Expert Group on the Commercialization of Infrastructure Projects (EGO; 1996), The India Infrastructure Report: Policy Imperatives for Growth and Welfare [Mohan Report]: New Delhi.
Milesi-Ferretti, G.M., and A. Razin (1996), “Persistent Current Account Deficits: a Warning Signal?”, International Journal of Finance and Economics, 1, 161–181.
Prepared by Martin Mühleisen.
See Chapter II of this report.
The public sector comprises central and state governments and central public enterprises.
Equity investment is assumed to rise (at different rates) in both scenarios, particularly direct foreign investment, but financing at the margin is assumed to be debt related.
Data on capital stock and labor force are partly available; however, attempts to estimate a production function did not yield sensible results. Capital stock estimates suffer from the low quality of investment data, while labor force estimates do not account for workers in the large informal sector.
The relationship between money and price increases has been quite stable, notwithstanding the financial reforms in progress (e.g., IMF [1995a], Chapter V).
This approach reflects the difficulties in finding stable econometric relationships in the Indian data. Most estimated equations yield poor forecasts and applying them in the model would have required extensive use of ad hoc adjustment factors. Moreover, with the continuing structural change in the Indian economy, the underlying empirical relationships are expected to shift as well, rendering regression results obsolete.
Relative to an estimated increase of 8 percent in the GDP deflator.
This relationship is broadly in line with results cited in the World Economic Outlook (IMF [1995b]).
The envisaged adjustment assumes an increase in the tax ratio to 18 percent of GDP by 2001/02, while nontax revenue rises by about 1 percentage point of GDP through improved public enterprise profitability. On the expenditure side, the scope to lower total noninterest expenditure is limited, given pressing needs for infrastructure and social spending that would absorb cutbacks in unproductive spending areas. Hence, expenditure reduction reflects mainly lower interest payments.
The initial adverse effect on demand would be diminished by maximizing the credibility of the fiscal adjustment package to prompt a strong private investment response.
The numbers for investment and saving presented in the scenarios are consistent with the different treatment of errors and omissions described in Chapter II, Appendix II. 1. These figures are 2–3 percentage points lower than the official numbers.
The expert group projects an increase of 1 percent of GDP in public saving, 2 percent in private saving, and 1 percent in the current account deficit (reaching 2½ percent of GDP by 2000/01). This would finance a 4 percentage point increase in the investment to GDP ratio, translating into a growth rate of 7½ percent by 2000/01.
In particular, substantial Fund repurchases and the repayment of a US$ 2.2 billion India Development Bond issue fall due in 1996/97.
The share of concessional lending to India is projected to fall from its current level of 40 percent to below 20 percent by 2001/02. It would still remain higher than current levels for East Asia or Latin America.
Cumulative equity investment figures have been derived from data going back to 1970.
A country’s external obligations should also be related to its ability to generate foreign exchange receipts to service these obligations. For example, cumulative external financing to both East Asia and Latin America is close to some 60 percent of GDP. However, the East Asian countries’ better export performance translates into a much lower ratio of cumulative financing to exports (140 percent, as opposed to 400 percent for Latin America).