India - Tenth and Eleventh Industrial Imports Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3508 PROGRAM PERFORMANCE AUDIT REPORT INDIA--TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS (CREDITS 528-IN AND 616-IN) June 24, 1981 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT 1974/75 US$ = Rs 7.976 1975/76 = 8.653 1976/77 = 9.000 1977/78 = 8.563 1978/79 = 8.206 FISCAL YEAR The Indian Fiscal Year runs from April 1 through March 31 ABBREVIATIONS BHEL - Bharat Heavy Electricals Limited GOI - Government of India HMT - Hindustan Machine Tools Limited ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India MMTC - Minerals and Metals Trading Corporation of India REP - Import replenishment licences for exporters SAIL - Steel Authority of India Limited STC - State Trading Corporation TDF - Technical Development Fund FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT INDIA--TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS (CREDITS 528-IN AND 616-IN) TABLE OF CONTENTS Page No. Preface ................................................ ...i...... i Basic Data Sheet (Credit 528-IN) ................................... ii Basic Data Sheet (Credit 616-IN) ..................................... iii Highlights ......................................................... iv PROGRAM PERFORMANCE AUDIT MEMORANDUM I. The Rationale for and the Objectives of Program Lending to India .............................. 1 II. The Short-term Effectiveness of the Credits .............. 4 A. Recent Trends in the Balance of Payments ............ 4 (i) IDA Tenth Credit and the Initial Economic Climate ................... 4 (ii) Performance of the Economy in Fiscal Year 1975/76 .................................... 4 (iii) IDA Eleventh Credit .......................... 6 (iv) Balance of Payments: 1976/77 to 1978/79 6 (v) Recent Developments ............................. 8 B. Impact of the Credits ............................. 9 C. Industrial Performance ................... ........ 11 III. The IDA-assisted Industries: Their Importance and Their Efficiency ................................. 15 A. The Targeting Approach .............................. 15 B. Short-term Impact of the Credits .................... 18 C. Long-term Impact of the Credits .................... 18 IV. Regulatory Policies Applied to Industry .................. 23 A. Import Controls ..................................... 23 B. Export Promotion Policies ........................... 25 (i) Cash Assistance ................. .......... 26 (ii) Import Duty and Indirect Tax Drawbacks ....... 26 (iii) Import Replenishment (REP) Licenses .......... 26 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Continued) - 2 - Page No. V. Conclusions ............................................. 30 Annex 1: Rate of Capacity Utilization in IDA-Assisted Manufacturing Industries (%) ......................... 33 ATTACHMENT A: Comments Received from the Ministry of Commerce ..... 35 ATTACHMENT B: Comments Received from the Ministry of Industry ..... 37 ATTACHMENT C: PROGRAM COMPLETION REPORT I. Introduction ................................... ........ 63 II. Background ............................................... 63 III. The Credits ............................................ 66 General ..................................................... 66 Disbursements .............................................. 67 Impact on Eligible Industries .............................. 68 Special Features of Credit 616-IN ........................ 68 Replenishment Licenses ................................ 68 Technical Development Fund ............................. 69 The Credits and Industrial Policy ........................ 71 Special Study ......................................... 71 Industry Policy Dialogue .............................. 71 IV. Conclusions ....... ..................................... 72 Annexes: 1. Balance of Payments ...o...................................74 2. Credit 528-IN, Allocations by Sector ..................... 75 3. Credit 616-IN, Allocations by Sector ..................... 76 4. Disbursements by Category of Industrial Imports Credits .. 77 5. Sources of Procurement for Industrial Imports Credits .... 78 6. Performance of IDA-assisted Industries ................... 79 7. Technical Development Fund--Applications Received and Approved, FY77-FY78 ................................ 92 - 1 - PROGRAM PERFORMANCE AUDIT REPORT INDIA--TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS (CREDITS 528-IN AND 616-IN) PREFACE This report presents a performance audit of the tenth and eleventh Industrial Imports Program Credits to India (Credits 528-IN and 616-IN)--to date, the last two of this kind to the country. OED issued a performance audit report covering the fifth, sixth, seventh and eighth credits on Octo- ber 3, 1975 (SecM75-704) and one covering the ninth Industrial Imports Program Credit on February 22, 1978 (Sec M78-136). The two credits under review, for an equal amount of US$200 million each, were approved in February 1975 and February 1976, respectively. Funding was provided mostly for the import of raw materials and spare parts for a number of selected industries; these included the fertilizer and pesticide industries and a group of capital goods industries. A Program Completion Report (PCR) covering the experience under the two Credits was prepared by the Bank's South Asia Regional Office and is attached. The audit memorandum was prepared after a visit to India by OED staff in November 1979. It is based on the PCR, a review of all relevant credit documents, as well as extensive discussions held with representatives of the Indian Government and business community during the country visit. The credits were extended at a time of great financial difficulties for India. They had, as a result, both immediate and longer-term objectives related to the availability of foreign exchange to, and more generally the efficiency of, the industrial sector. The audit memorandum attempts to assess the effectiveness of the credits in dealing with both sets of objectives. It evaluates their contribution in helping India bridge its resource gap, and in permitting a gradual liberalization of import licensing policies. Conclusions reached are fairly in line with those expressed in the PCR. The memorandum, however, questions the effectiveness of the targeting approach adopted under the credits in improving the performance of selected industries. It also suggests that discussions with the Government regarding export promo- tion policies should have been enlarged to encompass the subject of capacity licensing, which was found to have a direct bearing on the export performance of industrial enterprises. Comments received from the Ministry of Commerce and the Ministry of Industry of the Government of India have been taken into account in final- izing the report; they are reproduced as Attachments A and B to the audit memorandum. 率 - - ii - PROGRAM PERFORMANCE AUDIT REPORT INDIA--TENTH INDUSTRIAL IMPORTS PROGRAM CREDIT (CREDIT 528-IN) BASIC DATA SHEET Amounts (in US$M) As of 3/31/81 Original Disbursed Cancelled Repaid Outstanding Credit 528-IN 200 200 200 Cumulative Credit Disbursement Calendar Years 1975 1976 (i) Planned n.a. 200.0 (ii) Actual 186.4 200.0 (iii) (ii) as % of (i) n.a. 100.0 PROGRAM DATA Original Credit Date(s) Actual or Re-estimatee Board Approval 02/11/75 Credit Agreement 02/14/75 Effectiveness 03/31/75 Credit Closing 06/30/76 02/12/76 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Appraisal 09/75 4 5 20 01/16/75 Completion 06/78 2 1 2 01/11/79 FOLLOW-UP LOAN Loan 616-IN--Eleventh Industrial Imports Credit for US$200 million approved on February 24, 1976. - Iii - PROGRAM PERFORMANCE AUDIT REPORT INDIA--ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDIT (CREDIT 616-IN) BASIC DATA SHEET Amounts (in US$M) As of 3/31/81 Original Disbursed Cancelled Repaid Outstanding Credit 616-IN 200 200 - - 200 Cumulative Credit Disbursement Calendar Years 1976 1977 1978 (i) Planned n.a. 200.0 200.0 (ii) Actual 168.6 195.0 200.0 (iii) (ii) as % of (i) n.a. 97.5 100.0 PROGRAM DATA Original Credit Date(s) Actual or Re-estimated Board Approval 12/75 02/24/76 Credit Agreement -- 02/26/76 Effectiveness -- 04/01/76 Credit Closing 06/30/77 06/30/78 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Appraisal 10/75 4.7 5 23.5 02/02/76 Supervision I 12/76 4.3 2 8.6 62/08/77 Completion 06/78 2.0 1 2.0 01/11/79 - iv - PROGRAM PERFORMANCE AUDIT REPORT INDIA--TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS (CREDITS 528-IN AND 616-IN) HIGHLIGHTS The two credits under review concluded an almost continuous series of IDA credits made to India for industrial imports financing, which spanned more than a decade. Their primary objective was to help India bridge the foreign exchange gap that was anticipated for each of the two years 1975/76 and 1976/771/, at the outset of which the two credits were approved. Account- ing for 18 percent of the country-s import bill (excluding foodgrains and petroleum products) during the two year period 1975/76-1976/77, the importance of these two credits (for US$200 million each) in meeting India-s foreign exchange needs cannot be disputed. India's balance of payments considerably improved under the two loans, especially under the eleventh one when the large resource gap that was anticipated failed to materialize. However, as the Government refrained from loosening its control over imports until later years, both credits were disbursed in the context of restrictions keeping imports to a strict minimum; hence, irrespective of the "fungibility" argument which can be made about the utilization of their proceeds, the credits can be deemed to have contributed to the financing of imported commodities vital to the economy, even though in retrospect the eleventh credit would not be justified on balance of payments grounds. The credit proceeds were targeted to a group of industries which-- from the point of view of demand for their output or their growth potential through exports--was seen to play a crucial role in the Indian economy. Such a targeting approach, however, does not appear to have been effective. For one thing, given the situation of supply insufficiency and tight inter- industry links characterizing India's economic scene, most industries can probably be considered as having a role comparable in importance. Moreover, the available evidence suggests that focussing the credits on specific indus- tries was not effective in improving their performance in terms of output, efficiency or growth in relation to industry as a whole (PPAM, paras. 3.09 to 3.13). Although the credits were not designed to induce specific changes in Government policies, economic analysis of the industrial sector--as it was brought out from sub-sectors studies undertaken in relation to the credits--had underlined the need for reforms in the Government-s import control system and export promotion policies. A dialogue on the subject was established with the Government. Partly as a result of this dialogue and, no doubt, partly because of the much improved balance of payments situation, the Government-s import control system was substantially rationalized in 1977 and 1978, opening the door for greater trade liberalization in later years. With 1/ India's fiscal year runs from April 1 to March 31. - v - the eleventh credit, program lending was focussed on export promotion with a view to promote improvements in the policy system. Export promotion policies were rationalized although, overall, trade liberalization has led to a down- grading of the comparative advantages enjoyed by exporters. Moreover, long- run improvement in India's export performance proved difficult to achieve without giving appropriate attention to the effects of industrial licensing policies, an important and relevant topic which was not discussed under the credits. Other points of interest are: - the difficulties of translating the conclusions of sub-sector studies into actual action programs, and the lack of follow-up on recommendations made to the Government (PPAM, paras. 3.18 and 3.19); and - the element of selectivity in lending introduced by financing replenishment licenses (REPs) for exporters (PPAM, para. 3.21). PROGRAM PERFORMANCE AUDIT MEMORANDUM INDIA--TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS (CREDITS 528-IN AND 616-IN) I. The Rationale for and the Objectives of Program Lending to India 1.01 This report reviews the performance of the tenth and eleventh IDA Industrial Imports Program (IIP) credits to India--to date, the last two of this kind to the country. These two credits, approved in February 1975 and February 1976 respectively, concluded an almost continuous series of IDA credits to India for industrial imports financing, which spanned more than a decade (1964 to 1976) and, throughout this period, constituted an important component of World Bank lending to the country: Cumulative commitments under the eleven IIP credits amounted to US$1,330 million, the two credits under review, each for US$200 million, representing 23 percent of overall World Bank commitments to India during the two consecutive fiscal years when they were approved (FY75 and FY76)!/. 1.02 The general case for non-project assistance to India of the IIP type arose essentially from the fact that India is able to produce a high propor- tion of the capital goods which it needs for investment and that, at the same time, raw materials, which are essential to keep the economy going and sustain future growth, constitute a comparatively large proportion of its import requirements. Because of the country's low saving rate in those years, as well as its relatively well developed capital goods industry, external financ- ing requirements often exceeded expenditure on capital goods imports. In this context, program lending reflected IDA's concern to meet India's import needs, to contribute to the financing of the current account deficit (essentially of a long-term nature) in its balance of payments, and altogether to reduce the widespread underutilization of existing industrial capacity which resulted in part from chronic foreign exchange scarcity. As a complementary measure, the Association also increased its contribution to local currency expenses in connection with its regular project lending. However, there was hardly any substitutability between domestic and foreign expenditures in India. The country's supply of exportable goods was largely a residual of production after meeting domestic demand, and its import expenditures were always cut to * the bone or to a limit considered as incompressible. Furthermore, because of the slow pace of disbursement under project lending, local currency financing was not capable of responding effectively to India's particular foreign exchange needs. 1/ Calendar years, IDA's fiscal years, and India's fiscal years are shown as (e.g.) 1975, FY75, and 1975/76, respectively. India's fiscal year runs from April 1 to March 31. - 2 - 1.03 Program lending to India has gone through four relatively distinct phases. (i) In the first phase, comprising the first two credits (1964 and 1965), the focus of IIP lending was on the private sector, individual firms being selected for eligibility on the basis of efficiency, and production targets being specified within the loan documents. (ii) In subsequent years (1966 to 1970), India's mounting balance of payments difficulties, as well as the increasing awareness among the India Aid Consortium members of the need to contribute to the financing of the country's chronic current account deficit, prompted a change of approach. The primary purpose of program lending became to provide a means for a rapid transfer of resources, the third to sixth IIP credits being tied to balance of payments and general economic considerations. (iii) Starting with the seventh credit, the main objective of program lending to provide for a transfer of resources in a rapidly disbursable form was complemented by an increasing concern on the part of IDA for the performance of the industrial sector and the need for a continuing dialogue with the Government of India on industrial policies. (iv) From 1973 to 1977, India's foreign exchange financing requirements increased rapidly under the impact of a severe deterioration in its terms of trade and a succession of bad crops which led to a sharp increase in food imports. Converging short-term and long-term economic difficulties provided a further rationale for program lending and led to a substantial increase in the amount of IIP credits from the ninth credit on. 1.04 The central purpose of the IIP credits under review was thus to support India's capital goods manufacturing sector whose size, coverage, degree of development and import requirements provided the justification for program lending. Accordingly, the proceeds of the tenth IIP credit, as well as most of those of the eleventh, were made available for the financing of imported raw materials and spare parts by a number of selected ("IDA- assisted") capital goods industries providing inputs needed by vital sectors of the economy (e.g., agriculture, transportation and power). Also eligible under the credits were the fertilizer and pesticide industries which had a direct bearing on the development of agriculture. 1.05 Reflecting the Bank's intent to use program lending to outline more firmly its concern for the lack of competitiveness of Indian industry, the design of the eleventh credit was sharply focussed on export promotion. Although the list of IDA-assisted industries was changed only marginally, eligible industries were classified under one of two following categories: (i) a number of industries vital to the economy with also some export potential, and (ii) a number of industries vital to the priority sectors of agriculture and power. Import financing for these two groups of industries was comple- mented by an important (US$40 million) component intended to promote manufac- tured goods exports by contributing to the financing of import replenishment licenses (REPs) for industrial exporters. The eleventh credit was also meant, through a US$5 million allocation, to support the establishment of a Technical Development Fund (TDF) which was intended to finance balancing and moderniza- tion equipment as well as purchase of technical know-how and designs. IDA funds available under this category were earmarked for capital goods indus- tries considered to have some export potential and were expected to assist a fuller utilization of this potential. - 3 - 1.06 The two credits under review can thus be seen as having four objec- tives: (i) providing India with freely usable foreign exchange to help cover part of its essential import requirements and more generally to contribute to the financing of the country-s industrial investment program and support its overall development effort; (ii) as a subsidiary objective, supporting the Government of India-s efforts at curbing inflation and thus helping to bring the balance of payments under control; (iii) improving the performance of the particular industries they supported; and (iv) finally, and in relation to the preceding objective, the tenth and eleventh IIP credits were meant to provide a basis for a dialogue with the Government of India on trade policies, more particularly those related to import licensing and export incentives. 1.07 The main structural concern underlying the economic discussions with the Indian Government was the rationalization of industrial policies with, as its objective, an improvement in the operational efficiency of Indian industries. One of the areas for discussion, until the mid-1970s, was the issue of import regulations--their complexity, strong protectionist aspect, and procedures, which had led to allocational inefficiencies, delays, exces- sive paper work and a possibility of bureaucratic abuses. During the mid-1970s the main focus of discussions shifted to the promotion of non-traditional exports. Here the issue was the need for a more rapid and flexible system of export incentives and an easier access of exporters to foreign exchange and credit. 1.08 The present report reviews the progress made in improving both these sets of policies within the larger framework of the country's industrial policies. Besides the import substitution and export promotion policies, another set of policies could be considered of crucial importance to the efficiency of Indian industries namely, the capacity licensing policies. These policies have aimed at equilibrating ex ante the demand and supply of industrial products, preempting this task from consumers and producers' decisions, as reflected in the market. Their design could be considered as having its roots in the economic philosophy pursued by successive Indian Governments. They were not raised as an issue by Bank staff, probably because of their political connotations. Nevertheless, this latter set of policies was and remains important for improvement in import regulations and export promotion policies, as it determines the allocation of investment and its utilization in each particular line of production. 1.09 Starting with the eighth IIP credit, the Bank Group undertook to carry out special studies on some of the industries made eligible under its program credits. These studies were intended to provide a more analytical background, and hence better insight, on specific sectoral issues, establish a better understanding of constraints and potential for growth, and suggest possible measures for improvement of industrial performance. A survey of the commercial vehicles and tractor manufacturing industries was conducted in 1973 in connection with the appraisal of the eighth credit. The performance of the forging and foundry industries was reviewed in 1974 at the time of the ninth credit. Because of the short interval between the ninth and tenth credits, no - 4 - study was prepared as part of the appraisal of the tenth credit. A review of the textile machinery industry complemented the appraisal of the eleventh credit. These studies led to a number of recommendations for both individual firms and the Government. Implementation of these programs has been monitored by the Ministry of Industry and Civil Supplies of the Government of India. II. The Short-term Effectiveness of the Credits A. Recent Trends in the Balance of Payments (i) IDA Tenth Credit and the Initial Economic Climate 2.01 IDA approved its Tenth Industrial Imports Credit to India in Feb- ruary 1975 in the context of a grim balance of payments outlook for the country, as import prices were rising rapidly and foodgrain import require- ments increased sharply as a result of a number of successive crop failures. The same factors were also responsible for the strong inflationary trends which had developed since 1973: the failure of the 1974 monsoon had com- pounded India-s difficulties and inflation had, by mid-1974, reached the rate of 30 percent per annum. Although export earnings had increased more than anticipated in 1974, there was, when the credit was approved, little prospect for any improvement in the severely strained balance of payments position. 2.02 The overall balance of payments deficit exceeded US$2 billion in 1974/75 and a comparable deficit was expected for 1975/76. To make room for the higher cost of oil, fertilizer and food imports, it was expected that the volume of raw material imports by industry would have to be severely curtailed. An inevitable effect of such curtailment would have been a further reduction in investment and growth, already severely depressed by the draught- generated decline in domestic income. This combination of events reinforced the case for program assistance and its concentration on the needs of priority capital goods industries. (ii) Performance of the Economy in Fiscal Year 1975/76 2.03 Economic conditions improved greatly in 1975/76. The measures applied by the Government since 1973 to adjust to the difficulties created by poor crops and damaging shifts in the terms of trade eventually bore fruit. In particular, measures designed to tackle the inflationary situa- tion, which included the introduction of an incomes policy, strengthening of monetary controls and enforcement of tight fiscal and budgetary regulations, were remarkably successful in checking the inflation rate, which dropped to 3 percent per annum in the course of 1975/76. 2.04 Economic conditions were also greatly eased by a bumper crop which, after years of modest agricultural output, contributed to renewed price stability. Because of the need for stock rebuilding, however, foodgrain - 5 - imports were kept at a high level, while India's terms of trade deteriorated further. As a result, the trade deficit increased to US$1.8 billion with total gross financing requirements close to US$2.6 billion, somewhat less, however, than the deficit expected at the time of the appraisal of the tenth credit, as shown in the following table: Table 1 Summary of Balance of Payments (US$ Million)/a 1974/75 1975/76 1976/77 Actual Projected Actual Projected Actual Exports 4,174 4,100 4,672 4,550 5,753 Imports/b 5,665 6,125 6,449 6,200 5,928 Trade Deficit 1,491 2,025 1,777 1,650 175 Debt Service 785 775 786 860 830 Gross Financing Requirements 2,276 2,800 2,563 2,510 1,005 Gross Aid Disbursements 1,758 2,245 2,323 1,510 1,955 Use of IMF Credit 522 215 242 -45 -337 Miscellaneous Capital and Invisibles (Net)/c -42 190 792 350 962 Use of Reserves (- = Increase) 38 150 -794 695 -1,575 Overall Reserves (End of Year) 1,378 2,172 3,747 Net Reserves (End of Year) 758 1,365 3,276 /a Import and Export figures are based on trade data collected by the Directorate General of Commercial Intelligence and Statistics (DGCIS); as such, they differ from the payments data recently published for the years prior to 1976/77 and shown in Attachment B. /b From 1975/76, import figures have been adjusted to include imports of merchant ships. /c Includes remittances from Indian workers. Source: Economic Report No. 691a-IN, dated May 1, 1975, Economic Report No. 1073-IN, dated March 29, 1976, and Economic Report No. 3401-IN, dated April 15, 1981. - 6 - 2.05 The inflow of private remittances from abroad during 1975/76 turned out to be much larger than anticipated, while gross aid disbursements during the year rose over their previous-year level by 32 percent. This enabled India to add almost US$800 million to its foreign exchange reserves; by the end of 1975/76, reserves (gross of IMF credit) amounted to US$2.2 billion, equivalent to 4.0 months of imports--a significant improvement over the situation of previous years. Net of IMF credit, however, foreign exchange reserves still represented the equivalent of 2.5 months of imports only. (iii) IDA Eleventh Credit 2.06 Despite considerable improvement during the year--mostly on account of a smaller trade deficit than anticipated--, the balance of payments situa- tion was still seen towards the end of 1975/76 as suffering from some of the problems of the previous two years. Even though no further deterioration in the terms of trade was anticipated, past declines, which had aggregated to almost 30% between 1972/73 and 1974/75, were to have a lasting effect on India's import capability. Moreover, despite the record domestic crop, large foodgrain imports were still required during the coming year to restore stocks to an adequate level. Also, while the real growth in exports in 1975/76 had been significant, progress was based on a few items (such as sugar) with limited growth potential. It was also expected that the improved economic environment would induce the Govermment of India to adopt a conscious policy to raise investment and liberalize imports. As a result, India's trade deficit during 1976/77 was forecasti/ at US$1,650 million, calling for con- tinuation of a high level of net transfers from the aid community. 2.07 Another element, stressed in the PCR, which reinforced the need for continued assistance to India on a basis comparable to that of recent crisis years, was that very little insight was available as regards the factors behind the surge in private remittances from abroad during 1975/76. Increased contracting in the Middle East, as well as improved incentives for fund repatriation and crackdown on black-market practices, were mentioned, but their respective impact was left for speculation. Consequently, there was a strong possibility that such remittances would fall to a level more in line with trends before 1975/76. In general, therefore, the balance of payments outlook was still very much a matter of uncertainty. It was in this context that the Bank approved its eleventh IIP credit in February 1976. (iv) Balance of Payments: 1976/77 to 1978/79 2.08 India's balance of payments position eased considerably over the subsequent three years (1976/77 to 1978/79), with external reserves increasing from the equivalent of 4 months of imports in 1975/76 to that of 10 months 1/ Economic Situation and Prospects of India, Report No. 1073-IN, dated March 29, 1976. - 7 - by the end of 1978/79. The year 1976/77, during which most of the eleventh IIP Credit was disbursed, was itself marked by a sharp drop in the trade deficit from US$1.8 billion in 1975/76 to less than US$200 million (as against a forecast of US$1.6 billion). India's improved balance of payments position, however, induced the aid community to cut back the special food and program assistance it had been providing during the previous three years, and to give greater emphasis to project aid within new commitments. As a result, net aid transfers were more than halved between 1975/76 and 1977/78, as shown in the following table: Table 2 Summary of Balance of Payments (US$ Million) 1975/76 1976/77 1977/78 1978/79 (Estimated) Trade Deficit 1,777 175 873 1,541 Net Aid Transfers 1,555 1,124 689 655 Overall Reserves 2,172 3,747 5,823 7,357 2.09 This dramatic and largely unexpected development, which became apparent towards the end of 1975/76, resulted from several converging factors. Foremost among these was the succession of bumper crops which progressively eliminated the need for foodgrain imports, although larger imports of edible oil made up for part of the difference. This was paralleled by a substantial improvement in India's import capability owing to: (i) continued good export performance, with growth in iron and steel exports more than compensating for a sharp fall in the international price (and lower volume of exports) of sugar, India's largest export iteril; (ii) slower increase in the price of imported petroleum and petroleum-related products such as fertilizers,. which led to a relative improvement in India's terms of trade; and (iii) a greater inflow of foreign exchange through invisible receipts, as private remittances from abroad gathered further momentum, reaching an estimated US$1.2 billion in 1976/77 compared to an average of US$150 million annually prior to 1975/76. 2.10 The Government responded to this improved situation by progressively liberalizing its import policy, a development which the Bank had been urging for a number of years (see section IV below). This liberalization, however, remained cautious and the consequent increase in imports did not become noticeable until 1977/78, during which year imports other than foodgrains and POL products increased by 68 percent in real terms. 1/ It is worth noting that neither sugar nor iron and steel had been major exports prior to 1975/76 and 1976/77, and that they contributed to export earnings only to a limited extent thereafter. - 8 - Table 3 Merchandise Imports/a (US$ Million) 1974/75 1975/76 1976/77 1977/78 1978/79 At Current Prices Total Imports 5,665 6,084 5,676 7,030 8,300 Foodgrains 951 1,537 959 121 114 POL 1,451 1,417 1,581 1,811 2,043 Others 3,263 3,130 3,136 5,098 6,142 At Constant 1968/69 Prices Total Imports 2,518 2,504 2,436 3,225 3,487 Foodgrains 442 643 430 53 44 POL 327 334 351 417 513 Others 1,749 1,527 1,655 2,755 2,930 Memorandum Items (1974/75 = 100) Index Number of Imports (Excluding Grains) 100.0 89.6 96.6 152.8 165.8 Index Number of GDP 100.0 108.9 110.9 120.4 127.5 Import Elasticity (Excluding Grains) ----------------- 2.4 (average) ------------- /a Excluding imports of merchant ships. Source: Ministry of Commerce. (v) Recent Developments 2.11 Some adverse shifts have recently become apparent in the balance of payments, curbing the positive trends which marked the period 1976 to 1978. The growth in industrial exports slowed down in 1979/80, suggesting that the encouraging results recorded during the preceding few years did not necessarily reflect a lasting shift in the structure of the economy. Also, the growth rate of private remittances appears to have started tapering off, although the inflow has continued to increase. More recently, bursts of inflation around the world and particularly the sharp increase in petroleum prices have led to a further deterioration in India's terms of trade. This suggests that renewed foreign exchange difficulties might be lying ahead, - 9 - although in the immediate future the country should find itself on a compara- tively sound footing to face them, owing to the high level of international reserves which its conservative import policy has enabled it to accumulate over the last three to four years. B. Impact of the Credits 2.12 In their simplest form, the IIP credits were construed as IDA-s contribution to the financing of India's resource gap. In this general context, quick disbursement was deemed to be essential if the credits were to address the immediate foreign exchange shortages identified at the time of each successive appraisal. In the case of the two credits under review, IDA funds were expected to be disbursed within little more than one year from the date of approval. This actually took place, with the exception of a small (US$8 million) residual amount under the eleventh credit mostly on account of the Technical Development Fund (TDF) component, which was meant for the financing of capital goods imports. 2.13 The contribution of the two credits to the easing of India's re- source problem can be measured by their share of gross aid disbursements (9.1 percent), non-project aid disbursements (excluding food aid) (18.9 percent), total imports (3.3 percent) and imports of industrial inputs (excluding POL) (17.8 percent) during the two fiscal years (1975/76 and 1976/77) when almost the totality (98 percent) of disbursements took place: Table 7 Aid to India US$ Million Percentages (%) 1975/76 1976/77 1975/76 1976/77 Project Aid 791 767 33.8 39.3 Non-Project Aid 1,167 902 49.9 46.2 (of which IDA IIP Credits) (222.0) (170.0) (9.5) (8.7) Food Aid 383 284 16.4 14.5 Gross Disbursements 2,341 1,953 100.0 100.0 Debt Service 786 829 33.6 42.4 Net Transfers 1,555 1,124 66.4 57.6 Current Account Balance -1,212 717 IDA IIP Credits as % of Percentages (%) Non-Project Aid 19.0 18.8 Gross Disbursements 9.5 8.7 Net Transfers 14.3 15.1 Total Imports./ 3.6 3.0 Imports of Industrial Inputs Excluding POL 20.9 14.7 /a Excluding imports of merchant ships. - 10 - 2.14 The tenth IIP credit was disbursed in the context of severe foreign exchange scarcity which forced the Government to face tightly constrained choices as regards the allocation of available resources. Imports to meet basic consumption requirements and sustain a reduced program of economic activity accounted for almost the totality of the country s import bill in 1975/76. In comparison, the foreign exchange situation had eased considerably by the time disbursements under the eleventh IIP credit were under way. Because of the sharp upturn in India's current account balance, the need for fast-disbursing foreign aid anticipated at the time of the appraisal did not materialize, and 1976/77 export and non-export receipts more than covered import expenses during the year. 2.15 This sudden improvement in India's balance of payments, which in later years prompted a general reduction in non-project assistance, was clearly not foreseen by the aid community. Nor did it incite the Government to take advantage of the greater availability of resources to liberalize its import policy for 1976/77. Rather, the Government chose to allocate addi- tional foreign exchange resources to a much-needed buildup of international reserves. By the end of 1975/76, these amounted to the equivalent of 2.7 months of imports and further increased to reach the equivalent of 6.6 months of imports by the end of 1976/77. Both credits were thus disbursed in the context of strict import restrictions limiting imports to the essential; this minimizes the relevance of the "fungibility argument" that industries eligible under the credits were considered as priority by the Government and would have been provided with funds anyway at the expense of other potential beneficia- ries, and suggests that IDA funds available under both the tenth and the eleventh credit contributed in a substantial proportion to the financing of imported commodities vital to the economy. 2.16 Among the goods imported during the period, IDA funds went to cover the cost of imported raw materials and spare parts needed by the fertilizer and pesticide industries and a number of capital goods industries. As regards the latter, raw materials procured under the credits were intermediates, such as ferrous and non-ferrous metals, rather than raw materials proper. In fact, the allocation of IDA funds among raw materials, intermediate products and spare parts was patterned after India-s structure of imports, itself reflect- ing the needs of a vertically integrated industrial sector with large basic industry and capital goods industry segments. 2.17 Although the type of goods financed under the credits is not really relevant, one should mention that, until the ninth credit, alloy steels and special steels, neither of which could be produced economically in India, acccounted for the bulk of steel imports financed under the credits. Under the tenth credit, however, boiler manufacturers, which are heavy consumers of steel which can be produced economically in India, was added to the list of eligible industries. This was done bearing in mind the priority given to the power sector. Moreover, substantial imports of non-ferrous metals--mostly copper (a substitute for domestically-produced aluminum) for the cable and wire industry--were also financed under the credit, as well as imports of rock - 11 - phosphate, pending the protracted development of deposits in the State of Rajasthan. The amounts of IDA funds used to cover the cost of imports which might have been unnecessary if the production of domestic enterprises had been more efficient, represented however a small fraction of the credits. Overall, the conclusion may be drawn that the credits contributed efficiently to the financing of India-s trade deficit, whose size and composition reflected by part the high level of development of its capital goods industries compared to that of its basic industrial sector, and the poor performance of the latter. C. Industrial Performance 2.18 The industrial environment benefitted considerably from the general improvement in the economic situation recorded during the period covered by the two credits (1976-1978). Higher domestic demand and progressively allevi- ated foreign exchange constraints led to a sharp upturn in industrial produc- tion, as shown in the following table: Table 4 Manufacturing Industries (Average Annual Growth Rates [Percent]) 1970-75 1976-78 1970-78 Production Index 4.8 8.3 6.6 Index of Available Productive Capacity 8.1 4.0 6.1 Capacity Utilization Rate (%) 78.0 78.3 78.1 Source: Centre for Monitoring Indian Economy, Bombay. 2.19 From 83 percent in 1970, the average rate of capacity utilization for manufacturing industries declined to a low of 72 percent in 1972. It improved steadily thereafter, reaching an estimated 82 percent in 1978, a respectable coefficient in any country!i. On average, however, capacity utilization remained more or less stagnant around 78 percent, indicating that the rate of output expansion kept pace with the rate of capacity expansion, though with fluctuations from year to year. 1/ Because official capacity indices, which are based on capacity licensing information, usually underestimate actual productive capacity, capacity utilization rates tend to overestimate the real performance of industry. As a result, the figures shown in the text should be considered mainly as indicative of trends. - 12 - 2.20 Industrial expansion since 1975 has been far from uniform, as is evident from Table 5 below. Benefitting directly from the improvement in the balance of payments situation and the increased availability of imported raw materials, basic industries showed signs of recovery first, with progress in the capital, intermediate and consumer goods industries, driven by higher consumption and investment demand, lagging behind by about a year. Table 5 Index of Industrial Production (Average Annual Growth Rates [Percent]) 1975 1976 1977-78 1975-78 Basic Industries/a 13.4 14.3 4.9 9.3 Capital Goods Industries 1.1 10.5 4.4 5.1 Intermediate Goods Industries 1.6 7.5 5.4 5.0 Consumer Goods Industries 2.3 10.2 8.1 5.9 General Index 4.7 9.8 6.1 6.6 /a Basic industries include mining, chemicals, cement, iron and steel, non-ferrous metals and electricity. Source: Reserve Bank of India. 2.21 Improved industrial demand and above-average output growth during the last few years failed, however, to elicit from private industrialists the positive investment response that could have been expected!/. Reasons for the private investment restraint were of three kinds: (i) in spite of the sharp improvement in India-s economic situa- tion, a general hesitation about long-term demand prospects has persisted, due to the awareness that the country's economy had, despite impressive gains, remained heavily dependent upon the 1/ The evolution of (public and private) corporate investment is as follows: 1975/76 1976/77 1977/78 1978/79 -------------(Rs Billion)------------- Corporate investment 58.3 62.3 79.6 86.4 (of which private corporate investment) (20.0) (14.8) (16.1) (15.3) Source: CSO, National Accounts Statistics. - 13 - vagaries of agricultural production. Conservative investment decisions on the part of private industrialists reflect to an extent the unpredictability of the environment in which they operate. As such, they do not constitute a new feature of India's industrial scene but have recently become more critical in the context of a much less restrained availability of resources, when the process of moving the economy to a higher long-term economic growth path, perhaps having begun, has not materialized; (ii) aside from the general uncertainty over the outlook for the economy, private investment appears to have been impeded by Government regulations related to capacity licensing which have been only marginally revised during the last few years; (iii) finally, once the long-standing constraints on industry created by insufficient import of equipment and raw materials had been by and large removed, new constraints on industrial performance and thereby, on industrial investment became more readily apparent: shortages of essential domestic inputs, in particular power, steel and non-ferrous metals; unreliable railway service for the transportation of bulk products such as coal or cement; and uneasy labor relationships. In many key sectors such as power, steel, coal and cement, the pace of installation of additional productive capacity had slipped behind schedule; moreover, existing productive capacity was often not used efficiently and supply inevitably fell behind increasing demand. Bottlenecks developed as a result, causing the reemergence of rising trends in prices and a slowdown in the pace of industrial growth. 2.22 Since the advent of economic planning in 1951, the pace of installa- tion of new power plants has indeed remained substantially below the targets sst forth in each successive Five Year Plan. Achievement under the Fifth Plan (1974/75 to 1978/79) fell 25 percent short of objectives. This non-fulfill- ment of physical targets for the power sector has been aggravated by a chronic underutilization of installed capacity, particularly in the case of Govern- ment-owned plants. The capacity utilization rate for the sector as a whole was estimated at only 48 percent in 1978/79. During the two years 1977/78 and 1978/79, the power situation improved as a result of the excellent performance of hydroelectric power stations, itself the consequence of two exceptionally good monsoons in succession. The 1979 drought, however, led to a decline in hydroelectric power supply, which compounded the difficulties of thermal stations. 2.23 Over the last few years, shortfalls in power supply have averaged 10 percent for the country as a whole, with large disparities among States, West Bengal, and more generally the northeastern part of the country, being the region most severely affected. The impact of recurring power shortages on industry was particularly severe in the case of energy-intensive basic - 14 - industries such as aluminum, copper, nitrogenous fertilizers and caustic soda, in turn causing disruptions among downstream user industries. 2.24 To an extent, power shortages were due to inadequate coal supply at thermal stations for lack of sufficient rail transport. Successive plan periods have witnessed a slowdown in the rate of implementation of targeted investment in the railway sector, and rail haulage facilities are now clearly insufficient to meet the needs of industry. Shortages of railway freight services have been further accentuated by the increased incidence of unusable wagons, slow turn-round, as well as a general underutilization of equipment. 2.25 Shortages of key intermediate inputs--coal, steel, cement, non- ferrous metals, caustic soda and soda ash--have increased in acuteness over the years and, although they represent tradeable commodities, imports have been insufficient to meet existing shortfalls in domestic supply. Coal production has stagnated around 100 million tons annually over the last four to five years, whereas effective demand in 1979/80 was assessed at about 120 million tons. Shortfalls in coal supply, which in turn reflect power short- ages in the coal fields, labour disputes and deteriorating turn-round of transport vehicles, has been compounded by the declining quality of domes- tically-produced coal--i.e., its lower heat value and higher ash content. Power shortages were also partly responsible for production shortfalls in other tradeable inputs such as steel and non-ferrous metals. In the case of cement, existing facilities operated on average at relatively high levels of capacity; mainly on account of unremunerative prices because of Government control, sector growth has been slow, causing acute shortages across the country. Table 6 Production of Major Basic Commodities (Annual Growth Rates [Percent]) 1975/76 1976/77 1977/78 1978/79 Coal 25.4 2.0 -0.1 0.7 Steel 20.2 19.4 -0.5 -4.2 Cement 17.0 9.3 2.7 0.0 Electricity Generated 12.1 11.3 3.5 11.2 Railway Freight 11.1 6.8 4.3 -4.2 1/ Commenting on the report, the Government stresses that administered prices are decided after taking into account the market situation as well as production costs, and are based upon a careful economic analysis of all relevant factors. - 15 - 2.26 The emergence of these highly interconnected bottlenecks led to a slackening in the pace of industrial growth. Industrial production deceler- ated in 1977/78 and 1978/79 and, despite strong demand and underutilized capacity, actually stagnated during 1979/80. Most of the constraints have been of long standing, although they were less constraining in previous years when demand lagged. Growth in domestic demand progressively eliminated any existing slack and, although the Government substantially liberalized its import policy, industrial imports have been insufficient to eliminate all shortages of tradeable inputs.Y. This has led to a setback in export perfor- mance and, more recently, a resurgence of inflation. 2.27 The infrastructure bottlenecks responsible for the sluggish indus- trial growth of the last few years had been identified at the time of the appraisal of the tenth IIP credit. The President's Report of January 16, 1975, indicated that the fertilizer and aluminium industries were suffering from power shortages and that efforts to achieve improvements in the operation of the steel and fertilizer industries had met with persistent failures. The report further mentioned that steel output had not grown significantly during the preceding ten years even though some 40 percent additional capacity had been added in the course of the decade. This assessment of India's industrial sector proved accurate. As foreign exchange constraints eased (partly as a result of IIP credits), other constraints, reviewed above, surfaced. Their acuteness should be viewed against the backdrop of both poor planning and less than energetic action undertaken to remove them expeditiously. III. The IDA-assisted Industries: Their Importance and Their Efficiency A. The Targeting Approach 3.01 Transfer of funds under the IIP credits was effected by way of financing part of the import requirements of a number of pre-selected in- dustrial sub-sectors1. The value of such a targeting approach hinged on 1/ The Government-s view is that lack of imported materials has not been responsible for the slow growth in industrial production but that tardy growth rates are attributable to other factors like infrastructural deficiencies, setback in agricultural production due to drought, trans- port problems and high inflation rates. 2/ The two credits under review also included a small allocation for import of spare parts of power generating and heavy earthmoving equipment intended to support further the two priority sectors of power and agri- culture. - 16 - two basic assumptions, namely: (i) that the contribution of eligible indus- tries to the Indian economy was particularly vital in meeting essential needs or helping to deal with crucial bottlenecks, and/or that these industries were truly "leading" industries directly relevant to the industrial growth process; and (ii) that focussing IDA's program lending on a specific set of industries could be instrumental in improving their performance in terms of output, efficiency and/or growth. 3.02 The list of eligible industries changed only marginally from credit to credit, some fine-tuning in the choice of beneficiaries taking place at the time of each successive appraisal. Goods produced by industries eligible under the tenth credit fell into four categories: (i) goods supporting the development of agriculture (fertilizers, pesticides, tractors, power tillers and earthmoving equip- ment); (ii) goods supporting the transport sector (commercial vehicles and automotive ancillaries; foundries and forgings); (iii) goods supporting the power sector (electrical generating equipment, transmission and distribution equipment, aluminum smelting); and (iv) some general-purpose capital equipment (machine tools, small tools and ball and roller bearings). This list differed from previous lists in that, within the electrical goods category, power generating equipment and boilers were included for the first time, while cables and wires had been introduced under the preceding, ninth, credit. 3.03 The eleventh credit was structured somewhat differently from the earlier ones. Most notably, it included a substantial (US$40 million) al- location intended to support the development of exports by assisting the financing of import replenishment licenses (REPs) for industrial exporters. It also featured a small (US$5 million) component intended to support the operations of the newly created Technical Development Fund (TDF). Apart from these two categories, the proposed allocation of the credit did not differ markedly from that of the preceding, tenth, credit. The only modifications in the list of eligible industries were the elimination of aluminum smelting and heavy construction equipment manufacturing and the introduction, for the first time, of the textile machinery sub-sector, following the special study of this industry group conducted by the Bank. 3.04 IDA-financed industries belonged to the general class of industries considered priority by the Government. The concept of priority, which stands at the root of the Government-s licensing procedures, has however never - 17 - received a clear definition, nor does it appear to be founded on well-deline- ated economic criteria. The official concept of priority thus offers little indication as to the real importance of industries supported by the credits and the relevance of the targeting approach adopted under IDA's program lending. 3.05 There is little doubt about the "general" priority of IDA-assisted industries as main elements of the Government's import substitution strategy. The process of import substitution that has taken place since the 1948 and 1956 Industrial Policy Resolutions, which provided the basis for the Govern- ment's industrial development strategy, has been concentrated on the capital goods subsector, particularly metal products, transport equipment and elec- trical machinery. However, the role of India's import substitution strategy-- as implemented through its import control policies--in stimulating economic growth appears to have gradually diminished over the years, and the growth in demand, fueled by agricultural incomes, looks now as an increasingly relevant factor in future development. In this context, the role of IDA-financed industries as "leading" elements--or poles of growth--within the economy is not clear and their importance might be more safely assumed to rely on the fact that they aim at meeting essential demands. 3.06 With the eleventh credit, eligible industries were classified as (i) vital industries with export potential or as (ii) industries supporting priority sectors (agriculture and power). The merit of this classification was to spell out the rationale that lay behind the selection of these indus- tries or, at least, to rationalize a selection process which inevitably reflected diverse considerations. 3.07 Ly financing imports of industries in category (ii), the credits indirectly contributed to ease the two main constraints hampering economic growth: the slow progress of domestic demand (a reflection of difficulties in accelerating agricultural development) and the bottlenecks in the supply of non-tradeable inputs (e.g., power generation). Resources channelled to these industries thus enjoyed a substantial multiplier effect, owing to the vital linkages involved. 3.08 The case of industries in category (i)--vital industries with export potential--is somewhat different. The position of, and outlook for, this group of industries testify to the high level of import substitution achieved by India's capital goods industry, and reflect the constraints hindering its future growth. Indeed, for many capital goods industries the possibilities offered by the Government-s import substitution strategy appear to have run their course. This suggests that these industries need to turn towards export outlets if they are to overcome domestic market constraints, and maintain a long-term growth rate commensurate with that achieved during the fifties and sixties. This group of industries benefitted from access to IDA fundsl/ 1/ With the exception of textile machinery manufacturing industries. - 18 - long before their export potential was flagged as a rationale for IDA's support. The emphasis placed under the eleventh credit on ex'ort development was meant to underline IDA-s concern over the Government-s export policies with an eye to both the country-s balance of payments position and the effi- ciency and development of its industrial sector. B. Short-term Impact of the Credits 3.09 The short-term effectiveness of the credits lies essentially in the role they played in improving utilization of the existing production facili- ties of assisted industries. Annual disbursements averaged US$200 million during the two years, 1975/76 and 1976/77, amounting roughly to 25% of the annual foreign exchange requirements of eligible industries. The two credits under review supported the production of approximately US$1 billion worth of goods over this two-year period. It could be argued that these particular industries belonged to priority sub-sectors and would anyhow have been allo- cated comparable, though certainly lower, foreign exchange amounts, had the credits not been made. The credits, however, permitted the Government to raise its foreign exchange allocations to other industries, suggesting that, whatever the likely "without the credit" situation, IDA funds had a substantial impact on industrial production as a whole. 3.10 IDA-assisted industries specifically benefitted from being made eligible under the credits. The fact that entrepreneurs kept scrambling to gain access to what they considered a privileged list testifies to it. Above all, their expectations that industrial import lending would continue made planning easier, allowing them to take investment and supply decisions on a more reliable basis. Other privileges included: (i) the fact that IDA funds constituted a rare source of untied foreign exchange available to indus- trialists, making for cheaper imports; (ii) lower fees charged by the canal- izing agencies responsible for bulk import of raw materials; and (iii) freer. availability of import licenses. 3.11 Despite these substantial advantages, the available evidence (see Annex 1 to this memorandum) suggests that eligible industries did not perform, in terms of capacity utilization, any better than the rest of the manufac- turing industry during the two-year period 1976-1977, as low demand for indus- trial products proved an overwhelming factor in keeping production down, and indeed a stronger one than lack of foreign exchange. C. Long-term Impact of the Credits 3.12 Inasmuch as one is Left to ponder what the performance of IDA-as- sisted industries would have been without the credits, their relative perfor- mance in relation to other industries has only partial relevance in assessing the long-term impact of the credits. Being the only indicator available, there is however some justification in discussing it. Annex 6 of the PCR provides a review of the performance of IDA-assisted industries during the two years 1975/76 and 1976/77. This review, updated in an Appendix to the com- ments from the Ministry of Industry (Attachment B), provides the picture of a - 19 - mixed record. With the exception of the fertilizer and pesticide industries which benefitted from large public investment, IDA-assisted industries appear to have performed in terms of output growth hardly any better than the rest of the sector, as shown in the following table: Table 8 Annual Growth Rate of Output (Percent) 1970/71- 1970/71- 1974/75 1975/76 1976/77 1977/78 1978/79 1978/79 IDA-assisted Industries 8.2 3.2 11.2 -0.5 16.2 7.8 (Fertilizers and Pesticides) (11.4) (16.0) (29.9) (17.5) (13.6) (15.7) (Capital Goods Industries) (7.2) (1.2) (7.7) (-4.5) (16.8) (6.3) All Capital Goods Industries 6.7 0.5 10.5 5.5 3.4 5.8 All Manufacturing Industries 3.1 3.3 9.3 6.0 6.9 4.7 3.13 The export performance of IDA-assisted industries has improved notably since the early seventies, chiefly as a result of plummeting domestic demand although greater support by the Government from 1976 on was also a factor. Reflecting widespread excess capacity and increased profitability, record exports characterized the manufacturing sector as a whole and the share of IDA-assisted industries.!/ within total engineering goods exports increased by a few percentage points only, averaging about 30% over the years. Despite rapid growth, export of engineering goods remained marginal in relation to production, of which it accounted for 5 percent only in 1976/77; in this respect IDA-assisted industries were on average no exception. Moreover, preliminary indications suggest that exports have, in real terms, recorded at best very limited progress during the last two years, owing to surging domestic demand which severely cut into exportable surpluses3f. 1/ Other than exports of textile machinery which were included under the eleventh credit only. 2/ The latest export figures for IDA-assisted industries point to a sharp decline in export performance in 1978: 1975/76 1976/77 1977/78 April-Dec. 78 Exports (Rs million) 1,401 1,890 1,925 868 Reasons for the decline include growth in domestic demand, price in- creases, lack of power and essential imports. - 20 - Table 9 Exports of Engineering Goods (US$ Million) Average Annual Growth Rate (%) 73/74 76/77 78/79 73/74-76/77 76/77-78/79 Engineering Goods Exports 259 634 852 34.8 16.0 Engineering Goods Production 8,190 12,090 n.a. 13.9 n.a. (Exports--%) (3.2) (5.2) (n.a.) Total Exports 3,239 5,753 6,976 21.1 10.1 (Enginering Goods--%) (8.0) (11.0) (12.2) Source: Association of Indian Engineering Industry. 3.14 The Association expected that a number of eligible industries could progressively gain access to export markets and that such a development would provide a sound basis for future growth while adding to the country-s foreign exchange receipts. The Association was aware, however, that the transfer of funds provided under the credits would not be sufficient to bring about the efficiency improvement that was expected, and that a number of specific measures needed to be taken. It was also conscious that, to be in a position to offer meaningful suggestions on possible measures, it had to refine its own knowledge of the industries it: intended to support. This led IDA to undertake over the years a number of sub-sector reviews designed to obtain more analyt- ical background on, and hence better insight into, specific sectoral issues, establishing a better understanding of constraints and potential for their growth, and suggesting possible remedies for improvement of industrial perfor- mance. By illustrating the effects of Government policies on industrial structure and performance, these studies were also intended to provide an additional basis for a dialogue between the Association and the Indian Author- ities on industrial policy matters, for which they were to serve as case studies.!. The results of these discussions are discussed in section IV below. 3.15 Each of the sub-sector studies indicated that export growth of supported industries would not be possible without a substantial change in the industrial system (choice of product mix, manufacturing methods, marketing 1/ For example, the recommendation made in the Special Study of the Textile Machinery Manufacturing Industry that changes in export policies should be made in a way to permit exporting units not only to expand their exports, but to develop their domestic base as well, where this is required, to sustain export growth was meant to be pertinent to all industries with export potential. - 21 - services). Improved export performance was also to require that export incentives be substantially enhanced so as to make exports as profitable as sales in the highly protected domestic market. The studies also pointed out that there were marked differences in performance and competitiveness among firms within the same sub-sector and that the bulk of exports originated from a relatively small number of efficient firms among those supported by the credits. In other words, while improved international competitiveness and ability to export were set as objectives of the credits, it was implicitly recognized that achieving such an objective would require mechanisms, e.g., policy changes and improved industrial systems, which the credits were not specifically equipped to bring about. 3.16 The Government-s industrial licensing policies aim, among other objectives, at matching industrial investment with pent-up domestic demand, furthering the process of import substitution and moderating the growth of large companies so as to facilitate small and medium-size entrants to indus- try. As a result, firms sufficiently efficient to gain access to export markets have often had little capacity left for exports. They barely kept pace with the expansion of the more lucrative domestic market and consequently often enjoyed large backlogs of domestic orders. In this situation, an intensive export drive would have required a much faster expansion of capacity in lines of production with export potential than has actually taken place in the past. 3.17 For these reasons, very few companies have been in a position to base their expansion on a long-term export strategy. This, in turn, has led them to neglect factors essential to a successful export drive, e.g. product quality, adherance to delivery schedules, and development of effective after- sales services. Moreover, production processes have often failed to keep pace with the latest technical developments or to reach precision standards customary to export markets. This partly reflects the fact that Indian companies have often been too small to develop meaningful R&D programs and have, otherwise, been hindered in their modernization effort by the Govern- ment's controls over technology transfers. 3.18 The Special Studies included recommendations for action by the Government as well as individual companies. For the Government, recommenda- tions covered such matters as investment incentives, export incentives, and access to local and imported raw materials for the industries studied. To an extent, these recommendations were pertinent to industry as a whole, emphasiz- ing export development and import liberalization. They also tended, however, to suggest giving an enhanced status to the industries studied on the basis of their particular potential. As regards industry itself, recommendations made in the studies were designed primarily to help improve plant operations, with particular emphasis on the development of training and design facilities. 3.19 The recommendations made were discussed with the Government. The understandings reached concerning their implementation, however, remained vague, and there was little to convince industrialists of their long-term relevance, given the lack of incentive to improve operations in a protected - 22 - market. Though the recommendations dealt with well-defined problems, it proved difficult to translate them into actual action programs. In the case of the forging and foundry industries, the large number of firms and the variety of products involved made it particularly difficult to formulate effective measures. In general, the more efficient firms have formulated and implemented action programs as a response to individual recommendations made by IDA's consultants. The response of a majority of the companies has, however, been much more limited, partly because of lack of effective follow-up on the part of the Association, the Special Studies remaining somewhat dis- sociated from the lending operations themselves. 3.20 The targeting approach adopted under the credits had thus very little success in having a differential impact on the development of those industries selected for financing, although it provided the basis for a discussion of the problems faced by a number of them identified as vital to the development of the Indian economy. The efficiency of the credits would clearly have been enhanced, had they been supported by action programs com- monly agreed with the Government and industry representatives. Coming closer to a sub-sector loan type of operation, program lending could have benefitted from a sharper type of targeting with the advantage of dealing with narrow and managable areas. 3.21 With the eleventh, and last credit, two new facilities were intro- duced which were intended to provide the credit with more export orientation and a greater impact on industrial development. The credit for the first time included a US$40 million allocation intended to finance replenishment allow- ances for exporters (REPs). As the bulk of exports originate from the most efficient firms, this feature strongly underlined IDA's advocacy of increased export incentives, while at the same time introducing a very useful element of selectivity in lending--though all industrial exporters were eligible under this facility, whether or not they belonged to the list of otherwise eligible. sub-sectors. 3.22 The credit also featured a small US$5 million allocation to finance the operations of the Technical Development Fund (TDF) (paras. 21 to 25 of the PCR). The success of this small component, intended to provide foreign exchange for imported balancing and modernization equipment, technical know- how and designs, points to the need to complement maintenance imports financ- ing with some form of fixed asset financing designed to support modernization efforts. This component undoubtedly helped remove a number of production bottlenecks by allowing quick imports of balancing and modernization equip- ment, although its size was somewhat disproportionate in relation to that of the industries eligible under the credits. 3.23 Undoubtedly, the popularity of the fund stemmed from its enjoying quick decision-making and licensing procedures less complicated than those otherwise faced by investors. By providing free foreign exchange for invest- ment, TDF overlapped to an extent with the foreign exchange lending operations of DFCs supported by the Bank. This suggests that a more logical approach could have been to link industrial imports financing with the Bank's other - 23 - lending instruments dealing with industries eligible under the credits (e.g., the Bank/IDA-s DFC lending and direct lending to the fertilizer industry). Some headway in this direction was made in the form of the Plant Operations Improvement Project (Credit 481-IN) aimed at improving the efficiency of existing fertilizer units by financing critically needed equipment, spare parts and technical assistance. IV. Regulatory Policies Applied to Industry 4.01 While the credits were not designed as such to induce changes in the economic policies pursued by the Government, their objective of improving the efficiency of selected industries (partly with a view to help tapping their export potential) led to the establishment of a dialogue with the Government on industrial policies, on some changes in which the development of these industries was seen to be partly hinging. This section covers two subjects. The first relates to import controls; the second focuses on Government poli- cies related to exports of non-traditional goods. The import control policy is the one the IIP credits were mainly focusing on. While the Bank was aware, during the last decade or so, that full liberalization of imports would not be possible in India for a variety of reasons, it insisted minimally on simpli- fication of import control procedures and on some changes which, even in con- ditions of stringency in the availability of foreign exchange, were considered possible. The Bank had also emphasized in its discussions with the Indian Government, on the occasion of negotiations for consecutive industri. - credits during the last six or seven years and on other occasions, th. india should step up its efforts to promote exports of manufactures, stressing that this could take place only through improvements in export policy. Some rationalization in policies was achieved in the years 1976 to 1978 and there can be little doubt that the Bank-s detailed discussion of procedures and. needed reforms contributed to it. How far did this rationalization in import controls and export promotion policies go is the subject of the following two sections. A. Import Controls 4.02 Import controls in India have a long history, going back to the wartime controls on trade and exchange. Their stringency has remained un- changed over long periods of time, varying, in the by now over three decades' long history of independent India, only with the availability of foreign exchange in the country. The first relaxation took place in the early fif- ties, but was reversed in 1957-58 when the foreign exchange credit crunch led to the abolition of open general licenses for imports and tightening of import trade control policies. Later, the devaluation of the rupee in June 1966 brought about a number of changes in the control system: with a large inflow of external assistance, import policy was significantly liberalized; while the general framework of control was maintained, several industries were deli- censed, and import entitlements for actual users significantly stepped up. - 24 - However, the two successive droughts of 1965 to 1966 and 1966 to 1967 led again to intensification of controls. The need for these controls originated apparently from a large demand for agricultural imports, with annual food- grains imports in those years averaging around 4 million tons, although favorable harvests in subsequent years did not lead to an easing of restric- tions. 4.03 The major turnaround in the balance-of-payments situation of India in the mid-1970's, with the accompanying sharp increase in foreign exchange reserves led to fresh thinking within the Government on the need for changes in import controls. The import policy for 1977 marked a departure from the past: (a) procedures were drastically simplified and the policy laid down in simple and relatively unambiguous terms; (b) capital goods, intermediates as well as consumer goods were classified under three basic categories--banned, restricted and open, all items not specifically banned or restricted being freely imported under OGL (Open General License); (c) no distinction was drawn between private and public enterprises with regard to licensing require- ments, facilities or procedures; (d) import entitlements against exports were restricted to the requirements for export production by tightening up the list of goods eligible for import under the registered exporters policy (REP). 4.04 Recent changes (in 1978 and 1979) also led to considerable simplifi- cation in procedures. The main changes are that the two import books, hith- erto issued half-yearly, have been merged into one; seventy two separate appendices are now reduced to thirty, and enormously long lists of items permitted to actual users of imported items have disappeared. The actual user (AU) and replenishment license (REP) policies have been integrated, with the latter limited to items restricted in various ways by the former. Moreover, restrictions on transfer of replenishment licenses (REPs) have disappeared. Separate AU policies for individual industries have gone and item and value limits in AU licensing have disappeared. The OGL system has been extended and regional licensing authorities (RLAs) are expected to take over almost all the licensing functions, except for high value capital goods imports. However, those who would expect that much simplifications result now in a fully trans- parent system and relatively slim documentation would be mistaken: the changes still leave behind a volume of 21 chapters and 30 appendices. 4.05 It would be useful to review briefly the changes that the new import policy introduced in three major categories of imported goods. As regards capital goods, more than one-half of the categories (35 out of 63 machine tools and machines) have not been moved to categories generally considered as liberally admitted--open general licensing (OGL) and free licensing (FL). Therefore, one could conclude that as far as imports of capital goods are concerned, the new policy introduced practically no liberalization in the categories. However, permission for global tenders for equipment supplied to 14 industries can be considered as an important movement toward liberalization in this category of goods. Another substantial simplification is that banned - 25 - goods have now been grouped into 14 major categories and that an application for licenses can be made for all other categories of goodsl/. 4.06 Raw materials, components and spare parts have been shifted to the "negative" list, under which all imports are permitted other than those explicitly banned or restricted. Again, there is a distinction between banned items--which can be imported--and absolutely banned items which cannot. The banned and restricted import items can be imported through the mechanism of automatic (AL) and supplementary (SL) licenses. Apart from the movement from the positive to the negative listing and the simplification that this entails, the changes in this area have been small. Renewal of the automatic licenses (AL) can be made now at a level higher (by 10%) than the level consumed by the applicants of licenses in the preceding year--small comfort, given the infla- tion in recent years. 4.07 As regards consumer goods, imports are banned except for those specifically allowed under the open general licensing. The annexes related to the open general licensing do not mention any consumer goods. From this it may be surmised that import of consumer goods continues to remain absolutely banned. 4.08 The changes that have taken place in import liberalization are, therefore, mostly those of simplification and policy is still quite restric- tive. However, the discretion in its operation is reduced, and the open general licensing and automatic licensing systems are extended. What is important, however, is that the new policy makes some limited opening to Lport of goods coipciz±tize with domestic output, and brings out the pos- - LUilty ioaL it mignL be extended in the future. All other changes are simply expedients in the general sense in that they try to match the supply of imported goods--current and capital-- with the existing industrial (as opposed to consumers') demand for these goods.. B. Export Promotion Policies 4.09 Within a decade India has emerged as a major exporter of engineering goods. These have risen from about US$100 million in 1970 to approximately US$1 billion in 1979. Despite the striking growth of engineering exports, 1/ Commenting on the report, the Government indicates that, to its view, the import policy for capital goods was sufficiently liberalized by allowing a number of capital goods to be imported under OGL. The Government also mentions that the criteria for allowing import of capital goods is obviously subject to the essentiality of the import and to indigenous clearance, except for such capital goods that could be identified as scarce and essential for the development of the economy. 2/ Trade policies were also liberalized in regard to tariffs. With the switching over to the CCCN system of customs classification in August 1976, the custom duty on a number of items has come down from a range of 60-100 percent earlier to 30-60 percent. The basic custom duty on a number of capital goods was further reduced from 40 percent and over to 25 percent in March 1978. - 26 - India's share in world exports remains very low, only one-fifth of 1 percent. Moreover, the share of engineering goods production going for exports has remained marginal. 4.10 The structure of Indian engineering exports has also changed. In the mid-fifties (1956/57), simple steel and non-ferrous items accounted for as much as 54 percent of total engineering exports. This percentage has decreased to only 27 percent and yielded place to capital goods and turnkey projects, which have increased from 12 percent in the mid-fifties to as much as 38 percent in the late seventies (1978/79). Indian civil engineering and construction firms in both the public and the private sectors have been successful in winning contracts for building dams, roads, airport complexes and bridges, mainly in the Middle East. Some changes have also taken place in the destination of Indian manufacturing exports: in particular, the share of European countries has grown from one-fifth of 1 percent of total Indian engineering exports in the mid-fifties to as much as 20 percent in the late seventies; the share of Asia as importer of Indian goods has proportionately declined from 73 percent to 52 percent of the total. 4.11 Since the early 1960-s, the Indian Government has recognized that the protection-centered import control system it has operated to foster import substitution-based industrialization has had a significant home market bias. To offset the resultant discrimination against exports, various measures of direct and indirect support for exports were adopted. These measures con- sisted mainly of: (i) Cash Assistance in the form of a direct ad valorem subsidy expressed as a given percentage of the FOB value of exports, with specific rates for different goods. (ii) Import Duty and Indirect Tax Drawbacks, through which exporters obtain refunds of custom and central excise duties paid on raw materials. Drawbacks are not based on actual duties paid, but on various norms relating to the average estimate of the incidence of these duties on export products!/. (iii) Import Replenishment (REP) Licenses, which enable exporters to import certain raw materials, components and machinery used in the manufacture of export products or needed for future devel- opment. REP licenses are issued on the basis of a fixed proportion of the FOB value of exports, after the exports have been carried out. More recently, two additional schemes, building on the REP scheme, were added to supplement the availability of imports for exporters: (a) the imprest scheme, under which REP licenses equal to the amount of direct imports in the exports of the past year are granted at the beginning of the current licensing year; and (b) the granting of supple- mentary REP licenses, on an essentially ad-hoc basis, in cases where the original provision is considered to be inadequate. 1/ Duty drawbacks may also be calculated on the basis of actual duty paid but only after submission of detailed documentation. - 27 - 4.12 Import Regulations for Exporters: There were considerable changes in the REP policy during 1978/79: until 1978, registered exporters could import items permissible against actual user licenses; since 1979, however, these facilities are not allowed and the general system applies to exporters. The result has been a reduction in the privileges received by exporters since, to the extent that the automatic licensing system through actual user licenses provides now more goods, the replenishment licenses (REPs) are in relative terms not as valuable as they were in the past. 4.13 Other important changes have occurred with respect to REP licenses. Firstly, the list of permissible export items, abolished in the past, has been reintroduced, REP entitlements against exports of various engineering goods being either curtailed drastically or removed completely. Secondly, most REP rates have been lowered. Many categories have been deleted altogether and only a few have been added. This reduction applies to all export-oriented firms, except to those whose export exceeds 50% of output and these are only a few. With the reintroduction of shopping lists, all users are now restricted to items needed to produce the original export item. Exporters benefit also from the system of advanced licenses, introduced several years ago, which are duty exempt. Changes in the linkage between imports and exports may, however, weaken the incentive to export. This is a result, not so much of changes in regulations but, of the increased availability of foreign exchange, although the two are interdependent. 4.14 Imprest licenses have proved to take long to be issued; moreover, requests for imprest licenses for new final products, in cases where there has not been any previous import, might not necessarily be granted, preventing any substantial changes to take place in the structure of manufacturing exports. The system of duty-exempt import licences is not only helpful to exporters in that it reduces working capital requirements, but it also helps simplify policy operation. However, complaints are heard that it still takes five to. six months from the date of the application for the issue of such licences. Moreover, the scheme is applicable only to a few items; the need for its increase is obvious. 4.15 The question arises as to the extent to which export incentives, and in particular cash compensation schemes, were instrumental in the past increase in industrial goods exports. Cash incentives were set with the objective of making exports marginally profitable beyond a minimum level of assistance intended to offset domestic excise duties and other indirect taxes. For every additional rupee spent on cash assistance, exports eligible for cash assistance increased on an averaged by Rs. 5.6 during 1974 to 1977. It should also be noted that products which fared best were those where the stability of assistance rates was the longest. Further analysis shows, moreover, that on the whole, exports under cash assistance support have grown faster than those which are not subject to this support. It can be concluded, therefore, that cash assistance should be uniform across a large range of product groups and aimed at neutralizing the general policy bias of India-s import substitution regime. They would, in such case, act as a strong incentive to export goods in which Indian industry has an above-average comparative advantage. - 28 - 4.16 Cash incentives were divided into three categories: below 10%, between 10% and 15%, and above 15%. During 1974 to 1977, out of 154 items of engineering goods covered by the scheme for cash compensation support, data on export and other relevant parameters can be separated for 76 items, accounting for nearly two-thirds of the total value of engineering exports. The conclu- sions drawn from these data are: (i) the growth of exports of engineering goods was the highest (72%) for the group of products having cash bonuses below 10%; (ii) this group (engineering goods with cash support rates of less than 10%) also had the highest share in total exports of assisted products, accounting for about one-third of those assisted. This tends to suggest that the high level of subsidy has not, at least in the short period, led to any large increase in exports. Exports of high value items--usually the ones with a high share of labor incorporated--has been growing relatively fast, even with the smaller level of assistance, suggesting that Indian exports of manufactures tilt toward their highest comparative advantage. However, it would be inappropriate to establish too strong direct cause/effect relations considering that the relative impact of import duties and excise taxes, for which cash bonuses were supposed to compensate, is not known for each export groups. 4.17 An important aspect of Indian export activity which deserves to be underlined is the share of small-scale industries in total exports of non- traditional goods. In 1976 to 1977 the share of small industries in 16 specific product groups was as high as 37% compared to 28% in the preceding two years. These 16 products absorbed nearly 52% of total compensatory cash support extended to exports. 4.18 In the long run, the ability to sustain a liberal access to-imports would depend in a substantial degree on the growth in non-traditional exports. While over the past several years workers' remittances, improved harvests, increased production and growing oil output have played a greater role than exports in the growth of the Indian economy, this is unlikely to continue in the long run. Strong continued attention to exports should be first revived and then maintained. The erosion of export incentives that occurs automatically as general import liberalization proceeds and the import privi- leges of exporters become of diminished importance, has taken place under the recent policy. Therefore, it is important--and sufficient importance has been attached to it by neither the Government nor the Association in its analysis of Government policies--to expand the production base of items which offer possibilities of steady export growth. Export promotion policies need to be closely related to the industrial licensing policy. While the latter takes into consideration the needs of exporters of manufactures, it does not take these needs courageously or imaginatively enough. Moreover, occasional bans on exports and intermittent gluts and shortages in production undermine - 29 - the possibility of sensible long-term policy with respect to capacity expan- sion. The latest bans on exports may be considered as a visible example of this policy ambivalencel/. 4.19 The frequent changes in industrial licensing policy have resulted, among other things, in long periods of decline in capacity expansion and consequent shortages of essential commodities and services. Shortages of essential inputs and outputs, as well as frequent cases of non-implementation of licenses issued and of shortfalls in production because of inefficiency, labor unrest, etc. have prevented a consistent export effort to be mounted. A good part of the industrial licensing procedure has thus blocked export opportunities open to Indian industry. Thus, while the world demand for imports of cotton and blended cloth has increased between 1963 and 1973 nearly 3.5 times, of which two-thirds was for products of fresh mill-made cloth, Indian textile industry could hardly benefit from this boom as the licensed capacity of the mill-made cotton cloth was virtually frozenL/. It is true, however, that India's industrial licensing system may not have been the only, or even the most important determinant of shortages of essential commodities and services. Parallel to it, the fluctuating pattern of public investment, and periodic infrastructural bottlenecks coupled with pessimistic assessments of demand prospects (due largely to weather-induced fluctuations in agricul- tural performance) have resulted in an environment hardly conducive to growth. 4.20 Besides missing the opportunity for exports, a mirror image of the flaws in the licensing of capacity has been the attitude toward small-scale industries. The latter were supposed to develop through negative incentives, mainly through reservation and protection granted to them. However, had positive incentives, in terms of converting these industries into suppliers to larger enterprises, been allowed, these might have influenced the growth of small-scale industry in a more efficient way, and facilitated exports. 1/ On this issue, the Government commented that to its view the deceleration in exports growth since 1978 should be attributed to factors other than lack of incentives, mainly the recessionary conditions abroad, the protectionist policies followed by developed countries, and domestic constraints on account of infrastructure bottlenecks. While the audit points to the recent down-grading of incentives offered to exporters, it suggests that an even more important factor behind the slow-down in industrial export has been the insufficient capacity expansions allowed by the Government to the sectors benefitting from the best export poten- tials. The Government further mentioned, however, that since the new Administration took office in January 1980 export promotion has been assigned one of the highest national priorities and that a number of measures have been taken for removing domestic constraints on production for exports, including the liberalization of technology transfers and expansion of export financing facilities (see Attachment A). 2/ One should note, however, that while capacity licensing constraints would explain by themselves India-s inability to take advantage of the expan- sion of export markets, a major factor behind its sharply deteriorating textile export performance has been its failure to get into the produc- tion of blended fabrics, itself partly a reflection of controls over import of synthetics. - 30 - Finally, the industrial licensing system with the underlying idea that India should gradually become technologically self-sufficient, has also had an adverse impact on building up export capability. Technology transfer has become a business relationship in practically all countries; it has not yet been lifted to this level in India. V. Conclusions 5.01 The credits under review marked the conclusion of a long and con- tinuous series of program credits to India for industrial import financing. These two credits--as also the preceding ninth IIP credit--were approved in the context of a very difficult economic environment for India, which to an extent differentiates them from their predecessors: between 1973 and 1976, crop failures, the oil crisis, deteriorating terms of trade and world-wide recession combined to exacerbate India's recurrent deficit on the current account of its balance of payments, which IIP credits were intended to help bridge. The amplitude of the problems faced by India led IDA to increase the size of its IIP credits and stress the need to accelerate disbursements. In effect, the credits, initially understood as IDA's response to a number of structural issues and constraints, were progressively unfolded as two-pronged lending instruments with both short-term and long-term objectives. The increase in the size of the credits reflected this multiplicity of objectives, each one in a sense providing a rationale for part of the credit amounts. 5.02 The immediate effectiveness of the credits--and more generally that of IDA in increasing the proportion of program operations within its lending program and in convincing other members of the Aid Consortium to do likewise--was very high. The tenth credit was disbursed entirely during the year 1975/76 and was crucial in maintaining the country's import capabil- ity in the face of gross financing requirements (e.g., trade deficit + debt service) in excess of US$2 billion. While actual exports during the year were about 15% higher than anticipated, additional foreign exchange receipts were used to improve the level of international reserves, while imports were cautiously kept within targets. This underlines the important role assumed by the credit in meeting the country's import needs within the framework of the strictly-enforced foreign exchange budget prepared annually by the Government. Because of subsequent dramatic improvements in the foreign exchange payments front, the eleventh credit, disbursed in most part during 1976/77, turned out to be less urgent on immediate balance of payments grounds. It remained, however, an essential element in India's foreign exchange budget for the year, as the Government postponed releasing its tight control over imports until the end of 1976/77, using higher foreign exchange earnings to bolster its reserves position. 5.03 The proceeds of the credits were used for industries which--from the point of view of demand for their output or their growth potential through exports--was seen to play a crucial role in the Indian economy. However, the number of these industries was quite large and the exact rationale lying - 31 - behind their original selection is unclear. Overall, given the situation of supply insufficiency and tight inter-industry links characterizing India's economic scene, most industries can probably be considered as having a role comparable in importance. 5.04 Despite the yearly repetition of lending, the positive contribution of the IIP credits was predominantly in meeting the short-term objective of providing foreign exchange in a given year to given industries. While the credits were instrumental in helping India close its foreign exchange gap, they were not designed to deal with the long-term issues underlying the country's difficulties. Because of the non-recognition of the continuity in lending--and despite the fact that arguments for program lending provided the rationale for prolonged assistance--the IIP credits can be considered as dots which could have formed a solid line--as do the Bank's DFC lending operations in their efforts at building up its borrowers institutional capability, for example--, but unfortunately have not. 5.05 The credits did assist industries suffering from long-term problems and aimed at remedying the effects of these problems, but hardly touched upon the causes. The most obvious obstacle to higher industrial production was the skimpy availability of foreign exchange. While IDA credits contributed to increase this availability, the origins of the imbalance in the current account of the balance of payments were and still are in the inward-looking development of Indian industry, resulting in a sharply negative foreign exchange balance for the sector. 5.06 Industrial growth also suffered from insufficient coordination between import controls, export promotion incentives and industrial licensing (capacity expansion) policies. The inadequacy of this set of policies resided in its inherent nature (with its extreme differentiation leaving practically no margin of flexibility at the level of individual enterprises), in its. application (leaving a wide margin of discretion to public servants), and in its fluctuations (with different rules brought in every year). However, because of their short-term objectives, the IIP credits tended to concentrate on factors directly bearing on short-term aspects. Thus, they aimed at some changes in import controls, which in fact, given the scarcity of foreign exchange when the credits were being disbursed, consisted essentially of changes in the way these were applied. 5.07 As regards the IDA-assisted industries, it was initially assumed that the improved flow of imports guaranteed by the credits could ensure higher efficiency and competitiveness. More recently, as the limits of this approach became apparent, operational improvements were sought through sub-sector analyses, carried out by technical missions set up by the Associa- tion. Recommendations made by these missions remained, however, general in character, with hardly any specific action programs outlined. In general, the analysis of industry has been limited to the middle layer, being neither project-specific, which could offer concrete solutions to industrial enter- prises, nor sector-wide, which would have helped in a macro-dialogue with - 32 - the Government on the implications of its general economic policies for the manufacturing sector. The special studies, however, provided valuable insights on sub-sector issues, identifying "core" segments for future develop- ment, pointing at possible reorganizations and stressing the need to develop an institutional framework for the provision of technical assistance. 5.08 While this is not to suggest that the removal of controls could be sufficient to unleash growth forces--public investment in both agriculture and infrastructure has obviously a critical role to play in bolstering demand (through agricultural growth) and removing infrastructural bottlenecks--, the potential benefits of reforming India-s control system cannot be disputed. While IIP credits helped in making the course of economic policies implemented in India less painful to a number of selected and important industries, the Association's economic dialogue with the country could have focussed more strongly on the factors underlying their difficulties and been synthesized in mutually agreed and monitorable policy intentions. In reviewing these factors, the Association could have pointed out more clearly the interdepen- dence between various policies, which makes improvement in one single policy much less effective and relevanti. However, partly for lack of sufficient macroeconomic analysis of the industrial sector, the preparation of consecu- tive IIP credits remained a function of the forecast balance of payments situation rather than of the industrial situation. 1/ Commenting on the report, the Bank staff suggests that, if there had been mutually agreed and monitorable policy intentions with respect to the trade sector, GOI would certainly have fulfilled or even gone beyond them. While this may be correct, the audit suggests that such policy intentions should not have been circumscribed to the field of trade but have also encompassed the subject of capacity licensing. - 33 - ANNEX 1 RATE OF CAPACITY UTILIZATION IN IDA-ASSISTED MANUFACTURING INDUSTRIES (%) 1975 1976 1977 1978 Electrical Equipment Power Transformers 60 57 73 65 Electrical Motors 54 56 61 55 Winding Cables 46 48 51 57 PVC/VIR Cables 28 38 40 42 Power Cables 60 68 76 78 Automobile Ancillaries Tires 80 82 80 86 Storage Batteries 60 63 65 63 Automobile Diesel Engines 70 75 55 62 Commercial Vehicles Trucks and Buses 67 68 60 68 Jeeps 63 52 66 85 Three-wheelers 58 79 76 66 Tools and Parts Machine Tools 78 79 74 79 Ball and Roller Bearings 81 88 89 94 Others Tractors 65 75 65 100 Aluminum Smelting 71 84 72 66 Cast Iron Spun Pipes 58 48 33 31 Overall Manufacturing Sector 72 76 77 82 Source: Centre for Monitoring Indian Economy, Bombay. - 34 - - 35 - ATTACHMENT A COMMENTS RECEIVED FROM THE MINISTRY OF COMMERCE The Operations Evaluation Deptt. o( the World Bank has -prepared a performance Audit Report of he 10th and 11th Industrial Imports Programme credits to India. The two credits mentioned above amounting to US $ 200 million each, were approved in Oct.'75 and Feb.76, respectively. The credits were utilised mostly for the import of raw materials and spare parts for a number of selected industries, including the fertilizer and pesticide industry and a group of capital goods industries. The major conclusions of the study and our comments thereon are as follows s- a) As one of the important objects of the credits was to help India in bridging the resources gap and in permitting a gradual liberalisation of import Licensing Policies, the evaluation report has observed that the objective was not achieved because the Govt. did not l4beralise.its import policy - sufficiently and in the case of capDal goods particularly the new policy did not introduce any particular liberalisation. The Evaluation Report has also questioned the criteria for import of capital goods. COMMENTSs Several trade liberalisation measures regarding our import policy have been taken during the years 1975-78,consisten4 with the requirements of our development programmes and priorities. In regard to tariffs, with the switching over to the CCCN system of customs classification w.e.f. 2nd Auciust,1976 the customs duty on a number of items has come down, from a range of 60-100% earlier to 30-60%. The basic custom duty of a number of capital goods was reduced from 40% and over to 25% w.e.f. 1st March,1938. In the area of non-tariff measures, the Govt. of India has been progressively liberalising its import licensing policy at the time of the annual reviews. The policy changes have envisaged special emphasis on export promotion and import substitution. A number of measures have also been taken to simplify procedures. It seems that want of the imported materials are not responsible for the slow growth in industrial production. The reasons for the tardy growth-rates, is attributable to other factors like infra-structural / deficiencies, set back in agricultural productionddue to draught conditions, transport problems and the high rate-of inflation which has been experienced in India both on account of international and domestic factors. It may also be true,that the import liberalisation policy did not have its full play in affecting the necessary imports because of the rise- in prices abroad which coincided with the hikes in oil prices. It may also be mentioned that the import policy for 75-76 gave a special treatment to large scale industries which were financed by IDA credit, such as agricultural, tractors, pesticidqs, fertilisers, machine tools etc. The import policy for capital goods was also sufficiently liberal by the - extention of number of capital goods industries to be allowed to be imported under I= OGL." The criterial for allowing import of capital goods was obviously subject to the essentiality of the import and indigenous clearance, except in the caselsuch capital goods which could be identified as scarce and essential for the developmental needs of the economy. .2/- - 36 - b) The other major criticism given in the Audit Report is that export incentives were insufficient to realise an increase in production for exports, gaps in technology imports etc. Tt has also been alleged that the high level of susidies have not lee to any large increase in exports. COMMENTS: As in the case of import policy it has been the constant endeavour of the Govt. to introduce several new measures of export promotion during tht last few years. The export incentives system was revised following the report of the Committee on Import-Export Policies and Procedures submitted in January, 1978. The criteria for compensatory cash assistance wa learly defined to compensate the exporters for indirect taxes and duties on exports, development of markets, freight disadvantage, compensation for high interest rates on working capital etc. The growth in exports responded t* these policy measures till 1976-77, when growth rate in exports was more than 20 per cent continuously over 4 years. The deceleration in exports growth since 1978 is attributed to 'othrer factors rather than lack of incentives. The major reasons for the slower growth in exports was the recessionary conditions abroad and protestionist policies followed by developed countries. There were also domestic constraints mainly on account of infra-structural bottlenecks. Since the new Govt. took over in Jan.1980 export pzane promotion have been assigned one of the hichest national priorities. A number of measures have recently be;: taren for removing domestic constraints on production fol exports, liberalising imports of latest technology for exports, enlhrging the provision of finance for export, simplification of procedures-and improving the competitive strength of Indias' exports. A notewrithy development has been the recently announced, scheme of extending the facilities available in free trade zones to 100% export- zx*4a*id oriented units anywhere in the country. Relaxation have also been made in licensed capacity in the interest of encouraging export earnings. The budget for 1981-82 has extended a number of fiscal concessions to industry in the interest of increasing exports. Inspite of the difficult foreign exchange situation consequent to the succesave hikes in oil prices, the export-import policy for 1981-82 have continued to provide incentives for the import of essential inputs for strengthening the production base and enabling fuller utilisation of available capacities as well to provide greater impetus to exports. The evaluation of policies in the field of import and export should be judged and audited in the context of various economic factors operating in the economy domestically and the international environments which have rapidly deteriorated in the last few years. - 37 - ATTACHMENT B COMNTS RECEIVED FROM JHE MINISTIY OF INDUSTRY Comments on the Draft Program Performance Audit oport - India - Tenth -& Eleventh Industrial Imports Program Credits (Credits 528-IN and 616-IN)of the world Bank. The Audit- Report has attempted to- draw a relationship between disbursement of the IDA credit and the .entire spectrum of industribL, investment and trade policies and the rate and pattern of iddustrial growth. Economic policies are determined with reference to the overall objectives of growth and social justice set,before itself by the Indian Government and as such no unidimensional relationship can be sought to be established between the import credits and economic growth and policies. It may also be stressed that the IDA Industrial Import Credits were not designed as such to induce economic policy changes in India.. The policy changes taken by the Government have been the outcome of the conscious efforts directed towardb 'the fundamental aim of building,a strong and self-reliant economy and promotion of the requisite export drive and rationalisa- tion of imports therefor._ The policy of automatic licensing introduced in 1975-76 coupled with liberalised import policy for industrial imports have ensured that the capacity constraints do not come in the way of increased production for exports as well as production in high priority areas. The provision of export incentives has been devised in a manner asto eliminate delays. It is also too simplistic to analyse the implications of the IDA credit exclusively in respect of ihe subset of priority industries only. The import credits have enabled interalia the availability of foreign exchange resources for the needed>imports for the development of other industries tod. - 38 - This is apart from the linkage between the growth of the priority industries and the rest.of-the economy. The Report has stated in para 3.04 that the concept of,priority has never been clearly defined in terms of economic criteria andthat the official concept of priority offers little indication as to the real importance of industries suppdrted by the credits. Here it may be mentioned that out of the total. non-project aii during 1975-76 and 1976-77, the IDA credit formed 19 per cent in both the years. The industries which have been covered by this percentage of credit cannot be an all inclusive list of priority industries. At any rate, the IDA assisted industrial subsectors relate to the infrastruct:Lre and crucial imports for the important sectors of agriculture, transport, power and general Purpose capital equipment which themselves have a potential for i7enerating a large degree of spread effects. vor anaLysing the impact of IDA dredit on tFte crogress of production of the I assisted industries, it would perhaps. be better to take sto of the position as in 1978-79 wn_ n the full impact of uoth the credits would have got spelt out, instead of confining the period of examination up to 1976-77 only as has been done in the Report. This is so also because the effect of actual imports will be seen after a pe'riod of a year or so as.there is sufficient time-lag betweea the issue of imndrt licences and actual arrivals of goodsi Even after arrival, the availability of domestic infrastructure would play an important irole in r ealising the actual output. In this sense, the utilisation of these goods in the system may be spread over a period of more than a Year. It has been observed ..3/-. - - 39- that the weighted average index of production for the IDA assisted industries in 1978-79 stood 28.5,$ higher'tAan in 1976-76. The detailed performance of the IDA assisted industries covering the period up to 1978-79 on the basis of the latest available information is appended. It has been mentioned (Para 1.03) that from 1973 to 1977, India's foreign exchange position worsened rapidly under the impact of a severe-deterioration in its terms of trade and succession of bad crops which led to a sharp inrease in food imports. The factual position is as under :- Years Fore.ign Exchante Variation Net draw- Variation in reservesW in ings from reserves ex- reserves (+)and repay-clusive of ment (-) to transactions IF with IL,F.* 1 2 3 4 5 (3-4) ( . n crore5) 1973-74 580.8 (+) 101.9 + '62.0 + 39.9 1974-75 610.5 (a) 29.7 + 484.7 - 455.0 1975-76 1491.7 (+) 881.2 -0 207.1 + 674.* 1976-77 2863.0 (+) 1371.3' - 302.8 + 1674.1 1977-78 44998 (+) 1636.3 - 248.6 +* 1885.4 Source : Economic survey 1980-81 Except for the year 1974-75, India's foreign exchange reserves have continuously increased during the pqriod (col. 5). In fact during the period 1975-76-1977-78, the surge in foreign exchange reserves was the maximum. Even terms of trade did not worsen except in the year 1974-75 when the trade gap between the imports and exports was (-) F. 997.2 crores and in the remaining four years, the average annual gap works out to about P,r. 184 crores only with 1976-77 having favourable balance of trade. - 40 - The figures contained in Table I of the Report are not correct (Para 2.04). There is also some discrepancy in the import figure for 1976-77 as given in Table I and Table III of the Report. On the basis of the latest available data, the trade deficit was net U8 V 175 million but there was actually a surplus of US 4 346 millipn in 1976-77. Particularly, tkie Itport fiures given in the table are quite high compared to the revised estimates. As the revised data was already available at the time .of the visit of Audit Mission, it is not understood why the,same have not been used for the analysis. Revised data indicate an improved position. A Summar of Balance of Payments (Ug L million) 1974-75 1975-76 1976-77 F*port- Actual Ier- port- Actual Differ-.Hprt- Actu- Differ- ed ence ed ence ed al ence 1 2 3 4 5 6 r 8 - 1-2- ,(4 -5) J78) Exports 4174 4003 (+) 171 4665 4795 (-) 130 5753 5717 + 36 Imports 5665 5237 (+) 428 6084 5472 (+) -6:9 5928 5371 - 55 .Trade 1491 - 1234 (-) 257 (-)1419 - 677 (+) 742(-) 175 +346 + 521 Deficit Sources T ble I of the Report for Reported. * Table 6.3 of the Economic Survey 1980-81 for Actuals The Report states (para 4.06) that the criteria-for allowing imports other than banned items is not clear. The Import Policy for the years 1975,76 to 1978-79 lays down the criteria for allowing imports of various commodities and the procedures are quite explicit and no ambiguity exists in rules. It has been stated X(Para 2.15) that the private indust- rial investment response has' not been elicited fully and that there have been restraints on the private investment dus to dependence upon the vagaries of agricaltraiproduction, restrained availability-of resources and geneaj. uncertainty of outlook for the economy and insufficient import of raw -41- materials and equipment. Howqver, available evidence from the CO and RBI on'corporate investment in the 'economy during 1973-78 shows the following positions (p. Crores) Financial Corporate Invest-, Term lending Capital raised .Year ment (as per by Financial by non-Govern- National income (Institutions nent companies* A/cs.) Loan disbursed) 1973-74 4241 298 158 1974-75 6079 424 165 1975-76 5834 435 181 1976-77 6228 577 266 1977-78 7958 704 239 1978-79 8637 931 , 258 *Refers to oalendar years It is pertinent to mention that the-re has been a structural diversification of national output in these years which is a - continuation of the longer period trend. The share of agricul- tural sector in net national production in 1973-74 was 48.1% which declined to 44% in 1978-79 while that of manufacturing, construction etc. increased from 20.51 to 22.2o; the other groups of economic activity namely, transport, communication', trade, banking and insurance also registered growth. is for the observation of uncertainty in the outlook for the economy, there kas been a continuous process of planning in the economy and due consideration has been also given to the important role of the private sector. Fisca-l -incentives, liberalisation of imports, cash assistance for export and growth-oreAnted industrial. A policy are some -of the measures aimed at stimulatin- private investment in the economy. There has been virtually no constraint on import of equipment and raw materials- on industry as these are allowed without-any procedural difficulty to meet the ..6/- 42- requirements. It is well known that the Five-Year Plant had been formulated well in time and that these.plan documents lhave contained a strategy for the develo.pment of foreign trade sector, including schemes for boosting up of exports and ration4lisation of imports of essential codmodites required for speedy industrial growth. Incidentally, the figures of index of industrial produc ion furnished in the report for different years as per Table, 5 of the Report need revision in the light of more recent -information from the Co. The average annual growth rate of the index for 1975, 1976, 1977-78 and 1975-78 works out to be 5.41Z, 12.2;,, 5.1% and 7.OU respectively compared to the figures of 4.7 , 9.JA, 6,1 and 6.6A furnished in the rep.ort for these years. In view of this, there would be bhange in the rate of growth shown in the table against the use-based classification also. As for the observation of the unremunerative nature of cement price it ray be noted that levels of administered prices are decided after taking.into account the aspects pert.aig ing to supply and demand of relevant commodities and after going into the input, structure and cost of production and are thus based upon a careful economiic analysis of all relevant fa-btors. Annexure tI may be replaced by an updated version of the material on performance of IDA assisted industries (Appendix). -43 - . APPENDIX liview of the performance of the industries assisted byI..oredit No,528-IN and 616-IN. Table I gives the production data for 1978-79 of the industries covered under the Credit IDA 528 IN and, 616-IN. Th'e,corresponding figures for the previous year, namely, 1977-7 are also givOn in the table. ;2, It would be seen that generally the,performance of the IDA assisted industries have been better during 1978-79. Among the industries which showed a significant rate of growth ares - Diesel Eagines 12.5% HT bolts and nuts 51,5% Trucks and Buses 40.7% Tractors 32.7% Pesticides 23.9% Transformers_ 27.1I Machine Tools 23.2 Winding wires 2U.0% Industries which recorded the growth rate of 0 to 10 per cent were nitrogenous fertilizers (7.0%), PVC/VIR cables (4.5%), three-wheelers (4.2%)j ball and roller bearings (7.5,4), steel castings (8.2%), steel forgings (9.4%) and boilers (13.1-). As against the increase recorded in respect of the above- mentioned industries, there has been a fall of more than 100 in regard to. production .of synthetic rubber and Automobile 14aT springs. The fall has been mainly due to power cut-, paucity of some basic inputs and lower demand. 3. The General Index numbers of production of I.D.A. industries for the last few- years are given-below: Base 1970 = 100 1978-1 . .. 181.9 1977-78 ..* 156.6 1976-77 *** \.157.4 1975-76 ... 141.6 -44- Industrywise index numbers are.given In Table II. 4. The .atest Export figures.for IDA industries separately are available foithe period April-December, 1978. The following table gives the total value of export of IDA assisted industries during tbe last few years: Year N. Million 1978-79 - - 868 (April-,Decemb6r, 1978) 1977-78 1925 1976-77 1890 1975-76 1401 5. Table III gives the value of exports of the XDA assisted industries during the, last few years. It would be seen that during 1978-79 export of all important groups have shown a decline. The main ,reason for the decline in exports has been the increase in the domestic demand, increase in price because of the increased cost of inputs, the nonw availability of poier and certain basic inputs, etc. 6. A brief review of the performance of the industries covered by the IDA credit is given in; the following paragraphs: (a) jACTORS At present there are 14 units manufacturing tractors with a total installed capacity-of 61500 'Nos. The production of tractors'in the country increased fror. 18301 numbers'during 1971-72 to .54,280 Nos. in 1978-79r, Almost all the units in proqluction have achieved an indigenous ontent of over 80 per cent. Dach, tractor manufa-eturer has been providing direct support.to about 200 ancillary and small seale units by forming out finished and semi-finished components and inachinery and heat treatment operations. Besides, meeting the demand in the home market tractor industry has also been ...3/- - 45 - exporting-about 1000-1500 tractors every year to - Nepal, Afghanistan and otherSouth Asian countries and Africa.' (b) POWER TILLERS There are at present 5 units manufacturing power tillers but their capacity utilisation has been poor due to lack of demands As a part of Government measure to revitalise this industry, power tillers have been exempted from.the levy of excise duty. (c) 4QCL MUIPhENT The main and products covered under this Group are steam turbines and generators," hydel turbines and generators, boilers including their adcessories and . the wide range of transformers, switch gears, trans, mission line equipment, motors, etc. The demand for most of the electrical equipment is dir6ctly related to the addition to the generating capacity. An idea of - the performance of heavy electrical industry-in general can, therefore, be had from the fact that during 1978-79, the additional power generating capacity commissioned was 3,000 MW showing -an increase of over SK) per cent overthat of 1977-78. It has been estimatTd that the annual addition to the generating capacity in the next five years is likely to be, more or less, double of that during the 1974-79.period. The demand, for electrical equipment is, therefore, likely to increase very substantially. i 1) THliAL AND HYDRO-GENERATION EqUIFKOlNT BIEL-is the only manufacturer in the country for the manufacture of thermal generating equipment for utilities, large hydro-sets and larger industrial *..4/- - 46 - tubro-sets. The following aple gives.the production of these duping the last few yearst Year Hydro-turbineg &team turbines 1978-79 U.90 2.20 1977-78. 0.88 1.78 1976-77 0.64 1.30 ii) INDUSTRIAL BOILERS There are at present 15 units in addition to BHEM and Associated Vicker Babcock which are liQensed/regis- tered with the DC-TD for the manufacture of industrial boilers. Almost the entire demand is met indigenously. In view of the increasing demand for industrial boilers including that of waste heat boilers further capacity is being created by the optimisation of the existing capa- city and the addition of balancing equipment in such units as Richardsoh and Craddas, Bharat Heavy Plates and Vessels both in the public sector. The,production in this industry has maintained a steady rise as will be seen from the table belows 3 Year R. Million 1978-79 2237 1977-78 1979 1976-77 1590 iii) KLECTRIC NCTORS - There are at present 37 units in the organised sector for manufacturing electric motors of 1 IP and . above. The total capacity is 6.72 Million HP. The production of electric motors during the last few years areindicated in the table belows 1978-79 3.98 Million HP- 1977-78 3.96 it 1976-77 3.67 " " 1975-76 3.50 t - 47 - In the manufacture of motors upto 30 HP range, copper has been substituted by aluminium for squirrel cage induction motors. iv) TRANSFORMRS At present there-are 34 units in the organised sector with a total installed capacity of 28.1 million KVA for the manufacture of transformers. -The produc- tion of this industry during the last few years has been as follows: year Milion KVA 1978-79 20.5 1977-78 16.1 1976-77 15.1 1975-76 13.7 There are also a large number of units in the small - scale sector but they are mostly manufacturing distribu- tion transformers of small ratings and voltage only. There has been no imports of power of distribution transformers except for a 'few 400 KV transformers and the entire demand is met from indigenoUs sources, (d) CABLAS AN4D WIRAS Cables' and wires industry play a significant role in the development of the national economy. Cables and conductors are utilised mainly by the State Electricity Boards for the distribution system. Winding wires are mainly utilised by the manufacturers of electric motors. The,production of various types of cables and wires during the ...6/- - 48 - l4st-fewvyeafs are indicated in the table given below: Year ACSR/AAC Winding wires VIR/PVC Cables Power,Cables Conductors 'RPVC/PILC ILC3- PVC XP) 1978-79 65.5 26.5' 528 21.0 .1977-78 57.6 22.0 506 19.0 1976-77 <84.2 20U.2 404 17.80 1975-76 59.3 18.1 393 15.50 Production of cablas and i?ires during the last year has been very satisfactory, mainly because of increase in the demand for these products. Some problems.were, however, created.because of the shortage of aluminium and PVC. The. following paragraphs give the position" in regard .ta, the principal types of cables and' wired. (i) AC4PAitC -Conductors At present there are 47 large units in production with an installed capacity of 133208 tonnes. Although the produc- tion shoVed a significant improvement and the capacity utilisation was 51" as compared to 46"' during 1977-78, shortage of aluminium was posing a serious problem to increase produc- tion despite demand. (ij) WINDINd WIR S Under this category there are two main types of winding wires that is manufactured in the, co,untry; namely, the enamelled winding wires and. the pa.per covered winding wires. There are about 37 units in the organised sector, and-the installed capacity of both these units is about 45,152 tonnes. The utilisation of capacity is dbout,59 per cent. Import oF winding wire, except'for ve'ry fine gauges, is nQt permitted. (iii) VIR/PVC CABLES : The installed capacity of this type of cable is 1246.67 million core metres and the prodiction is about 527.7 million. core metres. the utilisation of capacity is to the extent of 43 per cent. The production of the organised sector - 49 - of house, wiringis very nominal apd comprises mainly, of control cables, railway commercial cables, drilling cables and other specialised cables. (iv) PVC/PIL POWER QA3LLS There are at present 12 units in the organised sector with an installed capacity of 25,800 KI. Production during 1978-79 was around 17,825. The utilisation of capacity was., there4ore,'to the extent of 56 per cent. The bulk of the production consisted.of PVC power cables as cables upto 6.6. KY have been substituted by PVC power cables in plad,e of paper insulated lead sheathed cables. There has been a subhtantial decline in the indigenous use of PILC Cables and the production is mainly for exports. (e) COIkhBRCIAL VEaICLES i.e. Trucks and Buses Production of comnercial vehicles and in fact that au omative industry which had been in a situation of near stagnation in the last few years showed a substantial imorovement in 1978-79. There are at4 present 7 units producing commercial vehicles with a total capacity .of 79,000 Nqs. as against a licensed capacity of 103,000 Nos. Presently, the comercial vehicles produced in the country range between 3/4 tonnes to 16 tonnes payload of which the principal,product is of 7± tonnes pay-load capacity. Out of the total production of vehicles of this range 30 per cent are passenger buses. Produc- tioZi of conmercial vehicles amounted to 4103>0 -in 1977-78 but rose to 57730 during 1978-79 recording an increase by about 41 per cent. The capacity utilisation of some of the units manufacturing commercial vehicles is not very satisfactory. Proposals are under way to improve their'design characteristics. Vehicles with turbo d&arged engines which would result in an increase of 10 to 15 ...*8/- - 50 - per cent in output "in terms of HP and better fuel efficien-y and lesser pollution Qre being introduced.. The possibility of introducing integral buses are alsl being explored. (f) JEE There is at present only one unit manufacturing Jeeps. Its licensed capacity is 15,000'and the installed capacity 13.,000. Actual production in 1978-79 was 12]00 against 9,147 during 1977-78.. Another automobile manufacturing unit in the private sector has been allowed to diversify its production and introduce a model havng the same' functional characteristics as that of a jeep. The existing capacity is adequate to.meet the' demand. The,introduction of diesel power of jeep has revived the demand for this type of vehicle. (g) THREErSERS Presently there aie two units engaged in the maMafacture of three-wheelers with a total capacity of 29,000 hos. per annum. Daring 1978-79, the production of three-wheelers was about 195CO*Nos. as against the production of 18730 Nos. during 1977-78. (h) AUT01OTIVE ANCILLARILS. This category of industries would include automobile tyres, storMge batteries, synthetic rubber, aut-oinobile leaf springs, hT bolts and nuts. The following table gives the production date during the ...9/- - 51 - last few yearsi Unit 1918-79 1977-7§ 1976-77 1975-76 Automobile tyres' Nillion 7.1 6.2 5.5 4,7 Nos. synthetic rubber Thousand 22.8 28.3 23.2 25.2 Nos. Storage Batteries hillion 1.63 1.62 1.37 1.4l Nos. BT Bolts and Nuts Thousand 10.00 6.6 8.4 7.5 Nos. Auto leaf Springs Thousand 26.2 29.2 29.3 28.7 No's. The following paragraphs review,,n brief, the position of the more important of these industries:- (1)' AUTOMiOBILE TYRES There are 16 units with an installed capacity of 7.93 million numbers. Out of these, 4 units are engaged in the manufacture of single category of tyres. Althouigh the performance of the industry during 1978-79 has been satisfactory, for some time there was some difficulties because of shortfall in the availability of rubber both natural and synthetic. T6 overcome this difficulty, importa were allowed. (ii) STNTIIRTIC RUBB&R There are at present two units manufacturing synthetic rubber witk a total installed capacity of 52,000 tonnes. The production has gone doWn during 197$-79 and the require- ments of the industry were being met through liberal imports. (iii) TORAGE BATTERIES There are 8 units in the organised sector with a total installed capacity of 2.52 million numbers. (There are some units in the small scale sector which are mainly engaged in ..10/- - 52 - reconditioning of old batteries). Production in the organised sector was 1.68 million nubbers which was just little higher than the- product4on during 197778. (iv) HT, BOLTS AND NUTS There are 15 unite manufactueing bolts and nuts with installpd capacity of 19250 tonnes. 'The utilisation capacity during 1978-79 was about 40 per cent and consequently there was a sharp increase in the production. (v) AUTOLOBILE LVAF §PRINGS There are 12 units,manufacturing automobile leaf. :springs with installed 'capacity of 21750 tonnes. Production ' during 1978-79 registered a decline, (vi) OTIAR AUTOV.TIAE COMPON=NS - This is a supp&rt industry for the main iidustries manufacturing commercial vehicles, Pkssenger cars, Jeeps, Three-wheelers, Vehicular Engines, Tractors, Mrth moving equipment, etc. The demand for automobile components rise not ally from the original equipment manufacturers but also from those using different types of vehicles.. There are more than i85 units in the organised sector manufacturing auto- mobile,components, though there are about 15 or 20 units which account for more than 60 per cent of total production. Annual demand for automatic components in India exceeds F, 35U Million. Most of the demand is met from indigenous sou7ces. Taking into account the capacity licensed and sanctioned, auto ancillary industry will, by and large, be able to meet the growing demand. The manufacturers of braking parts, piston assembly, bimetal bearings and dash board equipment may need augmentation through expansion programes. New c pacity may also have to be created for fuel ...11/- - 53 - injection equipment and auto electrical parts. (i) Hachine Tools -Machine Tools ianufactured in India can'broadly be put into two categories: a) Netal cutting and metal forming machinery; and b) t4chines for working on plastic and wood, portable electric and pneumatic tools, Die-casting machines, etc. There are at present'about 140 Units in the Public and Private Sector with an installed capacity of production valued at ?h. 1700 1illion. About 50 per cent of the total production of -iachine tools arefrom Public Sector Undertakings. The following table gives th6 production of the machine tools during.the last few years: 1978-79 , s. 1328 million 1977-78 B. 1076 n' 1976-77 P. 1163 " 1975-76 F-. 141 " It would be seen that there Vas a decline in the, production during 1977-78 as compared to the previous year mainly due to demand constraints, shortage.of power and labour trouble inecertain units. Demand has since improved and as a result, production in 1978-79 Vas approxirately 80 per cent. New items of machine tools hajing sophisticated technology like numerically controlled machinery centres, hight pressuare etrusion presses, Turret Drilling Yachines, etc. have been manufactured for the first time during 1978-79. However, bulk of the area,of precision machine tools required for tool rooms is currently being imported. (j) FETLZg There are at present 28, large units producing nitro- genous and complex fertilizers and 37 units producing phosphatic - 54- fertilizers. The total installed capAcity at -present 3.26 Million tonnes of nitrogen and 0.92 Million tonnes of P205. In addition to these operating units, thire are a number of projects under various stages of implementationt, *en these are completed the installed capabity will rise to 4.5 million tonnes of nitrogen and 1.23 illion tonnes of PaZ, The production of Nitrogenous and phosphatic. fertilizers during the -ast few years are ind eated in the table belows ( In thousand tonnei) Year NitroMenoug Phosphatiq 1978-79, 2164 771 1977-78 2023 . 647 1976-77. 1900 480 1975-76 1535 327 Pesticide industry has.assumed;a vital role in the crop production and public health programme. The present, installed capacity for the manufacture of pesticides is 61,130 tonnes*, The actual production dtring the last few years have been as follows Xmr Jhqusnd tonnes 1978-79 52.7 1977-78 42.8 1976-77 34.8 A1975-76 35.2 - 55 - : TABLE -1 PRODUCTION PERFORMANCE OF INDUSPRIAL SSCTORS ASSIa?ED. BY I.D.A. UNDER TETH AND ELEVENTH LINE OF CREDIT- 1976-77, 1977-78 AND 1978-79. 81. I EKS 0 1976,0 1977- t 1978- 0 Unit No. * 77 78 079 U (4) 1. Tractors 33.2 41.0 .54.3 Th.Nos. 2. power Tillers 1.7 1.6 , 2.3 -do- 3. Fertilize-rs a) Nitrogenous 1900 2023 2164 Th.Tonnes b) Phosphatic (P205) 480 647 771 -dol- 4 Zt Sticides a) Technical 34,8 40.62@ 49.90 w-do- b) Solid formulations 79.3 77.9L 80.6@ -do- c) Licuid formulations 11.3 15.2Gj 16.3@ Th.KV 5. glectrical Equi,,oment a) Electric Meters 3,670 3.96 3.98 Mill.Hp b) Switchgear and controlgear 1302 1368. 1568 lill.RS. c) Transformers 15.1 16.13 20.50 Mill.KVA 6.- Qables and wires - a) Winding wires 20.0 21.96 26.50 Th.Tonnes b) PVC/VIR Cables 494 504.97 527.72 M.C.M. c) Poer Cables 1) Paper Insulated Power cables 3.36 2.94 3.22 Th. K.M. ii) Others 14.44 15,71 14.57 -do- 7.. Steel stampings 45.8 48.3 50.00 Th.Tonnes 8. Commercial vehicles a) Trucks and buses 43.2 41.03 57.73 Th.Nos, b).Jeeps 8.4 9.14 12.10 -do- c) Three wheelers 20.0 18.78 19.52 -do- d) Automobile Diesel Engines 4 .55 3.15 3.58 -do- 9. Automotive Incill-aries a) Tyres 5.5 6.2 7.1 Mill.Nos. b) Synthetic Rubber 23.2 28.3 22.8 Th, Tonnes c) Storage batteries 1.4. 1.6 1.6 Mill.Nos. d) Auto components and parts 2636 2850 3675 1ii1.k. e) H.T. Bolts, Nuts and screws 8.40 6.60 .9.97 Th.Tonnes f) Auto Leaf Springs 2903 2P.2 26.2 -do- SCalendar year. - 56 - 10. Tools and 2,rts a ) Hachin4 Tools ..1163 ,1076-, -1328 Mill .s. b) Cutting, -sll tools &Abrasives 110.3 1205r.6 1433.9 -do e) Ba11 & ro41-er Bearingg 2. 2,.5 284 Mi1l.Nos. 11.o gsin: - ay Steel castings 63r.2 59.7 '75.4 • Th.Tomes b) Cast Iro Castings 174.5 180.1 215.4. -do- c), Molleable Iron Castings .20.1 20.0 20.9 -do- d) 8.T. Iran Gastings -4.6 6.2 7.1 -dó. e) Oast Iron 8pun Pipes 2091,9 145.2 166.1 -do- 12. Frgings 94.2 93.6 102.4 -do- N3. Boll,rs 1590.0 1978.5 2237.2 -ill.-. 14 A.lminium åmelting 203.7 18040 215.2 Th.Tonnes (Primry Metal)'. 15. Eigines for Earth Hoving Equipment 2503 2299 2976 Not. 16. Heavy' consruction equipment 1097 1062 1246 -do- 17å Fad Fal ers 187 708 740 -dp- 18. PoiVer Géneratig Equlpment. 1941 1809 1785 Mill .'. 19.' Textile achiLnery 149Q 1439 2017 Mi1W.. khurcei Ministry of Industry. - 57 - T TAB1LER II Index NO of Production of IDA Industries . Ba'e s 1970=100) T1. Inustry Weig Average -I xDEX No. Base 1977-78 1978-79 production ___ 2 34 5 6 1. AEriczltural Tractors 0.3308 1.7 206.0 266.5 2. Nitrogenous Fertilizers 0.8662 63.6 269.3 288.1 3. Phosphatic Fertilizers 0.5192 16.7 322.9 384.7 4. Pesticides(Tech cal) .1471 1.40 221 .3 293.6 A. BHC (Technical) 0.1008 1.40 171.4 207.1 B. Malatheon 0.0463 0.05 330.0 48 .U 5. Eleatric Motors 0.3521 0.25 132.0' 132.3 6. Transformers 1.4835 0.81 165.4 211.1 7. Aluminiur 0.5496 13.4 - 111.9 132.8 8.. Qomercial Vehicles ;.46 _ 4.9 105.6 144.1 A. Trucks'& Buses -1.3499 , 3.4 100.0 141.5 . B. Jeeps 0.1448 0.8 100.0 126.3 C. Three wheelers 0.0@6 0.4 290rO 407.5 D. Diesel Engines(V4h.$pea 0.0452 0.3 90.0 100.0 9. uto Tyres &Tubes .0959 N.A. N.A. A. Tyres 1.08 0.3 166.7 .200.0 B. Tubes 0 009 N.A. N.A. l. Storage Batteries 0.2160 0.10 135.0 135.9 11. Synthetic Rubber 0.0965 2.6 90.8 73.1 12,9 Auto Leaf springs 1.1417 2.35 103.4 92.8 13. E.T. Bolts & Nuts 0.0937 0.34 161.8 244.1-1l 14. 'Machine Tools 0.5367 35.2 115.5 138.1 15. Taxtile Machinery 0.7196 3d.4 95.3 124.2 16. Ball & Roller Bearings 0.4756 1.5 147.3 158.0 17. C.I. SpTr Pipes 0.1053 14.4 84. . 95.6 18. Steel Castings 0.6125 4.4 113.2 142.7 19. Road -ollers 0.0905 28.0 210.7 220.4 - 58 -. 20, Boilers 0.6422 26.0 299.4 285.8 21. Winding Wires 1.4 130.7 157.9 22. Aluminium Oonductors 0.0527 5.4 88.9 100.6 23:. VIP/PVC cables 0.1825 35.2 119.6. 125.0 24. Paper Insu ted Power cables '0.1456 0.20 122.5 134.0 25. Hand Tools,, Small cutting 0.9644 30,6 148.8 171.5 Tool;, Ovetall weight of above. - l I56s - 59 - TABLE III_. Production performance. of Industrial Sectors assisted by I.D.A. under 10th and 11th line of credit 1977-78 and 1978-79 S.No. Items Unit Production Percentage 1977-78 1978-79 variation 1. Tractors 000 'Nos. 41.0 54.3 + 32. 2. lbrtilizers a) Nitrogenous Th.Tonnes 2023 2164 + 7.0 b) Phosphatic " 647 771 * 19;8 3. pesticides a) B.H.C. (Technical) Th.Tonnes 28.5 35.3 + 23.9 4. Electrical Equilment- a) Electrical votors 1ill-h.P 3.96 3.98 + U.5 b) Tran6formers hill.KVA 16.1 20.5 + 27.1 5. Z.bles and Wires a) Winding Wires 'OOTonnes 22.0 26.5 + 20.0 b) PVC/VIR Cables UIll.C.M 505 528 + 4.5 c) Rower Cables i) Paper Insulated Th.K.M. 2.94 3.22 + 9.5 power cables 6. Cbmmercial Vehicles a) Trucks and-buses ' oODTU n 41.0 67.7 + 40.7 b) Jeeps 9.1 12.1 + 32.4 c) Three wheelers 18.7 19..5 + 4.2 d) Automobile Diesal Engines n 3.2 3.6 + 12.5 7. &utomobile Ancillaries a)'Tyres Mill.Nos. 6.2 7.1 + 14.5 b) Synthetic Rubber '000 Tonnes 28.3 22.8 - 19.4 c) Storage Batteries Mill.Nos. 1.62 1.63 + 0.6 d) H.T. Bolts, Nuts and Th.Tonnes 6.6 10.0 + 51.5 Screws e) Auto leaf springs Th.Tonnes 29.2 26.2 - 10.3 8. Tools and Parts a) Machine Tools 1ill.S. 1076 1328 + 23.2 b) Cutting, small tools ; Abrasives 1206 1434 + 18.9 c) Ball and Roll-er Mill Nos. 26.5 28.4 + 7.5 Bearings - 60 1. 2 3 5 6 9. Casting - a) Steel Castings '000 Tonnes 59.7 75.4 + 8.2 b) Cast Iron Spun Pipes 145.2 165.1 + 13.7 10. Forgoings " 93,6 102,4 .+ 9.4 11. Boilers - Mill.;. 1978.5 2237.2 * 13.1 12. Aluminium Smeltings ( primary Metal) '00OTones 180.0 215.2 + 19.6 13. Textile Machinery Mill.TLI. '1439 2017 + 40.2 1 - 61 - TABLE - VI statement showing Export performance of IDA Assisted Industries during 1976-77, 1977-78 and 1978-79. (b'z. MTillion) o. N 1976-77 1977-78 Provisional No. Name of Industry (April-December 1978-7q* 2 3 4 5 1. Tractors 2.80 4.86 6.49 a, Pesticides 16.10 1.04 6.26 3. Aluminium 5.66 - 4. Electric Eguipment 374.30 436.27 208.67 a) Electric Motors 7.90 4.43 5.46 b) Trahsformers 49.30 34.72 19.70 c) Switchgear and Control gear 51.50 89.07 41.30 d) Cables and Wires 240.40 298.20 123.02 e) Boilers 10.50 1.79 16.30 f) Power Generating Equipment 14.70 8.06 2.89 5. qomQercial Vehicles 246,60 289.77 107.73 a) Trucks and Buses 197.50 234.68 83.41 b) Jeeps 3,80 3.90 j.36 c) Three 'VheelErs 14.90 d) Autbmobile Diesel Engines -30.40 51.19 21.96 6. Automobile .ncillaries 529496 27986 a) Tyres and Tubes 181.50 184.C4 75.80 b) %ynthetic B abber 0.09 0.28 - c)Storage Batteries 82.90 92.01 43.50 d) Auto Components and parts . 265.00 239.35 160.48 7. Castings and Fbrgings 68.10 91.88 4.23 a) C.I. Castings 15.90 25.01 24.56 b) Steel Castings 5.40 8.42 3.96 c) c.I. Spun -pipes 33,00 49.18 25.49 d) Steel Forgings 3100 9.24 G.22 '8. Machine Tools, Small Tools etc. 508,90 479.83 160.78 a) hachine tools 199.40 136.60 37.91 b Cutting Tools,3mall Tools, 302,20 331.40 14-/6 Abrasives, etc. c) Ball, Roller, Taper and 7.30 11.83 4.78 other Rearings II. Heavy Construction Equirment 10O.CO 43.80 9. Textile achinery including parts 153.00 100.00 43.80 9.29 1924.96 867.82 * Provisional Sources Export and Re-Exports of DoGoOol.S. CALCUTTA. - b2 - - 63 - ATTACHMENT C PROGRAM COMPLETION REPORT INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS I. INTRODUCTION 1. The tenth industrial imports program credit to India, Credit 528-IN for US$200 million was signed on February 14, 1975. 1/ The Credit was fully disbursed by February 12, 1976, prior to the contractual closing date of June 30, 1976. The eleventh credit (Credit 616-IN), also for US$200 million, was signed on February 26, 1976. The original closing date was June 30, 1977. At that time, the Credit was fully disbursed ex- cept for the US$5 million Technical Development Fund component (para 21). Therefore, the closing date was extended by one year to June 30, 1978, at which time the credit was fully disbursed. 2. Prior to these Credits, the Association had made nine industrial imports credits to India, starting in 1964. A Project Performance Audit Report on Credits V-VIII was prepared in 1975, and on the ninth credit in 1976 (Rpnorr No. 1q21). Accordinvly, this ompletio Lepuit -.- conc,,ned with the circumstances surrounding the tenth and eleventh credit6. IDA has not extended any further such credits to India, due to its improed balance of payments situation (paras 7-10). II. BACKGROUND 3. During FY74 2/ and FY75, India's balance of payments situation deteriorated markedly. The trade balance, which had shown a small surplus in FY73, deteriorated to a deficit of almost US$1.5 billion in FY75 (26% of merchandise imports c.i.f.), due to rising foodgrain import requirements and a 28% decline in the terms of trade, caused to a large extent by the increased crude oil prices in the fall of 1973. India reduced the volume 1/ The original Credit Agreement was for US$100 million, which was increased to US$200 million on March 7, 1975, after the final ratification of the Fourth IDA Replenishment Agreement. 2/ India's FY: April 1-March 31. Annex 1 shows India's balance of payments FY75-FY77. - 64 - of non-food imports by 16% over this two-year period; without this reduction, the trade deficit would have risen even higher. India was able to finance the large trade deficits thanks to an increase in net aid disbursements from US$542 million in FY73 to US$1,246 million in FY75, and to drawings from the IMF totalling US$75 million in FY74 and US$553 million in FY75. As a result, the gross level of external reserves fell in FY74 to less than 3 months of imports, but in the following year increased somewhat. However, at the end of FY75, the reserves were still just over 4 months of imports, a minimum figure. Net of outstanding IMF drawings, the level of external reserves fell and by the end of FY75 was equivalent to only 1.6 months of imports. 4. By early 1975, the balance of payments outlook was also grim. Even with a good monsoon, foodgrain imports were likely to be required for restocking of the public distribution system. With no significant changes expected in the import bill for foodgrains, oil, and fertilizer, there was little prospect of any major change in the balance of payment situation, although export earnings could continue to increase. 1/ For industry, this would mean that the foreign exchange available for imports could limit the volume of imports in FY76 to no higher, at best, than the volume received in FY75, thus restricting the expansion of industrial output. It was against this background that Credit 528-IN was approved on February 11, 1975. 5. As had been expected, foodgrain imports continued to increase and the terms of trade deteriorated by a further 9% during FY76. However, the trade deficit was reduced to Rs 1.4 billion (23% of merchandise imports c.i.f.), through an 11% increase in the volume of exports and an 11% decrease in the volume of non-food imports. At the same time, India's ability to finance a large trade deficit continued to improve. Net aid disbursements rose to US$1,810 million, while at the same time, invisible receipts also increased considerably, primarily on account of workers' remittances and tourist receipts. Together with IMF drawings of US$242 million, these fac- tors permitted India's gross external reserves to increase by 58% to US$2,172 million at the end of FY76. 6. This improvement in India's balance of payments did not really become apparent until the last quarter of FY76; indeed, at the end of December 1975, the gross level of external reserves was still lower than nine months earlier. For FY76 as a whole, the estimated net aid disburse- ments and net invisible receipts for FY76 were substantially lower than the actual outcome, while the estimated trade balance deficit was somewhat higher than the actual figure. However, even allowing for this better than expected situation, the case for fast disbursing non-project aid still appeared quite strong. First, despite severe constraints on non-food imports, India was still running a large trade balance deficit. Secondly, little was known about the factors behind the sudden surge in invisible receipts, and the prospects were uncertain for sustaining these inflows. Thirdly, the record level of net 1/ In FY75, export earnings had increased by about 30% due primarily to increased exports of sugar and non-traditional items such as engineering goods. - 65 - aid disbursements had only been possible because of additional fast disbursing aid provided by IDA, OPEC countries, the EEC and other sources. Fourthly, net of outstanding IMF drawings, the level of external reserves at the end of FY76 was still equivalent to only 2.7 months of imports. In addition, it was considered that India would require an increased import capability to rebuild inventories in the manufacturing sector, continue to rebuild agricultural stocks, and to permit more liberal import licensing, thereby responding to the favorable demand factors following the good harvests in FY76. On this basis, Credit 616-IN was approved by the Board on February 24, 1976. 7. However, during FY77 the balance of payments situation improved dramatically. The trade deficit declined from US$1,419 million to US$190 million 1/, thanks to an 18% increase in the volume of exports (para 8), a 2% drop in the volume of imports caused largely by a 33% drop in the volume of foodgrain imports and a 36% drop in the volume of fertilizer imports (thanks to increased domestic production capacity), and a 9% improvement in the terms of trade. With reduced foodgrain import requirements, the volume of non-food imports was increased by about 10%. Net aid disbursements fell back to US$1,393 million, but this was more than offset by the continuing surge in net invisible receipts (para 9), which reached an estimated US$1 bil- lion in FY77. As a result, despite substantial repayments to IMF, the gross level of external reserves rose by 73% to over US$3.7 billion, while the level of reserves net of oustanding IMF drawings was equivalent to 6.6 months of imports by the end of FY77. 8. The improved export performance during FY76-77 was a welcome depart- ure from past trends. One-third of the 11% volume growth during FY76 was attributable to sugar, which GOI exported in large quantities to take advant- age of the very high world prices at that time. When the sugar prices sub- sided in 1977, the volume of sugar exports was cut substantially. The over- all export volume growth rate during FY77 of 18% was then even more remarkable. In both FY76 and FY77, India sustained a broadbased export effort in response to favorable world market conditions (e.g., clothing, gems, handicrafts, cotton textiles, oilcakes, and marine products) and domestic surpluses-(e.g. iron and steel). The volume of engineering goods exports, which declined by about 10% during FY76, recovered during FY77 to a level 14% higher than in FY75. 9. An even more notable development in the balance of payments over the past few years has been the surge in net invisible receipts. These receipts, which had been negative in the late sixties and early seventies, turned positive in FY75 and then continued rising to an estimated US$1 bil- lion in FY77. Primarily, the increase was caused by private transfers, which rose mainly on account of the rapidly expanding Indian workforce in the Middle East. However, other components have risen as well, including 1/ From FY77, the import figures used by the Bank include imports of merchant ships, not covered by the official trade data. Excluding these, the improvement in the trade balance would be even more dramatic. - 66 - investment income (due to the rising external reserves), and travel receipts due to an increase in tourism traffic. 10. As a result of these various unexpected developments, the need for fast-disbursing foreign aid was much less than anticipated at the time of approval of Credit 616-IN, which therefore, with the benefit of hind- sight, would not have been required on balance of payments grounds, although other objectives were served. In view of the continued improvement of India's balance of payments in FY78, the Bank has made no further industrial import credits to India. III. THE CREDITS General 11. The major objective of the credits was to make available quick- disbursing funds, and to achieve full disbursement within 12 months for each credit. As with previous credits, an additional objective was to improve overall industrial efficiency through the allocation of all of the funds (under Credit 528-IN), or a large portion (under Credit 616-IN) for the financing of imports for certain selected industries. The import requirement of these industries would ensure rapid disbursement of the credit amounts, and the selected industries were of high priority and requiring an improved flow of imports so that efficiency and competitiveness could be improved. The composition of industries changed slightly from Credit 528-IN to Credit 616-IN (para 12), but in general, the selected industries provided, directly or indirectly, inputs needed by vital sectors of the economy. Thus, the fertilizer, pesticides and tractor manufacturing industries supported agricultural development; commercial vehicles and automotive ancillaries supported the transport sector; electrical machinery, wires and cables, and aluminum supported the power sector. 12. Annexes 2 and 3 show the indicative allocations for Credits 528-IN and Credit 616-IN, respectively. The eligible industries under Credit 528-IN were basically the same as under the previous imports program credits; how- ever, the manufacture of power generating equipment and boilers was added in view of the priority being given to the power sector. These industries were previously dependent upon tied aid credits; a relatively small amount of IDA funds could therefore provide the flexibility required to ensure an even flow of imported materials. To make IDA's assistance as flexible as possible, ceilings on allocations under Credit 528-IN were not established, with the exception, as for previous credits, of supplies for fertilizers and pesticides manufacture, which were limited to US$75 million to avoid an unduly large amount of the Credit being utilized by these groups. Likewise, under Credit 616-IN ceilings were established for the manufacturers of fertilizer, pesticides, power generations and boilers. 13. As shown in Annex 3, Credit 616-IN included a component not found in the earlier credits, viz. a US$40 million allocation to support export development through the financing of import replenishment licenses for exporters (para 20). Otherwise, the list of eligible industries did not - 67 - differ very markedly from the previous credits, although there had been some modification of industry groups. In addition, aluminum smelting and manu- facture of heavy construction equipment were dropped; the former because there was no longer any special need for funds, and the latter because of a downturn in demand. Textile machinery was included for the first time fol- lowing the special study which had been conducted in connection with this Credit (para 26). Another new component was US$5 million for the Technical Development Fund (TDF), a fund set up to finance balancing and modernization equipment, and purchase of technical know-how and designs (paras 21-25). Disbursements 14. Credit 528-IN was fully disbursed by February 12, 1976, prior to the contractual closing date of June 30, 1976, while Credit 616-IN was fully disbursed by its closing date, June 30, 1977, except for the US$5 million TDF component (para 1). Annexes 2 and 3 show that the indicative allocations made at the time of appraisal were reasonably close to the actual disburse- ments in most cases. One exception was the textile machinery industry, which had received an indicative allocation of US$6 million under Credit 616-IN, but for which no disbursements were made. This was due to normal deviations from the tentative allocations, since free foreign exchange allocations were made also outside of the IDA funds. However, the textile machinery industry was the heaviest user of the TDF (para 21). Overall, the indicative alloca- tion provided a reasonable guide for credit allocation.- Annex 4 shows cumu- lative disbursements by industry categories for the first nine credits com- pared to the tenth and eleventh credits. 15. A large share of IDA-financed raw materials have been imported by public sector trading companies, the so-called canalizing agencies, which generally make advance bulk imports of raw materials. For Credits 528-IN and 616-IN these disbursements were as follows (US$ million): Credit 528-IN Credit 616-IN Minerals and Metals Trading Corporation of India (MMTC) 68.2 72.2 Steel Authority of India Ltd. (SAIL) 7.6 3.9 State Trading Corporation (STC) - 2.2 TOTAL 75.8 78.3 As % of Credit 37.9 39.2 The MMTC imported non-ferrous metals, sulphur and rock phosphate under the two credits, the SAIL imported steel sheets and plates, and STC imported some chemical products, mainly for the pesticide industry. The share of funds dis- bursed for the canalizing agencies fell from 64% under the ninth credit to less than 40% under the tenth and eleventh credits, due primarily to the lower percentage allocated for the fertilizer industry. The fertilizer and pesti- cides industries were allocated 50% of the ninth credit, 37.5% of the tenth and 25% of the eleventh credit. - 68 - 16. The geographical distribution of imports under these credits (Annex 5) followed roughly the pattern of the nine previous import credits. A number of countries including the Bahamas, Saudi Arabia, Senegal and Tunisia, for the first time under these credits obtained a significant amount of orders, while the four main countries of origin (USA, Germany, U.K. and Japan) accounted for 57% of all imports, compared to 49% under the ninth credit and 65% under all the first nine credits. Procurement by canal- ising agencies was mostly done through international competitive bidding. Impact on Eligible Industries 17. Credit 528-IN was extended at a time of serious balance of payments difficulties for India. In the absence of this credit, therefore, the avail- able imports for the eligible industries would have been reduced significantly. On the other hand, as discussed in para 10, Credit 616-IN would probably not have been required on balance of payments grounds under the changed circum- stances, although it is likely that the availability of the credit made it somewhat easier for these industries to obtain their import permits. 18. The performance of the IDA-assisted industries is discussed in some detail in Annex 6. These industries showed a production growth of 3.2% in FY76, and 11.2% in FY77. For FY76, the production figures were generally below appraisal estimates. This was in particular due to lack of domestic demand, coupled with the effects of the energy crisis, a restrictive domestic credit policy and power difficulties. Certain industries showed very large production increases over the two years in question, including fertilizers, aluminium, tools and parts, and power generating equipment. Other industries stagnated or showed a decline, such as commercial vehicles, castings, and heavy construction equipment. Overall, the IDA industries were affected, particularly in FY76, by the lack of demand for industrial products. The improved performance in FY77 followed the excellent harvests of the previous years, which increased the demand from the agricultural sector. 19. Total export earnings of the IDA-assisted industries grew from Rs 1,160 million in FY75 to Rs 1,889 million in FY77, an average annual nominal growth rate of 28%. This increase, which was almost double the rate for total manufactured exports, followed strong growth also in FY74 and FY75. Substantial export growth was recorded in particular for cables and wires, machine tools and small tools, and trucks and buses. For items such as hand tools, the export progress is based on the comparative advantage derived from the abundance of adequately skilled labor in India. Special Features of Credit 616-IN 20. Replenishment Licenses. As discussed in para 28, at the time of these credits, GOI started a gradual shift to liberalize imports and remove hurdles for exports. This was reflected in two special features of Credit 616-IN, the TDF (para 21) and the financing of import replenishment licenses for exporters (REPs). Up to the time of the credit, exporters had received their import requirements in the form of REPs after they had exported. This procedure had a constraining effect upon exporters; accordingly, GOI intro- duced a scheme whereby exporters could request REPs for export production in - 69 - advance of actual exports ("advance" and "imprest" licenses). Under Credit 616-IN, all REPs, with priority for advance and imprest REPs, were eligible for refinance except for REPs issued to the gems and jewelry industries. During FY77, total REPs amounted to US$340 million 1/ (against US$200 million estimated at the time of appraisal), so that the credit financed 12% of total REPs in that year. 21. Technical Development Fund. Under Credit 616-IN it was agreed to establish a Technical Development Fund (TDF) to provide foreign exchange for imported balancing and modernization equipment and the import of technical know-how and designs. A cell was set up within the Ministry of Industry to administer the fund, which was given an indicative allocation of US$5 million. A ceiling of US$250,000 to any enterprise was established to ensure that a reasonable number of enterprises would benefit from the fund, and to minimize overlap with the DFCs. 22. Initially, it was agreed that the eligible industries would be those that had previously been studied by IDA 2/, as well as any enterprises among IDA-assisted industries where special needs had been identified to enable the enterprise to compete for export orders. Subsequently, in June 1976 IDA agreed to an expansion of the list of eligible industries to cover also the other IDA industries, provided that the import of capital equipment would be linked to a specific export order. In view of the favorable response to the TDF (para 23), GOI announced in September 1976 its decision to provide its own free resources to the fund, and to extend eligibility to a wide spectrum of industrial activities considered to have priority. 23. Annex 7 shows the industry-wise utilization of TDF from inception through FY78. In that period, the fund approved 197 applications for Rs 173 million (about US$22 million equivalent), of which 107 applications for Rs 100 million under the extended TDF scheme not covered under IDA. In FY77, the six original sectors (para 22) accounted for 54% of all sanctions by amount; this percentage declined to 20% in FY78, due to the large sanctions in the previous year, the generally easier access to foreign exchange and the increasing inflow of applications from other industries under the extended scheme. 24. Disbursements have been lagging behind approvals; as a result, the closing date for Credit 616-IN was postponed by one year on account of the TDF component (para 1). This has been due primarily to the normal delivery periods for imported equipment; in addition, in a number of cases the industrialists were not fully prepared to proceed with the placement of orders as they had not expected quick decisions from the TDF . Lack of rupee resources was also a problem for some units. Accordingly, in December 1976, the Industrial Development Bank of India (IDB) established a special window to provide rupee credit facilities to industrial concerns receiving import licenses through TDF. As of March 31, 1978, the net sanctions of 1/ Hereof, advance and imprest licences accounted for 11%, most of which for the engineering industry. 2/ Commercial vehicles, tractors, forgings, foundries, textile machinery and machine tools. - 70 - this window were Rs 62 million for 46 units, equivalent to 36% by amount of the total TDF sanctions as of that date. This is a high percentage in view of the fact that IDBI's window was established eight months after TDF's commencement of operations. 25. The fund was favorably received, due primarily to its quick decision- making and less complicated licensing procedures than those normally prevailing in India. 1/ Also, as intended the fund did not engage in any extensive project evaluation, since the applications were for relatively small amounts 2/ for balancing and modernization, and the TDF involved the purchase of foreign exchange by TDF clients, and not any credit risk for the fund. As a result, through FY78 86% of all cases, including rejects, were decided in 45 days or less. Accordingly, the fund has helped remove bottlenecks by allowing quick imports of balancing and modernization equipment, as was the purpose. However, the overwhelming majority of the applications received so far were for imported equipment, and very little for drawings, designs, consultancy services or tech- nical know-how. This raises the question of overlap with the existing term- lending institutions such as ICICI, which could have handled most of the TDF applications, the majority of which came from existing ICICI clients, partic- ularly since ICICI could have undertaken an appropriate project evaluation without any significant delays. 3/ Nevertheless, TDF's real speed saving was due to the fact that TDF project enjoyed relaxed import licensing procedures. For the TDF type of project, such relaxed procedures were justified, but it would have been advantageous to extend these concessions further to all proj- ects meeting certain criteria, irrespective of their type of funding (TDF DFCs, self-finance, etc). However, it is doubtful whether even such a limited liberalization could have been achieved as part of an ICICI lending operation. Thus, it can probably be argued that the import credit provided the best mechanism to achieve this liberalization particularly since the Government at first was skeptical as to its usefulness. Another TDF advantage, particularly in view of the present concern over foreign exchange risks, is that the funds were bought with rupees, and not borrowed. At the time TDF was established, this advantage was not given much consideration, but in retrospect it has become important in view of the reluctance among ICICI's clients to carry the exchange risk on their borrowings in the light of the 1/ E.g., TDF projects do not have to go through the Capital Goods Committee; also, in September 1976, it was formally decided that TDF applications would not be subject to indigenous angle clearance (the requirement for advertisement of equipment among local procedures). 2/ Through FY78, 44% by number of the approved cases were for less than US$50,000, and only 17% for above US$200,000. 3/ E.g., in the first ten months of 1976, ICICI provided foreign currency loans of Rs 101 million for 49 modernization, balancing, replacement and R&D projects for an average of US$228,000 per project, and with an average processing time of about 30 days. - 71 - Bank's present policy (which is under review) of disbursing its hardest currencies. 1/ The Credits and Industrial Policy 26. Special Study. Under previous import credits, IDA prepared special studies for commercial vehicles and tractors (1973), and forgings and foundries (1974). No such study was undertaken for Credit 528-IN, in view of the short period between the ninth and tenth credits. However, as part of the appraisal of the eleventh credit, a study was undertaken of the textile machinery manufacturing industry, including a review of the textile industry as a whole. The study found that the textile machinery industry suffered from large excess capacity, fragmented organization, lack of adequate research and design capabilities, and sluggish domestic demand. The industry was included as eligible under Credit 616-IN in view of the industry's needs for modernization, but no amounts were actually disbursed for raw materials and spares (para 14). On the other hand, the industry was a heavy user of the TDF (Annex 7). 27. The study presented general recommendations for GOI to improve the performance of the textile machinery industry, as well as recommendations for the industry itself to improve product range, planning and manufacturing methods, training and marketing. The study received considerable attention within the industry, was useful for a number of firms in pointing out general problem areas and possible solutions, and a number of firms made investments based on the study, though there was little follow-up of the study's recom- mendations with GO. Accordingly, the impact of the study on overall Govern- ment policy design vis-a-vis the textile machinery industry has been modest. 2/ However, it is likely that the study was useful in the context of the general policy dialogue with GOI, and may have contributed to the improvement in the administration of the REPs (para 20), and liberalization of the import of capital goods and technical know-how, e.g. in the context of the TDF (para. 25). 28. Industry Policy Dialogue. The dialogue between GO1 and the Bank Group in the course of the appraisal of the two credits was primarily con- cerned with export incentives and their administration, in addition to the special study (para 26) and follow-up on the previous special studies. At that time, GOI started a gradual shift, still taking place, away from its heavy reliance on import substitution for industrial growth. A number of changes took place in the areas of industrial licensing, import licensing, 1/ Another advantage of the TDF for some clients is that it does not carry any conversiion clause, which loans from all-India financial institu- tions normally carry (except for loans under the modernization program in five subsectors). 2/ At the time of appraisal of Credit 616-IN, IDA expected that the TDF cell (para 21) would be responsible for monitoring the further pro- gress on special studies and the implementation of industry develop- ment program. However, the cell with its small staff has never been in a position to undertake other functions than the processing of the TDF applications, and there are no plans to broaden its scope of activity. - 72 - bureaucratic procedures, and the level and extent of cash incentives. These changes were largely procedural, and worked to liberalise imports and remove hurdles for exports. The policy of gradual reforms towards more open trade policies has continued in the following years. There is no direct connection between the import credits and GOI policy changes, except that the existence of the credits made it easier for GOI to liberalize its import policies. In addition, it is likely that the dialogue that took place in connection with the import credits, the economic reports, special work on exports that resulted in a separate report, 1/ and ICICI's export incentive study, to some extent have been instrumental in convincing GOI of the need for policy reforms. 29. As part of the monitoring of India's export performance, under the negotiations for Credit 616-IN certain detailed reporting requirements in this regard were agreed upon, with quarterly, half-yearly and annual statements on exports. However, the reporting was accompanied by little or no analysis, and therefore did not serve the intended purpose. IDA found direct contact with the concerned ministries more useful for the monitoring of India's export performance, as a result of which the reporting was dis- continued in April 1977. IV. CONCLUSIONS 30. After a marked deterioration in FY74 and FY75, India's balance of payments improved in FY76 and dramatically in FY77, as a result of reduced foodgrain and fertilizer imports, improved terms of trade, increasing exports and a surge in net invisible receipts. As a result, India's foreign exchange reserves have increased considerably. While Credit 528-IN helped India finance a large trade deficit, Credit 616-IN would probably not have been required on balance of payments grounds, with the benefit of hindsight. Both credits facilitated the gradual change in India over the past few years towards more open trade policies. The major objective of the credits was to make available quick--disbursing funds; this was achieved. Also, the industries supported by IDA for their importance to the economy showed increasing production, especially in FY77 following the excellent harvests of the previous years, which increased the demand from the agricultural sector. At the same time, total export earnings of these industries grew at an average annual rate of 28%. Nevertheless, many of the assisted industries are still facing demand constraints, with resulting low capacity utilization. 31. Over the period of the credits, the dialogue between GOI and IDA on industrial policy questions concentrated on export policies, export incen- tives, and their administration. This dialogue took place in the context of the import credits, the economic reports, special work on exports, and ICICI's export incentive study. Probably, this work to some extent helped convince 1/ "India: Export Performance, Problems, Policies and Prospects"; Report 1352-IN dated May 18, 1977. - 73 - GOI of the need for policy reforms. The existence of the credits undoubtedly facilitated the overall dialogue between GOI and IDA. The special textile machinery study under Credit 616-IN was useful within the general policy dialogue with GOI, and has been used by a number of firms in the industry. However, there was insufficient follow-up of the study's policy recommenda- tions with GOI, so that the impact of the study on overall policy design for the textile machinery industry has been modest. Under Credit 616-IN it was also agreed to establish the TDF, which primarily has been providing foreign exchange for imported balancing and modernization equipment. This fund be- came popular thanks to its quick decision-making and less complicated licens- ing procedures. It thereby helped remove bottlenecks by allowing quick imports of balancing and modernization equipment. - 74 - ANNEX 1 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Balance of Payments (US$ million) 1974/75 1975/76 1976177 Estimate Actual Estimate Actual Provisional January 19751. February 1976-V _ Merchandise Exports 4,000 4,174 4,120 4,665 5,760 Merchandise Imports -5,800 -5,665 -5,650 -6,084 -5,950 Debt Service -730 -785 -805 -786 -829 (of which, to Consortium (-635) (-673) n.a. (-680) (-679) Other) (-95) (-112) n.a. (-106) (-150) Credit Transactions with IMF 615 522 205 242 -336 Grose Aid Disbursements 1,750 1,761 1,900 2,341 1,953 (of which from Consortium n.a. (1,303) (1,500) (1,649) (1,589) Other) n.a. (458) (400) (692) (364) Miscellaneous Capital and Invisibles (Net) 3/ n.a. -45 260 416 978 Increase in Reserves n.a. -38 30 794 1,575 Reserve Level at end of Period n.a. 1,378 1,395 2,172 3,747 1/ President's Report on Credit 528-IN; No. P-1558-IN, January 16, 1975. i/ President's Report on Credit 616-IN; No. P-1754-IN, February 2, 1976. S/ Includes errors and omission. - 75- ANNEX 2 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Credit 528-IN, Allocations by Sector 1975/76 Tenth Credit Estimated Import Indicative As Percentage of Actual Requirement Allocation Import Requirement untiE --------- (US$ million)-------- ( % ) (US$million) A. Raw Materials, Components, and Spare Parts for Manufacturers of: 1. Tractors and Power Tillers 27 4 (15) 7.6 2. Fertilizers 259 70 (27) 75.0 3. Pesticides 54 5 (9) 4. Electrical Equipment: (i) Power Generating Equipment and Boilers 169 17 (10) 14.8 (ii) Upto 66 KV, including motors, transformers, switchgears, stampings, cables and wires 110 28 (25) 39.7 5. Aluminium Smelting 18 2 (11) 1.2 6. Commercial Vehicles 63 15 (24) 10.8 7. Automotive Ancillaries 99 25 (25) 13.0 8. Castings and Forgings 10 2 (20) 10.9 9. Machine Tools, Cutting and Small Tools and Abrasives, Ball and Roller Bearings 49 14 (28) 14.5 10. Heavy Construction Equipment 30 8 (27) B. Spare Parts of Existing Equipment 12.6 1. Heavy Earth Moving 20 9 (45) 2. Power Generating 3 1 (33) Total 911 200 (22) 200.0 1/ Total does not add up due to rounding. - 76- ANNEX 3 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Credit 616-IN, Allocations by Sector 1979/76 Eleventh Credit Estimated Import Indicative As Percentage of Actual Requirement Allocation Import Requirement Amount To Support Export Development million)--------- %) (US$million) 1. Import replenishment licenses for exporters 200 40 (20) 40.0 To Support Vital Industries with Export Potential 2. Raw materials, Components and Spares for Manufacturers of: (i) Commercial Vehicles 50 12 (24) 10.6 (ii) Automotive Ancillaries 70 15 (25) 9.9 (iii) Machine Tools, Small Tools, Ball and Roller Bearings, Casting and Forgings 70 15 (21) 10.6 (iv) Electrical Equipment up to 66 KV: Transformers and Switchgear and related components, Stamping, Cables and Wires 90 17 (19) 27.7 (v) Textile Machinery 20 6 (30) - 3. Technical Development Fund 5 5 (100) 5.0 Subtotal: 305 70 (23) 63.8 To Support Priority Sectors Agriculture: 4. Raw Materials,.Components and Spare Parts for Manufacturers of: (i) Tractors, Agricultural Discs and Power Tillers 30 5 (17) 10.7 (ii) Fertilizers 250 (Mi) Pesticides 35 ) 50 (18) 50.0 5. Spare Parts for Heavy Earth-moving Equipment 20 10 (50) 10.5 Power: 6. Raw Materials, Components, and Spare Parts for Manufacturers of Electrical Generators and Boilers and Spare Parts for power Generators. 150 25 (17) 25.0 Subtotal: 485 90 (19) 96.2 TOTAL 990 200 (20) 200.0 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COPLETION REPORT Disbursements by Category of Industrial Importe Credite (US$ million) Cartegry First Credit Second Credit Third Credit Fourth Credit Fifth Credit Sixth Credit Seventh Credit Eighth Credit Ninth Credit Firet to Ninth Tenth Credit Eleventh Credit Credite 2-N) (8-IN) (92-IN) (97-IN) (327TIN) (402-IN) (474-IN) Tntal (616-IN) A. Cnmpnnente and Material and Sptre Fart ior the Manufacture of: - Connercial Vehicles 43.6 31.6 22.8 5.9 13.3 10.4 9.8 7.5 8.5 153.4 10.8 10.6 - Agricultural Tractore - - 1.8 0.4 2.3 2.6 3.4 5.0 1.6 17.1 7.6 10.7 A- A tnive Acill,rtee 10.6 16.3 23.9 i09 23.9 26.6 17.0 12.2 8.1 13.0 9.9 - Machine Tnnls 4.3 4.1 2.2 1.1 2.5 ) - Cutting and Small Toole 4.8 5.0 4.7 2.2 3.5 16.9 21.6 39.7 ) 6.4 125.0 14.5 10.6 - Ball & Roller Bearings - - 2.5 1.1 2.4) - - - - Electrical Equipment 11.2 12.1 16.3 3.6 8.0 3.4 4.7 7.2 42.4 104-9 54.5 52.7 - Fertilizer and Pesticides - - 24.0 22.1 25.7 15.0 18.0 25.3 69.1 199.2 75.0 50.0 - Cablee and Wiree - 19.8 44.5 12.3 22.5 - - - - 99.1 - - - Industrial & Mining Machinery - - 4.3 3.3 16.0 - - - - 23.6 - - Basic Nonferrous Metals - - 2.6 2.0 3.2 - - - 3.7 11.5 - - - Castings & Forgings - - Small Sall 0.2 - - - - 0.2 10.9 - - Heavy Construction Equipment 2.9 3.5 - - - - - 2.8 - 9.2 12.6 - - Aluminum Smelting - - - - - - 0.5 0.3 1.7 2.5 1.2 - - Miscellaneous - - - Small 0.7 - - - - 0.7 - - B. Balancing Equipment 2.5 1.8 0.4 0.2 0.7 - - - - 5.6 - - C; Spare Parts for Heavy Construction Equip.ent Dealers 7.7 5.8 - - - - - - 1.9 15.4 - 10.5 D. Heavy Construction Equipment 2.4 - - - - - - - 6.6 9.0 - - E. Import Replenishment Licenes for Exporter. - - - - * - - - - - 40.0 F. Technical Development Fund - - - - - - - - - - 5.0 TOTAL 90.0 100.00 150.0 65.0 125.0 75.0 7 .0 100.0 150.0 930.0 200.0 200.0 .1 Inclusive of epare parts. i N D i A TENTH AND ELEVENTH INDUSTR AL IPORTS PROGRAM CREDITS ,COMPLETION REPORT Soorces of Prooursemet for Itdustrial Imports Credito (us$'000) First to Tenth and Elev- Credit Credit Credit Credit Crodit Credit Credit Credit Credit Ninth Cre- % of C,edit Crdilt enth Crdits Country 52-IN 78-IN 92-IN 97-IN 138-IN 182-IN 327-IN 402-IN 474-IN dits Total Total 528-IN 616-IN % of Total Australia 627 1,691 4,679 3,060 3,742 2,935 4,686 1,116 4,261 26,797 2.9 2,588 7,312 2.5 Austri 612 817 638 310 5,255 1,329 554 670 274 10,459 1.1 1,479 642 0.5 Bahamas n.a. n.a. n.a. n.0. n.a. n.a. n.a. n.a. n... n.a. n.a. 4,031 1,704 1.4 Belgium 786 3,190 11,078 644 1,038 313 - 230 - 17,279 1.9 308 323 0.2 Brazil - 59 - 3,180 315 - - - - 3,554 0.4 - 140 - Canada 960 4,016 8,641 9,026 9,962 1,365 1,237 3,373 943 39,523 4.2 8,612 3,643 3.1 France 1,111 1,459 2,770 3,096 2,223 999 1,700 2,063 230 15,651 1.7 11,086 6,187 4.3 Cerany 20,795 25,004 27,824 7,748 23,615 23,425 13,632 19,314 17,658 179,015 19.2 23,204 28,833 13.0 Ghana n.a. n... n,.. n.a. n.a. n.a. 513 481 neg 994 0.1 - - - Greece n... n.a. n.a. n.a. n.a. 689 - - 1,272 1,961 0.2 - - - Iran n.a. n.. n.a. n... n.a. 522 1,005 2,248 10,581 14,356 1.5 2,953 6,417 2.3 Iraq n.a. n.a. n.a. n.a. n.a. n.0. n.a. 836 2,085 2,921 0.3 7,143 4,764 3.0 Israel ..a. a... n.a. n.a. 689 683 seg 1,372 0.1 536 204 0.2 Italy 859 703 2,638 1,140 2,765 1,491 7283 1,882 878 13,084 1.4 1,620 673 0.6 Jopan 5,546 3,933 5,971 3,100 9,592 11,473 14,886 21,383 26,762 102,646 11.0 31,027 25,146 14.0 Jordan - - 2,964 3,375 4,016 332 2,174 1,777 16,485 31,123 3.3 3,096 1,053 1.0 Kuwatt n.at n.a. n.a. n.0. n.a. n... n.. 431 - 431 - 959 1,301 0,6 Liberia - - 1,395 1,080 1,795 426 - - - 4,696 0.5 - 90 - M..alysi 54 1,479 5,651 563 3,141 91 209 1,087 1,491 13,766 1.5 2,733 1,918 1.2 Mexico 76 - 1,909 1,945 191 98 2,662 4,271 13,634 24,786 2.7 18,292 3,824 5.5 Morocco - - 2,798 - 1,087 2,382 118 4,001 6,757 17,143 1.8 3,675 2,871 1.7 Netherland. 189 133 3,170 287 498 445 985 1,099 2,110 8,916 1.0 651 330 0.2 Norway 7 103 492 140 1,087 415 378 79 357 3,058 0.3 47 - Saodi Arabis n.a. n.a. n.a. ..a. a.. 0.. . 0.0. n.a. n.a. 1,469 - 0.4 Senegal n.a. n 0. n... n... n... n.0. n.a. n.a. n.a. ..a. n.a. 2,523 1,043 0.9 Sweden 1,430 1,835 2,906- 1,770 1,898 995 2,205 2,000 627 14,766 1.6 3,179 6,520 2.4 Switzerland 916 789 564 1,011 2,199 721 2,067 1,917 1,591 11,775 1.3 2,510 6,095 2.2 Tos.ia n.a. n.0. n.a. n.. n.an.n.a. n.a. n.0. n.a. n.. - 1,474 0.4 United Kingdo 44,448 35,758 30,489 9,829 25,149 9,729 13,355 13,133 10,658 192,548 20.7 33,170 25,020 14.5 United States 10,381 18,758 27,364 8,222 17,489 9,911 8,374 8,342 18,594 127,435 13.7 30,070 32,837 15.7 Yugoslaia n.a. n.a. n.a. n.a. n.a. n... n.a. 1,588 729 2,317 0.2 572 7,420 2.0 Zaire n.0. n.a. n.a. n... n... 1,784 23 2,580 786 5,173 0.6 77 - Zambia 65 5 373 1,164 7,176 1,147 2,338 3,376 9,998 25,642 2.8 1,697 19,375 5.3 Othe Coontrles 1,138 268 6,586 4,310 767 1,983 482 40 1,241 16,815 1.8 693 2,840 0.9 TOTAL 90,000 100,000 150,000 65,000 125,000 75,000 75,000 100,000 150,000 930,000 100.0 200.0 200.0 100.0 - 79 - ANNEX 6 Page 1 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Performance of IDA-assisted industries I. PRODUCTION 1/ Tractors and Related Equipment 1. The production of tractors increased by about 7% from FY75 to FY76, but remained stagnant in FY77 due to lack of domestic demand. There are 11 tractor manufacturing units in India with an installed capacity of 53,400 tractors in the range of 25-50 HP, with one unit producing tractors of up to 75 HP, and with a capacity utilization for the industry of about 65%. The direct import content for tractor manufacturing is as low as 10% for some units. Due to the easy availability, the statutory control on distribution and sale of most types of tractors was removed in January 1976, and GOI's price control is also limited to only some types of tractors. 2. Power Tillers. A power tiller is a two-wheeled type of tractor mostly used for paddy cultivation and farming in hilly areas. Production increased by 20% from FY75 to FY76, but declined considerably in FY77 due largely to higher prices again caused by low volume of operations. 3. Agricultural Discs. In FY76 and FY77, the production rebounded to about 79,000 pieced from a low of 23,000 pieces in FY75. The increase was due to easier availability of imported high carbon steel sheets/plates, and which are now also produced locally to a certain extent. Fertilizers 4. The use of fertilizers fell in FY75 as a result of dramatic price increases on imported fertilizers. Thereafter, fertilizer off-take increased rapidly, and an ambitious program of fertilizer plant capacity expansion coupled with more efficient use of ecisting capacity have resulted in a substantial increase in domestic fertilizer production; the production of nitrogenous fertilizers rose from 1,185 thousand tonnes in FY75 to 1,900 1/ Tables 1 and 2 summarize the production performance of the IDA-assisted industries. - 80 - ANNEX 6 Page 2 thousand tonnes in FY77, while the production of phosphatic fertilizers in- creased from 327 thousand tonnes to 480 thousand tonnes. At the same time, the feedstock pattern for ammonia production, which in the late 1960s emphasized the use of naptha, has been diversified to include fuel oil and coal, to reduce the country's petroleum import bill and to more fully reflect its resource base. Local capabilities developed ia the field of design, engineering, construciton, equipment fabrication and project implementation have helped to reduce the foreign exchange share of project costs. However, capacity utilization problems still exist at some older plants, primarily due to design defects. Pesticides 5. The production of solid formulation pesticides increased by an average of barely 9% p.a. between FY75 and FY77, while the production of other types remained stagnant. The industry is now starting to penetrate the export markets; total exports were Rs 0.2 million in FY75, Rs 6.8 million in FY76 and Rs 16.1 million in FY77. However, there should also be ample room for domestic increases in production since the application of pesticides in India is very low by international standards. Electrical Equipment 6. This sub-sector embraces a wide of products. Since the generation and distribution of electricity is largely in the public sector, Government expenditures at the Central and State levels in the power sector have a large influence in determining the demand for the products of the electrical equip- ment industry. The total installed capacity increased from 18,390 MW by end FY74 to 24,039 MW by end FY77, or by about 9.3% per annum. Domestic com- panies, in particular the Government-owned Bharat Heavy Electricals Limited (BHEL), are now delivering about 80% of the equipment for Indian power pro- jects, including water and steam turbines, generators, power transformers, high tension switchgear and boilers. BHEL had a capacity utilization of about 80% in FY76, which has since been declining due to a lack of increase in orders, but this is expected to improve over the period of the forthcoming sixth five-year plan. 7. Electrical Motors. There are now 33 units in the organized private sector manufacturing motors of 1 HP and above, whereas the public sector units can manufacture motors upto 10,000 HP. The production has remained stagnant for some years at about 3.6 million HP. 8. Transformers. The production of transformers grew from 12.5 million KVA in FY75 to 15.1 million KVA in FY77, while exports grew from Rs 26 million to Rs 49 million. The increase in production was helped by the easier re- source position of the State Electricity Boards, which are the main buyers of transformers in India. There are 33 units in the organized sector producing transformers; despite the increase in production they still operate at only about 70% of installed capacity. - 81 - ANNEX 6 Page 3 9. Switchgears and Controlgears. These items are essential equipment for transmission and distribution of electric power. The production has in- creased rapidly, from Rs 879 million in FY75 to Rs 1,302 million in FY77. At the same time, there has been considerable technical progress; for example, the 81 registered units have recently taken up the production of moulded case circuit breakers, HT circuit breakers of 400 KV, and sulpherhexa-fluoride and vacuum type circuit breakers. 10. Cables and Wires. This category comprises a number of products, such as conductors, winding wires, power cables and VIR/PVC cables. While the general production performance in respect of these items was unsatis- factory in FY75, production increased rapidly for most items between FY75 and FY77; thus, at an average annual compounded rate of 11% for winding wires, 9% for PVC/VIR cables (after a drop in FY76), and 11% for power cables. This growth has taken place despite problems such as shortages of certain aluminium grades and PVC resins. Exports have improved considerably, from Rs 133 million in FY75 to Rs 240 million in FY77. 11. Stampings and Laminations. These products are basic inputs for the manufacture of electric transformers and motors. The production increased from 38,000 tonnes in FY75 to 46,000 tonnes in FY75. Commercial Vehicles 12. In FY75, the InEian vehicle industry was affected by the rise in petrol prices, which took place at about the same time as sharp price in- creases for domestic vehicles. As a result, demand stagnated, in particular for vehicles with petrol engines. Lately, demand for commercial vehicles has also been affected negatively by improved operational efficiency of the railways, which has made the road transport industry less remunerative. 13. Trucks and Buses. There are now seven manufacturers of such vehicles, with an installed capacity of 70,000 vehicles per annum. Although the production grew at an average rate of about 8% between FY75 and FY77, the production of 43,000 vehicles in FY77 still gave a capacity utilization of only about 62%. Over the past few years, there has been an increase in the proportion of vehicles using diesel engines. The export of trucks and buses reached Rs 198 million in FY77, particularly on account of heavy duty vehicles (of 7.5 ton payload and above). 14. Jeeps. The production of jeeps has remained below the level of FY75 due to lack of demand caused in particular by the increased petrol prices. 15. Three-Wheelers. The production as well as export of three-wheelers increased very substantially in FY77, caused primarily by customers substitut- ing three-wheelers for automobiles. However, the demand is now expected to increase only moderately. 16. Automobile Diesel Engines. In FY77, the production of automobile diesel engines was 4,500 units, up from 2,900 units in FY75. The one Indian - 82 - ANNEX 6 Page 4 unit producing such engines for commercial sales has an installed capacity of 12,000, giving a capacity utilization of about 38%. Automotive Ancillaries 17. Tires and Tubes. This industry suffers from excess capacity; the average capacity utilization in FY77 was 73%. In addition, there may be con- siderable hidden capacity. The tire market in India was a sellers' market till about mid-1975, when the impact of the energy crisis on the road trans- port industry together with the creation of additional capacity changed the market situation completely. In addition, the progressive use of nylon type cord has improved mileage performance. As a result, in particular the new production units have been suffering losses. Exports in FY77 amounted to Rs 182 million, but was made at mostly little or no profit for the com- panies, while total production was 5.5 million tires, up from 4.8 million two years ealier. 18. Synthetic Rubber. There is only one unit in India manufacturing synthetic rubber. Production increased by 34% from FY75 to FY76, but fell in FY77 due to labor unrest. 19. Storage Batteries. Due to stagnating demand from the vehicle indus- try, the production of storage batteries has not increased significantly since FY75. Due to the excess capacity, Indian manufacturers more than doubled ex- ports between FY75 and FY77, to Rs 83 million in the latter year. 20. Auto Components and Parts. The automotive ancillary industry is a support industry for the units manufacturing commercial vehicles, passenger cars etc. There are more than 180 component manufacturers in the organized sector, of which 15-20 account for more than 60% of production. In addition, there are a number of small scale units. From 1975 to 1977, production 1/ measured in rupees increased from Rs 1,860 million to Rs 2,636 million, but part of this increase was caused by higher prices. In FY77, the production of auto components was affected negatively by the difficult labor situation in Tamil Nadu and in Faridabad, Haryana. Tools and Parts 21. Machine Tools. The production of the machine tool industry grew from Rs 904 million to Rs 1,163 million between FY75 and FY77, with exports more than trebling from Rs 56 million to Rs 199 million. There are 124 firms producing machine tools, of which Hindustan Machine Tools (HMT), a public sector corporation, accounts for about 40% of total production. The increase in exports is due largely to improved exporting efforts from large manufac- turers of quality machine tools like HMT and some other companies. 1/ Excluding H.T. bolts, nuts and screws and auto leaf springs. - 83 - ANNEX 6 Page 5 22. Cutting, Small Tools and Abrasives. Measured in rupees, the pro- duction increased by an average annual rate of about 21% between FY75 and FY77, while exports more than doubled to Rs 302 million, representing 27% of total production in that year. India produces a wide range of such tools, including diamond tools and diamond dies, precision measuring instruments, press tools, jigs and fixtures, steel files and rasps, and cutting tools. The increased exports are results of improved quality and delivery perform- ance of local manufacturers, now that the main raw materials including carbon steel are fully available indigenously. 23. Ball and Roller Bearings. Production increased from 23.3 million pieces in FY75 to 28 million pieces in FY78. There are nine units in India producing bearings; these units have an installed capacity of 32 million pieces, giving a capacity utilization of about 88%. The domestic demand is higher than supply, so that India imports bearings for around Rs 120 million per year. Castings and Forgings 24. The production of most types of castings and forgings remained stagnant or declined between FY75 and FY77 due to lack of demand. For instance, the demand for cast iron spun pipes has declined due to lower off- take from the public works departments for water supply and sanitation. The average capacity utilization is around 40%-50%. For steel castings, a major development has been the commencement of commercial production by BHEL's Central Foundry Force Plant at Hardwar with a capacity of 6,000 tonnes per annum. Boilers 25. The production of boilers increased from Rs 1,116 million (FY75) to Rs 1,590 (FY77). The 16 manufacturers in operation are basically able to meet the local demand for various types of boilers. However, there have been difficulties in obtaining boiler tubes and boiler quality plates from domestic sources. Some exports are undertaken by BHEL. Aluminum 26. The production of alunimum increased by 48% from FY75 to FY76, r due to improvements in the power situation. Heavy Construction Equipment 27. Between FY75 and FY77, the production of various types of heavy construction equipment developed as follows (in numbers): - 84 - ANNEX 6 Page 6 FY75 FY76 FY77 Excavators 124 122 196 Dumpers 317 275 323 Crawlers/tractors 310 391 428 Scrapers 17 20 44 Graders 25 30 5 Loaders 80 91 101 Total 873 926 1,097 Road Rollers 28. The production of road rollers fell from 1,349 in FY75 to 137 in FY77, due to low demand as a result of cut-backs in road building activities. Textile Machinery 29. The textile machinery industry is manufacturing a wide range of weaving, spinning, and finishing machinery. Between FY75 and FY77, the pro- duction developed as follows (Rs million): FY75 FY76 FY77 Complete machinery 772 804 957 Components and parts 498 540 528 Total 1,270 1,344 1,485 Exports declined in FY77 due to the international recession for the textile industry and increased foreign competition. Also, the domestic off-take started to decline towards the end of FY77, so that the production is expected to have declined during FY78. II. FINANCIAL PERFORMANCE 30. Profitability figures for all IDA-assisted units are not available. However, Table 3 shows the profitability figures for a sample of 417 companies, of which 59 in the IDA-supported industries. These figures show that for the total sample, profit before tax declined from 9% of sales (FY75) to 6.1% (FY77), while profit plus interest fell from 18.5% of total capital (FY75) to 15.1% (FY77). A number of the IDA-assisted industries showed better results than these averages; thus, profit before tax plus interest as percent of total capital in FY77 was 28.6% for fertilizer industries, 25.1% for automobile ancillaries, 15.6% for cables, 17.6% for small tools, and 15.8% for bearings. - 85 - ANNEX 6 Page 7 III. EXPORT PERFORMANCE 31. Total export earnings of the IDA-assisted industries grew from Rs 1,160 million in FY75 to Rs 1,401 million in FY76 and to Rs 1,889 million in FY77, or by 21% and 35%, respectively (Table 4). This impressive perform- ance followed strong increases also in FY74 and FY75. In FY75, four sub- sectors (cables and wires, auto components and parts, cutting, small tools and abrasives, and textile machinery) accounted for 58% of all exports from IDA-industries. This percentage fell to 51% in FY77, due to a lower than average growth for auto components and to a fall in the exports of textile machinery caused by a recession in the international textile industry. Auto- mobile component manufacturers in India have become established in the re- placement part market, particularly in Europe, but the growth of exports has been constrained by the exporters' inability to fulfill the large orders often required. The export of cutting, small tools and abrasives more than doubled from FY75 to FY77, to reach Rs 302 million in the latter year, while the export of cables and wires almost doubled from Rs 133 million to Rs 240 million. The prospects are good for further increases from these two sectors. In particular for hand tools, the export progress is based on the compara- tive advantage derived from labor abundance in India. Other sectors showing strong export growth between FY75 and FY77 have been trucks and buses (based on exports to Asia, Africa and the Middle East), tires and tubes, machine tools, and storage batteries. IV. PERFORMANCE vs. APPRAISAL ESTIMATES 32. Table 5 compares actual production performance in FY76 and FY77 with the estimates made at the time of appraisal, FY76 for Credit 528-IN and FY77 for Credit 616-IN. A number of industries showed reasonable in- creases over these two years, but actual performance was still substantially below expectations in many instances, in particular for FY76 when a majority of the industries showed a performance below expectations. In certain cases, the appraisal estimates had clearly been on the optimistic side, such as for fertilizers, transformers, power cables and heavy construction equipment. However, for a number of other sectors such as commercial vehicles, automotive ancillaries, and tractors, the effects of higher petroleum prices caused an unforeseen stagnation in the Indian production. Finally, the effects of the international recession, domestic power problems, a restric- tive credit policy and continued balance of payments problems (at least for FY76) caused constraints on many industries either on the production or the market side. 33. IDA's projections for FY77 turned out to be quite accurate in many cases, inter alia because a number of sectors such as commercial vehicles and electrical equipment showed improved growth. Important short-falls vis-a-vis the projections occurred only for tractors and power tillers, where demand remained stagnant despite several good years for agricultural - 86 - ANNEX 6 Page 8 production, some types of pesticides, cast iron spun pipes due to less demand from the public works department, synthetic rubber due to stagnant demand from the automotive industry, casting, forgings, and engines for earth moving equipment. - 87 - ANNEX 6 INDIA Table 1 TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Production Performance of IDA-assisted Industries 1965/66 1972/73 1973/74 1974/75 1975/76 1976/77 Tractors Nos.000 6 20 24 31 33 33 Power Tillers Nos.000 .4 .4 1.0 2.0 2.4 1.7 Fertilizers: Nitrogen 1000 tons 258 1,060 1,077 1,185 1,535 1,900 P 0 1000 tons 119 326 324 327 320 480 Pesticides: Technical 1000 tons 12 27 31 34 35 35 Solid Foundations 1000 tons n.a. 60 64 67 76 79 Liquid Foundations 1000 K1 n.a. 12 13 14 14 12 Electrical Equipment: Motors Mill. HP 2.0 3.0 3.1 3.6 3.5 3.7 Transformers I Mill. KVA 5.6 12.0 12.4 12.5 13.7 15.1 Switchgear and Control- gears Mill. Rs 170 469 650 879 979 1,302 Cables and Wires: Winding Cables 1000 tons 9.0 18.6 21.4 16.4 18.1 20.2 PVC/VIR Cables M.c.m. 1/ 367 721 578 414 393 494 Power Cables m.m. 2/ 9.0 19.3 20.4 14.5 15.5 17.8 Steel Stampings 1000 tons n.a. 25 33 38 41 46 Aluminium Smelting 1000 tons 69 175 148 126 187 209 (primary 'metal) Cast Iron Spun Pipes 1000 tons n.a. 209 274 287 290 210 Commercial Vehicles: Trucks and Buses Nos.000 35.0 38.4 42.9 36.8 39.1 43.2 Jeeps Nos.000 10.4 13.0 12.4 9.6 7.1 8.4 Three-Wheelers Nos.000 1.5 10.7 11.2 12.2 13.3 20.0 Automotive Ancillaries: Tires Nos.Mill 2.3 5.0 5.2 4.8 4.7 5.5 Synthetic Rubber 1000 tons n.a. 32 23 19 25 23 Storage Batteries Nos.Mill .7 1.1 1.3 1.3 1.4 1.4 Auto Components & Parts Mill. Rs 614 1,228 1,500 1,860 2,443 2,636 Automobile Diesel Engines Nos.000 n.a. 2.2 2.6 2.9 4.2 4.5 Tools & Parts: Machine Tools Mill. Rs 255 502 654 904 1,141 1,163 Cutting)Small Tools & Abrasives Mill. Rs 300 502 505 760 946 1,106 Ball and Roller Bearings Nos.Mill. 8.3 21.7 24.5 23.3 24.2 28.0 Engines for Earth-moving Equipment Nos. n.a. 1,447 1,864 2,709 2,847 2,503 Castings Steel Castings 1000 tons n.a. 71 69 64 62 63 Cast-Iron Castings 1000 tons n.a. 137 178 184 169 175 Malleable Iron Castings 1000 tons n.a. 19 18 19 19 20 S.G. Iron Castings 1000 tons n.a. 2.7 2.8 3.4 4.9 4.6 Forgings 1000 tons n.a. 79.0 98.0 95.0 91.1 96.8 Boilers Mill. Rs n.a. 606 812 1,116 1,419 1,590 Heavy Construction Equip- ment Nos. n.a. 1,669 1,861 873 929 1.097 Road Rollers Nos. n.a. 887 1,566 1,349 544 137 Power Generating Equipment Mill. Rs n.a. 1,017 897 1,263 1,902 1,941 Textile Machinery Mill. Rs n.a. 709 927 1,270 1,344 1,485 1/ Million crore meters. 2/ Million meters. Source: GOI, Ministry of Industries - 88 - ANNEX 6 Table 2 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT INDEX NUMBER OF PRODUCTION OF IDA INDUSTRIES (1970=100) Industry Weight 1974/75 1975/76 1976/77 Agricultural Tractors 0.3308 156.3 167.3 166.8 Nitrogenous Fertilizers 0.8662 155.3 201.2 249.0 Phosphatic Fertilizers 0.5192 163.5 160.0 240.0 Pesticides (Technical) 0.1471 171.7 180.8 195.2 Electric.Motors 0.3521 121.1 116.3 121.9 Transformers 1.4835 128.9 141.2 155.7 Aluminium 0.5496 78.6 116.3 129.5 Commercial Vehicles: (a) Trucks and Buses 1.2499 90.7 96.4 106.6 (b) Jeeps 0.1448 103.1 76.0 89.6 (c) Three-Wheelers 0.0296 290.5 316.7 476.2 Automobiles' Diesel Engines 0.0452 86.8 126.8 137.8 Tires and Tubes: (a) Tires 1.0033 132.0 129.4 150.5 (b) Tubes 0.0921 128.9 138.8 147.3 Storage Batteries 0.2160 111.7 121.8 118.7 Synthetic Rubber 0.0965 60.5 81.0 74.6 Auto Leaf Springs 1.1417 102.8 101.8 103.9 H.T. Bolts and Nuts 0.0937 163.0 183.5 206.6 Machine Tools 0.5367 141.3 133.3 127.5 Textile Machinery 0.7196 263.5 234.5 258.9 Ball and Roller Bearings 0.4756 128.7 133.7 154.7 C.I. Spun Pipes 0.1053 166.0 167.6 121.4 Steel Castings 0.6125 121.8 118.4 120.8 Road Rollers 0.0905 401.5 161.9 55.7 Boilers 0.5422 234.3 251.8 269.8 Winding Wires 0.2411 101.2 111.7 124.7 Aluminium Conductors 0.0527 44.0 92.0 129.5 VIR/PVC Cables 0.1825 97.9 92.9 116.8 Paper Insulated Power Cables 0.1456 111.8 110.9 139.7 Hand Tools and Small Cutting Tools 0.9644 127.8 128.9 139.4 Overall Index of Above 1/ 137.2 141.6 157.4 Growth over the previous year (%) (+3.2) (+11.2) 1/ The IDA industries listed above exclude a few items for which weights are not separately available. Also, aluminium was not financed under Credit 616-IN. However, adjustments for these factors would not affect the overall index significantly. Source: GOI, Ministry of Industries. INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Financial Performance of IDA - assisted Industries INDUSTRY Number of Net Sales (Rs million) Profit Before Tax Profit Before Tax plus Companies as % of Sales Interest as % of Total Capital 1. IDA-ASSISTED INDUSTRIES 1974/75 1975/7, 1976/77 1974/75 1975/76 1976/77 1974/75 1975/76 1976/77 Automobiles 8 4,022 4,470 4,946 0.9 0.7 2.6 8.3 10.1 13.1 Automobile Ancillaries 8 553 654 677 15.1 14.4 15.2 23.6 24.5 25.1 Pesticides 1 16 12 14 42.9 27.6 8.6 84.8 37.8 11.4 Fertilizers 4 614 623 769 20.4 22.1 19.2 26.9 26.5 28.6 Cables 6 542 650 696 11.6 8.2 4.7 24.8 21.7 15.6 Winding Wires 1 47 46 48 3.7 1.0 -3.5 16.5 15.1 5.1 Electric Motors 1 10 13 6 5.8 0.1 -104.1 15.5 10.4 -36.9 Storage Batteries 2 277 336 402 12.6 12.7 13.1 28.7 35.7 41.1 g Machine Tools 1 91 132 134 12.6 13.0 10.4 18.5 22.4 16.6 Small Tools 10 259 303 303 20.6 18.1 12.7 26.9 24.6 17.6 Bearings 4 271 271 317 22.5 15.9 11.7 27.2 18.8 15.8 Tractors 1 139 224 254 5.3 5.1 5.4 15.7 20.6 18.6 Power Tillers 2 20 2(. 20 -7.8 -9.2 -20.7 2.9 3.9 -0.9 Aluminium 2 609 675 1,024 14.0 10.9 12.5 12.1 10.7 17.3 Steel Forgings 3 174 180 248 10.6 7.4 4.6 19.4 15.9 17.0 Tires and Tubes 5 2,253 2,59( 2,608 6.6 5.9 4.0 19.3 19.0 13.8 2. ALL INDUSTRIES 417 59,764 68,54 75,413 9.0 6.7 6.1 18.5 16.3 15.1 Source: GOI, Ministry of Industries. The figures are ompiled from the financial statements of companies financed by Fl1-India financial institutions. All companies eligiblc for IDA financing have not been covered. - 90 - ANNEX 6 Table 4 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Export Performance of IDA-Assisted Industries (Rs million) Perc c ntage Growth. Industry 1974/75 1975/76 1976/77 1974/75-75/76 1975/76-76/77 Tractors 8.3 5.0 2.8 -40 -44 Power Tillers 8.1 - - -100 - Fertilizers - - - - - Pesticides 0.2 6.8 16.1 3,300 137 Aluminium 0.2 - - -100 - ELectricaL Equipment: Motors 14.8 17.4 7.9 18 -55 Transformers 25.9 42.1 49.3 63 17 Switchgear and Controlgear 40.6 49.7 51.5 22 4 Cables and Wires 132.8 213.0 240.4 60 13 Boilers 23.9 8.4 10.5 -65 25 Power Generating Equipment 9.6 10.2 14.7 6 44 Commercial Vehicles: Trucks and Buses 76.9 142.6 197.5 85 38 Jeeps 2.6 2.3 3.8 -12 65 Three-Wheelers 1.7 6.3 14.9 271 127 Automobile Diesel Engines 1.4 - 30.4 100 N.A. Automobile Ancillaries: Tires and Tubes 94.5 66.9 181.5 -29 171 Synthetic Rubber 4.1 - 0.1 -100 N.A. Storage Batteries 38.2 50.0 82.9 31 66 Auto Components and Parts 217.0 243.7 265.0 12 9 Castings and Forgings 65.4 27.5 58.1 -58 111 Tools and Parts: Machine Tools 55.6 80.7 199.4 45 147 Cutting, Small Tools and Abrasives 140.5 200.7 302.2 43 51 Ball and Roller Bearings 12.4 4.6 7.3 -63 59 Heavy Construction Equipment 0.1 - - -100 - Textile Machinery incl. Parts 185.0 223.0 153.0 21 -31 Total 1,159.8 1,400.8 1,889.3 21 35 All Engineering Goods Exports 3,565.7 4,129.7 5,544.3 16 34 Source: GOI, Ministry of Industries. - 91 - INDIA ANNEX 6 Table 5 TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Production Performance of IDA-gssisted Industries Industry Unit 1974/75 1975/76 1976/75 Projected 1/ Actual 2/ Projected 3/ Actual 2/ Tractors Nos.000 31 40 33 38 33 Power Tillers Nos.000 2.0 3.0 2.4 4.0 1.7 r Fertilizers: Nitrogenic 1,000 tons 1,185 2,000 1,535 1,900 1,900 Phosphatic 1,000 tons 327 600 320 480 480 Pesticides: Technical 1,000 tons 34 40 35 42 35 Solid Foundations 1,000 tons 67 80 76 68 79 Liquid Foundations 1,000 K1 14 20 14 16 12 Electrical Equipment: Motors Mill. HP 3.6 3.6 3.5 3.0 3.7 Transformers Mill. KVA 12.5 20.0 13.7 14.0 15.1 Switchgear Mill. Rs 879 750 979 1,250 1,302 Cables and Wires: Winding Cables 1,000 tons 16.4 26.0 18.1 22.0 20.2 PVC/VIR Cables m.c.m 4/ 414 850 393 450 494 Power Cables m.m 5/ 14.5 24.0 15.5 20.0 17.8 Steel Stampings 1,000 tons 38.0 38.0 41.3 45.0 45.8 Aluminium Smelting 6/ 1,000 tons 126.6 180.0 187.3 200.0 208.7 (primary metal) Cast Iron Spun Pipes 1,000 tons 287.0 300.0 289.8 340.0 209.9 Cotanercal Vehicles: Trucks and Buses Nos.000 36.8 46.0 39.1 46.8 43.2 Jeeps Nos.000 9.6 10.0 7.1 8.0 8.4 Three-Wheelers . Nos.000 12.2 16.0 13.3 13.0 20.0 Automotive Ancillaries: Tires Nos.Mill. 4.8 6.5 4.7 6.5 5.5 Synthetic Rubber 1,000 tc: 1s 30.0 25.2 30.0 23.2 Storage Batteries Nos.Mill. 1.3 1.7 1.4 1.5 1.4 Auto Components and Parts Mill.,Rs 1,860 1,900 2,443 2,200 2,636 Tools and Parts: Machine Tools Mill. Rs 904 850 1,141 1,160 1,163 Cutting, Small Tools and Abrasives Mill. Rs 760 650 946 720 1,106 Ball and Roller Bearings Nos.Mill 23.3 29.0 24.2 30.0 28.0 Heavy Construction Equipment 7/ Nos. 873 3,065 929 N'A. 1,097 Engines for Earthmoving Equipment.6/ Nos. 2,709 2,500 2,847 3,100 2,503 Castings: Steel Castings 1,000 tons 63.7 70.0 61.9 80.0 63.2 Cast-Iron Castings 1,000 tons 184.0 200.0 169.2 220.0 174.5 Malleable Iron Castings 1,000 tons 19.0 20.0 18.6 24.0 20.1 S.G. Iron Castings 1,000 tons 3.4 4.0 4.9 4..0 4.6 Forgings 1,000 tons 95.0 100.0 91.1 130.0 96.8 Boilers Mill. Rs 1,115.9 1,100 1,419.0 1,500 1,590.0 Power Generating Equipment Mill. Rs 1,263 2,943 1,902 N.A. 1,941 1/ Tenth Industrial Imports Credit - President's Report (P-1558-IN of January 16, 1975) Annex VIII. 2/ GOI, Ministry of Industries. 3/ Eleventh Industrial Imports Credit - President's Report (P-1754-IN of February 2, 1976), Annex IX Table 3. 4/ Million crore meters. 5/ Million meters. 6/ Not included under eleventh credit. 7/ Comprises excavators, dumpers, crawler tractors, scrapers, girders, loaders, and road rollers. - 92 - ANNEX 7 INDIA TENTH AND ELEVENTH INDUSTRIAL IMPORTS PROGRAM CREDITS COMPLETION REPORT Technical Development Fund-Applications Received and Approved, FY77-FY78 Applications Received Applications Approved FY77 FY78 FY77 FY78 (number) (number) (number) (Rs mill.) (number) (Rs mill.) 1. Textile machinery 17 14 16 14.5 13 4.1 2. Foundries 15 5 14 7.1 4 2.2 3. Forgings 5 3 4 4.3 3 4.2 4. Machine tools 6 3 6 4.7 2 3.7 5. Tractors 4 2 4 6.8 2 4.6 6. Commercial vehicles 3 1 3 3.5 1 0.2 7. Others (against specific 23 3 15 11.0 3 2.6 export orders) Total IDA-eligible 73 31 62 51.9 28 21.6 (1-7) 8. Others (under extended 24 114 21 24.1 86 75.5 TDF scheme) Total 97 145 83 76.0 114 97.1 Source: TDF cell, Department of Heavy Industries.