Front Matter
Author:
Mr. Richard Hemming
Search for other papers by Mr. Richard Hemming in
Current site
Google Scholar Close
,
Woosik Chu https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Woosik Chu in
Current site
Google Scholar Close
,
Mr. Charles Collyns
Search for other papers by Mr. Charles Collyns in
Current site
Google Scholar Close
,
Ms. Karen Elizabeth Parker https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Ms. Karen Elizabeth Parker in
Current site
Google Scholar Close
,
Mr. Ajai Chopra
Search for other papers by Mr. Ajai Chopra in
Current site
Google Scholar Close
, and
Mr. Oliver Fratzscher https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Mr. Oliver Fratzscher in
Current site
Google Scholar Close
Language:
English
Keywords:
OP; investment; India; liberalization
Download PDF (438 KB)

Abstract

This paper explores the Indian adjustment program of 1991/92 and its initial results. The contents include long-term growth trends for output, investment, and macroeconomic condition; education, labor employment, and poverty; growth, accumulation, and productivity; results of India-specific studies; the stabilization and adjustment strategy; the response to the reforms; the impact on unemployment and poverty; the behavior of private investment; fiscal adjustment and reform; recent experience with a surge in capital inflows: overall trends, the investor base, comparison with other countries, and factors behind the flows; the impact on the economy; the sustainability of capital flows; and structural reforms and the implications for investment and growth; trade reform; the investment regime; public enterprise reform; and financial market reform.

© 1995 International Monetary Fund

Cataloging-in-Publication Data

India: economic reform and growth/Ajai Chopra … [et al.]. — Washington, D.C. : International Monetary Fund, 1995

p. cm. — (Occasional Paper, ISSN 0251-6365 ; 134)

Includes bibliographical references.

ISBN 1-55775-539-6

1. India — Economic policy — 1980- . 2. Structural adjustment (Economic policy) — India. 3. Investments — India. I. Chopra, Ajai.

II. Series: Occasional paper (International Monetary Fund) ; no. 134.

HC 435.2.163 1995

Price: US$15.00

(US$12.00 to full-time faculty members and students at universities and colleges)

Please send orders to:

International Monetary Fund, Publication Services

700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

Tel.: (202) 623-7430 Telefax: (202) 623-7201

Internet: publications@imf.org

Contents

  • Preface

  • Abbreviations

  • I Overview

    • Ajai Chopra and Charles Collyns

    • Long-Term Growth

    • Response to the 1991 Crisis

    • Results of Adjustment

    • Fiscal Initiatives

    • Structural Reforms

    • The Road Ahead

  • II Long-Term Growth Trends

    • Ajai Chopra

    • Output, Investment, and Macroeconomic Conditions

    • Education, Labor, Employment, and Poverty

    • Growth, Accumulation, and Productivity

    • Results of India-Specific Studies

  • III The Adjustment Program of 1991/92 and Its Initial Results

    • Ajai Chopra and Charles Collyns

    • The Stabilization and Adjustment Strategy

    • The Response to the Reforms

      • The Supply Side and Sectoral Performance

      • Regional Patterns

    • The Impact on Unemployment and Poverty

  • IV The Behavior of Private Investment

    • Karen Parker

    • A Model of Private Investment Behavior

    • The Response of Private Investment to Reforms

      • The Crisis of 1991/92

      • The “Investment Pause” of 1992/93–1993/94

      • The Investment Recovery of 1994/95–1995/96

    • Appendix: Description of Variables

  • V Fiscal Adjustment and Reform

    • Richard Hemming

    • The Magnitude of Fiscal Adjustment

    • Taxation

    • Expenditure

    • Center-State Relations

    • The Need for Fiscal Consolidation

  • VI Recent Experience with a Surge in Capital Inflows

    • Charles Collyns

    • Recent Experience

      • Overall Trends

      • Investor Base

      • Comparison with Other Countries

      • Factors Behind the Flows

    • Impact on the Economy

      • Impact on Firms

      • Macroeconomic Impact

      • Impact on Financial Markets

    • Sustainability of Capital Flows

  • VII Structural Reforms and the Implications for Investment and Growth

    • Ajai Chopra, Woosik Chu, and Oliver Fratzscher

    • Trade Reform

      • Progress in Reducing Distortions

      • The Impact on the Economy

      • Future Priorities

    • The Investment Regime

      • Deregulation of the Industrial Sector

      • Infrastructure Policies

      • Exit Policies

      • Policies on Foreign Direct Investment

      • Agricultural Reform

    • Public Enterprise Reform

      • Public Sector Performance

      • Competition Policies

      • Management Policies

      • Restructuring Policies

      • Divestment Policies

    • Financial Market Reform

      • Progress in Reducing Interest Rate Distortions

      • Growth and Development of Financial Markets

      • Future Priorities

    • VIII References

    • Tables

      • 1.1 Key Economic Indicators

      • 2.1 Compound Annual Rates of Growth

      • 2.2 Average Investment and Domestic Savings

      • 2.3 Debt Indicators

      • 2.4 India and Selected Country Groupings: Indicators of Educational Attainment

      • 2.5 Stock of Educational Attainment

      • 2.6 Employment in the Organized Sector

      • 2.7 Rural and Urban Population Below the Poverty Line

      • 2.8 India and Selected Country Groupings: Factor Contributions to Output Growth

      • 2.9 Contribution of Accumulation to Growth

      • 2.10 Impact of Policies on Growth, Capital Accumulation, and Factor Productivity, 1970–92

      • 2.11 Productivity Trends in Manufacturing by End-Use

      • 2.12 Real Rates of Return to Investment

      • 3.1 Domestic Demand

      • 3.2 GDP by Sector of Production

      • 3.3 Index of Industrial Production

      • 3.4 Capital Goods Sector

      • 3.5 Per Capita State Domestic Product

      • 3.6 Unemployment Trends

      • 3.7 Percentage of Persons Below Poverty Line

      • 4.1 Private Capital Formation

      • 4.2 Private Investment Equation

      • 4.3 Investment Equation—Decomposition of Estimated Change

      • 4.4 Private Investment Forecast

      • 4.5 Sources of Financing for Private Investment

      • 5.1 Fiscal Deficits

      • 5.2 Domestic Savings

      • 5.3 Tax Revenue

      • 5.4 Tax Rates

      • 5.5 Central Government Revenue Shares

      • 5.6 Central Government Expenditure

      • 5.7 State Government Expenditure

      • 5.8 Central Government Expenditure Elasticities, 1990/91–1994/95

      • 5.9 Fiscal Operations

      • 6.1 Capital Account

      • 6.2 Foreign Direct and Portfolio Investment

      • 6.3 Indian GDR Issues

      • 6.4 Eurobond Issues by Indian Companies

      • 6.5 Investments by Foreign Institutional Investors

      • 6.6 Direct and Portfolio Investment in Selected Developing Countries, 1993–94

      • 6.7 Sectoral Distribution of Foreign Investment, 1991–94

      • 6.8 Domestic and External Financing

      • 6.9 Liquidity Impact of Capital Inflows

      • 7.1 Trade Policy Reform: Progress to Date and Future Reform Areas

      • 7.2 Effects of the Reform on Trade Regime

      • 7.3 Exports and Imports Relative to GDP

      • 7.4 Effects of the Reform on Trade

      • 7.5 International Comparison of Openness

      • 7.6 Industrial Policy Reform: Progress to Date and Medium-Term Objectives

      • 7.7 Profitability of Central Government Public Enterprises

      • 7.8 Public Enterprise Reform: Progress to Date and Medium-Term Objectives

      • 7.9 Public Sector Enterprises: Divestment

      • 7.10 Financial Sector Reform: Progress to Date and Future Reform Areas

      • 7.11 Effects of the Reform on Interest Rate Structure

      • 7.12 Effects of the Reform on Financial Market Structure

    • Charts

      • 2.1 Real GDP Growth

      • 2.2 Structure of GDP

      • 2.3 Saving and Investment in Selected Countries

      • 2.4 External Indicators

      • 2.5 Inflation and Exchange Rate Developments

      • 2.6 Public Sector Accounts

      • 2.7 Contribution of Total Factor Productivity to Growth

      • 3.1 Response Indicators

      • 3.2 Actual and Potential GDP and the Output Gap

      • 3.3 Industrial Production

      • 4.1 Gross Domestic Capital Formation

      • 4.2 Gross Private Capital

      • 4.3 Credit to the Private Sector

      • 4.4 Real Interest Rates and Investment

      • 4.5 Factors Underlying Private Investment Behavior

      • 6.1 Bombay Stock Exchange Sensitivity Index (Sensex)

      • 6.2 Portfolio Inflows

      • 6.3 Discounts or Premiums of GDR Prices Relative to Prices on the Bombay Stock Exchange

      • 6.4 Share Price Volatility of Companies Issuing GDRs

      • 6.5 GDR Price Premium and Change in Bombay Stock Exchange

The following symbols have been used throughout this paper:

… to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The Indian financial year runs April 1-March 31.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Preface

This report was prepared by a staff team in the Central Asia Department as background to the IMF’s 1995 consultation (under Article IV) with India. It is one of a series of eight country case studies prepared as input for research into the relationship between adjustment and growth conducted in the Fiscal Affairs Department and the Policy Development and Review Department, which will be published in 1996. The authors acknowledge the valuable comments and ideas provided by Hubert Neiss, Bijan Aghevli, David Goldsbrough, and Anoop Singh. Melanie Dieckman provided excellent research assistance, while Nirmal Mohanty of the IMF’s Delhi office helped assiduously to track down the data. Elena Frolia, Mila Villar, and Cathy Song provided unstinting secretarial support. The authors are also grateful to Esha Ray of the External Relations Department, who edited the paper for publication and coordinated production.

The views expressed here, as well as any errors, are the sole responsibility of the authors, and do not necessarily reflect the opinions of the Government of India, the Executive Directors of the IMF, or other members of the IMF staff.

The study was completed in June 1995, and is based on information available up to that time.

Abbreviations

BIFR

Board of Industrial and Financial Restructuring
CD

certificates of deposit
CRR

cash reserve requirement
FCCB

foreign currency convertible bond
FIPB

Foreign Investment Promotion Board
FII

foreign institutional investor
FRN

floating rate note
GDP

gross domestic product
GDR

global depository receipt
IIP

index of industrial production
LIBOR

London interbank offered rate
MODVAT

modified value-added tax
MoU

memorandum of understanding
NRF

National Renewal Fund
NRI

nonresident Indian
OECD

Organization for Economic Cooperation and Development
OPEC

Organization of Petroleum Exporting Countries
REER

real effective exchange rate
Sensex

Bombay Stock Exchange sensitivity index
SIA

Secretariat for Industrial Approvals
SLR

statutory liquidity ratio
TFP

total factor productivity
ULCRA

Urban Land Ceiling and Regulation Act
VAT

value-added tax
WPI

wholesale price index
  • Collapse
  • Expand
Cover India
India
Economic Reform and Growth
ISBN:
9781557755391
ISSN:
0251-6365
Publication Date:
01 Jun 1995
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557755391.084
Pages:
88

  • Ahluwalia, Isher Judge, Productivity and Growth in Indian Manufacturing (New Delhi: Oxford University Press, 1991).

  • Ahluwalia, Isher Judge, “The Manufacturing Sector in India,” in India: Industrial Development Review (London: Economist Intelligence Unit, and Vienna: United Nations Industrial Development Organization, 1995).

    • Search Google Scholar
    • Export Citation

  • Anant, T.C.A., Tamal Datta Chaudhuri, Shubhashis Gangopadhyay, and Omkar Goswami, “Industrial Sickness in India: Institutional Responses and Issues in Restructuring” (unpublished; New Delhi, April 1994).

    • Search Google Scholar
    • Export Citation

  • Aziz, Jahangir, “Discretionary Trading and Asset Price Volatility,” IMF Working Paper No. 95/104 (Washington: International Monetary Fund, October 1995).

    • Search Google Scholar
    • Export Citation

  • Balakrishnan P., and K. Pushpangadan, “Total Factor-Productivity Growth in Manufacturing Industry: A Fresh Look,” Economic and Political Weekly, July 30, 1994, pp. 2028–35.

    • Search Google Scholar
    • Export Citation

  • Barro, Robert J., and Jong-Wha Lee, “International Comparisons of Educational Attainment,” Journal of Monetary Economics, Vol. 32 (December 1993), pp. 363–94.

    • Search Google Scholar
    • Export Citation

  • Bhattacharya, B., Policy Impediments to Foreign Direct Investment in India: Status and Issues (New Delhi: Indian Institute of Foreign Trade, 1994).

    • Search Google Scholar
    • Export Citation

  • Cashin, Paul, and Ratna Sahay, “Internal Migration, Center-State Grants and Economic Growth in the States of India,” IMF Working Paper No. 95/66 (Washington: International Monetary Fund, July 1995).

    • Search Google Scholar
    • Export Citation

  • Confederation of Indian Industry, “The States: Strategy for Growth,” background paper on administrative reforms prepared for the 20th annual session (Calcutta, 1994).

    • Search Google Scholar
    • Export Citation

  • Dixit, Avinash K., and Robert S. Pindyck, Investment Under Uncertainty (Princeton, New Jersey: Princeton University Press, 1994).

  • Dunaway, Steven, and others, Private Market Financing for Developing Countries, World Economic and Financial Surveys (Washington: International Monetary Fund, 1995).

    • Search Google Scholar
    • Export Citation

  • Fischer, Stanley, “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics, Vol. 32 (December 1993), pp. 485–512.

    • Search Google Scholar
    • Export Citation

  • Goldsbrough, David, and others, The Response of Investment and Growth to Adjustment Policies: Lessons from Eight Countries (Washington: International Monetary Fund, forthcoming).

    • Search Google Scholar
    • Export Citation

  • Goldstein, Morris, and David Folkerts-Landau, International Capital Markets: Developments, Prospects, and Policy Issues, World Economic and Financial Surveys (Washington: International Monetary Fund, 1994).

    • Search Google Scholar
    • Export Citation

  • Goswami, Omkar, and others, Report of the Committee on Industrial Sickness and Corporate Restructuring (New Delhi, 1993).

  • Greene, Joshua, and Delano Villanueva, “Private Investment in Developing Countries: An Empirical Analysis,” Staff Papers, International Monetary Fund, Vol. 38 (March 1991), pp. 33–58.

    • Search Google Scholar
    • Export Citation

  • Hodrick, Robert, and Edward C. Prescott, “Postwar U.S. Business Cycles: An Empirical Investigation” (unpublished; Carnegie-Mellon University 1980).

    • Search Google Scholar
    • Export Citation

  • Industrial Credit and Investment Corporation of India Limited, Capacity Utilization in the Private Corporate Sector, 1991–92 and 1992–93 (Bombay, 1994).

    • Search Google Scholar
    • Export Citation

  • International Finance Corporation (1994a), Emerging Stock Markets: Factbook (Washington, 1994).

  • International Finance Corporation (1994b), Quarterly Review of Emerging Markets, First Quarter (Washington, 1994).

  • International Labor Organization, India: Employment, Poverty and Economic Policies (New Delhi, December 1993).

  • International Monetary Fund, World Economic Outlook, October 1994: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, 1994).

    • Search Google Scholar
    • Export Citation

  • Iyer, T.N. Anantharam, “The Evolution of the Money Market and Government Securities Market in India,” background paper for the Sixth Seminar on Central Banking, International Monetary Fund (Washington, 1994).

    • Search Google Scholar
    • Export Citation

  • Joshi, Vijay, and I.M.D. Little, India: Macroeconomics and Political Economy 1964–91 (Washington: World Bank, 1994).

  • Khatkhate, Deena, “Indian Banking System: Restitution and Reform Sequencing” (unpublished; Washington, 1993).

  • King, Robert G., and Ross Levine, “Capital Fundamentalism, Economic Development and Economic Growth,” Carnegie-Rochester Series on Public Policy, Vol. 40 (June 1994), pp. 259–92.

    • Search Google Scholar
    • Export Citation

  • Kirmani, Naheed, and others, International Trade Policies: The Uruguay Round and Beyond, World Economic and Financial Surveys (Washington: International Monetary Fund, 1994).

    • Search Google Scholar
    • Export Citation

  • Mankiw, N. Gregory, David Romer, and David N. Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics, Vol. 107 (May 1992), pp. 407–38.

    • Search Google Scholar
    • Export Citation

  • McCarthy, F. Desmond, J. Peter Neary, and Giovanni Zanalda, “Measuring the Effect of External Shocks and the Policy Response to Them: Empirical Methodology Applied to the Philippines,” Policy Research Working Paper WPS 1271 (Washington: World Bank, March 1994).

    • Search Google Scholar
    • Export Citation

  • Ministry of Finance, “Public Sector Commercial Banks and Financial Sector Reform: Rebuilding for a Better Future,” Discussion Paper (New Delhi, 1993).

    • Search Google Scholar
    • Export Citation

  • Ministry of Finance, Report of the Tenth Finance Commission (for 1995–2000) (New Delhi, 1994).

  • Ministry of Finance, Economic Survey, 1994–95 (New Delhi, 1995).

  • Ministry of Industry, Department of Public Enterprises, Public Enterprises Survey, 1993–94 (New Delhi, 1995).

  • Mohan, Rakesh, “Public Sector Reform and Issues in Privatization,” paper presented at a meeting organized by the OECD Development Center and Center for Policy Research, New Delhi, March 6–7, 1995.

    • Search Google Scholar
    • Export Citation

  • Narasimham, M., Report of the Committee on the Financial System (New Delhi, 1991).

  • Nayak, P. Jayendra, “The Reform of India’s Financial System” (unpublished; New Delhi, 1993).

  • Pradhan, B.K., D.K. Ratha, and Atul Sarma, “Complementarity Between Public and Private Investment in India,” Journal of Development Economics, Vol. 33 (July 1990), pp. 101–16.

    • Search Google Scholar
    • Export Citation

  • Pursell, Garry, and Ashok Gulati, “Liberalizing Indian Agriculture: An Agenda for Reform,” Policy Research Working Paper WPS 1172 (Washington: World Bank, September 1993).

    • Search Google Scholar
    • Export Citation

  • Psacharopoulos, George, “Returns to Investment in Education: A Global Update,” Policy Research Working Paper WPS 1067 (Washington: World Bank, January 1993).

    • Search Google Scholar
    • Export Citation

  • Rama, Martin, “Empirical Investment Equations for Developing Countries,” in Striving for Growth After Adjustment: The Role of Capital Formation, ed. by Luis Servén and Andres Solimano (Washington: World Bank, 1993).

    • Search Google Scholar
    • Export Citation

  • Rangarajan, C., and others, Report of the Committee on Divestment of Shares in Public Sector Enterprises (New Delhi, 1993).

  • Rangarajan, C., and others, “Developing the Money and Securities Markets in India,” paper presented at the Sixth Seminar on Central Banking, International Monetary Fund (Washington, 1994).

    • Search Google Scholar
    • Export Citation

  • Reserve Bank of India, Annual Report, 1993–94 (Bombay, 1994).

  • Reserve Bank of India, Report on Currency and Finance, 1994–95 (Bombay, 1995).

  • Summers, Robert, and Alan Heston, “The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–88,” Quarterly Journal of Economics, Vol. 106 (May 1991), pp. 327–68.

    • Search Google Scholar
    • Export Citation

  • Summers, Robert, and Alan Heston, The Penn World Table (Mark 5.6) database (1994).

  • Sundararajan, V., and Subhash Thakur, “Public Investment, Crowding Out, and Growth: A Dynamic Model Applied to India and Korea,” Staff Papers, International Monetary Fund, Vol. 27 (December 1980), pp. 814–55.

    • Search Google Scholar
    • Export Citation

  • Tax Reforms Committee (chaired by Raja J. Chelliah), Final Report, Parts I and II (New Delhi: Ministry of Finance, 1993).

  • World Bank, “India: Issues in Trade Reform,” Report No. 13169-IN (Washington, 1994).

  • World Bank, “India: Country Economic Memorandum, Recent Economic Developments: Achievements and Challenges,” Report No. 14402-IN (Washington, 1995).

    • Search Google Scholar
    • Export Citation