India - 1998 Macro economic update : reforming for growth and poverty reduction

Report No. 18089-IN India 1998 Macro Economic Update Reforming for Growth and Poverty Reduction June 30, 1998 Poverty Reduction and Economic Management Division South Asia Region  CURRENCY Rs/ US$ Currency Official Unified Market ' Prior to June 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 1997-98 37.16 Jan 1998 39.36 Feb 1998 38.91 Mar 1998 39.50 Note: The Indian fiscal year runs from April 1 through March 31. Source: IMF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. a A dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Vice President Mieko Nishimizu Country Director Edwin Lim Sector Manager Roberto Zagha Task Leader Sanjay Kathuria, Sr. Economist  Abbreviations and Acronyms ABBREVIATIONS AND ACRONYMS AP Andhra Pradesh QR Quantitative Restrictions APL Adaptable Programs Loan RB Resouce based ASEAN Association of South-East Asian Nations RBI Reserve Bank of India ASI Annual Survey of Industries RE Revised Estimates ATM Automatic Teller Machine REER Real Effective Exchange Rate BE Budget Estimates SDR Special Drawing Rights BOP Balance of Payments SIL Special Import License BOT Build-Operate-Transfer SLR Statutory Liquidity Requirements CAD Current Account Deficit SSI Small Scale Industry CIDA Canadian International Development TAMP Tariff Authority for Major Ports Agency TOR Terms of Reference CMIE Center for Monitoring Indian Economy TPDS Targeted Public Distribution System CONCOR Container Corporation of India TRAI Telecom Regulatory Authority of India CRR Cash Reserve Requirement UK-DFID UK-Department for International CSO Central Statistical Organization Development DECPG Development Economic Policy Group UNCTAD United Nationa Conference on Trade and DGCIS Directorate General of Commercial Development Intelligence and Statistics USAID US Agency for International Development DOT Department of Telecommunications UTI Unit Trust of India DRS Debt Reporting System V.A. Value Added ERP Effective Rate of Protection VAT Value Added Tax FDI Foreign Direct Investment VDIS Voluntary Disclosure Income Scheme FII Foreign Institutional Investor VSNL Videsh Sanchar Nigam Ltd. FSU Former Soviet Union WB World Bank GAIL Gas Authority of Indiia Limited WDI World Development Indicators GCF Gross Capital Formation WPI Wholesale Price Index GDP Gross Domestic Product WTO World Trade Organization GDR Global Depository Receipts GNFS Goods and Non-factor Services GNP Gross National Product GOI Government of India HSEB Haryana State Electricity Board IBRD International Bank for Reconstruction and Development ICICI Industrial Credit and Investment Corporation of India IDA International Development Association IFS International Financial Statistics LDBI Industrial Development Bank of India IMF International Monetary Fund IPP Independent Power Producers KfW Kredit Anstalt Frier Wiederaufrau Kwh Kilowatt-hour LNG Liquified Natural Gas LPG Liquified Petroleum Gas MFIL Mahindra Ford India Limited MODVAT Modified Value Added Tax MOU Memorandum of Understanding MTNL Mahangir Telephone Nigam Limited MW Megawatt NAS National Accounts Statistics NBFCs Non Bank Financial Companies NCAER National Council of Applied Economic Research NIPFP National Institute of Public Finance and Policy NFS Non-FactoT Services NRI Non-Resident Indian NPA Non-Performing Assets NTB Non-Tariff Barriers O&M Overheads and Maintenance OCC Oil Coordination Committee OECF Overseas Economic Cooperation Fund of Japan OGL Open General License PDS Public Distribution System PSU Public Sector Unit  CONTENTS Currency Abbreviations and Acronyms Acknowledgments Economic Development Data Executive Summary Chapter 1 Recent Macroeconomic Developments ..............................................................1 GDP Growth .............................................................I Inflation .............................................................2 The Balance of Payments .............................................................2 Chapter 2 Policy Developments and Issues ..............................................................5 Overview .............................................................5 Large Public Sector Deficits Remain an Issue ........................ .....................................5 The Growing Unsustainability of State Finances ..............................................................9 Public Finance Issues ............................................................. 10 Recent Monetary Policy ............................................................. 12 Financial Sector Liberalization and Strengthening ............................................................ 13 Slowing Trade Reform, Slowing Exports .................... ......................................... 14 Chapter 3 Policies to Reduce Poverty, Raise Growth ............................................................. 17 Introduction ............................................................ 17 Reducing the Deficit, Realigning Government ............................ ................................ 17 Developments in Private Participation in Infrastructure ............................................................ 19 Increasing Growth, Reducing Poverty through External and Internal Deregulation .................... 20 Reforming the Financial Sector ............................................................ 25 Chapter 4 Development and Financing Prospects ............................................................ 32 Endnotes References Annex Tables Statistical Appendix List of Trext Tables Table.1: GDP Growth 1981-98 .I Table 2: Balance of Payments, 1991-2000 .3 Table 3: Changes in State Spending on Economic & Social Infrastructure, 1990-96 (%GSDP) .10 Table 4: Trends in Commercial Bank Asset to Deposit Ratios .13  List of Text Boxes Box 1: India's Progress in Privatization 1991-92 to 1997-98 ................................................... 12 Box 2: Haryana Power Sector Reforms - Pioneering the Bank's Adaptable Program Lending Haryana ................................................. 22 Box 3 Legal and Procedural Reform is Lagging ................................................. 23 Box 4 Getting Agriculture Going ................................................. 26 Box 5 Impact of Small Industry Reservation ................................................. 27 Box 6 The Narasimham II, Khan and Gupta Reports on the Financial Sector .......................... 29 Box 7 Lessons from the S.E. Asian Crisis ................................................. 30 List of Text Figures Figure 1 Public Sector Deficits ..................................................6 Figure 2 Central Government Surpluses/Deficits ..................................................8 Figure 3 Gross Capital Formation by Pvt. Corp. Sector & Consolidated Deficit of Gen. Govt ....................................................9 Figure 4 India's Share in World Trade Rose when Tariffs Fell ................................................... 15 Figure 5 Exports Grew Rapidly in Countries Where Imports Also Grew Rapidly ........................ 16 Figure 6 Percentage of products covered by non-tariff barriers ...................................... 16 List of Annex Tables Table 1 Domestic Demand, 1981-96. .............................................i Table 2 Evolution of the Public Deficit, 1990-98 ................................................. ii Table 3 Central Government Finances, 1990-98 ................................................ iii Table 4 State Government Finances (%GDP) ................................................ iv Table 5 Year-wise details of shares disinvested since 1991-92 ................................................. v Table 6 Key Interest Rates, 1994-98 ................................................ vi Table 7 India's Share in World Trade rose when Tariffs fell ................................................ vii Table 8 Coverage Ratio for Non-Tariff Barriers on Indian Imports ........................................... viii Table 9 Coverage Ratio for Non-Tariff Barriers on Indian Imports 1981-97 ................................ ix Table 10C India/Tariff Structure, 1990-98 .................................................x Table 11 Current Trends in Direction of Trade ................................................ xi Table 12 Composition of Gross Product (Manufacturing): Average Shares .................... ............ xii Table 13 External environment for India ................................................ xiii Table 14 Foreign Direct and portfolio Investment ................................................ xiv Table 15 Details of mobilisation in the primary market .................... ............................ xv Table 16 Selected Monetary Indicators 1990-97 ................................................ xvi  ACKNOWLEDGMENTS This report was prepared by a team led by Sanjay Kathuria. It draws on contributions from Alok Bansal (surface transport), Benoit Blarel (agriculture), William McCarten (recent fiscal developments and tax reform), Jamies Hanson (fiscal issues and financial sector), Clive Harris (infrastructure and disinvestment), VJ Ravishankar (fiscal issues), and Djamal Mostefai and Sameer Shukla (Haryana power refornis). Background papers for the report were prepared by CRISIL Information Services (Banking, Performance of Indian Industry), NCAER (effective protection), Bibek Debroy (legal reform), Sanjaya Lall (export strategy), Garry Pursell (lessons from local sourcing programs in automobiles), Uday Sekhar (recent export performance), and Nisha Taneja (small-scale industry). The report benefited from comments by its peer reviewers (Suresh Tendulkar, Delhi School of Economics; Rakesh Mohan, NCAER; and Martin Muhleisen, IMF), and from detailed comments by John Williamson (Chief Economist, South Asia region), Roberto Zagha (Sector Manager, PREM) and Garry Pursell. Useful comments were also provided by Vivek Bharati, Peter Wogart, Bhaskar Naidu and Miria Pigato. Data analysis and management were done by Anjali Bhardwaj, Bhaskar Naidu, Farah Zahir and Harpinder Oberoi. It was desktopped by Shabnaz Rana and Rita Soni. Lata Ganesh and Lin Chin provided logistical support. The report was discussed with Indian Government officials in June 1998. The help rendered by various Government agencies including RBI, SEBI and the Ministry of Finance is gratefully acknowledged. The report was prepared under the guidance of James Hanson (Economics Advisor).  ECONOMIC DEVELOPMENT DATA GNP Per Canita (USS. 1996-97): 380 Gross Domestic Product (1996-97) Anuiiial Growth Rate (% p.a. constant prices) % of 70-71- 75-76- 80-81- 85-86- 92-93 93-94- 1 JSi Bln CDP 75-76 80-Rl 85-R6 91-92 96-97 GDP at Factor Cost 323.7 90.0 3.4 4.2 5.4 5.2 5.3 7.1 GDP at Market Prices 359.7 100.0 3.3 4.2 5.6 5.4 5.3 7.0 Gross Domestic Investment 90.7 25.2 5.3 3.7 5.7 6.6 12.3 11.4 Gross Domestic Saving 78.8 21.9 4.4 2.6 4.6 7.9 9.7 12.5 Current Account Balance -4.4 -1.2 -- -- -- -- -- -- Output, Employment and Productivity (1990-91) Valiue Added L T ahor Force b V A ner Worker I JS$ Rln % of Tot Mill. % nf Tot. I TS!