General Review

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Abox3.gif (4275 bytes)Review of Developments
Swaz1.gif (658 bytes) Macroeconomic Overview
          Swaz1.gif (658 bytes) Trends in GDP
          Swaz1.gif (658 bytes) Demand Factors
          Swaz1.gif (658 bytes) Supply Side : Production
          Swaz1.gif (658 bytes) Fiscal Developments
          Swaz1.gif (658 bytes) Inflation
          Swaz1.gif (658 bytes) Money Supply
          Swaz1.gif (658 bytes) External Sector
          Swaz1.gif (658 bytes) Balance of Payments

Abox3.gif (4275 bytes)Issues and Priorities
Swaz1.gif (658 bytes) Current Situation
          Swaz1.gif (658 bytes) Key Problems
          Swaz1.gif (658 bytes) Possible Solutions
          Swaz1.gif (658 bytes) Domestic Reforms
          Swaz1.gif (658 bytes) Summing Up

Review of developments

Macroeconomic Overview


1.1  Real GDP growth rate in 2000-01 is estimated at 6 per cent compared with a growth rate of 6.4 per cent achieved in 1999-2000 and 6.6 per cent in 1998-99. Despite deceleration of growth rate for the second consecutive year, India has the distinction of being one of the fastest growing economies in the world. The Indian economy has shown remarkable resilience in the face of substantial increase in the international price of crude oil over the last two years. The behavioural trends of the key macro-economic parameters are summarised in Tables 1.1 and 1.2.

1.2  The reduction of overall growth rate of GDP to 6 per cent in 2000-01 is mainly due to a decline in the growth rate of service sector from 9.6 per cent in 1999-2000 to 8.3 per cent in the current year. Among services, it is the community, social and personal services group that is expected to show the sharpest decline. In terms of growth of value added both industry and agriculture and allied sectors are expected to achieve higher growth rates than in the previous year.

1.3  Despite a normal monsoon for the thirteenth successive year on the basis of average rainfall, prospects of agricultural production in 2000-01 are not considered to be bright due to relatively unfavourable distribution of rainfall over time and regions, leading to floods in certain parts of the country and droughts in some others. Production of foodgrains is expected to decline to 199 million tonnes in 2000-2001 from the record level of 208.9 million tonnes in 1999-2000. This, in turn is expected to lead to a decline in the overall agricultural output in the current year. However, in terms of growth of value added, the agriculture and allied sector taken as a whole is expected to show a marginal increase from 0.7 per cent in 1999-2000 to 0.9 per cent in 2000-01.

1.4  The advance estimates of GDP indicate better performance by mining & quarrying, electricity, gas & water supply, and construction, in the current year compared to 1999-2000. Due to slightly better performance by these groups, the industry sector is expected to have higher growth in the current year despite reduction in the growth rate of manufacturing. Among services, trade, hotels, transport & communications are projected to have the same growth as in the previous year. Financial, real estate and business services are expected to experience a lower growth of 9.6 per cent in 2000-01 as against 10.1 per cent in 1999-2000. The community, social and personal services group is envisaged to experience the sharpest decline in the service sector by recording a growth of 7.6 per cent in 2000-01 compared with 11.8 per cent in 1999-2000. The anticipated decline for the sector is attributable to the effect of higher wages (arrears) drawn by Government employees in the previous years.

1.5  During 2000-01, the annual rate of inflation in terms of WPI has shown an increasing trend due to pressure from energy prices. The inflation rate hovered around a little over 6 per cent till September 2000 when the hike in administered prices of fuel products pushed up inflation to 7.8 per cent for the week ending September 30, 2000. The inflation rate, as on January 27, 2001, was around 8.2 per cent on point to point basis (compared with 3.6 per cent on the corresponding date of the previous year) and 6.6 per cent on the basis of 52 weeks average (compared with 3.4 per cent on the corresponding date of the previous year). This increase in inflation was caused mainly by the the fuel, power, light and lubricants group, whose point to point annual inflation as on January 27, 2001 was 29.6 per cent compared to 16.2 per cent in the corresponding period of the previous year. But for this sharp rise in the fuel group’s prices, this year’s point to point inflation rate would have been half of the observed rate of 8.2 per cent. Excluding the fuel, power, light and lubricants group, point to point annual inflation as on January 27, 2001 remained subdued at 2.4 per cent (compared with 1.5 per cent as on January 29, 2000). During the financial year the cumulative inflation rate was 4.8 per cent as on January 27, 2001 compared with 3 per cent during the corresponding period of 1999-2000. Given the trend, the year-end average rate of inflation in terms of WPI is expected to be around 6.5-7.0 per cent.

1.6  Inflation rate in terms of the Consumer Price Index for Industrial Workers (CPI) decelerated continuously during the year to reach a low of 2.7 per cent in November 2000 as against zero per cent in November 1999. The Index rose moderately by 3.5 per cent in December 2000. According to the twelve months average basis the inflation works out to 4 per cent for the year 2000 compared with 4.7 per cent for the year 1999.

1.7  During 1999-2000, Government’s fiscal position remained under strain due to unanticipated expenditure on elections, 50 day war in Kashmir and the super cyclone in Orissa. The gross fiscal deficit of the Central Government increased from 5.1 per cent of GDP in 1998-99 to 5.5 per cent of GDP in 1999-2000.

1.8  The Union Budget for 2000-01 envisaged a reduction of fiscal deficit from 5.5 per cent in 1999-2000 (provisional and unaudited) to 5.1 per cent of GDP. As regards revenues, direct tax collections have been buoyant throughout the current year. However, there are some shortfalls in indirect tax collections due to slowdown of industrial growth, the negative growth rate of non-oil imports, increase in the exemption limit for imposition of excise for the small scale sector and reduced duties on oil products. There is also significant shortfall in disinvestment proceeds. However, various austerity measures taken by the Government for reducing non-plan and non-capital expenditure have helped to keep expenditure and overall fiscal deficit under control.

1.9  On the external front, exports showed significant recovery in 1999-2000 from the negative growth in 1998-99. The current account deficit was contained at 0.9 per cent of GDP in 1999-2000, despite substantial increase in the oil import bill by 63 per cent due to hardening of international prices of crude oil and petroleum products.

1.10  Export growth rose further in 2000-01 due to Rupee depreciation alongwith further trade liberalisations, tariff reductions, and more openness to foreign investment in export-oriented sectors like information technology. The issue of India Millennium Deposits by the State Bank of India in October-November 2000 was very successful and raised more than US $5.5 billion of foreign exchange. The level of foreign exchange reserves (including gold and SDR) reached the record level of US $41.1 billion at the end of January 2001.

1.11  Official BOP statistics, compiled by the RBI for 2000-01, are available for only the first half of the year. According to these estimates, trade deficit increased from US$ 7.6 billion in April-September 1999 to US$ 9.2 billion in April-September 2000. Inflows of net invisible services increased from US $ 4.7 billion to US $ 5.2 billion resulting in an increase of current account deficit from US $ 2.9 billion to nearly US $ 4 billion during the same period. On the capital account, there was a decline of net capital inflows from US $ 3.7 billion in April-September 1999 to US $ 2.5 billion in April-September 2000 due to net outflows of external assistance and external commercial borrowing and a decline of foreign investment in April-September 2000. Consequently, foreign exchange reserves declined by US $ 1.5 billion during April-September 2000. However, foreign exchange reserves began to build up after the successful issue of IMD.

1.12  A tentative assessment of the BOP outlook for the current year indicates that the current account deficit in 2000-01 might widen to about 1.5-1.7 per cent of GDP compared to 0.9 per cent of GDP in 1999-2000. This is mainly due to the surge in India’s oil import bill because of the tripling of international oil prices between early 1999 and mid-2000. On the other hand, non-oil import growth remains subdued. Exports, however, are expected to remain buoyant, as is evident from the growth rate of 20.4 per cent (in US Dollar value), recorded by the DGCI&S data for April-December 2000. Net inflow of invisibles, despite moderate increase in outflows on account of interest, dividend, royalty payments etc., is expected to remain broadly at last year’s level, supported by the continued buoyancy in software service exports and private transfers. The widening of current account deficit will, however, be more than matched by the expected net capital inflows.

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Trends in GDP

1.13  Overall GDP growth rate decelerated marginally from 6.6 per cent in 1998-99 to 6.4 per cent in 1999-2000 mainly due to a significant slowdown in agriculture and allied sector growth from 7.1 per cent in 1998-99 to a mere 0.7 per cent in 1999-2000 (Table 1.3), despite a record level of foodgrains production in 1999-2000. However, in 1999-2000, apart from electricity, gas and water supply, there was acceleration in growth rates of all other major sectors of the economy. There was a significant improvement in overall growth in industrial value added from 3.4 per cent in 1998-99 to 6.4 per cent in 1999-2000 due to acceleration of growth in value added by the manufacturing sector from only 2.5 per cent in 1998-99 to 6.8 per cent in 1999-2000, and that in construction from 6.1 per cent to 8.1 per cent over the same period. Within the industry sector, while mining and quarrying showed some improvement in 1999-2000, there was marked deceleration in the growth rate of electricity, gas and water supply.

1.14  Service sectors also performed exceptionally well in 1999-2000. Average growth rate of trade, hotels, transport and communications, improved from 7.1 per cent in 1998-99 to 8 per cent in 1999-2000 and that of financial, real estate & business services accelerated from 8.4 per cent to 10.1 per cent over the same period. Community, social and personal services also grew at a much faster rate in 1999-2000 than in 1998-99.

1.15  The advance estimates of GDP for 2000-01, made available by the CSO, indicate a lower GDP growth of 6 per cent in the current year. The decline is attributable to lower growth of the services sector. However, agriculture and allied sectors, along with industry, are expected to post marginally higher growth of value added compared to the previous year.

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Demand Factors

Consumption, savings and investment

1.16 On the demand side, real consumption growth decelerated from 7.9 per cent in 1998-99 to 5.8 per cent in 1999-2000 mainly due to deceleration of the growth rate of private consumption from 7.2 per cent in 1998-99 to 4.1 per cent in 1999-2000, although Government consumption expenditure recorded a higher increase during the same period. The growth rate of gross domestic capital formation showed a significant acceleration from only 2.3 percent in 1998-99 to 9.4 per cent in 1999-2000 (Table 1.4)

1.17  The rates of investment and saving in India are high as judged by its level of economic development. Gross domestic savings as per cent of GDP declined from 23.5 per cent in 1997-98 to 22.0 per cent in 1998-99 due to negative savings in the public sector. Gross domestic savings have improved marginally to 22.3 per cent in 1999-2000 as a result of sustained economic growth, low inflation rates and better performance by the household sector. Private corporate savings remained stagnant at 3.7 per cent of GDP in 1999-2000. However, there was a steep fall in the savings of the public sector due to an increase in the dis-savings of Government administrative departments caused by large revenue deficit. In fact, public sector savings continued to be negative in 1999-2000 as in 1998-99. As a percentage of GDP, public sector savings deteriorated from (-) 0.8 per cent in 1998-99 to (-) 1.2 per cent in 1999-2000 (Table 1.5).

1.18  Gross domestic investment (GDI) as percentage of GDP has shown similar trends. It declined from 25.0 per cent in 1997-98 to 23.0 per cent in 1998-99 due to decline of investment in both public and private sectors. It is estimated that GDI as percentage of GDP has improved to 23.3 per cent in 1999-2000 (at current prices) due to higher investment by both public and private sectors (Table 1.5). While public investment as percentage of GDP improved from 6.4 per cent in 1998-99 to 7.1 per cent in 1999-2000, private investment as percentage of GDP also improved from 14.8 per cent to 15.6 per cent over the same period.

1.19  There was significant improvement in the real gross domestic capital formation (GDCF) in 1999-2000. The growth rate of public sector GDCF accelerated from 5.1 per cent in 1998-99 to 19 per cent in 1999-2000 and that of private sector GDCF accelerated from 1.6 per cent to 15.2 per cent resulting in the acceleration of the overall GDCF growth rate from 2.3 per cent to 9.4 per cent over the same period (Table 1.6). As percentage of GDP at market prices (at 1993-94 prices), real GDCF improved from 25.4 per cent in 1998-99 to 26 per cent in 1999-2000 due to improvement in both public and private sector real capital formation in 1999-2000. However, within private sector, there was marginal deterioration of real capital formation by the private corporate sector although the household sector showed significant improvement.

1.20  It is mentionable in this context that although GDCF in current prices seems to have fallen as a proportion of GDP in the late 90s, the trend in constant prices is quite different. Because of changes in relative prices, GDCF in constant prices has remained in the range of 25-26 per cent during this period.

1.21  Real gross fixed capital formation (GFCF) as per cent of GDP also showed some improvement from 23.5 per cent in 1998-99 to 23.8 per cent in 1999-2000 due to improvement in both public and private fixed capital formation. After a decline in 1998-99, inventories as proportion of GDP surged to 1.6 per cent in 1999-2000 with almost equal levels of inventories in public and private sectors (Table 1.6).

1.22  As data on capital formation are not available for the year 2000-01, the trends have to be assessed by looking at various leading indicators of investment and growth. These present a mixed picture. Both domestic production as well as imports of capital goods have shown considerable deceleration in the current year. There was significant improvement in sanctions and disbursements made by the All India Financial Institutions (AIFIs). The inflows of Foreign Direct Investment (FDI) also recorded significant improvement in the current year. Inflows of FII investment have been erratic in the current year with overall inflows of portfolio investment lower than those in the last year. The trends indicate that there may not be any significant recovery of investment in 2000-01. Sustained high economic growth would require significant improvement in investment, which in turn, would depend on steep rise of foreign direct and portfolio investment, structural reduction in inflationary expectations and real interest rates, reduction in the fiscal deficit and further liberalisation of the domestic debt and capital markets.

1.23  While India’s private savings rate is more or less comparable to those achieved by the high performing East Asian economies, its negative public savings is a major constraint on domestic resource mobilisation. The Government is restructuring public expenditure for fostering domestic savings, releasing resources for physical and social infrastructure development and for reducing the crowding out effect on private investment.

1.24  The tempo of economic reforms was sustained successfully in 1999-2000. Major fiscal reforms were undertaken for broadening the income tax base and streamlining the excise and customs duty structures. There were enabling reforms in foreign investment and trade policy spheres also. Reforms in public sector enterprises are underway for reducing pressures on public finances, increasing the efficiency of public sector operations and reducing the incremental capital output ratio (ICOR). Strengthening of legal, institutional and regulatory frameworks in insurance, banking, capital markets, power and telecom are being undertaken for inducing greater private investment in infrastructure. The Union Budget for 2000-01 announced various measures for further deepening of the capital markets and financial sector and allowed private entry in insurance and provident funds. The major reforms undertaken during 1999-2000 are provided in Box 1.1. It is expected that these measures would enhance both the savings and investment rates for the economy.

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Supply Side: Production

Agriculture and allied sectors

1.25  The adverse weather conditions affected the crop prospects, particularly foodgrains and oilseeds production in year 2000-01. The foodgrains production in 2000-01 is likely to be 199 million tonnes compared to 208.9 million tonnes in the preceding year. The decline of nearly 10 million tonnes should, however, not pose a serious supply management problem since the country is comfortably perched on nearly 45 million tonnes of foodgrain stocks, which should be an adequate safeguard against speculative uptrend in foodgrain prices.

1.26  As for commercial crops, the rabi prospects of oilseeds and pulses production in 2000-01 is also not satisfactory since their area sown is much less this year due to inadequate winter rainfall. Mustard crop has particularly suffered in the rabi season. Hence edible oil prices may be under pressure later in summer and would need to be carefully watched.


1.27  The overall industrial growth path in the 1990s has been marked by cyclical fluctuations with the peak level of industrial growth being 13 per cent in 1995-96. Since 1996-97, industrial growth has remained around 6.5 per cent annually except for a drop to 4.1 per cent in 1998-99. Some of the factors responsible for this cyclical behavior of industrial growth during the last few years are, high interest rate environment, lack of demand for capital goods, business cycle, inherent adjustment lags in industrial restructuring and infrastructural constraints, particularly for power, roads, telecommunications and transport.

1.28  According to the Index of Industrial Production (IIP), overall industrial growth was 5.7 per cent in April-December 2000 (compared to 6.4 per cent in April-December 1999) contributed by a growth of 4.1 per cent in mining, 5.9 per cent in manufacturing and 4.8 per cent in electricity. The growth rate of manufacturing in April-December 2000 at 5.9 per cent was lower than 7 per cent registered in April-December 1999. The growth rate of electricity generation in April-December 2000 at 4.8 per cent was significantly lower than 7.7 per cent achieved in April-December 1999. Only the mining sector was able to improve its growth rate from 0.5 per cent in April-December 1999 to 4.1 per cent in April-December 2000.

1.29  Mixed trends were noted while analysing industrial production according to use-based classification. While growth rates of both durable and non-durable consumer goods accelerated during the current year, there was deceleration in the growth rate of basic, capital and intermediate goods. The downward trends in the growth rates of capital goods and intermediate goods indicate that there is lack of sufficient investment demand. The high growth in the consumer goods sector continues to be a strength and with greater industrial restructuring and more favorable internal and external investment environment can lead to higher growth momentum in other sectors of the industry.

1.30  As regards the growth rates of broad manufacturing groups, the metal products and parts (except machinery & equipment) group registered a growth rate of 22.9 per cent in April-December 2000. The other groups to register double-digit growth were rubber, plastic, petroleum and coal products (10.4 per cent) and leather and leather & fur products (10.3 per cent). The other better performing groups were food products (9.4 per cent), textile products (8.4 per cent), machinery and equipment other than transport equipment (8.3 per cent) and other manufacturing industries (8.2 per cent). Only two groups viz. paper and paper products and print, publication & allied industries (-11.3 per cent) and non-metallic mineral products (-0.3 per cent) registered negative growth.

1.31  After decelerating to 4.1 per cent in 1998-99, industrial growth improved to 6.5 per cent in 1999-2000. To consolidate the higher growth momentum, the Union Budget for 2000-01 announced a number of policy measures. These included the following:

l Rationalisation of excise duty by introduction of CENVAT and reduction in the number of excise rates.

l Permitting enhancement of the Foreign Institutional Investment (FII) limit to 40 per cent of total equity through a special resolution by the shareholders.

l Raising of the limit for providing collateral to obtain finance for small-scale industries from Rs. 1 lakh to Rs. 5 lakh .

lExtension of existing tax holiday benefits for small-scale industries and industrial units set up in industrially backward states and districts by another two years, i.e. till 31st March 2002.

l Concession to the entertainment industry through reduction of import duty on cinematic camera and other related equipment.

1.32  In pursuance of Government’s commitment to further facilitate investment in Indian industry, foreign direct investment has been permitted through automatic route for all industries except for a few specified items and situations. Non-Banking financial companies have been allowed to hold foreign equity up to 100% if they are the holding companies. Their subsidiaries, which are the operating companies, have also been allowed to hold foreign equity up to 75%. To facilitate the setting up and operation of such subsidiaries, Government has further allowed holding companies with a minimum capital of US$ 50 million to set up 100% downstream subsidiaries undertaking specific non-banking financial activities with a minimum capital of US $ 5 million. Such a subsidiary, however, would be required to disinvest its equity to the minimum extent of 25% through a public offering only, within a period of 3 years.

1.33  An Expert Group constituted by Government to review the Industries Development and Regulation Act 1951, has proposed enactment of a new Industry Act, which would focus on promotion and development of industry instead of regulation. The Government is examining the feasibility of framing a new enactment in this regard.

Service sector

1.34  Liberalisation of the economy in the 1990s and encouragement of private investment in industry and infrastructure have induced sustained high growth in service sectors. A rapid increase in expenditure on public administration, social services, rural extension services and defence also had an impact on the growth of service sector. As a consequence, the share of the service sector in GDP increased from a level of 28 per cent in the early 1950’s to 41 per cent in 1990-91 and further to around 49 per cent in 2000-2001. The service sector is expected to grow at 8.3 per cent in 2000–01 induced by substantial foodgrains procure-
ment by the Government, sustained industrial growth and good performance of transport services, trade related activities and financial services.


1.35  The performance of infrastructure in the current year is mixed. There is a significant deceleration of growth rate in electricity generation. Among the other infrastructure sectors, there is deceleration of growth rate for cargo handled at major ports from 9.2 per cent in April-December 1999 to 3.9 per cent in April-December 2000 and for revenue earning goods traffic on railways from 8.0 per cent in last year to 5.2 per cent this year. However, the growth rate of new telephone connections increased significantly from 33.4 per cent last year to 29.8 per cent this year (Table 1.7).

1.36  The average growth rate of six core and infrastructure industries (i.e. electricity, crude oil, refinery, coal, steel, and cement), having a weight of 26.7 per cent in overall IIP, at 7.7 per cent in April-December 2000 is lower than that of 9.1 per cent achieved in April-December 1999. Petro-refinery production has improved its growth rate from 22.0 per cent in April-December 1999 to 25.9 per cent in April-December 2000. While steel and coal have performed well in the current year, performances of electricity and cement are poor.

1.37  Various policy measures were announced for boosting infrastructure growth during the current year. These include :

l Opening of domestic long distance service without any restriction on the number of operators.

l Permitting BSNL and MTNL to enter as third cellular operator in their respective circles.

l Introducing a revenue sharing regime in place of existing fixed licence fee for both basic and cellular service operators.

l Permitting the operation of a fourth cellular operator in all the circles.

l Permitting an additional basic service operator.

l Developing a scheme for securitisation of dues of central sector power and coal utilities for assisting the SEBs in clearing dues. Central Government support is linked to reforms in the operation of SEBs.

l Proposal to divest Government equity in domestic carrier, Indian Airlines and international carrier, Air India.

l Decision to upgrade to international standards the airports at Hyderabad, Ahmedabad, Goa, Kochi and Amritsar.

lReduction of customs duty for boosting infotech, telecom and other knowledge based industries.

lExtension of tax benefits available for infrastructure to urban infrastructure viz. water treatment and solid waste management.

lExtension of tax holiday for housing projects to projects completed before 31.3.2003 (present limit 31.3.2001).

Social sectors

1.38  Plan and non-plan expenditure of the Central Government on various components of social sectors has increased from of Rs. 9608 crore in 1992-93 to Rs. 36,270 crore in 2000-01 (BE), an increase of about four times in a matter of just eight years. As a proportion of total expenditure, the combined plan and non plan expenditure of the Centre rose from 8.1 per cent in 1992-93 to 10.7 per cent in 2000-01. The plan expenditure of the Centre, as a percentage of GDP at current market prices on major schemes of social sectors has been hovering between 1.1-1.2 per cent during the last decade. However, the central plan outlay in 2000-01(BE), as compared to the previous year’s revised estimate increased by 24.3 per cent for the education sector as a whole and 26.5 per cent for elementary education programmes; by 29.8 per cent for health sector programmes; by 16.8 per cent for women and child development; and by 12.8 per cent for family welfare schemes.

1.39  National programmes combatting major public health problems have resulted in steady improvement in basic indicators of human development. While the crude death rate declined from 12.5 per thousand in 1981 to 9.8 in 1991, and further to 8.7 in 1999, the infant mortality rate per thousand declined from 110 in 1981 to 80 in 1991 and further to 70 in 1999. As far as the educational status of population is concerned, the literacy rate had increased from 43.6 per cent in 1981 to 52.2 per cent in 1991 and to 62 per cent in 1997 as a result of intensifying the efforts under the national literacy mission.

1.40  In the seven years of post-reform period, from 1992-93 to 1998-99, the average annual real wage for non-agricultural sector was Rs. 2.64 compared to Rs. 2.29 for the pre-reform period, i.e. 1987-88 to 1991-92, for which all-India estimates are available.

1.41  Alleviation of poverty remains a major challenge before the nation. A comprehensive All India Household Consumer Expenditure Survey is undertaken roughly every 5 years which also forms the basis for estimating the level of poverty in the country. Comparable estimates based on a consistent methodology and data set are available until 1993-94. The estimated magnitude of poverty remained fairly high until the late 1970s. The proportion of people below the poverty line has been declining since the early 1980s along with the achievement of higher economic growth. The 1993-94 estimates placed the all India poverty ratio at 36 per cent (Table 1.8).

1.42  Some of the key results of the 55th Round of the Household Consumer Expenditure Survey of the National Sample Survey Organisation (NSSO) covering the period July 1999 to June 2000, have now become available showing a very significant decline in poverty to 26 per cent based on a 30-day recall and 23.3 per cent on a 7-day recall methodology. These two sets of estimates may not be strictly comparable to the earlier estimates of poverty. Nonetheless, they provide clear evidence indicating a substantial decline in the overall poverty ratio in the country during the 1990s.

1.43  Stabilising population is an essential requirement for promoting sustainable development and its equitable distribution. The National Population Policy (NPP-2000) recognises the fact that population stabilisation is as much a function of making reproductive health care affordable, as other life quality improving services such as primary and secondary education, sanitation, drinking water, housing, transport, communication and empowering women and enhancing scope for their employment. In pursuance of the NPP 2000, a national commission on population has been set up. State level commissions on population have also been set up with the objective of ensuring implementation of the policies.

1.44  National health programmes are implemented to control communicable and non-communicable diseases like malaria, tuberculosis, leprosy, blindness, AIDS, cancer etc. Strengthening of disease surveillance and response systems has also been undertaken to prevent outbreak of infectious diseases. HIV/AIDS is now sought to be projected as a socio- economic issue and not merely as a public health matter. The second phase of national AIDS control programme was launched in November 1999 at an estimated cost of Rs.1,425 crore over the next five years. Efforts have been to achieve zero incidence of polio by the end of the year 2001. The incidence of polio has sharply declined with many states reporting not a single case or only one or two cases of wild polio virus. The virus is, however, reported to be still active in U.P. and Bihar.

1.45  The National Housing and Habitat Policy, 1998, has been formulated with the objective of creating 20 lakh dwelling units each year. It also seeks to ensure that housing, along with supporting services, is treated as a priority sector at par with infrastructure. The central theme of this policy is the much expanded role of private sector for tackling housing and infrastructure problems. The Government recognises the urgent need to provide fiscal concessions and carry out legal and regulatory reforms for creating a conducive environment for housing construction.

1.46  The total flow of funds sanctioned to the housing sector in 1999-2000 was Rs. 21623.51 crore for 32.15 lakh housing units in the country under various housing finance schemes. This represented an increase of 27.34 per cent over the previous year. In the current year (upto September, 2000) a total of Rs. 11791.27 crore has been sanctioned for 19.63 lakh housing units. In terms of disbursements, a total of Rs. 19475.88 crore was disbursed for 28.55 lakh housing units in 1999-2000, representing an increase of 23.81 per cent over the previous year. In the current year (upto September, 2000) a total of Rs. 8481.97 crore have been disbursed for 6.93 lakh housing units.

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Fiscal developments

Union Budget : 2000-2001

1.47  The Budget for 2000-2001 was formulated in the backdrop of a series of exceptional exogenous events such as the 50 day war in Kashmir, long months of political uncertainty before the general election, the super cyclone in Orissa, a somewhat weak monsoon and the continued fragility in world economic recovery. These developments led to an unanticipated expenditure on national defense, elections and the super cyclone during 1999-2000. Furthermore, the residual impact of the Fifth Central Pay Commission, the need for special fiscal assistance to the states combined with shortfalls in receipts from disinvestment and revenue, exacerbated the fiscal deficit during 1999-2000. As a proportion of GDP, the Centre’s gross fiscal deficit (exclusive of states’ & UT’s share of small savings) estimated at 5.6 per cent in the revised estimate for 1999-2000 now stands at 5.5 per cent on the basis of provisional and unaudited figures. The Budget for 2000-2001 envisaged a fiscal deficit target of 5.1 per cent of the GDP. The primary deficit (fiscal deficit net of interest payments), which reflects the current fiscal stance of the Government, is budgeted at 0.5 per cent of GDP in 2000-01 as against 0.8 per cent in 1999-2000 (Table 1.9).

1.48  With a view to put India on a higher growth path, the Union Budget (2000-2001) indicated a seven fold strategy which included the following elements: To strengthen the foundations of growth of the rural economy, nurture knowledge based industries, strengthen and modernize traditional industries, remove infrastructure bottlenecks, accord high priority to human resource development with special emphasis on poorest and weakest sections of society, strengthen the country’s role in the world economy through rapid growth of exports, higher foreign investment and prudent external debt management, and establish a credible framework of fiscal discipline.

The Fiscal Responsibility and Budget Management Bill

1.49  The Fiscal Responsibility and Budget Management Bill, 2000, was introduced in the Lok Sabha in December 2000. The Bill provides for a legal and institutional framework to eliminate revenue deficit, bring down the fiscal deficit, contain the growth of public debt and stabilise debt as a proportion of GDP within a time frame. The proposed law casts an obligation on the Government itself for strengthening the institutional framework for conduct of prudent and accountable fiscal policy and pave the way for promoting greater macro-economic stability. This covers only the finances of the Central Government. The principles of fiscal responsibility have been defined in relation to deficit, borrowing and debt.

1.50  The Bill focuses on two deficit indicators, viz., revenue deficit and fiscal deficit, and provides normative ceilings within a time frame for chosen fiscal indicators. The Bill proposes elimination of revenue deficit and progressive reduction of the fiscal deficit to not more than 2 per cent of Gross Domestic Product within a period of five financial years following the promulgation of the law. Besides, the proposed Bill contains provisions, which will ensure flexibility in fiscal management under extraordinary circumstances like natural calamities and war. Under borrowing related principles, it is proposed to prohibit certain types of borrowing from the Reserve Bank of India and under the debt related principles, it is proposed to prescribe a limit on the debt stock. Accordingly, the Bill envisages that within a period of ten financial years, the total liabilities (including external debt at current exchange rate) would not exceed fifty per cent of the estimated GDP.

Fiscal and budgetary developments in 2000-2001

1.51  The fiscal parameters for the nine months of the current fiscal year (April-December 2000) reveals a decline in gross fiscal deficit from Rs. 67082 crore in April-December 1999 to Rs. 64628 crore in April-December 2000 due to better revenue receipts and lower growth in expenditure in the current year. Revenue receipts (net to Centre) increased by 15.3 per cent; other receipts (mainly disinvestment receipts) were only a miniscule Rs.236 crore against a budgeted target of Rs.10000 crore. Total expenditure at Rs. 204821 crore had an increase of only 7.7 per cent over the same period of last year. Borrowings and other liabilities at Rs. 64628 crore indicates a decline of 3.7 per cent over last year.

1.52  The data available for gross collections from major direct and indirect taxes for the first nine months (April-December, 2000) of the current year show strong recovery in direct tax collections. Collections from personal income tax and corporation tax increased by 30.5 per cent in April-December 2000 compared with an increase by 15.3 per cent in April-December 1999. Collections from excise and custom duties posted a growth of 7.1 per cent compared with an increase of 19 per cent in April-December 1999.

Expenditure management

1.53  Over the years the composition of central Government expenditure has acquired rigidity on account of growing number of precommitted items of expenditure. With a view to curb built-in expenditure growth and bring about structural changes in the composition of expenditure, the Union Budget (2000-01) proposed a number of initiatives which inter alia, included the following: all ongoing schemes will be subjected to rigorous zero-base budgeting scrutiny; the manpower requirements of Government departments will be reassessed by reviewing the norms for creation of posts and fresh recruitment in Government departments and institutions will be limited to minimum essential needs; the scheme for redeployment of surplus staff will be made more effective and a voluntary retirement scheme (VRS) will also be introduced for staff in the surplus pool; all subsidies would be reviewed with a view to bring in cost-based user charges wherever feasible; budgetary support to autonomous institutions would be reviewed and they will be encouraged to maximise generation of internal resources; the interest rate on general provident funds has reduced by 1 per cent to 11 per cent effective from April 1, 2000, for aligning it with the overall interest rate structure; and the Budget earmarked Rs.1,000 crore out of disinvestment proceeds for retiring Government debt.

1.54  During the course of the year, the Government took a series of measures for controling growth in non-plan, non-developmental expenditure which include, a mandatory 10 per cent cut in the budgetary allocation for non-plan non-salary expenditure of all ministries/departments and autonomous institutions; a complete ban on purchase of new vehicles for one year; ten per cent cut in the consumption and allocation of funds for expenditure on POL for staff cars; ban on creation of new posts for one year; and ban on foreign travel for study tours, seminars etc.

Tax reforms

1.55  The thrust of the direct tax proposals in the Budget was to retain stability in tax rates and widen the tax base. A new regime for venture capital funds (VCFs), which allows complete pass through status, was put in place for stimulating the growth of knowledge based industries. Provisions relating to amalgamations, demergers and slump sales have been further rationalised to provide tax-neutrality of corporate restructuring. Minimum Alternate Tax (MAT) is to be charged at 7.5 per cent of the "book profits" by all companies as determined under the Companies Act.

1.56  All tax concessions relating to earnings in foreign exchange are being phased out in a five-year period. With a view to expand the tax base, the "one-by-six" criteria introduced for identifying potential tax payers was extended to 79 more cities (from 54 cities) having a population of 2 lakh or more, as per the 1991 Census.

1.57  On the indirect tax front, the process of reduction in the dispersal, rationalisation and simplification of duty rates was carried forward to reduce the transaction and compliance costs. The system of central excise was overhauled with the introduction of a uniform Central Value Added Tax (CENVAT) of 16 per cent ad valorem on all manufactured goods with few exceptions. This will also encourage the States/Union Territories to implement their agreed programme for converting their sales taxes into VAT by April 1, 2002. In addition to CENVAT, three rates of special excise of 8 per cent, 16 per cent and 24 per cent respectively have been prescribed. These apply to certain specified goods like aerated water, tobacco products, motor vehicles, cosmetics etc. Rules and procedures for availing of CENVAT credit have been made short, simple and transparent. All inputs (except high-speed diesel and motor spirit) and all capital goods are eligible for input tax credit. Also, all finished goods (except matches) have been brought under the CENVAT credit scheme. The basis for payment of excise was changed to "transaction value" instead of "deemed wholesale price".

1.58  In the area of customs duty, the objective has been to reduce the high levels of tariffs gradually, so as to reduce the cost of production and improve the competitiveness of the user industry while allowing reasonable time to the domestic industry to adjust against competition from imports.

1.59  The move towards Asian levels of tariffs was reassured with peak protective customs tariff rate scaled down from 40 per cent to 35 per cent ad valorem and reducing the existing five major ad valorem rates of basic customs duty to 4 ad valorem rates viz. 5 per cent, 15 per cent, 25 per cent and 35 per cent. Several consumer goods and a large number of agricultural products were placed on the free list for imports effective from April 1, 2000. These goods are subject to the peak customs tariff rate of 35 per cent plus surcharge. The basic customs duties on crude petroleum and petroleum products were reduced in the Budget and were further scaled down to 10 per cent and 20 per cent respectively during the course of the year consequent to the rise in international oil prices.

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1.60  The year 1999-2000 witnessed a gradual fall in the rate of inflation due to bumper production of foodgrains and an efficient supply-demand management for essential commodities by the Government. The annual average rate of inflation in terms of the Consumer Price Index (CPI) declined sharply from 13.1 per cent in 1998-99 to 3.4 per cent in 1999-2000 despite an increase in fiscal deficit and sharp increase in energy prices. There was also a fall in the annual average rate of inflation in terms of the Wholesale Price Index (WPI) from 5.9 per cent in 1998-99 to 3.3 per cent in 1999-2000.

1.61  The year 2000-01 began with an inflation rate of 6.75 per cent. Over three fourths of this inflation rate may be attributed to the increase in the administered prices of fuel products like liquid petroleum gas (LPG), aviation turbine fuel (ATF) and kerosene in March 2000. But for the increase in the prices of these administered items, inflation would have been close to 4 per cent at the beginning of the current fiscal year. Inflation rate hovered a little over 6 per cent in the first half of the year (April-September), when a further increase in the prices of petroleum products - LPG, kerosene, diesel and petrol - at the end of September, caused the inflation rate to cross the 7 per cent level.

1.62  The annual rate of inflation (provisional) based on the Wholesale Price Index (WPI), for the week ending January 27, 2000 was 8.2 per cent on point to point basis compared with 3.6 per cent on the corresponding date a year ago. The 52 week average inflation rate on the same date was 6.6 per cent compared with 3.4 per cent on the corresponding date of 1999-2000.

1.63  The Wholesale Price Index of all commodities recorded an increase of 4.8 per cent during the first 44 weeks of the current financial year, The wholesale price index for primary articles increased by only 1.4 per cent during this period. The WPI of manufactured products also recorded a modest increase of 3.6 per cent during the first 44 weeks of the current year. Stability in prices of the primary and manufactured products had a sobering effect on the inflation rate, despite the hike in administered prices of energy products.

1.64  Movement in retail prices commonly measured by the Consumer Price Index for Industrial Workers (CPI-IW) remained moderate during the year. CPI (IW) based inflation rate was 5.5 per cent in April 2000 which decelerated continuously thereafter to reach a low of 3.5 per cent in December 2000. This reflects that retail prices of most of the essential commodities of daily use remained stable during the year.

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Money supply

1.65  The year-on-year growth of broad money supply (M3) was 15.8 per cent as on January 12, 2001 as against 16.7 per cent as on January 14, 2000. This reflected expansion in monetary base through the India Millennium Deposits in November 2000. Driven by the increase in the net foreign exchange assets of the RBI, reserve money increased by 5.1 per cent till January 12 in current financial year compared with negligible growth in the corresponding period of the previous year. The year-on-year growth in deposits of scheduled commercial banks (SCBs) as on January 12, 2001 at 17.9 per cent was above the RBI’s projected growth rate of 15.5 per cent. However, this reflected the inclusion of Rs. 25,662 crore from the India Millennium Deposits (IMD) Scheme in time deposits of banks, which grew at 15.7 per cent till January 12 in the current financial year compared to 13 per cent in the corresponding period of the previous year. Currency with the public expanded at a lower pace of 10.0 per cent till January 12, 2001 as against 14.9 per cent in the corresponding period of 1999-2000.

Financial developments

1.66  The important monetary measures undertaken in the current financial year relate to transition to a full-fledged Liquidity Adjustment Facility, increase in the permissible level of commercial banks’ exposure to the capital market, improvements in credit delivery system with special focus on the small scale industry, and renewed efforts aimed at speedier recovery of funds locked up in the non-performing assets of commercial banks. The impact of banking sector reforms on asset quality is discernible from the remarkable reduction in the ratio of incremental NPAs to the incremental total loan assets of SCBs from 16.9 per cent in 1998-99 to 2.8 per cent in 1999-2000. As per the revised guidelines for NPA recovery in respect of NPAs with outstanding balances of upto Rs. 5 crore, the public sector banks could recover about Rs. 546 crore till the end of December, 2000.

1.67  In order to enable financially sound banks to play a greater role in resource mobilisation for investment and growth, they have been permitted to enter the insurance business with prior approval of RBI. Similarly, well-managed non-banking financial companies (NBFCs) have also been allowed to enter insurance business with prior approval of RBI. Other measures include, revised norms for entry of new banks in the private sector, reduction in the minimum maturity of Certificates of Deposits from 3 months to 15 days, issuance of final guidelines on Commercial Papers imparting greater flexibility to corporates, especially those in the service sector in resource mobilisation, mandatory rating for term deposits accepted by AIFIs, and move towards consolidated supervision of banks and their subsidiaries by incorporating the balance sheets of subsidiaries in the balance sheet of the parent bank.

1.68  Till January 12, 2001, non-food credit from SCBs registered a growth of 11.9 per cent as against 10.5 per cent last year. There has been growing concern over the deceleration in industrial production despite higher flow of non-food credit. The acceleration in credit flow is not however due to an increase in credit to the oil sector. The credit flow to the petroleum sector till January 12, 2001 in the current financial year declined by Rs. 79 crore compared with an increase of Rs. 210 crore in the corresponding period of the previous year.

1.69  There was significant improvement in sanctions made by the All India Financial Institutions (AIFIs). The sanctions made by the AIFIs increased by 17.5 per cent in April-December 2000 compared with 5.0 per cent in April-December 1999. Disbursements made by the AIFIs increased by 12.4 per cent in the same period of the current year compared with 19.0 per cent last year.

1.70  A number of policy measures have been taken to improve the financial health and operational efficiency of commercial banks in India. The major policy measures include, legislative initiative to reduce the minimum Government shareholding in nationalised banks to 33 per cent, annoucement of revised norms for entry of new banks in the private sector, move towards consolidated supervision by incorporating the balance sheets of subsidiaries into the balance sheet of the parent bank, in-house arrangements by banks for collecting and collating credit and other related information required by the proposed Credit Information Bureau, close monitoring of suit-filed and decreed accounts on an on-going basis and a simplified, non-discretionary and non-discriminatory mechanism for recovery of non-performing assets (NPAs). In addition to these measures, a few notable initiatives aimed at enhancing opportunities for the relatively stronger banks in financial intermediation relating to entry into insurance business and increase in the permissible level of exposure to capital markets.

1.71  The year 1999-2000 witnessed significant decline in non-performing loans. For SCBs as a whole, gross non-performing loans declined from 14.7 per cent of gross advances at the end of March 1999 to 12.8 per cent at the end of March 2000. The corresponding decline in respect of public sector banks was from 15.9 per cent to 14.0 per cent whereas for private sector banks, it was from 10.8 per cent to 8.5 per cent. In the case of foreign banks, the corresponding decline was less than 1 percentage point from 7.6 per cent to 7.0 per cent. The decline in the percentage of net non-performing loans to net advances was less significant. For SCBs as a whole, net non-performing loans declined from 7.6 per cent of net advances as on March 31, 1999 to 6.8 per cent as on March 31, 2000. In the case of public sector banks, the corresponding decline was from 8.1 per cent as on March 31, 1999 to 7.4 per cent as on March 31, 2000, whereas in the case of private sector banks, it was from 7.4 per cent to 5.6 per cent. Net non-performing loans of foreign banks declined from 2.9 per cent to 2.4 per cent during the same period.

1.72  It is also meaningful to look at the magnitude of non-performing assets (NPAs) in relation to total assets. For SCBs as a whole, NPAs accounted for 5.5 per cent and 2.7 per cent of total assets in gross and net terms respectively. The corresponding figures in respect of public sector banks were 6.0 per cent and 2.9 per cent compared with 3.6 per cent and 2.3 per cent for private sector banks. It is mentionable that in the case of old private sector banks, these figures were higher at 5.1 per cent and 3.2 per cent in gross and net terms respectively as against much lower figures of 1.6 per cent and 1.1 per cent in the case of new private sector banks. In the case of foreign banks, the figure for gross NPAs was rather high at 3.2 per cent as against only 1.0 per cent in case of net NPAs.

Capital and money markets

1.73  The capital market witnessed subdued activity in the current financial year. During April-December 2000 resource mobilisation through public and rights issues was about 26 per cent lower than the amount raised in the corresponding period of the previous year. Though the amount raised through debt registered greater decline by about 32 per cent the amount raised through equity issues also declined by around 22 per cent during this period. This mirrored the relatively weaker investor sentiment in the secondary market, which was also reflected in the net FII investment. Net FII investment (as per estimates by the SEBI) in April-December 2000 constituted hardly one-third of that in the corresponding period of 1999.

1.74  Contrary to the buoyant conditions witnessed in the stock market in 1999-2000, there has been significant decline in share prices in the current financial year. The Bombay Stock Exchange (BSE) Sensitive Index declined by 13.5 per cent from 5001 at the close of March 2000 to 4327 at the close of January 2001. The National Stock Exchange (NSE) Index (S&P CNX Nifty) also exhibited similar trends in share prices. It declined by 10.2 per cent from 1528 to 1372 during the same period. This erosion in share prices reflected the influence of share price movements abroad, specially at the tech-heavy NASDAQ. Nevertheless, the decline at BSE and NSE was much less than that at NASDAQ where the index declined by 39.4 per cent from 4573 at the close of March 2000 to 2773 at it close of January 2001.

1.75  The Securities and Exchange Board of India (SEBI) has carried further the process of capital market reforms with the objective of moving towards a market, which is modern in terms of infrastructure as well as international best practices, investor friendly, efficient, safe and globally competitive. The major reforms undertaken in the capital market in course of the year include the following:

l Tightening of entry norms for IPOs through modifications of SEBI (Disclosure and Investor Protection) Guidelines,

l Relaxation of IPO norms for companies in all sectors by reducing the minimum level of public offering from 25 per cent to 10 per cent of post-equity issue,

l Compulsory book building in respect of IPOs by companies without proper track record, including the stipulation that 60 per cent of the offer be allotted to qualified institutional buyers,

l Permission for 100 per cent one-stage book building with bidding centres at all cities with stock exchanges and liberalisation of investment norms for mutual funds by allowing open-ended schemes to invest up to 10 per cent of their net asset value (NAV) in equity shares or in equity-related instruments of unlisted companies,

l Relaxation of permissible level of funds of commercial banks for investment in capital market by replacing the earlier ceiling of 5 per cent of previous year’s incremental deposits by 5 per cent of outstanding credit and

l Setting up of Investor Grievance Redressal Cell in Department of Economic Affairs to coordinate the efforts of regulatory agencies, viz., RBI, SEBI and the Department of Company Affairs.

l Introduction of derivatives trading based on stock index futures.

1.76  An important measure designed to further enhance the efficiency of the money market taken in June this year was related to the transition to a full-fledged Liquidity Adjustment Facility (LAF) involving injection and absorption of liquidity via variable rate reverse repo auctions and variable rate repo auctions respectively. Regulatory powers have been given to RBI under amendment to the Securities Contracts (Regulation) Act, 1956 to regulate dealings in Government and money market securities. The measures for further deepening and widening the Government securities market included permission to entities, who have been allotted securities in primary auctions, to sell them on the allotment date itself, and permission to all entities having SGL and current account with RBI Mumbai office to undertake repos in Treasury Bills and Central/State Government dated securities.

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External sector

International economic environment

1.77  The global economic and financial situation that was under pressure following the crises in Asia and Russia staged a rapid recovery in 1999 and gained strength in 2000. Global output is expected to grow at 4.7 per cent in 2000 compared with 3.4 per cent in 1999 and 2.6 per cent in 1998. Growth of world trade volume in goods and services recovered to 5.1 per cent in 1999 from 4.3 per cent in 1998 and is estimated to have almost doubled to 10 per cent in 2000. World trade prices of manufactures in US Dollar value, which continued to be on the downslide for five years since 1996, are expected to rise by 1.1 per cent only in 2001. World trade prices of non-fuel primary commodities, which had displayed downward trends in the last four years, are estimated to have increased by 3.2 per cent in 2000 with prospects for further increase in 2001. International oil prices increased by 37.5 per cent in 1999 and strengthened further by 47.5 per cent in 2000. They are expected to soften (by about 13 per cent) in 2001. All these trends will have favourable impact upon the economic prospects and balance of payments of the developing countries, including India.

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Balance of Payments

Current account deficit

1.78  India’s balance of payments situation remained comfortable in 1999-2000. The deficit on the current account increased only marginally from US $ 4 billion in 1998-99 to US $ 4.2 billion in 1999-2000, despite an unfavourable environment in international trade and finance and almost two-third hike in India’s oil import bill, reflecting the sharp increase in international prices of crude oil. This was made possible because of a strong recovery of exports and a surge in net inflow of invisibles reflecting sharp increases in software exports and private transfers. Net inflow of invisibles at US $ 12.9 billion covered 76 per cent of the deficit on trade account in 1999-2000, leaving a financing gap of US $ 4.2 billion on the current account. As percentage of GDP, the current account deficit recorded a marginal decline from 1 per cent in 1998-99 to 0.9 per cent in 1999-2000.

1.79  With the continued increase in oil prices and further increase of India’s oil import bill, the current account deficit is expected to widen to 1.5-1.7 per cent of GDP in 2000-2001. According to the latest quarterly estimates of BOP made by the Reserve Bank of India (RBI), current account deficit widened to nearly US $ 4 billion in April-September 2000 from US $ 2.9 billion in April-September 1999. While net invisibles increased by only US $ 0.5 billion from US $ 4.7 billion in April-September 1999 to US $ 5.2 billion in April-September 2000, trade deficit on BOP basis increased by US $ 1.7 billion from US $ 7.5 billion to US $ 9.2 billion during the same period (Table 1.10).

Trade deficit

1.80  The trade deficit on the BOP account widened to US $17.1 billion or 3.8 per cent of GDP in 1999-2000 from US $ 13.2 billion (3.2 per cent of GDP) in 1998-99. Exports made a welcome recovery from a negative growth of (-) 3.9 per cent in 1998-99 to 11.6 per cent in 1999-2000. Total imports, on payment basis,
also rose sharply by 16.5 per cent in 1999-2000 mainly due to a 63 per cent increase in the oil import bill.

1.81  According to the latest quarterly estimates of BOP by RBI, exports increased by 22.1 per cent and imports by 22.2 per cent, resulting in a widening of trade deficit by 22.3 per cent to US $ 9.2 billion in April-September 2000. Imports of crude and petroleum products showed a substantial increase from US $ 4.5 billion in April-September 1999 to US $ 8.3 billion in April-September 2000 due to continued pressure on international prices of oil.

1.82  Export growth has accelerated further in the current financial year. According to DGCI&S data, merchandised exports in US Dollar value in April-December 2000 have witnessed a strong growth of 20.4 per cent, much higher than 10.3 per cent in April-December 1999. Imports grew by 9.0 per cent in April-December 2000 compared to 10.7 per cent in April-December, 1999. The rise in imports was primarily due to the continued surge in oil imports, which increased sharply by 78.2 per cent due to hardening of international oil prices. The spurt in POL imports has, however, been offset by non-POL imports, which have declined by 8.3 per cent, reflecting weak domestic demand and subdued industrial activity. The continued buoyancy in exports and the declining trend in non-POL imports has resulted in a substantial decline in customs trade deficit from US $ 8.2 billion in April-December 1999 to US $ 5.9 billion in April-December 2000.

Trade policy

1.83  Trade policy reforms and changes during 2000-01 included the following :

l Peak rate of basic customs duty was reduced from 40 per cent to 35 per cent and the total number of slabs in customs duty rates was rationalised from five to four (i.e. 35, 25, 15 and 5 per cent).

l Duty on various items (mostly consumer goods and agriculture products) on which quantitative restrictions have been lifted have been placed at peak rate
(35 per cent plus surcharge) to
accord adequate tariff protection to these items.

l Setting up of Special Economic Zones (SEZ) to encourage export production free from the plethora of rules and regulations governing imports and exports.

l Evolution of a scheme for granting assistance to States based on their export performance for development of export related infrastructure.

l Rationalisation of existing export promotion schemes including abolition of Special Import License (SIL) from April 1, 2001.

l Sector specific initiatives to accelerate exports announced for core areas,

l Permission to import second hand capital goods which are less than 10 years old without obtaining any license on surrender of SIL.

l Deemed export benefits rationalised by extending benefits uniformly to eligible categories and expanding the definition of capital goods.

l Dereservation of the garment sector from the purview of SSI reservation in the new textile policy to boost garment exports.

Invisible account

1.84  Net inflow of invisible earnings reached an all time high of US $12.9 billion in 1999-2000 from US $9.2 billion in 1998-99. Gross invisible receipts increased by 17.7 per cent to US $30.3 billion in 1999-2000 as a result of the continued buoyancy in private transfers and software service exports. Private transfer receipts increased by 18.8 per cent to US $12.3 billion in 1999-2000. Software service exports had grown at an annual rate of over 50 per cent during the four years ended 1998-99. The growth momentum was sustained in 1999-2000, when they recorded a growth of 53 per cent and reached US $4.02 billion.

1.85  Gross invisible payments recorded a moderate increase of about 5.0 per cent in 1999-2000 to US $17.4 billion from US $16.6 billion in 1998-99, reflecting reasonable increase in payments on account of interest and dividends, financial services, management services, advertising, royalties and license fees.

1.86  Invisible flows continued to be buoyant in 2000-01. As per the quarterly BOP estimates by RBI, net invisibles increased from US $ 4.7 billion in April-September 1999 to US $ 5.2 billion in April-September 2000 mainly due to an increase of private transfer from US $ 5.8 billion to US $ 6.7 billion during the same period.

Capital account

1.87  Capital flows improved significantly in 1999-2000. Net inflows of capital on the capital account of BOP increased by US $ 2.4 billion from an aggregate of US $ 7.9 billion in 1998-99 to US $ 10.3 billion in 1999-2000. This improvement was mainly due to a sharp recovery in portfolio investments and continued buoyancy in non-resident deposits. Fresh inflow of funds by the Foreign Institutional Investors (FIIs) increased to US $ 2135 million in 1999-2000 in contrast to an outflow of US $ 390 million in 1998-99. Net inflows of non-resident deposits in 1999-2000 was US $ 2140 million. Gross disbursement of external assistance rose moderately by US $ 3074 million in 1999-2000 compared to US $ 2726 million in 1998-99. Gross borrowing on commercial terms at US $ 3187 million in 1999-2000 was only marginally higher than such borrowings (excluding borrowings through Resurgent India Bonds) at US $ 2995 billion in 1998-99.

1.88  During the first half of 2000-01, net inflows of capital amounted to only US $ 2.5 billion compared with US $ 3.7 billion in April-September 1999. The fall in net capital inflows was due to net outflows on external assistance and external commercial borrowing accounts, although foreign investment and non-resident deposits performed well. The capital flows were augmented by the funds raised by the SBI from NRIs/OCBs through India Millennium Deposits (IMD) amounting to US $5.51 billion in October-November 2000.

Capital account reforms

l Foreign Direct Investment (FDI) up to 100 per cent has been permitted in
e-commerce subject to specific conditions.

l The dividend balancing condition for FDI in twenty-two consumer goods industries has been removed.

l The existing upper limit of Rs.1500 crore for FDI in projects involving electricity generation, transmission and distribution (other than atomic reactor plants) has been dispensed with.

l For facilitating greater inflow of foreign funds in the crucial oil-refining sector, ceiling for FDI under the automatic route in oil refining was increased to 100 per cent from the existing 49 per cent.

l FDI under the automatic route has been permitted up to 100 per cent for all manufacturing activities in Special Economic zones (SEZs) except certain activities.

l Foreign Institutional Investors (FIIs) have been permitted greater leverage in the primary and secondary markets by allowing enhancement of the aggregate FII investment ceiling in the issued and paid up capital of Indian companies from the normal ceiling of 24 per cent to 40 per cent subject to specific conditions.

l Foreign equity participation up to 26 per cent in insurance sector is allowed under the automatic route subject to obtaining necessary license from the Insurance Regulatory and Development Authority.

l ECB guidelines have been liberalised. A series of policy liberalisations have been effected for facilitating the use of ECB as a window for resource mobilisation.

l Policies pertaining to international offerings through ADR/GDR by Indian companies have been further liberalised.

l 100 per cent FDI has also been allowed (with certain conditions) in telecommunications sector, for Internet service providers not providing gateways, infrastructure providers providing dark fibre, electronic mail and voice mail.

Foreign exchange reserves

1.89  The foreign exchange reserves consist of foreign currency assets held by the RBI, gold holdings of the RBI and SDRs. The moderation in current account deficit and the sharp increase in net capital inflows in 1999-2000 resulted in an increase of foreign exchange reserves by US $6.1 billion on top of an increase of US $3.8 billion in 1998-99.

1.90  During the first half of 2000-2001, foreign currency reserves showed declining trend due to excess demand for foreign currency caused by the huge import bill on oil. As per quarterly BOP estimates, foreign exchange reserves declined by US $1460 million in April-September 2000 compared with an increase of US $ 821 million in April-September 1999. Subsequently, as mentioned earlier, the issues of India Millennium Deposits by SBI helped to raise foreign currency assets amounting to US $ 5.51 billion, which were added to RBI’s foreign currency reserves in November 2000. Total foreign exchange reserves (including gold and SDRs)  at the end of January 2001 amounted to over US $ 41 billion, providing cover for 8 months of projected imports in 2000-01.

Exchange rate

1.91  The exchange rate of the Rupee against the US Dollar continues to be broadly market determined. During 1999-2000, the exchange rate market displayed reasonable stability, with the Rupee depreciating by about 2.9 per cent. The year 2000-01 witnessed significant downward pressures on the Rupee-Dollar rate from mid-May 2000. The forex markets were affected by considerable uncertainty with the Rupee depreciating by 6.7 per cent between end-April and end-October 2000. Since November 2000, the situation has shown large improvement and the forex markets have been relatively stable and the exchange rate of Rupee against the US dollar has also recovered partially. At the end of January 2001, the exchange rate of the Rupee was Rs.46.415 per US Dollar, showing a depreciation of 6.1 per cent, compared with the rate of Rs.43.605 at the end of March 2000.

External debt

1.92  The external debt to GDP ratio has been declining continuously over the years. The rates improved from 23.6 per cent at the end of March 1999 to 21.9 per cent at end-March 2000 and further to 20.7 per cent at end-September 2000. The absolute value of external debt rose marginally from US $ 97.68 billion at end-March 1999 to US $ 98.44 billion at end-March 2000 before decreasing to US $ 97.86 billion at the end of September 2000. The share of short-term debt to total debt was 4.6 per cent at end-September 2000 compared to 4.1 per cent at end-March 2000. The debt service ratio fell from 18 per cent in 1998-99 to 16.0 per cent in 1999-2000.

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Issues and priorities

1.93  The previous decade can be described as the decade of reforms for the Indian economy. While the early years of the decade witnessed the first phase of structural reforms in industrial, financial and external sectors, the final years saw the beginning of the second phase of economic restructuring. The decade of reform was successful in eliciting supply responses as evidenced in the higher growth of GDP, comfortable foreign exchange reserves, improving short term debt profile, moderate inflation and buoyant exports.

Current situation

1.94  The economy is currently at a difficult stage. Some problems of growth are likely to be faced in the coming year. Because of irregular rainfall for the second successive year, agricultural growth has been low or absent in 2000-2001. Industrial growth seems to have slowed down and the sentiment for new investment has not improved. The problem is compounded by the persistence of high international oil prices and the slowdown of the American economy, which is likely to affect the rest of the world. Although the major industries of Gujarat have fortunately escaped the worst effects of the recent massive earthquake, the impact of dislocations on the growth process cannot be ignored. It is therefore essential that the unfolding economic situation be watched carefully. Measures need to be taken to instill confidence in the economy so that the growth momentum of the 1990s can be improved upon.

1.95  Despite the positive response of economic agents to reforms, identifiable gaps in the reform process continue to cloud the long-term growth prospects of the economy. The fiscal situation has worsened since 1996-97. Outstanding Liabilities (non-RBI) of the Central Government has risen to 51.8 per cent of GDP in 1999-2000. More disturbing, it has been on an uptrend since 1996-97 when it reached a low of 46.4 per cent of GDP. This, more than any other indicator, encapsulates the issue of fiscal unsustainability, while more conventional indicators serve to flesh out the picture.

1.96  The central fiscal deficit has risen to 5.5 per cent of GDP in 1999-2000, up from a low of 4.1 per cent of GDP in 1996-97. The revenue deficit showed a similar pattern and at 3.5 per cent in 1999-2000 is now higher than the 3.3 per cent in 1990-91. Though the primary deficit of 0.8 per cent of GDP in 1999-2000 is 2 percentage points lower than in 1990-91, this is primarily due to a 1.9 percentage point reduction in capital expenditure. Interest payments have risen to 4.7 per cent of GDP in 1999-2000 from 3.8 per cent of GDP in 1990-91. Though the Union Budget of 2000-01 has tried to reverse these trends, sustained efforts will be required in this direction in the face of exogenous shocks like the Gujarat earthquake.

1.97  The key problem affecting the Indian economy is the persistence of high fiscal deficit at both the central and state levels. There is need to bring down the overall centre and states gross fiscal deficit of 10 per cent of GDP. The persistence of high fiscal deficit has reflected itself in an increasing share of debt service in the expenditure budget of both the central and state Governments. Consequently, the ability of Government at any level to undertake significant public investment has been seriously eroded. This has led to a decline in demand for Indian industrial goods. The lack of public investment has also slowed down private investment in infrastructure. The continued high borrowing, as a result or the high fiscal deficit has also kept real interest rates high in the economy. Thus, industry faces extremely high real interest rates of 8 per cent to 10 per cent, which would be among the highest in the world. It is therefore difficult for private industry, both foreign and domestic, to undertake new investment with any degree of confidence. The key area for action, for instilling confidence in the economy, pertains to a credible medium term programme for fiscal improvement. This has acquired new urgency at this juncture.

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Key problems

1.98  The changes in the components of fiscal deficit over the last decade give an indication of the reasons as well as potential solutions to the fiscal problem. Gross tax revenues of the central Government have declined between the period 1980-81 to 1991-92 and 1992-93 to 1999-2000 by 0.9 percentage points of GDP. This decline is primarily due to a fall in the indirect tax revenues by 1.6 percentage points. In contrast, direct taxes have increased by 0.7 per centage points of GDP. This rise compensated partially for the decline in customs revenues but was unable to prevent the overall ratio from declining. Among indirect taxes, though the decline in customs revenue was expected that in excise revenue was not.

1.99  Another significant factor in the current fiscal problem is the administered interest rates on Government pension and provident funds. The nominal inflexibility of these rates means that they have not varied with the rate of inflation, resulting in very high real interest rates on Government debt when inflation declined. With decline of inflation (WPI) from an average of 11 per cent during 1990-95 to an average of 5.6 per cent during 1995-99, real interest rates on pension and provident funds jumped from an average of 1 per cent to 6.3 per cent. Implicit interest rate floors on short term markets and the underdeveloped nature of the market for Government securities and treasury bills, have also contributed to the increasing, high rates of interest on Government debt.

1.100  High fiscal deficit puts upward pressure on market interest rates and international risk premium and raises the cost of capital for all producers. Crowding out of private investment by public borrowing also remains a potential threat to any industrial recovery. The central and state Governments have little money to spend on public goods and basic non-commercial infrastructure, whose quality continues to deteriorate. Inefficient monopolies, such as in power, impose additional costs that undermine the competitiveness of Indian manufacturing and agriculture. Other gaps in the reform process, such as those relating to labour laws and procedures, bankruptcy, land ceiling and rent control and small scale industry reservation, inhibit industrial restructuring, raise costs and reduce international competitiveness. The high industrial and GDP growth rates seen during 1994-95 to 1996-97 can be replicated only if these critical gaps in the reform process are attended to.

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Possible solutions


1.101  In the last half century, the Government’s production activity has expanded along with fiscal deficit & dis-saving. At the same time, investment in public goods and basic physical & social infrastructure has been starved of funds and their quality has deteriorated. It is necessary to get the Government out of the business of production and enhance its presence and performance in the provision of public goods. Governments, with their elaborate bureaucratic structures, multiple layers of accountability and complex crosschecks, are unsuited to the demands of commercial production in a competitive, fast growing economy. This has been recognised in principle and a privatisation process has been initiated. Privatisation will allow Government’s capital expenditure to be allocated to public goods and basic infrastructure that is not commercially viable. A significant portion of Central capital expenditure could be reallocated this way, if all public sector units producing private goods are sold to the public. The funds received from privatisation would also help in reducing the public debt incurred for setting up these units and will put the debt-GDP ratio on a sustainable path. Most importantly, privatisation would enable the competitive public enterprises to function effectively once again and would help them in contributing to the national economy.

1.102  A significant portion of the Indian basic industry remains in the public sector. Because of the lack of resources, public sector industrial growth in the 1990s has been significantly lower than that of private sector industrial growth, and also lower than its own growth in the 1980s. Thus accelerated privatisation of the competitive segment of the public sector should also serve in stimulating industrial growth.

Expenditure control

1.103  Expenditure management has been conceived as a major plank for second-generation reforms. The core issue in this regard is minimisation of wasteful expenditure and reallocation of funds to public goods, basic infrastructure and social welfare. The Fiscal Responsibility Bill and the reports of the Expenditure Reforms Commission are designed to move the expenditure structure in this direction.

Defence expenditure

1.104  Defence expenditure had fallen from 2.7 per cent of GDP in 1990-91 to 2.2 per cent of GDP in 1996-97. Given the heightened threat perception after Kargil, this has now risen back to the level at the beginning of the 90s. If the increased demand on the equipment budget of the defence services is to be met without raising the ratio further, there is need for a deep & comprehensive introduction of modern management systems. This must cover all the defence production units, procurement systems, supply chain management, logistics and inventory.


1.105  Subsidies are similar to indirect taxes in that they open a gap between the cost of production and distribution, and the price paid by the subsidised buyer. With the exception of completely inelastic goods, they distort the pattern of consumption. Large subsidies have the even more serious problem of providing incentives for rent-seeking diversion and corruption. The larger the unit subsidy the larger is likely to be the leakage. As revealed in the study on subsidies conducted by the National Institute of Public Finance & Policy (NIPFP), the indirect cost of subsidies is much greater than the direct budgeted subsidies. Thus, there is a need to reduce subsidies, target remaining subsidies on the poor and search for more efficient mechanisms for protecting the poor. This requires progress in reforming the existing control systems governing the fertiliser, petroleum and sugar sectors.

1.106  The retention price system in fertiliser is one of the most anachronistic. Various studies have shown that depending on world prices, anything between 50 per cent to 75 per cent of the fertiliser subsidy goes to the producers. Several committees, such as the Hanumantha Rao Committee and the Alagh Committee, have recommended its disbandment. The sooner this is done, the quicker will normal market incentives for improvement in productivity of investment and energy efficiency come into operation. To minimise the effect on farmers, the prices of fertiliser and natural gas should move towards parity with international prices, through appropriate customs and excise duties. As the current price to farmers is close to the landed cost of urea, this is an appropriate time for aggressive action in this direction.

1.107  The coal and petroleum sectors also need to be deregulated so that fertiliser and power producers are free to use any energy input, domestic or imported. Deregulation of the coal & petroleum sectors will also ensure that domestic producers of these products face the rigours of competition on a fair and equitable basis. A competitive system will ensure that fertiliser and power producers get the best inputs at most competitive prices.

1.108  A number of other reform measures need to be taken for ensuring that the profitability of farming is enhanced and that the rural poor can share in the gains of efficiency and productivity improvement. There is need for comprehensive decontrol of production, storage, transport trade (domestic & external) and processing of agricultural goods and the inputs used in agriculture. The management of the food economy needs comprehensive reforms, including a change in the monopoly role of the FCI (Food Corporation of India) and in the administration of the PDS. Food subsidies could be either channelled into guaranteed unskilled manual employment that is self-selecting (incentive compatible) or into a food or income supplement system (for the poor) using the latest smart card technology (including stored finger prints). The sugar sector (including its inputs) should be decontrolled, removed from the PDS and the tax incidence on sugar manufacturing should be rationalised. Given the current surplus in production, these measures will ensure that the market price of sugar is close to the price currently being paid by the poor. In the long term there will be a powerful incentive for increasing efficiency through economies of scale and scope.

1.109  Co-operatives and user groups should be allowed to run the irrigation system, so that it is properly maintained and regulated for the benefit of all farmers. Forward, futures and option markets should not only be allowed in all agriculture related goods, but should be actively encouraged by the Government.

1.110  Internet telephony needs to be opened up so that Internet access and telephone can be bundled together to take the information communication revolution to the rural areas.

Departmental enterprises

1.111  Many observers have noted the large size of the Government in terms of number of employees. Few, however, realise that this is largely due to the bloated size of departmental public enterprises (DPEs) whose staff are technically employees of the Government and are shown in budget documents as such. Many would say that this is quite apt as they are infused with bureaucratic culture, subject to CAG audit and the political pressures of parliamentary oversight. This has resulted in massive overmanning of these enterprises (DPEs), a running down of capital and deterioration in service quality. The conversion of these departmental enterprises into companies is essential for infusing them with commercial culture and subjecting them to market incentives and competitive pressures. The identification of "public sector" with "state monopoly" needs to be replaced by a public sector that is owned by the people/public. Shares in these newly formed companies would then eventually be sold to the public, while retaining majority only in companies producing major defence systems. The funds generated from the sale of shares could be used to repay debt incurred by and for them. An independent regulatory authority would have to be simultaneously set up to cover ‘natural monopoly’
segments like the rail track network.

Downsizing Government

1.112  In contrast to the DPEs, downsizing of the Government administration per se, will not result in much fiscal saving. The primary purpose of such downsizing is to eliminate bureaucratic controls and to change the anachronistic command mentality still prevalent in the system. Accordingly, all employee positions of this nature must be identified and eliminated. For this to be truly effective & sustained, divisions, departments and ministries, whose primary purpose was to control and direct the economy, must be abolished. Once this is done, the Government will be forced to become a facilitator of economic growth and investment. It can then sharpen its focus on the provision of public goods and critical non-commercial segments of infrastructure, much of which is in rural areas where a majority of the poor live.

Tax reform

1.113  The direct tax reform strategy of reducing rates, broadening the tax base and modernizing tax administration has been by and large successful. Despite the rise in effective marginal rates due to levy of surcharges during the last two years, the rise in the direct tax to GDP ratio has been sustained in the short term. Maintenance of the long-term faith of honest taxpayers requires that the personal & corporate income tax rates be kept at levels that eliminate the incentives for tax evasion. Deeper and more systematic efforts are also needed for weeding out economically unjustifiable exemptions and deductions. A wholesale modernisation of the tax administration is required including extensive use of information technology, data warehousing, data mining and analysis and use of economic data. Auditing systems and procedures must be such that high-income taxpayers who are more likely to evade taxes get picked rather than those who declare the most income and pay the most tax.

1.114  The central excise system has been radically changed over the past decade. Though the introduction of CENVAT was supposed to complete this process of rationalisation and simplification, some lacunae have remained, which need to be ironed out. When completed, this process will result in a simple but equitable indirect tax system that will be easy for honest taxpayers to comply with. It will also make it more efficient and effective in blocking excise evasion. Further, a proper CENVAT will also be easily evolvable into a national VAT.

1.115  Bringing more services under the tax net can offset the likely loss of revenue through lower customs tariffs. The growing contribution of services to GDP makes the sector conducive for mobilisation of greater resources. A technical committee on service tax was set up during the second half of 2000 and has submitted its interim report. Implementation of this report will help in setting up an economically rational service tax that can be integrated at a subsequent stage with the CENVAT. A comprehensive service tax combined with an efficient CENVAT could help in raising indirect tax revenues to the levels that prevailed earlier.

1.116  This will also make it possible to continue with the customs duty rate reductions. Our basic (protective) customs duty rates are still among the highest in the world and there is broad agreement on the need for reducing them to Asian levels. This is essential for pressurising industry and trade to increase efficiency and improve the competitiveness of the Indian economy. The rate reduction, however, must be accompanied by factor market & infrastructure reforms that make it possible for industry in adapting and introducing new technology, improving the productivity of labour, capital and land use and competing in domestic and international markets.

Interest costs

1.117  One reason for the fiscal deficit continuing to be high despite a decline in the primary deficit is the rise in interest costs. One of the key issues in this regard is the system for setting of interest rates on Government debt in the form of provident and pension funds. By their very nature, these rates are set by the Government. The administered interest rates on pension and provident funds must take account of the inflation rates, the effective term of the deposits and available tax exemptions. This will ensure that the after-tax real rate of interest paid on these borrowings reflects the market rates and is consistent with the overall demand and supply conditions in the debt market. The interest rates paid on small savings instruments must be benchmarked against equivalent market instruments.

1.118  The loan and debt market in the country has limited flexibility due to implicit floors on interest rate. This is reflected in the fact that nominal inter-bank call money rate on overnight and one day borrowing has very seldom fallen below 8 per cent. This is despite the fact that in recent years inflation has gone as low as zero for an entire month. Thus, despite the decline in inflation during the past decades, real overnight rates have been very high compared to global rates. Though the high fiscal deficit is a factor for medium to long-term rates, it is difficult to conceive it playing a major role in overnight markets. The market for Government securities and treasury bills also requires to be adequately broadened and deepened. This requires comprehensive decontrol and provision of a level playing field, so that potential retail investors have convenient access to these securities through the stock markets.

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Domestic reforms

1.119  Alongwith the application of competitive pressure, Indian industry must be provided the right environment for being able to compete. With the economic policy changes that have taken place in the 1990s, along with the worldwide changes that have occurred in the economic environment, it is essential for industry to become capable of restructuring on a continuous basis. Measures to promote such restructuring include factor market reforms, an end to any remaining investment controls and provisions for progressive improvement in infrastructure services. These reforms will also help Indian industry in meeting the challenge of imports resulting from the removal of the remaining import restrictions.

1.120  These issues assume greater importance in the light of the industrial growth experience of the 1990s. The industrial policy reforms of the 1990s, opening of foreign direct investment, improvement in access to foreign technology, abolition of MRTP and the phased manufacturing programmes, had led to an expectation of sustained higher growth in industrial production. After some exuberance in the mid-1990s industrial growth has slowed down. It is likely that this has happened due to the existing rigidities in factor markets. Capital remains locked up in sick enterprises due to dilatory bankruptcy procedures. Labour mobility is hampered by the existing labour laws and land utilisations by the Urban Land Ceiling Act and rent control laws. Consequently, resources in the industrial sector have not been able to move to more productive uses, in particular towards labour using employment generating industries, that could lead to higher industrial growth on a sustained basis.

Bankruptcy law

1.121  Inclusion of modern bankruptcy provisions in the Companies Act, repeal of SICA (Sick Industrial Companies Act) and dissolution of BIFR (Board for Industrial and Financial Reconstruction) will facilitate restructuring of Indian industry. The delays currently inherent in the BIFR process that prevent quick reorganisation of sick companies, or closure when required, should be eliminated. This would benefit shareholders, lenders and labour to move to more productive pursuits, thereby promoting industrial growth.

Labour laws and procedures

1.122  The contract labour law, as it exists today, makes it impossible for genuine small-scale entrepreneurs to provide services to industry. A modern contract labour act should encourage outsourcing of services so that new employment is generated. Labour laws and procedures have reduced the incentive for organised labour to work efficiently and have made it unprofitable for organised industry to generate new jobs. Greater flexibility is essential if Indian industry is to compete with Chinese industry and generate as many new jobs as the latter has.

Urban Land Ceiling

1.123  The states need to follow the lead of the centre and repeal the Urban Land Ceiling laws.

1.124  The above three reforms will facilitate industrial restructuring and make it possible for capital and skills to move quickly out of declining industries and into rising ones.

Small scale industry reservation

1.125  Small scale industry reservation is a variant of investment control. Whereas special support policies for small and medium enterprises are found in most countries of the world, developed and developing alike, the policy of small scale industries reservation is unique to India. In view of the imminent removal of all restrictions on imports in April 2001, the time has come to give up reliance on reservation as an instrument for supporting SSI. Labour intensive industry can then exploit economies of scale and scope and thus reduce unit cost of production to those of Chinese imports. As many SSI reserved goods (like bicycles, agricultural implements, garments) are used by the bottom half of the population, dereservation will also raise the real income of the poor and generate further demand for these goods.

1.126  This reform, along with the previous three, will enable organised industry to move out of capital intensive manufacturing and enter labour intensive manufacturing, and generate new employment at a much faster pace. Its ability to compete with Chinese imports will strengthen manifold and exports of labour-intensive goods will expand.

Power reform

1.127  The pricing of power at (efficient) cost of production-cum-distribution is not just a fiscal necessity, but essential for keeping the system from collapsing. Transmission and distribution losses need to be tackled on a war footing to make efficient pricing feasible. A special task force may be needed to be set up to push power sector reforms with state Governments in an organised manner. A modern Electricity Bill has been drafted. Its adoption will help in enabling the reform of State Electricity Boards so that the public, private and cooperative sectors can compete under a sound and independent regulatory regime.

States fiscal deficit

1.128  In 1999-2000, the combined fiscal deficit of the centre and states was estimated at nearly 10 per cent of GDP, an increase of almost one percentage point from 1998-99. The revenue deficit is also threatening to reach unsustainable limits.

1.129  The RBI study on states’ finances shows that the states’ debt to GDP ratio, which had declined from 19.4 per cent in 1990-91 to 17.8 per cent in 1996-97 has jumped to 21.4 per cent in 1999-2000 (RE). It is budgeted to jump further to 22.9 per cent in 2000-01. The states’ primary deficit in 1999-2000 was about 0.7 per cent of GDP higher than in 1990-91. In contrast to the central Government guarantees, which have declined as a proportion of GDP over the decade, the guarantees provided by the states have increased by 0.6 per cent of GDP between 1995-96 and 1999-2000. The result of this fiscal deterioration is that states’ expenditure on social sectors have remained stagnant. There is little money for improving the reach and quality of education services or of public health.

Social sector reform

1.130  Till the fiscal situation is brought under control, it is unlikely that states will have more funds spending on improvement of education. Besides improving the efficiency of public expenditure, private and cooperative efforts must be harnessed for filling the growing gaps in Government provision of education. This requires a simple, non-bureaucratic policy framework for private provision of all education services. The regulatory system must be modernised to free serious educational institutions from oppressive controls while laying greater stress on detecting and punishing fraudulent operators.

1.131  Similar reforms must be made in the case of urban infrastructure services so that maximum possible private participation can be elicited. The state Governments can then divert their limited investment budget into public goods and basic infrastructure services for the poor urban and undeveloped rural areas.

1.132  States also need to repeal the World War II era rent control acts that have been major contributors to the creation of urban slums. As the rent control acts basically serve to expropriate and transfer rental accommodation from the owner to the renter, they provide a powerful disincentive for the construction of rental accommodation. In countries without such laws, the poor and lower middle class live in rented apartments. In Indian metros, they rent accommodation in slums where there are no rent control laws. This reform, along with a forfeiture law and modernisation of municipal rules and regulations, can unleash a real estate boom that will generate hundreds of thousands of jobs and move people out of slums into proper rental accommodation.

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Summing Up

1.133  The Indian economy has performed well over the past two decades. Average annual real GDP growth accelerated from 5.4 per cent during the 12 year period ending 1991-92 to 6.4 per cent during 1992-93 through 2000-2001. During this period, it has gone through significant structural change that has been induced by a continuous process of economic reforms. The pace of reform was intensified in the 1990s and the economy has responded well to the new changes that have been introduced in almost all sectors of the economy during this period. As a consequence, the economy has also shown a great degree of resilience even in the presence of adversities, such as the East-Asian financial crisis of 1997-98 and the abnormal increase in oil prices more recently.

1.134  In view of the many changes that have taken place, it is now quite possible for the Indian economy to attain an even higher growth path. However, as has been outlined above, crucial action is required in a number of key areas in order to obtain the full benefits of the reforms carried out so far. If these measures are accomplished in an organised manner in the near future, it is quite likely that many of the latent energies that are yet to be released in the country would become apparent and a higher level of economic activity would emerge.


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