India - Tenth Industrial Imports Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1558-IN * .^i-f.< '1 i9i;'JrU~.> REPORT AND RECOMMENDATION - 'C..5OFOTHE Tnr e.jt4"' ? $ ' > 4 ':i - _rlo i J' ^ <Z PRESIDENT TO THE bau b..EXEECUTIVE DIRECT.O-RSQ , : - ____ C..C I P, PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE TENTH INDUSTRIAL IMPORTS PROGRAM January 16, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS (As at December 20, 19.74) US$1.00 = Rs 8.12 Rs. 100 = US$0.123 Rs. 1 million = US$123,000 (The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject to change.) FISCAL YEAR April 1 - March 31  INTEPNATTONAL DEVELOPMENT" ASSOCIATION REPCRT AND PTECOt1ENDATIONL OF THE PRESIDENT TO THlE EXECUTIVF DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNTMENT OF INDIA FOR THE TENTH INDUSTRIAL IMPORTS PROGRAM 1. I submit the following report and recommendation on a proposed credit to India in an amount equivalent to UJS$200 million on standard IDA terms for the Tenth Industrial Imports Program. Since, in the absence of final ratification of the Fourth Replenishment Agreement, the amount of funds available to IDA remains seriously constrained, the (Iraft Development Credit Agreement distributed for approval today is for the equivalent of USS100 million only. After the Fourth Replenishment Agreement becomes effec- tive I intend to recommend an amendment to this Agreement increasing the cre- dit amount to US$200 million equivalent. PART I - THE ECONOY AND TliE CASE FOR IION-PROJECT ASSISTANCE 2. An economic report, "Economic Situation and Prospects of India," (402-IN, dated May 7, 1974), was distributed to the Executive Directors on May 20, 1974. A country data sheet is attached as Annex I. 3. The Fourth Plan (1969/70 - 1973/74), which came to a close last March, covered a period that started with high hopes and ended with little growth having been achieved and the economy facing greater difficulties than ever before. At the beginning, agricultural production rose sharply with the high point being reached in 1970/71. Subsequently, weather conditions ceased to be favorable and production declined, especially in 1972/73 when drought affected large areas of the country. Although there was some recovery in 1973/74, food shortages persisted and the Government had to import food- grains to sustain the public distribution system on which much of society, especially the poorest section, is dependent. With agriculture accounting for 40% or so of National Income, and thus having an all pervasive influence on economic activity, it is not surprising that the acceleration in the growth rate of the economy at the beginning of the Plan period gave way in the later years to stagnation. This depressing outcome was associated with other adverse developments. A serious deterioration took place in India's terms of trade and compounded the balance of payments difficulties. Then, shortages of food and raw materials touched off an unprecedented inflationary spiral fueled by large budgetary deficits whiclh were attributable, in part at least, to expenditures for drought relief. And finally, persistent power shortages have constrained many sectors of the economy. 4. Internationally, 1973 witnessed sharp increases in the price not only of oil but also amongst a wide range of India's essential imports, especially fertilizer, fertilizer raw materials and foodgrain. GOI responded to this situation by raising sharply the tax on petroleum products and re- examining energy policy and investment programs as explained in the Economic  - 2 - Report (402-IN) distributed on May 20, 1974. However, the adjustment process is bound to take time and will require the redeployment of resources as well as their supplementation. Trends in 1974/75 5. Against this background, the failure of yet another monsoon this summer highlights the vulnerability of India's economy. It is the conjunction of these repeated setbacks in agriculture and serious infrastructure deficien- cies which leaves India so ill equipped to deal with the adjustments to the economy necessitated by the inflation and scarcity which presently pervade the world. 6. The immediate problem is the food situation. Foodgrain production in 1974/75 is not likely to exceed 100 million tons which is well below the minimum requirement for an already undernourished population. The resulting scarcity has led to rapidly rising prices, which by mid 1974 were about 30 percent higher than the level in mid 1973, and hoarding. The public distribution system xill require un to 12 million tons for issue in 1974/75 but the Government of India (GOI) is experiencing great difficulty in pro- curing the necessary amount of foodgrain, while at the same time wishing to avoid adding to the upward pressure on prices. As a result GOI may have to import anything from 5-7 million tons of foodgrain compared with an average level of imports over 1969-73 of 2.5 million tons. 7. The drop in foodgrain production is part of an overall decline in agricultural output which, as before, has affected the whole economy, and especially, the industrial sector as 40% of industrial output relies upon agriculturally based raw materials. Industry also suffered from chronic power shortages and a shortage of imported raw materials. As a consequence, industrial production expanded by less than 1% in 1973/74 and there is little sign of any significant improvement so far this year. In addition, the sharply higher export earnings and improvements in the availability of net aid and other resources have been largely offset by the effect of worldwide inflation upon the cost to India of essential imports. 8. Another grave problem is the rampant domestic inflation stemming very largely from the scarcity of commodities. The rate of growth in money supply has been brought down progressively over the past year. Even so, the Government and the Reserve Bank of India decided in July 1974 that more stringent control of credit was necessary and introduced measures which further strengthened those introduced in October 1973. As a consequence, the expansion of money supply over the twelve month periods up to the end of November 1973 and 1974 has slowed down markedly from 19 to 11 percent respectively. Both consumption and investment were affected by these measures but more recently some ad hoc relaxations have been granted to the corporate sector to maintain investment and further ways of safeguarding corporate sector investment activity are being examined. Government has also taken action through a supplementary budget introduced at the end of July to reduce the projected budgetary deficit by raising revenues and by cutting back development expenditures quite severely. These various actions appear now to  - 3 - have achieved some results as the rate of inflation has declined from the annual rate of 30 percent whiclh was being exnerienced in mid 1974, to 23 percent by the end of November 1974. Domestic Resource Position 9. The growth rate of the economy over the Fourth Plan period (1969/70- 1973/74) was about 3.5% p.a. with this average very much affected by the low rate of less than 2% growth in 1971/72 and no increase in 1972/73. Even though there was some recovery in 1973/74, and provisional estimates indicate that the rate may have been about 6%, the generally. low rate of growth nas exacerbated the difficulty of mobilizing resources from a population with a per capita income of US$110. Indeed, net investment over the past three years has declined quite sharply from an estimated 12.9% of national income in 1971/72 to possibly only 10.5% in 1973/74. Two thirds of this decline is attributable to the percentage decrease in net domestic savings and the balance to a percentage reduction in the inflow of foreign resources. As a result, there are no real prospects of generating the resources required to achieve even the modest growth rate of 5.5% p.a. proposed in the draft Fifth Plan (1974/75 - 1978/79). This has been strikingly demonstrated at the outset of tne Plan period by the July Supplementary Budget. Additional revenue raising measures, including significant increases in tariffs for Railways and Posts and Telegraphs, are expected to produce an 8% increase in revenues. Nevertheless, development expenditures have still got to be severely curtailed on account of price inflation and a decrease in real terms of 20% or more is expected. GOI has given priority to maintaining investment in energy and agriculture and, in these circumstances, this priority can only be accommodated by cuts in other sectors, where new project starts are likely to be deferred and the implementation of on-going projects slowed down. Import Requirements 10. Priorities have had to be set for imports because there has always been a shortage of foreign exchange and these priorities have not changed over time. The first priority is to import sufficient foodgrains to maintain a minimum supply in the country. The next is to import fertilizer as well as fertilizer raw materials and petroleum as these are crucial to support agricultural production and to keep transport and other essential parts of the economy functioning. In third place, there are raw materials for industry and essential capital equipment. The significance of meeting these priorities can be easily demonstrated (Annex VI). For instance, in 1969/70, foodgrains accounted for 16% of total imports, in 1974/75 the percentage may be up to 23%. More dramatic is the percentage change for fertilizer and petroleum; these accounted for another 16% in 1969/70 of total imports but in 1974/75 are expected to account for 35%. Consequently, the proportion for the balance of imports, including industrial raw materials, has been severely compressed from 68% of total imports in 1969/70 to about 42% expected in 1974/75. Even though the total value of imports has escalated sharply, the foreign exchange available for industrial raw materials has shown little or no increase in real terms as a result of this compression and the effect of inflation.  4- Export Performance 11. Historically, India's export performance has been disappointing with a growth rate in earnings of only about 3% in the decade up to 1969/70. In the past four years, earnings have increased at a much higher rate of just under 12% p.a. but much of this has been attributable to price increases. A sample assessment of volume trends over the past four years shows that volume growth was probably not much more than 5% p.a. The most striking contrast between earnings and volume growth occurred last year (1973/74) when earnings rose sharply by 22% while the volume increase was probably only between 2 and 3%. Nevertheless, there have been some significant shifts in the source and direction of export earnings. Over the period 1971/72- 1973/74, the percentage of export earnings from non-traditional items, that is excluding cotton and jute textiles and tea, was 72% compared with about 46% in the mid-1950s; thus, some diversification is taking place although aided, of course, by the fact that inflation has primarily benefitted the non- traditional items. Also, prior to 1972/73, exports to Eastern European countries had been rising much more rapidly than to the rest of the world. In 1973/74, this trend was sharply reversed with earnings to Eastern Europe remaining the same as in 1972/73 and all the increase coming from the rest of the world, principally Western Europe. However, it is still too early to assess, with any confidence, the reason for this sudden shift, which represents a 40% increase in earnings from the rest of the world. So far during 1974/75, export earnings have again been buoyant, so much so that total earnings for 1974/75 are now expected to reach US$4.0 billion or 29% more than in 1973/74. Substantial earnings are being made from sugar, and from non-traditional items including engineering goods from which an increase of 40% is expected. This performance is the one bright spot on the economic scene, and all the more so if it is associated with a significant increase in volume terms. An effect of this improvement is that India's debt service ratio is expected to show a sharp decline from about 23% in 1973/74 to about 18% in the current fiscal year, 1974/75. However, this ratio is likely to rise in the future given the magnitude of India's requirements and the unavoidability of having to finance part of these on non-concessional terms. GOI has recently been actively concerned to expand further export earnings and has set up a committee to make proposals on policies required to improve export performance. This committee is expected to report in the first half of 1975. The Availability of External Assistance 12. India has been the recipient of substantial external assistance particularly since the mid-1950's but in terms of her needs and in relation to the size of her population, the amount has only been modest compared with most other developing countries. Particularly striking, until just recently, was the rapid decline of net aid from 1965/66 until 1972/73. Whereas over the three years 1964/65 to 1966/67, net aid averaged just over US$1,200 million, over the three years 1970/71 to 1972/73 it declined to an average of only just under US$400 million (Annex V), or less than a dollar per capita. In 1973/74 this trend was reversed with net aid reaching approximately US$610 million, because of some increase in the level of new commitments and disbursements, and because the rate of growth of debt service has begun to  - 5 - level off as a cu1;sequence of the considerable softening of terms since the nmd-i960s. Net aid for 1974/75 is expected to show a further substantial improvement to reach US$1 billion and so reinforcing the upward trend started last year. Balance of Payments Situation 13. The prosent forecast for imports in 1974/75 is between US$5.6 and 6 billion (Annex IV). This range in the forecast arises from the uncertainty surrounding the amount of foodgrain which will be imported. As mentioned in paragraph 6, the likelihood is that between 5 and 7 million tons will be needed which would cost from US$0.9-1.3 billion; for the purpose of this report, the mid-point of US$1.1 billion is taken. Then, in order to maintain fertilizer and fertili: -r raw materials at approximately the level in the two preceding years, US$750 million will be required or about two and half times what the same quantities cost last year. Added to this the oil bill is expected to reach US$1.3 billion or five times the cost in 1972/73 even though the volume of oil imports is to be kept down to the level of that year. Of the balance of US$2.7 billion, US$1.9 billion will be available for industrial raw materials and US$0.8 billion will be shared between capital goods and miscellaneous items. 14. Export earnings are forecast to reach US$4.0 billion which leaves a balance of US$1.8 billion to be financed from aid and other sources. Net aid disbursements are expected to be just over US$1 billion, which includes estimated net aid from Consortium members of US$665 million and a presently estimated net contribution from non-Consortium countries, including credits from oil producers, of US$355 million. GOI has drawn its first allocation of US$240 million from India's quota of about US$770 million under the IMF Oil Facility; arrangements for drawing the balance have still to be made. GOI has also drawn India's gold and first credit tranche from the IMF amounting to US$375 million, which represents a depletion of the reserve credit facilities available to India. Net aid disbursements together with these various IMF drawings amount to about US$1.6 billion, thus leaving, according to present estimates, a deficit of around US$200 million still to be met. With reserves at the modest level of about US$1,480 million at the end of November 1974, or the equivalent of only 3 months imports, GOI clearly has little room to maneuver in managing the balance of payments. The situation will become all the more acute, if a higher level of foodgrain imports than assumed here becomes necessary and if these imports have to be purchased with India's own limited foreign exchange resources. Prospects for 1975/76 15. The prospects for the first half of 1975/76 are not at all encouraging. Even with foodgrain imports, food is likely to remain in short supply and the early part of 1975 is likely to witness severe hardship being endured over large areas of the country. Demand will be adversely affected, especially consumer demand, while a general slow down in investment activity, apart from the high priority industries manufacturing electrical, transport, and agricultural equipment, is expected. On the other hand, the  - 6 - Government's measures are beginning to moderate the rate of inflation and investment activity in the high priority industries just mentioned should be maintained. 16. Tne balance of payments outlook is also grim. No significant change is expected in the price of oil and fertilizer and hence in the import bill for these items. Even if there is a good monsoon, foodgrain imports are still likely to be required to meet the needs of an ever expanding population and re-stocking the public distribution system. Thus, it would not be prudent to assume that import requirements in 1975/76 for oil, fertil- izer, and foodgrain will be much different from this year. Export performance could continue to be good but much will depend upon international market conditions which are most uncertain at this time. Likewise, the prospects for additional aid and special assistance from oil producers or the IMF to help meet the cost of oil imports are hard to predict. Thus, overall, there is little prospect of any change in the balance of payments position. For industry, this means that the foreign exchange available for imports may limit the volume of imports in 1975/76 to no higher, at best, than the volume received this year, thus restricting the expansion of industrial output. 17. The prospects for the latter half of 1975/76 depend almost entirely upon weather conditions during the 1975 kharif (summer) season. A good monsoon should not only lead to a reduction in food prices, thereby helping to curb inflationary pressures, but should also fill up the reservoirs thus easing the power situation. However, until the harvest comes in, it is the realities of India's present situation and the urgent need for the transfer of resources which have to be faced. The Case for Non-Project Assistance 18. India's present domestic resource situation and the inadequate foreign exchange available to supplement these domestic resources with imports is the basis for aid assistance and more specifically for non-project assistance. In particular, the case for non-project assistance arises from the need for external assistance to match India's most urgent import require- ments to improve and expand production. This need stems from the structure of the economy, and in particular the large capital goods industry which means that there are limits to the extent to which assistance can be in the form of project aid that finances imported equipment. Indeed, the bulk of India's imports comprise raw materials, components and foodgrains, which have accounted for nearly 80% of total imports over the past five years (Annex VI), and so a significant proportion of foreign assistance should be available to finance these requirements and thereby to maintain, and possibly expand, industrial output from existing capacity. In view of India's balance of payments situation, it is also essential that non-project assistance should be in the form that facilitates a speedy and effective transfer. This transfer will create additional budgetary or counterpart resources for the Government which should help in the task of making adjustments in the development program.  19. Non-project assistance availability has declined Ol r ' the past few years from about US$870 million in 1969/70, or half of the cos. of imported foodgrain and raw materials, to just under US$500 million in 1972/73, or only 25%. of these imports. However, an encouraging response from aid donors, especially Consortium members, to India's aid requirements in general and for non-project assistance in particular, has resulted in this trend being reversed with non-project assistance of just under US$800 million in 1973/74 and up to US$1 billion projected for 1974/75. In terms of percentage contribution towards imports of foodgrain and raw materials, these new. figures represent little change on the low percentage reached in 1972/73. However, the limitations on the use of bilateral non-project assistance have been greatly eased in recent years. Furthermore, since 1968/69, the Consortium members have been providing debt relief, which is equivalent to non-project assistance in most respects, and the most recent set of agreements covering 1974/75 is for US$194 million which compares with an average of US$125 million from 1968/69 to 1973/74 and with debt service payments to these countries of US$635 mil- lion in 1974/75. 20. Over the past decade, the Association has approved nine industrial Imnorts Credits for a total of US$930 million which, in view of the untied nature of IDA financing, is equivalent in most respects to free foreign ,exchange. The case for yet further freely usable foreign exchange assistance from IDA is that India has an urgent need for supplemtnary resources in this form. The Association can also make free foreign exchange available through local currency financing related to projects. Disbursements for local currency expenditures have increased sharply in recent years and in FY1975 may reach about US$140 million out of total project disbursements of about US$230 million. Both figures reflect an improvement in project implementa- tion. However the latter only represents about 38% of expected commitments for projects this fiscal year. Disbursement rates are very much dependent upon the nature of the project. Those projects directed towards particularly difficult parts of the economy, especially those concerned with the rural poor, are generally slow disbursing and often encounter implementation problems which extend further the period required for completion. Some IDA financed projects have been designed to help a sector, i.e. railways, tele- communications and agricultural credit, and these sectoral projects offer somewhat faster rates of dfsbursements than the other projects, and they too can include local currency financing. Thus the Association has some choice in the mix of project types but in the short term, and especially with the amount of funds fer commitment rising, a more rapidly disbursing form of credit is desirable in order to improve the rate at which committed funds can be transferred. The effect of the Ninth Industrial Imports Credit approved in May 1974 and initial disbursements inder the proposed credit should be to raise total IDA disbursements for FY19175-to US$430 mi,llion or 71% of total IDA commitments in that year. Through the Industrial Imports Credi-s, the Association has been able, and would under the proposed credit continue to be able, to complement the efforts being made by Consortium members to make available resources in a more timely fashion to meet the urgent needs of the country.  - 8 - PART II - BANK GROUP OPERATIONS IN INDIA 21. Since 1949. the Bank Group has made 42 loans and 62 development credits to India totaling US$1,229 million and US$2,880 million (both net of cancellation), respectively. Of these amounts, US$660 million has been repaid and US$1,063 million was still undisbursed as of November 30, 1974. Annex II contains a summary statement of disbursements as of November 30, 1974 and notes on the execution of on-going projects. 22. Since 1957, IFC has made 13 commitments in India totaling IUS$42.3 million, of which US$7.6 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$20.8 million, 1S$13.7 million represents loans and US$7.1 million equity. A summary statemeat of IFC operations as of November 30, 1974 is also included in Annex II (page 2). 23. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultu-.al credit opera- tions. Major irrigation, marketing, and seed development are other agricul- tural activities supported by the Bank Group. In recognition of the import- ance of adequate fertilizer supplies for agricultural output, the Bank Group has been active in financing the expansion of fertilizer production. Apart from investments in fertilizer plants, the Bank Group has lent support to the industrial sector through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium and small- scale enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capacity utilization in these sectors. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supplv development, and related urban investments have also received Bank Group support in recent years. 24. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, and transport remains highly relevant. The priority of the agricultural sector has been further emphasized in the present world commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs, credit and on-farm investments, command area development of existing irrigation schemes, and seed production form an important aspect of the Bank Group's program for the next few years. Special emphasis will be given to projects designed to increase the productivity of small farmers and landless laborers. Lending in support of infrastructure and industrial investments will focus on projects concerned with improving power availability and increasing the use of coal. Repeater credits for power and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare projects specifically designed to improve coal production and its transport. Lending for fertilizer projects, which has been an important feature in recent years, is expected to continue to occupy a prominent place in the future program.  - 9 - 2 5. Of tlih external assistance received by India, the proportion con- tributed by the Bank C-oup has grown significantly. In 1969/70 the Bank Group accourteA for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 35%, 27% and 37% respectively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on Miarch 31, 1973 the Bank Group share of India's outstanding external public debt was 21%, by 1979 it is projected to account for about 25%. Because Bank Group assistance to India is pre- dominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1973/74 about 12% of India's total debt service payments were to the Bank Group. PART III - INDUSTRY 26. Over the past two decades the Government followed a policy of vigorous import substitution which gave rise to quite a rapid growth of industrial output of about 9% per annum during the late 1950's and the first half of the 1960's. As a consequence by the middle 1960's India had developed an industrial structure capable of producing a wide diversity of goods, in- cluding highly sophisticated items. However, since 1966 the record of indus- trial growth has been disappointing, having averaged less than 4% in the seven years through 1972 (Annex VII). Miore recently, the record has been even more disappointing with a growth in output of less than 1% in 1973 and the expectation that there was little, if any, more in 1974. 27. The reason for the poor record of recent years is complex, but undoubtedly important factors have been the overall stagnation of the economy, the dependence of the sector on agriculturally based raw materials, and the economic and social environment. The drought induced periods of stagnation over 1965-67 and over the past three years have had such a severe impact on the economy that the average rate of growth for the economy from 1965/66 to 1972/73 has been just under 3.5%. This stagnation set in just after the potential for import substitution had been largely exploited, thus there was no other internal stimulus to industrial activity. Exports could, of course, have provided some stimulus but until very recently export develop- ment has been given inadequate attention. 28. The other factor has been that about 40% of industrial activity is dependent upon domestically produced agricultural raw materials. So drought conditions have a direct and severe impact on this sector. Finally, there is the economic and social environment. Industrial policy has to balance the conflicting political aims of a vast population, the majority of whom are deprived of any reasonable standard of living. In such circumstances, the concentration of wealth and the wielding of economic power are matters of overriding concern, and have led to a system of controls for the indus- trial sector that appear on occasion to be in conflict with the need to exploit more fully India's comparative advantage. Against this general background, certain aspects are reviewed below.  - 10 - Industrial Policy Administration 29. There are three main elements of industrial policy administration, industrial licensing, price controls, and import licensing. In February 1973, the Government made an announcement which re-confirmed the areas for private and public sector activity and clarified the criteria for expansion by large industrial houses and investment by foreign corporations. The Government also said that a single secretariat would be set up to streamline adminis- trative procedures for the granting of industrial licenses. This announcement was well received by the private sector at the time, and since then there is a clear consensus that administrative arrangements have improved under the new Secretariat for Industrial Approvals. 30. On the second element, the decontrol of finished goods prices has been effected for a number of items and most recently, July-October 1974, tractors, all categories of commercial vehicles and tires were decon.rollea. Instead, the Government has asked industry to exercise self-restraint in raising prices. however the prices of some domestic raw materials or inter- mediate products are still set by Government (i.e. steel and cement). For many years, the Government has endeavored to keep the price of domestic steel down with serious consequences for the financial position of the steel mills. The Government has recently permitted a series of increases which have had the effect of bringing a range of steel products closer to international prices, although still some 10 to 20% below the prices now (December 1974) prevailing in Western European, US and Japanese markets. 31. The third element is import licensing. Until recently the import of many items was banned if local manufacturing facilities existed. This took no account of the ability of local manufacturers to produce the quantity required in time and to a quality standard which would enable production activity to be maintained. Yet now, within the severe foreign exchange constraint under the econimy has to operate, significant attempts have been made at offering some liberalization of import policy. In the case of priority industries, 5% of import licenses may be used freely for productive purposes. In the case of exporters, 10% of replenishment licenses (import licenses obtained in respect of the import content of exports) may be used freely. In addition, the Government nas been more forthcoming in issuing licenses in order to maintain production. 32. More generally, the emphasis on import substitution in the period up to 1965 resulted in industrial policy incorporating many restrictive features. Then, with growing balance of payments difficulties from 1965 onward and increasing social and political pressures regarding ownership and control, restrictions came to be extended over a wider field. Although some real improvements in administration have taken place over the past two years, much of industrial policy still remains essentially restrictive. The need for a more positive approach, within the constraints which apply to the economy as a whole, is recognized as matter of some urgency. In November this year, the Minister of Industrial Development and Civil Supplies set up a panel to develop a policy which will emphasize production and  - 11 - improved performance. The results of this panel's work should become known during the first half of 1975. Export Performance and Incentives 33. Exports of engineering goods as a whole increased at 20% p.a. over the period 1968/69 to 1973/74. Bicycles and bicycle parts, auto ancillaries and diesel engines provided most of the growth. Electrical goL.s, especially transmission towers, have also expanded rapidly as have exports of machine tools and textile machinery. The most interesting feature of this growth has been the marked shift to Europe and the U.S. A portion of the goods involved in the shift are components supplied under collaboration agreements and this demonstrates the growing acceptability of Indian products and price competitiveness. Markets in Africa and South Asia have also been expanded which is an encouraging trend, given the appropriateness of many Indian products for the conditions to be found in these areas. 34. Export incentives comprise (i) cash assistance at rates that are specific to each product, but, in general, range from 10 to 25% of f.o.b. prices for engineering goods; (ii) import replenishment entitlements (REPs) which represent the import content of exports; REPs are additional to ordinary import license allocations, are granted in free foreign exchange and 10% may oe used freely for productive purposes; (iii) import duty and excise tax drawbacks. A persistent complaint has been that while these incentives are reasonable, poor administration has destroyed their beneficial effect. In 1973, and more recently in April this year, procedures were modified to introduce a degree of automaticity; 85% of cash assistance is now paid on submission of shipping documents with the balance adjusted after review of these documents. Further, the time required for the issue of REPs has also been greatly reduced, as regular exporters receive licenses monthly based upon an estimate of annual exports. Exporters have commented favorably on these changes which mark a new concern of the Government with export promotion. The Power Situation 35. During the past three years power shortages have caused serious dislocation of industrial production. An underlying cause has been the slow growth of installed generating capacity during the Fourth Plan period, so that while effective demand for electric power was probably rising at about 10% p.a., the average annual increase in generating capacity was just over 5%. Prolonged delays in executing civil works for power projects delayed completion of nearly one-third of the capacity proposed under the Fourth Plan, while slow delivery of power equipment and the inadequacy of the transmission system were also factors in the slow implementation. 36. For thermal stations, which supply about half the total power generated, there has been little change over the past three years in the average plant load factor and performance has proved variable over time and between locations. In some cases, fuel supplies have been a problem, notably  - 12 - in the lignite-based station at Nyveli in Tamil Nadu and at coal burning stations in the south and west which are remote from coal fields. Where coal supplies have been available, the quality has been variable. In add- ition, equipment has been out of commission for periods much longer than would normally be required for routine maintenance, while labor unrest has led to operating problems in Haryana, Uttar Pradesh and West Bengal. For hydro power the unusually low rainfall in 1972, together with a low snow melt from the Himalayan range, led to a decline in generation. 37, During 1973/74 the output of power was probably little more than in the previous year. Hydro generation improved somewhat, following a general- ly favorable 1973 monsoon and there was also an increase in supply from the nuclear stations. But, the output from thermal stations apparently declined slightly, largely on account of operating problems. For the first half of this year, the estimated availability of power came to about 83% of require- ments for existing users, although there is considerable uncertainty as to what the level of demand would be if supply constraints did not exist. 38. The incidence and effect of shortages over the first half of the year has varied between different parts of the country. For instance, in the North, availability fell 20% below estimated requirements. This area accounts for about 15% of industrial output and is important for mini steel plants, a wide range of engineering industries, and one of India's three aluminum smelters. In West Bengal and Bihar area, which accounts for 25% of industrial output, the power shortages were chronic from May through July, although latterly there has been some improvement, especially in the Damodar Valley Corporation system. However, these shortages dislocated the jute industry, a large part of India's steel making capacity and a vast range of engineering enterprises concentrated round Calcutta. Shortages also affected the South with consequences for the machine tool, automobile and tractor industries. Only in the Western regi,n has there been no more than a marginal shortfall below estimated requirements. Even so, unplanned load shedding has caused disruptions to the many industries in an area which accounts for the major part, 40% or thereabouts, of the total industrial output. 39. The prospects for 1975 have to be considered separately for hydro and thermal generation. In the case of hydro, there are units primarily dependent upon snow melt in the Himalayas (i.e. those in North Western India) and those which depend upon the monsoon (i.e. Western, Central and Southern India). The monsoon has proved to be much more variable than snow melt conditions, so in all probability units in the North West can expect their reservoirs to reach a reasonable level by late spring of 1975. In the case of thermal generation, the current difficulties vary between units. Where there are maintenance or technical problems, the solution is not likely to be immediate. Where coal shortage has been a constraint, some improvement can be expected as a result of GOI's program to improve transportation and production. At the same time, the Government's program for planned load shedding in the face of the shortage of power is enabling industrialist's to make more effective use of the power that is available. In addition, a substantial number of new units, which were started during the Fourth Plan  - 13 - period but aeever cc. -p