India - Situation and prospects of the economy : a medium-term perspective (Vol. 2 of 3) : Main Report

Report No. 4962-IN Situation and Prospects of the Indian Economy-A Medium Term Perspective (In Three Volumes) Volume II: Main Report April 16, 1984 South Asia Programs India Division FOR OFFICIAL USE ONLY Document of the ~bd Bank This document has a resbicted distrbution and may be used by recipent only in the performnance of thidr official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND OTHER EQUIVALENTS Currency Prior to June 6, 1966: US$1.00 = Rs 4.7619 Rs 1.00 = US$0.21 From June 6, 1966 to mid-December 1971: US$1.00 = Rs 7.50 Rs 1.00 = US$0.13333 Mid-December 1971 to end-June 1972: US$1.00 = Rs 7.27927 Rs 1.00 = US$0.1374 After end-June 1972: floating rate Rate end-March 1984: UJS$1.00 = Rs 10.7C7 Rs 1.00 = US$0.0934 Rupee values have been converted into dollars by using the prevailing exchange rates indicated above up to 1970/71. For subsequent years the following average rates in rupees per US dollar have been used; 1971/72 : 7.444 1975/76 : 8.653 1979/80 : 8.076 1972/73 : 7.706 1976/77 : 8.939 1980/81 7.893 1973/74 : 7.791 1977/78 : 8.563 1981/82 : 8.929 1974/75 : 7.976 1978/79 : 8.206 1982/83 : 9.628 Source: IMF, International Financial Statistics (IFS), line "rf." In this report an estimate of 10.2 Rupees per US Dollar was used for 1983/84. The rate subsequently published in IFS is 10.312. Weights Unless otherwise specified all weight measures are metric. Years The Indinu fiscal year runs from April 1 through March 31.  FOR OFFICIAL USE ONLY TITLE SITUATION AND PROSPECTS OF THE INDIAN ECONOMY - A MEDIUM TERM PERSPECTIVE VOLUME II: MAIN REPORT COUNTRY : INDIA REGION SOUTH ASIA SECTOR COUNTRY ECONOMIC REPORT TYPE CLASSIF LMYY LANGUAGE 4962-IN CEM Restricted 04/84 English PUBDATE : 8404 ABSTRACT : This report updates the economic situation and prospects of India through Indian fiscal year 1983/84. The report consists of three volumes: Volume I containing the Executive Summary, Volume II containing the main body of the report and Volume III, the Statistical Appendix. The report reviews Current Developments, Domestic and External Resources (Chapters 2 and 3), Population and Poverty Issues (Chapters 4 and 5), and Medium Term Investment Issues in agriculture, human resources, energy, transportation, urban infrastructure and industry (Chapters 6-11). This document has a resaiied distribution and may be used by recipients only in the performance of tbeir of al dubt Its contents may not otherwi be disclsed without World llank authorizat  Acknowled2ement This report was prepared in New Delhi by members of the World Bank Resident Mission in India and of the India Division at the Bank head- quarters under the general guidance of E. Bevan Waide (Resident Mission Chief) and leadership of Roger W. Grave (Acting Principal Economist). Contributors to the report included Leslie Abbie, Zafer Ecevit, Christopher L. Hall, John R. Hansen, James Q. Harrison, Felipe Morris, Kiem H. Phan, Arnmando Pinell-Siles and James 0. Wright. Sunanda Sengupta and V.J. Ravishankar contributed to Chapter 1. Pravin Visaria contributed to Chapter 4. V.J. Ravishankar, P. Rajagopalan and L.K. Raut provided statistical and general research support. Willeu C.F. Bussink (Principal Economist) joined the Resident Mission late in the process of preparing this report and contributed to its review.  SITUATION AND PROSPECTS OF THE INDIAN ECONOMY- A MEDIUM TERM PERSPECTIVE VOLUME II: MAIN REPCRT Table of Contents Page CHAPTER 1: Recent Developments in the Indian Economy .................. 1 Annex 1.1 Recent Inflationary Factors .............................. .. 16 CHAPTER 2: Domestic Resource Management ............................... 21 A. Introduction .............................*................... .... 21 B. Investment and Savings Trends .............. ........ ...................... 21 C. Financial Policies for the Future ... ............................... 28 D. Domestic Resources during in the Sixth Plan ....................... 29 E. Public Finance Trends ........ ... .. .... so ....... ..... 32 F. Prospects for the Future . ............... .............. ...... ..... 38 Aznex 2.1 Indirect Taxation on Final Expenditures ..................... 45 Annex 2.2 State Revenue Effort ......... . . . . . . . . ................................. .....* 50 CHAPTER 3: External Resource Management ............................... 53 A. Introduction ....................................... ................ ......... .0 53 B. Recent Trends in the Current Account .......... ................... 53 C. Recent Trends in the Capital Account ......... . ............... 63 D. Exchange Rate Movements ............................................ 65 E. Determinants of Export Performance in Manufactured Goods ........... 68 F. Agricultural Exports with Emphasis on Processed Products ............ 72 G. Prospects for the Future ................ a ..................... . . . 76 CHAPTER 4: Population Trends and Implications ............. O..* ....... 87 A. The Final Figures from the 1981 Census ............................ 87 B. Underlying Demographic Trends ..................................... 88 C. Population Projections ............. ................ 95 D. Labor Force Trends and Prospects ... .... .. es ... 97 E. Other Socio-Economic Trends in Relation to Population ....soo ...... 102 F. Population Policies and Programs ................. ....... es. 114 CHAPTER 5: Poverty in India ... ...... ... .... oo....... ...... .. ........... 123 A. Poverty and India's Development Strategy .....o ............. ... 123 B. Characteristics of the Poor ....... ............ ............. ..o ..... 125 C. Distribution and Poverty .... ................................ .... 129 D. Income Levels, Growth and Poverty ............... .... ................. 131 E. Assisting the Poor: Policies and Programs - An Overview ......o..... 135 F. Assisting the Poor: Improving Human Capital .........o.......o.... 137 G. Assisting the Poor: Generating Assets ......... . ............. ..... 140 R. Assisting the Poor: Expanding Employment .......... ................ 146 I. Conclusions and Recommendations ...........................0 ..... 151  Page CHAPTER 6: Investment Issues in Agriculture ....................153 A. Background to Investment Issues . .............................. 153 B. Investment Issues ......................................................... .... 158 CHAPTER 7: Selected Expenditure Issues in Human Development ........... 171 A. Expenditure Composition and Trends ...............*................ 171 B. Expenditure Priorities ........... . .................. ........... . ........ ****.... 178 CHAPTER 8: Investment Issues in the Energy Sector .................... 183 A. Introduct ion ................... ............................................. 183 B. Energy Investment Trends and Prospects ..........................." 185 C. Investment Issues in the Power Sector ............................. 188 D. Investment Issues in Oil and Natural Gas ......................... 195 E. Investment Issues in the Coal Sector ...............................197 CHAPTER 9: Investment Issues in Transportation ............ . .......... 201 A. Iutroduction ................................................................ 201 B. Trends in Relative Shares and Levels of Real Public Investment in Transportation .......................................................... 201 C. "nvestment Issues in Transportation and Prospects for Improving Returns to Investment . ........................... . ................ 209 CHAPTER 10: Investment Issues in Housing, Urban Development and Water Supply . ........ ............... .... .................. 217 A. Economic Growth and Urban Development ....... ... ...... a....**...... 217 B. Land, Infrastructure and Shelter Development ...................... 218 C. Urban Development and Municipal Administration ..................... 223 D. Water Supply and Sanitation ....................................... 224 CHAPTER 11: Investment Issues in Manufacturing Industry ............... 227 A. Introduction ......................... ................................... 227 B. Policy Environment, Investment Planning and Implementation ......... 230 C. Medium-Term Investment Issues *,**e........... ..................... 234  -iii- List of Text Tables and Graphs CHAPTER 1 PaRe 1.1 Macro-Economic Indicators, 1980-84 ......... ............ 2 1.2 Monsoon Rainfall Index, 1978-1983 ...... 3 1.3 Estimates of Agricultural Production and Input Use (1980/81 to 1983/84} .......... s... 4 1.4 Recent Trends in Wheat and Fertilizer Prices ...................... 5 1.5 Industrial Production Growth .............. ....... . 6 1.6 Performance of the Petroleum Sector, 1981/82-1983/84 ............... 9 1.7 Power - Gross Energy Generated ........... o...................... . 11 1.8 Contribution of Selected Commodities to Increase in Wholesale Price Index (WPI), 1983 *......*.......... *... .....6.0.6-4 ... 12 1.9 Balance of Payments Summary .................... ....... 14 Annex 1.1.1 Money Supply and Demand .... ......... .......17 1.1.2 Medium-Term Monetary and Price Trends ........00.......... 18 1.1.3 Major Factors Affecting Money Supply .............................. 19 CHAPTER 2 2.1 Gross Domestic Savings, Gross Domestic Capital Formation and Savings-Investment Gap by Sector; 1965/66-1982/83 .... ......... 22 2.2 Private Corporate Capital Issues to Public ..................*....* 25 2.3 Domestic Credit Growth ................ ............. 27 2.4 Sectoral Deployment of Gross Bank Credit to Commercial Sector ..O.. 28 2.5 Own Resources Generated by the Public Sector, 1980-85 ......... 31 2.6 Government Finance Elasticities ... s0ee................*. * .. . . * * .. * . * . 32 2.7 Public Sector Resources for Plan Outlay 34 2.8 Nominal and Effective Indirect Tax Rates on Final Expenditure, 1980/81 ............ 0.......................................... 35 2.9 Financial Performance of Central Government Companies, 1979/80-1982/83 ....... .....oo.ee.*................... ........o.. 36 Annex 2.1.1 Nominal Tax on Final Use of Domestic Products .... .......... v.. 47 2.1.2 Nominal Tax on Final Use of Imported Goods ......... ....... ..........7.. 2.1.3 Nominal Tax on Total Final Use ........o........................... 48 2.1.4 Effective Tax on Final Use of Domestic Products ... ................ 49 2.1.5 Effective Tax on Total Final Use ...............................e... 49 2.2.1 State Governments Revenue Performance, 1970/71-1982/83 ........... 52  -ivr- CHAPTER 3 Pa 3.1 Balance of Payments, 1980/81-1983/84 .... 54 3.2 Annual Grovth Rates of Imports, 1981/82-1983/84 55 3.3 Average Annual Growth of World Imports and GDP, 1970-80 .......... 56 3.4 Indian Trade in the World Context ......... ................. 57 3.5 Export Volume, 1980/81-1983/84 .............. .............. 58 3.6 Value and Volume of Indian Exports .................................. 59 3.7 Growth of Manufactured Exports, 1983/84 ........................... 61 3.8 Capital Commitments . ..... .... ...***.***..**.*.. **......... 64 3.9 Net Incentives to Exporters and the Adjusted Real Effective Exchange Rate ............. ....* ..*........ ...0.0.. ..... .*... **.... 67 3.10 Comparisons of Quarterly Real Effective Exchange Rates ............. 68 3.11 Correlation Between Manufactures Export Grovth and Variability and Selected Industrial Characteristics (1968-1978) ............... 70 3.12 Major Processed Foods Categories, 1976/77-1982/83 ................. 73 3.13 Balance of Payments Scenarios: Basic Assumptiuns and Results ..... 79 Annex 3.1.1 Invisibles on Current Account, 1980/81-1983/84 .......... a......... 82 3.1.2 Balance of Payments Projections, Scenario 1 ... O..* ............. 83 3.1.3 Balance of Payments Projections, Scenario 2 ....................... 84 3.1.4 Balance of Payments Projections, Scenario 3 ................... .. 85 Graph 3.1 Nominal and Real Effective Exchange Rates, 1970-1983 ........... 66 Graph 3.2 Nominal and Real Effective Exchange Rates, 1980-1983 ........... 66 CHAPTER 4 4.1 Population Statistics of India: 1901-81 ........................... 88 4.2 Estimated Vital Rates, 1961-80 ..... seee .......... . o.. ... 89 4.3 Infant Mortality Rates by State and Rural-Urban Residence for 1970-72, 1973-75 and 1976-78 ...... ....................... 91 4.4 Estimates of Life Expectancy at Birth (By Sex) and Infant Mortality Rates, 1921-78 ... ................ O*........................... 93 4.5 Mean Age at Marriage by Sex, India 1951-81 ....................... 94 4.6 Decomposition of Changes in the Crude Birth Rate 1961-1981 ....... 94 4.7 Population Projections for Ind,i: 1980-2015 ...............a..... 96 4.8 Labor Force and Employment in the 19'0s ....... .................... 97 4.9 Projected Labor Force Growth - 1980-2000 .............. 100 4.10 Tentative Estimates of Components of Urban Growth in India 1961-81 ............... o ..............,,, ................... 104 4.11 Literacy Rates for Persons Aged 10 and Over, by Sex, 1901-81 106 4.12 School Attendance Ratios for Age Groups 5-9 and 10-14, by Sex, 1981 Census ................. ,,, ,. 108 4.13 Infant Mortality Rates by (a) Educational. Attainment and (b) Work Status/Occupational Group of Mothers, 1978 ............... 109  Paze 4.14 Percentage Distribution of Sample Birtbs by Type of Medical Attention at Birth, 1970-72 and 1976-78 ............................ 111 4.15 Selected National Health Policy Goals According to the 1982, Statement ............*.. .. ..112 4.16 Achievement of Targets of Family Planning Methods Since 1969/70 ... 117 4.17 Number of Couples Currently and Effectively Protected by Various Methods of Family Planning from 1970-71 to 1981-82 ............. 118 Figure 4.1 Percent Distribution of Population by Age and Sex, 1971, 1981 ...................*......... *......92 Figure 4.2a Total Fertility and Adult Literacy, All LDCs .....o.............. 103 Figure 4.2b Total Fertility and Infant Mortality, All LDCs ...........a..... 103 Figure 4.3 Contraceptive Practice Rates ................................... 119 CHAPTER 5 5.1 Consumption Expenditure, 1979/80 ................................s. 124 5.2 School Enrollment Ratios for Ages 5-9 and 10-14 by Per Capita Expenditure Decile in Gujarat and Maharashtra, 1972-73 ............ 127 5.3 Incidence of Weekly Status Unemployment by Monthly Per Capita Expenditure Group, 1977/78, all India ......................... .. 128 5.4 Rates of Change in Distribution Measures ...........* ... . 130 5.5 Plan Outlays on Selected Poverty Prograns ......................... 137 5.6 Minimum Needs Program - Selected Indicators, 1980-83 ............. 139 5.7 MRDP - Major Indicators ................***.....e*...... *.** 141 5.8 NREP - Najor Indicators ..... .... .......*. 147 5.9 Physical Achievements under NREP ................ ................ 149 CHAPTER 6 6.1 Sixth Plan for Agriculture: Targets and Achievements ............. 156 6.2 Existing and Ultimate Irrigation Potential ............... 163 CHAPTER 7 7.1 Composition of Government Expenditure on Education and Health ..... 172 7.2 Real Expenditure Growth Rates, 1974/75 to 1981/82 .................. 173 7.3 Enrollment in Classes as a Percent of Enrollment in Class I ....... 176 CHAPTER 8 8.1 Commercial Energy Demand/Supply Prospects ......................... 184 8.2 Real Investment in Power, Coal and Oil Sectors .........186 8.3 Potential Energy Savings in Industry, Agriculture and Transport Sectors ...... . .. ............. ............ . ........ .*... 188 8.4 VI Plan Power Expenditures .........................*....... *....189  -vi- Ppae 8.5 Power - Additions to Generating Capacity-Targets and Achievements 1951-1983 ..... ........... .. ..... 193 8.6 Performance Indices of Thermal Plants ......... .................... 194 8.7 VI Plan Coal and Lignite Expenditure ..............................198 CHAPTER 9 9.1 Transport Sector Public Investment ................................ 202 9.2 Sixth Plan Transport Sector Investment ............................ 204 9.3 Railway Investment Mix in Sixth Plan .............................. 206 9.4 Backlog in Railway Asset Replacement and Renewal Program ........... 212 9.5 Maintenance Norms for Roads ...... .. .. .. .. ..... ........... ... 214 CHAPTER 11 Graph 11.1 Capacity Utilization in Manufacturing Industries, 1970-1982 ... 229  Chapter I RECENT DEVELOPMENTS IN THE INDIAN ECONOMY 1.1 Macro-Developments. Rebounding from the 1982/83 drought, GDP growth in 1983/84 should reach 6.5Z to 7.0%, with agricultural growth in the 9Z-10Z range. Between the two drought-affected years of 1979/80 and 1982/83, GDP growth averaged almost 5Z p.a., while between the two recovery years of 1980/81 and 1983/84, it was 4.5Z p.a. This experience, combined with the recovery in 1983184 from the GD? growth rate of only 1.8Z in 1982/83 (and a decline in agriculture of 3.9%), suggests a higher growth trend in the 1980s than in the 1970s. However, short periods of accelerated growth on a trough to trough or peak to peak basis have been achieved before in India (most recently during the mid-1970s) without significantly raising the long-term average. The high investment levels of recent years, accompanied by improvement in the policy environment have contributed to the more rapid economic growth of recent years. Further efforts will be required both to maintain the investment rate and to improve the productivity of past and future investment. 1.2 A2riculture. Depressed by last year's drought, agricultural production in 1983/84 has rebounded strongly following an excellent monsoon. The rains started late, and by end-July, overall prospects were uncertain, although much improved over 1982. Over the next eight weeks, most of the country received plentiful and well-distributed rainfall, so that by end September the cumulative rainfall index stood at its highest level since 1978 (Table 1.1). Abundant rainfall and adequate power sup- plies for groundwater pumping provided a healthy climate for a resurgence of fertilizer consumption whicb reached 7.6-7.8 million tons, about 20X higher than in 1982/83. In addition, irrigated area expanded by around 2.0 million hectares, a substantial increase, even though somewbat lower than planned due to expenditure shortfalls for both major/medium and minor irrigation. As a result, kharif foodgrain production should reach a record 82-84 million tons, with rice output, at around 57 million tons, exceeding the previous record by 3 million tons. Soil moisture conditions for rabi (winter) planting were excellent. With adequate winter rains, rabi production should be in the 59-60 million ton range, including at least 43 million tons of wheat. Overall foodgrain production should therefore increase by 10M-12% over last year's level, reaching 142-144 million tons, in line with the official target (Table 1.2). After smooth- ing out annual fluctuations due to weather, this year's achievement means that foodgrain production continues to grow at a trend rate of 2.5Z per annumr-sufficient to maintain a broad balance between supply and steadily increasing domestic demand.  -2- Table 1.1: MACRO-ECONDMIC INDICATORS, 1980-84 (Estimated) 1980/81 1981/82 1982/83 1983184 Percent Change 1. Real GDP at Factor Cost 7.6 5.3 1.8 6.5-7.0 Agriculture 11.9 3.2 3.9 9.0-10.0 Industry 2.6 5.7 3.4 4.5 Services 6.3 7.5 6.8 5.6 2. Real ExDenditure/Rsources 8.0 5.5 2.2 6.5 Investment 6.4 2.5 0.3 7.4 Consumption 8.5 6.5 2.7 6.3 3. Inflation Wholesale Price Index 18.2 9.3 2.5 9.0 Consumer Price Index 11.4 12.5 7.8 12.0 Implicit GDP Deflator 11.7 10.2 7.8 7.5 4. Money and Credit money Supply (X3) 17.8 12.9 15.5 16.5 Credit to Government 28.2 22.3 14.2 16.5 Credit to Commercial Sector 20.9 15.9 17.5 17.5 As a percentage of GDP at Current Market Prices 5. Gross National Savings 22.9 22.5 22.3 22.7 Public 3.6 5.0 4.5 4.8 Private 19.2 17.5 17.8 17.9 6. Foreian Savints (Current Account Balance) 1.8 2.2 2.3 2.1 7. Gross Investment 4.7 24.7 24.6 24.8 Public 10.9 11.7 12.1 12.0 Private 13.8 13.0 12.5 12.8 Notes: Series 5,6 and 7 are derived on the basis of Statistical Appendix Standard Tables. Industry includes manufacturing, mining and quarrying, construction and electricity, gas and vater supply. Sources: 1. CSO Ouick Estimates. February 27, 1984. 2. Ministry of Finance, Economic Survey 1983/84. 3. World Bank estimates for 1983/84.  -3- Table 1.2: MONSOON RnIFhALL INDEX, 1978-1983 1978 1979 1980 1981 1982 1983 End September 81.5 62.1 77.1 78.3 63.5 79.3 Note: Cumulative rainfall fcor the mounsoon season as a percentage of the 50 year average, weighted by each meteorological district's con- tribution to kharif foodgrain production. Source: Calculated on the basis of rainfall data provided by the Meteorological Department, GOI. 1.3 In its management of the foodgrain economy during 1983, the Government-s concern has been to mitigate the impact of the 1982 drought, while also building a cushion for the future. By early 1983, public stocks bad been brought to reasonable levels through vigorous rice procurement efforts in the last quarter of 1982 (despite the decline in production) and 4 million tons of wheat imports. Record wheat procurement of 8.3 million tons followed in the spring to bring public stocks up to 15.7 million tons by the end of May 1983. In the middle of 1983, with monsoon prospects still uncertain and public stocks under some pressure, the Government bought 2.7 million tons of imported foodgrains-2.13 mil- lion tons of wheat, 0.57 million tons of rice-for delivery in late 1983/early 1984. As a result, the level of public stocks improved con- siderably and by the end of 1983, they stood at 15.4 million tons-21% higher than at the end of 1982. With this year's bumper rice crop and the favorable outlook for procurement of rabi wheat, food availability is likely to be very comfortable over the next six months. Public rice procurement was 7.6-7.8 million tons, a somewhat lower increase over the 1982 level than might have been expected, with the private trade being given more latitude to rebuild its own stocks. 1.4 Other major crops had a mixed year in 1983/84. Good weather allowed oilseeds to recover strongly from the previous year's setback. Production rose to 12.5 million tons, an 18Z increase over 1982/83, and the Sixth Plan target of 13 million tons is now in reach, given favorable veather conditions in 1984. This performance gave some much needed relief to the edible oils economy, where supply remained extremely tight and prices rose consistently and sharply throughout 1983. A widespread attack of pests in Punjab and parts of Haryana spoiled what would otherwise have been a good year for cotton. Production fell to 7.2-7.4 million bales-a decline of 42-6.5% over last year. High carryover stocks enabled this shortfall to be absorbed without unduly affecting overall availability, although as an extra precaution GOI banned further ray cotton exports in the new year. While this policy will enlarge domestic supplies in the  -4- short run, its impact on India's raw cotton export market prospects may prove harmful. Consequently, temporary imports to alleviate shortages could be considered as a less costly strategy to overcome these problems. Table 1.3: ESTIMATES OF AGRICULTURAL PRODUCTION AND INPUT USE (1980/81 to 1983/84) Z Change 1980/81 1981/82 1982/83 1983/84 1983/84 Foodgrains (million tons) 129.6 133.3 128.4 142-144 10.6-12.1 Oilseeds a/ (million tons) 9.4 12.2 10.6 12.3-12.7 16.0-19.8 Cotton Lint (million bales) 7.0 7.9 7.7 7.2-7.4 (-)6.5-3.9 Sugarcane (million tons) 154.3 186.4 189.1 175-180 (-)7.5-4.8 Agricultural Production Index (triennium ending 1969/70=100) 135.2 142.7 137.0 149.2-151.8 8.9-10.8 Fertilizer Consumption (million tons) 5.5 6.1 6.4 7.6-7.8 18.8-21.9 Irrigated Area (million hectares) 54.6 56.3 58.6 60-61 2.4-4.1 a/ Oilseeds include groundnut, rapeseed and mustard seeds, sesamum, linseed, castor, safflover, nigerseed, and cotton seed. Sources: 1. Government of India (various Ministries). 2. Fertilizer Association of India. 3. World Bank estimates. 1.5 Sugarcane production in 1983/84 is expected to decline to 175-180 million tons, as growers reduce acreage in response to lower effective prices. During 1982/83, higher than expected growth in domestic sugar demand, exports of just over 0.4 million tons and the creation of a public buffer stock of 0.5 million tons provided some relief to the financially pressed sugar mills. Sugarcane area rmnained high since producer prices were fixed by the States at much higher levels than were consistent with average prices received by the mills for the sale of levy and non-levy sugar. Sugarcane and sugar production reached 189.1 and 8.2 million tons respectively. As a result, carryover stocks of sugar at the beginning of the 1983/84 season (October) reached a record level of over 4.6 million tons. Unrealistically high producer prices and increased stocking costs ensured a further deterioration in the financial performance of the mills, and led to the accumulation of large arrears in payments to cane growers, thus effectively reducing incentives to plant sugarcane in 1983/84. To alleviate pressure further, the public buffer stock was increased to one million tons, while the Government also sought an increased quota for export of sugar. These measures, and the predicted decline in sugarcane production, may alleviate the effects of the current over-production.  -5- However, adjustments in sugarcane pricing are urgently required, if escalating financial losses due to excessive stockholding or, alternatively, a precipitous fall in sugar prices and ultimately sugarcane production, are to be avoided. 1.6 Procurement prices for the main foodgrains, rice and wheat, were raised in 1983/84 by 8.2Z and 6.3% respectively to Rs 1.32/kg for rice (as paddy) and Rs 1.51/kg for wheat. Extra incentive was provided by a uniform 7.5X cut in the statutory prices of major fertilizers to coincide with the 1983 growing season. Table 1.4 shows recent trends in two impor- tant price relationships for the Indian wheat farmer: the procurement price compared with price of imported wheat; and the input/output price ratio. Over the last three years, the wheat procurement price has risen steadily, both in absolute terms and in relationship to the price of wheat actually imported by India (suitably adjusted to the farmgate level). A similar trend can be seen in the wheat/fertilizer price ratio, where the amount of wheat needed to buy a kilo of nitrogen has declined significantly. Table 1.4: RECENT RENDS IN WHEAT AND FERTILIZER PRICES (Rs/ton) Marketing Year (April-March) 1981/82 1982/83 1983184 A. Wheat Procurement Price 1,300 1,420 1,510 Import Price a! 1,560 1,690 1,670 Procurement/Import Price Ratio 0.83 0.84 0.90 B. Fertilizer Urea Price hI 2,350 2,350 2,150 Nutrient Price Nitrogen c/ 5,110 5,110 4,670 Nitrogen/Wheat Procurement Price Ratio 3.93 3.60 3.09 a/ Unit landed cost of Wheat imported from USA less internal distribution costs. Equivalent to import parity price at farmgate. ../ Statutory price. )/ Urea price converted to nutrient price on basis of 46% nitrogen content. Source: Ministry of Agriculture.  -6- The effect of the 1983 fertilizer price reduction on the fertilizer: grain price ratio is particularly noticeable. These are encouraging trends for farmers but ones which require continued careful scrutiny in view of the potentially heavy costs to the Government in the form of rising food and fertilizer subsidies. Several other factors-notably costs in the fer- tilizer industry, foodgrain distribution costs, and the size of foodgrain buffer stocks-also contribute to these subsidies. A balanced mix of efforts to improve efficiency while maintaining adequate but not excessive incentives to farmers will be needed if the fiscal burden of these sub- sidies is not to become too great. In this context, the recent decision to increase the 1984/85 wheat procurement price by only 1% to Rs 1,520/ton is a welcome reflection of these concerns, and appears to balance the need to maintain incentives to farmers while keeping consumer prices reasonable and containing the subsidy costs. 1.7 Industry. The industrial sector continued to be characterized by slow and uneven growth. In 1982/83 industrial output rose 3.9Z (Table 1.5). Although growth was considerably lower than the 8.6% achieved in 1981/82, it was achieved inspite of constraints arising from a deteriorating power situation in many States; the prolonged textile strike in Bombay which led to a record total of 106 million mandays lost; overall shortfall of agro-based raw materials related to the drought conditions prevailing in the agricultural front; and inadequate demand, particularly for consumer durables. Table 1.5: INDUSTRIAL PRODUCTION GROWTH (in Z, p.a.) 1979/80 1980/81 1981/82 1982/83 1983/84 a/ Industry -1.4 4.0 8.6 3.9 4.5 Manufacturing -2.1 3.7 7.5 2.5 4.0 Electricity 2.1 5.7 10.2 7.1 3.7 b/ Coal 2.0 9.6 8.9 5.2 4.8 c/ aj April to October, 1983 compared to same period in 1982. b/ April to January. c/ April to December. Source: GOI, Economic Survey 1.8 Despite the good monsoon, improved crop prospects and higher purchasing power in the rural economy, the performance of the industrial sector up to the Fall of 1983 belied expectations of a broad revival. Industrial output increased by 4.5Z, only slightly faster than in 1982/83. Manufacturing output grew at 4% compared to only 2.5% in 1982/83. Within manufacturing, the intermediate and capital goods industries recorded  -7- growth of 5.3% and 4.6% respectively, followed by basic industries 2.8X. Consumer products, both durables and non-durables, declined by about 0.4Z. 1.9 Contributing to the disappointing output growth was a shortfall in power generation (11.5% of requirements during April-November 1983), as electricity generation increased by barely 3.7% during the first eleven months of the fiscal year. The intensity of power shortfall was most evident in the southern and eastern States due to decline in hydel gener- ation in the former and a sharp deterioration in Damodar Valley Corporation's performance in the latter. Production vas adversely affected in a broad range of industries but more intensely in the extrac- tion industries, fertilizers, cement and basic metals production (par- ticularly steel and aluminum). Output growth also remained constrained on account of continuing slack demand in the domestic economy, although there were signs that the scope of the recession was being progressively reduced in the last quarter of 1983/84. Major positive developments were the restoration of industrial peace in the textile industry, increased availability of agro-based inputs and several improvements in the policy environment. Notable among the latter were major improvements in licensing, import, and tax policies affecting the electronics industry, opening telecommunications equipment manufacturing to the private sector, and extending the automatic capacity expansion scheme for another year. In addition, the 1984/85 import-export policy continued the emphasis of recent years on export production, modernization, and procedural simplification. The new policy expanded the Open General License (OGL) list, especially for capital goods, increased facilities for import of technology, and provided increased incentives for exporters, including special facilities for products vith high export potential such as com- puter software and gold jewelry. Taken together these industry and trade policy measures are encouraging evidence of an increasingly flexible approach to the challenge of improving industrial performance in India. 1.10 Major Developments in Selected Industries during 1983/84. The steel sector's performance was disappointing. Production of saleable steel-barely 7.2 million tons during 1982/83-declined by about 17% in 1983/84. Inspite of this decline, the industry was confronted with mount- ing inventories while large scale imports reflected a mismatch between domestic demand and production. Engineering industries continued to experience low capacity utilization, escalation of input costs and stagna- tion in selling prices. Most categories of light engineering items and non-electrical capital goods shoved positive growth; some major exceptions were machinery and equipment for cement, sugar, mining and earth moving. Electrical equipment manufactures performed poorly on account of delays in the implementation of public investments in the power sector and also because of slack demand for consumer durables. To boost domestic demand the Government announced substantial reductions in excise duties on a range of electrical and electronic equipment, but little evidence of  -8- revival had materialized by early 1984. Profitability declined during 1982/83 and given slack demand, probably declined further in 1983/84. 1.11 In cotton textiles, production of both cloth and yarn recorded high growth rates (27.4Z and 13.7% respectively) over the depressed levels of the previous year, but demand was poor. Sugar production declined by 17.6% in the seven months April-October 1983, but for the year as a whole output is estimated at 7.5 million tons, 9.6Z below the record production of 8.3 million tons during 1982/83. The real constraint is again demand as sugarcane and sugar production have substantially exceeded domestic demand and export opportunities in recent years (see para. 1.5 above). 1.12 The continued increase in output and consumption of cement was encouraging. With liberal licensing of capacity, the improved pricing policy and partial decontrol, the industry has responded in creating additional capacity and improving operating performance. Fairly buoyant conditions prevailed also in transport equipment. Barring commercial vehicles (-13.8%), all other items showed positive growth ranging from 4% in cars and scooters, to 14% in jeeps and between 22%-26X for motorcycles, bicycles and three wheelers. Output growth in the chemical industry was also encouraging on the whole except for polyester fibers, fertilizers and pesticides. 1.13 There has been a marked revival of investment activity in the private corporate sector in the years 1979/80-1982/83, partly as a result of flexible and imaginative policies initiated in this period. The number of letters of intent to establish or expand industrial capacity which were approved increased from 550 in 1979 to 946 in 1980, and averaged about 1,050 in the following two years. Actual capital raised increased in these years from Rs 1.12 billion in 1980/81 to Rs 5.29 billion in 1981/82 and Rs 7.05 billion in 1982/83. A slight deceleration in capital raised is expected in 1983/84. A similar deceleration is evident in the growth of assistance from the financial institutions. Greater technology inflow is reflected in a steep increase in the number of foreign collaborations approved and in the increased volume of financial participation. The number of collaborations rose from 380 in 1981 to 591 in 1982 and 673 during 1983. The United States and West Germany, followed by UK, have the highest number of collaborations, but Japan continued to have the largest number of equity participations. Light commercial vehicles attracted substantial Japanese technology. 1.14 Energy. Significant progress continued to be made in the petroleum sector during 1983/84. For the third year in succession, there was a sizeable increase in domestic crude production which, along with a decline in the growth of consumption, led to a further reduction in India-s dependence on imported oil. The major indicators of petroleum performance over the last three years are shown below (Table 1.6).  -9- Table 1.6: PERFORMANCE OF TEE PETROLEUM SECTOR, 1981/82-1983/84 (millions of tons) 1981/82 1982/83 1983/84 (Actual) (Actual) (Estimate) Crude Production 16.20 21.06 26.23 Offshore 7.95 12.88 17.00 Onshore 8.25 8.18 9.23 Net Crude Imports a/ 14.52 12.60 7.30 Refinery Throughput 30.15 33.16 34.05 Net Product Imports a/ 4.92 4.23 6.30 Domestic Consumption 32.52 34.66 36.16 Memo Item: Net Crude Equivalent Imports b/ 19.80 17.10 14.00 a/ Imports less exports. b/ Crude imports plus crude content of product imports. Source: Ministry of Petroleum. 1.15 Domestic crude production grew by 24.5% in 1983/84, following growth last year of 32%. This was an impressive performance, particularly since this year's absolute production increase exceeded that for 1982/83. Production from the Bombay High offshore field was the major source of growth, rising by 32%, while onshore operations also yielded more output. During the year, India continued to exchange exported for imported crude in large quantities on the world market to achieve a mix better suited to domestic refineries. Net crude imports fell dramatically by 42%, a decline that was partly offset by much higher product imports than last year on account of bottlenecks in overall refining capacity. Refinery throughput increased by only 2.7Z in 1983/84, but should rise by a further 7-8 million tons over the next two years as investments in capacity expan- sion come onstream. The net effect of these developments was a further decline in India's reliance on imported oil from 46% of crude equivalent domestic consumption in 1982/83 to 36% this year-a reversal of the ratio that held only 5 years ago. The total POL import bill net of exports will be reduced from US$4.6 billion in 1982/83 to US$3.4 billion, a fall of 26Z. 1.16 Considerable resources continued to be spent on the oil explora- tion program in 1983/84. Aside from some small finds and promising indications, no major new discoveries were made. Further involvement of foreign companies in exploration has been held back, after disappointing  -10- responses to a second offering of production-sharing contracts early in the year. Efforts to strengthen onshore exploration by the Oil and Natural Gas Commission and Oil India Limited have been stepped up. 1.17 Domestic consumption of petroleum products grew by 4.3% during 1983/84, a lower rate of increase than last year's 6.6Z. Cautious and sensible pricing policy has continued as an essential component in India's efforts to conserve energy, thus contributing further to the decline in POL imports during the year. Prices of most petroleum products were raised in 1983/84 by between 2% and 12f, despite slack conditions and downward price pressures in the world oil market for much of the year. 1.18 Coal production is expected to increase by about 9 million tons during 1983/84 to reach the 139 million tons mark. Although this level is about 3 million tons below the Sixth Plan's target for 1983/84, coal supplies at the pitheads were large enough to meet demand given high opening pithead stocks (23.4 million tons), and slack demand in the steel sector and delays in the commissioning of thermal power plants. Only few small consumers requiring high grades of coal experienced sporadic shortages partly because of unavailability of high quality coal at the pitheads and/or rail transport. The deterioration in the coal quality continued to be the basic problem for the consumers. The Third National Coal Wage Agreement was signed early in the year, adding an estimated US$22.4 million to the cost of production of the coal companies. However, this and other cost escalations were compensated by a 25% increase in coal prices during January 1984. 1.19 There was no improvement in the extent of power shortages this year. During the first ten months of the fiscal 1983/84, the power deficit was actually higher (11.5%) than the 9.2Z level in 1982/83. The deficit for the year as a whole is expected to be only slightly lower. Although the Eastern Region experienced the largest deficits, low hydel generation due to less than average rainfall in Kerala, Karnataka and Tamil Nadu created unusually large power deficits in the Southern Region. The coal, steel, fertilizer, cement and aluminum sectors continued to be the worst affected. 1.20 The power generation target for 1983/84 was set at 144.3 TWH, assuming a 1lZ increase over the level achieved in 1982/83. Power gener- ation in the first nine months of 1983/84 was estimated at 102.2 TWH or 70.8% of the target and only 3.7% above the level during the same period in 1982/83 (Table 1.7). Apart from the water problems in the south, continued delays in the commissioning of new capacity and a relatively sharp decline in thermal capacity utilization have been responsible for lower than expected power supplies.  -11- Table 1.7: POWER -- GROSS ENERGY GENERATED (Gwh) April - 1980/81 1981/82 1982/83 Dec. 1983 (Provisional) (Provisional) A. Utilities Hydro 46,539 49,597 48,273 38,041 Thermal 61,301 69,392 81,261 61,579 Nuclear 3,001 3,021 2,024 2,628 Total Utilities 110,841 122,010 131,558 102,248 B. Non-Utilities 8,309 8,600 n.a. n.a. Grand Total 119,150 130,610 n.a. n.a. Source: Central Electricity Authority. 1.21 During the first nine months of 1983/84, 2,273 KW of nev capacity was installed bringing the total capacity installed since 1980/81 to 9,331 MW or only 47.4% of the target 19,265 MV set for the Sixth Plan period. Factors that have contributed to delays in commissioning of new plants are discussed in Chapter 8. 1.22 A second major reason for relatively slow growth in power gener- ation during the year has been the decline in capacity utilization in thermal plants. Thermal capacity utilization which had risen to 53.3% in the last quarter of 1982/83, declined to about 50% in the first quarter of 1983/84 and fell further to about 41% in the second quarter. Although some improvement is expected in the second half of the year, utilization for the year as a whole is expected to be lower than the previous year's 49.4% (see paras 8.19-8.22, Chapter 8). 1.23 Inflation and Demand Nanazement. Inflation in India, after decelerating over the past two years, accelerated again in 1983/84. The growth rate of wholesale prices (on an annual average basis), which declined from over 18% in 1980/81 to only 2.5X in 1982183, rose to over 9% in 1983/84, and the rate of growth of consumer prices exceeded 12%. Similar to the experience during the last round of rapid inflation in 1979, almost half the price increase during 1983 has been concentrated in a small group of agriculture based commodities (Table 1.8); in this instance, gur, oilseeds, edible oils and pulses. While clearly a major factor behind the recent spurt in prices is the poor agricultural perfor- mance in 1982/83, the danger of the price increases in a few specific commodities broadening into general inflation, as happened in 1979/80, cannot be ruled out. The Annex to this chapter analyzes some of the  -12- factors contributing to recent inflationary pressures compared with the 1979-81 experience. Table 1.8: CONTRIBUTION OF SELECTED COMMODITIES TO INCREASE IN WHOLESALE PRICE INDEX (WPI), 1983 (Index 1970/71 = 100) Annual Annual 1983 over 1982 Average Average Z Contribution to Commodity Groups Weights 1982 1983 X Change Change in WPI a/ Total Food Articles 29.8 244.7 275.7 12.7 46 Foodgrains 12.9 242.5 269.8 11.3 18 Other food 16.9 246.5 280.1 13.6 28 Raw Materials 11.9 334.8 347.1 3.7 5 Non-Food Agric. Items 10.6 242.1 269.6 11.4 15 Mineral 1.3 1,124.7 1,006.7 -10.5 -2 Fuel, Power & Lubricants 8.5 450.1 479.9 6.6 7 Coal 1.0 466.6 503.4 7.9 1 Mineral Oils 4.9 513.6 534.7 4.1 2 Electricity 2.4 305.8 343.8 12.4 4 Manufactured Products 49.9 269.7 287.9 6.8 41 Food Products 13.3 262.1 285.1 8.8 14 Sugar Group 7.2 266.6 284.6 6.8 6 Edible OIls 3.7 258.9 290.3 12.1 6 Beverage & Tobacco 2.7 216.1 237.2 9.8 3 Textiles 11.0 229.3 243.6 6.2 8 Chemicals & chemical products 5.6 267.1 276.3 3.4 2 Fertilizers 1.3 277.9 271.3 -2.4 0 Basic metals & Products 6.0 347.1 375.4 8.2 6 Iron, Steel & Ferro Alloys 3.5 370.9 409.9 10.5 4 Machinery & Transport Equipment 6.7 275.2 287.1 4.3 4 ALL COMMODITIES 100.0 285.3 307.8 7.9 100 a/ Weighted share of each commodity in total absolute cbange in WPI. Source: Office of the Economic Advisor, Ministry of Industry.  -13- 1.24 Fiscal Developments. Chapter 2, Domestic Resource Management, contains an analysis of public sector resource developments in the context of overall macro-economic management in India. During 1983/84, revised estimates of Government expenditures (both plan and non-plan) were 12% higher than originally budgeted. Despite these higher outlays, the budget deficit was contained to Rs 20.95 billion, including Rs 4 billion for clearance of States' overdrafts in March 1983. While tax and non-tax revenues, as well as small savings, were somewhat higher than estimated, budgetary pressures were mainly alleviated by a sharp rise in "other capital receipts" which more than doubled from Rs 20.84 billion to Rs 42.63 billion. Deposits of surplus funds from the oil sector were the principal source of this increase, and are estimated to remain significant in 1983/84. 1.25 Budget estimates for 1984/85 project the Central Government's non-plan and plan outlays to increase by 5% and 15.6Z respectively over the 1983/84 revised estimates. It may prove difficult to remain within the budgeted rise in non-plan expenditure since it is below the current inflation rate. Consequently, there may be less room for expanding plan outlays. At existing rates of taxation, the budget deficit would have been Rs 20.35 billion. However, the net impact of tax concessions and new revenue measures reduce it to Rs 17.6 billion for 1984/85. The Plan outlay of the Centre, States and Union Territories is projected to increase by 17% from a revised estimate of Rs 257.37 billion in 1983/84 to Rs 301.32 billion in 1984/85. 1.26 A significant change in the 1984/85 Budget was a reduction of 5 percentage points in most personal income tax rates, following recognition that existing rates are relatively high and the tax base too narrow. Other features of the Budget were an across-the-board rise in customs duties (principally a 5% increase in auxiliary duties); a substantial rise in the wealth tax exemption limit, withdrawal of some expenditure conces- sions under the corporate tax structure; and removal of excise duty on unrefined sugar. A committee to review the central excise tax system with a view to rationalization was also proposed. In summary, the Budget contains a desirable expansion of Plan outlays and some worthwhile tax initiatives, but no major changes in economic policy. 1.27 Balance of Payments. Chapter 3, External Resource Management, contains a detailed analysis of recent and prospective balance of payments developments. Improvements in the balance of payments which began in 1982/83 continued during 1983/84 and the current account deficit declined from 2.3% of GDP in 1982/83 to an estimated 2.1% in 1983/84. The trade balance improved even more markedly, led by a US$1.2 billion reduction in POL imports (para 1.15). Overall, the volume of imports is estimated to have grown by 7X during 1983/84, but declining dollar prices of POL and other manufactures reduced the import value growth to 1.1%. Preliminary estimates also indicate improved export performance in 1983/84, with  -14- Table 1.9: BALANCE OF PAYMENTS SUMMARY (US$ million) Actuals Estimates 1980/81 1981/82 1982/83 1983/84 Exports a1 8,504 8,519 8,001 8,466 Imports a/ -16,204 -15,500 -14,249 -14,412 Trade Balance -7,700 -6,981 -6,248 -5,946 Non-Factor Services (Net) 1,365 974 940 856 Resource Balance -6,335 -6,007 -5,308 -5,090 Investment Income (Net) 600 286 -415 -648 Current Transfers 2,771 2,318 1,849 1,790 Current Account Balance -2,964 -3,403 -3,874 -3,948 Concessional Aid (Net) 1,634 1,456 1,771 1,560 Medium & Long Term 318 441 614 973 Borrowing (Net) IDM Credit (Net) 1,035 690 1,980 1,295 Capital, N.E.I. -368 -1,582 12 1,039 Change in Reserves 345 2,398 -503 -919 Reserve Level (end of year) hI 6,859 4,461 4,964 5,883 ai Net of crude petroleum exports. hf Excluding gold. Source: Table 3.1  -15- volume growth exceeding 8Z (almost 6Z in value terms). major contributors to export value growth were polished diamonds, clothing, engineering goods, sugar, oilseed extractions, and tea. Net invisibles declined as travel receipts and current transfers stagnated, thus failing to offset an increase in interest payments. In the capital account there was a sig- nificant increase in disbursements of non-concessional medium- to long- term borrowing (primarily IBRD). Even though the amount utilized under India's EFF with the IMF declined, the overall balance led to an increase in external reserves of $900 million. Reserves at the end of 1983/84 were equivalent to four months of imports. On the basis of anticipated trends in the balance of payments for 1984 and 1985, the Government decided to forego the remaining SDR 1.1 billion to which India could have had access through the Extended Fund Facility, thus limiting total drawings to SDR 3.9 billion through April 1984. The Indian authorities had indicated when the original EFF documents were placed before Parliament that this option would be exercised if sufficient progress were made in external adjustment. While during this year and the next the balance of payments is likely to be manageable, this should be no reason for complacency, given the uneven performance of exports during the past five years and the decline in concessional aid commitments.  -16- Annex 1 1 Recent Inflationary Factors 1.1.1 Although the initial spurt in prices in 1979 was largely a result of supply shortfalls in agriculture and the rise in administered prices of coal and POL, the rate of inflation continued around 20Z throughout the period 1979-81, and this was not confined to agriculture and infrastruc- ture alone. The rate of inflation for investment goods, for example, was 15X in this period. One of the major factors contributing to the emer- gence of high inflation in 1979/81 was the accumulation of money balances during the preceding period of price stability, the inflationary potential of which was translated into an active force with the sudden shift in price expectations brought above by the major supply shocks in 1979. During the period 1979-81, nominal money expansion continued to be rapid, while the demand for real money balances declined considerably as the relative preference for holding cash balances and holding goods was quickly altered. The danger of such a phenomenon repeating itself in the current period, when price expectations are once again changing, cannot be ruled out. 1.1.2 The trends in nominal money expansion and in the real demand for money are shown in Table 1.7. The annual growth rate in the demand for real money balances increased from -1.4Z in 1979-81 to 9.2Z in 1981-83. That this occurred in spite of the real GDP growth of only 3.61 in 1981/83, is a reflection of the confidence of the public in price stability during this period, and their increased willingness to accumu- late real money balances, particularly in the agricultural sector. 1.1.3 The increased demand for real money balances carries the potential for accelerated inflation which is of concern not merely in the short run, but especially in the context of the medium-term adjustment effort, where the importance of relative domestic price stability cannot be overstated. Given the importance of fulfilling real investment needs in a climate of resource constraints, and the critical need to increase export competitiveness, measures to control inflation in the medium-term assume special importance. While the rate of inflation in India was sig- nificantly less than the international inflat:on rate in the period 1973-79, this trend has been reversed since then as shown in Table 1.1.2.  -17- Table 1.1.1: MONEY SUPPLY AND DEM&ND (Annual end-period percentage growth rates) Sep. 82- 1979-81 1981/82 1982/83 1981-83 SeR. 83 Nominal Supply of Money and Credit MN3 17.8 12.8 15.5 14.2 16.5 Commercial Credit to Agriculture 10.5 26.2 22.8 24.5 26.2 Commercial Credit to Industry 18.8 14.2 16.2 15.2 16.7 Prices Wholesale Price Index 19.5 2.8 6.3 4.4 9.2 Deflator of Agriculture Credit al 18.7 -1.4 6.9 2.6 12.7 Deflator of Industry Credit bI 20.3 6.4 6.3 6.3 5.6 Real Demand for Money & Credit c/ M13P -1.4 9.7 8.8 9.2 6.5 Commercial Credit to Agriculture -7.9 28.0 14.9 21.3 12.0 Commercial Credit to Industry -1.3 7.3 9.4 8.3 10.5 Production Real GDP (Factor Cost) 1.2 5.2 1.8 3.5 n.a. Marketed Foodgrain Output d/ -2.3 5.5 -6.4 -0.6 -3.7 Industrial Production Index 1.3 8.6 3.9 6.2 3.8 aJ Composite wholesale price index for consumer goods and fertilizers. &/ Composite wholesale price index for industrial inputs and investment goods. cJ Deflated by price indices above. In any financial year, the marketed output of foodgrains is computed as the sum of the kharif harvest of that year and the rabi harvest of the previous year.  -18- Table 1.1.2: MEDIUM TERM MONETARY AND PRICE TRENDS (percent per year) a/ 1974/75-1978179 1979/80-1982/83 Money Supply (Ml) 11.57 14.04 Real Income 5.70 3.19 Domestic Inflation / 4.78 9.35 Agriculture-based Prices 2.09 8.69 Non-agricultural Prices 7.86 9.95 International Inflation cJ 9.25 8.60 J/ Trend growth rates derived from quarterly series. h/ Based on the wholesale price index. cI Based on the consumer price index for industrial countries. 1.1.4 While short-term price movements in India are largely determined by the fluctuations in agricultural performance and its cost-push effect on agriculture-based commodities such as food products, the medium and longer term trends are closely related to the trends in monetary and real income growth, implying a stable long-term money demand function. With an apparently more stable monetary velocity in recent years, monetary and price trends have moved more closely together. If the velocity of money remain , on the average, unchanged in the medium-term future, then the growth of nominal money supply would need to be constrained to within 14Z, in order to achieve an average GDP growth rate of 5Z and at the same time contain inflation within 8.5% (which approximates the expected rate of international inflation over the next 5 years). On the other hand, if the velocity of money were to pick up in the coming years, then the rate of mone:ary growth would need to be reduced even further. Past trends indi- cate that the velocity of money picks up precisely during the periods of most rapid inflation, with a few months' time lag, which is a confirmation of the importance of price expectations in the Indian economy. Given the rising price expectations at the present time, efforts to control the growth in money supply assume additional importance in the coming years.  -19- Table 1.1.3: MAJOR FACTORS AFFECTING MONEY SUPPLY Annual Growth Rates (Z) a/ March 81 March 82 March 83 September 83 RBI Credit to Govt. (net) 32.6 24.3 11.7 11.1 RBI Credit to Banks & Financial Institutions 8.4 24.9 6.3 23.4 Net External Reserves -11.4 -43.3 -36.1 -5.0 Net Non-Monetary Liabilities of RBI 17.6 21.7 -6.9 -3.5 Reserve Money 17.4 7.9 10.0 14.7 Other Banks' Credit 18.5 16.5 17.6 17.7 of which: to Government 21.9 9.9 18.5 17.3 to Agriculture 9.8 26.2 22.8 to Industry 21.0 14.2 16.2 Money Supply: Ml 16.9 6.4 13.6 14.5 M3 17.6 12.3 15.6 16.3 al Growth rate over the 12 month period ending in the specified month. 1.1.5 The recent trends in the factors influencing money supply are shown in Table 1.1.3. The restraint in budgetary policy since 1981/82 has succeeded in considerably reducing the growth rate of RBI's credit to the Government, from more than 30X in 1981 to only 11% in 1983. However, the growth in reserve money, after decelerating very sharply to less than 8% in 1981/82, has once again accelerated to 15% at the present time, and the growth of aggregate money supply has also followed the same trend. The recent acceleration in money supply growth since March 1982, in spite of the restrictive budgetary policy stance, has been a result of the slower decline in net external reserves since the middle of 1982. The accelerated expansion of commercial credit took place despite the Reserve Bank's policy measures to restrict the commercial bank's access to loanable resources. The containment of monetary growth in the medium term future hence calls for continuing efforts to improve the fiscal perfor- mance of Gover nent, and appropriate flexibility in the allocation of commercial bank credit between the different sectors of the economy.  ,,,A/ A -e - A0 ` y%/ - ce-  -21- Chapter 2 DOMESTIC RESOURCE MANAGEMENT A. Introduction 2.1 This chapter and the following one on external resources deal with the macro-economic resource management issues in India. The focus, as stressed in the Executive Summary, is on maintaining a sustainable balance between the generation and utilization of resources, both domestic and foreign, with special emphasis on narrowing the gap between domestic savings and investment, jj particularly in the public sector. This chapter first examines the overall trends in investment and domestic savings. Because of the need to improve the public sector savings effort, special attention is given to issues of tax and expenditure policy against the background of performance to date under the Sixth Plan. 2.2 The Government has made substantial progress in recent years in izproving the savings performance of the private sector through a range of policy instruments that have resulted in a significant increase in financial intermediation, as well as in the overall savings level. The savings perfor- mance of the public sector, however, has been less satisfactory. Progress has been made since the beginning of the decade, but further changes are needed across a broad range of feasible areas for policy action including adjustments in the structure of indirect taxation, increased use of direct taxes, controls on revenue expenditures, still better focus and more effi- cient implementation of public investments, more adequate cost recovery, appropriate pricing of public sector goods and services, and higher com- plementary private investment to reduce pressures on limited public resources. B. Investment and SavinRs Trends 2.3 Investment. Capital formation in India has grown more rapidly than GDP during the past fifteen years. As a result, the share of gross domestic capital formation in GDP increased from 17.9% in 1965-70 to 22.6% in 1975-80 and to 24.7Z in 1980-83 (Table 2.1). Public investment grew more rapidly than that by the household and private corporate sectors. Investment in each sector has increased as a proportion of GDP since 1965-70. 2.4 The public sector's share of total investment has increased from 41Z in 1965-70 to 47Z in 1980-83, wbich has been accompanied by a larger share of non-departmental enterprises within the public sector itself (Government- owned industrial undertakings). Reflecting this, the asset composition of investment has also changed considerably with the proportion of machinery and equipment increasing relative to construction activities and inventories. 1/ Throughout this chapter domestic savings is used as identical with national savings (defined as investment expenditure minus current account deficit in the balance of payments).  -22- Table 2.1: GROSS DOMESTIC SAVINGS, GROSS DOMESTIC CAPITAL FORMATION AND SAVINGS-INVESTMENT GAP BY SECTOR; 1965/66-1982183 (as a Z of GDP at c.m.p.) Estimates 1965-70 1970-75 1975-80 1980-83 1980/81 1981/82 1982/83 1. Domestic Savings 15.6 18.4 22.6 22.6 22.8 22.5 22.3 1.1 Households 11.6 13.5 16.4 16.3 17.2 15.6 16.0 (financial) a (3.0) (4.2) (6.1) (6.8) (6.7) (6.5) (7.1) 1.2 Private Corporate 1.4 1.8 1.5 1.9 2.0 1.9 1.8 1.3 Public 2.6 3.2 4.7 4.4 3.6 5.0 4.5 1.3.1 Non-Dept.Entep. (0.7) (1.1) (1.5) (1.9) (1.4) (2.1) (2.3) 1.3.2 Gen.Govt (1.9) (2.0) (3.2) (2.4) (2.2) (2.9) (2.2) 2. Capital Formation b/ 17.9 19.1 22.6 24.7 24.7 24.7 24.6 2.1 Households 8.2 8.3 9.9 9.8 10.7 9.6 9.0 2.2 Private Corporate 2.3 3.2 2.6 3.3 3.1 3.4 3.5 2.3 Public 7.4 7.7 10.2 11.6 10.9 11.7 12.1 2.3.1 Non-Dept.Entep. (3.4) (3.6) (5.7) (6.2) (5.6) (6.4) (6.7) 2.3.2 Gen.Govt (4.0) (4.1) (4.4) (5.4) (5.3) (5.3) (5.4) 3. Savin2s-Investment -2.3 -0.7 0.0 -2.1 -1.8 -2.2 -2.3 3.1 Private 2.4 3.8 5.6 5.1 5.5 4.8 5.4 3.2 Households (3.3) (5.2) (6.6) (6.5) (6.5) (6.1) (7.0) 3.1.2 Corporate (-0.9) (-1.4) (-1.0) (-1.4) (-1.1) (-1.5) (-1.7) 3.2 Public -4.7 -4.5 -5.5 -7.2 -7.3 -6.7 -7.6 3.2.1 Non-Dept.Entep. (-2.7) (-2.5) (-4.2) (-4.3) (-4.2) (-4.3) (-4.4) 3.2.2 Gen.Govt c/ (-2.0) (-2.0) (-1.3) (-2.9) (-3.1) (-2.4) (-3.2) a/ These figures do not fully reflect the scale of financial intermediation, as they show only the net increases in the financial assets of the sector after deducting the increases in its financial liabilities. Capital formation figures are from CSO, unadjusted for errors and omissions. Domestic savings differ slight from CSO's because they have been adjusted for statistical discrepancies in order to make them consistent vith Bank estimates of balance of payments. c/ General Government includes Central and State Governments and their departmental enterprises. Source: CSO, National Accounts Statistics. 1983, and Quick Estimates dated February 27, 1984. See Standard Tables in the Statistical Appendix.  -23- 2.5 Investment by the private sector in 1980-83, although a lower share of total investment than in earlier years, still accounted for more than one half of the country's investment effort. The decline in the private sector's share was entirely due to a reduction in household investment; the private corporate sector maintained its share at about 132. That India's household sector still accounts for nearly 40Z of the nation's total investment should not be viewed as a negative phenomenon, particularly as this includes invest- ment by unincorporated enterprises, which is often highly productive. 2.6 Private corporate investment increased from 2.6% of GDP in 1975-80 to 3.3% in 1980-83, accounting for 26% of the increase in domestic investment during the period. Higher private corporate investment partly reflected stepped up activity in the cement subsector following policy changes which increased its attractiveness to private investors, and partly, positive developments in the capital market which increased the availability of inves- table funds to the private corporate sector in general. 2.7 About half the increase in the total investment share in GDP has resulted from the increase in the relative price of investment goods. Thus, although the rate of capital formation at current prices increased from 18.2% of GDP in 1970/71 to 24.6% in 1982/83, the investment rate at constant 1980/81 prices increased from 20.4% to 23.4% in 1982/83. The savings rate has had to increase to finance not only the higher investment volume but also the increase in the relative price of investment. 2.8 Savings. The significant increase in domestic investment since the mid-sixties was facilitated by an even more rapid growth in domestic savings. There has been an almost continual increase in the saving rate, which averaged 15.6Z in 1965-70, 20.5% in 1970-80, and 22.6% in 1980-83. The rate for the last period, however, dropped below the investment rate, resulting in an increased savings investment gap from negligible levels during the late 1970s to an average gap equal to 2.1% of GDP in 1980-83. The acceleration and maintenance of the savings rate at relatively high levels has been closely linked with income growth-the elasticity of gross domestic savings with respect to real income exceeds 2.0. The increase in the proportion of net disposable income to net domestic product partly explains the rising saving rate, but other factors have contributed as well, including the sig- nificant financial deepening of the Indian economy since Independence, and in the second half of the 1970s, the strong growth in production (especially in agriculture), and the improved performance of the public sector. 2.9 Higher public sector savings during most of the 1970s reflected an improvement both in general Government finances )J (through greater profits from departmental enterprises and revenue surpluses), and in the profits of 11 General Government includes Central and State Governments and their departmental enterprises.  -24- non-departmental public sector enterprises (especially financial institutions such as banks). This situation changed during 1980-83 when general Government savings rate declined while the share of savings of non- departmental enterprises increased. Lover general Government savings reflected inflationary conditions in 1980/81, which increased expenditures faster than revenues, and relief expenditures following the 1982 drought. Low industrial growth and higher than expected fertilizer subsidies were also responsible for the relative decline in general Government savings. 2.10 The higher savings of non-departmental enterprises mainly derived from: (a) additional oil revenues linked to petroleum pricing policies which have brought domestic consumer prices for petroleum products above import parity prices and (b) increases in domestic petroleum production. Outside the oil sector, efforts were made to strengthen non-departmental enterprise finances through pricing to reflect more closely economic costs. 2.11 There has been a marked increase in net financial savings of the household sector, which are now equivalent to 7% of GDP compared to 3% in 1965-70. The major casual factor has been the increased role of financial institutions in the Indian economy. This process started in the early 1950s, but accelerated after 1968 with the nationalization of most of the banking system followed by the introduction of the Lead Bank scheme and regional rural banks. This brought about a tremendous expansion in banking services by opening branches in previously unbanked rural and urban areas. The ratio of financial institutions assets to GDP has increased gradually from 38% in 1950 to 73% in 1975, then quickly to 103% by 1980, marking an extensive financial deepening of the economy. Other factors spurring the growth in financial savings, particularly during the 1970s, were: first, the sig- nificant increase in foreign remittances; 1] and second, the increased real return to savings due to the combined effect of higher interest rates and general price stability that characterized the period 1975-79. 1/ Foreign remittances increased from Rs 1.4 billion in 1973/74 to Rs 21.3 billion in 1980/81. As a proportion of gross financial savings and of bank deposits they increased from 3.9% to 18.2%, and from 9.4% to 39.6Z, respectively. In the absence of details on the uses of foreign remittances, it is not possible to determine precisely the extent to which incoming remittances are converted into financial savings or are put to alternative uses. Nonetheless, it seems reasonable to assume, as the Report of the Working Group on Savings (1982) did, that at least initially, foreign remittances would get reflected almost entirely in increases in household financial savings in the form of bank deposits and currency holdings.  -25- 2.12 Continued growth in financial savings during 1980-83 has resulted from the introduction of new financial instruments and Government efforts to improve the effectiveness of the capital market. To encourage the absorp- tion in the financial system of illegal funds circulating in parallel channels, ten-year Special Bearer Bonds (SBBs) with an annual interest rate of 22 were offered in 1981. Total subscriptions to SBBs amounted to Rs 9.6 billion; the amount purchased by the household sector was equivalent to about 6Z-7Z of new gross financial savings. In addition, the Government also introduced National Savings Certificates (NSCs) in 1981/82 with the attractive terms of 12% interest and six years maturity. The share of NSCs rose from 2% of household financial savings in 1980/81 to 4.6Z in 1981/82. In 1982/83 the Government introduced two long-term bonds, Capital Investment Bonds and Social Security Certificates; but the public response to these instruments has not been as strong as for NSCs. A new category of term banking deposits with a maturity of five years and above, bearing interest at 11% was reinstated in 1982. 2.13 The attractiveness of financial instruments was enhanced by raising the exemption limit for income tax from Rs 6,000 to Rs 7,000 on income from selected financial assets. Bank deposit interest rates were increased in March 1981 and 1982. In addition, the interest rate on five-year Post Office time deposits was increased from 10.5% to 11.5% in March 1983. The develop- ment of the private capital market has also been encouraged by recent Government policy measures such as allowing industrial firms to raise their debt-equity ratio to 2:1, increases in the rate of interest of convertible and non-cunvertible debentures, authorization to include buy-back clauses on issues of non-convertible debentures, and new measures to attract investments by non-resident Indians (Table 2.2). Table 2.2: PRIVATE CORPORATE CAPITAL ISSUES TO PUBLIC (in Rs million) Total as % of 12 months Net Financial Ended June Equity Debentures Total Sevin2s 1979 733 384 1,117 1.7 1980 1,036 779 1,815 2.8 1981 1,705 913 2,618 3.1 1982 1,765 3,772 5,537 5.7 1983 2,532 4,867 7,399 6.3 Source: Centre for Monitoring the Indian Economy, Economic Outlook, June 1983, and CSOs Quick Estimates dated January 27, 1984. 2.14 Despite this increase in capital market activity, its contribution to private corporate sector resources is small when compared to household finan- cial savings or the sector's needs. The "Report of the Study Group on  -26- Financing of Private Corporate Sector in the Sixth Five Year Plan" 1/ estimates that in 1980/81, only 6.8% of household financial savings floved to the corporate sector either as securities or company deposits. The sizable growth potential in the Indian capital market will only be tapped by continu- ing to: (a) improve the attractiveness of the instruments, (b) reduce the cost of intermediation and of floating of new issues, (c) strengthen the infrastructure of the capital market, (d) encourage the development of a secondary market, and perhaps most important (e) improve the productivity and financial performance of the corporate sector itself. 2.15 Savings-Investment Gap. The savings-investment gap in the Indian economy, which vas almost negligible during the second half of the 1970s, has increased during the past three years to an average of 2.1% of GDP, a level only marginally below that of 1965-70. The deficits of the private corporate and the public sectors as a proportion of GDP have increased steadily since 1965-70, and in 1980-83 accounted for 1.4% and 7.2% of GDP respectively (Table 2.1). Households are the main surplus sector financing the deficits of Government and private corporate business with foreign savings financing the remaining gap. Virtually the entire increase in public savings deficit during 1980-83 has been financed by foreign savings as the relative share of household savings decreased marginally. Thus, the financ- ing of the large capital expenditures in the Sixth Plan has significantly benefited from the use of foreign savings, partly in the form of concessional assistance and partly by drawing down net international reserves (which had been built up in the 1975-79 period). More recently, however, an increasing share of the gap has been financed by borrowing from abroad on commercial terms. 2.16 Credit. Domestic credit expansion was substantial towards the end of the 1970s and may well have contributed to the reemergence of inflationary pressures in the early 1980s. More recently, however, the Government has sought to limit domestic credit expansion. Bank borrowing to finance the budget deficit has been limited to promote monetary stability while meeting the credit needs of the commercial sector (Table 2.3). Xj Released by the Planning Commission in June 1983.  -27- Table 2.3: DOMESTIC CREDIT GROWTH (rates in Z) Est. 1979/ 1980/ 1981/ 1982/ 1983/ 1980 1981 1982 1983 1984 Total Domestic Credit 21.0 23.9 19.7 16.0 17.0 Government (Gen.Credit) 32.0 28.2 22.3 14.2 16.5 Commercial Sector a/ 14.3 20.9 15.9 17.5 17.5 Food Procurement -19.6 -8.6 28.2 12.1 n.a. Agriculture 27.4 29.8 21.3 14.2 n.a. Medium & Large Industry 13.0 21.2 12.1 16.6 n.a. Small-scale Industry 20.6 25.5 15.1 13.4 n.a. Other 21.1 17.2 13.1 14.4 n.a. Memo Items: GDP growth in nominal terms 9.8 19.1 16.6 10.6 14.5-15.0 GDP growth at 1970/71 prices -4.9 6.6 5.9 2.6 6.5- 7.0 A/ The growth rates of credit by sector are based on gross bank credit by scheduled commercial banks and exclude cooperative banks and RBI lending to financial institutions. Thus the sectoral growth rates are not strictly comparable with the data for total commercial sector credit growth. Sources: Reserve Bank of India, CSO, and Bank estimates. 2.17 Within overall credit targets, credit allocation policy has led to increased disbursements to priority sectors (mainly agriculture and small scale industry) and to designated disadvantaged groups in line witb overall planning objectives. Initial analysis indicates that credit expansion to priority sectors appears not to have reduced significantly access of medium and large industry to the banking system (Table 2.4). The substantial increase in bank deposits during the 1970s permitted the banks to continue servicing the needs of non-priority borrowers while increasing their lending to priority sectors. jj Nonetheless, during periods of tight credit or slow deposit growth, credit to medium and large industry can be significantly affected as credit to all borrowers is not distributed proportionally. The continuation of recent policies limiting bank credit to Government and j In 1980/81 bank deposits amounted to about 31.6% of net domestic product as compared to 15.5% in 1970/71 and 20.2% in 1975/76.  -28- accelerating the development of the capital markets can contribute impor- tantly to assure adequate financing for the private sector. Table 2.4: SECTORAL DEPLOYMENT OF GROSS BANK CREDIT TO COMMERCIAL SECTOR a/ (in percentages) March June March Marcb Item 1968 1976 1980 1983 1. Food Procurement 3.6 18.8 9.9 8.9 2. Priority Sectors n.a 24.2 31.7 35.9 Agriculture 2.2 9.4 13.0 15.4 Small-scale Industry 6.9 10.5 12.4 13.1 Other n.a 4.3 6.3 7.4 3. Medium & Large Industry 60.1 43.4 38.9 38.3 4. Wholesale Trade 17.7 7.0 9.0 6.8 5. Other n.a 6.6 10.5 10.1 6. Gross Bank Credit 100.0 100.0 100.0 100.0 a/ Lending by Scheduled Commercial banks only. Source: RBI, Report on Trends and Progress of Banking in India, various issues. RBI, Report on Currency and Finance. C. Financial Policies for the Future 2.18 If India is to maintain investment at about 25Z of GDP, a major effort will be required to continue to raise the necessary resources, with particular improvement called for in the public sector. The latter would lead to more resources for productive investment consistent with reducing somewhat the growth of the domestic money supply and external borrowing. This would also allow the use of foreign savings to be reduced marginally from the 2.1X-2.3Z GDP share of recent years to 1.5Z-1.8%, a range that should maintain an appropriate balance between investment growth and the external debt service burden. (These issues are discussed in Chapter 3). 2.19 While there is scope for further increases in domestic savings in all sectors, India's high current saving rate and low per capita income make substantial increases in the rate unlikely. A further shift in the composi- tion of household savings toward financial rather than physical assets appears more feasible and would have a positive impact on financing non- household investment. Such a shift could be encouraged by policies aimed at  -29- increasing returns to financial assets and reducing their investment risk. Despite some acceleration of inflation over the past twelve montbs, the real returns to long-term savers continue to be positive if allowance is made for tax concessions on interest income. Interest rates and other incentives for private savings should be kept under active review to ensure that real returns and the relative attractiveness of financial investments do not deteriorate. 2.20 It is also important that policies which affect returns on financial assets be revised to encourage balanced growth of different types of finan- cial assets. Currently, the combined effect of financial, fiscal and/or regulatory policies leads investors to prefer deposits or forces them to invest in approved securities rather than in typical capital market instruments. The following measures could help realize the sizable growth potential in the capital market: a) modify tax policies which presently make it attractive for firms to borrow rather than to issue equity; b) reduce the cost of capital issues (currently estimated at 7Z of the total issue); c) amend legislation of provident funds to permit investment in selected corporate securities; d) review tax exemption policies to balance incentives provided to different financial instruments. A recent Planning Commission report has highlighted the existing bias against equities as compared to low risk assets like bank deposits and units of the Unit Trust of India (UTI) which enjoy a deduction under the Income Tax Act. XI The 1983/84 Budget removed the bias tovards bank deposits by cancelling the exemption for income tax purposes. D. Domestic Resources during the Sixth Plan 2.21 This section reviews the progress of aggregate investment and savings during the Sixth Plan as it enters its final year in April 1984. Aggregate real investment in the Sixth Plan has progressed satisfactorily so far and is projected to be only 7% belov the original target for the period 1980-85, private investment being 5X to 10 higher and public investment about 20% lower in real terms than initially projected. Nevertbeless, aggregate real investment in the Sixth Plan is projected to be about 30% bigher than in the period 1975-80, with increases for public and private investment slightly above and below this level respectively. 2.22 Inadequate generation of domestic resources by the public sector, combined with stagnant concessional assistance and cautious recourse to commercial borrowing from abroad and from the monetary system, has been an important factor constraining public investment and retarding the implementa- tion of projects in various sectors. Resources raised during the first three years of the Sixtb Plan have certainly exceeded past standards but have 1 "Report of the Study Group on Financing of Private Corporate Sector in the Sixth Five-Year Plan", Planning Commission, June 1983.  -30- fallen short if Plan goals. Own resources j/ generated by the public sector for financing Plan expenditures doubled in nominal terms from Rs 43.01 bil- lion in 1979180 to Rs 88.21 billion in 1982/83 (Table 2.5). In real terms, however, own resources generated in the first three years of the Plan accounted for only 36.7X of the corresponding Plan target for 1980-85 and are likely to fulfill only 70S of that target by the end of the Plan. Furthermore, current budgetary savings of Government have disappeared as a source of Plan financing which, as shown in Tables 2.5 and 2.7, has depended increasingly in recent years on contributions from public enterprises (par- ticularly the Oil and Natural Gas Commission). 2.23 In terms of meeting Plan targets, the performance of the Central Government appears to be considerably better than that of the State Governments. Whereas the Central Government's own resources in the first three years of the Plan added up in real terms to 44Z of the Plan target for 1980-85 and are likely to reach about 80Z to 90X of the Plan target by the end of the Plan, the State Governments met less than 301 of their 1980-85 target in the first three years and will probably achieve only about 50% of that target by the end of the Plan. Although investment by the State Governments has grown more rapidly than that for the Centre since 1976 (see Table 2.6), the States bave been unable to realize as high an achievement rate vis a vis Plan targets as the Centre in physical implementation. The shortfalls in the States' investment show up particularly in those sectors where the States have the largest role: irrigation and power. One reason for these shortfalls has been that resources have not grown as rapidly as had been anticipated. On the other hand, if performance in resource mobilization is measured in terms of Government administration savings trends with respect to GDP, States' performance has been good and may in fact have surpassed that of the Centre. However, this comparison excludes the major improvements made by Central Government companies. It thus appears that the resource targets for State Governments under the Sixth Plan may have beea overly ambitious (see Annex 2 to this Chapter). 2.24 Large increases in own resources anticipated in the 1983/84 Plan Budget for both Central and State Governments failed to materialize as the economy (with the exception of agriculture) did not perform according to expectations, and new resource mobilization me6vures were limited in scope. In January 1984 the Central Government announced its intention to cut Plan outlay (which includes recurrent expenditures under the Plan in addition to public investment) by 51 and non-plan expenditure by 31 (with the exception of interest payments and transfers to the States) for the vear ending on Marcb 31, 1984 so as to attune public expenditt-:es to the existing level of resources and reduce the budget deficit. Despite these hpasures, the Central Government budget deficit for 1983/84 was revitvd upwards, from an initial estimate of Rs 15.86 billion to Rs 20.95 billion (includin- Rs 4.0 billion to cover State Governments' overdrafts with the Reserve Bank of India). jJ 'Own resources" include public fiscal savings as conventionally defined and Plan expenditure on revenue account.  -31- Table 2.5: OWN RESOURCES GENERATED BY THE PUBLIC SECTOR, 1980-85 (in Rs. billion) Range of (Budget) Targets Estimates a First Three Years of Plan Plan VI Plan Low Hinh 1980/81 1981/82 1982/83 Total 1983/84 1980-85 1980-85 1. Tctal Own Resources At current prices 48.2 75.7 88.2 112.6 At 1979180 prices 43.3 59.3 62.9 165.6 81.0 451.8 301 321 Achievement Rates (36.7) (66.5) (71.0) 2. Central Government At current prices 26.0 46.7 60.0 76.8 At 1979/80 prices 23.4 36.6 42.8 102.9 50.7 233.8 193 208 Achievement Rates (44.0) (82.5) (88.9) 3. State Governments At current prices 22.2 28.9 28.2 45.7 At 1979180 prices 19.9 22.7 20.1 62.7 30.2 218.0 108 208 Achievement Rates (28.8) (49.4) (51.7) Memo Items: a) Central Government Gross Savings 0.0 11.1 7.0 9.7 b) Gross profits (net of taxes) in selected Central Govt. companies 7.8 18.2 22.6 c) Savings on Government Administration 1.3 9.2 -6.8 Central Govt. -7.8 -2.9 -13.0 State Govts. 9.0 13.1 6.2 Notes: 1. "Own resources" are a budgetary measure which includes not only public savings as conventionally defined but also recurrent expenditure under the Plan. Based on Table 11 of Kid Term Appraisal: "Balance from current revenues" (at 1979180 rates) and "Additional Resource Mobilizatiou". 2. "Own resources" are deflated using the public investment deflator, which is assumed to increase by 8% in 1983/84. 3. Numbers in parentheses reflect the achievement rates (in percentages) with respect to the 1980-85 Plan targets. aj World Bank range of estimates and projections based on recent developments and trends. Sources: GOI, Mid-Term Appraisal of the Sixth Plan: Public Enterprises Survey 1981/82: Economic and Functional Classification of the Central Government Budtet (annual issues).  -32- Table 2.6: GOVERNMENT FINANCE ELASTICITIES Item 1976-83 1976-81 1981-83 Central Governmenc Revenues 0.84 0.59 2.50 Tax Revenue 0.86 0.66 2.57 Non-tax Revenue 1.00 0.71 2.29 Revenue Expenditure 1.55 1.65 2.67 Capital Expenditure 1.81 2.18 -0.21 Grants to States 1.55 2.25 2.00 Loans to States 4.34 7.41 0.60 States Revenues 1.91 2.15 1.99 Tax Revenue 2.17 2.28 2.06 Non-tax Revenue 0.55 0.72 1.34 Revenue Expenditure 2.34 2.53 2.47 Capital Expenditure 2.46 3.90 -0.83 Note: 'Elasticities" have been calculated with respect to GDP from actual receipts and payments and thus reflect policy changes and new measures; in the case of tax revenues this measure is sometimes called "buoyancy" to distinguish it from the strict concept of tax elasticity based upon an unchanging tax system. Expenditure elasticities vary more widely than those for revenues because public expenditures are more "discretionary" (i.e. less dependent on GDP) than public revenues. Source: Except for the last column, the elasticities in this table have been calculated on the basis of least-squares log regressions using current price data from the Statistical Appendix (Tables 5.2 and 5.3), deflated to constant prices by the implicit GDP deflator. E. Public Finance Trends 2.25 The progress achieved in raising resources in the last few years has been seen in the context of a policy environment which has recognized: (a) the need to increase the tax base rather than raise tax rates, (b) the importance of profitability to public sector enterprises, and (c) the need to maintain adequate incentives for savings and investment. This section reviews recent trends of major public revenue sources-taxation, the con- tribution of public enterprises, and other non-tax sources-and expenditure  -33- patterns (non-plan and Plan expenditure) to assess the nature of the financing-gap problem confronting the public sector. Additional measures to raise resources for the public sector are discussed subsequently in Section F. 2.26 Taxation. Among the major sources of Government current revenue, taxation shifted from about 14.7Z of GDP in 1977/78 to 16.2% in 1978/79 and increased gradually thereafter to about 17.2% in 1982/83 (Table 2.7), which is high considering India's per capita income and compares favorably with some low or even middle income countries |j. However, direct tax revenue as a fraction of GDP has remained constant (at about 3%) and declined as a proportion of total tax revenue from 21.2% in 1977178 to 17.8% in 1982/83. This is surprising in view of India's broad and growing industrial base. The share of direct taxes in India's total tax revenue is generally lower than in other developing countries. 2.27 Rising indirect tax rates and an expanding industrial base explain the growing significance of indirect taxes (14.1% of GDP in 1981/82 compared to 11.9% in 1977178). The pattern of indirect taxation inclusive of second and third round effects of taxes on inputs-referred to hereafter as effec- tive indirect taxation-shows a relatively high tax burden on manufactured products which may have inhibited industrial growth J/ and export potential (Annex 2.1 and Table 2.8). Due to the high taxation of inputs, the effective indirect tax rate on production for private consumption and fixed investment is 8.7% and 12.6% respectively, compared to nominal rates of only 4.1% and 3.4% respectively. Given a 35.3% duty on imports of capital goods, the effective indirect tax rate on aggregate gross fixed investment is 14.9%, which is the highest among major final expenditure categories. As the rela- tive price of investment goods has increased since the mid-1970s, and as AJ However, part of the increase in the tax ratio in drought years such as 1979/80 and 1982/83 reflects the abnormally low GDP base rather than higher taxation. Zj It is not legitimate to assume that indirect taxes are fully shifted to users in the form of higher prices since market conditions for certain commodities and services prevent such an accommodation, adversely affect- ing the generation of value added and profit itself, and thereby inducing a lower level of domestic production. To the extent that some of these taxes capture abnormally high profits resulting from the high degree of protection in certain industries, their disincentive impact may not be significant. Even so, they would have an inhibiting effect once produc- tion approaches demand limits, generating competition among domestic producers and reducing profit margins.  -34- Table 2.7: PUBLIC SECTOR RESOURCES FOR PLAN OUTLAY (As a percentage of GDP at market prices) 77/78 78/79 79/80 80/81 81/82 82/83 Revenue Receipts 20.4 21.4 21.3 20.2 20.4 21.4 Tax Revemtv 15.1 16.2 16.9 15.9 16.5 17.2 Direct 3.2 3.1 3.2 2.8 3.0 3.1 Indirect 11.9 13.1 13.7 13.1 13.5 14.1 Non-tax Rev. 5.2 5.2 4.4 4.3 3.9 4.2 Contribution of Public Entities 1.6 1.7 1.4 1.2 2.3 2.2 Total Current Revenue 22.0 23.2 22.7 21.4 22.7 23.6 Non-Plan Expenditure 17.5 18.0 18.6 17.6 17.6 18.2 Own Resources for Plan Financing 4.5 5.1 4.0 3.8 5.1 5.4 Balance from Current Revenue al 2.9 3.4 2.6 2.6 2.8 3.2 olw Budgetary Savings 1.8 1.6 0.9 0.1 0.5 -0.5 Contribution of Public Entities 1.6 1.7 1.4 1.2 2.3 2.2 Plan Outlay 10.3 11.0 11.4 11.6 12.3 13.0 Financing Gap (-=gap) -5.8 -5.9 -7.4 -7.8 -7.2 -7.6 Memo Items Total Public Expenditure 27.8 29.0 30.0 29.2 29.9 31.2 Own Resource Share of Plan Outlay (Z) 43.6 46.6 35.3 32.5 41.6 41.3 a/ Balance from revenue account includes Plan expenditures on current revenue account; thus, balance is not equal to current budgetary savings. Source: GOI, Mid Term Appraisal of the Sixth Plan, Tables 5 and 6, except for (a) GDP and tax data from CSO, National Accounts Statistics and Quick Estimates (January 27, 1984) and (b) non-tax revenue data which vere derived as a residual due to reclassification of related budgetary accounts in 1980/81. Subsidies are included in non-plan expenditures.  -35- indirect taxation also increased substantially in this period, it is quite plausible to attribute at least part of this shift in relative prices to higher effective indirect tax rates on manufactures and on imports. Final manufactured products accounted for Rs 86.5 billion of effective taxes (inclusive of input taxes), representing 62% of all indirect tax revenue net of subsidies in 1980/81 and reflecting an 18% effective tax rate on their market value, which is high considering that this base includes a number of processed foods which have low rates of taxation. Indirect taxation may have contributed also to inhibiting export growth of manufactured products, as export duty drawbacks and other fiscal measures have generally not compen- sated exporters adequately for the taxation of inputs. (Annex 2.1). Table 2.8: NOMINAL AND EFFECTIVE INDIRECT TAX RATES ON FINAL EXPENDITURE, 1980/81 (As a percentage of expenditure at market prices) Changes Private Public Fixed in Cons. Cons. Invest. Stocks Exports Total Domestic Production Nominal 4.1 1.7 3.4 0.0 0.9 3.4 Effective 8.7 6.5 12.6 10.2 7.5 9.1 Imports Nominal 19.2 24.9 35.3 - - 26.7 Total Expenditure Nominal 4.6 2.7 6.7 - 0.9 4.4 Effective 9.0 7.2 14.9 10.2 7.5 9.8 Source: Annex Tables 2.1.1 to 2.1.5 2.28 Public Enterprise Earnings. The aggregate contribution of public enterprises to Plan financing has increased in recent years. The contribu- tions vary greatly from firm to firm, however, and while the net earnings of public enterprise are an area of great potential for future resource mobilization, this source is still relatively small-about 2.3% of GDP during 1981-83, excluding taxes and dividends paid out by these companies. 2.29 The financial performance of Central Government companies has improved in recent years, but largely as a result of higher earnings in the petroleum sector (Table 2.9). Cashflow generation (net profits, income taxes  -36- Table 2.9: FINANCIAL PERFORMANCE OF CENTRAL GOVERNMENT COMPANIES, 1979/80-1982/83 Cashflow CaP.Emp (Rs billion) Gross Rate of Return (Z) 1981/82 79/80 80/81 81/82 82183 Enterprises Producing Goods 20.0 147.8 8.1 6.0 13.6 16.0 Petroleum 14.6 31.9 30.0 18.6 45.7 58.2 Total Excluding Petroleum 5.4 115.9 3.5 2.4 4.7 4.1 Steel 1.3 29.0 5.4 3.7 4.4 -1.0 Mining & Metals excl.Coal 0.1 15.3 6.2 4.0 0.7 0.5 Coal 1.4 16.6 -3.6 4.0 8.7 6.4 Chemical, Fertilizer & Pharmaceuticals 1.4 23.7 3.0 1.9 6.1 8.8 Heavy Engineering 0.3 10.7 0.7 -4.6 2.8 1.7 Med.& Light Engineering 1.2 7.3 13.2 10.2 16.1 15.1 Transport Equip. 0.6 8.0 5.2 1.7 7.9 7.9 Consumer Goods -0.2 1.9 -5.9 -12.3 -8.9 -6.3 Agro based Enterprises 0.0 0.3 18.1 10.1 14.1 15.0 Textiles -0.7 3.1 -1.8 -2.6 -24.6 1.4 Enterprises Rendering Services 3.8 71.6 3.9 4.2 5.3 4.4 All Companies 23.8 219.4 6.5 5.4 10.9 12.3 Notes: 1. Cashflow includes net after-tax profits, income tax and depreciation. 2. Gross Rate of Return is defined here as the ratio of cashflow to capital employed, the latter defined as gross fixed assets less accumulated depreciation thereon plus working capital (using historical book values unadjusted for inflation). 3. Enterprises under construction and those directly under Government Departments are not included in this table. The entire group of 185 major companies had a cumulative investment of Rs 257.3 billion and sales of Rs 415.3 billion in 1982/83. Source: Bureau of Public Enterprises, Public Enterprises Survey 1981-82 and 1982/83.  -37- and depreciation) as a percentage of capital employed jumped dramatically from 6.5% in 1979/80 to 12.32 in 1982/83. J/ However, the return on com- panies producing goods other than petroleum averaged only 3.7% between 1979/80 and 1982/83, while the profitability of service enterprises was slightly greater at 4.4%. In 1982/83 the profitability of non-petroleum companies was affected due to weak industrial demand partly related to the drought although it remained above the period average. Agricultural produc- tion rebounded strongly in 1983/84; but some industrial sectors still con- fronted weak demand and power shortages in the eastern and southern regions, which adversely affected production and led to large losses in major sectors (e.g. steel and fertilizers). Petroleum companies' profits on the other hand continued increasing as domestic crude production reached a new record in 1983/84. 2.30 The companies incurring losses had an aggregate loss (after deprecia- tion and taxes) of Rs 9.76 billion in 1982/83-equivalent to 27% of the aggregate contribution of all public enterprises to Plan resources-compared to Rs 8.13 billion in 1981/82. The most important loss-making companies were in the coal, metal and mining, textile, fertilizer and steel sectors. The coa'l companies-which incurred net losses of Rs 1.0 billion in 1979/80-have improved their profitability since then. In part this resulted from a production increase of 26Z between 1979/80 and 1982/83. More importantly, prices have been increased by 54% over the period (well ahead of general price increases). The most recent increase was 25% in January 1984 to com- pensate for higher wages and input costs and to reduce net losses (expected to reach about Rs 1.3 billion in 1983/84). Domestic coal prices however, remain below world prices. Metal and mining companies not engaged in coal production suffered a setback in 1981/82-largely on account of lower-than- expected iron ore exports (Kudremukh Iron Ore Company) and losses in aluminum companies. The textile companies group (National Textile Corporations) had losses equivalent to 24.6% of capital employed in 1981/82. Fertilizer com- panies (especially the Fertilizer Corporation of India which runs two coal- based fertilizer plants) accounted for net losses of Rs 1.04 billion in 1981/82. Large accumulation of inventories and a sharp fall in production in steel companies are expected to result in net losses of Rs 3.0 billion in 1983/84 compared to Rs 1.0 billion in 1982/83. 2.31 Unavailability of consolidated data on State-level enterprises precludes an assessment similar to that of Central Government companies. However, their aggregate losses (after depreciation and taxes) are known to be significant in certain sectors. Incomplete data reveal that State Electricity Boards incurred losses of about Rs 5.9 billion in 1981/82, fol- 1/ As data on fixed capital used in these calculations are book values unadjusted for inflation, the resulting rates of cashflow generation to total capital employed overstate both the rate of return and the improve- ment over time.  -38- lowed by Irrigation Work Departments (Rs 3.7 billion) and State Road Transport Corporations (Rs 2.0 billion). The combined losses of State and Central Government enterprises in 1981/82 are equiva'!-nt to more than 40% of the contribution of all public enterprises to Plan resources, highlighting the impact that greater efficiency and higher cost recovery in these enterprises could make to India's resource position. 2.32 Expenditure Patterns. The most significant expansion of public expenditure has been in Plan outlays--which include public investment and recurrent Plan expenditure--from 10.9% of GDP in 1977-80 to 12.3Z in 1980-83. (Public investment patterns by sectors are analyzed in Chapters 6 to 11). In contrast, non-plan expenditure was slightly lower in 1980-83 as a fraction of GDP than in the previous three years, although it vas subject to wider fluctuations: increasing to about 18.5% of GDP in the drought years of 1979/80 and 1982/83 from an average rate of around 17.7Z in the non-drought years since 1977/80. j/ 2.33 Public Sector Financing Gap. As own resources available for Plan financing increased only slightly from 4.6% of GDP in 1977-80 to 4.8Z in 1980-83 and much less than Plan outlays, the financing gap of the public sector rose from 6.3% in 1977-80 to 7.5% in 1980-83. A gap of this level vill be very difficult to sustain in the future. F. Prospects for the Future 2.34 Investment. The case for sustaining high investment rates in India rests in large part on the need for infrastructure investments to remove the bottlenecks that have inhibited growth in the past and for productivity- related investments in major sectors designed to accelerate the growth rate over the medium term. 2/ However, since the investment resources available to jj Central Government's own resources increased by 35Z p.a. in real terms between 1980/81 and 1982/83. Over the same period the State Governments' own resource generation fluctuated significantly: after increasing by 14Z in real terms in 1981/82, it fell back to its 1980/81 level as the 1982/83 drought led to an expansion of current expenditure on relief operations. Own resources as a fraction of GDP have fluctuated from 5.1% in 1978/79, to 3.8Z in 1980/81 and 5.4% in 1982/83. sI The current investment rate of about 25% of GDP is high when compared to that of other countries at India's level of per capita income, although it may not be directly comparable to them due to "household investment" (including unincorporated enterprises) of about 10% of GDP, which is unusually large when compared with similar categories in the statistics of other countries. Not enough is known about the composition of household investment in India but there has been a marked shift in the composition of household savings towards financial assets, which could become an increasingly important source for financing non-household investment without requiring a major increase in aggregate saving rates.  -39- the economy are limited, they should be deployed as efficiently as possible in high priority areas as discussed in Chapters 6-11. 2.35 Maintaining adequate levels of development expenditures will require substantial efforts to maintain the progress of recent years in raising overall resources and to improve substantially the performance of the public sector, especially as the use of foreign saving should decline somewhat to facilitate external debt management. However, ac neither income nor produc- tion can be presumed to remain invariant under different resource mobi- lization policies, considerable care will be required in the definition of policies. Policies that increase aggregate savings levels have to be accom- panied by income and production expansion to prevent an unacceptable fall in private consumption, especially in the case of low income groups. Similarly, policies that increase public savings must not do so at the expense of private savings. 2.36 There is a particular need for measures to increase public savings and contain the borrowing requirements of the public sector. This need arises because: (a) the public sector is already the key savings deficit sector; (b) the tax system, despite recent buoyancy from new revenue measures, appears at best able only to keep pace with the growth of the economy; (c) appropriate pricing policies in public enterprises are vital not only to revenue generation but also to increasing productivity; (d) recent trends in external concessional finance indicate declining support to India's inves.ment resources and need; and (e) there are limits on the ability of the domestic banking system to accommodate higher borrowing. In liue with its macro-economic objectives, the Government recognizes that continued growth in Government borrowing from the Reserve Bank of India to finance deficits at the rate recently experienced would not be desirable. Consequently, special efforts should be made to improve the public sector contribution to savings. An increase in public sector savings equivalent to 1% to 2% of GDP to sustain the public investment program in major sectors at levels comparable to those of recent years, would result in a significant improvement in the resource allocation pattern in India and in the overall economic and social situation if achieved in ways that promoted efficiency in the use of resources and equity in the distribution of benefits. 2.37 Measures to Raise Resources. The public sector has at its disposal a number of policy instruments and alternative measures to raise resources, but they may not be equally effective in meeting broader objectives of Government policy. The merits of alternative resource policies can be assessed by their contribution to public revenue and also in terms of the broader objectives which these policies have to serve: equity, growth and efficiency improvements, together with a satisfactory balance of payments position. Equity considerations include the attainment of a satisfactory growth of consumption for the poor, accompanied by investments (including expenditures for health, education, etc.) designed to improve the productivity of the poor in the longer term, while distributing the burden of raising resources according to income, benefits and ability to pay.  -40- 2.38 Resource measures contributing to efficiency are those that minimize the distortionary impact of taxes and other charges on production, trade and consumption patterns, encouraging, for instance, the adoption of least-cost methods of production, and trade patterns consistent with the comparative advantage of the economy. Other criteria by which to judge their effective- ness are: administrative ease, difficulty of evasion, collection costs, their impact on savings incentives and elasticity-the degree to which these measures generate resources in a self-sustained manner over time. The extent to which alternative resource mobilization measures provide appropriate incentives (or reduce disincentives) for the expansion of production and capacity is another important criterion. Some of these criteria will be used in assessing the desirability of various resource mobilization measures. 2.39 Efficiency Improvements. Potentially the most important source of additional resource generation in the public sector is higher operational efficiency. Greater efficiency in the use of existing capacity is most critical in power and irrigation, which are largely under the control of State Governments, and would increase their resources and enable output expansion in other sectors. At the Central Government level there is a need to improve the performance of manufacturing enterprises (particularly those operating in fertilizers, non-ferrous metals and steel), and to continue the advances made in recent years in railway performance. 2.40 Cost Recovery. Concurrently with efficiency improvements, there is scope for increasing cost recovery through price and tariff adjustment measures in selected areas such as power, irrigation and some manufacturing industries. Appropriate adjustments in prices and tariffs in line with inflation are an integral part of cost recovery, especially for industrial projects with long gestation lags, where the initial capital base would have to be adjusted for inflation. 2.41 User Charges. User charges on final goods and services have the advantage of taxing the use of resources rather than their generation and are more equitable than other resource mobilization measures because they fall directly on the beneficiaries. At present there are a number of services provided by the public sector in which user charges fail to cover even the operating costs of the system (e.g., power, irrigation, and water supply systems in some areas). While the income of the beneficiaries should be a consideration in the definition of appropriate user charges j/, it is generally the case that the income of the beneficiary is higher than that of the non-beneficiary population in similar circumstances--for instance, farmers with irrigated land as opposed to farmers without it. A broad recog- jj Explicit subsidy may be justified in the case of water supply projects benefiting primarily the poor, especially taking into account public health benefits.  -41- nition of this situation would reinforce the justification for higher user charges, and even for including an element of taxation in these measures. Equity consideration could vell justify a higher user charge rate than that required to cover the cost of the system, especially as larger public resour- ces are needed to extend services to those who have not yet benefited from such schemes. This would only be a moderately redistributive resource gener- ation step when compared to far-reaching but difficult-to-implement asset redistribution schemes such as land reform. Higher user charges for irriga- tion would be complementary to direct taxes on agriculture income or, if in the form of a land tax, on presumptive agricultural income. 2.42 Marketing charges in regulated markets for agricultural products are another form of user charge in the agricultural sector that has gained acceptance in recent years. For instance, a large part of agricultural production in the State of Haryana is sold through the Agricultural Marketing Board, where it is subject to an ad valorem rate of 2Z and wbere marketing collections were Rs 164 millio- in 1983/84. These funds were used for road construction, electricity generation and other development purposes. Since these charges are based on marketable surplus, they tend to be progressive resource generation measures. 2.43 Value Added Tax (VAT). High priority should be given to the rationalization of the present structure of indirect taxation, by shifting to a value added tax, as expansion of future production would require a lower and more widely distributed tax burden, especially on manufactures and on exports. Under a VAT the taxes on inputs are rebated or offset against the taxes collected on outputs, so that the incidence of the tax falls on value added: profits, interest payments and wages jj. In addition to reducing efficiency losses arising from the taxation of inputs, the VAT avoids penalizing exports by providing full rebate of input taxes falling on exports, while conforming with international trade agreements such as GATT. The VAT has a self-policing feature that can reduce the scope of tax evasion: producers would try to minimize their tax burden by accurately reporting taxes paid on their inputs, which would give them incentives to press sup- pliers for appropriate tax paid receipts. This would be a very valuable feature of the tax for India, where there is widespread agreement on the need for greater compliance with both direct and indirect taxes. VAT paid by a firm can provide useful information on its profits and serve as a cross-check on the corporate tax. As it falls partly on profits, the VAT can be a par- tial substitute for the corporation income tax. 2.44 The main disadvantage of the VAT is that, in a pure form, it would require a large administrative apparatus if it were to bring into the tax net a large number of small shops. Part of this problem can be avoided, however, ij In recent years the system of central excise taxes has moved to expand rebates of certain input taxes, although the impact is still limited.  -42- by initially narroving the scope of the VAT to registered manufacturing activities-the Jha Committee Report suggested that it be applied to all manufacturing-with special refund provisions for unregistered firms buying inputs from registered firms. This would also be desirable on income dis- tribution grounds as agricultural goods tend to figure prominently in the consumption of the poor. An excise tax or sales tax on luxury goods could be retained to increase the progresaivity of the tax system. In its initial stages the VAT could be limited to replacing Union excises only-as they have been identified as the principal reason for effective tax rates deviating from nominal tax rates-to avoid modification of the tax sharing agreements between the Centre and the States. ji 2.45 Direct Taxes. Greater emphasis on direct taxes in the future could improve the buoyancy and progressivity of the tax system while reducing the disincentives of the present structure of indirect taxes. It would be desirable to expand the scope of direct taxation of agricultural income by State Governments on equity grounds; the proceeds of taxing the higher income groups could then expand the State resources available for financing irriga- tion investment, making it more accessible to broader segments of the rural population. An agricultural land holdings tax, applied in its initial stages to the top 102 to 202 of agricultural housenolds in each State, appears to be a promising measure which would minimize the administrative problems of direct taxation in agriculture. ./ The Centre could encourage tapping this tax base by providing the States technical assistance and matching grants proportional to the tax revenue. Higher and progressive agricultural taxes would of course directly improve income distribu ion; but they could also help indirectly by reducing the need to rely as heavily on other less progressive taxes. Any changes in agricultural tax structure must of course, give careful consideration to maintaining adequate incentives for agricul- tural production. 2.46 Efforts should continue to increase direct tax revenue in non- agricultural activities, especially by increasing tax compliance through better tax administration. Higher tax rates on companies are likely to have jj An alternative to VAT as a potential replacement of the excise tax is the single point purchase tax (as opposed to a cascading multi-point sales tax) on final sales. Although it would avoid the introduction of a major change in the system of accounting and tax administration requiring a rebating of earlier stage taxes, and would also be consistent with the constitutional division of taxing powers, it would not be as effective as the VAT as it would require identifying a suitable "final" point of sale to avoid tax administration problems associated with collecting taxes from a vast multitude of small and self-employed retailers. V/ From the tax administration angle, it would be desirable to shift the unit of assessment from the "individual" to the "family."  -43- disincentive effects on production and investment. Greater operational efficiency, growth of firms and improved tax compliance should be the main factors expanding the company tax base. 2.47 Other Resource Mobilization Measures. There is scope for generating additional investable resources in the public sector through expenditure reductions, such as in subsidies, tax concessions and current expenditures. The rapid increase in subsidies in recent years is not entirely attributable to price support for low income groups; in the case of fertilizer industry subsidies it highlights the need for efficiency improvements and other measures that contain the rate of growth of ex factory prices. A review of the effectiveness of tax concessions in achieving their intended goal may be required to assess the scope for reductions in this ares. On the other band, the supply of basic services (health, education etc.) to a growing population and more general equity considerations mean that increases are desirable in some current expenditures relaced to the development of human resources. 2.48 The main recommendations for measures to increase public sector resources can be summarized as follows: H Higher public sector resource generation is required to maintain the real levels of public investment of the recent past while reducing the financing gap of the public sector to levels consistent with anticipated foreign and (non-inflationary) domestic borrowing possibilities. = Greater efficiency in the public sector can be a major source for additional resource generation, concurrently with emphasis on cost recovery and price adjustments in selected areas such a power, irriga- tion and various industries including coal, steel and non-ferrous metals. In power, irrigation and other services, user charges should cover at least the operating costs of the system, and whenever equitable and feasible, ain at full cost recovery so as to expand the ability of the public sector to extend similar services to broader segments of the population. . Rationalization of the present system of indirect taxes could be achieved by shifting to a value added tax that avoids the cascading taxation of inputs and attendant efficiency losses and disincentives. A VAT would also facilitate the promotion of manufactured exports while complying with international trade agreements on export subsidies. To promote equity and facilitate tax administration, the VAT would con- centrate on the manufacturing sector, where some excises and other indirect taxes could be retained to increase the progressivity of the tax system. . Over the medium term there is need to expand direct taxes to improve the buoyancy and progressivity of the system. In particular, there is  -44- scope for more direct taxation of agricultural income, in the form of an agricultural land holdings tax concentrated on upper-income farmers. ' As an integral part of these resource measures, there is need to expand and modernize the system of tax administration. 2.49 The diverse nature of the resource mobilization measures discussed above highlight the desirability of effecting changes in a number of fronts. Although some progress can be made in all directions, these diverse measures cannot move forward simultaneously. Given varying administrative and politi- cal circumstances, some will naturally follow a slower pace of implementation.  -45- Annex 2.1 Indirect Taxation on Final Expenditures 2.1.1 Nominal and effective indirect tax rates for major expenditure categories have been calculated for 1980/81 using the Ahmed/Stern 1/ methodology and assumption of full forward shifting of indirect tax rates to market prices. Nominal and effective indirect taxes and tax incidence rates on final expenditure categories are listed in Tables A.2.1 to A.2.5. Effective indirect tax rates on private consumption expenditure tend to be higher for above poverty households (ranging from 9.2% to 9.7Z of expenditures) than those applying to below poverty households (7.6% to 7.9%). Two assumptions may have contributed to understating the degree of progres- sivity of the tax system, although the nature of the results would probably not change with different assumptions. First, tax rates have been applied to total consumption, without distinguishing between cash purchases and consump- tion from home-grown production which is likely to be important in rural areas. Second, all subsidies are distributed uniformly by commodity whereas =ubsidized food sold through ration shops in effect means lower prices for lower income groups to the extent that lower income groups purchase propor- tionately more from ration shops. Comparisons of overall tax incidence- total taxes paid directly or indirectly as a percentage of their gross dis- posable income before taxes-iindicate that above-poverty urban households pay tax rates which are about 3 percentage points higher (on their disposable income) than above-poverty rural households. 2.1.2 The taxation of inputs occurs at so many levels that substantial differences exist between nominal and effective indirect taxes. To assess the impact of input taxation, effective taxes in 1980/81 have been attributed to final use categories of domestic production. Whereas the nominal tax rate on private consumption supplied from domestic production is 4.1%, the cor- responding effective indirect tax rate is 8.7%. Similarly, the average nominal tax on fixed investment supplied from domestic production is 3.4% but the effective tax is several times higher (12.6%), due to the heavy effective taxation of capital goods, intermediate manufactured products and construction. This high rate together with a 35% duty on imports of fixed investment goods translate into an effective indirect tax rate on all gross fixed investment expenditures (on locally produced goods plus imports) of 14.9%, which is the highest among major final expenditure categories. As pointed out earlier, the Working Group on Savings has highlighted the long- term trend that investment goods prices have increased faster than the implicit price deflator of GDP. As indirect taxation increased substantially jj E. Ahmad and N. Stern, "Effective Taxes and Tax Reforms in India", Development Economics Research Centre, University of Warwick, Discussion Paper No. 25, January 1983.  -46- in the 1970s, it is quite plausible that the changing pattern towards higher effective tax rates on manufactures and on imports has contributed in part to the higher rate of increase of the investment price deflator. Nominal taxes on final use of domestically produced manufactured goods are Rs 49.5 billion, compared with effective indirect taxes of Rs 86.55 billion which account for 18.3% of the market value of domestically produced manufactured products. Effective indirect taxes are more than twice the nominal taxes in the case of capital goods and intermediate manufactured products. Agricultural com- modities have much lower tax rates. Foodgrains had an effective indirect tax of about Rs 1.2 billion in 1980/81 (0.6% of the market value of foodgrains), compared to a nominal subsidy of Rs 5.9 billion. 2.1.3 Export subsidies in 1980/81 were less than the effective tax burden on exported commodities. The amount of export subsidies cannot be determined precisely because the corresponding 1980181 budget category of Rs 4.25 bil- lion ("Foreign Trade and Export Promotion") includes expenditures other than direct fiscal relief to exporters. In our calculations we have assumed that export subsidies were Rs 3.5 billion, whereas export taxes were Rs 1.21 billion, so that net export subsidies were Rs 2.29 billion. On the other hand, effective indirect taxes on exports amounted to Rs 6.7 billion. Depending on the measure used, export subsidies only cover between one-third and two-thirds of the effective taxes paid by exporters.  -47- Table 2.1.1 Nominal Tax on Final Use of Domestic Products - Rs.Billion, 190/e01 Household Consumption Public Fixed Change in GRAND R-Bel R-Abv U-Del U-Abv Total Consumption Investment Stocks Exports TOTAL 1. Foodgrains -2.31 -2.37 -0.42 -0.66 -5.76 -0.04 - - -0.11 -5.91 2. Other Food 0.04 0.10 0.01 0.06 0.21 - - - -0.32 -0.11 3. Raw Materials - - - - - - - - 0.13 0.13 4. Consum. Ianufac 6.28 16.46 1.74 6.43 30.91 0.60 - - 1.22 32.73 5. Capital Manufac 0.13 0.69 0.06 0.32 1.20 0.64 5.52 - -0.20 7.08 6. Other lanufac 0.38 1.87 0.16 0.79 3.20 0.60 1.83 - 0.26 5.89 7. Coal & Lignite - 0.01 - 0.01 0.02 - - - - 0.02 8. Crude Petroleum - - - - - o-- 9. Petroleum Prodcts 2.18 0.97 0.29 0.41 3.75 - - - 0.05 3.80 10. Poier - 0.11 0.03 0.04 0.18 0.02 - - - 0.20 II. Railways - - - - - - - - - 12. Other Transport 0.22 1.18 0.10 0.54 2.04 0.25 0.10 - -0.01 2.38 13. Constructiop - - - - - - -0.05 - - -0.05 14. Other Services 0.03 0.09 0.01 0.06 0.19 0.10 0.02 - -0.10 0.21 Total (ALL Coummdit1 6.95 19.01 1.98 8.00 35.94 2.17 7.42 - 0.84 46.37 Expend on DOI(at up) 199.71 420.53 56.01 192.23 868.48 125.13 216.24 62.86 89.93 1362.5 Tax Incidence (ZU 3.48 4.52 3.54 4.16 4.14 1.73 3.43 0.00 0.94 3.40 Table 2.1.2 Nominal Tax on Final Use of Imported Goods - Rs.Jillion, 19B0/18 Household Consumption Public Fixed Charnge in GRAND R-Bel R-Abv U-Bel U-Abv Total Consumption Investment Stocks Exports TOTAL 1. Foodgrains - 0.01 - - 0.01 - - - - 0.01 2. Other Food - 0.07 - 0.04 0.11 - - - - 0.11 3. Raw Materials - - - - - - 4. Consum. Manufac - 0.98 - 0.38 1.36 - - - - 1.36 5. Capital Nanufac - 0.29 - 0.14 0.43 0.24 8.27 - - 8.94 6. Other Hanufac - 0.90 - 0.38 1.28 0.39 0.50 - - 2.16 7. Coal & Lignite - - - - - - - - 8. Crude Petroleum - - - - - - - 9. Petroleum Prodcts - 1.37 - 0.65 2.02 0.66 - - - 2.68 10. Power - - - - - - - - - 11. Railways - - - - - - - 12. Other Transport - 0.02 - 0.01 0.03 - 0.02 - - 0.05 13. Construction - - - - - - - - - 14. Other Services - 0.01 - - 0.01 - 0.01 - - 0.02 Total for ALL Comod - 3.65 - 1.60 5.25 1.28 8.80 - - 15.33 Expend on INP(at mpi - 19.02 - 8.32 27.34 5.15 24.93 - - 57.42 Tax Incidence C!) - 19.19 - 19.23 19.20 24.85 35.30 - - 26.70 BEST COPY AVAILABW  -48- Table 2.1.3 Nominal Tax on Total Final Use - Rs.Billion, 1980(81 Household Consumption Public Fixed Change in GRAND R-Bel R-Ahv U-Bel U-Abv Total Consumption Investment Stocks Exports TOTAL 1. Foodqrains -2.31 -2.36 -0.42 -0.66 -5.75 -0.04 - - -0.11 -5.90 2. Other Food 0.04 0.17 0.01 0.10 0.32 - - - -0.32 - 3. Raw naterials - - - - - - - - 0.13 0.13 4. Consum. Hanufac 6.28 17.44 1.74 6.81 32.27 0.60 - - 1.22 34.09 5. Capital manufac 0.13 0.98 0.06 0.46 1.63 0.80 13.79 - -0.28 16.02 6. Other hanufac 0.38 2.77 0.16 1.17 4.48 0.9B 2.33 - 0.26 8.05 7. Coal & Lignite - 0.01 - 0.01 0.02 - - - - 0.02 B. Crude Petroleum - - - - - - - - - - 9. Petroleum Prodcts 2.18 2.24 0.29 1.06 5.77 0.66 - - 0.05 6.48 10. Power - 0.11 0.03 0.04 0.18 0.02 - - - 0.20 11. Railways - - - - - - - - - - 12. Other Transport 0.22 1.20 0.10 0.55 2.07 0.25 0.12 - -0.01 2.43 13. Construction - - - - - - -0.05 - - -0.05 14. Other Services 0.03 0.10 0.01 0.06 0.20 0.10 0.03 - -0.10 0.23 Total for ALL Comnod 6.95 22.66 1.90 9.60 41.19 3.45 16.22 - 0.84 61.70 Total Expend (at mp) 199.71 439.55 56.01 200.55 095.82 130.28 241.17 62.86 89.83 1420.0 Tax Incidence (I) 3.48 5.16 3.54 4.79 4.60 2.65 6.73 - 0.94 4.35 BEST COPY AVMA LE  -49- Table 2.1.4 Effective Tax on Final Use of Dorestic Products - Rs.Dillion, 1980/81 Household Consumption Public Fixed Change in GRAND R-Bel R-Abv U-Bel U-Abv Total Consumption Investment Stocks Exports TOTAL 1. Foodgrains 0.58 0.60 0.10 0.17 1.45 0.01 - -0.27 -0.02 1.17 2. Other Food 0.78 1.80 0.27 1.01 3.86 0.03 0.05 0.02 -0.10 3.86 3. Raw Materials - - - - - - - 0.05 0.29 0.34 4. Consue. hanufac 8.78 23.00 2.43 8.98 43.19 0.84 - 1.49 2.72 48.24 S. Capital Nanufac 0.28 1.42 0.13 0.65 2.48 1.32 11.38 1.63 0.45 17.26 6. Other Nanufac 0.74 3.64 0.31 1.53 6.22 1.17 3.56 3.42 2.47 16.84 7. Coal & Lignite 0.01 0.01 0.01 0.03 0.06 0.01 - 0.03 - 0.10 B. Crude Petroleum - - - - - - - 0.02 - 0.02 9. Petroleum Prodcts 2.42 0.96 0.32 0.45 4.15 - - 0.01 0.05 4.21 10. Power - 0.29 0.09 0.10 0.48 0.06 - - - 0.54 11. Railways 0.15 0.74 0.07 0.34 1.30 0.26 0.03 - - 1.59 12. Other Transport 0.74 3.98 0.34 1.83 6.89 0.84 0.33 - 0.36 8.42 13. Construction - - - - - 0.80 11.24 - - 12.04 14. Other Services 0.73 2.62 0.35 1.69 5.39 2.75 0.63 - 0.48 9.25 Total for ALL Couiod 15.21 39.06 4.42 16.78 75.47 8.09 27.22 6.40 6.70 123.88 Expend on DON(at op) 199.71 420.53 56.01 192.23 868.48 125.13 216.24 62.86 89.83 1362.5 Tax Incidence 11) 7.62 9.29 7.89 8.73 8.69 6.47 12.59 10.18 7.46 9.09 Table 2.1.5 Effective Tax on Total Final Use - Rs.8illion, 19801BI Household Consumption Public Fixed Change in GRAND R-Bel R-Abv U-Del U-Abv Total Consumption Investment Stocks Exports TOTAL 1. Foodgrains 0.58 0.61 0.10 0.17 1.46 0.01 - -0.27 -0.02 1.18 2. Other Food 0.78 1.87 0.27 1.05 3.97 0.03 0.05 0.02 -0.10 3.97 3. Raw Materials - - - - - - - 0.05 0.29 0.34 4. Coansuw. Nanufac 8.78 23.98 2.43 9.36 44.55 0.84 - 1.49 2.72 49.60 5. Capital Nanufac 0.28 1.71 0.13 0.79 2.91 1.56 19.65 1.63 0.45 26.20 6. Other Nanufac 0.74 4.54 0.31 1.91 7.50 1.55 4.06 3.42 2.47 19.00 7. Coal & Lignite 0.01 0.01 0.01 0.03 0.06 0.01 0.00 0.03 - 0.10 8. Crude Petroleum - - - - - - - - - - 9. Petroleum Prodcts 2.42 2.33 0.32 1.10 6.17 0.66 - 0.01 0.05 6.89 10. Power - 0.29 0.09 0.10 0.48 0.06 - - - 0.54 11. Railways 0.15 0.74 0.07 0.34 1.30 0.26 0.03 - - 1.59 12. Other Transport 0.74 4.00 0.34 1.84 6.92 0.84 0.35 - 0.36 8.47 13. Construction - - - - - 0.80 11.24 - - 12.04 14. Other Services 0.73 2.63 0.35 1.69 5.40 2.75 0.64 - 0.48 9.27 Total CALL ComAodit) 15.21 42.71 4.42 18.38 80.72 9.37 36.02 6.40 6.70 139.21 Total Expend (at up) 199.71 439.55 56.01 200.55 895.82 130.28 241.17 62.86 89.83 1420.0 Tax Incidence (O) 7.62 9.72 7.89 9.16 9.01 7.19 14.94 10.18 7.46 9.80 BEST COPY AVAIUBLE  -50- Annex 2.2 State Revenue Effort 2.2.1 As noted in the main text, State contribution to Plan expenditures are projected to fall vell below Sixth Plan targets. There is evidence however that the States Budgets have in fact done quite well in resource mobilization over the past decade, both in terms of the growth and buoyancy of revenues, and relative to the performance of the Central Government. The overall buoyancy of State revenues in constant 1970/71 prices was 2.0, compared to 1.6 for the Centre. 2.2.2 Each year the Central Government passes on to the States billions of rupees as their share of taxes collected by the Centre (Table A.2.6). These funds are made available to the States according to formulas set by the quinquennial Finance Commissions and in the context of the financial program determined at the time each Five Year Plan is approved. Such transfers are necessary in part because it has been decided by law that the States, for a variety of sound reasons, shall not have access to certain forms of taxation-specifically most forms of excise tax and taxes on foreign trade. Yet States have mandated obligations to provide a wide variety of social and economic services-the areas of "State concern". To cover this difference between access to sources of revenues and respon- sibility for expenditures, it is essential that transfers be made from the Centre to the States. The presence of such transfers thus does not per se indicate a weakness on the part of the States. 2.2.3 An examination of the States' own efforts at revenue generation indicates that on average they have turned in a creditable performance. Their own revenues grew in nominal terms from 1971 to 1983 by about 16X p.a., a rate almost exactly equal to the rate of growth of transfers from the Centre, and well in excess of the 12% nominal rate of GDP growth during the period. Revenues collected by the States through their own efforts during the 1970s increased from about 67Z of total State tax revenues (including contributions from the Centre) to about 71X. 2.2.4 In 1979/80 there was a notable discontinuity. Because of the awards under the Seventh Finance Commission, which increased substantially the volume of Central revenues shared with the States, the States' con- tribution dropped from over 70% to about 63% of total State revenues. But even in that year the share of taxes collected by the States as a percent- age of total tax collections actually rose slightly. Since then, the share of tax revenues from the State's own efforts has continued to rise and is now above the level in the early 1970s. 2.2.5 The main exception to the otherwise creditable performance of the States in raising resources lies in the State enterprises, particularly the State Electricity Boards, the irrigation authorities and Road Transport Corporations. This in turn has directly affected their ability to finance and execute investment projects in the Plan. However, the evidence presented here, combined with the more detailed data given ear- lier on the buoyancy of State revenue mobilization efforts, indicate that  -51- the States have done well in generating budgetary resources (and less well in generating resources at the enterprise level). It thus appears that the fact that State Governments are likely to fall about 50% short of the goals set in the Sixth Plan for "own resource" contribution to Plan expenditures, compared to a shortfall of only 1OZ-20% for the Central Government, reflects a combination of ambitious overall Plan targets for the States and insufficient resource mobilization efforts at the enterprise level.  Table 2,2.1: STATE GOVERNMENTS REVENUE PERFORMANCE, 1970/71-1982/83 1970/71 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 Re. Billion Tax Revenue 23.0 34.8 41.3 51.7 57.4 61.8 69.6 91.2 104.5 124.2 141.0 Own Efforts 15.4 23.1 29.1 35.7 40.5 43.6 50.0 57.1 66.7 81.3 94.3 From Centre 7.6 11.7 12.2 16.0 16.9 18.2 19.6 34.1 37.8 42.9 46.7 Income 3.6 5.3 5.1 7.3 6.5 6.8 7.1 8.7 10.0 10.4 11.3 Excise 3.9 6.3 7.0 8.6 10.3 11.2 12.4 25.3 27.7 32.3 35.3 Other .1 .1 .1 .1 .1 .2 .1 .1 .1 .2 .1 Non-Tax Revenues 5.4 7.1 7.8 9.7 11.8 11.8 13.4 15.0 15.8 17.5 20.4 Grants from Centre 6.2 9.9 10.6 12.9 16.2 19.6 26.4 24.1 28.0 28.8 32.5 Total Revenue _a 34.2 51.6 60.0 74.8 86.5 94.0 110.1 130.6 150.4 174.2 195.8 GDP 367.4 537.7 632.6 663.7 718.1 811.8 869.1 948.7 1,142.7 1,304.7 1,377.4 PERCENT OF REVENUES Tax Revenue 67.3 67.4 68.8 69.1 66.3 65.7 63.2 69.8 69.5 71.3 72.0 Own Efforts 45.0 44.8 48.5 47.7 46.8 46.4 45.4 43.7 44.3 46.7 48.2 From Centre 22.2 22.7 20.3 21.4 19.5 19.4 17.8 26.1 25.1 24.6 23.9 Income 10.5 10.3 8.5 9.8 7.5 7.2 6.4 6.7 6.6 6.1 5.8 Excise 11.4 12.2 11.7 11.5 11.9 11.9 11.3 19.4 18.4 18.5 18.0 Other .3 .2 .2 .1 .1 .2 .1 .1 .1 .1 .1 Non-Tax Revenues 15.8 13.8 13.0 13.0 13.6 12.6 12.2 11.5 10.5 10.0 10.4 Grants from Centre 18.1 19.2 17.7 17.2 18.7 20.9 24.0 18.5 18.6 16.5 16.6 Total Revenue .J 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 PERCENT OF GDP Tax Revenue 6.3 6.5 6.5 7.8 8.0 7.6 8.0 9.6 9.1 9.5 10.2 Own Efforts 4.2 4.3 4.6 5.4 5.6 5.4 5.8 6.0 5.8 6.2 6.8 From Centre 2.1 2.2 1.9 2.4 2.4 2.2 2.3 3.6 3.3 3.3 3.4 Income 1.0 1.0 .8 1.1 .9 .8 .8 .9 .9 .8 .8 Excise 1.1 1.2 1.1 1.3 1.4 1.4 1.4 2.7 2.4 2.5 2.6 Other .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 Non-Tax Revenues 1.5 1.3 1.2 1.5 1.6 1.5 1.5 1.6 1.4 1.3 1.5 Grants from Centre 1.7 1.8 1.7 1.9 2.3 2.4 3.0 2.5 2.5 2.2 2.4 Total Revenue pj 9.3 9.6 9.5 11.3 12.0 11.6 12.7 13.8 13.2 13.4 14.2 A/ Total revenues also includes minor miscellaneous transactions and adjustments. Source: Statistical Appendix Tables 5.2 and 5.3.  -53- Chapter 3 EXTERNAL RESOURCE MANAGENENT A. Introduction 3.1 India's external resource position has changed notably during the past five years. As a result of an accelerated development effort, expanded aggregate demand, adverse developments in world markets and, consequently, a growing external resource gap, India's external reserves have fallen from 9 months of imports in 1978/79 to just over 4 months at present. India has also increased its use of foreign savings from negligible levels to over 2% of GDP. This chapter examines recent developments on the current and capital account of the balance of payments, then looks at future prospects in terms of alternative growth objectives and related policy options. B. Recent Trends in the Current Account 3.2 The balance of payments improved in 1983/84. The trade deficit declined from US$6.2 billion in 1982/83 to US$5.9 billion, and the resource balance declined from US$5.3 billion to US$5.1 billion (Table 3.1). The current account deficit increased slightly to US$3.9 billion but fell as a percentage of GDP from the previous year and now stands at 2.1Z. The nominal current account deficit increased slightly because of lower current transfer receipts and a larger net outflow uf investment income due to larger amounts of interest on the debt which has built up over the past several years and a decline in interest earnings on the reduced reserve levels. 3.3 Imports. One major factor in the decline of the trade deficit con- tinues to be the lower net import bill for petroleum, which dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84. The rapid increase in the domestic production of petroleum over the past three years has so far been one of the most successful features of India's structural adjustment program. Reinforced by the continuing decline in international oil prices, this has brought about a substantially lover dependence on petroleum imports. In 1983/84 the value of petroleum imports (net of crude exports) declined to 24Z of the total import bill as compared to 32% in 1982/83 and more than 40Z in 1980/81. Contributing to this decline bave been the swap arrangements whereby India exports some domestically produced crude petroleum and imports crude and products in a mix more suitable to domestic requirements and present refining capacity. This year exports have totalled almost US$1.5 billion. 3.4 The drought in 1982 led to a sharp fall in fertilizer demand and accumulation of stocks. As domestic production bad risen sharply, the Government reduced imports of fertilizers to US$281 million in 1982/83, which was less than half the previous year's level. The rapid increase in fer- tilizer consumption in 1983/84, accompanying the record agricultural performance, combined with a fall in domestic production, has led to an  -54- Table 3.1 BALANCE OF PAYIIENTS (US $ Million) Actuals Estimates 1980/81 199I/82 1982/93 1983/94 EXPORTS(f.o.b - excIdg.crude) 8504 8519 9001 9466 Primary (excldg. crude) 2841 2573 2453 2519 Manufactures 5663 5946 5548 5947 IMPORTS (c.i .f) -16204 -15500 -14249 -14412 Edible Oils -865 -700 -235 -619 Fertilizers -1037 -793 -281 -642 Iran & Steel -1080 -1349 -1190 -45 Non-ferrous metals -605 -445 -290 -393 P.O.L (Net of Exportsl -6672 -5590 -4613 -3395 Others -5945 -634 -7640 -8468 TRADE BALANCE -7700 -6981 -6248 -5946 Non-factor Services Exports 2890 2669 2523 2643 Imports -1515 -1695 -1583 -1797 RESOURCE BALANCE -6335 -6007 -5309 -5090 Investment Income (net) 600 286 -415 649 Current Transfers 2771 2319 1949 1790 (Meo Item: Net Invisibles ) 4736 3578 2374 1998 CUMET ACCOUNT DULANCE -2964 -3403 -3874 -3948 CDNCESSIDNAL AID fnet) 1634 1456 1771 1560 of which: Gross Disbursements 2139 1957 2310 2093 Repayments -504 -501 -539 -533 EDIUM & LONE-TERM DORROIIN6 (net) 318 441 614 973 of which: Gross Disbursements 514 613 776 1223 Repayments -196 -172 -162 -250 I.M.F CREDIT (net) 1035 690 1980 1295 CAPITAL, n.e.i -368 -1592 12 1039 of which: ton-resident Deposits 0 96 466 750 CHANE IN RESERVES l- increase) 345 2398 -503 -919 RESERVE LEVEL (end of year) 6859 4461 4964 5883 Memo items: CurBalIGDPmp (1) 1.8 2.0 2.3 2.1 D.S.R. IU) 7.1 7.6 10.1 12.9 BEST COPY AvAIUBLE  -55- increased volume of imports, more than double the volume in 1981/82 but still below 1980/81. In the case of edible oils, the Government increased imports in 1983/84 to supplement stocks which had been depleted due to the drought; this year's record oilseeds outlut, vhich comes onto the market towards the end of the year, should have a moderating effect on imports in the following years. 3.5 The restructuring of steel output following the decontrol of steel prices implemented in 1982 has been especially effective in increasing production of cold-rolled sheets, which had been in short supply. Measures adopted this year to reduce excess stocks of saleable steel through price reductions, including the supply of certain items at international prices to valid import license holders, have succeeded in reducing iron and steel imports by nearly 25Z in 1983/84. Imports of non-ferrous metals, on the other hand, have increased this year mainly due to the current aluminum shortage, reflecting increased demand from the power sector. 3.6 While the bulk import items, taken together, showed no growth in volume terms during 1983/84, total imports are estimated to have grown by 7Z, implying a continued substantial volume growth (14.5Z) in "other" imports (Table 3.2). "Other" imports since 1979/80 are estimated to have grown by 17Z per annum (16Z if foodgrains are excluded from this category). Table 3.2: ANNUAL GROWTH RATES OF IMPORTS, 1981/82-1983/84 (Z p.a.) Volume Growth Valije Growth (US dollars) 1981/82 1982/83 1983/84 1981/82 1982/83 *1983/84 POL (Net) -18.8 -13.1 -14.9 -16.2 -17.5 -26.4 Fertilizers -6.0 -56.3 115.3 -24.5 -64.1 128.5 Iron & Steel 56.2 - -13.2 -27.7 24.8 -11.7 -24.8 Non-ferrous Metals -22.8 -33.4 39.9 -26.4 -34.8 35.5 Edible Oils -27.3 -65.5 166.8 -19.1 -66.4 16..4 "Other" Imports a/ 17.2 17.5 14.5 11.6 15.2 10.8 Total -0.4 -5.1 7.0 -4.3 -8.1 1.1 a/ Including foodgrains. 3.7 Exports. During the 1970s, India's export volume growth did reach an average annual rate of 7.3Z (Table 3.3), and from 1972/73 to 1976/77 India achieved a 10.2% per annum export volume grovth. After suffering a 3.4X volume decline in 1977/78, exports recovered during the next two years with annual rates of growth at 7.1Z and 10.6%, respectively. Growth during this period was particularly strong in non-traditional categories, such as clothing, gems and jevelry, engineering goods, chemicals, and handicrafts,  -56- reflecting the heterogenous nature of India exports and the diverse base for future growtb. As shown in Table 3.3 India achieved this growth at a time vhen industrial market economies were increasing their imports at only 4.4% in volume terms with associated GDP grovth of about 3.2% per annum. Table 3.3: AVERAGE ANNUAL GROWTH OF WORLD IMPORTS AND GDP, 1970-80 (in %) Import Volume Real GDP Industrial Market Economies 4.4 3.2 Low Income Economies 3.1 4.6 Middle Income Economies 4.2 5.6 Oil importers 3.8 5.6 Oil exporters 8.9 5.5 Memo: Indian Export Growth (1970-80): 7.3% Source: World Development Report. 1982. Indian export performance based on Directorate General of Commercial Intelligence and Statistics (DGCIS) volume indexes. 3.8 Despite volume growth of Indian exports which was greater than average world-wide import volume growth, India's share of world exports in value terms declined from 0.7% in 1970 to 0.4% in 1980, primarily a result of the oil price increases during the 1970s (Table 3.4). Indeed, India's share of total world exports to each of the four major country groups, namely industrial countries, oil exporters, other developing countries and centrally planned economies, fell during this period. The direction of Indian exports also changed, so that the sbare going to oil exporters nearly doubled, the shares to industrial countries and developing countries remained essentially the same, and the share to centrally planned economies declined substantially. Since 1980 India's share in world exports has changed very little. Preliminary data for 1983 indicate a small increase to just over 0.4% in the Indian share of imports by industrial countries (net of petroleum). This is encouraging as an indication that India's exports to this market are able to grow at greater than average rates even at a time of near stagnation in world trade. India's share in total non-oil LDC exports to industrial countries has followed a similar pattern, declining during the 1970s and stabilizing since 1980. In 1970 India accounted for 3.7% of non- oil LDC exports to industrial countries, falling to 3.1Z in 1975 and 2.5% in 1980. India's share fell slightly in 1981 and 1982 but increased in 1983 to just over 2.5Z.  -57- Table 3.4: INDIAN TRADE IN THE WORLD CONTEXT Market Other Industrial Oil Developing Countries Exnorters Countries CPEs Total Indian Share of World Exports 1970 0.50 1.45 0.84 3.49 0.72 1975 0.36 1.35 0.58 1.84 0.55 1980 0.32 0.76 0.39 1.64 0.41 1981 0.38 0.67 0.39 1.65 0.45 1982 0.36 0.66 0.40 1.55 0.43 Direction of Indian Exports 1970 54.9 6.5 19.2 19.4 100 1975 47.9 17.2 17.7 17.2 100 1980 53.1 12.6 21.0 12.7 100 1981 55.6 12.2 19.9 11.8 100 1982 55.0 12.6 21.1 11.3 100 Share of total increment in Indian Export value 1970-75 41.8 26.4 16.5 15.2 100 1975-80 61.1 6.4 25.7 6.8 100 Source: INF, Dire-tion of Trade, 1983 Yearbook. Note: 1982 data are net of Indian petroleum exports. 3.9 The direction of export growtb changed during the 1970s, as can be seen in the comparisons of contributions to incremental value during the two halves of the decade. Between 1970 and 1975 the oil exporters imported a larger share of India's incremental exports than they had in the past. During the second half of the 70s, however, increased exports to industrial economies and non-oil developing countries accounted for over 85Z of India's total export growth. 3.10 Export growth since the beginning of the 1980s has declined substan- tially (Table 3.5). Volume growth was actually negative in 1980/81 and 1982/83, and the average annual growth rate since 1980/81 has been only 1.3Z (on an end-point basis). This reflects in part the general downturn in world-wide economic activity over these four years and the resulting increased competition with other suppliers, but poor export performance has  -58- resulted from internal factors as vell. As documented in previous Economic Reports, export production has suffered from the severe infrastructural bottlenecks and input shortages which affected the entire economy in 1979-81. These problems included (a) inadequate and erratic power supplies, (b) tran- sport and shipping delays, and (c) unavailability of steel and other key rav materials. While infrastructural constraints on export production have eased somewhat in recent years, power shortages and port congestion continue while teleconmunications problems have worsened. Increased efforts to alleviate these problems (as discussed in Chapters 8 and 9) will pay extra dividend in terms of enhanced export opportunities. 3.11 Exports of primary products, discussed in paragraphs 3.13-3.17 below, were characterized by high variability across commodity lines in both produc- tion and demand during 1983/84. The estimated volume increase for primary goods exports in 1983/84 is virtually the same as in 1982/83 at 2.6%. Manufactured exports sbowed strong growth during 1983/84 (Table 3.5), increasing by an estimated 10.8% in volume terms as compared with a drop of 4.8% in 1982/83. The value of manufactured exports increased by US$400 million after a fall of the same magnitude the previous year. Exports of manufactured products have shown strength at a time when world conditions are only just beginning to recover and despite the lower levels of USSR purchases on its bilateral rupee account. Total export volume growth in 1983/84 is estimated to be 8.2% compared to the volume decline in 1982/83 of 2.6Z. Table 3.5: EXPORT VOLUME, 1980/81-1983/84 1980/81 1981/82 1982/83 1983/84 Primary Goods -2.5 -6.1 2.7 2.6 Manufactures -5.5 10.3 -4.8 10.8 Total Exports -4.5 4.8 -2.6 8.2 3.12 Primary Exports. The detailed breakdown in Table 3.6 of exports by value and volume over the period since 1980/81 shows that the volume of most primary exports declined during 1983/84. For the second year cashew exports have declined due to lower offtake by the USSR, wbich has also adversely affected prices. The volume decline in coffee exports of 7% follows reduc- tions in the quota set by the International Coffee Organization, which fell from 57 thousand tons in 1981/82 to 38.7 thousand tons in 1983/84. Sales to non-quota countries, primarily the USSR, were also slow during the first part of the year.  -59- Table 3.6: VALUE AND VOLUNE OF INDIAN EXPORTS (Quantities in '000 tons; values in US$ millions) Actual_ Estimates Projected 1980/82 1981/82 1982/83 1983/84 1984/85 Q V Q V Q V Q V Q V Cashews 33 179 32 209 30 137 26 120 30 151 Coffee 89 273 84 187 84 211 78 176 80 185 Tea 232 551 223 453 196 385 190 460 200 520 Marine Products 76 298 70 320 78 375 85 353 85 365 Oil cakes 1566 225 1468 178 1385 159 1410 235 1500 270 Sugar 72 46 i54 55 500 88 900 221 900 297 Spices 84 141 68 103 75 96 70 108 75 119 Rice 727 284 866 396 530 243 200 123 400 252 Tobacco 84 171 107 217 94 212 90 206 95 218 EPS 59 80 24 31 30 37 25 30 50 64 Cotton 144 224 32 40 70 104 93 149 50 84 Total Agriculture 2472 2189 2047 2181 2525 Iron Ore 22500 369 23000 384 21800 406 19000 338 22000 361 Total Primary 2841 2573 2453 2519 2886 Basic Chemicals 354 341 320 324 360 Chemicals and Allied 220 235 241 250 270 Textiles 660 598 622 686 730 Jute Manufacture 415 268 210 202 205 Leather 477 466 415 417 435 Engineering 1108 1187 1298 1358 1510 Handicrafts 453 403 360 377 410 Gemns & Jewelry 814 919 1068 1324 1410 Clothing 654 750 654 686 725 Other manufactures 508 780 359 322 400 Total Manufactures 5663 5947 5547 5946 6455 Total gxports 8504 8520 8000 8465 9341  -60- 3.13 The quantity of tea exports declined as a direct result of the Government's export ban imposed in December 1983 on all CTC (cut, tear, curl) tea aS a measure to insulate the domestic market from international price increases. Tea price increases in the world market this year reflected efforts to rebuild tea stocks, which had fallen to low levels, in an environ- ment of stagnating world production and the partial withdrawal of Sri Lanka from the market. With these higher world prices, India's exports this year will be US$75 million greater than last year despite the ban. 3.14 Other commodities experiencing export volumes declines were tobacco (orders from the USSR, China and the EEC were down); spices (the cardamon crop was seriously affected by drought during the blossoming season, and prices for other Indian spices remain above world prices); and BPS groundnuts (also affected by drought). While 200 thousand tons of basmati rice have been exported this year, India became a net importer of rice in 1983/84 as 570 thousand tons of rice were imported from neighboring countries to curb speculation during the pre-harvest season while marginally easing the short supply of rice in the public stocks. 3.15 Growth in oilcake exports is attributable to increases in deoiled rice bran, soybean extractions and minor oilcakes (primarily rapeseed). Exports of groundnut cake continue to be affected by toxicity problems and are thus not widely accepted on the world market. Detoxification procedures are being developed, but until these become fully operational, groundnut cake exports are in no position to regain the level they had in 1976/77 when US$184 million and 1.2 million tons were exported. At present groundnut extractions exports stand at about US$50 million. Marine products recorded a volume increase but a value decline due to the falling price of shrimp in the Japanese market. Cotton should record an increase in both volume and value in 1983/84, but the potential for further cotton exports of long-staple cotton has been hindered by production shortfalls due to untimely rains. The Government's imposition of an export quota of 44 thousand tons has kept India from maintaining a significant presence in the world export market just at a time when demand has begun to increase. 3.16 The volume of sugar exports recorded the most significant jump, from 500 thousand tons in 1982/83 to 900 thousand tons in 1983/84. Exports, which are canalized through the State Trading Corporation (STC), currently require budgetary support since domestic prices have remained substantially higher than world prices. Negotiations are now underway concerning future quotas under the International Sugar Agreement and may result in some increase of India's international export quota, which in 1983 stood at 650 thousand tons. The quota, which bad been as high as 825 thousand tons, was lowered in 1979 because of India's inability to deliver the allotted tonnage. 3.17 Manufactured Exports. Indian exports of manufactured goods rose by US$400 million in 1983/84 (by 7.2X in value terms and 10.8% in volume terms). The star performer was cut and polished diamonds (over 90% of the category of gems and jewelry), which grew from US$1,068 million to US$1,324 million and  -61- accounted for 55% of the increase in total exports. This reflects another instance where a single item in India's heterogenous export basket has raised the aggregate substantially. The other major contributors to total value growth were textiles and engineering goods (Table 3.7). 3.18 The strong performance of gems and jewelry exports during the past four years of global recession is explained in large part by the fact that the Indian industry specializes in diamonds at the lower end of the quality and size market. This part of the market bas actually grown during the recession as consumers in the West (the United States in particular) have become more cost conscious. Exports of gold jewelry have also expanded, particularly to the Middle East which has become a major market for tradi- tional Indian jewelry. The recent reversion to earlier policies regarding replenishment of gold used in jewelry exports should provide a boost to this activity. Table 3.7: GROWTH OF MANUFACTURED EXPORTS, 1983184 Estimated Percent Contribution Product Volume Growth to Total Value Growth Total Primary Goods 2.6 14.2 Basic Chemicals 4.7 0.9 Chemicals and Allied 7.4 1.9 Textiles 13.9 13.8 Jute -0.4 -1.7 Leather 3.8 0.4 Engineering Goods 8.1 12.9 Handicrafts 8.0 3.7 Gems and Jewelry 28.0 55.1 Clothing 8.4 6.9 Other Manufactures -7.3 -8.0 Total Manufactures 10.8 85.8 Source: World Bank estimates. 3.19 Textile and clothing exports have also begun to pick up again after poor performance in the 1982/83. The most rapid growth has been in the quota-constrained sales to the United States. The other major export category which along with gems and jewelry has performed well throughout the first half of the decade is engineering goods. Their average annual volume growth since 1980181 has been 10.72, and in 1983/84 engineering goods con- tributed 13% to the total export value increment. This year growth has been in exports of plant and equipment for production of sugar, cement and chemicals; heating and cooling equipment, fabricated steel structures;  -62- sanitary castings and other miscellaneous manufactures. Good performance in 1983/84 occurred in spite of a fall of $85 million in sales to the USSR (now down to about US$100 million per year) and despite a downturn in total world- wide exports of engineering goods. 3.20 Chemical exports reached previous years' l2vels in 1983/84 due to increased demand for naphtha from Japan, Singapore and Taiwan. Naphtha exports had been virtually nil in 1982/83 but will reach over US$100 million in 1983/84. This reflects the emergence of an exportable surplus of naphtha as a by-product of increased refining capacity. L/ Exports are one viable alternative, depending on the economic justification of increasing naphtha- based value added export products or using this product for efficient import substitution (e.g. fertilizer). The increase in naphtha exports offset the Soviet Union's lower purchase of soaps, detergents and cosmetics, exports of which had exceeded US$100 million in 1982/83 but may only reach one-third of that in 1983/84. 3.21 Manufactured jute exports decreased from US$210 million in 1982/83 to US$202 million in 1983/84. Jute export depends heavily on demand for carpet- backing in the United States which in turn is directly related to new housing starts. The Indian jute industry has only just begun to feel the effects of increased US construction activity. Indian jute exports are also affected by price competition with Bangladesh suppliers and with synthetic carpet-backing and sacking industries in other parts of the world. Prices for competitive synthetics continue at low levels, and as long as the Indian jute industry remains inefficient and fails to modernize, the prospects are for continued export decline. 3.22 Invisibles. The contribution of net invisibles (factor and non- factor earnings plus current transfers) to India's balance of payments was very significant in the late 19709, but declined in importance after 1980/81 and continued to decline in 1983/84. The invisibles account since 1980/81 is summarized on Table 3.1, and presented in more detail on Annex Table A.3.1. Net non-factor services remained at US$1 billion as in the past two years, mainly due to the stagnation in tourist traffic. In addition to the reces- sionary conditions in the developed countries and the rise in international air fares, recently increased visa requirements may also have compounded the disincentives to potential tourists. Factor service payments consist largely of interest payments and receipts. Interest earnings on reserves, which amounted to US$900 million in 1981/82 but fell sharply thereafter due to the decline in both India's reserve level and international interest rates, are estimated to be US$500 million in 1983/84. At the same time, interest pay- ments have increased substantially due primarily to higher interest payments to the DHF, which amounted to US$300 million this year. While current trans- fers by non-resident workers have steadily declined after 1980/81, there has jj Similar fluctuations in naphtha exports occurred in the mid-1970s.  -63- been a rising trend in savings transferred to Tadian banks under the various non-residents' deposit schemes with attractive interest rates (Section C). 3.23 Terms of Trade. The terms of trade moved in India's favor this year. Prices of merchandise exports measured in US dollars declined by 2.5% while import prices fell by 5.5Z. The price of India's import basket continues to be helped by stable or declining petroleum prices, though the fall in prices of both imports and exports also reflects the decline in the dollar prices of trade in manufactured goods, as measured by the World Bank's unit value index of OECD exports of manufactures (MUV Index). C. Recent Trends in the Capital Account 3.24 To finance the substantial current account deficits over the past four years, India has relied on a mixture of concessional aid, the INF Extended Facility, official assistance and other medium and long-term capital flows at market terms. In addition to these, recent policy changes have encouraged several other sources of capital inflows including the non- resident deposit scheme and, to lesser degrees, equity participation in Indian companies by non-resident Indians and increases in direct private foreign investment. 3.25 Historically, concessional aid has been the major source of external finance for the Indian economy. Total concessional aid disbursements this year declined slightly from US$2.3 billion in 1982/83 to US$2.1 billion, primarily because of a slowdown in disbursements of IDA projects. IDA dis- bursements which had been over US$1.1 billion last year were only US$874 million in 1983184. Grant commitment levels which had risen in recent years fell in 1983184 (Table 3.8). Disbursements of grants, estimated to be US$619 million this year, have been falling steadily from the 1980/81 level of US$800 million. This may reflect greater commitments of tied grants, which tend to disburse more slowly than untied assistance. 3.26 Non-concessional medium and long-term borrowings primarily come from the IBRD and the international capital markets, and to a lesser extent from official bilateral sources (mostly official export credits) and private suppliers credits. Disbursements on IERD-financed project loans were about US$470 million this year, more than double the amount just three years ago. As the project pipeline develops further and as the higher commitment levels over the past three years translate into higher disbursements, the relative importance of IBRD as a source of finance will also increase. 3.27 Over the past four years officially-guaranteed borrowing from the international capital market has totalled almost US$5.3 billion, mostly for public sector projects in the fields of oil exploration and extraction, steel, aluminum and shipping. Benefitting from the high proportion of out- standing debt from concessional sources and the resulting low debt servicing burden, the terms for these market borrowings have been very favorable, with floating interest rates at quite low spreads over prevailing Euro-dollar  -64- rates. Private, non-guaranteed market borrowings are also increasingly important. These have generally been project-related, totalling about US$750 million over the past two years. In January 1984 the Government restricted further private borrowings on the international capital market, at least through the end of 1983/84, in order to encourage fuller utilization of ICICI and IDBI financing, both of which had lendable foreign exchange resources on hand. Table 3.8: CAPITAL COMMITMENTS (US dollars million) 1980/81 1981/82 1982/83 1983/84 (Est.) IDA a/ 1,281 900 1,063 961 Bilateral Concessional Loans 1,465 837 650 575 IFAD & OPEC 68 0 55 53 Grants 404 570 732 600 Total Concessional 3.218 2.307 2.500 2.189 IBRD al 430 1,265 1,088 1,086 Bilateral Non-Concessional 42 16 8 8 Private Suppliers' Credits 123 375 250 280 Private Commercial: Guaranteed b/ 1,200 950 1,848 1,298 Non-guaranteed O n.a. n.a. 358 400 Total Non-concessional 1.795 2.606 3.552 3.072 GRAND TOTAL 5.013 4.913 6.052 5.261 a/ On the basis of the World Bank's fiscal year (July-June). b/ World Bank estimates. 3.28 The EFF of the International Monetary Fund has been a significant source of capital since India's program began in November 1981. SDR 3.9 billion (approximately US$4.3 billion) will have disbursed by the end of April 1984. In January 1984, India announced that it would not utilize the remaining SDR 1.1 billion. Repayments begin in 1984/85 and will continue through 1993/94. 3.29 The increasing diversity in sources of BOP financing has directly resulted from policies initiated by the Government over the last few years. The non-resident deposit scheme, whereby attractive interest rates payable in foreign exchange are offered on time deposits of hard currency, has attracted approximately US$1.3 billion in three years. Although new inflows under this scheme are projected to decline next year since original deposits probably reflected portfolio shifts and since the current high interest rate differen- tial may be hard to maintain, this source of finance should still be  -65- substantial. Lesser capital inflows have resulted from liberalized regula- tions governing purchases of equity in Indian enterprises by non-residents and non-resident companies. At present non-residents can acquire up to 5% of total equity in Indian companies. Indian companies are, however, reluctant to participate in this scheme since even this small amount of foreign owner- ship could destabilize existing management. It remains to be seen whether the scheme can eventually attract significant amounts of capital. Direct private foreign investment in India continues to be allowed subject to the 40% limit except in some high technology and export-oriented sectors. The amounts involved, however, remain very small, totalling around US$150 million over the past several years. D. Exchange Rate Movements 3.30 One indicator of India's export profitability and competitiveness in the world market is the real effective (export trade-weighted) exchange rate (REER index on Graph 3.1). From 1970 until 1979 the real exchange rate depreciated by an annual average of over 3%. During the first half of the decade this resulted from the depreciating nominal effective rate which more than offset deteriorating relative prices (i.e. greater inflation in India than in its major trading partners). During the latter half of the decade both nominal depreciation and higher relative prices abroad contributed to the real depreciation. Since 1979, however, the nominal rate has held fairly constant. When coupled with higher inflation in India relative to its trad- ing partners during 1980 and 1981, this led to a steady appreciation of the REER, averaging almost 6% per year. 3.31 Following a 2% real depreciation during 1982, the real exchange rate has appreciated substantially during the first nine months of 1983 (Graph 3.2). The index began to appreciate in February, a trend which reversed in September but not before resulting in a 9% appreciation. This was primarily caused by higher relative prices in India than abroad since relative prices increased by 7% over the period while the nominal exchange rate appreciated by 2%. Prices in India normally increase relative to world prices during February to September, reflecting seasonal increases in the prices of agricultural and consumer products, but the 7% rise during 1983 was greater than usual. Real depreciation of the rupee amounting to about 2% occurred during the last quarter of 1983 as a result of a steady though modest improvement in the relative price index during these months. For 1983 as a whole the real effective exchange rate appreciated by 2.5 percent. 3.32 The real effective exchange rate may be adjusted to take into account net export incentives, resulting in a more meaningful index of relative profitability and competitiveness. As can be seen on Table 3.9, the various export incentives such as CCS, duty drawbacks, and premia on import replenishment licenses have all increased since 1980/81 while export tax collections have fallen somewhat, thus allowing net incentives to increase both in value terms and as a percent of total exports. When the REER is thus adjusted for incentives, there was a small increase in the profitability of  -66- Graph 3.1 NOMINAL AND REAL EFFECTIVE EXCHANGE RATES. 1970 - 19E. USNG M9aC-=2 EXPORT WEIGHTB 9 I 9 - c -- . II. r-. In G3raph 3.2 NOM INAL AND REAL EFFECT IVE EXCHANGE RATES USUIC 19SC-32 FCitT %WE1G*f _ _. c~>I I , 0- U. I~ . ... . . . . - j V J S N J M U J 5 N J U M i S N J M OA J S N1 ?BBC t J1 11932 i*33 Note: Upward movement in the excbange rate indexes means a depreciation of the currency. Upward movement in the relative price index means hightr price increaseP abroad than ina India. BT CP A =~~~~~ET uyAAUL  -67- Indian exports during 1981/82 and 1982/83. During the first 9 months of 1983/84, however, the adjusted exchange rate index declined despite the increase in net incentives. For the year as a whole, this index is likely to remain below its level during 1982/83 since this year's increase in incen- tives is not enough to offset the real effective appreciation. Table 3.9: NET INCENTIVES TO EXPORTERS AND THE ADJUSTED REAL EFFECTIVE EXCHANGE RATE (Rs million) Actual Actual 1983/84 1980/81 1981182 1982/83 (est.) Cash Compensatory Support 3,760 4,520 4,490 4,950 REF Premia 711 882 982 1,102 Customs Duty Drawbacks 1,011 1,260 1,350 1,400 Export Taxes 1,176 612 680 708 Net Incentives 4,306 6,050 6,142 6,744 Real Effective Exchange Rate aI (1980/81=1) 1.000 0.989 1.001 0.962 kf REER Adjusted for Incentives 1.000 1.011 1.024 0.984 / a/ This index is based on units of foreign exchange per rupee. h 1983/84 exchange rate indexes based on April through December only. 3.33 Indian exporters continue to report intense competition from other Asian suppliers of manufactured exports. In this regard cross-country com- parisons of competitiveness can be made between India and other competitors using real effective exchange rate calculations to take into account relative price and exchange rate movements (Table 3.10). Caution should be taken, however, when interpreting these results since wholesale/producer prices across countries have different coverage, and correlations with the prices of traded goods vary. Over the period since the beginning of 1980, the Korean won appreciated somewhat during 1981 and 1982, but over the last year has depreciated by 4Z on a real basis and now remains at the same level as four years ago. Similarly, the Japanese yen has fluctuated over the past four years, though in the past year it has depreciated to some extent on a real basis and also is virtually at the same level as the beginning of 1980. Comparing the depreciation of these currencies with the Indian rupee's appreciation during the past year-which has placed the rupee index at its lowest level in the past four years-indicates at least one of the reasons that Indian exporters have sensed more intensive price competition in recent years.  -68- Table 3.10: COMPARISONS OF QUARTERLY REAL EFFECTIVE EXCUNAGE RATES al (Q1 1980 1) Korea Japan India 1980 Ql 1.000 1.000 1.000 Q2 0.975 0.937 0.980 Q3 1.013 0.913 0.923 Q4 1.035 0.885 0.933 1981 Ql 1.015 0.873 0.936 Q2 0.961 0.920 0.899 Q3 0.926 0.947 0.900 Q4 0.954 0.943 0.965 1982 Ql 0.958 0.973 0.966 Q2 0.966 1.009 0.961 Q3 0.960 1.048 0.917 Q4 0.957 1.048 0.933 1983 Ql 0.987 0.975 0.963 Q2 1.010 0.988 0.924 Q3 1.002 1.003 0.889 Q4 1.048 0.979 0.907 a/ This index is computed as the real effective exchange rate, export- weighted, for each country. The exchange rate is defined as the domestic price of foreign currency. Thus a rise represents a depreciation of the d^!='stic currency and vice versa. E. Determinants of Export Performance in Manufactured Goods 3.34 The deterioration of India's export performance during the 1980s must be reversed if India is to maintain a more open economy with its attendant benefits of faster growth and greater efficiency. Trade policy measures to achieve this objective have been discussed in previous World Bank reports; but it is increasingly apparent that exports cannot be treated in isolation from the domestic economy. In most sectors, and indeed for most firms, exports constitute the marginal portion of output, giving rise to con- siderable instability in performance as exportable surpluses rise and fall. The implications of this situation for agricultural exports are discussed in the following section. For manufactures recent economic and sector work provides further evidence on the linkages between exports and domestic industrial characteristics and policies.  -69- 3.35 Two measures of export performance, the trend rate of growth and the variation around that trend, jJ have been calculated for over 50 manufactur- ing sectors during the decade 1968/78. 2/ By matching these sectors with the input-output classifications it is possible to correlate export performance with various industrial characteristics (Table 3.11). 3/ The results strongly suggest a relationship between production characteristics and export growth. Manufacturing sectors with high value added were characterized by significantly more rapid export growth. High value added exports either reflect investments in efficient processing of indigenous and therefore relatively cheap raw materials (e.g. leather products) or capitalize effi- ciently on India's large pool of relatively cheap and skilled manpower using either imported or indigenous raw materials (e.g. diamond polishing). During the 1970s high-value added exports found relatively greater demand in industrial country markets. 3.36 In contrast, exports from manufacturing sectors with high backward linkages in the economy (both direct and indirect) grew significantly less rapidly. This correlation may reflect both compounded technical inefficien- cies as well as the cost escalations inherent in India's indirect tax structure. As indicated in Chapter 2 (para. 2.27), these costs are not adequately reimbursed by the Cash Compensatory Support (CCS) scheme. The relationship between imported inputs and export performance must be inter- preted witb care as import coefficients bave been quite unstable in India and those used in this exercise were estimated just after the first oil price shock when the range and extent of non-petroleum imports was abnormally compressed. Bearing in mind this qualification, these data indicate that while imported input intensity is not associated with export growth, it is significantly associated with instability--a very plausible indication of the effects frequent changes in quantitative import restrictions. Unfortunately it is not possible to analyze in this framework the impact of the rationalization of India's import policy which only took effect in jI As measured by the standard error of the estimate of the trend. ,/ This section draws heavily on results presented in James Riedel, Chris Hall, Roger Grawe, "Determinants of Indian Export Performance in the 1970s", draft mimeo, World Bank, 1983 and Weltwirtschaftliches Archiv, forthcoming. 2/ It would be emphasized that the results reported in Table 3.11 are simple correlations and do not take into account interactive effects or indicate causality.  -70- 1978179. However less rigorous evidence does suggest an increased utiliza- tion of imports by exporters since 1978. Il Table 3.11: CORRELATION BETWEEN MANUFACTURES EXPORT GROWTH AND VARIABILITY AND SELECTED INDUSTRIAL CHARACTERISTICS (1968-1978) (simple correlation coefficients) Growth Variabilitv Production Current Constant Current Constant Characteristics Prices Prices Prices Prices Value added/output .424*** .512*** -.027 -.014 Backward Linkage -.403*** -.480*** -.008 -.008 Imported inputs/output .063 -.013 .349*** .329** Rail & Transport Dependence -.359 -.416*** .224 .219 Electricity & Utility Dependence -.258* -.403*** .254* .137 Note: The critical values of the correlation coefficients at the 1(***), 5(**), and 10 * percent levels of significance are .354, .273 and .230. Source: Riedel, et.al. op cit. 3.37 Another important characteristic associated with slower export growth is dependence on infrastructure services, botb transport and pover. This finding reinforces the results of an informal survey of engineering exporters reported three years ago which emphasized in particular the importance of power constraints in explaining poor performance in 1980. ./ There is also a weak relationship between power dependence and export instability. Based on countrywide averages, this relationship suggests in fact very significant microeconomic effects of power constraints. 3.38 Using the same body of data, time-series analysis confirms the impor- tance of domestic factors in determining export orientation within the manufacturing sector. Most important during the 19709 was domestic profitability. Those subsectors for which output prices had increased rela- tively faster than a weighted average of input costs had significantly lower export orientation; similarly those sectors for which an index of domestic jj ICICI, Financial Performance of ComDanies, various issues; and World Bank Report #4395-IN, Economic Situation of India and Resource Mobilization Issues, April 11, 1983. 3] World Bank Report #3401-IN, Economic Situation and Prospects of India, April 15, 1981.  -71- demand was high relative to production also were less oriented toward exports. In contrast, the relative domestic/international price (which incorporates the effect of the exchange rate) was a significant determinant of export orientation for relatively few categories of manufactures. Significantly, however those categories which were influenced by relative prices were the ones in whicb, a priori, one would expect India to have a strong comparative advantage: labor-intensive engineering products, garments, printing, handicrafts, leather and miscellaneous manufactures (including gems and jewelry). The implication is that while attention to relative prices tbrough appropriate exchange rate policy may have less impact than domestic factors on many of India's manufactures, the subsectors for which relative prices are important are precisely those which could produce India's most efficient and dynamic exports. 3.39 Recognizing these strong linkages between exports and the domestic economy and the clear need to improve manufactures export performance, recent investigations of industrial subsectors have further documented how key elements of industrial policy such aS small-scale reservation, HRTP and FERA restrictions, and constraints on technology inputs have discouraged better export performance. The major finding with respect to light engineering products is that this policy environment has so reduced competitive pressures in the domestic economy that producers naturally concentrate on the domestic market; exports are treated as a residual by a large number of unspecialized units. The lack of domestic competition also adversely affects quality, which increasingly has become a constraint on expanding exports as India saturates the low quality range of various product lines. While any general policy reform must be considered on its merits for the entire industry or subsector, in those subsectors with demonstrable export potential, as repre- sented by past performance in the case of many light engineering products, industrial policy changes which would improve the competitive position of exports both in relation to domestic sales and in the vorld economy should be given serious consideration. These could include (i) selective removal of SSI reservation and the reduction of excise tax differentials favoring the output of small firms, (ii) elimination of exceptions of the measures of recent years designed to increase capacities, and (iii) liberalized access to imported technology even for "low-tech" product groups through higher ceil- ings on royalty payments and greater encouragement of foreign equity participation. It should be emphasized that while these changes may be most easily initiated in sectors with significant export potential as now perceived, they should be gradually extended to other sectors so as to spread the benefits of a more competitive, efficient environment through the economy and thereby provide substantial benefits to Indian consumers while encourag- ing export potential to develop in new product groups. 3.40 Complementing these findings on light engineering products, a review of non-electrical industrial machinery manufacturing similarly underscores the importance of competitive environment. In these product groups, firm entry has never been strictly controlled, nor has there been total insulation from import competition, and technology import has been encouraged. These  -72- differences stem largely from the greater importance attached to the capital goods sector as well as the practical difficulties of applying rigid quan- titative restrictions to a sector with heterogenous product compos:tion. As a result capital goods exports (though starting from a much smaller base than light engineering products) have grown rather rapidly in the 1980S increasing their share in world markets and providing much of the increment to aggregate engineering goods exports. This performance has occurred in spite of worldwide cutbacks in new investment. Constraints on more rapid export growth for capital goods relate to infrastructure performance and project export financing as well as to the marketing problems associated with non- homogenous products. 3.41 While continued improvements in export and trade policy are clearly a necessary condition for accelerating Indiass export growth, it is increas- ingly clear that sustained and more stable growth will not occur without attention to the domestic policy environment and the need to create a more productive manufacturing sector. The next section considers the complemen- tary potential that exists in agriculture and processed foods, which also have a major role to play in enhancing India's export prospects. F. Azricultural Exports with Emphasis on Processed Products 3.42 The processed foods export industry is a high value-added relatively labor-intensive activity and has potential for rapid growth. Indeed processed foods grew in importance relative to the total Indian export effort over the past several years with the value rising from US$107 million in 1976/77 to US$358 million in 1981/82 (Table 3.12). Since that time these exports have declined to US$245 million in 1983/84. While this downturn does reflect a decline in demand for some particular products (for instance the food additive guar, which is also used as input in the petroleum industry, has been severely affected by slower oil exploration activity in the United States), it also shows that India will not realize its export potential in many processed foods categories without policy changes and more sustained efforts to maintain and expand export markets. Since processed foods involve much the same diverse, highly decentralized production base as some otber agricultural export commodities, an examination of the constraints on increased export of processed foods should indicate how export policy might be directed to assist these and other agricultural exports. These con- straints include (a) the treatment of exports as a residual activity, (b) controls on exports, (c) underproduction of high value livestock (espe- cially buffalo), (d) infrastructure shortages, (e) inadequate marketing, and (f) lack of access to the domestic market.  -73- Table 3.12: MAJOR PROCESSED FOODS CATEGORIES, 1976/77-1982/83 (Quantities in '000 tons; values in US$ millions) 1976/77 1977178 978179 1979/80 1980181 1981182 1982/83 Si A ! *2 V v R Si SiA Guar Gua 45.1 16.9 56.3 22.3 67.6 37.2 54.1 43.8 59.1 66.8 88.0 96.9 44.6 36.5 Mango Juice 9.6 5.2 6.3 3.7 5.7 4.1 5.7 4.6 9.6 7.5 8.4 5.6 11.2 7.3 Mango Pulp 3.0 2.0 3.4 2.7 5.9 4.8 2.9 2.6 5.8 5.8 7.5 7.4 14.8 14.4 Otber Canned & Bottled Fruits 10.3 6.6 9.3 6.1 7.6 5.6 4.3 3.6 4.5 4.6 20.7 18.4 51.1 49.5 Packet Tea 14.6 22.7 23.7 59.3 33.9 84.1 42.2 101.2 34.2 88.9 n.a. n.a. n.a. n.a. lnstant Tea 0.6 2.8 0.6 3.6 0.6 4.1 0.6 3.8 0.7 5.0 0.8 5.5 n.a. n.a. Instant Coffee 0.2 1.6 0.4 7.1 0.4 4.4 0.9 9.2 1.2 15.5 1.3 14.6 n.a. n.a. Fresh Meat 3.1 4.5 6.8 10.6 7.1 12.1 6.8 11.0 1.4 2.4 8.6 17.4 10.9 20.7 Frozen Meat 8.3 7.4 10.7 9.6 15.9 15.4 26.6 27.5 41.7 47.4 42.8 46.1 40.7 43.3 Canned Meat - - - - 0.5 0.7 1.9 3.9 2.5 5.8 1.5 3.6 2.5 5.5 Total 107.0 122.9 168.2 201.8 221.0 358.4 290.8 Note: Processed foods exports in 1983/84 projected to be US$245 million. BEST COPY AVAILBLE  -74- 3.43 Exports as a Residual. Agricultural exports from India are generally based on exportable surpluses, i.e. only production above the level required for domestic consumption is allowed to be exported, although there are export commodities which are periodically demand- or quota-constrained in the inter- national market. Under certain conditions-such as domestic production shortfalls or increases in the world price of goods produced domestically- exports are restricted to allow domestic requirements to be met at "reasonable" prices. Although understandable, given India's sensitivity to inflationary pressures, exports of agricultural products from Irdia need not inevitably be a residual activity. Rather there should also be a concerted effort to coordinate agricultural production programs wiih export potential so that increased exports do not imply sacrificing domestic consumption. Increased export orientation itself could lead to greater production and domestic availability, particularly of the less traditional export products. 3.44 To the extent possible, policies to meet short-term domestic objec- tives should not be allowed to interfere with the long-term efforts to increase exports of agricultural commodities and to protect the share of export markets already gained. For example, the export ban on CTC (cut, tear, curl) tea risks turning consuming countries away from Indian tea and allowing preferences and marketing arrangements to be built up with other suppliers. This action, even if effective in insulating domestic from inter- national prices, should be removed as soon as feasible to take advantage of continued high prices and world-wide efforts at rebuilding stocks. A better approach to dealing with domestic production problems and/or international demand pressures would be greater reliance on trade to supply the domestic market, particularly if cheaper qualities or substitutes can be inported to meet domestic demand thus releasing India's export quality produce. A good example of missed potential for this approach occurred in 1983/84 with cardamon. India's dominance of the Middle East cardamon market, based on preference for Indian quality, had closed off that lucrative market from other suppliers, notably Guatemala. The 1983 cardamon crop in South India was severely affected by drought. Production fell short of domestic requirements, and cardamon exports virtually ceased. While the Government has recognized the need to export enough to maintain an export presence, efforts were inadequate, and India runs the risk of losing a preferred market position. India could instead have followed a more aggressive strategy of importing lesser quality cardamon from Sri Lanka for domestic consumption, freeing up the favored Indian varieties for export. 3.45 Export Controls. Other controls, such as export taxes, or minimum export prices, also adopted in response to particular domestic conditions, should be applied more flexibly and adjusted or abolished as soon as possible. Canalization should be reviewed on a case-by-case basis to see if it is clearly the best means for optimizing volumes and prices while still  -75- allowing for flexible response to market conditions. jj Private traders can normally retain more flexibility, moving in and out of the export market more rapidly as conditions change. While the need for subsidization can be an argument for Government marketing or cooperative federations, exclusion of traders through canalization should not be necessary. 3.46 Livestock. Specific policy measures could have substantial impact on exports of meat and meat by-products, where exports now exceed US$60 million. Exports of buffalo meat are constrained by the low supply of animals for slaughter. The high ratio of female to male buffalos, with nothing geneti- cally responsible for the imbalance, suggests that male calves are either slaughtered or allowed to die through neglect while females are retained for their milk-producing capability. If meat and by-products are not used immediately for some useful purpose, there would appear to be a case for raising the undesired male buffalos at special farms for slaughter and export. In addition, breeding farms could also improve strains of to be raised for frozen and fresh meat exports. 3.47 Infrastructure. Many processed foods exports require infrastructural facilities in order to promote growth and ensure adequate quality. Governmental efforts to eradicate animal diseases and fulfill all FAO requirements or instituting and maintaining disease-free zones would benefit both exports and the domestic market. Meat exports also require modern and hygienic slaughterhouses and proper meat packing and canning facilities. New or upgraded cold storage facilities are important to many of the processed food and fresh fruit and vegetable industries and need to be provided at major collection, distribution, processing and export points. Costs for provision of proper storage facilities should be offset by increased export quality. Increased availability of refrigerated trucks and rail wagons for use in transporting products would also allow maintenance of higher quality, as would adequate access to proper shipping containers and packing cases. Differential air and sea freight rates may also be required, at least in the market penetration stage, for some Indian goods to compete effectively with other suppliers, particularly in the European market. 3.48 Marketint. Gaining access to some export markets will require col- laboration arrangements with already-establishaed name-brands. Such proposals should be viewed favorably and even encouraged by the Government, even when such collaboration agreements do not include technological transfer in areas other than marketing. India has the capability to produce and export many different products within the processed foods category. However, this poten- tial will not be realized unless major efforts are made in marketing. 1/ Canalization refers to the practice of "channeling" trade in particular commodities through Government appointed agencies (usually Government trading or marketing organizations such as NMTC, STC or NAFED).  -76- 3.49 Product Mix and Processina. By taking advantage of the nation's abundant labor supply, the Indian food processing industry should be able to sort, grade and package a whole range of products (e.g. nuts and fruits) in terms of quality and size at a competitive cost. The high labor intensity of this phase of production gives the potential for increasing value added beyond the normal mass-produced products. India can also continue giving attention to bulk processing and packaging of fruit and vegetable pulp, though it would be better able to expand exports of these products if growers produced varieties which allowed higher recovery during processing. Efforts to identify these varieties and promote their production should be pursued. 3.50 Given the large volumes of tea, coffee and marine products already traded, the potential exists for higher value-added content (e.g. through consumer packaging) using these raw inputs. Recognizing that imports of cheap, lower quality teas are necessary for blending purposes if Indian production is to be price-competitive with other suppliers the Government has recently announced that some teas may be imported on a duty-free basis as inputs into export production 1/. Importea processing/packing machinery at reasonable rates of duty is also necessary. In some instances large, export- oriented units should be encouraged to enter activities previously reserved for the small-scale sector since maintenance of quality and the associated higher levels of production require the resources of the larger units. 3.51 Domestic Market Access. The food processing industry also needs access to the domestic market (a) to gain experience in producing and market- ing non-traditional products, (b) to encourage economies of scale, and (c) to assure adequate profitability for the operating units. This development would also benefit the domestic economy since, as incomes rise within India, demand for consumer-packaged foods will also increase. 3.52 This brief review indicates that future growth of processed food exports depend on: (a) easing production and marketing constraints, (b) improving product quality and mix, (c) instituting a more flexible import policy, and (d) providing required infrastructure. Such measures for these and other products would help to foster the concept that trade is an exten- sion of the domestic market, not just a residual activity. G. Prospects for the Future 3.53 The prospects for India's balance of payments depend very much on India's regaining the relatively strong export performance achieved during the 1970s. Export earnings are needed to purchase the imports required to support economic growth and to service external debt, thereby maintaining vital access to foreign capital markets. From a balance of payments perspective, a lower export growth would be tenable, but the economy would 1/ ImPex Times, March 10, 1984.  -77- suffer from the lack of imports required to meet economic growth objectives, and the debt service burden would be no lighter than if a higher level of export and economic growth were pursued. 3.54 Based on the past performance of Indian exports, growth in the range of 8%, though slightly higher than that achieved in the 1970s, should be possible. With an improved world economic environment, even faster growth could be attained. But in order for significant export growth to occur, policy changes must be made. Fiscal concessions, for-which exporters of many non-traditional exports are eligible, are important spurs to improved perfor- mance since they offset part of the burden of producing in a sheltered, high-priced market and to some extent the indirect tax burden imposed on all Indian production. Recent analytical work on Indian export performance confirms the major role that domestic profitability plays in determining export performance. .I While exports will generally be less profitable on average than domestic sales--given the large domestic market and increased competition in the international market--export performance can be assisted by lessening the relative difference between the two. 3.55 Given fiscal and other limits on the use of budgetary incentives to improve the relative profitability of exports, other means must receive major emphasis in the longer term. These include possible movement to a value- added tax which could be fully rebated when products are exported, continued progress to liberalize access to imported inputs, machinery and technology as well as maintenance of a realistic and flexible exchange rate policy, but most important are measures to increase domestic competition and improve efficiency. The above analysis noted the real depreciation which occurred during the period of substantial export growth as well as the less pronounced, though rather consistent appreciation since the beginning of the 1980s when export volumes levelled off. While the exchange rate was not the only factor in past growth or in recent stagnation, it must be viewed as a policy instrument with substantial implications for export incentives and relative profitability, especially for those commodities in which India appears to have a comparative advantage. As the experience of the second half of the 1970s demonstrates, price stability is an important complement to exchange rate policy. 3.56 Maintaining a viable external balance also depends on continued progress toward economically efficient import substitution in, for example, fertilizer, steel, non-ferrous metals and edible cils. The adjustment efforts must also include the maintenance of petroleum production at levels consistent with domestic consumption requirements and the need to maintain external balance. For the purpose of considering alternatives for growth and balance of payments management, annual domestic production of petroleum is estimated to reach 37 million tons by the end of the decade. However, there 11 James Riedel, et al, Ibid.  -78- does seem to be considerable scope for increasing this production level if balance of payments conditions require. Implicit in the estimates of petroleum imports is a consumption growth pattern that assumes significant conservation efforts and some increased utilization of natural gas as a substitute for petroleum. In the medium-term perspective, the investment needed to achieve these conservation and substitution targets must be assigned high priority given their direct impact on the balance of payments. 3.57 Proiections. Three alternative scenarios for the balance of payments based on different assumptions of GDP, export, and import growth as shown in Table 3.13 are considered here. In each case concessional assistance is assumed to remain constant in real terms using 1983/84 as the base, except for IDA commitments which are assumed to remain constant in real terms at the lower anticipated IDA-VII levels jJ. Thus all adjustments in the capital account are made through greater or lesser commercial borrowings. 3.58 The first scenario assumes GDP growth at around 5%, reflecting value- added growth for agriculture of 3.0Z, industry 7.0%, and services 5.5Z. Export growth is assumed to average 7.5Z between 1985/86 and 1989/90, rising slowly to 8.5% by the mid-1990s. Export volume growth at this level assumes the necessary combination of increased world-wide economic activity as well as trade and industrial policy adjustments within India as discussed above. This level of GDP growth and the rising level of export growth implies increasing levels of imports as inputs into the productive process, par- ticularly for manufactured products. Import growth is expected to average 6% over the projection period. The current account deficit would remain in the range of 1.6% to 1.9% of GDP, which represents a utilization of foreign savings that would result in sustainable long-term debt service. 3.59 The second scenario involves a lower GDP growth rate of 4Z, along with lower import levels and external borrowing requirements. The export volume growth necessary to finance this alternative is 6Z per annum in the 1980s, as compared to around 7.5% in scenario 1. Viewed another way, if a 6Z export growth is all that can be achieved, India's reduced ability to finance imports and to repay external borrowing would reduce GDP growth potential. In this case, the ratio of current account deficit to GDP would stay in the 1.6% to 1.7% range since export performance would not be adequate to support the debt service associated with higher levels of foreign savings utilization. AI The nominal growth in bilateral concessional commitments required to meet this assumption implies reversing trend of recent years: this rever- sal is not only important for India's growth prospects but also may not be as difficult to achieve as it currently appears if world economic conditions improve modestly during the remainder of the 1980s.  -79- Table 3.13: BALANCE OF PAYMENTS SCENARIOS: BASIC ASSUMPTIONS AND RESULTS 1984/ 1985/ 1986/ 19871 1988/ 1989/ 1985 1986 1987 1988 1989 1990 Scenario 1 (GDP growth = 5Z) Export volume growth 5.4 6.7 7.4 7.6 7.9 8.1 Import volume growth -0.1 5.7 4.2 5.7 6.9 7.2 Current Acc.Bal./GDP 1.7 1.6 1.6 1.6 1.7 1.9 Debt Service Ratio 13.3 15.2 19.4 20.4 19.9 19.4 Interest DSR 6.9 7.1 6.9 6.5 6.3 6.8 Scenario (GDP growth 4Z) Export volume growth 5.4 5.0 6.3 6.3 6.3 6.4 Import volume growth -0.1 4.5 2.6 4.1 5.2 5.6 Current Acc.Bal./GDP 1.7 1.6 1.6 1.6 1.6 1.7 Debt Service Ratio 13.3 15.4 19.9 21.1 20.6 20.2 Interest DSR 6.9 7.1 7.1 6.7 6.4 6.8 Scenario 3 (GDP growth 5.5%) Export volume growth 5.4 6.7 8.0 8.4 8.5 8.7 Import volume growth -0.1 7.0 5.2 6.7 7.9 8.1 Current Acc.Bal./GDP 1.7 1.7 1.7 1.8 1.9 2.0 Debt Service Ratio 13.3 15.2 19.3 20.1 19.9 19.5 Interest DSR 6.9 7.1 6.9 6.4 6.6 7.2 3.60 The third scenario assumes an 8Z growth of industrial value added. In this case export volume growth would ultimately have to rise to the 10% range since higher GDP growth would require financing of higher petroleum and other imports. The level of foreign savings required would increase only slightly from the first alternative and range from 1.7% to 2.0Z. 3.61 The projections show that India can manage its external balance even if export growth exceeding 8% p.a. by the 1990s is not feasible. Since the debt servicing burden is sustainable under each set of assumptions, however, India receives no particular balance of payments benefit from pursuing a low growth strategy such as characterized in Scenario 2. In each scenario the debt service ratio reaches peaks between 20% and 21% in 1987/88, as a result of repayments to the IMF. The ratios then decline somewhat thereafter before again turning upwards and beginning to level off at around 21Z to 22% in each of the cases by the mid-1990s. In each of these scenarios, the ratio of current account deficit to GDP is falling by this time, thus allowing the choice of further acceleration of the rate of growth of GDP and imports while maintaining the debt service ratio at around 20% or reduction of the debt service burden. India thus remains creditworthy for larger amounts of com- mercial borrowing, particularly since the generally conservative macro- economic management of the Indian economy has allowed GOI to constrain imports in years when conditions warrant.  -80- 3.62 Aid. Future sources of concessional and other official assistance to India are limited. The expected cuts in total IDA resources, and the declin- ing share available for India, will be particularly difficult for India to absorb while maintaining its adjustment effort. While IBRD lending has increased rapidly, there are limits as to how long and how fast this expan- sion can continue; in addition, the terms are far harder than for IDA. In seeking to maintain its development strategy in the face of these adverse developments, India's commercial borrowings have complemented other sources of external finance, but continuation of present trends will not cover total borrowing requirements. Projections now show a gap beginning in 1987/88 in each of the scenarios between capital requirements and availability (a gap acsumed to be filled by immediately disbursing long--term commercial borrowing for the purposes of the alternative scenarios reported in Table 3.13). India has benefitted in the recent past by borrowing from commercial sources only for project-related purposes, resulting in better terms than if borrowings had been for direct balance of payments support. In order to maintain the advantages inherent in borrowing for project purposes India should increase contracting its external commercial borrowing at a rate which would allow a larger disbursement pipeline to be developed. Nevertheless, the amounts of India's anticipated non-concessional borrowing is such that large non-project commitments are likely to become necessary by the end of the decade. 3.63 Despite India's decision at the beginning of the Sixth Plan period to broaden its sources of external finance, concessional assistance continues to play an essential role in India's development process. Over the past two decades ,ndia has demonstrated that it has the capability to use this aid effectively. Indeed during the 1970s an important source of India's ability to adjust to the various shocks such as drought and oil price increases was the increased commitment of concessional aid donors to India's development effort. During the 1980s relatively assured access to concessional assis- tance has minimized the risk for India's economic managers in utilizing more commercial debt and has enabled India to continue its investment and growth strategy even during years of relative resource scarcity. 3.64 In the three scenarios presented above, concessional commitments levels were assumed to remain constant in real terms. Failure to maintain those real levels would require India to borrow even more from commercial sources. However, since debt service ratios are already projected to reach the range of 20% within five years, even with constant concessional commit- ment levels in real terms, lower levels of concessional assistance cannot be replaced by equal amounts of non-concessional borrowing without moving the debt service burden towards levels much more difficult to sustain. If, for example, bilateral and multilateral concessional commitments were to remain at present nominal levels, this would add almost three percentage points to the debt service ratio by the mid-1990s with the difference even greater in later years. Such acceleration of debt servicing might be feasible for countries at higher levels of income, but not for a country in India's circumstances. Even if an average growth rate over the next ten years of around 5% can be achieved, India will still remain a very poor country with  -81- its annual per capita income just over US$400. Reducing concessional aid beyond what has already occurred in recent years would have unfortunate implications for the Indian economy's growth potential since both the invest- ment program and India's ability to import would be affected. For example, i,- debt service were to be maintained in the 20% range in the face of no growth in concessional aid commitments, the growth of the economy consistent with the reduced import capacity would be barely above the long-term average of 3.5% per annum (assuming no dramatic changes in import intensity or productivity). It would be much more appropriate to India's needs and cir- cumstances to have real growth in commitment levels, however modest, since that would permit a greater increase in total capital inflow which, in turn, would support a higher growth rate. 3.65 India has purposely pursued a growth-oriented strategy, despite the inherent risks, and is continuing to make the substantial sacrifices to raise the resources required for this strategy. The aid community has greatly assisted this effort over the past years through investment finance as well as import aid. Endangering the success of this strategy at this point by lowering the amount of concessional aid commitments would be most unfortunate. Instead concessional aid programs should be at least maintained in real terms to enhance the development effort and the prospects for raising the standards of living for the people of India. Real growth in concessional assistance would also allow donors to increase support to key sectors in social and physical infrastructure which have larger investment needs than are likely to be met unless more concessional assistance becomes available, given India's resource constraints.  -82- Anex Table 3.1.1 INvISILES ON CURRENT ACCOUNT (US S Hillions) Actuals Estimates 79/79 79/80 80H/1 91/82 82/93 83/94 mROSS RECEIPTS 3292 4972 6749 5736 426 4939 Non-Factor Services 1607 2304 2990 2669 2523 2643 of which: Transport (a) 342 394 458 445 400 423 Travel 689 1139 1477 1192 1163 1204 Others (b) 576 771 945 1032 ?60 1016 Investment Income 478 796 1093 912 433 496 Current Transfers 1207 1872 2796 2155 170 1910 GROSS PAYTENTS 1376 1791 2013 2342 2453 2941 ton-Factor Services B90 1262 1515 1695 1593 1797 of which: Transport Icl 297 313 450 540 499 504 Travel (d) 79 109 114 161 15B 153 Others (e) 524 340 951 994 926 1130 Investment Income 464 509 483 626 949 1134 Current Transfers 22 20 15 21 21 20 NET RECEIPTS 1916 3181 4736 3394 2373 1999 Non-Factor Services 717 1042 1365 974 940 956 of which: Transport 55 91 8 -95 -99 -81 Travel 610 1030 1363 1031 1005 1051 Others 52 -69 -6 3B 34 -114 Investment Income 14 287 600 286 -416 -648 Current Transfers 1195 1952 2771 2134 1949 1790 Memo items: Nerchandise Exports 6978 7948 9504 8519 9001 8466 Merchandise lports 8519 11383 16204 15500 14249 14412 International Inflation Rate(Z) 11.6 8.3 -4.8 -2.0 -3.2 BEST COPY AVAIUBLE  -83- Annex Table 3.1.2 BALANME OF PAYNENTS PROJECTIONS - Scenario I (UIP growth = 5Z; USY millions) 1984/05 1985/86 1906/87 1997/98 191809 1999/90 EIPORTS(f.o.b - excldg.crudel 9386 10823 12642 14786 17344 20199 Primary lexcldg. crude) 2932 3363 3857 4445 5136 5946 Nanufactures 6454 7460 9785 10341 12209 14252 INPORTS(c.i.f 1 -14882 -16854 -19261 -22283 -26065 -30274 Edible Oils -666 -658 -750 -855 -975 -1112 Fertilizers -577 -551 -5Z5 -442 -568 -765 Iron & Steel -953 -1065 -1205 -1363 -1542 -1721 Non-ferrous metals -397 -443 -501 -567 -642 -716 P.O.L (Net of Exports) -2951 -3487 -3921 -4714 -5685 -6678 Others -9338 -10650 -12359 -14342 -16653 -19002 TRADE BALANCE -5496 -6031 -6619 -7497 -9721 -10076 Non-factor Services Exports 2979 3318 3806 4556 5356 6226 Imports -1717 -1931 -219 -229 -2947 -33w RESOURCE BALANCE -4334 -4644 -4927 -5470 -6312 -7247 Investment Income (net) -717 -937 -1113 -1293 -1497 -1037 Current Transfers 1849 1998 2179 2374 2599 2782 (kwa Item: Net Invisibles ) 2294 2549 2757 3108 3500 3774 CURRENT ACCOUNT BALANCE -3202 -3483 -3B62 -4399 -5221 -6302 CONCESSIONAL AID (net) 1937 1796 1779 19o0 2103 2215 of which: Gross Disbursements 2451 2319 2331 2556 2613 2749 Repayments -514 -523 -552 -576 -510 -534 MEDIUM & LONG-TERN DORROCIN5 [net) 1634 1560 1210 1931 3730 4779 of which: Gross Disbuarsements 2064 2406 3073 4447 6736 7997 Repayments -430 -946 -1863 -2516 -3006 -3219 I.l.F CREDIT (net) tl is is It is Ss CAPITAL, n.e.i 317 340 369 403 438 473 of which: Ion-resident Deposits 250 270 294 320 348 374 CHANGE IN RESERVES (- increase) -686 -213 504 75 -1050 -1165 RESERVE LEVEL (end of year) 6569 6792 6278 6203 7253 8418 Ino items: CurDal/GDPmp (Z) 1.7 1.6 1.6 1.6 1.7 1.9 D.S.R. 10) 13.3 15.2 19.4 20.4 19.9 19.4 $t included in Rediun & Long-Term barroming BEST COPY AVAILABLE  -84- Annex Table 3.1.3 BALANCE OF PAYMENTS PROJECTIONS - Scenario 2 (DDP groth = 4Z; USS dillions) 1984/95 1905186 1986/07 1997/88 1988/09 1989/90 EIPORTS(f.o.b - excldq.crude) 93Db 10652 12313 14230 16450 18860 Primary (excldg. crude) 2932 3331 3928 4399 5059 5919 Manufactures 6454 7321 8495 9831 11391 13041 IMPORTS(c.i.f) -14981 -16675 -18756 -21356 -24599 -29124 Edible Oils -666 -658 -746 -846 -960 -1009 Fertilizers -577 -551 -525 -442 -568 -765 Iron & Steel -952 -1059 -1189 -1335 -1499 -1659 Non-ferrous metals -397 -441 -495 -556 -624 -691 P.O.L INet of Exports) -2951 -3436 -3800 -4504 -5357 -6402 Others -9338 -10530 -12001 -13673 -15581 -17518 TRADE BALANCE -5495 -6023 -6443 -7126 -9139 -9264 Non-factor Services Exports 2979 3266 3784 4383 5078 5811 Imports -1717 -1931 -2159 -2449 -2810 -3188 RESOURCE BALANCE -4333 -4698 -4818 -5192 -5971 -6641 Investment Income (net) -717 -837 -1117 -1288 -1459 -1748 Current Transfers 1949 1998 2178 2374 2588 2792 l(emo Item: Net Invisibles ) 2294 2496 2696 3020 3397 3657 CIURRENT ACCOUNT DALANCE -3201 -3527 -3757 -4106 -4742 -5607 CONCESSIONAL AID (net) 1937 1796 1779 1980 2103 2215 of which: 6ross Disbursements 2451 2319 2331 2556 2613 2749 Repaysents -514 -523 -552 -576 -510 -534 MEDIUM & LON6-TERM BORROWING (net) 1634 1560 1210 1336 3099 3900 of which: Gross Disbursements 2064 2406 3073 3852 6104 7119 Repayments -430 -946 -1863 -2516 -3005 -3219 I.M.F CREDIT (net) is Is It is tt S CAPITAL, n.e.i 316 339 369 403 439 470 of which: Non-resident Deposits 250 270 294 320 3'9 374 CHME IN RESERVES (- increase) -696 -168 399 307 -898 -978 RESERYE LEVEL (end of year) 6569 6738 6339 5951 6850 7828 Memo items: CurBal/6DPmp (ZI 1.7 1.6 1.6 1.6 1.6 1.7 D.S.R. (I) 13.3 15.4 19.9 21.1 20.6 20.2 St included in Medium & Long-Term Borroing BEST COPY AVAILABLE  -85- Annex Table 3.1.4 BALANCE OF PAYNENTS PROJECTIONS - Scenario 3 (GDP growth 5.5X; USS millions) 1984/85 1905/86 1986/87 197/B80 1991099 19 I"90 EXPORTS(f.o.b - excIdq.crude) 9386 10923 12747 15049 17779 20068 Primary (excldg. crude) 2932 3363 3930 4592 5366 6271 Manufactures 6454 7460 9817 10456 12412 14597 INPORTS(c.i.f) -14895 -17075 -19697 -22981 -27112 -31761 Edible Oils -666 -658 -752 -859 -982 -1123 Fertilizers -577 -551 -525 -442 -563 -765 Iron & Steel -956 -1075 -1221 -1396 -1574 -1764 Non-ferrous metals -397 -446 -506 -575 -53 -731 P.O.L (Net of Exports) -2951 -3538 -4042 -4926 -6016 -7365 Others -9339 -10907 -12641 -14793 -17319 -20013 TRADE BALANCE -5499 -6252 -6940 -7933 -9334 -10893 Non-factur Services Exports 2079 3318 3918 436 5409 6431 lmports -1717 -1931 -2214 -2575 -3028 -3520 RESOURCE BALANCE -4337 -4865 -5236 -5972 -6973 -7982 Investment Income (net) -717 -837 -1132 -1340 -1600 -2007 Current Transfers 1949 1998 2178 2374 2598 2782 (New Item: Net lnvisibles ) 2294 2548 2750 3095 3449 3686 CURRENT ACCOUNT BALANCE -3205 -3704 -4190 -438 -5905 -7207 CONCESSIONAL AID (net) 1937 1796 1779 1980 2103 2215 of which: Gross Disbursements 2451 2319 2331 2556 2613 2749 Repayments -514 -523 -552 -576 -510 -534 HEDIUJ! & LONG-TERN BORR OWING Inet) 1634 1560 1210 3117 4409 5904 of which: 6ross Disbursements 2064 2406 3073 5632 7495 9023 Repayments -430 -846 -1863 -2516 -3006 -3219 I.I.F CREDIT (net) is St is St to tt CAPITAL, n.e.i 316 340 370 404 439 473 of which: Non-resident Deposits 250 270 294 320 348 374 CHANGE IN RESERVES 1-= increase) -692 8 831 -663 -1146 -1285 RESERVE LEVEL (end of year) 6565 6558 5726 6389 7535 8820 neo items: Curial/GWmp (IO 1.7 1.7 1.7 1.9 1.9 2.0 D.S.R. (Z) 13.3 15.2 19.3 20.1 19.9 19.5 tt included in Nedium & Long-Term Borrwing BEST COPY AVAILBLE  - 4 A - f.g pte?Cc- s/pw  -87- Chapter 4 POPULATION TRENDS AND IMPLICATIONS 4.1 The publication of the final population totals and the key population statistics based on the 5Z sample of the 1981 Census provides a useful oppor- tunity to reassess the Indian demographic scene. These statistics coupled with the recent estimates of vital rates provide an opportunity to re-examine the likely future trends in the demographic parameters and in the rate of growth of population and labor force, and the consequent need to provide for a substantial expansion in employment opportunities in the years ahead. This Chapter will first review the main population statistics emerging from the most recent revisions of the 1981 Census data (Section A) and then analyse the basic underlying demographic trends (Section B). Section C presents a set of population projections incorporating the revised Census results, while Section D builds on these projections to present forecasts of labor force growth and employment trends. Section E discusses other socio-economic trends and implications revealed by the 1981 Census particularly with regard to urbanization, pressure on natural resources, literacy, education, mor- tality and health. The Cbapter concludes with a discussion of population policies and programs (Section F). A. The Final Figures from the 1981 Census 4.2 The trend in the intercensal growth rates as well as the key demographic characteristics of the population as reported by successive censuses are reported in Table 4.1. These figures indicate a population of 685.2 million on March 1, 1981. VJ The data presented in Table 4.1 are offi- cial Census statistics, unadjusted for undercounting as revealed by the Post Enumeration Check surveys and are presented here for consistency with offi- cial Government estimates. The projections in Table 4.7 (and Statistical Appendix (Volume III) Table 1.1) have been corrected for under-recording in both the 1981 and previous Censuses. The corrections raise the March 1, 1981 population estimate to about 704.6 million. Parallel adjustments to the 1971 data leave the growth rates in Table 4.1 unchanged. 4.3 The intercensal population growth during 1971-81 was 25.0% (compared to 24.8% during 1961-71). Taking account of the different reference dates of the 1971 and the 1981 censuses, the average annual growth rate during 1971-81 was slightly higher (2.25Z) than during 1961-71 (2.20%). Although these differences may not be too significant, at the very least they suggest that the expectation underlying the Sixth Plan projections of a decline in the the growth rate during the 1970s bas not been realized. 1/ Even the final population totals include only an estimate for Assam (based on the projection completed in 1978) where no census has been conducted in 1981.  -88- Tsble 4.1: POPULATION STATISTICS OF INDIA: 1901-81 Average Sex ratio Urban as Total annual Persons (males a percent Census population growth per sq. per 1,000 of total Year (millions) rate (Z) km. females) population 1901 238.3 0.30 77 1,029 10.8 1911 252.0 0.56 82 1,038 10.3 1921 251.2 -0.03 81 1,047 11.2 1931 278.9 1.06 90 1,053 12.0 1941 318.5 1.34 103 1,058 13.9 1951 361.0 1.26 117 1,057 17.3 1961 439.1 1.98 142 1,063 18.0 1971 548.2 2.20 bI 177 1,075 19.9 1981 a/ 685.2 2.25 / 216 1,071 23.3 a/ Including projected population of Assam where census was not held. bI Growth rates for 1961-71 and 1971-81 have been calculated by taking into account the reference date for the 1971 census as April 1 and for the 1981 census as March 1. Source: Census Report, various issues. B. Underlying Demographic Trends 4.4 Trends in Vital Rates. The natural increase in the population is the main determinant of population growth in India. jj The estimates of birth and death rates (summarized in Table 4.2) for the period 1970-81 are based on the Sample Registration System (SRS) but include an adjustment to include Bihar and West Bengal (with 18% of India's total population both in 1971 and 1981) and to correct for progressive improvement in the coverage of vital events. The figures for 1961 represent the current best judgement. 4.5 The decline in the birth rate in the 1970s has been much more rapid than in the 1960s (-13.8% vs -8.4%). What is perhaps even more significant is that while the decline in the birth rate during 1961-71 was largely due to changes in the sex, age and marital status composition of the population, during 1971-81 the net effect of these factors alone would have sightly increased the birth rate (paras 4.12-4.13 below). The decline in the 1970s has been due entirely to the fall in marital fertility rates as a consequence of the increased prevalence of contraceptive practice. Fertility rates fell 1/ Net emigration is estimated to have been on the order of 0.5 to 1.5 million between 1971 and 1981 and thus had little impact on the overall trends.  -89- from a level of about 5.75 at the beginning of the decade to an estimated 4.8 in 1981. 1/ This is a positive development. However, a major part of the decline in the birth rate occurred during 1971-77 and the process slowed down during the period 1977-80. Table 4.2: ESTIMATED VITAL RATES, 1961-80 Natural Increase Period a/ Birth Rate Death Rate Rate Around 1961 45.0 24.1 20.9 1971 41.2 17.4 23.8 1977 36.8 15.7 21.1 ,980 35.5 13.2 22.3 1971-80 (Average) 37.8 15.4 22.4 Percentage change 1961-71 - 8.4 -26.3 +13.9 1971-80 -13.8 -24.1 - 6.3 1971-77 -10.7 - 9.8 -11.3 1977-80 - 3.5 -15.9 + 5.7 a! Individual years refer to mid-point of three year period. Source: Adjusted Sample Registration System. 4.6 The decline in mortality was greater both in percentage and absolute terms during 1961-71 than during 1971-80. Further, the decline was much slower during the period 1971-77 than during the subsequent three years. As a result of these disparate trends in birth and death rates, the rate of natural increase rose between 1961 and 1971 and then declined between 1971-77. Due to the sharp drop in mortality, however, it rose yet again between 1977 and 1980. By current international standards, the crude death rate (and infant mortality rate) in India in 1980 was still rather high. Known, simple interventions can lower it significantly in a relatively short period, provided that the requisite delivery system can be organized and made effective. This welcome development would bring a further rise in the rate of natural increase in India, unless the family planning program continues to accelerate and fertility is lowered faster than mortality. 1/ As reported in Zachariah and Patel, Determinants of Fertility Decline in India draft mimeo, November 1983.  -90- 4.7 Infant Mortality and Life Expectancy. The SRS-based estimates of infant mortality in India, by State and rural-urban residence during 1970-78, show a peak of 140 during 1975, and then a decline by almost 10X by 1978 (Table 4.3). The rural-urban differential in infant mortality is striking. During 1976-78, the rural infant mortality rate Was 138, nearly 80% higher than the urban rate of 77. In several years, the infant mortality among girls was higher than among boys. The interstate differences in infant mortality are very large; the 1976-78 rate in Uttar Pradesh (174) was almost four times that in Kerala (48). Further, while the Kerala infant mortality rate has declined by nearly 16% betveen 1971-75 and 1976-78, the correspond- ing fall in Uttar Pradesh vas less than 3Z. 4.8 The intercensal data suggest a significant further rise in life expectancy from about 45-46 years in the 1960s to about 50 years in the late 1970s (Table 4.4). This substantial rise in life expectancy indicates that since the level of mortality in India, particularly infant mortality, is quite high by international standards, it can indeed respond relatively quickly to improvements in health services. 4.9 Sex Composition. The 1981 Census has reported a welcome through modest improvement in the sex ratio of the population, with the rates of males to females declining from 1.074 in 1971 to 1.070 in 1981, suggestive of a relative improvement in the chances of survival of women. 4.10 Age Distribution. The age distribution of a population provides an overview of its demographic history. The unsmoothed age distributions by age groups based on the 5% sample of the population enumerated by the 1971 and 1981 Censuses show a marked decline in the percentage of children aged 0-4 and 5-14 since the 1971 Census (Figure 4.1). The percentage of the 0-4 age group has declined from 14.5 in 1971 to 12.6 in 1981 and that of the 5-14 age group from 27.5 to 27.0. The associated increase in the percentage of population in working ages of 15-59 from 52% in 1971 to 54% in 1981 has lowered the age-dependency ratio by 7% from 91.9 to 85.4. The age pyramids shown in Figure 4.1 highlight the declines in the proportions of children aged 0-9 and the increase in the age group 15-24. The erosion of the base of the population pyramid is a significant and hopeful sign. Other data sources (NSS and SRS) report a smaller but still significant decline in the percent- age in the 0-4 age group 1/. 1/ National Sample Survey Organization Draft Report No. 298. Thirty Second Round (July 1977-June 1978) Report on the Second Quinquennial Survey of Employment and Unemployment. Survey Reports - All India, New Delhi, and Office of the Registrar General, India, Sample Registration System. 1976-78, New Delhi, 1983, p. 35.  i.able 4.3: INFANT MORTALITY RATES BY STATE AND RURAL-URBAN RESIDENCE FOR 1970-72, 1973-75 AND 1976-78 (deaths per thousand population) States 1970-72 1973-75 1976-78 Rural Urban All Rural Urban All Rural Urban All India 141 86 132 143 82 133 138 77 128 Andhra Pradesh 122 70 112 122 71 113 128 74 120 Assam 141 82 134 142 97 139 121 94 119 Gujarat 151 112 142 152 105 141 144 98 134 Haryana 85 64 81 113 64 107 120 55 111 Himachal Pradesh 129 61 122 101 65 100 110 54 108 Jammu & Kashmir 82 47 76 73 46 70 72 26 67 Karnataka 103 65 95 93 60 85 90 60 82 Kerala 61 44 58 57 42 54 50 37 47 Madhya Pradesh 154 98 145 152 93 144 148 87 140 Maharashtra 109 81 101 109 78 99 100 60 89 Orissa 136 87 130 153 84 148 139 82 135 Punjab 114 80 107 111 71 103 112 73 105 Rajasthan 136 87 128 152 81 142 147 77 138 Tamil Nadu 131 84 120 123 68 109 118 74 105 Uttar Pradesh 184 116 174 189 123 182 177 117 171 Source: 1. Office of the Registrar General, Sample Registration System, 1970-75 New Delhi, 1983 2. Office of the Registrar General, Sample Registration System, 1976-78, New Delhi, 1983 3. Office of the Registrar General, Survey on Infant andi Child tM-ortality, 1979, New Delhi, 1983.  -92- INDIA Figure 4.1 Percent Distrlbution of Populoflon by Age ond Sex, 1971,1981 M.ALS 70t FEMALES 60-64 55-59 Legen | 50-54 _ E E,co d 1971 ____ Oe 1981 45-49 E,cmof 1981 Oe 1971 40-44 35-39 30-34 25-29 20-24 15-19 1-14 10-_ 5-9 AGE 0-4 15 10 5 0 5 10 15 PERCENI S0uoc: Cfma .wa1.1971.1981. woQdoronk-26091  -93- Table 4.4: ESTIMATES OF LIFE EXPECTANCY AT BIRTH (BY SEX) AND INFANT MORTALITY RATES, 1921-1978 Life Expectancy Infant Mortality Rates (years) (deaths per '000 pop.) Period Males Females Males Females 1921 - 31 26.9 26.6 249 232 1931 - 41 32.1 31.4 N.A. N.A. 1941 - 51 32.4 31.7 190 175 1951 - 61 41.9 40.6 153 138 1961 - 71 /a 47.1 45.6 135 /c 130 Xc 1961 - 71 /b 46.4 44.7 135 /c 130 /c 1961 - 71 /d 46.8 45.2 N.A. N.A. 1970 - 75 /e 50.5 49.0 130 135 Rural Areas 48.9 47.1 139 146 Urban Areas 58.8 59.2 85 83 1976 - 78 /e 50.0 50.5 124 133 /a Based on the intercensal survival rates estimated from the one percent sample of the 1971 Census. lb Based on the intercensal survival rates estimated from the ten percent rural and twenty percent urban sample of the 1971 Census. /c Obtained by assuming a linear trend between the Infant mortality rate for 1951 and the estimated average for rural areas (1968-70) and for urban areas (1970 only) based on the SRS. /d An unpublished estimate by the India Panel set up by the U.S. National Academy of Sciences. /e. Based on the SRS data, excluding Bihar and West Bengal, which together accounted for 18 percent of the total population of the country in 1971. Source: Office of the Registrar General, Sample Registration System, 1970-75, New Delhi, 1983 pp. 59-62.  -94- 4.11 ChanRes in Marital Status. In India, as in many other developing countries of Asia, there has been a gradual rise in the age at marriage. Although the 1978 legislation prescribing 18 years as the minimum age of marriage for girls is yet to be fully observed in many parts of the country, the once coumon child marriages have become relatively infrequent. The rise in the mean age at marriage of females since 1971 has been markedly slover than during 1961-71 (Table 4.5). Table 4.5: MEAN AGE AT MARRIAGE BY SEX, INDIA 1951-81 Census Males Females 1951 19.92 15.59 1961 21.32 15.86 1971 22.36 17.16 1981 23.27 18.32 4.12 Impact on the Crude Birth Rate. Since there is very little child- bearing outside marriage in India, the decline in the proportion of married women in reproductive ages 15-49 can be expected to contribute to a lover birth rate. The birth rate, however, is also a function of changes discussed earlier in the sex and age composition of the population. To illustrate the likely magnitude of these changes, Table 4.6 shows the birth rate that would have been observed with the specified marital fertility rates of 1971-72 and the sex, age and marital status distributions of the last three censuses. During 1961-71, the effect of changes in all three demographic variables, as well as their joint interaction effect, was to lower the crude birth rate by a little over three points. During 1971-81, however, the negative effect of the decline in the proportion married was offset by a positive effect of the rise in the percentage of women in reproductive ages 15-49. Under a regime of constant marital fertility rates, the crude birth rate would have risen slightly during 1971-81. Table 4.6: DECOMPOSITION OF CHANGES IN THE CRUDE BIRTH RATE 1961-1981 (in births per 1000 population) 1961-71 1971-81 1. Total Change -3.80 -5.70 2. Due to all compositional factors -3.12 .0.13 - sex -0.29 +0.07 - age -1.15 +1.54 - marital status -0.50 -1.02 - interaction of sex, age, marital status -1.18 -0.46 3. Due to marital fertility -0.68 -5.83  -95- 4.13 The change in the birth rate is clearly attributable primarily to changes in the marital fertility rates. According to the estimates presented earlier in Table 4.2, the birth rate around 1961 was 45 and declined to 41.2 by 1971. About 80% of the decline in the birtb rate during 1961-71 is attributable to changes in the sex, age and marital status distribution of the population and only the remainder can be attributed to changes in marital fertility rates. In effect, therefore, the rise in the contraceptive use rate from a negligible level up to 1966 to an estimated 10.6% at the end of March 1971 had only a very small effect on the marital fertility rates. The decline in the birth rate during 1971-80 from about 41 to 36 per thousand was, however, entirely due to the decline in marital fertility rates that occurred in response to the rise in the contraceptive practice rate to 23X-24Z during the latter half of the decade (see Table 4.17). C. Population Proiections 4.14 The official population projections used by the Planning Commission and other agencies of the GOI are yet to be revised in the light of the age distribution reported by the 1981 Census and the more recent SRS data. The World Bank's population projections (Table 4.7) have been revised to take account of the final population figures of the 1981 Census as well as the results of the Post Enumeration Check. The revised projections assume that the replacement level of fertility will be reached in India during 2010-2015 instead of 1995 as anticipated in the Sixth Plan projections. 4.15 The total fertility rate is now expected to decline from an estimated 5.0 in 1978 to 4.8 during 1980-85 and 2.2 by 2020. Life expectancy is projected to rise from an estimated 50 during 1976-78 to 55 during 1980-85; but the improvement slows down thereafter so that it would reach 63 years during 2000-2005. The Bank projections thus envisage a slower decline in mortality (after 1985) as well as in fertility than bas been implied in the Sixth Plan. However, relative to previous World Bank population projection (presented in Report No. 3872-IN, April 7, 1982), the new projection allows for a higher life expectancy at birth during 1980-85, and also an earlier achievement of the replacement level of fertility (a net reproduction rate of unity by 2015 instead of 2020 AD). |j 1/ Althougb international migration is only a very small component of population growth in India, allowance is made for a projected emigration of 300,000 persons during 1980-85, 250,000 during 1985-90, 150,000 during 1990-95, and 50,000 during 1995-2000.  -96- Table 4.7: POPULATION PROJECTIONS FOR INDIA: 1980-2015 Year Population Birth Death Rate of Total Expectation of Life (million) Rate Rate Natural Ferti- at Birth Infant Increase lity Both Males Females Mortality Rate Sexes Rate 1980 687.3 35.5 13.2 2.23 115 34.2 12.7 2.15 4.80 55.0 55.5 54.4 94 1985 765.1 30.9 11.3 1.96 4.26 57.1 57.4 56.8 84 1990 843.6 27.5 10.1 1.74 3.63 59.3 59.4 59.1 73 1995 919.9 25.1 9.5 1.56 3.16 61.1 60.6 61.6 65 2000 994.6 22.7 8.8 1.39 2.75 62.8 61.8 63.9 58 2005 1066.1 20.2 8.4 1.18 2.39 64.5 63.1 66.0 51 2010 1130.7 18.8 8.3 1.06 2.23 66.0 64.3 67.7 45 2015 1192.0 Sixth Plan Adjusted to the Bank 1981 Census Count Estimates Difference March 1, 1986 749.4 775.1 25.7 1991 814.7 853.4 38.7 1996 881.0 929.5 48.5 4.16 The Bank projections suggest that the population of India would approach 995 million by 2000 AD. Compared with the Sixth Plan projections, the Bank estimates suggest a higher population with the difference of the order of 26 million by 1986. About half of this difference is because the Bank's initial base population takes into account the estimated net under- count of the population by the 1981 Census. The annual increase in popula- tion is expected to continue at about 15 million up to 2000, while the rate of natural increase would decline to about 1.6% by 1995 and 1.5% by 2000 AD.  -97- 4.17 The GOI is yet to review its population policy goals in the context of the Seventh Plan. However, there are indications of a determination to retain the goal of replacement level of fertility by 2000 AD. The targets of the family planning program during 1983/84 were raised sharply to make up for the shortfalls of the first three years of the Sixth Plan. Although the performance through 1983 has been below the targets, the performance during 1983/84 will almost certainly be better than the previous year's which was itself a record (excluding the "emergency" year of 1976/77). To maintain such momentum for several years without interruption would be highly commendable. The recent and further expected declines in infant and child mortality would facilitate a campaign to promote contraception, although international experience suggests considerable time lags between mortality decline, its clear perception by the people and the reduction of fertility. These issues are discussed in Section F below in the context of population policy and programs. D. Labor Force Trends and Prospects 4.18 The demographic developments over the 1970s have important implica- tions for the growth in the numbers of new entrants in the labor force. Between 1970 and 1980 the labor force grew by 2.8% and the work force (i.e. that part of the labor force that was usually employed) grew slightly more slowly (Table 4.8). Table 4.8: LABOR FORCE AND EMPLOYMENT IN THE 1970s 1970 1980 Labor Force (million) 228.4 302.1 I Rural 83.6 80.2 % Urban 16.4 19.8 I Employed ("usual status") 98.3 97.5 Z Rural 99.1 98.5 Z Urban ' 94.1 93.2 Z Unemployed ("usual status") 1.7 2.5 Rural 0.9 1.5 Urban 5.9 6.8 Crude Labor Force Participation Rate 0.4162 0.4395 Rural 0.4344 0.4595 Urban 0.3430 0.3734 Source: Derived from NSS and Census data by applying 1972/73 and 1977/78 NSS age-specific labor force and work force participation rates to mid-1970 and 1980 population estimates inter- polated from 1971 1981 Censuses adjusted for undercount.  -98- 4.19 Care must be exercised in attempting to interpret labor force and employment data. Not only are they derived from different sources using somewhat different methodologies, but the very concepts of "labor force" and "employment" are notoriously difficult to apply to the Indian situation where there is a substantial amount of self-employment and under-employment, as well as seasonal and year-to-year fluctuations. The data reported here use the most reliable estimates, but even if all the adjustments are correct and adequate, however, underlying conceptual problems remain. These problems show up most clearly in the unemployment estimates. The data presented in Table 4.8 are based on the worker's "usual status," i.e., whether during a given reference year he was usually employed, unemployed, or not participat- ing in the labor force. In an extreme case a worker would be counted as employed if he worked just over one-third of a year, with the remainder of the year divided between being unemployed and out of the labor force. This concept would tend to capture only the chronically unemployed. This is a very limited definition of employment and is responsible for the deceptively low unemployment rates. 4.20 Broader concepts of unemployment are the daily rate, which measures the proportion of the labor force unemployed on an average day, and the weekly rate, which measures the proportion not employed for at least one hour during the reference week. Although the daily rate is clearly the more complete measure of unemployment, survey data on daily status unemployment from the end of the 1970s are not compatible with those from the beginning of the decade. As a rough indication, however, the daily unemployment rate in 1977/78 was about 8.2% overall (7.7% in rural areas and 10.3Z in urban areas) while the weekly status rates were 4.5Z overall, 3.7Z rural and 7.8% urban. 1/ These data confirm the general impression that while chronic unemployment may affect only a small portion of the labor force, there is a much wider problem of intermittent unemployment. 4.21 Even these percentages do not adequately reflect the seriousness of unemployment in India. The unemployment rates may not seem alarmingly high compared to those experienced recently in a number of industrialized countries. It must be remembered, however, that the poor have little alter- native but to be employed or starve. In this context, "employment" includes a wide range of tasks of exceedingly low productivity and pay. Moreover, the deprivation caused by unemployment in a country with India's low per capita income and wages, and without any unemployment insurance is undoubtedly greater than in countries which have much bigher income levels, supplemented 1/ "Report on the Second Quinquennial Survey on Employment and Unemployment, NSS: 32nd Round," Sarvekshana. Vol. V, Nos. 1 and 2, July-October 1981, pp.11-18.  -99- by public unemployment insurance mechanisms. 1/ Noreover, the percentage unemployed applies to a very large base labor force implying. even under the very partial "usual 3tatus" concept, that at the end of the 1970s some 7-8 million people were chronically unemployed. 4.22 With these substantial limitations in mind, there are still some qualified implications which can be drawn from Table 4.8. First, the labor force grew significantly during the 1970s, by about 2.8% p.a., well above the population growth rate of 2.2Z. Two factors were at work here: the changing age distribution of the population, with age groups with bigh labor force participation rates growing faster than the population as a whole, and a rise in the age-specific labor force participation rates. Second, over the same period, employment as measured by the usual status work force grew at 2.7Z. As a result, unemployment, again measured as "usual status" unemployment, grew from 1.7% of the labor force to 2.5Z. 4.23 It is difficult to interpret these results in a straightforward way. If employment opportunities were becoming generally more scarce over the period, one might expect that labor force participation rates would decline or at least not show such a substantial increase. Structural cbanges within the labor force offer at least a partial explanation of the increase in unemployment: during the 1970s, the NSS data suggest modest but noticeable shifts in the occupational structure (from agriculture into non-agriculture), in the type of employment (from self-employment into wage and casual employment), and in location (from rural to urban) of the labor force. ;/ All of these shifts tend to move workers into categories where unemployment is less disguised and thereby contribute to a rise in reported unemployment. 4.24 Such changes in the composition of the labor force, combined witb variations in data due to metbodological changes, may make the implied deterioration in the employment situation more apparent than real. Nevertheless, the data at the very least provide no indication that there was significant progress in reducing the incidence of unemployment during the 1970s. The relatively slow growth of the economy during the decade does not appear to have been sufficient to absorb the growing labor force, despite the relatively high elasticity of employment to GDP of about 0.77 in the 1970s. Perhaps even more important, much of the additional employment created over this period was in very low productivity tasks. As noted in para. 4.21, the poor have little alternative but to be employed or starve. While the evidence at the national level suggests real wages have not declined in the 1/ Raj Krishna, The Growth of AMgregate Unemployment in India: Trends. Sources and Macro Policy Options, mimeo, draft Staff Working Paper, June 1983. 3] J. Krishnamurthy, Changes in the Indian Workforce in the Recent Period. draft. 1983.  -100- 1970s, many of those employed work at very low levels of productivity and income. This means that the concept of employment elasticity, and indeed of employment itself, must be treated with extreme caution in the Indian context (see para. 4.26 below). 4.25 The population projections presented in Section C above are used in Table 4.9 to estimate the growth in the labor force over the 1980-2000 period. Two projections are presented wbich bracket the range of most likely outcomes. Projection A assumes that age-specific labor force participation rates remain constant at the relatively high 1977/78 rates. Under this scenario the rate of growth of the labor force gradually declines from 2.4Z per year to 2.17Z per year, averaging 2.3% for the 20 year period. Due to sbifts in the age structure of the population, the crude labor force par- ticipation rate rises slowly throughout. In Projection B an attempt is made to capture the effects of several structural shifts in the population which are likely to reduce labor force participation. These stem primarily from the spread of education which delays the onset of labor force participation of young adults, and increased urbanization, whicb gives greater weigbt to the consistently lower labor force participation rates in urban areas. Under these assumptions, the growth of the labor force ranges between 2.13X to 2.062 per year over the period, averaging 2.1% per anum. Table 4.9: PROJECTED LABOR FORCE GROWTH - 1980-2000 (percent per year) 1980-85 1985-90 1990-95 1995-2000 Projection A Growth Rate 2.40 2.34 2.31 2.17 Crude Participation Rate (period end) 0.4458 0.4550 0.4685 0.4829 Projection B Growth Rate 2.13 2.10 2.11 2.06 Crude Participation Rate (period end) 0.4398 0.4433 0.4520 0.4635 4.26 The development of an economy which will provide productive employ- ment for these new entrants to the labor force, as well as reduce the exist- ing backlog, is a major objective of planning in India. The projections imply the need for a growth in employment in the 2.2Z-2.4Z range with little margin to reduce existing unemployment. A substantially accelerated GDP growth rate is needed to achieve this. As discussed in para. 4.24, the relationship between the growth of the economy and the growth in employment is not a simple one. For illustrative purposes, bowever, it is possible to look at the implications of alternative GDP growth rates and alternative elasticities of employment with respect to GDP. As we have noted, over the 1970s the ratio was about 0.77. Applying such a ratio to the projected labor force growth would imply that the required grovtb rate would be a modest 3%  -101- or so. It is most unlikely, however, that this kind of employment-output relationship is or should be sustainable in the future. For the issue in India is not only to create jobs, but also to raise the low levels of produc- tivity that depress income levels for the bulk of the labor force. Desirable productivity growth implies that historically estimated employment elas- ticities would necessarily fall. The employment analysis prepared for the Sixth Plan, for example, incorporated substantial increases in productivity (about 3% p.a.) resulting in employment elasticities of about 0.56. L/ A reasonable illustrative estimate of employment elasticity, allowing for still further productivity gains, would be 0.5. Under these assumDtions, GDP growth would need to accelerate to around 5Z p.a. to utilize the projected growth in the labor force productively. In this context the Sixth Plan's objective of accelerating the growth rate of the economy from the historical 3.5% rate to around 5%, would, if achieved and sustained, be likely to bring about a modest improvement in India's employment situation. 2J 4.27 While growth in output is undoubtedly the single most important factor ln determining growth in employment, a range of other policies and institutions can have significant effects as well. First, factor price distortions which artificially raise the price of labor (through union or minimum wage policies) or reduce the price of capital (e.g. subsidized loans for tractors or combines) can reduce both the efficiency and employment effects of a given growth path. Second, direct controls, including possibly even those which seek to promote employment, can have a wider impact on the growth rate and indirect effects on employment, which could on balance reduce efficiency and employment. Third, policies and programs to develop human capital can facilitate the employment and productivity of the labor force through programs of health, general education and specific training. In formulating a development program aimed at raising employment and produc- tivity it will be critical to reassess these and other relevant policies and programs to ensure they meet the country's changing needs. 11 Sixth Plan, Technical Note, p. 208. Elasticity cited here is weighted average of sector specific elasticities estimated by the Planning Commission. Elasticities of the major sectors are estimated as Agriculture (.67), Manufacturing (.63), Construction (.58), Trade (.71) and public administration (.48). These are in the same range as those estimated by Raj Krishna who found elasticity of agricultural employment to value added at about .75 and organized non-agricultural employment at about .51 to .74. 2/ Raj Krishna (op. cit. p. 41) estimates that GDP growth of around 6.5% wo-uld reduce unemployment (daily status) to about 1% by the year 2000.  -102- E. Other Socio-Economic Trends in Relation to Population 4.28 The Census data combined with other surveys undertaken in the 1970s indicate how population growth interacted with other selected socio-economic characteristics. This section describes developments in urbanization and housing, in pressure on natural resources, in literacy and education, and in health and mortality. Before discussing these developments however, it may be useful to put India's population growth rate and fertility, as revealed by the 1981 Census, into perspective by comparison with other countries. 4.29 The decline in fertility over the last 20 years ranks as one of the most significant features of demographic trends in India. By the standards of less developed countries, the Indian birth rate of around 34-35 in 1982 is rather low. Cross country analyses of the relationship between fertility and other socio-economic variables suggest that given India's present adult literacy rate, infant mortality rate and per capita income, one would expect a higher birth rate and fertility. (See Figure 4.2a and 4.2b.) Indeed, no other country at India's level of socio-economic development with respect to these three indices has a lower level of fertility. And five Indian States (Maharashtra, Tamil Nadu, Karnataka, Punjab and Kerala), with a total popula- tion of over 190 million, had a birth rate below 30. Yet, these facts can provide little comfort to Indian planners because there is no other country in the world with as large an annual absolute increment to its total popula- tion as India (almost 15 million during 1982 and 1983). China, where the recent Census enumerated 1,008 million persons on July 1, 1982, has an annual population growth rate of only 1.4%, so that it added only 14.1 million persons to its population during 1982/83. Also the young age structure of India's population has such a high built-in momentum for growth, that some time during the first half of the 21st century India's population is expected to overtake China's in terms of size, stabilizing at about 1.7 billion in 2150 AD. No country therefore faces such a massive absolute challenge in merely sustaining the standards of living of the people, let alone improving them. 4.30 Urbanization and Housing. The 1981 Census has reported a significant acceleration of urbanization. The proportion of urban population (excluding Assam) has increased from 20.2% (107.8 million) in 1971 to 23.7% (157.7 million) in 1981. The urban growth of 46.3% (3.84% year) has been the highest recorded for an intercensal decade. The urban population of India exceeds the total population of all except four countries: China, India itself, USSR, and USA. 4.31 The four components of urbanization are: the effect of reclassification, the extension of boundaries, the natural increase of the urban population, and migration. The effect of bourdary changes is difficult to document accurately and as a result, the estimates of other components (Table 4.10) become approximate. The estimate of net migration to urban areas during 1961-71 is based on the data on duration of residence in the place of enumeration, while that for 1971-81 is a residual after allowing for  -103- FIGURE 4.2a TOTAL FERTILITY AND ADULT LITERACY, ALL LDCS 8 ~~~~00 7 0 o 0 0 0 0 0 0 48 000 0 0 000 5 o 0 0 o o 0 0 0 0 94 ~~~00 0 0 0 0 0 00 0 >~~ 6- 0 0 0 0 0 0 14i V4 ~~~~~00 0 00 4J a 0~~~0 00 N ~~~~ ~~~INIA o0 0 0 0 o Lu 0~~~~~~~~~~~~ --~~~I 4- T I co 0 0 E-d 3 -0 a 0 0 0 0 0 2 0 20 40 60 80 100 ADULT LTERACY RATE(7.), 1977 FIGURE 4.2b TOTAL FERTILITY AND INFANT MORTALITY, ALL LDCS 9. 0 8 0 7 00 0 0 000 0 000 41 o0 0 00 0 0 O Ca 0 0 Goo00 00o 0 00 2- 0 0 0 00 0'w oo 0 a OJ 0 0 .- 0, O- 0 0 0 INFAT0 0 0 h-INDIA 01 0 0 ~0 0 rx4 000 0 0 .-44 - 0 0 U ~~ 0 0 o 0 0 E- 3 - 00 0 000 o0 0 2 0 0 0 100 150 200 250 INFANT MORTALITY (Deaths per 1000 live births)  -104- -eclassification and natural increase. The net migration, derived as a residual, seems to have accelerated substantially relative to the 1961-71 decade. As a result, the share of net migration in urban growth during the 1970s was 36Z, much higher than during the 1960s (21%) but lower than during the 1950s (50%). It must be remembered, however, that the reclassification data used are very preliminary and the residual attributed to 'net migration" also includes boundary changes. Both factors could lead to the over estima- tion of the net migration figure for the 1970s. Table 4.10: TENTATIVE ESTIMATES OF COMPONENTS OF URBAN GROWTH IN INDIA 1961-81 1961-71 1971-81 Millions millions of Persons Z Share of Persons % Share Total Urban Growth 30.2 100.0 49.9 100.0 1. Net Reclassification 4.5 14.9 8.7 a/ 17.4 2. Natural increase 19.4 64.2 25.0 b/ 50.1 3. Net migration 6.3 20.9 16.2 c/ 32.5 Urban population in the base year 77.8 107.8 Natural increase as % of base population 24.9 23.2 a/ Preliminary figure. The rate of natural increase in urban areas estimated by the SRS is adjusted upwards by 7.5 percent to allow for underregistration of births and deaths. c/ Derived as a residual which includes extension of boundaries. 4.32 The shift to urban areas combined with the growing population and numbers of households has placed strains on available housing, most obviously in cities and towns but also in rural areas. Between 1961 and 1981, the number of households in the country has increased by 45Z, whereas the average household size has increased by only 7% from 5.19 in 1961 to 5.55 in 1981. Evidently, the population growth of the order of 55% during 1961-81 has created a tremendous pressure for additional housing accommodation. Looking ahead, a recent Planning Commission projection puts the urban population at about 27% of the total in 1991 and at about 31% in 2001, suggesting continued strains on urban infrastructures. While the serious urban situation reflected in slums, rapidly expanding demands on services, especially water and transport, and rising urban land values and rents is well-known, the rural poor also experience great difficulty in finding housesites. The continuing population growth will certainly aggravate the problem of housesites and construction both in rural and urban areas.  -105- 4.33 The Government has necessarily a relatively minor role in the field of housing in India. The limited resources available to the public sector preclude the possibility of major governmental intervention. Shelter is, however, a basic need and along with other public amenities is an important determinant of the health of the people, affecting the morbidity and mor- tality among infants and children, as well as women who spend a lot of time inside inadequate housing. To meet this challenge the Government must reorient its strategy to provide affordable sites and services and emphasize appropriate policies and recover costs and encourage private development wherever feasible (see Chapter 10 below). 4.34 Pressure on Natural Resources. The steady increase in population continues to put pressures on available natural resources, most visibly on land and on forests. By the mid-1960s India had come close to bringing all productive land under cultivation. While cultivated area does increase marginally as new areas are brought under irrigation, the total net cul- tivated area has little scope to grow. Thus the natural resource- which is the main source of livelihood for the bulk of India's people has remained stagnant while population has grown. The inevitable outcome has been con- tinued division and subdivision of farms which were by no means large even when India became independent in 1947. The relevant data from the 1971172 and 1977/78 surveys by the Natural Sample Survey Organization (NSS), show a 19% increase in the number of holdings and a decrease of 18% in their average size from 2.7 hectares to 2.2 hectares. The number of operational holdings with less than half a hectare had increased the most (by over 42%), while those of more than 10 hectares have decreased by 21Z. 4.35 Two Agricultural Censuses during the 1970s have tabulated the data on the size of holdings using different concepts but with broadly similar results. They show a 16% increase in the number of operational holdings and 13% decrease in their average size (from 2.3 hectares to 2.0 hectares) over a period of six years. Once again, the small holdings of less than 0.5 hec- tares have increased the most (by almost 30%), although their average size has not declined. These studies support the expectation that with the limited scope for a further expansion of the area of land under cultivation, raising farm productivity will become increasingly important (see Chapter 6). They also suggest that an increasing share of the growing labour force will probably have to be absorbed in non-agricultural activities. At the very least an increasing share of the rural labor force will have as their main activity (in terms of time dispositi,n as well as source of income) agricul- tural labour or something other than cultivation. 4.36 Another serious consequence of continuing population growth has been pressure on forest resources for both domestic energy and construction. While the National Forest Policy of 1952 aimed at raising the total land area of the country under forests to one-third (60% in hilly areas and 20% in the plains), only about 23% of the land is actually under forests and only about half of that land (or less) has good forest cover. Besides the over- exploitation of forests for commercial purposes, including construction, the  -106- demand for fuelvood has naturally grown with population. Also, there is a growing encroachment on land under forests and pressures develop for a peri- odic recognition ("regularization") of the rights of encroachers. Since 1951, some 4.5 million hectares of forest land have been lost for diversion to cultivation, river valley projects, industrial estates and many other uses. This may actually be an underestimate but the total area under forests estimated in 1978-79 was only 74.2 million hectares, or about 0.11 hectares per capita. Since deforestation can have dangerous implications for ecologi- cal balance, social forestry programs (including rural fuelvood plantation and farm forestry) are important for offsetting the pressure of population growth. 4.37 Literacy and Education. An important correlate, if not a consequence, of population growth in India has been the very slow progress in the eradication of illiteracy. The Directive Principle of the Indian Constitution aimed to provide free and compulsory education to all children up to age 14 by 1960. If this goal had been realized, at least all children born during 1955-75 (who would have been eligible for admission to schools on attaining age five or six) would have been literate in 1981 and the Indian literacy rates would now have been higher (because persons born during 1955-75 formed 45% of the total population in 1981). In fact, only 44Z of the population aged 10 and over was literate in 1981 and there were sharp rural-urban and sex differentials (Table 4.11). Despite a faster increase in the female literacy rate than in the male rate, the percentage of literates among females 10 and over was just about half of that among males. The rural female literacy rate (in ages 10 and above) of 21Z was only a little above one-fourth that for urban males (over 77%). Table 4.11: LITERACY RATES FOR PERSONS AGED 10 AND OVER, BY SEX, 1901-81 Census Year Literates as Z of Population aged 10 and over Persons Males Females 1901 6.2 11.5 0.7 1911 7.0 12.6 1.1 1921 8.3 14.2 1.9 1931 9.2 15.4 2.4 1941 15.1 27.4 6.9 1951 19.8 29.6 9.3 1961 30.1 43.6 15.5 1971 36.8 49.9 22.6 1981 43.5* 57.0* 29.0* Note: * Assam is excluded. Data up to 1941 include Pakistan and Bangladesh.  -107- 4.38 The vell-known regional differentials persist. The rural female literacy rates ranged between 73Z in Kerala and less than 7Z in Rajasthan. In three other large States of Uttar Pradesh, Bihar and Madhya Pradesh (together accounting for 38Z of the rural females in the country), the rural female literacy rates ranged between 10.6% and 11.8%, with the rates for their urban sisters three to four times as high. Given these low levels of female literacy, it is not surprising that the birth rate in these four Sta%..._-s was higher than in otber States and the contraceptive practice rates at the end of March 1983 inL the three States of Uttar Pradesh, Bihar and Rajasthan were among the lowest (between 13% and 16%). 4.39 The observed rise in the literacy rates is a result of the dual process of the attrition (through ageing) of the elderly among whom illiteracy rates were much higher, and the progressive rise in the school enrollment rates of the young children. The 1981 Census data indicate sub- stantial differences in enrollment ratios by sex and rural-urban residence in age groups 5-9 and 10-14. Table 4.12 presents the school attendance ratios for selected States and indicates that in the four States with very low rural female literacy rates (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh), the school enrollment ratios for rural girls were also very low, ranging between 10% and 15% for ages 5-9 and between 10% and 19% for ages 10-14. There is nothing on the horizon suggesting significant progress in female literacy rates in these States. The sharp sex differential between the school enrollment ratios of boys and girls might eventually create some pressures for accelerated progress if literate boys insist on literate spouses. 4.40 Education. Health and Mortality. The expected close association between literacy and educational attainment of the mother and the level of infant mortality has been highlighted by the Infant and Child Mortality Survey, 1979. conducted in the SRS blocks. The data shown in Table 4.13, suggest infant mortality is markedly lower among children whose mothers are literate (90) than among those whose mothers are illiterate (145). There is also a clear effect of education up to the primary school stage. The possible association between literacy of women and living standards notwithstanding, the data point to a likely contribution of literacy and education of women to the rearing of children and the chances of their survival. Of course, many other factors are at work (including rural-urban location) which make it difficult to determine the causal relationship. Table 4.13 also shows infant mortality rates for children of working and non-working women. Given the general absence of creches, children of working women suffer from a clear disadvantage. Once again, however, the level of living of the household might be the underlying factor because female par- ticipation in labor force does seem to vary inversely with the per capita expenditure of the household. Children born to rural women working in agriculture experienced lower infant mortality than those of women working in other blue collar production activities, presumably because agriculture tends to be seasonal and permits flexibility in work and better childcare possibilities.  -108- Table 4.12: SCHOOL ATTENDANCE RATIOS FOR AGE GROUPS 5-9 AND 10-14, BY SEX, 1981 CENSUS (Z) Ages 5-9 Ages 10-14 Persons Males Females Persons Males Females India /a Total 38.45 44.33 32.21 50.45 62.07 37.47 Rural 32.95 39.63 25.83 44.27 57.75 29.18 Urban 58.69 61.65 55.55 71.58 77.00 65.60 Bihar Total 25.88 32.96 18.37 41.44 55.41 24.70 Rural 22.62 30.00 14.79 37.56 52.62 19.44 Urban 51.21 56.07 46.10 68.18 75.00 60.27 Gujarat Total 44.89 49.97 39.41 60.63 70.35 49.66 Rural 39.71 45.69 33.26 54.30 66.10 41.01 Urban 57.83 60.65 54.77 75.92 80.59 70.63 Kerala Total 75.10 75.14 75.06 85.96 87.90 83.97 Rural 74.26 74.24 74.27 85.37 87.57 83.12 Urban 79.05 79.30 78.79 88.66 89.40 87.89 Madhya Total 29.99 37.78 21.90 41.25 55.38 25.34 Pradesh Rural 24.37 33.01 15.39 33.50 49.40 15.57 Urban 55.28 59.23 51.17 71.86 79.19 63.70 Maharashtra Total 52.46 57.60 47.12 62.59 73.07 51.23 Rural 45.59 52.05 38.94 54.18 67.47 39.90 Urban 67.14 69.30 64.84 80.25 84.69 75.35 Rajasthan Total 26.97 36.84 16.28 39.99 58.84 18.68 Rural 21.65 32.57 9.73 33.64 54.16 10.44 Urban 49.05 54.87 42.93 65.23 77.51 51.40 Uttar Total 25.35 32.08 17.41 43.60 58.46 25.05 Pradesh Rural 21.79 29.27 13.03 40.01 56.92 18.61 Urban 43.07 46.41 39.35 59.85 65.67 53.00 /a Excludes Assam. Source: Census of India 1981, Series-i India, Paper-2 of 1983 Key Population Statistics Based on 5 Percent Sample Data, (New Delhi 1983), p. 25.  Table 4.13 : INFANT MORTALITY RATES BY (A) EDUCATIONAL ATTAINMENT AND (B) WORK STATUS/OCCUPATIONAL GROUP OF MOTHERS, 1978 deaths per thousand population) Characteristic India Gujarat Kerala Uttar Pradesh of Mother Rural Urban Rural Urban Rural Urban Rural Urban (A) Educational attainment Illiterate 145 88 138 89 55 29 188 125 Literate 90 50 101 81 37 25 132 86 Below Primary 101 57 112 84 44 40 141 105 Primary & above 71 47 51 79 29 21 115 72 (B) Work Status/Occupation Non-Workers 134 64 125 83 34 31 175 107 Workers 142 98 148 102 74 - 151 133 Agricultural 143 106 145 - 89 - 150 155 Blue Collar /a 150 129 203 143 50 - 236 164 /a Production and related workers, transport equipment operators and labourers. Source: Office of the Registrar General, Survey of Infant and Child Mortality, 1979, New Delhi, 1983, pp. 30, 189, 382, 703.  -110- 4.41 To probe further into the determinants of infant mortality, the survey on Infant and Child Mortality gathered data on the ten most important causes of infant deaths. The reliability of these data is limited since they are based on the perceptions of respondents in the absence of diagnosis by a trained physician, and since there is a large proportion of deaths for which the cause was not reported (e.g. 22% in Uttar Pradesh and 60% in Kerala). Yet, over 30% of the infant deaths in rural Uttar Pradesh were attributed to tetanus, which accounted for less than 2Z of the infant deaths in rural Kerala and did not figure among the 10 most important causes of death in rural Gujarat. Tetanus was important also in urban Uttar Pradesh, accounting for 23% of infant deaths, but not in urban Kerala or urban Gujarat (only 2% of infant deaths). Since tetanus can be prevented through irmunization of pregnant women, the high infant mortality in Uttar Pradesh could be lowered to perhaps two-thirds its present level (provided that the effectiveness of the vaccine can be ensured and the stipulated two doses can be given). 4.42 Dysentery and diarrhoea seem to be somewhat more frequent causes of death in urban areas than in rural areas (accounting for 10% and 8% of infant deaths, respectively). Quite probably, they are more important factors in morbidity, indirectly contributing to infant mortality, and may not be immediate causes 'f infant deaths. The need for promoting simple oral rehydration therapy (ORT) has been recognized, but the program needs more active implementation and careful monitoring through the basic health care delivery system. Among other major causes of infant deaths, prematurity and respiratory diseases, including influenza, pneumonia, and bronchitis are related to poverty (and malnutrition) whicb leads to a high incidence of anemia among women in general and pregnant women in particular. The incidence of respiratory diseases is markedly higher during the winter months and seems clearly related to the exposurt of young infants to cold because of inadequate clothing and housing, both of vh;'h are related to poverty and living standards. 4.43 Quite apart from the general problem of poverty and liviug standards, the type of medical attention available at the time of birth has an important bearing on the survival of children. According to SRS data only one out of every six births in rural India was attended by a doctor or a trained person or occurred in an institution like a hospital, with no improvement evident between 1970-72 and 1976-78 (Table 4.14). State level data reveal sharp interstate differences with Kerala at the one end of the spectrum (where the percentage of births attended by a trained person increased from 52 to 56 over the period) and Uttar Pradesh at the other end (where only 5% of births received attention from a trained person). The data for urban India show a much better situation. The percentage of urban births attended by a trained person increased from 54 during 1970-72 to 66 during 1976-78 and the institu- tional births increased from 30 to 43. Overall, during 1976-78, around 28% of all births were attended by a trained health functionary. The crucial role of trained birth attendants in lowering infant (and also maternal) mortality has been recognized in India and a program to train and equip dais  -111- (traditional midwives) has been an ongoing scheme since the Second Five Year Plan. The program has been intensified since 1977/78 and the goal is to train at least one dai for each of the 580,000 villages in the country by the end of Mareb 1984. The total number of dais trained since 1974 is reported to be about 362 thousand up to July 31, 1982. Table 4.14: PERCENTAGE DISTRIBUTION OF SANPLE BIRTHS BY TYPE OF MEDICAL ATTENTION AT BIRTH, 1970-72 AND 1976-78 Rural Areas Urban Areas 1970-72 1976-78 1970-72 1976-78 Hospital/Clinic 6.4 7.1 30.5 43.1 Trained Attendant a/ 10.3 9.4 23.3 23.1 Subtotal (16.7) (16.5) (53.8) (66.2) Untrained, Other 83.3 83.5 46.2 33.8 a/ Includes doctor, trained midwife or nurse. Source: Office of Registrar General, Sample Rezistration Septem, 1970-75 and 1976-78. New Delhi, 1983. 4.44 The National Health Policy Statement of 1982, recently discussed and approved by the Parliament, has laid down the broad goals up to the year 2000 in relation to the estimated recent situation (Table 4.15). Although the MCR (maternal and child health) program has made rapid progress since 1975/76, the targets seem ambitious. Yet, they are certainly not beyond the capacity of the country. The Village Health Guides (formerlv known as Community Health Volunteers), some 200,000 of whom had been trained by March 1982, can serve as an effective channel for the MCR. The target infant mortality rate of 106 by 1985 seems quite modest if the actual level reached in 1980 was 114. 4.45 Overall, India seems to have reached a stage where the health infrastructure supplemented by the village health guides could make a dent in the prevailing high level of infant and child mortality. The initial impact of such a decline would be to raise the rate of natural increase above the 2.1Z reported by the SRS for 1981, unless, as discussed below, the birth rate declines sharply in response to an expanded and more effective family plan- ning program. Yet eventually the lower infant and child mortality (desirable per se) would facilitate a decline in fertility.  -112- Table 4.15: SELECTED NATIONAL HEALTH POLICY GOALS ACCORDING TO i.iE 1982 STATEMT Sr. Indicator Current Goals No. Level 1985 1990 2000 1. Infant mortality Rural 136 (1978) 122 Urban 70 (1978) 60 Total 125 (1978) 106 87 Below 60 2. Perinatal mortality 67 (1976) 30-35 3. Babies with birth weight below 2500 grammes (Percentage) 30 25 18 10 4. Pregnant mothers receiving ante-natal care (Percentage) 40-50 50-60 60-75 100 5. Deliveries by trained attendants (Percengage) 30-35 50 80 100 6. Imunization coverage (Percent) a. Tetanus Toxoid for 20 60 100 100 Pregnant women b. Tetanus toxoid for school children aged 10 40 100 100 aged 16 20 60 100 100 c. DPT children below age 3 25 70 85 85 d. Polio vaccine for infants 5 50 70 85 e. BCG for infants 65 70 80 85 f. For new school entrants aged 5-6 i) DT 20 80 85 85 ii) Anti-typhoid 2 70 85 85 Source: GOI, Ministry of Health and Family Welfare, Statement on National Health Policy, New Delhi, 1982  -113- 4.46 Socio-Economic Factors and Family Planninz. It is necessary to recognize that some socio-economic factors are important to the progress of family planning in India. Two of the most important of these are the low levels of female literacy and the related high levels of infant (and child) mortality. While it is true that India cannot afford to wait for socio- economic development to generate the conditions conducive to the adoption of a small family norm, more widespread recognition of the long-run inter- relationships can help develop reasonable expectations about what can be achieved. This in turn, can help avoid unnecessary frustration and dis- couragement with less than expected success from the program interventions. 4.47 An analyais of the interstate variation in the contraceptive practice rates up to March 1982 in 13 major States shows these rates to be positively and significantly associated with female literacy and negatively related (although not significant statistically) to infant mortality. In another analysis for 16 major States, socio-economic variables have a higher explanatory power (59% of the total explained variance of 83.5%) than family planning program variables (which accounted for only 11% of the explained variance). Li The interaction between the two sets of variables accounted for the remaining 30% of the explained variance. Among the socio-economic variables, the female literacy rates and the per capita domestic product in the State were statistically significant. The critical importance of increasing female literacy is reinforced also by its marked inverse relation- ship with infant mortality rates, noted above. The attainment of a sig- nificant reduction in the level of infant mortality seems well within reach in India. An associated decline in infant and child mortality is expected to favor a fall in fertility (a) by increasing the inter-birth interval through amenorrhea associated with breastfeeding and (b) by accentuating the pressure on household resources through an increase in the number and proportion of surviving children. Also, since parents are concerned about the surviving children rather than children ever born, a fall in infant and child mortality is expected to facilitate the acceptance of family planning by younger couples increasingly seeking a smaller number of births. 4.48 Some useful lessons have emerged from recent field studies undertaken in Kerala, Karnataka and Sri Lanka. With low levels of income and nutrition, Kerala and Sri Lanka have experienced fertility declines comparable to those in the most successful middle income countries of the world. This fertility decline has been as much due to historical factors as to recent policy interventions, so that the experience of Kerala or Sri Lanka is certainly not entirely replicable in other parts of India. Some 30% of the fertility decline in Kerala during 1968-78, and 40% of the decline in Sri Lanka during XI The expenditures on family planning are to some extent directly related to the family planning performance during the year because of incentive payments but the dependent variable reflects the cumulative performance in a State since the inception of the program.  -114- 1964-74 could be attributed to delayed marriage, i.e., a decline in the proportion of women married at younger ages. 4.49 This rise in the age at marriage is associated with a widespread desire for sending both girls and boys to school. Even the illiterate women desired that their daughters should be educated up to high school level; while women with 10 or more years of education wanted their daughters to study up to the first degree level. If the age-specific proportions married in India (in 1981) were the same as those in Kerala, the total fertility rate in India would be lower by 20Z. Also, women who marry later would probably adopt family planning methods more frequently and thereby lower their family size. Thus, the potential fr.r fertility reduction in India through increased age at marriage among females is to raise female education, which showed the strongest positive association with age at marriage. 4.50 The Kerala study has also indicated that about 60% of the fertility decline in the State during the past decade could be attributed to socio- economic factors and balance 40% to the official family planning program. (Among the low-income segments of the population, the proportionate contribu- tion of the official program would be higher.) The principal socio-economic factors are, of course, reduced infant and child mortality, and literacy and education, particularly female education. It would, therefore, appear that in order to encourage an increase in age at marriage and the small family norms, the other States of India should intensify measures to reduce infant and child mortality and increase female education. 4.51 It also appears that, on the whole, Kerala's progress towards the adoption of the small family norm is due not to higher family planning input, at least as measured by budgetary outlays, but to a more efficient delivery of family planning services and their higher effectiveness resulting from a stronger interaction between family planning services and socio-economic conditions. The Kerala experience also demonstrates that the family planning program has narrowed the usual time-lag between the rise of motivation to control fertility and action or implementation of the preference for a small family. Likewise, because of the incentives offered by the Indian program, the usual differentials in the acceptance of contraceptive practice by the better-off and the poor are likely to be considerably reduced. F. PoDulation Policies and Programs 4.52 Background. India was the first country to recognize a potential population problem and in 1952 inaugurated a national family planning program aimed at slowing population growth. Activities in the 1950s were limited, bowever, and it was only in the wake of the 1961 census, when the implica- tions of the reported 2.0Z annual growth raze were first widely appreciated, that serious efforts to implement a program were undertaken. In 1966, a full-fledged Department of Family Planning vas set up in the Ministry of Health and annual targets for family planning field workers were introduced.  -115- 4.53 Under India's constitution, implementation of health programs (includ- ing family planning) is a State responsibility. However, since the family welfare program (family planning and maternal-child health (MCH) care) is considered of national importance, expenditures incurred by the States are met entirely from GOI funds. The program now focuses on the integrated delivery of family planning and health services, organized through a primary health center (PRC)/subcenter rural health structure. Subcenters are staffed by male and female multipurpose workers. Female Multipurpose Workers (MPWF) are the linchpin of the program, providing services to mothers and children, conveying family planning information, and supporting several hundred thousand village health guides (VHGs). There are now some 45,000 MPWFs and female health assistants (each of whom supervises four MPWFs), operating from nearly 6,000 PHCs, 8,000 rural and urban family welfare centers, and 64,000 rural subcenters. Associated programs select and train VHGs (1:1000 population) and also train traditional birth attendants. 4.54 Government Policy and Goals. The Government's underlying population policy is to reduce fertility by introducing social strategies known to contribute to fertility reduction (i.e., health, education and literacy programs) and by implementing a family planning program. ;de Government firmly supports a voluntary, integrated family planning program in the con- text of its overall health strategy "Health for All by 2000 A.D." The Planning Commission's working committee on population has set the following demographic targets for the program, to be achieved by 1996: Crude Birth Rate 21 (per 1000 population) Crude Death Rate 9 (per 1000 population) Infant Mortality Rate 60 (per 1000 live births) Life Expectancy 64 (years) Net Reproduction Rate 1 (female child per woman) Contraceptive Prevalence Rate 60 percent 4.55 Family Planning Targets. Targets have been a feature of the Indian family planning program; they are intended as a planning and monitoring tool but their operational significance has often been misinterpreted. Published targets are set in terms of desired notional declines in the crude birth rate and are not related to existing resources or capabilities. Each year, the Government sets targets for each of the four primary contraceptive methods (sterilizations, IUDs, conventional contraceptives, and oral contraceptives) and allocates these among the States on the basis of population and previous performance. States, in turn, sub-allocate to districts. Since India has always set ambitious goals for fertility reduction, including the most recent ones given above, and since targets are seen to act as a spur to performance, they have inevitably been set high and are rarely achieved. Given the nature of these targets, it is not appropriate to equate unmet targets with program "failure." It is encouraging to note that this year the Ministry of Health and Family Welfare (MOHEW) has, for the first time, requested the States to  -116- submit estimates of family planning targets that they judge could realisti- cally be achieved and will examine the possibility of relating future targets to such estimates. 4.56 The numerical targets used in the Indian program have two related drawbacks that will become increasingly significant as the program progresses. The first is that the emphasis on quantity (that is, the number of acceptors recruited) results in the neglected of the quality of care provided. Secondly, -a those States with the highest prevalence rates, the recruitment of new acceptors becomes progressively more difficult and the relative increase in the number of new acceptors becomes an unsatisfactory measure of program success. As prevalence attains higher levels, the role of quality of care in maintaining and expanding those levels will become increasingly important. 4.57 Program Achievements. Table 4.16 summarizes program targets and achievements since 1969/70. Sterilizations exceeded targets only during 1971172 (the year when the mass vasectomy camps began) and again during 1975-77 (the Emergency period during which special emphasis was placed on vasectomy). After setbacks in the aftermath of the Emergency, the program has gradually regained momentum. Heavy reliance is placed on sterilization, with a significant shift in favor of tubectomy, which constituted over 85Z of all sterilizations in 1982/83 compared with about 30% in the early 1970s. By 1981/82 the number of sterilization acceptors had reached levels exceeded only in the 1976/77 Emergency year, and numbers for other methods had exceeded all previous achievements. The program continued to progress in 1982/83, when for the first time the number of IUD insertions exceeded one million; there was also a sharp increase in the number of sterilizations in Uttar Pradesh (171%) and Bihar (120%). Overall, the best performance was in Punjab where effective prevalence 1 rose sharply from 27.4% at the end of 1981/82 to 34.7% at the end of 1982/83, giving Punjab the third highest rate-after Maharashtra and Gujarat-among the major Indian States. 4.58 Current and effective prevalence rates from 1970171 to 1982/83 are shown in Table 4.17 and Figure 4.3. At the end of 1982/83, these rates stood at 28.3% and 25.9Z respectively, a substantial achievement given India's low level of socio-economic development. From its inception through the end of 1982/83, the program is estimated to have averted about 55 million births. 1/ The current rate of contraceptive prevalence represents the proportion of couples calculated to be currently protected against the risk of pregnancy. Another measure, the effective prevalence rate, is calculated to reflect the relative effectiveness of various methods: sterilization and oral contraceptives are assumed to be 100% effective, IUDs 95Z, and conventional contraceptives 50%. Since sterilization constitutes the bulk of the Indian program, the effective rate is only slightly lower than the current rate.  Table 4.16 : ACHIEVEMENT OF TARGETS OF FAMILY PLANNING METHODS SINCE 1969/70 (figures in thousands) Sterilisations IUD Insertions Eq. C.C. Users Eq. Oral Pill Achi- Achieve- Achi- Achieve- Achi- Achieve- Achi- Achieve- eve- ment eve- ment eve- ment eve- ment Year Target ment % Target ment % Target ment % Target ment % 1 2 3 4 5 6 7 8 9 10 11 12 13 _ 1969/70 2,215 1,422 64.2 702 459 65.3 2,431 1,509 62.1 - - 1970/71 2,600 1,330 51.2 900 476 52.9 4,800 1,963 40.9 - - 1971/72 2,079 2,187 105.2 831 488 58.8 3,829 2,354 61.5 - - 1972/73 5,697 3,122 54.8 949 355 37.4 4,258 2,398 56.3 - - 1973/74 2,268 942 41.6 669 372 55.5 4,303 3,010 70.0 - - 1974/75 2,000 1,354 67.7 600 433 72.1 3,500 2,521 72.0 - - 1975/76 2,492 2,669 107.1 912 607 66.6 4,358/b 3,528/b 80.9/b - 32 1976/77 4,299 8,261 192.2 1,137 581 51.1 4,6907W 3,692/b 78.77b - 58 1977/78 3,990/c 949 23.8 1,000 326 32.6 5,000/b 3,253/b 65.1/b - 78 1978/79 3,965 1,484 37.4 600 552 91.9 4,000/b 3,4697E 86.7/b - 82 1979/80 3,049 1,778 58.3 1,149 635 55.2 5,003 2,987 59.7 500 82 1980/81 2,896 2,053 70.9 791 628 79.4 5,042 3,718 73.7 495 91 1981/82/a 2,896 2,792 96.4 791 750 94.9 5,042 4,433 87.9 495 120 1982/83 4,522 3,981 88.0 1,512 1,074 71.0 6,502 5,718 87.9 503 170 33.8 1983/84 5,900 2,009 51.1/d 2,500 841 50.5/d 7,900 5,380 102.2/d 1,100 247 33.7/d /a Figures are provisional. /b Includes equivalent Oral Pill users also. /c Targets (levels of expectation) not insisted upon for the year. /d Achievement relative to the pro-rata target for eight months. Note: Figures in brackets relate to Equivalent Conventional Contraceptive users.  Table 4.17: NUMBER OF COUPLES CURRENTLY AND EFFECTIVELY PROTECTED BY VARIOUS METI1ODS OF FAMILY PLANNING FROM 1970-71 TO 1981-82 Sterilization I.U.D. Insertions Equivalent C.C. Users Total C~owles Estimated currently& Cbuples Percent Cbuples Pereent Couples Percent Couples Percent Couples Percent Couples No. of effective- current- current- effective- effec- curr6nt- cur- effective- effec- current- cur- effective- Percent eligible ly pro- Pement ly pro- ly pro- ly pro- tively ly pro rently ly pro- tively ly pro- rently ly pro- effective- couples/a tected pro- tected tected tected protec- tected pro- tected protec- tected pro- tected ly pro- Year ('000) ('000) tected ('000) ('000) ('000) ted ('000) tected ('000) ted ('000) tected ('000) tected 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1970/71 93,013 7,584 8.1 1,356 1.5 1,288 1.4 1,963 2.1 981 1.1 10,902 11.7 19,853 10.6 1971/72 95,290 9,388 9.9 1,316 1.4 1,250 1.3 2,354 2.5 1,177 1.2 ,13.059 13.7 11,816 12.4 1972/73 97,439 12,005 12.3 1,161 1.2 1,103 1.1 2,398 2.5 1,199 1.2 15,563 16.0 14,306 14.7 1973/74 99,636 12,341 12.4 1,062 1.1 1,009 1.0 3,010 3.0 1,505 1.5 16,413 16.5 14,855 14.9 1974/75 101,882 13,036 12.8 1,039 1.0 987 1.0 2,521 2.5 1,260 1.2 16,596 16.3 15,284 15.0 1975/76 104,180 14,962 14.4 1,159 1.1 1,101 1.1 3,528Lb 3.4 1,7801b 1.7 16,648 18.9 17,843 17.1 1976/77 106,528 22,250 20.9 1,207 1.1 1,147 1.1 3,692/b 3.5 1,875/b 1.8 27,149 25.5 25,272 23.7 1977/78 108,930 21,998 20.2 1,001 0.9 951 0.9 3,253/b 3.0 1,665/b 1.5 26,252 24.1 24,614 22.6 1978/79 111,386 22,208 19.9 1,066 1.0 1,012 0.9 3,4697i 3.1 1,7761k 1.6 26,743 24.0 24,996 22.4 1979/80 113,898 22,663 19.9 1,174 1.0 1,116 1.0 3,069/b 2.7 1,575lb 1.4 26,906 23.6 25,354 22.3 1980/81 116,345 23,321 20.0 1,235 1.1 1,174 1.0 3,8091k 3.3 1,950/b 1.7 28,365 24.4 26,445 22.7 1981/82 /e 118,767 24,532 20.7 1,378 1.2 1,309 1.1 4,553s 3.8 2,336 2.0 30,463 25.7 28,177 23.7 1982/83 121,369 26,726 22.0 1,729 1.4 1,643 1.4 5,889 4.9 3,029 2.5 34,344 28.3 31,398 25.9 /a Estimates of couples with wives in the age group 15-44 years have been worked out on the basis of proportion of currently married c females to the total population as of 1971 census. Inter-censal yearly estimates of population were also revised in light of population figures of 1981 census. Estimates of population as on 31st March, 1982 were extrapolated. /b Including equivalent oral pill users also. /e Provisional figures. Note: I. The estimates of couples protected given in above table are based on (a) latest age distribution of acceptors and (b) latest estimates of joint survivance ratios of husbands and wives in different age groups. Annual attrition rate of IUD acceptors taken as 37.62 and average annual attrition rate for vasectomy acceptors and tubectomy acceptors taken as follows:- Period I five years II five years III five years IV five years V five years Vasecotomy 4.11X 7.14X 13.04% 18.742 33.50X Tubectomy 2.72X 6.20X 13.52X 28.65% 53.89X II. Couples effectively protected are arrived at by multiplying the couples currently protected by the level of use effectiveness of the method, which is taken as 1002 for sterilisations and oral Pills, 952 for IUD and 502 for Conventional Contraceptives. III. Couples protected and corresponding percentage reflect the position as at.the end of each year. IV. Totals may not tally due to rounding off. FEST COPY AVAILARBLE  -l119- Figure 4.3: CONTRACEPTIVE PRACTICE RATES P,CiNT CI.,WcLrP WCTIALV UIDCC?m - _ _ _ _ _ PmuT COLZ5 SpKT1IMV M&ICIM IT ICD tM IAmLATI L.J I-i on I T& i 0 3 r , ,-_____ ~ , '4' 1971 1972 1973 1974 1975 1976 1977 197S 1979 193C 1951 952 19S33 --EAR .11 US TI. EMU WUr* WICA I?/7I. fl The program's achievements in reducing fertility have prevented an increase in the growth rate in the face of declining mortality such as has occurred in several countries of Africa and Latin America. As documented in paras. 4.5, 4.13 and Table 4.2, a substantial decline in the birth rate Was achieved in the 1970s despite unfavorable changes in population structure. 4.59 Medical Termination of PreRnancy. Since 1972 India has permitted medical termination of pregnancy (MTP) on grounds that include the mother's health and contraceptive failure. By the end of March 1982, some 3,908 institutions (hospitals and postpartum centers) were approved for MTP, and up to that time about 2.4 million procedures had been performed under the provisions of the MTP Act. The number of unregistered abortions is unoffi- cially estimated at about four million a year. To what extent the slow but steady growth in the number of legal procedures represents new use of MNP rather than the substitution of MTP for traditional abortions is not possible to estimate. It has been suggested that the traditional association of abortion with the termination of socially undesirable pregnancies limits the potential appeal of abortion in India, although clearly there is much scope for expanded informational efforts. 4.60 Recent Initiatives. The 1981 census results, indicating no decline in the population growth rate over the previous decade, strengthened support for the family welfare program at the highest levels of Government. The Government has set up a Population Advisory Council with the Health Minister  -120- as Chairman to keep the family planning program under close review and to consider policy issues. The incentives offered to individuals accepting sterilization and IUDs were increased; for sterilization compensation was raised to Rs 100, and many State Governments encourage district panchayats or local bodies to supplement this amount from their own resources. 4.61 In addition, the Central Government has discussed recommending to the State Governments that various other incentives be provided to sterilize acceptors (e.g., free State lottery tickets, or a card that would entitle the recipient and the members of his family, particularly children, to priority service in health centers, hospitals, etc.). The Government has also approved special grants to States on the basis of the performance of their family planning programs, and several States have instituted similar awards for their district and municipal organizations. 4.62 A campaign to increase the use of oral contraceptives, including a pilot program in four States (Andhra Pradesh, Uttar Pradesh, Orissa and Maharashtra) to allow distribution >.E oral contraceptives by VHGs, is in progress. The Indian Council of Medical Research is conducting trials of injectable hormonal contraceptives; the general popularity of injections makes this method a promising possibility, particularly if quarterly or half-yearly doses prove feasible. 4.63 Areas for ProRram Improvement. The Indian family welfare program faces the complex and difficult tasks of motivating millions of primarily rural, largely illiterate couples to alter their traditional reproductive behavior and of providing adequate services to those who agree to practice family planning. The results already achieved indicate the program's very solid accomplishments. Nevertheless, there is still considerable scope for improvement. The extension of services to rural areas is by no means complete, and growing urban populations will also have to be served. The practical integration of family planning and MCH services, with the aim of making both more effective, needs attention, as do critical 1CR interventions such as child growth monitoring and oral rehyderation therapy. The Indian program continues to be hampered by serious problems in the areas of planning, management, training, monitoring and evaluation, information, education and communication (IEC), concentration on sterilization, and con- traceptive supplies. Some of these difficulties have parallels in other Indian development programs; others arise from the special circumstances of the family planning effort. Among the more important of these are: a. Mana2ement. Improved management is one of the keys to dealing with a host of implementation difficulties at all levels of the program. For example, doctors charged with running a PHC, let alone the medical services in an entire district, have substan- tial administrative and management responsibilities for which their professional training provides little or no preparation. Strong and more supportive organization, guidance and supervision of the vast field staff (para. 4.53) will be essential for enhancing program effectiveness. At all levels, the frequent  -121- turnover in both administrative and technical staff seriously hinders effective program implementation. b. IEC. A professional IEC effort is an important tool in creating demand for family planning; and it is now recognized that while the mass media are needed to popularize general notions such as the small family norm, interpersonal covmmunication is crucial to providing community leaders and individual couples with informa- tion about specific methods and motivating acceptance. IEC strategies such as those introduced in the World Bank-assisted Second Indian Population Project should be adopted as widely as possible. c. Training. Refresher and reorientation training of staff is often weak or non-existent. Training generally needs a more practical focus, with more field practice, and sbould include communication skills and concentration on priority tasks and clients. d. Reliance on Sterilization. In practice, the program continues to focus on sterilization to the relative neglect of temporary methods; it is vital that these be promoted, especially for younger couples who wish to delay having children. e. Monitoring and Evaluation. In most of the States, the collection of program performance information is cumbersome, time consuming, and produces data that are not helpful to either administrators or workers. Some States have introduced a management, informa- tion and evaluation system (MIES) that simplifies data collection, provides administrators with information useful for management purposes, and supplies staff with feedback on their performance. The Government has recommended that such systems, adapted to local needs, be adopted by all the States. f. Orientation of the Medical Profession. India needs a medical profession oriented towards public and preventive health care rather than urban-based clinical work. In the long-term, reorientation of medical education will be required to achieve this. However, much progress could be made in the shorter term if the current system of promotion and rewards were changed to reflect much more the importance of the quality of work performed by doctors as opposed to merely the quantity of clinical tasks performed. 4.64 Program Prospects. Despite these difficulties, the Indian family welfare program is basically on the right track. The Government is committed to providing additional funding as needed and to supporting alternative program approaches that may prove successful. However, the substantial achievements of the program thus far, provide no basis for complacency. Rather, they provide grounds for expecting that if program implementation can be made increasingly effective, the declines in the birth rate assumed in the population projections can be achieved.  I ~~~~~~I  -123- Chapter 5 POVERTY IN INDIA A. Poverty and India's Development Strateav 5.1 Since Independence, poverty reduction has been a fundamental goal of Indian economic and social policy. Yet the Sixth Plan estimated that in 1979/80, 48.4% of the entire population, or nearly 320 million people, lived below the poverty line, modestly defined as monthly per capita expenditures of Rs 76 in rural areas and Rs 88 in urban areas (Table 5.1). jj Estimates such as these raise a number of methodological questions, ]/ but such ques- tions cannot obscure the fundamental point that a very large proportion of the Indian population-a vast number of people--manages to live at very low levels of consumption expenditure. Indeed, even the average consumption level of those above the poverty line is exceedingly low. 5.2 As the mere size of the poverty group suggests, the poor in India generally can and do participate in economic activity. Their levels of living are so low that they bave no alternative. Those vho suffer from such severe and persistent mental, physical or other disabilities that they cannot participate, constitute a small fraction of the poor. The very fact that the j1 In 1979/80 prices, these are the mid-points of the mounthly per capita expenditure classes which consume 2,400 calories per day in rural areas and 2,100 calories per day in urban areas. Sixth Five Year Plan, pp.51-52. .V The approach of measuring numbers below a line, the so-called "head count" method, raises questions about the appropriateness of the line (e.g., the calorie intake assumed as required, or the prices used to convert between physical and monetary consumption) and about the failure to differentiate between those below but near the line and those far below the line (the intensity of poverty). Sukhatme has argued for a much stricter definition of poverty which would include about 20Z of the population (P.V.Sukhatme, "On Measurement of Poverty" EPW, August 8, 1981 pp.1318-1324) while Sen bas developed a poverty index which incor- porates a measure of intensity (A.K.Sen "Poverty, Inequality, Unemployment: Some Conceptual Issues in Measurement' EMM. August, 1973). No matter what approach is used, the results are also sensitive to choice of year (1979/80 was a very poor agricultural year which would tend to push the number of poor up), population estimates, and assump- tions about differentials between rural and urban per capita expenditures.  -124- Table 5.1: CONSUMPTION EXPENDITURE 1979/80 Average Monthly Per Capita Consumption Number of People (1979/80 Rupees) (millions) Population Group Rural Urban Total Rural Urban Total 1. Poorest Decile 32.11 41.38 34.12 51.20 14.21 65.41 2. Below Poverty Line 51.27 59.75 52.80 259.56 57.28 316.84 3. Above Poverty Line 125.71 165.83 135.83 252.44 84.82 337.26 4. Total Population 87.97 123.16 95.62 512.00 142.10 654.10 5. (Percent Below Poverty Line) - - - (50.70) (40.31) (48.44) Source: Derived from Sixth Five Year Plan, p. 52. Not adjusted for revised CSO estimates for aggregate consumer expenditure in 1979/80 or for revised population estimates based on 1981 Census. poor survive at such low levels of consumption suggests substantial resource- fulness and effort, even among those at the poorest end of the poverty spectrum. jJ The magnitude and scope of poverty therefore suggest an impor- tant corollary--that poverty is not an isolated problem, but ratber its alleviation is central to the whole of India's development strategy. This is reflected in the range of Government policies and programs which directly and indirectly contribute to poverty reduction. Going back many years, large public investments in agriculture, rural and urban infrastructure and industry have generated considerable benefits for the poor in terms of more widely available and cheaper food, higher incomes, employment opportunities and improved access to modern products and markets. Thus, investments to raise economic growth play a critical role in poverty alleviation in India, as the discussion later in this Chapter makes clear. In addition, public programs specifically directed at assisting the poor have an important sup- portive role in the development process. These can be grouped under three broad headings: (i) a range of pricing and regulatory policies which have poverty reduction as at least one of their objectives (subsidies on food, incentives for industries to locate in backward areas); (ii) widening access to basic minimum social services (education, health and family planning, water supply, shelter, nutrition); and (iii) targetted assistance for special 1/ See for example Nichael Lipton, Demosraphy and Poverty, World Bank Staff Working Paper No.623, pp.3-4, who concludes, "These ultra poor are mostly a resource, not a burdensome underclass".  -125- groups or areas (Integrated Rural Development Program, National Rural Employment Program, programs for backward classes, hill areas, drought prone areas). The latter are also supported by various State-level initiatives which seek to alleviate poverty. 5.3 The complexity and diverse nature of these programs make it very difficult to measure adequately the full extent of the Government's commit- ment to poverty reduction. This Chapter focusses on a relatively limited but important set of programs--those which have poverty reduction as their primary objective. Provision of basic services such as health and education represents a valuable long-term investment in the economic and social vell- being of India's future generations. Chapter 4 demonstrated the critical role which access to health and education can play in reducing population growth. They also have a special relevance in the fight against poverty. An analysis of selected policy and expenditure issues in these education and health programs is undertaken in Chapter 7: however, the role in poverty alleviation of India's major national program to provide basic social services--the Minimum Needs Program-is discussed briefly in this Chapter. This is followed by a more detailed examination of India's principal anti- poverty programs--IRDP and NREP--whicb have the objective of achieving sig- nificant poverty alleviation in the medium term, through creation of produc- tive assets and provision of employment opportunities. In view of the priority and increasing resources being given to these programs by the Government, an assessment of their recent performance, implementation problems and future role seems both timely and appropriate. B. Characteristics of the Poor 5.4 The poor are a diverse group, difficult to stereotype. The intensity of poverty varies substantially within the group below the poverty line, with the average consumption expenditure of the lowest decile less than 65Z of the average for all the poor (Table 5.1). It includes small farmers, landless field hands, urban construction workers, migrant workers, nomadic shepherds, members of scheduled castes, and tribals. Nevertheless, there are some broad characteristics of the poor, some of which intensify as poverty intensifies and which have implications for an appropriate development strategy. While most of these characteristics are clearly associated with poverty, the causal links are far less clear and no attempt is made to delineate them here. 5.5 The poor are predominantly (over 80%) rural. Within the rural sector, households with per capita expenditures below the poverty line are overwbelmingly engaged in agriculture (78Z), about half primarily self- employed on their own or rented land, the rest working as hired farm labor, with many combining both activities. Many of the poor not primarily engaged in agriculture supplement their incomes with agricultural work or are engaged  -126- in activities closely linked to agriculture. jJ Those of the poor fortunate enough to own land do not own much. Some 48% of the poor engaged in agricul- ture own no land or less than a quarter acre. ]) Data on other assets are difficult to collect and interpret, but the studies available confirm that the poor have a disproportionally low share of assets. V/ 5.6 In addition to the poor having few physical (or financial) assets, several factors combine to place limits on the value of their one major asset-their labor. These same factors also make it extremely difficult for the poor to change those limits and raise their productivity in the labor market. First, the poor tend to have a larger household size including a larger proportion of children than do the rest of the population. A/ This can limit the ability of the adult household members to work and also increase barriers to migration. The poor have larger households despite their higher rates of mortality and sickness which are closely associated with lower levels of nutrition. While statistics on sickness by income groups are not available, data on healtb care provided to children up to 6 years old indi- cate that only 1.6Z of children from households earning less than Rs 100 per month received trained medical attention, while nearly 80% of those from households earning more than Rs 100 per month did. 5/ Statistics on consumer expenditure indicate that in 1971/72, 52Z of rural households below the poverty line were deficient in calories compared with BZ for those above the poverty line. iJ jJ Sarvekshana, July-October 1981, p.S7. Results of 32nd Round NSS Survey on Employment and Unemployment. .J Ibid, p.S9. ]/ The All India Debt and Investment Survey, (cited in Sixth Plan, page 8) found that in 1971 the poorest 30% of rural households had only 2% of rural assets, while the NCAER, in its Household Income and Its Disposition 1980, (page 202) found that in 1975/76 the poorest third of rural households had about 12Z of the wealth. The differences between these results reflect methodological and definitial differences than any real change in asset ownership by the poor. A/ Lipton, Of.Cit. p.102-103. Based on NSS data for 1972/73. Sarvekshana, January 1979, p.S305 and S369. For example, the poorest 40% of the rural population had an average housebold size of 5.6 of which 2.7 were children while the remainder of the rural population had a household size of 4.9 of which 1.9 were children. |J GOI, Survey on Infant and Child Mortality. 1979, p.156.