India 1 Country Report September 2003 ' The Economist Intelligence Unit Limited 2003 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators

Country Report September 2003

India

September 2003

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

India at a glance: 2003-04

OVERVIEWThe general election, due by October 2004, is dominating politics. It could beheld as early as November 2003, in tandem with state elections in Delhi,Rajasthan, Madhya Pradesh and Tripura. More likely, if the ruling BharatiyaJanata Party (BJP) does well in the state elections, it could be brought forwardto February 2004. The general election is likely to result in another fracturedparliament, with the formation of a government dependent on the ability ofthe BJP and the main opposition party, Congress, to form alliances. TheEconomist Intelligence Unit expects the economy to grow by 6% in fiscal year2003/04 (April-March), underpinned by an agricultural rebound spurred by agood monsoon rainfall. We forecast consumer price inflation to average 4.6% in2003 and to rise to 5.4% in 2004 owing to increasing industrial bottlenecks. Thecurrent-account surplus will fall to 0.5% of GDP in 2003 as the global economyslows, but will rise to 0.9% of GDP in 2004, underpinned by services exportsfrom India�s booming information technology (IT) and IT-enabled servicessectors.

Key changes from last month

Political outlook• The strong monsoon and the general strength of the economy has raised the

possibility that a snap general election will be called in late November, inassociation with four state elections. If this does not occur, but the BJP doeswell in the state polls, it may decide to hold the general election in February.

Economic policy outlook• With the election approaching, no radical economic policies are expected to

be introduced, but the success of the disinvestment (privatisation) of thecarmaker, Maruti Udyog, may speed up the wider privatisation programme.

Economic forecast• We have lowered our forecast for India�s foreign-exchange reserves at end-

2003 to US$87.4bn!although reserves are soaring, the government isincreasingly keen to use these funds to pay off external debt.

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India 1

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook

10 Economic forecast

12 The political scene

18 Economic policy

24 The domestic economy24 Economic trends25 Agriculture26 Manufacturing27 Infrastructure29 Financial and other services

30 Foreign trade and payments

List of tables10 International assumptions summary12 Forecast summary18 Government finances22 Automatic release of foreign exchange24 GDP and its components25 Inflation25 Area under summer crops28 Number of telephones30 Trade, reserves and the exchange rate, 200331 Current and capital accounts31 Imports33 External debt

2 India


List of figures

12 Gross domestic product12 Consumer price inflation19 Money supply and foreign-exchange reserves26 All-India mean rainfall

India 3


Summary September 2003

A general election could be held as early as November 2003, in tandem withfour state elections. More likely, if the ruling Bharatiya Janata Party (BJP) doeswell in the state elections, it could be held in February 2004. The formation ofthe government will depend on the ability of the BJP and the main oppositionparty, Congress, to form alliances. The Economist Intelligence Unit expects theeconomy to grow by 6% in fiscal year 2003/04 (April-March), underpinned byan agricultural rebound. Consumer price inflation is forecast to rise to 5.4% in2004 as industrial bottlenecks develop. The current-account surplus will fall to0.5% of GDP in 2003 as the global economy slows, but will rise to 0.9% of GDPin 2004, underpinned by services exports from India�s booming informationtechnology (IT) and IT enabled-services sectors.

Congress is open to forming an alliance. The deputy prime minister, Lal KrishnaAdvani, has proposed that state and general elections be synchronised. Thegeneral election may be brought forward. In Uttar Pradesh, the government haslost a small ally, and there has been friction between the largest party, theBahujan Samaj Party, and the BJP. Water disputes have resurfaced. Gujarat�sjustice system has come under scrutiny. Government employees went on strikein Tamil Nadu in June. Relations with China and Pakistan have improved.

Both revenue and expenditure were weak in the first quarter of 2003/04. Thegovernment sold a stake in the carmaker, Maruti Udyog, in June. The ShippingCorporation of India may be sold and state governments are selling theirholdings. The Reserve Bank of India (central bank) is following a policy ofmonetary sterilisation. The shake-up of cable television has been delayed. Thegovernment has enforced a foreign equity cap on Star TV. Coca-Cola won aconcession from the government in July, but, along with Pepsi-Cola, was thencriticised for the quality of water used. Foreign-exchange controls have beenrelaxed. The government has tried to reduce its interest costs.

The services sector underpinned economic growth in 2002/03. Inflation hasremained around 5%. A bumper harvest is likely. Foodgrain stocks have fallen.Reform of the sugar industry has stalled. Moves to mix ethanol with petrolhave been delayed. A discussion paper has caused a furore in the telecom-munications sector. There has been increased competition in port services. Theinsurance sector has suffered. New stock exchanges have been set up.

Foreign-exchange reserves have continued to mount. Investment income hasrisen, and the current-account surplus rose to US$3.7bn in 2002/03. The US wasIndia�s largest market, but trade with Asia grew fast. India became the second-largest rice exporter in 2002/03, but lost preferential access to the EU. High-costexternal debt has been repaid.

Editors: Gareth Price (editor); Graham Richardson (consulting editor)Editorial closing date: August 18th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 India


Political structure

Republic of India

Federal republic, with 29 states and six union territories

President, currently Abdul Kalam, indirectly elected in 2002 for a five-year term bymembers of the central and state assemblies

The prime minister presides over a Council of Ministers chosen from elected members ofparliament

Bicameral. The Rajya Sabha, or upper house, has 245 members (233 elected by weightedvotes of the elected members of parliament and the legislative assemblies of states andunion territories, and 12 appointed by the president). The Lok Sabha, or lower house, has545 members: 543 elected from single-member constituencies (79 seats are reserved forscheduled castes and 40 for scheduled tribes) and two representatives of Anglo-Indiansappointed by the president

Unicameral or bicameral, with elected members; state governors are appointed by thepresident

Based on the 1950 constitution and English common law

The National Democratic Alliance (NDA), a coalition led by the Bharatiya Janata Party(BJP), won a clear majority in the September-October 1999 election and installed AtalBehari Vajpayee as prime minister. The NDA continues to rule, despite minor changes inits composition

The next Lok Sabha election is due by October 2004

Bharatiya Janata Party (BJP); Indian National Congress (Congress); Communist Party ofIndia (Marxist) (CPI-M); Telegu Desam Party (TDP); Samajwadi Party; Shiv Sena; BahujanSamaj Party (BSP); Dravida Munnetra Kazhagam (DMK); Janata Dal; Samata; All-IndiaAnna DMK (AIADMK); Biju Janata Dal (BJD); Trinamool Congress (TC); NationalistCongress Party (NCP); Rashtriya Janata Dal (RJD); Rashtriya Lok Dal (RLD); ShiromaniAkali Dal (SAD)

Prime minister, planning, statistics & atomic energy Atal Behari Vajpayee (BJP)Deputy prime minister, home affairs & personnel Lal Krishna Advani (BJP)Agriculture Rajnath Singh (BJP)Chemicals & fertiliser Sukh Dev Singh Dhindsa (SAD)Commerce & industry, law & justice Arun Jaitley (BJP)Communications & information technology & disinvestment Arun Shourie (BJP)Defence George Fernandes (Samata)External affairs Yashwant Sinha (BJP)Finance Jaswant Singh (BJP)Heavy industry & public enterprises Subodh Mohite (Shiv Sena)Human resources development, science & technology Murli Manohar Joshi (BJP)Petroleum & natural gas Ram Naik (BJP)Power Anant Gangaram Geete (Shiv Sena)Railways Nitish Kumar (Samata)

Bimal Jalan

Official name

Form of state

Head of state

The executive

National legislature

State legislatures

Legal system

National government

National election

Main political organisations

Key cabinet ministers

Central bank governor

India 5


Economic structure

Annual indicators1998 a 1999 a 2000a 2001 a 2002 b

GDP at market prices (Rs bn)c 17,409.9 19,369.3 20,589.6 22,960.5 24,260.9GDP (US$ bn) 414.3 444.4 450.7 481.4 501.2

Real GDP growth (%) 6.0 7.1 3.9 5.5 4.3Consumer price inflation (av; %) 13.2 4.7 4.0 3.8 4.3 a

Population (m) 981.7 997.9 1,014.0 1,030.0 b 1,045.8

Exports of goods fob (US$ m) 34,076.0 36,877.0 43,132.0 44,613.0 b 50,713.0Imports of goods fob (US$ m) -44,828.0 -45,556.0 -55,325.0 -52,207.0 b -57,106.0

Current-account balance (US$ m) -6,903.0 -3,227.0 -4,198.0 1,187.3 b 4,506.3Foreign-exchange reserves excl gold (US$ m) 27,341.0 32,667.0 37,902.0 45,871.0 67,666.0 a

Total external debt (US$ bn) 97.6 98.3 99.1 97.3 96.6

Debt-service ratio, paid (%) 21.2 15.8 14.9 11.8 b 13.1Exchange rate (av) Rs:US$ 41.26 43.06 44.94 47.19 48.61 a

a Actual. b Economist Intelligence Unit estimates. c Fiscal year.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2001a % of totalAgriculture 23.6 Private consumption 65.0Industry 26.2 Government consumption 12.8

Mining 2.2 Fixed investment 21.7Electricity, gas & water supply 2.5 Stockbuilding 0.8Manufacturing 15.4 Exports of goods & services 13.3

Services 50.2 Imports of goods & services 13.9

Principal exports 2002ab US$ bn Principal imports 2002ab US$ bnGems & jewellery 8.8 Petroleum & petroleum products 17.7Engineering goods (incl iron & steel) 8.4 Capital goods 7.7

Textiles 5.8 Precious & semi-precious stones 6.1Ready-made garments 5.4 Electronic goods 5.4

Chemicals 5.0 Chemicals & related products 4.7

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalUS 22.9 US 8.0UK 5.2 Belgium 7.5

UAE 5.2 China 5.2Hong Kong 4.6 Singapore 5.2

Germany 4.3 UK 5.2

a Fiscal years beginning April 1st of the year indicated. b Ministry of Finance, Economic Survey 2000-01.

6 India


Quarterly indicators2001 2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Government finance (Rs bn)Revenue 648.84 569.29 781.55 361.55 685.49 645.24 990.89 381.14Expenditure 799.48 886.81 1,253.52 757.15 867.35 930.47 1,574.67 767.22Balance -150.64 -317.52 -471.97 -395.60 -181.86 -285.23 -583.78 -386.08OutputGDP at constant 1993/94 prices (Rs bn)a 2,835.7 3,437.4 3,426.8 3,109.7 2,983.5 3,516.9 3,593.1 n/aGDP at constant 1993/94 prices (% change, year

on year) 5.1 6.3 6.3 5.3 5.2 2.3 4.9 n/aIndustrial production index (1993/94=100) 161.4 168.8 177.1 167.5 171.9 178.5 188.7 176.4

PricesConsumer prices (1982=100) 464.7 469.7 467 472.3 483.3 486.7 484.7 494.7Consumer prices (% change, year on year) 4.7 4.8 5.1 4.5 4.0 3.6 3.8 4.7

Wholesale prices (1993/94=100)General index 161.5 162.2 161.2 163.3 166.7 167.5 169.6 173.3Fuel 224.9 230.0 229.5 231.5 238.4 240.2 246.7 249.3Manufactured goods 144.6 144.3 144.1 145.7 148.0 148.5 150.2 153.5Financial indicatorsExchange rate Rs:US$ (av) 47.30 47.98 48.59 48.96 48.60 48.29 47.77 47.06Exchange rate Rs:US$ (end-period) 47.86 48.18 48.80 48.87 48.38 48.03 47.55 46.47Bank rate (end-period; %) 7.00 6.50 6.50 6.50 6.50 6.25 6.25 n/aLending rate (av; %) 12.00 12.00 12.00 12.00 12.00 11.67 11.50 n/aM1 (end-period; Rs bn) 3,720.8 3,846.0 4,017.3 4,204.5 4,206.8 4,318.6 4,501.3 n/aM1 (% change, year on year) 10.1 10.0 11.5 11.3 13.1 12.3 12.1 n/aM2 (end-period; Rs bn) 13,076 13,368 13,821 14,911 15,345 15,568 15,913 n/aM2 (% change, year on year) 16.4 14.3 14.4 17.0 17.4 16.5 15.1 n/aBSE Sensex (end-period; 1978/79=100) 2,812 3,262 3,469 3,245 2,991 3,377 3,049 3,607BSE Sensex (% change, year on year) -31.3 -17.9 -3.7 -6.1 6.4 3.5 -12.1 11.2Sectoral trendsCrude oil (m barrels; prodn/day) 0.73 0.75 0.74 0.75 0.76 0.76 0.76 0.73Production index (1993/94=100)Manufacturing 166.5 173.9 184.1 173.1 178.0 184.5 196.8 182.6Mining 126.4 137.2 141.1 131.4 134.2 143.6 149.1 138.3Electricity 158.3 160.6 163.1 160.6 163.5 167.8 165.5 166.9Foreign trade (Rs bn)Exports fob 502 493 579 590 579 607 642 619Imports cif -612 -596 -604 -677 -699 -766 -730 -818Trade balance -110 -103 -25 -87 -120 -159 -88 -199Balance of payments (US$ m)b

Merchandise trade balance fob-fob -3,804 -2,886 -2,281 -2,759 -2,651 -4,350 -2,700 n/aServices balance 947 1,359 1,560 699 1,434 2,111 1,100 n/aIncome balance -560 -768 -635 -1,067 -679 -934 -973 n/aNet transfer payments 2,303 3,090 3,373 3,586 3,535 3,894 3,573 n/aCurrent-account balance -1,114 795 2,017 459 1,639 721 1,000 n/aForeign reserves excl gold 42,583 45,871 51,671 55,363 60,319 67,666 72,566 n/a

a At factor cost. b Reserve Bank of India.

Sources: Centre for Monitoring Indian Economy, Monthly Review of the Indian Economy; IMF, International Financial Statistics; International Energy Agency, Monthly Oil Market Report;

Financial Times Reserve Bank of India.

India 7


Outlook for 2003-04

Political outlook

The timing of the general election has moved to the centre of the politicalagenda. The deputy prime minister and home minister, Lal Krishna Advani, iskeen to hold the election early to capitalise on the feel-good factor associatedwith this year�s good monsoon and strong overall economic growth. It ispossible that the election could be held as early as November 2003, at the sametime as four state elections, if the Bharatiya Janata Party (BJP) feels that it islikely to win in these states. Although they are controlled by the mainopposition party, Congress, the BJP may believe it will benefit from the anti-incumbency factor. Indeed, an early opinion poll has placed it well ahead inMadhya Pradesh. However, this would be a risky option given that the BJP hasperformed poorly in every recent state election apart from Gujarat, where itcampaigned on a hardline Hindu nationalist platform against a backdrop ofcommunal violence. Further outbreaks of violence are possible: the August 25thbombings in Mumbai have been blamed on an Islamist group. Hinduretaliation, and a new cycle of killings may now occur.

If the BJP performs well in the November state elections, perhaps winningthree of the four states, it is likely to bring the general election, due by October2004, forward, possibly to February. However, the Economist Intelligence Unit�scentral forecast remains that the election will be held later in the year and thatthe November state elections will not do enough to convince the BJP leadershipthat they are likely to win the general election. The BJP is still considering itsbroader electoral strategy, and whether or not it will adopt an aggressivelyHindu nationalist stance. If the BJP were to pursue this strategy in the generalelection, communal tensions would increase. The response of Congress wouldbe crucial. In Gujarat, it too adopted a more Hindu nationalist stance, believingthat Muslims would vote for it regardless. Such an approach in a generalelection could alienate India�s large Muslim minority. If Congress decides tofight the BJP from a secular standpoint, it could become a more attractive allythan the BJP to many of the smaller parties. These parties� support would beessential in enabling Congress to form a government after the election.

The outcome of the 2004 general election is difficult to predict. The greater thelikelihood of a Congress victory, the more vociferous will be the criticism of theItalian origins of its leader, Sonia Gandhi. The BJP will be keen to present theelection as a personality contest between the prime minister, Atal BehariVajpayee, and Mrs Gandhi. Congress, by contrast, will try to fight the electionon issues, one of which will be corruption. We expect that neither the BJP norCongress will secure an outright majority, and the composition of thegovernment will depend on the ability of the two main parties to formalliances with smaller parties. In some respects this may favour the BJP, whichhas successfully managed a disparate coalition since 1999, largely by offeringsops to many of the constituent parties. However, the BJP�s success has beenlargely down to Mr Vajpayee, who is widely respected across the political

Domestic politics

8 India


spectrum. It is doubtful if the ruling coalition, the National Democratic Alliance(NDA), would survive if he were to be replaced by the hawkish Mr Advani.

The other factor that will dominate politics is India�s relationship with Pakistan.On August 8th India�s ambassador presented his credentials to Pakistan�spresident, Pervez Musharraf, marking the formal restoration of diplomaticrelations which were suspended early last year. An informal peace conference,which included 100 parliamentarians from the two countries, took place inearly August, with the blessing of both governments and the participation ofright-wing religious parties from both countries. We now expect formal peacetalks between the two governments to take place early in 2004, perhaps at thesummit of the South Asian Association for Regional Co-operation (SAARC),which is scheduled for January 4th-6th in Islamabad, Pakistan. Mr Vajpayeeappears to be hoping that the prospect of improved relations with Pakistan willalso improve the BJP�s electoral chances.

However, the peace initiatives taken thus far are small steps toward the normal-isation of relations that have been exceptionally strained. The key to a long-term improvement will be an agreement over the status of Kashmir. India mayoffer to turn the Line of Control separating Indian and Pakistani Kashmir intoan international border, but this would probably prove unacceptable toPakistan�s government. Moreover, Kashmiri separatists and more radicalIslamist groups that operate in Indian Kashmir are likely to step up their anti-Indian activities in order to undermine any moves towards peace. Even so,neither side will want the talks to appear to have failed. We therefore expect tosee confidence-building measures emerge from the summit. These may includethe opening of bus links between the Indian and Pakistani parts of Kashmir.

Mr Vajpayee seems personally committed to peace. However, hardliners in theBJP may calculate that they are in a no-lose situation. Should the presentgovernment bring about an end to the dispute with Pakistan, its electoralprospects would improve. But if talks between the two countries were to fail,rising tensions would enable hardliners in the BJP to fight the election on ananti-Pakistani platform.

Economic policy outlook

Economic policy will become increasingly focused on winning the generalelection. The budget for fiscal year 2003/04 (April-March) included substantialtax cuts for the middle-class support base of the BJP, as well as for businessesand farmers, but did little to tackle the fiscal deficit. The government is clearlyhoping that tax cuts will spur higher growth (the government forecasts realGDP growth of around 6% in 2003/04) and hence greater revenue, but thisoutcome is far from guaranteed. Industry leaders welcomed the budget, whichcontained incentives for specific sectors, and which cut the number ofindustries reserved for small-scale production.

Fiscal matters aside, the government, driven by rising levels of foreign-exchangereserves and a steadily appreciating currency, is continuing its policy of gradual

Policy trends

International relations

India 9


liberalisation of the capital account. However, it will continue to movecautiously in this area, and will be prepared to reverse its course in the event ofa domestic or external shock.

India�s consolidated central government deficit stood at 5.9% of GDP in2002/03; we forecast that it will narrow slightly, to 5.6% of GDP, in 2003/04. Theconsolidated government deficit, which includes shortfalls among the states,remains above 10% and constitutes India�s greatest macroeconomic risk.Meeting this year�s deficit target will depend on the progress of thedisinvestment (privatisation) process, which received a boost from the successof an initial public offering for India�s largest car manufacturer, Maruti, in lateJune. The offering raised around US$210m for the government. However,progress towards the sale of the government�s stakes in Hindustan Petroleumand Bharat Petroleum, which could realise US$1.5bn-2bn, has stalled. We expectthat these stakes will be sold in 2003/04; the fiscal deficit will be higher if thesales are delayed.

Another concern in the run-up to the 2004 general election is that thegovernment may be tempted to overspend. This would be especially damagingbecause tax revenue in the first quarter of the current fiscal year was equal tojust 10.4% of the full-year budget, down from 14% during the year-earlier period.This is because officials overtax at the end of the fiscal year to achieve theirtargets, and then refund monies early in the following year. The first-quarterdeficit, at 25.1% of the projected full-year total, was below last year�s rate of29.2%, mainly as a result of lower spending!a trend that is not likely tocontinue as the election draws closer.

The financial system is awash with liquidity. Foreign reserves amounted toUS$84.7bn on August 1st, an increase of US$14.2bn since end-December 2002.The prime lending rate has been stable, at between 10.5% and 11.5%, since Maythis year. With the wholesale price index (WPI) falling again after a brief spurt,the Reserve Bank of India (RBI, the central bank) is likely to maintain itsaccommodative monetary policy. The benchmark bank rate has remained at 6%since April, its lowest level in 31 years. On June 14th the cash reserve ratio wascut to 4.5%, enabling banks to lend an additional Rs35bn, or US$750m (the cutwas announced in April). Surprisingly, bank lending has been languishing: bankcredit to the commercial sector fell between end-March 2003 and July 25th,although this may reflect both the delayed effect of last year�s drought andcheaper foreign borrowing opportunities for some larger companies. The RBIhas said that it will not change the bank rate before it announces its creditpolicy in October. Declining inflation may prompt the RBI to cut the repurchaserate (which is currently at 5%, higher than the rates for 91-day and 364-dayTreasury bills), particularly following the June US rate cut.

Fiscal policy

Monetary policy

10 India


Economic forecastInternational assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004GDP growthWorld 2.2 2.9 2.9 3.7US 0.3 2.4 2.2 3.2EU 1.5 1.0 0.7 1.8Exchange ratesUS$ effective (1990=100) 129.1 127.7 113.7 110.4¥:US$ 121.5 125.3 117.1 115.5US$:� 0.90 0.94 1.12 1.18

Financial indicatorsUS$ 3-month commercial paper rate 3.61 1.70 1.01 1.33¥ 2-month private bill rate 0.17 0.10 0.07 0.10

Commodity pricesOil (Brent; US$/b) 24.5 25.0 26.8 18.9Gold (US$/troy oz) 271.1 310.3 338.8 315.0Food, feedstuffs & beverages (% change in US$

terms) -1.9 12.7 2.1 1.8Industrial raw materials (% change in US$ terms) -9.7 2.2 9.1 3.9

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is enduring its second serious slowdown in two years. Weexpect world GDP to remain extremely sluggish until late 2003, althoughevidence of an upturn is slowly emerging in the US, India�s largest tradingpartner. Given that the economic situation is currently so fragile, firms indeveloping countries have major excess capacity problems. As a consequence,we expect business investment to remain weak until 2004. The sharp decline inaverage world prices of crude oil in 2004 will benefit India, which is asubstantial oil importer.

Monsoon rainfall was 106% of the long-term average between June 1st andAugust 4th. This reinforces our forecast for strong real GDP growth in 2003/04of 6%. As a result, we expect the agricultural sector to bounce back from itscontraction last year and to grow by 4% in 2003/04. Industrial output wasexpanding at a slower pace in the opening months of the current fiscal yearthan might have been expected, but this was likely owing to the lagged effectsof last year�s drought. Manufacturing production should rise at a faster rate inthe second half of the year as agro-industry benefits from a good harvest, andas rising incomes support higher rates of private consumption, especially inrural areas. Government infrastructure spending will also underpin goodgrowth in the construction and engineering sectors. In 2004/05 we expectslower agricultural growth of 2%. The main engine of growth will continue tobe the services sector, which we expect to expand at an average rate of 7% in2003/04 and 8.5% in 2004/05 as world demand picks up. As a result, GDP isexpected to grow by 6.6% in 2004/05.

International assumptions

Economic growth

India 11


Year-on-year wholesale price inflation peaked at 6.9% in early May but hasfallen back steadily since then and stood at 4.1% on July 26th. The earlierincrease had been driven by higher fuel prices, and by higher prices for fruitsand vegetables, owing to the effects of poor rainfall in 2002. Both trends havenow dissipated. Favourable monsoon rains will ensure a good harvest, keepingfood prices in check for the rest of the fiscal year. Bottlenecks in the industrialsector are likely to be the main source of pricing pressures for the remainder of2003. We forecast average consumer price inflation of 4.6% in 2003, rising to5.4% in 2004.

Following a pause in mid-July, the rupee has resumed its appreciation. Weexpect an average exchange rate of Rs46.7:US$1 in 2003. With the economyimproving, foreign investment inflows likely to pick up, remittances rising asoverseas Indians seek higher interest rates and the current-account solidly insurplus, inflows will remain strong. We expect the rupee to revert to a gradualdepreciation next year as the US economy continues to strengthen and the RBIworks harder to protect exporters. In 2004 we forecast the currency to averageRs46.2:US$1, a stronger annual average rate than this year owing to a morefavourable starting point. We forecast that the year-end exchange rate will beRs46.1:US$1 in 2003 and Rs46.2:US$1 in 2004. However, given that India�sinflation rate is relatively high, this will still imply a real exchange rateappreciation of around 5% in 2004.

India�s current account will record surpluses equivalent to 0.5% of GDP in 2003and 0.9% of GDP in 2004. Merchandise exports have performed strongly in thepast year: they grew by almost 19% (customs basis) in 2002/03, and by morethan 10% year on year in April-May 2003. Exports of gems and jewellery,India�s largest single export category, grew by 21% last year. This growth is likelyto be sustained into 2003/04 as a result of assistance provided to the sector inthe budget. Coming from a high base, and owing to the currently weak state ofthe global economy, we expect merchandise export growth to rise by a moremodest 13% this year.

Imports rose by almost 19% year on year in April-May 2003, but this wasmostly owing to high oil prices. We expect the trade deficit to rise slightly in2003, to US$6.6bn, owing to a slowdown in export growth as a result of theweak global environment, and to the effects of the appreciating rupee. In 2004the decline in oil prices will allow the trade deficit to contract to US$3.4bn. Weexpect substantial surpluses on the services account over the forecast period,owing to the IT sector and IT-enabled services such as call centres.

Exchange rates

External sector

Inflation

12 India


Forecast summary(% unless otherwise indicated)

2001a 2002 b 2003c 2004c

Real GDP growth 5.5 4.3 6.0 6.6Industrial production growth 2.7 4.9 a 6.0 7.1

Unemployment rate (av) 9.2 9.3 9.1 9.0Consumer price inflation (av) 3.8 4.3 a 4.6 5.4

Consumer price inflation (year-end) 5.2 3.2 a 6.2 6.1Short-term interbank rate 12.1 11.9 a 11.5 11.5

Government balance (% of GDP) -4.7 -5.9 -5.6 -5.4Exports of goods fob (US$ bn) 44.6b 50.7 57.5 66.1Imports of goods fob (US$ bn) -52.2b -57.1 -64.1 -69.4

Current-account balance (US$ bn) 1.2b 4.5 2.8 5.9Current-account balance (% of GDP) 0.2b 0.9 0.5 0.9

Total foreign debt (year-end; US$ bn) 97.3 96.6 95.3 97.3Exchange rate Rs:US$ (av) 47.19 48.61 a 46.70 46.24Exchange rate Rs:¥100 (av) 38.83 38.78 a 39.88 40.03

Exchange rate Rs:� (av) 42.26 45.93 a 52.43 54.68Exchange rate Rs:SDR (av) 60.07 62.97 a 65.09 65.98

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Bombs planted in two taxis exploded in Mumbai, India�s financial centre, onAugust 25th, killing 52 people and injuring 140. The attack was the sixthbombing in Mumbai in recent months, and may signal a rise in communalviolence. The hardline deputy prime minister and home minister, Lal KrishnaAdvani, initially suggested that the bombings were the work of IslamistKashmiri separatist groups based in Pakistan, most probably Lashkar-e-Toiba. Aweek later, Mumbai police charged four Muslims with involvement in thebombing. They are allegedly members of a little-known group, local toMumbai, who are motivated by grievances arising from last year�s communalviolence in Gujarat, in which more than 1,000 Muslims were killed by Hinduextremists.

Deadly blasts in Mumbai

India 13


If the Gujarat connection proves to be true, the bombings could lead to a newcycle of communal violence between Hindus and Muslims. Most of the 52 whodied were Hindus, and retaliation is now likely!although on what scale it isdifficult to predict. The national government, led by the Hindu-nationalistBharatiya Janata Party (BJP), may tolerate a certain amount of retaliatoryviolence by Hindu activists, but will feel compelled to step in if the situationthreatens to spin out of control.

Although Indian officials are usually quick to allege Pakistani connections insuch attacks, the government was restrained in its response to the killings,despite Mr Advani�s assertions. The authorities in Islamabad, for their part,quickly condemned the attacks. Although Indian officials will see this incidentas further proof of Pakistan"s inability or unwillingness to crack down onmilitants, neither side has an interest in stoking tensions, especially with adiplomatic rapprochement currently under way.

The militants who have carried out attacks in recent weeks have apparentlybeen seeking "soft" targets, such as financial and commercial sites with minimalsecurity. The latest bombings occurred near a major tourist site, and only daysbefore the start of an important festival, pointing to an economic motive.

The Election Commission has issued the timetable for state assembly electionsin Rajasthan, Madhya Pradesh, Delhi and Tripura. Nominations open onOctober 30th and the polls will be held on November 25th (and on November27th if a repoll is necessary in any constituency). The election process will becompleted by December 4th. The general election will be held in October 2004,unless the prime minister, Atal Behari Vajpayee, calls for the lower house to bedissolved early. The general election is already dominating politics, with theparties beginning to manoeuvre themselves into position. The results of thestate election will determine the timing of the national poll. On August 19thCongress, the main opposition party, called a no-confidence motion against thegovernment, signalling the onset of campaigning. Although the motion waseasily defeated, Congress hoped to tarnish the BJP-led government, particularlythe defence minister, George Fernandes, whom Congress accuses of trying tocover up a corrupt arms deal.

At the end of May, Congress held a meeting of party leaders in Srinagar. There,it passed a resolution saying that Congress would be prepared to forge allianceswith other parties to fight the general election, but that its leader, Sonia Gandhi,must be accepted as head of the coalition. Soon after, Mrs Gandhi clarified thatalliances would be made at state level by Congress chief ministers and partypresidents. Congress did not plan to form a grand national coalition, but ratherto make tactical alliances at state level. This decision was clearly a compromisebetween those who were uncomfortable with Congress� potential allies andwho would prefer to fight the election alone; and those who feared a split inthe vote for secular, anti-BJP parties. What they could all agree upon was thatSonia Gandhi should be the prime minister. Congress� announcement did notbring any warm responses from other parties, although it appears that theCommunist Party of India (Marxist) or CPI (M) has decided to back Congresswith or without a formal alliance.

The timetable for stateelections is released

Congress considers forgingalliances

14 India


In July, Mr Advani took up a suggestion first mooted by the vice-president,Bhairon Singh Shekhawat, that the general and state elections should be heldtogether. This had largely been the case until 1971 because Congress ruled inDelhi and had a majority in most states, allowing governments to completefive-year terms. At present, state elections are staggered. Mr Advani may alsohave considered that support for Congress is spread more widely than for theBJP and so simultaneous elections would strain the resources and manpowerof Congress more than those of the BJP.

However, the suggestion was quickly shot down. The chief electioncommissioner, James Michael Lyngdoh, said that although feasible, simul-taneous elections would contravene the constitution, which mandates a termof five years and requires an election to be held if a party or coalition cannotwin the confidence of a house. Mr Lyngdoh said that expenditure savingswould be minimal!elections require the marshalling of large numbers ofsecurity and other staff, and would have to be staggered anyway. This raises thepossibility that the general election will be brought forward. If the BJP feltconfident of success in the forthcoming state elections, it may consider that itwould also win these states if the general election were held simultaneously.

The Rashtriya Lok Dal (RLD), led by Ajit Singh, changed its allegiance in June.The RLD is primarily supported by the Jat community, predominantly farmersin Punjab, Haryana and Uttar Pradesh. In the 2000 state assembly election inHaryana, the RLD won only one seat out of 90. In the 2002 Uttar Pradeshelection it did better, winning 14 out of 400 seats. But although it joined theruling coalition, it gained scant reward. Mayawati, the leader of the main partyin the coalition, the Bahujan Samaj Party (BSP), dominates the government andeven her major partner, the BJP, has little say. With the RLD gaining little fromits alliance with the BJP, in April, Ajit Singh resigned from the central cabinet. InJune he withdrew his party from the Uttar Pradesh government. He then tookthe RLD assembly members out of Uttar Pradesh, to prevent them from beingtempted to defect, and asked the governor, Vishnu Kant Shastri, to call a sessionof the assembly so that the government could be voted out. Then, MulayamSingh, the leader of the Samajwadi Party, said that the government had lost itsmajority and asked Mr Shastri to dismiss the government. Mr Shastri didneither.

In June it was discovered that the Uttar Pradesh government was planning tobuild a large shopping complex worth Rs1.75bn (US$38m) close to the TajMahal. The central government�s tourism minister, Jagmohan Malhotra, who isalso in charge of the Archaeological Survey of India (ASI), wrote Mayawati aseries of letters telling her that any construction within 300 metres of the TajMahal required the ASI�s permission and asked her to stop the work. At firstshe seemed to comply, suspending two officials who she said were responsiblefor sanctioning the project. Then she accused Mr Malhotra of having exceededhis brief and called for his dismissal. The BJP, which has bent over backwardsto assuage Mayawati, was shocked. Mr Vajpayee told her that there was noquestion of dismissing Mr Malhotra and said that her demand was improper.

Mr Advani proposes thatelections are synchronised

The general election may bebrought forward

The Uttar Pradesh governmentloses a small ally

Tensions mount in UttarPradesh

India 15


For the first time since the BJP and the BSP formed a coalition, Mayawatibacked down. This may lead the BJP to deal with her more boldly in the future,but given that the BJP needs her support in the coming general election, it ismore likely that she will find some new means to show that she is in control.

In the 1999 state election, Congress swept the polls in Arunachal Pradesh,winning 59 out of 60 seats. The previous chief minister, Gegong Apang, was thelone opposition member. However, in late July, 38 Congress assembly membersleft the party and joined Mr Apang, who had himself split from Congress in1996, to form a United Democratic Front government. The legislators claimedthat the chief minister, Mukut Mithi, had been acting dictatorially. Mr Apangwas sworn in as chief minister on August 3rd and formed a cabinet comprising33 cabinet ministers and three ministers of state.

The dispute between Karnataka and Tamil Nadu over sharing the waters of theRiver Cauvery is an old and intractable one. Just as one of the worst droughtswas about to end, the Cauvery Monitoring Committee appointed a committeeto advise on how the waters should be shared in particularly dry years. Thecommittee first met on August 7th. Back in 1991, the Cauvery Water DisputesTribunal had issued an interim order asking Karnataka to release 205 bn cu fteach water year (June-May), but this order only applies in a normal year. Thecommittee will attempt to find a formula to allocate water in a below-normalyear. Meanwhile, Andhra Pradesh protested against the construction of ananicut (a low dam) by Karnataka on the Chitravati, a tributary of the Krishnariver which flows from Karnataka to Andhra Pradesh. Andhra Pradesh said thatthe dam was being built in breach of treaties made in 1892 and 1933, althoughKarnataka claimed that the project was legitimate because it aimed to providedrinking water which was not covered by the earlier treaties.

Cases related to the atrocities committed during the outbreak of communalviolence in Gujarat early last year are winding through the state�s courts. In acase relating to the burning of 12 people (nine Muslims and three Hindus) inthe Best Bakery in Baroda on March 1st 2002, all the witnesses turned hostile,and at the end of June the special fast-track court acquitted all 21 accused.Zahira Sheikh, the principal witness, then went to Mumbai with her mother,and said that they had changed their story under pressure from a local BJPofficial.

The National Human Rights Commission (NHRC) had taken a keen interest inthis case. It had asked the government to file the case in the first place, and onhearing that witnesses were turning hostile, had asked the police commissionerof Baroda to give them protection. After the verdict, the NHRC wrote to thestate government to ask what action it proposed to take and sent a team toBaroda to look at the court papers. Ms Sheikh came to Delhi and met theNHRC which then filed two petitions in the Supreme Court at the end of July.One asked for a retrial of the Best Bakery case outside Gujarat. The other askedfor the transfer of another four cases, including the one relating to the deaths of58 Hindu activists on a train in Godhra which sparked the violence, to courtsoutside Gujarat. Soon after, Narendra Modi, the chief minister of Gujarat, wrote

India backs off from sendingtroops to Iraq

Gujarat�s justice system comesunder scrutiny

Long-standing water disputesresurface

Congress loses power inArunachal Pradesh

16 India


to the Indian president, Abdul Kalam, saying that his state had been malignedand asked Mr Kalam for a list to be compiled of all the riots sinceindependence and of the action taken thereafter.

Just before the Supreme Court was to rule on the NHRC�s petition, the Gujaratgovernment appealed to the Gujarat High Court against the verdict in the BestBakery case. The Supreme Court rejected the NHRC�s petition to have the BestBakery and other cases transferred out of Gujarat, and allowed Gujarat�s appealto go ahead. However, the Supreme Court said that it would monitor theappeal, and if it found that it was �an eyewash�, it would allow the NHRC tointervene.

In February the Lucknow High Court ordered the ASI to excavate the site of theBabri Masjid (a mosque demolished by Hindu hardliners in 1992) to establishwhether it had been built on an earlier Hindu temple, as the zealots alleged. Inthe beginning of July, the ASI told the High Court that it had completedexcavating 68 of the 84 trenches it had planned and asked for an extension oftwo months owing to the onset of the monsoon. The High Court gave the ASIfive more weeks (excluding holidays and rainy days).

The report, submitted to the court on August 22nd and released three days later,concluded that there was �archaeological evidence of a massive structure�below ground where the mosque had stood. The ASI said that the structurebears the distinctive features of ancient temples of northern India. Althoughthis bolsters the case of Hindu hardliners, it may not resolve the matter.Muslims say the evidence has been misinterpreted by a politically influencedASI; the report also does not address the legal question of who has title to theland. Opinions on the Ayodhya dispute are unlikely to change, and tensionswill rise again as the election approaches.

The chief minister of Tamil Nadu, Jayaram Jayalalitha, passed the Tamil NaduEssential Services Maintenance Act in September 2002. Among otherprovisions, the act made incitement to strike punishable by three yearsimprisonment, a fine of Rs5,000, or both. Furthermore, the act made strikingpunishable by dismissal.

Facing a financial crisis, the government cut pension benefits in June. On July1st staff trade unions held a protest meeting following which three unionleaders were arrested. The next morning, union members began to protest.Later that day, police arrested over a thousand demonstrators. The workersappealed to the Madras High Court, which asked them to stop the strike andexpressed confidence that the government would withdraw its punitivemeasures. Although the strike stopped, the government did not respond. Thetrade unions appealed to the Supreme Court in the middle of July. By thispoint, the government had already refused to reinstate 31,128 employees. Thegovernment then assured the Court that all but 6,072 employees (against whomthere were charges of violence) would be reinstated. In its judgment on August6th, the Supreme Court said that government employees had no fundamentalright to strike. This judgment may have a radical effect on relations between

The Ayodhya temple disputelingers on

Government employees strikein Tamil Nadu

India 17


governments, especially in the states, and their employees, and may allowreform-minded governments to exert greater leverage on their staff.

Relations between India and the US have improved significantly during thetwo-year tenure of Robert D Blackwill as ambassador to India, which ended inJuly. Mr Blackwill adopted a combative tone towards Pakistan and seemedconvinced that it backed terrorism in India. He described India as a growingpower and moved outside of diplomatic circles, becoming close friends withMr Advani who had hitherto kept out of foreign affairs. In June, Mr Advanivisited Washington and he repeatedly delivered the message that Pakistan hadcontinued to back terrorism in India, and that there was no question of talksuntil it ceased. During his visit, Mr Advani was reminded of the US request thatIndia should send 14,000 troops to help police Iraq. The army was keen andidentified the formations to be sent (troops that are sent abroad get generousallowances). The government held broad consultations. The parties in theruling National Democratic Alliance left the decision to Mr Vajpayee. Iraq�sneighbours were consulted, but only Kuwait unreservedly supported thesending of Indian troops. On the domestic front, Congress opposed it. In Julythe government told the US that it would send troops only under the aegis ofthe UN.

In June Mr Vajpayee went on a six-day visit to China. The joint declarationmade at the end of his tour referred to Tibet as an autonomous region ofChina. Chinese sources said that this was the first time India had recognisedTibet as a part of China, though India said that this had been India�s positionsince 1956. The two countries agreed to open the road through Sikkim fortrade!this route had been the main conduit for trade between Bengal and Tibetprior to the Chinese takeover. India said that the opening of the trade routemeant that China recognised that Sikkim was part of India. China denied this.Both sides agreed to appoint special representatives to resolve ongoing borderdisputes, and India nominated Brajesh Mishra, Mr Vajpayee�s principalsecretary. India and China also agreed to relax visa rules for businessmen andtourists and to start direct flights.

India and Pakistan exchanged ambassadors in July and the bus servicebetween Delhi and Lahore has resumed. However, India has dragged its feet onresuming air connections. Pakistan has asked for a treaty prohibiting a ban onoverflights. (Indian flights do not have to divert much off their route to the westto avoid Pakistan, whereas Pakistani flights eastwards are much worse affectedby the need to avoid India.) India has not agreed to this proposal and furthernegotiations will take place in Islamabad in late August.

Legislators from member countries of the South Asian Association for RegionalCo-operation (SAARC) can visit other member countries without a visa. Takingadvantage of this provision, 14 members of the Pakistani assembly toured Indiain July. The BJP and its members did not meet them. Their visit was followed inlate July by that of Maulana Fazlur Rehman, a Pakistani assembly member fromthe alliance of six Islamist parties, the Muttahida Majlis-e-Amal (MMA). He hadmore success, and met members of the radical Hindu Rashtriya Swayamsevak

Mr Vajpayee�s visit improvesSin0-Indian relations

Relations with Pakistan areslowly improving

Relations with the US haveimproved

18 India


Sangh (RSS) and Mr Vajpayee. His trip was followed by a visit to Islamabad bya 50-member delegation from India�s parliament. They were received byPakistan�s president, General Pervez Musharraf, and prime minister, ZafarullahJamali. Both spelt out their desire for early talks. However, the BJP is cooltoward these overtures. Despite the initiative he took in May, Mr Vajpayee isbeing cautious. His position in Indian politics would suffer if an initiative atthis stage were to fail, and the chance of a major improvement in relationsbefore the general election is slim, prompting the government to move slowly.

Economic policy

Tax revenue for fiscal year 2003/04 (April-March) is running considerably belowthe level of last year. Tax officials collect excessive taxes from businesses at theend of the fiscal year to show performance. They then refund the excess in thefirst quarter of the next year. This practice has been even more prevalent thisyear than last. However, expenditure control has been more effective this year!spending is running far below last year partly because of lower interestpayments. As a result, the fiscal deficit is much lower than last year. If financialdiscipline continues to be as strict as it has been, the deficit will be kept undercontrol, although the risk of rising expenditure in an election year is great.

Government finances(Rs bn)

2003/04 budget Apr-Jun 2003 % change, year on yearRevenue receipts 2,539 250 -12.2 Tax revenue (net) 1,842 192 -14.0 Non-tax revenue 698 59 -7.9 Non-debt capital receipts 312 131 -21.2 Recovery of loans 180 131 -18.8 Other receipts 132 0 -24.7Total receipts 2,852 381 -13.2Non-plan expenditure 3,178 575 -19.4Plan expenditure 1,210 192 -15.9

Total expenditure 4,388 767 -18.5Fiscal deficit 1,536 386 -29.2

Source: Ministry of Finance.

India�s foreign-exchange reserves are now rapidly approaching the value ofnarrow money supply, M1. The Reserve Bank of India (RBI, the central bank)has been sensitive to the inflationary potential of the money being issued inexchange for the foreign currency it has been buying, and has followed anactive policy of monetary sterilisation. It sold government securities worthRs192.2bn (US$4.28bn) in 2000/01, Rs303.4bn in 2001/02 and Rs537.8bn in2002/03. Its holdings of government securities fell to Rs972bn on June 6th!Rs562bn below the level a year earlier. At the present rate of reserveaccumulation, the RBI would run out of securities in less than two years. But itis holding Rs920bn of non-marketable special securities issued at various timesby the government which it has begun to convert into marketable securities inorder to sell them.

Revenue and expenditure aredown

The RBI is trying to containinflation

India 19


Economic policy is being driven increasingly by the approaching generalelection. In July the government introduced a small pension scheme underwhich a contributor would pay a one-off premium of between Rs33,335(US$725) and Rs266,665. This would earn 9% interest and yield the contributor apension of between Rs200 (US$5) and Rs2,000 a month at the age of 55. Thepremium would have to be invested for at least 15 years.

A few days later the government asked state-owned banks to provide croploans of up to Rs50,000 at 9% interest. These loans will be short-term, seasonalloans. The co-operative banks, which provide 55% of farm loans, are notincluded in the scheme. These banks borrow from the National Bank forAgricultural and Rural Development (NABARD) at rates of 5.5-6.25%, but thesefunds then pass through state co-operative banks and district co-operativebanks before reaching the primary co-operatives. Their lending rates are thusseldom lower than 15-16%.

The government ceded management control and majority ownership of thecarmaker, Maruti Udyog, to its Japanese partner, Suzuki, in 2001. Marutiperformed well following the move, prompting the government to sell a further26% (out of the 46% equity it had retained). In June the government divested itsshare in a public issue. It offered 72.2m shares at a floor price of Rs115. The issueclosed on June 19th, having been ten times oversubscribed, and the govern-ment fixed the offer price at Rs125. It announced that 45% would be allotted toapplicants buying less than 1,000 shares, and another 15% to other personalinvestors. It took a 10% greenshoe option, of which 85% would go to personalinvestors and 15% to high-net-worth investors. After being listed on July 9th, theshare price opened at Rs157.25, a 25% premium, and stood at around Rs200 bythe second week of August. Including the greenshoe option, the governmentraised Rs993bn.

The success of the Maruti offering has given fresh impetus to the privatisationprogramme. Hitherto the government has generally sold part of the equity to astrategic partner, and it has only sold off a few companies. In July, however, theCabinet Committee on Disinvestment approved the sale of the remaining

The government sells a stakein Maruti Udyog

The privatisation process mayspeed up

The government focuses onpopulist schemes

20 India


stakes in several large companies, including an aluminium producer, Balco; thetelecommunications company, Videsh Sanchar Nigam Ltd (VSNL); apetrochemicals producer, the Indian Petrochemicals Corporation (IPCL); asoftware firm, CMC; an oil refiner and distributor, Indo-Burma Petroleum (IBP);Hindustan Copper and the Mineral Exploration Company (MECL). Theseshares will be sold in the open market. The strategic partner will not have theright of first refusal, but may be sold enough equity to raise their share to 51%.

An attempt to divest the Shipping Corporation of India failed in July 2002.Foreign buyers were not allowed to own more than 25% of the equity and hadto have an Indian majority partner. The interested foreign companies graduallywithdrew. Unit Trust of India blocked the bid of Essar Shipping, which hadreneged on loans to it. In April 2003 the government changed the terms andallowed foreign buyers to take a 51% stake. That attracted a single foreign bidfrom a Japanese company, K Line. Three Indian companies, Essar, Videocon andSterlite, expressed interest, however, and they are currently conducting duediligence. The government expects to complete the sale, which could be worthRs80bn (US$1.74bn), by the end of September.

Punjab Tractors, set up in 1970, successfully produced a small tractors ideal forsmall farms. The state government of Punjab provided the company with landand bought a stake in it. For three decades Punjab Tractors continued to be anactively innovating company, growing to Rs8.86bn in 2001/02. In July thePunjab government sold its 23.5% share to CDC Capital Partners, an affiliate ofthe London-based Commonwealth Development Corporation, for Rs2.18bn.

The Andhra Pradesh government received eight bids for its 25.9% share inGodavari Fertilisers and Chemicals in July. Coromandel Fertilisers, the topbidder, is reported to have bid Rs1.026bn for the 8.28m shares. The eight biddersagreed not to buy shares in the open market until sales were completed. Thesuccessful bidder will have to make an open offer for a further 20% of equity atthe bid price. The Andhra Pradesh government has postponed selling its sharein Nagarjuna Fertilisers and Chemicals. It holds small stakes in several othercompanies and intends to invite bids.

Over one-quarter of India�s population receives television broadcasts, mostlythrough a local cable operator. These cable operators often do not disclose thecorrect number of their clients to the government or broadcasters. Thegovernment suspects it is losing service tax, the broadcasters suspect they arelosing revenue and customers do not know whether there is any connectionbetween the cost of the service and what they pay. To remedy this, thegovernment decided to introduce the conditional access system (CAS), underwhich television sets would have set-top boxes (STBs) that could be used bycable operators to control and monitor viewers� access to channels. This wouldprovide the basis for records which could be used by broadcasters to levycharges, and by the government to assess tax policy. However, the governmentdid not want to take the risk that the introduction of STBs would lead tosignificantly higher charges, so it told broadcasters that they would have to

The shake-up of cabletelevision is delayed

State governments are alsoselling their holdings

The Shipping Corporation ofIndia may be sold off

India 21


provide a minimum of 30 free channels and it told cable operators that theycould not charge more than Rs72 (US$1.56) per month for these free channels.

Although agreement on this low-cost package seemed possible, the ratesproposed by broadcasters for their pay channels added up to over Rs175 amonth. Cable operators wanted to take 40-60% of what they charged viewers.So the comprehensive package of free and pay channels could cost close toRs500!far more than the highest charges being levied now. Fearingunpopularity, the Ministry for Information and Broadcasting rejected theproposed charges, and threatened to introduce new restrictions, such as one onadvertisement time on pay channels. Differences over these terms have led tothe postponement of the date for the introduction of CAS from July 15th toSeptember 30th, when the plan is to introduce it in several major cities. Ashortage of STBs, which are being imported, was also a factor in thepostponement.

The government had asked foreign television broadcasters to reduce theirequity stake to 26% or less by the end of June 2003. Star TV, a subsidiary ofRupert Murdoch�s News Corporation, has complied with the restriction bysplitting into two companies. News Corporation distributed the relevant 74%stake in Star News, an unlisted private limited company which has applied forpermission to uplink from India, to seven individuals, some of whom arebelieved to have sold on their stakes. The other company, Media Content andCommunication Services India, would remain owned by News Corporationand would sell programmes to Star News. Following a furore from itscompetitors that this arrangement was a device to circumvent the restriction onforeign investment, the government has postponed giving a licence to Star TVand is extending its permission to broadcast week-by-week.

When Coca-Cola was allowed back into India in 1996 (it had pulled out in 1978when it was asked to sell a majority stock to Indian shareholders), it wasallowed to set up two subsidiaries: one for the production of concentrate andthe other for bottling, with the proviso that 49% of the equity in thedownstream companies had to be divested to Indian shareholders in 3-5 years.When the time limit expired in 2001, Coca-Cola was still negotiating with thegovernment on whether the issue of Indian shareholders could be a privateplacement or had to be a public issue. At last the government agreed to aprivate placement. By February 2003, Coca-Cola divested the required equity toits Indian partners in bottling companies, but it did not give them voting rights.The Ministry of Finance insisted that it should. In July the Cabinet Committeeon Economic Affairs removed that condition as well. Thus Coca-Cola hasmanaged to satisfy the initial condition of disinvestment without sharingmanagerial control.

Coca-Cola, together with Pepsi-Cola, has also been in the news for pesticideresidues found in its bottled drinks. In February the Centre for Science andEnvironment (CSE) published the results of measurements made on 34 bottlesof drinking water purchased from the market. It found pesticides above EUstandards in all locally bottled water. Then in August it published the results of

The government enforces aforeign equity cap on Star TV

Coca-Cola wins a concessionfrom the government

Coca-Cola and Pepsi-Cola areaccused of low standards

22 India


similar measurements on 12 cold drinks and found the same pesticides inquantities above EU standards. At the end of July, the BBC reported thepresence of cadmium in residue from a Coca-Cola factory in Kerala. There werealso complaints from locals that the factory had depleted the water table. Onthe publication of the CSE report, the West Bengal government tested thesludge from the Coca-Cola factories in the state, and found cadmium and leadabove permissible levels.

Coca-Cola and Pepsi-Cola denied the allegations but they could not calm theuproar that followed. Their drinks were banned from the Delhi parliamentarycanteen. There were demonstrations in major cities. The Maharashtra govern-ment ordered Coca-Cola to destroy all stocks. Coca-Cola went to the MumbaiHigh Court and obtained an injunction against the order. On August 22nd thegovernment said that samples of soft drinks from Coca-Cola and Pepsi didmeet Indian standards. However, the row looks set to continue after parliamentdecided, the following day, to set up a committee to investigate the earlierreports claiming that the drinks could cause a health risk.

The Foreign Exchange Regulation Act, which had survived largely intact from1939, was replaced by the Foreign Exchange Management Act (FEMA) in 1999.Whereas the first assumed that all foreign-exchange transactions required RBIpermission and dealt with transgressions under criminal law, the latter allowsmost transactions within specified limits without prior permission and treatsoffences as civil matters. The RBI expects to move towards full currency con-vertibility by progressively relaxing the limits. Between 2000 and 2003, manynotifications were issued!these were consolidated and updated into compositenotifications on imports, exports and direct investment abroad in July.

Soon after, a number of limits were relaxed. The earlier limits for outwardtransfers for education, emigration or employment abroad were such that mostcases would have been referred to the RBI to approve the release of additionalforeign exchange. The new limits are generous enough to make thisunnecessary. Foreign exchange for medical treatment abroad has been doubledto US$100,000 and will be released without an estimate from the hospital orspecialist abroad.

Automatic release of foreign exchange(US $)

Pre-Jul 2003 Post-Jul 2003Employment abroad 5,000 100,000Emigration 5,000 100,000

Supporting relatives 5,000 100,000Education 30,000 100,000Medical treatment 50,000 100,000

Consultancy services 100,000 1,000,000

Source: Reserve Bank of India.

The RBI has also consolidated the number of deposits that can be placed withIndian banks by non-resident Indians (NRIs). Deposits may be made for one-three years (longer-term deposits would pay no more interest than three-yeardeposits). Deposits can only be made in major global currencies or rupees.

Foreign-exchange controls arerelaxed

NRI deposits are consolidated

India 23


Rupees can be repaid in one of the major currencies but the depositor willcarry the currency risk. To curb capital inflows, which have been causing thecurrency to appreciate, the interest rate on foreign-currency deposits has beencapped at 25 basis points below the Libor or swap rate for the foreign currency.On rupee deposits, it is at the Libor or swap rate plus 250 basis points. Non-convertible rupee deposits have been abolished.

Technology import agreements had to be approved by the government untilthe early 1990s. In 1991 this approval requirement was replaced by the need toregister and report technology imports. Subsidiaries of foreign firms werepermitted to pay royalties for technology from their parent company without atime limit, but Indian firms had to make agreements within a fixed period. Thisrequirement was removed in July. As long as firms do not pay more than 5% oftheir domestic sales receipts or 8% of their export receipts as royalties, they cancontinue to pay for technology imports indefinitely.

The break-up of the oil tanker, Prestige, off the Spanish coast in November 2002prompted many countries to impose standards based on the age of vessels oron ratings given by classification agencies. In June India�s Ministry of Petroleumand Natural Gas asked the state-owned oil companies to ensure that thetankers they hired were either less than 15 years old or had ConditionAssessment Programme (CAP) ratings. The move upset Indian shipowners aswell as the Ministry of Shipping, which viewed the Ministry of Petroleum ashaving stepped on its turf.

At the end of June, Gajendra Singh Sahni, the director-general of the Ministryof Shipping, called a meeting of Indian shipping charterers. He proposed thattankers carrying oil or chemicals should be less than 25 years old and that gastankers should be less than 30 years old. Tankers over 20 years old should haveCAP ratings for the hull, power plant and cargo equipment. Moreover, heproposed that the Indian Register of Shipping (as well as classification agencies)should also rate ships and warned that the hike in standards proposed by theMinistry of Petroleum would significantly increase transport costs.

Indian shipping companies pay the same taxes as other Indian companies.Despite having fairly generous depreciation allowances, they consider them-selves to be at a disadvantage compared with shipping companies from othercountries. In July the parliamentary Committee on Public Undertakingssubmitted its report on the Shipping Corporation of India. The committeesuggested that corporation tax be replaced by a tonnage tax and asked for theremoval of import duties (comprising customs duty at 5% and a specialadditional duty at 4.4%) on ships and port equipment. The committee alsosuggested that only the days sailors spent on land should be counted todetermine their residential status. Currently, days spent offshore in territorialwaters count as residency!if an individual spends more than 181 days in afiscal year as resident, they are liable to pay income tax.

The government threatens tochange shipping rules

Technology importrequirements are eased

New taxes for shipping aresuggested

24 India


As interest rates have fallen, the government decided in July to reduce interestcosts by swapping high-interest securities held by the banks for more liquid butlower-yielding securities. The government required the sellers to offer aminimum discount of 7.5% on the market price but the offer was unattractiveand only 14% of the bonds held by banks were offered for repurchase.

The domestic economy

Economic trends

The figures released by the Central Statistical Office for fiscal year 2002/03(April-March) show a fall of 3.2% in agricultural output!a surprisingly small dipgiven the severity of last year�s drought. Agricultural output may be reviseddownwards later. Despite the slump in agriculture, industry showed arespectable 5.7% rise in output. Growth in services accelerated to 7.1%, led by theconstruction sector. The decline in interest rates and surplus funds with banksare encouraging home-buying. The first quarter�s figures suggest that industrialgrowth was rising. There are signs of the beginning of a boom. The summermonsoon has brought good rains over most of the country and a bumper cropis expected. With a recovery in agriculture and a revival of industrial growth,the current year promises to show the best overall growth in years.

GDP and its components(% change, year on year)

Jan-Mar Jan-Mar2001/02a 2002/03a 2002 2003

Agriculture 5.7 -3.2 8.3 -2.8Industry 2.9 5.7 4.0 6.3

Mining 1.0 5.0 2.7 3.2Manufacturing 3.4 6.1 4.1 7.1Electricity 4.3 3.9 5.1 2.4

Services 6.2 7.1 6.2 7.5Construction 3.7 7.2 7.5 7.5

Trade & hotels 8.7 7.8 9.7 8.8Finance 4.5 6.1 3.3 4.4

Other 5.6 6.8 3.1 7.7GDP 5.6 4.3 5.6 4.3

a Fiscal years Apr-Mar.

Source: Central Statistical Office.

Inflation has stood at around 5% since the start of 2003/04. In the first coupleof months food price rises were the main cause of inflationary pressure. Lastyear�s poor crop had depleted market stocks. However, agricultural price riseshave recently eased, largely owing to the impact on expectations of the favour-able monsoon this year. As the industrial boom gathers strength, capacitybottlenecks are emerging, and industrial prices have begun to rise more rapidly.With the industrial boom continuing, industrial inflation may continue to rise.

The composition of inflation ischanging

The government tries toreduce interest costs

The services sectorunderpinned 2002/03 growth

India 25


Inflation2002 2003

Aug Sep Oct Nov Dec Jan Feb Mar Apr May JunConsumer price index 484 485 487 489 484 483 484 487 493 494 497 % change, year on year 3.7 4.1 4.1 3.6 3.2 3.4 3.9 4.1 5.1 4.7 4.8

Source: Ministry of Labour.

Agriculture

According to the meteorological department, rainfall during the south-westmonsoon (June 1st-August 4th) was 6% above normal. In the year-earlier period,rainfall was more than 60% below normal in four of the 35 rainfall divisions ofthe country, and 20-59% below normal in 21 divisions. This year it is 20-59%below normal in three divisions; within 20% of normal in 22 divisions; andover 20% above normal in 11.

The good rains are reflected in the sowings. A larger area has been sown thisyear than last for all crops except jute and sugarcane. The increase isparticularly high for crops that are usually not irrigated!coarse cereals, oilseedsand lentils. Last year India imported half of the edible oils it consumed, but thisyear imports are likely to be much lower.

Area under summer crops(m ha)

Normal season Aug 4th 2002 Aug 4th 2003Rice 40.6 15.5 17.5

Coarse cereals 23.1 14.6 19.0 Jowar 4.7 3.7 3.9 Bajra 9.4 5.1 8.0 Maize 5.9 5.1 6.1 Other 3.1 0.7 1.0Oilseeds 15.4 10.4 12.7 Groundnut 5.7 3.7 4.0 Soybean 6.3 5.1 6.5 Other 3.4 1.6 2.2

Pulses 10.4 8.2 11.2 Tur 3.5 2.6 2.9 Other 6.9 5.6 8.3

Cotton 8.8 5.9 6.5Jute 0.9 0.8 0.8

Sugarcane 4.3 4.3 4.2

Source: Ministry of Agriculture.

India�s surging food stocks had seemed unmanageable just one year ago. In2001/02 the Food Corporation of India (FCI) procured 41.8m tonnes, but soldjust 24.1m tonnes. However, poor harvests in 2002/03, an active exportpromotion programme and the moderation of support prices have transformedthe situation. At Rs6,200 (US$135) per tonne, the wheat procurement price in2003/04 was only Rs100 (US$2) more than that of 2002/03. As a result, wheatprocurement fell by 2.9m tonnes in 2002/03 to 15.5m tonnes. The procurementprice of paddy actually fell by Rs280 to Rs5,300. In 2002/03 overall

Foodgrain stocks decline

A bumper harvest is likely

26 India


procurement fell to 34.8m tonnes but sales rose to 40.8m tonnes. As a result,stocks fell by 18.8m tonnes to stand at 32.8m tonnes on March 31st.

As stocks fell, the FCI raised the price at which it sold wheat to exporters. Twoyears ago it charged them the same as it did ration-card holders below thepoverty line (Rs4,150 for wheat and Rs5,650 for rice). On August 1st the priceswere raised to Rs7,300 for white rice, Rs7,500 for parboiled rice and Rs5,300 forwheat.

Manufacturing

Output from India"s mines, utilities and factories continued to grow at a rapidpace in June. Overall industrial production rose by 5.7% year on year, thoughthis represented a marginal decline from May when it had grown by 6%. Allthree components reported strong year-on-year gains. Mining activity increasedby 5.9%, and electricity output rose by 4.7%. Manufacturing, the largestcomponent, rose by 5.8%, boosted by a 25.2% jump in the manufacture oftransport equipment and parts, and a 17% increase in wood products. However,the poor monsoon and consequent fall in cotton output in 2002/03 has harmedthe cotton textiles industry, which accounts for 14% of total manufacturing.Production from this sector fell by 8.4% in June year on year.

The output of India�s sugar industry is worth over US$3bn per year, withannual production of around 20m tonnes. However, the sugar mills� liquidity issuffering from their large stocks (at around 11m tonnes they are almost equal toeight months� consumption). Despite these problems, attempts to liberalise thesector have stalled. Over the past few years, the Bharatiya Janata Party (BJP) hadreduced from 40% to 15% the share of output that the government compulsorilyacquires from sugar mills for subsidised public distribution, and it relaxedrestrictions on the location of new mills. However, because of the sector�spolitical influence, the expected ending of sugar controls has not occurred. Co-operative sugar mills are headed by powerful politicians in Maharashtra andsugar mills are an important source of funds for politicians in Uttar Pradesh(where the BJP is part of the ruling coalition). In March the government

Reform of the sugar industryhas stalled

Industrial production remainsstrong

India 27


announced that decontrol would be postponed until October 2005, well afterthe general election.

Instead, the government has strengthened sugar controls. A number of sugarmills had gone to court in the past year and obtained the authority to sell sugarin the open market above the quota fixed by the government. The governmenthas amended the Sugar Control Order making it difficult for them to bypass thequotas. Furthermore, in July, it refused to give free sale quotas to 200 millswhich had sold sugar beyond their quota in the past.

The government compulsorily purchases sugar from mills at the levy price,based on the statutory minimum price (SMP) of cane. State governments,however, frequently force the state-owned mills (and ask private mills) to pay astate-advised price (SAP) to growers which is above the SMP. The mills relied onthe free sale quota to pay the SAP. The fall in market prices has reduced theability of the mills to pay the SAP and some southern states have stoppedissuing an SAP. In Uttar Pradesh, Punjab, Haryana and Uttaranchal an SAP hasbeen set at Rs95-110 per quintal (100 kg), whereas the SMP is Rs78 per quintal.This differential has proved a further drain on the resources of the states. As aresult of their plight, in July the central government took Rs6bn from the SugarDevelopment Fund (which is intended to develop the industry and was fundedfrom a tax on all sugar mills) and gave it to the governments of the fournorthern states, to the chagrin of the southern states. The southern states mayrevert to interfering in the market next year.

Late last year, the government announced that it would require petrol to bemixed with 5% ethanol from April 1st. The deadline was missed because therewas not enough ethanol capacity, but the situation has improved since then.With annual petrol consumption of 10m tonnes, 500m litres of ethanol arerequired. Capacity in Maharashtra is now 200m litres a year!enough to supplythe entire western region. Uttar Pradesh can produce another 120m litres andTamil Nadu 65m litres. However, the price being asked is too high in the viewof Ram Naik, the minister of petroleum. Most bids are in the range of Rs17.50-18a litre, higher than the pre-tax cost of petrol. In June, Mr Naik ordered aninquiry by the Tariff Commission into the costs of ethanol producers. In July hewrote to state governments asking them to reduce their taxes on ethanol. Theyare unlikely to do so given their fiscal problems, and many fear that a reductionof taxes would increase the danger of ethanol being used in drinks.

Infrastructure

There has been considerable bad blood in the telecommunications industry inrecent years. Soon after licences were given to private operators for landlinesand mobile telephones in 1995, the government-owned telephone operatorsflooded the market with new landline connections. Then, just as the mobilemarket was entering a phase of rapid expansion in 2001, the two government-owned operators, Mahanagar Telephone Nigam (MTNL) and Bharat SancharNigam (BSNL), entered it and took a significant share. In the end, both they andprivately owned Reliance were given licences for wireless local loop (WLL)

Moves to mix ethanol withpetrol stall

Telecoms licensing causesfriction

28 India


services, but their investment in landlines extended the reach of WLL andmade it indistinguishable from mobile telephony. Mobile operators regardedthis as a breach of the WLL licences. In the process, the courts are cluttered withcases and counter-cases among the various licensees and against decisions ofthe Telecommunications Regulatory Authority of India (TRAI).

In July the TRAI floated a consultation paper which suggested that thedistinction between landline and mobile licences should be removed and alloperators should be allowed to enter any market. The reaction from cellularoperators, who feared even greater intrusions into mobile services, wasvitriolic. TRAI then issued a clarification that it was in favour of integratingother licences as well!domestic long-distance, international long-distance andInternet service provision. The consultation paper also discussed migrationfrom the present state of fragmented competition to integration. That migrationcould include compensation to current licensees for the licence fees they havepaid and for the losses they may suffer. However, for the moment these issueshave been overlooked and battle lines have been drawn over integration asthey have been over a succession of issues in the telecoms sector.

No. of telephones(�000; end-Mar)

1997 1998 1999 2000 2001 2002 2003Bharti Cellular 79 123 122 189 539 1,351 3,168BSNL n/a n/a n/a n/a n/a 17 2,160

Idea 2 43 85 86 344 809 1,280BPL 46 153 220 341 645 899 1,131

Hutchison Essar n/a n/a n/a n/a n/a n/a 767Hutchison Max 63 132 100 146 252 424 665

Spice n/a 40 85 174 361 474 640Escotel 2 45 69 135 307 501 587Reliance n/a 17 30 69 187 380 541

Fascel 2 18 49 110 168 299 457Aircel 1 17 20 66 194 266 413

MTNL n/a n/a n/a n/a 18 201 292Hutchison Telecom n/a n/a n/a n/a n/a n/a 274RPG 12 26 29 43 69 120 179

Hexacom n/a 9 11 20 48 86 132Total cellular lines 339 889 1,187 1,884 3,577 6,431 12,688

Landlines 14,882 18,684 22,813 28,537 36,279 44,968 52,781Total 15,221 19,573 24,000 30,421 39,856 51,399 65,469

Source: Cellular Operators Association of India.

Private companies have taken over the management of a number of ports andthis, coupled with the pricing structure, is likely to improve India�s ports. Thetrend began when P&O Nedlloyd took over the container terminal at NhavaSheva (the new port of Mumbai) three years ago. In 1999 the Port of SingaporeAuthority took over Tuticorin in south-east India. The only port that an Indiancompany has taken over is the Vizagapatam container terminal, which ismanaged by United Liner Agency (in which Dubai Port Authority has a 24%share). Port charges at government-owned ports are controlled by the TariffAuthority for Major Ports (TAMP). In Mumbai, TAMP has fixed the container

Private companies areincreasing competition in ports

A telecoms discussion paperleads to a furore

India 29


terminal�s rates 16% more than the government-run terminal. In June P&Obought Mundra Port in Gujarat from the Adani Group, which built it, forUS$195m. This port will not be subject to TAMP�s price control and P&O will beable to set competitive rates.

Financial and other services

India�s insurance business was state-run between the 1950s, when insurancecompanies were nationalised, and 2000 when private insurance companieswere allowed. The state-owned companies did not have the financial capacityto bear the risk so they used to reinsure a large proportion of their businessabroad (the more poorly capitalised private companies have been even keenerto reinsure). Two major reinsurers!Swiss Re and Munich Re!picked upconsiderable business from India. Increased competition has increased demandfor reinsurance, but losses following the September 11th 2001 terrorist attackson the US and the stockmarket slump have affected the profits of Westerninsurance companies. Last year, the reinsurers limited total cover on seismicrisks and terrorism to US$158m. In the June 2003 agreement signed betweenreinsurers and Indian insurance companies, the reinsurers refused to offer anyliability cover, including cover for terrorism, calamities or accidents. They willprovide asset cover where the risk is calculable, but with a maximum limit ofRs70m for each client. The reinsurers asked Indian insurers to buy cover in thespot market where the rates are higher at around 2.5% of the sum assured,compared with 1.75% under the treaty.

The closure of reinsurance abroad for liability insurance has hit privateinsurance companies hard. The insurance regulator allows them to reinsure20% of their business with the government-owned General InsuranceCorporation, and the companies had wanted this limit to be raised. However,the companies� position improved at the end of July, by which time lossesrelated to September 11th had been fully provisioned, leading to a reduction infacultative reinsurance rates, especially for airlines and shipping companies.

On July 1st the Securities and Exchange Bureau of India (SEBI) replaced circuitbreakers based on individual stocks by one based on stockmarket indices. Theywill apply if either the Sensex 30, calculated by the Bombay Stock Exchange, orthe CNX Nifty, calculated by the National Stock Exchange, moves by more than10% during a day. Depending on the magnitude of the change and the time ofday, trading will cease for a period of between half an hour and the rest ofthe day.

Thousands of companies were floated in the early 1990s but the shares of mostare little traded. In July the Bombay Stock Exchange decided to transfer 2,260such shares to IndoNext, a joint electronic trading platform set up by theFederation of Indian Stock Exchanges, which represents 21 regional stockexchanges. The share capital of each of these companies is currently underRs200m (US$4) but they will stay with IndoNext even if it rises above Rs200m.Meanwhile, the Multi-Commodity Exchange of India was set up in Mumbai inJune. It has set up a fixed satellite very small aperture terminal (VSAT)-based

The circuit breaker system ischanged

The insurance sector issuffering

New stock exchanges are setup

30 India


national infrastructure for commodity trading and has linked up with theHousing Development Finance Corporation (HDFC) and IndusInd banks toprovide electronic fund transfers between 250 branches in 100 cities. It invitedmembers of regional stock exchanges to become members at a cost ofRs250,000.

Foreign trade and payments

India�s foreign-exchange reserves rose to US$84.9bn at end-July, an increase ofUS$11.9bn in six months and of US$36.2bn in a year. The rapid accumulation ofreserves has led the Reserve Bank of India (RBI, the central bank) to reverse itspolicy of managing a progressive depreciation of the currency. Over the pastyear, the rupee has appreciated by 5.3% against the dollar (partly owing to thedollar�s weakness). The change of policy reflects a belief that the build-up ofreserves is more important than the fears of exporters, given that one-fifth ofIndia�s exports and almost two-thirds of its software exports go to the US.

Export growth has remained strong. Exports in April-June 2003 rose by 11.1%year on year to US$13.15bn. This is particularly impressive given that thisgrowth comes on top of strong export growth in the same months of 2002.However, the ongoing domestic boom has begun to suck in imports. Accordingto the Directorate General of Commercial Intelligence and Statistics, oil importsin April-June 2003 rose by 17.9% year on year to US$4.09bn but non-oil importsrose by 31% to US$12.51bn.

As reserves have risen, so has the interest accruing to the RBI. Most of theinvestment income inflows, which in 2002/03 (April-March) amounted toUS$2.21bn, consisted of interest earned by the RBI on reserves invested abroad.However, as interest rates have fallen, interest earnings have not kept pace withreserve accumulation. The average return on reserves fell from 4.9% in 2000/01to 3.9% in 2001/02, and is likely to have fallen further since then.

Trade, reserves and the exchange rate, 2003(US$ bn unless otherwise indicated)

Feb Mar Apr May Jun JulImports 4.0 4.8 4.3 n/a n/a n/aExports -4.5 -5.5 -5.9 n/a n/a n/a

Trade balance -0.4 -0.8 -1.5 n/a n/a n/aForeign direct investment 192.0 183.0 58.0 n/a n/a n/a

Foreign portfolio investment 77.0 215.0 300.0 n/a n/a n/aExchange rate (Rs:US$)ab 47.7 47.6 47.4 47.0 46.5 46.2Reservesa 72.9 74.8 77.0 81.3 81.9 84.9

a Last Friday of the month. b RBI reference rate.

Source: Reserve Bank of India.e

The current account showed a surplus in 2001/02 for the first time in a quarterof a century. The surplus rose to US$3.7bn in 2002/03. The improvement wasrelated to the rise in software exports!the surplus on the services account roseby US$1.6bn. The surplus on transfer payments also rose by US$2.4bn. Much ofthis is likely to have originated from Indian software engineers abroad. Thus

Reserves continue to mount

The current-account surplushas risen

Investment income has risen

India 31


although the global information technology (IT) boom is over, Indiancompanies have continued to increase their exports thanks to their lower costs.Many of the larger IT firms in the US and Europe are either increasing theiroutsourcing from India or are setting up production facilities in India.

Current and capital accounts(US$ bn)

2001/02 2002/03Apr-Mar Apr-Mar Jul-Sep Oct-Dec Jan-Mar

Goods: exports 44.9 53.0 13.4 13.0 14.6

Goods: imports 57.6 65.5 16.0 17.3 17.3Trade balance -12.5 -12.7 -2.7 -4.3 -2.7Services: exports 20.7 25.0 6.4 6.9 6.4

Services: imports 16.1 18.8 4.8 4.2 5.3Services: balance 4.6 6.2 1.5 2.7 1.1Income: inflows 3.4 2.8 0.6 0.4 0.6Income: outflows 7.0 7.7 1.4 1.6 1.6Income: balance -3.6 -4.9 -0.7 -1.1 -1.0Current transfers: credit 12.6 15.5 3.8 4.0 3.8Current transfers: debit 0.1 0.4 0.1 0.0 0.2

Current transfers: balance 12.5 14.9 3.7 4.0 3.6Current-account balance 0.8 3.7 1.8 1.2 1.0Net direct investment 4.7 3.6 0.4 0.5 0.6Net portfolio investment 2.0 0.9 -0.1 0.7 0.6Official loans 1.1 -2.5 -0.1 0.1 -2.6

Commercial loans -1.6 -1.7 -1.0 -0.3 0.3Bank funds 2.8 5.4 1.2 3.4 1.0 Deposits by non-resident Indians 2.8 2.8 0.6 0.9 0.4Other capital flows incl rupee debt service -0.3 3.0 1.1 0.5 0.9Capital-account balance 10.6 12.6 2.3 5.9 1.8Errors & omissions 0.4 0.6 0.8 -1.0 1.4Change in international reserves 11.8 17.0 4.9 6.1 4.3

Note. Totals may not sum owing to rounding.


The US remained India�s largest market in 2002/03, receiving 21% of its exports.It was also the largest source of imports, although it supplied just 7%. Asexports of cut and polished diamonds revived, Belgium and South Africa, theprincipal sources of roughs, were also high among import sources and Belgiumwas the largest importer of India�s cut gems.

Imports(Apr-Mar; Rs bn)

2001/02 2002/03 % change % of totalUS 150.2 213.4 42.1 7.2Belgium 131.7 179.6 36.4 6.1

China 97.1 134.7 38.7 4.5UK 122.2 134.5 10.1 4.5

Germany 96.7 115 18.9 3.9Switzerland 136.9 112.7 -17.7 3.8South Africa 68.7 101.1 47.2 3.4

Japan 102.4 88.5 -13.6 3

The US is India�s largestmarket

32 India


Imports(Apr-Mar; Rs bn)

2001/02 2002/03 % change % of totalSouth Korea 54.4 73.7 35.5 2.5Malaysia 54.1 70.9 31.1 2.4

Singapore 62.2 69.4 11.6 2.3Other 1,375.4 1,672.5 21.6 56.4

Total 2,452.0 2,966.0 21.0 100

Source: Directorate General of Commercial Intelligence and Statistics.

As gold imports declined in 2002/03, imports from Switzerland fell. WithinEurope, the UK and Germany continued to be major sources of imports, and inaddition to Italy and France, are major markets for exports. But trade with eastand south-east Asian countries is rising rapidly. China (with Hong Kong)became the second largest market and the third largest source of imports. As aresult of South Korea�s investment in Indian car production and electronicgoods, imports from South Korea, largely of components, are rising rapidly.Singapore has become an important entrepot for exports to south-east Asia,and the UAE serves the same function for exports to Pakistan and the Gulf.Malaysia is India�s principal source of vegetable oil, but it also exportsincreasing quantities of electronic goods.

Merchandise trade figures released by the Ministry of Commerce differ slightlyfrom those in the balance of payments published by the RBI. According to theMinistry of Commerce, both imports and exports rose by 21% in 2002/03. Therevival of the world market for jewellery led to a sharp rise in imports of roughgems as well as exports of cut gems. After the removal of quantitative importrestrictions in 2001, imports of goods that were severely restricted!includingdrugs, vehicles, electronic goods and synthetic yarn!have risen rapidly. Indiansteel continues to be highly competitive. Its major market was the US untilimport restrictions were put in place, but China is increasingly important. Highprices pushed up oil imports in 2002 but these are likely to stabilise this year.

In 2002/03 India exported 4.1m tonnes of rice, worth US$750.8m, and displacedVietnam as the world�s second largest rice exporter. Rice was released fromgovernment stocks at the price charged to poor consumers under the publicdistribution scheme. On August 1st export prices were raised from Rs6,610(US$144) to Rs7,300 per tonne for white rice and from Rs6,915 to Rs7,500 forparboiled rice. Rising prices, the appreciation of the rupee and domestictransport costs all hinder India�s exports. India�s premium type of rice, basmati,also faces competition from cheaper US versions.

The EU is India�s major market for basmati rice and had an import duty regimewhich favoured basmati rice from India or Pakistan to the US products. (Theregime involves calculating an �intervention� price for different varieties of riceand charging duty equivalent to the intervention price minus the actual importprice.) Under the Uruguay round agreement of the World Trade Organisation(WTO), the EU fixed the intervention price of long-grained rice at #298 (US$335)per tonne. Indian basmati, which was generally priced close to the intervention

India becomes the secondlargest rice exporter

The removal of quantitativerestrictions boosts imports

Trade with Asia is growing fast

Indian rice loses preferentialaccess to the EU

India 33


price, hardly ever paid duty. Pakistani rice, which was generally #50-100cheaper, paid some duty. But US rice, which was considerably cheaper, paidheavy duty. As a result, India�s rice exports to the EU rose from 50,000 tonnesin 1994 to 160,000 tonnes in 2002, and Pakistan�s rose from 4,200 to 50,000tonnes. In the Uruguay round, however, the EU bound itself to a duty of #264,which it implemented in August. This is likely to harm Indian exports but couldlead to cheaper prices within India.

According to the RBI, India�s external debt rose by US$6.2bn in 2002. Theincrease was almost entirely in non-resident Indians (NRI)� deposits. In June theRBI argued that the rise was owing to the termination of two deposit schemeswhich had allowed NRIs to keep money in rupees and earn high interest.External debt will fall in August when the RBI repays holders of MillenniumBonds, which had been issued in 1998 to bolster reserves following theimposition of sanctions after India conducted nuclear tests.

Earlier this year, the government retired US$3.3bn of high-cost loans from theWorld Bank and the Asian Development Bank. In June it announced theprepayment of US$1.6bn of bilateral loans from 14 countries!the Netherlands,Russia, Canada, Sweden, Italy, Denmark, Belgium, Austria, Kuwait, Spain,Switzerland, Saudi Arabia, Australia, Czech Republic and Slovakia. In the future,India will take only untied aid from the US, UK, Japan, Germany, the EU andRussia. India has become a contributor to the IMF for the first time. In July theRBI contributed SDR205m (US$291.7m) to the IMF�s Financial Transactions Plan,which gives balance-of-payments assistance to developing countries.

External debt(US$ m; year-end)

2000 2001 2002Short-term 2,750 2,745 3,357

Long-term 95,801 96,016 101,630 Multilateral 31,233 31,898 32,564 Bilateral 15,373 15,323 16,630 Export credit 5,414 5,351 5,003 Commercial debt 23,756 23,248 22,417 Debt to NRIs 16,835 17,154 22,214 Rupee debt 3,190 3,042 2,802Total 98,551 98,761 104,987


NRI deposits cause externaldebt to rise temporarily

High-cost external debt isrepaid

Documents

India 1 Country Report September 2003 ' The Economist Intelligence Unit Limited 2003 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators