1995-96 witnessed a very satisfactory
growth rate in GDP of 7.1 per cent. The momentum of
growth has been maintained in 1996-97, thus providing
increasing evidence that the growth potential has improved as a result of the reforms initiated in
1991. With the passing of election distractions, the pace
of economic reform was also revived. Since June
1996, reform initiatives have been introduced or strengthened in almost every critical
infrastructure sub-sector. There have also been new
policy measures in several areas such as
industrial delicensing, foreign investment, trade policy,
financial sector and capital markets. With the
growing participation of virtually the entire spectrum of
political opinion in the reform process, there is a
good prospect that a higher growth rate would become
a permanent feature of the economy.
The initial spurt of reforms from 1991-92 to
1993-94 was very successful by all accounts, resulting
in a jump in economic growth to 7.2 per cent in
1994-95 (in terms of GDP at factor cost). Since
1994-95, however, there was a marked slow down in the
pace of reforms. Nevertheless, GDP grew by 7.1 per
cent in 1995-96. The slackening of reforms preceding
and during the election period may have been
responsible for some loss of momentum, but this has
been revived with a series of measures in recent
months. Economic growth in 1996-97 is estimated by
CSO to be around 6.8 per cent (GDP at factor cost).
Thus, the Eighth Plan is likely to end with an
average growth of 6.5 per cent per annum, 0.9 per cent
point higher than the target rate of 5.6 per cent, and
0.5 per cent point higher than the actual achievement
of the Seventh Plan (Table 1.1 and Table 1.2). More important for the future is the fact that the
average growth during the latest three years is 7 per
cent, probably placing India among the top ten
performers in the world during this period.
As the final year of the Eighth Plan draws to
a close, a comparison of some salient dimensions
of economic performance between the Eighth Plan period and its predecessor reveals the following:
Overall economic growth has been faster;
The manufacturing sector has grown almost
2 per cent points faster per year in the Eighth
Plan period;
Agriculture and allied sectors have grown at
about 3.5 per cent per annum in both periods;
Both exports and imports have grown
significantly faster in the Eighth Plan period;
The balance of payments has
strengthened considerably, with trade and current
account deficits declining as ratios of GDP, while
exports and imports have grown rapidly both in
value terms as well as in proportion to GDP;
The Central Government's fiscal deficit as
a proportion of GDP has declined significantly;
The average rate of gross domestic savings
has risen substantially from 20.6 per cent of GDP
in the Seventh Plan period to 23.9 per cent in the first four years of the Eighth Plan;
With the exception of telecommunications,
the rate of growth of net output (value added) of infrastructure sectors has slowed;
The average rate of inflation has risen
somewhat, though remaining below double digits.
Total gross domestic saving reached a new
peak of 25.6 per cent of GDP in 1995-96, exceeding
its previous peak of 24.9 per cent of GDP in
1994-95. (Table 1.3) This seems to vindicate the
reform strategy of encouraging savings by expanding
saving and investment opportunities, rather than
giving special incentives. The rise in domestic saving
in 1995-96 was primarily due to a rise in private
saving to 23.7 per cent of GDP. This rise in private
saving was smaller than the rise in private investment. As
a result, the surplus of private saving over
private investement was also smaller at 5.6 per cent
of GDP in 1995-96, compared to 7.9 per cent of GDP in 1994-95. Within the private sector, the
composition of household saving has also changed, with
saving in the form of physical assets rising sharply
from 7.7 per cent of GDP in 1994-95 to 10.7 per cent
in 1995-96, and saving in the form of financial
assets declining from 11.5 per cent to 8.8 per cent of
GDP. The flow of saving into the organised/financial
system declined from 17.2 per cent of GDP in 1994-95
to 14.9 per cent in 1995-96. The saving-investment
gap of the public sector fell from 7 per cent of GDP
in 1994-95 to 6.2 per cent of GDP in 1995-96.
Gross domestic investment (adjusted), as
a proportion of GDP at current prices, rose even
faster than gross domestic saving in 1995-96 to a high
of 27.4 per cent from 26 per cent in the previous
year. Gross domestic investment in real terms, as
a proportion of GDP at constant prices, reached a
new peak of 27.1 per cent, exceeding the
previous peak of 25.9 per cent in 1990-91 (Table 1.4).
Gross fixed capital formation which is even more
important for productivity and growth, exceeded the
1994-95 peak of 21.9 per cent by a substantial 2.2
percentage points, to reach a new peak of 24.1 per cent of
GDP in 1995-96. This new record was due solely to a
rise in private fixed investment from the previous
record of 13.4 per cent of GDP in 1994-95 to a new
record of 16.3 per cent of GDP. The contribution of
real stock accumulation increased only marginally
from 1.8 per cent of GDP in 1994-95 to 1.9 per cent
of GDP in 1995-96, and remained below the 2.4 per cent average of the Seventh Plan. Private
sector investment appears to have responded
vigorously to the policy of promoting competition,
removing policy distortions and hurdles, and improving
access to factors of production (e.g. technology, capital).
Estimates of savings and investment in
1996-97 are not yet available. Indicators are mixed. On
the one hand, domestic capital goods production
is buoyant and disbursement of financial
institutions are significantly higher. On the other hand,
capital goods imports have declined, non-oil imports
are lower in the first nine months of the year,
corporate demand for credit appears slack, and sanctions
of financial institutions are substantially lower.
The economy in 1996-97 so far presents a
mixed picture in other dimensions as well. Although
overall economic growth remains high at 6.8 per cent,
and agriculture has rebounded, the growth of manufacturing value added has slowed and
the performance of key infrastructure sectors,
especially power and crude oil, is weak. The annual rate
of inflation (point to point) has risen back to
average long-term levels and export growth has
decelerated markedly in recent months. Despite the slowdown
in exports, a combination of sluggish imports and reasonably buoyant inflows of invisibles and
capital flows have led to a build-up of foreign
exchange reserves by over $2.5 billion.
Agricultural crop production in 1996-97
is expected to show good recovery from the slower growth in 1995-96. Growth is projected at 3
per cent after a fall of 0.4 per cent in 1995-96.
The sharp decline in foodgrains production by 3.4
per cent, which was responsible for the slow growth
in 1995-96, is expected to be reversed by an
increase of 3.3 per cent in 1996-97. Foodgrains
production is expected to recover to 191.2 million tonnes,
only marginally lower than the level of production in
1994-95. This recovery is primarily due to coarse
cereals, as well as an anticipated rise in wheat
production which suffered a sharp setback in 1995-96.
As the agricultural year runs from July to
June, the estimates for 1995-96 were only firmed up
after the end of the financial year. A large
downward revision (of 3 million tonnes) was made in
the estimate of wheat production for 1995-96. The revision was unexpected and unexplained,
because average rainfall in 1995-96 was quite normal.
The revision, late in calendar year 1996, also
created severe problems for the management of the
food economy.
Commercial crop production has
done extremely well in 1996-97 with oilseeds and
cotton expected to reach record levels of 24.1 million
tonnes and 14.3 million tonnes, respectively. The 9.2
per cent growth in cotton production has come on top
of the 10.1 per cent growth last year. Jute and
mesta have also shown a growth of 3.4 per cent this
year. Sugarcane output is, however, unlikely to
maintain the record level of 283 million tonnes attained
in 1995-96.
Industrial production (as measured by the
index of industrial production-IIP), grew by 9.8 per cent
in the first seven months of 1996-97, 1.9
percentage points slower than the 11.7 per cent growth in
the first seven months of 1995-96. IIP growth of
11.7 per cent in 1995-96 was the highest growth rate
in the past 25 years, and growth rate of 9.5 per
cent to 10.5 per cent for 1996-97 as a whole would
still be the second highest growth rate over this 25
year period. The good performance of industrial
production in 1996-97 is due entirely to the
manufacturing sector, which has maintained its high growth.
During the first seven months of 1996-97, for the manufacturing sector, the rate of growth of 12.1
per cent is virtually the same as the 12.3 per cent
growth in the first seven months of 1995-96 (based on
the IIP for manufacturing). Even if the average
growth for the whole of 1996-97 falls below the
record breaking growth of 13.0 per cent during 1995-96,
it could still be the second highest over the past
fifteen years.
The slowing of industrial production is
clearly attributable to the dramatic fall in the rate of
growth of electricity production and a slowing of growth
in the mining sector mainly because of the 10 per
cent decline in crude oil production. During the first
seven months of 1996-97, electricity production
(as measured by the index) has grown by only 3.4
per cent compared to the 10.1 per cent growth in
the corresponding period of 1995-96. It is
somewhat surprising that manufacturing sector growth has
been barely affected by the slow growth in
electricity production. One possibility is that captive
electricity generation, which is increasingly used as a
back-up to public supply, has substituted for the lack
of generation by electricity boards. The high growth
of diesel imports, about 22 per cent by volume in
the first seven month of 1996-97 (with total
refinery throughput growing in the normal range of around
4 per cent), is consistent with this hypothesis.
At present, electricity statistics incorporate little or
no data on captive power generation.
Another noteworthy aspect of industrial
growth this year is the acceleration in the rate of growth
of capital goods production to 16.6 per cent in the
first seven months of this year from 15 per cent in
the first seven months of last year. This has off-set
the decline in the rate of growth of consumer goods
and basic goods. In contrast, capital goods imports
have declined by 6 per cent in the first seven months
of 1996-97. This shows the increased
competitiveness of the domestic capital goods industry. In the
initial stages of reforms, the capital goods sector
was subjected to the fastest tariff reduction to ensure
a quick recovery of private fixed investment. The
sector appears to have adjusted rapidly.
Subsequently, some of the tariff anomalies were removed gradually
by reducing tariff rates on steel and other
inputs closer to the 25 per cent rate on capital goods.
This move to more uniform tariffs on manufactured
goods has contributed to the growth of capital
goods production, and will have a positive effect
on employment generation.
The delicensing of investment in durables
such as cars and white goods, and the decontrol of imports of parts for these goods, contributed to
a boom in investment and production in this
sector. The pick-up in growth rate in the production
of consumer durables culminated in a phenomenal 37 per cent growth in 1995-96.
Accelerated modernisation and development of this
relatively backward sector required higher initial imports
of capital goods, parts and components. The
decline in the growth of consumer durables to 9.8 per
cent in the first seven months of 1996-97, compared
to 30.2 per cent in the first seven months of
1995-96, suggests that the pent-up demand in the
domestic economy has been met. Further growth will
depend on increased cost competitiveness, which
requires fuller exploitation of the comparative advantage
that India has in the production of (skilled and
unskilled) labour intensive parts. It is possible that the
slowing of non-oil imports is partly due to the maturing
of the consumer durable industry.
A number of changes have been made so
far in 1996-97 in the area of foreign investment.
The Foreign Investment Promotion Council has been
set up, the Foreign Investment Promotion Board
(FIPB) streamlined and made more transparent, and
the first ever guidelines have been announced by
the Government for consideration of foreign direct investment proposals by the FIPB, which are
not covered under the automatic route. The list of industries eligible for automatic approval of upto
51 per cent foreign equity has been expanded.
Foreign Institutional Investors (FIIs) have been allowed
to invest in unlisted companies and in corporate
and government securities, and external commercial borrowing (ECB) guidelines have been
liberalised and made more transparent.
Other industrial policy measures include
the setting up of a Disinvestment Commission, delicensing of consumer electronics, changes in
the sugar policy, enhancement of investment ceiling
on plant and machinery of the small scale
industries from Rs. 60 lakh/Rs. 75 lakh to Rs. 3 crore and
of tiny units from Rs. 5 lakh to Rs. 25 lakh, and reduction of export obligation of non-SSI
units producing reserved items from 75 per cent to
50 per cent. Another list of 9 industries eligible
for automatic approval of upto 74 per cent foreign
equity has been announced. State level industrial
reforms also took a step forward with several states
announcing comprehensive reform policies,
including disinvestment in or privatisation of state public
sector enterprises.
Since February 11, 1997 government
has deregulated prices and distribution of D grade
of non-coking coal, hard coke and soft coke, in
addition to the existing decontrol of prices and distribution
of coking coal and A, B and C grades of non-coking coal. The government has also allowed the
Coal India Limited and the Singareni Collieries
Company Limited to fix the prices of E, F and G grades
of non-coking coal as per BICP escalation formula
till January 1, 2000 and in relation to market
prices after January 1, 2000. The Government has
also decided to amend the Coal Mines
(Nationalisation) Act, 1973 to allow any Indian company to mine
coal and lignite not only for captive consumption but
also for sale.
The overall performance of the core
and infrastructure sectors during the first 8 months
of 1996-97 (April-November) has been poor (Table
1.5). Six industries namely, electricity generation,
coal, steel, crude oil, petroleum products and
cement, with a combined weight of 28.8 per cent in the
Index of Industrial Production (IIP), averaged a growth
of 4.1 per cent in April-November, 1996, less than
half the 8.9 per cent, in April-November, 1995.
The deceleration in the growth rate of these
infrastructure industries is mainly due to a decline in crude
oil production and power generation. Hydro power generation declined by 7.7 per cent, and
thermal power generation grew by only 6.4 per cent in
April-November, 1996 as compared to 14.6 per cent
in the April-March, 1995-96. Coal, cement and refineries' throughput have grown faster in
April-November, 1996-97 compared to the
corresponding period of 1995-96. Growth of sectors such
as railways, ports and telecommunication, which do
not appear in the IIP, also slowed. The rate of growth
of railways' revenue earning goods traffic
decelerated marginally from 7 per cent during 1995-96 to
6.3 per cent for April-November 1996. Growth of
cargo handled at major ports and new telephone connections provided decelerated more sharply
to 4.7 per cent in April-November, 1996 (from 9.1
per cent in 1995-96) and 8.3 per cent in
April-November, 1996 (from 23.3 per cent in 1995-96),
respectively. The slower growth in cargo handled by ports
is probably the result of a deceleration in the growth
of external trade. The telecommunication slowdown, however, suggests that the pace of
implementation of telecommunication reform needs to be
accelerated and its scope widened to include Department of
Telecommunications as a service provider.
The past few Economic Surveys
have emphasized the need to accelerate, widen and
deepen reforms of the non-tradable
infrastructure and energy sectors, to avert an impending
mismatch between economic growth and provision of
non-tradable services. Given the parlous financial
state of many public utilities, particularly the
State Electricity Boards, the possibility of crises
worsens with each passing year. The new government
has repeatedly stressed its firm determination to
reform the infrastructure and energy sectors. In line
with this commitment, a number of policy decisions
have been taken and new initiatives launched.
These include:
To provide long-term finance for
infrastructure, the Budget announced the establishment of
an Infrastructure Development Finance Company (IDFC). The IDFC has since been
incorporated under the Companies Act on 30.1.97 with
an authorised share capital of Rs. 5,000 crore.
A 5 year tax holiday for companies
developing, maintaining and operating infrastructure
facilities such as roads, bridges, new airports, ports
and railway projects, was extended to cover water supply, sanitation and sewerage projects.
After the National Highway Act was amended
to enable private participation, projects
involving Rs.42 crore have been awarded on a Build-Operate and Transfer (BOT) basis. The
capital base of the National Highways Authority of
India has been increased by a provision of Rs.200 crore, thereby providing greater leverage to
borrowing from external funding agencies
and other lenders.
The provisions relating to foreign investment
have been further liberalised to give automatic
approval for foreign equity participation up to 74 per
cent in key infrastructure sectors such as
electricity generation and transmission,
non-conventional energy generation and distribution,
and construction and maintenance of roads,
bridges, railbeds, ports, runways, pipelines and
harbours. The automatic approval list for foreign equity
upto 51 per cent has been expanded to include support services for land and water
transport. This includes operation of highway bridges,
toll roads and vehicular tunnels, operation and maintenance of piers, and loading
and discharging of vessels.
Through an Ordinance, the Government
has recently established a statutory Telecom Regulatory Authority of India (TRAI) which
will separate the regulatory functions from policy formulation and operational functions.
The Department of Telecommunications and financial institutions have also finalised an
assignability agreement which will facilitate funding of
cellular and basic telecom projects.
Letters of intent have been given to basic
telecom services in Karnataka and Madhya Pradesh. Cellular services are expanding rapidly
beyond the four non-metro areas. The Government has
announced that telecom will be treated
as infrastructure and all fiscal benefits, like
tax holiday and concessional duty on project
imports, now being made available to the power
sector will be extended to the telecom sector also.
New guidelines have been published for
private participation in ports for both leasing out
of existing assets and construction and operation of new assets such as container terminals,
cargo berths, warehousing, dry docking and ship
repair. Private investment in ports will be on a
BOT basis. It will include leasing out existing
assets of ports and construction and operation of additional assets such as container
terminals, cargo berths, warehousing, dry docking and
ship repair. The concession period will be decided
by the Port Trusts, up to a maximum period of
thirty years. A contract for a private container
terminal at JNPT, valued at Rs.700 crore, has been awarded.
An Independent Authority for regulating tariffs
in major ports has been created through an Ordinance.
New guidelines for private investment in
the highway sector have been announced, procedures simplified, and
environmental clearance and equity participation made
easier. An Ordinance has been issued containing provisions for acquisition of land for
development and maintenance of national highways. Once
the Government declares that the land is required for a highway, it would be deemed vested in
the Central Government and be non-justicable. Only compensation can be settled through arbitration.
A Common Minimum National Action Plan
for Power was approved by the Centre and the States, in December 1996. As a part of this
Plan, State Electricity Boards are to be urgently reformed and restructured to give them
more autonomy, retail tariffs and wheeling charges
are to be rationalised, and independent regulatory commissions are to be set up at the Central
and State level. Private participation in distribution
is to be encouraged. The Central Government has already issued an Ordinance allowing
private entry into power transmission as an
independent service. States have been given greater
authority: they are now free to clear projects up to
250 MW. Renovation and modernisation schemes no longer need approval of the Central
Electricity Authority.
In principle approval has been given by
the Government for a rail-based mass rapid transit system (MRTS) in Delhi. The cities of
Bangalore, Hyderabad, Mumbai and Calcutta have
proposed major improvements in their public transport
systems through the
introduction/augmentation of rail-based transit systems.
A new policy for private investment in civil
aviation has been announced and this includes
allowing 40 per cent foreign equity in domestic airlines.
The deceleration in inflation, initiated last
year through a reduction in monetary growth,
continued through the first quarter of 1996-97. As
measured by the wholesale price index, the annual
(point-to-point) inflation rate reached a trough of 4.5 per
cent in May and June 1996. Since then the rate has crept up gradually to reach 7.5 per cent
(provisional) in mid-January 1997. Despite the recent rising
trend in the growth of the WPI, the average inflation
for 1996-97 is expected to be at least one
percentage point less than the average inflation in 1995-96.
This is primarily due to continuing restraint on
money supply growth, a reduction in the fiscal deficit (as
a proportion of GDP) and the effect of competitive pressures on tradable goods consequent to
the opening up of international trade in manufactures.
There was a complete change in the
sectoral pattern of price changes during 1996-97. The
annual rate of inflation accelerated sharply in the
"fuel, power, light & lubricants" and "primary
articles" groups, while decelerating in the
"manufactures" group. The annual rate of price increase in the
fuel-power group went up to 17.4 per cent in
January 1997, from 1.1 per cent a year ago, mainly
because of the increase in the administered prices of oil
and petroleum products forced upon the new
government in mid-1996, thanks to the failure to correct
petroleum prices for two and a half years. The rate of
growth of primary prices also accelerated to 11.7 per
cent by January 1997 from 2.6 per cent a year
before, while the rate of growth of manufactured
goods' prices declined to 3.6 per cent from 6.9 per cent
in the previous year. As a result, primary goods'
inflation contributed 50.4 per cent of the inflation in
1996-97 (up to January 11, 1997), while the "fuel,
power, light & lubricants" group contributed 23.3 per cent.
The rise in primary goods' prices has
been largely due to a rise in the prices of cereals,
and fruits and vegetables. Among cereals, wheat
was the main contributor to the price rise, and this
was solely due to the lower production (3 million
tonnes in 1995-96) and the consequent lower
procurement (4 million tonnes) during April-June, 1996. After
the new Government assumed office, a number of
steps were taken to improve the supply position of
food items. FCI continued its open market sales of
wheat and rice through 1996-97, with a sale of 2.5
lakh tonnes of rice and 27 lakh tonnes of wheat by
mid-January, 1997. FCI's monthly open market sales
of wheat were stepped up to 6 lakh tonnes from December 1996. Wheat is also being imported
to augment supplies through the Public
Distribution System (PDS). The import duty on edible oils
was reduced to 20 per cent, and STC imported 2
lakh tonnes of palmolein for PDS supply during 1996.
The rise in the international prices of
crude and petroleum products during 1996-97 put
further pressure on the import bill for petroleum
and petroleum products. As administered price
changes had been postponed, the effect of this
external development (coupled with higher imports necessitated by rising demand and falling
domestic production) is channeled through the
burgeoning deficit in the oil pool account. Though this
deficit does not directly affect the gross fiscal deficit of
the Central Government, it adds to the
"quasi-fiscal deficit" of the public sector as a whole. And
the cumulation of arrears due to domestic oil
companies compromises their financial strength and
operational effectiveness.
Money supply growth has been higher in
1996-97 so far than in 1995-96. Up to the fortnight
ended January 17, 1997, broad money (M3) grew by
10.6 per cent as against 8.2 per cent growth in
the corresponding period of 1995-96. The annual
growth of M3 was 13.2 per cent on March 31, 1996,
against the planned growth of 15.5 per cent, due to
a somewhat tight monetary policy. This, along with
the high real interest rates brought about by a
sharp decline in inflation, gave rise to perceptions of
a liquidity squeeze, and hence, a need to expand money supply in 1996-97. The growth rate of
M3 was still only 15.7 per cent on January 17, 1997,
a shade under the planned growth of 16 per cent.
The gradual acceleration in money supply growth
was not, however, due to any acceleration in
reserve money growth. On the contrary, reserve money
has declined by 2.9 per cent during 1996-97 (up to January 17, 1997) in contrast to the expansion
of 14.0 per cent in the corresponding period of
1995-96. Annual growth of reserve money declined
from 14.8 per cent on March 31, 1996 to 7.2 per cent
on January 17, 1997.
The fall in reserve money growth is
primarily due to a sharp reduction in refinance taken from
the RBI by commercial and cooperative banks,
because of easy liquidity conditions following the reduction
in the Cash Reserve Ratio (CRR). Expansion of net RBI credit to Government at 3.3 per cent
(Rs.3987 crore) during FY 1996-97, was much smaller
than the 14.7percent (Rs.14961 crore) growth in
the corresponding period of 1995-96. Reserve money has, therefore, fallen despite a rise in the net
foreign exchange assets of the RBI by Rs. 11482 crore
(a growth of 15.5 per cent), compared with the decline
of Rs. 485 crore (-0.6 per cent) in 1995-96 (till
January 1996). Despite the reduction in reserve money,
the growth of money supply accelerated because of reductions in the CRR required to be maintained
by the banks against their net demand and time
liabilities. The average CRR was reduced from 14 per cent
at the beginning of 1996-97 to 10 per cent in
January 1997, in several phases.
The average effective Statutory Liquidity
Ratio (SLR) of the scheduled commercial banks is estimated to have fallen from 28.2 per cent of
their net demand and time liabilities in end-March
1996 to 27 per cent by end-December, 1996. The
structure of net bank credit to government has also
undergone a sharp change in 1996-97. The slower growth
of RBI credit to government has been more than
offset by an increase in ``other banks''' credit
to government, which has grown by 18.7 per cent in 1996-97 till January 17, 1997. This compares
with a growth rate of 11 per cent in the
corresponding period of 1995-96.
In contrast, the growth of bank credit to
the commercial sector at 5.3 per cent has been
less than half of the 11.6 per cent in the
comparable period of 1995-96. The growth of ``other banks'''
credit to the commercial sector has also been lower at
5.6 per cent during the current financial year up
to January 17, 1997, as against 11.9 per cent
recorded in the last financial year up to January 19,
1996. While non-food credit of scheduled
commercial banks has recently shown signs of a moderate
pick-up, the overall growth so far (5.2 per cent) is
about a third of the growth (15.2 per cent) registered
in the corresponding period of 1995-96.
The easing of monetary policy during
1996-97 has been reflected in relatively low call money
rates from the very beginning of 1996-97. The
average call money rate declined from a high of 13.75
per cent at the beginning of the current financial year
to a range of 5 to 11 per cent in September 1996,
and ruled between 10 and 11 per cent in December 1996, before falling to low single digits in
January 1997. The RBI resumed its repo auctions of government securities in November 1996
and intensified them with continuous operations in January 1997. The reversal of the 1995-96
excess demand for funds for investment in 1996-97 has
led to a general softening of interest rates in
1996-97. The cut-off yields on 91-day treasury bills has
come down from 12.4 per cent in the first week of July
to around 7.5 per cent at the end of January 1997. Cut-off yields on 364-day treasury bills have
also declined from around 13 per cent at the end of
June 1996 to 10.10 per cent at the end of January 1997.
An increase in the rate of growth of deposits,
coupled with the fall in demand for bank credit from
large corporates, has also led to a reduction in
bank interest rates, including the prime lending rates.
The Budget for 1996-97 envisaged a
reduction of the fiscal deficit by 0.8 per cent point of
GDP from 5.8 per cent in 1995-96 (RE) to 5 per cent
in 1996-97 (BE) (Table 1.6). The primary deficit is
also budgeted to fall from 1.1 per cent of GDP to 0.2
per cent of GDP. The other dimension of fiscal
adjustment is its quality, as reflected in the composition of
fiscal adjustment. The revenue deficit is budgeted to fall
to 2.5 per cent of GDP in 1996-7(BE), from 3.0 per cent in 1995-96 (RE).
The reduction in the fiscal deficit has
been attempted through an increase in revenues
coupled with a reduction in expenditure. Revenue
receipts (net) are budgeted to increase by 18.3 per
cent during 1996-97. These receipts, as a proportion
of GDP, are to edge up from 10 per cent in 1995-96 (RE) to 10.4 per cent in 1996-97(BE). Despite
a larger outgo on account of interest payments
(Rs. 60000 crore), subsidies (Rs.16320 crore) and provision for revision of salaries and pension
benefits (Rs.4000 crore), total revenue expenditure
is budgeted to grow at a lower rate of 12.7 per
cent compared with 17.5 per cent in 1995-96 (RE).
This deceleration in the growth of revenue
expenditure has led to a decline in the revenue expenditure
to GDP ratio from 13.1 per cent in 1995-96 (RE) to 12.9 per cent in 1996-97 (BE). This
favourable outcome on the expenditure side is largely on
account of containment of non-interest
non-plan expenditure growth at 9.3 per cent during
1996-97(BE), about half the growth of 18.8 per cent
in 1995-96 (RE). Consequently, non-interest
revenue expenditure as a proportion of GDP is budgeted
to fall to 8.1 per cent from 8.3 per cent in
1995-96 (RE). The revenue deficit is budgeted to fall by
0.5 per cent point of GDP.
A number of initiatives were outlined in
the 1996-97 budget, signaling the Government's
resolve to strengthen the infrastructure and social
sectors. To provide long term finance for infrastructure
sector, an Infrastructure Development Finance
Company (IDFC) has been set up. A budgetary allocation
of Rs.500 crore was made as Government's contribution. The budget also provided Rs.200
crore to strengthen the capital base of the
National Highway Authority. With a view to improve the
living standards of the rural poor, an additional outlay
of Rs.2466 crore was provided as Central
assistance for States' and Union Territories' Plans for
certain basic minimum services. These cover a wide
array of social programmes aimed at increasing the provision of safe drinking water, primary
education, primary health centres, public housing,
mid-day meals, and rural roads. Programmes for
completing irrigation projects were augmented. Excise duty
was reduced on a number of items of daily
consumption and many mass consumption goods were
exempted. The subsidy limit on small tractors, power tillers,
sprinklers and drip irrigation equipment
was enhanced, to reduce the cost of capital for
the agricultural sector. A provision of Rs.900 crore
was made for matching loans from the Centre to the States for the timely completion of selected
irrigation projects.
The 1996-97 budget also took some
steps toward reform of the tax regime. On the import
duty side, the basic duty rate on a number of items
was reduced to 30 or 40 per cent. Progress was
also made in unifying import duty rates on similar
items, in order to avoid disputes arising out of
mis-classification and multiplicity of rates. On the
excise front, the ambit of MODVAT was extended to
cover textiles. This would help rationalisation of the
rate structure and benefit the textile industry in
general. A mandatory penalty for evasion of excise duty
or misuse of MODVAT credit scheme on account of fraud, collusion etc., was also introduced.
On the direct taxes front, a mix of
changes were made. The surcharge on corporate tax
was reduced from 15 per cent to 7.5 per cent,
bringing down the total company tax rate from 46 per cent
to 43 per cent. This was off-set by the introduction of
a Minimum Alternate Tax, to raise the effective
corporate tax on corporations that do not pay taxes on
corporate income because of numerous exemptions, but
show high balance sheet profits. Companies engaged
in the power and infrastructure sectors are outside
its ambit. The scope of the five year tax holiday
provision was extended to include enterprises in irrigation,
water supply, sanitation and sewerage systems. The
long-term capital gains tax for domestic companies
was reduced to 20 per cent. The scope of the long
term capital gains tax exemption was widened to
include investment in shares issued by public companies
in specified sectors.
As a follow up to the Finance
Minister's announcement in his budget speech, the setting
up of a Tariff Commission has been approved by the Government.
Decontrol of the banking system
continued during 1996-97. The interest rate on term
deposits of over one year was deregulated, as was the
interest rate on non-resident external rupee deposits
above two years. Selective credit controls on a number
of commodities were eliminated from October 1996. The minimum maturity period of term deposits
was reduced to 30 days, and the ceiling rate on
term deposits of 30 days to one year was reduced to
10 per cent. A number of banks have reduced their prime lending rate (PLR) by 1 to 1-1/2 per
cent points and announced a 2.5 to 4.5 per cent
maximum margin over PLR. The rules for obligatory consortium
lending were liberalised by the RBI in October
1996. The ground rules can now be framed by the participating banks themselves, without
reference to the RBI. Competition in the banking sector
has increased gradually as ten new private sector
banks, out of the thirteen "in principle" approvals given
so far, have started functioning. The RBI has
issued guidelines for setting up of new local area
private banks with jurisdiction over three contiguous districts.
Two such banks have already been given "in principle" approval. Banks were allowed to fix
their own foreign exchange aggregate gap limits,
starting April 1996. From October 1996, banks were permitted to provide foreign currency
denominated loans based on their FCNR accounts, to be
used for meeting either foreign currency or rupee requirements.
There has been a steady improvement in
the capital adequacy of public sector banks over
the last few years. The State Bank of India and
its subsidiaries attained 8 per cent Capital to
Risk weighted Assets Ratio (CRAR) by March 1996.
Out of 19 nationalised banks, 11 reached the norm of
8 per cent CRAR, while 3 banks had a CRAR of 4 to 8 per cent. The process of tightening norms
of banking operations also continued. Recovery proceedings are being gradually streamlined,
with six tribunals and one Appellate Tribunal
functioning. Under the Banking Ombudsmen Scheme
announced in June 1995 to expedite inexpensive resolution
of customers' complaints, eleven ombudsmen are now functioning. Banks have opened 125
specialised branches for agricultural credit and 136
such branches for SSI credit.
Disbursements by Development
Finance Institutions (DFI) grew by 16.6 per cent during
April-December 1996, to Rs.22257 crore, from
Rs.19088 crore during April-December 1995. This growth
is only a little lower than the 17.4 per cent growth
rate achieved in 1995-96. Sanctions by DFIs,
however, declined by 30 per cent during April-December
1996, as a result of resource constraints, high
interest rates and slowing of proposals for new projects
from the corporate sector. To raise resources, most DFIs
issued bonds during the year. They also began charging market based interest rates in the face
of increasing competition for term loans by banks.
Their interest rates increased in 1995-96 and in the
first half of 1996-97, but declined subsequently.
Minimum lending rates were reduced from 17 per cent to
16.5 per cent in October 1996.
Non-banking financial companies
(NBFCs) have been brought under the regulatory purview
of the RBI, through an Ordinance amending the RBI Act, 1934. To protect the interests of
ordinary depositors, an NBFC has been defined to include a
company whose "principal business is the
receiving of deposits, under any scheme or arrangement or
in any other manner, or lending in any manner".
All NBFCs will have to meet net worth and capital adequacy criteria. The RBI will also
specify accounting, income recognition and other
norms under the law. Existing NBFCs will have a
transitional period of three years to come up to the
specified standards.
Steps were taken for development of
the Government securities market. A number of
primary dealers were set up and participated actively in
the auctions. Their purchases through auctions
were much higher than the minimum required under
the agreement with the RBI, partly because of the commission given to them. The
delivery-versus-payment system was extended to auction of
treasury bills in February 1996 and to other public debt
offices in May 1996. To encourage mutual fund
schemes dedicated to Government securities and thus
create a wider investor base, the RBI announced
liquidity support to such funds in April 1996. The RBI
will either purchase outright or engage in reverse
repos, up to a maximum of 20 per cent of the
mutual fund's outstanding investment in government securities. The RBI issued guidelines to banks
in June 1996 for retailing of Government securities
to non-bank clients. The ratio of investments to
be classified in current category by banks was
raised from 40 per cent to 50 per cent for the year
ending 1996-97, thus moving closer towards a fully
"marked to market" system of valuation. The ratio is
already 100 per cent for the new private sector banks.
In January 1997, FIIs were allowed to invest in government securities subject to ceilings.
An array of capital market reforms
was introduced during 1996-97, encompassing
primary and secondary markets, equity and debt, and
foreign institutional investment. Primary market
reforms aimed at imparting greater flexibility in the
issue process and strengthening the criteria for
accessing the securities market. Reforms in the
secondary market aimed at improving market
transparency, integrity and trading infrastructure. Among
the reforms undertaken were:
Passing of the Depositories Act, 1996
by Parliament, providing a legal framework for recording ownership details in book-entry
form and facilitating dematerialisation of securities.
The Depositories Related Laws (Amendment), 1997 issued through an Ordinance, will allow
banks, mutual funds and IDBI to dematerialise
their scrips.
Formulation of SEBI (Depositories &
Participants) Regulations, 1996, which allow SEBI to regulate
establishment and functioning of
depositories, and to protect investor interests.
Tightening of entry norms for equity issue
by companies, to improve quality.
Giving up vetting of public issue offer
documents by SEBI, to encourage self regulation.
SEBI's comments (if any) to be sent within 21 days
of filing.
Debt issues not accompanied by an
equity component permitted to be sold entirely by
the book-building process.
Issuers allowed to list debt securities on
stock exchanges even if equity is not listed.
FIIs permitted to invest up to 10 per cent in
the equity of any company, to invest in unlisted companies, to set up pure (100 per cent)
debt funds, and to invest in government securities.
Eligibility criteria for registration as an FII
were modified to allow endowment funds, university funds, foundations and charitable
trusts/societies to register.
Stock lending scheme was introduced and
this will not attract capital gains.
The SEBI (Mutual Funds) Regulations, 1993
were revised to provide for portfolio disclosure, standardisation of accounting policies,
valuation norms for determining net asset value
and pricing.
SEBI regulations on Venture Capital funds
(VCF) were issued, allowing them to invest in
unlisted companies, to finance turnaround
companies, and to provide loans. These provide flexibility
to VCFs so that high risk finance can be provided to the market.
Modified takeover code, based on
the recommendations of the Bhagwati comittee, was approved. It requires a mandatory minimum
public offer of 20 per cent purchase, when the
threshold limit of 10 per cent equity holding is
crossed. Those in "control" are permitted to purchase
2 per cent of shares per annum up to 51 per cent. To discourage frivolous attempts, acquirers
will have to deposit a certain value of cash and assets in an escrow account. The escrow
deposit would be higher for conditional public
offers, unless the acquirer agrees to acquire a
minimum of 20 per cent.
SEBI approved almost all the
recommendations of the Dave Committee for improving the
working of the Over The Counter Exchange of India (OTCEI).
The capital market remained subdued
during 1996-97. The primary market was characterised
by a reduction in the capital raised from Rs.14151
crore in April-December 1995 to Rs.10369 crore
during April-December 1996. The secondary market
saw low trading volumes and a downtrend in prices. Mutual funds and market intermediaries also
suffered from lower volumes. Besides UTI, there are now
10 public sector mutual funds and 21 private
sector mutual funds in operation. During
April-December 1996, mutual funds, including UTI, raised
Rs.2167 crore from different schemes. At the end
of December 1996, 427 Foreign Institutional
Investors (FIIs) were registered with SEBI. They have
invested around US $2032 million in the securities market
in 1996-97 till December, bringing the stock of
FII investments to US$7235 million. Indian issuers
also made Euro-issues (GDR's and FCCB's) of US
$1304 million during the same period, an amount
higher than that raised through euro-issues in the whole
of 1995-96.
The developments so far in 1996-97 in
the balance of payments point to an easing of
pressure on the current account and to buoyancy in
capital inflows. The deficit on trade account in 1996-97
is expected to be lower than in 1995-96, largely because of a sharp deceleration in the growth
of non-petroleum (non-POL) imports. This
improvement in the trade deficit will be partly offset by
an anticipated decline in invisible receipts, reflecting
an increase in payments for factor services and
some decline in private transfers. The current
account deficit is expected to decline from 1.7 per cent
of GDP in 1995-96 to less than 1.4 per cent of GDP in 1996-97. Net capital inflows in 1996-97
are expected to rise nearly three-fold over the
previous year, largely because of buoyant inflows under
non-resident deposits and foreign investment
flows, including Euro-equities, and a sizable decline
in repayments to the IMF. The easing of pressure
on the current account and buoyant capital flows
in 1996-97 resulted in a sizable build-up of
foreign exchange reserves. The foreign currency assets
of the RBI rose by over US $2.8 billion from about
US $ 17.0 billion at end-March 1996 to US
$19.8 billion at end-January 1997, providing cover for
about 5.5 months of imports.
As per DGCI&S data, the trade deficit for
April-December 1996 at US$ 3.3 billion was 8 per
cent lower than in April-December 1995. During
April-December 1996, imports recorded a growth rate
of only 4.4 per cent, entirely due to a sharp 41
per cent increase in POL imports. Non-POL imports,
on the other hand, showed a negative growth of 4.2 per cent during April-December 1996. Non-POL
imports grew at an annual average rate of 23
per cent during 1993-94 to 1995-96. The pattern
of import growth suggests that the hump in
imports, normally seen after a major trade and
investment liberalisation, is now behind us. The fall in
non-oil imports may also partly reflect a slowdown of
growth in investment and consumer durables' production.
There has also been a slowdown in the
growth of exports in 1996-97. During April-December
1996, exports, in US dollar terms, grew only by 6.4
per cent as against the annual average growth rate
of 19.7 per cent during the previous three years
(1993-94 to 1995-96). The slow growth in exports
during April-December 1996 is accounted for by
large declines in exports of unmanufactured tobacco,
tea, leather and leather manufactures, gems and jewellery, primary and semi-finished iron and
steel, and a sharp decleration in the growth of exports
of coffee, electronic goods, ready-made garments
and handicrafts. Among the significant reasons for
this decline are the slowdown in world trade growth
in 1996 (by about 3 percentage points), inadequate availability of non-tradeable infrastructure
services, the fall in agriculture production, and
large movements in cross-currency exchange rates.
The impact of variations in the cross-currency rates
is evident from the fact that during the first nine
months of 1996-97, exports valued in SDR terms grew
by 12.7 per cent compared to only 6.4 per cent
when valued in US dollar terms. The latest trend in
the growth rates of exports seems to suggest that
the initial impact of trade liberalisation is petering
out and the trade flows are reverting to their
normal trend determined by world demand and
domestic activity. Despite the export slow down, self
reliance, as measured by the coverage of imports by
exports (DGCI&S), has risen to 88.2 for April-December
1996 from 86.7 during 1995-96.
Consistent with the liberal thrust of the
1992-97 EXIM Policy, the Government undertook a
series of trade liberalization measures in 1996-97.
These included shifting of a large number of items,
including consumer goods, from the negative/restricted list
to the list of items which can be imported under
the export-linked, special import license (SIL)
scheme. A large number of SIL items were also moved to
the free (OGL) list.
In the capital account, foreign
investment continued to dominate the capital flows. Total
foreign investment (direct plus portfolio) during
April-December 1996 surged to over US $4 billion,
which is more than 50 per cent higher than in the corresponding period of 1995-96. This
revival followed a modest decline in such investment
flows from US $ 4.9 billion in 1994-95 to US $4.3
billion in 1995-96, mainly owing to a sharp fall in the issue
of Euro-equities. Foreign direct investment flows
were US $2.1 billion in 1995-96. During
April-December 1996, FDI flows were US $1.7 billion,
compared with US$1.5 billion in the corresponding period
of 1995. Portfolio investment, comprising
investment by FIIs and Euro-equities, doubled to over US
$2.3 billion in the first nine months of 1996-97 from
about US$1.1 billion in the corresponding period of
1995-96.
For the first time, detailed guidelines for
the Foreign Investment Promotion Board were announced in January 1997. The list of
industries eligible for automatic approval of foreign
investments was expanded considerably. FII investments
in securities of companies as 100 per cent debt
funds have been allowed subject to certain guidelines;
FIIs have also been allowed to invest in
gilt-edged securities within the framework of the
guidelines; and proprietory FII funds have been allowed to
invest in the country. The guidelines for Euro-issues
were liberalised in June 1996 so as to give the market
a freer play in judging the quality of issues and
the number of issues that can be floated in a year.
The conditions relating to end-use of GDR proceeds
have been relaxed significantly. Investment in the
stock market and real estate is not, however,
permitted out of GDR proceeds. Similarly, a number of
changes were announced in June, 1996 in the
external commercial borrowing (ECB) guidelines
governing the maximum borrowing limits and end-use restrictions. In particular, exporters can raise
ECB for meeting project-related rupee expenditure
upto the equivalent of US$15 million, or the
average annual exports of the previous three years,
whichever is lower. The maximum limit under the US$1
million window has been enhanced to US$3 million,
to help small and medium firms meet their working capital requirements. All infrastructure and
greenfield projects have been permitted to avail of ECB to
the extent of 35 per cent of total project cost,
as appraised by a recognized financial institution
or bank. Greater flexibility is allowed on merits to
power projects. In January 1997, the ECB limit for
the telecommunication sector was raised to 50 per
cent of the total cost of the project.
The exchange rate of the rupee against
the US dollar, which had depreciated to a monthly average of Rs. 36.63 in February 1996,
recovered to Rs.34.24 in April 1996. In the subsequent
months, the rate moved in the narrow range of Rs. 35.01
to Rs. 35.87. The rupee-dollar rate remained
steady although inflation in India was higher than in
her major trading partners. This resulted in some appreciation of the rupee in real effective
exchange rate terms.
Further measures were taken to
simplify procedures related to the purchase of foreign
exchange, so as to enhance current
account convertibility. These included permission to
Exchange Earner's Foreign Currency (EEFC) account
holders to use these funds for business related
current account transactions. Authorised Dealers (ADs)
were allowed to export surplus currency to private
money changers abroad, in addition to their own
branches and correspondents. ADs were empowered to
allow Indian resident families to remit US$5,000 per
year to close relatives abroad, without reference to
the RBI. Monetary ceilings on remittances for a
wide range of purposes were also removed, so that
ADs need not refer to the RBI.
India's external debt declined from US
$99.0 billion at end-March 1995 to US $92.2 billion at
end-March 1996. The downsizing of external debt
resulted in a decline in the external debt-to-GDP ratio
to 28.7 per cent in 1995-96. The share of
concessional debt in the total remains stable at about 45.5
per cent. The share of short-term debt was 5.5 per
cent at end-March 1996, and is low by
international standards. The high component of concessional
debt translates into a present value (PV) of debt at US
$ 70.7 billion at end-March 95. Debt service
payments, as a percent of current receipts, also declined from
27.5 per cent in 1994-95 to 25.7 per cent in 1995-96, and they are projected to decline further to
about 25 per cent in 1996-97.
The India Development Bonds (IDB), issued
in early 1992, fell due for redemption after five
years in mid-January and mid-February, 1997. Of the
IDBs falling due, redemption of only about a half in
net foreign currency terms continued to demonstrate
the relative attractiveness of investments in India.
Rapid creation of productive
employment opportunities is the best way of reducing
poverty. The Economic Survey, 1995-96 reported
Planning Commission estimates indicating a sharp
increase in additional employment generated in the
economy from 3 million in 1991-92 to over 7 million in
1994-95. These old estimates as well as the
methodology for estimating employment are currently under
review by the Planning Commission, and the
employment estimates for 1995-96 have not yet been
finalised. However, there is little doubt that the high growth
of the last few years would have led to a rapid expansion of employment opportunities.
The estimated proportion of population
below the poverty line is sensitive to the
estimation procedure adopted. However, according to a
variety of estimates, the decline in the proportion
of population below the poverty line was between
2.9 and 8.7 percentage points in the six-year
period ending in 1993-94. The appropriate methodology
for estimation of poverty is also currently under
review by the Planning Commission.
The Common Minimum Programme
(CMP), underpins the strong commitment of the
Government to the development of social sectors for
achieving distributive justice. This commitment is reflected
in the increase in Central Government Plan and non-Plan allocations for social services to a record
high of 1.19 per cent of GDP in 1996-97 (BE). This
ratio was 0.96 per cent in 1995-96. An additional
amount of Rs.2466 crore of Central assistance to
States' and Union Territories' plans has also been
allocated in the 1996-97 budget for expenditure on
basic minimum services.
The Government has also accorded
high priority to poverty alleviation programmes.
The Central Plan allocations for social sectors
and poverty alleviation programmes show highest
growth of 85.6 per cent for education in 1996-97 over
1995-96 (BE). The outlay for elementary education
has gone up by 247.8 per cent, mainly because of
the programme of nutritional support to primary
school students. The allocation for health was
raised by 21.6 per cent and for rural development,
encompassing the major programmes for poverty alleviation, by
12.1 per cent in 1996-97 over 1995-96 (BE).
The weaker sections especially scheduled castes/scheduled tribes and women have been
given importance in special programmes of poverty alleviation and employment as well as in
several other programmes. The PDS has been
streamlined recently in order to target the poorer sections of
the population.
The Update to the Economic Survey
1995-96, published about seven months ago, had
emphasised three key challenges for economic policy: how
to control the fiscal deficit; how to provide
adequate and reliable economic infrastructure services at
a reasonable cost and with sustainable financing
and pricing policies; and how to ensure
broad-based employment-generating growth of
agriculture, industry and other sectors, together
with strengthened programmes for basic social
services and anti-poverty programmes to ensure a
rapid alleviation of poverty.
These challenges remain central to
our concerns. It is essential to keep reducing the
Centre's fiscal deficit to below four per cent of GDP as
soon as possible in order to: reduce interest rates
and free up resources to finance the high levels
of investment, both public and private, envisaged
in the Approach Paper to the Ninth Plan; to
contain Central Government borrowing from the RBI
and thus check the growth of inflationary potential
and pressures; to moderate the growth of rapidly
rising interest payments which preempt the resources
available for spending on priority, social
and infrastructure needs; to facilitate orderly
development of the market for long-term debt securities which
is so essential for fostering the financing of infrastructure; and to reduce the risks
associated with excessive government borrowing from
external sources.
The path to fiscal deficit reduction is as
well known in theory as it is difficult to implement
in practice. We must persevere with our programme
of tax reforms which has helped to raise the ratio
of revenues to GDP. We must seek higher non-tax revenues in the form of larger dividends
from Government equity in public enterprises. We
must reduce the growth of subsidies through better targeting and much more systematic application
of user charges for Government services. The
normally difficult task of expenditure management will
be accentuated in the coming years by the
challenge of accommodating the recommendations of the
Fifth Central Pay Commission. Finally, Government
must act expeditiously on the recommendations of
the Disinvestment Commission.
The responsibility for fiscal consolidation
and prudence does not rest with the Central
Government alone. The States have to do their part in
reducing their borrowing requirements through better
design and implementation of their tax systems and
through steps to curb low priority expenditures.
As described earlier, the Government has
taken a wide array of initiatives to accelerate expansion
of infrastructure services in power,
telecommunications, roads, ports, civil aviation and irrigation. All
these initiatives need to be followed through with
vigour and dedication. We must quickly resolve the
residual difficulties in the induction of private providers
of basic and cellular telecom services. We must
follow up on the experience with the recently
announced guidelines for private projects in roads and ports
to iron out any difficulties that may arise. We
must resolve remaining ambiguities about our policy
on civil aviation. We must urgently complete as
many ongoing irrigation projects as possible to bring
the benefits of assured water supply to millions
of farmers. Above all, we must press ahead with
the recently agreed Common Minimum National Action Plan for Power on a war footing.
The recurring power failures even in the
capital city of Delhi this winter underline the critical
nature of the power problem throughout the
country. Because of unavailable, uncertain or erratic
supplies from the public grid, the economy is paying a
heavy price in the form of foregone production, lost
exports of goods and services, frustrated
investment intentions, recourse to high cost captive
power generation, loss of international
competitiveness, and barriers to the spread of information technology
which is redefining the terms of production,
technical progress and international specialisation
throughout the world. The key elements of the
Common Minimum National Action Plan for Power, which
need to be pursued vigorously, include the
establishment of independent State Electricity
Regulatory Commissions, the rationalisation of retail
power tariffs, induction of private participation in
electricity distribution and the restructuring and
corporatisation of State Electricity Boards to run on
commercial principles.
Power is only one, albeit critical, component
of our energy economy. Today, the development of our petroleum sector is under a serious threat,
with crude oil production having declined, oil imports
rising sharply and the deficit on the Oil Pool Account
rising each day and expected to exceed Rs.15,000
crore before the end of this financial year. There is
no economically viable alternative to adjusting
petroleum prices to reflect the impact of international oil
price increases. Furthermore, if we are to reap the
benefits of increased investment and efficient production
in all stages of the petroleum sector (ranging
from exploration and development to refining and distribution), we must carry out a phased
dismantling of the existing administered price mechanism in
this sector. The time for initiating this reform is
already overdue.
A pick-up in the growth momentum of
the economy will intensify the need for garnering increasing amounts of foreign savings to meet
the investment requirements of the economy and to sustain the growth momentum itself. Foreign
direct investment flows provide such savings without
adding to the country's external debt. As indicated in
the Common Minimum Programme, foreign direct investment should rise to US$10 billion per
year from the current level of US$2 to 3 billion. We
must learn from the pragmatic nationalism of China
which received around US$40 billion of investment
in 1996, and expects to attract more in 1997. We
must also learn from the flexibility and speed of
Indonesia, which modified its policies rapidly in response
to perceived competition from China and India, to double foreign investment inflows between 1994
and 1995. We must ensure that the regulations
governing the inflow of foreign investment are transparent
and attractive in comparison with what other Asian economies offer. A review of FERA is underway
in this context.
Fifty years after achieving
independence, poverty, illiteracy, disease and lack of minimum
social services continue to afflict hundreds of millions
of our people. Experience from all over the world
shows that rapid, employment-generating growth is the
most effective way of reducing poverty. Our policies
and programmes must accord the highest priority to
encouraging growth of sustainable and
productive job opportunities in all sectors. In agriculture,
income earning opportunities for farmers should be expanded by removing existing impediments
to domestic and international trade in
agricultural products and removing controls on key
agro-processing industries. At the same time, there
have to be renewed efforts to strengthen rural infrastructure in the form of irrigation, rural
roads, soil conservation, seed development, research
and extension, and rural credit systems. In many
cases this may call for a review and redirection of
existing programmes. Besides, it is imperative to
find incremental resources for public investment in
rural infrastructure. Such resources can be raised
only partly through the budget. Without hurting the
poor, the bulk of the resources would have to come
from the larger and better-off farmers.
There is a tremendous scope for
expanding productive employment in the construction and
other service sectors, especially in the cities and
towns. But to realise this potential, the Government
must be prepared to remove impediments imposed by various laws and regulations, such as the
Urban Land Ceiling Act.
For the vast majority of our people to
benefit from extension of job opportunities stemming
from rapid labour-intensive growth, there has to be
a commensurate expansion and quality improvement in the basic social services such as
primary education and primary health care. The
experience of countries as diverse as China and Indonesia
has demonstrated the critical requirement for
priority attention to these basic services.
For those at the margins of a market
driven economy, the effective provision of minimum
social services and special programmes for
employment and poverty alleviation fulfill an essential need.
Over time these special programmes have
proliferated, not always rationally. To maximise the
beneficial impact of anti-poverty programmes, it would
be desirable to seek ways of consolidation and rationalisation, and some attrition. The basic
goal should be to enhance sustainable benefits to
the poorest segments of the society, while
reducing administrative duplication and wastage
and minimising well-known "leakages".
Over the last 5 to 6 years the Indian
economy has demonstrated enviable resilience and
buoyancy as a result of wide ranging economic reforms
and closer integration with the world economy. On
the whole, those dimensions of the economy have performed best where reform efforts have been
most thorough and far-reaching. We must learn from
this experience as we look ahead to meet the
challenges of the future.
