In a generally healthy and well-regulated banking system, individual banks can and usually should be allowed to fail. Allowing market discipline and supervisory intervention to weed out weak institutions minimizes moral hazard. Where vulnerability is widespread, however, the potential negative externalities associated with widespread bank failures may call for intervention beyond what can be accomplished by the market or standard supervisory instruments.1 Systemic bank restructuring comprises a comprehensive program to rehabilitate a significant part of a banking system so as to provide vital banking services efficiently on a sustainable basis. Such restructuring programs have been undertaken by some 30 Fund member countries over the last fifteen years in a range of economic and political circumstances.
There can be little doubt that India is an emerging global economic power. India’s economic growth has averaged some 8 percent over the past three years, placing it among the world’s fastest growing economies. As a result of more than a decade of solid growth, India’s share of world output, at purchasing-power-parity-adjusted exchange rates, has increased from 4.3 percent in 1990 to 5.9 percent in 2005. Growth has been robust in the face of shocks, including the Asian crisis of 1997–98, several below-par monsoons, and the recent sharp increases in energy prices. In line with good growth, poverty has declined dramatically, with estimates indicating a drop in the poverty rate from 41 percent in 1992–93 to less than 29 percent in 2000. The reform process that has helped make this possible—and which began in earnest in 1991—has made steady progress despite several changes in political leadership. Looking ahead, it appears that the broad path of reform—although not the pace or details—is firmly established. And success begets success. India is now more than ever a focus for international investors, who are eager to take part in a new India.
Astriking feature of India’s growth performance over the past 15 years has been the strength of the services sector.1 The sector has benefited tremendously from the globalization of services and the increasing openness of the Indian economy to trade and foreign direct investment (FDI). Indeed, the services sector has benefited far more than has industry. Thus, India has become a leading exporter of services in the global economy with a share in global exports of services that is more than double its share of global exports of merchandise (Table 10.1). The most visible and well-known dimension of this phenomenon has been the takeoff in exports of software and services based on information technology (IT). But the growth in services has been broader than this and has also involved domestically consumed services. The pickup in growth since the 1990s has been most remarkable in business services, which includes the IT sector, and telecommunications, a sector that has witnessed a phenomenal expansion in domestic demand. This chapter shows that important roles have been played by economic reforms, and growing external demand for services exports in explaining the growth momentum of the services sector. The chapter also discusses the growth potential, in particular, of the IT sector and the challenges India faces in realizing this potential.
The removal in 2005 of quotas on textiles and clothing (T&C) presents important opportunities for India, but is also exposing key structural impediments to growth. India had been constrained by quotas, which suggests that it should benefit from their lifting in January 2005, under the Agreement on Textiles and Clothing (ATC). On the other hand, India now faces increased global competition, including from China. The Indian government is optimistic about export prospects—the National Textile Policy targets T&C exports to rise fourfold, to $50 billion by 2010—but the key question is: are policies in place to allow for such success?