Regions and Countries

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p. 2 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government’s Development Strategy III. ADB’s Development Experience IV. ADB’s Strategy V. ADB’s Assistance Program VI. Risks, Performance Monitoring, and Evaluation

Country Strategy and Program 2003-2006: India

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I. Current Development Trends and Issues

A. Economic Growth

1. Changing Dynamics of Growth. India is a fast-growing economy with growth rates of 5.6% in FY2001 and 4.4% in FY2002. However, these rates are lower than the average growth of 6.5% in the late 1990s, especially the high growth rates of 7–8% recorded during 1994-1996. The deceleration has sometimes been attributed to external shocks such as the Asian financial crisis of 1997, the events of 11 September 2001, or the poor monsoon of 2002. However, reduced growth over 5-6 years cannot be attributed to transient factors alone. Systemic factors have also been at work, driven primarily by fiscal imbalances (Figure 1). Growth was earlier led by public investment. However, the situation has changed significantly, especially since the late 1990s. Servicing of the burgeoning public debt¹, the burden of large subsidies, and a sharp increase in government salaries in the late 1990s following the Fifth Pay Commission Report have crowded out public investment. It declined from 11.2% of gross domestic product (GDP) in FY1986, to 8.2% in FY1993, 6.6% in FY1998, and 6.3% in FY2002. Unfortunately, private investment failed to fully replace public investment as an engine of growth since the private sector was constrained by the large government draft from the total savings pool, and the low level of business confidence. The consolidated fiscal deficit of the central and state governments together is estimated at 9.3% of GDP in FY 2002. Private savings amount to about 26.5% of GDP; private investment, only 16.0%. Thus, almost 40% of private savings are transferred through the financial sector to finance the government deficit. The effect of this crowding out of private investment is compounded by slow progress of policy reforms and by policy uncertainties in some sectors. Reduced rates of public and private investment, in turn, constrain the expansion of capacity, and especially the development of infrastructure, thereby reducing the economy’s growth potential. Consequently, after a brief period of acceleration in the mid-1990s, growth has decelerated in recent years (Appendix 1, Table A1.2).

2. While the Government has no control over monsoons and external shocks (Figure 1), it can embark on an aggressive fiscal adjustment program to reduce the chronic revenue deficit and implement reforms to reduce policy distortion and policy uncertainty. These measures will revive business confidence as well as public and private investment, and shift the economy back to a high-growth path. Fiscal adjustment is discussed in chapters IV and V. Regarding other structural reforms, the results of the reform program initiated since 1991 have been mixed, with significant progress in some aspects and little or no progress in others. Box 1 summarizes the progress on reforms.

3. Price Trends and Monetary Policy. Inflation declined marginally to 4% in December 2002, down from 4.3% in 2001, despite high international oil prices and a transition to market-determined hydrocarbon prices. The easing of prices despite a deficient monsoon is primarily due to the large surplus stock of food grain and global deflation. Money supply (M3) grew by 15.7% in 2002. The central bank progressively eased its monetary policy stance in 2001–2002 to revive growth, and has also been encouraging commercial banks to reduce their spreads. The central bank reduced the cash reserve ratio from 5.00% to 4.75%, and the bank rate from 6.50% to 6.25%. Subsequently, commercial banks have also lowered deposit and lending rates. However, the prime lending rate (PLR) of the major banks at 10.75-11.50% is still high in real terms. Also, the cost of money remains very high for nonprime borrowers.

4. External Sector. Growth of merchandise exports (11.4%) and imports (6.3%) in 2002 are marked improvements over the negative growth recorded during FY2001. International reserves now exceed $70 billion (excluding gold and special drawing rights), equivalent to over 14 months of imports (equivalent to 13 months imports net of short-term debts commitments). The sustained increase in reserves is mainly due to India’s large real interest rate differential compared to the international financial market. External capital flows are also encouraged by the modest level of external debt at about 21% of GDP, with an external debt service ratio of about 14% in FY2001. The Government has recently initiated some cautious steps to ease foreign exchange controls in view of the comfortable reserve position, and has also started prepaying external public debt.

B. Poverty

5. Growth-Poverty Nexus. High growth has led to significant and sustained poverty reduction (Appendix 3 A). The latest available official estimates indicate that poverty incidence has come down from 36% in 1993-94 to 26% in 1999-2000. In rural areas, the incidence of poverty is 27%; in urban areas, 23.6%². The actual number of people in poverty came downfrom 320 million to 260 million during this period. Of this, about 193 million live in rural areas. A great deal of compelling evidence suggests that this decline in poverty is primarily attributable to growth³. The poorer the country and more widespread the poverty, the greater the importance of a broad growth-led poverty reduction strategy (PRS)⁴, as opposed to direct poverty intervention schemes targeted at specific types of deprivation. Unfortunately, the decline in poverty has not been uniform across states, and regional disparities are pronounced, with the southern and western regions doing much better than the northern and eastern regions⁵.

6. Social Development and Human Poverty. Poverty is multidimensional. The data cited above refer primarily to income poverty—the proportion of population living below a minimum level of expenditure. They do not capture trends in human poverty, which reflects deprivation in other dimensions of the quality of life. Based on this more inclusive metric, and with a human development index value of 0.577, India is ranked 124 out of 173 countries⁶. India recently released its own human development report, which reveals a positive correlation between the levels of economic and human development. The report reveals large interstate disparities in social development levels, and also the persistence of rural-urban and gender disparities between and within states. Changes in population structure have resulted in a larger graying population as per the latest 2001 census, while changes in the global environment have enhanced insecurity of livelihood, which impacts on human development. The spread of HIV/AIDS⁷ and other infectious diseases, stress, and pollution—all pose new challenges to human development (Appendix 3 B). The Government has increasingly recognized that providing basic social services such as access to education, health care, potable water, and sanitation is key to human poverty reduction. Accordingly, the recently approved Tenth Five-Year Plan (10th Plan) has programmed a significant increase of nearly 80% in social expenditure. The 83rd constitutional amendment recognizes the right to primary education as fundamental. Finally, in the more progressive states, participatory planning is being strengthened considerably, and social service delivery has improved following the decentralization of several government functions under the 73rd and 74th constitutional amendments.

7. Progress in Achieving Millennium Development Goals. India's performance in achieving the Millennium Development Goals (MDGs) is mixed (Appendix 1, Table A1.1; and Appendix 3 A). India is one of the few countries on track for reducing income poverty, and is also likely to achieve the target for enrollment in primary education, and access to improved water sources. However, the country is lagging behind in female secondary enrollment and reduction of infant mortality rates.

C. Political Environment

8. Elections were held recently in six states. Chhattisgarh, Madhya Pradesh, Rajasthan, and Delhi will go to the polls later this year. National elections are due in 2004. The ruling Bharatiya Janata Party and its allies are in power in the central Government and in seven states. The Congress and other parties are in power in the remaining 21 states. While it has strengthened the forces of federalism, political plurality poses a challenge to coordinated macroeconomic management. However, the systems in place to harmonize state-level economic management with policies of the central Government and the central bank are working well. The success of elections in Kashmir and Gujarat despite terrorist attacks and communal violence is an important milestone in securing peace in the subcontinent. Tension between India and Pakistan has also eased since 2002. However, the global repercussions of the Iraq war could adversely affect economic performance.

D. Governance and Institutional Capacity

9. India has seen significant achievements in economic, political, and civil governance during the past decade, including some important reforms, decentralization, and other institutional changes (Appendix 3 C). However, important challenges remain, such as low levels of public accountability or transparency; bureaucratic inefficiency, harassment, and corruption; persisting law-and-order problems; and an overburdened and outdated justice system⁸. India’s performance according to the governance indicators of the United Nations Development Programme (UNDP) has, therefore, been mixed, faring fairly well in democracy (polity, civil liberties, political rights, press freedom) but recording low scores for “rule of law and government effectiveness,” and performing poorly in tackling corruption (footnote 6). Performance in participation, trade union membership, nongovernment organizations (NGOs), and ratification of rights instruments has also been moderate and mixed. The recently finalized 10th Plan addresses challenges in governance as a priority.

E. Gender Assessment

10. Women’s status has improved in recent years (Appendix 3 D). The gender development index improved from 0.424 in 1995 to 0.560 in 2002 (footnote 6). The gender equality index improved to 67.6% in the 1990s compared with 62% in the 1980s (footnote 8). A national policy to empower women is now in place, and one third of the seats in local government are now reserved for women. This measure alone is likely to create a strong gender-equalizing force from below. Such improvements notwithstanding, important areas of concern remain. The sex ratio⁹ in the 0-6 years age group has declined continuously, maternal mortality rates remain high (Appendix 1, Table A1.1) and about 51.8% of women are anemic¹⁰. India is also lagging behind the MDG targets on enrollment for girls and elimination of gender disparity in secondary education. Deprivation also contributes to the increasing incidence of trafficking in women and children and of HIV/AIDS and other sexually transmitted diseases.

F. Private Sector

11. The state-dominated path of development notwithstanding, India has a long history of domestic and foreign private enterprise, going back at least a couple of centuries. The private sector accounts for 74% of GDP and 71% of total investment (Appendix 3 E). One measure of the impact of reforms on competitive private sector development is that half the top 100 companies, ranked by market capitalization, were not in the top 100 when reforms began in 1991. Another measure is that foreign direct investment (FDI) which was virtually zero in 1991, is now around $2 billion per year. However, it is still only 0.5% of GDP compared to 2.0–3.0% in many emerging market countries. Despite the many significant gains during the past decade, much remains to be done. While the control regime is less restrictive than a decade ago, bureaucratic control is still widespread, especially at the state government level, where industries need many clearances for land acquisition, construction, water supply, power supply, environmental compliance, etc. Complaints of delays, corruption, and harassment are common. In trade policy, the average tariff rate is still much higher than the prevailing weighted average tariff in East and Southeast Asia. Many reform measures are yet to be implemented in some infrastructure sectors and the financial sector. Finally, labor market rigidities impede private investment.

G. Environment and Natural Resource Management

12. India’s burgeoning population and rapid urbanization, explosive growth in number of vehicles, industrial activities, as well as the increased dependence of agriculture on fertilizers and chemicals, have led to rapid changes in the quality and stock of natural resources and in the urban environment (Appendix 3 F). In 22 cities, the air-quality index falls in the “dangerous” category. Water availability and pollution are reaching crisis proportions. The growth of human and livestock populations exerts great pressure on land and forests. India thus enacted important laws, especially the Environmental Protection Act of 1986, and established an institutional framework at the central and state government levels to address these challenges. However, more economic incentives, improved environmental monitoring, and better regulatory enforcement are needed to tackle national environmental issues.

H. Regional Cooperation

13. Although the South Asian Association for Regional Cooperation (SAARC) has been in existence for 17 years, its achievements have been limited. However, India is now playing a leading role in the South Asia Subregional Economic Cooperation (SASEC) program initiated by the Asian Development Bank (ADB) to promote subregional cooperation among Bangladesh, Bhutan, India, and Nepal. The program has made rapid progress, especially during the past 2 years. Working groups of officials from the four countries have developed action programs for priority subregional projects in energy; transport; tourism; environment protection; and trade, investment, and private sector cooperation. The working group for the last theme is chaired by India. Several loans and technical assistance (TA) with subregional implications in the transport and energy sectors are included in the India program. The northeastern states and West Bengal have an especially important strategic role as the eastern and western flanks of SASEC. India is also active in several other regional cooperation initiatives and bilateral programs with Bhutan, Maldives, Sri Lanka, and Nepal.

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1. Total public debt is estimated at approximately 73% of gross domestic product (GDP).
2. Government of India. Press Information Bureau. 2001. Poverty Estimates for 1999-2000. New Delhi. 22 February. (Issued by Planning Commission, Government of India based on data from the National Sample Survey Organization, 55th Round).
3. Sundaram, K., and S.D. Tendulkar. 2001. Poverty in India: An Assessment and Analysis, and Implications for Country Strategy and Program in India: An Update. ADB supported study. New Delhi. See also International Monetary Fund (IMF). 2001. India: Recent Economic Developments and Selected Issues, IMF Country Report No. 01/181. Chapter VII. October. Washington, DC: IMF.
4. Ahluwalia, M. S. 2002. Poverty, Growth and Globalization: Facts, Myths and Misconceptions. Lecture delivered under the Distinguished Speakers Program. ADB, Manila, 30 January.
5. Deaton, Angus, and Jean Dreze. 2002. Poverty and Inequality in India. Economic and Political Weekly 37(36): 3729-48.
6. United Nations Development Programme (UNDP). 2002. Human Development Report 2002. Oxford: The University Press (Published for the UNDP).
7. Human Immunodeficiency Virus /Acquired Immune Deficiency Syndrome.
8. Government of India. Planning Commission. 2002. India: National Human Development Report 2001. New Delhi.
9. Number of females per 1,000 males.
10. International Institute for Population Sciences (IIPS). 2000. India: National Family Health Survey (NFHS-2), 1998-1999. Mumbai.
    

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