COUNTRY REPORT India Nepal 4th quarter 1999

Transcription

1 COUNTRY REPORT India Nepal The full publishing schedule for Country Reports is now available on our website at 4th quarter 1999 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) /2 newyork@eiu.com Hong Kong The Economist Intelligence Unit 25/F, Dah Sing Financial Centre 108 Gloucester Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.20) Fax: (44.20) This publication is available on the following electronic and other media: Online databases FT Profile (UK) Tel: (44.20) DIALOG (US) Tel: (1.415) LEXIS-NEXIS (US) Tel: (1.800) M.A.I.D/Profound (UK) Tel: (44.20) NewsEdge Corporation (US) Tel: (1.718) CD-ROM The Dialog Corporation (US) SilverPlatter (US) Microfilm World Microfilms Publications (UK) Tel: (44.20) Copyright 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any 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 permission of 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, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 1 Contents 3 Summary India 5 Political structure 6 Economic structure 7 Outlook for The political scene 15 Economic policy 18 The domestic economy 18 Economic trends 20 Oil and gas 22 Industry 23 Agriculture 24 Infrastructure and services 27 Foreign trade and payments Nepal 31 Political structure 32 Economic structure 33 Outlook for The political scene 38 Economic policy and the economy 40 Foreign trade and payments 44 Quarterly indicators and trade data List of tables 7 India: forecast summary 12 India: parliamentary seats after the 1999 election 13 India: selected ministers in the new government 17 India: Industry regulators 18 India: gross domestic product 19 India: ten largest companies by market capitalisation 28 India: balance of payments 29 India: foreign portfolio investment in India 38 Nepal: main economic indicators 42 Nepal: balance of payments 43 Nepal: remittances of foreign-resident Nepalis, 1997

4 2 44 India: quarterly indicators of economic activity 45 Nepal: quarterly indicators of economic activity 45 India: foreign trade 47 India: major partners trade List of figures 11 India: gross domestic product 11 India: Indian rupee real exchange rates 34 Nepal: gross domestic product 34 Nepal: Nepalese rupee real exchange rates

5 3 December 9th 1999 Summary 4th quarter 1999 India Outlook for The political scene Economic policy The domestic economy The newly elected BJP-led alliance should remain in power throughout the forecast period. The potential for good and stable government exists, although politicking will continue. Issues on the agenda include curbing mismanagement by some state governments, addressing the reform backlog and targeting the burgeoning fiscal deficit. The outlook for growth is good: GDP growth is projected at about 6.4% in 2000/01, although inflation will begin to rise. High oil prices will hit the trade deficit, but high reserves will maintain the balance of payments. Foreign direct investment should recover, after slowing in 1998/99 because of political uncertainty. Net portfolio investment is forecast to recover to around $3.5bn-4bn in 2000 and Thus, despite a deterioration in the current account, the government will have no difficulty maintaining the rupee s managed float. The currency will weaken to an average rate of Rs50.48:$1 in The BJP s alliance won a clear majority in the general election, thanks to the performance of the party s partners. There are new faces in the cabinet: some with a proven track record, others with a reputation for pork-barrel politics. The government has begun to break the parliamentary logjam. The new telecommunications policy has been approved, as has private-sector involvement in airport development and an insurance bill. The new government has acknowledged that it must cut the budget deficit. This will necessitate difficult decisions, including cutting subsidies (notably on petroleum) and raising taxes and administered prices. The government took a rapid decision after the election victory to raise diesel prices by 35-40%, closer to a free-market rate, provoking a strike by lorry drivers. Growth revived in the first quarter of 1999/2000. Annual growth rates for manufacturing and agriculture improved, compared with the same period of 1998/99. Gains were also registered in the construction sector, which moved to growth of 2.8%. A surge in foreign capital inflows fed a stockmarket rally which ended in October. Data for the first four months of 1999/2000 point to a slight recovery in industrial production. Manufacturing grew by 6.7%, compared with 4.2% in the same period last year. There was an exceptional recovery in the output of consumer durables, and intermediate goods also surged. However, the industrial recovery appears to be concentrated in these latter two sectors alone. Domestic demand for white goods and cars has been stimulated by improved quality, price cuts, and greater consumer choice. Foreign entrants, creative marketing and user-friendly financing have facilitated the boom.

6 4 Several initiatives from the telecoms regulatory body (TRAI) have drawn fire. An effort to invalidate a government-issued cellular licence was rebuked by a high court ruling that TRAI has no jurisdiction over licensing. It has adopted a calling party pays regime for cellular phones, placing the burden on less affluent fixed-line callers. The government has promised new legislation defining TRAI's role and its powers. The composition of the private sector has changed. Large industrial conglomerates such as Tata and Birla are being increasingly dominated by information technology, pharmaceuticals and media companies. Foreign trade and payments The trade deficit is stable at around $5bn. Rising oil import costs have offset a slowdown in non-oil imports. In August-October there was a substantial outflow of net foreign portfolio investment, reversing in part the large inflows in May-July. The exchange rate has remained relatively stable. Nepal Outlook for The political scene Economic policy and the economy Foreign trade and payments Infighting between the president of the Nepali Congress, Girija Prasad Koirala, and premier Krishna Prasad Bhattarai will continue, with Mr Koirala the likely victor. However, even if Mr Koirala succeeds in displacing Mr Bhattarai as premier, a new government would be likely to have similar policies and levels of efficiency. In the coming year GDP growth will stay flat at 3-4%, inflation will be higher than originally hoped, at 8-9%, and the trade deficit will widen despite strong export growth pushing the current account into deficit. Mr Koirala s negative campaign has benefited from the amorous misadventures of the housing minister. The opposition has demanded a probe of irregularities into the May election, but an electoral reform commission is to be established instead. There has been slow progress towards resolution of the border dispute with India, while an eighth round of talks on the Bhutanese refugee question has proved inconclusive. The South Asian Association for Regional Cooperation (SAARC) summit, scheduled for late November in Kathmandu, has been postponed, because of uncertainty over the coup in Pakistan. Private-sector credit growth grew sluggishly, and the money supply shrank, in the first two months of 1999/2000. The fiscal situation has improved, although revenue collection remains below target. Inflation has fallen back to single digits, but will rise again, owing to a sharp increase in diesel prices. The government is pushing the IMF for forgiveness of its foreign debt. Strong export growth produced a large reduction in the 1998/99 trade deficit, but higher imports in the first two months of 1999/2000 have offset this. Nepal has benefited from a free-trade agreement with India. The current account marked a rare surplus in 1998/99. Central bank statisticians have tried to account more accurately for remittances from Nepali workers abroad. Editor: Georgia Bush All queries: Tel: (44.20) Fax: (44.20) Next report: Our next Country Report will be published in March

7 India 5 India Political structure Official name Form of state Head of state The executive National legislature State legislatures Legal system National government National elections Main political organisations Republic of India Federal republic, 26 states and six union territories President, currently Kocheril Raman Narayanan, indirectly elected for a five-year term by the national and state legislatures The prime minister heads a Council of Ministers chosen from elected members of parliament Bicameral: upper house, Rajya Sabha, of 250 members (238 indirectly elected by states and union territories and 12 appointed by the president); lower house, Lok Sabha, of 543 members elected from single-member constituencies (79 seats reserved for scheduled castes, 40 for scheduled tribes) and 2 appointed by the president Uni- or bicameral, elected members, state governor appointed by the president Based on the 1950 constitution and English common law The Bharatiya Janata Party (BJP)-led coalition government, which assumed office on March 19th 1998, fell on April 17th A BJP-led coalition won a clear majority in the September-October election and reinstalled Atal Bihari Vajpayee as prime minister September-October 2004 (Lok Sabha) Bharatiya Janata Party (BJP); Indian National Congress (Indira, Congress (I) or Congress); Communist Party of India (Marxist CPI-M); Communist Party of India (CPI); Samajwadi Party; All-India Anna Dravida Munnetra Kazhagam (AIADMK); Rashtriya Janata Dal (RJD); Samata Party; Telegu Desam Party (TDP); Janata Dal; Dravida Munnetra Kazhagam (DMK); Bahujan Samaj Party (BSP) Council of Ministers Prime minister Atal Bihari Vajpayee (BJP) Key ministers Central bank governor Chemicals & fertiliser Surjit Singh Barnala (Akali Dal) Civil aviation Sharad Yadav (Janata Dal U) Commerce Murasoli Maran (DMK) Communications Ram Vilas Paswan (Janata Dal U) Defence George Fernandes (Janata Dal U) External affairs Jaswant Singh (BJP) Finance Yashwant Sinha (BJP) Home affairs Lal Krishna Advani (BJP) Human resources development Murli Manohar Joshi (BJP) Industry Manishar Joshi (Shiv Sena) Law, justice & company affairs Thambi Durai (AIADMK) Petroleum & natural gas Ram Naik (BJP) Power Rangarajan Kumaramangalam (BJP) Railways Mamata Bannerjee (Trinamool Congress) Bimal Jalan

8 6 India Economic structure Latest available figures Economic indicators a GDP at market prices ab (Rs bn) 10,378 12,180 14,099 15,636 18,122 GDP at market prices ab ($ bn) Real GDP growth bc (%) Consumer price inflation (av; %) d Population (m) Merchandise exports fob ($ m) 25,523 31,239 33,737 35,702 34,076 d Merchandise imports fob ($ m) 29,673 37,957 43,789 45,730 44,828 d Current-account balance ($ m) 1,676 5,561 5,957 2,965 6,903 d Reserves excl gold ($ m) 19,698 17,922 20,170 24,688 27,341 d Total external debt ($ bn) Debt-service ratio, paid (%) Exchange rate (av; Rs:$) d November 29th 1999 Rs43.39:$1 % of % of Origins of gross domestic product 1998 ab total Components of gross domestic product 1998 ab total Agriculture, forestry & fishing 26.8 Private consumption 64.1 Mining 2.1 Government consumption 11.9 Manufacturing 17.5 Investment e 24.2 Utilities 2.4 Exports of goods & non-factor services 12.3 Construction 4.5 Imports of goods & non-factor services 13.5 Services 46.6 GDP at market prices GDP at factor cost Principal exports (fob) 1997 bf $ bn Principal imports (cif) 1997 bf $ bn Textile goods 8.0 Petroleum & petroleum products 8.2 Gems & jewellery 5.1 Capital goods 7.1 Engineering goods (incl software) 5.0 Uncut gems 3.1 Chemicals 3.6 Iron & steel 1.5 Leather & leather goods 1.5 Fertiliser 1.0 Handicrafts 0.9 Non-ferrous metals 0.9 Total incl others 34.0 Total incl others 41.0 Main destinations of exports 1998 g % of total Main origins of imports 1998 g % of total US 20.6 US 9.6 Germany 5.7 Belgium 6.7 UK 5.6 Japan 6.4 Japan 5.2 Saudi Arabia 6.2 Hong Kong 4.6 Germany 5.8 UAE 4.3 UK 5.8 a EIU estimates. b Fiscal years beginning April 1st. New national accounts series with 1993/94 base year. c At factor cost. d Actual. e Including change in stocks. f Ministry of Finance, Economic Survey. g IMF, Direction of Trade Statistics.

9 India 7 Outlook for India: forecast summary (% change year on year unless otherwise indicated) 1998 a 1999 a 2000 b 2001 b Real GDP at factor cost c Agriculture Industry Services Real GDP at market prices c of which: private consumption public consumption gross fixed investment exports of goods & services imports of goods & services Consumer price inflation (year-end; %) 13.2 d Merchandise exports fob ($ m) 34,076 d 36,315 41,234 47,832 Merchandise imports fob ($ m) 44,828 d 50,176 58,463 68,418 Current-account balance ($ m) 6,903 d 8,673 9,983 13,604 Exchange rate (year-end; Rs:$) d a EIU estimates. b EIU forecasts. c Fiscal years beginning April 1st. New national accounts series with 1993/94 base year. d Actual. The potential for good and stable government exists although politicking will continue As the EIU reported, the most likely outcome of the Indian general election was a coalition government led by the Bharatiya Janata Party (BJP), with an overall majority, but no landslide victory (3rd quarter 1999, page 7). This came to pass. The ruling coalition increased its representation from 253 to 302 seats in the 543-seat Lok Sabha (the lower house), greatly enhancing the authority of the prime minister, Atal Bihari Vajpayee. The main opposition party, the Indian National Congress (Indira, Congress (I), or Congress), and its allies secured 135 seats, down from 147 in the previous parliament. As the BJP itself has only 182 seats, it depends on its coalition allies to hold a majority. Its largest ally in parliament, the Telegu Desam Party (TDP) with 29 seats, is considered stable, reliable and reform-minded. Other allies such as the Dravida Munnetra Kazhagam (DMK) from Tamil Nadu, with 12 MPs, and the Orissabased Biju Janata Dal, with ten MPs, are also fairly solid supporters. Consequently, the government has, in Indian terms, a rare window of opportunity to provide several years of stability and economic reform. The election result, however, will not produce a nirvana of strong and rational government. Some of the elements of the coalition are potentially disruptive and dysfunctional. The 21 MPs of the Janata Dal United (JD-U), a breakaway group from the Janata Dal party, are particularly prone to infighting and caste politics. The eight MPs of the Trinamool Congress, led by Mamata Bannerjee, are little better. The ministries controlled by these parties, including the communications ministry, led by the notoriously populist Ram Vilas Paswan of

10 8 India the JD-U, and the railways ministry, led by Ms Bannerjee, are likely to block reforms and dispense patronage. Mismanagement by some state governments will persist In addition, the role of central government is now less important than that of the states in areas such as fiscal consolidation, electricity reform and road transport. Some states are extremely badly governed; the Congress-ruled administration in Orissa, for example, simply collapsed in the face of the devastation caused by the recent cyclone. The governments of the two most populous states, Uttar Pradesh (in which the BJP has utterly failed to provide stable and honest government) and Bihar, are deeply penetrated by organised crime, and prey to caste politics. This severely limits what the central government can achieve. Moreover, even the most reform-minded ministers are vulnerable to lobbying and nationalistic pressures. The otherwise impressive and experienced minister of commerce, Murasoli Maran, has warned that foreign investors in joint ventures will continue to face obstacles to setting up wholly owned subsidiaries. The admirable minister for power, Rangarajan Kumaramangalam, has spoilt his record by having a significant power contract switched from a foreign supplier with the lowest bid to a state-owned firm manufacturing in his constituency. Radical change will thus be constrained. curbing, but not killing, efforts to address the reform backlog However, the new government should at least be able to pass certain items of legislation which have been held up for one year or more. Pending laws cover issues such as setting up an insurance regulatory authority, and opening the way to private entry in the insurance industry; strengthening intellectual property protection; derivatives trading; company law reform; money-laundering; securities contracts; and liberalised foreign-exchange trade and management. A further raft of reform legislation is being prepared, including an electronic commerce bill to recognise electronic signatures; a bill to strengthen the powers of the independent telecommunications regulator; modernised competition laws; and bills allowing for bank and coal privatisation. Administrative changes already passed include a 35-40% hike in diesel prices; counter guarantees for several private power projects; and ratification of a new telecoms policy, which partially alleviates the unsustainable cost to cellular telephone operators of their licence fees. and to target the burgeoning fiscal deficit The economic credibility of the government rests, above all, on reining in the budget deficit. The deficit target is set at 4.4% of GDP for 1999/2000 (fiscal year beginning April 1st). However, independent analysts (including the EIU) project a deficit of at least 6.5% of GDP, similar to the level in 1998/99. Various factors are behind this, including increased defence commitments, a spree of election spending, poor revenue collection, and rising world oil prices. Indeed, a deficit of 6.5% of GDP now appears rather optimistic. State-level budget deficits add an additional 2% of GDP, which would bring the cumulative deficit to almost 9% of GDP. The government is financing the deficit with market borrowing, putting short-term upward pressure on market interest rates, and risking a debt trap in the long term, when the country s debt service is no longer sustainable.

11 India 9 Current spending by the government must be cut, which, in practice, requires the government to attack some of the subsidies on fertiliser, fuel and power. The leader of the TDP, Chandrababu Naidu, has shown, at the state level, that it is possible to do this and remain in power. The strength of the prime minister may also increase the government s resolve to cut longstanding subsidies. In search of additional tax revenue, a corporate and income tax surcharge may be introduced. In addition, the government must push ahead with a sell-off of shares in state-owned companies, although it may not gain the Rs100bn ($2.3bn) targeted for 1999/2000. If it can approach this level, without resorting to cross-selling between state-owned companies, both fiscal consolidation and deeper reforms can be achieved. The outlook for growth is good The economy is growing strongly, and future growth prospects are good. The 1998/99 GDP growth figure was, as we predicted, close to 6%, mainly because of exceptional performance in the agricultural sector, which offset a relatively stagnant industrial sector. Trends for 1999/2000, to date, suggest slower agricultural growth, as an average monsoon typically follows a good one, but an upturn in industrial growth. Signs of the latter are thin on the ground, but include some spectacular growth in consumer durables, and in cement output, as well as faster manufacturing growth in the first quarter (of 6.2% year on year, compared with 5.2% in the same period of 1998/99). Consequently, we expect industrial growth to rise but not sharply from 4.1% in 1998/99 to 7.4% in 1999/2000. We do not foresee a return to double-digit industrial growth until after 2001/02, when export-oriented industries will benefit from a more favourable external environment, firmer prices for non-oil commodities, and cheaper inputs (as import controls and interest rates continue to ease). As we have emphasised in previous reports, much of the strength of the Indian economy is derived from the services sector (3rd quarter 1999, page 9). Rapid growth in telecoms, information technology (IT), individual transport, internal tourism and leisure and personal services is continuing (but remains difficult to measure). Assuming a slowdown in agricultural growth to 1.9%, but steady, strong growth in services, the overall GDP growth rate will rise from 6% in 1998/99 to 6.3% in 1999/2000. Growth in the services sector should remain strong thereafter, supported by soaring demand for Indian IT exports. Assuming faster agricultural growth, GDP growth should reach 6.4% in 2000/01. but inflation will begin to rise The remarkably subdued levels of inflation reported recently have continued. In July and August wholesale inflation was around 2%, and consumer price inflation (for industrial workers), was down for the first time in many years, at 3%. In this low-inflation environment, there is a risk that the government will see monetisation of the budget deficit as an easy means of covering its liabilities risking future inflation. So far it has resisted this temptation; instead, the deficit is being financed by market borrowing, and money supply (M3) growth is within its target. Some upward inflationary pressure can be expected in the future, from rising oil prices and cuts in subsidies. Inflation will begin to rise from the start of 2000, as domestic demand firms further, higher energy costs continue to feed through into retail prices, and, perhaps most importantly, the year-on-year effect of last year's high inflation rates begins to

12 10 India lessen. Annual average inflation is forecast at over 8% in Inflation should ease slightly in 2001, as currency depreciation slow further and the budget deficit shrinks slightly. High oil prices will hit the trade deficit After contracting by 2% in 1998, and 16% in the first quarter of 1999, imports (in dollar terms) are thought to have grown in the remaining three quarters of Oil prices, which began to rise in the second quarter of 1999, are now expected to increase by almost 40% in the year as a whole. The industrial recovery has drawn in capital and intermediate goods, while the boom in consumer spending has boosted sales of consumer durables, indirectly encouraging the import of components. As a result, we expect imports to rise by around 11% year on year in The rise in oil prices will add several billion dollars to the oil imports bill in We forecast a worsening of the merchandise trade deficit, from $13.9bn in 1999 to $17.2bn in Assuming that net inward transfers rise only slightly above 1999 levels, to $12.4bn, but that services exports grow more rapidly than imports, the current-account deficit will widen only slightly, to $10bn (equal to 2% of GDP), from $8.7bn (1.9% of GDP) in In 2001, a further lowering of import barriers, a continued upturn in demand, and a strengthening of world commodity prices, will boost import volumes and prices, pushing the trade deficit up to over $20bn. However, strong growth in services exports, which are set to rise to $18m in 2001, will see an improvement in the services balance, to $1.8m. Inflows from Indian workers employed abroad will continue to rise, reaching almost $13bn in This will only partly offset the rise in the merchandise trade deficit, giving a current-account deficit of $13.6bn (2.6% of GDP) but high reserves will maintain the balance of payments Foreign-exchange reserves have continued at historic highs, totalling $31.3bn at the end of August (excluding $2.2bn in gold). Moreover, major sources of capital inflows seem secure. Foreign direct investment (FDI) fell back in 1998/99 to $2.6bn, partly because of political uncertainty. These inflows should recover. We also expect the resumption of more footloose foreign portfolio investment on a significant scale. Net portfolio investment is set to recover and to stay around $3.5bn-4bn in 2000 and Thus, despite the deterioration in the current account, the government will have no difficulty maintaining the rupee s managed float. We expect capital inflows and low inflation to contain average annual depreciation to below 5% in 1999, with an average rate of Rs43.33:$1. As the external position worsens, and inflationary pressures increase, the currency will weaken to an average rate of Rs50.48:$1 in 2001.

13 India 11 The political scene The BJP s alliance wins the election The National Democratic Alliance (NDA), the electoral grouping led by the Bharatiya Janata Party (BJP), won a convincing victory in the general election in September-October. At least on paper, the alliance has a clear overall majority in parliament, which should be sufficiently robust to manage the factionalism which will inevitably occur. The government commands 302 seats, well above the 269 required for an overall majority. The BJP (with 182 seats) and its Hindu nationalist ideological partner from Maharashtra the Shiv Sena, with 15 seats form the core of the governing coalition. They are joined by some reasonably reliable allies, including the Dravida Munnetra Kazhagam (DMK) with 12 seats, and allied parties from Tamil Nadu with a total of nine seats; the Orissa-based Biju Janata Dal (BJD) with ten seats, and the Telegu Desam Party (TDP) from Andhra Pradesh, with 29 seats, which is not joining the government, but lends parliamentary support. However, the parliamentary majority is made up by some more unpredictable allies, including the Trinamool Congress from West Bengal, with eight seats, the Indian National Lok Dal (INLD, the Haryana peasant farmer party) with five seats, and the extremely fractious and volatile Janata Dal United (JD-U). The strong egos and left-wing inclinations of many members of the JD-U will make it an impossible long-term bedfellow for the BJP. The 16 parties of the coalition (with eight others not represented in the Lok Sabha, but involved in state-level alliances) will require much management. However, given the dominance of the BJP and the arithmetic of parliamentary seats, the coalition will probably survive most of its five-year term.

14 12 India India: parliamentary seats after the 1999 election Party Seats BJP and allies 302 Bharatiya Janata Party (BJP) 182 Telegu Desam Party (TDP) 29 Janata Dal United (JD-U) 21 Shiv Sena 15 Dravida Munnetra Kazhagam (DMK) 12 Biju Janata Dal (BJD) 10 Trinamool Congress 8 Indian National Lok Dal (INLD) 5 Pattali Makkal Katchi (PMK) 5 Marumalarchi Dravida Munnetra Kazhagam (MDMK) 4 Others 11 Congress and allies 135 Indian National Congress 114 All-India Anna Dravida Munnetra Kazhagam (AIADMK) 10 Others 11 Others 104 of which: Communist Party of India (Marxist, CPI-M) 33 Samajwadi Party 26 Bahujan Samaj Party (BSP) 14 Total 541 a a One seat in Karnataka and another in Uttar Pradesh must be recontested after being vacated by Sonia Gandhi and Mulayam Singh, respectively. Source: India Election Commission. thanks to the performance of the party s partners The Indian National Congress (Indira, Congress (I), or Congress), which won 114 seats, down from 141 in the previous parliament, appeared to suffer a crushing defeat, but actually registered an improvement in its share of the vote. Congress won 28% of all votes, and 34% of the 433 seats it contested; by comparison, the BJP won 24% of all votes and 39% of the 339 seats it contested. Both Congress and the BJP increased their share of the vote at the expense of other parties. There was a swing of 1.2% to the BJP and allies, and one of 3.4% to Congress and its allies. The BJP alliance gained ground, and Congress lost ground, because the BJP s alliance partners were by far the more effective. Congress had links to the highly unreliable and corrupt Jayalalitha Jayaram, the leader of the All-India Anna Dravida Munnetra Kazhagam (AIADMK) party in Tamil Nadu. The BJP, with carefully constructed alliances, was able to make deep inroads in states such as Andhra Pradesh, Bihar, Maharashtra, Orissa, Tamil Nadu and West Bengal. As a result, the BJP alliance outvoted Congress among the so-called other backward castes (OBCs), as well as the upper castes, among rural voters as well as urban. Congress outvoted the BJP only among Muslims and scheduled castes (who are extremely low in the caste hierarchy). On a more positive note for the party, Congress s relations with the breakaway Nationalist Congress in Maharashtra, led by Sharad Pawar, were repaired. The two parties formed a coalition in the state to oust the BJP-Shiv Sena state government.

15 India 13 Mrs Gandhi remains at the Congress helm but there are some new faces in the cabinet The Congress defeat has not dislodged the party president, Sonia Gandhi, who won two seats in the election (which is permitted). However, she appears weakened. Congress has a few talented individuals, such as the former minister, Madhavrao Scindia, but the dynastic pull of the Nehru-Gandhi family is likely to prevail. Mrs Gandhi s daughter, Priyanka, is expected to emerge as standardbearer of the dynasty, and the party. The changing balance of power within the BJP alliance has brought some new faces into vital positions. Several of the new ministers, such as Murasoli Maran, are former ministers with a track record of reform. Others, such as Ram Vilas Paswan and Mamata Bannerjee, are notorious for pork-barrel politics. India: selected ministers in the new government Continuing ministers Ministry Party Atal Bihari Vajpayee Prime minister BJP Lal Krishna Advani Home affairs BJP Yashwant Sinha Finance BJP Jaswant Singh Foreign affairs BJP George Fernandes Defence Janata Dal (U) Rangarajan Kumaramangalam Power BJP Nitish Kumar Surface transport Janata Dal (U) Jagmohan Urban affairs BJP New ministers Ministry Party Murasoli Maran Commerce DMK Ram Vilas Paswan Communications Janata Dal (U) Ram Naik Petroleum & natural gas BJP Sharad Yadav Civil aviation Janata Dal (U) Mamata Bannerjee Railways Trinamool Congress Source: Press reports. Although the TDP, led by Chandrababu Naidu, is not in the government, it is a major source of support in parliament. Mr Naidu s political credibility was greatly enhanced by his resistance to anti-reform forces at the state level. This stance resulted in the TDP winning 29 seats in parliament, and clinching the state assembly. The BJP alliance, including the TDP, won 36 out of 42 parliamentary seats in the state. The government aims to break the parliamentary logjam One of the first tasks of the newly installed government is to clear some 20 bills which are stuck in parliament. Some are viewed as essential to rekindling the reform drive. The pending legislation includes: a law setting up an insurance regulator; legislation to establish a patents regime compatible with World Trade Organisation (WTO) rules; a new company law; a bill strengthening intellectual property protection; a law covering securities contracts; and

16 14 India a bill reforming the foreign-exchange regime and targeting moneylaundering. In addition, another batch of bills, most of which are not considered especially controversial, are waiting to be tabled. These include: legislation preparing for the privatisation of the coal industry; a bill liberalising the life-insurance sector; a broadcasting bill updating antiquated media rules; a plant-variety breeders bill and a biodiversity bill; an acquisition bill, which aims to free up the property market; a foreign-trade bill; and legislation to facilitate derivatives trading. and launch an economic big bang In addition to the legislative programme, the new government acknowledges that it must act quickly on economic policy issues to establish its credibility. Topping the agenda is the aim of reducing the budget deficit from 6.5% of GDP in 1998/99 to 4.4% of GDP in 1999/2000 (fiscal years starting April 1st). This will necessitate difficult choices, including cutting subsidies (notably on petroleum), and raising taxes and administered prices. Another priority is the acceleration of equity divestment in state enterprises. The government had promised to raise Rs100bn ($2.3bn) from share sales this year. Bottlenecks in infrastructure development must also be addressed. The government has already embarked on some reforms, with mixed success. A new telecoms policy has been approved, as has an insurance bill and private-sector involvement in airport development. The new government took a quick decision to raise diesel prices by 35-40%, closer to a free-market rate, which provoked a strike by lorry drivers. Insurance company workers are also threatening to strike over sectoral reforms. Regionalism is strengthened The latest election reinforces the trend towards the decentralisation of power to the states. Results demonstrated the appeal of local parties, and their desire to remain independent. For example, Mr Naidu s TDP has chosen to concentrate its political activities in the state. Meanwhile, the BJP produced a particularly poor result in the largest state, Uttar Pradesh, even though this is the state of the prime minister, Atal Bihari Vajpayee, who represents Lucknow. The BJP state government was unable to extricate itself from the mire of caste-ism, corruption and incompetence which has characterised governance in the state. Consequently, a 76-year old political non-entity the only candidate free from disqualification based on caste was appointed chief minister. There are several consequences of the trend towards regionalism. One is that states increasingly compete or fail to compete for inward investment. The exercise of power in New Delhi comes to seem much less important than putting on a good show in the state capital. Those states which understood this first Gujarat, Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh are now booming, while Uttar Pradesh and Bihar drift further behind. A second consequence is that state governments, rather than central government, take the political credit or odium for governance. Thus, in the state of Orissa, where a recent cyclone had devastating consequences, it is the Congress-run state administration which is being blamed for failing to do more to help.

17 India 15 while concerns grow over Pakistan There is division over India s nuclear policy The military coup in Pakistan has created a new element of instability in India s external relations. The BJP government profited greatly, in political terms, from its successful management of the Kashmir confrontation earlier in the year; it must now confront a Pakistani military dictator who has come to power at least in part, and indirectly because of the civilian government s perceived failure in that conflict. India is wary of the combined impact of military leadership and the growing influence of Islamic extremism, which is spilling over from Afghanistan. In particular, there are fears of increased terrorism directed towards India, and of further attempts to infiltrate Kashmir. The fact that the Afghan-based Saudi dissident and alleged terrorist, Osama bin Laden, regards India as his primary target (ahead even of the US) is ominous. Within India, a serious and coherent strategy of nuclear deterrence has emerged. There is, however, tension between moderates, who want a limited deterrent against China and Pakistan (involving weapons delivered by aircraft and missiles), and hardliners, who want weapons (including some with long-range capability and nuclear submarines), capable of confronting even the US. The moderates, currently ascendant, would also like to sign the Comprehensive Test Ban Treaty (CTBT). Cost factors weigh heavily in favour of the moderate position, as the hardline option would cost an estimated $180bn over three decades. Economic policy The fiscal deficit is still the top priority The first major task of the finance minister, Yashwant Sinha, is to reduce the budget deficit. The EIU now expects this to drift from the targeted 4.4% of GDP in 1999/2000 to 6.5%, the same as in 1998/99 (fiscal years beginning April 1st). This pessimistic forecast is based on data showing that government borrowing increased by 27% year on year in the first quarter. There are several reasons for the worsening deficit. First, various improvements in public-sector financial management were put on hold after the fall of the government in April. Second, the Kargil conflict resulted in a large dent in the budget, both owing to direct costs, and to efforts to gear up for greater defence commitments. Third, the government was unable to resist the temptation to deliver some pre-election spending: some Rs10bn ($262m) was spent on higher support prices for farmers, increased fertiliser subsidies and greater civil-service allowances. The election itself cost around Rs10bn. On the revenue side, excise duty collection rose by 23% year on year in the first quarter. However, other revenue receipts have been below expectations, possibly owing to less energetic enforcement in the election season. Even if tax collection is now accelerated, a shortfall of Rs40bn ($924m) is forecast. as the new government moves to plug the gap The government has announced a package of tough-sounding measures. They include a freeze on new government posts; a ban on supplementary grants in the current financial year, and on financial support for restructuring weak public enterprises; and a 10% cut in non-development non-salary spending. More concretely, the government has raised diesel prices, and announced an

18 16 India Rs15bn supplementary budget package, including some additional duties. However, these are small sums in relation to the size of the budget deficit. A more effective effort would involve selling off some of the state enterprises. Mr Sinha, like many of his predecessors, has talked about several big ticket items for share divestment. At some point in the near future, he will also have to contemplate new taxes and large across-the-board increases in food prices. created, in part, by unbalanced policies Macroeconomic policy is seriously unbalanced, with fiscal policy lax and monetary policy tight. In late November the bank refinancing rate stood at 8%, with the prime lending rate hovering around %. Real interest rates are in double digits. Meanwhile, money supply growth (M3) is being contained within the 17% target: annual growth in M3 at the end of September was 16.2%, and net credits to the government from the Reserve Bank of India (RBI, the central bank) actually declined, year on year. The government has not resorted to monetisation of the deficit, which would have inflationary consequences (although it would have the reflationary benefit of pulling down real interest rates). Instead, it is borrowing from capital markets and banks, thereby driving up interest rates and shifting the adjustment problem from the public to the private sector, where the cost of borrowing is rising. Foreign investors receive mixed signals The government led by the Bharatiya Janata Party (BJP) appears to want to put an end to its reputation for economic nationalism by welcoming foreign investors. Mr Sinha has promised to bring in automatic approvals for foreign investment in almost every sector. In cases of proprietary and patented technology such as biotechnology 100% foreign ownership will be allowed. However the new minister of commerce, Murasoli Maran, who is generally thought to be in favour of liberalisation, has committed the government to retaining the controversial no objection certificates (NOCs) for wholly foreignowned subsidiaries. From December 1998 foreign investors wishing to make new investments in India have been required to secure NOCs from their Indian partners, proving that the partner has no objection to the investor s plans. In several cases, NOCs have been used to block expansion plans by foreign investors. For example, Denso, a Japanese car-parts manufacturer, was prevented from launching a joint venture to make air conditioners by an erstwhile partner and future competitor, Subros. Likewise, a Japanese vehicle-maker, Honda, was not permitted to manufacture scooters in competition with Kinetic, a former partner. This protectionist device is strongly supported by the commerce ministry, and by some leading Indian companies associated with the socalled Bombay Club. The prime minister s office is reputedly concerned about this vestige of swadeshi (self-reliance), with which the BJP is still associated. In addition, the election manifestos of the coalition parties were mixed. Overall, the National Democratic Alliance (NDA), led by the BJP, promised a strong swadeshi thrust. At the same time, it pledged to attract $10bn of foreign investment per year, and announced its commitment to creating a new investment promotions board. On certain specific and rather sensitive policies, the message is confused. While the NDA has tabled a bill allowing

19 India 17 private investment in insurance, and up to 26% in foreign equity, it plans to restrict foreign equity in private television broadcasting to 20%. It is noncommittal on foreign investment in the energy and telecommunications sectors. India is better prepared than many for Y2K India is better prepared for Y2K (the year 2000, a date which will be incompatible with older computing systems popularly known as the "millennium bug") than other developing countries, and even than many developed countries. There has been a systematic attempt to ready the country for potential problems, and as India has only recently implemented hightechnology processes in the public sector, its computers are relatively modern. India s world-class software companies have been geared to the Y2K problems of the West, but have also been involved in Indian preparations. However, some potentially serious gaps remain, including doubts over the preparedness of the power companies run by state governments, and the banking system. The banks themselves are mostly non-computerised, but it is feared that customers may make panic withdrawals. The RBI is considering loosening banks cash-reserve ratio requirements for the period around the new year. India: Industry regulators Sector Regulator Chair Electricity Central Electricity Regulatory Commission (CERC) S L Rao Telecoms Telecoms Regulatory Authority of India (TRAI) S S Sondhi Stock exchange Securities and Exchange Board (SEBI) n/a Insurance Insurance Regulatory and Development Authority (IRDA) a N Rangachary Ports Tariff authority only n/a Roads Proposed n/a Water Proposed at state level n/a Oil & gas None n/a Aviation Director-General for Civil Aviation b n/a Broadcasting None n/a Banking None c n/a a IRDA has no statutory powers at present. b There are plans to convert the DGCA to an independent regulator. c The Reserve Bank of India (RBI) regulates the banking sector. Source: Press reports. India is making the transition from controls to utility regulation India is making the transition to a market economy, in which competitive enterprises and utilities operate within rules set by independent regulators, rather than following the decisions of bureaucrats and politicians. This process is at an early stage, and the first full-fledged regulators, such as the Telecoms Regulatory Authority of India (TRAI), are coming under ferocious attack. Vested interests, including state-owned telecoms companies and the department of telecoms, have taken on the regulator in the courts and the forums of political opinion (See Infrastructure and services). TRAI has lost one major legal battle over its suspension of charges for incoming mobile telephone calls and its push for lower rental and usage charges; it is struggling to retain credibility. The electricity regulator is less advanced, but has made an early impact with a code for the national grid system, and a draft policy on tariffs.

20 18 India The domestic economy Economic trends Annual GDP growth rises Real GDP figures for the first quarter of 1999/2000 (fiscal year beginning April 1st) indicate that growth has begun to revive. (Quarterly GDP figures are a novelty in India, and ought perhaps to be treated with caution, given the significant revisions made to annual data months or years later.) Annual yearon-year growth rates for manufacturing and agriculture improved. Gains were also registered in the construction sector, which recorded growth of 6.7%. Growth in trade, transport and communications where railways, ports and postal services have seen a substantial increase in business eased to 6% in the first quarter of 1999/2000, after two consecutive quarters of 10% growth. (It should be noted that quarterly growth figures are subject to large short-term and seasonal variations.) India: gross domestic product (% change, year on year) 1999/ 1998/99 a 2000 a 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Agriculture Mining Manufacturing Utilities Construction Trade, transport & communication Finance Social & personal services GDP a Fiscal years beginning April 1st. Source: Central Statistical Organisation (CSO). and there are signs of a slight industrial recovery Data for the first four months of 1999/2000 point to a continued recovery in industrial production, with growth of 6% year on year, compared with 4.2% in the same period of 1998/99. Manufacturing grew by 6.7%, compared with 4.2% in the same period last year. There was an exceptional recovery in the output of consumer durables, which grew by 13.7% year on year, compared with 1% in the same period last year. Intermediate goods also surged, growing by 9.1%, compared with 5.6% in 1998/99. However, judging from the data, the industrial recovery appears to be concentrated in these latter two sectors alone. Furthermore, growth in the intermediate goods sector was primarily owing to increased cement production. Electricity generation slowed rising by 6.1% in April-July, compared with 8.7% last year as did growth in the mining sector (0.3%, compared with 0.5%) and in consumer non-durables (0.9%, down from 2.5%). These data suggest that the recovery is fairly narrow.

21 India 19 The consumer durables market continues to evolve cutting prices and boosting demand The overall figures for durable goods production mask the extent to which the sector has changed in recent years. Consumer choice has expanded massively, and quality has improved, with better service and falling prices easing access to new products. There are now 54 car models on offer, compared with 24 in 1995 and only two in the mid-1980s. Meanwhile, prices for comparable cars have dropped by around 35% in the past four years. There are 233 models of refrigerators, compared with 65 in 1995 (and prices have fallen sharply) and 2,400 models of audio equipment, up from 2,000 four years ago, when prices were, on average, 20% higher. There have been similar developments in airconditioning units and washing machines. The most dramatic explosion in consumer ownership has perhaps been in televisions: there are now an estimated 55m homes with televisions, and the number is growing by 20% per year. Of these, 20m are connected by satellite. Television prices have halved since 1995, and there are 2,700 models available. Indian consumer durable companies are now in a virtuous circle. Growing volumes are generating economies of scale, enabling producers to cut costs and prices, which stimulates even greater demand. Market liberalisation has brought access to foreign know-how, as well as better quality and production processes. A raft of imaginative marketing techniques, together with consumerfriendly financing, are facilitating the boom. When Indian consumer markets reach saturation at least with the first wave of consumer durables there will be a painful shakeout. For the moment though, the boom is continuing. India: ten largest companies by market capitalisation Company, 1999 Hindustan Lever Wipro Infosys Technologies Reliance Zee TV Indian Tobacco Co Ranbaxy Larsen & Toubro NIIT Satyam Infoway Company, 1995 Hindustan Lever Reliance Tata Engineering Tata Iron & Steel Indian Tobacco Co Larsen & Toubro Bajaj Grasim-Birla Hindalco-Birla Whirlpool Source: Press reports. Sector Consumer goods Information technology Information technology Petrochemicals Media Tobacco Pharmaceuticals Engineering Information technology Information technology Sector Consumer goods Petrochemicals Vehicles Metals Tobacco Engineering Vehicles Cement Metals Consumer durables