42 Special Areas Progranunes 0.06 0.05 0.07 0.12 0.19 0.17 0.20 7.92 8.10 7.98 8.11 Energy 3.94 5.59 6.90 7.49 5.37 2.67 5.48 3.97 5.62 5.10 5.61 IndustryandMinerals 13.57 12.20 17.96 12.26 12.03 17.98 17.93 12.88 19.00 20.19 26.84 Transport and Communications 6.06 6.79 15.62 8,05 9.19 9.68 14.45 17.80 15.69 18.19 19.94 Science,TechnologyandEnviro 7.57 9.34 10.40 11.27 12.87 13.68 15.86 17.20 18.76 19.22 21.24 General Economic Services 2.99 4.18 5.62 5.90 6.00 6.20 -1.84 7.53 -4.45 1.27 -12.37 B. Non-developmental 244.59 287.69 335.47 391.00 450.34 521.58 613.17 708.20 810.79 837.47 958.55 Defence services 88.60 95.58 101.94 108.74 114.42 121.09 149.77 164.26 181.46 188.35 188.55 Interestpayments 112.36 142.61 177.57 214.71 265.63 310.35 366.95 440.49 520.00 520.00 600.00 onInternalDebt 55.14 69.13 82.73 96.22 109.09 129.89 154.83 193.91 232.83 222.67 267.30 on External Debt 9.77 12.42 14.94 17.78 25.69 34.51 37.92 41.10 43.09 48.99 52.74 on Small Savings, PFs. etc. 44.90 58.01 75.73 96.37 124.20 138.83 168.42 198.91 237.35 239.45 270.75 Other 2.56 3.06 4.17 4.34 6.66 7.12 5.78 6.57 6.73 8.89 9.21 Administrative Services 15.32 17.91 20.71 25.24 27.98 37.83 38.27 42.14 44.46 49.30 95.52 Fiscal Services 10.94 11.00 12.78 12.12 17.69 20.48 21.37 23.55 24.75 27.12 26.70 Pensions and misc. services 17.37 20.60 22.46 30.19 24.63 31.84 36.80 37.76 40.13 52.70 47.78 C.Grants-in-aidandcontributions 93.49 102.08 109.36 134.39 159.53 180.54 211.11 204.83 220.47 222.61 237.43 GrantstoStateGovernments 91.36 100.15 107.44 132.02 157.00 178.30 213.77 200.47 215.44 216.82 231.31 a. Non Plan 19.80 24.11 23.69 42.19 86.45 27.41 32.39 92.54 61.07 60.50 64.13 b. State Plan Schemes 34.43 35.59 35.38 38.78 70.55 82.80 102.39 107.93 84.03 88.35 95.63 c. Central andCentrallysponsored 37.14 40.46 48.37 51.05 54.93 66.34 78.99 68.25 70.34 67.98 71.54 schemes Grants to UTs. and Others 2.13 1.93 1.92 2.37 2.53 2.24 -2.65 4.36 5.03 5.79 6.12 D. Revenue Disbursments of UTs( 9.43 10.92 13.09 13.75 15.05 16.30 13.73 6.59 6.97 7.66 7.95 Memo Items Total Subsidies 59.80 77.32 104.74 121.58 122.53 120.43 128.64 129.82 124.01 137.26 163.20 Major Subsidies 51.26 67.87 90.32 95.81 97.93 94.15 107.64 115.30 109.65 125.50 147.16 OtherSubsidies 8.54 9.45 14.42 25.77 24.60 26.28 21.00 14.52 14.36 11.76 16.04 (annual averages at constant 1980-81 prices - Rs. billion) RuralEmploymentProgramnme 14.10 12.44 21.00 20.00 18.17 25.46 39.06 46.75 54.32 47.71 38.35 RLEGP 6.66 7.84 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 NREP 7.45 4.60 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 JawaharRojgarYojana 0.00 0.00 20.96 20.00 18.17 25.26 33.06 35.35 38.62 29.55 18.65 Note: BE = Budget estimates; RE = Revised estimates. Source: Ministry of Finance, Union budget documents; Departnent of Expenditure, Finance Accounts. -197- Table A4.8 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 R.E. B.E.S Revenue expenditure (A+B+C) 451.54 522.96 602.53 717.73 861.86 962.05 1093.76 1310.14 1469.05 A. Developmental (1+2) 318.20 362.37 407.81 488.55 585.05 634.65 708.38 802.39 876.85 1. Social services 177.06 205.74 240.17 279.62 310.92 345.65 389.61 456.15 519.96 Education, Sports, Art and Culture 90.10 109.43 135.71 155.28 170.77 192.61 215.94 254.50 281.69 Health and Family Welfare. 30.53 34.77 39.64 45.86 50.54 56.62 66.69 74.72 79.97 Water supply and Sanitation 13.22 13.94 14.77 16.38 18.45 20.95 24.24 27.23 29.15 Welfare of SC, ST and BCs 11.84 13.18 14.69 17.90 20.71 23.01 25.70 30.83 34.85 Social security and welfare 8.23 9.70 11.07 13.62 14.77 16.63 18.65 24.28 26.49 Other 23.13 24.72 24.29 30.59 35.68 35.83 38.38 44.58 67.81 2. Economic services 141.14 156.63 167.64 208.92 274.13 288.99 318.78 346.24 356.89 Agriculture and Allied Services 38.98 42.65 48.29 62.67 69.81 84.34 88.93 88.26 99.15 Crop Husbandry 9.59 11.06 12.65 16.97 20.82 29.37 29.12 27.74 27.58 Food Storage and Warehousing 1.20 1.23 1.56 1.88 2.38 4.16 3.81 4.37 8.36 Forestry and Wild Life 8.69 9.46 10.28 11.75 13.42 14.90 15.74 17.74 19.81 Other 19.50 20.90 23.80 32.06 33.19 35.91 40.25 38.42 43.40 Rural Development 32.20 36.54 28.27 46.75 52.87 63.62 72.77 79.00 83.78 Special Areas Programmes 2.35 3.09 3.54 3.57 4.11 3.96 4.88 5.42 6.15 Irrigation and Flood Control 27.75 33.19 33.94 34.56 41.40 48.68 54.28 62.60 64.71 Energy 9.14 7.74 10.92 9.89 50.30 26.15 31.68 33.35 24.08 IndustryandMinerals 7.33 8.69 12.17 11.65 12.71 13.56 14.18 17.61 19.75 Transport and Communications 16.01 17.35 19.22 23.36 27.59 31.28 35.12 37.55 39.67 Science, Technology and Environ 0.24 0.23 0.26 0.29 0.36 0.39 0.53 0.71 0.81 General Economic Services 7.14 7.15 11.02 16.18 14.98 17.01 16.40 21.74 18.79 B. Non-Developmental 128.44 155.06 188.69 221.34 266.66 315.06 373.67 493.91 577.56 Interest Payments 52.68 64.11 76.68 92.21 109.44 138.65 165.45 202.51 233.97 Onloansfromthecentre 31.58 37.70 44.24 51.74 65.22 77.54 95.53 113.80 133.48 On the Internal Debt 8.95 10.42 13.41 15.68 21.70 24.67 27.77 38.85 46.91 On Small Savings, PFs. 7.63 10.58 12.70 17.03 21.17 24.73 30.87 36.54 41.29 Other 4.51 5.41 6.34 7.76 1.36 11.71 11.28 13.31 12.29 Administrative Services 44.18 50.31 59.74 70.18 78.10 93.44 104.73 118.10 160.34 Pensions and Miscellaneous Servic 17.58 23.92 29.31 35.93 44.79 52.72 69.99 127.43 135.57 Other 13.99 16.72 22.96 23.01 34.33 30.24 33.51 45.87 47.68 C. Otherexpenditureb 4.91 5.53 6.03 7.84 10.16 12.35 11.71 13.84 14.64 Note: BE = Budget estimates; RE = Revised estimates. a. Figure for 1994-95 includes Union Territory of Delhi. b. 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. -198- Table A4.9 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 1995-96 1996-97 B.E. R.E. B.E. Central Governmen Capital expenditure [A+B+C+D- 179.07 204.08 237.18 260.88 200.63 215.99 275.41 266.75 220.93 306.80 307.91 A. Developmental (1+2) 56.67 60.03 70.95 69.23 58.26 73.82 55.60 73.96 59.59 43.06 47.24 1. Social services 2.80 3.51 3.21 2.47 2.39 2.59 3.32 7.26 5.49 5.57 6.41 Education, Sports, Art etc. 0.05 0.13 0,08 0.06 0.04 0.05 0.06 2.25 0.12 0.14 0.11 Health and Family welfare 0.19 0.15 0.20 0.00 0.20 0.07 0.03 0.69 0.14 0.13 0.41 Housing 0.75 0.99 0.98 1.11 1.26 1.78 1.87 1.86 2.07 2.37 2.82 Information and Broadcasti 1.74 1.71 1.78 1.06 0.35 0,07 0.24 0.25 0.58 0.51 0.57 Other 0.08 0.52 0.18 0.24 0.53 0.62 1.12 2.23 2.58 2.42 2.52 2. Economic services 53.86 56.52 67.74 66.77 55.87 71.23 52.28 66.70 54.09 37.48 40.83 Agriculture and allied 0.54 0.55 0.45 0.45 0.49 0.47 0.48 2.83 4.48 3.76 3.45 Energy 18.46 19.05 26.07 27.09 19.91 16.21 17.69 22.68 13.22 11.60 9.86 Industry and Minerals 14.07 13.10 11.52 7.71 6.70 8.82 9.87 8.04 8.06 6.57 5.48 Transport&Communicatio 18.40 21.51 26.15 26.45 24.72 33.81 19.45 22.14 21.77 21.14 25.34 General Economic Services 0.65 0.00 1.26 2.52 2.57 9.07 1.58 6.86 2.37 -10.19 -8.21 Other 1.75 2.31 2.28 2.56 1.48 2.85 3.21 4.14 4.19 4.62 4.91 B. Non-developmental 33.39 40.76 45.27 49.56 52.32 58.88 73.92 72.51 83.88 90.34 100.87 Defence Services 31.08 37.83 42.22 45.52 49.05 54.73 68.67 68.19 73.54 80.44 89.44 Other 2.32 2.93 3.05 4.04 3.27 4.14 5.24 4.32 10.34 9.90 11.43 C. Capital Expenditure ofUTs 2.88 1.76 1.87 2.68 3.42 3.50 2.78 2.44 2.52 2.37 2.41 D. Loans and Advances(Net) 86.13 101.53 119.09 139.40 117.01 99.41 142.63 173.91 144.94 174.60 207.40 To State Govemments &UTs 58.51 67.30 79.55 98.69 94.18 86.97 100.72 143.13 115.27 142.67 170.76 To Others 27.62 34.23 39.55 40.71 22.83 12.44 41.92 30.78 29.67 31.93 36.64 E. Disinvestment ofequity in P 0.00 0.00 0.00 0.00 30.38 19.61 -0.48 56.07 70.00 3.57 50.01 Sa Govemmen Capital expenditure [A+B+C] 101.31 98.66 117.52 134.78 132.49 157.77 192.57 214.27 237.73 A. Developmental (1+2) 64.29 68.53 77.28 89.61 98.61 103.44 117.86 157.34 155.68 1. Social Services 10.74 11.28 11.71 12.57 16.47 16.64 19.80 24.93 28.70 Education, Sports, Art etc. 1.29 1.68 2.64 2.84 2.78 3.02 3.23 4.04 4.70 Health and Family welfare 1.88 2.04 1.84 2.37 2.76 2.63 3.31 3.65 4.33 Water supply and Sanitation 4.00 4.04 3.37 3.54 4.99 5.49 7.01 9.25 9.77 Other 1.45 1.63 1.87 2.00 3.86 3.62 4.18 5.29 6.43 2. Economic Services 53.55 57.25 65.57 77.03 82.14 86.80 98.06 132.41 126.97 Agriculture and allied 2.17 2.69 5.91 6.11 8.32 7.85 8.87 10.47 10.07 Irrigation and Flood control 29.66 32.66 32.91 36.56 38.52 42.93 46.46 53.61 61.87 Transport 9.43 10.27 11.59 13.42 13.92 15.90 19.98 25.86 26.95 Other 12.28 11.63 15.16 20.94 21.38 20.13 22.75 42.46 28.08 B. Non-developmental 2.26 2.25 2.36 2.63 2.34 3.10 4.02 4.80 8.20 C. Loans and advances(Net) 34.77 27.88 37.88 42.55 31.54 51.22 70.70 52.13 73.85 Note: BE = Budget estimates; RE = Revised estimates. Source: Ministry of Finance, Union budget documents; Reserve Bank of India, RBI bulletins on state finances. -199- Table A4.10 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 1995-96 1996-97 B.E. R.E. B.E. States' share in central taxes 95.98 106.69 132.32 145.35 171.97 205.22 222.42 248.40 293.88 292.66 348.35 Union excise duties 70.03 79.19 93.10 104.14 120.93 144.65 144.73 162.83 196.54 179.78 218.11 Incometax 25.89 27.49 39.22 41.21 51.04 60.57 77.69 85.57 97.34 112.88 130.24 Estate duty 0.06 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Grants to States 91.36 100.15 107.44 132.02 157.00 178.30 213.77 200.47 215.44 216.82 231.31 Non-plan grants 19.80 24.11 23.69 42.19 86.45 27.41 32.39 92.54 61.07 60.50 64.13 State plan schemes 34.43 35.59 35.38 38.78 70.55 82.80 102.39 107.93 84.03 88.35 95.63 Central and Centrally sponsored 37.14 40.46 48.37 51.05 54.93 66.34 78.99 68.25 70.34 67.98 71.54 schemes Loans to States & UTs 86.98 99.15 109.16 135.66 123.30 121.41 139.85 188.04 162.81 196.17 224.36 Loan Repayments by States and 28.47 31.85 29.62 36.97 29.12 34.44 39.13 44.91 47.54 53.50 53.60 InterestPayments by States 31.58 37.70 44.24 51.74 65.22 77.54 95.53 111.83 133.48 131.31 151.13 NETTRANSFER(Centreto Stat 214.28 236.43 275.07 324.32 357.93 392.94 441.37 480.17 491.10 520.84 599.28 Note: BE = Budget estimates; RE = Revised estimates. Source: Ministry of Finance, Union budget documents; Reserve Bank of India, RBI bulletins on state finances; Dept. of Expenditure, Finance Accounts. -200- Table A4.11 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 1995-96 1996-97 B.E. R.E. B.E. A. MaiorSubsidies 51.26 67.87 90.32 95.81 97.93 94.15 107.64 115.30 109,65 125.50 147.16 1. Food 20.00 22.00 24.76 24.50 28.50 28.00 55.37 51.00 52.50 55.00 58.84 2. Indegenious Fertilizers 20.50 30.00 37.71 37.30 35.00 48.00 38.00 40.75 37.50 43.00 45.00 3. Imported Fertilizers 1.14 2.01 7.71 6.59 13.00 9.96 7.62 11.66 16.50 19.35 16.48 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 5. ExportPromotion and 9.62 13.86 20.14 27.42 17.58 8.18 6.65 6.58 3.15 3.15 4.60 Market Development. 6. Sale of decontrolled fertilis 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.31 5.00 5.00 22.24 with concession to farmners B. Debtreliefto farmers 0.00 0.00 0.00 15.02 14.25 15.00 5.00 3.41 0.00 0.00 0.00 C. OtherSubsidies 8.54 9.45 14.42 10.75 10.35 11.28 16.00 11.11 9.36 11.76 16.04 5. Railways 1.74 2.07 2.33 2.83 3.12 3.41 4.05 4.23 4.11 4.18 4.69 6. Mill-made cloth 0.23 0.27 0.10 0.10 0.15 0.15 0.00 0.10 0.01 0.01 0.01 7. Handloom Cloth 1.24 1.46 1.81 1.85 1.87 1.94 1.90 1.59 1.57 1.47 1.39 8. Import/Export of Sugar, 0.05 0.40 0.00 .. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Edible Oils etc. 9. Interest Subsidies 3.93 4.06 8.81 3.79 3.16 1.12 1.13 0.76 0.34 0.34 4.34 10. OtherSubsidies 1.35 1.19 1.37 2.18 2.05 1.26 2.44 4.43 3.33 4.76 4.81 TOTAL - Subsidies 59.80 77.32 104.74 121.58 122.53 120.43 128.64 129.82 124.01 137.26 163.20 - Not available. Note: BE = Budget estimates; RE = Revised estimates. Source: Minstry of Finance, Union Budget Documents. -20 1- Tabbe A4.12 Tax Rgvenue: Center and States (Rs. billion at curmnt prices) 19S0.81 1981-82 1982-83 1983-S4 1984-85 1985-6 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993_94t l.ToReserveBankofIndia 152.78 184.86 218.53 258.02 318.58 38047 451.38 516.97 582.00 720.13 867.58 922.66 965.23 967.83 a Treasury bills 118.44 99.55 159.05 146.47 189.85 242.49 185.61 70.91 123.18 235.73 49.80 61.59 167.17 238.38 b.CGSecurities 38.58 51.26 63.34 77.91 98.19 104.23 82.26 88.43 110.89 141.02 174.50 171.47 86.43 33.11 c. Special securities 5.85 41.10 42.10 45.70 46.50 51.87 198.67 371.77 369.87 368.81 671.01 720.47 720.47 720.47 d. Other liabilities -2.92 -4.19 -7.52 -10.52 -9.84 -16.64 -6.95 -6.12 -11.69 -25.43 -27.73 -30.87 -.8.4 -24.13 e. Cash balances and Dpts. 7.17 2.86 38.44 1.54 6.12 1.48 8.21 8.02 10.25 - - - - - 2.TocommercialbanJks 73.64 78.79 98.59 106.70 118.26 151.90 202.10 241.46 287.66 333.85 388.13 460.46 531.12 795.85 a Treasury bills 5.21 1.51 11.55 9.38 2.98 0.46 0.16 0.14 0.03 0.06 0.10 0.11 3.06 0.72 b. CO Securities 68.43 77.28 87.04 97.32 115.28 151.44 201.94 241.32 287.63 333.79 3S8.03 460.35 528.06 795.13 To Banking system 226.42 263.65 317.12 364.72 436.84 532.37 653.48 758.43 869.66 1053.98 1255.71 1383.12 1496.35 1763.68 3.To Private Sector 258.09 294,93 394.78 433.12 531.20 660.94 808.99 964.95 1170.59 1344.52 1574.62 1794.02 2100.19 2542.56 a.Smnallsavings 79.76 93.75 110.98 135.07 171.57 214.49 247.25 283.58 338.33 417.91 501.00 557.55 601.27 672.85 b. Other 178.33 201.18 283.80 298.05 359.63 446.45 561.74 681.37 832.26 926.61 1073.62 1236.47 1498.92 1869.71 4.External Debt 112.9S 123.28 136.82 151.20 166.37 181.53 202.99 232.23 257.46 283.43 315.25 369.48 422.69 473.45 5.Totaloutstandingdebt 597.49 681.86 848.72 949.04 1134.41 1374.84 1665.46 1955.61 2297.71 2681.93 3145.58 3546.62 4019.24 4779.68 - Not available. a. End of year stocks. b. Provisional. Source: RBI, Report on Currency and FinmAcc various issues; Ministry of Finance, Union Budget & Indian Economic Statistics (Public Finance); Ministry of Finance, Economnic Srvy various issues; World Bank Staff estimates. -202- Table A4.13 Tax Revenue: Center and States (Rs. billion at current prices) 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 I.ToReserveBankoflndia 11.65 19.54 970 1008 24.92 6.31 11.47 9.90 14.14 16.70 20.90 17.50 19.26 25.17 a. Gross 12.11 19.66 9.84 10.93 25.76 10.65 14.58 10.09 14.29 -- -- -- -- -- b.CashbalancesandDpts. 0.46 0.12 0.14 0.85 0.84 4.34 3.11 0.19 0.15 -- -- -- -- -- 2.Tocommercial banks 19.11 23.14 25.75 31.62 41.66 44.53 55.25 75.37 89.92 100.83 125.32 182.01 245.28 252.25 a. SG Securities 16.81 19.59 23.17 29.12 38.38 47.74 56.18 69.47 85.02 103.49 122.90 150.12 171.82 195.09 b. Others 2.30 3.55 2.58 2.50 328 -3.21 -0.93 5.90 4.90 -2.66 2.42 31.89 7346 57.16 To BankingSystem (1)+(2) 30.76 42.68 35.45 41.70 66.58 50.84 66.72 85.27 104.06 117.53 146.22 19951 264.54 277.42 3.ToPrivateSector 45.00 47.00 59.38 70.26 68.84 108.06 106.36 119.05 15040 18933 219.89 234.90 236.46 32685 a ProvidentFund 24.63 29.27 36.30 44.27 48.46 58.17 66.99 83.27 103.29 126.35 157.04 18614 222.36 278.22 b. Others 20.37 17.73 23.08 25.99 20.38 49.89 39.37 35.78 47.11 6298 62,85 48,76 14.10 48 63 4.ToCentralGovt.(a-b-c) 164.01 187.61 230.40 271.90 308.52 352.23 421.58 483.69 542.06 623.41 719.56 80963 903.29 996.49 a. Loans from Center 170.71 190.80 235.58 274.56 312.26 369.84 437.02 495.34 562.22 64139 741.17 834.90 924.12 101945 b. States holding ofTrs.Bil 4.35 1.09 2.97 0.17 1.43 15.20 12.68 8.88 17.38 15.18 18.80 2495 2083 22.96 c. States'holdingofCGSe 2.35 210 2.21 2.49 2.31 2.41 2.76 2.77 2.78 2.80 2.81 032 0.00 000 5. Tota outstanding debt 239.77 277.29 325.23 383.86 443.94 511.13 594.66 688.01 796.53 930.27 1085.67 1244.04 1404.29 1600.75 -- Not available. a. End of year stocks. b 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. -203- Table A4.14 Tax Revenue: Center and States (Rs. billion at current prices) 1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94b 1. To Reserve Bank of India 164.43 386.78 462.85 526.87 596.14 736.83 888.48 940.16 984.49 993.00 a. Centre 152.78 380.47 451.38 516.97 582.00 720.13 867.58 922.66 965.23 967.83 b.State 11.65 6.31 11.47 9.90 14.14 16.70 20.90 17.50 19.26 25.17 2.To commercial banks 92.75 196.43 257.35 316.83 377.58 434.68 513.45 642.47 776.40 1048.09 a. Centre 73.64 151.90 202.10 241.46 287.66 333.85 388.13 460.46 531.12 795.85 b. State 19.11 44.53 55.25 75.37 89.92 100.83 125.32 182.01 245.28 252.25 ToBankingSystem(1)+(2) 257.18 583.21 720.20 843.70 973.72 1171.51 1401.93 1582.63 1760.89 2041.09 3.To Private Sector 296.39 751.39 899.91 1072.35 1300.84 1515.87 1772.90 2003.65 2315.84 2846.45 a. Small savings 79.76 214.49 247.25 283.58 338.33 417.91 501.00 557.55 601.28 672.85 b. Others 216.63 536.90 652.66 788.77 962.51 1097.96 1271.90 1446.10 1714.56 2173.60 4. External Debt 112.98 181.53 202.99 232.23 257.46 283.43 315.25 369.48 422.69 473.45 5. Total outstanding debt 666.55 1516.13 1823.10 2148.28 2532.02 2970.81 3490.08 3955.76 4499.41 5360.98 Loans to States from Centre 170.71 369.84 437.02 495.34 562.22 641.39 741.17 834.90 924.12 1019.45 -- Not available. a. End of year stocks. b. Provisional. Source: RBI, Report on Currency and Finance, various issues; Ministry of Finance, Union Budget & Indian Economic Statistics (Public Finance); Ministry of Finance, Economi Survy, various issues; World Bank Staff estimates. -204- Table 4.15(a) Tax Revenue: Center and States (Rs billion) Sixth Plan Seventh Plan Annual Plans Eighth Plan (80-81 - 84-85) (85-86 - 89-90) 90-91 91-92 92-93 - 96-97) 92-93 93-94 1994-95 Proj. Actuals Proj. Actuals Actuals Actuals Projected Actuals Actuals Revised A Agriculture&AlliedPrograms 119.15 152.02 222.34 315.10 85.44 90.59 636.43 105.91 126.60 154.13 Agriculture 56.95 66.24 105.24 127.93 33.96 38.51 224.67 42.16 42.64 56.78 Rural Development 53.64 69.97 89.06 152.46 41.21 41.42 344.25 50.91 70.33 82.70 Special Area Program 14.80 15.81 28.04 34.70 10.27 10.67 67.50 12.84 13.64 14.66 B Irrigation & Flood Control 121.60 109.31 169.79 165.91 38.37 42.32 325.25 47.05 53.71 54.10 Minor Irrigation 18.10 18.48 28.05 31.92 8.35 8.44 59.77 9.95 10.48 10.79 Majorlrrigation 84.48 74.93 115.56 110.20 25.01 28.24 224.15 30.47 35.71 35.97 Flood Control 10.45 8.11 9.47 9.45 2.08 2.64 16.23 3.30 3.66 2.97 Command Area Development 8.56 7.79 16.71 14.33 2.93 3.00 25.10 3.33 3.85 4.37 C Industry and Minerals 150.18 169.50 221.08 290.99 82.40 65.64 469.22 74.44 84.81 107.90 Village & Small Scale 17.81 19.45 27.53 32.49 9.07 9.41 63.34 9.95 11.52 14.59 Large & Medium Industries 132.37 150.05 193.55 258.50 73.33 56.23 405.88 64.49 73.29 93.30 D Energy 265.35 307.51 551.29 618.20 179.98 197.34 1155.61 202.90 269.09 290.26 Power 192.65 182.98 342.74 378.95 113.34 145.18 795.89 121.57 147.73 156.72 Petroleum 43.00 84.82 129.35 161.31 41.30 33.40 240.00 56.98 95.89 105.09 Coal 28.70 38.08 74.01 71.22 23.92 17.10 105.07 22.77 22.93 25.40 E Transport 124.12 142.07 229.71 297.70 86.96 93.14 559.26 106.63 119.77 152.12 Railways 51.00 65.87 123.34 165.50 49.16 53.93 272.02 61.62 59.01 68.89 Roads & Road Transport 46.35 50.82 71.90 84.59 21.32 24.82 169.52 28.48 32.49 39.84 Ports & Shipping' 14.86 12.13 23.13 26.07 10.97 8.45 76.14 7.28 15.95 19.27 Civil Aviation 8.59 9.57 7.58 18.99 4.92 5.47 40.83 8.82 11.46 23.41 F Communication & Broadcastin 31.34 34.69 61.14 98.93 33.54 36.14 289.66 51.51 62.02 74.98 G Science&Technology 8.65 10.11 24.63 30.23 7.87 8.62 90.42 9.30 11.53 14.74 H Social Services 140.35 159.15 295.78 332.61 87.90 102.99 751.55 113.23 140.16 182.23 Education 25.24 29.78 63.83 76.85 20.63 23.75 196.00 26.19 31.47 42.82 Health & Family Welfare 28.31 34.12 64.49 68.09 17.46 19.48 140.76 22.22 26.13 31.39 Housing&UrbanDevelopme 24.88 28.38 42.30 48.36 12.53 13.52 105.50 14.42 21.47 24.31 Water Supply & Sanitation 39.22 39.97 65.22 70.92 18.45 22.46 167.11 22.84 27.20 34.35 Other Social Services 22.70 26.90 59.94 68.38 18.84 23.77 142.19 27.55 33.89 49.35 I Others 8.02 16.50 24.24 57.94 12.72 10.74 63.60 17.56 13.11 31.59 J TOTAL 975.0 1100.9 1800.0 2207.6 615.18 647.51 4341.00 728.52 880.81 1062.04 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. -205- Table 4.15(b) Projected and Actual Plan Outlays by Sectors (annual averages at constant 1980-81 prices - Rs. billion) Sixth Plan Seventh Plan Annual Plans Eighth Plan (80-81 - 84-85) (85-86 - 89-90) 90-91 91-92 92-93 - 96-97) 92-93 93-94 1994-95 Proj. Actuals Proj. Actuals Actuals Actuals Projected Actuals Actuals Revised A Agriculture & Allied Programs 26.8 24.8 30.3 33.7 36.0 32.7 46.0 35.5 39.7 45.2 Agriculture 12.8 10.8 14.3 13.7 14.3 13.9 16.2 14.1 13.4 16.6 Rural Development 12.1 11.4 12.1 16.3 17.3 15.0 24.9 17.1 22.0 24.2 Special Area Program 3.3 2.6 3.8 3.7 4.3 3.9 4.9 4.3 4.3 4.3 B Irrigation & Flood Control 27.3 17.8 23.1 17.7 16.2 15.3 23.5 15.8 16.8 15.9 Minor Irrigation 4.1 3.0 3.8 3.4 3.5 3.1 4.3 3.3 3.3 3.2 MajorIrrigation 19.0 12.2 15.8 11.8 10.5 10.2 16.2 10.2 11.2 10.5 Flood Control 2.3 1.3 1.3 1.0 0.9 1.0 1.2 1.1 1.1 0.9 CommandAreaDevelopment 1.9 1.3 2.3 1.5 1.2 1.1 1.8 1.1 1.2 1.3 C Industry and Minerals 33.7 27.6 30.1 31.1 34.7 23.7 33.9 25.0 26.6 31.6 Village & Small Scale 4.0 3.2 3.8 3.5 3.8 3.4 4.6 3.3 3.6 4.3 Large & Medium Industries 29.7 24.4 26.4 27.6 30.9 20.3 29.3 21.6 23.0 27.3 D Energy 59.6 50.1 75.2 66.0 75.8 71.3 83.5 68.1 84.3 85.1 Power 43.3 29.8 46.7 40.5 47.7 52.5 57.5 40.8 46.3 45.9 Petroleum 9.7 13.8 17.6 17.2 17.4 12.1 17.4 19.1 30.0 30.8 Coal 6.4 6.2 10.1 7.6 10.1 6.2 7.6 7.6 7.2 7.4 E Transport 27.9 23.1 31.3 31.8 36.6 33.7 40.4 35.8 37.5 44.6 Railways 11.5 10.7 16.8 17.7 20.7 19.5 19.7 20.7 18.5 20.2 Roads & Road Transport 10.4 8.3 9.8 9.0 9.0 9.0 12.3 9.6 10.2 11.7 Ports & Shippinga 3.3 2.0 3.2 2.8 4.6 3.1 5.5 2.4 5.0 5.6 Civil Aviation 1.9 1.6 1.0 2.0 2.1 2.0 3.0 3.0 3.6 6.9 F Communication & Broadcastin 7.0 5.6 8.3 10.6 14.1 13.1 20.9 17.3 19.4 22.0 G Science & Technology 1.9 1.6 3.4 3.2 3.3 3.1 6.5 3.1 3.6 4.3 H Social Services 31.5 25.9 40.3 35.5 37.0 37.2 54.3 38.0 43.9 53.4 Education 5.7 4.9 8.7 8.2 8.7 8.6 14.2 8.8 9.9 12.5 Health & Family Welfare 6.4 5.6 8.8 7.3 7.3 7.0 10.2 7.5 8.2 9.2 Housing & Urban Developme 5.6 4.6 5.8 5.2 5.3 4.9 7.6 4.8 6.7 7.1 Water Supply & Sanitation 8.8 6.5 8.9 7.6 7.8 8.1 12.1 7.7 8.5 10.1 Other Social Services 5.1 4.4 8.2 7.3 7.9 8.6 10.3 9.2 10.6 14.5 I Others 1.8 2.7 3.3 6.2 5.4 3.9 4.6 5.9 4.1 9.3 J TOTAL 219.1 179.3 245.4 235.9 258.9 234.1 313.8 244.4 275.9 311.2 Memo Item: Investment Deflator 89.0 122.8 146.7 187.2 237.6 276.6 276.6 298.1 319.3 341.2 Note: See note to Table 4.15(a). a. Covers major and minor ports, shipping, lighthouses and inland water. Source: Planning Commission. -206- Table A4.15(c) Projected and Actual Plan Outlays by Sectors (percentage distribution and achievement rates)' Sixth Plan Seventh Plan Annual Plans Eighth Plan (80-81 - 84-85) (85-86 - 89-90) 90-91 91-92 92-93 - 96-97) 92-93 93-94 94-95 % Achieve- % Achieve- Achieve- Achieve- % Achieve- Achieve- Achieve- shareb mentC shareb mentC mentc mentc shareb mentc mentc mentc A Agriculture & Allied Programs 12.2 13.8 12.4 14.3 13.9 14.0 14.7 14.5. 14.4 14.5 Agriculture 5.8 6.0 5.8 5.8 5.5 5.9 5.2 5.8 4.8 5.3 Rural Development 5.5 6.4 4.9 6.9 6.7 6.4 7.9 7.0 8.0 7.8 Special Area Program 1.5 1.4 1.6 1.6 1.7 1.6 1.6 1.8 1.5 1.4 B Irrigation & Flood Control 12.5 9.9 9.4 7.5 6.2 6.5 7.5 6.5 6.1 5.1 Minor Irrigation 1.9 1.7 1.6 1.4 1.4 1.3 1.4 1.4 1.2 1.0 Major Irrigation 8.7 6.8 6.4 5.0 4.1 4.4 5.2 4.2 4.1 3.4 Flood Control 1.1 0.7 0.5 0.4 0.3 0.4 0.4 0.5 0.4 0.3 Command Area Development 0.9 0.7 0.9 0.6 0.5 0.5 0.6 0.5 0.4 0.4 C Industry and Minerals 15.4 15.4 12.3 13.2 13.4 10.1 10.8 10.2 9.6 10.2 Village & Small Scale 1.8 1.8 1.5 1.5 1.5 1.5 1.5 1.4 1.3 1.4 Large&Medium Industries 13.6 13.6 10.8 11.7 11.9 8.7 9.3 8.9 8.3 8.8 D Energy 27.2 27.9 30.6 28.0 29.3 30.5 26.6 27.9 30.6 27.3 Power 19.8 16.6 19.0 17.2 18.4 22.4 18.3 16.7 16.8 14.8 Petroleum 4.4 7.7 7.2 7.3 6.7 5.2 5.5 7.8 10.9 9.9 Coal 2.9 3.5 4.1 3.2 3.9 2.6 2.4 3.1 2.6 2.4 E Transport 12.7 12.9 12.8 13.5 14.1 14.4 12.9 14.6 13.6 14.3 Railways 5.2 6.0 6.9 7.5 8.0 8.3 6.3 8.5 6.7 6.5 Roads & Road Transport 4.8 4.6 4.0 3.8 3.5 3.8 3.9 3.9 3.7 3.8 Ports & Shippingd 1.5 1.1 1.3 1.2 1.8 1.3 1.8 1.0 1.8 1.8 Civil Aviation 0.9 0.9 0.4 0.9 0.8 0.8 0.9 1.2 1.3 2.2 F Communication & Broadcastin 3.2 3.2 3.4 4.5 5.5 5.6 6.7 7.1 7.0 7.1 G Science & Technology 0.9 0.9 1.4 1.4 1.3 1.3 2.1 1.3 1.3 1.4 H Social Services 14.4 14.5 16.4 15.1 14.3 15.9 17.3 15.5 15.9 17.2 Education 2.6 2.7 3.5 3.5 3.4 3.7 4.5 3.6 3.6 4.0 Health & Family Welfare 2.9 3.1 3.6 3.1 2.8 3.0 3.2 3.1 3.0 3.0 Housing & Urban Developme 2.6 2.6 2.4 2.2 2.0 2.1 2.4 2.0 2.4 2.3 Water Supply & Sanitation 4.0 3.6 3.6 3.2 3.0 3.5 3.8 3.1 3.1 3.2 Other Social Services 2.3 2.4 3.3 3.1 3.1 3.7 3.3 3.8 3.8 4.6 I Others 0.8 1.5 1.3 2.6 2.1 1.7 1.5 2.4 1.5 3.0 J TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a. Derived from Table 4.15(a). b. Percentage share in total plan outlay. c. Actual outlay as a percentage of target outlay for the Plan. d. Covers major and minor ports, shipping, lighthouses and inland water. Source: Planning Commission. -207- Table A5.1 Money Supply and Sources of Change, 1985-86 - 1995-96 (Rs. billion) 198546 198647 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96' BROAD MONEY SUPPLY (M3) 1193.99 1416.42 1642.79 2002.41 2309.48 2658.28 3170.49 3668.25 4344.07 5308.02 6004.98 NarrowMoneySupply(Ml) 440.99 515.22 585.59 711.01 810.58 928.92 1144.06 1240.66 1507.78 1914.72 2131.82 Currency with Public 250.59 283.82 335.59 380.71 463.00 530.48 610.98 682.73 823.01 1007.89 1182.53 Deposit Money (total) 187.50 228.30 246.00 323.40 341.60 391.70 524.23 544.80 659.52 873.03 949.29 Time Deposits with Banks 753.00 901.20 1057.20 1291.40 1498.90 1729.36 2026.43 2427.59 2836.29 3393.30 3873.14 SOURCES OF CHANGE NetBankDomestic Credit 1411.24 1667.61 1918.57 2300.36 2688.57 3119.62 3462.56 3963.73 4416.92 5120.71 6013.08 To Government 583.21 720.20 843.70 973.73 1171.53 1401.93 1582.63 1762.38 2039.18 2224.16 2626.69 From Reserve Bankoflndia(RBI) 386.78 462.85 526.87 596.15 736.83 888.48 940.16 984.49 993.00 1014.78 1269.61 From OtherBanks 196.43 257.35 316.83 377.58 434.70 513.45 642.47 777.89 1046.18 1209.38 1357.08 To Commercial Sector 828.03 947.41 1074.87 1326.63 1517.04 1717.69 1879.93 2201.35 2377.74 2896.55 3386.39 From Reserve Bank of India 30.52 33.94 37.90 55.24 63.49 63.42 72.60 62.20 64.45 65.93 68.54 From OtherBanks 797.51 913.47 1036.97 1271.39 1453.55 1654.27 1807.33 2139.15 2313.29 2830.62 3317.85 Net Foreign Exchange Assets 38.72 48.15 56.72 68.00 66.51 105.81 212.26 244.43 526.26 759.24 754.10 of Banidng Sector Government's CurrencyLiabilities 9.40 11.92 13.80 14.75 15.55 16.21 17.04 18.24 19.90 23.79 22.90 to the Public NetNon-MonetaryLiabilities 265.37 311.26 346.30 380.70 461.15 583.36 521.37 558.15 619.01 595.72 785.11 of Reserve Bank of Idia 107.07 134.44 142.25 169.36 175.36 270.22 274.15 282.46 260.37 293.61 378.19 of OtherBanks 158.30 176.82 204.05 211.34 285.79 313.14 247.22 275.69 358.64 302.11 406.92 Broad Money Supply (M3) 1193.99 1416.42 1642.79 2002.41 2309.48 2658.28 3170.49 3668.25 4344.07 5308.02 6004.98 GDP at market prices 2622.43 2929.49 3332.01 3957.82 4568.21 5355.34 6167.99 7053.28 8010.32 9456.15 10918.5 Note: 1995-96 figures are as of March31 on the basis of the closure of government accounts. a. The data for 1994-95 are not strictly comparable with those of the previous years, as M3 data for 1994-95 include scheduled commercial banks' data for 27 fortnights while for the previous years they include 26 fortrights. Source: Ministry of Finance, Eoomin S various issues; Reserve Bank of India, RBI Bulletin (Weekly Statistical Supplement). -208- Table A5.2 Base Money Supply and Sources of Change, 1985-86 - 1995-96 (Rs. billion) 198546 1986-87 198748 198849 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96' TOTALBASEMONEYSSUPPLY 381.66 448.08 534.90 629.59 775.91 877.79 995.05 1107.79 1386.71 1692.79 1943.35 CunencywithPublic 250.59 283.82 335.59 380.71 463.00 530.48 610.98 682.73 823.01 1007.89 1182.53 OtheDepositswidtRBI 2.89 3.09 3.97 6.94 5.98 6.74 8.85 13.13 25.25 33.80 34.34 CashwithBanks 14.65 15.31 15.63 19.72 19.86 22.34 26.40 30.53 30.94 38.92 41.04 BankDepositswidiRBI 113.53 145.86 179.71 222.22 287.07 318.23 348.82 381.A0 507.51 612.18 685.44 SOURCES OF CHANGE RBIClaims 441.92 524.39 609.18 722.18 875.03 1051.97 1063.78 1145.54 1112.96 1215.41 1557.71 On Government (net) 386.78 462.85 526.87 596.15 736.83 888.48 940.16 984.49 993.00 1014.78 1269.61 OnBanks 24.62 27.60 44.41 70.79 74.71 100.07 51.02 98.85 55.51 134.70 219.55 On Commercial Sector 30.52 33.94 37.90 55.24 63.49 63.42 72.60 62.20 64.45 65.93 68.55 Net Foreign Exchange Assets 37.41 46.21 54.17 62.02 60.69 79.83 188.38 226.47 514.22 747.20 740.92 of RBI GovemmenfsCunencyLiabilities 9.40 11.92 13.80 14.75 15.55 16.21 17.04 18.24 19.90 23.79 22.90 to tie Public Net Non-Monetry Liabilities 107.07 134.44 142.25 169.36 175.36 270.22 274.15 282.46 260.37 293.61 378.19 of Reserve Bank of India Total BaseMoney Supply 381.66 448.03 534.90 629.59 775.91 877.79 995.05 1107.79 1386.71 1692.79 1943.35 GDP at market prices 2622.43 2929.49 3332.01 3957.82 4568.21 5355.34 6167.99 7053.28 8010.32 9456.15 10918.50 Note: 1995-96 figures are as of March31 on the basis of the closure of govemment accounts. a. The data fr 1994-95 are not strictly compwrable with those of the previous yeaus, as M3 data for 1994-95 include scheduled commercial banks' data for 27 fortnights while for the previous yean they include 26 fortnights. Source: Ministry of Finance, Economnic Surv various isues; Resrve Bank of India, RBI Bulledn (Weekly Stadstical Supplement). -209- Table A5.3 Selected Monetary Policy Instruments Bank Minimum Statuoty Rate Cash Reserve' Liquidityb Year & Month Ratio Ratio 1981 July31 10 6.5 34.0 August 21 10 7.0 34.0 September 25 10 7.0 34.5 October 30 10 7.0 35.0 November 27 10 7.3 35.0 December 25 10 7.5 35.0 1982 January 29 10 7.8 35.0 April 10 10 7.3 35.0 June 11 10 7.0 35.0 1983 May28 10 7.5 35.0 July 30 10 8.0 35.0 August 27 10 8.5 35.0 November 12 10 Incremental CRR of 10% 35.0 overNovember 11, 1983 1984 February 4 10 9.0 35.0 July 28 10 9.0 35.5 September 1 10 9.0 36.0 October 30 10 9.0 36.0 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 October 24 10 10.0 37.5 1988 January 2 10 10.0 38.0 July 2 10 10.5 38.0 July 30 10 11.0 38.0 1989 July I 10 15.0 38.0 1990 September22 10 15.0 38.5 1991 July 4 11 15.0 38.5 October 9 12 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 September 17 12 14.0 25.0 1994 June 11 12 14.5 25.0 July 9 12 14.8 25.0 August 6 12 15.0 25.0 1995 November 11 12 14.5 25.0 December 9 12 14.0 25.0 1996 April 27 12 13.5 25.0 May 11 12 13.0 25.0 July 6 12 12.0 25.0 Note: Dates given are those on which the announced measures take effect. a. Minimum cash reserves to be deposited with the RBI as % of net demand and time liabilities (NDTl). b. The ratio 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 Comminee to Review the Working of the Monetary System, 1985; Reserve Bank of India, AnnuaLReoort. various issues. -210- Table A5.4 Structure of Short-term and Long-term Interest Rates (percent per annum) 1980-81 1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 A. SHORT-TERM RATES Reserve Bank Rate 9.0 10.0 10.0 12.0 12.0 12.0 12.0 Treasury Bills: 91-daya 4.6 4.6 4.6 4.6 8.8-10.7 7.1-11.1 7.2-11.9 182-day 10.0-10.1 8.8-10.1 7.8-8.4 364-day 9.9-10.3 10.0-11.4 9.4-11.9 Call Money Rate (Bombay) 7.1 10.0 15.9 19.6 14.4 7.0 9.4 Commercial Bank Rates: Maximum DepositRate b 10.0 11.0 11.0 13.0 11.0 10.0 11.0 Minimum Lending Rate 13.5 16.0 19.0 17.0 14.0 Free B. LONG-TERM RATES I.D.B.I. Prime Lending Rate 14.0 14.0 14.0-15.0 18.0-20.0 17.0-19.0 14.5-17.5 15.0 Company Deposit Rates: c Private Sector Companies d (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 (ii) 2 years 10.0-14.5 12.0-15.0 12.0-14.0 12.0-15.0 13.0-15.0 13.0-14.0 14.0-15.0 (iii) 3 years 13.0-15.5 13.0-15.0 13.5-14.0 14.0-15.0 15.0 14.0 14.0-15.0 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 (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 (iii) 3 years 13.5 13.5-14.5 13.0-14.0 13.0-15.0 15.0 14.0-15.0 14.0-15.0 Average Yield - Ordinary Shares 5.9 3.2 2.6 2.1 1.7 2.2 1.8 Redemption Yield - Government of India Securities (i) Short-term (1-5 years) 4.7-6.0 5.4-9.8 7.0-21.7 8.4-26.3 9.1-23.8 11.9-12.9 9.8-11.8 (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 (iii) Long-term (above 15 years) 6.4-7.5 8.4-11.5 10.9-12.0 9.9-12.4 8.8-12.5 12.9-13.4 11.8-13.5 Note: 1994-95 is preliminary. a. 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 sector companies. Source: Reserve Bank of India, Report on Currency and Finance, various issues. -211- Table A5.5 Sectoral Deployment of Gross Bank Credit (Rs billion - change during year) April-August 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1994-95 1995-96 Gross Bank Credit 72.57 73.56 76.91 154.68 169.43 153.48 79.86 211.34 97.18 407.46 18.13 -9.67 Public Food Procurement Credit -1.30 -4.31 -29.14 -14.21 12.37 25.00 1.64 20.73 41.64 13.68 6.23 18.45 Gross Non-Food Credit 73.87 77.87 106.05 168.89 157.06 128.48 78.22 190.61 55.54 393.78 11.90 -28.12 Priority Sectors 31.57 34.84 40.20 51.49 61.64 25.32 25.10 44.07 40.48 102.61 9.41 -1.00 Agriculture 13.98 15.12 14.39 19.41 25.76 2.24 14.07 18.06 12.45 27.72 0.49 0.08 Small Scale Industries 12.04 12.92 17.12 23.15 24.08 16.38 9.69 18.76 25.91 49.95 2.28 -2.39 Other Priority Sectors 5.55 6.80 8.69 8.93 11.80 6.70 1.34 7.25 2.12 24.94 6.64 1.31 Industry (Medium & Large) 24.83 29.34 37.97 70.32 60.87 62.46 25.82 115.46 -7.71 174.76 -4.69 -7.11 Wholesale Trade (other than food procurement) 4.17 0.14 5.18 11.69 7.05 4.38 2.44 8.15 3.61 24.19 0.68 -0.30 Other Sectors 13.30 13.55 22.70 35.39 27.60 36.32 24.86 22.93 19.16 92.22 6.50 -19.71 Export Credit (included in Gross Non-Food Credit) 0.74 7.37 7.71 22.24 21.04 9.41 11.08 50.62 17.30 82.96 18.81 -12.90 Priority Sector advances as percent of netbankcredita 40.80 42.20 44.10 43.20 42.40 39.20 38.70 35.10 35.30 33.20 35.40 33.20 a. In the last month of each period, advances include Participation Certificates. Source: Ministry of Finance, Economic Survey, various issues. -212- Table A6.1 Production of Major Crops 1980-81 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Total Foodgrains 129.6 152.4 145.5 150.4 143.4 140.4 169.9 171.0 176.4 168.4 179.5 184.3 191.1 Kharif 77.6 89.2 84.5 85.2 80.2 74.6 95.6 101.0 99.4 91.6 101.5 100.4 100.6 Rabi 51.9 63.1 61.0 65.2 63.2 65.8 74.3 70.0 77.0 76.8 78.0 83.9 90.5 Total Cereals 119.0 139.5 133.6 137.1 131.7 129.4 156.1 158.2 162.1 156.4 166.6 170.9 177.0 Kharif 73.9 83.9 79.8 80.7 76.0 70.2 90.0 95.5 94.0 87.2 95.8 95.0 95.8 Rabi 45.1 55.6 53.8 56.4 55.7 59.2 66.1 62.7 68.1 69.2 70.8 75.9 81.2 Rice 53.6 60.1 58.3 63.8 60.6 56.9 70.5 73.6 74.3 74.7 72.9 80.3 81.2 Kharif 50.1 55.0 53.8 59.4 53.6 49.0 63.4 65.9 66.3 66.4 65.3 70.7 71.4 Rabi 3.5 5.0 4.6 4.4 7.0 7.8 7.1 7.7 8.0 8.3 7.6 9.6 9.8 Wheat 36.3 45.5 44.1 47.1 44.3 46.2 54.1 49.8 55.1 55.7 57.2 59.8 65.5 Barley(Jowar) 10.4 11.9 11.4 10.2 9.2 12.2 10.2 12.9 11.7 8.1 12.8 11.4 9.2 Kharif 7.5 8.7 7.8 7.3 6.5 8.6 7.1 9.2 8.3 5.7 9.4 7.3 6.1 Rabi 2.9 3.3 3.6 2.9 2.7 3.6 3.1 3.7 3.4 2.4 3.4 4.1 3.1 Maize 7.0 7.9 8.4 6.6 7.6 5.7 8.2 9.7 9.0 8.1 10.0 9.6 9.1 Bajra 5.3 7.7 6.0 3.7 4.5 3.3 7.8 6.6 6.9 4.7 8.9 5.0 7.2 TotalPulses 10.6 12.9 12.0 13.4 11.7 11.0 13.8 12.8 14.3 12.0 12.8 13.3 14.1 Kharif 3.8 5.4 4.8 4.6 4.2 4.4 5.6 5.5 5.4 4.4 5.6 5.4 4.8 Rabi 6.8 7.5 7.2 8.8 7.5 6.6 8.2 7.3 8.9 7.6 7.2 7.9 9.3 Gramn 4.3 4.8 4.6 5.8 4.5 3.6 5.1 4.2 5.4 4.1 4.4 5.0 6.2 Tur 2.0 2.6 2.6 2.4 2.3 2.3 2.7 2.7 2.4 2.1 2.3 2.7 2.2 TotalOilseeeds 9.4 12.7 12.9 10.8 11.3 12.6 18.0 16.9 18.6 18.6 20.1 21.5 21.4 Kharif 5.0 7.2 7.0 6.0 6.4 6.4 10.5 9.6 9.8 9.3 12.0 12.3 11.9 Rabi 4.4 5.5 5.9 4.8 4.9 6.2 7.5 7.3 8.8 9.3 8.1 9.2 9.5 Groundnut 5.0 7.1 64 5.1 5.9 5.8 9.7 8.1 7.5 7.1 8.6 7.8 8.3 Kharif 3.7 5.3 4.7 3.7 4.4 4.2 7.5 6.1 5.1 5.0 6.7 5.7 6.2 Rabi 1.3 1.8 1.7 1.4 1.4 1.7 2.2 2.0 2.4 2.1 1.9 2.1 2.1 Rapeseed&Mustard 2.3 2.6 3.1 2.7 26 3.4 4.4 4.1 5.2 5.9 4.8 5.3 5.9 Sugarcane 154.2 174.1 170.3 170.7 186.1 196.7 203.0 225.6 241.0 254.0 228.0 229.7 258.4 Cotton 7.0 6.4 8.5 8.7 6.9 6.4 8.7 11.4 9.8 9.7 11.4 10.7 12.1 Jute & Mesta 8.2 7.7 7.8 12.6 8.6 6.8 7.9 8.3 9.2 10.3 8.6 8.4 9.5 Jute 6.5 6.3 6.5 10.9 7.3 5.8 6.7 7.1 7.9 8.9 7.5 7.3 8.3 Mesta 1.7 1.4 1.3 1.8 1.3 1.0 1.2 1.2 1.3 1.4 1.1 1.1 1.2 Potato 9.7 12.1 12.6 10.4 12.7 14.1 14.9 14.8 15.2 16.4 15.2 17.6 -- -- Not available. Notes: Units of measurement of all commodities is million tonnes, except in the case of cotton, jute and mesta where production is in terms of millions of bales. Figures for 1994-95 are provisional. a. Includes groundnuts, rapeseeds and mustard, sesame, linseed, castorseed, nigerseed, safflower, sunflower and soybean. Source: Ministry of Finance, Economic Survey, various issues. -213- Table A6.2 Irrigated Area Under Different Crops (million hectares) 1980-81 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 Total Foodgrains 37.6 38.4 40.2 40.1 40.4 41.8 40.5 43.9 44.3 44.5 45.5 46.3 Total Cereals 35.8 36.6 38.5 38.4 38.3 39.5 38.4 41.8 41.9 41.9 43.0 43.8 Rice 16.4 16.0 17.4 17.7 17.7 18.1 17.0 19.1 19.4 19.2 19.9 19.6 Jowar 0.8 0.6 0.6 0.7 0.7 0.8 0.8 0.8 0.9 0.9 0.8 0.8 Bajra 0.6 0.6 0.6 0.6 0.6 0.7 0.8 0.6 0.7 0.6 0.7 0.6 Maize 1.2 1.2 1.0 1.0 1.1 1.3 1.2 1.2 1.2 1.2 1.3 1.3 Wheat 15.6 17.0 17.9 17.5 17.3 17.7 17.8 19.1 18.8 19.4 19.5 20.7 Barley 0.9 0.7 0.7 0.6 0.7 0.6 0.6 0.6 0.5 0.5 0.6 0.6 Total Pulses 2.0 1.8 1.7 1.8 2.1 2.3 2.0 2.2 2.3 2.6 2.4 2.4 Other Crops Oilseeds1 2.3 2.6 3.1 3.5 3.4 3.4 4.3 5.0 5.2 5.6 6.6 6.4 Cotton 2.1 2.3 2.3 1.9 2.3 2.2 2.1 2.4 2.6 2.5 2.6 2.7 Sugarcane 2.4 2.8 2.6 2.6 2.6 2.8 3.0 3.0 3.1 3.3 3.6 3.6 a. Oilseeds include groundnuts, rapeseed and mustard, linseed, sesame, and others. Source: Ministry of Finance, Economic Survey, various issues. -214- Table A6.3 Yield Per Hectare of Major Crops (kgs. per hectare) 1980-81 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 TotalFoodgrains 1023 1102 1149 1175 1128 1173 1331 1349 1380 1382 1457 1501 1547 Kharif 933 1060 1041 1042 985 996 1166 1241 1231 1174 1302 1324 1341 Rabi 1195 1343 1341 1410 1382 1468 1628 1544 1635 1751 1725 1787 1864 Total Cereals 1142 1296 1285 1323 1266 1315 1493 1530 1571 1574 1654 1701 1763 Kharif 1015 1148 1129 1140 1074 1082 1270 1366 1357 1305 1440 1465 1488 Rabi 1434 1608 1617 1718 1673 1763 1964 1875 2010 2126 2068 2132 2280 Rice 1336 1457 1417 1552 1471 1465 1689 1745 1740 1751 1744 1888 1921 Kharif 1303 1413 1374 1514 1393 1368 1627 1677 1670 1676 1676 1807 1840 Rabi 2071 2205 2274 2329 2563 2640 2548 2678 2671 2720 2720 2816 2837 Wheat 1630 1844 1870 2046 1916 2002 2244 2121 2281 2394 2327 2380 2553 Barley (Jowar) 660 726 715 633 576 762 697 869 814 655 982 898 783 Kharif 737 851 820 761 665 892 789 1053 969 757 1230 1065 970 Rabi 520 522 563 447 437 568 550 604 582 496 632 704 570 Maize 1159 1352 1456 1146 1282 1029 1395 1632 1518 1376 1676 1602 1493 Bajra 458 652 519 344 401 378 646 610 658 465 836 521 707 Total Pulses 473 548 526 547 505 515 598 549 578 533 573 598 609 Kharif 361 483 453 412 392 435 504 480 471 393 495 492 459 Rabi 571 605 589 658 604 587 686 616 672 672 654 701 736 Gram 657 663 661 742 649 629 753 652 712 739 684 783 855 Tur 689 801 819 767 722 685 779 763 673 588 652 762 651 TotalOilseeds' 532 679 684 570 605 629 824 742 771 719 797 799 848 Kharif 492 655 633 516 554 559 805 691 698 604 804 759 810 Rabi 588 713 758 651 687 720 851 822 872 886 786 860 900 Groundnut 736 940 898 719 841 855 1132 930 904 818 1049 941 1042 Kharif 629 835 779 602 733 737 1066 824 751 687 969 813 948 Rabi 1444 1484 1518 1549 1540 1425 1442 1532 1611 1501 1473 1624 1495 Rapeseed & Mustard 560 674 771 674 700 748 906 831 904 895 776 847 944 Sugarcane 57844 55974 57673 60000 60000 60000 61000 65000 65000 66000 64000 67000 68000 Cotton 152 141 196 197 169 168 202 252 225 216 257 249 260 Jute & Mesta 1130 1323 1242 1524 1454 1274 1540 1646 1634 1662 1658 1713 1803 Jute 1245 1417 1411 1710 1647 1496 1748 1879 1833 1837 1857 1907 1983 Mesta 828 869 764 910 865 680 909 956 988 1019 955 1008 1100 Potato 13256 15206 14806 12000 15000 16000 16000 16000 16000 16000 15000 -- -- -- Not available. Note: Figures for 1994-95 are provisional. a. Includes groundnuts, rapeseeds and mustard, sesame, linseed, castorseed, nigerseed, safflower, sunflower and soybean. Sowuce: Ministry of Finance, Economic Survey various issues. -215- Table A6.4 Net Availability, Procurement and Public Distribution of Foodgrains a (million tonnes) 1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 NetProduction 113.4 131.6 125.5 122.8 148.7 149.7 154.3 147.3 157.0 161.2 167.2 Net Imports 0.7 -0.5 -0.2 3.8 1.2 1.3 -0.1 -0.4 2.6 0.5 -- Change in Government Stocks -0.2 -1.6 -9.5 -4.6 2.6 6.2 -4.4 -1.5 10.3 7.5 -0.6 NetAvailability 114.3 133.8 134.8 130.8 147.2 144.8 158.6 148.4 149.3 154.2 167.8 Procurement 13.0 19.7 15.7 14.1 18.9 24.0 19.6 17.9 28.1 26.0 22.5 Public Distribution 13.0 17.3 18.7 18.6 16.4 16.0 20.8 18.8 16.4 14.0 15.3 -- Not available. a. Production figures relate to agricultural year. Figures for procurement and public distribution relate to calendar years. Source: Ministry of Finance, Economic Survyy, various issues. -216- Table A6.5 New Index of Industrial Production (1980-81=100) 1993-94 1994-95 Index over over Weight 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1992-93 1993-94 General Index 100.00 155.1 166.4 180.9 196.4 212.6 213.9 218.9 232.0 251.9 6.0 8.6 Mining andQuanying 11.46 177.9 184.6 199.1 211.6 221.2 222.5 223.7 231.5 245.8 3.5 6.2 ElectricityGenerated 11.43 168.1 181.0 198.2 219.7 236.8 257.0 269.9 290.0 314.6 7.5 8.5 Manufacturing Index 77.11 149.7 161.5 175.6 190.7 207.8 206.2 210.7 223.5 243.6 6.1 9.0 Food products 5.33 133.2 139.0 148.5 150.9 169.8 178.0 175.3 160.0 181.7 4.7 13.6 Beverages,tobacco,etc. 1.57 98.5 84.9 92.1 103.0 104.8 107.3 113.7 137.8 134.4 21.2 -2.5 Cottontextles 12.31 112.5 111.2 107.8 112.3 126.6 139.0 150.1 160.5 155.8 6.9 -2.9 Jutetextiles 2.00 101.1 91.0 101.9 97.4 101.6 90.8 87.0 103.2 92.4 18.7 -10.5 Textile products 0.82 87.1 91.7 134.2 151.7 103.2 97.2 75.8 73.4 78.4 -3.2 6.8 Wood & wood products 0.45 246.1 161.7 171.7 176.0 197.2 185.0 190.5 199.3 203.0 4.6 1.9 Paper&paperproducts 3.23 163.2 166.3 171.3 181.5 198.0 203.0 210.9 224.8 257.5 6.6 14.5 Leather&leatberproducts 0.49 177.7 185.5 177.4 188.3 194.3 181.3 187.7 204.3 211.1 8.8 3.3 Rubber, plastic & petroleum prod. 4.00 149.6 155.1 168.3 173.5 174.0 172.0 174.6 176.4 181.9 1.0 3.1 Chemical & chemical products 12.51 175.5 200.9 233.4 247.6 254.1 261.2 276.9 297.9 327.7 7.6 10.0 Non-metallicmineraproducts 3.00 160.3 158.1 184.6 189.9 193.1 205.2 208.9 218.5 233.7 4.6 7.0 Basicmetal alloy products 9.80 126.8 135.6 144.9 143.7 158.8 167.8 168.4 224.2 199.2 33.1 -11.2 Meal products 2.29 124.5 129.6 133.5 142.6 143.1 133.1 124.6 126.5 149.5 1.5 18.2 Machinery&machinetools 6.24 141.8 139.2 161.2 171.9 186.9 183.3 181.1 189.2 207.6 4.4 9.7 Electrical machinery 5.78 254.7 335.2 346.0 459.2 563.6 493.7 483.6 460.1 609.2 -4.9 32.4 Transport equipment 6.39 144.9 151.9 171.3 181.1 192.5 191.1 200.6 211.2 239.1 5.3 13.2 isacellaneousproducts 0.90 235.4 272.1 306.3 333.2 321.8 269.9 281.3 267.0 267.8 -5.1 0.3 Note: Figures for 1994-95 are provisional. Source: Ministry of Finance, Economic Sun= various issues. -217- Table A6.6 Production, hnports and Consumption of Fertilizers (000' nutrient tons) Nitrogenous PhosphallCb Potassic Total (APr-Mar) Production Imports Consumption Product;on Imports Consumpton Imps Consumpton Production Imports Cosumption 198041 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 1311.0 3014.0 1280.0 1168.0 8543.0 3114.0 11568.0 1990-91 6993.0 414.0 7997.0 2052.0 1016.0 3221.0 1328.0 1328.0 9045.0 2758.0 12546.0 1991-92 7301.0 566.0 8046.0 2562.0 967.0 3321.0 1236.0 1361.0 9863.0 2769.0 12728.0 1992-93 7430.0 1160.0 8426.0 2306.0 746.0 2842.0 1082.0 884.0 9736.0 2988.0 12152.0 1993-94 7231.0 1564.0 8789.0 1816.0 722.0 2669.0 880.0 908.0 9047.0 3166.0 12366.0 1994-95 7945.0 1476.0 9507.0 2493.0 380 2932.0 1109.0 1125.0 10438.0 2965.0 13564.0 1995-960 8633.0 - 10754.0 2667.0 - 3560.0 - 1351.0 11300.0 13564.0 15665.0 -Not available. a. Excludes nitrogen meant for 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 feruliser imported on Govemnment aCcoUnt. Source: The Fertilizer Association of ndia, etlizeStVati;Sfis viousis ; M,nistry of Finance,EommicSM various issues. -218- Table A6.7 Indian Railways: Freight and Passenger Traffic Passenger Traffic Revenue Earning Freight Traffic Non-Suburban Suburban Originating Net tons- Average Passenger Passenger- Average Passenger Passenger- Average tonnage kilometeras lead originating kilometers lead originating kilometers lead Year (min.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 I884 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 19S8-89 302.1 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 1995-96 398.0 278766 700 1509 253549 168.0 2454 65806 26.8 Note: Figures for 1994-95 and 1995-96 are revised estimates and budget estimates respectively. 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. -219- Table A6.8 Petroleum Summary Commodity Balance of Petroleum and Petroleum Products (million tonnes) 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 A. CRULDE PTROLEUM I.RefineryThroughput 25.8 30.2 33.2 35.3 35.6 42.9 45.7 47.7 48.8 51.9 51.8 51.4 53.5 54.3 56.3 2.Domestic Production 10.5 16.2 21.1 26.0 29.0 30.2 30.5 30.4 32.0 34.1 33.0 30.4 27.0 27.0 32.2 (a)On-shore 5.5 8.2 8.2 8.6 8.9 9.4 9.9 10.2 10.9 12.4 11.8 11.4 11.2 11.6 12.0 (b) Off-shore 5.0 8.0 12.9 17.4 20.1 20.8 20.6 20.2 21.1 21.7 21.2 19.0 15.8 15.4 20.2 3.1mports 16.2 15.3 16.9 16.0 13.7 15.1 15.5 18.0 17.8 19.5 20.7 24.0 29.2 30.8 27.3 4.Exports - 0.8 4.5 5.5 6.5 0.5 -- - - -- - - - - - 5.Net Imports (3-4) 16.2 14.5 12.4 10.5 7.2 14.6 15.5 18.0 17.8 19.5 20.7 24.0 29.2 30.8 27.3 B. PRODUCTS l.Domestic Consumption' 30.9 32.5 34.7 35.8 38.5 40.8 43.4 46.4 50.1 54.1 55.0 57.0 58.9 60.8 65.5 of which: (a) Naphtha 2.3 3.0 3.0 2.8 3.1 3.1 3.2 2.9 3.4 3.4 3.4 3.5 3.4 3.2 3.4 (b) Kerosene 4.2 4.7 5.2 5.5 6.0 6.2 6.6 7.2 7.7 8.2 8.4 8.4 8.5 8.7 9.0 (c) High Speed Diesel 10.3 10.8 12.0 12.6 13.7 14.9 16.0 17.7 18.8 20.7 21.1 22.7 24.3 25.9 28.3 (d) Fuel oils 7.5 7.2 7.3 7.6 7.9 7.9 7.9 8.1 8.5 8.8 9.0 9.2 9.3 9.2 9.9 2.Domestic Production 24.1 28.2 31.1 32.9 33.2 39.9 42.8 44.7 45.7 48.7 48.6 48.3 50.4 51.1 52.9 (a) Naphtha 2.1 3.0 3.0 3.6 3.5 5.0 5.6 5.5 5.4 5.2 4.9 4.5 4.6 4.7 5.7 (b)Kerosene 2.4 2.9 3.4 3.5 3.4 4.0 4.9 5.1 5.2 5.7 5.5 5.3 5.2 5.3 5.3 (c) High Speed Diesel 7.4 9.0 9.8 10.9 11.1 14.6 15.5 16.3 16.7 17.7 17.2 17.4 18.3 18.8 19.6 (d) Fuel oils 6.1 6.9 8.0 8.0 7.9 8.0 8.0 8.5 8.9 9.0 9.4 9.6 10.4 10.3 9.8 3.1mports 7.3 4.9 5.0 4.3 6.1 3.9 3.1 3.9 6.5 6.6 8.7 9.4 11.3 12.1 14.0 4.Exports' -- 0.1 0.8 1.5 0.9 2.0 2.5 3.4 2.3 2.6 2.6 2.9 3.7 4.0 3.3 SNet Imports 7.3 4.8 4.2 2.8 5.2 1.9 0.6 0.5 4.2 4.0 6.1 6.5 7.6 8.1 10.7 - 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. -220- Table A6.9 Generation and Consumption of Electricity (in '000 GWH) 1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 A. GENERATION OF ELECTRICITY BY SOURCE AND REGION 1. Thermalb Northem 13.69 25.73 29.80 37.74 41.24 48.82 52.13 60.44 66.17 71.48 Westem 25.37 48.94 54.58 61.80 63.39 73.08 76.95 84.33 88.50 96.27 Southem 9.22 20.45 24.10 28.07 30.53 34.03 35.76 40.39 44.31 51.06 Eastem 12.53 18.37 19.31 20.77 21.40 21.55 20.39 22.40 24.56 28.44 North-Eastem 0.50 0.87 1.06 1.24 1.15 1.22 1.31 1.19 1.23 1.08 All-India 61.30 114.35 128.85 149.61 157.71 178.70 186.55 208.75 224.77 248.33 2. Hydro Northem 15.08 19.49 22.02 20.86 23.57 25.01 27.16 27.21 25.45 24.33 Westem 7.81 6.18 6.15 5.06 7.54 6.87 8.31 8.16 7.27 8.72 Southem 20.28 21.15 21.08 17.35 21.64 24.54 29.17 29.63 30.70 30.72 Eastem 2.96 3.17 3.67 3.19 3.76 4.11 5.34 5.87 4.52 4.46 North-Eastem 0.41 1.03 0.92 0.97 1.36 1.58 1.66 1.89 1.93 2.20 All-India 46.54 51.02 53.84 47.44 57.87 62.12 71.64 72.76 69.87 70.43 3. Nuclear Northem 1.23 1.28 1.32 1.39 1.87 1.73 2.16 1.66 2.77 1.53 Westem 1.77 1.96 2.00 1.61 1.90 1.55 1.90 1.71 1.97 2.48 Southern - 1.74 1.70 2.04 2.05 1.35 2.07 2.16 1.98 1.39 All-India 3.00 4.98 5.02 5.04 5.82 4.63 6.14 5.53 6.72 5.40 4. Utilities- All India(I +2+3) 110.84 170.35 187.71 202.09 221.40 245.44 264.33 287.03 301.36 324.16 5. Self-Generation in Industry 8.42 13.04 13.57 16.89 19.91 23.23 25.11 28.60 31.35 32.10 and Railways 6. Total-All India (4+5) 119.26 183.39 201.28 218.98 241.31 268.66 289.44 315.63 332.71 356.26 B. CONSUMPTION OF ELECTRICITY BY SECTORS 1.Mining&Manufacturing' 55.35 78.30 81.98 82.97 92.05 100.40 105.38 110.62 116.17 121.28 2. Transport 2.31 3.08 3.23 3.62 3.77 4.07 4.11 4.52 5.07 5.54 3. Domestic 9.25 17.26 19.32 22.12 24.77 29.58 31.98 35.85 39.72 43.14 4. Agriculture 14.49 23.42 29.44 35.27 38.88 44.06 50.32 58.56 63.33 70.69 5. Others 8.30 12.26 13.66 15.42 17.02 17.01 19.74 21.42 22.38 24.25 6. Total 89.70 134.32 147.64 159.40 176.49 195.12 211.53 230.97 246.67 264.90 a. Data for 1993-94 are provisional. 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 & Information Directorate. -22 1- Table A6.10 New Index Numbers of Wholesale Prices - by Years (Base 1981-82=100) Weights 82-83 86-87 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 percent change' TOTALFOODARTICLES 17.386 111.1 147.8 161.1 177.1 179.3 200.6 241.1 271.0 284.4 313.8 334.6 6.6 Food Grains 7.917 109.1 129.4 141.3 161.8 165.4 179.2 216.4 242.4 260.8 293.0 313.7 7.1 OtherFood 9.469 112.8 163.2 177.7 189.9 190.9 218.5 261.8 294.9 304.2 331.1 352.1 6.3 INDUSTRI,LRAWMAT. 14.909 101.6 124.4 142.8 140.3 145.3 166.6 192.3 192.2 211.8 247.1 267.6 8.3 Non-Food Articles 10.081 100.8 134.1 163.0 160.2 166.0 194.2 229.2 228 7 249.1 297.0 322.8 8.7 Minerals 4.828 103.3 104.2 100.5 98.6 102.2 109.0 113.5 116.1 133.9 142.9 152.4 6.7 FUEL, POWER & LUB. 10.663 106.5 138.6 143.3 151.2 156.6 175.8 199.0 227.1 262.4 280.4 284.4 1.4 MANUF. PRODUCTS 57.042 103.5 129.2 138.5 151.5 168.6 182.8 203.4 225.6 243.2 268.8 292.4 8.8 Food Products 10.143 97.4 129.1 140.5 147.8 165.4 181.7 206.3 223.8 246.7 269.9 279.3 3.5 Beverage & Tobacco 2.149 100.2 133.0 155.0 180.7 207.7 242.1 265.7 293.7 306.6 341.2 372.5 9.2 Textiles 11.545 104.8 116.0 126.6 139.6 158.2 171.2 188.0 201.3 219.9 255.4 293.1 14.8 Chemicals and 7.355 103.5 124.6 131.9 135.8 140.1 147.9 168.4 192.6 207.8 231.5 247.9 7.1 Chemical Products Basic metals and 7.632 104.5 141.3 149.7 176.4 205.6 219.9 234.8 256.6 276.6 298.7 326.3 9.3 Products Machinery and 6.268 102.8 127.3 132.3 150.8 166 2 180.2 208.3 230.6 237.9 260.7 281.9 8.1 Machine Tools Transport Eqpt. 2.705 103.6 129.6 135.5 148.9 166.2 181.3 202.5 218.1 223.9 238.2 253.2 6.3 ALL COMMODITIES 100.0 104.9 132.7 143.6 154.3 165.7 182.7 207.8 228.7 247.8 274.7 294.8 7.3 Note: This WPI senes based 1981-82 was introduced as of July 1989. Data for 1995-96 are provisional. a. Refers to percent change in fiscal year 1995-96 over 1994-95. Sources: Ministry of Industry, Office of the Economic Adviser; Centre for Monitoring Indian Economy. -222- Table A6.11 Contribution of Selected Commodities to Increase in WPI in Calendar Year 1994a 1995 over 1994 percent contribution 1994 1995 Percent Change to change in WPI Agriculture 296.9 327.2 9.2 34.7 Food 304.5 330.0 7.7 18.5 Cereals 275.6 297.6 7.4 6.3 Pulses 355.9 389.7 8.7 1.5 Others 319.4 346.4 7.8 10.7 Non-Food 283.9 322.4 11.9 16.2 Minerals 141.1 150.3 7.1 1.9 Fuel and Power 278.3 284.1 2.3 2.6 Coal 359.4 367.8 2.5 0.4 Mineral oils 234.0 235.0 0.4 0.3 Electricity 348.0 363.2 5.1 1.7 Manufactured Products 261.7 288.1 11.1 62.9 Food products 263.7 278.4 6.1 6.2 Sugar 244.7 223.0 -11.0 -3.7 Edible oils 269.0 301.9 13.0 3.4 Other food products 281.3 324.3 15.4 6.5 Textiles 246.4 285.4 18.3 18.8 Cement 225.4 263.1 18.1 1.4 Iron and Steel 266.1 285.9 8.0 2.0 Capital goods -- -- -- -- Others 332.4 364.3 10.4 34.4 ALL COMMODITIES 267.4 291.3 9.9 100.0 of which Agriculture-based 288.0 314.0 10.1 40.9 Non-Agricultural 255.0 277.6 9.8 59.1 -- Not available. a. Weighted share of each commodity in total absolute change in Wholesale Price. Source: Ministry of Industry, Office of the Economic Adviser. -223- Table A 6 12 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 (1984-85=100) General Index (1982=100) (1982=100) (1960-61=100) 1985-86 128 126 107 546 1986-87 141 137 115 572 1987-88 154 149 126 629 1988-89 169 163 136 708 1989-90 177 173 145 746 1990-91 199 193 161 803 1991-92 230 219 183 958 1992-93 254 240 202 1076 1993-94 272 258 216 1114 1994-95 297 279 232 1204 Average of weeks 1992 March 241 229 192 1046 June 251 236 197 1068 September 258 243 204 1112 December 256 243 205 1067 1993 March 252 243 205 1053 June 262 250 210 1057 September 275 259 217 1113 December 281 264 221 1166 1994 March 281 267 222 1175 June 294 277 230 1189 September 309 288 238 1251 December 311 289 240 1297 1995 March 311 293 244 1300 June 331 306 254 1337 September 345 317 261 1413 December - 317 -- 1996 March -- 319 -- -- Percentage Change in Index over the corresponding month of previous year 1993 March 4.6 6.1 6.8 0.7 June 4 4 5.9 6 6 -1.0 September 6 6 6 6 6.4 0.1 December 9.8 8.6 7.8 9.3 1994 March 11.5 9 9 8.3 116 June 12.2 10.8 9.5 12.5 September 12.4 112 9.7 12.4 December 10.7 9.5 8.6 11.2 1995 March 10 7 9.7 9.9 10.6 June 12.6 105 10 4 12.4 September 11.7 10.1 9.7 12.9 December -- 9.7 -- -- 1996 March -- 8.9 -- -- -- Not available. a. Indices relate to Agricultural Years (July-June) Source. Ministry of Labor, Labor Bureau, Simla; Central Statistical Organization; Ministry of Finance, Economic Survey, various issues, CMIE, Monthly Review of the Indian Economy. -224- Table A 6.13 Evolution of the Wholesale Price Index, 1991-96 (index and twelve months point-to-point increase) Weight June 1991 June 1993 June 1994 June 1995 June 1996 Index percent Index percent Index percent Index percent Index percent WPI 100.00 100.0 11.2 120.9 7.0 135.1 11.8 146.3 8.3 154.3 5.4 Primary Articles 32.30 100.0 8.3 116.7 3.7 133.8 14.6 144.2 7.8 155.4 7.8 Food 17.39 100.0 0.6 121.6 2.0 136.7 12.4 145.5 6.4 160.1 10.1 Food grains 7.92 100.0 18.6 124.9 -1.6 146.1 17.0 159.8 9.4 173.9 8.9 Non-Food 10.08 100.0 10.1 107.5 3.8 131.2 22.0 145.3 10.7 151.8 4.4 Minerals 4.83 100.0 6.4 122.2 18.2 126.4 3.5 133.5 5.6 139.9 4.8 Fuel, Power, Lubricants 10.66 100.0 9.2 133.7 18.3 146.7 9.8 150.2 2.4 155.7 3.7 Manufactured Products 57.04 100.0 9.4 120.8 6.9 133.7 10.6 146.8 9.8 153.1 4.3 Food products 10.14 100.0 12.0 121.9 10.2 134.3 10.2 139.0 3.5 141.1 1.6 Textiles 11.55 100.0 5.1 116.3 6.5 137.2 18.0 160.1 16.7 167.9 4.9 Chemicals 7.36 100.0 6.5 129.1 11.3 141.1 9.2 154.9 9.8 163.4 5.5 Metal and Metal Products 7.63 100.0 8.7 116.0 4.7 126.8 9.3 139.6 10.2 145.7 4.3 Machinery 6.27 100.0 9.5 119.2 3.9 128.0 7.4 141.3 10.3 146.7 3.8 MemoItems Administered Prices: 15.93 100.0 131.7 143.9 147.1 151.5 Petroleum crude & natural gas 4.27 100.0 123.4 127.1 130.3 130.3 Petroleum products 6.67 100.0 129.9 138.5 138.3 139.6 Coal 1.26 100.0 146.9 154.1 158.1 158.4 Electricity 2.74 100.0 134.3 160.4 169.3 185.5 Urea 0.99 100.0 127.9 148.4 155.3 155.2 Decontrolled Prices: Iron and steel 2.44 100.0 116.6 128.3 139.1 142.4 Phosphatic fertilizers 0.18 100.0 307.7 302.7 306.0 317.5 Super phosphate 0.06 100.0 295.3 282.2 290.9 320.9 Ammonium phosphate 0.12 100.0 315.4 315.4 315.4 315.4 Lubricating oil 0.45 100.0 160.3 171.0 168.7 184.8 Note: The last column indicates each item contribution to the WPI increase, that is the index item percentage change in June 1996 times the weight of the item in the WPI. 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