CURRENCY AND EQUIVALENT Currency Unit = Indian Rupee US$ 1 - INR 46.28 FISCAL YEAR April 1 - March 31 ACRONYMS AIDS Acquired Immuno-Deficiency ILO International Labour Organization Syndrome IMF International Monetary Fund APDRP Accelerated Power Development IT Information Technology and Reform Program MOP Muriate of Potash CAG Comptroller and Auditor General MRP Maximum Retail Price CENVAT Central Value-added Tax NER Net Enrolment Rate CII Competitiveness of India Inc. NGO Non Governmental Organization CRISIL Credit Rating and Information Services of India Limited OECD Organisation for Economic Co-operation and Development DAP Di-ammonia Phosphate PDS Public Distribution System EIU Economist Intelligence Unit RBI Reserve Bank of India EPF Employee Provident Fund RFI Rural Finance Institution EPS Employee Pension Scheme SEB State Electricity Board EU European Union SME Small and Medium-scale Enterprise FDI Foreign Direct Investment SSP Single Phosphate FICCI Federation of Indian Chambers of TFP Total Factor Productivity Commerce and Industry TPDS Targeted Public Distribution System GDP Gross Domestic Product VAT Value-added Tax HIV Human Immunodeficiency Virus WHO World Health Organization ICAR Indian Council of Agricultural Research WTO World Trade Organization ACKNOWLEDGEMENTS This report was prepared by a team led by Mark Baird and Manuela Ferro, under the overall guidance of Sadiq Ahmed and Michael Carter, and with advice from Stephen Howes and Ijaz Nabi. The peer reviewers were Nick Stern, Shankar Acharya, Suman Bery, and Pranab Bardhan. Major contributors to the report were Brian Pinto and Farah Zahir on fiscal policy, Robert Beschel and Vikram Chand on civil service reform, Jeffrey Hammer on human development, Priya Basu on the investment climate for industry and services, Dina Umali-Deininger on agriculture and rural development, Bhavna Bhatia on the power sector, James Hanson on the financial sector, Anthony Bottrill on the external sector, Kruti Bharucha on social outcomes, Luis Constantino on decentralization, Esperanza Lasagabaster on pensions, Gloria Kessler on the environment, Zhi Liu on roads, and Garry Pursell on trade policy. A background paper on fiscal management was prepared by National Institute of Public Finance and Policy (NIPFP) in New Delhi. Bhaskar Naidu and Kruti Bharucha provided statistical support. Administrative support was provided by Shunalini Sarkar and Shahnaz Rana. The DPR team visited India in February 2003 and received valuable comments on the draft report from the Government of India in June 2003. This report was edited by Bruce Ross-Larson, Elizabeth McCrocklin, and Christopher Trott of Communications Development Inc., Washington, D.C. INDIA: SUSTAINING REFORM, REDUCING POVERTY TABLE OF CONTENTS EXECUTIVE SUMMARY i CHAPTER 1. INTRODUCTION: ASSESSING DEVELOPMENT OUTCOMES 1 Poverty Outcomes and Economic Performance 1 Social Outcomes 6 Economic and Social Outcomes: A Regional Perspective 8 Accelerating Development in India: Goals and Policy Agenda 9 PART I. POLICY AGENDA: MANAGING PUBLIC RESOURCES 11 CHAPTER 2. FISCAL POLICY 13 Government Debt Dynamics and External Vulnerability 15 Government Debt Dynamics 17 External Vulnerability 18 Costs of the Fiscal Stance 20 Fiscal Reform Priorities 22 Tax Reform 23 Subsidy Reduction 24 Financial Policy 26 Fiscal Management 27 Government Debt Projections: Why Fiscal Adjustment? 29 CHAPTER 3. DELIVERY OF PUBLIC SERVICES 35 Civil Service Reform 35 Size and Structure of the Civil Service 35 Costs of the Civil Service 36 The Return on Civil Service Expenditures 38 Improving Public Service Delivery 40 Health, Education, and Social Safety Nets 42 Health Strategy and Policy Priorities 45 Education Strategy and Policy Priorities 48 Providing Effective Social Safety Nets 51 Toward the Future 51 PART II. POLICY AGENDA: IMPROVING THE INVESTMENT CLIMATE 53 CHAPTER 4. INDUSTRY AND SERVICES 55 Investment Climate: Key Constraints and Policy Priorities 58 Product Market Distortions 58 Factor Market Distortions 64 Infrastructure Bottlenecks 67 Estimated Impact of a Better Investment Climate on Overall Economic Performance 71 CHAPTER 5. AGRICULTURE AND RURAL DEVELOPMENT 73 Foodgrain (Rice and Wheat) Policy 75 Input Policies 77 Fertilizer Policy 77 Water Resources and Irrigation 78 Power Supply to Agriculture 79 Product and Factor Markets 81 Trade Policies and Regulations 81 Access to Land 82 Access to Rural Credit 84 Enhancing the Productivity of Public Investments 85 Agricultural Research and Extension 85 Rural Roads 86 Rural Electrification 87 CHAPTER 6. CONCLUSION: DEVELOPMENT PROSPECTS AND RISKS 89 Outlook 89 Risks 92 Conclusion 93 REFERENCES 97 STATISTICAL ANNEX 111 FIGURES Figure 1.1 Per Capita Income Trends, India and Comparator Countries, 1970-2000 1 Figure 1.2 Poverty and Per Capita Income Trends, 1983-1999/2000 2 Figure 1.3 Unemployment Rates, Current Weekly Status, 1987/88-1999/2000 6 Figure 1.4 Per Capita Income by State, Three-year Average, 1998/99-2000/01 9 Figure 2.1 General Government Deficit and Debt Stock, 1985/86-2002/03 13 Figure 2.2 Primary Deficits and the Implied Difference between the Real Rate of 18 Interest and Growth,1986/87-2002/03 Figure 2.3 Gross Capital Formation in Private Corporate Sector and the General 21 Government Deficit, 1986/87-2000/01 Figure 2.4 Real Interest Rates, 1990/91-2001/02 21 Figure 2.5 Projected Government Debt-to-GDP Ratio, 2002/03-2006/07 31 Figure 2.6 Projected General Government Fiscal Deficits, 2002/03-2006/07 31 Figure 3.1 Public Expenditures on Education, Center and States, 1991/92-1999/2000 43 Figure 3.2 Public Expenditures on Health, Center and States, 1991/92-1999/2000 43 Figure 3.3 Prevalence of Diseases by Income Group, All India,1992 48 Figure 4.1 Private Investment in Industry and Services, Average Annual Growth Rate, 55 1991/92-2000/0 Figure 4.2 State-level Industrial Growth, Average Compound Growth Rate by State, 57 1990-99 Figure 4.3 Bankruptcies as a Share of Total Firms 66 Figure 4.4 Cost of Power 68 Figure 4.5 Energy Costs as Share of Total Sales 68 Figure 4.6 Shipping Cost Disadvantages in Textiles 70 Figure 5.1 Gross Capital Formation in Agriculture and Allied Sectors, 1960/61-2000/01 75 Figure 5.2 Electric Pumps Only: Irrigation Cost as a Percent of Gross Farm 80 Income in Haryana, Share in Total Gross Income Figure 5.3 Distribution of Number of Owned Holdings and Area Owned, 83 by Farm Size, 1971/72-1999/2000 TABLES Table 1.1 Macroeconomic Trends Over the Past Two Decades 3 Table 1.2 Sectoral Shares of GDP, Factor Cost, 1980/81 and 2001/02 4 Table 1.3 Unemployment Rates, India and Comparator Countries, Selected Years 6 Table 1.4 Progress on Social Indicators, 1980-2000 7 Table 1.5 Concentration of Poverty in India, 1983-1999/2000 9 Table 2.1 General Government Fiscal Trends, 1985/86-2002/03 14 Table 2.2 Trends in Central Government Finances, 1985/86-2003/04 15 Table 2.3 Trends in State Government Finances, 1985/86-2003/04 16 Table 2.4 Key Macroeconomic Aggregates, 1985/86-2003/04 19 Table 2.5 Sustainable and Desirable Deficits in the Tenth Plan Context 20 Table 2.6 Government Subsidies, 1997/98-2003/04 24 Table 2.7 Fiscal Projections, Base Case and Reform Case, 2003/04-2006/07 32 Table 3.1 Ratio of Civil Service Salary and Dearness Allowance to GDP for the 36 Government of India and Selected States, 1995/96-2000/01 Table 3.2 Ratio of Average Wages in the Public and Private Sector, Selected 37 Categories of Employment, 1993/94-1999/2000 Table 3.3 Absentee Rates from Primary Facilities in Selected States, 2003 44 Table 3.4 Health Spending in India and Comparator Countries, 2001 45 Table 3.5 Education Spending in India and Comparator Countries 49 Table 4.1 GDP, Industry, and Services Growth Rates, 1992/93-2002/03 55 Table 4.2 Unweighted Average Customs Duty Rates in India and Other 61 Developing Countries, Various Years Table 4.3 Indirect Tax Rates in Selected Developing Countries 63 Table 5.1 GDP, Agriculture Sector Growth Rates, 1980/81-2001/02 74 Table 5.2 Recent Fertilizer Policy Reforms 78 Table 5.3 Major Domestic Policy and Trade Regulations, January 2003 81 Table 6.1 Macroeconomic Projections, Baseline and Reform Scenarios, 1997/98-2006/07 90 Table 6.2 Elasticity of Employment to GDP, Selected Sectors, 1993/94-1999/2000 91 BOXES Box 1.1 India's Success in Information Technology 5 Box 1.2 Targets for the Tenth Plan and Beyond 10 Box 2.1 Assumptions Underlying the Debt/Deficit Projections 30 Box 3.1 Karnataka's Ombudsman 41 Box 3.2 Building a Health Environment 47 Box 4.1 Key Structural Reforms since 1991 59 Box 5.1 Damaging the Land 74 Box 6.1 Summary of Priority Reforms 94 STATISTICAL ANNEX Table A1. Gross Domestic Expenditure and Product Table A2. Gross Domestic Expenditure and Product Table A3. Annual Growth Rates of National Income and Product at Constant Prices Table A4. Gross Domestic Product by Expenditure, National Income and Savings Table A5. Exchange Rates and Prices Table A6. Central Government Finances Summary Table A7. Budgetary Classification of Central Government Finances Table A8. Budgetary Classification of State Government Finances TableA9. Budgetary Classification of General Government Finances Table A10. Transfers Between Center and States Table A11. Outstanding Debt (Center and States) Table A12. Banking Survey and Interest Rates Table A13. Balance of Payments Table A14. Exports and Imports Table A15. External Debt and Debt Service Table A16. Financial Sector Indicators Table A17. Investment Climate Table A18. Vulnerability Indicators Table A19. Millennium Development Goals Indicators Table A20. Development Indicators, India and Comparator Countries Table A21. Unemployment Rates: Alternative Measures INDIA: SUSTAINING REFORM, REDUCING POVERTY EXECUTIVE SUMMARY India continued to make good progress in climate. More sectors have been opened to increasing incomes and improving living private activity. Trade policy and the exchange standards over the past decade. After the setback rate regime have been further liberalized. And associated with the 1991 balance of payments capital markets have been reformed. crisis, economic growth picked up, income poverty continued to decline, and many social Assessing Development Outcomes indicators, in particular literacy, continued to Development progress has been steady, but uneven improve (table 1). These developments were across indicators of living standards. While poverty supported by the wide-ranging reforms launched and education indicators have improved, those for in 1991 to open and deregulate the economy. maternal and under-five mortality have not. The Even though the pace of reforms has slowed new threat of HIV/AIDS is spreading quickly. And since the mid-1990s, the cumulative changes unemployment, though still low by international have been substantial, improving the investment standards, has increased. Progress has also been Table 1. Progress on Social Indicators, 1980-2000 Indicator 1980s 1990s 2000 Poverty Poverty incidence (%) 44.5 36.0 26.1 Adjusted poverty incidence (%) 28.6 Education Overall literacy rate: 7+ years (%) 44 52 65 Female literacy rate as a percent of male literacy rate (%) 53 61 71 Net enrollment rate (NER): grades 1-5 (%) 47 51 77 Female NER as a percent of male NER: grades 1-5 (%) 70 80 81 Health Life expectancy at birth (years) 56 60 61 Infant mortality rate 0-4 years (per 1000 live births) 115 79 68 Maternal mortality rate (per 100,000) n.a. 424 540 Prevalence of HIV (million people) n.a. 3.5 4.0 Sanitation Access to improved water source (%) n.a. 68 78 Households with toilet facility (%) n.a. 30 36 n.a. Reliable data not available. Source: Table 1.4. i India: Sustaining Reform, Reducing Poverty Box 1. Who are India's Poor? Pervasive in India, poverty is becoming more concentrated in the country's lagging states and rural areas. More than half of India's poor now live in Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh-more than two-thirds in rural areas. In rural areas, the poverty incidence is highest amongst agricultural workers, many of them small-scale farmers or casual laborers. And people of scheduled castes and scheduled tribes are far more likely to be poor than those of other social groups, because low status and gender barriers still operate as social obstacles that block or exclude them from opportunity. India's poor suffer from lower incomes-and from lower access to and quality of such public services as basic health, education, and infrastructure, all low in quality. Often lacking the leverage to ensure that state institutions serve them fairly, the poor must pay for education and health services that others receive for free. Studies by India's Public Affairs Center indicate that the wealthy and middle classes are more likely to resolve their complaints at a lower cost. Corruption is often a highly regressive tax, with the poor paying a higher proportion of their incomes than do the wealthy and the middle class. Source: World Bank. uneven across regions. There is evidence of Recent growth trends also give reason for concern divergence in per capita incomes across states, with (table 2). Economic growth slowed from an annual richer states increasing incomes faster than poorer average of 6.7% over the five years from 1992/93 ones. As a result, poverty has become concentrated to 1996/97, to 5.5% for 1997/98 to 2001/02. in the country's slower growing states (box 1). Offsetting strong growth in services was a Table 2. Macroeconomic Trends Over the Past Two Decades Indicator 1980s 1992/93- 1997/98- 2002/03a 1996/97 2001/02 GDP growth (% a year) 5.6 6.7 5.5 4.4 Agriculture 3.4 4.7 1.8 -3.1 Industry 7.0 7.6 4.5 6.1 Services 6.9 7.5 8.1 7.1 Investment rate (% of GDP) 22.0 23.3 22.5 22.1 Public 10.0 8.0 6.6 6.3 Private 12.1 15.3 15.9 15.7 Inflation (Wholesale Price Index, % a year) 8.0 8.7 4.9 2.5 General government deficit (% of GDP) 8.1 7.2 9.3 10.4 Current account balance (% of GDP) -2.1 -1.2 -0.7 1.0 External reserves (months of goods and services 3.3 5.9 7.0 11.0 imports, end of period) a. Estimated. Source: Table 1.1. ii Executive Summary slowdown in industrial growth and a marked income increases for its population. In its Tenth decline in agricultural performance. In 2002/03, Five-Year Plan, the government targets an average growth slowed even more-to an estimated 4.4%, growth rate of 8% a year for 2002/03-2006/07. due to the impact of poor rains on agricultural But macroeconomic vulnerabilities and structural output in several states. impediments limit India's prospects for accelerating growth and reducing poverty, as the The slowdown in growth was accompanied by a Tenth Plan and the most recent Economic Survey slowdown in investment, especially in the private recognize. India's development policy challenges sector. Firms borrowed and invested heavily in the can be grouped into two broad areas: mid-1990s, building capacity for demand from continuing high growth rates and continuing Improving the management of public reforms that would generate high returns. resources, by reducing budget deficits, Meanwhile, trade reforms left some sectors more reallocating spending to more productive open to competition, while facing "behind the investments, and enhancing the quality of border" constraints to increasing productivity. As service delivery. the pace of reforms slowed, interest rates rose, and Improving the investment climate and raising the expected demand failed to materialize, many productivity in industry, services, agriculture, firms found themselves saddled with excess and rural development. capacity and debt. The fiscal position of the general government Policy Agenda: Managing Public (center plus states) also deteriorated. The Resources overall budget deficit rose from around 7% in 1997/98 to more than 10% in 2002/03, due to Fiscal Policy a significant increase in government The general government (center plus states) fiscal consumption and continued low revenue deficit has averaged more than 9% of GDP over the mobilization. Higher public debt and higher past six years, the Ninth Plan year plus 2002/03 interest rates also added to the debt service (figure 1). About 60% of this deficit is at the center burden. As a result, resources available for and 40% at the state level, where much of the recent public investment became tighter, with consequences for infrastructure development. Figure 1. General Government Deficit and Debt Stock, 1985/86-2002/03 (% GDP) But there were some pluses as well. Prudent monetary policy helped contain inflation and strengthen the balance of payments. Rapid growth of information technology (IT) service exports, sluggish domestic demand for imports, and higher remittances turned the current account balance into surplus. With modest capital inflows, external reserves rose to more than $80 billion, almost a year of imports. With more than a billion people and one-third of the world's poor, India needs rapid growth to Source: Figure 2.1. reduce poverty and create enough jobs to sustain iii India: Sustaining Reform, Reducing Poverty deterioration in the fiscal situation has occurred. Of tight monetary" policy that has helped to keep particular concern is the sharp increase in revenue inflation low and the external accounts strong. But deficits, which doubled from less than 3% in the late this has been at the expense of growth and welfare. 1980s to more than 6% of GDP over the past six Growing interest payments have crowded out public years. Falling revenues-and rising expenditures on investment, and high real interest rates have interest payments, subsidies, civil service salaries and constrained private investment. Even though pensions, administration, and defense-have crowded interest rates have declined over the past 18 months, out development spending, with negative public debt dynamics have continued to worsen. implications for long-run growth and welfare. There is a lively debate in India today about These fiscal deficits have largely been financed by whether the large fiscal deficit is a serious problem borrowing, with a strategic shift toward long-term or not, given the external reserves and food stocks. rupee debt after the 1991 crisis. General Indeed, some see a fiscal stimulus as desirable to government debt rose from 58% of GDP at the end counter the slowdown in private sector activity. of March 1986 to 85% of GDP by the end of But the arguments for a fiscal stimulus are not March 2003 (see figure 1). Including the debt of convincing when public debt levels are so high and public enterprises, total public debt is now 95% of interest rates may well start to rise from their GDP, with contingent liabilities from loss-making current low levels. And to the extent that the recent public enterprises adding another 12% of GDP. increase in external reserves has reflected capital With high primary deficits (more than 3% of GDP) inflows driven by one-off events related to and interest rates close to growth rates, the burden September 11, 2001, it would be risky to slow of public debt is expected to continue rising-unless fiscal reform on a gamble that such flows will there is a concerted effort to adjust the fiscal position continue indefinitely. Nor would it be prudent to of the center and state governments, in a progressive assume that India can simply grow out of its fiscal and phased manner over the next few years. problem. To the contrary, analysis in the Tenth Plan suggests that a sizable fiscal adjustment will be On the surface, these fiscal indicators are worse than required to generate the level of public savings, and those faced in 1991-and worse than in many other provide space for the level of public and private countries that actually suffered a macroeconomic investment, needed to generate 8% growth. crisis. But the risk of crisis in India today is mitigated by the country's strong external position. Based on this analysis, fiscal reforms are needed in Rising external reserves and low levels of short-term the following areas: external debt give the country a very comfortable cushion to counter any speculative attack. Further Taxes. The Tenth Plan targets an increase in tax reducing the risk of a speculative attack is: a pliant revenues from 8.1% of GDP in 2001/02 to financial system (willing to hold large amounts of 10.3% of GDP by 2006/07. Achieving this domestic government debt), limited capital account goal rests on several key assumptions, including convertibility, and a flexible exchange rate. So India a strong recovery in manufacturing growth (the is not vulnerable in the short term to the type of sector with the highest tax buoyancy) and collapse suffered by Russia and Argentina. extending the tax base to the booming services. The Kelkar Committee reports on direct and Even so, the Tenth Plan is right to be concerned indirect taxes essentially endorse the above about the consequences over the medium term of approach, requiring that lower tax rates be leaving the current fiscal situation unchecked. What complemented with the elimination of has emerged in effect is a mixture of "loose fiscal, exemptions, bringing services and agriculture iv Executive Summary into the tax net, and using information 2001/02, about 1.4% of GDP. Recent studies technology to improve tax administration. show that the poor do not benefit from cheap These reforms deserve the highest priority in electricity, either in urban or rural areas, view of the substantial decline in the tax ratio providing little social justification for during the 1990s and the positive impact that a continuing losses. So, the financial and social stronger tax effort would have on reducing case for reform is strong (box 2). Similarly, primary and revenue deficits in the future. food and fertilizer subsidies totaled Rs.352 Subsidies. Financial losses of the power sector billion in 2002/03, also about 1.4% of GDP. reached an alarming Rs.332 billion in These subsidies have distorted the cropping Box 2. Urgent Need for Reforms in Power Distribution Reform of power distribution is essential for both fiscal sustainability and faster growth by providing more efficient supply and quality of power services to industry, farmers, and rural areas. Under the framework of the new Electricity Act (2003), reforms are urgently needed in the following areas: Tariffs. Ensuring that tariffs on average cover costs and yield a reasonable rate of return for the utility-and that regulatory systems have suitable mechanisms and sufficient independence to assure this over time. Achieving phased but time-bound reduction of the cross subsidy paid by industries and services, and improving cost recovery through consumption-based tariffs charged to agriculture and residential consumers. Subsidies. Ensuring that where, for policy reasons, the government wishes to subsidize power, subsidies are clearly delineated, targeted and funded, within fiscally sustainable levels. Developing alternative mechanisms to deliver subsidies while enabling the utilities to operate on a commercial basis. Moving from present flat-rate tariffs to consumption-based tariffs for agriculture water pumping. Restructuring, commercialization, and sector governance. Separating State Electricity Boards into generation, transmission, and distribution businesses. Ensuring that the unbundled utilities have independent boards, financial autonomy, and skilled management with full control over operations and labor force. Reducing transmission and distribution losses, including theft, and improving operational and managerial efficiency in power distribution and supply. Privatizing distribution. Accelerating privatization of the commercially viable segments of the distribution business to lock in the gains from improved operational and managerial efficiencies. Targeting a broader range of potential investors and actively mitigating the perceived policy and regulatory risks. Strategies for rural areas. Developing approaches to shift from the present form of subsidy for electricity consumption to innovative models of provision of capital subsidy for improving access in rural areas and for the poor. Facilitating new entry for timely and cost-effective provision of electricity services. Competition. Opening electricity trading by industries with self-generation, along with other power suppliers, by providing open access to transmission and distribution networks in a phased manner along with the elimination of cross-subsidies over an agreed time frame. Source: World Bank. v India: Sustaining Reform, Reducing Poverty and investment decisions of farmers, improve fiscal management at the state level contributing to natural resource degradation. by: enforcing global caps on borrowing (both Proposals for reforms in these areas-and for on-budget borrowing and off-budget reallocating funds to more productivity- borrowing through special-purpose vehicles); enhancing public investments-are outlined in simplifying the borrowing regime for states by the section on agriculture and rural allowing them to borrow responsibly from development. Petroleum subsidies, which markets within their global gaps while phasing totaled Rs.63 billion in 2002/03, or 0.3% of out borrowing from captive sources; further GDP, are also to be phased out over the expanding the volume of center-to-state medium term. transfers linked to reforms and performance; breaking down artificial distinctions between Financial sector. Indian banks have one of the plan and non-plan expenditures; and highest ratios of government debt to deposits consolidating centrally sponsored schemes, in the world. Financial institutions (including with greater flexibility for states to allocate the insurance and provident funds) that invested funds according to their needs and priorities. heavily in long-term government paper have been making trading profits as interest rates The government debt projections illustrate the continued to fall. But they now face risks from importance of generating primary fiscal surpluses to rising interest rates. Moreover, state provident stabilize or reduce the debt-to-GDP ratio (figure 2). funds have also invested heavily in bonds Without reforms, the debt-to-GDP ratio continues issued by special purpose vehicles and to rise to 107% by the end of the Tenth Plan guaranteed by state governments. The growing period. Under the reform scenario-with lower risk that these guarantees will be called is primary deficits (falling to 0.7% of GDP by reflected in the widening spread on state 2006/07) and higher economic growth (rising to guaranteed bonds relative to central 8% in 2006/07)-the debt-to-GDP ratio is brought government securities. It is thus encouraging down to 95%. With lower interest payments and to note that both the Reserve Bank of India subsidies, the reform scenario also frees up more and the Government of India are working to resources for spending on priority programs establish a clear and transparent framework for guarantees. Returns on provident funds Figure 2. Projected Government and small savings should also be linked to Debt-to-GDP Ratio, 2002/03-2006/07 market benchmarks. Fiscal management. The central government needs to lead by example-by cutting its revenue deficits and providing the right incentives for fiscal adjustment at the state level. Fiscal discipline at the center is likely be reinforced (but not guaranteed) by the new Fiscal Responsibility and Budget Management Bill, which mandates the elimination of the center's revenue deficit by March 2008. Three states have passed similar acts to limit their own deficits, and others are Source: Figure 2.5. following suit. The center can also help vi Executive Summary (including operations and maintenance, social There is also a pressing problem of affordability. services, and basic infrastructure). Both these The Fifth Pay Commission awards in 1996/97 trends-lower primary deficits and better significantly increased spending on civil service expenditure composition-would be good for wages, especially at the state level. Beyond the fiscal growth and poverty reduction. Without reform, the burden, these high salary awards are questionable risks of crisis would steadily build with higher and since the public sector is now paying a substantial less sustainable debt levels over the medium term. premium over the private sector in many job categories (table 3). Recent experience suggests it Delivery of Public Services may be wise to hold off on holding periodic pay Sustained growth is the most powerful driver of commissions. Instead, the Government of India poverty reduction. But poverty reduction also and state governments could opt for limited annual requires investment in human development-for wage increases, or even pursue a freeze for 2-3 health and education are the most important assets of years, followed by a limited relaxation for skilled the poor, allowing them to both contribute to and positions. Alternatively, a permanent pay benefit from growth through higher-paying commission could be established to continually employment. In addition, when incomes fall below analyze and recommend compensation, in minimum standards, the poor and vulnerable need consultation with the states. Whatever system is access to effective social safety nets. Better delivery of adopted, more weight should go to local market social services thus requires increasing the level and comparators in determining salary levels. (more important) the quality of public expenditures The costs of the civil service are raised further in these areas. And this in turn requires improving the by burgeoning pension liabilities at both the governance and productivity of India's civil service. center and state levels. In response, the On the positive side, a variety of reforms already Government of India recently announced a plan being implemented at the center, state, and local to establish a fully funded defined contribution levels could be quickly scaled up and disseminated scheme for new civil servants. This will force across the country. There is also a growing social the payment of pension liabilities as they demand for good governance. These developments accrue, creating a more transparent and present a real opportunity to raise the performance of financially viable scheme. But since this reform the civil service and enhance service delivery. The key will apply only to new civil servants, it will is to push ahead with implementation. contain pension costs only over the longer term. In aggregate numbers, the Indian civil service is Indeed, in the short to medium term, fiscal not particularly overstaffed in comparison with outlays may rise, as the government has to meet other countries. But there is a pronounced the combined costs of the old and new schemes. imbalance in skills mix. Staff profiles need to be Further reforms may therefore be needed, revisited to reduce the number of administrative including changes in eligibility criteria, a and support personnel (particularly at lower possible shift of younger civil servants to the grades) and increase the number of staff involved new plan, and opening the new scheme to in front-line service delivery, including rural private sector workers. These reforms could well schools and health clinics. In addition, reforms are serve as a model for the states to reform their needed to reduce the fragmentation of bureaucratic own pension plans, setting a benchmark for structures and responsibilities. Such reforms would reforming other pension schemes (including the improve coordination, shorten delivery times, and Employee Provident Fund and the Employee generate overall efficiency gains. Pension Scheme) over the medium term. vii India: Sustaining Reform, Reducing Poverty Table 3. Ratio of Average Wages in the Public and Private Sector Selected occupations 1993/94 1999/2000 Professional, technicians, and related workers 1.5 1.7 Engineers 1.1 1.3 Engineering technicians 1.3 1.3 Physicians and surgeons 1.7 2.0 Nurses 2.0 2.0 Teachers 1.8 2.0 Administrative, executive, and managerial workers 1.3 1.4 Clerical and related workers 1.6 1.7 Stenographers, typists, and others 1.7 2.1 General clerks (receptionist, office attendants, and others) 1.5 1.7 Service workers 2.3 2.5 Sweepers, cleaners, building caretakers 1.8 1.9 All 1.9 2.3 Source: Table 3.2. As a general rule, recent wage gains were not skewed government spending, limited access to compensated by any commensurate increase in services, and employee indifference. Civil service the overall quantity and quality of government reform is thus an essential element of any poverty services. To the extent that qualitative reduction program. An effective program of civil improvements have been made, they have often service reform will have to include measures that relied heavily on the application of information achieve the following three objectives: technology to streamline and re-engineer business processes. But even when IT has made Improve access to information. Citizen many functions redundant, civil servants and charters are one vehicle to empower the public powerful unions have often extracted pledges of in dealings with service providers. It is no job losses as the price of allowing the important, however, that such charters be innovations to go ahead. As a result, many line developed in consultation with major departments find themselves in a precarious stakeholders and widely disseminated. NGOs position, with a growing proportion of their can also help in collecting raw data, non-plan resources being taken up by salaries, transforming it into usable information, and over which they have very limited control. disseminating it to a wider audience. Several Another fundamental problem haunting India's states are using IT to improve access to civil service is the failure to use staff information and speed up decisionmaking. productively, pushing the cost structure of many While there is evidence that computerization government functions significantly higher than by itself seems to have an important effect on in the private sector. reducing corruption, the most successful initiatives combine computerization with The burden of weak administration falls extensive business re-engineering. The particularly heavily on the poor, who suffer from Government of India and a number of states viii Executive Summary are promoting greater transparency by and social safety nets. While India has made adopting Right to Information legislation. substantial progress toward better social indicators Strengthen accountability. Internal audit over the past two decades, the rates of procedures need to be strengthened, with clear improvement have not been sufficient to achieve sanctions for corrupt or incompetent officers. the targets set in the Tenth Plan or even the less But the key is to strengthen "external" ambitious Millennium Development Goals. accountability-to the public. The recent Indeed, progress in health indicators has been experience of the Lok Ayukta (Ombudsman) slowing precipitously. in Karnataka seems to be generating good Public spending on health and education in India results. Independence and adequate budgets has risen over the past decade, largely due to the are keys to the success of such initiatives. In sharp increase in wages awarded by the Fifth Pay addition, a comprehensive anti-corruption Commission in 1997. International comparisons strategy should include: a radical overhaul and suggest that India's spending on health and simplification of the procedures for imposing education is in line with other countries at similar major and minor penalties; expanded incomes-though with a more dominant role for "whistleblower" protection; and publication of the private sector in health, and distribution of property and tax returns of senior officials. public spending in education skewed toward the Each state should be asked to pass the Corrupt secondary and tertiary levels. While additional Public Servants (Forfeiture of Property) Act, funding would help, better outcomes depend on which has already been drafted by the Law improving the quality of services. As one Commission. indication, absentee rates for teachers and Reduce political interference. This topic is medical providers are very high in India, sensitive because the right to transfer civil especially in the poorer states (table 4). Since servants is clearly vested within the political absentee workers are on the payroll, it is no leadership under Article 310 of the surprise that public money does not translate Constitution. Yet few would disagree that directly into better outcomes. this power is often abused by both civil The root cause of poor quality services is that servants and politicians. The result in such governments do not focus on social outcomes. states as Uttar Pradesh has been a reduction One way to increase the focus on outcomes is to of average tenure for key senior service generate and disseminate information about positions to less than a year. Compounding progress in service delivery. Parents, patients, and this problem has been the relative absence of beneficiaries should know what they are entitled effective transition mechanisms. Recent to and have a place to lodge complaints when successful reform efforts show the value of services are not received. Providers and having an empowered and dedicated policymakers should know (and be constantly manager in place for several years. Karnataka learning) what works. One critical role of the has gone one step further and limited civil central government, when states have the service transfers, with transfer data posted on primary responsibility for health and education, a public website and more objective cadre is to be an independent source for measuring management committees to approve transfer outcomes. Over time, such measures could be requests. used to hold states accountable for Weaknesses in service delivery are of special improvements-perhaps by conditioning fiscal concern in the social sectors: education, health, transfers on progress. ix India: Sustaining Reform, Reducing Poverty Table 4. Absence Rates from Primary medical care, most of these activities are Facilities, 2003 (%) also much easier to administer. The largest emerging problem in State Primary School Primary Health communicable disease control is the Teachers Care Workers increase in HIV infections and AIDS Andhra Pradesh 31 n.a cases. While estimates vary, there is no Assam 31 58 dispute that the infection is spreading Bihar 26 58 rapidly. The primary focus of policy should be on prevention. There are Gujarat 21 52 many competing needs for public health Haryana 19 35 infrastructure, and it is important that Karnataka 23 43 HIV/AIDS programs neither undercut Kerala 18 n.a the resources to deal with such killers as Orissa 14 35 tuberculosis, malaria, and diarrhea-nor Punjab 18 n.a get marginalized. Rajasthan 23 39 Progress in education has been much Tamil Nadu 17 n.a greater than in health. This reflects the Uttar Pradesh 26 42 greater opportunities for communities Uttaranchal 25 45 and parents to monitor and evaluate school performance. Even so, there are West Bengal 21 43 large variations across states and income n.a. Reliable data not available. groups, and overall progress is Source: Table 3.3. insufficient to attain the Tenth Plan There are two deep problems in the health sector: goals. To accelerate progress in a lack of realism concerning the public sector's role elementary education, the Government of India in the health system, and a lack of priorities for the has launched the Sarva Siksha Abhiyan (Education public sector's possible contribution. Most health for All) program. It aims at providing eight years of care is now given in the private sector and, for the schooling for all children in the 6-14 age group by poor, by very poorly or untrained practitioners. 2010. Achieving this goal, which is also formalized But there is no way to expand free publicly in the 86th Constitutional Amendment, will supplied medical care to replace these private require additional public resources and practitioners. Instead, the government should aim improvements in how they are used. Making to improve the private market, by providing schools more accountable to the community is training, public information and accreditation; critical, possibly by giving parents the right to hire over time, public financing of private provision and fire teachers through local school committees could be increased. Government programs should (as tried in Madhya Pradesh). Localities must be focus on ways to improve health outcomes, allowed the freedom to find their best solutions, including programs outside the health sector (such while higher levels of government provide as those for clean water and sanitation). measures of attendance, learning outcomes, and other information to evaluate progress. Within the health sector, the highest priority for public funds is to combat communicable diseases. Many observers of the Indian administration have Disease control has large externalities, argued that decentralization and local disproportionately benefiting the poor. Relative to empowerment will be essential in improving the x Executive Summary quality of service delivery at the village level. The 1990s, most in the unorganized sector. The most visible achievement of the 73rd and 74th organized manufacturing sector provides only Amendments to the Constitution, ratified in 1992, about 7 million jobs today. Compare that with a has been the high degree of political total labor force of around 406 million, with just decentralization. But progress on the fiscal and under a million workers coming out of agriculture administrative aspects of decentralization has been every year. much more modest and hesitant. In response, India now needs to move from the decentralized Against this background, the Tenth Plan calls for patchwork it has created, toward an faster growth in the industrial sector to create 100 intergovernmental framework that leads to better million or so new jobs over the next decade. The service delivery without increasing fiscal pressures. Plan notes that sustained industrial growth and employment will require a step up in domestic Good fiscal management would suggest reallocating investment, particularly private investment, public funds from central and state schemes into a coupled with higher productivity. International well-designed fiscal framework for local comparisons indicate that India has intrinsic governments-to guarantee their autonomy and advantages, such as a large local market and skilled accountability, while helping them to match workforce, which should allow it to emerge as a resource allocations with local preferences. It would major hub for manufacturing and labor-intensive also suggest creating incentives for local service industries. At the same time, recent studies governments to collect a share of their revenues on the investment climate show that the from local taxpayers (say, through land taxes). Flows performance of India's industrial and service of funds from the center and state governments sectors continues to be constrained by three key should be dependent on good performance and factors: product market distortions, inefficiencies resource mobilization at the local level. in factor markets, and infrastructure bottlenecks. The success in achieving the ambitious targets set Policy Agenda: Improving the in the Tenth Plan will depend crucially on progress Investment Climate in these areas. Industry and Services Product market distortions. Inadequate follow- through on key reforms to create a level playing A wide range of structural reforms stimulated field for investment, both domestic and foreign, investment and growth in industry and services in inhibits industrial performance. So does slow the early 1990s-then momentum in industry progress in trade policy reforms. Tariff protection in slowed in the second half of the decade, especially India is still substantially higher than in most other in manufacturing. Despite recent signs of recovery, developing countries (table 5). The government has the manufacturing sector in India still accounts for many well-justified concerns about the policies of only 17% of GDP, compared with 35% in China other countries that restrict its exports. And it is one and 25-35% in the South East Asian economies. of the most active developing countries in raising Furthermore, India's penetration of world markets these concerns in international fora, such as the in industrial products has not increased much over World Trade Organization (WTO). the past decade, and foreign direct investment (as a share of GDP) is lower than in China and many India has some bargaining leverage to gain emerging markets. As a result of these trends, concessions from other countries. But it should growth in manufacturing employment has also use the WTO process to advance domestic averaged only about 2% a year since the mid- reforms and protect them from local pressure xi India: Sustaining Reform, Reducing Poverty Table 5. Customs Duty Rates in India and Other Developing Countries Country All goods Agriculture Manufacturing India 2001/02 (CD only) 32.3 41.7 30.8 India 2002/03 (CD only) 29.0 40.6 27.4 India 2002/03 (CD+SAD)a 35.0 47.1 33.3 India 2003/04 (CD+SAD)a 32.7 46.8 30.7 Pakistan 2001/02 20.4 21.8 20.2 Pakistan 2002/03a 18.2 13.9 18.3 Brazil 2000 14.1 12.9 14.3 China 2000 16.3 16.5 16.2 Indonesia 2000 8.4 6.3 8.9 Thailand 2000 16.6 39.9 14.6 South Korea 2000 12.7 47.9 6.6 105 developing countries (1996-2000) 13.4 17.4 12.7 Note: Unweighted average rates. CD=Customs Duty. SAD=Special Additional Duty. a. Estimated. Source: Table 4.2. groups. In particular, the government should procedures for the entry and exit of firms need to move aggressively to reduce import tariffs to a be simplified and expedited-for example, through single rate (say, 10%) over the next three to four "single window" clearances. years and phase out remaining tariff exemptions, specific tariffs, and anti-dumping duties. It Inefficiencies in factor markets, coupled with a should also remove other product market weak bankruptcy framework, further constrain the distortions by eliminating the remaining industrial and services sectors: preferential policies for small players, reducing Restrictions on the hiring and firing of workers indirect tax distortions by full and uniform are identified as one of greatest challenges of implementation of the new value-added tax doing business in India. Any registered firm across states, and phasing out remaining limits on wishing to retrench labor can do so only with foreign direct investment (FDI), including the the permission of the state government, which ban on FDI in the retail sector. is rarely granted. The government has recently While the "License Raj" has been largely announced its intention to raise the limit for eliminated at the center, it still survives at the state seeking permission from 100 to 300 workers. level, along with a pervasive "Inspector Raj". But to become effective, this requires Starting a business in India requires 10 permits (6 enactment of legislative changes by parliament. in China), and the median time taken is 90 days The government should also consider (30 in China). Complaints of delays, corruption, amending the Contract Labor Act to allow the and harassment are common. To reduce the costs use of contract labor for all activities-not just of investment related to delays and corruption, all for temporary activities. xii Executive Summary High real interest rates are often cited as Access to reliable power at reasonable cost is a another major impediment to industrial prime concern for most Indian businesses. Not performance in India. Large, creditworthy only does industry receive irregular and low quality borrowers have benefited from the recent power, but it is also charged tariffs much above the decline in interest rates. But the lack of access cost of supply, reducing the competitiveness of to adequate, timely credit on competitive firms. As a result, a large majority of Indian firms terms continues to constrain small and operate their own (captive) generators, medium-size enterprises (SMEs). In response, undermining utility finances. Small industries, banks should make efforts to introduce new unable to afford captive generation, often have to technologies for SME credit and to train and go without power. Power reforms are now widely motivate branch managers to provide loans to accepted as fundamental to improving industrial commercially viable SMEs. The government performance. Urgent priorities are to rationalize can help by facilitating the establishment of power tariffs, depoliticize tariff-setting, and well-functioning credit information implement a phased reduction in cross-subsidies bureaus/credit registries for small borrowers, that operate against industrial consumers. Time-of- updating land and property records for small day tariffs need to be introduced for industries loans, and promoting collateral substitutes. with peak and off-peak rates. Problems with the use and transfer of land also The foregoing measures need to be accompanied affect the performance of larger firms. Indeed, by steps to improve the financial and operational some 90% of land parcels in India are performance of the power utilities by unbundling reportedly subject to disputes over ownership, and commercializing State Electricity Boards, which take decades to settle in court. And ensuring independent regulation, and improving obsolete tenancy and rent control laws keep a sector governance. Privatization should be large part of urban real estate off the market. accelerated to lock in operational and managerial The central government has already abolished efficiencies. The strategy for privatizing the Urban Land Ceiling Act, which previously distribution should consider focusing on the made changes in land use very difficult. But commercially viable segments of the network, only a few states have repealed their while developing alternate strategies for improving corresponding Urban Land Ceiling Acts. services and targeting subsidies in rural areas. The new Electricity Act (2003) establishes the legal Outdated bankruptcy procedures make framework for power sector reform and industrial restructuring almost impossible. But restructuring. But the key will be its this could change when the recently enacted implementation. The government can support Amendments to the Companies Act are put reforms at the state level by imposing rigorous into effect, providing a framework for policies on payments to central generation and liquidating firms outside the court process. transmission utilities, rewarding progress in The repeal of the Sick Industries Companies reducing State Electricity Board losses, and Act is essential for this framework to become improving governance under the Accelerated effective. The recently passed law on the Power Development and Reform Program. enforcement of creditors' rights should also help accelerate industrial restructuring. Speedy, reliable door-to-door transport services are also critical to India's manufacturing Severe infrastructure bottlenecks continue to competitiveness. India has one of the most constrain India's industrial sector performance. extensive transport systems in the world, but it xiii India: Sustaining Reform, Reducing Poverty suffers from severe capacity and quality constraints. Agriculture and Rural Development The Tenth Plan proposes road upgrading programs Promoting more rapid agricultural and rural for 10,000 kilometers, along with access-controlled growth is a major priority for the government. expressways in high-volume corridors. Meeting the Although agriculture contributes only about a Tenth Plan targets will require a significant increase quarter of GDP today, its importance in the in funding from the private sector. In part, this can economic, social, and political fabric of India is far be addressed through better cost-recovery from greater. About 75% of India's poor live in rural users. Much can also be gained in the short to areas, and a large proportion of the rural poor medium term by strengthening the financial depend on agriculture for employment. Total performance and accountability of road agencies factor productivity in agriculture declined between and state public works departments. the 1980s and 1990s due to the slowdown in Indian Railways continues to be a patient that productivity gains from the earlier adoption of resists any bitter medicines, despite the many high-yielding varieties, the decline in public prescriptions available. Reforming the sector will investments in the agriculture sector, and require large-scale financial restructuring, increasing natural resource degradation due to the involving the shedding (or even ring-fencing) of existing incentive framework. noncore assets or businesses. Government policy Looking forward, better agricultural performance also needs to address price distortions resulting will require rebalancing government expenditures from the long practice of cross subsidization from from subsidies towards more productivity- freight to passenger services, which causes enhancing public investments and removing the excessively high freight tariffs, preventing Indian remaining restrictions on domestic trade to Railways from serving the nonbulk, high-margin improve the investment climate for farmers, while transport market. In the ports sector, total berth supporting a regulatory framework that ensures capacity is no longer a serious constraint. But the fair competition. Developing the nonfarm sector low productivity of port equipment and labor continues to cause delays in turnaround and to will also be essential to provide employment increase costs for cargo and containers, especially opportunities in rural areas and support the growth in older ports. of agriculture. The government is keen to promote greater The government's foodgrain policy has led to private participation in the provision and funding mounting buffer stocks and food subsidies in of infrastructure. In the long run, this requires recent years. In response, the government action to address the policy problems that underlie established a high-level committee to develop a investor concerns by raising prices to cost-covering long-term foodgrain policy-with the primary goal levels and establishing a sound legal and of self-sufficiency. The committee's proposals to regulatory framework. In the short run, various remove the rice levy and all restrictions on public-private partnerships involving subsidies, foodgrain trade (except in emergencies) will risk-bearing, and other forms of government improve incentives for the private sector. But other assistance may help attract private investment and key proposals raise concerns. The shift in the close financing gaps. But they can also risk simply underlying principle of the proposed policy from postponing the day of reckoning, imposing serious food security to self-sufficiency, which also ties costs on taxpayers. So they should be seen as farmers to low-value rice and wheat production, temporary measures at best, to be entered into will come at the cost of efficiency. The continuing with caution. large role envisioned for the public sector in xiv Executive Summary foodgrain markets will crowd out private increases and complete decontrol of urea by participation. And the reversion to an untargeted April 2006. Since then, several reform actions public distribution scheme is likely to bring back have been implemented. Continuing the earlier problems of subsidies being captured by commitment to the proposed timetable will nonpoor families and result in higher food significantly reduce fertilizer subsidies over the subsidies. next few years. Perhaps the most contentious issue in foodgrain Water. The government's national water policy policy is the Minimum Support Price (MSP) for promotes the adoption of a comprehensive and rice and wheat. Steady increases in the MSP in integrated approach to planning and managing recent years have encouraged more production, water resources. It gives priority to delivering leading to larger government procurement. Strong good quality water services, making demand- political pressure from states where the largest driven investments in rehabilitation and procurement takes place has stalled government maintenance of infrastructure through greater efforts to contain increases in the MSP. The participation of users in managing systems, proposal to limit the MSP to cover cash costs plus and recovering at least operations and the returns to family labor, land, and capital is a maintenance costs to ensure the longer term step in the right direction. But in the longer run financial and fiscal sustainability of operations. fostering competitive markets would ensure To encourage full adoption of these reforms at remunerative returns to farmers. For this, the MSP the state level, the government recently should be complemented by other schemes in introduced an incentive program to encourage providing a safety net for farmers (such as Targeted recovery of operations and maintenance costs. Public Distribution System and employment large subsidy on the price of schemes). Power. The electricity to farmers has contributed to the The government's agricultural policy of the last financial crises of State Electricity Boards. This three decades has relied on subsidizing key inputs undermines the boards' ability to undertake to promote faster production growth and ensure required investments and maintain day-to-day food security. But there is also broad recognition operations, resulting in deteriorating power that the rapidly rising subsidies are fiscally services to consumers, including farmers. The unsustainable-and crowding out productivity- incidence of subsidies is also heavily regressive. enhancing public investments in rural India should move to a more transparent and infrastructure, irrigation, and technology targeted subsidy mechanism. For this to work, upgrading. Power and water subsidies, to the it is indispensable that there be recovery of at extent they encourage inefficient water use, are also least operating costs, universal metering of leading to salinity, water logging, and declining consumption, payment discipline, and greater groundwater tables in many areas. And fertilizer efficiency of electricity providers. subsidies, concentrated largely on urea, have distorted input use. The priorities are as follows: Product and factor markets. While progress in economic and trade reforms has helped to improve Fertilizer. In 2001/02 the government the incentive framework for agriculture over the announced its policy to rationalize fertilizer past decade, the sector is still hampered by the pricing and to implement the continuing overregulation of domestic trading recommendations of the Expenditure Reforms activities for major agricultural commodities. On Commission for a phased program of price the positive side, the government has temporarily xv India: Sustaining Reform, Reducing Poverty lifted several key regulations such as storage, restrictions. For some states, the benefits from transport and credit control in recent years. But the relaxing tenancy laws are likely to be higher than in overhang of their possible re-introduction others, due to the more advanced discourages both local and foreign investments. commercialization of agriculture (and significant Moreover, some state governments have not lifted amounts of informal leasing) and stronger political the associated state controls. This inevitably raises commitment to reform. These states could serve as marketing margins, putting downward pressure on a starting point for pilots, and yield important farm prices and raising costs to consumers, insights for policy debate and tenancy reforms in reducing the competitiveness of exports. other states. Agricultural import tariffs have increased in recent The Department of Land Resources introduced a years to an unweighted average (including the scheme in the mid-1990s to pilot computerization special additional duty) of about 47%, compared of land records in selected districts nationwide. with an average nonagricultural import tariff of Some states have not only scaled up the program about 31%. With a few exceptions, India is no statewide-they have also implemented the program longer explicitly taxing or using licensing, export in partnership with the private sector. These bans, or quotas to deliberately restrict agricultural initiatives have reportedly contributed to more exports and depress domestic prices, as it did in the efficient and faster service, while reducing the past. But since 2001 it has been exporting stocks of opportunities for corruption through greater rice and wheat accumulated by the Food transparency. Over the longer term, the focus will Corporation of India at prices far below prevailing have to shift to a more holistic approach to domestic prices. It is questionable whether these improving land administration systems at the state subsidized exports are in India's long-term interests level. To be successful, the systems would have to in a more open international agricultural market. meet several other key standards of performance, India should also consider reducing its WTO including security, costs, fairness, and sustainability. agricultural tariff bindings, mostly now at 100% or more, as an external constraint on domestic lobbies Access to rural credit. India has a wide network of pressing for high tariffs. rural finance institutions, but many of the rural poor remain underserved or left out of the formal Access to land. The distribution of land ownership financial system. A key factor constraining better in India has become less skewed since the 1970s, access to rural credit relates to inefficiencies in the with a rising share owned by marginal and smaller formal rural finance institutions. The government farmers. The trend towards landlessness has also been should aim to improve the performance of the arrested. But regulations aimed at increasing the regional rural banks and rural credit cooperatives security of tenure for tenants have had unintended by enhancing regulatory oversight and supervision, adverse effects, leading to large-scale self-cultivation reducing government control and ownership, and by landlords or the adoption of wage labor contracts. strengthening the legal framework for loan Where their implementation was incomplete, they recovery and the use of land for collateral. may also reduce land access and equity. Other priorities for improving access to rural credit There is now a growing consensus, reflected in include: government policy statements, about the need to Liberalizing interest rates by removing the revisit and reformulate current tenancy legislations. existing "cap" for small loans (it has the In considering tenancy reform, it is critical to draw perverse effect of rationing credit available to lessons from states that do not have tenancy small rural borrowers). xvi Executive Summary Improving credit information on rural Rural roads. Most government programs for households, by designating an agency that rural roads are designed to address the could take the lead in collecting and immediate rural accessibility problem, disseminating information on micro without a carefully designed policy and borrowers. institutional framework to ensure the Facilitating the scaling-up and sustainability of sustainability of these investments. Additional existing low-cost microfinance models, such as funds should be allocated for rural road the self-help group bank linkage model and the maintenance, with more coordination by the Grameen bank replicators. Ministry of Rural Development. Community participation offers significant potential for Removing legal and regulatory obstacles to the mobilizing local support to generate resources, development of innovations that can help acquire land, and tailor rural road programs to reduce the costs and risks associated with rural local needs. finance. Rural electrification. India's rural Productivity-enhancing investments. Greater electrification program has focused on emphasis on productivity-enhancing investments extending the grid supply to villages and will be critical to raising agricultural growth and remote areas. But access by rural households developing the rural nonfarm sector. But to be remains low, and power-based economic effective, new investments need to be matched by activities in the electrified villages is minimal. improvements in the quality of public spending, The government plans to accelerate the rural particularly through a sharper focus on electrification program over the coming operations and maintenance, which also involves decade. This needs to be matched by a more significant institutional reforms. If anything, the conducive policy environment, with adequate growth rate is likely to slow down over time, as incentives for service providers and more the deteriorating fiscal situation and the sluggish effective targeting of subsidies to poorer progress on the reform agenda worsen the farmers and rural consumers. Decentralized investment climate. Sectoral priorities are as generation should be encouraged, as reforms follows: are put in place to privatize the commercially Research and extension. India's public viable parts of the sector. agricultural research and extension system is one of the largest in the world. But the Development Prospects and Risks efficiency and effectiveness of these services Continuing progress in poverty reduction will have been called into question. There is a require both higher growth and improved need for a more regionally differentiated delivery of health, water, sanitation, and research strategy, and greater coordination education services. Many of these goals are between the public and private sectors. reflected in the Tenth Plan, which projects an Similarly, the top-down, crop-focused average growth rate of 8% a year and rapid approach to agricultural extension has progress across a range of social indicators. But become outmoded and ineffective in meeting the plan period started with a slowing of growth the needs of farmers. The public extension to an estimated 4.4% in 2002/03. Some of the system needs to become more demand- slowdown was due to external factors on driven, with stronger synergies between agricultural output, including the impact of public and private extension efforts. flooding in some areas and drought in many xvii India: Sustaining Reform, Reducing Poverty Table 6. Macroeconomic Projections: Baseline and Reform Scenarios Indicator Ninth Plan Baseline Scenario Reform Scenario 1997/98-2001/02 2002/03-2006/07 2002/03-2006/07 Real GDP growth at factor cost (% a year) 5.5 5.0 6.5 Agriculture, forestry and fishing 1.8 1.5 2.2 Industry 4.5 5.3 7.1 Services 8.1 6.4 8.0 Investment (% of GDP) 22.5 20.5 27.7 Public 6.6 6.4 7.3 Public, general government 3.1 3.0 3.7 Private 15.9 14.1 20.4 Consumption (% of GDP) 78.8 80.5 73.5 Public 12.5 12.0 12.4 Private 66.3 68.5 61.1 General Government (% of GDP) Fiscal deficit 9.3 11.8 10.3 Primary deficit 3.5 3.6 2.2 Source: Table 6.1. others. While some recovery in growth is wages and pensions, subsidies and interest expected in 2003/04, as the external environment payments, and a shift towards operations and improves, this bounceback is unlikely to be maintenance and investments in key sustained-without a major push to reinvigorate infrastructure-would further "crowd in" private the reform agenda. In the absence of major investment. Improvements in the investment external or domestic shocks, current policies in climate, through the removal of remaining India are likely to translate into a continued bottlenecks in product and factor markets, and growth slowdown, averaging around 5% a year in key infrastructure areas, would increase the over the Tenth Plan period (table 6). productivity of both public and private investment across the economy, including India's By contrast, a comprehensive reform program poor rural areas. More effective delivery of health would allow India to achieve growth of 8% a year and education services, as well as social safety by the end of the Tenth Plan period, with nets, would help accelerate social progress, positive impacts on employment and poverty empowering India's citizens to both contribute reduction (box 3). Reforms to reduce fiscal and benefit from faster economic growth. imbalances at the center and in the states would create space for increased private investment. Accelerating growth and poverty reduction in Improvements in the composition of India cannot be achieved without accelerating expenditure-with less spending on civil servants' growth in India's lagging states. If the trends of xviii Executive Summary the past few years continue, the richer states into more productive areas and removing would have to grow at nearly 10% a year to structural impediments to higher private reach an all-India average of 6.5% during the investment and productivity. The sooner the Tenth Plan period. This is rather unlikely. So, roadmap for these reforms is put in place, and implicit in the envisaged reform scenario is a concrete action taken to show commitment to special effort to correct fiscal imbalances, follow through, the more manageable will be the reallocate public resources to priority programs, adjustment path, and the quicker the payoff in improve public service delivery, and strengthen faster growth and poverty reduction. the investment climate in lagging states. Primary There are other potential risks. Domestically, responsibility for these reforms lies with the Indian politics are often distracted by general or state governments. But the central government state elections and tensions with neighboring can also catalyze and set the pace for reform at countries. Externally, the global recovery is the state level. expected to be slow. While India is still a relatively Of particular importance for poverty reduction closed economy, and therefore somewhat protected and rural incomes are policies to increase from global trends, it does suffer from a loss of agricultural productivity. In the short run, the market share to its major competitors, especially removal of subsidies to foodgrains could reduce China, where reforms have moved ahead much agricultural output in a few states that benefit most faster. And the inflow of remittances into India and from them. But these are also states where other countries in the region may well slow down, significant agricultural diversification can take as the impact of one-off events weakens. So, it place. More important-this reform would free would be risky to gamble that the recent strength resources for agricultural research and in the balance of payments will continue, development and rural infrastructure. providing a counterweight to the deteriorating Simultaneously, faster growth in industry and fiscal situation. continuing rapid growth in services can provide India can be proud of its development record jobs for the labor force released from agriculture. over the past two decades. That record reflects India's large fiscal imbalances pose a serious threat the emergence of a much wider consensus about to sustained growth and development over the the importance of opening up the Indian medium term. The persistence of current fiscal economy to competition. The results in faster trends will, at best, limit growth and job creation. growth and poverty reduction are impressive. But And slower growth would, in turn, speed the India has still fallen behind its main competitors deterioration in debt dynamics. If this negative in East Asia. And poverty remains a reality for cycle continues, a full-fledged fiscal crisis cannot be many Indians, especially those in the poorer ruled out. states of the North and East. The government is right to set ambitious targets for growth and It is politically easy to downplay this risk, hoping social development during the Tenth Plan. The that faster growth and lower interest rates will key now is to implement the policy and eventually solve the fiscal problem. But institutional changes to achieve these goals. experience suggests it would be unwise to sit Sustained progress will no doubt be difficult, back and wait for such a virtuous circle to especially in the politically charged areas of labor, emerge. Instead, the central and state power, and agricultural reform. But those governments will have to be proactive in changes also promise high returns for poverty reducing the fiscal deficit, shifting expenditures reduction. xix India: Sustaining Reform, Reducing Poverty Box 3. Summary of Priority Reforms Fiscal Policy Progressively reduce the primary deficit at the center and in states by completing tax reforms (eliminating exemptions, bringing services into the tax net, and implementing a uniform state value-added tax), reducing power sector losses, and phasing out petroleum subsidies. Reduce financial sector risks by implementing the new securitization law, linking returns on provident funds and small savings to market benchmarks, and establishing a clear framework for managing state government guarantees. Improve fiscal management by imposing greater fiscal discipline on state borrowing and transfers, breaking down artificial distinctions between plan and non-plan expenditures, and consolidating centrally sponsored schemes. Improve the composition of public expenditures, by reducing the share spent on wages, pensions, interest payments, and agricultural subsidies, and increasing investment and operations and maintenance for priority social, infrastructure and agriculture programs. Delivery of Public Services Reduce administrative fragmentation and reform civil service pay policy and pensions. Improve the performance of the civil service and quality of service delivery by improving public access to information, strengthening accountability, and reducing political interference. Refocus health, education, and social safety net programs on outcomes. The central government can be an independent source for measuring progress toward agreed goals. Improve the private market for health care through training, public information, and accreditation. Priorities for public funds are to provide clean water and sanitation, and to combat communicable diseases (including HIV/AIDS prevention). Support the education-for-all goals by providing more public resources and improving resource use in elementary education. Schools should be more accountable to communities and have more local autonomy to find the best solutions. Develop a well-designed fiscal framework for local governments to guarantee their autonomy and accountability. Flows of funds from the center and states should depend on good local fiscal performance and resource mobilization. Investment Climate for Industry and Services Speed up trade reform by reducing average import tariffs and phasing out tariff exemptions, specific tariffs, and antidumping duties. Remove other product market distortions by eliminating preferential policies for small players, implementing a full and uniform value-added tax, and phasing out remaining foreign direct investment restrictions. xx Executive Summary Reduce inefficiencies in factor markets by easing restrictions on hiring and firing of workers, improving access to credit for small and medium-size enterprises, addressing problems in the use and transfer of land, and updating bankruptcy procedures. Ensure access to reliable power at reasonable costs by rationalizing power tariffs and improving the financial and operational performance of State Electricity Boards. Address capacity and quality constraints in transport by improving public sector performance (for roads and rail), mobilizing private investment (including better cost recovery for roads), phasing out price distortions (for rail), and improving the efficiency of existing capacity (for ports). Agricultural Policy and Rural Development Put in place a market-based foodgrain policy that protects the poor through targeted safety nets, while mitigating drastic supply shocks through a cost-effective and well-managed price stabilization mechanism. Reduce input subsidies that are fiscally unsustainable and distorting input use. Savings should be used to fund more productive investments in agricultural research and extension, rural roads, and rural electrification. Reduce regulation of domestic trading activities for major agricultural commodities and eliminate remaining trade policy distortions, including subsidized exports of rice and wheat. Improve access to land by revisiting current legislation on land tenancy and building on successful initiatives to improve land administration. Devise market-based solutions to improve rural access to a larger range of financial services at lower cost. Source: World Bank. xxi CHAPTER 1 INTRODUCTION: ASSESSING DEVELOPMENT OUTCOMES India made good progress in increasing incomes and the states, with rising deficits and worsening public improving living standards over the past decade. expenditure compositions limiting the prospect for After the 1991 balance-of-payments crisis, economic accelerating growth and poverty reduction. growth picked up, income poverty continued to India starts the twenty-first century with a per decline, and many social indicators continued to capita income around half that of China and improve. These developments were supported by Indonesia, countries that were at comparable stages wide-ranging reforms launched in 1991 to open and of development in 1970 (figure 1.1). In its Tenth deregulate the economy. Even though the pace of Five-Year Plan for 2002/03-2006/07, the reform has slowed since the mid-1990s, the Government targets an average growth rate of 8% cumulative changes have so far been substantial, a year. Accelerating poverty reduction requires improving the investment climate. More sectors have setting India on a higher growth path. This chapter been opened to private activity. Trade policy and the reviews the development outcomes of recent years. exchange rate regime have been further liberalized. The remainder of the report proposes policies to And capital markets have been reformed. accelerate development in India. Development progress has been steady but uneven. Figure 1.1. Per Capita Income Trends, Poverty and education indicators improved, India and Comparator Countries, particularly for females. But maternal and under- 19702000 (1995 dollars) five mortality have hardly improved. And unemployment, though still low by international standards, has increased in rural areas and among educated youth. Aggregate outcomes at the all- India level mask sharp and increasing inequalities in income and social development levels across the country, with large parts of the heavily populated northern and eastern states remaining particularly poor and undeveloped. Economic growth slowed after 1997/98, from an Source: World Bank 2002s. annual average of 6.7% between 1992/93 and Poverty Outcomes and Economic 1996/97 (Eighth Plan period), to 5.5% between 1997/98 and 2001/02 (Ninth Plan). Growth slowed Performance further in 2002/03, to an estimated 4.4%, due to Income poverty declined in the 1990s, broadly in the impact of poor rains on agricultural output. And line with earlier trends (figure 1.2).1 As a result, fiscal performance deteriorated at the center and in the share of the population living below the 1 The conventional definition of poverty equates it with income or expenditure levels. In India, the Planning Commission defines poverty as the level of per capita consumer expenditure sufficient to provide an average daily intake of 2,400 calories per person in rural areas and 2,100 calories per person in urban areas, plus a small allocation for basic nonfood items. This report relies on income poverty estimates from the National Sample Survey's quinquennial rounds ("thick samples" of 1983, 1987/88, 1993/94, and 1999/2000). 1 India: Sustaining Reform, Reducing Poverty Figure 1.2. Poverty and Per Capita doubling of per capita income over those two Income Trends, 19831999/2000 decades, a one-third increase in the 1990s alone (see figure 1.2).4 Growth has reduced poverty, but the pattern of growth was also decisive (Ravallion and Datt 1995). Rural consumption growth reduced poverty in both rural and urban areas. Urban growth benefited the urban poor somewhat, but had no impact on rural poverty. Economic growth has also been a key determinant for the improvement in some social indicators, particularly in poor states, where the private sector provides education and health services to a large share of the population. Source: India, Planning Commission; Central Statistical Organization; Deaton (2002). Macroeconomic performance. Overall, India's poverty line declined from nearly half in the early economy performed well in the 1980s and even 1980s, to a little over a quarter in 1999/2000 (26% better after the reforms of the early 1990s (table according to Government of India official 1.1). Inflation remained low, and external estimates or 28.6% according to alternative balances improved. GDP growth accelerated, estimates).2 Internationally comparable poverty from only 3.5% a year in the 1960s and 1970s, to estimates also show a decline in the proportion of nearly 7% a year between 1992/93 and 1996/97.5 people living on less than $1 a day, from 46% in Growth was led by industry and services in the the early 1990s to 39% in 1999/2000.3 1980s and by services in the 1990s (table 1.2). Agriculture, forestry, and fishing expanded slowly Most of the reduction in income poverty has been throughout the two decades. The structure of the driven by economic growth, with higher average Indian economy changed considerably as a result, consumption per capita (Deaton and Drèze 2002). with the share of agriculture declining to one- Although India's per capita growth rates never fourth of total output and the share of services reached East Asia's, the acceleration of growth in increasing to nearly half. But recent trends give the 1980s and 1990s translated into a near cause for concern. 2 Changes in the questionnaire design of the 55th Round (1999/2000) of the National Sample Survey render the official poverty estimates for that year not strictly comparable to those from previous rounds. Several researchers attempted to correct for the changes in the survey methodology. Most estimates (Sundaram and Tendulkar 2002; Deaton 2002; Ravallion and Datt 2002a) point to a 5-10 percentage point reduction between 1993/94 and 1999/2000. Based on the national accounts, Bhalla (2002) contends that conventional poverty measures overstate India's poverty and understate recent progress. However, there are conceptual and measurement differences that lead to discrepancies in the per capita income growth rates implied by the Central Statistics Office's national accounts statistics and the National Sample Survey Office's household level statistics. 3 Poverty estimated using internationally comparable poverty estimate for the mid-1990s, based on an international poverty line of $1 per day with adjustments for purchasing power across countries (Ravallion and Datt 2002b). 4 Econometric analysis (Ravallion and Datt 1996, 2002a) using 23 surveys over 1958-91 and private consumption per capita data from the national accounts reveal an elasticity of -1.2, obtained by regressing the log of the headcount poverty index against the log of private consumption per capita. 5 A recent study by the Reserve Bank of India (RBI 2002c) identified two regime shifts in India's GDP growth series over the past two decades, which caused increases in the trend growth rate of GDP. The first occurred in 1981/82, in the wake of an oil shock and a severe drought. The second break occurred in 1990/91 as a result of the structural reforms and stabilization that followed the balance of payments crisis. 2 Introduction: Assessing Development Outcomes First, fiscal aggregates of the general government medium-scale enterprises continue to face high (center plus states) deteriorated after 1997/98, interest costs. Except in the 1991 crisis, when fiscal with the overall budget deficit expanding from 7% policy clearly encouraged macroeconomic stability of GDP to more than 10% by 2002/03. Why the and growth, it can be argued that fiscal policy has deterioration? A decline in revenue mobilization, kept growth below potential. and a significant increase in government Second, economic growth decelerated, to 5.5% on consumption, driven by wages and pensions of average between 1997/98 and 2001/02, and to civil servants, food subsidies, and debt service. The 4.4% in 2002/03 (see table 1.1). Output from effects of nuclear tests, tight monetary policy to agriculture, which performed poorly throughout keep inflation low, and higher interest rates the 1990s, contracted by 3.1% in 2002/03. worldwide, contributed to higher interest costs. As Industrial growth slowed markedly between a result, resources available for public investment 1997/98 and 2001/02, and expanded at average were constrained, with adverse consequences for rates below those of the 1980s. The exception is infrastructure development and, to less extent, services, which continued to expand rapidly. social programs. Interest rates have declined since, primarily because of low investment demand in Sectoral output performance. Agricultural output India and the current low interest rates worldwide expanded slowly in the 1980s and 1990s. Growth for government and prime borrowers. But the slowed further after 1997, partly a result of public debt burden remains high, and small and extensive droughts in many states and flooding in Table 1.1. Macroeconomic Trends Over the Past Two Decades 1980s 1990s 1992/93- 1997/98- 2002/03c 1996/97a 2001/02b GDP growth (% a year) 5.6 5.8 6.7 5.5 4.4 Agriculture, forestry, and fisheries 3.4 3.0 4.7 1.8 -3.1 Industry 7.0 5.8 7.6 4.5 6.1 Services 6.9 7.6 7.5 8.1 7.1 Investment rate (% of GDP) 22.0 23.0 23.3 22.5 22.1 Private 10.0 7.8 8.0 6.6 6.3 Public 12.1 15.2 15.3 15.9 15.7 Inflation (Wholesale Price Index, % a year) 8.0 8.1 8.7 4.9 2.5 General government deficit (% of GDP) 8.1 7.8 7.2 9.3 10.4 Current account balance (% of GDP) -2.1 -1.4 -1.2 -0.7 1.0 External reserves (months of goods and 3.3 5.6 5.9 7.0 11.0 services imports, end of period) a. Eighth Plan period. b. Ninth Plan period. c. Estimated. Source: Central Statistical Organization. 3 India: Sustaining Reform, Reducing Poverty Table 1.2. Sectoral Shares of GDP, Factor Cost, combined with lower external demand 1980/81 and 2001/02 and rising interest rates, led to a (%) slowdown in industrial investment and growth after 1997/98. Industry has only Sector 1980/81 2001/02 recently begun to show signs of recovery, Agriculture, forestry, and fishing 38 25 with the index of industrial production suggesting a recovery, particularly in Industry 26 26 capital goods. Services 36 49 Total 100 100 Growth of the services sector has been strong and broadly based. One of the Source: Central Statistical Organization. reasons is the rapid expansion of information technology, which has others. Two other factors contributed to the turned India into one of the world's leading slowdown. First was the dwindling impetus from providers of software (box 1.1). But other services the green revolution that increased productivity have also expanded, such as transport, trade, and increases in Punjab, Haryana, Andhra Pradesh, and financial services. The national accounts also western Uttar Pradesh. Second was the limited reflect an increase in the value added by public public investment in agricultural infrastructure. administration. But if GDP estimates are corrected Instead, an increasing share of public resources for for the "spurious" addition to growth caused by agriculture was spent on the minimum support the use of the wage bill to estimate the value added price for foodgrains. This program has given of government services, annual GDP growth farmers little incentive to diversify. It has filled between 1997/98 and 1999/2000 would have been government storage facilities with grain stocks lower by about half a percentage point (Acharya while keeping the market price for foodgrains 2002a). artificially high. Slow agricultural growth is a concern not so much because of its contribution to Investment. Previously enabling phases of India's overall output or food security-but because acceleration and stability in periods of slowdown of the sector's importance in the country's (RBI 2001a), investment declined markedly after economic, social, and political fabric. Agriculture 1997/98, raising concerns about future growth.6 still provides employment to a large share of India's Public investment was clearly crowded out by population and an even larger share of the poor. expanding public consumption and debt service. Several economists agree that the slowdown of Industrial growth slowed sharply after the mid- public investment in the 1990s contributed to the 1990s. Following liberalization in the early 1990s, slowing of private investment, as there appears to investment and industrial output expanded be a crowding-in phenomenon between certain rapidly. But because demand failed to expand as types of public and private investments rapidly as expected, and with greater competition (Sundarajan and Thakur 1980 and RBI 2001a). from imports, industry was left with excess capacity. Simultaneously, the domestic policy Private investment slowed for several reasons. environment did not support productivity Following the high growth rates of the early increases. Infrastructure bottlenecks and 1990s, firms invested and borrowed heavily in the distortions in product and factor markets, mid-1990s, building capacity for a continuing 6 Given the low openness of India's economy, external demand has played a small role in influencing business cycles. 4 Introduction: Assessing Development Outcomes Box 1.1. India's Success in Information Technology India has emerged as a leader among developing countries in providing cross-border information services. Although the information technology (IT) industry in India has been around for more than three decades, its takeoff into a major software business is recent, with Bangalore, Hyderabad, Chennai, Mumbai, and Pune emerging as competitive IT hubs. Some critics assert that India's "new economy" has little to offer to the majority of Indians who are not engineers-and that it is essentially an export enclave. Others point out that India cannot live off IT services alone. There is some truth to these assertions, but India's new economy, beyond making an increasing contribution to GDP and exports, also sets an example. It grew from $1 billion (or 0.3% of GDP) in 1990/91, to $9.6 billion (or 2% of GDP) in 2001. And the share of IT (mainly software) in total exports jumped from 1% in the early 1990s to 18% in 2001. Several factors contributed to this takeoff. The skilled English-speaking workforce coming out of India's engineering schools and earning lower wages than European and US counterparts. The low dependence of IT on physical infrastructure. And introducing current account convertibility and easing controls and regulations in the early 1990s. IT-enabled services are also expanding rapidly in India, such as back-office operations, remote maintenance, accounting, public call centers, medical transcription, insurance claims, and other bulk processing. Such services have the potential for broader job creation than IT itself. Source: The Economist; World Bank. expansion in domestic demand. Businesses The balance of payments has strengthened invested on the expectation that the pace of considerably in recent years. The performance of regulatory and infrastructure reform and merchandise exports has been somewhat erratic-as investment would remain rapid-and thus the stimulus from the steep real depreciation of the contribute to higher productivity investment. rupee in the early 1990s faded, replaced by upward Meanwhile, trade reform left some sectors more pressure. Sluggish domestic demand growth, open to competition, while they still faced however, has more than offset the impact of gradual behind-the-border constraints to improving relaxation of import barriers, and import growth productivity. As the pace of reform slowed, has been modest in recent years. The trade deficit interest rates rose, and the expected demand from has thus roughly halved since 1999/2000-from high overall growth rates failed to materialize, around $12 billion to around $6 billion in many firms found themselves saddled with excess 2002/03. Exports of IT services have increased capacity and debt. sharply, and remittances have edged up. The current balance, which swung into a deficit of 3.4% External sector. India's integration into the global of GDP in 1990/91, has shifted to a small surplus. economy increased in the 1990s. The real depreciation of the rupee after the 1991 crisis Capital inflows picked up strongly in response to promoted exports, and the reduction of import the reforms of the early 1990s but have since been barriers allowed more foreign goods into the more modest. Foreign direct investment and equity country. Exports of goods and nonfactor services inflows have eased from their peaks, and borrowing rose from 7.5% of GDP in 1990/91 to 10.5% in from both official and private creditors has 2001/02. typically been more moderate. The external debt 5 India: Sustaining Reform, Reducing Poverty has risen only modestly, falling from almost 40% 1.3). Unemployment rates based on National of GDP in the early 1990s to around 23%. The Sample Survey data have been traditionally low in combination of an improving current balance and India.7 But all measures show an increase in even modest capital inflows has been enough to unemployment between 1993/94 and 1999/2000, allow a substantial buildup of reserves, from $17 explained almost entirely by an increase in billion in 1995/96 to more than $80 billion today- unemployment in rural areas (figure 1.3 and equivalent to almost 12 months of imports. statistical annex table A21). Disaggregated The external sector continues to play a modest Figure 1.3. Unemployment Rates, role, and India remains much more closed than Current Weekly Status, 1987/88-1999/00 other large Asian economies, where exports account for much larger shares of GDP-29% in China, 34% in Indonesia, and 41% in the Republic of Korea. India's share of world merchandise exports edged up from 0.5% in 1990 to 0.7% in 2001, but remains relatively modest for the size of the economy. The Government's cautious approach to opening the economy further in recent years reflects a desire to avoid a repetition of the balance-of-payments crisis of the early 1990s. Fiscal imbalances are re-emerging. And domestic vested interests, concerned about their ability to compete against foreign companies, resist Source: India, Planning Commission 2001b. further trade liberalization. unemployment figures in the rural sector suggest Unemployment. Jobless rates in India are not high that this deceleration in rural employment growth by international standards, but recent trends have is due to a decline in employment in agriculture raised concern, as reflected in the Tenth Plan (table and the low capacity of rural industry and services Table 1.3. Unemployment Rates, to absorb the labor released from agriculture. The India and Comparator Countries, share of employment in the organized sector Selected Years (%) remains low, and unemployment rates are high among certain population groups, such as urban Country Year Unemployment Rate educated youth, and in certain states, such as Kerala, Tamil Nadu, and West Bengal. India 1999/2000 4.4 China 1996 3.0 Social Outcomes Indonesia 1998 5.5 Social progress in India has been uneven. Education Brazil 1998 9.0 indicators have improved markedly, but progress in health has been mixed (table 1.4). For the first time Pakistan 2000 5.9 since independence, the absolute number of illiterates Source: ILO 2001. in India declined-between 1991 and 2001. Literacy 7 The National Sample Survey Organisation provides four different measures of unemployment, which capture different facets of the labor market situation: Usual Principal Status, Usual Principal and Subsidiary Status, Current Weekly Status, and Current Daily Status. 6 Introduction: Assessing Development Outcomes Table 1.4. Progress on Social Indicators, 1980-2000 Indicator 1980s 1990s 2000 Poverty Poverty incidence (%) 44.5 36.0 26.1 Adjusted poverty incidence (%) n.a. n.a. 28.6 Demographics Population (millions) 685 846 1,027 Rate of population increase (%) 2.4 2.2 n.a. Overall sex ratio, ages 0-4 (females per 1,000 males) 978 955 927 Education Overall literacy rate: 7+ years (%) 44 52 65 Female literacy rate as a percent of male literacy rate (%) 53 61 71 Net enrollment rate (NER): lower primary (%) n.a. 71 77 Net enrollment rate (NER): upper primary (%) n.a. 70 74 Female NER as % of male NER: lower primary (%) n.a. 84 90 Female NER as % of male NER: upper primary (%) n.a. 78 86 Dropout rate, grades 1-5 (%) 54 45 40 Health Life expectancy at birth (years) 56 60 61 Infant mortality rate 0-4 years (per 1,000 live births) 115 79 68 Under-five mortality rate (per 1,000 live births) 152 94 95 Maternal mortality rate (per 100,000 live births) n.a. 424 540 Malnourished children, ages 0-3 (%) n.a. 53 47 Prevalence of HIV (million people) n.a. 3.5 4.0 Sanitation Share of people with access to improved water resources (%) n.a. 68 78 Share of households with toilet facility (%) n.a. 30 36 Notes: Poverty estimates are for 1983, 1993/94 and 1999/2000. Demographics and literacy rates are for 1981, 1991, and 2001. Enrolment rates are for 1981, 1991, and 2000. Dropout rates are for 1982, 1993, and 1999. Health and sanitation data for 1992/93 and 1998/99. HIV prevalence is for 1998 and 2001. Improved water resources defined as access to piped drinking water and handpumps Sources: Poverty-India, Planning Commission based on National Statistical Survey; Deaton 2002. Demographics-India, Office of the Registrar General 1981, 1991, 2001. Education- National Statistical Survey; India, Office of the Registrar General 1981, 1991, 2001; India, Department of Education. Health-India, Office of the Registrar General 1981, 1991, 2001; National Family Health Survey, Sample Registration System. HIV-National AIDS Control Organisation. Sanitation- India, Office of the Registrar General 1981, 1991, 2001; National Family Health Survey. 7 India: Sustaining Reform, Reducing Poverty rates rose, particularly for women. Enrollment rates of Economic and Social Outcomes: primary-age children rose, and the gap in the A Regional Perspective enrollment ratios of boys and girls narrowed. India's good aggregate performance masks divergence Health indicators in the 1990s improved slowly or, in per capita incomes, poverty, and other indicators of in some cases, not at all. Between 1992/93 and well-being between richer and poorer states.9 1998/99, the infant mortality rate fell from 79 per 1,000 live births to 68, and population growth Poverty declined in both poorer and richer states, slowed. But there has been little progress in but the progress in richer states has been greater. An reducing India's high maternal mortality and important part of the explanation is that economic under-five mortality rates and in addressing growth has been slower in the states that were poorer malnutrition. Many of these outcomes have to do to start with (Deaton and Drèze 2002).10 Faster not only with health policy, but with slow progress population growth in states with initially higher in improving access to safe water and sanitation. incidences of poverty has concentrated poverty in India's northern and eastern states (table 1.5). In An estimated four million people in India are now 1999/2000, 76% of India's poor lived in states with infected by HIV/AIDS, and the rate of infection is per capita incomes lower than the all-India average. increasing. The preference for male children Indeed, 54% of the poor now live in four states continued to increase in the 1990s.8 And although alone: Uttar Pradesh, Bihar, Orissa, and Madhya polio has disappeared from most countries, India is Pradesh. So making progress in poverty reduction in one of seven where polio is endemic, accounting India requires faster growth in the lagging states. for 85% of all confirmed polio cases in the world in 2002 (World Heath Organization 2002). These are also states with weaker state institutions, and where government finances are most severely These worrisome trends are somewhat surprising. stressed (chapters 2 and 3). Recent research by the Worrisome, because they suggest that increased World Bank and the Confederation of Indian public expenditures alone will be insufficient to Industry suggests that a weaker investment climate improve outcomes. Public expenditures on health in these lagging states may also be behind this and education increased over the 1990s. Surprising, slower growth (chapters 4 and 5). because the 1990s witnessed a large increase in compensation to civil servants, including education These diverging trends have translated into large and health professionals, which could have disparities of incomes and other indicators of living contributed to improvements in the delivery of basic standards (figure 1.4). Average per capita incomes in education and health services. There is no evidence 1997-2000 varied from more than Rs15,000 in that it did. To the contrary, households (particularly Maharastra, Punjab, Haryana, and Gujarat, to below poor households) are increasingly resorting to the Rs7,500 in Orissa and Uttar Pradesh, and below private sector for education and health services. Rs5,000 in Bihar. Disparities in per capita income 8 The difference is due to female infanticide, the neglect of female children, and the abortion of female fetuses. 9 See, for instance, Nair (1985), Chaudhury (1966), Majumdar and Kapoor (1980), Rao, Shand, and Kalirajan (1999), Aiyar (2001), and Sachs, Bajpai, and Ramiah (2002). This is similar to the findings for China's provinces. 10Recent trends suggest that relative economic performance of India's poorest states is improving, partly because they are growing faster and partly because growth in previously fast growing states is slowing. These trends should be interpreted with caution because recent gross state domestic product estimates are subject to considerable revisions and establishing convergence or divergence rigorously requires a time series longer than just 4-5 years. 8 Introduction: Assessing Development Outcomes Table 1.5. Concentration of Poverty in India, 1983-1999/2000 (% of total number of poor people) Region 1983 1987/88 1993/94 1999/2000 Poorer statesa 70 70 71 76 Richer statesb 27 28 26 22 Others 3 2 3 3 Total 100 100 100 100 a. Includes Andhra Pradesh, Assam, Bihar, Kerala, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal. b. Includes Gujarat, Haryana, Karnataka, Maharashtra, Punjab, and Tamil Nadu. Source: World Bank staff calculations, based on India, Planning Commission. between richer and poorer states are mirrored in Figure 1.4. State-Wise Per Capita indicators of poverty, health, education, safe water, and Income, Three-year Average, sanitation. The average person born in Maharastra in 1998/99-2000/01(rupees) the mid-1990s was expected to live 65 years, but a person born the same year in Bihar, Orissa, or Assam would not be expected to live past age 57. The exception is the number of females per 1,000 males, worse and deteriorating faster in richer states, such as Haryana, Maharastra, Delhi, and Punjab. Accelerating Development in India: Goals and Policy Agenda Increasing growth to 8% and accelerating progress in a wide range of living standards indicators are the goals set out in the Government's Tenth Plan (box 1.2). But macroeconomic vulnerabilities and structural impediments limit India's ability to accelerate development, as the Plan and the most recent Economic Survey recognize. Meeting these Source: Central Statistical Organization. goals will require a radical departure from current Plan. These reforms can be grouped into two broad policies. Some of the structural weaknesses may areas. The first is improving the management of already help explain the growth slowdown of the public resources, by reducing budget deficits, past five years, suggesting that the high growth rates reallocating spending to more productive of the mid-1990s were an outlier, not a shift to a expenditures, and enhancing the quality of service higher growth path. They also help explain the delivery. The second is improving the investment mixed performance in improving living standards climate and raising productivity in industry, services and the persistence of regional disparities. and agriculture and rural areas. The concluding chapter looks at the potential impact of these reforms The two parts of this report look at the policy agenda on growth and poverty reduction-and the main risks to raise growth and achieve the goals of the Tenth that may jeopardize their realization. 9 India: Sustaining Reform, Reducing Poverty Box 1.2. Targets for the Tenth Plan and Beyond Macroeconomic M Increase annual economic growth to 8% during the Tenth Plan period and to 9.3% during the Eleventh Plan period. M Double per capita consumption level in 13 years: private consumption expenditure growth at 6.9% a year and per capita consumption growth at 5.3% a year in the Tenth Plan. M Achieve 12.4% annual growth in exports. M Restore agricultural growth to 4% a year and increase industrial growth to 8.7% and services growth to 9.3% over the Tenth Plan period. M Reduce the gross fiscal deficit of the center and states from 10.4% of GDP in 2001/02 to 6.5% of GDP in 2006/07. M Increase the investment rate to 28% and the savings rate to 27% of GDP. Poverty M Reduce the poverty ratio from 26% to 21% by 2007 and to 11% by 2012. Demographics M Reduce population growth from 21.3% between 1991 and 2001 to 16.2% between 2001 and 2011. Employment M Provide gainful, high-quality employment to at least the new additions to the labor force. M Reduce unemployment to 5.3% by 2006-07. Education M Ensure that all children are in school by 2003 and that all children complete 5 years of schooling by 2007. M Reduce gender gaps in literacy and wage rates by at least 50% by 2007. M Increase the literacy rate to 75% during the Plan period. Health M Reduce the infant mortality rate from 70 per 1,000 live births to 45 by 2007 and to 28 by 2012. M Reduce the maternal mortality rate to 2 per 1,000 live births by 2007 and to 1 per 1,000 live births by 2012. M Reduce the average prevalence of underweight children under three from 47% to 40% by 2007. M Reduce by half severe undernutrition in children ages 0-6. M Achieve zero growth of HIV/AIDS infections by 2007. M Increase the use of public health facilities from 20% at present to 75% by 2010. Sanitation M Provide all villages with sustained access to potable drinking water within the Plan period. M Clean major polluted rivers by 2007 and other notified stretches by 2012. Environment M Increase forest and tree cover to 25% by 2007 and 33% by 2012. Source: India, Planning Commission 2003. 10 PART I POLICY AGENDA: MANAGING PUBLIC RESOURCES The public sector has always played a major role in available, the delivery of services to the poor is India's development strategy. Reforms in the constrained by weaknesses in public institutions 1990s reduced the role of the state and improved and the regulatory framework for private the environment for private investment. But activities. developments in the public sector continue to have a major impact on the prospects for Chapter 2 reviews the debate over fiscal economic growth and poverty reduction. That is sustainability, proposing reforms in fiscal policy why the recent deterioration in the fiscal position and public resource management to steadily reduce at the center and in the states is cause for concern. the primary deficits at the center and state levels- The center and states now spend almost all their and to improve the composition of public revenues on interest payments, subsidies, civil expenditure. Chapter 3 considers longer term service salaries and pensions, administration, and reforms in the civil service to improve the delivery defense. Of particular concern are power sector of public services. It looks at the health and losses, placing massive stress on almost all state education sectors and at social safety nets, budgets. This leaves limited resources for public suggesting possible reforms to improve the investment, just as large deficits threaten to crowd prospects for achieving the targets set by the Tenth out private investment. Even when funds are Plan and the Millennium Development Goals. CHAPTER 2 FISCAL POLICY India's balance-of-payments crisis in 1991 followed guarantees in support of loss-making public an acceleration in economic growth to 5.6% a year enterprises, largely in power and irrigation, in the 1980s from a trend of 3.5% over the previous amounted to 12% of GDP. three decades. Large fiscal deficits fed into current account deficits and depleted foreign exchange In addition to the big rise in the debt burden, the reserves, pushing India to the brink of default in deteriorating quality of the fiscal stance in the 1991. The general government fiscal deficit (center 1990s has been another serious concern. Revenues and states consolidated) averaged 9% of GDP fell considerably during the Ninth Plan period before the crisis (figure 2.1). It then fell sharply relative to the second half of the 1980s (table 2.1). during the high growth and fiscal restraint of the While 2002/03 shows a large revenue increase, it is Eighth Plan period, but resumed growing equally based on the budget estimate for states, which sharply after 1997/98, returning to the 9-10% of tends to be optimistic. Compared with the average GDP range in the Ninth Plan period. for the second half of the 1980s, capital expenditure fell by more than three percentage The general government debt-to-GDP ratio rose points of GDP during the Ninth Plan, while the from about 58% in 1985/86 to 85% of GDP in sum of interest, administration, and pensions rose 2002/03, at which time public sector debt (general by three percentage points of GDP-and a massive government plus central public enterprises) stood 22 percentage points of revenue. Revenue deficits at 95% (see figure 2.1). Contingent liabilities from more than doubled, with spending on interest, administration, and pensions crowding out that Figure 2.1. General Government Deficit on social and physical infrastructure. The fiscal and Debt Stock, 1985/86-2002/03 improvement secured in the Eighth Plan period (% of GDP) involved a large compression of capital spending.11 At the center, revenues declined substantially during the Ninth Plan period relative to the pre- crisis benchmark, while interest payments, subsidies,12 civil service salaries13 and pensions, administration, and defense literally consumed 100% of revenues (table 2.2). The primary deficit fell by half, while the revenue deficit increased Source: India, Ministry of Finance, budget documents (center); substantially-as rising interest payments displaced RBI; IMF;World Bank staff estimates. capital spending. The fiscal deficit has been 11It was hoped the private sector would step into the breach and invest in infrastructure, but this has not happened on the desired scale except for telecommunications. As noted in RBI (2003a), a bigger private role in infrastructure would require institutional reform and "economically efficient user charges to ensure the reasonable return on investment." 12Explicit budgetary subsidies. 13Excluding railways and posts and telecommunications. 13 India: Sustaining Reform, Reducing Poverty Table 2.1. General Government Fiscal Trends, 1985/86-2002/03 (% of GDP) 1985/86- 1992/93- 1997/98- 2002/03c 1989/90 1996/97a 2001/02b Revenues 19.4 17.9 17.0 18.4 Current expenditure d 22.1 21.5 23.1 25.3 Social services 5.4 5.0 5.6 5.7 Economic services 6.5 5.8 5.5 6.5 General services 9.5 10.3 11.7 12.8 Capital expendituree 6.4 3.6 3.2 3.5 Gross fiscal deficit 9.0 7.2 9.3 10.4 Memo Primary deficit 5.3 2.1 3.5 3.8 Revenue deficit 2.6 3.6 6.1 6.9 Interest 3.8 5.1 5.8 6.5 (Irrigation+power+transport)/GDP 4.7 3.5 3.5 3.8 (Interest+admin.+pensions)/GDP 6.3 8.1 9.2 10.1 (Interest+admin.+pensions)/revenue 32.6 45.1 54.3 54.8 a. Eighth Plan. b. Ninth Plan. c. Revised estimates for the center and budget estimates for the states. d. Refers to revenue expenditure in the budget. e. Refers to capital outlay and net loans and advances from the center to the states. Source: India, Ministry of Finance, budget documents (center); Central Statistical Organization; RBI 2001b; World Bank staff estimates. reduced, but the fiscal stance has worsened. in central taxes plus grants almost fully explains the According to the revised estimates for 2002/03, there decline in revenues in the Ninth Plan period relative has been an encouraging increase in revenues, but to the second half of the 1980s. Once again, the interest payments, the primary deficit, the revenue signs of a deteriorating fiscal stance are deficit, and the gross fiscal deficit have all increased. unmistakable. Interest spending has risen, capital expenditure has declined, and developmental Trends in revenues and expenditure at the spending stagnated, even though the states have consolidated state level mirror those at the center, primary responsibility under the Constitution for except that the gross fiscal deficit rose significantly poverty reduction and the people's welfare. after falling during the Eighth Plan period (table 2.3). Revenue deficits have grown alarmingly, while A mechanical comparison of the numbers for the capital expenditures were cut-in part to general government, center, and states14 shows accommodate growing interest payments. The share that most of the increase in the general 14 Note that the general government gross fiscal and primary deficits differ from the sum of the respective deficits at the center and states because of the netting out of interest paid by the states to the center and net lending from the center to the states (which is a component of capital expenditure). 14 Fiscal Policy Table 2.2. Trends in Central Government Finances, 1985/86-2003/04 (% of GDP) 1985/86- 1992/93- 1997/98- 2002/03c 2003/04d 1989/90 1996/97a 2001/02b Revenues 10.4 9.2 8.9 9.7 9.3 Tax revenue (net) 7.8 6.8 6.2 6.7 6.8 Nontax revenue 2.5 2.5 2.7 3.0 2.6 Current expenditure 12.9 12.1 12.7 13.9 13.4 Interest payments 3.2 4.3 4.6 4.7 4.5 Subsidies 1.8 1.2 1.3 1.8 1.8 Salaries 0.0 1.1 1.0 1.3 1.2 Pensions 0.4 0.4 0.7 0.6 0.6 Defense 2.5 1.6 1.7 1.7 1.6 Capital expenditure 4.3 2.2 1.8 1.8 2.0 Capital outlay 2.6 1.4 1.1 1.2 1.5 Net lendinge 1.7 0.8 0.7 0.6 0.4 Gross fiscal deficitf 6.9 5.1 5.6 6.1 6.1 Memo Primary deficit 3.7 0.8 1.0 1.3 1.6 Revenue deficit 2.5 2.8 3.8 4.3 4.1 a. Eighth Plan. b. Ninth Plan. c. Revised estimates. d. Budget estimates. e. Excludes state's share of net small savings loans. f. Divestment receipts are treated as a financing item and not as revenues in computing the deficit. Source: India, Ministry of Finance, budget documents (center); World Bank staff estimates. government's revenue deficit between the second suffered from rising interest rates over the 1990s in half of the 1980s and the Ninth Plan period is part because of the high, administratively traceable to a big deterioration in state finances. determined interest rates on "small savings" loans But the underlying causes are a complex mix of (Govinda Rao 2000). fiscal developments at the center and states. For example, transfers (tax shares, grants, and loans) Government Debt Dynamics and from the center to states declined from 7.4% of External Vulnerability GDP in 1985/86 to 5% in 2002/03. Similarly, the Despite the growing debt burden and rising Fifth Pay Commission has had a big impact for revenue deficits, some are of the view that the large states, which were following the example of the fiscal deficit is not a serious problem because the center (Acharya 2001, 2002a). The states have also Reserve Bank of India's foreign exchange reserves 15 India: Sustaining Reform, Reducing Poverty Table 2.3. Trends in State Government Finances, 1985/86-2002/03 (% of GDP) 1985/86- 1992/93- 1997/98 2002/03c 1989/90 1996/97a -2001/02b Revenues 12.2 11.8 11.0 12.0 Share in central taxes 2.7 2.6 2.4 2.5 Grants from the center 2.2 2.1 1.7 2.2 Current expenditure 12.3 12.6 13.3 14.5 Education 2.6 2.5 2.7 2.7 Health and family welfare 0.8 0.7 0.7 0.7 Agriculture and allied services 1.1 0.9 0.8 0.7 Rural development 0.8 0.7 0.5 0.5 Interest payments 1.4 1.9 2.4 3.0 Administrative services 1.2 1.2 1.2 1.2 Pensions 0.4 0.7 1.0 0.9 Other 3.9 4.0 4.0 4.6 Capital expenditure 2.7 1.9 1.9 2.2 Capital outlay 1.9 1.5 1.5 1.8 Loans and advances (net) 0.9 0.4 0.4 0.4 Gross fiscal deficit 2.8 2.6 4.2 4.7 Financed by: Internal debt (net) 0.5 0.5 0.7 0.6 Loans from center (net) 1.8 1.2 0.9 0.5 Provident and insurance funds (net) 0.4 0.5 0.6 0.5 Memo Primary deficit 1.4 0.7 1.8 1.6 Revenue deficit 0.1 0.7 2.3 2.5 a. Eighth Plan. b. Ninth Plan. c. Revised estimates. Source: RBI bulletins; World Bank staff estimates. are at record levels, as are food stocks.15 They assert eventually grow out of its debt problem. that the high fiscal deficit has countered the Developments over the past 18 months appear slowdown in the private sector and that India will superficially to support this. Inflation and interest 15For a statement of this view and a refutation, see RBI 2003a. 16 Fiscal Policy rates have reached their lowest levels ever. Foreign But the increase in IT-related exports and exchange reserves have continued their remarkable remittances from abroad, which have contributed growth. And according to banks, the demand for to unprecedented back-to-back current account credit from industry remains low, while there is surpluses over the past two fiscal years, might well considerable excess capacity in manufacturing. continue-though the bulk of the increase in the Reserve Bank of India's reserves is still explained Arguing in favor of a fiscal consolidation is the by the capital account. If capital flows subside and worsening trend in debt dynamics (see below). It is the global economy picks up, interest rates will one thing to run a 10% deficit when general once again be determined by medium-run government debt is less than 60% of GDP, as it was inflationary expectations, molded by fiscal and in 1985/86. But it is quite another when that debt macro fundamentals. As analyzed here, they is more than 25 percentage points of GDP higher, strengthen the case for a fiscal adjustment. as it is today, with guarantees amounting to another 12% of GDP. Moreover, the increase in Government Debt Dynamics the general government debt-to-GDP ratio has Data on net public debt-defined as general accelerated from less than 2 percentage points of government debt minus net domestic assets and GDP per year over the first three years of the Ninth net foreign assets of the Reserve Bank of India plus Plan period (1997/98 to 1999/00) to more than its nonmonetary liabilities-capture compactly the 4.5 percentage points over the last three years joint position of public debt dynamics and (2000/01 to 2002/03), despite the low interest international liquidity (table 2.4).17 Except for the rates. Interest rates on government debt have fallen primary fiscal deficit and current account balance, sharply at the margin. But they will have to persist there was an across-the-board deterioration during for several years to improve the debt dynamics, the Ninth Plan relative to the second half of the driven by the weighted average yield of all 1980s and an even more striking deterioration outstanding debt minus the growth rate. relative to the Eighth Plan. General government debt fell from 71% of GDP at the end of 1989/90 The second issue needing a judgment is how long to 65% at the end of the Eighth Plan period. But interest rates will stay low and whether this will be it then rose an alarming 15 percentage points by enough to stimulate growth without a fiscal the end of the Ninth Plan, and another five adjustment and faster structural reforms. Interest percentage points the following year, rates have been driven by a combination of capital notwithstanding record low interest rates. Net flows and weakness in the world economy, which public debt displays a similar trajectory: the rapid has pushed OECD interest rates to 50-year lows accumulation of reserves is being offset by rising (World Bank 2003c). To the extent that capital government debt and sterilization. flows into India have been driven by one-off events since September 11, 2001-including fears of Interest payments consumed less than 20% of total increased scrutiny of accounts held overseas as part revenues in the pre-crisis period, compared with of anti-money laundering drives or by the over 30% during the Ninth Plan period. Revenue instability in Iraq-it would be risky to slow fiscal deficits doubled from less than 3% in the second reform on a gamble that such flows will continue half of the 1980s to 6% during the Ninth Plan indefinitely.16 period and beyond, capturing a deterioration in 16 Interestingly, a coincident reserve buildup has been observed in all the South Asian countries. 17 Analyses of public debt sustainability for Turkey, for example, use the notion of net public debt. 17 India: Sustaining Reform, Reducing Poverty Figure 2.2. Primary Deficits and the Implied -0.74 percentage points during the Ninth Plan Difference between the Real Rate of Interest period, while the primary deficit rose from an and Growth, 1986/87-2002/03 (%) average of 2.1% to 3.5% of GDP. Government debt dynamics have accelerated on both counts. Given the large volume of guarantees in support of loss-making public enterprises (especially in the power and irrigation sectors), government debt is on a considerably faster upward trajectory than hitherto observed. Foreign exchange reserves built up steadily after the 1991 crisis-with a dramatic increase of $22 billion over the past fiscal year, about 40% of it after November 2002. An unknown part of this might have been driven by capital inflows related to fears of the Iraq war, so this pace might not be maintained (RBI 2003b; Source: World Bank staff calculations based on India, Ministry of Kapur and Patel 2003). Furthermore, the Finance budget documents (center and states); RBI bulletins. reserve accumulation of the past few years has been facilitated by private sector sluggishness, the fiscal stance, with spending on social and which has prevented fiscal deficits around 10% of physical infrastructure crowded out by rising GDP from feeding into sizable current account interest and other current payments (see table 2.1). deficits (Ahluwalia 2002a; Acharya 2001; IMF At the same time, general government debt 2002). The current account deficit averaged 2.2% dynamics took a sharp turn for the worse over the of GDP in the five pre-crisis years, but less than past four years, evident in the implied difference 1% during the Ninth Plan period, even though between the real interest rate on the stock of fiscal deficits were similar (table 2.4). This suggests government debt and the real growth rate of GDP a crowding out, as well as a relative tightening of (figure 2.2).18, 19 Primary deficits fell from pre- monetary policy, discussed later in this chapter. crisis levels during the Eighth Plan period but have grown steadily since. The implied gap between the External Vulnerability real interest rate on the stock of government debt Reserves, $75 billion at the end of 2002/03, and and the growth rates charted a clear upward trend now more than $80 billion, imply a healthy after 1994/95 and has been either close to zero or cushion against external vulnerability, using positive since 1999/00, a trend maintained despite standard measures.20 An additional factor boosting record low interest rates over the last 18 months. liquidity has been the shift toward long-term rupee The average implied difference between real debt in government financing after the 1991 crisis. interest rates and growth rates rose from -6.0 The average maturity of dated securities issued percentage points during the Eighth Plan period to more than doubled from 6.6 years in 1997/98 to 18 For details of the calculations underlying figure 2.2, see Pinto and Zahir (2003). 19 A recent analysis of public debt dynamics is contained in Lahiri and Kannan (2002). For related analyses, see Buiter and Patel (1992); Acharya (2001); Ahluwalia (2002a); Srinivasan (2001); Cashin and others (2001). 20 India (2002) contains a cross-country comparison of external debt indicators that puts India in a favorable light. 18 Fiscal Policy Table 2.4. Key Macroeconomic Aggregates, 1985/86-2003/04 Aggregate 1985/86- 1990/91 1992/93- 1997/98- 2002/03a 2003/04b 1989/90 1996/97 2001/02 Pre-crisis Crisis Eighth Ninth period Plan Plan Gross fiscal deficitc 9.0 9.3 7.2 9.3 10.4 9.8 Revenue deficitc 2.6 4.0 3.6 6.1 6.9 6.2 Primary deficitc 5.3 4.8 2.1 3.5 3.8 4.1 Debt outstandingd 70.6 72.5 65.1 79.8 85.0 n.a. Net public debt,e 60.1 63.8 53.8 70.2 76.3 n.a. Memo Interest/revenue (%) 19.4 24.6 28.5 34.0 35.3 n.a. Forex reserves (billions of U.S. dollars)d 4.0 5.8 26.4 54.0 75.4 n.a. Current account balance/GDP (%) -2.2 -3.1 -1.2 -0.7 1.0 n.a. Real GDP growth (%) 5.9 5.6 7.1 5.5 4.4 n.a. n.a. Reliable data not available. a. Revised estimates. b. Budget estimates. c. For the general government. The figures for 2002/03 are revised estimates for central government and budget estimates for state governments. For 2003/04, the figures are budget estimates for center and World Bank staff estimates for states. d For end of last fiscal year in period. External debt is at current exchange rates. e. General government debt minus net domestic assets and net foreign assets of RBI plus its nonmonetary liabilities. Source: India, Ministry of Finance, budget documents (center); RBI 2001b; World Bank staff estimates. 14.3 in 2001/02 (RBI 2002a). Moreover, about that "total public sector debt relative to GDP in 90% of central and state government securities are India is much greater than in Argentina and Brazil, held by nationalized banks, State Bank of India, while the ratio for Turkey recently shot up (during the Reserve Bank of India, and the Life Insurance the crisis) to around that of India." And India's Company, with the rest held by Unit Trust of primary fiscal deficits are larger-indeed, the other India, National Bank for Agriculture and Rural three countries have generally run primary Development, employee provident funds, and surpluses over the last decade (IMF 2002). private banks (RBI 2001b). Cross-country comparisons are complicated by such Since the 1991 balance-of-payments crisis, interest factors as the currency composition of debt, its rates have been liberalized, India has become more maturity, whether the real exchange rate is in integrated into the world goods and capital equilibrium, whether privatization proceeds are markets, and fiscal fundamentals have deteriorated, included in revenues (thereby artificially boosting even relative to the late 1980s. IMF (2002) notes the primary surplus, as in Argentina),21 and the size 21 On this specific point and how it may have put a better complexion on debt dynamics, see Mussa (2002). 19 India: Sustaining Reform, Reducing Poverty of contingent liabilities and potential balance sheet 6.9% a year. The chapter notes that private problems in the banking and corporate sectors, a household savings rose over the Eighth and Ninth potent factor in the East Asian crisis of 1997/98. plans in response to the cut in tax rates and Further, countries with unsustainable public debt consequent rise in disposable income. This could dynamics that eventually experienced crisis, such as slow in the Tenth Plan period because of the need Russia and Argentina, had low international to raise the tax-to-GDP ratio, highlighting the liquidity. This combination proved intractable, even need to increase public savings from -1.7% in the with substantial bailout packages. Indeed, bailout base year of the Tenth Plan (2001/02) to +2.1% in packages could backfire in these circumstances its last year (2006/07). Unless this happens, the because they provide the means for private portfolio plan is quite explicit that the growth target is investors to exit, leaving the country burdened with unlikely to be reached. It also cautions that the senior loans from international financial institutions current account deficit should not be used to denominated in hard currency. slacken the public savings target-and that a safe upper limit is 3% of GDP. India's public debt dynamics have worsened, with state government finances in crisis, significant The plan then compares the fiscal deficits nonperforming assets in the financial system, and a projected under the preceding savings-investment large volume of guarantees. But reserves are high, scenario (the "desirable deficit" from a growth bolstered by limited capital account convertibility, a perspective) with the fiscal deficit that would flexible exchange rate, long-term capital inflows, and achieve sustainability, defined as a stable a pliant financial system that willingly holds long- government debt-to-GDP ratio (table 2.5). term, rupee-denominated government paper. In Comparing columns (2) and (4) shows the sizable short, India is not vulnerable to the type of collapse fiscal correction for the states to achieve suffered by Russia or Argentina. But without a fiscal sustainability, even if growth is 8%. Comparing adjustment, it is open to substandard growth. columns (3) and (4) shows that an even bigger Costs of the Fiscal Stance fiscal correction is needed to generate the needed public savings for investment and growth. So, The growth target for the Tenth Plan is 8% a year, achieving sustainable debt is "easier" than part of a strategy to double per capita GDP by the generating the public savings consistent with 8% end of the Eleventh Plan. Chapter 2 of the plan notes that Table 2.5. Sustainable and Desirable Deficits in the the investment rate will need to Tenth Plan Context rise by four percentage points to Sustainable deficita a little over to 28%, with Growth Growth Desirable Base domestic savings contributing target 6.5 target 8.0 deficitb year an additional 3.5 percentage points and the rise in the current (1) (2) (3) (4) account deficit 0.5 percentage Combined 7.4 8.6 6.8 9.3 points. The incremental capital- Center 4.4 5.2 3.6 4.9 output ratio is expected to fall from 4.5 to 3.6, investments to States 3.0 3.4 3.2 4.5 grow by 14% a year compared a. Table 2.21 of Tenth Plan. with the long-run growth rate of b. Table 2.22 of Tenth Plan. 6.5%, and consumption by Source: India, Planning Commission 2003. 20 Fiscal Policy Figure 2.3. Gross Capital Formation in the cyclical slowdown of the private sector. But Private Corporate Sector and the General real interest rates for borrowers remained high Government Deficit, 1986/87-2000/01 after 1996/97 and through 2001/02, averaging (% of GDP) more than 12% a year (figure 2.4). There may be several reasons behind the high real interest rates, including the interest rate liberalization of 1993/94, a sharp worsening in public debt dynamics, and a pronounced shift toward long-term rupee debt in deficit financing. What has emerged is a mix of a "loose fiscal-tight money" policy23 that has helped to keep inflation low and prevent worsening public debt dynamics from spilling over into the current account and depleting reserves, as happened in the late 1980s, leading to the 1991 crisis. But this has been at the expense of growth and welfare, as rising interest payments crowded out spending on social and Source: National Accounts Statistics; India, Ministry of physical infrastructure. Even though interest rates Finance; World Bank staff estimates. Figure 2.4. Real Interest Rates, growth. In other words, growth could continue to 1990/91-2001/02 (%) be substandard even if a crisis does not erupt-and avoiding crisis is not enough. India has a relatively closed capital account and substantial government ownership of financial institutions. The incentives would favor government financing needs, with a residual claim for the private sector. And the higher the deficit, the higher the real interest rate-and therefore the fewer the private sector investment projects likely to be profitable, increasing the severity of crowding out. Not surprisingly, there is a well-documented negative association between fiscal deficits and private investment (figure 2.3).22 One could argue Source: Mohan 2003. that a rise in fiscal deficits was needed to counteract 22See World Bank (2000a) and Reynolds (2001). 23The term "loose fiscal-tight money" refers to the additional burden on monetary policy to achieve stabilization goals and foreign exchange reserve targets given the deterioration in public finance fundamentals after 1996/97, meaning higher real interest rates for the private sector. As RBI (2003a) paragraph 4.67 notes, "The growing reliance on market borrowing for financing the fiscal deficit has been accompanied by restraint on reserve money growth and moderation of inflationary pressure. This has also had the effect of raising interest payments." And paragraph 4.85: "Continuing foreign exchange inflows and the recessionary conditions enabled the Reserve Bank to move to a softer interest rate regime in spite of a rising fiscal deficit." But the continuance of inflows suggests that interest rates are still "too high" in a relative sense. 21 India: Sustaining Reform, Reducing Poverty have declined sharply over the past 18 months or lending to government. This is reinforced by the so (for a variety of reasons in the external incentive structure in banks: managers complain environment), public debt dynamics have of being subject to criminal investigation if a loan continued to worsen. to a private enterprise goes sour. In addition, significant micro barriers to financing A last point is that the substantial shift in the the private sector could prevent the decline in composition of government spending away from marginal interest rates on government debt from capital expenditure directly inhibits private translating into low lending rates to the real sector, investment and reinforces the macro and micro except for the best credits. The Indian financial crowding out. An empirical investigation concludes system is segmented and must conform to various that a rise in government consumption crowds out minimum lending and portfolio composition private consumption, a rise in public investment in requirements. For example, the prime lending rate manufacturing crowds out private investment, and tends to be kept high because it cannot be exceeded public investment in infrastructure has strong when lending to the priority small-scale sector. positive complementarities with private investment Insurance companies must hold at least 50% of (RBI 2002c). So, the rise of revenue deficits, their assets in government debt and provident accompanied by an offsetting decline in funds, at least 50% in central government debt government social and infrastructure spending, has and 25% in state government debt. Annual also contributed to crowding out the private sector. inflows into small (postal) savings, which compete with banks for deposits, are invested wholly in Fiscal Reform Priorities government debt. These flows have grown from an In addition to the Tenth Plan document, concerns average of 7.9% of GDP in the Eighth Plan to about the fiscal situation have been expressed in nearly 10% currently, consuming nearly the whole key government reports and pronouncements. increase in net household financial saving. The According to the Economic Survey, 2002-03, administratively determined interest rates for these "Higher fiscal deficits, besides constraining growth instruments were set artificially high, at 10.5-13% have resulted in higher government borrowings.... until 2000 and are still at 7.5-9%, with tax The revenue deficit which constituted 49.4% of concessions. This worsens the public debt the fiscal deficit in 1990/91 accounted for 70.2% dynamics while raising the cost of funds for banks of fiscal deficit in 2001/02....While the and hence lending rates to the private sector. expenditure composition both for the center and Moreover, banks are under pressure to reduce their states continues to reflect a preponderance of nonperforming assets, which attracts them even wages, salaries, interest payments and subsidies, more to government debt. And nonbank financial there has been some welcome relief on the interest corporations, which held little government debt rates in recent months. The high fiscal deficit and funded riskier firms, represented an average of continues to complicate the task of conducting 7.7% of GDP in the Eighth Plan but only 1.1% counter-cyclical fiscal policies and augmenting in the Ninth. Their decline probably contributed outlays on the much needed social and physical to the rapid growth in bank deposits after 1996. infrastructure, and poverty alleviation programs" So, dominant government ownership of the (page 22). During the 2003/04 Union Budget financial sector, the portfolio problems of banks, discussions, the Finance Minister informed the the investment rules for insurance companies and Rajya Sabha on March 14, 2003 that "Of our provident funds, and the interest rates on small revenue, 50% is swallowed by payment of just savings all create a natural proclivity toward interest on (government) debt. Another 20% goes 22 Fiscal Policy on subsidies and 25% on defense. What am I left end of the Tenth Plan. Plan projections assume a with?"24 And RBI (2003a) notes that "...fiscal big increase in tax buoyancy-from 0.8 in the Ninth performance during the reform period, however, Plan to 1.26 in the Tenth. Most of this increased was characterized by a clear divide in the mid- buoyancy is expected to come from indirect taxes, 1990s in the attainment of fiscal targets. There was particularly customs duties. Achieving this goal evidence of the successful fiscal correction during rests on several key assumptions: complete 1991/92 to 1996/97 (except for 1993/94) in terms withdrawal of import tariff exemptions (except on of a significant fall in the fiscal deficit and in public strategic imports), a strong resumption of growth debt as a proportion of GDP. Since then there has in manufacturing, the sector with the highest tax been a significant reversal of trend. Indeed, many buoyancy, and extending the tax net to include the deficit indicators presently are even higher than the booming services sector. The states' own tax levels prevailing at the time of the crisis in 1991. collection is projected to be raised from 5.9% of The revenue deficit has not only persisted, but has GDP in the base year to 6.6% by the end of the grown in size during this period... Several pointers Tenth Plan. This increase rests crucially on the indicate a reversal of the fiscal consolidation implementation of a unified VAT covering all process in the recent years. These include decline in goods and services. tax-to-GDP ratio, downward rigidity in current expenditure, steady deterioration in public The decline in the tax-to-GDP ratio in the 1990s is investment in productive sectors, slow progress of due partly to the "costs of reform," reflecting the PSUs (public sector undertakings) restructuring reduction in customs and excise duties to increase and faster accumulation of public debt" (chapter competition and enhance efficiency. But it also IV, page 1). reflects the costs of incomplete reform. The shift toward direct taxes has failed to compensate fully for In view of the preceding analysis, fiscal reforms are the reduction in indirect taxes implemented as part needed to ensure a phased reduction in the primary of the reforms during the 1990s. As the Kelkar and revenue deficits of the center and state Committee reports emphasize, the lowering of tax governments, and to reallocate expenditure toward rates needs to be complemented by eliminating more productive uses. The discussion turns to exemptions, bringing services and agriculture into proposals for policy reforms in four key areas: the tax net, and improving technology-based tax administration (Kelkar 2002). These reforms deserve Tax reform. the highest priority in view of the decline in the tax- Subsidy reduction. to-GDP ratio in the 1990s and the direct positive effect this will have on reducing primary and revenue Financial policy. deficits. In this respect, while tax administration has Fiscal management. been given due prominence in the Union Budget for 2003/04, there has been a tendency to increase Tax Reform exemptions and special rates, even for excise taxes, The gross tax revenue of the central government despite the rationalization of main rates. And there fell from 10.3% of GDP in 1991/92 to 8.6% in has been no move to tax agricultural income, which 2001/02 (India, Planning Commission 2003). The will perpetuate incentives to disguise nonagricultural goal is to raise taxes back to 10.3% of GDP by the income as agricultural income. 24Times News Network, Times of India, March 14, 2003. 23 India: Sustaining Reform, Reducing Poverty Table 2.6. Government Subsidies, 1997/98-2003/04 Item 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03a 2003/04b Billions of rupees at current prices Food (including sugar) 79.2 92.1 94.8 121.0 175.1 242.0 278.0 Fertilizer 99.2 116.0 132.4 138.0 126.0 110.1 127.2 Petroleum n.a. n.a. n.a. n.a. n.a. 62.7 81.2 Interest subsidies 0.8 14.3 13.7 1.1 2.1 7.7 1.8 Others 6.2 13.6 3.9 8.3 8.9 23.8 10.9 Total subsidies 185.4 235.9 244.9 268.4 312.1 446.2 499.1 Percent of GDP Food (including sugar) 0.5 0.5 0.5 0.6 0.8 1.0 1.0 Fertilizer 0.7 0.7 0.7 0.7 0.5 0.4 0.5 Total subsidies 1.2 1.4 1.3 1.3 1.4 1.8 1.8 Memo (%) Food (including sugar)/gross 10.7 9.5 8.9 10.0 12.1 16.3 16.7 fiscal deficit Food /revenue 5.9 6.2 5.2 6.3 8.7 10.2 10.9 SEB losses/GDP 0.9 1.2 1.4 1.2 1.4 n.a. n.a. n.a. Reliable data not available. a. Revised estimates. b. Budget estimates. Source: India, Ministry of Finance, budget documents (center); India, Planning Commission 2002a. Subsidy Reduction growth in agriculture by shifting central Subsidies. The central food subsidy amounted to expenditures from food (subject to the maintenance of a minimum social safety net) and Rs242 billion with fertilizer subsidies adding fertilizer subsidies toward productivity- another Rs110 billion, a total of 1.4% of GDP in enhancing investments, including irrigation, 2002/03 (table 2.6). Foodgrain and input rural infrastructure, and research and extension subsidies have distorted farmer cropping and (see chapter 5). The petroleum subsidy, about investment decisions, contributing to natural 0.4% of GDP, is to be phased out over the resource degradation (soil nutrient imbalances, medium term. water logging, salinity). At the same time, public investments in agriculture have declined over the Power reform. This is a key reform both for fiscal last decade, in large part due to the pressing need sustainability and for spurring growth through to meet subsidy requirements in the foodgrain, more efficient provision of power services to fertilizer, irrigation, and power sectors. The main industrial and commercial users and more reliable reform goal therefore would not be to achieve provision to the rural areas. Estimated State fiscal savings. It would be to achieve faster Electricity Board (SEB) losses in 2001/02 were 24 Fiscal Policy Rs332 billion, about three times those in The financial and social case for reform is clear, as 1996/97.25 To put this in perspective, the gross are the essential elements. Average tariffs need to be fiscal deficit of the states was 4.4% of GDP in raised to reflect cost of supply. Universal metering 2001/02, or about Rs1,183 billion. Subtracting of consumption is required, especially for from this the actual subsidy paid by the states to agricultural and domestic consumers. Payments SEBs of Rs83 billion gives a fiscal deficit net of the discipline needs to be enforced. And a targeted subsidy of Rs1,100 billion. This means that if the subsidy scheme needs to be introduced for poor total losses of SEBs were consolidated with the households and farmers so that the cross-subsidy fiscal deficits of the states, these would rise on burden on industrial and commercial users can be average by 30%. Given the low actual subsidy eliminated. It is also accepted that there will be received, SEBs have been defaulting on their greater incentive to sustain reform with the payments to central government agencies privatization of the distribution business. (suppliers and lenders) to finance a part of these But political will has often been found wanting, losses. Bond issues by SEBs guaranteed by the state especially for raising tariffs for farmers, or for governments, rapidly adding to the contingent implementing better governance. The fundamental fiscal liabilities of the states, are another source of problems affecting the sector stem from the apparent financing (CRISIL 2002). SEBs have also been unwillingness of the state and central governments to "borrowing" from their employees by running allow the sector to function along commercial and arrears on related pension and provident fund economic lines. The Government of India has obligations. They have thus been unable to recently initiated a few potentially decisive steps to maintain their assets. give stronger incentives to states for reforming their power sectors. For these to work, privatization of SEB operations also entail significant transmission distribution, stronger action on tariffs, better and distribution losses (technical and commercial governance, and financial restructuring are needed. losses as well as theft), in some states as high as 40- 50%. Owing to poor collections, outstanding Parliament has passed a new Electricity Act, and the receivables of various state utilities grew from Ministry of Finance has instituted the Accelerated Rs145 billion in 1996/97 to Rs248 billion in Power Development and Reform Program 1999/2000. Tariffs covered only 68% of the cost of (APDRP) in support of power reforms. Other supply in 2001/02. There is also high dispersion in measures include the work of the Deepak Parekh tariffs, with commercial and industrial users cross- Committee on state-specific reforms and decisions subsidizing agricultural and domestic consumers to have independent agencies rate SEBs. The and being charged rates far in excess of the cost of Ahluwalia Committee had recommended that the supply. Given the poor quality of supply, many past-due arrears of SEBs to central government manufacturing companies install their own agencies-Rs415 billion at the end of February 2001- generators. Moreover, recent studies show that be compensated by bonds issued by the respective subsidies are regressive. The poor benefit little from state governments, guaranteed by the Government subsidized electricity, both in urban and rural areas, of India and carrying a tax-free interest rate of 8.5% providing little justification for continued subsidies a year.26 For this, a tripartite agreement involving to consumers (World Bank 2001b, 2002j). the Reserve Bank of India, state governments, and 25 India, Planning Commission (2002a). The actual financial loss is even greater because of collection problems. 26 Report of the Expert Group, Settlement of SEB Dues, May 2001. 25 India: Sustaining Reform, Reducing Poverty the Ministry of Power was signed in March 2003. foreign banks) mostly related to exports and Under the agreement, state governments have also imports and often with, the Reserve Bank of India agreed that in case of SEB default on payments of as the counterparty.27 These numbers are low in bills to central agencies, the Reserve Bank of India comparison with East Asia and China. But this has would deduct at source a corresponding amount to be looked at in the context of public sector debt due to the states. While initial signs are encouraging, above 90% of GDP in an environment of the effectiveness of this agreement in imposing a worsening government debt dynamics. hard budget constraint on states, and thereby providing a stronger incentive for reform, will There are two key reform issues. The first is depend on its continued enforcement by the enhancing the role of the financial system in Government of India. The APDRP could be efficient resource allocation. The second is another effective step. But if the scheme is to provide minimizing risks. The first is closely related to the incentives to states for reform, it needs to clearly link fiscal stance. As long as deficits are high, a high assistance strictly to tangible and irreversible proportion of bank assets will be invested in measures for reversing SEB losses and improving government debt. As of March 2002, about 28% governance. Without such a link, the APDRP may of bank assets were invested in government debt weaken the resolve to reform. and another 5.6% was with the Reserve Bank of India. Indian banks have one of the highest ratios Financial Policy of government debt to deposits in the world, Since 1992/93 varying but relatively small sums similar to Latin American countries and much have been spent to assist nationalized banks, higher than most East Asian comparators, even regional rural banks, Unit Trust of India, Industrial after the crisis. A fiscal adjustment would clearly Development Bank of India, and Industrial help-it would also relieve crowding out. Financial Corporation of India-with another 0.8% of 2002/03 GDP identified to help the latter three. Measures are also needed to contain risk and The banks' reported gross nonperforming loans manage nonperforming assets. In this connection, were 10.4% of all loans in March 2002. Net of the new Securitisation and Reconstruction of provisions the figure was 5.5%. And net Financial Assets and Enforcement of Security nonperforming loans as a percent of assets were Interest Act (2002), which allows banks to take 2.3% or about 1.5% of GDP. Some financial over collateral more easily, could push debtors to analysts have suggested that nonperforming loans pay up. Similarly, establishment of credit are substantially understated by various information bureaus should help in sharing "evergreening" methods, but a doubling of the information on credit risk, which would lower gross figure would put net nonperforming loans at transaction costs while helping to control less than 7% of bank assets, or about 4.5% of nonperforming loans. It would particularly help GDP. Another indicator of risk-lending for stocks, small and medium-scale enterprises, which suffer real estate, and commodities-is less than 4% of from very high real lending rates owing to the lending. perception of high risk (Mohan 2003). Off-balance sheet operations are equal to nearly One relevant topic is interest rate risk. Financial 60% of the balance sheet, but three-fourths of institutions that have invested in long-term them are forward exchange contracts (half by the government paper made large trading profits as 27While not a serious issue today, this could potentially encumber Reserve Bank of India reserves, so it bears monitoring. 26 Fiscal Policy interest rates fell, but these financial institutions now Corporation, the National Cooperative face the possibility of rising interest rates. To counter Development Council, the Rural Electrification this, the Reserve Bank of India has issued a directive Corporation, public sector banks, and regional on creating an investment fluctuation reserve. rural banks. Moreover, the guarantors-the state governments-are already heavily indebted. Not Insurance and provident funds, heavily invested in surprisingly, the spread on state guaranteed bonds government debt, will face losses as interest rates relative to central government securities widened rise. Moreover, state provident funds have also from 2-2.5% in 2000 to more than 4% in 2002. invested in special purpose vehicles guaranteed by the state. Many of these assets are now no longer Another problem is that even when state- earning interest, making the performance of the guaranteed bonds are not being serviced, creditors state provident funds even more dependent on do not treat them as nonperforming assets unless debt servicing by cash-starved states, now that the the guarantee is invoked and payment is not guarantees are beginning to be called. The ability received for two quarters. There is reluctance to of these provident funds to meet their obligations invoke guarantees, so defaults remain hidden, is likely to affect public confidence in government adding to the uncertainty and instability. Given the debt issues more broadly. The administratively set extensive list of creditors, a default would hurt the returns on the provident funds are significantly integrity and credibility of public institutions. above market rates-encouraging management to Containing the problem requires a need for a clear engage in risky investments in the nonregulated and transparent framework for guarantees. One part of their portfolio. This policy also generates idea is to create a guarantee redemption fund (RBI potential contingent liabilities for the central and 2003e). But given the fiscal constraints, finding state governments along the lines of Unit Trust of resources for the fund would not be easy. And the India. Linking rates on the provident fund more fund would work only if fundamental problems in closely to the market, and reducing the role of power and irrigation are corrected. administratively fixed rates, would help control the continuing buildup of these problems. A similar Fiscal Management link to rates on small savings would reduce interest costs for states. There is growing recognition that fiscal institutions need to be strengthened. This will require changes Guarantees. The contingent liabilities stemming at the center, in the states, and in center-state fiscal from borrowings of parastatals guaranteed by state relations. The central government needs to lead by governments are a critical issue. According to a example, getting its own house in order and recent study, such guarantees have risen sharply providing the right incentives for fiscal adjustment since 1996, mostly in connection with borrowings at the state level. And it needs to give states enough by SEBs and special purpose vehicles established in flexibility to use their limited resources efficiently. connection with large irrigation projects. It is estimated that of the market borrowings by state Legislating for fiscal prudence. The Fiscal entities guaranteed between 1995 and 2002, Responsibility and Budget Management Bill, Rs440 billion will be called over the next five years passed by the Lok Sabha (lower house of (CRISIL 2002). This may not seem much, but the parliament) in early 2003, mandates the estimate excludes guaranteed loans from the elimination of the center's revenue deficit by National Bank for Agriculture and Rural March 2008. The bill pertains only to the central Development, the Housing and Urban government, but three states-Karnataka, Punjab, Development Corporation, the Life Insurance and Tamil Nadu-have so far passed similar acts to 27 India: Sustaining Reform, Reducing Poverty limit their own deficits. And others are following Although the funding attached to the Fiscal suit. The proof of the usefulness of these pieces of Reform Facility is small given its universal coverage legislation will be progress toward their fiscal goals. (only 2% of all transfers to the states), it has had a A useful feature of the acts is the requirement that significant impact. First, it has required states to the central and concerned state governments draw up "Medium Term Fiscal Restructuring annually publish multiyear fiscal strategies- Plans" which, for the first time, have placed fiscal developing time-bound road maps for restoring policy at the state-level in a medium-term strategic fiscal sustainability and publicly monitoring framework. Second, the borrowing levels agreed progress. If carefully implemented, this could under the plans have started to take on the nature enhance the credibility of India's fiscal policy. of global borrowing caps. They have thus helped the Government of India to start to discipline state State borrowing. While states ultimately have to borrowing in an environment characterized by be responsible for their own fiscal adjustment, multiple borrowing windows. (Less progress has reforming the borrowing regime they operate in been made in preventing states from ("hardening their budget constraints") will also circumventing central controls on budget help induce fiscal reform. Global borrowing caps borrowing through use of off-budget special should be introduced and enforced by the purpose vehicles. Orders issued by the Government of India, using powers under Article Government of India and the Reserve Bank of 293 of the Constitution. The caps should cover India seem to have had little impact on this.) In both on-budget borrowing and off-budget 2002/03, the Fiscal Reform Facility also started to borrowing through state-level public enterprises provide authorization for qualifying states to and special purpose vehicles, whose debt-servicing borrow additional funds from the market. becomes a contingent liability in the budget. In return for much tighter control by the Multilateral agencies also provide financing to Government of India over the annual quantum of reforming states through the Government of borrowing, states could be given much greater India. It would be useful for assistance to fiscal freedom over how they arrange that borrowing. reformers to be passed on not as loans but as States should be allowed to borrow responsibly grants, both to increase the incentives for reform from the markets within their global cap. And and to help such states reduce their debt burden. borrowing from captive sources-small savings, Public reporting of access by various states to negotiated loans, and Government of India loans- reform facilities-and of reasons for both access and should be phased out. If necessary, a safety net can denial to access-will help ensure transparency and be provided for uncreditworthy borrowers. consistency. Performance and reform-based transfers. The Measures to simplify expenditure management. volume of center-to-state transfers linked to reform India's five-year plans help provide a strategic and performance needs to be expanded. The framework for development efforts, but the creation of the Fiscal Reforms Facility, division of budgetary resources into "plan" and recommended by the Eleventh Finance "nonplan" is counterproductive. It adds Commission, and the APDRP for the power sector complexity to the budgeting-and perpetuates a are steps in the right direction. The Fiscal Reform perception that plan spending is always better Facility provides grant funding for states that than nonplan and should always be increased. reduce their revenue deficit as a ratio of revenue Militating against fiscal correction, this leads receipts. to chronic underfunding of maintenance 28 Fiscal Policy (nonplan) relative to capital spending (plan). Government Debt Projections: Unfortunately, substantial government assistance Why Fiscal Adjustment? is provided for state plan spending, making elimination of the plan-nonplan distinction at The case for fiscal adjustment is illustrated by the state level a complex and unpopular general government debt projections to the end of proposition. But the Government of India could the Tenth Plan period, 2006/07, under a base case take the lead by abolishing the distinction at the scenario of "no reform" versus a "reform" scenario. central level. It could also propose to states that In both scenarios, the debt trajectory is driven its financial support to them be delinked from mainly by the primary (noninterest) fiscal deficit- because based on actual developments in recent their annual plans. Funding currently provided years, interest rates are unlikely to be substantially as plan support would be provided on the basis below growth rates without an undesirable reversion of an agreed and explicit set of criteria-which to financial repression. But given the extraordinarily initially could be based on those currently in low interest rates in today's weak global economy, it place-but could be termed "development is assumed that real interest rates remain below the support" rather than "plan support." Any such growth rate for a year or two, depending on the move would require consensus among states to scenario (even though, as noted above, the average succeed. The government could help build this interest rate on government debt has been close to or support by announcing that the move would above the growth rate for the past four years). enable funding for nonplan areas, such as maintenance. Two other factors deserve emphasis. Extrapolating from current trends, the pressure to fully absorb SEB losses Centrally sponsored schemes are provided by the into state fiscal deficits will grow, effectively raising the Government of India to the states, largely general government primary deficit by this amount. (though not entirely) as grants, for achieving And it would be prudent to assume that guarantees- such national goals as poverty alleviation and 12% of GDP in 2002/03, generally in support of loss- universal enrollment. But the schemes have making enterprises-will devolve at the rate of 1% of tended to proliferate, and there are now more GDP per year over the projection horizon.28 than 300, leading to budgetary rigidity and poor implementation at the state level. A practical If the goal is to stabilize or reduce the debt-to-GDP solution would be to consolidate the schemes ratio, generating primary fiscal surpluses is a must. So into a smaller number of programs, with a the focus of reform will have to be on cutting the minimum size, and to give the states flexibility primary deficit and raising growth. Moreover, it is to run them in accord with their needs and envisaged that the cut in the primary deficit will be priorities. Some central ministries have already achieved without reducing capital expenditure. Cuts in moved in this direction by adopting a cafeteria the primary deficit will thus automatically mean cuts in approach: a cluster of schemes is clubbed the revenue deficit, improving the quality of public together under one umbrella, and the selection spending. But the net impact on the revenue deficit will of individual schemes from this cluster is left to also depend on the path of interest payments.29 For the states. fiscal measures, revenue mobilization needs to be given 28Note that this assumption pertains only to the existing stock of guarantees, and does not take account of any new guarantees which may be issued after 2002/03. 29The Government of India has initiated debt swaps and prepayment of external debt in order to reduce interest payments. However, these measures are unlikely to be a substitute for a fundamental fiscal adjustment. 29 India: Sustaining Reform, Reducing Poverty Box 2.1. Assumptions Underlying the Debt/Deficit Projections The initial level of general government debt is 85.6% of GDP, its level at the end of 2002/03 (including about 0.8% of GDP proposed for bailouts in connection with Unit Trust of India, the Industrial Development Bank of India, and the Industrial Financing Corporation of India). The primary deficit of the general government stays at 3.5% of GDP in the base case, a little below its average level over the past six years.30 In the reform scenario, the primary deficit goes down linearly from 3.5% of GDP to 0.7% by the last year. This comes from raising central government revenue by 1.7 percentage points and state revenues by 0.7 percentage points by the terminal year, as envisaged in the Tenth Plan document, and from eliminating the petroleum subsidy of 0.4% of GDP. It is assumed that taxes rise as a result of eliminating exemptions, widening the tax net to include services, and implementing the state value-added tax. Food and fertilizer subsidies amount to about 1.4% of GDP. Under reforms, 0.5% of GDP is maintained as a minimum social safety net; the balance of 0.9% is phased out while productivity- enhancing investments in agriculture, such as rural infrastructure and research and extension, increase by the same amount. There is no change in the base case. SEB losses in the base case remain 1.5% of GDP and in the reform scenario go linearly to zero by the terminal year as a result of aggressive power sector reforms. Divestment receipts remain 0.5% of GDP in both scenarios. Guarantees (contingent liabilities) accumulated by the end of 2002/03 devolve at the rate of 1% of GDP per year in both scenarios. Growth, real interest rates, and inflation (%) are as follows:31 2003/04 2004/05 2005/06 2006/07 Growth (base) 5.5 5.0 5.0 5.0 Real interest rate (base) 4.0 5.0 5.5 5.5 Inflation (base) 5.5 5.0 5.0 5.0 Growth (reform) 5.5 7.0 7.5 8.0 Real interest rate (reform) 4.0 6.5 7.5 8.0 Inflation (reform) 5.0 3.5 3.5 3.5 Source: World Bank staff estimates. top priority, because revenues are low and debt is high The major policy levers flowing out of the while spending is roughly in line with other countries preceding analysis are raising tax revenues, (IMF 2002). reducing SEB losses, and eliminating the 30The primary deficit incorporates a portion of seigniorage in the form of Reserve Bank of India profits and dividends, which enter nontax revenue. 31The 8% Tenth Plan target would imply a growth rate of 8.9% per year over the remaining years of the Tenth Plan period, which seems unattainable at this point. The base case assumes a compound average growth rate of 5% during the Tenth Plan period- the reform scenario, 6.5%, reaching 8% in the terminal year. 30 Fiscal Policy Figure 2.5. Projected Government In the base case, general government fiscal deficits Debt-to-GDP Ratio, 2002/03-2006/07 rise steadily to 13% of GDP, as one would expect with primary deficits at 3.5% of GDP, debt exceeding 100% of GDP, and nominal interest rates of some 10% (figure 2.6). With reforms, deficits remain in the 10% of GDP range because of the drag from the high debt stock and the impact of rising interest rates as growth picks up; deficits will decline slowly as debt levels are brought under control.32 The only sure way to bring about a faster decline is to achieve primary fiscal surpluses. In these scenarios, the calling of guarantees is ignored in projecting debt levels and hence interest payments. While SEB losses are factored into the projection of debt levels and interest payments, they are not included in the deficits shown for comparability with present deficit reporting practices. So the "true" picture Source: World Bank staff estimates. especially under the base case is likely to be worse petroleum subsidy, supplemented with structural Figure 2.6. Projected General reforms to spur growth. The base case assumes Government Fiscal Deficits, that fiscal and structural reforms will proceed 2002/032006/07 (% of GDP) slowly or not at all. The reform scenario assumes a systematic plan to implement the needed fiscal and structural reforms over the Tenth Plan period (box 2.1). In the base case, the general government debt-to- GDP ratio reaches 107% by the end of the Tenth Plan period (figure 2.5). In the reform scenario, it reaches 95%. These results are being driven by the general government primary deficit, SEB losses, and the calling of guarantees-underlining the need for implementing fiscal and structural reforms. The broken lines are debt-to-GDP excluding contingent liabilities, which would lower the debt- to-GDP ratio to 103% by 2006/07 in the base Source: World Bank staff estimates. case and 91% in the reform scenario. 32The deficit projections here, which are repeated in table 2.7, are substantially higher than those reported in table 2.5 based on the macroeconomic framework for the Tenth Plan. The reason is that table 2.5 is formulated on the basis on either achieving debt sustainability (at a minimum) or the growth target of 8% a year (much more difficult); in this sense, it embodies an ideal outcome. By contrast, the projections in figure 2.5 and table 2.7 are more in the spirit of a probable outcome given conditions at the end of 2002/03 and the scenarios specified in box 2.1. 31 India: Sustaining Reform, Reducing Poverty than depicted unless power sector losses are the quality of spending will have vastly aggressively eliminated. improved. What is the potential for a more efficient Three points emerge. First, it is not going to be composition of public spending under reform? easy to eliminate revenue deficits by 2007/08. There is not much difference in interest Further, the focus must be on raising revenues, payments between the two scenarios-because of cutting subsidies, and controlling salaries-that is, the high level of initial debt, the absence of on the noninterest component of the revenue primary fiscal surpluses even in the reform deficit, because there is little or no control over scenario, and similar levels of nominal interest interest payments. In the same vein, it may be rates. But the reform scenario permits necessary to lay down intermediate targets by significantly higher "other spending" (defined specific budgetary category in the medium-term as total spending minus subsidies and interest) fiscal frameworks required by the central and by the end of the Tenth Plan period (table 2.7). state-level Fiscal Responsibility Acts. Second, even The increase in revenues (2.4 percentage points under a reform scenario, the government debt of GDP), the elimination of petroleum subsidy burden will continue to be heavy in the medium (0.4 percentage points), and the reduction in term. And third, without reform, the debt burden food and fertilizer subsidies (0.9 percentage and ratio of interest payments to revenues will points) will reduce the general government increase quickly, fueling inflationary expectations revenue deficit by close to 4 percentage points and eventually higher inflation. Private investment of GDP. But interest payments are projected to will be dampened if the private sector feels it is rise by about 3 percentage points-from 6.5% of going to be taxed to service the debt, leading to GDP in the first year of the Tenth Plan to about anemic growth. 9.5% of GDP by the terminal year, 2006/07. So the net reduction in the revenue deficit will To conclude, a program of progressive and phased only be about 1 percentage point of GDP. But fiscal adjustment must be a cornerstone of the Table 2.7. Fiscal Projections, Base Case and Reform Case, 2003/04-2006/07 (% of GDP) Item 2003/04 2004/05 2005/06 2006/07 2003/04 2004/05 2005/06 2006/07 Base case Reform case Primary deficit 3.5 3.5 3.5 3.5 2.8 2.1 1.4 0.7 Interest payments 7.6 8.3 9.1 9.6 7.2 8.1 9.1 9.6 Fiscal deficit 11.1 11.8 12.6 13.1 10.0 10.2 10.5 10.3 Revenues 17.5 17.5 17.5 17.5 18.1 18.7 19.3 19.9 Total spending 28.6 29.3 30.1 30.6 28.1 28.9 29.8 30.2 Subsidies 1.8 1.8 1.8 1.8 1.5 1.2 0.9 0.5 Other spending 19.2 19.2 19.2 19.2 19.4 19.6 19.8 20.1 Interest/revenue (%) 43.3 47.2 51.9 54.7 39.8 43.6 47.1 48.2 Source: World Bank staff estimates. 32 Fiscal Policy Government of India's attempts to spur poverty- or Russia. But it is paying a heavy price in reducing growth and avoid an unsustainable path growth and welfare for its current fiscal stance. for public debt. Even in a reform scenario, the On the positive side, India has the time to put general government fiscal deficit is likely to remain in place an orderly fiscal adjustment over the in the 10% range over the next few years. But with Tenth Plan period. And in the absence of an primary deficits more or less eliminated by the end impending crisis, it is hard to develop the of the Tenth Plan period, the deficit should later political momentum for reform. Indeed, in decline as debt levels and interest payments are some key areas, such as the power sector, there brought under control. The focus needs to be on are strong political and vested interests against tax reform and eliminating SEB losses. The reform. India has recognized the need for fiscal reallocation of food and fertilizer subsidies- adjustment in the Tenth Plan and in recent amounting to about 1% of GDP towards rural legislation. The challenge now is for the infrastructure and agricultural R&E, while Government of India and the states to maintaining 0.5% of GDP as a minimum food translate this commitment into an overall road social safety net-will raise development spending map and into specific policies for fiscal without a negative fiscal effect. consolidation. The payoff in freeing up resources for priority public programs and Fortunately, India is not facing an imminent improving the climate for private investment macroeconomic crisis of the type in Argentina will be well worth the effort. 33 CHAPTER 3 DELIVERY OF PUBLIC SERVICES Sustained growth may be the most powerful driver of particularly overstaffed when compared with other poverty reduction, but investments in human countries. Central government civilian development are also essential. Health and education employment is around 3.4 million, state are the most important assets of the poor, allowing employment is around six million, and another them to both contribute to and benefit from growth four million or so teachers and health workers through higher-paying employment. And, when work in government and grant-in-aid institutions. incomes fall below minimum standards, the poor That puts India's civil service employment at and vulnerable need access to effective safety nets. around 1.4% of the population. Although international comparisons can be tricky, the Delivering adequate social services requires average for Asia in the 1990s was around 2.6%, increasing their level, but more important it requires and for OECD countries 7.7%. improving the quality of expenditures-by improving the governance and productivity of India's civil Even though India's civil service is not unduly service at the center, state, and local levels. In many large by global standards, there is a pronounced of India's poorest states, such as Bihar and Uttar imbalance in the skills mix. Around 93% of the Pradesh, the private sector delivers health and civil service comprises Class III and IV employees education services to a large share of the population, for both the Government of India and various state including the poor. So improving service delivery governments. Class III encompasses frontline also requires an appropriate regulatory framework delivery workers, but also includes a large number for private contributions in health and education. of office staff (clerks and typists) whose functions are rapidly being made redundant by advances in How, then, to improve the performance of the civil information technology. Class IV employees service and the quality of public service delivery? function entirely in a support role (peons, Critically important are reforms to improve the sweepers, messengers, watchmen), and most could transparency, accountability, and independence of the be let go without any discernible impact on the civil service. Several states are already implementing functioning of the Government. This innovative reforms in delivery of public services, often overabundance of support and logistical personnel with the aid of information technology. The challenge often exists alongside chronic shortages of skilled is to broaden these initiatives and apply them across staff in rural schools and health clinics. the country, including the poorer states, where the governance environment is weak. To achieve the Changes in the skills mix need to be accompanied targets in the Tenth Plan and the Millennium by measures to reduce administrative Development Goals, both the public and private fragmentation. Within the Government and in sectors will have to be harnessed, with careful many states, the number of ministers, ministries, monitoring of progress along the way. and departments has proliferated far beyond any rational assignment of functions. The number of Civil Service Reform cabinet ministers for OECD countries has come down in recent years to an average of 14. The Size and Structure of the Civil Service Government of India has 31 cabinet ministers and In aggregate numbers, India's civil service is not another 45 ministers of state. Most Indian states 35 India: Sustaining Reform, Reducing Poverty have between 35-40 cabinet departments, and allowance) rose by around 40% between 1996/97 some states (Uttar Pradesh) have more than 70. and 1997/98. Over the 1990s, the Government of India's wage bill rose by an average nominal rate of Compounding the problem are relatively weak 14.3% a year, substantially higher than the 9.5% mechanisms for policy coordination in many average increase in the Consumer Price Index. states, since most departments report directly through their minister. Nor does fragmentation The situation in the states is even more dire (table end with administrative structures. Budget heads 3.1). In a sample of states, a mixture of the richer are not always closely aligned with departments. southern states and poorer northern ones, the wage The civil service is divided into dozens of cadres, bill increased on average by nearly 1% of state each with its own service, terms, and conditions, GDP between 1996/97 and 1998/99. Orissa is with controlling authorities widely disbursed extreme but not atypical. In the 1990s, its salary throughout the various departments. Rigid terms and pension obligations increased 4.7 times, while and conditions make it difficult to transfer staff to revenues increased approximately threefold. By cadres where they could be better used. 1999/2000 more than 180% of Orissa's own Institutional reforms are thus needed to reduce the source revenues were going to cover salary and administrative fragmentation and align the pension expenses. structure of the civil service more closely with modern day functions. Wages for selected categories of staff are consistently higher than they could expect to make Costs of the Civil Service in the private sector, with premiums ranging from The Fifth Pay Commission has been called "the 27% for engineering technicians to 145% for low- single largest adverse shock to India's strained end service workers (table 3.2). For teachers, the public finances in the last decade" and an act of premium is around 100%.33 So, even before the "fiscal profligacy" without parallel (Godbole 1997; recent salary increases, the vast majority of Indian Acharya 2001). The compensation paid to civil civil servants were already better compensated than servants (here defined as salaries and dearness other employees-explaining the low attrition rates Table 3.1. Ratio of Civil Service Salary and Dearness Allowance to GDP, Government of India and Selected States, 1995/96-2000/01 (%) Region 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 Government of India 1.3 1.2 1.6 1.5 1.5 1.4 Andhra Pradesh 4.8 4.3 5.0 4.7 5.4 5.5 Karnataka n.a. n.a. 4.9 4.5 4.8 4.4 Orissa 7.0 8.3 7.6 9.1 9.2 8.6 Rajasthan n.a. 6.8 7.0 8.6 8.2 7.9 Uttar Pradesh 5.6 5.4 6.2 6.1 5.9 6.0 Note: Government of India data on salaries is based on salaries for sanctioned strength of central government employees. Sources: India, Ministry of Finance budget documents; Central Statistical Organization. 33International comparisons of average primary school teacher salaries to per capita GDP indicate a ratio of around 5 to 1 in India, compared with 1.7 to 1 in a sample of 39 Asian countries between 1970 and 1990. See Nelson (1994) pp. 111-127. 36 Delivery of Public Services Table 3.2. Ratio of Average Wages in the Public and Private Sector, Selected Categories of Employment, 1993/94 and 1999/2000 Occupationa 1993/94 1999/2000 Professional, technicians, and related workers 1.52 1.72 Engineers 1.07 1.34 Engineering technicians 1.30 1.27 Physicians and surgeons 1.65 2.00 Nurses 2.00 2.00 Teachers 1.75 2.02 Administrative, executive, and managerial workers 1.26 1.42 Clerical and related workers 1.60 1.74 Stenographers and typists 1.69 2.14 General clerks (receptionists, office attendants) 1.54 1.72 Service workers 2.25 2.45 Sweepers, cleaners, and building caretakers 1.79 1.93 All 1.92 2.33 a. ILO 1968, based on National Classification of Occupations. Source: World Bank forthcoming, "Wage Differentials Between the Public and Private Sectors in India." throughout the public sector even for highly skilled cadres and review the classification of posts positions. would also improve managerial flexibility and consistency between various categories of Recent experience suggests that it may be wise to employees. hold off on holding periodic pay commissions, which provide impetus for substantial wage The costs of the civil service are raised further by increases. Instead, the central and state burgeoning pension liabilities. At the center, governments could opt for limited annual wage pension spending for civil servants increased increases, or even pursue a freeze for 2-3 years, dramatically in the 1990s, with average yearly followed by a limited relaxation for skilled growth surpassing 20%, to reach 1% of GDP. positions. Or, as recommended by the Fifth Pay And in Uttar Pradesh the ratio of pension Commission, the process of constituting spending to state GDP increased from 0.4% to commissions every ten years could be abandoned 1.2% in the 1990s. Pension expenditures for the in favor of a permanent pay commission, which center and the states are likely to keep on growing could continually analyze and make at a fast pace, especially for states, where recommendations for appropriate compensation employment more than doubled over the past 30 in consultation with the states. Whatever the years. Preliminary estimates conducted in 2001 system adopted, more emphasis needs to go to using the World Bank Pension Reform Options local market comparators (particularly those Toolkit actuarial model suggest that the present involving the private sector) in determining value of central and state pension liabilities could salary levels. Efforts to rationalize the number of amount to 25% of GDP. 37 India: Sustaining Reform, Reducing Poverty In the light of rising pension liabilities, the address the problems besetting the pension Government announced in February 2003 a plan system in India. The reform faces the dual to establish a fully funded defined contribution challenges of establishing a sound, well-regulated scheme for new civil servants. Individuals will be funded pension system for new federal civil able to choose from a limited number of servants and, more importantly, motivating prequalified private asset managers and one public further and deeper reforms within the rest of asset manager. The system will be centrally India's pension system. The new scheme should administered to reduce costs. A new specialized serve as a model for the states to reform their own pension regulatory agency will be created to pension plans. Some states (such as Tamil Nadu) supervise the new scheme.34 The shift to a fully are already contemplating similar changes for new funded defined contribution scheme will force the entrants. payment of pension liabilities as they accrue-more transparent and more financially viable. Once implemented at the central level, the Government also intends to expand the new Critical design issues are still to be defined, scheme to the unorganized private sector, which including the contribution rate, the criteria for remains uncovered by formal pension plans. While selecting private asset managers, and the structure laudable, it is likely that coverage of the of the public asset manager to minimize unorganized sector will expand only gradually governance problems. The implementation plan based on other international experiences.35 This will also have to be carefully devised to minimize raises questions about the viability of the new risks, and a strong and effective regulatory agency scheme unless it is able to attract a wider group of will have to be established. Since this reform will workers, including private sector employees apply to new civil servants, primarily younger participating in the Employee Provident Fund workers, it will contain pension costs only over the (EPF) and the Employee Pension Scheme (EPS). longer term. Indeed, in the short to medium term, At a minimum, the reform could allow new fiscal outlays may rise, as the Government has to workers in the private sector to join the new meet the combined costs of the old and new scheme and allow others to opt out of the EPF and schemes. Better measurement of the pension EPS.36 The success of this reform could well set a liabilities of current civil servants would likely benchmark for deeper changes in the EPF and EPS point to unsustainability and the need for further over the medium term. reforms, including changes in eligibility criteria The Return on Civil Service Expenditures and a possible shift of younger civil servants (on a voluntary or mandatory basis) to the new defined While the odd success story may be found, the contribution plan. recent wage gains generally were not compensated by any commensurate increase in The proposed defined contribution scheme for the overall quantity or quality of government civil servants constitutes the first attempt to services. Indeed, the mandate of India's public 34 Its regulatory authority will not cover existing pension plans. The Employee Provident Fund, the Employee Pension Scheme, and occupational plans will remain unsupervised despite performance concerns. 35 Inadequate coverage of the formal pension schemes also threatens to increase poverty among the elderly as informal arrangements become more strained. This raises the need to better target social assistance for the elderly poor. 36 There are also concerns about poor investment practices of occupational pension schemes (in particular, self-lending to the sponsoring enterprises and related parties). Asset management under occupational pension plans could now be transferred to asset managers under the new scheme. 38 Delivery of Public Services service has been shrinking, as governments in this period-to the detriment of spending on withdraw from direct involvement in training and learning materials, maintenance, and economic production and focus more on a scholarships. Because it is difficult to shed labor regulatory and facilitative role for private or adjust personnel inputs, the burden of any sector growth. shocks falls disproportionately on nonwage expenditures, making rational planning almost Qualitative improvements have often relied impossible. heavily on the application of information technology to streamline and re-engineer Another fundamental problem haunting India's business processes, such as the Bhoomi program civil service is the failure to use staff productively. for registering property records in Karnataka or In Uttar Pradesh, for example, the Public Works the e-Seva "one stop shops" for more than 40 Department has a total strength of 77,000, government services in Andhra Pradesh. Even including roughly 9,000 technical staff, 12,000 when information technology has made many administrative staff, and 56,000 gang laborers. functions redundant, civil servants and powerful With 51 laborers for every 100 kilometers of unions have extracted pledges of "no job losses" road, it has one of the highest manual staffing as the price for allowing the innovations to go ratios in India, and market manual wage rates are forward, thus limiting the economies and about a third of Public Works Department rates. efficiency gains to be reaped. One southern As a result, the cost of keeping this gang labor Indian state, for example, computerized part of force is substantial-in 1998/99, the actual its stamps and registration function. The result: expenditure on maintenance was Rs2.8 billion, faster client service and a reduction in while establishment costs were Rs3.4 billion. As turnaround times by nearly half. By some discussed below, absenteeism among frontline estimates, as many as 48% of the department's workers is often appalling, with few sanctioned staff of approximately 3,200 were made or dismissed from service despite chronic redundant by this decision, yet they are retained violations. on the state payroll at an estimated cost of more The burden of weak administration falls than $3 million a year. particularly on the poor, who suffer from Experience varies, but both the center and the skewed government spending, limited access to states have on average resisted pressure for new services, and employee indifference. One recruitment in much of the 1990s and beyond. assessment of spending for health and nutrition But even the best performers have yet to embark in northern India revealed that of every Rs100 on a significant program of staff reduction. As a of expenditure, the poorest 20% of households result, many line departments find themselves in received about Rs10, whereas the richest 20% a more precarious position, with a growing received Rs41 (World Bank 2002a). In rural proportion of their nonplan resources taken up by areas, only 4% of the poorest households had salaries, over which they have very limited access to electricity and 25% had access to control. For example, in the Andhra Pradesh drinking water, compared with 28% and 66% Department of Stamps and Registration, only for the richest. Innovative survey research by about 16% of nonplan resources went to the Public Affairs Center in Delhi and nonwage funding from 1995/96 to 1999/2000. Bangalore reveals that the average slum dweller Other critical departments in Andhra Pradesh, needed to make six trips to a government such as those looking after primary education, agency to resolve a problem, while the number spent 93% of their noncapital budget on salaries of trips among general households was four 39 India: Sustaining Reform, Reducing Poverty (Paul and Shekhar 1999; Shekhar and Affairs Committee conducted a user survey of Balakrishnan 1999). The rate of success was maternity wards that led to a major restructuring more than four times higher for general of the service by the Bangalore City Corporation. households-averaging 27%, compared with only Other NGOs have concentrated on public interest about 6% for slum dwellers. litigation to prod governments into action to improve the performance in laggard services. Improving Public Service Delivery Several states are using information technology to There are many reasons for the poor quality of improve access to information. Tamil Nadu has public service delivery in India. Internally, placed all major government orders of public administrative structures and responsibilities are interest on its website. Andhra Pradesh's portal highly fragmented, while human resource contains extensive information about Government management places more weight on seniority than departments, schemes, and policies. It also allows merit. It will obviously take time to reform these citizens to contact Government officials directly, long-standing structures and systems. But from the Chief Minister's office on down. And it experience throughout India shows that civil provides (initially) for limited online transaction servants do respond to external pressure for processing as well. Computerization is also being delivery of better services. Three key elements for used to re-engineer business processes and speed success: up decision making. Better public access to information. Finally, the center and several states are promoting Stronger accountability. greater transparency by adopting right to More independence from political interference. information legislation. Maharashtra provides access to cabinet-level documents (with some Better access to information. To demand better narrow exceptions), a public records commission public services, citizens need to be better informed to improve record keeping and cataloguing, an about service standards, norms, and procedures- independent appeals process, penalties for and have ready access to forms and other such noncompliance, and a high-level council to material. Opening access to information short- monitor implementation. These initiatives will be circuits the rent-seeking opportunities that secrecy followed closely, to see whether they can counter provides. Citizens' charters are one vehicle to well-entrenched practices and interests within the empower the public in their dealings with service civil service to limit public access to information. providers. It is important, however, that such charters be developed in consultation with major Stronger accountability. The vast majority of staff stakeholders and widely disseminated. One model at the center and in the state governments are is the charter developed by the Greater Mumbai promoted on the basis of seniority and merit. In Municipal Corporation in June 1999, with practice they will be promoted as a matter of assistance from Praja, an NGO. course regardless of their performance as long as no adverse remarks are entered against them. NGOs can also do much in collecting raw data, Performance evaluation is weak and poorly linked transforming it into usable information, creating to the system of rewards and promotions. Even databanks that other organizations can tap, and more problematic is the failure to punish or weed disseminating relevant information to a wider out corrupt or incompetent officers. The process of audience through report cards, surveys, and public sanctioning malfeasance or maladministration is hearings. In Bangalore, for example, the Public fraught with multiple review and appeals stages, 40 Delivery of Public Services resulting in years of delay. In only a minority of unchanged. Recently, reforms have attempted to cases are criminal or administrative sanctions enhance their "external" accountability and imposed.37 As a result, Indian civil servants have customer orientation. Some states, such as Madhya little to motivate them to better performance Pradesh, have sought to empower local beyond their innate professional ethic. communities by allowing them to recruit their own teachers through an Education Guarantee Scheme. The Indian administrative structure was designed Others, such as Janmabhoomi in Andhra Pradesh, in colonial times to facilitate the collection of regularly bring bureaucrats in contact with local revenue and preserve law and order. Government villagers to listen to their concerns. reporting relationships are inwardly focused and strongly hierarchical, with the pivotal role played Independent audits by the Comptroller and by the district collector and magistrate. At the Auditor General (CAG) are one of the primary subdistrict level, all lines of authority flowed institutional mechanisms for executive upwards to the district collector and magistrates, accountability. But the CAG mainly focuses on who in turn reported to superiors in the state financial irregularities. Some performance capital. While a host of developmental functions appraisals are carried out, but they rarely indicate have been added since independence, these basic how management can be strengthened. Discussion reporting relationships have survived largely of CAG reports by the Public Account Box 3.1. Karnataka's Ombudsman The Karnataka Lok Ayukta is probably the strongest of all ombudsman offices in the country. As in Madhya Pradesh, Karnataka has placed the Vigilance Department under the full control of the independent Lok Ayukta, to strengthen his capacity for autonomous action. In addition, the Karnataka Lok Ayukta Act vests the Lok Ayukta with wide statutory powers-from investigating corruption to addressing citizen grievances against any public servant, including the Chief Minister. He also has the right to initiate prosecution directly. Karnataka's Lok Ayukta is appointed for a fixed five-year term by the Chief Minister in consultation with the Speaker of the House, the Leader of the Opposition, and the Chief Justice. Once appointed, he can be removed only for "proven misbehavior" or "incapacity" by the Governor, after a two-thirds majority vote in both chambers of the legislature. The Lok Ayukta in Karnataka has been very active in investigating corruption in health and education facilities around the state, regularly visiting districts to hear complaints, unearthing large financial scams in Karnataka's city municipal corporations, and raiding regional transport and stamps and registration offices to catch people red-handed. The growing activism of the Lok Ayukta has forced many departments to furnish effective redress to citizens to avoid further investigation and adverse media attention. The growing credibility of the Lok Ayukta as a channel for redressing grievances is reflected in the dramatic increase in complaints in just one year-from 303 in January 2002 to 1,026 in December 2002. 37 In this regard, the comparison of Uttar Pradesh with Hong Kong's Independent Commission Against Corruption (ICAC), arguably the most effective anticorruption agency in Asia, is instructive. The average Hong Kong citizen is 39 times more likely to institute a complaint; the ICAC is more than 240 times more likely to investigate a case during the year in which the complaint is made; and a Hong Kong civil servant is 24 times more likely to be charged with a crime than his or her counterpart in Uttar Pradesh. Furthermore, disciplinary cases in Uttar Pradesh can wind through the courts for as long as 20 years, and a large majority ultimately end in acquittal. (Source: World Bank staff calculations based on annual reports for the Uttar Pradesh Vigilance Department, the Uttar Pradesh Lok Ayukta's Office, and the Hong Kong ICAC, 1997-99.) 41 India: Sustaining Reform, Reducing Poverty Committees of parliament and state assemblies are and well-intentioned manager to implement not open to the public and often come with a long lasting improvements. delay, which reduces the prospects for effective follow up. Clearly, audit procedures should be Several approaches have been tried to curb the improved. But there should also be wider use of excess transfers. Karnataka, for example, has a new other accountability mechanisms. The Lok Ayukta system of cadre management authorities to approve transfers, posting the number of transfers (Ombudsman) in Karnataka seems to be on a public website. This system has reduced generating good results and may hold valuable transfers below the 5% norm in most departments. lessons for other states (box 3.1). The success of The success of these initiatives should be followed vigilance and ombudsman functions depends on closely and extended to other states as appropriate. having enough independence, budget, and staff resources to investigate and prosecute corruption. In addition, a comprehensive anticorruption Health, Education, and Social Safety strategy should include: a radical overhaul and Nets simplification of the procedures for imposing Official estimates of poverty, literacy, and net major and minor penalties, expanded enrollment rates have been improving dramatically "whistleblower" protection, and publication of the since the 1980s, but not enough to achieve the property and tax returns of senior officials. Each targets set in the Tenth Plan or even the less state should be asked to pass the Corrupt Public ambitious Millennium Development Goals. Servants (Forfeiture of Property) Act, already Indeed, progress in health indicators has been drafted by the Law Commission. slowing precipitously. Infant mortality rates of 115 per 1,000 live births in the 1980s fell to 79 in 1992 More independence from political interference. but only to 68 in 2001. And mortality of children This topic is sensitive, for the right to transfer civil under five appears not to have improved in the servants is clearly vested within the political 1990s-even worsening (from 94 per 1,000 live leadership under Article 310 of the Indian births in 1992 to 95 in 2001). Education Constitution, which maintains that civil servants indicators have continued to improve, but there are serve at the "pleasure" of the ruling authorities. Yet still wide disparities across states, gender, and caste few would disagree that both civil servants and in completion of primary education. For example, politicians often abuse this power-the former in illiteracy rates for men ages 15-24 have declined seeking prime postings, the latter for a variety of from 27% to 20% and for women from 46% to legitimate and occasionally illegitimate reasons. 35%-showing substantial progress in levels and The result in such states as Uttar Pradesh has been gender differences, but still with some way to go. a reduction of average tenure for key senior civil service positions to less than a year. Chronic The gaps in both mortality and educational status political instability in Uttar Pradesh and Manipur between the poor and nonpoor are striking: the has led to the frequent collapse of government, 1998-99 National Family Health Survey indicates leading to new rounds of transfers as the next differences in child mortality between the poorest group of political leaders rewards supporters and and richest deciles of wealth of 100% to 400% puts its "own" staff into place. Compounding this across states, with enrollment rates varying by problem: the absence of effective transition multiples as well (World Bank 1998b, 2002l). For mechanisms. Since most reforms in large public example, the range of under-two mortality rates organizations require several years to produce from the poorest 5% to the richest 5% is from results, it is impossible for even the most capable 19% to 4% in Tamil Nadu and from 12% to 6% 42 Delivery of Public Services in Maharashtra. Similarly, in education, the range teachers (though not nurses), with all three of completion rates from the poorest 20% to the professions now receiving twice the private pay richest 20% is from 17% to 78% in Bihar and while in public service. This spending increase was 44% to 95% in Karnataka. Since mortality rates not likely to improve health or education are quite low and enrollment rates near universal outcomes-and it didn't. for the better-off, improvements in the average rates needed to reach the Tenth Plan goals cannot Figure 3.1. Public Expenditures on Education, Center and States, be achieved without directly improving the health 1991/92-1999/2000 and education of the poor. (billions of 1993 rupees) Plausible rates of economic growth alone will be insufficient to reach the Tenth Plan goals. If real GDP were to grow at 6% a year, India and the majority of states would not reduce infant mortality to half of the 1990 rate or achieve full primary enrollment by 2015. Nor can the goals be achieved by simply increasing public expenditures- without complementary measures to improve the effectiveness of public service delivery. This conclusion is corroborated by analyses of the National Family Health Survey: the presence of public health care facilities in a village has no effect on mortality, controlling for income, education, access to good roads, and water supply (World Source: Shariff and others 2002 Bank 1998b, 2002l). While the effectiveness of public expenditure in education is better, higher Figure 3.2. Public Expenditures on Health, Center and States, spending alone is still not enough to achieve 1991/92-1999/2000 universal enrollment, let alone universal (billions of 1993 rupees) completion of lower primary education. Public expenditures on health and education have increased over the past decade. But, because both health and education are labor-intensive, the bulk of this increase has been due to sharp increases in the wages of public service providers, following the Fifth Pay Commission recommendations in 1997. The impact of the Commission's recommendations on spending was somewhat higher in education and health than in other sectors. In some states the wage bill tops 90% of the total costs (figures 3.1 and 3.2). The increase in Source: Shariff and others 2002 the wage bill following the Commission decision led to increases in pay rates and not in the numbers The main weakness in the social sectors is in the of teachers, doctors, or nurses. This widened the implementation of good policies. The quality of gap in pay between public and private doctors and services needs to improve. As one indication, 43 India: Sustaining Reform, Reducing Poverty recent estimates of absentee rates for Table 3.3. Absentee Rates from Primary teachers and medical providers are high, Facilities in Selected States, 2003 (%) and the problem is generally much worse in poorer states (table 3.3). In Bihar State Primary school Primary health care surprise visits to schools indicated that as teachers workers many as 26% of the teachers were not Andhra Pradesh 31 n.a. present-and for medical practitioners, Assam 31 58 the rates are more than twice that. Since Bihar 26 58 these people are on the payroll, it is not surprising that public money does not Gujarat 21 52 translate directly into better outcomes. If Haryana 19 35 vacancy rates (positions unfilled) are Karnataka 23 43 included, the bias against poor people is Kerala 18 n.a. even more pronounced. Orissa 14 35 These and other indicators of low Punjab 18 n.a. quality are not lost on the public. Rajasthan 23 39 Bypassing free public services to use the Tamil Nadu 17 n.a. private sector is common, even among the poor. Data from the National Uttar Pradesh 26 42 Sample Survey of 1995 indicates that Uttaranchal 25 45 more than half of visits to medical West Bengal 21 43 providers by people in the poorest n.a. Reliable data not available. quintile in rural areas are to the private Source: World Bank forthcoming, World Development Report 2004. sector. Similarly, the use of private schools is increasing rapidly in general political benefits of being very visible and and to some extent among the poor. English- having opening ceremonies. But basic public medium schools are seen as a means of upward health activities-such as hygiene, education, mobility. and mosquito control-are not as beneficial to politicians. The cause of the implementation problem is that politicians and bureaucrats are not accountable for Policymakers have too few means of influencing social outcomes-the health status of the people, the the incentives facing service providers. As in learning by students-and that they do not hold civil service reform, the weakness of personnel providing the service accountable. administration-in this case illustrated by the Incentives to public providers make no one feel lack of control over staff behavior-hurts the responsible for better or worse outcomes. poor and denies them basic services. influence of parents and patients on For systemic reasons the interests of the poor The public providers (as in monitoring and are not reflected in policy decisions for health sanctioning) is not effective enough to and education. Influential urban and wealthier compensate. constituencies, for example, don't consider reaching remote areas or handling disease The intrinsic motivation of providers, while problems that mostly affect the poor to be high strong, is not sufficient to meet social priorities. Building facilities carries the objectives. 44 Delivery of Public Services One way to make outcomes more of a motivating Centrally sponsored schemes could also be made factor in service delivery is to generate and more flexible, and in many cases, as for disseminate information on progress. Parents and preventative health care, their functions and patients should know what they are entitled to and funding should be at least partially passed on to the have a place to lodge complaints when they do not states, for what works in Kerala may not work in receive services. Public officials should know the north. Measures to ensure ownership, political whether the public is satisfied or not. Providers and independence, and conscientious behavior of civil policymakers should know (and be constantly service staff may be unnecessary in states with a learning) about what works. This requires track record of good governance. Solutions to the outcomes to be more regularly measured and their problem of implementation can be found in the determinants analyzed. experimentation that such flexibility allows. The centrally sponsored schemes should also be One critical role of the central government, when evaluated rigorously, based on survey data. The states have the primary responsibility for the lessons will help all states improve their programs, delivery of publicly funded services, is to be an thus warranting central involvement. independent source for this measurement. Initially, measurement of outcomes may just be for Creating institutions and establishing information and the sake of openness. Over time, measurement and evaluation procedures that will such measures could be used to hold states yield more effective policies and better social accountable for improvements-perhaps outcomes will take time. The solutions will also conditioning fiscal transfers on progress. The vary by sector. increase in expenditures in figures 3.1 and 3.2 did not translate into better social indicators-primarily Health Strategy and Policy Priorities because the spending was simply an increase in There are two deep problems in the health sector: payments for inputs rather than outcomes. a lack of realism for the public sector's role in the Table 3.4. Health Spending in India and Comparator Countries, 2001 GDP per capita Total health Public health Private health spending spending spending (% of GDP) (% of GDP) (% of GDP) Pakistan 420 4.1 0.9 3.2 India 460 4.9 0.9 4.0 Indonesia 690 2.7 0.6 2.1 China 890 5.3 1.9 3.4 Russia 1,750 5.3 3.8 1.5 Thailand 1,940 3.7 2.1 1.6 South Africa 2,820 8.8 3.7 5.1 Brazil 3,070 8.3 3.4 4.9 Malaysia 3,330 2.5 1.5 1.0 Mexico 5,530 5.4 2.5 2.9 Source: World Bank 2002s. 45 India: Sustaining Reform, Reducing Poverty health system and a lack of priorities for the public achieve substantial reductions in child mortality. sector's possible contributions. There is a strong Although the situation is improving, 64% of tendency in the public sector (and in much public households still have no toilet facilities. discussion) to believe that provision in government Most medical care is now in the private sector- facilities is the whole of the health sector. In fact, and for the poor, mostly by very poorly trained government expenditures on health are only about or untrained practitioners. There is no way to 20% of the total. The share is even less for the expand free publicly supplied medical care to number of visits to providers, since the public replace these practitioners. With limited funds, sector is more prominent in expensive hospital care and more important with the difficulties of than it is in primary care. There is also a strong managing a dispersed network of primary health tendency in the public sector to believe that its centers with personnel who do not want to live clientele is predominantly poor. In fact, the use of in rural areas, replacing a private market is a low the public sector is much greater for those better return activity. It should thus be a low priority. off. Most public inpatient services (more than So, while there is room for expanding health 65%) are used by the richest 40% of the expenditures as India grows, the extra spending population (compared with 19% for the poorest must complement private expenditure rather 40%), as are most outpatient services (48% for the than displace it. Improving the private market- richest 40% and 31% for the poorest 40%) (Mahal through training, public information, and and others 2001). accreditation-is a far better option. And over International comparisons support the observation time, public financing of private provision could that the private sector dominates India's health be increased, subject to evaluation to make sure system (table 3.4). India's public expenditure on it works. health reflects its low income. For a large range of Attracting private investment to hospitals is also a countries public health expenditures are highly way to expand services-a complex solution since it correlated with income-with shares of public depends on payment mechanisms, such as health spending increasing with income. insurance, that will allow payment to private Unusually, India's private spending on health care facilities. Some reform proposals are being is higher as a share of income than that of such pursued, but there is likely to be substantial significantly richer countries as Thailand and learning from social insurance funds and their Malaysia. This indicates a substantial demand and subsequent revisions of policies. It may take a willingness to pay for health care, to be kept in long time to establish such mechanisms. Progress mind when considering financing options. will be faster in states where financial Many factors, most outside the health sector, accountability is easier to establish. In the contribute to health status. Clean water, sanitation, meantime, a clearer regulatory structure for the and efforts to reduce indoor air pollution are all hospitals themselves would help. Even with essential for a healthy environment (box 3.2). insurance or other payment systems, explicit Education (probably for women more than men) subsidies for poor patients will be necessary. And and income also have a strong impact, particularly before such systems take effect, ensuring better through nutritional status. Government programs access to catastrophic medical care is a priority for to improve health outcomes need to reflect the the poor-and may be more a matter of improving priority for clean water, sanitation, and clean air- roads, communications, and administrative and for simple medical care. Improvements in both procedures for admission than increasing sanitation and simple medical care are essential to facilities. 46 Delivery of Public Services Box 3.2. Building a Healthy Environment Water, sanitation, and hygiene. Adequate water and sanitation are central to improving health outcomes. Contaminated water can lead to water-borne illnesses, such as viral hepatitis, typhoid, cholera, dysentery, and many other diseases that cause diarrhea. Indians lose 22 million disability- adjusted life years annually to diarrheal diseases, the second-largest contributor to the country's disease burden (WHO 1999). Diarrhea and other diseases caused by poor water quality are estimated to be responsible for approximately 1.5 million deaths a year among children each year in India (Parikh and others 1999). Inadequate quantities of water make personal hygiene difficult, facilitating the spread of many diseases and infections. Although water quality is important, multicountry studies have shown that improved hygiene through hand washing and improved sanitation through latrine usage have a greater impact on health outcomes. Hygiene and sanitation improvements reduce diarrhea, parasitic infections, morbidity, and mortality more than water quality (Esrey and others 1991; Hutley and others 1997). India has been increasing water supplies, but sanitation coverage has lagged behind. Providing adequate clean water and promoting sanitation and hygiene would reduce the burden of water-borne diseases. But infrastructure alone will not necessarily decrease child mortality in poor families, which tend to be most vulnerable to disease. Piped water leads to improved child health outcomes in India, but the gains tend to be lower for children with less educated mothers and in less wealthy families (Jalan and Ravallion 2001). This points to combining education and poverty reduction strategies with infrastructure investment to protect the health of children in India. Indoor air pollution. Indoor air pollution is a larger problem in India than in most parts of the world. Smoke emissions from the use of biomass fuel (wood, dung, and straw) are estimated to be responsible for about 500,000 premature deaths and about half a billion illnesses each year (World Bank 2002l). Young children, who spend much of their time at home, are particularly vulnerable to the health consequences of exposure to smoke from solid fuel. A recent assessment concluded that the deaths of as many as 444,000 children under five years old may be attributable to solid fuel use (Smith 2000; Smith and Mehta 2000). Another study estimated that child mortality is about one-third lower in households using clean fuels than in comparable households using biomass (Hughes and others 2000). Converting to clean fuels would eliminate this health risk. But for the majority of rural households, biomass will continue to be the main cooking fuel, largely due to its relatively low cost (World Bank 2003a). So there is a need to find and promote cleaner ways of using biomass. International experience shows that highly successful programs typically include financial assistance for technical development, stove design, marketing, and public awareness campaigns. The national government can contribute by evaluating programs, providing training and seminars, and sharing information among programs. The dissemination of information about health risks of biomass fuel and mitigation options can lead to a greater willingness to switch to safer fuel or at least modify behavior and cooking areas. Community interventions are needed to assure that solutions are cost- effective, sustainable, and tailored to local conditions. 47 India: Sustaining Reform, Reducing Poverty Within the health sector, combating unique challenge for India's leadership. There are communicable diseases should continue to be the many competing needs for the public health highest priority for public funds. Why? Because infrastructure, and it is important to ensure that there are clear and considerable externalities of HIV/AIDS programs neither undercut resources to control, including such true public goods as deal with other killers like tuberculosis, malaria, swamp drainage and large-scale pest control. and diarrhea-nor get marginalized. Because the benefits are heavily skewed to the poor-with the difference in incidence of The main focus of HIV/AIDS policy should be communicable disease for the rich and the poor prevention. Treatment is expensive and has the many times that for noncommunicable disease possibility (as demonstrated in the United States, (figure 3.3). And because relative to medical care, Europe, and Australia) of undermining prevention most of these activities are much easier to activities by making contracting the disease less of administer. For example, pulse polio campaigns a catastrophe. Instead, treatment should be used require professionals to be in rural areas only only if it can complement prevention efforts-say, as periodically, without forcing them to move their an inducement for testing. Surveillance of the families. disease should not be limited to public antenatal clinics and other standard locations. Much more Figure 3.3. Prevalence of Diseases by attention is needed for accurate measurement of Income Group, All India,1992 the incidence as well as for research to understand the sexual (and drug use) behavior of people if effective prevention strategies are to be designed. While the political obstacles are severe, the epidemic can begin to be controlled only if there is a candid public discussion of sex. People must be able to know the extent of their risk and how to reduce this risk through safe sex. If this is not done, the country will face a genuine disaster. Education Strategy and Policy Priorities Progress in education has been much greater than in health. Enrollments have responded to higher expenditures. Political support has been more Source: World Bank 1998b. reliable in many states. And there are several The largest emerging problem in communicable notable success stories. But there are large disease control is the increase in Human variations across states, and the current rate of Immunodeficiency Virus (HIV) infections and aggregate progress in education indicators is Acquired Immuno-Deficiency Syndrome (AIDS) insufficient to attain the goals in the Tenth Plan. cases. Estimates of the spread of HIV infections, Of 200 million children ages 6-14, 42 million do ranging from 4-8 million in 2002, are subject to not attend school. There are problems of high much dispute. But there is no dispute that the dropout rates, low levels of learning achievement, infection is spreading rapidly. Some predict that as and low participation of girls. There are also many as 20-25 million cases will occur as soon as systemic issues of widespread teacher vacancies, 2010 (a more than doubling of current, estimates high teacher absenteeism, and inadequate teaching of prevalence). The HIV/AIDS crisis presents a and learning materials. 48 Delivery of Public Services Table 3.5. Education Spending in India and Comparator Countries GDP per capita Public expenditure per student (dollars) Primary Secondary Tertiary education education education Pakistan 420 n.a. n.a. n.a. India 460 7.2 23.1 92.5 Indonesia 690 3.2 8.7 12.2 China 890 6.1 12.1 85.8 Russia 1,750 n.a. 20.5 15.8 Thailand 1,940 12.5 12.8 38.2 South Africa 2,820 14 17.9 61.3 Brazil 3,070 12.5 12.6 72.8 Malaysia 3,330 11.2 19.9 86.1 Mexico 5,530 11.7 13.8 45.2 n.a. Reliable data not available. Source: World Bank 2002s. India's overall spending on education is not much education and improvements in the effectiveness different from that of other countries with similar of using public resources. The central issues: incomes (table 3.5). But the composition is skewed somewhat toward the secondary level and How to ensure that all children, particularly considerably toward higher education. Given the poor children, become enrolled in primary very sophisticated academic tradition coexisting school and are able and willing to complete an with mass poverty, it is perhaps not surprising that elementary education of reasonable quality? higher education is expensive in relation to GDP. What can be done to improve community- But this does not mean that higher education is a school relationships and make the education high priority use of public money-the main source system, including the teachers, more of funding can be private. accountable to the communities they are To accelerate progress in elementary education, intended to serve? the Government of India launched the Sarva How, and how much, can the experiences of Siksha Abhiyan (Education for All) program in educationally stronger states be replicated in 2000/01, aiming to provide eight years of weaker performing states to improve schooling for children ages 6-14 by 2010. It has completion rates and learning achievements? also enacted a Constitutional amendment (86th) that makes free and compulsory education a Education differs from health in that it is more fundamental right for children ages 6-14. possible to rely on communities and parents to Universalizing the completion of schooling monitor and evaluate performance. Parents are in the through the fifth standard and then through the best position to monitor what goes on in schools. eighth, across all Indian states will require They may not know the best pedagogical techniques, additional public resources for these levels of but they do know whether the teacher comes to 49 India: Sustaining Reform, Reducing Poverty work. And even illiterate parents can tell if their Competition can be for concessions to establish a children are learning anything. So effective reform school in a village even if there will be only one. will almost certainly put more power into their And competition can be enhanced by making it hands. In urban settings where there is the possibility easier for children to reach another school. Kerala, of choosing schools, increasing market power with for example, gives substantial subsidies for vouchers might be experimented with (maybe for the transportation. Parents can shop around for better poor, maybe for everyone, with limits on topping schools, and the revenue of the school depends on up). The essential feature is to allow money to follow enrollments. the student-and to allow schools enough autonomy to be able to compete for it. Schools need enough autonomy to attract teachers and students. Circumstances across India differ In rural areas, where little or no real choice is enormously, and reaching the poorest and most practical, increasing parent voice and influence remote children requires flexibility and over school operations is a good option. Making experimentation. Once again, localities must be schools more accountable to the community is allowed the freedom to find their best solutions. critical, possibly as far as giving parents the right to Higher levels of government can help by hire and fire teachers through local school establishing more regular measurement of committees. The most promising developments in attendance and learning outcomes and providing primary education have been in Madhya Pradesh, other information needed to evaluate progress. where communities have been allowed to hire This helps individual districts adjust their strategies informal, less qualified teachers at much lower and learn from each other. wages than possible in the civil service-with much better attendance and educational outcomes. Experience is accumulating on making contracts Other states, such as Rajasthan and Uttar Pradesh, with government contingent on better have also experimented with para-teachers, who performance on tests. NGOs and possibly for- appear to provide better services, despite their profit institutions can be given operating budgets lower qualifications and salaries.38 contingent on independent measures of teaching improvements. While overreliance on test scores States will differ in the degree and form of relying carries risks (such as "teaching to the test" and on parents and communities-depending on their ignoring less quantifiable aspects of education) ability to monitor and ensure good performance many parents would be happy if enough teaching from their teachers. While parents in the was taking place for test scores to improve. One community schools in Madhya Pradesh can way or another, schools should be more dismiss and hire teachers, other states might find accountable for better outcomes. This can be that ordinary complaint procedures through done in many ways-contracts with local panchayats can work as well. In all cases the active governments, contracts with state departments of participation of parents is likely to be a major education, giving parents a greater say in school factor in all successful education reforms for a long governance, or a greater choice between schools. time to come. The common feature is separating the funder of There may also be more scope for competition in the school and the provider, with the latter education than is ordinarily considered. beholden to the former. 38For example, a recent evaluation of a remedial education program run by Pratham (an NGO) concluded: "Hiring remedial education teachers from the community appears to be 10 times more cost-effective than hiring new teachers." See Duflo (2003). 50 Delivery of Public Services There is substantial demand for upper primary discriminate between poor and nonpoor (there and secondary education, partly a result of the were 2.8 nonpoor for each poor beneficiary) is a success in increasing primary enrollments. In matter of great concern. many states, secondary schools are grant-in-aid institutions (private schools paid for by public One general rule is that self-targeted programs, funds) and there is concern over the quality of such as the Maharashtra Employment Guarantee education in such facilities. In many states, there Scheme, tend to reach the poorest better than are also concerns about leakages from grant-in- those that rely on administrative discretion for aid expenditures. Again, more regular evaluation eligibility. Self-targeted programs allow people to of outcomes can improve oversight of such choose to participate but are designed to attract the contracts and increase public accountability for neediest. For example, if wages in an Employment the use of funds. Guarantee Scheme are below prevailing wages, only the neediest will volunteer. These programs Providing Effective Social Safety Nets are cheaper in administration, since there is no eligibility to check, and leakages, since only the Antipoverty programs, or social safety nets, suffer poor will volunteer (Ravallion and Datt 1995). from the same lack of focus on outcomes. The The lesson, though, is that one existing program is poverty problem has changed dramatically since not better or worse than another. It is, once again, India established the major antipoverty programs that all programs should be continually re- in the early post-independence era, such as the examined for their effectiveness. Regular Public Distribution System (PDS). Then, mass monitoring, measuring actual outcomes, and poverty-at rates of 60% or more-meant that refocusing of programs is essential. universal programs were bound to help poor people. Now, with poverty rates below 30% and Toward the Future falling, there is more need to avoid waste of public resources by making sure that program Many internal and external observers of Indian funds actually reach poor people. This requires administration have argued that more careful monitoring of programs to decentralization and local empowerment will determine how much it costs to transfer a rupee ultimately be essential in improving the quality to a poor person. of service delivery at the village level. Faced with slow and uneven progress on The costs vary widely. One study compared five decentralization, the 73rd and 74th programs and found that it cost from Rs1.8 for amendments to the Constitution, ratified in each rupee ultimately received by someone below 1992, obligated states to decentralize to lower the poverty line through the Integrated Child levels. The amendments created distinct rural Development Service, a nutrition and pre-school and urban governments, mandated periodic education program, to more than Rs6.3 through elections, and established an important the "two rupee per kilo" food distribution scheme accountability mechanism, the Gram Sabha in Andhra Pradesh (Radhakrishna and Subbarao (village assembly). But they left other matters of 1997). The PDS cost more than Rs5.3 per rupee implementation to the states. The most visible transferred. Included were the administrative costs achievement of these reforms has been the high of determining eligibility and implementation and degree of political decentralization. With the the "leakage" costs of benefits to people above the election of more than three million local poverty line. Since many state programs are tied to politicians-a third of them women and around a PDS eligibility conditions, its inability to fifth from scheduled castes and tribals-India's 51 India: Sustaining Reform, Reducing Poverty decentralization has, at least nominally, opened performance and resource mobilization. the state to democratic participation. Performance should be monitored not only by the local audit fund, but also by local journalists, But progress on the fiscal and administrative civil society groups, and panchayat leaders from aspects of decentralization has been much more neighboring districts. This would help modest and hesitant. Administrative evolution has strengthen accountability and ensure greater often failed to take account of the limited capacity participation and empowerment of local of local governments, the economies of scale in communities-one of the primary objectives of delivering services, or the potential role of the the decentralization process. private sector. And a serious overlap of responsibilities among state, district, block, and The federal structure, the common institutions village governments obscures the lines of and practices across states, and the ongoing accountability to voters. For the most part, local program of decentralization make India a fertile governments still raise little revenue of their own laboratory for reform. A variety of changes at (though the potential is much higher) and deliver the center, state, and local levels, implemented few services. Instead, they are usually treated by with varying degrees of success, can be quickly state and central bureaucracies as service agents for scaled up and disseminated across the country. higher level governments. India is a leader in the information technology India now needs to move from its decentralized revolution, and states such as Andhra Pradesh patchwork toward an intergovernmental and Karnataka are making impressive gains in framework that improves service delivery applying information technology solutions to a without increasing fiscal pressures. Good fiscal variety of public sector problems. For all their management would suggest re-allocating public weaknesses, cadres such as the Indian funds from central and state schemes to a well- Administrative Service remain a tremendous designed fiscal framework for local reservoir of talent and capacity. Perhaps most governments-guaranteeing their autonomy and important, some broader dynamics-such as the accountability while helping them to match rise of the Indian middle class and the growth of resource allocations with local preferences. It NGOs dedicated to governance-are fostering would also suggest creating incentives for local social demand for good governance. So, while governments to collect a share of their revenues the Indian public sector reform agenda has from local taxpayers (as through land taxes). remained fairly fixed for a decade or more, India Flows of funds from the center and state itself is changing in ways that make reform governments should depend on good local more feasible. 52 PART II POLICY AGENDA: IMPROVING THE INVESTMENT CLIMATE India's economic performance has been aided by India's ability to compete in world markets. the structural reforms introduced over the past Constraining agriculture are the imbalances in decade. On that, there is little doubt. But higher public expenditure-that favor subsidies over levels of private investment and productivity will productivity-enhancing investments-and the be needed to raise the growth rate to 8% a year, remaining restrictions on trade and as targeted in the Tenth Plan. Compared with competition-both of which need to be remedied. many other countries in Asia, India's private And developing the nonfarm sector will be sector faces a relatively unfavorable investment essential for providing employment climate. This constrains productivity and job opportunities in rural areas and supporting creation in industry and services. It also reduces agriculture. CHAPTER 4 INDUSTRY AND SERVICES Structural reforms stimulated industrial Figure 4.1. Private Investment in Industry and services growth and investment in the and Services, Average Annual Growth Rate, early 1990s (box 4.1). The industrial sector 1991/92-2000/01(%) grew 7.6% a year, and manufacturing 9.8% a year, in real terms from 1992/93- 1996/97 (table 4.1). Private investment in industry grew 20.1% a year in real terms over the same period (figure 4.1). But the momentum slowed in the second half of the decade, with industrial growth averaging only 4.5% a year and manufacturing growth only 3.8% during 1997/98-2001/02. Growth in private Source: Central Statistical Organization. investment in industry actually fell -3.4% a Table 4.1. GDP, Industry, and Services Growth Rates, 1992/93-2002/03 (compound annual growth rate %) 1992/93-1996/97 1997/98-2001/02 2001/02 2002/03 GDP at factor cost 6.7 5.5 5.6 4.4 Industry 7.6 4.5 3.3 6.1 Mining and quarrying 3.6 3.8 1.0 4.8 Manufacturing 9.8 3.8 3.4 6.1 Electricity, gas, and water 5.5 5.9 4.3 5.2 Construction 3.6 7.0 3.7 7.1 Services 7.5 8.1 6.8 7.1 Trade, hotels, transport, and 8.8 7.9 8.7 7.8 communication Trade, hotels, and restaurants 9.1 7.1 8.8 n.a. Transport, storage, and 8.1 9.6 8.5 n.a. communication Financing, insurance, real estate, and 8.0 7.5 4.5 6.5 business services Community, social, and personal services 5.1 9.1 5.6 6.4 n.a. Reliable data not available. Source: Central Statistical Organization. 55 India: Sustaining Reform, Reducing Poverty year during 1997/98-2000/01. The manufacturing The organized industry and services sectors now sector in India accounts for only 16.8% of GDP, account for 27 million jobs, of which just 7 million compared with 35% in China and 25-35% in the jobs are in manufacturing and 17 million are in the South East Asian economies. services sector (70% of the organized sector jobs are in public sector units). By comparison, the total The services sector, by contrast, has recorded strong labor force in India is around 406 million, with growth throughout the past decade. Domestic just under 1 million workers moving out of reforms to allow private participation and more agriculture every year. Organized services competition, coupled with more liberal foreign direct generated 760,000 new jobs over the past decade, investment (FDI) policies and access to global while employment in organized manufacturing has markets, played a key role in raising the growth of remained almost unchanged, with only 350,000 business services (primarily information technology), new jobs created between 1993/94 and telecommunications, and hotels and restaurants. But 1999/2000. Growth in total manufacturing such services as retail trade, potentially an engine of employment (organized and unorganized) in India job creation and growth, have not been liberalized- averaged only about 2% a year during 1994-2000, and thus have grown much less rapidly. with the unorganized sector accounting for the FDI in India stood at about 1.3% of GDP in bulk.40 2001/02, declining to 0.9% in 2002/03, compared Over the past 12 months, industry has begun to with 4% in China and 2-3% in many emerging show signs of recovery, fueled mainly by better use market countries.39 FDI in India has been oriented of existing capacity rather than by new to the domestic market, not to exports, unlike that investments-and by lower interest rates, giving in China and South East Asia. No significant huge windfall gains for industry. Industrial growth increase in India's penetration of world markets in for 2002/03 is estimated to be 6.1%, compared industrial products has been observed over the past with 3.1% for the previous year. But, as decade, with the share of nonagricultural exports emphasized in the Tenth Plan, much higher in world exports of the same commodities industrial sector growth will be required to create increasing only marginally from 0.5% in 1990/91 the targeted 100 million or so new jobs over the to 0.55% in 2000/01. Even so, India has achieved next decade. This will need faster growth in labor- a prominent position in global services, today intensive services, such as retail trade. The plan accounting for 1.4% of global exports in services. notes that sustained growth and employment will But this growth took place on the back of a narrow require a step up in domestic investment, set of subsectors-primarily software exports, which particularly private investment, and in grew at an annual average rate of 49% during the productivity. second half of the 1990s. India's performance in travel and transportation services, where the The investment climate varies considerably across underlying growth is linked to trade in goods, has the states. In general, there is a clear link between been mediocre. the investment climate and industrial performance 39In accordance with the new and expanded definition of FDI released by the Government on July 2, 2003, FDI is defined to include, besides equity capital (which comprises the equity capital of unincorporated entities, now also including the equity capital of foreign banks' branches in India, control premium and noncompetition fees), reinvested earnings of incorporated and unincorporated entities and other capital (including short-term and long-term borrowing, trade and suppliers' credit of more than 180 days, and financial leasing). 40Based on the National Sample Survey figures in India, Planning Commission 2001b. 56 Industry and Services Figure 4.2: State-level Industrial Growth, Average Compound Growth Rate by State, 1990-99 (% a year) Source: World Bank Staff estimates based on Central Statistical Organization data. (figure 4.2). Indeed, Karnataka and Gujarat, rated intensive service industries. The advantages include as the better investment climate states by the relative macroeconomic stability (if fiscal issues are World Bank-CII study (2002), recorded high addressed), a local market among the largest in the industrial growth rates (in excess of 8% in the world, a large and low-cost labor force, a critical 1990s). Karnataka is also the leader by far in mass of well-educated workers in engineering and exports of information technology services and science, and an abundance of raw materials. But inflows of FDI. more than five decades of protectionism, state- ownership, and selective interventions have created But even the better investment climate states are deep distortions, stifling India's private sector still way behind the curve compared to India's development, competitiveness, and growth. South East Asian and East Asian competitors. Kerala and West Bengal, ranked among the poorer It is now widely accepted within India that the investment climate states, had much lower Government would do far better by focusing on industrial growth during the 1990s. The only real creating a conducive environment and level outlier was Uttar Pradesh, where, despite a rather playing field for the private sector. More poor investment climate, industry grew at 6.4% a specifically, improving industry and services year during the 1990s. But Uttar Pradesh's requires tackling three key sets of issues industry grew from a very low base, and the growth simultaneously: removing product market in the late 1990s may be attributed largely to distortions, improving the efficiency of factor central government (rather than state) reforms. markets, and alleviating infrastructure bottlenecks. Success in achieving the ambitious India has intrinsic advantages that should allow it to targets in the Tenth Plan will depend on progress emerge as a major hub for manufacturing and labor- in all three areas. 57 India: Sustaining Reform, Reducing Poverty Investment Climate: Key processed foods, but also on some industrial Constraints and Policy Priorities products (such as automobiles)-are far above the new "peak" customs duty rate of 25% introduced Product Market Distortions in the 2003/04 budget. In March 2003, the Small businesses. A key area where industrial unweighted average protective tariff, including the policy reforms need to move faster is in the small- protective effect of the special additional duty, was scale industry reservations. At the start of the about 32.7% overall-30.7% for industrial goods reform program of the 1990s, about 800 items and 46.8% for agricultural products including were reserved for exclusive production in the small- processed foods. Far lower than pre-reform levels scale industry sector, which meant that investment in the 1980s, this is still very high by world in plant and machinery in any individual small- standards. scale industry unit could not exceed a specified Comparing the unweighted average customs duty monetary ceiling. Over the years, this list has been rates of 105 developing countries between 1996 only slightly pruned, so that, in June 2003, 674 and 2000, India's average tariff was the second items remained reserved exclusively for the sector, highest (next to Morocco). Even without allowing although larger-sized industrial firms can now for the special additional duty, India's tariffs are obtain a license to produce products reserved for much higher than average tariffs in other large the small-scale industry sector, if they are exported. developing countries-more than twice China's and For 610 of the reserved categories, total investment Brazil's, four times Indonesia's, and two and a half in plant and machinery for any single firm is times the average of developing countries (table capped at Rs10 million (a little over $200,000), 4.2). Reducing import tariffs is critical to while for 64 reserved items, the cap has been raised improving industrial performance. India should to Rs50 million (about $1 million). This policy of aim to reduce import tariffs on all imports to a product reservation and investment ceilings has single rate (say, 10%) over the next three to four held back the small-scale industry sector from years. Comparable to the rate of tariff reduction in achieving economies of scale and greater China and Brazil over the past decade (China's efficiencies-by inhibiting small firms from import duties are expected to average 9% by investing beyond the stipulated limits, expanding 2005), this schedule would give domestic their operations in the domestic market, and then manufacturers the time to restructure and become moving into exports. Now is the time to eliminate competitive. this reservation policy-to unleash India's Various tariff exemptions that increase effective businesses, encouraging them to grow and protection, create other distortions, and compete on world markets. complicate tax administration should be Trade policy. Import licensing has been abolished. eliminated, preferably by bringing down the For tariff reductions progress was rapid until the general level of tariffs and reducing the demand for mid-1990s, but the process has since slowed (box special treatment. A "jumbo exemption" 4.1). And high import tariffs remain a key notification was introduced in 1996 to consolidate constraint to better industrial performance and and bring greater clarity to the previous competitiveness, driving up the prices of impenetrable maze of exemption notifications. But manufactured products, suppressing demand, and since then the jumbo has grown, and the total providing opportunities for inefficient firms to number of exemptions now appears to be about survive and for efficient firms to capture rents. double the number in 1996. In 2002/03 the Many tariffs-mostly on agricultural products and jumbo exemption customs notification listed 415 58 Industry and Services Box 4.1. Key Structural Reforms since 1991 The structural reform program started in 1991 envisaged a decisive shift in industrial and trade policy, in private and foreign investment in industry and services, and in financial policy. There have been major changes, but slow progress in liberalizing trade and industry remains a serious concern. Industrial policy reforms. Central government industrial controls were mostly dismantled in the early 1990s. The earlier reservation of 18 industries for the public sector, which prevented the private sector from investing in these areas, has been reduced to three (defense aircrafts and warships, atomic energy generation, and railway transport). Central government industrial licensing has been almost completely abolished, except for a few hazardous and environmentally sensitive industries (a pervasive regime of government inspection and clearances remains). The requirement that investments by large industrial houses be cleared separately under the Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power has been abolished, with the act replaced by a competition law that will attempt to regulate anticompetitive behavior. These reforms notwithstanding, three key areas need immediate attention: removing small-scale industry reservations, reducing government interference and bureaucratic hassles in the entry and operation of firms, and improving the bankruptcy framework to facilitate the exit of troubled firms. Trade policy reforms. Import licensing was abolished for most capital and intermediate goods in 1991. But for manufactured consumer goods and agricultural products it was removed only in stages between 1997 and 2001, following pressures from the United States, the EU, and other developed countries under the WTO dispute settlement mechanism. Unweighted average tariffs declined sharply-from 128% in 1990/91 to 34.4% in 1997/98. But the trend was reversed in 1998/99 when average tariffs increased by about 5 percentage points, remaining above the 1997/98 levels until a new reduction program began in 2002/03. The increase during 1998/99-2001/02 was due to protective import taxes on top of customs duties, initially a "special duty," then a "surcharge" (both now abolished), and now the Special Additional Duty. Industrial tariffs were reduced again in the 2003/04 budget, but agricultural tariffs, omitted from the reduction program, are now much higher than nonagricultural tariffs. India used the Uruguay round negotiations to support its industrial tariff reductions in the 1990s. But about a third of its industrial tariffs remain unbound, and most of the rest are bound at a high 40%. With a few exceptions, agricultural tariffs are bound very high-mostly at prohibitive rates of 100%, 150%, or 300%. Policies toward private sector participation and competition. India has advanced considerably in reducing the state's role in industry and services, and in opening them to domestic and foreign competition. Public sector units in aluminum, car manufacturing, telecommunications, and information technology have been privatized. In telecommunications, banking, insurance, and health- previously under the exclusive control of public sector monopolies-private companies, both domestic and foreign, have been allowed to operate. Foreign direct investment (FDI) was substantially liberalized at an early stage of the reforms and extended at regular intervals. 59 India: Sustaining Reform, Reducing Poverty Limits on the share of foreign equity allowed have been liberalized by allowing 100% foreign ownership in a large number of industries and majority ownership in almost all the others. Procedures for obtaining permission were also greatly simplified by notifying lists of industries eligible for automatic approval up to the specified levels of foreign equity (100%, 74%, and 51%) and by requiring potential investors to register only with the Reserve Bank of India. In 1993 qualified institutional investors were allowed to invest in Indian companies by purchasing shares in the stock market, subject to a maximum percentage, progressively liberalized. Financial sector reform. Reforms in banking have included: Dismantling the complex system of interest rate controls. Introducing prudential norms and capital adequacy requirements in line with international standards. Strengthening banking supervision. Creating a more competitive environment in banking through more liberal licensing of private banks and expansion by foreign banks. Strengthening the framework for bad debt recovery through the Securitization, Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002). Improving the bankruptcy framework through amendments to the Companies Act (2002). A number of reforms have also been introduced to strengthen stock market regulation. Even so, concerns remain about the integrity of the markets. items for which some kind of exemption is Other forms of protection are undermining other allowed, each item corresponding to a harmonized efforts to liberalize the trade regime, the most system code (two digit, four digit, or six digit). serious being antidumping. Starting in 1993, And many are supplemented by one or more of 43 antidumping has become a major activity in India, detailed product lists, which contain over 1,100 with more than 300 cases completed, nearly all detailed product descriptions. resulting in specific duties on imports from particular firms and countries, added on top of The vast majority of these exemptions are for normal import duties. The ad valorem equivalents intermediate material inputs or for machinery and of the antidumping duties range from around 10% equipment items and may involve one, two, or all of normal international prices to more than 100% three of the basic customs duties, the additional of international prices, with the total resulting duty, and the special additional duty. Other import tariffs often prohibitive. The effects of complications come from exemptions and partial antidumping duties go beyond the products exemptions that give excise tax advantage to small actually subject to antidumping duties, since Indian firms over larger Indian firms and help the domestic firms can use the threat of bringing small firms in competing with imports. Although actions to prevent or limit competition from the benefit to small firms has been reduced by imports. India's antidumping activity (especially value-added tax (VAT) principles, the small firm following recent antidumping duties imposed on exemption increases the opportunities for tax imports from firms in Nepal and Bangladesh) is evasion and the costs of tax administration. influencing other South Asian countries to also 60 Industry and Services Table 4.2. Unweighted Average Customs Duty Rates in India and Other Developing Countries, Various Years (%) All goods Agriculture Manufacturing India 2001/02 (Customs duty only) 32.3 41.7 30.8 India 2002/03 (Customs duty only) 29.0 40.6 27.4 India 2002/03 (Customs duty and special additional duty)a 35.0 47.1 33.3 India 2003/04 (Customs duty and special additional duty)a 32.7 46.8 30.7 Pakistan 2001/02 20.4 21.8 20.2 Pakistan 2002/03a 18.2 13.9 18.3 Brazil 2000 14.1 12.9 14.3 China 2000 16.3 16.5 16.2 Indonesia 2000 8.4 6.3 8.9 Thailand 2000 16.6 39.9 14.6 South Korea 2000 12.7 47.9 6.6 105 developing countries (1996-2000) 13.4 17.4 12.7 Notes: The India 2001/02 tariffs are customs duties from the World Trade Organization (WTO) Trade Policy Review, January 2002. They do not include the special additional duty. The India 2002/03 and 2003/04 averages are from Arun Goyal, Easy Reference Customs Tariff 2003-2004, plus additional information supplied by the author. The protective effect of the special additional duty was estimated from the average customs duty by assuming an average 16% additional duty rate. The 2001/02 average tariffs for Pakistan are from the January 2002 WTO Trade Policy Review on Pakistan. The 2002/03 average tariffs for Pakistan are estimated from the 2001/02 averages by assuming that all 30% tariffs were reduced to 25% following the cut in the general maximum rate from 30% to 25% in the 2002/03 budget. There are no other explicitly protective import taxes than customs duties in Pakistan. The average tariffs for other developing countries were compiled by Francis Ng (DECRG-TR) from WTO, IDB CD ROM 2000, and Trade Policy Review, various issues, 1993-2001; World Bank. a. Estimate. Source: Sattar and Pursell 2003. embark on antidumping, thus complicating efforts as a proportion of the CIF prices of some to reduce barriers to regional trade. imports, above the equivalent rate on domestically produced products. Sanitary and Other methods are also used to provide extra phytosanitary rules and technical regulations are protection. Specific tariffs mostly protect textile applied in ways that discriminate against fabric and garment producers against low-priced imports. And a new customs ordinance gives import competition, the ad valorem equivalents discretionary power to the Ministry of Finance to of which (based on export prices from China and quickly increase customs duties without Korea) can be prohibitive, ranging from 50% to obtaining the parliamentary clearance previously more than 100%. Government mandated import required. monopolies (state trading enterprises) control imports of foodgrains and fertilizers. Applying The Government has been streamlining its export maximum retail price rules to imported policies, especially the large number of schemes consumer goods raises the effective excise tax rate used to exempt, offset, or refund import duties on 61 India: Sustaining Reform, Reducing Poverty imported inputs used by exporters.41 But many India's negotiating stance on developed country long-standing problems in the administration of restrictions has been combined with defensive these schemes have continued, including delays positions for its own commitments, as indicated by and high negotiation and transactions costs for prohibitively high agricultural tariff bindings, exporters. The underlying reason for the many unbound industrial tariffs, and conservative difficulties is the still very high levels of tariffs and bindings under the General Agreement on Trade in indirect taxes. They mean that fast and complete Services. Because of the current and future size of rebates or exemptions are essential for profitable its economy, India has some bargaining leverage in exporting. But they create large potential economic offering to trade some of these restrictions for rents from the misuse of the schemes. That leads to concessions by other countries (Mattoo and different schemes to meet different circumstances Subramanian 2003). But these potential economic and to complex layers of control. benefits should be weighed against the current and ongoing economic costs of not taking advantage of India has many well-justified concerns about the the opportunity offered by the WTO process to policies of other countries that restrict exports of help lock in liberalizing reforms-by making them goods and services where it has a clear comparative more difficult to reverse under the pressure of advantage. And it is one of the most active domestic protectionist forces. developing countries combating these policies in various international fora, especially at the World The WTO bargaining process can also help Trade Organization (WTO). Of particular overcome domestic interests resisting trade concern: liberalization by balancing greater import competition in the domestic market with better Agricultural protectionism in the EU, United and more secure access to export markets. From States, and other developed countries. this perspective, some of the recent directions of Escalated tariff structures in developed Indian trade policies-especially the routine use of countries. antidumping, sanitary and phytosanitary regulations, and technical regulations for The multifiber arrangement restricting textile protection, and the subsidized exports of rice and and garments exports. wheat-are emulating developed country practices Developed-country regional preferential about which India complains. They are likely to policies, such as the North American Free undermine its credibility in negotiating for Trade Agreement, which divert imports from multilateral rules to limit their future use. India and other excluded suppliers. Domestic taxes. The business environment in The misuse of antidumping, sanitary and India has greatly benefited from VAT principles phytosanitary regulations, and technical and the gradual broadening and simplification of regulations as protective instruments. the previously extremely complex central The reluctance of developed countries to allow government indirect (excise) tax system, now Indians and people from other developing known as CENVAT. Under way since the mid- countries to provide services by temporarily 1980s, this has continued with major moving within their borders. improvements in recent years (especially for 41Current export policies are outlined in the Ministry of Commerce "Report of the High Level Committee for the EXIM Policy, 2002-07" (India, Ministry of Commerce 2002b). 62 Industry and Services textiles), despite a recent move to a basic Table 4.3 Indirect Tax Rates in Selected three-tier structure (8%, 16%, and 24%) Developing Countriesa (%) rather than a system with a single basic Standard rate Significant other rate. But in sharp contrast to an VAT ratesb overwhelming majority of developing countries-by 1998, 116 countries around Asia the world had a VAT or VAT-like tax-India China 17 n.a. has not yet introduced a VAT. It India 8, 16, 24 n.a. announced that sales taxes would be Indonesia 10 5, 20, 35 replaced by a VAT regime on April 1, Korea 10 2, 3.5 2003, but that has been delayed. If fully and uniformly implemented across all Pakistan 10 n.a. states, the VAT should help eliminate Philippines 10 n.a. distortions caused by the cascading effect Singapore 3 n.a. of sales taxes applied at each stage of the Sri Lanka 12.5 n.a. value chain. Thailand 10 n.a. Meanwhile, the prevailing indirect tax Africa regime in India creates significant Kenya 16 12 distortions and transactions costs, and the indirect tax rates remain high relative to Mauritius 10 n.a. other developing countries (see table 4.2). South Africa 14 n.a. A recent calculation suggests that lowering Latin America domestic sales taxes in India would Chile 18 n.a. significantly reduce costs in the value Mexico 15 10 chain, lower consumer prices, and result in rapid growth in domestic sales volumes n.a. Reliable data not available. (McKinsey and CII 2002). It would do this a. With the exception of India, all of the countries in the table have without having an adverse impact on introduced VAT (or a VAT-like) tax. government revenues (given the elasticity b. Excludes the zero-rate on exports. While such multiple VAT rates are likely to complicate VAT administration, they are politically of demand for manufactured goods and attractive by ostensibly serving-though not necessarily effectively- that a reduction in rates would encourage an equity objective. In fact, most OECD countries have multiple firms to move from the unorganized to the VAT rates. Still, the administrative price for addressing equity organized sector, bringing them into the concerns through multiple VAT rates is likely to be higher in developing, than in developed countries. tax net). Another tax-related distortion worth mentioning relates to various states Source: Tanzi and Zee 2000. in India granting discretionary tax and insurance). And it is still subject to limits, holidays. While this problem has been reduced since the abolition of sales tax concessions after particularly on full ownership by foreign players. 1999, it does continue to fragment manufacturing For example, FDI currently is not permitted in capacities, resulting in high costs. pure retailing (global retailers can participate in India's retail sector only through wholesale trade or Foreign direct investment. While FDI policies by operating retail outlets through local have been significantly liberalized, FDI is still franchises). In apparel, another important sector allowed only in selected sectors (such as telecoms for job creation, FDI is limited to 24% of equity. 63 India: Sustaining Reform, Reducing Poverty In housing construction, restrictions on foreign bureaucracy, compared with 9% in China, 11% in ownership of land limit the entry of foreign Latin America, and 12% in transitional Europe builders and developers into the construction (World Bank 2000c). The opportunity cost of market, so that foreign players face higher risks managers' time is considerable. The persistence of when operating in India-because they cannot take controls also opens the door to possibilities for land ownership as collateral for the capital they corruption. The same survey found that the share have invested. of firms making irregular payments in India is about 90%, almost twice that in Malaysia. To Phasing out these FDI limits would bring the reduce the costs of investment related to delays and necessary capital into these sectors (the local capital rent-seeking, all procedures for entry of firms need markets and the pockets of the Indian players are to be simplified and expedited. This requires re- not deep enough to provide the necessary equity engineering the gamut of regulatory processes, commitment). It would also generate growth and especially at the state and local levels. Needed are employment. And as several studies show, the entry clear principles of transparency, an absence of of multinationals would likely lead to technology discretion, and strong accountability. Introducing and skills transfers to domestic firms. If foreign "single window" clearances would help greatly. firms introduce new products and processes, domestic firms would benefit from the accelerated Factor Market Distortions diffusion of technology. Diffusion could also occur Inefficiencies in factor markets-for labor, capital, from labor turnover as domestic employees move and land-coupled with a weak bankruptcy from foreign firms (which typically focus more on framework further constrain the business job training programs) to domestic firms. environment. There is less agreement on the way Business entry. While the "License Raj" has been forward in these areas, and there are strong substantially reduced at the center, it survives at the political and vested interests against change. state level, along with a pervasive "Inspector Raj."42 Private investors require many permissions Labor market restrictions on hiring and firing workers are one of the greatest challenges of doing from state governments to start a business. They business in India, according to the Global also have to interact with the state bureaucracy in Competitiveness Report-India ranks 73rd of 75 day-to-day operations because of laws governing pollution, sanitation, worker welfare, and safety.43 countries (China ranks 23rd). Employment in India's registered firms (those with more than 100 Starting a business in India requires 10 permits, employees) is highly protected. Any registered firm compared with 6 in China. And the median time wishing to retrench labor can do so only with the in India is 90 days, three times the 30 days in permission of the state government, and China (World Bank 2003b). Complaints of delays, permission is rarely granted. These provisions, corruption, and harassment in these interactions especially onerous for labor-intensive sectors, make are common. labor rationalization very difficult and discourage A recent survey found that managers in India the hiring of labor in the organized sector. They are spend 16% of their time dealing with the obviously especially burdensome for exporters 42It may be noted that the License Raj still exists in some traditional areas, notably tariff and other protection policies, and the rebate and tariff exemption schemes for exporters. 43India, Ministry of Commerce (2002a) provides a good review of some existing procedural complexities with public and private investment. 64 Industry and Services competing with producers in other exporting shortages of working capital, investment funds, countries. And they explain the tendency of FDI to and other types of financing, undermining their focus on the domestic market rather than to use ability to grow. Interest rate caps on small loans India as a base for exports. A recent survey found lead to the rationing of credit from formal financial that the typical Indian firm reported having 17% institutions, so that even the better-performing more workers than it desired and that the labor SMEs are often forced to resort to informal sources laws and regulations were the main reason it could of finance-at interest rates significantly above the not adjust to the preferred level (World Bank-CII prime lending rate. High interest costs for Indian 2002e). small businesses affect their international competitiveness: the interest costs over sales were a The Government recently announced its intention quarter higher for Indian firms than firms in South to raise the limit for seeking permission from 100 East Asia (World Bank-CII 2002e). to 300 workers. But this requires legislative changes by Parliament (repealing section 5B of the In large part, the problem of SME financing may Industrial Disputes Act), and the political be attributed to market inefficiency. Transaction sensitivity of such changes is likely to make them costs for SME lending are high because most banks very difficult to implement. Contract labor is not use the same lending technologies for small subject to these retrenchment laws, but flexibility business financing as they do for large in hiring contract workers is limited by the corporations, but they do not have the credit Contract Labor Act, which allows the use of information on SMEs to assess credit risk. And contract labor only for activities of a temporary lenders perceive the default risks of lending to nature. Amendments to the Contract Labor Act, small business as high, because small firms often now being considered, would allow the use of lack collateral that would secure loans. Problems in contract labor for all activities-not just temporary using land as collateral (lack of updated land and activities. property records and the uncertainty surrounding ownership), the nonrecognition by lenders of other Various expert committees appointed by the types of collateral, difficulty in collateral Government and the Reserve Bank of India enforcement and loan recovery, and a bankruptcy emphasize that the lack of adequate, timely framework that does not allow for the easy exit of financing on competitive terms is the single most troubled firms further drive up the risk of default. important constraint to small and medium-scale enterprise (SME) growth and development.44 To improve the efficiency of financial markets for With the shrinkage of the nonbank financial SMEs, the Government needs to: sector, credit to small units has declined since 1997.45 Small players in India typically cannot get Remove interest rate caps on small loans. any startup financing from commercial sources. Facilitate the establishment of well- Even after they have reached a break-even point in functioning credit information bureaus and their operations, profitable small businesses face credit rating agencies for small borrowers. 44See, for example, India, Planning Commission (1997), the "The Interim Report of the S.P. Gupta Study Group on Development of Small Enterprises" (India 2000) and the "Report of the S.L. Capoor High Level Credit Committee on SMEs" (India 1999). 45Public sector banks' lending to small firms has declined from 2.5% of GDP in 1997/98 to 2.2% in 2001/02, with total lending rising only 30% over the period. But private banks' lending to the sector has grown 50% over the period, and foreign banks' lending has more than doubled (from a small base), perhaps reflecting their ability to evaluate borrowers and earn reasonable returns in the sector. 65 India: Sustaining Reform, Reducing Poverty Introduce legislative changes in mortgage abolished the Urban Land Ceiling Act, which registration to make the process more made changes in land use very difficult. But only a customer-friendly. few states have repealed their corresponding Urban Update land and property records for small Land Ceiling Acts, which they should now do. loans. Outdated bankruptcy procedures and ineffective Simplify the legal framework for collateral laws have led to inefficiencies in the system, making enforcement and loan recovery by introducing industrial restructuring almost impossible. Recent alternative (out-of-court) methods of dispute estimates show that it is common for proceedings to resolution between creditors and debtors. The take more than two years, and more than 60% of recently enacted Law on Securitization, liquidation cases before the High Courts have been Reconstruction of Financial Assets and in process for more than 10 years. Not surprisingly, Enforcement of Security Interest, which allows when looking at the share of firms that go for the out-of-court settlement of bad loans, bankrupt, India has a much lower share (0.04%) should be extended to small loans. than other emerging markets (figure 4.3). Promote collateral substitutes and peer Figure 4.3. Bankruptcies as a Share of group security in providing and pricing Total Firms (%) loans to SMEs. Strengthen the bankruptcy framework to facilitate the easy exit of small firms, given their higher mortality rate. And banks should introduce new technologies (such as credit scoring) for SME credit and motivate branch managers to provide loans to commercially viable SMEs. Problems with the use and transfer of land Source: World Bank-CII 2002e. affect larger firms. Indeed, some 90% of land parcels in India are reportedly subject to The recent Amendments to the Companies Act disputes over ownership, which take decades to (2002) should improve the bankruptcy settle in court. And obsolete tenancy and rent framework. They stipulate the abolition of the control laws keep a large part of urban real estate Bureau of Industrial and Financial Restructuring off the market. Freezing rents at unrealistically low and the creation of a new umbrella body-the levels in Mumbai, for instance, has raised rents for National Company Law Tribunal-that will new properties to phenomenal levels while keeping restructure, amalgamate, and wind down rents for old properties very low. This hampers the companies (previously performed by the high growth of domestic retail trade and construction courts and district courts) and revive and by making it very difficult for new players to enter. rehabilitate sick companies (previously assigned to A report on "India's Growth Imperative" by the the restructuring bureau). Under the new McKinsey Global Institute argues that land market framework, courts will no longer have any powers distortions account for about 1.3 percentage points in mergers and liquidations, and this should help of lost growth per year (McKinsey Global Institute expedite the restructuring and liquidation of sick 2001). The central government has already companies. 66 Industry and Services For this new bankruptcy framework to be Unscheduled power cuts impose substantial costs effective, repealing the Sick Industries Companies on firms. Average industrial production losses per Act is essential. The new framework will also outage unit are reported at Rs5 for firms in depend to some extent on the pace of labor Karnataka and Rs22 in Haryana (TERI 2000).47 market reforms, since the successful winding Production losses due to outages are estimated at down of companies may be hampered by 7.6-7.9% of the production costs for industries in problems in retrenching workers. The recent law Haryana and 12.4-15.3% in Karnataka. Some on the enforcement of creditors' rights should 40% of the industries surveyed in Andhra help industrial restructuring, unlocking the Pradesh report damage to equipment due to the resources tied up in nonperforming enterprises poor quality of power-with damage much more for more productive use. But to help the costly for industries with sensitive equipment, restructuring of small firms, the law needs to be and process and quality heavily dependent on extended to cover them. motor speed. Infrastructure Bottlenecks Industry is charged tariffs much above the cost Severe capacity shortfalls, poor quality, and high of supply, due to the cross-subsidization of costs of key infrastructure continue to constrain power tariffs by state governments and the Indian businesses.46 The most important and widespread power theft euphemistically referred difficult area for reform is power. to as "transmission and distribution losses." In most states, political factors dictate that Power. Access to reliable power at reasonable agricultural consumers pay little or nothing for cost is a prime concern for most Indian the power they consume. Households also pay businesses. Industry surveys have found that relatively little-often conniving with the acute power shortfalls, unscheduled power cuts, electricity departments to draw much more erratic power quality (low voltage coupled with power than is billed. Industry ends up paying an fluctuations), delays and informal payments average tariff of Rs3.81/kWh (as against an required to obtain new connections, and very average tariff of Rs2.39/kWh for all categories) high industrial energy costs, hurt industry and an average cost of public power supply of performance and competitiveness. Nationwide, Rs3.50/kWh. Industrial tariffs for larger firms in the shortfall in 2001/02 was estimated at 7.5% India are 8-9 cents/kWh, among the highest in for energy and 13% for peak demand, with the world, higher than 8 cents in Argentina, 7 in substantial variation across states in availability Bolivia, 6 in Brazil and Thailand, and 3-4 in and reliability. Firms in Karnataka are reported China. Typical rates in Western Europe are 6-7 to face, on average, daily power cuts of 2.4 cents/kWh. hours, compared with 6.6 hours (mostly unscheduled cuts) for their counterparts in A great proportion of Indian firms have been Haryana (TERI 2000). forced to operate their own (captive) generators, 46This section focuses on infrastructure bottlenecks that are in most critical need of being addressed in order to improve the business environment. One sector that is not covered is telecommunications, mainly because considerable progress has been made with reforms, and most business surveys report that Indian firms are reasonably satisfied with the country's telecommunications infrastructure. The challenge now is to improve rural telephone density and further improve overall access rates to communication services. 47The wide difference between the two states is because the average production cost for industries is higher in Karnataka than in Haryana, and firms in Haryana rely more heavily on self-generation. 67 India: Sustaining Reform, Reducing Poverty Figure 4.4. Cost of Power Source: CMIE Energy 2002; TARU Leading Edge. further increasing the cost of power for industry, subsidies that operate against industrial consumers. further reducing firm competitiveness. The share Several states have begun to depoliticize tariff- of fuel costs in the overall production costs of fixing by establishing statutory regulatory Indian firms in all the major industrial sectors was authorities-and others should follow suit. Andhra higher in 2000/01 than in 1994/95 (figure 4.4). Pradesh and Karnataka have introduced price Captive power generation capacity is about 22,000 incentive schemes to encourage industry to shift to megawatts, one-fifth of the total capacity of the the grid. The initial results for Andhra Pradesh are power utilities. Some 69% of the manufacturing encouraging, with a 22% increase in demand in firms surveyed across India had their own power 2003. Time-of-day tariffs need to be introduced generator, far more than the 30% in China (World Bank-CII 2002e).48 For garments Figure 4.5. Energy Costs as Share of Total and electronics, energy costs in Indian firms were found to be twice those in Indonesia, the Philippines, and Thailand (figure 4.5). While large firms can bear such costs, SMEs suffer severely. They either have to go without power, or else install their own generator: the typical Indian SME has its own generator, tying up one-sixth of its capital, stunting its growth. Urgent priorities are rationalizing power tariffs, depoliticizing tariff-setting, and Source: World Bank-CII 2002e. implementing a phased reduction in cross- 48 In states that have made more progress with power sector reforms (Maharashtra) a smaller proportion of firms (45%) had captive generators. In contrast, more than 85% of firms surveyed in Delhi and Punjab, and more than 97% of firms surveyed in West Bengal, reported having captive generators. 68 Industry and Services for industries with peak and off-peak rates. To efforts to maintain a hard budget constraint for minimize financial losses to the power utilities, cost state utilities, including rigorous policies on recovery needs to be enhanced by charging higher payments to central generation and transmission tariffs to agriculture and residential consumers. utilities. These measures must be accompanied by steps to Transport. Ensuring speedy, reliable, door-to-door encourage greater private investment in power. Key transport services is also critical to industrial reform measures include improving the financial and performance. India has one of the most extensive operational performance of the SEBs and increasing transport systems in the world, but there are severe distributional efficiency through commercialization capacity and quality constraints. While notable and privatization. The strategy for privatizing progress has been made with the implementation distribution should focus on the commercially viable of the National Highways Development Project, segments of the network and develop alternatives for India currently has no interstate expressways improving services and targeting subsidies in rural linking the major economic centers, and only areas. Going after a broader range of investors and 3,000 kilometers of four-lane highways (China has mitigating the perceived risks will be keys to built 25,000 kilometers of four- to six-lane, access- privatizing the distribution business. Trading by controlled expressways in the last 10 years). Poor industries with self-generation, along with other riding quality and congestion result in truck and power suppliers, should be encouraged by providing bus speeds on Indian highways that average 30-40 open access to the transmission and distribution kilometers an hour, about half the expected networks and eliminating cross-subsidies over an average. agreed time frame. The Government and some states are Since power reform is primarily the responsibility implementing major highway upgrading of the states, alleviating bottlenecks requires the programs, with the four-laning of 13,000 full commitment of state governments. The central kilometers of national highways most notable. In government can support them by introducing addition, the Tenth Plan proposes road upgrading legislation to foster reforms to encourage private projects totaling 10,000 kilometers, and recognizes involvement. The new Electricity Act (2003) the need to start investing soon in a program of should help through its provisions for moving to access-controlled expressways to provide faster and open access, removing entry barriers to new safer transport in high-volume corridors. Meeting generation, delicensing off-grid supply in rural the Tenth Plan targets will a big increase in private areas, trading distribution licenses, stopping theft, funding, previously limited. Although private and deepening regulatory reforms. financing of transport infrastructure has increased considerably in recent years, it can realistically be The new legislation effectively empowers Indian expected to fund only a small fraction of sector states to accelerate power sector reforms in the investment. direction of greater competition, better governance, and private sector investment. But In the short to medium term, much can be many implementation details remain to be gained through greater efforts to strengthen the decided, and the act's success will depend on state policy, regulatory, and legal framework, to action. The central government has also reduce uncertainties about political interference introduced a scheme to provide financial assistance and weak contract enforcement. Better cost to states willing to adopt power reforms. More recovery from users would also help. India critical, however, are continuing government introduced a national fuel tax in 1999, but 69 India: Sustaining Reform, Reducing Poverty resource mobilization through such charges delays turnarounds and increases handling costs for remains low. Reform should also focus on cargo and containers. strengthening the public works departments by improving their financial performance and The average turnaround for vessels has come down accountability. And users and other stakeholders from 8.1 days in 1990/91 to 3.7 days in 2001/02 must have a strong voice in overseeing the (and in some of the newer ports, such as the planning and implementation of transport Jawaharlal Nehru Port Trust, to 1.04 days). But infrastructure. India still has to catch up with international standards, where the turnaround time is in hours. India's high-density rail corridors also face severe This will require strong efforts to modernize capacity constraints, compounded by poor equipment and improve labor productivity, maintenance. The average rail speed is only 24 together with measures to reform customs kilometers an hour. Capacity expansion, an administration. The time taken to get goods urgent priority, must be accompanied by efforts cleared through customs is 50% longer in India to improve efficiency in the use and maintenance than in Korea or Thailand, and triple what many of existing capacity. Indian Railways continues to OECD countries report (World Bank-CII 2002e). be a patient resisting bitter medicines, despite the Costs associated with shipping a container of many prescriptions available. It recently slid into textiles to the United States are more than 20% operating deficits and now depends on the higher from India than from Thailand, and 35% central budget for its large investment program. higher than from China (figure 4.6). Reforming railways will require large-scale Figure 4.6. Shipping Cost Disadvantages financial restructuring, involving the shedding in Textiles (%) (or even ring-fencing) of noncore assets or businesses. The Government also needs to address price distortions from the long practice of cross-subsidization from freight to passenger services, causing excessive freight tariffs, discouraging the use of railways, and preventing Indian Railways from serving the nonbulk high-margin transport market. (The freight traffic of Indian Railways as a percentage of traffic units is a mere 5% compared with 79% in China; Indian roads account for 60% of land transport freight and 80% of passenger traffic). Source: World Bank - CII 2002e For the ports, berth capacity is no longer a serious Promoting greater private sector participation in the constraint. The corporatization of major ports and provision and financing of infrastructure is a key the establishment of an independent tariff concern. In the long run, the Government cannot regulatory authority have helped bring in the attract and sustain private investment in private sector to develop new ports. But the infrastructure unless it addresses the policy problems efficiency of existing capacity, particularly in the that underlie investor concerns-by raising prices to older ports, needs improvement. In these ports, the cost covering levels and establishing a sound legal low productivity of port equipment and labor and regulatory framework. 70 Industry and Services In the short run, various public-private regulatory, and legal risks. In short: icebreaking partnerships-involving subsidies, risk-bearing, and services. Beyond that, the success of scaling up other forms of financial support from government- investment in infrastructure will depend less on may help attract private investment and close clever financing and more on the framework financing gaps. Such arrangements allow underpinning private participation in government to bear risks that the private sector infrastructure. In the long run, government cannot feels it cannot mitigate through other means-for attract and sustain private investment in example, risks related to the demand for services or infrastructure unless the policy, regulatory, and the cost of financing.49 Frequently used legal problems that underlie investors' concerns are instruments for government support to addressed. So public-private partnerships should infrastructure projects include cash subsidies, in- be seen, at best, as temporary measures and should kind grants, tax breaks, capital contributions, and be entered into with caution. guarantees of risks. In general, instruments such as cash subsidies and tax breaks are not desirable, Estimated Impact of a Better particularly for countries facing fiscal constraints. Investment Climate on Overall Tax breaks may improve the bottom line but not Economic Performance target particular consumer groups-and they can cause serious distortions and create opportunities The potential gains from removing key investment for graft. Where there are imperfections or gaps in climate bottlenecks have been estimated in the range the financial markets, capital contributions and the of 2-4 percentage points of annual economic guarantee of risks not under the Government's growth. A 2001 study estimated that addressing the control may be the best instrument to use. If the inefficiencies generated by the multiplicity of concerns relate to political and regulatory risks, investment regulations, distortions in the land some form of government guarantee offering markets, and widespread government ownership of compensation may be the most appropriate. business would free India's economy to grow as fast as China's-at 10% a year-and to create some 75 While public-private partnerships may help attract million new jobs (McKinsey Global Institute 2001). some private financing for infrastructure, they can That would ward off the looming crisis in also risk postponing the day of reckoning and employment to reabsorb the majority of workers impose serious costs on taxpayers (in forgone taxes displaced by productivity improvements. A 2002 or revenues from public assets, higher study estimated that, if each Indian state could expenditures, or contingent liabilities on the attain the best practice in India in terms of Government's budget).50 Given India's huge investment climate, the economy should grow about unmet investment needs in infrastructure, selective 2 percentage points faster (World Bank-CII 2002). use of various public support arrangements could The survey also indicated that, if India could achieve help private sector innovators pilot transactions Chinese or Thai levels in areas of the investment that have good underlying cash flow, but where climate where it lags behind those countries, its they cannot carry the full costs of the policy, growth acceleration would be even faster. 49For a more detailed discussion on the available instruments for public-private partnerships in the infrastructure sector, based on international experience, and the factors that government should take into consideration when selecting an appropriate instrument, see Basu and others (2003). 50For a discussion on the ways to measure costs associated with various types of government support and methods to value guarantees, see Irwin (2002) and Irwin, Klein, Perry, and Thobani (1997). 71 CHAPTER 5 AGRICULTURE AND RURAL DEVELOPMENT About 75% of India's poor are in rural areas, and a Given the conditions for agricultural households, the large proportion of them depend on agriculture for Government's National Agricultural Policy and Tenth employment and as a major source of livelihood. Plan place high priority on raising agricultural Analysis of the 55th National Sample Survey productivity to promote faster agricultural growth-and (1999/2000) shows that agricultural households51 on promoting the faster growth of the rural nonfarm make up 54% of poor rural households52 -- and in sector. Promoting both is vital because of their strong some states, such as Rajasthan and Uttar Pradesh, backward and forward linkages.55 Opening greater more than 70%. The large number of poor employment opportunities in the rural nonfarm agricultural households and their income sectors would create demand for agricultural labor, vulnerability are major concerns for policymakers, contributing to higher agricultural wages and incomes. driving agricultural policies (trade protection and This will require improving access to basic marketing controls) and public spending infrastructure (roads, markets, electricity, water) and (investments and subsidies). Improving agriculture's services (market information, credit, education). performance, especially increasing foodgrain output to achieve self-sufficiency to meet its food security Agricultural growth rates are slowing, with dire goals, has also been a major government priority. consequences if appropriate actions are not taken. The slowdown can be partly traced to the continuing According to the latest census, about 235 million decline in productivity-enhancing investment by the people (58% of the labor force) were employed in Government. Although most domestic trade the agricultural sector in India in 2001,53 most of restrictions were lifted in 2002, the possibility of their them in low productivity activities.54 Their re-imposition at any time reduces private incentives prospects are not bright. Large numbers of workers to invest in agriculture. Improving agricultural are tied to agriculture in almost all states. performance requires progress in two key policy areas. Agricultural growth is slowing down. The share of First is rebalancing government expenditures from agriculture in GDP is shrinking from about 35% subsidies toward more productivity-enhancing public in 1980/81 to 23% in 2001/02. And the investments, including irrigation, rural infrastructure, opportunities for employment in the rural research, and extension. Second is permanently nonfarm sector are limited. removing restrictions on domestic trade to improve 51These include households involved in cultivation and agricultural wage labor. 52Based on the Planning Commission rural poverty line. 53These include 128 million cultivators and 107 million agricultural laborers. In rural areas, dependence on the agricultural sector is even greater. About 228 million workers, or nearly three-quarters of the rural population, were employed in the agricultural sector. 54Average labor productivity is measured by the sector gross state domestic product divided by the number of workers employed in the sector. In major states, excluding Punjab and Kerala, agricultural labor productivity on average amounts to about one quarter of labor productivity in the nonagricultural sector. 55Forward linkages take the form of the agricultural sector supplying products for downstream processing or direct consumption, agricultural surplus providing investment funds to the nonfarm economy, and consumption by agricultural household of goods and services from the nonfarm sector. Backward linkages take the form of the nonfarm sector stimulating growth in the agricultural sector by supplying inputs and investing in the agricultural sector (Lanjouw and Feder 2001; Haggblade and others 2001). 73 India: Sustaining Reform, Reducing Poverty the investment climate for farmers while supporting a and 1990s (Kumar 2002; Sharma 2002). In the regulatory framework to ensure fair competition. Indo-Gangetic Plains, the seat of the green revolution, Kumar finds TFP growth of 2% a year Agricultural performance. The recent slowdown in between 1981 and 1990, but negative growth agricultural GDP growth-to 1.8% a year from between 1990 and 1996. These and other studies 1997/98 to 2001/02) can be largely attributed to attribute the deceleration in TFP growth to the extensive droughts in many states and to flooding in slowdown in productivity gains from the earlier some northern states (table 5.1). Several recent adoption of high-yielding varieties, the decline in studies find that total factor productivity (TFP) in public investments in the agricultural sector, and the agriculture has been declining between the 1980s rise in natural resource degradation (box 5.1). Table 5.1. GDP, Agriculture Sector Growth Ratesa, 1980/81-2001/02 (%) 1980/81- 1990/91- 1992/93- 1997/98- 1989/90 1999/00 1996/97 2001/02 GDP at factor cost 5.6 5.8 6.7 5.5 Agriculture, forestry, and fishing 3.4 3.0 4.7 1.8 Agriculture 3.5 3.0 4.8 1.7 Forestry and logging 0.0 0.6 0.1 2.4 Fishing 5.9 5.2 7.7 2.9 a. Compound annual growth rate. Source: Central Statistical Organization, National Accounts Statistics. Box 5.1. Damaging the Land As recently as 1999, the Government estimated that nearly half of the country's 329 million hectares of soil could be categorized as degraded (India, Ministry of Finance 1999). One study asserts that the majority of Indian soil has been harmed, concluding that only 36% of land area suffers no serious damage. It found that 5% faced low-level degradation (less than 15% yield loss), 11% was moderately degraded (15-33% yield loss), 43% was highly degraded (33-67% yield loss), and 5% was so damaged that the land became unusable. A study in Uttar Pradesh showed that waterlogging and salinization led to significant declines in paddy and wheat yields over a 10-year period (Joshi and Jha 1991). The productivity losses leads to significant economic losses. A study from the mid-1990s estimated that agricultural output loss due to soil degradation amounts to about $1.9 billion a year (Brandon and Hommann 1995). One researcher estimated that waterlogging and salinization caused annual cereal production loss amounting to about 5% of agricultural GDP (Young 1993). Dregne and Chou (1992) found that human-induced water erosion led to irreversible soil productivity losses of 20% or more in some parts of India. 74 Agriculture and Rural Development Public investments in agriculture. Total Public investment in the agriculture sector over the investments in agriculture and its allied sectors last decade declined in large part because of (fishing and forestry) have been increasing. But growing subsidy requirements, major contributors since the mid-1980s they were driven largely by to the rising fiscal deficit in the central and state private investments, mainly in farm equipment, governments. For example, central government minor irrigation, and land improvements (figure food subsidies reached Rs242 billion ($5 billion) in 5.1). Public investment systematically declined.56 2002/03, 1.0% of GDP. Fertilizer subsidies, while Its share of annual agricultural gross capital declining, amounted to Rs110 billion ($2.3 formation fell from 44% in 1985/86 to 23% in billion), 0.4% of GDP. Foodgrain and input 2000/01, a major cause for concern because of the subsidies have distorted farmer cropping and potential negative impact on agricultural growth investment decisions, which are both economically over the longer term. Gulati and Bathla (2002) inefficient and contributing to widespread soil and estimate that a 10% decrease in public land degradation. The bias toward subsidies also investments (including irrigation and power) leads reduces resources for much-needed social to a 2.4% annual reduction in agricultural GDP investments and for appropriate operations and growth. Because of the complementarities, lower maintenance of critical rural infrastructure. public investment would also worsen the environment for private investment in agriculture. Policymakers question why India should reduce its Gulati and Bathla estimate the elasticity of private agricultural subsidies, in view of the large gross capital formation in agriculture to agricultural subsidies provided by the EU and cumulative financial public investment to be 0.16 United States. These issues clearly need to be raised in irrigation and 0.15 in power.57 and addressed through bilateral and multilateral negotiations. But India's reduction of agricultural Figure 5.1. Gross Capital Formation in subsidies is no longer purely an issue of its fiscal Agriculture and Allied Sectors costs and of using its fiscal resources more (billions of 1993/94 rupees) efficiently. The extent to which these subsidies are eroding the core foundation for sustained agricultural growth over the longer term, due to inadvertent natural resource degradation, is just as critical, perhaps even more. Foodgrain (Rice and Wheat) Policy Foodgrain policy rests on two major pillars. One is to ensure farmers a reasonable income through Note: 2000/01 based on quick estimates. government procurement at a minimum support Source: India, Ministry of Agriculture 2002a. price for rice and wheat. The other is to ensure 56 According to the Indian System of National Accounts, the public capital formation statistics primarily comprise investments in major and medium irrigation schemes. Gulati and Bathla (2002) re-estimate public gross capital formation to include investments in power (Concept II) and power plus investments made in agriculture and allied activities as defined under budgetary heads of the government accounts (Concept III). Under both concepts, public capital investments declined. 57 Gulati and Bathla (2002) also find that availability of institutional credit and terms of trade between agriculture and nonagriculture also has a positive and significant influence on private gross capital formation. 75 India: Sustaining Reform, Reducing Poverty adequate availability of foodgrains for consumers necessitating greater government procurement. But at reasonable prices through the distribution of strong political pressure from states where the subsidized foodgrains and the stabilization of largest procurement take place-Punjab, Haryana, prices through buffer stocking operations. and Andhra Pradesh-stalled efforts to contain the increases. With the reduction in foodgrain off-take, The Targeted Public Distribution System (TPDS), with the shift to TPDS, and with the downward introduced in June 1997, aims to ensure access by trend in world market prices, limiting export the poor and other vulnerable groups to essential possibilities, buffer stocks rose to more than 60 food commodities. The program supplies rice, million metric tons in July 2002, more than three wheat, and sugar nationally, and other times the norm of 18 million tons (India, Ministry commodities such as edible oils and coarse grains of Finance 2003b). The buffer stock component of in some states, at subsided prices. The shift to the the food subsidy thus rose from 12.5% in 1997/98 TPDS was a significant milestone in the to about 41.6% in 2001/02. The overhang of Government's food security strategy, targeting a burgeoning buffer stocks put downward pressure larger share of the foodgrain subsidy to the poor on market prices, and combined with high relative to the nonpoor.58 To support the TPDS minimum support price necessitated even greater and price stabilization activities, trade restrictions government procurement. on the private sector were enforced by the central and state governments. To reduce surplus stocks, the central government instituted several measures-increasing the monthly The Essential Commodities Act (1955) empowers allocations under the TPDS for all households, the central and state governments to enforce controls lowering the issue price for families above the poverty on movement, storage, exports and imports, and line, increasing the use of foodgrains for welfare access to trade credit. Controls were enforced or lifted schemes and drought relief, selling at prices below depending on the severity of supply shortfalls and economic costs, and subsidizing exports. These price rises, thus eliminating private sector incentives measures raised the food subsidy bill even more. for spatial and temporal arbitrage. In 2002 the Government finally lifted the licensing requirements Recent analysis of the impact of the shift to the and movement and storage restrictions on private TPDS indicates higher participation of persons dealers. But the potential for re-imposition continues below the poverty line at the all-India level and in to discourage private investments in the foodgrain most states (Deininger and Umali-Deininger, sector. Recognizing this, the Government is forthcoming). Despite this improvement, many considering the amendment of the Essential of the poorest are still unserved. The most Commodities Act to permanently remove these trade frequently cited reasons that households cite for restrictions, with provisions for their enforcement not purchasing foodgrains from the TPDS are: only in emergency conditions. In 2003 restrictions on "the item was not available in the ration shop," the use of risk-management instruments, specifically "not having a ration card," and "unsatisfactory futures contracts, were also removed. quality." Steady increases in the minimum support price for Recognizing the crisis of mounting buffer stocks rice and wheat encouraged increased production, and food subsidies, the central government 58Its predecessor, the Public Distribution System, by contrast was a general entitlement scheme, which was widely criticized for its failure to serve the population below the poverty line. It was also criticized because it provided meager income, suffered from urban bias, leakage, and diversion and supplied deteriorating quality of grain, and lacked transparent procurement and delivery systems. 76 Agriculture and Rural Development established a high-level committee to develop Input Policies proposals for a long-term foodgrain policy, with The Government's agricultural policy of the last the report released in 2002. The committee three decades has relied on subsidizing key inputs proposals to remove the rice levy and all to promote growth and ensure food security- restrictions on foodgrain trade, and reactivating subsidies that are fiscally unsustainable. Fertilizer them only in emergency conditions, will improve subsidies, that are largely concentrated on urea, incentives for the private sector. But some of the have distorted input use. Power and irrigation other proposals raise concerns. The proposed subsidies are causing fiscal crises in many states policy toward maintaining self-sufficiency-it also and, with deteriorating state finances, crowding ties farmers to low-value rice and wheat out productivity-enhancing public investments. production-will come at the cost of efficiency. The They are also leading to salinity, water logging, and continuing large public sector role envisioned in declining groundwater tables in many areas. foodgrain markets will crowd out private sector participation. Fertilizer Policy The proposal to set the minimum support price to Fertilizer subsidies were introduced in the 1970s in cover the cash costs plus the returns to family labor, response to the sharp rise in the prices of oil and land, and capital is a positive step. But in the have since remained. Domestic producers of urea longer term, fostering competitive markets would are given a designated plant specific retention better ensure remunerative returns to farmers. So, price, essentially from a cost-plus formula. The the minimum support price should be reduced to fertilizer subsidy to the firm is the difference cover the cash cost only, which complemented by between the retention price and the farmgate price others schemes (employment schemes, TPDS) of fertilizer. Di-ammonium phosphate production would serve as a safety net for farmers. Otherwise and muriate of potash, generally imported, receive the Government would be determining farm prices a flat-rate subsidy under a concession scheme. The rather than the market. fertilizer subsidy, now equivalent to 0.4% of GDP, is wholly borne by the central government. The proposed reversion to an untargeted public distribution scheme is likely to bring back the Who are benefiting from the fertilizer subsidies: earlier problems food subsidies being captured by farmers or domestic fertilizer manufacturers? nonpoor households, escalating the subsidies. Gulati and Narayanan (2002) estimate the Effectively targeted safety nets would help protect distribution of the subsidy based on the difference the poor from price and income shocks, while between farmgate prices of domestically produced drastic supply shocks would be mitigated by a cost- fertilizer relative to imports. While the actual effective and well-managed price stabilization farmer share varies yearly due to the fluctuation in mechanism. world prices, the average subsidy share of farmers was about 67% from 1981/82 to 1999/2000, and There is broad agreement in India that the current foodgrain policy is not sustainable-but only limited that of industry was about 33%. agreement on the way forward. Significant political Concerned with rising subsidy costs, the economy constraints, necessitating complex Government established a High Powered Fertilizer negotiations between the center and the states, Pricing Policy Review Committee in 1997. Its compound the complexity of managing the reform report, completed in 1998, recommended: process. Future progress will require a strong government commitment. Deregulating the fertilizer industry. 77 India: Sustaining Reform, Reducing Poverty Discontinuing the unit-wise retention price. timetable would lead to a significant reduction in Basing prices on the long-run marginal cost. fertilizer subsidies over the next few years. Abolishing allocations under the Essential Water Resources and Irrigation Commodities Act. Surface irrigation has been a pillar of the Giving new units a guaranteed price for 15 years. Government's agricultural strategy for increasing Setting up a Fertilizer Policy Planning Board. agricultural productivity and incomes, fostering agricultural growth and rural poverty reduction, In 2001/02 the Government announced its and reducing volatile production fluctuations, thus policy to rationalize fertilizer pricing and improving food security. Public investments in implement the recommendations of the surface irrigation accounted for a major share of Expenditure Reforms Commission for a phased expenditures in agriculture. Owing to increasing program of price increases (7% a year) and costs of expanding irrigation projects to more complete decontrol of urea by April 2006. Since difficult areas, and higher costs of borrowing, then, the Government has implemented a capital expenditures at the national level increased number of reform actions (table 5.2). from about Rs53.5 billion in 1985/86 to Rs63.1 Continuing the commitment to the proposed billion in 2001/02 (constant 1993/94 rupees), Table 5.2. Recent Fertilizer Policy Reforms Budget period Reform announcement Reform actions taken 2001/02 First phase of decontrol to commence on Proposal for replacement of the April 1, 2001. Retention Price Scheme by a Group Unit specific RPS will be replaced by a Concession Scheme being prepared Group Concession Scheme. Current by the Ministry of Fertilizers maximum retail price (MRP) arrangement will be continued and the concession for each group calibrated to enable units to sell urea at stipulated MRP. Concession rate for urea units based on Implemented in 2001. naptha/furnace oil/low sulfur heavy stock be Maximum retail prices of urea, DAP, linked to international prices of feedstock. MOP and complex fertilizers 2002/03 Urea, di-ammonium phosphate (DAP), and increased and rate of subsidy on SSP muriate of potash (MOP) prices increased by reduced by Rs50/mt. 5% and reduce the subsidy on single [Urea price increase reversed in phosphate (SSP) by 50/mt. Prices of March 2003] complex fertilizers will be suitably modified 2003/04 Issue price of urea will be raised by Rs12 and DAP and MOP by Rs10 per bag Implementation of Group Concession Scheme beginning April 1, 2003 Source: India, Ministry of Finance budget speeches and implementation of budget announcements from 2001-03. 78 Agriculture and Rural Development about 24% of the total central and state capital rehabilitation and maintenance. It also promotes expenditures.59 These investments contributed to cost recovery of at least operations and an all-India increase in net surface irrigated area maintenance costs to ensure longer-term financial from 15.7 million hectares in 1981/82 to 17.7 and fiscal sustainability of operations. And it seeks million hectares in 1998/99. to re-orient water agencies toward greater attention to clients and the delivery of good quality water Water resource management is a state subject. A services. Several states have begun to adopt these major challenge for all states is intersectoral measures in varying degrees, including Andhra competition-between agriculture, the largest Pradesh, Karnataka, Maharashtra, Rajasthan, consumer, and other sectors such as industry, Tamil Nadu, and Uttar Pradesh. Because water is drinking water, and other users. In some areas, under the purview of state governments, the drinking water supplies have fallen to crisis levels challenge is to encourage states to adopt the whole due to overextraction of groundwater. Surface reform package. irrigation is suffering from a vicious circle: deteriorating infrastructure hurts agricultural As a start, the national government recently productivity, contributing to poor cost recovery introduced an incentive program to encourage cost and the fiscal crisis in many states. recovery of operations and maintenance costs under the Accelerated Benefits Program by Who benefits from surface irrigation and its providing central assistance for the completion of associated subsidies? In general, small and marginal "last mile" projects, with Rs95 billion allocated farmers account for the major proportion using during the Tenth Plan period. So far, Rajasthan, canal irrigation. The distribution of canal-irrigated Madhya Pradesh, Orissa, Maharashtra, and Uttar land according to farm size varies considerably by Pradesh have availed of these resources. In 2003 state, however. In 10 of the 15 major states the Government established a task force to look examined, small and marginal farmers accounted into the feasibility of interlinking rivers as a way of for half the total of canal-irrigated area (World transferring water from surplus to deficit areas. Bank 2003b). Household analysis of the incidence of canal irrigation subsidies in Rajasthan finds, Power Supply to Agriculture however, that its distribution is regressive, with a marginal farmer receiving about a tenth of the In 1997/98 about 57% of net irrigated area in India subsidies received by a large farmer (Sur and used groundwater. Electric pumps have been critical Umali-Deininger 2003. for expanding groundwater irrigated area, contributing to the growth of agricultural The Government's national water policy (2002) productivity and aggregate output. Studies at the aims to address the constraints, by ensuring the village level found that the use of electric pumps for long-term sustainable allocation and efficient use irrigation increased aggregate output growth by two through a comprehensive and integrated approach percentage points (World Bank 2002i). A study on to planning and management of water resources, the cost of unserved energy found an estimated loss river basin by river basin. It puts priority on in crop production of 3.1% of agricultural gross rebalancing expenditures from the creation of new state domestic product in Haryana and 13.3% in assets to demand-driven investments in Karnataka (Tata Energy Research Institute 2000). 59The public sector gross capital formation statistics from the national accounts and the capital expenditures based on the government budget differ considerably. The irrigation capital expenditure estimates, which primarily make up the agriculture gross capital formation, exceed the reported agriculture gross capital formation figure, due to differences in definition. 79 India: Sustaining Reform, Reducing Poverty The large subsidy on the price of electricity to marginal farmers, amounting to about 10% of farmers, however, has led to the severe financial gross farm income for marginal farmers in Haryana crises among the State Electricity Boards (SEB): and about 8% in Andhra Pradesh (figure 5.2). and fiscal crises for state governments because of Simulating the impact of tariff increases with and the need to cover for the huge SEB losses. without improvements in the quality of electricity Because a large part of the power supply to supply, the study found that improvements in the agriculture is unmetered,60 utilities disguise quality of supply could more than compensate theft and other commercial losses as farmers for the increase in tariffs. consumption of power by agriculture, hiding their inefficiencies and poor governance. A Figure 5.2. Electric Pumps Only: metering study in Haryana showed that the state Irrigation Cost as a Percent of Gross Farm Income in Haryana, Share in Total utility overestimated the electricity consumption Gross Income (%) by agriculture by a third (World Bank 2001b). State level studies of the incidence of the subsidies find them to be regressive, benefiting larger farmers more. In Karnataka, Howes and Murgai (2002) found that a large farmer received almost 10 times the subsidy received by a marginal farmer. The financial crisis of the SEBs has had direct repercussions on agriculture sector, reducing their ability to undertake required investments, Note: Pump maintenance includes travel costs for repair respond to rising local demand, and maintain and other costs. Motor burnout consists of motor reliable day-to-day operations. The results: power rewinding cost. Fixed costs per year cover pump and well investments. Some farmers have zero fixed costs, as rationing, frequent power interruptions, and large pumps are fully depreciated (assuming a 20-year lifespan). voltage fluctuations that led to pump burnouts, Source: World Bank 2001b. reducing the reliability of irrigation water supplies, undermining farm productivity, and Current subsidy delivery mechanism is inefficient lowering farm profits. Farmer dissatisfaction has and ineffective. A large proportion of farmers increased, making them less than willing to pay who are not using electricity for irrigation do not even the highly subsidized charges. Their delays benefit from the subsidies, and those who are in paying electricity bills and resistance to tariff connected do not receive adequate electricity increases, in turn, aggravates the financial crises in services. India should thus move toward adopting the SEBs. a more transparent and targeted mechanism. For Recent farm-level studies in Haryana and Andhra such an alternative model, it is indispensable that Pradesh found that poor quality of supply imposed there is cost recovery of at least operating costs, additional costs on farmers (World Bank 2001b). universal metering of consumption, payment Motor burnouts cost about Rs1,000 to Rs4,000 to discipline, and more efficient electricity repair and impose undue burdens on small and providers. 60Metered power supply was universal practice in India until the mid-1970s and 1980s. As SEBs faced increasing problems of pilferage, poor collection efficiency, and large numbers of corrupt meter readers, the shift was made to flat tariffs (Kishore and other 2003) 80 Agriculture and Rural Development Product and Factor Markets operation of wholesale "regulated" markets for Trade Policies and Regulations agricultural products to the state government and force farmers within a defined area to sell only Economic and trade reforms in the 1990s have through these regulated markets. These regulations improved the incentive framework for agriculture, increase transaction costs and market risks-and hurt overregulation of domestic trading activities for the agricultural sector. major agricultural commodities hampers growth. These include small-scale reservations and controls The licensing requirements and movement and on storage, transport, processing, credit, and exports storage restrictions for rice, wheat, coarse grains, and imports under the umbrella of the Essential edible oil, oilseeds, and sugar were lifted in 2002. Commodities Act 1955 is the umbrella for small- But the continuing uncertainty over their possible scale reservations and controls on storage, transport, re-introduction discourage private sector processing, credit, and exports and imports (table investments, both local and foreign, in marketing, 5.3). In addition, the Agricultural Product Market agro-processing, and industry. And some state Acts of most states restrict the development and governments continue to enforce some controls Table 5.3. Major Domestic Policy and Trade Regulations, January 2003 Regulation Rice Wheat Sugar Oilseeds/edible Cotton Livestock/ oils products Central Government Movement controls Lifted Lifted Lifted Lifted Lifted Storage controls Lifted Lifted Lifted Lifted Lifted Zoning Small scale reservation Selective credit controls Lifted Lifted Lifted Lifted Lifted Jute packaging requirement Minimum price support Consumer price subsidy Export/import Futures banned State Governments Mill commodity levy Marketing controls Storage controls Lifted Lifted Lifted Lifted Lifted Price support Consumer price subsidy Note: Shaded cells-commodity regulation exists. Lifted-commodity regulation temporarily not enforced. These commodities account for about two-thirds of agricultural GDP. Source: World Bank staff estimates. 81 India: Sustaining Reform, Reducing Poverty (cotton marketing controls in Maharasthra). A Even though Indian agriculture remains consensus has emerged, however, on the reform of internationally competitive, there are dangers the state Agricultural Produce Markets Acts to given the direction of increasing trade protection. permit greater private sector and cooperative Experience worldwide, especially in agriculture, involvement in wholesale market development and shows that high protection will sooner or later to remove the restrictions on farmer marketing create high-cost production-as land, labor and options. A government taskforce is currently capital move to produce products protected by drafting a model act. So far, only Karnataka has high barriers to imports, at the expense of other made minor amendments to allow the National products where pro-protection lobbies are less Dairy Development Board to set up a fruit and effective. Exporters and exports are typically vegetable wholesale market. And Punjab, Haryana, major losers in this process, since they have to and Madhya Pradesh have allowed farmers under compete in world markets without protection. contract farming arrangements to bypass the From this perspective, it would be in India's wholesale markets and sell directly to the private interests to reduce its World Trade Organization buyer and contractors. agricultural tariff bindings to much lower levels- constraining domestic lobbies pressing for high The reduction in manufacturing protection and protection. As one of the world's largest exchange rate devaluations, started in 1991/92, agricultural economies, India directly influences substantially reduced the overall anti-agriculture the world markets of many agricultural products. bias of the system (Blarel and others 1999). After If it follows open, predictable, noninterventionist 1997, however, several major aspects of the trade policies, it can broaden these markets and external environment changed, with repercussions reduce their instability. But if India intervenes for India's agricultural trade policies. The excessively to protect its domestic market against quantitative restrictions on agricultural consumer instability in world markets, it is large enough to goods imports were abolished in April 2001 when increase international instability, reinforcing world prices of some major commodities produced moves for protection and intervention in other by India declined substantially, reinforcing local countries. pressures for protection. And Indian policymakers developed a more pessimistic view of the prospects Access to Land for world agricultural trade liberalization, The agrarian structure in India has undergone especially following the massive new subsidies in significant structural transformation since the the 2001 U.S. Farm Bill. In response, the 1970s, with the distribution of land ownership Government has raised agricultural tariffs, so that becoming less skewed (figure 5.3).61 The trend they are now above the average nonagricultural toward landlessness also appears to have been tariffs. In 2003/04 the unweighted average rate arrested, with the percentage of landless remaining (including the special additional duty) is 46.8% at around 11% between 1982/83 and 1999/2000. compared with 30.7% for nonagricultural tariffs. The two main factors driving this process have But with only a few exceptions, India is no longer been the Government's land policies and the explicitly using taxes, licensing, export bans, or demographic pressures (farm breakups through quotas to restrict agricultural exports and depress inheritance), though the contribution of each of domestic prices. these is open to some debate. 61These figures do not account for land quality. The ceiling on land ownership varies across states and depends on the quality of the land (dryland, irrigated land with one or two crops). 82 Agriculture and Rural Development Figure 5.3. Distribution of Number of ceiling legislation. Another area of concern is Owned Holdings and Area Owned by ensuring legal recognition of property rights for Farm Size (%) women, neglected in earlier land legislations (Saxena 2000b).62 Tenancy restrictions vary by state, ranging from a total ban to almost complete freedom of rental.63 These laws, however, had unintended adverse impacts, including large-scale self-cultivation by landlords and the adoption of wage labor contracts. Appu (1997) estimated that tenancy legislations were associated with the eviction of more than 100 million tenants, causing the rural poor to lose access to about 30% of the total Note: Marginal-0.1 to less than 1 hectare. Small-1 to 2 operated area. The legislation has also driven hectares. Semi-medium-2 to 4 hectares. Medium-4 to 10 tenancy underground in most states, reducing the hectares. Large-10 or more hectares. scope for greater land access through rental Source: 1971/72 and 1992/93 National Sample Surveys, as cited in Vyas 2002b; 1990/00 National Sample Survey markets and the tenant's bargaining position and - Deininger 2003. ability to enforce contract terms. These restrictions are also limiting the ability of small and marginal Under the Constitution, state governments have farmers to use their labor more productively, the responsibility for land reform, and all states whether in farming by renting in land or renting it completed the passing of land reform legislations out to take advantage of higher-paying nonfarm in 1972. The legislation focused on abolishing opportunities. intermediaries between the state and the cultivator, imposing land ownership ceilings and distributing There is a growing consensus about the need to surplus lands to the landless, reforming tenancy to revisit and reformulate tenancy legislation. In provide security of tenure and regulate fair rent, considering reform, it would be critical to draw and consolidating holdings to prevent their further lessons from experience in states that do not have fragmentation. The land ceiling, the redistribution any tenancy restrictions. More important, in of surplus land, and the purchase of land by some states the benefits from relaxing tenancy tenants contributed to the changing land laws are likely to be higher than in others, due to ownership structure in India. But it appeared to the more advanced commercialization of work more through encouraging subdivision rather agriculture (and significant amounts of informal than selling surplus land to the poor. Government leasing) and stronger political commitment to purchases of ceiling surplus land for redistribution reform. These states could serve as pilots, yielding to the landless have been very limited in almost all important insights for the policy debate and states. Today, because of declining average farm serving as a basis for broader implementation of sizes in all states, there is more debate on the land tenancy reform initiatives in other states. 62For example, in Haryana, Himachal Pradesh, Jammu and Kashmir, Punjab, Delhi and Uttar Pradesh, a woman can only hold limited tenancy rights on the land and on her death, the holding goes to the heirs of the last male landowner and not to her heirs. 63Tenancy is totally banned in Bihar, Gujarat, Karnataka, Kerala, Manipur, Orissa, Rajasthan, Jammu and Kashmir, and Uttar Pradesh, while there is almost complete freedom of rental in Assam, Punjab, and Haryana. 83 India: Sustaining Reform, Reducing Poverty In 1997/98 the Department of Land Resources commission agents) to meet their consumption introduced a centrally sponsored scheme to pilot the credit needs-at annual interest rates ranging computerization of land records in selected districts from 36% to 120% a year. nationwide. Its objective was to promote greater efficiency through faster information retrieval and A key factor constraining improved access to rural transparency. Some states, such as Karnataka and credit relates to inefficiencies in the formal RFIs. Maharashtra, have scaled-up the program statewide Several task forces set up by the Government have and implemented the program in partnership with concluded that the weak financial health and poor the private sector. The initiatives reportedly performance of RFIs prevent them from providing contribute to more efficient and faster service and credit to rural areas. Most regional rural banks reduce the opportunities for corruption. Over the report losses, despite major government efforts to longer term, the focus would need to shift toward recapitalize and reform them. Cooperative banks in improving land administration systems at the state general, and rural credit cooperatives in particular, level. To be successful, the land administration are also performing poorly, due to governance and system would need to meet several other key management weaknesses, the result of pervasive standards of performance, including security, cost- government control. Rural access to finance is effectiveness, fairness, clarity, simplicity, and further constrained by the inefficiency of rural sustainability. States could draw on the considerable financial markets, characterized by interest rate international experience in this area. "caps" requiring banks to price small loans within a range of 2% above or below the prime lending rate. Access to Rural Credit These caps have the perverse effect of rationing credit to small rural borrowers, because banks prefer India has a wide network of rural finance not to lend than lend at these rates. That drives institutions (RFIs), but many rural poor small rural borrowers to borrow from the informal remain underserved or completely left out of sector, where money lenders charge exorbitant rates. the formal financial system. There are more than 30,000 commercial bank branches, Both the Government and RFIs can devise market- 14,000 regional rural banks, and 100,000 rural based solutions to help the rural poor gain access to credit cooperatives, in addition to several a larger range of financial services more easily-and nonbank financial institutions. This translates on less costly terms. Future priorities for the to about 4,700 people served by each RFI Government should include: outlet. But the last available rural household survey found that only about a sixth of rural Liberalizing interest rates by removing the households borrowed from formal RFIs (RBI existing interest rate "caps" for small loans. 1991). Noninstitutional sources accounted for Improving credit information on rural 52-62% of household outstanding debt. The households, by designating an agency that rural nonfarm sector also faces constraints to could take the lead in collecting and getting finance. A recent study covering some disseminating information on micro borrowers. 20 million small rural enterprises (in the unorganized sector) found that commercial Facilitating the scaling-up and sustainability of banks reportedly meet only 4% of the credit existing low-cost microfinance models, such as needs of this sector, and microfinance sources the self-help group-bank linkage model, as well provide another 3%. Various estimates suggest as the Grameen Bank replicators, piloted in that India's rural poor rely almost entirely on various parts of India, particularly in the informal sources (money lenders, traders, South, to make finance accessible to the poor. 84 Agriculture and Rural Development Removing legal and regulatory obstacles to government, is one of the largest in the world. The innovations that can help reduce the costs and public agricultural research system overseen by the risks associated with rural finance. Indian Council of Agricultural Research (ICAR) alone includes 184 institutes, centers, directorates, The Government should also aim to improve the and special projects and programs and 29 state performance of the regional rural banks and rural agricultural universities with a research staff of credit cooperatives through: more than 30,000. The extension system is Enhancing regulatory oversight and primarily under the purview of the state supervision based on internationally accepted government, though ICAR also operates 261 prudential norms. Krishi Vigyan Kendras (farmer science centers) and 8 trainer training centers (ICAR 2002). The public Reducing government control and ownership, agricultural and extension services have promoted which, for regional rural banks would require agricultural productivity and output growth, an amendment to the existing law, and for especially during the green revolution in the 1970s rural credit cooperatives, states to adoption of and 1980s. But over time their efficiency and cost the recently enacted Model Cooperatives law. effectiveness have since been called to question. Strengthening corporate governance. Agricultural research. During the Ninth Plan Improving management and staff skills, (1997/98-2001/02), the budget outlay for the particularly in credit decisions and risk public agricultural research system amounted to assessment and management. Rs67 billion, 0.8% of agricultural GDP. Strengthening the legal framework to make it Although there is room for increasing budgetary easier for regional rural banks and rural credit allocations further, there is also an urgent need to cooperatives to recover small loans and to first improve the effectiveness of existing facilitate the use of land as collateral. expenditures. Critical weaknesses of the ICAR system include: Enhancing the Productivity of Public Investments Crop bias towards rice and wheat. Greater emphasis on productivity-enhancing Inadequate priority to post-harvest, gender- investments-such as agricultural research and related, and environmental conservation extension, irrigation, and rural infrastructure-is issues. critical to enhancing agricultural productivity, rural Inadequate regional emphasis to rainfed areas. nonfarm growth, and rural poverty reduction. Imbalances in research priorities and resource Indeed, Fan, Hazell, and Thorat (2000) estimate allocations. that a 10% increase in government expenditures on agricultural research and development, irrigation, Multiplicity of agencies at times leading to and rural roads contributes to increases of 2.6%, duplication. 0.4%, and 0.6% in total factor productivity and Inadequacy of collaborative multidisciplinary reductions of 0.6%, 0.1%, and 0.5% reduction in research. the rural poverty rate. Weak interaction among researchers, extension Agricultural Research and Extension workers, farmers and the private sector. India's public agricultural research and extension Excessive centralization of planning and service, primarily under the purview of the central monitoring. 85 India: Sustaining Reform, Reducing Poverty The lack of accountability for performance (public and private) delivery systems, greater (Vaidyanathan 2002; ICAR 2002). farmer participation (including women) in planning and implementation, greater use of Private participation in agricultural research is on innovative information technologies, and the rise in India, especially with biotechnology and initiatives for increased financial sustainability and recent key policies, including the Plant Variety cost effectiveness. The challenge lies in promoting Protection and Farmer's Rights Act (2002), the adoption and implementation of this policy National Seed Policy (2002), and National Seed framework at the state level. Act (in draft) aimed to protect of intellectual property rights. But private participation tends to Rural Roads focus more on higher value crops grown in better India's rural road network faces two major endowed areas. Public research still needs to problems. First, about 40% of the rural villages are address the problems of poorer farmers in less- not yet connected by all-weather roads to market endowed regions (Hanumantha Rao 2003). So, centers or main road networks. These unconnected what is needed is a more regionally differentiated villages are often cut off from the outside world for research strategy. Greater consultation and long periods during the monsoons. It is estimated coordination between the public and private that 20-30% of the agricultural, horticultural, and sectors would also minimize duplication of forest produce is wasted due to lack of roads to research efforts. carry the produce to markets and processing centers. Second, much of the rural road network is Agricultural extension. The agricultural extension poorly maintained, thus severely deteriorated. Due systems at the state level-based on the training and to poor maintenance of bridges and culverts, many visit system with its top-down, narrow crop- rural roads become practically impassable in the focused approach-has become outmoded and rainy season. ineffective in meeting the new needs of farmers. In many states, tight fiscal constraints have led to the Most government programs suffer from the lack of breakdown of the state extension machinery a carefully designed policy and institutional (Hanumantha Rao 2003). At the same time the framework to ensure the sustainability of these private sector is providing more extension to investments. All India rural road maintenance farmers. And cooperatives, input suppliers, traders requires about Rs50 billion a year, but only 20- and private extension providers have become an 30% of that is generally available. Politicization of important source of information for farmers. investment decisions bias resource allocation towards investment. And the quality of In the future, improving the effectiveness of the construction and maintenance work is generally public extension system would require reforms to poor, resulting in overall low service lives for the make them more demand-driven and address the roads. The multiplicity of agencies involved in broad information and technical needs of farmers, roads further increases the complexity of rural road taking advantage of major advances in development and management. communication technologies and innovative delivery mechanisms. There is also a need to build The Government gives priority to improving the synergies between public and private extension. connectivity of villages through several centrally The Ministry of Agriculture formulated a new sponsored programs. Rural roads generally received Policy Framework for Agricultural Extension in about 50% of funding from various government 2002. The key priorities include the adoption of a employment-generation programs. The farming systems approach through multiagency Government is committed to providing all-weather 86 Agriculture and Rural Development roads to the remaining unconnected villages, supply conditions in rural areas deteriorated. The upgrading or constructing about 1.1 million policy of various states has been to subsidize kilometers of rural roads at a cost of Rs1.1 trillion. electricity prices for agriculture and domestic use In 2000 it launched a national program, called rather than improving access to the consumers. "Pradhan Mantri Gram Sadak Yogna" (Prime Often the rural areas face extensive power cuts Minister's Rural Road Program), to provide all- (scheduled and unscheduled), much more than weather road access to all communities with more what urban areas experience.66 About a tenth of than 1,000 people by 2003 and those with more the households reported adverse impact on their than 500 by 2007.64 livelihood, and among the salaried and business category households by about a fourth (TARU To ensure greater consistency, the Ministry of 2001). Rural Development should take the lead in essential policy and institutional changes, and in The Government plans to accelerate the financing, technology transfer, human resources electrification program, setting targets for covering development, and monitoring of rural road all the remaining 62,000 unelectrified villages by development in different states. The Pradhan 2007 and having 100% household connections by Mantri Gram Sadak Yojana can also influence 2012. The remaining 18,000 remote villages are to state-level rural road sector reform. If the program be electrified by 2012 through the use of is properly structured, it can provide a powerful nonconventional technologies. Funds have been incentive for change. Panchayat Raj bodies at made available under the Prime Minister's district, block and village levels are expected to play Gramadaya Yojna. For strategic and a pivotal role in the construction and management implementation support, the Ministry of Power of rural roads. recently set up a high-level commission for renewable energy. Rural Electrification India's rural electrification program has focused To facilitate electricity service delivery for on extending the grid supply to villages and agriculture and rural development will require a remote areas, covering 85%65 of the villages and conducive policy environment: electrifying 13 million irrigation pumps. But Adequate incentives for the service provider. access by rural households remains low at 31% (All India household access rate 52%). And At a minimum the agriculture and residential tariffs should cover the operating costs. electricity-based economic activities in the electrified villages are minimal. About 77% of the Early subsidy reform to bring subsidies to a rural poor and 31% of the urban poor remain fiscally sustainable levels and enable more unconnected. During the 1990s the rural effective targeting of poorer farmers and rural electrification program slowed down, and the consumers. 64The major source of funding of the program is the Central Road Fund with revenues from an earmarked tax on diesel and gasoline. The allocation to rural roads amounted to Rs25 billion in 2001. 65In India village electrification is defined as the existence of at least one electricity connection within the revenue boundary of a particular village. A village could just have a single connection to the house, or an agriculture pump and it would be considered as electrified by the utility and planning agencies. 66In Kerala a fifth of consumers surveyed in 2000 reported power cuts, 98% of which were from the rural areas. In Haryana (2000), a third of rural households reported frequent power cuts, and in Andhra Pradesh (2001) 40% of the rural households reported dissatisfaction. 87 India: Sustaining Reform, Reducing Poverty Encouraging cost-effective technical designs of A supportive regulatory regime for rural rural networks and exploiting the scope for supply. Decentralized generation should be reducing the construction and operating cost incorporated into the rural energy service of rural electrification. company model to augment power supply, Improving affordability of connection charges provide voltage support, and reduce through subsidized connection charges and transmission losses. These steps to reform need financing of the capital subsidy for the service to be put in place in parallel with reforms provider through innovative models of subsidy aimed at more conventional privatization of provision. the commercially viable parts of the sector. 88 CHAPTER 6 CONCLUSION: DEVELOPMENT PROSPECTS AND RISKS India's economic growth over the past two decades Outlook has been one of the world's fastest for large Growth. The Tenth Plan period started with a countries. In an outcome that few might have further deceleration of growth in fiscal 2002/03 to expected in the late 1970s, it jumped from an an estimated 4.4%, partly as a result of external entrenched 3.5% a year to close to 6% during the shocks. Agricultural output declined by 3% due to 1980s and 1990s, substantially reducing poverty. flooding in some areas and drought in others. Although progress in improving other indicators of Industrial and services output growth remained living standards has been uneven, there has been above 6%, despite depressed global demand. The real progress in education. Because around a third degree to which global demand affects domestic of the world's poor live in India, these are also output (except information technology (IT) achievements of global significance. But India output and exports) remains limited, however. And remains far behind its main competitors in East domestic demand and the policies that affect it are Asia, particularly China. Poverty remains widespread, with average incomes low and social still largely responsible for India's output indicators poor. Moreover, a gulf is growing performance. between India's richer and poorer states. Baseline scenario. In the absence of major external Accelerating development requires improving the or domestic shocks, and despite the expected delivery of health, water, and sanitation, setting recovery in 2003/04, the continuation of current India on a higher growth trajectory. Many of these policies will translate into a growth slowdown over goals are reflected in the Government's Tenth Five- the Tenth Plan period (table 6.1). Without a major Year Plan for 2002/03-2006/07, which targets reform impetus, it is unlikely that GDP will average growth rate of 8% a year and rapid progress average much more than 5% a year between across a wide range of living standards. But if the 2002/03 and 2006/07. Agricultural output is trends of the past decade continue, the goals of the expected to recover from the 2002/03 slump and Tenth Plan (and the less ambitious Millenium subsequently return to the previous trend. Development Goals) will not be achieved. Growth Industrial sector growth is expected to remain at has fallen in recent years, to below 6% a year between 5% and 6% a year, although the lagged between 1997/98 and 2001/02, and below 5% in effect of the contraction in agriculture on 2002/03. Loose fiscal policies and a slowdown in industrial output may dampen this recovery in the pace of structural reform have been likely 2003/04. Services, the fastest growing sector over contributors to this growth deceleration. Although the 1990s, can be expected to continue expanding a recovery may take place in 2003/04, India's rapidly throughout the period, albeit at rates current growth trajectory appears closer to 5%, slightly lower than those of the past five years, than to the desired 8%. And the rate of progress in because large civil service wage increases are improving social indicators is insufficient to meet unlikely to be repeated given the existing fiscal the Government's goals. A comprehensive set of crisis. Although growth in IT-enabled services may reforms, as discussed in this report and expand rapidly, it is also unlikely that the IT sector summarized in box 6.1, could unleash faster will continue to expand at rates comparable to growth and improve delivery of key services. those of previous years. The speed of recovery in 89 India: Sustaining Reform, Reducing Poverty global demand will be important to continue fuel during and beyond the Tenth Plan period. Reforms the growth in services. to reduce fiscal imbalances at the center and state levels would reduce crowding out and create space Reform scenario. A comprehensive reform for increased private investment. Improvements in program could improve the outlook considerably the composition of public expenditures-with a by providing new impetus to growth and lower share spent on civil servants' wages, accelerating improvements in social indicators. pensions, and interest, and on covering power Although it is unlikely that an average annual sector losses, and a higher share spent on growth rate of 8% can be achieved, it would be operations and management and investments in possible to gradually set growth on a higher key infrastructure-would further "crowd in" trajectory and reach 8% by the end of the Tenth private investment. Improvements in the Plan period. Because of the low initial growth rate investment climate, through the removal of in 2002/03, this would translate into an average bottlenecks in product and factor markets and key growth rate of 6.5% a year over the Tenth Plan infrastructure, would increase the productivity of period (table 6.1). both public and private investment across the The reforms underpinning the above reform economy, including in India's poor rural areas. scenario are comprehensive, and would be More foreign direct investment would contribute expected to have an impact across the board- to technology transfer and increase output. More Table 6.1. Macroeconomic Projections, Baseline and Reform Scenarios, 1997/98-2006/07 1997/98-2001/02a 2002/03-2006/07 2002/03-2006/07 Baseline scenario Reform scenario Real GDP growth at factor cost (% a year) 5.5 5.0 6.5 Agriculture, forestry, and fishing 1.8 1.5 2.2 Industry 4.5 5.3 7.1 Services 8.1 6.4 8.0 Investment (% of GDP) 22.5 20.5 27.7 Public 6.6 6.4 7.3 of which: general government 3.1 3.0 3.7 Private 15.9 14.1 20.4 Consumption (% of GDP) 78.8 80.5 73.5 Public 12.5 12.0 12.4 Private 66.3 68.5 61.1 General government (% of GDP) Fiscal deficit 9.3 11.8 10.3 Primary deficit 3.5 3.6 2.2 a. Ninth Plan. Source: 1997/98-2001/02-Central Statistical Office. 2002/03-2006/07-World Bank staff estimates. 90 Conclusion: Development Prospects and Risks effective delivery of health, education and safety where significant agricultural diversification can nets would accelerate progress in social indicators, take place. More important, this reform would empowering India's citizens to contribute to and release resources for other expenditures, such as benefit from faster economic growth. research and extension, rural electrification, and rural roads. Simultaneously, faster growth in Accelerating growth and poverty reduction in industry and continuing rapid growth in services India cannot be achieved without also can provide jobs for the labor force released from accelerating growth in India's lagging states. If agriculture. growth continues to be divergent across states in 2002-07 (with poorer states growing no faster Employment impact. Relative to the baseline than 5% a year or only slightly better than in scenario, reforms can be expected to have a 1997-2002), richer states would have to grow at positive impact on employment. Even though the nearly 10% a year on average in 2002-07 to reach employment elasticity of GDP is less than one an all-India average of 6.5% a year-a rather (reflecting increased productivity of labor) and has unlikely scenario. Implicit in the envisaged been declining in India since the 1970s, a higher reform is an acceleration of growth in India's aggregate growth rate of the economy can be lagging states, which have to implement the expected to generate higher employment levels reform agenda outlined in this report-reducing (table 6.2). The composition of growth also fiscal imbalances, realigning the composition of matters. Agriculture, which employs a large share public expenditures, improving the investment of the labor force, can be expected to continue climate, and strengthening the delivery of health expanding output without increasing employment and education services and social safety nets. The significantly, reflecting underemployment and central government has to catalyze and set the improvements in labor productivity, and thus pace for reforms at the state level. increasing agricultural wages. During the 1990s agricultural growth had a zero elasticity of Particularly important for reducing poverty and employment, even though it has a strong positive increasing rural incomes are policies to increase impact on poverty reduction. The estimated productivity of agriculture. In the short run, elasticities of employment to GDP in services and removing subsidies to foodgrains could reduce manufacturing are considerably higher, so agricultural output in the few states that benefit accelerating growth in these sectors will have a the most from them. But these are also the states stronger impact on job creation. Table 6.2. Elasticity of Employment to GDP, Selected Sectors, 1993/94-1999/2000 Estimated elasticity Agriculture 0.00 Manufacturing 0.26 Construction 1.00 Wholesale and retail trade 0.55 Transport, storage, and construction 0.69 Finance, real estate, insurance, and business services 0.73 Source: India, Planning Commission 2001a. 91 India: Sustaining Reform, Reducing Poverty Poverty impact. The continuation of the foreign commercial banks and the bond markets. current growth trajectory is unlikely to make a India's attractiveness to direct and portfolio equity big dent on poverty. Without efforts to reform investors is likely to require reinvigoration of the the agricultural sector, improve productivity, Government's privatization program and fresh and direct development expenditures to rural reforms to enhance domestic industrial prospects. growth, it is unlikely that agricultural growth Foreign lenders, in turn, are likely to look for rates will accelerate beyond 3% a year. This will action to tackle the imbalances in the domestic have direct consequences on the pace of poverty economy, especially the fiscal deficits of the central reduction in India over the next five years. government and the states. The current high level Given the strong correlation between of reserves provides a cushion against both agricultural performance and wages and poverty domestic and external shocks, although a change in reduction in rural areas, an unbalanced growth sentiment for the rupee-as a result of continued pattern-with agriculture continuing to lag high fiscal deficits or nervousness about the health behind-will do little to accelerate poverty of parts of the domestic financial sector-could lead reduction in India. Part of the rapid progress in to some erosion of reserves. reducing poverty in China is due to faster growth in agriculture, fueled by reforms in the Risks sector. The incidence of poverty can be Fiscal. India's large fiscal imbalances pose a projected to decline by less than 6 percentage serious threat to sustained growth and points under the baseline scenario between development over the medium term. In the short 2002/03 and 2006/07 and by nearly 10 run, the risk of a speculative attack is reduced by percentage points under the reform scenario. a compliant financial system, a large pool of household savers, the limited convertibility of the External sector. The continuation of recent current account, and a flexible exchange rate. So, trends would translate into modest growth of in the absence of a rapid increase in interest rates merchandise exports over the Tenth Plan and weakening growth performance, India is not period. But recovery in domestic demand, vulnerable in the short term to the type of coupled with the Government's planned collapse suffered by Russia or Argentina. But over reduction in import tariffs, could lead to some the medium term, there are consequences to acceleration in import growth, possibly pushing leaving the current fiscal situation unchecked. the current balance into deficit again. This Current policies have helped reduce external could be reinforced by a renewed rise in vulnerabilities, but they have also kept economic domestic interest rates as a result of competition growth below potential-with growing interest between public and private borrowers, putting payments crowding out public investment and further upward pressure on the real effective high real interest rates constraining private exchange rate. So part of any crowding out investment. Slower growth, in turn, speeds up the could be reflected in the balance of payments. deterioration in debt dynamics. Even though Without any major policy slippage, however, interest rates have declined over the past 18 any renewed current deficit is likely to be months, public debt dynamics have continued to moderate. The Tenth Plan envisages a deficit worsen. With interest rates can be expected to equal to about 3-4% of GDP by 2006/07, albeit increase from the current historical lows, the with faster growth of both exports and imports. growth-interest rate ratio that has prevented the Financing such a deficit would require a mix of current fiscal vulnerabilities from translating into renewed equity inflows and new borrowings from a full-blown macroeconomic crisis could 92 Conclusion: Development Prospects and Risks deteriorate. The persistence of current fiscal External. In the short run, developments in the trends will, at best, further limit growth and job external environment cannot be expected to be creation. If this negative cycle continues, a full- strong positive forces. The recovery of the global fledged fiscal crisis cannot be ruled out over the economy is expected to be slow. There remain medium term. weaknesses in demand in the world's largest markets Western Europe, Japan, and North It is easy politically to downplay this risk, hoping America. This will slow the growth in industry. that higher growth and lower interest rates will A slow down in the inflow of remittances is also eventually solve the fiscal problem. But it would be likely. At least part of the higher inflow of unwise to sit back and wait for such a virtuous remittances observed in India is likely to have circle to emerge. Instead, the central and state been a one-off episode. The same trends can be governments will have to be active in reducing the observed in other countries, such as Pakistan fiscal deficit, shifting expenditures to more and Bangladesh. This level of inflows can be productive areas, and removing structural expected to weaken, emphasizing India's fiscal impediments to higher private investment and vulnerabilities. productivity. The sooner the roadmap for these reforms is put in place, and concrete actions taken Conclusion to show commitment to follow through, the more manageable will be the adjustment path, and the India can be proud of its development record quicker the payoff in higher growth and reduced over the past two decades. It reflects the poverty. emergence of a much wider consensus about the importance of opening the Indian economy to Political. Other risks could threaten India's competition. The results in faster growth and development prospects. An important risk is that poverty reduction are impressive. But India has the comprehensive reforms needed to accelerate still fallen behind its main competitors in East development will be delayed due to the primacy of Asia-and poverty remains a reality for many political concerns, such as general or state Indians, especially those in the poorer states of elections. Another is the diversion of the North and East. The Government is right to policymakers' attention (and public resources) to set ambitious targets for growth and social other issues, such as the tensions with neighboring development during the Tenth Plan. The key countries. Political obstacles to the needed now is to implement the policy and institutional hardening of budget constraints between the changes to achieve these goals. Sustained progress center and the states, particularly in states that will no doubt be difficult, especially in the wield considerable political power, threaten to politically charged areas of labor, power, and further erode state finances and discourage agricultural reform. But it also promises high reforming states. returns by reducing poverty. 93 India: Sustaining Reform, Reducing Poverty Box 6.1. Summary of Priority Reforms Fiscal Policy Progressively reduce the primary deficit at the center and in states by completing tax reforms (eliminating exemptions, bringing services into the tax net, and implementing a uniform state value- added tax), reducing power sector losses, and phasing out petroleum subsidies. Reduce financial sector risks by implementing the new securitization law, linking returns on provident funds and small savings to market benchmarks, and establishing a clear framework for managing state government guarantees. Improve fiscal management by imposing greater fiscal discipline on state borrowing and transfers, breaking down artificial distinctions between plan and nonplan expenditures, and consolidating centrally sponsored schemes. Improve the composition of public expenditures, by reducing the share spent on wages, pensions, interest payments, and agricultural subsidies, and increasing investment and operations and maintenance for priority social, infrastructure and agriculture programs. Delivery of Public Services Reduce administrative fragmentation and reform civil service pay policy and pensions. Improve the performance of the civil service and quality of service delivery by improving public access to information, strengthening accountability, and reducing political interference. Refocus health, education, and social safety net programs on outcomes. The central government can be an independent source for measuring progress toward agreed goals. Improve the private market for health care through training, public information, and accreditation. Priorities for public funds are to provide clean water and sanitation, and to combat communicable diseases (including HIV/AIDS prevention). Support the education-for-all goals by providing more public resources and improving resource use in elementary education. Schools should be more accountable to communities and have more local autonomy to find the best solutions. Develop a well-designed fiscal framework for local governments to guarantee their autonomy and accountability. Flows of funds from the center and states should depend on good local fiscal performance and resource mobilization. Investment Climate for Industry and Services Speed up trade reform by reducing average import tariffs and phasing out tariff exemptions, specific tariffs, and antidumping duties. Remove other product market distortions by eliminating preferential policies for small players, implementing a full and uniform value-added tax, and phasing out remaining foreign direct investment restrictions. 94 Conclusion: Development Prospects and Risks Reduce inefficiencies in factor markets by easing restrictions on hiring and firing of workers, improving access to credit for small and medium-scale enterprises, addressing problems in the use and transfer of land, and updating bankruptcy procedures. Ensure access to reliable power at reasonable costs by rationalizing power tariffs and improving the financial and operational performance of State Electricity Boards. Address capacity and quality constraints in transport by improving public sector performance (for roads and rail), mobilizing private investment (including better cost recovery for roads), phasing out price distortions (for rail), and improving the efficiency of existing capacity (for ports). Agricultural Policy and Rural Development Put in place a market-based foodgrain policy that protects the poor through targeted safety nets, while mitigating drastic supply shocks through a cost-effective and well-managed price stabilization mechanism. Reduce input subsidies that are fiscally unsustainable and distorting input use. Savings should be used to fund more productive investments in agricultural research and extension, rural roads, and rural electrification. Reduce regulation of domestic trading activities for major agricultural commodities and eliminate remaining trade policy distortions, including subsidized exports of rice and wheat. Improve access to land by revisiting current legislation on land tenancy and building on successful initiatives to improve land administration. Devise market-based solutions to improve rural access to a larger range of financial services at lower cost. 95 REFERENCES Acharya, Shankar. 2001. "India's Macroeconomic Management in the Nineties." 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Gross capital formation 21.3 23.4 26.5 21.8 22.6 21.4 23.7 22.5 22.4 a) Gross fixed capital formation 21.4 21.9 24.4 22.8 21.7 21.5 21.8 21.8 21.7 i) Public sector 8.0 8.8 7.7 6.9 6.4 6.5 6.2 6.1 5.9 ii) Private sector 13.4 13.2 16.7 15.9 15.3 15.1 15.6 15.8 15.7 b) Change in inventories -0.2 1.4 2.2 -1.0 0.9 -0.1 1.9 0.7 0.8 3. Total absorption (1+2) 99.5 99.7 101.8 98.5 98.4 99.1 102.3 100.2 100.3 4. Resource balance 0.0 -0.3 -1.2 -1.2 -1.3 -1.7 -2.0 -0.8 -0.7 a) Exports of goods and services 10.0 10.0 11.0 10.6 10.9 11.2 11.8 13.8 13.3 b) Imports of goods and services 10.0 10.3 12.2 11.8 12.1 12.9 13.7 14.5 13.9 5. Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 6. Net income from abroad -1.4 -1.3 -1.1 -1.0 -0.9 -0.9 -0.8 -0.8 -0.6 7. Gross national income (5+6) 98.6 98.7 98.9 99.0 99.1 99.1 99.2 99.2 99.4 8. Net current transfers from abroad 1.9 2.5 2.4 3.2 2.9 2.5 2.7 2.8 2.5 9. Gross national disposable 100.5 101.2 101.3 102.3 102.0 101.6 101.9 102.0 102.0 income (7+8) 10. National savings (9-1) 22.2 24.9 26.0 25.6 26.2 23.9 23.3 24.2 24.1 a) Public sector 0.6 1.7 2.0 1.7 1.3 -1.0 -1.0 -2.3 -2.5 b) Private sector 21.6 23.2 23.9 23.9 24.9 24.9 24.4 26.5 26.6 B. Shares of GDP by Industrial Origin 1. Agriculture 28.2 27.5 25.5 26.5 25.4 25.4 23.9 22.7 22.8 2. Industry 23.9 24.5 25.4 24.9 24.9 24.3 23.5 24.2 23.6 Construction 4.7 4.6 4.6 4.6 5.1 5.3 5.4 5.5 5.5 Gas, electricity, and water 2.2 2.4 2.3 2.2 2.3 2.5 2.2 2.2 2.2 Mining and quarrying 2.3 2.2 2.1 2.0 2.2 2.0 2.1 2.2 2.0 Manufacturing 14.6 15.3 16.3 16.1 15.2 14.5 13.8 14.3 13.9 3. Services 38.9 38.5 39.4 39.5 41.0 42.0 43.6 44.2 44.8 4. Statistical discrepancy -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5. Total value added at basic prices 90.9 90.5 90.3 90.9 91.3 91.8 91.0 91.1 91.2 6. Taxes less subsidies on products 9.1 9.5 9.7 9.1 8.7 8.2 9.0 8.9 8.8 7. GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Memo Item (billions of rupees) Gross domestic product at 8,592 10,128 11,880 13,682 15,225 17,409 19,369 21,043 22,960 market prices Source: Central Statistical Organization, National Accounts Statistics. 113 Table A2. Gross Domestic Expenditure and Product (billions of rupees at current prices) 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 A. GDP by Expenditure 1. Final consumption 6,725 7,728 8,946 10,494 11,539 13,534 15,227 16,353 17,879 a) Public sector 977 1,086 1,288 1,457 1,722 2,140 2,511 2,759 2,950 b) Private sector 5,748 6,642 7,658 9,037 9,817 11,394 12,716 13,594 14,929 2. Gross capital formation 1,826 2,368 3,152 2,979 3,437 3,722 4,583 4,736 5,151 a) Gross fixed capital formation 1,843 2,222 2894 3,119 3,304 3,743 4,219 4,598 4,973 i) Public sector 689 889 916 943 971 1,123 1,204 1,277 1,357 ii)Private sector 1,154 1,334 1978 2,175 2,333 2,620 3,015 3,321 3,616 b) Change in inventories -17 145 258 -140 133 -21 364 138 178 3. Total absorption (1+2) 8,551 10,096 12,098 13,472 14,976 17,257 19,809 21,089 23,030 4. Resource balance 1 -31 -142 -162 -191 -295 -380 -159 -158 a) Exports of goods and services 861 1,016 1,307 1,449 1,652 1,953 2,277 2,902 3,045 b) Imports of goods and services 860 1,047 1,450 1,610 1,843 2,247 2,657 3,061 3,202 5. Gross domestic product 8,592 10,128 11,880 13,682 15,225 17,409 19,369 21,043 22,960 6. Net income from abroad -121 -131 -135 -131 -132 -150 -154 -174 -127 7. Gross national income (5+6) 8,471 9,997 11,745 13,551 15,093 17,260 19,215 20,869 22,834 8. Net current transfers from abroad 165 254 285 439 440 432 531 585 578 9. Gross national disposable 8,637 10,251 12,030 13,990 15,533 17,692 19,746 21,454 23,412 income (7+8) 10. National savings (9-1) 1,912 2,523 3,084 3,497 3,994 4,158 4,519 5,101 5,533 a) Public sector 54 168 241 229 203 -172 -200 -480 -577 b) Private sector 1,857 2,355 2,843 3,267 3,792 4,329 4,720 5,581 6,110 B. GDP by Industry of Origin 1. Agriculture 2,420 2,788 3,031 3,626 3,870 4,425 4,620 4,785 5,226 2. Industry 2,052 2,485 3,018 3,411 3,785 4,235 4,557 5,099 5,417 Construction 406 466 550 628 778 920 1,053 1,166 1,256 Gas, electricity, and water 190 238 277 300 353 436 423 466 500 Mining and quarrying 201 227 253 277 334 357 413 454 463 Manufacturing 1,255 1,554 1,938 2,207 2,320 2,522 2,668 3,014 3,199 3. Services 3,342 3,897 4,684 5,398 6,246 7,320 8,443 9,293 10,297 Transportation 511 611 707 836 975 1,125 1,243 1,403 1,545 Trade 994 1,192 1,463 1,717 1,945 2,208 2,460 2,727 3,025 Dwellings 484 529 590 655 728 855 1,015 1,204 1,370 Banking 417 501 661 720 840 956 1,191 1,185 1,302 Public administration 436 486 573 652 800 996 1,167 1,240 1,331 Other 500 577 690 817 958 1,180 1,367 1,535 1,726 4. Statistical discrepancy 0 0 0 0 0 0 0 0 0 5. Total value added at basic prices 7,813 9,171 10,733 12,435 13,901 15,981 17,619 19,177 20,940 6. Taxes less subsidies on products 779 957 1147 1,247 1,324 1,429 1,750 1,866 2,020 7. GDP at market prices 8,592 10,128 11,880 13,682 15,225 17,409 19,369 21,043 22,960 Source: Central Statistical Organization, National Accounts Statistics. 114 Table A3. National Income and Product at Constant Prices (annual growth rates, %) 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 A. GDP by Expenditure and Income 1. Final consumption 4.2 6.5 7.4 3.8 7.4 7.1 2.3 6.1 a) Public sector 1.2 8.0 4.5 11.1 12.9 13.2 0.6 7.2 b) Private sector 4.6 6.2 7.9 2.6 6.4 6.0 2.6 5.9 2. Gross capital formation 12.8 19.3 1.6 2.2 8.6 8.6 9.4 3.0 Gross fixed capital formation 11.8 19.3 1.5 2.1 8.7 8.6 4.7 3.0 i) Public sector 18.0 -6.5 -5.9 -2.8 9.4 4.9 10.9 3.0 ii) Private sector 8.1 36.1 4.8 4.1 8.4 10.0 2.4 3.0 3. Total absorption 6.0 9.4 6.0 3.4 7.7 7.5 4.0 5.3 4. Exports of goods and services 13.1 31.4 6.3 -2.3 13.9 18.0 23.4 6.0 5. Imports of goods and services 22.7 28.0 -2.5 13.2 20.8 7.0 6.5 3.5 6. Capacity to importa 18.9 19.0 -2.7 12.8 17.2 5.5 17.8 3.8 7. Gross domestic income at market prices 8.0 6.4 6.3 6.3 6.4 5.5 3.0 5.1 8. Gross national income 7.4 7.8 7.7 4.5 5.9 7.2 3.9 5.8 9. Gross national disposable income 8.1 7.7 8.5 4.2 5.5 7.5 3.9 5.5 10. Gross national savings 21.8 11.4 11.6 5.6 0.5 8.5 8.7 4.0 B. GDP by Industrial Origin 1. Agriculture 5.0 -0.9 9.6 -2.4 6.2 0.3 -0.4 5.7 2. Industry 10.2 11.6 7.1 4.3 3.7 4.8 6.6 3.3 Construction 5.5 6.2 2.1 10.2 6.2 8.0 6.9 3.7 Gas, electricity, and water 9.4 6.8 5.4 7.9 7.0 5.2 5.0 4.3 Mining and quarrying 9.3 5.9 0.5 9.8 2.8 3.3 2.4 1.0 Manufacturing 12.0 14.9 9.7 1.5 2.7 4.0 7.3 3.4 3. Services 7.1 10.5 7.2 9.8 8.4 10.1 5.6 6.8 4. Total value added at basic prices 7.3 7.3 7.8 4.8 6.5 6.1 4.4 5.6 5. GDP at market prices 7.5 7.6 7.4 4.5 6.0 7.1 3.9 5.5 a. Exports deflated by import price index. Source: Central Statistical Organization, National Accounts Statistics. 115 Table A4. Gross Domestic Product by Expenditure, National Income and Savings (billions of 1993-94 rupees) 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 A. GDP by Expenditure and Income 1. Final consumption 6,725 7,004 7,458 8,012 8,313 8,924 9,561 9,780 10,378 a) Public sector 977 989 1,069 1,116 1,240 1,400 1,584 1,593 1,709 b) Private sector 5,748 6,015 6,389 6,896 7,073 7,524 7,977 8,186 8,669 2. Gross capital formation 1,826 2,061 2,458 2,496 2,551 2,772 3,010 3,294 3,394 a) Gross fixed capital formation 1,843 2,061 2,458 2,495 2,548 2,769 3,008 3,148 3,244 i) Public sector 689 813 759 715 695 760 798 885 911 ii) Private sector 1,154 1,248 1,698 1,780 1,853 2,009 2,210 2,264 2,333 b) Change in inventories 141 378 252 189 343 140 493 304 150 3. Total absorption (1+2) 8,551 9,065 9,916 10,509 10,864 11,696 12,571 13,074 13,772 4. Resource balance 1 -82 -71 43 -163 -290 -144 149 210 a) Exports of goods and services 861 974 1,280 1,361 1,329 1,514 1,786 2,204 2,336 b) Imports of goods and services 860 1,055 1,351 1,318 1,492 1,803 1,930 2,054 2,125 5. Gross domestic product 8,592 9,233 9,939 10,674 11,152 11,820 12,664 13,163 13,881 6. Trading gains or losses 0 50 -61 -175 8 53 -132 -256 -315 7. Gross domestic income (5+6) 8,592 9,284 9,878 10,499 11,161 11,874 12,532 12,907 13,566 8. Net income from abroad -121 -132 -126 -107 -106 -120 -116 -124 -84 9. Gross national income (7+8) 8,471 9,101 9,813 10,567 11,046 11,700 12,548 13,039 13,798 10. Net current transfers from abroad 165 232 238 339 322 293 345 362 345 11. Gross national disposable income (9+10) 8,637 9,333 10,052 10,906 11,368 11,994 12,892 13,401 14,143 12. Gross national savings (11-1) 1,912 2,329 2,594 2,894 3,056 3,069 3,332 3,621 3,765 Memo Item Capacity to import 861 1,024 1,219 1,185 1,337 1,567 1,654 1,948 2,021 B. GDP by Industrial Origin 1. Agriculture 2,420 2,541 2,519 2,761 2,694 2,861 2,870 2,859 3,021 2. Industry 2,052 2,261 2,524 2,702 2,818 2,923 3,064 3,266 3,375 Construction 406 428 455 465 512 544 587 628 652 Gas, electricity, and water 190 208 222 234 252 270 284 298 311 Mining and quarrying 201 220 233 234 257 264 273 279 282 Manufacturing 1,255 1,405 1,614 1,770 1,797 1,846 1,920 2,061 2,131 3. Services 3,342 3,579 3,953 4,238 4,654 5,043 5,551 5,862 6,259 Transportation 511 562 623 674 730 789 876 983 1,066 Trade 994 1,100 1,259 1,355 1,458 1,569 1,682 1,751 1,906 Dwellings 484 499 527 550 580 613 659 719 761 Banking 417 452 501 550 648 705 800 790 816 Public administration 436 442 472 491 562 622 704 722 743 Other 500 525 571 617 676 744 829 897 966 4. Statistical discrepancy 0 0 0 0 0 0 0 0 0 5. Total value added at basic prices 7,813 8,380 8,996 9,701 10,166 10,827 11,484 11,987 12,654 6. Taxes less subsidies on products 779 853 944 974 987 993 1,179 1,177 1,227 7. GDP at market prices (5+6) 8,592 9,233 9,939 10,674 11,152 11,820 12,664 13,163 13,881 Source: Central Statistical Organization, National Accounts Statistics. 116 Table A5. Exchange Rates and Prices 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 Exchange Rates (rupees per U.S. dollar) Nominal official average exchange rate 31.37 31.40 33.45 35.50 37.16 42.07 43.33 45.68 47.69 Real effective exchange rate (1985=100) 61.59 66.0 63.6 63.8 67.0 63.4 63.3 66.5 68.4 Price Indices Wholesale Price Index (1993-94=100) 100.0 112.5 121.6 127.2 132.8 140.7 145.3 155.7 161.3 Consumer Price Index (1993-94=100) 100.0 107.6 118.3 129.4 138.3 156.4 161.6 168.0 173.1 Consumer Price Index (% change) 5.0 7.6 10.0 9.4 6.8 13.1 3.3 3.9 3.1 Manuf. Exp. Unit Value Index (1990=100) 106.7 110.5 117.0 111.3 103.5 99.6 99.4 97.3 95.9 Implicit Deflators (1993=100) Real gross domestic product 100.0 109.7 119.5 128.2 136.5 147.3 153.0 159.9 165.4 Exports of goods and services 100.0 95.9 97.9 93.9 80.4 77.5 78.4 75.9 76.7 Imports of goods and services 100.0 100.8 93.2 81.8 81.0 80.2 72.6 67.1 66.4 Terms of Trade Index 100.0 95.1 105.0 114.8 99.4 96.6 108.0 113.1 115.6 Source: IMF; RBI; India, Ministry of Industry; World Bank staff estimates. 117 a 71 36 494 968 441 515 698 392 306 653 499 794 180 132 6.1 9.3 15.3 2,539 1,842 4,208 3,178 1,232 1,210 1,668 1,501 2003/04 27,435 b 72 34 455 874 373 447 728 406 322 560 446 733 183 6.0 9.6 2,369 1,642 3,858 2,899 1,160 1,141 1,488 1,590 -135 15.6 2002/03 24,655 a 8 61 452 914 425 486 721 414 307 650 399 746 177 120 5.8 9.6 15.4 2,451 1,730 3,926 2,968 1,174 1,135 1,475 1,348 2002/03 25,571 29 36 65 403 726 320 366 678 355 323 543 312 683 164 6.3 8.8 15.1 001/022 2,014 1,337 3,461 2,613 1,075 1,012 1,446 1,354 22,960 49 21 57 475 685 318 357 559 328 231 993 496 268 672 827 120 5.7 9.2 14.9 1,926 1,367 3,136 2,429 1,210 1,113 2000/01 21,043 91 17 21 484 349 307 375 532 339 193 946 471 245 558 762 101 5.5 9.4 14.9 y 1,815 1,283 2,880 2,219 1,064 1,035 1999/00 19,369 58 51 59 91 ummarS 407 286 245 448 301 148 779 399 236 474 668 106 954 876 5.5 8.6 14.1 ices) 998/991 1,495 1,047 2,449 1,888 17,409 pr 9 inancesF ent 36 64 83 11 957 402 255 200 382 253 129 656 353 185 378 591 741 721 4.9 8.8 13.7 curr 997/981 1,339 2,080 1,572 15,225 at 4 rnmentevo 47 41 75 03 937 429 235 186 326 221 105 595 295 155 323 535 565 531 4.1 9.2 13.4 G upeesr 1996/97 1,263 1,828 1,368 13,682 of 43 32 89 4 3 65 819 358 222 165 282 184 500 269 127 324 464 517 510 4.3 9.3 13.6 1,101 1,618 1,219 Central 1995/96 11,880 (billions A6. 35 23 87 63 15 36 911 675 268 211 138 236 158 440 232 119 245 474 536 450 5.3 9.0 ableT 14.3 1994/95 1,447 1,037 10,128 14 26 96 0 62 51 755 534 222 172 101 220 151 932 367 218 116 230 437 552 502 6.4 8.8 estimates 15.2 1993/94 1,307 8,592 staff 18 98 32 67 eceipts.r ankB 64 20 53 741 540 238 164 201 125 817 310 176 108 223 367 379 306 5.1 9.9 15.0 oss orld 1992/93 1,120 7,484 gr W that, savings. 16 97 23 05 60 30 54 660 501 223 160 160 109 999 750 266 163 123 198 310 339 254 5.2 After 10.1 15.3 e. small documents; 1991/92 6,531 on shar e loans budget state's of and (net) union (net) net e PSEs eriesv expenditur e loans of wingo GDP/ ecor inanceF c of wingo estimates. estimates. of c tax GDP/e y 1999-2000 loan c cise deficit borr ex tax enuever d eceiptsr e of expenditur payments nonplan yrev :yb borr eficit GDP/ estment ntil et inistr enueveR enuever D udgetB evisedR est est U N M expenditur ecor fiscal axT ustomsC nion U ncomeI ther Corporate O ntaxo nterI hert efense ther isinv omestic ce: O N xpenditurE onplan nterI D ubsidiesS O N lanP ossr Less: G inancedF D D xternalE emo GDPmp iscalF enueveR xpenditurE M a. b. c. d. ourS 118 a 698 803 20 11 203 921 443 524 501 545 188 177 232 012 3 61 123 107 231 0 75 36 354 2,539 1,842 3,662 1,124 1,995 1,232 1,668 1,072 2003/04 -1123 b 728 103 18 10 179 894 411 450 430 441 135 125 165 941 3 3 43 0 85 138 135 505 2,369 1,642 3,416 1,073 1,876 1,160 -1047 1,488 1,000 -135 2002/03 a 721 972 3 17 11 -3 8 80 974 193 781 436 487 468 2,451 1,730 3,405 1,926 1,174 -954 521 172 161 232 412 115 118 021 959 100 209 1,475 2002/03 678 692 16 84 823 185 638 381 432 415 444 -34 118 178 261 3 74 63 88 24 65 179 105 877 347 2001/02 2,014 1,337 3,016 1,746 1,075 -1002 1,446 559 072 8 5 14 93 85 88 35 12 83 94 57 726 156 570 372 993 384 368 1,926 1,367 2,778 1,654 -852 357 136 421 123 729 251 1,209 2000/01 532 452 4 14 11 97 31 71 90 66 21 607 156 451 352 946 290 290 999/001 1,815 1,283 2,491 1,580 -676 388 108 129 911 148 117 703 177 1,064 448 212 3 12 76 10 67 96 57 21 95 75 91 585 131 454 299 779 264 251 1,495 1,047 2,165 1,303 -670 285 109 001 954 690 330 -201 1998/99 inancesF 957 382 871 6 10 73 67 19 2 67 9 25 44 11 460 106 354 262 656 232 297 997/981 1,339 1,803 1,101 -464 277 100 101 741 325 245 107 937 326 251 9 7 84 47 40 93 58 2 97 96 4 28 32 03 400 315 943 210 595 238 232 1,263 1,589 -327 239 565 200 153 155 rnmentevo 1996/97 ices) G pr 819 282 031 8 5 66 50 45 88 08 2 78 84 4 30 32 3 29 356 290 817 188 500 218 213 219 517 331 128 995/961 1,101 1,399 -297 ent Central curr 911 675 236 211 7 7 47 74 67 73 86 2 77 64 31 15 02 estimates. 36 61 301 254 708 164 440 205 200 1,221 -310 226 536 203 166 1994/95 staff of at 69 41 41 3 56 52 74 96 3 93 15 0 42 91 81 ankB 51 upeesr 993/941 755 534 220 244 203 613 150 367 211 208 1,082 -327 225 552 289 104 orld W of 87 34 61 3 74 71 59 55 4 57 44 12 02 37 57 61 53 741 540 201 927 209 174 522 121 310 181 178 -186 193 379 196 Classification 1992/93 ccounts;A y 56 31 51 2 58 56 52 94 3 62 93 23 03 75 66 31 54 (billions 660 501 160 823 198 168 450 114 266 160 157 1991/92 -163 176 339 100 inanceF dgetaruB e, 25 28 41 2 69 67 50 64 3 69 82 0 41 80 91 21 32 550 430 120 735 196 168 391 109 215 134 132 1990/91 -186 191 376 161 A7. xpenditurE 44 25 86 31 3 71 68 45 24 2 62 22 0 40 74 86 11 26 of 500 383 116 642 184 159 335 102 178 109 ableT 1989/90 -142 180 322 125 tment 98 83 22 96 11 4 60 57 41 83 2 62 52 0 37 84 58 01 25 93 436 338 541 140 118 288 143 102 100 epar 1988/89 -105 165 270 D 90 23 9 3 3 0 9 19 95 89 93 91 370 280 462 114 245 112 -91 57 54 33 13 58 82 30 59 39 29 dia,nI 151 242 107 1987/88 88 82 7 4 2 0 8 17 86 92 92 79 74 331 243 409 103 220 -78 76 72 15 31 68 22 46 55 34 20 160 238 121 documents; 1986/87 69 91 6 2 1 0 4 86 13 74 70 75 72 67 280 211 339 176 -59 59 57 16 01 54 62 28 49 44 14 78 131 190 budget 1985/86 s s nion U UT UT states states vices (net) PSEs to ofe ser ofe in omfr e vices vices inance,F ser and ances s ser uments of est vices vices rants (A+B+C+D)e vices efense estimates. adv UT equity -bills)T estimates. y ser G definition) of elopmental ser payments expenditur balance ser D & elopmental deficit instr eceiptsr nterI expenditur and expenditur yb funds inistr ocialS conomicE ent loans udgetB evisedR M enueveR enuever enuever est expenditur states others ankB loans ondev efense rants-in-aid which: ocialS conomicE which: fiscal estment savings (includes which: curr elopmentalve ondev axT ntaxo orld isinv ketra ce: ther N of enueveR elopmentalve D 1. 2. N D nterI G contributions of enueveR D 1. 2. N of Capital Loans to to (A+B+C+D) A. B. C. et D. N apitalC A. B. C. D. ossr G W( inancedF D M mallS videntorP xternalE O a. b. ourS 119 B.E. 66 94 22 186 625 918 541 704 747 310 436 546 415 322 109 137 187 511 624 002/032 3,034 2,116 1,305 3,552 1,911 1,207 1,575 -518 1,064 53 82 18 77 R.E. 162 554 824 507 687 664 297 367 2,709 1,885 1,169 3,314 1,861 1,174 1,400 -605 461 365 283 175 148 811 624 1,066 2001/02 57 85 15 77 B.E. 165 603 816 486 654 671 311 360 2,831 2,015 1,247 3,327 1,840 1,185 1,430 -496 480 388 303 977 122 168 231 554 2001/02 9 50 58 48 84 132 507 692 378 640 532 274 258 2,380 1,687 1,048 2,915 1,685 1,045 1,181 -536 360 302 245 895 130 131 551 2000/01 45 43 11 115 911 441 605 306 963 552 463 254 209 2,072 1,467 2,611 1,515 1,051 -539 377 244 201 122 916 142 124 971 471 1999/00 8 35 42 80 100 790 394 480 239 820 498 847 376 209 167 1,764 1,284 2,201 1,319 -436 311 223 181 748 122 311 021 195 1998/99 94 30 34 10 51 79 26 64 718 404 487 242 683 455 699 316 175 140 1,703 1,216 1,866 1,138 -163 279 218 184 442 237 1997/98 7 84 19 30 38 65 45 80 627 350 467 232 603 458 609 269 152 117 inancesF 1,528 1,061 1,689 1,062 -161 213 168 139 374 175 1996/97 7 81 99 15 929 558 290 439 210 893 536 357 542 230 131 -82 26 47 64 94 53 232 178 152 314 148 1,368 1,450 rnmentevo 1995/96 ices) 4 70 90 13 23 33 41 84 33 pr 806 487 249 417 200 790 450 340 482 201 112 -62 G 208 171 148 270 148 1,223 1,285 1994/95 tateS ent 4 50 95 70 12 688 415 224 367 212 708 390 319 374 165 -38 18 43 42 95 34 25 168 121 102 206 of curr 1993/94 1,056 1,094 at 42 911 604 356 206 306 178 269 3 78 60 12 635 346 289 315 139 -51 17 87 51 39 89 63 45 158 103 209 upeesr 992/931 of 40 805 526 318 168 279 152 668 2 65 50 10 589 315 274 267 115 -61 99 16 82 32 33 94 92 37 132 193 Classification y 991/921 34 90 13 77 43 26 13 32 (billions 665 446 270 142 219 126 817 8 3 92 52 40 489 280 209 221 -53 135 188 100 990/911 udgetarB 30 85 565 391 230 131 174 206 6 2 76 44 32 408 240 168 188 -37 77 12 66 38 26 79 32 26 118 154 A8. 1989/90 24 97 ableT 504 331 200 107 173 225 6 2 7 63 37 26 362 206 157 154 -18 99 69 11 57 28 22 67 02 117 1988/89 20 97 83 440 290 173 150 254 5 2 53 31 21 318 177 141 128 -12 64 11 54 35 18 58 61 02 101 113 1987/88 estimates. 17 84 70 382 251 150 131 183 4 1 2 44 27 17 94 61 10 51 32 93 14 48 01 12 269 152 117 107 staff 1986/87 ankB 15 73 63 334 218 131 116 823 4 7 1 97 93 34 17 17 85 57 10 46 27 78 14 58 01 3- 231 134 orld W 1985/86 es (net) funds finances; tax center c omfr [A+B+C]e e (1+2) payments vices est [A+B+C]e state (1+2) vices ances (net) vidento on central ser ser ument: vices vices adv pr es es rants ser elopmental nterI balance ser elopmental deficit instr center and eceiptsr tax ine G expenditur and bulletins tax expenditur yb enueveR enuever ect shar enuever elopmentalve center others ent expenditur RBI ocialS ondev which: ther elopmentalve loans ondev fiscal omfr ectri conomicE oT oT O ocialS conomicE Loans savings axT D ndirI tateS ontax which: N of enueveR D 2. N of curr D 1. 2. N 1. ce: A. B. C. et N apitalC A. B. C. ossr G inancedF ketra M Loans mallS hert O ourS 120 a 85 699 008 3 49 63 449 401 196 151 842 65 860 3,901 3,201 5,619 2,684 1,359 1,325 2,850 2001/02 -1,718 2,518 1,318 75 604 926 5 66 83 12 396 330 145 362 57 519 3,670 3,066 5,052 2,411 1,201 1,210 2,565 2,010 1,132 2000/01 -1,382 59 576 946 4 54 71 352 297 140 153 433 21 515 1999/00 3,320 2,743 4,557 2,122 1,118 1,003 2,377 -1,237 1,886 1,008 64 478 951 953 025 3 52 95 299 247 117 101 959 705 91 76 2,806 2,328 3,906 1,903 1,938 1,621 1998/99 -1,100 448 789 809 -22 -544 974 2 9 40 76 292 251 109 513 153 11 140 1997/98 2,653 2,205 3,197 1,598 1,622 1,024 53 410 688 774 -488 383 2 4 36 66 215 179 100 870 344 032 03 263 inancesF 1996/97 2,408 1,999 2,896 1,461 1,400 82 381 602 646 -373 304 2 4 32 95 77 229 197 776 450 991 3 120 tates)S 1995/96 2,132 1,751 25,05 1,249 1,229 and 42 341 497 594 -372 883 2 30 77 64 15 245 215 760 254 432 36 186 1994/95 1,821 1,480 2,194 1,091 1,078 92 3 0 22 78 85 51 (Center 280 952 431 521 891 1,501 1,221 1,872 -371 243 176 154 713 343 251 167 ices) 1993/94 pr 03 rnmentevo ent 252 843 380 463 759 -236 603 4 19 62 64 02 87 177 158 542 901 53 273 1992/93 1,396 1,144 1,632 G curr at 82 221 787 346 442 652 -215 962 3 19 55 54 03 157 138 484 122 801 54 169 1991/92 1,252 1,030 1,467 eneral G upeesr 42 879 160 685 307 377 561 792 3 0 15 52 83 159 144 527 115 431 32 246 of of 1990/91 1,039 1,269 -230 24 937 776 162 592 265 327 480 -177 572 2 0 15 48 77 148 133 452 106 021 26 199 (billions 1989/90 1,114 Classification y 805 668 137 629 91 2 0 15 43 65 88 25 503 228 275 404 1988/89 -121 832 129 114 359 111 135 estimates. staff 14 36 65 85 46 29 udgetarB 695 569 126 097 71 432 196 236 341 -95 522 3 0 121 107 320 142 ankB 1987/88 orld A9. 617 495 122 986 71 372 169 204 300 -72 332 2 0 W 14 17 77 80 25 20 136 122 305 153 1986/87 ableT finances; 535 432 103 385 61 317 146 171 250 -48 981 1 0 12 17 55 70 85 14 95 115 103 237 states. state 1985/86 for on bulletin estimates e s RBI UT PSEs. funds (net) of evisedr in [A+B+C]e and ocuments; expenditur vices [A+B+C+D]e (1+2) ances D vices ument: vidento bills)-T equities pr center ser ser adv of for eceiptsr enuever vices budget elopmental balance vices elopmental deficit nstrI and expenditur ser enuever ser and disbursements yb nion enueveR enuever tax elopmentalve ent expenditur Loans loans (including ctualsA U ondev ther ondev fiscal estment savings D N O curr elopmentalve axT on N enueveR ocialS conomicE D ocialS conomicE N Loans Capital ce: A. 1. 2. B. C. et N apitalC ketra thers A. 1. 2. B. C. isinv D. ossr G inancedF D M mallS xternalE O a. ourS 121 a 0 .. .. .. .. 638 501 242 155 308 918 918 2.3 1.8 0.9 0.0 0.6 1.1 0.5 3.3 0.5 3.3 ,435 1,381 1,381 2003/04 27 b 0 .. .. .. .. 561 430 249 149 301 790 790 2.3 1.7 1.0 0.0 0.6 1.2 0.5 3.2 0.5 3.2 1,240 1,240 24,655 2002/03 a 0 .. .. .. .. 612 468 252 155 279 899 899 2.4 1.8 1.0 0.0 0.6 1.1 2.5 3.5 2.5 3.5 1,333 1,333 25,571 2002/03 0 .. .. .. .. 528 415 206 140 296 713 713 2.3 1.8 0.9 0.0 0.6 1.3 0.5 3.1 0.5 3.1 1,149 1,149 2001/02 22,960 /01 0 .. .. .. .. 517 368 173 117 270 672 672 2.5 1.7 0.8 0.0 0.6 1.3 0.5 3.2 0.5 3.2 1,058 1,058 2000 21,043 0 98 435 290 193 254 918 565 819 .. 565 2.2 0.9 0.0 1.4 1.5 1.0 0.0 0.5 1.3 7.4 2.9 7.4 2.9 1999/00 19,369 95 391 251 385 230 212 720 797 .. 489 2.2 0.8 0.0 1.4 1.4 2.2 1.3 0.5 1.2 9.5 4.1 6.4 2.8 1,027 1998/99 17,409 71 435 297 294 151 178 777 678 627 2.9 0.9 0.5 0.0 1.5 2.0 1.9 1.0 0.5 1.2 7.6 5.1 8.5 4.1 997/981 1,027 15,225 65 351 232 231 107 152 318 596 607 .. 490 2.6 1.0 0.0 1.6 1.7 1.7 0.8 0.5 1.1 9.5 4.4 2.5 3.6 tatesS 996/971 13,682 and 48 293 213 193 100 130 996 521 995 .. 421 2.5 0.9 0.0 1.5 1.8 1.6 0.8 0.4 1.1 9.5 4.4 0.5 3.5 1995/96 11,880 Center 97 45 248 200 188 112 736 480 045 .. 383 2.5 0.8 0.0 1.6 2.0 1.9 1.0 0.4 1.1 3.6 4.7 3.5 3.8 een 1994/95 10,128 50 52 96 betw 222 208 140 175 423 125 .. 373 2.6 0.9 0.0 1.7 2.4 1.6 0.6 0.6 1.1 6.6 4.9 1.6 4.3 993/941 8,592 43 46 78 205 178 121 505 381 264 .. 338 2.7 0.8 0.0 1.9 2.4 1.6 0.6 0.6 1.0 7.6 5.1 2.6 4.5 ransfersT 7,484 1992/93 estimates. 55 38 65 172 157 123 254 349 793 .. 294 2.6 0.8 0.0 1.9 2.4 1.9 0.8 0.6 1.0 9.6 5.3 1.6 4.5 staff 6,531 A10. 1991/92 ankB 70 47 52 ableT 145 132 136 314 315 343 .. 244 2.6 0.7 0.0 1.8 2.3 2.4 1.2 0.8 0.9 3.7 5.5 0.6 4.3 orld W 5,687 1990/91 86 57 34 44 132 109 823 250 172 .. 193 2.7 0.8 0.0 1.9 1.8 2.2 1.2 0.7 0.9 7.6 5.1 6.5 4.0 ccounts;A 989/901 4,862 99 42 33 38 107 100 603 235 462 .. 193 2.5 0.7 0.0 1.9 2.4 2.4 1.0 0.8 0.9 3.7 5.6 3.6 4.6 inanceF 4,216 1988/89 96 91 87 31 36 32 472 207 342 .. 176 2.7 0.7 0.0 2.0 2.6 2.5 0.9 1.0 0.9 7.7 5.8 9.6 finances; 5.0 3,543 1987/88 state 85 74 75 28 29 28 332 177 502 .. 149 2.7 0.7 0.0 2.0 2.4 2.4 0.9 0.9 0.9 5.7 5.7 6.6 on 4.8 3,112 1986/87 75 67 92 29 27 19 432 188 502 .. 159 2.7 0.7 0.0 2.0 2.4 3.3 1.0 1.0 0.7 4.8 6.8 4.7 bulletins 5.7 2,780 RBI 1985/86 es es tax states) states) states states tax states) states) states states savings states states to upees)r documents; yb yb to to to savings states states to to to duties yb yb to of central small (center (center savings) savings) central small estimates. estimates. (center (center savings) savings) budget (center cise (center upeesr ine (center on states GDP ine (center tax on states duty ex states states (billions udgetB evisedR nion U of shar to payments small small of payments small small to which: epaymentsr to est transfers transfers shar transfers transfers transfer transfers ncomeI nion to VDIS Estate U which: epaymentsr est transfer transfers ce: illionsB tates'S rants of of G Loans Loan nterI ossr et ossr et G N G without N without centreP tates'S rants G Loans Loan nterI ossr et ossr et G N G without N without GDPmp a. b. ourS 122 0 19 41 195 586 679 456 926 887 371 9.0 001/022 9,091 5,171 1,488 1,579 2,077 1,459 1,013 2,376 1060 70.8 79.8 5,882 2,077 12,741 16,246 18,323 0 19 41 163 585 659 855 324 592 928 772 751 9.6 65.8 75.4 2000/01 8,037 4,288 1,048 1,440 2,019 1,220 2,244 4,979 2,019 11,108 13,843 15,862 0 15 55 160 664 475 584 986 729 201 264 789 656 331 60.2 10.3 70.6 7,143 3,559 1,344 9,626 2,004 2,162 4,201 2,004 1999/00 11,665 13,669 0 .. 15 29 102 416 573 771 603 139 611 508 201 55.9 11.1 66.9 1998/99 4,597 2,854 2,065 1,268 8,346 1,928 2,038 3,420 9,727 1,928 11,655 0 .. 16 162 421 553 594 498 -13 38 108 491 408 997/981 54.6 11.9 66.5 3,890 2,166 1,678 1,241 7,230 1,812 1,727 2,812 8,314 1,812 10,127 0 6 .. 82 84 37 565 379 542 516 425 429 356 52.3 12.8 65.1 ates)tS 1996/97 3,445 1,841 1,390 1,001 6,214 1,754 1,491 2,435 7,159 1,754 8,913 0 0 .. 19 72 56 438 920 337 512 432 360 375 310 and 53.5 15.1 68.6 ices) 995/961 3,079 1,640 1,214 5,550 1,792 1,315 2,122 6,357 1,792 8,149 pr 0 .. (Center ent 82 323 858 290 509 352 301 -12 63 85 326 268 54.8 17.7 72.5 1994/95 2,665 1,309 1,064 4,877 1,792 1,167 1,845 5,555 1,792 7,347 ebt curr D at 0 7 .. 84 35 84 326 879 725 246 473 303 261 278 230 56.9 19.6 76.5 1993/94 2,457 1,106 4,306 1,688 1,019 1,601 4,888 1,688 6,575 upeesr of 0 7 .. 88 32 14 utstanding 817 206 770 598 238 423 263 224 924 235 193 54.7 21.8 76.5 O 1992/93 1,991 3,597 1,631 1,422 4,094 1,631 5,726 11: 0 9 .. (billions 88 40 32 53 A 780 697 518 235 369 230 189 835 199 164 55.2 19.3 74.5 991/921 1,728 3,177 1,259 1,263 3,606 1,259 4,864 ableT 0 7 .. 70 11 29 03 705 618 453 219 315 929 192 156 741 170 140 929 56.1 16.3 72.5 1,540 2,830 1,103 3,192 4,121 1990/91 rates) ent rates rnmentevo rates) wments rates) funds G change rnmentevo ernmentv endo rnmentevo curr estimates. change at G go G ex staff vidento ex change institutions and change ent ex ex debt pr Central ent tateS bonds ankB curr other central NSSF usttr eneral G ent GDP) at of and of orld to W historical curr other of of and omfr fund curr external GDP) deposits (% GDP) (at (at and issued funds (at RBI; of of deposits and liabilities RBI funds banks ances pension (with (% (% Liabilities loans -billsT Liabilities Liabilities udget,B loans debt liabilities liabilities debt omfr adv vidento and liabilities liabilities rates) liabilities securities pr which:f ketra -billsT savings, accounts fundsev omfr domestic ketra vidento and liabilities pr liabilities liabilities liabilities Central utstanding O M 91 182/364 ce: change O nternalI mallS ther O eserR otalT xternalE xternalE utstanding M Compensation WMA Loans O nternalI Loans pecialS otalT tateS nsuranceI otalT utstanding omestic O D xternalE otalT omestic ex D xternalE otalT ourS 123 Table A12. Banking Survey and Interest Rates 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 I. Banking Survey A) Billions of Rupees, EndYear Stock Net foreign assets 423 650 647 889 1,109 1,373 1,663 1,966 2,603 Domestic credit 4,375 5,083 5,929 6,533 7,434 8,692 9,942 11,415 12,819 Claims on public sector 2,141 2,344 2,739 2,952 3,343 3,877 4,397 4,986 5,689 Claims on private sector 2,10 2,611 3,057 3,455 3,945 4,621 5,319 6,256 6,974 Claims on nonbank financial 124 128 133 126 147 193 226 174 156 institutions Total assets (= total liabilities) 4,798 5,733 6,576 7,422 8,543 10,065 11,605 13,381 15,422 Liquid liabilities 4,798 5,733 6,577 7,422 8,543 10,065 11,605 13,381 15,422 of which: money + quasimoney 4,106 5,025 5,657 6,578 7,746 9,122 10,345 12,077 13,821 Money market instruments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long term foreign liabilities 0.0 0.0 0.0 0.0 0.0 13.7 12.9 13.5 0.0 All other net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 B) Shares of GDP (%) Net foreign assets 4.9 6.4 5.4 6.5 7.3 7.9 8.6 9.3 11.3 Domestic credit 50.9 50.2 49.9 47.7 48.8 49.9 51.3 54.2 55.8 to public sector 24.9 23.1 23.1 21.6 22.0 22.3 22.7 23.7 24.8 to private sector 24.6 25.8 25.7 25.3 25.9 26.5 27.5 29.7 30.4 Liquid liabilities 55.8 56.6 55.4 54.2 56.1 57.8 59.9 63.6 67.2 Long term foreign liabilities 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.0 C) Real annual growth rates (%) Net foreign assets 43.0 -9.5 25.5 16.8 9.5 17.2 13.7 28.5 Domestic credit 8.0 6.1 0.7 6.5 3.4 10.7 10.5 9.0 to public sector 1.8 6.3 -1.5 6.0 2.5 9.8 9.1 10.7 to private sector 15.0 6.5 3.3 6.9 3.6 11.4 13.2 8.2 Liquid liabilities 11.1 4.3 3.1 7.7 4.1 11.6 11.0 11.8 Long term foreign liabilities .. .. .. .. .. -9.3 0.8 .. II. Interest rates (%) Money market rate (call money rates) 6.99 9.4 17.7 7.8 8.7 7.8 8.9 9.2 7.3 Yield on Government of India 11.86-12.86 9.75-11.76 6.00-14.28 5.21-16.21 5.50-17.69 4.45-17.73 3.18-14.30 4.94-16.66 -- securities (1-5 years) Deposit rate (1-3 years) 10 11.0 12.0 11.0-12.0 10.5-11.0 9.0-11.0 8.5-9.5 8.5-9.0 8.0-8.5 Lending rate (minimum lending rate) 14 15.0 16.5 14.5-15.0 14 12.0-13.0 12.0-12.5 11.0-12.0 11.0-12.0 Real deposit ratea 5.0 3.4 2.0 1.6-2.6 3.7-4.2 -4.1 - -2.1 5.2-6.2 4.6-5.1 4.9-5.4 Real lending ratea 9.0 7.4 6.5 5.1-5.6 14.0 -1.0 - -0.1 8.7-9.2 7.1-8.1 7.9-8.9 a. Nominal rate less Inflation. Source: IFS; RBI. 124 Table A13. Balance of Payments (millions of U.S. dollars) 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Current Account Exports of goods and services 27,947 32,990 39,657 41,607 45,109 47,484 53,251 63,764 65,201 Exports of goods 22,683 26,855 32,311 34,133 35,680 34,298 37,542 44,894 44,915 Exports of services 5,264 6,135 7,346 7,474 9,429 13,186 15,709 18,870 20,286 Imports of goods and services 31,468 41,437 51,213 55,696 59,297 58,565 67,028 75,656 73,705 Imports of goods, f.o.b. 26,739 35,904 43,670 48,948 51,187 47,544 55,383 59,264 57,618 Imports of services 4,729 5,533 7,543 6,748 8,110 11,021 11,645 16,392 16,087 Net trade in goods and services -3,521 -8,447 -11,556 -14,089 -14,188 -11,081 -13,777 -11,892 -8,504 Income receipts 395 886 1,429 1,073 1,561 1,935 1,931 2,366 2,749 Income payments 3,665 4,317 4,634 4,380 5,082 5,479 5,490 6,187 5,403 Net income from abroad -3,270 -3,431 -3,205 -3,307 -3,521 -3,544 -3,559 -3,821 -2,654 Private current transfer receipts 5,287 8,112 8,539 12,435 11,875 10,341 12,290 12,873 12,192 Private current transfer payments 22 19 33 68 45 61 34 75 67 Net private current transfers 5,265 8,093 8,506 12,367 11,830 10,280 12,256 12,798 12,125 Current account balance -1,526 -3,785 -6,255 -5,029 -5,879 -4,345 -5,080 -2,915 967 Capital and Financial Account Net official capital grants 368 416 345 410 379 307 382 336 384 Net total private investment inflows 4,235 4,807 4,805 6,153 5,390 2,412 5,191 5,102 5,925 Net direct investment inflows 668 983 2,057 2,841 3,562 2,473 2,165 2,342 3,905 Net portfolio investment inflows 3,567 3,824 2,748 3,312 1,828 -61 3,026 2,760 2,020 External assistance, net 1,901 1,526 883 1,109 907 820 901 427 1,204 Commercial borrowings, net 607 1,030 1,275 2,848 3,999 4,362 313 4,011 -1,147 Rupee debt service -1,053 -983 -952 -727 -767 -802 -711 -617 -519 NRI deposits, net 1,205 172 1,103 3,350 1,125 960 1,540 2,317 2,754 Other capital 2,800 2,604 -2,425 -1,321 -643 508 3,866 -2,805 2,189 Reserves, net change -8,724 -4,644 2,936 -5,818 -3,893 -3,829 -6,142 -5,830 -11,757 (negative sign indicates increase) Other Series Foreign exchange reserves 19,254 25,186 21,687 26,423 29,367 32,490 38,036 42,281 54,106 (end of period, including gold) Reserves (as months of imports 7.3 7.3 5.1 5.7 5.9 6.7 6.8 6.7 8.8 of goods and services) GDP (billions of U.S. dollars) 273.9 322.6 355.2 385.4 409.7 413.8 447.0 460.6 481.4 Source: RBI. 125 Table A14. Exports and Imports (US$ million) 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 A. EXPORTS A1. Exports (f.o.b., U.S. dollars) Total primary commodities 4,916 5,214 7,257 8,035 7,687 6,928 6,524 7,126 7,065 Oil meals 741 573 702 985 924 462 378 448 474 Marine products 814 1,126 1,011 1,129 1,207 1,038 1,183 1,396 1,218 Ores and minerals 888 988 1,175 1,172 1,061 893 916 1,155 1,214 Other primary commodities 2,473 2,527 4,369 4,749 4,495 4,535 4,048 4,127 4,159 Manufactures 16,657 20,404 23,747 24,613 26,547 25,792 29,714 34,391 33,241 Gems and jewelry 3,996 4,500 5,275 4,753 5,346 5,929 7,502 7,384 7,306 Readymade garments 2,586 3,282 3,676 3,753 3,876 4,365 4,765 5,578 5,004 Other manufactures 10,075 12,622 14,797 16,107 17,325 15,497 17,447 21,429 20,930 Total 22,683 26,855 32,311 34,133 3,5680 34,298 37,542 44,894 44,915 A.2 Exports (constant 1993/94 prices) Total primary commodities 4,916 4,907 7,868 7,694 6,676 7,904 7,171 7,877 8,546 Oil meals 741 579 687 770 685 633 490 453 493 Marine products 814 935 922 1,033 1,030 994 1,141 1,231 1,288 Ores and minerals 888 1,136 1,386 1,181 1,043 910 1,070 1,104 1,094 Other primary commodities 2,473 2,258 4,874 4,711 3,918 5,367 4,469 5,090 5,671 Manufactures 16,657 20,388 23,207 27,003 23,891 21,907 23,988 38,427 41,061 Gems and jewelry 3,996 4,339 5,283 5,622 5,700 6,452 7,898 8,857 8,116 Readymade garments 2,586 2,978 3,285 4,562 5,711 6,415 7,090 81,46 8,637 Other manufactures 10,075 13,071 14,639 16,819 12,481 9,040 9,000 21,424 24,308 Total 22,683 25,769 33,739 36,290 34,007 35,638 40,711 49,681 52,391 B. IMPORTS B.1 Imports (c.i.f., U.S. dollars) Food 327 1,144 970 1,214 1,483 2,524 2,417 1,443 2,044 Consumer goods 3,032 4,249 5,819 5,115 5,143 4,307 4,618 3,722 4,209 POL and other energy 5,754 5,928 7,526 10,036 8,164 6,399 12,611 15,650 14,000 Intermediate goods 7,951 9,696 12,031 12,845 16,898 19,094 21,059 20,780 21,519 Pearls, precious and semiprecious stones 2,635 1,630 2,106 2,925 3,342 3,760 5,436 4,808 4,622 Organic and inorganic chemicals 1,371 2,137 2,566 2,661 2,956 2,684 2,866 2,444 2,771 Other intermediate goods 3,946 5,929 7,359 7,260 10,600 12,650 12,757 13,528 14,126 Capital goods 6,243 7,638 10,330 9,922 9,796 10,064 8,966 8,941 9,315 Total 23,306 28,654 36,675 39,132 41,485 42,389 49,671 50,536 51,087 B.2 Imports (constant 1993/94 prices) Food 327 858 641 1,002 1,276 2,085 1,768 2,078 1,542 Consumer goods 3,032 3,603 4,606 3,812 4,171 3,551 4,133 3,215 4,202 POL and other energy 5,754 5,775 6,832 7,614 7,793 8,504 9,533 9,207 9,978 Intermediate goods 7,951 4,212 12,073 13,196 18,108 22,794 24,873 25,326 24,709 Pearls, precious and semiprecious stones 2,635 1,493 1,550 2,337 2,875 3,656 5,518 4,161 4,600 Organic and inorganic chemicals 1,371 1,898 2,319 2,784 2,881 5,986 7,480 5,419 2,773 Other intermediate goods 3,946 821 8,204 8,075 12,352 13,152 11,875 15,745 17,337 Capital goods 6,243 14,413 12,286 10,584 8,438 8,635 9,559 9,598 11,091 Total 23,306 28,861 36,438 36,208 39,786 45,568 49,865 49,424 51,523 C. INDICES (1993=100) C1. Volume indices Merchandise exports 100.0 113.7 149.2 159.9 149.9 155.0 179.0 221.7 274.7 Merchandise imports 100.0 124.1 156.4 155.5 170.8 195.7 214.2 212.1 210.0 C2. Price Indices Merchandise export price index 100.0 104.2 95.8 94.1 104.9 96.2 92.2 90.4 86 Merchandise import price index 100.0 99.3 100.7 108.1 104.3 93.0 99.6 102.3 99 Merchandise terms of trade 100.0 105.0 95.1 87.0 100.6 103.5 92.6 88.4 86 Source: RBI. 126 Table A15. External Debt and Debt Service 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 I. (millions of U.S. dollars) A. Debt outstanding and disbursed Total long term 85,676 93,907 87,040 85,427 88,606 93,021 94,354 95,971 94,120 Public and public guaranteed 83,906 87,480 80422 78,045 79,398 84,611 86,410 83,491 82,446 Private nonguaranteed 1,770 6,427 6,618 7,382 9,208 8,409 7,944 12,480 11,674 Short term 3,626 4,264 5,049 6,726 5,046 4,329 3,933 3,462 2,951 IMF 5,041 4,312 2,374 1,313 664 288 26 0 0 Total DOD 94,342 102,483 94,464 93,466 94,317 97,637 98,313 99,433 97,071 B. Debt service Interest 4,178 4,633 4,918 4,364 4,864 5,120 3,782 4,182 3,817 Amortizations 4,033 5,144 6,929 6,644 6,936 6,574 6,062 6,661 5,465 IMF repurchases 134 1,174 1,719 972 613 390 262 25 0 Total 8,345 10,951 13,566 11,981 12,413 12,084 10,107 10,868 9,282 II. Ratios (%) Total DOD to GDP 34.4 31.8 26.6 24.3 23.0 23.6 22.0 21.6 20.2 Total DOD (% total exports) 280.5 244.1 190.4 169.6 161.1 163.4 145.7 125.9 121.1 Debt service (% total exports) 24.8 26.1 27.3 21.7 21.2 20.2 15.0 13.8 11.6 Source: Global Development Finance, 2003. 127 Table A16. Financial Sector Indicators 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 A. Banking System 1. Depth and structure Total domestic credit (%of GDP) 47.7 48.8 49.9 51.3 54.2 55.8 of which private credit (% of GDP) 25.3 25.9 26.5 27.5 29.7 30.4 Number of banks Public sector 27 27 27 27 27 27 Private banks 30 Foreign banks 23 2. Efficiency and strength Spread over LIBOR 10.4 8.1 8.0 7.1 5.8 8.3 Nonperforming loans as % of total Public sector banks(27) 17.8 16.0 15.9 14.0 12.4 11.1 Private banks (34) 8.5 8.7 10.8 8.2 8.4 9.7 Foreign banks (45) 4.3 6.4 7.6 7.0 6.8 5.4 B. Stock Market Market capitalization (% of GDP) 32.0 31.4 25.4 41.5 32.4 23.1 Value Traded (% of GDP) 25.06 38.64 35.80 62.63 111.56 52.20 Number of listed companies 5795 S&P/IFC investable index (annual % change) -2.0 5.8 -23.0 81.0 -31.1 -19.9 Source: RBI and World Development Indicators. 128 Table A17. Investment Climate Year India Income Group Regional Middle-Income Average Average Average Private Investment Environment Private investment/gross domestic fixed investment (%) 1995-1999 61.0 53.7 71.8 74.8 Domestic credit to private sector (stock, % GDP) 2001 29.1 24.1 28.8 57.8 Real lending rate 2001 Highest marginal corporate tax rate (%) 2002 36.0 Euromoney credit rating Sep-02 55.1 28.4 38.7 46.5 ICRG composite risk rating Oct-02 65.8 58.8 69.5 69.8 Institutional investor risk rating Sep-02 47.3 18.0 36.4 39.0 Governance ICRG corruption rating (1-6, bad to good) Feb-03 1.5 ICRG bureaucratic quality rating (1-6) Feb-03 3.0 ICRG law and order (1-6) Feb-03 4.0 Openness Trade (imports+exports)/GDP (%) 2001 19.5 37.6 23.4 50.2 FDI inflows (% GDP) 2001 0.6 1.7 0.6 3.9 WTO member? Y Weighted mean tariff (%) 2001 28.2 Infrastructure Paved roads (% of total) 1995-2001 45.7 16.1 36.9 52.7 Motor vehicles (per 1,000 persons) 2000 8 10 8 65 Cost of calls to United States (U.S. dollars per 3 min) 2001 4.20 .. 3.60 .. Internet users (thousands) 2001 5,000 9,337 5,413 87,311 Electricity consumption (kWh per capita) 2000 355 350 323 1,391 GDP per unit energy use 1999 4.6 3.6 4.9 4.0 (PPP dollars per kilogram oil equivalent) Wages and Productivity Minimum wage (U.S. dollars per year) 1995-99 408 Labor cost per worker in manufacturing 1995-99 1,192 (U.S. dollars per year) Value added per worker in manufacturing 1995-99 3,118 (U.S. dollars per year) R&D expenditure (% of GNI) 1989-2000 0.62 .. 0.62 .. Source: World Bank, World Development Indicators Database, 2003. 129 Table A18. Vulnerability Indicators 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 A. Market Indicators Annual percent change in average exchange rate (%) 6.1 4.7 13.2 3.0 5.4 4.4 Annual change in T-Bill rates (short-term) Average spread on Eurobonds (basis points) Annual change in stock market index (%) -2.0 5.8 -23.0 81.0 -31.1 -19.9 B. Risk Ratings ICRG composite (1-100, bad to good) 68.1 69.2 65.2 63.3 63.8 65.0 Euromoney (1-100, bad to good) Institutional Investor (1-100, bad to good) C. Financial Annual growth in real domestic credit (%) 0.7 6.5 3.4 10.7 10.5 9.0 Foreign currency to total deposits (%) 15.4 16.4 17.0 18.1 18.6 21.9 Nonperforming loans of commercial banks (% of total) Public sector 17.84 16.0 15.89 13.98 12.37 11.09 Private banks 8.49 8.7 10.81 8.17 8.37 9.65 Foreign banks 4.29 6.4 7.59 6.99 6.84 5.38 D. Reserve Cover Indicators Reserve cover of imports (months of imports) 5.7 5.94 6.7 6.8 6.7 8.8 Reserves to short term debt 3.9 5.8 7.5 9.7 12.2 18.3 Reserves/M2 (%) 12.2 13.2 13.7 14.8 15.3 18.0 E. Prices Annual change in terms of trade (%) -8.5 15.6 2.8 -10.5 -4.5 -2.2 Annual depreciation REER (%) 0.3 5.0 -5.3 -0.2 5.1 2.9 F. External Current account balance (% of GDP) -1.3 -1.4 -1.0 -1.1 -0.6 0.2 External debt (% of GDP) 24.3 23.0 23.6 22.0 21.6 20.2 G. Fiscal Sustainability Indicators (General Government) Total public debt (% of GDP) 65.1 66.5 66.9 70.6 75.4 79.8 Fiscal deficit (% of GDP) 6.4 6.7 9.3 9.7 9.6 11.0 Primary deficit (% of GDP) 1.2 1.5 3.9 3.8 3.6 4.7 Sources: IFS, WDI, Reserve Bank of India and World Bank Staff Estimates. 130 Table A19. Millennium Development Goals Indicators 1990 1994 1999 2001 1. Eradicate extreme poverty and hunger 2015 target = halve 1990 $1 a day poverty and malnutrition rates Population below $1 a day (%) .. 44 .. .. Poverty gap at $1 a day (%) .. 12 .. .. Poverty rate (%) 36 28.6 Percentage share of income or consumption held by poorest 20% .. .. 8 .. Prevalence of child malnutrition (% of children under age 5) 64 53 47 .. Population below minimum level of dietary energy consumption (%) 25 .. 23 .. 2. Achieve universal primary education 2015 target = net enrollment to 100 Net primary enrollment ratio (% of relevant age group) .. 51 77 .. Percentage of cohort reaching grade 5 (%) .. 55 60 .. Youth literacy rate (% ages 15-24) 64 68 72 73 3. Promote gender equality 2005 target = education ratio to 100 Ratio of girls to boys in primary and secondary education (%) 68 70 75 .. Ratio of young literate females to males (% ages 15-24) 74 78 81 81 Share of women employed in the nonagricultural sector (%) .. .. .. .. Proportion of seats held by women in national parliament (%) 8 .. 48 .. 4. Reduce child mortality 2015 target = reduce 1990 under 5 mortality by two-thirds Under-five mortality rate (per 1,000) .. 94 95 .. Infant mortality rate (per 1,000 live births) .. 79 68 .. Immunization, measles (% of children under 12 months) .. 35 42 .. 5. Improve maternal health 2015 target = reduce 1990 maternal mortality by three-fourths Maternal mortality ratio (per 100,000 live births) .. 424 540 .. Births attended by skilled health staff (% of total) .. 34 42 .. 6. Combat HIV/AIDS, malaria and other diseases 2015 target = halt, and begin to reverse, AIDS, etc. Prevalence of HIV, female (% ages 15-24) .. .. 0.6 .. Contraceptive prevalence rate (% of women ages 15-49) .. 40.6 48.2 .. Number of children orphaned by HIV/AIDS .. .. .. .. Incidence of tuberculosis (per 100,000 people) .. 467 544 .. Tuberculosis cases detected under DOTS (%) .. .. 6 .. 7. Ensure environmental sustainability 2015 target = various (see notes) Forest area (% of total land area) 21.4 .. .. 21.6 Nationally protected areas (% of total land area) .. 4.8 4.8 .. GDP per unit of energy use (PPP dollar per kilogram oil equivalent) 3.3 4 4.7 .. CO2 emissions (metric tons per capita) 0.8 1 1.1 .. Access to an improved water source (% of population) .. 68 78 .. Access to improved sanitation (% of population) 21 .. .. 31 Number of households with toilet facility (%) .. 30 36 .. Access to secure tenure (% of population) .. .. .. .. 8. Develop a Global Partnership for Development 2015 target = various (see notes) Youth unemployment rate (% of total labor force ages 15-29) 10.1 .. 12.1 Fixed line and mobile telephones (per 1,000 people) 5.9 13 26.5 32 Personal computers (per 1,000 people) 0.3 1.3 3.3 4.5 Note: In some cases the data are for earlier or later years than those stated. Source: World Development Indicators database, April 2003; National Family Health Survey (NFHS); National Sample Survey (NSS); Planning Commission, Government of India. 131 Table A20. Development Indicators, India and Comparator Countries Indicator Unit Year India China Brazil Indonesia Pakistan Per capita Income U.S. dollars 2000 450 840 3,580 570 440 PPP Per capita income U.S. dollars 2000 2,340 3,920 7,300 2,830 1,860 Population Million 2000 1,016 1,262 170 210 138 Male literacy rate Percent 2001 76 92 85 92 57 Female literacy rate Percent 2001 54.3 76 85 82 28 Population below the poverty linea Percent Survey year 26.1 (2000) 6 (1996) 17.4 (1990) 15.7 (1996) 34 (1991) in brackets Population below $1/day Percent Survey year 44.2 (1997) 18.8 (1999) 11.6 (1998) 7.7 (1999) 31 (1996) in brackets Number of poor Million 1999/2000 312.6 75.7 29.6 33 47 Infant mortality rate Per 1000 2000 69 32 32 41 83 live births Life expectancy at birth Years 2000 63 70 68 66 63 Access to improved sanitation facilitiesb Percent 2000 31 38 77 66 61 Note: Data on male and female literacy rate for countries other than India is for the year 2000. a. An alternate methodology used by Deaton and Drèze estimated the poverty headcount to be 28.6% in 1999/2000. b. Access to improved sanitation facilities refers to percent of population with at least adequate excreta disposal facilities (private or shared, but not public) that can effectively prevent contact with excreta. Source: World Development Indicators, 2002, The World Bank; Poverty data on India (1999/2000) sourced from India, Planning Commission. 132 Table A21. Unemployment Rates: Alternative Measures Unemployment Usual Principal Usual Principal Current Weekly Current Daily Rates Status and Subsidiary Status Status Status All-India 1987/88 3.8 2.6 4.8 6.1 1993/94 2.6 1.9 3.6 6.0 1999/00 2.8 2.2 4.4 7.3 Urban 1987/88 6.6 5.3 7.1 9.4 1993/94 5.2 4.5 5.8 7.4 1999/00 5.2 4.6 5.9 7.7 Rural 1987/88 3.1 2.0 4.2 5.3 1993/94 1.8 1.2 3.0 5.6 1999/00 2.0 1.4 3.9 7.2 133