Statement by Valeriano F. García at the Board meeting of February 18, 1999

International Bank for Reconstruction and Development International Development Association 86774 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-27 February 17, 1999 Board Meeting of February 18, 1999 Statement by Valeriano F. García India: Country Assistance Strategy – Progress Report (R99-12) We would like to thank the staff for preparing the CAS progress report for India. We think that staff has presented a very comprehensive and objective vision of the recent social, political and economic developments in India and has presented a good analysis of its policy implications in this progress report. Unfortunately, the external conditions for India have changed since last CAS was presented to the board on January 15, 1998. There are not doubts the external environment existing when the CAS was presented, has worsened since January 1998, basically due to the nuclear events on may 1998 and to the effects of the Asian crisis. These have affected the trade and capital inflows for India including loan disbursements and financial aid of financial organizations, including the World Bank. We are very concerned with the reversal of the foreign trade liberalization and the persistent overall fiscal deficit that is about 10% of GDP consolidating the central government, states and public enterprises. We also think that it would be appropriate to deepen structural reforms including: a) reducing the fiscal deficit, b) reducing tariffs and quantitative barriers on imports, c) liberalizing foreign investment in many areas and d) encouraging privatization process. In our view, special attention deserves the reduction of public expenditures. We think that the reduction of subsidies, which now add up to 14% of GDP, and a reduction in the current expenditures should be priority. In fact, staff forecasts that current expenditure would actually increase by 1.7% of GDP for 1999 and that there will be no reductions in subsidies. All these delays in implementation of structural reforms are undermining the fundamentals for a sustainable growth and suffocating the action of private sector.  2 Regarding the Bank strategy in India, we applaud selective support to reforming states as a solution to encourage the adoption of structural reforms by the whole country. However, we would like to know if the staff has taken into consideration the possible effects of potential migration from non-reforming states to reforming states. This is important because of the externalities that could be caused due to migratory process. In spite of the worrisome level of fiscal deficit and the slow pace of structural reforms, this chair goes along with base case scenario of the CAS. We believe that India’s authorities will interpret the support of the Bank as a confidence message to their commitment to implement the pending agenda of reforms.