The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.

Abstract

The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.

II. Economic Activity and Prices1

A. Overall Developments

1. The Indian economy recovered strongly in 1998/99, and real GDP growth (at market prices) rose to 6¾ percent from 4½ percent in 1997/98. However, the pickup mainly reflected a sharp rebound in agricultural production, which had been adversely affected by a poor monsoon in 1997 (Table II.1). Activity in the industrial and service sectors, slowed in response to the continued effects of the Asian crisis and the previous year’s drop in agricultural incomes. On the expenditure side, the recovery was supported by a sharp rise in private sector consumption growth from 2½ percent in 1997/98 to 5 percent in 1998/99, which was boosted by the increase in agricultural incomes and the sharp increase in civil service salaries (Table II.2). In particular, wage hikes associated with the Fifth Pay Commission contributed to average annual public sector consumption growth of 12½ percent in 1997/98–98/99.2 Investment growth increased only modestly, rising to 5½ percent in 1998/99, from 4¾ percent in the previous year, as a sharp decline in household investment partially offset a significant pickup in capital accumulation by the public and private corporate sectors.

Table II.1.

India: GDP at Factor Cost by Sector of Origin, 1994/95-1999/00 1/

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Source: Data provided by the Indian authorities.

1999/00 data are advance estimates.

1999/00 estimate includes transport and communication.

Includes mining and quarrying, manufacturing, electricity, gas and water supply, and construction.

Table II.2.

India: GDP at Market Prices by Expenditure Components, 1993/94-1998/99

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Source: Data provided by the Indian authorities.

Includes statistical discrepancy. Data on exports and imports of goods and services at constant prices are not available.

2. Advance estimates indicate that GDP growth moderated to 6 percent in 1999/00, roughly equal to India’s potential growth rate (see Section B). This was largely due to a sharp slowdown in the agricultural sector, where growth eased to ¾ percent, which more than offset an acceleration in industrial sector growth to 7 percent. Growth in the services sector remained roughly constant at 8¼ percent in 1999/00, reflecting rapid increases in financial services and moderation of government services and trade.

Agriculture

3. Agricultural output surged by 7¼ percent in 1998/99, following a 2 percent decline the year before. Foodgrain production reached a record high of 203 million tonnes (Table II.3). Nonfood items such as oilseeds, sugarcane, cotton, and tea also recorded strong growth. However, flooding and excessively high temperatures in some parts of the country negatively affected the supply of cotton, fruits, and vegetables. Supply shortages for potatoes and onions were particularly severe, and the prices of these commodities rose sharply during July–November 1998.

Table II.3.

India: Agricultural Production and Yields, 1993/94-1999/00 1/2/

(Production in millions of tons, unless otherwise indicated; yield in kg per hectare)

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Sources: Government of India, Economic Survey; and data provided by the Indian authorities.

Relates to crop years, July-June.

1999/00 data are preliminary estimates

Nine major oilseeds.

In million bales of 170 kg each.

In million bales of 180 kg each.

Data are for calendar years. For example, data under the heading 1993/94 are for 1993.

In metric tons per hectare.

4. More recently, advance estimates indicate that agricultural sector growth slowed to ¾ percent in 1999/00. Although the monsoon was considered normal, with total rainfall during the entire season being 96 percent of the annual average rainfall, 7 out of 35 meteorological sub-divisions recorded deficient rainfall. Heavy rains and flooding in some states, periods of deficient rainfall, and the super-cyclone in Orissa, also adversely affected agricultural output. Thus, production of wheat, cotton, coarse cereals, pulses, and oilseeds are estimated to have fallen in 1999/00.

India: Estimates of Agriculture Production

The agricultural year in India is divided into the rabi (winter) and kharif (summer) seasons. Estimates during the year of agricultural output vary widely, depending on methodologies used, and can change during the year depending on the outcome of the monsoons. Official estimates are usually based on the Ministry of Agriculture estimates that are compiled as follows:

  • The first set of estimates is prepared in September following the Ministry’s Rabi Conference of state governments and union territories. During this conference, estimates of the kharif crop are prepared based on surveys by the state governments. In addition, projections for the rabi crop also are made, which are made public.

  • A second set of estimates is published in January/February. These figures include firmer estimates of the kharif output, based on actual crop cutting, and estimates of the rabi crop are made on the basis of surveys.

  • A subsequent set of estimates results from the March/April Kharif Conference, where more precise estimates of the rabi crop are made available and final data for the fiscal year are released.

Industry

5. Growth in the industrial sector slowed sharply during the three years to 1998/99.3 Industrial sector growth fell to 4 percent in 1998/99, down from 6 percent the year before and well below the recent peak of 11¾ percent growth achieved in 1995/96. The slowdown reflected several factors that dampened both consumer and business demand. These included spillovers from the weak agricultural output in 1997/98, depressed capital markets, and a sharp drop in exports to regional partners. In addition, weaker business investment reflected a buildup of excess capacity in the mid-1990s and inadequate infrastructure (Chart II.1).

CHART II.1
CHART II.1

INDIA: Industrial Production and Business Confidence, 1995-2000

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Sources: Data provided by the Indian authorities, CEIC, and NCAER.1/ Three-month moving average.2/ Based on weighted average of the electricity, coal, steel, crude petroleum, petroleum products, and cement indices.

6. However, with the pickup in domestic and foreign demand, industrial sector growth increased to 7 percent in 1999/00. A recovery in the manufacturing sector has been the principal factor behind the recent strengthening of industrial activity. Following lacklustre growth of 4 percent in 1998/99, manufacturing sector output, which has a weight of 79 percent in the Index of Industrial Production (IIP), grew by 9¼ percent in 1999/00. The pickup in manufacturing growth was due to basic goods, intermediate goods, and consumer goods output, pointing to strong household demand (Table II.4). By contrast, output of capital goods slowed to 5¼ percent in 1999/00, down from 11¾ percent in 1998/99, suggesting that investment in machinery and equipment remained weak (Chart II.2).

Table II.4.

India: Industrial Production Index, 1995/96-1999/00 1/

(Annual percentage change)

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Source: Data provided by the Indian authorities.

Percentage change over corresponding period in the previous year.

CHART II.2
CHART II.2

INDIA: Components of Industrial Production, 1995-2000

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Source: Data provided by the Indian authorities.1/ Three-month moving average.

7. The recent financial performance of the corporate sector confirms that an industrial recovery is underway. After declining for three straight years, Profits After Tax (PAT) for manufacturing companies increased by 15 percent in the first half of 1999/00.4 Growth in net sales of manufacturing companies also increased to 20¾ percent in the first half of 1999/00, compared to 9½ percent in the corresponding period of 1998/99. For the entire corporate sector, sales grew 17¾ percent, and PAT grew 8 percent in the first half of 1999/00. While comprehensive data for the whole of 1999/00 are not yet available, a survey of 502 companies by the Business Standard reported a 41½ percent growth in net profits and a 21 percent growth in sales for the last quarter of the year, suggesting continued strong financial performance.

Services

8. The service sector remained the fastest growing sector of the economy in 1998/99, although growth slowed slightly to 8¼ percent from 9 percent for the previous year. The slowdown reflected a 2 percent decline in railway freight traffic, stagnant cargo handling at major ports after 10½ percent growth in 1997/98, and a decline in growth of new telephone connections from 27 percent in 1997/98 to 16½ percent in 1998/99. However, the lack of fiscal discipline contributed to strong growth in public administration services, and the information technology sector continued to grow rapidly. In 1999/00, advance estimates indicate that services sector growth was roughly unchanged at 8¼ percent. A substantial increase in financial services growth was largely offset by declines in growth of other services such as public administration and trade.

9. The rapid growth of the services sector has led to a steady increase in its share of GDP, from around 39 percent in 1990/91 to 47 percent in 1999/00. The sector has been led by telecommunications activity—new telephone connections grew at an average annual rate of 25½ percent during 1994/94-1998/99—and the computer software sector—where exports (which constitute the bulk of software output) expanded by 54 percent (in U.S. dollars) in 1998/99.

Investment

10. Gross fixed capital formation fell to 21½ percent of GDP at current prices in 1998/99, from 22¾ percent in the previous year. This was entirely due to a decline in the rate of private fixed investment, as public sector fixed investment remained constant at 6½ percent of GDP. Corporate fixed investment declined by ½ percentage point to 7½ percent of GDP, while household fixed investment declined by almost one percentage point to 7¼ percent of GDP (Table II.5). However, a major contributory factor for the decline in the share of fixed investment was that the overall GDP deflator grew much faster (9 percent) than the investment deflator (4 percent).

Table II.5.

India: Saving and Investment, 1993/94-1998/99

(In percent of GDP at market prices)

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Sources: Government of India, Economic Survey; and data provided by the Indian authorities.

Includes errors and omissions.

11. In constant-price terms, the only category of fixed investment that fell as a share of GDP (by ½ percentage point) in 1998/99 was household fixed investment. This reflected the boom in consumption, and more than offset pickups in public and private corporate sector fixed investment. The share of private corporate sector fixed investment increased marginally, reflecting the pickup in consumer demand and improvement in the business outlook following the bumper harvest. Public sector fixed investment increased by ¼ percentage point of GDP, after fiscal slippages had caused it to decline in the previous three years. Although data for 1999/00 are not yet available, a substantial decline in growth of capital goods production and subdued growth in non-oil imports suggest investment weakened.

Saving

12. The gross domestic saving rate fell to 22¼ percent of GDP in 1998/99, down from 24¾ percent of GDP in 1997/98, reflecting weakness in both the private sector and public sector saving rates. As regards the private sector, the household saving rate fell by ½ percentage point to 18½ percent of GDP in 1998/99, as a result of a decline in the physical saving rate that more than offset an increase in the financial saving rate. The lower physical saving rate largely reflected the surge in private consumption growth that occurred after the bumper agricultural harvest. Corporate saving fell for the third straight year to 3¾ percent of GDP in 1998/99, owing to the effect of the industrial slowdown on profits. The decline in public savings reflected continued fiscal slippage in 1998/99.

Labor market

13. Employment in the organized sector grew by ½ percent in 1997/98, the last year for which data are available (Table II.6). Public sector employment, which accounts for about 69 percent of employment in the formal sector, fell by ½ percent, while private sector employment rose by 1 percent. Female employment, which accounts for about 16½ percent of formal sector employment has grown at an average of 3½ percent per year over the period 1992/93–1996/97, much faster than male employment (½ percent over the same period).

Table II.6.

India: Employment and Labor Statistics, 1993/94-1997/98

(In millions of persons, end-of-period)

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Source: Data provided by the Indian authorities.

All establishments in the public sector and nonagricultural private establishments with ten or more employees.

For industrial disputes involving ten or more workers.

For example, data under the heading 1993/94 refer to end-December 1994.

Data are for calendar years. For example, data under the heading 1993/94 are for 1994.

Inflation

14. After accelerating in the latter half of 1998, inflation declined to historically low levels. In particular, wholesale price inflation rose from 3¾ percent in February 1998 to 7¼ percent in November (on a 12-month basis) owing to effect of shortages of key agricultural commodities (fruits and vegetables).5 Thereafter, however, inflation declined markedly as agricultural supply conditions eased, and fell to a low of 2 percent by July 1999 (Chart II.3). Inflation began to edge up subsequently, particularly with the 40 percent increase in diesel fuel prices that was implemented in October and the increases in wheat and other food prices that were introduced as part of the 2000/01 budget, and inflation rose to 6 percent by April 2000. Nonetheless, inflation for 1999/00 as a whole averaged only 3½ percent, an 18-year low, and expected inflation for 2000/01, as measured by the May 2000 Consensus Forecast, has edged down to 5 percent.

CHART II.3
CHART II.3

INDIA: Inflation Indicators, 1995-2000

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Source: Data provided by the Indian authorities.1/ For industrial workers.

15. Inflation measured using the consumer price index (CPI) followed broadly similar trends (Table II.7). CPI inflation increased steadily from 4¾ percent in mid-1997 to a peak of 19¾ percent by November 1998 (on a 12-month basis), reflecting its greater weight on food items, but fell to zero in November 1999. Thereafter CPI inflation began rising, reaching 4¾ percent in March 2000.

Table II.7.

India: Price Developments, 1995/96-1999/00

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Source: Data provided by the Indian authorities.

B. Potential Output and Total Factor Productivity Growth

16. An economy’s potential level of output is often defined as the level of output that results when all resources are utilized at normal levels, or the level of resource utilization where inflation is stable or nonaccelerating. Potential output is often estimated using the Hodrick-Prescott filter to isolate the underlying trend value of GDP. Applying this approach to real GDP data for India suggests that potential output growth was low and stagnant—about 3½ percent per annum—during 1962/63-1972/73.6 Subsequently, potential growth increased steadily, reaching just under 6 percent by 1996/97 and remaining at around this level to 1999/00.

17. A key issue is the extent to which the apparent increase in potential growth since the early 1970s resulted from a pickup in labor or capital inputs or from productivity gains. To address this question, total factor productivity (TFP) growth was estimated using the following equation, which assumes a Cobb-Douglas production function:

Growth of TFP = Growth of output - [α][Growth of capital] - [l-α][Growth of labor], where α was assumed to equal the historical income share of capital (0.32). Capital was measured by the net fixed capital stock, while labor was measured by actual employment. Trend TFP was estimated using the Hodrick-Prescott filter. The estimates indicate that after stagnating throughout the 1960s and early 1970s, trend growth in total factor productivity (TFP) increased steadily after 1974, reaching 2½ percent per annum by 1996.

uA02fig01

Growth of GDP

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

uA02fig02

Growth in Total Factor Productivity

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Sources: Data provided by the Indian authorities; and staff estimates.

C. Estimating the Expenditure Side of the National Accounts

18. In India, data on the expenditure side of the National Accounts are released with a lag of about 10 months, while data on the production side of the accounts are released with a much shorter lag (advance estimates for 1999/00 were released in February 2000). This raises the question of whether the expenditure components can be estimated from the production side of the data. This issue is particularly relevant for private consumption and fixed investment, since information on the public sector and the balance of payments is available from other sources.

19. In the case of private consumption, an equation was estimated in which private consumption growth (C) was regressed on current and lagged growth in the agriculture (A) sector, current growth in the industrial (I) and services (S) sectors, and lagged consumption growth. With the exception of the coefficient of services growth, all coefficients are precisely estimated and are significant at the 10 percent level, and the equation’s R2 indicates a good fit. Interestingly, the lag structure on agricultural growth suggests that a pickup in the agricultural sector has a large contemporaneous impact that is partly reversed in the subsequent year.

20. As for private fixed investment, the preferred equation was one in which the ratio of private fixed investment to GDP at factor cost (INVGDP) was a function of the current and lagged ratio of industrial output to GDP (IGDP), lagged ratio of services output to GDP (SGDP), and the lag of INVGDP. A noticeable feature of the equation is that the short-term impact of changes in the share of industrial output on the private fixed investment rate exceeds the long-term impact.

Least Squares Estimates of the Private Fixed Investment Rate (INVGDP) and Private Consumption Growth (C) Equations

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uA02fig03

Actual and Estimated Private Consumption Growth

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

uA02fig04

Actual and Estimated Share of Private Investment in GDP

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Sources: Data provided by the Indian authorities; and staff estimates.

D. Poverty Trends

21. Official estimates indicate an impressive decline in the poverty ratio from 55 percent of the population in 1973/74 to 36 percent of the population in 1993/94.7

uA02fig05

Poverty Rates

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Source: Government of India, National Sample Survey.

However, given population growth during this period, the number of poor has actually remained roughly stable at around 320 million. Poverty in India therefore remains very high—both in absolute terms and compared to other countries in the region.8

uA02fig06

Comparative Poverty Rates

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A002

Source: World Bank, World Development Report 1999/2000; figures refer to US dollars measured in 1985 prices and converted al PPP exchange rats.

Other social indicators, including access to safe water and infant mortality rates, have shown more encouraging improvements.

22. The government’s poverty alleviation programs have most recently focused on generation of employment in rural areas, with central outlays averaging about ½ percent of GDP, or 4 percent of total expenditures and net lending. Many other anti-poverty programs, such as the Public Distribution System (PDS), and public spending on education and health care have been found to benefit the non-poor disproportionately more than they benefit the poor.9

Social and Demographic Indicators

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Source: World Bank, World Development Indicators; and Selected Education Statistics. Government of India.

Fifteen years old or older

Data from Selected Educational Statistics, 1997/98 (Government of India, Department of Education)

23. In addition to faster growth, studies on India have indicated that critical ingredients to poverty reduction include increased public spending to expand the poor’s access to quality health care and education (particular at the primary school level), more effective targeting of public works programs, and improvements to physical infrastructure.10

1

Prepared by Daniel Kanda.

2

See Chapter III for a more detailed discussion.

3

The industrial sector is here defined to include mining and quarrying, manufacturing, electricity, gas and water supply, and construction.

4

Based on a sample of 1,078 listed companies reported by the Centre for Monitoring the Indian Economy (CMIE).

5

The WPI is the most commonly used price index in India. Revised WPI data were released in April 2000, based on 1993/94 weights, which have raised measured inflation rates in recent months by around ¾ percentage point.

6

Since consistent historical GDP data are not available, the estimates were based on data constructed by splicing the national accounts series for 1993/94-1999/00, which are based on 1993/94 weights, to the older series, which were based on 1980/81 weights.

7

More recent official estimates are not available. Data underlying official poverty estimates are collected and analyzed by the National Sample Survey (NSS), which carries out two types of consumer expenditure surveys. The first is an annual pilot survey with very limited sample size and coverage; the second is conducted roughly every five years and has large coverage. Poverty lines are computed by the Planning Commission, largely according to a methodology recommended by a government-commissioned Expert Group on Estimation of Proportion and Number of Poor. The Expert Group further suggested that only the five-year survey data be used to estimate poverty ratios, since their recommended methodology involved construction of state-specific poverty lines and the annual sample coverage was inadequate for this purpose. A five-year survey was due out in 1998/99, but has been delayed.

8

The World Bank’s World Development Report 1999/2000 suggests an even more severe poverty problem, with almost half of the population living on less than $1 per day (on a purchasing power parity adjusted basis) and seven-eighths of the population living on less continued than $2 per day in 1994. However, recent research (A. Deaton and A. Tarozzi, “Prices and Poverty in India”, Princeton University unpublished manuscript, December 1999), which uses price indices calculated from the NSS data instead of CPI data, paints a more optimistic picture. Deaton and Tarozzi’s preliminary findings indicate that rural poverty rates declined from 38 percent in 1987/88 to 33 percent in 1993/94 (compared to official estimates of 39 percent and 37 percent, respectively), while urban poverty rates declined from 22 percent to 18 percent during the same period (compared to official estimates of 40 percent and 33 percent, respectively).

9

World Bank, India: Reducing Poverty in India, Report No. 17881-IN, June 1998. In the 2000/01 budget, the allocation of food grains under the PDS to consumers below the poverty line was doubled to 20 kilograms in an attempt to give greater benefits to the poor.

10

See World Bank, Reducing Poverty in India; and Chapter IV of the accompanying Selected Issues volume.

India: Recent Economic Developments
Author: International Monetary Fund