India - Stabilizing and reforming the economy

Report No. 10489-IN India Stabilizing and Reforming the Economy May'18, 1992 Country Operations, Industry and Finar,ce Division India Country Department South Asia Region Report No. IJ489- IN Type: ECO) FOR OFFICIAL USE ONLY ZAGHA, ri./ X80348, P10095,' 3A201 Document of the World Bank i'his document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY Currency Rs/US$ Prior to June 6, 1966: 4.76 From June 6, 1966 to mid-December 1971: 7.50 Mid-December 1971 to end-June 1972: 7.28 1971/72: 7.44 1972/73: 7.71 1973/74: 7.79 1974/75: 7.98 1975/76: 8.65 1976/77: 8.94 1977/78: 8.56 1978/79: 8.21 1979/80: 8.08 1980/81: 7.89 1981/82: 8.93 1982/83: 9.63 1983/84: 10.31 1984/85: 11.89 1985/86: 12.24 1986/87: 12.79 1987/88: 12.97 1988/89: 14.48 1989/90: 16.66 1990/91: 17.95 1991/92: 24.52 February 1992: 25.93 March 1992: 24.89 Market Rates, 1992 1/ March 30.4 April 30.9 Source: IMF, International Financial Statistics (IFS), line "rf.n, and Reserve Bank of India. Years: The Indian fiscal year runs from April 1 through March 31. 1/ A free market for foreign exchange was created in March 1992. The other exchange rates refer to the official rate.  FOR OFFICIAL USE ONLY TITLE INDIA: STABILI?ING AND REFORMING THE ECONOMY COUNTRY INDIA REGION SOUTH ASIA SECTOR : COUNTRY ECONOMIC Report TYPE CLASSIFICATION MM/YY LANGUAGE 10489-IN CEM Restricted 05/92 English ABSTRACT This report assesess India's progress in stabilizing and reforming its economy. After a review of the main macroeconomic and policy developments during the last year, the report analyzes progress achieved in reforming trade, industrial and financial policies. Next, it examines the performance of public enterprises and the restructuring measures needed to improve their efficiency. Finally, the report reviews briefly India's achievements and shortcomings in improving the living standards of the country's poor, and the measures needed to extend the reform process to the social sectois. I This document has a restricted distribution and n.ay be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  INDIA COUNTRY ECONOMIC MEMORANDUM STABILIZING AND REFORMING THE ECONOMY Table of Contents Page No. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . i CHAPTER I: PROGRESS IN STABILIZING THE ECONOMY . . . . . . . . . . 1 A. Introduction .1... . . . . . . . . . . . . . . . . . . . . . . . B. Background .1... . . . . . . . . . . . . . . . . . . . . . . . The Macroeconomic Problems . . . . . . . . . . . . . . . . . . 1 The Policy Framework ... . . . . . . . . . . . . . . . . . . 5 C. Changing Course .... . . . . . . . . . . . . . . . . . . .. 6 The July 1991 Measures ... . . . . . . . . . . . . . . .. 6 The First Set of Results ... . . . . . . . . . . . . . .. 8 D. The 1992/93 Budget and the Deepening of Reforms . . . . . . . . . 17 The Budget .... . . . . . . . . . . . . . . . . . . . . . . 17 Structural Reforms ... . . . . . . . . . . . . . . . . . . . 21 E. Summary .... . . . . . . . . . . . . . . . . . . . . . . . . . 22 CHAPTER 2: MANAGING THE ADJUSTMENT PROCESS . . . . . . . . . . . . 23 A. Challenges to Adjustment and Policy Priorities . . . . . . . . . . 23 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 23 Exports .... . . . . . . . . . . . . . . . . . . . . . . . . 25 Private Investment ... . . . . . . . . . . . . . . . . . . . 25 B. External Financing .... . . . . . . . . . . . . . . . . . . . . 28 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 28 Managing the Balance of Payments . . . . . . . . . . . . . . . 31 Aid Requirements .... . . . . . . . . . . . . . . . . . . . 34 CHAPTER 3: TRADE, INDUSTRIAL, AND FINANCIAL POLICY REFORMS . . . . 37 A. Reforming the Trade Regime ... . . . . . ..... . . . . . . . 37 Background. . . . . . . . . . . . . . . . . . . . . . . . . 37 Reforms during July 1991 - April 1992. . . . . . . . . . . . . 41 B. Industrial Deregulation and Restructuring . . . . . . . . . . . . 46 Recent Evolution of Industrial Policies . . . . . . . . . . . . 46 Regulation of Labor and Capital Mobility . . . . . . . . . . . 48  Page No. C. Financial Sector Reform . . . . . . . . . . . . . . . . . . . . . 52 Background . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Financial Sector Reforms in 1992 .... . .......... . 53 CHAPTER 4: REFORMING PUBLIC ENTERPRISES . . . . . . . . . . . . . . 59 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 B. Selected Issues for PEs in the Fertilizer and Energy Sectors . . . 61 Investment Decisions . . . . . . . . . . . . . . . . . . . . . 62 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 C. Explaining Public Enterprise Performance . . . . . . . . . . . . . 69 Investment and Financing ... . . . . . . . . . . . . . . . . 69 Other Restricticns on PE Autonomy . . . . . . . . . . . . . . . 70 Memoranda of Understanding . . . . . . . . . . . . . . . . . 71 D. Directions for Future Reform ... . . . . . . . . . . . . . . . . 72 The Government's Program . . . . . . . . . . . . . . . . . . . 72 Future Reforms .... . . . . . . . . . . . . . . . . . . . . 73 CHAPTER 5: ECONOMIC REFORM AND INDIA'S POOR . . . . . . . . . . . . 77 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 B. The Poor in India's Development Policies ... . . . . . . . . . . 79 Programs and Policies for the Poor . . . . . . . . . . . . . . 79 Recent Trends in Poverty . . . . . . . . . . . . . . . . . . . 85 C. The Economic Reforms Underway and the Poor . . . . . . . . . . . 86 Bibliographical Note ... . . . . . . . . . . . . . . . . . . . . . 89 Statistical Appendix ... . . . . . . . . . . . . . . . . . . . . . 91 This Report has been prepared by a team led by Roberto Zagha and comprising M. Babu (Consultant, institutional aspects of public enterprise reform), W. Byrd (recent budgetary developments), M. Dutz (industrial policies and exit issues), A. Galal (public enterprise reform, selected issues), M. Gupta (exports), S. Otoo (inflation, selected fiscal and financial sector adjustment issues, external financing), L. Pritchett (capital goods in the trade reform process), V.J. Ravishankar (recent export developments and statistical appendix), U. Sae-Hau (macroeconomic projections), L. Serven (private investment), M. Singh (exports), and H. Tang (trade policy reforms and medium-term macroeconomic scenarios). The team was assisted by D. Ahluwalia and P. Cox (recent developments and policies in the agriculture sector), H. Bhattacharya (public enterprises in the textile sector), M. Dailami and A. Khanna (financial sector reform issues), W. Nickel (structural constraints to growth in agriculture), P. Pollak (energy sector issues and policies), M. Ravallion and K. Subbarao (poverty and adjustment), C. Rodriguez (Consultant, fiscal adjustment issues), and M. Tomlinson (power sector issues and policies). The assistance of the Ministry of Finance, Reserve Bank of India, Ministry of Commerce, Ministry of Industry, Department of Public Enterprises and other government institutions is gratefully acknowledged. The repor'. vas discussed with the Indian authorities in the first half of May 1992.  List of Tables and Figures Text Tables Page No. 1.1 The Evolution of Central Government Expenditure and Fiscal Deficit, 1980-93 . . . . . . . . . . . . . . . 3 1.2 India's Macroeconomic Performance, Selected Indicators, 1970-92 4 1.3 The Public Sector and India's Long-Te=m Growth, 1950-91 . . . . 6 1.4 Summary of Adjustment Policies in India, July 1991 to Mid-May ;992 . . . . . . . . . . . . . . . . . . . . . . . . 9 1.5 India's Real Exchange Rate, 1980-1992 . . . . . . . . . . . . . 10 1.6 Export Performance: Selected Growth Rates, 1990-92 . . . . . . 11 1.7 Selected Monetary Indicators, 1990-92 . . . . . . . . . . . . . 14 1.8 Recent Economic Performance, Selected IndIcators, 1987-92 . . . 16 2.1 Explaining Private Investment . . . . . . . . . . . . . . . . . 26 2.2 External Debt Profile . . . . . . . . . . . . . . . . . . . . 30 2.3 Balance of Payments, 1990-97 . . . . . . . . . . . . . . . . . 33 2.4 External Financing Requirements, 1990-97 . . . . . . . . . . . 35 3.1 Import Licensing Regime Before and After the Reforms During July 1991 - April 1992 ... . . . . . . . . . . . . . . . . 38 3.2 Import Duty Collection Rates, 1960-91 . . . . . . . . . . . . . 40 3.3 Customs Revenues in 1990/91 ... . . . . . . . . . . . . . . . 41 3.4 Some Effects of the July 1991 Liberalization of Industrial Policies . . . . . . . . . . . . . . . . . . . . . 47 4.1 The Public Sector and Public Enterprises in the Iz 'ian Economy, 1970-90 . . . . . . . . . . . . . . . . . . . . . . 59 4.2 Public Enterprise Profitability. Selected Indicators, 1970-91 60 4.3 Central Government PE Performance and the Central Government Budget, 1980-91 . . . . . . . . . . . . . . . . . 62 4.4 Financing Central Government PEs' Plan Investments, 1988-93 . . 63 4.5 The Fertilizer Subsidy, Selected Indicators, 1981-92 . . . . . 64 4.6 Comparison of Domestic and International Prices for Selected Fuels, 1991 . . . . . . . . . . . . . . . . . 65 4.7 Summary of Effects from Full LRMC Pricing and Efficiency Improvements, 1989-90 . . . . . . . . . . . . . . . . . . . . 67 4.8 Budgetary Support to PEs, DPE Definition, 1991-92 . . . . . . . 73 5.1 Poverty in the Developing World, 1985 and 1990 . . . . . . . . 78 5.2 Social Indicators in Selected Years, 1960-90 . . . . . . . . . 79 5.3 Social Sectors in Government Expenditure, 1988-93 . . . . . . . 82 5.4 Wheat Purchased from Public Distribution System as a Percentage of Total Wheat Purchased . . . . . . . . . . . . . 83 Figures 4.1 Energy Intensity, Selected Countries 1989 . . . . . . . . . . . 68 5.1 Poverty in India, 1951-1989 . . . . . . . . . . . . . . . . . . 86 Boxes 1.1 Revitalizing Agricultural Growth . . . . . . . . . . . . . . . 12 5.1 India's Social Safety Net . . . . . . . . . . . . . . . . . . . 80  LIST OF ABBREVIATIONS AND ACRONYMS USED BIFR Board for Industrial and Financial Reconstruction CAG Comptroller and Auditor General CCFF Compensatory and Contingency Financing Facility CD Certificate of Deposit CPI Consumer Price Index DFHI Discount and Finance House of India DPE Department of Public Enterprises ED Electricity Department FERA Foreign Exchange Regulation Act of 1973 GOI Government of India IDCS Integrated Child Development Services IRDP Integrated Rural Development Program MEGS Maharashtra Employment Guarantee Scheme MLT Medium- and Long-Term MOU Memorandum of Understanding NRI Non-Resident Indian PDS Public Distribution System PE Public Enterprise PIB Public Investment Board PMP Phased Manufacturing Program QR Quantitative Restriction RBI Reserve Bank of India SEB State Electricity Board SEBI Securities and Exchange Board of India SICA Sick Industrial Companies Act SSI Small-Scale Industry WPI Wholesale Price Index  ECgNOMIC DVELOPgENT DATA ONP PER CAPITA IN 1990 US$350 /a GROSS DOMESTtC PRODUCt IN I ;a ANNUAL RATE OF GROWTH Cl 1980/81 Constant Prfces) 60/61- 05/66- Z0/71- D'i6- 80/81-- 85/86- *J in. I GOP at M4arket Prices 295.03 100.0 5.1 3.0 2.1 3.6 5.6 6.1 Gross Domestic Investmmnt 70.81 24.0 9.0 1.8 5.0 4.9 2.5 842 Gross National Saving 61.94 21.0 - 1.1 7.4 Current Account Batance 8.86 3.0 - - - OUTPUT. LABOR FORCE AND PRODUCtlVTY IN 1981 Value added (at factor cost) r / P2C Worker USS Bln. X fflLL- ~ ~~ ~~~X US of Mat, 6veraoe iriculture 58.9 38.0 l12.7 70.6 341 53.9 ndustry 40.1 25.9 31.6 12.9 1268 200.3 'arvices 55.9 36.1 40.3 16.5 1387 219.1 -lat/Average 154.9 100.0 244.6 100.0 633 100.0 GOVERNIENT FINAk- General Governmient /d Central Government es, Bln. X of GOP Rs 5t.Xo D 1990/9 19091t86/-1990 1-990'91 1990/91 1983/7^919/9 Revenue Receipts 1039.07 19.6 20.7 549.54 10.4 11.1 Revenue Expenditures 1300.42 24.6 23.8 735.16 13.9 13.8 Revenue Surplus/Def it -261.36 -4.9 *3.1 -185.62 -3.5 -2.7 Capital Expenditur< '1 303.15 5.7 6.6 260.88 4.9 5.7 External Assistancb nt) /f 31.81 0.6 0.7 MONEY. CREDtT AND PRICES Z= 76 D lA a OSLO 3 & 8 V90 fi/1 91/9 (Rs. billIon outstanding at end of period) Money and Quasi Money La 109.8 224.8 557.7 1023.6 1193.9 1416.3 1642.8 2002.4 2309.5 2654.4 3148.0 Bank Credit to Goverreent (net) L 54.6 106.3 257.2 503.4 583.2 720.2 843.7 973.7 1171.5 1402.0 1576.0 Sank Credit to Cmmrciat Sector L 64.6 156.2 366.4 709.5 828.0 947.4 1074.9 1326.6 1517.0 1731.5 1901.0 (Percentage or Index Nurers) Mnewy ald Quasi money as X of GDP 27.3 30.3 41.0 "4.2 45.6 48.5 49.4 50.7 51.3 50.1 52.0 WhotesaLe Price Index (1981/82u100) 120.1 125.4 132.7 143.6 154.3 165.7 182.7 207.6 Anmual Percentage changes In: Wholesale Price Dat - - 6.4 4.4 5.8 8.2 7.5 7.4 t0.3 13.6 Sank Credit to Governmnt tnet) La 15.0 22.7 28.5 23.9 15.9 23.5 17.1 15.4 20.3 19.7 12.4 Bank Credit to Cmercial Sector la 19.4 22.7 18.2 16.8 16.7 14.4 13.4 23.4 14.4 14.1 9.8 4. The per capita GNP estimate Is at mrket prices, using World Bank Attas meta.logy. Other conversions to dollatr in this tabLe are at the preailing average exchenge rate for the period covered. Q Ouick Estimates, Central Statistical Orgnization. jc Total Labor Force nd percentage breakdoin from 1981 Cenus. Excludes date for Asam. Transfers betwn Centre wnd States have been netted out. All loans and advunces to third perties have been netted out. As recorded In the gove rnmnt budget. La Figures for 91/92 are preliminary estimates from the Reserve Bank of India.  SALANCE OF PAYMENTS 198t/89 1989/90 1990/91 1991/92Lt (USS mlitfon) MERCHANDISE ixPoRTs tAVERAg! 1986/87-1990/91 Ib) Export of Goods Lb 14262 16850 19485 18002 us$ m.lL Imports of Goods L 23339 26414 26427 20671 Trade Balatce -9077 -7564 -7942 -2669 Too 493 3.5X Non Factor Servfces (net) 731 725 823 634 Irvn Ore 490 3.5X Chemicals 1138 8.1X Resource Salance 8346 -6839 -7119 -2035 Leather wnd Leather products 1046 7.41 Textiles 1305 9.2X Garments 1612 11.4X Interest Income (net) . 298"5 -3305 -3743 -3653 Gems nd Jewlory 2551 18.1X Net Transfers S_ 2654 2256 2000 2685 Engineering Goods 1518 10.7X Others 3971 28.11 Palance on Currenit Account -8677 -7888 -8862 -3003 tbUl 14124 100.01 Direct Investment 287 350 112 200 Official Loans & Gr -nts (net) 3039 3011 2755 3731 Gross Disbursements 4007 4040 3962 5090 Amortization 968 1029 1207 1359 EXTERNAL DEST, MARCH 31. 1991 US$ # ilUf Private Borrowing (net) 1731 1726 647 270 Non-Resident Deposits 2650 2341 1314 974 Net Transactions with IMF -1210 -1008 -1214 781 Outstanding end Disbursed 70122 Att other Items Lg 607 450 1050 200 Undisbursed 33785 Errors and Omissions 141 167 0 0 Outstanding including Undisbursed 103907 Increase In Reserves 1432 851 1770 -3153 Gross Reserves (end of year)/_ 4959 4108 2338 5491 DEBT SERVICE RATIO FOR 1991/92 La Lf 28.2X Net Reserves (end of year) LS 2594 2615 -285 n.a. Fuel and Related Moterials IBRD/IDA LENDINGC MARCH 31, 1