India - 1991 Country economic memorandum (Vol. 1 of 2) : Policies for adjustment with growth

Report No. 9412-IN India 1991 Country Economic Memorandum (In Two Volumes) Volume I: Policies for Acljustment with C;rowtth August 23, 1991 (Country Operations I )ivvion India Country D)eparrnient Asia Region FOR OFFICIAL USE ONLY Document of the World Bank 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 Pank authorization.  CURRENCY AND OTHER EOUIVALENTS Currency Prior to June 6, 1966: US$1.00 - Rs. 4.76 From June 6, 1966 to mid-December 1971: Us$1.00 - Rs. 7.50 Mid-December 1971 to end-June 1972: US$1.00 Rs. 7.28 After end-June 1972: Floating rate 1971,'72: 7.44 1972/73: 7.71 1973/74: 7.79 1974/75: 7.98 1975/76: 8.65 1976/77: 8.94 1977/78: 8.56 1978/79: 8.21 1979/80: 8.08 1980/81: 7.89 1981/82: 8.93 1982/83: 9.63 1983/84: 10.31 1984/85: 11.89 1985/86: 12.24 1986/87: 12.79 1987/88: 12.97 1988/89: 14.48 1989/90: 16.66 1990/91: 17.95 Rate end-March 1991: US$1.00 = Rs. :9.62 Rate end-June 1991: US$1.00 = Rs. 21.14 Rate end-July 1991: US$1.00 = Rs. 25.77 Source: IMF, International Financial Statistics (IFS), line "rl." June 1991 and July 1991 rates are RBI's spot selling rates. Years: The Indian fiscal year runs from April 1 through March 31.  FOR OICIAL US Om TITLE INDIA: POLICIES FOR ADJUSTMENT WITH GROWTH COUNTRY : INDIA REGION ASIA SECTOR COUNTRY ECONOMIC Repo=t I=lU CLASSIFIATION m LANGUAGE 9412-IN CEM Restricted 05/90 English ABSTRACT The oil shock resulting from developments in the Persian Gulf in 1990 precipitated an economic crisis in India. Although not as severe as those in the 1970s, the shock came after years of macroeconomic imbalances had greatly weakened the economy. And it was compounded by political instability, internal conflicts and other domestic problems which delayed corrective action and eroded the confidence of external commercial lenders. As a result, with foreign exchange reserves at a historically low level, India is now facing tremendous difficulties in managing its balance of payments. The country has been successful at maintaining its impeccable debt servicing record, but this was at the cost of engineering a severe contraction in imports that is hurting economic activities and that, unless relaxed, may severely reduce growth. The new Government that took office on June 21, 1991 is well aware that, while essential, extricating India from its predicament requires more than fiscal adjustment measures. In its first two months in office the new Government has introduced or announced a most impressive array of policy measures aimed not only at stabilizing the economy, but also at restructuring it. After a review of the economic and policy developments that preceded the crisis, this report analyzes the measures introduced by the new Government. Next, it emphasizes that while the impressive steps taken in the last two months have set in motion fundamental structural changes, the economic policy agenda remains formidable. Major policy reforms remain to be implemented to: (I) reduce public expenditures and increase their returns to the economy, (ii) reform the tax system with a view to reducing its dependence on trade taxes; (iii) liberalize the trade regime which is at present the single biggest obstacle to international competitiveness and higher growth in India; (iv) complete the process of industrial deregulation that begun in July 1991; (v) increase the efficiency of the financial sector; and (vi) restructure public enterprises with a view to increasing their efficiency. Finally, the report highlights that substantial donors' support will be essential if these reforms are to succeed. 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.  Akn2owledgements Volume I was written by Gene Tidrick, assisted by William Byrd and based on contributions by Deepak Ahluwalia, Ataman Aksoy, Robert Anderson, Roberto Bentjerodt, Mansoor Dailami, Francois Ettori, Harald Hansen, K.R. Holla (Consultant), Trevor Kanaley, Cheikh Kane, Damianos Odeh, Samuel Otoo, Richard Podolske, V.J. Ravishankar, Helena Tang, Mark Tomlinson, and Roberto Zagha. Statistical and computational assistance was provided by Sajitha Bashir, K.B. Naidu, and Manisha Singh, under the direction of V.J. Ravishankar.  INDIA 1991 COUNTRY ECONOMIC MEMORANDUM VOLU I: POLICIES EO ADJUSTMNT WI GROWTH Table of Contents Page No. EXECUTIVE SUMMARY ................................................ Introduction ............................................... i Background to the Crisis .................................... Developments in 1990/91 . .................................... i Re-establising the Foundations for Growth ..................iii The 1991/92 Budget ............... .......................... iv Structural Reforms ............... .......................... v The Future Agenda .......................................... vi Medium Term Prospects and Financing Requirements ..... ...... vii CHAPTER I: RECENT ECONOMIC DEVELOPMENTS ........................ I Introduction ............................................... 1 Background to the Current Crisis ........................... 1 Growth .............. ..................................... 2 Fiscal developments ...................................... 3 Saving and investment .................................... 5 Prices, money and the financial sector ................... 7 Balance of payments ...................................... 8 Developments in 1990/91 .................................... 12 The Oil shock and the balance of ........................ 13 Fiscal Developments ...................................... 17 Other Developments ................... ................... 19 Early 1991/92 Developments .......... .............. 19 Attachment I .........................,.................. 21 CHAPTER II: RE-ESTABLISHING THE FOUNDATIONS FOR GROWTH .... 23 Introduction ........................ 23 Fiscal Adjustment ........................ 24 The 1991/92 Budget ........................ 24 The medium-term fiscal adjustment framework ..... ......... 27  Structural Reforms ............................... 28 Industrial policy r-form ............................... 28 Trade reform ............................... 31 Financial sector reform ............................... 32 Public enterprise reform ............................... 34 Tax reform ............................... 35 Energy sector reform ................................ 36 Social sectors and safety uets ........................... 37 Concluding Remarks . ............................... 38 CHAPTER III: MEDIUM TERM PROSPECTS AND FINANCING REQUIREMENTS .. 40 Introduction ................ ............... 40 Managing the Balance of Payments ........................... 41 Aid Requirements ................ ............... 44 List of Tables and Eigures Tables Pnge No. 1.1 Real GDP Growth Rates & Shares by Sector .... ........ 2 1.2 Central Budgetary Expenditure Trends ..... ........... 4 1.3 Saving-Investment Balances ...... .................... 6 1.4 Monetary and Price Developments ..... .............. 7 1.5 Decomposition of Export Growth in 1980s .......... 8 1.6 Decomposition of Import Growth in 1980s ..... ...... . 10 1.7 Sources of Deterioration of Current Account Balance . 12 1.8 Balance of Payments .15 1.9 Budgetary Performance in 1990/91 .18 A.1 Government Deficit .21 2.1 Fiscal Adjustment in 1991/92 .24 3.1 Balance of Payments Projections .42 3.2 Financing Pl.n .45 ELFue 1.1 Sources of Domestic Inmvestment ...... ................. 5 1.2 Exchanga Rate & Exports ....... ....................... 9 1.3 Oil Shock Impact .............. 14  IUDBRl"VIATXONJB BIFR Board for Industrial and Financial Reconstruction CPEs Central Government Public Enterprises CRR Cash Reserve Ratio EPRs Effective Protection Rates GDP Gross Domestic Product GNP Gross National Product GOI (iovernment of India lIP Index of Industrial Production IRDP Integrated Rural Development Program LPG Liquid Petroleum Gas MO!VAT Modified Value Added Tax MOU Memoranda of Understanding MRTP Monopolies and Restrictive Trade Practices Act NEI Not Elsewhere Included NREP National Rural Employment Program NRI Non-Resident Indian PMP Phased Manufacturing Program RBI Reserve Bank of India REP Replenishment (License) SLR Statutory Liquidity Ratio SEBI Securities and Exchange Board of India  ENMIS DEVELPMENT DAT GNP PS CAPITA IN 1989 1.5553 Ia NROSS Dm;ESTIC PRODUCT IN 1919/90a bNUAL RMTE OF WTN LX 191081 Contant prices) 60/61- 72/j1- hC/71- U13- 85/6 WLuL 0L/7 ZYLfl Zb~~ /825 fl21 GDP at Market Prices 265.72 100.0 5.1 3.0 2.1 3.6 5.3 5.9 Orsa Domotic Inrvtment 62.65 23.6 9.0 1.8 5.0 4.9 4.0 7.5 Gross Ntional Saving 54.39 20.5 - - 3.5 6.4 Current Account Blance 8.26 3.1 OUTPUT. LOR FORCE AND PROUCTIVITY IN 1981 Valu, added (at factor cost) eL FaE L.&L V.A. Por Wk.rar lln . Xfl . X X of Mat Agriculture 58.9 38.0 172.7 70.6 341 53.9 Irdstry 40.1 25.9 31.6 12.9 1268 200.3 Services 5S.9 36.1 40.3 16.5 1387 219.1 Total/Average 154.9 100.0 244.6 100.0 633 100.0 GOYERNNT FICE General Gt aumnt /d Central Covrmnt l1WM 12s5B 19250fi-191K929 1999 19999 1985/86-1989/o Revero Receipts 929.09 21.0 20.8 499.96 11.3 11.1 Reveme Expeditures 1119.30 25.3 23.5 642.08 14.5 13.8 Revee Surplus/Deficit -190.20 -4.3 -2.7 -142.12 -3.2 -2.7 Capitet Expenditures LI 278.53 6.3 7.0 237.18 5.4 5.7 External Assistance (net) Li 25.95 0.6 0.7 ME. CREDIT AN PRICES DM1 7L76 M1 NMam am9 89/90 hM I= I CRs. billion outstnding at end of period) Money and Quasi NMn g 109.8 224.8 557.r 1023.6 1186.8 1407.2 1631.4 1988.5 2374.3 2732.1 Bank Credit to Government (rwt) La 54.6 106.3 257.2 503.4 583.2 720.2 843.7 973.7 1180.9 1400.5 Sank Credit to Coarcial Sector g 64.6 156.2 366.4 709.5 828.0 947.4 104.9 1326.6 1567.3 1791.3 CPercente or Index oiumbers) honey and uasi Money as X of GDP 27.3 30.3 41.0 44.2 45.3 48.2 49.1 50.3 53.6 53.5 Wholesaot Price Index (1961/82.100) - - 120.1 125.4 132.7 143.6 154.3 165.7 182.7 Annuml Percentage changes in: W toleale Price Date - - 6.4 4.4 5.8 8.2 7.5 7.4 10.3 Bank Credit to overmnent (net) Li 15.0 22.7 28.5 23.9 15.9 23.5 17.1 15.4 21.3 18.6 BSnk Credit to Comiirofal Sector ig 19.4 22.7 18.2 16.8 16.7 14.4 13.4 23.4 18.1 14.3 A The per cfpita a estimte is at market prices, using World Sank Atlas methodology. Other conversions to dollars In this table are at the prevailing average exchange rate for the period covered. ik Quick Estimtes, Central Statistieal Organization. Ic Total Labor Force nd perc2ntae breakdoem from 1981 Cenu. Excludes datt for ^ssmm. Transfers between Centre and States hav be netted out. La All loans nd advance to third pertfes hav be netted out. Li As recorded In the goverrmant budget. Fa Figures for 90/91 ar* preloiinery estim_tes baed on provisional data for March 23, 1990 end March 22, 1991.  uBLANCE OF PAYIUTS 1967/88 1969 1969/90 1990191 CUSS million) Ea0S T9 tAWRAIE 19686/71990i91 lb) Export of Goods ^ 12644 1422 16M0 163M l S Reorts of Goods L 19612 23626 2476 27052 Trade Baltace -7168 -9364 -M -O T* 493 3 Non Factor Services (net) 544 731 72 695 Iron Ore 490 3.5X Chemicls 1138 8.11 guR&r.ssiu1ue a -6624 -83 -210 .7965 Leather and Leather prk-cts 1046 7.41 Textiles 1305 9.21 arents 1612 11.4X Interest Irya_m (net) & -2471 -298S -3305 -4023 Gm and Jlety 2551 18.11 Net Transfer /A 2696 2654 2256 20s5 Enginspring Goods 1518 10.71 0thers 3971 28.11 Balante on Currant Accomt 6397 -864 -259 *9933 O Tot l ~~~~~14124 100.01 Direct Investmnt 11 287 350 253 Official LoaS & Grants (not) 2913 3045 3021 3241 Gross Disbur"mnta 4017 4013 4055 4529 Amortization 1104 968 1034 128 EXTERNAL DEBT. pRCH SI.t990 I$ lAilin Private Borroifng (net) 1288 1731 14 1425 Non-Resident Deposits 1992 2650 2341 1314 Net Transactiors with INF -1082 -1210 -1008 1117 Outstwading an Disbursed 63126 All other Item L 1497 1392 297 813 tndisbursed 21362 Errors and oif"fns -731 141 - - Oitstandino including Undisbursed 84488 Inc-ease in Resrves 339 1432 851 1770 Gross Reserves (end of year)Lt 6391 4959 4108 2338 DEBT SERVICE RATIO FOR 1990/91 La Z 28.2X Net Reserves (end of year) Lg 2737 2594 2615 -285 Fuel and Related Naterials ID/IDA LEIDING, MARCN 311 1990 US f ttliro roports (Petrolte) b 3148 2938 376 5726 ISl I of which: Crude 2395 1891 2455 3238 Products 753 1047 1311 2480 outstandgna*d Disbrsed 6614 12521 Undisbursed 7426 4126 Outstendin includIng Undisbursed 14040 16647 RATE OF EXCHANGE June 1966 to .Id-Deczber 1971 USSI .00 a Re. ?.so Mid-Decesber 1971 to erd-Jw 1972 USSI.00 a Rs. 7.28 After end-June 1972 Floating Rate Spot rate end-merch 1991 US31.00 a Rs. 19.62 Spot rate and-July 1991 USSI.00 a Rs. 25.77 Li Estfmted. Lb Net of crude petrolt. oil eports. LS Figures given cover all fiwstnt incme (net). fajor paymnts are Interest an foreign ltoan ad charges paid to 1tF, end m_or recopts is fnterest earned an foreign asets. jL Figures given include workers, remttances but exclude official grant assstance which Is Included within official loans and grants, and non-resident deposits Aich ore shn seprately. La Includes short term lon, exchane rate adjustmnts to the valuation of reserves and financing of lmbetaces in rupee trade. _f Excluding gold,. Lg Exclude not use of INF credit. h Amortization and interest payments an foreign lovn as a percente of total current receipts.  Sodal ludlcators of Development, 1990 India Mn S region incor 8roup 2530 1520 rNcn exighr Ufn of yean yd= eIu7a* Low.- W1J8WW nwaswe ag0 0o0 ("We) Asia income 8roa '(UMAN RESOURCES Sh4 growth, structre otpopuation Toul popudon (mmu = 1989) miions 461 613