India - Economic situation and prospects

Report No. 3401-IN FILE COPY Economic Situation and Prospects of India April 15, 1981 South Asia Region FOR OFFICIAL USE ONLY Document of the xId Rank This documrent has a restricted distrbution and mnay be used by recipients only in the performance of their offcial dutes. Its contents may not otherwise be discosed 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 Spot rate (end-December 1980) US$1.00 = Rs 7.93 Rs 1.00 = US$0.126 Rupee trade figures have been converted into dollars by using the prevailing exchange rate up to 1970/71. For subsequent years the following average IMF trade conversion factors/market rates have been used (rupees per US dollar): 1971/72 : 7.444 1974/75 : 7.976 1977/78 : 8.563 1972/73 7.706 1975/76 : 8.653 1978/79 : 8.206 1973/74 : 7.791 1976/77 : 8.939 1979/80 : 8.076 For 1980/81, the average market rate for the first nine months was Rs 7.82. For the year as a whole the rate of Rs 7.85 has been used. Weights Unless otherwise specified all weight measures are metric. Years The Indian fiscal year runs from April 1 through March 31. Abbreviations Used (unless otherwise specified) n.a. = not available n.s. = not significant (blank)= not applicable  FOR OFFICIAL USE ONLY ACKNOWLEDGMENT This report was prepared in New Delhi by members of the World Bank Resident Mission, and of the India Division at the Bank headquarters under the guidance of Jean-David Roulet (Chief of Resident Mission), and Attila Sonmez (Principal Economist). The contributors were George J. Beier (Domestic Resources, Railways), Zafer Ecevit (Energy), James Q. Harrison (Agriculture and Sugar), Roger W. Grawe (Balance of Payments, Exports), Niels Krogh-Poulsen (Railways), Kiem Phan (Current Developments in Industry), Armando Pinell-Siles (Domestic Resources, Fertilizer, Cement), Sunanda Sengupta (Iron and Steel) and John W. Wall (Current Developments,Balance of Payments, Oil and Gas, Edible Oils). V. J. Ravishankar and P. Rajagopalan provided statistical and general research support. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ECONOMIC SITUATION AND PROSPECTS OF INDIA Table of Contents Page No. Acknowledgment Basic Data Map Summary and Conclusions CHAPTER 1: Current Developments ................................... 1 Annex to Chapter 1 ................................................. 13 CHAPTER 2: Resources for Development .............................. 19 A. External Resources: Balance of Payments Prospects .... ......... 25 B. Domestic Resources ....... ............. ............................ 35 Annex to Chapter 2 ........................ ......................... 43 CHAPTER 3: Export Prospects and Policies ..... ..................... 55 A. Recent Performance of India's Exports .......................... 55 B. Determinants of Export Performance ............................. 61 C. Policies for Sustaining Export Growth .......................... 72 Annex to Chapter 3 ................................................. 78 CHAPTER 4: Import Avoidance in Selected Industries: Fertilizer, Steel and Cement ....................................... 81 A . Introduction ................................................ 81 B. Fertilizer Industry ............................................ 84 C. The Steel Industry ............................................. 97 D. The Cement Industry ............................................ 106 Annex to Chapter 4 ................................. ................ 113 CHAPTER 5: The Energy Sector ...................................... 121 A. Energy Overview ................................................ 121 B. The Coal Sector ................................................ 126 C. The Power Sector ............................................... 139 D. Oil and Gas Sector ............................................. 148 CHAPTER 6: Agriculture ....... ....................... .............. 163 A. The Foodgrain Context ...... .................. .. ................ 163 B. The Vegetable Oil Economy ................ .. .................... 166 C. The Sugar Economy ........ .............. ........................ 183 D. Conclusions ... ........................................ . 198 Statistical Appendix (including List of Tables)  - ii- Page No. List of Text Tables Chapter 1 1.1 Agricultural Production, 1978/79 to 1980/81 ......... . 2 1.2 Agricultural Support and Procurement Prices 1978/79 to 1980/81 According to MIarketing Year .... ......... 3 1.3 Index of Industrial Production, 1979/80 and 1980/81 6 1.4 Contribution of Selected Commodities to Wholesale Price Index Changes ......................... 10 1.5 Summary of Balance of Payments Estimates .... ......... 11 Annex to Chapter 1 A.1.1 Railway Traffic, 1976/77 to 1989/90 .14 A.1.2 Sixth Plan Outlay for Railways, 1980/81 to 1984/85 16 A.1.3 Prospects for Meeting Freight Requirements of Railways .17 Chapter 2 2.1 Projected Growth of Output, 1979/80-1984/85 .......... 23 2.2 Macroeconomic Projections, 1980/81 to 1984/85 ........ 24 2.3 Balance of Payments .................................. 27 2.4 Growth Rates of Merchandise Exports and Imports ...... 28 2.5 Savings Requirement for Investment Program, 1980/81 to 1984/85 .............. .. ................. 36 2.6 Financing of Plan Expenditures, 1980-85 .............. 37 2.7 Consolidated Finances of Central and State Governments .................... .................... 39 2.8 Public Sector Savings in the Sixth Plan .............. 40 2.9 Financing of Public Sector Plan Expenditure, 1980-85 . .42 Annex to Chapter 2 A.2.1 Macroeconomic Estimates .46 A.2.2 National Accounts .47 A.2.3 National Accounts as Percent of GDP .48 A.2.4 Gross Disposable Income, Consumption and Savings in Government Sector, 1973/74 to 1979/80 .49 A.2.5 Gross Disposable Income, Consumption and Savings in Private Sector, 1973/74 to 1979/80 .50 A.2.6 National Accounts Summary .51 A.2.7 Foreign Trade at Constant Prices, 1979/80 to 1984/85 52 A.2.8 Foreign Trade at Current Prices, 1979/80 to 1984/85 . 53 A.2.9 Balance of Payments, 1974/75 to 1980/81 .... .......... 54  - iii - Page No. List of Text Tables (cont.) Chapter 3 3.1 The Commodity Composition of LDC Exports and Indian Exports in Selected Years ....... 56 3.2 Export Volume Growth and the Contribution to the Volume Increment 1970-72 to 1977-79 .... ............ 59 3.3 Major Manufactures--Annual Export Volume Growth Rates .............................................. 60 3.4 Major Agricultural Exports--Annual Volume Growth Rates ... * ...........60 3.5 India's Share of World Exports - by Category .61 3.6 Replenishment Licences to Registered Exporters .71 Annex to Chapter 3 A.3.1 Volume Growth Rates of World Trade, LDC Exports and Indian Exports by Major Commodity Aggregates .78 A.3.2 Geographic Pattern of LDC Exports and Indian Exports by Major Commodity Aggregates .79 Chapter 4 4.1 Capacity Utilization and Imports. 82 4.2 Percent of Lost Production Due to Selected Causes 83 4.3 Production, Consumption and Imports of Nitrogenous and Phosphatic Fertilizers ..... .................... 85 4.4 Capacity Utilization Rates in the Fertilizer Industry, 1970/71 to 1979/80 ................................. 88 4.5 Comparison of Domestic Retail Prices and Import Prices of Urea . .89 4.6 Demand and Supply of Fertilizers. 94 4.7 Fertilizer Capacity in Operation in 1979/80 and Planned for 1984/85 .. ............................. 95 4.8 Main Steel Plants: Production of Pig Iron, Ingot and Saleable Steel ................ ................. 99 4.9 Capacity, Production & Consumption of Saleable Steel 1979/80 ......... ............................. 100 4.10 Exports and Imports of Finished Steel ................ 102 4.11 Finished Steel--Sectoral Demand .......... ............ 105 4.12 Ingot & Saleable Steel--Demand, Capacity and Production ......................................... 105 4.13 Finished Steel: Demand, Availability and Trade 1984/85 and 1989/90 ................................ 106 4.14 India - Cement Capacity, Production and Consumption Trends in the Last Two Decades ......... .......... 112  - iv - Page No. List of Text Tables (cont.) Annex to Chapter 4 A.4.1 Financial and Economic Prices of Basic Inputs for Ammonia/Urea Production ............................ 113 A.4.2 Input-Output Coefficients for Three Different Processes of Ammonia/Urea Production According to Feedstock ............................. 114 A.4.3 Financial and Economic Costs of Producing Ammonia/ Urea According to Feedstock ......................... 115 A.4.4 India - Fertilizer Consumption and Related Foodgrain Productivity and Price Variables, 1962/63 to 1979/80 ............................. 117 A.4.5 Major Steel Plants - Installed Capacity Production and Capacity Utilization ........................... 118 A.4.6 Finished Steel--Imports and Exports, 1974/75 to 1978/79 .119 Chapter 5 5.1 Commercial Energy--Projected Supply-Demand Balance 122 5.2 Share of Different Energy Sources in Total Energy Consumption -. 1953/54 to 1975/76 .124 5.3 Sectoral Breakdown and Growth of Commercial Energy 125 5.4 Coal Production and Plan Targets and Actuals .128 5.5 Loss of Production in Coal India 1977/78 to 1979/80 129 5.6 Coal Consumption by Major Industries .131 5.7 Sectorwise Coal Loading .132 5.8 Coal India Limited: Average Cost of Production, Average Sale Price and Losses (1976/77 to 1979/80). 133 5.9 International Spot Steam Coal Prices .134 5.10 Wholesale Prices of Coal, Electricity, Mineral Oils and Non-Primary Goods (1970/71 = 100) .135 5.11 Coal Demand Projections .136 5.12 Projected Coal Production 1980/81 to 1989/90 .138 5.13 All-India Gross Electricity Generation (GWh) .140 5.14 Consumption of Electric Energy by Major Sectors 141 5.15 Growth of Electricity Consumption and GDP Growth .142 5.16 Power Requirement, Supply and Shortages .142 5.17 Performance Indices of Thermal Plants .143 5.18 Rate of Return in Main State Electricity Boards 1976/77 to 1978/79 ............................... 146 5.19 Power Supply-Demand Position, 1980/81 to 1984/85 .... 148 5.20 Production of Crude Petroleum 1979/80 to 1984/85 ..... 150 5.21 Number of Exploratory Wells Planned by ONGC 1980/81 to 1984/85 .151 5.22 Compound Annual Growth Rates of Demand for POL Products, Prices and GDP, 1950/51 to 1979/80 .152 5.23 Energy and POL Consumption .......................... 152 5.24 Retail POL Prices ................................... 153 5.25 Sectoral Breakdown and Growth of Oil Consumption .... 154  v Page No. List of Text Tables (cont.) 5.26 POL Consumption by Products 1970/71 to 1979/80 ....... 154 5.27 Projection of Demand for Petroleum Products 1982/83 to 2000/01 .................................. 155 5.28 Projected Supply, Demand and Imports of Crude Petroleum ........................................... 156 5.29 Projections of Petroleum Production, Consumption and Imports, 1979/80 to 1984/85 ..................... 158 5.30 Refinery Expansion Plans 1980/81 to 1984/85 .... ...... 160 5.31 Composition of Offshore Natural Gas as a Percent of Total Volume . ................................... 162 Chapter 6 6.1 Foodgrain Production, Availability and Demand ........ 164 6.2 Foodgrain Production and Demand ..... ................. 165 6.3 Pattern of Land Use and Output Mix by Major Crops .... 166 6.4 Oilseeds and Vegetable Oil Production by Source ...... 168 6.5 Annual Growth Rates of Area, Production and Yield of Oilseeds 1949/50 to 1978/79 .............. . 168 6.6 Vegetable Oil Supply-Demand Gap 1985 to 2000 .......... 172 6.7 Yields of Oilseeds in Selected Countries, 1979 ....... 173 6.8 Exports of Oilseeds and their Products, 1976/77 ...... 176 6.9 Potential and Actual Production of Forest Oilseeds 1970/71 to 1978/79 .177 6.10 Indian and World Market Prices of Vegetable Oils Spot Market Prices, November 1980 .180 6.11 Medium-Term Projections of Supply, Demand, Imports from 1980/81 through 1984/85 (Oil Years) .183 6.12 Growth Trends in Sugarcane Area, Yield and Output put 189 6.13 Cane Yields, Sugar Content and Sugar Yields ......... . 191 6.14 Sugarcane Production Costs and Returns 1976/77 ........ 191 6.15 Sugar Export Potential ....... ........................ 195  Page I TABLE 3A INDIA - SOCIAL INDICATORS DATA SHEET INDIA REPERENCE GROUPS (WEIGHTED AVHAGES LAND AREA (THOUSAND SQ. KM..) MOST RECENT ESTIMATE- TOTAL 3287. 6 AGRICULTURAL 1824.0 MOST RECENT LOW INCOME MIDDLE INCCME 1960 lb 1970 /b ESTIMATE /b ASTA & PACIFIC ASIA 6 PACIFIC GNP PER CAPITA (US$) 60.0 100.0 190.0 212.4 1114.7 ENERGY CONSUMPTION PER CAPITA (KILOC-RAMS OF COAL EQUIVALENT) 108.D/c 141.0/c 176.O0c 166.0 842.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 434.9 547.6 643.9 URBAN POPULATION (PERCENT OP TOTAL) 17.9 19.7 21.7 20.8 39.1 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 974.0 STATIONARY POPULATION (MILLIONS) 1645.0 YEAR STATIONARY POPULATION IS REACHED 2150 POPULATION DENSITY PER SQ. EM. 132.0 167.0 196.0 193.2 376.1 PER SQ. KM. AGRICULTURAL LAND 247.0 308.0 353.0 409.6 2350.4 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 40.0 42.5 41.4 42.0 40.4 15-64 YRS. 56. 5 54. 6 55.6 55. 0 56.2 65 YRS. AND ABOVE 3.5 2.9 3.0 3.0 3.4 POPULATION GROWTH RATE (PERCENT) TOTAL 1.9 2.5 2.0 2.2 2.4 URBAN 2.5/d 3.3 3.3 3.9 4.1 CRUDE BIRTH RATE (PER THOUSAND) 43.0 40.0 35.0 37.4 28.7 CRUDE DEATH RATE (PER THOUSAND) 21.0 17.0 14.0 14.6 7.9 GROSS REPRODUCTION RATE 3.2 2.9 2.4 2.6 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) 64.0 3782.0 4714.0 USERS (PERCENT OF MARRIED WOMEN) .. 12.0 16.9 15.6 39.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 98.0 102.0 103.0 101.4 116.9 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 93.0 92.0 91.0 92.4 108.9 PROTEINS (GRAMS PER DAY) 52.0 51.0 50.0 49.8 60.3 OF WHICH ANIMAL AND PULSE 17.0 15.0 13.0 12.0 18.8 CHILD (AGES 1-4) MORTALITY RATE 28.0 22.0 18.0 17.9 5.3 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 43.0 48.0 51.0 50.8 63.0 INFANT MORTALITY RATE (PER THOUSAND) .. 134.0 .. .. 52.8 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 17.0 33.0 30.2 42.4 URBAN .. 60.0 83.0 66.0 62.1 RURAL .. 6. 0 20.0 20.0 29.7 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 18.0 20.0 17.7 52.8 URBAN .. 85.0 87.0 71.3 71. 1 RURAL .. 1. 0 2.0 .. 42.4 POPULATION PER PHYSICIAN 5800. Oe 4890.0 3617.0 6322.7 4120.1 POPULATION PER NURSING PERSON 9630.Oje 5220.0 5675.0 9459.0 2213.6 POPULATION PER HOSPITAL BED TOTAL 2149.0/f 1629.0 1289.0 1758.4 819.4 URBAN .. .. RURAL .. .. ADMISSIONS PER HOSPITAL BED .. .. .. .. 28.8 HOUSING AVERAGE SIZE OP HOUSEHOLD TOTAL 5.2 .. 5.2 URBAN 5.2 .. 4.8 RURAL 5.2 .. 5.3 AVERAGE NLMBER OF PERSONS PER ROOM TOTAL 2.6 2.8 URBAN .. .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DIWELLINGS) TOTAL .. .. URBAN .. .. RURAL .. ..  Page 2 TABLE 3A INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVEXGES - MOST RECENT ESTIM&TE) MOST RECENT LOW INCOME MIDDLE INCOME 1960 /b 1970 A ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLllENT RATIOS PRIMARY: TOTAL 61.0 72.0 80.0 80.9 98.6 MWAE 80.0 87.0 95.0 94.3 99.2 FEMALE 40.0 55.0 64.0 66.7 97.7 SECONDARY: TOTAL 20.0 29.0 28.0 26.6 55.5 MALE 30.0 39.0 38.0 34.8 60.7 FEMALE 10.0 17.0 18.0 18.2 49.9 VOCATIONAL ENROL. (C OF SECONDARY) 8.0 6. 0 A . 9.9 13. 7 PUPIL-TEACHER RATIO PRIMARY 29.0 40.0 42.0 41.1 34.6 SECONDARY 16.0 17.0 .. 20.5 28.5 ADULT LITERACY RATE (PERCENT) 28.0 33.0 36.0 40.9 85.8 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 0. 7 1. 0 1. 3 1.8 9.0 RADIO RECEIVERS PER THOUSAND POPULATION 5.0 21.0 24.0 25.8 118.9 TV RECEIVERS PER THOUSAND POPULATION . 0 0.5 2.4 39.4 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 11.0 16.0 16.0 13.4 CINEMA ANNUAL ATTENDANCE PER CAPITA 4.0 6.3 3. 8 .. 4.9 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 189761.4 220670.5 252235.8 FEMALE (PERCENT) 31.3 32.6 32.0 29.4 36.8 AGRICULTURE (PERCENT) 74.0 74.0 74.0 70.5 51.9 INDUSTRY (PERCENT) 11.0 11.0 11.0 11.6 21.9 PARTICIPATION RATE (PERCENT) TOTAL 43. 0 40.2 39.2 37.9 39.1 MALE 57.1 52. 3 51. 3 51.3 48.5 FEMALE 27.9 27.1 26.2 23.7 29.6 ECONOMIC DEPENDENCY RATIO 1. 0 1.1 1. 1 1. 2 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 26.7 26. 3/h HIGHEST 20 PERCENT OF HOUSEHOLDS 51.7 48.9/h LOWEST 20 PERCENT OF HOUSEHOLDS 4.1 6. 7 . LOWEST 40 PERCENT OF HOUSEHOLDS 13.6 17.2h . POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 88.0 107.8 RURAL .. .. 76.0 86.5 192.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. RURAL .. .. .. .. 182.5 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 40.7 46.2 RURAL .. .. 47.9 51.7 33.2 Not available Not applicable. NOTES L The group averagea for each indicator aTe population-weighted arithmetic imeans. Coverage of countTies among the indicators depends on availability of data and is not uniform. lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Eatimate, between 1974 and 1978. Lc Solid fuel conversion factors revised, /d 1951-60; /e 1962; /f 1958; /j 1967; /h 1964-65. Most recent estimate of GNP per capita is for 1979, all other data are as of April, 1980. October, 1980  Page 3 DEFIXITIONS OF SOCIAL InjICATORS Notes- Althogh the data are drone fro- soutces generally judged lre most at thoritativ- and relcable, it should also bO soted shot they say not be ister- s .niaihy col parahicb beoca- of the latk of stauderdi.ed defieitioos and concepts used by differeos -ostries Os co.leonttg the data. The dota see, ses- theles-, useful to desrtibe orders of -agninude. itdicato trosid, aud oh--arseri-s certain aj.or diffece-ces betseenrcoutries. Tlb referenos groups are (1) rho sane country group of the subecut nosetry and (2; a co9untro roup cith seeobat high- c aveeaSe incoee thee the noutry group of the aubjeon countcy (e-copt fur "Capital Surplus Oil Expo-ters" grSup where 'Middle Isco=e Nocth Africa asd Middle East" is uhoses because of stroager soca-cuie..I affifities) . Is the refecence group data the averages ore population weighted urithien-c =eass for each ihdicatr- aed sh-ae osloy whs at leest holf of the countrics icagraup has data f or than indieatro. Sinne the coverage of countries asse- the indicatuca depeuds on the availability of dsta asd is uot uniforr, cautios mast be cexriged in taloting averages of use indicator to ao-ther Those avrrages are oaly aseful is _t=pariSg the value of ass isdicator sta tune a=ong the co-ntry and referesce grups. LAND AREA (theusand oq.'s. )fopalaniun par Physician - Pupulacion divided by sinner of p-antisisg phY- Total - Total sarfane sreas -opriring load area snd inlard eaters sicloes quslifiod from a medical school at univertity level. Agri-ultural - Eftisase of agricultuacl area used tespocr-ily or per -anently Population per Nursing Peeros - Popalation divided by somber of pcraticiag fur cr0p-, yastures, sarkeo and kitche- gsrdc- t lic fallw; 1977 data. sale ad fenale gradurte nurses, prctical aurass, sad assistt ass.es. Poptlotice per Uspital Bed - total urban, and rural - Population (ota.l, GNP PER CAPITA (005) - CNP per c-pita sntisto.s an cutr-r-t skret prices, rul- utbas, sad aroal) divided by their respective au=bor of hospital bade c-rtd by as --sortic- tethod as Worhd B00k Atlas (1977-79 basis) ; 1960, avilabl tio public ad privat e g al ed ipentsi d hopital an 1000, cud 1979 data. hbiblitotion co Hes -fpitala ar osutbliabhents permosetly staffed by oc lc-t us phyelias.. Eatsblisbnontt proidiag principally snetadi.l ENERGY CONSUdPTION PEO CAPITA - ..sual consunpticn of ccanercia' eunegy (coal care ore eno included. oral hoapitals, hwo=ev, isclude health and medisal and lignite, petroleum, ncoal gao and bydee-, enuear end geotbetsal elc- rentera not pernently staffedn by a physicisa (ban by a aedical assistant, trihioy) in hklogra-a of coal equioalent pee .opitt; 1960, 1970, and 1976 surse, =id=ife, otur) whith off-e is-patient -cn-udotio and provide a data. liited range of m.din.l farilniest Par statistial purposes arbah boapi- tcla ifolude WHO. pcincipal general and spe-ialie-d hsspital, and rerr POPULATION ARD VITAL STATISTICS hospitals local or rural boapicals and =ediral and maternity nantees Total Populatio., Mid-Year (millions) - As of Jaly 1; 1960, 1970, gad 1978 Adnisaions per gositnal fed - Total number of odmlssio. s to nr discharges data. from hospitals divided by she t sh ber of beds. Trban Populstion (peccent of total) - Ratio of urb:, to total populatioe; different defisitioet of urban areus say affcti co=parability of data HOUSING amoog countries; 1960, 190I , and 190 data. Avenrag lice of gusaehold (per-s-s per household) - ttal, urban, and teal- Pooalatinn Pro-o-tiose A household cousiacs of a group of individuals she share living quarters Popultatin ia year 2100 - Correst poyulation prujections are hosed as 1900 end their ami -ea1. A boarder otr Iodgr may ay not be i.tla ded is tto.l population by age and sex sad their _artality sad fertility rttce. thr hourhold fot otatisti_al puoposer P-rj-cti_n paca-netec for ncctality rates cosprise of three levelsossu-- A-erage cutber of p-sons Per coon- tonal urban, and rural - Avoergo sur- ing life expectaucy at birth increasing with crustry'a per eapits iscone bet of persona per root Ic all urban, and meal occupied ruaventinnal level, and feale life caperst ory atabilizing at 77.5 yearu The pare- d llifg, teapertely. D- niling crludeon -pecnasnt snctucores and meters for fertility vote also hove three levels ess.anig derlihe is ue c-pied pa vcts.X fertility according to fnco=r level and past foully planning performate. unA J.s,cc t -le pt,icIt (percent of Itellisga) - total, urba, and rural - Euch country is chsn asaigned cur of these tiner cuabicaticus of =octeliry Touventional dnolliaga with electricity in living quarters as pernestage and fertility trends for projertion purposes of toal urban, and rural deellugs respectively stationary ropulations-tInsacstaionry popslanios there is so grovth since rho birth cats is equal cc the death rate, and also the age ftructure to- EDTCAIIOU sain-acoeatoac Thit it achieved ouly after fertility rates decline to Adjusted Enroll=not Ratios the reylacoasat level of Unit oar reprudauction rote, when each genetstios Friary school - total, sale and female - iross canal, miale tand fema le of sienes replaces itsolf exactly. The stationary ponpuleuiun sloe was enrullosut of all ages at cIse primary local re per;ntataeasio respeotive eacimatod con the basia of the projected charancteristics of the populeation yciary .cbool-age populations; nernally lutlados rhlldrch aged b-Il hr the year 20Q0O, and uhe rote of derline of fertility rate to replace- years but adjusted for different leugths of prinary edacatisa; for meat level.?~Itb~Y P ti level countries =ith ,t itto- -tuniversal educatios eurolln may s d 110 peeent Tear sateienury onruletlon is trasched - Ths year siben statiouary ypoplation alonce sear papils are belo= c or bove the offtcial school age. mih.ba bet etn res bedl. thnoear-tshool- tutl. sdo-I..femleh- onpuod anabov;tsecndar Population btens reny e Sedundarrcioroquic attaleast Ocur years of approved primnary imatrantien; Per as.on.D - Bid-year population per usquaro kilueeter (101 heetares)of nrpovides goneral, cocatirsal, or teach en training tastrasiOnsa for popibi total area. usually. .t ofA 1td 1E-Il.o Rto 7yaso ag;crrpndn cass r eeal Per a. Ikt agrirultural lad - Cenpated as obvey fur agricultoral loO eu uladod nely-. Ouratfatsoa-l-deiIrollnetf c (ement of esrnedsy)1 -l VInaPioal inft-tottan Population Age Structure (percoent) - ThuAcren (0-lu years), worhisg-oge (10- include technical, induatrial, or other progras which operate ladapan- hi years), sud retired (00 years and over) as pernencages of aid-your poyu- dscsly cr as depart=ents of secoadary tustitucions. lesion; l96O, 1900, and 1908 dat. p nul-teacher ratio - risarv and -s-eIdIv - Total students carolled in eouloico Growth Rate (poreus) - total - dual groeth rates of total nil- primary sed dary vadbt tiidtd by r of seachere is the year pepulctions for 195Q-60, 196O-TI, sad 1900-O. correoponding levels. e s Population Ornovth ions (perceunt) - urban - Annual growth races of arban popu- Adult literacy race (Percent) - Literate adalts (able to read and vrite) lons fur 190-i, 1960-0 aud 1970-O 1 Crsde aBirtb Rate (per uhousand) - Aanu.al lioe birtbs per theuseed of elI-year as a prcsetage of caa adul poulats =gs 1a yargedvr population; 1960, 197Q, and l97f data. CQN81MPTf0N feuds leach Rate (nor choosand) - Annual deaths per theasoad of nld-yesr Paseesgor Tars (ver thousand pepulaclee) - Pausseger rare comprise antur papulaclos; 1960, 19701, and 1978 data. vcar seating less than eight persons; .uscludes anbulannee, hearses and GrosisReproduntion k tis- Average s ert of doughnetes aoomah will beat in cuintary obirlc.1 ber eurnal reproductivn period if she experiences present age-spotific for- Radio Iereloiens (Per thousand perulonicr) - All typo ref reneivees for codi ellity ratesa; usually fico-year averages ending is 1060, 1900, and 19707 broadcasts no general public per thousand cf popalaniss; anniodes nual- Famsily Planninga-Acceponrs, Annusal (nboaasrda) - Annual unubec of acteptors ceosol rtnsivere in countries and in yeara when negimtration of radio set of birth-control devices under saupices of notiosaxl family planning progrin. waa it effect; data for recent years may sot be conparablo slate mast Fautily Planaing-lUsers (Percent cf married neassn) - Perennage of married countries abolished liceasing. PoPse of child- te-ring age (lb-4G years) who use birth-control devices to TO yeceivora (et ohousaad population) - TO receivera for broadcast to all married semen in san=e ago group grenetl public per tboasand populatlue; esuludets tliPetmh d TV receivers P 6411 ANI fIlTOITIOi cuatris and ia years whoa rogietratin of TO sets was is seffeat. Index of Food Produeniss por Cerite (1969-1l- IOQ) - Isles of per capita onnoal tins f "daily general interest newspaper", d finTe as aperi1dal pia- productiou of all fond c_o=pdities Production pncludem seed aed deed and licton deoted prima ily to ordin r sen It is nonsidared is en cal-edar year basis. Co=todittea never pcinary goods (e g. sugarnans cc be "dudy" if Ind FPi a rec r eo tie e awoe; instead of sugar) =hich ace edible and rentals scdisFcs (e g. toffee and Conoma Aneual Attendance per Capita Per Year-bared en the somber of too urnerncluded) Aggregate production of earl tountry is bnsed n tichets acid daring the year, istl1ding admissions un drive-in tiasfas satiisal overage producer price weights; 1981-ho, 1970, and 108 dataIO Per nanita sorpl d of calories (percent of red uihements) - Computed from and mbes ts. nergy eqaivalent of ret food supplies available is cou.r. y per capis LAdO PORC per day. Available supylies nempriss domestic production, imports leaa Teotal Labor Purrs (throaceds) - iEsonoirally actice persoss, including enports, eel changes in snoch. Net supplies et;clude animal feed, sends, armed furces and unemployed hue sorluding beusewivos, studeata, atn. quastitiss uaed is food processing, and losses is diserlaibutio Osquire- Definftions is vaiou countrie aect nospable; 1960, 1900 and seats were estimwated by PAD based on physiologinal needa for normtal acci- 1000 date. vru nreszen r viny and healeh cosuideriag savirenPeatal noripenature, body coighes, age Posala (percent) - Puzale labor forte as porrennage of eocal iaber ferns. and son distrihution of population, aed allowing 10 psercent for vests at Agriculture (proc=te) - Labur force is farniag, forescry, huatiag and household level; 161-85, 1970, and 1970 data fishing at pennensage of tocal labor fort; A9l D. 1900 and 19of data Per capita supply of pretee (grrins per day) - Protein costsen of per capita Induttry (percent) - Labor form in nOsing, construction msufanturiag net aupply of food pee - ay. Net supply of food it defined as above. Re and el-criicy, wter *nd s s po ,g cf tpt-l labor forte 1960 quicenenats forc all countries established by UEDA provide f or =nirmnus 1970 and 1976 data. a sere allwouace of hO grams of total proteus pee day and _i -a-sd of -nial and yarctsieontei R atsCderneec) - total, sle, and female - Pt otioipction -r pulse proeint, of which 10 grinps tould ho animal preie Theme sted- acti ity rates are compared ma total, male, a d female labor forte as arIa are lower than these of 00 geans of total pteai and 03 ga of c v animal protein as as average for the world, propoemd by PAD in tbs Third percensaesa of total, sal a nd fane popal*tanio of lsgaepei Uorld Peed furvoy; 1961-hO, 1970 and 1907 data, 100,1970 sadctr iofo dta. pulthese are longs parirptiends caes afetati g Per rapinescponein supply from animal and pulse - Protcein supply of fond de- tg-eon nr of theppitoDd1 ls ie ra.A a ni rived drum asinoal aol pulses is grgins per lay; 1961-65, 1970 and 1970 dana, ic9enoi9c edery= t-oktis -ketio of ppopl1nion ande 10 and 63 anDd ocer Child (ages 1-A) Mortality Rour (pen thousand) - cAsual deaths per cheasand 5 et h tol a 1 bor o . a age group 1-4 years, eo childres is this age group; for ma developing nose- o tries done dsrivsd fgrun life nobles; 1960, 1970 and 1900 dana INCOE DISTRIB.TIOh Percatm ofPrivte th-a (b de 1-rsha Sha)- tecive by ehee hBALTB ofFoodP P pit 71100-I-ofP -pit.-..I'Pt5 percent, drIfest 2 p t, p s 0 p sad po iesth 4emcent Lifea tceutascf at Mirth (years) - Average anurer of years of life aig of households. e n e n at birch; 1960, 1970 and 1906 data. Infest Mortality Oats (par thoasatd) - Annual deaths of isfansi under 0ne year POvdtdT TARGET GMOTUD of ago per cbYubnd live bieths. tsti=ated Absolute Povorty Inc-e Level (010 per capita) - urhan gad coral- Arrest to Saf e goner (norcest of coculacien) - coral, urban, sod crorl - N. Absolute poverty lanoen level ia that incPPe 1ece7 below which amiminalJe Nprber of people (toctal, urban, and rural) with reanesable onnese re sade outriniosaillyadequaate diet plus easential use-food requiremuents is sot water supply (inclades treated sariface w teem or untreaneg hut arestotinared affordable. o water sneh mas thai Eron protested hereheles, spriage, and sasltory' cells) 8 Estimated Relative Poverty lanumei Level (TOO per C-Pit-) - nrba Dmed rurai - petneatages of Eheit reespennice popalations. Ts am urban area a public isnel relative pocry moon level is one-third of average per capits f ountain or standyost lonated set neor than 200 meters fene a bouse say ho pesoal i; ee of ven nou=ey Urbaa local is dorived dean she rural nonsidered as beiing witbin reasenable anuses od thee house. En rural areas level with aluos for higher net of li;ving in arhan erase crsnasubleoacesos=ould implY that the heasowifo or ne=bers od the househuld Esiaede =soatisen: Beow Aouer C09ra I0 on n ee sret r dc ear have no spesd a disptoportionate psrt of she day ie feucbieg the ee ra- Perusetio Elof p ;oplaies- (utrbanD sad rural) abs- are 'ahshate pans". faintly ' a water seeds. Access to fodcreta &igol (earnst t of dteulotise --totsl. urban and rural - Ofumbec of people (total, urban, sand rural) served by enoireas disposal em pernes9gee of their respective popalations. 1acrata dis- itoneniie and foiai Data Dicisiia pesel may include the nellectlee and disposal, sib or =ithout trecaser, fuen;i analysis and PeoseItiosa Dnpatsmt of human entrcra sand wasts-anec by water-borne systems nr theuses of Octoher 1950 pit privies eed s fimlar taseallatinap i  Page 4 ECONCKIC DEVELOPHINT DATA GNP PER CAPITA DI 1979 US$190 GROSS NATIONAL PRODUCT IN 1979/80 ANIUAL RATE OF GROWTH (%. constant prices) USS Bin. . 1955/56-1959/60 1960/61-1964/65 1965/66-1969/70 1970/71-1974/75 1975/76-1978/79 GNP at Market Prices 134.16 100.0 3.7 3.6 3.6 2.8 4.5 Gross Dosestic Investment 29.24 21.8 Gross National Saving 28.55' 21.3 Currant Account Balance d/ -0.85 - 0.6 OUTPUT. LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added (at factor cost) Labor Force V.A. Per Worker US$ aln. 7 Mil. 7. S$ 7. of National Averaae Agriculture 24.5 46.6 130.0 72.1 188 64 Industry 11.8 22.3 20.2 11.2 582 199 Services 16.3 31.1 30.2 16.7 542 186 Total/average 52.6 100.0 180.4 100.0 292 100 GOVERNMENT FINANCE General Government Central Government Re. Bln. % of GDP Rs. Bln. I of GDP 1979/80 1979/80 1975/76-1979/80 1979/80 1979/80 1975/76-1979/80 Current Receipts 208.18 19.2 18.9 108.96 10.0 10.6 Current Expenditures 206.44 19.0 17.7 117.67 10.8 10.6 Current Surplus/Deficit 1.74 0.2 1.2 - 8.71 - 0.8 Capital Expenditures f/ 81.81 7.5 7.4 56.93 5.2 5.1 External Assistance (net) 4/ 7.97 0.7 0.9 7.97 0.7 0.9 MONEY. CREDIT AND PRICES 1970/71 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 December 1979 December 1980 (Rs Billion outstanding at end of period) Money and Quasi Money 109.6 175.7 194.6 222.9 272.8 329.1 398.9 468.2 448.3 521.7 Bank Credit to Government (net) 52.6 87.3 95.3 101.1 110.2 134.7 153.9 192.2 176.4 231.4 Bank Credit to Ca_ercial Sector 64.6 107.0 126.7 153.9 185.0 212.2 253.5 306.5 294.7 335.9 (Percentage or Index Numbers) April-Dec 1979 April-Dec 1980 Money and Quasi Money as 7 of GDP 27.2 29.8 27.9 30.2 34.0 36.5 40.8 43.1 Wholesale Price Index (1970/71 - 100) 100.0 139.7 174.9 173.0 176.6 185.8 185.8 217.6 212.2 253.5 Annual percentage changes in: Wholesale Price Index 7.7 20.2 25.2 - 1.1 2.1 5.2 - 17.1 14.6 19.5 Bank Credit to Government (net) 10.8 12.3 9.2 6.1 9.0 22.2 14.3 24.9 24.9 j/ 31.2 h/ Bank Credit to Comercial Sector 19.4 22.6 18.4 21.5 20.2 14.7 19.5 20.9 17.5 S/ 14.0 h/ &/ The per capita GNP estimate is at market prices, calculated by the conversion technique used in the World Bank Atlas, 1979. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. b Quick Estimates. c/ Computed from trend line of GNP at factor cost series, including one observation before first year and one observation after last year of listed period. d/ World Bank estimates; not necessarily consistmnt vith official figures. e/ Transfers bet-eem Centre and States have been netted out. y All loans and advances to third parties have been netted out. 8/ Percentage change frm end-December 1978 to end-December 1979. hJ Percentage change from end-December 1979 to end-December 1980.  page 5 BAIANCE OF PAYMENTS 1977/78 1978/79 1979/80 9 1980/81 MERCHhNDISE EXPORTS (AVERAGE 1976/77 - 1979180) US$ Mln. 1 Exports of Goods 6,315 6,978 7,958 8,998 Engineering Goods 768 1/ 11 Imports of Goods -7,188 -8,519 -11,249 -15,624 Tea 462 7 Trade Balance - 873 -1,541 - 3,291 - 6,626 Gems 605 9 NFS (net) 691 773 633 463 Clothing 460 7 Leather and Leather Resource Balance - 182 - 768 - 2.658 - 6,163 Products 425 6 Jute Manufactures 284 4 Interest Payments (net) 8/ Iron Ore 298 5 Other Factor Payments (net) Cotton Textiles 289 4 Net Transfera 1,077 1,216 1,458 2,462 Sugar 132 2 Others 3,028 45 Balance on Current Account 806 413 -850 -3 398 Total 6.751 100 Official Aid Disbursements 1,628 1,695 1,891 2,389 ETERNAL DEBT, MARCH 31. 1980 Amortization - 645 - 702 - 676 - 707 USS billion Transactions with IHF - 330 - 158 - 1,035 Outstanding and Disbursed 15.6 All Other Items 617 286 - 143 133 Undisbureed 5.7 Outstanding, including 21.3 Increase in Reserves () -2,076 -1,534 - 222 548 Undisbursed Gross Reserves (end year) 5,823 7,357 7,579 7,031 Net Reserves (end year) )/ 5,668 7,357 7,579 6,691 DEBT SERVICE RATIO FOR 1979/80 !I!! 10.4 per cent Fuel and Related Materials IBRD/IA LEDIID DECElt 31. 1980 Imports 1,811 2,043 3,977 7,012 USS million of which: Petroleum 1,811 2,043 3,977 7,012 IDRD MA Exports 32 24 26 n.e. Outstanding and Disbursed 806 4,895 Undisbursed 572 3,547 Outstanding, including 1,378 8,442 Undisbure-d RATE OF EXCHANGE June 1966 to mid-December 1971 US$1.00 - Rs 7.5 Re 1.00 - US$0.13333- Mid-December 1971 to end-June 1972 US$1.00 - Rs 7.27927 Re 1.00 - US$0.137376 After endjune 1972 Floating Rate Spot Rate end-December 1979 US$1.00 - Re 7.907 Re 1.00 - US$0. 126 Spot Rate end-December 1980 US$1.00 - Rs 7.930 Re 1.00 - US$0.126 h/ Estimated. i/ Figures given cover all investment income (net). Major payments are intereet on foreign loans and charges paid to IMF, and major receipt is interest earned on foreign assets. / Figures given include workers' remittances but exclude official greant aeistance, which is included within official aid disbursements. k/ Excludes net use of WF credit. i/ Figure for 1979/80 is estimated. m/ Amortization and interest payments on foreign loans as a percentage of exports of goods and services.  IBRD 10483R4 79' 90 90' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MARCH- 1979 DEMOCRATIC REPUBLIC OF - .--. AFGHANISTAN INDIA .Ar 9.'9 .h inn e o! c... JAMMIAU - KASHM/IR 5 j : ~~~~~SrinCgor . State ano Union Territory Capitols * Natonaol Copitol '2 y- HI'MADH 0 O ther Cities ,P'A!, DESC/-I, \ r StoleandUnion- --I t i I-Territory Boundories - I.-rotinonl Boundaries PAKISTAN red gnrh .op { PUIJ/JAB no / .,HAPYANA CHINA Delhi L r G - / P90 8 DELHI 6 - lt-angor D E 5 0~~ /i TAP ~ NEPAL \/ 1 B-AN AJA HAN Jaipur Lucknow e t ,5 A S SA 54 K1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 Paine 5 ~ ~ A 5 5tA a 7' X g KrJnpur Prtn: >rk <4/ 9;KanA /S nna Udaipur B/ /A ty$hsI 3 AgarlsI4~' " Gandhmnogor BhopO1 WEST ' IJARAT C NA Al, A 0 H A P R A D F S H BURMA /AAHAERA SH T RA hbe ~~~~embsy ~ ~ ~ ~ ~ ~~1-yemo I' ANDHR4A7 Ar ~~~~~C PE~~~~A DESH I APA KAjjaon o  SUMMARY AND CONCLUSIONS i. As indicated in last year's Economic Report on India, a combina- tion of internal and external factors have moved India into a period of relative scarcity of domestic and external resources. It is clearly important to understand these factors and the key areas for policy and program action which will enable the Indian economy to adjust to this new situation without undue cost in terms of growth or other Plan objectives, for given India's low level of per capita income (about $190) and its per- vasive poverty, efforts to increase the level of income and improve its distribution necessarily remain at the center of India's development effort. ii. This year's Economic Report has been organized and its content selected to help develop this understanding. Chapter One analyses the current developments in the Indian economy over the past year, emphasizing the interplay of external and internal factors which contributed to the deterioration in India's resource position. Since railways emerged as a particularly important area among several where basic infrastructural lim- itations have constrained growth, an annex to Chapter One provides greater detail on developments in this critical part of the transportation sector. Chapter Two provides a perspective on India's present domestic and exter- nal resource position and projects future trends. Chapters One and Two form the background and context for the remainder of the report, which focuses on the opportunities and assesses the policy options available to India to remove or at least loosen the resource constraints which threaten the achievement of its Plan objectives. The growth of exports is central to this effort and is discussed in Chapter Three. Balanced investments in key industries which can alleviate the expected growth in the import bill are analysed in Chapter Four. Chapter Five analyses issues and prospects in the energy sector which affect the resource position both directly (e.g. through the POL import bill) and indirectly by providing an essen- tial input into export development and import alleviation. Finally, Chapter Six highlights developments in the agricultural sector--import reduction and export prospects in foodgrains, import reduction in oilseeds, and export prospects of sugar--which are important in their own right and in their potential impact on India's adjustment process. iii. This report was substantively prepared before India's Sixth Five Year Plan became available in late February 1981, so the report does not attempt a complete overview of the Plan, Nevertheless, since the report addresses itself to the subjects which are given central importance in the Plan, extensive references to the Plan have been incorporated in later revisions of the draft. * * *  - ii- iv. The recovery in 1980/81 from the setback of 1979/80 has been slower than expected. Agriculture has regained by and large its earlier record level of output, but widespread shortages of infrastructural ser- vices and of basic goods resulted in an industrial growth that was short of its potential. Towards the end of the year, however, most economic indicators became more favorable so that the GDP growth for 1980/81 is estimated to be 7% to 8%. Inflation moderated a bit from its very high level of the previous year but still remained high. The balance of pay- ments situation deteriorated sharply in 1980/81, with a current account deficit of US$3.4 billion and foreign exchange reserves fell for the first time since the mid-1970s. v. Some elements of the very large balance of payments deficit of 1980/81 were temporary, arising from the Assam situation combined with the rapid rise in POL prices. But the deterioration of balance of payments prospects does not appear to be of short duration and does require economic policy changes to manage the large deficits in coming years. In the last four years, exports have financed a decreasing share of imports. POL prices are expected to increase in real terms in the foreseeable future. It will, therefore, take increasing amounts of resources to finance the POL bill. The modernization of industry and continued liberalization of trade will lead further to growing imports. vi. Resources. After a period of fairly rapid growth with plentiful resources during the last half of the 1970s, India is entering the 1980s with uncertain growth prospects due to resource scarcities. The economy is facing basic infrastructural and supply constraints whose relaxation requires substantial domestic investments and a daunting import bill whose financing requires an unprecedented mobilization of foreign resources. To raise these foreign exchange resources India must accelerate exports, avoid imports that can be produced economically at home, mobilize and then utilize aid at a faster rate and borrow more on non-concessional terms. Export performance is the key element of this strategy as only growing exports, and the increase in commercial borrowing they allow, have the capacity to keep pace with rising import requirements. Although much can be done to increase domestic production of some items that loom large in the import bill--petroleum, fertilizer, edible oils, steel and others--the growth in demand for these and other essential materials and equipment will make the import bill grow rapidly. vii. The financing of India's ambitious investment plan for the medium term, through 1984/85, relies heavily on raising the domestic saving rate from its already high level, implying high marginal saving rates. As private sector saving is already high, major reliance is to be placed on raising public sector saving from its fairly low current level. The Government does intend to raise some additional resources from higher taxes but there are definite limits to this as both average and marginal  -iii- tax rates are already quite high for a country of India's low income. Government subsidies (mainly on food, fertilizer and exports) are modest compared to the purposes they achieve. The main scope for raising public sector saving lies in mobilizing more resources from the goods and ser- vices provided by the public sector, both by improving efficiency and by raising rates and tariffs. The public sector in India provides not only public infrastructural services such as power, rail transport and telecom- munications, but also basic goods such as coal, oil, steel, non-ferrous metals, fertilizers, chemicals, heavy electrical and many other commodi- ties. The financial surpluses from Government departments and public enterprises generally have been low and have financed only a small portion of the investment needs for these same goods and services. Financial pro- visions of the Sixth Plan include as a major source much improved revenue performances of public sector undertakings. This improved performance will no doubt take some time to materialize as it will depend partly on improvements in infrastructural services which will come about slowly, and partly on raising prices across a broad spectrum, which for policy reasons cannot be done all at once. viii. The Sixth Plan relies on a significant amount of foreign savings to help finance India's investment program. Foreign resources on conces- sional aid terms are scheduled to finance 6% of total investment and about 10% of total imports, similar to past proportions. In addition, India expects to borrow on non-concessional terms at least 4% of total invest- ment and 7% of imports to help finance the required investment and foreign exchange needs. Foreign aid and concessional borrowing will have a cru- cial role in India's effort to manage the scarce resource position facing the economy. Aid directly contributes resources to help finance the investment program and close the foreign exchange gap. The concessional- ity of aid helps reduce the future debt service burden and allows more borrowing on commercial terms than otherwise would be the case. This has become of some importance as India clearly intends to undertake a major amount of foreign borrowing to augment resources for development. This is a new response to resource scarcity for India, brought about partly by the international financial community's recognition of India's enhanced creditworthiness and partly by India's more expansionary and open response to the situation of scarcity. ix. Exports. In the long run, it is only by a healthy growth of exports that India's balance of payments problem can be managed. Against the background of export performance during most of the 1970s, we project that merchandise exports will grow at an annual average rate of almost 7% from 1979/80 to 1984/85. In the latter year, the volume growth is pro- jected to approach 9%. As the bulk of the volume growth will come from manufactured exports and other exports with good price prospects, the average unit price of exports should rise roughly as fast as prices of imports other than POL and fertilizer. The projections are contingent upon some gradual improvement in economic policies affecting exports, a  -iv- process which has already begun. They also assume no sharp deterioration in the international trading environment. x. Since the mid-1970s, India has maintained a stable export policy regime when measured in terms of the real effective exchange rate and other policies affecting exports. If export growth is to accelerate as India's adjustment requires and our projections indicate, all factors affecting export profitability will have to be monitored carefully to ensure that the changes being implemented are timely and adequate. The first priority must be alleviation of transport and power shortages and other economy-wide constraints. It would be impractical and uneconomic to try to solve infrastructural problems for the export industries alone. But ready access to tradeable inputs such as raw materials, capital goods, spares and technology, at competitive prices, will be needed in order to build up a competitive industrial base and to sustain a long-term export strategy. xi. Export profitability must be improved if India's manufacturers and entrepreneurs are to be attracted away from the security of India's large and protected domestic market. The volatility observed in the growth of many of India's important exports indicates the continuing effects of India's wide and thinly spread industrial structure which generates exports as a residual element. This situation is changing with the gra- dual deepening and specialisation of industry. The existing industrial structure provides diversity to India's exports, but it also causes spasmodic growth. Adaptation to stable and sustained growth is unlikely to take place spontaneously and will require improved policy to support the process. xii. Energy. Since 1979, energy shortages have hindered economic per- ( formance. All sectors of the economy, including agriculture, have suf- fered output losses due to inadequate energy supply. Towards the end of 1980/81, most indicators showed some improvement in the energy supply situation so that shortages should be somewhat eased in the immediate future. However, given the growth of demand,we expect shortages in coal and power to persist until around the end of the 1980s. xiii. There is considerable scope for alleviation of POL imports. In effect, our projections indicate that volume of POL imports would not again reach the unusually high level of 1980/81 before the end of the Plan period, 1984/85. This is not only because of an exceptionally high volume of imports in 1980/81 due to the Assam crisis, but also because we expect the production of crude oil off the west coast to be some 3.5 times higher in 1984/85 than it was in 1979/80. A vigorous exploration program is being pursued by national agencies, and the Government is seeking colla- boration with foreign firms, so that there is hope for further expansion of production in later years.  _v xiv. Given the relatively high dependence of economic growth in India on energy use, and given persistent shortages, the need for long-range planning of energy development and its integration with growth in energy demand of the economy is strong. The Sixth Plan allocates sizeable resources to energy development and many of the major energy sector issues are resolved. Some progress has also been made, in recent months, on the issue of power and coal pricing. Since the mid-1970s, retail prices of petroleum products have roughly corresponded to international prices. Improvements are needed and feasible in project design and implementation and in efficient use of existing capacities in the power and coal sectors. xv. Adequate and timely price policies and ample availability of coal and power are important for the financing of large investments needed in these sectors, and for allowing a higher growth of the economy. These policies are also important in promoting the substitution of domestically available energy for fuel imports. xvi. Industry. Imports of several important industrial products in which India has apparent comparative advantage have grown substantially in recent years. Notable among these are fertilizer, steel products and cement which are, of course, key inputs into other sectors, particularly agriculture (including irrigation facilities) and export industries. For these three industries, there is substantial scope for improved capacity utilization as the interlocking constraints of power, coal and transport are eased. xvii. In fertilizer, investments planned in nitrogenous fertilizer plants using available natural gas feedstocks appear to offer the best scope for containing import growth. The investment program for nitro- genous fertilizers set out in the Sixth Plan seeks to exploit these feedstocks to the fullest extent that available financial and managerial resources will allow. Substantial additions to phosphate capacity are also planned. Despite this, and even with better capacity utilization, the gap between domestic supplies of and demand for fertilizers is likely to grow throughout the Plan period, though by substantially less than if these improvements and investments were not made. xviii. In steel, the main increases in production during the Sixth Plan are expected to arise from improved capacity utilization combined with investments in expansion, modernization and rehabilitation of existing plants. In addition to the constraints of power shortages and decline in the quality of coking coal, which have reduced capacity utilization rates in recent years, the industry faces a number of technical difficulties, relating to the quality of raw materials and choice of production process, which affect productivity. In the past two years, increased attention has been given to developing technological solutions to these problems. The increased production expected by 1984/85 will offset the anticipated growth in demand, so that net imports of steel would remain at about their 1979/80 levels.  -vi- xix. In cement, shortages of power and particularly coal have prevented better capacity utilization. Modernization plans for existing plants are aimed at, among other things, reducing the power and coal requirements per unit of output. Such improvements, combined with a major expansion planned in cement capacity could bring cement supply and demand into rough balance by the end of the Plan period. Adjustment of the retention price of cement to allow higher prices for increased production from existing plants may provide an incentive for short run increases in production, perhaps making possible the temporary use of imported coal or fuel oil to improve capacity utilization. xx. Agriculture. As the dominant sector of the economy, agriculture plays a crucial role not only in generating income, employment and suste- nance for the bulk of India's population, but also in India's adjustment to the emerging resource constraints. As noted in last year's Economic Report, foodgrain supply and demand trends in recent years have reduced and probably eliminated the need for large scale foodgrain imports. The ability to accumulate and manage large foodgrain buffer stocks enabled India to withstand the most serious effects of the 1979/80 drought, the worst in 15 years, without recourse to foodgrain imports and without major cereal price rises. If present trends continue, agriculture exports could become significant. These developments have given the Indian economy, formerly chronically dependent on foodgrain imports, a new dimension of flexibility. This result was achieved by India's long-term commitment to devote substantial resources and efforts to develop agriculture. To retain this flexibility will require that these efforts are sustained. xxi. Imports of edible oils, however, have virtually replaced foodgrains in India's import bill. The gap between fairly rapid increases in demand and slow growth of supplies has been filled by rapidly growing imports in the recent period when foodgrain imports disappeared and foreign exchange was relatively plentiful. The growth in imports prevented a significant rise in prices which could have slowed demand growth and stimulated greater domestic production. Extrapolation of present supply and demand trends suggests a continuing shortage. While there are a number of promising technical opportunities for increasing production of edible oils, for many of them it is too early to be certain of their impact. A major research and extension effort is needed to increase oilseed productivity and profitability. In the short-to-medium- term, a policy of containing edible oil imports and allowing price increases to stimulate production and dampen demand seems necessary. Even with the most optimistic set of projections, imports of edible oils remain significant through 1984/85. xxii. For sugar, long-term supply and demand trends indicate a growing exportable surplus. Moreover, such data as are available indicate that India can produce sugar at prices well below present and expected world market prices. The sugar economy, however, is highly volatile due to  -vii- serious market imperfections. This has led to violent swings from periods of glut to periods of severe domestic shortage, creating a very unstable and unreliable situation, with repercussions felt not only in export earn- ings, but also throughout the domestic economy. The Indian Government is evolving a set of policies, including appropriate cane prices, buffer stocking of sugar and a gradual reduction in market imperfections, which aim at reducing these year-to-year instabilities. In the longer run, the extension and research efforts to raise productivity and the expansion of irrigated area should provide the basis for sustained growth in sugarcane production. A substantial increase in sugar exports appears feasible. xxiii. Much of India's past success has arisen from the massive effort and investment which has gone into implementing its broad strategy of agricultural development. To bring about the projected increases in pro- ductivity in these important crops, however, an equally impressive effort will be required. Improvements in research and extension will need to be consolidated and refined. Greater efficiency in irrigation will be required as India moves to increase output on existing irrigated areas and expand irrigation capacity. Input supply systems, particularly for seeds, will need to be improved, and carefully balanced pricing policies will need to be maintained. The Sixth Plan provides a framework for these developments. * * * xxiv. As India prepares for another period of balance of payments diffi- culties, the country has several advantages compared with earlier experi- ences, notably compared with the crisis of the mid-1970s. India now has a stronger agriculture, and barring an extraordinary conjunction of unfavor- able weather conditions, is no longer dependent on imports for its staple food. The industrial base is larger and more diversified. Saving and investment rates are much higher than a decade ago. Moreover, India has not only a relatively high level of foreign exchange and foodgrain reserves, but also a low level of debt and substantial capacity for bor- rowing. xxv. In the area of economic policies also significant changes are tak- ing place, in response to the changing resource position of the country. In the face of mounting trade deficits the policy impulse has not been to cut back imports but to search for means to accelerate export growth and to rationalize the domestic economy to save foreign exchange. The Govern- ment of India has introduced a series of measures in the last few years concerning industrial licensing and location policies, trade regime for raw materials and capital goods imports, which are all steps towards an expansion of trade and encouragement to export. These policies are moves in the right direction and should help India adjust to the current economic situation. Nevertheless, India continues to face domestic and external difficulties that will require policy improvements in several areas and the mobilization of resources at levels well above those of the recent past.  Chapter 1 CURRENT DEVELOPMENTS 1.1 The rebound of the economy in 1980/81 from the disappointing per- formance of the previous year was slower in coming than many had hoped, des- pite a return to normal weather in 1980. Nevertheless, many economic indica- tors began improving in the last half of the fiscal year; in the last few months some indicators picked up sharply. After the falls in both agricul- tural and industrial production in 1979/80, a strong recovery was expected in 1980/81, with foodgrain production exceeding the 1978/79 record of 132 mil- lion tons, an early easing of basic supply constraints, and industrial pro- duction growing by as much as 8%. In the event, foodgrain production is unlikely to exceed the 1978/79 level, although the crop will be a good one. Several supply constraints, particularly rail transport and electricity, per- sisted longer than had been expected, although there had been early improve- ment in some, such as coal production and port clearance. Industrial produc- tion rose by only 4% during 1980/81, although it is now rising at a faster rate and growth in 1981/82 should be much stronger. Real GDP rose by about 7% to 8% during 1980/81. 1.2 Agriculture. Agricultural production rose by about 15% to 19% in 1980/81 after the 16% fall in 1979/80. The 1980 monsoon was one of India's best through August. The rains appeared on time and were well distributed. Unfortunately, the monsoon deteriorated sharply in September and some areas, particularly in the western part of India, experienced long breaks in the rain. This adversely affected all crops; but groundnut and cotton, which are both grown in western India, were more affected than foodgrains. In broad terms the 1980 monsoon was a normal one, although worse than normal for a few crops. It was much better than in 1979 but not nearly as favorable as in 1978. Table 1.1 presents estimates of the 1980/81 crop along with comparable estimates for the previous two years. 1.3 Fertilizer consumption grew only slowly for the second year in succession. In the three years 1976/77 through 1978/79, consumption grew by 17% to 27%. During 1979/80, consumption grew by only 2.7%, due to drought. During 1980/81, fertilizer consumption grew by only about 6% despite better weather, because of a 38% price rise during the year and short supplies. Area under irrigation is likely to have risen by more than 2 million hectares, about equally divided between surface and groundwater development. 1.4 The final estimate of the 1979/80 foodgrain crop of 108.9 million tons was much lower than many had estimated earlier. This meant an unprece- dented fall of 23 million tons from the previous year's record crop of 132 million tons. Even though some fall was to be expected as the trend level was below that record, the low production meant a large reduction in domestic availability of foodgrain during 1980 that had to be managed. The foodgrain economy was managed in ways that successfully avoided much of the distress that has accompanied low harvests in the past. Government foodgrain stocks were 17.5 million tons at the start of 1980 and during 1980 public agencies  - 2 - procured 11 million tons through price support programs. Public distribution of grain through the Fair Price Shops was about 13 million tons. The Govern- ment released another 2 million tons through Food-for-Work Program, which continued to be needed in 1980 to handle the effects of the 1979 drought on employment and income of agricultural laborers. Foodgrain stocks were drawn-down by over 5.5 million tons during 1980 and the stock level at the end of December was just under 12 million tons, 5.0 million tons of wheat and 6.7 million tons of rice. 1/ Although foodgrain prices did rise somewhat starting in June 1979, the rise in 1980 of 16.7% has been no higher than that of the total for all commodities. Table 1.1: AGRICULTURAL PRODUCTION, 1978/79 TO 1980/81 1978/79 1979/80 1980/81 % Change During (Revised) (Final) (Provisional) 1979/80 1980/81 Foodgrains (million tons) 131.9 108.9 128.0-133.0 -17.4 17.5-22.1 Five Major Oilseeds (million tons) 9.6 8.1 8.4-9.0 -15.6 3.7-11.1 Cotton Lint (million bales) 8.0 7.7 7.7-7.9 -3.0 0-2.6 Sugarcane (million tons) 151.5 128.0 152.0-155.0 -18.0 18.8-21.1 Agricultural Produc- tion Index (Triennium ending 1969/70=100) 139.4 117.0 135.0-140.0 -16.0 15.0-19.0 Source: Ministry of Agriculture and World Bank estimates. 1.5 Availability of sugar became strained during 1980, particularly in the last quarter. The very low level of sugarcane production during 1979/80 showed up during 1980 as a severe scarcity of sugar, despite marginal imports. The proportions of the cane crop sold to the mills also fell because village and small scale processors were able to offer higher prices to the farmers since the prices of their products, unlike sugar, are not controlled. 1.6 Availability of edible oils was maintained through 1980 at levels only slightly below the high levels of the past four years despite the low production in 1979/80 by continued large-scale imports of over 1 million tons of oil. Nevertheless, reports of yet another poor groundnut crop in 1980/81, speculation that the Government would limit imports for 1981 to at most one 1/ In addition, the Government held 110,000 tons of coarse grain.  million tons of oil and reports of an informal agreement between the Government of Gujarat and oil millers to restrict movement of groundnut oil out of Gujarat, caused edible oil prices to spurt at the very end of 1980 and early 1981. 1.7 The Government increased support and procurement prices for a variety of agricultural commodities as part of its pricing policy to encourage expanded production. The various prices for the current and past two agri- cultural marketing years are presented in Table 1.2. In addition to these, the Agricultural Prices Commission has raised the procurement price of wheat 11% to Rs 1,300 per ton for the crop harvested in spring 1981. The issue price of rice and various coarse cereals distributed through the public Fair Price Shops were raised in November 1980 to offset the higher procurement prices offered. The prices of coarse cereals were raised 10% and rice 9% to 10%, depending on the variety. The issue price of wheat was raised 11.5%, from Rs 1.30 to Rs 1.45 per kg as of April 1, 1981. The levy price of sugar (the price paid to mills for the sugar levied by the Government) was raised 23% at the same time to compensate mills for the increased price of cane which mills are required to pay farmers. With the exceptions of sugarcane and cotton in 1979/80, none of the increases in the support prices were as high as the rises in the wholesale price index. Table 1.2: AGRICULTURAL SUPPORT AND PROCUREMENT PRICES 1978/79 TO 1980/81 ACCORDING TO MARKETING YEAR (in Rs per Metric Ton) % Change in 1978/79 1979/80 1980/81 1979/80 1980/81 Procurement Prices Paddy (common varieties) 850 950 1,050 11.8 10.5 Wheat 1,125 1,150 1,170 /a 2.2 1.7 Coarse Cereals 850 950 1,050 11.8 10.5 Support Prices Gram (Chickpea) 1,250 1,400 1,450 12.0 3.6 Cotton (Kapas--coarse variety) 2,550 2,750 3,040 22.2 10.6 Groundnut in shell 1,750 1,900 2,060 8.6 8.4 Soyabean and Sunflower 1,750 1,750 1,830 - 4.6 Mustard Seed 2,250 2,450 - 8.9 n.a. Sugarcane (Statutory minimum price) 100 125 130 25.0 4.0 Average Level of Whole- sale Price Index, all commodities 1970/71=100 186 217 256 /b 16.9 18.0 /a For the 1981/82 wheat marketing year, starting April 1, 1981, the procure- ment price of wheat has been set at Rs 1,300 per ton, an 11% increase. /b Estimated on basis of 9 months data. Source: Ministry of Agriculture.  - 4 - 1.8 Many have argued that the procurement prices of rice and wheat, which become the floor prices in many markets at harvest time, are already high enough and think the Government should raise the support prices of certain other commodities faster that those for rice and wheat. Oilseeds and pulses are in short supply and their support prices lie considerably below market prices throughout the country. In the long run it is important to set support prices in relation to each other and to other non-agricultural prices very carefully to give farmers the proper signals. Nevertheless, the Govern- ment still has the short-run need to set the procurement prices for rice and wheat at levels that allow procurement to supply the public distribution system. The large buffer stocks built since 1975 have allowed the Government considerably more flexibility than heretofore in managing the foodgrain economy. The fall in the stocks during 1980 means the Government needs to boost procurement out of the larger 1980/81 foodgrain crop to replenish stocks. The latest rise in the procurement price for rice and the similar increase in the procurement price for the 1981 wheat crop can be interpreted as needed to ensure ample procurement in light of the rises in the market prices of these cereals during 1979/80 and, to a lesser extent, during 1980/81. It is possible to time procurement price increases with a view to procure grain in a timely way while still maintaining the proper price relationships in the longer run. As India expects to export a limited amount of cereals during the next four years, it is important to set a procurement price so that export of the cereals is possible at world market prices without a loss to the Government. 1.9 The procurement and support prices set by the Central Government sometimes are different from those established by the State Governments. In the past States have occasionally set foodgrain procurement prices slightly higher than those adopted by the Center. States sometimes stipulate state advised prices which sugar mills must pay to farmers for sugarcane and which are much higher than the statutory minimum prices fixed by the Central Govern- ment. During 1980/81, farmer agitation in Maharashtra and elsewhere have led some State Governments to fix higher support or minimum market prices for sugarcane, cereals and, in Maharashtra, onions. 1.10 Industry. Industrial production deteriorated sharply in 1979/80, registering a decline of 1.4% after four years with an average rate of growth of almost 7%. In 1979/80 manufacturing industries declined by 2.1% while electricity generation increased by only 2.1% and mining and quarrying was virtually stagnant. Shortages of power and essential commodities (coal, steel, cement), agricultural setbacks due to drought and labor unrest con- tributed to the deterioration in industrial production in 1979/80. 1.11 During 1980/81 public infrastructure and the supply of certain basic commodities continued to be a constraint to industrial production. Railway transport was perhaps the most severe bottleneck. Even though coal production did increase markedly early in the year, many users of coal complained of shortages as coal stocks rose at pitheads. Power generation rose only modestly, 6% to 7%. Hydel power rose only 2%, despite the good monsoon in 1980 but thermal power rose 10%. For the year as a whole, coal production rose about 10% to reach 114 million tons. The production of steel continued to decline during 1980/81, as power and coal continued in short supply.  Production of fertilizer rose only marginally as a rise of over 10% in the production of phosphatic fertilizer just barely offset a decline of 1% or more in the much larger production of nitrogenous fertilizers despite new capacity coming on stream. Nitrogenous fertilizer production was hurt by power shor- tages, by labor troubles, and particularly by feedstock supply problems that derived ultimately from the Assam situation. 1/ The Assam situation more directly affected the production of crude oil, which declined 10%, and the production of refined petroleum products, which fell by 7%, over their levels in 1979/80. 1.12 Several factors affecting industrial production improved in the second half of 1980/81. Power production rose sharply starting in November and production of several important commodities, such as steel, cement and aluminum, rose as well. Rail transport also improved so that the freight traffic in the last months of the year was higher than average. During 1980 time lost to strikes and lockouts fell to 13 million mandays from 44 million mandays lost during 1979, a fall of about 70%. 1.13 Overall, the index of industrial production rose about 4% in 1980/81, as improved performance in the second half of the year offset the poor first half. (Table 1.3 and Graph 1.1.) In fact the second half performance has established a rate of growth that, if continued, would indicate quite strong industrial growth in 1981/82. 1.14 The Government introduced a variety of policy changes designed to improve the environment for industrial investment and production. Some of these were announced in the June budget speech, some in the July Industrial Policy Resolution of 1980 and others in various notifications and announce- ments throughout the year. One of the most important changes was the signi- ficant enlargement in the category of industrial firms allowed automatic expansion of 25% in five years without a new license or other permission of the Government, subject to certain conditions. 2/ A virtually identical 1/ Political agitation in Assam resulted in an embargo in the movement of crude oil and oil productions out of Assam virtually all of 1980. This meant two major refineries, Bongaigon in Assam and Barauni in Bihar, operated very little. 2/ The 1975 provision for automatic growth was applied to an initial list of 15 engineering industries producing mainly capital goods. The August 14, 1980 notification (following the July Industrial Policy Reso- lution) added 19 core industries considered to be basic, critical and strategic industries and those involving high technology or having long- term export potential. These 19 industries produce mainly intermediate goods--chemicals other than fertilizers, drugs, pulp and paper, automo- bile tires and tubes, glass, ceramics and cement, non-ferrous metals, fertilizers--and some that produce capital goods. The conditions are that the items produced should not be reserved for the small scale sec- tor; expansions requiring imported capital equipment would attract an export obligation, and the firms should not be a dominant undertaking in the industry.  group of industries qualifying for automatic expansion was allowed to regularize existing capacity in excess of authorized capacity, subject to cer- tain conditions. 1/ In the budget speech, the Finance Minister announced modifications in the convertibility clause now included in loan agreements between public financial (term lending) institutions and industrial firms. This clause allows the Government (through the lending institutions) at its discretion to convert loans outstanding into equity. The changes are that now the clause will apply to loans exceeding Rs 10 million (US$1.25 million) rather than Rs 5 million, and the convertibility clause would not be exercised to raise the Government's holding of a firm's equity above 40%. 2/ On December 3, 1980 the Government announced a partial relaxation of its indus- trial location policy, which had restricted the creation or expansion of industrial capacity within municipal limits. All of these changes were designed to improve industrial efficiency and make better use of existing industrial capacity. Table 1.3: INDEX OF INDUSTRIAL PRODUCTION, 1979/80 AND 1980/81 (1970=100) 1979/80 1980/81 % Apr. - October Apr. - Oct.-March Year Weight Sept. - March Year Sept. Provisional Provisional Mining and 9.7 139.2 151.0 145.1 135.6 162.4 149.0 Quarrying (5.9) (-3.7) (0.7) (-2.6) (7.6) (2.7) Electricity 9.2 195.1 188.6 191.8 192.5 214.1 203.3 (7.1) (-2.5) (2.1) (-1.3) (13.5) (6.0) Manufacturing 81.1 140.2 146.8 149.5 140.6 157.6 149.1 (-1.7) (-2.5) (-2.1) (0.3) (7.4) (3.9) General Index 100.0 145.2 151.0 148.1 144.9 163.3 154.1 (-) (-2.7) (-1.4) (-0.2) (8.1) (4.0) Note: Figures in parentheses are percentage change over the corresponding period of the previous year. Source: Bank staff estimates. 1/ The main conditions are: the item produced is not reserved for the small scale sector, the firm is not a unit controlled under the Foreign Exchange Regulations Act (FERA) or the Monopoly and Restrictive Trade Practices (MRTP) Acts and no additional machinery is installed. 2/ However, in the case of persistent default, mismanagement or continuous closure of a unit producing essential goods or services, the lending institutions, with the concurrence of the Government can raise their equity through this clause, to even more than 51%, if need be.  -7- Graph 1.1: ANNUAL RATE OF CHANGE IN THE INDEX OF INDUSTRIAL PRODUCTION GRAPH 1. I M79 J79 N79 M80 J8O N80 MSI 10- 9- 7- 6- :2 . 'L o 3 cr 2- 0- -1- -2- Annuai Rate of Change in the index of Industrial Production MOVING AVERAGE ANNUJAL RATE OF GROWTH OVER PREVIOUS TWELVE MONTHS. SOURCE : C SO 1.15 The July 1980 Industrial Policy Statement states that, "Government would sympathetically consider requests for setting up 100% export oriented units, requests for expansion of existing units exclusively for purposes of export and for allowing higher production for exploiting fully the emerging opportunities." By the end of November 1980, the Government had announced the approval by the Cabinet Committee on Exports of a scheme for providing special facilities to 100%-export-oriented units which includes the exemption of tariff duties on imported capital goods, raw materials and components; liberal imports of raw materials and components; and the non-enforcement of the condition under the Foreign Exchange Regulations Act (FERA) that foreign shareholders must reduce their holding to 40% or less of total share capital. The Monopolies and Restrictive Trade Practices Act has also been amended to exclude exports for the purpose of determining the dominance of a unit under the MRTP Act. 1.16 The 1980/81 budget contained several tax measures favorably affect- ing profitability of industry, including a reduction from 20% to 10% in the income tax surcharge on registered firms, additional depreciation allowance and a reduction or elimination of excise duties on a wide variety of goods. To attract additional foreign financing for industry, the Government announced a liberalization of foreign private investment from individuals from OPEC countries, whereby investment would be allowed in certain firms up to 40% of total equity, even where no technology transfer or export obligations are involved. 1/ 1/ The investment can be in export oriented companies or one of the 19 core industries. MRTP and FERA companies can also avail themselves of the investment and joint ventures can raise loans abroad provided the terms are reasonable. Hotels and hospitals also qualify for this investment.  -8- 7 These policy changes ameliorate restrictions that have accumulated unueEr India's industrial control policy, although the basic features of the control policy remain in force and these changes do not alter the fundamental conditions of industrial investment and production prevalent in India. The changes are in the direction of liberalization and expansion and have been welcomed in most quarters. The Government has said that further changes are possible but that it is waiting to see the response from these changes before introducing others. 1.18 Prices. The rate of inflation continued to accelerate through the first half of 1980/81 and began to decelerate thereafter. See Graph 1.2. In the first half of the year wholesale prices showed the effects of the bad har- vests in 1979/80, increased oil prices and, to a lesser extent, continued infrastructural bottlenecks and supply shortages. Rises in certain adminis- tered prices, particularly petroleum products and fertilizers, had a signifi- cant effect as well. In the last half of the year, prospects of a normal agricultural harvest and some easing of the infrastructural supply constraints ameliorated a bit the price rise, despite another rise in the price of petro- leum products. Wholesale prices at the end of March 1981 were about 17% higher than the end of March 1980, which in turn was 21% higher than a year earlier. Nevertheless the average rise over the year, 18%, will probably be slightly higher than the 17% of 1979/80. Consumer prices broadly reflected previous rises in wholesale prices but at the lower rate of about 12% in each 1979/80 and 1980/81. 1.19 Growth in the money supply was sufficient to accommodate these higher prices. National product fell 5% in 1979/80 while the money supply (M3) rose 17%. National product rose 7% to 8% in 1980/81 while the money supply again rose about 17%. The main source of growth in the money supply during 1980/81, rise in net bank credit to the public sector, may contain more inflationary potential than the higher rise in the period 1975/76 through 1978/79, when a major source of money growth was the rise in foreign exchange reserves. In fact, the drawdown of foreign exchange reserves has been dampen- ing in 1980/81 the growth of the money supply, offsetting fairly heavy public sector borrowing.  _9 GRAPH 1.2 ANNUAL *. RATE OF CHANGE IN THE WHOLESALE PRICE INDEX AND CONSUMER PRICE INDEX 20 - WPI 1 6 w 12 CP- I-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ z w o 8 - - ---- -- w a.~ 4 - M J N M J N M 79 79 79 80 80 80 81 SOURCE WPI: OFFICE OF THE ECONOMIC ADVISER, MINISTRY OF INDUSTRY CPI :LABOUR BUREAU, MINISTRY OF LABOUR  - 10 - 1.20 During 1980/81, about half of the price rise was contributed by food items, mainly by very large rises in thc prices of a few items in particularly short supply. Much of the rise contributed by food and agricultural items derived from shortages of sugarcane, oilseeds and pulses. One-quarter of the price rise was contributed by rising energy prices, and almost all of this was due to POL prices. The remainder was contributed by other manufactures, among which the price rises were fairly evenly spread (Table 1.4). Table 1.4: CONTRIBUTION OF SELECTED COMMODITIES TO WHOLESALE PRICE INDEX CHANGES /a Percentage Percent Percent in Weight in in 1980/81 the Index 1979/80 (April-December) Food Items 47.3 41.1 52.4 of which: Cereals (10.7) (5.4) (5.6) Pulses (2.8) (-0.2) (3.6) Sugar, Khandsari & Gur (7.2) (19.2) (29.7) Edible Oils, Oilseeds & Oilcakes (8.8) (8.0) (8.1) Others (17.8) (8.7) (5.4) Non-Food Agricultural Items /b 6.4 4.5 1.2 Energy Prices /c 9.7 21.6 26.1 of which: Crude Oil, Natural Gas & POL Products (5.5) (17.0) (22.7) Others 36.6 32.8 20.3 of which: Fertilizers (1.3) (-0.3) (2.1) Total 100.0 100.0 100.0 /a Based on percentage change in the average level of the index in the period indicated over the average level of the same period of the preced- ing year. /b Excludes oilseeds. Ic Includes the entire minerals category, which includes a few items of non- energy minerals, with a small combined weight. Source: Office of the Economic Adviser, Ministry of Industry. 1.21 The deficit as defined by the Central budget was higher than the Rs 14.5 billion (US$1.8 billion) anticipated at the time the budget was first presented to Parliament. The revised estimates place it at almost Rs 20 bil- lion (US$2.5 billion). The main reasons for the rise were larger transfers to the states for Plan expenditures and greater budget transfers to public sector undertakings reflecting their lower earnings, or larger losses than expected. Subsidies for food, fertilizers and export incentives remained  - 11 - large--but they did not grow significantly because the Government raised food and fertilizer prices during the year. Tax avenue reached its expected level. 1.22 Net bank credit to the Government, a more comprehensive measure of the effect of Government on the money system, rose significantly and more accurately reflected the poor revenue performance of the public sector. Many of India's largest public sector organizations--the Steel Authority of India, Coal India Limited, the Oil and Natural Gas Commission, Oil India Limited and Indian Railways, among others--experienced disappointing revenue performance due to production at lower levels than expected and required higher than expected transfers from the Government. Although these organizations encoun- tered special problems in 1980/81--power, coal and rail transport shortages and political unrest--their poor performance further accentuated the chronic problem of low public sector saving, despite heavy investment in the public sector. 1.23 Balance of Payments. India's balance of payments in 1980/81 turned out to be somewhat worse than projected a year ago. The main reason was the continuation throughout 1980 of the embargo on the movement of crude oil and petroleum products from Assam. This required the import of about 3.5 million tons of extra petroleum products at a cost of over US$1 billion. Fertilizer production fell due to lack of naphtha from the refineries in the eastern region and this also increased the import requirements. The import bill rose to US$15.6 billion. Exports grew in value terms as expected to about US$9 billion, although the volume growth was only 4%, slightly lower than hoped. The resulting trade deficit of US$6.6 billion was higher than expected by about US$2.1 billion. India's increased trade deficit was financed with a modest increase in net aid flows,? a sizeable but probably exceptional increase in net invisibles, and a very large increase--from zero to US$1 billion--in use of IMF facilities. India also drew down reserves by US$550 million to US$6.7 billion, less than six months of imports, the lowest level since the mid-1970s. Table 1.5: SUMMARY OF BALANCE OF PAYMENTS ESTIMATES (US$ million) 1979/80 1980/81 Exports 7,960 9,000 Imports -11,250 -15,630 Trade Balance -3,290 -6,630 Net Invisibles 2,440 3,230 Current Account Balance -850 -3,400 Net Aid 1,147 1,413 Use of IMF Credit - 1,035 Errors and Omissions and capital n.e.i. -77 402 Change in Reserves (- equals increase) -220 550 End of Year Reserve Level 7,204 6,656  TREND OF WHOLESALE PRICES (monthly) (1970/71 =100 30 0 X/ t~~~~~~~~~~~~~~~~ 250 200 150 -.;__ ALL COMMODITIES (100*0%.) AGRICULTURE BASED COMMODITIES (53.7%.) PRIMARY FOOD AND NONFOOD ARTICLES, MANUFACTURED FOOD PRODUCTS NON AGRICULTURE BASED COMMODITIES (46.3% ) 100 MINERALS FUELS POWER MANUFACTURES OTHER THAN FOOD PRODUCTS M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M I 72-73 1 73-74 1 74-75 1 75-76 1 76-77 1 77-78 1 78-79 1 79-80 1 80-81 1 month / year  - 13 - Annex to Chapter 1 INDIAN RAILWAYS A.1.1 The discussion of infrastructure in last year's Economic Report on India 1/ included a treatment of transport in general and railways in parti- cular. Rail transportation of freight was identified there as a basic infra- structural constraint in the economy. Developments over the past year have demonstrated the persistence of the problems of Indian Railways. While some other basic infrastructural and supply problems, such as those in the coal and power sector, have responded to some extent to the efforts to increase production, problems of the railways deepened for the first three-quarters of this year. The short-term operational problems have been somewhat relieved in recent months, due partly to a change in operating procedures that makes much greater use of unit trains for bulk commodities on certain runs. The review of projected future demand and likely developments in the railways sug- gests that railway transport may continue to be one major limiting factor on the growth of the economy. A.1.2 This Annex reviews the performance of railways during the past few years. It also discusses past investment and priorities for future investment as reflected in the Sixth Five Year Plan. It is not a comprehensive review of the sector and does not discuss such important issues as tariff policy and other financing matters. A.1.3 Traffic. Indian Railways moves more than two-thirds of India's total freight traffic. The largest volume of traffic moved by Indian Railways amounted to 239 million tons originating in 1976/77. The current level of traffic is estimated to be 217 million tons, and is estimated to grow to about 400 million tons in 1990 (Table A.1.1). A.1.3 Recent Operational Trends. Railway operations during the period 1976-80 have been affected by: (i) labor troubles and civil disturbances; (ii) drop in the efficiency of major rail-users; (iii) changes in traffic patterns; (iv) port congestion; and (v) inadequate availability of steam locomotive coal. These factors accounted for much of the deterioration in usage of wagons and drop in traffic between 1976 and 1980. Coal availability has improved in the last half of 1980/81 and port congestion has eased con- siderably. The other difficulties remain. A.1.4 After 1976/77 there was a perceptible drop in the efficiency and productivity of railway staff. From 1977/78 onwards there were frequent agitations by staff, particularly in the eastern sector which is the hub of activity on Indian Railways. Many of these agitations were organized by sectoral unions such as the Loco Running Staff Association, the Carriage and Wagon Staff Association and the All-India Station Masters Association, although some of the agitations were sponsored by one or the other of the recognized 1/ Economic Situation and Prospects of India, May 1, 1980.  - 14 - federations. Instances of work-to-rule/work-to-destination on the part of running staff and others were also frequent. Table A.1.1: RAILWAY TRAFFIC, 1976/77 TO 1989/90 Actual Estimated Projected 1976/77 1977/78 1978/79 1979/80 1980/81 1984/85 1989/90 Freight Traffic (in million originat- ing tons) Steel Plants 33.0 31.2 29.8 27.9 28.5 42.7 n.a. Coal 67.4 69.1 64.1 62.0 61.9 105.5 n.a. Iron Ore Export 10.0 10.6 10.3 9.7 10.9 16.0 n.a. Cement 13.7 13.6 12.3 10.5 10.0 21.3 n.a. Foodgrains 20.0 19.5 16.7 18.5 17.8 19.0 n.a. Fertilizers 7.8 8.2 8.6 8.2 7.8 16.0 n.a. Petroleum Products 12.4 13.1 14.3 14.2 15.1 20.0 n.a. Other Goods 48.3 45.5 43.5 43.5 42.1 46.0 n.a. Revenue 212.6 210.8 199.6 194.0 194.0 286.5 375.0 Non-Revenue 26.5 26.5 23.8 25.0 23.0 22.5 25.0 Total--Freight 239.1 237.3 223.4 219.0 217.0 309.0 400.0 Passenger Traffic (in million origi- nating passengers) Surburban 1,802 1,928 2,114 1,903 n.a. 2,450 n.a. Non-Surburban 1,498 1,576 1,606 1,602 n.a. 2,214 n.a. Total--Passengers 3,300 3,504 3,720 3,505 n.a. 4,664 n.a. Source: Indian Railways A.1.5 The deterioration of order outside the railway organization since early 1977 has also had adverse effects on railway operations. Frequent civil agitations and strikes in related industries have led to interruptions in train operations which in turn has led to holdup of rolling stock. Railway staff and property including stations, cabins and rolling stock often have been attacked. A.1.6 The efficiency of major railway users such as steel plants, coal mines, power houses and the Food Corporation of India also deteriorated caus- ing adverse effects on the efficiency of the railway system. Thus, the steel plants are holding 10% to 15% more wagons than in the past. Similarly, wagons loaded with foodgrain traffic for unloading by the Food Corporation of India suffered long detentions, particularly in the eastern sector including  - 15 - the Calcutta terminals. Despite coal stocks at power plants being generally low, long delays were caused in unloading coal rakes by several power plants, which were using railway rolling stock as storage. A.1.7 Certain developments after 1976/77 have changed the traffic pattern on Indian Railways. One of the most important is the cessation of foodgrain imports into the country. Before 1976 the foodgrain requirements of the regions in the vicinity of the ports were being met from nearby ports. Calcutta and Bombay themselves consumed a large portion of all grain supplied through the public distribution system. With the cessation of foodgrain imports, all the deficit areas, including areas in the south, have to be supplied with foodgrain transported from the surplus northern states, mainly Haryana, Punjab and Uttar Pradesh. This has resulted in sharply increased leads 1/ of foodgrain traffic from about 948 km in 1976/77 to 1,253 km in 1978/79. Another reason for the change in the pattern of rail movement is the increased fertilizer imports which, due to congestion in the major northern ports, have been channeled through the minor ports in the southern region of the country from where they are carried by rail to the northern states, an area of heavy fertilizer consumption. This again has resulted in Indian Railways having to undertake very long lead movements over routes suffering from inadequate capacity. The lead of fertilizer traffic increased from 940 km in 1976/77 to 1,034 km in 1978/79. In the past, cement produced in the western part of the country was exported and therefore did not require rail transport towards the hinterland. With the shortage of cement in the country, cement is now being imported, and rail transport is required not only for the indigenous production, which was previously exported, but also for imported cement. Lead of cement traffic has gone up from 649 km in 1976/77 to 718 km in 1978/79. A.1.8 For some time the railways have not been getting the required quan- tity of adequate quality steam coal for running their train services. This often has resulted in cancellation of steam goods trains and passenger trains as well as interruption in yard and industrial shunting services. With the improvement in coal production in 1980/81, interruptions should become less frequent, but coal continues to be in short supply. A.1.9 Investment. The planned levels of investment as of late 1979 appeared to be barely adequate in some components and inadequate in others. The Sixth Five Year Plan has now approved a level of investment which substan- tially increases the funds allocated for most components of the railway investment requirements (Table A.1.2). 1/ A "lead" is the average length of haul of a category of freight. Origi- nating freight data do not reflect the impact on the railways of having to carry the same volume of freight differing distances. The "lead" times originating traffic yields the kilometers tons.  - 16 - Table A.1.2: SIXTH PLAN OUTLAY FOR RAILWAYS, 1980/81-1984/85 Rs Million % Rolling Stock 21,000 41 Track Renewal 5,000 10 Traffic Facilities 4,800 9 Electrification 4,500 9 New Lines 3,800 7 Workshops & Sheds 2,800 5 Metropolitan Projects 2,550 5 Machinery & Plant 2,300 4 Bridge Works 900 2 Signalization & Telecommunication 900 2 Others 2,450 5 Total 51,000 100 Source: Sixth Five Year Plan. A.l.10 With the plan allocation of Rs 4,500 million, electrification on the main trunk networks should be substantially accelerated as this represents a substantial increase compared with figures envisaged earlier. A.1.11 Electric locomotive manufacture is an area requiring major policy decisions because the present generation of electric locomotives is techno- logically obsolete. The Sixth Plan provides for 390 new electric locomotives, which should be adequate to future needs. However, decisions on a new type of locomotive have not been made, and the cost of delay in changing over to a new system increases each year. A.1.12 The allocations for maintenance and repair cannot be compared to railway needs from the limited detail in the Sixth Plan. In one important category, track replacement, the plan provision allows for the physical works that the Indian Railways estimated to be necessary during the plan period. A.1.13 Improvement in operating control systems, which would include an expanded data transmission network and computers capable of rapid processing of information on location and use of railway stock, has been identified as a high priority investment. In money terms the investment is a small propor- tion of total investment, and such a system could perhaps be accommodated in the Sixth Plan total allocations but the specific investment head "Signalling and Telecommunications" appears to be inadequate for this investment. Pre- paration is nevertheless underway to undertake this investment in the Sixth Plan period. If physical work can begin as early as 1982, corresponding to the present schedule of preparation, an increased allocation would be required in the Sixth Plan period.  - 17 - Table A.1.3: PROSPECTS FOR MEETING FREIGHT REQUIREMENTS OF RAILWAYS Actual Best Actual 1979/80 Historical Performance Performance 1. Net ton km, 1979/80 (billion ton km) 154.5 169.1 /a 2. Net ton km per day per wagon, 1979/80, (broad gauge) (ton km) 955.0 1,045.0 3. Additional net ton km per year /b (billion ton km) 34.9 38.1 4. Total haulage capability end of 1984/85, (billion ton km) (1+3) 189.4 207.2 5. Projected demand in 1980-84 /c (billion ton km) 220.0 220.0 6. Projected haulage deficit (billion ton km) (5-4) 30.6 12.8 7. Deficit as percent of projected demand 13.9 5.8 /a Assuming that net ton km per day per wagon 1979/80 had been equal to the 1977/78 performance, the best actual performance, then 169.1 billion ton km could have been hauled in 1979/80. /b Assuming the addition of 100,000 wagons, as provided in the Sixth Plan. /c The Sixth Plan projection. It implies only a 36% increase over 1977/78, the last relatively unconstrained demand year. A.1.14 The remaining area of substantial under-programming of investment in railroads is rolling stock--both freight wagons and coaches. The planned coach acquisition will hardly preserve the present numbers in the fleet, and the growth in passenger traffic in the order of 7% to 8% per year, is not likely to be accommodated. It is unlikely that the acquisition of 100,000 wagons, as provided in the Sixth Plan, will allow the railway freight trans- port targets to be met. This issue is somewhat complicated by uncertainties of the scope for rapid improvement in efficiency. In particular, improvements in the last quarter of 1980/81, which included the formation of about 500 unit trains operating end-to-end on specified routes and by-passing intermediate yards, have substantially increased daily wagon loadings on the broad gauge system. But even assuming that the railways will achieve and maintain their best historical level of efficiency in terms of ton kilometers per wagon (1977/78), the wagon acquisition authorized in the Sixth Plan will be inade- quate to eliminate the present freight transport shortages. The calculations in Table A.1.3 illustrate that the shortage could be quite severe. A.1.15 It should be noted that the calculations in Table A.1.3 implicitly assume that there will be no deterioration of the 1979/80 stock of wagons; the 100,000 wagons to be acquired during the plan period are treated as a net addition. In fact, it is estimated by Indian Railways that about 65,000 wagons in use in 1979/80 were seriously overaged.  - 18 - A.1.16 In summary, the short-run outlook for rail freight movement is somewhat brighter because of improvements in operations during the last few months. If these improvements are sustained, transport bottlenecks in 1981/82 will be less severe than those experienced in the last two years. But a major constraint can be expected to emerge again quite soon because of the persistent under-investment in freight wagons, even assuming improved effi- ciency in their use. By the end of the Sixth Plan period 1984/85, the haulage capacity of the Railways may be seriously below the projected demand, unless rolling stock is increased at a faster pace. 1/ A.1.17 The consequences of a railway freight capacity shortage are obviously serious, both in terms of frustrated traffic and in terms of increased POL use by traffic diverted to roads. While it would be possible to envisage a con- fluence of factors that would show a freight capacity surplus (e.g., slow growth in coal, cement and steel; dramatic increases in railway efficiency; overall improvement in the working environment of railways), the more likely outcome appears to be that railway freight shortages will be at the hub of the infrastructure problems at the end of the Sixth Plan, if the rate of acquisi- tion of freight wagons is not increased well beyond its presently planned rate. There is no doubt about the scope and desirability of efficiency improvements, but since there is no effective substitute for rail freight--the truck fleet, at a much higher cost, can absorb only a portion of the railway shortfall--it would be more prudent to plan a faster expansion in rolling stock, even at the risk of some under-utilized capacity. From the point of view of overall resource allocation, it would be much less serious to under- invest in any industry where a shortage could be made up, if necessary, by imports. 1/ The Sixth Plan includes a note to the effect that in the process of year- to-year review, revisions can be made in the rate of rolling stock acquisition.  - 19 - Chapter 2 RESOURCES FOR DEVELOPMENT 2.1 Introduction. This chapter reviews the macroeconomic setting at the start of the Sixth Plan as a background to the estimates of external and domestic resources required by the economy. Although our projections provide a 15-year perspective, the focus in this chapter is on the period 1980-85, coinciding with India's Sixth Five-Year Plan period. At the beginning of this decade the Indian economy is faced with three sets of problems: (a) Deterioration of the balance of payments primarily as a result of the substantial oil price increase in 1979, requir- ing structural adjustments in exports and imports. The stock of foreign exchange reserves accumulated over the period 1976/77 to 1978/79 provides a cushion but is not sufficient to cover the anticipated balance of payments deficits over the next few years. (b) Infrastructure bottlenecks and shortages of basic inputs, triggered by power shortages resulting partly from the drought in 1979/80 and the associated shortages of coal and transportation services, have increased the gap between potential and actual output, especially in the industrial sector. To the extent that by removing these constraints industrial output may increase without requiring additional investments--simply by better utilization of existing capa- city--this may be a source of strength in the future. However, it also illustrates the dependence of the economy at large on the performance and capacity in these sectors. (c) The sharp decline in overall output in 1979/80, together with the decline in domestic saving rates in both the public and private sectors and the excess liquidity that has fol- lowed the substantial expansion of money supply over the last three years (although at more moderate rates in 1980/81), have led to an inflationary situation, partly fueled by increases in international prices. This situation has eroded the resource position of the public sector and limited its ability to finance an increasing level of investment. 2.2 The main medium and long-term issue facing the Indian economy is to simultaneously adjust to the deteriorating external environment while bringing about improvements in the utilization of internal resources and maintaining high investment rates that can achieve sustainable growth. A number of policy steps were taken by the GOI in recent years in response to changing interna- tional economic circumstances and in particular to the emerging balance of payments deficit. These measures are discussed throughout this report in relevant sections.  - 20 - 2.3 India had, in 1973-75, an adjustment experience that was comparable in its severity to the present situation. The Bangladesh conflict in 1971 and its sequels, such as the huge refugee relief effort, had left a largely inflated government expenditure level. The drought of 1972/73, the cessation of the US PL 480 assistance and the steep rise in grain prices in the world markets had drained the foreign exchange and public revenue resources of the country. Foodgrains imports which had absorbed about 15% of the import capacity in the early 1970s, jumped to 25% in 1975. Finally, largely due to petroleum price increase in November 1973, India's POL imports climbed from 11% of the total import bill in 1972/73 to over 25% in 1974/75 and disrupted the balance of payments situation. 2.4 In retrospect, the adjustment policies pursued by the GOI in 1973-75 were successful. Between 1975 and 1979, the GDP grew at an annual rate of 5.8%, well above the historical rate; volume of exports grew by 7.6%, while growth rate of imports was 4.2%. Also with the help of private remittances, net external reserves rose from US$1.3 billion at the end of 1973/74 to US$7.4 billion at the end of 1978/79. In the meantime, India experienced a remarkable price stability: wholesale price index rose at the rate of 6%, while the international inflation was about 13% on average. 2.5 These achievements reflected the results of long ranging policies aiming at structural changes in the economy which obviously were in the making for a much longer period than the period under consideration. One prime example is the massive import substitution in foodgrains. Undoubtedly, also helped by better than average monsoons, foodgrain imports were eliminated after 1976/77, thanks to the increasing domestic production and distribution. Per capita availability of foodgrains was maintained or perhaps slightly improved if the average of the first half of the decade is compared to the second half. 2.6 In 1973-75, the GOI adjusted to the changing resource situation with a series of mutually reinforcing measures. 1/ Domestic retail gasoline price was doubled, kerosene price was increased by nearly 60%, while coal production was stepped up. In 1975, the growth of money supply was sharply reduced by a combination of tightened credit to the commercial sector (increased cash and liquidity requirements for the banks, higher lending and deposit rates and more stringent limits on advances against commodity pur- chases and on financing of inventories). The 1974/75 Budget was marked by considerable restraint in expenditures and sizeable effort to resource mobili- zation. Railway fares, post and telephone service charges were raised and netted some Rs 10 billion in 1974/75. These measures were followed up by others in the following year's budget. A series of small exchange rate adjustments between 1972 and 1975 preserved the level of incentives for exports. 2.7 The situation at the beginning of the 1980s contains some of the challenges faced in 1973-75. Inflation--as measured by the wholesale price 1/ W.R. Cline and Associates, World Inflation and the Developing Countries, Brookings Institutions, 1981 (forthcoming). Chapter Five: "India's Closed Economy and World Inflation," by Surjit S. Bhalla.  - 21 - index of all commodities--has been high in 1979/80 (21,4%), although expected to slow down somewhat to 16-17% in 1980/81. The economy's savings performance declined drastically. The current account deficit reached record levels with US$3.4 billion in 1980/81 (28.7% of export earnings). Two aspects highlight the seriousness of the present balance of payments situation when compared with the period 1973-76. As a percent of GDP at current market prices, the current account deficit never exceeded 1.4% in the period 1973-76 whereas it is expected to be 2% in 1980/81, and is projected to remain above 1.7% through- out 1981-85. Similarly, the resource gap--net imports of goods and non-factor services--as percentage of GDP at current market prices did not exceed 1.7% in the period 1973-76 whereas it is estimated to have reached 2.0% and 3.5%, respectively, in 1979/80 and 1980/81, and is projected to remain above 2.5% in 1981-85. An encouraging development in the domestic economy during the 1970s was the long-term increase in the gross domestic savings rate, together with a fairly sizeable increase in invisible receipts from abroad, 1/ which have raised the gross national savings rate from 16.8% in 1970/71 to 23.9% in 1978/79, although it declined to 21.2% in 1979/80. These trends in savings have enabled the economy to step up the investment rate from 17.6% in 1970/71 to 23.5% in 1978/79 and 21.8% in 1979/80 (Graph 2.1). There was a correspond- ing improvement in real output growth up to 1978/79. 2.8 A major factor in the adjustment in the mid-1970s was a sizeable increase in the concessional aid disbursements. Although in the early 1980s, India has the possibility of recourse to commercial borrowing and appears to be willing to exercise this option, the case for concessional assistance con- tinues to be strong. The fact that the present report focuses on the adjust- ment process and policies should not dissimulate India's poverty. Moreover, the following projections show that a successful adjustment to the balance of payments situation will allow only about one percent annual growth in per capita consumption during the remaining four years of the Plan. An improve- ment in concessional aid performance would make it possible to increase the consumption at a higher rate without sacrificing future growth. 2.9 Growth Prospects. GDP at constant market prices is projected to grow at about 5% per annum in the period 1979/80-1984/85 registering a higher increase (7.7%) in 1980/81 and an average growth of 4.3% per annum in 1981/82- 1984/85. 2/ These projections are based on sectoral growth rates for agricul- ture, industry and services, as detailed in Table 2.1. The high growth rate for 1980/81 reflects primarily the recuperation of value added in the agricul- tural sector to the 1978/79 level after the serious decline in 1979/80. In fact overall GDP in 1980/81 is estimated to be about 3% higher than in 1978/79. 1/ Primarily from Indian workers in the Middle East. 2/ The incremental gross capital output ratio (ICOR) implied in these output projections is fairly high, about 5.0. No doubt, there is considerable potential for higher growth in the economy. However, to achieve full potential, and bring ICORs to lower levels, improvements in capacity utilization rates and removal of infrastructure constraints would be required.  - 22 - GRAPH 2.1 INVESTMENTS AND SAVINGS RATES (as