India - Recent economic developments and prospects

7 4 tO os ivtj~ ' Recent Economic Developments and Prospects H@i1 A W O R L D B A N K C O U N T R Y S T U D Y  A W O RLD B A N K C O UN TRY STUD Y India |~ ~~~ -- I -, Recent Economic Developments and Prospects The World Bank Washington, D.C.  Copyright C 1995 The Intenational Bank for Reconstuction and Development/ THE WORLD BANK 1818 H Street, N.W. Washngton, D.C 20433, USA. All rights resrved Manufactured in the United States of America First priting March 1995 World Bank Country Studies are among the many zeports orginally prepared for: itemal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the govenments. Some of the reports are published in this series with the least possible delay for the use of govenments and the aca- denic, business and fmancial, and developmt communrities. The typescipt of tigs paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for err Some soues cited m this paper may be iformal documents that are not readily available. The World Bank does not guarantee the accuracy of the data indluded in this pubication and accpts no responsibility wvhatsoever for any consequence of their use. The boumdaries, colors, denomiations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorse- ment or acceptance of such boundare The material in this publication is copyrighted. Reqxests for permission to reproduce portions of it should be sent to the Office of ihe Publishe at the address shown in the copyright notice above. The World Bank encourages dmiation of its work and wil nomially give pemission promptly and, when the reproduction is for noncommral purposes, without asking a fee. Permission to copy portons for dassroom use is granted through the Copyright Clearance Caent, hnc, Suite 910, 222 Rosewood Drive, Danvers, Massacmusetts 01923, USA. The complete baklrist of publicatons from the World Bank is shown m the annual Index of Publications, which contamns an alphabeical title list (with full orderng information) and indexes of subjects, authors, and conmties and egions. The latest edition is available free of dharge from the Distribution Unit Office of the Publisher, The World Bank, 1818 H Steet, N.W., Washington, D C 20433, USA ., or from Publications, The World Bank, 66, avenue d'6na, 75116 Parns, France ISSN: 040253-21 Library of Congess Cataloging-in-Pubication Data India, recent economic developments and prospects. p. cm -(AWorld Bank country study) 'ISBN 048213-3156-6 1. India-Econonic policy-1980- 2. Economic stabilization- India 3. Envimn policy-India. L International Bank for ReconstuctionandDevelopment. IM Series. HC435.238 1995 338.954- dc2O 94-46502 CIP  - ii - CONTENTS Abbbrvbos ...................... ix Curreny ... .... x Admowledgments ...................... i Ecnomic Development Data ...................... xi Priority Poverty Indicators ....................... v Resources & Expenditures ............................ xv Eeutive Summary ................. xvi CHAPTER 1: RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS ....... 1 Introduction ............................................ 1 Stabilizing the Economy ................ 1 Intoduefion .1................................. Demand ..................................Mam t 2 Fiscal .........i.....l ......................4 The Economy's Response. 7 Introduction. 7 Investme ........ ................................... 8 Inflation ............................................ 17 Recent Developments in Money and Capital Markets ................ 19 Balance of Payme t...................................... 22 The 1994-95 Budget . ..................................... 28 Highlights .............................. 28 Fiscal Adjusm ............................. 29 Adjustment in State Finance ..............................-.32 External Debt Management and Exteal Finncing Requirements ....... ... 37 External Debt Management 37 External Financing .39 CHAPTER 2: THREE YEARS OF REFORM; SHORT AND MEDIUM-TERM POLICY ISSUES .41 Results of Three Years of Reform ............................. 41 Introduction ............................. 41 The Liberalizaton of Private Investment ......................... 41 The Liberantion of the Trade and Extema Payments Regime .... ...... 45 Reforming FinancialM i ................................ 47 Tax Reform .... . .................................... 50 Progress and Sho n in Public teprise Refom............... 52 Short- and Medim-Term Poficy Isu e . ......................... 57  - iv - CHAPTER 3: MANAGING INDIA'S ENVIRONMENT - SELECTED ASPECTS .... 66 na's Environment Today .................................. 66 Environmental Polution ................................... 67 Forests, Wildlife and Biodiversity ............................ 71 TheCumotEnviromcntal M gmeFramework .................. 75 Overview ..................................... 75 Enviromnmenta PoUutionContl .............................Co 76 Conservation of Forests, Wildlife, and Biodiversity ................. 78 Issues and Options .81.................................... 81 Are the Highest Priority Problems Being Addressed? ................ 81 Are th Right Strategies Being Employed? ....................... 86 Is the Institutional Framework Adequate? ........................ 91 Is Eugh Being Done? .................................. 93 Concluding Observations ................................... 95 ENDNOTES .................... 97 STATISTICAL APPENDIX .................... 102  v - TABLES .1 Central Government Finances ................................. 3 1.2 Recent Evolution of the Public Deficit ................5 1.3 Evolution of the Public Debt Stock ................ 6 1.4 Interest Rates on Central Government Debt ........................ . 7 1.25 Growth Performance . ................................... 8 L.6 Indusrial Growth by Industry of Use ................ 8 1.7 Investment by Type of Institution ................. 9 1.8 The Relative Size of India's Transfer Problem ...................... 11 1.9 Trends in Capacity Utilization - Use-based Classification ................ 11 1.10 Financial Performance of the State Electricity Boards .................. 15 1.11 Evolution of the Wholesale Price Index .......................... 18 1.12 Domestic and International Prices of Wheat and Rice .................. 19 1.13 IKeylnterest Rates..20 1.13 i:ylnerest ........................................ 21 1.14 Issues by Public and Private Co ies. ............................ 1.15 Selected Monetary Indicators ................................. 22 1.16 Balance of Payments . 23 1.17 Foreign Direct and Portfolio Investments . ........................ 25 1.18 Portfolio Investment in Selected Counties ......................... 27 1.19 Real Exchange Rate of India's Main Trading Partners and Competiors ..................... 27 1.20 Centrl Government Transfers to High and Low Income States ........................................ 33 1.21 State Government Fimnces . ................................. 35 1.22 Devolution of Resourc from the Center to State Governments ........................................ 36 1.23 India's Extenal Debt ..................................... 37 2.1 GrossCapital FormationbyIndustry.................. 42 2.2 Foreign Investment Approvals . ............................. 45 2.3 Tariffs and Colection Rates-Interational Comparisons ................. 46 2.4 Tariff Structu ......................................... 47 2.5 Public Sector and Public Enterises in the Economy .................. 52 2.6 Finaming Centrl Govenment PEs' Plan Investm s ................. 53 2.7 BIER Activities, Public Sector ................................ 54 2.8 Profitability Profie of non-Departmental Centrl CJoverznent PEs . ...................................... 56  -vi - TABLES (continued) 3.1 AmbientLead .......................................... 69 3.2 Trends in Ambient Air Pollution .............................. 69 3.3 ExcedencesofBOD andTotal ColiformReference Lcels ............... 71 3.4 Estimated Area Under Forest ............................ 73 3.5 MoEFBudgetedExpenditures ................................ 76 3.6 Cumulative Enforcement Activity Under the Water andAirActs .......................................... 79 BOXES 1.1 Constrints to Privat Irnvestment in Agriculture ....................... 14 1.2 StatePowerSectorRestructuring .............................. 16 1.3 Institutional Constaints on Private Invs ......................I. 17 1.4 Istruments Used by Foreign Direct and Portfolio Investors ............................................ 24 1.5 Fom thel994-95Budget Speech.2 1.6 Main Tax Reforms Introduced in the 1994-95 Budget ...30.. . .... 30 1.7 Transfers of Resources from the Centrl to the StateGovenments .............................4....... 34 1.8 Fiscal Adjustment in Selected States ............................ 36 1.9 Non-ResidentDeposits ............................ 38 2.1 T. - U eralization of India's Investment Regime in - S .4 Key Sectors .44 2.2 Case Studies: Hmdustan Machine Tools (BMT), Mysore Kirloskar Ltd (MKL), and the National Textile Corporation(NTC) ...................................... 55 2.3 Recent Experiences in Dealn with Capital Inflows ................... 65 3.1- Some Indicators of Environmena Pollution ........................ 67 3.2 BiodiversityinIndia ...................................... 72 3.3 NTPC's Environmental AcionPln ............................P. 78 3.4 EAPriorities .......................................... 82 3.5 Development Policies and Dfremstion in Brzil andCostaRica ........................................ 83 3.6 Enviromnenta Health...................84................ 8 3.7 InflexibleStandardsandUnpalatableChoices ....................... 87 3.8 Conflicts Between Growth and EnvironmenW lQualty................. 88  -vii,- BOXES (contined) 3.9 Effluent Chargesin Use .................................... 89 3.10 Icrporating Ecnomic Considerations into Standard Design .90............................... 90 3.11 TheSr SaroS aPje c ....................... 92 3.12 Trading Off Alternative Developmen Interventions ................... 94 FIGURES 3.1 Ambient Cocentrations of Air Pollution .......................... 68 3.2 Forestry and Logging-Changes in Output and Prices .................. 74 3.3 Forestry Deflator/GDP Deflator ............................... 75 GRAPH Graph 1 Agricudlural Prices in Real Terms: in the World, at the Indian Border, and Domestic ........................ 13  A=EVIATIONS AND ACRONYMS BIFR Board of Industrial and Financial Restuctering BOD Biochemical Oxygen Demand BRO Build-OperaterTansfer CD Certificate of Deposit CMIE Centre for the Monitoring of te Indiak uicnmy CP Commercial Paper CPCB Central Pollution Control Board CPI Consumer Price Indes CRR Cash Reserve Requiremt DALY Disability-AdjusmnentLife Year DEII Deparmet of Heavy Industries DOT Department of Teleommunications EAP Enviromnmtal Action Programm iCB Euro-Convertible Bond FERA Foreign Exchange Regulation Act FIn Foreign Institutional Investor FIPB Foreign Investment Promotion Board GDR Global Depositoqy Receipt GOI Government of India GOM Govemment of Maharaua HC Hydrocos HMT Hindustan Machine Tools HS Harmonized System of classification IRDP Integrated Rurl Developme Programme JFM loint Forest Managemet JICA Japan lmernational Coopero Agency JRY lawahar Rozgar Yahana M1bAS Minmum National Saards MKL Mysore Kiidoskr Ltd MLR Minimum Lending Rate MODVAT Modified Value-Added Tax MoEF Ministry of Environment and Forests MOU Memorandum of Understnding MW Megawatt NAEB National Agricultural Extension Board NEERI National Environmental Engineering Institite NGO Non-Governmental Orgniation NRF National Renewal Fund NRI Non-ResidentIndian NTC National Textile Corporatin NTPC National Thermal Power Corporaion ODA Official Develpment Assstance ODB Overseas Depository Bank OGL Open General Licen OSEB Orissa State Elaricity Board PA Protected Area PE Public Enterprise RBI Reserve Bank of India REER Real Effective Exchange Rate SBI State Bank of India SEB State Electricity Board SEBI Sectuities and Excbange Board of India SIA Secretaiat of Indust Approvals SLR Statry Liquidity Requirements SPCB Stare Pollution Control Board SPM Suspended Particulate Matter UNEP United Nations Enviroment Programme  - x - CURRENCY RsIUS Currency Official Marketl' Prior to une, 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mfid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 January 1994 31.37 Febnrry 1994 31.37 March 1994 31.37 - Source: IM[F, Intrnational Fianial Stistics (IFS), line "rf, and Reserve Bank of India. Note: lhe Indian fiscal year runs from April 1 dtrough March 31. u A dual exchange rate system was created i Mrmch 1992, with a free markt for about 60 percent of foreign exchmage tmnacdons. The exchange rae was reunified at the begnning of March 1993 at the free market rate.  - xi - ACKNOWLEDGMENTS Thizi Report was prepared by a tean led by Roberto Zagha. R. Anderson was responsible for the chapter on envroment The Report was based on contributions by: D. Ahluwalia (recent developments and policies in the agricultural sector), P. Auffret (recent economic developments, selected fiscal iss), P. Bedcknan (financial sector reform), B. Blarel (recent developments and policies in the agricultual sector), M. Haddad (developments in the mamnfacuing sector), H. Hansen C nkastncre), D. Kantawala (Consultant, environment), S. Kunte (inflation), K. Nyman (power sector issues and policies), P. Pflak (developmeats in the hydrocarbon and coal sectors), V.J. Ravisbankar (public finance), C. Rees (enviromnent-forests, wildlife, and biodiversity), S. Sengupta (small-scale industries), L. Serven (fiscal sustinabilit), K. Siddique (selected public finance issues), H. Suzuld (public enterprises), W. Thirsk (Consultant, tax reforms), and F. Yagci (industrial policy developmens). Statistical and computational assisamce was provided by R KEaina, S. Kunte and E. Simel. Arrangements for the missions were carried out by P. Gopalan in Delhi. The report was produced by E. Torre with R Bessette, H.Y. Kim, L Chin and Z. Jagdeo. The repo twas prepared under the general direction of Javad Khalil h-Sirazi. The assistance of the Ministzy of Finance, Reserve Bank of India, the Minstzy of Eiroment and Forests, the Maharashtra State Pollution Control Board, Ministries of Finance of Ma and Tamil Nadu, and other government and private institutions n the- preparation of this Memorandum is gratefully ackmowledged. The Memorandum was discussed with the Indian authorities in May 1994.  - xli - ECONOMIC DEVELOPMENT DATA GIP PER CAPITA IN 1991 US330 /a GROSS DOMESTIC PRWUCT IN 1991/2 MUAL RATE GF G (X l180/81 tant Prices) 65& 70171- 75- Wa/1 8 55Lf un 90/9- LO Bln. x GDP at Market Prices 248.2 100.0 3.0 2.1 3.6 5.6 6.1 5.7 1.2 Gross Do mstic lIwestment 59.7 24.5 1.8 5.0 4.9 2.5 8.2 1B.9 -18.9 Gross National Saving 56.2 22.6 - - - 1.1 7.4 20.9 -10.4 Current Account Balance 3.5 1.4 - - OUTPtUT. LADO FORCE AND PRODUCTIVITY IN 1981 Vloue added (at factor cost) Labor Force b/ V.A. Per Worker U$ gin, X Nil. I USS X of Nat. Averaae AgricuLture 58.9 38.0 172.7 70.6 341 53.9 Industry 40.1 25.9 31.6 12.9 1Z68 200.3 Services 55.9 36.1 40.3 16.5 1387 219.1 Total/Average 154.9 100.0 244.6 100.0 633 100.0 GOVERNMENT FINMCE General Goverment Ic Central Government RU .L A O19f91 MP Re. 192 W Rln. Z of GDP 19"1921991 im990t9 1985/8-1989190 19919 1991/92 199019195it8-19!990 Revenue Receipts 1226.5 20.2 19.6 20.7 660.5 10.9 10.4 11.1 Revenue Expenditures 1424.5 23.4 24.6 23.8 823.1 13.5 13.9 13.5 Revernue Surplus/Deficit -198.0 -3.3 -4.9 -3.1 -167.0 -2.7 -3.5 -2.7 Capital Expenditures a 291.4 4.8 5.7 6.6 200.6 3.3 4.9 5.7 External Assistance tnet) fr 35.1 0.6 0.6 0.7 MONEY. CREDIT AND PRICES 70k71 75176 0BO81 85186 B6/87 8718 U/89 89/90 90/91 2JL2 (Rs. biLtion outstanding at end of period) Honey and Quasi Money 109.8 224.8 557.7 1193.9 1416.3 1642.B 2002.4 2309.5 2654.4 3150.8 Bank Credit to Government (net) 54.6 106.3 257.2 58.2 720.2 843.7 973.7 1171.5 1402.0 1582.9 Bank Credit to Commercial Sector 64.6 156.2 366.4 128.0 947.4 1074.9 1326.6 1567.7 1717.6 1910.7 (Percentage or Index NuWbers) Morey ard Quasi Money a X of GDP 27.3 30.3 41.0 45.6 48.5 49.4 50.7 51.3 50.1 51.7 Wholesale Price Index C1981/3100) - - - 125.4 132.7 143.6 154.3 165.7 182.7 207.6 Annual Percentage changes in: Uholessle Price Data - - - 4.4 5.8 8.2 7.5 7.4 10.3 13.6 Bank Credit to Goverruent (net) 15.0 22.7 28.5 15.9 23.5 17.1 15.4 20.3 19.7 12.9 Bank Credit to Commrcial Sector 19.4 22.7 18.2 16.7 14.4 13.4 23.4 18.2 9.6 11.2 /a The per capita GNP estimate is at market prices, using World Bark Atlas methodology. Other conversions to doltars in this table are at the prailing averap exchange rate for the period covered. /b Total Labor Force and percentage breakdwn from 1981 Cens. Excludes data for Asmam. Ic Transfers between Centre and States have been netted out. id All loans and advances to third parties have been netted out. le As recorded in the goverummnt budget.  - xiii - BALANCE OF PAYMENTS 1988/89 19B9/9O 1990191 1991/921 CUSS miltion) MERCHANDISE EPORTS (AVERAGE 1967/88-1991/92 la) Export of Goods fa 14257 16850 1B491 18135 USS mitt x Imports of Goods _a 23618 24414 26427 Z0813 Trade BeLance -9361 -7564 -7936 -2678 Tea 500 3.2Z Non Factor Services Cnet) 731 725 785 676 Iron Ore 521 3.3Z Chemicats 1434 9.11 Resource BoLance -8630 -6841 -7151 -2002 Leather and Leather produets 1151 7.31 Textiles 14JB 9.41 Garm ents 1843 11.71 Interest Incoa (net) b -2915 -3305 -3743 -4178 Grms md JeweLery 275 17.63 Net Transfers /c 2654 2256 0Z05 2685 Engineering Goods 1735 11.0X Others 4353 Z7.5Z BaLance an Current Account -8961 -7890 -8894 -3495 TotaI 1580O 100.01 Direct Investount 287 350 112 2Z0 Official Grants & Aid 406 500 476 451 Net Medium & Long-term Capital 4351 3910 2764 4805 Grass Disbursements 6299 5892 5169 7468 PrincipaL Repayments 1948 1982 2405 25 E3 EXTERNAL DE3T_ MARCH 31- 1992 U0 # "tton Other Capital Flout