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Country Report March 2003

India

March 2003

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

India at a glance: 2003-04

OVERVIEWThe current government is likely to remain in power into 2004, when the nextgeneral election is due. The Bharatiya Janata Party (BJP, the lynchpin of theruling coalition) has been bolstered by its success in the Gujarat state assemblyelection and has forced the main opposition party, Congress, on the defensive.Tensions between India and Pakistan remain high, and India’s relationshipwith Bangladesh has deteriorated. A number of economic reforms are underdiscussion. The Economist Intelligence Unit forecasts that the government’sfiscal deficit target of 5.3% of GDP will be overshot in 2002/03. Inflation isforecast to increase slightly in 2003 and GDP growth in 2003/04 is expected torise to 5.9%.

Key changes from last month

Political outlook• The success of the BJP in the Gujarat state election has thrown Congress on

the defensive, and has rendered the outcome of the 2004 general electionmore uncertain. Our assumption that a Congress-led coalition wouldtriumph has been put on hold until the results of several state elections dueto take place later this year are known. These will better indicate the balanceof power between Congress and the BJP.

Economic policy outlook• The 2003/04 budget is likely to implement several of the recommendations

of two committees that examined direct and indirect taxation: this couldplace pressure on revenue as the system of taxation is reformed.

Economic forecast• We have lowered our forecasts for consumer price inflation in 2003 and

2004 to 4.8% and 5.1% respectively owing to continued low levels ofinflation at the end of 2002.

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India 1

Country Report March 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook10 Economic forecast

13 The political scene

20 Economic policy

24 The domestic economy24 Economic trends28 Agriculture29 Infrastructure30 Oil and gas31 Financial and other services

32 Foreign trade and payments

List of tables10 International assumptions summary12 Forecast summary23 Recommended customs duties24 Change in GDP and its components25 Inflation27 Number of telephones29 Output of principal crops32 Mergers and acquisitions32 Trade, reserves and the exchange rate, 2002-0333 Current and capital accounts34 Exports34 Imports

2 India


List of figures12 Gross domestic product12 Indian rupee real exchange rates14 Gujarat state election results24 Sales of passenger cars and multi-utility vehicles, 200226 Sugar production and prices30 Oil producti0n and imports, 2002

India 3


Summary March 2003

The current government is likely to remain in power into 2004 when the nextgeneral election is due. The Bharatiya Janata Party (BJP, the lynchpin of theruling coalition) has been bolstered by its success in the Gujarat state assemblyelection and has forced the main opposition party, Congress, on to thedefensive. Tensions between India and Pakistan remain high, and India’srelationship with Bangladesh has deteriorated. A number of economic reformsare being discussed. The Economist Intelligence Unit forecasts that thegovernment will overshoot its fiscal deficit target of 5.3% of GDP in 2002/03.Inflation is forecast to increase slightly in 2003 and GDP growth in 2003/04 isexpected to rise to 5.9%.

The BJP triumphed in the Gujarat state election, despite accusations that thestate government was complicit in anti-Muslim rioting earlier in 2002. Congresshas been unsettled by the election result. An extensive cabinet reshuffle hastaken place. Election candidates must disclose their criminal record. A proposalto appoint judges independently has been revived. The chairman investigatingthe Tehelka scandal has resigned. Four people have been convicted for the 2001attack on parliament. A command structure for nuclear weapons has been setup. Relations with Bangladesh have been strained.

The states have agreed to introduce a value-added tax (VAT) on April 1st. Therehave been mixed signals regarding privatisation. Two task-forces looking intodirect and indirect taxes have published interim reports. The first recommendedthat direct tax collection should be made more efficient, that the income taxstructure should be simplified, that the corporate tax rate should be loweredand that customs officials should limit their scrutiny of imports. The indirecttax task-force proposed that services taxes be integrated into the VAT system.

GDP growth remained strong in the first half of 2002/03 (April-March).Consumer price inflation fell towards the end of 2002. Gujarat’s finances are ina poor state. The introduction of buffer stocks has halted moves towards sugarliberalisation. A telecoms dispute has been resolved. The collapse of Enron hasaffected Indian banks. Defaults on power payments are spreading, The autumnharvest was sharply down. A new metro system has begun operating in thecapital, Delhi. A massive plan to counter future droughts has been announced.The system of oil pipelines is being overhauled. The Reserve Bank of India (RBI,the central bank) has allowed trading in government bonds.

Rising reserves have forced a change in exchange-rate policy. The currentaccount has remained strong. Exports surged in the first half of 2002/03 andimport growth has also been firm. Foreign portfolio investment rules have beenrelaxed. Japan has resumed its programme of aid to India.

Editors: Gareth Price (editor); Graham Richardson (consulting editor)Editorial closing date: February 21st 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

The political scene

The domestic economy

Foreign trade and payments

Economic policy

4 India


Political structure

Republic of India

Federal republic, with 29 states and six union territories

President, currently Abdul Kalam, indirectly elected in 2002 for a five-year term bymembers of the central and state assemblies

The prime minister presides over a Council of Ministers chosen from elected membersof parliament

Bicameral. The Rajya Sabha, or upper house, has 245 members (233 elected by weightedvotes of the elected members of parliament and the legislative assemblies of states andunion territories, and 12 appointed by the president). The Lok Sabha, or lower house, has545 members: 543 elected from single-member constituencies (79 seats are reserved forscheduled castes and 40 for scheduled tribes) and two representatives of Anglo-Indiansappointed by the president

Unicameral or bicameral, with elected members; state governors are appointed by thepresident

Based on the 1950 constitution and English common law

The National Democratic Alliance (NDA), a coalition led by the Bharatiya Janata Party(BJP), won a clear majority in the September-October 1999 election and installed AtalBehari Vajpayee as prime minister. The NDA continues to rule, despite minor changes inits composition

The next Lok Sabha election is due by October 2004

Bharatiya Janata Party (BJP); Indian National Congress (Congress); Communist Party ofIndia-Marxist (CPI-M); Telegu Desam Party (TDP); Samajwadi Party; Shiv Sena; BahujanSamaj Party (BSP); Dravida Munnetra Kazhagam (DMK); Janata Dal; Samata; All-IndiaAnna DMK (AIADMK); Biju Janata Dal (BJD); Trinamool Congress (TC); NationalistCongress Party (NCP); Rashtriya Janata Dal (RJD); Rashtriya Lok Dal (RLD); ShiromaniAkali Dal (SAD)

Prime minister Atal Behari Vajpayee (BJP)

Deputy prime minister, home affairs & personnel Lal Krishna Advani (BJP)Agriculture Ajit Singh (RLD)Chemicals & fertiliser Sukh Dev Singh Dhindsa (SAD)Civil aviation Shahnawaz Hussain (BJP)Commerce & industry, law & justice Arun Jaitley (BJP)Communications & information technology & disinvestment Arun Shourie (BJP)Defence George Fernandes (Samata)External affairs Yashwant Sinha (BJP)Finance & company affairs Jaswant Singh (BJP)Heavy industry & public enterprises Balasaheb Vikhe Patil (Shiv Sena)Human resources development, science & technology Murli Manohar Joshi (BJP)Petroleum & natural gas Ram Naik (BJP)Power Anant Gangaram Geete (Shiv Sena)

Bimal Jalan

Official name

Form of state

Head of state

The executive

National legislature

State legislatures

Legal system

National government

National election

Main political organisations

Council of Ministers

Key ministers

Central bank governor

India 5


Economic structure

Annual indicators1998 a 1999 a 2000a 2001 b 2002 b

GDP at market prices (Rs bn)c 17,409.9 19,369.3 20,589.6 22,960.5 a 24,583.0GDP (US$ bn) 414.3 444.4 450.7 481.4 a 507.6

Real GDP growth (%)c 6.0 7.1 3.9 5.5 a 4.5Consumer price inflation (av; %) 13.2 4.7 4.0 3.7 a 4.2Population (m) 981.7 997.9 1,014.0 1,030.0 1,045.8

Exports of goods fob (US$ m) 34,076.0 36,877.0 43,132.0 44,613.0 47,872.3Imports of goods fob (US$ m) 44,828.0 45,556.0 55,325.0 52,207.0 55,034.6

Current-account balance (US$ m) -6,903.0 -3,227.0 -4,198.0 1,111.2 5,503.9Foreign-exchange reserves excl gold (US$ m) 27,341.0 32,667.0 37,902.0 45,871.0 a 65,739.5

Total external debt (US$ bn) 97.6 98.2 99.1 100.2 100.7Debt-service ratio, paid (%) 21.3 15.8 12.9 12.8 13.0Exchange rate (av) Rs:US$ 41.26 43.06 44.94 47.19 a 48.61 a

a Actual. b Economist Intelligence Unit estimates. c Fiscal year.

Origins of gross domestic product 2000a % of total Components of gross domestic product 2000a % of totalAgriculture 24.3 Private consumption 66.0Industry 27.7 Government consumption 12.8

Mining 2.3 Fixed investment 22.3 Electricity, gas & water supply 2.4 Stockbuilding 0.7

Manufacturing 17.6 Exports of goods & services 14.1Services 48.0 Imports of goods & services -14.9

Principal exports 2000ab US$ bn Principal imports 2000ab US$ bnTextile goods 10.9 Petroleum & petroleum products 15.7

Gems & jewellery 7.4 Capital goods 5.5Engineering goods (incl iron & steel) 7.0 Uncut gems 4.8Chemicals 5.0 Machinery 3.7

Leather & leather goods 2.0 Fertiliser 0.7

Main destinations of exports 2000 % of total Main origins of imports 2000 % of totalUS 21.7 US 8.3UK 5.7 Belgium 6.2

Hong Kong 4.9 Singapore 6.0Japan 4.9 UK 5.7

Germany 4.7 Saudi Arabia 5.1

a Fiscal years beginning April 1st of the year indicated. b Ministry of Finance, Economic Survey 2000-2001.

6 India


Quarterly indicators2001 20021 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Government finance (Rs bn)Revenue 650.48 228.91 648.84 569.29 781.55 361.55 685.49 645.24Expenditure 1,147.89 650.89 799.48 886.81 1,253.52 757.15 867.35 930.47Balance -497.41 -421.98 -150.64 -317.52 -472.0 -395.60 -181.86 -285.23

OutputGDP at constant 1993/94 prices (Rs bn)a 3,224.3 2,954.4 2,835.7 3,437.4 3,426.8 3,131.2 2,999.7 n/aGDP at constant 1993/94 prices (% change, year

on year) 1.9 4.4 5.1 6.3 6.3 6.0 5.8 n/aIndustrial production index (1993/94=100) 171.8 160.6 161.4 168.8 177.1 167.5 171.9 177.4

PricesConsumer prices (1995=100) 145.1 147.5 151.7 153.4 152.4 154.2 157.8 158.9Consumer prices (% change, year on year) 2.9 2.7 4.6 4.4 5.1 4.5 4.0 3.6Wholesale prices (1993/94=100)General index 158.8 160.3 161.5 162.2 161.2 163.3 166.7 167.4Fuel 221.8 222.4 224.9 230.0 229.5 231.5 238.4 240.2Manufactured goods 143.8 144.1 144.6 144.3 144.1 145.7 148.0 148.4Financial indicatorsExchange rate Rs:US$ (av) 46.56 46.90 47.30 47.98 48.59 48.96 48.60 48.29Exchange rate Rs:US$ (end-period) 46.64 47.04 47.86 48.18 48.80 48.87 48.38 48.03Bank rate (end-period; %) 7.00 7.00 7.00 6.50 6.50 6.50 6.50 6.20Lending rate (av; %) 12.33 12.00 12.00 12.00 12.00 12.00 12.00 11.50M1 (end-period; Rs bn) 3,603.7 3,778.4 3,720.8 3,846.0 4,017.3 4,206.9 4,163.6 n/aM1 (% change, year on year) 11.6 9.4 10.1 10.0 11.5 11.3 11.9 n/aM2 (end-period; Rs bn) 12,077.1 12,749.5 13,076.1 13,368.0 13,820.7 14,913.0 15,251.8 n/aM2 (% change, year on year) 16.7 16.4 16.4 14.3 14.4 17.0 16.6 n/aBSE Sensex (end-period; 1978/79=100) 3,604 3,457 2,812 3,262 3,469 3,245 2,991 3,377BSE Sensex (% change, year on year) -27.9 -27.2 -31.3 -17.9 -3.7 -6.1 6.4 3.5Sectoral trendsCrude oil (m barrels; prodn/day) 0.74 0.70 0.73 0.75 0.74 0.75 0.76 0.75Production index (1993/94=100)Manufacturing 178.2 166.3 166.5 173.9 184.1 173.1 178.0 183.2Mining 138.8 123.0 126.4 137.2 141.1 131.4 134.2 142.6Electricity 156.8 154.8 158.3 160.6 163.1 160.6 163.5 167.6Foreign trade (Rs bn)Exports fob 540 486 502 493 598 564 579 607Imports cif -553 -600 -612 -596 -606 -633 -699 -766Trade balance -13 -114 -110 -103 -8 -69 -120 -159

Balance of payments (US$ m)Merchandise trade balance fob-fob -1,029 -2,449 n/a n/a n/a n/a n/a n/aServices balance -440 -934 n/a n/a n/a n/a n/a n/aIncome balance -887 -692 n/a n/a n/a n/a n/a n/aNet transfer payments 3,127 3,744 n/a n/a n/a n/a n/a n/aCurrent-account balance 771 -331 n/a n/a n/a n/a n/a n/aForeign reserves excl gold 40,172 41,265 42,583 45,871 51,671 55,363 60,319 n/a

a At factor cost.

Sources: Centre for Monitoring Indian Economy, Monthly Review of the Indian Economy; IMF, International Financial Statistics; International Energy Agency, Monthly Oil Market Report;

Financial Times.

India 7


Outlook for 2003-04

Political outlook

The success of the Bharatiya Janata Party (BJP, the key party in the governingNational Democratic Alliance—NDA—coalition) in the Gujarat state election inDecember 2002 has given a jolt to the political system and a recent opinionpoll gave the BJP a massive lead over the main opposition party, Congress.Because of its success in Gujarat, the BJP is likely to fight future state elections—and the 2004 general election—on a hardline Hindu-nationalist platform. Muchwill depend on how Congress responds to its poor showing in Gujarat. It maytry to fight the BJP from a secular standpoint, polarising the political situation,or it may move towards a more Hindu-nationalist standpoint, potentiallyalienating India’s large Muslim minority. (In Gujarat, it adopted the latter policywithout success.) Were Congress to emphasise its secularism, it would alsobecome a more preferable ally for many of the smaller parties whose supportmight be essential following the general election. In large parts of India,particularly the south, a specific appeal to communal allegiance would alsoprobably not be successful. With the response of Congress uncertain, theoutcome of the 2004 election looks too close to call. The results of variousforthcoming state elections in 2003 will provide a better indication.

The Economist Intelligence Unit assumes that the current government willsurvive into 2004—a general election is due by the end of that year. The Gujaratresults make the NDA slightly more secure. The smaller parties within thecoalition will be less likely to disassociate themselves from the BJP if it appearsto be in the ascendant, even if they dislike the tenor of the BJP’s campaign inGujarat. Over the past year, the BJP has also offered sops to many of theseparties to encourage them to remain within the NDA and this is likely to ensurethat their support is maintained. A decision by the prime minister, Atal BehariVajpayee, to stand down could still precipitate the government’s collapse,assuming that he is replaced by his deputy, Lal Krishna Advani, whoseleadership could prove unacceptable to many members of the NDA. However,Mr Vajpayee has shown no inclination to stand down before the election.

The situation within the BJP itself is equally difficult, but, similarly, some policytrade-offs appear to be under way. There has been an increase in the discussion(if not the actual implementation) of a number of economic reform proposals.It is possible, although far from certain, that the BJP may currently be in theprocess of jettisoning the platform of swadeshi (self-reliance) that has been themain excuse used by members of the BJP to oppose economic reforms. Instead,the party may be considering combining a more hardline political agenda withmore free-market economic policies. Whether the political climate would allowan acceleration of reforms before the 2004 election is doubtful. Realising thatthe strength of the BJP can only be countered by the opposition Congress party,some minor parties have begun to gravitate towards Congress, which was onceIndia’s dominant political organisation. Congress must, however, regroup afterthe setback in Gujarat. The party has been drifting in recent weeks and inJanuary 2003 the party’s leader, Sonia Gandhi, engineered the removal of theineffective chief minister of Maharashtra, a key Congress-ruled state. Congress

Domestic politics

8 India


must offer a clearer response to the BJP’s renewed Hindu fundamentalism if itis to regain momentum and be in a position to form the next government.

Tensions between India and Pakistan remain high, flaring up again inmid-January when India conducted three missile tests, including one of thepowerful short-range ballistic missile, the Agni-1, which can carry nuclearwarheads. Pakistan reacted angrily to the tests. The two sides also tradedaccusations over alleged mistreatment of their respective diplomats. The BJP’snew hardline stance increases the possibility of a war during the outlook period,particularly as the 2004 general election approaches, and a growing number ofsenior Indian politicians are again fanning the flames of war—the foreignminister, Yashwant Sinha, in mid-December called for the inclusion of Pakistan inthe US “axis of evil”.

India’s relationship with Bangladesh has deteriorated. In late January India’sBorder Security Force detained around 200 people who they claimed wereBangladeshis attempting to enter India illegally. The two countries both took ahardline stance on the issue. The stand-off ended when Bangladesh acceptedthat the group was comprised of its own citizens, but similar incidents willcontinue to raise tensions between the two neighbours. Already fraughtrelations have been worsened by a decision by India to deploy additionaltroops in the border regions and by its threat in January to expel an alleged20m unlawful immigrants between April and June 2003. Of particular concernis the fact that this policy reflects the Indian government’s increasingly Hindu-nationalist agenda, whereas the ruling party in Bangladesh, the BangladeshNational Party, is seen by some as being supportive of Islamic fundamentalists.

Economic policy outlook

The budget for 2003/04, which is to be announced on February 28th, is likely tobe based on the recommendations of two task-forces, both chaired by VijayLaxman Kelkar, the adviser to the finance minister. The reports have called for adramatic simplification of the system of direct taxation (with a major reductionin exemptions) and for the system of indirect taxation to be streamlined. After alengthy hiatus, a number of important economic reforms are currently underdiscussion; the chances that some reforms will be enacted may have increased,particularly if the BJP attempts to give a freer rein to reformers to ensure theircontinued support in the light of the party’s shift to a more Hindu-nationalistagenda. After a three-month consultation period, in early-December thepro-reform minister for disinvestment, Arun Shourie, announced that thegovernment planned to sell its share of Hindustan Petroleum (HPCL) to astrategic investor, and its stake in Bharat Petroleum (BPCL) through a publicshare issue. The privatisation of the two oil companies had stalled, owing todivisions within the cabinet over privatisation. In late January the cabinetapproved the sale of both companies. Although the privatisation process hasnow resumed, the strength of opposition to further government sales is likely toensure that the pace remains slow, at least until 2004, and Mr Shourie admittedin late January that the government had jettisoned its target of Rs120bn(US$2.5bn) for privatisation receipts in 2002/03.

Policy trends

International relations

India 9


The Reserve Bank of India (RBI, the central bank) has taken significant steps inrecent weeks to liberalise transactions under the capital account. With foreign-exchange reserves at an all-time high (nearly US$70bn at the end of 2002), the RBIhas had the confidence to allow—and even encourage—outflows, in part to slowthe appreciation of the rupee to aid exporters. In the event of an economic crisis,the RBI would probably be quick to reinstate capital controls. But, for now, theauthorities have accelerated the move towards full capital-account convertibility.

India’s gross (central government) fiscal deficit, which was equivalent to 4.7% ofGDP in fiscal year 2001/02 (April-March), according to IMF data, is expected torise to 5.6% in 2002/03. The government’s fiscal deficit target of 5.3% will beovershot largely owing to the effects of poor monsoon rainfall in criticalfarming states. Government payments to farmers to offset the effects of thedrought will push up public outlays.

Tax revenue receipts have been reasonably strong in 2002/03: in the first tenmonths of the fiscal year they rose by 15.3% year on year, although the level ofreceipts has been weakening recently, partly owing to the effects of thedrought. The government will badly miss its targets for corporate tax andincome tax this year. The privatisation process has resumed, but by end-November the government had realised just 26% of its privatisation revenuetarget for the year (the target has since been jettisoned). The sale of governmentstakes in HPCL and BPCL alone could realise between US$1.5bn and US$2bn—around 0.3% of GDP—but our assumption is that these stakes will not be solduntil 2003/04. As a result, we forecast a fiscal deficit in that year of 5.4% ofGDP, assuming a normal harvest. However, if the Kelkar proposals to changethe tax system are implemented, there is a risk that tax receipts could fallbelow our current expectation as the new system is introduced. The deficit isforecast to remain at 5.4% in 2004/05. The current industrial upturn will reducepressure on the deficit, but in the run-up to a general election the governmentis unlikely to increase taxation, yet is almost certain to increase expenditure forelectoral purposes.

India’s consolidated fiscal deficit (including the deficits of state governments,the central government and public-sector undertakings) is estimated to havebeen around 10% of GDP every year since 1997/98. The nature of coalitiongovernment makes it difficult to control spending by the states, and theirrevenue may suffer as they move over to a system of VAT on April 1st 2003.Even though we expect the gross fiscal deficit to follow a gradual downwardtrend, the consolidated deficit is likely to remain close to double digits as thedeficits of the states remain high.

Interest rates have been steady since the RBI cut a series of key interest rates onOctober 29th 2002 in a bid to boost liquidity and stimulate a weakeningeconomy. The benchmark bank rate stands at 6.25%, the lowest level since 1973.The RBI’s decision to cut rates came at a critical time for the economy, as thepoorest monsoon rains for 15 years had by then made a drop in agriculturaloutput certain. In addition to the cut in the bank rate, the RBI also trimmed therepurchase rate to 5.5% from 5.75%. At the same time, the RBI lowered the cashreserve ratio (CRR) to 4.75% from 5%. The change in the CRR will leave

Monetary policy

Fiscal policy

10 India


commercial banks with an additional Rs30bn to lend. We expect monetarypolicy to remain soft in 2003, with another cut in the bank rate possible.Liquidity is also abundant, partly owing to significant capital inflows fromIndians overseas, which have boosted the level of foreign reserves.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004GDP growthWorld 2.1 2.8 3.1 3.8US 0.3 2.4 2.3 3.2EU 1.4 0.9 1.3 2.1Exchange ratesUS$ effective (1990=100) 129.1 127.6 117.6 117.9¥:US$ 121.5 125.3 120.3 121.5US$:€ 0.90 0.95 1.12 1.11Financial indicatorsUS$ 3-month commercial paper rate 3.61 1.70 1.26 3.08¥ 2-month private bill rate 0.17 0.10 0.10 0.10Commodity pricesOil (Brent; US$/b) 24.5 25.0 26.6 19.6Gold (US$/troy oz) 271.1 309.8 316.3 290.0Food, feedstuffs & beverages (% change in US$

terms) -1.9 13.1 11.5 -3.1Industrial raw materials (% change in US$ terms) -9.8 2.0 4.0 5.4

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We forecast world GDP growth of 3.1% in 2003 and 3.8% in 2004 (at purchasingpower parity—PPP—exchange rates), a modest improvement compared with2002. US GDP in real US dollar terms is set to expand by 2.3%, although the USeconomy will be weak in the first half of the year. The greatest risk to our globalforecast is the possibility of a prolonged slowdown in the US, brought on byweakness in the equity markets and a subsequent decline in privateconsumption. This would reduce demand for Indian exports to the US,especially those of information-technology-related services. Our assumption isthat the expected war in Iraq will end quickly, reducing currently high oil pricesand easing the impact on India’s current account.

The Central Statistical Office (CSO) released its first estimates of GDP growth in2002/03 (April-March) at the end of January. The CSO estimates overall growth (atfactor cost) of 4.4%. The services sector is estimated to have grown by 7% and theindustrial sector by 6.1%, but the agricultural sector is estimated to have contractedby 3.1%. The CSO figures may be revised: the agricultural contraction may turn outto be greater, but the services sector has performed strongly and growth in thissector may be revised upwards. A significant slowdown in growth is likely to havetaken place in the second half of the fiscal year: real GDP expanded by 6% and5.8% year on year in the first two quarters of the fiscal year respectively.

Industrial production has held up reasonably well, expanding by 6.2% inOctober and by 3.7% in November on a year-on-year basis. A monthly survey

International assumptions

Economic growth

India 11


by the National Council of Applied Economic Research (NCAER) noted thatbusiness confidence was strong in January. Indian industrial growth seemspoised to continue in the short term, driven in part by government road-building programmes and by strong automotive production, which has beenfuelled by lower prices and cheaper financing. We expect industrial productionto remain strong in the coming months and to average 6% in 2003/04.

The main source of growth throughout the forecast period will continue to bethe services sector, which we forecast will grow at an average rate of more than8% in 2003/04-2004/05. The agricultural sector is forecast to grow by 4% in2003/04—historically, poor harvests have alternated with stronger ones. For thesame reason, we expect agricultural growth to slow in 2004/05, to 1.2%. Despitethe importance of agriculture for employment, there is little historic correlationbetween agricultural output and private consumption growth unless theharvest is disastrous, and the continued growth of the services sector shouldunderpin private consumption growth. We forecast that the industrial sectorwill remain strong, and expect a pick-up in investment in 2003/04. Exportgrowth will moderate in early 2003 owing to the more restrained outlook fordemand in the OECD countries, but will thereafter be bolstered by continuedgrowth in information technology (IT) and the IT-enabled services sector.

India has massive stockpiles of food, so harvest-related shortages—and hencemuch higher food prices—are unlikely. Nonetheless, the drought has creatednegative sentiment in agricultural markets and further upward pressure may beplaced on food prices when the extent of the harvest failure becomes clearer.Consumer price inflation averaged 4.2% in 2002 (although year-on-year inflationwas just 2.3% in December). We expect inflation to rise to an average of 4.8% in2003 and 5.1% in 2004. Inflation in the past few years has been low by historicalstandards and the recovery in the industrial sector will push it up. The othermain factor causing higher inflation is the planned reduction in subsidies foritems such as fertiliser.

The rupee has steadily appreciated since June 2002, when it touched Rs49:US$1,to stand at Rs47.65:US$1 on February 20th 2003. This is the most prolongedperiod of appreciation in recent years and stems partly from US dollarweakness, but also from higher foreign investment inflows and a surge inremittances from Indians overseas. We expect the rupee’s gradual depreciationto resume during the outlook period, with the central bank playing an activerole in the markets to ensure that exchange-rate developments do not damageIndia’s competitiveness. Strong inflows are likely to continue for some time,however, and we expect the rupee to average Rs47.8:US$1 in 2003 andRs48.6:US$1 in 2004.

Merchandise exports have performed well recently, rising by 15.8% year on yearin the first eight months (April-November) of 2002/03 and by more than 30% inDecember. The government has set a target for export growth of 12% in 2002/03,but will probably only just fail to meet it as slower growth in the majorindustrialised countries reduces external demand for Indian exports in early2003. Merchandise imports, meanwhile, have surged, rising by an average of

Inflation

Exchange rates

External sector

12 India


30% in September-November and by 14% so far in the fiscal year. As a result, weforecast a trade deficit in calendar year 2003 of US$7.4bn, following an estimateddeficit of US$7.2bn in 2002.

Largely as a result of IT services exports, we are forecasting that India’s currentaccount will record a sustained surplus over the outlook period. Despite the globaleconomic slowdown, IT and IT-enabled services, such as call centres, are wellpositioned to compete on price. We expect a larger surplus on the services accountin 2003, owing to the IT sector. Tourism receipts, which have been falling, arelikely to stabilise, as cheaper hotels tempt price-sensitive tourists. (This assumes nomarked increase in tensions either with Pakistan or between religiouscommunities within India.) As a result of these factors, we forecast that India’scurrent account will record a surplus of 0.5% of GDP in 2003 and 1% in 2004.

Forecast summary(% unless otherwise indicated)

2001a 2002 b 2003c 2004c

Real GDP growth 5.5 4.5 5.9 6.7

Industrial production growth 2.7 4.7 6.0 7.1Unemployment rate (av) 9.2 9.3 9.1 9.0Consumer price inflation (av) 3.7 4.2 4.8 5.1

Consumer price inflation (year-end) 5.2 2.3 4.9 6.0Short-term interbank rate 12.1 12.0 11.7 11.5

Government balance (% of GDP) -4.7b -5.6 -5.4 -5.4Exports of goods fob (US$ bn) 44.6b 47.9 53.5 61.7

Imports of goods fob (US$ bn) -52.2b -55.0 -60.9 -66.1Current-account balance (US$ bn) 1.1b 5.5 2.7 5.8Current-account balance (% of GDP) 0.2b 1.1 0.5 1.0

Total foreign debt (year-end; US$ bn) 100.2b 100.7 100.8 101.6Exchange rate Rs:US$ (av) 47.19 48.61 47.81 48.64

Exchange rate Rs:¥100 (av) 38.83 38.78 39.76 40.03Exchange rate Rs:€ (av) 42.26 45.99 53.31 53.75Exchange rate Rs:SDR (av) 60.07 62.97 66.49 67.20

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

India 13


The political scene

The Gujarat state election was held on December 12th 2002. The chief minister,Narendra Modi, had wanted to hold the election in October; but the ElectionCommission (EC) had postponed the contest, saying that the situation was stillunstable. (On February 28th 2002 a train carrying Hindu volunteers wasattacked in Godhra and 57 were killed. In retaliation, around 1,000 people—mainly Muslims—were killed in an outbreak of communal rioting andthousands were made homeless.) The EC used the extra two months to locate176,000 voters who had been displaced by the communal riots. Arrangementswere made to let them vote in district offices instead of polling stations close totheir original homes. Voting in all 36,657 polling stations used electronic votingmachines. At least one-half of the staff in every polling station came from otherdistricts and some diplomatic missions sent observers.

Just before the election, a citizens’ tribunal set up by an Indian non-governmental organisation (NGO), the People’s Union for Civil Liberty, issued areport accusing the state of complicity in the anti-Muslim violence. Thisfollowed a report in November by the parliamentary standing committee on theempowerment of women that said that the state government had failed to takemeasures to prevent the communal rioting from breaking out or to control thesituation afterwards. The committee said that the government had failed toconfiscate hate literature or to identify those responsible for the attacks onMuslims, and could have done more to provide relief and security to thoseaffected by the rioting. It said that women were refused compensation for thedeaths of their husbands on technical grounds such as lack of proof of the deathor failure to identify the body. The state government claimed that it haddisbursed Rs76.2m (US$1.6m) in 4,954 cases where houses had been completelydestroyed and Rs155.5m in the cases of 18,294 partly destroyed houses, and thatthe compensation varied between Rs1,000 (US$21) and Rs50,000. However, thecommittee was shown cheques for amounts as small as Rs40-200. In somecases, tenants suffered the loss, but landlords received the compensation.

The Bharatiya Janata Party (BJP) stoutly defended Mr Modi, who was seen tohave condoned, if not to have facilitated, the anti-Muslim riots, the fall-out fromwhich dominated the election campaign. The main opposition party, Congress,brought in as its state-level leader Shankar Singh Waghela, who had a similarbackground to Narendra Modi, having been a member of BJP’s motherorganisation, the Rashtriya Swayamsevak Sangh (RSS), but who had movedinto Congress. Congress tried to play down the riots and the resultingcommunal tensions, but this did not help it in the election. It won 51 seats (twofewer than in the 1998 election) and it lost many seats in those areas of centralGujarat where the rioting had been most severe. The BJP won 126 seats—a gainof 10. Minor parties, apart from the Janata Dal (United), which won two seats,were wiped out, but independent candidates won two more seats.

The Gujarat election result has dented the confidence of Congress. Apart fromissuing a statement after the election condemning the abusive and provocativetone of the BJP campaign, the party has fallen silent. In January it replaced theCongress chief minister of Maharashtra, Vilasrao Deshmukh, whose perform-

The BJP triumphs in theGujarat state election

Congress is unsettled by theGujarat election result

14 India


ance had been lacklustre, with Sushilkumar Shinde, an older and moreexperienced politician who was the joint candidate of the Congress and thecommunist parties for the post of president in 2002. A state election is due to beheld in October 2003 in Madhya Pradesh. The Congress chief minister of thatstate, Digvijay Singh, has launched a pre-emptive strike on the BJP, criticising itfor failing to ban the slaughter of cows. Mr Singh has also asked another radicalHindu group, the Rashtriya Swayamsevek Sangh (RSS), to hand over land itowns to a neighbouring temple. The Congress leadership is uncomfortableabout these policies, but is enjoying the BJP’s discomfort.

As the current parliamentary term nears its end, the BJP’s more extreme alliesare getting restless. In response to attacks from one Hindu extremist group—theVishwa Hindu Parishad (VHP, World Hindu Council), which has spearheadedthe agitation to build a temple in Ayodhya, Uttar Pradesh, on the site of amosque demolished in 1992—the central government filed a petition in theSupreme Court against the court’s order banning religious activity on thesurrounding land. Some of this land belongs to the VHP and was taken over bythe central government after 1992 under an act that specifically forbade religiousactivity on the land.

The government of Uttar Pradesh, which is ruled by a coalition of the BahujanSamaj Party (BSP) and the BJP, had issued an order on September 28th dividingthe case against those who pulled down the mosque into two: the case againstsenior leaders, including the deputy prime minister, Lal Krishna Advani, and thecurrent minister of human resources development, Murli Manohar Joshi, wouldbe tried by one court, whereas another court would hear the case against dozensof minor offenders. The state government defended the division as a means ofexpediting the litigation, and the Supreme Court accepted its argument, althoughit has recently admitted a petition against the division, which argues that it isdesigned to delay the trial of the senior leaders.

Mr Modi’s electoral victory papered over divisions within the BJP and gave theparty a boost before a series of state-level elections beginning in 2003, whichwill culminate in the 2004 general election. Elections will be held on

The Ayodhya demolition caseis split in two

Hindu extremists arepressuring the government

An extensive cabinet reshuffletakes place

India 15


February 26th in four states—Himachal Pradesh, Meghalaya, Nagaland andTripura. In preparation for these elections, on January 29th the prime minister,Atal Behari Vajpayee, made his tenth and most extensive reshuffle of thecabinet. He appointed one new minister and six ministers of state, droppedthree ministers and made several other changes. The powerful Department ofPersonnel, which controls civil service appointments, was moved back to theMinistry of Home Affairs. (The department had been moved from the Ministryof Home Affairs to the Prime Minister’s Office in 1981, when Indira Gandhi wasprime minister.) Vasundhara Raje, who had been in charge of personnel, hasbeen made appointed chairman of the BJP in Rajasthan, where an election isdue by October 2003.

Pramod Mahajan, the former telecommunications and information-technologyminister, who was seen to have mishandled a telecoms dispute, was sent backto work within the BJP. Arun Shourie, who has handled the difficultdisinvestment portfolio with some distinction, has also been given theresponsibility for communications and information technology. ShatrughanSinha, a movie actor who became notorious for his absences from parliament,has been moved from the Ministry of Health to the Ministry of Shipping.Chandreshwar Prasad Thakur (the previous health minister) has beenreaccommodated as minister in charge of small-scale industries and the north-east. Arun Jaitley, who was dropped as law minister last May, being sent to aidthe Gujarat election campaign, returns as minister of commerce, industry, lawand justice. As far as the law portfolio is concerned, he replaces JanaKrishnamurti, who resigned as he did not like the change of portfolio offered tohim; in commerce and industry, he replaces Murasoli Maran, who has been ill.Uma Bharti, the former minister of coal and mines, has been sent to MadhyaPradesh to lead the BJP’s election campaign there.

In January an amendment to the Representation of the People Act received thepresident’s assent. This requires election candidates to disclose whether theyhave been convicted of crimes incurring imprisonment of a year or more orhave been charged with a criminal office the penalty for which is imprisonmentfor two or more years. They will also have to declare their assets and liabilitiesto the presiding officer of the legislature. Failure to disclose or falsification ofinformation will attract penal proceedings. This enactment overturns the muchmore stringent requirements that had been imposed by the EC and confirmedby the Supreme Court in the face of the government’s opposition. Following itslegal defeat, Mr Vajpayee called an all-party meeting, which agreed on theamendment passed in January. According to an Indian NGO, the Association forDemocratic Reform, 38 of the members of the local assembly (MLAs) elected inGujarat in December have a criminal background. Of these, 29 belong to the BJP,seven to Congress and two to the Janata Dal (United). One state minister, AshokBhatt, has been accused of murder during riots in 1985, whereas another, DilipPatel has been accused of rioting, bank fraud and burning people alive. OtherMLAs are accused of murder, riot, intimidation and bank fraud.

A number of incidents involving members of the judiciary have revived interestin a plan to establish a National Judicial Commission to appoint Supreme Court

Election candidates mustdisclose criminal records

A proposal to appoint judgesindependently is revived

16 India


and High Court judges, and to take disciplinary action against misconduct bymembers of the judiciary. Currently, the judiciary itself is responsible forappointments. On November 4th in Mysore, Karnataka, three High Court judgeswere reported by the press to have visited a resort with women who had justbeen appointed as magistrates. The chief justice of the Karnataka High Court,N K Jain, appointed a committee of judges to investigate the claims, but thecommittee did not confirm that the incident had taken place. The KarnatakaHigh Court then issued contempt notices to 14 newspapers and magazines.Concerned at the outrage that ensued, the chief justice of India, G B Pattanaik,ordered another inquiry whose results were not published, but which probablyfound a more solid basis for the reports, for Justice Pattanaik subsequentlytransferred the three judges to High Courts in Gauhati, Patna and Jammu andKashmir. Lawyers at those High Courts protested that their courts had beenmade dumping grounds for the judges. In the Punjab, where the governmenthas jailed and seized the assets of the chairman of the State Public ServiceCommission for selling civil services places, three High Court judges wereaccused of having used their influence to ensure that their children and othercandidates passed the Public Service Commission examinations. Followinganother inquiry ordered by Mr Pattanaik, one judge, M L Singhal, was let offwith a warning, but the other two—Amarjit Singh and Mehtab Singh Gill—wereasked to take leave.

Justice K Venkataswami, the chairman of the commission investigating the affairof the news website, Tehelka.com, which exposed corruption in the Ministry ofDefence, resigned in November after Congress accused him of having acceptedanother office of profit in the government (he had been chairman of theAuthority on Advance Rulings on Excise and Customs). Justice Venkataswamisaid that he had accepted the other position on the invitation of the former chiefjustice, Sam Bharucha, and did not regard it as interfering in the discharge of hisfunctions. However, he said that he did not want the judicial character of thecommission to be undermined. The Tehelka commission had held 181 hearings,examined 50 witnesses, passed 720 interim orders and taken over 4,000 pagesof depositions. Its draft report was almost ready, but will now be delayedbecause of Justice Venkataswami’s resignation. Justice S N Phukan, anotherretired Supreme Court judge, was appointed as the new chairman of thecommission in January.

The government believes that the terrorist attack on the parliament building inDecember 2001 was masterminded by Ghazi Baba, a commander ofJaish-e-Mohammad (since declared a terrorist organised by the US) and MaulanaMasoor Azhar, its founder. Mr Azhar had been in an Indian prison, but wasreleased in 1999 to secure the release of hostages taken in an Air India plane thatwas hijacked between the Nepali and Indian capitals, Kathmandu and Delhi,and flown to Afghanistan. In December a special court set up to try cases underthe Prevention of Terrorism Act convicted four people. Three of them—SyedAbdul Rehman Geelani, a lecturer in Arabic in a Delhi college; Shaukat HusseinGuru, one of Mr Geelani’s former students; and Mohammed Afzal, who oncebelonged to the Jammu and Kashmir Liberation Front—were convicted oftreason and sentenced to death. Navjot Sidhu, who had married Mr Guru, was

Four people are convicted forthe 2001 attack on parliament

The chairman investigating theTehelka scandal resigns

India 17


convicted of concealing knowledge of the controversy and sentenced to fiveyears’ rigorous imprisonment and a fine of Rs10,000 (US$205).

The government’s concerns about terrorism were reflected in the treatment ofIfikhar Gilani, the Delhi correspondent of the Kashmir Times. Mr Gilani wasarrested last May under the Official Secrets Act for possessing secret documents,which he claimed were Pakistan government documents downloaded from theInternet. At his trial in December, the director-general of military intelligencetestified that the documents were neither secret nor a threat to national security.The government contradicted his testimony and resolved to pursue the case, butit changed its mind six days later. Mr Gilani was then released after sevenmonths in jail. He accused the Intelligence Bureau of having instigated anincome tax raid on his house, of getting him arrested, obtaining a damagingopinion from Military Intelligence and trying to implicate him in the murder ofAbdul Ghani Lone, the leader of the All Parties Hurriyat Conference, in Srinagar,the capital of the Indian state of Jammu and Kashmir, last July.

The ruling coalition in Uttar Pradesh has a wafer-thin majority, holding 205 seatscompared with the opposition’s 198. In an attempt to guarantee the support ofMLAs, the chief minister, Mayawati, formed a cabinet containing 80 ministers, butthis created discontent among those who were not made ministers. A number ofBJP MLAs revolted in October and asked the governor, Vishnu Kant Shastri, toconvene the assembly. Sensing an opportunity, Mulayam Singh, the leader of theSamajwadi Party, which has 145 seats, made a bid for power. However, MulayamSingh’s failure to support Sonia Gandhi’s bid to become prime minister in 1998cost him dear—Congress did not declare its support for him and he fell short of amajority. However, in the vote at least 16 BJP MLAs voted for the Samajwadi Partycandidate, highlighting the Mayawati’s vulnerability.

She acted quickly to buttress her position. Two independent MLAs—RaghurajPratap Singh (also known as Raja Bhaiya) and Dhananjay Singh—were arrestedfor intimidating a BJP MLA. (Many charges were already outstanding against theformer Mr Singh, who has been accused of feeding those who cross him to hiscrocodiles.) In February the principal witness in one case against him was shotdead, but his arrest has neutralised his power. The BJP leader in the assembly,Lalji Tandon, sought to have the rebel BJP MLAs disqualified under the anti-defection law on the grounds that their numbers did not reach one-third of theparty’s strength in the assembly. His call led the chastised MLAs to return to thefold. At the end of January eight of the 24 Congress MLAs defected and joinedthe Akhil Bharatiya Congress Dal (ABCD). Soon afterwards, Mayawati appointedthree of the defectors to the cabinet. She then asked the governor to convene theassembly at the end of February.

In July the Delhi High Court had quashed the proceedings against the Hindujabrothers for bribery in the acquisition of Bofors guns by the Indian army in the1980s. Soon afterwards, the Supreme Court stayed the High Court’s order. Thespecial court investigating the case laid charges in November. Prem Kumar, thespecial judge of the Central Bureau of Investigation (CBI) court, said that theprime minister during the incident, Rajiv Gandhi, had manipulated the

The political scene in UttarPradesh is fragmented

The Bofors bribery scandaldrags on

A journalist charged withspying is released

18 India


proposal received from the Army Headquarters so that it would recommendthe gun made by the Swedish company, Bofors. However, the army consideredthe French Sofma gun to be superior and when the commander-in-chief,General Vaidya, refused to change his opinion, the then defence minister, ArunSingh, said that the general had to resign. Mr Kumar also investigated the linksbetween Mr Gandhi and Ottavio Quattrochi, an agent for several foreigncompanies, and uncovered a number of large plant construction contracts. AEServices, a British agency with which Mr Quattrochi was associated, was paid3% commission, amounting to more than Skr50m (US$7m), on March 24th 1986.The judge posted the Bofors case for trial on December 4th. However, theSupreme Court stayed the case because the CBI was awaiting its appeal againstthe earlier High Court order in the Supreme Court. In December a court inMalaysia rejected India’s application for the extradition of Mr Quattrochi. Indiaappealed, and a higher court ordered that his passport be impounded, but hehad already left the country.

India has promised to set up a command and control mechanism since it firsttested nuclear weapons in 1998. The mechanism was finally put in place at thebeginning of January 2003. The Nuclear Command Authority consists of apolitical council and an executive council. The political council, chaired by theprime minister, is the sole body able to authorise the use of nuclear weapons.The executive council is chaired by the prime minister’s national securityadviser, currently Brajesh Mishra. The executive council will provide informationto the political council and implement its decisions. The commander-in-chief ofthe Strategic Forces Command (SFC) is responsible for the administration of thenuclear forces. The SFC is led by an air force officer who reports to the chairmanof the Chiefs-of-Staff Committee, currently Admiral Madhavendra Singh, chief ofnaval services. Although the SFC will have the use of the nuclear weapons andancillary equipment, these assets remain with the three services. At present,only air force planes are capable of carrying the weapons—some Jaguars arethought to have been adapted for the purpose. India is talking to Russia aboutbuying dedicated aircraft to carry the weapons. In the meantime, the 333rdregiment of the army is testing out terrestrial mobile platforms.

The Naga National Council declared independence for Nagaland in 1947, and acivil war has simmered until today. The main faction of Naga rebels, theNational Socialist Council of Nagaland (IM)—NSCN (IM)—is led by Isaac Swuand Thuingaleng Muivah, who are based in the UK. The NSCN (IM) has alsobeen in a subdued civil war with another rebel faction, the NSCN (K). Aftermeeting Mr Vajpayee in Paris, France, and Tokyo, Japan, Mr Swu and Mr Muivahheld talks in Delhi in January. The last time that Naga leaders had met an Indianprime minister was in 1966. One of their demands is that all the areas wherethey claim that Nagas live should be unified into a single state. Since they claima part of Manipur, the chief minister of Manipur, Okram Iboni Singh, also metMr Vajpayee with an all-party delegation asking him not to cede any ofManipur to the Nagas. The talks have not yet reached a conclusion, but Mr Swuhas said that the NSCN (IM) will stop fighting the Indian army.

Mr Vajpayee meets Nagarebels

A command structure fornuclear weapons is set up

India 19


When, the hilly, mineral-rich southern portion of Bihar was made a separatestate in 2000, a large proportion of the civil servants in the new state ofJharkhand were from Bihar. In September 2000 the new government ofJharkhand announced that it would give preference in governmentappointments to local residents, defined as descendants of those who werelisted in the land settlement of 1932. This announcement sparked widespreadrioting in which six people died. Responding to the protests, the Jharkhandgovernment said that it would also give preference to those who knew the locallanguage, traditions and customs. Two petitions led the Ranchi High Court toreview the policy. In November the High Court struck down the government’sdefinition based on the 1932 settlement, but it upheld the principle of preferencefor locals and supported a definition based on local knowledge.

The Russian president, Vladimir Putin, made a brief visit to Delhi in December,during which he promised to help India’s nuclear power programme. Bothcountries declared themselves against the unilateral use of force in Iraq. Beforehis visit, Mr Putin had reiterated his view that that India, China and Russiashould strengthen their relationship. He noted the success of India and Russiain the joint development and production of complex weapon systems andcalled for its replication in civilian production. He also called for an increase inmutual trade, saying that the current annual level of US$1.5bn was too low. Healso expressed concern about the threat from Pakistani nuclear weapons.

In January the defence minister, George Fernandes, visited Russia. He openednegotiations to buy some Mig-29K fighters for the aircraft carrier, AdmiralGorshkov, which Russia is refurbishing for India. In a trilateral partnership,radars from Israel will be fitted to Russian IL-76s to make AWACs (airbornewarning and control system) for India. India will get transfer-of-technologydocuments for the T-90 tanks that it is importing from Russia at a discountedprice. India will review the performance of its upgraded T-72 tanks—India hasbeen complaining about the unreliability of Russian equipment.

In an attempt to placate Mr Putin, Pakistan’s president, Pervez Musharraf,visited Russia in February. General Musharraf has also visited Bangladesh twicein the past year—on his first visit he expressed regret at Pakistani excessesduring the 1971 war. Since then, relations between India and Bangladesh havedeteriorated. India’s foreign minister, Yashwant Sinha, has asked Bangladesh tostop playing host to Pakistan’s intelligence agency, the Inter-ServicesIntelligence, as well as to various terrorist groups from north-east India. InFebruary India’s Border Security Force intercepted a group of people—mainlysnake-charmers. Bangladesh said that they were Indian Muslims whom Indiawas trying to push into Bangladesh. There was a confrontation between theforces of the two countries, with the migrants caught between them. After aweek-long stand-off, the group suddenly vanished into Bangladesh.

Mr Advani has long advocated the deportation of visa overstayers and illegalimmigrants, of whom there are generally estimated to be as many as 16m fromBangladesh—most of them, however, are untraceable. He has proposed issuingidentity cards to all Indian citizens and a pilot project is about to begin in severalborder districts, including Jammu and Kashmir, where 2.9m cards will be issued.

The Russian president pledgesnuclear assistance

Jharkhand introduces a policyfavouring “sons of the soil”

Relations with Bangladesh arestrained

20 India


Economic policy

The states have agreed to replace their sales taxes with a value-added tax (VAT)on April 1st. Most of the states have submitted their legislation for vetting bythe centre. The centre will compensate them for any revenue loss in the firstthree years (100% in the first year, 75% in the second and 50% in the third). Therates will be 0% for defence-related goods, 1% for gold, 4% for food and otheressential agricultural goods, 20% for non-merit goods such as tobacco andalcohol, and 10-12.5% for other goods. Sugar, textiles and raw tobacco will bearstate-level VAT of between 1% and 4%. A constitutional amendment will bepassed to enable states to tax some services; they will be divided into threeclasses—those that can be taxed by the centre, those that can be taxed by statesand those that both can tax. The central sales tax, which will temporarilyreplace state sales taxes on interstate trade and whose proceeds are sharedamong them, will be phased out in three years.

In September, following a major cabinet revolt, plans to privatise two oilcompanies, Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL), were puton hold. In December the minister of disinvestment, Arun Shourie, announcedthat HPCL would be sold to a strategic partner, whereas the government wouldmake a public offer to reduce its holding in BPCL. In response to the protests ofUma Bharti, the minister of coal and mines, that the country’s national resourceswere being auctioned off, Mr Shourie announced that the Ministry of Financeand the Ministry of Defence would work out guidelines for the sale of “nationalasset” companies such as National Aluminium (NALCO). An asset-managementcompany would be set up to manage the government’s holdings in companiessold to strategic partners. However, a number of ministers are trying to pushthrough substantial investment plans for the public enterprises under theircontrol. The Ministry of Civil Aviation has sent to the cabinet committee onsecurity a proposal to buy 17 planes for Air India, the international airline, and 43for Indian Airlines, the domestic carrier.

Soon after he assumed the finance portfolio in August, the finance minister,Jaswant Singh, appointed two task-forces under the chairmanship of his newadvisor, Vijay Laxman Kelkar, to examine direct and indirect taxes. The task-forces published interim reports at the end of November that are likely tounderpin the 2003/04 budget, which will be announced at the end of February.The direct tax report unleashed a lively debate in the media; the proposedabolition of various tax rebates and exemptions was widely criticised, althoughthe fact that the tax concessions were to be replaced by a higher overallexemption limit was largely ignored. The proposals on indirect taxes hardlyevoked a comment. Mr Kelkar and his teams toured the major cities, heldmeetings with chambers of commerce and the press, and produced revisedreports by Christmas.

The task-force on direct taxes attempted to devise a system that would beefficient, equitable and effective. It recommended that income tax returns becomputerised, and that the current system whereby three departments issuedifferent identity cards be reformed, with the various identity numbers being

Task-forces on direct andindirect taxes report back

Direct taxes collection shouldbe made more efficient

There are mixed signals onprivatisation

The states agree to introduceVAT on April 1st

India 21


replaced by the Department of Income Taxes permanent account numbers(PANs) alone. The backlog of 28m income tax returns is intended to be clearedby March 31st, and the task-force recommended that the returns should providethe basis for a Tax Information Network (TIN). The task-force also recommendedthat the current practice of levying a penal tax of 60% on concealed incomeunearthed in raids must be stopped. The report also recommended that theCentral Bureau of Direct Taxes (CBDT) be administratively separated from theMinistry of Finance and be made autonomous and that income taxombudsmen should be appointed in state capitals and the ten cities with thehighest tax revenue.

The task-force suggested a dramatic simplification of the income tax system: itrecommended tax rates of 20 and 30%, with the elimination of the presentsurcharge of 5% on tax. Under the recommendations, the exemption thresholdwould be raised from the current Rs50,000 (US$1,000) to Rs100,000 and the20% tax bracket extended from Rs100,000 to Rs400,000. Employees earning lessthan Rs500,000 currently receive a complex deduction. According to therecommendations, this should be abolished, although a vehicle allowancewould be allowed. The tax concession on house mortgages would be replacedby an interest subsidy and dividends and capital gains would be exempted fromtax. The task-force said that nearly all tax concessions should be ended. Personalincome tax rates should also apply to co-operative societies, according to thetask-force report.

In relation to corporate taxation, the task-force recommended that the top rateof corporation tax be the same as the highest rate of personal income tax. Taxconcessions for exports should be removed, they argued, although softwareexporters should be given credit for tax paid abroad. Agreements should bemade with the countries of their clients whereby income would be taxed inonly one country. To compensate for the reduction in the tax rate (from 36.75%),the task-force recommended that the standard rate of depreciation be reducedfrom 25% to 15%. Once indefinite carry-forward of losses is allowed, all taxholidays given to new enterprises in various industries would becomeredundant and would, according to the proposals, be abolished. Capital gainson equity would be exempted from tax. Other capital gains would be exempt ifreinvested in a house or lent to the National Highways Authority to build theGolden Quadrilateral and the north-south and east-west highways.

In relation to indirect taxes, the task-force attempted to follow the principles oftrust, best international practice, simplicity, transparency, stability and service,and it proposed the maximum use of information technology. With regard tocustoms, it recommended that the delayed system of electronic datainterchange between ports be completed by April 1st 2004 and that customsexamination on arrival be replaced as far as possible by pre-shipmentinspection and post-clearance audit. The task-force recommended theencouragement of the electronic filing of documents . Bills of entry, it said,should be assessed by the importer and scrutinised only exceptionally.Documentation requirements for reputable importers should be reduced, andscrutiny based on intelligence and risk assessment. To reduce congestion and

A simplification of income taxis recommended

A lower corporate tax rate issuggested

22 India


delay, it was suggested that transporters’ and importers’ agents be given spacein the customs area to set up warehouses. Currently, if a dispute arisesregarding the valuation of imports, the customs authorities takes the maximumduty in advance and the matter is passed to a special valuation branch. Thetask-force recommended that customs stop taking duty in advance, and that atime limit on the process of valuation be set.

In relation to excise duty, the task-force recommended that the concept of“manufacture”, on which excise is charged, be replaced by the concept of valueaddition. The excise authorities have compelled manufacturers of many goodsto declare a maximum retail price and have then levied excise on that price.Under the proposals, this practice would be discontinued and, if a manufacturertried to escape duty by shipping goods in bulk to a packer, the packer would bedeemed to have indulged in manufacture. Currently, if a company paying taxconsumes goods that it has made within its own factory, excise is charged onsuch goods on the assumption that their price is 15% above the cost ofproduction. The task-force said that this should be lowered to 5%. It alsorecommended that the excise on goods that are returned be rebated.

Exports are currently exempted from excise as well as import duties in anumber of ways.

• Drawback: duty paid is refunded after proof of export.

• Duty exemption passbook (DEPB): the import duty payable is squared offagainst credits accruing on exports in a running account.

• Advance licences: duty-free import licences are issued against exportorders.

• Export-promotion capital goods (EPCG): the import of capital goods isallowed against a promise to export a multiple of their value over a numberof years.

• Export-oriented units (EOU): establishments are allowed duty-free importson the condition that they export their entire output; however, they are allowedto sell up to 50% of their output within India on payment of some duties.

• Export promotion zones and special economic zones (EPZs and SEZs):there are customs islands in which all units are treated as EOUs.

Of these preferential measures, the task-force favours retention of only three:drawback, advance licences, and EPZs and SEZs. It said that the divergent rulesand notifications regarding EOUs, EPZs and SEZs should be consolidated into asingle set of rules. EOUs and EPZ units are currently allowed to sell up to 50% oftheir output within India on payment of 50% of the customs duty. The task-forcesaid that they should pay the full duty on domestic sales. Those that do notimport any inputs should pay the central excise duty, or if there is none 30% ofthe customs duty on equivalent goods.

The task-force noted numerous instances of hardship to exporters arising fromthe lack of co-ordination between the Central Board of Excise and Customs andthe Directorate-General of Foreign Trade (DGFT), which fixes duty exemptions

Excise duty on the basis ofvalue addition is proposed

India 23


and issues import licences. The customs authorities do not recognise the DGFT’sinstructions until they have themselves issued confirming notifications. The task-force recommended the setting up of committees to co-ordinate the customs andthe DGFT at the central and regional levels. The task-force recommended thatfive of the eight types of customs duty currently in force be abolished, leavingjust basic duty, additional duty and anti-dumping or safeguard duty.

Recommended customs duties(%; by recommended date of implementation)

ImmediatelyLifesaving drugs & imports by the government 0Agricultural goods & demerit goods Up to 150Motor vehicles 502003/04Crude oil 8Petroleum products 15Mobile phones 0

2004/05Raw materials, inputs & intermediate goods 10Consumer durables 20Crude oil 5Petroleum products 102006/07Basic raw materials 5Intermediate goods 8Consumer durables 20Other finished goods 10

Source: Press reports.

The task-force proposed that central value-added tax (CENVAT) be charged in fivebands: for life-saving drugs, military goods, food, agricultural products, necessities,tea, coffee, 0%; for processed foods, 6%; a standard rate of 14%; 20% forautomobiles, air conditioners and aerated drinks, and a higher rate for tobacco andalcohol. Industrialists have complained that, coupled with state-level VAT, thiswould cause the average total tax paid to average around 20%. The reportrecommended that exemptions be replaced as far as possible by direct subsidies.

The task-force recommended the integration of the services tax, currently 5% oncertain services, into the VAT structure. This would allow the tax rate to be raised,but would also allow service sector taxpayers to receive duty credit on inputs. Thereport suggested 3 rates of tax: a high rate (eventually of 14%), a lower rate forthose who do not gain duty credit on inputs and a rate of 1% on service providerswith an annual turnover below Rs1m (US$21,000). In view of the inexperience ofboth tax administrators and the taxpayers in the services sector, the task-forcerecommended leniency towards defaulters. If a default is detected by the serviceprovider or the tax authorities, the defaulter would under these proposals beallowed to pay the tax voluntarily without being prosecuted.

An integration of servicestaxes into VAT is proposed

Five bands of CENVAT areproposed

24 India


The domestic economy

Economic trends

GDP growth accelerated to 5.9% year on year in the first half of 2002/03 (April-March), driven by the continuing industrial revival. Growth is likely to havefallen drastically in October-December owing to the fall in the autumn harvest,but the rest of the economy has been growing rapidly. Manufacturing almostdoubled its growth rate in the first half of 2002, led by automobiles, metals andtobacco products. Mining, which had barely grown in the year-earlier period,grew by 5.2% in the first half of 2002. Construction shows a similar pick-up.Services sector growth has also picked up pace. The Central Statistical Office(CSO) has released its advance estimates for GDP growth (at factor cost) in2002/03. It estimates growth of 4.4%, down from 5.6% in the previous year. Thefall is entirely the result of a contraction in agriculture, whose output is expectedto decline by 3.1%; industrial growth is expected to grow by 6.1%, and servicesgrowth is expected to show a slight rise, growing by 7.1%.

Change in GDP and its components(%)

Fiscal year Apr-Sep2000/01 2001/02 2001 2002

Agriculture -0.2 5.8 3.3 2.5

Industry 6.2 2.9 2.4 5.4Mining 3.3 1.8 0.2 5.2

Manufacturing 6.7 2.8 2.6 5.1Electricity 6.2 4.6 4.6 5.1

Services 5.0 6.2 6.0 7.6Construction 6.8 3.6 1.2 6.8Trade & hotels 5.3 6.2 5.4 7.4

Finance 2.9 7.8 7.3 7.7Other 6.0 5.9 5.9 5.7

GDP 4.0 5.4 4.4 5.9

Source: Central Statistical Office.

GDP growth is strong in thefirst half of 2002/03

India 25


Year-on-year consumer price inflation, which was around 5% at the beginning of2002, came down during the year, reaching just over 3% in December. Despitethe huge fall in the autumn crop output, agricultural prices have not risensignificantly. The gathering industrial boom notwithstanding, industrial pricesalso do not show signs of rising. This suggests that the economy is operatingbelow its potential, and will be able to bear a faster rate of expansion withouthigher inflation.

Inflation, 2002Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Consumer price index 466 468 469 472 476 481 484 485 487 489 484 % change, year on year 5.2 5.2 4.7 4.7 4.2 3.7 3.7 4.1 4.1 3.6 3.2

Source: Ministry of Labour.

The government of Maharashtra has had a monopoly on the cotton trade since1972, but has lost a cumulative total of Rs45bn (just under US$1bn at currentexchange rates) on this trade. Around 3m farmers produce cotton inMaharashtra, and their output is used by 236 government-financed co-operativemills. However, only 46 of these are currently operating. The Maharashtragovernment is now ruing its decision to guarantee loans to a large number ofcotton (and sugar) mills controlled by influential politicians. In January a DebtRecovery Tribunal (DRT) took over the offices of the secretaries of twodepartments for not paying Rs506.9m (US$10.6m) to government financialinstitutions on a guaranteed loan under default. The loan had been given to aco-operative sugar mill run by Hemant Deshmukh, a state minister belonging tothe Nationalist Congress party. The takeover was resorted to after thegovernment did not reply to the DRT’s notices for a year.

Although they are not as desperate as those of Maharashtra, Gujarat’s financesare also in poor shape. Its debt of Rs1.26trn (US$26bn) is equivalent to 26% of thestate’s domestic product and its annual revenue deficit is Rs100bn. The stategovernment owes Rs9bn to contractors. An Indian ratings agency, Crisil, hasdowngraded the bonds of Gujarati state-owned companies. This has reducedthe market for their bonds and the state government is forcing contractors toreceive payments in bonds, rather than cash.

Decontrol of the sugar industry—which was expected to have taken place inApril 2003—will now continue into 2003-04. In December the cabinet committeeon economic affairs approved the creation of a buffer stock of 2m tonnes ofsugar, and the management of this stock is likely to depend on political, ratherthan economic, considerations. Buffer stocks of 500,000 tonnes were authorisedin 1982, 1983, 1993 and 1996. In 2002 overproduction was greater, so a largerbuffer stock was proposed. The government still has to decide how to distributethe buffer stock between mills. In the past, it was distributed in proportion tooutput. However, mills in Maharashtra—many of which are controlled bypoliticians—currently hold stocks of around 4.4m tonnes and they are pressingfor the buffer stock to be allocated in proportion to stocks. Mills in Uttar Pradeshhold stocks of around 2.6m tonnes, but many have secured court ordersallowing them to sell sugar on the open market and so are less concerned. Mills

Government offices are takenover for non-payment of debts

Consumer price inflation fallstowards the end of 2002

Gujarat’s finances are in apoor state

Sugar liberalisation is delayedby new buffer stocks

26 India


in southern India export more sugar and hold lower stocks, although theysupport a stock-based distribution.

As a result, the system of minimum prices for sugarcane is beginning to breakdown. The central government has promised to pay Rs7.86bn towards the debtsof sugar mills; this will be particularly helpful to the ruling alliance between theBahujan Samaj Party (BSP) and the Bharatiya Janata Pary (BJP) in Uttar Pradesh.Relieved of the worry of arrears, the state government there has fixed theminimum cane purchase price for sugar mills at Rs73.50 (US$1.50) per 100 kg—Rs4 more than the minimum price fixed by the central government. However,the government of Maharashtra, which is burdened by the debts of co-operativesugar mills, has instructed the mills to pay no more than Rs56 per 100 kg.

In an attempt to bale out the sugar mills, the central government ordered petrolstations in some areas of certain states to sell petrol mixed with 5% ethanol.Excise duty on the blended mixture will be 30 paise (0.6 US cents) per litrelower. The ethanol will be bought for Rs17 per litre—Rs3 higher than the importprice. However, sugar mills are agitating for a higher rate. Six private mills inTamil Nadu have set up ethanol plants and are awaiting orders. However, owingto the generally low supply of ethanol, the government’s plans have beenpostponed until April 1st.

The resolution of a regulatory face-off in January 2003 between the operators ofmobile-phone services and fixed-line operators using wireless local loop (WLL)technology should increase mobile penetration. The dispute between the twoerupted in December following the ambitious launch of an all-India WLLservice by the Reliance group (one of India’s largest private-sector companies)across 673 towns and cities at affordable rates. Eight mobile-phone operatorssubsequently responded by announcing a drastic cut in rates for all mobile-to-mobile long-distance calls. Emboldened by a Supreme Court ruling in December,they also refused to interconnect with the WLL networks of Reliance and TataTeleservices (the telecommunications arm of the private-sector Tata Group). OnJanuary 25th Indian telecoms regulators settled the dispute by announcingradically revised tariffs and interconnection charges for all types of telephoneservices. The new regime (applicable from April 1st) increases rates for basic

A telecommunications disputeis resolved

Petrol stations are told to mixethanol with petrol

India 27


phone users, lowers rates for mobile-phone users and addresses most of theissues of a “level playing field” between mobile and fixed-line operators. Theregulator’s new tariffs will make mobile phones more affordable for their 10musers, but make basic phones, used by 40m Indians, more expensive.

There are three major foreign investors in the mobile-phone sector. The Singaporestate-owned telecoms company, Singapore Telephones (Singtel), has invested inBharti Telecom and two companies from Hong Kong—First Pacific andHutchison—have invested in Escotel and Essar respectively. In November thethree companies wrote to the prime minister, Atal Behari Vajpayee, saying thatthe Department of Telecommunications and the Telecoms Regulatory Authorityof India (TRAI) had sown confusion and caused nervousness among foreigninvestors. Feeling the pinch of competition, Bharti Telecom, the largest mobileoperator, raised loans abroad for Rs315m. Data Access (a joint enterprise betweena domestic company, SPA Enterprises, and a Hong Kong-based telecoms company,Pacific Century Cyber Works) has continued to increase its share of theinternational call market. It currently has 40% of the market, and is concentratingon incoming calls, which account for 80% of the total.

Number of telephones(end-Mar unless otherwise stated; m)

Land lines Mobile phones1997 14.4 0.3

1998 17.8 0.91999 21.6 1.22000 26.7 1.9

2001 32.1 3.62002 37.7 6.4

Dec 2002 40.3 10.4

Source: The Hindu.

The collapse of the US energy company, Enron, has had a dramatic effect on theDabhol Power Corporation (DPC). Enron owns 65% of the equity in DPC andthe other shareholders—the US-based multinational, GE, the US constructioncompany, Bechtel, and the Maharashtra State Electricity Board (MSEB)—haveshown no inclination to take over the company. All of Enron’s shares have beenpledged to the creditors—all state-owned financial institutions—so they can intheory take over the project. These institutions have lent Rs64bn to Enron (IDBIhas lent Rs21.21bn, ICICI Rs14.7bn, IFCI Rs4.5bn, the State Bank of India Rs17.5bnand Canara Bank Rs4.1bn). These institutions are subject to rules laid down bythe Reserve Bank of India (RBI, the central bank). As Enron DPC missedinstalments repayable on April 1st and July 1st 2002, its debts are non-performing. However, if they were classified as non-performing loans (NPLs),they would leave a big hole in the balance sheets of the Indian lenders. Theyhave therefore asked the RBI to classify the project as one under construction.

Since the assets of Dabhol have been pledged to the lenders, the financialinstitutions can sell the project to the highest bidder and file claims against theguarantors of the loans—the central and state governments—and the MSEB.However, under pressure from the central government, the financial institutionsare close to reaching an arrangement with the MSEB, whose default triggered the

The collapse of Enron affectsIndian banks

Foreign investors complain tothe prime minister

28 India


crisis. The MSEB is about to approve the purchase of power from DPC at Rs2.77per kwh. This price covers fuel costs, operation costs and 40 paise per kwh forinterest. The revenue will cover only concessional interest on the debt. If thefinancial institutions agree the deal, they will forgo their contractual rights andeffectively subsidise the MSEB. Once they accept it, the market value of theirassets will be zero. The losers will be the creditors, although the loss to thefinancial institutions will be a gain to other Indian government agencies. The reallosers will be the foreign creditors whose legal action is likely to drag on for years.

Defaults on power projects are spreading across India. Gujarat is paying deemedgeneration costs, rather than contracted tariffs, on naphtha-fuelled projects witha capacity of 1,200 mw. The government of Karnataka has been directed by theKarnataka High Court to pay the contracted tariff to the Tannirbhavi project andthe court has also upheld the invocation of the escrow cover. Electricityregulatory commissions have directed the state electricity boards of UttarPradesh and Madhya Pradesh to honour their contractual commitments.

In early January the president gave his assent to the Cable Television NetworksAmendment Bill. This bill paves the way for the introduction of the conditionalaccess system: cable-television viewers will be required to buy a box, which willenable them to choose the channels that they wish to view, and cable providerswill be obliged to charge for only these channels. Hitherto, cable serviceproviders have charged a flat monthly fee and shown channels of their choice.They have mostly broadcast free channels; channels subject to subscription havefound market penetration difficult. Various forms of informal courting andbribery of cable service providers are common. Broadcasters have also found itdifficult to estimate the number of viewers; although commercially run surveysare available, their reliability is suspect. Broadcasters have mainly dealt with thebig firms. The concentration of distribution has been conducive to theconcentration of broadcasting as well: Star, Zee-Turner and Sony have so fardominated private broadcasts. With the passing of the bill, their attention islikely to turn to the viewers and last-mile providers. Broadcasters are in touchwith them and are negotiating access charges. They are also trying to raise thecharges for their more popular channels. The coming of the “black box” maybring in new broadcasters and increase choice.

Agriculture

At the end of December the Ministry of Agriculture released its first forecast ofthe 2002/03 harvest. The ministry estimates that the autumn harvest was 19%lower year on year owing to the effects of the drought. The ministry forecaststhat the spring crop will be 7.5% lower than that of 2002, owing to lower soilmoisture levels. Rain-fed crops are expected to see the biggest declines in outputin 2002/03—output of coarse grains is forecast to fall by 26%, that of oilseeds by25%, and that of cotton by 12%. Rice production is expected to fall by 17%.Although rice is largely grown in irrigated or wet areas, low rainfall in southernIndia and the stand-off between Karnataka and Tamil Nadu regardingdistribution of water from the Cauvery river have harmed production.

Television viewers may receivemore choice

Other states are defaulting onpayments to power generators

The autumn harvest has fallensharply

India 29


Sugarcane and wheat (which are largely grown in irrigated areas) will suffer less,with production falling by 5% and 4% respectively.

Output of principal crops(m tonnes unless otherwise indicated)

Autumn 2001 Autumn 2002 2001/02 2002/03Foodgrains 111.5 90.6 212.0 183.1 Wheat n/a n/a 71.8 68.9 Rice 79.4 66.8 93.1 77.7 Coarse grains 27.1 19.5 33.9 25.1 Pulses n/a n/a 13.2 11.5Oilseeds 13.2 9.9 20.5 15.4

Cotton (m 180-kg bales) n/a n/a 10.1 8.9Jute & mesta n/a n/a 11.6 11.5Sugarcane n/a n/a 300.0 285.3

Sources: Business Line; Business Standard.

After pressure from farmers overcame the central government’s inertia, 55,000farmers have now planted Bt (genetically modified, or GM) cotton on more than104,000 acres. Maharashtra has the largest acreage (41,229), followed byKarnataka (16,950), Gujarat (16,140), Tamil Nadu (12,560), Madhya Pradesh (8,990)and Andhra Pradesh (8,400). Although the acreage is still modest, the popularityof the seeds has spread far beyond Gujarat and Maharashtra, where they werefirst grown. The Genetic Engineering Approval Committee (GEAC) had givenpermission in August 2001 for Proagro Seed, a subsidiary of the Germancompany Bayer, to conduct trials in GM mustard. Proagro claims that yields havebeen 20% higher than those achieved by the best non-GM varieties. However, inDecember the GEAC refused to accept the results of Proagro’s trials and asked itto give its seeds to the government’s Indian Council for Agricultural Research fortrial. Proagro’s GM mustard is tolerant to a herbicide patented by Bayer, in effectlocking farmers into the use of both the seed and the herbicide.

Infrastructure

On December 25th Mr Vajpayee inaugurated Delhi’s first underground metrorailway, which stretches for 8.3 km among some of old Delhi’s most congestedareas. Around 1m passengers travelled on the metro, built by the South KoreanRotan consortium, on its first day, but the traffic has now settled down toaround 60,000 passengers a day. The metro is being extended in all directions. Itwill be built over seven years at a cost of Rs105bn (US$2.2bn); the sources offinance are Japanese aid (56%), the national government (18%), the stategovernment (18%), property development (3%) and interest-free subordinate debt(5%). When completed, it will have a total length of 12.5 km underground and 50km above ground and will connect outlying areas to the central districts.

Three years ago the Supreme Court ordered all public vehicles to be convertedto use compressed natural gas (CNG). Consequently, the government gave theDelhi Transport Corporation (DTC) Rs400m, or US$8.4m, for this purpose, andpaid a further Rs1.7bn for 1,000 new buses. DTC now has the world’s largestfleet of CNG vehicles. The arrival of new buses and the renovation of old ones

A new metro system beginsoperating in Delhi

Genetically modified seeds areincreasingly popular

The DTC has majorexpansion plans

30 India


has reduced downtime—between November 2001 and November 2002 busmiles increased from 157 to 187 km per day and total revenue rose from Rs60mto Rs135m. DTC is now thinking of introducing trams on some routes andwants to introduce dedicated bus corridors with 120-passenger buses, which itsays would cost only Rs30m per km, compared with the metro, which has costRs1bn per km. DTC’s fleet has expanded to 2,824 buses (although it has only2,500 drivers, some of whom work as drivers for officials). DTC employs 12,000conductors, but with a requirement of 2.5 conductors per bus and 500 checkingsquads, it is short of conductors as well and plans to outsource drivers, ratherthan employ them directly.

The central government is considering both short- and long-term projects to dealwith drought. In December it waived the interest on autumn crop loans andpromised to release Rs27bn and 3.875m tonnes of foodgrain for drought relief. In2001 the Supreme Court heard a petition asking the government to implement a30-year-old plan to link rivers. The petition said that the transfer of surplus waterfrom northern rivers to the south was the only solution to the south’s perennialwater shortage. The Supreme Court instructed the government to implement thescheme. In December Mr Vajpayee announced that a Rs5.6trn, 10-year project tobuild 30 links between rivers across India would begin immediately. The projectwould enable water to be shared across the country and prevent squabblesbetween states over water. A former power minister, Suresh Prabhu, who resignedin August, was appointed as chairman of a task-force to implement this project.

Oil and gas

In the third round of the New Exploration Licensing Policy held in March 2002(the earlier two rounds were held in 1998 and 2000), the Ministry of Petroleumand Natural Gas had offered 27 blocks. The cabinet committee for economicaffairs approved the award of licences for 23 blocks in November. As in theprevious round, almost all of the blocks went to Reliance (bidding jointly thistime with the UK independent oil company, Hardy) and the state-owned Oiland National Gas Corporation (ONGC, which bid jointly with the state-ownedfirms, Indianoil and Oil India); Reliance won 9 blocks and the ONGC won 13.

A long-term project to counterfuture droughts is announced

Reliance and the ONGC winmost exploration licences

India 31


Embarrassed by favouritism in the allocation of dealerships in petrol, keroseneand liquefied petroleum gas, in August 2002 the central government cancelledeach of the 3,760 allotments made since January 2000. Some of the aggrieveddealers went to court and in December the Supreme Court quashed thegovernment’s decision. It confirmed the 2,248 allotments where agreements hadbeen signed, and appointed a committee to review 413 tainted cases. In aseverely critical judgement, the court said that the cancellations were based, noton any logic, but were simply an attempt to attract popular accolades.

A Petroleum Regulatory Board bill is currently before parliament. The proportionof oil carried in pipelines today is 32%. It is intended to increase this to 45% overthree years. The common carrier principle will apply to new pipelines over300 km and pipelines originating from ports. Shorter pipelines may serveparticular consumers, but must provide 25% extra capacity for other users.Hitherto, the Gas Authority of India and various oil companies have builtpipelines for their own use. The result is a welter of poorly utilised pipelineswith no interconnections. The pipelines also act as an entry barrier against newcompetitors. The application of the common carrier principle will allow anational oil and gas market to emerge without each competitor having to buildhis own pipelines.

Financial and other services

The RBI runs a computerised trading ring in government securities for banksand a few other permitted organisations. Trading in privately issued securitieswas made fully screen-based five years ago, but the RBI did not allow the stockexchanges to trade in government securities, except for the small holdings thatwere held outside the banking system. Then, on December 26th 2002 it gave alimited go-ahead to bond trading on three exchanges—the Bombay StockExchange, the National Stock Exchange and the Over-the-counter TradingExchange of India. Trading in dated central government bonds only—notTreasury bills or state government bonds—has been allowed. The permittedstock exchanges are obliged to have t+3 rolling settlements, to set up separatetrade guarantee funds, to give the RBI a weekly statement on all banktransactions and to set up a system for intra-day risk containment and let the RBIview it at any time. They have to set up a system for exception reporting,including settlement failures and off-market deals. They will be jointly inspectedby the RBI and the Securities and Exchange Board of India. Interest-ratederivatives trading will be introduced next.

Mergers and acquisitions activity was high in 2002, with only 2000 seeing moreactivity in recent years. In 2000 telecoms saw the greatest activity as the newprivate licensees ran out of money and stronger entrants bought out the weakerones. Activity has continued in this sector, but at a lower intensity. Mergers andacquisitions in the information-technology (IT) sector also peaked in 2000: asthe US IT sector weakened that year, Indian firms found their markets shrinkingor threatened and the weaker firms sold out. The shakedown in the powersector has almost finished. Nearly all of the state governments that had attractedprivate investment in the sector have since reneged on their agreements or

Mergers and acquisitionsactivity is high in 2002

A Supreme Court judgment iscritical of the government

The system of oil pipelines isbeing overhauled

The RBI allows trading ingovernment bonds

32 India


defaulted on payments to private generators, and few companies want to buytheir assets. In 1998 the RBI introduced minimum own capital requirements fornon-bank finance companies (NBFCs), to be met by April 1st 2002. As thedeadline neared, smaller NBFCs closed down or merged, causing merger activityin this sector peaked in 2001.

The industry that saw the highest mergers and acquisitions activity in 2002 wasoil and gas. A number of licensees from the first two rounds of India’s oil andgas licensing had chosen not to exploit the oil or gas that they had discovered. Alarge number sold their concessions, in many cases to Reliance or ONGC, bothcash-rich companies that wanted to consolidate their hold over crude supplies.

Mergers and acquisitions1999 2000 2001 2002

No. of deals 243 801 408 676Value (Rs bn) 160 429 271 392

Industry shares (%) Oil & gas 0 3 7 32 Telecommunications 5 24 14 14 Information technology 22 20 10 10 Auto & components 1 2 2 5 Pharmaceuticals 3 2 9 3 Power 16 14 3 4 Finance 9 3 24 5 Foods 3 2 0 3 Hotels 0 1 1 3 Other 41 29 28 21

Source: Business Line.

Foreign trade and payments

As industrial growth has accelerated, imports have begun to rise, widening thetrade deficit. After the Reserve Bank of India (RBI, the central bank) abandonedits policy of sustained devaluation in July, the rupee has followed anappreciating course. The change has not prevented the rapid accumulation ofreserves, which rose by US$12bn between August 2002 and January 2003.

Trade, reserves and the exchange rate, 2002-03(US$ bn unless otherwise stated)

Aug Sep Oct Nov Dec JanExports 3.89 4.00 4.09 4.14 5.08 n/aImports -4.63 -5.11 -5.44 -5.36 4.37 n/aTrade deficit -0.74 -1.11 -1.35 -1.22 0.71 n/aForeign direct investment 0.23 0.23 0.30 0.16 n/a n/aForeign portfolio investment -0.33 -0.13 0.11 0.18 n/a n/a

Exchange rate (Rs:US$)ab 48.51 48.38 48.38 48.30 48.00 47.80Reservesa 61.52 62.72 64.04 66.90 70.30 73.60

a Last Friday of the month. b Reserve Bank reference rate.

Source: Reserve Bank of India.

Rising reserves force a changein exchange-rate policy

India 33


Although the continued strength of the industrial sector has led to a rise inimports, the current account remained in surplus in the third quarter of 2002(the fourth successive quarter of surplus). Remittances from Indians abroadcontinue to be strong, and services earnings rose substantially, probablyreflecting a surge in software exports. The rise more than offset the worsening ofthe merchandise trade deficit. Although portfolio investment flows remainnegligible (foreign investors appear to doubt the sustainability of the industrialexpansion and are wary of investing, given recent stockmarket scandals), directinvestment flows have remained steady. The combination of continued capitalinflows and the current-account surplus lies behind the strong rise in foreign-exchange reserves.

Current and capital accounts(US$ bn)

2001 2002Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep

Goods: exports 10.8 11.1 12.3 11.8 12.3

Goods: imports 14.6 14.0 14.6 14.8 16.1Trade balance -3.8 -2.9 -2.3 -3.1 -3.9Services: exports 5.5 5.0 5.0 5.2 7.0Services: imports 4.6 3.6 3.4 4.4 4.6Services: balance 0.9 1.4 1.6 0.8 2.3Income: inflows 0.7 0.5 0.8 0.6 0.6Income: outflows 1.3 1.3 1.5 1.7 1.3

Income: balance -0.6 -0.8 -0.6 -1.1 -0.7Current transfers: credit 2.3 3.1 3.4 3.7 3.7Current transfers: debit 0.0 0.0 0.0 0.0 0.1

Current transfers: balance 2.3 3.1 3.4 3.6 3.6Current-account balance -1.1 0.8 2 0.3 1.3Net direct investment 0.9 0.9 1.2 1.0 0.6Net portfolio investment 0.3 0.1 0.7 -0.2 -0.1

Official loans 0.2 0.0 1.0 -0.6 -0.7Commercial loans -0.4 -0.4 -0.3 -0.7 -0.9Bank funds -0.1 1.8 0.5 0.6 1.9 Deposits by non-resident Indians 0.8 0.9 0.5 0.8 0.6Other capital flows incl rupee debt service 0.4 0.3 0.8 1.1 1.2

Capital-account balance 1.2 2.6 3.7 0.9 2.6Errors & omissions 0.4 0.2 0.5 0.4 0.9Change in international reserves 0.5 3.6 6.2 1.7 4.9

Totals may not sum owing to rounding.

Source: Reserve Bank of India.

Exports in April-September 2002 rose by 22.9% year on year. The jewellerymarket in the US and South-east Asia has revived, and India’s exports of gemsand jewellery have risen strongly. China has emerged as a new market for ironore, doubling its iron ore imports from India in 2002. Japan and Korea, thetraditional markets, also imported more. Textiles, exports of which declined in2001, staged a modest year-on-year recovery during 2002.

The current account is stillstrong

Exports surge in the first halfof 2002/03

34 India


Exports(Apr-Sep; Rs bn)

2001 2002Textiles 224 257Gems & jewellery 158 217

Engineering goods 64 77Leather goods 48 46

Metal goods 37 42Marine products 30 32

Ores & minerals 26 37Iron & steel 21 32Electronic goods 28 28

Plantation products 15 14Rice 14 21

Oilmeal 6 4Spices 8 8Meat & meat products 5 7

Tobacco 4 5Fruit & vegetables 8 9

Pulses 2 2Sugar 11 6

Cotton 0 0Wheat 6 8Other 280 371

Total 995 1,223

Source: Directorate-General of Commercial Intelligence and Statistics.

Imports rose by 13.4% in April-September year on year. Increasing exports of cutgems required larger imports of rough gems—imports in this category rose by46.6%. The rising world gold prices quelled Indian demand and importsconsequently fell. As India’s markets for consumer durables expand, electronicgoods have become one of the fastest growing imports. Apart from the US, themain sources of India’s imports are in East and South-east Asia, and China’sshare is rising rapidly. The imposition of high import duties brought down thegrowth of edible oil imports. Imports of cars have doubled since quantitativeimport restrictions were removed in 2001, but they are still small.

Imports(Apr-Sep; Rs bn)

2001 2002Petroleum products 363 423Gems 103 151

Iron & steel 20 22Gold & silver 123 93

Electronic goods 84 116Chemicals 95 109Edible oils 36 40

Fertilisers 16 12Ores & scrap 29 26

Equipment 85 96Paper & board 12 11Pharmaceuticals 9 12

Import growth is strong

India 35


Cotton 12 6

Synthetic yarn 7 9Leather 4 4Wood 12 9

Textiles 19 14Non-ferrous metals 15 16

Pulses 15 13Vehicles 12 25Other 157 1867

Total 1,228 1,393

Source: Directorate-General of Commercial Intelligence and Statistics.

In order to stimulate the use of its foreign-exchange reserves, in the final quarterof 2002 the RBI permitted Indian mutual funds to invest up to US$500m incompanies listed abroad that held at least 10% equity in Indian-listed companies.In January the RBI raised the limit to US$1bn. Listed Indian companies caninvest up to US$1bn, or 25% of their net worth, whichever is the lower.Individuals will also be allowed to invest abroad, but since the RBI has not yetannounced a limit on such investment, banks have not yet permitted it. Indiancompanies can now retain abroad money that they raise from ADRs (Americandepositary receipts) and GDRs (global depositary receipts). Those that haveoffices or branches abroad can buy property for business or for employees’residence. The limit of US$20,000 on remittances made for employee stockoption plans has been removed. Those who have earned foreign exchange andkept it in accounts in India can now lend it abroad. Residents can transfer sharesworth less than Rs1m (US$21,000) a year to overseas relatives.

In the 1990s Japan had been the largest aid donor to India. However, it stoppedits aid programme after India conducted nuclear tests in May 1998. It has nowdecided to resume aid. In 2003 it plans to give India aid totalling ¥110bn(US$920m). Over 60% of the budget has been allocated to two projects—theDelhi metro rail project and the construction of the Bakreshwar thermal powerstation. The government has also decided to prepay US$1.55bn of debt owed tothe World Bank and US$1.25bn to the Asian Development Bank (ADB), but hasnot announced when this will be done.

Foreign investment rules arerelaxed

Japan resumes its aidprogramme to India

India · 2007-08-12 · Tensions between India and Pakistan remain high, and India’s relationship...

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Transcript of India · 2007-08-12 · Tensions between India and Pakistan remain high, and India’s relationship...