India: Recent Economic Developments and Selected Issues

India rebounded strongly from its 1991 balance-of-payments crisis, aided by structural reforms and other policy adjustments. The government has sought to reinvigorate the process of structural and fiscal reform. The paper examines trends in interstate differences in rural poverty; reviews India's postal saving system and possible reform issues; describes and evaluates the current system of pensions and provident funds, and discusses reform options. The paper also briefly reviews the structure of and recent developments in the Indian foreign exchange market.

Abstract

India rebounded strongly from its 1991 balance-of-payments crisis, aided by structural reforms and other policy adjustments. The government has sought to reinvigorate the process of structural and fiscal reform. The paper examines trends in interstate differences in rural poverty; reviews India's postal saving system and possible reform issues; describes and evaluates the current system of pensions and provident funds, and discusses reform options. The paper also briefly reviews the structure of and recent developments in the Indian foreign exchange market.

V. Fiscal Developments1

A. Background

1. The deficit of the consolidated public sector deteriorated steadily during the second half of the 1990s, leading to increasing concerns regarding fiscal sustainability.2 The deficit reached a peak of 11.2 percent of GDP in 1999/2000, but appears to have narrowed in 2000/01 to 10.6 percent of GDP (Table V.1 and Chart V.1a). Notwithstanding this improvement, however, public sector debt is estimated to have continued to increase, to over 83 percent of GDP by end-March 2001 (Chart V. 1b).

Table V.1.

India: Consolidated Public Sector Operations, 1995/96-2001/02 1/

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

The consolidated public sector comprises the central government, state governments, central public enterprises (PSUs), and the accounts of the Oil Coordination Committee (OCC).

Staff projections, Utilizes revised estimates for central government, PSUs, and OCC. For state government figures, utilizes revised estimates for central transfers to slates and assumes all other budget targets are met. Ratios employ the staffs estimate of nominal GDP in 2000/01.

Ratios employ the authorities’ projection for nominal GDP in 2001/02.

Overall balance excluding interest payments.

Above-the-line items in central government accounts that cancel out in the consolidation (e.g., loans to stales and public enterprises).

Chart V.1.

India: Government Deficits and Debt, 1990/91 - 2001/02

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Source: Union budget documents. Reserve Bank of India, Public Enterprise Survey, and staff estimates.1/ Consolidated public sector comprises central and state governments, central public sector undertakings (PSUs), and the accounts of the Oil Coordinating Committee (OCC). Figures are staff estimates.2/ 2000/01 figures based on state government budget estimates.3/ External debt valued at current exchange rates.4/ External debt valued at historical exchange rates.

2. Several factors underly the deterioration in fiscal indicators since the mid-1990s. The central government tax ratio declined, led by deterioration in excise and customs collections, and owing primarily to rate cuts that were not accompanied by sufficient base-broadening measures (Chart V.2a). On the expenditure side, civil service salaries and pensions rose sharply beginning in 1997/98, following wage increases granted in line with recommendations of the Fifth Pay Commission.3 In addition, the interest burden increased at both the central and state government levels as the debt stock rose, the share of concessional external financing declined, and financial sector liberalization and the high debt stock put upward pressure on domestic interest rates (Chart V.2b).

Chart V.2.

India: Fiscal Trends - Central and State Governments, 1990/91 - 2001/02

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Sources: Union budget documents; Reserve Bank of India.1/ Includes central tax revenues transferred to state governments.2/ General government comprises central and state governments.3/ State government figures are revised estimates in 1999/00 and budget estimates in 2000/01.

3. The government has sought to address the fiscal situation by tabling draft fiscal responsibility legislation in Parliament. The legislation would eliminate the center’s revenue deficit—current expenditures less current revenues—and reduce its overall deficit to 2 percent of GDP by 2006 (Box V.1). The Eleventh Finance Commission (EFC), which submitted its final report in August 2000, also set the target of eliminating the revenue deficits of state governments by 2005 (Table V.2).

Table V.2.

India: Fiscal Targets

(percent of GDP)

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Sources; Report of the Eleventh Finance Commission, July 2000; The Fiscal Responsibility and Budget Management Bill, 2000; Union Budget documents.

Authorities’ definition—divestment receipts are included above the line.

Authorities’ definition—consolidated central and state governments (OCC excluded).

External debt valued at current exchange rates.

B. Central Government Fiscal Performance in 2000/01

4. The 2000/01 budget targeted a 5.6 percent of GDP deficit (using the staff’s definition), which was 0.2 percentage points higher than the outturn for 1999/2000.4 New tax measures were expected to yield 0.2 percent of GDP, while improved buoyancy, especially in the area of excise and customs collections, was expected to increase tax collections by a further 0.3 percent of GDP. However, roughly half the increase was budgeted as transfers to the states and union territories (UTs) under the interim recommendations of the Eleventh Finance Commission (EFC). Key tax measures included: the replacement of the MODVAT with the CENVAT at a single rate of 16 percent; the phasing out of the income tax exemption on export earnings; and the reduction in the peak tariff rate from 40 percent to 35 percent.

India: The Fiscal Responsibility and Budget Management Bill

The Fiscal Responsibility and Budget Management (FRBM) bill was tabled in Parliament in December 2000, and is expected to be brought to a vote by the Fall of 2001. It establishes targets for central government deficit and debt reduction over the medium term, as well as requirements for improved transparency. Its key features include:

  • The revenue deficit is to be reduced by at least ½ percent of GDP per year, and eliminated by 2006; thereafter, a surplus is to be built up and used to repay debt.

  • The overall deficit is to be reduced by at least ½ percent of GDP per year, and brought to 2 percent of GDP by 2006.

  • The deficit reduction targets may be relaxed in case of unforeseen demands owing to national security or natural calamities.

  • New central government guarantees are capped at ½ percent of GDP each year.

  • The central government is prohibited from borrowing directly from the RBI (except for ways and means advances) after 2004.

  • Total liabilities are to be reduced to 50 percent of GDP or lower by 2011.

  • Improvements are to be made to transparency and reporting, including submission to Parliament of annual statements on the fiscal strategy, specification of three-year rolling targets for prescribed fiscal indicators and underlying assumptions, and assessments of fiscal sustainability.

  • The Finance Minister will be required to report to Parliament quarterly on revenue and expenditure trends, to explain any deviation in fiscal performance from FRBM obligations, and to propose remedial measures. Expenditures are to be “proportionately curtailed” in the event of revenue shortfalls or expenditure overruns.

5. The budget also implied an increase in expenditures of about 0.3 percent of GDP. The increase largely reflected increased allocations for defense, which were to rise by 0.5 percent of GDP in response to the military action in the Kargill area. Food subsidies were targeted to fall by 0.1 percent of GDP, as a result of reforms that adjusted the price of food grains to above-poverty-line consumers to match economic costs, and prices to below-poverty-line consumers to 50 percent of economic costs. Similarly, outlays on fertilizer subsidies were lowered by 0.1 percent of GDP owing to a hike in fertilizer prices. Grants to states and UTs were increased by 0.3 percent of GDP in line with the EFC recommendations.

6. Revised estimates put the 2000/01 deficit at 5.3 percent of GDP—somewhat lower than the budget target of 5.6 percent of GDP—reflecting higher-than-budgeted nontax revenue collections, and shortfalls on capital expenditures (Table V.3 and Chart V.3a).5 Unaudited actual figures released at end-May indicate the deficit was slightly higher—5.4 percent of GDP—with tax revenues falling about 0.7 percent of GDP short of the revised estimates, and only partially offset by additional year-end expenditure cuts. The discussion that follows nonetheless focuses on the revised estimates, which remain the only comprehensive official data on the 2000/01 outturn.6

Chart V.3.

India: Central Government Budget Targets vs. Outturns 1991/92-2001/02

A05fig03
Sources: Union budget documents.1/ Divestment receipts excluded from revenues; small savings onlending excluded from expenditures and net lending.2/ Excluding small savings onlending.3/ Includes 91-day T-bills.
Table V.3.

India: Central Government Operations, 1995/96-2001/02

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

Ratios utilize the staff’s estimate of nominal GDP in 2000/01.

Ratios utilize the authorities’ projections for nominal GDP in 2001/01.

Excludes onlending to the states from Small Savings collections in all years. (This represents a change in accounting treatment relative to the last consultation cycle, see footnote 6/ below.)

Overall balance excluding interest payments.

Total receipts (excluding divestment proceeds) less non-capital expenditures.

Authorities’ definition includes divestment receipts in revenues, rather than in domestic financing; onlending to states from the Small Savings collections is included in capital expenditure and net lending through 1998/99, and excluded thereafter.

External debt measured at historical exchange rates.

7. On the revenue side, shortfalls in gross tax revenue were estimated at 0.1 percent of GDP (Chart V.3b). While the success of new measures to widen the tax base led to higher-than-budgeted noncorporate income tax collections, all other collections fell short of target. Corporate tax revenues were adversely impacted by the economic slowdown and accelerated write-off of VRS expenditures by public sector banks. Excise and customs revenues were reduced by post-budget cuts in rates applying to petroleum products, and customs collections were also depressed by sluggish non-oil imports. The Gujarat earthquake was expected to have reduced tax collections in all categories. However, the tax shortfalls projected by the revised estimates were more than offset by strong nontax collections—in particular, large interest and dividend receipts from PSUs, and higher-than-budgeted remittance of profits from the RBI owing to interest earnings from the increase in foreign exchange reserves during the latter part of the fiscal year (see Chapter III).

8. Expenditures on current account items were estimated to exceed budget targets by 0.3 percent of GDP, led by overruns on food subsidies owing to post-budget hikes in support prices and the cost of maintaining large buffer stocks of foodgrain (Chart V.3c).7 Fertilizer subsidies were also expected to exceed the budget target, owing to higher world prices of naphtha. Higher-than-budgeted grants reflected central assistance to financially-troubled public sector undertakings (PSUs) for payment of salaries and voluntary separation schemes. These overruns were estimated to be more than offset by compression of capital expenditures, including on the central plan and for military capital expenditures—the latter due to procurement delays (Chart V.3d).8

9. The bulk of financing needs in 2000/01 were met through market borrowing. Net issuance of government bonds was estimated at Rs 779.5 billion (3.6 percent of GDP), of which about Rs 119 billion was accounted for by the RBI (Chart V.3e). Divestment receipts were estimated to fall Rs 75 billion (0.4 percent of GDP) short of target (Chart V.3f). Other important sources of financing included borrowing against deposits to the National Small Savings Fund, provident fund collections, and special deposit schemes (0.4 percent of GDP each).9

10. Total liabilities of the central government were estimated to have reached Rs 11.6 trillion (53.9 percent of GDP) by March 31, 2001, of which only Rs 584.3 billion (2.7 percent of GDP) was external debt—although the latter is reported at historical exchange rates. Almost three-quarters of domestic debt was in the form of government securities. While estimates of central government guarantees are not yet available for 2001, the amount outstanding at end-March 2000 was Rs 839.5 billion (4.3 percent of GDP).

C. Central Government Budget for 2001/02

11. Under the staff’s definition of the deficit (see footnote 4), the 2001/02 budget targeted little consolidation relative to the revised estimates for 2000/01, with cuts in current expenditures (relative to GDP) offset by higher capital spending, lower nontax revenue, and higher tax transfers to state governments (Table V.3 and Chart V.3a). However, on the authorities’ definition, the deficit target of 4.7 percent of GDP would imply 0.4 percent of GDP in consolidation, owing to an equivalent increase in divestment proceeds.

12. Gross tax revenues were expected to hold steady relative to GDP, notwithstanding the introduction of significant new measures (Chart V.3b and Box V.2). Although the budget removed special surcharges on both corporate and higher-income noncorporate taxpayers, direct tax revenues were budgeted to remain constant relative to GDP owing to tax buoyancy and increased voluntary compliance. Excise revenues were budgeted to increase slightly relative to GDP, owing to rate rationalization, hikes in duties on diesel and gasoline, and a new special surcharge on selected tobacco products. Customs revenues were budgeted to decline by 0.1 percent of GDP, with revenue losses resulting from tariff rate cuts partially offset by faster import growth and increased buoyancy. Service tax revenues were budgeted to rise by Rs 36 billion—a 64 percent increase over revenues anticipated in 2000/01—owing to the addition of new services under the tax net. However, revenues from the service tax would still be quite small, at just less than 0.2 percent of GDP. Nontax revenues were budgeted to decline slightly relative to GDP, with lower profits from the RBI expected to be partially compensated by increased license fee collections, especially from the newly corporatized telecommunications company BSNL.

India: FY 2001/02 Revenue Measures

The key revenue measures announced in the 2001/02 budget included:

  • Further rationalization of the excise duty structure toward a manufacturing-level VAT (CENVAT) with a 16 percent central rate and a 16 percent special excise duty on selected items. A modest start was made toward a longer-term commitment to gradually eliminate individual excise exemptions, although a new exemption was also introduced.

  • Increased excise duties on diesel and gasoline.

  • Special surcharge on cigarettes and tobacco products for funding the National Calamity Contingency Fund.

  • Inclusion of additional service sectors under the service tax net.

  • Elimination of the 10 percent customs surcharge, which would lower the peak tariff rate to 35 percent.

  • Commitment to reduce the peak tariff rate further to 20 percent within three years.

  • Sharp hikes in customs duties on many items subject to removal of quantitative import restrictions in April 2001, including second-hand cars, tea, coffee, and edible oils.

  • Reduced customs duties applicable to gold and favored industries, such as IT, film, and jewelry.

  • Elimination of the 10 percent surcharge on corporate and high-income noncorporate incomes; however, the new 2 percent surcharge for financing the National Calamity Contingency Fund is retained.

  • Measures to widen the income tax net and improve tax administration.

  • Withdrawal of some income tax exemptions; however, new tax holidays were also introduced, including for investments in infrastructure and telecommunications.

When the budget was presented to Parliament for debate on April 25, the Finance Minister introduced several additional measures:

  • Increases in standard deductions for income tax.

  • A more liberal amortization schedule for expenditures by public sector banks on voluntary retirement schemes.

  • An increase in the tax deduction limit on interest earned from government securities.

  • Extension of small-scale excise exemptions to the garment sector.

  • Sharp hikes in the basic customs duty on new imported cars and two-wheelers, and cuts in customs duties on some telecom and IT-related items, ships, clothing accessories, raincoats, and plastic footware.

  • A slowing of the planned phase-out of the tax exemption on export earnings—while 100 percent of profits will still be subject to taxation by 2004/05, in 2001/02 only 30 percent of profits will be taxable, compared with the 40 percent specified in the last budget speech.

The Finance Minister indicated that, although the increase in standard income tax deductions would reduce budgeted revenues by Rs 10 billion (0.04 percent of GDP), the changes in excise and customs taxes would be revenue neutral.

13. Total expenditures were budgeted to decline by 0.3 percent of GDP relative to the 2000/01 revised estimates, with a 0.3 percent of GDP increase in plan and nonplan capital expenditures more than offset by a 0.6 percent of GDP decrease in current expenditures (Charts V.3c and V.3d). Savings on current expenditures were expected from fertilizer subsidies and wages and salaries, owing to implementation of reform measures recommended by the Expenditure Reforms Commission (Box V.3). Interest payments were also budgeted to decline relative to GDP, given cuts in provident fund rates announced in the budget and expectations of a broader softening of interest rates during the year. The increase in capital expenditures was projected to be led by higher military and plan spending, although the budget indicated that 0.2 percent of GDP in plan capital allocations would not actually be spent unless a corresponding amount of privatization receipts (in excess of Rs 70 billion) were achieved.10 Earthquake relief for Gujarat was expected to be financed by the tax surcharge for the National Calamity Contingency Fund (targeted to yield Rs 10 billion), and would also take the form of accelerated allocation of central resources for plan spending.11

India: Recommendations of the Expenditure Reforms Commission

The Expenditure Reforms Commission (ERC) was constituted following the Budget Speech in February, 2000, to make recommendations on central government expenditure reforms—in particular with regard to streamlining and downsizing the structure of government, and improving the targeting and cost of subsidies. The ERC has so far submitted five reports, which included recommendations to:

  • ban the creation of new civil service posts for two years;

  • cut 10 percent of staff by 2004/05, facilitated by a new voluntary retirement scheme and restructuring of eight departments and ministries;

  • implement a ration card system for food subsidies at the state government level;

  • allow greater autonomy of state governments in providing food subsidies, including through more market-oriented procurement procedures;

  • take steps to reduce foodgrain buffer stocks in excess of 10 million tons, including by moderating increases in support prices; and

  • decontrol the fertilizer sector and increase prices toward import parity, gradually over a period of 10 years.

14. The 2001/02 budget was again expected to be financed primarily by market borrowing, although this was budgeted to decline by 0.5 percent of GDP relative to the 2000/01 revised estimates (Chart V.3e). Divestment proceeds were budgeted to increase by 0.4 percent of GDP (Chart V.3f), and other sources of finance were expected to be relatively stable relative to GDP. Total liabilities were budgeted to rise by Rs 1.5 trillion, to Rs 13.2 trillion (53.2 percent of GDP), by March 31, 2002. External liabilities (measured at historical exchange rates) were projected to remain relatively low, at Rs 595.9 billion (2.5 percent of GDP).

15. The 2001/02 budget also introduced a number of structural measures, including with regard to reforming food and fertilizer subsidies, labor markets, small-scale industries, the power sector, social security, financial sectors, and capital account transactions. These measures are discussed in greater detail in Chapter VI of this volume.

D. State Government Finances

16. During 1999/2000, state government finances continued to deteriorate, with the combined deficit of the states and union territories rising to 4.8 percent of GDP, compared to 4.3 percent of GDP in 1998/99 and 2.9 percent of GDP in 1997/98 (Table V.4).12 This outturn was also significantly higher than the budget estimate of 3.9 percent of GDP (Chart V.4), The slippage reflected 0.7 percent of GDP in expenditure overruns, primarily on teachers’ salaries, pensions, interest payments on market loans, additional expenditures on natural calamities, and transfers to local governments. In addition, states’ tax collections fell short of target by 0.2 percent of GDP, due in part to the harmonization and rationalization of sales tax rates undertaken in preparation for a nationwide VAT in 2002. Grants from the central government for nonplan spending and to support states’ expenditures on the central plan were also marginally lower-than-budget targets.

Table V.4.

India: State Government Operations, 1995/96-2001/02

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

Ratios utilize the staff’s estimate of nominal GDP in 2000/01.

Ratios utilize the authorities’ projections for nominal GDP in 2001/02.

According to central government accounts.

Includes other expenditure, and discrepancies between central government and state sources on share of central government tax revenues and grants from central government.

Includes other financing, and discrepancy between central government and stale sources on loans from central government.

Overall balance excluding interest payments.

Total receipts (excluding divestment proceeds) less non-capital expenditures.

Explicit guarantees of 17 major states.

Chart V.4.

India: State Governments Budget Targets vs. Outturns, 1991/92-2000/01

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Sources: Union budget documents; Reserve Bank of India.

17. The higher-than-budgeted deficit in 1999/2000 was financed by additional loans from the central government, higher market borrowing, and increased borrowing against small savings schemes and provident funds. Increases in the first two of these sources reflected funding under the memoranda of understanding (MOUs) signed by thirteen states with the central government during the year, whereby short-term loans and relaxation of market borrowing constraints were granted in exchange for commitments to reform.13 Although the overall reform parameters were agreed jointly, policy design was left primarily to individual states, and included commitments to enhanced user charges and fees, improved targeting of subsidies, divestment, and reforms to tax systems, civil services, and power sectors. While details of these MOUs and the states’ subsequent performance were not made public, the fact that the state deficit target was missed by such a wide mark reflected difficulties in implementing these reforms.

18. 2000/01 budgets targeted a 4.3 percent of GDP consolidated deficit for the states, with the implied fiscal consolidation driven by improvements in state tax collections, and increased tax and grant transfers from the central government, as recommended by the Eleventh Finance Commission (Box V.4). Expenditures were budgeted to increase by 0.5 percent of GDP, with a shift in composition toward nondevelopmental components reflecting strong growth in interest payments and expenditures on administrative services. These two components combined were budgeted to account for 24 percent of total state expenditures in 2000/01, compared to only 17 percent a decade earlier.

19. Although consolidated data on the 2000/01 outturn and 2001/02 budgets will not be released until the Fall of 2001, information on central transfers published in the central government’s 2001/02 budget indicates that the states’ share of central tax revenues may be at least 0.1 percent of GDP lower than targeted, owing to shortfalls in central collections. Another risk to the 2001/02 targets is developments in state power sectors (Box V.5).

20. The total state government liabilities outstanding was estimated to have reached Rs 41.9 billion (21.4 percent of GDP) at the end of March 2000, and was projected to rise to Rs 49.9 billion (22.9 percent of GDP) by end-March 2001. Almost 60 percent of these liabilities represent loans and advances from the central government. Although market borrowing has increased in recent years, it remains low at about 17 percent of total liabilities.

21. Outstanding guarantees extended by 17 major states were estimated at Rs 993.1 billion (5.1 percent of GDP) at end-March 2000—a sharp increase from Rs 830.1 billion (4.7 percent of GDP) at end-March 1999. In addition to these explicit guarantees—mostly related to public investments—states have acquired other contingent liabilities, including payment assurances and letters of comfort to banks and financial institutions. Contingent liabilities may also arise from pay-as-you-go or inadequately funded state government pension schemes, various state insurance and social security schemes, and recapitalization requirements of state financial institutions and public enterprises—including guarantees extended by state enterprises and arrears built up by state public utilities. A recent RBI report has recommended enhanced disclosure norms covering many of these potential liabilities, and efforts are underway in several states to establish sinking funds and ceilings on guarantees.14

India: Recommendations of the Eleventh Finance Commission and the Fiscal Reform Facility

The Eleventh Finance Commission (EFC) was constituted by the President in 1998 to give recommendations on specified aspects of center-state fiscal relations during 2000-2005. The EFC recommendations were detailed in two main reports, submitted in July and August 2000, and included:

  • An increase in the share of central government tax revenues to be transferred to the state governments, subject to a new cap on total tax and grant transfers at 37.5 percent of gross central receipts.

  • A reallocation of tax and grant transfers toward poorer and more fiscally responsible states.

  • Financial assistance for natural disasters to be provided through a scheme of state Calamity Relief Funds, with central contributions financed by temporary levy of a special surcharge on central taxes.

  • Creation of an Incentive Fund from which performance-based grants could be made.

  • Recommendations for specific expenditure and revenue reforms, aimed at reducing the fiscal deficits and debt levels of both the central and state governments. In particular, the EFC recommended annual limits on increases in interest payments and wages and salaries, and that explicit subsidies be reduced by 50 percent over the next five years, and eliminated by 2009/10.

The first four of these recommendations have already been accepted by the central government and were incorporated into the 2001/02 budget, including the establishment of a Fiscal Reform Facility, which encompasses the formation of state-level Medium Term Fiscal Reform Programs (MTFRPs), a Monitoring Committee, and an Incentive Fund, and operates as follows:

  • Each state may draw up its own MTFRP in the context of the broad parameters suggested by the EFC.

  • This MTFRP will be subject to the approval of a Monitoring Committee, which includes representatives of the Ministry of Finance, Planning Commission, Reserve Bank of India, and the state government.

  • The new Incentive Fund will have a corpus of Rs 53 billion in previously allocated non-plan grant funds and a new matching contribution by the central government, to be apportioned at the rate of Rs 21.2 billion (about 0.1 percent of GDP) per annum during 2000-05. In addition, other grants for specific purposes which remain unutilized due to non-observance of conditionalities attached to their release may also be credited to the Incentive Fund during 2004/05.

  • The Incentive Fund will be available to all states, with potential allocations determined on the basis of relative population.

  • A state will be eligible for this earmarked allocation in a given year if it achieved a minimum improvement of 5 percent in its revenue deficit (surplus) as a proportion of revenue receipts in the previous year. If a state is unable to obtain the full amount initially earmarked for it in any year, such amount will be retained in the Fund and will be available to the state in subsequent years. However, if a state is not able to draw the amount earmarked on the basis of performance during the first four years, the amount undisbursed to that state would be distributed to performing states during the fifth year on a pro-rata basis and in addition to the amounts to which they are initially entitled.

India: Power Sector Issues

The constitution stipulates that responsibility for electricity supply in India should be shared by the central and state governments. At the state government level, State Electricity Boards (SEBs) form the foundation of the power system, generating almost 70 percent of India’s electricity supply and providing most of the distribution to consumers.

India’s power sector faces severe capacity shortages, with poor reliability, frequent blackouts, and low per capita consumption relative to other countries in the region.

uA05fig01

Per Capita Electric Power Consumption in 1998

(in thousands of kilowatt hours per person)

Citation: IMF Staff Country Reports 2001, 181; 10.5089/9781451818550.002.A005

Source: World Sank World Development Indicators on energy.

SEBs are also highly unprofitable—commercial losses were estimated at 1.3 percent of GDP in 1999/2000. Underlying factors include uneconomic tariff rates, with high rates charged to industrial users in order to partially subsidize low (or zero) tariffs granted to agricultural users. In addition, transmission % distribution losses are enormous, owing largely to inefficiency and corruption—official estimates indicate that more than 25 percent of power is lost or stolen during transmission, although the World Bank suggests that there is significant underreporting and the actual figure could be much higher. These factors have grown more pressing in recent years, as evidenced by further deterioration in rates of return on fixed assets in service and increasing state government support for SEBs. Moreover, the outstanding dues of SEBs—primarily to central power utilities—is currently estimated at around Rs 260 billion (1.1 percent of GDP).

Financial Performance of the State Power Sector

(in percent of GDP)

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Source: Ministry of Finance, Economic Survey 2000-01.

In recent years, there have been many efforts to reform the power sector in India, including central government-and World Bank-supported programs negotiated on a state-by-state basis, and legislative reform at the central level. Several states—notably Orissa, Haryana, Andhra Pradesh, and Uttar Pradesh—have developed power reform programs supported by grants and loans from the World Bank, with particular emphasis on separating and privatizing the generation, transmission, and distribution activities of SEBs, and setting up autonomous regulatory authorities to establish and regulate tariffs. Similarly, the Ministry of Power has recently signed memoranda of understanding (MOUs) with several states—including Karnataka, Haryana, Uttar Pradesh, Gujarat, and Tamil Nadu—providing technical and financial support in exchange for commitments to power sector reform. At the national level, the draft Electricity Bill would enable unbundling of the power sector into generation, transmission, and distribution activities.

While progress has been made—14 states have already setup their own state electricity regulatory commissions, and the SEBs of several states have been unbundled and corporatized—reforms have proven costly to implement in short-run. Moreover, financial difficulties at some SEBs have come to a head in recent months. U.S. energy company Enron, which operates a $3 billion power project in the state of Maharashtra, has threatened to terminate its contract owing to non-payment of dues by the Maharashtra State Electricity Board (MSEB). The state government guarantee and central government counter-guarantee have been invoked, but not honored pending a decision on the MSEB’s counterclaim for a penalty payment from Enron for non-supply of power during specific time periods. In Orissa, U.S. company AES has shut down one of its generating units, also over non-payment of dues.

E. Performance of Public Sector Undertakings (PSUs)15

22. The PSU fiscal deficit in 2000/01 is expected to be only 1.4 percent of GDP—0.3 percent of GDP less than the budget target—owing to both higher-than-budgeted net internal resources and lower-than-budgeted plan expenditures (Chart V.5a). Net internal resources are estimated to have increased relative to the budget target, owing largely to the strong performance of oil PSUs during the year, which more than compensated for losses of engineering PSUs. The underspending on plan projects primarily reflected shortfalls in external and other sources of financing (Chart V.5b).

Chart V.5.

India: Fiscal Indicators - PSUs, 1990/91 - 2001/02

A05fig05
Source: Union budget documents.

23. The PSU deficit in 2001/02 is budgeted to rise to 1.6 percent of GDP, as plan expenditures increase to more typical levels, and as more PSUs offer Voluntary Retirement Schemes (VRSs) in order to shed surplus staff.

24. The government’s stated divestment policy is to: (i) bring government shareholding in nonstrategic PSUs to 26 percent or less through strategic sales, (ii) retain majority shareholding in strategic PSUs (defense, atomic energy, and railways), and (iii) protect the interests of workers. Over the last two years, three strategic sales had been completed, and a further 31 PSUs have been approved for divestment in 2001/02 and beyond. Three loss-making PSUs were closed during 2000/01, and ten more awaited closure following recent approval for winding up from the Board for Industrial and Financial Reconstruction (BIFR).

F. Oil Coordination Committee (OCC) Accounts

25. The OCC is responsible for coordinating the cross-subsidization of key petroleum products—diesel, kerosene, liquid petroleum gas (LPG), motor spirit, and aviation turbine fuel (ATF). Delays in hiking domestic prices in line with higher world prices during 2000/01 resulted in an OCC deficit of about Rs 60 billion (0.3 percent of GDP), and its cumulative debt stock (primarily arrears to state oil companies) rose to Rs 125 billion (0.6 percent of GDP; Chart V.6a).

Chart V.6.

India: OCC Accounts, 1990/91-2000/01

A05fig06
Sources: Ministry of Petroleum; IMF IFS; staff estimates.1/ Calculated as average ex-storage price less average adjusted import parity price, divided by average adjusted import parity price. Positive number indicates positive subsidy.

26. In his 2001/02 budget speech, the Finance Minister affirmed that by April 1, 2002 the pricing of petroleum products would be fully moved to import parity, the OCC would be wound up, and the two remaining subsidies on kerosene and liquid petroleum gas (LPG) would be moved onto the central government’s budget (Chart V.6b). One important issue that may have to be resolved is how the OCC’s outstanding debt will be repaid, in the event that oil prices remain high or if domestic prices are lowered, and the OCC is unable to accrue a sufficient surplus during its last year.

1

Prepared by Patricia Reynolds and Poonam Gupta.

2

The consolidated public sector comprises the central government, state governments and union territories, central public enterprises (also known as public sector undertakings or PSUs), and the accounts of the Oil Coordination Committee (OCC). Fiscal sustainability risks are discussed in greater detail in Chapter 5 of India at the Crossroads, T. Callen, P. Reynolds, and C. Towe eds., (Washington DC: IMF), 2001; and also in the Annual Report 1997/98 of the Reserve Bank of India.

3

Pay scales for central government civil servants are determined on the basis of recommendations of the Pay Commission, a constitutionally-mandated body that is established about every ten years. Recommendations of the Fifth Pay Commission, which submitted its report in January 1997, included a three-fold increase in basic pay scales, downsizing of 30 percent in each government department and agency over a 10-year period, and an overhaul of the organizational structure of the central government. Although the wage awards were incorporated beginning with the 1997/98 budget—resulting in a permanent increase in central government wages and salaries of roughly 0.5 percent of GDP—the recommended reorganization and staffing cuts were not implemented. While state governments are not obligated to adopt the Pay Commission recommendations, in practice they have tended to follow central government pay revisions with a lag of about a year.

4

The staff’s definition of the deficit treats divestment proceeds as below-the-line financing, while the authorities’ definition includes divestment proceeds in revenues. Under the authorities’ definition of the deficit, the overall deficit was targeted at 5.1 percent of GDP, compared with 5.4 percent of GDP in 1999/2000.

5

Ratios for 2000/01 employ the staff’s estimate of nominal GDP. Under the authorities’ definition of the deficit (see footnote 4, above), and using the official nominal GDP estimate for 2000/01, the overall deficit is estimated to have exactly met the 5.1 percent of GDP budget target.

6

Revised estimates for 2000/01 were released at the time of the 2001/02 budget, at end-February 2001. Unaudited actuals for 2000/01 were released by the Controller General of Accounts on May 31, 2001, although these figures contain insufficient detail to permit reconciliation with either the budget or revised estimate figures (e.g., breakdowns of tax revenues by type of tax or of expenditures beyond categorization into current and capital items are not provided). Actual and comprehensive figures for 2000/01 will be released at the time of the 2002/03 budget.

7

As part of its strategy to ensure food security, the government targets a foodgrain buffer stock of 15 million tons. By the end of 2000/01, the actual stock had reached about 42 million tons, owing to the high procurement prices offered to farmers.

8

Plan expenditures are jointly determined by the Planning Commission, Ministry of Finance, central government spending ministries, and—where relevant—state governments. These consist mainly of outlays for development projects, and have both capital and current expenditure components.

9

Special deposit schemes include special deposits with the government by nongovernment provident funds, superannuation and gratuity funds, and surplus funds of the Life Insurance Corporation and the Employees’ State Insurance Corporation.

10

Specifically, Rs 120 billion in divestment receipts were targeted for 2001/02. The first Rs 70 billion earned was earmarked for restructuring assistance to PSUs, worker safety nets, and debt reduction. The next Rs 50 billion—if realized—would be used for additional budgetary support for plan expenditures. If all or part of this Rs 50 billion is not earned, the associated sending would not go forward.

11

External assistance was also anticipated, in particular from the World Bank and Asian Development Bank, although this was not incorporated into the center’s budget figures.

12

Includes 25 states and the National Capital Territory of Delhi that existed until October 2000; in November 2000, three new states—Chattisgarh, Jharkhand, and Uttaranchal—were created by bifurcating the states of Madhya Pradesh, Bihar, and Uttar Pradesh, respectively.

13

During the early months of 1999/2000, the central government accelerated transfer of budgeted central tax and plan grants. Then, in December 1999, Rs 25.7 billion in transfers to thirteen states were converted to three-year loans under a newly-created Extended Ways and Means Advances Facility. In addition, seven of these states were allowed to borrow Rs 19.2 billion in excess of borrowing limits set by the central government at the beginning of 1999/2000. The thirteen states were Andhra Pradesh, Assam, Himachal Pradesh, Jammu % Kashmir, Madhya Pradesh, Manipur, Mizoram, Nagaland, Orissa, Punjab, Rajasthan, Sikkim, and Uttar Pradesh.

14

Reserve Bank of India, Department of Economic Analysis and Policy, “Report of the Core Group on Voluntary Disclosure Norms for State Governments,” January 12, 2001.

15

There were 240 PSUs as of end-March 1999, according to the most recent Public Enterprises Survey published by the Department of Public Enterprises. In contrast, the central government budget reports financial information for somewhat less than 200 PSUs. The difference in coverage results from the budgets’ inclusion of the Indian Railways (which is formally a commercial department) and some subsidiaries of PSUs that receive direct budgetary support, and its exclusion of PSUs not receiving budgetary support.

India: Recent Economic Developments and Selected Issues
Author: International Monetary Fund