ECONOMIC
SURVEY 1997-98
PRESENTED TO PARLIAMENT
May 27, 1998
Macroeconomic Overview
"Overall economic growth of GDP has decelerated significantly to 5 per cent in
1997-98 from 7.5 per cent in 1996-97. There has also been a fall in the average rate of
inflation during 1997-98 to less than 5 per cent from 6.3 per cent during 1996-97. The
drop in GDP growth in 1997-98 is attributable mainly to a sharp fall in the growth rate in
agriculture and a deceleration in the growth of industry. The service sector posted a
robust growth of 8.9 per cent in 1997-98", says the Economic Survey for 1997-98 which
has been placed in both Houses of Parliament today.
2. At a more fundamental level, the growth slow-down can be traced to a combination of
underlying supply factors and temporary demand factors. The former are associated
primarily with the quantity, quality and cost of basic infrastructure services such as
power, railways and roads (and to a lesser extent
ports, airports and telecom). The demand slow-down is attributable to several factors
including the sharp deceleration in exports since 1996-97, substantial uncertainty in
domestic and international environments, tightening of money-credit policies in 1995-96
and other cyclical factors.
3. Total gross domestic savings, reached an all time high of 26.1 per cent of GDP at
current market prices in 1996-97. The rise in domestic savings was primarily due to a rise
in private savings.
4. Gross domestic capital formation (adjusted), as a proportion of GDP at current
market prices has continued to surge ahead of gross domestic savings rate to attain a high
of 27.3 per cent in 1996-97.
5. Agricultural production in 1997-98 is likely to be lower than last year's record
output especially of foodgrains and commercial crops. Foodgrain output will, however, be
higher than in 1995-96. The production of foodgrains during 1997-98 is expected to be
194.1 million tonnes compared with 199.3 million tonnes during 1996-97, representing a
decline of 2.6 per cent.
6. Industrial production has grown by 4.2 per cent in 1997-98. This is composed of a
growth rate of 4.9 per cent in mining, 3.6 per cent in manufacturing and 6.8 per cent in
electricity. As per the use-based classification intermediate goods and basic goods grew
at 6.9 per cent and 7.0 per cent respectively, whereas consumer goods registered growth
rate of 4.6 per cent and capital goods suffered a decline of 4 per cent. Thus, the decline
in investment seems to be an important factor in the continuing industrial slowdown in
1997-98.
7. The slow growth of industry in 1997-98 followed growth of 7.1 per cent in 1996-97,
which was much lower than the 12.1 per cent growth achieved in 1995-96.
8. Given the background of slowing industrial growth, the Budget for 1997-98 cut
personal and corporate income tax rates across the board. The credit policy (of April
1997) reduced the Bank Rate, abolished the statutory liquidity ratio (SLR) on inter-bank
deposit and reduced the cash reserve ratio (CRR). The resultant easing of monetary
conditions was reflected in a reduction in nominal interest rates.
9. During 1997-98, the number of industries subject to industrial licensing was reduced
from 14 to 9. The investment limit on plant and machinery in the small-scale sector was
enhanced to Rs. 3 crore from Rs. 60 lakh/75 lakh for small scale industrial
undertakings/ancillary industrial undertakings. The limit for tiny
sector was correspondingly raised to Rs.25 lakh from Rs.5 lakh. Fifteen items, hitherto
reserved exclusively for manufacture in the small sector have been dereserved.
10. In 1997-98, the list of industries eligible for foreign direct equity investment
under the automatic approval route by RBI has been expanded. Nine high priority industries
in metallurgical and infrastructure sectors and 13 other priority industries that were
eligible for 74 per cent and 51 per cent foreign equity investment respectively, have been
opened up for 100 per cent equity investment by NRIs/OCBs. Foreign equity investment
limits in mining (3 categories of industries) has also been enhanced to 100 per cent for
NRIs/OCBs. The existing ceiling of 24 per cent for aggregate portfolio investment limit
for NRIs/OCBs/FIIs can now be raised to 30 per cent of the issued and paid up capital of
the company with the approval of the Board of Directors and special resolution by the
general body of the company.
11. Measures for public sector reform included enhanced autonomy for nine selected
Public Sector Enterprises referred to as "Navaratnas", and subsequently for GAIL
and MTNL. Greater functional and operational autonomy has been granted also to 97 other
profit-making public sector enterprises referred to as "Mini-Ratnas" for making
them more efficient and competitive.
12. Six basic industries (electricity generation, coal, steel, crude oil, refinery
throughput and cement) with a weight of 28.8 per cent in the Index of Industrial
Production (IIP), averaged a growth of 4.6 percent for April-February 1997-98, higher than
the 3.5 percent growth during April-February 1996-97.
13. Policies to encourage investment in infrastructure included redefining
"infrastructure" to cover telecom, oil exploration and industrial parks for the
purpose of fiscal incentives. An Infrastructure Development Finance Company has been set
up to encourage innovative means of financing. External commercial borrowing parameters
for infrastructure projects were liberalised and fiscal incentives provided for
infrastructure projects. The Telecom Regulatory Authority of India has been set up. The
capital base of the National Highway Authority of India was expanded substantially to Rs.
500 crore. The Tariff Authority for Major Ports was established. Ordinance for setting up
a Central Electricity Regulatory Commission (CERC) at the Centre and State Electricity
Regulatory Commissions (SERCs) in the States has been promulgated on April 25, 1998.
Money and Prices
14. The annual rate of inflation, which was 6.7 per cent at the start of 1997-98,
had fallen to an eleven-year low of 3.4 per cent by the end of August 1997,
despite an increase in the administered prices of petroleum products and
electricity.
15. The low inflation rate of less than 4 per cent was maintained up to end
November 1997. Thereafter, there was a slight upward drift in the growth rate
(caused by the increase in prices of some primary products) and the year 1997-
98 ended with an inflation rate of 5 per cent.
16. Prices of primary products, which include major essential commodities, rose
only by 5.5 per cent on a point to point annual basis at the end of March 1998.
The Targeted Public Distribution System replaced the erstwhile PDS from June
1997. Under the new system, a two-tier subsidised pricing system was
introduced to benefit the poor. Under the system, each below poverty line (BPL)
family is entitled to 10 Kgs. of foodgrains per month at specially subsidised
prices. The State Governments were to streamline the PDS by issuing special
cards to BPL families and selling essential articles under TPDS to them at
specially subsidised prices with better monitoring of the delivery system.
17. The RBI set a lower indicative target of 15 to 15.5 per cent for broad money
(M3) growth in 1997-98 based on a projected real GDP growth of about 6 per
cent and an anticipated inflation rate of the same order. The expansion in broad
money in 1997-98 at 17.0 per cent was higher than 16.0 per cent in the previous
financial year.
18. The RBI's flexibility and autonomy in conducting monetary policy was
enhanced by the new system of Ways and Means Advances introduced with
effect from April 1997. This replaced the practice of issuing of ad-hoc treasury
bills, which in earlier years resulted in automatic monetisation of the budget
deficit.
19. Despite the easy liquidity situation, especially in the first half of
1997-98,
credit growth continued to be low because of weak demand for credit and banks'
cautious approach to lending. Non-food credit, however, expanded by 14.2 per
cent during 1997-98 as against 10.9 per cent growth in 1996-97.
20. In an effort to increase the depth of the call money market, the SLR and the
CRR on inter-bank liabilities were removed from April 26, 1997. The SLR was
also simplified into a single uniform rate of 25 per cent on total NDTL with effect
from October 25, 1997. Actual investment in government securities was,
however, in excess of the SLR requirements.
21. RBI reactivated the Bank Rate by making it a reference rate for key interest
rates in the market and a signal for its monetary policy stance.
22. Developments in the external environment leading to speculative activity
resulted in a temporary change in the direction of monetary policy during
November-January, 1997-98. The CRR, which was reduced to 9.5 percent in
November 1997, was raised to 10 per cent from December 6, 1997 and to 10.5
per cent from January 17 1998. The Bank Rate was increased by 2 percentage
points to 11 per cent, These measures were reversed partially in March 1998,
following more orderly conditions in the foreign exchange market.The Bank Rate,
which was reduced to 10 per cent with effect from April 3, 1998, has further been
reduced to 9 per cent with effect fromApril 30, 1998. The CRR was reduced to 10
per cent with effect from the fortnight beginning April 11, 1998.
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Fiscal Developments
23. The process of fiscal consolidation received a setback during 1997-98 with
the Central Government fiscal deficit (Revised Estimates) reaching 6.1 per cent
of GDP as against the budget target of 4.5 per cent.
24. The deterioration in the fiscal deficit was due primarily to a tax revenue
shortfall of Rs. 14236 crore (net to Centre), and a shortfall of Rs. 3894 crore in
disinvestment receipts.
25. The 1997-98 budget introduced sharp cuts in income tax rates with a view to
stimulate saving and investment and encourage higher tax compliance. Personal
and corporate tax rates were reduced and rationalised to bring them to
internationally comparable levels. The top marginal personal income tax rate was
cut from 40 to 30 per cent. The corporate tax rate for domestic companies was
reduced from 40 to 35 per cent and on (branches of) foreign firms from 55 to 48
per cent. The surcharge on corporate tax was abolished. The tax on dividends
in the hand of receipients was replaced by a 10 per cent tax on distributed profits
of domestic companies.
26. A significant initiative was taken to widen the tax base by stipulating that
residents of large metropolitan cities who satisfy certain specified economic
criteria must file their tax return. Another proposal with the same objective was
the introduction of an estimated income scheme for retail traders. With a view to
harness "black money" for productive purposes a new Voluntary Disclosure
Income Scheme (VDIS) was introduced, which netted tax collections estimated
to exceed Rs. 10,000 crore.
27. The peak customs duty was lowered from 50 per cent to 40 per cent.
28. The discontinuation of ad-hoc treasury bills for financing the budget deficit is
a
step towards strengthening fiscal discipline. Budget for 1997-98 also took some
initiatives in the infrastructure and agriculture sectors.
29. There was progress in the decontrol of the banking system, with further
deregulation of interest rates on deposits.
30. Competition in the banking sector has intensified with the formation of ten
new private sector banks.
31. The Reserve Bank of India (Amendment) Act, 1997, conferred wide ranging
powers on the RBI for registration, regulation, supervision, issue of guidelines
and winding-up of the non-banking financial companies (NBFCs).
32. On January 2, 1998 the RBI issued detailed guidelines regarding norms of
deposit acceptance, prudential norms, etc. for various categories of the NBFCs.
These were later reconsidered and revised guidelines were issued on January
31, 1998. According to these guidelines, an NBFC will have to obtain the
minimum prescribed investment rating before accepting public deposits.
33. During 1997-98, the financial assistance sanctioned by All India Financial
Institutions grew by 48.8 per cent while disbursements increased by 28.5 per
cent. This followed a sharp decline of 14.7 per cent in sanctions and a modest
growth of 8.4 per cent in disbursements during 1996-97. This was one of the few
quantitative indications of a potential recovery in industrial investment.
34. A number of measures were taken by RBI to enhance the depth and liquidity
of the government treasury bill and government securities market.
35. A number of measures were taken by SEBI to strengthen investor protection
and develop capital markets, with particular emphasis on efficiency and
transparency of both the primary and secondary segments.
36. The capital market continued to remain dormant in 1997-98. Resource
mobilisation from the primary market through public issues steadily declined to
Rs. 14276 crore in 1996-97 and further down to Rs. 4570 crore in 1997-98.
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External Sector
37. The balance of payments situation in 1997-98 remained sound. The current
account deficit fell to about 1.0 per cent of GDP in 1996-97, reflecting mainly the
slow-down in industrial growth and investment and growth of net invisibles. In
1997-98, the current account deficit is expected to be about 1.5 per cent of GDP,
which is significantly less than the average deficit of about 2.3 per cent of GDP
during the Seventh Plan period (1985-86 to 1989-90). A major factor has been
the buoyancy of inflows of foreign investments, particularly direct investment.
38. The demand for imports has been subdued over the last two years, reflecting
moderation in industrial activity. Non-oil imports based on DGCI&S data (in US
dollar terms), declined by 0.2 per cent in 1996-97, after an increase of about 29
per cent per year in the previous two years. During 1997-98, such imports
recovered to grow by about 14.5 per cent (provisional).
39. Based on DGCI&S data, export growth, in US dollar terms, decelerated to
5.3 per cent in 1996-97 and to 2.6 per cent (provisional) in 1997-98, after three
successive years of increase ranging from 18 to 21 per cent per annum.
40. The slowdown in export performance reflects a range of factors of foreign
and domestic origins. The two most important factors were probably the sharp
decline in the growth of the value (US$) of world trade in 1996 and 1997, and
the real appreciation of the rupee vis-a-vis the currencies of India's major trading
partners and competitors.
41. Other external factors included the decline in export prices of some major
items of manufactured goods, and tighter requirements of quality, standards,
testing and labelling in the major trading partner countries for some major items
of India's exports. Other domestic factors are the slow down in growth of power,
tighter supply conditions in the domestic market for agricultural items especially
rice and wheat, tightening of domestic environmental regulations, and
infrastructure bottlenecks.
42. As a measure of import decontrol, four hundred and eighty eight items were
moved from the restricted list to the OGL between April 1, 1996 and April
1,1997. An additional 128 items, mainly textiles, were freed during 1997-98,
and another 340 items were shifted from the Restricted List to the OGL in April
1998.
43. The capital account of balance of payments exhibited a handsome surplus in
1996-97, following sustained buoyancy in foreign investment flows and a surge in
net inflow of non-resident deposits. Net capital inflows in 1997-98, are estimated
to be at about the 1996-97 level. Total foreign investment rose to US $6.0 billion
in 1996-97 from US $4.9 billion in 1995-96. During 1997-98, total foreign investment
amounted to US $4.8 billion. Of particular interest is Foreign Direct Investment
(FDI).
Inflow of FDI in 1996-97 increased by about 26 per cent to US $2.7 billion. During
1997-98, FDI amounted to US $3.2 billion, an increase of 18.6 per cent over the
corresponding period in 1996-97.
44. The surpluses in the capital account of balance of payment in 1996-97 and
1997-98 exceeded the deficits in the current account by a large margin, resulting
in sizeable accretions to foreign currency assets of the Reserve Bank. The
foreign currency assets increased by US $5.3 billion in 1996-97 and by US $3.6
billion in 1997-98 to attain US $26.0 billion at the end of March 1998. Total
foreign exchange reserves (including gold and SDRs) at the end of March 1998
amounted to US $29.4 billion.
45. The exchange rate of the rupee displayed reasonable stability during the
year 1996-97. The stability in the exchange rate of the rupee was disturbed in
the last week of August 1997, when the currency experienced a mild contagion
effect of currency turmoil in Southeast Asia. Beginning in the second week of
November 1997, the exchange rate of the rupee against the US dollar came
under renewed downward pressure. The recent market movement in the rupee-
dollar rate, however, corrects a part of the appreciation in real effective exchange
rate, which has occurred over the last two years.
46. India's external debt increased marginally by US $0.7 billion from US $92.2
billion at the end of 1996-97 to US $92.9 billion at the end of September, 1997.
As a per cent of GDP, external debt declined to about 24 per cent at end
September 1997 from about 26 per cent in 1996-97. Debt service payments
declined from 24.3 per cent of current receipts in 1995-96 to 21.4 per cent in
1996-97, despite the bunching of repayments of India Development Bonds. In
1997-98, the ratio is expected to decline to about 18 per cent.
47. The incidence of poverty has continued to decline during the 1990s. The
poverty ratio for rural and urban areas combined, for the country as a whole
declined by 2.9 percentage points in 1993-94 over 1987-88 (Planning
Commission estimate). The incidence of poverty has declined considerably over
two decades from 56.4 per cent in 1973-74 to 37.3 per cent in 1993-94 in rural
sector and from 49 per cent to 32.4 per cent in urban sector. Overall, the all
India poverty ratio declined from 55 per cent to 36 per cent over the period
1973-93. Rapid growth in subsequent years should have further reduced the
poverty ratio.
48. Average real wages for unskilled agricultural labour that reflect the
economic
condition of agricultural labourers declined by 6.2 per cent in the crisis year of
1991-92 (Agricultural year July to June) for the country as a whole. But in the
subsequent years they have increased each year except in 1994-95 when there
was marginal fall of 0.4 per cent.
49. The Central Plan and non-Plan expenditure on social sectors including Rural
Development and Basic Minimum services recovered to an average of 1.7 per
cent of GDP during 1995-96 to 1997-98 (RE). This compares with an average of
1.5 per cent of GDP during 1992-93 to 1994-95. The Central Plan allocations on
major schemes for social sectors and programmes grew by about 13 per cent in
1997-98 (RE) over 1996-97 (RE). The outlay for education has gone up by about
30 per cent in 1997-98 (RE) over 1996-97 (RE). A new scheme "Balika Samridhi
Yojana" (BSY) to provide college and technical education to girls has been
launched
on the October 2, 1997.
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Issues and Priorities
50. The sharp slow down in GDP and export growth following three years of high
growth in each case, are two central areas of concern. The level of concern
regarding the fiscal deficit and infrastructure problems continues to rise with each
passing year. Higher growth is the best antidote for removing mass poverty and
unemployment, and for generating revenues needed to supply public goods and
other vital government services. Therefore, it is imperative to put back the
economy on a higher growth path of the order 7 to 8 per cent per annum. This
would necessitate raising of our savings rate to about 30 per cent of GDP
through a reduction of government dissavings, an improvement in the
performance of non-traded infrastructure (energy, transport and communications)
and restoration of export growth to respectable levels.
51. The slippage on the fiscal front during 1997-98 is a cause of concern.
52. Our earlier experience shows that high levels of government expenditure
and fiscal deficits can also put pressure on the current account deficit in the
balance of payments.
53. States have also to share the responsibility of fiscal consolidation and
prudence in a federal polity.
54. The banking system has to be reformed so that interest rates come done
due to competitive pressures, greater efficiency and lower implicit taxation of
the banking sector. Access of companies to debt markets also needs to be
improved by deepening and widening these markets.
55. Inflationary pressures tend to build up either on account of supply side
shortfalls in primary products, which later get reflected in the manufacturing
sector or due to pressures on the demand side. The year 1998-99 may require
special efforts at supply management in order to offset the possible shortfall in
food-grains, sugar and cotton production.
56. The pace of industrial growth and investment has slackened markedly since
the middle of 1996-97 for a variety of reasons. On the policy side, measures
should embrace a broad array and include: steps to boost export growth, to
revive the primary capital market, to encourage higher private and public
investment to relieve infrastructure bottlenecks and boost demand for core
industrial sectors, and fiscal and monetary policies aimed at moderating real
rates of interest and ensuring adequate availability of productive capital to
industry.
57. While there has been substantial progress with delicencing industry and
foreign trade, the "controls mind-set" remains influential and the
"inspector raj"
continues to flourish. Fresh initiatives are necessary to reduce the role of these
factors in industry, agriculture, trade, infrastructure, finance and social services
in order to unleash the productive energies and capacities of economic agents in
all these areas. At the same time, new emphasis must be accorded to improve
rating and certification systems, self-regulatory organisations and (in areas of
natural monopoly such as some infrastructure services) independent regulatory
authorities.
58. As we approach the beginning of the twenty first century, the shortcomings
in our social sectors - such as education, health, water supply and sanitation,
housing - in relation to both our own aspirations as well as performance levels
achieved by other Asian countries becomes increasingly stark and unacceptable.
59. The ongoing economic reform process should be re-appraised and
revitalised to give the entire national development effort a more humane face.
The eradication of poverty and unemployment must be the abiding goal of our
development policies and programmes. The achievement of this goal will require
sustained and rapid economic growth combined with well functioning public
programmes for social services, rural development and employment generation
to provide an effective safety net for all those millions at the margins of the
growth
process.
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Postscript: Following the
testing of nuclear devices by India in the second week
of May 1998, some industrialised countries have reacted negatively in the field of
economic relations. As of mid-May (when this document goes for printing), it is too
early to assess the implications of these reactions for the short and medium-term
development prospects of the Indian economy. One thing however is clear : to the
extent to which these reactions render the external economic environment less
friendly,
to that extent, it becomes more urgent to implement the policy decisions necessary
to
ensure macroeconomic stability and rapid and sustainable economic growth.
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