Economic Reforms in India byTarun Das

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Economic Reforms in India-

Scope, Rationale, Progress and Unfinished Agenda

Dr. Tarun Das*,

Economic Adviser, Ministry of Finance

and Government Nominee Director, Bank of Maharashtra

December 2002

_______________________________________________________________________

_

The authour would like to thank the Bank of Maharashtra for inviting him todeliver this lecture at their Head Quarter at Pune on the 21st December 2002.

The paper expresses personal views of the authour, which donot necessarily imply

the views of either the Ministry of Finance and Company Affairs, Government of

India or the Bank of Maharashtra.

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ContentsContents Pages

1. Introduction 3

2. Rationale and scope of economic reforms 5

3. Macro stabilisation policies 8(a) Fiscal reforms since 1991 8(b) Central government budget for 2002-03 13(c) Financial sector reforms 14(d) Monetary and credit policies for 2002-03 15(e) Exchange rate policies 17

4. Structural reforms 18

(a) reforms in industry and infrastructure 18(b) social sector policies and reforms 20(c) agricultural policies and reforms 21(d) Trade and tariff policies and reforms 22

5. Unfinished agenda on reforms 236. Key Policy issues 24

(a) fiscal policy 24(b) Money and capital markets 25(c) External sector policies 26(d) Infrastructure policies and reforms 27(e) Strategy for social sector development 28(f) Structural policies 29

7. Role of managers in the post reforms period 30

8. Concluding remarks 31

Tables1. Paradigms of economic reforms in India since 1991 72. Fiscal reforms: progress to date 93. Financial sector reforms since 1991 114. Trend of excise and customs duties and corporate tax rates 125. Tax/GDP ratios since 1990-91 126. Progress of structural reforms 197. India: Trends of macro-economic indicators since 1990-91 348. Basic economic indicators of selected Asian economies in 2000 379. Growth of output in selected Asian economies in 1980s and 1990s 3810. Tax policies in selected Asian economies in 1990 and 2000 39

11. Fiscal incentives in selected Asian economies 4012. Tariff barrier indicators in selected Asian economies 4113. Global integration indicators of selected Asian economies 4214. Private sector development in selected Asian economies 4315. Financial depth and efficiency in selected Asian economies 4416. Foreign investment regime in selected Asian economies 45

References 46

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Economic Reforms in India-

Scope, Rationale, Progress and Unfinished Agenda

Dr. Tarun Das, Economic Adviser, Ministry of FinanceAnd Government Nominee Director, Bank of Maharashtra

1. Introduction

It is well known that since 1991 India has started a sort of economic revolution to exploitfully the countrys potentials to achieve higher growth. Credible reforms have been takenin industry, trade, infrastructure, fiscal, financial and public sectors to improve efficiency, productivity and international competitiveness of Indian industries and to impartdynamism to the overall growth process. As the initial reforms take root and second-

generation reforms unfold, India is emerging as one of the favourable destinations forforeign investment and a land of immense opportunity for all.

Indias reforms program is characterised by the following unique features:

Gradual, Step by Step, Evolutionaryapproach not aBig Bang, Shock Therapy orRevolutionary Approach

General political consensus Strong emphasis on human face

Practically no sacrifice made by people

No write-off / rescheduling of external debt

Indias reforms programme has emphasized gradualism, step by step approach andevolutionary transition rather than shock therapy or a big bang approach as wasdone in Latin American countries or the Commonwealth of Independent States (CIS).Because of slow pace of reforms, some foreign investors compare India with a tortoise.But, everyone knows the story that ultimately the race was won by the tortoise and not bythe proud hare. In my view, India is an elephant: huge, cautious slow moving; but bold,strong firm-footed determined, self-willed and always forward-looking.

India has a multi-party democracy and growth with social justice has been one of thebasic objectives of our planing since 1951. No reforms program can succeed unless weare able to take the people along with us. Therefore, all our reforms are based on generalpolitical consensus and have a bias for employment generation and poverty reduction.

More than eleven years have passed since the reforms started. Eleven years is a longperiod for an individual, but for a country as complex and large as India and with a multi- party democracy, eleven years is a short period to expect completion of all reforms,

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particularly when the global economy is changing at a fast speed. However, it is a matterof some satisfaction that the results until now had been highly encouraging (see Table-7).

India has moved up on a higher growth path with higher employment and higher real

wages, less inflation and lower level of poverty. It has the distinction of coming out of asevere crisis in the external sector without recourse to debt rescheduling or debt write-off.On contrary, India was able to prepay a part of its external debt to the multilateral fundingagencies and bilateral countries.

India is one of the few countries of the world, which have reaped these benefits withoutserious economic disruptions and without any sacrifice made by the people. In manycountries with significant reforms, there were high rates of inflation, unemployment andpoverty at the initial stage. There had been no such adverse situation in India. Indianreform programme emphasised development of appropriate safety nets for the vulnerableand weaker sections that might be adversely affected by structural reforms.

Despite global recession and hardening of international prices of oil in recent years and the border conflicts with Pakistan, India has emerged as one of the fasted ten growingeconomies of the world. Inflation has come down from more than 16 per cent in June1991 to around three percent today. Poverty ratio has come down from 36 per cent in1993-94 to 26 per cent in 1999-2000. There had been no wage freeze, no denial ofdearness allowance and no retrenchment of employees or shutting down of companies.

There has been significant improvement in Indias external sector. Total foreign exchangereserves which dwindled to US$1 billion, equivalent to only two weeks level of imports,in June 1991 have increased to more than US$67 billion equivalent to more than one year

of imports. The current account balance, which showed a deficit of 3.1 per cent of GDP in1990-91, had a surplus amounting to 0.3 per cent of GDP in 2001-02.

Foreign investment inflows improved significantly in 1990s and amounted to $5.1 billionin 2000-01 and $5.9 billion in 2001-02 compared with only US$1 billion throughout thewhole decade of 1980s. The growth in foreign investment was the result of the stabilityof the exchange rate, continual reforms in infrastructure, liberalisation of foreigninvestment policies.

External debt indicators also show steady improvement. Among the top ten debtordeveloping countries of the world, India ranked third after Brazil and Mexico. In the year

2000, while Brazil still ranks the first in stock of external debt, Indias position hasimproved to the ninth rank after Brazil, Russian Federation, Mexico, China, Argentine,Indonesia, Korean republic and Turkey.The external debt-to-GDP ratio declined continuously from 38.7 per cent at end March1992 to 19.7 per cent at end March 2002. The debt-service ratio (i.e. the ratio of total debtservices to gross receipts on the current account of the external sector) also declinedcontinuously from 35.3 per cent in 1990-91 to 13 per cent in 2001-02. The share of short-

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term debt in total external debt declined continuously from 10.3 per cent in 1991 to 2.8 percent in 2001. Due to these improvements, India is now categorized as a low indebtedcountry compared with its classification as a moderately indebted country in 1991.

2. Rationale and Scope of Economic Reforms

During the decade of 1980s India successfully completed the Sixth (1980-1985) and theSeventh (1985-1990) Five Year plans and moved on a higher growth path with an averagegrowth rate of 5.7 per cent per annum compared with a trend rate averaging 3.5 per centuntil the end of 1970s. However, sustainability of the growth process came under seriousdoubt due to large and persistent macro economic imbalances manifested in rising fiscaldeficits, precarious balance of payments situation and high inflationary pressures.

During 1980s the overall economic philosophy in India was to liberalise imports to someextent, promote export-oriented industries, reduce physical controls and regulations inindustry, encourage capacity augmentation and technological upgradation and allowflexible exchange rate and attract foreign investment in selected sectors on the basis of

case by case approvals. However, these liberalisation measures were not carried to fullextent and not supplemented by fiscal prudence, monetary discipline, privateparticipation, reforms in taxation policies or in monopolistic trade and industrial licenses.

India still adopted a very restrictive policy as regards foreign equity, capacity expansionfor economies of scale and private participation in infrastructure and other strategicsectors. In the pre-reforms period, Indian economy in general was characterised by:

Mixed economy, but too closed

Far behind world wide globalisation

High level of control, licenses and regulation

Monopolistic practices in public utilities Complex tax regime with high rates

High tariff walls and Quantitative Restrictions (QRs) on imports

Rigid factor markets for land, labour and capital

High levels of fiscal deficits and public debt

Precarious balance of payments situation

Over control, excessive regulation, high protection, licensing raj and high taxes andduties resulted in:

Low efficiency and productivity

High transactions cost

High cost economy and rent seeking

Non-optimal allocation of resources

Sub-optimal choice of technology and location of industries

Low quality but high prices of products and services

Bureaucratic inefficiency and corruption

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Due to these inefficiencies Indian economy entered the decade of the 1990s with largeimbalances on internal and external account, which made the economy highly vulnerableto internal and external shocks. These problems were exacerbated by the Gulf crisis in1990-1991 and consequent hardening of international prices of oil.

There was precarious balance of payments situation and our foreign exchange reservesdwindled to US$1 billion, which was sufficient to finance only two weeks level ofimports as compared to prudent level of three months imports. India was on the verge ofexternal default. International credit rating organisations downgraded Indian scrips andput them in the no investment grade. Our non-resident Indians started withdrawing theirdeposits at a faster speed as they lost confidence in the Indian banking system. Thewindow of commercial borrowing was closed to the Indian banks, financial institutionsand the corporate bodies. Rate of inflation reached 16 per cent hurting everybody,particularly the weaker sections of the society whose incomes are not indexed to prices.There was also widespread unemployment.

Indian government has to lift physically gold from the chest of the Reserve Bank of Indiaand deposit it with the Bank of England and the Bank of Tokyo to create internationalconfidence on India. The new government in June 1991 and the then Finance MinisterManmohan Singh, recognizing that there was no time to lose, immediately adopted anumber of stabilisation measures designed to restore internal and external confidence.The government also announced comprehensive reforms in industry, trade, financial andfiscal sectors to improve competitiveness of Indian economy. Fortunately for us, thereforms program was supported by quick-disbursing finance from the InternationalMonetary Fund (IMF), World Bank and the Asian Development Bank and also individualdonor countries, particularly Japan.

Paradigms of reforms since 1991 are summarised in Table-1. Basic objectives of thesereforms were thew following:

To encourage private participation including foreign investment in the developmentprocess. Over the years, government had widened its scope and was participating inthe activities where private initiatives might be more productive and useful.

In many cases, twin objectives of the government (namely growth and equity) wereintermixed and one objective was taken as an alibi for failure for another. In theprocess, both the prospects of higher growth and social justice were impaired.

It was recognised that as there are imperfections in the markets, there are alsoimperfections in the government. It was, therefore, necessary to redefine the role and

scope of the government and to open the economy to both internal and externalmarket competitions.

Having discussed the rationale and objectives of the economic reforms, the purpose ofthis paper is to make a review of the ongoing reforms and to answer a number ofquestions, particularly the following:

How far have we progressed?

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Where do we want to go?

How to prioritize, sequence these reforms with what speed and intensity?

What are their likely impact on growth, output and employment?

Table-1 Paradigms of Economic Reforms in India since 1991

Pre-Reforms Period Post Reforms Period

1. Quantitative licensing on trade andindustry

2. State regulated monopolies of utilitiesand trade

3. Govt control on finance and capitalmarkets

4. Restrictions on foreign investment andtechnology

1. Abolition of industrial and tradelicensing

2. Removal of state monopolies,privatization & divestment

3. Liberalisation of financial and capitalmarkets

4. Liberal regime for FDI, portfolioinvestment, foreign technology

5. Import substitution and export ofprimary goods

6. High duties & taxes with multiple ratesand large dispersion

7. Sector-specific monetary, fiscal andtariff policies

8. End-use and sector-specific multipleand controlled interest rates

5. Export promotion and exportdiversification, no import bias

6. Reduction and rationalization of taxesand duties

7. Sector-neutral monetary, fiscal andtariff policies

8. Flexible interest rates without any end-use or sector specifications

9. Foreign exchange control, no

convertibility of rupee10. Multiple and fixed exchange rates

11. Administered prices for minerals,utilities, essential goods

12. Tax concessions on exports and savings

9. Abolition of exchange control, full

convertibility on current A/C10. United and market determined

exch.rates11. Abolition of all administered prices

except for few drugs12. Rationalised and being phased out

13. Explicit subsidies on food, fertilisers,and some essential items

14. Hidden subsidies on power, urbantransport, public goods, POL

15. General lack of consumers protectionand other rights

13. No change, budget subsidies on LPGand kerosene introduced

14. No change, but user charges are beingrationalised, and subsidies targeted

15. Acts governing consumer rights, IPR,independent regulatory authority

16. Central planning, discretionary process,high degree of bureaucracy

17. Outdated Companies Act18. No exit policy for land and labour

16. Decentralisation, sound institutionalframework, reforming civil services

17. No change18. No change in labor policy, slow

progress of reforms in land markets

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19. Outdated legal system 19. No change

Macro adjustment policies can be broadly divided into two groups- stabilisation policiesand structural reforms. While stabilisation policies aim at reducing macro economicimbalances by attacking demand, structural adjustment policies aim at increasing supplyand improving productivity and growth by imparting competitiveness, efficiency anddynamism to the system. These policies encompass the following specific measures:

Macro stabilization policies:(a) Fiscal policies(b) Monetary and credit policies(c) Exchange rate adjustment(d) Tariff policy(e) Wage-income-price policies

Structural adjustment policies(a) Reforms in trade and external sector(b) Reforms in industry and infrastructure(c) Reforms in agriculture(d) Public sector reforms(e) Factor market reforms- land, labour and capital(f) Administered price policy

3. Macro Stabilisation Policies

(a) Fiscal Reforms Since 1991

The basic objective of fiscal reforms since 1991 had been the reduction of fiscal deficitsto sustainable levels by augmenting resources and containing expenditure, and to simplifyrules and procedures for taxes and duties. The basic objective of tax reforms is to create atax system, which is simple, equitable, progressive and stable, and interferes least withthe efficient allocation of resources. Government desires to gradually increase the scopeof direct taxes and to move towards a system of value added tax system.

Government is also focusing attention on contingent liabilities and is trying to havereforms in provident funds, pension funds and insurance funds. The Government desiresto have a Fiscal Responsibility Act indicating limits on government borrowing andoverall fiscal deficit as percentage of GDP.

Table-2 summarises major reforms in fiscal policies and Table-3 summarises majorreforms in money and capital markets since 1991, while Table-4 indicates trends ofincome and corporate taxes and excise duties, and Table-4 indicates trends of tax-GDPratios since 1990-91.

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Table- 2 Fiscal Reforms: Progress to Date (As in December 2002) continued

Status in June 1991 Status in December 2002

Fiscal deficit of the Central government at 6.6

per cent of GDP, revenue deficit at 3.3 per centof GDP and primary deficit at 2.8 per cent ofGDP in 1990-91 was unsustainable.

Fiscal deficit of the Central Government as per

cent to GDP is reduced to:Year Fiscal Revenue Primary

Deficit Deficit Deficit

1990-91 6.6 3.3 2.81991-92 4.7 2.5 0.71992-93 4.8 2.5 0.71993-94 6.4 3.8 2.21994-95 4.7 3.1 0.41995-96 4.1 2.4 0.01996.97 4.0 2.3 -0.21997-98 4.7 3.0 0.51998-99 5.1 3.8 0.71999-00 5.4 3.5 0.7

2000-01 5.7 4.1 0.92001-02 RE 5.9 4.0 1.12002-03 BE 5.3 3.8 0.7

RE= Revised estimate, BE = Budget estimate.

Traditionally fiscal deficit was financed by :

(a) The RBI through ad hoc treasury billsissued at fixed rate of interest of 4.6%;

(b) the banking system which holds datedsecurities to meet SLR obligations;

(c) direct market borrowings through openmarket operations by sale of govt.bonds/securities;

(d) public funds such as pension/providentfunds and small savings; and

(e) external debt.

(a) Ad-hocs have been replaced by the Waysand Means Advances (WMAs);

(b) SLR and CRR reduced significantly toallow banks more private lending;

(c) Govt. securities are auctioned at marketrates. Primary dealer system forgovernment securities introduced.

(d) Changes in pension and provident fundsystem and small savings.

(e) Govt. emphasises inflows of non-debtfinancial flows and raising of equity.

Combined fiscal deficit of the Centre and Stateswas 9.4 per cent of GDP in 1990-91:

Central government 6.6States & UTs 3.3Centre & States/ UTs 9.4

Overall fiscal deficit of the Centre and Statesremained more or less invariant over 1990s.

2001-2002 2002-2003Central government 5.7 5.3States and UTs 4.5 3.8Central & State / STs 9.9 8.7

Public debt as percentage of GDP

(a) Central Govt 66%- Internal 49%- External 17%

(b) States 19%- Internal 19%

General Govt 72%- Internal 55%- External 17%

Public debt as percentage of GDP

(a) Central Govt 68%- Internal 58%- External 10%

(b) States 28%- Internal 28%

General Govt 81%- Internal 71%- External 10%

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Table- 2 Fiscal Reforms: Progress to Date (As in December 2002) completed


Direct budgetary support to central publicenterprises amounted to 1.5% of GDP in

addition to a variety of subsidies, and financingat below market prices.No hard budget constraints for PSEs.No disinvestment policy by the government.

Budgetary support curtailed to 0.6% of GDP,financing from domestic capital market has

increased, preferential access to bank credits /price preference eliminated.MOUs with CPSEs strengthened.Disinvestment of govt. equity to the extent ofan average of 20% of equity has been realised.

High monetisation of government debt. Ad-hocs are replaced by WMAs, which wouldalso be phased out.

Control on interest rate on governmentsecurities.

Government securities are auctioned and soldat market determined rates.

Irrational duty structure and very high rates ofboth direct and indirect taxes.

Maximum Rates

Excise duties 110%Import duties 400%Income tax 54%Corporate taxes:Domestic cos. 49% and 54%Foreign cos. 65%

Both direct and indirect taxes have beenreduced and rationalised.Maximum Rates

Excise duties 16% CENVAT+ 16% SEDImport duties 30% + 4% SADIncome tax 30% + surcharge of 5%Corporate tax :Domestic cos. 35% + surcharge of 5%Foreign cos. 40% + surcharge of 5%

Multiple rates for excise (19 major rates) andcustoms duties (20 major rates) depending on

end-uses.Many rates were specific.

End-use specifications are abolished.Specific rates are replaced by ad-valorem rates.

Only two major rates for excise, and four majorrates for customs duties.

No service taxes.No Minimum Alternate Tax (MAT).No Value Added Tax (VAT).No MRP-linked excise duties.No presumptive income tax.No estimated income scheme for retail trades.

Tax base widened by introducing servicetaxes on 51 services.

MAT introduced except for exporters.MODVAT introduced for many sectors.Concept of MRP introduced for consumptiongoods and other products.Estimated income scheme for retail trades isintroduced. Presumptive income tax schemeintroduced for individuals owning houses, motorvehicles, telephone, or having traveled abroad.

Double dividend tax on both individual incomesand companies profits.Existence of gift tax.Limited cases of tax holidays.

Dividend tax only at the individual level.Gift tax abolished.Tax holidays extended to many infrastructure andeco-friendly sectors, public safety and securityprojects, IT industries, backward areas etc.

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Table-3: Financial sector Reforms since 1991


Highly regulated and controlled banking systemwith strict entry and branching rules.

Guidelines for entry of new private banksformulated, and new private banks set up.

Restriction on opening or closing branchesrelaxed. Government share of equity in publicsector banks are being brought down to 49 percent and aim at bringing down to 33 per cent.Equity participation in new private banks byFIIs and NRIs is allowed to the extent of 40%.

Bank deposit rates fixed according to accounttypes and maturities. Minimum maturity offixed deposit is 30 days. Ceiling rate on depositsannounced by the RBI.

Bank deposit rates except for savings accountare liberalised and allowed to be determinedby the banks. The minimum maturity of termdeposit is reduced to seven days.

Issuing and pricing of securities, shares andbonds determined by the Controller of Capital

Issues (CCI) under the Ministry of Finance.

The office of CCI is abolished. Independentregulatory authority i.e. SEBI is established

for orderly growth of capital markets.Bank lending rates are fixed according to loansize and uses, floor rate on loans exceedingRupees two lakhs fixed by the RBI at 21%.

Lending rate is determined by the banks, andPLR is ranging between 10,75 to 12%. Banksare also allowed to lend at below PLR rates.

Interest rates on CDs are free, but bankwiselimits on issuance of CDs are fixed by RBI.

Bankwise limits on issuance are abolished.

At least 40 per cent of bank credits channelisedto the priority sectors at concessional rates.

Number if directed credit categoriesrationalised, and interest rate subsidy isreduced. No concessional rates except forsmall loans up to Rs.25000.

Government pre-empted large portion of bankreserves through CRR of 25% and SLR of

38.5%.RBIBank rate at 12%.PLR was high at above 21%.

CRR reduced to 4.75%.

SLR reduced to 25%.Bank rate is reduced to 6.25%.PLR is free. Present PLR is 10.75%-11.5%.

Inadequate norms concerning incomerecognition, provisioning and capital adequacy.

Regulations, monitoring and norms onasset classification, provisioning, capitaladequacy tightened as per internationalbest practices.

Portfolio investment by foreign investors inIndian companies is not allowed.Foreigners not allowed to buy governmentsecurities or government equity sharesdisinvested from PSUs.

FIIs, NRIs and OCBs are allowed tooperate in Indias stock markets subject toindividual ceiling of 10% for FIIs and 5%for NRIs/OCBs, cumulative ceiling 49%for FIIs and 10% for NRIs/OCBs and

collective ceiling of 49% of paid upcapital.

FIIs are allowed to buy government securities anddebt issues, NRIs/ FIIs/ foreign companies areallowed to buy disinvested shares subject to thelimits on foreign equity in the respective sectors.

Indian firms not allowed raising funds fromforeign stock exchanges.

Indian firms allowed to raise funds abroadthrough Global Depository Receipts (GDRs),Foreign Currency Convertible Bonds and

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offshore fund.

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Table-4: Trend of Excise and Customs duties and Corporate Tax rates since 1991

Year Excise duty (%) Customs tariff rate (%)

No.of

dutyrates

Peak basicrate

No.ofmajor

dutyrates

Peakbasic

rate

Basicsurcharg

e or Sp.Cus. duty

SAD(Special

additional duty)

No. of

services

coveredunder

servicetax

Corporate tax

rate

Domes-tic

companies

Foreigncompani

es

1991-92 19 110 20 150 0 0 0 45% +15% sur

65

1992-93 19 110 16 110 0 0 0 45% +15% sur

65

1993-94 19 110 16 85 0 0 0 45% +15% sur

65

1994-95 17 110 12 65 0 0 3 40% +15% sur

55

1995-96 12 50 9 50 0 0 3 40% +15% sur

55

1996-97 9 40 8 50 2% SCD 4 6 40% +

7.5%sur

55

1997-98 10 40 7 40 5% SCD 4 18 35% +0% sur

48

1998-99 11 40 7 40 5% SCD 4 26 35% +0% sur

48

1999-00 6 24+16%SED

5 40 10% sur-charge

4 26 35% +10% sur

48

2000-01 5 16%CENVAT+24%SED

4 38.5 10% sur-charge

4 26 35% +13% sur

48

2001-02 2 16%CENVAT+16%SED

4 35 0 4 41 35% +2% sur

48

2002-03 2 16%CENVAT+16%SED

4 30 0 4 51 35% +5% sur

40% +5% sur

Table-5: Tax to GDP ratio (%)

Year Customs Central Excise Others Total

1991-92 3.6 4.6 0.3 8.5

1992-93 3.4 4.4 0.0 7.8

1993-94 2.7 3.9 0.1 6.7

1994-95 2.6 3.6 0.1 6.3

1995-96 3.0 3.4 0.1 6.5

1996-97 3.1 3.3 0.1 6.5

1997-98 2.6 3.2 0.1 5.9

1998-99 2.3 3.1 0.1 5.5

1999-2000 2.5 3.2 0.1 5.8

2000-2001 2.3 3.3 0.1 5.7

2001-2002 2.3 3.3 0.1 5.7

2002-2003 2.4 3.6 0.1 6.1

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(b) Central government budget for 2002-03

The Central Government Budget for 2002-03, formulated against the background of alarge slippage of fiscal situation, targeted the fiscal deficit at 5.3 per cent of GDP andattempted to stimulate industrial and infrastructure growth by announcing several fiscal

and other incentives. These include rationalisation of customs and excise duties andreduction of the maximum tariff rate to 30 per cent. The budget also announced acommitment to reduce these rates further by 5 percentage points every year until 2004-05to reach 20 per cent and to move to a two-tier tariff structure in the medium term.

On the revenue side, key initiatives included an increase in the income tax surcharge from2 per cent to 5 per cent, a rationalisation of excise and customs duties, and an extensionof service tax to 51 services. On the expenditure side, the main initiatives includedmodest reduction of fertilizer subsidies and surplus manpower, and expansion of thescope of conditional fiscal and structural reforms by the states.

During 2002-03 progress was made in some aspects of structural reforms. In particular,bold steps were taken to accelerate the pace of disinvestment. Another key achievementwas the dismantling of the Administered Price Mechanism (APM) for petroleum products, and announcing a timetable for phasing out the remaining subsidies onkerosene and domestic LPG. Related to trade liberalisation, statutory peak tariff rateswere reduced from 35 per cent in 2001-02 to 30 per cent in 2002-03.

The Budget attempted to stimulate the economy by leaving direct taxes unchanged andincreasing public expenditure on agriculture, infrastructure and rural development.Policies were announced to stimulate capital markets, corporate restructuring, capital provisioning for weak banks, research and development, construction and housing,information technology and knowledge based industries. Budget had also a strongcommitment to the development of social sectors for achieving distributive justice,strengthening the public distribution system and poverty alleviation programmes,improving rural infrastructure and generation of employment.

Major fiscal measures announced in the budget for 2002-03 include the following:

Corporation tax applicable to foreign company reduced to 40 per cent.

A surcharge of 5 per cent imposed on all categories of taxpayers.

Higher depreciation rates allowed for capacity expansion.

Peak rate of customs duty reduced from 35 to 30 per cent, and a road map is given toreduce customs duties every year by 5 per cent and to reach 20 per cent by 2005.

Special Economic Zones (SEZs) entitles to procure duty free equipment, rawmaterials, components etc. whether imported or purchased locally.

Import duty reduced on a number of items used in iron and steel industry, seaportsand airports, agriculture, IT industry etc.

Service tax extended to inland cargo handling, storage warehousing (except foragriculture), event management, rail travel agents, and corporate bodies providingfinancial service. Services provided by hotels continue to be exempted.

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As a part of second generation reforms, several measures were announced in the Budgetsfor 2001-2002 and 2002-03 to strengthen the banking system, to increase banksoperational autonomy, and to improve the functioning of money and capital markets.These measures include the following:

Establishment of Clearing Corporation

Screen based trading in G-securities

Replacement of Public Debt Act by Government Securities Act

Reduction of Govt equity in banks

Voluntary Retirement Scheme for commercial banks

Legislation on securitisation and foreclosure in banking sector

FII portfolio investment will not be subject to the sectoral limits for FDI.

Indian companies are allowed to invest up to US $100 million abroad.

A pilot Asset Reconstruction Company to be set up to initiate measures for takingover NPAs in the banking sector and develop a market for securitised loans.

Foreign banks allowed to operate as branches or to set up subsidiaries.

Full convertibility is permitted for deposits by non-resident Indians.

NRIs can also repatriate their current earnings in India in foreign currency.

Indian mutual funds are allowed to invest in securities in countries with fully

convertible currencies.

Administered interest rates to be bench marked to the average annual yields of

Government securities of equivalent maturity.

State governments allowed prepaying their high cost debts from additional sources at

lower interest rates.

Scheduled commercial banks (SCBs) improved their performance in 2001-02. The ratioof operating profits to total assets improved from 1.53 per cent in 2000-01 to 1.94 percent in 2001-02. There was also a decrease of net non-performing assets (NPAs) of thecommercial banks, which amounted to 5.5 per cent of net advances at end March 2002compared with 6.2 per cent at end March 2001 and 9.2 per cent in 1996.

92 commercial banks out of 97 banks attained the minimum capital adequacy ratio(CAR) of 9 per cent by end March 2002. The ratio is to be raised to 10 per cent by endMarch 2003. 23 banks out of 27 public sector banks and 62 banks out of 70 private sectorbanks had already achieved CAR exceeding 10 per cent by end March 2002.

(d) Monetary and credit policies for 2002-03

The basic objective of monetary policies announced by RBI in April 2002 and October2002 was to contain inflation around 4 per cent alongwith sustaining overall GDP growthrate in the range of 5 to 5.5 per cent. In the face of a distinct moderation of the inflation

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rate, the thrust of the monetary policy in 2002 was to ensure adequate flow of credits tothe productive sectors of the economy and to support revival of investment demand.

In the financial sector, loan classification and provisioning regulations were tightened,and foreign entry to the banking system was further liberalised through the lifting of

limits on FDI and FII investment. Actions were taken to strengthen capital marketsincluding the restructuring of the Unit Trust of India (UTI), Industrial Development Bankof India (IDBI) and the Industrial Finance Corporation of India (IFCI).

In pursuit with the monetary and credit policy stance announced in April 2002, the cashreserve ratio (CRR) was reduced by 0.5 percentage point to 5 per cent with effect fromJune 2002. A flexible stance was indicated with respect to bank rate prevailing at 6.5 percent since October 2001. A system of variable interest rates and deposit rates wasintroduced and banks were directed to disclose maximum spread over and below thePrime Lending Rate (PLR) for greater transparency.

In order to boost economic activities, the mid-year monetary policy announced by theRBI on the 29th October 2002 reduced the bank rate from 6.5 per cent to 6.25 per cent andCRR by 0.25 percentage point to 4.75 per cent and focused on the twin objectives ofconsolidating reforms in the long run and providing adequate liquidity in the short run.

Despite significant reduction of RBI bank rate, lending rates of the commercial banks didnot fall commensurately and domestic credit growth continued to decelerate. Banklending and deposit rates fell by only 50-150 basis points during 2001-2002. The primelending rate (PLR) virtually remained unchanged, reflecting the rigidities arising fromadministered rates on small savings. However, banks are lending below PLR and havealso reduced the maximum spread over PLR and so effective lending rates have declinedby 50-100 basis points.

The sanctions and disbursements of the long-term credit by the financial institutionsdeclined in 2002-03 implying weak investment demand. However, lending by thecommercial banks, which are generally for working capital and trade finances, increasedsignificantly in 2002-03 due to revival of industrial growth and pick up of exports.

Other major measures announced in the Mid Term policy include the following:

Regional rural banks, local area banks and co-operative banks advised not to payadditional interest on savings accounts over what is payable by commercial banks.

Banks were allowed to determine their PLR and sub-PLR rates for export credits.

Banks were free to issue Certificates of Deposits (CDs) on floating rate basis.

In order to improve credit delivery to the priority sectors, scope of credits toagriculture, small business and weaker sections of people were expanded.

System of micro credit finance institutions was strengthened.

Establishment of offshore banking units in the Special Economic Zones as branchesof banks operating in India was allowed.

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Residents were permitted to open bank accounts in foreign currency with foreignexchange earned abroad and remittances received from outside.

(e) Exchange rate policies

In international categorizations by the International Monetary Fund (IMF), India isregarded as one of the countries having independent floating exchange rate arrangement.The day to day fluctuations in the exchange rate of Indian rupee are determined by freemarket forces for supply and demand for foreign exchange, such fluctuations reflect botheconomic fundamentals and short term speculation. The rupee is also fully convertible oncurrent account and almost fully convertible on capital account for the non-residents.

The broad principles that have guided India after the Asian crisis of 1997 are:

Careful monitoring and management of exchange rates without a fixed target or a pre-

announced target or a band.

A policy to build a higher level of foreign exchange reserves which takes into accountnot only current account deficits but also liquidity at risk arising from unanticipatedcapital movements;

A judicious policy for management of capital account. India has adopted the golden

principle for capital account convertibility i.e. first liberalising inflows of non-debtcreating financial flows and concentrating on concessional loans from the multilateralfunding agencies followed by liberalisation of the long term commercial loans withstrict monitoring on short-term external loans.

In order to further liberalise the movement of cross-border capital flows, especially in thearea of outward foreign direct investment, inward direct and portfolio investment, non-

resident deposits and external commercial borrowings, RBI announced the followingimportant measures relating to current and capital account during 2002:

Considerable liberalisation of release of foreign exchange for individual residents for

most purposes like travel, education, medical expenses etc.

Non-Resident Indians/ Persons of Indian Origin (NRIs/ PIOs) were permitted to

repatriate assets in India acquired by way of inheritance/legacy, and current incomelike rent, dividend, pension and interests.

Units located in Special Economic Zones (SEZs) are permitted to remit premium for

general insurance policies taken from insurance companies outside India.

Insurance companies registered with IRDA are allowed issuance of general insurance

policies denominated in foreign currency.

Corporates are permitted to prepay External Commercial Borrowings (ECBs) up to US

$100 million without permission from RBI up to end-March 2003.

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Corporatisation of DOT and ports

Private investment in airports

Convergence Bill to cover telecommunications, IT and broadcasting

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Table-6 Progress of structural reforms since 1991


1. Industry and infrastructure:(a) Government licensing required formost industries, which accounted for66% of new investment.

(b) Restrictions on expansion under MRTP(c) Reservation of 836 items for SSI units(d) 18 major industries reserved for public

sector.

(e) Restricted foreign investment policy.

(f) No Competition Act.

(a) Licensing abolished except for 6industries, which account for less than8% of production.

(b) MRTP Act amended.(c) Many items dereserved.(d) Only four industries viz. Defense

products, atomic energy, mineralsrequired by atomic energy, and railtransport reserved for public sector.

(e) Almost all the sectors are open forforeign investment except a few whichare strategic on considerations ofnational security, public health, andenvironment.

(f) Competition Bill approved by theCabinet.

2. Public sector:

(a) Budget support to PSEs: 1.5% of GDP(b) Price and purchase preference for PSEs

(c) Preferential treatment for bank credits

(d) No hard budget constraints(e) No disinvestment(f) SICA does not include sick PSUs

(a) Support reduced to 0.6% of GDP(b) No price preference, but purchase

preference exists(c) No preferential treat-ment for bank

credits(d) MOUs with PSEs strengthened(e) Divestment allowed(f) SICA amended to refer loss-making

PSUs to BIFR.

3. External Sector reforms:

(a) Fixed exchange rate determined by RBI(b) QRs on 91% of imports(c) Imports of 55 goods canalized(d) 439 items of exports are subject to

export licenses.(e) Export taxes on agro products and

minerals(f) Rupee not convertible.(g) No capital account convertibility.

(a) Exchange rate is market determined(b) Most QRs removed(c) Most items decanalised(d) Abolished except for minerals &

agriculture.(e) Abolished

(f) Fully convertible on current account.(g) Significant convertibility on capital

account.

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Many policies were announced in the 2002-03 Budget to encourage private investmentin industry and infrastructure. These measures include the following:

Public investment in key infrastructure sectors increased and an infrastructure EquityFund set up to help in providing equity investment fund for infrastructure projects.

One time settlement scheme in regard to State Electricity Board (SEB) over dues to

the Central Public Sector Utilities through securitisation and bonds.

Corporatisation of major ports in a phased manner.

Concession package for private sector participation in green-field airports.

Urban Reform Incentive Fund set up to provide incentive for reforms of Rent Control

Act, rationalisation of high stamp duty regime, streamlining approval process forconstruction and development of sites, simplification of legal procedures and realisticuser charges to convert agricultural land into non-agricultural use.

Dismantling of Administered price mechanism for petroleum products from April2002. Subsidies on LPG and kerosene to be phased out in the next 3-5 years.

Dereservation of 50 items relating to agricultural equipment, chemicals and drugs etc.

reserved for the small-scale sector.

Increase in issue price of urea, DAP and MOP fertiliser by about 5 per cent and

reduction in the subsidy for SSP.

(b) Social sector policies and reforms

Growth with social justice and alleviation of poverty has been primary objectives ofIndian planning since its inception in 1951. Several anti-poverty measures have been in

operation for decades focusing the poor as the target groups. These include programmesfor the welfare of weaker sections, women and children, and a number of specialemployment programmes for self- and wage employment in both rural and urban areas.

The government has relied mainly on two approaches for poverty alleviation: the firstbased on the anticipation that economic growth will have a trickle down effect on thelevels of living of all groups in society; and the second that direct anti-povertyprogrammes are also required. More recently, government shifted public expenditureaway from investment in infrastructure and industry towards social sectors, and improvedtargeting of subsidies through changes in the public distribution system.

Indias anti-poverty strategy comprises of a wide range of poverty alleviation andemployment generation programmes many of which have been in operation for severalyears and have been strengthened to generate more employment, create productive assets,impart technical and entrepreneurial skills and raise the income level of the poor.

India is committed to achieve the UN MDG targets by 2015. According to the HumanDevelopment Report (UNDP 2001) India is one of the 11 countries in the world that ison track to meet the UN MDG while 70 other countries are lagging or slipping. The

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report acknowledges the significant reduction of poverty ratio from 36 per cent in 1993-1994 to 26 per cent in 1999-2000, and also significant improvement in literacy rate.There has been continuous increase in the share of expenditure on social services of theCentre, States and Union Territories taken together in their total expenditure from 14.4per cent in the Sixth Five Year Plan (1980-1985) to 21.7 per cent in the Ninth Five Year

Plan (1997-2002).

(c) Agricultural policies and reforms

Indian agriculture suffers from a mis-match between food crops and cash crops, loweryields per hectare than the world average, except for wheat, volatility in production andwide disparities of productivity over regions and crops. Domestic production of pulsesand oilseeds are still below the domestic requirements and India has to depend on importsof pulses and edible oils to satisfy domestic demand.

Although the country holds a record buffer stock of foodgrains at 60 million tonnes, food

management is inefficient with unsustainable level of food subsidies. The rural economyand the private sector lack the basic infrastructure to build up sufficient buffer stocks, andagriculture remains vulnerable to weather shocks. In recent years, government has provided various fiscal incentives for improving rural storage facilities. The centralgovernment is also providing financial assistance to the States for procurement anddistribution of foodgrains at subsidised rates particularly to the families below thepoverty line.

The enhanced availability of bank credits through priority lending to agriculture and agrobased industries, favourable terms of trade, liberalised domestic and external trade foragricultural products have attracted greater private investment in agriculture in recentyears. The Central Government Budgets for 2001-02 and 2002-03 stepped up publicinvestment significantly for rural electrification, rural roads, rural employment, irrigation,agriculture research and public distribution system for foodgrains.

Other major measures taken for the development of agriculture and rural sector includethe following:

Greater thrust on rural infrastructure

Review of Essential Commodities Act

Higher credit to agriculture

Introduction of Kisan credit cards

Setting up Agricultural Export Zones Watershed development

Amendment of the Milk and Milk Products Control Order 1992 on March 26, 2002 to

remove restrictions on new milk processing capacity.

Decanalisation of exports of agricultural commodities and phasing out of the

remaining control on agricultural exports.

Expansion of futures and forward trading to cover all agricultural commodities.

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Additional allocations to the states for decontrol and deregulation of agriculture.

Additional allocation for construction of cold storage and rural warehouses.

Strengthening the micro credit delivery system through Self-Help Groups.

One time settlement of bank loans for small and marginal farmers.

Setting up a new Corporation for Agriculture Insurance.

To prepare a modern integrated food law affecting food and food processing sector.

With two-thirds of the Indian population still dependent on agriculture and nearly 75 percent of the poor living in the rural areas, further increase in rural investment, income andemployment is necessary for accelerating the overall economic growth and reducing thedisparities between rural and urban sectors.

(d) Trade and tariff policies and reforms

The Five Year EXIM policy for the period 2002-2007 announced on March 31, 2002includes removal of QRs on all exports (except a few sensitive products reserved forexports through the state trading enterprises), a farm-to-port approach for exports ofagricultural products, special focus on exports of handicrafts and assistance to States fordevelopment of infrastructure for exports.

32 Agri Export Zones (AEZs) have so far been sanctioned in 15 states to promote theexport of agro products and agro-based processed products. Export capabilities of thesmall-scale sector, which accounts for about 50 per cent of Indian exports, werestrengthened through a special program for the Cottage Sector and Handicrafts.

Several measures including abolition of licensing regime and zero customs duty onimports of rough diamonds were undertaken to enable India to emerge as a majorinternational centre for diamonds. Important measures were taken to provide a fillip to jewellery exports, including reduction in value addition norms for export of plainjewellery from 10 to 7 per cent and allowing mechanized unstudded jewellery exports ata value addition of only 3 per cent.

Facilities for special Economic Zones (SEZs) include the following:

Income tax concessions and 100 per cent deduction of export profits for five years.

Exemption from Central sales tax and duty drawback for on supplies from the

domestic area (DTA).

No restrictions on external commercial borrowing and overseas investment.

Freedom to carry out commodity hedging.

Overseas Banking Units exempted from the RBI SLR and CRR obligations are

allowed to be set up in the SEZs.

Supplies from DTA are treated as exports for the purpose of all duties and taxes under

the Income Tax Act and Customs Act.

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In order to boost the hardware industry, the Electronic Hardware Technology Park(EHTP) Scheme was modified to enable the sector to avail of the zero duty regimes underthe Information Technology Agreement under the WTO.

Transport subsidy was extended to units located in the hilly regions to offset thedisadvantages of being far away from the seaports. In order to encourage re-location ofindustries to India, import of plant and machinery was permitted without any licensewhere the depreciated value of such relocating plants exceeded Rs.500 million.

5 Unfinished Agenda on Reforms

Since the early 1990s, the Indian authorities have made considerable progress inaddressing the underlying structural distortions in the economy and encouraging privatesector activity. Trade and tariff reforms, financial sector liberalisation, and the opening ofthe investment regime prompted strong supply responses. However, the rapid pace ofeconomic growth witnessed in 1992-2000, which was partly cyclical, could not besustained in 2001-2002 due to inherent adjustment lags in industrial restructuring andlack of both internal and external demand. Although normal business cycles andcontagion from the regional crisis and global recession had contributed partly to theslowdown, there are a number of fundamental structural constraints affecting growth.

Insufficient fiscal adjustment kept pressure on real interest rates, and infrastructure bottlenecks and incomplete reforms in public enterprises, small-scale sector andagriculture constrained output and export growth. These were compounded byuncertainties created by the September 2001 terrorist attack in the USA and subsequentUS retaliation in Afghanistan and by the severe drought in 2002.

A comprehensive agenda of second generation reforms was announced by the thenFinance Minister in the 2001-02 budget and the thrust continued in the 2002-03 budget byextending these reforms to the state levels. But the reforms in critical areas appear to havebeen delayed. Particularly, the privatisation program of the government has slowed and thereforms in labour markets have not started due to socio-political reasons.

Revival of higher growth in industry and trade, sustaining rapid progress toward povertyalleviation and maintaining the momentum of reform would require determinedimplementation of the governments policy agenda. In particular, ambitious fiscalconsolidation and broad based structural reforms are needed to allow resources to be

redirected from servicing public debt toward development and social programs and tocreate enabling environment for private investment.

Areas where further reforms would promote greater efficiency include the following:

Privatisation of public enterprises at a faster speed,

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Elimination of the practice of restricting entry and foreign investment in certainsectors reserved for the small-scale industries,

Liberalisation in land and labour markets,

Formulation of an effective exit policy for bankrupt firms

Coordinating state level reforms

Reforms in municipalities and corporations Strengthening regulation in infrastructure

Development of debt and bond markets

Setting up an independent public debt office

Reforms in provident funds and pension fund

Thrust on state provision of basic needs

Assuming that there would be no major internal or external shocks, which might havedestabilising effects on the Indian economy, no monsoon failures and no politicalinstability, India would be able to sustain real GDP growth rates in the range of 8 percent in the medium term. Industrial production is expected to show upturn largely drivenby cyclical factors and induced by a rise in liquidity, lower interest rates, moderate crudeoil prices, rise in rural income and increased public spending on physical infrastructure.Services sectors, particularly trade, commerce and financial sectors and others, which hadbeen quite buoyant in the post-reforms period and now account for more than 50 per centof GDP are expected to achieve significant growth rates.

Higher growth would be feasible through a sustained pace of fiscal adjustment combinedwith second-generation economic reforms. Increased public and private sector savingswill boost Indias investment rate and provide necessary resources for upgrading criticalareas of infrastructure. While some increased use of foreign capital, particularly of directforeign investment and portfolio investment, is consistent with external sector viability,the bulk of the savings will be generated domestically.

6. Key policy issues

The Tenth five-year Plan (2002-2007) has set a target of 10 per cent for industrial growthand 8 per cent for overall GDP growth. The Plan has highlighted that the overwhelmingpriority is to speed up second-generation reforms to regain the growth momentum andboost domestic and foreign investment. At present, inflation is low and both food stocksand foreign exchange reserves are high. But both industrial growth and overall growthcontinue to be slow and are likely to be much lower in the first year (i.e. 2002-03) of the

plan than the plan targets. Although the outcome in 2002-03 is partly due to adverseweather conditions, it highlights the need to implement reforms at a faster speed togenerate broad-based and high quality growth for reduction of poverty.

(a) Fiscal Policy

The fiscal situation has deteriorated, raising concerns regarding sustainability. Thecombined fiscal deficit of the central and state governments has increased from 9.1

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percent of GDP in 2000 to 10 percent of GDP in 2001, causing combined public debt ofthe general government to reach 85 percent of GDP, reflecting sluggish revenue growthand expenditure overruns (including interest payments, pensions, and subsidies).Although the average interest rate on the existing public debt is around 8.5 percent andthe debt servicing does not cause immediate problem, this reflects the effect of

concessional external borrowing and the practice of automatic monetisation of budgetdeficit through low cost borrowing from the Reserve Bank of India in the past. However,financial sector reforms are reducing the scope to roll over government debt at low realinterest rates, and funding costs are considerably higher for the states.

The government is committed to fiscal consolidation but the results to date are notencouraging. Large revenue and primary deficits with nearly one third of revenues goingtoward interest payments, high and growing amounts of public debt, poor physical andsocial infrastructure, and high levels of poverty and inequality are not conducive tosustained high growth. Moreover, such a situation limits the scope for use of fiscalpolicies to support economic activity, complicates the conduct of monetary policy, and

erodes the government's credibility with investors. There is also a risk that high fiscaldeficits might slow down potential growth, by crowing out private investment and byconstraining public investment in much needed infrastructure and social programmes.

The public debt of the government may need to be viewed from the perspective ofdevelopments in government's quasi fiscal activities, unfunded liabilities (viz. Liabilitiesarising from unfunded public pension, provident fund, small savings or insuranceschemes) and contingent liabilities (viz. Loan guarantees, exchange rate guarantee,deposit insurance etc.). From the viewpoint of prudent long term fiscal management, thepension, provident funds, small savings and insurance schemes need to be fully fundedand managed on the basis of international best practices, instead of the present "pay asyou go approach"adopted by the government.

A significant increase in the revenue/ expenditure ratio would be an essential prerequisiteto successful fiscal consolidation. Given commitment to lowering customs duties,significant offsetting measures would be required to achieve the needed increase in therevenue ratio. Revenues need to be raised through broadening of tax base, rationalisationof tax rates and exemptions, continued improvement in tax administration, introductionof a comprehensive Value Added Tax (VAT) and further widening the service tax base.Disinvestment of government equity in public enterprises needs to be expedited and apart of the privatisation receipts may be earmarked for high priority social expendituresand pre-payment of more expensive public debt. It is equally important to put limits onfiscal subsidies, to improve the public delivery system, to target poverty reductionprograms, to downsize government, and to increase efficiency of public spending.

The government desires to formulate a medium-term strategy to put the fiscal balances ona sustainable path. Fiscal consolidation and debt reduction programs have to be made anintegral part of a more comprehensive, coherent and multi pronged strategy consisting oftax and expenditure reforms. The passage of the Fiscal Responsibility and BudgetManagement Act would be important as a signal for fiscal reforms.

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successive Finance Ministers to bring down Indias customs duties to 20 per cent by April2004.

Second, given the favourable foreign exchange and balance of payments situation,progress towards greater capital account convertibility is both desirable and inevitable,

but such progress will have to be carefully calibrated to reduce the down side risks thathad been brought home so vividly by the recent East Asian crisis.

Third, although the exchange rates of Indian rupee per major currencies are broadly inline with macro-economic fundamentals, the exchange rate might need to adjust to theeffects of capital account and trade liberalisation, domestic deregulation in industry andinfrastructure, fiscal consolidation and more difficult external environment. While RBIspolicy of occasional market intervention to maintain orderly exchange market conditionshad helped broader macro-economic stability, market forces need to be given morefreedom in times ahead to provide adequate incentives to risk management and smootheradjustments in exchange rates to changing circumstances.

Fourth, the strong foreign exchange reserves position provides a good opportunity togradually allow greater flexibility in the exchange rate in both directions, which in turnwould help to develop a deeper market for foreign exchange transactions. Such flexibilitywould also encourage greater hedging of currency risk by corporates, which willincreasingly be needed with India's continued integration with the global economy.

(d) Infrastructure policies and reforms

Infrastructure constraints in a number of key sectors of the economy, particularly power,telecommunications, roads and ports have come to the fore, since reforms and investmentin these sectors have failed to keep pace with increase in demand, and have limitedfurther improvement in growth potential of the economy.

The poor performance of power is largely a reflection of the deteriorating financial healthof the State Electricity Boards, which, in turn, is due to high transmission and distributionlosses including power theft, very low tariffs for agriculture and operationalinefficiencies.

Transportation is another problem area. Road transportation, which currently accounts forabout 80 per cent of both passenger and freight traffic, is hindered by the large proportionof unsurfaced roads (50 percent of total road network) and over-dependence on nationalhighways, which account for less than 2 percent of the road network, but carry as muchas 40 percent of total traffic.

Rail transport suffer from over aged assets, over crowded corridors, lack of desiredconnectivity in many parts of the country, irrational fright rates for goods traffic and lackof resources for capacity expansion.

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Port capacity is also insufficient to meet existing demand by external trade, and the portsare characterised by outdated technology, restrictive labor practices, and slow customclearance procedures. These results in pre-berthing delays, longer ship turnaround time,and higher costs compared to other ports in the Asian region.

Government policy has focused on improving the efficiency of public sectorinfrastructure provision and encouraging a greater role for the private sector. In general,while many contracts have been awarded to the private sector, relatively few deals havereached financial closure.

There is an urgent need to formulate a comprehensive inter-modal transport plan and torationalise tariff charges for all service sectors to generate internal resources and toencourage investment for capacity expansion and to improve quality of services.

(e) Strategy for social sector development

The development and proper utilisation of vast human resources is the essence of thesocial sector development strategy followed by the government. Significant progress hasbeen made over the years in human resource development which is reflected in improveddemographic indicators such as expectation of life, infant, child and maternal mortalityrates, health care services, progress in the field of education and adult literacy rates.

The Approach Paper to the Tenth Five-Year Plan (2002-2007), which outlines a strategyto achieve a GDP growth rate of 8 per cent, has a specific focus on human development.The Approach Paper stipulates that growth in per capita GDP should be accompanied bysignificant improvement in human development indicators and basic services to thepeople such as basic health, education, drinking water and sanitation. It also includes theexpansion of economic and social opportunities for all individuals and groups, reductionin disparities and a greater participation of people in the decision making process.

The Plan indicates the following monitorable targets:

Reduction of poverty ratio by 5% points by 2007 and by 15% points by 2012.

Providing gainful employment to the additional labour force over the Tenth Plan.

All children to go to schools by 2003.

All children to complete at least five years of schooling by 2007.

Reduction of gender gaps in literacy and wage rates by at least 50 per cent by 2007.

Reduction in the decadal rate of population growth to 16.2 per cent in 2011.

Increase in the literacy rate to 75 per cent during the Tenth Five-Year Plan.

Reduction in the infant mortality rate to 45 by 2007 and to 28 by 2012. All villages to have access to potable drinking water within the plan period.

Cleaning of major polluted rivers by 2007 and other notified stretches by 2012.

Increase in the forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012.

The attainment of these targets not only necessities a substantial allocation of resourcesfor the social sectors but also involves an enhanced role for the government in theprovision of social services and development of urban and rural infrastructure.

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(f) Structural Policies

The following structural reforms need to be given priority:

Although major reforms have been done at the macro level and in production sectors,credible reforms need to be taken at the municipal and corporation levels particularlywith regard to sale, acquisition and transfer of land.

Indian labour is highly protected. Reforms are necessary in labour markets forenhancing employment.

Regaining the momentum of the disinvestment program is critical. The privatisation process has already yielded sizable gains to the government. A long delay inimplementation of the rest of the disinvestment program in the year will havenegative consequences on the Centres budget and could derail the process of

disinvestment at the states. It will also have adverse effects on the stock markets.

Notwithstanding the recovery in FDI recorded so far in the year and measurementissues, that suggest that such flows are understated, India is clearly not fulfilling itspotential for FDI.

Further liberalisation of the non-debt creating financial flows including FDI isrequired for petroleum, real estate, telecommunications, civil aviation, banking andfinancial sectors. There are synergies between the disinvestment program and the FDIstrategy, and serious consideration may be given to use disinvestment as a magnet forforeign investment.

Global integration indicators for India are very low as compared to many Asianeconomies (see Table-13). There is significant scope for India to increase its exportsby encouraging both labour-intensive and high technology products.

India will have to face and surmount the challenges posed by new technologies andmarket places, such as Internet and e-commerce.

It will be important to lock in recent gains on the inflation front. Although inflationeased considerably during 2001-2002, continuous increase in oil prices and largepublic sector deficit have again put pressure on inflation. Management of inflation

and protecting the interest of the vulnerable and weaker sections of the society remaina priority area for the government.

Another priority of the government is to reduce wide spread poverty ratios, inter-statedisparities and interregional inequality, although substantial gains have been achievedin these areas during reforms period since 1991.

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7. Role of managers in post reforms period

In the post reforms period, there is a change of the role of the government:

From a controller to an enabler, From a supplier to a facilitator,

From an operator to a policy maker, and

From a regulator to a trustee of social equity and environmental sustainability.

In the post reforms period, there is re-orientation of public policies. The basic job of thegovernment is now:

To create enabling environment for public-private partnership,

To link fiscal, monetary and other incentives to productivity,

To streamline public investment and social welfare programs,

To put emphasis on consultations, flexibility, decentralisation, selectivity, monitoringand co-ordination of policies and operations,

To repair market failures, and

To strengthen institutional structures and legal system.

In the post reforms period, the managers in the government or in the public sectorenterprises have to change their mind set to fulfill these objectives. At the same time,there is need for greater co-ordination, co-operation and partnership between private andpublic sectors. We must realise that:

Both well-governed state and well functioning markets are essential for high growthand sustainability.

Government and free markets should supplement and complement each other.

Government should withdraw from sectors where private participation is moreproductive and more efficient.

Scope of government to remain large in social sectors and infrastructure.

Responsibility of a manager in a public sector enterprise has also increased in the postreforms period. In the pre-reforms period, a public sector enterprise was under the strictcontrol of a government department. As the economy was relatively closed and freemarket operations were limited, there was less risk; and whatever risk was there was

shared by an enterprise and the government department. But today there is lessinterference by the government department; PSUs have been given more autonomy andmore freedom and are run by independent board of directors. PSUs have to bear fullresponsibility for their performance.

A manager has now greater risk and greater responsibility for the following reasons:

World is now a global village.

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Knowledge and technology are the most valuable assets.

There is wider choice of resources- domestic/ foreign, debt/ equity/ portfolio etc.

There is greater competition among the operators.

There is greater risk due to fluctuations of exchange rate, interest rate, commodityprices, and composition of currency and markets.

Emphasis on decentralisation, consultation and risk sharing.

PSUs therefore need to strengthen systems for:

Management information

Asset-Liability Management

Measurement and management of risk

Project appraisal and post evaluation

Quality control

Inventory management

Performance evaluation

Prediction of sickness

8. Concluding Remarks

Indian economy has many positive factors to achieve higher growth in future.

India is the fourth largest economy in the world after USA, Japan and China in terms

of purchasing power parity adjusted GDP.

India possesses the eighth largest industrial estate in terms of stock of capital.

It possesses huge domestic market with the second largest population after China anda middle class in the range of 150-200 million.

India has the third largest pool of scientific and technical manpower.

India is the largest democracy with multi-party system, free press, independent

judiciary, efficient administration, a long history of private enterprise and a stronginstitutional base for development.

India has vast natural resources. It ranks sixth in coal and iron ore reserves, fifth in

bauxite, 17th in crude petroleum, and 23rd in natural gas reserves,

India ranks first in production of milk, millet, ground nut, tea, jute, mangoes and

bananas, stocks of cattle and buffaloes, second in arable land and irrigated area,production of rice, wheat, rapeseed, sugarcane and tobacco, and third in production ofcotton, natural rubber.

India ranks 19th in terms of value added in industry (first in production of sugar,

fourth in nitrogenous fertilisers and coal, fifth in cement and iron ore, ninth inelectricity generation, tenth in steel, 13th in commercial vehicles, and 20th in crudepetroleum production.

India has cheap but reasonably skilled and dedicated labour force and peaceful

industrial relations.

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Language does not pose any problem as English is an accepted language in

educational institutions, government offices and corporate houses.

India has a strategic location to cater the markets in the South, East and West Asia and

can even be gateway to the markets in Europe and Africa.

India has a mature banking and financial system with several large commercial banks,

financial institutions and insurance companies. India has a vibrant capital market with around 10,000 listed companies (second

highest in the world) and a market capitalisation of over US$250 billion.

India has a diversified and well-spread infrastructure. It ranks one of the 20 largest

telecom networks in the world. It possesses largest network of post offices in theworld, ranks first in the rail network and third in the road network.

Economic reforms since 1991 helped India to utilise some of its potentials. However,there is significant scope for improvement in all sectors of the economy.

Among the democratic countries, India achieved the highest average growth rate of

5.8 per cent over a 20-year period of 1980-2000. Among the major economies, Indiasgrowth rate was exceeded by only by China in 1980s and 1990s.

Growing cross-border tradability of services supported by the growth of Internet ande-commerce helped India to increase exports of services where India has acomparative advantage. Invisible exports in fact increased four and half times fromUS$7.5 billion in 1990-91 to US$34.5 billion in 2000-01.

Services made significant contributions to GDP growth with an average growth rateof 8 per cent in 1990s. Share of services in GDP increased from 39 per cent in 1990-91 to 50 per cent in 2001-02.

However, India is a price-taker in all services with a very low share in global serviceexports as is the case with Indias share in global merchandise exports. Servicesexports should therefore grow rapidly in the next decade or so.

Exports of goods and services have tripled in terms of US$ in the past decade. Theshare of merchandise exports in GDP have increased from 5.5% in 1990-91 to 9% in2001-01 and that of services from 3% to 8.5% over the same period. Export potentialin agricultural products, textiles, garments, gems and jewellery, and engineeringgoods remains far from being fully exploited.

Higher export earnings and remittances from abroad enabled India to service itsobligations on current account with less dependence on capital flows. Although theshare of imports increased from 8% of GDP in 1990-91 to 13% of GDP in 2001-02,India was able to build up its foreign exchange reserves from US$1 billion in June1991 to about US$67 billion in December 2002.

The present foreign exchange reserves are equivalent to about 13 months of imports.Only China has a higher level of import cover.

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Table-7: INDIA- Macro-economic Trends: 1990-2001: continued

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02

Actual Actual Actual Actual Actual Actual Actual

Per Capita GNP ( Rupees ): 6688 6760 15657 17558 19123 20320 21844

GDP growth rate at constant fc 5.6 1.3 4.8 6.5 6.1 4.0 5.4

GR agriculture 4.1 -1.5 -2.4 6.2 1.3 -0.2 5.7

GR industry 7.7 -0.6 4.3 3.7 4.9 6.3 3.1

GR manufacturing 6.1 -3.6 1.5 2.7 4.2 6.7 2.8

GR non-manufacturing 10.0 5.4 9.5 5.6 6.1 5.8 3.5

GR services 5.3 4.8 9.8 8.3 9.5 4.8 6.5

GDP (const. fc) sectoral shares 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture 31.6 30.8 26.5 26.4 25.2 24.2 24.3

Industry 29.7 29.3 27.7 27.0 26.7 27.3 26.7

Services 38.7 39.9 45.8 46.6 48.1 48.5 49.0

Average Exchange Rate (Rs/US$) 17.9 24.7 37.2 42.1 43.3 45.7 47.7

Inflation rate in terms of CPI 13.6 13.9 6.8 13.1 3.4 3.8 4.3

Inflation rate in terms of WPI 12.1 13.6 4.4 5.9 3.3 7.2 3.6

Growth rate of broad money supply (%) 15.1 19.4 18.0 19.4 14.6 16.8 14.2

Gross Domestic Investment as % of

GDP

26.3 22.6 24.6 22.7 24.3 24.0 25.3

-- Private sector 11.6 9.5 17.4 15.7 16.8 16.6 17.5-- Public sector 14.7 13.1 7.2 7.0 7.5 7.4 7.8

Gross Domestic Savings as % of GDP 23.1 22.0 23.1 21.7 23.2 23.4 25.5

-- Household sector 19.3 17.0 17.6 18.9 20.3 20.9 21.0

-- Private corporate sector 2.7 3.1 4.2 3.7 3.7 4.2 4.5

-- Public sector 1.1 2.0 1.3 -1.0 -0.9 -1.7 0.0

BALANCE OF PAYMENTS (US$ million)

Merchandise exports, fob 18477 18266 35680 34298 37542 44894 44915

Merchandise imports, cif 27915 21064 51187 47544 55383 59264 57618

Trade balance -9438 -2798 -15507 -13246 -17841 -14370 -12703

Other goods, services and income -2771 -2623 -2202 -1379 505 -1343 1545

Non factor services 982 1207 1319 2165 4064 2478 4199Investment income -3753 -3830 -3521 -3544 -3559 -3821 -2654

Unrequited income 2529 4243 12209 10587 12638 13134 12509

Private transfers 2068 3783 11830 10280 12256 12798 12125

Official transfers 461 460 379 307 382 336 384

Net invisibles -242 1620 10007 9208 13143 11791 14054

Current account balance -9680 -1178 -5500 -4038 -4698 -2579 1351

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Table-7: INDIA- Macro-economic Trends: 1990-2001: continued

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02


Capital inflows (US$ million; fy) 8505 4696 9393 7867 10840 8409 10406

External assistance,net 2210 3037 907 820 901 427 1204

External commercial borrowings 2248 1456 3999 4362 313 4011 -1147

Foreign investment 103 133 5390 2412 5181 5102 5925

Direct foreign investment 97 123 3562 2480 2157 2342 3905

Portfolio investment 6 10 1828 -68 3024 2760 2020

IMF, net 1214 786 -618 -393 -260 -26 0

NRI deposits,net 1536 290 1125 960 1540 2317 2754

Other capital,net 1091 -1139 -1410 -294 3165 -3422 1670

Change of reserves [increase (-) ] 1175 -3518 -3893 -3829 -6142 -5830 -11757

Foreign exch. reserves (US$mn,end fy) 5834 9220 29367 32490 38036 42281 54106

Foreign Exch.Res. (months of imports) 2.5 5.3 6.9 8.2 8.2 8.6 11.3

Growth rates : Fiscal YearMerchandise exports 9.0 -1.1 4.5 -3.9 9.5 19.6 0.0

Merchandise imports 14.4 -24.5 4.6 -7.1 16.5 7.0 -2.8

EXTERNAL DEBT (US$ Mn. end fy)

Total outstanding and disbursed 83801 85285 93531 96886 98263 99704 98138

Debt-service ratio (to XGS in per cent) 35.3 30.2 19.5 18.9 15.7 15.4 13.7

Debt/GDP ratio (in per cent) 28.7 38.7 22.8 23.4 22.1 21.8 20.5

Debt/exports ratio (in per cent) 453.5 466.9 262.1 282.5 261.7 222.1 218.5

Short term debt/ Total Debt ratio (%) 10.2 8.3 5.4 4.4 4.0 3.5 2.8

Short term debt/Foreign exch. ratio (%) 382.0 125.6 19.4 14.5 11.2 8.8 6.1

Public ext.debt/ Total Debt ratio (%) 59.6 59.8 49.7 47.6 47.7 44.2 43.9Concessional to total debt ratio (%) 45.9 44.8 39.5 38.5 38.9 36.0 35.9

Indebtedness classification Severe Severe Moderate Moderate Less Less Less

Memo Items:

As per cent of GDP at current mp:

Merchandise exports, fob 5.8 6.9 8.7 8.3 8.4 9.8 9.4

Merchandise imports, cif 8.8 7.9 12.5 11.5 12.4 13.0 12.1

Trade balance -3.0 -1.1 -3.8 -3.2 -4.0 -3.1 -2.7

Other goods, services and income -0.9 -1.0 -0.5 -0.3 0.1 -0.3 0.3

Non factor services 0.3 0.5 0.3 0.5 0.9 0.5 0.9

Investment income -1.2 -1.4 -0.9 -0.9 -0.8 -0.8 -0.6

Unrequited income 0.8 1.6 3.0 2.6 2.8 2.9 2.6Private transfers 0.7 1.4 2.9 2.5 2.8 2.8 2.5

Official transfers 0.1 0.2 0.1 0.1 0.1 0.1 0.1

Net invisibles -0.1 0.6 2.4 2.2 3.0 2.6 2.9

Current account balance -3.1 -0.4 -1.3 -1.0 -1.1 -0.6 0.3

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Table-7: INDIA- Macro-economic Trends: 1990-2001: Completed

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02


Capital flows (as % of GDP) 2.7 1.8 3.6 2.5 3.6 3.0 3.4

External assistance,net 0.7 1.1 0.2 0.2 0.2 0.1 0.3

External commercial borrowings 0.7 0.5 1.0 1.1 0.1 0.9 -0.2

Foreign investment 0.0 0.1 1.3 0.6 1.2 1.1 1.2

Direct foreign investment 0.0 0.0 0.9 0.6 0.5 0.5 0.8

Portfolio investment 0.0 0.0 0.4 0.0 0.7 0.6 0.4

IMF, net 0.4 0.3 -0.2 -0.1 -0.1 0.0 0.0

NRI deposits,net 0.5 0.1 0.3 0.2 0.3 0.5 0.6

Other capital,net 0.3 -0.4 -0.3 -0.1 0.7 -0.7 0.3

Change in reserves [increase (-)] 0.4 -1.3 -1.0 -0.9 -1.4 -1.3 -2.5

Foreign exch. reserves at end year 1.8 3.5 7.2 7.9 8.5 9.3 11.3

CENTRAL GOVT. FINANCE (As % of GDP):

Current revenue 9.7 10.1 8.8 8.6 9.4 9.2 9.3

Taxes 7.6 7.7 6.3 6.0 6.6 6.6 6.2

Non-taxes including external grants 2.1 2.4 2.5 2.6 2.8 2.7 3.1

Current expenditure 12.9 12.6 11.8 12.4 12.9 13.3 13.4

Capital receipts 5.6 5.1 5.5 6.1 6.0 6.4 6.7

Recovery of loans 1.0 0.9 0.5 0.6 0.5 0.6 0.7

Disinvestment of govt.equity 0.0 0.5 0.1 0.3 0.1 0.1 0.2

Govt. borrowings & other liabilities 4.6 3.7 4.9 5.2 5.4 5.7 5.8

Capital expenditure 4.4 3.6 2.4 2.2 2.5 2.3 2.6

Total expenditure 17.3 16.2 14.2 14.7 15.4 15.6 16.0

Central government (% of GDP)

Fiscal deficit (+) 6.6 4.7 -4.8 -5.1 -5.4 -5.7 -5.8

Primary deficit (+) 2.8 0.7 -0.5 -0.7 -0.7 -0.9 -1.1

Budget deficit (+) 2.0 1.0 0.1 0.0 0.0 0.0 0.0

Revenue deficit (+) 3.3 2.5 -3.1 -3.8 -3.5 -4.1 -4.0

States governments (% of GDP)

Fiscal deficit (+) 3.3 2.9 2.9 4.3 4.7 4.2 4.6

Primary deficit (+) 1.8 1.2 0.9 2.2 2.4 1.7 1.8

Budget deficit (+) 0.0 0.0 -0.1 0.2 0.2 -0.2 0.3

Revenue deficit (+) 0.9 0.9 1.1 2.5 2.8 2.5 2.6

Centre & States combined (% of GDP)

Fiscal deficit (+) 9.4 7.0 7.3 9.0 9.6 9.4 9.9

Primary deficit (+) 5.0 2.3 2.1 3.7 3.9 3.7 3.6

Budget deficit (+) 2.0 1.0 0.0 0.2 0.2 -0.2 0.3

Revenue deficit (+) 4.2 3.4 4.1 6.4 6.3 6.5 6.6

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Table-8 Basic Economic Indicators of selected Asian countries in 2000

Country Population

million

Area

'000

sq.km.

GNP

US$ billion

GNP

per capita

(US $)

PPP GNP

US$ billion

PPP GNP

Per capita

(US $)

Adult

Literacy

(%)

Life

Expectancy

(years)

2000 2000 2000 2000 2000 2000 2000 2000

Newly Industrializing Economies (NIEs)

Hong Kong 7 1 176 25920 174 25590 79 80

Korea,Republic 47 99 421 8910 818 17300 72 73

Singapore 4 1 99 24740 100 24910 76 78

Taiwan,China 22 36 280 12670 .. .. 75 76

China & Mongolia

China 1262 9598 1063 840 4951 3920 69 70

Mongolia 2 1567 0.9 390 4 1760 64 67

South-East Asia

Cambodia 12 181 3 260 17 1440 53 54

Indonesia 210 1905 120 570 596 2830 64 66

Lao, PDR 5 237 1.5 290 8 1540 52 54

Malaysia 23 330 79 3380 194 8330 71 72

Myanmar 48 677 .. .. .. .. 59 60

Philippines 76 300 79 1040 319 4220 66 69

Thailand 61 513 122 2000 384 6320 69 69

Vietnam 79 332 30 390 157 2000 68 69

South Asia

Bangladesh 131 144 48 370 209 1590 58 61

Bhutan 0.8 47 0.5 590 1.2 1440 48 61

India 1016 3287 455 450 2375 2340 62 63

Maldives 0.3 0.3 0.5 1960 1.2 4240 63 68

Nepal 23 147 6 240 32 1370 55 58

Pakistan 138 796 61 440 257 1860 60 63

Sri Lanka 19 66 16 850 67 3460 72 73East Asia

Japan 127 378 4519 35620 3436 27080 80 81

World

Low & middle income 5154 101491 6315 1230 19980 3910 65 64

East Asia & Pacific 1855 16385 1962 1060 7609 4130 68 69

Europe & Central Asia 474 24217 953 2010 3140 6670 68 69

Latin America & Carib. 516 20459 1895 3670 3624 7080 69 70

Mid. East & N.Africa 295 11023 618 2090 1545 5270 66 68

South Asia 1355 5140 595 440 2984 2240 61 63

Sub-Saharan Africa 659 24297 310 470 1044 1600 52 47

High Income 903 32315 24994 27680 24793 27770 77 78

World 6057 133806 31309 5170 44459 7410 67 66

Note: (a) Two dots (..) stand for "Data not available"

Sources :

(1) World Development Indicators 2002, World Bank.

(2) World Development Report 2002, World Bank.

(3) Asian Development Outlook 2002, Asian Development Bank, Manila.

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Table-9 Growth of output in selected Asian countries in 1980-1990 and 1990-2000

Country GDP growth

per annum

1980-1990

GDP growth

per annum

1990-2000

Agriculture

Growth pa

1990-2000

Industry

Growth pa

1990-2000

Manufacture

Growth pa

1990-2000

Services

growth pa

1990-2000

Newly Industrializing Economies (NIEs)

Hong Kong 6.9 4.0 .. .. .. ..

Korea,Republic 8.9 5.7 2.0 6.3 7.5 5.7

Singapore 6.7 7.8 -1.6 7.9 7.1 7.8

Taiwan,China 8.8 6.1 0.5 5.3 5.5 7.0

China & Mongolia

China 10.1 10.3 4.

Documents

Economic Reforms in India byTarun Das