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India

Economic performance

Economic growth: During FY2000 (ending 31 March 2001), the optimism that prevailed at the beginning of the year gradually waned, mainly because of unfavorable monsoon conditions in some areas and sluggishness in the industry sector. The agriculture sector also performed below expectations because of uneven and erratic rainfall. In some regions such as Gujarat, Rajasthan, and Madhya Pradesh, rainfall was below the annual average by as much as 30–40 percent. Food grain production thus fell short of the target level of 202 million tons, and is likely to be only 199 million tons in 2000–2001.

The industry sector also failed to sustain the recovery begun in the previous year, its outlook being revised downward during the year to reflect the negative economic environment for new investment. The index of industrial production showed an increase of 5.7 percent during the first nine months of the year, compared with 6.4 percent in the previous corresponding period. The capital goods sector showed the lowest growth, reflecting a wait-and-see attitude on the part of investors amid weak demand and higher interest rates. The deceleration in the capital goods sector was accompanied by an overall slowdown in industry sector activities, including manufacturing and power. Growth in the services sector is expected to decelerate to about 8.3 percent during the year, compared with 9.6 percent the previous year. Reflecting the negative mood in the overall economy, the 2000 GDP growth is estimated at 6.0 percent, compared with the 6.5–7.0 percent level targeted at the beginning of the year.

Employment: Sustained high growth rates for both GDP and the services sector were key in accelerating the employment growth rate in 1998–2000.

Inflation: The inflation rate for FY2000, measured by year-on-year changes in the monthly average of the wholesale price index was 7.0 percent, from 3.3 percent the previous year, mainly because of a rise in fuel prices of almost 32 percent in the latter month of FY2000. Prices of agricultural products remained relatively stable.

Fiscal balance:¹¹ While the Government was able to contain expenditures at its budgeted level, the rate of increase in tax revenues slowed during the second half of the year with the slowdown in non-oil imports, which meant growth in customs duties collections was minimal. The Government also reduced excise duties on crude oil and petroleum products as part of its efforts to reduce the deficit in the oil pool account. Revenues from public sector disinvestment also fell short of the budgeted amount by 70 percent. Overall, assuming slower GDP growth in FY2000, the estimated fiscal deficit is approximately 5.1 percent of GDP. The fiscal deficit was met mainly by market borrowings, which put further pressure on domestic liquidity during the second half of the current fiscal year.

External sector: The impressive performance of the export sector continued in FY2000, with exports up by 20.4 percent or to $32.3 billion during the first nine months of this fiscal year, compared with $26.8 billion during the same period a year ago. Imports grew by only 9 percent and the trade deficit dropped by $2.3 billion, despite the surge in the oil import bill, mainly because of robust growth in exports and a decline in non-oil imports. Because of the strong export performance, higher oil prices did not put undue pressure on the balance of payments with the current account deficit remaining at around 1.6 percent of GDP during FY2000.

In FY1999, the rupee depreciated by 2.8 percent against the US dollar. Higher oil prices, rising inflation, and a stronger US dollar against all major currencies caused the rupee to lose nearly 7 percent of its value from the beginning of FY2000. However, depreciation in the real effective rate was less than 2 percent in FY2000.

Foreign direct investment inflows were $1.9 billion during the first nine months of FY2000, marking a slight increase, compared with $1.5 billion during the same period in the previous year. About half of foreign direct investment went to energy (power and oil refineries) and telecommunications. Foreign institutional investment recorded a net outflow of $476 million, compared with significant net inflows of $1.1 billion in FY1999. However, foreign exchange reserves remained at a comfortable level, having gradually fallen during the first half of the fiscal year, but rising again during the second half to $41.6 billion.

Domestic policies: The macroeconomic environment was less favorable in FY2000 than previously. In recent years, the Reserve Bank of India has maintained low interest rates and provided sufficient liquidity to support industry sector recovery. Ample liquidity to the corporate sector helped strengthen performance of the industry sector during the previous fiscal year. However, rising US interest rates and the subsequent depreciation of the rupee prompted the Reserve Bank of India to raise the interest rate and reserve ratio in July 2000, which was followed by a hike in the prime lending rate to commercial borrowers. Because of the large fiscal deficit, government borrowing also put pressure on interest rates. Both higher interest rates and tightening liquidity adversely affected the industry sector and the overall economic outlook in FY2000. The Government introduced a Fiscal Responsibility and Budget Management Bill in the winter session of the Parliament to bring the government debt down to 50 percent of GDP by 2001.

ADB operations

Operational strategy: ADB’s operational strategy for India promotes employment and poverty reduction by minimizing bottlenecks in key infrastructure sectors; developing and improving the enabling environment for private sector investment; improving public resource mobilization and management at the state level, including enhancing resource allocation for social sectors; and strengthening the focus on urban development, environmental improvement, and housing finance. ADB’s operational program continues to be selective with regard to sector and geography: state-level operations will account for up to 50 percent of annual lending in the next few years. Support for private sector infrastructure development (including power generation and transmission, and ports) and public-private partnerships continues to be the main focus of private sector operations.

Policy dialogue: Policy dialogue with the Government focused on improving the urban environment, instituting economic and structural reforms at the state level, implementing policy and institutional reforms in the power subsector at the national and state levels, and strengthening the role of community-based and microfinance institutions in housing finance. ADB’s projects in 2000 supported these objectives. For example, the Calcutta Environmental Improvement Project will support improved urban management and municipal administration and address urban poverty and environmental concerns. The Gujarat Power Sector Development Program will support restructuring of the state’s power sector; and the Power Transmission Improvement (Sector) Project will improve generation capacity by strengthening the power transmission network, building long-term institutional capacity, and facilitating private sector participation. The Housing Finance II Project will channel financing from formal institutions through intermediaries such as community-based finance institutions and nongovernment organizations.

Loans and technical assistance: In 2000, ADB approved nine loans for five projects, totaling $1.3 billion: four loans for the social infrastructure sector (housing finance), one for transport, one for environmental improvement, and three for the energy sector (including one program loan). ADB also approved 16 technical assistance grants totaling $9.5 million.

Project implementation: Since joining ADB in 1966, India has received 65 loans, of which 40 were active at the end of 2000. Contract awards totaled $380.8 million, bringing the cumulative figure to $5.8 billion. The contract award ratio was 20.3 percent, lower than the ADB-wide average of 21 percent. Disbursements during the year totaled $487.0 million, bringing cumulative disbursements to $5.5 billion. The disbursement ratio was 22.2 percent, higher than the ADB-wide average of 20.5 percent.

Project implementation in India continued to be affected by delays in recruiting consultants, and in selecting and awarding contracts. In addition to several specific actions to minimize delays at project start-up, such as preparing consultant selection documents prior to loan negotiations and encouraging executing agencies to use direct payment and commitment letters to ease cash flow pressures, ADB and the Government agreed on a time-bound action plan to improve portfolio performance. Among other things, the plan calls for following up on results of random audits undertaken by the India Resident Mission.

   

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