India - An industrializing economy in transition

Report No. 6633-IN India: An Industrializing Economy in Transition (In Three Volumes) Volume l: E,;ecutive Summary May 6,1987 South Asia Programs India Division FOR OFFICIAL USE ONLY Document of the World Bank This report 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 W/orld Bank authorization.  CURRENCY AND OTHER EQUIVALENTS Currency Prior to June 6, 1966: US$1.00 Rs 4.7619 Rs 1.00 - US$0.21 From June 6, 1966 to mid-December 1971: US$1.00 - Rs 7.50 Rs 1.00 - US$0.13333 Mid-December 1971 to end-June 1972: US$1.00 = Rs 7.27927 Rs 1.00 - US$0.1374 After end-June 1972: floating rate Rate end-March 1987 US$1.00 = Rs 12.87 Rs 1.00 - 0.0777 Rupee values have been converted into dollars by using the prevailing exchange rates indicated above up to 1970/71. For subsequent years the following average rates in rupees per US dollar have been used: 1971/72 : 7.444 1972/73 : 7.706 1973/74 : 7.791 1974/75 : 7.976 1975/76 : 8.653 1976/77 : 8.939 1977/78 : 8.563 1978/79 : 8.206 1979/80 : 8.076 1980/81 : 7.893 1981/82 :8.99 1982/83 : 9.628 1983/84 : 10.312 1984/85 : 11.887 1985/86 : 12.237 Source: IMF, International Financial Statistics (IFS), line "rf " In this report an estimate of 12.75 Rupees per US Dollar was *ustd for 1986/87. Weights Unless otherwise specified all weight measures are metric. Years The Indian fiscal year runs from April 1 through March 31.  FOR OMCUL USE ONLY TITLE INDIA: AN INDUSTRIALIZING ECONOMY IN TRANSITION VOLUME I : EXECUTIVE SUMMARY COUNTRY : INDIA REGION SOUTH ASIA SECTOR COUNTRY ECONOMIC REPORT TYPE CLASSIF mM/YY LANGUAGE 6633-IN CEM Restricted 05/87 English ABSTRACT This Report analyzes the industrial and trade policies that would help assure a smooth transition from .he highly protected industrial environment of the past, in which direct controls were a key means of allocating resources, to a more open environment in which competitive forces have a much greater role in shaping investment, output and pricing decisions. After a surveying recent economic developments (Chapter 1) and analyzing of progress and problems in domestic resource mobilization (Chapter 2), the report examines the past framework of domestic regulatory policies and incentives for industrial development, the impact of these policies on industrial structure and performance, the recent changes in industrial policies, and extensions of these measures that would accelerate the transition (Chapter 3). As domestic regulatory policies have been closely linked to external trade policies, the following chapter examines ways in which trade policies have protected domestic industry, the effects of this protection on manufacturing performance, and the measures which could be taken over time to restore a greater degree of competition--both, with imports and in export markets. The report concludes that reforms of domestic and ex:ernal regulatory policies would need to be made simultaneously over the medium term to effect a successful transition to a more competitive, efficient and faster growing industrial sector. Chapter 5 ends with a call for a significant increase in concessional assistance to provide the resource cushion needed to reduce the risks of BOP problems--and thus to help assure the success of the liberalization process that is already underway. 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.  Agknowl2dfemspt This report was prepared under the leadership of John R. Hansen, with written contributions and guidance from E. Bevan Waide, David Greene and James A. ianson. Responsibility for drafting lay with: Roberto Bentjerodt, Anand Gupta, Lloyd McKay, Sharif Mohammad, Sally Mott, Peter Pollak, Garry Pursell, V.J. Ravishankar, Sunanda Sengupta, K. Subbarao and J.P. Wogart. Statistical and computing assistance was provided by Sajitha Bashir, Rajesh Dewan, Robert King, and P. Rajagopalan. The report benefitted from published studies and a variety of papers prepared as part of the overall World Bank program of economic and sector work on the Indian industrial sector; selected papers from this series will be available in due course. References are given in the Bibliographical Note at the end of Volume II of the report.  INDIA: AN INDUSTRIALIZING ECONOMY IN TRANSITION Country Economic Memorandum Table of Contents VOLUME I - EXECUTIVE SUMMARY Page, No. Abbxaviations Currency and Units Basic Data Map A. RECENT ECONOMIC DEVELOPMENTS .. 1 Economic Growth .. 1 Domestic Resource Mobilization ..................... 3 External Resources .. 5 B. INDUSTRIAL POLICY ....................................... 6 Introduction ....................................... 6 The Regulatory System .............................. 9 The Domestic Economy . . 9 External Trade . . 11 Distribution ......... 13 The Incentive System . . 14 External Tariffs . . 14 Export Incentives . . 15 Prices, Wages and Taxes . . 16 Scale, Location and Purchase Preferences .. 17 Results ............................................ 18 Industrial Structure . . 18 Firm Behaviour . . 20 Industrial Performance . . 21 Performance Against Objectives other than Growth ........................... 21 Recent Reform Measures ............................. 23 Trade Controls ................................ 23 Tariffs and Other Taxes ....................... 24 Domestic Regulatory Controls .................. 25 Specific Industries ........................... 25 C. AN APPROACH TO POLICY REFORM . . 26 The Goals of Policy Change . . 26 Domestic Industrial Policies . . 28 Trade Policies .. 31 The Economic Environment for Reform . . 34 D. THE IMPLICATIONS OF THE REFORMS . . 36 Costs and Benefits of the Reform Package . . 36 Sequencing and Phasing of Policy Reform . . 38 E. BALANCE OF PAYMENTS PROSPECTS, CAPITAL FLOWS AND CONCESSIONAL AID . . 39  - (ii) - VOLUME II - MAIN REPORT C APTER 1: E E T E O O I E EO M ........................................... A. The Real Economy ..................................... 1 GDP Growth ....... 1 Sectoral Developments ........................ . .. 2 B. Progress in Poverty Alleviation ...................... 6 C. Macroeconomic Balances ............................... 7 D. The External Sector .................................. 9 Imports ...................................... . . . 9 Exports ......................................... 11 Invisibles .................................... 15 Capital Account .............................. . .. 15 Gross International Reserves .................... 15 E. Prices and Monetary Developments ................... .. 16 F. Public Finance ....................................... 17 CHAPTER 2: PUBLIC SECTOR F2NANCES AND DOMESTIC RESOURCE MOBILIZATION ....................... 20 A. Introduction ........................................ 20 B. Trends in Public Sector Speneing and Revenues ....... 20 C. Public Sector Expenditures . . ........................ 24 Interest Payments ... . . ....... 24 Subsidies . . . ................................... 26 Coapensation of Government Employees ........... 26 D. Public Sector Revenues .. 27 Taxes .. 27 Indirect Taxes ............................ 27 Central Excise Duty . . 28 Customs Duties . . 29 Sales Taxes ............................... 29 Direct Taxes . . 29 Broadening of Tax Base .................... 31 Lowering of Tax Rates . . 3