india...3,287,263 sq km (including indian-administered kashmir); 57% is agricultural land and 16%...

Country Profile 2004

IndiaThis Country Profile is a reference work, analysing thecountry’s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit’s Country Reports analyse current trends and provide atwo-year forecast.

The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where itslatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7830 1023E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 0248E-mail: [email protected]

Hong KongThe Economist Intelligence Unit60/F, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-line databasesand as direct feeds to corporate intranets. For further information, please contact your nearest EconomistIntelligence Unit office

Copyright© 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author’s and the publisher’s ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 1473-9127

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

India 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

3 Regional overview3 Membership of organisations

4 Basic data

5 Politics5 Political background6 Recent political developments9 Constitution, institutions and administration11 Political forces15 International relations and defence

20 Resources and infrastructure20 Population22 Education22 Health23 Natural resources and the environment23 Transport, communications and the Internet26 Energy provision

28 The economy28 Economic structure29 Economic policy31 Economic performance33 Regional trends

34 Economic sectors34 Agriculture35 Mining and semi-processing36 Manufacturing38 Construction38 Financial services39 Other services

40 The external sector40 Trade in goods41 Invisibles and the current account41 Capital flows and foreign debt42 Foreign reserves and the exchange rate

44 Appendices44 Sources of information45 Reference tables45 Population statistics46 Transport statistics46 Energy statistics47 Government finances47 Gross domestic product48 Gross domestic product by sector, at constant prices48 Gross domestic product by sector, at factor cost48 Money supply

2 India


49 Prices and wages49 Availability of selected consumption items50 Agricultural production50 Minerals production51 Industrial production51 Gross domestic savings51 Stockmarket indicators52 Exports53 Imports54 Main trading partners55 Balance of payments, IMF series56 Balance of payments, national series56 External debt57 Foreign-exchange reserves57 Exchange rates

India 3


Regional overview

Membership of organisations

The South Asian Association for Regional Co-operation (SAARC), whichcomprises India, Pakistan, Sri Lanka, Bangladesh, Nepal, the Maldives andBhutan, was established in 1985 at a meeting in Bangladesh. SAARC’s aimsinclude promoting welfare, accelerating economic growth, eradicating povertyand improving relations between member states.

Summit meetings are intended to be held annually and are complemented bytechnical committees, meetings of foreign ministers and a standing committeeof the foreign secretaries (civil servants) of each country. An under-resourcedsecretariat, based in Kathmandu, co-ordinates SAARC’s activities.

In the early years, agreements were made to establish a food security reserve(an agreement that has never been implemented), to establish a meteorologicalcentre, to combat terrorism and to create various cultural exchanges betweenmember states. Together with micro-level issues, SAARC has also proposed thecreation of a South Asian Free-Trade Area (SAFTA). SAFTA is seen as areplacement for the South Asian Preferential Trading Arrangement, which wasagreed in 1995 and which had by 1996 identified more than 2,000 products aseligible for preferential treatment. At the 12th SAARC summit in January 2004,SAARC member countries signed an accord that schedules the creation ofSAFTA for January 1st 2006. A customs union is to be created by 2015 and aneconomic union by 2020. Political factors weigh against this timetable, however.

The 2004 summit, held in the Pakistani capital, Islamabad, was dominated bylandmark talks between the leaders of India and Pakistan over the disputedborder territory of Kashmir. In spite of a recent gradual improvement, tensionsbetween India and Pakistan continue to hamper SAARC’s progress on widerissues, although the association has been relatively effective in providing a forumfor meetings of non-governmental organisations and professional groupings.There is pressure on SAARC from the smaller countries for the association to dealwith bilateral issues; much of this pressure stems from the problematicrelationship between India and Pakistan. There is a consensus that this issueprevents multilateral progress, thus leading to a growing emphasis on bilateraltrading relationships. India has signed bilateral free-trade agreements, effectivelybypassing SAARC, with Nepal (1996) and Sri Lanka (2000). Bhutan and India alsohave a free-trade agreement. Much of SAARC’s work is also likely to besuperseded by World Trade Organisation (WTO) regulations.

SAARC’s ability to reposition itself as the preferred conduit for bilateralrelationships within South Asia is likely to determine the success or otherwiseof the organisation. SAARC’s success in arranging greater civil society linkageswithin South Asia contrasts strongly with its failure to boost government-levelties. Improved relations between India and Pakistan, the largest members ofSAARC, remain a prerequisite for closer economic co-operation in the region;the potential gains from increased trade are immense. At present, intra-regionaltrade accounts for only about 5% of total trade by SAARC nations. The nextSAARC summit will be held in January 2005 in Bangladesh.

The South Asian Associationfor Regional Co-operation

4 India


Basic data

3,287,263 sq km (including Indian-administered Kashmir); 57% is agriculturalland and 16% forest area

1.05bn (mid-2003)

Population in millions, 2001 census

Mumbai (Bombay) 16.4Kolkata (Calcutta) 13.2Delhi 12.8Chennai (Madras) 6.4Bangalore 5.7Hyderabad 5.5

Varied; humid subtropical in Ganges basin, semi-arid in north-west, tropicalhumid in north-east and most of peninsula, tundra in Himalayas; all areasreceive rain from the south-west monsoon in June-September; the south is alsoserved by the north-east monsoon in January-March

Hottest month, May, 26-41°C (average daily minimum and maximum); coldestmonth, January, 7-21°C; driest month, November, 4 mm average rainfall; wettestmonth, July, 180 mm average rainfall

Hindi is the national language and primary tongue of 30% of the population.There are 14 other official languages: Bengali, Telugu, Marathi, Tamil, Urdu,Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi andSanskrit. English is widespread in business circles and as a second language

Hindu (82% in 1991 census); Muslim (12.1%); Christian (2.3%); Sikh (1.9%);Buddhist (0.8%); Jain (0.4%)

Metric system. Numbers are often written in lakhs (100,000) and crores (10m)

Rupee (Rs)=100 paise. Average exchange rate in 2003: Rs46.58:US$1. Exchangerate on May 17th 2004: Rs45.50:US$1

April 1st-March 31st

5 hours 30 minutes ahead of GMT

January 26th; August 15th; October 2nd; also major Hindu, Muslim, Christianand other religious holidays

Land area

Population

Main towns

Climate

Weather in New Delhi(altitude 218 metres)

Languages

Measures

Currency

Fiscal year

Time

Public holidays

Religion

India 5


Politics

India is a parliamentary federal democracy with an indirectly elected president,Abdul Kalam. The prime minister, Manmohan Singh, leads the UnitedProgressive Alliance (UPA), a coalition dominated by the Congress party, whichfell short of a majority in the May 2004 general election. The minority UPAgovernment is currently being supported by the Left Front, a group of left-wingparties dominated by the Communist Party of India (Marxist).

Political background

The urban Indus civilisation flourished in west and north-west India around5,000 years ago. India was a major exporter of textiles and spices and tradedwith Arabia, Egypt, Rome, south-east Asia and China. Migrants and invadersfrom central and western Asia have entered India many times since, if notbefore, Alexander the Great did so in the 4th century BC. As a result, India, theworld’s second-largest country by population and sixth-largest in terms of area,exhibits a great diversity of people, religions and culture.

In 1526 a central Asian warrior, Babur, invaded India and established theMughal empire. After Vasco Da Gama discovered the sea route to India via theCape of Good Hope in 1498, a series of European chartered companies—Portuguese, British, Dutch, French and Danish—set up trading posts andcolonies in India. The British East India Company eventually dominated, and in1757 the Mughal emperor granted it the right to administer Bengal. By then theMughal dynasty was in decline and the Marathas from the west had becomethe dominant power. After the East India Company defeated the Marathas in1818, it had no military rival. After a major Indian revolt in 1857, the East IndiaCompany deposed the last Mughal emperor, Bahadur Shah. Within months, itscharter to trade with India was abrogated by the British government, whichannexed the Company’s Indian territories.

British rule in India ended in 1947 after a sustained campaign for independence,led by the Indian National Congress (Congress). British India was partitioned,amid great bloodshed, to create Muslim-majority Pakistan and the secular stateof India. India’s first prime minister was the Congress leader, Jawaharlal Nehru.Under his government, India established a complex system of socialisteconomic controls that remained in place until the 1980s. Congress and itssuccessor—Congress (Indira), or Congress (I), named after Nehru’s daughter,Indira Gandhi, who became prime minister in 1966—dominated politics inIndia until the 1990s. Mrs Gandhi’s administration continued to implement aninward-looking economic policy but adopted increasingly authoritarianmeasures. In 1975 she declared a state of emergency that lasted for two years.Civil rights were suspended, the press was controlled, many of her critics wereimprisoned and her son, Sanjay, began an unpopular mass-sterilisationprogramme to stem population growth. In the 1977 general election, votersrejected Mrs Gandhi. Her party was defeated and she lost her seat.

Early history

Independence and dominanceof Congress

6 India


Having returned as prime minister in 1980, Mrs Gandhi tacitly supported aviolent movement against the Akali Dal, the ruling Sikh party in Punjab.However, the violence became uncontrollable and she finally ordered thearmy to storm the Golden Temple, the prime Sikh shrine in Amritsar, and killthe terrorists’ leader. In retaliation, in 1984 she was assassinated by her Sikhbodyguards, and her elder son, Rajiv Gandhi, succeeded her as prime minister.He won an unprecedented majority in an election later that year, and hisadministration began cautious steps towards economic liberalisation. How-ever, Congress lost its majority in the 1989 general election amid a series ofcorruption scandals, and Mr Gandhi stepped down. He was assassinated by aSri Lankan Tamil extremist during the 1991 election campaign.

Following the 1991 general election, Congress formed a minority governmentunder Narasimha Rao that initiated a series of economic reforms. The May 1996elections returned another hung parliament. The Hindu-nationalist BharatiyaJanata Party (BJP) formed a government that lasted just 13 days; this wasfollowed by a left-leaning United Front (UF) coalition, which was supportedfrom the backbenches by Congress. The UF government continued toimplement the economic reforms begun under Congress, but when Congresswithdrew its support in November 1997 the government fell. A general electionheld in February-March 1998 produced yet another hung parliament. The BJPfinally formed a governing coalition, the National Democratic Alliance (NDA),with 22 other parties under the leadership of Atal Behari Vajpayee.

Recent political developments

In April 1999 the NDA government collapsed after narrowly losing a vote ofconfidence. It remained as a caretaker administration for six months beforere-establishing itself in power following a general election held in September-October 1999. Although it cobbled together a more secure majority, with 302 ofthe 543 parliamentary seats, the alliance of more than 20 parties included anumber of unreliable partners. These smaller regional and caste-based partiesexercised disproportionate influence in government, often holding theadministration to ransom in order to gain concessions in their home states.

The BJP government gradually jettisoned its hardline Hindu-nationalist rhetoricin a bid to appeal to more mainstream voters as the 2004 general electionapproached. It presented itself both as a party that delivered economicprosperity and as a steward of a strong India with a presence on the globalstage. The BJP promoted its “India is shining” campaign, which aimed tocapitalise on a buoyant economy—partly the result of its economic reforms, butalso of good fortune. An excellent monsoon delivered a record agriculturaloutput in fiscal year 2003/04 (April-March), which lifted annual GDP growthabove the 8% mark. In contrast, the opposition Congress party presented itselfas the defender of India’s inclusive, secular heritage. It tried to appeal to votersacross castes and religions, as well as to the poor, who had not seen the fruitsof economic reform.

The age of coalition politics

The BJP leads a coalitiongovernment from 1998 to 2004

India 7


The May 2004 general election returned a Congress-led coalition, the UnitedProgressive Alliance (UPA), to power. The UPA fell short of a majority and isbeing supported in parliament by the Left Front communist parties, althoughthese parties have chosen not to join the government and are supporting it“from outside”. The minority government is being led by Manmohan Singh,who was sworn in as prime minister following the refusal of the Congressleader, Sonia Gandhi, to take up the post. Mrs Gandhi will be the Congressleader in parliament and will remain Congress party president. Mr Singh, whohas held many important positions in the economic and civil service hierarchyin India, is a respected economist, a pragmatist, and is highly regarded acrossthe political spectrum. He is widely credited with the successfulimplementation of wide-ranging economic reforms as finance minister in aCongress-led minority government in 1991 at a time of deep economic crisis.

The new cabinet consists of non-reformist Congress stalwarts, alliancemembers, and two pro-reformers in key positions, namely Mr Singh as primeminister and Panaliappan Chidambaram as finance minister. Forces within thecabinet will pull in both a pro-reform and an anti-reform direction. As underthe previous administration, governmental performance is likely to behampered by pervasive lobbying of the government by coalition partners forspending and concessions benefiting narrow interest-groups. Concerns that theBJP may regain power if the government falls are likely to deter coalitionpartners from withdrawing support. However, the minority government isinherently unstable, and may not last its entire five-year term.

Composition of the Lok Sabha, May 2004a

Party No. of seatsUnited Progressive Alliance (UPA) 217Congress 145Rashtriya Janata Dal 21Dravida Munnetra Kazahagam (DMK) 16Nationalist Congress Party (NCP) 9Pattali Makkal Katchi 6Telengana Rajya Sabha 5Jharkhand Mukti Morcha 5Marumalrchi DMK 4Lok Jan Shakti Party (LJSP) 3J&K People’s Democratic Party 1Republican Party (Ambedkar) 1Muslim League 1

United Progressive Alliance allies 121Communist Party of India (Marxist) 43Samajwadi Party 36Bahujan Samaj Party (BSP) 19Other Left Front parties 16Other “outside” support 7

Congress returns to power

8 India


Composition of the Lok Sabha, May 2004a

Party No. of seatsBJP & allies 185Bharatiya Janata Party (BJP) 138Shiv Sena 12Biju Janata Dal 11Shiromani Akali Dal 8Janata Dal (United) 7Telugu Desam Party (TDP) 5All India Trinamool Congress (AITC) 2Nagaland People’s Front 1Mizo National Front 1

Others 19Total 545

a The lower house of parliament.

Source: Lok Sabha.

Important recent events

September-October 1999

A general election returns the BJP-led coalition to power under Atal Behari Vajpayee.

November 2000

India announces the first ever unilateral ceasefire in Kashmir.

April 2001

The remaining quantitative restrictions on imports are lifted. However, freer trade ishampered by high tariffs on many items.

June 2001

India calls off the ceasefire in Kashmir and invites Pakistan’s leader, General PervezMusharraf, to meet in India to discuss relations between the two countries, includingthe Kashmir issue.

December 2001

Four terrorists try to enter the Indian parliament and are killed after a four-hourshoot-out. India accuses Pakistan of having instigated the attack, and moves troops tothe border.

January 2002

Hindu revivalists step up a campaign to build a temple on the site of a 16th-centurymosque in Ayodhya that they pulled down in 1992.

February 2002

A Muslim mob attacks Hindu volunteers travelling back from Ayodhya in Godhra inGujarat. Fifty-seven are burnt alive in a railway carriage. Riots follow in Gujarat inwhich 900 people are killed and over 100,000 rendered homeless.

October 2002

India announces that it will begin to withdraw its troops from its border withPakistan, and Pakistan reciprocates.

India 9


April 2003

Mr Vajpayee begins moves to defuse tension with Pakistan, re-establishingcommunication and diplomatic links.

June 2003

India and China reach de facto agreement over the status of Tibet and also of Sikkim,a state whose accession to India in 1975 China still refuses to recognise officially, in acrossborder trade agreement.

August 2003

At least 50 people are killed in two simultaneous car bomb blasts in Mumbai.

November 2003

India matches Pakistan’s offer of a ceasefire along the Line of Control in Kashmir.Pakistan’s unilateral offer followed measures announced unexpectedly by the Indiangovernment in October to improve ties with its neighbour.

December 2003

India and Pakistan agree to resume direct air links and to allow overflights. India hadsuspended air links after the December 2001 attack on the Indian parliament, whichit blamed on Pakistani terrorists.

January 2004

A groundbreaking meeting is held between the Indian government and moderateKashmiri separatists, marking a new chapter in the 14-year stand-off between theIndian government and the separatists.

February 2004

Formal peace talks over the disputed region of Kashmir are held in the Pakistanicapital, Islamabad. India and Pakistan agree to hold further negotiations in May orJune, following the Indian general election.

May 2004

A general election returns the Congress-led United Progressive Alliance to poweragainst all expectations. Sonia Gandhi, the Congress leader, refuses to become primeminister. Manmohan Singh, a former finance minister and reformer, is sworn in asprime minister.

Constitution, institutions and administration

The Republic of India is a constitutional federal democracy made up of29 states and seven union territories. The Indian constitution defines thedivision of most powers between the centre and the states, although the centretakes precedence in relation to residual powers. Representation in parliamenthas been frozen on the basis of the results of the 1971 census. Given thatpopulation growth is much higher in the northern states, the relative value ofvotes cast in the north in terms of political representation has fallen. TheNational Population Council has recommended an extension of the “freeze”on representation until 2026. This is likely to become a source of major tensionbetween the country’s northern and southern states. India’s federal structureoften leads to demands for further devolution of powers to the states, as well

Federalism

10 India


as demands for new states to be created. In 2000 three new states—Chhattisgarh, Jharkhand and Uttaranchal (all three northern states with strongtribal representations)—were formed from Madhya Pradesh, Bihar and UttarPradesh respectively.

The Indian constitution provides for an independent judiciary, with highcourts in every state and a Supreme Court in New Delhi. There are two housesof parliament. The lower house, or Lok Sabha (house of the people), is electedevery five years by universal adult suffrage. The prime minister is elected bythe Lok Sabha. Members of the upper house, or Rajya Sabha (house of thestates), are elected by their respective state legislatures, according to statequotas based on population. The president is elected every five years by bothhouses of parliament and the state legislatures. He is confined to acting on theadvice of the Council of Ministers, which is chosen by the prime minister.

India is the world’s most populous democracy and has held regular and largelyfree elections since 1947. The Election Commission of India (ECI) has widepowers to requisition the government machinery for elections and has ensuredfairly orderly elections; in 2003 it won the right to make candidates disclosecriminal records. However, there are occasional cases of poll rigging andintimidation; spending limits on candidates are poorly enforced and candidateswith criminal records are sometimes elected, particularly to the state as-semblies. A high level of political awareness and the sheer size of the electoratenevertheless generally ensures that the final results reflect the wishes of thepeople, and the ousting of incumbent administrations is increasingly frequent.

Congress, which led the agitation for independence, emerged as the dominantparty thereafter and won elections in most states in the 1950s and 1960s,although the communists and Tamil separatists occasionally won state-levelelections. The situation changed following the 1975-77 state of emergency. Casteand regional splinters from the opposition alliance that won the 1977 electionwere increasingly successful in state elections. In the current political landscape,none of the three national parties—Congress, the BJP and the Communist Partyof India (Marxist)—can hope to win a majority in the central government on itsown, and each needs to ally itself with more localised parties.

India’s 29 states vary enormously in size, population and natural resources. Thecentre’s powers to tax income, production and foreign trade give it far greateraccess to revenue, a large part of which is shared out among the states by theplanning commission and by finance commissions that are appointed everyfive years. The states cannot borrow without the centre’s permission. However,as the central government has become increasingly reliant on the support ofregional allies, it has found it harder to refuse the states’ demands to managetheir own finances. Both the centre’s and the states’ deficits are largely financedby banks and financial institutions, which channel public savings to thegovernments. This pre-emption of bank funds to finance excess consumptionby the government—amounting to about 10% of GDP each year—has become adrag on economic growth.

The judiciary and thelegislature

Democracy and corruption

The centre versus the states

India 11


As central controls on industry, finance and foreign trade have been relaxed inthe past decade, industry has received the freedom to relocate but at the sametime has faced greater competition. These competitive pressures have beenpassed on to the states, which have tried to attract and retain industry. In thiscompetition, the littoral states have been more successful: as foreign trade hasbecome freer, industry has moved closer to Gujarat, Maharashtra, Karnatakaand Tamil Nadu. In an effort to cut costs, producers have also moved closer tosuppliers and markets, causing long-distance road transport to enter a pro-longed slump, from which it is now slowly emerging.

Political forces

Congress led the campaign for independence and has remained a powerfulforce in Indian politics, transcending religious, ethnic and caste divisions.However, it is also a party tightly focused on its heritage: members of theNehru-Gandhi family have led the party throughout most of its history. India’sfirst prime minister, Jawaharlal Nehru, was succeeded by Lal Bahadur Shastri,who died within a year of taking office. The party then turned to Nehru’sdaughter, Indira Gandhi, who remained leader until her assassination in 1984when her son, Rajiv, took over as party leader. Rajiv was assassinated in 1991and Congress is now led by his widow, Sonia.

The decline of Congress began when Mrs Gandhi declared a state ofemergency. Her opponents combined to form the Janata Party, which won the1977 election. In 1980 Mrs Gandhi brought down the Janata government andreturned to power. Her son, Rajiv, came to power in 1984 with the largestmajority ever and the aim of liberalising and modernising government, but hewas soon mired in a corruption scandal and lost the 1989 election. He toomanaged to split and finally bring down the Janata Dal government thatfollowed him, but he was killed before the 1991 general election. Althoughfalling just short of majority, Congress formed a government after the electionand, under the spur of a payments crisis, carried out considerable economicliberalisation. That did not, however, save it from defeat in the 1996 election.

As repeated efforts to form a national alternative failed, the electorate turned toregional and caste-based parties. Following Congress’s poor performance in the1998 general election, Rajiv Gandhi’s Italian-born widow, Sonia, gave in torepeated requests and took over as party leader. However, her foreign birth hasprompted criticism in parts of Congress as well as by the BJP. Three Congressparty members were expelled from the party for challenging Mrs Gandhi’scredentials for the leadership; they included a powerful senior figure, SharadPawar, who went on to establish the Nationalist Congress Party (NCP) in theelectorally significant state of Maharashtra—where Congress and the NCP makeup a coalition state government.

The stability of the current Congress-led government depends crucially on howreadily the Left Front group of communist parties withdraws its support in caseof disagreement over policy. Equally important, however, are divisions withinCongress which could result in government instability. Loyalties in the Councilof Ministers are likely to be split between Mr Singh and Mrs Gandhi.

The Congress party

12 India


Mrs Gandhi will have to reconcile the demands of individual members of thegovernment as well as interest groups within the diverse Congress party inorder to secure a stable government.

Congress’s success in the 2004 general election is evidence that the dynasticclaim still exerts considerable force, particularly in rural areas. Congress profitedfrom the excitement created by the candidacy of Rahul Gandhi, Mrs Gandhi’sson, and her charismatic daughter, Priyanka, is widely believed to be a likelyfuture candidate to lead the party.

The Bharatiya Janata Party (BJP) traces its roots back to the Bharatiya Jan Sangh,a party representing traditional Hindu values. It is the political wing of a groupof interconnected cultural and religious movements—the Sangh Parivar—ofwhich the most politically significant is the RSS (Rashtriya SwayamsevakSangh), a disciplined cadre organisation that counts the prime minister andhome minister among its members. The RSS, one of whose members assas-sinated Mahatma Gandhi, is seen by its critics as a sinister, anti-Muslim group.

The BJP emerged as a significant force in the 1989 general election, winning 88seats. A central campaign issue was the demand that a Hindu temple beconstructed on the site of the Babri mosque in Ayodhya in Uttar Pradesh,which many Hindus believe was earlier the site of a temple marking thebirthplace of the Hindu god-king Ram. In the 1991 election the BJP establisheditself as the main national opposition and won power in four states. InDecember 1992 Sangh Parivar activists demolished the Babri mosque, triggeringcommunal riots that left thousands dead. In the 1993 state elections the BJPsuffered setbacks and won just one state administration, but in the 1996 generalelection it won 160 seats in the Lok Sabha.

In May 1996 the BJP formed its first national government, led by AtalBehari Vajpayee, which lasted just 13 days. The BJP re-emerged as the powerbroker in 1998, when it won 182 seats in the general election and cobbledtogether a coalition of 13 parties under Mr Vajpayee’s leadership. The coalitionproved unwieldy, collapsing in April 1999. However, Mr Vajpayee provedhimself able to rally parties of disparate political persuasions to form agovernment. Another election in September-October 1999 returned a BJP-ledcoalition of 20 partners to power. Members of the new coalition, the NationalDemocratic Alliance, campaigned under a common platform and won 302seats. Despite the increased majority, however, the range of parties involved ingovernment left the alliance vulnerable to the whims of smaller regionalparties. For instance, when the Andhra Pradesh-based Telugu Desam Party(TDP) withdrew its support for the government in the vote on the BJP’sperformance in riot-torn Gujarat in 2002, the BJP hurriedly formed an alliancewith the Bahujan Samaj Party (BSP) in Uttar Pradesh, despite the failure of aprevious alliance with that party.

As leader of the BJP’s moderate wing, Mr Vajpayee has sought to rein in theparty’s more extreme Hindu nationalist members, particularly in relation toquestions of economic reform. But the party’s reformist credentials provedincreasingly shaky in the face of conflicting demands from coalition membersand resistance from the BJP’s nationalist wing. The close relations the party

The BJP

India 13


cultivated with leading industrialists also resulted in increased protection forsome industries from foreign competition. On the foreign policy front,Mr Vajpayee sought improved relations with neighbouring Pakistan andmatters did improve; formal peace talks were held in February 2004 in thePakistani capital, Islamabad, and the two countries agreed to hold furthernegotiations.

The Communist Party of India (CPI) emerged from Congress, splitting from theIndian National Congress during the second world war. The CPI itself later splitto form a Marxist group, the Communist Party of India (Marxist) or CPI (M).The CPI (M) is strongest in West Bengal, where it has been in power for twodecades, and it has frequently held power in Kerala. Although the “third force”includes several powerful regional parties that are increasingly important in afractured political scene, these parties have no strong ideological commitmentto a common agenda. Instead, they are motivated by state or caste interests thatcan often be better served through alliances with the BJP or Congress. Morerecently, the Left Front group of communist parties decided not to formally jointhe Congress-led UPA government, but to support it from “the outside”.

The United Front (UF) coalition that fell at the end of 1997 comprised severalCongress offshoots. The largest was the Janata Dal. Based on the support ofOther Backward Castes (OBCs, a governmental classification) and Muslims, theparty has provided three of India’s prime ministers in the last ten years.However, it has been even more weakened than Congress by splits anddefections. First, a former party leader, Laloo Prasad Yadav, formed theRashtriya Janata Dal (RJD). More recently, the party’s leader in Karnataka,J H Patel, formed an election alliance with the BJP-led NDA. Other formermembers of the UF, including the TDP in Andhra Pradesh and the SamajwadiParty, led by Mulayam Singh Yadav, left the alliance after the 1998 election, andthe TDP has since aligned itself with the BJP.

Main political figures

Manmohan Singh

Prime minister and former finance minister (in a minority government underNarasimha Rao) in the early 1990s. Has held many important positions in theeconomic/civil service hierarchy including governor of the Reserve Bank (the centralbank) and deputy chairman of the Planning Commission. An Oxford-educatedeconomist, Mr Singh is widely respected across political parties and has a reputationof being a pragmatist without ideological posturing.

Sonia Gandhi

Italian-born widow of a former prime minister, Rajiv Gandhi, and Congress partyleader in parliament and Congress party president. Led Congress to success in the2004 general election. Declined the post of prime minister, a move that enhancedher moral stature. Retains significant appeal as heir to the Nehru-Gandhi dynasty,particularly in rural areas, although her Italian origins count against her. Herdaughter, Priyanka, is widely seen as the natural heir to the dynasty.

The failure of the “third force”

The communist parties

14 India


Palaniappan Chidambaram

Finance minister. Suave, articulate politician from the southern Indian state of TamilNadu. He is well known for his pro-market reforms, particularly tax reform andbudgetary discipline, during his tenure as finance minister in 1996-98. A Harvard-educated lawyer and a strong supporter of the World Trade Organisation,Mr Chidambaram is popular with businesses.

Shivraj Patil

Interior minister. A respected and experienced politician, he held several ministriesunder Congress governments of Indira and Rajiv Gandhi. His appointment to thekey position of interior minister came as surprise as he lost his seat in the May 2004general election. A former university lecturer, Mr Patil is also a former speaker of theLok Sabha, the lower house of parliament.

Natwar Singh

External affairs minister. A career diplomat and former ambassador to Pakistan,Mr Singh was a junior minister in Rajiv Gandhi’s cabinet.

Pranab Mukherjee

Defence minister. A prominent Gandhi family loyalist, Mr Mukherjee held at leasthalf a dozen important ministries in past Congress governments, including financeand external affairs. He has close links with the left.

Laloo Prasad Yadav

Railway minister. Informally rules the most lawless state of Bihar by proxy. TheRashtriya Janata Dal (RJD) leader made his wife, Rabri Devi, the chief minister of thestate in 1997, following a corruption scandal which forced him to resign. He formedthe RJD in 1997, after breaking away from the Janata Dal party.

Lal Krishna Advani

Leader of the opposition Bharatiya Janata Dal (BJP) party. The former deputy primeminister under Mr Vajpayee is often described as a soft-spoken hardliner. He createda major controversy in 1992 by leading a rath yatra (chariot journey) to the city ofAyodhya, a trip that culminated in the destruction of the Babri mosque. Mr Advaniis credited with making the BJP a major political force since 1984, when it held onlytwo parliamentary seats.

Atal Behari Vajpayee

Former prime minister and former foreign minister (in a left-right anti-Indira Gandhicoalition in the late 1970s), who has had a distinguished parliamentary career.Respected by politicians and voters from across the political spectrum. Following theBJP’s defeat in the May 2004 general election, Mr Vajpayee is now the party’schairman, a newly created and largely symbolic position. Likely to act as an elderstatesman guiding the party.

Abdul Kalam

President of India, and founding father of India’s nuclear programme. A Muslim, heis widely respected.

India 15


Somnath Chatterjee

Lok Sabha speaker. A veteran Marxist leader, Mr Chatterjee is the first communistleader to occupy this position. A member of parliament for the tenth time,Mr Chatterjee has established a rapport with politicians across party lines.

Mulayam Singh Yadav

Leader of the Uttar Pradesh-based Samajwadi Party and former defence minister inthe United Front (UF) coalition. Important among the new breed of “backward caste”politicians.

International relations and defence

India became independent in 1947 at the start of the cold war. The primeminister, Jawaharlal Nehru, had visited the Soviet Union in the 1930s and feltthat it provided the best economic model for India’s development.Consequently, India did not join the western alliance, instead following apolicy of neutrality between the two blocs. Pakistan meanwhile joined the US-led South-east Asian Treaty Organisation. India’s defeat by China in a short warin 1962 brought the US and India briefly closer, but, as Indian relations withPakistan deteriorated, US sympathy for India waned. In 1971, when Hindurefugees from East Pakistan flooded into India, India decided to attack Pakistanand, to ward off the US, entered into a treaty with the Soviet Union. The treatyprovided India with low-cost security for the next 18 years. Since the collapseof the Soviet Union, India has tried to build closer relations with the US andthe West. Its liberal reforms in the early 1990s also made it more receptive toforeign trade and investment, and led Western countries to take greater interestin India. The 1998 nuclear tests caused a glitch in the process, but it hascontinued nevertheless. The US and Indian armed forces recently held limitedjoint exercises in India. Meanwhile, India has stepped up its militaryexpenditure considerably in the past five years.

India has fought three wars with Pakistan and one with China sinceindependence. Disputes with Pakistan have been mainly territorial. In 1947Pakistani tribesmen invaded the mainly Muslim princely state of Jammu andKashmir, and Indian forces intervened at the request of the state’s Hindumaharaja. The resulting war left about one-third of Kashmir with Pakistan andthe remainder with India (in 1963 Pakistan ceded some of the territory itcontrolled to China). Kashmir remains the subject of bitter dispute between thetwo countries. A short war was fought in 1965 over a Pakistani incursion intodisputed territory in Kutch. Another was fought over the exodus of Hindurefugees from East Pakistan in 1971; it ended with the separation of East andWest Pakistan, and the creation of Bangladesh.

The victory of the BJP-led coalition at the general election in 1998 produced anotable cooling in relations with Pakistan, compounded by both countries’nuclear tests in May that year. Talks between the two sides resumed in October1998, culminating in the so-called bus diplomacy that saw Mr Vajpayee journeyacross the border for talks with his Pakistani counterpart, Nawaz Sharif, thefollowing year. However, any thaw was quickly undone when Pakistani-backed

Relations with Pakistan look alittle brighter

Independence and itsaftermath

16 India


insurgents crossed the Line of Control (LoC) dividing Indian and Pakistanipositions in Kashmir, capturing several high-altitude Indian border posts in theKargil sector in May 1999. During two months of intense fighting each side losthundreds of men, and the conflict threatened to escalate into all-out war. Thecrisis was resolved in July, when the Pakistani government agreed to withdrawthe intruders. Three months later the commander-in-chief of the Pakistani army,General Pervez Musharraf, staged a coup and removed Mr Sharif’s electedgovernment.

In November 2000, two years after the failed bus diplomacy of 1998, Indiaagain took the initiative on Kashmir, announcing, and subsequently extending,a unilateral ceasefire. At the end of May 2001 Mr Vajpayee called off theceasefire and invited General Musharraf for talks in Agra in July. On the secondday of talks General Musharraf said that an agreement on Kashmir must comebefore other normalising measures. His Indian hosts were embarrassed, andthe talks broke up without an understanding being reached.

After the September 11th 2001 terrorist attacks in the US, General Musharrafsupported US action against the Taliban in Afghanistan and subsequentlybanned some terrorist organisations operating from Pakistan, many of whichrenamed themselves to evade the crackdown. India gave General Musharraf alist of 20 wanted terrorists; they including Sikhs who had taken refuge inPakistan in the 1980s, and also Dawood Ibrahim, the Mumbai smuggler thoughtto have moved to Karachi and Dubai after the bomb blasts in Mumbai in 1993were linked to him. Pakistan refused to hand them over. After the abortedattack on India’s parliament in December 2001, India identified the attackersand their handler as Pakistanis. India reduced diplomatic representation inPakistan, suspended bus, train and air services, and stopped Pakistanioverflights. The number of terrorist attacks in Jammu and Kashmir increased inthe next six months, and in early 2002 both countries moved troops to theborder. In October 2002, however, the People’s Democratic Party (PDP) waselected to government in Jammu and Kashmir, forming an administration withthe support of Congress. The PDP is committed to reconciliation, and at theinvitation of the new chief minister, Mufti Mohammad Sayeed, Mr Vajpayeeaddressed a public meeting in Srinagar in April 2003, when he “extended thehand of friendship” to Pakistan.

In November 2003 India matched Pakistan’s unilateral offer of a ceasefire alongthe LoC in Kashmir. The offer followed measures announced unexpectedly bythe Indian government to improve ties with its neighbour a month earlier. InDecember 2003 India and Pakistan then agreed to resumed air links and toallow overflights, both of which had been suspended following the attack onthe Indian parliament two years earlier. A groundbreaking meeting was alsoheld between the Indian government and moderate Kashmir separatists inDecember 2003, marking a new chapter in the 14-year stand-off between theIndian government and the Kashmiri separatists. In February 2004 formalpeace talks over the disputed region of Kashmir were held in the Pakistanicapital, Islamabad. Both sides agree to hold further negotiations in May or June,following the Indian general election. The situation in Kashmir remains volatile.

India 17


At the end of May 2004, an explosion of a landmine planted by Islamic rebelson a key Kashmir highway killed 28 Indian soldiers.

India’s relations with China are also delicate. In 1957 India discovered thatChina had built a road across what it regarded as the north-east corner ofKashmir. (There was no administrative presence in this arid desert tract, so thatthe road was not immediately noticed.) China rejected India’s territorial claims,and a series of violent clashes between border guards took place over the nextfive years. In 1962, after a particularly bloody clash, Mr Nehru ordered the armyto throw out the Chinese. The army was poorly equipped and inadequatelytrained for mountain warfare, however, and whereas the Chinese had builtroads to the border, the Indian army had to ascend along mule paths. TheChinese army dealt it a crushing defeat, but then declared a ceasefire. Thedefeat has made India circumspect. Despite the fact that China has a militaryalliance with Pakistan, and has given it considerable military assistance, theSino-Indian border has been quiet for 40 years. In the 1980s the two countriesbegan talks to demarcate their frontier, although the work has progressed onlyslowly. There have been several high-level visits since 1993, when the Indianprime minister, Narasimha Rao, visited Beijing. In June 2003 India and Chinareached a de facto agreement over the status of Tibet and Sikkim (whoseaccession to India in 1975 China still refuses to recognise officially), in acrossborder Sikkim-Tibet trade agreement. Significantly, bilateral trade betweenIndia and China has increased sevenfold since the two countries signed a free-trade agreement in February 2000. China is now India’s sixth-largest exportmarket, and ranks third as a source of Indian imports.

The 1971 India-Pakistan war ended with the surrender of Pakistan’s entire armyin the east and the establishment of Bangladesh as an independent state.Relations between India and Bangladesh are nevertheless close, if notparticularly friendly. Agreements between India and Bangladesh to share thewater of the Ganges and to extend transit rights to Indian goods have bolsteredlinks between the two countries. The Bangladeshi political scene is polarisedbetween the heirs of those who fought for independence from Pakistan on onehand, and the pan-Islamists, to whom the present governing party is close, onthe other. India has recently protested strongly against the alleged infiltration ofBangladeshis, who enter India in search of work. India is Bangladesh’s closestsource of many goods, especially yarn for its export-oriented textile industry.

Mrs Gandhi aided Sri Lanka’s Tamil separatists in the early 1980s, but, in anabout-turn, her son Rajiv sent the Indian army to help Sri Lanka subdue theLiberation Tigers for Tamil Eelam (LTTE). After the Indian forces received abloody nose, the next prime minister, V P Singh, withdrew them. In May 1991an LTTE suicide squad killed Rajiv Gandhi. Since then India has steered clear ofSri Lankan affairs. As Sri Lanka has become more confident of India’sneutrality, relations between the two countries have improved. Sri Lanka hasbuilt up Colombo into a transshipment port for imports destined for minorIndian ports. After Norway arranged a ceasefire between the Sri Lankangovernment and the LTTE, both sides asked for India’s involvement, but the

Relations with China remaindelicate

Bangladeshi migrants causeconcern

A neutral approach toSri Lanka

18 India


Indian government is wary of doing anything that would imply a recognitionof the LTTE.

India conducted its first atomic test in 1974, after which Pakistan embarkedupon its own nuclear programme. By 1994 it was widely accepted that Pakistanhad acquired both the atom bomb and Chinese-supplied ballistic missiles.India has developed its own intermediate-range ballistic missile. In 1998 Indiatested nuclear devices, and Pakistan followed suit. The US president at the time,Bill Clinton, tried to persuade India to sign Treaty on the Non-Proliferation ofNuclear Weapons (NPT) and the Comprehensive Test Ban Treaty (CTBT).However, India’s political establishment regards the two treaties as biased, andhopes of Indian participation have receded.

India maintains the second-largest army in the world, with total armed forcesof 1.33m active servicemen and first-line reserves of another 535,000. However,its soldiers are poorly equipped, particularly for the demanding conditionsfaced in Kashmir. The army has a strictly non-political role, although the armedforces are often called upon to help beleaguered police forces in areas facingsecessionist movements, such as Kashmir and the north-east. Defenceexpenditure is likely to approach 3% of GDP in 2003/04 and, in view of tenserelations with Pakistan, is likely to remain high.

Military forces, 2003/04India Pakistan China

ArmyPersonnel 1,100,000 550,000 1,700,000Main battle tanks 3,898 >2,368 7,180

NavyPersonnel 55,000 25,000 250,000Frigates 16 8 42Submarines 19 10 69Air forcePersonnel 170,000 45,000 400,000Combat aircraft 744 374 >1,900

Source: International Institute for Strategic Studies, The Military Balance 2003/04.

Security risk in India

Armed conflict

India has fought three wars with Pakistan—two over the disputed territory ofKashmir and one during Bangladesh’s war of independence—as well as a majorskirmish in Kargil in 1999 between Pakistan-backed militants and the Indian army.Shelling along the Line of Control (LoC), which divides Indian and PakistaniKashmir, is commonplace. India accuses Pakistan of giving military backing toKashmiri separatists and Islamic militants fighting against India in Kashmir, butPakistan claims only to give moral support to the insurgents and accuses India ofrepressing Muslims in Kashmir.

Tensions between the two nuclear powers have been high since an attack on India’sparliament building in December 2001, which India blamed on Pakistani-based

The nuclear issue

The armed forces

India 19


militant groups. Both countries mobilised troops, and stood on the brink of war.Hostility between the two countries has remained intractable, owing to the underlyingKashmir dispute: each country faces considerable domestic pressure not to makeconcessions to the other in relation to Kashmir. However, in April 2003 relations beganto improve significantly, largely as a result of a US-led international initiative to diffusethe crisis. In May both sides said that they would restore diplomatic links. Further talksare scheduled for July 2004.

In the past, peace talks have floundered over the question of the relative importanceof Kashmir. India has argued that the Kashmir dispute is one of several issues thatneed to be resolved, and has attempted to improve bilateral relations through, forinstance, the establishment of a bus link between Delhi and Lahore, in the hope thatwith better relations the Kashmir dispute will diminish in relative importance. Incontrast, Pakistan argues that the Kashmir dispute is central to the two countries’poor relations, and that without its resolution other confidence-building measureswill be impossible. Pakistan fears that, should militancy in Kashmir end, India willfeel little compulsion to offer Pakistan any concessions regarding Kashmir.

India fought a war with China in 1962, and in 1998 the defence minister, GeorgeFernandes, raised tensions with China by claiming that it was India’s main threat.Relations between the two countries are nevertheless generally friendly, althoughpart of their common border in north-east India remains disputed. India’srelationship with Bangladesh is also generally good, despite occasional clashesbetween border guards.

Terrorism

India suffers from occasional bomb attacks, often occurring on buses or trains, or atbus stations. Such low-level attacks are generally blamed on Pakistan’s intelligenceagency, the Inter-Services Intelligence agency (ISI). Numerous subnationalist groupsoperate within India, and although their activities are generally confined to specificareas, Kashmiri militants have conducted attacks in Delhi. The most daring of theseoccurred in December 2001, when a group of militants entered India’s parliamentbuilding, killing at least seven people. Kashmiri militants have also taken foreignhostages, notably in 1995 when four foreigners were kidnapped in Kashmir—the fourare presumed dead. Apart from Kashmiri militants, several other groups operate innorth-east India, campaigning for state status, or independence, for their regions.Maoist rebels operate in the tribal-dominated areas of central India, and are thoughtto be linked to the Communist Party of Nepal (Maoist).

Civil unrest

Religious clashes between Hindus and Muslims are not infrequent and, as events inGujarat showed in 2002, can escalate rapidly. In February 2002 a gang of Muslimsattacked a train carrying Hindus from Ayodhya, killing 57 people. Hindus respondedby attacking Muslims throughout Gujarat, and up to 1,000 are thought to have died.Communal clashes are often sparked or exacerbated by, for instance, property orcommercial disputes, rather than simply by religious intolerance. Such riots usuallytake place in poor districts of cities in northern India. Anti-western protests haveoccurred in the past, often organised by Hindu extremist groups targeting Westernfood outlets, although incidents have declined since the Bharatiya Janata Party (BJP)took power in 1999 and attempted to attract foreign investment.

20 India


Crime

Petty crime is common in India. According to the National Crime Records Bureau(NCRB), in 2001 there were over 250,000 incidents of theft and over 100,000 ofburglary. Such statistics are likely to understate the prevalence of crime. Many crimesgo unreported, owing to a lack of confidence in the police. Bag-snatching andpick-pocketing is fairly common, particularly in crowded tourist areas. According tothe NCRB, there were over 36,000 murders in 2001.

Drug smuggling and organised crime

Organised crime is a concern in India, particularly in Mumbai. Protection andextortion rackets have flourished, particularly in the film industry and the mediagenerally, including cable companies. Some gangs are thought to have moved intotrade unionism. This problem is likely to have worsened owing to the number ofpoliticians—particularly in state assemblies—with criminal records.

The worst incident connected to India’s underworld took place in Mumbai in 1993.A number of bomb explosions occurred, resulting in 257 deaths. The stock exchange,several hotels and other offices were hit, and hand-grenades were thrown at theinternational airport. The incidents were blamed on a combination of theunderworld and the ISI.

Resources and infrastructure

Population

According to the 2001 census, India’s population stood at 1.027bn on March 1stof that year. Even under fairly optimistic assumptions about the pace of futurefertility decline, India’s population is likely reach 1.4bn by 2025. Around half ofthe 400m increase in population is likely to occur in the northern states ofBihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. The future fertilitydeclines in these states will determine the country’s demographics. In 2002India’s total fertility rate, stood at 2.9 births per woman. However, regionaldifferences are vast. Uttar Pradesh’s total fertility rate stands at 4.7, whereas thatfor Kerala is 1.8—below the replacement level of 2.1 births per woman. Thenumber of females per 1,000 males was 933; the difference is due to femaleinfanticide, the neglect of female children and, lately, the abortion of femalefoetuses, although sex determination of the foetus is banned. The labourparticipation rate was 39% (52% for males and 26% for females). “Main” (that is,more or less fully employed) workers accounted for 78% of all workers (87% ofmales and 57% of females). The rest were “marginal” workers. Populationgrowth averaged 1.9% per year in 1991-2001, down from an average of 2.1% in1981-91 and 2.3% in the 1960s.

Life expectancy at birth increased to 63 years for men and 64 years for womenin 2001, from 32 years for both men and women in 1951. This comparesunfavourably with figures for China (69 years for men and 73 years for women)or Sri Lanka (70 years for men and 76 years for women). Mortality rates for theunder-fives have fallen significantly, from 127 per 1,000 in 1970 to 67 per 1,000

The population exceeds 1bnin 2001

India 21


in 2001. However, the male mortality rate is significantly lower than the ratefor females.

Population breakdown, 2001Total (m) % of total

Male Female Total Male Female TotalPopulation 531 496 1,027 51.7 48.3 100.0 Rural 381 361 742 37.1 35.1 72.2 Urban 150 135 285 14.6 13.2 27.8

Aged 6 or below 82 76 158 8.0 7.4 15.4Literacy 340 227 567 33.1 22.1 55.2

Workers 275 127 403 26.8 12.4 39.2 Main 241 73 313 23.4 7.1 30.5 Marginal 35 54 89 3.4 5.3 8.7

Source: Census of India, 2001.

The rate of contraceptive use for women between the ages of 15 and 49 for1990-2001 was 52%. This compares with 83% during the same period in China.Increased use of family planning methods is believed to have reduced thepopulation growth rate to about 1.5%. If the present difference in fertility ratescontinues, India is expected to overtake China as the world’s most populouscountry by 2030, with the population stabilising at around 1.5bn.

India has a relatively low level of urbanisation compared with most otherdeveloping countries in Asia: almost 60% of Indians live in villages with apopulation of less than 5,000. However, the rate of migration from rural tourban areas is increasing. The urban population constituted 28% of the total in2001, up from just over 25% in the mid-1990s, and is likely to reach 36% around2025. In 2001 there were 35 cities with a population above 1m; the number ofsuch cities is likely to rise to 70 by 2025, when they will contain about one-halfof the country’s urban inhabitants. The urban population is growing fastest instates like Bihar and Uttar Pradesh, which have comparatively low levels ofurbanisation. More developed states like Maharashtra and Tamil Naduexperience lower urban growth as their populations do not grow as fast. Thelargest urban agglomerations are Mumbai (16.4m in 2001), Kolkata (13.2m),Delhi (12.8m), Chennai (6.4m), Bangalore (5.7m) and Hyderabad (5.5m).

India’s population is extremely diverse, differentiated by language, religion,caste and class. A significant political divide exists between Hindus (83% of thepopulation) and other religious groups, including Muslims (11%), Sikhs andChristians. However, Hinduism is itself a highly stratified religion, and a largenumber of Hindus, particularly among the lower castes, do not have a politicalaffinity with Hindu nationalist movements. Another important distinction isthat between the primarily Hindi-speaking north, and the south, where anumber of vernacular languages are in use, together with English. English is alingua franca throughout the country, however, and competence in thelanguage is more a function of class than region.

Income—or consumption—differentials are significant but not high by developing-country standards: the top fifth of India’s population accounts for around 46% of

Control of population growth

A shift from rural to urban

A diverse population

22 India


income or consumption, whereas the bottom fifth accounts for around 8%.However, incomes vary greatly between different parts of the country.

Education

Rates of literacy among the population aged seven years and over have risenconsiderably during the 1990s. The 2001 census recorded literacy rates of 65.2%, upfrom 52.2% in 1991 – the highest rise ever in a single decade. The male literacy ratewas 75.6% in 2001 (up from 56% in 1981 and 27% in 1951), compared with 54% forwomen (30% in 1981 and 9% in 1951). The 2001 census indicated a decline in thetotal number of illiterate people for the first time since independence, with 21.5mfewer illiterate males and 10.5m fewer illiterate females in 2001 than in 1991. Inspite of recent progress, India still lags behind in educational standards, bothabsolutely and compared with other developing countries: it has 17% of theworld’s population, but some 40% of the world’s illiterates. India also possesses alarge pool of highly educated and vocationally qualified people, although theymake up a small fraction of the population. There are considerable regionalvariations in literacy rates: Kerala has a rate of 91%, down from 96% in 1991,whereas Bihar has a rate of only 48%.

The rate of enrolment in primary schools has risen significantly in recentdecades, from 61% of the eligible age group in 1960 to over 98% in 1991. Thecorresponding rate of enrolment for girls rose from 40% to 83% in the sameperiod. The overall rate of enrolment in secondary schools rose from 20% in1960 to 44% in 1991 (with the female rate rising from 13% to 32%). The rate ofenrolment in higher education for males and females was 9% in 1990, thehighest by far for a low-income developing country, and up from 3% in 1960.

India has more than 225 universities, 6,800 affiliated colleges and 1,128polytechnics. From 1992 to 1996 the rate of college enrolment increased by 5.2%per year, with 6.4m students enrolled in 1995/96. Higher education is highlycompetitive, increasingly so as the economy has opened up and has createdmore well-paid jobs in the private sector as a result. However, subsidies forhigher education and a system of positive discrimination have resulted in askewed education system. A great number of students are accepted on the basisof caste or religion rather than ability, and cheating is a serious problem. Indiahas also become a major international centre for the recruitment of high-quality information technology (IT) staff.

Health

Government spending on healthcare provision is around 1% of GDP, equivalentto around US$4 per person per year, although private expenditure on health isseveral times higher and total expenditure is estimated to be just over 5% ofGDP. Government spending levels compare poorly with those in othercountries, although life expectancy has slowly risen from just 29 years atindependence to around 64 years, and child mortality rates have come down.(The improvement in child mortality rates is associated with the shift inpopulation to urban areas.) However, indicators for health and nutrition are

A mixed picture

Universities dominate

Health indicators improveslowly

India 23


poor overall. According to the National Nutrition Monitoring Bureau, less than15% of the population are adequately nourished, although 96% receiveadequate calorie intake. Daily average calorie intake in 1998 was estimated at2,280 kcal, compared with an Asian average of 2,770 kcal. Although there is onedoctor per 1,916 head of population (1998 figures), doctors are concentrated inurban areas, and this is reflected in health indicators.

There are striking regional disparities in healthcare. Kerala has an infantmortality rate of 12 per 1,000, a figure not far short of high-income countrystandards, but Uttar Pradesh has an infant mortality rate of 85 per 1,000. Otherstates, such as Orissa and Madhya Pradesh, have even poorer rates. Access tohealthcare is also a function of wealth. India has a rudimentary publichealthcare system of hospitals and clinics, but in general healthcare andmedicines must be bought.

Natural resources and the environment

The great majority of Indians are dependent on agriculture for a living.Agriculture accounts for 60% of India’s labour force and one-quarter of GDP.The net sown area in fiscal year 1998/99 (April-March) was 142.6m hectares (outof a total area of 329m hectares). Almost two-thirds of the cultivated area wasunder foodgrains, and of the latter, about one-third was under rice and aboutone-fifth under wheat. In 2002/03 around 40% of cultivated land was irrigated,leaving most farmers dependent entirely on rainfall—in particular the annualmonsoon. The growth in irrigated land has been slower than planned, partlyowing to resource constraints on state governments. The government has takensteps to deregulate the fertiliser industry to encourage greater competition and amore balanced use of urea (as opposed to phosphatic and potassic fertilisers).Most Indian farmers harvest one crop per year because of a shortage of water,although double- or even triple-cropping is more common in irrigated areas.

About one-fifth of the country, 69m ha, is covered by forests and woodland.About one-half this area is reserved for the production of timber and otherforestry products. However, there are increasing concerns over the rapiddepletion of forest areas, and some efforts are being made to encourageconservation and to promote commercial forestry in place of illegal felling.Timber, firewood and charcoal are the main forestry products, and smalleramounts of products such as lac (resin) are exported. India is not well endowedwith natural resources. Its main mineral reserves are of coal, iron ore andbauxite, although the government has tried to generate interest in exploring oiland gas reserves.

Transport, communications and the Internet

The poor condition of India’s infrastructure is a major hindrance to growth.Although recent government pronouncements have increasingly emphasisedthe need to secure investment in major infrastructure projects, real progress hasonly been made in the “new economy” telecommunications sector, andrecently in road construction.

Regional disparities inhealthcare are striking

Agriculture is the mainstay ofthe economy

Standards of infrastructureare low

24 India


India’s railways are in many ways impressive. The country has the world’smost extensive rail network, at 63,100 km. Indian Railways employs 1.5m staff,although this figure is likely to fall to 1.2m by 2010. The railways suffer fromchronic underinvestment and underpricing, insufficient progress on regulatoryreform and unsound cross-subsidisation policies. Passenger traffic is heavilysubsidised by higher freight charges, increasingly forcing freight onto the roads.Although revenue-earning freight traffic increased from 391m tonnes in 1995/96to 519m tonnes in 2002/03, extremely low levels of labour productivity haveprevented more dramatic rates of growth. Railway safety has also become anissue of considerable concern after frequent accidents in recent years,underlining a lack of investment. In a bid to raise revenue, private-sectorparticipation in India’s railways is now being encouraged, with initiatives toprovide containers for occasional goods traffic through the ContainerCorporation of India (CONCOR) and the Own-Your-Wagon Scheme.Public-private projects to connect railways to local ports have also beenintroduced, as have joint ventures between state and central governments. Therailways are also increasingly exploring alternative means of raising revenue,including leasing rights of way to fibre-optic cable networks.

India’s poor road network has received renewed emphasis in recent years.There are 3m km of roads, most of which are badly maintained. Nationalhighways cover just 57,700 km and carry around 45% of total road transport.The ambitious National Highways Development Project seeks to expand morethan 13,000 km of highway to between four and six lanes in two key areas—between India’s four metropolitan centres, Delhi, Mumbai, Chennai andKolkata, and in the north-south and east-west corridors. The first phase wasoriginally due to be completed by 2004. In 2000 the date was brought forward,but in May 2003 the government reverted to the original end-2004 completiondate because of law-and-order problems in Bihar and land acquisition problemsin other states. Plans have been developed to add almost 5,000 km to thenational highway network by 2005 on a priority basis, and another 11,000 kmby 2020. A Central Road Fund established in November 2000, funded by a levyon petrol and diesel, will help to guarantee funds for the upkeep anddevelopment of the road network, including rural roads. Concessions onimports of equipment to construct national highways have been extended toother road construction projects. In an effort to attract private-sector investment,proposals for up to 100% foreign-equity participation in the constructionof roads and bridges will receive automatic approval up to a ceiling ofaround US$300m.

India has 13 major ports, seven on the east coast and six on the west, which aremanaged by the Port Trust of India. An additional 148 minor ports, managed bystate governments, account for 18% of total cargo handled. Two large projectshave recently eased previously existing capacity constraints—a new port atEnnore and a mechanised coal-handling facility at Paradip port. The majorports, which handle 82% of all cargo handled 314m tonnes of cargo in 2002/03,compared with a capacity of 363m tonnes. India’s ports are plagued byinefficiency. The average turnaround time is 4.7 days, and pre-berth waitingtimes are around 0.9 days. Poor port governance and inefficient customs

Railways

Ports

Roads

India 25


clearing translate into high costs. An identical shipment of textiles to the USfrom India costs, on average, 20% more than from Thailand and 35% more thanfrom China.

Government initiatives to increase private-sector participation include:automatic approval for up to 100% foreign equity in port and harbourconstruction projects; establishing a Tariff Authority for Major Ports (TAMP) tofix port charges collected by private providers; and setting up a Maritime StatesDevelopment Council (MSDC) to help frame an integrated port developmentpolicy. Gujarat, Maharashtra and Andhra Pradesh have made particularly goodprogress towards attracting private-sector participation in port development.The government has also drawn up plans to promote joint ventures betweenmajor Indian ports and minor foreign ports in a bid to attract new technologyand improve management practices.

The state-owned domestic carrier, Indian Airlines, has retained a dominantposition in air transport despite liberalisation of the sector to allow privatedomestic—but not foreign—operators. Private operators, notably Jet Airways andSahara, have steadily increased their market share. The state-ownedinternational carrier, Air India, has continued to suffer losses, owing toincreased competition, a rising wage bill and the depreciation of the rupee. Thegovernment has given up trying to privatise Indian Airlines and Air India as aresult of strong political resistance. Plans to lease out Mumbai, Delhi, Chennaiand Kolkata international airports have been drawn up, and three newinternational airports will be constructed with private-sector participation inBangalore, Hyderabad and Goa.

India’s telecommunications sector has registered rapid growth in recent years,spurred by reforms to introduce greater competition to the sector. However,rates of teledensity remain low. A total of 41.4m working connections had beeninstalled by end-2003. There is an average of one public phone for every 383people living in India’s cities, and 3.8m out of a total of 6m villages currentlyhave a public telephone.

Cellular telecoms services have been liberalised since 1994. The number ofcellular subscribers has expanded rapidly, to reach around 10.9m by end-2003,up from 3.2m at end-2000. Basic telecoms services have also been liberalised,but so far private services are being offered in only six states (Andhra Pradesh,Gujarat, Maharashtra, Madhya Pradesh, Rajasthan and Punjab).

Steps to introduce a powerful Communications Commission of India toregulate and issue licences in the communications, information andentertainment industries appear to be on hold. The proposed commission is tofacilitate convergence in telecoms, broadcasting and the Internet by establishinga one-stop shop for licences, replacing the existing Telecoms RegulatoryAuthority of India (TRAI). The courts have now removed obstacles to thegovernment’s decision to allow fixed-service operators to use wireless in localloop (WLL) technology to offer limited mobility services, which cellular phoneoperators claimed encroached on the services for which they had purchasedlicences. However, the government remains committed to a rapid expansion ofteledensity and to the promotion of a conducive telecoms environment. VSNL,

Airlines

Telecommunications

26 India


the state-owned international call carrier, lost its monopoly and was privatisedon April 1st 2002. Long-distance services have been open to private competitionsince January 2000. Rates for long-distance and international calls have fallen,but remain high by international standards. Internet connectivity remains lowat six users per 1,000 people, compared with 26 in China.

India has a postal network of more than 150,000 post offices, around 90% ofwhich are in rural areas. An emphasis on universal provision has meant theservice operates at a loss, despite a revision in postal charges. In an attempt toimprove performance, a number of services have been introduced to capturethe business market, as have steps towards computerising sorting offices.

India has a free and diverse press, published in Hindi, English and vernacularlanguages. In 2001 there were 5,638 daily newspapers with a combinedcirculation of 57.8m copies, and 45,974 periodicals with a total circulation of56.9m. Several international publishers have printing offices in India, althoughforeign newspapers are not allowed to publish in the country. India alsoproduces the largest number of films in the world. There is rapid growth indemand for satellite and cable television. Foreign ownership of terrestrialchannels is banned, and foreign participation in satellite channels is limited to49% of equity.

Energy provision

Although total power generated has continued to increase, reaching573.2bn kwh in 2001/02, shortages amounted to 6% of total demand, rising toover 12% at peak times. Problems in the power sector are manifold: they includethe grossly inefficient State Electricity Boards (SEBs), high levels of power theft,unsound cross-subsidisation policies and chronic underinvestment. The averagecost of power in India exceeds Rs4 per unit. This compares with less than Rs2in the US and Rs2.5 in both South Korea and Taiwan. Official targets forincreased generation capacity have been set below required levels for decades,and even these have not been met. As a result, the tenth plan period (2002-07)started off with a massive 27,000-mw shortfall—a serious constraint oneconomic growth. Around 70% of India’s power is generated by thermalstations.

India’s power sector urgently requires substantial investment. However, afterdecades of neglect the public sector lacks the necessary resources, and theprivate sector is unwilling to fill the gap, deterred by the fact that the mainelectricity purchasers, the state-owned SEBs, are bankrupt. Farmers pay little—insome states nothing—for the power that they use for irrigation. Only industry ischarged a market rate, and over 25% of power generated is lost in transmissionand distribution, much of it stolen. The central government has now drawn upan agreement with the state administrations whereby SEBs would charge usersmarket rates for electricity, reserving subsidies for those genuinely in need. Inreturn, the central government will cover the US$5.6bn owed by SEBs to powergenerators, through the issue of long-term bonds.

Post

Media services

A major constraint on growth

An urgent need for privateinvestment

India 27


In an effort to stimulate further investment in the power sector, proposals for100% foreign direct investment (FDI) in electricity generation, transmission anddistribution projects up to around US$300m receive automatic approval. So-called mega-projects (with a capacity of at least 1,500 mw for thermal projectsor of over 500 mw for hydroelectric plants) qualify for exemption from customsand countervailing duties. Power transmission has been opened to the privatesector, and funding is available for investors keen to tap India’s vast potentialfor generating hydroelectric power, which currently accounts for less than 20%of total electricity generated. However, as long as the SEBs have a monopoly ofdistribution, investors will be hesitant, particularly given the collapse of theDabhol power project—India’s largest-ever foreign investment—and the withdrawalof most foreign companies from power-generating projects.

India’s total coal reserves are estimated at around 200bn tonnes, and provenreserves total around 70bn tonnes. Coal accounts for 67% of commercial energysupplies, but a high ash content makes it a polluting and inefficient source ofenergy. Low levels of mining productivity—around 0.5 tonnes per man-shift indeep mines and 2 tonnes per man-shift overall—are a serious problem. In anattempt to promote greater investment, regulation has been reduced and coal andlignite mining no longer require licences.

India is a net importer of oil. In 1998/99 it produced 32.7m tonnes of crude, andimported 39.8m tonnes of crude and 23.1m tonnes of refined products; itproduced 64.5m tonnes of refined products and consumed 90.6m tonnes.Boosted in that year by the start of production at Reliance Industries’ 27m-tonnerefinery, crude imports rose to 78.7m tonnes by 2001/02, and the deficit ofrefined products turned into a net export of 3.1m tonnes; consumptionmeanwhile rose to 100.1m tonnes. The government is currently offering someacreage for licensing under the fourth New Exploration Licensing Policy, butforeign interest in the previous three rounds has been low, and the licensees—mainly composed of Reliance and state-owned companies—have added little tooutput. Over 75% of India’s total estimated reserves of 17bn tonnes (oilequivalent) is in the form of natural gas, although only 25% of this is proven.Measures to encourage the production of natural gas include a joint venturebetween the Gas Authority of India (GAIL) and British Gas, and thecommissioning of new plants in Assam and Maharashtra.

Price and distribution controls that were introduced at the time of the oil crisisin the 1970s were finally removed on April 1st 2002, and a number of Indianand foreign companies have received licences to open petrol stations. Mostproduction originates from government refineries; their prices are controlled bythe Ministry of Petroleum and Natural Gas. In 2002 a bill was passed providingfor the establishment of a Petroleum Regulatory Board to regulate the supplyof petrol.

Coal, oil and gas

28 India


The economy

Economic structureMain economic indicators, 2003GDP growtha (at factor cost; %) 8.3Consumer price inflation (av; %) 3.8Current–account surplus (% of GDP)b 0.6

Total external debt (US$ bn)c 104.4Exchange rate (av; Rs:US$) 46.6

Population (bn)d 1.050

a 2003/04 (April–March). b Estimate. c End-2002. d Mid-2002.

Sources: Central Statistical Office; Economic Survey, IMF; International Financial Statistics.

Two-thirds of India’s labour force works in agriculture which, with forestryand fishing, accounts for around 25% of GDP. However, the majority oflandholdings are farmed at subsistence level, and many farming families livebelow the poverty line. India has some of the lowest human developmentindicators in the world, particularly in rural areas. At the other end of thescale, India also has a large number of highly qualified professionals, as wellas several internationally established industrial groups. Without a rapid andsustained increase in economic growth and higher investment in primaryeducation and healthcare, reducing poverty will remain a considerablechallenge.

Agricultural production, mainly of foodgrains, accounts for around 25% of GDP (atfactor cost) and is an important determinant of overall economic growth. Totalfoodgrain production in fiscal year 2001/02 (April-March) amounted to a record212m tonnes, including 89.5m tonnes of rice and 75.6m tonnes of wheat. However,yields per hectare remain low by international standards. Other major cropsgrown include oilseeds, cotton, pulses, sugar, tea, coffee, rubber, jute and potatoes.

Comparative economic indicators, 2003India China Pakistan Bangladesh Sri Lanka

GDP (US$ bn) 592.0 1,409.0 69.0 51.9 18.6

GDP per head (US$) 558 1,090 456 354 972GDP per head (US$ at PPP) 2,690 4,910 1,970 1,270 3,350

Consumer price inflation (av; %) 3.8 1.2 2.9 5.6 6.3Current-account balance (US$ bn) 3.4 45.9 3.2 0.4 -0.4Current-account balance (% of GDP) 0.6 3.3 4.7 0.7 -2.0

Exports of goods fob (US$ bn) 57.2 438.3 11.7 6.9 5.1Imports of goods fob (US$ bn) -74.4 -393.6 -12.6 -9.3 -6.7

External debt (US$ bn) 104.4 196.8 33.6 18.1 10.6Debt-service ratio, paid (%) 13.9 4.8 13.5 7.5 9.2

Source: Economist Intelligence Unit, CountryData.

A policy of import substitution in the decades after independence encouragedthe development of a broad industrial base, but a lack of competitioncontributed to poor product quality and inefficiencies in production. Severalsectors have now been opened up to foreign participation under India’s

Agriculture

Industry

India 29


liberalising reform programme, contributing to a significant expansion in theproduction of durable consumer goods including cars, scooters, consumerelectronics, computer systems and white goods. However, a large proportion ofheavy industry is still publicly owned.

The services sector has proved to be India’s most dynamic sector in recentyears, with telecoms and IT registering particularly rapid growth. Services,including airlines, banks, construction and small-scale private traders, as wellas the public sector, accounted for 50.8% of GDP in 2002/03. The governmenthas sold its 25% stake in Videsh Sanchar Nigam Limited (VSNL), the formerstate-owned international call carrier which recently lost its monopoly oninternational calls. However, privatisation of the domestic telecoms company,Bharat Sanchar Nigam Limited (BSNL), and of the national and internationalcarriers, Indian Airlines and Air India, has stalled. The predominance ofinefficient state-owned enterprises, particularly in the banking sector, remainsa brake on growth.

Economic policy

India’s economic growth remains severely constrained by an unsustainablylarge fiscal deficit. A concerted effort will be required to reduce the fiscalimbalance substantially. The fiscal deficit reached 6.6% of GDP in 1991/92, whenIndia experienced a payments crisis. A sustained effort at fiscal restraint broughtthe deficit down to 4.1% in 1996/97. The succession of weak coalitiongovernments that followed allowed it to rise again, to reach 5.4% in 2002/03,while the states ran a deficit equal to an additional 4.2% of GDP. Thedeterioration in the fiscal position since the mid-1990s was reflected almostexactly in the worsening of aggregate savings and investments ratios—providingclear evidence of the adverse impact of the fiscal deficit on savings andinvestment. While private savings and public investment in India arecomparable with those of East Asia, public savings and private investment aremarkedly lower. The former has fallen in line with the fiscal deterioration,whereas private investment continues to be crowded out by unproductivepublic consumption, resulting in a reduced growth rate of GDP.

A Fiscal Responsibility and Budget Management Bill, designed to place astatutory limit on government borrowing, was passed in December 2000, yet aparliamentary committee watered it down and mandatory benchmarks fordeficit reduction were dropped. High subsidies, an inadequately small tax baseand high growth in the government employees’ wage bill have all contributedto the fiscal imbalance. The magnitude of the required fiscal adjustment ishuge—a radical departure from current policy is needed to address India’s singlemost important risk to macroeconomic stability.

The objective of the Reserve Bank of India (RBI, the central bank) is to maintainprice stability and ensure an adequate flow of credit to the economy. Importantchanges to the institutional set-up of the RBI have resulted in improvedmonetary control in the economy. In recent years, inflation has fallen to levelsof around 4-5%, down from double-digit inflation in the first half of the 1990s.

Services

The fiscal position isunsustainable

Monetary policy

30 India


The objective of price stability has gained further importance following theopening up of the economy and far-reaching reform in the financial sector.Furthermore, the authorities are aware that inflation control hits the poorhardest since they possess no hedges against inflation. The RBI officially targetsbroad money, M3, but movements in interest rates, credit availability to theproductive sectors and the exchange rate in particular play a crucial role whenformulating policy.

Attempts to liberalise the economy were made by the Janata Party in 1977 andat the beginning of Rajiv Gandhi’s first administration. The Janata governmentfell after reducing some industrial and import controls, and Rajiv Gandhi’sadministration quickly became mired in scandal and lost the power to overrideparty members who enjoyed the benefits of controls. Then, in 1991, Indiaborrowed from the IMF and the World Bank to overcome a payments crisis.The conditions of the loans included fiscal correction and trade liberalisation;the finance minister, Manmohan Singh, attempted broader package of reformscovering subsidies, banking, industrial and exchange controls. A spectacularexport and industrial boom ensued, making the reforms more acceptable.However, once the crisis was overcome and foreign-exchange reserves becamecomfortable, the pressure of party members again slowed the reform process.

The adoption of a command economy with severe restrictions on the privatesector led to the growth of large and inefficient enterprises unaccustomed tocompetition. Moves to open up India’s economy have met opposition fromvested interests including politicians, unions, bureaucrats and someindustrialists. Hindu nationalist groups associated with the BJP have alsoopposed the opening up of the economy to foreign competition, insteadespousing swadeshi or self-reliance. The reform process has neverthelesscontinued, if slowly, since 1991. The imposition of economic sanctions in 1998,in the aftermath of India’s nuclear tests, was the latest catalyst for reform,although initial reform proposals were often later diluted.

In recent years, significant steps have been taken to reduce bureaucraticrestrictions on industry and encourage foreign direct investment (FDI). Inparticular, the financial and insurance sectors have been opened to private andforeign participation, as have the telecoms sector and many sectors ofmanufacturing industry. The government has also removed the remainingquantitative restrictions (QRs) on imports, in line with its obligations to theWorld Trade Organisation (WTO)—although it has raised agricultural tariffs andimposed many anti-dumping duties to mollify domestic lobbies.

A decade of reforms

Despite their slow pace, the cumulative reforms since 1991 have been substantial.The reforms can be summarised as follows.

• Progressively more sectors were opened to private investment, including power,steel, oil refining and exploration, road construction, air transport, telecoms,ports, mining, pharmaceuticals and the financial sector. Sectors such as

A difficult reform process

India’s big bang

India 31


garments and textiles that were previously reserved for small-scale industrieswere also delicensed.

• Policymakers sought to encourage foreign direct investment (FDI) with majorityequity (except in a few “strategic” sectors) and portfolio investment. Red tapewas significantly reduced.

• Most industries were delicensed to encourage competition.• Trade policy was liberalised. Some import quotas were converted into tariffs,

and the tariff system was simplified to reduce the number of bands and achievea reduction in overall rates imposed. From April 2001 remaining quantitativerestrictions (QRs) on imports were removed, although tariffs remain high.

• Some aspects of business decision-making, such as the location of newenterprises and technology transfer, were taken out of the state’s control.(Labour relations and the shutting down of loss-making enterprises, or “exitpolicy”, remain strictly regulated.)

• The exchange-rate regime was liberalised, with the devaluation of the rupee by22% against the US dollar in two instalments in July 1991. A market-determinedexchange rate was introduced in March 1993, and current-account convertibilitybegan in August 1994. Since July 1995 all official foreign debt-service paymentshave been channelled through the interbank market. However, the rupee is notyet fully convertible on the capital account.

• Capital markets were reformed. Private mutual funds, foreign institutionalinvestors and country funds are active investors, and the stockmarket is subjectto more rigorous regulation, although scandals every couple of years suggestthere is still some way to go.

As central controls have receded, states have acquired more freedom to manoeuvre.Some states, such as Andhra Pradesh, Karnataka and Maharashtra, have shownconsiderable initiative in raising additional finance, including issuing bonds andencouraging private investment in irrigation, roads, bridges, software development,and agricultural and horticultural projects. However, most states have made littleprogress.

Economic performance

India’s economy expanded considerably during the 1980s to reach an annualrate of GDP growth of around 5.5% at the end of the period, after three decadesof growing by just 3.5% per year (equivalent to GDP growth per head of only1.5%)—what had become known as the “Hindu rate of growth”. Economicgrowth collapsed to 0.4% in the crisis year of 1991/92, but following thedevaluation, import liberalisation and industrial delicensing, it rapidly roseabove 5%, peaking at 7.8% in 1995/96. Since then it has eased back. Real GDPgrowth at factor cost averaged 5.2% in the five-year period from 1997/98 to2002/03, down from 6.7% in 1992/93-1996/97. This slowdown was mainly theresult of a significant fall in industrial and agricultural growth, whereas servicesgrowth continued its rapid expansion and has become the main engine ofeconomic growth. Worryingly, growth in the agricultural sector slowed toaround 1% in 1997/98-2002/03, down from 4.7% in the previous five years. In2003/04, the best monsoon rains in a decade generated growth of 10% in the

The “Hindu rate of growth”belongs to the past

32 India


agricultural sector, and continuing robust service sector growth lifted GDP atfactor cost above 8%.

The low level of productivity in the large state sector is a major constraint onhigher GDP growth. The state employs 70% of the 28m workers in organisedemployment in India. Most public-sector enterprises are hugely overstaffed,debt-ridden and inefficient. A high level of unionisation, and politicalexpediency, have restricted labour reforms and technological advances thatcould threaten jobs, and have thus deterred potential investors. The 2001/02budget included a promise to implement the “exit policy”, which would permitowners of enterprises that employed up to 1,000 staff to shed workers withoutgovernment approval, as well as to allow contract employment, but theproposal was not passed. However, the government has made a modest yetdecisive beginning in the privatisation of public enterprises over the past twoyears, by selling minority stakes in major companies to the equity markets—astrategy that is likely to continue under the new government.

India’s private companies have responded better to the reform process, withmergers in several sectors helping to improve efficiency. However, overalleconomic growth has been severely hampered by weak infrastructure,including poor transport networks and insufficient and erratic power supplies,which have also limited investment. Levels of capacity utilisation have beenlow and capital productivity has been poor, with negligible growth in totalfactor productivity.

In the boom years between 1992 and 1996 the rate of inflation averaged closeto 10%. In 1997-2003 the rate averaged around 6%, largely owing to improvedproductivity, an appreciating currency and improved monetary managementby the central bank. Furthermore, globally lower inflation and low commodityprices contributed to a reduction in the inflation rate. Another factor is thatIndia’s cost of living index is heavily weighted in favour of food, prices ofwhich were ratcheted up as a result of price-support operations by thegovernment. However, the government has moderated the annual increases insupport prices (thus lowering overall inflation), and has tried to reduce foodstocks through public works programmes, poor relief and exports. Stocks wereover 60m tonnes in 2001, but had fallen to 21m tonnes by April 2004.

Exports have surged in the past two years. Merchandise exports rose by 20.2%year on year in fiscal year 2002/03, and 17.1% in 2003/04. Import growth stoodat 16.9% in 2002/03, and accelerated to 25.3% in 2003/04 as the fast growingeconomy sucked in more imports. This resulted in a widening trade deficit in2003/04 of US$13.7bn, up from US$7.5bn in the year-earlier period. Remittancesby Indians abroad have continued to rise strongly, as have exports of ITservices. The current-account deficit stood at US$3.6bn in 2000/01. India hasbeen running surpluses on the current account for three consecutive years sincethen. The surplus reached US$3.2bn in April-December 2003.

Inflation is largely undercontrol

India 33


Regional trends

India’s national performance in many aspects masks considerable interstatevariation in terms of economic growth, economic policy, population andhuman development. Since 1991 Gujarat and Maharashtra have been thefastest-growing states, enjoying growth rates of around 6-8%, comparable withthe East Asian economies. High-growth private-sector industries are concen-trated around Mumbai in Maharashtra and parts of Gujarat; around Delhi,including Haryana and western Uttar Pradesh; and in the corridor fromBangalore in Karnataka to Chennai in Tamil Nadu. The process of economicpolicy reform that began in 1991 had important implications for state-levelgrowth. Data suggest that growth differential between states has intensified.Bihar, the poorest state, grew at a rate nearly ten times lower than that ofGujarat, whereas Assam’s economy contracted during the post-reform period.The prosperous states with higher-quality administrations appear to havebenefited the most in the post-1991 period.

India’s regional economic growthReal state

GDP per headReal state

GDP per headAnnual growth

(%)Annual growth

(%)Annual growth

(%)1969-71 1995-97 1970-97 1970-90 1991-97

NorthBihar 555 741 1.6 2.1 0.8Haryana 1,190 2,579 3.1 2.7 4.6Madyha Pradesh 730 1,324 2.8 2.5 3.3Punjab 1,431 2,930 2.9 2.4 3.4Rajasthan 760 1,313 2.2 1.2 5.8Uttar Pradesh 803 1,244 2.0 2.1 3.0

EastAssam 687 1,114 2.6 3.1 -0.9Orissa 746 1,233 2.7 2.8 0.9West Bengal 1,065 1,771 2.2 1.9 3.5WestGujarat 1,042 2,245 3.3 2.8 7.8Maharashtra 1,013 2,498 3.8 3.6 5.9SouthAndhra Pradesh 848 1,867 3.5 3.0 4.1Karnataka 937 1,767 3.1 2.7 3.9Kerala 725 1,441 2.7 2.3 3.5Tamil Nadu 878 1,923 3.8 3.2 4.2

Source: M K Baddeley et al, “Divergence in India: Economic Growth at the State Level, 1990-97”, Wellcome Project Working Paper, London School of Economics, 2003.

The 1990s have seen faster improvements in human development indicators,especially in literacy and life expectancy. Generally, fertility and mortality arelower in southern and western states compared with most of the northernstates. The speed of fertility decline has been slowest in Bihar and UttarPradesh, where the number of births per woman is still between four and five,way above the all-India average of around three. As trade was liberalised andindustry freed to locate where it wished, industrial development becameconcentrated in the south and along the west coast. The northern states havefallen further behind. The software export boom has also been largely

34 India


concentrated in the southern and western cities of Chennai, Bangalore,Mumbai and Hyderabad.

Economic sectors

Agriculture

India’s agricultural sector employs about 60% of the country’s workforce andaccounts for one-quarter of GDP. Unlike in East Asian countries, the shift of thelabour force from agriculture to non-agriculture in India is peculiarly slow,largely attributable to rigid labour laws in both the agricultural and industrialsectors. The agricultural sector boomed in the post-reform period 1992-97 withaverage growth at 4.7%, up from an average of 3.6% in the 1980s. However,growth fell to a meagre 1.2% in the period 1997-2001. The reasons for thedeceleration in agricultural growth are manifold. Public investment inagriculture fell by one-fifth between fiscal year 1994/95 (April-March) and2000/01. Inadequate road linkages remain a major constraint for thedevelopment of well-functioning agricultural markets. A continuingfragmentation of landholdings, poor maintenance of existing irrigation systemsand declining soil fertility in some areas are other factors. Production growthand yields in principal crops, accounting for some 70% of value added inagriculture, declined significantly during the 1990s compared with the 1980s.

Growth of production and yields in principal crops(%; fiscal years beginning Apr 1st of year shown)

Production Yield

1980-89 1990-2000 1980-89 1990-2000Foodgrains 2.85 1.66 2.74 1.34Non-food crops 3.77 1.86 2.31 0.59

All crops 3.19 1.73 2.56 1.02

Source: Ministry of Finance, Economic Survey.

The introduction of high-yield crop varieties and new fertilising and irrigationtechniques over several decades—the so-called Green Revolution—dramaticallyincreased productivity in some regions. India has been self-sufficient in foodsince the mid-1970s, maintaining buffer stocks adequate to meet demanddespite failed harvests and seasonal fluctuations. However, given agriculture’sdiminishing yet still huge importance for India’s overall growth prospects, therecent slowdown in the sector is worrying and calls for a change in thegovernment’s agricultural policy. Academic research suggests that for a countryto sustain GDP growth at around 7% or higher, agriculture has to grow at 4% ormore. Even allowing for the fact that these estimates overstate the requiredagricultural growth, the current underlying agricultural growth of 1-2% is clearlyinadequate.

Food support prices for wheat and rice have given farmers little incentive todiversify and have filled government storage facilities to overflowing, whilekeeping the market price of foodgrains artificially high. Current agriculturalpolicy, which supports cereal production, is exceedingly expensive and will be

Deceleration in agriculturalgrowth

India 35


unable to deal with a likely scenario of a shift in consumption from cereal foodtowards non-cereal food. A lack of market infrastructure also hampers themovement of crops, leading to sudden shortages. India has considerablepotential as an exporter of rice, cotton, many types of fruit and even flowers.

Less than one-third of cropland is irrigated, making agricultural output heavilydependent on the annual monsoon. The main foodgrain crops (the kharif orautumn crop—predominantly rice, harvested in September-October) and somecash crops (oilseeds, cotton, jute and sugar) depend on the south-westmonsoon. This brings 80% of India’s rain, usually within a three-month periodfrom June to mid-September. A second, north-east, monsoon brings lighter rainsto the south of the country from mid-October to December. Winter rain innorth-west India from October to March waters a crop of wheat and coarsegrains (the rabi crop, harvested in April-May). The 2002 south-west monsoonwas disastrous, causing the autumn grain harvest to fall by 18% year on year. In2003 the best monsoon rains in a decade generated growth of around 10% inthe agricultural sector.

Mining and semi-processing

India derives little wealth from its mining sector, which accounts for less than2% of GDP. Nevertheless, a range of non-hydrocarbons minerals is extracted. Inaddition to those listed below, India produces significant amounts of mica,manganese, dolomite, limestone, chromite, magnesite, apatite and phosphorite.Private-sector participation in the mining sector is increasing.

India possesses among the world’s largest reserves of iron ore, at around 19.2bntonnes, and is one of the world’s lowest-cost sources. Around 50% of iron oreexports is destined for China, the remainder largely goes to South Korea andJapan. Almost one-half of the output comes from privately owned minesin Goa.

India also has large reserves of bauxite, at approximately 2bn tonnes or 11% ofthe world total, and is the fifth-largest world bauxite producer. Ambitious plansexist to expand smelting and aluminium production for home consumptionand export.

There are substantial reserves of copper (estimated at 422m tonnes), but India isa net copper importer, to the tune of 50,000 tonnes in 1999. Reserves of leadand zinc are estimated at 360m tonnes. A complex with a lead-zinc capacity of70,000 tonnes has cut import demand for both metals, although around30,000 tonnes of each were imported in 1999.

Foreign investors have shown considerable interest in joint ventures to minefor gold, particularly the state-run mine at Kolar in Karnataka. In addition,more than 20 companies, including the UK-based De Beers and Cluff, haveregistered an interest in diamond prospecting in the country.

Iron ore

Bauxite

Non-ferrous metals

Gold and diamonds

36 India


Manufacturing

Industrial production(fiscal years Apr-Mar; 1993/94=100; % change year on year)

1999/2000 2000/01 2001/02 2002/03 2003/04a

Basic goods 5.5 3.9 2.6 4.9 5.4Capital goods 6.9 1.8 -3.4 10.5 12.7Intermediate goods 8.8 4.7 1.5 3.9 6.2

Consumer durables 14.1 14.5 11.5 -6.3 11.6Consumer non-durables 3.2 5.8 4.1 12.0 5.7All (index of industrial

production) 6.7 5.0 2.7 5.9 6.7

a Preliminary.

Source: Reserve Bank of India (RBI).

Industrial growth averaged 7.1% in the 1980s. It accelerated slightly to 7.6% in thefirst five years following the beginning of the economic policy reform processin 1991, which led to an investment boom, particularly in industry. Since thenindustrial growth has trended lower at around 5%, although the recent businesscycle upturn lifted industrial growth to 6-7% in 2002/03 and 2003/04respectively. Although reforms have reduced licensing and regulation, heavyindustry is still dominated by public-sector enterprises. State-owned companieshave accounted for the bulk of activity in steel, non-ferrous metals (virtually100% for copper, lead and zinc, and about 50% for aluminium), shipbuilding,engineering, chemicals and paper. The government has pledged to reduce itsholdings in non-strategic public-sector undertakings to a maximum of 26%, andto close down non-viable enterprises. It has begun to make some progresstowards these goals, and has sold off controlling interests or brought inminority managing partners in a number of public enterprises. Onerous labourregulations, as well as a shortage of cheap credit, limit opportunities forrestructuring and so further restrain rates of growth.

Finished steel production rose by 7.4% to 36.2m tonnes in 2003/04, following a7.6% rise in 2002/03. Increased demand from China as well as strong domesticdemand, particularly by consumer durables and automotive manufacturers andthe construction sector are the main drivers of production growth. Theimposition of US import tariffs in 2002 increased competition in the world steelmarket: Indian steel producers complained Production of competition fromCommonwealth of Independent States (CIS) countries, and the governmentimposed anti-dumping duties on CIS steel. However, in April 2003 the USwithdrew tariffs on Indian steel, thus boosting the industry. Around 40% ofoutput is produced in integrated steel plants; the remainder comes from mini-plants (electric arc furnaces), of which over 180 exist, almost all in the privatesector. Reforms to the sector have lifted controls on prices, distribution andimports of industrial inputs. However, the government maintains a floor on theprice of imports of steel products in order to protect the domestic industry.

Textiles account for around one-fifth of total export earnings. Fabric output in2002/03 stood at 40.3bn sq metres, virtually unchanged compared with theprevious year. Because the government discriminated for decades against

Steel

Textiles

Industrial growth

India 37


integrated textile mills, with the aim of helping handlooms, most mills closeddown. Mills currently produce only 4% of textiles output. Despite governmentassistance, the share of handlooms in total output is only 18%; the remainder isproduced by power looms located in sheds outside the mills, which allowthem to escape the restrictions.

India’s information technology (IT) and service industry has grown at anaverage annual rate of around 50% a year since 1993, to reach a turnover ofUS$16.5bn in 2002/03, equivalent to 3% of the country’s GDP. The industry ishighly export-oriented—the domestic IT market accounts for about 40% of thetotal. Out of an estimated 5,000 IT software and service companies in India,about 60% are domestic players and 40% are multinational corporations. Thelatter account for about 65% of the industry’s revenue. IT products—mainlysoftware—accounted for 11% of current-account receipts and 19% of goodsexports in 2002/03. The most important market is the US, which absorbs about70% of India’s software exports, followed by the UK with 14% and Europe(excluding UK) with 9%. Indian firms are especially strong in software forbanks, finance houses and insurance companies. IT exports grew at an averageof 52% a year between 1993/94 and 2002/03. However, the slowdown in the USIT industry in 2002-03 affected the Indian industry: IT export growth fell to anannual average of 24% during 2001/02 and 2002/03. Although the biggercompanies have largely held their own, smaller exporters have suffered.Nevertheless, the Indian IT industry has withstood the slowdown reasonablywell. It has also been forced to increase diversification in non-US markets suchas Europe and Asia in areas such as the management for clients of IT-relatedbusiness processes. At the other end of the market, call services and IT-enabledservices, which use cheap labour and do not require a knowledge of softwareengineering, are growing rapidly in India.

The rapid growth of software exports has attracted thousands of people intothe industry and has stimulated the demand for computers. Sales of computersrose by 37% in 2002/03, to 2.3m. Import liberalisation and the entry of foreignmanufacturers has transformed this industry, which, until five years ago, wastiny and dominated by a few Indian manufacturers. The ease of importingcomponents has nurtured hundreds of unbranded assemblers, whichcommand 62% of the market. Only three major Indian brands remain. HCLsold 151,000 computers in 2001, Wipro sold 65,000 and Zenith sold 64,000.Among foreign manufacturers, Compaq (147,000 units sold in 2001), HewlettPackard (84,000 units sold), IBM (72,000 units), Dell (35,000 units) and Acer(18,000 units) have a significant presence. After their recent merger, Compaqand Hewlett Packard have become the largest branded supplier.

Car sales in 2003/04 rose by a massive 32.2% year on year to 1.03m units. Risingincome levels, continuing poor public transport systems, wider availability ofcar finance and an increasing percentage of young population are the maindrivers of growth. In July 2003 the government sold a 25% share in MarutiUdyog, its joint venture with Suzuki Motor of Japan, leaving the governmentholding about 20% of Maruti and Suzuki about 54%. The initial public offering(IPO) was the largest-ever domestic share offer for privatisation in India’s capital

Electronics and software

Vehicles

Computer hardware

38 India


market and laid the groundwork for other privatisation efforts. With 11producers, the Indian car market is highly fragmented, although Hyundai andTata have emerged as serious competitors to Maruti. Sales of two-wheelersincreased by 12.8% to 5.6m units in 2003/04. Hero Honda is the dominantplayer in the two-wheeler market, with a market share of around 50%. Theonce-dominant Bajaj has been left behind, owing to its concentration onscooters, but its partnership with Kawasaki has enabled it to introduce newmotorcycle models. After years of stagnation, output of commercial vehiclesincreased by 25% and 35% in 2002/03 and 2003/04 respectively.

Construction

Construction accounts for around 5% of GDP, employing an estimated3.5m people full-time and a further 6.5m seasonally. The construction industrycontributes more incremental value added per unit of investment than anyother sector, and has been a focus of government investment in an effort tokick-start other industries, particularly steel and cement. Construction accountsfor around 40% of public-sector plan outlays, and more than 1m workers areengaged in public-sector construction projects. Large-scale public-sector projectslike the “golden quadrilateral” project that aims to link the cities of Delhi,Calcutta, Mumbai and Chennai via national highways, the need for fastdevelopment of urban infrastructure combined with fast rising demand forresidential housing have contributed to a boom in the sector in recent years.

India has a serious housing shortage. Under a Special Action Plan on housing,2m units will be constructed each year—700,000 in urban areas and 1.3m inrural areas. Around 50m people in urban areas live in what are officiallydesignated as slums. Rural housing conditions are also poor.

Financial services

The financial services sector has long been dominated by state-ownedinstitutions. During the second world war, the government introduced controlson public issues and used pricing formulas that under-priced share issues. As aresult, although India had a large number of stock exchanges, little money wasraised through public issues, the floating stock was small and the markets werespeculative and volatile. In the 1950s the government set up long-term financialinstitutions that supplied the bulk of industry’s debt and equity finance, and in1970 it nationalised banks. Henceforth, virtually all industrial finance wasprovided by government institutions. Following the government’s liberalisationof capital issues in 1992 there was a spectacular boom in public issues, althoughthis eased after 1996 with the slowdown in industrial growth.

The central government owns four long-term financial institutions—theIndustrial Development Bank of India (IDBI), the Industrial FinanceCorporation of India (IFCI), the Small Industries Development Bank of India(SIDBI) and the Industrial Investment Bank of India (IIBI)—and is the largestshareholder in the Industrial Capital and Investment Corporation ofIndia (ICICI). These institutions in turn own three venture-capital funds: IDBI

The housing shortage

State-owned financialinstitutions dominate

India 39


owns the Indian Venture Capital Fund (IVCF) and the Technology FinanceCorporation of India (TFCI), and ICICI owns the ICICI Venture Fund. Inaddition, the Unit Trust of India (UTI), the Life Insurance Corporation (LIC)and the General Insurance Corporation (GIC) also provide finance.

After the central government stopped the financial institutions’ recourse toautomatic and cheap finance from banks in 1993, their margins began toshrink. More recently, banks have been allowed to provide long-term finance,and have thus begun to compete directly with the financial institutions. As aresult, the financial institutions are in decline. In 2002/03 they sanctionedloans worth Rs169bn (US$3.5bn), compared with Rs248bn in 2001/02 and theirdisbursements fell from Rs193bn to Rs125bn. As a result of this trend, ICICImerged with the bank it owned in May 2002. The government has divided upUTI into an arm that holds government securities and offers fixed-returninvestment schemes, and one that runs open mutual funds. The respectivelosses (Rs140bn and Rs55bn) of the two arms have been borne by thegovernment, which is dithering over the fate of the other institutions.

The size and liquidity of the Indian stockmarket has risen notably in recentyears. The Bombay Stock Exchange benchmark index BSE 100 rose by 85%during 2003 as a whole. The volume of shares traded in 2003 was 71% higherthan in 2002. Of the 7,000-plus listed shares, 1,752 had been traded in January2003, and this level increased to 2,190 by December. Market capitalisation oflisted companies as a percentage of GDP stood at around 25% in 2002, up from13% in 1990 and 5% in 1980. This compares with an average of 33% indeveloping countries. Since the government relaxed guidelines governing theissue of foreign-currency convertible bonds in March 2003, Indian corporateshave drawn up plans to raise resources from overseas markets.

Other services

India has more than 5m retail outlets, and the retail sector is underdeveloped,unorganised and dominated by small, family-owned firms. Although theorganised retail sector has begun to develop rapidly, particularly in the fourlargest cities (Chennai, Mumbai, Delhi and Kolkata), it faces major impedimentsto growth. In particular, inflexible labour laws and high supply-chain costs, aswell as a preference for known retailers, work against the sector’s development.

In 2003/04 a revival of international interest in India as a tourist destinationwas reflected in an increase of 18.5% in tourist arrivals. However, India has sofar failed to exploit its tourism potential, attracting a mere 0.4% of the world’stotal tourists and 1% of total spending on tourism. Tourism receipts have grownmarginally (to around US$3bn), but net tourism receipts have fallen as moreIndians have travelled overseas. The tourism industry is hampered by aperception of India as poor, politically unstable and requiring precautionsagainst disease. There is also a shortage of hotel rooms to attract foreign visitors.However, special tax incentives have helped to encourage projects targetingmiddle-range business clients and tourists.

The stockmarket

Tourism remains peripheral

40 India


The external sector

Trade in goods

The payments crisis in 1991 was tackled with a remarkably successful fiscalcorrection and currency devaluation. The trade deficit was reduced to US$1bnby fiscal year 1993/94 (April-March). After that, however, imports rose morerapidly than exports as the ensuing investment boom sucked in more imports.The trade deficit rose to US$17.8bn by 1999/2000 as a consequence. Aslowdown in economic growth temporarily saw the trade deficit narrow toUS$12.7bn in 2002/03. Strong domestic demand, rising commodity prices andan appreciating currency resulted in a widening trade deficit in 2003/04. In theperiod April-December 2003 the merchandise trade deficit amounted toUS$15bn compared with a deficit of US$12.9bn in the whole of 2002/03. Therecent notable widening of the trade balance was attributable to exceptionallystrong import growth. Merchandise imports surged by 25% year on year in2003/04, reflecting a pick-up in industrial activity and outpacing merchandiseexports, which advanced by 17.1%.

Main trading partners, 2002/03(US$ bn)

Exports to:US 10.9UAE 3.3UK 2.5Hong Kong 2.5Germany 2.1China 2.0Japan 1.9Imports from:US 4.4Belgium 3.7China 2.8UK 2.8Germany 2.4Switzerland 2.4South Africa 2.1

Note. Imports do not include crude petroleum and products.

Source: Centre for Monitoring Indian Economy.

India’s major exports have long been textiles and gems re-exported aftercutting. Recently, however, the country has developed significant exports ofchemicals, principally drugs and dyes. India also exports relatively cheapmachinery. Its largest import is mineral oils. Domestic crude oil meets onlyabout 30% of India’s needs. Recently, with import liberalisation, electronicgoods imports have also grown. The legalisation of gold imports has meantthat gold, which used to be smuggled in, has begun to be imported legally andnow constitutes a major import.

When it removed the last quantitative import restrictions in 2001, thegovernment feared a big rise in imports of agricultural goods, and raised tariffs

Textiles and gems have beenthe key exports

The trade deficit widens

India 41


on cereals and edible oils to over 60%. The fears proved groundless: imports ofthe 300 “sensitive” items that the government had decided to monitor wereworth US$1.7bn in April-December 2001—no more than in the previous year.Most of the imports were edible oils, cotton and silk, which India alreadyimported. The only new categories of goods being imported were fruit andvegetables. India is beginning to import out-of-season and exotic fruit fromcountries including Australia, South Africa and Thailand. Foreign garment andshoe producers have set up shops or obtained outlets in the major cities.Although India is slowly opening up to consumer goods imports, thegovernment has introduced non-tariff barriers on cars, fruit, meat, vegetable oilsand other agricultural products.

Invisibles and the current account

The current account moved into surplus in 2001/02 for the first time in 24 years,in spite of a sizeable trade deficit. This was largely because of a sharp increasein remittances from overseas Indians on the invisibles side of the currentaccount. Remittances amounted to US$15.2bn in 2002/03, thereby more thanoffsetting a US$12.9bn trade deficit. After the September 11th 2001 terroristattacks, a crackdown on unofficial remittances (aimed at preventing terroristfinancing) through the Hawala system, an informal channel for transferringfunds, is likely to have increased officially transferred funds. Furthermore, alarge interest differential between India and most developed economies, whereinterest fell to historical lows during the recent economic downturn, is alsolikely to have raised remittances volumes. At present, the country is a netcreditor—its current account has been in surplus for three consecutive years—buta sharp fall in remittances flows is a cause for concern as the current accountwould invariably move into deficit as a result.

Income from software services exports is the main driver of the servicessurplus of the current account. After a brief decline in 2000/01 to US$2.5bn(from US$4.1bn in the previous year) as the software boom collapsed in the US,the services surplus bounced back to US$4.6bn in 2001/02. It reached US$6.8bnin 2002/03. In April-December 2003 alone, the services surplus amounted toUS$8.8bn. Rapid future growth in software services is likely to continue tosupport the current account and increasingly offset the risk of a sudden fall inremittances.

Capital flows and foreign debt

India’s external position has strengthened considerably in 2003/04. Rising inter-national investor confidence in the Indian economy was reflected in a surge ofportfolio investment and revision of international credit ratings to investmentgrade. Portfolio investment inflows amounted to US$7.6bn in April-December2003, up from US$400m in the year-earlier period, the highest in any year sincethe opening of Indian stock exchanges to foreign direct investment (FDI) in1992/93. FDI stood at US$4.5bn, falling marginally short of the previous year’slevel of US$4.7bn. The fast-growing services sector was the largest recipient ofFDI inflows. Net inflows from non-resident Indians (NRIs) into NRI deposit

Remittances and softwareservices offset trade deficit

The external position hasstrengthened

42 India


schemes surged to US$3.6bn in the first nine month of 2003, largely driven by ahigh differential between deposits in India and those in most developedcountries. In April-December 2003 there was a net repayment of commercialloans of US$3.7bn and a repayment of US$1.8bn of external debt.

At the end of March 2003 India’s foreign-exchange reserves had surged toUS$113bn, making the stock of reserves the fifth-largest among emerging marketeconomies and the sixth-largest in the world. Foreign-exchange reserves rosefurther to US$118.6bn at the beginning of May 2004. During 2003/04 reservesrose by US$37bn. The objective of the Reserve Bank of India (RBI) has been tocurb the appreciation of the rupee through purchases of excessive capitalinflows. The accumulation of reserves is, unlike during the 1991 balance-of-payments crisis when reserves had sunk to one month of import cover, theoutcome of the central bank’s exchange-rate policy and not driven by an“insurance motive”. In May 2004 India’s foreign-exchange reserves providedabout 17 months of import cover.

India’s total external debt has risen from US$83.8bn in 1991 to US$112.1bn at theend of December 2003 (government measure). However, the ratio of debt toGDP has fallen from 28.7% to 20.2% over the same period. Commercial financeis increasingly replacing foreign aid. India is still the World Bank’s biggestborrower, but nearly one-half of the funds are lent on near-commercial terms.Sanctions imposed on India in 1998 forced the World Bank to freeze lending for“non-humanitarian” programmes, although lending has subsequently resumed.OECD aid to India is co-ordinated by the World Bank-sponsored IndiaDevelopment Forum. India has not needed IMF funds since the 1991 financialcrisis, when it borrowed US$4.5bn (now repaid).

India’s current debt stock and foreign payment obligations are manageable.Restrictions on external commercial borrowings have gradually been lifted,with total annual borrowing permitted up to a ceiling of US$8.5bn. Foreignbanks can guarantee rupee borrowings by Indian companies, and companieswith foreign-exchange earnings can raise up to US$500m through externalcommercial borrowings. Furthermore, the end use of external commercialborrowings was enlarged to include overseas direct investment in jointventures in order to allow Indian corporates to diversify into internationalmarkets. India has never defaulted on its external debt, and its external riskassessment is now generally positive.

Foreign reserves and the exchange rate

India’s foreign-exchange reserves, including gold and special drawing rights(SDRs), rose to US$118.6bn on May 7th 2004—an unprecedented increase ofUS$42.5bn since the end of March 2002. Foreign-exchange intervention by theRBI was the main cause of the build-up of reserves during 2003/04. The mainfocus of the central bank’s currency policy has been to smooth the rupee’sappreciation since June 2002 and deliver a low volatility of the nominalexchange rate. In fact, limited movements in the nominal exchange against theUS dollar suggest that the monetary authorities have primarily had a nominal

Foreign-exchange reservesgrow

Exchange-rate policy drivesreserves build-up

The foreign debt position isimproving

India 43


exchange-rate policy in recent years, and that reserves accretion has been theside effect of this de facto peg to the US dollar.

The RBI has overseen a managed decline over a number of years in the valueof the rupee, intervening only to prevent a sharp fall in the currency. After adevaluation in July 1993, the rupee remained constant at around Rs31.37:US$1for two years, before a nominal depreciation in 1995. It then graduallyweakened to reach Rs48.92:US$1 in early June 2002. The currency remainedroughly constant in terms of the government’s real effective exchange-ratecalculation, which takes into account trade-weighted changes in the nominalrate against a basket of currencies and also relative inflation. Exchange-ratepolicy focused on maintaining India’s external competitiveness. After June2002, however, the RBI was faced with the depreciation of the US dollar againstother principal currencies: the rupee appreciated against the US dollar but fellagainst the euro and the yen.

India has taken a gradualist approach to capital-account convertibility and hasmoved in this direction at a slow pace, although the capital account remainsrelatively closed. Starting from current-account convertibility in 1994, full capitalaccount convertibility was introduced for NRIs in early 2002. The transfer ofcapital abroad by resident Indians is still subject to controls. In January 2004custom duties on capital-goods imports were reduced further and Indiancompanies are now allowed to invest abroad up to their net worth. Furtherreforms in the real sector and the financial system are required in order tominimise the risk of a loss of macroeconomic stability that could result from afull convertibility of the capital account. At present, a weak banking sector anda high fiscal deficit remain the main obstacles to full convertibility. Restrictionson capital outflows stem mainly from the concern that the rupee needs to beprotected from a speculative attack, depleting foreign-exchange reserves. Therecent build-up in foreign-exchange reserves acts as insurance against such anattack and allows the RBI to respond quickly to short-term capital movements,resulting in unfavourable movements in the exchange rate.

The rupee’s managed slide

Full capital account con-vertibility a distant possibility

44 India


Appendices

Sources of information

There are a great number of detailed statistics available, of variable but oftenhigh quality. Three sources stand out: the annual Economic Survey of theMinistry of Finance is an excellent summary of most key economic data; theReserve Bank of India produces a steady stream of data in its weekly, monthlyand annual publications; and the Mumbai-based Centre for Monitoring theIndian Economy (CMIE) produces monthly and annual data in great detailand variety.

For economic data, the daily Business Line is the most comprehensivenewspaper, although Business Standard and The Economic Times can be quickeroff the mark.

For primary data, the following sources are the most important.

Census of India, 2001

Central Statistical Office (CSO), Annual National Accounts Statistics, New Delhi

CSO, Estimates of National Product, Savings and Capital Formation (annual),New Delhi

CSO, Monthly Abstract of Statistics, New Delhi

Directorate General of Commercial Intelligence and Statistics (DGCIS), TradeStatistics of the DGCIS (monthly and annual), Kolkata. The DGCIS alsopublishes a shorter summary entitled Foreign Trade Statistics of India (PrincipalCommodities and Countries), which is reasonably detailed

Ministry of Finance, Budget of the Central Government (annual), New Delhi(although Indian budgetary conventions are arcane and require someinterpretation)

Reserve Bank of India (RBI, the central bank), Bulletin (monthly), Mumbai

RBI, Report on Currency and Finance (annual), Mumbai

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Geographical Distribution of Financial Flows to Developing Countries(annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, World Development Report (annual)

National statistical sources

International statistical sources

India 45


Business World (weekly), Business India and Business Today (both fortnightly) arethe chief business magazines

Economic and Political Weekly is a left-wing academic journal with high-qualityanalysis

India Today and Outlook are weekly magazines that concentrate on politics

For those wishing to get a general feel for Indian society, the best source is India’snovelists. Particularly recommended are R K Narayan (especially the Malgudinovels), Vikram Seth (A Suitable Boy), Amit Chaudhuri (A Strange and SublimeAddress), Ruth Prawer Jhabwala, Ved Mehta (Portrait of India, Face to Face), GitaMehta, Anita Desai, Mulk Raj Anand, Nayantara Sahgal and Sunil Gangopadhyay

Academic analyses of the background to the economic reform programme are inBimal Jalan (ed), The Indian Economy: Problems and Prospects, New Delhi,Viking/Penguin, 1992, and in Vijay Joshi and Ian Little (eds), Indian EconomicReform, Oxford University Press, 1995. A more up-to-date discussion of India’seconomic reforms is contained in India in the Era of Economic Reforms, edited byAshutosh Varshney and Jeffrey Sachs, Oxford University Press, 2000

An integrated account of India’s population, development and economy can befound in Tim Dyson et al, Twenty-First Century India, Oxford UniversityPress, 2004

A regional perspective of economic growth in India can be found in M Baddeley,K McNay and R H Cassen, Divergence in India: Economic Growth at the State Level,1990-7, London School of Economics, 2003

Major historical works are Louis Fischer’s Life of Mahatma Gandhi (Granada,1951) and Jawaharlal Nehru’s The Discovery of India (Meridian, London, 1945).Two more recent additions include Patrick French’s Liberty or Death (HarperCollins, 1997) and Sunil Khilnani’s The Idea of India (Hamish Hamilton, 1997)

Ministry of Finance: www.nic.in/finmin/

Election Commission of India, www.eci.gov.in/

The best all-encompassing news site is www.samachar.com

Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Population statistics1998 1999 2000 2001 2002

Total (m) 983.1 1,000.2 1,016.9 1,033.4 1,049.5 % change, year on year 1.75 1.70 1.65 1.59 1.54

Source: IMF, International Financial Statistics.

Select bibliography andwebsites

46 India


Transport statistics(fiscal years Apr-Mar)

1997/98 1998/99 1999/2000 2000/01 2001/02RailwaysTotal length (‘000 km) 62.5 62.8 62.8 63.0 63.1 Electrified (‘000 km) 12.7 13.8 14.3 14.9 n/aGoods traffic (m tonnes) 445.5 441.6 478.2 504.2 521.2Passengers (m) 4,348 4,411 4,585 4,833 5,093RoadRegistered vehicles (‘000) 41,368 44,875 48,393 n/a n/a Goods vehicles (‘000) 2,536 2,554 2,681 n/a n/aSurfaced roads (‘000 km) 1,402 1,449 n/a n/a n/aAirPassengers handled at domestic

airports 36.53 36.97 39.00 42.03 40.00Cargo (‘000 tonnes) 706 699 797 842 854PortsGoods traffic (m tonnes) 251.7 251.7 271.9 281.1 287.6


Energy statistics(fiscal years Apr-Mar; m tonnes production unless otherwise indicated)

1998/99 1999/00 2000/01 2001/02 2002/03Coal 292.3 300.0 309.6 327.8 367.3 a

Lignite 23.4 22.1 23.0 24.8 n/aElectricity:Installed capacity (‘000 mw) 107.4 113.0 117.0 121.0 n/aGeneration (bn kwh) 496.9 532.2 554.5 573.2 n/aCrude petroleum 32.7 31.9 32.4 32.0 33.0

Petroleum products 64.5 79.4 95.6 100.0 n/aNatural gas 27.4 28.4 29.5 29.7 31.4

a Provisional; figure combines coal and lignite.


India 47


Government finances(fiscal years Apr-Mar; Rs bn unless otherwise indicated)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Total revenue 2,980 3,256 3,624 4,003 4,743 Current 1,815 1,926 2,014 2,317 2,630 Taxb 1,283 1,367 1,337 1,594 1,875 Non-tax 532 559 678 723 755 Capital 1,165 1,330 1,610 1,686 2,112 Recovered loans 101 121 164 341 646 Borrowings & other liabilities 1,047 1,188 1,410 1,313 1,321 Other 17 21 36 32 145

Total expenditure 2,981 3,256 3,625 2,889 3,527 Current 2,491 2,779 3,016 2,681 2,848 Interest payments 902 993 1,075 1,178 1,246 Subsidies 236 245 268 312 435 Capital 490 477 608 607 1,113

Fiscal deficitc 1,047 1,188 1,410 1,313 1,536 % of GDP 5.4 5.7 6.1 5.4 5.6Memorandum itemsRevenue deficitd 676 852 1,002 1,078 1,113Primary deficite 145 195 335 298 304

a Revised estimates. b Net of states’ share of income tax and union excise duties. c Total expenditure minus total receipts less borrowings andother liabilities. d Revenue expenditure minus revenue receipts. e Fiscal deficit minus interest payments.

Sources: Ministry of Finance, Budget at a Glance.

Gross domestic product(fiscal years Apr-Mar; at factor cost)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Total (Rs bn)At current prices 17,618 19,030 20,909 22,496 25,169At constant (1993/94) prices 11,484 11,986 12,678 13,183 14,245 % change, year on year 6.1 4.4 5.8 4.0 8.1Per head (net national product; Rs)At constant (1993/94) prices 11,482 11,786 12,269 12,561 13,376 % change, year on year 4.2 2.6 4.1 2.4 6.5

a Provisional.


48 India


Gross domestic product by sector, at constant prices(fiscal years Apr-Mar; Rs bn; constant 1993/94 prices)

1998/99 1999/2000 2000/01 2001/02 2002/03Agriculture 2,861 2,870 2,859 3,053 2,894Industry 2,923 3,064 3,266 3,375 3,592 Mining 264 273 279 285 310 Construction 544 587 627 645 693 Electricity, gas & water supply 270 284 298 306 319 Manufacturing 1,846 1,920 2,061 2,137 2,270Servicesa 5,043 5,551 5,862 6,250 6,697

GDP 10,827 11,484 11,986 12,678 13,183

a Including statistical discrepancy.

Sources: Central Statistical Office; Economist Intelligence Unit.

Gross domestic product by sector, at factor cost(fiscal years Apr-Mar; % share of total; % change year on year in brackets)

1998/99 1999/2000 2000/01 2001/02 2002/03Agriculture 26.4 25.0 23.8 23.9 22.0

(6.2) (0.3) (-0.4) (5.7) (-5.2)Mining 2.4 2.4 2.3 2.2 2.4

(2.8) (3.3) (2.4) (1.0) (8.7)Construction 5.0 5.1 5.2 5.1 5.3

(6.2) (8.0) (6.9) (3.7) (7.4)Electricity, gas & water 2.5 2.5 2.5 2.5 2.4

(7.0) (5.2) (5.0) (4.3) (4.2)

Manufacturing 17.0 16.7 17.2 16.8 17.2(2.7) (4.0) (7.3) (3.4) (6.2)

Services 46.6 48.3 48.9 49.5 50.8(8.4) (10.1) (5.6) (6.8) (7.1)

Sources: Central Statistical Office; Economist Intelligence Unit.

Money supply(Rs bn unless otherwise indicated; end-period)

1999 2000 2001 2002 2003Money (M1) incl others 3,161 3,496 3,846 4,325 5,018 % change, year on year 16.9 10.6 9.1 12.5 16.0Quasi-money 6,992 8,198 9,522 11,283 12,566

Money (M2) 10,153 11,694 13,368 15,609 17,584 % change, year on year 17.1 15.2 13.8 16.5 12.6Interest ratesCommercial bank prime rate 12.5 12.3 12.1 11.9 11.5


India 49


Prices and wages(fiscal years Apr-Mar; % change)

1998/99 1999/2000 2000/01 2001/02 2002/03Wholesale prices (base year 1993/94)General 5.9 3.3 7.2 3.6 3.4Food 12.8 3.8 3.0 3.5 1.8Fuel, power, light & lubricants 2.8 9.5 28.4 9.1 5.5Manufactures 4.7 2.2 3.6 1.4 2.6

Consumer pricesIndustrial workers (base year 1982) General 13.1 3.4 3.7 4.3 4.1 Food 14.7 0.2 1.6 -1.5 n/aUrban non–manual employees (base year 1982) 11.6 4.5 5.4 5.1 3.8Agricultural labourers (base year 1986/87) 11.0 4.4 -0.3 1.3 3.9Index of relative prices of manufactures &

agricultural products (base year 1993/94) -6.8 1.4 0.5 -1.4 n/a

Sources: Ministry of Finance, Economic Survey; Reserve Bank of India.

Availability of selected consumption items(fiscal years Apr-Mar; per head)

1997/98 1998/99 1999/2000 2000/01 2001/02 a

Foodgrains (kg) 164.0 175.0 167.0 152.0 n/a

Edible oils (kg) 6.2 8.5 9.1 8.1 8.6Sugar (kg)b 14.5 14.9 15.6 15.8 16.5

Cloth (metres) 30.9 28.2 30.6 30.7 32.0 Cotton 15.9 13.1 14.2 14.2 14.8 Synthetics 15.0 15.1 16.4 16.5 17.2

Tea (g) 635 684 642 652 657Electricity (kwh) 62.9 66.7 71.2 75.2 n/a

a Provisional. b Crop years (November-October).


50 India


Agricultural productiona

(m tonnes unless otherwise indicated)

1998/99 1999/2000 2000/01 2001/02 2002/03Foodgrains & pulses Rice 86.1 89.7 84.9 93.1 72.7 Wheat 71.3 76.4 69.7 71.2 65.1 Coarse grains (millet, sorghum

& maize) 31.3 30.3 31.6 33.9 25.3 Pulses 14.9 13.4 11.1 13.2 11.1Total 203.6 209.8 196.8 212.0 174.2Oilseedsb

Groundnut 9.0 5.3 6.4 7.2 4.4Total (9 species) 24.7 20.7 18.4 20.8 15.1Beverages Teac 0.9 0.8 0.8 0.8 n/a Coffeed 0.3 0.3 0.3 0.3 n/aFibres Cotton (lint; m 170-kg bales)d 12.3 11.5 9.5 10.1 8.7 Jute & mesta (m 180-kg bales) 9.8 10.6 10.5 11.6 11.4Other products Sugarcane 288.7 299.3 296.0 300.1 281.6 Rubberd 0.6 0.6 0.6 0.6 n/a Potatoes 22.5 25.0 22.2 24.0 n/a

a Crop years (July-June) unless otherwise indicated. b October-September. c Calendar years; bn kg.d Fiscal years (April-March).

Sources: Ministry of Agriculture, Statistics at a Glance; Ministry of Finance, Economic Survey.

Minerals production(fiscal years Apr-Mar; m tonnes)

1998/99 1999/2000 2000/01 2001/02 2002/03 a

Coal & lignite 315.7 322.1 332.6 352.6 367.3Iron ore 70.7 n/a n/a n/a n/a

Crude oilDomestic production 32.7 31.9 32.4 32.0 33.0Imports 39.8 45.0 74.1 78.7 82.0Refinery throughput 68.5 86.0 103.4 107.3 112.5Petroleum productsb

Domestic production 64.5 79.4 95.6 100.0 n/aImports (net) 23.1 15.9 0.9 -3.1 n/a

a Provisional. b Some disparity is likely owing to refinery consumption and stock changes.


India 51


Industrial production(fiscal years Apr-Mar)

1997/98 1998/99 1999/2000 2000/01 2001/02 a

Finished steel (m tonnes) 23.4 23.7 28.5 30.3 31.1

Aluminium (virgin metal; ‘000 tonnes) 550 536.8 497.9 620.4 503.7Copper (blister; ‘000 tonnes) 43.7 37.7 n/a n/a n/aMotor vehicles (‘000 units)b 701.5 642.0 824.4 784.2 748.2

Motorcycles & mopeds (‘000 units) 3,036 3,278 3,722 3,756 3,932Bicycles (‘000 units) 9,814 10,373 13,733 14,974 10,834

Power-driven pumps (‘000 units) 697 555 599 481 430

a Provisional. b Four-wheeled; all types.


Gross domestic savings(fiscal years Apr-Mar; % of total)

1997/98 1998/99 1999/2000 2000/01 2001/02Household sector 76.2 87.2 86.2 92.3 93.8Private corporate 18.0 17.4 18.1 17.5 16.7

Public sector 5.8 -4.6 -4.3 -9.8 -10.5


Stockmarket indicators(Mumbai Stock Exchange; end-period)

1999 2000 2001 2002 2003BSE 200a (1989/90=100) 592 437 341 394 766

Change in US-dollar value of stockmarket index (%) 84.3 -31.4 -24.3 15.9 87.5Price/earnings ratio 20.9 14.8 11.9 11.0 15.1

No. of listed companies 5,879 5,937 5,795 5,650 5,644Market capitalisation (US$ bn) 185 148 110 131 279

a Index of 200 leading shares.

Sources: Standard & Poor’s, Emerging Stock Market Review; Bombay Stock Exchange.

52 India


Exports(fiscal years Apr-Mar; fob; % of total by value)

1998/99 1999/2000 2000/01 2001/02 2002/03Agricultural 18.1 15.2 13.5 13.4 13.0 Cereals 4.5 2.0 1.7 2.2 3.2 Fish products 4.5 3.2 3.1 2.8 2.9 Tea 1.6 1.1 1.0 0.8 0.7 Oil meal 1.4 1.0 1.0 1.1 0.6 Coffee 1.2 0.9 0.6 0.5 0.4 Spices 1.1 1.1 0.8 0.7 0.7 Cashew 1.1 1.5 0.9 0.8 0.9 Fruit & vegetables 0.5 0.6 0.6 0.6 0.5 Tobacco 0.4 0.5 0.3 0.3 0.3 Raw cotton 0.2 0.0 0.1 0.0 0.0

Minerals 2.0 2.5 2.6 2.9 3.9 Iron ore 1.2 0.7 0.8 1.0 1.7

Manufactures 78.6 80.7 78.0 76.1 76.8 Gems & jewellery 17.8 20.4 16.6 16.7 17.1 Processed minerals 0.8 0.8 0.8 0.8 1.1 Garments 13.1 12.9 12.5 11.4 11.5 Cotton textiles 8.3 8.4 7.9 7.0 8.3 Pharmaceuticals 4.5 4.5 4.3 4.7 5.1 Handicrafts 3.8 3.6 3.1 2.5 1.5 Machinery 3.5 3.2 3.7 4.0 3.9 Metals 3.1 3.3 3.6 3.7 3.6 Leather & leather goods 3.2 2.6 2.9 2.8 3.6 Transport equipment 2.3 2.2 2.4 2.3 2.4 Semi–finished iron & steel 1.5 2.0 2.0 1.7 2.8 Electronic goods 1.5 1.8 2.4 2.7 2.4 Dyes, etc 1.4 1.6 1.4 1.3 1.4 Leather shoes 1.0 1.0 0.9 0.9 0.8

Sources: Ministry of Finance, Economic Survey; Centre For Monitoring Indian Economy (CMIE).

India 53


Imports(fiscal years Apr-Mar; cif; % of total by value)

1998/99 1999/2000 2000/01 2001/02 2002/03Fuel 17.4 27.4 33.2 29.5 n/aCrude oil & products 15.1 25.4 31.0 27.2 28.6

Edible oils 4.3 3.7 2.6 2.6 2.9Fertilisers 2.5 2.8 1.5 1.3 0.9

Coking coal 2.3 2.0 2.2 2.2 2.0Paper & newsprint 1.1 0.9 0.9 0.9 0.7

Cereals 0.7 0.4 0.0 0.0 0.0Cashew nuts 0.5 0.6 0.4 0.2 0.4Pulses 0.4 0.2 0.2 1.3 0.9

Capital goods 18.1 12.0 11.0 11.4 12.6 Electrical machinery 1.0 0.9 1.0 1.2 1.1 Transport equipment 1.9 2.3 1.9 2.9 2.9 Project goods 6.3 2.0 1.5 1.1 0.9 Other machinery 7.2 5.5 5.4 5.8 5.6

Chemicals 8.8 7.9 6.7 7.6 7.6Pearls, precious & semi-precious stones 8.9 10.9 9.6 9.0 9.9Iron & steel 2.4 1.6 1.4 1.5 1.4

Non-ferrous metals 1.4 1.1 1.1 1.3 1.1Precision instruments 1.9 1.7 1.7 2.0 1.7

Sources: CMIE; Ministry of Finance, Economic Survey;.

54 India


Main trading partners(fiscal years Apr-Mar; % of total)

1998/99 1999/2000 2000/01 2001/02 2002/03Exports to:US 21.7 22.8 20.9 19.4 20.8UK 5.6 5.5 5.2 4.9 4.7Hong Kong 5.7 6.8 6.0 5.4 4.7Germany 5.6 4.7 4.3 4.1 4.0China 1.29 1.5 1.9 2.2 3.8Japan 5.0 4.6 4.0 3.4 3.6Belgium 3.9 3.7 3.3 3.2 3.2Singapore 1.6 1.8 2.0 2.2 2.7Italy 3.2 3.1 2.9 2.8 2.6Bangladesh 3.0 1.7 2.0 2.3 2.1France 2.5 2.4 2.3 2.2 2.0Netherlands 2.3 2.4 2.0 2.0 2.0OECD 57.8 57.3 52.7 49.3 n/aOther less developed countries 24.5 25.6 26.7 28.0 n/aOPEC 10.7 10.6 10.9 12.0 n/aEastern Europe 2.7 3.1 2.4 2.3 n/a

Imports from:US 8.6 7.2 6.0 6.1 7.2China 2.6 2.6 3.0 4.0 4.5UK 6.2 5.5 6.3 5.0 4.5Germany 5.1 3.7 3.5 3.9 3.9Switzerland 6.9 5.2 6.3 5.6 3.8South Africa 3.2 4.1 2.0 2.8 3.4Japan 5.8 5.0 3.6 4.2 3.0South Korea 3.3 2.6 1.8 2.2 2.5Malaysia 3.8 4.1 2.3 2.2 2.4Singapore 3.3 3.1 2.9 2.5 2.3Indonesia 2.0 1.9 1.8 2.0 2.3Australia 3.4 2.2 2.1 2.5 2.2OECD 51.6 43.0 39.9 40.1 n/aOPEC 18.3 22.5 5.1 5.8 n/aOther less developed countries 21.1 20.7 17.5 19.1 n/aEastern Europe 1.6 1.6 1.3 1.4 n/a

Note. Imports do not include petroleum crude imports from 2000/01 onwards.


India 55


Balance of payments, IMF series(US$ m)

1998 1999 2000 2001 2002Goods: exports fob 34,076 36,877 45,636 45,399 52,743Goods: imports fob -44,828 -45,556 -60,268 -58,232 -65,159

Trade balance -10,752 -8,679 -14,632 -12,833 -12,416Services: credit 11,691 14,509 19,175 20,886 24,859

Services: debit -14,540 -17,271 -16,654 16,253 -18,691Income: credit 1,806 1,919 2,405 2,777 2,298

Income: debit -5,443 -5,629 -6,290 -5,461 -6,184Current transfers: credit 10,402 11,958 13,434 12,712 15,156Current transfers: debit -67 -35 -78 -68 -366

Current-account balance -6,903 -3,228 -2,640 1,761 4,656Direct investment abroad -48 -79 -424 -697 -453

Direct investment in India 2,635 2,169 2,657 4,334 3,030Portfolio investment assets 0 0 -1730 -70 -36Portfolio investment liabilities -601 2317 2,774 2,041 967

Other investment assets -3,239 -450 -1,519 2,205 4,790Other investment liabilities 9,837 5,623 6,075 1,566 -234

Financial balance 8,584 9,579 9,391 9,378 8,065Capital-account credit n/a n/a 4,059 3,662 6,369

Capital-account debit n/a n/a -4,355 -3,500 -2,889Capital-account balance n/a n/a -296 162 3,480Net errors & omissions 1,390 313 -475 597 666

Overall balance 3,071 6,664 -5,979 11,897 16,868Memorandum itemChange in international reserves (– indicates increase) -3,071 -6,664 -5,979 -11,897 -16,868


56 India


Balance of payments, national series(US$ m)

1998/99 1999/2000 2000/01 2001/02 2002/03 a

Merchandise exports fob 34,298 37,542 44,894 44,915 52,512Merchandise imports cif -47,544 -55,383 59,264 57,618 65,422

Trade balance -13,246 -17,841 -14,370 -12,703 -12,910Invisible inflows 25,770 30,312 34,786 36,690 43,373

Invisible outflows -16,562 -17,169 -24,006 23,205 26,326Invisibles balance 9,208 13,143 10,780 13,485 17,047

Current–account balance -4,038 -4,698 -3,590 782 4,137Foreign investment 2,312 5,117 5,862 6,692 4,555Net foreign aid 799 891 427 -1,204 -2,428

Commercial borrowing 3,619 710 3,737 -1,576 -2,344Banking 698 2,127 811 5,592 8,412

Rupee debt service -802 -711 -617 -519 -474Other capital 1,809 2,310 -290 158 3,445Net errors & omissions -175 656 -572 402 730

Capital-account balance 8,260 11,100 10,018 10,573 12,113Overall balance 4,222 6,402 5,856 11,757 16,980

Change in reserves (– indicates increase) -3,829 -6,142 -5,856 -11,757 -16,980

a Provisional.

Source: Reserve Bank of India (RBI).

External debt(US$ m unless otherwise indicated; year-end current prices)

1998 1999 2000 2001 2002Total external debt 97,637 98,313 99,098 97,516 104,429 Long-term debta 93,021 94,354 95,636 94,774 99,860 Short-term debt 4,329 3,933 3,462 2,742 4,569 Use of IMF credit 288 26 0 0 0Public & publicly guaranteed long-term debt 84,611 86,410 83,156 83,100 88,271 Official creditors 53,654 58,545 50,626 49,795 49,947 Multilateral 30,516 31,360 30,463 31,054 29,497 Bilateral 23,138 27,184 20,163 18,741 20,451 Private creditors 30,957 27,865 32,530 33,305 38,324 Banks 20,924 18,514 21,182 22,515 27,701 Bonds 5,996 5,722 10,215 10,101 10,049

Total debt service 12,084 10,107 10,868 9,327 13,128 Principal 6,964 6,324 6,686 5,478 9,344 IMF repurchases 415 269 26 0 0 Interest 5,120 3,782 4,182 3,849 3,784 Short-term debt 327 209 185 112 146Ratios (%)Total external debt/GNP 23.8 22.2 21.7 20.4 20.7Debt-service ratiob 21.2 15.7 14.4 12.1 14.9Short-term debt/total external debt 4.4 4.0 3.5 2.8 4.4Concessional long-term loans/long-term debt 41.1 45.4 37.9 37.8 38.4

a Original maturity of more than one year. b Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

India 57


Foreign-exchange reserves(US$ m unless otherwise indicated)

1999 2000 2001 2002 2003SDRs 4.0 2.0 5.0 7.0 3.0Reserve position at the IMF 671.0 637.0 614.0 665.0 1,318

Foreign exchange 31,992 37,264 45,251 66,994 97,617Total reserves excl gold 32,667 37,902 45,870 67,665 98,938

Gold (m troy oz) 11.50 11.50 11.50 11.50 11.50Gold (national valuation) 2,403 2,252 2,329 2,712 3,322

Total reserves incl gold 35,070 40,154 48,199 70,377 102,260


Exchange rates(annual averages)

1999 2000 2001 2002 2003Rs:US$ 43.06 44.94 47.19 48.61 46.58

Rs:£ 59.47 68.47 67.83 72.58 76.10Rs:DM (€ in 2001 & 2002) 20.93 22.66 42.19 45.65 52.70Rs:¥ 0.300 0.361 0.389 0.386 0.400

Sources: IMF, International Financial Statistics; CMIE.

Editors: Tom Joehnk (editor); Graham Richardson (consulting editor)Editorial closing date: June 2nd 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

india...3,287,263 sq km (including indian-administered kashmir); 57% is agricultural land and 16%...

Documents