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.

VIII. Recent Structural Policy Developments1

A. Introduction

1. The process of structural reform in India began in the mid-1980s, but accelerated following the balance of payments crisis of 1991. Key measures included industrial deregulation, and fiscal, external and financial sector reforms.

  • The investment licensing scheme in the manufacturing sector was dismantled, and steps were taken to liberalize investment approvals procedures. Also, many areas of the economy that had previously been reserved for the public sector were opened for private investment, including power, telecommunications, mining, ports, roads, river transport, air transport, and banking.

  • External sector reforms were significant, and included reductions in tariffs, the easing of import licensing requirements, a relaxation of controls on foreign direct and portfolio investment, and greater exchange rate flexibility. Tariffs cuts reduced the import-weighted tariff rate from 87 percent in 1990/91 to 25 percent by 1996/97, and there were substantial reductions in the number of quantitative restrictions on imports. The exchange rate regime was also liberalized. The rupee was floated in March 1992, and full current account convertibility was established in August 1994, earning India Article VIII status with the IMF.

  • In the financial sector, interest rates were liberalized, prudential norms and supervision were strengthened, private sector competition in the banking system was increased, and reforms were introduced to develop and deepen capital and debt markets. This enabled a gradual shift toward implementing monetary policy by means of indirect rather that direct instruments.

  • Fiscal reforms focused on rationalizing tax rates, cutting expenditures, and privatizing public enterprises. The public sector deficit was brought down to 8¼ percent by 1995/96, from 11¼ percent before the crisis.

2. The pace and scope of reform in the latter half of the 1990s was adversely affected by political instability, including three general elections and six changes of government between early 1996 and late 1999. Nonetheless, a number of important measures have been implemented since 1998, and these are discussed in greater detail in the following section.

B. Recent Policy Developments

Financial sector

3. In January 2000, the Insurance Regulatory and Development Authority (IRDA) Act of 1999 was given final assent. The Bill opened the Indian insurance sector—which has been dominated by the state-owned Life Insurance Corporation and the General Insurance Corporation—to private and foreign competition, and established a regulator (the IRDA) for the industry. Entry is subject to the requirement that paid up capital is at least Rs 1 billion in the case of insurers, and Rs 2 billion in the case of reinsurers. Ownership shares of a single domestic entity are required to be reduced to 26 percent over a 10-year period, and total foreign ownership is limited to 26 percent. In April 2000, the RBI issued prudential guidelines on bank participation in the insurance sector.

4. A number of additional measures have been implemented recently to provide greater flexibility in the capital markets. The Securities Contracts (Regulations) Amendment (SCRA) Bill was passed in 1999 to provide a framework for the introduction of trading in derivatives and “collective investment schemes.” The Foreign Exchange Management Bill (FEMA) was also passed in 1999, to facilitate external trade and payments and promote orderly conditions in the foreign exchange market. In October 1999, banks were given the freedom to set different Prime Lending Rates (PLRs) for different loan maturities. In March 2000, the government lifted the 30-year ban on forward trading in securities, paving the way for the introduction of derivative products such as stock index futures.

5. The Securities and Exchange Board of India (SEBI) announced measures in 1999 to liberalize the norms governing the capital market and bring them on par with international standards. Entry norms for initial public offerings (IPOs) were relaxed, mutual funds were allowed to trade in derivatives, and regulations on employee stock options were put in place. Draft regulations on credit rating agencies were also approved.

6. To improve mechanisms for debt recovery, in 2000 the government amended the Recovery of Debt Due to Banks and Financial Institutions Act (1993) by widening the definition of debt and giving Debt Recovery Tribunals (DRTs) increased powers to attach the assets of defaulters. The constitutionality of this law was later upheld by the Supreme Court.

7. In its April 1999 credit policy, the RBI took a series of steps to facilitate the development of the government securities market: Restrictions on repurchase agreements (repos) were relaxed, with interbank repos now allowed in government securities, public sector enterprise bonds, and bonds of companies and financial institutions held in “demat” form.2 In addition, restrictions on the maximum maturity for repos were removed. To aid in the development of the government securities market, state governments were allowed special ways and means advances against the collateral of their investment in treasury bills, and the RBI introduced auctions for 182-day treasury bills.

External sector3

8. A number of measures have been adopted recently to ease restrictions on capital flows. In February 2000, the use of External Commercial Borrowings (ECBs) was opened to all sectors except real estate and the capital market, and quantitative limits were relaxed.4 In addition, restrictions on the ability of Indian corporations to issue equity abroad through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) were liberalized in January 2000. Prior government approval is no longer required, but companies are subject to reporting requirements and caps on the percentage of foreign ownership of equity.

9. In order to promote foreign direct investment, the government established a system of automatic approvals for FD1 for investments up to Rs 6 billion. However, a negative list remains, and includes investment in agriculture, the petroleum industry, defenserelated equipment, and industrial explosives. There are also limits on foreign ownership of equity in various industries.5 In order to minimize bureaucratic impediments, the government also established the Foreign Investment Implementation Authority (FIIA) as a single interface for foreign investors in obtaining all necessary approvals and to approve FDI proposals not covered under the automatic approvals route.

Power sector

10. Although power generation has grown strongly, power constraints remain a serious problem. In particular, although power generation increased by 6½ percent in 1998/99, energy and peaking shortages remained high at 6 percent and 14 percent, respectively. Problems have been ascribed to the inefficiency of thermal plants and the State Electricity Boards (SEBs), which distribute electricity to most end-users. SEBs typically provided energy to the agriculture sector at well below cost, leading to heavy financial losses. Operational inefficiencies have also meant that the SEBs’ transmission and distribution losses—officially estimated at around 25 percent—are among the highest in the world. In 1997/98, only three SEBs had a rate of return higher than the legally mandated minimum of 3 percent, which has limited the ability of the SEBs to invest in capacity.

11. Power sector reforms have begun in several states. Orissa, Haryana, Andhra Pradesh, Uttar Pradesh, and Karnataka enacted legislation to reform their power sectors, and to establish independent State Electricity Regulatory Commissions (SERCs) mandated to set economically sound power tariffs. A total of 13 states have either set up SERCs or announced that their intention to do so. Reform efforts in Orissa, Haryana, and Andhra Pradesh have been supported by the World Bank and the Department for International Development (UK), and progress has been the greatest in Orissa, where power distribution has been successfully privatized.

12. Power sector reforms have also taken place at the central government level. The government announced a revised power policy which envisages the development of “mega” power projects6 in both the public and private sectors, in order to take advantage of economies of scale. The policy includes the creation of a Power Trading Corporation (PTC), which would purchase power from large power projects and sell only to states that have embarked on reforms, including by establishing independent SERCs empowered to fix tariffs. Since private sector mega projects would only have to deal with the PTC, this is expected to considerably reduce the risk of non-payment of dues. To attract private sector participation, the tax holiday for infrastructure projects was extended to the power sector. As of May 1999, there were 11 mega power projects in India.

Telecommunications

13. Although the telecommunications sector has grown rapidly, telephone density in India remains among the lowest in the world.7 To enhance private sector participation in the sector, the government announced a new telecom policy in 1999 which allowed multiple fixed service operators and opened domestic long distance services to private operators. It also allowed the migration of telecom operators from the previous fixed-fee regime to a revenue-sharing arrangement.

14. The Telecom Regulatory Authority of India (TRAI) was reconstituted in January 2000 to give a clearer distinction between its advisory and regulatory functions. It is now mandatory for the government to seek TRAI’s advice on policy and licensing issues. To separate policy and licensing from the provision of services, a separate Department of Telecom Services (DTS) was set up in October 1999 to look after all non-policy issues related to the provision of telecom services. It is envisaged that the DTS will eventually be corporatized. The Department of Telecommunications (DOT) is now be restricted to policy matters, licensing, research, and the administration and implementation of laws and treaties related to the telecom sector.

Transportation

15. India faces significant transportation bottlenecks. The national highways, which account for about 40 percent of the movement of goods and passengers, are very congested. As a result, commercial vehicles are only able to run 200-250 km per day compared to 600 km per day in developed countries. The government has estimated that an additional 15,766 km of highway will be required by the year 2020, out of which 4,885 km is needed by 2005.

16. To improve the roads network, the National Highway Authority of India (NHAI) was given the mandate to implement the National Highway Development Program in 1998/99. The Program envisages upgrading highways linking the “golden quadrilateral” of Delhi, Mumbai, Chennai, and Calcutta, as well as upgrading highways between Kashmir and Kanyakumari, Silchar and Saurashtra, and Salem and Cochin. In all, 13,252 km of highway are to be upgraded by 2009. Excises on petrol and diesel have been earmarked to finance road projects, and are estimated to yield Rs 50 billion per year—still well short of total expected funding requirements of Rs 540 billion. To encourage private sector participation in road transport, agreements for Build-Operate-Transfer (BOT) schemes have been finalized, and as of end-March 2000, 20 BOT projects with a total investment of Rs 10 billion have begun.

17. Port capacity is also insufficient to meet existing demand. Major ports (which handle 90 percent of all cargo) handled 252 million tons of cargo as of end-March 1999, in excess of their 240 million ton capacity. This resulted in substantial delays in pre-berthing and turnaround. Although, productivity at Indian ports improved in 1998/99, it is still much lower than that of efficient ports in the Asian region.8

18. To address the lack of port capacity, the authorities have sought to encourage greater private sector investment in this sector. Guidelines have been issued concerning private investment in ports, and the Tariff Authority for Major Ports (TAMP) began operations in April 1997, including by establishing port charges to be collected by private providers of port services. The Maritime States Development Council (MSDC) has also been formed as a forum for developing an integrated policy for the entire Indian ports sector. In addition, the government announced the corporatization of Ennore, Haldia, and Jawaharlal Nehru ports in January 1999, which is expected to enhance their ability to mobilize resources from the market and therefore reduce the need for budgetary support. At the state level, ports development programs are underway in Gujarat, Maharashtra, and Andra Pradesh, with private sector participation.

19. The productivity and financial viability of the railways is another important concern. The railway system suffers from undercapacity (capacity utilization is estimated at 100–120 percent along the golden quadrilateral), pressures to maintain and add uneconomic passenger lines, and weak revenue generation. The latter stems in large part from a fare system that requires freight traffic to cross-subsidize passengers, and is encouraging a diversion of freight traffic to other transport modes, including roads. Recent policy on railways has been geared towards improving staff productivity and safety by streamlining safety procedures and upgrading railway training centers. The government has also announced that the six production units of the railway ministry are to be converted into independent cost and profit centers, which would pave the way for their eventual corporatization.

20. To improve the efficiency of airports, the government announced in January 2000 that it was restructuring five major airports (Mumbai, Delhi, Bangalore, Chennai, and Calcutta) by leasing them to private operators for 30 years.

Land use

21. In 1999, the Urban Land Ceiling and Regulation Act (ULCRA) of 1976 was repealed. This legislation had constrained the housing industry as it set upper limits on the amount of land that could be owned individuals and companies, and prohibited firms from selling surplus land in urban areas without the permission of the state government (which was rarely granted).

C. The Impact of Structural Reform

22. There is evidence to suggest that the reforms that were implemented in the 1990s paid important dividends. The recovery from the 1991 crisis was rapid, with a sharp rise in the private investment rate and an increase in real per capita GDP growth to more than 6 percent by 1995/96 (Table VIII.1). Significant improvements in productivity were also achieved—as evidenced by increased total factor productivity growth at both the aggregate and firm levels,9 and by declining incremental capital output ratios, particularly in the services sector.

Table VIII.1

Expenditure and Sectoral Components of Growth in India 1/

(In percent)

article image
Sources: Central Statistical Organisation, National Accounts Statistics.

Calculations based on constant price data; base year is 1980/81 for data until 1993/94, and 1993/94 thereafter.

Average contributions of consumption spending, and public and private sectors are calculated over 1961/62-1979/80.

1999/00 figures on GDP and sectoral production are CSO Revised Estimates; 1999/00 figures on expenditure categories and 1998/99 and 1999/00 figures on public and private sector GDP are staff estimates; ICORs computed over 1997/98-1998/99.

Measured at market prices.

Includes statistical discrepancy.

Measured at factor cost.

The incremental capital output ratio (ICOR) is the ratio of the investment rate to the GDP growth rate; a falling ICOR over time therefore indicates improved capital productivity.

23. However, per capita growth has slowed more recently, averaging closer to 4 percent between 1997/98 and 1999/00. To some extent, this reflects the completion of cyclical catch-up following the 1991 balance of payments crisis, as well as the adverse impact of the 1997 regional crisis and agricultural supply shocks. In addition, though, economic performance appears to have been adversely affected by a reversal of fiscal adjustment. Increases in civil service wages, subsidies, and rising debt service payments pushed up the public sector deficit almost to pre-crisis levels by 1999/00, likely contributing to higher real interest rates and dampening private investment.

24. The recent slowdown also raises questions as to whether the pace of structural reform has been sufficient to sustain income gains. Indeed, a number of analytical studies suggest that the benefits from deeper structural reform could be significant (Table VIII.2). These include studies that have analyzed the nature of the structural impediments in India,10 the reasons for the differences in the growth performances of India relative to China and other developing countries,11 and the effects of structural reforms at the state level.12 Comparisons of India and China have concluded that the much higher growth rates experienced by China—over 4 percentage points during 1980-96—have been due to the more liberal regulatory environment enjoyed by China’s non-state sector (particularly with respect to agricultural sector pricing and labor laws) as well as the more attractive incentives offered by its Special Export Zones. A study of the effects of structural reforms at the state level in India found that reform-oriented states (such as Gujarat, Tamil Nadu, and Maharashtra), grew faster, and attracted much more private investment—both domestic and foreign—than those which have lagged behind in the reform process.13

Table VIII.2

India: Explaining India’s Relative Growth Performance

article image
Sources: Kongsamut, P. and A. Vamvakidis, “Economic Growth,” in The Philippines: Toward Sustainable and Rapid Growth, IMF Occasional Paper 187 (Washington: International Monetary Fund, 2000); N. Bajpai and J. Sachs “India’s Economic Reforms: Some Lessons from East Asia,” Journal of International Trade and Economic Development, Vol. 6 No. 2 (1999), pp. 135-164

Calculated as the estimated coefficient times the difference in the independent variable value (India - East Asia). Reported difference in growth rates of real per capita GDP are actuals

25. It been suggested by a number of analysts—both inside and outside the policymaking sphere in India—that the next wave of reforms should include focus on a number of difficult issues that have so far remained relatively untouched.14 These include:

Agriculture

26. Reform of the agricultural sector is key to improving living standards in the rural areas and to reversing the recent slowdown in the rate of decline of the poverty rate, since some 70 percent of the labor force still relies on the land for its livelihood.15 The relatively poor performance of the agricultural sector during the 1990s (Table VIII.1) reflected both adverse supply shocks and the lack of agricultural reform, which in turn contributed to low investment rates and productivity in this sector, thus constraining growth. While recent efforts to increase fertilizer prices, improve foodgrain storage and distribution, and liberalize some agro-processing industries are steps in the right direction, key issues that still need to be addressed include:

  • Subsidies on power, water and fertilizer inputs have distorted production decisions and contributed to environmental degradation, which has adversely affected productivity. Moreover, their high cost has crowded out public spending on much needed agricultural investment, in particular rural roads and irrigation.

  • The operations of the Food Corporation of India (FCI) and the Public Distribution System (PDS) have distorted normal regional and seasonal commodity price variations, prevented or constrained efficient private trade, and distorted production decisions.17

  • Trade distortions have also prevented the proper functioning of market mechanisms, with most agricultural imports and exports (including of farm inputs) subject to high tariffs, licensing requirements, and/or “canalization”—which grants monopoly rights for trade in particular commodities.

  • Reservation policies, which restrict domestic production of most processed agricultural commodities and farm inputs to small-scale manufacturers, have adversely affected product quality, the level of technology, and marketing.

Infrastructure

27. Infrastructure deficiencies—particularly in power, transportation, and communications, as discussed in Section B—are among the most important impediments to growth in India. The 1998 Global Competitiveness Report of the World Economic Forum, which examined the strengths and weaknesses of 53 countries and provided an assessment of their medium-term growth prospects, ranked India’s overall infrastructure 53rd, and all aspects of infrastructure were found to have severe weaknesses.

28. Durable fiscal reform is needed to free resources for greater public spending on physical infrastructure. In addition, substantial private sector—including foreign-investment in infrastructure is required. Such involvement has so far been impeded by regulatory problems and non-transparent approvals procedures, which have created uncertainty and delayed the finalization of contracts.17 Moreover, progress on commercialization and privatization in the power, transportation, and water sectors has been very slow.

Small Scale Industries

29. As noted by the government-commissioned Hussain Committee report in 1997, the reservation of certain products for the exclusive production by small scale industries (SSI reservation) has crippled the growth of several industrial sectors, and restricted exports in many areas—including garments, toys, and leather products—where India has a potential comparative advantage.18 SSI reservation has also been an impediment to FDI, since many of the industries which would otherwise be attractive to foreign investors are reserved.

30. The need to eliminate SSI reservation has recently become even more urgent, as the removal of quantitative restrictions in April 2001 will create an anomalous situation where small scale industries face competition from imports, but large domestic firms are restricted from entry into those industries. The elimination of quotas under the Multi Fibre Agreement by 2005 also may increase competitive pressures on the Indian textiles industry.

Labor markets

31. About 8 percent of India’s labor force is employed by the “organized” sector, which enjoys extensive social protection and effectively guarantees lifetime employment under the Industrial Disputes Act, the Companies Act, and the Sick Industrial Companies Act. Moreover, labor legislation has been introduced at both the central and state government levels, leading to considerable interstate variation in definitions and coverage. In contrast, the “unorganized” sector is largely market-driven and subject to little regulation or protection.

32. The 1998 Global Competitiveness Report ranked India’s labor market flexibility 45th out of 53 countries. Surveys of industry carried out by the World Bank and the Confederation of Indian Industry (CII)19 identified labor regulations as the second biggest obstacle to business operations and growth.

33. Several studies20 have recommended that reforms focus on harmonizing state labor laws while extending them to encompass the unorganized sector. At the same time, government intervention should be reduced and labor market flexibility improved through easing restrictions on lay-offs, retrenchements and firm closures.

Legal framework

34. Industrial and corporate restructuring, contract enforcement, and debt recovery frequently have been impeded by the enormous backlog of cases and excessively complex legislative and administrative procedures. In particular, the Sick Industrial Companies Act (SICA) operates as an important disincentive to early restructuring by providing protection from creditors only after a company’s net worth has been completely eroded. Once a medium size or large company is declared “sick,” it no longer has the power to restructure on its own, as SICA requires that restructuring of such units be handled by the Board of Industrial and Financial Reconstruction (BIFR). Procedures employed by the BIFR encourage long delays, undermine governance of sick units, and adversely affect creditors (including banks), since they require consensus by all concerned parties at every stage of the restructuring process.21

35. Weaknesses in the legal framework, particularly those dealing with debt recovery, have been blamed for a substantial portion of the high non-performing assets of the banking system. In recognition of this, debt recovery tribunals (DRTs) were formed. New legislation has been passed recently strengthening the powers of DRTs over debt recovery cases in the banking sector. However, more fundamental reforms are needed to simplify and strengthen the entire legal framework and improve efficiency in all sectors.22

Public Sector Undertakings (PSUs)

36. There are about 240 central public enterprises in India, operating in a wide range of industries and services, and accounting for about 7 percent of employment in the organized sector. Given their quasi-governmental nature, many PSUs carry out activities which would not be justifiable on purely commercial grounds. This has reduced incentives for profit maximization and efficiency and, as a result, nearly half of all PSUs made losses in 1997/98.23

37. The resulting drain on the central government’s budget has highlighted the need for a strong divestment program, which would improve PSU governance and efficiency, as well as the fiscal position of the public sector. However, progress in divesting PSUs has been slow. The government announced a new divestment policy in March 1999, under which its stake in non-strategic PSUs could be divested up to 100 percent,24 and a new Department of Disinvestment was constituted in December to administer the divestment process.

D. Concluding Observations

38. There is broad agreement in India that further reforms are needed—the experience of the early 1990s has demonstrated the potential benefits of reform, and consistent views on many of the key issues emerged from the major parties during the October 1999 election. In particular, faster growth would require durable fiscal consolidation to raise national saving and crowd-in private investment spending;25 further liberalization of foreign trade and investment flows; additional reforms to labor markets and the legal framework; and further liberalization of the agricultural, industrial, infrastructure and financial sectors to promote greater efficiency and export competitiveness. These reforms need to include removal of domestic pricing distortions, improvements to bankruptcy procedures, and an easing of restrictions on firm and farm size and regulations that make it difficult to shed labor (and therefore impede job creation). Fiscal priorities also need to be redirected toward investment in human and physical capital.

39. Encouragingly, the new government has taken a number of initiatives that suggest a strengthened commitment to structural reform, including liberalization of the insurance sector, automatic clearance for foreign direct investment in many sectors, and a landmark agreement on state sales tax rationalization. At the same time, however, a clearly-defined agenda for reform has yet to be established. Hence, critical and difficult challenges remain to be addressed.

1

Prepared by Daniel Kanda and Patricia Reynolds. This paper has drawn upon information from a range of sources, including the Ministry of Finance Economic Survey, various issues; Reserve Bank of India, Annual Report, various issues; Rajiv Gandhi Institute for Contemporary Studies, Agenda for Change, March 1998; World Bank, India: Policies to Reduce Poverty and Accelerate Sustainable Development, Report No. 19471 -IN, January 2000; and A.V. Desai, “The Economics and Politics of Transition to an Open Market Economy,” OECD Technical Paper No. 155, October 1999.

2

Securities held in dematerialized (demat) form are those that are traded electronically, and do not require exchange of paper scrips during settlement.

3

For a discussion of trade policy developments, see Chapter VII.

4

Companies implementing infrastructure projects via subsidiary joint ventures are permitted to tap ECB up to $200 million (the previous limit was $50 million), and ECB exposure limits on infrastructure projects have been increased to 50 percent from 35 percent (the limit can also exceed 50 percent in special cases). Export units are now allowed ECB exposure up to 60 percent of project cost. ECB clearance procedures were simplified, and 100 percent prepayment of borrowing through export earnings is now allowed.

5

For example, foreign ownership of equity is limited to 49 percent in telecommunications, 74 percent in bulk Pharmaceuticals, mining of diamonds and precious stones, and advertising, and 51 percent in hotels and tourism related industry. Also, foreign investment in small-scale industries is limited to 24 percent of capital.

6

Mega power projects are defined as thermal plants that will generate at least 1,000 mw annually, or hydro plants that will generate at least 500 mw annually.

7

In particular, switching capacity increased by 23 percent in 1998/99 alone. However, telephone density in India is 1.7 percent, compared to 11.4 percent in Thailand, 7.3 percent in China, and 2.9 percent in Indonesia (World Bank, India: Policies to Reduce Poverty).

8

Average turnaround time fell from 6.6 days in 1997/98 to 5.9 days in 1998/99, compared to about 8 hours turnaround in competitor ports.

9

See Chapter II; World Bank, India: Policies to Reduce Poverty; and Krishna, P. and D. Mitra, “Trade Liberalization, Market Discipline and Productivity Growth: New Evidence from India,” Journal of Development Economics, Vol. 56 (1998), pp. 447-62.

10

See, for example, World Bank. India: Macroeconomic Update 1998, and N. Bajpai and J.D. Sachs, Strengthening India’s Strategy for Economic Growth, Development Discussion Paper No. 641, Harvard Institute for International Development, 1998.

11

See, for example, N. Bajpai, T. Jian, and J.D. Sachs, Economic Reforms in China and India: Selected Issues in Industrial Policy, Development Discussion Paper No 580, Harvard Institute for International Development, 1999; World Bank, India: Policies to Reduce Poverty; and Kongsamut, P. and A. Vamvakidis, “Economic Growth”, in The Philippines: Toward Sustainable and Rapid Growth, IMF Occasional Paper 187 (Washington: International Monetary Fund, 2000).

12

See, for example, Chapter IV of the accompanying Selected Issues volume.

13

N. Bajpai, and J.D. Sachs, The Progress of Policy Reform and Variations in Performance at the Sub-National Level in India, Development Discussion Paper No. 730, Harvard Institute for International Development, 1999.

14

In particular, see V. Kelkar, “India’s Emerging Economic Challenges,” Economic and Political Weekly, August 1999.

15

While figures from the 1998/99 large-coverage National Sample Survey are not yet available, the unofficial small-sample surveys—which are conducted annually—indicate that the poverty rate did not decline appreciably between 1988/89 and 1998/99. See also S. Tendulkar, “Indian Economic Policy Reforms and Poverty: An Assessment,” in I.J. Ahluwalia and I.M.D. Little, eds., India’s Economic Reforms and Development: Essays for Manmohan Singh (Delhi: Oxford University Press, 1998).

16

Operations of the FCI and PDS are discussed in greater detail in Chapter IV of the Selected Issues (IMF Staff Country Report No. 96/132, January 1997).

17

An important example of the adverse effects of these regulatory problems is the recent decision by the U.S. company Cogentrix to pull out of a power project in Karnataka, after 10 years and $27 million in expenditures, due to clearance delays. Approval of power purchase agreements at the state level can require clearances by as many as 27 interministerial committees (Economist Intelligence Unit, India Country Report, First Quarter 2000).

18

Small scale industries are defined as firms with investment in plant and machinery not exceeding Rs 10 million. Production of over 800 manufactured items is reserved for SSIs, and they account for roughly 40 percent of manufacturing production in India. See Hussain Committee, Report of the Expert Committee on Small Enterprises, New Delhi, 1997.

19

See World Bank, India: Policies to Reduce Poverty.

20

See, in particular, Rajiv Gandhi Institute, Agenda for Change.

21

As of end-November 1999, less than one percent of companies referred to the BIFR had been revived.

22

See World Bank, India: Policies to Reduce Poverty.

23

World Bank, India: Policies to Reduce Poverty. The operations and profitability of PSUs are discussed in greater detail in Chapter V o IMF, India Selected Issues, (IMF Staff Country Report No. 96/132, January 1997.

24

PSUs in strategic sectors—defense, railways, and atomic energy—would not be divested.

25

See Chapter III of the accompanying Selected Issues volume.